================================================================================
SCHEDULE 14A
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:
[ ] 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 under Section 240.14a-12
Tollgrade Communications, Inc.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] $125 per Exchange Act Rules O-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2)of Schedule 14A.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: _______
(2) Aggregate number of securities to which transaction applies: __________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule O-11 (set forth the amount on which the
filing fee is calculated and state how it was determined): ____________
(4) Proposed maximum aggregate value of transaction: ______________________
(5) Total fee paid: _______________________________________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
O-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.: _________________________
(3) Filing Party: _________________________________________________________
(4) Date Filed: ___________________________________________________________
================================================================================
TOLLGRADE(R)
TOLLGRADE COMMUNICATIONS, INC.
493 NIXON ROAD, CHESWICK, PENNSYLVANIA 15024
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 5, 2004
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 in the Allegheny
Room at the Rivers Club, One Oxford Centre, 301 Grant Street, Pittsburgh,
Pennsylvania, on Wednesday, May 5, 2004 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 three-year terms or
until their respective successors shall have been elected and
shall have qualified; and
(2) Such other matters as may properly be brought before the
meeting.
The Board of Directors has fixed the close of business on March 4, 2004
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 held by you. A copy
of the Company's 2003 Annual Report on Form 10-K 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
March 15, 2004
TOLLGRADE COMMUNICATIONS, INC.
CHESWICK, PENNSYLVANIA 15024
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
MAY 5, 2004
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 5, 2004 at 3:00
p.m., in the Allegheny Room at the Rivers Club, One Oxford Centre, 301 Grant
Street, Pittsburgh, Pennsylvania. It is expected that this proxy statement, the
accompanying notice of annual meeting, the proxy cards and the Company's Annual
Report on Form 10-K will be mailed to shareholders on or about March 15, 2004.
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 three-year terms or
until their respective successors shall have been elected and
shall have qualified; and
(2) Such other matters as may properly be brought before the
meeting.
VOTING
The Board of Directors of the Company has fixed the close of business on March
4, 2004 as the record date for determining those shareholders entitled to notice
of, and to vote on, all matters that may properly come before the Annual Meeting
(the "Record Date"). As of the Record Date, the Company had 13,581,554 issued
and outstanding shares of common stock, par value $.20 (the "Common Stock").
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, 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.
1
ELECTION OF DIRECTORS
The Amended and Restated Articles of Incorporation and the Amended and Restated
By-Laws of the Company provide that 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. 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. Messrs. Barnes and Mullins serve as directors with terms of office
expiring at the 2006 Annual Meeting.
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
2007 and until their respective successors shall have been elected and
qualified. The Nominating Sub-Committee of the Corporate Governance Committee of
the Board has recommended to the Board for its nomination, and the Board has
nominated, Dr. Heibel and Mr. Kampmeinert as its nominees for election to the
Board at the Annual Meeting. Unless otherwise instructed, the persons named in
the accompanying proxy will vote, as permitted by the Amended and Restated
By-laws of the Company, to elect Dr. Heibel and Mr. Kampmeinert 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 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 a substitute
nominee, if any, as shall be designated by Board upon the recommendation of the
Nominating Sub-Committee of the Corporate Governance Committee of the Board.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITS NOMINEES.
2
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.
DIRECTOR
NAME SINCE PRINCIPAL OCCUPATION; OTHER DIRECTORSHIPS; AGE
- -------------------------------------------------------------------------------------------------------------------------------
Nominees for a term expiring in 2007:
Richard H. Heibel, M.D. 1996 Retired; Private Investor; formerly, Board-certified cardiologist with the
firm Consultants in Cardiology and an original investor in the Company prior
to the initial public offering; Chairman, Investment Committee; Age 57.
Robert W. Kampmeinert 1995 Chairman, President, Chief Executive Officer and Director, Parker/Hunter
Incorporated, an investment firm; Chairman, Compensation Committee; Age 60.
Continuing Directors with a term expiring in 2005:
Christian L. Allison 1992 Chairman of the Board since April 1998; Chief Executive Officer of the
Company since September 1995; President of the Company from October 1993
until January 2001; Treasurer of the Company from May 1992 until April 1997;
Chief Operating Officer of the Company from November 1990 until October
1993; Divisional Manager of the Company from June 1988 until November 1990;
Age 43.
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; Chairman, Audit
Committee and Corporate Governance Committee; Age 56.
David S. Egan 1998 Chief Marketing Officer, ReedSmith LLP, a law firm, since January 2002;
prior thereto, President, Clubcom, Inc., a provider of communication devices
to private broadcast networks, from September 2000 until January 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, from June 1999 until June 2000; prior thereto,
President, Ketchum Advertising; Age 47.
Continuing directors 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 42.
Brian C. Mullins 2002 Retired; formerly, Senior Vice President, Chief Financial Officer and
Treasurer at SCA North America, Packaging Division, formerly called
Tuscarora Incorporated, a manufacturer of protective packaging and
material-handling products, since 1976; Age 63.
3
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The Board, which is elected by the shareholders, is the ultimate decision-making
body of the Company, except with respect to those matters reserved to the
shareholders. The Board selects the senior management team of the Company, which
is charged with the conduct of the Company's business. The Board acts as an
advisor and counselor to senior management and ultimately monitors its
performance.
The operation and mission of the Board is embodied in the Company's
Board Guidelines on Corporate Governance Issues, (the "Guidelines"), a copy of
which is available on the Company's website at www.tollgrade.com. The Guidelines
were adopted by the Board to serve as a framework for its oversight
responsibilities to the Company. Among other matters, the Guidelines:
- reinforce that the mission of the Board is to represent the
shareholders' interest in the success of the Company through the
Board's active oversight and monitoring of management;
- provide that the Board shall consist of at least a majority of
"independent" directors;
- confirm that the Board shall maintain standing committees including an
Audit Committee, Compensation Committee, Corporate Governance
Committee, Investment Committee, Nominating Sub-Committee of the
Corporate Governance Committee and Stock Compensation Sub-Committee of
the Compensation Committee, and that each of such committees will
consist solely of independent directors;
- provide for an annual evaluation by the Corporate Governance Committee
of the performance and procedures of the Board, with the goal of
increasing the effectiveness of the Board; and
- provide that the independent members of the Board shall conduct
executive sessions without the presence of any employees of the Company
at least two times each year.
