<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
---------------------------------------------
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
___________________________________
NORTH PITTSBURGH SYSTEMS, INC.
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1485389
_______________________________ ____________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4008 Gibsonia Road, Gibsonia, Pennsylvania 15044-9311
________________________________________________________________________________
(Address of principal executive offices)
(Zip Code)
412 443-9600
________________________________________________________________________________
(Registrant's telephone number, including area code)
No Change
________________________________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
________ ________
APPLICABLE ONLY TO CORPORATE USERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding
________________________
At October 23, 1997, the Registrant had 15,005,000 shares of common stock
outstanding, par value $.15625 per share, the only class of such stock issued.
<PAGE>
PART I
ITEM 1
FINANCIAL STATEMENTS
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(Thousands - Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30 Ended September 30
-------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Operating revenues:
Local network services $ 2,736 $ 2,184 $ 7,480 $ 6,360
Long distance and access services 10,482 10,370 32,466 31,143
Directory advertising, billing & other services 526 561 1,637 1,647
Telecommunication equipment sales 738 750 2,232 2,194
Other operating revenues 1,452 1,387 6,571 3,482
-------- -------- -------- --------
Total Operating Revenues 15,934 15,252 50,386 44,826
-------- -------- -------- --------
Operating expenses:
Network and other operating expenses 6,353 6,888 20,929 19,412
Depreciation and amortization 2,660 2,385 7,951 7,032
State and local taxes 701 613 2,190 1,898
Telecommunication equipment expenses 698 616 2,038 1,910
-------- -------- -------- --------
Total Operating Expenses 10,412 10,502 33,108 30,252
-------- -------- -------- --------
Net Operating Revenues 5,522 4,750 17,278 14,574
Other expense (income), net:
Interest expense 424 386 1,239 1,166
Interest income (156) (186) (421) (581)
Sundry expense (income), net (543) (302) (807) (214)
-------- -------- -------- --------
(275) (102) 11 371
-------- -------- -------- --------
Earnings before income taxes 5,797 4,852 17,267 14,203
Income taxes:
Current 2,343 1,973 6,904 5,648
Deferred - - - -
-------- -------- -------- --------
2,343 1,973 6,904 5,648
-------- -------- -------- --------
Net earnings $ 3,454 $ 2,879 $10,363 $ 8,555
======== ======== ======== ========
Weighted average common shares outstanding 15,005 15,040 15,023 15,040
======== ======== ======== ========
Earnings per share of common stock $.23 $.19 $.69 $.57
======== ======== ======== ========
Dividends per share of common stock $.14 $.13 $.42 $.39
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Thousands of Dollars)
<TABLE>
<CAPTION>
ASSETS Sept. 30 Dec. 31
------ 1997 1996
--------- --------
<S> <C> <C>
Current Assets:
Cash and temporary investments $ 15,604 $ 11,313
Marketable securities available for sale 199 329
Marketable securities held to maturity 200 451
Accounts receivable:
Customers 3,806 4,090
Access service settlements and other 5,577 5,270
Prepaid Expenses 163 163
Inventories of construction and operating materials and
supplies 3,559 3,169
Prepaid taxes 127 -
--------- --------
Total current assets 29,235 24,785
--------- --------
Property, plant and equipment
Land 479 357
Buildings 10,319 11,834
Equipment 115,095 108,878
--------- --------
125,893 121,069
Less accumulated depreciation and amortization 66,809 60,333
--------- --------
59,084 60,736
Construction in progress 11,392 4,858
--------- --------
Total property, plant and equipment, net 70,476 65,594
Investments 8,252 5,763
Deferred financing costs 980 1,055
Prepaid pension cost 798 622
Other assets 1,259 1,704
--------- --------
$111,000 $ 99,523
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 790 $ 753
Obligations under capital lease - 191
Accounts payable 6,424 4,702
Accrued interest 113 119
Dividend payable 2,101 1,955
Taxes other than income taxes 317 657
Accrued vacation 705 705
Other liabilities 603 632
Federal and state income taxes 1,173 670
--------- --------
Total current liabilities 12,226 10,384
--------- --------
Long-term debt 27,243 20,937
Obligations under capital lease - 374
Unamortized investment tax credits 294 369
Deferred income taxes 5,965 5,969
Postretirement benefits 4,697 4,497
Other liabilities 1,729 1,687
Shareholders' equity:
Capital stock/Common stock 2,350 2,350
Capital in excess of par value 2,215 2,215
Retained earnings 54,779 50,724
Unrealized gain (loss) on available for sale securities, net 10 17
Less cost of treasury stock (1997-35,000 shares) (508) -
--------- --------
