-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NEt3M46xwORgkCPGBQYPrlMbgLPe2DhC0rGcc3wewGs9Q+FRoZ2eIl9TVDMXH+Uh n7ViHaSf5Ek4t0/GdwnLkg== 0000950128-03-000429.txt : 20030326 0000950128-03-000429.hdr.sgml : 20030325 20030326155240 ACCESSION NUMBER: 0000950128-03-000429 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030326 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOLLGRADE COMMUNICATIONS INC \PA\ CENTRAL INDEX KEY: 0001002531 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TELEPHONE INTERCONNECT SYSTEMS [7385] IRS NUMBER: 251537134 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27312 FILM NUMBER: 03618385 BUSINESS ADDRESS: STREET 1: 493 NIXON RD CITY: CHESWICK STATE: PA ZIP: 15024 BUSINESS PHONE: 4122742156 10-K 1 j9925501e10vk.txt FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 COMMISSION FILE NUMBER 0-27312 TOLLGRADE COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-1537134 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 493 NIXON ROAD, CHESWICK, PENNSYLVANIA 15024 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 412-820-1400 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.20 PER SHARE (Title of Class) Indicate by a check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Act") during the preceding 12 months (or for such shorter period that the Registration was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No ____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.__ Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes __X__ No ____ The Registrant estimates that as of the close of trading on March 7, 2003, the aggregate market value of shares of the Registrant's Common Stock held by non-affiliates (excluding for purposes of this calculation only, 181,154 shares of Common Stock held by affiliates of the Registrant as a group) of the Registrant was $153,104,613. As of March 7, 2003, the Registrant had outstanding 13,552,736 shares of its Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Parts of Form 10-K into which Document Document is incorporated Portions of the Annual Report to Shareholders for the year ended December 31, 2002 II and IV Portions of the Proxy Statement to be distributed in connection with the 2003 Annual Meeting of Shareholders III PART I CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. The statements contained in this Annual Report on Form 10-K, including, but not limited to those contained in Item 1 Business, and statements incorporated by reference into this Form 10-K from the 2002 Annual Report to Shareholders, along with statements in other reports filed with the Securities and Exchange Commission, external documents and oral presentations, which are not historical are considered "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements, which may be expressed in a variety of ways, including the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "estimate," "plan," or "anticipates" or the negative thereof, other variations thereon or compatible terminology, relate to, among other things, projected cash flows used in the valuation of intangible assets, the anticipated results of negotiations for new maintenance service agreements, as well as purchase orders and other customer purchase agreements, the ability to utilize current deferred and refundable tax assets, opportunities which the Services group offers to customers, the potential loss of certain customers, the timing of orders from customers, the effect of consolidations in the markets to which Tollgrade Communications, Inc. (the "Company") sells, the effects of the economic slowdown in the telecommunications and cable industries, the possibility of future provisions for slow moving inventory, and effect on earnings and cash flows of changes in interest rates. The Company does not undertake any obligation to publicly update any forward-looking statements. These forward-looking statements, and other forward-looking statements contained in other public disclosures of the Company which make reference to the cautionary factors contained in this Form 10-K, are based on assumptions that involve risks and uncertainties and are subject to change based on the considerations described below. These risks, uncertainties and other factors may cause actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Therefore, the Company wishes to caution each reader of this Form 10-K to consider the following factors and certain other factors discussed herein and in other past reports, including but not limited to prior year Form 10-K reports and annual reports filed with the Securities and Exchange Commission ("SEC"). The factors discussed herein may not be exhaustive. Therefore, the factors contained herein should be read together with other reports and documents that are filed by the Company with the SEC from time to time, which may supplement, modify, supercede or update the factors listed in this document. General economic conditions and the economic conditions of the telecommunications and cable industries, including the effect of subscriber line loss and competition for the Company's RBOC customers from wireless, cable providers and other carriers entering the local telephone service market, can and has affected the capital budgets of the Company's customers. If such conditions result in a further reduction of such budgets, the Company's revenues could be adversely affected. If the Company's customers find themselves unable to meet their established purchase forecasts and their own growth projections, such customers may curtail their purchase of the Company's products, which would adversely affect the Company's revenues. If the Company would be unable to establish customer or sales distribution or original equipment manufacturer ("OEM") relationships relating to the Cheetah(TM) cable status and performance monitoring product line recently acquired from Acterna, LLC by the Company, it could affect the rate of incoming orders, which would adversely affect the Company's sales and revenues. If the financial strength of certain of the Company's major customers should deteriorate or such customers encounter difficulties in accessing capital, the ability of such customers to purchase and pay for the Company's products could be impaired, with a corresponding adverse affect on the Company's revenues. If third parties with whom the Company has entered into sales and marketing partnerships should fail to meet their own performance objectives, customer demand for the Company's products could be adversely affected, which would have an adverse effect on the Company's revenues. 2 Seasonal fluctuations in customer demand for the Company's products can create corresponding fluctuations in period to period revenues, and any increases in the rate of order cancellation by customers could adversely affect future revenues. The carrying value of certain intangible assets, including goodwill, acquired by the Company from Lucent Technologies, Inc. ("Lucent") could be impaired if changing market conditions indicate that lower than anticipated cash flows will be produced by such intangible assets. If the Company were to encounter a shortage of key manufacturing components from limited sources of supply, or experience manufacturing delays caused by reduced manufacturing capacity or integration issues related to the acquisition of the Cheetah product line, loss of key assembly subcontractors or other factors, the Company's ability to produce and ship its manufactured products could be adversely affected, with an adverse effect upon revenues. The introduction of improved products or services or reduced prices by the Company's competitors could reduce the demand for the Company's products and services and adversely affect revenues. If the Company proves unable to respond effectively to technological change in its industry, such as an evolution of the telephone network from circuit to packet-based, by developing new products and services and obtaining customer approval and acceptance of its products and services, demand for the Company's products and services could be adversely affected, which would adversely affect revenues. The Company is dependent on a relatively narrow range of products and a small number of large customers. As a result, the failure of one or a small number of the Company's products to gain or maintain acceptance in the marketplace, or the decision by one or a few of the Company's customers to curtail their purchases of the Company's products could have an adverse effect on revenues. If one or more of a small number of key employees of the Company were to cease to be associated with the Company, the Company's future results could be adversely affected. If the Company is unable to successfully assert and defend its proprietary rights in the technology utilized in its products, its future results could be adversely affected. If third parties were able to successfully assert that the Company's use of technology infringed upon the proprietary rights of others, the future results of the Company could be adversely affected. If one or more of the Company's products were to prove defective, the Company's relationships with its customers could be jeopardized and the Company could be subject to potential liability, adversely affecting the Company's future results. If for any reason demand for the Company's products should decrease, including the successful development of a secondary market for the Company's products by a third party, the Company could continue to find itself with excess inventory and obsolete parts on hand, which could adversely affect future results. Changes in government regulation, such as modification or repeal of The Telecommunications Act of 1996, increasing the costs of doing business by the Company or its customers, or preventing the Company or its customers from engaging in business activities they may wish to conduct could adversely affect the Company's future results. The Company has recently completed several acquisitions and expects to pursue additional acquisitions and new business opportunities in the future as part of its business strategy. If the Company fails to integrate successfully the operations and products of acquired businesses, or if such acquisitions subject the Company to unexpected liabilities and claims, the Company's future results could be adversely affected. The Company's future sales in international markets are subject to numerous risks and uncertainties, including local economic and labor conditions, political instability including terrorism and other acts of war or hostility, unexpected changes in the regulatory environment, trade protection measures, tax laws, the ability of the Company to market current or develop new products suitable for international markets, obtaining and maintaining successful distribution and resale channels and foreign currency exchange rates. Reductions in the demand for or the sales of the Company's products in international markets could adversely affect future results. ITEM 1. BUSINESS. The Company was incorporated in Pennsylvania in 1986, began operations in 1988 and completed its initial public offering in 1995. Its principal offices are located at 493 Nixon Road, Cheswick, Pennsylvania 15024 and its telephone number is (412) 820-1400. The Company's Internet website address is www.tollgrade.com. The Company designs, engineers, markets and supports test system, test access and status monitoring products for the telecommunications and cable television industries. The Company's proprietary telecommunications test access products enable telephone companies to use their existing line test systems to remotely diagnose problems in "Plain Old Telephone Service" ("POTS") lines containing both copper and fiber optics. POTS lines comprise the vast majority of lines in service today throughout the world. In addition to traditional voice service, POTS includes lines for popular devices such 3 as computer modems and fax machines. POTS excludes the more complex lines, such as data communications service lines, commonly referred to as "special services." In general, POTS line test systems, which are located at telephone companies' central offices, focus on helping local exchange carriers conduct the full range of fault diagnosis in the "local loop", the portion of the telephone network which connects end users to a telephone company's central office. In addition, these line test systems have the ability to remotely qualify, deploy and maintain next generation services that include Digital Subscriber Line ("DSL") service and Integrated Services Digital Network ("ISDN") service. These test systems reduce the time needed to identify and resolve problems and eliminate or reduce the cost of dispatching a technician to the problem site. Most POTS line test systems were designed for use over copper wireline only, so that the introduction of fiber-optic technology into the local loop renders it inaccessible to these test systems. The Company's MCU(R) products solve this problem by extending test-system access through the fiber-optic portion into the copper portion of the local loop. In addition, the Company's DigiTest(R) system is designed to provide complete hardware testing for POTS and local loop prequalification and in-service testing for DSL service. The Company's LIGHTHOUSE(R) cable status monitoring system provides a broad testing solution for the Broadband Hybrid Fiber Coax distribution system found in the cable television industry. This status monitoring system gathers status information and reports on strategic components within the cable network. On September 30, 2001, the Company acquired certain assets and assumed certain liabilities of the LoopCare(TM) product line from Lucent Technologies, Inc. ("Lucent") for approximately $62,000,000 in cash. The acquired assets consisted principally of rights to existing contracts, software and related computer equipment, while the assumed liabilities were related principally to deferred revenues and warranties currently under contract. The LoopCare product software integrates with and enhances the value of the Company's hardware products, resulting in what has been and what the Company believes will continue to be a significant competitive advantage in the market place. The Company used available cash and short-term investments to finance the acquisition. The offices for the LoopCare product line are located at 685 Route 202/206 South, Bridgewater, New Jersey 08807 and its telephone number is 908-243-3900. On February 13, 2003, the Company closed on a Purchase and Sale Agreement with Acterna, LLC ("Acterna") to acquire certain assets and assume certain liabilities related to Acterna's Cheetah(TM) status and performance monitoring product line, for $14,300,000 in cash. As part of the agreement, contingent purchase consideration of up to $2,400,000 in the form of an earn-out may be payable during the first half of 2004, based on certain 2003 performance targets for the acquired business. The acquired assets consist principally of existing contracts, product inventory, intellectual property, software and related computer equipment, while the assumed liabilities principally relate to warranty obligations. The $14,300,000 due at closing was paid from available cash and short-term investments. The Company believes the acquired business will complement and augment its current cable operations and strategically position the Company to be the leading supplier of testing equipment and software for the cable industry. The acquisition will be recorded under the purchase method of accounting and accordingly, the results of operations of the acquired business from February 14, 2003 forward will be included in the consolidated financial statements of the Company. Because the acquisition occurred subsequent to the end of 2002, detailed disclosure regarding the acquired business is not contained in this report, rather, such disclosure will be included in subsequent filings by the Company. The purchase price allocation is currently under evaluation and is expected to be finalized by the end of the first quarter. The Company has determined that its business has one reportable segment in the test assurance industry. All product sales are considered components of the business of testing infrastructure and networks for the telecommunications and cable television industries. Although the Company does internally develop sales results associated with the various product categories, this information is not considered sufficient for segment reporting purposes nor does the chief operating decision maker base his critical decisions or allocate assets based solely on this information. The Company's products and services have similar economic characteristics, the same or similar production processes and are sold to similar types or classes of customers in, or entering into, the telecommunications and cable businesses through similar distribution means. 4 Products. The Company's MCU products plug into digital loop carrier ("DLC") systems, which are large systems manufactured by equipment vendors such as Lucent (formerly part of AT&T) used by telephone companies to link the copper and fiber-optic portions of the local loop. MCU products allow the Company's customers to extend their line testing capabilities to all of their POTS lines, both copper and fiber-optic, linked by the DLCs. DLC systems are located at telephone companies' central offices and at remote sites within a local user area, and effectively multiplex the services of the copper lines into a single fiber-optic line. In many instances, several DLC systems are located at a single remote site to serve several thousand different end-user homes and offices. Generally, for every DLC remote site, at least two MCU line-testing products are deployed. To ensure compatibility of the Company's MCU products with these DLC systems, the Company pays royalties pursuant to license agreements for the use of proprietary design integrated circuits ("PDICs"), which are the design and property of each DLC system manufacturer. The Company maintains such license agreements with and pays royalties to Lucent Technologies, Fujitsu Network Transmission Systems, Inc., NEC America, Inc. and Reliance Comm/Tec Corporation. In general, one of these agreements contains a term of indefinite duration and the others contain automatic renewal provisions (unless earlier terminated) for periods of between one and five years. The Company paid $2,507,000, $1,827,000 and $847,000 respectively in 2000, 2001 and 2002 in royalties under these license agreements, which are calculated either as a percentage of the list price of the MCU products or as a fixed amount per MCU unit that incorporates the technology licensed under each such agreement. The Company also has a similar PDIC license agreement with Adtran, Inc.; no royalties have been payable under this agreement to date. Certain of the license agreements require the Company to maintain the confidentiality of the licensor's proprietary information and/or the terms and conditions of the agreement itself. In addition, the Company maintains license agreements that do not contain royalty provisions with Advanced Fibre Communications, Alcatel USA Sourcing, L.P. (formerly DSC Technologies Corporation), UTSTARCOM, Inc., Next Level Communications and SAGEM SA (a French corporation). The expiration dates of these agreements range from between September 2003 and May 2007, with renewal provisions (unless earlier terminated) for periods of one or more years. Future license agreements entered into by the Company may contain terms comparable to, or materially different than, the terms of existing agreements as competitive and other conditions warrant. The loss of PDIC license agreements, or the inability of the Company to maintain an adequate supply of PDICs, could have a material adverse effect on the Company's business. Other MCU technology is also used with home and business alarm systems. As with POTS line testing, home alarm systems must be monitored from the alarm company's headquarters along a hybrid copper and fiber-optic line. The Company's alarm-related MCU products are used to facilitate the transport of analog alarm signals from subscriber homes to alarm company monitoring stations across the hybrid telephone network. These units plug into equipment at both central office and remote locations. In the fourth quarter of 2002, an RBOC cancelled a significant network testability initiative. The cancellation is believed to have considerably reduced sales of MCU products, that are driven by these testability programs, to this RBOC. MCU products and related hardware accounted for more than 70%, 68% and 48% of the Company's sales in the years ended December 31, 2000, 2001 and 2002, respectively. The Company's MCU product line is expected to continue to account for a substantial portion of the Company's revenues. The Company's DigiTest centralized network test system platform, which incorporates certain LoopCare software base code and developed enhancements, focuses on helping local exchange carriers conduct the full range of fault diagnosis, along with the ability to qualify, deploy and maintain next generation services including DSL and ISDN. The Company's DigiTest system is designed to provide the complete solution for testing POTS and performing local loop prequalification for DSL services. With the acquisition of the LoopCare software product line, the Company now owns LoopCare software which has remained the major Operation Support System ("OSS") utilized by the Regional Bell Operating Companies for over twenty five years to test the integrity and quality of their POTS network infrastructure. The DigiTest system serves as an integral component of this OSS system, allowing for the request and retrieval of precise measurement results that form the basis for state-of-the-art fault diagnosis for both traditional narrowband and wideband applications. DigiTest's compact digital measurement unit ("DMU"), which resides in the customers' central office, acts as the test head in the test system, with the ability to determine subscriber line characteristics through network diagnostic functions including load coil detection, loop length measurement and longitudinal balance for Single-Ended Loop Qualification ("SELQ"). DigiTest's digital wideband unit ("DWU") next-generation testing platform enables single-ended loop qualification by identifying and locating bridged taps and measuring crosstalk and wideband noise, all of which are important factors in the prequalification and in-service maintenance of local loops for DSL service. The DigiTest system also includes the Digital Measurement Node ("DMN"), which consists of a metal-chassis, backplane and an alarm/fuse card which is used to house the DMU and DWU. The Company's DigiTest system hardware has also been optimized to work with and support the OSS system owned by Nortel Networks Corporation. In connection therewith, pursuant to a license 5 agreement with Nortel Networks Corporation, the Company pays royalties for the use of certain network interface information. The initial term of this agreement expired in July 2002, but by its terms is automatically renewed (unless earlier terminated) for periods of one year each. The Company paid royalties of $404,000, $6,000 and $15,000 in 2000, 2001 and 2002, respectively, as royalties under this license agreement, which royalties are calculated based on a percentage of the sale price of the DMU and certain DWU units that incorporate the technology licensed under the agreement. The license agreement requires the Company to maintain the confidentiality of the licensor's proprietary information and/or the terms and conditions of the agreement itself. The Company markets and sells its DigiTest products directly as well as through certain continuing Original Equipment Manufacturer ("OEM") arrangements with Lucent Technologies and Nortel Networks Corporation. The OEM agreement with Lucent Technologies also allows that Company to resell the LoopCare software on an OEM basis. The Company has also entered into license agreements with Acterna, LLC and Aware, Inc. for certain technology related to its DigiTest products and will pay royalties and licenses for use of such technology on a fixed per unit basis. The license agreement with Acterna, LLC will expire by its terms (unless earlier terminated) in 2008, and the original term of the license agreement with Aware, Inc. extends until September, 2005, with consecutive one year renewal terms. Sales of the DigiTest product line accounted for approximately 18%, 18% and 14% of the Company's revenue for the years ended December 31, 2000, 2001 and 2002, respectively. In addition to the OSS software, the LoopCare products have several features that enhance the performance, listing and analysis of telecommunication service over copper line loops. These products, which represent primarily engineered enhancements to the LoopCare base code software, include the Common Object Request Broker Architecture (CORBA), the Application Programming Interface (API), Benchmark Data Base, DSL Testing, the Advanced Testhead Feature Package, and LoopCare TCP/IP Communications Network (LTCN). Sales of stand-alone LoopCare software accounted for approximately 13% of the Company's revenue for the year ended December 31, 2002. The Company's LIGHTHOUSE cable products consist of a complete cable status monitoring system that provides a comprehensive testing solution for the Broadband Hybrid Fiber Coax distribution system. The status monitoring system consists of a host for user interface, control and configuration; a headend controller for managing network communications; and transponders that are strategically located within the cable network to gather status reports from power supplies, line amplifiers and fiber-optic nodes. The Company has entered into license agreements with C-COR.net Corp. (formerly C-COR Electronics, Inc., a cable television systems developer) and Alpha Technologies, Inc., under which the Company provides status monitoring transponder technology that is incorporated into those companies' cable network management systems. The Company, under certain other business arrangements, also markets and sells its cable products directly as well as through various OEM customers such as C-COR.net Corp., Arris Corporation (formerly ANTEC Corportation), and Motorola (formerly General Instrument). Sales of the LIGHTHOUSE product line accounted for approximately 9%, 4% and 5% of the Company's revenue for the years ended December 31, 2000, 2001 and 2002, respectively. During its fiscal year 2002, the Company completed its first major central office test system upgrade package delivery, which includes hardware resale and services. This project represents approximately 2% of the Company's revenues for the year ended December 31, 2002. The Company's Digital Access Unit ("DAU") product provides automated test access of locally non-switched, two wire circuits and helps facilitate the line sharing or spectral unbundling process for both incumbent ("ILEC") and competitive local exchange carriers ("CLEC"). Although sales of the DAU have been significant in prior years (5% in 2001), this product line represented less than 1% of the Company's total revenue for the year ended December 31, 2002. The cornerstones of the Company's Services offerings are the Testability Improvement Initiatives. These services may offer the customer the opportunity to make dramatic improvements in testability levels, while training their own staffs in targeted geographic regions over a defined period of time. In this way, the customers' internal repair technicians can make use of automated systems to diagnose and repair subscriber loop problems, thereby automatically eliminating the need for the involvement of several highly trained people. The Services business was considerably expanded upon the acquisition of software maintenance contracts related to the LoopCare software product line. In the fourth quarter of 2002, however, an RBOC cancelled a significant network testability initiative that had accounted for 6 revenue of approximately $980,000 of the Company's revenue for the nine months ended September 28, 2002. The cancellation is believed to have considerably reduced sales of MCU products, that are driven by these testability programs, to this RBOC. Including software maintenance, Services revenue accounted for approximately 6% and 14% of the Company's revenue for the years ended December 31, 2001 and 2002. Product and Technology Development. The Company's product development personnel are organized into teams, each of which is effectively dedicated to a specific product line(s) or technology. Each product team also implements the Company's ongoing value engineering programs that are designed to replace the Company's products with successive generations having additional features and/or lower costs. The Company continuously monitors developing technologies in order to introduce products as defined standards and markets emerge. In addition, the Company continues to investigate the development of new applications for its MCU technology, as well as enhancements and new features to its LoopCare software product lines and other technologies to service the telecommunications industry. During 2000, 2001 and 2002, research and development expenses were approximately $12,456,000, $12,428,000 and $13,839,000, respectively. Proprietary Rights. The names "Tollgrade(R)", "MCU(R)", "LIGHTHOUSE(R)", "DigiTest(R)", "Telaccord(R)" and "MICRO-BANK(R)", and the Company's corporate logo are registered trademarks of the Company. "LoopCare(TM)" and "MLT(TM)" are common law trademarks of the Company. "Team Tollgrade(SM)" is a common law service mark of the Company. The Company has obtained three United States patents on the MCU products with expiration dates ranging from 2010 to 2014, two United States patents on cable technology that expire in 2017 and 2018, one Canadian patent and four United States patents on other telecommunications technology, which expire in dates ranging from 2017 to 2019. In addition, the Company has four United States, three Canada, one Taiwan and seven international patent cooperation treaty ("PCT") patent applications pending. The Company will seek additional patents from time to time related to its research and development activities. The Company protects its trademarks, patents, inventions, trade secrets, and other proprietary rights by contract, trademark, copyright and patent registration, and internal security. Customers. The Company's primary customers for its telecommunication products and services are the four Regional Bell Operating Companies ("RBOCs"), which are Verizon Communications, BellSouth Corporation, SBC Communications, Inc., and Qwest, Inc., as well as major independent telephone companies and certain DLC equipment manufacturers. Sales in 2002 to SBC Communications, Inc., Verizon Communications, and BellSouth Corporation accounted for approximately 38%, 18%, and 14%, respectively, or 77% collectively, of the Company's total revenues. Due to the Company's present dependency on all four of these key customers, the potential loss of one or more of them as a customer, or the reduction of orders for the Company's products by them, could materially and adversely affect the Company. Orders from these customers may fluctuate due to a variety of business facts faced by each of the RBOCs, including relationships with their various organized labor groups and an increasing tendency to place large orders for shipment of hardware and software towards the end of a quarter. In addition to its reliance on sales to its RBOC customers, the acquisition by Comcast Corporation of AT&T Broadband, the Company's primary customer for its LIGHTHOUSE products whose purchases represented 4% of the Company's revenue in 2002, may adversely affect the Company's results. Manufacturing. The Company's manufacturing operations consist primarily of quality control, functional testing, final assembly, burn-in and shipping. The Company is ISO 9001 registered from the British Standards Institution, Inc. ISO 9000 is a harmonized set of standards that define quality assurance management. Written by the International Organization for Standardization (ISO), it is recognized throughout the United States, Canada, the European Union and Japan. To be registered, the Company develops and maintains internal documentation and processes to support the production of quality products to ensure customer satisfaction. The Company utilizes two key independent subcontractors to perform a majority of the circuit board assembly and in-circuit testing work on its products. The Company also utilizes other subassembly contractors on a more limited basis. The loss of the subcontractors could cause delays in the Company's ability to meet production obligations and could have a material adverse effect on the Company's results of operations. In addition, shortages of raw material to, or production capacity constraints at, the Company's subcontractors could negatively affect the Company's ability to meet its production obligations and result in increased prices for affected parts. Any such reduction may result in delays in shipments of the Company's products or increases in the price of components, either of which could have a material adverse impact on the Company. 