-----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, Emqoa0vhn5iQvoDB2vHHLNJGVyj2DlCln5Ym/VpOesOudsAirKdymx5s3AQKvInZ Ifj74an8yOGU9spPLR+YqQ== 0000950128-96-000590.txt : 19961113 0000950128-96-000590.hdr.sgml : 19961113 ACCESSION NUMBER: 0000950128-96-000590 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961112 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOLLGRADE COMMUNICATIONS INC \PA\ CENTRAL INDEX KEY: 0001002531 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TELEPHONE INTERCONNECT SYSTEMS [7385] IRS NUMBER: 251537134 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27312 FILM NUMBER: 96657982 BUSINESS ADDRESS: STREET 1: 493 NIXON RD CITY: CHESWICK STATE: PA ZIP: 15024 BUSINESS PHONE: 4122742156 10-Q 1 TOLLGRADE COMMUNICATIONS, INC. 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, 1996 [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to ____________ Commission file number 0-27312 TOLLGRADE COMMUNICATIONS, INC. (Exact Name of Registrant as Specified in its Charter) PENNSYLVANIA 25-1537134 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification Number) 493 NIXON RD. CHESWICK, PA 15024 (Address of Principal Executive Offices, including zip code) 412-274-2156 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ___X___ No _______ As of October 24, 1996, there were 5,624,135 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 22 pages. The exhibit index is at page 15. 2 TOLLGRADE COMMUNICATIONS, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1996 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO. - ------------------------------ -------- ITEM 1 -- CONSOLIDATED FINANCIAL STATEMENTS: CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 1996 AND DECEMBER 31,1995 ...................................................................... 3 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995.................................... 4 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995 ................................... 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................................. 6 Report of Independent Accountants.......................................................... 7 ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION...................................................... 8 PART II. OTHER INFORMATION ITEM 1 -- LEGAL PROCEEDINGS..........................................................................13 ITEM 2 -- CHANGES IN SECURITIES......................................................................13 ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES............................................................13 ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................13 ITEM 5 -- OTHER INFORMATION..........................................................................13 ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K...........................................................13 SIGNATURE................................................................................................14 EXHIBIT INDEX............................................................................................15
2 3 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- TOLLGRADE COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------
(UNAUDITED) SEPTEMBER 30, 1996 DECEMBER 31, 1995 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 3,191,388 $15,157,387 Short term investments 12,414,888 -- Accounts receivable: Trade, net of allowances of $50,000 and $-0-, respectively 3,875,303 2,571,233 Other 37,311 59,887 Inventories 8,705,838 6,021,466 Prepaid expenses and deposits 296,196 151,451 Deferred tax asset 262,990 159,500 - -------------------------------------------------------------------------------------------------------------------------- Total current assets 28,783,914 24,120,924 Property and equipment, net 2,573,352 1,457,677 Deferred tax asset 89,503 80,100 Patents and other assets 78,530 69,402 - -------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $31,525,299 $25,728,103 - -------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,071,324 $ 1,967,445 Accrued expenses 1,098,609 347,947 Royalties payable 544,874 561,436 Income taxes payable 827,981 84,800 - -------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 4,542,788 2,961,628 Deferred tax liability 204,042 157,100 - -------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 4,746,830 3,118,728 - -------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY: Common stock, $.20 par value; authorized shares, 7,000,000; issued 5,567,635 and 5,443,830, respectively 1,113,527 1,088,766 Additional paid-in capital 22,520,389 22,339,022 Less: Common stock, 2,200 and -0- shares, respectively, in treasury, at cost (49,775) --- Unearned compensation (121,130) (168,529) Retained earnings (accumulated deficit) 3,315,458 (649,884) - -------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 26,778,469 22,609,375 - -------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $31,525,299 $25,728,103 - --------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 3 4 TOLLGRADE COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------- FOR THE FOR THE