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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 31,1998
------------------------------------------------------
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
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 12, 1999, the
aggregate market value of the voting stock held by non-affiliates of the
Registrant is $200,691,875. (Includes 1,474,829 shares beneficially owned by
Directors and Officers as a group.)
OUTSTANDING SHARES OF EACH CLASS OF REGISTRANT'S COMMON STOCK
-------------------------------------------------------------
Class Outstanding at March 12, 1999
----- -----------------------------
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, 1998.
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 is also
certificated as a Competitive Access Provider and a competitive local exchange
provider and has entered into these businesses. Pinnatech, Inc. (Pinnatech), a
wholly-owned subsidiary of the Registrant formed in 1995, provides Internet
related services. The Registrant, NPTC, Penn Telecom and Pinnatech operate
under the provisions of the Pennsylvania Business Corporation Law. 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, 1998.
(b) Financial Information About Industry Segments:
---------------------------------------------
This paragraph is not applicable. The Registrant, through North
Pittsburgh, Penn Telecom and Pinnatech, is engaged in the business of providing
telecommunication services and equipment, which is not considered separable into
industry segments.
(c) Narrative Description of Business:
---------------------------------
(1) Business Done and Intended To Be Done:
-------------------------------------
(i) Principal Services Rendered.
---------------------------
The Registrant, through North Pittsburgh, Penn Telecom and Pinnatech,
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 utility
properties, accounting and various other matters.
1
The Telecommunication 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. This initial suspension period expires on July 10,
1999. North Pittsburgh recently filed a petition seeking a one-year extension
of the suspension until July 10, 2000. A decision by the PA PUC is expected in
the second quarter of 1999.
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 was required to develop and file a Network Modernization
Plan by July, 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, also sought
approval of an alternative form of regulation from the PA PUC, by proposing
price cap regulation. The petition for approval of the Network Modernization
Plan and alternative regulation under price caps is pending before the PA PUC
and a decision is expected in the second quarter of 1999.
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 are
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.
2
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. If a customer
chooses North Pittsburgh as his intraLATA toll carrier, North Pittsburgh bills
the charges for such calls within the LATA 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 and other telephone companies for terminating this toll traffic.
Conversely, North Pittsburgh receives network access charge revenues for
terminating the traffic of others. Charges for calls, which originate or
terminate over a carrier's network, other than North Pittsburgh, are billed to
the carrier at rates contained in a PTA tariff on file with the PA PUC.
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, which are still pending.
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 Telecom has been able to sustain its business activities in a
strong, competitive market.
3
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
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 Cellular
---------------------
Association of South Carolina, L.P. are Limited Partners with a partnership
interest of 3.6 percent each and Cellco Partnership, d.b.a. Bell Atlantic NYNEX
Mobile 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 360(degree)
Communications Company of Pennsylvania No. 1 is the General Partner with a
partnership interest of 57.13 percent in Pennsylvania RSA 6(I) Limited
Partnership, 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 including 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, the 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. The FCC licenses to
operate two point-to-point microwave systems (call signs KGO-21 and KGN-88) were
discontinued as of March 30, 1998. North Pittsburgh has an FCC license for the
continued operation of a non-commercial private license for its own maintenance
radio service and other purposes (call sign WPCD 845 expiring 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
its 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, 1998, the Registrant, through all of its
subsidiaries, employed 312 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.
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 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, 1994 to December 31, 1998, North Pittsburgh made gross
property additions of approximately $75,212,000 (which is about 49.8% of the
original cost of the present telephone plant) and property retirements of
approximately $11,979,334. North Pittsburgh's 1999 construction program,
subject to adjustment for economic conditions, postponements of housing
developments, etc. is projected to be in excess of $20 million and will include
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, 1998.
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, Jr. 56 Chairman, Board of
Registrant and North Pittsburgh Directors
Telephone Company: Chairman of the
Board of Directors since May 15, 1998;
Director since 1993; Partner in the law
firm of Thomas, Thomas, Armstrong &
Niesen, Harrisburg, PA, since the
formation of this firm in 1991which is
retained as general counsel to the
Registrant; Partner in the law firm of
Thomas & Thomas from 1977 to 1990.
Harry R. Brown 62 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 52 Director, Vice President
Registrant: Director since January 30, and Treasurer
1998; Vice President since 1989;
Treasurer since incorporation in 1985;
Secretary from 1993 to January 30, 1998.
North Pittsburgh Telephone Company:
Director since January 30, 1998; 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 44 Vice President and
Registrant: Vice President since 1994; Secretary
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.
Kevin J. Albaugh 47 Vice President
Registrant: Vice President since
January 1, 1999. North Pittsburgh
Telephone Company: Vice President -
Regulatory Affairs since January 1,
1999; Manager and Assistant Vice
President - Revenues from 1997 to 1998;
Revenue Requirements Supervisor from
1993 to 1997.
Frank A. Macefe 50 Vice President
Registrant: Vice President since
January 1, 1999. North Pittsburgh
Telephone Company: Vice President - Sales
since January 1, 1999; Assistant Vice
President - Marketing from 1989 to 1998;
Marketing Manager from 1979 to 1989;
Marketing Supervisor from 1978 to 1979.
Albert W. Weigand 40 Vice President
Registrant: Vice President since
January 1, 1999. North Pittsburgh
Telephone Company: Vice President -
Operations since January 1, 1999;
Assistant Vice President - Operations
from 1997 to 1998; Sr. Planning Engineer
from 1995 to 1997; Planning Engineer
from 1986 to 1995; Customer Equipment
Supervisor from 1984 to 1986; Customer
Equipment Engineer from 1979 to 1984.
(1) Directors. Messrs. Thomas, Brown and Kimble were elected as Directors at
---------
the 1998 Annual Meeting of Shareholders held May 15, 1998 to serve until
the 1999 Annual Meeting of Shareholders. Messrs. Thomas, Brown and Kimble
will be nominees for reelection as Directors at the Annual Meeting of
Shareholders to be held May 21, 1999.