To aid its oversight of the Company's management and employees, and to comply
with recently enacted SEC rules and Nasdaq listing standards, the Board has
adopted several codes of conduct designed to enumerate the Board's expectations
for the conduct of the Company's employees in carrying out the mission of the
Company.
- The Company's Code of Ethics for Senior Executive and Financial
Officers (the "Code of Ethics"), to which the Company's Chief Executive
Officer, Chief Financial Officer, Controller, and any other senior
executive or financial officers performing similar functions are
subject, requires that such individuals carry out their jobs in an
honest and ethical manner, in compliance with laws, avoiding conflicts
of interest, while implementing and maintaining the Company's public
communication and disclosure reporting systems. The Code of Ethics
constitutes a "code of ethics" within the meaning of Item 406 of the
SEC's Regulation S-K. A copy of the Code of Ethics is available on the
Company's website at www.tollgrade.com.
- The Company has also adopted a Code of Business Conduct and Ethics (the
"Code of Business Conduct") applicable to all directors and employees
of the Company, including those subject to the Company's Code of
Ethics. The Code of Business Conduct covers issues generally applicable
to all of the Company's employees, such as: the duty to conduct the
Company's business honestly and ethically; avoidance of conflicts of
interest; compliance with all laws; the prohibition on insider trading;
the prohibition on loans to the Company's executive officers and
directors; and the duty to protect the Company's confidential
information. The Code of Business Conduct obligates directors and
employees to report any conduct that they believe in good faith to be
apparent violations of the Code. All employees, without exception, are
required to read and certify their continued compliance with the Code
of Business Conduct. A copy of the Code of Business Conduct, which is a
"code of conduct" as required by Nasdaq listing standards, is available
on the Company's website at www.tollgrade.com.
4
In addition to the compliance reporting mechanisms set forth in the Code of
Business Conduct, the Audit Committee of the Board has also implemented, in
accordance with SEC rules and Nasdaq listing standards, procedures for the
receipt, retention and treatment of complaints received by the Company regarding
accounting, internal accounting controls and auditing matters, including a
mechanism for the confidential, anonymous submission by Company employees of
concerns regarding questionable accounting or auditing matters.
COMMUNICATIONS WITH DIRECTORS
In order to provide the Company's shareholders and other stakeholders with a
direct and open means of communication to the Board, the Board has adopted the
following procedures for communicating with Directors:
- Shareholders and other interested persons may communicate with the
chairpersons of the Company's Corporate Governance Committee,
Nominating Sub-Committee of the Corporate Governance Committee, Audit
Committee or Compensation Committee or with the non-management
directors of Company as a group by sending an e-mail to
investor_relations@tollgrade.com or by mail to Investor Relations
Department, Tollgrade Communications, Inc., 493 Nixon Road, Cheswick,
PA 15024. The correspondence should specify which of the foregoing is
the intended recipient.
- All communications received in accordance with these procedures will be
reviewed initially by the Company's Investor Relations Department. The
Investor Relations Department will relay all such communications to the
appropriate director or directors unless the Investor Relations
Department determines that the communication:
- does not relate to the business or affairs of the Company or
the functioning or constitution of the Board or any of its
committees;
- relates to routine or insignificant matters that do not
warrant the attention of the Board;
- is an advertisement or other commercial solicitation or
communication;
- is frivolous or offensive; or
- is otherwise inappropriate for delivery to directors.
- The director or directors who receive any such communication will have
discretion to determine whether the subject matter of the communication
should be brought to the attention of the full Board or one or more of
its committees and whether any response to the person sending the
communication is appropriate. Any such response will be made through
the Company's Investor Relations Department and only in accordance with
the Company's policies and procedures and applicable laws and
regulations relating to the disclosure of information.
- The Company's Investor Relations Department will retain copies of all
communications received pursuant to these procedures for a period of at
least one year.
- The Corporate Governance Committee will review the effectiveness of
these procedures from time to time and, if appropriate, recommend
changes to the Board.
FUNCTIONING OF THE BOARD OF DIRECTORS
It is the general policy of the Company that all major decisions are considered
by the Board as a whole. As a result, the committee structure of the Board is
limited to those committees considered to be basic to, or required for, the
operation of a publicly-held company. Currently, there are four standing
committees of the Board: the Compensation Committee; the Corporate Governance
Committee; the Investment Committee; and the Audit Committee. In addition, there
are two standing sub-committees, the Stock Compensation Sub-Committee of the
Compensation Committee and the Nominating Sub-Committee of the Corporate
Governance Committee. The members and chairs of each of these committees and
sub-committees are selected by the Board upon the recommendation of the
Nominating Sub-Committee.
5
The Board has determined that Dr. Heibel and Messrs. Barnes, Barry,
Egan, Kampmeinert and Mullins are "independent directors" as that term is
defined by Rule 4200 of the Nasdaq listing standards.
The Company's Board of Directors met six times during 2003. 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 2003. It is
expected that all directors attend the annual meetings of shareholders. All of
the Company's directors were present at the 2003 Annual Meeting.
COMMITTEES OF THE BOARD OF DIRECTORS
The COMPENSATION COMMITTEE 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. A subcommittee of the Compensation Committee called the STOCK
COMPENSATION SUB-COMMITTEE 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 Sub-Committee are Dr. Heibel
and Mr. Barry. Each member of the Compensation Committee is an "independent
director" as defined by Nasdaq listing standards. The Compensation Committee
held six meetings in 2003.
The CORPORATE GOVERNANCE COMMITTEE is charged with, among other things,
reviewing and supervising issues of corporate governance and director
qualification and independence. The current members of the Corporate Governance
Committee are Dr. Heibel and Messrs. Barnes, Barry, Egan, Kampmeinert and
Mullins. The Corporate Governance Committee held six meetings in 2003.
The NOMINATING SUB-COMMITTEE of the Corporate Governance Committee was
created by resolution of the Board to make recommendations to it for Board
nominees. The Board has adopted a charter for the Nominating Sub-Committee of
the Corporate Governance Committee, a copy of which can be found on the
Company's website at www.tollgrade.com.
