<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, 1998
-----------------------------------------
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)
724 443-9600
- -----------------------------------------------------------------------------
(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 23, 1998, 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
---------------------------------------------
1998 1997 1998 1997
---------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating revenues:
Local network services $ 2,983 $ 2,404 $ 5,808 $ 4,743
Long distance and access services 11,801 11,111 22,797 21,984
Directory advertising, billing & other services 569 525 1,191 1,111
Telecommunication equipment sales 866 886 1,426 1,494
Other operating revenues 1,020 2,938 2,113 5,119
---------- ------- ------- -------
Total Operating Revenues 17,239 17,864 33,335 34,451
---------- ------- ------- -------
Operating expenses:
Network and other operating expenses 6,136 7,558 12,352 14,576
Depreciation and amortization 2,922 2,677 5,820 5,291
State and local taxes 702 710 1,457 1,489
Telecommunication equipment expenses 807 789 1,343 1,339
---------- ------- ------- -------
Total Operating Expenses 10,567 11,734 20,972 22,695
---------- ------- ------- -------
Net Operating Revenues 6,672 6,130 12,363 11,756
Other expense (income), net:
Interest expense 456 395 919 815
Interest income (387) (115) (769) (265)
Sundry expense (income), net (195) (264) (1,099) (265)
---------- ------- ------- -------
(126) 16 (949) 285
---------- ------- ------- -------
Earnings before income taxes 6,798 6,114 13,312 11,471
Income taxes 2,732 2,399 4,995 4,561
---------- ------- ------- -------
Net earnings $ 4,066 $ 3,715 $ 8,317 $ 6,910
========== ======= ======= =======
Weighted average common shares outstanding 15,005 15,025 15,005 15,032
========== ======= ======= =======
Basic and diluted earnings per share of common stock $.27 $.25 $.55 $.46
========== ======= ======= =======
Dividends per share of common stock $.15 $.14 $.35 $.28
========== ======= ======= =======
</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>
June 30 Dec. 31
ASSETS 1998 1997
------ ---------- ---------
<S> <C> <C>
Current Assets:
Cash and temporary investments $ 24,986 $ 15,938
Marketable securities available for sale - 16,847
Accounts receivable:
Customers 3,537 3,401
Access service settlements and other 7,028 5,995
Prepaid Expenses - 25
Inventories of construction and operating materials and
supplies 3,713 3,360
Prepaid taxes 510 -
-------- --------
Total current assets 39,774 45,566
-------- --------
Property, plant and equipment
Land 475 475
Buildings 10,792 10,543
Equipment 126,079 122,492
-------- --------
137,346 133,510
Less accumulated depreciation and amortization 73,795 69,303
-------- --------
63,551 64,207
Construction in progress 10,857 6,990
-------- --------
Total property, plant and equipment, net 74,408 71,197
Investments 8,837 7,499
Deferred financing costs 906 954
Prepaid pension cost 931 580
Other assets 1,370 2,037
-------- --------
$126,226 $127,833
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt $ 829 $ 803
Accounts payable 6,390 4,794
Accrued legal settlement - 3,180
Dividend payable 2,251 2,101
Deferred income taxes - 5,289
Other accrued liabilities 1,847 2,304
Federal and state income taxes 3,100 389
-------- --------
Total current liabilities 14,417 18,860
-------- --------
Long-term debt 26,613 27,037
Deferred income taxes 6,831 6,560
Postretirement benefits 4,885 4,764
Other liabilities 1,858 2,052
Shareholders' equity:
Capital stock/Common stock 2,350 2,350
Capital in excess of par value 2,215 2,215
Retained earnings 67,565 64,501
Unrealized gain (loss) on available for sale securities, net - 2
Less cost of treasury stock (1998 and 1997-35,000 shares) (508) (508)
-------- --------
Total shareholders' equity 71,622 68,560
-------- --------
$126,226 $127,833
======== ========
</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
---------------------
1998 1997
-------- --------
<S> <C> <C>
Cash from operating activities:
Net earnings $ 8,317 $ 6,910
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization 5,820 5,291
Gain on sale of marketable securities (1) (90)
Equity (income) losses of affiliated companies (751) (250)
Provision for postretirement benefits other than pensions 121 133
Changes in assets and liabilities:
Accounts receivable (1,169) (1,600)
Inventories of construction and operating materials &
supplies (353) 299
Prepaid federal and state taxes (510) (432)
Accounts payable 1,596 1,126
Other accrued liabilities (651) (405)
Federal and state income taxes (2,307) 282
Deferred financing costs, prepaid pension costs
and other assets 364 (18)
Other, net 62 (104)
-------- --------
Total adjustments 2,221 4,232
-------- --------
Net cash from operating activities 10,538 11,142
-------- --------
Cash used for investing activities:
Expenditures for property and equipment (9,457) (9,180)
Net salvage on retirements 389 134
-------- --------
Net capital additions (9,068) (9,046)
-------- --------
Proceeds from redemption of marketable securities held to
maturity - 150
Purchase of marketable securities available for sale - (131)
Proceeds from sale of marketable securities available for sale 105 445
Proceeds from sale of investment 13,561 -
Investments in affiliated entities (630) (1,901)
Distributions from affiliated entities 43 -
-------- --------
Net cash used for investing activities 4,011 (10,483)
-------- --------
Cash used for financing activities:
Cash dividends (5,103) (4,061)
Retirement of debt (398) (373)
Proceeds from issuance of debt - 3,132
Purchase of treasury stock - (508)
Payment on capital lease obligations - (118)
-------- --------
Net cash used for financing activities (5,501) (1,928)
-------- --------
Net (decrease) increase in cash and temporary investments 9,048 (1,269)
Cash and temporary investments at beginning of period 15,938 11,313
-------- --------
Cash and temporary investments at end of period $24,986 $ 10,044
======== ========
Interest paid $ 876 $ 760
======== ========
Income taxes paid $ 7,302 $ 4,293
======== ========
</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. (Penn Telecom) 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.
