<PAGE> 1
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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 September 30, 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 October 24, 1996, there were 5,624,135 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.
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This report consists of a total of 22 pages. The exhibit index is at page 15.
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TOLLGRADE COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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<S> <C>
ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1996
AND DECEMBER 31,1995 ...................................................................... 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995.................................... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995 ................................... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................. 6
Report of Independent Accountants.......................................................... 7
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION...................................................... 8
PART II. OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS..........................................................................13
ITEM 2 -- CHANGES IN SECURITIES......................................................................13
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES............................................................13
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................13
ITEM 5 -- OTHER INFORMATION..........................................................................13
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K...........................................................13
SIGNATURE................................................................................................14
EXHIBIT INDEX............................................................................................15
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
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TOLLGRADE COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, 1996 DECEMBER 31, 1995
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,191,388 $15,157,387
Short term investments 12,414,888 --
Accounts receivable:
Trade, net of allowances of
$50,000 and $-0-, respectively 3,875,303 2,571,233
Other 37,311 59,887
Inventories 8,705,838 6,021,466
Prepaid expenses and deposits 296,196 151,451
Deferred tax asset 262,990 159,500
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Total current assets 28,783,914 24,120,924
Property and equipment, net 2,573,352 1,457,677
Deferred tax asset 89,503 80,100
Patents and other assets 78,530 69,402
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TOTAL ASSETS $31,525,299 $25,728,103
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,071,324 $ 1,967,445
Accrued expenses 1,098,609 347,947
Royalties payable 544,874 561,436
Income taxes payable 827,981 84,800
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TOTAL CURRENT LIABILITIES 4,542,788 2,961,628
Deferred tax liability 204,042 157,100
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TOTAL LIABILITIES 4,746,830 3,118,728
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SHAREHOLDERS' EQUITY:
Common stock, $.20 par value; authorized shares, 7,000,000;
issued 5,567,635 and 5,443,830, respectively 1,113,527 1,088,766
Additional paid-in capital 22,520,389 22,339,022
Less: Common stock, 2,200 and -0- shares, respectively,
in treasury, at cost (49,775) ---
Unearned compensation (121,130) (168,529)
Retained earnings (accumulated deficit) 3,315,458 (649,884)
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TOTAL SHAREHOLDERS' EQUITY 26,778,469 22,609,375
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $31,525,299 $25,728,103
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</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
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TOLLGRADE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
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FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30, 1996 SEPT. 30, 1995 SEPT. 30, 1996 SEPT. 30, 1995
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<S> <C> <C> <C> <C>
REVENUES $10,080,385 $5,307,481 $27,112,057 $16,645,390
COST OF PRODUCT SALES 4,999,944 2,743,013 13,435,042 8,566,431
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GROSS PROFIT 5,080,441 2,564,468 13,677,015 8,078,959
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OPERATING EXPENSES:
Selling and marketing 1,234,449 781,051 3,385,308 2,113,491
General and administrative 671,673 351,232 1,746,702 1,062,004
Research, engineering and development 1,044,087 686,687 2,635,778 1,814,411
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TOTAL OPERATING EXPENSES 2,950,209 1,818,970 7,767,788 4,989,906
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INCOME FROM OPERATIONS 2,130,232 745,498 5,909,227 3,089,053
Interest income (expense) 90,139 11,113 478,810 (6,550)
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INCOME BEFORE INCOME TAXES 2,220,371 756,611 6,388,037 3,082,503
Provision for income taxes 824,695 272,679 2,422,695 1,110,000
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NET INCOME $ 1,395,676 $ 483,932 $ 3,965,342 $ 1,972,503
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EARNINGS PER SHARE INFORMATION:
Weighted fully diluted common
and common equivalent shares 5,943,265 4,468,607 5,919,579 4,365,705
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Net income per common and common equivalent shares:
Primary $ .23 $ .11 $ .67 $ .45
Fully Diluted $ .23 $ .11 $ .67 $ .45
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
