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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC
-------------------------------
FORM 10-Q
(Mark One)
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended April 1, 2000
[ ] 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)
412-820-1400
(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 25, 2000, there were 12,858,003 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 18 pages. The exhibit index is on page 17.
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TOLLGRADE COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED APRIL 1, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF APRIL 1, 2000 AND DECEMBER 31, 1999 ....... 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE-MONTH PERIODS
ENDED APRIL 1, 2000 AND MARCH 27, 1999 ................................................ 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THREE-MONTH PERIODS ENDED APRIL 1, 2000 AND MARCH 27, 1999 ............................ 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS................................... 6
REPORT OF INDEPENDENT ACCOUNTANTS...................................................... 9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION..............................................................................10
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.......................................................15
SIGNATURE............................................................................................16
EXHIBIT INDEX........................................................................................17
</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>
<CAPTION>
(UNAUDITED)
APRIL 1, 2000 DECEMBER 31, 1999
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ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $18,065,984 $15,555,810
Short term investments 16,915,641 13,516,676
Accounts receivable:
Trade 11,533,433 10,865,244
Other 493,623 335,155
Inventories 20,159,241 17,335,747
Prepaid expenses and deposits 442,513 461,934
Deferred tax assets 575,251 575,251
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TOTAL CURRENT ASSETS 68,185,686 58,645,817
Long term investments 6,315,000 2,850,000
Property and equipment, net 5,143,345 4,337,115
Deferred tax assets 367,626 367,626
Patents and other assets 84,564 1,396
================================================================================================================
TOTAL ASSETS $80,096,221 $66,201,954
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,208,428 $ 911,769
Accrued expenses 1,214,814 1,222,866
Accrued salaries and wages 1,043,380 2,209,473
Royalties payable 944,526 793,689
Income taxes payable 2,409,928 2,443,609
Deferred income 2,494,264 1,106,483
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TOTAL CURRENT LIABILITIES 10,315,340 8,687,889
Deferred tax liabilities 9,950 9,950
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TOTAL CURRENT LIABILITIES 10,325,290 8,697,839
Shareholders' equity:
Common stock, $.20 par value; authorized shares,
25,000,000; issued shares, 12,740,916 and 12,102,280,
respectively
2,548,183 2,420,456
Additional paid-in capital 35,743,043 28,828,568
Treasury stock, at cost, 386,800 shares, respectively (3,164,975) (3,164,975)
Retained earnings 34,644,680 29,420,066
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TOTAL SHAREHOLDERS' EQUITY 69,770,931 57,504,115
================================================================================================================
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $80,096,221 $66,201,954
================================================================================================================
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements
3
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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS ENDED
APRIL 1, 2000 MARCH 27, 1999
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<S> <C> <C>
REVENUES $22,417,535 $11,120,345
COST OF PRODUCT SALES 8,371,660 4,751,944
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GROSS PROFIT 14,045,875 6,368,401
OPERATING EXPENSES:
Selling and marketing 2,383,683 1,398,441
General and administrative 1,377,723 1,048,436
Research and development 2,590,668 1,875,678
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Total operating expenses 6,352,074 4,322,555
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INCOME FROM OPERATIONS 7,693,801 2,045,846
Interest and other income, net 469,813 271,214
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INCOME BEFORE INCOME TAXES 8,163,614 2,317,060
Provision for income taxes 2,939,000 831,000
================================================================================================
NET INCOME $ 5,224,614 $ 1,486,060
================================================================================================
EARNINGS PER SHARE INFORMATION:
Weighted average shares of common stock and equivalents:
Basic 12,218,591 11,575,638
Diluted 13,546,166 11,759,404
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Net income per common and common equivalent shares:
Basic $ .43 $ .13
Diluted $ .39 $ .13
================================================================================================
</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)
<TABLE>
<CAPTION>
Three Months Ended
April 1, 2000 March 27, 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,224,614 $ 1,486,060
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 375,036 268,445
Changes in assets and liabilities:
Increase in accounts receivable-trade (668,189) (1,667,864)
Increase in accounts receivable-other (158,468) (42,887)
Increase in inventories (2,823,494) (1,233,552)
Increase in prepaid expenses and other assets (63,747) (15,520)
Increase in accounts payable 1,296,659 602,203
Increase (decrease)in accrued expenses and deferred income 1,379,729 (232,610)
Increase (decrease) in royalties payable 150,837 (122,132)
Decrease in accrued salaries and wages (1,166,093) (458,144)
(Decrease) increase in income taxes payable (33,681) 504,241
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Net cash provided by (used in) operating activities 3,513,203 (911,760)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption/maturity of investments 2,327,854 2,200,383
Purchase of investments (9,191,819) (276,187)
Capital expenditures (1,181,266) (392,016)
Purchase of treasury stock -- (941,600)
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Net cash (used in) provided by investing activities (8,045,231) 590,580
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options including related tax 7,042,202 211,200
benefits
