-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OfPZ37RUb1eu0/xZBi7HpmE3+GUZ2bZxG6qx48WdXgcOaHi2V1+aT+8Kbx/WNdGC Qc+bYC5/ZTjTSZ0MZZUXrw== 0000950132-98-000227.txt : 19980323 0000950132-98-000227.hdr.sgml : 19980323 ACCESSION NUMBER: 0000950132-98-000227 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980319 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTH PITTSBURGH SYSTEMS INC CENTRAL INDEX KEY: 0000764765 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 251485389 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-13716 FILM NUMBER: 98569215 BUSINESS ADDRESS: STREET 1: 4008 GIBSONIA RD CITY: GIBSONIA STATE: PA ZIP: 15044-9311 BUSINESS PHONE: 4124439600 MAIL ADDRESS: STREET 1: 4008 GIBSONIA ROAD CITY: GIBSONIA STATE: PA ZIP: 15044-9311 10-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 ------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- ------------------- 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 (IRS Employer Identification No.) incorporation or organization) 4008 Gibsonia Road, Gibsonia, Pennsylvania 15044-9311 --------------------------------------------- ----------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code 724/443-9600 --------------- Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of each exchange on which registered - ----------------------- ----------------------------------------- None Not Applicable (Cover page continued on next page) Securities registered pursuant to Section 12(g) of the Act: Common Stock , par value $.15625 per share ---------------------------------------------------- (Title of Class) SECTION 13 OR 15(d) FILING REQUIREMENTS --------------------------------------- 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 (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------- ------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES ------------------------------------------------------------- Based on the average of the bid and asked prices on March 13, 1998, the aggregate market value of the voting stock held by non-affiliates of the Registrant is $249,500,000. (Includes 1,550,695 shares beneficially owned by Directors and Officers as a group.) OUTSTANDING SHARES OF EACH CLASS OF REGISTRANT'S COMMON STOCK ------------------------------------------------------------- Class Outstanding at March 13, 1998 ----- ----------------------------- Common Stock, Par Value $.15625 per share 15,005,000 shares DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- The information for Item 10, Directors and Executive Officers of the Registrant; Item 11, Executive Compensation; Item 12, Security Ownership of Certain Beneficial Owners and Management; and Item 13, Certain Relationships and Related Transactions, has been incorporated into Part III of this Form 10-K by reference to Registrant's Definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after December 31, 1997. (End of cover page) PART I Item 1. Description of Business - ------ ----------------------- (a) General Development of Business: ------------------------------- North Pittsburgh Systems, Inc. (the Registrant), organized May 31, 1985, is a holding company and has no operating function. Its predecessor, North Pittsburgh Telephone Company (North Pittsburgh or NPTC), a telephone public utility incorporated in 1906, became a wholly-owned subsidiary of the Registrant on May 31, 1985. Penn Telecom, Inc. (Penn Telecom) became a wholly-owned subsidiary of the Registrant on January 30, 1988. Prior to this date, Penn Telecom was a wholly-owned subsidiary of North Pittsburgh. The principal business activities of Penn Telecom consist of the sale, rental and servicing of telecommunication equipment to end users, the resale of bulk billed message toll services and high capacity intercity facilities. Penn Telecom has recently been certificated as a Competitive Access Provider and has entered into this business. Pinnatech, Inc. (Pinnatech), a wholly-owned subsidiary of the Registrant formed in 1995, provides Internet access services. Management Consulting Solutions, Inc. (MCSI), formed in 1995, was sold on July 31, 1997. MCSI provided consulting and computer outsourcing services to healthcare and other industries. The Registrant, NPTC, Penn Telecom and Pinnatech operate under the provisions of the Pennsylvania Business Corporation Law. Other than the sale of MCSI, no significant changes in the mode of conducting business by the Registrant or its subsidiaries have occurred since the beginning of the fiscal year ended December 31, 1997. (b) Financial Information About Industry Segments: --------------------------------------------- This paragraph is not applicable. The Registrant, through North Pittsburgh and Penn Telecom, is engaged in the business of providing telecommunication services and equipment which is not considered separable into industry segments. The business activities of Pinnatech, to date, are not considered significant and are not reportable as an industry segment of the Registrant. (c) Narrative Description of Business: --------------------------------- (1) Business Done and Intended To Be Done: ------------------------------------- (i) Principal Services Rendered. --------------------------- The Registrant, through North Pittsburgh and Penn Telecom, is engaged in providing the following telecommunication services and equipment to customers generally located in Western Pennsylvania: Local Network Services. North Pittsburgh furnishes wireline ----------------------- telecommunication services in parts of Allegheny, Armstrong, Butler and Westmoreland Counties subject to the jurisdiction of the Pennsylvania Public Utility Commission (PA PUC) under the provisions of the Pennsylvania Public Utility Code which confers upon that Commission broad powers of supervision and regulation over public utilities with respect to service and facilities, rates and charges, securities, the encumbering or disposition of public 1 utility properties, accounting and various other matters. At January 31, 1998, North Pittsburgh served approximately 66,600 customers through its digital fiber-linked central offices. The Telecommunications Act of 1996 (the 1996 Act) prohibits state legislative or regulatory restrictions or barriers to entry regarding the provision of local telephone service. It also requires most incumbent local exchange carriers to interconnect with the networks of other telecommunications carriers, unbundle their services into network elements, offer their telecommunications services at wholesale rates to allow the resale of such services and allow other telecommunications carriers to locate equipment on their premises. Local exchange telephone carriers are also required to compensate each other for the transport and termination of calls. North Pittsburgh's wireline operations are considered Rural under the 1996 Act and are exempt from certain of the foregoing obligations unless, in response to a bona fide request for interconnection, the PA PUC removes that exemption. North Pittsburgh along with 17 other rural companies in Pennsylvania was granted a temporary suspension for a two-year period of the interconnection requirements outlined in the 1996 Act. North Pittsburgh is currently under rate base rate-of-return (ROR) regulation within the intrastate jurisdiction. However, under PA PUC Chapter 30 rules, North Pittsburgh is required to develop and file a Network Modernization Plan prior to July 8, 1998 that commits North Pittsburgh to providing broadband service capability throughout its service area or be subject to a show cause order for failure to do so. North Pittsburgh, as part of this filing, may seek approval of an alternative form of regulation from the PA PUC, such as price cap regulation. Historically, North Pittsburgh's wireline operations have not experienced significant competition in its franchised service area. As a result of the passage of the 1996 Act, North Pittsburgh's local wireline operations is experiencing increased competition from various sources, including, but not limited to, resellers of their local exchange services, large end users installing their own networks, Interexchange Carriers (IXCs), satellite transmission services, cellular communications providers, cable television companies, radio-based personal communications companies, Competitive Access Providers (CAPs) and other systems capable of completely or partially bypassing local telephone facilities. North Pittsburgh cannot predict the specific effects of competition on its local telephone business, but is intent on taking advantage of the various opportunities that competition should provide. North Pittsburgh is currently addressing potential competition by focusing on improved customer satisfaction, reducing costs, increasing efficiency, restructuring rates and examining new product offerings and new markets for entry. Long Distance and Access Services. Telephone service by North ---------------------------------- Pittsburgh to locations outside of its franchised telephone service territory but within the Local Access Transport Area (LATA) is furnished through switched and special access connections with Bell Atlantic - Pennsylvania, Inc., (BAPA), other independent telephone companies and, in some instances, IXCs, CAPs or resellers. North Pittsburgh bills toll calls within the LATA to its customers using toll rates contained in a Pennsylvania Telephone Association (PTA) tariff on file with the PA PUC. North Pittsburgh retains the revenues for such calls and pays network access charges to BAPA 2 and other telephone companies for terminating this toll traffic. Conversely, North Pittsburgh receives network access charge revenues for terminating the traffic of others. North Pittsburgh is a participating Issuing Carrier in the National Exchange Carrier Association (NECA) tariffs which are on file with the Federal Communications Commission (FCC) in respect to the provision of network access to IXCs and others for interstate telephone service to areas beyond the LATA. Such tariffs contain the rates chargeable for interstate switched and special access to and from North Pittsburgh's telephone facilities. North Pittsburgh is also a participating Issuing Carrier under the authority of a PTA tariff on file with the PA PUC which contains the rates chargeable for intrastate switched and special access from North Pittsburgh's telephone facilities to other Pennsylvania locations and to North Pittsburgh's facilities from such locations. Penn Telecom, as an IXC, markets intrastate and interstate toll services by reselling bulk billed message toll services. North Pittsburgh also provides facilities for special circuits (alarms, data transmission, etc.). Access charges concerning interstate services are regulated by the FCC. On December 24, 1996, the FCC released a Notice of Proposed Rulemaking regarding access charge reform. The proposed rules, in most significant aspects, are not applicable to North Pittsburgh's wireline operation as they apply predominantly to price cap regulated companies. The FCC has indicated it will issue another proposed rulemaking with respect to ROR companies which may affect North Pittsburgh. The PA PUC also has instituted access and universal service investigations. Toll telecommunications services beyond North Pittsburgh's franchised telephone service area and within the Pittsburgh LATA, hereinafter referred to as intraLATA, are presently provided through interconnections with BAPA and other telephone companies. The PA PUC has ordered intraLATA Presubscription (also known as equal access) under which a customer chooses his or her intraLATA toll carrier similar to the choice currently made for an interLATA toll carrier. North Pittsburgh implemented presubscription on August 8, 1997. It is not possible to determine the ultimate impact of intraLATA Presubscription, but it is expected that it may result in some reduction of revenues. North Pittsburgh's 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 it in a solid position to meet competition and minimize any loss of revenues. In addition, North Pittsburgh continues to make its network flexible and responsive to the needs of its customers to meet competitive threats. New services, access line growth and anticipated usage growth will lessen or offset any reductions in North Pittsburgh's revenue sources. Directory Advertising, Billing and Other Services. North Pittsburgh -------------------------------------------------- receives revenues from the sale of advertising space in telephone directories and from billing and collection activities. Directory Advertising is subject to competition