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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
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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 28, 1997
[ ] 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 July 29, 1997, there were 5,691,726 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 20 pages. The exhibit index is on page 18.
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TOLLGRADE COMMUNICATIONS, INC.
Quarterly Report On Form 10-Q
For The Quarter Ended June 28, 1997
Table Of Contents
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PART I. FINANCIAL INFORMATION PAGE NO.
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ITEM 1 -- Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of June 28, 1997
and December 31,1996 ..................................................................... 3
Condensed Consolidated Statements of Operations
for the Three-Month and Six-Month
Periods Ended June 28, 1997 and June 29, 1996 ............................................ 4
Condensed Consolidated Statements of Cash Flows for the Six-Month
Periods Ended June 28, 1997 and June 29, 1996 ............................................ 5
Notes To Condensed Consolidated Financial Statements...................................... 6
Report Of Independent Accountants ........................................................ 8
ITEM 2 -- Management's Discussion and Analysis of Results
of Operations and Financial Condition..................................................... 9
PART II. OTHER INFORMATION
ITEM 1 -- Legal Proceedings.........................................................................15
ITEM 2 -- Changes in Securities.....................................................................15
ITEM 3 -- Defaults Upon Senior Securities...........................................................15
ITEM 4 -- Submission of Matters to a Vote of Security Holders.......................................15
ITEM 5 -- Other Information.........................................................................15
ITEM 6 -- Exhibits and Reports on Form 8-K..........................................................16
Signature...............................................................................................17
Exhibit Index...........................................................................................18
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
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(UNAUDITED)
JUNE 28, 1997 DECEMBER 31, 1996
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,035,725 $ 4,591,273
Short term investments 13,556,808 12,342,592
Accounts receivable:
Trade 5,637,991 5,153,589
Other 316,481 304,434
Inventories 8,289,566 8,569,818
Prepaid expenses and deposits 284,379 549,753
Deferred tax asset 171,730 171,776
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TOTAL CURRENT ASSETS 35,292,680 31,683,235
Property and equipment, net 2,858,831 2,769,657
Deferred tax asset 157,169 157,169
Patents and other assets 12,578 15,569
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TOTAL ASSETS $38,321,258 $34,625,630
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,341,004 $ 1,691,928
Accrued expenses 580,120 1,077,151
Accrued salaries and wages 740,758 769,855
Royalties payable 848,116 741,781
Income taxes payable 1,154,844 170,889
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TOTAL CURRENT LIABILITIES 4,664,842 4,451,604
Deferred tax liability 168,455 168,455
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TOTAL LIABILITIES 4,833,297 4,620,059
SHAREHOLDERS' EQUITY:
Common stock, $.20 par value; authorized shares, 7,000,000;
issued 5,691,547 and 5,620,417, respectively 1,138,309 1,124,083
Additional paid-in capital 24,319,083 24,091,210
Treasury stock, at cost, 2,200 shares (49,775) (49,775)
Unearned compensation (79,152) (106,686)
Retained earnings 8,159,496 4,946,739
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TOTAL SHAREHOLDERS' EQUITY 33,487,961 30,005,571
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $38,321,258 $34,625,630
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</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
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TOLLGRADE COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
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FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 28, 1997 JUNE 29, 1996 JUNE 28, 1997 JUNE 29, 1996
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REVENUES $12,115,025 $10,182,286 $20,734,431 $17,031,672
COST OF PRODUCT SALES 5,454,400 4,971,735 9,243,766 8,435,098
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GROSS PROFIT 6,660,625 5,210,551 11,490,665 8,596,574
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OPERATING EXPENSES:
Selling and marketing 1,333,946 1,258,889 2,380,135 2,150,860
General and administrative 913,748 595,645 1,744,035 1,075,029
Research and development 1,424,600 878,394 2,665,854 1,591,691
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TOTAL OPERATING EXPENSES 3,672,294 2,732,928 6,790,024 4,817,580
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INCOME FROM OPERATIONS 2,988,331 2,477,623 4,700,641 3,778,994
Interest and other income, net 239,377 184,294 416,365 388,672
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INCOME BEFORE INCOME TAXES 3,227,708 2,661,917 5,117,006 4,167,666
Provision for income taxes 1,194,247 1,050,000 1,904,252 1,598,000
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NET INCOME $ 2,033,461 $ 1,611,917 $ 3,212,754 $ 2,569,666
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EARNINGS PER SHARE INFORMATION:
Fully diluted weighted average shares of
common stock and equivalents 5,964,243 5,941,567 5,961,166 5,938,303
Net income per common and common equivalent shares:
Primary $ .34 $ .27 $ .54 $ .44
