<PAGE> 1
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
-----------------------
FORM 10-Q
(Mark One)
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 29, 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 April 17, 1997, there were 5,657,096 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 17 pages. The exhibit index is at page 15.
<PAGE> 2
TOLLGRADE COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 29, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
<S> <C>
ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS:
CONSOLIDATED BALANCE SHEETS AS OF MARCH 29, 1997
AND DECEMBER 31,1996 ......................................................................3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE-MONTH
PERIODS ENDED MARCH 29, 1997 AND MARCH 30, 1996 ...........................................4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE-MONTH
PERIODS ENDED MARCH 29, 1997 AND MARCH 30, 1996 ...........................................5
NOTES TO 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.........................................................................13
ITEM 2 -- CHANGES IN SECURITIES.....................................................................13
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES...........................................................13
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................13
ITEM 5 -- OTHER INFORMATION.........................................................................13
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K..........................................................13
SIGNATURE.............................................................................................14
EXHIBIT INDEX.........................................................................................15
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(UNAUDITED)
MARCH 29, 1997 DECEMBER 31, 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,495,380 $ 4,591,273
Short term investments 11,399,362 12,342,592
Accounts receivable:
Trade 4,294,192 5,153,589
Other 322,463 304,434
Inventories 8,147,794 8,569,818
Prepaid expenses and deposits 358,099 549,753
Deferred tax asset 171,730 171,776
- --------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 31,189,020 31,683,235
Property and equipment, net 2,864,670 2,769,657
Deferred tax asset 157,169 157,169
Patents and other assets 14,373 15,569
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $34,225,232 $34,625,630
- --------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 652,202 $ 1,691,928
Accrued expenses 652,262 1,077,151
Accrued salaries and wages 376,042 769,855
Royalties payable 597,955 741,781
Income taxes payable 462,600 170,889
- --------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,741,061 4,451,604
Deferred tax liability 168,455 168,455
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,909,516 4,620,059
SHAREHOLDERS' EQUITY:
Common stock, $.20 par value; authorized shares,
7,000,000; issued 5,659,296 and
5,620,417, respectively 1,131,859 1,124,083
Additional paid-in capital 24,200,519 24,091,210
Treasury stock, at cost, 2,200 shares (49,775) (49,775)
Unearned compensation (92,919) (106,686)
Retained earnings 6,126,032 4,946,739
- --------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 31,315,716 30,005,571
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $34,225,232 $34,625,630
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
3
<PAGE> 4
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
FOR THE
THREE MONTHS ENDED
MARCH 29, 1997 MARCH 30, 1996
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<S> <C> <C>
REVENUES $ 8,619,406 $ 6,849,387
COST OF PRODUCT SALES 3,789,366 3,463,363
- -------------------------------------------------------------------------------------------------------
GROSS PROFIT 4,830,040 3,386,024
- -------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling and marketing 1,046,189 891,970
General and administrative 830,287 479,834
Research and development 1,241,254 713,297
- -------------------------------------------------------------------------------------------------------
Total operating expenses 3,117,730 2,085,101
- -------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 1,712,310 1,300,923
Interest and other income, net 176,988 204,378
- -------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,889,298 1,505,301
Provision for income taxes 710,005 548,000
- -------------------------------------------------------------------------------------------------------
NET INCOME $ 1,179,293 $ 957,301
- -------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE INFORMATION:
Fully diluted weighted average shares of
common stock and equivalents 5,975,675 5,866,136
Net income per common and common equivalent shares:
Primary $ .20 $ .16
- -------------------------------------------------------------------------------------------------------
Fully Diluted $ .20 $ .16
- -------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
4
<PAGE> 5
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 29, 1997 MARCH 30, 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,179,293 $ 957,301
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 231,776 120,459
Deferred income taxes 46 --
Compensation expense for restricted stock 13,767 15,800
Changes in assets and liabilities:
Decrease (increase) in accounts receivable-trade 859,397 (907,443)
Increase in accounts receivable-other (18,029) (30,157)
Decrease (increase) in inventories 422,024 (225,778)
Decrease (increase) in prepaid expenses and deposits 191,654 (121,292)
Increase in other assets -- (51,100)
Decrease in accounts payable (1,039,726) (201,478)
(Decrease) increase in accrued expense and royalties payable (962,528) 378,806
Increase in income taxes payable 291,711 474,800
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,169,385 409,918
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption/maturity of short-term investments 2,996,189 --
Purchase of short-term investments (2,052,959) --
Capital expenditures (325,593) (536,178)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 617,637 (536,178)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options 117,085 --
IPO issuance cost -- (46,350)
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 117,085 (46,350)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,904,107 (172,610)
Cash and cash equivalents at beginning of period 4,591,273 15,157,387
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 6,495,380 $14,984,777
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements included herein
have been prepared by Tollgrade Communications, Inc. (the "Company") in
accordance with generally accepted accounting principles for the interim
financial information and Article 10 of Regulation S-X. The consolidated
financial statements as of and for the three-month period ended March 29, 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
consolidated financial statements do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements, although the Company believes that the disclosures are
adequate to make the information presented not misleading. In the opinion of
the Company's management, all adjustments considered necessary for a fair
presentation of the accompanying consolidated financial statements have been
included, and all adjustments are of a normal and recurring nature. Operating
results for the three-month period ended March 29, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997.
