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. Penn Telecom is certificated as a Competitive Access Provider (CAP) and a Competitive Local Exchange Carrier (CLEC) and has entered into these businesses. Other 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. Pinnatech, Inc. (Pinnatech), a wholly-owned subsidiary of the Registrant formed in 1995, provides Internet related services including the Nauticom Sports Network which, inter alia, ----- ---- broadcasts high school and college sports over the Internet. 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, 1999.
(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 ---------------------- telecommmunication services in parts of Allegheny, Armstrong, Butler and Westmoreland Counties. Penn Telecom furnishes local network services throughout Western Pennsylvania as a CLEC. Both North Pittsburgh and Penn Telecom are 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.
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 of the interconnection requirements in the 1996 Act that expires on July 10, 2000. North Pittsburgh recently filed a petition seeking further extension of the suspension until July 10, 2001. A decision by the PA PUC on the suspension extension is expected in the second quarter of 2000.
Historically, North Pittsburgh's wireline operations have not experienced significant competition in its franchised service area. However, as a result of the passage of the 1996 Act, North Pittsburgh's local wireline operations are experiencing increased competition from various sources, including, but not limited to, 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.
At the same time, Penn Telecom is actively expanding its CLEC operations outside of North Pittsburgh's service territory with customers having been added in Bell Atlantic's and Sprint's traditional service territories.
Toll and Access Services. North Pittsburgh and Penn Telecom furnish ------------------------ Long Distance Toll Services to their customers through company-owned facilities and facilities leased from other telecommunications companies. North Pittsburgh and Penn Telecom also provide other local and interexchange carriers with the use of their local networks to complete long distance calls. North Pittsburgh and Penn Telecom also provide facilities for private line services commonly referred to as special access services. Special access services are typically non-switched services used to transport data between customer locations. Charges for toll and access services are filed in tariffs with the PA PUC and Federal Communications Commission (FCC).
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 rural companies under rate-of-return (ROR) regulation, which may affect North Pittsburgh.
North Pittsburgh is currently under ROR regulation within the intrastate jurisdiction. However, in July of 1998, North Pittsburgh joined with 18 other companies and filed for an alternative form of regulation to replace traditional rate base/rate-of-return regulation. In the filing, North Pittsburgh proposed a price cap plan whereby rates for noncompetitive services are allowed to be increased based on an index that measures general economy wide price increases. Under the proposed plan, services may also be declared competitive and thereby freed from all rate regulation. In return for regulation under the price cap plan, North Pittsburgh has also proposed a network modernization plan. The PA PUC entered an Order on January 20, 2000 modifying North Pittsburgh's plan for alternative regulation. On February 4, 2000, North Pittsburgh filed a Petition for Reconsideration seeking clarification and/or modification of the PA PUC's original Order. North Pittsburgh expects the PA PUC to make a final ruling on the Petition for Reconsideration some time in the second quarter of 2000. Until final PA PUC action is taken in regard to the proposed alternative form of regulation, North Pittsburgh is unable to determine the effect on its operations and revenues.
On September 30, 1999, the PA PUC issued an Order dealing with a variety of issues impacting Local Exchange Carriers in Pennsylvania. Referred to as the Global Proceeding, the Order dealt with certain issues that affect North Pittsburgh. Specifically, the Order allows North Pittsburgh to rebalance and lower access charges in order to prepare North Pittsburgh to meet competition when it is introduced in the North Pittsburgh serving area. The reduction in access charges is to be offset by reimbursements from an interim state universal service fund that is funded by all telecommunication providers (excluding wireless) in the state. While a number of parties, including North Pittsburgh, have filed court appeals regarding other issues in the same Order, the rebalancing and lowering of access charges and the implementation of universal service funding is expected to move forward and should be implemented before the end of the second quarter of 2000. Because the rebalancing and reduction of access charges is offset by reimbursement from the fund, North Pittsburgh does not expect any significant impact on operations or revenues in regard to the Global Order regardless of the outcome of the pending court appeals.
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. 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 CLEC. 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 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 ALLTEL Communications, Inc. 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 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) is a Pennsylvania Limited Liability Partnership Competitive Access Provider (CAP) equally owned by the Registrant and a company in the Armstrong Group. It 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.