from a number of sources and, to date, efforts to meet such competition have been successful. Billing and collection services are provided to various IXCs, including Penn Telecom. Telecommunication Equipment. Penn Telecom sells, rents and services ---------------------------- telecommunication equipment to customers generally in the Western Pennsylvania area. Penn 3 Telecom has been able to sustain its business activities in a strong, competitive market. Penn Telecom is certified by the PA PUC to offer toll resale services and has a tariff on file with the FCC to provide interstate toll services and has recently petitioned the PA PUC for authority to operate as a Competitive Local Exchange Carrier. As a reseller of both interstate and intrastate toll services, Penn Telecom is in direct competition with other IXCs. Operating Revenues. The respective amounts of operating revenues ------------------- contributed by local network services, long distance and access services, telecommunication equipment sales, directory advertising and billing and collection services during each of the last three fiscal years are set forth in the Financial Statements and Schedules provided in response to Item 8 and are incorporated herein by reference. (ii) Other Services. --------------- Cellular Partnerships. North Pittsburgh and Alltel Mobile ---------------------- Communications, Inc. are Limited Partners with a partnership interest of 3.6 percent each and Bell Atlantic Mobile Systems of Pittsburgh, Inc. is both a General and a Limited Partner with partnership interests of 40.0 and 52.8 percent, respectively, in the Pittsburgh SMSA Limited Partnership which provides cellular radio service (Cellular Service) in and around the Pittsburgh Standard Metropolitan Statistical Area (SMSA) as authorized by the FCC. North Pittsburgh, Centennial Cellular Telephone Company of Lawrence (Centennial) and Venus Cellular Telephone Company, Inc. (Venus) are Limited Partners, each with a partnership interest of 14.29 percent, and Sprint Cellular Company of Pennsylvania is the General Partner with a partnership interest of 57.13 percent in Pennsylvania RSA 6(I) Limited Partnership, d.b.a. 360/o/ Communications Company, which provides Cellular Service in a Rural Service Area (RSA) consisting of Clarion and Lawrence Counties and the Northern portions of Armstrong and Butler Counties. North Pittsburgh, Centennial and Venus are Limited Partners with partnership interests of 20.29, 14.29 and 14.29 percent, respectively, and Cellco Partnership, d.b.a. Bell Atlantic NYNEX Mobile, is the General Partner with a partnership interest of 51.13 percent in Pennsylvania RSA 6(II) Limited Partnership which provides Cellular Service in a RSA consisting of the Southern portions of Armstrong and Butler Counties. Boulevard Communications. Boulevard Communications, L.L.P. ------------------------- (Boulevard), a Competitive Access Provider, provides point-to-point data services to businesses in Western Pennsylvania to include access to Internet Service Providers, connections to interexchange companies and high speed data transmission. Boulevard, a Pennsylvania Limited Liability Partnership, is an equally owned joint venture of the Registrant and a company in the Armstrong Group. Internet Access and Services. Pinnatech provides dial up and ----------------------------- dedicated Internet access to business and residential customers in Western Pennsylvania. Pinnatech also provides virtual hosting services, web page creation and other Internet related services. Pinnatech is in direct competition with national and regional Internet Service Providers. 4 (iii) Status of New Products. ---------------------- This paragraph is not applicable. The Registrant and its subsidiaries have not made public any information concerning new products or services that would require the investment of a material amount of the assets of the Registrant or that otherwise would be material. (iv) Equipment Availability. ---------------------- The Registrant and its subsidiaries have not encountered, nor do they anticipate, any difficulty in obtaining a ready supply of telecommunication equipment from manufacturer suppliers. Although certain individual suppliers may each supply more than 10 percent of their equipment requirements, the Registrant and its subsidiaries are not primarily dependent upon any one supplier with alternative suppliers of telecommunication equipment being readily available. (v) Certificates, Franchises, Etc. and Licenses. ------------------------------------------- North Pittsburgh holds valid, continuing and subsisting rights, certificates, franchises, licenses (other than those mentioned in the following paragraph) and renewable permits adequate for the conduct of its business in the territory it serves, none of which contain any burdensome restrictions. However, see Local Network Services under paragraph (c)(1)(i) concerning, inter alia, impact of the 1996 Act. ----- - ---- North Pittsburgh has an FCC license to operate a private operational telephone maintenance radio service station (WIK 838 expiring on March 20, 2001). The FCC license to operate an Improved Mobile Telephone System (IMTS) (call sign KGH-862) was discontinued as of January 1, 1998. Renewal license applications were filed on December 27, 1990 with the FCC for the continued operation by North Pittsburgh of two point-to-point microwave systems (call signs KG0-21 and KGN-88). The FCC acknowledged such renewal applications in a Public Notice dated March 21, 1991 indicating an expiration date of February 1, 2001. A renewal license application was filed on February 4, 1998 with the FCC for the continued operation by North Pittsburgh of a non-commercial private license for its own maintenance radio service and other purposes (call sign WPCD 845 which will expire, after renewal, on April 29, 2003). North Pittsburgh has not encountered in the past, nor does it anticipate in the future, any difficulty in renewing these FCC licenses. (vi) Seasonality of Business. ----------------------- None of the business activities of the Registrant or its subsidiaries are seasonal. (vii) Practices Relating to Working Capital. ------------------------------------- This paragraph is not applicable. No special practices relating to working capital have been adopted by the Registrant or its subsidiaries. (See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations.) 5 (viii) Customers. --------- No material part of the overall business of the Registrant or it subsidiaries is dependent upon a single customer or a few customers, the loss of any one or more of whom would have a materially adverse effect on its business. (ix) Backlog of Orders. ----------------- The Registrant and its subsidiaries do not have a significant backlog of service and installation orders. Improvements and expansion of their facilities are, to the extent possible, made in anticipation of demands for service and a reasonable and adequate inventory is maintained to meet the requirements of customers. (x) Renegotiation of Profits or Termination of Contracts. ---------------------------------------------------- The Registrant and its subsidiaries do not have a material portion of their business subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government. (xi) Competition. ------------ The competitive environment faced by the Registrant in respect to the services provided by it or by its subsidiaries is fully discussed under paragraph (c)(1)(i) of this Item 1. (xii) Research Activities. ------------------- The Registrant and its subsidiaries do not engage in any research activities relating to the development of new products or services or the improvement of existing products or services and no amounts have been expended in the past three years for such activities. (xiii) Environmental Matters. --------------------- Compliance with federal, state and local provisions which have been adopted regulating the discharge of materials into the environment or otherwise relating to the protection of the environment have not materially affected the capital expenditures, earnings and competitive position of the Registrant and its subsidiaries. (xiv) Employees. --------- At December 31, 1997, the Registrant, through all of its subsidiaries, employed 276 persons. (d) Financial Information About Foreign and Domestic Operations and Export ---------------------------------------------------------------------- Sales. This paragraph is not applicable. The Registrant and its subsidiaries do - ----- not engage in any operations in foreign countries. 6 Item 2. Properties - ------ ---------- The Registrant owns in fee, an office/warehouse building which houses the operations of Penn Telecom and leases excess space to unrelated businesses. The materially important physical properties of North Pittsburgh, all owned in fee (except some rights-of-way) and most of which are held subject to certain mortgage and security agreements executed in connection with loans through the Rural Utilities Service, consist principally of land, buildings, central office equipment, long distance switching facilities, transmission facilities, pole lines, aerial cable, underground cable, aerial wire, buried cable, buried wire, distribution wire, underground conduit, furniture, office and computer equipment, garage facilities, vehicles and work equipment and generally any and all property required to operate a modern telecommunications network. Such facilities are fully utilized except that improvement and expansion of those facilities are, to the extent possible, made in anticipation of the demand for service. All of the foregoing properties are located within Allegheny, Armstrong, Butler and Westmoreland Counties in Western Pennsylvania. From January 1, 1993 to December 31, 1997, North Pittsburgh made gross property additions of approximately $66,611,000 (which is about 51.1% of the original cost of the present telephone plant) and property retirements of approximately $10,802,614. North Pittsburgh's 1998 construction program, subject to adjustment for economic conditions, postponements of housing developments, etc. is projected to be in the $23 million to $26 million range which includes central office equipment additions, distribution lines, etc. to permit expansion or improvement of North Pittsburgh's telecommunications services. Item 3. Legal Proceedings - ------ ----------------- As of the date hereof, except for regulatory matters before the PA PUC and FCC, including matters which could result in the expansion of competition, there were no material pending legal or governmental proceedings directly involving the Registrant or its subsidiaries, other than ordinary routine litigation or ordinary routine utility matters incidental to the business and matters as to which the Registrant and its subsidiaries are insured. Item 4. Submission of Matters to a Vote of Security Holders - ------ --------------------------------------------------- No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1997. 7 ADDITIONAL ITEM FOR PART I. - Executive Officers of the Registrant ------------------------------------------------------------------ Information regarding the Registrant's Executive Officers is provided below. In addition to the positions and business experience related to the Registrant, additional information related to North Pittsburgh Telephone Company, the Registrant's predecessor and principal subsidiary, is also presented. Executive Officers of the Registrant: - -------------------------------------
Positions and Offices --------------------- Name and Business Experience Age with Registrant (1) - ---------------------------- --- ------------------- Charles E. Thomas, Sr. 84 Chairman, Board of Registrant: Chairman of the Board of Directors Directors since incorporation in 1985; Partner in the law firm of Thomas, Thomas, Armstrong & Niesen, Harrisburg, PA, since the formation in 1991 of this firm which is retained as general counsel to the Registrant; Partner in the law firm of Thomas & Thomas from 1977 to 1990. North Pittsburgh Telephone Company: Chairman of the Board of Directors since 1968; Director since 1957. Harry R. Brown 61 Director and President Registrant: Director since 1989; President since January 30, 1998; Vice President from 1992 to January 30, 1998. North Pittsburgh Telephone Company: Director since 1989; President and General Manager since January 30, 1998; Vice President - Operations from 1987 to January 30, 1998; Assistant Vice President - Operations from 1986 to 1987; Network Engineering Manager from 1984 to 1986; Equipment Supervisor from 1975 to 1984.