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Net cash provided by financing activities 7,042,202 211,200
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Net increase (decrease) in cash and cash equivalents 2,510,174 (109,980)
Cash and cash equivalents at beginning of period 15,555,810 8,311,353
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Cash and cash equivalents at end of period $18,065,984 $ 8,201,373
=====================================================================================================================
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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
April 1, 2000 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, 1999. 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 April 1, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
2. INVENTORIES
At April 1, 2000 and December 31, 1999, inventory consisted of the following:
<TABLE>
<CAPTION>
(Unaudited)
April 1, December 31,
2000 1999
----------- ------------
<S> <C> <C>
Raw materials . . . . . . . $ 8,422,937 $ 8,173,299
Work in progress. . . . . . 9,969,110 7,410,203
Finished goods. . . . . . . 1,767,194 1,752,245
---------- -----------
$20,159,241 $17,335,747
=========== ===========
</TABLE>
3. SHORT-TERM AND LONG-TERM INVESTMENTS
Short-term investments at April 1, 2000 and December 31, 1999 consisted of
individual municipal bonds 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. Long-term investments are comprised of individual
municipal bonds with a maturity of more than one year but less than eighteen
months. 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. Realized gains and losses are computed
using the specific identification method.
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4. INCOME PER COMMON SHARE
Net income per share is calculated by dividing net income by the weighted
average number of common shares plus incremental common stock equivalent shares
(shares issuable upon exercise of stock options). Incremental common stock
equivalent shares are calculated for each measurement period based on the
treasury stock method, which uses the monthly average market price per share.
The calculation of net income per common and common equivalent shares follows
(unaudited):
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Three Months Three Months
Ended Ended
April 1, 2000 March 27, 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Net income $5,224,614 $1,486,060
--------------------------------------------------------------------------------
Common and common equivalent shares:
Weighted average number of
common shares outstanding
during the period......................... 12,218,591 11,575,638
Common shares issuable upon exercise of
outstanding stock options:
Diluted................................ 1,327,575 183,766
Common and common equivalent shares
Outstanding during the period:
---------------------------------------------------------------------------------
Diluted................................ 13,546,166 11,759,404
---------------------------------------------------------------------------------
Earnings per share data
Net income per common and common Equivalent
shares:
Basic.................................. $ .43 $ .13
Diluted................................ $ .39 $ .13
</TABLE>
7
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5. STOCK SPLIT
On February 10, 2000, the Company's Board of Directors authorized a two-for-one
stock split of the Company's common stock, payable in the form of a 100 percent
stock dividend. On March 20, 2000 shareholders of record received one additional
share of common stock for each share of common stock held of record on February
28, 2000. The split has been reflected in the accompanying condensed
consolidated financial statements, and all references as to the number of common
shares and per share information have been restated assuming the split had
occurred at the beginning of the earliest period presented.
6. DEFERRED INCOME
Deferred income as of April 1, 2000 of $2,494,264 primarily represents product
shipments of certain components of the Company's DigiTest centralized network
test platform hardware to one of the Company's customers through the first
quarter of 2000 that were awaiting final customer acceptance pending receipt of
certain independent third party laboratory certification approvals. Revenues and
corresponding income related to this sale have been deferred and will be
recognized when final customer acceptance has occurred.
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REVIEW 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 April 1, 2000, and the
related condensed consolidated statements of operations and cash flows for the
three month period ended April 1, 2000 and March 27, 1999. 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 interim financial statements
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of Tollgrade
Communications, Inc. and subsidiaries as of December 31, 1999 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 24,
2000, except for Note 2, which is as of March 20, 2000, 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, 1999, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
April 12, 2000
9
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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 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 Tollgrade Communications,
Inc.'s (the "Company") present expectations or beliefs concerning future events.
The Company cautions that such statements must be qualified by important factors
that could cause actual earnings and other results to differ materially from
those achieved in the past or those expected by the Company. These statements as
to management's beliefs, strategies, plans, expectations or opinions in
connection with Company performance, are based on a number of assumptions
concerning future conditions that may ultimately prove to be inaccurate. Such
statements must be qualified by important factors that could cause actual
earnings and other results to differ materially from those achieved in the past
or those expected by the Company. These include: rapid technological change
along with the need to continually develop new products and gain customer
acceptance and approval; the Company's dependence on a relatively narrow range
of products; competition; the Company's dependence on key employees;
difficulties in managing the Company's growth; the Company's dependence upon a
small number of large customers and certain suppliers; the Company's dependence
upon proprietary rights; 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 test system, test access and status
monitoring products for the telecommunications and cable television industries.
