<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 June 30, 2000
---------------------------------------------
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.
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(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)
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
--- ---
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 August 1, 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 Six Months
Ended June 30 Ended June 30
-------------------- ------------------
2000 1999 2000 1999
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Operating revenues:
Local network services $ 3,782 $ 3,355 $ 7,395 $ 6,687
Long distance and access services 14,014 11,505 26,911 23,112
Directory advertising, billing & other services 748 768 1,415 1,376
Telecommunication equipment sales 533 678 1,134 1,373
Other operating revenues 1,145 1,047 2,420 2,205
------- ------- ------- -------
Total Operating Revenues 20,222 17,353 39,275 34,753
Operating expenses:
Network and other operating expenses 11,042 7,997 20,437 15,144
Depreciation and amortization 4,118 3,313 7,997 6,530
State and local taxes 838 768 1,768 1,570
Telecommunication equipment expenses 528 669 1,083 1,259
------- ------- ------- -------
Total Operating Expenses 16,526 12,747 31,285 24,503
------- ------- ------- -------
Net Operating Revenues 3,696 4,606 7,990 10,250
Other expense (income), net:
Interest expense 694 499 1,333 1,010
Interest income (284) (211) (567) (456)
Sundry expense (income), net (2,353) (392) (2,600) (709)
------- ------- ------- -------
(1,943) (104) (1,834) (155)
------- ------- ------- -------
Earnings before income taxes 5,639 4,710 9,824 10,405
Income taxes 2,363 1,931 4,112 4,210
------- ------- ------- -------
Net earnings $ 3,276 $ 2,779 $ 5,712 $ 6,195
======= ======= ======= =======
Weighted average common shares outstanding 15,005 15,005 15,005 15,005
======= ======= ======= =======
Basic and diluted earnings per share of
common stock $.22 $.18 $.38 $.41
======= ======= ======= =======
Dividends per share of common stock $.17 $.16 $.33 $.32
======= ======= ======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
<TABLE>
<CAPTION>
(Unaudited)
June 30 Dec. 31
ASSETS 2000 1999
------ ----------- -------
<S> <C> <C>
Current Assets:
Cash and temporary investments $ 14,366 $ 12,480
Marketable securities available for sale 11,012 17,022
Accounts receivable:
Customers, net of allowance for doubtful accounts of
$323 and $356, respectively 4,749 4,975
Access service settlements and other 9,031 7,842
Prepaid expenses 525 614
Inventories of construction and operating materials and
supplies 5,571 4,754
Prepaid taxes 506 -
Deferred income tax - 199
-------- --------
Total current assets 45,760 47,886
-------- --------
Property, plant and equipment:
Land 475 475
Buildings 12,663 11,622
Equipment 165,485 154,061
-------- --------
178,623 166,158
Less accumulated depreciation and amortization 94,181 86,688
-------- --------
84,442 79,470
Construction in progress 9,589 8,279
-------- --------
Total property, plant and equipment, net 94,031 87,749
Investments 9,834 9,615
Deferred financing costs 719 764
Prepaid pension cost 26 465
Other assets 1,273 1,313
-------- --------
$151,643 $147,792
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 3,140 $ 2,629
Accounts payable 6,623 7,086
Dividend payable 2,551 2,401
Other accrued liabilities 2,992 2,724
Federal and state income taxes 227 305
-------- --------
Total current liabilities 15,533 15,145
-------- --------
Long-term debt 43,148 38,940
Deferred income taxes 8,902 9,526
Accrued postretirement benefits 5,518 5,122
Other liabilities 1,592 1,812
Shareholders' equity:
Capital stock/Common stock 2,350 2,350
Capital in excess of par value 2,215 2,215
Retained earnings 73,107 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 (214) 843
-------- --------
Total shareholders' equity 76,950 77,247
-------- --------
$151,643 $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 Six Months
Ended June 30
-------------------
2000 1999
-------- --------
<S> <C> <C>
Cash from operating activities:
Net earnings $ 5,712 $ 6,195
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization 7,997 6,530
Gain on sale of marketable securities (2,163) (186)
Equity (income) losses of affiliated companies (361) (289)
Changes in assets and liabilities:
Accounts receivable (963) (918)
Inventories of construction and operating materials
and supplies (817) (1,371)
Deferred financing costs, prepaid pension cost
and other assets 524 275
Prepaid taxes (506) (848)
Accounts payable (463) 1,560
Other accrued liabilities 48 (915)
Accrued postretirement benefits 396 65
Federal and state income taxes (78) (420)
Deferred income taxes 325 -
Other, net 109 (47)
-------- --------
Total adjustments 4,048 3,436
-------- --------
Net cash from operating activities 9,760 9,631
-------- --------
Cash used for investing activities:
Expenditures for property and equipment (14,405) (13,845)
Net salvage on retirements 106 64
-------- --------
Net capital additions (14,299) (13,781)
-------- --------
Purchase of marketable securities available for sale (6,103) (5,777)
Proceeds from sale of marketable securities available for sale 12,469 4,870
Distributions from affiliated entities 142 2,102
-------- --------
Net cash used for investing activities (7,791) (12,586)
-------- --------
Cash used for financing activities:
Cash dividends (4,802) (4,652)
Retirement of debt (1,353) (920)