(2) Officers. Messrs. Thomas, Brown, Kimble and Barthlow were elected to their
--------
respective offices at a Board of Directors' Organizational Meeting which
followed the May 15, 1998 Annual Meeting of Shareholders. Messrs. Albaugh,
Macefe and Weigand were elected to their respective offices at a Board of
Directors' Meeting held on December 8, 1998. All officers will hold their
offices until the first meeting of the Board following the 1999 Annual
Meeting of Shareholders.
(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.
9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholders
- ------ --------------------------------------------------------------
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. The
Nasdaq High and Low sales prices for the Registrant's Common Stock for each
quarter of 1998 and 1997 are listed below:
1998 1998 1997 1997
High Low High Low
------- ------- ------- -------
First Quarter $18.750 $14.500 $24.000 $18.250
Second Quarter 17.000 13.500 23.500 14.375
Third Quarter 16.094 11.313 23.500 15.250
Fourth Quarter 16.750 11.000 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 3,021 common shareholders on March 12, 1999.
(c) Common Stock Dividends:
----------------------
Cash dividends declared per share by the Registrant on the outstanding
shares of Common Stock in 1998 and 1997 were as follows:
10
1998 1997
---- ----
First Quarter $ .15 $ .14
First Quarter Special Dividend .05 -
Second Quarter .15 .14
Third Quarter .15 .14
Fourth Quarter .15 .14
----- -----
$ .65 $ .56
===== =====
Item 6. Selected Financial Data (Amounts in Thousands Except Per Share Data).
- ------ --------------------------------------------------------------------
The following summary of Selected Financial Data for the years 1998 - 1994
should be read in conjunction with the consolidated financial statements and
notes included elsewhere in this report.
11
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Operating revenues $ 66,788 $ 66,207 $ 59,933 $ 52,757 $ 49,188
Operating expenses 44,377 44,090 40,349 33,748 31,728
-------- --------- -------- -------- --------
Net operating revenues 22,411 22,117 19,584 19,009 17,460
Interest expense (1,884) (1,710) (1,549) (1,596) (1,645)
Interest income 1,308 608 764 1,066 772
Sundry (expense) income, net 1,947 840 840 (738) 202
Net gain on sale of
investment* - 14,516 - - -
-------- --------- -------- -------- --------
Earnings before income
taxes 23,782 36,371 19,639 17,741 16,789
Income tax expense 9,264 14,186 7,909 7,054 6,885
-------- --------- -------- -------- --------
Net earnings $ 14,518 $ 22,185 $ 11,730 $ 10,687 $ 9,904
======== ========= ======== ======== ========
Average common shares
outstanding 15,005 15,019 15,040 15,040 15,040
======== ========= ======== ======== ========
Basic and diluted earnings
per share $ .97 $ 1.48 $ .78 $ .71 $ .66
======== ========= ======== ======== ========
Dividends declared per share
of Common Stock $ .65 $ .56 $ .52 $ .48 $ .44
======== ========= ======== ======== ========
Total assets $135,315 $ 127,833 $ 99,523 $ 96,156 $ 91,578
======== ========= ======== ======== ========
Long-term debt $ 32,196 $ 27,037 $ 21,311 $ 21,694 $ 22,396
======== ========= ======== ======== ========
*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 1998 were $14,518, or $.97 per share. Record earnings
in 1997 of $22,185, or $1.48 per share included a one-time $.60 per share gain
relating to the sale of an investment. These fluctuations were attributable to
the following factors:
(1) Operating Revenues.
------------------
Total operating revenues increased $581 (.9%) during 1998. This
modest increase was primarily the net result of increases in local network
services of $1,639 (16.0%) and long distance and access services of $1,740
(4.0%) offset by a decrease in other operating revenues of $3,196 (42.6%).
Increased local network service revenues were attributable to customer growth,
growth in second lines and expanded penetration of enhanced services. Long
distance and access services increased moderately due to the implementation of a
toll savings plan in July, 1997 and rate decreases on interstate switched access
revenues beginning January 1, 1998. The decrease in other operating revenues
was primarily due to the cessation of operations and subsequent sale of MCSI on
July 31, 1997 offset, in part, by the growth of Internet access customers.
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 (3.95%), 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 number of customers and
minutes of use. However, the rate of increase 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 Internet access customers and the growth of consulting and
outsourcing services through July 31, 1997.
(2) Operating Expenses and Net Revenues.
-----------------------------------
Total operating expenses for 1998 increased $287 (.6%) over the
preceding year. That change was principally the result of a decrease in network
and other operating expenses of $1,314 (4.7%), offset by an increase in
depreciation and amortization of $1,278 (12.0%). The net decrease in network
and other operating expenses consisted of a decrease resulting from the sale of
MCSI, offset by an increase due to the introduction of a data processing
transition plan, increased marketing efforts and on-going increases in
maintenance, customer service and other administrative expenses. The increase
in depreciation and amortization was the direct result of the growth in fixed
assets to serve current and future customer needs. The increase in total
operating revenues of $581 discussed above coupled with the increase in total
operating expenses of $287 resulted in net operating revenues increasing $294
(1.3%) in 1998 as compared to 1997.
13
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 was 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.
Interest income increased $700 in 1998 primarily due to increased
levels of investment in temporary investments. The net increase in Sundry
expense (income) of $1,107 was primarily due to an increase in cellular
partnership income in 1998 as compared to 1997 and receipts from a one-time
insurance settlement.
(3) 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 a series of transactions
which resulted in a net pre-tax gain of $14,516 ($9,003 after income taxes, $.60
per share) in 1997 which was recorded in net gain on sale of investment.
(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 advanced in 1998
and 1997 were $7,258 and $6,903, respectively, with all final maturity dates of
advances occurring on 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.
14
Capital expenditure commitments for the purchase and installation of
new equipment at December 31, 1998 amounted to approximately $4.4 million, with
such amount being part of a 1999 construction program which is projected to be
in excess of $20 million. Management expects cash flows provided by operating
activities and cash reserves in 1999 to be sufficient to service long-term debt,
to pay dividends and to finance approximately 25% to 50% of capital additions.