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TOLLGRADE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
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NINE MONTHS ENDED
SEPT. 30, 1996 SEPT. 30, 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,965,342 $ 1,972,503
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 416,801 204,753
Deferred income taxes (65,951) 604,500
Adjustments to non-cash reserves 295,000 60,000
Compensation expense for restricted stock 47,399 12,425
Changes in assets and liabilities:
Increase in accounts receivable-trade (1,304,070) (493,349)
Decrease in accounts receivable-other 22,576 82,778
Increase in inventories (2,979,372) (2,605,939)
Increase in prepaid expenses and deposits (144,745) (36,325)
Increase in other assets (9,336) (122,600)
Increase in accounts payable 103,879 796,137
Increase in accrued expense and royalties payable 734,100 469,155
Increase in income taxes payable 743,181 106,735
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Net cash provided by operating activities 1,824,804 1,050,773
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CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) redemption of short-term investments (12,414,888) 74,219
Capital expenditures (1,527,508) (670,200)
Patent expenditures (4,760) (3,225)
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Net cash used for investing activities (13,947,156) (599,206)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under line of credit ---- (865,719)
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 ---- 2,828,752
Proceeds from the exercise of stock options 205,643 ----
IPO issuance cost (49,290) ----
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Net cash provided by (used for) financing activities 156,353 (1,090,675)
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Net decrease in cash and cash equivalents (11,965,999) (639,108)
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Cash and cash equivalents at beginning of period 15,157,387 740,013
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Cash and cash equivalents at end of period $ 3,191,388 $ 100,905
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</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
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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 for the interim
financial information and Article 10 of Regulation S-X. The consolidated
financial statements as of and for the three and nine-month periods ended
September 30, 1996 should be read in conjunction with the Company's
consolidated 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 consolidated financial statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements, although the Company believes that the
disclosures are adequate to make the information presented not misleading. In
the opinion of the Company's management, all adjustments considered necessary
for a fair presentation of the accompanying consolidated financial statements
have been included, and all adjustments are of a normal and recurring nature.
Operating results for the three and nine-month periods ended September 30, 1996
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
2. INVENTORY
At September 30, 1996 and December 31, 1995 inventory consisted of the
following:
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- -----------
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . . . . . . $3,039,857 $2,577,638
Work in progress. . . . . . . . . . . . . . . . . . 1,321,226 1,730,364
Finished goods. . . . . . . . . . . . . . . . . . . 4,344,755 1,713,464
---------- ----------
$8,705,838 $6,021,466
========== ==========
</TABLE>
3. SHORT-TERM INVESTMENTS
Short-term investments at September 30, 1996 consisted of individual municipal
bonds stated at cost, which approximated market value. The primary investment
purpose is to provide a reserve for future business purposes, including
possible acquisitions, capital expenditures and to meet working capital
requirements.
6
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Tollgrade Communications, Inc.:
We have reviewed the accompanying consolidated balance sheets of Tollgrade
Communications, Inc. and subsidiaries as of September 30, 1996, and the related
consolidated statements of operations and cash flows for the three-month and
nine-month periods then ended. These financial statements are the
responsibility of the company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1995 and the
related consolidated statements of operations and cash flow for the year then
ended (not presented herein); and in our report dated January 29, 1996, we
expressed an unqualified opinion on those consolidated financial statements.
/s/ Coopers & Lybrand L.L.P.
Pittsburgh, Pennsylvania
October 17, 1996
7
<PAGE> 8
ITEM 2. 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.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.
The statements contained in the following Management's Discussion and Analysis
of Results of Operations and Financial Condition which are not historical are
"forward looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements represent the
Company's present expectations or beliefs concerning future events. The Company
cautions that such statements are qualified by important factors that could
cause actual results to differ materially from those in the forward looking
statements. Results actually achieved thus may differ materially from expected
results included in these statements.
OVERVIEW
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 Plain Old Telephone Systems' (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 approximately 96%
of the Company's revenue for the third quarter ended September 30, 1996 and
will continue to account for a majority of the Company's revenues for the
foreseeable future.
