SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<Table>
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11c or Section 240.14a-12
</Table>
Tollgrade Communicatioins, Inc.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------------------
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(4) Date Filed:
----------------------------------------------------------------------
[TOLLGRADE logo]
TOLLGRADE COMMUNICATIONS, INC.
493 NIXON ROAD, CHESWICK, PENNSYLVANIA 15024
MARCH 26, 2003
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 13, 2003
To The Shareholders of Tollgrade Communications, Inc.:
Notice is hereby given that the Annual Meeting of Shareholders of TOLLGRADE
COMMUNICATIONS, INC. (the "Company") will be held at The Holiday Inn R.I.D.C.,
180 Gamma Drive, Pittsburgh, PA 15238, on Tuesday, May 13, 2003 at 3:00 p.m.,
local time, for the purpose of considering and acting upon the following:
(1) The election of two directors to serve for a three-year term or until
their respective successors shall have been elected and shall have
qualified.
(2) Such other matters as may properly be brought before the meeting.
The close of business on March 7, 2003 has been fixed by the Board of Directors
as the record date for the determination of shareholders entitled to notice of
and to vote at said meeting.
Enclosed you will find a proxy card, which should be completed and
returned in order to vote all Common Stock which you hold. The Company's 2002
Annual Report to Shareholders is also enclosed.
You are cordially invited to attend the Annual Meeting of Shareholders.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, WE URGE YOU TO PLEASE
SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE
PAID ENVELOPE SO THAT YOUR SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES
AND IN ORDER THAT THE PRESENCE OF A QUORUM IS ASSURED AT THE ANNUAL MEETING.
SHAREHOLDERS WHO ATTEND THE ANNUAL MEETING MAY VOTE THEIR SHARES PERSONALLY EVEN
THOUGH THEY HAVE SENT IN THEIR PROXIES.
By Order of the Board of Directors,
/s/ Sara M. Antol
Sara M. Antol
General Counsel and Corporate Secretary
This page intentionally left blank.
TOLLGRADE COMMUNICATIONS, INC.
CHESWICK, PENNSYLVANIA 15024
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
MAY 13, 2003
The solicitation of the proxy or proxies enclosed with this Proxy Statement is
made on behalf of the Board of Directors of Tollgrade Communications, Inc. (the
"Company"), 493 Nixon Road, Cheswick, Pennsylvania 15024, for use at the annual
meeting of shareholders (the "Annual Meeting") to be held on May 13, 2003 at
3:00 p.m., at The Holiday Inn R.I.D.C., 180 Gamma Drive, Pittsburgh, PA 15238.
It is expected that this Proxy Statement, the accompanying notice of annual
meeting, the proxy cards and the Company's Annual Report will be mailed to
shareholders on or about March 26, 2003. At the Annual Meeting, the shareholders
of the Company will be asked to consider and vote upon the following:
(1) The election of two directors to serve for a three-year term or until
their respective successors shall have been elected and shall have
qualified.
(2) Such other matters as may properly be brought before the meeting.
As of the close of business on March 7, 2003 (the "Record Date"), the
Company had 13,552,736 outstanding shares of common stock, par value $.20 (the
"Common Stock"). Holders of Common Stock of record at the close of business on
the Record Date are entitled to notice of, and to vote on all matters that may
properly come before, the Annual Meeting. Each share of the Company's Common
Stock entitles the holder thereof to one vote on all matters submitted to the
shareholders. Under the Company's Amended and Restated Articles of
Incorporation, shareholders do not have cumulative voting rights in the election
of directors. The presence in person or by proxy of shareholders entitled to
cast at least a majority of all votes entitled to be cast at such meeting shall
constitute a quorum.
The proxy solicited hereby may be revoked at any time before its
exercise by giving notice of revocation to the Secretary of the Company, or by
executing and delivering a proxy bearing a later date or by attending and voting
at the Annual Meeting or any adjournment thereof. Unrevoked proxies will be
voted at the meeting in accordance with the specifications made thereon, but in
the absence of such specifications will be voted FOR each proposal. Unsigned and
undated proxies will not be voted.
3
PROPOSAL 1
ELECTION OF DIRECTORS
The Company's Board of Directors (the "Board") is divided into three classes.
Each class of directors serves for a three year term, with one class being
elected by the Company's shareholders at each annual meeting. Messrs. Barnes and
Mullins serve as directors with terms of office expiring at the 2003 Annual
Meeting. Dr. Heibel and Mr. Kampmeinert serve as directors with terms of office
expiring at the 2004 Annual Meeting. Messrs. Allison, Barry and Egan serve as
directors with terms of office expiring at the 2005 Annual Meeting. In addition,
Rocco Flaminio, age 78, who served as a member of the Board since 1995, decided
not to stand for reelection at the expiration of his term at the 2003 Annual
Meeting, but will serve as a non-voting director emeritus.
Two directors will be elected at the Annual Meeting to serve three-year
terms expiring on the date of the Annual Meeting of Shareholders to be held in
2006 and until their respective successors shall have been qualified. The
Corporate Governance Committee of the Board of Directors has nominated Messrs.
Barnes and Mullins as its nominees for election to the Board at the Annual
Meeting; each will be elected to serve until the 2006 Annual Meeting and until
their successors are duly elected and qualified. Unless otherwise instructed,
the persons named in the accompanying proxy will vote, as permitted by the
Amended and Restated Bylaws of the Company, to elect Messrs. Barnes and Mullins
to the Board of Directors.
Only affirmative votes are counted in the election of directors. The
two nominees for election as directors at the Annual Meeting who receive the
highest number of votes cast for the election of directors by the holders of the
Company's Common Stock present in person or voting by proxy, a quorum being
present, will be elected as directors. Although it is expected that the nominees
of the Corporate Governance Committee of the Board will be available for
election, if either of them becomes unable or is unwilling to serve at the time
the election occurs, it is intended that shares represented by proxies will be
voted for the election of the other substituted nominees, if any, as shall be
designated by the Company's Corporate Governance Committee of the Board of
Directors.
THE CORPORATE GOVERNANCE COMMITTEE OF THE BOARD OF DIRECTORS RECOMMENDS A VOTE
FOR ITS NOMINEES.
The following table sets forth certain information regarding the nominees and
the continuing directors as of the Record Date. Except as otherwise indicated,
each nominee and director has held the principal occupation listed or another
executive position with the same entity for at least the past five years.
4
- ----------------------------------------------------------------------------------------------------------------------
NAME DIRECTOR SINCE PRINCIPAL OCCUPATION; OTHER DIRECTORSHIPS; AGE
- ----------------------------------------------------------------------------------------------------------------------
Nominees with a term expiring in 2006:
James J. Barnes 1997 Partner and attorney at ReedSmith LLP, a law firm, since
February 2002; prior thereto, shareholder and attorney at
Buchanan Ingersoll, PC, a law firm; Age 41.
Brian C. Mullins 2002 Retired; formerly, Senior Vice President, Chief Financial
Officer and Treasurer at Tuscarora Incorporated, a
manufacturer of protective packaging and material-handling
products, since 1976; Age 62.
