<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 2000
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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.
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(Exact name of registrant as specified in its charter)
Pennsylvania 25-1485389
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(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)
724-443-9600
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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_____
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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 24, 2000, 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 Sept. 30 Ended Sept. 30
--------------------- ---------------------
2000 1999 2000 1999
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Operating revenues:
Local network services $ 3,862 $ 3,461 $11,257 $10,148
Long distance and access services 13,628 11,440 40,538 35,012
Directory advertising, billing & other services 678 619 2,093 1,992
Telecommunication equipment sales 537 738 1,671 2,114
Other operating revenues 1,230 1,144 3,650 3,349
------- ------- ------- -------
Total Operating Revenues 19,935 17,402 59,209 52,615
Operating expenses:
Network and other operating expenses 11,837 8,004 32,274 23,148
Depreciation and amortization 4,355 3,502 12,352 10,032
State and local taxes 813 769 2,581 2,339
Telecommunication equipment expenses 467 642 1,549 1,901
------- ------- ------- -------
Total Operating Expenses 17,472 12,917 48,756 37,420
------- ------- ------- -------
Net Operating Revenues 2,463 4,485 10,453 15,195
Other expense (income), net:
Interest expense 912 607 2,245 1,616
Interest income (413) (242) (980) (698)
Sundry expense (income), net (114) (1,431) (2,714) (2,140)
------- ------- ------- -------
385 (1,066) (1,449) (1,222)
------- ------- ------- -------
Earnings before income taxes 2,078 5,551 11,902 16,417
Income taxes 920 2,272 5,032 6,667
------- ------- ------- -------
Net earnings $ 1,158 $ 3,279 $ 6,870 $ 9,750
======= ======= ======= =======
Weighted average common shares outstanding 15,005 15,005 15,005 15,005
======= ======= ======= =======
Basic and diluted earnings per share of
common stock $ .08 $ .22 $ .46 $ .65
======= ======= ======= =======
Dividends per share of common stock $ .17 $ .16 $ .50 $ .48
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
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NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
(Unaudited)
Sept. 30 Dec. 31
ASSETS 2000 1999
------ ----------- --------
<S> <C> <C>
Current Assets:
Cash and temporary investments $ 16,714 $ 12,480
Marketable securities available for sale 9,265 17,022
Accounts receivable:
Customers, net of allowance for doubtful accounts of
$340 and $356, respectively 5,028 4,975
Access service settlements and other 7,839 7,842
Prepaid expenses 704 614
Inventories of construction and operating materials and
supplies 4,395 4,754
Prepaid taxes 774 -
Deferred income tax - 199
-------- --------
Total current assets 44,719 47,886
-------- --------
Property, plant and equipment:
Land 475 475
Buildings 12,732 11,622
Equipment 177,012 154,061
-------- --------
190,219 166,158
Less accumulated depreciation and amortization (96,521) (86,688)
-------- --------
93,698 79,470
Construction in progress 9,997 8,279
-------- --------
Total property, plant and equipment, net 103,695 87,749
Investments 10,840 9,615
Deferred financing costs 697 764
Prepaid pension cost - 465
Other assets 1,199 1,313
-------- --------
$161,150 $147,792
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 3,425 $ 2,629
Obligation under capital lease 734 -
Accounts payable 6,073 7,086
Dividend payable 2,551 2,401
Other accrued liabilities 3,642 2,724
Federal and state income taxes - 305
-------- --------
Total current liabilities 16,425 15,145
-------- --------
Long-term debt 45,380 38,940
Obligation under capital lease 7,329 -
Deferred income taxes 9,173 9,526
Accrued pension and postretirement benefits 5,637 5,122
Other liabilities 1,598 1,812
Shareholders' equity:
Capital stock/Common stock 2,350 2,350
Capital in excess of par value 2,215 2,215
Retained earnings 71,714 72,347
Less cost of treasury stock (2000 and 1999-35,000 shares) (508) (508)
Accumulated other comprehensive income-unrealized gain
(loss) on available for sale securities, net (163) 843
-------- --------
