-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GVToixgAFOOT1qYxJDG2Y81+ygFhvTVT/kHUTrQO5v2QDhL0HogkeHVmQs+GJK7P IgAy0AZ0CyjfDX7OSex6LA== /in/edgar/work/0000950128-00-001325/0000950128-00-001325.txt : 20001114 0000950128-00-001325.hdr.sgml : 20001114 ACCESSION NUMBER: 0000950128-00-001325 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOLLGRADE COMMUNICATIONS INC \PA\ CENTRAL INDEX KEY: 0001002531 STANDARD INDUSTRIAL CLASSIFICATION: [7385 ] IRS NUMBER: 251537134 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27312 FILM NUMBER: 762023 BUSINESS ADDRESS: STREET 1: 493 NIXON RD CITY: CHESWICK STATE: PA ZIP: 15024 BUSINESS PHONE: 4122742156 10-Q 1 j8499501e10-q.txt TOLLGRADE COMMUNICATIONS, INC. FORM 10-Q 1 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC - -------------------------------------------------------------------------------- FORM 10-Q (Mark One) [ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2000 [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ___________ to ____________ Commission file number 0-27312 TOLLGRADE COMMUNICATIONS, INC. (Exact Name of Registrant as Specified in its Charter) PENNSYLVANIA 25-1537134 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification Number) 493 NIXON RD. CHESWICK, PA 15024 (Address of Principal Executive Offices, including zip code) 412-820-1400 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ___X___ No _______ As of October 28, 2000, there were 13,296,249 shares of the Registrant's Common Stock, $0.20 par value per share, and no shares of the Registrant's Preferred Stock, $1.00 par value per share, outstanding. - -------------------------------------------------------------------------------- This report consists of a total of 34 pages. The exhibit index is on page 21. 2 TOLLGRADE COMMUNICATIONS, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO. - ------------------------------ -------- ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999 .....3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE-MONTH AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 25, 1999..............................4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 25, 1999 ...........................................5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.......................................6 REVIEW REPORT OF INDEPENDENT ACCOUNTANTS..................................................10 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION................................................................................ 11 PART II. OTHER INFORMATION - --------------------------- ITEM 1 LEGAL PROCEEDINGS.........................................................................21 ITEM 2 CHANGES IN SECURITIES.....................................................................21 ITEM 3 DEFAULTS UPON SENIOR SECURITIES...........................................................21 ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................21 ITEM 5 OTHER INFORMATION.........................................................................21 ITEM 6 EXHIBITS AND REPORTS FILED ON FORM 8-K....................................................21 SIGNATURE...............................................................................................22 EXHIBIT INDEX...........................................................................................23
2 3 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED) SEPTEMBER 30, 2000 DECEMBER 31, 1999 ========================================================================================================================= ASSETS CURRENT ASSETS: Cash and cash equivalents $ 33,245,797 $ 15,555,810 Short-term investments 20,772,837 13,516,676 Accounts receivable: Trade 14,096,405 10,865,244 Other 673,123 335,155 Inventories 26,130,850 17,335,747 Prepaid expenses and deposits 465,662 461,934 1 Deferred and refundable tax assets 13,820,231 575,25 - ------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 109,204,905 58,645,817 Long-term investments 4,533,000 2,850,000 Property and equipment, net 5,935,753 4,337,115 Deferred tax assets 516,702 367,626 Patents and other assets 47,254 1,396 ========================================================================================================================= TOTAL ASSETS $ 120,237,614 $ 66,201,954 ========================================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 3,256,719 $ 911,769 Accrued expenses 1,314,833 1,222,866 Accrued salaries and wages 2,817,227 2,209,473 Royalties payable 745,979 793,689 Income taxes payable 605,395 2,443,609 Deferred income 100,000 1,106,483 - ------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 8,840,153 8,687,889 Deferred tax liabilities 9,950 9,950 - ------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 8,850,103 8,697,839 Shareholders' equity: Common stock, $.20 par value; authorized shares, 50,000,000; issued shares, 13,258,031 and 12,102,280, respectively 2,651,606 2,420,456 Additional paid-in capital 62,806,780 28,828,568 Treasury stock, at cost, 386,800 shares, respectively (3,164,975) (3,164,975) Retained earnings 49,094,100 29,420,066 - ------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 111,387,511 57,504,115 ========================================================================================================================= TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 120,237,614 $ 66,201,954 =========================================================================================================================
