<PAGE> 1
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
----------------------
FORM 10-Q
(Mark One)
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 1996
[ ] 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 0-27312
TOLLGRADE COMMUNICATIONS, INC.
(Exact Name of Registrant as Specified in its Charter)
PENNSYLVANIA 25-1537134
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
493 NIXON RD.
CHESWICK, PA 15024
(Address of Principal Executive Offices, including zip code)
412-274-2156
(Registrant's telephone number, including area code)
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
----- -----
As of March 14, 1996, there were 5,443,830 shares of the Registrant's
Common Stock, $0.20 par value per share, and no shares of the Registrant's
Preferred Stock, $1.00 par value per share, outstanding.
- - --------------------------------------------------------------------------------
This report consists of a total of 13 pages. The exhibit index is at page 12.
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TOLLGRADE COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1996
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION PAGE NO.
- - ------------------------------ --------
ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS:
STATEMENTS OF OPERATIONS FOR THE QUARTERS ENDED
MARCH 31, 1995 AND MARCH 31, 1996 . . . . . . . . . . . . . 3
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1995
AND MARCH 31, 1996 . . . . . . . . . . . . . . . . . . . . 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE QUARTERS
ENDED MARCH 31, 1995 AND MARCH 31, 1996 . . . . . . . . . . 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . 6
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . 7
PART II. OTHER INFORMATION
- - ---------------------------
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
- - ---------
EXHIBIT INDEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
- - -------------
ITEM 6 -- EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . 13
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
- - -------------------------------
TOLLGRADE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------
QUARTER ENDED MARCH 31,
1995 1996
- - -----------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Product sales $5,794,961 $6,848,807
Royalty fees 986 580
- - -----------------------------------------------------------------------------------------------------
TOTAL REVENUES 5,795,947 6,849,387
COST OF PRODUCT SALES 3,112,208 3,463,363
- - -----------------------------------------------------------------------------------------------------
GROSS PROFIT 2,683,739 3,386,024
- - -----------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling and marketing 621,211 891,970
General and administrative 330,080 479,834
Research, engineering and development 524,016 713,297
- - -----------------------------------------------------------------------------------------------------
Total operating expenses 1,475,307 2,085,101
- - -----------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 1,208,432 1,300,923
Interest income (expense) (36,667) 204,378
- - -----------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,171,765 1,505,301
Provision for income taxes 421,800 548,000
=====================================================================================================
NET INCOME $ 749,965 $ 957,301
=====================================================================================================
EARNINGS PER SHARE INFORMATION:
Weighted common and common equivalent shares 4,540,599 5,857,566
- - -----------------------------------------------------------------------------------------------------
Net income per common and common equivalent shares:
Primary $ .17 $ .16
Fully Diluted $ .17 $ .16
=====================================================================================================
</TABLE>
3
<PAGE> 4
TOLLGRADE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------
DECEMBER 31, 1995 MARCH 31, 1996
ASSETS
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $15,157,387 $14,984,777
Accounts receivable:
Trade 2,571,233 3,478,676
Other 59,887 90,044
Inventories 6,021,466 6,247,244
Prepaid expenses and deposits 151,451 272,743
Deferred tax asset 159,500 159,500
- - --------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 24,120,924 25,232,984
Property and equipment, net 1,457,677 1,874,953
Deferred tax asset 80,100 80,100
Patents and other assets 69,402 118,944
- - --------------------------------------------------------------------------------------------------------
TOTAL ASSETS $25,728,103 $27,306,981
========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
========================================================================================================
CURRENT LIABILITIES:
Accounts payable $ 1,967,445 $ 1,765,967
Accrued expenses 347,947 241,215
Royalties payable 561,436 1,046,974
Income taxes payable 84,800 559,600
- - --------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,961,628 3,613,756
Deferred tax liability 157,100 157,100
- - --------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,118,728 3,770,856
SHAREHOLDERS' EQUITY:
Common stock, $.20 par value; authorized shares,
7,000,000; issued shares, 5,443,830 1,088,766 1,088,766
Additional paid-in capital 22,339,022 22,292,671
Unearned compensation (168,529) (152,729)
Retained earnings (accumulated deficit) (649,884) 307,417
- - --------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 22,609,375 23,536,125
- - --------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $25,728,103 $27,306,981
========================================================================================================
</TABLE>
4
<PAGE> 5
TOLLGRADE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------