Continuing Directors with a term expiring in 2005:
Christian L. Allison 1992 Chairman of the Board since April 1998; Chief Executive
Officer since September 1995; also Treasurer of the Company
from May 1992 until April 1997; President of the Company from
October 1993 until January 2001; Chief Operating Officer of
the Company from November 1990 until October 1993; Age 42.
Daniel P. Barry 1995 Private investor; formerly, director of AMSCO International, a
manufacturer of medical equipment, from January 1990 until
1996 and Vice Chairman from July 1995 until May 1996;
President and Chief Executive Officer of AMSCO from October
1994 until July 1995, and Senior Vice President, Finance and
Administration at AMSCO from June 1991 until February, 1993;
Age 55.
David S. Egan 1998 Chief Marketing Officer, ReedSmith LLP, a law firm, since
January of 2002; prior thereto, President, Clubcom, Inc., a
provider of communication devices to private broadcast
networks, from September 2000 to January of 2002; prior
thereto, Vice President, Blattner Brunner, an advertising
firm, from June 2000 until September 2000; prior thereto,
President, Egan/St. James, Inc., an advertising firm, an EPB
partner company, from June 1999 until June 2000; prior
thereto, President, Ketchum Advertising; Age 46.
Continuing directors with a term expiring in 2004:
Richard H. Heibel, M.D. 1996 Retired; formerly, Board-certified cardiologist with the firm
Consultants in Cardiology; Age 56.
Robert W. Kampmeinert 1995 Chairman, President, Chief Executive Officer and Director,
Parker/Hunter Incorporated, an investment firm; Age 59.
</Table>
5
BOARD AND COMMITTEE MEETINGS
The Company's Board of Directors met six times during 2002. All directors
attended all of the meetings of the Board of Directors and all committees of the
Board of which they were members held during their respective terms as
directors.
The Company has a standing Compensation Committee of the Board of
Directors that reviews and makes recommendations to the Board on salary,
incentive compensation practices and benefit programs for the compensation of
the Chief Executive Officer and other key employees, and recommends to the Board
the amount and method of compensation of the Board members. In order to comply
with the requirements of Rule 16b-3 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), the Company has a subcommittee of the
Compensation Committee called the Stock Compensation Subcommittee, which
administers the Company's 1995 Long-Term Incentive Compensation Plan and 1998
Employee Incentive Compensation Plan. The members of the Compensation Committee
are Dr. Heibel and Messrs. Barnes, Barry and Kampmeinert; the members of the
Stock Compensation Subcommittee are Dr. Heibel and Mr. Barry. The Compensation
Committee held five meetings in 2002.
The Company also has a standing Corporate Governance Committee of the
Board, which is charged with, among other things, reviewing and supervising
issues of corporate governance and director qualification and independence.
Because the Corporate Governance Committee consists solely of the Company's
outside directors, the Board by resolution provided that the Corporate
Governance Committee assume all of the responsibilities of the Nominating
Committee as set forth in the Company's Amended and Restated Bylaws, including
but not limited to the duty of recommending nominees to the Board to fill Board
vacancies and the membership of the committees of the Board when a vacancy
occurs through retirement or otherwise. The current members of the Corporate
Governance Committee are Dr. Heibel and Messrs. Barnes, Barry, Egan, Kampmeinert
and Mullins. The Corporate Governance Committee will consider a nominee
recommendation by a shareholder for election to the Board of Directors if such
recommendation is presented on a timely basis in accordance with, and if such
recommendation accompanies the information required by, the Company's Amended
and Restated Bylaws and the Exchange Act. The Corporate Governance Committee
held five meetings in 2002.
The Investment Committee of the Board of Directors is responsible for
overseeing the management of the Company's investments. The members of the
Investment Committee are Dr. Heibel and Messrs. Egan and Kampmeinert. The
Investment Committee did not meet in 2002, but met in January, 2003 to review
the Company's fiscal year 2002 portfolio performance.
The Company has a standing Audit Committee of the Board of Directors
that engages the independent public accountants to audit the financial
statements of the Company, reviews the proposed scope and results of the audit,
and reviews the scope, adequacy and results of the Company's internal
6
audit and control procedures. During fiscal year 2002, the Board of Directors
updated the Audit Committee Charter. The original Charter was adopted on August
27, 1996 and revised in July, 1999, October, 2000, and October, 2001. Additional
amendments to the audit charter were proposed and formally adopted by the
Committee on May 7, 2002. The complete text of the amended Charter is reproduced
in Exhibit A to this Proxy Statement. The current members of the Audit Committee
are Dr. Heibel and Messrs. Barry and Mullins. Mr. Kampmeinert served on the
Audit Committee during calendar year 2002, but was replaced by Mr. Mullins on
January 22, 2003, when Mr. Mullins became a member of the Board. The members of
the Audit Committee are "independent" as that term is defined by Rule
4200(a)(15) of the listing standards of the National Association of Securities
Dealers.
REPORT OF THE AUDIT COMMITTEE
Pursuant to the Audit Committee Charter, the primary responsibilities
of the Audit Committee are to assure the directors, regulators and shareholders
that the Company's business controls are adequate and effective, the financial
accounting and reporting practices are of the highest quality and that the
Company is complying with applicable rules and regulations relating thereto.
The Audit Committee has implemented procedures to ensure that during
the course of each fiscal year it devotes the attention that it deems necessary
or appropriate to each of the matters assigned to it under the Committee's
charter. To carry out its responsibilities, the Committee met eight times during
fiscal year 2002.
In overseeing the preparation of the Company's financial statements,
the Committee met with both management and the Company's outside auditors,
PricewaterhouseCoopers LLP ("PwC"), to review and discuss all financial
statements prior to their issuance and to discuss significant accounting issues.
Management advised the Committee that all financial statements were prepared in
accordance with generally accepted accounting principles, and the Committee
discussed the statements with both management and PwC. The Committee's review
included discussion with PwC of matters that are required to be discussed
pursuant to Statement on Auditing Standards No. 61 (Communication with Audit
Committees).
The Committee also discussed with PwC matters relating to PwC's
independence, including disclosures made by PwC to the Committee as required by
the Independence Standards Board Standard No. 1 (Independence Discussions with
Audit Committees).
On the basis of these reviews and discussions, the Committee
recommended to the Board of Directors that the Board approve the inclusion of
the Company's audited consolidated financial statements in the Company's annual
report on Form 10-K for the fiscal year ended December 31, 2002, for filing with
the Securities and Exchange Commission.
7
MEMBERS OF THE AUDIT COMMITTEE:
Daniel P. Barry, Chairman
Richard H. Heibel, M.D.
Robert W. Kampmeinert*
Brian C. Mullins
*Mr. Kampmeinert was replaced by Mr. Mullins on the Audit Committee, effective
January 22, 2003.
THE FOREGOING REPORT OF THE AUDIT COMMITTEE DOES NOT CONSTITUTE SOLICITING
MATERIAL AND SHOULD NOT BE DEEMED FILED OR INCORPORATED BY REFERENCE INTO ANY
OTHER COMPANY FILING UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, EXCEPT TO THE EXTENT THAT THE
COMPANY SPECIFICALLY INCORPORATES THIS REPORT BY REFERENCE THEREIN AND SHALL NOT
OTHERWISE BE DEEMED TO BE FILED UNDER SUCH ACTS.
