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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(Mark One)
{X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
-------------------------------------------
OR
{ } TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission File Number 0-13716
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NORTH PITTSBURGH SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1485389
--------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4008 Gibsonia Road, Gibsonia, Pennsylvania 15044-9311
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(Address of principal executive offices)
(Zip Code)
724-443-9600
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(Registrant's telephone number, including area code)
No Change
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO ____
---
APPLICABLE ONLY TO CORPORATE USERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock Outstanding
------------------------
At August 2, 2002, the Registrant had 15,005,000 shares of common stock
outstanding, par value $.15625 per share, the only class of such stock issued.
PART I
Item 1
Financial Statements
North Pittsburgh Systems, Inc. and Subsidiaries
Consolidated Statements of Earnings (Unaudited)
(Amounts in Thousands - Except Per Share Data)
For the Three Months For the Six Months
Ended June 30 Ended June 30
------------------------- -------------------
2002 2001 2002 2001
--------- ---------- -------- --------
Operating revenues:
Local network services $ 5,751 $ 4,976 $ 11,280 $ 9,825
Long distance and access services 13,805 13,092 27,502 26,155
Directory advertising, billing & other services 342 605 693 1,196
Telecommunication equipment sales 501 631 1,108 1,118
Other operating revenues 1,539 1,767 3,866 3,435
--------- ---------- -------- --------
Total Operating Revenues 21,938 21,071 44,449 41,729
Operating expenses:
Network and other operating expenses 11,334 10,550 22,200 22,339
Depreciation and amortization 4,416 4,217 8,806 8,694
State and local taxes 782 794 1,641 1,666
Telecommunication equipment expenses 356 460 756 777
--------- ---------- -------- --------
Total Operating Expenses 16,888 16,021 33,403 33,476
--------- ---------- -------- --------
Net Operating Income 5,050 5,050 11,046 8,253
Other expense (income), net:
Interest expense 897 954 1,811 1,843
Interest income (139) (309) (292) (646)
Sundry, net 515 6 217 93
--------- ---------- -------- --------
1,273 651 1,736 1,290
--------- ---------- -------- --------
Earnings before income taxes 3,777 4,399 9,310 6,963
Income taxes 1,556 1,840 3,842 2,930
--------- ---------- -------- --------
Net earnings $ 2,221 $ 2,559 $ 5,468 $ 4,033
========= ========== ======== ========
Weighted average common shares outstanding 15,005 15,005 15,005 15,005
========= ========== ======== ========
Basic and diluted earnings per share $ .15 $ .17 $ .36 $ .27
========= ========== ======== ========
Dividends per share $ .17 $ .17 $ .34 $ .34
========= ========== ======== ========
See accompanying notes to condensed consolidated financial statements.
1
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in Thousands)
(Unaudited)
June 30 Dec. 31
ASSETS 2002 2001
------------- -------------
Current Assets:
Cash and temporary investments $ 32,742 $ 35,299
Marketable securities available for sale 285 244
Accounts receivable:
Customers, net of allowance for doubtful accounts of
$415 and $415, respectively 4,973 5,404
Access service settlements and other 7,163 8,606
Prepaid expenses 748 496
Inventories of construction and operating materials and
supplies 2,483 2,548
Prepaid taxes other than income taxes 559 -
Deferred income tax 246 1,249
------------- ----------
Total current assets 49,199 53,846
------------- ----------
Property, plant and equipment:
Land 475 475
Buildings 13,589 13,531
Equipment 175,954 173,714
Assets held under capital lease 10,363 10,363
------------- ----------
200,381 198,083
Less accumulated depreciation and amortization 106,295 99,660
------------- ----------
94,086 98,423
Construction in progress 4,044 2,875
------------- ----------
Total property, plant and equipment, net 98,130 101,298
Investments 13,085 11,891
Deferred financing costs 550 590
Other assets 1,208 1,338
------------- ----------
$ 162,172 $ 168,963
============= ==========
(Continued)
2
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in Thousands)
(Unaudited)
June 30 Dec. 31
LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2001
--------------- --------------
Current liabilities:
Current portion of long-term debt $ 4,159 $ 4,125
Obligation under capital lease 964 926
Accounts payable 6,253 7,764
Dividend payable 2,551 2,551
Other accrued liabilities 3,027 3,938
Federal and state income taxes 554 1,605
------------- -------------
Total current liabilities 17,508 20,909
------------- -------------
Long-term debt 45,112 47,202
Obligation under capital lease 7,123 7,607
Deferred income taxes 9,200 10,483
Accrued pension and postretirement benefits 6,485 6,476
Other liabilities 1,994 1,944
------------- -------------
Total liabilities 87,422 94,621
------------- -------------
Shareholders' equity:
Capital stock-common stock, par value $.15625;
authorized 50,000 shares; issued 15,040 shares
and outstanding 15,005 shares 2,350 2,350
Capital in excess of par value 2,215 2,215
Retained earnings 70,707 70,342
Less cost of treasury stock (35 shares) (508) (508)
Accumulated other comprehensive income-unrealized loss
on available for sale securities, net (14) (57)
------------- -------------
Total shareholders' equity 74,750 74,342
------------- -------------
$ 162,172 $ 168,963
============= =============
See accompanying notes to condensed consolidated financial statements.