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, high speed Internet connectivity using Digital Subscriber Line (DSL) circuits, frame relay and Asynchronous Transfer Mode (ATM) technologies. Pinnatech provides web page design and creation along with e commerce enabling technologies to customers. Pinnatech also provides streaming media broadcasts of sporting events through its Nauticom Sports Network division. This is a one-of-a-kind network combining local radio broadcasts and streaming media of predominantly high school and small college sporting events.
(iii) Status of New Products. ----------------------
With the exception of the Nauticom Sports Network previously discussed, 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) of this Item 1 concerning, inter alia, the impact of the 1996 Act. ----- ----
North Pittsburgh has FCC licenses to operate a private operational telephone maintenance radio service station (WIK 838 expiring on March 20, 2001) and 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.)
(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, 1999, the Registrant, through all of its subsidiaries, employed 342 persons.
(d) Financial Information About Geographic Areas. All of the Registrant's -------------------------------------------- operations are located in the United States. See financial information provided in Item 14.
Item 2.
Item 2. Properties. - ------ ----------
The Registrant owns in fee one of the office/warehouse buildings, which houses the operations of Penn Telecom, and Penn Telecom owns the other.
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, 1995 to December 31, 1999, the Registrant made gross property additions of approximately $94,259,000 (which is about 54.0% of the original cost of the present telephone plant) and property retirements of approximately $8,556,000. The Registrant's 2000 construction program, subject to adjustment for economic conditions, postponements of housing developments, etc. is projected to be in excess of $27 million and will permit expansion or improvement of the Registrant's telecommunications services.
Item 3.
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.
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, 1999.
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: - ------------------------------------
(1) Directors. Messrs. Thomas, Brown and Kimble were elected as Directors at --------- the 1999 Annual Meeting of Shareholders held May 21, 1999 to serve until the 2000 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 19, 2000.
(2) Officers. All of the foregoing officers were elected to their respective -------- offices at a Board of Directors' Organizational Meeting which followed the May 21, 1999 Annual Meeting of Shareholders. In September, 1999, the Registrant entered into executive employment agreements with each of its executive officers, except Mr. Thomas, which, inter alia, specify the ----- ---- offices and duties for each executive.
(3) Arrangements. There are no arrangements or understandings between any of ------------ the above executive officers and any other person pursuant to which they were elected as an officer.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholders - ------ -------------------------------------------------------------- Matters. -------
(a) Market Information: ------------------
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 1999 and 1998 are listed below:
(b) Approximate Number of Holders of Common Stock: ---------------------------------------------
Calculated on the basis of the number of shareholder accounts, the Registrant had approximately 2,871 common shareholders on March 13, 2000.
(c) Common Stock Dividends: ----------------------
Cash dividends declared per share by the Registrant on the outstanding shares of Common Stock in 1999 and 1998 were as follows:
(d) Sale of Equity Securities: -------------------------
There were no sales of equity securities by the Registrant during the twelve months ended December 31, 1999.
Item 6.
Item 6. Selected Financial Data (Amounts in Thousands Except Per Share Data). - ------ --------------------------------------------------------------------
The following summary of Selected Financial Data for the years 1999 - 1995 should be read in conjunction with the consolidated financial statements and notes included elsewhere in this report.
*See Notes to Consolidated Financial Statements in Item 14.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and - ------ --------------------------------------------------------------- Results of Operations (Amounts in Thousands). --------------------------------------------
(a) Results of Operations. ---------------------
Net earnings for 1999 were $12,685, or $.85 per share compared to net earnings of $14,518 or $.97 per share for 1998 and $22,185 or $1.48 per share for 1997. These fluctuations were attributable to the following factors:
(1) Operating Revenues. ------------------
1999/1998 ---------
Total operating revenues increased $4,513 (6.8%) during 1999. This increase was primarily the result of increases in local network services of $1,353 (10.9%) and long distance and access services of $2,331 (5.2%) and an increase in other operating revenues of $557 (14.9%). Increased local network service revenues were attributable to customer growth, growth in second lines and expanded penetration of enhanced services. Higher long distance and access services were generally the result of an increase in number of customers and minutes of use. The increase in other operating revenues was primarily due to growth of Internet access customers.