The charter of the Nominating Sub-Committee provides that the members
of the Sub-Committee shall be the current members of the Corporate Governance
Committee who are "independent" as defined by applicable SEC rules and Nasdaq
listing standards. The current members of the Nominating Sub-Committee are Dr.
Heibel and Messrs. Barry and Mullins, each of whom the Board has determined to
be "independent" under the relevant standards. Prior to the establishment of the
Nominating Sub-Committee in May 2003, three of the Corporate Governance
Committee meetings held in 2003 related to board nominee matters. After
establishment of the Nominating Sub-Committee, that Sub-Committee held no
separate meetings during the remainder of 2003.
The primary function of the Nominating Sub-Committee under its charter
is to identify and recommend to the Board individuals for its nomination for
election as directors of the Company. The charter provides that, to fulfill its
duties and responsibilities, the Nominating Sub-Committee must:
- select and recommend to the Board director nominees for election at
each annual meeting of shareholders, as well as director nominees to
fill vacancies arising between annual meetings of shareholders;
- if deemed necessary, select and retain an executive search firm to
identify qualified candidates to serve as members of the Board,
considering effectiveness, responsiveness and other relevant factors,
and approve the fees and other compensation to be paid to the executive
search firm;
- determine requirements for, and means of, director orientation and
training; and
- review the charter of the Sub-Committee and assess the performance of
the members of the Sub-Committee at least annually and recommend
updates and changes to the Board as warranted.
The Nominating Sub-Committee has adopted position specifications applicable to
members of the Board, and individuals recommended for nomination to the Board by
the Nominating Sub-Committee must meet the qualifications set forth in these
position specifications, a copy of which is available on the Company's website
at www.tollgrade.com. The specifications provide that a candidate for director
should:
6
- have a reputation for industry, integrity, honesty, candor, fairness
and discretion;
- be an acknowledged expert in his or her chosen field of endeavor, which
area of expertise should have some relevance to the Company's business;
- be knowledgeable, or be willing and able to become so quickly, in the
critical aspects of the Company's business and operations; and
- be experienced and skillful in serving as a competent overseer of, and
trusted advisor to, senior management of a corporation.
Among the areas of expertise that the Nominating Sub-Committee seeks in its
recommended nominees for the Board are backgrounds in: accounting and finance;
telecommunications; international business; investment banking; leadership;
business and management; strategic planning; investor relations; executive
leadership development; and executive compensation. The Nominating Sub-Committee
reviews both newly recommended individuals and incumbent directors against (i)
the position specifications applicable to members of the Board, (ii) the
relevant independence standards, and (iii) other intangible characteristics,
such as perceived abilities of an individual that will increase the quality and
knowledge of the Board and/or its committees, and recommends suitable candidates
to the Board based upon these criteria.
The policy of the Nominating Sub-Committee regarding the consideration
of director candidates recommended by its shareholders is that the Sub-Committee
will consider such candidates on the same basis that it considers its own
recommended candidates. Any such recommendations should be communicated to the
chairperson of the Nominating Sub-Committee in the manner described above under
the subsection entitled "Communications With Directors" and should be
accompanied by the same types of information as are required under the Company's
Amended and Restated By-laws for shareholder nominees.
The Company's Amended and Restated By-laws provide that nominations of
individuals for election to the Board may be made at any meeting of shareholders
by or at the direction of the Board or by any shareholder entitled to vote for
the election of members of the Board at the meeting. In order to make a
nomination, a shareholder must have provided timely notice in writing to the
Secretary of the Company, and any nominee should meet the qualifications
established by the Nominating Sub-Committee in the Company's most recent proxy
statement. To be timely, a shareholder's notice must be delivered to the
Secretary between the close of business on the 60th day and 120th day prior to
the first anniversary of the date of the proxy statement for the annual meeting
of the Company for the preceding year; provided, however, that if the date of an
annual meeting is more than 30 days before or more than 60 days after the first
anniversary of the preceding year's annual meeting, or in the case of a special
meeting of shareholders, such notice will be timely if it is delivered not
earlier than the close of business on the 120th day prior to such meeting and
not later than the close of business on the later of (i) the 90th day prior to
such meeting, and (ii) the 10th day following the day on which public
announcement of the date of such meeting is first made. Delivery of a notice to
the Chairperson of the Nominating Sub-Committee pursuant to the terms of this
proxy statement shall constitute delivery of the same to the Secretary of the
Company under its Amended and Restated By-laws.
The notice given by a shareholder must contain: (a) all information
regarding the shareholder's proposed nominee that is required to be disclosed in
solicitations of proxies for elections of directors in an election contest, or
is otherwise required, pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended, and Rule 14a-11 thereunder (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected), along with a description of all arrangements
or understandings between the shareholder and the nominee and any other person
or persons (naming such person or persons) pursuant to which the nomination is
to be made by the shareholder; (b) a representation that the shareholder intends
to appear in person or by proxy at the meeting to nominate the person specified
in the notice; and (c) with respect to both the shareholder giving the notice
and the beneficial owner, if any, on whose behalf that nomination is made, the
name and address of each as they appear on the Company's books and the class and
number of shares of the Company's stock which are owned beneficially and of
record by each.
7
The INVESTMENT COMMITTEE of the Board 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 met
once in 2003.
The AUDIT COMMITTEE of the Board 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 audit and control procedures. During fiscal
year 2003, the Board updated the Audit Committee Charter. The original Charter
was adopted on August 27, 1996 and was revised in July 1999, October 2000,
October 2001, and October 2003. Additional amendments to the Charter were
proposed by the Committee and formally adopted by the Board on January 21, 2004.
Since the Company's last proxy statement, the Charter has been amended to
provide that, among other things, the Audit Committee:
- has sole authority to appoint or replace the Company's independent
auditors;
- must approve all auditing and permitted non-auditing services to be
provided to the Company by its outside auditor;
- shall establish procedures for receiving and handling complaints
regarding the Company involving accounting, internal control and
auditing matters, including a means for employees of the Company to
submit such concerns in a confidential and anonymous manner;
- manages the Company's implementation of its Code of Ethics; and
- has the responsibility of evaluating potential conflicts of interest
between the Company and its officers, directors and employees.
