Document:

EX-10.10

 

Exhibit 10.10

SECURITIES PURCHASE AGREEMENT

     This Securities Purchase Agreement (this “Agreement”) is dated as of May 4, 2006 among PICO
Holdings, Inc., a California corporation (the “Company”), and the purchaser identified on the
signature page hereto (the “Purchaser”).

     WHEREAS, subject to the terms and conditions set forth in this Agreement, the Company desires
to issue and sell to the Purchaser, and the Purchaser desires to purchase from the Company,
securities of the Company as more fully described in this Agreement; and

     WHEREAS, the Company expects to enter into Securities Purchase Agreements which are
substantially identical to this Agreement (this Agreement, together with such Agreements, the
“Investment Agreements” and each an “Investment Agreement”) with other purchasers (the “Other
Purchasers” and together with the Purchaser, the “Participating Purchasers”) and pursuant to such
Investment Agreements the Company expects to sell an aggregate of 2,600,000 shares of its Common
Stock for an aggregate purchase price of $78,000,000.

     NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for
other good and valuable consideration the receipt and adequacy of which are hereby acknowledged,
the Company and the Purchaser agree as follows:

ARTICLE I

DEFINITIONS

     1.1 Definitions. In addition to the terms defined elsewhere in this Agreement, the
following terms have the meanings indicated:

     “Advice” has the meaning set forth in Section 6.5.

     “Agreement” has the meaning set forth in the preamble.

     “Affiliate” means any Person that, directly or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with a Person, as
such terms are used in and construed under Rule 144 under the Securities Act.

     “Benefit Plans” means (i) all “employee pension benefit plans,” as defined in section
3(2) of ERISA, established, maintained, or contributed to by the Company or its Subsidiaries
for the benefit of any employees or agents of the Company or its Subsidiaries; (ii) all
“employee welfare benefit plans,” as defined in section 3(1) of ERISA, established,
maintained, or contributed to by the Company or its Subsidiaries for the benefit of any
employees or agents of the Company or its Subsidiaries; and (iii) to the knowledge of the
Company, all other material incentive, employment, supplemental retirement, severance,
deferred compensation and other employee benefit plans, programs, agreements and
arrangements established, maintained, or contributed to by the Company or its Subsidiaries
for the benefit of any employees or agents of the Company or its Subsidiaries, without
regard to the coverage of any such plan, program, agreement or arrangement by ERISA or any
provision of the Code.

     “Board” means the board of directors of the Company.

 

 

     “Business Day” means any day other than Saturday, Sunday or other day on which
commercial banks in the City of New York are authorized or required by law to remain closed.

     “Closing” means the closing of the purchase and sale of the Shares pursuant to
Section 2.1.

     “Closing Date” means the date of the Closing.

     “Code” means the Internal Revenue Code of 1986, as amended.

     “Commission” means the Securities and Exchange Commission.

     “Common Stock” means the common stock of the Company, par value $0.001 per share.

     “Company” has the meaning set forth in the preamble.

     “Convertible Securities” means any stock or securities (other than Options) convertible
into or exercisable or exchangeable for Common Stock.

     “Effective Date” means the date that the Registration Statement is first declared
effective by the Commission.

     “Effectiveness Period” has the meaning set forth in Section 6.1(b).

     “Eligible Market” means any of the New York Stock Exchange, the American Stock
Exchange, the NASDAQ National Market or the NASDAQ Capital Market.

     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

     “Event” has the meaning set forth in Section 6.1(d)(i) through (v).

     “Event Payments” has the meaning set forth in Section 6.1(d).

     “Exchange Act” means the Securities Exchange Act of 1934, as amended.

     “Filing Date” means the date that is 30 days after the Closing Date, with respect to
the initial Registration Statement required to be filed hereunder, and, with respect to any
additional Registration Statements that may be required pursuant to Section 6.1, the
30th day following the date on which the Company first knows, or reasonably should have
known, that such additional Registration Statement is required under such Section.

     “GAAP” has the meaning set forth in Section 3.1(g).

     “Indemnified Party” has the meaning set forth in Section 6.4(c).

     “Indemnifying Party” has the meaning set forth in Section 6.4(c).

     “Intellectual Property Rights” has the meaning set forth in Section 3.1(t).

     “Lien” means any lien, charge, claim, security interest, encumbrance, right of first
refusal or other restriction.

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     “Losses” means any and all losses, claims, damages, liabilities, settlement costs and
expenses, including, without limitation, costs of preparation and reasonable attorneys’
fees.

     “Material Adverse Effect” has the meaning set forth in Section 3.1(b).

     “Material Permits” has the meaning set forth in Section 3.1(u).

     “NASD” has the meaning set forth in Section 3.1(i).

     “Options” means any rights, warrants or options to subscribe for or purchase Common
Stock or Convertible Securities.

     “Person” means any individual or corporation, partnership, trust, incorporated or
unincorporated association, joint venture, limited liability company, joint stock company,
government (or an agency or subdivision thereof) or any court or other federal, state, local
or other governmental authority or other entity of any kind.

     “Proceeding” means an action, claim, suit, investigation or proceeding (including,
without limitation, an investigation or partial proceeding, such as a deposition), whether
commenced or threatened.

     “Prospectus” means the prospectus included in the Registration Statement (including,
without limitation, a prospectus that includes any information previously omitted from a
prospectus filed as part of an effective registration statement in reliance upon Rule 430A
promulgated under the Securities Act), as amended or supplemented by any prospectus
supplement or by any free writing prospectus as defined under Rule 405 of the Securities
Act, with respect to the terms of the offering of any portion of the Registrable Securities
covered by the Registration Statement, and all other amendments and supplements to the
Prospectus including post effective amendments, and all material incorporated by reference
or deemed to be incorporated by reference in such Prospectus.

     “Purchaser” has the meaning set forth in the preamble.

     “Purchaser Counsel” has the meaning set forth in Section 6.2(a).

     “Registrable Securities” means any Common Stock (including the Shares) issued or
issuable pursuant to the Transaction Documents, together with any securities issued or
issuable upon any stock split, dividend or other distribution, recapitalization or similar
event with respect to the foregoing.

     “Registration Statement” means each registration statement required to be filed under
Article VI, including (in each case) the Prospectus, amendments and supplements to such
registration statement or Prospectus, including pre- and post-effective amendments, all
exhibits thereto, and all material incorporated by reference or deemed to be incorporated by
reference in such registration statement.

     “Regulatory Order” has the meaning set forth in Section 3.1(i).

     “Related Person” has the meaning set forth in Section 4.8.

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     “Required Effectiveness Date” means 90 days from the Closing Date (120 days if the
Registration Statement is reviewed by the SEC).

     “Rule 144,” “Rule 415,” and “Rule 424” means Rule 144, Rule 415 and Rule 424,
respectively, promulgated by the Commission pursuant to the Securities Act, as such Rules
may be amended from time to time, or any similar rule or regulation hereafter adopted by the
Commission having substantially the same effect as such Rule.

     “Schedule” means the section numbers of the Disclosure Schedule that correspond to the
first, or principal, section of the Agreement to which the disclosures relate.

     “SEC Reports” has the meaning set forth in Section 3.1(g).

     “Securities” means the Shares.

     “Securities Act” means the Securities Act of 1933, as amended.

     “Self-Regulatory Organization” has the meaning set forth in Section 3.1(i).

     “Shares” means an aggregate of 2,600,000 shares of Common Stock, which are being issued
and sold to the Participating Purchasers at the Closing.

     “Subsidiary” means any Person in which the Company, directly or indirectly, owns at
least 30% of the capital stock or holds an equity or similar interest.

     “Taxes” means any federal, state, county, local, or foreign taxes, charges, fees,
levies, imposts, duties, or other assessments, including income, gross receipts, excise,
employment, sales, use, transfer, license, payroll, franchise, severance, stamp, occupation,
windfall profits, environmental, federal highway use, commercial rent, customs duties,
capital stock, paid-up capital, profits, withholding, Social Security, single business and
unemployment, disability, real property, personal property, registration, ad valorem, value
added, alternative or add-on minimum, estimated, or other tax or governmental fee of any
kind whatsoever, imposes or required to be withheld by the United States or any state,
county, local or foreign government or subdivision or agency thereof, including any
interest, penalties, and additions imposed thereon or with respect thereto.

     “Tax Return” means any report, return, information return, or other information
required to be supplied to a governmental authority in connection with Taxes, including any
return of an affiliated or combined or unitary group that includes the Company and any
amendments thereof.

     “Trading Market” means the NASDAQ National Market or any other Eligible Market on which
the Common Stock is then listed or quoted.

     “Transaction Documents” means this Agreement, the stock certificates representing the
Securities, and any other documents or agreements executed in connection with the
transactions contemplated hereunder.

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ARTICLE II

PURCHASE AND SALE

     2.1 Closing. Subject to the terms and conditions set forth in this Agreement, at the
Closing the Company shall issue and sell to the Purchaser, and the Purchaser shall purchase from
the Company, such number of Shares, each as indicated below such Purchaser’s name on the signature
page of this Agreement, for an aggregate purchase price for such Purchaser as indicated below such
Purchaser’s name on the signature page of this Agreement. The Closing shall take place at such
location and time as the parties may agree.

     2.2 Closing Deliveries.

          (a) At the Closing, the Company shall deliver or cause to be delivered to the Purchaser (or in
the case of the stock certificates for the Shares, to the Custodian designated by the Purchaser)
the following:

          (i) stock certificates, free and clear of all restrictive and other legends (except as
expressly provided in Section 4.1(b) hereof), evidencing such number of Shares equal
to the number of Shares indicated below such Purchaser’s name on the signature page of this
Agreement, registered in the name of such Purchaser; for greater clarity, the Company hereby
acknowledges that the stock certificates described above shall be delivered prior to payment
of the purchase price by such Purchaser; provided, however, that for the period commencing
upon such delivery and ending upon the Company having received satisfactory evidence that
the purchase price has been paid, the Custodian shall hold the Share certificates in escrow;
and provided, further, that if Purchaser does not pay the purchase price within one (1)
Business Day after the Company has delivered such certificates, then the Purchaser shall
cause the Custodian to release same from escrow and return them to the Company, duly
endorsed in blank or accompanied by stock transfer powers, immediately without demand
therefor;

          (ii) a legal opinion of DLA Piper Rudnick Gray Cary US LLP, counsel to the Company, in
the form of Exhibit A, executed by such counsel.

     2.3 At the Closing, the Purchaser shall deliver or cause to be delivered to the Company the
purchase price indicated below such Purchaser’s name on the signature page of this Agreement, in
United States dollars and in immediately available funds, by wire transfer to the account
designated by the Company on Exhibit B to this Agreement.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

     3.1 Representations and Warranties of the Company. The Company hereby represents and
warrants to each of the Purchaser as follows:

          (a) Subsidiaries. Other than as set forth in the SEC Reports (as defined in
Section 3.1(g)) the Company has no material Subsidiaries.

          (b) Organization and Qualification. Each of the Company and the Subsidiaries is an
entity duly organized, validly existing and in good standing under the laws of the jurisdiction of
its incorporation or organization (as applicable), with the requisite power and authority to own
and use its properties and assets and to carry on its business as currently conducted. Neither the
Company nor any Subsidiary is in violation of any of the provisions of its respective certificate
or articles of incorporation, bylaws or other organizational or charter documents. Each of the
Company and the Subsidiaries is duly

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qualified to do business and is in good standing as a foreign corporation or other entity in
each jurisdiction in which the nature of the business conducted or property owned by it makes such
qualification necessary, except where the failure to be so qualified or in good standing, as the
case may be, would not, individually or in the aggregate, (i) adversely affect the legality,
validity or enforceability of any Transaction Document, (ii) have or result in a material adverse
effect on the results of operations, assets, prospects, business or condition (financial or
otherwise) of the Company and the Subsidiaries, taken as a whole on a consolidated basis, or (iii)
adversely impair the Company’s ability to perform fully on a timely basis its obligations under any
of the Transaction Documents (any of (i), (ii) or (iii), a “Material Adverse Effect”).

          (c) Authorization; Enforcement. The Company has the requisite corporate power and
authority to enter into and to consummate the transactions contemplated by each of the Transaction
Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and
delivery of each of the Transaction Documents by the Company and the consummation by it of the
transactions contemplated hereby and thereby have been duly authorized by all necessary action on
the part of the Company, its officers, Board and shareholders and no further consent or action is
required by the Company, its officers, Board or its shareholders. Each of the Transaction
Documents has been (or upon delivery will be) duly executed by the Company and is, or when
delivered in accordance with the terms hereof, will constitute, the legal, valid and binding
obligation of the Company enforceable against the Company in accordance with its terms, except (i)
as may be limited by (1) applicable bankruptcy, insolvency, reorganization or others laws of
general application relating to or affecting the enforcement of creditors’ rights generally and (2)
the effect of rules of law governing the availability of equitable remedies and (ii) as rights to
indemnity or contribution may be limited under federal or state securities laws or by principles of
public policy thereunder.

          (d) No Conflicts. The execution, delivery and performance of the Transaction
Documents by the Company and the consummation by the Company of the transactions contemplated
hereby and thereby do not and will not (i) conflict with or violate any provision of the Company’s
or any Subsidiary’s certificate or articles of incorporation, bylaws or other organizational or
charter documents, (ii) conflict with, or constitute a default (or an event that with notice or
lapse of time or both would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any
material agreement, credit facility, debt or other instrument (whether evidencing a Company or
Subsidiary debt or otherwise) or other understanding to which the Company or any of its
Subsidiaries is a party or by which any property or asset of the Company or any of its Subsidiaries
is bound or affected or (iii) result in a violation of any law, rule, regulation, order, judgment,
injunction, decree or other restriction of any court or governmental authority to which the Company
or a Subsidiary is subject (including federal and state securities laws and regulations and the
rules and regulations of the principal market, system or exchange on which the Common Stock is
traded, quoted or listed), or by which any property or asset of the Company or a Subsidiary is
bound or affected.