1998/1997 ---------
Total operating revenues increased $821 (1.3%) during 1998. This modest increase was primarily the net result of increases in local network services of $1,695 (15.8%) and long distance and access services of $1,980 (4.6%) offset by a decrease in other operating revenues of $3,252 (46.5%). 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 Management Consulting Solutions, Inc. (MCSI) on July 31, 1997 offset, in part, by the growth of Internet access customers.
(2) Operating Expenses and Net Revenues. -----------------------------------
1999/1998 ---------
Total operating expenses for 1999 increased $6,967 (15.7%) over the preceding year. That change was principally the result of increases in network and other operating expenses of $5,422 (20.5%) and depreciation and amortization expenses of $1,736 (14.5%). The increase in network and other operating expense consisted of an increase in personnel costs due to an expansion of existing business, and an increase in personnel and other expenses due to start-up activities of CLEC and Internet-related activities. 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 $4,513 discussed above, coupled with the increase in total operating
expenses of $6,967, resulted in an 11.2% decrease in net operating revenues in 1999 as compared to 1998.
1998/1997 ---------
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 $821 discussed above coupled with the increase in total operating expenses of $287 resulted in a 2.5% increase in net operating revenues in 1998 as compared to 1997.
(3) Other Items. -----------
1999/1998 ---------
Interest expense increased in 1999 due to increased debt borrowings. Interest income decreased $332 in 1999 primarily due to decreased levels of investment in temporary investments. The net increase in Sundry income of $901 was primarily due to receipts from a one-time insurance settlement in 1998 and a decrease in cellular partnership income from 1998 to 1999, offset by net realized gains on available for sale securities and a one-time gain from a cellular partnership transaction recorded in the third quarter of 1999.
1998/1997 ---------
Interest income increased $700 in 1998 primarily due to increased levels of investment in temporary investments. The net increase in Sundry income of $867 was primarily due to an increase in cellular partnership income in 1998 as compared to 1997 and receipts from a one-time insurance settlement.
(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 had 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, for the purpose of furnishing or improving
telephone service in rural areas. Funds advanced in 1999 and 1998 were $9,513 and $7,258, 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.
Capital expenditure commitments for the purchase and installation of new equipment at December 31, 1999 amounted to approximately $6.8 million, with such amount being part of the 2000 construction program, which is projected to be in excess of $27 million. Management expects cash flows provided by operating activities and cash reserves in 2000 to be sufficient to service long- term debt, to pay dividends and to finance approximately 25% to 50% of capital additions. The balance of capital additions will be financed from 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 2000 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 2000, 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 did not have 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. ---------------------------------------
North Pittsburgh is currently under ROR regulation within the intrastate jurisdiction. However, in July of 1998, North Pittsburgh joined with 18 other companies and filed for an alternative form of regulation to replace traditional rate base/rate-of-return regulation. In the filing, North Pittsburgh proposed a price cap plan whereby rates for noncompetitive services are allowed to be increased based on an index that measures general economy wide price increases. Under the proposed plan, services may also be declared competitive and thereby freed from all rate regulation. In return for regulation under the price cap plan, North Pittsburgh has also proposed a network modernization plan. The PA PUC entered an Order on January 20, 2000 modifying North Pittsburgh's plan for alternative regulation.
On February 4, 2000, North Pittsburgh filed a Petition for Reconsideration seeking clarification and/or modification of the PA PUC's original Order. North Pittsburgh expects the PA PUC to make a final ruling on the Petition for Reconsideration some time in the second quarter of 2000. Until final PA PUC action is taken in regard to the proposed alternative form of regulation, North Pittsburgh is unable to determine the effect on its operations and revenues.
