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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 June 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 August 9, 1996, there were 5,480,149 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 27 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 JUNE 30, 1996
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C>
ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 1996
AND DECEMBER 31,1995 ......................................................................3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX-MONTH
PERIODS ENDED JUNE 30, 1996 AND JUNE 30, 1996..............................................4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX-MONTH
PERIODS ENDED JUNE 30, 1996 AND JUNE 30, 1995 .............................................5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................................................6
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION......................................................7
PART II. OTHER INFORMATION
ITEM 1 -- LEGAL PROCEEDINGS.........................................................................12
ITEM 2 -- CHANGES IN SECURITIES.....................................................................12
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES...........................................................12
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
<PAGE> 3
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)
JUNE 30, 1996 DECEMBER 31, 1995
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,668,691 $15,157,387
Short Term Investments 6,942,506 --
Accounts receivable:
Trade 3,625,980 2,571,233
Other 115,512 59,887
Inventories 7,134,461 6,021,466
Prepaid expenses and deposits 333,830 151,451
Deferred tax asset 185,000 159,500
----------- -----------
Total current assets 27,005,980 24,120,824
Property and equipment, net 2,198,247 1,457,677
Deferred tax asset 40,759 80,100
Patents and other assets 78,222 69,402
----------- -----------
TOTAL ASSETS $29,323,208 $25,728,103
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,510,457 $ 1,967,445
Accrued expenses 893,958 347,947
Royalties payable 974,185 561,436
Income taxes payable 632,459 84,800
----------- -----------
TOTAL CURRENT LIABILITIES 4,011,059 2,961,628
Deferred tax liability 140,000 157,100
----------- -----------
TOTAL LIABILITIES 4,151,059 3,118,728
SHAREHOLDERS' EQUITY:
Common stock, $.20 par value; authorized shares, 7,000,000;
issued and outstanding 5,448,709 and 5,443,830, respectively 1,089,742 1,088,766
Additional paid-in capital 22,299,557 22,339,022
Unearned compensation (136,930) (168,529)
----------- -----------
Retained earnings (accumulated deficit) 1,919,780 (649,884)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 25,172,149 22,609,375
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $29,323,208 $25,728,103
----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
3
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TOLLGRADE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Product sales $10,182,286 $5,540,837 $17,031,092 $11,335,798
Royalty fees -- 1,125 580 2,111
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TOTAL REVENUES 10,182,286 5,541,962 17,031,672 11,337,909
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COST OF PRODUCT SALES 4,971,735 2,711,210 8,435,098 5,823,418
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GROSS PROFIT 5,210,551 2,830,752 8,596,574 5,514,491
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OPERATING EXPENSES:
Selling and marketing 1,258,889 711,229 2,150,860 1,332,440
General and administrative 595,645 380,692 1,075,029 710,772
Research, engineering and development 878,394 603,708 1,591,691 1,127,724
- --------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 2,732,928 1,695,629 4,817,580 3,170,936
- --------------------------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 2,477,623 1,135,123 3,778,994 2,343,555
Interest income (expense) 184,294 19,004 388,672 (17,663)
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INCOME BEFORE INCOME TAXES 2,661,917 1,154,127 4,167,666 2,325,892
- --------------------------------------------------------------------------------------------------------------------------
Provision for income taxes 1,050,000 415,521 1,598,000 837,321
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NET INCOME $ 1,611,917 738,606 2,569,666 1,488,571
EARNINGS PER SHARE INFORMATION:
Weighted fully diluted common
and common equivalent shares 5,942,000 4,548,000 5,938,000 4,548,000
- --------------------------------------------------------------------------------------------------------------------------
Net income per common and common equivalent shares:
Primary $ .27 $ .16 $ .44 $ .33
Fully Diluted $ .27 $ .16 $ .43 $ .33
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</TABLE>
The accompanying notes are an integral part of this statement.
4
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TOLLGRADE COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
1996 1995
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,569,666 1,488,571
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 234,031 118,281
Compensation expense for restricted stock 31,599 21,864
Changes in assets and liabilities:
(Increase) decrease in accounts receivable-trade (1,054,747) (770,755)
(Increase) decrease in accounts receivable-other (55,625) 84,875
(Increase) decrease in inventories (1,112,995) (772,419)
(Increase) decrease in prepaid expenses and deposits (182,379) (51,920)
(Increase) decrease in other assets (8,820) --
Increase (decrease) in accounts payable (456,988) 415,846
Increase (decrease) in accrued expense and royalties payable 958,760 386,583
Increase (decrease) in deferred income taxes 8,400 370,800
- --------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in income taxes payable 547,659 433,038
Net cash provided by operating activities 1,478,561 1,724,764
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CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption (purchase) of short-term investments (6,942,506) 78
Capital expenditures (992,861) (267,193)
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Net cash used in investing activities (7,935,367) (267,115)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (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 17,400 2,828,752
IPO issuance cost (49,290) --
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NET CASH USED IN FINANCIAL ACTIVITIES (31,890) (1,090,675)
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (6,488,696) 366,974
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 15,157,387 740,013
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 8,668,691 $ 1,106,987
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</TABLE>
The accompanying notes are an integral part of this statement.
