-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SkqHlM7+/6mqSmFRsasPL3/CRL39+ZWptXVX2J0tjyKti4AIvKrw6W39+sJDM4qC MzhK4rriwiANBW8Po+5h7A== 0000950132-99-000311.txt : 19990331 0000950132-99-000311.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950132-99-000311 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTH PITTSBURGH SYSTEMS INC CENTRAL INDEX KEY: 0000764765 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 251485389 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-13716 FILM NUMBER: 99578593 BUSINESS ADDRESS: STREET 1: 4008 GIBSONIA RD CITY: GIBSONIA STATE: PA ZIP: 15044-9311 BUSINESS PHONE: 4124439600 MAIL ADDRESS: STREET 1: 4008 GIBSONIA ROAD CITY: GIBSONIA STATE: PA ZIP: 15044-9311 10-K 1 FORM 10-K 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 EX-3.II 2 BYLAWS OF NORTH PITTSBURGH SYSTEMS, INC EXHIBIT 3(ii) Bylaws Of North Pittsburgh Systems, Inc. ================================================================================ ARTICLE I GENERAL Section 1. Principal Office. The principal office of the Corporation shall be ----------------- located at Gibsonia, Allegheny County, Pennsylvania. Section 2. Branch Offices. The Corporation may establish and maintain such --------------- other office or offices at such place or places as the Board of Directors may, from time to time, deem necessary, desirable or expedient. Section 3. Seal. The corporate seal of this Corporation shall have inscribed ----- thereon the name of the Corporation, the year of its incorporation and the State where it was incorporated, and such seal may be used by any of the corporate officers by causing an impression or facsimile thereof to be impressed or placed upon the paper or document to be sealed. Section 4. Fiscal Year. The fiscal year of the Corporation shall begin January ------------ 1 and end December 31. Section 5. Waiver of Notice. Any notice required by these Bylaws to be given ----------------- Directors or Shareholders for any meeting may be waived by any Director or Shareholder in writing, signed by each Director or Shareholder, or by his attorney thereunto authorized, and filed with the Secretary of the Corporation. Attendance of a person at any Directors' Meeting and attendance of a person either in person or by proxy at any Shareholders' Meeting shall constitute a waiver of such notice of meeting except where such person attends a meeting for the express purpose of objecting to the transacting of any business because a meeting was not lawfully called or convened. Section 6. Dividends. Dividends may be declared and paid out of the net ---------- profits or surplus of the Corporation as often and at such times and to such extent as the Board of Directors may determine, consistent with the provisions of the charter of the Corporation and the law of the Commonwealth. Section 7. Audit. An annual examination and audit of the financial status, ------ property and affairs of the Corporation shall be made by an Audit Committee or an approved firm of accountants who shall be appointed by the Board. Such annual examination and audit shall be undertaken and completed a sufficient time before the annual meeting of the shareholders to permit the submission of an appropriate report at such meeting. Section 8. Checks and Notes. Checks, notes, drafts, acceptances, bills of ----------------- exchange, and other obligations for the payment of money, made, accepted or endorsed, shall be signed by such officer or officers, or person or persons, as the Board of Directors shall from time to time determine. Section 9. Repeal of Prior Bylaws. Any and all Bylaws heretofore existing ----------------------- for this Corporation are hereby repealed. ARTICLE II SHAREHOLDERS Section 1. Place. All meetings of shareholders will be held at the principal ----- office of the Corporation or at such other place or places within Pennsylvania as the Directors may from time to time determine. Section 2. Annual Meeting. There shall be an Annual Meeting of the -------------- Shareholders of the Corporation for the purpose of electing directors and transacting other proper business, on the third Friday of May of each year at 2:00 o'clock PM, EST, unless such day be a legal holiday, in which case, the meeting shall be held at the same hour on the next day following that is not a legal holiday. Section 3. Special Meetings. Special meetings of the shareholders may be ---------------- called by the Chairman of the Board, the President or the Board of Directors at any time, and shall be called by the President upon the written request of three (3) or more common shareholders. Such request must specify the purpose of the proposed meeting and the business transacted thereat shall be confined to the object or objects stated in the call. Section 4. Notice. Written notice of every meeting of the shareholders stating ------ the purpose or purposes for which the meeting is called and the time and place where it is to be held shall be served either personally or by mail upon each shareholder of record entitled to vote at such meeting, not less than five (5) days before the meeting, unless a longer period of notice is required by law. If mailed, such notice shall be directed to each shareholder at his last known address as shown on the records of the Corporation. Section 5. Quorum. The holders of record of a majority of the stock issued and ------ outstanding and entitled to vote at any shareholders' meeting, present in person or represented by proxy, shall constitute a quorum for transacting business, unless otherwise provided by law. Section 