The complete text of the amended Audit Committee 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. Each of the members of the Audit
Committee is "independent" as that term is defined by both Rule 10A-3 under the
Securities Exchange Act of 1934, as amended, and Nasdaq listing standards.
The Board has determined that each of Messrs. Barry and Mullins is an
"audit committee financial expert" as that term is defined in Item 401(h) of
Regulation S-K of the Securities and Exchange Commission.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the Board of Directors (the "Committee") is composed of
three directors, each of whom is "independent" as defined by Rule 10A-3 under
the Securities Exchange Act of 1934, as amended, and Nasdaq listing standards.
The Committee operates under a written Audit Committee Charter (the "Charter")
adopted by the Board of Directors which was last reviewed and revised by the
Board on January 21, 2004, a copy of which is attached as Exhibit A to this
proxy statement.
Management is responsible for internal controls, the financial
reporting process and compliance with laws and regulations and ethical business
standards. The independent auditors are responsible for performing an
independent audit of the Company's financial statements in accordance with
generally accepted auditing standards and for issuing a report thereon. The
Committee is charged with the duty to monitor and oversee these processes.
Pursuant to the Charter, the primary responsibilities of the
Committee are to assure the directors, regulators and shareholders that the
Company's business controls are adequate and effective, that the Company's
financial accounting and reporting practices are of the highest quality and that
the Company is complying with applicable rules and regulations relating thereto.
In this regard, the Charter charges the Committee with the responsibility of
overseeing the activities of the Company's outside auditors as they relate to
the preparation and issuance of audit reports and related work. The Committee
has sole authority to select, determine the compensation paid to, and replace
the Company's outside auditors. The Committee must pre-approve all audit and
permitted non-audit services to be performed by the auditor.
8
The Charter further provides that the Committee shall always consist of
no less than three members, all of whom must be independent directors. If at any
time a member of the Committee is no longer independent, or if the resignation
of a Committee member or any other event leaves the Committee with less than
three members, it is expected that the Board will replace the non-independent or
departed director in a timely fashion.
The 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 Charter. To carry
out its responsibilities, the Committee met eight times during fiscal year 2003.
The Committee met with both management and the Company's outside
independent auditors, PricewaterhouseCoopers LLP ("PwC"), to review and discuss
the Company's 2003 year-end 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. 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 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). PwC informed the Committee that it was independent with
respect to the Company within the regulations promulgated by the Securities and
Exchange Commission and the requirements of the Independence Standards Board.
The Committee also considered whether the non-audit consulting services provided
by PwC could have impaired its independence and concluded that the provision of
such services had not and has not impaired PwC's independence.
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, 2003, for filing with
the Securities and Exchange Commission.
MEMBERS OF THE AUDIT COMMITTEE:
Daniel P. Barry, Chairman
Richard H. Heibel, M.D.
Brian C. Mullins
THE FOREGOING REPORT OF THE AUDIT COMMITTEE DOES NOT CONSTITUTE SOLICITING
MATERIAL AND SHOULD NOT BE DEEMED TO BE 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
During 2003, the Board increased the compensation levels for its non-employee
directors, based upon the recommendation of the Compensation Committee, and
consideration of market analyses performed internally and by an outside
executive compensation consultant. This increase was the first since the
Company's initial public offering in 1995. Following the modification,
non-employee directors receive an annual retainer of $12,000, a fee of $1,000
for attendance at each Board meeting and a fee of $750 for attendance at each
committee meeting. Further, chairpersons of Board committees receive an
additional annual retainer of $4,000.
Pursuant to amendments to the Company's 1995 Long-Term Incentive
Compensation Plan, the Board is permitted to make grants and awards under the
1995 Plan from time to time to non-employee directors. In July 2003, the Board
adopted a policy regarding stock option grants to directors, pursuant to which
5,000 non-qualified stock options will be granted in December of each year to
each of the non-employee directors, unless otherwise determined by the Board.
9
During 2003, the Board made non-qualified stock option grants pursuant
to this policy under the Company's 1995 Long-Term Incentive Compensation Plan in
the amount of 5,000 shares of Common Stock to each of its non-employee
directors: James J. Barnes; Daniel P. Barry; David S. Egan; Dr. Richard H.
Heibel; Robert W. Kampmeinert; and Brian C. Mullins. These option grants were
made with an exercise price equal to the fair market value of the Company's
Common Stock on the date of grant, were immediately exercisable and remain
outstanding for a period of ten years. If a non-employee director ceases to be a
director for any reason other than resignation, removal for cause or death, then
the options are exercisable for a period of one year from the date the
non-employee director ceases to be a director or the expiration date of such
options, whichever is shorter.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information regarding compensation
received in all capacities by the Chief Executive Officer and the four other
most highly compensated executive officers of the Company (the "Named Executive
Officers") for the years ended December 31, 2003, 2002 and 2001.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS
ANNUAL COMPENSATION RESTRICTED SECURITIES ALL OTHER
STOCK UNDERLYING COMPENSATION
NAME/PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) AWARDS ($) OPTIONS (#) ($)
Christian L. Allison, 2003 $212,200 $13,485(1) - - - - - - - - - - - -
Chief Executive Officer 2002 $241,177 - - - - - - - - - - - - - - - -
2001 $270,923 - - - - - - - - 22,000 - - - -
David J. Breiter, General 2003 $130,581(2) $45,000(3) - - - - 15,000 - - - -
Manager, Cable Products
Wylie E. Etscheid, 2003 $189,641 $ 6,765(1) - - - - - - - - - - - -
Executive Vice President, 2002 $189,623 $ 5,000(4) - - - - 4,000 - - - -
New Business Development, OSS 2001 $ 62,774(5) $25,000(6) - - - - - - - - - - - -
Products
Mark B. Peterson, 2003 $202,996 $10,139(1) - - - - - - - - - - - -
President 2002 $202,977 - - - - - - - - 10,000 - - - -
2001 $198,044 - - - - - - - - 27,000 - - - -
Gregory L. Quiggle, 2003 $225,004 $11,238(1) - - - - - - - - - - - -
Executive Vice President, 2002 $225,004 - - - - - - - - 1,500 - - - -
Marketing 2001 $ 86,540(7) - - - - - - - - - - - - $108,005 (8)
(1) Represents a discretionary bonus paid under the Management Incentive
Compensation Plan. Bonus was paid in 2004, based on 2003 performance.