THREE MONTHS ENDED NINE MONTHS ENDED SEPT. 30, 1996 SEPT. 30, 1995 SEPT. 30, 1996 SEPT. 30, 1995 - ---------------------------------------------------------------------------------------------------------------------- REVENUES $10,080,385 $5,307,481 $27,112,057 $16,645,390 COST OF PRODUCT SALES 4,999,944 2,743,013 13,435,042 8,566,431 - ---------------------------------------------------------------------------------------------------------------------- GROSS PROFIT 5,080,441 2,564,468 13,677,015 8,078,959 - ---------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Selling and marketing 1,234,449 781,051 3,385,308 2,113,491 General and administrative 671,673 351,232 1,746,702 1,062,004 Research, engineering and development 1,044,087 686,687 2,635,778 1,814,411 - ---------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 2,950,209 1,818,970 7,767,788 4,989,906 - ---------------------------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 2,130,232 745,498 5,909,227 3,089,053 Interest income (expense) 90,139 11,113 478,810 (6,550) - ---------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 2,220,371 756,611 6,388,037 3,082,503 Provision for income taxes 824,695 272,679 2,422,695 1,110,000 - ---------------------------------------------------------------------------------------------------------------------- NET INCOME $ 1,395,676 $ 483,932 $ 3,965,342 $ 1,972,503 - ---------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE INFORMATION: Weighted fully diluted common and common equivalent shares 5,943,265 4,468,607 5,919,579 4,365,705 - ---------------------------------------------------------------------------------------------------------------------- Net income per common and common equivalent shares: Primary $ .23 $ .11 $ .67 $ .45 Fully Diluted $ .23 $ .11 $ .67 $ .45 - ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 4 5 TOLLGRADE COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- ---------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPT. 30, 1996 SEPT. 30, 1995 - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,965,342 $ 1,972,503 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 416,801 204,753 Deferred income taxes (65,951) 604,500 Adjustments to non-cash reserves 295,000 60,000 Compensation expense for restricted stock 47,399 12,425 Changes in assets and liabilities: Increase in accounts receivable-trade (1,304,070) (493,349) Decrease in accounts receivable-other 22,576 82,778 Increase in inventories (2,979,372) (2,605,939) Increase in prepaid expenses and deposits (144,745) (36,325) Increase in other assets (9,336) (122,600) Increase in accounts payable 103,879 796,137 Increase in accrued expense and royalties payable 734,100 469,155 Increase in income taxes payable 743,181 106,735 - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,824,804 1,050,773 - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: (Purchase) redemption of short-term investments (12,414,888) 74,219 Capital expenditures (1,527,508) (670,200) Patent expenditures (4,760) (3,225) - ---------------------------------------------------------------------------------------------------------------------- Net cash used for investing activities (13,947,156) (599,206) - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net repayments under line of credit ---- (865,719) Payments on long-term debt ---- (1,800,000) Purchase of stock warrants ---- (1,253,708) Proceeds from issuance of common stock, net of issuance costs ---- 2,828,752 Proceeds from the exercise of stock options 205,643 ---- IPO issuance cost (49,290) ---- - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by (used for) financing activities 156,353 (1,090,675) - ---------------------------------------------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (11,965,999) (639,108) - ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period 15,157,387 740,013 - ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 3,191,388 $ 100,905 - ----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 5 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements included herein have been prepared by Tollgrade Communications, Inc. (the "Company") in accordance with generally accepted accounting principles for the interim financial information and Article 10 of Regulation S-X. The consolidated financial statements as of and for the three and nine-month periods ended September 30, 1996 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, 1995. Accordingly, the accompanying consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of the Company's management, all adjustments considered necessary for a fair presentation of the accompanying consolidated financial statements have been included, and all adjustments are of a normal and recurring nature. Operating results for the three and nine-month periods ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. 2. INVENTORY At September 30, 1996 and December 31, 1995 inventory consisted of the following:
September 30, December 31, 1996 1995 ------------- ----------- Raw materials . . . . . . . . . . . . . . . . . . . $3,039,857 $2,577,638 Work in progress. . . . . . . . . . . . . . . . . . 1,321,226 1,730,364 Finished goods. . . . . . . . . . . . . . . . . . . 4,344,755 1,713,464 ---------- ---------- $8,705,838 $6,021,466 ========== ==========
