<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 28, 1998
[ ] 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)
724-274-2156
(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, 1998, there were 5,836,066 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 28, 1998
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------------------------------ --------
<S> <C>
ITEM 1 -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 28, 1998
AND DECEMBER 31,1997 ......................................................................3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE-MONTH
PERIODS ENDED MARCH 28, 1998 AND MARCH 29, 1997 ...........................................4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE-MONTH
PERIODS ENDED MARCH 28, 1998 AND MARCH 29, 1997 ...........................................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.........................................................................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
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
MARCH 28, 1998 DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,854,547 $ 3,183,944
Short term investments 13,640,065 15,666,626
Accounts receivable:
Trade 7,004,641 7,884,683
Other 280,636 517,090
Inventories 13,076,328 12,101,114
Prepaid expenses and deposits 1,122,524 409,252
Deferred tax asset 213,216 213,216
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 40,191,957 39,975,925
Long-term investments 2,120,000 600,000
Property and equipment, net 3,387,600 3,001,824
Deferred tax asset 126,895 126,895
Patents and other assets 7,488 8,568
- -------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 45,833,940 $ 43,713,212
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,784,850 $ 959,185
Accrued expenses 1,276,627 1,091,990
Accrued salaries and wages 519,679 1,529,525
Royalties payable 541,484 878,780
Income taxes payable 693,843 946,233
- -------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 4,816,483 5,405,713
Deferred income 292,000 --
Deferred tax liability 206,116 206,116
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 5,314,599 5,611,829
SHAREHOLDERS' EQUITY:
Common stock, $.20 par value; authorized shares, 7,000,000;
issued 5,853,957 and 5,727,350, respectively 1,170,791 1,145,470
Additional paid-in capital 26,404,340 25,232,315
Treasury stock, at cost, 17,500 and 3,200 shares, respectively (307,778) (70,355)
Unearned compensation (22,459) (35,934)
Retained earnings 13,274,447 11,829,887
- -------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 40,519,341 38,101,383
- -------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 45,833,940 $ 43,713,212
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
3
<PAGE> 4
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
FOR THE
THREE MONTHS ENDED
MARCH 28, 1998 MARCH 29, 1997
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<S> <C> <C>
REVENUES $ 10,763,840 $ 8,619,406
COST OF PRODUCT SALES 4,355,312 3,789,366
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GROSS PROFIT 6,408,528 4,830,040
- ---------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling and marketing 1,621,884 1,046,189
General and administrative 1,089,707 830,287
Research and development 1,628,002 1,241,254
- ----------------------------------------------------------------------------------------------------------------------
Total operating expenses 4,339,593 3,117,730
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INCOME FROM OPERATIONS 2,068,935 1,712,310
Interest and other income, net 188,625 176,988
- ----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 2,257,560 1,889,298
Provision for income taxes 813,000 710,005
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,444,560 $ 1,179,293
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EARNINGS PER SHARE INFORMATION:
Weighted average shares of common stock and equivalents:
Basic 5,777,666 5,631,878
Diluted 5,956,313 5,975,675
- ----------------------------------------------------------------------------------------------------------------------
Net income per common and common equivalent shares:
Basic $ .25 $ .21
Diluted $ .24 $ .20
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
4
<PAGE> 5
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED
MARCH 28, 1998 MARCH 29, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,444,560 $ 1,179,293
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 295,282 231,776
Deferred income taxes -- 46
Compensation expense for restricted stock 13,475 13,767
Changes in assets and liabilities:
Decrease in accounts receivable-trade 880,042 859,397
Decrease (increase) in accounts receivable-other 236,454 (18,029)
(Increase) decrease in inventories (975,214) 422,024
(Increase) decrease in prepaid expenses and deposits (713,272) 191,654
Increase (decrease) in accounts payable 825,665 (1,039,726)
Increase (decrease) in accrued expense and royalties payable 139,341 (568,718)
Decrease in accrued salaries and wages (1,009,846) (393,810)
(Decrease) increase in income taxes payable (252,390) 291,711
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 884,097 1,169,385
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption/maturity of short-term investments 3,493,387 2,996,189
Purchase of short-term investments (2,986,826) (2,052,959)
Capital expenditures (679,978) (325,593)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (173,417) 617,637
- ------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options including related tax benefits 1,197,346 117,085
Purchase of treasury stock (237,423) --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 959,923 117,085
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 1,670,603 1,904,107
Cash and cash equivalents at beginning of period 3,183,944 4,591,273
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 4,854,547 $ 6,495,380
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
<PAGE> 6
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-month period ended
March 28, 1998 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, 1997. 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-month period ended March 28,1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.