The balance of capital additions will be financed from 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 1999
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 1999, which should enable North Pittsburgh to 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 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, filed a petition with the PA PUC, on
July 31, 1998, seeking 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 also included a proposed network modernization plan. In
the filing, North Pittsburgh proposed a price cap plan whereby rates for
noncompetitive services are allowed to be increased based on an index that
measures general economy wide price increases. This petition is still pending
before the PA PUC and may be modified in the final order. However, it is not
possible at this time to determine the PA PUC's disposition of this petition 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 further spell out the specifics of the Telecommunications
Act of 1996 (the 1996 Act). The PA PUC must then finalize its course of action
to fully implement the 1996 Act, or to the extent possible and permissible,
change the manner in which such regulations are
15
implemented in Pennsylvania before the impact on North Pittsburgh, a Rural
Telephone Company under the 1996 Act, can be fully understood and measured.
However, the clear intent of the 1996 Act is to open up the local exchange
market to competition. The 1996 Act appears to mandate, among other items, that
North Pittsburgh, at some point in time, permit the resale of its services at
wholesale rates, provide number portability, if feasible, provide dialing
parity, provide interconnection to any requesting carrier for the transmission
and routing of telephone exchange service and exchange access and provide access
to network elements. 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. This initial two-year suspension expires
July 10, 1999. In January, 1999, North Pittsburgh filed for a one-year extension
of the suspension until July 10, 2000. A decision by the PA PUC is expected in
the second quarter of 1999.
The 1996 Act, FCC and PA PUC regulatory proceedings and the thrust
towards a fully competitive marketplace have created some uncertainty in respect
to the levels of North Pittsburgh's revenue growth in the future. However, its
unique location in a growing commercial/residential suburban traffic corridor to
the north of the City of Pittsburgh, its state-of-the-art switching transmission
and transport facilities and its extensive fiber network place North Pittsburgh
in a solid position to meet competition and minimize any loss of revenues. In
addition, North Pittsburgh continues to make its network flexible and responsive
to the needs of its customers to meet competitive threats. New services, access
line growth and anticipated usage growth are expected to lessen or offset any
reductions in North Pittsburgh's revenue sources.
(5) Year 2000.
---------
(a) State of Readiness.
------------------
The Registrant has taken actions to understand the nature and
extent of the work required in order to make its systems and infrastructure Year
2000 compliant. The Registrant began work last year to prepare its information
technology (IT) and non-information technology (non-IT) systems, including
updating and/or replacing existing legacy systems. The Registrant has formed a
Corporate Year 2000 Task Force, which is responsible for all Year 2000
activities and is being monitored by senior management and the Board of
Directors.
There are six phases of the Registrant's Year 2000 program:
Awareness, Inventory, Assessment, Renovation, Validation and Implementation. The
Registrant has defined the six phases as follows:
Awareness - Gain the commitment of management and staff to solving the problem.
This phase has been completed.
Inventory - Conduct a thorough inventory of all hardware and software systems.
This phase will run until December, 1999 in order to maintain the inventory
throughout the life of the project.
16
Assessment and Planning - Decide which systems to retire, repair or replace.
Prepare contingency plans. This phase has been completed.
Renovation - Perform upgrades to hardware and software. This phase is underway
and is scheduled to be completed in June, 1999. The Registrant has contracted
to outsource certain operational support, billing and accounting systems to a
third party vendor. The software and hardware components of the systems
selected have been certified as Year 2000 compliant. All mission critical
systems are scheduled to be remediated by April, 1999.
Validation - Test and certify new and renovated systems. This phase is underway
and will continue through June, 1999.
Implementation and Follow-up - New or renovated systems go into service. This
phase is scheduled to be completed in December, 1999, and will include the
resolution of any outstanding problems. This phase is currently underway. The
Year 2000 Project will extend until March, 2000 in order to address the leap day
of February 29, 2000 and to address any outstanding issues.
The Registrant's Year 2000 issues related to third parties can be
broken into two categories: third party vendors who supply products to the
Registrant, and other telecommunications companies who provide joint service to
our customers. The third party vendors have been providing the Registrant with
Year 2000 solutions on an on-going basis. Year 2000 upgrades, repairs and
testing are being performed as per vendor specifications. Other
telecommunications service providers are implementing Year 2000 programs in much
the same fashion as the Registrant and industry testing is being performed on an
on-going basis.
(b) Cost to Address Year 2000 Issues.
--------------------------------
Expenditures related to Year 2000 remediation are not expected to
exceed $3.5 million. These expenditures include costs related to the data
processing transition plan, license fees for purchase of software and training
and implementation costs. A portion of these costs are being capitalized and
will be amortized over the estimated useful life of the asset beginning in
approximately the second quarter of 1999, the anticipated completion date of the
project. The remainder of these costs will be expensed as incurred.
(c) Risks of Year 2000 Issues.
-------------------------
The most reasonably likely worst case scenario is loss of
services to other interconnecting companies which, unlike the Registrant, will
not have attained Year 2000 compliance. However, this is unlikely to occur since
the interconnecting companies realize their responsibility to comply.
Nevertheless, should this worst case scenario occur, the Registrant will give
customers the option of rerouting service to a working carrier.
17
(d) Contingency Plan.
----------------
The Registrant has developed a Corporate Year 2000 Contingency
Plan to cover its primary business activities. This plan outlines the key areas
of business, and the manner in which they will be supported in the event of a
Year 2000 failure. This plan has been developed as a result of research into
United States Telephone Association member telephone company responses to
hurricanes, tornadoes, ice storms and other disasters. The Registrant has
studied and modified these plans to cover operations during potential Year 2000
related failures. The Registrant has also updated and revised the existing
Emergency Response Plan. The Registrant's Emergency Response Plan will form the
core of its Contingency Plan if a major service outage should occur. Tests of
the Registrant's Contingency Plan will be conducted during the second quarter of
1999.
Key components of the Contingency Plan are the preparations to
revert to a manual operation, stockpiling and conservation of materials,
increased staffing levels, data storage for processing at a later date,
isolation of harmful network elements and positioning key personnel in areas
where they will be most effective. Should there be a serious service affecting
problem, the Emergency Response Plan will be activated until all services are
restored. Events, which could trigger activation of the Emergency Response Plan,
include widespread loss of gas or electric service, failures at various
interconnecting companies or failure of internal switching or transmission
systems.