The accompanying notes are an integral part of the condensed consolidated financial statements. 3 4 TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
For the For the Three Nine Months Ended Months Ended Sept. 30, 2000 Sept. 25, 1999 Sept. 30, 2000 Sept. 25, 1999 =========================================================================================================================== REVENUES $29,787,819 $13,402,653 $81,872,064 $38,792,717 COST OF PRODUCT SALES 10,840,558 6,039,595 30,625,600 16,694,313 - --------------------------------------------------------------------------------------------------------------------------- GROSS PROFIT 18,947,261 7,363,058 51,246,464 22,098,404 - --------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Selling and marketing 3,439,953 1,560,692 8,851,097 4,726,680 General and administrative 1,591,603 980,508 4,464,660 2,993,877 Research and development 3,178,081 2,125,826 8,866,844 6,159,484 - --------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 8,209,637 4,667,026 22,182,601 13,880,041 - --------------------------------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 10,737,624 2,696,032 29,063,863 8,218,363 Interest and other income, net 661,917 334,301 1,677,171 842,064 - --------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 11,399,541 3,030,333 30,741,034 9,060,427 Provision for income taxes 4,104,000 1,092,000 11,067,000 3,262,855 =========================================================================================================================== NET INCOME $7,295,541 $1,938,333 $19,674,034 $5,797,572 =========================================================================================================================== Earnings per share information: Weighted average shares of common stock and equivalents: Basic 12,821,132 11,547,610 12,536,510 11,553,492 Diluted 13,460,481 12,016,604 13,314,988 11,786,080 - --------------------------------------------------------------------------------------------------------------------------- Net income per common share: Basic $.57 $.17 $1.57 $.50 Diluted $.54 $.16 $1.48 $.49 ===========================================================================================================================
The accompanying notes are an integral part of the condensed consolidated financial statements. 4 5 TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended Sept. 30, 2000 Sept. 25, 1999 ====================================================================================================================== CASH FLOWS FROM OPERATING ACTIVITIES: Net income $19,674,034 $5,797,572 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,331,410 920,097 Deferred income taxes (114,785) (253,545) Changes in assets and liabilities: Increase in accounts receivable-trade (3,231,161) (1,521,422) Increase in accounts receivable-other (337,968) (12,393) Increase in inventories (8,795,103) (4,740,301) (Increase) decrease in prepaid expenses and other assets (49,586) 124,222 Increase in accounts payable 2,344,950 718,440 (Decrease) increase in accrued expenses and deferred income (914,516) 801,218 Increase in accrued salaries and wages 607,754 132,369 Decrease in royalties payable (47,710) (219,905) (Decrease) increase in income taxes payable (1,838,214) 151,863 - --------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 8,629,105 1,898,215 - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Redemption/maturity of investments 14,427,752 9,353,489 Purchase of investments (23,366,913) (9,299,831) Capital expenditures (2,930,048) (1,259,712) Purchase of treasury stock -- (1,375,688) - --------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (11,869,209) (2,581,742) - --------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options, including related tax benefits 20,930,091 677,857 - --------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 20,930,091 677,857 - --------------------------------------------------------------------------------------------------------------------- Net increase (decrease)in cash and cash equivalents 17,689,987 (5,670) Cash and cash equivalents at beginning of period 15,555,810 8,311,353 - --------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $33,245,797 $8,305,683 ======================================================================================================================
The accompanying notes are an integral part of the condensed consolidated financial statements. 5 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements included herein have been prepared by Tollgrade Communications, Inc. (the "Company") in accordance with accounting principles generally accepted in the United States of America for the interim financial information and Article 10 of Regulation S-X. The condensed consolidated financial statements as of and for the three-month and nine-month periods ended September 30, 2000 should be read in conjunction with the Company's consolidated financial statements (and notes thereto) included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Accordingly, the accompanying condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of the Company's management, all adjustments considered necessary for a fair presentation of the accompanying condensed consolidated financial statements have been included, and all adjustments are of a normal and recurring nature. Operating results for the three-month and nine-month periods ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. 2. INVENTORIES At September 30, 2000 and December 31, 1999, inventories consisted of the following:
(Unaudited) September 30, December 31, 2000 1999 ---- ---- Raw materials . . . . . . . . . . . . . . . $10,560,352 $ 8,173,299 Work in progress . . . . . . . . . . . . . 12,572,315 7,410,203 Finished goods . . . . . . . . . . . . . . 2,998,183 1,752,245 ----------- ----------- $26,130,850 $17,335,747 =========== ===========
3. SHORT-TERM AND LONG-TERM INVESTMENTS Short-term investments at September 30, 2000 and December 31, 1999 consisted of individual municipal bonds stated at cost, which approximated market value. These securities have a maturity of one year or less at date of purchase and/or contain a callable provision in which the bonds can be called within one year from date of purchase. Long-term investments are comprised of individual municipal bonds with a maturity of more than one year but less than eighteen months and are stated 6 7 at cost, which approximated market value. The primary investment purpose is to provide a reserve for future business purposes, including possible acquisitions and capital expenditures and to meet working capital requirements. Realized gains and losses are computed using the specific identification method. 7 8 4. INCOME PER COMMON SHARE Net income per share is calculated by dividing net income by the weighted average number of common shares plus incremental common stock equivalent shares (shares issuable upon exercise of stock options). Incremental common stock equivalent shares are calculated for each measurement period based on the treasury stock method, which uses the monthly average market price per share. The calculation of net income per common and common equivalent shares follows:
Three Months Three Months Nine Months Nine Months Ended Ended Ended Ended Sept. 30, 2000 Sept. 25, 1999 Sept. 30, 2000 Sept. 25, 1999 =============================================================================================================================== Net income $ 7,295,541 $ 1,938,333 $19,674,034 $ 5,797,572 =========== =========== =========== =========== Common and common equivalent shares: Weighted average number of common shares outstanding during the period 12,821,132 11,547,610 12,536,510 11,553,492 Common shares issuable upon exercise of outstanding stock options Diluted 639,349 468,994 778,478 232,588 ----------- ----------- ----------- ----------- Common and common equivalent shares outstanding during the period Diluted 13,460,481 12,016,604 13,314,988 11,786,080 =========== =========== =========== =========== Earnings per share data: Net income per common and common equivalent shares Basic $ 0.57 $ 0.17 $ 1.57 $ 0.50 Diluted $ 0.54 $ 0.16 $ 1.48 $ 0.49
8 9 5. DEFERRED AND REFUNDABLE TAX ASSETS The Company's current deferred and refundable tax assets as of September 30, 2000 includes a tax benefit of $13,279,271 resulting from the exercising of certain nonstatutory stock options by various directors, officers and other employees under the Company's various stock option programs during the first nine months of 2000. The Company is entitled to a tax deduction in the current tax year ending December 31, 2000 equal to the difference between the fair market value of the shares received by the option holders upon exercise and the exercise price of the nonstatutory stock options. It is anticipated that these deductions will be utilized over the next twelve-month period either through elimination of income taxes payable or refund of prior taxes paid. This tax benefit is accounted for as a non-cash item in the Condensed Consolidated Statements of Cash Flow. 9 10 REVIEW REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Tollgrade Communications, Inc.: We have reviewed the accompanying condensed consolidated balance sheet of Tollgrade Communications, Inc. and its subsidiaries as of September 30, 2000, and the related condensed consolidated statements of operations for each of the three-month and nine-month periods ended September 30, 2000 and September 25, 1999 and the condensed consolidated statement of cash flows for the nine-month periods ended September 30, 2000 and September 25, 1999. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Tollgrade Communications, Inc. and subsidiaries as of December 31, 1999 and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated January 24, 2000, except for Note 2, which is as of March 20, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1999, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ PricewaterhouseCoopers LLP Pittsburgh, Pennsylvania October 10, 2000 10 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this report. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. The statements contained in the following Management's Discussion and Analysis of Results of Operations and Financial Condition which are not historical are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent Tollgrade Communications, Inc.'s (the "Company") present expectations or beliefs concerning future events. The Company cautions that such statements must be qualified by important factors that could cause actual earnings and other results to differ materially from those achieved in the past or those expected by the Company. These statements as to management's beliefs, strategies, plans, expectations or opinions in connection with Company performance, are based on a number of assumptions concerning future conditions that may ultimately prove to be inaccurate. Such statements must be qualified by important factors that could cause actual earnings and other results to differ materially from those achieved in the past or those expected by the Company. These include: customers' ability to meet established purchase forecasts and their own growth projections; the ability of certain customers to maintain financial strength and access to capital; the ability for sales and marketing partners to meet their own performance objectives and provide vendor financing to certain local exchange carriers; rapid technological change along with the need to continually develop new products and gain customer acceptance and approval; the Company's focus on a relatively narrow range of products; competition; the Company's dependence on key employees and the ability to continue to recruit appropriate personnel; difficulties in managing the Company's growth; the Company's dependence upon certain customers and certain suppliers and contract manufacturers; 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 71% of the Company's revenue for the third quarter ended September 30, 2000 and will continue to account for a majority of the Company's revenues for the foreseeable future. The Company's DigiTest(R) centralized network test system platform focuses on helping local exchange carriers conduct the full range of fault diagnosis, along with the ability to qualify, deploy and maintain next generation services that include Digital Subscriber Line ("DSL") service and 11 12 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 - 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 15% of the Company's revenue for the third quarter of 2000. The Company's LIGHTHOUSE(R) cable products consist of a complete cable status monitoring system that provides a broad testing solution for the Broadband Hybrid Fiber Coax distribution system. The status monitoring system includes a host for user interface, control and configuration; a headend controller for managing network communications; and transponders that are strategically located within the cable network to gather status reports from power supplies, line amplifiers and fiber-optic nodes. Sales of the LIGHTHOUSE product line accounted for approximately 12% of the Company's revenue for the third quarter of 2000. Through the third quarter of 2000, the Company continued to build upon and extend its Professional Services offering to customers. The cornerstone of the Company's Professional Services offering is the Testability Improvement Initiatives. These services may offer the customer the opportunity to make dramatic improvements in testability levels, while training their own staffs in targeted geographic regions over a defined period of time. By making improvements in the customer's digital loop carrier ("DLC") testability levels, the customer's internal repair technicians can make use of automated systems to diagnose and repair subscriber loop problems thereby automatically eliminating the need for the involvement of several highly trained people to test and diagnose line problems. The Professional Services business levels continued to increase in the third quarter of 2000 but are not yet considered material to the Company's revenue. The Company's telecommunication product sales are primarily to the four Regional Bell Operating Companies ("RBOCs") as well as major independent telephone companies and to certain digital loop carrier ("DLC") equipment manufacturers. For the third quarter ended September 30, 2000, approximately 64% of the Company's total revenue was generated from sales to these four RBOCs, the two largest of which comprised approximately 49% of revenues. The Company markets and sells its cable products directly, as well as through various Original Equipment Manufacturer ("OEM") arrangements with cable network equipment manufacturers. The Company presently has one such OEM arrangement under contract and works under less formal arrangements with several other OEM partners. The Company's operating results have fluctuated and may continue to fluctuate as a result of various factors, including the timing of orders from and shipments to the RBOCs. This timing is particularly sensitive to various business factors within each of the RBOCs, including the RBOCs relationships with their various organized labor groups. Certain contracts concerning Verizon Communications ("Verizon") (formerly Bell Atlantic) organized employees expired on August 6, 2000, and were subject to negotiation during the third quarter. Such contracts cover the majority of 12 13 Verizon's union employees associated with the former Bell Atlantic. These employees entered into a formal work stoppage against Verizon in the third quarter and subsequently reached a formal agreement during the quarter. The Company believes the effect of the short-term work stoppage on its operations was not significant. 