3
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
(Amounts in Thousands)
For the Six Months
Ended June 30
----------------------------------
2002 2001
------------- -------------
Cash from operating activities:
Net earnings $ 5,468 $ 4,033
Adjustments to reconcile net earnings to net cash from
operating activities:
Depreciation and amortization 8,806 8,694
Gain on sale of marketable securities - (55)
Equity (income) loss of affiliated companies (1,194) 59
Changes in assets and liabilities:
Accounts receivable 1,874 (135)
Inventories of construction and operating materials
and supplies 65 999
Deferred financing costs, prepaid expenses and
other assets (82) 232
Prepaid taxes (559) (500)
Accounts payable (1,511) (587)
Other accrued liabilities (861) 232
Accrued pension and postretirement benefits 9 343
Federal and state income taxes (1,051) 141
Deferred income taxes (312) 783
Other, net 117 (128)
------------- -------------
Total adjustments 5,301 10,078
------------- -------------
Net cash from operating activities 10,769 14,111
------------- -------------
Cash used for investing activities:
Expenditures for property and equipment (5,559) (7,406)
Net salvage and cost of removal on retirements (92) 26
------------- -------------
Net capital additions (5,651) (7,380)
------------- -------------
Purchase of marketable securities available for sale (71) (1,045)
Proceeds from sale of marketable securities available for sale - 5,865
Distributions from affiliated entities - 57
------------- -------------
Net cash used for investing activities (5,722) (2,503)
------------- -------------
Cash used for financing activities:
Cash dividends (5,102) (5,102)
Payments of capital lease obligation (446) (401)
Retirement of debt (2,056) (1,786)
Proceeds from issuance of debt - 6,253
------------- -------------
Net cash used for financing activities (7,604) (1,036)
------------- -------------
Net (decrease) increase in cash and temporary investments (2,557) 10,572
Cash and temporary investments at beginning of period 35,299 19,240
------------- -------------
Cash and temporary investments at end of period $ 32,742 $ 29,812
============= =============
Interest paid $ 1,785 $ 1,794
============= =============
Income taxes paid $ 5,211 $ 1,800
============= =============
Supplemental disclosure of noncash financing activities:
A capital lease obligation of $1,060 was incurred when a subsidiary of the
Registrant entered into a lease for new equipment during the six-month period
ended June 30, 2001. No obligation was incurred during the six-month period
ended June 30, 2002.
See accompanying notes to condensed consolidated financial statements.
4
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Amounts in Thousands)
(Unaudited)
(1) General
-------
The condensed consolidated financial statements included herein have been
prepared by the Registrant, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Consolidated herein are the financial
results of the Registrant's wholly-owned subsidiaries, North Pittsburgh
Telephone Company (North Pittsburgh), Penn Telecom, Inc. (Penn Telecom) and
Pinnatech, Inc. (Pinnatech). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations. Nevertheless, the Registrant believes that its
disclosures herein are adequate to make the information presented not misleading
and, in the opinion of management, all adjustments (which consisted only of
normal recurring accruals) necessary to present fairly the results of operations
for the interim periods have been reflected. These condensed consolidated
financial statements should be read in conjunction with the financial statements
and the notes thereto included in the Registrant's latest Annual Report to the
Securities and Exchange Commission on Form 10-K.
In July, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets". The Registrant adopted this pronouncement on January 1, 2002. As of
June 30, 2002, the Registrant had a net book value of $561 in equity method
goodwill (recorded under "Investments") as the result of the purchase of
additional interest in the Pennsylvania RSA 6(II) Limited Partnership in
September, 2000. SFAS No. 142 discontinues the amortization of equity method
goodwill and prescribes that the Registrant continue to test for impairment in
accordance with Accounting Principles Board (APB) Opinion 18. The Registrant
noted no impairment during its review of the equity method goodwill and
associated investment during 2002. This pronouncement did not have a significant
impact on the consolidated financial statements.
In August, 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets". The
Registrant adopted this pronouncement on January 1, 2002. This pronouncement did
not have a significant impact on the consolidated financial statements.
(2) Comprehensive Income
--------------------
SFAS No. 130, "Reporting Comprehensive Income", establishes requirements
for disclosure of comprehensive income. The objective of SFAS 130 is to report
all changes in equity that result from transactions and economic events other
than transactions with owners. Comprehensive income is the total of net income
and all other non-owner changes in equity. The reconciliation of net income to
comprehensive income is as follows:
For the Three Months For the Six Months
Ended June 30 Ended June 30
------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 2,221 $ 2,559 $ 5,468 $ 4,033
Unrealized gain (loss) on
marketable securities
including reclassification
adjustments, net of tax 54 (57) 43 (7)
----------- --------- --------- ---------
Comprehensive income $ 2,275 $ 2,502 $ 5,511 $ 4,026
=========== ========= ========= =========
(3) Worldcom Bankruptcy
-------------------
On July 21, 2002, Worldcom petitioned the U.S. Bankruptcy Court for the
Southern District of New York for bankruptcy protection under Chapter 11 of the
U.S. Bankruptcy Code. Although the Registrant is routinely faced with the
bankruptcies of very small carriers, which do not individually or in the
aggregate have a material financial statement impact, the Registrant had not
experienced a bankruptcy of the magnitude of Worldcom, the second largest access
revenue source of the Registrant. Due to the timing of the bankruptcy petition
being near the filing date of this document, the substantial
5
issues still to be ruled upon and resolved as well as uncertainties relating to
the impact of Worldcom's bankruptcy filing on the National Exchange Carrier
Association (NECA) pooling process, as described in more detail below, the
Registrant cannot determine in absolute dollars the potential impact of the
Worldcom bankruptcy on the Registrant's future financial statements.
Through preliminary filings and hearings concerning the Worldcom bankruptcy, it
appears that the Regional Bell Operating Companies (RBOCs) and both independent
and competitive local exchange carriers will be classified as utilities.
Although this status offers forms of payment protection during the bankruptcy
process, the protection is not as great as for those companies listed as
critical vendors, nor is the likelihood as great of receiving payments for
pre-bankruptcy amounts outstanding. Although the RBOCs and independent and
competitive local exchange carriers are expected to petition to seek critical
vendor status, the ultimate resolution of this matter is not certain at this
time. As such, in estimating the bad debt reserves necessary with respect to the
amounts outstanding from Worldcom, the Registrant has made the assumption that
the utility status will remain and that the Registrant will be an unsecured
creditor which will most likely receive nothing for pre-bankruptcy claims.
The amounts outstanding to the Registrant from Worldcom relating to services
provided through June 30, 2002, the date of the reported financial statements
provided in this Quarterly Report on Form 10-Q, are $978. This amount can be
broken down into three sub-classes as follows: $28 outstanding in total to Penn
Telecom; $372 in intrastate revenues outstanding to North Pittsburgh; and $578
in interstate revenues outstanding to North Pittsburgh. With Penn Telecom's
status as a competitive local exchange carrier (CLEC) and the respective tariffs
it operates under, there is no recovery mechanism for amounts outstanding in the
event that Worldcom's debts to unsecured creditors are absolved. In addition,
with North Pittsburgh operating under a price cap plan as opposed to a rate of
return tariff in the state of Pennsylvania, there is no recovery mechanism for
the intrastate amounts outstanding. As such, the Registrant has recorded as of
June 30, 2002 a total reserve against accounts receivable in the amount of $400
for the Penn Telecom and North Pittsburgh intrastate access amounts outstanding
of $28 and $372, respectively. In addition, the Registrant estimates that
between $15 to $20 for Penn Telecom and $125 to $145 for North Pittsburgh
intrastate access revenues will need to be reserved and therefore not recognized
as revenue during the third quarter of 2002 for estimated services provided from
July 1, 2002 through July 21, 2002, the date of Worldcom's bankruptcy filing.