6. Adjournment. If a quorum shall not be present in person or by ----------- proxy, the shareholders present in person or by proxy shall have the power to adjourn the meeting from time to time without notice other than announced at the meeting, until the requisite amount of stock shall be represented. At such adjourned meeting at which the requisite amount of stock shall be represented, any business may be transacted which might have been transacted at the meeting as originally notified. Section 7. Right to Vote. Except as otherwise provided by law, each common ------------- shareholder of record shall be entitled, at every meeting of the Corporation, to cast one vote for each share of common stock standing in the name of such common shareholder on the books of the Corporation. Each preferred shareholder of record shall be entitled at every meeting of the Corporation (at which such preferred shareholder is entitled to vote by the Charter of the Corporation or the law of the Commonwealth), to cast one (1) vote for each share of preferred stock standing in the name of such preferred shareholder on the books of the Corporation. Section 8. Proxies. Votes may be cast at shareholders' meetings either in ------- person or by written proxy, duly executed by the shareholder, and dated not more than two (2) months prior to the meeting involved, which meeting shall be named therein. Section 9. Mode of Voting. All voting, unless required by law or by these --------------- Bylaws to be by ballot, shall be viva voce, unless a stock vote shall be called for, in which event the vote shall be by ballot, each ballot to state the name of the shareholder voting, the number of shares owned by him, and in addition, if such ballot be cast by proxy, the name of the proxy. Any qualified voter may demand a stock vote and in such event, a stock vote shall immediately be taken. Section 10. Judges of Election. Prior to each meeting of the Shareholders, the ------------------- Board of Directors shall appoint up to three (3) Judges of Election, or such number as may be required by law, who shall perform the duties required by law at such meeting and any adjournment thereof. If any Judge shall refuse to serve, or neglect to attend at the election, or his office becomes vacant, the presiding officer shall appoint a Judge in his place. Judges of Election shall be sworn. Section 11. List of Shareholders. A complete list of Shareholders entitled to --------------------- vote at any meeting shall be compiled by the Secretary of the Corporation or obtained from its agent at least five (5) days before each meeting of shareholders and kept on file at the Corporation's principal office, subject to the inspection of any proper party at any time during the usual business hours and such list shall also be exhibited at the meetings. Said list shall be arranged alphabetically giving the address of each Shareholder entitled to vote and the number of shares held by each. ARTICLE III DIRECTORS Section 1. Number of Directors. The property, affairs and business of the -------------------- Corporation shall be managed and controlled by a board of not less than seven (7) nor more than (9) Directors who may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law, the charter of the Corporation, or its Bylaws, required to be exercised or to be done by the Shareholders. The number of Directors to be elected at the Annual Meeting, not less than seven (7) nor more than nine (9), shall be determined by the Board of Directors prior to the Annual Meeting at which such Directors are to be elected. In the event the Board of Directors determines that less than nine (9) directors shall be elected at the Annual Meeting, it may at any time, by majority vote, until the next Annual Meeting, increase the Board by electing one or two additional Directors to fill the vacancy or vacancies so created by such determination to serve until the next Annual Meeting if it believes it to be in the best interest of the Corporation to do so. Section 2. Qualification and Term. A Director need not be a shareholder of the ----------------------- Corporation. The Directors shall be elected by ballot at the Annual Meeting of the Shareholders. After their election, they shall continue in office until the next Annual Meeting of Shareholders and until their successors have been elected and qualified. Section 3. Vacancies. In the case of any vacancy in the Board of Directors, ---------- the remaining Directors, by affirmative vote of a majority thereof, may elect a successor to hold office for the unexpired portion of the term of the director whose place shall be vacant and until the election and qualification of his successor. Section 4. Place of Meeting. Meetings of the Board of Directors shall be held ----------------- at the principal office of the Corporation or at such other place or places within or without the Commonwealth of Pennsylvania as may from time to time be fixed by resolution of the Board, or as may be specified in the call of any meeting. Section 5. Regular Meetings. Regular meetings of the Board of Directors shall ----------------- be held at such times as may be fixed by resolution of the Board, provided that a Regular Meeting of the Board shall be held within thirty (30) days following each Annual Meeting of the Shareholders and that a regular meeting of the Board shall be held at least once every two (2) months thereafter. No notice shall be required for any Regular Meeting of the Board. Section 6. Special Meetings. Special meetings of the Board of Directors may be ----------------- held at any time upon the call of the Chairman of the Board, the President or three (3) of the Directors then in office, by oral, telegraphic or written notice duly served on or sent or mailed to each Director not less than twenty- four (24) hours before such meeting. Section 7. Quorum. A majority of the members of the Board of Directors then ------- holding office shall constitute a quorum for the transaction of business, but if there shall be less than a quorum at any meeting of the Board, a majority of those present (or if only one be present, then that one) may adjourn the meeting from time to time and the meeting may be held as adjourned without further notice. Section 8. Election of Officers. The Board of Directors, at the first Regular --------------------- Meeting held after the Annual Meeting of the Shareholders of the Corporation, shall elect a Chairman of the Board, (who shall be a Director), a President, a Vice President, a Secretary, a Treasurer, and such additional Vice Presidents, Assistant Secretaries, Assistant Treasurers, and other Officers, as it may deem necessary or desirable. Except as otherwise provided by law, the duties of more than one office may be discharged by one person. Any officers or agents elected or appointed by the Directors shall be removed at any time by the affirmative vote of a majority of the whole Board of Directors. Section 9. Resignation of Whole Board. In case the entire Board of Directors --------------------------- shall die or resign, any Shareholder may call a Special Meeting in the same manner as the Chairman of the Board or the President may call such a meeting and Directors for the unexpired terms may be elected at any such Special Meeting in the same manner as that provided for their election at annual meetings. Section 10. Interest in Contracts. No Directors shall be disqualified from ---------------------- voting or acting on behalf of the Corporation in contracting with any other company because of the fact that he may be an Officer, Director or Shareholder therein. Section 11. Committees. The Board of Directors may, in its discretion, by ----------- resolution adopted by a majority of the whole Board, appoint committees that shall have and may exercise such powers as shall be conferred or authorized by the resolution appointing them. The Board shall have the power at any time to change the members of any such committee, to fill vacancies thereon, and to discharge any such committee. Section 12. Expenses. Directors may be reimbursed for expenses incurred in --------- attending any meeting of the Board of Directors or of any committee of the Board. Nothing herein contained shall preclude any Directors in serving in any other capacity and receiving compensation therefore. Section 13. Telephonic Meetings. Any meeting of the Board of Directors or of a -------------------- committee thereof, including the Executive Committee, may be held in which any one or more or all of the Directors or participants may participate as if present in person, by means of conference telephone or similar communication equipment in a manner in which all persons participating in the meeting can hear each other. Section 14. Personal Liability of Directors. To the fullest extent that the -------------------------------- laws of the Commonwealth of Pennsylvania, as now in effect or as hereafter amended, permit elimination or limitation of the liability of Directors, no Director of the Company shall be personally liable for monetary damages as such for any action taken, or any failure to take any action, as a Director. Further, any amendment or repeal of Section 14 which has the effect of increasing Director liability shall operate prospectively only, and shall not affect any action taken, or any failure to act, prior to its adoption. ARTICLE IV OFFICERS Section 1. Election. The Executive Officers of the Corporation shall be: a --------- Chairman of the Board, a President, a Vice President, a Secretary, a Treasurer, and such additional Vice Presidents, Assistant Secretaries, Assistant Treasurers, and other Officers as the Board of Directors may by resolution determine. All of such Officers shall be elected by the Board of Directors in the manner set forth in Article III hereof and they shall be subject to removal at any time by a majority vote of the whole Board. The Officers of the Corporation shall each have such powers and duties as are hereinafter set forth and as generally pertain to their respective offices and in addition thereto, such powers and duties as may from time to time be conferred upon them by the Board of Directors. Section 2. Chairman of the Board. The Chairman of the Board shall be the ---------------------- titular head of the Corporation, and shall preside at meetings of the shareholders and of the Board of Directors. He shall advise and consult with the other members of the Board, the President and the other Officers concerning the property, business and affairs of the Company, and he shall perform such other duties and shall have supervision over such other matters as the Board may from time to time prescribe. He shall be ex-officio a member of all Committees of the Board of Directors. Section 3. President. The President shall, in the absence of or at the ---------- direction of the Chairman of the Board, preside at all meetings of the shareholders and the Board of Directors. He shall be ex-officio a member of all Committees of the Board of Directors and he shall perform such other duties as may be assigned to him from time to time by the Board of Directors. He