7 The Company currently procures all of its components from outside suppliers. Generally, the Company uses industry standard components for its products; however, application specific integrated circuits ("ASICs") are also a key component to the manufacturing process and are custom made to the Company's specifications. Although the Company has generally been able to obtain ASICs on a timely basis, a delay in the delivery of these components could have a material adverse impact on the Company. Backlog. The Company's backlog consists of firm customer purchase orders and signed software maintenance agreements. As of December 31, 2002, the Company had backlog of approximately $7,200,000, all of which is expected to be filled in 2003, as compared to approximately $4,900,000 at December 31, 2001. The increase between years is due partially to the timing of signing renewal annual software maintenance contracts with existing RBOC customers. The backlog at December 31, 2002 includes approximately $3,800,000 related to LoopCare software maintenance contracts. Income under these maintenance contracts will be earned and recognized on a straight-line basis over the remaining terms of the underlying agreements, which are usually one year or less. Periodic fluctuations in customer orders and backlog result from a variety of factors, including but not limited to the timing of significant orders and shipments. While these fluctuations could impact short-term results, they are not necessarily indicative of long-term trends in sales of the Company's products. Competitive Conditions. The market for telecommunications and cable television equipment is highly competitive. The deciding competitive factors in the Company's market include price, product features, performance, reliability, service and support, breadth of product line, technical documentation and prompt delivery. The Company believes that it competes favorably on all of these factors, and certain of its products have proprietary or patented features. The Company also attempts to enter into development agreements for its MCU products with the manufacturers of DLC and other complex systems, which serves to ensure compatibility for its products. Competition would increase if new companies enter the Company's product markets or existing competitors expand their product lines. For instance, telecommunications reform legislation has lifted the restrictions that previously prevented the RBOCs from manufacturing telecommunications equipment. Pursuant to this legislative reform, the RBOCs, which are the Company's largest customers, may become competitors of the Company in the markets served by the Company. For the Company's line-testing MCU devices, the primary competitive technologies are the remote monitoring units made by Teradyne, Inc. and the Harris Communications Product Division of Harris Communications, Inc. In addition, the Anritsu Wiltron Test and Measurement Group, a division of Anritsu Corporation, offers the Wiltron LoopMATE, a modular remote test head, which competes with the Company's POTS testing capabilities. The Company believes the MCU is simpler and less costly to install and permits the full complement of centralized testing to be performed as quickly and accurately as with copper by-pass wiring. The alarm-related MCU product's primary competitor is the Turbo 2000 unit made by Arris Corporation. The primary competitors for the Company's DigiTest product line include Spirent Communications, Harris Corporation, Porta Systems Corp., Teradyne, Inc. and Turnstone Systems, Inc. For the Company's cable products, the primary competitors for status monitoring are AM Communications, Inc., Harmonic, Inc. and Scientific Atlanta, Inc. The Company believes that recent changes within the telecommunications marketplace, including industry consolidation, as well as the Company's ability to successfully penetrate certain new markets, have required it to grant more favorable terms to some of its customers. In addition, certain customers have consolidated product purchases that have resulted in large bulk orders. There is an increasing trend, in part in response to some of the Company's discounting programs, for certain of the Company's customers to place such large bulk orders towards the end of a quarter for shipment of large quantities of hardware and software in the last month of the quarter. Although the Company will continue to strive to meet the demands of its customers, which include delivery of quality products at an acceptable price and on acceptable terms, the Company can provide no assurance that it will be successful in negotiating acceptable terms and conditions in its purchase orders or customer purchase agreements. Additionally, continuing consolidation efforts among RBOC customers, providing RBOCs the ability to consolidate their inventory and product procurement systems, could cause fluctuations or delays in the Company's order patterns. Consolidation in the cable industry, as well as the 8 adoption of industry standards requiring transponders to function among various monitoring systems, could cause pricing pressure as well as adversely affect certain customers' deployment of the Company's cable products. In addition, markets for the Company's cable products have been, and may continue to be difficult for the foreseeable future. The Company cannot predict such future events or business conditions and the Company's results could be adversely affected by these industry trends in the primary markets it serves. Employees. As of December 31, 2002, the Company had 250 full-time employees, all in the United States. None of the Company's employees are represented by a collective bargaining agreement. Government Regulation. The telecommunications industry is subject to regulation in the United States and other countries. Federal and state regulatory agencies, including the FCC and various state public utility commissions and public service commissions, regulate most of the Company's domestic customers. While such regulation does not typically affect the Company directly, the effects of such regulations on the Company's customers may, in turn, adversely impact the Company's business and operating results. Governmental authorities also have promulgated regulations which, among other things, set installation and equipment standards for private telecommunications systems and require that all newly installed hardware be registered and meet certain government standards. International Sales. International sales represented approximately 6.3% of the Company's total revenue for the year ended December 31, 2002. The Company makes available free of charge on or through its Internet website (www.tollgrade.com) the Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act, as soon as reasonably practicable after the Company electronically files such materials with or otherwise furnishes to the Securities and Exchange Commission. ITEM 2. PROPERTIES. The Company's headquarters and principal administrative, engineering, manufacturing, warehouse and maintenance facilities are located in Cheswick, Pennsylvania. The Company occupies a 111,600 square foot facility. The Company occupies its current facilities under a lease that expires in December 2005. The Company has acquired certain land parcels that surround the current leased facility for the possible expansion of parking and/or new building structures that the Company believes will provide adequate space to support future operations and sales growth, if necessary. In addition, the Company leases 18,778 square feet of space in Bridgewater, New Jersey. The lease will expire on January 21, 2007. This facility provides workspace for the administrative and engineering personnel of the LoopCare Product Line. The Company has also entered into an agreement pursuant to which it will lease 22,122 square feet of space in Sarasota, Florida, to provide new workspace for the personnel of the Company's Cheetah Product Line, which the Company acquired in February 2003. The five year lease term will commence on or about April 28, 2003, and may be extended, at the Company's option, for an additional five-year period. ITEM 3. LEGAL PROCEEDINGS. There are currently no outstanding or pending material legal proceedings with respect to the Company or its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. During the fourth quarter of 2002, there were no matters submitted to a vote of security holders through solicitation of proxies or otherwise. 9 EXECUTIVE OFFICERS OF THE COMPANY Information relating to the executive officers of the Company as of January 31, 2003 is set forth below: Christian L. Allison Chairman of the Board of Directors of the Company since April 1998; Chief Executive Officer of the Company since September 1995; also Treasurer of the Company from May 1992 until April 1997; also President of the Company from October 1993 until January 2001; also Chief Operating Officer of the Company from November 1990 until October 1993; Age 42. Sara M. Antol General Counsel of the Company since December 2000; Secretary of the Company since April 1996; Chief Counsel of the Company from April 1996 until December 2000; prior thereto, attorney at Babst, Calland, Clements & Zomnir, P.C., a law firm; Age 41. Richard A. Bair, Jr. Executive Vice President, Engineering/Testing of the Company since August 2000; Vice President Engineering, DigiTest of the Company from June 2000 until August 2000; Engineering Manager of the Company from April 1999 until August 2000; prior thereto, Senior Design Engineer of the Company from March 1996 until April 1999; Age 40. Wylie E. Estcheid Executive Vice President, Business Development, OSS of the Company since September 2001; Senior Vice President and General Manager of Telco Access Products, a manufacturer of telecommunications products, from October 2000 until September 2001; Vice President, Network Engineering Midwest Division of BC, a provider of telecommunication services, from December 1999 until October 2000; prior thereto, Vice President, Service Integration and Delivery of Ameritech, a provider of telecommunication services, from February 1996 until December 1999; Age 53. Rocco L. Flaminio Director; member of the Board from October 1995 through 2003; also Vice Chairman and Chief Technology Officer of the Company since 1993; President of the Company from June 1990 until October 1993; prior thereto, spent 40 years in applications engineering with Bell of Pennsylvania; Age 78. Carol M. Franklin Executive Vice President, Software Products Division of the Company since July 2001; Director of Order Management Development of Lucent Technologies, a manufacturer of communication systems, software and products and formerly AT&T Bell Laboratories, from May 2000 until July 2001; Director for Integration Test of Lucent Technologies from September 1999 until May 2000; Director for Starter Solutions for Emerging Carriers and Internet Customer Care of Lucent Technologies from February 1999 until August 1999; prior thereto, Product Realization Leader of Lucent Technologies from February 1996 until January 1999; Age 52. Samuel C. Knoch Chief Financial Officer of the Company since August 1996; Treasurer since April 1997; prior thereto, Controller of AMSCO International, Inc., a manufacturer of health care equipment, from October 1994 until August 1996; Age 46. Joseph G. O'Brien Senior Vice President, Human Resources of the Company since October 1997; Director of Employee Development from April 1997 until October 1997; prior 10 thereto, Coordinator, Elderberry Junction, Goodwill Industries, a charitable organization, from May 1995 until April 1997; Age 43. Mark B. Peterson President of the Company since January 2001; Executive Vice President, Sales and Marketing of the Company from November 1999 until January 2001; Executive Vice President, Sales of the Company from October 1997 until November 1999; prior thereto, Testing Application Group product manager (MLT and Switched Access Remote Test Systems (SARTS) product lines) of Lucent Technologies, a manufacturer of communication systems, software and products and formerly AT&T Bell Laboratories, from October 1995 until October 1997; Age 42. Gregory L. Quiggle Executive Vice President, Marketing of the Company since August 2001; Director of Marketing, Loop Products Acterna LLC (formerly, Telecommunications Techniques Corporation, or TTC), a global communications equipment company, from May, 1998 until August 1998; prior thereto, Product Line Manager, TTC from May 1996 until May 1998; Age 34. Matthew J. Rosgone Executive Vice President, Operations of the Company since September 2001; Senior Vice President, Purchasing/Manufacturing of the Company from July 1998 until September 2001; prior thereto, Vice President, Purchasing of the Company from July 1996 until July 1998; Certified Purchasing Manager; Age 34. Charles J. Shearer Controller of the Company since February 2002; prior thereto, Controller of Resource Investments, Inc. (a privately held real estate investment and management company) from February 1979 until January 2002; Age 58. Roger A. Smith Executive Vice President, Technology of the Company since June 2000; Senior Vice President, Test Systems from July 1998 until June 2000; prior thereto, Senior Software Development Engineer of Caldon Inc., a manufacturer of ultrasonic flow meters for nuclear power industry; Age 42. Stephanie M. Wedge Vice President, Professional Services of the Company since November 1999; Sales Executive, Professional Services, Inacom Corporation, a reseller and integrator of client/server solutions for messaging, from February, 1998 until November 1999; prior thereto, Sales Manager, Business Development, Digital Equipment Corporation, a manufacturer and integrator of main-frame computers; Age 46. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS. Information relating to the market for the Company's Common Stock and other matters related to the holders thereof is set forth under the caption "Common Stock Market Price" on page 34 of the Company's 2002 Annual Report to Shareholders and is incorporated herein by reference. 11 ITEM 6. SELECTED FINANCIAL DATA. A summary of selected financial data for the Company, including each of the last five fiscal years in the period ended December 31, 2002, is set forth under the caption "Selected Consolidated Financial Data" on page 6 of the Company's 2002 Annual Report to Shareholders and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION. A discussion of the Company's results of operations and financial condition is set forth under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 7 through 17 of the Company's 2002 Annual Report to Shareholders and is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. A discussion of the Company's quantitative and qualitative market risk is set forth under the caption "Quantitative and Qualitative Disclosures about Market Risk" on pages 16 through 17 of the Company's 2002 Annual Report to Shareholders and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Company's consolidated financial statements, together with the report thereon of PricewaterhouseCoopers LLP, are set forth on pages 18 through 34 of the Company's 2002 Annual Report to Shareholders and are incorporated herein by reference. Such financial statements and supplementary data are listed in Part IV Item 15(a)(1), Exhibits, Financial Statement Schedules, and Reports on Form 8-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 12 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. In addition to the information reported in Part I of this Form 10-K, under the caption "Executive Officers of the Company," the information required by this item appears beneath the caption "Election of Directors" in the Company's definitive Proxy Statement for its 2003 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information relating to executive compensation is set forth beneath the caption "Compensation of Executive Officers" in the Company's definitive Proxy Statement for its 2003 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information relating to the security ownership of beneficial owners of 5% or more of the Common Stock and of the executive officers and directors of the Company is set forth under the caption "Stock Ownership of Management and Certain Beneficial Owners" in the Company's definitive Proxy Statement for its 2003 Annual Meeting of Shareholders and is incorporated herein by reference. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS AS OF DECEMBER 31, 2002 EQUITY COMPENSATION PLAN INFORMATION
- ----------------------------------------------------------------------------------------------------------------------- PLAN CATEGORY NUMBER OF SECURITIES TO BE WEIGHTED AVERAGE EXERCISE NUMBER OF SECURITIES ISSUED UPON EXERCISE OF PRICE OF OUTSTANDING REMAINING AVAILABLE FOR OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND FUTURE ISSUANCE UNDER WARRANTS AND RIGHTS RIGHTS EQUITY COMPENSATION PLANS (EXCLUDING SECURITIES LISTED IN COLUMN (a)) - ------------------------------- ----------------------------- ---------------------------- ----------------------------- EQUITY COMPENSATION PLANS APPROVED BY THE SECURITYHOLDERS 1,193,199 $37.673 317,211 - ------------------------------- ----------------------------- ---------------------------- ----------------------------- EQUITY COMPENSATION PLANS NOT APPROVED BY THE SECURITYHOLDERS (1) 443,657 $24.644 26,850 - ------------------------------- ----------------------------- ---------------------------- ----------------------------- TOTAL 1,636,856 344,061 - -----------------------------------------------------------------------------------------------------------------------
(1) 1998 Employee Incentive Compensation Plan The Company's 1998 Employee Incentive Compensation Plan (the "Plan"), which was adopted by the Company's Board of Directors and is effective as of January 28, 1998, is intended, among other purposes, to help the Company to motivate, attract and retain qualified employees (other than officers and directors of the Company). The Plan is administered by the Compensation Committee of the Company's Board of Directors (the "Committee"), which has full discretion to determine the employees who receive awards under the Plan as well as the nature and size of such awards. The Committee may issue nonqualified stock options, stock appreciation rights, restricted stock, performance shares and performance units under the Plan. Award recipients (other than recipients of stock appreciation rights) are subject to a non-competition arrangement with the Company. Upon a change of control in the Company, all awards become exercisable, vested or fully earned, as applicable. The exercise price of options and the sale price of restricted stock granted under the Plan is 100% of the fair market value of the Company's common stock as of the date of grant. All options granted under the plan expire not later than ten years after the date of grant and typically vest over two years. There are currently 990,000 shares of the Company's common stock authorized under the Plan for granting awards. 13 See Note 5 to the consolidated financial statements on pages 28 through 30 of the Company's 2002 Annual Report to Shareholders for additional information regarding the Company's equity compensation plans. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information relating to certain relationships and related transactions is set forth beneath the caption "Certain Relationships and Related Transactions" in the Company's definitive Proxy Statement for its 2003 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 14. CONTROLS AND PROCEDURES. Within 90 days prior to the filing date of this report, the Company carried out an evaluation, under the supervision of, and with the participation of, the Company's management, including the Company's chief executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the chief executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information related to the Company required to be disclosed in the Company's periodic SEC filings. Subsequent to that date that the Company carried out its evaluation, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect these material controls. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) The following financial statements and supplementary data are incorporated in Item 8 of Part II of this Form 10-K by reference to pages 18 through 34 of the Company's 2002 Annual Report to Shareholders, which are incorporated herein by reference: Statement of Management's Responsibility for Financial Reporting, dated January 22, 2003 Report of Independent Accountants, dated January 22, 2003, except for Note 8, as to which the date is February 7, 2003 and Note 13, as to which the date is February 13, 2003 Consolidated Balance Sheets at December 31, 2001 and 2002 Consolidated Statements of Operations for each of the three years in the period ended December 31, 2002 Consolidated Statements of Changes in Shareholders' Equity for each of the three years ended December 31, 2002 Consolidated Statements of Cash Flows for each of the three years ended December 31, 2002 Notes to Consolidated Financial Statements Statements of Operations Data by Quarter (a)(2) The following financial statement schedule is included herewith on page 23 and made a part hereof: Schedule II (Valuation and Qualifying Accounts) 14 (a)(3) The following exhibits are included herewith and made a part hereof: Exhibit Number Description 3.1 Amended and Restated Articles of Incorporation of the Company, as amended through May 6, 1998 (conformed copy), incorporated herein by reference to Exhibit 3.1 to the Annual Report of Tollgrade Communications, Inc. (the "Company") on Form 10-K (File No. 000-27312), filed with the Securities and Exchange Commission (the "SEC") on March 24, 1999 (the "1998 Form 10-K"). 3.1a Statement with Respect to Shares dated July 23, 1996 (conformed copy), incorporated herein by reference to Exhibit 3.1a to the 1998 Form 10-K. 3.2 Amended and Restated Bylaws of the Company, filed herewith. 4.1 Rights Agreement, dated as of July 23, 1996, between the Company and Chase Mellon Shareholder Services, L.L.C., incorporated herein by reference to Exhibit 1 to the Registration Statement of the Company on Form 8-A (File No. 000-28852), filed with the SEC on August 9, 1996. 10.1 Common Stock Purchase Agreement dated November 7, 1994, between the Company and the investors listed on Schedule A thereto (attachments and exhibits omitted), incorporated herein by reference to Exhibit 10.1 to the Registration Statement of the Company on Form S-1 (Reg. No. 33-98322) filed with the SEC on October 18, 1995 (the "S-1"). 10.2* 1995 Long-Term Incentive Compensation Plan, amended and restated as of January 24, 2002, incorporated herein by reference to Exhibit B to the 2002 Proxy Statement of the Company (File No. 000-27312), filed with the SEC on March 22, 2002. 10.3 License Agreement, dated August 24, 1993, between Fujitsu Network Transmission Systems, Inc. and the Company, incorporated herein by reference to Exhibit 10.4 to the S-1. 10.4 License Agreement, dated September 26, 1994, between NEC America, Inc. and the Company, incorporated herein by reference to Exhibit 10.5 to the S-1. 10.5 Interface License Agreement, dated March 22, 1995, between Northern Telecom Inc. and the Company, incorporated herein by reference to Exhibit 10.7 to the S-1. 10.6 Technical Information Agreement, dated February 1, 1993, between Lucent Technologies, Inc. (formerly American Telephone and Telegraph Company) and the Company, incorporated herein by reference to Exhibit 10.8 to the S-1. 10.7 Technology License Agreement, dated November 16, 1994, between Alcatel USA (formerly DSC Technologies Corporation) and the Company, incorporated herein by reference to Exhibit 10.12 to the S-1. 10.8 License Agreement, dated August 24, 1993, between Reliance Comm/Tec Corporation and the Company, incorporated herein by reference to Exhibit 10.13 to the S-1. 10.9* Employment Agreement, dated as of December 13, 1995, between the Company and Christian L. Allison, incorporated herein by reference to Exhibit 10.11 to the Annual Report of the Company on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K"). 15 10.10* Stock Option Agreement entered into December 14, 1995 between the Company and R. Craig Allison, together with a schedule listing substantially identical agreements with Gordon P. Anderson, Jeffrey Blake, John H. Guelcher, Richard H. Heibel, Joseph T. Messina and Douglas T. Halliday, incorporated herein by reference to Exhibit 10.14 to the 1995 Form 10-K. 10.11* Form of Stock Option Agreement dated December 14, 1995 and December 29, 1995 for Non-Statutory Stock Options granted under the 1995 Long-Term Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.15 to the Annual Report of the Company on Form 10-K (File No. 000-27312) , filed with the SEC on March 19, 1997 (the "1996 Form 10-K"). 10.12* Form of Stock Option Agreement for Non-Statutory Stock Options granted under the 1995 Long-Term Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.2 to the Quarterly Report of the Company on Form 10-Q (File No. 000-27312), filed with the SEC on November 12, 1996. 10.13* Amendment to Employment Agreement, dated as of December 13, 1996, between the Company and Christian L. Allison, incorporated herein by reference to Exhibit 10.20 to the 1996 Form 10-K. 10.14* Amendment to Employment Agreement, dated as of December 13, 1997, between the Company and Christian L. Allison, incorporated herein by reference to Exhibit 10.21 to the Annual Report of the Company on Form 10-K (File No. 000-27312) , filed with the SEC on March 25, 1998 (the "1997 Form 10-K"). 10.15 Amendment, dated February 21, 1997, to Technical Information Agreement relating to Metallic Channel Units Types A and B, dated February 1,1993, between American Telephone and Telegraph Company (AT&T) (licensor) and the Company (licensee) incorporated herein by reference to Exhibit 10.3 to the Quarterly Report of the Company on Form 10-Q (File No. 000-27312), filed with the SEC on November 10, 1997. 10.16* Form of Non-employee Director Stock Option Agreement with respect to the Company's 1995 Long-Term Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.25 to the 1997 Form 10-K. 10.17* Amendment to Employment Agreement, dated as of December 30, 1998, between the Company and Christian L. Allison, incorporated herein by reference to Exhibit 10.28 to the 1998 Form 10-K. 10.18* Amendment to Employment Agreement, dated as of January 18, 2000, between the Company and Christian L. Allison, incorporated herein by reference to Exhibit 10.25 to the Annual Report of the Company filed on Form 10-K (File No. 000-27312), filed with the SEC on March 27, 2000 (the "1999 Form 10-K"). 10.19* Change in Control Agreement, entered into February 9, 2000 between the Company and Sara M. Antol, together with a schedule listing substantially identical agreements with Robert Cornelia, Ruth Dilts, Bradley Dinger, Rocco Flamino, Mark Frey, Samuel Knoch, James Price, and Matthew Rosgone, incorporated herein by reference to Exhibit 10.26 to the 1999 Form 10-K. 10.20* Change in Control Agreement, entered into August 10, 2000 between the Company and Stephen M. Garda, incorporated herein by reference to Exhibit 10.30 to the Quarterly Report of the Company on Form 10-Q (File No. 000-27312), filed with the SEC on November 13, 2000. 10.21* Amendment to Employment Agreement, dated as of January 3, 2001, between the Company and Christian L. Allison, incorporated herein by reference to Exhibit 10.23 to the Annual Report of the Company on Form 10-K (File No. 00027312), filed with the SEC on March 23, 2001 (the "2000 Form 10-K"). 16 10.22* Change in Control Agreement, entered into January 19, 2001 between the Company and Joseph G. O'Brien, together with a schedule listing substantially identical agreements with Lawrence J. Fey, William J. Gumbert, Gary L. Gump, Michael D. McSparrin, Timothy D. O'Brien, Mark B. Peterson, Roger A. Smith and Jeffrey J. Tatusko, incorporated herein by reference to Exhibit 10.24 to the 2000 Form 10-K. 10.23* 1998 Employee Incentive Compensation Plan, amended and restated as of January 24, 2002, incorporated herein by reference to Exhibit 10.25 to the Annual Report of the Company on Form 10-K (File No. 000-27312), filed with the SEC on March 22, 2002 (the "2001 Form 10-K"). 10.24 Asset Purchase Agreement by and between Lucent Technologies, Inc. and Tollgrade Communications, Inc. dated September 28, 2001, incorporated herein by reference to Exhibit 2.1 to the Current Report of the Company on Form 8-K (File No. 000-27312) filed with the SEC on October 15, 2001. 10.25* Amendment to Employment Agreement, dated as of January 10, 2002, between the Company and Christian L. Allison, incorporated herein by reference to Exhibit 10.27 to the 2001 Form 10-K. 10.26* Change in Control Agreement, entered into October 30, 2001 between the Company and Richard Skaare, together with a schedule listing substantially identical agreements with Wylie Etscheid, Carol M. Franklin and Gregory Quiggle, incorporated herein by reference to Exhibit 10.28 to the 2001 Form 10-K. 10.27* Change in Control Agreement, entered into January 2, 2002 between the Company and Charles L. Geier, Jr., incorporated herein by reference to Exhibit 10.29 to the 2001 Form 10-K. 10.28* Change in Control Agreement, entered into January 2, 2002 between the Company and James D. Coleman, incorporated herein by reference to Exhibit 10.30 to the 2001 Form 10-K. 10.29* Change in Control Agreement, entered into December 20, 2002 between the Company and Eric Sucharski, filed herewith. 10.30* Amendment to Employment Agreement, dated as of December 20, 2002, between the Company and Christian L. Allison, filed herewith. 10.31 Purchase and Sale Agreement, entered into February 13, 2003, between the Company and Acterna, LLC, incorporated herein by reference to Exhibit 2.1 to the Current Report of the Company on Form 8-K (File No. 000-27312),filed with the SEC on February 27, 2003. 10.32 Lease, dated February 18, 2003, between Lakewood Ranch Properties, L.L.C. and the Company, filed herewith. 