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| TLGD > SEC Filings for TLGD > Form 10-Q on 7-May-2009 | All Recent SEC Filings |
7-May-2009
Quarterly Report
As described in the Form 10-K, management completed a comprehensive strategic
review of all our businesses in 2008 to address these trends. As a result of the
review, we determined that the appropriate strategy for the Company included
focusing our strategic efforts and resources on the substantial and growing
telecom service assurance market, where we have a significant installed customer
base, and use this position to expand into adjacent markets and developing an
integrated software platform that will serve multiple applications and products
for the telecom industry including the next-generation IP service assurance
market.
Products
Services
Our services offerings include software maintenance and support for our
operating support systems ("OSS") offerings and hardware maintenance for the
test probes, as well as our professional services, which are designed to ensure
that all of the components of our customers' test systems operate properly. The
primary customers for our services offerings are the large domestic carriers and
international customers. We have a number of large service agreements with these
customers which cover both software and hardware maintenance for our products.
Historically, our services business was comprised of the more traditional
POTS-based testability services, and the revenue stream was largely
project-based and as such, difficult to predict. During the last few years, and
primarily as a result of the Broadband Test Division acquisition, the services
business has moved toward more contract-based software maintenance services, the
revenue from which is more predictable. Because of this increase, our focus on
our software applications as part of our refined strategy, and the decline in
revenues from our other product lines, we expect services to continue to
comprise a larger percentage of our revenue in the future. During the first
quarter of 2009 we finalized a multi-year software maintenance agreement for one
of the three major software maintenance contract renewals which were open at the
end of 2008. In addition, we also entered into a new, multi-year managed
services contract with a large global network equipment provider to provide
customer support and engineering services.
Telecommunications Test and Measurement Products
Our proprietary telecommunications test and measurement products, which include
our System Test and MCU® products, enable telephone companies to qualify and
troubleshoot broadband DSL and IP services and remotely diagnose problems in
POTS lines. Most DSL lines today provide broadband Internet access for
residential and business customers, fed from a central or remote office Digital
Subscriber Line Access Multiplexer ("DSLAM") and configured with either a shared
POTS voice service or "unbundled" from the voice switch entirely (in the case of
a competitive local exchange carriers ("CLECs") service offering). Our systems
can be used to qualify loops for DSL service as well as ongoing maintenance and
repair of these "IP" lines. As telecommunications service providers move to all
IP networks and services (voice, video and data), Tollgrade's test systems are
positioned to be upgraded to support the testing of these services. POTS lines
provide traditional voice service as well as connections for communication
devices such as computer modems and fax machines. POTS excludes non-switched and
private lines, such as data communications service lines, commonly referred to
as "special services."
An important aspect of efficiently maintaining a telecommunications network is
the ability to remotely test, diagnose and locate any service-affecting problems
within that network. Tollgrade's System Test Products are made up of a
centralized test operating system integrated into the customers' repair handling
database systems, and remote test hardware located at telephone companies'
central and remote offices. These systems enable local exchange carriers to
conduct a full range of fault diagnostics in the "local loop," the portion of
the telephone network that connects end users to the central office. In
addition, line test systems provide the capability to remotely qualify, deploy
and maintain services such as DSL and Integrated Services Digital Network
("ISDN") services which are carried over POTS lines. These test systems reduce
the time needed to identify and resolve problems, eliminating or reducing the
costs of dispatching a technician to the problem site. Most POTS line test
systems, however, were designed only for use over copper wire line; as a result,
traditional test systems could not access local loops in which fiber-optic
technology had been introduced. Our MCU product line, which is used primarily by
large domestic carriers, solved this problem, extending LoopCare™ testing from
the central office to the fiber-fed remote Digital Loop Carrier ("DLC") lines by
mimicking a digital bypass pair, which is essentially a telephone circuit that
connects central test and measurement devices to the copper circuits close to
the customer, i.e., "the last mile."
We believe our DigiTest system is well positioned for the present and future of
telecommunication network testing, combining our line test system with a next
generation test platform to provide a complete test system solution for POTS and
DSL local loop prequalification and in-service testing.
