<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
PROXY STATEMENT PURSUANT TO SECTION 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S> <C>
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
</TABLE>
[ X ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
TOLLGRADE COMMUNICATIONS, INC.
--------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
N/A
----------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (check the appropriate box):
<TABLE>
<S> <C> <C>
[ X ] No fee required.
[ ] 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 0-11 (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 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.:
------------------------------------------------------------
3) Filing Party:
------------------------------------------------------------
4) Date Filed:
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</TABLE>
<PAGE> 2
[TOLLGRADE LETTERHEAD]
March 15, 2000
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Filing of Preliminary Proxy Statement for Tollgrade Communications, Inc.
Ladies and Gentlemen:
Attached hereto for filing is the Preliminary Proxy Statement for Tollgrade
Communications, Inc. It is expected that the definitive proxy materials will be
mailed to the Company's shareholders on March 27, 2000. If there are any issues
or concerns with this document, please contact me at (412) 820-1495.
Sincerely,
/s/ Sara M. Antol
Sara M. Antol
Chief Counsel
<PAGE> 3
[TOLLGRADE(R) LOGO] [PRELIMINARY COPY DATED
MARCH 15, 2000]
TOLLGRADE COMMUNICATIONS, INC.
493 NIXON ROAD, CHESWICK, PENNSYLVANIA 15024
MARCH 27, 2000
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
MAY 4, 2000
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 Syria Mosque, 1877
Shriners Way, Cheswick, PA 15024, on Thursday, May 4, 2000 at 3:00 p.m., local
time, for the purpose of considering and acting upon the following:
(1) The election by the holders of the Common Stock of the Company of two
directors to serve for a three-year term or until their respective
successors shall have been elected and shall have qualified.
(2) Amendment of the Company's Articles of Incorporation (the "Articles")
to increase the number of shares of Common Stock authorized for
issuance by the Company to fifty million shares.
(3) Ratification of appointment of PricewaterhouseCoopers LLP as the
Company's independent auditors for fiscal year 2000.
(4) Such other matters as may properly be brought before the meeting.
The close of business on March 10, 2000 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.
You will find enclosed a proxy card which should be completed and returned in
order to vote all Common Stock which you hold. The Company's 1999 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 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 be assured at the Annual Meeting.
By Order of the Board of Directors,
/s/ Sara M. Antol
Sara M. Antol
Chief Counsel and Corporate Secretary
1
<PAGE> 4
TOLLGRADE COMMUNICATIONS, INC.
Cheswick, Pennsylvania 15024
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
May 4, 2000
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 the Annual Meeting
of Shareholders to be held on May 4, 2000 at 3:00 p.m. at The Syria Mosque, 1877
Shriners Way, Cheswick PA 15024. It is expected that this proxy statement and
proxies will be mailed to shareholders on or about March 27, 2000.
As of the close of business on March 10, 2000 (the "Record Date"), the Company
had 12,737,670 outstanding shares of Common Stock (reflecting the two-for-one
split of the Company's Common 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.) 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 Articles, the
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 of Shareholders 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.
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, 2000 by (i) each
director and nominee, (ii) each of the executive officers named in the Summary
Compensation Table included elsewhere in this Proxy Statement and (iii) all
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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
NAME AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP (1)(2) PERCENT(3)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Christian L. Allison 398,522 (4)(5) 3%
James J. Barnes 25,200 (2) *
Daniel P. Barry 50,000 (4) *
Robert L. Cornelia 70,328 (4) *
David S. Egan 25,450 (4) *
Rocco L. Flaminio 91,690 (4)(5) *
Richard H. Heibel 353,104 (4)(5) 3%
Robert W. Kampmeinert 67,000 (4)(6) *
Samuel C. Knoch 70,000 (4) *
Mark B. Peterson 40,000 (4) *
All directors and executive
officers as a group (18 persons) 1,414,618 10%
</TABLE>
* Less than 1%.
(1) Under regulations of the Securities and Exchange Commission (the
"SEC"), 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
2
<PAGE> 5
in the other footnotes below, each person has sole voting power and
sole investment power as to all shares listed opposite his name.
(2) 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.
(3) Reflects percentages calculated on outstanding shares as of the Record
Date.