10.33 Lease and Lease Agreement, dated as of October 24, 2001, between Route 206 Associates and the Company (as successor by merger to Tollgrade Acquisition Company), filed herewith. 10.34 Lease Agreement, dated as of August 5, 1993, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.35 First Amendment of Lease Agreement, dated as of March 15, 1994, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 17 10.36 Second Amendment of Lease Agreement, dated as of July 1, 1994, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.37 Third Amendment of Lease Agreement, dated as of September 15, 1994, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.38 Fourth Amendment of Lease Agreement, dated as of September 15, 1994, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.39 Fifth Amendment of Lease Agreement, dated as of March 6, 1995, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.40 Sixth Amendment to Lease, dated as of September 18, 1995, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.41 Seventh Amendment to Lease, dated as of July 9, 1996, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.42 Eighth Amendment to Lease, dated as of May 13, 1997, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.43 Ninth Amendment to Lease, dated as of December 8, 1998, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.44 Tenth Amendment to Lease, dated as of March 15, 2000, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.45 Eleventh Amendment to Lease, dated as of July 19, 2000, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company (exhibits omitted), filed herewith. 13.1 Company's 2002 Annual Report to Shareholders, filed herewith. 21.1 List of subsidiaries of the Company, filed herewith. 23.1 Consent of PricewaterhouseCoopers LLP, filed herewith. 99.1 Certification of Chief Executive Officer, filed herewith. 99.2 Certification of Chief Financial Officer, filed herewith. * Management contract or compensatory plan, contract or arrangement required to be filed by item 601(b)(10)(iii) of Regulation S-K. The Company agrees to furnish to the Commission upon request copies of all instruments not listed above which define the rights of holders of long-term debt of the Company. Copies of the exhibits filed as part of this Form 10-K are available at a cost of $.20 per page to any shareholder of record upon written request to the Secretary, Tollgrade Communications, Inc., 493 Nixon Road, Cheswick, Pennsylvania 15024. (b) Reports on Form 8-K filed during the quarter ended December 31, 2002: Not applicable. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized as of March 26, 2003. TOLLGRADE COMMUNICATIONS, INC. By /s/Christian L. Allison ----------------------- Christian L. Allison Chairman and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated as of March 26, 2003. SIGNATURE TITLE /s/Christian L. Allison Director, Chairman and Chief - ----------------------------------- Executive Officer, Christian L. Allison (Principal Executive Officer) /s/James J. Barnes Director - ----------------------------------- James J. Barnes /s/Daniel P. Barry Director - ----------------------------------- Daniel P. Barry /s/David S. Egan Director - ----------------------------------- David S. Egan /s/Rocco L. Flaminio Director, Vice Chairman - ----------------------------------- and Chief Technology Officer Rocco L. Flaminio /s/Richard H. Heibel, M.D. Director - ----------------------------------- Richard H. Heibel, M.D. /s/Robert W. Kampmeinert Director - ----------------------------------- Robert W. Kampmeinert /s/Brian C. Mullins Director - ----------------------------------- Brian C. Mullins /s/Samuel C. Knoch Chief Financial Officer and Treasurer - ----------------------------------- (Principal Financial Officer) Samuel C. Knoch /s/Charles J. Shearer Controller - ----------------------------------- (Principal Accounting Officer) Charles J. Shearer 19 CERTIFICATION I, Christian L. Allison, certify that: 1. I have reviewed this annual report on Form 10-K of Tollgrade Communications, Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function); (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 26, 2003 /s/Christian L. Allison - ------------------------------- Name: Christian L. Allison Title: Chief Executive Officer 20 CERTIFICATION I, Samuel C. Knoch, certify that: 1. I have reviewed this annual report on Form 10-K of Tollgrade Communications, Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and (c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function); (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 26, 2003 /s/Samuel C. Knoch - ------------------------------- Name: Samuel C. Knoch Title: Chief Financial Officer 21 Report of Independent Accountants on Financial Statement Schedule To the Board of Directors of Tollgrade Communications, Inc.: Our audits of the consolidated financial statements referred to in our report dated January 22, 2003 (except for Note 8, as to which the date is February 7, 2003, and Note 13, as to which the date is February 13, 2003) appearing in the 2002 Annual Report to Shareholders of Tollgrade Communications, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PRICEWATERHOUSECOOPERS LLP Pittsburgh, Pennsylvania March 26, 2003 22 SCHEDULE II TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 2000, 2001 and 2002 (In thousands)
Col. A Col. B Col. C Col. D Col. E ------ --------- ------ ------ ------ Balance at Additions Beginning Charged to Charged to Balance at of Year Expense Other AccountsDeductions End of Year ------- -------- ------------------------ ------------ Inventory reserves: Year ended December 31, 2000 660 743 -- (318) 1,085 Year ended December 31, 2001 1,085 300 -- (274) 1,111 Year ended December 31, 2002 1,111 2,547 -- (1,315) 2,343 Allowance for doubtful accounts: Year ended December 31, 2000 181 22 -- (3) 200 Year ended December 31, 2001 200 175 -- -- 375 Year ended December 31, 2002 375 -- 100 -- 475 Warranty reserve: Year ended December 31, 2000 600 588 -- (143) 1,045 Year ended December 31, 2001 1,045 1,157 (19) (153) 2,068 Year ended December 31, 2002 2,068 811 -- (898) 1,981
23 EXHIBIT INDEX (Pursuant to Item 601 of Regulation S-K)
Exhibit Number Description 3.1 Amended and Restated Articles of Incorporation of the Company, as * amended through May 6, 1998 (conformed copy), incorporated herein by reference to Exhibit 3.1 to the Annual Report of Tollgrade Communications, Inc. (the "Company") on Form 10-K (File No. 000-27312), filed with the Securities and Exchange Commission (the "SEC") on March 24, 1999 (the "1998 Form 10-K"). 3.1a Statement with Respect to Shares dated July 23, 1996 (conformed * copy), incorporated herein by reference to Exhibit 3.1a to the 1998 Form 10-K. 3.2 Amended and Restated Bylaws of the Company, filed herewith. 4.1 Rights Agreement, dated as of July 23, 1996 between the Company and * Chase Mellon Shareholder Services, L.L.C., filed as Exhibit 1 to the Registration Statement of the Company on Form 8-A (File No. 000-28852), filed with the SEC on August 9, 1996. 10.1 Common Stock Purchase Agreement dated November 7, 1994, between * the Company and the investors listed on Schedule A thereto (attachments and exhibits omitted), incorporated herein by reference to Exhibit 10.1 to the Registration Statement of the Company on Form S-1 (Reg. No. 33-98322), filed with the SEC on October 18, 1995 (the "S-1"). 10.2 1995 Long-Term Incentive Compensation Plan, amended and restated * as of January 24, 2002, incorporated herein by reference to Exhibit B to the 2002 Proxy Statement of the Company (File No. 000-27312), filed with the SEC on March 22, 2002. 10.3 License Agreement, dated August 24, 1993, between Fujitsu Network * Transmission Systems, Inc. and the Company, incorporated herein by reference to Exhibit 10.4 to the S-1. 10.4 License Agreement, dated September 26, 1994, between NEC America, * Inc. and the Company, incorporated herein by reference to Exhibit 10.5 to the S-1. 10.5 Interface License Agreement, dated March 22, 1995, between * Northern Telecom Inc. and the Company, incorporated herein by reference to Exhibit 10.7 to the S-1. 10.6 Technical Information Agreement, dated February 1, 1993, between * Lucent Technologies, Inc. (formerly American Telephone and Telegraph Company) and the Company, incorporated herein by reference to Exhibit 10.8 to the S-1. 10.7 Technology License Agreement, dated November 16, 1994, between * Alcatel USA (formerly DSC Technologies Corporation) and the Company, incorporated herein by reference to Exhibit 10.12 to the S-1.
24 10.8 License Agreement, dated August 24, 1993, between Reliance * Comm/Tec Corporation and the Company, incorporated herein by reference to Exhibit 10.13 to the S-1. 10.9 Employment Agreement, dated as of December 13, 1995, between the * Company and Christian L. Allison, incorporated herein by reference to Exhibit 10.11 to the Annual Report of the Company on Form 10-K for the year ended December 31, 1995 (the "1995 Form 10-K"). 10.10 Stock Option Agreement entered into December 14, 1995 between the * Company and R. Craig Allison, together with a schedule listing substantially identical agreements with Gordon P. Anderson, Jeffrey Blake, John H. Guelcher, Richard H. Heibel, Joseph T. Messina and Douglas T. Halliday, incorporated herein by reference to Exhibit 10.14 to the 1995 Form 10-K. 10.11 Form of Stock Option Agreement dated December 14, 1995 and * December 29, 1995 for Non-Statutory Stock Options granted under the 1995 Long-Term Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.15 to the Annual Report of the Company on Form 10-K (File No. 000-27312), filed with the SEC on March 19, 1997) (the "1996 Form 10-K"). 10.12 Form of Stock Option Agreement for Non-Statutory Stock Options * granted under the 1995 Long-Term Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.2 to the Quarterly Report of the Company on Form 10-Q (File No. 000-27312) filed with the SEC on November 12, 1996. 10.13 Amendment to Employment Agreement, dated as of December 13, 1996, * between the Company and Christian L. Allison, incorporated herein by reference to Exhibit 10.20 to the 1996 Form 10-K. 10.14 Amendment to Employment Agreement, dated as of December 13, 1997, * between the Company and Christian L. Allison, incorporated herein by reference to Exhibit 10.21 to the Annual Report of the Company on Form 10-K (File No. 000-27312), filed with the SEC on March 25, 1998 (the "1997 Form 10-K"). 10.15 Amendment, dated February 21, 1997, to Technical Information * Agreement relating to Metallic Channel Units Types A and B, dated February 1,1993, between American Telephone and Telegraph Company (AT&T) (licensor) and the Company (licensee) incorporated herein by reference to Exhibit 10.3 to the Quarterly Report of the Company on Form 10-Q (File No. 000-27312), filed with the SEC on November 10, 1997. 10.16 Form of Non-employee Director Stock Option Agreement with respect * to the Company's 1995 Long-Term Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.25 to the 1997 Form 10-K. 10.17 Amendment to Employment Agreement, dated as of December 30, 1998, * between the Company and Christian L. Allison, incorporated herein by reference to Exhibit 10.28 to the 1998 Form 10-K.
25 10.18 Amendment to Employment Agreement, dated as of January 18, 2000, * between the Company and Christian L. Allison, incorporated herein by reference to Exhibit 10.25 to the Annual Report of the Company on Form 10-K (File No, 000-27312), filed with the SEC on March 27, 2000 (the "1999 Form 10-K"). 10.19 Change in Control Agreement, entered into February 9, 2000 between * the Company and Sara M. Antol, together with a schedule listing substantially identical agreements with Robert Cornelia, Ruth Dilts, Bradley Dinger, Rocco Flamino, Mark Frey, Samuel Knoch, James Price, and Matthew Rosgone, incorporated herein by reference to Exhibit 10.26 to the 1999 Form 10-K. 10.20 Change in Control Agreement, entered into August 10, 2000 between * the Company and Stephen M. Garda, incorporated herein by reference to Exhibit 10.30 to the Quarterly Report of the Company on Form 10-Q (File No. 000-27312), filed with the SEC on November 13, 2000. 10.21 Amendment to Employment Agreement, dated as of January 3, 2001, * between the Company and Christian L. Allison, incorporated herein by reference to Exhibit 10.23 to the Annual Report of the Company on Form 10-K (File No. 000-27312), filed with the SEC on March 23, 2001 (the " 2000 Form 10-K"). 10.22 Change in Control Agreement, entered into January 19, 2001 between * the Company and Joseph G. O'Brien, together with a schedule listing substantially identical agreements with Lawrence J. Fey, William J. Gumbert, Gary L. Gump, Michael D. McSparrin, Timothy D. O'Brien, Mark B. Peterson, Roger A. Smith and Jeffrey J. Tatusko, incorporated herein by reference to Exhibit 10.24 to the 2000 Form 10-K. 10.23 1998 Employee Incentive Compensation Plan, amended and restated as * of January 24, 2002, incorporated herein by reference to Exhibit 10.25 to the Annual Report of the Company on Form 10-K (File No. 000-27312), filed with the SEC on March 22, 2002 (the "2001 Form 10-K"). 10.24 Asset Purchase Agreement by and between Lucent Technologies, Inc. * and Tollgrade Communications, Inc. dated September 28, 2001, incorporated herein by reference to Exhibit 2.1 to the Current Report of the Company on Form 8-K (File No. 000-27312), filed with the SEC on October 15, 2001. 10.25 Amendment to Employment Agreement, dated as of January 10, 2002, * between the Company and Christian L. Allison, incorporated herein by reference to Exhibit 10.27 to the 2001 Form 10-K. 10.26 Change in Control Agreement, entered into October 30, 2001 between the Company and Richard Skaare, together with a schedule listing substantially identical agreements with Wylie Etscheid, Carol M. Franklin and Gregory Quiggle, incorporated herein by reference to Exhibit 10.28 to the 2001 Form 10-K. 10.27 Change in Control Agreement, entered into January 2, 2002 between the Company and Charles L. Geier, Jr., incorporated herein by reference to Exhibit 10.29 to the 2001 Form 10-K.
26 10.28 Change in Control Agreement, entered into January 2, 2002 between the Company and James D. Coleman, incorporated herein by reference to Exhibit 10.30 to the 2001 Form 10-K. 10.29 Change in Control Agreement, entered into December 20, 2002 between the Company and Eric Sucharski, filed herewith. 10.30 Amendment to Employment Agreement, dated as of December 20, 2002, between the Company and Christian L. Allison, filed herewith. 10.31 Purchase and Sale Agreement, entered into February 13, 2003, between the Company and Acterna, LLC, incorporated herein by reference to Exhibit 2.1 to the Current Report of the Company on Form 8-K (File No. 000-27312), filed with the SEC on February 27, 2003. 10.32 Lease, dated February 18, 2003, between Lakewood Ranch Properties, L.L.C. and the Company, filed herewith. 10.33 Lease and Lease Agreement, dated as of October 24, 2001, between Route 206 Associates and Tollgrade Acquisition Company (as successor by merger to Tollgrade Acquisition Company), filed herewith. 10.34 Lease Agreement, dated as of August 5, 1993, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.35 First Amendment of Lease Agreement, dated as of March 15, 1994, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.36 Second Amendment of Lease Agreement, dated as of July 1, 1994, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.37 Third Amendment of Lease Agreement, dated as of September 15, 1994, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.38 Fourth Amendment of Lease Agreement, dated as of September 15, 1994, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.39 Fifth Amendment of Lease Agreement, dated as of March 6, 1995, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.40 Sixth Amendment to Lease, dated as of September 18, 1995, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.41 Seventh Amendment to Lease, dated as of July 9, 1996, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 27 10.42 Eighth Amendment to Lease, dated as of May 13, 1997, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.43 Ninth Amendment to Lease, dated as of December 8, 1998, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.44 Tenth Amendment to Lease, dated as of March 15, 2000, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company, filed herewith. 10.45 Eleventh Amendment to Lease, dated as of July 19, 2000, between Regional Industrial Development Corporation of Southwestern Pennsylvania and the Company (exhibits omitted), filed herewith. 13.1 Company's 2002 Annual Report to Shareholders, filed herewith. 21.1 List of subsidiaries of the Company, filed herewith. 23.1 Consent of PricewaterhouseCoopers LLP, filed herewith. 99.1 Certification of Chief Executive Officer, filed herewith. 99.2 Certification of Chief Financial Officer, filed herewith. * Incorporated by reference. 28 EX-3.2 3 j9925501exv3w2.txt BYLAWS EXHIBIT 3.2 BYLAWS OF TOLLGRADE COMMUNICATIONS, INC. (A PENNSYLVANIA CORPORATION) ARTICLE I OFFICES AND FISCAL YEAR Section 1.01. Registered Office. The registered office of the corporation in Pennsylvania shall be at 493 Nixon Road, Cheswick, Pennsylvania 15024, until otherwise established by an amendment of the articles or the board of directors and a record of such change is filed with the Department of State in the manner provided by law. Section 1.02. Other Offices. The corporation may also have offices at such other places within or without Pennsylvania as the board of directors may from time to time appoint or the business of the corporation may require. Section 1.03. Fiscal Year. The fiscal year of the corporation shall begin on the first day of January in each year. ARTICLE II NOTICE - WAIVERS - MEETINGS GENERALLY Section 2.01. Manner of giving notice. (a) General rule. Whenever written notice is required to be given to any person under the provisions of the Business Corporation Law or by the articles or these bylaws, it may be given to the person either personally or by sending a copy thereof by first class or express mail, postage prepaid, or by telegram (with messenger service specified), telex or TWX (with answerback received) or courier services, charges prepaid, or by telecopier, to the address (or to the telex, TWX, telecopier or telephone number) of the person appearing on the books of the corporation or, in the case of directors, supplied by the director to the corporation for the purpose of notice. If the notice is sent by mail, telegraph or courier service, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office or courier service for delivery to that person or, in the case of telex or TWX, when dispatched. A notice of meeting shall specify the place, day and hour of the meeting and any other information required by any other provision of the Business Corporation Law, the articles or these bylaws. (b) Adjourned shareholder meetings. When a meeting of shareholders is adjourned, it shall not be necessary to give any notice of the adjourned meeting or of the business to be transacted at an adjourned meeting, other than by announcement at the meeting at which the adjournment is taken, unless the board fixes a new record date for the adjourned meeting. Section 2.02. Notice of Meetings of Board of Directors. Notice of a regular meeting of the board of directors need not be given. Written notice of every special meeting of the board of directors shall be given to each director by telephone or in writing at least 24 hours (in the case of notice by telephone, telex or TWX) or 48 hours (in the case of notice by telecopier, telegraph, courier service or express mail) or five day (in the case of notice by first class mail) before the time at which the meeting is to be held. Every such notice shall state the time and place of the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board need be specified in any notice of the meeting. Section 2.03. Notice of meetings or shareholders. (a) General rule. Written notice of every meeting of the shareholders shall be given by, or at the direction of, the secretary to each shareholder of record entitled to vote at the meeting at 10 days prior to the day named for the meeting. If the secretary neglects or refuses to give notice of a meeting, the person or persons calling the meeting may do so. In the case of a special meeting of shareholders, the notice shall specify the general nature of the business to be transacted. (b) Notice of action by shareholders on bylaws. In the case of a meeting of shareholders that has as one of its purposes action on the bylaws, written notice shall be given to each shareholder that the purpose, or one of the purposes, of the meeting is to consider the adoption, amendment or repeal of the bylaws. There shall be included in, or enclosed with, the notice a copy of the proposed amendment or a summary of the changes to be effected thereby. Section 2.04. Waiver of notice. (a) Written waiver. Whenever any written notice is required to be given under the provisions of the Business Corporation Law, the articles or these bylaws, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of the notice. Except as otherwise required by this subsection, neither the business to be transacted at, nor the purpose of, a meeting need be specified in the waiver of notice of the meeting. In the case of a special meeting of shareholders, the waiver of notice shall specify the general nature of the business to be transacted. (b) Waiver by attendance. Attendance of a person at any meeting shall constitute a waiver of notice of the meeting except where a person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Section 2.05. Modification of proposal contained in notice. Whenever the language of a proposed resolution is included in a written notice of a meeting required to be given under the provisions of the Business Corporation Law or the articles or these bylaws, the meeting considering the resolution may without further notice adopt it with such clarifying or other amendments as do not enlarge its original purpose. 2 Section 2.06. Exception to requirement of notice. (a) General rule. Whenever any notice or communication is required to be given to any person under the provisions of the Business Corporation Law or by the articles or these bylaws or by the terms of any agreement or other instrument or as a condition precedent to taking any corporate action and communication with that person is then unlawful, the giving of the notice or communication to that person shall not be required. (b) Shareholders without forwarding addresses. Notice or other communications shall not be sent to any shareholder with whom the corporation has been unable to communicate for more than 24 consecutive months because communications to the shareholder are returned unclaimed or the shareholder has otherwise failed to provide the corporation with a current address. Whenever the shareholder provides the corporation with a current address, the corporation shall commence sending notices and other communications to the shareholder in the same manner as to other shareholders. Section 2.07. Use of conference telephone and similar equipment. The board of directors may provide by resolution with respect to a specific meeting or with respect to a class of meetings that one or more persons may participate in a meeting of the board of directors or of the shareholders of the corporation by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting Participation in a meeting pursuant to this section shall constitute presence in person at the meeting. ARTICLE III MEETINGS OF SHAREHOLDERS Section 3.01. Place of Meeting. All meetings of the shareholders of the corporation shall be held at the registered office of the corporation unless another place is designated by the board of directors in the notice of a meeting. Section 3.02. Annual Meeting. The board of directors may fix the date and time of the annual meeting of the shareholders, but if no such date and time is fixed by the board, the meeting for any calendar year shall be held on the first Monday of June in such year, if not a legal holiday under the laws of Pennsylvania, and, if a legal holiday, then on the next succeeding business day, not a Saturday, at 10:00 a.m., and at said meeting the shareholders then entitled to vote shall elect directors and shall transact such other business as may properly be brought before the meeting. If the annual meeting shall not have been called and held within six months after the designated time, any shareholder may call the meeting at any time thereafter. Section 3.03. Special Meetings. Special meetings of the shareholders may be called at any time by resolution of the board of directors, which may fix the date, time or place of the meeting, it shall be the duty of the secretary to do so. A date fixed by the secretary shall not be more than 60 days after the date of the adoption of the resolution of the board calling the special meeting. 3 Section 3.04. Quorum and Adjournment. (a) General rule. A meeting of shareholders of the corporation duly called shall not be organized for the transaction of business unless a quorum is present. The presence of shareholders entitled to cast at least a majority of the votes that all shareholders are entitled to cast on a particular matter to be acted upon at the meeting shall constitute a quorum for the purposes of consideration and action on the matter. Shares of the corporation owned, directly or indirectly, by it and controlled, directly or indirectly, by the board of directors of this corporation, as such, shall not be counted in determining the total number of outstanding shares for quorum purposes at any given time. (b) Withdrawal of a quorum. The shareholders present at a duly organized meeting can continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. (c) Adjournments generally. Any regular or special meeting may be adjourned for such period and to such place as the shareholders present and entitled to vote shall direct. (d) Electing directors at adjourned meeting. Those shareholders entitled to vote who attend a meeting called for the election of directors that has been previously adjourned for lack of a quorum, although less than a quorum as fixed in this section, shall nevertheless constitute a quorum for the purpose of electing directors. (e) Other action in absence of quorum. Those shareholders entitled to vote who attend a meeting of shareholders that has been previously adjourned for one or more periods aggregating at least IS days because of an absence of a quorum, although less than a quorum as fixed in this section, shall nevertheless constitute a quorum for the purpose of acting upon any matter set forth in the notice of the meeting if the notice states that those shareholders who attend the adjourned meeting shall nevertheless constitute a quorum for the purpose of acting upon the matter. Section 3.05. Action by shareholders. (a) General rule. Except as otherwise provided in the Business Corporation Law or the articles or these bylaws, whenever any corporate action is to be taken by vote of the shareholders of the corporation, it shall be authorized by a majority of the votes cast at a duly organized meeting' of shareholders by the holders of shares entitled to vote thereon. (b) Interested shareholders. Any merger or other transaction authorized under the Business Corporation Law between the corporation or a subsidiary thereof and a shareholder of this corporation, or any voluntary liquidation authorized under the Business Corporation Law in which a shareholder is treated differently from other shareholders of the same class (other than any dissenting shareholders), shall require the affirmative vote of the shareholders entitled to cast at least a majority of the votes that all shareholders other than the interested shareholder are entitled to cast with respect to the transaction, without counting the vote of the interested shareholder, for the 4 purposes of the preceding sentence, interested shareholder shall include the shareholder who is a party to the transaction or who is treated differently from other shareholders and any person, or group of persons, that is acting jointly or in concert with the interested shareholder and any person who, directly or indirectly, controls, is controlled by or is under common control with the interested shareholder. An interested shareholder shall not include any person who, in good faith and not for the purpose of circumventing this subsection, is an agent, bank, broker, nominee or trustee for one or more other persons, to the extent that the other person or persons are not interested shareholders. (c) Exceptions. Subsection (b) shall not apply to a transaction: (1) that has been approved by a majority vote of the board of directors without counting the vote of directors who: (i) are directors or officers of, or have a material equity interest in, the interested shareholder; or (ii) were nominated for election as a director by the interested shareholder, and first elected as a director, within 24 months of the date of the vote on the proposed transaction; or (2) in which the consideration to be received by the shareholders for shares of any class of which shares are owned by the interested shareholder is not less than the highest amount paid by the interested shareholder in acquiring shares of the same class. (d) Additional approvals. The approvals required by subsection (b) shall be in addition to, and not in lieu of, any other approval required by the Business Corporation Law, the articles of these bylaws, or otherwise. Section 3.06. Organization. At every meeting of the shareholders, the chairman of the board, the president, or, in the case of vacancy in office or absence of the chairman of the board, one of the following officers present in the order stated: the vice presidents in their order of rank and seniority, or a person chosen by vote of the shareholders present, shall act as chairman of the meeting. The secretary, or, in the absence of the secretary, an assistant secretary, or in the absence of both the secretary and assistant secretaries, a person appointed by the chairman of the meeting, shall act as secretary. Section 3.07. Voting rights of shareholders. Unless otherwise provided in the articles, every shareholder of the corporation shall be entitled to one vote for every share standing in the name of the shareholder on the books of the corporation.. Section 3.08. Voting and other action by proxy. (a) General rule. 5 (1) Every shareholder entitled to vote at a meeting of shareholders may authorize another person to act for the shareholder by proxy. (2) The presence of, or vote or other action at meeting of shareholders by a proxy of a shareholder shall constitute the presence of, or vote or action by the shareholder. (3) Where two or more proxies of a shareholder are present, the corporation shall, unless otherwise expressly provided in the proxy, accept as the vote of all shares represented thereby the vote cast by a majority of them and, if a majority of the proxies cannot agree whether the shares represented shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among those persons. (b) Minimum requirements. Every proxy shall be executed or authenticated by the shareholder or by his duly authorized attorney-in-fact and filed with or transmitted to the secretary of the corporation or its designated agent. A shareholder or his duly authorized attorney-in-fact may execute or authenticate a writing or transmit an electronic message authorizing another person to act for him by proxy. A telegram, telex, cablegram, datagram, e-mail, Internet communication, or other means of electronic transmission from a shareholder or attorney-in-fact or a