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Fully Diluted $ .34 $ .27 $ .54 $ .43
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</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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SIX MONTHS ENDED
JUNE 28, 1997 JUNE 29, 1996
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,212,754 $ 2,569,666
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 476,513 234,031
Deferred income taxes 46 8,400
Compensation expense for restricted stock 27,534 31,599
Changes in assets and liabilities:
Increase in accounts receivable-trade (484,402) (1,054,747)
Increase in accounts receivable-other (12,047) (55,625)
Decrease (increase) in inventories 280,252 (1,112,995)
Decrease (increase) in prepaid expenses and deposits 265,374 (182,379)
Increase in other assets --- (8,820)
Decrease in accounts payable (350,921) (456,988)
(Decrease) increase in accrued expense and royalties payable (419,793) 958,760
Increase in income taxes payable 983,955 547,659
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Net cash provided by operating activities 3,979,265 1,478,561
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CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption/maturity of short-term investments 7,154,961 (6,942,506)
Purchase of short-term investments (8,369,177) ---
Capital expenditures (562,696) (992,861)
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Net cash used in investing activities (1,776,912) (7,935,367)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 242,099 17,400
IPO issuance cost --- (49,290)
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Net cash provided by (used in) financing activities 242,099 (31,890)
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Net increase (decrease) in cash and cash equivalents 2,444,452 (6,488,696)
Cash and cash equivalents at beginning of period 4,591,273 15,157,387
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Cash and cash equivalents at end of period $ 7,035,725 $ 8,668,691
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</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed 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 condensed
consolidated financial statements as of and for the three and six-month periods
ended June 28, 1997 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, 1996. Accordingly,
the accompanying condensed 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 condensed
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 28, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997.
2. INVENTORY
At June 28, 1997 and December 31, 1996 inventory consisted of the following:
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June 28, December 31,
1997 1996
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Raw materials . . . . . . . . . . . . . . . . . . . . . . . $3,440,855 $3,816,242
Work in progress. . . . . . . . . . . . . . . . . . . . . . 3,399,367 3,808,842
Finished goods. . . . . . . . . . . . . . . . . . . . . . . 1,449,344 944,734
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$8,289,566 $8,569,818
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</TABLE>
3. SHORT-TERM INVESTMENTS
Short-term investments at June 28, 1997 consisted of individual U.S. Government
and 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.
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4. NEW ACCOUNTING PRONOUNCEMENTS:
In February 1997 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS 128
specifies the computation, presentation, and disclosure requirements for
earnings per share. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. The Company
plans to adopt the new standard at year-end 1997 and believes that the impact
of this standard will not have a material impact on the Company's consolidated
earnings per share calculations.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Tollgrade Communications, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Tollgrade Communications, Inc. and subsidiaries as of June 28, 1997, and the
related condensed consolidated statements of operations for the three months and
six months then ended and the condensed consolidated statements of cash flows
for the six months 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 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 of Tollgrade Communications, Inc. and
subsidiaries as of December 31, 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated January 29, 1997, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1996, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
/s/ Coopers & Lybrand L.L.P.
Pittsburgh, Pennsylvania
July 10, 1997
8
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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. Those factors which specifically relate
to the Company's business include the following: rapid technological change
along with the need to continually develop new products; dependence on a single
product line; competition; dependence on key employees; management of Company's
growth; dependence on certain customers; dependence on certain suppliers;
fluctuations in operating results; proprietary rights and risks of third party
claims of infringement; and government regulation.
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 Service ("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 94%
of the Company's revenue for the second quarter ended June 28, 1997 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 six Regional Bell Operating
Companies ("RBOCs") as well as major independent telephone companies such as
Sprint and to certain digital loop carrier ("DLC") equipment manufacturers. For
the second quarter ended June 28, 1997, approximately 85% of the Company's
total revenue was generated from sales to these six RBOCs, the two largest of
which comprised approximately 50% 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.
