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 29, 2001
[ ] 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 25, 2001, there were 13,456,017 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 25 pages. The exhibit index is on page 24.
TOLLGRADE COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 29, 2001
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 29, 2001
AND DECEMBER 31, 2000 .................................................................. 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE-MONTH
AND NINE-MONTH PERIODS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000.................. 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE-MONTH
PERIODS ENDED SEPTEMBER 29, 2001 AND SEPTEMBER 30, 2000................................. 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.................................... 6
REVIEW REPORT OF INDEPENDENT ACCOUNTANTS................................................ 11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION... 12
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS...................................................................... 23
ITEM 2 CHANGES IN SECURITIES.................................................................. 23
ITEM 3 DEFAULTS UPON SENIOR SECURITIES........................................................ 23
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................................... 23
ITEM 5 OTHER INFORMATION...................................................................... 23
ITEM 6 EXHIBITS AND REPORTS FILED ON FORM 8-K................................................. 23
SIGNATURE........................................................................................ 24
EXHIBIT INDEX.................................................................................... 25
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 29, DECEMBER 31,
2001 2000
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 80,430,325 $ 30,423,783
Short-term investments 11,049,292 28,405,655
Accounts receivable:
Trade 12,409,465 18,775,643
Other 375,417 813,809
Inventories 23,070,681 30,499,482
Prepaid expenses and deposits 395,784 787,098
Prepaid and refundable taxes 533,402 8,950,672
Deferred tax assets 975,118 983,246
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 129,239,484 119,639,388
Long-term investments 1,455,000 2,750,000
Property and equipment, net 7,427,307 6,503,923
Deferred tax assets 2,657,479 2,380,828
Other assets 328,991 417
=====================================================================================================================
TOTAL ASSETS $ 141,108,261 $ 131,274,556
=====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 228,866 $ 1,874,328
Accrued expenses 2,634,980 1,937,589
Accrued salaries and wages 772,500 2,813,433
Royalties payable 339,238 1,142,478
Income taxes payable 430,427 636,938
Deferred income 120,000 100,000
- ---------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 4,526,011 8,504,766
Deferred tax liabilities 9,950 9,950
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 4,535,961 8,514,716
Shareholders' equity:
Common stock, $.20 par value; authorized shares,
50,000,000; issued shares, 13,453,351 and 13,329,264,
respectively
2,690,670 2,665,853
Additional paid-in capital 68,442,922 66,343,728
Treasury stock, at cost, 386,800 shares, in 2001 and 2000,
respectively (3,164,975) (3,164,975)
Retained earnings 68,603,683 56,915,234
- ---------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 136,572,300 122,759,840
=====================================================================================================================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 141,108,261 $ 131,274,556
=====================================================================================================================
The accompanying notes are an integral part of the
condensed consolidated financial statements.
3
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 29, SEPTEMBER 30, SEPTEMBER 29, SEPTEMBER 30,
2001 2000 2001 2000
===============================================================================================================================
REVENUES $16,037,957 $29,787,819 $65,804,126 $81,872,064
COST OF SALES 7,666,181 10,840,558 29,506,014 30,625,600
- -----------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 8,371,776 18,947,261 36,298,112 51,246,464
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES:
Selling and marketing 2,022,930 3,439,953 6,965,250 8,851,097
General and administrative 1,019,748 1,591,603 3,612,046 4,464,660
Research and development 2,638,680 3,178,081 8,747,326 8,866,844
Severance and related expense -- -- 400,000 --
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 5,681,358 8,209,637 19,724,622 22,182,601
INCOME FROM OPERATIONS 2,690,418 10,737,624 16,573,490 29,063,863
Interest and other income, net 800,436 661,917 2,497,971 1,677,171
- -----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 3,490,854 11,399,541 19,071,461 30,741,034
Provision for income taxes 1,361,000 4,104,000 7,383,012 11,067,000
===============================================================================================================================
NET INCOME $ 2,129,854 $ 7,295,541 $11,688,449 $19,674,034
===============================================================================================================================
EARNINGS PER SHARE INFORMATION:
Weighted average shares of common stock and equivalents:
Basic 13,065,809 12,821,132 13,017,819 12,536,510
Diluted 13,377,544 13,460,481 13,392,507 13,314,988
- -----------------------------------------------------------------------------------------------------------------------------
Net income per common and common equivalent shares:
Basic $ .16 $ .57 $ .90 $ 1.57
Diluted $ .16 $ .54 $ .87 $ 1.48
The accompanying notes are an integral part of the
condensed consolidated financial statements.