3. SHORT-TERM INVESTMENTS Short-term investments at September 30, 1996 consisted of individual municipal bonds stated at cost, which approximated market value. The primary investment purpose is to provide a reserve for future business purposes, including possible acquisitions, capital expenditures and to meet working capital requirements. 6 7 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of Tollgrade Communications, Inc.: We have reviewed the accompanying consolidated balance sheets of Tollgrade Communications, Inc. and subsidiaries as of September 30, 1996, and the related consolidated statements of operations and cash flows for the three-month and nine-month periods then ended. These financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1995 and the related consolidated statements of operations and cash flow for the year then ended (not presented herein); and in our report dated January 29, 1996, we expressed an unqualified opinion on those consolidated financial statements. /s/ Coopers & Lybrand L.L.P. Pittsburgh, Pennsylvania October 17, 1996 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto appearing elsewhere in this report. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. The statements contained in the following Management's Discussion and Analysis of Results of Operations and Financial Condition which are not historical are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent the Company's present expectations or beliefs concerning future events. The Company cautions that such statements are qualified by important factors that could cause actual results to differ materially from those in the forward looking statements. Results actually achieved thus may differ materially from expected results included in these statements. OVERVIEW The Company was organized in 1986 and began operations in 1988. The Company designs, engineers, markets and supports proprietary products which enable telephone companies to use their existing line test systems to remotely diagnose problems in Plain Old Telephone Systems' (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 96% of the Company's revenue for the third quarter ended September 30, 1996 and will continue to account for a majority of the Company's revenues for the foreseeable future. The Company's product sales are primarily to the seven Regional Bell Operating Companies ("RBOCs"). For the third quarter ended September 30, 1996, approximately 94% of the Company's total revenue was generated from sales to these seven RBOCs, the two largest of which comprised 64% of revenues. The Company's operating results have fluctuated and may continue to fluctuate as a result of various factors, including the timing of orders from, and shipments to, the RBOCs. Although international sales to date have not been significant, the Company believes the international markets offer sales opportunities. The Company intends to focus additional sales, marketing and development resources on increasing its international presence; however, there can be no assurance that these efforts will be successful or that the Company will achieve significant international sales. The Company believes that continued growth will depend on its ability to design, engineer and market new products and, therefore, spends a significant amount on research, engineering and development. Research, engineering and development expenses as a percent of revenues were approximately 10% for the third quarter ended September 30, 1996. The Company expects its research, engineering and development expenses to continue at significant levels. 8 9 The Eighth Circuit Court of Appeals recently imposed a partial stay of the Federal Communications Commission's Interconnection Order in Iowa Utilities Board, et. al v. FCC (consolidated cases beginning at no. 96-3321). The FCC has petitioned the U.S. Supreme Court asking that Court to lift the partial stay. The stay postponed the pricing standards of the Interconnection Order on the basis of arguments the FCC exceeded its authority in setting pricing levels, which authority should reside with state commissions. The FCC's Interconnection Order would have imposed mandates on the pricing methods of local exchange carriers under the Telecommunications Act of 1996. To date, these legal proceedings have not yet been finally determined, and it remains uncertain how the ultimate outcome will affect the Company's future results of operations. RESULTS OF OPERATIONS - THIRD QUARTER REVENUES Revenue for the third quarter of 1996 increased 89.9%, or $4,772,904, to $10,080,385 from $5,307,481 in the third quarter of 1995. The increase in revenues for the third quarter was primarily attributable to an increase in unit volume sales of the MCU(R) line testing and synchronization products as a result of increased market penetration. GROSS PROFIT Gross profit for the quarter was $5,080,441, an increase of $2,515,973, or 98.1%, over the $2,564,468 of gross profit recorded in the third quarter of 1995. Gross profit as a percentage of revenues increased