(2) Mr. Breiter was hired on February 14, 2003, and this represents his
prorated salary for the year.
(3) Represents a special incentive bonus paid to Mr. Breiter in 2004, based on
2003 performance.
(4) Represents payment to Mr. Etscheid of a special incentive bonus.
(5) Mr. Etscheid was hired on September 4, 2001, and this represents his
prorated salary for the year.
(6) Represents a signing bonus paid to Mr. Etscheid.
10
(7) Mr. Quiggle was hired on August 13, 2001, and this represents his prorated
salary for the year.
(8) Represents payment to Mr. Quiggle for relocation expenses.
The following table sets forth information concerning the number of shares
underlying stock options granted during the fiscal year ended December 31, 2003
to the Named Executive Officers and certain other information regarding stock
options.
OPTIONS GRANTED IN 2003
POTENTIAL REALIZABLE VALUE OF
ASSUMED ANNUAL RATES OF STOCK
INDIVIDUAL GRANTS PRICE APPRECIATION FOR OPTION TERM(3)
-------------------------------- ------------------------------------
NO. OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE/SHARE EXPIRATION
NAME GRANTED (#)(1) 2003(2) ($/SH) DATE 5% 10%
Christian L. Allison - - - - - - - - - - - - - - - - - - - - - - - -
David J. Breiter 15,000(4) 12.4275% $ 12.55 3-20-13 $118,389.41 $300,022.02
Wylie E. Etscheid - - - - - - - - - - - - - - - - - - - - - - - -
Gregory L. Quiggle - - - - - - - - - - - - - - - - - - - - - - - -
Mark B. Peterson - - - - - - - - - - - - - - - - - - - - - - - -
(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 120,700 options to purchase Common Stock of the Company were
granted to employees and non-employee directors of the Company in the year
ended December 31, 2003.
(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.
(4) Options are first exercisable in three equal installments on March 20,
2003, March 20, 2004 and March 20, 2005.
11
OPTION EXERCISES AND VALUES
The following table sets forth certain information concerning exercises of stock
options during the fiscal year ended December 31, 2003 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 2003 AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 12-31-03 AT 12-31-03 (#)(2)
SHARES VALUE
ACQUIRED AT REALIZED
NAME EXERCISE (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
Christian L. Allison 0 0 266,054 0 $2,008,606.62 $ 0.00
David J. Breiter 0 0 5,000 10,000 $ 24,900.00 $49,800.00
Wylie E. Etscheid 1000 $ 7,505 41,667 1,333 $ 2,825.56 $ 5,434.43
Mark B. Peterson 0 0 56,668 3,332 $ 220,898.73 $11,393.77
Gregory L. Quiggle 0 0 56,000 500 $ 8,045.00 $ 4,022.50
(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, 2003
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 primary function of the Compensation Committee (the "Committee") is to
assist the Board of Directors of Tollgrade Communications, Inc. (the "Company")
in ensuring that the officers and management personnel of the Company are
effectively compensated in terms of salaries and other benefits which are
externally competitive and advance the long term interests of the Company's
shareholders. The Committee's primary means of achieving this purpose is its
administration of the Company's compensation program for executive officers. The
Committee is comprised of non-employee directors, all of whom have been
determined by the Board of Directors to be "independent" under the relevant SEC
rules and Nasdaq listing standards.
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. From time to time,
the Committee has utilized the services of independent compensation consultants
to assist it in development of an overall compensation strategy.
12
COMPENSATION OF EXECUTIVE OFFICERS
BASE SALARY
The Company's compensation program for 2003 consisted of base salary and an
opportunity for payment of a bonus under the Company's Management Incentive
Compensation Plan (the "MICP"). In determining executive officer base salaries
for 2003, the Committee took into account such factors as competitive industry
salaries, the contribution and experience of each particular officer and the
recommendations of Chris Allison, the Company's Chief Executive Officer. With
the exception of Mr. Breiter, who was hired as part of the Company's acquisition
of the Cheetah cable product line and whose compensation package was negotiated
as part of that transaction, the 2003 salaries for the Named Executive Officers
listed in the proxy statement were approved by the Compensation Committee. In
establishing the salaries for those Named Executive Officers, the Committee
applied the above criteria and also considered the recommendations of Mr.
Allison. The 2003 salaries for other executive officers not listed in the
Summary Compensation Table in this proxy statement were determined by Mr.
Allison 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 Committee also administers the Company's MICP. The MICP applies 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 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, eligible employees are awarded up to 110%
of the amount ascribed to them individually by designation.
Although the Company's did not meet its stated operating income goal
for 2003, given the Company's performance in a difficult market, the Board of
Directors approved payment of a bonus to all employees under the discretionary
payment provisions of the MICP. These bonuses equaled approximately 14% of the
payments that would have been received by all employees under the MICP if 100%
of the Company's 2003 operating income goal had been met. This discretionary
bonus was paid in 2004 to four of the five Named Executive Officers based on
2003 performance. Mr. Breiter, who was awarded a separate incentive bonus based
on certain performance goals, which bonus was approved by the Committee, did not
receive this MICP discretionary payment.
LONG-TERM INCENTIVE COMPENSATION
Long-term incentive compensation is provided to executive officers through the
Company's 1995 Long-Term Incentive Compensation Plan (the "Plan"). Under the
Plan, stock option awards are based upon executive management's and the
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 2003 is
contained elsewhere in this Proxy Statement.
13
COMPENSATION OF CHIEF EXECUTIVE OFFICER
The compensation program for Mr. Allison is comprised of base salary, stock
option grants and the opportunity for a bonus payment under the MICP. Although
Mr. Allison has an employment agreement which sets forth his base salary at
$315,000, Mr. Allison had requested that his salary be paid at a reduced rate of
$252,000 in 2002. In 2003, Mr. Allison again requested that his base salary be
decreased from $252,000 annually to $212,000. 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 accordingly. For 2004,
the Committee determined that Mr. Allison's salary should be reinstated at the
contracted level. Mr. Allison was not present during the deliberations of or
voting by the Compensation Committee on his compensation program. In addition to
his base salary for 2003, Mr. Allison was awarded a bonus under the
discretionary provisions of the MICP in 2004 based on 2003 performance as
described above.