QUARTER ENDED MARCH 31,
1995 1996
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 749,965 $ 957,301
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 55,676 120,459
Deferred income taxes 370,800 ---
Compensation expense for restricted stock 11,361 15,800
Changes in assets and liabilities:
(Increase) decrease in accounts receivable-trade (62,095) (907,443)
(Increase) decrease in accounts receivable-other 76,681 (30,157)
(Increase) decrease in inventories (118,318) (225,778)
(Increase) decrease in prepaid expenses and deposits (19,952) (121,292)
(Increase) decrease in other assets --- (51,100)
Increase (decrease) in accounts payable 118,881 (201,478)
Increase (decrease) in accrued expense and
royalties payable (22,076) 378,806
Increase (decrease) in income taxes payable 40,159 474,800
- - ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,201,082 409,918
============================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption of short-term investment 1,261 ---
Capital expenditures (83,371) (536,178)
Patent expenditures (3,225) ---
- - ------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (85,335) (536,178)
============================================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit --- ---
Payments on long-term debt (1,800,000) ---
Purchase of stock warrants (1,253,708) ---
Proceeds from issuance of common stock,
net of issuance costs 2,986,384 ---
Receipt of stock subscriptions (157,756) ---
IPO issuance cost --- (46,350)
- - ------------------------------------------------------------------------------------------------------------
Net cash used in financial activities (225,080) (46,350)
============================================================================================================
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 890,667 (172,610)
Cash and cash equivalents at beginning of period 740,013 15,157,387
- - ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,630,680 $14,984,777
============================================================================================================
</TABLE>
5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements included herein
have been prepared by Tollgrade Communications, Inc. (the "Company") in
accordance with generally accepted accounting principles. The financial
statements as of and for the quarter period ended March 31, 1996 should be read
in conjunction with the Company's financial statements (and notes thereto)
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995. Accordingly, the accompanying statements do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation of the quarter
financial statements have been included, and all adjustments are of a normal
and recurring nature. Operating results for the three months ended March 31,
1996 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996.
2. INVENTORY
At December 31, 1995 and March 31, 1996, inventory consisted of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
---- ----
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . . . . $2,577,638 $2,874,618
Work in progress. . . . . . . . . . . . . . . . 1,730,364 1,514,925
Finished goods. . . . . . . . . . . . . . . . . 1,713,464 1,857,701
---------- ----------
$6,021,466 $6,247,244
========== ==========
</TABLE>
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto appearing elsewhere in this report.
OVERVIEW
Tollgrade Communications, Inc. (the"Company") was organized in 1986 and began
operations in 1988. The Company designs, engineers, markets and supports
proprietary products which enable telephone companies to use their existing
line test systems to remotely diagnose problems in POTS lines containing both
copper and fiber optics. The Company's MCU(R) product line, which includes POTS
line testing as well as alarm-related products, represented more than 77% of
the Company's revenue for the first quarter ended March 31, 1996 and will
continue to account for a majority of Tollgrade's revenues for the foreseeable
future.
The Company's product sales are primarily to the seven Regional Bell Operating
Companies ("RBOCs"). For the first quarter ended March 31, 1996, 73% of
revenues was from the seven RBOCs, the two largest of which comprised 48% of
revenues. The Company's operating results have fluctuated and may continue to
fluctuate as a result of various factors, including the timing of orders from
and shipments to the RBOCs.
Although international sales to date have not been significant, the Company
believes the international markets offer sales opportunities. The Company
intends to focus additional sales, marketing and development resources on
increasing its international presence; however, there can be no assurance that
these efforts will be successful or that the Company will achieve significant
international sales.
Tollgrade believes that continued growth will depend on its ability to design
and engineer new products and, therefore, spends a significant amount on
research, engineering and development. Research, engineering and development
expenses as a percent of revenues were approximately 10% for the first quarter
ended March 31, 1996. The Company expects its research, engineering and
development expenses to continue at significant levels.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1996 COMPARED TO
QUARTER ENDED MARCH 31, 1995
REVENUES
Revenue for the first quarter of 1996 increased 18.2%, or $1,053,440, to
$6,849,387 from $5,795,947 in the first quarter of 1995. The sales increase in
the first quarter was primarily due to completion of a one-time project for a
major customer. This project, which was not related to the Company's core
MCU(R) line testing product line, added $1,344,200 in revenue for this quarter.