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, 1997 to June 30, 1998, 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, 1998
amounted to approximately $1,301,000 with such amount being part of
the 1998 Construction Program of $23 million to $26 million. Funds
for financing construction expenditures in the six-month period
ended June 30, 1998 were generated from internal sources. Based on
its 1998 construction budget and projected cash flows, the
Registrant anticipates cash flows provided by operating activities
and cash reserves in 1998 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 debt
financing available from the Rural Utilities Service. At June 30,
1998, construction work in progress was $10,802,000. An additional
$5,818,000 is expected to be expended to complete these projects.
In January 1998, the Registrant delivered shares of SmarTalk
Teleservices, Inc. ("SmarTalk"), as well as cash, for transfer to
another shareholder of Conquest Telecommunications Services Corp.
("Conquest") in accordance with an agreement reached in 1997 to
settle certain claims. In January 1998, the Registrant also sold
its remaining shares of SmarTalk to Waterton Investment Group II,
L.L.C. ("Waterton") for $14,311,000 in cash pursuant to an option
agreement entered into by the Registrant and Waterton in December
1997.
4
<PAGE>
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 above 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
----------------------
North Pittsburgh, as required under Chapter 30 of the Pennsylvania
Public Utility Code, filed on July 1, 1998 its advance notice of
intent to file a petition on July 31, 1998 with the Pennsylvania
Public Utility Commission ("PA PUC") for approval of an alternative
form of regulation to replace traditional rate base/rate of return
regulation. This petition will include a plan where North
Pittsburgh will move to a more streamlined form of rate regulation
under price caps in return for some pricing flexibility for services
that are declared to be competitive. In addition, North Pittsburgh
will include a proposed network modernization plan in which North
Pittsburgh will commit to certain benchmarks over a number of years
to provide broadband services throughout its service area.
While North Pittsburgh is still in the process of developing the
final price cap plan and network modernization proposal, we do
expect that the filing of this petition for an alternative form of
regulation under price caps will be of significance to North
Pittsburgh. Under Chapter 30 rules, the PA PUC must act on the
petition within nine (9) months, or by May 1, 1999. However, it is
not possible at this time to determine the PA PUC's disposition of
the filed petition and plan, or the effect on North Pittsburgh's
financial position or results of operation.
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
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 approved the petition on July 10, 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 is expected to lessen or offset any
reductions in North Pittsburgh's revenue sources.
In March, 1998, Penn Telecom received notification from the PA PUC
that its application to provide competitive local exchange service
in the areas presently served by GTE and Bell Atlantic in
Pennsylvania had been approved. Penn Telecom has begun operating in
the Bell Atlantic area and has secured its first customer, a large
apartment complex.
5
<PAGE>
2. Results of Operations
---------------------
Total operating revenues decreased $1,116,000 (3.2%) in the six-
month period ended June 30, 1998 over the comparable period in 1997.
This change was due to an increase in local network services of
$1,065,000 (22.5%), offset by a decrease in other operating revenues
of $3,006,000 (58.7%). Increased local network service revenues
were attributable to customer growth, growth in second lines and
expanded penetration of enhanced services. The decrease in other
operating revenues is primarily due to the cessation of operations
and subsequent sale of MCSI on July 31, 1997. Long distance and
access services increased only moderately for the six-month period
ended June 30, 1998 due to the implementation of a toll savings plan
in July, 1997, and rate decreases on interstate switched access
revenues beginning January 1, 1998. The introduction of the toll
savings 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.