4
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
Sept. 29, 2001 Sept. 30, 2000
============================================================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,688,449 $ 19,674,034
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,738,537 1,331,410
Tax benefit from exercise of stock options 1,065,801 9,883,835
Refund of income taxes paid 8,417,270 --
Deferred income taxes (268,523) (114,785)
Provision for losses on inventory 164,963 391,152
Provision for allowance for doubtful accounts 175,000 3,393
Changes in assets and liabilities:
Decrease (increase) in accounts receivable-trade 6,191,178 (3,231,161)
Decrease (increase) in accounts receivable-other 438,392 (341,361)
Decrease (increase) in inventories 7,263,838 (9,186,255)
Decrease (increase) in prepaid expenses and other assets 391,314 (49,586)
(Decrease) increase in accounts payable (1,645,462) 2,344,950
Increase (decrease) in accrued expenses and deferred income 717,391 (914,516)
(Decrease) increase in accrued salaries and wages (2,040,933) 607,754
Decrease in royalties payable (803,240) (47,710)
Decrease in income taxes payable (206,511) (1,838,214)
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 33,287,464 18,512,940
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption/maturity of investments 46,473,811 14,427,752
Purchase of investments (27,822,448) (23,366,913)
Capital expenditures (2,661,504) (2,930,048)
Investments in other assets (328,991) --
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 15,660,868 (11,869,209)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 1,058,210 11,046,256
- --------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 1,058,210 11,046,256
- --------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 50,006,542 17,689,987
Cash and cash equivalents at beginning of period 30,423,783 15,555,810
- --------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 80,430,325 $ 33,245,797
==========================================================================================================================
The accompanying notes are an integral part of the condensed
consolidated financial statements.
5
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 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 29, 2001 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, 2000.
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 29, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001.
2. INVENTORIES
At September 29, 2001 and December 31, 2000, inventories consisted of the
following:
(Unaudited)
September 29, December 31,
2001 2000
------------ ------------
Raw materials .............. $ 12,285,770 $ 14,885,196
Work in progress ........... 7,159,894 12,981,052
Finished goods ............. 4,641,017 3,718,234
------------ ------------
24,086,681 31,584,482
Reserves for slow moving and
obsolete inventory (1,016,000) (1,085,000)
------------ ------------
$ 23,070,681 $ 30,499,482
============ ============
3. SHORT-TERM AND LONG-TERM INVESTMENTS
6
Short-term investments at September 29, 2001 and December 31, 2000 consisted of
individual municipal bonds stated at cost, which approximated market value.
These securities have maturities 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 at cost, which approximated market value. The primary
investment purpose is to provide a reserve for future business purposes,
including acquisitions and capital expenditures. Realized gains and losses are
computed using the specific identification method.
The estimated fair values of the Company's financial instruments are as follows:
(Unaudited)
September 29, December 31,
2001 2000
---------------------------- -------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
Financial assets:
Cash and cash equivalents .......... $80,430,325 $80,430,325 $30,423,783 $30,423,783
Short-term and long-term investments 12,504,292 12,515,450 31,155,655 31,104,323
----------- ----------- ----------- -----------
$92,934,617 $92,945,775 $61,579,438 $61,528,106
=========== =========== =========== ===========
7
4. INCOME PER COMMON SHARE
Net income per share is calculated by dividing net income by the weighted
average number of common shares plus incremental common stock equivalent shares
(shares issuable upon exercise of stock options). Incremental common stock
equivalent shares are calculated for each measurement period based on the
treasury stock method, which uses the monthly average market price per share.
The calculation of net income per common and common equivalent shares follows
(unaudited):
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 29, September 30, September 29, September 30,
2001 2000 2001 2000
==========================================================================================================================
Net income ...................................... $ 2,129,854 $ 7,295,541 $11,688,449 $19,674,034
==========================================================================================================================
Common and common equivalent shares:
Weighted average number of
common shares outstanding
during the period ............................... 13,065,809 12,821,132 13,017,819 12,536,510
Common shares issuable upon exercise
of outstanding stock options:
Diluted ...................................... 311,735 639,349 374,688 778,478
Common and common equivalent shares
Outstanding during the period:
- -------------------------------------------------------------------------------------------------------------------------
Diluted ...................................... 13,377,544 13,460,481 13,392,507 13,314,988
==========================================================================================================================
Earnings per share data
Net income per common and common
Equivalent shares:
Basic ........................................... $ .16 $ .57 $ .90 $ 1.57
Diluted ......................................... $ .16 $ .54 $ .87 $ 1.48
8
5. DEFERRED AND REFUNDABLE TAX ASSETS
The Company's current refundable tax assets as of December 31, 2000 included a
tax benefit of $8,950,672, which resulted principally from the exercising of
certain nonstatutory stock options by various directors, officers and other
employees under the Company's stock option programs during 2000. The Company was
entitled to a tax deduction in the tax year ended 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.
During 2001, the company received $8,417,270 in federal income tax refunds
associated with prior year taxes paid. The remaining current prepaid and
refundable taxes are prepaid state income taxes and it is anticipated that these
amounts will be refunded to the Company during the fourth quarter of 2001.