TAX POLICY
Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"),
disallows any federal income tax deductions for the Company 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 Plan
is structured to permit grants of stock options and certain other awards 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
Mr. Allison is employed pursuant to an employment agreement with the Company
dated December 13, 1995, as later amended. The employment agreement, as amended,
provides for a base annual salary of $315,000, with such increases as the
Compensation Committee may determine. Mr. Allison is also 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 Mr. Allison. Mr. Allison asked that
his base salary be reduced below the contractual level in both 2002 and 2003.
Mr. Allison's salary was reduced accordingly effective September 26, 2002, and
he was paid $241,200 and $212,200 for calendar years 2002 and 2003,
respectively.
14
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 three times the sum of (i) Mr. Allison's annual base
salary at the time of termination or change in control 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 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 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 current term of the agreement, the Company is required to pay to Mr.
Allison a severance amount of two times his base salary plus bonus (if no change
in control has occurred) or three times his 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.
The employment agreement defines a "change in control" as a
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 surviving entity. Regardless of the Board's vote on
the matter, or whether or not the Board votes at all, a change in control will
be deemed to have occurred as of the first day any one or more of the following
occurs:
- 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 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
- the shareholders of the Company approve:
(i) a plan of complete liquidation of the Company; or
(ii) an agreement for the sale or disposition of all or
substantially all of the Company's assets; or
(iii) 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.
15
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 Mr. Allison's employment agreement as described above.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the Company's fiscal year ended December 31, 2003, the members of the
Compensation Committee were Dr. Richard H. Heibel, James J. Barnes, Daniel P.
Barry and Robert W. Kampmeinert. Mr. Kampmeinert is Chairman, President, Chief
Executive Officer and Director of Parker/Hunter Incorporated, an investment
banking firm. Parker/Hunter performed investment banking services on behalf of
the Company during 2003 and it is expected that the Company will continue to
utilize Parker/Hunter's services during 2004. Mr. Barnes is a partner and
attorney with the law firm of ReedSmith LLP, which performed legal services on
behalf of the Company in 2003.
16
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as to the beneficial
ownership of the Company's Common Stock as of January 15, 2004 by: (i) each
director and director 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.
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENTAGE OF COMMON
BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP (2) STOCK OUTSTANDING (3)
- ------------------------------------------- --------------------------- -------------------------
Christian L. Allison 283,544 (4) 2%
James J. Barnes 26,200 (4) *
Daniel P. Barry 50,500 (4) *
David J. Breiter 5,000 (4) *
David S. Egan 40,000 (4) *
Wylie E. Etscheid 41,767 (4) *
Richard H. Heibel 205,504 (4)(5) 2%
Robert W. Kampmeinert 73,000 (4)(6) *
Brian C. Mullins 11,000 (4) *
Mark B. Peterson 56,668 (4) *
Gregory L. Quiggle 56,000 (4) *
All directors and executive officers as a
group (23 persons) 1,110,773 (4) 8%
Other Principal Shareholders:
Brown Capital Management, Inc.
1201 N. Calvert Street
Baltimore, MD 21020 2,153,550 (7) 16%
Thomson Horstmann & Bryant, Inc.
Park 80 West, Plaza Two
Saddle Brook, NJ 07663 692,600 (8) 5%
Barclays Global Investors, N.A.
45 Fremont Street
San Francisco, CA 94105-2228 683,261 (9) 5%
*Less than 1%
(1) If not provided above, the address of listed shareholders is c/o Tollgrade
Communications, Inc., 493 Nixon Road, Cheswick, Pennsylvania 15024.
17
(2) Under regulations of the Securities and Exchange 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 13,580,370 shares of Common Stock
outstanding as of January 15, 2004, plus any shares subject to outstanding
stock options that were exercisable within 60 days after January 15, 2004,
held by the person or persons in question.
(4) Includes options that were exercisable or exercisable within 60 days after
January 15, 2004, issued to the following persons for the following
amounts: Christian L. Allison, 266,054; James J. Barnes, 20,000; Daniel P.
Barry, 44,000; David J. Breiter, 5,000; David S. Egan, 39,000; Wylie E.
Etscheid, 41,667; Dr. Richard H. Heibel, 109,100; Robert W. Kampmeinert,
58,000; Brian C. Mullins, 10,000; Mark B. Peterson, 56,668; Gregory L.
Quiggle, 56,000; and all directors and executive officers as a group,
942,594.
(5) Includes 50,438 shares held by the spouse of Dr. Heibel, as to which shares
Dr. Heibel shares voting and dispositive power.
(6) Includes 15,000 shares held by Parker/Hunter Incorporated, of which Mr.
Kampmeinert is Chairman and Chief Executive Officer; voting and disposition
of such shares are administered by a committee of which Mr. Kampmeinert is
a member, but by committee charter, Mr. Kampmeinert has no authority to
direct the voting or disposition of such shares.
(7) Information taken solely from the Schedule 13G/A filed with the Commission
by Brown Capital Management, Inc. ("BCM") on February 11, 2004, reflecting
ownership of the Company's Common Stock as of December 31, 2003. The filing
reflects that BCM has sole voting power over 1,057,650 shares and sole
dispositive power over 2,153,550 shares.
(8) Information taken solely from the Schedule 13G filed with the Commission by
Thomson Horstmann & Bryant, Inc. ("THB") on January 21, 2004, reflecting
ownership of the Company's Common Stock as of December 31, 2003. The filing
reflects that THB has sole voting power over 365,400 shares and sole
dispositive power over 692,600 shares.
(9) Information taken solely from the Schedule 13G filed with the Commission by
Barclays Global Investors, N.A. ("Barclays") on February 13, 2004,
reflecting ownership of the Company's Common Stock as of December 31, 2003.
The filing reflects that Barclays has sole voting and dispositive power
over 586,587 shares. The report disclosed shares held by Barclays in trust
accounts for Barclays Global Investors, N.A., Barclays Global Fund Advisors
and Barclays Bank, PLC in the amounts of 438,213, 240,348 and 4,700 shares,
respectively.
18
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 January 1, 1999 and ending December 31, 2003). The calculation of
total cumulative return assumes a $100 investment on January 1, 1999 in the
Company's Common Stock, the Standard & Poor's Composite 500 and the Nasdaq
Telecommunications Index and assumes the reinvestment of dividends.