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 financial
statements as of and for the three and six-month periods ended June 30, 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, 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 six-month periods
ended June 30, 1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996.
2. INVENTORY
At June 30, 1996 and December 31, 1995 inventory consisted of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- ------------
<S> <C> <C>
Raw materials ............................................. $3,256,127 $2,577,638
Work in progress .......................................... 2,078,253 1,730,364
Finished goods ............................................ 1,800,081 1,713,464
---------- ----------
$7,134,461 $6,021,466
========== ==========
</TABLE>
3. SERIES A JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS -
SUBSEQUENT EVENT
In order to protect shareholder value in the event of an unsolicited offer to
acquire the Company, on July 23, 1996, the Board of Directors of the Company
declared a dividend of one preferred share purchase right for each outstanding
share of common stock. The dividend is payable on August 15, 1996 to
shareholders of record as of that date. The aforementioned rights are
exercisable only if a person or group acquires or announces an offer to acquire
20% or more of the Company's common stock. The Company is presently unaware of
any such action.
For a detailed discussion of the terms and conditions of such rights, refer to
Part II, Item 2 of this Form 10-Q and to forms referenced therein.
6
<PAGE> 7
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 95%
of the Company's revenue for the second quarter ended June 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 second quarter ended June 30, 1996, 92% of the
Company's total revenue was generated from sales to these seven RBOCs, the two
largest of which comprised 61% 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
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 9% for the second quarter
ended June 30, 1996. The Company expects its research, engineering and
development expenses to continue at significant levels.
7
<PAGE> 8
RESULTS OF OPERATIONS - SECOND QUARTER
REVENUES
Revenue for the second quarter of 1996 increased 83.7%, or $4,640,324, to
$10,182,286 from $5,541,962 in the second quarter of 1995. The increase in
revenues for the second 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. MCU(R) line testing and synchronization
product's revenues increased 83.4%, or $4,166,510, in the second quarter of
1996 compared to the second quarter of 1995.
GROSS PROFIT
Gross profit increased 84.1% from $2,830,752 in the second quarter of 1995, to
$5,210,551 in the second quarter of 1996. The $2,379,799 second quarter
increase in gross profit was primarily attributable to an increase in revenues,
because the gross profit margin remained at approximately 51%.
SELLING & MARKETING EXPENSE
Selling and marketing expense in the second quarter of 1996 increased 77.0%, or
$547,660 to $1,258,889 from $711,229 in the second quarter of 1995. As a
percentage of revenues, selling and marketing expenses decreased to 12.4% in
the second quarter of 1996 from 12.8% in the second quarter of 1995. The
increase was due primarily to increased sales commissions resulting from higher
sales and increased expenses of developing international markets.
GENERAL & ADMINISTRATIVE EXPENSE
General and administrative expense in the second quarter of 1996 increased
56.5%, or $214,953, to $595,645 from $380,692 in the second quarter of 1995. As
a percentage of revenues, general and administrative expenses decreased to 5.8%
in the second quarter of 1996 from 6.9% in the second quarter of 1995. The
increase in this expense for each comparative period is largely attributable to
increased employee bonuses that are based on Company performance and to
increased costs including professional fees incurred as a result of being a
publicly owned company during the second quarter of 1996, but not during the
comparative period of 1995.
RESEARCH, ENGINEERING & DEVELOPMENT EXPENSE
Research, engineering and development expense in the second quarter of 1996
increased 45.5%, or $274,686 to $878,394 from $603,708 in the second quarter of
1995. As a percentage of revenues, research, engineering and development
expense decreased to 8.6% in the second quarter of 1996 from 10.9% in the
second quarter of 1995. The increase for each comparative period was primarily
due to increased personnel expenses such as recruiting and salaries for new
employees and to related expenditures for computers, software and equipment.
OTHER INCOME AND EXPENSE
Other income and expense consists primarily of interest income and interest
expense. Other income was $184,294 for the second quarter of 1996 compared to
other income of $19,004 for the quarter ended June 30, 1995. The increase in
other income was primarily attributable to 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.)
8
<PAGE> 9
PROVISION FOR INCOME TAXES
The provision for income taxes for the second quarter of 1996 increased 153% or
$634,479 from $415,521 in the second quarter of 1995. The increase in the
provision for income taxes was primarily due to the increase in income from
operations and investment income. The effective tax rate also reflects the
unavailability of the credit for research and development expenses during the
period. Although this credit was recently reinstated through legislation, its
effect is only prospective.
NET INCOME
As a result of the above factors, net income increased 118.2% from $738,606 in
the three months ended June 30, 1995 to $1,611,917 in the second quarter of
1996.
RESULTS OF OPERATIONS - YEAR TO DATE
REVENUES
For the first six months of 1996, revenues totaled $17,031,672 compared to
$11,337,909 for the first six months of 1995, representing an increase of
$5,693,763 or 50.2%. The increase in revenues for the six 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.
MCU(R) line testing and synchronization product revenue increased 55.1%, or
$4,894,509 in the six month period ended June 30, 1996 compared to the same six
months of 1995.