On September 30, 1999, the PA PUC issued an Order dealing with a variety of issues impacting Local Exchange Carriers in Pennsylvania. Referred to as the Global Proceeding, the Order dealt with certain issues that affect North Pittsburgh. Specifically, the Order allows North Pittsburgh to rebalance and lower access charges in order to prepare North Pittsburgh to meet competition when it is introduced in the North Pittsburgh serving area. The reduction in access charges is to be offset by reimbursements from an interim state universal service fund that is funded by all telecommunication providers (excluding wireless) in the state. While a number of parties, including North Pittsburgh, have filed court appeals regarding other issues in the same Order, the rebalancing and lowering of access charges and the implementation of universal service funding is expected to move forward and should be implemented before the end of the second quarter of 2000. Because the rebalancing and reduction of access charges is offset by reimbursement from the fund, North Pittsburgh does not expect any significant impact on operations or revenues in regard to the Global Order regardless of the outcome of the pending court appeals.
(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 implemented in Pennsylvania before the impact on North Pittsburgh, a Rural Telephone Company under the 1996 Act, can be fully understood and measured. However, the clear intent of the 1996 Act is to open up the local exchange market to competition. The 1996 Act appears to mandate, among other items, that North Pittsburgh, at some point in time, permit the resale of its services at wholesale rates, provide number portability, if feasible, provide dialing parity, provide interconnection to any requesting carrier for the transmission and routing of telephone exchange service and exchange access and provide access to network elements. North Pittsburgh along with 17 other rural companies in Pennsylvania was granted a temporary suspension of the interconnection requirements in the 1996 Act that expires on July 10, 2000. North Pittsburgh recently filed a petition seeking further extension of the suspension until July 10, 2001. A decision by the PA PUC on the suspension extension is expected in the second quarter of 2000.
The 1996 Act, FCC and PA PUC regulatory proceedings and the thrust towards a fully competitive marketplace have created some uncertainty in respect to the levels of North Pittsburgh's revenue growth in the future. However, its unique location in a growing commercial/residential suburban traffic corridor to the north of the City of Pittsburgh, its state-of-the-art switching transmission and transport facilities and its extensive fiber network place North Pittsburgh in a solid position to meet competition and minimize any loss of revenues. In addition, North Pittsburgh continues to make its network flexible and responsive to the needs of its customers to meet competitive threats. New services, access line growth and anticipated
usage growth are expected to lessen or offset any reductions in North Pittsburgh's revenue sources.
(5) Year 2000. ---------
(a) Year 2000 Conversion Activities and Follow-Up. ---------------------------------------------
As of March 13, 2000, the Registrant had substantially completed its Year 2000 Compliance Program. As of this date, no material problems were reported in any of the Registrant's facilities or operations in conjunction with the Year 2000 conversion. In addition, as of this date, the Registrant had not experienced any material Year 2000 problems with its IT or non-IT systems or products, nor had the Registrant experienced any material problems with any of its key customers or suppliers.
(b) Cost to Address Year 2000 Issues. --------------------------------
Expenditures related to Year 2000 remediation were $3.3 million. These expenditures include costs related to the data processing transition plan, license fees for purchase of software and training and implementation costs. Portions of these costs were capitalized and are being amortized over the estimated useful life of the asset. The remainder of these costs were expensed as incurred.
(6) New Accounting Pronouncements. -----------------------------
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The pronouncement is effective for fiscal years beginning after June 15, 2000. The Registrant does not expect the pronouncement to impact the consolidated financial statements because the Registrant has not entered into derivative or hedging transactions.
Item 7A.
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 debt securities 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.
As the table incorporates only those exposures that exist as of December 31, 1999, 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.
Item 8. Financial Statements and Supplementary Data. - ------ -------------------------------------------
Financial statements meeting the requirements of Regulation S-X and the supplementary financial information specified by Item 302 of Regulation S-K are attached to this document.
Item 9.
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.
Item 10. Directors and Executive Officers of the Registrant. - ------- --------------------------------------------------
and
Item 11.
Item 11. Executive Compensation. - ------- ----------------------
and
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management. - ------- --------------------------------------------------------------
and
Item 13.
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 and such information is incorporated into Part III of this Form 10-K by reference thereto.
PART IV
Item 14.
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, 1999 and 1998
Consolidated Statements of Earnings for the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
2. Financial Statement Schedules: -----------------------------
Condensed Financial Information of Registrant for the years ended December 31, 1999, 1998 and 1997
All schedules other than those listed above have been omitted because the information is either not required or is set forth in the financial statements or notes thereto.