Total shareholders' equity 58,846 55,306
--------- --------
$111,000 $ 99,523
========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Thousands of Dollars)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30
-------------------
1997 1996
-------- --------
<S> <C> <C>
Cash from operating activities:
Net earnings $ 10,363 $ 8,555
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization 7,951 7,045
Gain on sale of marketable securities (90) -
Equity (income) losses of affiliated companies (659) (274)
Gain on sale of MCSI (292) -
Provision for postretirement benefits other than pensions 200 183
Investment tax credit amortization (75) (76)
Changes in assets and liabilities:
Accounts receivable (1,768) (1,415)
Inventories of construction and operating materials &
supplies (390) (742)
Prepaid federal and state taxes (127) ( 87)
Accounts payable 2,158 ( 837)
Taxes other than income taxes (338) ( 103)
Other liabilities, accrued interest and accrued vacation 32 1,552
Federal and state income taxes 503 398
Deferred financing costs, prepaid pension costs
and other assets 344 1,752
Other, net (98) (106)
-------- --------
Total adjustments 7,351 7,290
-------- --------
Net cash from operating activities 17,714 15,845
-------- --------
Cash used for investing activities:
Expenditures for property and equipment (15,233) (11,785)
Net salvage on retirements 286 277
-------- --------
Net capital additions (14,947) (11,508)
-------- --------
Purchase of marketable securities held to maturity - (454)
Proceeds from redemption of marketable securites held to maturity 250 4,927
Purchase of marketable securities available for sale ( 235) ( 322)
Proceeds from sale of marketable securities available for sale 445 970
Proceeds from sale of MCSI, net of cash sold 3,305 -
Investments in affiliated entities (1,901) (538)
Distribution from affiliated entities 71 -
-------- --------
Net cash used for investing activities (13,012) (6,925)
-------- --------
Cash used for financing activities:
Cash dividends (6,161) (5,716)
Additions to debt 6,903 -
Retirement of debt (512) (523)
Payment on capital lease obligations (133) -
Purchase of treasury stock (508) -
-------- --------
Net cash used for financing activities (411) (6,239)
-------- --------
Net (decrease) increase in cash and temporary investments 4,291 2,681
Cash and temporary investments at beginning of period 11,313 9,359
-------- --------
Cash and temporary investments at end of period $ 15,604 $ 12,040
======== ========
Interest paid $ 1,170 $ 1,094
======== ========
Income taxes paid $ 6,406 $ 5,340
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
-------
The condensed consolidated financial statements included herein have
been prepared by the Registrant, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission. Consolidated
herein are the financial results of the Registrant's wholly-owned
subsidiaries, North Pittsburgh Telephone Company (North Pittsburgh),
Penn Telecom, Inc. and Pinnatech, Inc. (Pinnatech). Also consolidated
is the financial activity of Management Consulting Solutions, Inc.
(MCSI) until its sale on July 31, 1997. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations.
Nevertheless, the Registrant believes that its disclosures herein are
adequate to make the information presented not misleading and, in the
opinion of management, all adjustments (which consisted only of normal
recurring accruals) necessary to present fairly the results of
operations for the interim periods have been reflected. It is suggested
that these condensed consolidated financial statements be read in
conjunction with the financial statements and the notes thereto included
in the Registrant's latest annual report to the Securities and Exchange
Commission on Form 10-K.
(2) NET INCOME PER SHARE
--------------------
Net income per common share is calculated based on the weighted average
number of common shares outstanding during the year. In February, 1997,
Financial Accounting Standards No. 128 "Earnings Per Share" (FAS 128)
was issued by the Financial Accounting Standards Board. FAS 128
specifies modifications to the calculation of earnings per share, but
these modifications will have no impact on the Registrant.
(3) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
Statements of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure," No. 130, "Reporting Comprehensive
Income Summary," and No. 131, "Disclosures about Segments of an
Enterprise and Related Information," are effective for the year ended
December 31, 1997. The Registrant does not believe these statements will
have a material impact on its financial statements.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1. Financial Condition
-------------------
(a) General
-------
There were no material changes in the Registrant's consolidated general
financial condition from the end of its preceding fiscal year on
December 31, 1996 to September 30, 1997, the end of the nine-month
period reported herein.