During 2008, the Company determined after a thorough strategic review process to
reposition itself with a greater focus on its service assurance offerings. The
Company intends to build upon the strength of its System Test Products, which
are at the center of our service assurance offerings, but with a greater
emphasis on expanding our service assurance software solutions. Our System Test
product software offerings include four separate OSS: LoopCare, 4TEL, Celerity,
and LTSC™, each having an established installed base. LoopCare is also the
primary application for broadband DSL testing and can be architected to overlay
4TEL and LTSC to add this functionality to the existing line test application
with the addition of the DigiTest measurement platform. We plan to leverage
these software incumbencies, and extend testing coverage to next generation
network architectures. The implementation of our strategy initially will expand
upon existing customer requests for enhanced features and capabilities.
Our legacy MCU products plug into DLC systems, the large network transmission
systems used by telephone companies to link the copper and fiber-optic portions
of the local loop. MCU products allow our customers to extend their line testing
capabilities to all of their POTS lines served by a DLC system regardless of
whether the system is fed by a copper or fiber optic link. DLC systems, which
are located at telephone companies' central offices and at remote sites within
local user areas, effectively multiplex the services of a single fiber-optic
line into multiple copper lines. In many instances, several DLC systems are
located at a single remote site to create multiple local loops that serve
several thousand different end-user homes and businesses. Generally, for every
DLC remote site, customers will deploy at least two MCU line-testing products.
One of three patents for our legacy MCU products will expire during 2010, and we
expect that the loss of this patent protection will permit greater competition
within this market segment that could cause our revenues from this product line
to decline.
Cable Testing Products
The Company's Cheetah performance and status monitoring products provide a broad
network assurance solution for the broadband HFC distribution system found in
the cable television industry. Our Cheetah products gather status information
and report on critical components within the cable network. The Company's
monitoring systems include complete hardware and software solutions that enable
efficient HFC plant status monitoring. By providing a constant, proactive view
of the health and status of outside plant transmission systems, the products can
reduce operating costs and increase subscriber satisfaction. Our cable offerings
consist of CheetahXD™ broadband assurance software, our proprietary CheetahNet™
(formerly NetMentor™) software systems, maintenance, head-end controllers,
return path switch hardware, both proprietary and DOCSIS® -based transponders
and other equipment which gather status and performance reports from power
supplies, line amplifiers and fiber optic nodes. Our CheetahIP/HFC service
assurance solution allows cable operators to proactively test and monitor VoIP
using hardware test probes and software analysis tools. By layering VoIP test
point software on to DOCSIS-based transponders, the HFC access network is
populated with a Tollgrade test probe that is controlled by a software
management system, placing active on-demand and batch VoIP test calls
point-to-point across the network for remote fault diagnosis.
We continued to explore strategic opportunities with our cable business during
the first quarter of 2009, and on May 1, 2009, the Company entered into an
agreement with Cheetah Technologies, L.P. to sell substantially all of the
assets of the Company's cable status monitoring product line (the "Agreement")
for a sale price of $3,150,000, subject to adjustment for certain items pursuant
to the terms of the Agreement. Closing of the transaction is subject to
completion of certain customary closing conditions. The Agreement provides that
the transaction is to close within ten business days after completion of the
closing conditions or no later than May 15, 2009, unless closing is delayed in
accordance with the Agreement.
Electric Utility Monitoring Products
The Company's new product development effort, the LightHouse product line, is
being designed to provide power grid monitoring capabilities to electric
utilities. Research and investment throughout 2007 and 2008 enabled the general
availability of the first release of the product line during the first quarter
of 2009. The test system solution currently consists of line mounted sensors,
aggregators, and centralized software providing an end to end solution for power
providers to efficiently monitor their overhead distribution circuits in real
time. A LightHouse sensor, mounted directly on the electrical conductor, will
continuously monitor key circuit parameters and transmit data over a wireless
network to a central location, reducing time of detecting a problem on the grid,
identifying its location and restoring service. LightHouse is intended as an
innovative means for electric power utilities to deploy technology to provide
real-time grid intelligence to detect faults and help minimize the impact of
outages while optimizing the utilization of assets. The system is designed to
improve the overall efficiency of energy delivery, improve customer satisfaction
and improve the financial performance of the electric utilities.
Our Customers
The Company's customers range from the top telecom and cable providers, to
numerous independent telecom, cable and broadband providers around the world.