Management believes that during fiscal year 1998 there is a possibility that
one of the Company's major customers will have satisfied a substantial portion
of its requirements for certain of the Company's product lines. Management is
focusing on the development of new product lines to meet the requirements of
this and other customers.
Although international sales to date have not been significant, the Company
believes the international markets offer 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.
9
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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 and development. Research and development expenses as a percent of
revenues were approximately 11.8% for the second quarter ended June 28, 1997.
The Company expects its research and development expenses to continue at
significant levels.
On July 18, 1997, the United States Court of Appeals for the Eighth Circuit
issued an opinion vacating, in part, the Federal Communication Commission's
Interconnection Order promulgated under the Telecommunications Act of 1996 (the
"Act") in Iowa Utilities Board, et. al. v. FCC, et al (consolidated cases
beginning at no. 96-3321). In the opinion, the court vacated the FCC's pricing
rules on the basis that the FCC exceeded its jurisdiction in promulgating
pricing rules regarding local telephone service, and asserting that the Act
grants state commissions, not the FCC, authority to determine the rates
involved in the implementation of the local competition provisions of the Act.
In addition, the court vacated the FCC's "pick and choose" rule implemented
under subsection 252(i) of the Act which allowed a local exchange carrier to
select among individual provisions of other interconnection agreements
previously negotiated between an incumbent local exchange carrier and other
requesting carriers, without being required to accept the terms and conditions
of the agreements in their entirety. Among other actions taken by the court, it
also upheld most of the unbundling regulations promulgated by the FCC in the
Interconnection Order. To date, it remains uncertain how this decision and the
actions of state commissions required as a result will affect the Company's
future results of operations.
RESULTS OF OPERATIONS - SECOND QUARTER
REVENUES
Revenue for the second quarter of 1997 were $12,115,025 and were $1,932,739, or
19%, higher than the revenues of $10,182,286 reported for the second quarter of
1996. The increase in revenues for the second quarter was primarily
attributable to an increase in unit volume sales of the MCU line testing and
synchronization products as a result of increased market penetration and
customer acceptance. This increased product demand is at least partly
attributable to technology licensing agreements and/or joint venture
relationships with certain major DLC equipment manufacturers, as well as
continued expansion of a marketing program to train customers in advanced line
test system trouble-shooting.
GROSS PROFIT
Gross profit for the second quarter of 1997 was $6,660,625 compared to
$5,210,551 for the second quarter of 1996, representing an increase of
$1,450,074, or 27.8%. Gross profit as a percentage of revenues increased to
55.0% in the second quarter of 1997, compared to 51.2% in the same quarter last
year. The overall increase in gross profit margin resulted primarily from
increased sales levels, while improvements in gross margin as a percentage of
revenues were a result of increased sales of certain higher-margined products
within the MCU product line.
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SELLING AND MARKETING EXPENSE
Selling and marketing expense for the second quarter of 1997 was $1,333,946
compared to $1,258,889 for the second quarter of 1996. This increase of
$75,057, or 6.0%, is due to the addition of personnel associated with the
expansion of customer technical support, expansion of marketing and
communications functions, development of domestic and international markets,
and increased commissions related to greater sales volume. As a percentage of
revenues, selling and marketing expenses decreased to 11.0% in the second
quarter of 1997 from 12.4% in the second quarter of 1996, primarily due to the
increased revenue base discussed above.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense for the second quarter of 1997 was $913,748,
an increase of $318,103, or 53.4%, over the $595,645 recorded in the second
quarter of 1996. The increase in general and administrative expense primarily
reflects the addition of six positions to support expanded business
requirements for accounting, legal, operations, investor relations, and
administrative support, as well as increased international travel and other
costs associated with being a public company. As a percentage of revenues,
general and administrative expenses increased to 7.5% in the second quarter of
1997 from 5.8% in the second quarter of 1996.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense in the second quarter of 1997 was $1,424,600,
an increase of $546,206, or 62.2%, over the $878,394 recorded in the second
quarter of 1996. The increase was due to engineering and development costs
associated with the addition of sixteen new personnel, as well as other costs
associated with new product development. These personnel were hired for
positions in design engineering, hardware and software development, engineering
support, and test engineering. Their efforts are associated with the
development of future products, support for newer products, and feature
enhancements for existing products. As a percentage of revenues, research and
development expense increased to 11.8% in the second quarter of 1997 from 8.6%
in the second quarter of 1996.