Total shareholders' equity 75,608 77,247
-------- --------
$161,150 $147,792
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
2
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NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Thousands of Dollars)
<TABLE>
<CAPTION>
For the Nine Months
Ended Sept. 30
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash from operating activities:
Net earnings $ 6,870 $ 9,750
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization 12,352 10,032
Gain on sale of marketable securities (2,161) (352)
Equity (income) losses of affiliated companies (494) (515)
Changes in assets and liabilities:
Accounts receivable (50) 111
Inventories of construction and operating materials
and supplies 359 (555)
Deferred financing costs, prepaid pension cost
and other assets 646 367
Prepaid taxes (774) (481)
Accounts payable (1,013) 542
Other accrued liabilities 704 (627)
Accrued pension and postretirement benefits 515 93
Federal and state income taxes (305) 370
Deferred income taxes 560 -
Other, net (90) (250)
-------- --------
Total adjustments 10,249 8,735
-------- --------
Net cash from operating activities 17,119 18,485
-------- --------
Cash used for investing activities:
Expenditures for property and equipment (19,564) (20,963)
Net salvage on retirements 141 199
-------- --------
Net capital additions (19,423) (20,764)
-------- --------
Purchase of marketable securities available for sale (6,580) (8,398)
Proceeds from sale of marketable securities available for sale 14,778 7,271
Investments in affiliated entities (1,003) -
Distributions from affiliated entities 272 742
-------- --------
Net cash used for investing activities (11,956) (21,149)
-------- --------
Cash used for financing activities:
Cash dividends (7,353) (7,052)
Principal payments under capital lease obligation (812) -
Retirement of debt (2,130) (1,383)
Proceeds from issuance of new debt 9,366 7,409
-------- --------
Net cash used for financing activities (929) (1,026)
-------- --------
Net (decrease) increase in cash and temporary investments 4,234 (3,690)
Cash and temporary investments at beginning of period 12,480 16,786
-------- --------
Cash and temporary investments at end of period $ 16,714 $ 13,096
======== ========
Interest paid $ 2,036 $ 1,554
======== ========
Income taxes paid $ 6,013 $ 6,723
======== ========
</TABLE>
Supplemental disclosure of noncash financing activities:
A capital lease obligation of $8,875 was incurred when a subsidiary of the
Registrant entered into a lease for new equipment during the Third Quarter
of 2000.
See accompanying notes to condensed consolidated financial statements.
3
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NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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). 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. These condensed consolidated financial
statements should 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) COMPREHENSIVE INCOME
--------------------
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130) establishes requirements for disclosure of
comprehensive income. The objective of SFAS 130 is to report all changes in
equity that result from transactions and economic events other than
transactions with owners. Comprehensive income is the total of net income
and all other non-owner changes in equity. The reconciliation of net income
to comprehensive income (loss) is as follows (in thousands):
For the Three Months For the Nine Months
Ended Sept. 30 Ended Sept. 30
--------------------- ---------------------
2000 1999 2000 1999
---- ---- ---- ----
Net income $1,158 $3,279 $ 6,870 $9,750
Unrealized gain (loss) on
marketable securities
including reclassification
adjustments, net of tax 51 (465) (1,006) (272)
------ ------ ------- ------
Comprehensive income $1,209 $2,814 $ 5,864 $9,478
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PART I
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which are not historical are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements represent the
Registrant's present expectations or beliefs concerning future events. The
Registrant cautions that such statements are qualified by important factors that
could cause actual results to differ materially from those in the forward-
looking statements. Thus, results actually achieved may differ materially from
expected results included in these statements.