3. Exhibits: ---------
The Exhibit Index for Annual Reports on Form 10-K and applicable Exhibits are reported in this report under the caption OTHER INFORMATION.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the ------------------- quarter ended December 31, 1999.
(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.
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Financial Statements and Schedule (Form 10-K)
December 31, 1999, 1998 and 1997
(With Independent Auditors' Report Thereon)
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, 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.
Pittsburgh, Pennsylvania February 28, 2000
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
(Amounts in Thousands, Except Per Share Data)
(Continued)
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
(Amounts in Thousands, Except Per Share Data)
See accompanying notes to consolidated financial statements.
(Continued)
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
For the Years Ended December 31, 1999, 1998 and 1997
(Amounts in Thousands, Except Per Share Data)
See accompanying notes to consolidated financial statements.
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income
For the Years Ended December 31, 1999, 1998 and 1997
(Amounts in Thousands, Except Per Share Data)
(Continued)
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income
For the Years Ended December 31, 1999, 1998 and 1997
(Amounts in Thousands, Except Per Share Data)
See accompanying notes to consolidated financial statements.
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
(Amounts in Thousands)
(Continued)
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
(Amounts in Thousands)
See accompanying notes to consolidated financial statements.
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(Amounts in Thousands, Except Per Share Data)
(1) Summary of Significant Accounting Policies
(a) 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.
(b) 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 1998.
(c) Marketable Securities
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.
(Continued)
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(Amounts in Thousands, Except Per Share Data)
(d) Investments
The Company's investments in limited partnerships are carried at cost plus equity in accumulated net profits or losses.
(e) Property, Plant and Equipment
Property, plant and equipment 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 and equipment 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 and equipment in service amounted to 8.7%, 8.5% and 8.4% in 1999, 1998 and 1997, respectively. The average remaining life of plant and equipment in service as of December 31, 1999, 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 1999, 1998 or 1997.
Expenditures for maintenance, repairs and renewals are charged to operations as incurred.
(f) 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.
(g) 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 principally represent amounts due from interexchange carriers.
Uncollected accounts receivable are typically expensed approximately 30 days after telephone service to such customer has been disconnected.
(Continued)
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(Amounts in Thousands, Except Per Share Data)
(h) 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.
(i) 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. Under conditions of the Company's loan agreement with the Rural Utilities Services, the Company has cash of $781 and $469 for 1999 and 1998, respectively, that is restricted in use.
(j) Pension and Other Postretirement Benefits
The Company provides pension and other postretirement benefits to substantially all of its employees and eligible retirees. Benefits provided by these plans are expensed over the estimated working lives of employees.
(k) Comprehensive Income
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.
(l) 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.
(Continued)
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(Amounts in Thousands, Except Per Share Data)
(m) Reclassifications
Certain prior year amounts have been reclassified to conform with the current year's presentation.
(2) Long-Term Debt
Long-term debt as of December 31, 1999 and 1998, was as follows:
1999 1998 -------- -------
Notes payable to Rural Telephone Bank, maturing at various dates from 2009 through 2019 $ 19,277 20,133 Notes payable to Federal Financing Bank, maturing in 2012 22,292 13,913 -------- -------
41,569 34,046
Less current portion of long-term debt 2,629 1,850 -------- -------
Long-term debt $ 38,940 32,196 ======== -------
Principal payments required over the next five years calculated on the outstanding indebtedness at December 31, 1999, are: $2,629 in 2000; $2,689 in 2001; $2,754 in 2002; $2,823 in 2003; and $2,897 in 2004.
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 by NPTC. 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 shareholders or purchase, redeem or retire any of its capital stock or make any investment in affiliated companies. As a result of the NPTC restrictions, $2,674 of NPTC retained earnings were available for dividends to the Company as of December 31, 1999.
(Continued)
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(Amounts in Thousands, Except Per Share Data)
As of December 31, 1999, consolidated retained earnings of the Company of approximately $31,786 were available for dividends and other distributions to shareholders.
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.
