<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 June 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
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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 (I.R.S. Employer Identification No.)
incorporation or organization)
4008 Gibsonia Road, Gibsonia, Pennsylvania 15044-9311
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(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 July 24, 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 Six Months
Ended June 30 Ended June 30
--------------------- --------------------
1997 1996 1997 1996
-------- -------- ------- --------
<S> <C> <C> <C> <C>
Operating revenues:
Local network services $ 2,404 $ 2,062 $ 4,743 $ 4,176
Long distance and access services 11,111 10,308 21,984 20,774
Directory advertising, billing & other services 525 538 1,111 1,086
Telecommunication equipment sales 886 723 1,494 1,443
Other operating revenues 2,938 1,079 5,119 2,095
-------- -------- ------- --------
Total Operating Revenues 17,864 14,710 34,451 29,574
-------- -------- ------- --------
Operating expenses:
Network and other operating expenses 7,558 6,559 14,576 12,525
Depreciation and amortization 2,677 2,340 5,291 4,647
State and local taxes 710 620 1,489 1,284
Telecommunication equipment expenses 789 623 1,339 1,294
-------- -------- ------- --------
Total Operating Expenses 11,734 10,142 22,695 19,750
-------- -------- ------- --------
Net Operating Revenues 6,130 4,568 11,756 9,824
Other expense (income), net:
Interest expense 395 385 815 780
Interest income (115) (198) (265) (395)
Sundry expense (income), net (264) 97 (265) 88
-------- -------- ------- --------
16 284 285 473
-------- -------- ------- --------
Earnings before income taxes 6,114 4,284 11,471 9,351
Income taxes:
Current 2,399 1,664 4,561 3,675
Deferred - - - -
-------- -------- ------- --------
2,399 1,664 4,561 3,675
-------- -------- ------- --------
Net earnings $ 3,715 $ 2,620 $ 6,910 $ 5,676
======== ======== ======= ========
Weighted average common shares outstanding 15,025 15,040 15,032 15,040
======== ======== ======= ========
Earnings per share of common stock $.25 $.17 $.46 $.38
======== ======== ======= ========
Dividends per share of common stock $.14 $.13 $.28 $.26
======== ======== ======= ========
</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 June 30 Dec. 31
- ------ 1997 1996
------------- -----------
<S> <C> <C>
Current Assets:
Cash and temporary investments $ 10,044 $ 11,313
Marketable securities available for sale 70 329
Marketable securities held to maturity 300 451
Accounts receivable:
Customers 5,565 4,090
Access service settlements and other 5,395 5,270
Prepaid Expenses 277 163
Inventories of construction and operating materials and
supplies 2,870 3,169
Prepaid taxes 432 -
------------- -----------
Total current assets 24,953 24,785
------------- -----------
Property, plant and equipment
Land 506 357
Buildings 11,663 11,834
Equipment 112,749 108,878
------------- -----------
124,918 121,069
Less accumulated depreciation and amortization 64,839 60,333
------------- -----------
60,079 60,736
Construction in progress 9,259 4,858
------------- -----------
Total property, plant and equipment, net 69,338 65,594
Investments 7,915 5,763
Deferred financing costs 1,005 1,055
Prepaid pension cost 1,016 622
Other assets 1,378 1,704
------------- -----------
$ 105,605 $ 99,523
============= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 777 $ 753
Obligations under capital lease 192 191
Accounts payable 5,828 4,702
Accrued interest 124 119
Dividend payable 2,101 1,955
Taxes other than income taxes 309 657
Accrued vacation 705 705
Other liabilities 574 632
Federal and state income taxes 952 670
------------- -----------
Total current liabilities 11,562 10,384
------------- -----------
Long-term debt 23,672 20,937
Obligations under capital lease 255 374
Unamortized investment tax credits 319 369
Deferred income taxes 5,955 5,969
Postretirement benefits 4,630 4,497
Other liabilities 1,733 1,687
Shareholders' equity:
Capital stock/Common stock 2,350 2,350
Capital in excess of par value 2,215 2,215
Retained earnings 53,426 50,724
Unrealized gain (loss) on available for sale securities, net (4) 17
Less cost of treasury stock (1997-35,000 shares) (508) -
------------- -----------
Total shareholders' equity 57,479 55,306
------------- -----------
$ 105,605 $ 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 Six Months
Ended June 30
-------------------
1997 1996
--------- --------
<S> <C> <C>
Cash from operating activities:
Net earnings $ 6,910 $ 5,676
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization 5,291 4,654
Gain on sale of marketable securities (90) -
Equity (income) losses of affiliated companies (250) 75
Provision for postretirement benefits other than pensions 133 119
Investment tax credit amortization (50) (51)
Changes in assets and liabilities:
Accounts receivable (1,600) (1,024)
Inventories of construction and operating materials &
supplies 299 27
Prepaid federal and state taxes (432) (482)
Accounts payable 1,126 (1,337)
Taxes other than income taxes (348) ( 89)
Other liabilities, accrued interest and accrued vacation ( 7) 7
Federal and state income taxes 282 (273)
Deferred financing costs, prepaid pension costs
and other assets (18) 1,273
Other, net (104) (87)
--------- --------
Total adjustments 4,232 2,812
--------- --------
Net cash from operating activities 11,142 8,488
--------- --------
Cash used for investing activities:
Expenditures for property and equipment (9,180) (6,693)
Net salvage on retirements 134 92
--------- --------
Net capital additions (9,046) (6,601)
--------- --------
Purchase of marketable securities held to maturity - (102)
Proceeds from redemption of marketable securites held to maturity 150 2,211
Purchase of marketable securities available for sale ( 131) ( 143)
Proceeds from sale of marketable securities available for sale 445 894
Investments in affiliated entities (1,901) (214)
--------- --------
Net cash used for investing activities (10,483) (3,955)
--------- --------
Cash used for financing activities:
Cash dividends (4,061) (3,760)
Additions to debt 3,132 -
Retirement of debt (373) (346)
Payment on capital lease obligations ( 118) -
Purchase of treasury stock (508) -
--------- --------
Net cash used for financing activities (1,928) (4,106)
--------- --------
Net (decrease) increase in cash and temporary investments (1,269) 427
Cash and temporary investments at beginning of period 11,313 9,359
--------- --------
Cash and temporary investments at end of period $ 10,044 $ 9,786
========= ========
Interest paid $ 760 $ 734
========= ========
Income taxes paid $ 4,293 $ 4,103
========= ========
</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., Pinnatech, Inc. (Pinnatech) and Management Consulting
Solutions, Inc. (MCSI). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. Nevertheless, the Registrant
believes that its disclosures herein are adequate to make the information
presented not misleading and, in the opinion of management, all
adjustments (which consisted only of normal recurring accruals) necessary
to present fairly the results of operations for the interim periods have
been reflected. It is suggested that these condensed consolidated
financial statements be read in conjunction with the financial statements
and the notes thereto included in the Registrant's latest annual report
to the Securities and Exchange Commission on Form 10-K.
(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 June 30, 1997, the end of the six-month period
reported herein.
(b) Liquidity and Capital Resources
-------------------------------
Consolidated capital expenditure commitments for the purchase and
installation of communications and other equipment at June 30, 1997
amounted to approximately $1,771,000 with such amount being part of the
1997 Construction Program of $23 million to $26 million. Funds for
financing construction expenditures in the six-month period ended June
30, 1997 were generated from both internal sources (65%) and external
sources (35%). Based on its 1997 construction budget and projected cash
flows, the Registrant anticipates cash flows provided by operating
activities and cash
4
<PAGE>
reserves in 1997 to service long-term debt, to pay dividends and to
finance approximately 50% of capital additions. The balance of capital
additions will be financed from new borrowings. Beginning in the second
quarter of 1997, a portion of the funds used for construction was
obtained from new debt financing from the Rural Utilities Service. At
June 30, 1997, construction work in progress was $9,259,000. An
additional $6,470,000 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 $4,877,000 (16.5%) in the six-month
period ended June 30, 1997 over the comparable period in 1996. This
change was due to increases in long distance and access services of
$1,210,000 (5.8%), local network services of $567,000 (13.6%), and other
operating revenues of $3,024,000 (144.3%). 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. The increase in
other operating revenues is primarily due to the growth of Pinnatech's
Internet services and MCSI's consulting and outsourcing services.
5
<PAGE>
Total operating expenses for the six-month period ended June 30, 1997,
increased $2,945,000 (14.9%) over the preceding year. That change is
principally the result of an increase in network and other operating
expenses of $2,051,000 (16.4%), and an increase in depreciation and
amortization of $644,000 (13.9%). Approximately $1,900,000 of the
$2,051,000 increase in network and other operating expenses was directly
associated with the increase in other operating revenues of $3,024,000
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
19.7% increase in net operating revenues in 1997 as compared to the same
period in 1996.