to 50.4% in the third quarter of 1996, compared to 48.3% in the same quarter last year. The increase from the prior year quarter was primarily the result of increased production volume with fixed overhead costs being spread over a larger volume base. SELLING & MARKETING EXPENSE Selling and marketing expense in the third quarter of 1996 was $1,234,449, an increase of $453,398, or 58.0%, over the $781,051 recorded in the third quarter of 1995. The increase in selling and marketing expense reflects increased commissions related to greater sales volume, additional salaries and benefits associated with increased staffing levels to support expanding product lines, and increased consulting and travel expenses associated with the planned expansion into international markets. As a percentage of revenues, selling and marketing expenses decreased to 12.2% in the third quarter of 1996 from 14.7% in the third quarter of 1995. GENERAL & ADMINISTRATIVE EXPENSE General and administrative expense in the third quarter of 1996 was $671,673, an increase of $320,441, or 91.2%, over the $351,232 recorded in the third quarter of 1995. The increase in general and administrative expense primarily reflects additional salaries and benefits associated with increased staffing levels to support the expanded business operations. As a percentage of revenues, general and administrative expenses increased to 6.7% in the third quarter of 1996 from 6.6% in the third quarter of 1995. RESEARCH, ENGINEERING & DEVELOPMENT EXPENSE Research, engineering and development expense in the third quarter of 1996 was $1,044,087, an increase of $357,400, or 52.0%, over the $686,687 recorded in the third quarter of 1995. The increase in research, 9 10 engineering and development expense was due to engineering costs associated with additional personnel to support new product introductions and product feature enhancements. As a percentage of revenues, research, engineering and development expense decreased to 10.4% in the third quarter of 1996 from 12.9% in the third quarter of 1995. OTHER INCOME AND EXPENSE Other income and expense consists primarily of interest income and interest expense. Other income was $90,139 for the third quarter of 1996 compared to $11,113 for the third quarter of 1995. The increase in other income was primarily attributable to increased interest income, which resulted from an overall increase in funds available for investment during the period primarily due to the proceeds received from the Company's initial public offering in December 1995. PROVISION FOR INCOME TAXES The effective income tax rate increased to approximately 37.1% in the third quarter of 1996, compared to approximately 36.0% in the third quarter of 1995. The estimated effective tax rate for the third quarter of 1996 reflects the effect of federal and state income taxes adjusted for estimated research and development tax credits available to the Company which were reinstated on July 1, 1996. NET INCOME As a result of the above factors, net income for the third quarter of 1996 was $1,395,676, an increase of $911,744, or 188.4%, over the $483,932 recorded in the third quarter of 1995. Primary and fully diluted earnings per common share of $.23 for the third quarter of 1996 increased by 109.1%, or $.12, from the $.11 per share earned in the third quarter of 1995. Fully diluted weighted average common and common equivalent shares outstanding were 5,943,265 in the third quarter of 1996 compared to 4,468,607 in the third quarter of 1995. The increase in outstanding shares was primarily due to the sale of 1,490,000 new shares in the initial public offering on December 14, 1995. As a percentage of revenues, net income for the third quarter of 1996 increased to 13.8% compared to the 9.1% for the third quarter of 1995. The increase was primarily due to increased revenues, as described above. RESULTS OF OPERATIONS - YEAR TO DATE REVENUES For the first nine months of 1996, revenues were $27,112,057 compared to $16,645,390 for the first nine months of 1995, representing an increase of $10,466,667 or 62.9%. The increase in revenues for the nine month period was primarily attributable to an increase in unit sales volume of the MCU(R) line test products and also to a one time sale of a special application product to a customer for the 1996 summer Olympic games of approximately $1.36 million. GROSS PROFIT For the first nine months of 1996, gross profit increased to $13,677,015 compared to $8,078,959 for the first nine months of 1995, representing an increase of $5,598,056, or 69.3%. As a percentage of revenues, gross profit increased to 50.4% in the first nine months of 1996 compared to 48.5% in the same period for 10 11 1995. The increase from the prior year period was primarily the result of the introduction of new products with higher gross profit margins and increased production volume with fixed overhead costs being spread over a larger volume base. SELLING & MARKETING EXPENSE For the first nine months of 1996, selling and marketing expense was $3,385,308 compared to $2,113,491 for the first nine months of 1995, representing an increase of $1,271,817, or 60.2%. The increase in selling and marketing