COMPENSATION OF DIRECTORS
Non-employee directors receive an annual retainer of $10,000, a fee of
$750 for attendance at each Board of Directors meeting and a fee of $500 for
attendance at each committee meeting. Pursuant to amendments to the Company's
1995 Long-Term Incentive Compensation Plan, the Board is permitted to make
grants and awards under the Plan from time to time to non-employee directors.
During 2002, the Board made non-qualified stock option grants pursuant
to the Company's 1995 Long-Term Incentive Compensation Plan in the amount of
5,000 shares of Common Stock to each of its non-employee directors: James J.
Barnes; Daniel P. Barry; David S. Egan; Dr. Richard H. Heibel; and Robert W.
Kampmeinert. These option grants were made with an exercise price equal to the
fair market value of the Company's Common Stock on the date of grant, were
immediately exercisable and remain outstanding for a period of ten years. If a
non-employee director ceases to be a director for any reason other than
resignation, removal for cause or death, then the options are exercisable for a
period of one year from the date the non-employee director ceases to be a
director or the expiration date of such options, whichever is longer.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information regarding
compensation received in all capacities by the Chief Executive Officer and the
four other most highly compensated executive officers of the Company (the "Named
Executive Officers") for the years ended December 31, 2002, 2001 and 2000:
8
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
SECURITIES
RESTRICTED UNDERLYING ALL OTHER
STOCK AWARDS OPTIONS COMPENSATION
NAME/PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) (#)(1) ($)
- ----------------------------------------------------------------------------------------------------------------------
Christian L. Allison 2002 $241,177 - - - - - - - - - - - - - - - -
Chief Executive Officer 2001 $270,923 - - - - - - - - 22,000 - - - -
2000 $300,000 $184,275 (2) - - - - - - - - - - - -
Wylie E. Etscheid 2002 $189,623 $ 5,000 (3) - - - - 4,000 - - - -
Executive Vice President, New 2001 $ 62,774 (4) $ 25,000 (5) - - - - - - - - - - - -
Business Development, OSS
Products
Samuel C. Knoch 2002 $169,109 - - - - - - - - 5,000 - - - -
Chief Financial Officer and 2001 $165,000 - - - - - - - - 12,000 - - - -
Treasurer 2000 $128,628 $58,525 (2) - - - - 3,000 - - - -
Mark B. Peterson 2002 $202,977 - - - - - - - - 10,000 - - - -
President 2001 $198,044 - - - - - - - - 27,000 - - - -
2000 $288,614 (6) $ 85,819 (2) - - - - 3,000 - - - -
Gregory L. Quiggle 2002 $225,004 - - - - - - - - 1,500 - - - -
Executive Vice President, 2001 $ 86,540 (7) - - - - - - - - - - - - $108,005 (8)
Marketing
(1) All share information reflects the two-for-one split of the Company's
stock approved by the Board of Directors for all holders of record of
the Company's Common Stock as of February 28, 2000, and distributed to
the shareholders on March 20, 2000.
(2) These bonuses, which were awarded in accordance with the Company's
Management Incentive Compensation Plan, were paid to the Named
Executive Officers following the end of each fiscal year.
(3) Represents payment to Mr. Etscheid of a performance incentive bonus.
(4) Mr. Etscheid was hired on September 4, 2001, and this represents his
prorated salary paid for the year.
(5) Represents a signing bonus paid to Mr. Etscheid as part of a recruiting
package.
(6) Prior to January 2001, Mr. Peterson served as Executive Vice President,
Sales and Marketing. Includes $100,000 in commissions paid to Mr.
Peterson under the Company's sales commission programs for 2000, which
was paid to Mr. Peterson following the end of the year.
(7) Mr. Quiggle was hired on August 13, 2001, and this represents his
prorated salary paid for the year.
(8) Represents payment to Mr. Quiggle for relocation expenses as part of
his recruiting package.
9
OPTION GRANTS IN THE LAST FISCAL YEAR
The following table sets forth certain information concerning the number of
shares underlying stock option granted during the fiscal year ended December 31,
2002 to the Named Executive Officers and certain other information regarding
such stock options.
OPTIONS GRANTED IN 2002
- ----------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
OF ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM (3)
------------------------------ -----------------------------
NO. OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS
OPTIONS GRANTED TO EXERCISE
GRANTED EMPLOYEES IN PRICE/SHARE EXPIRATION
NAME (#)(1) 2002(2) ($/SH) DATE 5% 10%
- ----------------------------------------------------------------------------------------------------------------------
Christian L. Allison - - - - - - - - - - - - - - - - - - - - - - - -
Wylie E. Etscheid 2,500 (4) 1.6447 $15.835 7-18-12 $23,532.17 $60,920.02
1,500 (5) .9868 $9.485 10-24-12 $9,570.65 $23,667.08
Samuel C. Knoch 1,500 (5) .9868 $9.485 10-24-12 $9,570.65 $23,667.08
3,500 (6) 2.3026 $13.63 12-16-12 $29,488.32 $75,212.46
Gregory L. Quiggle 1,500 (5) .9868 $9.485 10-24-12 $9,570.65 $23,667.08
Mark B. Peterson 5,000 (4) 3.2895 $15.835 7-18-12 $47,064.33 $121,840.04
1,500 (5) .9868 $9.485 10-24-12 $9,570.65 $23,667.08
3,500 (6) 2.3026 $13.63 12-16-12 $29,488.32 $75,212.46
(1) Options were granted pursuant to the 1995 Long-Term Incentive
Compensation Plan (the "Plan"). The exercise price per share was equal
to the fair market value of the Company's Common Stock on the date of
grant, as calculated in accordance with the Plan. Fair market value is
the average of the high and low sales prices of the Company's Common
Stock on the date of grant on the NASDAQ National Market System as
reported in The Wall Street Journal. The exercise price may be paid in
cash, in shares of Common Stock or in any combination of cash and such
shares.
(2) A total of 152,000 options to purchase Common Stock of the Company were
granted to employees of the Company in the year ended December 31,
2002.
(3) The 5% and 10% assumed annual rates of stock price appreciation do not
reflect actual changes in the fair market value of the Company's Common
Stock since the date of grant. The information in the table is provided
in accordance with the rules of the SEC regarding the disclosure of
compensation of executive officers. The information is not intended to
forecast possible future stock price appreciation, if any.
10
(4) Options are first exercisable in three equal installments on July 18,
2002, July 18, 2003 and July 18, 2004.
(5) Options are first exercisable in three equal installments on October
24, 2002, October 24, 2003 and October 24, 2004.
(6) Options are first exercisable in three equal installments on December
16, 2002, December 16, 2003 and December 16, 2004.
OPTION EXERCISES AND VALUES
The following table sets forth certain information concerning exercises of stock
options during the fiscal year ended December 31, 2002 by each of the Named
Executive Officers and the value of unexercised options held by each of the
Named Executive Officers on December 31, 2003.
