<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 March 31, 2000
------------------------------------------
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
- -------------------------------------------------------------------------------
(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 April 20, 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
Ended March 31
--------------------
2000 1999
-------- --------
<S> <C> <C>
Operating revenues:
Local network services $ 3,613 $ 3,332
Long distance and access services 12,896 11,886
Directory advertising, billing & other services 667 695
Telecommunication equipment sales 601 608
Other operating revenues 1,275 1,156
------- -------
Total Operating Revenues 19,052 17,677
Operating expenses:
Network and other operating expenses 9,393 7,130
Depreciation and amortization 3,878 3,218
State and local taxes 931 801
Telecommunication equipment expenses 556 607
------- -------
Total Operating Expenses 14,758 11,756
------- -------
Net Operating Revenues 4,294 5,921
Other expense (income), net:
Interest expense 639 510
Interest income (283) (267)
Sundry expense (income), net (247) (17)
------- -------
109 226
------- -------
Earnings before income taxes 4,185 5,695
Income taxes 1,749 2,279
------- -------
Net earnings $ 2,436 $ 3,416
======= =======
Weighted average common shares outstanding 15,005 15,005
======= =======
Basic and diluted earnings per share of
common stock $.16 $.23
======= =======
Dividends per share of common stock $.16 $.16
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
(Unaudited)
Mar. 31 Dec. 31
ASSETS 2000 1999
------ -------- --------
<S> <C> <C>
Current Assets:
Cash and temporary investments $ 9,437 $ 12,480
Marketable securities available for sale 17,635 17,022
Accounts receivable:
Customers, net of allowance for doubtful accounts of
$327 and $356, respectively 4,821 4,975
Access service settlements and other 7,691 7,842
Prepaid expenses 445 614
Inventories of construction and operating materials and
supplies 5,181 4,754
Prepaid taxes 872 -
Deferred income tax - 199
-------- --------
Total current assets 46,082 47,886
-------- --------
Property, plant and equipment:
Land 475 475
Buildings 11,854 11,622
Equipment 161,286 154,061
-------- --------
173,615 166,158
Less accumulated depreciation and amortization 90,388 86,688
-------- --------
83,277 79,470
Construction in progress 10,527 8,279
-------- --------
Total property, plant and equipment, net 93,754 87,749
Investments 9,720 9,615
Deferred financing costs 742 764
Prepaid pension cost 116 465
Other assets 1,323 1,313
-------- --------
$151,737 $147,792
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 2,825 $ 2,629
Accounts payable 7,692 7,086
Dividend payable 2,401 2,401
Other accrued liabilities 2,787 2,724
Federal and state income taxes 1,127 305
-------- --------
Total current liabilities 16,832 15,145
-------- --------
Long-term debt 40,413 38,940
Deferred income taxes 9,641 9,526
Accrued postretirement benefits 5,464 5,122
Other liabilities 1,831 1,812
Shareholders' equity:
Capital stock/Common stock 2,350 2,350
Capital in excess of par value 2,215 2,215
Retained earnings 72,382 72,347
Less cost of treasury stock (2000 and 1999-35,000 shares) (508) (508)
Accumulated other comprehensive income-unrealized gain
on available for sale securities, net 1,117 843
-------- --------
Total shareholders' equity 77,556 77,247
-------- --------
$151,737 $147,792
======== ========
</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 Mar. 31
--------------------
2000 1999
--------- --------
<S> <C> <C>
Cash from operating activities:
Net earnings $ 2,436 $ 3,416
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization 3,878 3,218
Gain on sale of marketable securities (24) (12)
Equity (income) losses of affiliated companies (205) (149)
Changes in assets and liabilities:
Accounts receivable 305 186
Inventories of construction and operating materials
and supplies (427) 99
Deferred financing costs, prepaid pension cost
and other assets 361 (180)
Prepaid taxes (872) (862)
Accounts payable 606 (560)
Other accrued liabilities 82 (424)
Accrued postretirement benefits 342 38
Federal and state income taxes 942 1,806
Other, net 167 185
------- -------
Total adjustments 5,155 3,345
------- -------
Net cash from operating activities 7,591 6,761
------- -------
Cash used for investing activities:
Expenditures for property and equipment (9,890) (7,766)
Net salvage on retirements 9 (102)
------- -------
Net capital additions (9,881) (7,868)
------- -------
Purchase of marketable securities available for sale (2,845) (2,514)
Proceeds from sale of marketable securities available for sale 2,724 1,984
Distributions from affiliated entities 100 -
------- -------
Net cash used for investing activities (9,902) (8,398)
------- -------
Cash used for financing activities:
Cash dividends (2,401) (2,251)
Retirement of debt (654) (462)
Proceeds from issuance of new debt 2,323 -
------- -------
Net cash used for financing activities (732) (2,713)
------- -------
Net (decrease) increase in cash and temporary investments (3,043) (4,350)
Cash and temporary investments at beginning of period 12,480 16,786
------- -------
Cash and temporary investments at end of period $ 9,437 $12,436
======= =======
Interest paid $ 618 $ 488
======= =======
Income taxes paid $ 614 $ 342
======= =======
</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). 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
Ended Mar. 31
--------------------
2000 1999
---- ----
Net income $2,436 $3,416
Unrealized gain (loss) on
marketable securities 274 189
------ ------
Comprehensive income $2,710 $3,605
====== ======
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
Pinancial 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.