GROSS PROFIT
For the first six months of 1996, gross profit increased to $8,596,574 compared
to $5,514,491 for the first six months of 1995, representing an increase of
$3,082,083, or 55.9%. As a percentage of revenues, gross profit increased to
50.5% in the first six months of 1996 compared to 48.6% in the same period for
1995. Factors contributing to the increase in gross profit were product sales
mix and the introduction of new products with higher gross profit margins.
SELLING & MARKETING EXPENSE
For the first six months of 1996, selling and marketing expense totaled
$2,150,860 compared to $1,332,440 for the first six months of 1995,
representing an increase of $818,420 or 61.4%. As a percentage of revenues,
selling and marketing expense increased to 12.6% in the first six months of
1996 from 11.8% for the same period of 1995. The increase was due primarily to
increased sales commissions resulting from higher sales and increased expenses
of developing international markets.
GENERAL & ADMINISTRATIVE EXPENSE
For the first six months of 1996, general and administrative expense totaled
$1,075,029 compared to $710,772 for the first six months of 1995, representing
an increase of $364,257, or 51.2%. As a percentage of revenues, general and
administrative expense remained constant at 6.3% for the first six months of
1996 and 1995. The increase in this expense is largely attributable to
increased employee bonuses that
9
<PAGE> 10
are based on Company performance and to increased costs including professional
fees incurred as a result of being a publicly owned company during the first
six months of 1996, but not during the comparative period of 1995.
RESEARCH, ENGINEERING & DEVELOPMENT EXPENSE
For the first six months of 1996, research, engineering and development expense
totaled $1,591,691 compared to $1,127,724 for the first six months of 1995,
representing an increase of $463,967, or 41.1%. As a percentage of revenues,
research, engineering and development expense decreased to 9.4% from 10% for
the first six months of 1995. The increase was primarily due to increased
personnel expenses such as recruiting and salaries for new employees and to
related expenditures for computers, software and equipment.
OTHER INCOME AND EXPENSE
Other income and expense consists primarily of interest income and interest
expense. For the first six months of 1996, other income was $388,672 compared
to other expense of $17,663 for the first six months of 1995, representing an
increase of $406,335. The increase in other income was primarily attributable
to 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.)
PROVISIONS FOR INCOME TAXES
The provision for income taxes for the first six months of 1996 increased 91%
or $760,679 to $1,598,000 from $837,321 for the first six months of 1995. The
increase in the provision for income taxes was primarily due to the increase in
income from operations and investment income. The effective tax rate also
reflects the unavailability of the credit for research and development expenses
during the period. Although this credit was recently reinstated through
legislation, its effect is only prospective.
NET INCOME
For the first six months of 1996, net income was $2,569,666 compared to
$1,488,571 for the first six months of 1995, representing an increase of
$1,081,095 or 72.6%. As percentage of sales, net income for the second quarter
and the first six months of 1996 increased to 15.8% and 15.1%, respectively.
The increase was primarily due to increased revenues, as described above.
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $23.0 million at June 30, 1996 compared to
working capital of $4.7 million at June 30, 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 $1.5 million and $1.7 million for
the six months ended June 30, 1996 and 1995, respectively. Income from
operations was the primary source of cash for the six months ended June 30,
1996 offset by increases in accounts receivable and inventories due to
increased sales during the period. Also, during the first six
10
<PAGE> 11
months of 1996, operating cash was used to reduce accounts payable as the
Company initiated a program to take advantage of discounts offered by
suppliers. At June 30, 1996, the Company had not borrowed any amounts against
its $2,500,000 available bank line of credit.
Capital expenditures were $992,861 for the first six 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. Capital expenditures were $267,193 for the first six
months of 1995, and were primarily related to office equipment, test fixtures
and development systems, tooling and leasehold improvements. The Company
presently has no material capital expenditure commitments. The Company
anticipates capital expenditures to continue to increase in 1996 to support
future growth.
BACKLOG
The Company's backlog consists of firm customer purchase orders for the
Company's various products. As of June 30, 1996 the Company had a backlog of
$5,369,478, an increase of $3,257,298 or 154% from the backlog $2,112,180 at
December 31, 1995 and an increase of $1,309,254 or 32% from the backlog of
$4,060,224 of March 31, 1996.
11
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
On July 23, 1996 the Company's Board of Directors declared a distribution of
one Preferred Stock Purchase Right for each outstanding share of the Company's
common stock. The rights will be exercisable only if a person or group acquires
20% or more of the Company's common stock or announces a tender or exchange
offer for 20% or more of the common stock. In such an event, each right will
entitle shareholders to buy one-hundredth of a share of a new series of
preferred stock at an exercise price of $115.00. Each one-hundredth of a share
of the new preferred stock has terms designed to make it the economic and
voting equivalent of one share of common stock.
If a person or group acquires 20% or more of the Company's outstanding common
stock, each right not owned by the person or group will entitle its holder to
purchase at the right's exercise price a number of shares of the Company's
common stock (or, at the option of the Company, the new preferred stock) having
a market value of twice the exercise price. Further, at any time after a person
or group acquires 20% or more (but less than 50%) of the outstanding common
stock, the Board of Directors may at its option, exchange part or all of the
rights (other than rights held by the acquiring person or group) for shares of
the Company's common or preferred stock for a one-for-one basis.
