Attached files
file | filename |
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EX-31.1 - EX-31.1 - TOLLGRADE COMMUNICATIONS INC \PA\ | l42669exv31w1.htm |
EX-32 - EX-32 - TOLLGRADE COMMUNICATIONS INC \PA\ | l42669exv32.htm |
EX-31.2 - EX-31.2 - TOLLGRADE COMMUNICATIONS INC \PA\ | l42669exv31w2.htm |
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
þ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2011
o | 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: 000-27312
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 No.) |
3120 Unionville Road, Suite 400
Cranberry Township, PA 16066
(Address of principal executive offices, including zip code)
Cranberry Township, PA 16066
(Address of principal executive offices, including zip code)
724-720-1400
(Registrants telephone number, including area code)
(Registrants 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 þ No o |
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 229.405) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files).
Yes o No o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act):
Large accelerated filer o
|
Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ |
As of May 3, 2011, there were 13,084,449 shares of the Registrants Common Stock, $0.20 par value
per share, outstanding.
TOLLGRADE COMMUNICATIONS, INC.
Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2011
Table of Contents
For the Quarter Ended March 31, 2011
Table of Contents
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PART I. FINANCIAL INFORMATION
Item 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value) (Unaudited)
March 31, 2011 | December 31, 2010 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 70,886 | $ | 72,194 | ||||
Short-term investments |
| 3 | ||||||
Accounts receivable: |
||||||||
Trade, net of allowance for doubtful accounts at $1,658 in 2011 and $1,496 in
2010 |
8,798 | 7,975 | ||||||
Other |
906 | 650 | ||||||
Inventories |
1,256 | 1,373 | ||||||
Prepaid expenses and deposits |
751 | 798 | ||||||
Deferred and refundable income taxes |
111 | 93 | ||||||
Total current assets |
82,708 | 83,086 | ||||||
Property and equipment, net |
3,877 | 2,246 | ||||||
Intangibles |
5,190 | 5,391 | ||||||
Deferred tax assets |
241 | 191 | ||||||
Other assets |
423 | 423 | ||||||
Total assets |
$ | 92,439 | $ | 91,337 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 544 | $ | 1,867 | ||||
Accrued warranty |
189 | 222 | ||||||
Accrued expenses |
2,139 | 986 | ||||||
Accrued salaries and wages |
509 | 1,044 | ||||||
Accrued royalties payable |
67 | 218 | ||||||
Income taxes payable |
489 | 481 | ||||||
Deferred revenue |
927 | 593 | ||||||
Total current liabilities |
4,864 | 5,411 | ||||||
Pension obligation |
864 | 795 | ||||||
Deferred tax liabilities |
14 | 14 | ||||||
Other liabilities |
1,748 | 825 | ||||||
Total liabilities |
7,490 | 7,045 | ||||||
Commitments and contingencies |
||||||||
Shareholders equity: |
||||||||
Common
stock, $0.20 par value 50,000 authorized shares, issued shares, 14,270 in 2011 and 14,073 in 2010 |
2,854 | 2,815 | ||||||
Additional paid-in capital |
78,854 | 77,326 | ||||||
Treasury stock, at cost, 1,162 shares in 2010 and 2009 |
(8,632 | ) | (8,632 | ) | ||||
Retained earnings |
12,789 | 13,966 | ||||||
Accumulated other comprehensive loss |
(916 | ) | (1,183 | ) | ||||
Total shareholders equity |
84,949 | 84,292 | ||||||
Total liabilities and shareholders equity |
$ | 92,439 | $ | 91,337 | ||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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Table of Contents
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data) (Unaudited)
Three Months Ended | ||||||||
March 31, 2011 | March 31, 2010 | |||||||
Revenues: |
||||||||
Products |
$ | 2,830 | $ | 4,222 | ||||
Services |
6,566 | 6,945 | ||||||
Total revenues |
9,396 | 11,167 | ||||||
Cost of sales: |
||||||||
Products |
1,596 | 1,814 | ||||||
Services |
1,700 | 1,993 | ||||||
Amortization |
302 | 400 | ||||||
Severance |
| 468 | ||||||
Total cost of sales |
3,598 | 4,675 | ||||||
Gross profit |
5,798 | 6,492 | ||||||
Operating expenses: |
||||||||
Selling and marketing |
1,390 | 2,063 | ||||||
General and administrative |
3,509 | 2,218 | ||||||
Research and development |
1,774 | 2,360 | ||||||
Severance |
245 | 1,258 | ||||||
Total operating expense |
6,918 | 7,899 | ||||||
Loss from operations |
(1,120 | ) | (1,407 | ) | ||||
Other income |
90 | (409 | ) | |||||
Loss before income taxes |
(1,030 | ) | (1,816 | ) | ||||
Provision/(benefit) for income taxes |
147 | (153 | ) | |||||
Net loss |
(1,177 | ) | (1,663 | ) | ||||
PER SHARE INFORMATION: |
||||||||
Weighted average shares of common stock and equivalents: |
||||||||
Basic |
13,018 | 12,656 | ||||||
Diluted |
13,018 | 12,656 | ||||||
Net loss per common share: |
||||||||
Basic |
$ | (0.09 | ) | $ | (0.13 | ) | ||
Diluted |
$ | (0.09 | ) | $ | (0.13 | ) | ||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
March 31, | March 31, | |||||||
2011 | 2010 | |||||||
Cash flows from operating activities : |
||||||||
Net Loss |
$ | (1,177 | ) | $ | (1,663 | ) | ||
Adjustments to reconcile net loss to net cash used in
operating activities |
||||||||
Amortization expense |
302 | 400 | ||||||
Depreciation expense |
298 | 327 | ||||||
Stock-based compensation expense |
172 | 506 | ||||||
Deferred income taxes |
(46 | ) | (825 | ) | ||||
Loss on disposed assets |
5 | | ||||||
Inventory impairment |
73 | | ||||||
Provision for allowance for doubtful accounts |
75 | | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable-trade and other |
(967 | ) | (1,065 | ) | ||||
Inventories |
44 | 267 | ||||||
Prepaid expenses, deposits and other assets |
52 | 5 | ||||||
Accounts payable |
(1,272 | ) | 115 | |||||
Accrued warranty |
(36 | ) | (2 | ) | ||||
Accrued expenses |
(420 | ) | 410 | |||||
Income taxes payable |
339 | (494 | ) | |||||
Other |
843 | | ||||||
Net cash used in operating activities |
(1,715 | ) | (2,019 | ) | ||||
Cash flows from investing activities: |
||||||||
Redemption of short term investments |
3 | | ||||||
Purchase of property and equipment |
(1,132 | ) | (151 | ) | ||||
Net cash used in investing activities |
(1,129 | ) | (151 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from the exercise of stock options |
1,395 | | ||||||
Other |
114 | |||||||
Repurchase of treasury stock |
| (69 | ) | |||||
Net cash provided by/(used) in financing activities |
1,509 | (69 | ) | |||||
Net (decrease)/increase in cash and cash equivalents |
(1,335 | ) | 2,239 | |||||
Effect of exchange rate changes on cash and cash equivalents |
27 | (50 | ) | |||||
Cash and cash equivalents, beginning of period |
72,194 | 66,046 | ||||||
Cash and cash equivalents, end of period |
$ | 70,886 | $ | 63,757 | ||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid during the period for income taxes |
231 | 704 |