During the past year, the Company has continued to develop and sell variations
of its MCU(R) product line, which contributed $646,478 to first quarter 1996
sales. The MCU(R) alarm-related product revenue decreased $1,347,494 in the
first quarter of 1996 from the first quarter of 1995. The decrease in the
three months ended March 31, 1996 was due to a customer deferring deployment
and installation of this alarm-related product, which is used to transport
alarm services over fiber-optic lines. MCU(R) line testing and
synchronization product revenue increased 10.2%, or $410,256, in the first
quarter of 1996 compared to the first quarter of 1995.
7
<PAGE> 8
GROSS PROFIT
Gross profit increased 26.2% from $2,683,739 in the first quarter of 1995, to
$3,386,024 in the first quarter of 1996. Gross profit, as a percentage of
sales, increased to 49.4% in the three months ended March 31, 1996 from 46.3%
in the three months ended March 31, 1995. While the $702,285 increase in gross
profit was primarily attributable to the increase in revenues, the increase in
gross profit margin was due primarily to product sales mix and the ability to
spread fixed overhead costs over a larger revenue base which included the
shipments of four new variations of the MCU(R) product line that had higher
gross profit margins.
SELLING & MARKETING EXPENSE
Selling and marketing expense in the first quarter of 1996 increased 43.6%, or
$270,759, to $891,970 from $621,211 in the first quarter of 1995. As a
percentage of revenues, selling and marketing expenses increased to 13.0% in
the first quarter of 1996 from 10.7% in the first quarter of 1995. The
increase was due primarily to increased sales commissions resulting from higher
sales and the Company's investment in development and expansion into
international markets.
GENERAL & ADMINISTRATIVE EXPENSE
General and administrative expense in the first quarter of 1996 increased
45.4%, or $149,754, to $479,834 from $330,080 in the first quarter of 1995. As
a percentage of revenues, general and administrative expenses increased to 7.0%
in the first quarter of 1996 from 5.7% in the first quarter of 1995. The
increase was due primarily to additional expenses incurred as a result of
becoming a publicly-owned company.
RESEARCH, ENGINEERING & DEVELOPMENT EXPENSE
Research, engineering and development expense in the first quarter of 1996
increased 36.1%, or $189,281, to $713,297 from $524,016 in the first quarter of
1995. As a percentage of revenues, research, engineering and development
expenses increased to 10.4% in the first quarter of 1996 from 9.0% in the first
quarter of 1995. The increase was due primarily to increased personnel costs
as a result of expansion of the engineering department for new product
development.
OTHER INCOME AND EXPENSE
Other income and expense consists primarily of interest income and interest
expense. Other income was $204,378 for the quarter ended March 31, 1996
compared to other expense of $36,667 for the quarter ended March 31, 1995. The
decrease in other expense was the result of reduced interest expense from the
elimination of outstanding debt. Increase in other income resulted from the
investment of the net proceeds of $15.8 million from the Company's initial
public offering in December 1995. (See Liquidity and Capital Resources.)
NET INCOME
As a result of the above factors, net income increased 27.6% from $749,965 in
the three months ended March 31, 1995 to $957,301 in the three months ended
March 31, 1996. As a percentage of sales, net income increased from 12.9% in
the three months ended March 31, 1995 to 14.0% in the three months ended March
31, 1996.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $21.6 million at March 31, 1996 compared to
working capital of $4.1 million at March 31, 1995. The improvement in working
capital position was due primarily to the net proceeds of $15.8 million
received from the Company's initial public offering on December 14, 1995. The
Company has used and expects to continue to use the remaining proceeds of the
initial public offering for working capital and new product development
activities. Cash provided by operations was $409,918 and $1,201,082 for the
first quarter ended March 31, 1996 and 1995, respectively. Increased net income
was the primary source of cash provided by operations for the first quarter
ended March 31, 1996. Increases in accounts receivable and inventories due to
increased sales were the primary uses of cash in operations for the first
quarter ended March 31, 1996. At March 31, 1996, the Company had no amounts
outstanding under its $2,500,000 available bank line of credit.