8
Positions and Offices --------------------- Name and Business Experience Age with Registrant (1) - ---------------------------- --- ------------------- Allen P. Kimble 51 Director, Vice President Registrant: Director since January 30, 1998; and Treasurer Vice President since 1989; Treasurer since incorporation in 1985; Secretary from 1993 to January 30, 1998. North Pittsburgh Telephone Company: Vice President since 1989; Treasurer since 1979; Secretary from 1993 to January 30, 1998; Assistant Vice President from 1987 to 1989; Assistant Secretary from 1977 to 1993. N. William Barthlow 43 Vice President and Secretary Registrant: Vice President since May, 1994; Secretary since January 30, 1998; Assistant Secretary from 1993 to January 30, 1998; Assistant Vice President from 1990 to 1994. North Pittsburgh Telephone Company: Vice President - Marketing and Revenues since 1994; Secretary since January 30, 1998; Assistant Secretary from 1993 to January 30, 1998; Assistant Vice President - Revenue Requirements from 1989 to 1994; Revenue Requirements Manager from 1987 to 1989.
(1) Directors. Messrs. Thomas and Brown were elected as Directors at the 1997 --------- Annual Meeting of Shareholders held May 16, 1997 to serve until the 1998 Annual Meeting of Shareholders. Mr. Kimble was appointed to the Board of Directors on January 30, 1998 to fill the vacancy created by the death of Gerald A. Gorman. Messrs. Brown and Kimble will be nominees for reelection as Directors at the Annual Meeting of Shareholders to be held May 15, 1998. Mr. Thomas has indicated his intention to retire and not stand for reelection. (2) Officers. Messrs. Thomas and Kimble were elected to their respective -------- offices at a Board of Directors' Organizational Meeting which followed the May 16, 1997 Annual Meeting of Shareholders. Messrs. Brown and Barthlow were elected to the offices of President and Secretary, respectively, at the January 30, 1998 Board of Directors' Meeting. All officers will hold their offices until the first meeting of the Board following the 1998 Annual Meeting of Shareholders. 9 (3) Arrangements. There are no arrangements or understandings between any of ------------ the above executive officers and any other person pursuant to which they were elected as an officer. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters - ------ --------------------------------------------------------------------- (a) Principal Markets and Market Price: ---------------------------------- The Registrant's Common Stock is registered with the Securities and Exchange Commission pursuant to Section 12(g) of the Securities Exchange Act of 1934 and, effective January 10, 1997, the Registrant's Common Stock commenced trading on the Nasdaq National Market tier of the Nasdaq Stock Market under the Symbol 'NPSI'. Prior thereto, the stock was not listed on any Stock Exchange and was considered as being traded on the OTC (Over-the-Counter) market. In 1996, a brokerage firm in Pittsburgh continued its past effort to establish a market for the Registrant's Common Stock. The market price range on the same market in 1996 was $28.00 to $36.00 per share adjusted for a 2 for 1 stock split-up on May 22, 1996 and $23.00 to $53.00 per share thereafter. The Nasdaq High and Low sales prices for the Registrant's Common Stock for each quarter of 1997 are listed below:
1997 High Low ----------- ------- ------- First Quarter $24.000 $18.250 Second Quarter 23.500 14.375 Third Quarter 23.500 15.250 Fourth Quarter 19.500 16.125
(b) Approximate Number of Holders of Common Stock: --------------------------------------------- Calculated on the basis of the number of shareholder accounts, the Registrant had approximately 3,094 common shareholders on March 13, 1998. 10 (c) Common Stock Dividends: ---------------------- Cash dividends declared per share by the Registrant on the outstanding shares of Common Stock in 1997 and 1996 (adjusted for a 2 for 1 stock split-up effective May 22, 1996) were as follows:
1997 1996 ----- ----- First Quarter $ .14 $ .13 Second Quarter .14 .13 Third Quarter .14 .13 Fourth Quarter .14 .13 ----- ----- $ .56 $ .52 ===== =====
Item 6. Selected Financial Data (Amounts in Thousands Except Per Share Data) - ------- ------------------------------------------------------------------- The following summary of Selected Financial Data for the years 1997-1993 (adjusted for a 2 for 1 stock split-up effective May 22, 1996) should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report. 11
1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- Operating revenues $ 66,207 $ 59,933 $ 52,757 $ 49,188 $ 44,241 Operating expenses 44,090 40,349 33,748 31,728 28,367 -------- -------- -------- -------- -------- Net operating revenues 22,117 19,584 19,009 17,460 15,874 Interest expense (1,710) (1,549) (1,596) (1,645) (1,573) Interest income 608 764 1,066 772 878 Sundry (expense) income, net 840 840 (738) 202 (558) Net gain on sale of investment /(1)/ 14,516 ---- ---- ---- ---- -------- -------- -------- -------- -------- Earnings before income taxes, cumulative effect of change in accounting method 36,371 19,639 17,741 16,789 14,621 Income tax expense 14,186 7,909 7,054 6,885 5,906 -------- -------- -------- -------- -------- Earnings before cumulative effect of change in accounting method 22,185 11,730 10,687 9,904 8,715 Cumulative effect of change in accounting method ---- ---- ---- ---- 450 -------- -------- -------- -------- -------- Net earnings $ 22,185 $ 11,730 $ 10,687 $ 9,904 $ 9,165 ======== ======== ======== ======== ======== Average common shares outstanding 15,019 15,040 15,040* 15,040* 15,040* ======== ======== ======== ======== ======== Earnings per share before cumulative effect of change in accounting method $ 1.48 $ .78 $ .71* $ .66* $ .58* ======== ======== ======== ======== ======== Basic and diluted earnings per share $ 1.48 $ .78 $ .71* $ .66* $ .61* ======== ======== ======== ======== ======== Dividends declared per share of Common Stock $ .56 $ .52 $ .48* $ .44* $ .40* ======== ======== ======== ======== ======== Total assets $127,833 $ 99,523 $ 96,156 $ 91,578 $ 88,771 ======== ======== ======== ======== ======== Long-term debt $ 27,037 $ 21,311 $ 21,694 $ 22,396 $ 23,058 ======== ======== ======== ======== ========
*Adjusted for a 2 for 1 stock split-up effective May 22, 1996 /(1)/ See Results of Operations under Item 7. 12 Item 7. Management's Discussion and Analysis of Financial Condition - ------- ----------------------------------------------------------- and Results of Operations (Amounts in Thousands) ------------------------------------------------ (a) Results of Operations --------------------- Net earnings for 1997 were $22,185, an increase of $10,455 (89.1%) over 1996 net earnings of $11,730. The 1996 net earnings represented an increase of $1,043 (9.8%) as compared to 1995. These fluctuations were attributable to the following factors: (1) Stock Sales ----------- As reported in its Current Report on Form 8-K, dated January 28, 1998, the Registrant had an investment in the common stock of Conquest Telecommunications Services Corporation (Conquest), a non-public company, engaged in the development and marketing of prepaid calling cards and other enhanced telecommunications services. In 1997, SmarTalk Teleservices, Inc. (SmarTalk), a public company, engaged, inter alia, in similar businesses, and Conquest ----- ---- announced the proposed acquisition of Conquest by SmarTalk. The merger was completed on December 31, 1997. In connection with liquidating its investment in Conquest, the Registrant entered into the following transactions which resulted in a net pre-tax gain of $14,516 ($9,003 after income taxes, $.60 per share) in 1997. (i) In November 1997, the Registrant agreed to settle litigation brought against it by certain other Conquest shareholders (Plaintiffs). The settlement agreement, which became effective only upon completion of the proposed merger, resulted in a 1997 pre-tax loss of $3,180. In January 1998, the Registrant, in satisfaction of the settlement agreement, paid the Plaintiffs $750 in cash and transferred 106,820 shares of SmarTalk stock (the Settlement Shares) which it received upon completion of the merger. (ii) In order to ensure utilization of expiring tax loss carryforwards, the Registrant entered into a transaction in December, 1997 whereby it sold a portion of its investment in Conquest to a third party for cash resulting in a pre-tax gain of $1,572. In addition, the Registrant granted the buyer an option to purchase all of the SmarTalk shares it would receive upon completion of the merger, except the Settlement Shares, at a price of $21 per share (the Option Price). (iii) On December 31, 1997, the merger was completed and the Registrant exchanged its remaining shares of Conquest common stock for shares of SmarTalk common stock resulting in a realized pre-tax gain of $16,124. As of December 31, 1997, the SmarTalk shares were included in Available for Sale securities and were valued at the Option Price. The option was exercised in January, 1998 resulting in the Registrant selling its remaining SmarTalk shares for cash. (2) Operating Revenues ------------------ Total operating revenues increased $6,274 (10.5%) during 1997. This change was principally due to increases in long distance and access services of $1,632 (3.9%), local network services of $1,525 (17.6%) and other operating revenues of $2,958 (65.0%). Higher long distance and access service revenues were generally the result of an increase in the 13 number of customers and minutes of use. However, the rate of increase has slowed due to the introduction of an automatic savings plan in July, 1997. Increased local network service revenues were attributable to customer growth, growth in second lines, expanded penetration of enhanced services and line rate increases for residential and business customers in several exchanges. Other operating revenues increased due to growth of Pinnatech's Internet access customers and the growth of consulting and outsourcing services provided by MCSI through July 31, 1997. Total operating revenues increased $7,176 (13.6%) during 