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, 1999 to March 31, 2000, 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, 2000
amounted to approximately $6,910,000, 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 three-month
period ended March 31, 2000 were generated from internal sources and debt
financing.
4
<PAGE>
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 March 31, 2000, construction work in
progress was $10,527,000.
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 is currently under rate-of-return regulation within the
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 has accepted the modified Chapter
30 plan and will begin implementation upon final order of the PA PUC which
is expected sometime during the third 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 allows 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 to be offset by reimbursements
from an interim state universal service fund that is funded by all
telecommunication providers (excluding wireless) in the state. While a
number of parties, including North Pittsburgh, have filed court appeals
regarding other issues in the same Order, the rebalancing and lowering of
access charges and the implementation of universal service funding is
expected to move forward and should be implemented before the end of the
second quarter of 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 appeals.
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). 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. The 1996 Act 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. North Pittsburgh along with 17 other rural companies in
Pennsylvania was granted a temporary suspension of the interconnection
requirements in the 1996 Act that expires on July 10, 2000. North
Pittsburgh recently filed a petition seeking further extension of the
suspension until July
5
<PAGE>
10, 2001. A decision by the PA PUC on the suspension extension is expected
during the second or third quarter of 2000.
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 are expected to lessen or offset any reductions in North
Pittsburgh's revenue sources.
2. Results of Operations
---------------------
Total operating revenues increased $1,375,000 (7.5%) in the three-month
period ended March 31, 2000 over the comparable period in 1999. This
change was due to an increase in local network services of $281,000 (8.4%),
and an increase in long distance and access services of $1,010,000 (3.5%).
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 services revenues were generally
the result of an increase in the number of customers and minutes of use.
Total operating expenses for the three-month period ended March 31, 2000
increased $3,002,000 (25.5%) over the preceding year. That change was
principally the result of an increase in network and other operating
expenses of $2,263,000 (31.7%), and an increase in depreciation and
amortization of $660,000 (20.5%). The increase in network and other
operating expenses consisted of an increase in personnel costs due to an
expansion of existing business 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 $1,627,000 (27.5%)
lower for the first quarter of 2000 compared to the first quarter of 1999.
Interest expense increased $129,000 (25.3%) due to an increased level of
debt financing in 2000. The decrease in net operating revenues for the
three-month period ended March 31, 2000, in conjunction with the increase
in Sundry income, net, resulted in a decrease of $1,510,000 (26.5%) in
earnings before income taxes.
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.
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.
6
<PAGE>
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 May 1, 2000 /s/ N. W. Barthlow
____________________ __________________________________________
N. W. Barthlow, Vice President & Secretary
Date May 1, 2000 /s/ A. P. Kimble
____________________ __________________________________________
A. P. Kimble, Vice President & Treasurer
7
<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 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 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 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
</TABLE>
(b) Reports on Form 8-K - No reports on Form 8-K were filed during the
-------------------
quarter ended March 31, 2000.
8
<PAGE>
EXHIBIT 11
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Statement of Computation of Earnings per Share
<TABLE>
<CAPTION>
For the Three Months
Ended Mar. 31
------------------------
2000 1999
----------- -----------
<S> <C> <C>
Net Earnings $ 2,436,000 $ 3,416,000
=========== ===========
Weighted average common shares
outstanding 15,005,000 15,005,000
=========== ===========
Basic and diluted earnings per share
of common stock $ .16 $ .23
=========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31,
2000 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 9,437
<SECURITIES> 17,635
<RECEIVABLES> 12,839
<ALLOWANCES> 327
<INVENTORY> 5,181
<CURRENT-ASSETS> 46,082
<PP&E> 184,142
<DEPRECIATION> 90,388
<TOTAL-ASSETS> 151,737
<CURRENT-LIABILITIES> 16,832
<BONDS> 40,413
0
0
<COMMON> 2,350
<OTHER-SE> 75,206
<TOTAL-LIABILITY-AND-EQUITY> 151,737
<SALES> 601
<TOTAL-REVENUES> 19,052
<CGS> 556
<TOTAL-COSTS> 14,758
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 639
<INCOME-PRETAX> 4,185
<INCOME-TAX> 1,749
<INCOME-CONTINUING> 2,436
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,436
<EPS-BASIC> .16
<EPS-DILUTED> .16
</TABLE>