In the interstate jurisdiction, North Pittsburgh participates in a
revenue pooling process administered by NECA. Uncollectible interstate amounts,
which totaled $578 for North Pittsburgh as of June 30, 2002, can be submitted to
NECA for reimbursement via the pooling mechanism. However, due to the magnitude
of the expected uncollectibles from all NECA members, North Pittsburgh will most
likely not be able to recover 100% of the uncollectibles submitted. In the event
that the rate of return for the NECA pool falls below the authorized return of
11.25%, the recovery of the accounts receivable submitted will be less than
dollar for dollar. Through June 30, 2002, which period excludes the impact of
Worldcom uncollectibles since they will most likely not be reported by pool
members until August and September, pool earnings exceeded the authorized rate
of 11.25%. As such, North Pittsburgh had an accrual of $462 recorded for the
potential liability associated with the 2002 over-earnings. Therefore, in the
event that the rate of return for the NECA pool falls below the 11.25%
authorized rate of return and North Pittsburgh does not recover its entire
uncollectible amount submitted through the pool, the associated reversal of the
$462 over-earnings reserve would mitigate the financial statement impact. Due to
the existence of this mitigating reserve and the fact that North Pittsburgh
cannot reasonably estimate the amount of potential write-offs for all
participants in the NECA pool nor the rate of return of the pool after the
submission of Worldcom uncollectibles, the Registrant did not establish a
separate reserve for the $578 in interstate access receivables as of June 30,
2002. The Registrant also estimates that there will be approximately $240 to
$270 of additional interstate uncollectible revenues reported to NECA for the
period July 1, 2002 through July 21, 2002, the date of the bankruptcy filing.
The Registrant notes that due to the NECA pooling mechanisms, there is a
possibility that North Pittsburgh may be unsuccessful in recovering not only the
$578 of interstate revenues outstanding as of June 30, 2002 and the estimated
$240 to $270 in revenues expected to be generated from July 1, 2002 through July
21, 2002, but may ultimately be liable to reimburse the NECA pool. This
situation could occur if: 1) the magnitude of the Worldcom bankruptcy causes the
rate of return of the NECA pool to approach 0% or even turn negative; 2) the
percentage of North Pittsburgh's uncollectibles to total interstate reported
revenues is smaller than the average NECA pool members; and 3) NECA and/or North
Pittsburgh is unsuccessful at petitioning the Federal Communications Commission
(FCC) for financial remedies given such events.
Due to the fact that the ultimate outcome of the Worldcom bankruptcy is
uncertain at this time, the fact that the critical information necessary to
calculate the NECA pool rate of return is not available at this time to the
Registrant or NECA and the fact that the Registrant cannot predict what actions,
if any, the FCC may take to give local exchange carriers (LECs) current or
future financial remedies, the Registrant cannot reasonably estimate the
ultimate financial impact of the Worldcom bankruptcy filing on future revenues.
6
In addition, Worldcom is a major contributor to the federal universal
service fund (USF) and is required under FCC rules to provide monthly
contributions to the USF by making payments to the Universal Service
Administration Corporation (USAC), which is the non-profit agency that
administers the federal USF. North Pittsburgh, under FCC rules, is eligible for
and receives federal USF funding in the form of two (2) payments from USAC
referred to as Long Term Support (LTS) and Interstate Common Line Support
(ICLS). North Pittsburgh currently receives approximately $81 per month in LTS
and effective July, 2002 will begin receiving approximately $229 per month in
ICLS. The new ICLS support will be offset by a decrease in the carrier common
line charge billed directly to interexchange toll providers. Worldcom is also a
monthly contributor to the Pennsylvania Intrastate Universal Service Fund (PA
USF). North Pittsburgh receives approximately $435 per month in PA USF support
payments. North Pittsburgh does not know what percent of the amount it receives
from either the federal USF or the PA USF is contributed by Worldcom.
Worldcom has made a motion to the Bankruptcy Court for authorization to pay
regulatory fees and has stated that regulatory fees are critical to Worldcom's
operations. Worldcom included on its list for payment of regulatory fees both
federal and state USF programs. While it appears likely that the Court may grant
Worldcom's motion to authorize payments to the federal and state USF programs,
the Registrant is unable to predict the outcome of the request or its impact on
the Registrant's revenues if the request is denied.
PART I
Item 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Amounts in Thousands Except Per Share Data and Operating Statistics)
The statements contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" which are not historical are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements represent the
Registrant's present expectations or beliefs concerning future events. The
Registrant cautions that such statements are qualified by important factors that
could cause actual results to differ materially from those in the
forward-looking statements. Thus, results actually achieved may differ
materially from expected results included in these statements.
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
(a) Changes in Financial Condition
------------------------------
There were no material changes in the Registrant's consolidated
general financial condition from the end of its preceding fiscal year on
December 31, 2001 to June 30, 2002, the end of the six-month period reported
herein.
(b) Results of Operations for the Six Months Ended June 30, 2002 and
----------------------------------------------------------------
2001
----
Net earnings for the six-month period ended June 30, 2002 were
$5,468, or $.36 per share, compared to net earnings of $4,033, or $.27 per
share, for the comparable prior year period. These fluctuations were
attributable to the following factors:
(1) Operating Revenues
------------------
Total operating revenues increased $2,720, or 6.5%, in the
six-month period ended June 30, 2002 over the comparable period in 2001. This
increase was primarily the result of increases in local network service revenues
of $1,455 (14.8%), long distance and access service revenues of $1,347 (5.2%)
and other operating revenues of $431 (12.5%), offset partially by a decrease in
directory advertising, billing and other services revenues of $503 (42.1%) and a
minimal decrease in telecommunication equipment sales of $10 (0.9%).