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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Tollgrade Communications, Inc. and Subsidiaries
Consolidated Statements of Changes in Shareholders Equity
In thousands (Unaudited)
Common Stock | Treasury Stock | |||||||||||||||||||||||||||||||
Additional | Accumulated Other | |||||||||||||||||||||||||||||||
Paid-In | Retained | Comprehensive | ||||||||||||||||||||||||||||||
Shares | Amount | Capital | Shares | Amount | Earnings | Loss | Total | |||||||||||||||||||||||||
Balance at December 31, 2010 |
14,073 | $ | 2,815 | $ | 77,326 | 1,162 | $ | (8,632 | ) | $ | 13,966 | $ | (1,183 | ) | $ | 84,292 | ||||||||||||||||
Exercise of common stock options |
197 | $ | 39 | $ | 1,356 | $ | 1,395 | |||||||||||||||||||||||||
Compensation expense for options
and restricted stock, net |
$ | 172 | $ | 172 | ||||||||||||||||||||||||||||
Foreign currency translation |
$ | 267 | $ | 267 | ||||||||||||||||||||||||||||
Net Loss |
$ | (1,177 | ) | $ | (1,177 | ) | ||||||||||||||||||||||||||
Balance at March 31, 2011 |
14,270 | $ | 2,854 | $ | 78,854 | 1,162 | $ | (8,632 | ) | $ | 12,789 | $ | (916 | ) | $ | 84,949 | ||||||||||||||||
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)
FINANCIAL STATEMENTS (Unaudited)
1. BASIS OF PRESENTATION
We have prepared the accompanying unaudited condensed consolidated financial statements included
herein 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 unaudited condensed
consolidated financial statements as of and for the three month period ended March 31, 2011 should
be read in conjunction with our consolidated financial statements (and notes thereto) included in
our Annual Report on Form 10-K for the year ended December 31, 2010. Accordingly, the accompanying
unaudited 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 we believe that the disclosures are adequate to make the
information presented not misleading. In the opinion of our management, all adjustments considered
necessary for a fair statement of the accompanying unaudited condensed consolidated financial
statements were included, and all adjustments are of a normal and recurring nature. Operating
results for the quarter ended March 31, 2011 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2011.
As of March 31, 2011, we have adopted accounting guidance for revenue arrangements with multiple
deliverables that are outside the scope of software revenue recognition guidance. This adoption
has not had a material impact on our financial position, results of operations or cash flows.
As of March 31, 2011, we have also adopted accounting guidance for revenue arrangements that
include both tangible products and software elements. This adoption has not had a material impact
on our financial position, results of operations or cash flows.
2. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date. The fair
value hierarchy distinguishes between (1) market participant assumptions developed based on market
data obtained from independent sources (observable inputs) and (2) an entitys own assumptions
about market participant assumptions developed based on the best information available in the
circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which
gives the highest priority to unadjusted quoted prices in active markets for identical assets or
liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of
the fair value hierarchy are described below:
| Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; | ||
| Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means; and | ||
| Level 3 Inputs that are both significant to the fair value measurement and unobservable. |
The fair value of cash equivalents was $70.9 million and $72.2 million at March 31, 2011 and
December 31, 2010, respectively. These financial instruments are classified in Level 1 of the fair
value hierarchy.
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3. STOCK BASED COMPENSATION
We currently sponsor one active stock compensation plan. Our 2006 Long-Term Incentive Compensation
Plan (the 2006 Plan) was adopted by our Board of Directors in March 2006 and was approved by our
shareholders in May 2006. The 2006 Plan originally authorized up to 1,300,000 shares under the
Plan, and was amended during 2009 to increase the shares authorized for issuance under the 2006
Plan to 2,800,000 shares, provided however, that, the maximum number of restricted shares of that
total shall be 300,000. This amendment was adopted by our Board of Directors in May 2009 and
approved by our shareholders in August 2009. Awards in the form of stock options, restricted
shares, stock appreciation rights, performance shares or performance units may be granted to
directors, officers and other employees under the 2006 Plan.
Options granted under our equity compensation plans prior to 2007 generally vested over a two-year
period with one-third vesting upon grant. Beginning in 2007, options were granted which generally
vest over a three-year period, with one-third vesting at the end of each year during such period.
Options granted under our equity compensation plans expire ten years from the date of the grant.
The grant price on any such shares or options is equal to the quoted fair market value of our
shares at the date of the grant, as defined in the 2006 Plan. Restricted shares and stock
appreciation rights will vest in accordance with the terms of the applicable award agreement and
the 2006 Plan. The 2006 Plan requires that non-performance-based restricted stock grants to
employees vest in no less than three years, while performance-based restricted stock grants may
vest after one year. Grants of restricted stock to directors may vest after one year.
Stock-Based Compensation Expense
We recognized total stock-based compensation expense of approximately $0.2 million and $0.5 million
for the three month period ended March 31, 2011 and March 31, 2010, respectively.
The unamortized stock-based compensation expense from operations related to stock options and
restricted stock totaled $1.5 million at March 31, 2011.
Transactions involving stock options under the Companys various plans and otherwise are summarized
below:
Number of | Range of Option | Weighted Average | ||||||||||
Shares | Prices | Exercise Price | ||||||||||
Outstanding, December 31, 2010 |
1,312,992 | $ | 3.27 - $32.90 | $ | 8.03 | |||||||
Exercised |
(196,772 | ) | $ | 5.17 - $9.49 | $ | 7.09 | ||||||
Cancelled/Forfeited/Expired |
(16,650 | ) | $ | 8.49 - $32.28 | $ | 18.42 | ||||||
Outstanding, March 31, 2011 |
1,099,570 | $ | 3.27 - $32.90 | $ | 8.04 | |||||||
4. SEVERANCE
During the first quarter of 2011, we recorded a severance charge of $0.2 million in operating
expenses associated with the second quarter departure of our former Vice President of Research and
Development. All cash payments related to this action are expected to be paid during the second
quarter of 2011 and no further expense is anticipated.
