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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
COMMISSION FILE NUMBER 0-27312
TOLLGRADE COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1537134
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
493 NIXON ROAD, CHESWICK, PENNSYLVANIA 15024
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 412-820-1400
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.20 PER SHARE
(Title of Class)
Indicate by a 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
Registration was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-----
The Registrant estimates that as of March 10, 2000, the aggregate market value
of shares of the Registrant's Common Stock held by non-affiliates (excluding for
purposes of this calculation only,441,160 shares of Common Stock held of record
or beneficially by the executive officers and directors of the Registrant as a
group) of the Registrant was $767,763,343.
As of March 10, 2000, the Registrant had outstanding 12,737,670 shares of its
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of Form 10-K into which
Document Document is incorporated
Portions of the Annual Report to Shareholders
for the year ended December 31, 1999 II and IV
Portions of the Proxy Statement to be distributed
in connection with the 2000 Annual
Meeting of Shareholders III
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PART I
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
The statements contained in this Annual Report on Form 10-K, specifically those
contained in Item 1 Business and Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operation, and statements incorporated by
reference into this Form 10-K from the 1999 Annual Report to Shareholders, along
with statements in other reports filed with the Securities and Exchange
Commission, external documents and oral presentations, 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 present
expectations or beliefs of Tollgrade Communications, Inc. (the "Company")
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. Those factors which specifically relate to the Company's
business include the following: rapid technological change along with the need
to continually develop new products and gain customer acceptance and approval;
dependence on a relatively narrow range of products; competition; dependence on
key employees; difficulties in managing the Company's growth; dependence upon a
small number of large customers; dependence on certain suppliers; proprietary
rights and risks of third party claims of infringement; and government
regulation.
ITEM 1. BUSINESS.
The Company was incorporated in Pennsylvania in 1986 and began
operations in 1988. Its principal offices are located at 493 Nixon Road,
Cheswick, Pennsylvania 15024 and its telephone number is (412) 820-1400.
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. POTS lines comprise the vast majority
of lines in service today throughout the world. In addition to traditional voice
service, POTS includes lines for popular devices such as computer modems and fax
machines. POTS excludes the more complex lines, such as data communications
service lines, commonly referred to as "special services."
In general, POTS line test systems, which are located at telephone
companies' central offices, focus on helping local exchange carriers conduct the
full range of fault diagnosis in the "local loop", which is the portion of the
telephone network which connects end users to a telephone company's central
office. In addition, these line test systems have the ability to remotely
qualify, deploy and maintain next generation services that include Digital
Subscriber Line (DSL) service and Integrated Services Digital Network (ISDN)
service. These test systems reduce the time needed to identify and resolve
problems and eliminate or reduce the cost of dispatching a technician to the
problem site. Most POTS line test systems were designed for use over copper
wireline only, so that the introduction of fiber-optic technology into the local
loop renders it inaccessible to these test systems. The Company's metallic
channel unit (MCU(R)) products solve this problem by extending test-system
access through the fiber-optic portion into the copper portion of the local
loop. In addition, the Company's DigiTest(R) system is designed to provide
complete hardware testing for POTS and local loop prequalification for DSL
service.
Products. The Company's MCU products plug into the digital loop
carrier (DLC) systems that are large systems manufactured by equipment vendors
such as Lucent (formerly part of AT&T), that are used by telephone companies to
link the copper and fiber-optic portions of the local loop. DLC systems are
located at the telephone company central offices and at remote sites within a
local user area, and effectively multiplex the services of the copper
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lines into a single fiber-optic line. In many instances, several DLC systems are
located at a single remote site to serve several thousand different end-user
homes and offices. Generally, for every DLC remote site, two MCU line testing
products are deployed. To ensure compatibility with these DLC systems, the
Company pays royalties pursuant to license agreements for the use of proprietary
design integrated circuits (PDICs). The PDICs are the design and property of the
DLC system manufacturer from which they are purchased. The Company maintains
license agreements with and pays royalties to Lucent Technologies, Fujitsu
Network Transmission Systems, Inc., NEC America, Inc. and Reliance Comm/Tec
Corporation. In general, the current terms for expiration of these agreements
range at various times between August 2000 and an indefinite duration, with
renewal provisions (unless earlier terminated) for periods of between one and
five years. In addition, certain of these agreements can be terminated prior to
renewal. The Company incurred $2,014,000, $1,904,000 and $1,895,000 respectively
in 1997, 1998 and 1999 as royalties under the license agreements, which
royalties are calculated either based on a percentage of the list price of the
MCU products or a fixed amount per unit which incorporate the technology
licensed under each such agreement. Certain of the license agreements require
the Company to maintain the confidentiality of the licensor's proprietary
information and/or the terms and conditions of the agreement itself. In
addition, the Company maintains license agreements that do not contain royalty
provisions with Advanced Fibre Communications, Alcatel USA Sourcing, L.P;
(formerly DSC Technologies Corporation), Northern Telecom Inc., UTSTARCOM, Inc.,
Next Level Communications and SAGEM SA (a French corporation). The expiration
dates of these agreements range at various times between May 2000 and November
2004, with renewal provisions (unless earlier terminated) for periods of one or
more years. Future license agreements entered into by the Company may contain
terms comparable to, or materially different than, the terms of existing
agreements as competitive and other conditions warrant. The loss of PDICs
license agreements or the inability of the Company to maintain an adequate
supply of PDICs could have a material adverse effect on the Company's business.
Other MCU technology is also used with home and business alarm systems. As with
home service line testing, home alarm systems must be monitored from the alarm
company's headquarters along a hybrid copper and fiber-optic line. The Company's
alarm-related MCU products are used to facilitate the transport of analog alarm
signals from subscriber homes to alarm company monitoring stations across the
hybrid telephone network. These units plug into equipment at both central office
and remote locations. MCU products accounted for more than 94%, 90% and 74% of
the Company's sales in 1997, 1998 and 1999, respectively.
The Company's DigiTest system provides complete hardware testing
for POTS and local loop prequalification for DSL services. The DigiTest product
line is designed to work in conjunction with the major Operation Support System
(OSS) equipment manufacturers. DigiTest's compact digital measurement unit (DMU)
which resides in the central office, qualifies local loops through load coil
detection, identification, and location. The DMU is designed to act as the test
head in the system, with the ability to determine subscriber-line
characteristics for POTS and DSL. The DigiTest system also includes the Digital
Measurement Node (DMN), which consists of a metal-chassis, backplane and an
alarm/fuse card. In addition, the Company has introduced its Digital Wideband
Unit (DWU) as part of the Company's DigiTest next-generation testing platform.
The DWU enables the DigiTest system to identify and locate bridge taps up to
18,000 feet, and measure crosstalk and wideband noise, all important factors in
the prequalification and in-service maintenance of local loops for DSL service.
To ensure interoperability with these OSS systems, the Company pays royalties
pursuant to license agreements for the use of certain network interface
information to Lucent Technologies and Nortel Networks Corporation. In general,
the current terms for expiration of these agreements range at various times
between July 2002 and September 2003, with renewal provisions (unless earlier
terminated) for a period of one year. The Company incurred $0, $0, and $116,000
respectively in 1997, 1998 and 1999 as royalties under the license agreements,
which royalties are calculated based on a percentage of the sale price of the
DMU product which incorporate the technology licensed under each such agreement.
The license agreements require the Company to maintain the confidentiality of
the licensor's proprietary information and/or the terms and conditions of the
agreement itself.
The Company's cable products consist of a complete cable status
monitoring system that provides a comprehensive testing solution for the
Broadband Hybrid Fiber Coax distribution system. The status monitoring system
consists of 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
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power supplies, line amplifiers and fiber-optic nodes. The Company has entered
into a license agreement with C-Cor Electronics, Inc. (a cable television
systems developer) in which the Company provides its status monitoring
transponder technology that is incorporated into C-Cor's cable network
management system. The Company, under certain other business arrangements, also
markets and sells its cable products directly as well as through various OEM
customers such as ANTEC and Motorola (formerly General Instrument).
Product and Technology Development. The Company's product
development personnel are organized into teams, each of which is effectively
dedicated to a specific product line(s) or technology. Each product team also
implements the Company's ongoing value engineering programs which are designed
to replace the Company's products with successive generations having additional
features and/or lower costs. The Company continuously monitors developing
technologies in order to introduce products as defined standards and markets
emerge. In addition, the Company continues to investigate the development of new
applications for its MCU technology and other technologies to service the
telecommunications industry. During 1997, 1998 and 1999, research and
development expenses were approximately $5,945,000, $6,880,000 and $8,757,000,
respectively.
Proprietary Rights. The names "Tollgrade(R)", "MCU(R)",
LIGHTHOUSE(R), DigiTest (R) and "Micro-Bank(R)", and the Company's corporate
logo are registered trademarks of the Company. "Team Tollgrade(SM)" is a service
mark of the Company. The Company has also applied for trademark registration for
Telaccord(TM)". The Company has obtained three United States patents on the MCU
products with expiration dates ranging from 2010 to 2014 and a United States
patent on a cable product which expires in 2016. In addition, the Company has
one U.S. provisional, two United States, one Canada and three international
patent cooperation treaty (PCT) patent applications pending. The Company will
seek additional patents from time to time related to its research and
development activities. The Company protects its trademarks, patents,
inventions, trade secrets, and other proprietary rights by contract, trademark,
copyright and patent registration, and internal security.
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Customers. The Company's primary telecommunication customers are
the four regional Bell operating companies ("RBOCs"), which are Bell Atlantic
Corporation, BellSouth Corporation, SBC Communications Inc., and US WEST Inc.,
as well as major independent telephone companies. Sales to the RBOCs accounted
for approximately 59% in 1999. BellSouth Corporation and US West Inc. accounted
for approximately 17% of the Company's sales in 1999. In addition, sales to
Nortel Networks Corporation accounted for approximately 11% of the Company's
sales in 1999. The Company's primary cable products are sold on a direct basis
as well as to certain cable Original Equipment Manufacturer ("OEM") customers
such as C-Cor.net Corp. (formerly C-Cor Electronics, Inc.), ANTEC Corporation
and Motorola, Inc. (formerly General Instrument). Sales of the Company's cable
products in 1999 were approximately 7% of total revenues. The Company's
relationships with its customers are material to the Company's business, and the
loss of any such relationship could have a material adverse effect on the
Company's business.
Manufacturing. The Company's manufacturing operations consist
primarily of quality control, functional testing, final assembly, burn-in and
shipping. The Company is ISO 9001 registered from the British Standards
Institution, Inc. ISO 9000 is a harmonized set of standards that define quality
assurance management. Written by the International Organization for
Standardization (ISO), it is recognized throughout the United States, Canada,
the European Union and Japan. To be registered, the Company develops and
maintains internal documentation and processes to support the production of
quality products to ensure customer satisfaction.
The Company utilizes two key independent subcontractors to perform
a majority of the circuit board assembly and in-circuit testing work on its
products. The Company also utilizes other subassembly contractors on a more
limited basis. The loss of the subcontractors could cause delays in the
Company's ability to meet production obligations and could have a material
adverse effect on the Company's results of operations. In addition, shortages of
raw material to, or production capacity constraints at, the Company's
subcontractors could negatively affect the Company's ability to meet its
production obligations and result in increased prices for affected parts. Any
such reduction may result in delays in shipments of the Company's products or
increases in the price of components, either of which could have a material
adverse impact on the Company.
The Company currently procures all of its components from outside
suppliers. Generally, the Company uses industry standard components for its
products. Application specific integrated circuits (ASICs) are a key component
to the manufacturing process and are custom made to the Company's
specifications. Although the Company has generally been able to obtain ASICs on
a timely basis, a delay in the delivery of these components could have a
material adverse impact on the Company.
Backlog. The Company's backlog at December 31, 1999 was
approximately $12.1 million, as compared to approximately $0.6 million at
December 31, 1998. The Company's backlog consists of firm customer purchase
orders for the Company's various products. The backlog at December 31, 1999 also
includes approximately $1.4 million related to shipments of certain DigiTest
hardware components to a customer in the fourth quarter of 1999 which were
awaiting customer acceptance at December 31, 1999. Such acceptance was
predicated on the customer receiving final certification approvals from an
independent third party laboratory. Revenue and income related to this sale has
been deferred and will be recognized when final customer acceptance has
occurred. 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. Because of the quick turnaround that the customers expect
on their orders, which is sometimes one to two weeks, and because of the
possibility of customer changes in delivery schedules or cancellation of orders,
the Company's backlog as of any particular date may not be indicative of actual
revenues expected for any future period.
Competitive Conditions. The market for telecommunications and cable
television equipment is highly competitive. The deciding competitive factors in
the Company's market include price, product features, performance, reliability,
service and support, breadth of product line, technical documentation and prompt
delivery. The Company believes that it competes favorably on all of these
factors, and certain of its products have proprietary or patented
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features. The Company also attempts to enter into development agreements for its
MCU products with the manufacturers of DLC and other complex systems, which
serves to ensure compatibility for its products. Competition would increase if
new companies enter the Company's product markets or existing competitors expand
their product lines. For instance, the telecommunications reform legislation has
lifted the restrictions that previously prevented the RBOCs from manufacturing
telecommunications equipment. Pursuant to this legislative reform, the RBOCs,
which are the Company's largest customers, may become competitors of the Company
in the markets served by the Company.
For the Company's line-testing MCU devices, the primary competitive
products are the remote monitoring units made by Teradyne, Inc. and the Harris
Communications Product division of Harris Communications, Inc. In addition, the
Anritsu Wiltron Test and Measurement Group, a division of Anritsu Corporation,
offers the Wiltron LoopMATE, a modular remote test head, which competes with the
Company's POTS testing capabilities. The Company believes the MCU is simpler and
less costly to install and permits the full complement of centralized testing to
be performed as quickly and accurately as with copper by-pass wiring. The
alarm-related MCU product's primary competitor is the Turbo 2000 unit made by
ANTEC Corporation. The primary competitors for the Company's DigiTest product
line include Harris Corporation, Hekimian Laboratories and Turnstone Systems,
Inc. For the Company's cable products, the primary competitors for status
monitoring are Cheetah Technologies and AM Communications, Inc.
Employees. At December 31, 1999, the Company had 282 full-time
employees, all in the United States. None of the Company's employees are
represented by a collective bargaining agreement.
Government Regulation. The telecommunications industry is subject
to regulation in the United States and other countries. Federal and state
regulatory agencies, including the FCC and various state public utility
commissions and public service commissions, regulate most of the Company's
domestic customers. While such regulation does not typically affect the Company
directly, the effects of such regulations on the Company's customers may, in
turn, adversely impact the Company's business and operating results.
Governmental authorities also have promulgated regulations which, among other
things, set installation and equipment standards for private telecommunications
systems and require that all newly installed hardware be registered and meet
certain government standards.
ITEM 2. PROPERTIES.
The Company's headquarters and principal administrative,
engineering and assembly facilities are located in Cheswick, Pennsylvania and
occupy approximately 104,400 square feet. The Company occupies its current
facilities under a lease that expires in December, 2001 with an option to renew
the term of the lease for one additional period of three years. The Company
believes that its current facilities are adequate to support its present level
of operations and there is ample room to support continued sales growth for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
There are currently no outstanding or pending material legal
proceedings with respect to the Company or its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of 1999, there were no matters submitted
to a vote of security holders through solicitation of proxies or otherwise.
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EXECUTIVE OFFICERS OF THE COMPANY
Information relating to the executive officers of the Company as of January 31,
2000 is set forth below:
Christian L. Allison Chairman of the Board, since April 1998; Chief
Executive Officer since September 1995; also Treasurer
from May 1992 until April 1997; also Secretary from
May 1992 until April 1996; President since October
1993; Age 38.
Sara M. Antol Chief Counsel and Secretary since April 1996; prior
thereto, employed by the law firm of Babst, Calland,
Clements and Zomnir, P.C.; Age 38.
Robert L. Cornelia Executive Vice President, Operations since May 1996;
prior thereto; Vice President, Manufacturing; Age 37.
Bradley N. Dinger Controller since September 1996; prior thereto,
Assistant Controller of AMSCO International, Inc.
(manufacturer of health care equipment); Age 37.
Herman Flaminio Executive Vice President, Marketing Services, Planning
and Technical Support since July 1997; prior thereto,
Senior Vice President, Marketing and Strategic
Products; brother of Rocco L. Flaminio, Vice Chairman,
Chief Technology Officer and a Director; Age 60.
Rocco L. Flaminio Vice Chairman and Chief Technology Officer; brother of
Herman Flaminio, Executive Vice President; Age 75.
Mark C. Frey Senior Vice President, Access Products since 1993; Age
46.
Samuel C. Knoch Chief Financial Officer since August 1996; Treasurer
since April 1997; Controller of AMSCO International,
Inc. (manufacturer of health care equipment) from
October 1994 until August 1996; Age 43.
Joseph G. O'Brien Senior Vice President, Human Resources since October
1997; Director of Employee Development from April 1997
until October 1997; Coordinator, Elderberry Junction,
Goodwill Industries (a charitable organization) from
May 1995 until April 1997; prior thereto, Director of
Public Relations of Goodwill Industries from June 1994
until May 1995; Age 40.
Timothy D. O'Brien Director of Communications since August 1997; Vice
President of Ketchum Public Relations ( a public
relations firm) from November 1995 until August 1997;
prior thereto, Account Supervisor at Ketchum; Age 39.
Mark B. Peterson Executive Vice President, Sales and Marketing since
November 1999; Executive Vice President, Sales from
October 1997 until November 1999; prior thereto,
Testing Application Group product manager (MLT and
Switched Access Remote Test Systems (SARTS) product
lines) of Lucent Technologies (a manufacturer of
communication systems, software and products and
formerly AT&T Bell Laboratories) from October 1995
until October 1997; prior thereto, various other
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management level positions at Lucent in systems
engineering, hardware design, system test and product
management; Age 39.
Matthew J. Rosgone Senior Vice President, Purchasing/Manufacturing since
July 1998; Vice President, Purchasing from July 1996
until July 1998; Director of Purchasing from July 1995
until July 1996; prior thereto, Buyer; Age 31.
Roger A. Smith Senior Vice President, Test Systems since July 1998;
Engineering Manager from June 1997 until July 1998;
Senior Software Engineer from June 1996 until June
1997; prior thereto, Senior Software Development
Engineer of Caldon Inc., (a manufacturer of ultrasonic
flow meters for nuclear power industry); Age 39.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS.
Information relating to the market for the Company's Common Stock and
other matters related to the holders thereof is set forth under the caption
"Common Stock Market Price" on page 27 of the Company's 1999 Annual Report to
Shareholders and is incorporated herein by reference.
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 or about March 20, 2000, shareholders of record
will receive one additional share of common stock for each share of common stock
held of record on February 28, 2000.
ITEM 6. SELECTED FINANCIAL DATA.
A summary of selected financial data for the Company, including each of
the last five fiscal years in the period ended December 31, 1999, is set forth
under the caption "Selected Consolidated Financial Data" on page 6 of the
Company's 1999 Annual Report to Shareholders and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
A discussion of the Company's financial condition and results of
operations is set forth under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" on pages 7 through 13 of the
Company's 1999 Annual Report to Shareholders and is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements, together with the
report thereon of PricewaterhouseCoopers LLP, are set forth on pages 15 through
26 of the Company's 1999 Annual Report to Shareholders and are incorporated
herein by reference. Such financial statements and supplementary data are listed
in Item 14(a) (1), Exhibits, Financial Statement Schedules, and Reports on Form
8-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
In addition to the information reported in Part I of this Form 10-K,
under the caption "Executive Officers of the Company," the information required
by this item appears beneath the caption "Election of Directors" in the
Company's definitive proxy statement for its 2000 Annual Meeting of Shareholders
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information relating to executive compensation is set forth beneath the
caption "Executive Compensation" in the Company's definitive proxy statement for
its 2000 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information relating to the security ownership of beneficial owners of
5% or more of the Common Stock and of the executive officers and directors of
the Company is set forth under the caption "Stock Ownership of Management and
Certain Beneficial Owners" in the Company's definitive proxy statement for its
2000 Annual Meeting of Shareholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information relating to certain relationships and related transactions
is set forth beneath the caption "Certain Relationships and Related
Transactions" in the Company's definitive proxy statement for its 2000 Annual
Meeting of Shareholders and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) The following financial statements and supplementary data are
incorporated in Item 8 of Part II of this Form 10-K by reference to pages 14
through 27 of the Company's 1999 Annual Report to Shareholders, which are
incorporated herein by reference:
Statement of Management's Responsibility for Financial Reporting,
dated January 24, 2000
Report of Independent Accountants, dated January 24, 2000, except
for Note 2, which is as of March 20, 2000
Consolidated Balance Sheets at December 31, 1998 and 1999
Consolidated Statements of Operations for each of the three years
in the period ended December 31, 1999
Consolidated Statements of Changes in Shareholders' Equity for each
of the three years ended December 31, 1999
Consolidated Statements of Cash Flows for each of the three years
ended December 31, 1999
Notes to Consolidated Financial Statements
Statements of Operations Data by Quarter
(a)(2) The following financial statement schedule is included herewith on page
16 and made a part hereof:
Schedule II (Valuation and Qualifying Accounts)
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(a)(3) The following exhibits are included herewith and made a part hereof:
Exhibit
Number Description
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3.1 Amended and Restated Articles of Incorporation of the Company, as
amended through May 6, 1998 (conformed copy), filed as Exhibit 3.1
to the Annual Report of Tollgrade Communications, Inc. on Form 10-K
for the year ended December 31, 1998 (the "1998 Form 10-K").