Increases in local network service revenues of $1,455, or
14.8%, were attributable to several factors, one of which was North Pittsburgh's
Chapter 30 filing with the Pennsylvania Public Utility Commission (PA PUC) in
December of 2001. As a result of this revenue neutral filing, North
7
Pittsburgh increased local rates, with the corresponding offset occurring
through a decrease in intrastate access rates. The revenue shift from long
distance and access services revenues to local network services revenues was
approximately $900 for the six-month period ended June 30, 2002. Penn Telecom's
basic area and vertical features revenues also increased by $700 due to
continued successful penetration south of North Pittsburgh's territory in the
city of Pittsburgh and surrounding areas as well as north of North Pittsburgh's
territory in the city of Butler, PA. Penn Telecom's basic access lines installed
increased from 6,582 as of June 30, 2001 to 13,046 as of June 30, 2002, and
primary rate interface (PRI) circuits grew from 143 circuits as of June 30, 2001
to 251 circuits as of June 30, 2002.
The increase in long distance and access service revenues of $1,347, or 5.2%,
was attributable to an increase in high capacity circuits sold (special access
revenues), an increase in cellular termination revenues and an increase in
access revenues, offset partially by a decrease in toll revenues. Special access
revenues increased $597 at North Pittsburgh and $602 at Penn Telecom, mostly as
a result of large increases in the number of DS-1 and DS-3 circuits sold. At
Penn Telecom, the numbers of DS-1s, DS-3s and OC-3s installed have increased
from 114, 13 and 1, respectively, as of June 30, 2001 to 299, 21 and 2,
respectively, as of June 30, 2002. Cellular termination access revenues
increased $261 due to the growth in minutes of use (MOUs) of cellular traffic.
Interstate, intrastate and other access revenues increased approximately $115,
mostly as a result of growth in access revenues at Penn Telecom as the number of
lines in service nearly doubled and an increase at North Pittsburgh in intraLATA
settlement revenues, offset partially by the North Pittsburgh Chapter 30 filing
which, as described above, shifted approximately $900 from intrastate access
revenues to local network service revenues. Toll revenues decreased
approximately $200 due to a decrease in intraLATA toll revenues at North
Pittsburgh, partially offset by a growth in both intraLATA and interLATA toll
revenues at Penn Telecom. The decrease in intraLATA toll revenues at North
Pittsburgh was mostly a result of a decrease in market share and loss of minutes
of use to such competition as cellular and to a decrease in the average billed
rate due to the development of additional calling plans to meet the competitive
environment. This decrease was partially offset by an increase in both intraLATA
and interLATA toll revenues at Penn Telecom due to the successful bundling of
toll with local calling packages. As of June 30, 2002, 79% of Penn Telecom's
CLEC customers subscribed to one of its toll packages.
The increase in other operating revenues of $431, or 12.5%, was
primarily due to the growth in digital subscriber line (DSL) revenues of
approximately $864 as combined DSL lines (both wholesale and retail) increased
from 3,705 as of June 30, 2001 to 6,116 as of June 30, 2002. This increase was
partially offset by higher carrier reserve charges, which included $101 and $400
related to the bankruptcies of Global Crossings and Worldcom, respectively.
The decrease in directory advertising, billing and other services
revenues of $503, or 42.1%, was mostly due to a decrease of $383 in directory
advertising revenue and a decrease of $88 in carrier billing and collection
revenues. Directory advertising revenues for 2002 are expected to decrease
approximately $750 from $1,800 in annual revenue in 2001 to $1,050 in annual
revenue for 2002. North Pittsburgh's five-year agreement with its former
directory partner expired with the 2001 directory. As the terms proposed by the
former directory partner for the next contract greatly decreased North
Pittsburgh's share of the income generated by the directory, North Pittsburgh
negotiated a five-year contract with a new partner, at terms much more
advantageous to North Pittsburgh. However, as the former partner continued to
publish its directory, the competitive environment increased, resulting in lower
revenues generated by North Pittsburgh's 2002 directory. With respect to carrier
billing and collection revenues, North Pittsburgh has contracts with several
interexchange carriers (IXCs) and other telecommunications companies under which
it earns fees for performing billing and collection services on behalf of these
companies. North Pittsburgh has seen the volume of services and calls billed on
behalf of these companies steadily decrease over the past two years, mostly as a
result of more companies bringing these functions in-house.
(2) Operating Expenses and Net Operating Income
-------------------------------------------
Total operating expenses decreased $73, or 0.2%, in the six-month
period ended June 30, 2002 over the comparable period in 2001. The change was
primarily the result of decreases in network and other operating expenses of
$139 (0.6%), state and local taxes of $25 (1.5%) and telecommunications
equipment expenses of $21 (2.7%), offset by an increase in depreciation and
amortization expenses of $112 (1.3%).
The decrease in network and other operating expenses of $139, or
0.6%, was due to decreased expenses at North Pittsburgh and Pinnatech as well as
a small reduction in corporate expenses, offset partially by an increase in
expenses at Penn Telecom. At North Pittsburgh, network and other operating
expenses for the six-month period ended June 30, 2002 decreased by approximately
$304 from the prior year comparable period due to several factors, one of which
was a cost reduction program instituted during the later part of the first
quarter of 2001. As discussed under
8
the Regulatory Matters section of this report (paragraph (e)(2) of this
section), the intent of the Telecommunications Act of 1996 (the 1996 Act) as
well as some current FCC and PA PUC regulatory proceedings is to open up the
telecommunications market to competition. Although North Pittsburgh has yet to
see any material impact on its revenues or material loss of access lines, it has
adopted a pro-active approach to cost reduction. The cost reduction program has
to date involved not only the elimination of direct external expenses such as a
large reduction in the use of outside contractors, but also improving operating
procedures. Internal processes and procedures have been re-engineered to
maximize both labor and material usage as well as inventory levels. In addition,
with the recent completion of the five-year modernization of North Pittsburgh's
network during 2001, maintenance expense has decreased from prior year levels as
legacy equipment has been upgraded and/or replaced. These costs savings were
partially offset by an increase in pension expense, healthcare expense and
corporate insurance premiums. Also, the prior year period included a charge of
$318 to reduce inventory to the lower of cost or market.