photographic facsimile or similar reproduction of a writing executed by a shareholder or attorney-in-fact: (1) may be treated as properly executed or authenticated for purposes of this subsection; and (2) shall be so treated if it sets forth or utilizes a confidential and unique identification number or other mark furnished by the corporation to the shareholder for the purposes of a particular meeting or transaction. A proxy, unless coupled with an interest, shall be revocable at will, notwithstanding any other agreement or any provision in the proxy to the contrary, but the revocation of a proxy shall not be effective until written notice thereof has been given to the secretary of the corporation. An unrevoked proxy shall not be valid after three years from the date of its execution unless a longer time is expressly provided therein. A proxy shall not be revoked by the death or incapacity of the maker unless, before the vote is counted or the authority is exercised, written notice of the death or incapacity is given to the secretary of the corporation. Section 3.09. Voting by fiduciaries and pledgees. Shares of the corporation standing in the name of a trustee or other fiduciary and shares held by an assignee for the benefit of creditors or by a receiver may be voted by the trustee, fiduciary, assignee or receiver. A shareholder whose shares are pledged shall be entitled to vote the shares until the shares have been transferred into the name of the pledgee, or a nominee of the pledges, but nothing in this section shall affect the validity of a proxy given to a pledgee or nominee. Section 3.10. Voting by joint holders of shares. (a) General rule. Where shares off the corporation are held jointly or as tenants in common by two or more persons, as fiduciaries or otherwise: (1) if only one or more of such persons is present in person or by proxy, all of the shares standing in the names of such persons shall be deemed to be represented for the purpose 6 of determining a quorum and the corporation shall accept as the vote of all the shares the vote cast by a joint owner or a majority of them; and (2) if the persons are equally divided upon whether the shares held by them shall be voted or upon the manner of voting the shares, the voting of the shares shall be divided equally among the persons without prejudice to the rights of the joint owners or the beneficial owners thereof among themselves. (b) Exception. If there has been filed with the secretary of the corporation a copy, certified by an attorney at law to be correct, of the relevant portions of the agreement under which the shares are held or the instrument by which the trust or estate was created or the order of court appointing them or of an order of court directing the voting of the shares, the persons specified as having such voting power in the document latest in date of operative effect so filed, and only those persons, shall be entitled to vote the shares but only in accordance therewith. Section 3.11. Voting by corporations. (a) Voting by corporate shareholders. Any corporation that is a shareholder of this corporation may vote at meetings of shareholders of this corporation by any of its officers or agents, or by proxy appointed by any officer or agent, unless some other person, by resolution of the board of directors of the other corporation or a provision of its articles or bylaws, a copy of which resolution or provision certified to be correct by one of its officers has been filed with the secretary of this corporation, is appointed its general or special proxy in which case that person shall be entitled to vote the shares. (b) Controlled shares. Shares of this corporation owned, directly or indirectly, by it and controlled, directly or indirectly, by the board of directors of this corporation, as such, shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares for voting purposes at any given time. Section 3.12. Determination of shareholders of record. (a) Fixing record date. The board of directors may fix a time prior to the date of any meeting of shareholders as a record date for the determination of the shareholders entitled to notice of, or to vote at, the meeting, which time, except in the case of an adjourned meeting, shall be not more than 90 days prior to the date of the meeting of shareholders. Only shareholders of record on the date fixed shall be so entitled notwithstanding any transfer of shares on the books of the corporation after any record date fixed as provided in this subsection. The board of directors may similarly fix a record date for the determination of shareholders of record for any other purpose. When a determination of shareholders of record has been made as provided in this section for purposes of a meeting, the determination shall apply to any adjournment thereof unless the board fixes a new record date for the adjourned meeting. (b) Determination when a record date is not fixed. If a record date is not fixed: 7 (1) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholder shall be at the close of business on the day next preceding the day on which notice is given. (2) The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. (c) Certification by nominee. The board of directors may adopt a procedure whereby a shareholder of the corporation may certify in writing to the corporation that all or a portion of the shares registered in the name of the shareholder are held for the account of a specified person or persons. Upon receipt by the corporation of a certification complying with the procedure, the persons specified in the certification shall be deemed, for the purposes set forth in the certification, to be the holders of record of the number of shares specified in place of the shareholder making the certification. Section 3.13. Voting lists. (a) General rule. The officer or agent having charge of the transfer records for shares of the corporation shall make a complete list of the shareholders entitled to vote at any meeting of shareholders, arranged in alphabetical order, with the address of and the number of shares held by each. The list shall be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting for the purposes thereof except that, if the corporation has 5,000 or more shareholders, in lieu of the making of the list the corporation may make the information therein available at the meeting by any other means. (b) Effect of list. Failure to comply with the requirements of this section shall not affect the validity of any action taken at a meeting prior to a demand at the meeting by any shareholder entitled to vote thereat to examine the list. The original transfer records, or a duplicate thereof kept in this Commonwealth, shall be prima facie evidence as to who are the shareholders entitled to examine the list or transfer records or to vote at any meeting of shareholders. Section 3.14. Judges of election. (a) Appointment. In advance of any meeting of shareholders of the corporation, the board of directors may appoint judges of election, who need not be shareholders, to act at the meeting or any adjournment thereof. If judges of election are not so appointed, the presiding officer of the meeting may, and on the request of any shareholder shall, appoint judges of election at the meeting. The number of judges shall be one or three. A person who is a candidate for office to be filled at the meeting shall not act as a judge. 8 (b) Vacancies. In case any person appointed as a judge fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the board of directors in advance of the convening of the meeting or at the meeting by the presiding officer thereof. (c) Duties. The judges of election shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies, receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes, determine the result and do such acts as maybe proper to conduct the election or vote with fairness to all shareholders. The judges of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three judges of election, the decision, act or certificate of a majority shall be effective in all respects as the decision, act or certificate of all. (d) Report. On request of the presiding officer of the meeting, the judges shall make a report in writing of any challenge or question or matter determined by them, and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts stated therein. Section 3.15. Consent of shareholders in lieu of meeting. Any action required or permitted to be taken at a meeting of the shareholders or of a class of shareholders may be taken without a meeting only upon the unanimous written consent of all shareholders who would have been entitled to vote thereon at a meeting of shareholders called to consider the matter. Section 3.16. Minors as security holders. The corporation may treat a minor who holds shares or obligations of the corporation as having capacity to receive and to empower others to receive dividends, interest, principal and other payments or distributions, to vote or express consent or dissent and to make elections and exercise rights relating to such shares or obligations unless, in the case of payments or distributions on shares, the corporate officer responsible for maintaining the list of shareholders or the transfer agent of the corporation or, in the case of payments or distributions or obligations, the treasurer or paying officer or agent has received written notice that the holder is a minor. Section 3.17. Notice of Shareholder Business and Nominations. (a) Annual Meetings of Shareholders. (1) Nominations of persons for election to the Board of Directors of the corporation and the proposal of business to be considered by the shareholders at an annual meeting of shareholders must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (including by a Committee appointed by the Board of Directors), (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors (including by a Committee appointed by the Board of Directors), or (c) otherwise properly brought before the meeting by a shareholder of the corporation who was a shareholder of record at the time of giving of notice provided for in this 9 Section 3.17(a), who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 3.17(a). Nominations of persons for election to the Board of Directors of the corporation shall exclusively be made by the Board (or a Committee thereof appointed by the Board, including the Nominating Committee), which will consider nominations properly made by shareholders in accordance with the procedures of Section 3.17(a)(2) below. (2) For nominations or other business to be properly brought before an annual meeting by a shareholder pursuant to paragraph (a)(1) of this Section 3.17, the shareholder must have given timely notice thereof in writing to the Secretary of the corporation and such other business must be a proper matter for shareholder action. To be timely, a shareholder's notice shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the 60th day nor earlier than the close of business on the 120th day prior to the first anniversary of the date of the preceding year's proxy statement for the annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after the first anniversary of the preceding year's annual meeting, notice by the shareholder to be timely must be so delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. In no event shall the public announcement of an adjournment of an annual meeting commence a new time period for the giving of a shareholder's notice as described above. Such shareholder's notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule 14a-11 thereunder (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected), along with a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholders; (b) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; (c) a representation that the shareholder intends to appear in person or by proxy at the meeting to nominate the person or persons or raise the proposal specified in the notice; and (d) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such shareholder, as they appear on the corporation's books, and of such beneficial owner and (ii) the class and number of shares of the corporation which are owned beneficially and of record by such shareholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (a)(2) of this By-Law to the contrary, but subject to Section 4.04 of the By-Laws, in the event that the number of directors to be elected to the Board of Directors of the corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the corporation at least 70 days prior to the first 10 anniversary of the date of the preceding year's proxy statement for the annual meeting, a shareholder's notice required by this Section 3.17(a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the corporation. (b) Special Meetings of Shareholders. Only such business shall be conducted at a special meeting of shareholders as shall have been brought before the meeting pursuant to the corporation's notice of meeting. Nominations of persons for election to the Board of Directors at a special meeting of shareholders at which directors are to be elected pursuant to the corporation's notice of meeting must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (including by a Committee appointed by the Board of Directors), (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors (including by a Committee appointed by the Board of Directors), or (c) otherwise properly brought before the meeting by a shareholder of the corporation who was a shareholder of record at the time of giving of notice provided for in this Section 3.17(b), who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 3.17(b). Nominations of persons for election to the Board of Directors of the corporation shall exclusively be made by the Board (or a Committee thereof appointed by the Board, including the Nominating Committee), which will consider nominations properly made by shareholders in accordance with the procedures of Section 3.17(b) below. In the event the corporation calls a special meeting of shareholders for the purpose of electing one or more directors to the Board of Directors, any such shareholder may propose for nomination a person or persons (as the case may be), for election to such position(s) as specified in the corporation's notice of meeting, if the shareholder's notice required by paragraph (a)(2) of this Section 3.17 shall be delivered to the Secretary at the principal executive offices of the corporation not earlier than the close of business on the 120th day prior to such special meeting and not later than the close of business on the later of the 90th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a shareholder's notice as described above. (c) General. (1) Only such persons who are nominated by the Board of Directors or a Committee of the Board in accordance with the procedures set forth in this Section 3.17 shall be eligible to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 3.17. Except as otherwise provided by law, the Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made, or proposed, as the case may be, in accordance with the procedures set forth in this Section 3.17 and, if any proposed nomination or business is not in compliance with this Section 3.17, to declare that such defective proposal or nomination shall be disregarded. 11 (2) For purposes of this Section 3.17, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 3.17, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 3.17. Nothing in this Section 3.17 shall be deemed to affect any rights of (i) shareholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) the holders of any series of Preferred Stock to elect directors under specified circumstances. ARTICLE IV BOARD OF DIRECTORS Section 4.01. Powers; personal liability. (a) General rule. Unless otherwise provided by statute, all powers vested by law in the corporation shall be exercised by or under the authority of, and the business and affairs of the corporation shall be managed under the direction of, the board of directors. (b) Standard of care; justifiable reliance. A director shall stand in a fiduciary relation to the corporation and shall perform his or her duties as a director, including duties as a member of any committee of the board upon which the director may serve, in good faith, in a manner the director reasonably believes to be in the best interests of the corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. In performing his or her duties, a director shall be entitled to rely in good faith on information, opinions, reports or statements, including financial statements and other financial data, in each case prepared or presented by any of the following: (1) One or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented. (2) Counsel, public accountants or other persons as to matters which the director reasonably believes to be within the professional or expert competence of such person. (3) A committee of the board upon which the director does not serve, duly designated in accordance with law, as to matters within its designated authority, which committee the director reasonably believes to merit confidence. A director shall not be considered to be acting in good faith if the director has knowledge concerning the matter in question that would cause his or her reliance to be unwarranted. (c) Consideration of factors. In discharging the duties of their respective positions, the board of directors, committees of the board and individual directors may have, in 12 considering the best interests of the corporation, consider the effects of any action upon employees, upon suppliers and customers of the corporation and upon communities in which offices or other establishments of the corporation are located, and all other pertinent factors. The consideration of those factors shall not constitute a violation of subsection (b). (d) Presumption. Absent breach of fiduciary duty, lack of good faith or self-dealing, actions taken as a director or any failure to take any actin shall be presumed to be in the best interests of the corporation. (e) Personal liability of directors. (1) A director shall not be personally liable, as such, for monetary damages for any action taken, or any failure to take any actin, unless: (i) the director has breached or failed to perform the duties of his or her office under this section; and (ii) the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. (2) The provisions of paragraph (1) shall not apply to the responsibility or liability of a director pursuant to any criminal statute, or the liability of a director for the payment of taxes pursuant to local, State or Federal law. (f) Notation of dissent. A director who is present at a meeting of the board of directors, or of a committee of the board, at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his or her dissent is entered in the minutes of the meeting or unless the director files a written dissent to the action with the secretary of the meeting before the adjournment thereof or transmits the dissent in writing to the secretary of the corporation immediately after the adjournment of the meeting, the right to dissent shall not apply to a director who voted in favor of the action. Nothing in this section shall bar a director from asserting that minutes of the meeting incorrectly omitted his or her dissent if, promptly upon receipt of a copy of such minutes, the director notifies the secretary, in writing, of the asserted omission or inaccuracy. Section 4.02. Qualifications and selection of directors. (a) Qualifications. Each director of the corporation shall be a natural person of full age who need not be a resident of this commonwealth or a shareholder of the corporation. (b) Election of directors. The candidates receiving the highest number of votes from each class or group of classes, if any, entitled to elect directors separately up to the number of directors to be elected by the class or group of classes shall be elected. If at any meeting of shareholders, directors of more than one class are to be elected, each class of directors shall be elected in a separate election. 13 Section 4.03. Number and term of office. (a) Number. The board of directors shall consist of such number of directors, not more than nine, as may be determined from time to time by resolution of the board of directors. (b) Term of office. Each director shall hold office until the expiration of the term for which he or she was selected and until a successor has been selected and qualified or until his or her earlier death, resignation or removal. A decrease in the number of directors shall not have the effect of shortening the term of any incumbent director. (c) Resignation. Any director may resign at any time upon written notice to the corporation. The resignation shall be effective notice to the corporation. The resignation shall be effective upon receipt thereof by the corporation or at such subsequent time as shall be specified in the notice of resignation. (d) Classified board of directors. The directors shall be classified in respect of the time for which they shall severally hold office as follows: (1) Each class shall be as nearly equal in number as possible. (2) The term of office of at least one class shall expire in each year. (3) The members of each class shall be elected for a period of three years. Section 4.04. Vacancies. (a) General Rule. Vacancies in the board of directors, including vacancies resulting from an increase in the number of directors, may be filled by a majority vote of the remaining members of the board though less than a quorum, or by a sole remaining director, and each person so selected shall be a director to serve until the next selection of the class for which such director has been chosen, and until a successor has been selected and qualified or until his or her earlier death, resignation or removal. (b) Action by resigned directors. When one or more directors resign from the board effective at a future date, the directors then in office, including those who have so resigned, shall have power by the applicable vote to fill the vacancies, the vote thereon to take effect when the resignations become effective. Section 4.05. Removal of directors. (a) Removal by the shareholders. The entire board of directors, or any class of the board, or any individual director may be removed from office by vote of the shareholders entitled to vote thereon only for cause. In case the board or a class of the board or any one or 14 more directors are so removed, new directors may be elected at the same meeting. The repeal of a provision of the articles or these bylaws prohibiting, or the addition of a provision to the articles or bylaws permitting, the removal by the shareholders of the board, a class of the board or a director without assigning any cause shall not apply to any incumbent director during the balance of the term for which he was selected. (b) Removal by the board. The board of directors may declare vacant the office of a director who has been judicially declared of unsound mind or who has been convicted of an offense punishable by imprisonment for a term of more than one year or if within 60 days after notice of his or her selection, the director does not accept the office either in writing or by attending a meeting of the board of directors. Section 4.06. Place of meetings. Meetings of the board of directors may be held at such place within or without Pennsylvania as the board of directors may from time to time appoint or as may be designated in the notice of the meeting. Section 4.07. Organization of meetings. At every meeting of the board of directors, the chairman of the board, if there be one, or, in the case of a vacancy in the office or absence of the chairman of the board, one of the following officers present in the order stated: the vice chairman of the board, if there be one, the president, the vice presidents in their order of rank and seniority, or a person chosen by a majority of the directors present, shall act as chairman of the meeting. The secretary, or, in the absence of the secretary, an assistant secretary, or in the absence of the secretary and the assistant secretaries, any person appointed by the chairman of the meeting, shall act as secretary. Section 4.08. Regular Meetings. Regular meetings of the board of directors shall be held at such time and place as shall be designated from time to time by resolution of the board of directors. Section 4.09. Special Meetings. Regular meetings of the board of directors shall be held at such time and place as shall be designated from time to time by resolution of the board of directors. Section 4.10. Quorum of and action of directors. (a) General rule. A majority of the directors in office of the corporation shall be necessary to constitute a quorum for the transaction of business and the acts of a majority of the directors present shall be the acts of the board of directors. (b) Action by written consent. Any action required or permitted to be taken at a meeting of the directors may be taken without a meeting if, prior or subsequent to the action, a consent or consents thereto by all of the directors in office is filed with the secretary of the corporation. Section 4.11. Executive and Other Committees. 15 (a) Establishment and powers. The board of directors may, by resolution adopted by a majority of the directors in office, establish one or more committees to consist of one or more directors of the corporation. Any committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all of the powers and authority of the board of directors except that a committee shall not have any power or authority as to the following: (1) The submission to shareholders of any action requiring approval of shareholders under the Business Corporation Law. (2) The creation or filling of vacancies in the board of directors. (3) The adoption, amendment or repeal of these bylaws. (4) The amendment or repeal of any resolution of the board that by its terms is amendable or repealable only by the board. (5) Action on matters committed by a resolution of the board of directors to another committee of the board. (b) Alternate committee members. The board may designate one or more directors as alternate members of any committee who may replace any absent or disqualified member at any meeting of the committee or for the purposes of any written action by the committee. In the absence or disqualification of a member and alternate member or members of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another director to act at the meeting in the place of the absent or disqualified member. (c) Term. Each committee of the board shall serve at the pleasure of the board. (d) Committee Procedures. The term "board of directors" or "board," when used in any provision of these bylaws relating to the organization or procedures of or the manner of taking action by the board of directors, shall be construed to include and refer to any executive or other committee of the board. Section 4.12. Compensation. The board of directors shall have the authority to fix the compensation of directors for their services as directors and a director may be a salaried officer of the corporation. ARTICLE V OFFICERS Section 5.01. Officers Generally. (a) Number, qualifications and designation. The officers of the corporation shall be a chairman and chief executive officer, a chief operating officer and a president, one or 16 more vice presidents, a secretary, a treasurer, and such other officers as may be elected in accordance with the provisions of Section 5.03. Officers may but need not be directors or shareholders of the corporation. The president and secretary shall be natural persons of full age. The treasurer may be a corporation, but if a natural person shall be of full age. The board of directors shall elect from among the members of the board a chairman of the board who shall be an officer of the corporation. Any number of offices may be held by the same person. (b) Resignations. Any officer may resign at any time upon written notice to the corporation. The resignation shall be effective upon receipt thereof by the corporation or at such subsequent time as may be specified in the notice of resignation. (c) Bonding. The corporation may secure the fidelity of any or all of its officers by bond or otherwise. (d) Standard of care. Except as otherwise provided in the articles, an officer shall perform his or her duties as an officer in good faith, in a manner he or she reasonably believes to be in the best interests of the corporation and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. A person who so performs his or her duties shall not be liable by reason of having been an officer of the corporation. Section 5.02. Election and terms of office. The officers of the corporation, except those elected by delegated authority pursuant to Section 5.03, shall be elected annually by the board of directors, and each such officer shall hold office for a term of one year and until a successor has been selected and qualified or until his or her earlier death, resignation or removal. Section 5.03. Subordinate officers, committees and agents. The board of directors may from time to time elect such other officers and appoint such committees, employees or other agents as the business of the corporation may require, including one or more assistant secretaries, and one or more assistant treasurers, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. The board of directors may delegate to any officer or committee the power to elect subordinate officers and to retain or appoint employees or other agents, or committees thereof and to prescribe the authority and duties of such subordinate officers, committees, thereof and to prescribe the authority and duties of such subordinate officers, committees, employees or other agents. Section 5.04. Removal of officers and agents. Any officer or agent of the corporation may be removed by the board of directors with or without cause. The removal shall be without prejudice to the contract rights, if any, of any person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. Section 5.05. Vacancies. A vacancy, in any office because of death, resignation, removal, disqualification, or any other cause, shall be filled by the board of directors or by the officer or committee to which the power to fill such office has been delegated pursuant to Section 5.03, 17 as the case may be, and if the office is one for which these bylaws prescribe a term, shall be filled for the unexpired portion of the term. Section 5.06. Authority. All officers of the corporation, as between themselves and the corporation, shall have such authority and perform such duties in the management of the corporation as may be provided by or pursuant to resolutions or orders of the board of directors or in the absence of controlling provisions in the resolutions or orders of the board of directors, as may be determined by or pursuant to these bylaws. Section 5.07. The Chairman of the Board and President. The Chairman of the Board or in the absence of the Chairman, the President, shall preside at all meetings of the shareholders and of the board of directors and shall perform such other duties as may from time to time be requested by the board of directors. Section 5.08. The Chairman. The Chairman shall be the Chief Executive Officer of the corporation and shall have general supervision over all business and operations of the corporation, subject however, to the control of the board of directors. The Chairman shall sign, execute, and acknowledge, in the name of the corporation, deeds, mortgages, bonds, contracts or other instruments authorized by the board of directors, except in cases where the signing and execution thereof shall be