AGGREGATED OPTION EXERCISES IN 2002 AND FISCAL YEAR-END OPTION VALUES
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 12-31-02 AT 12-31-02 (#) (2)
SHARES VALUE
ACQUIRED AT REALIZED
NAME EXERCISE (#) ($) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------------------------------------------------------------------------------------------
Christian L. Allison 10,000 $155,500 258,722 7,332 $650,343.42 $0.00
Wylie E. Etscheid 0 0 28,002 15,998 $1,122.50 $2,245.00
Samuel C. Knoch 0 0 60,668 7,332 $160,662.50 $2,245.00
Mark B. Peterson 0 0 44,335 15,665 $83,222.50 $2,245.00
Gregory L. Quiggle 0 0 37,168 19,332 $1,122.50 $2,245.00
(1) The value realized is the difference between the aggregate fair market
value of the shares acquired upon exercise and the aggregate exercise
price.
(2) The value of unexercised in-the-money stock options is the difference
between aggregate fair market value of shares covered by stock options
with an exercise price less than fair market value at December 31, 2002
and the aggregate exercise price of such stock options (exercise prices
range from $6.00 to $55.8985).
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION
The Company's compensation program for its executive officers is administered by
the Compensation Committee, all of the members of which are non-employee
directors. In 2002, the members of the Company's Compensation Committee were
James J. Barnes, Daniel P. Barry, Robert W. Kampmeinert
11
and Dr. Richard H. Heibel. Mr. Kampmeinert served as the Chairman of the
Compensation Committee during 2002. The following report, which is being
submitted over the names of the current members of the Compensation Committee,
addresses the Company's compensation policies for 2002 as they affected the
Company's executive officers, including the Chief Executive Officer and the
other Named Executive Officers.
COMPENSATION PHILOSOPHY
The Company's compensation philosophy is designed to attract and retain key
employees of outstanding ability, including executive officers, to motivate
employees to perform to the full extent of their abilities, to ensure that
compensation is competitive with other leading companies in the Company's
industry and with companies of similar size, to reward employees for corporate,
group and individual performance and to align the compensation of executive
officers with the creation of long-term shareholder value.
COMPENSATION OF EXECUTIVE OFFICERS
BASE SALARY
The Company's compensation program for 2002 consisted of base salary, stock
option grants and an opportunity for payment of a bonus under the Company's
Management Incentive Compensation Plan (the "MICP"). Because the Company failed
to meet its stated operating goals, no payments were made under the MICP for
year 2002. In determining 2002 executive officer base salaries, the Committee
utilized performance-based criteria, also taking into account such factors as
competitive industry salaries and the contribution and experience of the
particular officer and the recommendation of the Chief Executive Officer. The
2002 salaries for the Named Executive Officers were approved by the Compensation
Committee applying the above criteria and also based upon the recommendation of
Mr. Allison, the Company's Chief Executive Officer. The 2002 salaries for other
executive officers not listed in the Summary Compensation Table were determined
by the Chief Executive Officer utilizing performance-based criteria, again
taking into account such factors as competitive industry salaries and the
contribution and experience of the particular officer.
BONUSES
The Company's MICP is administered by the Compensation Committee. The MICP is
applicable to the Chief Executive Officer and all other executive officers. The
objectives of the MICP are to: (i) increase the growth and profitability of the
Company in a manner which is consistent with the goals of the Company, its
shareholders and its employees; (ii) provide executive compensation which is
competitive with other high-tech companies and provide the potential for payment
of meaningful cash awards; (iii) attract and retain personnel of outstanding
ability and encourage excellence in the performance of individual
responsibilities; and (iv) motivate and reward those members of management who
contribute to
12
the success of the Company. Awards made under the MICP are based upon certain
Company performance objectives, taking into account the effect of the aggregate
bonus payment. Individual awards are based 80% on the achievement of Company
financial goals and 20% on the achievement of individual goals. All eligible
employees are provided with a group designation, which determines the percentage
of their base salary to be paid as a bonus, provided the performance objectives
are met. Under the MICP, if the Company exceeds its stated operating income goal
for the fiscal year and other requirements are met, each eligible employee is
awarded up to 110% of the amount ascribed to such employee by designation.
No payments were made to any employees for 2002 pursuant to provisions
of the MICP due to the Company's failure to meet its stated operating income
goal for the fiscal year 2002.
LONG-TERM INCENTIVE COMPENSATION
Long-term incentive compensation is provided to executive officers through the
Company's 1995 Long-Term Incentive Compensation Plan. Under this Plan, stock
option awards are based upon executive management's and the Compensation
Committee's subjective judgment concerning the responsibilities of the
individual, the nature and value to the Company of his or her services, his or
her present and/or potential contribution to the success of the Company and any
other factors deemed relevant. Stock option grants are intended to tie the
interests of the executive officers and other employees to the long-term
performance of the Company. The Compensation Committee believes that such awards
provide an effective incentive for the recipients to increase shareholder value
over the long-term. Information on stock options granted in fiscal year 2002 is
contained elsewhere in this Proxy Statement.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
The compensation program for Christian L. Allison, Chief Executive Officer, is
comprised of base salary, stock option grants and the opportunity for a bonus
payment under the MICP. In 2002, Mr. Allison received a base salary as the sole
component of his compensation. Although Mr. Allison has an employment agreement
which sets forth his base salary, in 2001, Mr. Allison requested that his base
salary be decreased from $315,000 annually to $252,000. In September, 2002, Mr.
Allison again requested that his base salary be decreased an additional 10% from
the $252,000 that he was paid in 2001. Although the Committee determined that it
would have paid Mr. Allison's contracted salary in applying the overall criteria
used to determine appropriate compensation, the Committee accepted Mr. Allison's
request and Mr. Allison's salary was reduced in September, 2002 accordingly.
No payments were made to Mr. Allison for 2002 pursuant to the
provisions of the MICP due to the Company's failure to meet its stated operating
income goal for the fiscal year 2002.
At Mr. Allison's request, no stock options were granted to him in 2002
under the Company's 1995 Long-Term Incentive Compensation Plan.
13
TAX POLICY
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"),
disallows the Company's federal income tax deductions for compensation paid to
the Chief Executive Officer and any of the other four highest compensated
executive officers in excess of $1 million each in any taxable year, subject to
certain exceptions. One exception involves compensation paid pursuant to
shareholder-approved compensation plans that are performance-based. The
Company's 1995 Long-Term Incentive Compensation Plan is structured to permit
grants of stock options and certain other awards under such Plan to be eligible
for this performance-based exception (so that compensation upon exercise of such
options or receipt of such awards, as the case may be, should be deductible
under the Code). Payments of cash compensation to executives (and certain other
benefits which could be awarded under the Plan, such as restricted stock)
currently are not eligible for this performance-based exception, although the
value of such payments and awards, when combined with other includable
compensation, is well below the $1 million limit. The Committee has taken and
intends to continue to take whatever actions are necessary to minimize the
Company's non-deductible compensation expense, while maintaining, to the extent
possible, the flexibility which the Committee believes to be an important
element of the Company's executive compensation program.
MEMBERS OF THE COMPENSATION COMMITTEE:
Robert W. Kampmeinert, Chairman
James J. Barnes
Daniel P. Barry
Richard M. Heibel, M.D.