At Pinnatech, network and other operating expenses for the
six-month period ended June 30, 2002 decreased approximately $223 from the prior
year comparable period. The decrease was a result of a lower employee base,
which resulted in a reduction of $111 in salary and related benefits expense. In
addition, approximately $54 in Nauticom Sports Network (NSN) charges were
incurred by Pinnatech in the prior year comparable period. Although the NSN was
closed in December of 2000, several contracts were settled for higher amounts
than originally accrued for in the restructuring reserve and other miscellaneous
charges were incurred in the first six months of 2001.
At Penn Telecom, network and other expenses for the six-month
period ended June 30, 2002 increased approximately $453 from the prior year
comparable period. The increase was mostly due to the underlying growth in Penn
Telecom's CLEC variable costs in association with the overall growth in access
line equivalents and revenue. Unbundled network element (UNE) costs for
non-facilities based access lines, broadband circuit costs and DSL costs
increased approximately $514 from the comparable prior year period to support
the overall growth in the network, access lines, high capacity circuits and DSL
lines in service. In addition, personnel and sales expenses grew approximately
$625 in order to support the revenue and organizational growth. These increases
were partially offset by an approximate $500 charge incurred in the prior year
period due to the expensing of operational support system evaluation charges in
accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". In addition, office
and renovation expense decreased $133 as the prior year period included a major
renovation to a Penn Telecom facility and the current year period included $136
in performance assurance payments received from Verizon, which are recorded as a
reduction in operating expenses.
The increase in depreciation and amortization expenses of $112, or
1.3%, was the result of the increase in the depreciable asset base (gross
property, plant and equipment) of 1.2% over the prior year period.
The decrease in state and local taxes of $25, or 1.5%, was mostly
attributable to a reduction in the Pennsylvania capital stock tax due to a
reduction in millage rates from the prior year, offset partially by an increase
in gross receipts tax at Penn Telecom due to its revenue growth.
The decrease in telecommunications and equipment expense of $21,
or 2.7%, was a direct result of the decrease in telecommunications equipment
sales of 0.9% and a slight increase in margins as revenue from labor charges
billed, which have a higher associated margin, increased $67 from the prior
year.
Overall, the increase in total operating revenues of $2,720,
coupled with the decrease in total operating expenses of $73, resulted in a
33.8% increase in net operating income for the six-month period ended June 30,
2002 over the comparable period in 2001.
(3) Other Items
-----------
Interest expense decreased for the six-month period ended June 30,
2002 by $32 over the comparable period in 2001 due to lower average debt
balances. Interest income decreased $354 primarily due to the liquidation of
available for sale debt securities in April of 2001 and the general decrease in
short-term money market rates for temporary investments. The change in
sundry, net of $124 was primarily due to an increase in costs expended by the
Registrant in exploring strategic alternatives and business arrangements.
Associated costs totaled $1,220 during the six months ended June 30, 2002 as
compared to $0 incurred in the comparable prior year period. In addition, the
Registrant recorded an investment loss of $140 associated with the
other-than-temporary decline of several equity securities. These charges were
partially offset by a $1,284 increase in equity income from the Registrant's
investments in three cellular partnerships.
9
(c) Results of Operations for the Three Months Ended June 30, 2002 and
------------------------------------------------------------------
2001
----
Fluctuations in revenue and expenses for the three-month period
ended June 30, 2002, as compared to the same quarterly period in 2001, are
generally attributable to the same reasons discussed in the six-month
comparisons above with the exception of the following:
Other operating revenues decreased $228, or 12.9%, for the
three-month period ended June 30, 2002 as compared to the same quarterly period
in 2001 versus a six-month year to date increase of $431, or 12.5%, as
previously described. Although DSL revenues increased $425 quarter over quarter,
charges for uncollectible revenues increased $575, mostly as a result of the
establishment of reserves by the Registrant in the second quarter of 2002 in
association with the Worldcom and Global Crossings bankruptcies.
Network and other operating expenses increased $784, or 7.4%, for
the three-month period ended June 30, 2002 as compared to the same quarterly
period in 2001 versus a six-month year to date decrease of $139, or 0.6%, as
previously described. The prior year charges of $318 at North Pittsburgh to
decrease inventory to the lower of cost or market, $500 at Penn Telecom to
expense operational support system evaluation costs and the majority of the $54
of NSN related costs, which significantly contributed to the six-month year over
year decrease, occurred in the first quarter of 2001. The 7.4% increase in
network and other operating expenses in the second quarter of 2002 over the
prior year quarter was mostly due to the increase in network, installation,
personnel and sales costs to support the revenue and organizational growth at
Penn Telecom as well as the year over year increases in the Registrant's
pension, healthcare and insurance costs.
Sundry, net changed by $509 for the three-month period ended June
30, 2002 as compared to the same quarterly period in 2001 versus a six-month
year to date change of $124, as previously described. The costs expended by the
Registrant in exploring strategic alternatives and business arrangements in the
second quarter of 2002 increased to $822 from $0 in the prior year quarter. In
addition, the entire investment loss of $140 associated with the
other-than-temporary decline of several equity securities was recorded in the
second quarter of 2002 versus a gain on the sale of available for sale debt
securities of $68 recorded in the second quarter of 2001. These fluctuations
were partially offset by a $563 increase in equity income from the Registrant's
investments in three cellular partnerships during the three-month period ended
June 30, 2002.
(d) Liquidity and Capital Resources
-------------------------------
June 30, December 31,
2002 2001
----------- ------------
Cash and temporary investments $ 32,742 $ 35,299
Working capital $ 31,691 $ 32,937
Long-term debt (including current maturities) $ 49,271 $ 51,327
Cash and temporary investments were $32,742 at June 30, 2002 as
compared to $35,299 at December 31, 2001. The decrease was due in part to the
$7,604 expended for financing activities, including cash dividends and the
scheduled repayments of debt and capital lease obligations, during the six-month
period ended June 30, 2002. In addition, the Registrant internally funded 100%
of the $5,559 of expenditures for property and equipment during the six-month
period ended June 30, 2002. These cash outlays were partially offset by cash
flows from operations of $10,769 for the six-month period ended June 30, 2002.
Temporary excess funds were 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 throughout 2002, which should enable the
Registrant to satisfactorily meet all short-term obligations.
Working capital levels at June 30, 2002 decreased $1,246 from
December 31, 2001, mostly as a result of the Registrant funding all capital
expenditures and financing activities with cash generated from operations and
internal cash reserves.