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 6.2%.
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, 1999, is $36,928.
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 1999 or 1998.
(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)
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(Amounts in Thousands, Except Per Share Data)
Assumptions used in the calculations as of December 31, 1999, 1998 and 1997, are:
Pension benefits Other benefits ------------------ ------------------ 1999 1998 1997 1999 1998 1997 ---- ---- ---- ---- ---- ---- Weighted average assumption:
Discount rate % 7.50 6.75 7.00 7.50 6.75 7.00 Expected return on assets 8.00 7.50 7.50 N/A N/A N/A Rate of compensation increase 4.50 5.00 5.00 4.50 5.00 5.00
(Continued)
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(Amounts in Thousands, Except Per Share Data)
Net periodic benefit costs include the following:
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 1999 was 9.1 percent for participants whose coverage included Major Medical Insurance, 8.0 percent for participants who have Blue Cross/Blue Shield coverage only, and 6.3 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 health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in the assumed health care trend rate would have the following effects:
15 (Continued)
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(Amounts in Thousands, Except Per Share Data)
(4) Income Taxes
The components of income tax expense are:
1999 1998 1997 -------- -------- -------- Current: Federal $ 6,093 10,231 6,141 State 1,810 3,243 2,263 -------- -------- -------- 7,903 13,474 8,404 Deferred: Federal 809 (3,114) 4,460 State 190 (1,005) 1,420 -------- -------- -------- 999 (4,119) 5,880
Deferred investment tax credit (69) (91) (98) -------- -------- --------
$ 8,833 9,264 14,186 ======== ======== ========
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:
1999 1998 1997 --------- -------- -------
Statutory federal income tax $ 7,531 8,324 12,729 State taxes on income (net of federal income tax benefit) 1,300 1,455 2,362 Change in beginning of year valuation allowance 86 (374) (845) Investment tax credit (69) (91) (98) Tax-exempt interest -- (13) (5) Other tax-exempt income -- (301) -- Other (15) 264 43 --------- -------- -------
Income tax expense $ 8,833 9,264 14,186 ========= ======== =======
16 (Continued)
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(Amounts in Thousands, Except Per Share Data)
The significant components of deferred income tax expense attributable to income from operations are as follows:
1999 1998 1997 ----- ------- ------
Deferred tax expense (exclusive of the effects of the other components below) $ 913 1,544 737 Net gain on investment (note 5) -- (5,289) 5,289 Use of capital loss carryforward -- -- 699 Increase (decrease) in beginning of year valuation allowance 86 (374) (845) ----- ------- ------
$ 999 (4,119) 5,880 ===== ======= ======
Additional deferred taxes of $267 and $330 were recorded in 1999 and 1998, respectively, related to an unrealized gain on marketable securities classified as available for sale (note 6).
(Continued)
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(Amounts in Thousands, Except Per Share Data)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998, are presented below:
18 (Continued)
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(Amounts in Thousands, Except Per Share Data)
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, 1999 and 1998, was $68 and $442, respectively. For the year ended December 31, 1999, there was a net increase in the valuation allowance in the amount of $86. The net change in the valuation allowance for the year ended December 31, 1998, was a decrease of $374. 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, 1999. 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.
At December 31, 1999, the Company has net operating loss carryforwards for state income tax purposes of $1,754 which are available to offset future state taxable income, if any, through 2009.
(5) Investments
The Company's investments at December 31, 1999 and 1998, consist of the following:
1999 1998 -------- ------ Investments at equity: Investments in cellular limited partnerships $ 9,006 9,176 Boulevard Communications, LLP 609 461 -------- ------
Total investments $ 9,615 9,637 ======== ======
In 1999 and 1998, the Company had capital calls amounting to $-0- and $880, respectively, to maintain its ownership percentages in its limited partnership investments.
19 (Continued)
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(Amounts in Thousands, Except Per Share Data)
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.
