<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 March 31, 1997
----------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-13716
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NORTH PITTSBURGH SYSTEMS, INC.
-----------------------------------------------------------------
(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
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(Registrant's telephone number, including area code)
No Change
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(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 April 25, 1997, the Registrant had 15,040,000 shares of common stock
outstanding, par value $.15625 per share, the only class of such stock issued.
<PAGE>
PART I
ITEM 1
FINANCIAL STATEMENTS
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(Thousands - Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31
--------------------
1997 1996
-------- ---------
<S> <C> <C>
Operating revenues:
Local network services $ 2,340 $ 2,114
Long distance and access services 10,873 10,465
Directory advertising, billing & other services 586 548
Telecommunication equipment sales 607 721
Other operating revenues 2,181 1,017
-------- ---------
Total Operating Revenues 16,587 14,865
-------- ---------
Operating expenses:
Network and other operating expenses 7,018 5,966
Depreciation and amortization 2,603 2,307
State and local taxes 779 664
Telecommunication equipment expenses 550 671
-------- ---------
Total Operating Expenses 10,950 9,608
-------- ---------
Net Operating Revenues 5,637 5,257
Other expense (income), net:
Interest expense 420 395
Interest income (150) (197)
Sundry expense (income), net 10 (8)
-------- ---------
280 190
-------- ---------
Earnings before income taxes 5,357 5,067
Income taxes:
Current 2,162 2,011
Deferred - -
-------- ---------
2,162 2,011
-------- ---------
Net earnings $ 3,195 $ 3,056
======== =========
Average common shares outstanding 15,040 15,040*
======== =========
Earnings per share of common stock $.21 $.20*
======== =========
Dividends per share of common stock $.14 $.13*
======== =========
</TABLE>
*Adjusted for a 2 for 1 stock split-up effective May 22, 1996.
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Thousands of Dollars)
<TABLE>
<CAPTION>
ASSETS Mar. 31 Dec. 31
- ------ 1997 1996
--------- --------
<S> <C> <C>
Current Assets:
Cash and temporary investments $ 10,764 $ 11,313
Marketable securities available for sale 257 329
Marketable securities held to maturity 351 451
Accounts receivable:
Customers 4,698 4,090
Access service settlements and other 6,251 5,270
Prepaid Expenses 97 163
Inventories of construction and operating materials and
supplies 3,407 3,169
Prepaid taxes 702 -
--------- --------
Total current assets 26,527 24,785
--------- --------
Property, plant and equipment
Land 506 357
Buildings 11,679 11,834
Equipment 110,970 108,878
--------- --------
123,155 121,069
Less accumulated depreciation and amortization 62,562 60,333
--------- --------
60,593 60,736
Construction in progress 6,011 4,858
--------- --------
Total property, plant and equipment, net 66,604 65,594
Investments 5,763 5,763
Deferred financing costs 1,030 1,055
Prepaid pension cost 1,234 622
Other assets 1,446 1,704
--------- --------
$102,604 $ 99,523
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Current portion of long-term debt $ 765 $ 753
Obligations under capital lease 186 191
Accounts payable 5,523 4,702
Accrued interest 119 119
Dividend payable 2,106 1,955
Taxes other than income taxes 494 657
Accrued vacation 704 705
Other liabilities 517 632
Federal and state income taxes 2,161 670
--------- --------
Total current liabilities 12,575 10,384
--------- --------
Long-term debt 20,736 20,937
Obligations under capital lease 305 374
Unamortized investment tax credits 344 369
Deferred income taxes 5,974 5,969
Postretirement benefits 4,562 4,497
Other liabilities 1,707 1,687
Shareholders' equity:
Capital stock/Common stock 2,350 2,350
Capital in excess of par value 2,215 2,215
Retained earnings 51,813 50,724
Unrealized gain (loss) on available for sale securities, net 23 17
--------- --------
Total shareholders' equity 56,401 55,306
--------- --------
$102,604 $ 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 Three Months
Ended March 31
--------------------
1997 1996
---------- ---------
<S> <C> <C>
Cash from operating activities:
Net earnings $ 3,195 $ 3,056
