Urges Stockholders to Support Real Change on the Tollgrade Board by Voting FOR
the Ramius Nominees on the GOLD Proxy Card Today
NEW YORK, July 13 /PRNewswire/ -- RCG Starboard Advisors, LLC, a subsidiary of
Ramius LLC (collectively, "Ramius"), today announced that it has filed
supplemental proxy materials with the SEC in connection with the 2009 Annual
Meeting of Tollgrade Communications, Inc. (Nasdaq: TLGD) and has delivered a
letter to all stockholders of the Company.
Ramius is the largest stockholder of Tollgrade, owning approximately 15.2% of
the Company's outstanding shares of Common Stock. Ramius is urging
stockholders to elect at the Annual Meeting its three highly qualified
nominees, Scott Chandler, Ed Meyercord and Jeffrey Solomon, in place of
incumbent directors James J. Barnes, David S. Egan and Brian C. Mullins.
Ramius's director nominees collectively have over 35 years of combined
experience in the telecom equipment and services industries and have a large
vested interest in the future financial performance of the Company.
The full text of the letter follows:
July 13, 2009
Dear Fellow Tollgrade Communications, Inc. Stockholder:
VOTE NOW FOR REAL CHANGE ON THE TOLLGRADE BOARD
AS TOLLGRADE'S LARGEST STOCKHOLDER, RAMIUS HAS A TRUE VESTED INTEREST IN
TURNING AROUND TOLLGRADE
OUR NOMINEES HAVE THE TELECOM INDUSTRY EXPERIENCE THIS BOARD DESPERATELY NEEDS
VOTE THE GOLD PROXY CARD TODAY TO SUPPORT OUR EFFORTS TO REBUILD STOCKHOLDER
VALUE
RCG Starboard Advisors, LLC, a subsidiary of Ramius LLC (together with its
affiliates, "Ramius" or the "Ramius Group"), collectively owns approximately
15.2% of the common stock of Tollgrade Communications, Inc. ("Tollgrade" or
the "Company"). We are the Company's largest stockholder. Over the past four
years, as stockholders, we have watched as management and the current Board of
Directors, as composed prior to the recently announced changes (the "Board"),
have failed time and time again to address the long-term financial
underperformance of the Company. The recent changes in the composition of the
Board were made by the Company only after we publicly announced a competing
slate of director candidates for the 2009 Annual Meeting (the "Meeting").
These reactionary changes fail to address the significant issues facing the
Company and, in our opinion, are transparent attempts by the Company to win
votes in the upcoming election contest.
DO NOT BE INFLUENCED BY THIS BOARD'S REACTIONARY BOARD CHANGES
VOTE FOR DIRECTORS WHO WILL BE PROACTIVE AND WORK TIRELESSLY TO ENHANCE VALUE
Stockholders deserve a Board that is fully committed to enhancing value, not
one that is clearly doing the minimum it believes is necessary to win an
election contest. When the pressure is off, what will keep the Board from
returning to its past practices of complacent oversight and weak governance?
The time has come for stockholders to demand real change at Tollgrade, not
just the illusion of change. We therefore urge all stockholders to support
the Ramius nominees by voting the GOLD proxy card today.
Tollgrade Has Significantly Underperformed Under the Direction of the Current
Board
-- Over the past five years ended June 30, 2009, Tollgrade's stock
price is down approximately 51% versus the NASDAQ Composite total
return
(including dividends), which is down approximately 7%.
-- As of June 30, 2009, Tollgrade had an enterprise value of
approximately
$6 million after factoring in its $60 million cash balance.
Effectively, stockholders are attributing little to no value to
Tollgrade's operating businesses.
Unfortunately, this is not just the case today, but has been the case for much
of the past two years. We believe this is a reflection of the poor operating
performance and terrible allocation of corporate resources and capital over
the past five years. From 2003 to 2008:
-- Annual revenue declined by approximately $8 million from $65.1 million
in 2003 to $57.2 million in 2008, a decline of 12%;
-- Annual gross profit declined by approximately $7.0 million from $38.4
million in 2003 to $31.6 million in 2008, a decline of 18%;
-- Annual operating expenses remained constant at $31.2 million; and
-- Adjusted annual EBITDA declined by $7.4 million from $9.4 million in
2003 to $2.0 million in 2008, a decline of 79%.
THE COMPANY HAS VERY LITTLE TO SHOW FOR ITS $116 MILLION INVESTMENT OVER THE
PAST 5 YEARS
These poor results are in spite of massive investments in the business. Over
the past five years, the Company has poured excessive amounts of capital into
research and development projects as well as ill-conceived and poorly executed
acquisitions. From 2003 to 2008 Tollgrade spent:
-- $84 million on internal research and development projects; and
-- $32 million on external acquisitions.
Between research and development and external acquisitions, Tollgrade has
spent $116 million of cash in the past five years, or $9.15 per share, with
little to show for it. This compares to the current $6 million enterprise
value and the $5.24 stock price as of June 30, 2009. Clearly, the Company has
failed to execute and stockholders have suffered under the leadership of the
current Board.