INTEREST AND OTHER INCOME
Interest and other income consists primarily of interest income. For the second
quarter of 1997, interest and other income was $239,377 compared to $184,294
for the second quarter of 1996, representing an increase of $55,083, or 29.9%.
The increase was primarily attributable to increased interest income, which
resulted from an overall increase in funds available for investment between
comparable periods.
PROVISION FOR INCOME TAXES
The provision for income taxes for the second quarter of 1997 was $1,194,247,
an increase of $144,247, or 13.7%, from $1,050,000 for the second quarter of
1996. The effective income tax rate decreased to approximately 37.0% in the
second quarter of 1997, compared to approximately 39.4% in the second quarter
of 1996. The increased provision for income taxes was primarily due to
increased earnings levels of the Company between comparable periods, while the
decrease in the effective tax rate reflects the estimated benefit related to
R&D tax credits which were available during the second quarter of 1997 but not
available during the second quarter of 1996.
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NET INCOME
As a result of the above factors, net income for the second quarter of 1997 was
$2,033,461, an increase of $421,544, or 26.2%, over the $1,611,917 recorded in
the second quarter of 1996. Primary and fully diluted earnings per common share
of $.34 for the second quarter of 1997 increased by 25.9%, or $.07, from the
$.27 per share earned in the second quarter of 1996. Fully diluted weighted
average common and common equivalent shares outstanding were 5,964,243 in the
second quarter of 1997 compared to 5,941,567 in the second quarter of 1996. As
a percentage of revenues, net income for the second quarter of 1997 increased
to 16.8% compared to the 15.8% for the second quarter of 1996.
RESULTS OF OPERATIONS - YEAR TO DATE
REVENUES
For the first six months of 1997, revenues were $20,734,431 compared to
$17,031,672 for the first six months of 1996, representing an increase of
$3,702,759 or 21.7%. The increase in revenues for the six month period was
primarily attributable to an increase in unit sales volume of the MCU line test
products as a result of increased market penetration and customer acceptance.
In addition, increased product demand is at least partly attributable to
technology and licensing agreements and/or joint venture relationships with
certain major DLC equipment manufacturers, as well as continued expansion of a
marketing program to train customers in advanced line test system
trouble-shooting. MCU line testing and synchronization product revenue
increased $4,819,190, or 32.6%, in the six month period ended June 28, 1997
compared to first six months of 1996.
GROSS PROFIT
For the six months of 1997, gross profit increased to $11,490,665 compared to
$8,596,574 for the first six months of 1996, representing an increase of
$2,894,091, or 33.7%. As a percentage of revenues, gross profit increased to
55.4% in the first six months of 1997 compared to 50.5% in the same period for
1996. The overall increase in gross profit margin resulted primarily from
increased sales levels, while improvements in gross margin as a percentage of
revenues were a result of increased sales of certain higher-margined products
within the MCU product line as well as per unit cost reductions related to
increased manufacturing efficiencies.
SELLING AND MARKETING EXPENSE
For the first six months of 1997, selling and marketing expense totaled
$2,380,135 compared to $2,150,860 for the first six months of 1996,
representing an increase of $229,275, or 10.7%. The increase is due to the
addition of new personnel associated with the expansion of customer technical
support, expansion of marketing and communication functions, development of
domestic and international markets and increased commissions related to greater
sales volume. As a percentage of revenues, selling and marketing expense
decreased to 11.5% in the first six months of 1997 from 12.6% for the same
period of 1996. The decrease was due primarily to the increased revenue base
discussed above.
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GENERAL AND ADMINISTRATIVE EXPENSE
For the first six months of 1997, general and administrative expense totaled
$1,744,035 compared to $1,075,029 for the first six months of 1996, representing
an increase of $669,006, or 62.2%. The increase in general and administrative
expense primarily reflects the addition of six positions to support expanded
business requirements for accounting, legal, operations, investor relations and
administrative support, as well as increased international travel and other
costs associated with being a public company. As a percentage of revenues,
general and administrative expense increased to 8.4% for the first six months of
1997 from 6.3% for the same period of 1996.