1996. This change was principally due to increases in long distance and access services of $2,983 (7.7%), local network services of $1,160 (15.4%) and other operating revenues of $2,582 (131.3%). Higher long distance and access service revenues were generally the result of an increase in the number of customers and in minutes of use. Increased local network service revenues were attributable to customer growth, growth in second lines and expanded penetration of enhanced services. Other operating revenues increased due to growth of Pinnatech's Internet access customers, MCSI's consulting customers and the introduction of MCSI's data processing outsourcing services. (3) Operating Expenses and Net Revenues ----------------------------------- Total operating expenses for 1997 increased $3,741 (9.3%) over the preceding year. That change was principally the result of increases in network and other operating expenses of $1,737 (6.7%) and depreciation and amortization expenses of $1,169 (12.3%). The increase in network and other operating expense was principally due to an increase in Central Office switching expenses and an increase in advertising costs. The growth in depreciation and amortization expenses is the direct result of the growth in fixed assets to serve current and future customer needs. The increase in total operating revenues of $6,274 discussed above, coupled with the increase in total operating expenses of $3,741, resulted in a 12.9% increase in net operating revenues in 1997 as compared to 1996. Total operating expenses for 1996 increased $6,601 (19.6%) over the preceding year. That change was principally the result of increases in network and other operating expenses of $4,931 (23.3%) and depreciation and amortization expenses of $1,163 (14.0%). Approximately $4,000 of the $4,931 increase in network and other operating expenses was directly associated with the increase in other operating revenues of $2,582 discussed above. The growth in depreciation and amortization expenses is the direct result of the growth in fixed assets to serve current and future customer needs. The increase in total operating revenues of $7,176 discussed above coupled with the increase in total operating expenses of $6,601 resulted in a modest 3% increase in net operating revenues in 1996 as compared to 1995. The composition and amounts of sundry expense (income), net, is comparable between 1996 and 1997. Approximately $509 more of cellular partnership income was recorded in 1996 than 1995. Included in 1995 is approximately $567 of non- recurring charges related to costs of start-up businesses. 14 (b) Liquidity and Capital Resources ------------------------------- In 1987, North Pittsburgh exhausted the remaining unborrowed funds which had first become available from the Rural Telephone Bank in 1977. Information relating to long-term debt is included in Note 2 to the Consolidated Financial Statements. The Registrant and its subsidiaries financed capital expenditures, debt service and dividend payments from internal sources from 1987 to 1996. In 1996, North Pittsburgh was granted approval for a loan from the Federal Financing Bank (FFB) guaranteed by the Rural Utilities Service in the maximum principal amount of $75 million. The maximum principal amount will be advanced periodically over a five-year period which began on January 2, 1997 to furnish or improve telephone service in rural areas. Funds were advanced in 1997 for $3,132 and $3,771 with Interim Maturity Dates of June 30, 1998 and March 31, 1998, respectively. Per the Note Agreement with the FFB, North Pittsburgh intends to elect to extend the maturity dates of the advances, but not beyond the Final Maturity Date of December 31, 2012. North Pittsburgh established a line of credit in 1994 in the amount of $10 million with the Rural Telephone Finance Cooperative that is available for general business purposes. No borrowings have taken place against the line of credit. Capital expenditure commitments for the purchase and installation of new equipment at December 31, 1997 amounted to approximately $1.1 million, with such amount being part of a 1998 construction program of $23 million to $26 million. Management expects cash flows provided by operating activities and cash reserves in 1998 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 new borrowings. It is anticipated that future payments for long- term debt service will be made from the same sources of internally generated funds. Capital additions beyond 1998 are anticipated to be 25% internally financed. Temporary excess funds are invested in short-term cash equivalents with maturity dates scheduled to coincide with tax payment due dates, debt principal payments, etc. Management expects to continue the investment of such excess funds in 1998 which will satisfactorily meet all short-term obligations. (c) Other Information ----------------- (1) Inflation and Changing Prices ----------------------------- During the three most recent fiscal years, inflation and changing prices have not had a significant impact on net sales and on income from continuing operations. (2) Regulatory Assets ----------------- Management does not believe that the Registrant has any significant regulatory assets or liabilities under Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation." Historically, the Registrant has monitored closely the 15 economic lives of plant in service and has adjusted depreciable lives as necessary to conform to generally accepted accounting principles. (3) Alternative Form of Regulation Petition --------------------------------------- As discussed in Item 1(c)(i), North Pittsburgh, under Chapter 30 of the Pennsylvania Public Utility Code, must, prior to July 8, 1998, file a petition with the PA PUC for approval of an alternative form of regulation to replace traditional rate base/rate of return regulation or be subject to a show cause proceeding. The petition must include a proposed network modernization plan. Although North Pittsburgh has not determined the form and content of its petition, the ultimate filing of such petition is expected to be of significance to North Pittsburgh. However, it is not possible at this time to determine the PA PUC's disposition of any petition filed or the effect on North Pittsburgh's financial position or results of operations. (4) Federal and State Regulatory Proceedings ---------------------------------------- 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. (5) Year 2000 --------- The Registrant has taken actions to understand the nature and extent of the work required to make its systems and infrastructure Year 2000 compliant. The Registrant began 16 work last year to prepare its operational support, financial and other computer- based systems for the Year 2000, including replacing and/or updating existing legacy systems. Some of the work is part of larger systems upgrades. In mid- 1999, the Registrant will begin outsourcing operational support systems and accounting functions currently performed in-house. The outsourcing vendors report that their systems are Year 2000 compliant. These systems will enable the Registrant to provide for its future data processing needs. The Registrant estimates that the incremental costs associated with downsizing its internal data processing workforce will be $1.5 million over the next two years. Other costs associated with outsourcing data processing functions cannot be estimated at this time. The Registrant expects to avoid disruption of its information, telephony and business systems as a result of these efforts. (6) New Accounting Pronouncements ----------------------------- Statements of Financial Accounting Standards No. 128, "Earnings Per Share", No. 130, "Reporting Comprehensive Income Summary" and No. 131, "Disclosures about Segments of an Enterprise and Related Information" were effective for the year ended December 31, 1997. These statements have no material impact on the Registrant. Item 7A. Quantitative and Qualitative Disclosure About Market Risk - -------- --------------------------------------------------------- This item is not applicable. Item 8. Financial Statements and Supplementary Data - ------ ------------------------------------------- Financial statements meeting the requirements of Regulation S-X and the supplementary financial information specified by Item 302 of Regulation S-K are attached to this document. Item 9. Changes in and Disagreements with Accountants on Accounting and - ------ --------------------------------------------------------------- Financial Disclosure -------------------- This paragraph is not applicable. There has not been a change of accountants in the past 24 months nor has any disagreement on any matter of accounting principles or practices been reported on Form 8-K during the same time period. 17 PART III Item 10. Directors and Executive Officers of the Registrant - ------- -------------------------------------------------- and Item 11. Executive Compensation - ------- ---------------------- and Item 12. Security Ownership of Certain Beneficial Owners and Management - ------- -------------------------------------------------------------- and Item 13. Certain Relationships and Related Transactions - ------- ---------------------------------------------- Information in respect to executive officers of the Registrant is included herein as a separate Additional Item for Part I under the caption "Executive Officers of the Registrant" and follows Item 4. The other information required by Items 10, 11, 12 and 13 has been omitted from this report since the Registrant expects to file a Definitive Proxy Statement pursuant to Regulation 14A involving, inter alia, the election of Directors not later than 120 days ----- ---- after the end of the fiscal year covered by this report. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K - ------- --------------------------------------------------------------- (a) The following documents of the Registrant and its subsidiaries are filed as part of this report: 1. Financial Statements: -------------------- Consolidated Balance Sheets as of December 31, 1997 and 1996 Consolidated Statements of Earnings for each of the years in the three-year period ended December 31, 1997 18 Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended December 31, 1997 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1997 Notes to Consolidated Financial Statements 2. Financial Statement Schedules: ----------------------------- Condensed Financial Information of Registrant for each of the years in the three-year period ended December 31, 1997 All schedules other than those listed above have been omitted because the information is either not required or is set forth in the financial statements or notes thereto. 3. Exhibits. The Exhibit Index for Annual Reports on Form 10-K and -------- applicable Exhibits are reported in this report under the caption OTHER INFORMATION. (b) Reports on Form 8-K. A Form 8-K was filed on December 12, 1997, ------------------- disclosing the resignation of Gerald A. Gorman as President of the Registrant and the election of Harry R. Brown as Senior Vice President of the Registrant and Senior Vice President and Acting General Manager of NPTC. (c) Exhibits Required by Item 601 of Regulation S-K. See (a)(3) above. ----------------------------------------------- (d) Financial Statement Schedules. The financial statement schedules ----------------------------- listed in Item 14(a)(2) are hereby filed as part of this Form 10-K. 19 NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Consolidated Financial Statements and Schedule (Form 10-K) December 31, 1997, 1996 and 1995 (With Independent Auditors' Report Thereon) NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Index to Consolidated Financial Statements and Schedule December 31, 1997, 1996 and 1995 Page ---- Independent Auditors' Report 1 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 1997 and 1996 2 - 3 Consolidated Statements of Earnings for the Years Ended December 31, 1997, 1996 and 1995 4 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 6 - 7 Notes to Consolidated Financial Statements 8 - 21 Consolidated Financial Statement Schedule: I. Condensed Financial Information of Registrant for the Years Ended December 31, 1997, 1996 and 1995 22 - 26 Independent Auditors' Report ---------------------------- The Board of Directors North Pittsburgh Systems, Inc.: We have audited the consolidated financial statements of North Pittsburgh Systems, Inc. and subsidiaries (the Company) as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of North Pittsburgh Systems, Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP Pittsburgh, Pennsylvania February 13, 1998 NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1997 and 1996 (Amounts in Thousands, Except Per Share Data)
1997 1996 ---- ---- Assets ------ Current assets: Cash and temporary investments $ 15,938 11,313 Marketable securities available for sale (notes 6 and 7) 16,847 329 Marketable securities held to maturity (note 7) - 451 Accounts receivable: Customers 3,401 4,090 Access service settlements and other 5,995 5,270 Prepaid expenses 25 163 Inventories of construction and operating materials and supplies 3,360 3,169 -------- ------- Total current assets 45,566 24,785 Property, plant and equipment (note 2): Land 475 507 Buildings 10,543 11,834 Equipment 122,492 108,728 -------- ------- 133,510 121,069 Less accumulated depreciation and amortization 69,303 60,333 -------- ------- 64,207 60,736 Construction-in-progress 6,990 4,858 -------- ------- Total property, plant and equipment, net 71,197 65,594 Investments (note 6) 7,499 5,763 Deferred financing cost 954 1,055 Prepaid pension cost (note 3) 580 622 Other assets 2,037 1,704 -------- ------- $127,833 99,523 ======== =======
(Continued) NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Consolidated Balance Sheets, Continued (Amounts in Thousands, Except Per Share Data)
1997 1996 ---- ---- Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Current portion of long-term debt (note 2) $ 803 944 Accounts payable 4,794 4,702 Accrued legal settlement (note 6) 3,180 - Dividend payable 2,101 1,955 Deferred income taxes (note 5) 5,289 - Other accrued liabilities 2,304 2,113 Federal and state income taxes (note 5) 389 670 -------- ------ Total current liabilities 18,860 10,384 Long-term debt (note 2) 27,037 21,311 Deferred income taxes (note 5) 6,560 5,969 Postretirement benefits (note 4) 4,764 4,497 Other liabilities 2,052 2,056 Shareholders' equity: Capital stock - common stock, par value $.15625; authorized 50,000 shares; issued and outstanding 15,040 shares 2,350 2,350 Capital in excess of par value 2,215 2,215 Retained earnings (note 2) 64,501 50,724 Less cost of treasury stock (1997: 35 shares) (508) - Unrealized gain on available for sale securities, net (notes 5 and 7) 2 17 -------- ------ Total shareholders' equity 68,560 55,306 -------- ------ $127,833 99,523 ======== ======
See accompanying notes to consolidated financial statements. NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Earnings For the Years Ended December 31, 1997, 1996 and 1995 (Amounts in Thousands, Except Per Share Data)
1997 1996 1995 ------ ---- ---- Operating revenues: Local network services $ 10,209 8,684 7,524 Long distance and access services 43,512 41,880 38,897 Directory advertising, billing and other services 2,210 2,181 2,139 Telecommunication equipment sales 2,769 2,639 2,230 Other operating revenues 7,507 4,549 1,967 -------- ------ ------ 66,207 59,933 52,757 Operating expenses: Network and other operating expenses 27,803 26,066 21,135 Depreciation and amortization (note 1) 10,677 9,508 8,345 State and local taxes 3,009 2,364 2,267 Telecommunication equipment expenses 2,601 2,411 2,001 -------- ------ ------ 44,090 40,349 33,748 -------- ------ ------ Net operating revenues 22,117 19,584 19,009 Other expense (income), net: Interest expense 1,710 1,549 1,596 Interest income (608) (764) (1,066) Net gain on sale of investment (note 6) (14,516) - - Sundry expense (income), net (840) (840) 738 -------- ------ ------ (14,254) (55) 1,268 -------- ------ ------ Earnings before income taxes 36,371 19,639 17,741 Provision for income taxes (note 5) 14,186 7,909 7,054 -------- ------ ------ Net earnings $ 22,185 11,730 10,687 ======== ====== ====== Average common shares outstanding 15,019 15,040 15,040 ======== ====== ====== Basic and diluted earnings per share $1.48 .78 .71 ===== === === Dividends per share $ .56 .52 .48 ===== === ===
See accompanying notes to consolidated financial statements. NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity For the Years Ended December 31, 1997, 1996 and 1995 (Amounts in Thousands, Except Per Share Data)
1997 1996 1995 ------ ---- ---- Capital stock - common stock: Amount at beginning and end of year $ 2,350 2,350 2,350 ======= ====== ====== Capital in excess of par value: Amount at beginning and end of year $ 2,215 2,215 2,215 ======= ====== ====== Retained earnings: Amount at beginning of year 50,724 46,814 43,346 Net earnings for year 22,185 11,730 10,687 ------- ------ ------ 72,909 58,544 54,033 Dividends on common stock 8,408 7,820 7,219 ------- ------ ------ Amount at end of year $64,501 50,724 46,814 ======= ====== ====== Treasury stock: Amount at beginning of year - - - Purchased (35 shares in 1997) 508 - - ------- ------ ------ Amount at end of year $ 508 - - ======= ====== ====== Unrealized gain on available for sale securities: Amount at beginning of year 17 148 - Change during year (15) (131) 148 ------- ------ ------ Amount at end of year $ 2 17 148 ======= ====== ======
See accompanying notes to consolidated financial statements. NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended December 31, 1997, 1996 and 1995 (Amounts in Thousands)
1997 1996 1995 ------ ---- ---- Cash from operating activities: Net earnings $ 22,185 11,730 10,687 Adjustments to reconcile net earnings to net cash from operating activities: Depreciation and amortization 10,677 9,508 8,345 Net gain on sale of investment (note 6) (14,516) - - Gain on sale of MCSI (292) - - Gain on sale of marketable securities (99) (128) - Equity income of affiliated companies (1,077) (989) (474) Provision for postretirement benefits other than pensions 267 247 185 Investment tax credit amortization (98) (101) (151) Deferred income taxes 5,880 389 (85) Changes in assets and liabilities: Accounts receivable (1,781) (515) (1,381) Inventories of construction and operating materials and supplies (191) (788) (270) Deferred financing costs, prepaid pension costs and other assets (179) 1,536 131 Accounts payable 576 (1,635) 1,163 Other accrued liabilities 314 390 214 Federal and state income taxes (281) 379 43 Other, net - (163) 20 -------- ------ ------ Total adjustments (800) 8,130 7,740 -------- ------ ------ Net cash from operating activities 21,385 19,860 18,427
(Continued) NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued (Amounts in Thousands)
1997 1996 1995 ------ ---- ---- Cash used for investing activities: Expenditures for property and equipment $(18,913) (16,303) (15,818) Net (cost of removal) salvage on retirements 547 382 (148) -------- ------- ------- Net capital additions (18,366) (15,921) (15,966) Proceeds from sale of investment (note 6) 1,655 - - Proceeds from sale of MCSI, net of cash sold 3,305 - - Purchase of marketable securities held to maturity - (454) (7,381) Proceeds from redemption of marketable securities held to maturity 451 6,519 6,376 Purchase of marketable securities available for (234) (433) (908) sale Proceeds from sale of marketable securities available for sale 541 1,657 1,683 Investments in affiliated entities (1,893) (898) (282) Distributions from affiliated entities 534 - 361 -------- ------- ------- Net cash used for investing activities (14,007) (9,530) (16,117) Cash used for financing activities: Cash dividends (8,262) (7,670) (7,068) Retirement of debt (886) (706) (661) Proceeds from issuance of debt 6,903 - - Purchase of treasury stock (508) - - -------- ------- ------- Net cash used for financing activities (2,753) (8,376) (7,729) -------- ------- ------- Net increase (decrease) in cash and temporary investments 4,625 1,954 (5,419) Cash and temporary investments at beginning of year 11,313 9,359 14,778 -------- ------- ------- Cash and temporary investments at end of year $ 15,938 11,313 9,359 ======== ======= ======= Supplemental disclosures of cash flow information: Interest paid $ 1,612 1,450 1,492 ======== ======= ======= Income taxes paid $ 8,685 7,241 6,994 ======== ======= ======= Fixed assets acquired under capital leases $ - 565 - ======== ======= ======= Marketable securities received in connection with investment transaction (note 6) $ 16,124 - - ======== ======= =======