(4) Includes options which are currently exercisable or exercisable within
60 days of January 31, 2000, issued to the following persons for the
following amounts: Mr. Christian L. Allison, 257,722; Mr. Barnes,
24,000; Mr. Barry, 44,000; Mr. Cornelia, 70,328; Mr. Egan, 24,000; Mr.
Flaminio, 51,690; Dr. Heibel, 104,100; Mr. Kampmeinert, 44,000; Mr.
Knoch, 70,000; Mr. Peterson, 40,000; and all directors and executive
officers as a group, 944,458.
(5) Includes shares held by the spouses of the following persons in the
following amounts: Mr. Allison, 1,800 shares; Mr. Flaminio, 40,000
shares; Dr. Heibel, 143,038; and all directors and executive officers
as a group, 184,838 shares. Such persons share voting and dispositive
power with their spouses, except Mr. Allison, as to which shares Mr.
Allison has no voting or dispositive power and disclaims beneficial
ownership.
(6) Includes 21,000 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.
OTHER BENEFICIAL OWNERS
Information with respect to the only other persons known by the Company to be
the beneficial owner of more than 5% of the Company's Common Stock as of the
close of business on December 31, 1999 is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
NAME AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP (1) PERCENT (2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FMR Corp. 1,567,400 (3) 12%
82 Devonshire Street
Boston, MA 02109
Investment Advisors, Inc. 809,800 (4) 6%
501 Second Avenue South
Suite 3500
Minneapolis, MN 55402
Frontier Capital Management Company 836,760 (5) 7%
99 Summer Street
19th Floor
Boston, MA 02110
</TABLE>
(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) Reflects percentages calculated on outstanding shares as of the Record
Date.
(3) FMR Corp. is a parent holding company of Fidelity Management & Research
Company, an investment advisor registered under Section 203 of the
Investment Advisors Act of 1940 which acts as investment advisor to
various investment companies registered under Section 8 of the
Investment Company Act of 1940. Fidelity Management & Research Company
was the beneficial owner of 1,040,400 shares of the Company's stock.
Fidelity Management Trust Company, a wholly owned subsidiary of FMR
Corp., was the beneficial owner of 527,000 shares of the Company's
stock as a result of serving as an investment manager for individual
accounts. The beneficial ownership of the Company's shares arises in
the context of passive investment activities only, by various accounts
managed by the Fidelity companies and their affiliates on a
discretionary basis.
(4) Shares held by Investment Advisors, Inc. ("IAI") for the benefit of
separately managed accounts. IAI has sole investment power over 809,800
shares and sole voting power over 581,800 shares. On February 15, 2000,
IAI filed an amendment to Schedule 13G with the Securities and Exchange
Commission indicating its ownership fell below 5% as of that date.
3
<PAGE> 6
(5) Information taken solely from a Schedule 13G filed with the Securities
and Exchange Commission by Frontier Capital Management Company on
February 15, 2000, reflecting ownership as of December 31, 1999.
ELECTION OF DIRECTORS
Two directors will be elected for a three-year term expiring on the date of the
Annual Meeting of Shareholders to be held in 2003 or until their respective
successors shall have qualified. The Nominating Committee of the Board of
Directors has nominated for election, and the persons named in the enclosed
proxy intend to vote for, the nominees whose names appear below. Although it is
expected that such nominees will be available for election, if any 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 nominees named and such substituted nominees, if any, as shall be
designated by the Company's Board of Directors.
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.
<TABLE>
<CAPTION>
NAME DIRECTOR SINCE PRINCIPAL OCCUPATION; OTHER DIRECTORSHIPS; AGE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nominees for a term expiring in 2003:
James J. Barnes 1997 Shareholder and attorney at Buchanan Ingersoll a Professional
Corporation; Member of the Compensation Committee and the Nominating
Committee; Age 38.
Rocco L. Flaminio 1995 Vice Chairman and Chief Technology Officer; Age 75.
- ------------------------------------------------------------------------------------------------------------------------------------
Continuing directors with a term expiring in 2001:
Richard M. Heibel, M.D. 1996 Retired in September 1996; prior thereto Cardiologist with
Consultants in Cardiology, Inc.; Member of the Audit Committee, the
Compensation Committee and the Investment Committee; Age 53.