During the first quarter of 2010, we accelerated our efforts to reduce our operating expenses in
order to help position us to achieve stronger profitability levels in the future. As such, we
eliminated approximately 48 positions across all functional levels of the organization in an effort
to reduce our overall cost structure. The total severance charge associated with these actions was
approximately
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$1.7 million of which approximately $.5 million was recorded as cost of sales expense and $1.2
million was recorded as an operating expense. All cash payments related to this action have been
made and there are no further expenses related to these actions.
5. INTANGIBLE ASSETS
The following information is provided regarding our intangible assets (in thousands):
March 31, 2011 | ||||||||||||||||||
Impairments | ||||||||||||||||||
During the | ||||||||||||||||||
Useful Life | Accumulated | Reporting | ||||||||||||||||
(Years) | Gross | Amortization | Period | Net | ||||||||||||||
Amortizing Intangible Assets: | ||||||||||||||||||
Post warranty service agreements |
6-15 | $ | 37,757 | $ | 33,407 | $ | 4,350 | |||||||||||
Technology |
2-10 | 13,332 | 12,728 | $ | 604 | |||||||||||||
Customer relationships |
5-15 | 732 | 544 | $ | 188 | |||||||||||||
Tradenames and other |
0.5-10 | 305 | 257 | $ | 48 | |||||||||||||
Total Intangible Assets |
$ | 52,126 | $ | 46,936 | $ | 0 | $ | 5,190 | ||||||||||
December 31, 2010 | ||||||||||||||||||
Impairments | ||||||||||||||||||
During the | ||||||||||||||||||
Useful Life | Accumulated | Reporting | ||||||||||||||||
(Years) | Gross | Amortization | Period | Net | ||||||||||||||
Amortizing Intangible Assets: | ||||||||||||||||||
Post warranty service agreements |
6-15 | $ | 37,539 | $ | 33,113 | $ | 4,426 | |||||||||||
Technology |
2-10 | 13,986 | 13,275 | $ | 711 | |||||||||||||
Customer relationships |
5-15 | 905 | 704 | $ | 201 | |||||||||||||
Tradenames and other |
0.5-10 | 574 | 521 | $ | 53 | |||||||||||||
Total Intangible Assets |
$ | 53,004 | $ | 47,613 | $ | 0 | $ | 5,391 | ||||||||||
Amortization expense is estimated to be $0.9 million, $0.7 million, $0.6 million, $0.5 million
and $0.4 million for the remainder of 2011, and each of the years 2012, 2013, 2014 and 2015,
respectively.
Impairments
Long-Lived Assets
We perform impairment reviews of our long-lived assets upon a change in business conditions or upon
the occurrence of a triggering event. No impairments have been triggered for the three months
ended March 31, 2011 and March 31, 2010.
6. INVENTORIES
Inventories consisted of the following (in thousands):
March 31, 2011 | December 31, 2010 | |||||||
Raw materials |
$ | 525 | $ | 804 | ||||
Work in process |
117 | 179 | ||||||
Finished goods |
614 | 390 | ||||||
Total Inventory |
1,256 | 1,373 | ||||||
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7. PRODUCT WARRANTY
Activity in the warranty accrual is as follows (in thousands):
March 31, 2011 | December 31, 2010 | |||||||
Balance at the beginning of the period |
$ | 222 | $ | 504 | ||||
Accruals for warranties issued during the period |
46 | 251 | ||||||
Settlements during the period |
(79 | ) | (533 | ) | ||||
Balance at the end of the period |
$ | 189 | $ | 222 | ||||
8. PER SHARE INFORMATION
Basic income (loss) per common share is computed by dividing net loss by the weighted-average
number of common shares outstanding during the reporting period. Diluted income per common share
is computed by dividing net income by the combination of dilutive common share equivalents,
comprised of shares issuable under our share-based compensation plans and the weighted-average
number of common shares outstanding during the reporting period. Dilutive common share equivalents
include the dilutive effect of in-the-money shares, which is calculated based on the average share
price for each period using the treasury stock method. Under the treasury stock method, the
exercise price of a share, the amount of compensation cost, if any, for future service that we have
not yet recognized, and the amount of estimated tax benefits that would be recorded in additional
paid-in capital, if any, when the share is exercised are assumed to be used to repurchase shares in
the current period. When we are in a loss position, we do not include any stock options
outstanding with an exercise price below the average market price, as their effect would be
considered anti-dilutive. The three month periods ended March 31, 2011 and 2010 do not include the
effect of dilutive securities because inclusion would be anti-dilutive to the earnings per share
calculation. As of March 31, 2011 and March 31, 2010, 166,353 and 1,510,678 equivalent shares,
respectively, were anti-dilutive.
9. REVENUE CONCENTRATION, MAJOR CUSTOMERS
The following table represents our total sales by major product lines as well as the percentage of
total revenue represented by sales of each such major product line.
March 31, 2011 | March 31, 2010 | |||||||||||||||
System Test Products |
$ | 1,630 | 17 | % | $ | 2,430 | 22 | % | ||||||||
MCU |
1,142 | 12 | % | 1,776 | 16 | % | ||||||||||
Other |
58 | 1 | % | 16 | 0 | % | ||||||||||
Total Products |
$ | 2,830 | 30 | % | 4,222 | 38 | % | |||||||||
Managed Services |
1,697 | 18 | % | 1,748 | 16 | % | ||||||||||
Other Services |
4,869 | 52 | % | 5,197 | 47 | % | ||||||||||
Total Services |
$ | 6,566 | 70 | % | 6,945 | 62 | % | |||||||||
Total Revenue |
$ | 9,396 | 100 | % | $ | 11,167 | 100 | % | ||||||||
As of March 31, 2011, we had approximately $1.4 million of accounts receivable with one
customer, which individually exceeded 10% of our March 31, 2011 receivable balance. As of December
31, 2010, we had approximately $3.0 million of accounts receivable with two customers, each of
which individually exceeded 10% of our December 31, 2010 receivable balances.