may sign and execute all contracts in the name of the Corporation and shall with the Treasurer, sign all certificates of stock of the Corporation. He shall have general control and direction of the business of the Corporation, and he shall perform all acts and things incident to the position of President. He shall have power to sign all notes, drafts, checks and orders for the payment of money in the event of the temporary absence or inability of the Treasurer. Section 4. Vice President. Any Vice President shall have such power and --------------- perform such duties as the Board of Directors may from time to time prescribe and shall also perform such duties as may be assigned to him from time to time by the President. In the event of the death, absence, or inability of the President to perform any duties imposed upon him by these Bylaws or by the Board of Directors, a Vice President may exercise his powers and perform his duties, subject to the control of the Board of Directors. Section 5. Secretary. The Secretary shall attend the meetings of the ---------- shareholders and the Board of Directors and shall keep careful record of all such meetings; the proceedings whereof shall be transcribed into the record book over his signature. He shall give due notice of any and all meetings of the shareholders and of the Board of Directors unless notice is directed by law or by these Bylaws to be otherwise given. He shall be the custodian of the seal and the stock book of the Corporation and shall keep a proper registry of all outstanding certificates of stock. At all meetings of the shareholders, he shall furnish the Judges with lists of the shareholders of the Corporation, as shown by the books of the Corporation, which lists shall show the number of shares owned by each shareholder. He shall safely keep all books, documents and papers of the Corporation committed to his charge. The Secretary shall supervise and control the manner in which the records and files of the Corporation shall be kept and shall perform such other duties as may be assigned to him by the Board of Directors. The Board of Directors shall have the authority to assign the duty of attending and keeping minutes at any Shareholders' Meeting or at any Board of Directors' Meeting(s) to another person other than the Secretary, including an officer or member of the Board of Directors, in those circumstances in which a majority of the Board of Directors believes appropriate. Any minutes so recorded and approved shall be transcribed in the Company's record book of minutes over the signature of the person designated by the Board to take such minutes. Any such minutes shall make reference to such appointment. Section 6. Treasurer. The Treasurer shall have the care and custody of all ---------- funds of the Corporation, which may come into his hands and to deposit the same in the name of the Corporation in such bank or banks or depository, as the Board may designate. He shall sign all drafts, notes and orders for the payment of money, and he shall pay out and dispose of the same under the direction of the Board. He shall, with the President, sign all certificates of stock. He shall render a statement of his cash account to enter regularly, in books to be kept by him, for that purpose, a full and accurate account of all moneys received and paid to him on account of the Corporation and shall perform all acts and things incident to the position of Treasurer. The Treasurer, and other officers as the Board of Directors may determine, be bonded in respect to the faithful performance of their duties in such sums as the Board of Directors may agree upon. Section 7. Assistants. Any Assistant Secretary, Assistant Treasurer, or any ----------- other assistant Officer elected by the Board of Directors, shall perform such duties as the Secretary, the Treasurer, or any other officer elected by the Board of Directors, as the case may be, or the Board of Directors, may from time to time assign to him. ARTICLE V CAPITAL STOCK Section 1. Certificated and Uncertificated Shares. Shares of the Corporation's --------------------------------------- stock may be certificated or uncertificated, as provided under Pennsylvania law. Certificates for shares of the capital stock of the Corporation shall be in such form not inconsistent with law as approved by the Board of Directors, and shall state that the Corporation is incorporated under the laws of Pennsylvania, the name of the person to whom issued, and the number and class of shares and the designation of the series (if any) that the certificate represents and such other terms and provisions as may be required by statute or authorized by the Board of Directors. The share register or transfer books and blank share certificates shall be kept by the Secretary or by a transfer agent and/or registrar designated by the Board of Directors for that purpose. The share certificates of the Corporation shall be numbered and registered in the share register or transfer books of the Corporation as they are issued. Unless otherwise directed by the Board of Directors, certificates shall be signed by the President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, and any of such signatures may be a facsimile. Certificates shall bear the corporate seal, which may be embossed, a facsimile, engraved or printed. Where any such certificate is signed by a transfer agent or a registrar, the signature of any authorized signer upon such certificate may be a facsimile, engraved or printed. In case any authorized signer who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such