(b) Liquidity and Capital Resources
-------------------------------
Consolidated capital expenditure commitments for the purchase and
installation of communications and other equipment at September 30, 1997
amounted to approximately $1,511,000 with such amount being part of the
1997 Construction Program of $23 million to $26 million. Funds for
financing construction expenditures in the nine-month period ended
September 30, 1997 were generated from both internal sources (54%) and
external sources (46%). Based on its 1997 construction budget and
projected cash flows, the Registrant anticipates cash flows provided by
operating activities and cash reserves in 1997 to service long-term
debt, to pay dividends and to finance approximately 50% of capital
additions. The balance of
4
<PAGE>
capital additions will be financed from new borrowings. Beginning in the
second quarter of 1997 and continuing through the third quarter of 1997,
a portion of the funds used for construction was obtained from new debt
financing from the Rural Utilities Service. At September 30, 1997,
construction work in progress was $11,392,000. An additional $7,269,000
is expected to be expended to complete these projects.
The Registrant and its subsidiaries have not experienced any difficulty
in the past meeting either long-term or short-term cash commitments.
Cash flow generated through regular operations has been adequate to not
only finance a significant portion of the capital requirements of the
Registrant as discussed in the previous paragraph but also to meet
principal and interest payments on long-term debt and all working
capital requirements. It is anticipated that future long-term interest
and principal payments will be made from the same source of internally
generated funds.
(c) Regulatory/Competition
----------------------
The Federal Communications Commission (FCC) has continued its work on
implementing the Telecommunications Act of 1996 (1996 Act) by issuing a
number of rulemakings concerning interconnection, access charge reform
and universal service funding reform. Some of these rulemakings are the
subject of court appeals which, as of yet, are unresolved. In addition,
the Pennsylvania Public Utility Commission (PA PUC) is addressing all of
these same issues at the state level. While it is clear that the effect
of the 1996 Act and the subsequent FCC and PA PUC rulemakings will
eventually open the local exchange market to competition, restructure
access charge revenue streams and change the way in which universal
service funding is calculated and funded, there are still too many
issues that need to be resolved before the full effects of the 1996 Act
can be fully understood and measured. All current indications are that
any impact on the Registrant will occur over some transition period. In
addition, the PA PUC recently granted North Pittsburgh, along with a
number of other rural companies in Pennsylvania, a two-year waiver of
certain portions of the interconnection requirements of the 1996 Act in
order to allow those companies to prepare for competition.
The 1996 Act, FCC and PA PUC regulatory proceedings and the thrust
towards a fully competitive marketplace have created some uncertainty in
respect to the levels of North Pittsburgh's revenue growth in the
future. However, its unique location in a growing commercial/residential
suburban traffic corridor to the north of the City of Pittsburgh, its
state-of-the-art switching transmission and transport facilities and its
extensive fiber network place North Pittsburgh in a solid position to
meet competition and minimize any loss of revenues. In addition, North
Pittsburgh continues to make its network flexible and responsive to the
needs of its customers to meet competitive threats. New services, access
line growth and anticipated usage growth will lessen or offset any
reductions in North Pittsburgh's revenue sources.
2. Results of Operations
---------------------
Total operating revenues increased $5,560,000 (12.4%) in the nine-month
period ended September 30, 1997 over the comparable period in 1996. This
change was due to increases in long distance and access services of
$1,323,000 (4.3%), local network services of $1,120,000 (17.6%), and other
operating revenues of $3,089,000 (88.7%). 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. The increase in other operating revenues
is primarily due to the growth of Pinnatech's Internet services and, until
July 31, 1997, MCSI's consulting and outsourcing services. The increase in
other operating revenues is primarily due the growth of consulting and
outsourcing services provided by MCSI through July 31, 1997, and to a lesser
extent, due to growth in Pinnatech's Internet services.
5
<PAGE>
Total operating expenses for the nine-month period ended September 30, 1997,
increased $2,856,000 (9.4%) over the preceding year. That change is
principally the result of an increase in network and other operating
expenses of $1,517,000 (7.8%), and an increase in depreciation and
amortization of $919,000 (13.1%). Approximately $1,200,000 of the $1,517,000
increase in network and other operating expenses was directly associated
with the increase in other operating revenues of $3,089,000 discussed above.
The increase in depreciation and amortization is the direct result of the
growth in fixed assets to serve current and future customer needs. The
increase in total operating revenues discussed above coupled with the
increase in total operating expenses resulted in a 18.5% increase in net
operating revenues in 1997 as compared to the same period in 1996.
Interest income decreased $160,000 primarily due to decreased levels of
investment in such instruments. The net increase in sundry income (non-
operating) of $593,000 is primarily due to an increase in cellular
partnership income in 1997 as compared to 1996 and to the sale of MCSI on
July 31, 1997.