RESEARCH AND DEVELOPMENT EXPENSE
For the first six months of 1997, research and development expense totaled
$2,665,854 compared to $1,591,691 for the first six months of 1996,
representing an increase of $1,074,163, or 67.5%. The increase was due to
engineering and development costs associated with the addition of sixteen new
personnel, as well as other costs associated with new product development. As a
percentage of revenues, research and development expense increased to 12.9% in
the first six months of 1997 from 9.3% for the first six months of 1996.
INTEREST AND OTHER INCOME
Interest and other income consists primarily of interest income. For the first
six months of 1997, interest and other income was $416,365 compared to $388,672
for the first six months of 1996, representing an increase of $27,693, or 7.1%.
This was primarily attributable to increased interest income, which resulted
from an overall increase in funds available for investment between comparable
periods.
PROVISIONS FOR INCOME TAXES
The provision for income taxes for the first six months of 1997 was $1,904,252
which was an increase of $306,252, or 19.2%, from $1,598,000 for the first six
months of 1996. The effective tax rate was 37.2% for the first six months of
1997 versus 38.3% for the comparable period in the prior year. The increased
provision for income taxes was primarily due to increased earnings levels of
the Company between comparable periods, while the decrease in effective tax
rate reflects the estimated benefit related to R&D tax credits which were
available during the first half of 1997 but not in the first half of 1996.
NET INCOME
For the first six months of 1997, net income was $3,212,754 compared to
$2,569,666 for the first six months of 1996, representing an increase of
$643,088, or 25.0%. Fully diluted earnings per common share of $.54 for the
first six months of 1997 increased by 25.6%, or $.11, from the $.43 per share
earned in the first six months of 1996. Fully diluted weighted average common
and common equivalent shares outstanding were 5,961,166 in the first six months
of 1997 compared to 5,938,303 in the first six months of 1996. As a percentage
of revenues, net income for the first six months of 1997 increased to 15.5%
from 15.1% in the comparable period in the prior year.
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LIQUIDITY AND CAPITAL RESOURCES
At June 28, 1997, the Company had working capital of $30,627,838, which
represented an increase of $3,396,207, or 12.5%, from the $27,231,631 of
working capital as of December 31, 1996. The increase in working capital can be
attributed primarily to operating cash flow (income from operations before
depreciation and amortization) exceeding requirements for purchases of property
and equipment. Management believes that operating cash flow and cash reserves
are adequate to finance currently planned capital expenditures and to meet the
overall liquidity needs of the Company.
The Company made capital expenditures of $562,696 in the first six months of
1997 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 June 28, 1997, the Company had not borrowed any amounts
against its $2,500,000 available bank line of credit. The credit agreement has
been extended to June 30, 1998 on terms similar to those previously in effect.
On April 22, 1997 the Company's Board of Directors authorized a program to
repurchase up to 200,000 shares of its common stock over the next two years.
The shares will be utilized to provide stock under certain employee benefit
programs. The number of shares that the Company intends to purchase and the
time of such purchases will be determined by the Company, at its discretion.
The Company plans to use existing cash and short-term investments to finance
the repurchases. To date, the Company has not purchased any stock under this
program.
BACKLOG
The Company's backlog consists of firm customer purchase orders for the
Company's various products. As of June 28, 1997 the Company had a backlog of
$1,385,102 compared to $912,507 at December 31, 1996 and $3,541,254 at March
29, 1997. The decline in backlog for the quarter occurred due to shipments
exceeding customer orders during the period, resulting in part from reduced
order levels compared to the previous quarter. Periodic fluctuations in
customer orders and backlog result from a variety of factors, including but not
limited to the timing of significant orders and shipments, and are not
necessarily indicative of long-term trends in sales of the Company's products.