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The following table represents sales to our customers that individually exceeded 10% of our net
sales:
March 31, 2011 | March 31, 2010 | |||||||||||||||
Customer A |
$ | 1,697 | 18 | % | $ | 1,752 | 16 | % | ||||||||
Customer B |
1,550 | 17 | % | 2,828 | 25 | % | ||||||||||
Customer C |
1,062 | 11 | % | 950 | 9 | % | ||||||||||
Total |
$ | 4,309 | 46 | % | $ | 5,530 | 50 | % | ||||||||
Our sales are primarily in the following geographic areas: Domestic (United States); the
Americas (excluding the United States); Europe, the Middle East and Africa (EMEA); and Asia. The
following table represents sales to our customers based on these geographic locations:
March 31, 2011 | March 31, 2010 | |||||||||||||||
Region |
||||||||||||||||
EMEA |
$ | 2,125 | 23 | % | $ | 3,455 | 31 | % | ||||||||
Americas |
635 | 7 | % | 235 | 2 | % | ||||||||||
Asia |
10 | 0 | % | 12 | 0 | % | ||||||||||
Total International |
2,770 | 30 | % | 3,702 | 33 | % | ||||||||||
Total Domestic |
6,626 | 70 | % | 7,465 | 67 | % | ||||||||||
Total Revenue |
$ | 9,396 | 100 | % | $ | 11,167 | 100 | % | ||||||||
10. COMPREHENSIVE INCOME
Three Months Ended | ||||||||
March 31, 2011 | March 31, 2010 | |||||||
Net Loss |
$ | (1,177 | ) | $ | (1,663 | ) | ||
Foreign currency translation |
(29 | ) | 421 | |||||
Comprehensive Loss |
$ | (1,206 | ) | $ | (1,242 | ) | ||
11. SUBSEQUENT EVENTS
As we have previously disclosed, on February 22, 2011, we announced that we had entered into an
Agreement and Plan of Merger (the Merger Agreement) dated February 21, 2011 with Talon Holdings,
Inc. a Delaware corporation (Parent), and Talon Merger Sub Inc., a Pennsylvania Corporation and a
direct wholly-owned subsidiary of Parent (Merger Sub), providing for the merger of Merger Sub
with and into the Company (the Merger), with the Company surviving the Merger as a wholly-owned
subsidiary of the Parent. Parent is owned by investment funds managed by Golden Gate Private
Equity, Inc. Subsequent to our announcement of the Merger Agreement, four class action lawsuits
were filed against the Company, the Companys directors, and in some cases, Parent, Merger Sub and
Golden Gate Capital in connection with the proposed Merger. On April 1, 2011, we filed a
definitive proxy statement describing the proposed merger. On April 27, 2011, we reached an
agreement in principle with the plaintiffs providing for the settlement and dismissal of their
lawsuits. Pursuant to that agreement, we agreed to make certain supplemental disclosures regarding
the proposed merger, and filed a supplement to our definitive proxy statement on April 27, 2011.
Although a final settlement amount has yet to be reached, we have accrued $0.4 million as our
estimate of what we believe the anticipated outcome may be.
On May 5, 2011, we held a special meeting of shareholders to adopt the Merger Agreement. At the
meeting, our shareholders voted in favor of the proposal to adopt the Merger Agreement.
Represented at the meeting were
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9,373,671 shares or 71.6% of the 13.092,152 shares of our common stock outstanding and entitled to
vote at the meeting. Voting in favor of the proposal to adopt the Merger Agreement were 9,094,896
shares, representing 97.0% of the shares that voted, and 69.5% of total shares outstanding and
entitled to vote. We anticipate the Merger closing on May 10, 2011 with our subsequent delisting
from the NASDAQ exchange.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited Condensed Consolidated
Financial Statements and Notes thereto appearing elsewhere in this report. Additionally, when used
in this form 10-Q unless the context requires otherwise, the terms we, our, and us refer to
Tollgrade Communications, Inc.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995.
Managements Discussion and Analysis of Results of Financial Condition and Results of Operations
(this MD&A) should be read in conjunction with our annual report on Form 10-K for the year ended
December 31, 2010 (the Form 10-K).
Certain statements contained in this MD&A and elsewhere in this report 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, which involve risks and uncertainties.
These statements relate to future events or our future financial performance. In some cases,
forward-looking statements can be identified by terminology such as believe, expect, intend,
may, will, should, could, potential, continue, estimate, plan, or anticipate, or
the negatives thereof, other variations thereon or compatible terminology. These statements involve
a number of risks and uncertainties. Actual events or results may differ materially from any
forward-looking statement as a result of various factors, including those described in Part II,
Item 1A below under Risk Factors.
Overview
Tollgrade Communications, Inc. is a provider of centralized test and measurement systems and
service offerings to the telecommunications market. We design, engineer, and support test systems
and status monitoring hardware and software products for some of the largest telecommunication
companies within the United States and Europe. Our products enable service providers to remotely
diagnose and proactively address problems within their networks. By coupling our hardware and
software offerings together, we provide proactive centralized test systems for our customers. Our
service and managed service business includes software maintenance and support for our operating
systems, along with hardware maintenance for our test probes, and our professional services, which
are designed to ensure that all of the components of our customers test systems operate properly.
In addition, since 2007, we have been developing a sensor and a software operating platform for the
utility industry that leverages our core competency and years of experience in scaling test systems
in large telecommunications networks and applying that similar business model to the utility
marketplace.
As we have previously disclosed, on February 22, 2011, we announced that we had entered into an
Agreement and Plan of Merger (the Merger Agreement) dated February 21, 2011 with Talon Holdings,
Inc. a Delaware corporation (Parent), and Talon Merger Sub Inc., a Pennsylvania Corporation and a
direct wholly-owned subsidiary of Parent (Merger Sub), providing for the merger of Merger Sub
with and into the Company (the Merger), with the Company surviving the Merger as a wholly-owned
subsidiary of the Parent. Parent is owned by investment funds managed by Golden Gate Private
Equity, Inc. Subsequent to our announcement of the Merger Agreement, four class action lawsuits
were filed against the Company, the Companys directors, and
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in some cases, Parent, Merger Sub and Golden Gate Capital in connection with the proposed Merger.
On April 1, 2011, we filed a definitive proxy statement describing the proposed merger. On April
27, 2011, we reached an agreement in principle with the plaintiffs providing for the settlement and
dismissal of their lawsuits. Pursuant to that agreement, we agreed to make certain supplemental
disclosures regarding the proposed merger, and filed a supplement to our definitive proxy statement
on April 27, 2011. Although a final settlement amount has yet to be reached, we have accrued $0.4
million as our estimate of what we believe the anticipated outcome may be.
