-----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, HlkWNLO2dbp4XzMTmgN7sFmXnSK9UzQ33v33E+mF+cLyTSp4DRP92YAXKcLweIAp qIhia1FbYUujXmNMbqWcgQ== 0000950128-98-000784.txt : 19980513 0000950128-98-000784.hdr.sgml : 19980513 ACCESSION NUMBER: 0000950128-98-000784 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980328 FILED AS OF DATE: 19980512 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: SEC FILE NUMBER: 000-27312 FILM NUMBER: 98616731 BUSINESS ADDRESS: STREET 1: 493 NIXON RD CITY: CHESWICK STATE: PA ZIP: 15024 BUSINESS PHONE: 4122742156 10-Q 1 TOLLGRADE COMMUNICATIONS, INC. 1 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC ------------------------------- FORM 10-Q (Mark One) [ X ] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 28, 1998 [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _____________ to ____________ Commission file number 0-27312 TOLLGRADE COMMUNICATIONS, INC. (Exact Name of Registrant as Specified in its Charter) PENNSYLVANIA 25-1537134 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification Number) 493 NIXON RD. CHESWICK, PA 15024 (Address of Principal Executive Offices, including zip code) 724-274-2156 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- As of April 17, 1998, there were 5,836,066 shares of the Registrant's Common Stock, $0.20 par value per share, and no shares of the Registrant's Preferred Stock, $1.00 par value per share, outstanding. - -------------------------------------------------------------------------------- This report consists of a total of 17 pages. The exhibit index is at page 15. 2 TOLLGRADE COMMUNICATIONS, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 28, 1998 TABLE OF CONTENTS -----------------
PART I. FINANCIAL INFORMATION PAGE NO. - ------------------------------ -------- ITEM 1 -- CONDENSED CONSOLIDATED FINANCIAL STATEMENTS: CONDENSED CONSOLIDATED BALANCE SHEETS AS OF MARCH 28, 1998 AND DECEMBER 31,1997 ......................................................................3 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 28, 1998 AND MARCH 29, 1997 ...........................................4 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE-MONTH PERIODS ENDED MARCH 28, 1998 AND MARCH 29, 1997 ...........................................5 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.......................................6 REPORT OF INDEPENDENT ACCOUNTANTS..........................................................8 ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION......................................................9 PART II. OTHER INFORMATION ITEM 1 -- LEGAL PROCEEDINGS.........................................................................13 ITEM 2 -- CHANGES IN SECURITIES.....................................................................13 ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES...........................................................13 ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................13 ITEM 5 -- OTHER INFORMATION.........................................................................13 ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K..........................................................13 SIGNATURE...............................................................................................14 EXHIBIT INDEX...........................................................................................15
2 3 PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------------------------------------------------- (UNAUDITED) MARCH 28, 1998 DECEMBER 31, 1997 - ------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 4,854,547 $ 3,183,944 Short term investments 13,640,065 15,666,626 Accounts receivable: Trade 7,004,641 7,884,683 Other 280,636 517,090 Inventories 13,076,328 12,101,114 Prepaid expenses and deposits 1,122,524 409,252 Deferred tax asset 213,216 213,216 - ------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 40,191,957 39,975,925 Long-term investments 2,120,000 600,000 Property and equipment, net 3,387,600 3,001,824 Deferred tax asset 126,895 126,895 Patents and other assets 7,488 8,568 - ------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 45,833,940 $ 43,713,212 - ------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,784,850 $ 959,185 Accrued expenses 1,276,627 1,091,990 Accrued salaries and wages 519,679 1,529,525 Royalties payable 541,484 878,780 Income taxes payable 693,843 946,233 - ------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 4,816,483 5,405,713 Deferred income 292,000 -- Deferred tax liability 206,116 206,116 - ------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 5,314,599 5,611,829 SHAREHOLDERS' EQUITY: Common stock, $.20 par value; authorized shares, 7,000,000; issued 5,853,957 and 5,727,350, respectively 1,170,791 1,145,470 Additional paid-in capital 26,404,340 25,232,315 Treasury stock, at cost, 17,500 and 3,200 shares, respectively (307,778) (70,355) Unearned compensation (22,459) (35,934) Retained earnings 13,274,447 11,829,887 - ------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 40,519,341 38,101,383 - ------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 45,833,940 $ 43,713,212 - -------------------------------------------------------------------------------------------------------------------------