expressly delegated by the board of directors, or by these bylaw, to some other officer or agent of the corporation; and, in general, shall perform all duties incident to the office of chairman and such other duties as from time to time may be assigned by the board of directors. Further, the general responsibilities of the Chairman shall include the physical plant, investor relations, equity events, key management morale, employee morale and government relations. Section 5.09. The Vice-Chairman. The Vice Chairman shall serve as Chief Technology Officer but will have no additional powers or duties incident to the honorary office of Vice-Chairman. Section 5.10. The President. The President shall be the Chief Operating Officer of the corporation and shall have responsibility for the day to day operations of the business. Further, the general responsibilities of the President shall include supervision of sales and marketing, long term strategic planning, research and development, finance and production. The President shall perform all duties, including the operational duties of the Chairman in the absence of the Chairman. The President shall be a member of the Board of Directors. Section 5.11. The Vice President. The Vice Presidents of the corporation shall consist of a Senior Vice President, Engineering, a Senior Vice President, Design, a Senior Vice President, Strategic Products and such other Vice Presidents as may be designated from time to time by resolution of the board of directors. Section 5.12. The Secretary. The secretary or an assistant secretary shall attend all meetings of the shareholders and of the board of directors and shall record all the votes of the shareholders and of the directors and the minutes of the meetings of the shareholders and of the board of directors and of committees of the board in a book or books to be kept for that purpose; 18 shall see that notices are given and records and reports properly kept and filed by the corporation as required by law; shall be the custodian of the seal of the corporation and see that it is affixed to all documents to be executed on behalf of the corporation under its seal; and, in general, shall perform all duties as may from time to time be assigned by the board of directors or the president. Section 5.13. The Treasurer. The treasurer or an assistant treasurer shall have or provide for the custody of the funds or other property of the corporation; shall collect and receive or provide for the collection and receipt of moneys earned by or in any manner due to or, received by the corporation; shall deposit all funds in his or her custody as treasurer in such banks or other places of deposit as the board of directors may from time to time designate; shall, whenever so required by the board of directors, render an account showing all transactions as treasurer and the financial condition of the corporation; and, in general, shall discharge such other duties as may from time to time be assigned by the board of directors or the president. Section 5.14. Salaries. The salaries of the officers elected by the board of directors shall be fixed from time to time by the board of directors or by such officer as may be designated by resolution of the board. The salaries or other compensation of any other officers, employees and other agents shall be fixed from time to time by the officer or committee to which the power to elect such officers or to retain or appoint such employees or other agents has been delegated pursuant to Section 5.03. No officer shall be prevented from receiving such salary or other compensation by reason of the fact that the officer is also a director of the corporation. ARTICLE VI CERTIFICATES OF STOCK, TRANSFER, ETC. Section 6.01. Share certificates. Certificates for shares of the corporation shall be in such form as approved by the board of directors, and shall state that the corporation is incorporated under the laws of Pennsylvania, the name of the person to whom issued, and the number and class of shares and the designation of the series (if any) that the certificate represents. The share transfer records and blank share certificates shall be kept by the secretary or by any transfer agent or registrar designated by the board of directors for that purpose. Section 6.02. Issuance. The share certificates of the corporation shall be numbered and registered in the transfer records of the corporation as they are issued. They shall be signed by the president or a vice president and by the secretary or an assistant secretary or the treasurer or an assistant treasurer, and shall bear the corporate seal, which may be a facsimile, engraved or printed; but where such certificate is signed by a transfer agent or a registrar the signature of any corporate office upon such certificate may be a facsimile, engraved or printed. In case any officer who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer because of death, resignation or otherwise, before the certificate is issued, it may be issued with the same effect as if the officer had not ceased to be such at the date of its issue. The provisions of this Section 6.02 shall be subject to any inconsistent or contrary agreement at this the between the corporation and any transfer agent or registrar. 19 Section 6.03. Transfer. Transfers or shares shall be made on the transfer records of the corporation upon surrender of the certificates therefor, endorsed by the person named in the certificates or by an attorney lawfully constituted in writing. No transfer shall be made inconsistent with the provisions of the Uniform Commercial Code, 13 Pa.C.S. Sections 8101 et seq., and its amendments and supplements. Section 6.04. Record holder of shares. The corporation shall be entitled to treat the person in whose name any share or shares of the corporation stand on the books of the corporation s the absolute owner thereof, and shall not be bound to recognize any equitable or other claim to, or interest in, such share or shares on the part of any other person. Section 6.05. Lost, destroyed or mutilated certificates. The, holder of any shares of the corporation shall immediately notify the corporation of any loss, destruction or mutilation of the certificate therefor, and the board of directors may, in its discretion, cause a new certificate or certificates to be issued to such holder, in case of mutilation of the certificate, upon the surrender of the mutilated certificate, upon satisfactory proof of such loss or destruction and, if the board of directors shall so determine, the deposit of a bond in such form and in such sum, and with such surety or sureties, as it may direct. ARTICLE VII INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHER AUTHORIZED REPRESENTATIVES Section 7.01. Scope of Indemnification. (a) General Rule. The corporation shall indemnify an indemnified representative against any liability incurred in connection with any proceeding in which the indemnified representative may be involved as a party or otherwise by reason of the fact that such person is or was serving in an indemnified capacity, including, without limitation, liabilities resulting from any actual or alleged breach or neglect of duty, error, misstatement or misleading statement, negligence, gross negligence or act giving rise to strict products liability, except: (1) where such indemnification is expressly prohibited by applicable law; (2) where the conduct of the indemnified representative has been finally determined pursuant to Section 7.06 or otherwise. (i) to constitute willful misconduct or recklessness within the meaning of 15 Pa.C.S. Section 1713 or any superseding provision of law sufficient in the circumstances to bar indemnification against liabilities arising from the conduct; or (ii) to be based upon or attributable to the receipt by the indemnified representative from the corporation of a personal benefit to which the indemnified representative is not legally entitled; or 20 (3) to the extent such indemnification has been finally determined in a final adjudication pursuant to Section 7.06 to be otherwise unlawful. (b) Partial Payment. If an indemnified representative is entitled to indemnification in respect of a portion, but not all, of any liabilities to which such person may be subject, the corporation shall indemnify such indemnified representative to the maximum extent for such portion of the liabilities. (c) Presumption. The termination of a proceeding by judgment, order, settlement or conviction or upon a plea of nolo contendera or its equivalent shall not of itself create a presumption that the indemnified representative is not entitled to indemnification. (d) Definitions. For purposes of this Article: (1) "indemnified capacity" means any and all past, present and future service by an indemnified representative in ore or more capacities as a director, officer, employee or agent of the corporation, as a director, officer, employee, agent, fiduciary or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other entity or enterprise; (2) "indemnified representative" means any and all directors and officers of the corporation and any other person designated as an indemnified representative by the board of directors of the corporation (which may, but need not, include any person serving at the request of the corporation, as a director, officer, employee, agent, fiduciary or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other entity or enterprise); (3) "liability" means any damage, judgment, amount paid in settlement, fine, penalty, punitive damages, excise tax assessed with respect to an employee benefit plan, or cost or expense, of any nature (including, without limitation, attorneys' fees and disbursements); and (4) "proceeding" means any threatened, pending or completed action, suit, appeal or other proceedings of any nature, whether civil, criminal, administrative or investigative, whether formal or informal, and whether brought by or in the right of the corporation, a class of its security holders or otherwise. Section 7.02. Proceedings initiated by indemnified representatives. Notwithstanding any other provision of this Article, the corporation shall not indemnify under this Article an indemnified representative for any liability incurred in a proceeding initiated" (which shall not be deemed to include counter-claims or affirmative defenses) or participated in as an intervenor or amicus curiae by the person seeking indemnification unless such initiation of or participation in the proceeding is authorized, either before or after its commencement, by the affirmative vote of a majority of the directors in office. This section does not apply to reimbursement of expenses incurred in successfully prosecuting or defending an arbitration under Section 7.06 or otherwise 21 successfully prosecuting or defending the rights of an indemnified representative granted by or pursuant to this Article. Section 7.03. Advancing expenses. The corporation shall pay the expenses (including attorneys' fees and disbursements) incurred in advance in good faith by an indemnified representative in advance of the final disposition of a proceeding described in Section 7.01 or 7.02 upon receipt of an undertaking by or on behalf of the indemnified representative to repay the amount if it is ultimately determined pursuant to Section 7.06 that such person is not entitled to be indemnified by the corporation pursuant to this Article. The financial ability of any indemnified representative to repay an advance shall not be a prerequisite to the making of such advance. Section 7.04. Securing of indemnification obligations. To further effect, satisfy or secure the indemnification obligations provided herein or otherwise, the corporation may maintain insurance, obtain a letter of credit, act as self-insurer, create a reserve, trust, escrow, cash collateral or other fund or account, enter into indemnification agreements, pledge or grant a security interest in any assets or properties of the corporation, or use any other mechanism or arrangement whatsoever in such amounts, at such costs, and upon such other terms and conditions as the board of directors shall deem appropriate. Absent fraud, the determination of the board of directors with respect to such amounts, costs, terms and conditions shall be conclusive against all security holders, officers and directors and shall not be subject to voidability. Section 7.05. Payment of indemnification. An indemnified representative shall be entitled to indemnification within 30 days after a written request for indemnification has been delivered to the secretary of the corporation. Section 7.06. Arbitration. (a) General rule. Any dispute related to the right to indemnification, contribution or advancement of expenses as provided under this Article, except with respect to indemnification for liabilities arising under the Securities Act of 1933 that the corporation has undertaken to submit to a court for adjudication, shall be decided only by arbitration in the metropolitan area in which the principal executive offices of the corporation are located at the time, in accordance with commercial arbitration rules then in effect of the American Arbitration Association, before a panel of three arbitrators, one of whom shall be selected by the corporation, the second of whom shall be selected by the indemnified representative and the third of whom shall be selected by the other two arbitrators. In the absence of the American Arbitration Association, or if for any reason arbitration under the arbitration rules of the American Arbitration Association cannot be initiated, or if one of the parties fails or refuses to select an arbitrator or if the arbitrators selected by the corporation and the indemnified representative cannot agree on the selection of the third arbitrator within 30 days after such time as the corporation and the indemnified representative have each been notified of the selection of the other's arbitrator, the necessary arbitrator or arbitrators shall be selected by the presiding judge of the court of general jurisdiction in such metropolitan area. 22 (b) Qualifications of arbitrators. Each arbitrator selected as provided herein is required to be or have been a director or executive officer of a corporation whose shares of common stock were listed during at least one year of such service on the New York Stock Exchange or the American Stock Exchange or quoted on the National Association of Securities Dealers Automated Quotations System. (c) Burden of proof. The party or parties challenging the right of an indemnified representative to the benefits of this Article shall have the burden of proof. (d) Expenses. The corporation shall reimburse an indemnified representative for the expenses (including attorneys' fees and disbursements) incurred in successfully prosecuting or defending such arbitration. (e) Effect. Any award entered by the arbitrators shall be final, binding and nonappealable and judgment may be entered thereon by any party in accordance with applicable law in any court of competent jurisdiction, except that the corporation shall be entitled to interpose as a defense in any such judicial enforcement proceeding any prior final judicial determination adverse to the indemnified representative under Section 7.01 (a)(2) in a proceeding not directly involving indemnification under this Article. This arbitration provision shall be specifically enforceable. Section 7.07. Contribution. If the indemnification provided for in this Article or otherwise is unavailable for any reason in respect of any liability or portion thereof, the corporation shall contribute to the liabilities to which the indemnified representative may be subject in such proportion as is appropriate to reflect the intent of this Article or otherwise. Section 7.08. Mandatory indemnification of directors, officers, etc. To the extent that an authorized representative of the corporation has been successful on the merits or otherwise in defense of any action or proceeding referred to in 15 Pa.C.S. Sections 1741 and 1742 or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees and disbursements) actually and reasonably incurred by such person in connection therewith. Section 7.09. Contract rights; amendments or repeal. All rights under this Article shall be deemed a contract between the corporation and the indemnified representative pursuant to which the corporation and each indemnified representative pursuant to which the corporation and each indemnified representative intend to be legally bound. Any repeal, amendment or modification hereof shall be prospective only and shall not affect any rights or obligations then existing. Section 7.10. Scope of article. The rights granted by this Article shall not be deemed exclusive or any other rights to which those seeking indemnification, contribution or advancement of expenses may be entitled under any statute, agreement, vote of shareholders or disinterested directors or otherwise both as to action in an indemnified capacity and as to action in any other capacity. The indemnification, contribution and advancement of expenses provided by or granted pursuant to this Article shall continue as to a person who has ceased to be an 23 indemnified representative in respect of matters arising prior to such time, and shall inure to the benefit of the heirs, executors, administrators and personal representatives of such a person. Section 7.11. Reliance on provisions. Each person who shall act as an indemnified representative of the corporation shall be deemed to be doing so in reliance upon the rights provided by this Article. Section 7.12. Interpretation. The provisions of this Article are intended to constitute bylaws authorized by 15 Pa.C.S.A. Section 513 (relating to non-exclusivity and supplementary coverage). ARTICLE VIII MISCELLANEOUS Section 8.01. Corporate Seal. The corporation shall have a corporate seal in the form of a circle containing the name of the corporation, the year of incorporation and such other details as may be approved by the board of directors. Section 8.02. Checks. All checks, notes, bills or exchange or other orders in writing shall be signed by such persons or persons as the board of directors or any person authorized by resolution of the board of directors may from time to time designate. Section 8.03. Contracts. (a) General Rule. Except as otherwise provided in the Business Corporation Law in the cases of transactions which require action by the shareholders, the board of directors may authorize any officer or agent to enter into any contract or to execute or deliver any instrument on behalf of the corporation, and such authority may be general or confined to specific instances. (b) Statutory form of execution of instruments. Any note, mortgage, evidence of indebtedness, contract or other document, or any assignment or endorsement thereof, executed or entered into between the corporation and any other person, when signed by one or more officers or agents having actual or apparent authority to sign it, or by the president or vide president and secretary or assistant secretary or treasurer or assistant treasurer of the corporation, shall be held to have been properly executed for and in behalf of the corporation, without prejudice to the rights of the corporation against any person who shall have executed the instrument in excess of his or her actual authority. Section 8.04. Interested directors or officers; quorum. (a) General rule. A contract or transaction between the corporation and one or more of its directors or officers or between the corporation and another corporation, partnership, joint venture, trust or other enterprise in which one or more of its directors or officers are directors or officers or have a financial or other interest, shall not be void or voidable solely for that reason, or solely because the director of officer is present at or participate in the meeting of the board of 24 directors that authorizes the contract or transaction, solely because his, or her or their votes are counted for that purpose, if: (1) the material facts as to the relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors and the board authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors even though the disinterested directors are less than a quorum; (2) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the shareholders entitled to vote thereon and the contract or transaction is specifically approved in good faith by vote of those shareholders; or (3) the contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified by the board of directors or the shareholders. (b) Quorum. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board which authorizes a contract or transaction specified in subsection (a). Section 8.05. Deposits. All funds of the corporation shall be deposited from time to time to the credit of the corporation in such banks, trust companies or other depositaries as the board of directors may approve or designate, and all such funds shall be withdrawn only upon checks signed by such one or more officers or employees as the board of directors shall from time to time determine. Section 8.06. Corporate Records. (a) Required records. The corporation shall keep complete and accurate books and records of account, minutes of the proceedings of the incorporators, shareholders and directors and a share registrar giving the names and addresses of all shareholders and the number and class of shares held by each. The share register shall be kept at either the registered office of the corporation in this Commonwealth or at its principal place of business wherever situated or at the office of its registrar or transfer agent. Any books, minutes or other records may be in written form or any other form capable of being converted into written form within a reasonable time. (b) Right of inspection. Every shareholder shall, upon written verified demand stating the purpose thereof, have a right to examine, in person or by agent or attorney, during the usual hours for business for any proper purpose, the share register, books and records of account, and records of the proceedings of the incorporators, shareholders and directors and to make copies of extracts therefrom. A proper purpose shall mean a purpose reasonably related to the interest of the person as a shareholder. In every instance where an attorney or other agent is the person who seeks the right of inspection, the demand shall be accompanied by a verified power of attorney or other writing that authorizes the attorney or other agent to so act on behalf of the shareholder. The 25 demand shall be directed to the corporation at its registered office in Pennsylvania or at its principal place of business wherever situated. Section 8.07. Amendment of By-Laws. These bylaws may be amended or repealed, or new by-laws may be adopted, either (i) by vote of the shareholders at any duly organized annual or special meeting of shareholders, or (ii) with respect to those matters which are not by statute reserved exclusively to the shareholders and regardless of whether the shareholders have previously adopted or approved the by-law being amended or repealed, by vote of a majority of the board of directors of thee corporation in office at any regular or special meeting of directors. Any change in these by-laws shall take effect when adopted unless otherwise provided in the resolution effecting the change. See Section 2.03(b) (relating to notice of action by shareholders on by-laws). 26 EX-10.29 4 j9925501exv10w29.txt AGREEMENT EXHIBIT 10.29 AGREEMENT This Agreement, made as of the 20th day of December, 2002 by and between TOLLGRADE COMMUNICATIONS, INC., a Pennsylvania corporation (the "Corporation") and ERIC SUCHARSKI, an individual residing in the Commonwealth of Pennsylvania and an employee of the Corporation (the "Executive"). WITNESSETH: WHEREAS, the Board of Directors of the Corporation has determined that it is in the best interests of the Corporation to enter into this Agreement with the Executive to provide for compensation of the Executive upon termination of employment under certain circumstances relating to a change in control of the Corporation; and WHEREAS, the Executive desires to obtain such benefits in the event the Executive's employment is terminated under the circumstances provided herein. NOW, THEREFORE, in consideration of the covenants and premises contained herein, and intending to be legally bound hereby, the parties hereto agree as follows: 1. DEFINITION OF TERMS. The following terms when used in this Agreement shall have the meaning hereafter set forth: "ANNUAL SALARY ADJUSTMENT PERCENTAGE" shall mean the mean average percentage increase in base salary for all elected officers of the Corporation during the two full calendar years immediately preceding the time to which such percentage is being applied; provided however, that if after a Change-in-Control, as hereinafter defined, there should be a significant change in the number of elected officers of the Corporation or in the manner in which they are compensated, then the foregoing definition shall be changed by substituting for the phrase "elected officers of the Corporation" the phrase "persons then performing the functions formerly performed by the elected officers of the Corporation." "CAUSE FOR TERMINATION" shall mean: (a) the deliberate and intentional failure by the Executive to devote substantially his entire business time and best efforts to the performance of his duties (other than any such failure resulting from the Executive's incapacity due to physical or mental illness or disability) after a demand for substantial performance is delivered to the Executive by the Board of Directors which specifically identifies the manner in which the Board of Directors believes that the Executive has not substantially performed his duties, or 1 (b) wilfully engaging by the Executive in conduct which constitutes a fraud against the Corporation or a material breach of this Agreement, or (c) the Executive's conviction of any crime which constitutes a felony. For purposes of this definition, no act, or failure to act, on the Executive's part shall be considered "deliberate and intentional" or "willfully" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that his action or omission was in the best interests of the Corporation. "CHANGE-IN-CONTROL" shall mean the determination (which may be made effective as of a particular date specified by the Board of Directors of the Corporation) by the Board of Directors of the Corporation, made by a majority vote that a change in control has occurred, or is about to occur. Such a change shall not include, however, a restructuring, reorganization, merger, or other change in capitalization in which the Persons who own an interest in the Corporation on the date hereof (the "Current Owners")(or any individual or entity which receives from a Current Owner an interest in the Corporation through will or the laws of descent and distribution) maintain more than a sixty-five percent (65%) interest in the resultant entity. Regardless of the Board's vote or whether or not the Board votes, a Change-in-Control will be deemed to have occurred as of the first day any one (1) or more of the following subparagraphs shall have been satisfied: (a) Any Person (other than the Person in control of the Corporation as of the date of this Agreement, or other than a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation, or a corporation owned directly or indirectly by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation), becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing more than thirty five percent (35%) of the combined voting power of the Corporation's then outstanding securities; or (b) The stockholders of the Corporation approve: (i) A plan of complete liquidation of the Corporation; (ii) An agreement for the sale or disposition of all or substantially all of the Corporation's assets; or (iii) A merger, consolidation, or reorganization of the Corporation with or involving any other corporation, other than a merger, consolidation, or 2 reorganization that would result in the voting securities of the Corporation outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least sixty-five percent (65%) of the combined voting power of the voting securities of the Corporation (or such surviving entity) outstanding immediately after such merger, consolidation, or reorganization. However, in no event shall a Change in Control be deemed to have occurred, with respect to the Executive, if the Executive is part of a purchasing group which consummates the Change-in-Control transaction. The Executive shall be deemed "part of the purchasing group" for purposes of the preceding sentence if the Executive is an equity participant or has agreed to become an equity participant in the purchasing company or group (except for (i) passive ownership of less than five percent (5%) of the voting securities of the purchasing company; or (ii) ownership of equity participation in the purchasing company or group which is otherwise deemed not to be significant, as determined prior to the Change-in-Control by a majority of the non-employee continuing Directors of the Board of Directors of the Corporation). "DATE OF TERMINATION" shall mean: (a) if the Executive's employment is terminated for Disability, the date that a Notice of Termination is given to the Executive; (b) if the Executive terminates due to his death or Retirement, the date of death or Retirement, respectively; (c) if the Executive decides to terminate employment upon Good Reason for Termination, the date following such decision specified by the Corporation after it has been notified of the Executive's decision to terminate employment; or (d) if the Executive's employment is terminated for any other reason, the date on which such termination becomes effective pursuant to a Notice of Termination. "DISABILITY" shall mean such incapacity due to physical or mental illness or injury as causes the Executive to be unable to perform his duties with the Corporation during 180 consecutive days. "GOOD REASON FOR TERMINATION" shall mean the occurrence of: (a) without the Executive's express written consent, the assignment to the Executive of any duties materially and substantially inconsistent with his positions, duties, responsibilities and status with the Corporation immediately prior to a Change-in-Control, or a material change in his reporting responsibilities, titles or offices as in 3 effect immediately prior to a Change-in-Control, or any removal of the Executive from or any failure to re-elect the Executive to any of such positions, except in connection with the termination of the Executive's employment due to Cause for Termination, Disability or Retirement (as hereinafter defined) or as a result of the Executive's death; (b) (i) a reduction by the Corporation prior to a Change-in-Control in the Executive's base salary unless such reduction is the result of the Board of Directors of the Corporation determining that the Executive has not adequately discharged his duties; (ii) a reduction by the Corporation after a Change-in-Control in the Executive's base salary as in effect immediately prior to any Change-in-Control or a failure by the Corporation after a Change-in-Control to increase the Executive's base salary by the Annual Salary Adjustment Percentage; (c) a failure by the Corporation to continue to provide incentive compensation comparable to that provided by the Corporation immediately prior to any Change-in-Control; (d) a failure by the Corporation after a Change-in-Control to continue in effect any benefit or compensation plan, stock option plan, pension plan, life insurance plan, health and accident plan or disability plan in which the Executive is participating immediately prior thereto (provided, however, that there shall not be deemed to be any such failure if the Corporation substitutes for the discontinued plan, a plan providing the Executive with substantially similar benefits) or the taking of any action by the Corporation which would adversely affect the Executive's participation in or materially reduce the Executive's benefits under any of such plans or deprive the Executive of any material fringe benefit enjoyed by the Executive immediately prior to a Change-in-Control (provided, however, that any act or failure to act by the Corporation that is on a plan-wide basis, i.e., it similarly affects all employees of the Corporation or all employees eligible to participate in any such plan, as the case may be, shall not constitute Good Reason for Termination); (e) the failure of the Corporation to obtain the assumption of this Agreement by any successor as contemplated in SECTION 10(c) hereof; (f) any purported termination of the employment of the Executive by the Corporation which is not (i) due to the Executive's Disability, Retirement (as hereinafter defined) or Cause for Termination, or (ii) effected as a Notice of Termination, as defined herein; or (g) the Corporation's requiring the Executive to be based anywhere other than the Corporation's executive offices at which the Executive has his principal office 4 immediately prior to a Change-in-Control or executive offices located within 50 miles of the location of the Corporation's executive offices immediately prior to a Change-in-Control, except for required travel on the Corporation's business to an extent substantially consistent with the Executive's present business travel obligations. "NOTICE OF TERMINATION" shall mean a written statement which sets forth the specific reason for termination and, if such is claimed to be a Cause for Termination or Good Reason for Termination, in reasonable detail the facts and circumstances which indicate that such is Cause for Termination or Good Reason for Termination. "OPTIONS" shall mean any stock options issued pursuant to any present or future stock option plan of the Corporation. "PERSON" shall have the meaning ascribed to such term in Section 3(a)(9) of the Securities Exchange Act of 1934, as in effect on the date hereof and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) thereof. "RETIREMENT" shall mean the termination of the Executive's employment after age 65 or in accordance with any mandatory retirement arrangement with respect to an earlier age agreed to by the Executive. "STOCK APPRECIATION RIGHT" shall mean any stock appreciation rights issued pursuant to any stock option plan of the Corporation or any future stock appreciation rights plan. 2. TERMS OF EMPLOYMENT. The Executive acknowledges that this Agreement does not constitute an employment contract and that the Executive's employment relationship with the Corporation is at-will and not for any particular period. Rather, this Agreement is only intended to set forth certain liquidated damages to be paid in the event of termination of the Executive upon the terms and conditions specified herein. 