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization 2,603 2,310
Gain on sale of marketable securities (12) -
Provision for postretirement benefits other than pensions 65 56
Investment tax credit amortization (25) (25)
Changes in assets and liabilities:
Accounts receivable (1,589) (367)
Inventories of construction and operating materials &
supplies (238) 331
Prepaid federal and state taxes (702) (642)
Accounts payable 821 (1,247)
Taxes other than income taxes (163) (129)
Other liabilities, accrued interest and accrued vacation (96) (122)
Federal and state income taxes 1,491 1,521
Deferred financing costs, prepaid pension costs
and other assets (329) 990
Other, net 154 (71)
---------- ---------
Total adjustments 1,980 2,605
---------- ---------
Net cash from operating activities 5,175 5,661
---------- ---------
Cash used for investing activities:
Expenditures for property and equipment (3,702) (2,665)
Net salvage on retirements 2 22
---------- ---------
Net capital additions (3,700) (2,643)
---------- ---------
Proceeds from redemption of marketable securites held to maturity 100 1,200
Purchase of marketable securities available for sale (55) (65)
Proceeds from sale of marketable securities available for sale 149 510
Investments in affiliated entities - -
---------- ---------
Net cash used for investing activities (3,506) (998)
---------- ---------
Cash used for financing activities:
Cash dividends (1,955) (1,805)
Retirement of debt (189) (174)
Payment on capital lease obligations (74) -
---------- ---------
Net cash used for financing activities (2,218) (1,979)
---------- ---------
Net (decrease) increase in cash and temporary investments (549) 2,684
Cash and temporary investments at beginning of period 11,313 9,359
---------- ---------
Cash and temporary investments at end of period $10,764 $12,043
========== =========
Interest paid $ 395 $ 371
========== =========
Income taxes paid $ 667 $ 557
========== =========
Fixed assets acquired under capital leases $ - $ -
========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) GENERAL
-------
The condensed consolidated financial statements included herein have been
prepared by the Registrant, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Consolidated herein are the
financial results of the Registrant's wholly-owned subsidiaries, North
Pittsburgh Telephone Company (North Pittsburgh), Penn Telecom, Inc., Pinnatech,
Inc. (Pinnatech) and Management Consulting Solutions, Inc. (MCSI). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. Nevertheless, the
Registrant believes that its disclosures herein are adequate to make the
information presented not misleading and, in the opinion of management, all
adjustments (which consisted only of normal recurring accruals) necessary to
present fairly the results of operations for the interim periods have been
reflected. It is suggested that these condensed consolidated financial
statements be read in conjunction with the financial statements and the notes
thereto included in the Registrant's latest annual report to the Securities and
Exchange Commission on Form 10-K.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1. Financial Condition
-------------------
(a) General
-------
There were no material changes in the Registrant's consolidated general
financial condition from the end of its preceding fiscal year on December 31,
1996 to March 31, 1997, the end of the three-month period reported herein.
(b) Liquidity and Capital Resources
-------------------------------
Consolidated capital expenditure commitments for the purchase and installation
of communications and other equipment at March 31, 1997 amounted to
approximately $2,033,000 with such amount being part of the 1997 Construction
Program of $23 million to $26 million. Funds for financing construction
expenditures in the three-month period ended March 31, 1997 were generated from
internal sources. Based on its 1997 construction budget, preliminary
construction budget for 1997 and projected cash flows, North Pittsburgh
anticipates 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. Beginning in the second quarter of 1997, a portion of the
funds used for construction are expected to be obtained from new debt financing
from the Rural Utilities Service. At March 31, 1997, construction work in
progress was $6,010,000. An additional $5,736,000 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.