2. INVENTORY
At March 29, 1997 and December 31, 1996 inventory consisted of the following:
<TABLE>
<CAPTION>
March 29, December 31,
1997 1996
---------- ------------
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . . . . . . $3,058,791 $3,816,242
Work in progress. . . . . . . . . . . . . . . . . . 3,723,644 3,808,842
Finished goods. . . . . . . . . . . . . . . . . . . 1,365,359 944,734
---------- ----------
$8,147,794 $8,569,818
========== ==========
</TABLE>
3. SHORT-TERM INVESTMENTS
Short-term investments at March 29, 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.
6
<PAGE> 7
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 the impact of this
standard will not have a material impact on the Company's consolidated earnings
per share calculations.
7
<PAGE> 8
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Tollgrade Communications, Inc.:
We have reviewed the accompanying consolidated balance sheets of Tollgrade
Communications, Inc. and subsidiaries as of March 29, 1997, and the related
consolidated statements of operations and cash flows for the three-month period
then ended. These financial statements are the responsibility of the company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 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.
/s/ Coopers & Lybrand L.L.P.
Pittsburgh, Pennsylvania
April 10, 1997
8
<PAGE> 9
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 related
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;
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 95%
of the Company's revenue for the first quarter ended March 29, 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
GTE Corporation and Sprint and to certain digital loop carrier ("DLC")
equipment manufacturers. For the first quarter ended March 29, 1997,
approximately 89% 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.
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
<PAGE> 10
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 14% for the first quarter ended March 29, 1997. The
Company expects its research and development expenses to continue at
significant levels.
In 1996, the Eighth Circuit Court of Appeals imposed a partial stay of the
Federal Communications Commission's Interconnection Order in Iowa Utilities
Board, et. al v. FCC (consolidated cases beginning at no. 96-3321). The stay
postponed the pricing standards of the Interconnection Order on the basis of
arguments the FCC exceeded its authority in setting pricing levels, which
authority should reside with state commissions. The FCC's Interconnection Order
would have imposed mandates on the pricing methods of local exchange carriers
under the Telecommunications Act of 1996. To date, these legal proceedings have
not yet been finally determined, and it remains uncertain how the ultimate
outcome will affect the Company's future results of operations.
RESULTS OF OPERATIONS - FIRST QUARTER
REVENUES
Revenue for the first quarter of 1997 were $8,619,406 and were $1,770,019, or
25.8%, higher than the revenues of $6,849,387 reported for the first quarter of
1996. The first quarter of 1996 included special project sales of $1,344,200
associated with the Atlanta Olympic Games, which were unrelated to the
Company's core MCU product line. Excluding this special project, sales for the
first quarter of 1997 increased by $3,114,219, or 56.5%. The increase in
revenues for the first 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. In addition,
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 first quarter of 1997 was $4,830,040 compared to
$3,386,024 for the first quarter of 1996, representing an increase of
$1,444,016, or 42.7%. Gross profit as a percentage of revenues increased to
56.0% in the first quarter of 1997, compared to 49.4% 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 as well as per unit cost reductions related to
increased manufacturing efficiencies.
10
<PAGE> 11
SELLING AND MARKETING EXPENSE
Selling and marketing expense for the first quarter of 1997 was $1,046,189
compared to $891,970 for the first quarter of 1996. This increase of $154,219,
or 17.3%, is due to the addition of seven new 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 12.1% in the first
quarter of 1997 from 13.0% in the first quarter of 1996.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense for the first quarter of 1997 was $830,287,
an increase of $350,453, or 73.0%, over the $479,834 recorded in the first
quarter of 1996. The increase in general and administrative expense primarily
reflects the addition of seven positions to support expanded business
requirements for accounting, legal, operations, investor relations, and
administrative support, as well as costs associated with being a public
company. As a percentage of revenues, general and administrative expenses
increased to 9.6% in the first quarter of 1997 from 7.0% in the first quarter
of 1996.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense in the first quarter of 1997 was $1,241,254,
an increase of $527,957, or 74.0%, over the $713,297 recorded in the first
quarter of 1996. The increase was due to engineering and development costs
associated with the addition of 27 new personnel. These personnel are
associated with design engineering, hardware and software development,
engineering support, and test engineering. Their efforts are associated with
the development of future products, support for new products launched in 1996,
and feature enhancements for existing products. As a percentage of revenues,
research and development expense increased to 14.4% in the first quarter of
1997 from 10.4% in the first quarter of 1996.
PROVISION FOR INCOME TAXES
The effective income tax rate increased to approximately 37.6% in the first
quarter of 1997, compared to approximately 36.4% in the first quarter of 1996.
The estimated effective tax rate for the first quarter of 1997 reflects an
estimate of the effective tax rate for fiscal year 1997. The effective tax rate
includes the estimated benefit related to R&D tax credits which are available
during the first half of 1997.