3. TERM OF AGREEMENT. The initial term of this Agreement shall be for a period of four (4) years. Upon expiration of the initial term, the Company shall, in its sole discretion, determine whether this Agreement shall be renewed upon such terms it deems advisable. 4. PAYMENTS FOLLOWING TERMINATION OF EMPLOYMENT UPON A CHANGE-IN-CONTROL. (a) If the Executive's employment with the Corporation shall be terminated: (i) due to the Executive's death, (ii) by the Executive other than the Executive's having terminated for Good Reason for Termination following a Change-in-Control, or 5 (iii) by the Corporation due to Cause for Termination or for Disability or Retirement, then the Corporation shall have no obligations to the Executive other than to pay the Executive any unpaid portion of base salary due until the Date of Termination and any other sums due in accordance with the then various policies, practices and benefit plans of the Corporation. (b) If the Executive's employment with the Corporation shall have terminated during the period commencing six months prior to the date of a Change-in-Control and ending on the third anniversary of a Change-in-Control other than in the circumstances described in subsection (a) above, then the Corporation shall pay on or before the fifth day following the Date of Termination (or if the Date of Termination preceded the date of the Change-in-Control, on or before the fifth day following the date of the Change-in-Control), to the Executive the following sums: (i) in cash any unpaid portion of the Executive's full base salary for the period from the last period for which the Executive was paid to the Date of Termination, or the date of the Change-in-Control, as the case may be; and (ii) an amount in cash as liquidated damages for lost future renumeration equal to the product obtained by multiplying (A) the lesser of (1) two, or (2) a number equal to the number of calendar months remaining from the Date of Termination to the date on which the Executive is 65 years of age (or, if earlier, the age agreed to by the Executive pursuant to any prior arrangement) divided by twelve, or (3) a number equal to the greater of (i) one (1.0) or (ii) thirty six (36) less the number of completed months commencing after the date of the Change-in-Control during which the Executive was employed by the Corporation and did not have Good Reason for Termination times (iii) one-twelfth (1/12) times (B) the sum of 6 (1) the greater of (i) the Executive's annual base salary for the year in effect on the Date of Termination (provided that in the case of Termination for Good Reason by the Executive the date immediately preceding the date of the earliest event which gave rise to the Termination for Good Reason by the Executive shall be used instead of the Date of Termination) or (ii) the Executive's annual base salary for the year in effect on the date of the Change-in-Control; plus (2) the greater of (i) the average annual cash award received by the Executive as incentive compensation or bonus for one calendar year immediately preceding the Date of Termination (provided that in the case of Termination for Good Reason by the Executive the date immediately preceding the date of the event which gave rise to the Termination for Good Reason by the Executive shall be used instead of the Date of Termination) or (ii) the average annual cash award received by the Executive as incentive compensation or bonus for one calendar year immediately preceding the date of the Change-in-Control. 5. OUTPLACEMENT SERVICES. If the Executive's employment with the Corporation should terminate under circumstances as to entitle the Executive to receive payment hereunder, the Corporation shall reimburse the Executive for any reasonable fees or other costs incurred by the Executive during the two (2) years following the Date of Termination in retaining executive placement agencies, up to a maximum dollar amount not to exceed fifteen percent (15%) of the Executive's base salary at the time of such termination. Such reimbursement shall be made within 7 five (5) days following the Executive's presentment of bills or other evidence of the costs incurred with executive placement agencies. 6. TAX IMPLICATIONS. If any payment due to the Executive pursuant to this Agreement result in a tax being imposed on the Executive pursuant to Section 4999 of the Internal Revenue Code of 1954, as amended, or any successor provision ("Section 4999"), then the Corporation shall, at the Executive's option, either (i) reduce the total payments payable to the Executive to the maximum amount payable without incurring the Section 4999 tax, or (ii) pay to the Executive the total amount payable, with the understanding that Section 4999 tax will be due on that total amount. 7. BENEFITS. If the Executive's employment with the Corporation should terminate under circumstances as to entitle the Executive to receive payment hereunder, the Executive shall also be deemed, for purposes of medical insurance, pension and other benefits of the Corporation, to have remained in the continuous employment of the Corporation for the two (2) year period following the Date of Termination and shall be entitled to all of the medical insurance, pension or other benefits provided by the Corporation as if the Executive had so remained in the employment of the Corporation. If, for any reason, whether by law or provisions of the Corporation's employee medical insurance, pension or other benefit plans, or otherwise any benefits which the Executive would be entitled to under this SECTION 6 cannot be paid pursuant to such employee benefit plans, then the Corporation contractually agrees to pay the Executive the difference between the benefits which the Executive would have received in accordance with this Section if the relevant employee medical insurance, pension or other benefit plan could have paid such benefit and the amount of benefits, if any, actually paid by such employee medical insurance, pension or other benefit plan. The Corporation shall not be required to fund its obligation to pay the foregoing difference. 8. OTHER EMPLOYMENT. In the event of termination under the circumstances contemplated in SECTION 4(b) hereunder, the Executive shall have no duty to seek any other employment after termination of his employment with the Corporation and the Corporation hereby waives and agrees not to raise or use any defense based upon the position that the Executive had a duty to mitigate or reduce the amounts due him hereunder by seeking other employment whether suitable or unsuitable and should the Executive obtain other employment, then the only effect of such on the obligations of the Corporation shall be that the Corporation shall be entitled to credit against any payments that would otherwise be made pursuant to SECTION 7 hereof, any comparable payments to which the executive is entitled under the employee benefit plans maintained by the Executive's other employer or employers in connection with services to such employer or employers after termination of this employment with the Corporation. 9. STOCK APPRECIATION RIGHTS AND OPTIONS. If the Executive's employment should terminate under circumstances as to entitle the Executive to receive payment hereunder, then with respect to any standing Stock Appreciation Rights and/or Options which did not immediately become exercisable upon the occurrence of a Change-in-Control, such Stock Appreciation Right or Option shall be automatically vested and remain outstanding in accordance with its terms and be exercisable thereafter until the stated expiration date of such Stock Appreciation Right or Option. 8 10. MISCELLANEOUS. (a) This Agreement shall be construed under the laws of the Commonwealth of Pennsylvania. (b) This Agreement constitutes the entire understanding of the parties hereto with respect to the subject matter hereof and may only be amended or modified by written agreement signed by the parties hereto. This Agreement specifically supercedes the agreement entered into between the Corporation and the Executive dated as of August 5, 1996 with respect to the subject matter hereof, and by the execution of this Agreement, the previous agreement is hereby terminated and of no further force and effect. (c) The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation, by agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner required of the Corporation and to perform it as if no such succession had taken place. As used in this Agreement, "Corporation" shall mean the Corporation as hereinbefore defined and any successor to its business and/or assets as aforesaid which executes and delivers the agreement provided for in this subsection (c) or which otherwise becomes bound by all of the terms and provisions of this Agreement by operation of law. (d) This Agreement shall inure to the benefit of and be enforceable by the Executive and the Corporation and their respective legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designee or, if there be no such designee, to his estate. (e) Any notice or other communication provided for in this Agreement shall be in writing and, unless otherwise expressly stated herein, shall be deemed to have been duly given if mailed by United States registered mail, return receipt requested, postage prepaid, addressed in the case of the Executive to his office at the Corporation with a copy to his residence and in the case of the Corporation to its principal executive offices, attention to the Chief Executive Officer. (f) No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing signed by the Executive and approved by resolution of the Board of Directors of the Corporation. No waiver by 9 either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. (g) The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or unenforceability of any other provision of this Agreement, which shall remain in full force and effect. If any provision hereof shall be deemed invalid or unenforceable, either in whole or in part, this Agreement shall be deemed amended to delete or modify, as necessary, the offending provision and to alter the bounds thereof in order to render it valid and enforceable. (h) This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which taken together will constitute one and the same instrument. (i) If litigation should be brought to enforce, interpret or challenge any provision contained herein, the prevailing party shall be entitled to its reasonable attorney's fees and disbursements and other costs incurred in such litigation and, if a money judgment be rendered in favor of the Executive, to interest on any such money judgment obtained calculated at the prime rate of interest in effect from time to time at Mellon Bank, N.A., from the date that the payment should have been made or damages incurred under this Agreement. IN WITNESS WHEREOF, this Agreement has been executed on the date first above written. TOLLGRADE COMMUNICATIONS, INC. By: /s/ Sara M. Antol, Secretary ------------------------------------ /s/ Eric Sucharski ---------------------------------------- 10 EX-10.30 5 j9925501exv10w30.txt AMENDMENT EXHIBIT 10.30 AMENDMENT THIS AMENDMENT, dated as of December 20, 2002 and effective as of December 13, 2002 (the "Amendment") is entered into between TOLLGRADE COMMUNICATIONS, INC. ("Tollgrade") and CHRISTIAN L. ALLISON (the "Executive"). AMENDMENT TO AGREEMENT WHEREAS, Tollgrade and the Executive entered into an Agreement dated as of the 13th day of December, 1995, as amended, governing the employment of Executive and certain benefits to be received by Executive in the event his employment is terminated (collectively, the "Agreement"); and WHEREAS, Tollgrade and the Executive desire to amend the Agreement upon the terms and conditions stated in this Amendment. NOW, THEREFORE, in consideration of the promises and the faithful performance of the mutual covenants herein contained, and intending to be legally bound hereby, Tollgrade and the Executive agree as follows: 1. Capitalized terms used herein and not otherwise defined shall have the meaning assigned to them in the Agreement. 2. The Agreement shall be amended to extend the salary terms as currently in effect until December 13, 2003. 3. Except as modified by this Amendment, the provisions of the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above. TOLLGRADE COMMUNICATIONS, INC. By: /s/Sara M. Antol /s/ Christian L. Allison -------------------------------- ---------------------------------- Title: General Counsel & Secretary Christian L. Allison ----------------------------- EX-10.32 6 j9925501exv10w32.txt LEASE EXHIBIT 10.32 L E A S E This is a Lease, dated February 18, 2003, between LAKEWOOD RANCH PROPERTIES, L.L.C, A FLORIDA LIMITED LIABILITY COMPANY, hereinafter referred to as "Landlord," and TOLLGRADE COMMUNICATIONS, INC., a Pennsylvania corporation, hereinafter referred to as "Tenant." In consideration of the rents to be paid hereunder, the mutual promises and covenants contained herein, and for other good and valuable consideration, Landlord and Tenant hereby covenant and agree as follows: 1. DEMISE OF PREMISES. Landlord does hereby lease to Tenant, and Tenant does hereby rent from Landlord, the real property located on the first floor of the office building with a street address of 7020 Professional Parkway, Sarasota, Florida 34240, and as depicted on EXHIBIT "A" annexed hereto, together with all improvements located thereon and all of Landlord's easements and privileges appertaining to or used in connection therewith, hereinafter referred to as the "Premises." Tenant shall have the exclusive use of the Premises during the term of the Lease. For purposes of this Lease, the term "Property" shall mean the entire building located at the above address (including the Premises) as well as all land and improvements adjoining same. The legal description of such of the Property is described as EXHIBIT "B", which is attached hereto and by this reference is incorporated herein and made a part hereof. 2. TERM. The initial term of this Lease shall commence as soon as (A) a Certificate of Occupancy is issued for Tenant at the Premises, and (B) the first shall occur of the following (i) Tenant takes possession of the Premises, or (ii) April 28, 2003. The initial Lease term shall terminate on midnight on the last day of the calendar month which falls five (5) full years from the month in which the initial term of this Lease commences. By way of example, if the initial Lease term commences in mid-April 2003, then the initial Lease term will expire on the last day of the month in April 2008. Provided that this Lease is not previously terminated by either party or automatically, as hereinafter provided, by operation of law or otherwise, then Tenant shall have the option to renew this Lease for an additional term of five (5) years, subject to the same terms and conditions as in this Lease, including the possible annual rental increases based upon increases as specified in Section 3 below. Accordingly, the rental rate for the first year of the renewal term will equal the rental rate for the last year of the initial five (5) year term as increased by the Consumer Price Index adjustment described in Section 3 below. For clarification purposes, the base rental, for each year under this Lease, whether initial term or renewal term, shall be adjusted from the prior year, based upon the Consumer Price Index formula described in Section 3 hereof. Tenant, in order to exercise the above option to renew, shall give to Landlord or Landlord's successors and assigns, written notice of the exercising of said option, on or before one hundred eighty (180) days prior to the expiration of the then existing Lease term. Time is of the essence of this provision. 3. RENT. Tenant agrees to pay to Landlord, as annual base rent hereunder, the sum of $13.25 per square foot of rentable area of the Premises. The precise rentable area of the Premises is hereby agreed to be 22,122 square feet. Base rent shall be paid in consecutive monthly installments of Twenty-Four Thousand Four Hundred Twenty-Six Dollars and Thirty-Eight Cents ($24,426.38) on or before the first (1st) day of every calendar month during the term of the Lease, commencing on the commencement date of the Lease term as determined in accordance with Section 2 hereof. All rent payable under this Lease shall be paid without deduction or offset. Rent for partial months shall be prorated. Base rent shall be in addition to any tax imposed by the State of Florida on rentals. Base rent plus sales tax shall be paid to Landlord C/O JOHN A. MORAN, 22 SOUTH LINKS AVENUE, SUITE 300, SARASOTA, FLORIDA 34236, or such other address as Landlord shall hereafter designate in writing. The covenant of Tenant to pay rent hereunder shall be independent of any other covenant contained in this Lease. Notwithstanding anything stated herein to the contrary, the parties agree that the base rent for the first three (3) full calendar months of the Lease term shall be as follows: First (1st) full calendar month $ 4,426.38 plus tax Second (2nd) full calendar month $ 4,426.38 plus tax Third (3rd) full calendar month $14,426.38 plus tax
In addition to the base rent, Tenant shall also be responsible for a pro rata portion of the Common Area Maintenance (see item 4), which shall be paid by Tenant as provided in this Lease. Tenant shall be responsible for all sales tax payments on any rent payments made under this Lease. Commencing on the First Anniversary Date of the first (1st) full calendar month of this Lease and adjusted each Anniversary Date thereafter the base rent hereunder shall be increased by the percentage, if any, of increase in the Consumer Price Index as of such Anniversary Date over that which existed on the commencement of the term of this Lease; provided, however, that said increase shall in no event exceed three percent (3%) per annum during the initial term (but such cap shall not apply to the renewal term). Such increase shall be determined by Landlord who shall notify Tenant thereof, in writing, not less than thirty (30) days in advance of each Anniversary Date, and such notice shall include -2- for Tenant's review, Landlord's calculations relating to any asserted increase. Tenant shall pay the increased rental to the Landlord for the period of time elapsing between the Anniversary Date and notice of such increase upon request by Landlord. Thereafter the increase shall be payable equally with the regular rental payments. The term "Consumer Price Index" shall mean the Consumer Price Index as now published by the U.S. Bureau of Labor Statistics under the caption: "United States City Average for Urban Wage Earners and Clerical Workers All Items" or any revision or equivalent thereof hereafter published by that Bureau, or, if there ceases to be any such publication, then any substantially equivalent Price Index generally recognized as authoritative, designated by Landlord. In the event that Tenant does not pay the full base rental payment, additional rental payment, or other payment due hereunder within five (5) days of the due date, then a late payment penalty of five percent (5%) of the total amount due shall be charged and shall be immediately due and payable. Landlord is not obligated to accept any rental payment if all applicable or accrued late charges are not paid. The extension of time or times for payment of any installment or payment due hereunder or the acceptance by Landlord of any payment other than as provided for herein shall not constitute a waiver or release of the rights of Landlord to insist on having any or all of the said payments of rent, late fee(s), or other payments due hereunder made in the manner and at the time herein specified. 4. COMMON AREA MAINTENANCE. 4.1 Common Areas Landlord shall make available within the Property such Common Areas as Landlord in its sole discretion shall deem appropriate, subject to the provisions of this Section 4.1. For purposes of this Lease, the term "Common Areas" shall mean the pedestrian sidewalks, truckways, driveways, parking areas, loading docks, hallways, lobby, corridors, delivery areas, elevators, ramps, stairs, public restrooms and comfort stations, landscaped and planted areas, and all other areas or improvements provided by Landlord for the convenience and use of the tenants of the Property and their respective officers, employees, agents, customers, contractors, subtenants, licensees, concessionaires and invitees, not located within the Premises or other leased or leasable areas of the Property. Landlord shall operate, manage, equip, light, repair and maintain said Common Areas for their intended purposes in such manner as Landlord, in its sole and absolute discretion, shall determine in conformity with prevailing standards for similar space in the region of Sarasota, Florida, and Landlord reserves -3- the right to change from time to time the size, location, nature and use of any Common Area, to sell or lease any portion thereof and to make additional installations therein and to move and remove the same and Landlord shall not be subject to liability therefore nor shall Tenant be entitled to any compensation, or diminution or abatement of rent, nor any such action be deemed an actual or a constructive eviction of Tenant; provided, however, that Landlord shall not materially diminish any service to Tenant or make any change that will materially (a) diminish the area of the Property or the Premises; (b) interfere with access to the Premises; (c) change the location of the entrances to the Premises; (d) interfere with Tenant's quiet use and enjoyment of the Premises. Any change by Landlord in the arrangement or location of all or any part of the Common Areas shall be accomplished by Landlord within a reasonable period of time. The Common Area Maintenance (sometimes referred to herein as CAM expenses), shall include all reasonable and customary costs and expenses paid or incurred by Landlord in the operation, maintenance, servicing and management (however, management fees shall not exceed rates generally paid to unaffiliated third parties for management of similar space in the region of Sarasota, Florida) of that portion of the Property not directly leased to Tenant as part of this Lease, but which relates to the use of the Premises by Tenant and shall also include the property located outside the air conditioned space of the Premises; including but not limiting the generality of the foregoing, utilities and water and sewer charges, grounds maintenance, window washing, air conditioning repair and maintenance, security, pest control, elevator maintenance and repair, fire sprinkler maintenance and repair, building cleaning, painting, supplies, maintaining, repairing and replacing the roof, parking lot maintenance and resurfacing, liability, casualty, and property damage insurance, management fees, professional fees and administration expenses relative to the operation of the building, real property taxes, property owners' association fees, garbage and trash collection and removal, and such other miscellaneous items which may be related in any way to the operation or maintenance of the Premises and indoor property. For clarification purposes, Tenant shall only be responsible for its pro rata share of any CAM expenses as provided in Sections 4.3 and 4.4 hereof. For purposes of identification, without limiting the specific items which would otherwise be considered Common Area Maintenance, the parties hereby incorporate EXHIBIT "C" and by this reference, such Exhibit is hereby incorporated herein and made a part hereof. In the event that Landlord experiences expenses that are not specified on EXHIBIT "C" annexed hereto, but which are customarily treated as Common Area Maintenance expenses, with respect to leases between third parties for similar space in the region of Sarasota, Florida, Landlord shall so notify Tenant, such notification to include the type and -4- extent of such expense, and such expense shall be added to Common Area Maintenance expense charges and include in EXHIBIT "C" as an item of same. With regard to any items of capital improvement which relate to the Common Areas, Landlord shall reserve and plan for the cost of such items, as part of the common area maintenance charges to Tenant. In addition, Landlord and Tenant agree that the cost of replacement of any heating, ventilating and/or air conditioning equipment or component thereof serving the Premises shall be considered a capital improvement and shall be included in the planning for Common Area Maintenance charges and shall be reserved by Landlord. Accordingly, Landlord assumes that such equipment is under the standard five (5) year Manufacturers Warranty for major components. 4.2 Use of Common Areas During the term of this Lease only, Tenant and its officers, employees, agents, customers, contractors, subtenants, licensees, concessionaires and invitees shall have the non-exclusive right, in common with Landlord and all others to whom Landlord has or may hereafter grant rights, to use the Common Areas as designated from time to time by Landlord, subject to such reasonable rules and regulations as Landlord may from time to time impose, including the designation of specific areas in which cars owned by Tenant, its permitted officers, employees, agents, customers, contractors, subtenants, licensees, concessionaires and invitees must be parked. If Landlord shall designate such parking areas and if any car of Tenant or the foregoing related parties is parked in any other portion of the Property, Tenant hereby authorizes Landlord to tow or cause any such car to be towed from the Property, and agrees to reimburse Landlord for the cost thereof upon demand, and to otherwise indemnify and hold Landlord harmless with respect thereto. Tenant agrees after notice thereof to abide by such rules and regulations and to use its best efforts to cause its permitted officers, employees, agents, customers, contractors, subtenants, licensees, concessionaires and invitees to conform thereto. Landlord may at any time close temporarily any Common Area to make repairs or changes, to prevent the acquisition of public rights in such areas and to discourage parking that does not conform hereto, and Landlord shall not be subject to liability therefore nor shall any such action be deemed an actual or constructive eviction of Tenant. Landlord may do such other acts in and to the Common Areas as in its judgment may he desirable to improve the convenience thereof, subject to the provisions of this Section 4.2. Tenant shall not at any time interfere with the rights of Landlord and other tenants of the Property, its and their officers, employees, agents, customers, contractors, subtenants, licensees, concessionaires and invitees, to use any part of the parking areas and other Common Areas. Neither Tenant -5- nor Tenant's officers, employees, agents, customers, contractors, subtenants, licensees, concessionaires or invitees may solicit business in the parking or other Common Areas or distribute any handbills or other advertising matter in such areas or place any such handbills or advertising matter in or on any automobiles parked therein without Landlord's prior written consent. Landlord reserves the right to grant to third persons the non-exclusive right to cross over and use in common with Landlord and all tenants of the Property the Common Areas as designated from time to time by Landlord. 4.3 Charge for Common Areas Tenant's pro rata share of the Common Areas costs shall be the portion of such costs which the floor area of the Premises bears to the gross leasable area in the building in which the Premises are located. Tenant shall pay to Landlord, in the manner provided in 4.4 (immediately following) Tenant's pro rata share of the Common Area maintenance costs. Accordingly, since the rentable area of the Premises is 22,122 square feet and the total rentable area of the building is 38,644 square feet, then Tenant's pro rata portion is equal to 57.25% of such total common area costs. 