Robert W. Kampmeinert 1995 Chairman, President, Chief Executive Officer and Director,
Parker/Hunter Incorporated (investment banking firm); Director of
Tuscarora Incorporated; Member of the Audit Committee, the
Nominating Committee, the Compensation Committee and the Investment
Committee; Age 56.
- ------------------------------------------------------------------------------------------------------------------------------------
Continuing directors with a term expiring in 2002:
Christian L. Allison 1992 Chairman of the Board since April, 1998; Chief Executive Officer
since September 1995; also Treasurer from May 1992 until April 1997;
also Secretary from May 1992 until April 1996; President since
October 1993; Member of the Nominating Committee; Age 39.
Daniel P. Barry 1995 Private investor; director of AMSCO International, Inc.
(manufacturer of medical equipment) from January 1990 until May 1996
and Vice Chairman from July 1995 until May 1996; President and Chief
Executive Officer of AMSCO from October 1994 until July 1995;
Director of Respironics, Inc.; Member of the Audit Committee and the
Compensation Committee; Age 52.
David S. Egan 1998 President, Egan/St. James, Inc., an EPB partner company, since
September 1999; prior thereto, President, Ketchum Advertising;
Member of the Investment Committee; Age 43.
</TABLE>
4
<PAGE> 7
VOTE REQUIRED
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.
BOARD AND COMMITTEE MEETINGS
During 1999 there were ten meetings of the Company's Board of Directors. All
directors attended at least 75% of the total number of 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 Audit Committee recommends to the Board the engagement of 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. The Audit
Committee held three meetings in 1999.
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. 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 does not include Mr. Kampmeinert or Mr. Barnes) which
administers the Company's 1995 Long-Term Incentive Compensation Plan and 1998
Employee Incentive Compensation Plan as to employees. The Compensation Committee
held six meetings in 1999.
The Nominating Committee recommends to the Board nominees to fill Board
vacancies and the membership of the committees of the Board when a vacancy
occurs through retirement or otherwise. Section 3.17of the Company's By-Laws, a
copy of which is available from the Secretary of the Company, sets forth
procedures by which shareholders may recommend candidates to the Nominating
Committee for election as directors. The Nominating Committee held one meeting
in 1999.
The Investment Committee is responsible for overseeing the management of the
Company's investments. The Investment Committee held one meeting in 1999.
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 $500 for attendance
at each committee meeting.
Pursuant to amendments to the Company's 1995 Long Term Incentive Compensation
Plan, approved by the shareholders on April 22, 1997, the Board is permitted to
make grants and awards under the Plan from time to time to non-employee
directors.
During 1999, the Board made nonstatutory stock option grants pursuant to the
Company's 1995 Long-Term Incentive Compensation Plan in the amount of 10,000
shares (post-split) each to non-employee directors Robert W. Kampmeinert, James
J. Barnes, Daniel P. Barry, David S. Egan and Dr. Richard H. Heibel. These
option grants were made with an exercise price equal to the fair market value of
the Company's Common Stock at the date of grant, were immediately exercisable
and remain outstanding for a period of ten years.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Kampmeinert is the President of Parker/Hunter Incorporated, which has been
paid fees for services rendered. Mr. Barnes is a partner in the law firm
Buchanan Ingersoll, a Professional Corporation, which has been paid fees for
services rendered. See the disclosure provided under "Compensation Committee
Interlocks and Insider Participation."
5
<PAGE> 8
EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information regarding compensation
received by the Chief Executive Officer and the four remaining most highly
compensated executive officers of the Company as of December 31, 1999:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
LONG-TERM COMPENSATION AWARDS
ANNUAL COMPENSATION RESTRICTED STOCK SECURITIES UNDERLYING ALL OTHER
NAME/PRINCIPAL POSITION YEAR SALARY ($) BONUS($)(1) AWARDS($) OPTIONS(#)(2) COMPENSATION($)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Christian L. Allison 1999 $200,000 $200,000 -- -- --
Chief Executive Officer 1998 193,000 45,495 -- 100,000 --
1997 180,300 96,500 -- 70,000 --
Robert L. Cornelia 1999 117,970 61,932 -- -- --
Executive V.P., 1998 112,350 19,661 -- 50,000 --
Operations 1997 105,600 36,750 -- -- --
Rocco L. Flaminio 1999 110,249 57,881 -- -- --
Vice Chairman, 1998 105,000 18,375 -- 22,000 --
Chief Technology Officer 1997 100,000 35,000 -- -- --
Samuel C. Knoch 1999 120,210 63,113 -- -- --
Chief Financial Officer 1998 114,490 20,036 -- 50,000 --
and Treasurer 1997 106,800 37,450 -- -- --
Mark B. Peterson 1999 226,275 (3) 92,544 -- 30,000 --
Executive V.P., 1998 178,116 (3) -- -- 50,000 --
Sales and Marketing 1997 31,730 (4) 20,000 (5) -- 20,000 --
</TABLE>
(1) The cash bonuses, which were awarded in accordance with the Company's
Management Incentive Compensation Plan, were paid to the executive
officers following the end of each fiscal year.