2. INVENTORY
At March 28, 1998 and December 31, 1997 inventory consisted of the following:
<TABLE>
<CAPTION>
March 28, December 31,
1998 1997
----------- -----------
<S> <C> <C>
Raw materials ................................... $ 4,894,379 $ 5,738,576
Work in progress................................. 6,203,735 5,070,113
Finished goods................................... 1,978,214 1,292,425
----------- ----------
$13,076,328 $12,101,114
=========== ===========
</TABLE>
6
<PAGE> 7
3. INVESTMENTS
Short-term investments at March 28, 1998, and December 31, 1997, consisting of
individual U.S. Government and municipal bonds are stated at cost, which
approximated market value. These securities have a maturity of one year or less
at date of purchase and/or contain a callable provision in which the bonds can
be called within one year from date of purchase. The primary investment purpose
is to provide a reserve for future business purposes, including possible
acquisitions and capital expenditures and to meet working capital requirements.
Long-term investments are comprised of individual municipal bonds with a
maturity of more than one year but less than eighteen months.
4. NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. This
Statement, which is effective for financial statements for fiscal years
beginning after December 15, 1997, requires that all items that are required to
be recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same prominence
as other financial statements.
Additionally, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. This
Statement, which is effective for financial statements for fiscal years
beginning after December 15, 1997, also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Company has adopted both of the above standards in the first quarter of
1998 and the standards did not impact the financial position and results of
operations of the Company in the first quarter of 1998.
7
<PAGE> 8
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 March 28, 1998, and the
related condensed consolidated statements of operations and cash flows for the
three-months ended March 28, 1998, and March 29, 1997. 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 condensed 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 of Tollgrade Communications, Inc. and
subsidiaries as of December 31, 1997 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 27, 1998, 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, 1997, 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
April 13, 1998
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 Condensed
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 and consolidation efforts within the Companies
primary customer base; dependence on certain suppliers; fluctuations in
operating results; proprietary rights and risks of third party claims of
infringement; and government regulation.
IMPACT OF THE YEAR 2000 ISSUE
The Company is currently assessing whether its existing computer systems will
properly utilize dates beyond December 31, 1999. If modifications are required
for its existing systems and the modifications are not completed on a timely
basis, the Year 2000 Issue could have a material impact on the operations of the
Company. The company believes that it has no exposure to contingencies related
to the Year 2000 Issue for the products it has sold.
The Company plans to engage in formal communication with all of its significant
suppliers and large customers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue.
There can be no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted, or that a failure to convert by
another company, or a conversion that is incompatible with the Company's
systems, would not have a material adverse effect on the Company.
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
9
<PAGE> 10
alarm-related products, represented approximately 91% of the Company's revenue
for the first quarter ended March 28,1998 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 five 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 first quarter ended March 28, 1998, approximately 87% of the Company's total
revenue was generated from sales to these five RBOCs, the two largest of which
comprised approximately 59% 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. This timing is
particularly sensitive to various business factors within each of the RBOC's,
including the RBOC's relationships with their various organized labor groups.
Certain contracts concerning the RBOC's organized employees are subject to
renegotiation during the third quarter of 1998 . The impact, if any, on the
timing of RBOC ordering of the Companies products related to a work disruption
within the RBOC's cannot be determined.
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 certain 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.
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 15% for the first quarter ended March 28, 1998. The
Company expects its research and development expenses to continue at significant
levels.
RESULTS OF OPERATIONS - FIRST QUARTER
REVENUES
Revenue for the first quarter of 1998 were $10,763,840 which were $2,144,434, or
24.9%, higher than the revenues of $8,619,406 reported for the first quarter of
1997. 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
vendors, as well as continued expansion of a marketing program to train
customers in advanced line test system trouble-shooting. 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.
10
<PAGE> 11
GROSS PROFIT
Gross profit for the first quarter of 1998 was $6,408,528 compared to $4,830,040
for the first quarter of 1997, representing an increase of $1,578,488, or 32.7%.
Gross profit as a percentage of revenues increased to 59.5% in the first quarter
of 1998, compared to 56.0% 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.
SELLING AND MARKETING EXPENSE
Selling and marketing expense for the first quarter of 1998 was $1,621,884
compared to $1,046,189 for the first quarter of 1997. This increase of $575,695
or 55.0%, is primarily attributable to the addition of personnel associated with
the expansion of certain marketing and communications functions as well as the
costs associated with the continuing development of domestic and international
markets. As a percentage of revenues, selling and marketing expenses increased
to 15.1% in the first quarter of 1998 from 12.1% in the first quarter of 1997.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense for the first quarter of 1998 was $1,089,707,
an increase of $259,420 or 31.2%, over the $830,287 recorded in the first
quarter of 1997. The increase in general and administrative expense primarily
reflects additional salaries and benefits associated with increased staffing
levels to support expanded business operations, increased international travel
costs, as well as increased costs associated with personnel recruiting
activities. As a percentage of revenues, general and administrative expenses
increased to 10.1% in the first quarter of 1998 from 9.6% in the first quarter
of 1997.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense in the first quarter of 1998 was $1,628,002, an
increase of $386,748 or 31.2%, over the $1,241,254 recorded in the first quarter
of 1997. The increase is primarily associated with additional personnel and
related engineering costs to support new product introductions. The new
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 15.1% in the first quarter of 1998
from 14.4% in the first quarter of 1997.