The Company's telecommunications proprietary test access products 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 83% of the
Company's revenue for the first quarter ended April 1, 2000 and will continue to
account for a majority of the Company's revenues for the foreseeable future.
The Company's DigiTest(R) centralized network test system platform focuses on
helping local exchange carriers conduct the full range of fault diagnosis, along
with the ability to qualify, deploy and maintain next generation services that
include Digital Subscriber Line ("DSL") service and Integrated Services Digital
Network ("ISDN") service. The Company's DigiTest system is designed to provide
complete hardware testing for POTS and local loop prequalification for DSL
services. The system currently consists of three integrated pieces of hardware,
that being the Digital Measurement Node ("DMN"), the Digital Measurement Unit
("DMU"), and the Digital Wideband Unit ("DWU"). When used in an integrated
fashion, the DigiTest system will permit local exchange carriers to perform a
complete array of central office testing including POTS, DSL line
prequalification, bridged tap detection, data rate
10
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prediction, and in-service wideband testing. Sales of the DigiTest product line
accounted for approximately 8.5% of the Company's revenue for the first quarter
of 2000.
The Company's LIGHTHOUSE(R) cable products consist of a complete cable status
monitoring system that provides a broad testing solution for the Broadband
Hybrid Fiber Coax distribution system. The status monitoring system includes a
host for user interface, control and configuration; a headend controller for
managing network communications; and transponders that are strategically located
within the cable network to gather status reports from power supplies, line
amplifiers and fiber-optic nodes. Sales of the LIGHTHOUSE product line accounted
for approximately 6.0% of the Company's revenue for the first quarter of 2000.
Through the first quarter of 2000, the Company continued to build upon and
extend its Professional Services offering to customers. The cornerstone of the
Company's Professional Services offering is the Testability Improvement
Initiatives. These services may offer the customer the opportunity to make
dramatic improvements in testability levels, while training their own staffs in
targeted geographic regions over a defined period of time. By making
improvements in the customers digital loop carrier ("DLC") testability levels,
the customers internal repair technicians can make use of automated systems to
diagnose and repair subscriber loop problems thereby automatically eliminating
the need for the involvement of several highly trained people to test and
diagnose line problems. The Professional Services business levels continued to
increase in the first quarter of 2000 but are not yet considered material to the
Company's revenue.
The Company's telecommunication product sales are primarily to the four Regional
Bell Operating Companies ("RBOCs") as well as major independent telephone
companies and to certain digital loop carrier ("DLC") equipment manufacturers.
For the first quarter ended April 1, 2000, approximately 74% of the Company's
total revenue was generated from sales to these four RBOCs, the two largest of
which comprised approximately 50% of revenues. The Company markets and sells its
cable products directly, as well as through various Original Equipment
Manufacturer ("OEM") arrangements with cable network equipment manufacturers.
The Company presently has one such OEM arrangement under contract and works
under less formal arrangements with several other OEM partners.
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 RBOCs including the RBOCs relationships with
their various organized labor groups. In addition, the markets for the Company's
new products, specifically DigiTest and LIGHTHOUSE, are highly competitive,
beyond the competition historically seen in the Company's MCU markets. Due to
the rapidly evolving market in which these products compete, additional
competitors with significant market presence and financial resources could
further intensify the competition for these products.
The Company believes that recent changes within the telecommunication
marketplace, including industry consolidation, as well as the Company's ability
to successfully penetrate certain new markets, have resulted in some discounting
and more favorable terms granted to certain customers of the Company. In
addition, the Company experienced certain customer demands to consolidate
product purchases which have translated into large bulk orders. Although the
Company will continue to strive to
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meet the demands of its customers, which include delivery of quality products at
an acceptable price and on acceptable terms, there are no assurances that the
Company will be successful in negotiating acceptable terms and conditions
pertaining to these large orders. Additionally, recent consolidations among the
RBOCs, and their ability to consolidate their inventory and product procurement
systems could cause fluctuations or delays in the Company's order patterns.
Also, recent efforts in the cable status monitoring industry to standardize
transponders among status monitoring systems could cause pricing pressure as
well as affect deployment within certain customers of the Company's cable
products. These standards, if adopted by the standards setting body, are
expected to become final in the year 2000 and may affect the Company's revenues
from such products in subsequent periods. The Company cannot predict such future
events or business conditions and the Company's results may be adversely
affected by these industry trends in the primary markets its serves.