3.1a Statement with Respect to Shares dated July 23, 1996 (conformed
copy), filed as Exhibit 3.1a to the 1998 Form 10-K.
3.2 Amended and Restated Bylaws of the Company, filed as Exhibit 3.2 to
the Report on Form 10-Q of the Company filed on August 10, 1999 and
incorporated herein by reference thereto.
4.1 Rights Agreement, dated as of July 23, 1996 between the Company and
Chase Mellon Shareholder Services, L.L.C., filed as Exhibit 1 to
the Company's Registration Statement on Form 8-A and incorporated
herein by reference thereto.
10.1 Common Stock Purchase Agreement dated November 7, 1994, between the
Company and the investors listed on Schedule A thereto (attachments
and exhibits omitted), filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (the "S-1") and incorporated
herein by reference thereto.
10.2* 1995 Long-Term Incentive Compensation Plan, filed as Exhibit A to
the Company's 1999 Proxy Statement and incorporated herein by
reference thereto.
10.3 License Agreement, dated August 24, 1993 between Fujitsu Network
Transmission Systems, Inc. and the Company, filed as Exhibit 10.4
to the S-1 and incorporated herein by reference thereto.
10.4 License Agreement, dated September 26, 1994 between NEC America,
Inc. and the Company, filed as Exhibit 10.5 to the S-1 and
incorporated herein by reference thereto.
10.5 Interface License Agreement, dated March 22, 1995 between Northern
Telecom Inc. and the Company, filed as Exhibit 10.7 to the S-1 and
incorporated herein by reference thereto.
10.6 Technical Information Agreement, dated February 1, 1993 between
American Telephone and Telegraph Company and the Company, filed as
Exhibit 10.8 to the S-1 and incorporated herein by reference
thereto.
10.7 Technology License Agreement, dated November 16, 1994 between DSC
Technologies Corporation and the Company, filed as Exhibit 10.12 to
the S-1 and incorporated herein by reference thereto.
10.8 License Agreement, dated August 24, 1993 between Reliance Comm/Tec
Corporation and the Company, filed as Exhibit 10.13 to the S-1 and
incorporated herein by reference thereto.
10.9* Employment Agreement, dated as of December 13, 1995, between the
Company and Christian L. Allison, filed as Exhibit 10.11 to the
Annual Report of the Company on Form 10-K for the year ended
December 31, 1995 (the "1995 Form 10-K").
10.10* Stock Option Agreement entered into December 14, 1995 between the
Company and R. Craig
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Allison, together with a schedule listing substantially identical
agreements with Gordon P. Anderson, Jeffrey Blake, John H.
Guelcher, Richard H. Heibel, Joseph T. Messina and Douglas T.
Halliday, filed as Exhibit 10.14 to the 1995 Form 10-K.
10.11* Form of Stock Option Agreement dated December 14, 1995 and December
29, 1995 for Non-Statutory Stock Options granted under the 1995
Long-Term Incentive Compensation Plan, filed as Exhibit 10.15 to
the Annual Report of the Company on Form 10-K for the year ended
December 31, 1996 (the "1996 Form 10-K").
10.12* Change in Control Agreement, entered into July 17, 1997 between the
Company and Timothy O'Brien, together with a schedule listing a
substantially identical agreement with Joseph O'Brien, filed as
Exhibit 10.1 to the Report on Form 10-Q of the Company filed on
November 10, 1997.
10.13* Change in Control Agreement, entered into July 17, 1997 with
Michael D. McSparrin, together with a schedule listing
substantially identical agreements with G. Wayne Lloyd, Gary Gump,
William Gumbert and Lawrence J. Fey, filed herewith.
10.14* Change in Control Agreement, entered into October 15, 1997 between
the Company and Mark B. Peterson, filed as Exhibit 10.24 to the
1997 Form 10-K.
10.15* Change in Control Agreement, entered into July 17, 1997 between the
Company and Roger A. Smith, filed as Exhibit 10.26 to the 1998 Form
10-K.
10.16* Change in Control Agreement, entered into July 16, 1999 between the
Company and Donald J. Pavlek, filed as Exhibit 10.29 to the Report
on form 10-Q of the Company filed on August 10, 1999.
10.17* Form of Stock Option Agreement for Non-Statutory Stock Options
granted under the 1995 Long-Term Incentive Compensation Plan, filed
as Exhibit 10.2 to the Report on Form 10-Q of the Company filed on
November 12, 1996.
10.18* Form of Non-employee Stock Option Agreement entered into December
13, 1996 and December 30, 1997 between the Company and Lawrence
Arduini, filed as Exhibit 10.19 to the 1996 Form 10-K.
10.19* Amendment to Employment Agreements, dated as of December 13, 1996,
between the Company and R. Craig Allison and Christian L. Allison,
filed as Exhibit 10.20 to the 1996 Form 10-K.
10.20* Amendment to Employment Agreements, dated as of December 13, 1997,
between the Company and R. Craig Allison and Christian L. Allison,
filed as Exhibit 10.21 to the Annual Report of the Company on Form
10-K for the year ended December 31, 1997 (the "1997 Form 10-K").
10.21 Amendment, dated February 21, 1997, to Technical Information
Agreement relating to Metallic Channel Units Types A and B, dated
February 1,1993, between American Telephone and Telegraph Company
(AT&T) (licensor) and the Company (licensee) incorporated by
reference to Exhibit 10.3 to the Report on Form 10-Q of the Company
filed on November 10, 1997.
10.22* Form of Non-employee Director Stock Option Agreement with respect
to the Company's 1995 Long-Term Incentive Compensation Plan, filed
as Exhibit 10.25 to the 1997 Form 10-K.
10.23* 1998 Employee Incentive Compensation Plan, filed as Exhibit 10.27
to the 1998 Form 10-K.
12
<PAGE> 13
10.24* Amendment to Employment Agreement, dated as of December 30, 1998,
between the Company and Christian L. Allison, filed as Exhibit
10.28 to the 1998 Form 10-K.
10.25* Amendment to Employment Agreement, dated as of January 18, 2000,
between the Company and Christian L. Allison, filed herewith.
10.26* Change in Control Agreement, entered into February 9, 2000 between
the Company and Sara M. Antol, together with a schedule listing
substantially identical agreements with Robert Cornelia, Ruth
Dilts, Bradley Dinger, Herman Flaminio, Rocco Flamino, Mark Frey,
Samuel Knoch, James Price, and Matt Rosgone, filed herewith.
10.27* Change in Control Agreement, entered into December 20, 1999 between
the Company and Scott Robbins, filed herewith.
10.28* Amendment No. 1 to Change in Control Agreement, entered into
February 9, 2000 between the Company and Timothy O'Brien, together
into a schedule listing substantially identical agreements with
Joseph O'Brien, William J. Gumbert, Lawrence J. Fey, Gary Gump, G.
Wayne Lloyd, Michael D. McSparrin, Donald J. Pavlek, Mark B.
Peterson, Scott Robbins and Roger Smith, filed herewith.
13.1 Company's 1999 Annual Report to Shareholders, filed herewith.
21.1 List of subsidiaries of the Company, filed as Exhibit 21.1 to the
S-1 and incorporated herein by reference thereto.
23.1 Consent of PricewaterhouseCoopers LLP, filed herewith.
27 Financial Data Schedule
* Management contract or compensatory plan, contract or arrangement required to
be filed by item 601(b)(10)(iii) of Regulation S-K.
The Company agrees to furnish to the Commission upon request copies
of all instruments not listed above which define the rights of holders of
long-term debt of the Company.
Copies of the exhibits filed as part of this Form 10-K are
available at a cost of $.20 per page to any shareholder of record upon written
request to the Secretary, Tollgrade Communications, Inc., 493 Nixon Road,
Cheswick, Pennsylvania 15024.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1999.
None
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized as of March 27, 2000.
TOLLGRADE COMMUNICATIONS, INC.
By /s/Christian L. Allison
-----------------------
Christian L. Allison
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Company and in the capacities indicated as of March 27, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/Christian L. Allison Director, Chairman, President and Chief
- -------------------------------------------------------------- Executive Officer,
Christian L. Allison (Principal Executive Officer)
/s/James J. Barnes Director
- --------------------------------------------------------------
James J. Barnes
/s/Daniel P. Barry Director
- --------------------------------------------------------------
Daniel P. Barry
/s/David S. Egan Director
- --------------------------------------------------------------
David S. Egan
/s/Rocco L. Flaminio Director, Vice Chairman
- -------------------------------------------------------------- and Chief Technology Officer
Rocco L. Flaminio
/s/Richard H. Heibel, M.D. Director
- --------------------------------------------------------------
Richard H. Heibel, M.D.
/s/Robert W. Kampmeinert Director
- --------------------------------------------------------------
Robert W. Kampmeinert
/s/Samuel C. Knoch Chief Financial Officer and Treasurer
- -------------------------------------------------------------- (Principal Financial Officer)
Samuel C. Knoch
/s/Bradley N. Dinger Controller
- -------------------------------------------------------------- (Principal Accounting Officer)
Bradley N. Dinger
</TABLE>
14
<PAGE> 15
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors
Tollgrade Communications, Inc.:
Our audits of the consolidated financial statements referred to in our report
dated January 24, 2000, except for Note 2, which is as of March 20, 2000,
appearing in the 1999 Annual Report to Shareholders of Tollgrade Communications,
Inc. and Subsidiaries (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in the index on page 10 of this
Form 10-K. In our opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PRICEWATERHOUSECOOPERS LLP
Pittsburgh, Pennsylvania
January 24, 2000
15
<PAGE> 16
SCHEDULE II
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1997, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
Col. A Col. B Col. C Col. D Col. E
- ------ ------ ------ ------ ------
Additions
Balance at --------------------------------
Beginning Charged to Charged to Balance at
of Year Expense Other Accounts Deductions End of Year
------- ------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Inventory reserve:
Year ended December 31, 1997 $215 $ -- $ -- $(36) $179
Year ended December 31, 1998 179 88 -- -- 267
Year ended December 31, 1999 267 393 -- -- 660
Allowance for doubtful accounts:
Year ended December 31, 1997 $ -- $50 $ -- $-- $50
Year ended December 31, 1998 50 50 -- -- 100
Year ended December 31, 1999 100 100 -- (19) 181
Warranty reserve:
Year ended December 31, 1997 $200 $100 $ -- $-- $300
Year ended December 31, 1998 300 135 -- -- 435
Year ended December 31, 1999 435 165 -- -- 600
</TABLE>
16
<PAGE> 17
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Articles of Incorporation of the
Company, as amended through May 6, 1998 (conformed copy),
filed as Exhibit 3.1 to the Annual Report of Tollgrade
Communications, Inc. on Form 10-K for the year ended
December 31, 1998 (the "1998 Form 10-K"). *
3.1a Statement with Respect to Shares dated July 23, 1996
(conformed copy), filed as Exhibit 3.1a to the 1998 Form
10-K. *
3.2 Amended and Restated Bylaws of the Company, filed as
Exhibit 3.2 to the Report on Form 10-Q of the Company
filed on August 10, 1999 and incorporated herein by
reference thereto. *
4.1 Rights Agreement dated as of July 23, 1996 between the
Company and Chase Mellon Shareholder Services, L.L.C.,
filed as Exhibit 1 to the Company's Registration
Statement on Form 8-A and incorporated herein by
reference thereto. *
10.1 Common Stock Purchase Agreement dated November 7, 1994,
between the Company and the investors listed on Schedule
A thereto (attachments and exhibits omitted), filed as
Exhibit 10.1 to the Company's Registration Statement on
Form S-1 (the "S-1") and incorporated herein by reference
thereto. *
10.2 1995 Long-Term Incentive Compensation Plan, filed as
Exhibit A to the Company's 1997 Proxy statement and
incorporated herein by reference thereto. *
10.3 License Agreement, dated August 24, 1993 between Fujitsu
Network Transmission Systems, Inc. and the Company, filed
as Exhibit 10.4 to the S-1 and incorporated herein by
reference thereto. *
10.4 License Agreement, dated September 26, 1994 between NEC
America, Inc. and the Company, filed as Exhibit 10.5 to
the S-1 and incorporated herein by reference thereto. *
17
<PAGE> 18
10.5 Interface License Agreement, dated March 22, 1995 between
Northern Telecom Inc. and the Company, filed as Exhibit
10.7 to the S-1 and incorporated herein by reference
thereto. *
10.6 Technical Information Agreement, dated February 1, 1993
between American Telephone and Telegraph Company and the
Company, filed as Exhibit 10.8 to the S-1 and
incorporated herein by reference thereto. *
10.7 Technology License Agreement, dated November 16, 1994
between DSC Technologies Corporation and the Company,
filed as Exhibit 10.12 to the S-1 and incorporated herein
by reference thereto. *
10.8 License Agreement, dated August 24, 1993 between Reliance
Comm/Tec Corporation and the Company, filed as Exhibit
10.13 to the S-1 and incorporated herein by reference
thereto. *
10.9 Employment Agreement, dated as of December 13, 1995,
between the Company and Christian L. Allison, filed as
Exhibit 10.11 to the Annual Report of the Company on Form
10-K for the year ended December 31, 1995 (the "1995 Form
10-K"). *
10.10 Stock Option Agreement entered into December 14, 1995
between the Company and R. Craig Allison, together with a
schedule listing substantially identical agreements with
Gordon P. Anderson, Jeffrey Blake, John H. Guelcher,
Richard H. Heibel, Joseph T. Messina and Douglas T.
Halliday, filed as Exhibit 10.14 to the 1995 Form 10-K. *
10.11 Form of Stock Option Agreement dated December 14, 1995
and December 29, 1995 for Non-Statutory Stock Options
granted under the 1995 Long-Term Incentive Compensation
Plan, filed as Exhibit 10.15 to the Annual Report of the
Company on Form 10-K for the year ended December 31, 1996
(the "1996 Form 10-K"). *
10.12 Change in Control Agreement, entered into July 17, 1997
between the Company and Timothy O'Brien, together with a
schedule listing a substantially identical agreement with
Joseph O'Brien, filed as Exhibit 10.1 to the Report on
Form 10-Q of the Company filed on November 10, 1997. *
10.13 Change in Control Agreement, entered into July 17, 1997
with Michael D. McSparrin, together with a schedule
listing substantially identical agreements with G. Wayne
Lloyd, Gary Gump, William Gumbert and Lawrence J. Fey,
filed herewith.
18
<PAGE> 19
10.14 Change in Control Agreement, entered into October 15,
1997 between the Company and Mark B. Peterson, filed as
Exhibit 10.24 to the 1997 Form 10-K. *
10.15 Change in Control Agreement, entered into July 17, 1997
between the Company and Roger A. Smith, filed as Exhibit
10.26 to the 1998 Form 10-K. *
10.16 Change in Control Agreement, entered into July 16, 1999
between the Company and Donald J. Pavlek, filed as
Exhibit 10.29 to the Report on form 10-Q of the Company
filed on August 10, 1999. *
10.17 Form of Stock Option Agreement for Non-Statutory Stock
Options granted under the 1995 Long-Term Incentive
Compensation Plan, filed as Exhibit 10.2 to the Report on
Form 10-Q of the Company filed on November 12, 1996. *
10.18 Form of Non-employee Stock Option Agreement entered into
December 13, 1996 and December 30, 1997 between the
Company and Lawrence Arduini, filed as Exhibit 10.19 to
the 1996 Form 10-K. *
10.19 Amendment to Employment Agreements, dated as of December
13, 1996, between the Company and R. Craig Allison and
Christian L. Allison, filed as Exhibit 10.20 of the 1996
Form 10-K. *
10.20 Amendment to Employment Agreements, dated as of December
13, 1997, between the Company and R. Craig Allison and
Christian L. Allison, filed as Exhibit 10.21 to the
Annual Report of the Company on Form 10-K for the year
ended December 31, 1997 (the "1997 Form 10-K"). *
10.21 Amendment, dated February 21, 1997, to Technical
Information Agreement relating to Metallic Channel Units
Types A and B, dated February 1, 1993, between American
Telephone and Telegraph Company (AT&T) (licensor) and the
Company (licensee) incorporated by reference to Exhibit
10.3 to the Report on Form 10-Q of the Company filed on
November 10, 1997. *
10.22 Form of Non-employee Director Stock Option Agreement with
respect to the Company's Long-Term Incentive Compensation
Plan, filed as Exhibit 10.25 to the 1997 Form 10-K. *
10.23 1998 Employee Incentive Compensation Plan, filed as
Exhibit 10.27 to the 1998 Form 10-K. *
10.24 Amendment to Employment Agreement, dated as of December
30, 1998, between the Company and Christian L. Allison,
filed as Exhibit 10.28 to the 1998 Form 10-K. *
10.25 Amendment to Employment Agreement, dated as of January
18, 2000, between the Company and Christian L. Allison,
filed herewith.
10.26 Change in Control Agreement, entered into February 9,
2000 between the Company
19
<PAGE> 20
and Sara M. Antol, together with a schedule listing
substantially identical agreements with Robert Cornelia,
Ruth Dilts, Bradley Dinger, Herman Flaminio, Rocco
Flamino, Mark Frey, Samuel Knoch, James Price and Matt
Rosgone, filed herewith.
10.27 Change in Control Agreement, entered into December 20,
1999 between the Company and Scott Robbins, filed
herewith.
10.28 Amendment No. 1 to Change in Control Agreement, entered
into February 9, 2000 between the Company and Timothy
O'Brien, together into a schedule listing substantially
identical agreements with Joseph O'Brien, William J.
Gumbert, Lawrence J. Fey, Gary Gump, G. Wayne Lloyd,
Michael D. McSparrin, Donald J. Pavlek, Mark B. Peterson,
Scott Robbins and Roger Smith, filed herewith.
13.1 Company's 1999 Annual Report to Shareholders, filed
herewith.
21.1 List of subsidiaries of the Company, filed as Exhibit
21.1 to the S-1 and incorporated herein by reference
thereto. *
23.1 Consent of PricewaterhouseCoopers LLP, filed herewith.
27 Financial Data Schedule
- --------
* Incorporated by reference.
20
<PAGE> 1
Exhibit 10.13
AGREEMENT
This Agreement, made as of the 17th day of July, 1997 by and between
TOLLGRADE COMMUNICATIONS, INC., a Pennsylvania corporation (the "Corporation")
and Michael D. McSparrin, an individual residing in the Commonwealth of
Pennsylvania and an employee of the Corporation (the "Executive").
WITNESSETH:
WHEREAS, the Board of Directors of the Corporation has determined that
it is in the best interests of the Corporation to enter into this Agreement with
the Executive to provide for compensation of the Executive upon termination of
employment under certain circumstances relating to a change in control of the
Corporation; and
WHEREAS, the Executive desires to obtain such benefits in the event the
Executive's employment is terminated under the circumstances provided herein.
NOW, THEREFORE, in consideration of the covenants and premises
contained herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. DEFINITION OF TERMS. The following terms when used in this Agreement
shall have the meaning hereafter set forth:
"ANNUAL SALARY ADJUSTMENT PERCENTAGE" shall mean the mean average
percentage increase in base salary for all elected officers of the
Corporation during the two full calendar years immediately preceding
the time to which such percentage is being applied; provided however,
that if after a Change-in-Control, as hereinafter defined, there should
be a significant change in the number of elected officers of the
Corporation or in the manner in which they are compensated, then the
foregoing definition shall be changed by substituting for the phrase
"elected officers of the Corporation" the phrase "persons then
performing the functions formerly performed by the elected officers of
the Corporation."
"CAUSE FOR TERMINATION" shall mean:
(a) the deliberate and intentional failure by the Executive to
devote substantially his entire business time and best efforts
to the performance of his duties (other than any such failure
resulting from the Executive's incapacity due to physical or
mental illness or disability) after a demand for substantial
performance is delivered to the Executive by the Board of
Directors which specifically identifies the manner in which
the Board of Directors believes that the Executive has not
substantially performed his duties,
or
(b) wilfully engaging by the Executive in conduct which
constitutes a fraud against the
21
<PAGE> 2
Corporation or a material breach of this Agreement,
or
(c) the Executive's conviction of any crime which constitutes a
felony.
For purposes of this definition, no act, or failure to act, on the
Executive's part shall be considered "deliberate and intentional" or
"willfully" unless done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that his action or omission
was in the best interests of the Corporation.
"CHANGE-IN-CONTROL" shall mean the determination (which may be made
effective as of a particular date specified by the Board of Directors
of the Corporation) by the Board of Directors of the Corporation, made
by a majority vote that a change in control has occurred, or is about
to occur. Such a change shall not include, however, a restructuring,
reorganization, merger, or other change in capitalization in which the
Persons who own an interest in the Corporation on the date hereof (the
"Current Owners")(or any individual or entity which receives from a
Current Owner an interest in the Corporation through will or the laws
of descent and distribution) maintain more than a sixty-five percent
(65%) interest in the resultant entity. Regardless of the Board's vote
or whether or not the Board votes, a Change-in-Control will be deemed
to have occurred as of the first day any one (1) or more of the
following subparagraphs shall have been satisfied:
(a) Any Person (other than the Person in control of the
Corporation as of the date of this Agreement, or other than a
trustee or other fiduciary holding securities under an
employee benefit plan of the Corporation, or a corporation
owned directly or indirectly by the stockholders of the
Corporation in substantially the same proportions as their
ownership of stock of the Corporation), becomes the beneficial
owner, directly or indirectly, of securities of the
Corporation representing more than thirty five percent (35%)
of the combined voting power of the Corporation's then
outstanding securities; or
(b) The stockholders of the Corporation approve:
(i) A plan of complete liquidation of the Corporation;
(ii) An agreement for the sale or disposition of all or
substantially all of the Corporation's assets; or
(iii) A merger, consolidation, or reorganization of the
Corporation with or involving any other corporation,
other than a merger, consolidation, or reorganization
that would result in the voting securities of the
Corporation outstanding immediately prior thereto
continuing to represent (either by
22
<PAGE> 3
remaining outstanding or by being converted into
voting securities of the surviving entity) at least
sixty-five percent (65%) of the combined voting power
of the voting securities of the Corporation (or such
surviving entity) outstanding immediately after such
merger, consolidation, or reorganization.