On May 5, 2011, we held a special meeting of shareholders to adopt the Merger Agreement. At the
meeting, our shareholders voted in favor of the proposal to adopt the Merger Agreement.
Represented at the meeting were 9,373,671 shares or 71.6% of the 13.092,152 shares of our common
stock outstanding and entitled to vote at the meeting. Voting in favor of the proposal to adopt
the Merger Agreement were 9,094,896 shares, representing 97.0% of the shares that voted, and 69.5%
of total shares outstanding and entitled to vote. We anticipate the Merger closing on May 10, 2011
with our subsequent delisting from the NASDAQ exchange.
As a result of the Merger, our first quarter 2011 results were negatively impacted by certain costs
that we either paid or accrued in the first quarter of 2011 in conjunction with the merger. These
costs included the payment of $0.5 million to Piper Jaffray & Co, our financial advisors in the
transaction, for their fairness opinion. The payment to our attorneys of $0.3 million and accrued
legal expenses of $0.3 million for their services in preparing the Merger Agreement, the definitive
proxy statement and subsequent defense of the lawsuits mentioned above. In addition, we also
accrued $0.4 million related to the proposed settlement of the lawsuits. Lastly, our first
quarter 2011 results were negatively impacted by the accrued severance expense in the amount of
$0.2 million related to our former Vice-President of Research and Development.
Our Customers
Our customers include the top telecom providers and numerous independent telecom and broadband
providers around the world. Our primary customers for our telecommunications products and services
are large domestic and European telecommunications service providers. We track our
telecommunication sales by two large customer groups, the first of which includes AT&T, Verizon and
Qwest (referred to herein as large domestic carriers), and the second of which includes certain
large international telephone service providers in Europe, namely British Telecom, Royal KPN N.V.,
Belgacom S.A., Deutsche Telecom AG (T-Com) and Telefónica O2 Czech Republic, a.s. (collectively
referred to herein as the European Telcos). For the first quarter of 2011, sales to the large
domestic customers accounted for approximately 26% of our total revenue compared to approximately
34% of total revenue for the first quarter of 2010. Sales in the first quarter of 2011 and 2010 to
the European Telcos accounted for approximately 21% and 18% respectively, of total revenue.
Backlog
Our order backlog for firm customer purchase orders, software maintenance contracts and managed
services contracts was $19.1 million as of March 31, 2011 and December 31, 2010. The backlog at
March 31, 2011 and December 31, 2010 included approximately $12.1 million and $13.4 million,
respectively, related to software maintenance contracts. For the remainder of 2011, we expect to
recognize $14.7 million of the March 31, 2011 backlog of $19.1 million.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2011 COMPARED TO THREE MONTHS ENDED MARCH 31, 2010
Revenues
March 31, 2011 | March 31, 2010 | Change | % | |||||||||||||
System Test Products |
$ | 1,630 | $ | 2,430 | $ | (800 | ) | -33 | % | |||||||
MCU |
1,142 | 1,776 | $ | (634 | ) | -36 | % | |||||||||
Other |
58 | 16 | $ | 42 | 263 | % | ||||||||||
Total Products |
2,830 | 4,222 | $ | (1,392 | ) | -33 | % | |||||||||
Managed Services |
1,697 | 1,748 | $ | (51 | ) | -3 | % | |||||||||
Other Services |
4,869 | 5,197 | $ | (328 | ) | -6 | % | |||||||||
Total Services |
6,566 | 6,945 | $ | (379 | ) | -5 | % | |||||||||
Total Revenue |
$ | 9,396 | $ | 11,167 | $ | (1,771 | ) | -16 | % | |||||||
Our total revenues for the first quarter of 2011 were $9.4 million compared to total revenues
of $11.2 million for the first quarter of 2010.
Our product revenue consists primarily of sales of our System Test Products as well as sales of our
traditional MCU product line. Product revenues were approximately $2.8 million or 30% of our total
first quarter 2011 revenues compared to $4.2 million or 38% of our total first quarter revenue for
2010. Overall, our first quarter 2011 product revenues decreased by approximately $1.4 million or
33% compared to the same period in the prior year. The decrease in our total product sales is
primarily attributable to a $0.6 million decline in each of our MCU and DMU product lines as a
result of lower demand from two of our large domestic customers. Although we expect continued
sales in the foreseeable future, these are mature product lines with sales that do fluctuate based
on an unpredictable demand, but we believe sales for these product lines will continue to decline
over time.
Services revenue was approximately $6.6 million or 70% of total first quarter 2011 revenues
compared to $6.9 million or 62% of the total first quarter revenue for 2010. Our services revenue
consists of software maintenance for our 4TEL and Celerity LTSC and LoopCare products, project
management fees, repair work and managed services. Overall, our first quarter 2011 service revenue
decreased by approximately $0.3 million or 5% compared to the same period in the prior year. The
decrease was primarily attributable to lower first quarter 2011 revenues associated with our
4TEL/Celerity software maintenance with a large international customer as compared to the first
quarter 2010.
Gross Profit
Our gross profit for the first quarter of 2011 was $5.8 million compared to $6.5 million in the
first quarter of 2010, a decrease of $0.7 million. However, as a percentage of sales, our gross
profit margin for the first quarter of 2011 was 62% versus 58% for the first quarter of 2010. This
4% increase in our gross profit margin percentage is primarily attributable to a reduced headcount
in 2011 as compared to the same 2010 period and an increase in the percentage of revenue comprised
of service revenues which typically carry higher gross margins as compared to product revenues.
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Selling and Marketing Expenses
March 31, 2011 | March 31, 2010 | Change | % | |||||||||||||
Employee Costs |
$ | 960 | $ | 1,502 | $ | (542 | ) | -36 | % | |||||||
Travel Expenses |
167 | 207 | (40 | ) | -19 | % | ||||||||||
Consulting |
150 | 137 | 13 | 9 | % | |||||||||||
Other |
113 | 217 | (104 | ) | -48 | % | ||||||||||
Total |
$ | 1,390 | $ | 2,063 | $ | (673 | ) | -33 | % |
Our total selling and marketing expenses was $1.4 million in the first quarter of 2011
compared to $2.1 million in the first quarter of 2010, a decrease of $0.7 million or 33%. Our
total selling and marketing expenses consist primarily of employee costs, which include salaries
and related payroll taxes, benefits and commission expenses as well as related travel expenses,
consulting expenses and other expenses which are individually immaterial. This decrease is
primarily attributable to lower employee costs in the first quarter of 2011 as a result of our 2010
workforce reductions. Travel and consulting expenses fluctuated very little quarter over quarter,
while other expense items resulted in a net decrease quarter over quarter, none of which are
individually material. As a percentage of revenues, selling and marketing expenses decreased to
15% in the first quarter of 2011 from 18% in the first quarter of 2010.