          (e) Issuance of the Securities. The Securities are duly authorized and, when issued
and paid for in accordance with the Transaction Documents, will be duly and validly issued, fully
paid and nonassessable, free and clear of all Liens and shall not be subject to preemptive rights
or similar rights of shareholders.

          (f) Capitalization. The number of shares and type of all authorized, issued and
outstanding capital stock, options and other securities of the Company (whether or not presently
convertible into or exercisable or exchangeable for shares of capital stock of the Company) is as
set forth in the SEC Reports (as defined in Section 3(g) below) and there has been no change in
such information since the date of the most recent SEC Report. All outstanding shares of capital
stock are duly authorized, validly issued, fully paid and nonassessable and have been issued in
compliance with all applicable

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securities laws, and none of such issuances were, and the issuance
of the Securities will not be, made in violation of any preemptive rights or other rights. Except
for issuances pursuant to plans or programs described in the SEC
Reports, there are no outstanding options, warrants, script rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities, rights or obligations
convertible into or exercisable or exchangeable for, or giving any Person any right to subscribe
for or acquire, any shares of Common Stock, or contracts, commitments, understandings or
arrangements by which the Company or any Subsidiary is or may become bound to issue additional
shares of Common Stock, or securities or rights convertible or exchangeable into shares of Common
Stock. There are no anti-dilution or price adjustment provisions contained in any security issued
by the Company (or in any agreement providing rights to security holders) and the issue and sale of
the Securities will not obligate the Company to issue shares of Common Stock or other securities to
any Person (other than the Purchaser) and will not result in a right of any holder of Company
securities to adjust the exercise, conversion, exchange or reset price under such securities. To
the knowledge of the Company and except as specifically disclosed in the SEC Reports or in any
Schedule 13D or Schedule 13G filed with the Commission, no Person or group of related Persons
beneficially owns (as determined pursuant to Rule 13d-3 under the Exchange Act), or has the right
to acquire, by agreement with or by obligation binding upon the Company, beneficial ownership of in
excess of 5% of the outstanding Common Stock, ignoring for such purposes any limitation on the
number of shares of Common Stock that may be owned at any single time. The Shares, when issued,
will conform in all material respects to the description of the Company’s Common Stock contained in
the Company’s SEC Reports and other filings with the SEC.

          (g) SEC Reports; Financial Statements. The Company has filed all reports required to
be filed by it under the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for
the two years preceding the date hereof (or such shorter period as the Company was required by law
to file such material) (the foregoing materials (together with any materials filed by the Company
under the Exchange Act, whether or not required, within the two years preceding the date hereof)
being collectively referred to herein as the “SEC Reports”) on a timely basis or has received a
valid extension of such time of filing and has filed any such SEC Reports prior to the expiration
of any such extension. As of their respective dates, the SEC Reports complied in all material
respects with the applicable requirements of the Securities Act and the Exchange Act and the rules
and regulations of the Commission promulgated thereunder, and none of the SEC Reports, when filed,
contained any untrue statement of a material fact or omitted to state a material fact required to
be stated therein or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The financial statements of the Company
included in the SEC Reports comply in all material respects with applicable accounting requirements
and the rules and regulations of the Commission with respect thereto as in effect at the time of
filing. Such financial statements have been prepared in accordance with United States generally
accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”),
except as may be otherwise specified in such financial statements or the notes thereto, and fairly
present in all material respects the financial position of the Company and its consolidated
subsidiaries as of and for the dates thereof and the results of operations and cash flows for the
periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end
audit adjustments. All material agreements to which the Company or any Subsidiary is a party or to
which the property or assets of the Company or any Subsidiary are subject, and which are required
to be filed by the rules and regulations of the Commission are included as part of or specifically
identified in the SEC Reports.

          (h) Material Changes. Since December 31, 2005 (i) there has been no event, occurrence
or development that, individually or in the aggregate, has had or that would result in a Material
Adverse Effect, (ii) the Company has not incurred any liabilities (contingent or otherwise) other
than (A) trade payables and accrued expenses incurred in the ordinary course of business and (B)
liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or
required to be disclosed in filings made with the Commission, (iii) the Company has not altered its
method of accounting

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or the identity of its auditors, except as disclosed in its SEC Reports or as
required by changes in GAAP, (iv) the Company has not declared or made any dividend or distribution
of cash or other property to its shareholders
or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital
stock (other than pursuant to written agreements with employees to repurchase stock upon the
termination of such employee’s employment) and (v) the Company has not issued any equity securities
to any officer, director or Affiliate, except pursuant to existing Company stock-based plans or as
disclosed in the SEC Reports.

     (i) Absence of Litigation. Except as set forth in the SEC Reports, (A) there are no
actions, suits, claims, proceedings, inquiries or investigations before or by any court, public
board, government agency, self-regulatory organization or body pending or, to the knowledge of the
Company, threatened against or affecting the Company or any of its Subsidiaries or any of their
respective assets that could (i) adversely affect or challenge the legality, validity or
enforceability of any of the Transaction Documents, individually or in the aggregate, (ii) have a
Material Adverse Effect or (iii) if adversely decided, would have a Material Adverse Effect on, or
delay the issuance of, the Securities or the consummation of the transactions contemplated by the
Agreement, (B) no action, suit, proceeding, claim, investigation or inquiry by the Company
or any Subsidiary is currently pending nor does the Company intend to initiate any action, suit,
proceeding, claim, investigation or inquiry, in each case, that if resolved in a manner adverse to
the Company, would have a Material Adverse Effect, (C) neither the Company nor any Subsidiary (i)
is subject to any order, decree, agreement, memorandum of understanding or similar arrangement
with, or commitment letter or similar submission to, or (ii) has received any extraordinary
supervisory letter from, or adopted any board resolutions at the request of, any Self-Regulatory
Organization or governmental entity charged with the supervision or regulation of broker-dealers or
the supervision or regulation of its business (each such item referred to in clauses “(i)” and
“(ii)” of this Section 3.1(i), a “Regulatory Order”), including any such Regulatory Order
that restricts materially the conduct of the business of the Company or any Subsidiary, or in any
manner relates to the capital adequacy, credit policies or management of the Company or any
Subsidiary, and (D) neither the Company nor any Subsidiary has received written notice from any
governmental entity or Self-Regulatory Organization that such organization or authority is
contemplating issuing or requesting any such Regulatory Order. For purposes of this Agreement, the
term “Self-Regulatory Organization” shall mean the National Association of Securities Dealers, Inc.
(or any successor entity thereto) (“NASD”), the American Stock Exchange, the National Futures
Association, the Chicago Board of Trade, the New York Stock Exchange, any national securities
exchange (as defined in the Exchange Act), any other securities exchange, futures exchange,
contract market, commodities market, any other such exchange, clearinghouse or corporation or other
similar federal, state or foreign self-regulatory body or organization.

     (j) Compliance. Neither the Company nor any Subsidiary (i) is in default under or in
violation of (and no event has occurred that has not been waived that, with notice or lapse of time
or both, would result in a default by the Company or any Subsidiary under), nor has the Company or
any Subsidiary received notice of a claim that it is in default under or that it is in violation
of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a
party or by which it or any of its properties is bound, (ii) is in violation of any order of any
court, arbitrator or governmental body or (iii) is in violation of any statute, rule or regulation
of any governmental authority, including without limitation all foreign, federal, state and local
laws relating to taxes, environmental protection, occupational health and safety, product quality
and safety and employment and labor matters, except in each case as would not, individually or in
the aggregate, have or result in a Material Adverse Effect. None of the Company or any Subsidiary
is in default under, or in violation of any of the listing or quotation requirements of the NASDAQ
National Market (or of any other Eligible Market on which the Common Stock is currently traded,
listed or quoted) as in effect on the date hereof, and the Company is not aware of any facts which
could reasonably lead to de-listing or suspension of trading in the Common Stock by the

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NASDAQ
National Market (or any other Eligible Market on which the Common Stock is then traded, listed or
quoted) in the foreseeable future.

     (k) Title to Assets. The Company and the Subsidiaries have good and marketable title
in fee simple to all real property owned by them that is material to the business of the Company
and good and marketable title in all personal property owned by them that is material to the
business of the Company,
in each case free and clear of all Liens, except for Liens as do not materially affect the
value of such property and do not materially interfere with the use made and proposed to be made of
such property by the Company. Any real property and facilities held under lease by the Company and
the Subsidiaries are held by them under valid, subsisting and enforceable leases of which the
Company and the Subsidiaries are in compliance.

     (l) Private Placement. Assuming the accuracy of the representations and warranties of
the Purchaser set forth in Section 3.2 hereof, the offer and sale of the Securities shall be exempt
from registration under the Securities Act. Neither the Company nor any Person acting on the
Company’s behalf has sold or offered to sell or solicited any offer to buy the Securities by means
of any form of general solicitation or advertising. Neither the Company nor any of its Affiliates
nor any Person acting on the Company’s behalf has, directly or indirectly, at any time within the
past six months, made any offer or sale of any security or solicitation of any offer to buy any
security under circumstances that would (i) eliminate the availability of the exemption from
registration under Regulation D under the Securities Act in connection with the offer and sale of
the Securities as contemplated hereby or (ii) cause the offering of the Securities pursuant to the
Transaction Documents to be integrated with prior offerings by the Company for purposes of any
applicable law, regulation or shareholder approval provisions, including, without limitation, under
the rules and regulations of any Trading Market. The Company is not a United States real property
holding corporation within the meaning of the Foreign Investment in Real Property Tax Act of 1980.

     (m) Form S-3 Eligibility. The Company is eligible to register its Common Stock for
resale by the Purchaser using Form S-3 promulgated under the Securities Act.

     (n) Listing and Maintenance Requirements. The Company has not, in the two years
preceding the date hereof, received notice (written or oral) from any Trading Market on which the
Common Stock or other Company security is or has been listed or quoted to the effect that the
Company is not in compliance with the listing or maintenance requirements of such Trading Market.
The Company is, and has no reason to believe that it will not in the foreseeable future continue to
be, in compliance with all such listing and maintenance requirements. The approval of the
Company’s shareholder is not required under the listing or maintenance requirements of the NASDAQ
National Market or any Trading Market for the consummation of the transactions contemplated herein.

     (o) Registration Rights. The Company has not granted or agreed to grant to any Person
any rights (including “piggy-back” registration rights) to have any securities of the Company
registered with the Commission or any other governmental authority that have not been satisfied.
No Person, including current or former shareholders of the Company, underwriters, brokers or
agents, has any right of first refusal, preemptive right, right of participation, or any similar
right to participate in the transactions contemplated by the Transaction Documents or to require
that the Company include any such securities in the registration of Securities as contemplated
herein.

     (p) Application of Takeover Protections. There is no control share acquisition,
business combination, poison pill (including any distribution under a rights agreement) or other
similar anti-takeover provision under the Company’s charter documents or the laws of its state of
incorporation that is or could become applicable to any of the Purchaser as a result of the
Purchaser and the Company fulfilling their obligations or exercising their rights under the
Transaction Documents, including, without

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limitation, as a result of the Company’s issuance of the
Securities and the Purchaser’s ownership of the Securities.

          (q) Disclosure. The Company confirms that it has not, nor have any of its
Subsidiaries or Affiliates, provided to the Purchaser any material non-public information (or
information that will become material non-public information after issuance of the press release
referenced in Section 4.5 below) other than information related to the transactions contemplated by
the Transaction Documents, which information related to such transactions the Company will publicly
disclose in accordance with Section 4.5 below. The Company understands and confirms that each of
the Purchaser will rely on the foregoing
representations in effecting the transactions in securities of the Company. All disclosure
provided to the Purchaser regarding the Company, its business and the transactions contemplated
hereby, including without limitation the representations and warranties of the Company contained
herein and in the Schedules to this Agreement, furnished by or on behalf of the Company are true
and correct and do not contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements made therein, in the light of the
circumstances under which they were made, not misleading. No event or circumstance has occurred or
information exists with respect to the Company or any of its Subsidiaries or its or their business,
properties, prospects, operations or financial conditions, which, under applicable law, rule or
regulation, requires public disclosure or announcement by the Company but which has not been so
publicly announced or disclosed. The Company acknowledges and agrees that no Purchaser makes or
has made (i) any representations or warranties with respect to the transactions contemplated hereby
other than those specifically set forth in Section 3.2 or (ii) any statement, commitment or
promise to the Company or, to its knowledge, any of its representatives which is or was an
inducement to the Company to enter into this Agreement or otherwise.

          (r) Acknowledgment Regarding Purchaser’s Purchase of Securities. The Company
acknowledges and agrees the Purchaser is acting solely in the capacity of an arm’s length purchaser
with respect to the Company and to this Agreement and the transactions contemplated hereby.

          (s) Regulatory Permits. The Company and the Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state, local or foreign regulatory
authorities necessary to conduct their respective businesses as described in the SEC Reports,
except where the failure to possess such permits would not, individually or in the aggregate, have
a Material Adverse Effect (“Material Permits”), and neither the Company nor any Subsidiary has
received any notice of proceedings relating to the revocation or modification of any Material
Permit.

          (t) Investment Company. The Company has been advised of the rules and requirements
under the Investment Company Act of 1940, as amended (the “Investment Company Act”). The Company
is not, and immediately after receipt of payment for the Securities will not be, an “investment
company” within the meaning of the Investment Company Act.