However, in no event shall a Change in Control be deemed to have
occurred, with respect to the Executive, if the Executive is part of a
purchasing group which consummates the Change-in-Control transaction.
The Executive shall be deemed "part of the purchasing group" for
purposes of the preceding sentence if the Executive is an equity
participant or has agreed to become an equity participant in the
purchasing company or group (except for (i) passive ownership of less
than five percent (5%) of the voting securities of the purchasing
company; or (ii) ownership of equity participation in the purchasing
company or group which is otherwise deemed not to be significant, as
determined prior to the Change-in-Control by a majority of the
non-employee continuing Directors of the Board of Directors of the
Corporation).
"DATE OF TERMINATION" shall mean:
(a) if the Executive's employment is terminated for Disability,
the date that a Notice of Termination is given to the
Executive;
(b) if the Executive terminates due to his death or Retirement,
the date of death or Retirement, respectively;
(c) if the Executive decides to terminate employment upon Good
Reason for Termination, the date following such decision
specified by the Corporation after it has been notified of the
Executive's decision to terminate employment; or
(d) if the Executive's employment is terminated for any other
reason, the date on which such termination becomes effective
pursuant to a Notice of Termination.
"DISABILITY" shall mean such incapacity due to physical or mental
illness or injury as causes the Executive to be unable to perform his
duties with the Corporation during 180 consecutive days.
"GOOD REASON FOR TERMINATION" shall mean the occurrence of:
(a) without the Executive's express written consent, the
assignment to the Executive of any duties materially and
substantially inconsistent with his positions, duties,
responsibilities and status with the Corporation immediately
prior to a Change-in-Control, or a material change in his
reporting responsibilities, titles or offices as in effect
immediately prior to a Change-in-Control, or any removal of
the Executive from or any failure to re-elect the Executive to
any of such positions, except in
23
<PAGE> 4
connection with the termination of the Executive's employment
due to Cause for Termination, Disability or Retirement (as
hereinafter defined) or as a result of the Executive's death;
(b) (i) a reduction by the Corporation prior to a
Change-in-Control in the Executive's base salary unless such
reduction is the result of the Board of Directors of the
Corporation determining that the Executive has not adequately
discharged his duties;
(ii) a reduction by the Corporation after a Change-in-Control
in the Executive's base salary as in effect immediately prior
to any Change-in-Control or a failure by the Corporation after
a Change-in-Control to increase the Executive's base salary by
the Annual Salary Adjustment Percentage;
(c) a failure by the Corporation to continue to provide incentive
compensation comparable to that provided by the Corporation
immediately prior to any Change-in-Control;
(d) a failure by the Corporation after a Change-in-Control to
continue in effect any benefit or compensation plan, stock
option plan, pension plan, life insurance plan, health and
accident plan or disability plan in which the Executive is
participating immediately prior thereto (provided, however,
that there shall not be deemed to be any such failure if the
Corporation substitutes for the discontinued plan, a plan
providing the Executive with substantially similar benefits)
or the taking of any action by the Corporation which would
adversely affect the Executive's participation in or
materially reduce the Executive's benefits under any of such
plans or deprive the Executive of any material fringe benefit
enjoyed by the Executive immediately prior to a
Change-in-Control (provided, however, that any act or failure
to act by the Corporation that is on a plan-wide basis, i.e.,
it similarly affects all employees of the Corporation or all
employees eligible to participate in any such plan, as the
case may be, shall not constitute Good Reason for
Termination);
(e) the failure of the Corporation to obtain the assumption of
this Agreement by any successor as contemplated in SECTION
10(C) hereof;
(f) any purported termination of the employment of the Executive
by the Corporation which is not (i) due to the Executive's
Disability, Retirement (as hereinafter defined) or Cause for
Termination, or (ii) effected as a Notice of Termination, as
defined herein; or
(g) the Corporation's requiring the Executive to be based anywhere
other than the Corporation's executive offices at which the
Executive has his principal office immediately prior to a
24
<PAGE> 5
Change-in-Control or executive offices located within 50 miles
of the location of the Corporation's executive offices
immediately prior to a Change-in-Control, except for required
travel on the Corporation's business to an extent
substantially consistent with the Executive's present business
travel obligations.
"NOTICE OF TERMINATION" shall mean a written statement which sets forth
the specific reason for termination and, if such is claimed to be a
Cause for Termination or Good Reason for Termination, in reasonable
detail the facts and circumstances which indicate that such is Cause
for Termination or Good Reason for Termination.
"OPTIONS" shall mean any stock options issued pursuant to any present
or future stock option plan of the Corporation.
"PERSON" shall have the meaning ascribed to such term in Section
3(a)(9) of the Securities Exchange Act of 1934, as in effect on the
date hereof and used in Sections 13(d) and 14(d) thereof, including a
"group" as defined in Section 13(d) thereof.
"RETIREMENT" shall mean the termination of the Executive's employment
after age 65 or in accordance with any mandatory retirement arrangement
with respect to an earlier age agreed to by the Executive.
"STOCK APPRECIATION RIGHT" shall mean any stock appreciation rights
issued pursuant to any stock option plan of the Corporation or any
future stock appreciation rights plan.
2. TERMS OF EMPLOYMENT. The Executive acknowledges that this Agreement
does not constitute an employment contract and that the Executive's employment
relationship with the Corporation is at-will and not for any particular period.
Rather, this Agreement is only intended to set forth certain liquidated damages
to be paid in the event of termination of the Executive upon the terms and
conditions specified herein.
3. TERM OF AGREEMENT. The initial term of this Agreement shall be for a
period of four (4) years. Upon expiration of the initial term, the Company
shall, in its sole discretion, determine whether this Agreement shall be renewed
upon such terms it deems advisable.
4. PAYMENTS FOLLOWING TERMINATION OF EMPLOYMENT UPON A
CHANGE-IN-CONTROL.
(a) If the Executive's employment with the Corporation shall be
terminated:
(i) due to the Executive's death,
(ii) by the Executive other than the Executive's having
terminated for Good Reason for Termination following
a Change-in-Control, or
(iii) by the Corporation due to Cause for Termination or
for Disability or Retirement,
25
<PAGE> 6
then the Corporation shall have no obligations to the
Executive other than to pay the Executive any unpaid portion
of base salary due until the Date of Termination and any other
sums due in accordance with the then various policies,
practices and benefit plans of the Corporation.
(b) If the Executive's employment with the Corporation shall have
terminated during the period commencing six months prior to
the date of a Change-in-Control and ending on the third
anniversary of a Change-in-Control other than in the
circumstances described in subsection (a) above, then the
Corporation shall pay on or before the fifth day following the
Date of Termination (or if the Date of Termination preceded
the date of the Change-in-Control, on or before the fifth day
following the date of the Change-in-Control), to the Executive
the following sums:
(i) in cash any unpaid portion of the Executive's full
base salary for the period from the last period for
which the Executive was paid to the Date of
Termination, or the date of the Change-in-Control, as
the case may be; and
(ii) an amount in cash as liquidated damages for lost
future renumeration equal to the product obtained by
multiplying
(A) the lesser of
(1) two, or
(2) a number equal to the number of
calendar months remaining from the
Date of Termination to the date on
which the Executive is 65 years of
age (or, if earlier, the age agreed
to by the Executive pursuant to any
prior arrangement) divided by
twelve, or
(3) a number equal to the greater of (i)
one (1.0) and (ii) thirty six (36)
less the number of completed months
commencing after the date of the
Change-in-Control during which the
Executive was employed by the
Corporation and did not have Good
Reason for Termination times (iii)
one-twelfth (1/12) times
(B) the sum of
(1) the greater of
26
<PAGE> 7
(i) the Executive's annual base
salary for the year in
effect on the Date of
Termination (provided that
in the case of Termination
for Good Reason by the
Executive the date
immediately preceding the
date of the earliest event
which gave rise to the
Termination for Good Reason
by the Executive shall be
used instead of the Date of
Termination)
or
(ii) the Executive's annual base
salary for the year in
effect on the date of
the Change-in-Control;
plus
(2) the greater of
(i) the average annual cash
award received by the
Executive as incentive
compensation or bonus for
one calendar year
immediately preceding the
Date of Termination
(provided that in the case
of Termination for Good
Reason by the Executive the
date immediately preceding
the date of the event which
gave rise to the
Termination for Good Reason
by the Executive shall be
used instead of the Date of
Termination)
or
(ii) the average annual cash
award received by the
Executive as incentive
compensation or bonus for
one calendar year
immediately preceding the
date of the
Change-in-Control.
5. OUTPLACEMENT SERVICES. If the Executive's employment with the
Corporation should terminate under circumstances as to entitle the Executive to
receive payment hereunder, the Corporation shall reimburse the Executive for any
reasonable fees or other costs incurred by the Executive during the two (2)
years following the Date of Termination in retaining executive placement
agencies, up to a maximum dollar amount not to exceed fifteen percent (15%) of
the Executive's base salary at the time of such termination. Such reimbursement
shall be made within five (5) days following the Executive's presentment of
bills or other evidence of the costs incurred with executive placement agencies.
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<PAGE> 8
6. TAX IMPLICATIONS. If any payment due to the Executive pursuant to
this Agreement result in a tax being imposed on the Executive pursuant to
Section 4999 of the Internal Revenue Code of 1954, as amended, or any successor
provision ("Section 4999"), then the Corporation shall, at the Executive's
option, either (i) reduce the total payments payable to the Executive to the
maximum amount payable without incurring the Section 4999 tax, or (ii) pay to
the Executive the total amount payable, with the understanding that Section 4999
tax will be due on that total amount.
7. BENEFITS. If the Executive's employment with the Corporation should
terminate under circumstances as to entitle the Executive to receive payment
hereunder, the Executive shall also be deemed, for purposes of medical
insurance, pension and other benefits of the Corporation, to have remained in
the continuous employment of the Corporation for the two (2) year period
following the Date of Termination and shall be entitled to all of the medical
insurance, pension or other benefits provided by the Corporation as if the
Executive had so remained in the employment of the Corporation. If, for any
reason, whether by law or provisions of the Corporation's employee medical
insurance, pension or other benefit plans, or otherwise any benefits which the
Executive would be entitled to under this SECTION 6 cannot be paid pursuant to
such employee benefit plans, then the Corporation contractually agrees to pay
the Executive the difference between the benefits which the Executive would have
received in accordance with this Section if the relevant employee medical
insurance, pension or other benefit plan could have paid such benefit and the
amount of benefits, if any, actually paid by such employee medical insurance,
pension or other benefit plan. The Corporation shall not be required to fund its
obligation to pay the foregoing difference.
8. OTHER EMPLOYMENT. In the event of termination under the
circumstances contemplated in SECTION 4(b) hereunder, the Executive shall have
no duty to seek any other employment after termination of his employment with
the Corporation and the Corporation hereby waives and agrees not to raise or use
any defense based upon the position that the Executive had a duty to mitigate or
reduce the amounts due him hereunder by seeking other employment whether
suitable or unsuitable and should the Executive obtain other employment, then
the only effect of such on the obligations of the Corporation shall be that the
Corporation shall be entitled to credit against any payments that would
otherwise be made pursuant to SECTION 7 hereof, any comparable payments to which
the executive is entitled under the employee benefit plans maintained by the
Executive's other employer or employers in connection with services to such
employer or employers after termination of this employment with the Corporation.
9. STOCK APPRECIATION RIGHTS AND OPTIONS. If the Executive's employment
should terminate under circumstances as to entitle the Executive to receive
payment hereunder, then with respect to any standing Stock Appreciation Rights
and/or Options which did not immediately become exercisable upon the occurrence
of a Change-in-Control, such Stock Appreciation Right or Option shall be
automatically vested and remain outstanding in accordance with its terms and be
exercisable thereafter until the stated expiration date of such Stock
Appreciation Right or Option.
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<PAGE> 9
10. MISCELLANEOUS.
(a) This Agreement shall be construed under the laws of the
Commonwealth of Pennsylvania.
(b) This Agreement constitutes the entire understanding of the
parties hereto with respect to the subject matter hereof and
may only be amended or modified by written agreement signed by
the parties hereto.
(c) The Corporation will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the
Corporation, by agreement in form and substance satisfactory
to the Executive, to expressly assume and agree to perform
this Agreement in the same manner required of the Corporation
and to perform it as if no such succession had taken place. As
used in this Agreement, "Corporation" shall mean the
Corporation as hereinbefore defined and any successor to its
business and/or assets as aforesaid which executes and
delivers the agreement provided for in this subsection (c) or
which otherwise becomes bound by all of the terms and
provisions of this Agreement by operation of law.
(d) This Agreement shall inure to the benefit of and be
enforceable by the Executive and the Corporation and their
respective legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the
Executive should die while any amounts would still be payable
to him hereunder if he had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to his devisee,
legatee or other designee or, if there be no such designee, to
his estate.
(e) Any notice or other communication provided for in this
Agreement shall be in writing and, unless otherwise expressly
stated herein, shall be deemed to have been duly given if
mailed by United States registered mail, return receipt
requested, postage prepaid, addressed in the case of the
Executive to his office at the Corporation with a copy to his
residence and in the case of the Corporation to its principal
executive offices, attention to the Chief Executive Officer.
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<PAGE> 10
(f) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and approved by
resolution of the Board of Directors of the Corporation. No
waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject
matter hereof have been made by either party which are not set
forth expressly in this Agreement.
(g) The invalidity or unenforceability of any provisions of this
Agreement shall not affect the validity or unenforceability of
any other provision of this Agreement, which shall remain in
full force and effect. If any provision hereof shall be deemed
invalid or unenforceable, either in whole or in part, this
Agreement shall be deemed amended to delete or modify, as
necessary, the offending provision and to alter the bounds
thereof in order to render it valid and enforceable.
(h) This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of
which taken together will constitute one and the same
instrument.
(i) If litigation should be brought to enforce, interpret or
challenge any provision contained herein, the prevailing party
shall be entitled to its reasonable attorney's fees and
disbursements and other costs incurred in such litigation and,
if a money judgment be rendered in favor of the Executive, to
interest on any such money judgment obtained calculated at the
prime rate of interest in effect from time to time at Mellon
Bank, N.A., from the date that the payment should have been
made or damages incurred under this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed on the date first
above written.
ATTEST: TOLLGRADE COMMUNICATIONS, INC.
By: /s/ Sara M. Antol
----------------------------------------
WITNESS: /s/ Michael D. McSparrin
----------------------------------------
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<PAGE> 11
SCHEDULE 10.13
Change in Control Agreements were entered into between the Company and G. Wayne
Lloyd, Gary Gump, William Gumbert and Lawrence J. Fey, which were substantially
identical to that filed as Exhibit 10.13.
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<PAGE> 1
Exhibit 10.25
AMENDMENT
THIS AMENDMENT, dated as of January 18, 2000 and effective as of December
13, 1999 (the "Amendment") is entered into between TOLLGRADE COMMUNICATIONS,
INC. ("Tollgrade") and CHRISTIAN L. ALLISON (the "Executive").
AMENDMENT TO AGREEMENT
WHEREAS, Tollgrade and the Executive entered into an Agreement effective the
13th day of December, 1995, as amended, governing the employment of Executive
and certain benefits to be received by Executive in the event his employment is
terminated (herein, the "Agreement"); and
WHEREAS, Tollgrade and the Executive desire to amend the Agreement upon the
terms and conditions stated in this Amendment.
NOW, THEREFORE, in consideration of the promises and the faithful performance of
the mutual covenants herein contained, and intending to be legally bound hereby,
Tollgrade and the Executive agree as follows:
1. Capitalized terms used herein and not otherwise defined shall have the
meaning assigned to them in the Agreement.
2. The Agreement shall be amended such that the Executive's base salary,
as specified in Section 2(b) of the Agreement, shall be increased to
$300,000 per annum, plus the cost of the Executive's annual long term
disability premium.
3. The Agreement shall be further amended to provide that the Executive
shall be reimbursed on a monthly basis for the cost of his membership
fees at the Rivers Club.
4. Except as modified by this Amendment, the provisions of the Agreement
shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
first written above.
TOLLGRADE COMMUNICATIONS, INC.
By:
---------------------------------- ------------------------------------
Christian L. Allison
Title:
------------------------------
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<PAGE> 1
Exhibit 10.26
AGREEMENT
This Agreement, made as of the 9th day of February, 2000 by and between
TOLLGRADE COMMUNICATIONS, INC., a Pennsylvania corporation (the "Corporation")
and SARA M. ANTOL, an individual residing in the Commonwealth of Pennsylvania
and an employee of the Corporation (the "Executive").
WITNESSETH:
WHEREAS, the Board of Directors of the Corporation has determined that
it is in the best interests of the Corporation to enter into this Agreement with
the Executive to provide for compensation of the Executive upon termination of
employment under certain circumstances relating to a change in control of the
Corporation; and
WHEREAS, the Executive desires to obtain such benefits in the event the
Executive's employment is terminated under the circumstances provided herein.
NOW, THEREFORE, in consideration of the covenants and premises
contained herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. DEFINITION OF TERMS. The following terms when used in this Agreement
shall have the meaning hereafter set forth:
"ANNUAL SALARY ADJUSTMENT PERCENTAGE" shall mean the mean average
percentage increase in base salary for all elected officers of the
Corporation during the two full calendar years immediately preceding
the time to which such percentage is being applied; provided however,
that if after a Change-in-Control, as hereinafter defined, there should
be a significant change in the number of elected officers of the
Corporation or in the manner in which they are compensated, then the
foregoing definition shall be changed by substituting for the phrase
"elected officers of the Corporation" the phrase "persons then
performing the functions formerly performed by the elected officers of
the Corporation."
"CAUSE FOR TERMINATION" shall mean:
(a) the deliberate and intentional failure by the Executive to
devote substantially his entire business time and best efforts
to the performance of his duties (other than any such failure
resulting from the Executive's incapacity due to physical or
mental illness or disability) after a demand for substantial
performance is delivered to the Executive by the Board of
Directors which specifically identifies the manner in which
the Board of Directors believes that the Executive has not
substantially performed his duties,
or
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<PAGE> 2
(b) wilfully engaging by the Executive in conduct which
constitutes a fraud against the Corporation or a material
breach of this Agreement,
or
(c) the Executive's conviction of any crime which constitutes a
felony.
For purposes of this definition, no act, or failure to act, on the
Executive's part shall be considered "deliberate and intentional" or
"willfully" unless done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that his action or omission
was in the best interests of the Corporation.
"CHANGE-IN-CONTROL" shall mean the determination (which may be made
effective as of a particular date specified by the Board of Directors
of the Corporation) by the Board of Directors of the Corporation, made
by a majority vote that a change in control has occurred, or is about
to occur. Such a change shall not include, however, a restructuring,
reorganization, merger, or other change in capitalization in which the
Persons who own an interest in the Corporation on the date hereof (the
"Current Owners")(or any individual or entity which receives from a
Current Owner an interest in the Corporation through will or the laws
of descent and distribution) maintain more than a sixty-five percent
(65%) interest in the resultant entity. Regardless of the Board's vote
or whether or not the Board votes, a Change-in-Control will be deemed
to have occurred as of the first day any one (1) or more of the
following subparagraphs shall have been satisfied:
(a) Any Person (other than the Person in control of the
Corporation as of the date of this Agreement, or other than a
trustee or other fiduciary holding securities under an
employee benefit plan of the Corporation, or a corporation
owned directly or indirectly by the stockholders of the
Corporation in substantially the same proportions as their
ownership of stock of the Corporation), becomes the beneficial
owner, directly or indirectly, of securities of the
Corporation representing more than thirty five percent (35%)
of the combined voting power of the Corporation's then
outstanding securities; or
(b) The stockholders of the Corporation approve:
(i) A plan of complete liquidation of the Corporation;
(ii) An agreement for the sale or disposition of all or
substantially all of the Corporation's assets; or
(iii) A merger, consolidation, or reorganization of the
Corporation with or involving any other corporation,
other than a merger, consolidation, or
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<PAGE> 3
reorganization that would result in the voting
securities of the Corporation outstanding immediately
prior thereto continuing to represent (either by
remaining outstanding or by being converted into
voting securities of the surviving entity) at least
sixty-five percent (65%) of the combined voting power
of the voting securities of the Corporation (or such
surviving entity) outstanding immediately after such
merger, consolidation, or reorganization.
However, in no event shall a Change in Control be deemed to have
occurred, with respect to the Executive, if the Executive is part of a
purchasing group which consummates the Change-in-Control transaction.
The Executive shall be deemed "part of the purchasing group" for
purposes of the preceding sentence if the Executive is an equity
participant or has agreed to become an equity participant in the
purchasing company or group (except for (i) passive ownership of less
than five percent (5%) of the voting securities of the purchasing
company; or (ii) ownership of equity participation in the purchasing
company or group which is otherwise deemed not to be significant, as
determined prior to the Change-in-Control by a majority of the
non-employee continuing Directors of the Board of Directors of the
Corporation).