6. STOCK REPURCHASE PROGRAM
On April 19, 2001, the Company announced its Board of Directors authorized the
continuation of a share repurchase program that was originally initiated on
April 22, 1997. Under the current extension, the Company may repurchase an
additional one million shares of its common stock before December 31, 2001. 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 any such purchases.
As of September 29, 2001, no shares have been repurchased under this program.
Prior to the aforementioned stock repurchase program extension, the Company had
repurchased 382,400 shares of common stock. These repurchased shares are
intended to provide stock under certain employee benefit programs.
7. SEVERANCE AND RELATED EXPENSE
On April 19, 2001, the Company announced a restructuring program to implement
certain cost reduction initiatives that included the elimination of
approximately 80 positions within the general and administrative, research and
development and support areas. As a result of the restructuring program, the
Company recorded a pre-tax charge for severance, outplacement and other related
costs of $400,000 during the second quarter. This realignment is estimated to
generate approximately $4,300,000 in annualized pre-tax savings.
8. SUBSEQUENT EVENT
On September 28, 2001, the Company entered into an Asset Purchase Agreement (the
"Agreement") in accordance with which, subject to certain closing conditions, it
would acquire certain assets and assume certain liabilities of the
MLT/LoopCare(TM) product business from Lucent Technologies, Inc. ("Lucent")
for approximately $60,000,000 in cash. Tollgrade closed on this transaction on
September 30, 2001 after meeting all conditions of closing. The assets consisted
principally of existing contracts, software and related computer equipment,
while the liabilities were principally related to software warranties currently
under contract. Tollgrade used available cash and short-term investments to
finance the acquisition. LoopCare is the Plain Old Telephone Services ("POTS")
test system used universally by the Regional Bell Operating Companies. The
LoopCare acquisition will be recorded under the purchase method of accounting
and accordingly, the results of operations of the LoopCare business for the
period beginning October 1, 2001, forward will be included in the consolidated
financial statements of the Company. The purchase
9
price allocation is currently under evaluation and is expected to be finalized
by the end of the fourth quarter.
9. ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 established
accounting and reporting standards for business combinations. SFAS No. 142
established accounting and reporting standards for acquired goodwill and other
intangible assets, specifically how they should be treated upon and subsequent
to their acquisition. Both SFAS No. 141 and SFAS No. 142 are required to be
applied in fiscal years beginning after December 15, 2001; however, early
adoption is permitted. SFAS 142 statements contain provisions which require that
these statements be applied to all business combinations initiated after June
30, 2001. Therefore, the Company is expecting to adopt SFAS N0. 141 and SFAS No.
142 during the fourth quarter of fiscal year 2001 as it relates to its recent
acquisition.
On August 15, 2001, FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." On October 4, 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Company is presently
evaluating the impact these statements may have on the Company.
10
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Tollgrade Communications, Inc. and subsidiaries:
We have reviewed the accompanying condensed consolidated balance sheet of
Tollgrade Communications, Inc. and its subsidiaries as of September 29, 2001,
and the related condensed consolidated statements of operations for each of the
three-month and nine-month periods ended September 29, 2001 and September 30,
2000 and the condensed consolidated statements of cash flows for the nine- month
periods ended September 29, 2001 and September 30, 2000. 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, 2000, 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 19,
2001, except for the last paragraph of Note 1, as to which the date is August
14, 2001 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, 2000, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
PricewaterhouseCoopers LLP
Pittsburgh, Pennsylvania
October 9, 2001
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;
- - Customers' seasonal buying patterns and the risk of order cancellations;
- - Risk of shortage of key components and possibility of limited source of
supply;
- - Manufacturing delays and availability of manufacturing capacity;
- - Intense competition in the market for the Company's products;
- - Rapid technological change along with the need to continually develop new
products and gain customer acceptance and approval;
- - The company's dependence on a relatively narrow range of products;
- - Competition;
- - The Company's dependence on key employees;
- - Difficulties in managing the Company's growth;
- - The Company's dependence upon a small number of large customers and
certain suppliers;
- - The Company's dependence upon proprietary rights;
- - Risks of third party claims of infringement;
- - Possibility of product defects;
- - The potential of having excess inventory and risk of parts' obsolescence
should demand for the Company's products decrease substantially; and
- - Government regulation.
12
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 following overview discussion excludes the recent acquisition of the
LoopCare product business from Lucent (see section entitled Subsequent Event for
a discussion of this acquisition). 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 78% of the Company's revenue for the third quarter
ended September 29, 2001. The Company's MCU product line will continue to
account for a majority of the Company's revenues for the foreseeable future.