[LINE CHART]
12/31/99 12/31/00 12/31/01 12/31/02 12/31/03
-------- -------- -------- -------- --------
Tollgrade Communications, Inc. $ 100 $ 211.60 $ 91.40 $ 35.20 $ 149.40
NASDAQ Telecommunications Index $ 100 $ 42.60 $ 66.90 $ 46.00 $ 166.20
S&P 500 $ 100 $ 91.10 $ 88.20 $ 77.80 $ 128.80
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 Securities and
Exchange 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 SEC regulations 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, 2003, the
Section 16 Persons complied with all Section 16(a) filing requirements
applicable to them, except that Form 3s were inadvertently failed to be filed on
a timely basis to report initial holdings following the promotions of Jeffrey
Tatusko and Eric Sucharski to positions that qualified them as Section 16
Persons.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Kampmeinert is the Chairman, President, Chief Executive Officer and Director
of Parker/Hunter Incorporated, an investment banking firm to which the Company
paid fees in the amount of $499,296.00 for services rendered in 2003. Mr. Barnes
is a partner and attorney and Mr. Egan is the Chief Marketing Officer in the law
firm of ReedSmith LLP, to which the Company paid fees in the amount of $1,468.00
for services rendered in 2003. See the disclosure provided under "Compensation
Committee Interlocks and Insider Participation."
19
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. Beginning in 2003, Mr. Quiggle has made payments of principal
and interest that further reduced the balance of the Note to $160,870 as of
February 6, 2004. The remaining 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 Audit Committee of the Board of Directors of the Company has selected
PricewaterhouseCoopers LLP ("PwC") to serve as the independent public
accountants for the Company for the fiscal year ending December 31, 2004. 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 at the Annual Meeting, will be
given the opportunity to make a statement, if he or she so desires, and will be
available to respond to appropriate questions.
As of May 2003, the Audit Committee has required that all non-audit
services to be performed by outside independent accounts be approved in advance
by the Committee, and in October 2003, the Audit Committee Charter was amended
to that effect.
AUDIT FEES
The aggregate estimated fees for professional services rendered by PwC for the
audit of the Company's annual financial statements for fiscal years ended
December 31, 2003 and December 31, 2002, and the review of the Company's interim
financial statements for those fiscal years, were $190,850 and $175,000,
respectively.
AUDIT-RELATED FEES
The aggregate estimated fees for assurance and related services rendered by PwC
that are reasonably related to the audit or review of the Company's financial
statements and that are not disclosed under the caption "Audit Fees" above were
$104,770 and $88,540 for the fiscal years ended December 31, 2003 and December
31, 2002, respectively. In 2003, the audit-related services consisted of the
audit and related services for the Company's 401(k) plan and services relating
to the Company's acquisition of the cable status monitoring product line from
Acterna, LLC on February 13, 2003 (the "Cable Acquisition"). In 2002, these fees
related to the audit and related services for the Company's 401(k) plan and the
Cable Acquisition. The Audit Committee pre-approved 100% and 53% of these
Audit-Related Fees in 2003 and 2002, respectively.
TAX FEES
The aggregate estimated fees for professional services rendered by PwC for tax
compliance, tax advice and tax planning were $26,705 and $40,470 for the years
ended December 31, 2003 and December 31, 2002, respectively. The Audit Committee
pre-approved 100% of these Tax Fees in both 2003 and 2002.
ALL OTHER FEES
The aggregate estimated fees billed for services rendered by PwC for all other
services provided to the Company for the years ended December 31, 2003 and
December 31, 2002 were $69,903 and $0, respectively. The 2003 fees are
principally attributable to services relating to the Company's due diligence
activities for a potential acquisition that was not consummated. The Audit
Committee pre-approved 100% of these Other Fees.
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.
20
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.
SHAREHOLDER PROPOSALS
For shareholder proposals submitted pursuant to Rule 14a-8 under the Securities
Exchange Act of 1934, as amended, to be presented at the Company's annual
meeting of shareholders in 2005 and included in the Company's proxy statement,
such proposals must be submitted and received by the Secretary of the Company at
the Company's principal offices, Tollgrade Communications, Inc., 493 Nixon Road,
Cheswick, Pennsylvania 15024, on or before November 16, 2004.
In addition, Section 3.17 of the Amended and Restated By-laws 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 to the secretary
of the Company, containing the information specified in Section 3.17, 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 15, 2005 for the Company's annual meeting of shareholders in 2005. Any
shareholder proposal received by the Secretary of the Company after January 15,
2005 will be considered to be 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, INCLUDING FINANCIAL STATEMENTS AND SCHEDULES THERETO, FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31, 2003, 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 THE 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 15, 2004
21
EXHIBIT A
AUDIT COMMITTEE CHARTER
(Last Revised 1/21/04)
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
applicable Securities and Exchange Commission ("SEC") rules and regulations and
National Association of Securities Dealers ("NASD") listing rules. No Audit
Committee member may, other than in his or her capacity as a member of the Audit
Committee, the Board of Directors or another Committee of the Board of
Directors: (i) accept any consulting, advisory or other compensatory fee from
the Corporation; or (ii) be an affiliated person of the Corporation or any
subsidiary thereof.
Members of the Audit 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
Sub-Committee of the Corporate Governance 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 Corporation further intends that at least one of the Audit
Committee members be a "financial expert," as defined in applicable SEC rules
and regulations; during periods of time when and if the Audit Committee
membership does not comply with this requirement, the Corporation will disclose
that fact and explain why no such expert serves on the Audit Committee.
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.
PURPOSE
The Audit Committee shall provide assistance to the Board of Directors in
carrying out its responsibilities as they relate to the following:
- - business risk and control
- - internal and external audit
- - accounting systems
- - financial reporting systems
- - compliance with regulatory, legal and tax requirements
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. Maintain sole authority to appoint or replace the independent
accountants. The Audit Committee shall be directly responsible for the
compensation and oversight of the work of the independent accountants (including
resolving disagreements between management and the independent accountants
regarding financial reporting-related issues) for the purpose of preparing or
issuing an audit report or related work. The independent accountant shall report
directly to the Audit Committee.