"DATE OF TERMINATION" shall mean:
(a) if the Executive's employment is terminated for Disability,
the date that a Notice of Termination is given to the
Executive;
(b) if the Executive terminates due to his death or Retirement,
the date of death or Retirement, respectively;
(c) if the Executive decides to terminate employment upon Good
Reason for Termination, the date following such decision
specified by the Corporation after it has been notified of the
Executive's decision to terminate employment; or
(d) if the Executive's employment is terminated for any other
reason, the date on which such termination becomes effective
pursuant to a Notice of Termination.
"DISABILITY" shall mean such incapacity due to physical or mental
illness or injury as causes the Executive to be unable to perform his
duties with the Corporation during 180 consecutive days.
"GOOD REASON FOR TERMINATION" shall mean the occurrence of:
(a) without the Executive's express written consent, the
assignment to the Executive of any duties materially and
substantially inconsistent with his positions, duties,
responsibilities and status with the Corporation immediately
prior to a Change-in-Control, or a material change in his
reporting responsibilities, titles or offices as in
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<PAGE> 4
effect immediately prior to a Change-in-Control, or any
removal of the Executive from or any failure to re-elect the
Executive to any of such positions, except in connection with
the termination of the Executive's employment due to Cause for
Termination, Disability or Retirement (as hereinafter defined)
or as a result of the Executive's death;
(b) (i) a reduction by the Corporation prior to a
Change-in-Control in the Executive's base salary unless such
reduction is the result of the Board of Directors of the
Corporation determining that the Executive has not adequately
discharged his duties;
(ii) a reduction by the Corporation after a Change-in-Control
in the Executive's base salary as in effect immediately prior
to any Change-in-Control or a failure by the Corporation after
a Change-in-Control to increase the Executive's base salary by
the Annual Salary Adjustment Percentage;
(c) a failure by the Corporation to continue to provide incentive
compensation comparable to that provided by the Corporation
immediately prior to any Change-in-Control;
(d) a failure by the Corporation after a Change-in-Control to
continue in effect any benefit or compensation plan, stock
option plan, pension plan, life insurance plan, health and
accident plan or disability plan in which the Executive is
participating immediately prior thereto (provided, however,
that there shall not be deemed to be any such failure if the
Corporation substitutes for the discontinued plan, a plan
providing the Executive with substantially similar benefits)
or the taking of any action by the Corporation which would
adversely affect the Executive's participation in or
materially reduce the Executive's benefits under any of such
plans or deprive the Executive of any material fringe benefit
enjoyed by the Executive immediately prior to a
Change-in-Control (provided, however, that any act or failure
to act by the Corporation that is on a plan-wide basis, i.e.,
it similarly affects all employees of the Corporation or all
employees eligible to participate in any such plan, as the
case may be, shall not constitute Good Reason for
Termination);
(e) the failure of the Corporation to obtain the assumption of
this Agreement by any successor as contemplated in SECTION
10(C) hereof;
(f) any purported termination of the employment of the Executive
by the Corporation which is not (i) due to the Executive's
Disability, Retirement (as hereinafter defined) or Cause for
Termination, or (ii) effected as a Notice of Termination, as
defined herein; or
(g) the Corporation's requiring the Executive to be based anywhere
other than the Corporation's executive offices at which the
Executive has his principal office
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<PAGE> 5
immediately prior to a Change-in-Control or executive offices
located within 50 miles of the location of the Corporation's
executive offices immediately prior to a Change-in-Control,
except for required travel on the Corporation's business to an
extent substantially consistent with the Executive's present
business travel obligations.
"NOTICE OF TERMINATION" shall mean a written statement which sets forth
the specific reason for termination and, if such is claimed to be a
Cause for Termination or Good Reason for Termination, in reasonable
detail the facts and circumstances which indicate that such is Cause
for Termination or Good Reason for Termination.
"OPTIONS" shall mean any stock options issued pursuant to any present
or future stock option plan of the Corporation.
"PERSON" shall have the meaning ascribed to such term in Section
3(a)(9) of the Securities Exchange Act of 1934, as in effect on the
date hereof and used in Sections 13(d) and 14(d) thereof, including a
"group" as defined in Section 13(d) thereof.
"RETIREMENT" shall mean the termination of the Executive's employment
after age 65 or in accordance with any mandatory retirement arrangement
with respect to an earlier age agreed to by the Executive.
"STOCK APPRECIATION RIGHT" shall mean any stock appreciation rights
issued pursuant to any stock option plan of the Corporation or any
future stock appreciation rights plan.
2. TERMS OF EMPLOYMENT. The Executive acknowledges that this Agreement
does not constitute an employment contract and that the Executive's employment
relationship with the Corporation is at-will and not for any particular period.
Rather, this Agreement is only intended to set forth certain liquidated damages
to be paid in the event of termination of the Executive upon the terms and
conditions specified herein.
3. TERM OF AGREEMENT. The initial term of this Agreement shall be for a
period of four (4) years. Upon expiration of the initial term, the Company
shall, in its sole discretion, determine whether this Agreement shall be renewed
upon such terms it deems advisable.
4. PAYMENTS FOLLOWING TERMINATION OF EMPLOYMENT UPON A
CHANGE-IN-CONTROL.
(a) If the Executive's employment with the Corporation shall be
terminated:
(i) due to the Executive's death,
(ii) by the Executive other than the Executive's having
terminated for Good Reason for Termination following
a Change-in-Control, or
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<PAGE> 6
(iii) by the Corporation due to Cause for Termination or
for Disability or Retirement,
then the Corporation shall have no obligations to the
Executive other than to pay the Executive any unpaid portion
of base salary due until the Date of Termination and any other
sums due in accordance with the then various policies,
practices and benefit plans of the Corporation.
(b) If the Executive's employment with the Corporation shall have
terminated during the period commencing six months prior to
the date of a Change-in-Control and ending on the third
anniversary of a Change-in-Control other than in the
circumstances described in subsection (a) above, then the
Corporation shall pay on or before the fifth day following the
Date of Termination (or if the Date of Termination preceded
the date of the Change-in-Control, on or before the fifth day
following the date of the Change-in-Control), to the Executive
the following sums:
(i) in cash any unpaid portion of the Executive's full
base salary for the period from the last period for
which the Executive was paid to the Date of
Termination, or the date of the Change-in-Control, as
the case may be; and
(ii) an amount in cash as liquidated damages for lost
future renumeration equal to the product obtained by
multiplying
(A) the lesser of
(1) two, or
(2) a number equal to the number of
calendar months remaining from the
Date of Termination to the date on
which the Executive is 65 years of
age (or, if earlier, the age agreed
to by the Executive pursuant to any
prior arrangement) divided by
twelve, or
(3) a number equal to the greater of (i)
one (1.0) or (ii) thirty six (36)
less the number of completed months
commencing after the date of the
Change-in-Control during which the
Executive was employed by the
Corporation and did not have Good
Reason for Termination times (iii)
one-twelfth (1/12)
times
(B) the sum of
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<PAGE> 7
(1) the greater of
(i) the Executive's annual base
salary for the year in
effect on the Date of
Termination (provided that
in the case of Termination
for Good Reason by the
Executive the date
immediately preceding the
date of the earliest event
which gave rise to the
Termination for Good Reason
by the Executive shall be
used instead of the Date of
Termination)
or
(ii) the Executive's annual base
salary for the year in
effect on the date of the
Change-in-Control;
plus
(2) the greater of
(i) the average annual cash
award received by the
Executive as incentive
compensation or bonus for
one calendar year
immediately preceding the
Date of Termination
(provided that in the case
of Termination for Good
Reason by the Executive the
date immediately preceding
the date of the event which
gave rise to the
Termination for Good Reason
by the Executive shall be
used instead of the Date of
Termination)
or
(ii) the average annual cash
award received by the
Executive as incentive
compensation or bonus for
one calendar year
immediately preceding the
date of the
Change-in-Control.
5. OUTPLACEMENT SERVICES. If the Executive's employment with the
Corporation should terminate under circumstances as to entitle the Executive to
receive payment hereunder, the Corporation shall reimburse the Executive for any
reasonable fees or other costs incurred by the Executive during the two (2)
years following the Date of Termination in retaining executive placement
agencies, up to a maximum dollar amount not to exceed fifteen percent (15%) of
the Executive's base salary at the time of such termination. Such reimbursement
shall be made within
39
<PAGE> 8
five (5) days following the Executive's presentment of bills or other evidence
of the costs incurred with executive placement agencies.
6. TAX IMPLICATIONS. If any payment due to the Executive pursuant to
this Agreement result in a tax being imposed on the Executive pursuant to
Section 4999 of the Internal Revenue Code of 1954, as amended, or any successor
provision ("Section 4999"), then the Corporation shall, at the Executive's
option, either (i) reduce the total payments payable to the Executive to the
maximum amount payable without incurring the Section 4999 tax, or (ii) pay to
the Executive the total amount payable, with the understanding that Section 4999
tax will be due on that total amount.
7. BENEFITS. If the Executive's employment with the Corporation should
terminate under circumstances as to entitle the Executive to receive payment
hereunder, the Executive shall also be deemed, for purposes of medical
insurance, pension and other benefits of the Corporation, to have remained in
the continuous employment of the Corporation for the two (2) year period
following the Date of Termination and shall be entitled to all of the medical
insurance, pension or other benefits provided by the Corporation as if the
Executive had so remained in the employment of the Corporation. If, for any
reason, whether by law or provisions of the Corporation?s employee medical
insurance, pension or other benefit plans, or otherwise any benefits which the
Executive would be entitled to under this SECTION 6 cannot be paid pursuant to
such employee benefit plans, then the Corporation contractually agrees to pay
the Executive the difference between the benefits which the Executive would have
received in accordance with this Section if the relevant employee medical
insurance, pension or other benefit plan could have paid such benefit and the
amount of benefits, if any, actually paid by such employee medical insurance,
pension or other benefit plan. The Corporation shall not be required to fund its
obligation to pay the foregoing difference.
8. OTHER EMPLOYMENT. In the event of termination under the
circumstances contemplated in SECTION 4(b) hereunder, the Executive shall have
no duty to seek any other employment after termination of his employment with
the Corporation and the Corporation hereby waives and agrees not to raise or use
any defense based upon the position that the Executive had a duty to mitigate or
reduce the amounts due him hereunder by seeking other employment whether
suitable or unsuitable and should the Executive obtain other employment, then
the only effect of such on the obligations of the Corporation shall be that the
Corporation shall be entitled to credit against any payments that would
otherwise be made pursuant to SECTION 7 hereof, any comparable payments to which
the executive is entitled under the employee benefit plans maintained by the
Executive's other employer or employers in connection with services to such
employer or employers after termination of this employment with the Corporation.
9. STOCK APPRECIATION RIGHTS AND OPTIONS. If the Executive's employment
should terminate under circumstances as to entitle the Executive to receive
payment hereunder, then with respect to any standing Stock Appreciation Rights
and/or Options which did not immediately become exercisable upon the occurrence
of a Change-in-Control, such Stock Appreciation Right or Option shall be
automatically vested and remain outstanding in accordance with its terms and be
40
<PAGE> 9
exercisable thereafter until the stated expiration date of such Stock
Appreciation Right or Option.
10. MISCELLANEOUS.
(a) This Agreement shall be construed under the laws of the
Commonwealth of Pennsylvania.
(b) This Agreement constitutes the entire understanding of the
parties hereto with respect to the subject matter hereof and
may only be amended or modified by written agreement signed by
the parties hereto. This Agreement specifically supercedes the
agreement entered into between the Corporation and the
Executive dated as of August 5, 1996 with respect to the
subject matter hereof, and by the execution of this Agreement,
the previous agreement is hereby terminated and of no further
force and effect.
(c) The Corporation will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the
Corporation, by agreement in form and substance satisfactory
to the Executive, to expressly assume and agree to perform
this Agreement in the same manner required of the Corporation
and to perform it as if no such succession had taken place. As
used in this Agreement, "Corporation" shall mean the
Corporation as hereinbefore defined and any successor to its
business and/or assets as aforesaid which executes and
delivers the agreement provided for in this subsection (c) or
which otherwise becomes bound by all of the terms and
provisions of this Agreement by operation of law.
(d) This Agreement shall inure to the benefit of and be
enforceable by the Executive and the Corporation and their
respective legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the
Executive should die while any amounts would still be payable
to him hereunder if he had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to his devisee,
legatee or other designee or, if there be no such designee, to
his estate.
(e) Any notice or other communication provided for in this
Agreement shall be in writing and, unless otherwise expressly
stated herein, shall be deemed to have been duly given if
mailed by United States registered mail, return receipt
requested, postage prepaid, addressed in the case of the
Executive to his office at the Corporation with a copy to his
residence and in the case of the Corporation to its principal
executive offices, attention to the Chief Executive Officer.
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<PAGE> 10
(f) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and approved by
resolution of the Board of Directors of the Corporation. No
waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject
matter hereof have been made by either party which are not set
forth expressly in this Agreement.
(g) The invalidity or unenforceability of any provisions of this
Agreement shall not affect the validity or unenforceability of
any other provision of this Agreement, which shall remain in
full force and effect. If any provision hereof shall be deemed
invalid or unenforceable, either in whole or in part, this
Agreement shall be deemed amended to delete or modify, as
necessary, the offending provision and to alter the bounds
thereof in order to render it valid and enforceable.
(h) This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of
which taken together will constitute one and the same
instrument.
(i) If litigation should be brought to enforce, interpret or
challenge any provision contained herein, the prevailing party
shall be entitled to its reasonable attorney's fees and
disbursements and other costs incurred in such litigation and,
if a money judgment be rendered in favor of the Executive, to
interest on any such money judgment obtained calculated at the
prime rate of interest in effect from time to time at Mellon
Bank, N.A., from the date that the payment should have been
made or damages incurred under this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed on the date first
above written.
TOLLGRADE COMMUNICATIONS, INC.
By: /s/ Samuel C. Knoch
----------------------------------------
/s/ Sara M. Antol
----------------------------------------
42
<PAGE> 11
SCHEDULE 10.26
Change in Control Agreements were entered into between the Company and Robert
Cornelia, Ruth Dilts, Bradley Dinger, Herman Flaminio, Rocco L. Flaminio, Mark
Frey, Samuel Knoch, James Price and Matt Rosgone, which were substantially
identical to that filed as Exhibit 10.26.
43
<PAGE> 1
Exhibit 10.27
AGREEMENT
This Agreement, made as of the 20th day of December, 1999 by and
between TOLLGRADE COMMUNICATIONS, INC., a Pennsylvania corporation (the
"Corporation") and Scott Robbins, an individual residing in the Commonwealth of
Pennsylvania and an employee of the Corporation (the "Executive").
WITNESSETH:
WHEREAS, the Board of Directors of the Corporation has determined that
it is in the best interests of the Corporation to enter into this Agreement with
the Executive to provide for compensation of the Executive upon termination of
employment under certain circumstances relating to a change in control of the
Corporation; and
WHEREAS, the Executive desires to obtain such benefits in the event the
Executive's employment is terminated under the circumstances provided herein.
NOW, THEREFORE, in consideration of the covenants and premises
contained herein, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. DEFINITION OF TERMS. The following terms when used in this Agreement
shall have the meaning hereafter set forth:
"ANNUAL SALARY ADJUSTMENT PERCENTAGE" shall mean the mean average
percentage increase in base salary for all elected officers of the
Corporation during the two full calendar years immediately preceding
the time to which such percentage is being applied; provided however,
that if after a Change-in-Control, as hereinafter defined, there should
be a significant change in the number of elected officers of the
Corporation or in the manner in which they are compensated, then the
foregoing definition shall be changed by substituting for the phrase
"elected officers of the Corporation" the phrase "persons then
performing the functions formerly performed by the elected officers of
the Corporation."
"CAUSE FOR TERMINATION" shall mean:
(a) the deliberate and intentional failure by the Executive to
devote substantially his entire business time and best efforts
to the performance of his duties (other than any such failure
resulting from the Executive's incapacity due to physical or
mental illness or disability) after a demand for substantial
performance is delivered to the Executive by the Board of
Directors which specifically identifies the manner in which
the Board of Directors believes that the Executive has not
substantially performed his duties,
44
<PAGE> 2
or
(b) wilfully engaging by the Executive in conduct which
constitutes a fraud against the Corporation or a material
breach of this Agreement,
or
(c) the Executive's conviction of any crime which constitutes a
felony.
For purposes of this definition, no act, or failure to act, on the
Executive's part shall be considered "deliberate and intentional" or
"willfully" unless done, or omitted to be done, by the Executive not in
good faith and without reasonable belief that his action or omission
was in the best interests of the Corporation.
"CHANGE-IN-CONTROL" shall mean the determination (which may be made
effective as of a particular date specified by the Board of Directors
of the Corporation) by the Board of Directors of the Corporation, made
by a majority vote that a change in control has occurred, or is about
to occur. Such a change shall not include, however, a restructuring,
reorganization, merger, or other change in capitalization in which the
Persons who own an interest in the Corporation on the date hereof (the
"Current Owners")(or any individual or entity which receives from a
Current Owner an interest in the Corporation through will or the laws
of descent and distribution) maintain more than a sixty-five percent
(65%) interest in the resultant entity. Regardless of the Board's vote
or whether or not the Board votes, a Change-in-Control will be deemed
to have occurred as of the first day any one (1) or more of the
following subparagraphs shall have been satisfied:
(a) Any Person (other than the Person in control of the
Corporation as of the date of this Agreement, or other than a
trustee or other fiduciary holding securities under an
employee benefit plan of the Corporation, or a corporation
owned directly or indirectly by the stockholders of the
Corporation in substantially the same proportions as their
ownership of stock of the Corporation), becomes the beneficial
owner, directly or indirectly, of securities of the
Corporation representing more than thirty five percent (35%)
of the combined voting power of the Corporation's then
outstanding securities; or
(b) The stockholders of the Corporation approve:
(i) A plan of complete liquidation of the Corporation;
(ii) An agreement for the sale or disposition of all or
substantially all of the Corporation's assets; or
(iii) A merger, consolidation, or reorganization of the
Corporation with or
45
<PAGE> 3
involving any other corporation, other than a merger,
consolidation, or reorganization that would result in
the voting securities of the Corporation outstanding
immediately prior thereto continuing to represent
(either by remaining outstanding or by being
converted into voting securities of the surviving
entity) at least sixty-five percent (65%) of the
combined voting power of the voting securities of the
Corporation (or such surviving entity) outstanding
immediately after such merger, consolidation, or
reorganization.
However, in no event shall a Change in Control be deemed to have
occurred, with respect to the Executive, if the Executive is part of a
purchasing group which consummates the Change-in-Control transaction.
The Executive shall be deemed "part of the purchasing group" for
purposes of the preceding sentence if the Executive is an equity
participant or has agreed to become an equity participant in the
purchasing company or group (except for (i) passive ownership of less
than five percent (5%) of the voting securities of the purchasing
company; or (ii) ownership of equity participation in the purchasing
company or group which is otherwise deemed not to be significant, as
determined prior to the Change-in-Control by a majority of the
non-employee continuing Directors of the Board of Directors of the
Corporation).
"DATE OF TERMINATION" shall mean:
(a) if the Executive's employment is terminated for Disability,
the date that a Notice of Termination is given to the
Executive;
(b) if the Executive terminates due to his death or Retirement,
the date of death or Retirement, respectively;
(c) if the Executive decides to terminate employment upon Good
Reason for Termination, the date following such decision
specified by the Corporation after it has been notified of the
Executive's decision to terminate employment; or
(d) if the Executive's employment is terminated for any other
reason, the date on which such termination becomes effective
pursuant to a Notice of Termination.
"DISABILITY" shall mean such incapacity due to physical or mental
illness or injury as causes the Executive to be unable to perform his
duties with the Corporation during 180 consecutive days.
"GOOD REASON FOR TERMINATION" shall mean the occurrence of:
(a) without the Executive's express written consent, the
assignment to the Executive of any duties materially and
substantially inconsistent with his positions, duties,
responsibilities and status with the Corporation immediately
prior to a Change-in-
46
<PAGE> 4
Control, or a material change in his reporting
responsibilities, titles or offices as in effect immediately
prior to a Change-in-Control, or any removal of the Executive
from or any failure to re-elect the Executive to any of such
positions, except in connection with the termination of the
Executive's employment due to Cause for Termination,
Disability or Retirement (as hereinafter defined) or as a
result of the Executive's death;
(b) (i) a reduction by the Corporation prior to a
Change-in-Control in the Executive's base salary unless such
reduction is the result of the Board of Directors of the
Corporation determining that the Executive has not adequately
discharged his duties;
(ii) a reduction by the Corporation after a Change-in-Control
in the Executive's base salary as in effect immediately prior
to any Change-in-Control or a failure by the Corporation after
a Change-in-Control to increase the Executive's base salary by
the Annual Salary Adjustment Percentage;
(c) a failure by the Corporation to continue to provide incentive
compensation comparable to that provided by the Corporation
immediately prior to any Change-in-Control;
(d) a failure by the Corporation after a Change-in-Control to
continue in effect any benefit or compensation plan, stock
option plan, pension plan, life insurance plan, health and
accident plan or disability plan in which the Executive is
participating immediately prior thereto (provided, however,
that there shall not be deemed to be any such failure if the
Corporation substitutes for the discontinued plan, a plan
providing the Executive with substantially similar benefits)
or the taking of any action by the Corporation which would
adversely affect the Executive's participation in or
materially reduce the Executive's benefits under any of such
plans or deprive the Executive of any material fringe benefit
enjoyed by the Executive immediately prior to a
Change-in-Control (provided, however, that any act or failure
to act by the Corporation that is on a plan-wide basis, i.e.,
it similarly affects all employees of the Corporation or all
employees eligible to participate in any such plan, as the
case may be, shall not constitute Good Reason for
Termination);
(e) the failure of the Corporation to obtain the assumption of
this Agreement by any successor as contemplated in SECTION
10(c) hereof;
(f) any purported termination of the employment of the Executive
by the Corporation which is not (i) due to the Executive's
Disability, Retirement (as hereinafter defined) or Cause for
Termination, or (ii) effected as a Notice of Termination, as
defined herein; or
(g) the Corporation's requiring the Executive to be based anywhere
other than the
47
<PAGE> 5
Corporation's executive offices at which the Executive has his
principal office immediately prior to a Change-in-Control or
executive offices located within 50 miles of the location of
the Corporation's executive offices immediately prior to a
Change-in-Control, except for required travel on the
Corporation's business to an extent substantially consistent
with the Executive's present business travel obligations.