(2) 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.
(3) Includes $50,000 in commissions paid to Mr. Peterson under the
Company's sales commission programs for 1999, which was paid to Mr.
Peterson following the end of the year, and $26,002 in commissions paid
to Mr. Peterson in 1998.
(4) Mr. Peterson became an employee of the Company on October 6, 1997 and
this figure represents salary for the period from such date through the
end of the fiscal year.
(5) Represents a signing bonus paid to Mr. Peterson upon start of
employment.
6
<PAGE> 9
OPTION GRANTS
The following table sets forth information concerning stock option grants made
during 1999 to the persons named in the Summary Compensation Table:
<TABLE>
<CAPTION>
OPTIONS GRANTED IN 1999
- ------------------------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE OF
---------------------------------------- ASSUMED ANNUAL RATES OF STOCK
NO. OF SECURITIES % OF TOTAL OPTIONS PRICE FOR OPTION TERM (3)
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE PRICE/ EXPIRATION -----------------------------
NAME GRANTED(#)(1)(2) IN 1999 SHARE ($/SH)(2) DATE 5% 10%
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Christian L. Allison -- -- -- -- -- --
Robert L. Cornelia -- -- -- -- -- --
Rocco L. Flaminio -- -- -- -- -- --
Samuel C. Knoch -- -- -- -- -- --
Mark B. Peterson 30,000 (4) 6.9% $7.6875 6/22/09 $145,039 $367,556
</TABLE>
(1) Options were granted pursuant to the 1995 Long-Term Incentive
Compensation Plan. The exercise price per share was equal to the fair
market value of the Company's Common Stock on the date of grant, as
calculated in accordance with the Plan. Fair market value is the mean
of the high and low sales prices of the Company's Common Stock on the
date of grant on the NASDAQ National Market System as reported in The
Wall Street Journal. The exercise price may be paid in cash, in shares
of Common Stock or in any combination of cash and such shares.
(2) All share and exercise price information reflects the two-for-one split
of the Company's stock approved by the Board of Directors for all
holders of record of the Company's common stock as of February 28,
2000, and distributed to the shareholders on March 20, 2000.
(3) The 5% and 10% assumed annual rates of stock price appreciation do not
reflect actual changes in the fair market value of the Company's Common
Stock since the date of grant. The information in the table is provided
in accordance with the rules of the SEC regarding the disclosure of
compensation of executive officers. The information is not intended to
forecast possible future stock price appreciation, if any.
(4) Options are first exercisable in three equal installments on June 22,
1999, June 22, 2000 and June 22, 2001.
OPTION EXERCISES AND VALUES
The following table sets forth information concerning option exercises made
during 1999 and the value of unexercised options as of December 31, 1999 for the
persons named in the Summary Compensation Table:
<TABLE>
<CAPTION>
AGGREGATED OPTION EXERCISES IN 1999 AND YEAR-END OPTION VALUES (1)
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS
SHARES ACQUIRED VALUE UNEXERCISED OPTIONS AT 12/31/99(#) AT DECEMBER 31, 1999($)(3)
NAME AT EXERCISE(#) REALIZED($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Christian L. Allison -- -- 257,722 33,332 $2,136,748 $322,278
Robert L. Cornelia -- -- 83,662 16,666 574,269 146,453
Rocco L. Flaminio -- -- 48,358 7,332 327,470 63,531
Samuel C. Knoch -- -- 63,334 16,666 450,421 146,453
Mark B. Peterson 5,000 $26,562 58,334 36,666 450,109 337,703
</TABLE>
(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) The value realized is the difference between the aggregate fair market
value of the shares acquired upon exercise and the aggregate exercise
price.