          (u) Transactions With Affiliates and Employees. Except as set forth in the SEC
Reports or as otherwise below the SEC disclosure thresholds, none of the officers or directors of
the Company and, to the knowledge of the Company, none of the employees of the Company is presently
a party to any transaction with the Company or any Subsidiary (other than for services as
employees, officers and directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real or personal
property to or from, or otherwise requiring payments to or from any officer, director or such
employee or, to the knowledge of the Company, any entity in which any officer, director, or any
such employee has a substantial interest or is an officer, director, trustee or partner.

          (v) Employee Benefits. Each of the Benefit Plans has been administered in accordance
with its terms and any federal, state or local statute, law, ordinance, regulation, order, writ,
injunction, directive, judgment or decree applicable to the Company, the Subsidiaries, or any of
their

10

 

respective properties, or assets, as the case may be (including, where applicable, ERISA and
the Code), except where the failure to so administer such Benefit Plan would not have a Material
Adverse Effect. Each of the Benefit Plans intended to be “qualified” within the meaning of section
401(a) of the Code has been determined by the United States Internal Revenue Service to be so
qualified, except where the failure to so qualify such Benefit Plan would not have a Material
Adverse Effect.

          (w) Taxes. (i) The Company has filed (or joined in the filing of) when due all Tax
Returns required by applicable law to be filed with respect to the Company and has paid (A) all
Taxes shown to be due on such Tax Returns and (B) all Taxes otherwise due, except where the failure
to pay such Taxes would not cause a Material Adverse Effect; (ii) all such Tax Returns were true,
correct and complete
in all material respects as of the time of such filing; or (iii) any liability of the Company
for Taxes not yet due and payable, or which are being contested in good faith, in each case as of
December 31, 2005, has been accrued or reserved for on the financial statements of the Company in
accordance with GAAP, in each case except in the case that any such failure to file or pay Taxes
would not result in a Material Adverse Effect.

          (x) Customer Complaints. Neither the Company nor any of the Subsidiaries has received
any customer complaints concerning such entity’s services, other than immaterial, nonrecurring
problems.

          (y) No Manipulation of Stock. The Company has not taken, in violation of applicable
law, any action designed to or that might cause or result in stabilization or manipulation of the
price of the Common Stock to facilitate the transactions contemplated hereby or the sale or resale
of the shares of Common Stock.

          (z) Internal Accounting Controls. The Company and the Subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable assurance that (i) transactions
are executed in accordance with management’s general or specific authorizations, (ii) transactions
are recorded as necessary to permit preparation of financial statements in conformity with GAAP and
to maintain asset accountability, (iii) access to assets is permitted only in accordance with
management’s general or specific authorization and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.

          (aa) Sarbanes-Oxley Act. The Company is in compliance with applicable requirements of
the Sarbanes-Oxley Act of 2002 and applicable rules and regulations promulgated by the Commission
thereunder in effect as of the date of this Agreement.

          (bb) Registrations. All federal, self-regulatory and state registration requirements
have been complied with in all material respects, and such registrations as currently filed, and
all periodic and other reports, including notice filings, required to be filed with respect
thereto, are accurate and complete in all material respects. The information contained in such
registrations, forms and reports was true and complete in all material respects as of the date of
the filing thereof, and timely amendments were filed, as necessary, to correct or update any
information reflected in such registrations, forms or reports.

     3.2 Representations, Warranties and Certain Agreements of the Purchaser. The
Purchaser hereby, as to itself only and for no Other Purchaser, represents and warrants to the
Company and agrees that:

          (a) Organization; Authority. Such Purchaser is an entity duly organized, validly
existing and in good standing under the laws of the jurisdiction of its organization with the
requisite corporate or partnership power and authority to enter into and to consummate the
transactions contemplated by the Transaction Documents and otherwise to carry out its obligations
hereunder and thereunder. The purchase by such Purchaser of the Shares hereunder has been duly
authorized by all

11

 

necessary action on the part of such Purchaser. This Agreement has been duly
executed and delivered by such Purchaser and constitutes the valid and binding obligation of such
Purchaser, enforceable against it in accordance with its terms.

          (b) Investment Intent. Such Purchaser is acquiring the Securities for investment
purposes only and not with a view to or for distributing or reselling such Securities or any part
thereof, without prejudice, however, to such Purchaser’s right, subject to the provisions of this
Agreement, at all times to sell or otherwise dispose of all or any part of such Securities pursuant
to an effective registration statement under the Securities Act or under an exemption from such
registration and in compliance with applicable federal and state securities laws. Nothing
contained herein shall be deemed a representation or warranty by such Purchaser to hold Securities
for any period of time.

          (c) Purchaser Status. At the time such Purchaser was offered the Shares, it was, and
at the date hereof it is, an “accredited investor” as defined in Rule 501(a) under the Securities
Act.

          (d) Reliance on Exemptions. Such Purchaser understands that the Securities are being
offered and sold to it in reliance on specific exemptions from the registration requirements of
United States federal and state securities laws and that the Company is relying in part upon the
truth and accuracy of, and such Purchaser’s compliance with, the representations, warranties,
agreements, acknowledgments and understandings of such Purchaser set forth herein in order to
determine the availability of such exemptions and the eligibility of such Purchaser to acquire such
securities.

          (e) Experience of such Purchaser. Such Purchaser, either alone or together with its
representatives has such knowledge, sophistication and experience in business and financial matters
so as to be capable of evaluating the merits and risks of the prospective investment in the
Securities, and has so evaluated the merits and risks of such investment. Such Purchaser is able
to bear the economic risk of an investment in the Securities and, at the present time, is able to
afford a complete loss of such investment.

          (f) Information. Such Purchaser and its advisors, if any, have been furnished with
all materials relating to the business, finances and operations of the Company and materials
relating to the offer and sale of the Securities that have been requested by such Purchaser. Such
Purchaser and its advisors, if any, have been afforded the opportunity to ask questions of the
Company. Such Purchaser understands that its investment in the Securities involves a high degree of
risk. Neither such inquiries nor any other investigation conducted by or on behalf of such
Purchaser or its advisors shall modify, amend or affect such Purchaser’s right to rely on the
truth, accuracy and completeness of the disclosure made to such Persons in respect of the Company
or this transaction and the Company’s representations and warranties contained in this Agreement.
The Purchaser acknowledges and agrees that the Company has not made (i) any representations or
warranties to such Purchaser with respect to the transactions contemplated hereby other than those
specifically set forth in the Transaction Documents or (ii) any oral statement, commitment or
promise that is or was an inducement to such Purchaser to enter into this Agreement or otherwise.

          (g) Purchaser Questionnaire. Such Purchaser has completed or caused to be completed
the Purchaser Questionnaire in substantially the form as set forth on Exhibit C, and the
information provided by each Purchaser in such Purchaser’s Purchaser Questionnaire is true and
correct as of the date of this Agreement and shall be true as of the Effective Date.

          (h) Acknowledgement Regarding Purchaser’s Purchase of Securities. Such Purchaser
acknowledges and agrees that it is acting solely in the capacity of an arm’s length purchaser with
respect to the Company and to this Agreement and the transactions contemplated hereby.

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          (i) Prohibited Transactions.

               (i) During the last thirty (30) days prior to the date hereof, neither such Purchaser
nor any Affiliate of such Purchaser, foreign or domestic, has, directly or indirectly,
effected or agreed to effect any “short sale” (as defined in Rule 200 under Regulation SHO),
whether or not against the box, established any “put equivalent position” (as defined in
Rule 16a-1(h) under the 1934 Act) with respect to the Common Stock, borrowed or pre-borrowed
any shares of Common Stock, or granted any other right (including, without limitation, any
put or call option) with respect to the Common Stock or with respect to any security that
includes, relates to or derived any significant part of its value from the Common Stock or
otherwise sought to hedge its position in the Securities (each, a “Prohibited Transaction”).

               (ii) Prior to the earliest to occur of (i) the termination of this Agreement, (ii)
the Effective Date or (iii) the Required Effectiveness Date, such Purchaser shall not, and
shall cause its Affiliates not to, engage, directly or indirectly, in (a) a Prohibited
Transaction nor (b) any sale, assignment, pledge, hypothecation, put, call, or other
transfer of any of the Shares acquired hereunder, provided that such Purchaser may pledge
Shares that such Purchaser acquired hereunder in connection with a bona fide margin
account.

ARTICLE IV

OTHER AGREEMENTS OF THE PARTIES

     4.1 Transfer Restrictions.

          (a) Securities may only be disposed of pursuant to an effective registration statement under
the Securities Act or pursuant to an available exemption from the registration requirements of the
Securities Act, and in compliance with any applicable state securities laws. In connection with
any transfer of Securities other than pursuant to an effective registration statement or to the
Company or pursuant to Rule 144(k), except as otherwise set forth herein, the Company may require
the transferor to provide to the Company an opinion of counsel selected by the transferor, the form
and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that
such transfer does not require registration under the Securities Act. Notwithstanding the
foregoing, the Company hereby consents to and agrees to register on the books of the Company and
with its transfer agent, without any such legal opinion, any transfer of Securities by a Purchaser
to an Affiliate of such Purchaser, provided that the transferee certifies to the Company that it is
an “accredited investor” as defined in Rule 501(a) under the Securities Act and make the
representations set forth in 3.2.

          (b) The Purchaser agrees to the imprinting, so long as is required by this Section
4.1(b), of the following legend on any certificate evidencing Securities:

THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE
COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION
FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES
ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF
THE SECURITIES ACT AND IN COMPLIANCE WITH APPLICABLE STATE SECURITIES LAWS OR BLUE
SKY LAWS.

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Upon the earlier of (i) registration of the Securities for sale pursuant to Article VI or (ii) Rule
144(k) becoming available with respect to all of the Purchaser’s Securities, the Company shall,
upon the Purchaser’s written request (which in the case of clause (i) shall be accompanied by a
written certification by the Purchaser that (A) the Purchaser has a present intention to dispose of
Securities covered by such Registration Statement pursuant to the plan of distribution included in
a currently available final prospectus related thereto, and (B) the Purchaser will comply with the
prospectus delivery requirements applicable to such disposition, and which, in the case of clause
(ii), shall be accompanied by such reasonable and appropriate customary representations as may be
reasonably requested by the Company), promptly cause certificates evidencing such Securities to be
replaced with certificates which do not bear the restrictive legend described above.

     4.2 Furnishing of Information. As long as the Purchaser owns Securities, the Company
covenants to timely file all reports required to be filed by the Company after the date hereof
pursuant to the Exchange Act. Upon the request of the Purchaser, the Company shall deliver to such Purchaser
a written certification of a duly authorized officer as to whether it has complied with the
preceding sentence. As long as the Purchaser owns Securities, if the Company is not required to
file reports pursuant to such laws, it will prepare and furnish to the Purchaser and make publicly
available in accordance with paragraph (c) of Rule 144 such information as is required for the
Purchaser to sell such Purchaser’s Securities under Rule 144. The Company further covenants that
it will take such further action as any holder of Securities may reasonably request to satisfy the
provisions of Rule 144 applicable to the issuer of securities relating to transactions for the sale
of securities pursuant to Rule 144.

     4.3 Integration. The Company shall not, and shall use reasonable efforts to ensure
that no Affiliate of the Company shall, sell, offer for sale or solicit offers to buy or otherwise
negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be
integrated with the offer or sale of the Securities in a manner that would require the registration
under the Securities Act of the sale of the Securities to the Purchaser or that would be integrated
with the offer or sale of the Securities for purposes of the rules and regulations of any Trading
Market.

     4.4 Reservation of Securities. The Company shall maintain a reserve from its duly
authorized shares of Common Stock for issuance pursuant to the Transaction Documents in such amount
as may be required to fulfill its obligations in full under the Transaction Documents. In the
event that at any time the then authorized shares of Common Stock are insufficient for the Company
to satisfy its obligations in full under the Transaction Documents, the Company shall promptly take
such actions as may be required to increase the number of authorized shares.

     4.5 Securities Laws Disclosure; Publicity. The Company shall, promptly after
execution of this Agreement and in no event later than the Business Day prior to the Closing Date,
issue a press release (a copy of which will be provided to the Purchaser or their counsel for
review as early as practicable prior to its filing) disclosing the material terms of the
transactions contemplated hereby (the “Press Release”). Thereafter, the Company shall timely file
any filings and notices required by the Commission or applicable law with respect to the
transactions contemplated hereby and provide copies thereof to the Purchaser or Purchaser’s counsel
for review. The Company and the Purchaser shall consult with each other in issuing any press
releases or otherwise making public statements or filings and other communications with the
Commission or any regulatory agency or Trading Market with respect to the transactions contemplated
hereby. Notwithstanding the foregoing, the Company shall not publicly disclose the name of the
Purchaser, or include the name of the Purchaser in any filing with the Commission or any regulatory
agency or Trading Market, without the prior written consent of the Purchaser, except to the extent
such disclosure (but not any disclosure as to the controlling Persons thereof) is required by
subpoena, applicable law or Trading Market regulations, in which case the Company shall provide the
Purchaser with at least 5 days prior written notice of such disclosure.