The decrease in long-term debt was a result of the scheduled
$2,056 of principal repayments in the six-month period ended June 30, 2002. As
mentioned above, the Registrant funded 100% of its 2002 year to date
expenditures for property and equipment from operations cash flows and cash
reserves. As such, no additional advances were requested from the Registrant's
available debt facilities. In 1996, North Pittsburgh was granted approval for a
loan from the Federal Financing Bank (FFB) guaranteed by the Rural Utilities
Service (RUS) in the maximum principal amount of $75 million. The principal
amount has been and will be advanced periodically over a total six-year period
for qualified capital expenditure projects, as defined in the loan agreement, to
furnish
10
and improve telephone service in rural areas. All advances have a maturity date
of December 31, 2012. The total amount outstanding at June 30, 2002 to the FFB
under this loan was $32,395. As of June 30, 2002, North Pittsburgh had $4,734 of
qualified capital expenditures that were eligible to be drawn against this
facility. In addition, North Pittsburgh had principal outstanding of $16,876 at
June 30, 2002 from loan advances from the Rural Telephone Bank (RTB) made from
1977 through 1987. The advances from the RTB have maturity dates ranging from
2009 through 2019.
The notes payable to the RTB are secured by a supplemental Mortgage
Agreement executed by North Pittsburgh, which provides that substantially all of
the property, plant and equipment of North Pittsburgh, which approximates a net
book value of $74 million, are subject to a lien or a security interest. Such
agreement contains restrictions regarding dividends and other distributions by
North Pittsburgh. Under these restrictions, unless certain working capital and
net worth levels are maintained, North Pittsburgh 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 shareholders or purchase, redeem or retire
any of its capital stock or make any investment in affiliated companies. As a
result of these restrictions, $6,994 of North Pittsburgh's retained earnings
were available for dividends to the Registrant as of June 30, 2002. Taking into
consideration the North Pittsburgh restrictions, consolidated retained earnings
of the Registrant of approximately $26,227 were available for dividends and
other distributions to the Registrant's shareholders as of June 30, 2002.
The original six-year advancement period for the RUS loan ends in
November of 2002, at which time North Pittsburgh has the option of executing a
three-year extension of the advancement period through November of 2005. The
unadvanced amount of this facility as of June 30, 2002 was $34,764.
North Pittsburgh also has available through June of 2004 a $10 million
line of credit with the Rural Telephone Finance Cooperative at a rate of prime
plus 1 1/2%. No borrowings have taken place against the line of credit.
A summary of the Registrant's significant contractual obligations and
commitments as of June 30, 2002 is as follows:
Debt Principal Capital Lease*
-------------- -------------
Remainder of 2002 $ 2,069 $ 796
2003 4,194 1,592
2004 4,268 1,592
2005 4,347 1,450
2006 4,431 1,272
Thereafter 29,962 4,362
*Represents total minimum lease commitments (interest and executory costs are
included).
Consolidated capital expenditure commitments for the purchase and
installation of new equipment at June 30, 2002 amounted to approximately $0.5
million, with such amount being part of the 2002 construction program, which is
projected to be in the range of $12.0 million to $13.0 million. The Registrant
has made expenditures of $5.6 million in association with this construction
program through June 30, 2002 and expects capital expenditures ranging between
$6.4 million to $7.4 million for the second half of 2002.
Management expects cash flows provided by operating activities and
cash reserves in 2002 to be sufficient to service long-term debt and capital
lease obligations, to pay dividends and to finance all non-RUS qualified
projects. The Registrant has the necessary cash flows from operations and cash
reserves to internally finance 100% of its projected capital expenditures.
However, due to the low cost financing available through the RUS for qualified
North Pittsburgh capital expenditures, the Registrant may request advancements
from the RUS facility in the future.
(e) Other Information
-----------------
(1) Critical Accounting Policies
----------------------------
Certain accounting policies are very important to the portrayal
of the Registrant's financial condition and results of operations and require
management's most subjective or complex judgments. These policies are as
follows:
11
Revenue Recognition
-------------------
Revenues are recognized when local network, long distance and access
services are provided. Local service and intrastate long distance and access
service revenues are subject to the jurisdiction of the PA PUC. The Registrant
participates in interstate pooling arrangements with other telephone companies.
Such pools are funded by access service charges regulated by the FCC. Revenue
earned through pooling is initially recorded based on estimates. The Registrant
has settled substantially all access service arrangements through 2000. Revenues
from equipment sales are recorded after equipment has been installed and
accepted by the customer.
Nonrefundable, up-front activation fees associated with the
provisioning of telephone service, when material, are deferred and recognized
over the expected term of the customer relationship.
Impairment of Long-Lived Assets
-------------------------------
Based upon the provisions of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", the Registrant reviews assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of the assets may not be recoverable. A determination of
impairment (if any) is made based on estimates of future cash flows. The
Registrant determined that there was no impairment to the carrying value of such
assets during the second quarter of 2002.
Valuation of Accounts Receivable
--------------------------------
Management reviews accounts receivable to determine which are
doubtful of collection. In determining the appropriate allowance for doubtful
accounts, management considers the Registrant's accounts receivable aging
schedules, history of write-offs, relationships with its customers and the
overall credit worthiness of its customers. With respect to receivables due from
Worldcom, see also Note (3) of Notes to Condensed Consolidated Financial
Statements above in this Quarterly Report on Form 10-Q.
Income Taxes
------------
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.
The judgments used in applying the above policies are based on
management's evaluation of the relevant facts and circumstances as of the date
of the financial statements. Actual results may differ from those estimates.
(2) Regulatory Matters
------------------
Both North Pittsburgh and Penn Telecom are subject to regulatory
oversight by the PA PUC for intrastate services and the FCC for interstate
services. The PA PUC and the FCC have 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 utility properties,
accounting and various other matters.
In 1996, Congress passed the 1996 Act, which has the goal of opening
the telecommunications industry to further competition for all services. 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.
The FCC has issued a number of Rulemakings that continue to implement
the requirements of the 1996 Act. The clear intent of the 1996 Act was to open
up the local exchange market to competition. The 1996 Act appears to mandate,
among other items, that North Pittsburgh, at some point in time, permit the
resale of its services at wholesale rates, provide number portability, 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.
