ADVANCED FIBRE COMMUNICATIONS, INC.

AUDIT COMMITTEE CHARTER

Purpose

      The purpose of the Audit Committee (the “Committee”) of the Board of Directors (the “Board”) of Advanced Fibre Communications, Inc. (the “Corporation”) is to assist the Board in fulfilling its responsibility for oversight of the quality and integrity of the accounting, auditing, and financial reporting practices of the Corporation, and such other duties as directed by the Board. The Committee’s role includes a particular focus on the qualitative aspects of financial reporting to shareholders, and on the Corporation’s processes to manage business and financial risk, and for compliance with significant applicable legal, ethical, and regulatory requirements. The Committee is directly responsible for the appointment, compensation, and oversight of the public accounting firm engaged to prepare or issue an audit report on the financial statements of the Corporation.

      Notwithstanding the purpose of the Committee, it is understood that the Committee duties do not include planning or conducting audits or determining that the Corporation’s financial statements are accurate, complete and in accordance with generally accepted accounting principles. The foregoing is the responsibility of management and the independent auditors. It is not the duty of the Committee to resolve disagreements between management and the independent auditors or to ensure compliance with applicable laws, regulations, NASD Rules (as defined below) or the Corporation’s Code of Conduct.

Membership and Procedures

 

 

 

 

Membership and Appointment

      The Committee shall comprise not fewer than three members of the Board, as shall be appointed from time to time by the Board based on recommendations from the Nominating and Governance Committee.

 

 

 

 

Removal of Members

      The entire Committee or any individual Committee member may be removed from such Committee with or without cause by the affirmative vote of a majority of the Board. Any Committee member may resign from the Committee effective upon giving oral or written notice to the Chairman of the Board, the Corporate Secretary, or the entire Board (unless the notice specifies a later time for the effectiveness of such resignation). The Board may appoint a qualified successor to take office when such resignation becomes effective.

 

 

 

 

Chairperson

      A chairperson of the Committee (the “Chairperson”) may be designated by the Board upon recommendations by the Nominating and Corporate Governance Committee of the Board, if any. In the absence of such designation, the members of the Committee may designate the Chairperson by majority vote of the full Committee membership. The Chairperson shall determine the agenda, the frequency and the length of meetings. All Committee members, including the Chairperson, shall have unlimited access to management, employees and information.

 

 

 

 

Independence and Qualifications

      Each member of the Committee shall be generally knowledgeable in financial and auditing matters. In addition, the Board shall endeavor to appoint at least one member to the Committee who qualifies as an “audit committee financial expert” as defined in Item 401(h) of Regulation S-K under the Securities Act of 1933, as amended. Each member shall be an “independent director” as defined by the rules promulgated by

 

 

the National Association of Securities Dealers, Inc. (“NASD Rules”), as amended, and shall satisfy all applicable independence requirements under the federal securities laws or rules thereunder.

 

 

 

 

Meetings

      The Committee shall meet at the call of the Chairperson. Meetings may be held in conjunction with regularly scheduled meetings of the Board or otherwise. Notice of meetings shall be given in accordance with the provisions of the Corporation’s By-laws.

 

 

 

 

Delegation

      The Committee may, by resolution passed by a majority of the Committee, designate one or more subcommittees, each subcommittee to consist of one or more members of the Committee. Any such subcommittee to the extent provided in the resolutions of the Committee, and to the extent permitted by applicable law or NASD Rule, shall have the power and authority of the Committee to grant preapprovals of auditing and non-audit services by the independent auditor. Any decision of a subcommittee to whom authority is delegated to preapprove an activity shall be presented to the Committee at each of its scheduled meetings.

 

 

 

 

Authority to Retain and Terminate Advisers

      The Committee shall have the power and authority, at the Corporation’s expense, to retain, terminate and compensate independent counsel and other advisers, as it determines necessary to carry out its duties.

 

 

 

 

Annual Performance Evaluation

      The Committee shall perform an annual performance evaluation of the Committee and, to the extent the Committee so determines, make recommendations to the Board for changes or modifications to the Committee’s Charter.

Authority

      In discharging its oversight role, the Committee is empowered to investigate any matter brought to its attention that is within its Charter, with full power to retain outside counsel or other experts for this purpose.

Duties and Responsibilities

      The following shall be the common recurring duties and responsibilities of the Committee in carrying out its oversight functions. These duties and responsibilities are set forth below as a guide to the Committee with the understanding that the Committee may alter or supplement them as appropriate under the circumstances to the extent permitted or required by applicable law, regulation or NASD Rules.

 

 

 

      1. Annually, the Committee shall retain the Corporation’s independent auditor, subject to stockholder ratification, if required or sought.

 

 

 

      2. The Committee, or a subcommittee of the Committee, shall preapprove the provision of all auditing and non-audit services by the independent auditor to the Corporation and its subsidiaries and shall also approve all audit and non-audit engagement fees and terms with the independent auditor.