General and Administrative Expenses
March 31, 2011 | March 31, 2010 | Change | % | |||||||||||||
Employee Costs |
$ | 821 | $ | 913 | $ | (92 | ) | -10 | % | |||||||
Stock Compensation |
81 | 415 | (334 | ) | -80 | % | ||||||||||
Bad Debt Expense |
75 | 0 | 75 | 100 | % | |||||||||||
Legal & Professional Fees |
1,890 | 260 | 1,630 | 627 | % | |||||||||||
Other |
642 | 630 | 12 | 2 | % | |||||||||||
Total |
$ | 3,509 | $ | 2,218 | $ | 1,291 | 58 | % |
Our general and administrative expenses for the first quarter of 2011 were $3.5 million
compared to $2.2 million in the first quarter of 2010, an increase of $1.3 million or 58%. Our
general and administrative expenses consist primarily of employee costs, which include salaries
payroll taxes and related employee benefit costs, stock compensation expenses, travel expenses,
legal and professional fees, and other various expenses. Our general and administrative expenses
increased in the first quarter 2011 primarily as a result of higher legal and professional fees of
approximately $1.6 million primarily as a result of our pending merger. Included in these merger
related costs are $0.5 million related to the fairness opinion provided by Piper Jaffray and Co.,
$0.6 million in paid and accrued legal costs to prepare the merger agreement, proxy statement and
the defense of ligation for the lawsuits that were filed subsequent to the merger announcement as
well as $0.4 million of accrued expenses associated with settlements of the lawsuits.
The increase in our legal and professional fees is partially offset by lower payroll and payroll
related costs in the first quarter of 2011 as a result of our 2010 workforce reductions. The
decrease in stock compensation expenses is due primarily to a restricted stock grant of 50,000
common shares to our Chairman of the Board in the first quarter of 2010 that did not transpire in
the first quarter of 2011. Various other expense items resulted in a slight increase quarter
over quarter, primarily as a result of additional travel expenses related to the proposed merger
agreement and overseas contract negotiations. As a percentage of revenues, general and
administrative expenses increased to 37% in the first quarter of 2011 compared to 20% in the first
quarter of 2010.
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Research and Development Expenses
March 31, 2011 | March 31, 2010 | Change | % | |||||||||||||
Employee Costs |
$ | 1,416 | $ | 1,889 | $ | (473 | ) | -25 | % | |||||||
Professional Fees |
142 | 336 | (194 | ) | -58 | % | ||||||||||
Other |
216 | 135 | 81 | 60 | % | |||||||||||
Total |
$ | 1,774 | $ | 2,360 | $ | (586 | ) | -25 | % |
Our research and development expenses for the first quarter of 2011 were $1.8 million compared to
$2.4 million in the first quarter of 2010, a decrease of $0.6 million or 25%. Our research and
development expense consist primarily of employees costs, which include salaries, payroll taxes
and related employee benefit costs, professional fees, and other expenses. In addition, because
some of our contractual agreements require us to provide engineering development or repair services
to our customers, a portion of our engineering costs are allocated to cost of sales. Our employee
related costs have declined by approximately $0.5 million in the first quarter of 2011 as a result
of our 2010 workforce reductions. Professional fees have decreased by $0.2 million due to overall
cost reduction efforts. Various other expense items resulted in a slight increase of $0.1 million
quarter over quarter, none of which are individually material. As a percentage of revenues,
research and development expense for the first quarter of 2011 was 19% as compared to 21% for the
first quarter of 2010.
Severance Expenses
In the first quarter of 2011, we recorded approximately $0.2 million of severance related to the
termination of our former Vice President of Research and Development. During the first quarter of
2010, we accelerated our efforts to reduce our operating expenses in order to help position
ourselves to achieve stronger profitability. As such we eliminated 48 positions across all
functional levels of the organization in an effort to reduce our overall cost structure. The total
severance charge associated with these actions was approximately $1.7 million of which $0.5 million
was recorded as part of cost of sales and $1.2 million was recorded as an operating expense.
Other (Expense)/Income
Other income for the first quarter of 2011 was $0.1 million compared to $0.4 million of expense for
the first quarter of 2010. This change of $0.5 million is due primarily to temporary foreign
currency translation adjustments of our foreign entities.
Income Taxes
We recorded income tax expense of $0.1 million during the first quarter of 2011 compared to an
income tax benefit of $0.2 million in the first quarter of 2010. The increase in tax expense in the
first quarter of 2011 is primarily due to higher taxable earnings in the foreign operating
jurisdictions as compared to the first quarter 2010.
We continue to record a valuation allowance against U.S. federal, state and certain foreign net
operating losses from continuing operations incurred in the first quarter of 2011 as the tax
benefit generated from those losses was deemed to be likely unrealizable in future periods.
LIQUIDITY AND CAPITAL RESOURCES
We have historically met our working capital and capital spending requirements, including the
funding for expansion of operations, product developments and acquisitions, through net cash flows
provided by operating activities. Our principle source of liquidity is our operating cash flows
and cash on our balance sheet. Our cash, cash equivalents and short-term investments are
unrestricted and available for corporate purposes, including acquisitions, research and development
and other general working capital requirements. In addition, there are
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no material restrictions on our ability to transfer and remit funds among our international
affiliated companies. Our cash and cash equivalents and short-term investments decreased to $70.9
million at March 31, 2011 from $72.2 million at December 31, 2010. The $1.3 million decrease in
cash and cash equivalents and short term investments from December 31, 2010 is largely attributable
to cash payments of $0.8 million related to legal and professional fees associated with the
proposed merger, $0.6 million related to final payments pursuant to our 2010 incentive plan, $1.1
million related to capital expenditures for our new Cranberry, Pennsylvania headquarters, and an
increase in trade accounts receivables of $0.8 million, partially offset by proceeds from the
exercise of stock options of $1.4 million. We believe we have sufficient cash balances to meet our
cash flow requirements and growth objectives over the next twelve months.
Net cash used in operating activities for the three months ended March 31, 2011 was $1.7 million
compared to net cash used in operating activities of $2.0 million for the same period in the prior
year. The decrease in net cash used in operating activities is primarily attributable to $0.5
million of additional net income over the prior period as well as other working capital
fluctuations.