The Company's product sales are primarily to the seven Regional Bell Operating
Companies ("RBOCs"). For the third quarter ended September 30, 1996,
approximately 94% of the Company's total revenue was generated from sales to
these seven RBOCs, the two largest of which comprised 64% 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.
The Company believes that continued growth will depend on its ability to
design, engineer and market 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
third quarter ended September 30, 1996. The Company expects its research,
engineering and development expenses to continue at significant levels.
8
<PAGE> 9
The Eighth Circuit Court of Appeals recently imposed a partial stay of the
Federal Communications Commission's Interconnection Order in Iowa Utilities
Board, et. al v. FCC (consolidated cases beginning at no. 96-3321). The FCC has
petitioned the U.S. Supreme Court asking that Court to lift the partial stay.
The stay postponed the pricing standards of the Interconnection Order on the
basis of arguments the FCC exceeded its authority in setting pricing levels,
which authority should reside with state commissions. The FCC's Interconnection
Order would have imposed mandates on the pricing methods of local exchange
carriers under the Telecommunications Act of 1996. To date, these legal
proceedings have not yet been finally determined, and it remains uncertain how
the ultimate outcome will affect the Company's future results of operations.
RESULTS OF OPERATIONS - THIRD QUARTER
REVENUES
Revenue for the third quarter of 1996 increased 89.9%, or $4,772,904, to
$10,080,385 from $5,307,481 in the third quarter of 1995. The increase in
revenues for the third quarter was primarily attributable to an increase in
unit volume sales of the MCU(R) line testing and synchronization products as a
result of increased market penetration.
GROSS PROFIT
Gross profit for the quarter was $5,080,441, an increase of $2,515,973, or
98.1%, over the $2,564,468 of gross profit recorded in the third quarter of
1995. Gross profit as a percentage of revenues increased to 50.4% in the third
quarter of 1996, compared to 48.3% in the same quarter last year. The increase
from the prior year quarter was primarily the result of increased production
volume with fixed overhead costs being spread over a larger volume base.
SELLING & MARKETING EXPENSE
Selling and marketing expense in the third quarter of 1996 was $1,234,449, an
increase of $453,398, or 58.0%, over the $781,051 recorded in the third quarter
of 1995. The increase in selling and marketing expense reflects increased
commissions related to greater sales volume, additional salaries and benefits
associated with increased staffing levels to support expanding product lines,
and increased consulting and travel expenses associated with the planned
expansion into international markets. As a percentage of revenues, selling and
marketing expenses decreased to 12.2% in the third quarter of 1996 from 14.7%
in the third quarter of 1995.
GENERAL & ADMINISTRATIVE EXPENSE
General and administrative expense in the third quarter of 1996 was $671,673,
an increase of $320,441, or 91.2%, over the $351,232 recorded in the third
quarter of 1995. The increase in general and administrative expense primarily
reflects additional salaries and benefits associated with increased staffing
levels to support the expanded business operations. As a percentage of
revenues, general and administrative expenses increased to 6.7% in the third
quarter of 1996 from 6.6% in the third quarter of 1995.
RESEARCH, ENGINEERING & DEVELOPMENT EXPENSE
Research, engineering and development expense in the third quarter of 1996 was
$1,044,087, an increase of $357,400, or 52.0%, over the $686,687 recorded in
the third quarter of 1995. The increase in research,
9
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engineering and development expense was due to engineering costs associated
with additional personnel to support new product introductions and product
feature enhancements. As a percentage of revenues, research, engineering and
development expense decreased to 10.4% in the third quarter of 1996 from 12.9%
in the third quarter of 1995.
OTHER INCOME AND EXPENSE
Other income and expense consists primarily of interest income and interest
expense. Other income was $90,139 for the third quarter of 1996 compared to
$11,113 for the third quarter of 1995. The increase in other income was
primarily attributable to increased interest income, which resulted from an
overall increase in funds available for investment during the period primarily
due to the proceeds received from the Company's initial public offering in
December 1995.
PROVISION FOR INCOME TAXES
The effective income tax rate increased to approximately 37.1% in the third
quarter of 1996, compared to approximately 36.0% in the third quarter of 1995.