"NOTICE OF TERMINATION" shall mean a written statement which sets forth
the specific reason for termination and, if such is claimed to be a
Cause for Termination or Good Reason for Termination, in reasonable
detail the facts and circumstances which indicate that such is Cause
for Termination or Good Reason for Termination.
"OPTIONS" shall mean any stock options issued pursuant to any present
or future stock option plan of the Corporation.
"PERSON" shall have the meaning ascribed to such term in Section
3(a)(9) of the Securities Exchange Act of 1934, as in effect on the
date hereof and used in Sections 13(d) and 14(d) thereof, including a
"group" as defined in Section 13(d) thereof.
"RETIREMENT" shall mean the termination of the Executive's employment
after age 65 or in accordance with any mandatory retirement arrangement
with respect to an earlier age agreed to by the Executive.
"STOCK APPRECIATION RIGHT" shall mean any stock appreciation rights
issued pursuant to any stock option plan of the Corporation or any
future stock appreciation rights plan.
2. TERMS OF EMPLOYMENT. The Executive acknowledges that this Agreement
does not constitute an employment contract and that the Executive's employment
relationship with the Corporation is at-will and not for any particular period.
Rather, this Agreement is only intended to set forth certain liquidated damages
to be paid in the event of termination of the Executive upon the terms and
conditions specified herein.
3. TERM OF AGREEMENT. The initial term of this Agreement shall be for a
period of four (4) years. Upon expiration of the initial term, the Company
shall, in its sole discretion, determine whether this Agreement shall be renewed
upon such terms it deems advisable.
4. PAYMENTS FOLLOWING TERMINATION OF EMPLOYMENT UPON A
CHANGE-IN-CONTROL.
(a) If the Executive's employment with the Corporation shall be
terminated:
(i) due to the Executive's death,
(ii) by the Executive other than the Executive's having
terminated for Good
48
<PAGE> 6
Reason for Termination following a Change-in-Control,
or
(iii) by the Corporation due to Cause for Termination or
for Disability or Retirement,
then the Corporation shall have no obligations to the
Executive other than to pay the Executive any unpaid portion
of base salary due until the Date of Termination and any other
sums due in accordance with the then various policies,
practices and benefit plans of the Corporation.
(b) If the Executive's employment with the Corporation shall have
terminated during the period commencing six months prior to
the date of a Change-in-Control and ending on the third
anniversary of a Change-in-Control other than in the
circumstances described in subsection (a) above, then the
Corporation shall pay on or before the fifth day following the
Date of Termination (or if the Date of Termination preceded
the date of the Change-in-Control, on or before the fifth day
following the date of the Change-in-Control), to the Executive
the following sums:
(i) in cash any unpaid portion of the Executive's full
base salary for the period from the last period for
which the Executive was paid to the Date of
Termination, or the date of the Change-in-Control, as
the case may be; and
(ii) an amount in cash as liquidated damages for lost
future renumeration equal to the product obtained by
multiplying
(A) the lesser of
(1) two, or
(2) a number equal to the number of
calendar months remaining from the
Date of Termination to the date on
which the Executive is 65 years of
age (or, if earlier, the age agreed
to by the Executive pursuant to any
prior arrangement) divided by
twelve, or
(3) a number equal to the greater of (i)
one (1.0) and (ii) thirty six (36)
less the number of completed months
commencing after the date of the
Change-in-Control during which the
Executive was employed by the
Corporation and did not have Good
Reason for Termination times (iii)
one-twelfth (1/12)
times
49
<PAGE> 7
(B) the sum of
(1) the greater of
(i) the Executive's annual base
salary for the year in
effect on the Date of
Termination (provided that
in the case of Termination
for Good Reason by the
Executive the date
immediately preceding the
date of the earliest event
which gave rise to the
Termination for Good Reason
by the Executive shall be
used instead of the Date of
Termination)
or
(ii) the Executive's annual base
salary for the year in
effect on the date of the
Change-in-Control;
plus
(2) the greater of
(i) the average annual cash
award received by the
Executive as incentive
compensation or bonus for
one calendar year
immediately preceding the
Date of Termination
(provided that in the case
of Termination for Good
Reason by the Executive the
date immediately preceding
the date of the event which
gave rise to the
Termination for Good Reason
by the Executive shall be
used instead of the Date of
Termination)
or
(ii) the average annual cash
award received by the
Executive as incentive
compensation or bonus for
one calendar year
immediately preceding the
date of the
Change-in-Control.
5. OUTPLACEMENT SERVICES. If the Executive's employment with the
Corporation should terminate under circumstances as to entitle the Executive to
receive payment hereunder, the Corporation shall reimburse the Executive for any
reasonable fees or other costs incurred by the Executive during the two (2)
years following the Date of Termination in retaining executive placement
agencies, up to a maximum dollar amount not to exceed fifteen percent (15%) of
the
50
<PAGE> 8
Executive's base salary at the time of such termination. Such reimbursement
shall be made within five (5) days following the Executive's presentment of
bills or other evidence of the costs incurred with executive placement agencies.
6. TAX IMPLICATIONS. If any payment due to the Executive pursuant to
this Agreement result in a tax being imposed on the Executive pursuant to
Section 4999 of the Internal Revenue Code of 1954, as amended, or any successor
provision ("Section 4999"), then the Corporation shall, at the Executive's
option, either (i) reduce the total payments payable to the Executive to the
maximum amount payable without incurring the Section 4999 tax, or (ii) pay to
the Executive the total amount payable, with the understanding that Section 4999
tax will be due on that total amount.
7. BENEFITS. If the Executive's employment with the Corporation should
terminate under circumstances as to entitle the Executive to receive payment
hereunder, the Executive shall also be deemed, for purposes of medical
insurance, pension and other benefits of the Corporation, to have remained in
the continuous employment of the Corporation for the two (2) year period
following the Date of Termination and shall be entitled to all of the medical
insurance, pension or other benefits provided by the Corporation as if the
Executive had so remained in the employment of the Corporation. If, for any
reason, whether by law or provisions of the Corporation?s employee medical
insurance, pension or other benefit plans, or otherwise any benefits which the
Executive would be entitled to under this SECTION 6 cannot be paid pursuant to
such employee benefit plans, then the Corporation contractually agrees to pay
the Executive the difference between the benefits which the Executive would have
received in accordance with this Section if the relevant employee medical
insurance, pension or other benefit plan could have paid such benefit and the
amount of benefits, if any, actually paid by such employee medical insurance,
pension or other benefit plan. The Corporation shall not be required to fund its
obligation to pay the foregoing difference.
8. OTHER EMPLOYMENT. In the event of termination under the
circumstances contemplated in SECTION 4(B) hereunder, the Executive shall have
no duty to seek any other employment after termination of his employment with
the Corporation and the Corporation hereby waives and agrees not to raise or use
any defense based upon the position that the Executive had a duty to mitigate or
reduce the amounts due him hereunder by seeking other employment whether
suitable or unsuitable and should the Executive obtain other employment, then
the only effect of such on the obligations of the Corporation shall be that the
Corporation shall be entitled to credit against any payments that would
otherwise be made pursuant to SECTION 7 hereof, any comparable payments to which
the executive is entitled under the employee benefit plans maintained by the
Executive's other employer or employers in connection with services to such
employer or employers after termination of this employment with the Corporation.
9. STOCK APPRECIATION RIGHTS AND OPTIONS. If the Executive's employment
should terminate under circumstances as to entitle the Executive to receive
payment hereunder, then with respect to any standing Stock Appreciation Rights
and/or Options which did not immediately become exercisable upon the occurrence
of a Change-in-Control, such Stock Appreciation Right or
51
<PAGE> 9
Option shall be automatically vested and remain outstanding in accordance with
its terms and be exercisable thereafter until the stated expiration date of such
Stock Appreciation Right or Option.
10. MISCELLANEOUS.
(a) This Agreement shall be construed under the laws of the
Commonwealth of Pennsylvania.
(b) This Agreement constitutes the entire understanding of the
parties hereto with respect to the subject matter hereof and
may only be amended or modified by written agreement signed by
the parties hereto.
(c) The Corporation will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the
Corporation, by agreement in form and substance satisfactory
to the Executive, to expressly assume and agree to perform
this Agreement in the same manner required of the Corporation
and to perform it as if no such succession had taken place. As
used in this Agreement, "Corporation" shall mean the
Corporation as hereinbefore defined and any successor to its
business and/or assets as aforesaid which executes and
delivers the agreement provided for in this subsection (c) or
which otherwise becomes bound by all of the terms and
provisions of this Agreement by operation of law.
(d) This Agreement shall inure to the benefit of and be
enforceable by the Executive and the Corporation and their
respective legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the
Executive should die while any amounts would still be payable
to him hereunder if he had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to his devisee,
legatee or other designee or, if there be no such designee, to
his estate.
(e) Any notice or other communication provided for in this
Agreement shall be in writing and, unless otherwise expressly
stated herein, shall be deemed to have been duly given if
mailed by United States registered mail, return receipt
requested, postage prepaid, addressed in the case of the
Executive to his office at the Corporation with a copy to his
residence and in the case of the Corporation to its principal
executive offices, attention to the Chief Executive Officer.
52
<PAGE> 10
(f) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is
agreed to in writing signed by the Executive and approved by
resolution of the Board of Directors of the Corporation. No
waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or
otherwise, express or implied, with respect to the subject
matter hereof have been made by either party which are not set
forth expressly in this Agreement.
(g) The invalidity or unenforceability of any provisions of this
Agreement shall not affect the validity or unenforceability of
any other provision of this Agreement, which shall remain in
full force and effect. If any provision hereof shall be deemed
invalid or unenforceable, either in whole or in part, this
Agreement shall be deemed amended to delete or modify, as
necessary, the offending provision and to alter the bounds
thereof in order to render it valid and enforceable.
(h) This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of
which taken together will constitute one and the same
instrument.
(i) If litigation should be brought to enforce, interpret or
challenge any provision contained herein, the prevailing party
shall be entitled to its reasonable attorney's fees and
disbursements and other costs incurred in such litigation and,
if a money judgment be rendered in favor of the Executive, to
interest on any such money judgment obtained calculated at the
prime rate of interest in effect from time to time at Mellon
Bank, N.A., from the date that the payment should have been
made or damages incurred under this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed on the date first
above written.
ATTEST: TOLLGRADE COMMUNICATIONS, INC.
By: /s/ Sara M. Antol
----------------------------------------
/s/ Scott Robbins
----------------------------------------
53
<PAGE> 1
Exhibit 10.28
AMENDMENT NO. 1
TO AGREEMENT
THIS AMENDMENT NO. 1 dated as of February 9, 2000 (herein called the
Amendment")is entered into by and between TOLLGRADE COMMUNICATIONS, INC. (the
"Corporation") and TIMOTHY O'BRIEN (the "Executive").
WHEREAS, the Corporation and the Executive entered into an agreement
dated as of December 20, 1999 to provide for compensation of the Executive upon
termination of employment under certain circumstances relating to a change in
control of the Corporation (herein referred to as the "Agreement"); and
WHEREAS, the Corporation and the Executive desire to amend the
Agreement to revise certain terms of the Agreement, upon the terms and
conditions stated in this Amendment.
NOW, THEREFORE, in consideration of the promises and the faithful
performance of the mutual covenants herein contained, and intending to be
legally bound hereby, the Corporation and the Executive agree that the Agreement
shall be modified as follows:
1. Capitalized terms used herein and not otherwise defined in this
Amendment shall have the meaning assigned to them in the Agreement.
2. Section 4(b)(ii)(A)(3) of the Agreement shall be replaced in its
entirety with the following:
"a number equal to the greater of (i) one (1.0) or (ii) thirty six (36)
less the number of completed months commencing after the date of the
Change-in-Control during which the Executive was employed by the
Corporation and did not have Good Reason for Termination times (iii)
one twelfth (1/12)"
3. Except as modified by this Amendment No. 1, the provisions of the
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 as of
the date hereof by their duly authorized officers.
TOLLGRADE COMMUNICATIONS, INC.
By: /s/ Sara M. Antol
-------------------------------------
Print Name: Sara M. Antol
-----------------------------
Title: Chief Counsel & Secretary
----------------------------------
/s/ Timothy O'Brien
- ----------------------------------------
54
<PAGE> 2
SCHEDULE 10.28
Amendment No. 1 to Change in Control Agreement were entered into between the
Company and Joseph O'Brien, William J. Gumbert, Lawrence J. Fey, Gary Gump, G.
Wayne Lloyd, Michael D. McSparrin, Donald J. Pavlek, Mark B. Peterson, Scott
Robbins and Roger Smith, which were substantially identical to that filed as
Exhibit 10.28.
55
<PAGE> 1
Exhibit 13
Building a Cathedral
Tollgrade Communications, Inc.
1999 Annual Report to Shareholders
<PAGE> 2
A Story of Perspective...
A gentleman walks along a sidewalk in a grand city during medieval times.
He comes across a worker who is disgruntled. He asks the worker, "What are you
doing?"
The laborer replies, "What does it look like I'm doing? I'm putting one brick on
top of the other. Bricks and mud. That's what I'm doing."
The gentleman moves further down the sidewalk and stops at a second laborer, who
is whistling and seems to be working at twice the pace of the other. The
gentleman asks what he is doing. The second laborer steps back from his work
without missing a beat, lifts his arms and motions to the heights where his
creation would someday reach, and he says, "I am building a beautiful cathedral,
where my friends and family will join me to learn and discover."
-- Author Unknown
TABLE OF CONTENTS
1999 Financial Highlights ...............................................1
Letter to Shareholders ..................................................2
1999 Operations Highlights ..............................................4
Selected Consolidated Financial Data ....................................6
Management's Discussion and Analysis of Results
of Operations and Financial Condition ..............................7
Statement of Management's Responsibility for Financial Reporting .......14
Report of Independent Accountants ......................................15
Consolidated Financial Statements ......................................16
Notes to Consolidated Financial Statements .............................20
Shareholder Information ................................................28
Board of Directors and Executive Officers ...............Inside back cover
<PAGE> 3
1999 Financial Highlights
<TABLE>
<CAPTION>
(In thousands, except per share data
and number of employees)
December 31, 1998 DECEMBER 31, 1999
<S> <C> <C>
OPERATIONS
Total Revenues $ 46,277 $ 61,111
- ------------------------------------------------------------------------------------------------------------
Net Income $ 6,967 $ 10,623
- ------------------------------------------------------------------------------------------------------------
Earnings Per Share-- Diluted (1)(2) $ .58 $ .89
- ------------------------------------------------------------------------------------------------------------
Weighted Average Shares of Common Stock and Equivalents (2) 11,933,102 11,958,976
- ------------------------------------------------------------------------------------------------------------
Number of Employees 230 282
- ------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION
Total Assets $ 49,865 $ 66,202
- ------------------------------------------------------------------------------------------------------------
Working Capital $ 40,539 $ 49,958
- ------------------------------------------------------------------------------------------------------------
Shareholders' Equity $ 45,696 $ 57,504
- ------------------------------------------------------------------------------------------------------------
</TABLE>
NET INCOME
(DOLLARS IN THOUSANDS)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
$2,522 $5,597 $6,883 $6,967 $10,623
REVENUES
(DOLLARS IN THOUSANDS)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
$22,310 $37,490 $45,421* $46,277* $61,111
* Includes license fees of $250 and $150, respectively.
DILUTED EARNINGS PER SHARE (2)
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
$0.28 $0.47 $0.58 $0.58 $0.89
(1) 1998 includes $.02 per share related to the after-tax effect of net key
man life insurance proceeds associated with the death of the Company's
former Chairman R. Craig Allison.
(2) Restated to reflect the two-for-one stock split of the Company's common
stock (see Note 2 to the accompanying Consolidated Financial
Statements).
1
<PAGE> 4
"We are building a magnificent virtual cathedral by providing innovative testing
products for world-class communications companies."
Dear Shareholder,
Historians have written that European monks saved western culture during the
Dark Ages by protecting books in medieval cathedrals. In a way, today's
sophisticated communications network is a "virtual" cathedral that protects and
distributes the world's knowledge.
So-called bricks-and-mortar companies like Tollgrade are helping to build these
cathedrals with optical switches, fiber-optic backbones, cross-connects, hubs,
routers, transmission systems, LANs and WANs. Our vernacular isn't the Latin and
Greek of the Middle Ages, but languages such as C++, T1, DSL, ATM and DSP. And
leading-edge test systems are the guardians of our virtual cathedrals. They
monitor voice, data and video transmission quality, and automate customer
service.
For test system companies like Tollgrade, opportunities have been created by
this new Age of Enlightenment. Large telecommunications service providers are
consolidating. Competitive providers are blazing trails with services in
traditional Baby Bell territories. Telecommunications and CATV companies are
offering bundled telephony, data and video services. Long-distance companies are
going local, and local providers are delivering long-distance service.
Just as the network has evolved, Tollgrade has changed, too. We've introduced
new products to address the growing testing needs of our customers:
o New versions of our MCU(R) technology, our flagship product that connects
central office-based test systems to subscribers' voice lines. Key MCU market
factors will be new phone line growth, as well as the need to improve testing
in legacy parts of the network.
o DigiTest(R), a next-generation system for testing voice service and the
Internet-oriented DSL service. DigiTest focuses on the expanded testing needs
of incumbent carriers, as well as emerging competitive communications
companies.
o LIGHTHOUSE(R), a system that helps CATV operators monitor the health of
mission-critical power supplies, as well as fiber-optic nodes in HFC networks.
CATV networks are being converted from one-way to two-way networks so that
cable companies can deliver video, telephony and data services.
As a result of core product sales growth and new product introductions in 1999,
we posted $61.1 million in revenues, a 32.1 percent increase from $46.3 million
in 1998. Gross profit as a percentage of sales increased from 57.6 percent to
59.1 percent. And earnings per share rose 53.4 percent to $.89 from $.58 in
1998.
2
<PAGE> 5
We shipped $4.4 million in LIGHTHOUSE cable status monitoring system equipment
to AT&T Broadband and Internet Services (formerly TCI), RCN and several original
equipment manufacturer (OEM) customers, such as ANTEC, C-COR.net and Motorola.
In July, we announced our partnership with Nortel Networks for DigiTest. This
development and marketing agreement is similar to the one forged with Lucent
Technologies in 1998. As a result, DigiTest now interfaces with both Lucent's
Mechanized Loop Testing (MLT) system, as well as Nortel's AccessCare(TM) system.
MLT is the standard voice test system used by the Regional Bell Operating
Companies (RBOCs), while AccessCare is making inroads into both major Incumbent
Local Exchange Carriers (ILECs) and Competitive Local Exchange Carriers (CLECs).
DigiTest not only enables MLT and AccessCare to provide DSL testing, it also
upgrades these systems with new, state-of-the-art testing hardware.
By the end of 1999, Tollgrade had shipped $6.6 million in DigiTest products and
accessories to Sprint North Supply, Sprint Canada and Lucent Technologies.
Sales of Tollgrade's core MCU technology continued to increase, most notably to
U S WEST and Nortel, a major OEM customer.
In 1998, MCU product sales accounted for approximately 90 percent of total
company revenues. In 1999, even though MCU sales enjoyed an increase, new
products and services accounted for 21.6 percent of total revenues. MCU sales
were 74 percent of the total.
And throughout all of 1999, Tollgrade began to build a solid Professional
Services business unit. We provided testing-related consulting and training to
companies such as U S WEST, Bell Atlantic and Ameritech.
As we've grown our company, we haven't forgotten about helping people in the
Pittsburgh community. In 1999, we named our charity golf tournament after my
Dad, the visionary who founded Tollgrade. Last year, the R. Craig Allison
Memorial Classic raised $40,000 for INROADS(R), an organization that helps needy
and talented minority college students. Over the past three years, Tollgrade has
distributed more than $90,000 to hard-working young men and women in our area
for school-related expenses.
Like the productive laborer in our story, Tollgrade is doing more than stacking
the bricks and mortar of the evolving network. We are building a magnificent
virtual cathedral by providing innovative testing products for world-class
communications companies.
Thank you for joining us in this great crusade.
/s/ Chris Allison
- -----------------
Chris Allison
Chairman, President and
Chief Executive Officer
3
<PAGE> 6
1999 Operations Highlights
To know where the communications industry is going, you have to know where it's
been. At Tollgrade, we've been integral to the constant effort to upgrade and
maintain the local exchange carrier network since 1988.