THE FOREGOING REPORT OF THE COMPENSATION COMMITTEE DOES NOT CONSTITUTE
SOLICITING MATERIAL AND SHOULD NOT BE DEEMED FILED OR INCORPORATED BY REFERENCE
INTO ANY OTHER COMPANY FILING UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, EXCEPT TO THE EXTENT THAT THE
COMPANY SPECIFICALLY INCORPORATES THIS REPORT BY REFERENCE THEREIN AND SHALL NOT
OTHERWISE BE DEEMED TO BE FILED UNDER SUCH ACTS.
AGREEMENTS WITH NAMED EXECUTIVE OFFICERS
Christian L. Allison is employed pursuant to an employment agreement with the
Company dated December 13, 1995, as later amended. Such amended agreement
provides for a base annual salary of $315,000, with such increases as the
Compensation Committee may determine. Mr. Allison is entitled to receive annual
bonuses based upon the achievement of performance objectives established by the
Compensation Committee. The agreement had an initial term of two years and is
automatically extended for successive additional terms of one year, unless
terminated by either the Company or the employee. In September, 2002, Mr.
Allison requested that his base salary be reduced to $226,800 on an annual
basis.
14
Mr. Allison's salary was reduced accordingly effective September 26, 2002. The
agreement provides for certain severance payments upon termination of
employment. Such payments vary depending upon whether a "change in control" of
the Company (as defined below) has occurred. If, within six months prior to a
change in control or three years after a change in control, Mr. Allison's
employment is terminated by the Company for any reason other than "for cause"
(as defined in the agreement), or is terminated by Mr. Allison after a change in
control "for good reason" (as defined in the agreement), Mr. Allison is entitled
to a severance payment of a maximum of three times the sum of (i) the employee's
annual base salary at the time of termination or change in control plus (ii) the
average annual cash award received by the employee as incentive compensation or
bonus for the two calendar years preceding the time of termination or change in
control.
If, absent a change in control, Mr. Allison's employment is terminated
by the Company for any reason other than for cause, Mr. Allison is entitled to a
severance payment of a maximum of two times the sum of (i) Mr. Allison's annual
base salary at the time of termination plus (ii) the average annual cash award
received by Mr. Allison as incentive compensation or bonus for the two calendar
years preceding the time of termination.
If Mr. Allison's employment is terminated at the end of any term of the
agreement by the Company upon giving notice at least six months prior to the end
of the then term of the agreement, the Company is required to pay to Mr. Allison
a severance amount of two times base salary plus bonus (if no change in control
has occurred) or three times base salary plus bonus (if a change in control has
occurred).
If Mr. Allison's employment is terminated by the Company for cause, by
Mr. Allison other than for good reason after a change in control, or as a result
of Mr. Allison's death, disability or retirement, no severance payment is due.
As used in the employment agreement, "change in control" means the
determination (which may be made effective as of a particular date specified by
the Board) by the Board that a change in control has occurred, or is about to
occur. Such a change does not include, however, a restructuring, reorganization,
merger, or other change in capitalization in which the persons who own an
interest in the Company as of the date of the employment agreement maintain more
than a 65% interest in the resultant entity. Regardless of the Board's vote or
whether or not the Board votes, a change in control will be deemed to have
occurred as of the first day any one or more of the following subparagraphs is
satisfied:
(i) Any person (other than the person in control of the Company as of the date
of the employment agreement, or other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company, or a corporation owned
directly or indirectly by the shareholders of the Company in substantially the
same proportions as their ownership of the stock of the Company) becomes the
15
beneficial owner, directly or indirectly, of securities of the Company
representing more than 35% of the combined voting power of the Company's then
outstanding securities; or
(ii) The shareholders of the Company approve:
(a) A plan of complete liquidation of the Company; or
(b) An agreement for the sale or disposition of all or
substantially all of the Company's assets; or
(c) A merger, consolidation, or reorganization of the Company with
or involving any other corporation, other than a merger,
consolidation, or reorganization that would result in the
voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of
the surviving entity) at least 65% of the combined voting
power of the voting securities of the Company (or such
surviving entity) outstanding immediately after such merger,
consolidation or reorganization.
However, in no event will a change in control be deemed to have occurred with
respect to the executive if the employee is part of a purchasing group, which
consummates the change in control transaction.
CHANGE IN CONTROL AGREEMENTS
The Company has entered into change in control agreements with each of the Named
Executive Officers. These agreements are not employment agreements and do not
guarantee the continuation of employment for any particular period of time. Each
agreement provides for certain severance payments to the Named Executive
Officers upon termination of employment as a result of a change in control of
the Company. If within six months prior to a change in control or three years
after a change in control, a Named Executive Officer's employment is terminated
by the Company other than "for good reason" (as defined in the agreements), that
Named Executive Officer is entitled to a severance payment of a maximum of two
times the sum of (i) that Named Executive Officer's annual base salary at the
time of the change in control, plus (ii) the average annual cash award received
by that Named Executive Officer as incentive compensation or bonus for the two
calendar years preceding the time of termination or change in control. As used
in these agreements, "change in control" is defined the same way as such term is
used in the employment agreement with Mr. Allison, as described above.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee reviews and recommends the compensation arrangements
for officers and other senior level employees, reviews general compensation
levels for other employees as a group, determines the stock options to be
granted to eligible persons under the Company's 1995 Long Term Incentive
Compensation Plan and takes such other actions as may be required in connection
with the
16
Company's compensation and incentive plans. The current members of the
Compensation Committee are Dr. Heibel and Messrs. Barnes, Barry and Kampmeinert.
Robert W. Kampmeinert, a director of the Company and a member of the
Compensation Committee, is Chairman, President, Chief Executive Officer and
Director of Parker/Hunter Incorporated, an investment banking firm.
Parker/Hunter has performed investment banking services on behalf of the Company
during 2002 and it is expected that the Company will continue to utilize
Parker/Hunter's services during 2003. James J. Barnes, a director of the Company
and a member of the Compensation Committee became a partner and attorney with
the law firm of ReedSmith LLP in February 2002, which firm performed legal
services on behalf of the Company in 2002.
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
MANAGEMENT
The following table sets forth certain information as to the beneficial
ownership of the Company's Common Stock as of January 31, 2003 by (i) each
director and nominee, (ii) each of the Named Executive Officers named in the
Summary Compensation Table included under the caption "Compensation of Executive
Officers" in this Proxy Statement, (iii) each other person who is known by the
Company to beneficially own 5% or more of its Common Stock and (iv) all current
directors and executive officers as a group. The information in the table
concerning beneficial ownership is based upon information furnished to the
Company by or on behalf of the persons named in the table.