The Company's DigiTest(R) centralized network test system platform focuses on
helping local exchange carriers conduct the full range of fault diagnosis, along
with the ability to qualify, deploy and maintain next generation services that
include Digital Subscriber Line ("DSL") service and Integrated Services Digital
Network ("ISDN") service. The Company's DigiTest system is designed to provide
complete hardware testing for POTS and local loop prequalification for DSL
services. The system currently consists of three integrated pieces of hardware -
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 4% of the Company's revenue
for the third quarter of 2001. In addition, the Company's DigiTest Access Unit
("DAU") provides automated test access of locally non-switched, two wire
circuits and helps facilitate the line sharing or the spectral unbundling
process for both incumbent (ILEC) and competitive local exchange carriers
(CLECs). Sales of the DAU accounted for approximately 6% of total revenue for
the current quarter.
The Company's LIGHTHOUSE(R) cable products consist of a complete cable status
monitoring system that provides a broad testing solution for the Broadband
Hybrid Fiber Coax distribution system. The status monitoring system includes a
host for user interface, control and configuration; a headend controller for
managing network communications; and transponders that are strategically located
within the cable network to gather status reports from power supplies, line
amplifiers and fiber-optic nodes. Sales of the LIGHTHOUSE product line accounted
for approximately 6% of the Company's revenue for the third quarter of 2001.
The Company's Professional Services business offers various Testability
Improvement Initiatives. These services may offer the customer the opportunity
to make 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. Sales of the Professional Services business accounted
for approximately 6% of the Company's revenue for the third quarter of 2001.
The Company's telecommunication product sales and services 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
13
September 29, 2001, approximately 74% of the Company's total revenue was
generated from sales to these four RBOCs. During the third quarter of 2001,
sales to one RBOC exceeded 10% of consolidated revenues, accounting for
approximately 63% of consolidated revenues. Due to the Company's present
dependency on these key customers, the loss of one or more of them as a customer
or the reduction of orders for the Company's products by them could materially
and adversely affect the Company.
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 and other key customers. This timing is particularly
sensitive to various business factors within each of the RBOCs, including the
RBOCs relationships with their organized labor groups. In addition, the markets
for the Company's new products, specifically DigiTest and LIGHTHOUSE, are highly
competitive. 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. The
Company's operating results for the third quarter of 2001 included certain sales
incentive-based MCU orders and shipments that were made late in the third
quarter which could affect product sales in the fourth quarter. The continued
success of the Company's Professional Services business will be vital to
maintaining a solid rate of MCU deployments in the near-term. 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, continuing consolidation efforts among the RBOCs and cable
television industry, and their ability to consolidate their inventory and
product procurement systems could cause fluctuations or delays in the Company's
order patterns. The timing of these orders is also sensitive to the RBOCs
relationships with their various organized labor groups. 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 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 it 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.
However, the Company continues to evaluate opportunities for its other products
in international markets. There can be no assurance that any continued efforts
by the Company will be successful or that the Company will achieve significant
international sales. Additionally, on October 18, 2001, the Company announced
that it
14
has entered into a strategic alliance with Acterna (the world's largest provider
of test and management solutions for optical transport, access and cable
networks, and the second largest communication test company overall) to help
improve the installation, deployment and management of DSL services worldwide.
Under the terms of the agreement, Acterna and the Company will jointly develop
and market DSL remote test solutions for provisioning and maintenance of service
provider networks worldwide. The first joint offering from this alliance is
expected to be available in the first quarter of 2002.
The Company believes that the continued downturn in the U.S. economy during 2001
has had a dramatic effect on capital spending across all industries, including
the telecommunications and cable television industries. Several of the Company's
key RBOC customers have announced capital spending reductions in 2001. In
addition, on October 17, 2001 Sprint Corporation announced the discontinuation
of their Integrated On-demand Network ("ION") project. Historically, Sprint
Corporation has been a material customer for the Company's DigiTest products for
this ION project. Although the Company will continue to strive to market and
sell its DigiTest products to other customers, the loss of sales to the Sprint
ION project could materially and adversely affect the Company. The Company's key
Lighthouse customers, that include AT&T Broadband and RCN Corporation, have
announced capital spending deferrals until their current excess inventories are
consumed. The Company believes that, as a result of the current economic
environment as well as the items just mentioned, it is difficult to predict with
any level of certainty revenues and earnings per share beyond the fourth quarter
of 2001.
The Company believes that continued growth will depend, in part, 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 percentage
of revenues were approximately 17% for the third quarter of 2001.
The Company believes that the near-term economic climate is one of challenge and
uncertainty. In addition, the Company believes that future growth may be
affected as a result of the economic slowdown whereby customers become more
conservative in their ordering patterns and quantities, or that certain emerging
carriers become financially unstable. Due to this uncertainty, the Company will
evaluate its investments in marketing and research and development expenses and
monitor, control or decrease expense levels as appropriate.