If after a person or group acquires 20% or more of the outstanding common stock
the Company is acquired in a merger or other business transaction, each right
will entitle its holder to purchase, at the right's exercise price, a number of
the acquiring company's common shares having a market value at that time of
twice the exercise price.
The Board of Directors is entitled to redeem the rights for one cent per right
at any time before a 20% position has been acquired. The Board is also
authorized to reduce the 20% thresholds referred to above to not less than 10%.
The rights are not being distributed in response to any specific effort to
acquire control of the Company, nor is the Company aware of any such effort.
The distribution of the rights will not affect the Company's reported earnings
and is not taxable to shareholders or to the Company. Shareholders will not
receive any documents evidencing their rights unless and until the rights
become exercisable. Until that time, the rights will not trade separately from
the common stock. The rights will expire on August 15, 2006. For a more
complete and detailed description of the terms and conditions of such rights,
refer to the text of the complete Rights Agreement referenced and incorporated
herein by reference at Exhibit 4.1 and included as Exhibit 1 to the Company's
Registration Statement on Form 8-A.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
12
<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 22, 1996 the Company held its annual stockholders meeting. At that
meeting, R. Craig Allison, Christian L. Allison and Daniel P. Barry were
elected to the Board of Directors for a three year term expiring at the annual
meeting of the shareholders in 1999. Also, the terms of Lawrence A. Arduini,
Thomas M. Dugan, Rocco L. Flaminio and Robert W. Kampmeinert continued after
the meeting. On May 31, 1996 Thomas M. Dugan resigned from the Board for
personal reasons.
The total votes cast and the results of the voting were as follows:
<TABLE>
<CAPTION>
Total Votes Cast For Withheld
---------------- --- --------
<S> <C> <C> <C>
R. Craig Allison 4,437,893 4,427,260 10,633
Christian L. Allison 4,437,893 4,426,960 10,933
Daniel P. Barry 4,437,893 4,425,960 11,933
</TABLE>
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>
4.1 Rights Agreement, dated as of July
23, 1996 between the Company and
Chase Mellon Shareholder Services,
L.L.C. filed as Exhibit 1 to the
Company's Registration Statement on
Form 8-A, and incorporated herein by
reference thereto.
10.1 Change in Control Agreement, entered
into May 30, 1996 between the
Company and Sara M. Antol, together
with a schedule listing
substantially identical agreements
with Robert Cornelia, Ruth Dilts,
Herman Flaminio, Rocco Flaminio,
Mark Frey, Joseph Giannetti, Douglas
Halliday, Fred Kiko, Samuel Knoch,
Goeffrey Lea, Gregory Nulty, Matthew
Rosgone and Kristee Williams.
11.1 Statement re Computation of Per Share Earnings
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 June 30, 1996.
13
<PAGE> 14
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: August 13, 1996 /s/ CHRISTIAN L. ALLISON
----------------------------------
Christian L. Allison
Chief Executive Officer & Director
Dated: August 13, 1996 /s/ DOUGLAS T. HALLIDAY
----------------------------------
Douglas T. Halliday
Treasurer
14
<PAGE> 15
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
4.1 Rights Agreement, dated as of July 23, 1996
between the Company and Chase Mellon
Shareholder Services, L.L.C. filed as
Exhibit 1 to the Company's Registration
Statement on Form 8-A and incorporated
herein by reference thereto.
10.1 Change in Control Agreement, entered
into May 30, 1996 between the
Company and Sara M. Antol, together
with a schedule listing
substantially identical agreements
with Robert Cornelia, Ruth Dilts,
Herman Flaminio, Rocco Flaminio,
Mark Frey, Joseph Giannetti, Douglas
Halliday, Fred Kiko, Samuel Knoch,
Goeffrey Lea, Gregory Nulty, Matthew
Rosgone and Kristee Williams.
11.1 Statement re Computation of Per Share Earnings
27 Financial Data Schedule
</TABLE>
15
<PAGE> 1
EXHIBIT 10.1
AGREEMENT
This Agreement, made as of the 30th day of May, 1996 by and between
TOLLGRADE COMMUNICATIONS, INC., a Pennsylvania corporation (the "Corporation")
and SARA M. ANTOL, an individual residing in the Commonwealth of Pennsylvania
and an employee of the Corporation (the "Executive").
WITNESSETH:
WHEREAS, the Board of Directors of the Corporation has determined that
it is in the best interests of the Corporation to enter into this Agreement
with the Executive to provide for compensation of the Executive upon
termination of employment under certain circumstances relating to a change in
control of the Corporation; and
WHEREAS, the Executive desires to obtain such benefits in the event
the Executive's employment is terminated under the circumstances provided
herein.
NOW, THEREFORE, in consideration of the covenants and premises
contained herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. DEFINITION OF TERMS. The following terms when used in this
Agreement shall have the meaning hereafter set forth:
"ANNUAL SALARY ADJUSTMENT PERCENTAGE" shall mean the mean average
percentage increase in base salary for all elected officers of the
Corporation during the two full calendar years immediately preceding
the time to which such percentage is being applied; provided however,
that if after a Change-in-Control, as hereinafter defined, there
should be a significant change in the number of elected officers of
the Corporation or in the manner in which they are compensated, then
the foregoing definition shall be changed by substituting for the
phrase "elected officers of the Corporation" the phrase "persons then
performing the functions formerly performed by the elected officers of
the Corporation."