Although international sales to date have not been significant, the Company
believes that certain international markets may offer opportunities. However,
the international telephony markets differ from those found domestically due to
the different types and configurations of equipment used by those international
communication companies to provide services. In addition, certain competitive
elements also are found internationally which do not exist in the Company's
domestic markets. These factors, when combined, have made entrance into these
international markets very difficult. From time to time, the Company has
utilized the professional services of various marketing consultants to assist in
defining the Company's international market opportunities. With the assistance
of these consultants and through direct marketing efforts by the Company, it has
been determined that its present MCU technology offers limited opportunities in
certain international markets for competitive and other technological reasons.
These markets include China (other than through an existing OEM relationship),
Europe and the Pac Rim countries. There can be no assurance that any continued
efforts by the Company 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 12% for the first quarter ended April 1, 2000. The
Company expects its research and development expenses to continue at significant
levels.
RESULTS OF OPERATIONS - FIRST QUARTER
REVENUES
Revenues for the first quarter of 2000 of $22,417,535, were $11,297,190, or
101.6%, higher than the revenues of $11,120,345 reported for the first quarter
of 1999. The increase in revenues for the first quarter of 2000 was primarily
attributable to an increase in unit volume sales of core MCU line testing
products to US West associated with that company's continued effort to improve
testability in selected states, as well as to BellSouth associated with their
program to upgrade select DLC systems with certain regions from remote terminal
test devices to the Company's MCU technology. The current quarter also included
increased shipments of the Company's next generation DigiTest system products
primarily to Sprint under the Company's purchase agreement with Sprint North
Supply. In addition, the current quarter includes increased sales of the
Company's LIGHTHOUSE Cable Status Monitoring System to RCN Corporation and AT&T
Broadband and Internet Services (AT&T BIS), as well as to ANTEC, an Original
Equipment Manufacturer of cable network products. Additionally, the current
quarter also
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included increased billings related to the Company's Professional Service
business. 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.
GROSS PROFIT
Gross profit for the first quarter of 2000 was $14,045,875 compared to
$6,368,401 for the first quarter of 1999, representing an increase of
$7,677,474, or 120.6%. Gross profit as a percentage of revenues increased to
62.7% in the first quarter of 2000, compared to 57.3% in the same quarter last
year. The overall increase in gross profit resulted primarily from the increased
sales levels, while improvements in gross margin as a percentage of sales were a
result of a favorable sales mix in relation to higher-margined products, as well
as increased sales volumes and associated manufacturing efficiencies.
SELLING AND MARKETING EXPENSE
Selling and marketing expense for the first quarter of 2000 was $2,383,683
compared to $1,398,441 for the first quarter of 1999. This increase of $985,242,
or 70.5%, is primarily due to an increase in the number of sales and marketing
personnel to support new product introductions and enhance customer support, as
well as an increase in commissions associated with the increased sales level
during the current quarter. In addition, the current quarter includes increased
spending on advertising, promotion and related marketing activities. As a
percentage of revenues, selling and marketing expenses decreased to 10.6% in the
first quarter of 2000 from 12.6% in the first quarter of 1999.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense for the first quarter of 2000 was $1,377,723,
an increase of $329,287, or 31.4%, from the $1,048,436 recorded in the first
quarter of 1999. The increase in general and administrative expense primarily
reflects increases in certain performance-based compensation reserves, certain
professional service fees, as well as various recruiting-related expenditures.
As a percentage of revenues, general and administrative expenses decreased to
6.1% in the first quarter of 2000 from 9.4% in the first quarter of 1999.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense in the first quarter of 2000 was $2,590,668, an
increase of $714,990, or 38.1%, over the $1,875,678 recorded in the first
quarter of 1999. The increase is primarily associated with additional personnel
and related development costs associated with developing new products and new
technologies and enhancing features of existing products. The new personnel were
hired for positions in design engineering, hardware and software development,
engineering support, and test engineering. In addition, research and development
expenses reflect an increase in certain performance-based compensation reserves
associated with the Company's management incentive compensation program. As a
percentage of revenues, research and development expense decreased to 11.6% in
the first quarter of 2000 from 16.9% in the first quarter of 1999.
INTEREST AND OTHER INCOME
Interest and other income consists primarily of interest income. For the first
quarter of 2000, interest and other income was $469,813 compared to $271,214 for
the first quarter of 1999, representing an
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increase of $198,599, or 73.2%. This increase is primarily a result of
additional funds available for investment purposes during the current period.