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 THREE MONTHS ENDED MARCH 28, 1998 MARCH 29, 1997 - ---------------------------------------------------------------------------------------------------------------------- REVENUES $ 10,763,840 $ 8,619,406 COST OF PRODUCT SALES 4,355,312 3,789,366 - ---------------------------------------------------------------------------------------------------------------------- GROSS PROFIT 6,408,528 4,830,040 - --------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES: Selling and marketing 1,621,884 1,046,189 General and administrative 1,089,707 830,287 Research and development 1,628,002 1,241,254 - ---------------------------------------------------------------------------------------------------------------------- Total operating expenses 4,339,593 3,117,730 - ---------------------------------------------------------------------------------------------------------------------- INCOME FROM OPERATIONS 2,068,935 1,712,310 Interest and other income, net 188,625 176,988 - ---------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 2,257,560 1,889,298 Provision for income taxes 813,000 710,005 - ---------------------------------------------------------------------------------------------------------------------- NET INCOME $ 1,444,560 $ 1,179,293 - ---------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE INFORMATION: Weighted average shares of common stock and equivalents: Basic 5,777,666 5,631,878 Diluted 5,956,313 5,975,675 - ---------------------------------------------------------------------------------------------------------------------- Net income per common and common equivalent shares: Basic $ .25 $ .21 Diluted $ .24 $ .20 - ----------------------------------------------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------------------------------------------------------------ FOR THE THREE MONTHS ENDED MARCH 28, 1998 MARCH 29, 1997 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,444,560 $ 1,179,293 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 295,282 231,776 Deferred income taxes -- 46 Compensation expense for restricted stock 13,475 13,767 Changes in assets and liabilities: Decrease in accounts receivable-trade 880,042 859,397 Decrease (increase) in accounts receivable-other 236,454 (18,029) (Increase) decrease in inventories (975,214) 422,024 (Increase) decrease in prepaid expenses and deposits (713,272) 191,654 Increase (decrease) in accounts payable 825,665 (1,039,726) Increase (decrease) in accrued expense and royalties payable 139,341 (568,718) Decrease in accrued salaries and wages (1,009,846) (393,810) (Decrease) increase in income taxes payable (252,390) 291,711 - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 884,097 1,169,385 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Redemption/maturity of short-term investments 3,493,387 2,996,189 Purchase of short-term investments (2,986,826) (2,052,959) Capital expenditures (679,978) (325,593) - ------------------------------------------------------------------------------------------------------------------------------------ Net cash (used in) provided by investing activities (173,417) 617,637 - ------------------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the exercise of stock options including related tax benefits 1,197,346 117,085 Purchase of treasury stock (237,423) -- - ------------------------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 959,923 117,085 - ------------------------------------------------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents 1,670,603 1,904,107 Cash and cash equivalents at beginning of period 3,183,944 4,591,273 - ------------------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 4,854,547 $ 6,495,380 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the condensed consolidated financial statements. 5 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements included herein have been prepared by Tollgrade Communications, Inc. (the "Company") in accordance with generally accepted accounting principles for the interim financial information and Article 10 of Regulation S-X. The condensed consolidated financial statements as of and for the three-month period ended March 28, 1998 should be read in conjunction with the Company's consolidated financial statements (and notes thereto) included in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. Accordingly, the accompanying condensed consolidated financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of the Company's management, all adjustments considered necessary for a fair presentation of the accompanying condensed consolidated financial statements have been included, and all adjustments are of a normal and recurring nature. Operating results for the three-month period ended March 28,1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 2. INVENTORY At March 28, 1998 and December 31, 1997 inventory consisted of the following:
March 28, December 31, 1998 1997 ----------- ----------- Raw materials ................................... $ 4,894,379 $ 5,738,576 Work in progress................................. 6,203,735 5,070,113 Finished goods................................... 1,978,214 1,292,425 ----------- ---------- $13,076,328 $12,101,114 =========== ===========
6 7 3. INVESTMENTS Short-term investments at March 28, 1998, and December 31, 1997, consisting of individual U.S. Government and municipal bonds are stated at cost, which approximated market value. These securities have a maturity of one year or less at date of purchase and/or contain a callable provision in which the bonds can be called within one year from date of purchase. The primary investment purpose is to provide a reserve for future business purposes, including possible acquisitions and capital expenditures and to meet working capital requirements. Long-term investments are comprised of individual municipal bonds with a maturity of more than one year but less than eighteen months. 4. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. This Statement, which is effective for financial statements for fiscal years beginning after December 15, 1997, requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Additionally, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. This Statement, which is effective for financial statements for fiscal years beginning after December 15, 1997, also establishes standards for related disclosures about products and services, geographic areas and major customers. The Company has adopted both of the above standards in the first quarter of 1998 and the standards did not impact the financial position and results of operations of the Company in the first quarter of 1998. 7 8 REPORT OF INDEPENDENT ACCOUNTANTS --------------------------------- To the Board of Directors of Tollgrade Communications, Inc.: We have reviewed the accompanying condensed consolidated balance sheet of Tollgrade Communications, Inc. and subsidiaries as of March 28, 1998, and the related condensed consolidated statements of operations and cash flows for the three-months ended March 28, 1998, and March 29, 1997. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Tollgrade Communications, Inc. and subsidiaries as of December 31, 1997 and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated January 27, 1998, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1997, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ Coopers & Lybrand L.L.P. Pittsburgh, Pennsylvania April 13, 1998 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF - ------------------------------------------------------------ OPERATIONS AND FINANCIAL CONDITION ---------------------------------- The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this report. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. The statements contained in the following Management's Discussion and Analysis of Results of Operations and Financial Condition which are not historical are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements represent the Company's present expectations or beliefs concerning future events. The Company cautions that such statements are qualified by important factors that could cause actual results to differ materially from those in the forward looking statements. Results actually achieved thus may differ materially from expected results included in these statements. Those factors which specifically related to the Company's business include the following: rapid technological change along with the need to continually develop new products; dependence on a single product line; competition; dependence on key employees; management of Company's growth; dependence on certain customers and consolidation efforts within the Companies primary customer base; dependence on certain suppliers; fluctuations in operating results; proprietary rights and risks of third party claims of infringement; and government regulation. IMPACT OF THE YEAR 2000 ISSUE The Company is currently assessing whether its existing computer systems will properly utilize dates beyond December 31, 1999. If modifications are required for its existing systems and the modifications are not completed on a timely basis, the Year 2000 Issue could have a material impact on the operations of the Company. The company believes that it has no exposure to contingencies related to the Year 2000 Issue for the products it has sold. The Company plans to engage in formal communication with all of its significant suppliers and large customers to determine the extent to which the Company is vulnerable to those third