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 fourth quarter of 2000 and may affect the Company's revenues from such products in subsequent periods. The Company cannot predict such future events or business conditions and the Company's results may be adversely affected by these industry trends in the primary markets its serves. Although international sales to date have not been significant, the Company believes that certain international markets may offer opportunities. However, the international telephony markets differ from those found domestically due to the different types and configurations of equipment used by those international communication companies to provide services. In addition, certain competitive elements also are found internationally which do not exist in the Company's domestic markets. These factors, when combined, have made entrance into these international markets very difficult. From time to time, the Company has utilized the professional services of various marketing consultants to assist in defining the Company's international market opportunities. With the assistance of these consultants and through direct marketing efforts by the Company, it has been determined that its present MCU technology offers limited opportunities in certain international markets for competitive and other technological reasons. These markets include China (other than through an existing OEM relationship), Europe and the Pac Rim countries. There can be no assurance that any continued efforts by the Company will be successful or that the Company will achieve significant international sales. The Company believes that continued growth will depend on its ability to design and engineer new products and, therefore, spends a significant amount on research and development. Research and development expenses as a percent of revenues were approximately 11% for the third quarter ended 13 14 September 30, 2000. The Company expects its research and development expenses to continue at significant levels. 14 15 RESULTS OF OPERATIONS - THIRD QUARTER REVENUES Revenues for the third quarter of 2000 of $29,787,819 were $16,385,166, or 122.3%, higher than the revenues of $13,402,653 reported for the third quarter of 1999. The increase in revenues for the third quarter of 2000 was primarily attributable to an increase in unit volume sales of core MCU line testing products to SBC Communications, Inc. (including Ameritech, Pacific Bell and SNET) associated with its Project Pronto, a broadband initiative, and its continued effort to improve testability in their multi-state region, as well as significantly increased sales to Verizon (formerly Bell Atlantic). The current quarter also included increased shipments of the Company's next generation DigiTest system products primarily to Lucent for deployment into the CLEC (Competitive Local Exchange Carrier) markets, including Choice One Communications, as well as direct sales to Sprint and SBC Telecom, Inc. (a CLEC subsidiary of SBC Communications, Inc.). In addition, the current quarter includes increased sales of the Company's LIGHTHOUSE Cable Status Monitoring System to RCN Corporation. Additionally, the current quarter included increased billings related to the Company's Professional Service business. Periodic fluctuations in customer orders and backlog result from a variety of factors, including but not limited to, the timing of significant orders and shipments, and are not necessarily indicative of long-term trends in sales of the Company's products. GROSS PROFIT Gross profit for the third quarter of 2000 was $18,947,261 compared to $7,363,058 for the third quarter of 1999, representing an increase of $11,584,203, or 157.3%. Gross profit as a percentage of revenues increased to 63.6% in the third quarter of 2000, compared to 54.9% in the same quarter last year. The overall increase in gross profit resulted primarily from the increased sales levels, while improvements in gross margin as a percentage of sales were a result of a favorable sales mix and associated manufacturing efficiencies related to increased production levels. The Company's gross margin continue to be highly sensitive to the mix of products shipped. Revenues from the Company's DigiTest test platform, which is being marketed aggressively on both a direct and OEM sale basis, in what is becoming an extremely competitive environment, are expected to become a larger portion of the Company's total revenues in 2001. To the extent that such increased DigiTest revenues are attributable either to O.E.M. sales or to product deployment into applications downstream from the central office, the Company believes that actual overall margins may decline slightly from their current levels. 15 16 SELLING AND MARKETING EXPENSE Selling and marketing expense for the third quarter of 2000 was $3,439,953 compared to $1,560,692 for the third quarter of 1999. This increase of $1,879,261, or 120.4%, is primarily due to an increase in the number of sales and marketing personnel to support new product introductions and enhance customer support, as well as an increase in commissions associated with the increased sales level during the current quarter. In addition, the current quarter includes increased spending on advertising, promotion and related marketing activities. As a percentage of revenues, selling and marketing expenses decreased slightly to 11.5% in the third quarter of 2000 from 11.6% in the third quarter of 1999. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense for the third quarter of 2000 was $1,591,603, an increase of $611,095, or 62.3%, from the $980,508 recorded in the third quarter of 1999. The increase in general and administrative expense primarily reflects increases in certain performance-based compensation reserves associated with the Company's management incentive compensation program, certain professional service fees, as well as various recruiting-related expenditures. As a percentage of revenues, general and administrative expenses decreased to 5.3% in the third quarter of 2000 from 7.3% in the third quarter of 1999. RESEARCH AND DEVELOPMENT EXPENSE Research and development expense in the third quarter of 2000 was $3,178,081, an increase of $1,052,255, or 49.5%, over the $2,125,826 recorded in the third quarter of 1999. The increase is primarily associated with additional personnel and related development costs associated with developing new products and new technologies and enhancing features of existing products. The new personnel were hired for positions in design engineering, hardware and software development, engineering support, and test engineering. In addition, research and development expenses reflect an increase in certain performance-based compensation reserves associated with the Company's management incentive compensation program. As a percentage of revenues, research and development expense decreased to 10.7% in the third quarter of 2000 from 15.9% in the third quarter of 1999. INTEREST AND OTHER INCOME Interest and other income consists primarily of interest income. For the third quarter of 2000, interest and other income was $661,917 compared to $334,301 for the third quarter of 1999, representing an increase of $327,616, or 98%. This increase is primarily a result of additional funds available for investment purposes during the current period. PROVISION FOR INCOME TAXES The provision for income taxes for the third quarter of 2000 was $4,104,000, an increase of $3,012,000, or 275.8%, from the $1,092,000 for the third quarter of 1999. The effective income tax rate for the third quarter of 2000 was approximately 36.0% of pretax income, which is comparable to the effective tax rate for the third quarter of 1999. 16 17 NET INCOME AND EARNINGS PER SHARE As a result of the above factors, net income for the third quarter of 2000 was $7,295,541, an increase of $5,357,208, or 276.4%, from the $1,938,333 recorded in the third quarter of 1999. Basic and diluted earnings per common share of $.57 and $.54, respectively, for the third quarter of 2000 increased by $.40 and $.38, or 235.3% and 237.5%, from the $.17 and $.16, respectively, earned in the third quarter of 1999. Basic and diluted weighted average common and common equivalent shares outstanding were 12,821,132 and 13,460,481, respectively, in the third quarter of 2000 compared to 11,547,610 and 12,016,604, respectively, in the third quarter of 1999. The increase in the weighted average equivalent shares resulted primarily from an increase in the average share price between periods. As a percentage of revenues, net income for the third quarter of 2000 increased to 24.5% compared to the 14.5% for the third quarter of 1999. 17 18 RESULTS OF OPERATIONS - YEAR TO DATE REVENUES For the first nine months of 2000, revenues were $81,872,064 compared to $38,792,717 for the first nine months of 1999, representing an increase of $43,079,347, or 111.1%. The increase in revenues for the first nine months of 2000 was primarily attributable to an increase in unit volume sales of core MCU line testing products to SBC Communications, Inc. (including Ameritech, Pacific Bell and SNET), Verizon (formerly Bell Atlantic), Bell South and Qwest (formerly US West). The first nine months also includes increased shipments of the Company's next generation DigiTest system products to Sprint and SBC Telecom, Inc., as well as to Nortel Networks and Lucent for deployment into the CLEC markets, including TriVergent Communications, ATI and Choice One Communications. The first nine months of 2000 sales include approximately $1,400,000 of revenue related to orders shipped prior to January 1, 2000 and an additional $2,200,000 shipped during the first quarter of 2000 which were pending receipt of final third party certifications and customer acceptance. All such certifications and customer acceptance notifications were received in the second quarter of 2000. Additionally, the first nine months includes increased sales of the Company's LIGHTHOUSE Cable Status Monitoring System to RCN Corporation and AT&T Broadband and Internet Services (AT&T BIS), as well as to ANTEC, an Original Equipment Manufacturer of cable network products. Also, sales included increased billings related to the Company's Professional Service business. Periodic fluctuations in customer orders and backlog result from a variety of factors, including but not limited to, the timing of significant orders and shipments, and are not necessarily indicative of long-term trends in sales of the Company's products. GROSS PROFIT Gross profit for the first nine months of 2000 was $51,246,464, which represents an increase of $29,148,060, or 131.9%, from the $22,098,404 in the same period last year. As a percentage of