The estimated effective tax rate for the third quarter of 1996 reflects the
effect of federal and state income taxes adjusted for estimated research and
development tax credits available to the Company which were reinstated on July
1, 1996.
NET INCOME
As a result of the above factors, net income for the third quarter of 1996 was
$1,395,676, an increase of $911,744, or 188.4%, over the $483,932 recorded in
the third quarter of 1995. Primary and fully diluted earnings per common share
of $.23 for the third quarter of 1996 increased by 109.1%, or $.12, from the
$.11 per share earned in the third quarter of 1995. Fully diluted weighted
average common and common equivalent shares outstanding were 5,943,265 in the
third quarter of 1996 compared to 4,468,607 in the third quarter of 1995. The
increase in outstanding shares was primarily due to the sale of 1,490,000 new
shares in the initial public offering on December 14, 1995. As a percentage of
revenues, net income for the third quarter of 1996 increased to 13.8% compared
to the 9.1% for the third quarter of 1995. The increase was primarily due to
increased revenues, as described above.
RESULTS OF OPERATIONS - YEAR TO DATE
REVENUES
For the first nine months of 1996, revenues were $27,112,057 compared to
$16,645,390 for the first nine months of 1995, representing an increase of
$10,466,667 or 62.9%. The increase in revenues for the nine month period was
primarily attributable to an increase in unit sales volume of the MCU(R) line
test products and also to a one time sale of a special application product to a
customer for the 1996 summer Olympic games of approximately $1.36 million.
GROSS PROFIT
For the first nine months of 1996, gross profit increased to $13,677,015
compared to $8,078,959 for the first nine months of 1995, representing an
increase of $5,598,056, or 69.3%. As a percentage of revenues, gross profit
increased to 50.4% in the first nine months of 1996 compared to 48.5% in the
same period for
10
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1995. The increase from the prior year period was primarily the result of the
introduction of new products with higher gross profit margins and increased
production volume with fixed overhead costs being spread over a larger volume
base.
SELLING & MARKETING EXPENSE
For the first nine months of 1996, selling and marketing expense was $3,385,308
compared to $2,113,491 for the first nine months of 1995, representing an
increase of $1,271,817, or 60.2%. The increase in selling and marketing expense
reflects increased commissions related to greater sales volume, additional
salaries and benefits associated with increased staffing levels to support
expanding product lines, and increased consulting and travel expenses
associated with the planned expansion into international markets. As a
percentage of revenues, selling and marketing expense decreased to 12.5% in the
first nine months of 1996 from 12.7% for the same period of 1995.
GENERAL & ADMINISTRATIVE EXPENSE
For the first nine months of 1996, general and administrative expense totaled
$1,746,702 compared to $1,062,004 for the first nine months of 1995,
representing an increase of $684,698, or 64.5%. The increase in general and
administrative expense primarily reflects additional salaries and benefits
associated with increased staffing levels to support the expanded business
operations and increased costs including professional fees incurred as a result
of being a publicly owned company during the first nine months of 1996, but not
during the comparative period of 1995. As a percentage of revenues, general and
administrative expense remained constant at 6.4% for the first nine months of
1996 and 1995.
RESEARCH, ENGINEERING & DEVELOPMENT EXPENSE
For the first nine months of 1996, research, engineering and development
expense totaled $2,635,778 compared to $1,814,411 for the first nine months of
1995, representing an increase of $821,367, or 45.3%. The increase in research,
engineering and development expense was due to engineering costs associated
with additional personnel to support new product introductions and product
feature enhancements. As a percentage of revenues, research, engineering and
development expense decreased to 9.7% in the first nine months of 1996 from
10.9% for the first nine months of 1995.
OTHER INCOME AND EXPENSE
Other income and expense consists primarily of interest income and interest
expense. For the first nine months of 1996, other income was $478,810 compared
to other expense of $6,550 for the first nine months of 1995, representing an
increase of $485,360. The increase in other income was primarily attributable
to increased interest income, which resulted from an overall increase in funds
available for investment during the period primarily due to the proceeds
received from the Company's initial public offering in December 1995.