(6) New Accounting Pronouncements.
-----------------------------
In June, 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
The Registrant does not expect the pronouncement to impact the consolidated
financial statements because the Registrant has not entered intro derivative or
hedging transactions.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
- ------- ---------------------------------------------------------
The Registrant's exposure to market risk for changes in interest rates
relates primarily to the Registrant's investment portfolio and long-term
obligations. The Registrant does not use derivative financial instruments in
its investment portfolio. The Registrant places its investments with high
credit quality issuers and, by policy, limits the amount of credit exposure from
any one issuer. The portfolio includes only marketable securities with active
secondary or resale markets to ensure portfolio liquidity. The Registrant has
no cash flow exposure due to rate changes for long-term debt obligations. The
Registrant primarily enters into debt obligations to support capital
expenditures.
The table below presents principal amounts and related average
interest rates by year of maturity for the Registrant's investment portfolio and
debt obligations. All temporary investments mature in 90 days or less.
Available for sale debt securities have maturities which range between 1 and 10
years.
18
THERE-
1999 2000 2001 2002 2003 AFTER TOTAL FV
---- ---- ---- ---- ---- ------ ----- --
Fixed Debt 1,850 1,907 1,968 2,033 2,102 24,186 34,046 32,442
Average %
Rate 4.81 5.45 5.49 5.52 5.55 5.76 5.68 -
Temporary
Investments 16,212 - - - - - 16,212 16,212
Average %
Rate 4.45 - - - - - 4.45 -
AFS* Debt
Securities - 1,841 2,061 1,759 2,183 1,134 8,978 8,978
Average %
Rate - 6.25 6.88 6.19 6.00 5.70 5.17 -
*Available for sale
As the table incorporates only those exposures that exist as of
December 31, 1998, it does not consider those exposures or positions which could
arise after that date. Moreover, because firm commitments are not presented in
the table above, the information presented therein has limited predictive value.
As a result, the Registrant's ultimate realized gain or loss with respect to
interest rate fluctuations will depend on the exposures that arise during the
period, the Registrant's borrowing and investing strategies at the time, and
interest rates.
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.
19
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.
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
20
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, 1998 and 1997
Consolidated Statements of Earnings for the years ended December
31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
-----------------------------
Condensed Financial Information of Registrant for the years ended
December 31, 1998, 1997 and 1996
21
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. No reports on Form 8-K were filed during the
-------------------
quarter ended December 31, 1998.
(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.
22
NORTH PITTSBURGH SYSTEMS, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
and Schedule (Form 10-K)
December 31, 1998, 1997 and 1996
(With Independent Auditors' Report Thereon)
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedule
December 31, 1998, 1997 and 1996
Page
----
Independent Auditors' Report 1
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1997 2 - 3
Consolidated Statements of Earnings for the Years Ended
December 31, 1998, 1997 and 1996 4
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the Years Ended December 31, 1998, 1997 and 1996 5 - 6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996 7 - 8
Notes to Consolidated Financial Statements 9 - 22
Consolidated Financial Statement Schedule:
I. Condensed Financial Information of Registrant for the
Years Ended December 31, 1998, 1997 and 1996 23 - 27
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, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, 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 LLP
Pittsburgh, Pennsylvania
February 19, 1999
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
(Amounts in Thousands, Except Per Share Data)
1998 1997
---- ----
Assets
------
Current assets:
Cash and temporary investments $ 16,786 15,938
Marketable securities available for sale (note 6) 14,670 16,847
Accounts receivable:
Customers 3,599 3,401
Access service settlements and other 7,310 5,995
Prepaid expenses 204 109
Inventories of construction and operating
materials and supplies 4,019 3,360
-------- -------
Total current assets 46,588 45,650
Property, plant and equipment (note 2):
Land 475 475
Buildings 11,067 10,543
Equipment 136,779 122,492
-------- -------
148,321 133,510
Less accumulated depreciation and amortization 78,854 69,303
-------- -------
69,467 64,207
Construction-in-progress 6,863 6,990
-------- -------
Total property, plant and equipment, net 76,330 71,197
Investments (note 5) 9,637 7,499
Deferred financing cost 857 954
Prepaid pension cost (note 3) 598 580
Other assets 1,305 1,953
-------- -------
$135,315 127,833
======== =======
(Continued)
2
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
(Amounts in Thousands, Except Per Share Data)
1998 1997
---- ----
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt (note 2) $ 1,850 803
Accounts payable 6,756 4,794
Accrued legal settlement (note 5) - 3,180
Dividend payable 2,251 2,101
Deferred income taxes (note 4) - 5,289
Other accrued liabilities 2,616 2,304
Federal and state income taxes (note 4) 920 389
-------- -------
Total current liabilities 14,393 18,860
Long-term debt (note 2) 32,196 27,037
Deferred income taxes (note 4) 8,060 6,560
Accrued postretirement benefits (note 3) 5,002 4,764
Other liabilities 1,858 2,052
Shareholders' equity:
Capital stock - common stock, par value $.15625;
authorized 50,000 shares; issued and
outstanding 15,005 shares 2,350 2,350
Capital in excess of par value 2,215 2,215
Retained earnings (note 2) 69,265 64,501
Less cost of treasury stock (35 shares) (508) (508)
Accumulated other comprehensive income - unrealized
gain on available for sale securities, net (notes 4 and 6) 484 2
-------- -------
Total shareholders' equity 73,806 68,560
-------- -------
$135,315 127,833
======== =======
See accompanying notes to consolidated financial statements.