authorized signer because of death, resignation or otherwise, before the certificate is issued, it may be issued with the same effect as if the authorized signer had not ceased to be such at the date of its issue. Every shareholder of record shall be entitled to a single share certificate representing the total number of shares of each class owned by him/her/it. If a shareholder desires to have share certificates issued or reissued to him/her/it in a manner inconsistent with the immediately preceding sentence, all costs of issuance or reissuance may be at the sole expense of the requesting shareholder. Section 2. Transfers. Transfers of shares shall only be made upon the books of ---------- the Corporation by the record holder or by his legal representative or by power of attorney duly executed and filed with the Corporation or its agent, and, in the case of stock represented by a certificate, on the surrender and cancellation of the certificate or certificates of such shares properly assigned. Section 3. Closing of Stock Transfer Books and Fixing of Record Date for ------------------------------------------------------------- Determination of Shareholders. The Board of Directors of the Corporation may - ------------------------------ close the Stock Transfer books of the Corporation for a period not exceeding sixty (60) days preceding the date of any meeting of shareholders, or the date for the payment of any dividend, or the date for the allotment of any rights, or the date when any exchange or conversion, or exchange of capital stock shall go into effect, or may fix, in advance, a date not exceeding sixty (60) days preceding any of the aforesaid dates as a record date for the determination of the shareholders entitled to vote at any such meeting, or entitled to receive payment of any such dividend, or to any such allotment of rights, or to exercise the rights in respect to any such exchange or conversion, or exchange of capital stock. In case the Stock Transfer books are closed, as aforesaid, ten (10) days' written notice thereof shall be mailed to the shareholders at their last known address as the same appears on the books of the Corporation. Section 4. Lost Certificates. No certificate or shares in the capital stock of ------------------ the Corporation shall be issued in place of any certificate alleged to have been lost, stolen or destroyed, except on delivery to the Corporation or its agent of a bond of indemnity, with sufficient surety, against such lost, stolen or destroyed certificate. Proper and legal evidence of such loss, theft or destruction shall be produced to the Company or its agent if they require the same. Section 5. Aggregate Number of Shares. The aggregate number of shares which --------------------------- the Corporation shall have authority to issue is: (a) The Corporation shall have the authority to issue a total of 50,000,000 shares of Capital Stock. Of the 50,000,000 shares of Capital Stock, 40,000,000 shares shall be Common Stock, par value $.15625 per share. The Board of Directors, at such time or times as it believes appropriate, may divide the remaining 10,000,000 shares of Capital Stock of the Corporation into one or more classes of shares of Common Stock, the voting power per share of which shall not be greater than the voting power per share of the Common Stock issued and outstanding on April 9, 1996 and/or one or more classes and series of Preferred Stock, with par or stated value. The determination of the voting rights, preferences, qualifications, privileges, limitations, restrictions, options, conversion rights and other special or relative rights of the shares of any such class or classes of stock shall be accomplished by an amendment to this Article 5 solely by action of the Board of Directors, which shall have the full authority permitted by law to make such divisions and determinations. ARTICLE VI AMENDMENTS TO BYLAWS These Bylaws may be amended, altered, modified or added to by the majority of the members present and constituting a quorum at any regular or special meeting of the Board of Directors. The authority of the Board of Directors to amend, alter or modify, the Bylaws is subject always to the authority of the shareholders of the Corporation entitled to vote thereon to rescind or alter such amendment or to amend, alter or modify the Bylaws by a majority vote of all such stock represented in person or by proxy at an annual or special meeting of the shareholders provided that written notice shall be mailed to each of said shareholders at least five (5) days prior to said meeting. ARTICLE VII INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 1. Right to Indemnification. Except as prohibited by law, every ------------------------- director and officer of the Company shall be entitled as of right to be indemnified by the Company against reasonable expense and any liability paid or incurred by such person in connection with any actual or threatened claim, action, suit or proceeding, civil, criminal, administrative, investigative or other, whether brought by or in the right of the Company or otherwise, in which he or she may be involved, as a party or otherwise, by reason of such person being or having been a director or officer of the Company or by reason of the fact that such person is or was serving at the request of the Company as a director, officer, employee, fiduciary or other representative of another corporation, partnership, joint venture, trust, employee benefit plan or other entity (such claim, action, suit or proceeding