PROVISIONS FOR INCOME TAXES
The effective income tax rate increased to approximately 37.9% in the first
nine months of 1996, compared to approximately 36.0% in the first nine months
of 1995. The increase in the effective tax rate reflects the unavailability of
the tax credit for research and development expenses during the first six
months of 1996. Although this credit was reinstated effective July 1, 1996
through legislation, its effect is only prospective.
11
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NET INCOME
For the first nine months of 1996, net income was $3,965,342 compared to
$1,972,503 for the first nine months of 1995, representing an increase of
$1,992,839, or 101.0%. Primary and fully diluted earnings per common share of
$.67 for the first nine month of 1996 increased by 48.9%, or $.22, from the
$.45 per share earned in the same period of 1995. Fully diluted weighted
average common and common equivalent shares outstanding were 5,919,579 in the
first nine months of 1996 compared to 4,365,705 in the first nine months of
1995. The increase in outstanding shares was primarily due to the sale of
1,490,000 new shares in the initial public offering on December 14, 1995. As
percentage of revenues, net income for the first nine months of 1996 increased
to 14.6% compared to the 11.9% for the same period in the prior year. The
increase was primarily due to increased revenues, as described above.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had working capital of $24,241,126, which
represented an increase of $3,081,930, or 14.6%, from the $21,159,296 of
working capital as of December 31, 1995. The increase in working capital can be
attributed primarily to operating cash flow exceeding requirements for
purchases of property, plant and equipment. Management believes that operating
cash flow and cash reserves are adequate to finance currently planned capital
expenditures and to meet the liquidity needs of the Company.
The Company made capital expenditures of $1,527,508 in the first nine months of
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. The Company presently has no
material capital expenditure commitments.
As of and through September 30, 1996, the Company had not borrowed any amounts
against its $2,500,000 available bank line of credit.
BACKLOG
The Company's backlog consists of firm customer purchase orders for the
Company's various products. As of September 30, 1996 the Company had a backlog
of $2,624,731, which represents an increase of $512,551, or 24.3%, from the
$2,112,180 backlog at December 31, 1995.
12
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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:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.1 Change in Control Agreement, entered into September 9, 1996 between
the Company and Bradley N. Dinger (incorporated by reference to
Exhibit 10.1 of the Report on Form 10-Q of the Company filed on August
13, 1996).
10.2 Stock Option Agreement entered into September 9, 1996 between the
Company and Bradley N. Dinger, together with a schedule listing
substantially similar agreements with Robert Cornelia and Samuel C.
Knoch.
11.1 Statement re Computation of Per Share Earnings
15 Letter re unaudited interim financial information
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
The Company did not file any Current Report on Form 8-K during the
quarter ended September 30, 1996.
13
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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: November 11, 1996 /s/ CHRISTIAN L. ALLISON
----------------------------------
CHRISTIAN L. ALLISON
CHIEF EXECUTIVE OFFICER & DIRECTOR
Dated: November 11, 1996 /s/ SAMUEL C. KNOCH
----------------------------------
SAMUEL C. KNOCH
CHIEF FINANCIAL OFFICER
14
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EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.1 Form of Change in Control Agreement, entered into September 9, 1996
between the Company and Bradley N. Dinger (incorporated by reference
to Exhibit 10.1 of the Report on Form 10-Q of the Company filed on
August 13, 1996).
10.2 Stock Option Agreement entered into September 9, 1996 between the
Company and Bradley N. Dinger, together with a schedule listing
substantially similar agreements with Robert Cornelia and Samuel C.
Knoch.
11.1 Statement re Computation of Per Share Earnings
15 Letter re unaudited interim financial information
27 Financial Data Schedule
</TABLE>
15
<PAGE> 1
EXHIBIT 10.2
TOLLGRADE COMMUNICATIONS, INC.
1995 LONG-TERM INCENTIVE COMPENSATION PLAN
NONSTATUTORY STOCK OPTION AGREEMENT
THIS AGREEMENT is made and entered into this 9th day of September,
1996, by and between TOLLGRADE COMMUNICATIONS, INC., a Pennsylvania corporation
(the "Company") and BRADLEY N. DINGER, an employee of the Company (the
"Holder").