3
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
For the Years Ended December 31, 1998, 1997 and 1996
(Amounts in Thousands, Except Per Share Data)
1998 1997 1996
---- ---- ----
Operating revenues:
Local network services $ 11,848 10,209 8,684
Long distance and access services 45,252 43,512 41,880
Directory advertising, billing
and other services 2,471 2,210 2,181
Telecommunication equipment sales 2,906 2,769 2,639
Other operating revenues 4,311 7,507 4,549
-------- ------- -------
66,788 66,207 59,933
Operating expenses:
Network and other operating expenses 26,489 27,803 26,066
Depreciation and amortization (note 1) 11,955 10,677 9,508
State and local taxes 3,098 3,009 2,364
Telecommunication equipment expenses 2,835 2,601 2,411
-------- ------- -------
44,377 44,090 40,349
-------- ------- -------
Net operating revenues 22,411 22,117 19,584
Other expense (income), net:
Interest expense 1,884 1,710 1,549
Interest income (1,308) (608) (764)
Net gain on sale of investment (note 5) - (14,516) -
Sundry expense (income), net (1,947) (840) (840)
-------- ------- -------
(1,371) (14,254) (55)
-------- ------- -------
Earnings before income taxes 23,782 36,371 19,639
Provision for income taxes (note 4) 9,264 14,186 7,909
-------- ------- -------
Net earnings $ 14,518 22,185 11,730
======== ======= =======
Average common shares outstanding 15,005 15,019 15,040
======== ======= =======
Basic and diluted earnings per share $ .97 1.48 .78
======== ======= =======
Dividends per share $ .65 .56 .52
======== ======= =======
See accompanying notes to consolidated financial statements.
4
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income
For the Years Ended December 31, 1998, 1997 and 1996
(Amounts in Thousands, Except Per Share Data)
Accumulated
Capital in other Total
Common excess of Retained Treasury comprehensive stockholder's
stock par value earnings stock income equity
------ --------- -------- ----- ------ ------
Balances at December 31, 1995 $ 2,350 2,215 46,814 - 148 51,527
Comprehensive income:
Net income - - 11,730 - - 11,730
Other comprehensive income:
Unrealized holding gains (losses) arising
during the period (54)
Less: Reclassification adjustments for net
gains included in net income (77)
----
Net unrealized change in investment
securities, net of tax effect of $(90) (131) (131)
Comprehensive income 11,599
Dividends declared on common stock - - (7,820) - - (7,820)
------- ----- ------ ---- ---- -------
Balances at December 31, 1996 2,350 2,215 50,724 - 17 55,306
(Continued)
5
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income,
Continued
(Amounts in Thousands, Except Per Share Data)
Accumulated
Capital in other Total
Common excess of Retained Treasury comprehensive stockholder's
stock par value earnings stock income equity
------ --------- -------- ----- ------ ------
Comprehensive income:
Net income - - 22,185 - - 22,185
Other comprehensive income:
Unrealized holding gains (losses) arising
during the period 44
Less: Reclassification adjustments for net
gains included in net income (59)
----
Net unrealized change in investment
securities, net of tax effect of $(11) (15) (15)
------
Comprehensive income 22,170
Dividends declared on common stock - - (8,408) - - (8,408)
Stock repurchased - - - (508) - (508)
------- ----- ------ ---- ---- -------
Balances at December 31, 1997 2,350 2,215 64,501 (508) 2 68,560
Comprehensive income:
Net income - - 14,518 - - 14,518
Other comprehensive income:
Unrealized holding gains (losses) arising
during the period 489
Less: Reclassification adjustments for net
gains included in net income (7)
----
Net unrealized change in investment
securities, net of tax effect of $330 482 482
Comprehensive income 15,000
Dividends declared on common stock - - (9,754) - - (9,754)
------- ----- ------ ---- ---- ------
Balances at December 31, 1998 $ 2,350 2,215 69,265 (508) 484 73,806
======= ===== ====== ==== ===== ======
See accompanying notes to consolidated financial statements.
6
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
(Amounts in Thousands)
1998 1997 1996
---- ---- ----
Cash from operating activities:
Net earnings $14,518 22,185 11,730
Adjustments to reconcile net earnings
to net cash from operating activities:
Depreciation and amortization 11,955 10,677 9,508
Net gain on sale of investment (note 5) - (14,516) -
Gain on sale of MCSI - (292) -
Gain on sale of marketable securities (12) (99) (128)
Equity income of affiliated companies (1,332) (1,077) (989)
Investment tax credit amortization (91) (98) (101)
Deferred income taxes (4,120) 5,880 389
Changes in assets and liabilities:
Accounts receivable (1,513) (1,781) (515)
Inventories of construction and
operating materials and supplies (659) (191) (788)
Deferred financing costs, prepaid
pension costs and other assets 633 (179) 1,536
Accounts payable 1,962 576 (1,635)
Other accrued liabilities (2,972) 314 390
Accrued postretirement benefits 238 267 247
Federal and state income taxes 531 (281) 379
Other, net - - (163)
------- ------- ------
Total adjustments 4,620 (800) 8,130
------- ------- ------
Net cash from operating
activities 19,138 21,385 19,860
(Continued)
7
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Amounts in Thousands)
1998 1997 1996
---- ---- ----
Cash used for investing activities:
Expenditures for property and equipment $(17,847) (18,913) (16,303)
Net (cost of removal) salvage on retirements 759 547 382
-------- ------- -------
Net capital additions (17,088) (18,366) (15,921)
Proceeds from sale of investment (note 5) - 1,655 -
Proceeds from sale of MCSI, net of cash sold - 3,305 -
Purchase of marketable securities held to maturity - - (454)
Proceeds from redemption of marketable
securities held to maturity - 451 6,519
Purchase of marketable securities available for (18,060) (234) (433)
sale
Proceeds from sale of marketable securities
available for sale 21,061 541 1,657
Investments in affiliated entities (880) (1,893) (898)
Distributions from affiliated entities 74 534 -
-------- ------- -------
Net cash used for investing
activities (14,893) (14,007) (9,530)
Cash used for financing activities:
Cash dividends (9,603) (8,262) (7,670)
Retirement of debt (1,052) (886) (706)
Proceeds from issuance of debt 7,258 6,903 -
Purchase of treasury stock - (508) -
-------- ------- -------
Net cash used for financing
activities (3,397) (2,753) (8,376)
-------- ------- -------
Net increase (decrease) in cash and temporary
investments 848 4,625 1,954
Cash and temporary investments at beginning of year 15,938 11,313 9,359
-------- ------- -------
Cash and temporary investments at end of year $ 16,786 15,938 11,313
======== ======= =======
Supplemental disclosures of cash flow information:
Interest paid $ 1,791 1,612 1,450
======== ======= =======
Income taxes paid $ 12,853 8,685 7,241
======== ======= =======
Fixed assets acquired under capital leases $ - - 565
======== ======= =======
Marketable securities received in connection with
investment transaction (note 5) $ - 16,124 -
======== ======= =======
See accompanying notes to consolidated financial statements.