14
<PAGE> 15
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
On April 22, 1997 the Company held its annual stockholders meeting. At
the meeting, James J. Barnes and Rocco L. Flaminio were elected to the Board of
Directors for a three year term expiring at the annual meeting of shareholders
in 2000. The terms of Directors R. Craig Allison, Christian L. Allison and
Daniel P. Barry continued after the meeting and will expire at the annual
meeting of shareholders in 1999. The terms of Directors Robert W. Kampmeinert
and Richard H. Heibel also continued after the meeting and will expire at the
annual meeting of shareholders in 1998. In addition the Company's 1995 Long-Term
Incentive Compensation Plan (the "Plan") was amended to increase the number of
shares authorized for issuance under the Plan and to allow for inclusion of
non-employee directors under the plan. The results of the voting are as follows:
<TABLE>
<CAPTION>
Total Votes
Election of Directors: Cast For Against Withheld Abstained
- ---------------------- ---- --- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
James J. Barnes 4,799,883 4,716,913 ----- 82,970 -----
Rocco L. Flaminio 4,799,883 4,718,190 ----- 81,693 -----
Amendment of the 1995
Long-Term Incentive
Compensation Plan 3,772,657 3,615,524 107,965 ----- 49,168
</TABLE>
ITEM 5. OTHER INFORMATION
None.
15
<PAGE> 16
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>
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 June 28, 1997.
16
<PAGE> 17
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 8, 1997 /s/ CHRISTIAN L. ALLISON
----------------------------------
CHRISTIAN L. ALLISON
CHIEF EXECUTIVE OFFICER & DIRECTOR
Dated: August 8, 1997 /s/ SAMUEL C. KNOCH
----------------------------------
SAMUEL C. KNOCH
CHIEF FINANCIAL OFFICER
Dated: August 8, 1997 /s/ BRADLEY N. DINGER
----------------------------------
BRADLEY N. DINGER
CONTROLLER
17
<PAGE> 18
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
11.1 Statement re Computation of Per Share Earnings
15 Letter re unaudited interim financial information
27 Financial Data Schedule
</TABLE>
18
<PAGE> 1
EXHIBIT 11.1
CALCULATION OF EARNINGS PER SHARE
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 28, 1997 AND JUNE 29, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 28, 1997 JUNE 29, 1996 JUNE 28, 1997 JUNE 29, 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income . . . . . . . . . . . . . . . . . . $2,033,461 $1,611,917 $3,212,754 $2,569,666
========== ========== ========== ==========
Common and common equivalent shares:
Weighted average number of
common shares outstanding
during the period . . . . . . . . . . . 5,676,862 5,445,610 5,654,543 5,444,708
Common shares issuable upon exercise
of outstanding stock options
Primary . . . . . . . . . . . . 265,583 495,957 303,304 458,815
Fully diluted . . . . . . . . . 287,381 495,957 306,623 493,595
Common and common equivalent shares
outstanding during the period
Primary . . . . . . . . . . . . 5,942,445 5,941,567 5,957,847 5,903,523
========== ========== ========== ==========
Fully diluted . . . . . . . . . 5,964,243 5,941,567 5,961,166 5,938,303
========== ========== ========== ==========
Earnings per share data
Net income per common and common
equivalent shares
Primary . . . . . . . . . . . . $ 0.34 $ 0.27 $ 0.54 $ 0.44
Fully diluted . . . . . . . . . $ 0.34 $ 0.27 $ 0.54 $ 0.43
</TABLE>
19
<PAGE> 1
EXHIBIT 15
July 10, 1997
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 July 10, 1997 on our review of interim
financial information of Tollgrade Communications, Inc. and subsidiaries for
the three months and six months ended June 28, 1997 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.
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED JUNE 28, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001002531
<NAME> TOLLGRADE COMMUNICATIONS, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-28-1997
<CASH> 7,035,725
<SECURITIES> 13,556,808
<RECEIVABLES> 5,954,472
<ALLOWANCES> 50,000
<INVENTORY> 8,289,566
<CURRENT-ASSETS> 35,292,680
<PP&E> 4,805,490
<DEPRECIATION> 1,946,659
<TOTAL-ASSETS> 38,321,258
<CURRENT-LIABILITIES> 4,664,842
<BONDS> 0
0
0
<COMMON> 1,138,309
<OTHER-SE> 32,349,652
<TOTAL-LIABILITY-AND-EQUITY> 38,321,258
<SALES> 20,534,431
<TOTAL-REVENUES> 20,734,431
<CGS> 9,222,176
<TOTAL-COSTS> 9,243,766
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 50,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,117,006
<INCOME-TAX> 1,904,252
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,212,754
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.54
</TABLE>