hereinafter being referred to as "Action"). Such indemnification shall include the right to have expenses incurred by such person in connection with an Action paid in advance by the Company prior to final disposition of such Action, subject to such conditions as may be prescribed by law. Persons who are not Directors or Officers of the Company may be similarly indemnified in respect of service to the Company or to another such entity at the request of the Company to the extent the Board of Directors at any time designates such person as entitled to the benefits of this Section. As used herein, "expense" shall include fees and expenses of counsel selected by such person; and "liability" shall include amounts of judgements, excise taxes, fines and penalties, and amounts paid in settlement. Section 2. Right of Claimant to Bring Suit. If a claim for indemnification by -------------------------------- any person eligible to be indemnified under Section 1 is not paid in full by the Company within thirty (30) days after a written claim has been received by the Company, the claimant may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim, and, if successful in whole or in part, the claimant shall also be entitled to be paid the expense of prosecuting such claim. It shall be a defense to any such suit that the conduct of the claimant was such that under Pennsylvania law, the Company would be prohibited from indemnifying the claimant for the amount claimed, but the burden of proving such defense shall be on the Company. Neither the failure of the Company (including its Board of Directors, independent legal counsel and its Shareholders) to have made a determination prior to the commencement of such suit that indemnification of the claimant is proper in the circumstances because the conduct of the claimant was not such that indemnification would be prohibited by law, nor an actual determination by the Company (including its Board of Directors, independent legal counsel or its Shareholders) that the conduct of the claimant was such that indemnification would be prohibited by law, shall be a defense to the suit or create a presumption that the conduct of the claimant was such that indemnification would be prohibited by law. Section 3. Insurance and Funding. The Company may purchase and maintain ---------------------- insurance to protect itself and any person eligible to be indemnified hereunder against any liability or expense asserted or incurred by such person in connection with any Action, whether or not the Company would have the power to indemnify such persons against such liability or expense by law or under the provisions of this Article VII. The Company may create a trust fund, grant a security interest, cause a letter of credit to be issued or use other means (whether or not similar to the foregoing) to ensure the payment of such sums as may become necessary to effect indemnification as provided herein. Section 4. Non-Exclusivity; Nature and Extent of Rights. The right of --------------------------------------------- indemnification provided for herein shall: (1) not be deemed exclusive of any other rights, whether nor existing or hereafter created, to which those seeking indemnification hereunder may be entitled under any agreement, Bylaw or Charter provision, vote of Shareholders or Directors or otherwise; (2) shall be deemed to create contractual rights in favor of persons entitled to indemnification hereunder; (3) shall continue as to persons who have ceased to have the status pursuant to which they were entitled or were denominated as entitled to indemnification hereunder and shall inure to the benefit of the heirs and legal representatives of persons entitled to indemnification hereunder; and (4) shall be applicable to Actions commenced after the adoption hereof. The right of indemnification provided for herein may not be amended, modified or repealed so as to limit in any way the indemnification provided for herein with respect to any acts or omissions occurring prior to the effective date of any such amendment, modification or repeal. EX-11 3 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE Exhibit 11 NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Statement re computation of per share earnings Statement of Computation of Earnings Per Share
For the Year Ended December 31 ------------------------------------- 1998 1997 1996 ---- ---- ---- 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 ======== ======== ========
EX-21 4 SUBSIDIARIES OF REGISTRANT Exhibit 21 NORTH PITTSBURGH SYSTEMS, INC. AND SUBSIDIARIES Subsidiaries of Registrant North Pittsburgh Telephone Company, Penn Telecom, Inc. and Pinnatech, Inc. are wholly-owned subsidiaries of the Registrant. The wholly-owned subsidiaries of the Registrant are incorporated in the Commonwealth of Pennsylvania and do business only under their respective names. In addition, Penn Telecom, Inc. owns 49.5% of Boulevard Communications, L.L.P. (Boulevard). The Registrant owns 50% of the voting capital stock of Multi, Inc. which in turn owns 0.5% of Boulevard. Neither Boulevard nor Multi, Inc. is considered a significant subsidiary at this time. Penn Telecom, Inc.'s ownership of Boulevard and the Registrant's ownership of Multi, Inc. are accounted for using the equity method. EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 16,786 14,670 10,909 0 4,019 46,588 155,184 78,854 135,315 14,393 32,196 0 0 2,350 71,456 135,315 2,906 66,788 2,835 44,377 0 0 1,884 23,782 9,264 14,518 0 0 0 14,518 .97 .97
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