17
- -------------------------------------- ------------------------------------------------- -----------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP (2) PERCENTAGE OF COMMON STOCK
(1) OUTSTANDING (3)
- -------------------------------------- ------------------------------------------------- -----------------------------------
Christian L. Allison 276,222 (4) 2%
James J. Barnes 21,200 (4) *
Daniel P. Barry 45,500 (4) *
David S. Egan 31,667 (4) *
Wylie E. Etscheid 28,102 (4) *
Rocco L. Flaminio 47,168 (4) (5) *
Richard H. Heibel 213,104 (4) (5) 1.6%
Robert W. Kampmeinert 68,000 (4) (6) *
Samuel C. Knoch 60,668 (4) *
Brian C. Mullins 5,000 (4) *
Mark B. Peterson 47,668 (4) *
Gregory L. Quiggle 37,168 (4) *
All directors and executive officers
as a group
(19 persons) 990,159 (4) 6.9%
Other Principal Shareholders:
Brown Capital Management, Inc. (7) 2,046,600 15.1%
*Less than 1%
(1) The address of Brown Capital Management, Inc. is 1201 N. Calvert
Street, Baltimore, Maryland 21202. The address of all other listed
shareholders is c/o Tollgrade Communications, Inc., 493 Nixon Road,
Cheswick, Pennsylvania 15024.
(2) Under regulations of the Securities and Exchange Commission (the "SEC"
or the "Commission"), a person who has or shares voting or investment
power with respect to a security is considered a beneficial owner of
the security. Voting power is the power to vote or direct the voting of
shares, and investment power is the power to dispose of or direct the
disposition of shares. Unless otherwise indicated in the other
footnotes below, each person has sole voting power and sole investment
power as to all shares listed opposite his name. The inclusion of any
shares of stock deemed to be beneficially owned does not constitute an
admission of beneficial ownership of those shares.
(3) The number of shares outstanding includes 13,552,736 shares of Common
Stock outstanding as of January 31, 2003, plus any shares subject to
outstanding stock options that were exercisable within 60 days after
January 31, 2003, held by the person or persons in question.
18
(4) Includes options that were exercisable or exercisable within 60 days
after January 31, 2003, issued to the following persons for the
following amounts: Christian L. Allison, 258,722; James J. Barnes,
15,000; Daniel P. Barry, 39,000; David S. Egan, 34,000; Wylie E.
Etscheid, 28,002; Rocco L. Flaminio, 23,168; Dr. Richard H. Heibel,
104,100; Robert W. Kampmeinert, 53,000; Samuel C. Knoch, 60,668; Brian
C. Mullins, 5,000; Mark B. Peterson, 47,668; Gregory L. Quiggle,
37,168; and all directors and executive officers as a group, 809,005.
(5) Includes shares held by the spouses of the following persons in the
following amounts: Rocco L. Flaminio, 19,000 shares and Dr. Heibel,
58,038 shares. Such persons share voting and dispositive power with
their spouses.
(6) Includes 15,000 shares held by Parker/Hunter Incorporated, of which Mr.
Kampmeinert is Chairman and Chief Executive Officer, as to which shares
Mr. Kampmeinert shares voting and dispositive power.
(7) Information taken solely from the Schedule 13G/A filed with the
Commission by Brown Capital Management, Inc. ("BCM") on February 11,
2003, reflecting ownership of the Company's Common Stock as of December
31, 2002. The filing reflects that BCM has sole voting power over
1,467,900 shares and sole dispositive power over 2,046,600 shares.
SHAREHOLDER RETURN PERFORMANCE GRAPH
The following line graph compares percentage changes in the cumulative total
return on the Company's Common Stock against the cumulative total return of the
Standard & Poor's Composite 500 Stock Index and the Nasdaq Telecommunications
Index (measured in accordance with the rules of the SEC for the period
commencing December 15, 1995 and ending December 31, 2002). The calculation of
total cumulative return assumes a $100 investment on December 15, 1995 in the
Company's Common Stock, the Standard & Poor's Composite 500 and the Nasdaq
Telecommunications Index and assumes the reinvestment of dividends. In addition,
the Company's market capitalization on December 15, 1995 was $65.3 million,
compared to $159.0 million at the end of 2002.
[GRAPHIC OMITTED]
19
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") requires the Company's directors and officers, and persons who own more
than ten percent of a registered class of the Company's equity securities
(collectively, the "Section 16 Persons"), to file with the Commission and NASDAQ
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Such persons are required by the
Commission regulation to furnish the Company with copies of all Section 16(a)
forms which they file. Based solely upon its review of the copies of such forms
received by it, or written representations from certain Section 16 Persons that
no Section 16(a) reports were required for such persons, the Company believes
that for its fiscal year ended December 31, 2002, the Section 16 Persons
complied with all Section 16(a) filing requirements applicable to them except
that Form 4s were inadvertently failed to be filed on a timely basis to report
stock option grants made to such individuals during October, 2002, for each of
Dr. Heibel, Messrs. Bair, Etscheid, Flaminio, Knoch, O'Brien, Peterson, Quiggle,
Rosgone, Shearer, Smith and Mlle. Antol and Wedge.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Kampmeinert is the Chairman, President, Chief Executive Officer and Director
of Parker/Hunter Incorporated, which investment firm has been paid fees for
services rendered. Mr. Barnes is a partner and attorney and Mr. Egan is the
Chief Marketing Officer in the law firm of ReedSmith LLP, which firm has been
paid fees for services rendered in 2002. See the disclosure provided under
"Compensation Committee Interlocks and Insider Participation."
Gregory Quiggle was hired by the Company as Executive Vice President of
Marketing on August 13, 2001. In connection with the recruitment of Mr. Quiggle,
the Company made a loan to Mr. Quiggle in the amount of $210,000 pursuant to a
Promissory Note (the "Note") with interest accruing at 5% per annum. On August
20, 2001, Mr. Quiggle made a payment toward the principal balance of the Note in
the amount of $48,000, thereby reducing the outstanding principal balance of the
Note to $162,000. The entire outstanding balance of the Note is due and payable
on or before the earlier of (i) May 2, 2008, (ii) the date of termination of Mr.
Quiggle's employment with the Company, or (iii) the date that Mr. Quiggle sells
or otherwise transfers ownership of all or a portion of 40,200 shares of common
stock of Acterna LLC, which shares are being held by the Company as collateral
for payment of the Note.
INDEPENDENT ACCOUNTANTS
The Company has selected PricewaterhouseCoopers LLP ("PwC") to serve as
the independent public accountants for the Company for the fiscal year ending
December 31, 2003. PwC or its predecessor, Coopers & Lybrand, LLP, has served at
the Company's independent public accountants since the initial public offering
of the Company's stock in 1995. A representative of PwC will be present
20
at the Annual Meeting and will be given the opportunity to make a statement if
he or she so desires. The representative will be available to respond to
appropriate questions.
AUDIT FEES
The aggregate estimated fees for professional services rendered by PwC for the
audit of the Company's annual financial statements for fiscal year ended
December 31, 2002, and the review of the Company's quarterly Form 10-Qs for that
fiscal year were $175,000.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
The Company's independent auditors, PwC, did not perform for the Company in the
year ended December 31, 2002 any professional services for financial information
systems, design or implementation or which are otherwise of the type identified
in Rule 2-01(4)(ii)(B) of Regulation S-X.
ALL OTHER FEES
Other than the fees identified above, the aggregate estimated fees billed for
services rendered by PwC to the Company, other than the services covered under
the headings "audit fees" and "financial information systems design and
implementation fees" for the year ended December 31, 2002 were $83,470,
principally for business acquisition fees relating to the Company's acquisition
of the status monitoring business from Acterna, LLC on February 13, 2003 and for
tax services, including preparation of the Company's federal and state tax
returns. The Audit Committee believes that the provision of the above services
by PwC is compatible with maintaining the independence of PwC.