"CAUSE FOR TERMINATION" shall mean:
(a) the deliberate and intentional failure by the Executive to
devote substantially her entire business time and best
efforts to the performance of her duties (other than any such
failure resulting from the Executive's incapacity due to
physical or mental illness or disability) after a demand for
substantial performance is delivered to the Executive by the
Board of Directors which specifically identifies the manner
in which the Board of Directors believes that the Executive
has not substantially performed her duties,
or
(b) wilfully engaging by the Executive in conduct which
constitutes a fraud against the Corporation or a material
breach of this Agreement,
1
<PAGE> 2
or
(c) the Executive's conviction of any crime which constitutes a
felony.
For purposes of this definition, no act, or failure to act, on the
Executive's part shall be considered "deliberate and intentional" or
"willfully" unless done, or omitted to be done, by the Executive not
in good faith and without reasonable belief that her action or
omission was in the best interests of the Corporation.
"CHANGE-IN-CONTROL" shall mean the determination (which may be made
effective as of a particular date specified by the Board of Directors
of the Corporation) by the Board of Directors of the Corporation, made
by a majority vote that a change in control has occurred, or is about
to occur. Such a change shall not include, however, a restructuring,
reorganization, merger, or other change in capitalization in which the
Persons who own an interest in the Corporation on the date hereof (the
"Current Owners")(or any individual or entity which receives from a
Current Owner an interest in the Corporation through will or the laws
of descent and distribution) maintain more than a sixty-five percent
(65%) interest in the resultant entity. Regardless of the Board's vote
or whether or not the Board votes, a Change-in-Control will be deemed
to have occurred as of the first day any one (1) or more of the
following subparagraphs shall have been satisfied:
(a) Any Person (other than the Person in control of the
Corporation as of the date of this Agreement, or other than a
trustee or other fiduciary holding securities under an
employee benefit plan of the Corporation, or a corporation
owned directly or indirectly by the stockholders of the
Corporation in substantially the same proportions as their
ownership of stock of the Corporation), becomes the
beneficial owner, directly or indirectly, of securities of
the Corporation representing more than thirty five percent
(35%) of the combined voting power of the Corporation's then
outstanding securities; or
(b) The stockholders of the Corporation approve:
(i) A plan of complete liquidation of the Corporation;
(ii) An agreement for the sale or disposition of all
or substantially all of the Corporation's assets;
or
(iii) A merger, consolidation, or reorganization of the
Corporation with or involving any other
corporation, other than a merger, consolidation,
or reorganization that would result in the voting
securities of the Corporation outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being
converted into voting securities of the surviving
entity) at least sixty-five percent (65%) of the
combined voting power of the voting securities of
the Corporation (or such surviving entity)
outstanding immediately after such merger,
consolidation, or reorganization.
However, in no event shall a Change in Control be deemed to have
occurred, with respect to the Executive, if the Executive is part of a
purchasing group which consummates the Change-in- Control transaction.
The Executive shall be deemed "part of the purchasing group" for
purposes
2
<PAGE> 3
of the preceding sentence if the Executive is an equity participant or
has agreed to become an equity participant in the purchasing company
or group (except for (i) passive ownership of less than five percent
(5%) of the voting securities of the purchasing company; or (ii)
ownership of equity participation in the purchasing company or group
which is otherwise deemed not to be significant, as determined prior
to the Change-in-Control by a majority of the non-employee continuing
Directors of the Board of Directors of the Corporation).
"DATE OF TERMINATION" shall mean:
(a) if the Executive's employment is terminated for Disability,
the date that a Notice of Termination is given to the
Executive;
(b) if the Executive terminates due to her death or Retirement,
the date of death or Retirement, respectively;
(c) if the Executive decides to terminate employment upon Good
Reason for Termination, the date following such decision
specified by the Corporation after it has been notified of
the Executive's decision to terminate employment; or
(d) if the Executive's employment is terminated for any other
reason, the date on which such termination becomes effective
pursuant to a Notice of Termination.
"DISABILITY" shall mean such incapacity due to physical or mental
illness or injury as causes the Executive to be unable to perform
herduties with the Corporation during 180 consecutive days.