Interest income decreased $130,000 primarily due to decreased levels of
investment in such instruments. The net increase in sundry income (non-
operating) of $353,000 is primarily due to an increase in cellular
partnership income in 1997 as compared to 1996.
The increase in net operating revenues for the six-month period ended
June 30, 1997, in conjunction with the increase in Sundry income, net,
resulted in an increase of $2,120,000 (22.7%) in earnings before income
taxes.
Fluctuations in the revenues and expenses for the three-month period
ended June 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.
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.
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.
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
(a) The 1997 Annual Meeting of Shareholders was held on May 16, 1997.
(b) The only matter voted upon at the Annual Meeting was the election
of Directors. The vote tabulation in respect to the Directors
elected at such meeting to serve until the 1998 Annual Meeting of
Shareholders and until their successors are elected is shown in the
following table:
<TABLE>
<CAPTION>
Number of Number of
Shares Shares
Name Voted in Favor Withheld
- -------------------------------------------------------------
<S> <C> <C>
Harry R. Brown 13,374,518 252,258
Dr. Charles E. Cole 13,458,966 167,810
Gerald A. Gorman 13,481,314 145,462
Richard R. Kauffman 13,409,688 217,088
Frank D. Reese 13,473,900 152,876
Jay L. Sedwick 13,471,366 155,410
Charles E. Thomas, Sr. 13,432,923 193,853
Charles E. Thomas, Jr. 13,441,036 185,740
Barton B. Williams 13,488,667 138,109
</TABLE>
6
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
- ------ --------------------------------
(a) Exhibits - Exhibit Index for Quarterly Reports on Form 10-Q.
--------
<TABLE>
<CAPTION>
Exhibit
Number Subject Applicability
- ------ ------- -------------
<S> <C> <C>
(2) Plan of acquisition, Not Applicable
reorganization,
arrangement,
liquidation or
succession
(3) (i) Articles of Provided in Quarterly Report
Incorporation 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 Provided in Registration of
the rights of security Securities of Certain
holders including Successor Issuers on Form
indentures 8-B filed on June 25, 1985
and Incorporated Herein by
Reference.
(10) Material Contracts Not Applicable
(11) Statement re Attached Hereto
computation of per
share earnings
(15) Letter re unaudited Not Applicable
interim financial
information
(18) Letter re change in Not Applicable
accounting principles
(19) Report furnished to Not Applicable
security holders
(22) Published report Not Applicable
regarding matters
submitted to a vote of
security holders
(23) Consents of experts Not Applicable
and counsel
(24) Power of attorney Not Applicable
(27) Financial Data Schedule Attached Hereto
(99) Additional exhibits Not Applicable
</TABLE>
(b) Reports on Form 8-K - No reports on Form 8-K were filed
-------------------
during the quarter ended June 30, 1997.
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 July 24, 1997 /s/ G. A. Gorman
_________________________ ________________________________________
G. A. Gorman, President
Date July 24, 1997 /s/ A. P. Kimble
_________________________ ________________________________________
A. P. Kimble, Vice President, Secretary &
Treasurer
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 Six Months
Ended June 30 Ended June 30
------------------------------- ----------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Earnings $ 3,715,000 $ 2,620,000 $ 6,910,000 $ 5,676,000
=========== =========== =========== ===========
Weighted average common
shares outstanding 15,025,000 15,040,000 15,032,000 15,040,000
=========== =========== =========== ===========
Earnings per share of common stock $ .25 $ .17 $ .46 $ .38
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1997 QUARTERLY REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 10,044
<SECURITIES> 370
<RECEIVABLES> 10,960
<ALLOWANCES> 0
<INVENTORY> 2,870
<CURRENT-ASSETS> 24,953
<PP&E> 134,177
<DEPRECIATION> 64,839
<TOTAL-ASSETS> 105,605
<CURRENT-LIABILITIES> 11,562
<BONDS> 23,672
0
0
<COMMON> 2,350
<OTHER-SE> 55,129
<TOTAL-LIABILITY-AND-EQUITY> 105,605
<SALES> 1,494
<TOTAL-REVENUES> 34,451
<CGS> 1,339
<TOTAL-COSTS> 22,695
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 815
<INCOME-PRETAX> 11,471
<INCOME-TAX> 4,561
<INCOME-CONTINUING> 6,910
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,910
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
</TABLE>
