Mail Stop 3561
September 23, 2005
Via U.S. Mail and Fax (412- 820-1530)
Mr. Samuel C. Knoch
Chief Financial Officer
Tollgrade Communications, Inc.
493 Nixon Road
Cheswick, PA 15024
Re: Tollgrade Communications, Inc.
Form 10-K for Fiscal Year Ended December 31, 2004
Filed March 3, 2005
Form 10-Q for Fiscal Quarter Ended June 25, 2005
File No. 0-27312
Dear Mr. Knoch:
We have reviewed your supplemental response letter dated
August
31, 2005 as well as the above referenced filings and have the
following comment. As noted in our comment letter dated July 25,
2005, we have limited our review to only the issues addressed in
our
letter and will make no further review of your documents. As
such,
all persons who are responsible for the adequacy and accuracy of
the
disclosure are urged to be certain that they have included all
information required pursuant to the Securities Exchange Act of
1934.
Form 10-K for the fiscal year ended December 31, 2004
Intangible Assets and Goodwill, page 26
1. Please refer to prior comment #2. We have reviewed your
response
and have the following comments:
* Tell us why it is appropriate to use the average stock price for
a
12 month period to estimate the fair value of your reporting unit.
Also, tell us why it is not appropriate to use the stock price at
the
date of your impairment test. Further, tell us the total fair
value
calculated based on your average stock price.
* You state that the average stock price for a 12 month period is
not
representative of your reporting unit`s fair value because your
stock
price has been higher than your book value in a number of
individual
dates in 2005. Tell us why it is appropriate for your impairment
analysis to consider a "temporary decline" in your fair value.
Also,
tell us how a number of individual dates where the price is higher
than your book value weighs more heavily than when the number of
individual dates where the stock price is lower than your book
value.
* Tell us how you considered any control premium in determining
your
fair value. Also, tell us the amount assigned to the control
premium.
* You state you will obtain a third party valuation if the lower
market value conditions continue to exist. Tell us why it is
appropriate to change your impairment testing methodology.
* The annual test for goodwill impairment is required and must be
done exclusive of a triggering event. Your statement that the
temporary decline is not a triggering event is inconsistent with
your
discussion of annual testing.
Note 2. Intangible Assets, page 46
Please refer to prior comment #9. We have reviewed your response
and
have the following comments.
LoopCare Business Software
2. Please tell us how you have considered the competitive,
economic
and technological factors in evaluating your LoopCare Base
Software
as an indefinite-lived intangible asset as discussed in your
filing.
More specifically address, the downturn in the telecommunications
industry, the RBOCs considerable slowing of capital investment in
POTS lines, and the new focus on fiber-optic technology, wireless
and
VoIP communications. Also, tell us how you considered the term of
any patents related to the LoopCare Base Software. Refer to
paragraphs 11(d) and 11(e) of FAS 142.
3. Please tell us whether there have been any modifications to the
original LoopCare Base Software Code prior to and after the
acquisition of the software. Also, tell us the nature of these
modifications.
4. Please tell us the amount of your annual maintenance costs for
the
LoopCare Base software in relation to its carrying value. If you
have concluded that such costs are minimal, tell us your basis for
your conclusion. Refer to paragraph 11(f) of FAS 142.
Post Warranty Maintenance Agreements
5. We note that you entered into two software maintenance
agreements
in 2004 with two RBOCs for a one year term that expires on
December
31, 2005. Your previous three year software maintenance agreement
with another RBOC expires on December 31, 2005. Further, you
entered
into a software maintenance agreement in early 2005 with the
remaining RBOC for a two year term. It appears to us that these
maintenance agreements are not automatically renewed and are
relatively short-term in nature. Also, it appears that there are
economic changes taking place with the RBOCs. Please tell us in
more
detail how you considered these factors in concluding that your
software maintenance agreements are an indefinite-lived asset. We
understand that these agreements were renewed over the past 30
years.
Refer to paragraphs 11(c), 11(d) and 11(e) of FAS 142.
6. Please tell us whether there have been any material
modifications
to the original terms and conditions of your software maintenance
agreements. We understand that each party has the right or
ability
to make changes to these agreements through the renewal
negotiation
process. Include in your response a discussion of the changes
made
during each renewal process and the modifications made over
several
renewal periods, the types of changes made to the original terms
and
conditions, and whether you expect future changes or modifications
in
these agreements.
Cheetah Customer Base
7. Please tell us if you have experienced any loss of Cheetah
customers since the original customer base was acquired in
February
2003. Also, tell us the historical customer turnover experienced
by
Acterna LLC prior to the acquisition.
8. You disclose that the market for your cable television testing
equipment is "highly competitive." We also note your disclosure
in
the Form 10-Q for the period ended June 30, 2005 that the overall
sales of cable hardware and software products has decreased, you
have
experience increased competition, and the standardization of these
products has allowed customers to purchase system components from
a
number of vendors. Based on the foregoing, please tell us in more
detail why the embedded base in your equipment "establishes
significant barriers to entry by competitors as well as
significant
economic barriers to replacement by the customer." Also, tell us
why
a life of 10 years based on historical data is not appropriate for
your Cheetah customer base.
* * * *
Please respond to this comment within 10 business days or
tell
us when you will provide us with a response. Please furnish a
letter
that keys your responses to our comments and provides any
requested
information. Detail letters greatly facilitate our review.
Please
file your response letter via EDGAR. You may contact Bob Carroll,
Staff Accountant, at (202) 551-3362 or Dean Suehiro, at (202) 551-
3384 if you have questions regarding comments on the financial
statements and related matters. Please contact me at (202) 551-
3810
if you have any other questions.
Sincerely,
/s/ Kyle Moffatt for
Larry Spirgel
Assistant Director
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Mr. Samuel C. Knoch
Tollgrade Communications, Inc.
Page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
DIVISION OF
CORPORATION FINANCE