OTHER BUSINESS
The Board of Directors does not know at this time of any other matter or further
business that may come before the Annual Meeting, but, if any such matters
should hereafter become known or determined and be properly brought before such
meeting for action, the proxy holders will vote upon the same according to their
discretion and best judgment.
EXPENSES OF SOLICITATION
The cost of soliciting proxies will be borne by the Company. In addition to
solicitation by mail, in a limited number of instances, officers, directors and
regular employees of the Company may, for no additional compensation, solicit
proxies in person or by telephone. The Company may also hire a proxy
solicitation firm, the costs of which are not determined at this time but which
would be paid by the Company.
21
SHAREHOLDER PROPOSALS
In order to be eligible for inclusion in the Company's Proxy Statement for the
2004 Annual Meeting of Shareholders, a proposal submitted by a shareholder for
such meeting must be received by the Secretary, Tollgrade Communications, Inc.,
493 Nixon Road, Cheswick, Pennsylvania 15024 on or before November 27, 2003.
Section 3.17 of the Amended and Restated Bylaws of the Company requires
that any shareholder intending to present a proposal for action at an Annual
Meeting must give written notice of the proposal, containing the information
specified in such Section 3.17, so that it is received by the Company not later
than the notice deadline determined under such Section 3.17. This notice
deadline will generally be 60 days prior to the anniversary date of the
Company's Proxy Statement for the Annual Meeting for the previous year, or
January 27, 2004 for the Company's 2004 Annual Meeting. Any shareholder proposal
received by the Secretary of the Company after January 27, 2004 will be
considered untimely under Rule 14a-4(c)(1) promulgated by the Securities and
Exchange Commission under the Securities Exchange Act of 1934.
SHAREHOLDERS MAY OBTAIN, WITHOUT CHARGE, A COPY OF THE COMPANY'S ANNUAL REPORT
ON FORM 10-K, INCLUDNG FINANCIAL STATEMENTS AND SCHEDULES THERETO, FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 2002, BY
WRITING TO THE CORPORATE SECRETARY, TOLLGRADE COMMUNICATIONS, INC., 493 NIXON
ROAD, CHESWICK, PA 15024.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE URGED TO COMPLETE,
DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE IN ORDER
TO ENSURE REPRESENTATION OF YOUR SHARES. SHAREHOLDERS WHO ATTEND THE ANNUAL
MEETING MAY VOTE THEIR SHARES PERSONALLY EVEN THOUGH THEY HAVE SENT IN THEIR
PROXIES.
By Order of the Board of Directors,
/s/ Sara M. Antol
Sara M. Antol
General Counsel and Corporate Secretary
March 26, 2003
22
EXHIBIT A TO PROXY STATEMENT
AUDIT COMMITTEE CHARTER
(Dated as of 8/27/96; Revised 7/15/99, 10/12/00, 10/11/01, 5/7/02)
The Board of Directors of Tollgrade Communications, Inc. (the "Corporation")
hereby establishes the following charter for the function and operation of the
Audit Committee.
ORGANIZATION AND MEMBERSHIP
The Audit Committee is a committee of the Board of Directors of the Corporation.
The membership of the Audit Committee shall consist of at least three members of
the Board of Directors, all of whom are considered Independent (as defined in
Rule 4200(a)(15) of the NASD listing rules, as amended, attached hereto as
Exhibit A.) Notwithstanding the foregoing, in exceptional and limited
circumstances, the Board of Directors may appoint one member to the Audit
Committee who is not Independent and is not a current employee or an immediate
family member of such employee if the Board determines it is in the best
interest of the Corporation and its shareholders, and so discloses in the next
annual proxy statement the nature of that relationship and the reasons for that
determination.
Members of the Committee shall serve at the pleasure of the Board.
Audit Committee members and the Committee chairman shall be designated by the
full Board of Directors upon the recommendation of the Nominating Committee. The
Board of Directors shall consider a nominee's background before appointment to
the Audit Committee; it is a requirement that each appointed Audit Committee
member be able to read and understand the fundamental financial statements of
the Corporation at the time of the appointment or soon thereafter. In addition,
the Chairman of the Audit Committee must have past employment experience in
finance or accounting, requisite professional certification in finance or
accounting, or any other comparable experience or background which results in
the individual's financial sophistication, including being or having been a
chief executive officer, chief financial officer or other senior officer with
financial oversight responsibilities.
The duties and responsibilities of a member of the Audit Committee are
in addition to those duties required for a member of the Board of Directors.
RESPONSIBILITIES
The Audit Committee shall provide assistance to the Board of Directors in
carrying out its responsibilities as they relate to the following:
23
o business risk and control
o internal and external audit
o accounting systems
o financial reporting systems
o compliance with regulatory, legal and tax requirements
Maintaining flexible policies and procedures is appropriate to enable the Audit
Committee to perform its responsibilities.
In carrying out its responsibilities, the Audit Committee is expected to:
(1) Review and reassess the adequacy of the Audit Committee's charter
annually and recommend to the Board any revisions thereto.
(2) Recommend to the Board the independent accountant to be nominated,
recommend to the Board the approval of the compensation of the
independent accountant, and review and recommend to the Board the
approval of the discharge of the independent accountant. The ultimate
accountability of the independent accountant is to the Board of
Directors and the Audit Committee, as representatives of the
Corporation's shareholders.
(3) Review and recommend to the Board the concurrence in the appointment,
replacement, reassignment or dismissal of the Chief Financial Officer.
(4) Obtain a formal written statement from the independent accountant
delineating all relationships between the independent accountant and
the Corporation, consistent with Independence Standards Board Statement
1, actively engage in dialogue with the independent accountant with
respect to any disclosed relationships or services that may impact the
objectivity and independence of the independent accountant, and
recommend that the Board of Directors take appropriate action to
oversee the independence of the independent accountant.
(5) Inquire of executive management, the Chief Financial Officer and the
independent accountant about significant risks of loss exposure for the
Corporation and assess the steps management has taken to minimize such
risks to the Corporation.
(6) Consider, in consultation with the independent accountant and the Chief
Financial Officer, the audit scope and plan of the independent
accountant.
(7) Consider with management and the independent accountant the rationale
for employing audit firms other than the principal independent
accountant.
24
(8) Review with the Chief Financial Officer and the independent accountant
the coordination of audit effort to assure completeness of coverage,
reduction of redundant efforts and the effective use of audit
resources.
(9) Consider and review with the independent accountant and the Chief
Financial Officer:
a. The adequacy of the Corporation's internal controls including
computerized information system controls and security.
b. Any related significant findings and recommendations of the
independent accountant and internal auditing together with
management's responses thereto.
(10) Review with management and the independent accountant at the completion
of each quarterly reporting period but before public announcement of
results, the earnings release and financial statements related thereto,
and inquire as to the results of the independent accountant's review,
which is to be completed in accordance with SAS 71.