expense reflects increased commissions related to greater sales volume, additional salaries and benefits associated with increased staffing levels to support expanding product lines, and increased consulting and travel expenses associated with the planned expansion into international markets. As a percentage of revenues, selling and marketing expense decreased to 12.5% in the first nine months of 1996 from 12.7% for the same period of 1995. GENERAL & ADMINISTRATIVE EXPENSE For the first nine months of 1996, general and administrative expense totaled $1,746,702 compared to $1,062,004 for the first nine months of 1995, representing an increase of $684,698, or 64.5%. The increase in general and administrative expense primarily reflects additional salaries and benefits associated with increased staffing levels to support the expanded business operations and increased costs including professional fees incurred as a result of being a publicly owned company during the first nine months of 1996, but not during the comparative period of 1995. As a percentage of revenues, general and administrative expense remained constant at 6.4% for the first nine months of 1996 and 1995. RESEARCH, ENGINEERING & DEVELOPMENT EXPENSE For the first nine months of 1996, research, engineering and development expense totaled $2,635,778 compared to $1,814,411 for the first nine months of 1995, representing an increase of $821,367, or 45.3%. The increase in research, engineering and development expense was due to engineering costs associated with additional personnel to support new product introductions and product feature enhancements. As a percentage of revenues, research, engineering and development expense decreased to 9.7% in the first nine months of 1996 from 10.9% for the first nine months of 1995. OTHER INCOME AND EXPENSE Other income and expense consists primarily of interest income and interest expense. For the first nine months of 1996, other income was $478,810 compared to other expense of $6,550 for the first nine months of 1995, representing an increase of $485,360. The increase in other income was primarily attributable to increased interest income, which resulted from an overall increase in funds available for investment during the period primarily due to the proceeds received from the Company's initial public offering in December 1995. PROVISIONS FOR INCOME TAXES The effective income tax rate increased to approximately 37.9% in the first nine months of 1996, compared to approximately 36.0% in the first nine months of 1995. The increase in the effective tax rate reflects the unavailability of the tax credit for research and development expenses during the first six months of 1996. Although this credit was reinstated effective July 1, 1996 through legislation, its effect is only prospective. 11 12 NET INCOME For the first nine months of 1996, net income was $3,965,342 compared to $1,972,503 for the first nine months of 1995, representing an increase of $1,992,839, or 101.0%. Primary and fully diluted earnings per common share of $.67 for the first nine month of 1996 increased by 48.9%, or $.22, from the $.45 per share earned in the same period of 1995. Fully diluted weighted average common and common equivalent shares outstanding were 5,919,579 in the first nine months of 1996 compared to 4,365,705 in the first nine months of 1995. The increase in outstanding shares was primarily due to the sale of 1,490,000 new shares in the initial public offering on December 14, 1995. As percentage of revenues, net income for the first nine months of 1996 increased to 14.6% compared to the 11.9% for the same period in the prior year. The increase was primarily due to increased revenues, as described above. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1996, the Company had working capital of $24,241,126, which represented an increase of $3,081,930, or 14.6%, from the $21,159,296 of working capital as of December 31, 1995. The increase in working capital can be attributed primarily to operating cash flow exceeding requirements for purchases of property, plant and equipment. Management believes that operating cash flow and cash reserves are adequate to finance currently planned capital expenditures and to meet the liquidity needs of the Company. The Company made capital expenditures of $1,527,508 in the first nine months of 1996 and were primarily related to test fixtures and development systems, computer and office equipment for increased staff, as well as leasehold improvements made to the Company's facilities. The Company presently has no material capital expenditure commitments. As of and through September 30, 1996, the Company had not borrowed any amounts against its $2,500,000 available bank line of credit. BACKLOG The Company's backlog consists of firm customer purchase orders for the Company's various products. As of September 30, 1996 the Company had a backlog of $2,624,731, which represents an increase of $512,551, or 24.3%, from the $2,112,180 backlog at December 31, 1995. 12 13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 2. CHANGES IN SECURITIES None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: The following exhibits are being filed with this report:
Exhibit Number Description ------ ----------- 10.1 Change in Control Agreement, entered into September 9, 1996 between the Company and Bradley N. Dinger (incorporated by reference to Exhibit 10.1 of the Report on Form 10-Q of the Company filed on August 13, 1996). 10.2 Stock Option Agreement entered into September 9, 1996 between the Company and Bradley N. Dinger, together with a schedule listing substantially similar agreements with Robert Cornelia and Samuel C. Knoch. 11.1 Statement re Computation of Per Share Earnings 15 Letter re unaudited interim financial information 27 Financial Data Schedule
(b) Reports on Form 8-K: The Company did not file any Current Report on Form 8-K during the quarter ended September 30, 1996. 13 14 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TOLLGRADE COMMUNICATIONS, INC. (REGISTRANT) Dated: November 11, 1996 /s/ CHRISTIAN L. ALLISON ---------------------------------- CHRISTIAN L. ALLISON CHIEF EXECUTIVE OFFICER & DIRECTOR Dated: November 11, 1996 /s/ SAMUEL C. KNOCH ---------------------------------- SAMUEL C. KNOCH CHIEF FINANCIAL OFFICER 14 15 EXHIBIT INDEX (Pursuant to Item 601 of Regulation S-K)
Exhibit Number Description ------ ----------- 10.1 Form of Change in Control Agreement, entered into September 9, 1996 between the Company and Bradley N. Dinger (incorporated by reference to Exhibit 10.1 of the Report on Form 10-Q of the Company filed on August 13, 1996). 10.2 Stock Option Agreement entered into September 9, 1996 between the Company and Bradley N. Dinger, together with a schedule listing substantially similar agreements with Robert Cornelia and Samuel C. Knoch. 11.1 Statement re Computation of Per Share Earnings 15 Letter re unaudited interim financial information 27 Financial Data Schedule
15 EX-10.2 2 TOLLGRADE COMMUNICATIONS, INC. 10-Q 1 EXHIBIT 10.2 TOLLGRADE COMMUNICATIONS, INC. 1995 LONG-TERM INCENTIVE COMPENSATION PLAN NONSTATUTORY STOCK OPTION AGREEMENT THIS AGREEMENT is made and entered into this 9th day of September, 1996, by and between TOLLGRADE COMMUNICATIONS, INC., a Pennsylvania corporation (the "Company") and BRADLEY N. DINGER, an employee of the Company (the "Holder"). WHEREAS, the Company desires to issue, and the Holder desires to receive, an option to purchase shares of the common stock of the Company, pursuant to the terms described herein. NOW, THEREFORE, in consideration of the terms and conditions contained herein and intending to be legally bound hereby, the parties agree as follows: 1. GRANT OF OPTION. The Company hereby confirms the grant to the Holder on August 15, 1996 (the "Date of Grant") of an option (the "Option") to purchase, from time to time in accordance with the terms hereof Five Thousand (5,000) shares of common stock of the Company, par value $.20 per share (the "Common Stock") at an option price of $21.75 per share, under and subject to the terms and conditions of the Company's 1995 Long-Term Incentive Compensation Plan (the "Plan") and this Agreement. The Plan is incorporated herein by reference and made a part hereof as though set forth in full herein. Terms which are capitalized herein but which are not defined herein have the same meaning as in the Plan unless the context otherwise requires. The Option confirmed hereby is a nonstatutory stock option as that term is defined in Section 2.20 of the Plan. Subject to the terms of Section 6.8 of the Plan regarding the periods during which stock options may be exercised upon termination of employment, and Section 14.1 of the Plan regarding the periods during which the Option may be exercised during a Change-in-Control (as defined in the Plan), the Option shall be exercisable as follows: (a) From and after February 15, 1997, the Option shall be exercisable for 1,666 shares covered hereby. (b) From and after August 15, 1997, the Option shall be exercisable for an additional 1,666 shares covered hereby. (c) From and after August 15, 1998, the Option shall be exercisable for all of the shares covered hereby. The Option will expire at the close of business on August 15, 2005. 2. ACCEPTANCE OF GRANT OF OPTION. The Holder accepts the grant of the Option confirmed hereby, acknowledges having received a copy of the Plan and agrees to be bound by the terms and provisions of the Plan, as the Plan may be amended from time to time; provided, however, that no alteration, amendment, revocation or termination of the Plan shall, without the written consent of the Holder, adversely 16 2 affect the rights of the Holder with respect to the Option. 3. NON-TRANSFERABILITY. This Option shall not be transferrable otherwise than by Will or the laws of descent or distribution, and the Option shall be exercisable during the lifetime of the Holder only by the Holder. 