"GOOD REASON FOR TERMINATION" shall mean the occurrence of:
(a) without the Executive's express written consent, the
assignment to the Executive of any duties materially and
substantially inconsistent with her positions, duties,
responsibilities and status with the Corporation immediately
prior to a Change-in-Control, or a material change in her
reporting responsibilities, titles or offices as in effect
immediately prior to a Change-in-Control, or any removal of
the Executive from or any failure to re-elect the Executive
to any of such positions, except in connection with the
termination of the Executive's employment due to Cause for
Termination, Disability or Retirement (as hereinafter
defined) or as a result of the Executive's death;
(b) (i) a reduction by the Corporation prior to a
Change-in-Control in the Executive's base salary unless such
reduction is the result of the Board of Directors of the
Corporation determining that the Executive has not adequately
discharged herduties;
(ii) a reduction by the Corporation after a Change-in-Control
in the Executive's base salary as in effect immediately prior
to any Change-in-Control or a failure by the Corporation
after a Change-in-Control to increase the Executive's base
salary by the Annual Salary Adjustment Percentage;
(c) a failure by the Corporation to continue to provide incentive
compensation comparable to that provided by the Corporation
immediately prior to any Change-in-Control;
3
<PAGE> 4
(d) a failure by the Corporation after a Change-in-Control to
continue in effect any benefit or compensation plan, stock
option plan, pension plan, life insurance plan, health and
accident plan or disability plan in which the Executive is
participating immediately prior thereto (provided, however,
that there shall not be deemed to be any such failure if the
Corporation substitutes for the discontinued plan, a plan
providing the Executive with substantially similar benefits)
or the taking of any action by the Corporation which would
adversely affect the Executive's participation in or
materially reduce the Executive's benefits under any of such
plans or deprive the Executive of any material fringe benefit
enjoyed by the Executive immediately prior to a
Change-in-Control (provided, however, that any act or failure
to act by the Corporation that is on a plan-wide basis, i.e.,
it similarly affects all employees of the Corporation or all
employees eligible to participate in any such plan, as the
case may be, shall not constitute Good Reason for
Termination);
(e) the failure of the Corporation to obtain the assumption of
this Agreement by any successor as contemplated in SECTION
10(C) hereof;
(f) any purported termination of the employment of the Executive
by the Corporation which is not (i) due to the Executive's
Disability, Retirement (as hereinafter defined) or Cause for
Termination, or (ii) effected as a Notice of Termination, as
defined herein; or
(g) the Corporation's requiring the Executive to be based
anywhere other than the Corporation's executive offices at
which the Executive has her principal office immediately
prior to a Change-in-Control or executive offices located
within 50 miles of the location of the Corporation's
executive offices immediately prior to a Change-in-Control,
except for required travel on the Corporation's business to
an extent substantially consistent with the Executive's
present business travel obligations.
"NOTICE OF TERMINATION" shall mean a written statement which sets
forth the specific reason for termination and, if such is claimed to
be a Cause for Termination or Good Reason for Termination, in
reasonable detail the facts and circumstances which indicate that such
is Cause for Termination or Good Reason for Termination.
"OPTIONS" shall mean any stock options issued pursuant to any present
or future stock option plan of the Corporation.
"PERSON" shall have the meaning ascribed to such term in Section
3(a)(9) of the Securities Exchange Act of 1934, as in effect on the
date hereof and used in Sections 13(d) and 14(d) thereof, including a
"group" as defined in Section 13(d) thereof.
"RETIREMENT" shall mean the termination of the Executive's employment
after age 65 or in accordance with any mandatory retirement
arrangement with respect to an earlier age agreed to by the Executive.
"STOCK APPRECIATION RIGHT" shall mean any stock appreciation rights
issued pursuant to any stock option plan of the Corporation or any
future stock appreciation rights plan.
2. TERMS OF EMPLOYMENT. The Executive acknowledges that this
Agreement does not constitute an employment contract and that the Executive's
employment relationship with the
4
<PAGE> 5
Corporation is at-will and not for any particular period. Rather, this
Agreement is only intended to set forth certain liquidated damages to be paid
in the event of termination of the Executive upon the terms and conditions
specified herein.
3. TERM OF AGREEMENT. The initial term of this Agreement shall be for
a period of four (4) years. Upon expiration of the initial term, the Company
shall, in its sole discretion, determine whether this Agreement shall be
renewed upon such terms it deems advisable.
4. PAYMENTS FOLLOWING TERMINATION OF EMPLOYMENT UPON A
CHANGE-IN-CONTROL.
(a) If the Executive's employment with the Corporation shall be
terminated:
(i) due to the Executive's death,
(ii) by the Executive other than the Executive's having
terminated for Good Reason for Termination following
a Change-in-Control, or
(iii) by the Corporation due to Cause for Termination or
for Disability or Retirement, then the Corporation
shall have no obligations to the Executive other
than to pay the Executive any unpaid portion of base
salary due until the Date of Termination and any
other sums due in accordance with the then various
policies, practices and benefit plans of the
Corporation.
(b) If the Executive's employment with the Corporation shall have
terminated during the period commencing six months prior to
the date of a Change-in-Control and ending on the third
anniversary of a Change-in-Control other than in the
circumstances described in subsection (a) above, then the
Corporation shall pay on or before the fifth day following
the Date of Termination (or if the Date of Termination
preceded the date of the Change-in-Control, on or before the
fifth day following the date of the Change-in-Control), to
the Executive the following sums:
(i) in cash any unpaid portion of the Executive's full
base salary for the period from the last period for
which the Executive was paid to the Date of
Termination, or the date of the Change-in-Control,
as the case may be; and
(ii) an amount in cash as liquidated damages for lost
future renumeration equal to the product obtained by
multiplying
(A) the lesser of
(1) two, or
(2) a number equal to the number of calendar
months remaining from the Date of
Termination to the date on which the
Executive is 65 years of age (or, if
earlier, the age agreed to by the Executive
pursuant to any prior arrangement) divided
by twelve, or
5
<PAGE> 6
(3) a number equal to the greater of (i) one
(1.0) and (ii) thirty six (36) less the
number of completed months commencing after
the date of the Change-in-Control during
which the Executive was employed by the
Corporation and did not have Good Reason
for Termination times (iii) one-twelfth
(1/12) times
(B) the sum of
(1) the greater of
(i) the Executive's annual base salary
for the year in effect on the Date
of Termination (provided that in
the case of Termination for Good
Reason by the Executive the date
immediately preceding the date of
the earliest event which gave rise
to the Termination for Good Reason
by the Executive shall be used
instead of the Date of Termination)
or
(ii) the Executive's annual base salary
for the year in effect on the date
of the Change-in-Control;
plus
(2) the greater of
(i) the average annual cash award
received by the Executive as
incentive compensation or bonus for
one calendar year immediately
preceding the Date of Termination
(provided that in the case of
Termination for Good Reason by the
Executive the date immediately
preceding the date of the event
which gave rise to the Termination
for Good Reason by the Executive
shall be used instead of the Date
of Termination)
or
(ii) the average annual cash award
received by the Executive as
incentive compensation or bonus for
one calendar year immediately
preceding the date of the
Change-in-Control.