See accompanying notes to consolidated financial statements. NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 (Amounts in Thousands, Except Per Share Data) (1) Summary of Significant Accounting Policies ------------------------------------------ Basis of Presentation and Consolidation --------------------------------------- The consolidated financial statements include the accounts of North Pittsburgh Systems, Inc. (the Company) and its subsidiaries, North Pittsburgh Telephone Company (NPTC), Penn Telecom, Inc. (PTI) and Pinnatech, Inc. Also consolidated herein is the financial activity of Management Consulting Solutions, Inc. (MCSI) until its sale on July 31, 1997. The Company, through NPTC and PTI, is primarily engaged in providing telecommunications equipment and services to its customers generally located in western Pennsylvania. All significant intercompany accounts and transactions have been eliminated in consolidation. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. The estimates and assumptions used in the accompanying consolidated financial statements are based upon management's evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results may differ from the estimates and assumptions used in preparing the accompanying consolidated financial statements. Revenue Recognition ------------------- Revenues are recognized when earned. Local service and intralata long distance revenues are subject to the jurisdiction of the Pennsylvania Public Utilities Commission (PUC). The Company participates in interstate pooling arrangements with other telephone companies. Such pools are funded by access service charges regulated by the Federal Communications Commission. Revenue earned through pooling is initially recorded based on estimates. The Company has settled substantially all access service arrangements through 1996. (Continued) NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Marketable Securities --------------------- All marketable equity securities are considered available for sale, and debt securities are classified either as available for sale or held to maturity. Marketable securities available for sale are recorded at fair value, based on quoted market prices. Significant changes in value of available for sale securities are included as a separate component of shareholders' equity. Marketable securities held to maturity are recorded at amortized cost. A decline in the fair value of any marketable investment security below cost, that is deemed other than temporary, is charged to earnings resulting in a new cost basis for the security. Costs of investments sold are determined on the basis of specific identification. Investments ----------- The Company's investments in three cellular limited partnerships are carried at cost plus equity in accumulated net profits or losses. Other investments in nonmarketable securities are carried either at cost or at equity as the circumstances warrant. Property, Plant and Equipment ----------------------------- Telephone plant in service is recorded at cost. Retirements relating to replacements of telephone plant and equipment are accounted for in accordance with applicable regulations of the PUC. Accordingly, the original costs of facilities retired, plus costs of removal, net of salvage or other credits, are charged to accumulated depreciation. Depreciation on telephone plant in service is provided on a straight-line basis over estimated useful lives of 10 to 30 years for buildings and 5 to 20 years for equipment. In 1995, the Company reduced estimated useful lives of cable and central office equipment due to technological and competitive changes in the telecommunications industry, resulting in a 1995 charge of $593 ($357 after income taxes, $.02 per share). Depreciation as a percentage of average depreciable plant in service amounted to 8.4%, 8.2% and 8.2% in 1997, 1996 and 1995, respectively. The average remaining life of plant in service as of December 31, 1997, is approximately 6.0 years. On construction projects lasting 12 months or more, interest costs incurred on the related funds expended during the construction period are capitalized as part of the project cost in accordance with regulatory requirements. No interest was capitalized during 1997, 1996 or 1995. Expenditures for maintenance, repairs and renewals are charged to operations as incurred. (Continued) NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Inventories ----------- Inventories consist of telecommunication equipment and parts to provide service to, or to make sales to, the Company's customers. Inventories are valued at the lower of cost (using the moving average method) or market. Accounts Receivable ------------------- The Company provides telecommunication services to customers (business and residential) located in western Pennsylvania and access connectivity to interexchange carriers. Access service settlements and other represent, for the most part, amounts due from interexchange carriers. The Company employs the direct write-off method for bad debts. Uncollected accounts receivable are expensed approximately 90 days after telephone service to such customer has been disconnected. Income Taxes ------------ Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Investment tax credits applicable to assets acquired or committed for by January 1, 1986, are being amortized over the average useful lives of the assets to which they relate. The Company and its subsidiaries file a consolidated federal income tax return. Cash Equivalents ---------------- For purposes of the consolidated statements of cash flows, the Company considers all temporary investments with a maturity of three months or less to be cash equivalents. (Continued) NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Postretirement Benefits ----------------------- The Company provides pension and other postretirement benefits to substantially all of its employees and eligible retirees. Benefits provided by these plans are expensed over the estimated working lives of employees. Earnings Per Share ------------------ In 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128), which requires the presentation of "Basic Earnings Per Share" and "Diluted Earnings Per Share." The adoption of SFAS 128 had no impact on the Company's calculation of earnings per share because the Company has no potential, dilutive common shares outstanding. Reclassifications ----------------- Certain prior year amounts have been reclassified to conform with the current year's presentation. (2) Long-Term Debt -------------- Long-term debt as of December 31, 1997 and 1996, was as follows:
1997 1996 ------ ---- 6.5% notes payable to Rural Telephone Bank, maturing in 2019 $20,937 21,690 5.9% note payable to Federal Financing Bank 3,132 - 5.3% note payable to Federal Financing Bank 3,771 - Capital lease on MCSI equipment - 565 ------- ------ 27,840 22,255 Less current portion of long-term debt 803 944 ------- ------ Long-term debt $27,037 21,311 ======= ======
Principal payments required over the next five years calculated on the outstanding indebtedness at December 31, 1997, are: $803 in 1998; $857 in 1999; $913 in 2000; $974 in 2001; and $1,039 in 2002. (Continued) NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The notes payable to the Rural Telephone Bank are secured by a supplemental Mortgage Agreement executed by NPTC which provides that substantially all of the property, plant and equipment of NPTC are subject to a lien or a security interest. Such agreement contains restrictions regarding dividends and other distributions. Under these restrictions, unless certain working capital and net worth levels are maintained, NPTC is not permitted to pay dividends on its capital stock (other than in shares of capital stock), or to make any other distributions to its shareholder, or purchase, redeem or retire any of its capital stock or make any investment in affiliated companies. As of December 31, 1997, consolidated retained earnings of the Company of approximately $35,639 were available for dividends and other distributions. In 1996, NPTC was granted approval for a loan from the Federal Financing Bank (FFB) guaranteed by the Rural Utilities Service in the maximum principal amount of $75 million. The maximum principal amount will be advanced periodically over a five-year period beginning January 2, 1997, to furnish or improve telephone service in rural areas. In 1997, advances of $3,132 and $3,771 were made to the Company with interim maturity dates of June 30, 1998, and March 31, 1998, respectively. As permitted by the note agreement with the FFB, the Company intends to extend the maturity dates of the advances up to December 31, 2012. Based on borrowing rates currently available to the Company for loans with similar terms and maturities, the estimated fair value of long-term debt as of December 31, 1997, is $27,437. NPTC also has a $10 million line of credit at a rate of prime plus 1-1/2% with the Rural Telephone Finance Cooperative. The line of credit was not used in 1997 or 1996. (3) Retirement Plan --------------- Substantially all employees of the Company are covered by a noncontributory, defined benefit retirement plan. The benefits are based on each employee's years of service and compensation. The Company's funding policy is to contribute an amount annually that satisfies at least the minimum funding required under the Employee Retirement Income Security Act of 1974. The assets of the plan are held in a trust and are invested in a variety of equity and fixed income securities. (Continued) NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Net periodic pension cost includes the following components:
1997 1996 1995 ---- ---- ---- Service cost $ 892 836 779 Interest cost on projected benefit obligation 1,722 1,595 1,491 Return on assets (4,027) (2,539) (1,975) Net amortization and deferral 2,284 1,012 655 ------- ------ ------ Net periodic pension cost $ 871 904 950 ======= ====== ======
Assumptions used in the calculation of net periodic pension cost are:
1997 1996 1995 ---- ---- ---- Discount rate % 7.00 7.00 7.00 Salary increases 6.00 6.00 6.00 Expected long-term rate of return 7.50 7.50 7.50
(Continued) NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheets at December 31, 1997 and 1996:
1997 1996 ---- ---- Actuarial present value of benefit obligations: Vested benefit obligation $(18,868) (17,069) ======== ======= Accumulated benefit obligation $(19,745) (17,788) ======== ======= Projected benefit obligation $(26,056) (25,026) Plan assets at fair value 27,528 23,482 -------- ------- Plan assets in excess of (less than) projected benefit obligation 1,472 (1,544) Unrecognized net asset at transition (1,223) (1,376) Unrecognized prior service cost 2,146 1,738 Unrecognized net (gain) loss (1,815) 1,804 -------- ------- Prepaid pension cost $ 580 622 ======== ======= Assumptions used in the calculation of the actuarial present value of benefit obligations: Discount rate % 7.00 7.00 Salary increases 5.00 6.00
(Continued) NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (4) Other Postretirement Benefit Plans ---------------------------------- Eligible retirees are provided healthcare and life insurance benefits until the retiree reaches 65 years of age under an unfunded plan. The following table presents the plan's funded status reconciled with amounts recognized in the Company's consolidated balance sheets at December 31, 1997 and 1996:
1997 1996 ---- ---- Accumulated postretirement benefit obligation: Retirees $1,200 1,004 Fully eligible active plan participants 1,204 1,240 Other active plan participants 2,210 2,132 ------ ----- Accumulated postretirement benefit obligation 4,614 4,376 Unrecognized prior service cost 99 111 Unrecognized net gain 51 10 ------ ----- Accrued postretirement benefit cost $4,764 4,497 ====== =====
Net periodic postretirement benefit cost includes the following components:
1997 1996 1995 ---- ---- ---- Service cost $142 144 151 Interest cost 300 272 267 ---- --- --- Net periodic postretirement benefit cost $442 416 418 ==== === ===
For measurement purposes, the annual rate of increase in the per capita cost of covered benefits (i.e., healthcare cost trend rate) for 1997 was 10.3 percent for participants whose coverage included Major Medical insurance and Point-of-Service Plan and 8.9 percent for participants who have Blue Cross/Blue Shield coverage only; the rates were assumed to decrease gradually to 5 percent by the year 2008 and remain at that level thereafter. The healthcare cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed healthcare cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997, by $462 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 1997, by $59. (Continued) NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7 percent at December 31, 1997 and 1996. Salaries were assumed to increase at a rate of 5 percent per year in 1997 and 6 percent per year in 1996 for current active employees for life insurance benefit projections. (5) Income Taxes ------------ The components of income tax expense are:
1997 1996 1995 ---- ---- ---- Current: Federal $ 6,141 5,603 5,446 State 2,263 2,018 1,844 ------- ----- ----- 8,404 7,621 7,290 Deferred: Federal 4,460 291 (85) State 1,420 98 - ------- ----- ----- 5,880 389 (85) Deferred investment tax credit (98) (101) (151) ------- ----- ----- $14,186 7,909 7,054 ======= ===== =====
The Company's income tax expense differs from income tax expense computed at the federal statutory rate of 35 percent due to the following factors:
1997 1996 1995 ---- ---- ---- Statutory federal income tax $12,729 6,874 6,209 State taxes on income (net of federal income tax benefit) 2,362 1,275 1,152 Federal benefit of phase-in of 1% surtax - - (30) Change in beginning of year valuation allowance (845) 99 57 Investment tax credit (98) (101) (151) Tax-exempt interest (5) (88) (143) Other 43 (150) (40) ------- ----- ----- Income tax expense $14,186 7,909 7,054 ======= ===== =====
(Continued) NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The significant components of deferred income tax expense attributable to income from operations are as follows:
1997 1996 1995 ---- ---- ---- Deferred tax expense (exclusive of the effects of the other components below) $ 737 290 (142) Net gain on investment (note 6) 5,289 - - Use of capital loss carryforward 699 - - Increase (decrease) in beginning of year valuation allowance (845) 99 57 ------ --- ---- $5,880 389 (85) ====== === ====
Additional deferred tax benefit of $1 and $12 for the years ended December 31, 1997 and 1996, respectively, were included in shareholders' equity in relation to an unrealized gain on marketable securities classified as available for sale (note 7). The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996, are presented below:
1997 1996 ---- ---- Deferred tax assets: Postretirement benefits $(1,947) (1,837) Deferred compensation (446) (428) Compensated absences, principally due to accrual for financial reporting purposes (238) (228) Capital loss carryforward - (699) Goodwill (64) (206) Other (687) (607) ------- ------ Total gross deferred tax assets (3,382) (4,005) Less valuation allowance 442 1,287 ------- ------ Net deferred tax assets (2,940) (2,718)
(Continued) NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
1997 1996 ---- ---- Deferred tax liabilities: Plant and equipment, principally due to differences in depreciation $ 8,424 7,642 Pension 538 608 Amortization of deferred financing costs 193 219 Basis in SmarTalk stock (note 6) 5,289 - Net unrealized gain on available for sale securities 1 12 Other 344 206 ------- ----- Total gross deferred tax liability 14,789 8,687 ------- ----- Net deferred tax liability $11,849 5,969 ======= ===== Unamortized investment tax credit $ 271 369 ======= =====
The valuation allowance for deferred tax assets relates to state loss carryforwards of subsidiaries and impairment write-downs. The valuation allowance for deferred tax assets as of January 1, 1997 and 1996, was $1,287 and $1,188, respectively. The net change in the total valuation allowance for the years ended December 31, 1997 and 1996, was a decrease of $845 and an increase of $99, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences, net of the existing valuation allowances at December 31, 1997. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. (Continued) NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued At December 31, 1997, the Company has net operating loss carryforwards for state income tax purposes of $3,000 which are available to offset future federal taxable income, if any, through 1999. (6) Investments ----------- The Company's investments at December 31, 1997 and 1996, consist of the following:
1997 1996 ---- ---- Investments at equity: Investments in cellular limited partnerships $7,404 5,062 Boulevard Communications, LLP 95 - Conquest Telecommunication Services Corporation - 701 ------ ----- Total investments $7,499 5,763 ====== =====
In 1997 and 1996, the Company had capital calls amounting to $1,800 and $898, respectively, to maintain its ownership percentages in its cellular limited partnership investments. Since 1988, the Company has owned an investment in the common stock of Conquest Telecommunications Services Corporation (Conquest), a non-public company. In 1997, SmarTalk Teleservices, Inc. (SmarTalk), a public company, announced a proposed acquisition of Conquest, which was completed on December 31, 1997. In connection with liquidating its investment in Conquest, the Company entered into the following transactions which resulted in a net pre-tax gain of $14,516 ($9,003 after income taxes, $.60 per share) in 1997. (1) In November 1997, the Company agreed to settle litigation brought against it by other Conquest shareholders (Plaintiffs). The settlement agreement, which became effective only upon completion of the proposed acquisition, resulted in a 1997 pre-tax loss of $3,180. In January 1998, the Company paid the Plaintiffs $750 in cash and $2,430 in SmarTalk stock (the Settlement Shares) in satisfaction of the settlement agreement. (Continued) NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (2) In order to utilize expiring tax loss carryforwards, the Company entered into a transaction in December 1997 whereby it sold a portion of its investment in Conquest to a third party for cash resulting in a pre-tax gain of $1,572. In addition, the Company granted the buyer an option to purchase all of its SmarTalk shares, except the Settlement Shares, received upon completion of the acquisition, at $21 per share (the Option Price). (3) On December 31, 1997, the acquisition was completed, and the Company exchanged its remaining shares of Conquest common stock for shares of SmarTalk common stock resulting in a realized pre-tax gain of $16,124. As of December 31, 1997, the SmarTalk shares were included in available-for-sale securities (note 7) and were valued at the Option Price. The option was exercised in January 1998 resulting in the Company exchanging its remaining SmarTalk shares for cash. (7) Marketable Securities --------------------- Information about marketable investment securities at December 31, 1997 and 1996, is as follows:
1997 -------------------------------------- Unrealized Unrealized Market Cost gains losses value ------ ---------- ---------- ------ Available for sale: Equity securities $16,845 2 - 16,847 ======= = = ====== 1996 -------------------------------------- Unrealized Unrealized Market Cost gains losses value ------ ---------- ---------- ------ Available for sale: Equity securities $300 41 (12) 329 ==== == === === Held to maturity: Debt securities of states and their political subdivisions due within one year $451 1 - 452 ==== == === ===