4. PROCEDURE FOR EXERCISE OF OPTION. The Option may be exercised only by (a) execution and delivery by the Holder to the Company of an exercise form or forms prescribed by the Committee; and (b) surrender of this Agreement at the principal office of the Company. Each exercise form must set forth the number of shares of Common Stock for which the Option is exercised and must be dated and signed by the person exercising the Option. Upon partial exercise hereof, a new Agreement containing the same provisions as this Agreement shall be issued by the Company to the Holder for the number of shares of Common Stock with respect to which this Option shall not have been exercised. Subject to the last paragraph of this Section 4, the exercise is not effective until the Company receives payment of the full option price for the number of shares of Common Stock for which the Option is exercised. The Option Price shall be paid to the Company in full in the manner specified in Section 6.6 of the Plan. To the extent the Holder pays the Option Price in whole or in part by shares of already-owned Common Stock, as permitted by the Plan, the Company shall advise any person exercising the Option in such manner as to the amount of any cash required to be paid to the Company for any shares representing a fraction of a share, and such person will be required to pay any such cash directly to the Company before any distribution of certificates representing shares of Common Stock will be made. The person exercising the Option should execute the form of assignment on the back of the certificate or should deliver an executed Assignment Separate from Certificate with respect to each stock certificate delivered in payment of the Option Price. If any person other than the Holder exercises the Option, the exercise material must include proof satisfactory to the Company of the right of such person to exercise the Option, and the signature on all certificates or stock powers must be guaranteed by a commercial bank or trust company or by a firm having membership in the New York Stock Exchange, Inc., the American Stock Exchange, Inc., or the National Association of Securities Dealers, Inc. The date of exercise of the Option is the date on which the exercise form or forms, proof of right to exercise (if required) and payment of the Option Price are received by the Company. For purposes of determining the date of exercise where payment of the Option Price is made in shares of already-owned Common Stock, any cash required to be paid to the Corporation with respect to a fraction of a share shall not be taken into account when determining whether payment of the Option Price has been made. 5. ISSUANCE OF CERTIFICATES. Subject to Section 4 above and this Section 5, the Company will issue a certificate or certificates representing the number of shares of Common Stock for which the Option is exercised as soon as practicable after the date of exercise. Unless otherwise directed, the certificate(s) will be registered in the name of the person exercising the Option and delivered to such person. If the Option Price is paid in whole or in part with shares of already-owned Common Stock, the Company will issue at the same time and return to the person exercising the Option a certificate representing the number of any excess shares included in any certificate or certificates delivered to the Company at the time of exercise. The obligation of the Company to issue shares on exercise of an option is subject to the effectiveness 17 3 of a Registration Statement under the Securities Act of 1933, as amended, with respect to such shares, if deemed necessary or appropriate by counsel to the Company. The Company is not obligated to file such a Registration Statement. If at the time of exercise of the Option, no such Registration Statement is in effect, the issuance of shares on exercise of the Option may also be made subject to restrictions on the transfer of the shares, including the placing of an appropriate legend on the certificates restricting the transfer thereof, and to such other restrictions as the Committee, on the advice of counsel, may deem necessary or appropriate to prevent a violation of applicable securities laws. 6. WITHHOLDING OF TAXES. The Holder will be advised by the Company as the amount of any Federal income, employment or excise taxes required to be withheld by the Company on any compensation income resulting from the exercise of the Option, and the Holder will pay such taxes directly to the Company upon request. State, local or foreign income or employment taxes may also be required to be withheld by the Company and the Holder will also be required to pay such taxes directly to the Company upon request. If the Holder does not pay any taxes required to be withheld directly to the Company within ten (10) days after any such request, the Company may withhold such taxes from any other compensation to which the Holder is entitled from the Company. The Holder will hold the Company harmless in acting to satisfy its withholding obligations in this manner if it becomes necessary to do so. 7. INTERPRETATION OF PLAN AND AGREEMENT. This Agreement is an award agreement referred to in Section 6.2 of the Plan. If there is any conflict between the Plan and this Agreement, the provisions of the Plan shall control. Any dispute or disagreement which shall arise under or in any way relate to the construction or interpretation of the Plan or this Agreement shall be resolved by the Committee, and the decision of the Committee shall be final, binding and conclusive for all purposes. 