8
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
(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 provides telecommunication services and equipment 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)
9
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. Costs of investments sold are determined on the
basis of specific identification.
Investments
-----------
The Company's investments in limited partnerships are carried at cost plus
equity in accumulated net profits or losses.
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. Depreciation as a percentage of average
depreciable plant in service amounted to 8.5%, 8.4% and 8.2% in 1998,
1997 and 1996, respectively. The average remaining life of plant in
service as of December 31, 1998, is approximately 5.8 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 1998, 1997 or 1996.
Expenditures for maintenance, repairs and renewals are charged to
operations as incurred.
(Continued)
10
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 30 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 purchased with a maturity of three
months or less to be cash equivalents.
(Continued)
11
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Pension and Other Postretirement Benefits
-----------------------------------------
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 132, "Employers' Disclosures About Pension and Other
Postretirement Benefits." SFAS No. 132 revises employers' disclosures
about pension and other postretirement benefit plans. SFAS No. 132 does
not change the method of accounting for such plans.
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.
Comprehensive Income
--------------------
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for reporting
and presentation of comprehensive income and its components in a full set
of financial statements. Comprehensive income consists of net income and
net unrealized gains (losses) on securities and is presented in the
consolidated statements of shareholders' equity and comprehensive income.
The Statement requires only additional disclosures in the consolidated
financial statements; it does not affect the Company's financial position
or results of operations. Prior year financial statements have been
reclassified to conform to the requirements of SFAS No. 130.
Earnings Per Share
------------------
Basic earnings per share is calculated based upon the weighted average
number of common shares actually outstanding, and diluted earnings per
share is calculated based upon the weighted average number of common
shares outstanding and other potential common shares if they are
dilutive. 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.
(Continued)
12
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(2) Long-Term Debt
--------------
Long-term debt as of December 31, 1998 and 1997, was as follows:
1998 1997
---- ----
Notes payable to Rural Telephone
Bank, maturing at various dates from 2009
through 2019 $ 20,133 20,937
Notes payable to Federal Financing Bank,
maturing in 2012 13,913 6,903
-------- ------
34,046 27,840
Less current portion of long-term debt 1,850 803
-------- ------
Long-term debt $ 32,196 27,037
======== ======
Principal payments required over the next five years calculated on the
outstanding indebtedness at December 31, 1998, are: $1,850 in 1999;
$1,907 in 2000; $1,968 in 2001; $2,033 in 2002; and $2,102 in 2003.
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, 1998, consolidated
retained earnings of the Company of approximately $34,215 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.
(Continued)
13
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Notes payable to the Rural Telephone Bank carry an interest rate of 6.5%.
Notes payable to the Federal Financing Bank carry interest rates ranging
from 4.3% to 4.7%.
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, 1998, is $32,442.
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 1998 or 1997.
(3) Retirement Plan and Other Postretirement Benefit Plans
------------------------------------------------------
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.
Eligible retirees of the Company are provided healthcare and life insurance
benefits until the retiree reaches 65 years of age under an unfunded
plan.
(Continued)
14
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The following table sets forth the Plans' change in benefit obligation,
change in plan assets and reconciliation of funded status at December 31,
1998 and 1997.
Pension benefits Other benefits
---------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
Change in benefit obligation:
Benefit obligation at beginning of year $ 26,056 25,026 4,614 4,376
Service cost 887 892 161 154
Interest cost 1,792 1,722 314 300
Plan amendments - 593 - -
Benefits paid (904) (809) (225) (174)
Actuarial (gain) or loss 934 (1,369) (962) (42)
-------- ------ ------ ------
Benefit obligation at end of year 28,765 26,055 3,902 4,614
Change in plan assets:
Fair value at beginning of year 27,528 23,482 - -
Actual return on plan assets 1,028 4,027 - -
Employer contributions 701 828 225 174
Benefits paid (904) (809) (225) (174)
-------- ------ ------ ------
Fair value at end of year 28,353 27,528 - -
Reconciliation of funded status:
Funded status (412) 1,473 (3,902) (4,614)
Unrecognized actuarial (gain) or loss 161 (1,815) (1,013) (51)
Unrecognized transition (asset) (1,070) (1,223) - -
Unrecognized prior service cost 1,919 2,145 (87) (99)
-------- ------ ------ ------
Net amount at year end $ 598 580 (5,002) (4,764)
======== ====== ====== ======
Assumptions used in the calculations as of December 31, 1998 and 1997, are:
Pension benefits Other benefits
---------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
Weighted average assumptions as of
December 31, 1998:
Discount rate % 6.75 7.00 6.75 7.00
Expected return on assets 7.50 7.50 N/A N/A
Rate of compensation increase 5.00 5.00 5.00 5.00
(Continued)
15
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
Net periodic benefit costs include the following:
Pension benefits Other benefits
---------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
Components of net periodic benefit cost:
Service cost $ 887 892 161 154
Interest cost 1,792 1,722 314 300
Expected return on plan assets (2,069) (1,777) - -
Amortization of prior service cost 227 186 (12) (12)
Amortization of transition (asset) (153) (153) - -
Recognized actuarial (gain) or loss - - - -
-------- ------ --- ---
Net periodic benefit cost $ 684 870 463 442
======== ====== === ===
For purposes of measuring other postretirement benefits, the annual rate of
increase in the per capita cost of covered benefits (i.e., healthcare
cost trend rate) for 1998 was 9.7 percent for participants whose coverage
included Major Medical Insurance, 8.4 percent for participants who have