RESULTS OF OPERATIONS - THIRD QUARTER
REVENUES
Revenues for the third quarter of 2001 of $16,037,957 were $13,749,862, or
46.2%, lower than the revenues of $29,787,819 reported for the third quarter of
2000. The revenue performance for the current quarter versus the prior year
period include:
- - A decrease in revenues for the third quarter of 2001 was primarily
attributable to a decrease in unit volume sales of core MCU line testing
products. Sales to SBC were comparable between periods due to strong sales
of certain MCU products to Ameritech, related to the restoration
testability initiatives of that customer's network. Additionally, the
Company's OEM resellers shipped fewer next-generation Digital Loop Carrier
(DLC) systems, which affected related MCU products sales to these
customers. Overall sales of the Company's core MCU products comprised
78.0% of the total quarterly revenues.
- - The current quarter included decreased shipments of the Company's next
generation DigiTest system products to Sprint USA and to authorized
resellers for resale to CLECs. Sales of DigiTest products represented 3.6%
of total revenue for the quarter.
15
- - Continued shipments of the Company's DAU product to Sprint USA. Sales of
DAU represented 6.4% of revenue for the quarter.
- - Sales of the Company's Professional Services business increased between
periods, primarily from installation oversight and project management
services provided to the Ameritech region of SBC associated with their
restoration of testability levels previously mentioned. Sales of
Professional Services represented 6.0% of third quarter 2001 revenue.
- - Sales of the LIGHTHOUSE product decreased between periods as a result of
the slow-down by certain cable customers in deploying cable status
monitoring systems. The current quarter included initial modest shipments
of the LIGHTHOUSE system to AOL Time Warner Corporation. Sales of the
Company's LIGHTHOUSE Cable Status Monitoring system represented 5.7% of
third quarter 2001 revenue.
The third quarter 2001 revenue included certain sales incentive-based MCU orders
and shipments that occurred late in the quarter. These sales incentives included
bulk sales of MCU's to both SBC and BellSouth. The Company believes that these
bulk purchases of MCUs will ultimately help facilitate those customers ability
to improve their regional testability rates upon deployment of these units. In
certain cases, the Company will support the customer in deploying these MCUs
within their respective regions. Due to the significance and timing of these MCU
shipments and the Company's reliance on our customer's ability to successfully
deploy these units in a timely fashion, the sales of MCUs in the fourth quarter
of 2001 could be affected. 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 2001 was $8,371,776 compared to
$18,947,261 for the third quarter of 2000, representing a decrease of
$10,575,485, or 55.8%. Gross profit as a percentage of revenues decreased to
52.2% in the third quarter of 2001, compared to 63.6% in the same quarter last
year. The overall decrease in gross profit as a percentage of sales resulted
primarily from an increase in allocated unit costs arising from lower production
volume, the impact of the sales incentive programs for bulk-buys of MCU's
mentioned above, certain product warranty reserves, as well as the product mix
of sales. The Company's gross margin continues to be highly sensitive to the mix
of products sold.
SELLING AND MARKETING EXPENSE
Selling and marketing expense for the third quarter of 2001 was $2,022,930
compared to $3,439,953 for the third quarter of 2000. This decrease of
$1,417,023, or 41.2%, is primarily due to reduced discretionary spending on
general advertising, promotion and related marketing activities as well as
reduced salaries and related costs associated the workforce reduction and the
realignment of costs initiated in the second quarter of 2001. As a percentage of
revenues, selling and marketing expenses increased to 12.6% in the third quarter
of 2001 from 11.5% in the third quarter of 2000.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense for the third quarter of 2001 was $1,019,748,
a decrease of $571,855, or 35.9%, from the $1,591,603 recorded in the third
quarter of 2000. The decrease in general and administrative expense primarily
reflects the decrease in salaries and related costs associated with the
workforce reduction and the realignment of costs initiated in the second quarter
of 2001, reduced expenditures on professional services and reduced
recruiting-related costs. As a percentage of revenues, general and
administrative expenses increased to 6.4% in the third quarter of 2001 from 5.3%
in the third quarter of 2000.
16
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense in the third quarter of 2001 was $2,638,680, a
decrease of $539,401, or 17.0%, over the $3,178,081 recorded in the third
quarter of 2000. The decrease in research and development expense is primarily
associated with the decrease in salaries and related costs associated with the
workforce reduction and the realignment of costs initiated in the second quarter
of 2001, as well as a reduction in certain project-related costs for materials
and supplies. As a percentage of revenues, research and development expense
increased to 16.5% in the third quarter of 2001 from 10.7% in the third quarter
of 2000.