4.4 CAM Expenses Tenant shall pay to Landlord, during the calendar year 2003, the sum of $3.50 per square foot of the Premises leased by Tenant, per year, payable in advance in equal monthly installments, and pro rated by the number of months (and days of any partial month) of calendar year 2003 that fall within the initial term, without prior demand therefore, toward CAM Expenses. At the end of each calendar year, Landlord shall determine Tenant's pro rata share of the CAM Expenses actually incurred by Landlord during such period and such information shall be provided to Tenant. Landlord shall maintain books and records of its CAM Expenses in accordance with sound accounting and management practices and such information shall be provided to Tenant along with the calculation, which Landlord makes, for the preceding calendar year and Tenant shall have the right to inspect such books and records at any time prior to the date that is one (1) year after the expiration of the calendar year to which such books and records pertain. In the event Tenant's pro rata share of such costs as determined by Landlord exceeds the sums paid by Tenant during the calendar year in which such costs are incurred, Tenant shall pay to Landlord the excess within fifteen (15) days of Tenant's receipt of such request from Landlord. In such case, subsequent monthly payments for Tenant's pro rata share of CAM Expenses shall be adjusted so that the monthly payments for the next calendar year will be based on the actual CAM Expenses incurred for the preceding calendar year. In no event will Tenant's payments hereunder be less than that described in the first sentence of this Section 4.4. -6- If the Lease expires during a partial calendar year, Landlord shall bill Tenant, not more than sixty (60) days prior to the expiration date of the Lease, for its estimated pro rata share of CAM Expenses for the partial calendar year. Tenant shall remit full payment to Landlord within fifteen (15) days of such bill. If Tenant fails to remit such full payment to Landlord, Landlord, in its sole discretion, may deduct the amount due from Tenant's security deposit described in Section 6 hereof and be entitled to all other rights and remedies hereunder for Tenant's default. Notwithstanding anything stated in this Section 4.4 to the contrary, Landlord agrees to provide to Tenant, during the first full year of this Lease Term, a Five Thousand Dollar ($5,000.00) allowance to be applied towards the routine preventative maintenance and repair of (A) HVAC system serving the Premises, and (B) the plumbing system serving the Premises. Tenant agrees to contact Landlord's property manager to coordinate and upon presentment of an invoice to Tenant, Tenant agrees to promptly provide such invoice to Landlord for payment after receiving Tenant's authorization and approval for payment. 5. NET LEASE. The parties acknowledge that this is a Triple Net Lease and, as such, Tenant will keep the interior of the building on the Premises, including plumbing, air conditioning and electrical service serving the Premises, in good maintenance and repair and in clean and sanitary condition during the term of this Lease and any renewal terms, at Tenant's sole expense, and Tenant will comply with all governmental ordinances and directions of proper public officers in connection with such maintenance during the term of this Lease, and at the end of said term and/or any renewal term hereof, as the case may be, will yield up the Premises to Landlord in good condition, ordinary wear and tear excepted. Tenant further agrees to maintain all glass, including plate glass and any special glass, store front or equipment, at its sole expense, and shall replace the same with glass of the same size and quality in the event of breakage or damage to any such glass. Any janitorial service desired for the Premises, to the extent not included in the CAM services for the building, shall be Tenant's sole responsibility and cost. EXHIBIT "C" details how certain expense items will be handled and by this reference, said Exhibit is incorporated herein and made a part hereof. 6. SECURITY DEPOSIT. Landlord acknowledges the receipt of the sum of Sixty-one Thousand Seven Hundred Fifty-Seven Dollars and Twenty-Five Cents ($61,757.25) as a deposit, without liability for interest thereon, as security for the full and faithful performance by Tenant of each and every covenant and agreement of this Lease. It is expressly agreed that the -7- security deposit shall not be considered an advance payment of rent, nor is it a measure of landlord's damages in the event of Tenant's default. In the event that Tenant fails to materially comply with all of the terms and covenants of this Lease, Landlord may, without prejudice to its other available remedies, use the said security deposit to cure any defaults of Tenant, and Tenant shall promptly upon demand, restore said security deposit to the amount which had been on deposit prior to Landlord's use thereof. The full security deposit of Tenant hereunder, or such portion that has not been applied by Landlord to cure defaults of Tenant hereunder, shall be returned in full, without interest, to Tenant upon the termination hereof. 7. EXCULPATION. Landlord shall not be liable for any injury to Tenant's business or loss of income from it, or for damage to its personal property or that of its officers, employees, agents, customers, contractors, subtenants, licensees concessionaires and invitees or any other person in or on the Premises, or for injury to such persons or parties, caused by casualty or accident, regardless of the cause, unless the cause is due to the negligence or willful misconduct of Landlord (including, for such purposes, parties acting at or under the direction, on behalf of, or in furtherance of the interests of Landlord) or a defect or condition in the Property or the Premises that is not attributable to Tenant. Landlord shall not be liable to Tenant for any claim or demand arising from any act or omission of any other tenant in the building in which the Premises is located unless such act or omission is due to the negligence or willful misconduct of Landlord. 8. SUBORDINATION. This Lease shall be subject and subordinate at all times to the lien of any mortgage or mortgages, now encumbering the Premises, or which Landlord may at any time place against the Premises. Tenant agrees to execute such documents as may be reasonably requested by any mortgagee to evidence the subordination contained herein, provided that such documents to not materially diminish Tenant's rights under this Lease; and provided, however, that as a condition of such subordination, the holder of such mortgage shall be required to agree with Tenant that, notwithstanding the foreclosure of such mortgage, Tenant's occupancy of the Premises shall not be disturbed so long as Tenant is not in default hereunder and attorns to such Mortgagee and agrees to perform all obligations owed to Landlord hereunder for the benefit of such Mortgagee. 9. CONSTRUCTION OF IMPROVEMENTS. Landlord covenants with Tenant that in the event of defects in construction or workmanship relative to any improvements to be constructed pursuant hereto (including, without limitation, pursuant to Section 41 hereof), Landlord shall use all reasonable efforts to procure correction of the same by the contractor or subcontractor involved. In no event, however, so long as the Premises are usable for their intended purposes shall Tenant be -8- entitled to withhold or abate rental pending correction of repairs. 10. ALTERATIONS BY TENANT. Landlord agrees that Tenant may make, at its own expense, any minor non-structural alterations, repairs, replacements or additions to the Property or the Premises, provided: A. Any such alterations, repairs, replacements or additions shall not lessen the value of the Property as it shall be at the commencement of this Lease; and, B. Tenant shall perform such alterations, repairs, replacements or additions, in accordance with the statutes, ordinances, rules, regulations and orders of all public or quasipublic authorities having jurisdiction thereof and in accordance with the rules and regulations of the local board of Fire Insurance Underwriters; and, C. The Premises and the Property shall at all times be kept free and clear of all mechanic's, materialmen's, labor or other liens or claims of liens, and Tenant agrees to indemnify and save harmless Landlord from all claims, demands and liability, including damage to person or property arising out of or in connection with any such work; and, D. At all reasonable times during the progress of such construction work, Landlord or persons authorized by Landlord, shall have the right to go upon the Premises for the purpose of inspecting the construction work then in progress; and, E. Tenant shall, at its sole expense, provide Landlord with a set of as-built construction drawings within fifteen (15) days of completion of the work provided for herein. Said as-built drawings shall become a part of this Lease, as though attached hereto. F. Tenant shall, at the expiration of the term of the Lease, and at Tenant's expense, remove any partitions constructed by Tenant, upon request by Landlord. Tenant covenants and agrees with Landlord that Tenant shall not make any material additions or alterations or structural changes in or about the Premises, without first submitting plans and specifications thereof to Landlord, and obtaining the written approval of Landlord. Upon obtaining such written approval, Tenant may make such additions or alterations at Tenant's sole cost and expense and subject to the obligations of subparagraphs A - F above, inclusive, and providing that such additions or alterations do not damage the building or endanger its support or stability. Such additions, alterations, or improvements (except trade fixtures), put in at the expense of Tenant, as aforesaid, shall be and become a part of the Premises and at the termination -9- of this Lease, the same shall remain the property of Landlord. Tenant shall have the right to remove Tenant's trade fixtures provided the walls, floors and ceilings are restored to the condition existing on the date of commencement of this Lease. Nothing in the lease shall be construed to authorize Tenant or any person dealing with or under Tenant, to charge the rents of the Premises or the Property, or the interest of Landlord in the estate of the Premises, or any person under and through whom Landlord has acquired its interest in the estate of the Premises, with a mechanics' lien or encumbrance of any kind, and under no circumstances shall Tenant be construed to be the agent, employee or representative of Landlord in the making of any such alterations or improvements to the Premises, but on the contrary, the right or power to charge any lien, claim or encumbrance of any kind against Landlord's rents or the Premises or said land is denied. In the event of the filing of any such lien, Tenant will promptly pay same and take steps immediately to have same removed. Landlord acknowledges that Tenant anticipates certain alterations to the Premises and/or the Property prior to occupying the Premises, and that time is of the essence in Tenant's commencement, performance and completion of such alterations. Accordingly, Landlord shall fully cooperate with Tenant in facilitating the expeditious commencement, performance and completion of such alterations, including, without limitation, permitting Tenant access to the Premises at all times, provided that Tenant undertakes appropriate security measures to protect the Premises and the Property during any nonbusiness hours that Tenant conducts such alterations, and provided that Tenant shall reimburse Landlord for such additional expenses (including, without limitation, additional electricity charges) as Landlord incurs therein. 11. USE OF PREMISES; QUIET ENJOYMENT. The Premises shall be used by Tenant solely for its office and/or light manufacturing purposes, and related uses. Tenant agrees that Tenant shall not sell or permit to be kept, used or sold in or about the Premises any articles which may be prohibited by standard form fire insurance policies. Tenant further agrees that Tenant will not use the Premises, or permit the same to be used, for any unlawful, immoral, obnoxious or offensive business or practice. If and so long as Tenant pays the rent and other amounts due hereunder and observes and performs all of the covenants, conditions and provisions on Tenant's part to be observed and performed hereunder, Tenant shall and may peaceably and quietly have, hold and enjoy the Premises for the entire Lease term, and Tenant shall have access to and use of the Premises at all times, 24 hours per day, 365 days per year. -10- 12. UTILITIES. Tenant shall pay for all electrical utility services supplied to the Premises for the benefit of Tenant. Tenant acknowledges that, at present, the Premises are not separately metered and, therefore, until such time as it may become separately metered, Tenant shall pay its share of the monthly electric bill for the Property, based upon square footage leased by Tenant hereunder, in relation to the total square footage of the Property, as billed, based upon the same 57.25% as set out in Section 4.3 above. This utility bill shall be paid by Tenant to Landlord as additional rent, in addition to base rent and Tenant's share of CAM Expenses. Landlord agrees that if it has not already commenced the process to have the Premises separately metered for electric, that it will do so within ninety (90) days of the commencement of the initial Lease term. Landlord also agrees that if and to the extent that it does not separately meter the spaces leased to other tenants of the Property, it shall collect from such tenants their respective shares of the monthly electricity bill for the Property, calculated in the manner provided above, and that the portions of the electricity bill for the Property that are collectible from such tenants shall not be included in CAM Expenses. 13. SIGNS. Tenant shall not have the right to construct, erect, place, put, paint, maintain or control on the Premises any exterior sign or signs, without first obtaining the written consent and approval of the same from Landlord, and upon obtaining such consent and approval from Landlord, any such sign or signs must comply with all rules, regulations, laws, statutes and ordinances and/or applicable governmental authorities (including developmental approval), and must be erected and maintained so as to not cause damage to the building in which the Premises are located. 14. LICENSES, FEES AND TAXES. Tenant shall pay all state, county, municipal, occupational or other licenses, fees and taxes which may be imposed upon the Tenant's personal property located in the Premises as well as all taxes and fees imposed on the business or occupation of Tenant conducted on or from the Premises and Tenant shall pay any tax imposed by the State of Florida on rentals. Landlord covenants to promptly pay when due all real property taxes relating to the Premises. 15. OBSERVANCE OF LAWS, RULES AND REGULATIONS. With the exception of any express provisions herein to the contrary, Tenant agrees, insofar as applicable to Tenant's responsibility during the term of this Lease, to promptly observe, comply with and execute at its own cost and expense all present and future laws, rules, requirements, orders, directions, ordinances, and regulations, of any and all governmental authorities or agencies, bureaus, boards or officials, and of any Board of Fire Underwriters relating to the Premises and/or the use thereof by Tenant (collectively, "Governmental Requirements"), to the extent applicable to Tenant's manner of use of the Premises. Tenant -11- shall not have responsibility for the compliance of other parts of the Property (including, without limitation, Common Areas) with Governmental Requirements, except to the extent that changes to the Common Areas may be included in CAM Expenses to the extent such changes are actually required to obtain compliance with Governmental Requirements. Landlord hereby represents and warrants that on the date of this Lease the Property (including, without limitation, the Premises) complies with, and covenants that as a result of the performance of the reconfigurations and improvements discussed in Section 41 hereof, shall comply with, all Governmental Requirements, and that no actions or alterations on the part of Tenant are necessary to obtain compliance with existing Governmental Requirements. Tenant, however, may contest, review or appeal from all Governmental Requirements that would impose costs upon Tenant, provided Tenant shall, prior to contesting the same, notify Landlord in writing of its intention to do so, and shall guarantee to Landlord that its title or other interest in the Premises shall not be divested nor shall there be any seizure, destruction, alteration or other interference with the Premises by any governmental authority, and provided that all such proceedings shall be promptly commenced by Tenant and diligently prosecuted by Tenant at its expense to a speedy and final conclusion. Tenant recognizes that the entire Premises and the building within which the Premises are located is, and shall continue to be, designated as "non-smoking." In the event a designated smoking area is established by Landlord, outside of the building, then smoking will only be permitted in such designated area. Such a provision, if promulgated by Landlord, will be applicable to all tenants in the building. Tenant shall ensure its employees' compliance with this provision. 16. INSURANCE. At all times subsequent-to the commencement date of the term of this Lease and during the full term, Tenant shall keep the Premises covered, at Tenant's sole cost and expense by the following types of insurance: A. Fire and extended coverage multi-peril insurance in an amount equal to 100% of the full replacement cost of Tenant's furniture, fixtures and equipment located on the Premises. Any policy providing such coverage shall contain the so-called special coverage all risk endorsement and the full replacement cost endorsement. B. Claims for personal injury or property damage under a policy of general public liability insurance with limits of at least ONE MILLION DOLLARS ($1,000,000.00) in respect to bodily injury and FIVE HUNDRED THOUSAND DOLLARS ($500,000.00) for property damage. -12- C. Flood insurance in an amount equal to 100% of the full replacement cost of Tenant's furniture, fixtures and equipment located on the Premises. D. Plate glass insurance on the Premises in an amount sufficient to cover the value of the plate glass located on the Premises for which Tenant has maintenance responsibility pursuant to Section 5 hereof. E. Against such other hazards and in such amounts as the holder of any mortgage to which this Lease is subordinate may from time to time require. All insurance required to be maintained by Tenant shall be effected by valid and enforceable policies issued by insurers licensed to do business in the State of Florida, countersigned by an agent licensed to do business in Florida and of recognized responsibility satisfactory to Landlord. Within fifteen (15) days after the commencement of the term of this Lease, Tenant shall promptly deliver to Landlord true, correct and complete copies of such policies as specified above and within fifteen (15) days after the premium of each such policy shall become due and payable, such premium shall be paid by Tenant and Landlord shall be furnished with satisfactory evidence of such payment. Landlord shall procure and maintain during the Lease term, at its sole cost and expense, insurance against all risks of direct physical loss, including loss by fire, lightning, flood and other risks which at the time are included under "extended coverage" endorsements, in amounts not less than one hundred percent (100%) of the actual replacement value of the building in which the Premises is located. 17. DESTRUCTION BY CASUALTY. If the Premises shall be substantially damaged by fire or other casualty so as to be untenantable, the Landlord may either (a) cancel this Lease and rent shall thereupon cease as of the date of fire or such casualty; or (b) the Landlord may notify the Tenant in writing no later than thirty (30) days after the fire or casualty that it intends to restore the Premises and in the event the Landlord completes such restoration within six (6) months from the date of fire or casualty, this Agreement shall remain in full force and effect except that rental shall abate from the date of such fire or casualty until the date when the Premises are ready for occupancy. If the Premises are partially damaged by fire or other casualty to the extent that there is a substantial and material interference with the use of the Premises by the Tenant, rent shall be abated proportionately, and in the event that the Landlord does not in its discretion complete the restoration of the Premises within a reasonable time after the fire or other casualty, the Tenant shall have the right to serve notice of -13- cancellation of this Agreement effective thirty (30) days thereafter, during which thirty (30) day period the Landlord may effect such restoration; provided that if any such fire or other casualty occurs after the commencement of the last three (3) months of the term herein demised, this Lease shall cease and terminate on the date of such fire or other casualty. Any rights of the Tenant pursuant to the provisions of this paragraph shall be conditioned upon the fire or other casualty not having been caused by willful negligence of the Tenant, its servants, agents or employees. 18. CONDEMNATION. If the whole of the Premises shall be taken or condemned or purchased in lieu thereof by any competent authority for any public or quasi-public use or purpose, then and in that event, the term of this Lease shall cease and terminate from the time when the possession shall be required for such use or purpose. The rent shall in such case be apportioned to the date of such taking or purchase, as the case may be. If any part of the Premises shall be taken or condemned or purchased in lieu thereof by any competent authority for any public or quasi-public use or purpose, then and in that event the Landlord shall so notify 'the Tenant in writing and the Tenant shall have the option to cancel this Lease, giving the Landlord written notice within twenty (20) days after receipt of such notice from the Landlord; provided the balance of the Premises remaining cannot be suitably used by the Tenant for its purposes heretofore stated. If the Tenant is entitled to exercise said option to cancel and does so, then such canceling shall be effective and the rent shall in such case be apportioned to the date of such taking or purchase, as the case may be. In the event the Tenant is not entitled to cancel the Lease of if it is entitled to do so but does not exercise its option, said Tenant will be responsible for the rent as heretofore set forth and apportioned to the date of such taking or purchase, i.e., after the taking or purchase in lie thereof, the rent herein reserved shall be reduced and the Tenant shall be required to pay that proportion of rent herein reserved as the remaining leasable space of the Premises bears to the leasable space of the Premises before such taking or purchase. The Landlord and the Tenant hereby agree that any award or proceedings resulting from a condemnation or sale in lieu thereof of the whole or any part of the Premises shall belong solely to the Landlord, and that Tenant hereby waives any right to make any claim therefore as a result of this Lease, except that Tenant shall be entitled to any separate award made for Tenant's loss of business, inconvenience, costs or loss of its leasehold interest in the Premises. 19. ENTRY UPON PREMISES. Tenant agrees that Landlord may at any reasonable time or times during the business hours of -14- Tenant, enter upon the Premises for the purpose of inspecting the same, or to make necessary repairs where Landlord is obligated to make such repairs or where Tenant is delinquent in making repairs it is obligated to make; provided, however, that Landlord shall not unreasonably interfere with Tenant's use and enjoyment of the Premises. Tenant agrees to permit Landlord and Landlord's agents, sixty (60) days prior to the expiration of the term hereby granted, to place in one or more conspicuous places upon the exterior of the Premises, signs advertising the Premises "For Sale" or "For Lease/For Rent" provided that said signs shall not obstruct the windows of or entrances to the Premises or otherwise interfere with the operation of Tenant's business. Tenant further agrees to allow Landlord to enter upon the Premises at all reasonable times for the purpose of installing or servicing electrical wiring, telephone cables, water and sewer lines, or other similar transmission lines, which serve or cross the Premises for the purpose of rendering service to the Premises or to adjacent property. 20. ASSIGNMENTS AND SUBLETTING. Tenant shall not sublet the Premises or assign this Lease without the written consent of Landlord. Landlord agrees not to withhold such consent unreasonably. No assignment or sublease nor acceptance of rent from any assignee or subtenant, nor any other dealings of the Landlord with any assignee or subtenant shall in any manner release Tenant from the payment of rent and the due performance of all the terms, covenants and conditions contained in this Lease. In the event of a request by Tenant to Landlord to approve an assignment, Tenant shall reimburse to Landlord the reasonable costs and value of time invested by Landlord in determining the proposed assignee's acceptability, which reimbursement shall be a condition of approval. Such reimbursement shall also include any attorneys' fees, paralegals, fees, legal assistants' fees, court costs and expenses incurred relative to the same. In no event shall such costs for which Tenant shall be responsible exceed the sum of FIVE THOUSAND and NO/l00 ($5,000.00) DOLLARS. If Tenant shall assign or sublet the Premises, or any part thereof, having first obtained Landlord's consent, at a rent in excess of the rent due and payable by Tenant under the Lease, said excess rent shall be divided equally between Landlord and Tenant after adjustment for all costs and expenses of such sublease or assignment, including any time period that the Premises are vacant between the occupancy of Tenant and Tenant's subtenant or assignee. Provided, however, that Landlord shall not be responsible for any deficiency if Tenant shall assign or sublet the Premises or any part thereof at a rent less than that provided for herein. -15- 21. COVENANTS AS TO BREACH AND REMEDIES. If Tenant defaults in the payment of any rent obligation or other payment when due under the terms of this Lease, and such default in payment continues for a period of three (3) business days after receipt by Tenant of written notice thereof (Tenant hereby acknowledges that it shall be responsible for any late payment penalty provided for in Section 3 hereof that is incurred during such cure period), or in the event the Tenant abandons or repudiates this Lease in writing before the expiration of the term hereof, or commits any other act or omission constituting a breach of this Lease, and such breach continues for a period of thirty (30) days after receipt by Tenant of written notice thereof, or if there is a receiver appointed to take possession of all or substantially all of Tenant's property or if there is a general assignment by Tenant for the benefit of creditors, or if Tenant, either voluntarily or involuntarily, files for protection under the United States Bankruptcy Act (except for an involuntary filing that Tenant causes to be lifted or withdrawn within sixty (60) days), all of which shall constitute breaches of this Lease by Tenant, then in such event, the Landlord may at its sole and exclusive discretion: A. Terminate this Lease, effective upon delivery of written notice to Tenant, at which time Tenant shall pay to Landlord, and Landlord shall be entitled to recover as liquidated damages, in order to cover the unknown costs and expenses associated with termination and re-letting of the Premises and because of the uncertainty of Landlord's ability to find a new tenant(s), Landlord shall receive from Tenant, the then present value of the monthly rent, including CAM Expenses, multiplied by six (6) months; and Landlord shall have the immediate right to re-entry and may remove all persons and property from the Premises, by summary legal process or otherwise; or B. Elect to re-enter and retake possession of the Premises without terminating this Lease, in which case Tenant shall not be deemed released from its obligations to pay the rent and additional rent and other charges payable by Tenant under the terms of this Lease, and all rent and other payments due hereunder, including Tenant's pro rata share of CAM Expenses, reserved for the entire remainder of the stated term of this Lease shall, at the Landlord's option, be accelerated and become immediately due and payable by Tenant to Landlord. In no event shall Landlord be required to postpone or delay its lawsuit or action for damages or accelerated rent until the date when the term of the Lease would have expired or until such rent would have become payable, had the rent not been accelerated; provided however, that the option set forth in this Paragraph B shall not diminish in any respect Landlord's duty to mitigate its damages resulting from any breach giving rise to Landlord's exercise of this option; or -16- C. Elect to re-enter and retake possession of the Premises without terminating this Lease, for the account of Tenant, and Landlord shall make good faith efforts to re-let the Premises on the best terms, conditions and rent as Landlord can reasonably obtain. In such case, Tenant shall be liable for Landlord's reasonable incidental and consequential damages including but not limited to, the cost to re-let the Premises, including but not limited to the reasonable cost of remodeling and/or building out the Premises for new Tenant (s), the reasonable costs of realtor, broker or other commissions paid in connection with such reletting, all reasonable attorney's fees and costs incurred in connection with removing Tenant and in collecting sums due Landlord from Tenant and in negotiating and drafting the new leases(s), and for any deficiency in rent to be received by Landlord as a result of any such re-letting of the Premises, in which event the rents received by Landlord from such re-letting shall be applied, first, to the payment of any costs and expenses Landlord incurs in regaining possession of the Premises from Tenant, including attorney's fees, second, to the payment of any costs and expenses of such re-letting including but not limited to brokerage fees, costs of such alterations and repairs as described above, and third, to the amount of rent and other charges payable by Tenant under the terms of this Lease. Tenant shall be liable to Landlord for any resulting deficiency in rents received after application of the foregoing costs, compared with rents to be received under the terms of this Lease. No re-entry or taking of the Premises by Landlord shall be construed as an election on its part to terminate this Lease, unless written notice of such intention to terminate the Lease is given to Tenant, or the Premises are re-let, or unless the termination is decreed by a court of competent jurisdiction. Notwithstanding any such re-letting or other action by Landlord, as described above, Landlord may at any time, elect to terminate this Lease for any breach, in which case Landlord shall be entitled to recover its damages described in paragraph A above. In the event Tenant defaults or breaches any term or condition or covenant of this Lease, and the Landlord is put to the necessity of employing an attorney as a result of such default or breach, then Tenant agrees to pay Landlord's reasonable attorney's fees, paralegal fees, legal assistant fees and court costs and expenses associated with Tenant's default or breach, including but not limited to all such fees and costs through trial and all appeals. TENANT HEREBY EXPRESSLY WAIVES ANY RIGHT WHICH TENANT MAY HAVE UNDER FLORIDA STATUTE SECTION 83.20 OR ANY SUCCESSOR OR REPLACEMENT STATUTE OR AMENDMENT OR MODIFICATION TO SUCH STATUTE, OR UNDER ANY OTHER LOCAL, STATE OR FEDERAL LAW, ORDINANCE, RULE OR REGULATION, TO RECEIVE ADVANCED NOTICE OF ANY DEFAULT OR OTHER NOTICE OF ANY DEFAULT OR OPPORTUNITY TO CURE ANY DEFAULT. TENANT'S RIGHTS IN THE EVENT OF DEFAULT SHALL BE LIMITED TO THE RIGHTS (INCLUDING, WITHOUT LIMITATION, THE RIGHTS TO NOTICE AND -17- CURE OF DEFAULTS) SET FORTH IN THIS LEASE. Except as otherwise expressly set forth in this Lease, Tenant shall have any and all remedies available to it at law or in equity for a breach of Landlord hereunder. 