Our primary customers for our telco products and services are large domestic and
European telecommunications service providers. The
Company tracks its telco sales by two large customer groups, the first of which
includes Qwest, AT&T and Verizon (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 2009, sales to the large domestic customers accounted for
approximately 44.4% of the Company's total revenue, compared to approximately
30.4% of total revenue for the first quarter of 2008. Sales to AT&T individually
exceeded 10% of the Company's total revenue and comprised 25.5% of the Company's
total revenue for the first quarter of 2009, compared to 20.0% of the Company's
total revenue for the first quarter of 2008. Sales in the first quarter of 2009
and 2008 to the European Telcos accounted for approximately 21.4% and 29.1%
respectively, of total revenue. For the three months ended March 28, 2009, sales
to customers in the Americas (excluding the United States) were approximately
$1.3 million or 30.2% of international sales; sales to customers in EMEA were
$2.8 million or 65.1% of international sales; and sales to customers in Asia
Pacific were $0.2 million or 4.7% of international sales. For the three months
ended March 29, 2008, sales to customers in the Americas (excluding the United
States) were approximately $0.7 million or 11.5% of international sales; sales
to customers in EMEA were $5.3 million or 86.9% of international sales; and
sales to customers in Asia Pacific were $0.1 million or 1.6% of international
sales.
Backlog
The Company's order backlog for firm customer purchase orders and signed
software maintenance contracts was $13.0 million as of March 28, 2009, compared
to a backlog of $16.3 million as of December 31, 2008. The backlog at March 28,
2009 and December 31, 2008 included approximately $9.7 million and
$12.1 million, respectively, related to software maintenance contracts, which is
primarily earned and recognized as income on a straight-line basis during the
remaining terms of these agreements. During the first quarter 2009, the Company
finalized a multi-year software maintenance agreement for one of the three major
software maintenance contract renewals which had not been completed at the end
of 2008. Expected revenue from that signed software maintenance agreement is
included in the backlog as of March 28, 2009; however, revenues from the two
other agreements that are still under negotiation are not included in backlog.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
On January 1, 2009, the Company adopted SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements-an amendment of ARB No. 51," (SFAS 160).
SFAS 160 amends Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This standard defines a noncontrolling interest, previously called a
minority interest, as the portion of equity in a subsidiary not attributable,
directly or indirectly, to a parent. SFAS 160 requires, among other items, that
a noncontrolling interest be included in the consolidated statement of financial
position within equity separate from the parent's equity; consolidated net
income to be reported at amounts inclusive of both the parent's and
noncontrolling interest's shares and, separately, the amounts of consolidated
net income attributable to the parent and noncontrolling interest all on the
consolidated statement of operations; and if a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former subsidiary be measured
at fair value and a gain or loss be recognized in net income based on such fair
value.
The adoption of SFAS 160 had no impact on the Company's consolidated financial
statements.
On January 1, 2009, the Company adopted SFAS No. 141 (revised 2007), "Business
Combinations," (SFAS 141(R)), which replaces SFAS No. 141, "Business
Combinations," (SFAS 141) but retains the fundamental requirements in SFAS 141,
including that the purchase method be used for all business combinations and for
an acquirer to be identified for each business combination. This standard
defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as
the date that the acquirer achieves control instead of the date that the
consideration is transferred. SFAS 141(R) requires an acquirer in a business
combination, including business combinations achieved in stages (step
acquisition), to recognize the assets acquired, liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions. It also requires the
recognition of assets acquired and liabilities assumed arising from certain
contractual contingencies as of the acquisition date, measured at their
acquisition-date fair values. Additionally, SFAS 141(R) requires
acquisition-related costs to be expensed in the period in which the costs are
incurred and the services are received instead of including such costs as part
of the acquisition price. The impact of the adoption of SFAS 141R will depend on
the nature and extent of business combinations occurring on or after the
effective date.
On January 1, 2009, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 157, "Fair Value Measurements," (SFAS 157) as it relates to
nonfinancial assets and nonfinancial liabilities that are not recognized or
disclosed at fair value in the financial statements on at least an annual basis.
SFAS 157 defines fair value, establishes a framework for measuring fair value in
accounting principles generally accepted in the United States of America (GAAP),
and expands disclosures about fair value measurements. The provisions of this
standard apply to other accounting pronouncements that require or permit fair
value measurements and are to be applied prospectively with limited exceptions.
See Note 5 for the effect of the adoption of SFAS 157, as it relates to
nonfinancial assets and nonfinancial liabilities, on the Company's consolidated
financial statements. The provisions of SFAS 157 will be applied at such time a
fair value measurement of a nonfinancial asset or nonfinancial liability is
required, which may result in a fair value that is materially different than
would have been calculated prior to the adoption of SFAS 157.