NET INCOME
As a result of the above factors, net income for the first quarter of 1997 was
$1,179,293, an increase of $221,992, or 23.2%, over the $957,301 recorded in
the first quarter of 1996. Primary and fully diluted earnings per common share
of $.20 for the first quarter of 1997 increased by 25.0%, or $.04, from the
$.16 per share earned in the first quarter of 1996. Fully diluted weighted
average common and common equivalent shares outstanding were 5,975,675 in the
first quarter of 1997 compared to 5,866,136 in the first quarter of 1996. As a
percentage of revenues, net income for the first quarter of 1997 decreased to
13.7% compared to the 14.0% for the first quarter of 1996.
11
<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
At March 29, 1997, the Company had working capital of $28,447,959, which
represented an increase of $1,216,328, or 4.5%, 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
liquidity needs of the Company.
The Company made capital expenditures of $325,593 in the first quarter 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 March 29, 1997, the Company had not borrowed any amounts
against its $2,500,000 available bank line of credit. The credit agreement
expires on June 30, 1997, however the Company believes its financial position
will enable it to negotiate any further credit agreements on comparable or more
favorable terms.
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.
BACKLOG
The Company's backlog consists of firm customer purchase orders for the
Company's various products. As of March 29, 1997 the Company had a backlog of
$3,541,254, which represents an increase of $2,628,747, or 288.1%, from the
$912,507 backlog at December 31, 1996.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibits are being filed with this report:
Exhibit
Number Description
------- -----------
10.1 Form of Change in Control Agreement, entered into
February 1, 1997 between the Company and G. Wayne
Lloyd (incorporated by reference to Exhibit 10.1 of
the Report on Form 10-Q of the Company filed on
August 13, 1996)
11.1 Statement re Computation of Per Share Earnings
15 Letter re unaudited interim financial information
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company did not file any Current Report on Form 8-K during the
quarter ended March 29, 1997.
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: April 30, 1997 /s/ CHRISTIAN L. ALLISON
-------------------------------------
CHRISTIAN L. ALLISON
CHIEF EXECUTIVE OFFICER & DIRECTOR
Dated: April 30, 1997 /s/ SAMUEL C. KNOCH
-------------------------------------
SAMUEL C. KNOCH
CHIEF FINANCIAL OFFICER
14
<PAGE> 15
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit
Number Description
------- -----------
10.1 Form of Change in Control Agreement, entered into
February 1, 1997 between the Company and G. Wayne
Lloyd (incorporated by reference to Exhibit 10.1 of
the Report on Form 10-Q of the Company filed on
August 13, 1996)
11.1 Statement re Computation of Per Share Earnings
15 Letter re unaudited interim financial information
27 Financial Data Schedule
15
<PAGE> 1
EXHIBIT 11.1
CALCULATION OF EARNINGS PER SHARE
FOR THE THREE MONTHS ENDED MARCH 29, 1997 AND MARCH 30, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 29, 1997 MARCH 30, 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 1,179,293 $ 957,301
=========== ===========
Common and common equivalent shares:
Weighted average number of
common shares outstanding
during the period . . . . . . . . . . . . . . . . . 5,631,878 5,443,830
Common shares issuable upon exercise
of outstanding stock options
Primary . . . . . . . . . . . . . . . . . 343,797 413,736
Fully diluted . . . . . . . . . . . . . . 343,797 422,306
Common and common equivalent shares
outstanding during the period
Primary . . . . . . . . . . . . . . . . . 5,975,675 5,857,566
=========== ===========
Fully diluted . . . . . . . . . . . . . . 5,975,675 5,866,136
=========== ===========
Earnings per share data
Net income per common and common
equivalent shares
Primary . . . . . . . . . . . . . . . . . $ 0.20 $ 0.16
Fully diluted . . . . . . . . . . . . . . $ 0.20 $ 0.16
</TABLE>
16
<PAGE> 1
EXHIBIT 15
April 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 April 10, 1997 on our review of interim
financial information of Tollgrade Communications, Inc. and subsidiaries for
the three-month period ended March 29, 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.
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE PERIOD ENDED MARCH 29, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001002531
<NAME> TOLLGRADE COMMUNICATIONS, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-29-1997
<CASH> 6,495,380
<SECURITIES> 11,399,362
<RECEIVABLES> 4,616,655
<ALLOWANCES> 0
<INVENTORY> 8,147,794
<CURRENT-ASSETS> 31,189,020
<PP&E> 4,568,387
<DEPRECIATION> (1,703,717)
<TOTAL-ASSETS> 34,225,232
<CURRENT-LIABILITIES> 2,741,061
<BONDS> 0
0
0
<COMMON> 1,131,859
<OTHER-SE> 30,183,857
<TOTAL-LIABILITY-AND-EQUITY> 34,225,232
<SALES> 8,619,406
<TOTAL-REVENUES> 8,619,406
<CGS> 3,789,366
<TOTAL-COSTS> 3,789,366
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,889,298
<INCOME-TAX> 710,005
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,179,293
<EPS-PRIMARY> 0.20
<EPS-DILUTED> 0.20
</TABLE>