12
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 until July 10, 2002 of certain
interconnection requirements in the 1996 Act applicable to incumbent LECs as
they relate to non-facilities based competition. North Pittsburgh, along with 19
other rural companies in Pennsylvania, filed a Petition with the PA PUC on June
7, 2002 requesting an additional three (3) year extension of the suspension
until July 10, 2005. The request is still pending and the outcome of the
proceeding is not yet known.
The provision of interstate toll and access services by North
Pittsburgh and Penn Telecom is subject to the regulatory scrutiny of the FCC.
Terms, conditions and rates for interstate toll and access services are filed in
interstate tariffs for review and approval by the FCC. However, effective August
1, 2001, the FCC no longer requires non-dominant interstate toll providers,
including Penn Telecom, to file tariffs for their interstate toll services. Penn
Telecom now informs its toll customers of the rates, terms and conditions
through written notice.
In October of 2001, the FCC adopted an Order referred to as the Multi
Association Group, or MAG Order, that modified the interstate access charge
rules and universal service support system for rate-of-return (ROR) incumbent
LECs. North Pittsburgh is subject to this Order. According to the FCC, the new
rules, which went into effect January 1, 2002, are intended to accomplish the
following three (3) goals: 1) align the interstate access rate structure more
closely with the manner in which costs for access are incurred; 2) replace
implicit support for universal service with explicit support that is portable to
all eligible telecommunications carriers on a competitively neutral basis; and
3) provide certainty and stability for small and mid-sized local telephone
companies serving rural and high-cost areas by permitting these carriers to
continue to set rates based on a ROR of 11.25%, thereby encouraging investment
in rural America.
The MAG Order had the following effects: 1) increased flat rate
charges referred to as Subscriber Line Charges (SLCs) that are billed to
residential and business customers; and 2) decreased per minute of use switched
access charges billed to interexchange toll providers that originate and
terminate traffic on a LECs network.
The MAG Order also created a new universal service support mechanism,
ICLS. The ICLS will replace the Carrier Common Line (CCL) charge, which was
previously billed to interexchange toll providers. The ICLS will be phased in
beginning July of 2002 and the CCL will be eliminated as of July of 2003. The
initial effect of the implementation of the MAG Order on North Pittsburgh is
expected to be revenue neutral. A number of parties have filed Petitions for
Reconsideration regarding certain issues contained in the MAG Order. The outcome
of these Petitions is unknown at this time. Because the outcome of these
proceedings is uncertain at this time, North Pittsburgh is unable to predict the
specific long-term effect that the MAG Order will have on its revenues and
operations.
Penn Telecom, as a CLEC, was not directly affected by the MAG Order,
as it does not currently offer services in the areas served by incumbent LECs
that were subject to the Order.
At the same time the MAG Order was adopted, the FCC also issued a
Further Notice of Proposed Rulemaking seeking comment on an incentive regulation
plan for incumbent LECs which are now under ROR regulation in the interstate
jurisdiction. Because the outcome of this proceeding is not yet known, North
Pittsburgh is not able to predict the specific effect that it will have on its
operations and revenues.
In February of 2002, the FCC issued a Notice of Proposed Rulemaking
(NPRM) regarding the possible classification of wireline broadband Internet
access as an information service rather than a telecommunications service.
Should the FCC adopt this finding, it may remove network based broadband
offerings such as DSL services from regulation under the FCC. However, in the
NPRM, the FCC also asked whether it should extend USF requirements to not only
facilities based wireline Broadband Internet Service Providers (BISPs) but also
wireless, cable TV and satellite BISPs.
Should the FCC extend a USF contribution requirement to all BISPs,
both North Pittsburgh and Penn Telecom would be affected. Because the outcome of
this proceeding is unknown at this time, neither North Pittsburgh nor Penn
Telecom is able to determine the specific effect such action would have on their
operations and revenues.
In February of 2002, the FCC also issued a Further Notice of Proposed
Rulemaking regarding the possible reformation of the system for assessing and
recovering USF funds. In addition to asking whether BISPs should contribute as
described above, the FCC has
13
asked for comment on whether it should assess carrier contributions based on the
number and capacity of connections that contributing carriers provide to
customers, rather than on the current method which is based on the interstate
revenues they earn.
Should the FCC move to reform the current system for assessing and
recovering USF funds, both North Pittsburgh and Penn Telecom would be affected
by the change. Because the outcome of this proceeding is unknown at this time,
neither North Pittsburgh nor Penn Telecom is able to determine the specific
effect such action would have on their operations and revenues.
Effective January 22, 2001, North Pittsburgh moved from ROR regulation
in the intrastate jurisdiction to an alternative form of regulation, which is a
price cap plan. Under North Pittsburgh's price cap plan, rates for
non-competitive intrastate services are allowed to increase based on an index
that measures economy-wide price increases less a productivity offset. There is
no limitation on earnings under this plan. The terms of the plan also allow
North Pittsburgh to rebalance rates once each year in order to allow North
Pittsburgh to gradually realign its intrastate rate structure on a more rational
basis in order to meet future competition. In addition, as competition develops
in the future, North Pittsburgh may file with the PA PUC to declare certain
services competitive and thereby be freed from all rate regulation for those
services. In return for approval of the alternative form of regulation, North
Pittsburgh has committed to continue to upgrade its network in the future to
ensure that all its customers will have access to broadband services. While
there is no immediate impact to North Pittsburgh's operations and revenues under
the price cap plan, it is North Pittsburgh's view that the plan as approved will
aid North Pittsburgh in meeting competition in the future.
Historically, North Pittsburgh's wireline operations have not
experienced significant competition in its franchised service area. However, as
a result of the passage of the 1996 Act, North Pittsburgh's local wireline
operations are experiencing increased competition from various sources,
including, but not limited to, large end users installing their own networks,
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.
Specifically, the PA PUC, in an order entered April 10, 2001, granted
AT&T Communications and its affiliate, TCG Pittsburgh, (AT&T/TCG) authority to
provide local dial tone services as a facilities-based CLEC in the service areas
of eight (8) telephone companies in Western Pennsylvania, including North
Pittsburgh, utilizing cable TV facilities. However, due to changes in business
plans and a corporate reorganization, AT&T/TCG in January of 2002 withdrew their
request for authority as a CLEC in those rural service areas.
North Pittsburgh is currently addressing potential competition by
focusing on customer satisfaction, reducing costs, increasing efficiency,
restructuring rates and examining new product offerings and new telecom related
markets for entry. Although North Pittsburgh cannot predict the specific effects
of competition on its local telephone business, it is intent on taking advantage
of the various opportunities that competition should provide.