(Continued) NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Realized gains and losses on the sale of marketable securities in each of the three years ended DecemberE31, 1997, were not significant. (8) Unaudited Quarterly Financial Data for 1997 and 1996 ---------------------------------------------------- The following are summaries of quarterly financial data for the years ended December 31, 1997 and 1996, as reported by the Company:
Unaudited (in thousands, except per share data) ------------------------------------------------ First Second Third Fourth quarter quarter quarter quarter ------------- ---------- ---------- --------- 1997: Operating revenues $16,587 17,864 15,934 15,823 Net operating revenues 5,637 6,130 5,522 4,828 Net earnings 3,195 3,715 3,454 11,821* Earnings per common share: Net earnings .21 .25 .23 .79* 1996: Operating revenues $14,865 14,710 15,252 15,106 Net operating revenues 5,257 4,568 4,750 4,879 Net earnings 3,056 2,620 2,879 3,175 Earnings per common share: Net earnings .20 .17 .19 .21
* The 1997 fourth quarter reflects the net after-tax gain of $9,003 described in note 6. Schedule I ---------- NORTH PITTSBURGH SYSTEMS, INC. (Parent Company) Condensed Financial Information of Registrant Condensed Balance Sheets December 31, 1997 and 1996 (Amounts in Thousands)
Assets 1997 1996 ------ ---- ---- Current assets: Cash and temporary investments $ 3,932 5,609 Marketable securities available for sale 16,741 - Marketable securities held to maturity - 451 Dividend receivable from subsidiary 2,106 1,955 Accounts receivable - other 22 22 ------- ------ Total current assets 22,801 8,037 Property, plant and equipment: Land 150 150 Buildings 1,208 1,208 ------- ------ 1,358 1,358 Less accumulated depreciation and amortization 76 32 ------- ------ 1,282 1,326 Other assets 1,702 2,230 Investment in subsidiaries 52,573 40,328 Notes and accounts receivable - subsidiaries 1,177 5,488 ------- ------ $79,535 57,409 ======= ======
(Continued) Schedule I, Continued --------------------- NORTH PITTSBURGH SYSTEMS, INC. (Parent Company) Condensed Financial Information of Registrant Condensed Balance Sheets, Continued (Amounts in Thousands)
1997 1996 ---- ---- Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Dividend payable $ 2,101 1,955 Accrued legal settlement 3,180 - Deferred income taxes 5,289 - Accounts payable - subsidiaries 27 - Other liabilities 378 148 ------- ------ Total current liabilities 10,975 2,103 Shareholders' equity: Common stock 2,350 2,350 Capital in excess of par value 2,215 2,215 Retained earnings 64,501 50,741 Unrealized gain on available for sale securities 2 - Less cost of treasury stock (508) - ------- ------ 68,560 55,306 ------- ------ $79,535 57,409 ======= ======
(Continued) Schedule I, Continued --------------------- NORTH PITTSBURGH SYSTEMS, INC. (Parent Company) Condensed Financial Information of Registrant Condensed Statements of Operations For the Years Ended December 31, 1997, 1996 and 1995 (Amounts in Thousands)
1997 1996 1995 ------ ---- ---- Revenues: Dividends from subsidiaries $ 2,106 13,821 9,415 Interest income 542 459 288 Nonoperating income 6 142 104 Net gain on sale of investment 14,516 - - ------- ------ ------ 17,170 14,422 9,807 Expenses: General office salaries and expenses 395 387 292 State taxes 115 82 65 Bad debt expense - note receivable - subsidiary 1,389 - - ------- ------ ------ 1,899 469 357 ------- ------ ------ Earnings before income taxes and equity earnings 15,271 13,953 9,450 Income taxes (benefit) 5,366 16 (23) ------- ------ ------ Earnings before equity earnings 9,905 13,937 9,473 Equity in (overdistributed) undistributed net earnings of subsidiaries 12,280 (2,207) 1,214 ------- ------ ------ Net earnings $22,185 11,730 10,687 ======= ====== ======
(Continued) Schedule I, Continued --------------------- NORTH PITTSBURGH SYSTEMS, INC. (Parent Company) Condensed Financial Information of Registrant Condensed Statements of Cash Flows For the Years Ended December 31, 1997, 1996 and 1995 (Amounts in Thousands)
1997 1996 1995 ------ ---- ---- Cash from operating activities: Net earnings $ 22,185 11,730 10,687 Adjustments to reconcile net earnings to net cash provided by operating activities: Equity in undistributed earnings of affiliates (12,280) 2,207 (1,214) Net gain on liquidation of Conquest investment (note 6) (14,516) - - Other adjustments 22 (157) (166) Changes in assets and liabilities: Receivables 4,310 150 (149) Dividend receivable (151) 2,045 (2,346) Accounts payable - affiliates 27 - - Other liabilities 231 (83) 151 Deferred income taxes 5,161 - - -------- ------ ------ Total adjustments (17,196) 4,162 (3,724) -------- ------ ------ Net cash provided by operating activities 4,989 15,892 6,963 -------- ------ ------ Cash from investing activities: Expenditures for property and equipment - (794) (564) Investment in affiliates (2) - (40) Proceeds from sale of investment 1,655 - - Purchase of marketable securities held to maturity - (454) (1,237) Proceeds from maturity of marketable securities held to maturity 451 1,014 1,144 Notes receivable - subsidiaries - (3,815) (1,673) -------- ------ ------ Net cash provided by (used for) investing activities 2,104 (4,049) (2,370) -------- ------ ------
(Continued) Schedule I, Continued --------------------- NORTH PITTSBURGH SYSTEMS, INC. (Parent Company) Condensed Financial Information of Registrant Condensed Statements of Cash Flows, Continued (Amounts in Thousands)
1997 1996 1995 ------ ---- ---- Cash used for financing activities: Cash dividends $(8,262) (7,670) (7,068) Purchase of treasury stock (508) - - ------- ------ ------ Net cash used for financing activities (8,770) (7,670) (7,068) Net (decrease) increase in cash and temporary investments (1,677) 4,173 (2,475) Cash and temporary investments at beginning of year 5,609 1,436 3,911 ------- ------ ------ Cash and temporary investments at end of year $ 3,932 5,609 1,436 ======= ====== ======
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 By /s/ H. R. Brown By /s/ C. E. Thomas, Sr. -------------------------------- ------------------------------- H. R. Brown C. E. Thomas, Sr. President and Director Chairman of the Board Date March 19, 1998 Date March 19, 1998 ----------------------------- ------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By /s/ A. P. Kimble -------------------------------- A. P. Kimble Director, Vice President and Treasurer Date March 19, 1998 ------------------------------ Directors: By /s/ F. D. Reese By /s/ C. E. Cole -------------------------------- ------------------------------- F. D. Reese C. E. Cole Date March 19, 1998 Date March 19, 1998 ----------------------------- ------------------------------- OTHER INFORMATION Exhibit Index for Annual Reports on Form 10-K ---------------------------------------------
Exhibit No. Subject Applicability - ----------- ------- ------------- (2) Plan of acquisition, re- Not Applicable organization, arrangement, liquidation or succession (3) (i) Articles of incorporation Provided in Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and Incorporated Herein by Reference. (3) (ii) By-Laws Provided in Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and Incorporated Herein by Reference. (4) Instruments defining the rights Provided in Registration of of security holders, including Securities of Certain Successor indentures Issuers on Form 8-B filed on June 25, 1985 and Incorporated Herein by Reference. (9) Voting trust agreement Not Applicable (10) Material contracts Not Applicable (11) Statement re computation of per Attached Hereto share earnings (12) Statement re computation of ratios Not Applicable (13) Annual report to security holders, Not Applicable Form 10-Q or quarterly report to security holders (16) Letter re change in certifying Not Applicable accountant
Exhibit No. Subject Applicability - ----------- ------- ------------- (18) Letter re change in accounting Not Applicable principles (21) Subsidiaries of the Registrant Attached Hereto (22) Published report regarding matters Not Applicable submitted to vote of security holders (23) Consent of experts and counsel Not Applicable (24) Power of attorney Not Applicable (27) Financial data schedule Attached Hereto (99) Additional Exhibits Not Applicable
EX-11 2 STATEMENT OF COMPUTATIONS OF EARNINGS PER SHARE Exhibit 11 NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Statement re computation of per share earnings Statement of Computations of Earnings per Share
For the Year Ended December 31 ---------------------------- 1997 1996 1995 -------- -------- -------- Net Earnings $22,185 $11,730 $10,687 ======= ======= ======= Average common shares outstanding 15,019 15,040 15,040* ======= ======= ======= Basic and diluted earnings per share $ 1.48 $ .78 $ .71* ======= ======= =======
*Adjusted for a 2 for 1 stock split-up effective May 22, 1996 EX-21 3 SUBSIDIARIES OF REGISTRANT Exhibit 21 NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Subsidiaries of Registrant North Pittsburgh Telephone Company, Penn Telecom, Inc. and Pinnatech, Inc. are wholly-owned subsidiaries of the Registrant. The wholly-owned subsidiaries of the Registrant are incorporated in the Commonwealth of Pennsylvania and do business only under their respective names. In addition, Penn Telecom, Inc. owns 49.5% of Boulevard Communications, L.L.P. (Boulevard). The Registrant owns 50% of the voting capital stock of Multi, Inc. which in turn owns 0.5% of Boulevard. Neither Boulevard nor Multi, Inc. is considered a significant subsidiary at this time. Penn Telecom, Inc.'s ownership of Boulevard and the Registrant's ownership of Multi, Inc. are accounted for using the equity method. EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM *____________ AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. *Identify the financial stastement(s) to be referenced in the legend: December 31, 1997 Annual Report 1,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 15,938 16,847 9,396 0 3,360 45,566 140,500 69,303 127,833 18,860 27,037 2,350 0 0 66,210 127,833 2,769 66,207 2,601 44,090 0 0 1,710 36,371 14,186 22,185 0 0 0 22,185 1.48 1.48
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