4
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1. Financial Condition
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(a) General
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There were no material changes in the Registrant's consolidated general
financial condition from the end of its preceding fiscal year on December
31, 1999 to September 30, 2000, 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, 2000
amounted to approximately $3,770,000, with such amount being part of the
2000 construction program, which is expected to be in excess of $27
million. Funds for financing construction expenditures in the nine-month
period ended September 30, 2000 were generated from internal sources and
debt financing. Based on its 2000 construction budget and projected cash
flows, the Registrant anticipates cash flows provided by operating
activities and cash reserves in 2000 to be sufficient to service long-term
debt, to pay dividends and to finance approximately 25% to 50% of capital
additions. The balance of capital additions will be financed from debt
financing available from the Rural Utilities Service. At September 30,
2000, construction work in progress was $9,997,000.
The Registrant and its subsidiaries have not experienced any difficulty in
the past in 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 is currently under rate-of-return regulation within its
intrastate jurisdiction. However, in July of 1998, North Pittsburgh joined
with 18 other companies and filed for an alternative form of regulation to
replace traditional rate base/rate-of-return regulation. In the filing,
North Pittsburgh proposed a price cap plan whereby rates for noncompetitive
services are allowed to be increased based on an index that measures
general economy wide price increases. Under the proposed plan, services
may also be declared competitive and thereby freed from all rate
regulation. In return for regulation under the price cap plan, North
Pittsburgh has also proposed a network modernization plan. The
Pennsylvania Public Utility Commission (PA PUC) entered an Order on January
20, 2000 modifying North Pittsburgh's plan for alternative regulation. On
February 4, 2000, North Pittsburgh filed a Petition for Reconsideration
seeking clarification and/or modification of the PA PUC's original Order.
The PA PUC responded to the Petition for Reconsideration with an Order
entered on March 30, 2000 in which it granted, in part, and denied, in
part, portions of North Pittsburgh's Petition. North Pittsburgh is
currently endeavoring to finalize a plan consistent with the January 20 and
March 30, 2000 orders, and will begin implementation upon final order of
the PA PUC, which is expected sometime during the fourth quarter of 2000.
On September 30, 1999, the PA PUC issued an Order dealing with a variety of
issues impacting Local Exchange Carriers in Pennsylvania. Referred to as
the Global Proceeding, the Order dealt with certain issues that affect
North Pittsburgh. Specifically, the Order allowed North Pittsburgh to
rebalance and lower access charges in order to prepare North Pittsburgh to
meet competition when it is introduced in the North Pittsburgh serving
area. The reduction in access charges is being offset by reimbursements
from an interim state universal service fund that is funded by all
telecommunication providers (excluding wireless) in the state. While
Verizon (formerly Bell Atlantic) has a pending court appeal regarding other
issues in the same Order, the rebalancing and lowering of access charges
and the implementation of the universal service funding was completed by
North Pittsburgh as of April 1, 2000. Because the rebalancing and
reduction of access charges is offset by reimbursement from the fund, North
Pittsburgh does not expect any significant impact on operations or revenues
in regard to the Global Order regardless of the outcome of the pending
court appeal.
The Federal Communications Commission (FCC) continues to work on
Rulemakings that will further spell out the specifics of the
Telecommunications Act of 1996 (the 1996 Act) as it relates to Rural
Telephone Companies. 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
5
<PAGE>
measured. However, the clear intent of the 1996 Act is to open up the
telecommunication markets to competition. The 1996 Act appears to mandate,
among other items, that North Pittsburgh, at some point in time, permit the
resale of its local exchange 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. North Pittsburgh, along with 17 other rural companies in
Pennsylvania, has been granted a temporary suspension of the Section 251(b)
and (c) interconnection requirements in the 1996 Act. The most recent
suspension expires on July 10, 2001. On April 19, 2000, AT&T Communications
Pennsylvania, Inc. and its affiliate, TCG Pittsburgh filed for a
Certificate of Authority with the PA PUC to provide facilities-based
competitive local exchange service in the service area of eight (8)
telephone companies in Western Pennsylvania, including North Pittsburgh,
using cable TV facilities. Following an Administrative Law Judge's decision
recommending approval of the application, the application is presently
pending final decision by the PA PUC.