At the same time, Penn Telecom is actively expanding its CLEC
operations outside of North Pittsburgh's service territory in Verizon's
(formerly Bell Atlantic) and Sprint's traditional service territories.
The provision of intrastate toll and access services is subject to
regulatory scrutiny by the PA PUC. Terms, conditions and rates for intrastate
toll and access services are filed in intrastate tariffs for PA PUC review and
approval.
On September 30, 1999, the PA PUC issued an Order dealing with a
variety of issues impacting LECs in Pennsylvania. Referred to as the Global
Order, it dealt with certain issues that affected North Pittsburgh.
Specifically, the Order allowed North Pittsburgh to rebalance and lower access
charges in order to prepare North Pittsburgh to meet competition in its serving
area. The reduction in access charges was offset in part by reimbursements from
an interim state USF that is funded by all telecommunications providers
(excluding wireless) in the state. Because the rebalancing and reduction of
access charges were offset by reimbursement from the fund, North Pittsburgh has
not experienced any significant impact on operations or revenues as a result of
the Global Order. The PA PUC, in the Global Order, indicated that it would
commence another proceeding on or after January 2, 2001 to examine further
changes to the USF and possible additional access charge reform. By Secretarial
Letter dated February 1, 2002, the PA PUC granted a coalition of telephone
companies, including North Pittsburgh, a ninety (90) day extension until April
15, 2002 in which to submit a proposal to the PA PUC outlining proposed changes
in access charges and the fund along with a timeline for these changes. The
coalition submitted its proposal on April 15,
14
2002. Upon completion of a review of the proposal, it is expected that the PA
PUC will initiate an "on the record proceeding" to examine the need for further
access charge and USF reform.
The 1996 Act, FCC and PA PUC regulatory proceedings and the thrust
toward 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. At the same time,
Penn Telecom continues its CLEC edge-out strategy in the Pittsburgh metropolitan
area and the city of Butler, PA, while taking advantage of the opportunities
afforded by the 1996 Act and the introduction of competition into the toll,
local wireline and broadband markets.
(3) Transactions with Related Parties
---------------------------------
In 1998, the Registrant entered into an agreement to outsource certain
data processing functions to a third party processor (Processor). The Registrant
and the Processor are related by a common shareholder and director. Payments to
the Processor under this agreement were $1,881 and $1,715 for the six-month
periods ended June 30, 2002 and 2001, respectively. Also, the Registrant paid
$282 and $2, respectively, in each of those same periods to the law firm of a
member of the Board of Directors for various legal services. As of June 30,
2002, the Registrant had estimated amounts outstanding of $240 and $300 to the
Processor and law firm, respectively.
(4) New Accounting Pronouncements
-----------------------------
In June, 2001, the Financial Accounting Standards Board issued SFAS
No. 143, "Accounting for Asset Retirement Obligations". The pronouncement is
effective for the Registrant's year beginning January 1, 2003. The Registrant
does not expect this pronouncement will have a significant impact on the
consolidated financial statements.
In July, 2002, the Financial Accounting Standards Board issued SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The
pronouncement is effective prospectively for exit or disposal activities after
December 31, 2002. The Registrant does not expect this pronouncement will have a
significant impact on the consolidated financial statements.
PART I
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
There have been no material changes in reported market risks faced by
the Registrant since the end of the preceding fiscal year on December 31, 2001.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
NORTH PITTSBURGH SYSTEMS, INC.
------------------------------
(Registrant)
August 13, 2002 /s/ H. R. Brown
Date _______________ ________________________________________
H. R. Brown, President and Chief
Executive Officer
August 13, 2002 /s/ A. P. Kimble
Date _______________ ________________________________________
A. P. Kimble, Vice President, Treasurer
and Chief Accounting Officer
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The 2002 Annual Meeting of Shareholders was held on May 17,
2002.
(b, c) The only matter voted upon at the Annual Meeting was the
election of Directors. The vote tabulation in respect to
each nominee to serve as a Director until the 2003 Annual
Meeting of Shareholders is shown in the following table:
Number of Number of
Shares Shares
Name Voted in Favor Withheld
---- -------------- --------
Nominees Elected:
----------------
Harry R. Brown 12,047,884 644,405
Dr. Charles E. Cole 12,459,670 232,619
Allen P. Kimble 12,060,840 631,449
Stephen G. Kraskin 12,490,896 201,393
David E. Nelsen 12,490,289 202,000
Jay L. Sedwick 12,446,448 245,841
Charles E. Thomas, Jr. 12,482,476 209,813
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibits - Exhibit Index for Quarterly Reports on Form 10-Q.
--------
Exhibit
Number Subject Applicability
- ------ ------- -------------
(2) Plan of acquisition, reorganization, Not Applicable
arrangement, liquidation or
succession
(3) (i) Articles of Incorporation Provided in Quarterly Report on
Form 10-Q for the quarter ended
June 30, 1996 and Incorporated
Herein by Reference.
(3) (ii) By-Laws Provided in Annual Report on
Form 10-K for the year ended
December 31, 1998 and
Incorporated Herein by
Reference.
(4) Instruments defining the rights of Provided in Registration of
security holders including indentures Securities of Certain Successor
Issuers on Form 8-B filed on
June 25, 1985 and Incorporated
Herein by Reference.
Exhibit
Number Subject Applicability
- ------ ------- -------------
(10) Material Contracts Provided in Quarterly Report on
Form 10-Q for the quarter ended
March 31, 2002 and Incorporated
Herein by Reference.
(11) Statement of computation of earnings Attached Hereto
per share
(15) Letter re unaudited interim financial Not Applicable
information
(18) Letter re change in accounting Not Applicable
principles
(19) Report furnished to security holders Not Applicable
(22) Published report regarding matters Not Applicable
submitted to a vote of security holders
(23) Consents of experts and counsel Not Applicable
(24) Power of attorney Not Applicable
(99.1) Certification of Quarterly Report by the
President and Chief Executive Officer
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 Attached Hereto
(99.2) Certification of Quarterly Report by the
Vice President, Treasurer and Chief
Accounting Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 Attached Hereto
(b) Reports on Form 8-K - No reports on Form 8-K were filed
-------------------
during the quarter ended June 30, 2002.