(11) Review with management and the independent accountant at the completion
of the annual examination:
a. The Corporation's annual financial statements and related
footnotes.
b. The independent accountant's audit of the financial statements
and his or her report thereon and the Corporation's critical
accounting policies.
c. Any significant changes in the independent accountant's audit
plan.
d. Any serious difficulties or disputes with management
encountered during the course of the audit.
e. Other matters related to the conduct of the audit, which are
to be communicated to the Committee under generally accepted
auditing standards.
(12) Review policies and procedures with respect to officers' expense
accounts and perquisites, including their use of corporate assets, and
consider the results of any review of these areas by the independent
accountant.
(13) Review legal and regulatory matters that may have a material impact on
the financial statements, related company compliance policies and
programs and reports received from regulators.
(14) Establish and maintain policies and practices regarding the retention
of the independent accountant for any non-audit services and the hiring
by the Corporation of any person employed as an auditor with the
independent accountant and was engaged in the Corporation's audit.
25
(15) Meet with the independent accountant and management in separate
executive sessions to discuss any matters that the Committee or these
groups believe should be discussed privately with the Audit Committee.
(16) The Audit Committee shall report in the Corporation's annual proxy
statement as to whether the Committee has: (i) reviewed and discussed
the audited financial statements with management; (ii) discussed with
the independent accountant the matters required to be discussed by
Statement on Auditing Standards No. 61; and (iii) received from the
independent accountant the disclosures regarding the independent
accountant's independence required by Independence Standards Board
Standard No. 1 and discussed with the independent accountant the
independent accountant's independence. The report shall also state
whether, based on the review and discussions noted above, the Audit
Committee recommended to the Board of Directors that the audited
financial statements be included in the Corporation's Annual Report on
Form 10-K for the last fiscal year for filing with the Securities and
Exchange Commission.
(17) Report Committee actions to the Board of Directors with such
recommendations as the Committee may deem appropriate.
(18) Perform such other functions as assigned by law, the Corporation's
Articles of Incorporation or Bylaws or the Board of Directors.
In fulfilling its responsibilities, the Audit Committee is expected to maintain
free and open communications with the Chairman, Chief Executive Officer, Chief
Financial Officer and the Controller as well as the Corporation's independent
auditors. The Audit Committee shall have the power to conduct or authorize
investigations into any matters within the Committee's scope of
responsibilities. If appropriate, the Audit Committee may retain independent
legal counsel, accountants or others to assist it from time to time, at the
Corporation's expense.
The Committee shall meet at least four times per year or more
frequently as circumstances require. The Committee may ask members of management
or others to attend the meeting and provide pertinent information as necessary.
26
EXHIBIT A
NASD RULE 4200(A)(15)
"Independent director" means a person other than an officer or employee of the
company or its subsidiaries or any other individual having a relationship which,
in the opinion of the company's board of directors, would interfere with the
exercise of independent judgment in carrying out the responsibilities of a
director. The following persons shall not be considered independent:
(a) a director who is employed by the corporation or any of its
affiliates for the current year or any of the past three years;
(b) a director who accepts any compensation from the corporation or any
of its affiliates in excess of $60,000 during the previous fiscal year, other
than compensation for board service, benefits under a tax-qualified retirement
plan, or non-discretionary compensation;
(c) a director who is a member of the immediate family of an individual
who is, or has been in any of the past three years, employed by the corporation
or any of its affiliates as an executive officer. Immediate family includes a
person's spouse, parents, children, siblings, mother-in-law, father-in-law,
brother-in-law, sister-in-law, son-in-law, daughter-in-law, and anyone who
resides in such person's home;
(d) a director who is a partner in, or a controlling shareholder or an
executive officer of, any for-profit business organization to which the
corporation made, or from which the corporation received, payments (other than
those arising solely from investments in the corporation's securities) that
exceed 5% of the corporation's or business organization's consolidated gross
revenues for that year, or $200,000, whichever is more, in any of the past three
years;
(e) a director who is employed as an executive of another entity where
any of the company's executives serve on that entity's compensation committee.
27
Please
Mark here
for Address [ ]
Change or
Comments
SEE REVERSE SIDE
1. ELECTION OF DIRECTORS FOR A TERM EXPIRING IN 2006: 2. In his or her discretion, the Proxy
FOR WITHHOLD is authorized to vote upon such
01 JAMES J. BARNES AND 02 BRIAN C. MULLINS all nominees AUTHORITY other business as may be properly
(except as to vote for all brought before this meeting.
INSTRUCTION: To withhold authority to vote for any indicated) nominees
individual nominee(s), write the names of such
nominee(s) in the space provided: [ ] [ ]
By checking the box to the right, I consent to [ ]
future delivery of annual reports, proxy
statements, prospectuses and other materials and
shareholder communications electronically via
the Internet at a webpage which will be
disclosed to me. I understand that the Company
may no longer distribute printed materials to me
from any future shareholder meeting until such
consent is revoked. I understand that I may
revoke my consent at any time by contacting the
Company's transfer agent, Mellon Investor
Services LLC, Ridgefield Park, NJ and that costs
normally associated with electronic delivery,
such as usage and telephone charges as well as
any costs I may incur in printing documents,
will be my responsibility.
SIGNATURE SIGNATURE(S) DATE
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Please date and sign exactly as name appears hereon. When signing as Attorney, Executor, Administrator, Trustee, Guardian,
Corporate Official, etc. full title as such should be shown. For joint accounts, each joint owner should sign.
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FOLD AND DETACH HERE
VOTE BY INTERNET OR TELEPHONE OR MAIL
24 HOURS A DAY, 7 DAYS A WEEK
INTERNET AND TELEPHONE VOTING IS AVAILABLE THROUGH 11 PM EASTERN TIME
THE DAY PRIOR TO ANNUAL MEETING DAY.
YOUR INTERNET OR TELEPHONE VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR SHARES IN THE SAME MANNER
AS IF YOU MARKED, SIGNED AND RETURNED YOUR PROXY CARD.
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INTERNET TELEPHONE MAIL
http://www.eproxy.com/tlgd 1-800-435-6710
Use the Internet to vote your proxy. Use any touch-tone telephone to Mark, sign and date
Have your proxy card in hand when vote your proxy. Have your proxy your proxy card
you access the web site. You will be OR card in hand when you call. You will OR and
prompted to enter your control be prompted to enter your control return it in the
number, located in the box below, to number, located in the box below, enclosed postage-paid
create and submit an electronic and then follow the directions envelope.
ballot. given.
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If you vote your proxy by Internet or by telephone,
you do NOT need to mail back your proxy card.
TOLLGRADE COMMUNICATIONS, INC.
2003 Annual Meeting of Shareholders
The undersigned does hereby appoint Christian L. Allison and Sara M. Antol, or
any one of them, Proxies for the undersigned with full power of substitution to
vote at the Annual Meeting of the Shareholders of Tollgrade Communications, Inc.
(the "Company") to be held May 13, 2003 and at any and all adjournments of said
meeting, all the shares of Common Stock of the Company which the undersigned may
be entitled to vote.
This proxy when properly executed will be voted in the manner directed herein by
the undersigned shareholder. If no direction is made this proxy will be voted
FOR each proposal.
This proxy is solicited on behalf of the Board of Directors of the Company.
(over)
TOLLGRADE
Address Change/Comments (Mark the corresponding box on the reverse side)
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FOLD AND DETACH HERE