WHEREAS, the Company desires to issue, and the Holder desires to
receive, an option to purchase shares of the common stock of the Company,
pursuant to the terms described herein.
NOW, THEREFORE, in consideration of the terms and conditions contained
herein and intending to be legally bound hereby, the parties agree as follows:
1. GRANT OF OPTION. The Company hereby confirms the grant to the
Holder on August 15, 1996 (the "Date of Grant") of an option (the "Option") to
purchase, from time to time in accordance with the terms hereof Five Thousand
(5,000) shares of common stock of the Company, par value $.20 per share (the
"Common Stock") at an option price of $21.75 per share, under and subject to
the terms and conditions of the Company's 1995 Long-Term Incentive Compensation
Plan (the "Plan") and this Agreement. The Plan is incorporated herein by
reference and made a part hereof as though set forth in full herein. Terms
which are capitalized herein but which are not defined herein have the same
meaning as in the Plan unless the context otherwise requires.
The Option confirmed hereby is a nonstatutory stock option as that
term is defined in Section 2.20 of the Plan. Subject to the terms of Section
6.8 of the Plan regarding the periods during which stock options may be
exercised upon termination of employment, and Section 14.1 of the Plan
regarding the periods during which the Option may be exercised during a
Change-in-Control (as defined in the Plan), the Option shall be exercisable as
follows:
(a) From and after February 15, 1997, the Option shall be
exercisable for 1,666 shares covered hereby.
(b) From and after August 15, 1997, the Option shall be exercisable
for an additional 1,666 shares covered hereby.
(c) From and after August 15, 1998, the Option shall be exercisable
for all of the shares covered hereby.
The Option will expire at the close of business on August 15, 2005.
2. ACCEPTANCE OF GRANT OF OPTION. The Holder accepts the grant of the
Option confirmed hereby, acknowledges having received a copy of the Plan and
agrees to be bound by the terms and provisions of the Plan, as the Plan may be
amended from time to time; provided, however, that no alteration, amendment,
revocation or termination of the Plan shall, without the written consent of the
Holder, adversely
16
<PAGE> 2
affect the rights of the Holder with respect to the Option.
3. NON-TRANSFERABILITY. This Option shall not be transferrable otherwise
than by Will or the laws of descent or distribution, and the Option shall be
exercisable during the lifetime of the Holder only by the Holder.
4. PROCEDURE FOR EXERCISE OF OPTION. The Option may be exercised only by
(a) execution and delivery by the Holder to the Company of an exercise form or
forms prescribed by the Committee; and (b) surrender of this Agreement at the
principal office of the Company. Each exercise form must set forth the number
of shares of Common Stock for which the Option is exercised and must be dated
and signed by the person exercising the Option. Upon partial exercise hereof, a
new Agreement containing the same provisions as this Agreement shall be issued
by the Company to the Holder for the number of shares of Common Stock with
respect to which this Option shall not have been exercised.
Subject to the last paragraph of this Section 4, the exercise is not
effective until the Company receives payment of the full option price for the
number of shares of Common Stock for which the Option is exercised. The Option
Price shall be paid to the Company in full in the manner specified in Section
6.6 of the Plan. To the extent the Holder pays the Option Price in whole or in
part by shares of already-owned Common Stock, as permitted by the Plan, the
Company shall advise any person exercising the Option in such manner as to the
amount of any cash required to be paid to the Company for any shares
representing a fraction of a share, and such person will be required to pay any
such cash directly to the Company before any distribution of certificates
representing shares of Common Stock will be made. The person exercising the
Option should execute the form of assignment on the back of the certificate or
should deliver an executed Assignment Separate from Certificate with respect to
each stock certificate delivered in payment of the Option Price.
If any person other than the Holder exercises the Option, the exercise
material must include proof satisfactory to the Company of the right of such
person to exercise the Option, and the signature on all certificates or stock
powers must be guaranteed by a commercial bank or trust company or by a firm
having membership in the New York Stock Exchange, Inc., the American Stock
Exchange, Inc., or the National Association of Securities Dealers, Inc.