7
<PAGE> 10
(3) 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, 1999
and the aggregate exercise price of such stock options.
Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended (the "Securities
Act"), or the Exchange Act that might incorporate future filings, including this
Proxy Statement in whole or in part, the following report and the Stock
Performance Graph appearing elsewhere in this Proxy Statement shall not be
incorporated by reference into any such filings.
REPORT 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 1999, the members of the Company's Compensation Committee were
James J. Barnes, Daniel P. Barry, Robert W. Kampmeinert and Dr. Richard H.
Heibel. Mr. Kampmeinert served as the Chairman of the Compensation Committee
during 1999. 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 1999 as they affected the Company's executive
officers, including the Chief Executive Officer and the other individuals named
in the Summary Compensation Table.
COMPENSATION PHILOSOPHY
The Company's compensation philosophy is designed to attract and retain key
employees, including the executive officers, of outstanding ability, to motivate
employees to perform to the full extent of their abilities, to ensure
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 1999 consisted of base
salary and bonus. The Company utilized a performance -based standard to
determine 1999 executive officer salary increases from the 1998 base levels,
pursuant to which the executive officers each merited a 5% salary increase. The
1999 salaries for executive officers, other than the Chief Executive Officer,
were determined by the Chief Executive Officer and approved by the Compensation
Committee.
Bonuses. Cash bonuses were paid to the executive officers of the Company for
1999 performance pursuant to the Company's Management Incentive Compensation
Plan ("MICP"). The 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 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. In December, 1999, the Board of Directors approved, subject
to the determination of final financial results, payment of bonuses under the
MICP at the level of 110%, as provided under the terms of the MICP if the
Company exceeds its financial goals. In January, 2000, the Board approved
payment of these bonuses at the level of 150%, rather than 110%, pursuant to
certain discretionary provisions of the MICP. The Board approved this
discretionary payment based upon the fact that the Company's 1999 financial
results were significantly better than the Company's operating plan for the
year. The MICP payment for the Chief Executive Officer, as discussed in the
Section entitled "Compensation of Chief Executive Officer" below, was decided
separately by the Board and was not subject to this discretionary payment. These
payments, applicable to the 1999 performance, were paid to the executive
officers and other employees following the end of the 1999 fiscal year.
Long-Term Incentive Compensation. Long-term incentive compensation is provided
to executive officers through the Company's 1995 Long-Term Incentive
Compensation Plan. Pursuant to the 1995 Long-Term Incentive Compensation Plan,
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. In mid-1999, stock options were granted to Mark B. Peterson based upon
outstanding individual performance. No other awards were made to executive
officers in 1999.
8
<PAGE> 11
Stock option grants are intended to tie the interests of the executive officers
and other employees to the long-term performance of the Company. Such awards
provide an effective incentive for the recipients to increase shareholder value
over the long-term.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
In 1999, the compensation for the Chief Executive Officer, Christian L. Allison,
consistent with the philosophy of compensation applied to all executive
officers, included components of base salary and cash bonus. Mr. Allison's 1999
base salary was determined in accordance with the terms of his employment
agreement, which is described elsewhere in this Proxy Statement. In December
1999, the Compensation Committee increased the base salary level payable under
this employment agreement, based upon individual and Company performance in
1999. In determining the level of increase in base salary payable to the Chief
Executive Officer, the Committee increased Mr. Allison's salary by 50% based
upon significant Company performance and individual performance.
The Committee also approved, in January, 2000, based upon 1999 performance,
payment to Mr. Allison, in addition to the 110% level bonus approved by the
Board at its December, 1999 meeting as described above, an additional cash bonus
under certain discretionary provisions of the MICP in the amount of $101,000, to
reward Mr. Allison for significant individual and Company performance. This
payment, applicable to 1999 performance, was paid to Mr. Allison following the
end of the 1999 fiscal year.
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) are
not at present 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, if not eliminate,
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.