It is from this perspective that we work to find new ways to deliver everything
from old-fashioned voice service to faster, more dependable high-speed Internet
access.
To be sure, according to a study conducted by the Yankee Group, the U.S. market
for residential high-speed Internet services will grow to 3.3 million
subscribers in 2000, and will reach 16.6 million by 2004.
According to the report, the installed base of domestic high-speed Internet
subscribers was 1.4 million at the end of 1999, with 80 percent of those homes
using cable modems for access. That same report, however, predicted that by
2004, about nine million or 58 percent of high-speed Internet subscribers will
rely on Digital Subscriber Line (DSL) service.
The build-up that has begun for this battle contributed directly to Tollgrade's
record performance in 1999. We saw better than expected sales for both of our
two new system offerings -- DigiTest(R) and LIGHTHOUSE,(R) along with a
continued increase in our flagship MCU(R) test access product line.
Test Access Products
CORE PRODUCTS
MCU Technology that gives local exchange carriers the ability to conduct
in-service testing in Digital Loop Carrier (DLC) environments.
KEY CUSTOMERS
BellSouth, Bell Atlantic, U S WEST, SBC Communications, Ameritech, Pacific Bell,
Southwestern Bell, Southern New England Telephone, Sprint Communications,
Allegiance Telecom
HIGHLIGHTS
Continued increased sales across the majority of sectors of the business;
increased sales under major Original Equipment Manufacturer's agreement.
Test Systems for Telephony
CORE PRODUCTS
DigiTest system, which includes the Digital Measurement Node (DMN), the Digital
Measurement Unit (DMU), the Digital Wideband Unit (DWU) and other critical
components. The system works with major test Operations Support Systems to
conduct the full range of tests for Plain Old Telephone Service (POTS), along
with special measurement functions for such next generation services as
Integrated Services Digital Network (ISDN) and Digital Subscriber Line (DSL).
KEY CUSTOMERS
Sprint North Supply, the procurement division of Sprint USA; Lucent Canada for
deployment in Sprint Canada
HIGHLIGHTS
Shipment of $6.6 million in DigiTest products to customers for both POTS and DSL
loop qualification applications; the announcement of our joint development
agreement with Nortel Networks; the development of the DWU for DSL applications.
4
<PAGE> 7
Status Monitoring Systems for Cable Television
CORE PRODUCTS
LIGHTHOUSE Cable Status Monitoring System, which includes a headend controller,
host software and transponders for power supplies, amplification and nodes.
Cable television system operators use Tollgrade's LIGHTHOUSE system to monitor
their systems from a central Network Operations Center, out to the outside
plant. As a result, they can identify and resolve the most common and costly
cable television system power, performance and service problems.
KEY CUSTOMERS
AT&T Broadband and Internet Services, RCN Corporation, C-COR.Net, ANTEC,
Motorola
HIGHLIGHTS
Shipment of $4.4 million in LIGHTHOUSE Products; the successful deployment of
LIGHTHOUSE products in AT&T's Dallas and Seattle markets; the continued
development of strategic partnerships for future OEM and direct sales.
Professional Services
CORE SERVICES
Support for all phases of telco life-cycle of DLC test systems; Planning and
Design; Grassroots Testability Improvement Initiatives; POTS Test Assurance
Training Programs; Test Equipment Installation Support; On-site Fault Diagnosis
and Resolution.
KEY CUSTOMERS
U S WEST, Ameritech, Bell Atlantic, BellSouth
HIGHLIGHTS
Completed major training and testability improvement initiatives from an average
40% testability per wire center to approximately 80% across the board.
Revenues by Product
(PERCENTAGE OF 1999 REVENUES)
TELACCORD, PROFESSIONAL
MCU PRODUCTS DIGITEST CATV PRODUCTS SERVICES & OTHER
- ------------ -------- ------------- ----------------
74% 11% 7% 8%
5
<PAGE> 8
Selected Consolidated Financial Data
The selected consolidated financial data of the Company as of December 31, 1995,
1996, 1997, 1998, 1999 and for the years then ended is derived from audited
consolidated financial statements of the Company.
<TABLE>
<CAPTION>
(In thousands, except per share data)
Years Ended December 31,
1995 1996 1997 1998 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues(1) $ 22,310 $ 37,490 $ 45,421 $ 46,277 $61,111
Cost of product sales 11,329 18,322 20,104 19,620 25,014
- ---------------------------------------------------------------------------------------------------------------
Gross profit 10,981 19,168 25,317 26,657 36,097
Operating expenses:
Selling and marketing 2,953 4,767 5,446 5,704 7,006
General and administrative 1,471 2,552 3,768 4,128 4,723
Research and development 2,637 3,921 5,945 6,880 8,757
- ---------------------------------------------------------------------------------------------------------------
Total operating expenses 7,061 11,240 15,159 16,712 20,486
- ---------------------------------------------------------------------------------------------------------------
Income from operations 3,920 7,928 10,158 9,945 15,611
Other income, net 20 845 899 1,062 949
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 3,940 8,773 11,057 11,007 16,560
Provision for income taxes 1,418 3,176 4,174 4,040 5,937
- ---------------------------------------------------------------------------------------------------------------
Net income $ 2,522 $ 5,597 $ 6,883 $ 6,967 $ 10,623
- ---------------------------------------------------------------------------------------------------------------
Earnings per share: (2)(3)
Basic $ .30 $ .51 $ .61 $ .60 $ .92
Diluted .28 .47 .58 .58 .89
- ---------------------------------------------------------------------------------------------------------------
Weighted average shares
of common stock and equivalents: (3)
Basic 8,455 11,002 11,372 11,683 11,574
Diluted 9,007 11,879 11,923 11,933 11,959
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
1995 1996 1997 1998 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 21,159 $ 27,232 $ 34,570 $ 40,539 $ 49,958
Total assets 25,728 34,626 43,713 49,865 66,202
Shareholders' equity 22,609 30,006 38,101 45,696 57,504
- ---------------------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
- ---------------------------------------------------------------------------------------------------------------
OTHER DATA: (4)
Number of employees at year end 126 184 205 230 282
Average revenue per employee $ 177 $ 204 $ 222 $ 201 $ 217
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes license fees of $250 and $150 for 1997 and 1998, respectively.
(2) 1998 includes $.02 per share related to the after-tax effect of net key
man life insurance proceeds associated with the death of the Company's
former Chairman R. Craig Allison.
(3) Restated to reflect the two-for-one stock split of the Company's common
stock (see Note 2 to the accompanying Consolidated Financial
Statements).
(4) Data not derived from Company's audited financial statements.
6
<PAGE> 9
Management's Discussion and Analysis of Results of Operations and Financial
Condition
The following discussion should be read in conjunction with the "Selected
Consolidated Financial Statements" and notes thereto appearing elsewhere in this
Annual Report to Shareholders.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.
The statements contained in this Annual Report to Shareholders, including those
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 74% of the
Company's revenue for the year ended December 31, 1999 and will continue to
account for a majority of the Company's revenues for the foreseeable future.
During 1999, the Company initiated production and began shipping the
DigiTest(R) centralized network test system platform. In general, test systems
focus 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 prediction, and
in-service wideband testing. Sales of the DigiTest product line accounted for
approximately 11% of the Company's revenue for the year ended December 31, 1999.
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;
7
<PAGE> 10
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 7% of
the Company's revenue for the year ended December 31, 1999.
During 1999, 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 1999 but are not
yet considered material to the Company's revenue for the year ended December 31,
1999.
The Company's telecommunications product sales are primarily to the
four Regional Bell Operating Companies (RBOCs) as well as major independent
telephone companies and to certain DLC equipment manufacturers. For the year
ended December 31, 1999, approximately 59% of the Company's total revenue was
generated from sales to these four RBOCs, the two largest of which comprised
approximately 34% of revenues. In addition, sales to an Original Equipment
Manufacturer (OEM) customer accounted for approximately 11% of the Company's
total revenues in 1999. The Company markets and sells its cable products
directly, as well as through various 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 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
8
<PAGE> 11
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 14% for the year ended December 31, 1999. The
Company expects its research and development expenses to continue at significant
levels.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES
Revenues for the year ended December 31, 1999 were $61.1 million, and were $14.8
million, or 32.1%, higher than the revenues of $46.3 million for the year ended
December 31, 1998. The increase in revenues is primarily associated with the
sale of new products, as well as increased sales of core MCU products. During
1999, the Company generated revenues of approximately $9.4 million associated
with new product introductions including the Company's DigiTest product line,
while same product and services sales between years increased $5.4 million, or
11.8%. Contributing to the increase in same product and services sales in 1999
was continued strong purchasing by U S WEST associated with that company's
continued effort to improve testability in selected states, offset by the lower
sales to certain Bell Atlantic regions. The Company believes the decreased sales
within the Bell Atlantic region during 1999 was the result of higher than
expected inventories as a result of slower than expected deployment of MCU
products within certain regions. Bell Atlantic's testability improvement
initiatives migrated to more complex embedded DLC architectures that require the
provisioning of additional equipment and increased installation time. The
Company has implemented certain strategies, including providing professional
services which provide comprehensive technical training and other testability
improvement initiatives services which are designed to return product usage to
historical levels. The effectiveness of these programs have resulted in some
increased deployment of the Company's MCU technology which in turn, the Company
believes, has begun to reduce existing inventory levels within Bell Atlantic.
There can be no assurances as to the ultimate effectiveness of these programs in
returning product deployment to historical levels.
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. Management believes that there is a continuing
possibility that the requirements for certain important MCU products which are
utilized in legacy DLC systems may be satisfied at some point. In order to
reduce associated risks, the Company is focusing on the development of new
product lines to attempt to meet the other requirements of customers.
GROSS PROFIT
Gross profit for 1999 was $36.1 million compared to $26.7 million for 1998,
representing an increase of $9.4 million, or 35.4%. Gross profit as a percentage
of revenues increased to 59.1% for 1999 compared to 57.6% for 1998. 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. Maintaining
the Company's current gross margin levels is contingent on its ability to
negotiate price increases and gain further cost reductions. Furthermore,
maintaining gross margin levels will also depend on the actual mix of products
sold which will include the effect of the Company's cable products, which carry
lower gross margins than earned historically on the Company's telecommunication
products.
SELLING AND MARKETING EXPENSE
Selling and marketing expenses consist primarily of personnel costs as well as
commissions and travel expenses of direct sales and marketing personnel, and
costs associated with marketing programs. Selling and marketing expense for 1999
was $7.0 million, or 11.5% of revenues, compared to $5.7 million, or 12.3% of
revenues for 1998. This increase of $1.3 million, or 22.8%, is primarily related
to increased costs associated with certain performance-based compensation
programs, as well as an increase in spending on general advertising, promotion
and related marketing activities. The Company expects selling and marketing
expenses to rise commensurate with increased revenues and selling efforts. The
Company is continuing its efforts to expand its business
9
<PAGE> 12
by marketing new products and the development of comprehensive technical
training and other testability improvement initiatives.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses consist primarily of personnel costs for
finance, administrative and general management personnel as well as accounting
and legal expenses. General and administrative expense for 1999 was $4.7
million, or 7.7%, of revenues, compared to $4.1 million, or 8.9%, of revenues
for 1998. This increase of $0.6 million, or 14.4%, is primarily attributable to
an increase in professional services consulting fees, as well as an increase in
expense for the Company's management incentive compensation program associated
with the Company's financial performance for the year ended December 31, 1999.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses consist primarily of personnel costs and costs
associated with the development of new products and technologies, including
DigiTest and LIGHTHOUSE, and enhancing features of existing products. Research
and development expense for 1999 was $8.8 million, or 14.3%, of revenues,
compared to $6.9 million, or 14.9%, of revenues for 1998. This increase of $1.9
million, or 27.3%, was principally due to costs associated with new product
development and the addition of personnel to support these new product
development activities. In addition, research and development expenses reflect
an increase in expense associated with the Company's management incentive
compensation program as mentioned above. The Company expenses all research and
development costs as they are incurred.
OTHER INCOME AND EXPENSE
Other income, which consists primarily of interest income, was $1.0 million for
1999 compared to $1.1 million for 1998. The decrease of $0.1 million, or 10.6%,
was primarily the result of the prior year period including approximately $0.2
million of net key man life insurance proceeds associated with the death of the
Company's former Chairman R. Craig Allison.
PROVISIONS FOR INCOME TAXES
The Company's effective tax rate for 1999 was 35.9% of income before income
taxes, compared to the 36.7% rate in 1998. The decrease in the effective income
tax rate primarily reflects the permanent effect of an increase in non-taxable
interest income on the Company's short- and long-term investments related to
individual municipal bonds.
NET INCOME AND EARNINGS PER SHARE
For the year ended December 31, 1999, net income was $10.6 million compared to
$7.0 million for the year ended December 31, 1998, representing an increase of
$3.7 million, or 52.5%. Diluted earnings per common share of $.89 for 1999
increased by 53.4%, or $.31, from the $.58 earned in 1998. Fiscal year 1998
includes approximately $0.2 million, or $.02 per share, related to the after-tax
effect of net key man life insurance as previously discussed above. Excluding
the effect of net key man life insurance proceeds, net income increased $3.9
million, or 55.7%, while diluted earnings per share for 1999 increased 58.9%, or
$0.33 per share. Diluted weighted average shares of common stock and equivalents
outstanding were 11,958,976 in 1999 compared to 11,933,102 in 1998. As a
percentage of revenues, net income for 1999 increased to 17.4% from 15.1% in
1998. All share and per share information was restated to reflect the
two-for-one stock split of the Company's common stock (see Note 2 to the
accompanying consolidated financial statements).
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Revenues for the year ended December 31, 1998 were $46.3 million, and were $0.9
million, or 1.9%, higher than the revenues of $45.4 million for the year ended
December 31, 1997. Revenues for both years consisted almost entirely of product
sales. Revenues for 1998 and 1997 included approximately $0.5 million and $0.9
million, respectively, for non-recurring engineering fees, royalty and license
fees. The increase in revenues was primarily associated with new product
revenues. During 1998, the Company generated revenues of approximately $2.2
million associated with new product introductions including the Company's
LIGHTHOUSE cable products, while same product sales between periods decreased
$1.3 million, or 3.0%. This decrease occurred primarily in the second half of
1998, which the Company believes was caused by several factors including certain
labor disputes at Bell Atlantic, U S WEST and Southern New England Telephone
during the third quarter of 1998, higher than expected inventories at Ameritech,
as well as slower than expected deployment of MCU products within certain
regions of Bell Atlantic as their testability improvement initiatives migrated
to more complex embedded DLC architectures requiring the provisioning of
additional equipment and increased installation time.
GROSS PROFIT
Gross profit for 1998 was $26.7 million compared to $25.3 million
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<PAGE> 13
for 1997, representing an increase of $1.3 million, or 5.3%. Gross profit as a
percentage of revenues increased to 57.6% for 1998 compared to 55.7% for 1997.
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 increased sales volumes and increased manufacturing efficiencies.
SELLING AND MARKETING EXPENSE
Selling and marketing expenses consist primarily of personnel costs as well as
commissions and travel expenses of direct sales and marketing personnel, and
costs associated with marketing programs. Selling and marketing expense for 1998
was $5.7 million, or 12.3% of revenues, compared to $5.4 million, or 12.0% of
revenues for 1997. This increase of $0.3 million, or 4.7%, was primarily
associated with additional personnel to support expanding product lines and
increased consulting and travel expenses associated with international market
development.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses consist primarily of personnel costs for
finance, administrative and general management personnel as well as accounting
and legal expenses. General and administrative expense for 1998 was $4.1
million, or 8.9%, of revenues, compared to $3.8 million, or 8.3%, of revenues
for 1997. This increase of $0.3 million, or 9.5%, was primarily attributable to
increased expenditures for legal and professional fees associated with business
development activities as well as personnel recruiting costs.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses consist primarily of personnel costs and costs
associated with the development of new products and technologies. Research and
development expense for 1998 was $6.9 million, or 14.9%, of revenues, compared
to $5.9 million, or 13.1%, of revenues for 1997. This increase of $1.0 million,
or 15.7%, was principally due to costs associated with new product development
and the addition of personnel to support these new product development
activities. The Company expenses all research and development costs as they are
incurred.
OTHER INCOME AND EXPENSE
Other income, which consists primarily of interest income, was $1.1 million for
1998 compared to $0.9 million for 1997. The increase of $0.2 million, or 18.2%,
includes approximately $0.2 million of net key man life insurance proceeds
associated with the death of the Company's former Chairman R. Craig Allison.
Additionally, 1998 other income and expense included interest expense of
approximately $0.1 million related to settlements of certain prior years' tax
returns.
PROVISIONS FOR INCOME TAXES
The Company's effective tax rate for 1998 was 36.7% of income before income
taxes, compared to the 37.7% rate in 1997. The decrease in the effective income
tax rate reflects the permanent effect of an increase in non-taxable interest
income on the Company's short and long-term investments related to individual
municipal bonds.
NET INCOME AND EARNINGS PER SHARE
For the year ended December 31, 1998, net income was $7.0 million compared to
$6.9 million for the year ended December 31, 1997, representing an increase of
$0.1 million, or 1.2%. Diluted earnings per common share of $.58 for 1998
remained unchanged from the $.58 earned in 1997. Fiscal year 1998 includes
approximately $0.2 million, or $.02 per share, related to the after-tax effect
of net key man life insurance as previously discussed above. Excluding the
effect of net key man life insurance proceeds, net income decreased $0.2
million, or 2.1%, while diluted earnings per share for 1998 decreased 3.4%, to
$.56 per share. Diluted weighted average shares of common stock and equivalents
outstanding were 11,933,102 in 1998 compared to 11,923,080 in 1997. As a
percentage of revenues, net income for 1998 decreased to 15.1% from 15.2% in
1997. All share and per share information was restated to reflect the
two-for-one stock split of the Company's common stock (see Note 2 to the
accompanying consolidated financial statements).
LIQUIDITY AND CAPITAL RESOURCES
The Company had working capital of $50.0 million as of December 31, 1999
compared to the working capital of $40.5 million as of December 31, 1998. The
increase of $9.5 million, or 23.2%, can be attributed 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 and funding of the Company's stock buyback program. Significant
components of the Company's change in working capital include an increase in
cash and cash equivalents which include the effect of additional operating cash
flow as well as cash received as a result of stock option exercises, an increase
in inventories due to the investment required to introduce new products and to
maintain sufficient inventory stocking levels, and an increase in accounts
receivable-trade as a result of the increased sales levels during the latter
part of 1999. In addition, the decrease in short-
11
<PAGE> 14
term investments of $0.7 million was more than offset by an increase of $ 1.3
million in long-term investments. This reclassification reflects the Company's
strategy to migrate to individual municipal bonds with a maturity of more than
one year but less than eighteen months and was undertaken to maximize investment
income levels. Such funds are still available for general corporate use upon
maturity. As of December 31, 1999, the Company had $31.9 million of cash and
cash equivalents, short-term and long-term investments which are unrestricted
and available for corporate purposes including acquisitions and other general
working capital requirements.
The Company made capital expenditures of $2.3 million in 1999 which were
primarily related to additions and upgrades of the MIS infrastructure,
production test equipment and fixtures, as well as various leasehold
improvements made to the Company's facilities. Capital expenditures were $1.7
million and $1.2 million for 1998 and 1997, respectively, which were primarily
related to upgrades to the MIS infrastructure, office equipment, test fixtures
and development systems, tooling and leasehold improvements. The Company
presently has no material capital expenditure commitments. Planned capital
expenditures for 2000 are anticipated to total approximately $2.8 million. These
planned capital projects include test fixtures and development systems, computer
and office equipment and leasehold improvements to the Company's facilities.
On April 22, 1997, the Company's Board of Directors authorized a program to
purchase up to 400,000 shares of its common stock over two years. The program
intended that the shares would be utilized to provide stock under certain
employee benefit programs. As of April 22, 1999, the expiration of this initial
program, the Company had purchased 382,400 shares of common stock under this
program. The Company used existing cash and short-term investments to finance
these purchases. On May 6, 1999, the Company's Board of Directors authorized a
new program to purchase up to 400,000 shares of its common stock over a two-year
period. As of December 31, 1999, the Company had not initiated any purchases of
common stock under this program. 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 purchases.
The impact of inflation on both the Company's financial position and the
results of operations has been minimal and is not expected to adversely affect
2000 results. The Company's financial position enables it to meet cash
requirements for operations and capital expansion programs.
On July 23, 1996, the Board of Directors of the Company declared a dividend
of one preferred stock purchase right for each outstanding share of the
Company's common stock. The rights will be exercisable only if a person or group
acquires or announces a tender or exchange offer for 20% or more of the
Company's common stock. In such an event, each right will entitle shareholders
to buy one-hundredth of a share of a new series of preferred stock at an
exercise price of $115.00. Each one-hundredth of a share of the new preferred
stock has terms designed to make it the economic and voting equivalent of one
share of common stock.
If a person or group acquires 20% or more of the Company's outstanding
common stock, each right not owned by the person or group will entitle its
holder to purchase, at the right's exercise price, a number of shares of the
Company's common stock (or, at the option of the Company, the new preferred
stock) having a market value of twice the exercise price. Further, at any time
after a person or group acquires 20% or more (but less than 50%) of the
outstanding common stock, the Board of Directors may, at its option, exchange
part or all of the rights (other than rights held by the acquiring person or
group) for shares of the Company's common or preferred stock on a one-for-one
basis.