 

 

 

      In connection with the Committee’s approval of non-audit services, the Committee shall consider whether the independent auditor’s performance of any non-audit services is compatible with the independence of the independent auditor.

 

 

 

 

 

      3. At least annually, the Committee shall obtain and review a report by the independent auditor describing:

 

 

 

 

      a) the independent auditor’s internal quality-control procedures;

 

 

 

      b) any material issues raised by the most recent internal quality control review or peer review of the independent auditor’s firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the independent auditor’s firm, and the steps taken to deal with those issues; and

 

 

 

      c) all relationships between the independent auditor and the Corporation, in order to assess the auditor’s independence.

 

 

 

 

      4. The Committee shall review the report by the independent auditor, which is required by Section 10A of the Securities Exchange Act of 1934, concerning:

 

 

 

 

      a) all critical accounting policies and practices to be used;

 

 

 

      b) alternative treatments of financial information within GAAP that have been discussed with management officials, ramifications of the use of such alternative disclosures and treatments, and the treatment preferred by the independent auditor; and

 

 

 

      c) any other material written communications between the independent auditor and the Corporation’s management.

 

 

 

 

      5. The Committee shall discuss the annual audited financial statements and quarterly financial statements with management, the internal auditor and the independent auditor, including the Corporation’s disclosures under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Corporation’s reports filed with the SEC, including its reports on Form 10-K and Form 10-Q.

 

 

 

      6. In connection with its review of the Corporation’s financial statements, the Committee shall review and discuss with management, the internal auditor and the independent auditor the matters relating to the conduct of the audit required to be discussed by Statements on Auditing Standards Nos. 61 and 90 (Communications with Audit Committees), as they may be modified or supplemented, including the auditor’s judgment about the quality, not just acceptability, of the Corporation’s accounting principles as applied in its financial reporting.

 

 

 

      7. Based on its review and discussions with management, the internal auditors and the independent auditor, the Committee shall recommend to the Board whether the Corporation’s financial statements should be included in the Corporation’s Annual Report on Form 10-K (or the annual report to stockholders if distributed prior to the filing of the Form 10-K).

 

 

 

      8. The Committee shall prepare or cause the preparation of the report required by SEC rules to be included in the Corporation’s annual stockholders’ meeting proxy statement.

 

 

 

      9. The Committee shall ensure that management includes a copy of this Charter in the proxy statement at least triennially or after any significant amendment to this Charter.

 

 

 

      10. The Committee shall generally discuss earnings press releases as well as financial information and earnings guidance provided to financial analysts, investors and rating agencies before such information is communicated publicly.

 

 

 

      11. Periodically, the Committee shall meet separately with each of management, internal auditors and the independent auditors.

 

 

 

      12. The Committee shall review with the independent auditor any audit problems or difficulties and management’s response.

 

 

 

      13. The Committee shall establish the Corporation’s hiring policies for employees or former employees of the Corporation’s independent auditors.

 

 

 

 

 

      14. The Committee shall discuss the Corporation’s policies with respect to risk assessment and risk management.

 

 

 

      15. Periodically, the Committee shall review with management, the internal auditor and the independent auditor the adequacy and effectiveness of the Corporation’s systems and controls for monitoring and managing legal and regulatory compliance, including the Corporation’s disclosure controls and procedures and the Corporation’s internal control over financial reporting.

 

 

 

      16. The Committee shall establish procedures for:

 

 

 

 

      a) the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal accounting controls or auditing matters; and

 

 

 

      b) the confidential, anonymous submission by the Corporation’s employees of concerns regarding accounting or auditing matters.

 

 

 

 

      17. The Committee shall formulate and recommend to the Board a code of ethics and business conduct for directors, officers and employees of the Corporation (a “Code of Conduct”). The Committee shall obtain reports from management concerning compliance with the Code of Conduct and the Corporation’s other compliance policies and guidelines, and advise the Board with respect to such compliance. The Committee shall from time to time recommend to the Board any revisions to the Code of Conduct and other compliance policies and guidelines that the Committee deems appropriate or to ensure compliance with applicable securities laws or regulations and securities listing requirements.

 

 

 

      18. The Committee shall communicate to the Board any issues with respect to the quality or integrity of the Corporation’s financial statements, the Corporation’s compliance with legal or regulatory requirements, the performance and independence of the Corporation’s independent auditors or the performance of the independent audit function.

 

 

 

      19. The Committee shall review with the Chief Financial Officer the scope and plan of the work to be done by the Internal Audit function, and the results of such work.

 

 

 

 

Reliance on Information Provided

      In adopting this Charter, the Board acknowledges that the Committee members are not necessarily legal experts and are not providing any expert or special assurance as to the Corporation’s legal compliance. Each member of the Committee shall be entitled to rely on the integrity of those persons and organizations within and outside the Corporation that provide information to the Committee and the accuracy and completeness of the information provided to the Committee by such persons or organizations absent actual knowledge to the contrary.

Amendment

      This Charter and any provision contained herein may be amended or repealed by the Board.