parties' failure to remediate their own Year 2000 Issue. There can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. OVERVIEW The Company was organized in 1986 and began operations in 1988. The Company designs, engineers, markets and supports proprietary products which enable telephone companies to use their existing line test systems to remotely diagnose problems in Plain Old Telephone Service (POTS) lines containing both copper and fiber optics. The Company's MCU(R) product line, which includes POTS line testing as well as 9 10 alarm-related products, represented approximately 91% of the Company's revenue for the first quarter ended March 28,1998 and will continue to account for a majority of the Company's revenues for the foreseeable future. The Company's product sales are primarily to the five Regional Bell Operating Companies ("RBOCs") as well as major independent telephone companies such as Sprint and to certain digital loop carrier ("DLC") equipment manufacturers. For the first quarter ended March 28, 1998, approximately 87% of the Company's total revenue was generated from sales to these five RBOCs, the two largest of which comprised approximately 59% of revenues. The Company's operating results have fluctuated and may continue to fluctuate as a result of various factors, including the timing of orders from, and shipments to, the RBOCs. This timing is particularly sensitive to various business factors within each of the RBOC's, including the RBOC's relationships with their various organized labor groups. Certain contracts concerning the RBOC's organized employees are subject to renegotiation during the third quarter of 1998 . The impact, if any, on the timing of RBOC ordering of the Companies products related to a work disruption within the RBOC's cannot be determined. Management believes that during fiscal year 1998 there is a possibility that one of the Company's major customers will have satisfied a substantial portion of its requirements for certain of the Company's product lines. Management is focusing on the development of new product lines to meet the requirements of this and other customers. Although international sales to date have not been significant, the Company believes certain international markets offer opportunities. The Company intends to focus additional sales, marketing and development resources on increasing its international presence; however, there can be no assurance that these efforts will be successful or that the Company will achieve significant international sales. The Company believes that continued growth will depend on its ability to design and engineer new products and, therefore, spends a significant amount on research and development. Research and development expenses as a percent of revenues were approximately 15% for the first quarter ended March 28, 1998. The Company expects its research and development expenses to continue at significant levels. RESULTS OF OPERATIONS - FIRST QUARTER REVENUES Revenue for the first quarter of 1998 were $10,763,840 which were $2,144,434, or 24.9%, higher than the revenues of $8,619,406 reported for the first quarter of 1997. The increase in revenues for the first quarter was primarily attributable to an increase in unit volume sales of the MCU line testing and synchronization products as a result of increased market penetration and customer acceptance. In addition, increased product demand is at least partly attributable to technology licensing agreements and/or joint venture relationships with certain major DLC vendors, as well as continued expansion of a marketing program to train customers in advanced line test system trouble-shooting. Periodic fluctuations in customer orders and backlog result from a variety of factors, including but not limited to the timing of significant orders and shipments, and are not necessarily indicative of long-term trends in sales of the Company's products. 10 11 GROSS PROFIT Gross profit for the first quarter of 1998 was $6,408,528 compared to $4,830,040 for the first quarter of 1997, representing an increase of $1,578,488, or 32.7%. Gross profit as a percentage of revenues increased to 59.5% in the first quarter of 1998, compared to 56.0% in the same quarter last year. The overall increase in gross profit margin resulted primarily from increased sales levels, while improvements in gross margin as a percentage of revenues were a result of increased sales of certain higher-margined products within the MCU product line. SELLING AND MARKETING EXPENSE Selling and marketing expense for the first quarter of 1998 was $1,621,884 compared to $1,046,189 for the first quarter of 1997. This increase of $575,695 or 55.0%, is primarily attributable to the addition of personnel associated with the expansion of certain marketing and communications functions as well as the costs associated with the continuing development of domestic and international markets. As a percentage of revenues, selling and marketing expenses increased to 15.1% in the first quarter of 1998 from 12.1% in the first quarter of 1997. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense for the first quarter of 1998 was $1,089,707, an increase of $259,420 or 31.2%, over the $830,287 recorded in the first quarter of 1997. The increase in general and administrative expense primarily reflects additional salaries and benefits associated with increased staffing levels to support expanded business operations, increased international travel costs, as well as increased costs associated with personnel recruiting activities. As a percentage of revenues, general and administrative expenses increased to 10.1% in the first quarter of 1998 from 9.6% in the first quarter of 1997. RESEARCH AND DEVELOPMENT EXPENSE Research and development expense in the first quarter of 1998 was $1,628,002, an increase of $386,748 or 31.2%, over the $1,241,254 recorded in the first quarter of 1997. The increase is primarily associated with additional personnel and related engineering costs to support new product introductions. The new personnel were hired for positions in design engineering, hardware and software development, engineering support, and test engineering. Their efforts are associated with the development of future products, support for newer products, and feature enhancements for existing products. As a percentage of revenues, research and development expense increased to 15.1% in the first quarter of 1998 from 14.4% in the first quarter of 1997. INTEREST AND OTHER INCOME Interest and other income consists primarily of interest income. For the first quarter of 1998, interest and other income was $188,625 compared to $176,988 for the first quarter of 1997, representing an increase of $11,637, or 6.6%. The increase was primarily attributable to increased interest income, which resulted from an overall increase in funds available for investment between comparable periods. PROVISION FOR INCOME TAXES The effective income tax rate decreased to approximately 36.0% in the first quarter of 1998, compared to 11 12 approximately 37.6% in the first quarter of 1997. The slight decrease reflects higher levels of tax-exempt interest and increased credits for research and development. NET INCOME AND EARNINGS PER SHARE As a result of the above factors, net income for the first quarter of 1998 was $1,444,560, an increase of $265,267, or 22.5%, over the $1,179,293 recorded in the first quarter of 1997. Basic and diluted earnings per common share of $.25 and $.24, respectively for the first quarter of 1998 increased by 19.0% and 20.0%, respectively, or $.04 and $.04, respectively, from the $.21 and $.20 per share, respectively earned in the first quarter of 1997. Basic and diluted weighted average common and common equivalent shares outstanding were 5,777,666 and 5,956,313, respectively in the first quarter of 1998 compared to 5,631,878 and 5,975,675, respectively in the first quarter of 1997. As a percentage of revenues, net income for the first quarter of 1998 decreased to 13.4% compared to the 13.7% for the first quarter of 1997. LIQUIDITY AND CAPITAL RESOURCES At March 28, 1998, the Company had working capital of $35,375,473, which represented an increase of $805,261 or 2.3%, from the $34,570,212 of working capital as of December 31, 1997. The increase in working capital can be attributed primarily to operating cash flow (income from operations before depreciation and amortization) exceeding requirements for purchases of property and equipment. Management believes that operating cash flow and cash reserves are adequate to finance currently planned capital expenditures and to meet the liquidity needs of the Company. The Company incurred capital expenditures of $679,978 in the first quarter of 1998 which were primarily related to an upgrade of the MIS infrastructure, as well as purchases of test equipment and fixtures. The Company presently has no material capital expenditure commitments. As of and through March 28, 1998, the Company had not borrowed any amounts against its $2,500,000 available bank line of credit. The credit agreement expires on June 30, 1998, however the Company believes its financial position will enable it to negotiate any further credit agreements on comparable or more favorable terms. On April 22, 1997 the Company's Board of Directors authorized a program to repurchase up to 200,000 shares of its common stock over the next two years. The shares will be utilized to provide stock under certain employee benefit programs. The number of shares that the Company intends to purchase and the time of such purchases will be determined by the Company, at its discretion. The Company plans to use existing cash and short-term investments to finance the repurchases. To date, the Company has purchased 17,500 shares of the Company's common stock under this program. BACKLOG The Company's backlog consists of firm customer purchase orders for the Company's various products. As of March 28, 1998 the Company had a backlog of $3,481,359, compared to $1,554,495 at December 31, 1997 and $3,541,254 at March 29, 1997. The increase in backlog from December 31, 1997 to March 28, 1998, occurred due to customer orders exceeding product shipments during the period. Periodic fluctuations in customer orders and backlog result from a variety of factors, including but not limited to the timing of significant orders and shipments, and are not necessarily indicative of long-term trends in sales of the Company's products. 