If after a person or group acquires 20% or more of the outstanding common
stock, each right will entitle its holder to purchase, at the right's exercise
price, a number of the acquiring company's common shares having a market value
at that time of twice the exercise price.
The Board of Directors is entitled to redeem the rights for one cent per
right at any time before a 20% position has been acquired. The Board of
Directors is also authorized to reduce the 20% thresholds referred to above to
not less than 10%.
The rights were not distributed in response to any specific effort to
acquire control of the Company, nor is the Company presently aware of any such
effort. The distribution of the rights will not affect the Company's reported
earnings and is not taxable to shareholders or to the Company. Shareholders will
not receive any documents evidencing their rights unless and until the rights
become exercisable. Until that time, the rights will not trade separately from
the common stock. The rights will expire on August 15, 2006.
12
<PAGE> 15
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue exists because many computer systems and applications use
two digit rather than four digit date fields to designate an applicable year. As
a result, the systems and applications may not properly recognize the year 2000
or process data which include it, potentially causing data miscalculations or
inaccuracies or operational malfunctions or failures.
The Company established a Year 2000 committee to transition the Company's
business applications, computing infrastructure and communication systems into
the next millennium. The objectives of the Year 2000 committee were to ensure
all internal computer systems function correctly in the year 2000, ensure data
exchanged with external organizations conforms to year 2000 standards and ensure
all products sold by the Company conform to year 2000 standards. The Company
developed an inventory of all Company business systems and corresponding
software applications, and assessed the business priority of each system. Each
system was classified by mission criticality and a determination was made to
either replace or remediate the system depending upon its importance. In
addition, the Year 2000 project included a review of the Year 2000 compliance
efforts of the Company's key suppliers and other principal business partners
and, as appropriate, the development of joint business support and continuity
plans for Year 2000 issues.
The Company's products with time-of-day (TOD) clocks in their design have
been tested for successful Year 2000 operation. Products that do not have TOD
clocks have no potential Year 2000 operational issues and therefore have not
been tested. The Company believes that it will have no material exposure to
contingencies related to the Year 2000 Issue for the products it has sold.
As of December 31, 1999, all of the Company's critical applications were
prepared to process Year 2000 information and have not experienced any material
problems since January 1, 2000. We are not able to determine at this time
whether undiscovered Year 2000 problems will occur in the future, however, the
Company has developed contingency plans to address such situations that may
result if we experience year 2000 problems.
The Company expenses associated with the Year 2000 efforts were
approximately $0.1 million through 1999 with an additional $0.3 million for
capital improvement costs to support this project.
BACKLOG
As of December 31, 1999, the Company's backlog was $12.1 million compared to the
backlog at December 31, 1998 of $0.6 million. The Company's backlog consists of
firm customer purchase orders for the Company's various products. Backlog at
December 31, 1999 also includes approximately $1.4 million related to shipments
of certain DigiTest hardware components to a customer in the fourth quarter of
1999 which were awaiting customer acceptance at December 31, 1999. Such
acceptance was predicated on the customer receiving final certification
approvals from an independent third party laboratory. Revenue and income related
to this sale has been deferred and will be recognized when final customer
acceptance has occurred. 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.
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 or about March 20, 2000, shareholders of record will receive
one additional share of common stock for each share of common stock held of
record on February 28, 2000. The stock split has been reflected in the
accompanying financial statements, and all applicable references as to the
number of common shares, per share information and market prices have been
restated assuming the split had occurred at the beginning of the earliest year
presented (see Note 2 to the accompanying consolidated financial statements).
ACCOUNTING PRONOUNCEMENTS
In 1999, the Company adopted Statement of Financial Accounting Standards (SFAS)
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This statement establishes standards for reporting information about operating
segments, products and services, geographic areas and major customers in annual
and interim financial statements. The adoption of this standard did not affect
the disclosure of the Company's segment information.
13
<PAGE> 16
TOLLGRADE COMMUNICATIONS, INC., AND SUBSIDIARIES
Statement of Management's Responsibility
for Financial Reporting
The accompanying consolidated financial statements of Tollgrade Communications,
Inc., and Subsidiaries have been prepared by management, who are responsible for
their integrity and objectivity. The statements have been prepared in conformity
with generally accepted accounting principles and include amounts based on
management's best estimates and judgements. Financial information elsewhere in
this Annual Report is consistent with that in the financial statements.
Management has established and maintains a system of internal control
designed to provide reasonable assurance that assets are safeguarded and that
the financial records reflect the authorized transactions of the Company. The
system of internal control includes widely communicated statements of policies
and business practices that are designed to require all employees to maintain
high ethical standards in the conduct of Company affairs. The internal controls
are augmented by organizational arrangements that provide for appropriate
delegation of authority and division of responsibility.
The financial statements have been audited by PricewaterhouseCoopers LLP,
Independent Accountants. As part of their audit of the Company's 1999 financial
statements, PricewaterhouseCoopers LLP considered the Company's system of
internal control to the extent they deemed necessary to determine the nature,
timing and extent of their audit tests. The Independent Accountants' Report
follows.
The Board of Directors pursues its responsibility for the Company's
financial reporting through its Audit Committee, which is composed entirely of
outside directors. The Audit Committee has met periodically with the Independent
Public Accountants and management. The Independent Public Accountants had direct
access to the Audit Committee, with and without the presence of management
representatives, to discuss the results of their audit work and their comments
on the adequacy of internal accounting controls and the quality of financial
reporting.
/s/ Christian L. Allison
------------------------
Christian L. Allison
Chairman, President and
Chief Executive Officer
/s/ Samuel C. Knoch
------------------------
Samuel C. Knoch
Chief Financial Officer and
Treasurer
January 24, 2000
14
<PAGE> 17
Report of Independent Accountants
January 24, 2000
To the Board of Directors and Shareholders of Tollgrade Communications, Inc. and
Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows present fairly, in all material respects, the financial position of
Tollgrade Communications, Inc. and its subsidiaries at December 31, 1999 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
Pittsburgh, Pennsylvania
January 24, 2000, except for Note 2,
which is as of March 20, 2000
15
<PAGE> 18
TOLLGRADE COMMUNICATIONS, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31, 1998 DECEMBER 31, 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 8,311,353 $ 15,555,810
Short-term investments 14,249,164 13,516,676
Accounts receivable:
Trade 7,888,060 10,865,244
Other 300,680 335,155
Inventories 13,201,771 17,335,747
Prepaid expenses and deposits 352,413 461,934
Deferred tax assets 354,891 575,251
- -------------------------------------------------------------------------------------------------------------------
Total current assets 44,658,332 58,645,817
Long-term investments 1,553,000 2,850,000
Property and equipment, net 3,314,522 4,337,115
Deferred tax assets 334,474 367,626
Patents 4,247 1,396
- -------------------------------------------------------------------------------------------------------------------
Total assets $ 49,864,575 $ 66,201,954
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 687,079 $ 911,769
Accrued expenses 1,128,421 1,222,866
Accrued salaries and wages 801,908 2,209,473
Royalties payable 712,971 793,689
Income taxes payable 788,479 2,443,609
Deferred income ---- 1,106,483
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 4,118,858 8,687,889
Deferred income 40,000 --
Deferred tax liabilities 9,950 9,950
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 4,168,808 8,697,839
Commitments
Shareholders' equity (Note 2):
Preferred stock, $1.00 par value; authorized shares,
10,000,000; issued shares, -0- in 1998 and 1999, respectively -- --
Common stock, $.20 par value; authorized shares, 25,000,000;
issued shares, 11,840,928 in 1998 and 12,102,280 in 1999 2,368,186 2,420,456
Additional paid-in capital 26,319,679 28,828,568
Treasury stock, at cost, 218,200 shares in 1998
and 386,800 shares in 1999 (1,789,287) (3,164,975)
Retained earnings 18,797,189 29,420,066
- -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 45,695,767 57,504,115
- -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 49,864,575 $ 66,201,954
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
16
<PAGE> 19
TOLLGRADE COMMUNICATIONS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1998 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 45,421,135 $ 46,277,409 $ 61,111,103
Cost of product sales 20,104,202 19,620,226 25,014,418
- ----------------------------------------------------------------------------------------------------------------
Gross profit 25,316,933 26,657,183 36,096,685
Operating expenses:
Selling and marketing 5,446,102 5,704,323 7,006,118
General and administrative 3,767,925 4,127,580 4,722,970
Research and development 5,944,819 6,880,015 8,756,551
- ----------------------------------------------------------------------------------------------------------------
Total operating expenses 15,158,846 16,711,918 20,485,639
- ----------------------------------------------------------------------------------------------------------------
Income from operations 10,158,087 9,945,265 15,611,046
Other income (expense):
Interest expense (3,271) (107,694) (1,549)
Interest and other income 901,981 1,169,531 950,380
- ----------------------------------------------------------------------------------------------------------------
Total other income (expense) 898,710 1,061,837 948,831
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes 11,056,797 11,007,102 16,559,877
Provision for income taxes 4,173,649 4,039,800 5,937,000
- ----------------------------------------------------------------------------------------------------------------
Net income $ 6,883,148 $ 6,967,302 $ 10,622,877
- ----------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE INFORMATION:
- ----------------------------------------------------------------------------------------------------------------
Weighted average shares of common stock and equivalents:
Basic 11,372,364 11,682,694 11,573,580
Diluted 11,923,080 11,933,102 11,958,976
- ----------------------------------------------------------------------------------------------------------------
Net income per common share:
Basic $ .61 $ .60 $ .92
Diluted $ .58 $ .58 $ .89
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
17
<PAGE> 20
TOLLGRADE COMMUNICATIONS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Paid-in
Shares Amount Shares Amount Capital
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at
December 31, 1996 -- -- 5,620,417 1,124,083 24,091,210
2-for-1 stock split in the
form of a stock dividend
(Note 2) -- -- 5,620,417 1,124,083 (1,124,083)
Exercise of common
stock options -- -- 214,566 42,913 435,303
Restricted stock -
compensation
charged to expense,
net -- -- -- -- --
Shares forfeited -- -- (700) (140) (18,268)
Tax benefit from exercise
of stock options -- -- -- -- 702,684
Purchase of
treasury stock -- -- -- -- --
Net income -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 -- -- 11,454,700 2,290,939 24,086,846
Exercise of common
stock options -- -- 387,628 77,527 1,076,112
Restricted stock -
compensation
charged to expense,
net -- -- -- -- --
Shares forfeited -- -- (1,400) (280) (6,720)
Tax benefit from exercise
of stock options -- -- -- -- 1,163,441
Purchase of
treasury stock -- -- -- -- --
Net income -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1998 -- -- 11,840,928 2,368,186 26,319,679
EXERCISE OF COMMON
STOCK OPTIONS -- -- 261,352 52,270 2,123,652
TAX BENEFIT FROM EXERCISE
OF STOCK OPTIONS -- -- -- -- 385,237
PURCHASE OF
TREASURY STOCK -- -- -- -- --
NET INCOME -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1999 -- $ -- 12,102,280 $ 2,420,456 $ 28,828,568
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Treasury Unearned Retained
Stock Compensation Earnings Total
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at
December 31, 1996 (49,775) (106,686) 4,946,739 30,005,571
2-for-1 stock split in the
form of a stock dividend
(Note 2) -- -- -- --
Exercise of common
stock options -- -- -- 478,216
Restricted stock -
compensation
charged to expense,
net -- 52,344 -- 52,344
Shares forfeited -- 18,408 -- --
Tax benefit from exercise
of stock options -- -- -- 702,684
Purchase of
treasury stock (20,580) -- -- (20,580)
Net income -- -- 6,883,148 6,883,148
- ---------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1997 (70,355) (35,934) 11,829,887 38,101,383
Exercise of common
stock options -- -- -- 1,153,639
Restricted stock -
compensation
charged to expense,
net -- 28,934 -- 28,934
Shares forfeited -- 7,000 -- --
Tax benefit from exercise
of stock options -- -- -- 1,163,441
Purchase of
treasury stock (1,718,932) -- -- (1,718,932)
Net income -- -- 6,967,302 6,967,302
- ---------------------------------------------------------------------------------------------------------------------
Balance at
December 31, 1998 (1,789,287) -- 18,797,189 45,695,767
EXERCISE OF COMMON
STOCK OPTIONS -- -- -- 2,175,922
TAX BENEFIT FROM EXERCISE
OF STOCK OPTIONS -- -- -- 385,237
PURCHASE OF
TREASURY STOCK (1,375,688) -- -- (1,375,688)
NET INCOME -- -- 10,622,877 10,622,877
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT
DECEMBER 31, 1999 $ (3,164,975) $ -- $ 29,420,066 $ 57,504,115
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
18
<PAGE> 21
TOLLGRADE COMMUNICATIONS, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1998 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 6,883,148 $ 6,967,302 $ 10,622,877
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,005,744 1,387,598 1,252,743
Deferred income taxes 26,495 (545,420) (253,512)
Provision for losses on inventory -- 88,000 393,000
Provision for allowance for doubtful accounts 50,000 50,000 100,000
Compensation expense for restricted stock 52,344 28,934 --
Changes in assets and liabilities:
Increase in accounts receivable-trade (2,781,094) (53,377) (3,077,184)
(Increase) decrease in accounts receivable-other (212,656) 216,410 (34,475)
Increase in inventories (3,531,296) (1,188,657) (4,526,976)
(Increase) decrease in prepaid expenses and deposits 140,501 56,839 (109,521)
Increase (decrease) in accounts payable (732,743) (272,106) 224,690
Increase (decrease) in accrued expenses, salaries
and wages, royalties payable and deferred income 911,508 (816,995) 2,649,211
Increase (decrease) in income taxes payable 775,344 (157,754) 1,655,130
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,587,295 5,760,774 8,895,983
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of investments (19,567,255) (17,380,104) (15,183,124)
Redemption/maturity of investments 15,643,221 17,844,566 14,618,612
Capital expenditures (1,230,910) (1,695,975) (2,272,485)
Purchase of treasury stock (20,580) (1,718,932) (1,375,688)
- ----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,175,524) (2,950,445) (4,212,685)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from the exercise of stock options
including related tax benefits 1,180,900 2,317,080 2,561,159
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,180,900 2,317,080 2,561,159
- ----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (1,407,329) 5,127,409 7,244,457
Cash and cash equivalents at beginning of year 4,591,273 3,183,944 8,311,353
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 3,183,944 $ 8,311,353 $ 15,555,810
- ----------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 3,271 $ 107,694 $ 1,549
Cash paid during the year for income taxes 2,420,460 3,596,079 4,078,830
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
19
<PAGE> 22
TOLLGRADE COMMUNICATIONS, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
Tollgrade Communications, Inc. (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 test system products, specifically DigiTest, focus on helping local
exchange carriers conduct the full range of fault diagnosis along with the
ability to prequalify, deploy and maintain next generation services including
Digital Subscriber Line service. The Company's cable products consist of a
complete cable status monitoring system that provides a comprehensive testing
solution for the Broadband Hybrid Fiber Coax distribution system. The status
monitoring system consists of 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. The
Company was organized in 1986 and began operations in 1988.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expense during the reporting period. Actual
results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents. Substantially all of the
Company's cash and cash equivalents are maintained at one financial institution.
No collateral or security is provided on these deposits, other than $100,000 of
deposits per financial institution insured by the Federal Deposit Insurance
Corporation.
INVESTMENTS
Short-term investments at December 31, 1998 and 1999 consist of a treasury note
and/or 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 individual municipal bonds
with a maturity of more than one year but less than eighteen months. The primary
investment purposes are to provide a reserve for future business purposes,
including possible acquisitions, capital expenditures and to meet working
capital requirements. Realized gains and losses are computed using the specific
identification method.
The Company classifies its investment in all debt securities as "held to
maturity" in accordance with Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined on
the first-in, first-out method. The Company provides appropriate reserves for
any inventory deemed slow moving or obsolete.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Property and equipment is depreciated
on a straight-line method over their estimated useful lives ranging from 3 to 7
years. Leasehold improvements are amortized over the related lease period or the
estimated useful life, whichever is shorter.
The cost of renewals and betterments that extend the lives or productive
capacities of properties is capitalized. Expenditures for normal repairs and
maintenance are charged to operations as incurred. The cost of property and
equipment retired or otherwise disposed of and the related accumulated
depreciation or amortization are removed from the accounts, and any resulting
gain or loss is reflected in current operations.
PATENTS
The costs of patents are being amortized on a straight-line method over a period
of five years.
20
<PAGE> 23
PRODUCT WARRANTY
The Company records estimated warranty costs on the accrual basis of accounting.
These reserves are based on applying historical returns and cost experience to
the current level of product shipments.
REVENUE RECOGNITION
Revenue from product sales is recognized at the time of shipment. Revenue for
license and royalty fees is recognized when earned.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations in the year incurred.
INCOME TAXES
The Company follows the provisions of SFAS No. 109, "Accounting for Income
Taxes" (SFAS 109). Under SFAS 109, deferred tax liabilities and assets are
determined based on the "temporary differences" between the financial statement
carrying amounts and the tax basis of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
SEGMENT INFORMATION
The Company follows the provisions of SFAS No. 131. In 1999, the Company adopted
SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information, Financial Reporting for Segments of a Business." This statement
establishes standards for reporting information about operating segments,
products and services, geographic areas and major customers in annual and
interim financial statements. The Company manages and operates its business as
one segment.
PER SHARE INFORMATION
Net income per share has been computed in accordance with the provisions of SFAS
No. 128, "Earnings Per Share" for all periods presented. All share and per share
information reflects the two-for-one split of the Company's common stock (see
Note 2). SFAS No. 128 requires companies with complex capital structures to
report earnings per share on a basic and diluted basis, as defined. Basic
earnings per share are calculated on the actual number of weighted average
common shares outstanding for the period, while diluted earnings per share must
include the effect of any dilutive securities. All prior periods have been
restated in accordance with SFAS No. 128. A reconciliation of earnings per share
is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1998 1999
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income $ 6,883,148 $ 6,967,302 $ 10,622,877
- ----------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 11,372,364 11,682,694 11,573,580
- ----------------------------------------------------------------------------------------------------------------
Effect of dilutive securities - stock options 550,716 250,408 385,396
- ----------------------------------------------------------------------------------------------------------------
11,923,080 11,933,102 11,958,976
- ----------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ .61 $ .60 $ .92
- ----------------------------------------------------------------------------------------------------------------
Diluted $ .58 $ .58 $ .89
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
2. 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 will receive one
additional share of common stock for each share of common stock held of record
on February 28, 2000. The stock split has been reflected in the accompanying
financial statements, and all applicable references as to the number of common
shares, per share information and market prices have been restated assuming the
split had occurred at the beginning of the earliest year presented.
3. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31, 1998 DECEMBER 31, 1999
- -----------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 6,135,743 $ 8,173,299
Work in process 4,725,776 7,410,203
Finished goods 2,340,252 1,752,245
- -----------------------------------------------------------------------------------
$ 13,201,771 $ 17,335,747
- -----------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 24
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, 1998 DECEMBER 31, 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Test equipment and tooling $ 3,289,767 $ 4,217,189
Office equipment and fixtures 2,728,443 3,269,761
Leasehold improvements 1,127,904 1,590,704
- -------------------------------------------------------------------------------------------------------------------
7,146,114 9,077,654
Less accumulated depreciation and amortization 3,831,592 4,740,539
- -------------------------------------------------------------------------------------------------------------------
$ 3,314,522 $ 4,337,115
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
5. SHAREHOLDERS' EQUITY
COMMON STOCK
The Company has 25,000,000 authorized shares which have a par value of $.20 per
share. As of December 31, 1998 and 1999, there are 11,840,928 and 12,102,280
issued shares, respectively.
STOCK REPURCHASE PROGRAM
On April 22, 1997, the Company's Board of Directors authorized a program to
purchase up to 400,000 shares of its common stock over a two-year period. The
program intended that the shares would be utilized to provide stock under
certain employee benefit programs. As of April 22, 1999, the expiration of this
initial program, the Company had purchased 382,400 shares of common stock under
this program. The Company has used existing cash and short-term investments to
finance these purchases. On May 6, 1999, the Company's Board of Directors
authorized a new program to purchase up to 400,000 shares of its common stock
over a two-year period. As of December 31, 1999, the Company had not initiated
any purchases of common stock under this new program. 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 purchases.
STOCK COMPENSATION PLANS
Under the Company's stock compensation plans, directors, officers and other
employees may be granted options to purchase shares of the Company's common
stock. The option price on all outstanding options is equal to the fair market
value of the stock at the date of the grant, as defined. The options generally
vest ratably over a two-year period, with one-third vested upon grant. The
Company's option programs cover all employees and are used to attract and retain
qualified personnel in all positions.