Total operating expenses for the six-month period ended June 30,
1998 decreased $1,723,000 (7.6%) over the preceding year. That
change is principally the result of a decrease in network and other
operating expenses of $2,224,000 (15.3%), offset by an increase in
depreciation and amortization of $529,000 (10.0%). The net decrease
of $2,224,000 in network and other operating expenses consists of a
decrease of $3,250,000 resulting from the sale of MCSI, offset by an
increase of $723,000 due to the introduction of a data processing
transition plan, increased marketing efforts and on-going increases
in maintenance, customer service and other administrative expenses.
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 total operating revenues discussed above
coupled with the decrease in total operating expenses resulted in
net operating revenues increasing $607,000 (5.2%) between 1998 and
1997.
Interest income increased $504,000 primarily due to increased levels
of investment in temporary instruments. The net increase in Sundry
income (non-operating) of $834,000 is primarily due to an increase
in cellular partnership income in 1998 as compared to 1997 and
receipts from a one-time insurance settlement.
The increase in net operating revenues for the six-month period
ended June 30, 1998, in conjunction with the increase in Sundry
income, net, resulted in an increase of $1,841,000 (16.1%) in
earnings before income taxes.
Fluctuations in the revenues and expenses for the three-month period
ended June 30, 1998, as compared to the same quarterly period in
1997 are generally attributable to the same reasons above in the
year-to-date comparisons.
3. Adoption of New Accounting Pronouncements
-----------------------------------------
The Registrant will implement SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" in 1998. SFAS No.
131 establishes standards for the way that public enterprises report
information about operating segments in annual and interim financial
statements. Because SFAS No. 131 has a disclosure-only effect on the
notes to the Registrant's financial statements, adoption of SFAS No.
131 has no impact on the Registrant's results of operations or
financial condition. In the year of adoption, the disclosure
requirements of SFAS No. 131 need not be applied to interim
financial statements. The Registrant will implement SFAS No. 131 in
its full year 1998 financial statements.
In June, 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The Registrant does not expect this pronouncement to
impact the consolidated financial statements because the Registrant
has not entered into derivative or hedging transactions.
6
<PAGE>
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
1. This item is not applicable.
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, 1998 /s/ H. R. Brown
------------------------ ----------------------------------------
H. R. Brown, President
Date July 24, 1998 /s/ A. P. Kimble
------------------------ ----------------------------------------
A. P. Kimble, Vice President & Treasurer
<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
(a) The 1998 Annual Meeting of Shareholders was held on May 15, 1998.
(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 1999 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 12,891,183 388,928
Dr. Charles E. Cole 13,036,853 243,258
Richard R. Kauffman 12,979,193 300,918
Allen P. Kimble 13,055,717 224,394
Jay L. Sedwick 12,943,254 336,857
Charles E. Thomas, Jr. 13,040,289 239,822
Barton B. Williams 13,053,493 226,618
</TABLE>
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 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 March 31, 1998 and
Incorporated Herein by
Reference.
(4) Instruments defining the Provided in Registration of
rights of security holders Securities of Certain Successor
including indentures 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
</TABLE>
<PAGE>
<TABLE>
Exhibit
Number Subject Applicability
- ---------------- ----------------------- ---------------------
<S> <C> <C>
(15) Letter re unaudited interim Not Applicable
financial information
(18) Letter re change in Not Applicable
accounting principles
(19) Report furnished to Not Applicable
security holders
(22) Published report regarding Not Applicable
matters submitted to a
vote of security holders
(23) Consents of experts and Not Applicable
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, 1998.
<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
------------------------- ------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Earnings $ 4,066,000 $ 3,715,000 $ 8,317,000 $ 6,910,000
=========== =========== =========== ===========
Weighted average common
shares outstanding 15,005,000 15,025,000 15,005,000 15,032,000
=========== =========== =========== ===========
Basic and diluted earnings per share
of common stock $ .27 $ .25 $ .55 $ .46
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM JUNE 30,
1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 24,986
<SECURITIES> 0
<RECEIVABLES> 10,565
<ALLOWANCES> 0
<INVENTORY> 3,713
<CURRENT-ASSETS> 39,774
<PP&E> 148,203
<DEPRECIATION> 73,795
<TOTAL-ASSETS> 126,226
<CURRENT-LIABILITIES> 14,417
<BONDS> 26,613
<COMMON> 2,350
0
0
<OTHER-SE> 69,272
<TOTAL-LIABILITY-AND-EQUITY> 126,226
<SALES> 1,426
<TOTAL-REVENUES> 33,335
<CGS> 1,343
<TOTAL-COSTS> 20,972
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 919
<INCOME-PRETAX> 13,312
<INCOME-TAX> 4,995
<INCOME-CONTINUING> 8,317
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,317
<EPS-PRIMARY> .55
<EPS-DILUTED> .55
</TABLE>