5. OUTPLACEMENT SERVICES. If the Executive's employment with the
Corporation should terminate under circumstances as to entitle the Executive to
receive payment hereunder, the Corporation shall reimburse the Executive for
any reasonable fees or other costs incurred by the Executive during the two (2)
years following the Date of Termination in retaining executive placement
agencies, up to a maximum dollar amount not to exceed fifteen percent (15%) of
the Executive's base salary at the time of such termination. Such reimbursement
shall be made within five (5) days following
6
<PAGE> 7
the Executive's presentment of bills or other evidence of the costs incurred
with executive placement agencies.
6. TAX IMPLICATIONS. If any payment due to the Executive pursuant to
this Agreement result in a tax being imposed on the Executive pursuant to
Section 4999 of the Internal Revenue Code of 1954, as amended, or any successor
provision ("Section 4999"), then the Corporation shall, at the Executive's
option, either (i) reduce the total payments payable to the Executive to the
maximum amount payable without incurring the Section 4999 tax, or (ii) pay to
the Executive the total amount payable, with the understanding that Section
4999 tax will be due on that total amount.
7. BENEFITS. If the Executive's employment with the Corporation should
terminate under circumstances as to entitle the Executive to receive payment
hereunder, the Executive shall also be deemed, for purposes of medical
insurance, pension and other benefits of the Corporation, to have remained in
the continuous employment of the Corporation for the two (2) year period
following the Date of Termination and shall be entitled to all of the medical
insurance, pension or other benefits provided by the Corporation as if the
Executive had so remained in the employment of the Corporation. If, for any
reason, whether by law or provisions of the Corporation's employee medical
insurance, pension or other benefit plans, or otherwise any benefits which the
Executive would be entitled to under this SECTION 6 cannot be paid pursuant to
such employee benefit plans, then the Corporation contractually agrees to pay
the Executive the difference between the benefits which the Executive would
have received in accordance with this Section if the relevant employee medical
insurance, pension or other benefit plan could have paid such benefit and the
amount of benefits, if any, actually paid by such employee medical insurance,
pension or other benefit plan. The Corporation shall not be required to fund
its obligation to pay the foregoing difference.
8. OTHER EMPLOYMENT. In the event of termination under the
circumstances contemplated in SECTION 4(B) hereunder, the Executive shall have
no duty to seek any other employment after termination of her employment with
the Corporation and the Corporation hereby waives and agrees not to raise or
use any defense based upon the position that the Executive had a duty to
mitigate or reduce the amounts due her hereunder by seeking other employment
whether suitable or unsuitable and should the Executive obtain other
employment, then the only effect of such on the obligations of the Corporation
shall be that the Corporation shall be entitled to credit against any payments
that would otherwise be made pursuant to SECTION 7 hereof, any comparable
payments to which the Executive is entitled under the employee benefit plans
maintained by the Executive's other employer or employers in connection with
services to such employer or employers after termination of this employment
with the Corporation.
9. STOCK APPRECIATION RIGHTS AND OPTIONS. If the Executive's
employment should terminate under circumstances as to entitle the Executive to
receive payment hereunder, then with respect to any standing Stock Appreciation
Rights and/or Options which did not immediately become exercisable upon the
occurrence of a Change-in-Control, such Stock Appreciation Right or Option
shall be automatically vested and remain outstanding in accordance with its
terms and be exercisable thereafter until the stated expiration date of such
Stock Appreciation Right or Option.
10. MISCELLANEOUS.
(a) This Agreement shall be construed under the laws of the
Commonwealth of Pennsylvania.
7
<PAGE> 8
(b) This Agreement constitutes the entire understanding of the
parties hereto with respect to the subject matter hereof and
may only be amended or modified by written agreement signed
by the parties hereto.
(c) The Corporation will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the
Corporation, by agreement in form and substance satisfactory
to the Executive, to expressly assume and agree to perform
this Agreement in the same manner required of the Corporation
and to perform it as if no such succession had taken place.
As used in this Agreement, "Corporation" shall mean the
Corporation as hereinbefore defined and any successor to its
business and/or assets as aforesaid which executes and
delivers the agreement provided for in this subsection (c) or
which otherwise becomes bound by all of the terms and
provisions of this Agreement by operation of law.