On May 6, 1999, the shareholders of the Company approved an amendment of
the 1995 Long-Term Incentive Compensation Plan (the "Amended Plan") to increase
the number of shares available under the Plan by 460,000 shares, from 1,750,000
to 2,210,000 shares. In approving the increase to the authorized shares under
the Amended Plan, shareholders of the Company also approved a cancellation of
460,000 shares under the Company's 1998 Employee Incentive Compensation Plan
(the "Plan"). This action was taken so that the increase in shares would not
result in a dilution of the outstanding shares in the event all shares available
for issuance under both plans were awarded and exercised. The aggregate number
of shares of the Company's Common Stock which may be issued under the Amended
Plan and the Plan is 2,210,000 and 740,000 shares respectively, subject to
proportionate adjustment in the event of stock splits and similar events. The
maximum number of shares which may be awarded under the Amended Plan to any one
Named Executive Officer during any calendar year of the life of the Amended Plan
is 100,000 shares. All full-time active employees of the Company, excluding
officers and directors, are eligible to participate in the Plan. The shares
authorized but not granted under these plans at December 31, 1998 and 1999 were
as follows:
<TABLE>
<CAPTION>
Shares Authorized But Not Granted
December 31, 1998 DECEMBER 31, 1999
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
1995 Long-Term Incentive Compensation Plan 128,146 510,016
1998 Employee Incentive Compensation Plan 778,666 67,988
- ----------------------------------------------------------------------------------------------------------
Total 906,812 578,004
- ----------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 25
Certain employees and directors of the Company were granted stock options
under the Amended Plan and the Plan and various other agreements. The Company
has adopted the disclosure-only provisions of SFAS No. 123 "Accounting for
Stock-Based Compensation," but applies Accounting Principles Board Opinion No.
25 and related interpretations in accounting for its plans. If the Company had
elected to recognize compensation cost for these stock options based on the fair
value at the grant dates for awards granted under those plans in 1997, 1998 and
1999 consistent with the method prescribed by SFAS No. 123, net income and
earnings per share would have been changed to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1998 1999
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income As reported $ 6,883,148 $ 6,967,302 $ 10,622,877
Pro forma $ 5,805,709 $ 5,159,610 $ 8,889,233
- ---------------------------------------------------------------------------------------------------------------
Diluted earnings per share As reported $ .58 $ .58 $ .89
Pro forma $ .49 $ .43 $ .74
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of the stock options used to compute pro forma net income
and earnings per share disclosures is the estimated present value at grant date
using the Black-Scholes option-pricing model with the following weighted average
assumptions for 1997, 1998 and 1999: expected volatility of 40.4% in 1997, 50.8%
in 1998 and 51.9% in 1999; a risk-free interest rate of 6.10% in 1997, 4.82% in
1998 and 4.97% in 1999; and an expected holding period of 4 years. The weighted
average fair value of stock options, calculated using the Black-Scholes
option-pricing model, granted during 1997, 1998 and 1999, is $4.27, $3.84 and
$4.76, respectively.
Transactions involving stock options under the Company's various stock
option plans and otherwise are summarized below:
<TABLE>
<CAPTION>
Weighted Average
Number of Shares Range of Option Price Exercise Price
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding, December 31, 1996 1,460,110 $ .47850 - $ 12.87500 $ 6.55
Granted 271,500 8.75000 - 12.56500 10.75
Exercised (214,566) .47850 - 8.75000 2.21
Cancelled (10,110) 6.00000 - 7.50000 6.91
- ----------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1997 1,506,934 .47850 - 12.87500 7.92
Granted 1,080,000 7.28125 - 13.56250 8.60
Exercised (387,428) .48000 - 11.75000 2.98
Cancelled (81,066) 6.00000 - 13.56250 10.33
- ----------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1998 2,118,440 6.00000 - 13.56250 9.08
Granted 432,000 7.50000 - 17.25000 10.41
Exercised (256,220) 6.00000 - 12.87500 8.30
Cancelled (103,192) 6.00000 - 13.56250 10.18
- ----------------------------------------------------------------------------------------------------------
OUTSTANDING, DECEMBER 31, 1999 2,191,028 $ 6.00000 - $ 17.25000 $ 9.38
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Weighted Average
Options exercisable at: Number of Shares Exercise Price
- -------------------------------------------------------------------------------------------
<S> <C> <C>
December 31, 1997 1,230,578 $ 7.09
December 31, 1998 1,422,030 9.20
DECEMBER 31, 1999 1,657,808 9.50
- -------------------------------------------------------------------------------------------
</TABLE>
23
<PAGE> 26
The following table summarizes the status of the stock options, outstanding
and exercisable, at December 31, 1999:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
- --------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Weighted
Range of Exercise Remaining Average Average
Prices Shares Contractual Life Exercise Price Shares Exercise Price
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 6.00000 - $ 7.28125 459,500 7.07 $6.48 426,168 $6.41
- --------------------------------------------------------------------------------------------------------------------
$ 7.50000 - $ 7.56250 467,326 8.56 7.56 316,660 7.55
- --------------------------------------------------------------------------------------------------------------------
$ 7.68750 - $ 9.81250 540,532 8.60 9.44 237,284 9.56
- --------------------------------------------------------------------------------------------------------------------
$ 10.31250 - $ 12.87500 623,002 7.45 11.82 596,350 11.82
- --------------------------------------------------------------------------------------------------------------------
$ 13.56250 - $ 17.25000 100,668 9.39 15.76 81,346 15.98
- --------------------------------------------------------------------------------------------------------------------
TOTAL 2,191,028 7.98 $9.38 1,657,808 $9.50
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS
In order to protect shareholder value in the event of an unsolicited offer to
acquire the Company, on July 23, 1996, the Board of Directors of the Company
declared a dividend of one preferred stock purchase right for each outstanding
share of the Company's common stock. The dividend was payable on August 15, 1996
to shareholders of record as of that date. The aforementioned rights are
exercisable only if a person or group acquires or announces an offer to acquire
20% or more of the Company's common stock. In such an event, each right will
entitle shareholders to buy one-hundredth of a share of a new series of
preferred stock at an exercise price of $115.00. Each one-hundredth of a share
of the new preferred stock has terms designed to make it the economic and voting
equivalent of one share of common stock.
If a person or group acquires 20% or more of the Company's outstanding
common stock, each right not owned by the person or group will entitle its
holder to purchase at the right's exercise price a number of shares of the
Company's common stock (or, at the option of the Company, the new preferred
stock) having a market value of twice the exercise price. Further, at any time
after a person or group acquires 20% or more (but less than 50%) of the
outstanding common stock, the Board of Directors may at its option, exchange
part or all of the rights (other than rights held by the acquiring person or
group) for shares of the Company's common or preferred stock on a one-for-one
basis. Each right further provides that if the Company is acquired in a merger
or other business transaction, each right will entitle its holder to purchase,
at the right's exercise price, a number of the acquiring company's common shares
having a market value at that time of twice the exercise price.
The Board of Directors is entitled to redeem the rights for one cent per
right at any time before a 20% position has been acquired. The Board of
Directors is also authorized to reduce the 20% thresholds referred to above to
not less than 10%.
6. LICENSE AND ROYALTY FEES
The Company has entered into several technology license agreements with certain
major Digital Loop Carrier (DLC) vendors and major Operation Support System
(OSS) equipment manufacturers under which the Company has been granted access to
the licensor's patent technology and the right to manufacture and sell the
patent technology in the Company's product line. The Company is obligated to pay
royalty fees, as defined, through the terms of these license agreements. Royalty
fees of $2,014,000, $1,903,701 and $2,011,930 were incurred in 1997, 1998 and
1999, respectively, and are included in cost of product sales in the
accompanying consolidated statements of operations.
24
<PAGE> 27
7. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1998 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 3,726,200 $ 4,030,841 $ 5,478,412
State 421,000 554,379 712,100
- --------------------------------------------------------------------------------------------------------------------
4,147,200 4,585,220 6,190,512
- --------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (28,160) (475,494) (221,011)
State 54,609 (69,926) (32,501)
- --------------------------------------------------------------------------------------------------------------------
26,449 (545,420) (253,512)
- --------------------------------------------------------------------------------------------------------------------
$ 4,173,649 $ 4,039,800 $ 5,937,000
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Reconciliations of the federal statutory rate to the effective tax rates
are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1998 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory tax rate 34% 34% 34%
Research and development tax credit (2) (1) --
State income taxes 3 3 3
Foreign sales corporation tax benefit -- -- (1)
Other 3 1 --
- --------------------------------------------------------------------------------------------------------------------
Effective tax rate 38% 37% 36%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The components of and changes in the deferred tax assets and liabilities
recorded in the accompanying balance sheets at December 31, 1998 and 1999 were
as follows:
<TABLE>
<CAPTION>
Deferred Deferred
December 31, Expense December 31, Expense DECEMBER 31,
1997 (Credit) 1998 (Credit) 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DEFERRED TAX ASSETS:
Excess of tax basis over book basis for:
Property and equipment $ -- $(149,797) $ 149,797 $ 27,989 $ 121,808
Inventory 73,798 (130,980) 204,778 (42,404) 247,182
Reserves recorded for:
Warranty 117,000 (52,650) 169,650 (64,350) 234,000
Inventory 69,810 (34,320) 104,130 (153,270) 257,400
Allowance for doubtful accounts 19,500 (19,500) 39,000 (31,670) 70,670
Other 60,003 37,993 22,010 10,193 11,817
- ----------------------------------------------------------- --------- ---------
Total deferred tax assets 340,111 689,365 942,877
- ----------------------------------------------------------- --------- ---------
DEFERRED TAX LIABILITIES:
Excess of book basis over tax basis for:
Property and equipment (196,166) (196,166) -- -- --
Other (9,950) -- (9,950) -- (9,950)
- ----------------------------------------------------------- --------- ---------
Total deferred tax liabilities (206,116) (9,950) (9,950)
- ----------------------------------------------------------- --------- ---------
- ---------------------------------------------------------------------------------------------------------------------------------
Net deferred taxes $ 133,995 $(545,420) $ 679,415 $(253,512) $ 932,927
Reconciliation to the balance sheet:
Current portion of deferred tax assets 213,216 354,891 575,251
Long-term portion of deferred
tax liabilities (206,116) (9,950) (9,950)
- ---------------------------------------------------------------------------------------------------------------------------------
Long-term deferred taxes, net $ 126,895 $ 334,474 $ 367,626
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
25
<PAGE> 28
8. LEASE COMMITMENTS
The Company leases office space and equipment under agreements which are
accounted for as operating leases. The office lease expires December 31, 2001
and may be extended up to an additional 3 years. The equipment lease expires in
September 2003. The Company is also involved in various month-to-month leases
for research and development equipment. In addition, the office lease includes
provisions for possible adjustments in annual future rental commitments relating
to excess taxes and excess maintenance costs that may occur. The Company made
additional rental payments of $4,727, $4,827 and $0 in 1997, 1998 and 1999,
respectively.
Minimum annual future rental commitments under noncancelable leases as
of December 31 are:
2000 ............................................... $ 595,577
2001 ............................................... 616,457
2002 ............................................... 31,817
2003 ............................................... 23,863
2004 ............................................... 0
The rent expense for all lease commitments was approximately $354,000,
$425,714 and $599,615 in 1997, 1998 and 1999, respectively.
9. MAJOR CUSTOMERS, REVENUE CONCENTRATION AND DEPENDENCE ON CERTAIN SUPPLIERS
The Company designs, engineers, markets and supports test system, test access
and status monitoring products for the telecommunications and cable television
industries. Sales are concentrated primarily with the four Regional Bell
Operating Companies (RBOCs) as well as major independent telephone companies and
to certain digital loop carrier equipment manufacturers. Sales are primarily
from the Company's metallic channel unit (MCU) product line. The MCU product
line accounted for more than 74% of the Company's net product sales for 1999.
The Company expects that revenues from MCU products will continue to account for
a majority of the Company's revenues for the foreseeable future. In addition,
the Company has begun shipments of the DigiTest centralized network test
platform. The DigiTest product line accounted for approximately 11% of the
Company's net product sales for 1999.
Sales to the RBOCs accounted for approximately 86%, 79% and 59% of the
Company's net product sales for fiscal years 1997, 1998 and 1999, respectively.
During fiscal years 1997, 1998 and 1999, sales to two RBOCs individually
exceeded 10% of consolidated revenues and, on a combined basis, comprised 54%,
54% and 34%, respectively, of the Company's net product sales. In addition,
sales to an Original Equipment Manufacturer accounted for approximately 1%, 3%
and 11% of the Company's net product sales for fiscal years 1997, 1998 and 1999,
respectively. Due to the Company's present dependency on the RBOCs, the loss of
one or more of the RBOCs as a customer, or the reduction of orders for the
Company's products by the RBOCs, could materially and adversely affect the
Company.
The Company utilizes two key independent subcontractors to perform a
majority of the circuit board assembly and in-circuit testing work on its
products. The Company also utilizes other subassembly contractors on a more
limited basis. The loss of the subcontractors could cause delays in the
Company's ability to meet production obligations and could have material adverse
effect on the Company's results of operations. In addition, shortages of raw
material to, or production capacity constraints at, the Company's subcontractors
could negatively affect the Company's ability to meet its production obligations
and result in increased prices for affected parts. Any such reduction may result
in delays in shipments of the Company's products or increases in the price of
components, either of which could have a material adverse impact on the Company.
10. EMPLOYEE BENEFIT PLANS
The Company adopted a 401(k) benefit plan effective March 1, 1996. Eligible
employees, as defined in the plan, may contribute up to 20% of eligible
compensation or not to exceed the regulatory imposed limit, as defined. The
Company does not make any matching contributions to the plan.
11. DEFERRED INCOME
Deferred income as of December 31, 1999 of $1,106,483 primarily represents
product shipments of certain components of the Company's DigiTest centralized
network test platform hardware to one of the Company's customers during the
fourth quarter of 1999 which were awaiting customer acceptance at December 31,
1999. Such acceptance was predicated on the customer receiving final
certification approvals from an independent third-party laboratory. Revenues and
corresponding income related to this sale have been deferred and will be
recognized when final customer acceptance has occurred.
26
<PAGE> 29
STATEMENTS OF OPERATIONS DATA BY QUARTER
The following table presents unaudited quarterly operating results for each of
the Company's last eight fiscal quarters. This information has been prepared by
the Company on a basis consistent with the Company's audited financial
statements and includes all adjustments (consisting only of normal recurring
adjustments) that the Company considers necessary for a fair presentation of the
data. Such quarterly results are not necessarily indicative of the future
results of operations.
<TABLE>
<CAPTION>
(In thousands, except per share data)
Quarter Ended (Unaudited)
March 31, June 30, Sept. 30, Dec. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $10,764 $14,025 $10,120 $11,368 $11,120 $14,270 $13,403 $22,318
Cost of product sales 4,355 5,920 4,511 4,834 4,752 5,903 6,040 8,320
- ------------------------------------------------------------------------------------------------------------------------------
Gross profit 6,409 8,105 5,609 6,534 6,368 8,367 7,363 13,998
Operating expenses:
Selling and marketing 1,622 1,499 1,227 1,356 1,398 1,767 1,561 2,280
General and administrative 1,090 1,263 1,133 642 1,048 965 980 1,729
Research and development 1,628 1,542 1,587 2,123 1,876 2,158 2,126 2,597
- ------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 4,340 4,304 3,947 4,121 4,322 4,890 4,667 6,606
- ------------------------------------------------------------------------------------------------------------------------------
Income from operations 2,069 3,801 1,662 2,413 2,046 3,477 2,696 7,392
Other income, net 189 417 103 353 271 236 334 107
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 2,258 4,218 1,765 2,766 2,317 3,713 3,030 7,499
Provision for income taxes 813 1,575 655 997 831 1,340 1,092 2,674
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,445 $ 2,643 $ 1,110 $ 1,769 $ 1,486 $ 2,373 $ 1,938 $ 4,825
- ------------------------------------------------------------------------------------------------------------------------------
Net income per common share (1)(2)
Basic $ .13 $ .23 $ .09 $ .15 $ .13 $ .21 $ .17 $ .41
Diluted $ .12 $ .22 $ .09 $ .15 $ .13 $ .20 $ .16 $ .39
Weighted average shares of
common stock and equivalents: (2)
Basic 11,555 11,710 11,786 11,677 11,576 11,538 11,548 11,631
Diluted 11,913 12,015 12,096 11,779 11,759 11,612 12,017 12,397
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Second quarter 1998 includes $.02 per share related to the after-tax
effect of net key man life insurance proceeds associated with the death
of the Company's former Chairman R. Craig Allison.
(2) Restated to reflect the two-for-one stock split of the Company's common
stock (see Note 2 to the accompanying Consolidated Financial
Statements).
COMMON STOCK MARKET PRICES
The Company's Common Stock has been included for quotation on the Nasdaq
National Market System under the Nasdaq symbol "TLGD" since the Company's
initial public offering in December 1995. The following table sets forth, for
the periods indicated, the high and low sales prices for the Common Stock on
such market:
<TABLE>
<CAPTION>
High Low
- -------------------------------------------------------------------------------------
<S> <C> <C>
1998:
First Quarter $ 11-7/8 $ 9-1/8
Second Quarter 13-1/4 10-1/4
Third Quarter 13-7/8 9-7/8
Fourth Quarter 10-1/2 5-1/2
1999:
FIRST QUARTER $ 9-13/16 $ 7-1/2
SECOND QUARTER 8-7/16 7-1/16
THIRD QUARTER 13-7/16 7-1/2
FOURTH QUARTER 19-11/16 10-1/2
- -------------------------------------------------------------------------------------
</TABLE>
At February 25, 2000, the Company had 207 holders of record of its Common
Stock and 12,715,698 shares outstanding. These shares reflect the restatement
for the two-for-one split of the Company's common stock (see Note 2 to the
accompanying Consolidated Financial Statements).
The Company has never paid any dividends on its Common Stock and does not
expect to pay cash dividends in the foreseeable future.
27
<PAGE> 30
Shareholder Information
SHAREHOLDERS ANNUAL MEETING
The Annual Meeting of Shareholders of Tollgrade Communications, Inc., will be
held at The Syria Mosque, 1877 Shriners Way, Cheswick, PA 15024, on Thursday,
May 4, 2000, at 3:00 p.m. Notice of the meeting and proxy materials were
included with this Annual Report.
TRANSFER AGENT AND SHAREHOLDER INQUIRIES
The Company's transfer agent is ChaseMellon Shareholder Services, L.L.C.
Inquiries concerning transfer requirements, lost certificates and change of
address should be directed to
ChaseMellon Shareholder Services, L.L.C.
P.O. Box 3315
South Hackensack, NJ
www.chasemellon.com.
All other inquiries should be directed to:
Tollgrade Communications, Inc.
Investor Relations Department
493 Nixon Road
Cheswick, PA 15024
1-800-878-3399
www.tollgrade.com.
FORM 10-K
A copy of the Tollgrade Communications, Inc. Form 10-K for 1999, which will be
filed with the Securities and Exchange Commission during the first quarter of
2000, is available without attachments at no charge upon written request.
Inquiries should be directed to the Investor Relations Department, Tollgrade
Communications, Inc., 493 Nixon Road, Cheswick, PA 15024.
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP, Pittsburgh, Pennsylvania.
COUNSEL
Reed Smith Shaw & McClay LLP, Pittsburgh, Pennsylvania.
STOCK MARKET LISTING
Tollgrade Communications, Inc. is listed on the Nasdaq Stock Market.SM Symbol:
TLGD.
28
<PAGE> 31
Board of Directors
[PHOTO] CHRIS ALLISON
Chairman, President and Chief Executive Officer
[PHOTO] JAMES J. BARNES
Attorney at Law, Buchanan Ingersoll P.C.
[PHOTO] DANIEL P. BARRY
Private Investor, Director of Respironics, Inc.
[PHOTO] DAVID S. EGAN
President, Egan/St. James, Inc. an EPB Partner Company
[PHOTO] ROCCO L. FLAMINIO
Vice Chairman and Chief Technology Officer
[PHOTO] RICHARD H. HEIBEL, M.D.
Board Certified Cardiologist (retired)
[PHOTO] ROBERT W. KAMPMEINERT
Chairman, President and Chief Executive Officer,
Parker/Hunter Incorporated
Executive Officers
CHRIS ALLISON
Chairman, President and Chief Executive Officer
SARA M. ANTOL
Chief Counsel and Secretary
ROBERT L. CORNELIA
Executive Vice President, Operations
BRADLEY N. DINGER
Controller
HERMAN FLAMINIO
Executive Vice President, Marketing Services, Planning and Technical Support
ROCCO L. FLAMINIO
Vice Chairman and Chief Technology Officer
MARK C. FREY
Senior Vice President, Access Products
SAMUEL C. KNOCH
Chief Financial Officer and Treasurer
JOSEPH G. O'BRIEN
Senior Vice President, Human Resources
TIMOTHY D. O'BRIEN
Director of Corporate Communications
MARK B. PETERSON
Executive Vice President, Sales and Marketing
MATTHEW J. ROSGONE
Senior Vice President, Purchasing/Manufacturing
ROGER A. SMITH
Senior Vice President, Test Systems
(R) TOLLGRADE, MCU, DigiTest and LIGHTHOUSE are registered trademarks of
Tollgrade Communications, Inc. All other trademarks are the property of their
respective owners.
(C)2000 Tollgrade Communications, Inc.
<PAGE> 32
[TOLLGRADE LOGO]
CORPORATE HEADQUARTERS
493 Nixon Road, Cheswick, PA 15024
1-800-878-3399
www.tollgrade.com
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We here by consent to the incorporation by reference in the Registration
Statement on Form S-8 (Registration No. 333-4290 and Registration No. 333-52907)
of Tollgrade Communications, Inc. and Subsidiaries of our report dated January
24, 2000, except for Note 2, which is as of March 20, 2000, relating to the
financial statements, which appears in the Annual Report to Shareholders, which
is incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report dated January 24, 2000 relating to the
financial statement schedule, which appears in this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP
Pittsburgh, Pennsylvania
March 27, 2000
56
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001002531
<NAME> TOLLGRADE COMMUNICATIONS, INC.
<S> <C>
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<PERIOD-END> DEC-31-1999
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0
0
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</TABLE>