Blue Cross/Blue Shield coverage only, and 6.5 percent for participants
who have Point of Service coverage. The rates were assumed to decrease
gradually to 5 percent by the year 2007 and remain at that level
thereafter. Assumed healthcare cost trend rates have a significant
effect on the amounts reported for the healthcare plans. A one
percentage point change in the assumed healthcare trend rate would have
the following effects:
One One
percentage percentage
point increase point decrease
-------------- --------------
Effect on total of service and interest cost
components for 1998 60 (51)
Effect on 1998 postretirement benefit obligation 378 (331)
(Continued)
16
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4) Income Taxes
------------
The components of income tax expense are:
1998 1997 1996
---- ---- ----
Current:
Federal $ 10,231 6,141 5,603
State 3,243 2,263 2,018
-------- ------ -----
13,474 8,404 7,621
Deferred:
Federal (3,114) 4,460 291
State (1,005) 1,420 98
-------- ------ -----
(4,119) 5,880 389
Deferred investment tax credit (91) (98) (101)
-------- ------ -----
$ 9,264 14,186 7,909
======== ====== =====
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:
1998 1997 1996
---- ---- ----
Statutory federal income tax $ 8,324 12,729 6,874
State taxes on income (net of
federal income tax benefit) 1,455 2,362 1,275
Change in beginning of year
valuation allowance (374) (845) 99
Investment tax credit (91) (98) (101)
Tax-exempt interest (13) (5) (88)
Other tax-exempt income (301) - -
Other 264 43 (150)
------- ------ -----
Income tax expense $ 9,264 14,186 7,909
======= ====== =====
(Continued)
17
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:
1998 1997 1996
---- ---- ----
Deferred tax expense (exclusive of the
effects of the other components below) $ 1,544 737 290
Net gain on investment (note 5) (5,289) 5,289 -
Use of capital loss carryforward - 699 -
Increase (decrease) in beginning of year
valuation allowance (374) (845) 99
-------- ----- ---
$ (4,119) 5,880 389
======== ===== ===
Additional deferred taxes of $331 and $1 as of December 31, 1998 and 1997,
respectively, were included in shareholders' equity in relation to an
unrealized gain on marketable securities classified as available for sale
(note 6).
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997, are presented below:
1998 1997
---- ----
Deferred tax assets:
Postretirement benefits $ (2,044) (1,947)
Deferred compensation (403) (446)
Compensated absences, principally due
to accrual for financial reporting purposes (252) (238)
Capital loss carryforward - -
Goodwill (58) (64)
Other (170) (687)
-------- ------
Total gross deferred tax assets (2,927) (3,382)
Less valuation allowance 68 442
-------- ------
Net deferred tax assets $ (2,859) (2,940)
(Continued)
18
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
1998 1997
---- ----
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation $ 9,369 8,424
Pension 533 538
Amortization of deferred financing costs 169 193
Basis in SmarTalk stock (note 6) - 5,289
Net unrealized gain on available for sale
securities 331 1
Other 517 344
------- ------
Total gross deferred tax liability 10,919 14,789
------- ------
Net deferred tax liability $ 8,060 11,849
======= ======
Unamortized investment tax credit $ 180 271
======= ======
The valuation allowance for deferred tax assets relates to state loss
carryforwards of subsidiaries. The valuation allowance for deferred tax
assets as of January 1, 1998 and 1997, was $442 and $1,287, respectively.
The net change in the total valuation allowance for the years ended
December 31, 1998 and 1997, was a decrease of $218 and $845,
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, 1998. 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)
19
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
At December 31, 1998, the Company has net operating loss carryforwards for
state income tax purposes of $1,002 which are available to offset future
federal taxable income, if any, through 2005.
(5) Investments
-----------
The Company's investments at December 31, 1998 and 1997, consist of the
following:
1998 1997
---- ----
Investments at equity:
Investments in cellular limited partnerships $ 9,176 7,404
Boulevard Communications, LLP 461 95
------- -----
Total investments $ 9,637 7,499
======= =====
In 1998 and 1997, the Company had capital calls amounting to $880 and
$1,800, respectively, to maintain its ownership percentages in its
limited partnership investments.
The Company 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)
20
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 6) 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.
(6) Marketable Securities
---------------------
Information about marketable investment securities at December 31, 1998 and
1997, is as follows:
1998
---------------------------------------
Unrealized Unrealized Market
Cost gains losses value
---- ----- ---------- -----
Available for sale:
Equity securities $ 4,937 898 (143) 5,692
Debt securities 8,918 79 (19) 8,978
-------- --- ---- ------
$ 13,855 977 (162) 14,670
======== === ==== ======
1997
---------------------------------------
Unrealized Unrealized Market
Cost gains losses value
---- ----- ---------- -----
Available for sale:
Equity securities $16,845 2 - 16,847
======= = == ======
(Continued)
21
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
The carrying value of debt securities at December 31, 1998, by contractual
maturity, are as follows:
Due in:
One year or less $ -
One to five years 7,844
Five to ten years 1,134
-----------
$ 8,978
===========
Realized gains and losses on the sale of marketable securities in each of
the three years ended December 31, 1998, were not significant.
(7) Related Party Transaction
-------------------------
In 1998, the Company entered into an agreement to outsource certain data
processing functions to a third party processor (Processor). The Company
and the Processor are related by a common shareholder and director.
Payments to the Processor under this agreement were $1,227 in 1998.
(8) Unaudited Quarterly Financial Data for 1998 and 1997
----------------------------------------------------
The following are summaries of quarterly financial data for the years ended
December 31, 1998 and 1997, as reported by the Company:
Unaudited (in thousands, except per share data)
-------------------------------------------------
First Second Third Fourth
quarter quarter quarter quarter
------ ------- ------- -------
1998:
Operating revenues $16,096 17,239 16,329 17,124
Net operating revenues 5,691 6,672 5,282 4,766
Net earnings 4,251 4,066 3,204 2,997
Earnings per common share:
Net earnings .28 .27 .21 .21
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*
* The 1997 fourth quarter reflects the net after-tax gain of $9,003
described in note 5.