revenues, gross profit increased to 62.6% in the first nine months of 2000 compared to 57.0% in the same period for 1999. The overall increase in gross profit resulted primarily from increased sales levels, while improvements in gross margin as a percentage of sales were a result of a favorable sales mix and associated manufacturing efficiencies related to increased production levels. The Company's gross margin continue to be highly sensitive to the mix of products shipped. Revenues from the Company's DigiTest test platform, which is being marketed aggressively on both a direct and OEM sale basis, in what is becoming an extremely competitive environment, are expected to become a larger portion of the Company's total revenues in 2001. To the extent that such increased DigiTest revenues are attributable either to O.E.M. sales or to product deployment into applications downstream from the central office, the Company believes that actual overall margins may decline slightly from their current levels. SELLING AND MARKETING EXPENSE For the first nine months of 2000, selling and marketing expense totaled $8,851,097 compared to $4,726,680 for the first nine months of 1999, representing an increase of $4,124,417 or 87.3%. The 18 19 increase is primarily due to an increase in the number of sales and marketing personnel to support new product introductions and enhance customer support, as well as an increase in commissions associated with the increased sales level. In addition, selling and marketing expenses for the first nine months of 2000 include increased spending on advertising, promotion and related marketing activities. As a percentage of revenue, selling and marketing expense decreased to 10.8% in the first nine months of 2000 from 12.2% for the same period in 1999. GENERAL AND ADMINISTRATIVE EXPENSE For the first nine months of 2000, general and administrative expense totaled $4,464,660 compared to $2,993,877 for the first nine months of 1999, representing an increase of $1,470,873, or 49.1%. The increase in general and administrative expense reflects an increase in certain performance-based compensation reserves associated with the Company's management incentive compensation program, certain professional service fees, as well as various employee recruiting-related expenditures. As a percentage of revenue, general and administrative expense decreased to 5.5% in the first nine months of 2000 from 7.7% for the same period of 1999. RESEARCH AND DEVELOPMENT EXPENSE For the first nine months of 2000, research and development expense totaled $8,866,844 compared to $6,159,484 for the first nine months of 1999, representing an increase of $2,707,360, or 44.0%. This increase is primarily associated with additional personnel to support new product development, increased expenditures on prototypes, and an increase in certain performance-based compensation reserves associated with the Company's management incentive compensation program. As a percentage of revenue, research and development expense decreased to 10.8% in the first nine months of 2000 from 15.9% for the same period of 1999. INTEREST AND OTHER INCOME For the first nine months of 2000, interest and other income was $1,677,171 compared to $842,064 for the first nine months of 1999, representing an increase of $835,107, or 99.2%. This increase is primarily attributable to an increase in funds available for investments during the first nine months of 2000. PROVISION FOR INCOME TAXES The provision for income taxes for the first nine months of 2000 was $11,067,000, which was an increase of $7,804,145, or 239.2%, from $3,262,855 for the first nine months of 1999. The effective income tax rate for the first nine months of 2000 was 36.0% of income before taxes, which was consistent with the rate in the prior year period. NET INCOME AND EARNINGS PER SHARE As a result of the above factors, net income for the first nine months of 2000 was $19,674,034, an increase of $13,876,462, or 239.3% , from the $5,797,572 recorded in the first nine months of 1999. Basic and diluted earnings per common share of $1.57 and $1.48, respectively, for the first nine months of 2000 increased by $1.07 and $.99, or 214.0% and 202.0%, from the $.50 and $.49, respectively, earned in the first nine months of 1999. Basic and diluted weighted average common and common equivalent shares outstanding were 12,536,510 and 13,314,988, respectively, in the first nine months of 2000 compared to 11,553,492 and 11,786,080, respectively, in the first nine 19 20 months of 1999. The increase in the weighted average equivalent shares resulted primarily from an increase in the average share price between periods. As a percentage of revenues, net income for the first nine months of 2000 increased to 24.0% compared to the 14.9% in the first nine months of 1999. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2000, the Company had working capital of $100,364,752, which represented an increase of $50,406,824, or 100.9%, from the $49,957,928 of working capital as of December 31, 1999. The increase in working capital can be attributed primarily to operating cash flow (income from operations before depreciation and amortization) and proceeds from the exercise of stock options including related tax benefits exceeding requirements for purchases of property and equipment. Significant components of the Company's change in working capital include an increase in inventories of $8,795,103 associated primarily with increases in raw materials and work-in-process to support the new product introductions of the Company's DigiTest and LIGHTHOUSE cable status monitoring system as well as an increase in MCU related inventory to support certain project related customer programs. Management believes that operating cash flow and cash reserves are adequate to finance currently planned capital expenditures and to meet the overall liquidity needs of the Company. BACKLOG The Company's backlog consists of firm customer purchase orders. As of September 30, 2000, the Company had a backlog of $14,412,165 compared to $12,115,608 at December 31, 1999 and $7,765,957 at September 25, 1999. The backlog includes a $2,610,000 order for Tollgrade's Broadcast Program Channel destined for use at the Salt Lake City Winter Olympic Games. The Company plans to ship this order during the next six months. 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. 20 21 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: The following exhibits are being filed with this report: Exhibit Number Description ------ ----------- 10.30 Change in Control Agreement, entered into August 10, 2000 between the company and Stephen M. Garda, together with a schedule listing a substantially identical agreement entered into October 20, 2000 with William Anderson. 15 Letter re unaudited interim financial information 27 Financial Data Schedule 21 22 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TOLLGRADE COMMUNICATIONS, INC. (REGISTRANT) Dated: November 13, 2000 /S/ CHRISTIAN L. ALLISON --------------------------------------- CHRISTIAN L. ALLISON CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER Dated: November 13, 2000 /S/ SAMUEL C. KNOCH --------------------------------------- SAMUEL C. KNOCH CHIEF FINANCIAL OFFICER AND TREASURER Dated: November 13, 2000 /S/ BRADLEY N. DINGER --------------------------------------- BRADLEY N. DINGER CONTROLLER 22 23 EXHIBIT INDEX (Pursuant to Item 601 of Regulation S-K) Exhibit Number Description ------ ----------- 10.30 Change in Control Agreement, entered into August 10, 2000 between the company and Stephen M. Garda, together with a schedule listing a substantially identical agreement entered into October 20, 2000 with William Anderson. 15 Letter re unaudited interim financial information 27 Financial Data Schedule 23 EX-10.30 2 j8499501ex10-30.txt AGREEMENT 1 EXHIBIT 10.30 AGREEMENT This Agreement, made as of the 10th day of August, 2000 by and between TOLLGRADE COMMUNICATIONS, INC., a Pennsylvania corporation (the "Corporation") and STEPHEN M. GARDA, 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 24 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 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 25 3 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 connection with the termination of the Executive's employment due to Cause for 26 4 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 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 27 5 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, 28 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) 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 (1) the greater of 29 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. 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 30 8 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. 31 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. 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. 32 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/ Sara M. Antol ------------------------------ /s/ Stephen M. Garda ------------------------------ Stephen M. Garda 33 11 Schedule to Exhibit 10.30 A Change in Control Agreement was entered into on October 20, 2000 between the Company and William Anderson, which was substantially identical to that filed as Exhibit 10.30. 34 EX-15 3 j8499501ex15.txt LETTER 1 EXHIBIT 15 November 13, 2000 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 RE: Tollgrade Communications, Inc. and subsidiaries 1). Form S-8 (Registration No. 333-4290) 1995 Long-Term Incentive Compensation Plan and Individual Stock Options Granted to Certain Directors and Employees Prior to the Adoption of the Plan 2). Form S-8 (Registration No. 333-52907) 1998 Employee Incentive Compensation Plan Commissioners: We are aware that our report dated October 10, 2000 on our review of interim financial information of Tollgrade Communications, Inc. and subsidiaries as of and for the three month and nine month period ended September 30, 2000 and included in the Company's quarterly report on Form 10-Q for the quarter then ended is incorporated by reference in the registration statements referred to above. Very truly yours, /s/ PricewaterhouseCoopers LLP EX-27 4 j8499501ex27.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE THIRD QUARTER ENDED SEPTEMBER 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001002531 TOLLGRADE COMMUNICATIONS, INC. 3-MOS DEC-31-2000 JUL-02-2000 SEP-30-2000 33,245,797 25,305,837 14,947,339 177,811 26,130,850 109,204,905 11,557,845 5,622,091 120,237,614 8,840,153 0 0 0 2,651,606 108,735,905 120,237,614 29,787,819 29,787,819 10,840,558 10,840,558 0 0 0 11,399,541 4,104,000 0 0 0 0 7,295,541 .57 .54
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