INTEREST AND OTHER INCOME
Interest and other income consists primarily of interest income. For the first
quarter of 1998, interest and other income was $188,625 compared to $176,988 for
the first quarter of 1997, representing an increase of $11,637, or 6.6%. 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 effective income tax rate decreased to approximately 36.0% in the first
quarter of 1998, compared to
11
<PAGE> 12
approximately 37.6% in the first quarter of 1997. The slight decrease reflects
higher levels of tax-exempt interest and increased credits for research and
development.
NET INCOME AND EARNINGS PER SHARE
As a result of the above factors, net income for the first quarter of 1998 was
$1,444,560, an increase of $265,267, or 22.5%, over the $1,179,293 recorded in
the first quarter of 1997. Basic and diluted earnings per common share of $.25
and $.24, respectively for the first quarter of 1998 increased by 19.0% and
20.0%, respectively, or $.04 and $.04, respectively, from the $.21 and $.20 per
share, respectively earned in the first quarter of 1997. Basic and diluted
weighted average common and common equivalent shares outstanding were 5,777,666
and 5,956,313, respectively in the first quarter of 1998 compared to 5,631,878
and 5,975,675, respectively in the first quarter of 1997. As a percentage of
revenues, net income for the first quarter of 1998 decreased to 13.4% compared
to the 13.7% for the first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
At March 28, 1998, the Company had working capital of $35,375,473, which
represented an increase of $805,261 or 2.3%, from the $34,570,212 of working
capital as of December 31, 1997. 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 incurred capital expenditures of $679,978 in the first quarter of
1998 which were primarily related to an upgrade of the MIS infrastructure, as
well as purchases of test equipment and fixtures. The Company presently has no
material capital expenditure commitments.
As of and through March 28, 1998, the Company had not borrowed any amounts
against its $2,500,000 available bank line of credit. The credit agreement
expires on June 30, 1998, 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. To date, the Company has purchased 17,500 shares of the Company's
common stock under this program.
BACKLOG
The Company's backlog consists of firm customer purchase orders for the
Company's various products. As of March 28, 1998 the Company had a backlog of
$3,481,359, compared to $1,554,495 at December 31, 1997 and $3,541,254 at March
29, 1997. The increase in backlog from December 31, 1997 to March 28, 1998,
occurred due to customer orders exceeding product shipments during the period.
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.
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
------ -----------
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
first quarter ended March 28, 1998.
13
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TOLLGRADE COMMUNICATIONS, INC.
(REGISTRANT)
Dated: May 11, 1998 /s/ CHRISTIAN L. ALLISON
--------------------------------------------
CHRISTIAN L. ALLISON
CHAIRMAN, CHIEF EXECUTIVE OFFICER & DIRECTOR
Dated: May 11, 1998 /s/ SAMUEL C. KNOCH
--------------------------------------------
SAMUEL C. KNOCH
CHIEF FINANCIAL OFFICER AND TREASURER
Dated: May 11, 1998 /s/ BRADLEY N. DINGER
--------------------------------------------
BRADLEY N. DINGER
CONTROLLER
14
<PAGE> 15
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit
Number Description
------ -----------
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 28, 1998 AND MARCH 29, 1997
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 28, 1998 MARCH 29, 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income ............................................................ $1,444,560 $1,179,293
========== ==========
Common and common equivalent shares:
Weighted average number of
common shares outstanding
during the period ............................................... 5,777,666 5,631,878
Common shares issuable upon exercise
of outstanding stock options
Diluted ................................................ 178,647 343,797
---------- ----------
Common and common equivalent shares
outstanding during the period
Diluted ................................................ 5,956,313 5,975,675
========== ==========
Earnings per share data
Net income per common and common
equivalent shares
Basic .................................................. $ 0.25 $ 0.21
Diluted ................................................ $ 0.24 $ 0.20
</TABLE>
16
<PAGE> 1
EXHIBIT 15
April 13, 1998
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 13, 1998, on our review of interim
financial information of Tollgrade Communications, Inc. and subsidiaries for the
three-month period ended March 28,1998 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 28, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-28-1998
<CASH> 4,854,547
<SECURITIES> 15,760,065
<RECEIVABLES> 7,285,277
<ALLOWANCES> 50,000
<INVENTORY> 13,076,328
<CURRENT-ASSETS> 40,191,957
<PP&E> 6,153,681
<DEPRECIATION> 2,766,081
<TOTAL-ASSETS> 45,833,940
<CURRENT-LIABILITIES> 4,816,483
<BONDS> 0
0
0
<COMMON> 1,170,791
<OTHER-SE> 39,348,550
<TOTAL-LIABILITY-AND-EQUITY> 45,833,940
<SALES> 10,763,840
<TOTAL-REVENUES> 10,763,840
<CGS> 4,355,312
<TOTAL-COSTS> 4,355,312
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,257,560
<INCOME-TAX> 813,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,444,560
<EPS-PRIMARY> .25
<EPS-DILUTED> .24
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