3. Review and approve, in advance, all auditing services and permitted
non-audit services (including the fees, scope and terms thereof) to be performed
for the Corporation by its independent accountant, subject to the de minimus
exceptions for non-audit services described in Section 10A(i)(I)(B) of the
Exchange Act that are approved by the Audit Committee before the audit is
completed. The Audit Committee may, from time to time, delegate its authority to
pre-approve non-audit services on a preliminary basis to one or more Audit
Committee members, provided that such designees present any such approvals to
the full Audit Committee for its approval at the next Audit Committee meeting.
4. Review and recommend to the Board the concurrence in the appointment,
replacement, reassignment or dismissal of the Chief Financial Officer.
5. Obtain a formal written statement from the independent accountant, on
an annual basis, delineating all relationships between the independent
accountant and the Corporation, consistent with Independence Standards Board
Statement 1 and applicable SEC rules and regulations relating to auditor
independence, 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 take, or
recommend that the Board of Directors take, appropriate action to oversee the
independence of the independent accountant and further ensure the rotation of
the audit team as required by law.
6. 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.
7. 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.
8. 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.
9. Review with management and the independent accountant the Corporation's
financial statements contained in the Corporation's quarterly reports on Form
10-Q, including the disclosures made in management's discussion and analysis
("MD&A") prior to filing of such reports, including the results of the
independent accountant's review of the quarterly financial statements.
2
10. Review with management and the independent accountant at the completion
of the annual examination:
a. The Corporation's annual financial statements and related
footnotes contained in the Corporation's annual report on Form 10-K,
including disclosures made in the MD&A, prior to filing of such
reports.
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 Audit Committee under generally accepted
auditing standards or by law.
11. Establish procedures for receiving, retaining and treating complaints
received by the Corporation regarding accounting, internal accounting controls
or auditing matters, and the confidential, anonymous submission by employees of
concerns regarding questionable accounting or auditing matters.
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 with the General Counsel 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. Meet with the independent accountant and management at least annually
in separate executive sessions to discuss any matters that the Committee or
these groups believe should be discussed privately with the Audit Committee.
15. 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 SEC.
16. Review with management and assess the adequacy of the Corporation's
Code of Ethics, as it applies to the Chief Executive Officer, Chief Financial
Officer and Controller, or persons providing similar functions.
17. Prepare and provide to management and the Board of Directors, on an
annual basis, a budget of the funding required by the Audit Committee to fulfill
its responsibilities as outlined in this Charter.
18. Perform the functions of a qualified legal compliance committee
("QLCC"), within the meaning of Rule 205.2(k) promulgated by the SEC, to receive
reports of evidence of material violations (as defined in Rule 205.2(i) of the
SEC) by the Company or any of its officers, directors, employees or agents. In
its capacity as QLCC, the Committee shall maintain written
3
procedures for the confidential receipt, retention and consideration of
any report of evidence of a material violation, pursuant to Rule
205.2(k)(2). The Committee shall perform the functions of the QLCC in
accordance with such procedures and with applicable laws.
19. Review and approve any "related party transactions" for
potential conflict of interest situations, as such transactions may be
presented to the Committee by management. For purposes of this Charter,
"related party transactions" shall refer to transactions required to be
disclosed pursuant to SEC Regulation S-K, Item 404.
20. Report Committee actions to the Board of Directors with such
recommendations as the Committee may deem appropriate.
21. 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 and may communicate with or make inquiries of any other officer of
employee of the Corporation or the Corporation's outside legal counsel. The
Audit Committee shall have the power to conduct or authorize investigations into
any matters within the Committee's scope of responsibilities. The Audit
Committee shall have the authority, to the extent it deems necessary or
appropriate, to retain independent legal counsel, accountants or other advisors
to assist it from time to time. The Corporation shall provide for appropriate
funding, as determined by the Audit Committee, to compensate for these services,
for all activities set forth in this Charter, as well as for any other ordinary
administrative expenses of the Audit Committee that are necessary and
appropriate in carrying out its duties.
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.
While the Audit Committee has the responsibilities and powers set forth
in this Audit Committee Charter, it is not the Audit Committee's duty to plan or
conduct audits or to determine that the Corporation's financial statements and
disclosures are complete and accurate, or are in accordance with GAAP and
applicable rules and regulations. These are the responsibilities of management
and the independent accountant.
4
Please Mark Here [ ]
for Address
Change or
Comments
SEE REVERSE SIDE
1. ELECTION OF DIRECTORS 2. In his or her discretion,
FOR A TERM EXPIRING IN FOR WITHHOLD the Proxy is authorized
2007: 01 RICHARD H. all nominees AUTHORITY to vote upon such other
HEIBEL AND 02 ROBERT W. (expect as to vote for business as may be
KAMPMEINERT indicated) all nominees properly brought before
[ ] [ ] this meeting.
INSTRUCTION: To withhold
authority to vote for any
individual nominee(s),
write the names of such
nominee(s) in the space
provided:
___________________________________
CONSENTING TO RECEIVE ALL FUTURE
ANNUAL MEETING MATERIALS AND
SHAREHOLDER COMMUNICATIONS
ELECTRONICALLY IS SIMPLE AND
FAST! Enroll today at
www.melloninvestor.com/ISD for
secure online access to your
proxy materials, statements, tax
documents and other important
shareholder correspondence.
SIGNATURE________________________ SIGNATURE(S)____________________ DATE_________
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.
- 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 11:59 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.
INTERNET
HTTP://WWW.EPROXY.COM/TLGD
Use the Internet to vote your proxy.
Have your proxy card in hand when
you access the web site.
OR
TELEPHONE
1-800-435-6710
Use any touch-tone telephone to
vote your proxy. Have your proxy
card in hand when you call.
OR
MAIL
Mark, sign and date
your proxy card
and
return it in the
enclosed postage-paid
envelope.
IF YOU VOTE YOUR PROXY BY INTERNET OR BY TELEPHONE,
YOU DO NOT NEED TO MAIL BACK YOUR PROXY CARD.
TOLLGRADE COMMUNICATIONS, INC.
2004 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 5, 2004 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(R)
ADDRESS CHANGE/COMMENTS (MARK THE CORRESPONDING BOX ON THE REVERSE SIDE)
- FOLD AND DETACH HERE -