14

 

     4.6 Reimbursement. If the Purchaser or any of its Affiliates or any officer,
director, partner, controlling Person, employee or agent of a Purchaser or any of its Affiliates (a
“Related Person”) becomes involved in any capacity in any Proceeding brought by or against any
Person in connection with or as a result of the transactions contemplated by the Transaction
Documents, the Company will indemnify and hold harmless such Purchaser or Related Person for its
reasonable legal and other expenses (including the costs of any investigation, preparation and
travel) and for any Losses incurred in connection therewith, as such expenses or Losses are
incurred, excluding only Losses that result directly from such Purchaser’s or Related Person’s
gross negligence or willful misconduct. In addition, the Company shall indemnify and hold harmless
the Purchaser and Related Person from and against any and all Losses, as incurred, arising out of
or relating to any breach by the Company of any of the representations, warranties or covenants
made by the Company in this Agreement or any other Transaction Document, or any allegation by a
third party that, if true, would constitute such a breach. The conduct of any Proceedings for
which indemnification is available under this paragraph shall be governed by Section 6.4(c)
below. The indemnification obligations of the Company under this paragraph shall be in addition to
any liability that the Company may otherwise have and shall be binding upon and inure to the
benefit of any successors, assigns, heirs and personal representatives of the Purchaser and any
such Related Persons. The Company also agrees that neither the Purchaser nor any Related Persons
shall have any liability to the Company or any Person asserting claims on behalf of or in right of
the Company in connection with or as a result of the transactions contemplated by the Transaction
Documents, except to the extent that any Losses incurred by the Company result from (1) the gross
negligence or willful misconduct of the applicable Purchaser or Related Person in connection with
such transactions or, (2) as a result of any breach by the Purchaser of any of the representations,
warrants and covenants made by such Purchaser in this Agreement or in any of the Transaction
Documents. If the Company breaches its obligations under any Transaction Document, then, in
addition to any other liabilities the Company may have under any Transaction Document or applicable
law, the Company promptly shall pay or reimburse the Purchaser for all costs of collection and
enforcement, including the indemnification obligations under this paragraph and reasonable
attorneys’ fees and expenses.

ARTICLE V

CONDITIONS

     5.1 Conditions Precedent to the Obligations of the Purchaser. The obligation of the
Purchaser to acquire Securities at the Closing is subject to the satisfaction or waiver by such
Purchaser, at or before the Closing, of each of the following conditions:

          (a) Representations and Warranties. The representations and warranties of the Company
contained herein shall be true and correct as of the date hereof;

          (b) Delivery of Stock Certificates. The Purchaser shall have received the certificate
or certificates for the Shares the Purchaser is purchasing;

          (c) Performance. The Company shall have performed, satisfied and complied in all
material respects with all covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by it at or prior to the Closing;

          (d) Minimum Closing. The Company and the Other Purchasers shall have, simultaneous
with the Closing under this Agreement, consummated the purchase and sale of at least 2,600,000 of
the Company’s Common Stock pursuant to the Investment Agreements.

15

 

          (e) Securities Exemptions. The offer and sale of the Securities to the Purchaser
pursuant to this Agreement shall be exempt from the registration requirements of the Securities Act
and the registration and/or qualification requirements of all applicable state securities laws;

          (f) No Statute or Rule Challenging Transaction. No statute, rule, regulation,
executive order, decree, ruling, injunction, action, proceeding or interpretation shall have been
enacted, entered, promulgated, endorsed or adopted by any court or governmental authority of
competent jurisdiction or any self-regulatory organization or the staff of any of the foregoing,
having authority over the matters contemplated hereby which questions the validity of, or
challenges or prohibits the consummation of, any of the transactions contemplated by this
Agreement;

          (g) No Suspensions of Trading in Common Stock. The trading in the Common Stock shall
not be restricted or suspended by the Commission or the Trading Market (except for any restriction
or suspension of trading of limited duration solely to permit dissemination of material
information regarding the Company);

          (h) Litigation. No Proceeding shall have been instituted or threatened against the
Company that would, individually or in the aggregate, have a Material Adverse Effect;

          (i) Compliance Certificate. The Company shall have delivered to the Purchaser a
certificate of the Company executed by the President of the Company, dated as of the Closing,
certifying to the fulfillment of the conditions specified in Sections 5.1(a)-(c) of this
Agreement;

          (j) Secretary’s Certificate. The Company shall have delivered to the Purchaser a
certificate of the Company executed by an officer of the Company, dated as of the Closing,
certifying (i) resolutions adopted by the Board authorizing the execution of the Transaction
Documents, the issuance of the Securities, the filing of the Registration Statement, and the
transactions contemplated hereby; and (ii) the Certificate of Incorporation and Bylaws of the
Company, each as amended, and copies of any required third party consents, approvals and filings
required in connection with the consummation of the transactions contemplated by this Agreement;

          (k) Other Documents. The Company shall have delivered to the Purchaser such other
documents relating to the transactions contemplated by this Agreement as the Purchaser or their
counsel may reasonably request; and

          (l) Listing Approvals. The Company shall have obtained any necessary approvals for
the listing of the Shares on the NASDAQ National Market, which are required to be obtained prior to
closing and shall have undertaken to obtain any other necessary approvals for the listing of the
Shares on the NASDAQ National Market.

     5.2 Conditions Precedent to the Obligations of the Company. The obligation of the
Company to sell Shares at the Closing is subject to the satisfaction or waiver by the Company, at
or before the Closing, of each of the following conditions:

          (a) Representations and Warranties. The representations and warranties of the
Purchaser contained herein shall be true and correct as of the date hereof;

          (b) Performance. The Purchaser shall have performed, satisfied and complied in all
material respects with all covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by the Purchaser at or prior to the Closing;

16

 

          (c) Securities Exemptions. The offer and sale of the Securities to the Purchaser
pursuant to this Agreement shall be exempt from the registration requirements of the Securities Act
and the registration and/or qualification requirements of all applicable state securities laws;

          (d) Payment of Purchase Price. The Purchaser shall have delivered to the Company by
wire transfer of immediately available funds to the account designated on Exhibit B, full
payment of the purchase price for the Shares as indicated below the Purchaser’s name on such
Purchaser’s signature page;

          (e) Receipt of Purchaser Questionnaires. Each Purchaser shall have delivered to the
Company a completed Purchaser Questionnaire in substantially the form attached hereto as
Exhibit C;

          (f) No Statute or Rule Challenging Transaction. No statute, rule, regulation,
executive order, decree, ruling, injunction, action, proceeding or interpretation shall have been
enacted, entered, promulgated, endorsed or adopted by any court or governmental authority of competent
jurisdiction or any self-regulatory organization or the staff of any of the foregoing, having
authority over the matters contemplated hereby which questions the validity of, or challenges or
prohibits the consummation of, any of the transactions contemplated by this Agreement; and

          (g) Other Documents. The Purchaser shall have delivered to the Company such other
documents relating to the transactions contemplated by this Agreement as the Company or counsel may
reasonably request.

ARTICLE VI

REGISTRATION RIGHTS

     6.1 Registration.

          (a) Subject to receipt of necessary information from the Purchaser after prompt request from
the Company to the Purchaser to provide such information, the Company shall prepare and file with
the Commission not later than the Filing Date, a Registration Statement covering the resale of all
Registrable Securities for an offering to be made on a continuous basis pursuant to Rule 415. The
Registration Statement shall be on Form S-3.

          (b) The Company shall use all commercially reasonable efforts to cause the Registration
Statement to be declared effective on or before the Required Effectiveness Date. The Company shall
use all commercially reasonable efforts to keep the Registration Statement continuously effective
under the Securities Act from the date such Registration Statement becomes effective until the
earlier of (i) the date when all Registrable Securities have been resold under such Registration
Statement, and (ii) the date on which all Registrable Securities may be resold without restriction
or limitation under the federal securities laws or may be sold pursuant to paragraph (k) of Rule
144 (the “Effectiveness Period”).

          (c) The Company shall notify the Purchaser in writing promptly (and in any event within one
Business Day) after receiving notification from the Commission that the Registration Statement has
been declared effective.

          (d) On every monthly anniversary of any Event until the applicable Event is cured (or in the
case of a partial month, upon the date of cure), as partial relief for the damages suffered
therefrom by the Purchaser (which remedy shall not be exclusive of any other remedies available
under

17

 

this Agreement, at law or in equity), the Company shall pay to the Purchaser an amount in
cash, as liquidated damages and not as a penalty, equal to 1.0% of the aggregate purchase price
paid by such Purchaser hereunder for every month, prorated for any partial month. The payments to
which a Purchaser shall be entitled pursuant to this Section 6.1(d) are referred to herein
as “Event Payments.” Any Event Payments payable pursuant to the terms hereof shall apply on a
pro-rata basis for any portion of a month prior to the cure of an Event.

          (e) For such purposes, each of the following shall constitute an “Event”:

          (i) the Registration Statement is not declared effective by the Required Effectiveness
Date, except if the Registration Statement has not been declared effective as a result of
the Purchaser’s actions or failure to act (including the failure to provide needed
information to the Company after prompt request from the Company to the Purchaser to provide
such information);

          (ii) after the Effective Date, the Registration Statement ceases to be effective and
available to the Purchaser for any continuous period that exceeds 45 calendar days or for
one
or more periods that exceed 90 calendar days in any 12 month period, unless such
Purchaser may sell the Registrable Securities pursuant to Rule 144(k) and Section 6.2(e)
hereof;

          (iii) after the Effective Date, any Registrable Securities covered by such Registration
Statement are not listed on an Eligible Market directly or indirectly due to an action or
inaction of the Company, except if such action or inaction is a result of a Purchaser’s
actions or failure to act (including the failure to provide needed information to the
Company after prompt request from the Company to the Purchaser to provide such information);
or

          (iv) the Common Stock is not listed or quoted, or is suspended from trading, on an
Eligible Market for a period of five consecutive Trading Days.

          (f) The Company shall not, prior to the Effective Date of the Registration Statement, prepare
and file with the Commission a registration statement (other than a Registration Statement filed on
a Form S-4 or S-8) relating to an offering for its own account or the account of others under the
Securities Act of any of its equity securities.

     6.2 Registration Procedures. In connection with the Company’s registration
obligations hereunder, the Company shall:

          (a) Not less than three Business Days prior to the filing of a Registration Statement or any
related Prospectus or any amendment, or not less than one Business Day for any supplement thereto,
the Company shall furnish to the Participating Purchasers and any counsel designated by the
Participating Purchasers (“Purchaser Counsel”) copies of all such documents proposed to be filed.
The Company shall not file a Registration Statement or any such Prospectus or any amendments or
supplements thereto to which Participating Purchasers holding a majority of the Registrable
Securities shall reasonably object in writing, prior to the contemplated filing date.

          (b) Except in the event paragraph (c) below applies, prepare and file with the Commission such
amendments, including post-effective amendments, to each Registration Statement and the Prospectus
used in connection therewith as may be necessary to keep the Registration Statement continuously
effective as to the applicable Registrable Securities for the Effectiveness Period and prepare and
file with the Commission such additional Registration Statements in order to register for resale
under the Securities Act all of the Registrable Securities; (ii) cause the related Prospectus to be
amended or

18

 

supplemented by any required Prospectus supplement, and as so supplemented or amended to
be filed pursuant to Rule 424; (iii) respond as promptly as reasonably possible, and in any event
within ten Business Days, to any comments received from the Commission with respect to the
Registration Statement or any amendment thereto and, at the request of the Purchaser, as promptly
as reasonably possible provide such Purchaser who may so request true and complete copies of all
correspondence from and to the Commission relating to the Registration Statement; and (iv) comply
in all material respects with the provisions of the Securities Act and the Exchange Act with
respect to the disposition of all Registrable Securities covered by the Registration Statement
during the applicable period in accordance with the intended methods of disposition by the
Purchaser thereof set forth in the Registration Statement as so amended or in such Prospectus as so
supplemented.

          (c) Notify the Purchaser of Registrable Securities to be sold and the Purchaser Counsel as
promptly as reasonably possible, and (if requested by any such Person) confirm such notice in
writing no later than one Business Day thereafter, of any of the following events: (i) the initial
filing of the Registration Statement with the Commission; (ii) the Commission notifies the Company
whether there will be a “review” of any Registration Statement; (iii) any Registration Statement or
any post-effective amendment is declared effective; (iv) the Commission issues any stop order
suspending the effectiveness of
any Registration Statement or initiates any Proceedings for that purpose; or (v) the Company
receives notice of any suspension of the qualification or exemption from qualification of any
Registrable Securities for sale in any jurisdiction, or the initiation of any Proceeding.

          (d) Subject to paragraph (e) below, in the event (i) of any request by the Commission or any
other federal or state governmental authority during the period of effectiveness of the
Registration Statement for amendments or supplements to a Registration Statement or related
Prospectus or for additional information; (ii) of the issuance by the Commission or any other
federal or state governmental authority of any stop order suspending the effectiveness of a
Registration Statement or the initiation of any proceedings for that purpose; (iii) of the receipt
by the Company of any notification with respect to the suspension of the qualification or exemption
from qualification of any of the Shares for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; or (iv) of any event or circumstance which, upon
the advice of its counsel, necessitates the making of any changes in the Registration Statement or
Prospectus, or any document incorporated or deemed to be incorporated therein by reference, so
that, in the case of the Registration Statement, it will not contain any untrue statement of a
material fact or any omission to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, and that in the case of the Prospectus, it will not
contain any untrue statement of a material fact or any omission to state a material fact required
to be stated therein or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; then the Company shall deliver a certificate in writing
to the Purchaser (the “Suspension Notice”) to the effect of the foregoing and, upon receipt of such
Suspension Notice, the Purchaser will refrain from selling any Shares pursuant to the Registration
Statement (a “Suspension”) until the Purchaser’s receipt of copies of a supplemented or amended
Prospectus prepared and filed by the Company, or until it is advised in writing by the Company that
the current Prospectus may be used, and has received copies of any additional or supplemental
filings that are incorporated or deemed incorporated by reference in any such Prospectus. In the
event of any Suspension, the Company will use its reasonable commercial efforts to cause the use of
the Prospectus so suspended to be resumed as soon as reasonably practicable within 45 business days
after the delivery of a Suspension Notice to the Purchaser. In addition to and without limiting
any other remedies (including, without limitation, at law or at equity) available to the Purchaser,
the Purchaser shall be entitled to specific performance in the event that the Company fails to
comply with the provisions of this Section 6.2(d).