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. At the same time, the Registrant through
its Penn Telecom, Inc. subsidiary is presently offering competitive local
exchange service in the local exchange territories of Verizon and Sprint
and presently has almost 9,000 access lines equivalent. 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 are expected to lessen or offset
any reductions in North Pittsburgh's revenue sources.
2. Results of Operations
---------------------
Total operating revenues increased $6,594,000 (12.5%) in the nine-month
period ended September 30, 2000 over the comparable period in 1999. This
change was due to an increase in local network services of $1,109,000
(10.9%), and an increase in long distance and access services of $5,526,000
(15.8%). Increased local network service revenues were attributable to
customer growth, growth in second lines and expanded penetration of
enhanced services. Higher long distance and access service revenues were
generally the result of an increase in the number of customers and minutes
of use.
Total operating expenses for the nine-month period ended September 30, 2000
increased $11,336,000 (30.3%) over the preceding year. That change was
principally the result of an increase in network and other operating
expenses of $9,126,000 (39.4%), and an increase in depreciation and
amortization of $2,320,000 (23.1%). The increase in network and other
operating expenses consisted of an increase in personnel costs due to an
expansion of existing businesses and an increase in personnel and other
expenses due to start-up activities of Competitive Local Exchange Carrier
and Internet-related services. The increase in depreciation and
amortization was 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 net operating revenues being $4,742,000 (31.2%) lower
for the nine months ended September, 2000 compared to the nine months ended
September, 1999.
Interest expense increased $629,000 (38.9%) due to an increased level of
debt financing in 2000. Sundry income, net increased $574,000 due to a
one-time gain on available for sale securities of $2,100,000 (after tax
$1,200,000 or $.08 per share) during 2000, offset partially by a one-time
gain from a cellular partnership transaction during 1999. The decrease in
net operating revenues for the nine-month period ended September 30, 2000,
in conjunction with the increase in Sundry income, net, resulted in a
decrease of $4,515,000 (27.5%) in earnings before income taxes.
Fluctuations in the revenue and expenses for the three-month period ended
September 30, 2000, as compared to the same quarterly period in 1999, are
generally attributable to the same reasons discussed in the year-to-date
comparisons.
6
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3. New Accounting Pronouncements
-----------------------------
In June, 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". The
pronouncement is effective for the Registrant's year beginning January 1,
2001. The Registrant does not expect this pronouncement will have a
significant impact on the consolidated financial statements.
In December of 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements".
The bulletin is effective for the Registrant beginning in the fourth
quarter of 2000. The Registrant does not expect this bulletin will have a
significant impact on the consolidated financial statements.
PART I
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
1. There have been no material changes in reported market risks faced by the
Registrant since December 31, 1999.
7
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SIGNATURES
Pursuant to the requirements of the Securities and 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 November 2, 2000 /s/ H. R. Brown
____________________ ________________________________________
H. R. Brown, President
Date November 2, 2000 /s/ A. P. Kimble
____________________ ________________________________________
A. P. Kimble, Vice President & Treasurer
<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 Annual
Report on Form 10-K
for the year ended
December 31, 1998 and
Incorporated Herein
by Reference.
(4) Instruments defining the rights of Provided in
security holders including indentures Registration of
Securities of Certain
Successor Issuers on
Form 8-B filed on
June 25, 1985 and
Incorporated Herein by
Reference.
(10) Material Contracts Provided in Quarterly
Report on Form 10-Q
for the quarter ended
September 30, 1999
and Incorporated
Herein by Reference.
(11) Statement of computation of earnings Attached Hereto
per share
(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 - No reports on Form 8-K were filed during
-------------------
the quarter ended September 30, 2000.