James J. Barnes
Daniel P. Barry
Dr. Richard H. Heibel
Robert W. Kampmeinert
EMPLOYMENT AGREEMENT
Christian L. Allison is employed pursuant to an employment agreement, as
amended, with the Company dated December 13, 1995. Such agreement, as amended,
provides for a base annual salary of $300,000, 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 December, 1999, the Board
of Directors increased the base salary under the agreement from $200,000 to
$300,000. 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, the employee's
employment is terminated by the Company for any reason other than "for cause"
(as defined in the agreements), or is terminated by the employee after a change
in control "for good reason" (as defined in the agreements), the employee 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, the employee's employment is terminated by the
Company for any reason other than for cause, the employee is entitled to a
severance payment of a maximum of two times the sum of (i) the employee's annual
base salary at the time of termination 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.
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If the employee'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 the
employee 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 the employee's employment is terminated by the Company for cause, by the
employee other than for good reason after a change in control, or as a result of
the employee'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 agreements 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 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 its
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 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, the executive officer's employment is terminated by the Company after a
change in control "for good reason" (as defined in the agreements), the
executive officer is entitled to a severance payment of a maximum of two times
the sum of (i) the executive officer's annual base salary at the time of the
change in control, plus (ii) the average annual cash award received by the
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
Robert W. Kampmeinert, a director of the Company and a member of the
Compensation Committee, is Chairman and Chief Executive Officer of Parker/Hunter
Incorporated, an investment banking firm. Parker/Hunter has performed investment
banking services on behalf of the Company during 1999 and it is expected that
the Company will continue to utilize Parker/Hunter's services during 2000. James
Barnes, a director of the Company and a member of the Compensation Committee, is
a shareholder with the law firm of Buchanan Ingersoll, a Professional
Corporation, which has performed legal services on behalf of the Company in the
past. The Company may utilize the services of Buchanan Ingersoll in 2000.
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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 29, 1995 and ending December 31, 1999. This graph assumes a
$100 investment on December 29, 1995 and assumes the reinvestment of dividends.
[GRAPH]
AMENDMENT OF THE COMPANY'S ARTICLES OF INCORPORATION TO INCREASE
The Number Of Authorized Shares
The shareholders are being asked to adopt an amendment to the Company's Articles
to increase the number of authorized shares of Common Stock from 25,000,000 to
50,000,000. The text of the amendment is set forth in Exhibit A to this Proxy
Statement.
Of the currently available 25,000,000 shares of Common Stock, the Company has
outstanding, following the Company's two-for-one split of Common Stock for
shareholders of record on February 28, 2000 and as of the Record Date hereof
12,737,670 (post-split) shares of Common Stock, with an additional 2,950,000
(post-split) reserved for issuance under the Company's 1995 Long-Term Incentive
Compensation Plan and 1998 Employee Incentive Compensation Plan. The Company
believes it is desirable to have the ability to issue additional shares of
Common Stock in connection with acquisitions, stock splits and any other
corporate transactions that might necessitate the issuance of additional Common
Stock promptly, without the delay and expense associated with calling a special
meeting of the shareholders for this purpose. At this time, the Company is not
involved in the negotiation of any transaction that would require the issuance
of additional shares.
The Company's shareholders do not have preemptive rights. As a result,
authorized but unissued shares may and will be issued from time to time and at
any time upon approval of the Company's Board of Directors, but without further
approval by the Company's shareholders. However, under the rules of NASDAQ, no
more than 20% of the outstanding shares can be issued in an acquisition
transaction without shareholder approval.
Although the proposed amendment is not intended to be an anti-takeover measure,
under certain circumstances the additional shares of Common Stock could be used
to make any attempt to gain control of the Company or the Board of Directors
more difficult or time-consuming. For example, the additional shares of Common
Stock could be privately placed (with or without an option to repurchase) with
purchasers who might side with the Board in opposing a hostile takeover bid.
The Amendment to increase the authorized Common Stock might be considered to
have the effect of discouraging a takeover attempt by another person or entity,
since the issuance of the additional shares of Common Stock could be used to
dilute the stock ownership of a person or entity seeking to obtain control and
to increase the cost to a person or entity seeking to acquire a majority of the
voting power of the Company. In such a case, the effect of the additional
authorized shares of Common Stock might be (i) to deprive shareholders of an
opportunity to sell their stock at a temporarily higher price as a result of a
tender offer or the purchase of shares by a person seeking to obtain control of
the Company or (ii) to assist incumbent management in retaining control of the
Company.