The increase in net operating revenues for the nine-month period ended
September 30, 1997, in conjunction with the increase in Sundry income, net,
resulted in an increase of $3,064,000 (21.5%) in earnings before income
taxes.
Fluctuations in the revenues and expenses for the three-month period ended
September 30, 1997, as compared to the same quarterly period in 1996 are
generally attributable to the same reasons above in the year-to-date
comparisons except for the following: Long distance and access services
increased moderately for the quarter ended September 30, 1997 due to the
implementation of an automatic toll savings plan in July, 1997. The
introduction of such plan was a proactive step by the Registrant to retain
present customers and thus preserve market share in the newly competitive
IntraLATA long distance market. Also, Network and other operating expenses
decreased $535,000 (7.8%) due to the cessation of operations and subsequent
sale of MCSI on July 31, 1997.
In February, 1997, Financial Accounting Standard No. 128 "Earnings Per
Share" (FAS 128) was issued by the Financial Accounting Standards Board. FAS
128 specifies modifications to the calculation of earnings per share, but
these modifications will have no impact on the Registrant.
Statements of Financial Accounting Standard No. 129, "Disclosure of
Information about Capital Structure," No. 130, "Reporting Comprehensive
Income Summary," and No. 131, "Disclosures about Segments of an Enterprise
and Related Information," are effective for the year ended December 31,
1997. The Registrant does not believe these statements will have a material
impact on its financial statements.
6
<PAGE>
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits - Exhibit Index for Quarterly Reports on Form 10-Q.
--------
Exhibit
Number Subject Applicability
- ------- ------- -------------
(2) Plan of acquisition, reorganization, Not Applicable
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 of Provided in Registration of
security holders including indentures Securities of Certain
Successor Issuers on Form
8-B filed on June 25, 1985
and Incorporated Herein by
Reference.
(10) Material Contracts Not Applicable
(11) Statement re computation of per Attached Hereto
share earnings
(15) Letter re unaudited interim financial Not Applicable
information
(18) Letter re change in accounting Not Applicable
principles
(19) Report furnished to security holders Not Applicable
(22) Published report regarding matters Not Applicable
submitted to a vote of security holders
(23) Consents of experts and counsel Not Applicable
(24) Power of attorney Not Applicable
(27) Financial Data Schedule Attached Hereto
(99) Additional exhibits Not Applicable
(b) Reports on Form 8-K - A Form 8-K was filed on
-------------------
August 1, 1997 disclosing the sale of MCSI.
7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTH PITTSBURGH SYSTEMS, INC.
______________________________
(Registrant)
Date October 23, 1997 /s/ A. P. Kimble
_________________________ ________________________________________
A. P. Kimble, Vice President, Secretary &
Treasurer
Date October 23, 1997 /s/ N. W. Barthlow
_________________________ ________________________________________
N. W. Barthlow, Vice President &
Assistant Secretary
8
<PAGE>
Exhibit 11
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Statement - computation of per share earnings
Statement of Computations of Earnings per Share
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended Sept. 30 Ended Sept. 30
------------------------ -----------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
----------- ----------- ----------- ----------
Net Earnings $ 3,454,000 $ 2,879,000 $10,363,000 $8,555,000
=========== =========== =========== ==========
Weighted average common
shares outstanding 15,005,000 15,040,000 15,023,000 15,040,000
=========== =========== =========== ==========
Earnings per share of common stock $ .23 $ .19 $ .69 $ .57
=========== =========== =========== ==========
</TABLE>
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEPTEMBER
30, 1997 QUARTERLY REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 15,604
<SECURITIES> 399
<RECEIVABLES> 9,383
<ALLOWANCES> 0
<INVENTORY> 3,559
<CURRENT-ASSETS> 29,235
<PP&E> 137,285
<DEPRECIATION> 66,809
<TOTAL-ASSETS> 111,000
<CURRENT-LIABILITIES> 12,226
<BONDS> 27,243
0
0
<COMMON> 2,350
<OTHER-SE> 56,496
<TOTAL-LIABILITY-AND-EQUITY> 111,000
<SALES> 2,232
<TOTAL-REVENUES> 50,386
<CGS> 2,038
<TOTAL-COSTS> 33,108
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,239
<INCOME-PRETAX> 17,267
<INCOME-TAX> 6,904
<INCOME-CONTINUING> 10,363
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,363
<EPS-PRIMARY> .69
<EPS-DILUTED> .69
</TABLE>