(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, 1999 and 1998, is as follows:
----------------------------------------------- Unrealized Unrealized Market Cost gains losses value -------- ---------- ---------- ------ Available for sale: Equity securities $ 6,135 2,320 (441) 8,014 Debt securities 9,446 -- (438) 9,008 -------- ------ ----- -------
$ 15,581 2,320 (879) 17,022 ======== ====== ===== =======
(Continued)
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(Amounts in Thousands, Except Per Share Data)
---------------------------------------------- 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 ========= ========== ========== =======
The carrying value of debt securities at December 31, 1999, by contractual maturity, are as follows:
Due in: One year or less $ -- One to five years 6,122 Five to ten years 2,886 ---------------
$ 9,008 ===============
Realized gains and losses on the sale of marketable securities in each of the three years ended December 31, 1999, were immaterial.
(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 $2,553 and $1,227 in 1999 and 1998, respectively.
(Continued)
NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(Amounts in Thousands, Except Per Share Data)
(8) Unaudited Quarterly Financial Data for 1999 and 1998
The following are summaries of quarterly financial data for the years ended December 31, 1999 and 1998, as reported by the Company:
Schedule I
NORTH PITTSBURGH SYSTEMS, INC. (Parent Company)
Condensed Financial Information of Registrant
Condensed Balance Sheets
December 31, 1999 and 1998
(Amounts in Thousands)
(Continued)
Schedule I
NORTH PITTSBURGH SYSTEMS, INC. (Parent Company)
Condensed Financial Information of Registrant
Condensed Balance Sheets
December 31, 1999 and 1998
(Amounts in Thousands)
(Continued)
Schedule I
NORTH PITTSBURGH SYSTEMS, INC. (Parent Company)
Condensed Financial Information of Registrant
Condensed Statements of Operations
For the Years Ended December 31, 1999, 1998 and 1997
(Amounts in Thousands)
(Continued)
Schedule I
NORTH PITTSBURGH SYSTEMS, INC. (Parent Company)
Condensed Financial Information of Registrant
Condensed Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
(Amounts in Thousands)
(Continued)
Schedule I
NORTH PITTSBURGH SYSTEMS, INC. (Parent Company)
Condensed Financial Information of Registrant
Condensed Statements of Cash Flows
For the Years Ended December 31, 1999, 1998 and 1997
(Amounts in Thousands)
See accompanying independent auditors' report.
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
/s/ H. R. Brown /s/ C. E. Thomas, Jr. By______________________________ By_______________________________ H. R. Brown C. E. Thomas, Jr. President, Director, and Chairman of the Board Principal Executive Officer
March 27, 2000 March 27, 2000 Date____________________________ Date______________________________
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.
/s/ A. P. Kimble By_________________________________ A. P. Kimble Director, Vice President, Treasurer and Principal Financial and Accounting Officer
March 27, 2000 Date_______________________________
/s/ C. E. Cole By_________________________________ C. E. Cole Director
March 27, 2000 Date_______________________________
OTHER INFORMATION
Exhibit Index for Annual Reports on Form 10-K ---------------------------------------------
Exhibit No. Subject Applicability - ----------- ------- -------------
(2) Plan of acquisition, Not Applicable reorganization, arrangement, liquidation or succession
(3)(i) Articles of Incorporation Provided in Quarterly Report on Form 10-Q for the quarter ended June 30, 1996 and Incorporated Herein by Reference.
(3)(ii) By-Laws Provided in Annual Report on Form 10-K for the year ended December 31, 1998 and Incorporated Herein by Reference.
(4) Instruments defining the Provided in Registration of rights of security holders, Securities of Certain Successor including indentures issuers on Form 8-B filed on June 25, 1985 and Incorporated Herein by Reference.
(9) Voting trust agreement Not Applicable
(10) Material contracts Provided in Quarterly Report on Form 10-Q for the quarter ended September 30, 1999 and Incorporated Herein by Reference.
(11) Statement re computation of Attached Hereto per share earnings
(12) Statement re computation of Not Applicable ratios
(13) Annual report to security Not Applicable holders, Form 10-Q or quarterly report to security holders
Exhibit No. Subject Applicability - ----------- ------- --------------
(16) Letter re change in certifying Not Applicable accountant
(18) Letter re change in accounting Not Applicable principles
(21) Subsidiaries of the Registrant Attached Hereto
(22) Published report regarding Not Applicable matters 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