(d) This Agreement shall inure to the benefit of and be
enforceable by the Executive and the Corporation and their
respective legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If
the Executive should die while any amounts would still be
payable to her hereunder if she had continued to live, all
such amounts, unless otherwise provided herein, shall be paid
in accordance with the terms of this Agreement to her
devisee, legatee or other designee or, if there be no such
designee, to her estate.
(e) Any notice or other communication provided for in this
Agreement shall be in writing and, unless otherwise expressly
stated herein, shall be deemed to have been duly given if
mailed by United States registered mail, return receipt
requested, postage prepaid, addressed in the case of the
Executive to her office at the Corporation with a copy to her
residence and in the case of the Corporation to its principal
executive offices, attention to the Chief Executive Officer.
(f) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and approved by
resolution of the Board of Directors of the Corporation. No
waiver by either party hereto at any time of any breach by
the other party hereto of, or compliance with, any condition
or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject
matter hereof have been made by either party which are not
set forth expressly in this Agreement.
(g) The invalidity or unenforceability of any provisions of this
Agreement shall not affect the validity or unenforceability
of any other provision of this Agreement, which shall remain
in full force and effect. If any provision hereof shall be
deemed invalid or unenforceable, either in whole or in part,
this Agreement shall be deemed amended to delete or modify,
as necessary, the offending provision and to alter the bounds
thereof in order to render it valid and enforceable.
(h) This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of
which taken together will constitute one and the same
instrument.
8
<PAGE> 9
(i) If litigation should be brought to enforce, interpret or
challenge any provision contained herein, the prevailing
party shall be entitled to its reasonable attorney's fees and
disbursements and other costs incurred in such litigation
and, if a money judgment be rendered in favor of the
Executive, to interest on any such money judgment obtained
calculated at the prime rate of interest in effect from time
to time at Mellon Bank, N.A., from the date that the payment
should have been made or damages incurred under this
Agreement.
9
<PAGE> 10
IN WITNESS WHEREOF, this Agreement has been executed on the date first
above written.
ATTEST: TOLLGRADE COMMUNICATIONS, INC.
By:
--------------------------------
WITNESS:
------------------------------------
Sara M. Antol
10
<PAGE> 11
SCHEDULE 10.1
Change in Control Agreements were entered into between the Company and Robert
Cornelia, Ruth Dilts, Herman Flaminio, Rocco Flaminio, Mark Frey, Joseph
Giannetti, Douglas Halliday, Fred Kiko, Samuel Knoch, Goeffrey Lea, Gregory
Nulty, Matthew Rosgone and Kristee Williams, which were substantially identical
to that filed as Exhibit 10.1.
11
<PAGE> 1
EXHIBIT 11.1
CALCULATION OF EARNINGS PER SHARE
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1996 JUNE 30, 1995
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . $1,611,917 $ 738,606 $2,569,666 $1,488,571
========== ========== ========== ==========
Common and common equivalent shares:
Weighted average number of
common shares outstanding
during the period . . . . . . . . . . . . . . 5,445,610 3,361,008 5,444,708 3,356,908
Common shares issuable upon
conversion of convertible
preferred stock
Primary . . . . . . . . . . . . . . . -- 951,721 951,721
Fully diluted . . . . . . . . . . . . -- 951,721 951,721
Common shares issuable upon exercise
of outstanding stock options
Primary . . . . . . . . . . . . . . . 495,957 235,271 458,815 239,371
Fully diluted . . . . . . . . . . . . 495,957 235,271 493,595 239,371
Common and common equivalent shares
outstanding during the period
Primary . . . . . . . . . . . . . . . 5,941,567 4,548,000 5,903,523 4,548,000
========== ========== ========== ==========
Fully diluted . . . . . . . . . . . . 5,941,567 4,548,000 5,938,303 4,548,000
========== ========== ========== ==========
Earnings per share data
Net income per common and common
equivalent shares
Primary . . . . . . . . . . . . . . . $ 0.27 $ 0.16 $ 0.44 $ 0.33
Fully diluted . . . . . . . . . . . . $ 0.27 $ 0.16 $ 0.43 $ 0.33
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANICAL STATEMENTS.
</LEGEND>
<CIK> 0001002531
<NAME> TOLLGRADE COMMUNICATION, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 8,668,691
<SECURITIES> 6,942,506
<RECEIVABLES> 3,625,980
<ALLOWANCES> (50,000)
<INVENTORY> 7,134,461
<CURRENT-ASSETS> 27,005,980
<PP&E> 3,238,614
<DEPRECIATION> 1,040,367
<TOTAL-ASSETS> 29,323,208
<CURRENT-LIABILITIES> 4,011,059
<BONDS> 0
0
0
<COMMON> 1,089,742
<OTHER-SE> 24,082,407
<TOTAL-LIABILITY-AND-EQUITY> 29,323,208
<SALES> 17,031,092
<TOTAL-REVENUES> 17,031,672
<CGS> 8,435,098
<TOTAL-COSTS> 8,435,098
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,167,666
<INCOME-TAX> 1,598,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,569,666
<EPS-PRIMARY> 0.44
<EPS-DILUTED> 0.43
</TABLE>