Poor Performance Has Been Driven by a Misguided Strategy and Weak Execution
We believe the Company's poor performance is due primarily to a convoluted and
ineffective growth strategy made worse by poor execution and failed oversight.
Tollgrade is a small player in the telecom equipment industry. The core of
Tollgrade's existing businesses is legacy hardware and software solutions that
allow telecom operators to manage their legacy copper networks. This is the
market for which the Company is best known and in which it has had success
historically. However, Tollgrade has aggressively pursued broad and wide
ranging product development initiatives and acquisitions outside its core
competencies spanning multiple industries on a global scale. These include
products for next generation telecom networks, power utilities and, up until
recently, cable operators. These initiatives have, for the most part, failed.
Tollgrade has lost focus on who are its key customers and how to best serve
those customers with products and services that the customer actually needs
and would purchase from Tollgrade.
Tollgrade's key customers are large, global, multibillion dollar enterprises
that require extreme focus and attention. The Company has failed in its
business strategy because it is pursuing too many markets with too few
resources to be effective. The Company's "product first" strategy where it
develops or acquires products and then attempts to market them has
consistently failed. Instead, Tollgrade should pursue a "customer-first"
product development strategy where the Company forges strong relationships
with existing customers and works with them to develop products and services
that fit their needs. Effectively implemented and executed, this strategy
would produce better, more consistent results with a much improved return on
invested capital. Tollgrade must rein in its capital spending on speculative
projects which have shown little likelihood of success and instead focus on
the core markets for which the Company has a strong reputation and a
market-leading technology.
Although Tollgrade has begun to make some changes in its strategy, the Company
needs better guidance and oversight from an experienced Board in order to
shape the future of Tollgrade and to avoid the serious mistakes of the past
overseen by the current Board.
The Current Board Has No Relevant Industry Experience, Is Ill-Equipped to
Oversee a Turnaround at Tollgrade and Lacks a Substantial Vested Interest in
the Company's Financial Performance
We believe the Company's poor financial performance and misguided business
strategy is in large part due to a Board composed of directors with little, if
any, experience in the technology and telecom industry. They have allowed
management to make unchecked business decisions which have destroyed
stockholder value. Apart from the Chief Executive Officer of the Company,
none of the other current Board members have any direct experience in the
telecom equipment industry, an industry in which Tollgrade generates a vast
majority of its revenues. Additionally, in the aggregate, the current Board
owns just 130,884 shares directly, representing approximately 1% of the shares
outstanding, and therefore lacks a substantial vested interest in the
financial performance of the Company.
The Ramius Nominees Have the Skills and Incentives Necessary to Turn Around
Tollgrade
The nominees that we have proposed for the Board have over 35 years of
combined experience in the telecom equipment and services industries and have
a large vested interest in the future financial performance of the Company.
Scott Chandler Mr. Chandler has over 20 years of senior and executive
level management experience in the telecom industry.
Prior to founding Franklin Court Partners, a consulting
and advisory firm focused on the telecom and technology
industry, Mr. Chandler served as the Chief Financial
Officer of RHYTHMS NetConnections, a provider of
broadband services utilizing digital subscriber line
(DSL) technology that is now part of Verizon. Prior to
RHYTHMS, Mr. Chandler served as President and Chief
Executive Officer of C-COR, a pioneer in the cable
television industry and a supplier of broadband
telecommunications equipment that was sold to Arris
Group Inc. in 2007.
Ed Meyercord Mr. Meyercord has over 15 years of experience in the
telecom services industry. Most recently, Mr. Meyercord
was the President, Chief Executive Officer, and Director
of Cavalier Telephone, a privately held voice and data
services provider with over $500 million in revenue and
$90 million of EBITDA. Prior to Cavalier, Mr. Meyercord
was the President, Chief Executive Officer, and Director
of Talk America, Inc., a telecom services company
providing phone and internet services to consumers and
small business customers. Talk America, a
publicly-traded NASDAQ company, was acquired by Cavalier
Telephone in 2006 at which time Mr. Meyercord became the
Chief Executive Officer of the combined company. During
his tenure at Talk America, Mr. Meyercord acted in many
capacities including Marketing and Corporate
Development, Chief Financial Officer, Chief Operating
Officer, and finally Chief Executive Officer. He is
credited with designing and implementing many value
enhancing plans at both Cavalier and Talk America which
led to substantial value realization for stockholders of
both companies.
Jeffrey Solomon Mr. Solomon is a Managing Member of Ramius, a $7 billion
diversified investment management firm. Mr. Solomon
joined Ramius when it was founded in 1994 and has been
responsible for the development, management and
oversight of a number of the investment strategies
currently employed by Ramius. Mr. Solomon has extensive
experience in corporate finance, restructuring, mergers
and acquisitions, and corporate governance.
* For full biographies of the Ramius nominees, please refer to our definitive
proxy statement filed on June 25, 2009.