          (e) Notwithstanding the foregoing paragraphs of this Section 6.2, the Purchaser shall not be
prohibited from selling Shares under the Registration Statement as a result of Suspensions on

19

 

more
than two occasions of not more than 45 days each in any 12 month period, unless, in the good faith
judgment of the Company’s Board of Directors, upon the written opinion of counsel of the Company,
the sale of Shares under the Registration Statement in reliance on this paragraph 6.2(e) would be
reasonably likely to cause a violation of the Securities Act or the Exchange Act and result in
liability to the Company.

          (f) Use commercially reasonable efforts to avoid the issuance of or, if issued, obtain the
withdrawal of (i) any order suspending the effectiveness of any Registration Statement, or (ii) any
suspension of the qualification (or exemption from qualification) of any of the Registrable
Securities for sale in any jurisdiction, as soon as possible.

          (g) Promptly deliver to the Purchaser and Purchaser Counsel, without charge, as many copies of
the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement
thereto as such Persons may reasonably request. The Company hereby consents to the use of such
Prospectus and each amendment or supplement thereto by the selling Purchaser in connection with the
offering and sale of the Registrable Securities covered by such Prospectus and any amendment or
supplement thereto.

          (h) (i) In the time and manner required by each Trading Market, prepare and file with such
Trading Market an additional shares listing application covering all of the Registrable Securities;
(ii) take all steps necessary to cause such Registrable Securities to be approved for listing on
each Trading Market as soon as possible thereafter; and (iii) maintain the listing of such
Registrable Securities on each such Trading Market.

          (i) Use commercially reasonable efforts to register or qualify or cooperate with the selling
Purchaser and Purchaser Counsel in connection with the registration or qualification (or exemption
from such registration or qualification) of such Registrable Securities for offer and sale under
the securities or blue sky laws of such jurisdictions within the United States as the Purchaser
reasonably requests in writing, to keep each such registration or qualification (or exemption
therefrom) effective during the Effectiveness Period and to do any and all other acts or things
necessary or advisable to enable the disposition in such jurisdictions of the Registrable
Securities covered by a Registration Statement; provided, however, that the Company shall not be
required to qualify to do business or consent to service of process in any jurisdiction in which it
is not now so qualified or has not so consented.

          (j) Cooperate with the Purchaser to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be delivered to a transferee pursuant to a
Registration Statement, which certificates shall be free, to the extent permitted by law, of all
restrictive legends, and to enable such Registrable Securities to be in such denominations and
registered in such names as the Purchaser may request.

          (k) Upon the occurrence of any event described in Section 6.2(c), as promptly as
reasonably possible, prepare a supplement or amendment, including a post-effective amendment, to
the Registration Statement or a supplement to the related Prospectus or any document incorporated
or deemed to be incorporated therein by reference, and file any other required document so that, as
thereafter delivered, neither the Registration Statement nor such Prospectus will contain an untrue
statement of a material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances under which they were
made, not misleading.

          (l) Cooperate with any due diligence investigation undertaken by the Purchaser in connection
with the sale of Registrable Securities, including, without limitation, by making available any

20

 

documents and information; provided that the Company will not deliver or make available to the
Purchaser material, nonpublic information unless such Purchaser specifically requests in advance to
receive material, nonpublic information in writing.

          (m) provide a “Plan of Distribution” section of the Registration Statement in substantially
the form attached hereto as Exhibit D.

          (n) Comply with all applicable rules and regulations of the Commission.

     6.3 Registration Expenses. The Company shall pay (or reimburse the Purchaser for) all
fees and expenses incident to the performance of or compliance with this Agreement by the Company,
including without limitation (a) all registration and filing fees and expenses, including without
limitation those related to filings with the Commission, any Trading Market and in connection with
applicable state securities or blue sky laws, (b) printing expenses (including without limitation
expenses of printing certificates for Registrable Securities and of printing prospectuses requested
by the Purchaser), (c) messenger, telephone and delivery expenses, (d) fees and disbursements of
counsel for the Company, (e) fees and expenses of all other Persons retained by the Company in
connection with the consummation of the transactions contemplated by this Agreement, and (f) all
listing fees to be paid by the Company to the Trading Market.

     6.4 Indemnification.

          (a) Indemnification by the Company. The Company shall, notwithstanding any
termination of this Agreement, indemnify and hold harmless the Purchaser, the officers, directors,
partners and members and each Person who controls any such Purchaser (within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act) to the fullest extent permitted by
applicable law, from and against any and all Losses, as incurred, arising out of or relating to any
untrue or alleged untrue statement of a material fact contained in the Registration Statement, any
Prospectus or any form of prospectus or in any amendment or supplement thereto or in any
preliminary prospectus, or arising out of or relating to any omission or alleged omission of a
material fact required to be stated therein or necessary to make the statements therein (in the
case of any Prospectus or form of prospectus or supplement thereto, in the light of the
circumstances under which they were made) not misleading, except to the extent, but only to the
extent, that (i) such untrue statements, alleged untrue statements, omissions or alleged omissions
are based solely upon information regarding such Purchaser furnished in writing to the Company by
such Purchaser expressly for use therein (except where the Purchaser has notified the Company in
writing that the information is outdated or defective), or to the extent that such information
relates to such Purchaser or such Purchaser’s proposed method of distribution of Registrable
Securities and was provided to such Purchaser in the draft Registration Statement or Prospectus or
(ii) in the case of an occurrence of an event of the type specified in Section 6.2(c)(v),
the use by such Purchaser of an outdated or defective Prospectus after the Company has notified
such Purchaser in writing that the Prospectus is outdated or defective and prior to the receipt by
such Purchaser of the Advice contemplated in Section 6.5. The Company shall notify the
Purchaser promptly of the institution, threat or assertion of any Proceeding of which the Company
is aware in connection with the transactions contemplated by this Agreement.

          (b) Indemnification by Purchaser. Notwithstanding any termination of this Agreement,
the Purchaser shall, severally and not jointly, indemnify and hold harmless the Company, each of
its directors, each of its officers who signed the Registration Statement and each Person who
controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the
Exchange Act) to the fullest extent permitted by applicable law, from and against all losses, as
incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact
contained in the

21

 

Registration Statement, any Prospectus, or any form of prospectus, or in any
amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to
any omission or alleged omission of a material fact required to be stated therein or necessary to
make the statements therein (in the case of any Prospectus or form of prospectus or supplement
thereto, in the light of the circumstances under which they were made) not misleading, but only to
the extent, that (i) such untrue statements, alleged untrue statements, omissions or alleged
omissions are based solely upon information regarding such Purchaser furnished in writing to the
Company by such Purchaser expressly for use therein (except where the Purchaser has notified the
Company in writing that the information is outdated or defective), or to the extent that such
information relates to such Purchaser or such Purchaser’s proposed method of distribution of
Registrable Securities and was provided to such Purchaser in the draft Registration Statement or
Prospectus, or (ii) in the case of an occurrence of an event of the type specified in Section
6.2(c)(v), the use by such Purchaser of an outdated or defective Prospectus after the Company
has notified such Purchaser in writing that the Prospectus is outdated or defective and prior to
the receipt by such Purchaser of the Advice contemplated in Section 6.5. In no event shall
the liability of any selling Purchaser hereunder be greater in amount than the dollar amount of the
net proceeds received by such Purchaser upon the sale of the Registrable Securities giving rise to
such indemnification obligation.

          (c) Conduct of Indemnification Proceedings. If any Proceeding shall be brought or
asserted against any Person entitled to indemnity hereunder (an “Indemnified Party”), such
Indemnified Party shall promptly notify the Person from whom indemnity is sought (the “Indemnifying
Party”) in writing, and the Indemnifying Party shall assume the defense thereof, including the
employment of counsel
reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses
incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to
give such notice shall not relieve the Indemnifying Party of its obligations or liabilities
pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by
a court of competent jurisdiction (which determination is not subject to appeal or further review)
that such failure shall have proximately and materially adversely prejudiced the Indemnifying
Party.

          An Indemnified Party shall have the right to employ separate counsel in any such Proceeding
and to participate in the defense thereof, but the fees and expenses of such counsel shall be at
the expense of such Indemnified Party or Parties unless: (i) the Indemnifying Party has agreed in
writing to pay such fees and expenses; or (ii) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such
Indemnified Party in any such Proceeding; or (iii) the named parties to any such Proceeding
(including any impleaded parties) include both such Indemnified Party and the Indemnifying Party,
and such Indemnified Party shall have been advised in writing by counsel that a conflict of
interest is likely to exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in
writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the
Indemnifying Party shall not have the right to assume the defense thereof and such counsel shall be
at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which consent shall not be
unreasonably withheld or delayed. No Indemnifying Party shall, without the prior written consent
of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any
Indemnified Party is a party, unless such settlement includes an unconditional release of such
Indemnified Party from all liability on claims that are the subject matter of such Proceeding.
Each Indemnified Party shall furnish such information regarding itself or the claim that is the
subject matter of such Proceeding in question as an Indemnifying Party may reasonably request in
writing and as shall be reasonably required in connection with the investigation and defense of
such claim.

          All fees and expenses of the Indemnified Party (including reasonable fees and expenses to the
extent incurred in connection with investigating or preparing to defend such Proceeding in a

22

 

manner
not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within
thirty (30) Business Days of written notice thereof to the Indemnifying Party (regardless of
whether it is ultimately determined that an Indemnified Party is not entitled to indemnification
hereunder; provided, that the Indemnifying Party may require such Indemnified Party to undertake to
reimburse all such fees and expenses to the extent it is finally judicially determined that such
Indemnified Party is not entitled to indemnification hereunder).

          (d) Contribution. If a claim for indemnification under Section 6.4(a) or
(b) is unavailable to an Indemnified Party (by reason of public policy or otherwise), then
each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the
amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as
is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in
connection with the actions, statements or omissions that resulted in such Losses as well as any
other relevant equitable considerations. The relative fault of such Indemnifying Party and
Indemnified Party shall be determined by reference to, among other things, whether any action in
question, including any untrue or alleged untrue statement of a material fact or omission or
alleged omission of a material fact, has been taken or made by, or relates to information supplied
by, such Indemnifying Party or Indemnified Party, and the parties’ relative intent, knowledge,
access to information and opportunity to correct or prevent such action, statement or omission.
The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject
to the limitations set forth in Section 6.4(c), any reasonable attorneys’ or other
reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent
such party would have been
indemnified for such fees or expenses if the indemnification provided for in this Section was
available to such party in accordance with its terms.

          The parties hereto agree that it would not be just and equitable if contribution pursuant to
this Section 6.4(d) were determined by pro rata allocation or by any other method of
allocation that does not take into account the equitable considerations referred to in the
immediately preceding paragraph. Notwithstanding the provisions of this Section 6.4(d), no
Purchaser shall be required to contribute, in the aggregate, any amount in excess of the amount by
which the net proceeds actually received by such Purchaser from the sale of the Registrable
Securities subject to the Proceeding exceeds the amount of any damages that such Purchaser has
otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or
alleged omission. No Person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any Person who was not guilty
of such fraudulent misrepresentation. The obligations of the Purchaser under this Section
6.4(d) shall be several and not joint.

          (e) The indemnity and contribution agreements contained in this Section are in addition to any
liability that the Indemnifying Parties may have to the Indemnified Parties.

     6.5 Dispositions. The Purchaser agrees that it will comply with the prospectus
delivery requirements of the Securities Act as applicable to it in connection with sales of
Registrable Securities pursuant to the Registration Statement. The Purchaser further agrees that,
upon receipt of a notice from the Company of the occurrence of any event of the kind described in
Sections 6.2(c)(v), such Purchaser will discontinue disposition of such Registrable
Securities under the Registration Statement until such Purchaser’s receipt of the copies of the
supplemented Prospectus and/or amended Registration Statement contemplated by Section
6.2(j), or until it is advised in writing (the “Advice”) by the Company that the use of the
applicable Prospectus may be resumed, and, in either case, has received copies of any additional
or supplemental filings that are incorporated or deemed to be incorporated by reference in such
Prospectus or Registration Statement. The Company may provide appropriate stop orders to enforce
the provisions of this paragraph.

23

 

     6.6 No Piggyback on Registrations. Neither the Company nor any of its security
holders (other than the Purchaser in such capacity pursuant hereto) may include securities of the
Company in the Registration Statement other than the Registrable Securities, and the Company shall
not after the date hereof enter into any agreement providing any such right to any of its security
holders.

     6.7 Piggy-Back Registrations. If at any time during the Effectiveness Period there is
not an effective Registration Statement covering all of the Registrable Securities and the Company
shall determine to prepare and file with the Commission a Registration Statement relating to an
offering for its own account or the account of others under the Securities Act of any of its equity
securities, other than on Form S-4 or Form S-8 (each as promulgated under the Securities Act) or
their then equivalents relating to equity securities to be issued solely in connection with any
acquisition of any entity or business or equity securities issuable in connection with stock option
or other employee benefit plans, then the Company shall send to the Purchaser written notice of
such determination and if, within fifteen days after receipt of such notice, any such Purchaser
shall so request in writing, the Company shall include in such Registration Statement all or any
part of such Registrable Securities such Purchaser requests to be registered.

ARTICLE VII

MISCELLANEOUS

     7.1 Termination. This Agreement may be terminated by the Company or the Purchaser, by
written notice to the other party, if the Closing has not been consummated by the third Business
Day following the date of this Agreement; provided that no such termination will affect the right
of any party to sue for any breach by the other party (or parties).