PROVISION FOR INCOME TAXES
The provision for income taxes for the first quarter of 2000 was $2,939,000, an
increase of $2,108,000, or 253.7%, from the $831,000 for the first quarter of
1999. The effective income tax rate for the first quarter of 2000 was
approximately 36.0% of pretax income, which is comparable to the effective tax
rate for the first quarter of 1999.
NET INCOME AND EARNINGS PER SHARE
As a result of the above factors, net income for the first quarter of 2000 was
$5,224,614, an increase of $3,738,554, or 251.6%, from the $1,486,060 recorded
in the first quarter of 1999. Basic and diluted earnings per common share of
$.43 and $.39, respectively, for the first quarter of 2000 increased by $.30 and
$.26, or 230.8% and 200.0%, from the $.13 and $.13, respectively, earned in the
first quarter of 1999. Basic and diluted weighted average common and common
equivalent shares outstanding were 12,218,591 and 13,546,166, respectively, in
the first quarter of 2000 compared to 11,575,638 and 11,759,404, respectively,
in the first quarter of 1999. The increase in the weighted average equivalent
shares resulted from an increase in the average share price between periods. As
a percentage of revenues, net income for the first quarter of 2000 increased to
23.3% compared to the 13.4% for the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
At April 1, 2000, the Company had working capital of $57,870,346 which
represented an increase of $7,912,418, or 15.8%, from the $49,957,928 of working
capital as of December 31, 1999. The increase in working capital can be
attributed primarily to operating cash flow (income from operations before
depreciation and amortization) and proceeds from the exercise of stock options
exceeding requirements for purchases of property and equipment. Significant
components of the Company's change in working capital include an increase in
inventories of $2,823,494 associated primarily with increases in raw materials
and work-in-process to support the new product introductions of the Company's
DigiTest and LIGHTHOUSE cable status monitoring system as well as an increase in
MCU related inventory to support certain project related customer programs.
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.
BACKLOG
The Company's backlog consists of firm customer purchase orders for the
Company's various products and services. As of April 1, 2000, the Company had a
backlog of $15,191,025 compared to $12,115,608 at December 31, 1999 and
$1,096,206 at March 27, 1999. The backlog as of April 1, 2000, included
approximately $3,600,000 of certain DigiTest hardware component shipments
through the first quarter of 2000 that were awaiting final customer acceptance
pending receipt of certain independent third party laboratory certification
approvals. The majority of the backlog is expected to be recognized as revenue
in the second quarter of 2000. 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
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
------- -----------
15 Letter re unaudited interim financial information
27 Financial Data Schedule
(b) Reports on Form 8-K:
On February 11, 2000, the Company filed a report on Form 8-K announcing
that on February 10, 2000, the Company's Board of Directors authorized a
two-for-one stock split of the Company's common stock , payable in the form of a
100 percent stock dividend. On March 20, 2000, shareholders of record received
one additional share of common stock for each share of common stock held of
record on February 28, 2000.
15
<PAGE> 16
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 12, 2000 /s/ CHRISTIAN L. ALLISON
-------------------------------------------
CHRISTIAN L. ALLISON
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Dated: May 12, 2000 /s/ SAMUEL C. KNOCH
-------------------------------------------
SAMUEL C. KNOCH
CHIEF FINANCIAL OFFICER AND TREASURER
Dated: May 12, 2000 /s/ BRADLEY N. DINGER
-------------------------------------------
BRADLEY N. DINGER
CONTROLLER
16
<PAGE> 17
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit
Number Description
------- -----------
15 Letter re unaudited interim financial information
27 Financial Data Schedule
17
<PAGE> 1
EXHIBIT 15
May 11, 2000
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
2). Form S-8 (Registration No. 333-52907) 1998 Employee Incentive
Compensation Plan
Ladies and gentlemen:
We are aware that our report dated April 12, 2000 on our review of interim
financial information of Tollgrade Communications, Inc. and subsidiaries as of
and for the three month period ended April 1, 2000 and in the Company's
quarterly report on Form 10-Q for the quarter then ended is incorporated by
reference in the registration statements referred to above.
Very truly yours,
/s/ PricewaterhouseCoopers LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE FIRST QUARTER ENDED APRIL 1, 2000, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0001002531
<NAME> TOLLGRADE COMMUNICATIONS, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> APR-01-2000
<CASH> 18,065,984
<SECURITIES> 16,915,641
<RECEIVABLES> 11,711,244
<ALLOWANCES> 177,811
<INVENTORY> 20,159,241
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<COMMON> 2,548,183
<OTHER-SE> 67,222,748
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