INTEREST AND OTHER INCOME
Interest and other income consists primarily of interest income. For the third
quarter of 2001, interest and other income was $800,436 compared to $661,917 for
the third quarter of 2000, representing an increase of $138,519, or 20.9%. 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 2001 was $1,361,000, a
decrease of $2,743,000, or 66.8%, from the $4,104,000 for the third quarter of
2000. The effective income tax rate for the third quarter of 2001 was
approximately 39.0% of pretax income compared to the 36.0% effective income tax
rate for the third quarter of 2000. The increase in the effective income tax
rate was primarily due to higher relative levels of state income taxes
associated with expanding business activities.
NET INCOME AND EARNINGS PER SHARE
As a result of the above factors, net income for the third quarter of 2001 was
$2,129,854, a decrease of $5,165,687, or 70.8%, from the $7,295,541 recorded in
the third quarter of 2000. Basic and diluted earnings per common share of $.16
for the third quarter of 2001 decreased by $.41 and $.38, or 71.9% and 70.4%,
from the $.57 and $.54, respectively, earned in the third quarter of 2000. Basic
and diluted weighted average common and common equivalent shares outstanding
were 13,065,809 and 13,377,544, respectively, in the third quarter of 2001
compared to 12,821,132 and 13,460,481, respectively, in the third quarter of
2000. As a percentage of revenues, net income for the third quarter of 2001
decreased to 13.3% compared to the 24.5% for the third quarter of 2000.
17
RESULTS OF OPERATIONS YEAR-TO-DATE
REVENUES
For the first nine months of 2001, revenues were $65,804,126 compared to
$81,872,064 for the first nine months of 2000, representing a decrease of
$16,067,938, or 19.6%. The revenue performance for the first nine months of 2001
versus the comparable prior year period include:
- - The decrease in revenues for the first nine months of 2001 was primarily
attributable to a decrease in unit volume sales of core MCU line testing
products primarily to Qwest, BellSouth and certain CLEC customers as a
result of slower deployments, due to continuing budget restrictions
causing these customers to reduce their MCU purchases. In addition, sales
of OEM-related MCU products decreased primarily as a result of certain OEM
resellers shipping fewer next-generation DLC systems to their end
customers. Overall sales of the Company's core MCU comprised 71.6% of the
total revenues for the first nine months of 2001.
- - The first nine months of 2001 included decreased shipments of the
Company's next generation DigiTest system products to Sprint USA, SBC
Telecom, Inc. (a CLEC subsidiary of SBC) and to certain resellers for
resale to other CLECs between periods. Sales of DigiTest products
represented 14.8% of total revenue for the first nine months of 2001.
- - Sales of the Company's new DAU product to Sprint USA, as well as to Lucent
for deployment within a certain CLEC continued and represented 6.1% of the
first nine months of 2001 revenues.
- - Sales of the LIGHTHOUSE product decreased between periods as a result of
AT&T's Broadband's decision to delay purchases of cable related equipment,
as well as a slow-down by RCN Corporation in deploying cable status
monitoring systems. Sales of the Company's LIGHTHOUSE Cable Status
Monitoring system represented 4.2% of the first nine months of 2001
revenue.
- - Sales of the Company's Professional Services business increased between
periods, primarily from installation oversight and project management
services provided to the Ameritech region of SBC associated with their
restoration of testability levels previously mentioned. Sales of
Professional Services represented 3.2% of the first nine months of 2001
revenue.
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 2001 was $36,298,112 compared to
$51,246,464 for the first nine months of 2000, representing a decrease of
$14,948,352, or 29.2%. Gross profit as a percentage of revenues decreased to
55.2% in the first nine months of 2001 compared to 62.6% in the same period last
year. The overall decrease in gross profit as a percentage of sales resulted
primarily from an increase in allocated unit costs arising from lower production
volume, the introduction of the new DAU product during the period and lower
margins associated with the sale of the Broadcast Program Channel Units during
the first quarter of 2001. The Company's gross margin continues to be highly
sensitive to the mix of products sold.
18
SELLING AND MARKETING EXPENSE
Selling and marketing expense for the first nine months of 2001 was $6,965,250
compared to $8,851,097 for the first nine months of 2000. This decrease of
$1,885,847, or 21.3%, is primarily due to reduced discretionary spending on
general advertising, promotion and related marketing activities as well as
reduced salaries and related costs associated with the workforce reduction and
the realignment of costs initiated in the second quarter of 2001. As a
percentage of revenues, selling and marketing expenses decreased to 10.6% in the
first nine months of 2001 from 10.8% in the same period last year.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense for the first nine months of 2001 was
$3,612,046, a decrease of $852,614, or 19.1%, from the $4,464,660 recorded for
the first nine months of 2000. The decrease in general and administrative
expense primarily reflects reduced expenditures on professional services,
recruiting and travel offset, somewhat, by an increase in the reserve for bad
debts. As a percentage of revenues, general and administrative expenses were
5.5% in the first nine months, which is consistent with the same period last
year.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense in the first nine months of 2001 was
$8,747,326, a decrease of $119,518, or 1.3%, over the $8,866,844 recorded in the
first nine months of 2000. The decrease is primarily associated with a decrease
in certain performance-based compensation reserves as well as project and travel
related expenses, offset somewhat by additional personnel and associated costs
to support product development. As a percentage of revenues, research and
development expenses increased to 13.3% in the first nine months of 2001 from
10.8% during the first nine months of 2001.