     7.2 Fees and Expenses. Except as expressly set forth in the Transaction Documents to
the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and
other experts, if any, and all other expenses incurred by such party incident to the negotiation,
preparation, execution, delivery and performance of this Agreement. The Company shall pay all
transfer agent fees, stamp taxes and other taxes and duties levied in connection with the issuance
of the Securities. The Company shall pay the reasonable fees and expenses of Goodwin | Procter
LLP, special counsel for the Purchaser.

     7.3 Entire Agreement. The Transaction Documents, together with the Exhibits and
Schedules thereto, contain the entire understanding of the parties with respect to the subject
matter hereof and supersede all prior agreements and understandings, oral or written, with respect
to such matters, which the parties acknowledge have been merged into such documents, exhibits and
schedules. At or after the Closing, and without further consideration, the Company will execute
and deliver to the Purchaser such further documents as may be reasonably requested in order to give
practical effect to the intention of the parties under the Transaction Documents. Notwithstanding
anything to the contrary herein, Securities may be assigned to any Person in connection with a bona
fide margin account or other loan or financing arrangement secured by such Securities.

     7.4 Notices. Any and all notices or other communications or deliveries required or
permitted to be provided hereunder shall be in writing and shall be deemed given and effective on
the earliest of (a) the date of transmission, if such notice or communication is delivered via
facsimile prior to 5:00 p.m. on a Business Day, (b) the next Business Day after the date of
transmission, if such notice or communication is delivered via facsimile on a day that is not a
Business Day or later than 5:00 p.m. on any Business Day, or (c) upon actual receipt by the party
to whom such notice is required to be given. The addresses and facsimile numbers for such notices
and communications are those set forth on the

24

 

signature pages hereof, or such other address or
facsimile number as may be designated in writing hereafter, in the same manner, by any such Person.

     7.5 Amendments; Waivers. No provision of this Agreement may be waived or amended
except in a written instrument signed by the Company and the holders of a majority of the Shares.
No waiver of any default with respect to any provision, condition or requirement of this Agreement
shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a
waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of
either party to exercise any right hereunder in any manner impair the exercise of any such right.

     7.6 Construction. The headings herein are for convenience only, do not constitute a
part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.
The language used in this Agreement will be deemed to be the language chosen by the parties to
express their mutual intent, and no rules of strict construction will be applied against any party.

     7.7 Successors and Assigns. This Agreement shall be binding upon and inure to the
benefit of the parties and their successors and permitted assigns. The Company may not assign this
Agreement or any rights or obligations hereunder without the prior written consent of the
Purchaser. The Purchaser may assign its rights under this Agreement to any Person to whom such
Purchaser assigns or transfers any Securities, provided such transferee agrees in writing to be
bound, with respect to the transferred Securities, by the provisions hereof that apply to the
“Purchaser.”

     7.8 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the
parties hereto and their respective successors and permitted assigns and is not for the benefit of,
nor may any provision hereof be enforced by, any other Person, except that each Indemnified Party is an
intended third party beneficiary of Section 6.4 and (in each case) may enforce the
provisions of such Sections directly against the parties with obligations thereunder.

     7.9 Governing Law; Venue; Waiver Of Jury Trial. ALL QUESTIONS CONCERNING THE
CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE COMPANY AND
PURCHASER HEREBY IRREVOCABLY SUBMIT TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS
SITTING IN THE CITY AND COUNTY OF SAN DIEGO FOR THE ADJUDICATION OF ANY DISPUTE BROUGHT BY THE
COMPANY OR THE PURCHASER HEREUNDER, IN CONNECTION HEREWITH OR WITH ANY TRANSACTION CONTEMPLATED
HEREBY OR DISCUSSED HEREIN (INCLUDING WITH RESPECT TO THE ENFORCEMENT OF ANY OF THE TRANSACTION
DOCUMENTS), AND HEREBY IRREVOCABLY WAIVE, AND AGREE NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING
BROUGHT BY THE COMPANY OR THE PURCHASER, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE
JURISDICTION OF ANY SUCH COURT, OR THAT SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. EACH PARTY
HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO PROCESS BEING SERVED IN ANY
SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF VIA REGISTERED OR CERTIFIED MAIL OR
OVERNIGHT DELIVERY (WITH EVIDENCE OF DELIVERY) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES
TO IT UNDER THIS AGREEMENT AND AGREES THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT
SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY
WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. THE COMPANY AND PURCHASER HEREBY
WAIVE ALL RIGHTS TO A TRIAL BY JURY.

25

 

     7.10 Execution. This Agreement may be executed in two or more counterparts, all of
which when taken together shall be considered one and the same agreement and shall become effective
when counterparts have been signed by each party and delivered to the other party, it being
understood that both parties need not sign the same counterpart. In the event that any signature
is delivered by facsimile transmission, such signature shall create a valid and binding obligation
of the party executing (or on whose behalf such signature is executed) with the same force and
effect as if such facsimile signature page were an original thereof.

     7.11 Severability. If any provision of this Agreement is held to be invalid or
unenforceable in any respect, the validity and enforceability of the remaining terms and provisions
of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt
to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon
so agreeing, shall incorporate such substitute provision in this Agreement.

     7.12 Replacement of Securities. If any certificate or instrument evidencing any
Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued
in exchange and substitution for and upon cancellation thereof, or in lieu of and substitution
therefor, a new certificate or instrument, but only upon receipt of evidence reasonably
satisfactory to the Company of such loss, theft or destruction and customary and reasonable
indemnity, if requested. The applicants for a new certificate or instrument under such
circumstances shall also pay any reasonable third-party costs associated with the issuance of such
replacement Securities.

     7.13 Remedies. In addition to being entitled to exercise all rights provided herein
or granted by law, including recovery of damages, each of the Purchaser and the Company will be
entitled to specific performance under the Transaction Documents. The parties agree that monetary damages may not
be adequate compensation for any loss incurred by reason of any breach of obligations described in
the foregoing sentence and hereby agrees to waive in any action for specific performance of any
such obligation the defense that a remedy at law would be adequate.

     7.14 Payment Set Aside. To the extent that the Company makes a payment or payments to
the Purchaser hereunder or the Purchaser enforces or exercises its rights hereunder or thereunder,
and such payment or payments or the proceeds of such enforcement or exercise or any part thereof
are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from,
disgorged by or are required to be refunded, repaid or otherwise restored to the Company by a
trustee, receiver or any other Person under any law (including, without limitation, any bankruptcy
law, state or federal law, common law or equitable cause of action), then to the extent of any such
restoration the obligation or part thereof originally intended to be satisfied shall be revived and
continued in full force and effect as if such payment had not been made or such enforcement or
setoff had not occurred.

     7.15 Adjustments in Share Numbers and Prices. In the event of any stock split,
subdivision, dividend or distribution payable in shares of Common Stock (or other securities or
rights convertible into, or entitling the holder thereof to receive directly or indirectly shares
of Common Stock), combination or other similar recapitalization or event occurring after the date
hereof, each reference in any Transaction Document to a number of shares or a price per share shall
be amended to appropriately account for such event.

     7.16 Independent Nature of Participating Purchasers Obligations and Rights. The
obligations of the Purchaser under any Transaction Document are several and not joint with the
obligations of any Other Purchaser, and no Participating Purchaser shall be responsible in any way
for the performance of the obligations of any Other Purchaser under any Transaction Document. The
decision of the Purchaser to purchase Shares pursuant to this Agreement has been made by such
Purchaser independently of any

26

 

Other Purchaser and independently of any information, materials,
statements or opinions as to the business, affairs, operations, assets, properties, liabilities,
results of operations, condition (financial or otherwise) or prospects of the Company or of the
Subsidiary which may have been made or given by any Other Purchaser or by any agent or employee of
any Other Purchaser, and neither the Purchaser nor any of its agents or employees shall have any
liability to any Other Purchaser (or any other Person) relating to or arising from any such
information, materials, statements or opinions. Nothing contained herein or in any Transaction
Document, and no action taken by the Purchaser pursuant thereto, shall be deemed to constitute the
Participating Purchasers as a partnership, an association, a joint venture or any other kind of
entity, or create a presumption that the Participating Purchasers are in any way acting in concert
or as a group with respect to such obligations or the transactions contemplated by the Transaction
Document. The Purchaser acknowledges that no Other Purchaser has acted as agent for such Purchaser
in connection with making its investment hereunder and that no Other Purchaser will be acting as
agent of such Purchaser in connection with monitoring its investment hereunder. The Purchaser
shall be entitled to independently protect and enforce its rights, including without limitation the
rights arising out of this Agreement or out of the other Transaction Documents, and it shall not be
necessary for any Other Purchaser to be joined as an additional party in any proceeding for such
purpose.

     7.17 Limitation on Liability. A copy of the Agreement and Declaration of Trust of the
Purchaser is on file with the Secretary of the Commonwealth of Massachusetts and notice is hereby
given that this Agreement is executed on behalf of the Trustees of the Purchaser as Trustees and
not individually and that the obligations of this Agreement are not binding upon any of the
Trustees, officers or stockholders of the Purchaser individually but are binding only upon the
assets and property of the Purchaser. The Company is expressly put on notice that the rights and
obligations of each series of shares
of the Purchaser under its Declaration of Trust are separate and distinct from those of any
and all other series.

[SIGNATURE PAGES TO FOLLOW]

27

 

     IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement
to be duly executed by their respective authorized signatories as of the date first indicated
above.

	 	 	 	 	 	 	 
	 	 	PICO HOLDINGS, INC.	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 

	 	 
	 

	 	Name:
	 	James F. Mosier	 	 
	 

	 	Title:
	 	General Counsel and Secretary	 	 
	 
	 	 	 	 	 	 
	 	 	Address for Notice:	 	 
	 
	 	 	 	 	 	 
	 	 	875 Prospect St.	 	 
	 	 	La Jolla, CA 92037	 	 
	 	 	Phone — (858) 551—6835	 	 
	 	 	Fax — (858) 456-6172	 	 
	 
	 	 	 	 	 	 
	With a copy to:	 	DLA Piper Rudnick Gray Cary	 	 
	 	 	4365 Executive Drive	 	 
	 	 	Suite 1100	 	 
	 	 	San Diego, CA 92121	 	 
	 	 	Facsimile No.: (858) 677-1401	 	 
	 	 	Telephone No.: (858) 677-1400	 	 
	 	 	Attn: Douglas Rein	 	 
	 

	 	          Marty Lorenzo	 	 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR PURCHASER FOLLOWS]

Signature Page to Securities Purchase Agreement.

 

 

	 	 	 	 	 	 	 
	 

	 	PURCHASER NAME:
	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	Purchase Price:	 	$30.00	 	 
	 
	 	 	 	 	 	 
	 

	 	Number of Shares to be acquired:	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Tax ID #:	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Full Address:	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Facsimile #:	 	 	 	 
	 

	 	Telephone #:	 	 	 	 
	 

	 	Attn:	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	With a copy
to           	 	 	 	 
	 

	 	(Purchaser Counsel):	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Full Address:	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 

	 	Facsimile #:	 	 	 	 
	 

	 	Telephone #:	 	 	 	 
	 

	 	Attn:	 	 	 	 

Signature Page to Securities Purchase Agreement.

 

 

	 	 	 
	Exhibits:	 	 
	A

	 	Form of Legal Opinion
	 
	 	 
	B

	 	Wire Instructions
	 
	 	 
	C

	 	Purchaser Questionnaire
	 
	 	 
	D

	 	Plan of DistributionEX-10.1

 

Exhibit 10.1

TOLLGRADE COMMUNICATIONS, INC.

MANAGEMENT INCENTIVE COMPENSATION PLAN

EFFECTIVE JANUARY 1, 1997

	 	 
	Prepared
By:  

	 Samuel C. Knoch
	 

	 November 27, 1996

Amended effective: 10/15/97; 1/29/98; 12/17/98; 1/28/99; 5/6/99; 7/15/99; 10/14/99; 1/25/01

 

 

TOLLGRADE COMMUNICATIONS, INC.