Net cash used in investing activities was approximately $1.1 million for the three months ended
March 31, 2011, which was primarily related to capital expenditures for our new Cranberry,
Pennsylvania headquarters location. Net cash used in investing activities of $0.2 million for the
three months ended March 31, 2010 was primarily related to capital expenditures in support of
operations.
Net cash received in financing activities was approximately $1.5 million for the three months ended
March 31, 2011 as the result of the exercise of approximately 197,000 shares of our common stock.
Net cash used in financing activities was approximately $0.1 million for the three months ended
March 31, 2010 as a result of purchasing 10,600 shares of our common stock under our stock
repurchase program.
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
We lease office space and equipment under agreements which are accounted for as operating leases.
The lease for our new Cranberry, Pennsylvania headquarters facility commenced on February, 28, 2011
and expires on March 1, 2018. Our lease on our former Cheswick facility expired on March 31,
2011. The lease for our Piscataway, New Jersey location expires on April 30, 2012. We also have
office leases in Bracknell, United Kingdom and Wuppertal, Germany, which expire on December 24,
2012 and January 31, 2012, respectively. We are also involved in various month-to-month leases for
research and development and office equipment at all locations.
Minimum annual future commitments due by period as of March 31, 2011 are (in thousands):
More | ||||||||||||||||||||
Less than 1 | 3-5 | than 5 | ||||||||||||||||||
Total | year | 1-3 years | years | years | ||||||||||||||||
Operating Lease Obligations |
$ | 3,658 | $ | 831 | $ | 1,199 | $ | 814 | $ | 814 | ||||||||||
Severance Obligation |
273 | 273 | ||||||||||||||||||
Uncertain Tax Obligations |
904 | 904 | ||||||||||||||||||
Pension Obligations |
863 | 863 | ||||||||||||||||||
Total |
$ | 5,698 | $ | 1,104 | $ | 2,103 | $ | 814 | $ | 1,677 | ||||||||||
The lease expense for the three month periods ended March 31, 2011 and March 31, 2010 was $0.2
million for the respective periods.
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In addition, we are, from time to time, party to various legal claims and disputes, either asserted
or unasserted, which arise in the ordinary course of business. While the final resolution of these
matters cannot be predicted with certainty, we do not believe that the outcome of any of these
claims will have a material adverse effect on our consolidated financial position, or annual
results of operations or cash flow.
Application of Critical Accounting Policies
The preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period.
Therefore, the determination of estimates requires the exercise of judgment based on various
assumptions and other factors such as historical experience, economic conditions, and in some
cases, actuarial techniques. Actual results may differ from those estimates. A discussion of
market risks affecting us can be found in Quantitative and Qualitative Disclosures about Market
Risk in this Quarterly Report on Form 10-Q.
As of March 31, 2011, we have adopted accounting guidance for revenue arrangements with multiple
deliverables that are outside the scope of software revenue recognition guidance. This adoption
has not had a material impact on our financial position, results of operations or cash flows.
As of March 31, 2011, we have also adopted accounting guidance for revenue arrangements that
include both tangible products and software elements. This adoption has not had a material impact
on our financial position, results of operations or cash flows.
A summary of our significant accounting policies and application of these policies are included in
the Notes to Consolidated Financial Statements and in MD&A included in our Annual Report on Form
10-K for the year ended December 31, 2010. Management believes that the application of these
policies on a consistent basis enables us to provide useful and reliable financial information
about our operating results and financial condition. There were no changes to our critical
accounting policies during the first quarter of 2011.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our current investment policy limits our 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. We believe that our risk is
minimized 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 & Poors. We hold our
investment securities to maturity and believe 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.
In addition, we are exposed to foreign currency translation fluctuations with our international
operations. We do not have any foreign exchange derivative contracts to hedge against foreign
currency exposures. Therefore, we are exposed to the related effects when the foreign currency
exchange rates fluctuate. If the U.S. dollar strengthens against the Euro and/or the British pound
sterling and or the Czech Republics Koruna, the translation rate for these foreign currencies will
decrease, which will have a negative impact on our operating income. Foreign currency translation
fluctuations have no impact on cash flows as long as we continue to reinvest any profits back into
the respective foreign operations.
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Item 4. CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Financial Officer and Treasurer of the Company (its
principal executive officer and principal financial officer, respectively) have concluded, based on
their evaluation as of the end of the period covered by this report, that the Companys disclosure
controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 are
effective to ensure that information required to be disclosed by the Company in the reports filed
or submitted by it under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the SECs rules and forms, and include
controls and procedures designed to ensure that information required to be disclosed by the Company
in such reports is accumulated and communicated to the Companys management, including the Chief
Executive Officer and the Chief Financial Officer and Treasurer, as appropriate, to allow timely
decisions regarding required disclosure.
There were no changes in the Companys internal controls over financial reporting (as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the fiscal quarter
ended March 31, 2011 that have materially affected or are reasonably likely to materially affect
our internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
As we have previously disclosed, on February 22, 2011, we announced that we had entered into an Agreement and Plan of
Merger (the Merger Agreement) dated February 21, 2011 with Talon Holdings, Inc. a Delaware corporation (Parent), and
Talon Merger Sub Inc., a Pennsylvania Corporation and a direct wholly-owned subsidiary of Parent
(Merger Sub), providing for the merger of Merger Sub with and into the Company (the Merger),
with the Company surviving the Merger as a wholly-owned subsidiary of the Parent. Parent is owned
by investment funds managed by Golden Gate Private Equity, Inc. Subsequent to the merger announcement,
four class action lawsuits were filed against the Company, the Companys directors, and in some
cases, Parent, Merger Sub and Golden Gate Capital in connection with the proposed Merger.
| Steven Tencza vs. Edward H. Kennedy, et al. (Case No. GD-11-003755 (Derivative) and Case No. GD-11-006284 (Class Action)) and Vladimir Gusinsky Revocable Trust vs. Edward H. Kennedy, et al. (Case No. GD-11-003908 (Derivative) and Case No. GD-11-006285 (Class Action)), which were filed on February 24, 2011 and on March 1, 2011, respectively, in the Court of Common Pleas of Allegheny County, Pennsylvania; | ||
| Equity Benefit Partners vs. Edward H. Kennedy, et al. (Case No. 11-10364), filed in the Court of Common Pleas of Butler County, Pennsylvania on March 18, 2011; and | ||
| Margaret W. Crouthamel vs. Edward H. Kennedy, et al., filed in the U.S. District Court for the Western District of Pennsylvania (Case No. 2:11-cv-00403-RCM) on March 28, 2011. |
On April 1, 2011, we filed a
definitive proxy statement describing the proposed merger. On April 5, 2011, the Tencza and Vladimir Gusinsky Revocable Trust cases were consolidated at In
re Tollgrade Communications, Inc. Derivative and Class Action Litigation, Consolidated Case No.