Proceeds from issuance of new debt 6,072 -
-------- --------
Net cash used for financing activities (83) (5,572)
-------- --------
Net (decrease) increase in cash and temporary investments 1,886 (8,527)
Cash and temporary investments at beginning of period 12,480 16,786
-------- --------
Cash and temporary investments at end of period $ 14,366 $ 8,259
======== ========
Interest paid $ 1,294 $ 969
======== ========
Income taxes paid $ 4,615 $ 4,813
======== ========
</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):
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30 Ended June 30
--------------------- -------------------
2000 1999 2000 1999
------- ------ ------- ------
<S> <C> <C> <C> <C>
Net income $ 3,276 $2,779 $ 5,712 $6,195
Unrealized gain (loss) on
marketable securities
including reclassification
adjustments (1,331) 4 (1,057) 193
------- ------ ------- ------
Comprehensive income $ 1,945 $2,783 $ 4,655 $6,388
======= ====== ======= ======
</TABLE>
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
<PAGE>
1. Financial Condition
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(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 June 30, 2000, 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, 2000
amounted to approximately $4,409,000, 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 six-month
period ended June 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 June 30, 2000, construction
work in progress was $9,589,000.
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 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 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 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 the universal service funding has
been completed 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 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
5
<PAGE>
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, has been granted
temporary suspensions of the Section 251(b) and (c) interconnection
requirements in the 1996 Act. The most recent suspension expires on July
10, 2001 and does not apply to facilities-based competition. On April 19,
2000, AT&T Communications Pennsylvania, Inc. filed for a Certificate of
Authority with the PA PUC to provide facilities-based telephone service in
the service area of eight (8) telephone companies in Western Pennsylvania,
including North Pittsburgh, using the cable TV facilities of AT&T
affiliate, TCG Pittsburgh. The application is presently the subject of
hearings before the PA PUC and a decision is expected by the fourth 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 $4,522,000 (13.0%) in the six-month
period ended June 30, 2000 over the comparable period in 1999. This change
was due to an increase in local network services of $708,000 (10.6%), and
an increase in long distance and access services of $3,799,000 (16.4%).
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 six-month period ended June 30, 2000
increased $6,782,000 (27.7%) over the preceding year. That change was
principally the result of an increase in network and other operating
expenses of $5,293,000 (34.9%), and an increase in depreciation and
amortization of $1,467,000 (22.5%). 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 $2,260,000 (22.1%) lower
for the six months ended June, 2000 compared to the six months ended June,
1999.
Interest expense increased $323,000 (32.0%) due to an increased level of
debt financing in 2000. Sundry income, net increased $1,891,000 due to a
one-time gain on available for sale securities of $2,100,000 (after tax
$1,200,000 or $.08 per share). The decrease in net operating revenues for
the six-month period ended June 30, 2000, in conjunction with the increase
in Sundry income, net, resulted in a decrease of $581,000 (5.6%) in
earnings before income taxes.
Fluctuations in the revenue and expenses for the three-month period ended
June 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.
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
6
<PAGE>
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.
7
<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)
8/7/2000 /s/ H. R. Brown
Date____________________ ________________________________________
H. R. Brown, President
8/7/2000 /s/ A. P. Kimble
Date____________________ ________________________________________
A. P. Kimble, Vice President & Treasurer
8
<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The 2000 Annual Meeting of Shareholders was held on May 19, 2000.
(b,c) The only matter voted upon at the Annual Meeting was the election of
Directors. The vote tabulation in respect to each nominee to serve
as Director until the 2001 Annual Meeting of Shareholders shown in
the following table:
<TABLE>
<CAPTION>
Number of Number of
Shares Shares
Name Voted in Favor Withheld
---- -------------- ---------
<S> <C> <C>
Nominees Elected:
----------------
Harry R. Brown 11,971,440 715,163
Dr. Charles E. Cole 12,318,240 368,363
Allen P. Kimble 12,090,559 596,044
Stephen G. Kraskin 12,363,705 322,898
David E. Nelsen 12,360,305 326,298
Jay L. Sedwick 12,344,290 342,313
Charles E. Thomas, Jr. 12,367,205 319,398
Nominees Not Elected:
---------------------
George J. Steffish, III 12,000 -
</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, 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.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Subject Applicability
------- ------- -------------
<S> <C> <C>
(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 June 30, 2000.
10