SEVERANCE AND RELATED EXPENSE
On April 19, 2001, the Company announced a cost realignment initiative. The
restructuring program resulted in workforce reduction charges of $400,000
related to the cost of severance and related benefits for the termination of
approximately 80 employees, as well as exit costs consisting of consulting and
legal fees. During the second quarter of 2001, all terminations of identified
personnel were completed. The Company paid approximately $291,000 for
involuntary termination benefits and other associated costs during the second
and third quarter of 2001. The Company expects annualized pre-tax savings of
$4,300,000, or $.20 per share after-tax, associated with this cost realignment
initiative.
INTEREST AND OTHER INCOME
Interest and other income consists primarily of interest income. For the first
nine months of 2001, interest and other income was $2,497,971 compared to
$1,677,171 for the first nine months of 2000, representing an increase of
$820,800, or 48.9%. This increase is primarily a result of additional funds
available for investment purposes during the current period.
PROVISION FOR INCOME TAXES
The provision for income taxes for the first nine months of 2001 was $7,383,012,
a decrease of $3,683,988, or 33.3%, from the $11,067,000 for the first nine
months of 2000. The effective income tax rate for the nine months of 2001 was
approximately 38.7% of pretax income compared to the 36.0% effective income tax
rate for the prior year period. The increase in the effective income tax rate
was primarily due to higher relative levels of state income taxes associated
with expanding business activities.
19
NET INCOME AND EARNINGS PER SHARE
As a result of the above factors, net income for the first nine months of 2001
was $11,688,449, a decrease of $7,985,585, or 40.6%, from the $19,674,034
recorded in the first nine months of 2000. Basic and diluted earnings per common
share of $.90 and $.87, respectively, for the first nine months of 2001
decreased by $.67 and $.61, or 42.7% and 41.2%, from the $1.57 and $1.48,
respectively, earned in the first nine months of 2000. The first nine months of
2001 includes approximately $400,000, or $.02 per share after-tax, related to
the charge for severance and related costs that was recorded in the second
quarter of 2001. Basic and diluted weighted average common and common equivalent
shares outstanding were 13,017,819 and 13,392,507, respectively, in the first
nine months of 2001 compared to 12,536,510 and 13,314,988, respectively, in the
first nine months of 2000. As a percentage of revenues, net income for the first
nine months of 2001 decreased to 17.8% compared to the 24.0% for the first nine
months of 2000.
LIQUIDITY AND CAPITAL RESOURCES
At September 29, 2001, the Company had working capital of $124,713,472, which
represented an increase of $13,578,850, or 12.2%, from the $111,134,622 of
working capital as of December 31, 2000. The increase in working capital can be
attributed primarily to net income and proceeds from the exercise of stock
options exceeding the Company's requirements for purchases of property and
equipment of $2,661,504. The Capital expenditures for the first nine months of
2001 include approximately $1,622,657 associated with the purchase of certain
land parcels that surround the current leased facility in Cheswick Pennsylvania.
This purchase was made to provide for future expansion of parking and/or new
building structures should they become necessary to support the business
operation.
On April 19, 2001, the Company announced its Board of Directors authorized the
continuation of a share repurchase program it first started on April 22, 1997.
Under the current extension, the Company may repurchase an additional one
million shares of its common stock before December 31, 2001. 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 any such purchases. As of
September 29, 2001, no shares have been repurchased under this program.
Prior to the aforementioned stock repurchase program extension, the company had
repurchased 382,400 shares of common stock. These repurchased shares are
intended to provide stock under certain employee benefit programs.
The Company's days sales outstanding ("DSO's") in accounts receivable trade,
based on twelve months rolling revenue, was 47 and 61 days as of September 29,
2001 and December 31, 2000, respectively. The Company's inventory turnover ratio
was 1.7 and 1.8 turns as of September 29, 2001 and December 31, 2000,
respectively. Approximately $2,000,000 in inventory was returned to vendors for
credit during the first nine months of 2001 associated with a program addressed
to decrease on hand inventory levels commensurate with current sales levels.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's current investment policy limits its investments in financial
instruments to cash and cash equivalents, individual municipal bonds, and
corporate and government bonds. The use of financial derivatives and preferred
and common stocks is strictly prohibited. The Company
20
believes it minimizes its risk through proper diversification along with the
requirements that the securities must be of investment grade with an average
rating of "A" or better by Standard & Poor's. The Company holds its investment
securities to maturity and believes that earnings and cash flows are not
materially affected by changes in interest rates, due to the nature and
short-term investment horizon for which these securities are invested.