12 13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - ---------------------------- None. ITEM 2. CHANGES IN SECURITIES - -------------------------------- None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES - ------------------------------------------ None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - -------------------------------------------------------------- None. ITEM 5. OTHER INFORMATION - ---------------------------- None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ------------------------------------------- (a) Exhibits: The following exhibits are being filed with this report: Exhibit Number Description ------ ----------- 11.1 Statement re Computation of Per Share Earnings 15 Letter re unaudited interim financial information 27 Financial Data Schedule (b) Reports on Form 8-K: The Company did not file any Current Report on Form 8-K during the first quarter ended March 28, 1998. 13 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: May 11, 1998 /s/ CHRISTIAN L. ALLISON -------------------------------------------- CHRISTIAN L. ALLISON CHAIRMAN, CHIEF EXECUTIVE OFFICER & DIRECTOR Dated: May 11, 1998 /s/ SAMUEL C. KNOCH -------------------------------------------- SAMUEL C. KNOCH CHIEF FINANCIAL OFFICER AND TREASURER Dated: May 11, 1998 /s/ BRADLEY N. DINGER -------------------------------------------- BRADLEY N. DINGER CONTROLLER 14 15 EXHIBIT INDEX (Pursuant to Item 601 of Regulation S-K) Exhibit Number Description ------ ----------- 11.1 Statement re Computation of Per Share Earnings 15 Letter re unaudited interim financial information 27 Financial Data Schedule 15 EX-11.1 2 TOLLGRADE COMMUNICATIONS, INC. 1 EXHIBIT 11.1 CALCULATION OF EARNINGS PER SHARE FOR THE THREE MONTHS ENDED MARCH 28, 1998 AND MARCH 29, 1997
- -------------------------------------------------------------------------------------------------------------------- THREE MONTHS THREE MONTHS ENDED ENDED MARCH 28, 1998 MARCH 29, 1997 - -------------------------------------------------------------------------------------------------------------------- Net income ............................................................ $1,444,560 $1,179,293 ========== ========== Common and common equivalent shares: Weighted average number of common shares outstanding during the period ............................................... 5,777,666 5,631,878 Common shares issuable upon exercise of outstanding stock options Diluted ................................................ 178,647 343,797 ---------- ---------- Common and common equivalent shares outstanding during the period Diluted ................................................ 5,956,313 5,975,675 ========== ========== Earnings per share data Net income per common and common equivalent shares Basic .................................................. $ 0.25 $ 0.21 Diluted ................................................ $ 0.24 $ 0.20
16 EX-15 3 TOLLGRADE COMMUNICATIONS, INC. 1 EXHIBIT 15 April 13, 1998 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 RE: Tollgrade Communications, Inc. and subsidiaries 1). Form S-8 (Registration No. 333-4290) 1995 Long-Term Incentive Compensation Plan and Individual Stock Options Granted to Certain Directors and Employees Prior to the Adoption of the Plan Ladies and gentlemen: We are aware that our report dated April 13, 1998, on our review of interim financial information of Tollgrade Communications, Inc. and subsidiaries for the three-month period ended March 28,1998 and included within the Company's quarterly report on Form 10-Q for the quarter then ended is incorporated by reference in the registration statement referred to above. Pursuant to Rule 436(c)under the Securities Act of 1933, this report should not be considered a part of the registration statement prepared or certified by us within the meaning of Sections 7 and 11 of that Act. Very truly yours, /s/ Coopers & Lybrand L.L.P. 17 EX-27 4 TOLLGRADE COMMUNICATIONS, INC.
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q FOR THE PERIOD ENDED MARCH 28, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0001002531 TOLLGRADE COMMUNICATIONS, INC. 3-MOS DEC-31-1998 JAN-01-1998 MAR-28-1998 4,854,547 15,760,065 7,285,277 50,000 13,076,328 40,191,957 6,153,681 2,766,081 45,833,940 4,816,483 0 0 0 1,170,791 39,348,550 45,833,940 10,763,840 10,763,840 4,355,312 4,355,312 0 0 0 2,257,560 813,000 0 0 0 0 1,444,560 .25 .24
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