Capital expenditures were $536,178 for the quarter ended March 31, 1996 and
were primarily related to test fixtures and development systems, computer and
office equipment for increased staff, as well as leasehold improvements made to
the Company's facilities. Capital expenditures were $83,371 for the first
quarter of 1995, and were primarily related to office equipment, test fixtures
and development systems, tooling and leasehold improvements. The Company has no
material capital expenditure commitments. The Company anticipates capital
expenditures to continue to increase in 1996 to support future growth.
9
<PAGE> 10
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- - --------------------------
None.
ITEM 2. CHANGES IN SECURITIES
- - ------------------------------
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- - ----------------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - ------------------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
- - --------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- - -----------------------------------------
(a) Exhibits:
The following exhibits are being filed with this report:
Exhibit
Number Description
------- -----------
11 Statement re Computation of Per
Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company did not file any Current Report on Form 8-K during the
quarter ended March 31, 1996.
10
<PAGE> 11
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TOLLGRADE COMMUNICATIONS, INC.
(REGISTRANT)
Dated: May 3, 1996 /s/ CHRISTIAN L. ALLISON
----------------------------------
CHRISTIAN L. ALLISON
CHIEF EXECUTIVE OFFICER,
TREASURER & DIRECTOR
Dated: May 3, 1996 /s/ DOUGLAS T. HALLIDAY
----------------------------------
DOUGLAS T. HALLIDAY
CHIEF FINANCIAL OFFICER
11
<PAGE> 12
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit
Number Description
------- -----------
11.1 Statement re Computation of Per
Share Earnings
27 Financial Data Schedule
12
<PAGE> 1
EXHIBIT 11.1
CALCULATION OF EARNINGS PER SHARE
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
- - ------------------------------------------------------------------------------------------------------------
MARCH 31,
1995 1996
- - ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 749,965 $ 957,301
========== ==========
Common and common equivalent shares:
Weighted average number of common shares
outstanding during the period . . . . . . . . . . . . . . . . . 3,199,141 5,443,830
Common shares issuable upon conversion of convertible
preferred stock
Primary . . . . . . . . . . . . . . . . . . . . . . . . 951,721 ---
Fully diluted . . . . . . . . . . . . . . . . . . . . . 951,721 ---
Common shares issuable upon conversion of redeemable
warrants
Primary . . . . . . . . . . . . . . . . . . . . . . . . 146,266 ---
Fully diluted . . . . . . . . . . . . . . . . . . . . . 146,266 ---
Common shares issuable upon exercise of outstanding
stock options
Primary . . . . . . . . . . . . . . . . . . . . . . . . 243,471 413,736
Fully diluted . . . . . . . . . . . . . . . . . . . . . 243,471 422,306
---------- ----------
Common and common equivalent shares outstanding
during the period
Primary . . . . . . . . . . . . . . . . . . . . . . . . 4,540,599 5,857,566
========== ==========
Fully diluted . . . . . . . . . . . . . . . . . . . . . 4,540,599 5,866,136
========== ==========
Earnings per share data
Net income per common and common equivalent shares
Primary . . . . . . . . . . . . . . . . . . . . . . . . $ .17 $ .16
Fully diluted . . . . . . . . . . . . . . . . . . . . . $ .17 $ .16
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001002531
<NAME> TOLLGRADE COMMUNICATIONS, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 14,984,777
<SECURITIES> 0
<RECEIVABLES> 3,478,676
<ALLOWANCES> 0
<INVENTORY> 6,247,244
<CURRENT-ASSETS> 25,232,984
<PP&E> 2,785,429
<DEPRECIATION> 910,476
<TOTAL-ASSETS> 27,306,981
<CURRENT-LIABILITIES> 3,613,756
<BONDS> 0
<COMMON> 1,088,766
0
0
<OTHER-SE> 22,447,359
<TOTAL-LIABILITY-AND-EQUITY> 27,306,981
<SALES> 6,848,807
<TOTAL-REVENUES> 6,849,387
<CGS> 3,463,363
<TOTAL-COSTS> 3,463,363
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,505,301
<INCOME-TAX> 548,000
<INCOME-CONTINUING> 957,301
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 957,301
<EPS-PRIMARY> 0.16
<EPS-DILUTED> 0.16
</TABLE>