As the largest stockholder of Tollgrade, our interests are directly aligned
with those of all stockholders. For all the reasons we have stated above, we
firmly believe that our proposed changes to the composition of the Board are
appropriate and necessary.
Recent Actions Taken By the Board in Response to Our Nomination Notice Do
Little to Address the Major Issues Facing the Company
The average tenure of the current Board, excluding the addition of the Chief
Executive Officer to the Board in late 2007 and the recently announced
changes, is twelve years. Prior to the recently announced changes, the newest
independent member of the Board has been a director since 2002, over six years
ago. The Chief Executive Officer has been at the Company for two years and
has had ample opportunity to address the lack of relevant expertise on the
Board. Up until our nomination notice on February 11, 2009, the Company
completely ignored the lack of independent industry experience on the Board.
We believe that the actions taken since our nomination notice to change the
Board's structure are purely reactionary and are an attempt to better position
the Company in the election contest. We do not believe these actions have
been done with a sincere intention of changing the manner in which Tollgrade
is overseen and governed. Why didn't the Company make these Board changes
earlier? Would these changes have been made if we had not nominated a
competing slate of directors for election at the Meeting? We believe the
answer is clear.
The Board has made Reactive Corporate Governance Reforms and Has Demonstrated
Poor Business Judgment
Additionally, we believe that the Company's recent corporate governance
reforms have been entirely reactive. First, consider the Company's decision
to put a proposal to declassify the Board to a shareholder vote at the 2007
Annual Meeting. This decision only came after the holders of 7,318,509
shares, or approximately 80% of the shares that voted, approved a non-binding
shareholder proposal at the 2006 Annual Meeting to declassify the Board of
Directors. The Company's 2006 proxy statement in connection with the 2006
Annual Meeting stated that the Board "concluded that the Company's classified
board structure continues to be in the best interests of the Company and its
various constituencies, including the Company's stockholders, and oppose this
proposal." What changed between 2006 and 2007? We believe the Company's
flip-flop in corporate governance was motivated more by a desire to do the
minimum it takes to receive your votes than a desire to truly take actions
that are in your best interests.
After we publicly voiced our concern that the current Board lacks members with
relevant experience in the telecom equipment and services industries, the
Company announced on June 24, 2009 the appointment of a new independent
director, Edward Kennedy, and on July 7, 2009 the replacement of an incumbent
director with a new independent director, Charles Hoffman. These individuals
were selected by the current Board and we do not believe that their election,
by itself, will yield adequate changes to the composition and structure of the
Board.
The Company goes further to request the support of stockholders based on the
actions they have taken to date including the announcement of a $15 million
stock repurchase program and the divestiture of the cable products business.
We think it is important for stockholders to note that as of December 31,
2008, the Company had only repurchased 496,918 shares for an aggregate value
of $2.2 million out of the $15 million earmarked or repurchases. We are not
aware of any further repurchases executed since that time nor were any further
repurchases disclosed in the Company's first quarter 10-Q filed with the SEC
on May 7, 2009. During this time frame, the Company's stock has traded
substantial volume at prices that imply almost zero enterprise value for the
operating business. Evidently, the Company's $15 million stock repurchase
program is mostly form over substance and only represents the appearance of
positive actions as opposed to real actions.
Additionally, stockholders should note that the sale of the cable products
business for approximately $3 million on May 28, 2009 compares to a purchase
price of $14.3 million on February 13, 2003 for Acterna's Status and
Performance Monitoring Product Line, a large portion of the cable products
business. Obviously any credit the Company wishes to take for exiting the
cable products business must be offset by the significant destruction of
stockholder value caused by the poor execution of the acquisition in the first
place.
As we have highlighted above, the changes in board leadership, corporate
governance, and board composition do little to remedy the shortcomings of the
current Board. Stockholders must heavily discount the Company's veiled
attempt to garner support with reactionary measures that are clearly meant to
win votes as opposed to create real change at Tollgrade. The best way for
stockholders to ensure their interests are represented in the board room is to
elect new, independent industry representatives to work alongside a
representative of the largest stockholder to unlock value at Tollgrade.
Our Interests Are Directly Aligned with ALL Stockholders
Vote the GOLD Proxy Card to Improve the Tollgrade Board
We are not seeking control of Tollgrade. We are seeking to improve the
quality and accountability of the Board by adding two highly qualified,
independent directors with relevant industry experience and a direct
representative of the largest stockholder. We firmly believe these three
individuals will represent the best interests of all stockholders. We urge
you to vote the GOLD proxy card today.
We look forward to your support at the 2009 Annual Meeting.
Best Regards,
Peter A. Feld
Managing Director
Ramius LLC
About Ramius LLC
Ramius LLC is a registered investment advisor that manages assets in a variety
of alternative investment strategies. Ramius LLC is headquartered in New York
with offices located in London, Tokyo, Hong Kong, Munich, and Luxembourg.
Media Contact:
Peter A. Feld / Ramius LLC / (212) 201-4878
SOURCE Ramius LLC
Peter A. Feld, Ramius LLC, +1-212-201-4878