MANAGEMENT INCENTIVE COMPENSATION PLAN

TABLE OF CONTENTS

	 	 	 	 	 
	 	 	 	 	Page
	ARTICLE I
	 	OBJECTIVES	 	 
	 
	 	 	 	 
	Section 1.01
	 	Objectives	 	1
	 
	 	 	 	 
	ARTICLE II
	 	DEFINITIONS	 	 
	 
	 	 	 	 
	Section 2.01
	 	Definitions	 	2
	 
	 	 	 	 
	ARTICLE III
	 	ADMINISTRATION OF THE PLAN	 	 
	 
	 	 	 	 
	Section 3.01
	 	Committee and Agents	 	4
	Section 3.02
	 	Rules and Regulations	 	4
	Section 3.03
	 	Quorum	 	4
	Section 3.04
	 	Plan Interpretation	 	4
	Section 3.05
	 	Notice of Participation	 	4
	Section 3.06
	 	Costs	 	4
	Section 3.07
	 	Unsecured Creditor	 	4
	Section 3.08
	 	Authority of Board and Committee	 	5
	Section 3.09
	 	Amendment, Modification or Termination	 	5
	Section 3.10
	 	Claim and Appeal Procedure	 	5
	 
	 	 	 	 
	ARTICLE IV
	 	PARTICIPATION ELIGIBILITY	 	 
	 
	 	 	 	 
	Section 4.01
	 	Designation of Groups	 	7
	Section 4.02
	 	Termination of Employment	 	7
	Section 4.03
	 	Death, Retirement, Disability, Leave of Absence or Transfer	 	7
	Section 4.04
	 	Directors	 	7
	Section 4.05
	 	New Participants	 	7
	Section 4.06
	 	New Participating Entities	 	7

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	ARTICLE V
	 	DETERMINATION OF INCENTIVE COMPENSATION AWARD AND DISCRETIONARY BONUS	 	 
	 
	 	 	 	 
	Section 5.01
	 	Required Financial Performance Levels	 	9
	Section 5.02
	 	Performance Criteria	 	9
	Section 5.03
	 	Determination of Salary Percentage and Allocation of Performance Criteria	 	10
	Section 5.04
	 	Determination of Incentive Compensation Award	 	10
	Section 5.05
	 	Determination of Discretionary Bonus	 	10
	 
	 	 	 	 
	ARTICLE VI
	 	PAYMENT FOR PARTICIPANTS	 	 
	 
	 	 	 	 
	Section 6.01
	 	Timing of Payment	 	11
	Section 6.02
	 	Payment in Common Stock	 	11
	Section 6.03
	 	Beneficiary Designation	 	12
	 
	 	 	 	 
	ARTICLE VII
	 	MISCELLANEOUS PROVISIONS	 	 
	 
	 	 	 	 
	Section 7.01
	 	No Recourse	 	13
	Section 7.02
	 	Expense	 	13
	Section 7.03
	 	Merger or Consolidation	 	13
	Section 7.04
	 	Legal Costs	 	13
	Section 7.05
	 	Gender and Number	 	13
	Section 7.06
	 	Construction	 	13
	Section 7.07
	 	Non-alienation	 	13
	Section 7.08
	 	No Employment Rights	 	14
	Section 7.09
	 	Minor or Incompetent	 	14
	Section 7.10
	 	Illegal or Invalid Provision	 	14

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ARTICLE I

OBJECTIVES

     Section 1.01
 — Objectives. The Plan was originally adopted and was and continues to be,
designed to achieve the following objectives:

	 	(a)	 	Increase the profitability and growth of the Company in a manner which is
consistent with the goals of the Company, its stockholders and its employees.

	 	(b)	 	Provide executive compensation which is competitive with other high-tech
companies and provide the potential for payment of meaningful cash awards.

	 	(c)	 	Attract and retain personnel of outstanding ability and encourage excellence
in the performance of individual responsibilities.

	 	(d)	 	Motivate and reward those members of management who contribute to the success
of the Company.

	 	(e)	 	Allow the flexibility which permits revision and strengthening from time to
time to reflect changing organizational goals and objectives.

     The intent of this Plan, which is effective as of January 1, 1997, is profit enhancement
through quality performance.

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ARTICLE II

DEFINITIONS

     Section 2.01 —
Definitions. As used herein, the following words and phrases shall have the
meanings below, unless the context clearly indicates otherwise:

	 	(a)	 	“Award Year” shall mean a calendar year beginning on or after January 1,
1997.
	 
	 	(b)	 	“Beneficiary” shall mean the person or persons, natural or legal, designated
in writing by the Participant to receive any benefits under the Plan which may become
payable in the event of the Participant’s death or, if none is designated or surviving
at the time of the Participant’s death, the Participant’s surviving spouse shall be
the Beneficiary or, if there is no surviving spouse, then the Participant’s surviving
children shall share equally or, if none, then the estate of the Participant shall be
the Beneficiary.
	 
	 	(c)	 	“Board” shall mean the Board of Directors of Tollgrade Communications, Inc.
	 
	 	(d)	 	“Committee” shall mean the Compensation Committee of the Board.
	 
	 	(e)	 	“Company” shall mean the corporate entity of Tollgrade Communications, Inc.
without regard to any subsidiaries thereof, unless further amended by the Board at a
subsequent date to include another Participating Entity, as defined.
	 
	 	(f)	 	“Disability” shall mean the total and permanent disability of a Participant,
as defined by any welfare benefit plan maintained by the Company or a Participating
Entity which is applicable to the Participant, as in effect at the time of
determination.
	 
	 	(g)	 	“Employee” shall mean any full-time or part time (meaning, for purposes of
this Plan, an employee working twenty four (24) or more hours per week) common law
employee of Tollgrade Communications, Inc. or a Participating Entity.
	 
	 	(h)	 	“ERISA” shall mean the Employment Retirement Income Security Act of 1974, as
amended from time to time.
	 
	 	(i)	 	“Fair Market Value” shall mean the fair market value of one share of
Tollgrade Communications, Inc. Common Stock as determined pursuant to Section 6.02.
	 
	 	(j)	 	“Financial Performance” shall mean the financial performance of Tollgrade
Communications, Inc. and/or a Participating Entity as determined from time to time by
the Committee or its delegate.

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	 	(k)	 	“Group” shall mean the group to which a Participant is assigned in accordance
with Section 4.01.
	 
	 	(l)	 	“Incentive Compensation Award” shall mean the dollar amount of compensation
awarded to a Participant for an Award Year as determined under Article V of the Plan.
	 
	 	(m)	 	“Participant” shall mean any Employee who has been designated by the
Committee to be a participant in the Plan in accordance with Section 3.05, and only
for as long as such designation remains in effect.
	 
	 	(n)	 	“Participating Entity” shall mean a subsidiary of an affiliate or other
affiliated entity of the Company which elects to participate in the Plan with respect
to its Employees and is approved by the Board to participate in the Plan, with such
status as a Participating Entity and participation in the Plan ceasing automatically
on the date the subsidiary or affiliate ceases to be a subsidiary or affiliate of the
Company.
	 
	 	(o)	 	“Plan”: shall mean the Management Incentive Compensation Plan, effective
January 1, 1997, as set forth herein, and as it may be amended from time to time
hereafter.
	 
	 	(p)	 	“Salary” shall mean the Participant’s base salary and overtime payments from
Tollgrade Communications, Inc. or a Participating Entity.

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ARTICLE III

ADMINISTRATION OF THE PLAN 

     Section 3.01 — Committee and Agents. Full power and authority to administer
the Plan shall be vested in the Committee. The Committee may appoint a secretary who may, but need
not be, a member of the Committee. The Committee may also employ such other agents as it deems
appropriate to assist it with the administration of the Plan.

     Section 3.02 — Rules and Regulations. The Committee shall, from time to time,
establish rules, forms and procedures of general application for the administration of the Plan.

     Section 3.03 — Quorum. A majority of the members of the Committee shall
constitute a quorum for purposes of transacting business relating to the Plan. The acts of a
majority of the members present (in person, or by conference telephone) at any meeting of the
Committee at which there is a quorum shall be valid acts of the Committee. Acts reduced to and
approved unanimously in writing by all of the Committee members shall also be valid acts.

     Section 3.04 — Plan Interpretation. The Committee shall have the full power
and authority to construe and interpret the Plan, and make all determinations of Incentive
Compensation Awards under the Plan, approve all Employees who are to participate in the Plan,
determine the Group to which a Participant is assigned under Section 4.01, and determine all facts
and other issues relating to claims and appeals under the Plan.

     Section 3.05 — Notice of Participation. The Committee shall send a written
notice, in the form prescribed by the Committee or its delegate, informing the Employee that he or
she has been selected to be a Participant in the Plan and specifying the period for which such
designation is to remain in effect. No Employee shall have the right to become a Participant and
shall not be a Participant until the date specified in the notice. Furthermore, being designated a
Participant does not guarantee an Employee that an Incentive Compensation Award will be earned or
paid.

     Section 3.06 — Costs. All costs and expenses involved in the administration of
the Plan shall be borne by the Company or the Participating Entity.

     Section 3.07  — Unsecured Creditor. The Plan constitutes a mere promise by
Tollgrade Communications, Inc. or the Participating Entity to make benefit payments in the future.
The Company and the Participating Entities obligations under the Plan shall be unfunded and
unsecured promises to pay. The Company and the Participating Entities shall not be obligated under
any circumstance to fund their respective financial obligations under the Plan. Any of them may, in
its discretion, set aside funds in a trust or other vehicle, subject to the claims of its
creditors, in order to assist it in meeting its obligations under the Plan, if such arrangement
will not cause the Plan to be

-4-

 

considered a funded deferred compensation plan under ERISA, or the Internal Revenue Code of 1986,
as amended, and provided, further, that any trust created by the Company or a Participating Entity
and any assets held by such trust to assist the Company or the Participating Entity in meeting its
obligations under the Plan will conform to the terms of the model trust, as described in Rev. Proc.
92-64, 1992-2 C.B. 422. To the extent that any Participant or Beneficiary or other person acquires
a right to receive payments under the Plan, such right shall be no greater than the right, and each
Participant and Beneficiary shall at all times have the status of a general unsecured creditor of
the Participating Entity.

     Section 3.08 — Authority of Board and Committee. Any determination or action
of the Committee or the Board and the records of the Committee shall be final, conclusive and
binding on all Participants and Beneficiaries, and their beneficiaries, heirs, personal
representatives, executors and administrators, and upon the Company, the Participating Entities and
all other persons having or claiming to have any right or interest in or under the Plan. No
Participant shall participate in any decision of the Board or the Committee which directly or
indirectly affects the Plan.

     Section 3.09 — Amendment, Modification or Termination. The Board, in its sole
discretion, may amend, modify or terminate the Plan at any time.

     Section 3.10 — Claims and Appeal Procedure.

	 	(a)	 	In the event of a claim by a Participant or a Participant’s Beneficiary for
or in respect of any benefit under the Plan or the method of payment thereof, such
Participant or Beneficiary shall present the reason for his claims in writing to the
Committee, in c/o the Secretary, if applicable, or such other person or entity
designated and communicated by the Committee.
The Committee, shall, within ninety (90) days after the receipt of such
written claim, send written notification to the Participant or Beneficiary as to
its disposition, unless special circumstance require an extension of time for
processing the claim. If such an extension of time for processing is required,
written notice of the extension shall be furnished to the claimant prior to the
termination of the initial ninety (90) day period. In no event, shall such
extension exceed a period of ninety (90) days from the end of such initial period.
The extension notice shall indicate the special circumstances requiring an
extension of time and the date by which the Committee expects to render the final
decision.
	 
	 	 	 	In the event the claim is wholly or partially denied, the written notification
shall state the specific reason or reasons for the denial, include specific
references to pertinent Plan provisions on which the denial is based, provide an
explanation of any additional material or information necessary for the Participant
or Beneficiary to perfect the claim and a statement of why such material or
information is necessary, and set forth the procedure by which the Participant or
Beneficiary may appeal the denial of the
claim. If the claim has not been granted and notice is not furnished within the
time period specified in the preceding paragraph, the claim shall be deemed denied
for the purpose of proceeding to appeal in accordance with paragraph (b) below.

-5-

 

	 	(b)	 	In the event a Participant or Beneficiary wishes to appeal the denial of his
claim, he may request a review of such denial by making written application to the
Committee, in c/o the Secretary, if applicable, or such other person or entity
designated and communicated by the Committee, within sixty (60) days after receipt of
the written notice of denial (or the date on which such claim is deemed denied if
written notice is not received within the applicable time period specified in
paragraph (a) above). Such Participant or Beneficiary (or his duly authorized
representative) may, upon written request to the Committee, review documents which are
pertinent to such claim, and submit in writing issues and comments in support of his
position.
	 
	 	 	 	Within sixty (60) days after receipt of the written appeal (unless an extension of
time is necessary due to special circumstances or is agreed to by the parties, but
in no event more than one hundred and twenty (120) days after such receipt), the
Committee shall notify the Participant or Beneficiary of its final decision. Such
final decision shall be in writing and shall include specific reasons for the
decision, written in a manner calculated to be understood by the claimant, and
specific references to the pertinent Plan provisions on which the decision is
based. If an extension of time for review is required because of special
circumstances, written notice of the extension shall be furnished to the claimant
prior to the commencement of the extension. If the claim has not been granted and
written notice is not provided within the time period specified above, the appeal
shall be deemed denied.
	 
	 	(c)	 	If a Participant or Beneficiary does not follow the procedures set forth in
paragraphs (a) and (b) above, he shall be deemed to have waived his right to appeal
benefit determinations under the Plan. In addition, the decisions, actions and records
of the Committee shall be conclusive and binding upon the Company, the Participating
Entities and all persons having or claiming to have any right or interest in or under
the Plan.

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ARTICLE IV

PARTICIPANT ELIGIBILITY 

     Section 4.01 — Designation of Groups. An Employee who is designated by the
Committee as a Participant for an Award Year shall be a member of a Group, as determined from time
to time by the Committee or its delegate. With respect to a Participant who moves from one Group to
another during an Award Year, such Participant shall be treated as a member of each Group for the
period of time in that Group during the Award Year and the Participant’s actual Salary for the
period in each Group shall be used to calculate the Incentive Compensation Award applicable for the
period of time in each Group.

     Section 4.02 — Termination of Employment. A Participant who voluntarily or
involuntarily terminates employment with the Company and all Participating Entities prior to the
end of an Award Year or subsequent to the end of an Award Year but prior to the time that Incentive
Compensation Awards for such award year are paid by the Company will forfeit any right to an
Incentive Compensation Award for the Award Year during which termination occurs, except as
otherwise provided in Section 4.03 below or as otherwise determined by the Committee or its
delegate.

     Section 4.03 — Death, Retirement, Disability, Leave of Absence or Transfer.
If, during an Award Year, a Participant dies, retires, becomes disabled, is granted a leave of
absence, or is transferred to a non-Participating Entity or out of all Groups, the Committee may,
at its discretion or under such uniform rules as it may prescribe, make a partial or full Incentive
Compensation Award to the Participant for the Award Year.

     Section 4.04 — Directors. A member of the Board who is not an Employee in one
of the Groups may not participate in the Plan.