GD-11-003755. On April 19, 2011, the Vladimir Gusinsky Revocable Trust case was severed and
voluntarily dismissed by the plaintiff with the courts approval. On April 27, 2011, we and the
plaintiffs in Tencza and Equity Benefit Partners reached an agreement in principle providing for
the settlement and dismissal of their lawsuits. Pursuant to that agreement, we agreed to make
certain supplemental disclosures regarding the proposed merger and filed a supplement (the
supplement) to our definitive proxy statement on April 27, 2011.
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Although a final settlement amount has yet to be reached, we have accrued $0.4 million as our
estimate of what we believe the anticipated outcome may be.
Item 1A. RISK FACTORS
In addition to the other information set forth in this Form 10-Q, we wish to caution each reader of
this Form 10-Q to carefully consider the factors discussed in Part I, Item 1A, Risk Factors in
our Annual Report on Form 10-K for the year ended December 31, 2010 (our 2010 Form 10-K), which
could materially affect our business, financial condition or future results. There are no material
changes in our risk factors from those disclosed in our 2010 Form 10-K.
Item 6. EXHIBITS
(a) | Exhibits: |
The following exhibits are being filed with this report:
Exhibit | ||
Number | Description | |
2.1
|
Agreement and Plan of Merger, dated as of February 21, 2011, by and among Talon Merger Sub, Inc., a Pennsylvania corporation, Talon Holdings, Inc., a Delaware corporation, and Tollgrade Communications, Inc., a Pennsylvania corporation, filed as Exhibit 2.1 to the Companys report on Form 8-K filed with the SEC on February 25, 2011. | |
10.1
|
Second Amendment to Agreement, dated as of February 20, 2011, by and between Tollgrade Communications, Inc., a Pennsylvania corporation, and Michael D. Bornak, filed as Exhibit 10.1 to the Companys report on Form 8-K filed with the SEC on February 25, 2011. | |
10.2
|
First Amendment to Agreement, dated as of February 20, 2011, by and between Tollgrade Communications, Inc., a Pennsylvania corporation, and Edward H. Kennedy, filed as Exhibit 10.2 to the Companys report on Form 8-K filed with the SEC on February 25, 2011. | |
10.3
|
Summary of 2011 Commission Program for Robert H. King, filed as Exhibit 10.26 to the Companys Annual Report on Form 10-K filed with the SEC on March 10, 2011 (the 2010 10-K). | |
10.4
|
Amendment dated February 20, 2011 to Agreement in effect between the Company and Gregory M. Nulty, filed as Exhibit 10.34 to the Companys 2010 10-K. | |
10.5
|
Amendment dated February 20, 2011 to Agreement in effect between the Company and Jennifer M. Reinke, filed as Exhibit 10.35 to the Companys 2010-10-K. | |
31.1
|
Certification of Chief Executive Officer, filed herewith. | |
31.2
|
Certification of Chief Financial Officer, filed herewith. | |
32
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18.U.S.C. Section 350, filed herewith. |
LoopCare is a trademark of Tollgrade Communications, Inc.
LTSC is a trademark of Tollgrade Communications, Inc.
®Tollgrade is a registered trademark of Tollgrade Communications, Inc.
®MCU is a registered trademark of Tollgrade Communications, Inc.
®4TEL is a trademark of Tollgrade Communications, Inc.
®Celerity is a trademark of Tollgrade Communications, Inc.
All other trademarks are the property of their respective owners.
LTSC is a trademark of Tollgrade Communications, Inc.
®Tollgrade is a registered trademark of Tollgrade Communications, Inc.
®MCU is a registered trademark of Tollgrade Communications, Inc.
®4TEL is a trademark of Tollgrade Communications, Inc.
®Celerity is a trademark of Tollgrade Communications, Inc.
All other trademarks are the property of their respective owners.
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SIGNATURES
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 10, 2011 |
||||
/s/ Edward H. Kennedy | ||||
Edward H. Kennedy | ||||
Chief Executive Officer and President | ||||
Dated: May 10, 2011 |
||||
/s/ Michael D. Bornak | ||||
Michael D. Bornak | ||||
Chief Financial Officer and Treasurer |
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EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
(Pursuant to Item 601 of Regulation S-K)
Exhibit | ||
Number | Description | |
2.1
|
Agreement and Plan of Merger, dated as of February 21, 2011, by and among Talon Merger Sub, Inc., a Pennsylvania corporation, Talon Holdings, Inc., a Delaware corporation, and Tollgrade Communications, Inc., a Pennsylvania corporation, filed as Exhibit 2.1 to the Companys report on Form 8-K filed with the SEC on February 25, 2011. | |
10.1
|
Second Amendment to Agreement, dated as of February 20, 2011, by and between Tollgrade Communications, Inc., a Pennsylvania corporation, and Michael D. Bornak, filed as Exhibit 10.1 to the Companys report on Form 8-K filed with the SEC on February 25, 2011. | |
10.2
|
First Amendment to Agreement, dated as of February 20, 2011, by and between Tollgrade Communications, Inc., a Pennsylvania corporation, and Edward H. Kennedy, filed as Exhibit 10.2 to the Companys report on Form 8-K filed with the SEC on February 25, 2011. | |
10.3
|
Summary of 2011 Commission Program for Robert H. King, filed as Exhibit 10.26 to the Companys Annual Report on Form 10-K filed with the SEC on March 10, 2011 (the 2010 10-K). | |
10.4
|
Amendment dated February 20, 2011 to Agreement in effect between the Company and Gregory M. Nulty, filed as Exhibit 10.34 to the Companys 2010 10-K. | |
10.5
|
Amendment dated February 20, 2011 to Agreement in effect between the Company and Jennifer M. Reinke, filed as Exhibit 10.35 to the Companys 2010-10-K. | |
31.1
|
Certification of Chief Executive Officer, filed herewith. | |
31.2
|
Certification of Chief Financial Officer, filed herewith. | |
32
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18.U.S.C. Section 350, filed herewith. |
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