The date of exercise of the Option is the date on which the exercise form
or forms, proof of right to exercise (if required) and payment of the Option
Price are received by the Company. For purposes of determining the date of
exercise where payment of the Option Price is made in shares of already-owned
Common Stock, any cash required to be paid to the Corporation with respect to a
fraction of a share shall not be taken into account when determining whether
payment of the Option Price has been made.
5. ISSUANCE OF CERTIFICATES. Subject to Section 4 above and this Section
5, the Company will issue a certificate or certificates representing the number
of shares of Common Stock for which the Option is exercised as soon as
practicable after the date of exercise. Unless otherwise directed, the
certificate(s) will be registered in the name of the person exercising the
Option and delivered to such person. If the Option Price is paid in whole or in
part with shares of already-owned Common Stock, the Company will issue at the
same time and return to the person exercising the Option a certificate
representing the number of any excess shares included in any certificate or
certificates delivered to the Company at the time of exercise.
The obligation of the Company to issue shares on exercise of an option is
subject to the effectiveness
17
<PAGE> 3
of a Registration Statement under the Securities Act of 1933, as amended, with
respect to such shares, if deemed necessary or appropriate by counsel to the
Company. The Company is not obligated to file such a Registration Statement. If
at the time of exercise of the Option, no such Registration Statement is in
effect, the issuance of shares on exercise of the Option may also be made
subject to restrictions on the transfer of the shares, including the placing of
an appropriate legend on the certificates restricting the transfer thereof, and
to such other restrictions as the Committee, on the advice of counsel, may deem
necessary or appropriate to prevent a violation of applicable securities laws.
6. WITHHOLDING OF TAXES. The Holder will be advised by the Company as the
amount of any Federal income, employment or excise taxes required to be
withheld by the Company on any compensation income resulting from the exercise
of the Option, and the Holder will pay such taxes directly to the Company upon
request. State, local or foreign income or employment taxes may also be
required to be withheld by the Company and the Holder will also be required to
pay such taxes directly to the Company upon request. If the Holder does not pay
any taxes required to be withheld directly to the Company within ten (10) days
after any such request, the Company may withhold such taxes from any other
compensation to which the Holder is entitled from the Company. The Holder will
hold the Company harmless in acting to satisfy its withholding obligations in
this manner if it becomes necessary to do so.
7. INTERPRETATION OF PLAN AND AGREEMENT. This Agreement is an award
agreement referred to in Section 6.2 of the Plan. If there is any conflict
between the Plan and this Agreement, the provisions of the Plan shall control.
Any dispute or disagreement which shall arise under or in any way relate to the
construction or interpretation of the Plan or this Agreement shall be resolved
by the Committee, and the decision of the Committee shall be final, binding and
conclusive for all purposes.
8. EFFECT OF AGREEMENT ON RIGHTS OF COMPANY AND HOLDER. This Agreement
does not confer any rights on the Holder to continue in the employ of the
Company or interfere in any way with the rights of the Company to terminate the
employment of the Holder or to otherwise reassign or change the current
position of the Holder.
9. INDEMNIFICATION. The Holder indemnifies and holds harmless the Company
from and against any and all loss, damages, liability or expense, including
costs and reasonable attorneys' fees, to which the Company may be put or may
incur by reason of or in connection with any misrepresentation made by the
Holder, any breach of the Holder's warranties, or the Holder's failure to
fulfill any of his or her covenants or agreements set forth herein.
10. BINDING EFFECT. This Agreement shall be binding upon the successors
and assigns of the Company and upon the legal representatives, heirs and
legatees of the Holder.
11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties and supersedes all prior agreements and understandings,
oral or written, between the parties with respect to the subject matter of this
Agreement.
12. AMENDMENT. This Agreement may be amended only a written instrument
signed by the Company and the Holder.
13. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the Commonwealth of Pennsylvania.
18
<PAGE> 4
IN WITNESS WHEREOF, the Company and the Holder have executed this
Agreement as of the date first written above.