On January 1, 2009, the Company adopted FASB Staff Position (FSP) No. FAS 142-3,
"Determination of the Useful Life of Intangible Assets," (FSP FAS 142-3). FSP
FAS 142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under FASB Statement No. 142, "Goodwill and Other Intangible
Assets," (SFAS 142) in order to improve the consistency between the useful life
of a recognized intangible asset under SFAS 142 and the period of expected cash
flows used to measure the fair value of the asset under SFAS 141 (R) and other
GAAP. The adoption of FSP FAS 142-3 had no impact on the Financial Statements.
On January 1, 2009, the Company adopted FSP No. EITF 03-6-1, "Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities," (FSP EITF 03-6-1). FSP EITF 03-6-1 states that
unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings per share
pursuant to the two-class method. The adoption of FSP EITF 03-6-1 had no impact
on the Financial Statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2009, the FASB issued FASB Staff Position ("FSP") FAS No. 107-1 and
Accounting Principles Board ("APB") Opinion No. 28-1, Interim Disclosures about
Fair Value of Financial Instruments ("FSP FAS No. 107-1 and APB Opinion
No. 28-1"), which amends the disclosure requirements of SFAS No. 107 and APB
Opinion No. 28 and requires disclosure about the fair value of its financial
instruments whenever it issues summarized financial information for interim
reporting periods. FSP FAS No. 107-1 and APB Opinion No. 28-1 are effective for
financial statements issued for interim reporting periods ending after June 15,
2009. The Company is currently evaluating the impact of the adoption of FSP FAS
No. 107-1 and APB Opinion No. 28-1 on its consolidated financial statements.
In April 2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, Recognition
and Presentation of Other-Than-Temporary Impairments ("FSP FAS No. 115-2 and FAS
No. 124-2"), which amends SFAS No. 115 and FSP FAS No. 115-1 and FSP FAS
No. 124-1 and conforms changes to other standards including EITF Issue No. 99-20
and AICPA Statement of Position ("SOP") No. 03-3, Accounting for Certain Loans
or Debt Securities Acquired in a Transfer, and improves the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. FSP FAS No. 115-2 and FAS No. 124-2 are effective for
interim and annual reporting periods ending after June 15, 2009. The Company is
currently evaluating the impact of the adoption of FSP FAS No. 115-2 and FAS
No. 124-2 on its consolidated financial statements.
In April 2009, the FASB issued FSP FAS No. 157-4, Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly ("FSP FAS
No. 157-4"), which provides additional guidance for estimating fair value in
accordance with SFAS No. 157, Fair Value Measurements, when the volume and level
of activity for the asset or liability have significantly decreased. This FSP
also includes guidance on identifying circumstances that indicate a transaction
is not orderly and applies to all assets and liabilities within the scope of
accounting pronouncements that require or permit fair value measurements, except
in paragraphs 2 and 3 of SFAS No. 157. FSP FAS No. 157-4 is effective for
interim and annual reporting periods ending after June 15, 2009. The Company is
currently evaluating the impact of the adoption of FSP FAS No. 157-4 on its
consolidated financial statements.
In December 2008, the FASB issued FSP 132(R)-1, "Employers' Disclosures about Postretirement Benefit Plan Assets." FSP 132(R)-1 amends SFAS 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits," to provide guidance on an employer's disclosures about plan assets of a defined benefit pension or other postretirement plan. This FSP is effective for fiscal years ending after December 15, 2009. The Company does not expect this adoption to have a material impact on our financial statements.
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 the Company
can be found in "Quantitative and Qualitative Disclosures about Market Risk" in
this Quarterly Report on Form 10-Q.
A summary of the Company's significant accounting policies are included in the
Notes to Consolidated Financial Statements and in the critical accounting
policies in Management's Discussion and Analysis included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2008. Management
believes that the application of these policies on a consistent basis enables
the Company to provide useful and reliable financial information about the
company's operating results and financial condition. There were no changes to
our critical accounting policies during the first quarter of 2009.
RESULTS OF OPERATIONS
FIRST QUARTER OF 2009 COMPARED TO FIRST QUARTER OF 2008
Revenues
The Company's revenues for the first quarter of 2009 were $12.0 million compared
to revenues of $13.2 million for the first quarter of 2008.
Services revenue consists of installation oversight and product management
services provided to customers and fees from software maintenance agreements and
service applications. Services revenue was approximately $4.9 million in the
. . .
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