22
SCHEDULE I
----------
NORTH PITTSBURGH SYSTEMS, INC. (Parent Company)
Condensed Financial Information of Registrant
Condensed Balance Sheets
December 31, 1998 and 1997
(Amounts in Thousands)
1998 1997
---- ----
Assets
------
Current assets:
Cash and temporary investments $ 2,641 3,932
Marketable securities available for sale 14,670 16,741
Dividend receivable from subsidiary 2,248 2,106
Accounts receivable - other 151 22
-------- ---------
Total current assets 19,710 22,801
Property, plant and equipment:
Land 150 150
Buildings 1,187 1,187
Equipment 21 21
-------- ---------
1,358 1,358
Less accumulated depreciation and amortization 131 76
-------- ---------
1,227 1,282
Other assets 957 1,702
Investment in subsidiaries 54,949 52,573
Notes and accounts receivable - subsidiaries 1,175 1,177
-------- ---------
$ 78,018 79,535
======== =========
(Continued)
23
SCHEDULE I, CONTINUED
---------------------
NORTH PITTSBURGH SYSTEMS, INC. (Parent Company)
Condensed Financial Information of Registrant
Condensed Balance Sheets, Continued
(Amounts in Thousands)
1998 1997
---- ----
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Dividend payable $ 2,251 2,101
Accrued legal settlement - 3,180
Deferred income taxes 293 5,289
Accounts payable - subsidiaries 3 27
Federal and state income taxes 1,586 236
Other liabilities 79 142
---------- --------
Total current liabilities 4,212 10,975
Shareholders' equity:
Common stock 2,350 2,350
Capital in excess of par value 2,215 2,215
Retained earnings 69,265 64,501
Less cost of treasury stock (508) (508)
Accumulated other comprehensive income - unrealized gain
on available for sale securities, net 484 2
---------- --------
73,806 68,560
---------- --------
$ 78,018 79,535
========== ========
(Continued)
24
SCHEDULE I, CONTINUED
---------------------
NORTH PITTSBURGH SYSTEMS, INC. (Parent Company)
Condensed Financial Information of Registrant
Condensed Statements of Operations
For the Years Ended December 31, 1998, 1997 and 1996
(Amounts in Thousands)
1998 1997 1996
---- ---- ----
Revenues:
Dividends from subsidiaries $ 11,009 2,106 13,821
Interest income 833 542 459
Nonoperating income 114 6 142
Net gain on sale of investment - 14,516 -
Gain on insurance policy 860 - -
--------- --------- ----------
12,816 17,170 14,422
Expenses:
General office salaries and expenses 405 395 387
State taxes 121 115 82
Bad debt expense - note receivable - subsidiary - 1,389 -
--------- --------- ----------
526 1,899 469
--------- --------- ----------
Earnings before income taxes and equity earnings 12,290 15,271 13,953
Income taxes 148 5,366 16
--------- --------- ----------
Earnings before equity earnings 12,142 9,905 13,937
Equity in (overdistributed) undistributed net earnings
of subsidiaries 2,376 12,280 (2,207)
--------- --------- ----------
Net earnings $ 14,518 22,185 11,730
========= ========= ==========
(Continued)
25
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, 1998, 1997 and 1996
(Amounts in Thousands)
1998 1997 1996
---- ---- ----
Cash from operating activities:
Net earnings $ 14,518 22,185 11,730
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Equity in undistributed earnings of affiliates (2,376) (12,280) 2,207
Net gain on liquidation of Conquest
investment - (14,516) -
Other adjustments 792 22 (157)
Changes in assets and liabilities:
Receivables (127) 4,310 150
Dividend receivable (142) (151) 2,045
Accounts payable - subsidiaries (23) 27 -
Other liabilities (1,894) 231 (83)
Deferred income taxes (5,330) 5,161 -
--------- -------- ------
Total adjustments (9,100) (17,196) 4,162
--------- -------- ------
Net cash provided by operating
activities 5,418 4,989 15,892
--------- -------- ------
Cash from investing activities:
Expenditures for property and equipment - - (794)
Investment in affiliates (3) (2) -
Proceeds from sale of investment - 1,655 -
Purchase of marketable securities held to maturity - - (454)
Proceeds from maturity of marketable
securities held to maturity - 451 1,014
Purchases of marketable securities available for sale (18,060) - -
Proceeds from sale of marketable securities
available for sale 20,957 - -
Notes receivable - subsidiaries - - (3,815)
--------- -------- ------
Net cash provided by (used for)
investing activities 2,894 2,104 (4,049)
--------- -------- -------
(Continued)
26
SCHEDULE I, CONTINUED
---------------------
NORTH PITTSBURGH SYSTEMS, INC. (Parent Company)
Condensed Financial Information of Registrant
Condensed Statements of Cash Flows, Continued
(Amounts in Thousands)
1998 1997 1996
---- ---- ----
Cash used for financing activities:
Cash dividends $ (9,603) (8,262) (7,670)
Purchase of treasury stock - (508) -
-------- -------- --------
Net cash used for financing
activities (9,603) (8,770) (7,670)
-------- -------- --------
Net (decrease) increase in cash and temporary
investments (1,291) (1,677) 4,173
Cash and temporary investments at beginning of year 3,932 5,609 1,436
-------- -------- --------
Cash and temporary investments at end of year $ 2,641 3,932 5,609
======== ======== ========
27
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, Jr.
------------------------- ---------------------------
H. R. Brown C. E. Thomas, Jr.
President and Director Chairman of the Board
Date 3/30/99 Date 3/30/99
----------------------- --------------------------
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 3/30/99
-------------------------------
Director:
By /s/ C. E. Cole
---------------------------------
C. E. Cole
Date 3/30/99
-------------------------------
OTHER INFORMATION
EXHIBIT INDEX FOR ANNUAL REPORTS ON FORM 10-K
---------------------------------------------
Exhibit No. 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 Attached Hereto.
(4) Instruments defining the rights Provided in Registration
of security holders, including of Securities of Certain
indentures Successor 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
(18) Letter re change in accounting Not Applicable
principles
Exhibit No. Subject Applicability
- ----------- ------- -------------
(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