TOLLGRADE COMMUNICATIONS, INC.
By:
---------------------------
Title:
------------------------
WITNESS:
- ------------------------------ ------------------------------
Bradley N. Dinger
19
<PAGE> 5
SCHEDULE TO EXHIBIT 10.2
Stock Option Agreements were entered into between the Company and each of
Robert Cornelia dated July 23, 1996, and Samuel C. Knoch, dated August 5, 1996,
which were substantially identical to that filed as Exhibit 10.2, differing
only in the number of shares underlying the option granted, the exercise price
and the vesting schedule.
20
<PAGE> 1
EXHIBIT 11.1
CALCULATION OF EARNINGS PER SHARE
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPT. 30, 1996 SEPT. 30, 1995 SEPT. 30, 1996 SEPT. 30, 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income . . . . . . . . . . . . . . . . . . $1,395,676 $483,932 $ 3,965,342 $ 1,972,503
========== ======== ========== ===========
Common and common equivalent shares:
Weighted average number of
common shares outstanding
during the period . . . . . . . . . . . . 5,504,280 3,273,298 5,463,983 3,238,482
Common shares issuable upon
conversion of convertible
preferred stock
Primary . . . . . . . . . . . . -- 958,721 958,721
Fully diluted . . . . . . . . . -- 958,721 958,721
Common shares issuable upon exercise
of outstanding stock options
Primary . . . . . . . . . . . . 435,786 236,588 437,592 168,502
Fully diluted . . . . . . . . . 438,985 236,588 455,596 168,502
Common and common equivalent shares
outstanding during the period
Primary . . . . . . . . . . . . 5,940,066 4,468,607 5,901,575 4,365,705
========= ========= ========= =========
Fully diluted . . . . . . . . . 5,943,265 4,468,607 5,919,579 4,365,705
========= ========= ========= =========
Earnings per share data
Net income per common and common
equivalent shares
Primary . . . . . . . . . . . . $ 0.23 $ 0.11 $ 0.67 $ 0.45
Fully diluted . . . . . . . . . $ 0.23 $ 0.11 $ 0.67 $ 0.45
</TABLE>
21
<PAGE> 1
Exhibit 15
October 17, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Tollgrade Communications, Inc. and subsidiaries
1). Form S-8 (Registration No. 333-4290) 1995 Long-Term Incentive
Compensation Plan and Individual Stock Options Granted to Certain Directors and
Employees Prior to the Adoption of the Plan.
Ladies and gentlemen:
We are aware that our report dated October 17, 1996 on our review of interim
financial information of Tollgrade Communications, Inc. and subsidiaries for
the three-month and nine-month periods ended September 30, 1996 and included
within the Company's quarterly report on Form 10-Q for the quarter then ended
is incorporated by reference in the registration statement referred to above.
Pursuant to Rule 436(c) under the Securities Act of 1933, this report should
not be considered a part of the registration statement prepared or certified by
us within the meaning of Sections 7 and 11 of that Act.
Very truly yours,
/s/ Coopers & Lybrand L.L.P.
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001002531
<NAME> TOLLGRADE COMMUNICATIONS, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 3,191,388
<SECURITIES> 12,414,888
<RECEIVABLES> 3,875,303
<ALLOWANCES> (50,000)
<INVENTORY> 8,705,838
<CURRENT-ASSETS> 28,783,914
<PP&E> 3,776,761
<DEPRECIATION> 1,203,409
<TOTAL-ASSETS> 31,525,299
<CURRENT-LIABILITIES> 4,542,788
<BONDS> 0
0
0
<COMMON> 1,113,527
<OTHER-SE> 25,664,942
<TOTAL-LIABILITY-AND-EQUITY> 31,525,299
<SALES> 27,112,057
<TOTAL-REVENUES> 27,112,057
<CGS> 13,435,042
<TOTAL-COSTS> 13,435,042
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,388,037
<INCOME-TAX> 2,422,695
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,965,342
<EPS-PRIMARY> 0.67
<EPS-DILUTED> 0.67
</TABLE>