     Section 4.05 — New Participants. Except as otherwise provided in this Section
4.05, an Employee who is not a Participant as of the first day of an Award Year shall not become a
Participant for that Award Year. New Employees of the Company or a Participating Entity hired
during an Award Year, and Employees promoted to a Group during the Award Year who were not eligible
to participate in the Plan at the beginning of the Award Year, may become a Participant during an
Award Year and participate in the Plan for such Award Year on a pro-rata basis if the Employee
becomes a Participant effective not later than (6) months after the beginning of the Award Year.
Notwithstanding the above, the Committee, in its discretion, may provide in writing that a new
Employee or an Employee promoted to a Group during an Award Year, shall join the Plan more than six
months after the beginning of an Award Year and shall specify in such writing the basis in which
the New Employee or an Employee promoted to a Group during an Award Year, shall be eligible for an
Incentive Compensation Award for the first Award Year.

     Section 4.06 — New Participating Entities. Except as otherwise provided in
this Section 4.06, a Participating Entity may only join the Plan as of the first day of an Award
Year. New Participating Entities acquired during an Award Year, or otherwise not participating
in the Plan at the beginning of

-7-

 

the Award Year, may become a Participating Entity during an Award Year and participate in the Plan
for such Award Year on a pro-rata basis, or other basis specified by the Committee, if the
Participating Entity joins the Plan effective not later than six (6) months after the beginning of
the Award Year. Notwithstanding the above, the Committee, in its sole discretion, may provide in
writing that a Participating Entity shall join the Plan more than six (6) months after the
beginning of an Award Year and shall specify in such writing the basis on which the Participating
Entity’s Participants shall be eligible for an Incentive Compensation Award for the first Award
Year.

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ARTICLE V

DETERMINATION OF INCENTIVE COMPENSATION AWARD 

AND DISCRETIONARY BONUS 

     Section 5.01 — Required Financial Performance Levels. In order for an
Incentive Compensation Award to be made for an Award Year, the following performance levels must be
met:

	 	(a)	 	The minimum level of Financial Performance, including the effect of any
amounts calculated as due under this or any other Incentive Compensation Plan, as
established by the Committee for an Award Year for Tollgrade Communications, Inc. or a
Participating Entity, must be met before any Incentive Compensation Award based on
Tollgrade Communications, Inc.’s or such Participating Entity’s Financial Performance
can be made.
	 
	 	(b)	 	Tollgrade Communication, Inc.’s financial Performance for the Award Year must
be at least ninety (90) percent (or such other percentage established by the
Committee) of the minimum level of Financial Performance established for Tollgrade
Communications, Inc. Under (a) above.
	 
	 	(c)	 	The Committee shall establish from time to time and communicate to
Participants the performance rating required to apply the minimum, maximum and other
intermediate percentages within the performance criteria established under Section
5.02 for purposes of calculating the Incentive Compensation Award for an Award Year;
provided, however, that notwithstanding any other provision of the Plan to the
contrary, any Participant who receives a rating of “unsatisfactory” on any performance
appraisal report during an Award Year shall be ineligible for an Incentive
Compensation Award for that Award Year, and any Participant who receives a rating of
“improvement needed” on any performance appraisal report during an Award Year shall be
eligible for all or part of any Incentive Compensation Award for that Award Year only
if approved by the Committee upon recommendation of the Company’s management.

     Section 5.02 — Performance Criteria.

	 	(a)	 	The Incentive Compensation Award for a Participant may be calculated in part
on the basis of Financial Performance and in part on the basis of the Financial
Performance of the Participating Entity who employs the Participant.
	 
	 	(b)	 	In addition to the Financial Performance criteria referred to in paragraph
(a) above, the Incentive Compensation Award for a Participant may be calculated in
part based on the Participant’s individual performance and/or
performance of the Participant’s job unit, the levels of which will be measured by
general criteria (e.g., revenues,

-9-

 

	 	 	 	margins, cost management, quality, customer service, etc.) and in part may consist
of a discretionary piece based on the Participant’s individual performance measured
by personal behavioral criteria (e.g. attitude, teamwork, etc.). Guidelines for
determining the requirements for achieving the various performance levels (e.g.,
Outstanding, Meets Expectations, etc.) will be developed by the Committee or its
delegate and communicated to Participants from time to time during the Award Year.
	 
	 	(c)	 	The Committee may, in its sole discretion, change or eliminate the
performance criteria referred to in paragraphs (a) or (b) above, and may establish new
or additional performance criteria, from time to time, provided that the applicable
performance criteria are communicated to affected Participants.
	 
	 	(d)	 	the specific Group and Performance criteria in effect as of October 15, 1997,
and until further amended by the Committee, is as set forth in Appendix I to this
Plan.

     Section 5.03 — Determination of Salary Percentage and Allocation of Performance
Criteria. The Committee shall determine and, itself or through its delegate, communicate to
Participants from time to time the percentage of a Participant’s Salary to be taken into account
for purposes of determining a Participant’s Incentive Compensation Award for an Award Year. The
Committee shall also determine and, itself or through its delegate, communicate to Participants the
percentages of the performance criteria established under Section 5.02 above which are applicable
to Participants in each Group, and for this purpose may subdivide each Group into Participants and
Participating Entity Participants, or such other subgroups as it may determine.

     Section 5.04 — Determination of Incentive Compensation Award. The amount of a
Participant’s Incentive Compensation Award for an Award Year, if any, shall be determined by the
Committee or its delegate in accordance with the terms of the Plan and shall be communicated in
writing to the Participant on or before March 15th of the next year.

     Section 5.05 — Determination of Discretionary Bonus. The Committee may grant,
from time to time in its sole discretion, a bonus to any Participant based on any criteria it
determines. Such bonus, if specifically designated by the Committee as payable under this Plan,
shall be subject to such provisions of the Plan as it shall specify.

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ARTICLE VI

PAYMENT TO PARTICIPANTS 

     Section 6.01 — Timing of Payment. An Incentive Compensation Award for an Award
Year shall be paid to the Participant, or in the case of death to the Participant’s Beneficiary, on
or before March 15th of the next year.

     Section 6.02 — Payment in Common Stock. Consistent with the provisions of the
Tollgrade Communications, Inc. Common Stock Incentive Plan (TCIP) or any similar plan in effect
from time to time, and at the discretion of the Compensation Committee which administers the TCIP
(the “Committee”), Incentive Compensation Awards payable under any Section of this Article VI may
be paid in whole or in part in shares of Tollgrade Communications, Inc. Common Stock. The number of
shares of Common Stock to be paid would be determined by dividing the cash payment which would
otherwise be made by the Fair Market Value on the date on which the payment is to be made. Any
fractional shares shall be paid in cash. A Participant shall be considered, on the date as of which
Fair Market Value is determined for purposes of the stock distribution, as a shareholder of
Tollgrade Communications, Inc. with respect to the shares to be distributed.

     For purposes of this Section 6.02, Fair Market Value is the mean between the following prices,
as applicable, for the date as of which Fair Market Value is to be determined, as quoted in
The Wall Street Journal (or in such other reliable publication as
the Committee or its delegate, in its discretion, may determine to rely upon):

	 	 (a)	 	if the Common Stock is listed on the New York Stock Exchange, the highest and
lowest sales prices per share of the Common Stock as quoted in the NYSE-Composite
Transactions listing for such date,
	 
	 	 (b)	 	if the Common Stock is not listed on the New York Stock Exchange, the highest
and lowest sales prices per share of Common Stock for such date on (or on any
composite index including) the principal United States securities exchange registered
under the Securities Exchange Act of 1934 on which the Common Stock is listed, or
	 
	 	 (c)	 	if the Common Stock is not listed on any exchange referred to in paragraphs
(a) or (b) above, the highest and lowest sales prices per share of the Common Stock
for such date on the National Association of Securities Dealers Automated Quotations
System or any successor system then in use (“NASDAQ”).

     If there are no such sales price quotations for the date as of which Fair Market Value is to
be determined, but there are such sale price quotations within a reasonable period both before and
after such date, then the Fair Market Value shall be determined by taking a weighted average of the
means

-11-

 

between the highest and lowest sales prices per share of the Common Stock as so quoted on the
nearest date before and the nearest date after the date as of which Fair Market Value is to be
determined. The average should be weighted inversely by the respective numbers of trading days
between the selling dates and the date as of which Fair Market Value is to be determined. If there
are no such sale price quotations on or within a reasonable period both before and after the date
as of which Fair Market Value is to be determined, then Fair Market Value shall be the mean between
the bona fide bid and asked prices per share of Common Stock as so quoted for such date on NASDAQ,
or if none, the weighted average of the means between such bona fide bid and asked prices on the
nearest trading date before and the nearest trading date after the date as of which Fair Market
Value is to be determined in the manner described above in this Section 6.02.

     If the Fair Market Value of the Common Stock cannot be determined on the basis previously set
forth in this Section 6.02 on the date as of which Fair Market Value is to be determined, the TCIP
Committee or its delegate shall in good faith determine the Fair Market Value of the Common Stock
on such date. Fair Market Value shall be determined without regard to any restriction other than a
restriction which, by its terms, will never lapse.

     Section 6.03 — Beneficiary Designation. A Participant may file with the
Committee or its delegate a completed designation of Beneficiary Form as prescribed by the
Committee or its delegate. Such designation may be made, revoked or changed by the Participant at
any time before death. Such designation of Beneficiary will not be effective and supersedes all
prior designations until it is received and acknowledged by the Committee or its delegate. If the
Committee has any doubt as to the proper Beneficiary to receive payments hereunder, the Committee
shall have the right to withhold such payments until the matter is finally adjudicated. However,
any payment made in good faith shall fully discharge the Committee, the Participating Entities and
the Board from all further obligations with respect to that payment.

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ARTICLE VII

MISCELLANEOUS PROVISIONS 

     Section 7.01 — No Recourse. If the Financial Performance taken into account
for determination of an Incentive Compensation Award is found to be incorrect by the Company’s
independent certified public accountants and was more than the correct amount, there shall be no
recourse by the Company against any person or estate. However, the Company shall have the right to
correct such error by reducing by the entire excess amount any subsequent payments yet to be made
under the Plan for all Award Years.

     Section 7.02 — Expense. Incentive Compensation Awards shall be treated as an
expense for book purposes in the fiscal year of the Company or the Participating Entity, as
applicable, in which the Incentive Compensation Award is earned by a Participant, as opposed to
subsequent fiscal year(s) during which the Incentive Compensation Award is paid.

     Section 7.03 — Merger or Consolidation. All obligations for amounts earned but
not yet paid under this Plan shall survive any merger, consolidation or sale of all or
substantially all of Tollgrade Communications, Inc. Or a Participating Entity’s assets to any
entity, and be the liability of the successor to the merger or consolidation or the purchaser of
assets.

     Section 7.04 — Legal Costs. A Participant will be reimbursed by the Company
(or its successor) for any and all expenses incurred in successfully enforcing, by judgment of a
court of competent jurisdiction and after all appeals have been exhausted, the Participant’s right
to receive payments under the terms of this Plan.

     Section 7.05 — Gender and Number. The masculine pronoun whenever used in the
Plan shall include the feminine and vice versa. The singular shall include the plural and the
plural shall include the singular whenever used herein unless the context requires otherwise.

     Section 7.06 — Construction. The provisions of the Plan shall be construed,
administered and governed by the laws of the Commonwealth of Pennsylvania, including its statute of
limitations provisions, to the extent not preempted by ERISA or other applicable Federal law.
Titles of Articles and Sections of the Plan are for convenience of reference only and are not to be
taken into account when construing and interpreting the provisions of the Plan.

     Section 7.07 — Non-alienation. Except as may be required by law, neither the
Participant nor any Beneficiary shall have the right to, directly or indirectly, alienate, assign,
transfer, pledge, anticipate or encumber (except by reason of death) any amount that is or may be
payable hereunder, including in respect of any liability of a Participant or Beneficiary for
alimony or other payments for the support of a spouse, former spouse,
child or other dependent, prior to actually being received by the Participant or Beneficiary
hereunder, nor shall the Participant’s or Beneficiary’s rights to benefit payments under the Plan
be subject in any manner to anticipation, alienation, sale, transfer,

-13-

 

assignment, pledge, encumbrance, attachment, or garnishment by creditors of the Participant or
Beneficiary or to the debts, contracts, liabilities, engagements, or torts of any Participant or
Beneficiary, or transfer by operation of law in the event of bankruptcy or insolvency of the
Participant or any Beneficiary, or any legal process.

     Section 7.08 — No Employment Rights. Neither the adoption of the Plan nor any
provision of the Plan shall be construed as a contract of employment between the Company or a
Participating Entity and any Employee or Participant, or as a guarantee or right of any Employee or
Participant to future or continued employment with the Company or a Participating Entity, or as a
limitation on the right of the Company or a Participating Entity to discharge any of its Employees
with or without cause. Specifically, designation as a Participant does not create any rights, and
no rights are created under the Plan, with respect to continued or future employment or conditions
of employment.

     Section 7.09 — Minor or Incompetent. If the Committee determines that any
Participant or Beneficiary entitled to a payment under the Plan is a minor or incompetent by reason
of physical or mental disability, it may, in its sole discretion, cause any payment thereafter
becoming due to such person to be made to any other person for his benefit, without responsibility
to follow application of amounts so paid. Payments made pursuant to this provision shall completely
discharge the Participating Entities, the Plan, the Committee and the Board.

     Section 7.10 — Illegal or Invalid Provision. In case any provision of the Plan
shall be held illegal or invalid for any reason, such illegal or invalid provision shall not affect
the remaining parts of the Plan, but the Plan shall be construed and enforced without regard to
such illegal or invalid provision.

-14-

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