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<PAGE> 14
The Board of Directors has proposed and recommends that the shareholders adopt
this amendment to the Articles to increase the number of authorized shares of
the Company to allow additional flexibility in situations where the issuance of
additional shares of Common Stock may be necessary or desirable. The proxies
solicited on behalf of the Board will be voted for the amendment to the
Company's Articles to increase the authorized number of shares unless otherwise
specified. The affirmative vote of a majority of the votes cast in person or by
proxy at a meeting in which the holders of at least a majority of the
outstanding shares of the Company's Common Stock are present in person or by
proxy and voting is required for adoption of the amendment to the Articles.
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors of the Company, following the recommendation of the Audit
Committee, has appointed the independent auditing firm of PricewaterhouseCoopers
LLP (formerly Coopers & Lybrand LLP) to examine the consolidated financial
statements of the Company for the 2000 fiscal year. PricewaterhouseCoopers LLP
audited the financial statements of the Company for the 1999 fiscal year.
Although appointment of independent auditors is not required to be submitted to
a vote of the shareholders, the Board believes that the shareholders should
participate in the selection of independent auditors through the ratification
process. The proxies solicited on behalf of the Board of Directors will be voted
for that firm unless otherwise specified.
In the event that the shareholders fail to ratify the appointment, the Board
will consider such vote as a recommendation to appoint other independent
auditors for the 2001 fiscal year. The Board of Directors expects that
representatives of PricewaterhouseCoopers LLP will be present at the Annual
Meeting of Shareholders and, while such representatives do not currently plan to
make a statement at the meeting, they will be available to respond to
appropriate questions.
OTHER BUSINESS
The Board of Directors does not know at this time of any other 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.
SHAREHOLDER PROPOSALS
In order to be eligible for inclusion in the Company's Proxy Statement for the
2001 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 26, 2000.
Section 3.17 of the 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 26, 2001 for the Company's
Annual Meeting in 2001. Any shareholder proposal received by the Secretary of
the Company after January 26, 2001 will be considered untimely under Rule
14a-4(c)(1) promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934.
By Order of the Board of Directors,
/s/ Sara M. Antol
Sara M. Antol
Chief Counsel and Corporate Secretary
March 27, 2000
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EXHIBIT A
PROPOSED AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION
3. CAPITAL STOCK (a) GENERALLY. The authorized capital stock of the
corporation shall be: 50,000,000 shares of Common Stock, par value of
$.20 per share, and 10,000,000 shares of Preferred Stock, par value of
$1.00 per share.
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(side 1)
TOLLGRADE COMMUNICATIONS, INC.
2000 ANNUAL MEETING OF SHAREHOLDERS
The undersigned does hereby appoint Christian L. Allison and Herman Flaminio, 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 4, 2000 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)
FOLD AND DETACH HERE
(Tollgrade logo)
(side 2)
------------------------------------------------------------------------
(right side) Please mark your votes as indicated in this example
(Box with "x" inside)
1. ELECTION OF DIRECTORS FOR A TERM EXPIRING IN 2003: JAMES J. BARNES,
ROCCO L. FLAMINIO
FOR all nominees (except as indicated) (box)
WITHHOLD AUTHORITY to vote for all nominees (box)
INSTRUCTION: To withhold authority to vote for any individual
nominee(s), write the names of such nominee(s) in the space provided:
- --------------------------------------------------------------------------------
2. Amendments to the Tollgrade Communications, Inc. Articles of
Incorporation to increase the number of authorized shares of the
Company's Common Stock to 50 million.
FOR (box)
AGAINST (box)
ABSTAIN (box)
3. Ratification of the appointment of PricewaterhouseCoopers, LLP as
auditors for the fiscal year ending December 31, 2000.
FOR (box)
AGAINST (box)
ABSTAIN (box)
4. In his discretion, the Proxy is authorized to vote upon such other
business as may be properly brought before this meeting.
(box) Check box if you plan to attend meeting.
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.
Signature(s)___________________Signature(s)___________________Date________, 2000
FOLD AND DETACH HERE
PLEASE SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE.