8. EFFECT OF AGREEMENT ON RIGHTS OF COMPANY AND HOLDER. This Agreement does not confer any rights on the Holder to continue in the employ of the Company or interfere in any way with the rights of the Company to terminate the employment of the Holder or to otherwise reassign or change the current position of the Holder. 9. INDEMNIFICATION. The Holder indemnifies and holds harmless the Company from and against any and all loss, damages, liability or expense, including costs and reasonable attorneys' fees, to which the Company may be put or may incur by reason of or in connection with any misrepresentation made by the Holder, any breach of the Holder's warranties, or the Holder's failure to fulfill any of his or her covenants or agreements set forth herein. 10. BINDING EFFECT. This Agreement shall be binding upon the successors and assigns of the Company and upon the legal representatives, heirs and legatees of the Holder. 11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties and supersedes all prior agreements and understandings, oral or written, between the parties with respect to the subject matter of this Agreement. 12. AMENDMENT. This Agreement may be amended only a written instrument signed by the Company and the Holder. 13. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania. 18 4 IN WITNESS WHEREOF, the Company and the Holder have executed this Agreement as of the date first written above. TOLLGRADE COMMUNICATIONS, INC. By: --------------------------- Title: ------------------------ WITNESS: - ------------------------------ ------------------------------ Bradley N. Dinger 19 5 SCHEDULE TO EXHIBIT 10.2 Stock Option Agreements were entered into between the Company and each of Robert Cornelia dated July 23, 1996, and Samuel C. Knoch, dated August 5, 1996, which were substantially identical to that filed as Exhibit 10.2, differing only in the number of shares underlying the option granted, the exercise price and the vesting schedule. 20 EX-11.1 3 TOLLGRADE COMMUNICATIONS, INC. 10-Q 1 EXHIBIT 11.1 CALCULATION OF EARNINGS PER SHARE FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996
- ------------------------------------------------------------------------------------------------------------------- THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPT. 30, 1996 SEPT. 30, 1995 SEPT. 30, 1996 SEPT. 30, 1995 - ------------------------------------------------------------------------------------------------------------------- Net income . . . . . . . . . . . . . . . . . . $1,395,676 $483,932 $ 3,965,342 $ 1,972,503 ========== ======== ========== =========== Common and common equivalent shares: Weighted average number of common shares outstanding during the period . . . . . . . . . . . . 5,504,280 3,273,298 5,463,983 3,238,482 Common shares issuable upon conversion of convertible preferred stock Primary . . . . . . . . . . . . -- 958,721 958,721 Fully diluted . . . . . . . . . -- 958,721 958,721 Common shares issuable upon exercise of outstanding stock options Primary . . . . . . . . . . . . 435,786 236,588 437,592 168,502 Fully diluted . . . . . . . . . 438,985 236,588 455,596 168,502 Common and common equivalent shares outstanding during the period Primary . . . . . . . . . . . . 5,940,066 4,468,607 5,901,575 4,365,705 ========= ========= ========= ========= Fully diluted . . . . . . . . . 5,943,265 4,468,607 5,919,579 4,365,705 ========= ========= ========= ========= Earnings per share data Net income per common and common equivalent shares Primary . . . . . . . . . . . . $ 0.23 $ 0.11 $ 0.67 $ 0.45 Fully diluted . . . . . . . . . $ 0.23 $ 0.11 $ 0.67 $ 0.45
21 EX-15 4 TOLLGRADE COMMUNICATIONS, INC. 10-Q 1 Exhibit 15 October 17, 1996 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 RE: Tollgrade Communications, Inc. and subsidiaries 1). Form S-8 (Registration No. 333-4290) 1995 Long-Term Incentive Compensation Plan and Individual Stock Options Granted to Certain Directors and Employees Prior to the Adoption of the Plan. Ladies and gentlemen: We are aware that our report dated October 17, 1996 on our review of interim financial information of Tollgrade Communications, Inc. and subsidiaries for the three-month and nine-month periods ended September 30, 1996 and included within the Company's quarterly report on Form 10-Q for the quarter then ended is incorporated by reference in the registration statement referred to above. Pursuant to Rule 436(c) under the Securities Act of 1933, this report should not be considered a part of the registration statement prepared or certified by us within the meaning of Sections 7 and 11 of that Act. Very truly yours, /s/ Coopers & Lybrand L.L.P. 22 EX-27 5 TOLLGRADE COMMUNICATIONS, INC. 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE PERIOD ENDED SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001002531 TOLLGRADE COMMUNICATIONS, INC. 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 3,191,388 12,414,888 3,875,303 (50,000) 8,705,838 28,783,914 3,776,761 1,203,409 31,525,299 4,542,788 0 0 0 1,113,527 25,664,942 31,525,299 27,112,057 27,112,057 13,435,042 13,435,042 0 0 0 6,388,037 2,422,695 0 0 0 0 3,965,342 0.67 0.67
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