SUBSEQUENT EVENT
On September 30, 2001, the Company completed the acquisition of the software
assets of the MLT/LoopCare(TM) test system business from Lucent Technologies,
Inc. ("Lucent") for approximately $60,000,000 in cash. The transaction was
consummated pursuant to an Asset Purchase Agreement, entered into on September
28, 2001. The assets consisted principally of software and related computer
equipment. The equipment was used by Lucent in support of the software and
Tollgrade presently intends to continue to use the equipment for the same
purpose. The purchase price of $60,000,000 in cash was arrived at by negotiation
among the parties. Tollgrade used available cash and short-term investments to
finance the acquisition. LoopCare is the Plain Old Telephone Services ("POTS")
test system used by all of the Regional Bell Operating Companies. The testing
system measures loop parameters, gathers provisioning and operational
information from the network elements, and analyzes data. The software products
include the Mechanized Loop Testing (MLT) system that currently tests more than
140 million lines in telecommunication networks worldwide, LoopCare which
incorporates the expertise derived from the MLT system supports xDSL, ISDN, POTS
and coin service on local metallic wire and DLC loops. The LoopCare solution,
which currently works with the Company's existing DigiTest test system platform,
includes the measurement of the metallic parameters of the loop to detect
shorts, grounds, opens, or other metallic faults that could affect DSL service;
measure the broadband spectral density of the noise on the loop; identify the
location and length of bridged taps that affect DSL service; predict the
downstream and upstream data rate that the loop can support; recommend the most
effective remedial action to improve the data rate on lines that cannot support
the rate requested by the subscriber. The revenues of this business include
initial Right To Use ("RTU") fees, as well as fees associated with annual
maintenance contracts. These maintenance fees are based upon various service
levels selected by the customer. The Company plans to recognize revenue from the
RTU fees in accordance with the American Institute of Certified Public
Accountants Statement of Position ("SOP") 97-2, "Software Revenue Recognition"
and SOP 98-9 "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions. When the arrangement with the customer includes
future obligations for which fair value does not exist or when customer
acceptance is required, revenue is recognized when those obligations have been
met or customer acceptance has been received. The customer's network planning
and purchase decisions for these software systems normally involve a significant
commitment of its resources and a lengthy evaluation and qualification process.
Revenue from maintenance support services will be deferred based upon the fair
value of the program and then recognized on a straight-line basis over the
period of the maintenance contract. The Company may experience fluctuations in
its RTU and maintenance fees in future periods. As the Company cannot predict
such future events or business conditions the Company's results may be adversely
affected by these trends. The LoopCare acquisition will be recorded under the
purchase method of accounting and accordingly, the results of operations of
LoopCare for the period beginning September 30, 2001, forward will be included
in the consolidated financial statements of the Company.
BACKLOG
21
The Company's backlog consists of firm customer purchase orders. As of September
29, 2001, the Company had a backlog of $3,604,105 compared to $8,224,460 at
December 31, 2000 and $14,412,165 at September 30, 2000. Approximately 77% of
the current backlog is currently scheduled to be sold in the fourth quarter of
2001. 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. While these fluctuations could impact short-term results, they are
not necessarily indicative of long-term trends in sales of the Company's
products.
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibits are being filed with this report:
Exhibit
Number Description
15 Letter re unaudited interim financial information
(b) Reports on Form 8-K:
The Company filed one Current Report on Form 8-K during the quarter
ended September 29, 2001. On September 20, 2001, the Company disclosed certain
information in the form 8-K pursuant to Regulation FD (17 CFR 243.100-243.103).
23
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, 2001 /S/ CHRISTIAN L. ALLISON
-------------------------------------
CHRISTIAN L. ALLISON
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Dated: November 13, 2001 /S/ SAMUEL C. KNOCH
-------------------------------------
SAMUEL C. KNOCH
CHIEF FINANCIAL OFFICER AND TREASURER
Dated: November 13, 2001 S/ BRADLEY N. DINGER
-------------------------------------
BRADLEY N. DINGER
CONTROLLER
24
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit
Number Description
------ -----------
10.2 Tollgrade Communications, Inc. 1995 Employee
Incentive Compensation Plan (as amended through
May 3, 2001).
10.25 Tollgrade Communications, Inc. 1998 Employee
Incentive Compensation Plan (as amended through
May 3, 2001).
10.26 Asset Purchase Agreement by and between Lucent
Technologies and Tollgrade Communications, Inc.
dated September 28, 2001, incorporated by
reference to the Company's 8-K filed on October
15, 2001.
15 Letter re unaudited interim financial information
25