4
<PAGE>
(c) Regulatory/Competition
----------------------
The Federal Communications Commission (FCC) continues its work on Rulemakings
related to the Telecommunications Act of 1996 (1996 Act) and the Pennsylvania
Public Utility Commission (PA PUC) is proceeding to 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 service at wholesale rates, provide number
portability if feasible, provide dialing parity, provide interconnection to any
requesting carrier for the transmission and routing of telephone exchange
service and exchange access and provide access to network elements. The Company
recently joined with seventeen (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-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 $1,722,000 (11.6%) in the three-month period
ended March 31, 1997 over the comparable period in 1996. This change was due to
increases in long distance and access services of $408,000 (3.9%), local network
services of $226,000 (10.7%), other operating revenues of $1,164,000 (114.4%)
offset by a decrease in telecommunication equipment sales of $114,000 (15.8%).
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. Telecommunication
equipment sales fluctuate from period to period depending on the sale of large
systems.
Total operating expenses for the three-month period ended March 31, 1997,
increased $1,342,000 (14.0%) over the preceding year. That change is
principally the result of an increase in network and other operating expenses of
$1,052,000 (17.6%), an increase in depreciation and amortization of $296,000
(12.8%) offset by a decrease in telecommunication equipment expenses of $121,000
(18.0%). Approximately $979,000 of the $1,052,000 increase in network and other
operating expenses was directly associated with the increase in other operating
revenues of $1,164,000 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 decrease in telecommunication equipment expenses
is related to the decrease in equipment sales discussed above. The increase in
total operating revenues discussed above coupled with the increase in total
operating expenses resulted in a 7.2% increase in net operating revenues in 1997
as compared to the same period in 1996.
Interest income decreased $47,000 primarily due to decreased levels of
investment in such instruments.
The increase in net operating revenues for the three-month period ended March
31, 1997, in conjunction with the increase in Sundry income, net, resulted in an
increase of $290,000 (5.7%) in earnings before income taxes.
5
<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.
--------
<TABLE>
<CAPTION>
Exhibit
Number Subject Applicability
- --------------------------- ------------------------------------ ---------------------
<S> <C> <C>
(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 Attached Hereto
computation of per
share earnings
(15) Letter re unaudited Not Applicable
interim financial
information
(18) Letter re change in accounting Not Applicable
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 March 31, 1997.
6
<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 April 25, 1997 /s/ A. P. Kimble
--------------------- ----------------------------------
A. P. Kimble, Vice President,
Secretary & Treasurer
Date April 25, 1997 /s/ N. W. Barthlow
--------------------- ----------------------------------
N. W. Barthlow, Vice President and
Assistant Secretary
7
<PAGE>
Exhibit No. (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
Ended March 31
---------------------------------------
1997 1996
--------------- ----------------
<S> <C> <C>
Net Earnings $3,195,000 $ 3,056,000
========== ===========
Average common shares outstanding 15,040,000 15,040,000*
========== ===========
Earnings per share of common stock $ .21 $ .20*
========== ===========
</TABLE>
*Adjusted for a 2 for 1 stock split-up effective May 22, 1996.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
1997 QUARTERLY REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 10,764
<SECURITIES> 608
<RECEIVABLES> 10,949
<ALLOWANCES> 0
<INVENTORY> 3,407
<CURRENT-ASSETS> 26,527
<PP&E> 129,166
<DEPRECIATION> 62,562
<TOTAL-ASSETS> 102,604
<CURRENT-LIABILITIES> 12,575
<BONDS> 20,736
<COMMON> 2,350
0
0
<OTHER-SE> 54,051
<TOTAL-LIABILITY-AND-EQUITY> 102,604
<SALES> 607
<TOTAL-REVENUES> 16,587
<CGS> 550
<TOTAL-COSTS> 10,950
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 420
<INCOME-PRETAX> 5,357
<INCOME-TAX> 2,162
<INCOME-CONTINUING> 3,195
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,195
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