22. ABANDONMENT. If Tenant shall remove all, or substantially all of its personal property, fixtures and equipment from the Premises, without first notifying Landlord, in writing, of its intention to continue the Lease, then such removal of the personal property, fixtures and equipment shall be deemed to be an abandonment by Tenant of the Premises, in the event the Premises remain in such condition for seven (7) consecutive days. Such abandonment shall be an act of default under this Lease and Landlord shall have all available remedies provided herein for a default by the Tenant. 23. SURRENDER OF PREMISES. At the termination of this Lease, Tenant shall quit, deliver and surrender up the Premises, as well as all keys to the Premises, to Landlord in good, clean condition, reasonable wear and tear accepted. Tenant may remove, and at the Landlord's request, shall remove, all of its trade fixtures, equipment, personal property and signs provided that such removal will not structurally injure the Premises. In the event Tenant fails to remove any of Tenant's personal property, equipment, trade fixtures and signs within ten (10) days after the termination of this Lease, said property shall, at the option of Landlord, either be deemed abandoned and become the exclusive property of Landlord, or Landlord shall have the right to remove and store said property at the expense of Tenant, without further notice or demand upon Tenant and shall hold Tenant responsible for any and all storage charges and moving costs and expenses incurred by Landlord as a result thereof. Tenant indemnifies Landlord against any losses, costs, damages, liabilities and expenses resulting from Tenant's failure or delay in surrendering the Premises, including, without limitation, any claims made by the succeeding occupants founded on such delay. Tenant's obligations under this Section 23 shall survive the expiration or sooner termination of the term of this Lease. 24. PERFORMANCE BY LANDLORD OF TENANT'S OBLIGATIONS. In the event Landlord shall pay or be compelled to pay a sum of money, or to do any act which requires the payment of any money, by reason of the failure of Tenant to perform one or more of the covenants herein contained to be kept and performed by Tenant, then in such event, the sum or sums so paid by Landlord, including attorney's fees, together with all interest, expense or obligations incurred by Landlord, shall be considered as additional rent and shall be added to the rent becoming due for the next month and shall be collectible in the same manner and with the same remedies as if they had been rents originally reserved. Landlord agrees not to pay any sum of money or to do any act which requires payment of any sum of money for which -18- under the provisions of this Section 24 it would be entitled to be reimbursed by Tenant, unless it shall have first given fifteen (15) days notice of its intention so to do and Tenant shall have failed during such period to make payment of such sum or sums as shall be payable hereunder, or to do such act or acts which under the terms of this Lease it is required to do. 25. SURRENDER. The voluntary or other surrender of this Lease by Tenant or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Landlord, terminate all or any existing subleases or subtenancies or, at the option of Landlord, may operate as an assignment to it of any or all such subleases or subtenancies. 26. NOTICES. All notices to be given to Tenant shall be given in writing, by hand-delivery or courier, or by depositing the same in the United States Mails, certified or registered mail, return receipt requested, postage prepaid and addressed to Tenant at 493 Nixon Road, Cheswick, Pennsylvania 15024 or at such other address as Tenant may hereafter designate in writing. Notice given via hand-delivery or courier shall be deemed effective upon delivery by leaving the notice with any receptionist, officer, agent or employee of Tenant at its foregoing address. Notices to be given to Landlord shall be given in a like manner and addressed to Landlord at: C/O JOHN A. MORAN, 22 SOUTH LINKS AVENUE, SUITE 300, SARASOTA, FLORIDA 34236, or at such other address as Landlord may hereafter designate in writing. 27. WAIVER. In the event either party does not insist on a strict performance of any of the terms and conditions of the other hereunder, such shall not be deemed a waiver of the rights or remedies that such party shall have to insist upon strict performance of any such terms or conditions in the future or any other conditions and terms of this Lease. No receipt of money by Landlord from Tenant with knowledge of the breach of any covenant of this Lease shall be deemed a waiver of such breach unless Landlord has so agreed in writing. Likewise, no application of the Tenant's security deposit by Landlord, to cure a default or breach by Tenant shall be deemed a waiver or satisfaction of such default or breach. 28. SUCCESSORS AND ASSIGNS. The conditions and covenants herein contained shall apply to and bind the heirs, successors, personal representatives and assigns, where allowed, of the parties hereto. 29. INVALIDITY OF ANY PROVISIONS. If any term, covenant, condition or provision of this Lease shall be held to any extent to be invalid or unenforceable under applicable law, the remaining terms, covenants, conditions and provisions of this Lease shall not be affected thereby but shall remain in full force and effect. -19- 30. MISCELLANEOUS. The masculine, feminine or neuter gender, wherever used herein, shall be deemed to include the masculine, feminine and neuter whenever and wherever applicable herein. Whenever the singular is used it shall be deemed to include the plural whenever and wherever applicable herein. 31. RADON GAS. Florida Statutes Section 404.056(8) requires the following statement to be included in this Lease: RADON GAS: Radon is a naturally occurring radioactive gas that, when it has accumulated in a building in sufficient quantities, may present health risks to persons who are exposed to it over time. Levels of radon that exceed federal and state guidelines have been found in buildings in Florida. Additional information regarding radon and radon testing may be obtained from your county public health unit. Landlord hereby represents and warrants that it is not aware of the presence of any radon gas that exceeds Federal and State guidelines, nor the presence of any toxic mold in the building in which the Premises is located. 32. HAZARDOUS WASTE. Tenant agrees that the Premises shall not be used for the discharge or storage of any Hazardous Substance as defined in any federal, state or local statute, rule, regulation or ordinance, except for usage of standard office and cleaning solutions, solvents and materials, and for usage of Hazardous Substances pursuant to development, manufacture or testing of Tenant's products or components thereof, and except for storage of inventory, parts and works-in progress produced or held in the development, manufacture or testing of Tenant's products, and that all such usage, storage and disposal of Hazardous Substances shall be in compliance with all Governmental Requirements. Tenant agrees to indemnify Landlord and hold Landlord harmless from and against any and all losses, liabilities, including strict liability, damages, injuries, expenses, including reasonable attorneys' fees, paralegals, fees and legal assistants' fees, costs of any settlement or judgment in claims of any and every kind, whatsoever paid, incurred or suffered by, or served against Landlord by any person or entity or governmental agency for, with respect to, or as a direct or indirect result of, the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission or release from the Premises, in connection with Tenant's operations thereon, of any Hazardous Substance, including any such loss or liability arising under the Comprehensive Environmental Response, Compensation and Liability Act, and any similar federal, state or local laws or ordinances. If Tenant receives any notice of: (i) the happening of any material event involving the escape, seepage, leakage, spillage, discharge, emission, release or clean up of any Hazardous Substance on the Premises in connection with Tenant's operations thereon, or (ii) any complaint, order, citation, or material notice with regard to air emission, water discharge or any other environmental health or safety matter affecting Tenant (an -20- "environmental complaint") from any person or entity, Tenant shall immediately notify Landlord orally and in writing of said notice. Any breach of any warranty or representation contained in this Section 32 shall be an event of default under the Lease, which, if not cured within thirty (30) days of notice thereof, shall entitle Landlord to exercise any and all remedies provided in the Lease or otherwise provided by law; provided, however, Landlord agrees that if the remedy or such default cannot be reasonably achieved within said thirty (30) day period, then Tenant shall have such further time as is reasonable under the circumstances to effect such remedy provided that Tenant shall notify Landlord within the thirty (30) day curative period of the necessity for additional time and provided further that Tenant shall institute immediate steps to effect such remedy and shall continuously and diligently pursue such remedy to completion. 33. RELATIONSHIP OF THE PARTIES. Nothing herein contained shall be deemed or construed as creating the relationship of principal and agent or of partnership or joint venture between Landlord and Tenant; it being understood and agreed that neither the method of computing rent nor any other provision contained herein nor any acts of Landlord and Tenant shall be deemed to create any relationship between the parties other than that of landlord and tenant. 34. PARKING. Tenant will have the right to the nonexclusive use of the parking in common with Landlord, and the guests, and employees and invitees of the Property. Landlord shall at all times during the term provide Tenant an adequate number of nonexclusive parking spaces for its use which shall be adjacent to the building or reasonably convenient thereto. Tenant agrees that it and its employees will park only in such areas as Landlord may from time to time designate for employee parking. Tenant will furnish to Landlord upon request, license numbers assigned to its cars and the names of all of its employees who have cars parked on the Property. Neither the parking area, nor any Common Area on the Property will be used by Tenant or any agent or employee of Tenant for any political campaigning or other similar use, including without limitation, the dissemination of advertising or campaign leaflets or flyers. 35. WAIVER OF JURY TRIAL. Landlord and Tenant hereby waive trial by jury in any action, proceeding, or counterclaim brought by either of them against the other or any matters whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant's use or occupancy of the Premises and/or claim of injury or damage. 36. HOLDOVER. If Tenant remains in possession of the Premises after the expiration of the term hereof, Tenant shall be -21- deemed to be a Tenant from month-to-month, at twice the rental rate in effect at the end of the term hereof. 37. BROKER. Other than any communication which Tenant had with Lakewood Ranch Realty, Tenant does hereby represent and warrant that it has not contacted or employed any real estate broker in connection with this transaction. Accordingly, Tenant agrees to indemnify and hold Landlord harmless from and against any claim, loss, damage, cost, or liability for any brokerage commission or fee which may be asserted on account of this transaction by any person who establishes by court action a right to such commission arising out of dealings with the indemnifying party. Landlord acknowledges it is responsible and shall pay the brokerage commission owing to Lakewood Ranch Realty in connection with this Lease. 38. LAW GOVERNING. This Lease shall be governed and construed under the laws of the State of Florida and jurisdiction of any legal proceedings concerning the subject of this Lease shall be in the State of Florida, venue shall be in Sarasota County. 39. POSSIBLE EXPANSION. The parties have discussed the possible need of Tenant to expand, either during the initial term or during any renewal term provided for in this Lease. 39.1 Right of First Refusal on Available Space. In the case of expansion, it would be Tenant's preference to take on additional square footage, in the same building, which relates to Tenant's Lease of the Premises, as part of this Lease. Therefore, Tenant would prefer to receive notice of any available space, as it occurs. On the other hand, Tenant is also aware that Landlord currently has space available for lease on the second floor of the building (as Tenant is only leasing the first floor) and therefore, Tenant understands Landlord's need to be able to market such available space, without any material restrictions. In order to address both parties' objectives, it is agreed that except for any Leases entered into by Landlord concerning the Property during the one (1) year time frame, which coincides with the initial first year of this Lease, to the extent any rentable space becomes available in the building subsequent thereto, and no other Tenant under Lease with the Landlord has any option rights with respect to such space (provided, however, that to the extent that Landlord affords any other tenant such an option right, such option right shall be expressly subsidiary to Tenant's option right hereunder), then Landlord agrees to promptly notify Tenant of the future availability of such space, in writing, as soon as practicable. Upon Tenant's receipt of such written notification from Landlord, Tenant shall have ten (10) days to notify Landlord as to whether it wishes to elect to add on such additional available space, as part of the rentable space, under this Lease. If Tenant elects to do so, then such additional space (to which Tenant elects) -22- shall be added on to the rentable square footage which is already the subject matter of this Lease, and such total space shall be administered under the terms of this Lease, with rental rates and all other obligations, to be computed at the same per square foot rates as calculated herein, and as adjusted herein, from year to year. If Tenant fails to provide its written election to add this additional available space, within ten (10) days of its receipt of such notice from Landlord, then Tenant shall be deemed to have waived its right hereunder and Landlord may proceed to market and lease such space. The parties agree that time is of the essence with regard to the time frames stated herein. 39.2 Good Faith Pursuit of Other Options for Expansion. In the event that suitable space in the building in which the Premises is located is not available at such time as Tenant desires additional space, Tenant shall have the right to present Landlord with a plan or plans for construction of additional space through (a) the addition of modular or temporary space on the Property, whether or not physically connected to the Premises or the building; (b) construction of an addition to the building in a location that adjoins the Premises; or (c) construction of additional floor space where physically feasible above the Premises but within the existing building containing the Premises. Landlord may reject such plans on the bases of (i) noncompliance with Governmental Requirements (including, without limitation, zoning) or easement obligations or other covenants then affecting the Property; (ii) non-compliance with Landlord's established aesthetic or construction quality standards; (iii) material negative impact that such construction would have on the value of the Property; (iv) non-compliance with any mortgage terms and conditions affecting the Property; (v) such expansion plans are not supportable given the quality of the utilities servicing the Property; or, (vi) the cost of construction in relation to the remaining lease term of Tenant, does not make economic sense for Landlord in its sole discretion. In the event that there is no basis for rejection of such plans, and the plans are deemed by both Landlord and Tenant to be financially feasible, Landlord and Tenant shall negotiate in good faith an agreement regarding the remaining lease term and/or an extension of such lease term (with the new square footage to be charged at the then-current rates as part of this Lease, including all applicable adjustments as required by the Lease from year to year). 39.3 Termination of Lease Due to Inability to Expand. In the event that Tenant desires additional space and its interest therein is not satisfied through any of the means described in Sections 39.1 and 39.2 hereof (or if such plans would be overly expensive or time-consuming for Tenant to pursue, in Tenant's sole discretion) or through the availability of space in contiguous buildings that is a feasible alternative (in Tenant's sole discretion) to space within the building in which the Premises is located, Tenant shall have the right, exercisable at any time after the end of the third (3rd) year of the Lease term, -23- to terminate this Lease unilaterally upon not less than nine (9) months advance written notice (which notice cannot be given prior to the end of the third year of the initial lease term), and upon the payment of liquidated damages equal to six (6) months rent at the rate of rent (including CAM) existing at the time that Tenant furnishes its notice, but otherwise without penalty or payment from Tenant of any kind except for any payment that would be due in connection with its quitting of the Premises at the end of the Lease term upon the expiration of the Lease. 40. TERMINATION OF LEASE DUE TO UNAVAILABILITY OF PREMISES. Landlord and Tenant hereby acknowledge that on the date of this Lease, the Property, including the Premises, is occupied by SPEEDCOM WIRELESS CORPORATION ("Speedcom") pursuant to an existing lease agreement between Landlord and Speedcom (the "Speedcom Lease"). Landlord hereby represents and warrants to Tenant that Speedcom is in default of the Speedcom Lease, that such default is not subject to cure, that Landlord is presently pursuing legal action against Speedcom to evict it from the Property, and that Landlord intends to and shall, as soon as possible, either terminate the Speedcom Lease and evict Speedcom from the Property, using whatever legal means are necessary for that purpose, or procure and enter into an amendment of the Speedcom Lease whereby Speedcom's right to occupy the Premises will cease and Speedcom will be caused to promptly vacate the Premises. If the court to which Landlord has applied for an eviction action against Speedcom denies such request for eviction, Landlord shall promptly thereupon undertake its best efforts to negotiate Speedcom's permanent vacation of the Premises. Landlord shall keep Tenant reasonably informed as to the outcome of its aforementioned legal action against Speedcom. Landlord acknowledges and agrees that Tenant has not induced Landlord to terminate the Speedcom Lease or act to evict Speedcom from the Property or the Premises, and that Tenant shall make no financial or other contribution toward or play any role in Landlord's interactions with Speedcom. Notwithstanding any other provision of this Lease, Tenant shall have the option at its sole discretion, but not the obligation, to terminate this Lease, effective immediately, without penalty or payment of any kind, in the event that Speedcom has not been fully and finally evicted from or irrevocably released its right of occupancy of the Premises and ceased to occupy the Premises no later than twenty-one (21) days after the date of this Lease first set forth above. The foregoing option of Tenant, if not exercised immediately, shall remain exercisable until such time as Speedcom has actually been fully and finally evicted from or irrevocably released its right of occupancy of the Premises and ceased to occupy the Premises. The foregoing provisions shall not constitute an obligation of Tenant, or be understood to express any willingness of Tenant, to enter into a sublease of the Premises from Speedcom or an assignment of the Speedcom Lease as it pertains to the Premises. -24- Landlord has apprised Tenant, that an eviction hearing concerning Speedcom has been scheduled for Wednesday afternoon, February 19, 2003. Unless Speedcom enters into a written agreement agreeing to vacate the premises by February 28, 2003, Landlord will seek a Court Order requiring Speedcom to vacate the Premises on or before such date. Landlord agrees to provide an update as to the status of the Speedcom matter as soon as an agreement is reached, or, if an agreement is not reached, the Court's finding from its hearing on Wednesday, February 19, 2003. If a Court Order is not received which requires Speedcom to vacate the premises on or before February 28, 2003, then in that event, Tenant shall have the option (in addition to its twenty-one (21) day option referenced in the preceding paragraph) to cancel this Lease within seven (7) days after the full execution of this Lease, if it is not satisfied, in its sole and absolute discretion, concerning the timetable for the vacancy by Speedcom, of its occupancy of the Premises. For clarification purposes, if the Court Order requires Speedcom to vacate the Premises prior to February 28, 2003, or if a written agreement is entered into whereby Speedcom agrees to vacate the Premises on or before such date, then no such seven (7) day option under this paragraph shall apply to Tenant. 41. RECONFIGURATION OF PROPERTY FOR MULTI-TENANCY. Tenant acknowledges that the Property is presently configured for single tenant occupancy. However, promptly upon the eviction of or vacation by Speedcom of the Premises, Landlord shall commence reconfiguration of and improvements to the Property (starting with the Premises) for multi-tenant occupancy, which reconfiguration and improvements Landlord shall diligently pursue to completion as soon as possible, and which Landlord shall endeavor to coordinate with any alterations undertaken by Tenant pursuant to Section 10 hereof so as to allow Tenant to commence and complete such alterations as soon as possible. Landlord hereby warrants that such reconfiguration and improvements shall be materially completed no later than the last day of March, 2003. Landlord acknowledges that time is of the essence in the completion of the aforementioned reconfiguration and improvements. Such reconfiguration and improvements shall be at Landlord's sole cost and expense, and Landlord's expenditures therein shall not be deemed part of the CAM Expenses. DATED on this 18 day of February, 2003. WITNESSES: LAKEWOOD RANCH PROPERTIES, L.L.C., A FLORIDA LIMITED -25- BY: /s/ John A. Moran - -------------------------------- ----------------------------------- PRINT NAME JOHN A. MORAN ---------------------- AS ITS MANAGER - -------------------------------- PRINT NAME ---------------------- "LANDLORD" (REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.) WITNESSES: TOLLGRADE COMMUNICATIONS, INC., A PENNSYLVANIA CORPORATION /S/ SARA M. ANTOL BY: /s/ CHRISTIAN L. ALLISON - -------------------------------- ---------------------------------- PRINT NAME SARA M. ANTOL NAME CHRISTIAN L. ALLISON ---------------------- --------------------------------- AS ITS CHAIRMAN AND C.E.O. ------------------------------- - -------------------------------- PRINT NAME ---------------------- "TENANT" (REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK) -26- EXHIBIT "A" [FLOOR PLAN OF LEASED PREMISES] EXHIBIT "B" [LEGAL DESCRIPTION OF PROPERTY] EXHIBIT "C" A. Expenses Paid Through CAM 1. Real property taxes 2. Insurance coverage, which under the Lease is to be paid by Landlord 3. Lakewood Ranch Association Fees 4. Property Management Fees and other administrative expenses 5. Maintenance for Building (exterior) 6. Common Area Maintenance - Exterior of building and also Interior, if considered common area for multi-Tenants. 7. Landscaping 8. Grounds, maintenance and repair (parking lot, lighting, walks, etc) 9. Trash removal (from containers outside of building) 10. Janitorial services for common areas (lobby, stairwells, etc) 11. Heating, ventilating and air conditioning systems and equipment for areas common to multi-Tenants (except as otherwise provided for the initial first year of the Lease Term, as provided in Section 4.4 of the Lease) 12. Plumbing (restrooms, water fountains, etc) for areas common to multi-Tenants (except as otherwise provided for the initial first year of the Lease Term, as provided in Section 4.4 of the Lease) 13. Lighting system (florescent lighting tubes, etc) for areas common to multi-Tenant and for overhead florescent lighting in the Premises 14. Elevator maintenance 15. Life safety systems (fire extinguishers, exit lighting, fire alarm and fire sprinkler system, etc.) for areas common to multi-Tenant and for the Premises 16. Water/Sewer 17. Pest control 18. Painting (other than Tenant's interior premises) - ------------------ ----------------- Landlord Initials Tenant Initials 2002 10-K Exhibit 10.32 (Florida Lease) B. Expenses to be Paid Directly by Tenant 1. Electric Expense for Premises 2. Janitorial Service for interior of premises, including carpet maintenance, vinyl, tile, dusting, lunch area maintenance, and trash removal from offices, lunch area etc. 3. All maintenance costs and repairs associated with Tenant's use and occupancy of the Premises. FOOTNOTE: IT IS THE INTENTION OF THE LANDLORD AND TENANT TO ENTER INTO A TRIPLE NET LEASE. ACCORDINGLY, ALL ITEMS OF EXPENSE ASSOCIATED WITH TENANT'S INTERIOR USE OF THE PREMISES, ARE TO BE THE RESPONSIBILITY OF TENANT AND SHALL BE PAID BY TENANT DIRECTLY. FURTHERMORE, ALL ITEMS RELATING TO THE COMMON AREAS OF THE PROPERTY (THE AREA OF THE PROPERTY USED BY THE GENERAL PUBLIC AND/OR OTHER TENANTS IN THE BUILDING) AS WELL AS ALL AREAS OUTSIDE OF THE BUILDING, UPON WHICH THE PREMISES IS SITUATED, SHALL BE PAID FOR THROUGH CAM CHARGES HANDLED AS PROVIDED IN SECTION 4 OF THE LEASE. - ------------------ ----------------- Landlord Initials Tenant Initials 2002 10-K Exhibit 10.32 (Florida Lease) EX-10.33 7 j9925501exv10w33.txt LEASE AND LEASE AGREEMENT EXHIBIT 10.33 LEASE AND LEASE AGREEMENT Between ROUTE 206 ASSOCIATES The Landlord And TOLLGRADE COMMUNICATIONS, INC. The Tenant For Leased Premises In 685 Route 202/206, Bridgewater, New Jersey October 24, 2001 TABLE OF CONTENTS
PAGE ---- 1. DEFINITIONS..............................................................................1 2. LEASE OF THE LEASED PREMISES.............................................................1 3. RENT.....................................................................................1 4. TERM.....................................................................................2 5. PREPARATION OF THE LEASED PREMISES.......................................................3 6. OPTIONS..................................................................................4 7. USE AND OCCUPANCY........................................................................6 8. UTILITIES, SERVICES, MAINTENANCE AND REPAIRS.............................................9 9. ALLOCATION OF THE EXPENSE OF UTILITIES, SERVICES, MAINTENANCE, REPAIRS AND TAXES..........................................................10 10. COMPUTATION AND PAYMENT OF ALLOCATED EXPENSES OF UTILITIES, SERVICES, MAINTENANCE, REPAIRS, TAXES AND CAPITAL EXPENDITURES....................................................................10 11. LEASEHOLD IMPROVEMENTS, FIXTURES AND TRADE FIXTURES.....................................16 12. ALTERATIONS, IMPROVEMENTS AND OTHER MODIFICATIONS BY THE TENANT.........................16 13. LANDLORD'S RIGHTS OF ENTRY AND ACCESS...................................................18 14. LIABILITIES AND INSURANCE OBLIGATIONS...................................................18 15. CASUALTY DAMAGE TO BUILDING OR LEASED PREMISES..........................................20 16. CONDEMNATION............................................................................21 17. ASSIGNMENT OR SUBLETTING BY TENANT......................................................21 18. SIGNS, DISPLAYS AND ADVERTISING.........................................................24 19. QUIET ENJOYMENT.........................................................................24 20. (INTENTIONALLY OMITTED).................................................................25 21. SURRENDER...............................................................................25 22. EVENTS OF DEFAULT.......................................................................26 23. RIGHTS AND REMEDIES.....................................................................27 24. TERMINATION OF THE TERM.................................................................29 25. MORTGAGE AND UNDERLYING LEASE PRIORITY..................................................30 26. TRANSFER BY LANDLORD....................................................................30 27. INDEMNIFICATION.........................................................................31 28. PARTIES' LIABILITY......................................................................32 29. (INTENTIONALLY OMITTED).................................................................33 30. REPRESENTATIONS.........................................................................33
-i- 31. RESERVATION IN FAVOR OF TENANT..........................................................34 32. TENANT'S CERTIFICATES AND MORTGAGEE NOTICE REQUIREMENTS.................................34 33. WAIVER OF JURY TRIAL AND ARBITRATION....................................................36 34. SEVERABILITY............................................................................36 35. NOTICES.................................................................................37 36. CAPTIONS................................................................................37 37. COUNTERPARTS............................................................................37 38. APPLICABLE LAW..........................................................................37 39. EXCLUSIVE BENEFIT.......................................................................37 40. SUCCESSORS..............................................................................37 41. AMENDMENTS..............................................................................37 42. WAIVER..................................................................................37 43. COURSE OF PERFORMANCE...................................................................38 44. LANDLORD'S CONCESSIONS..................................................................38
EXHIBIT DESCRIPTION PAGE - ----------------------------------------------------------------------------------------- A LEASED PREMISES FLOOR SPACE DIAGRAM 38 PROPERTY DESCRIPTION 39 C WORK LETTER 40 D BUILDING RULES AND REGULATIONS 41 E DEFINITIONS AND INDEX OF DEFINITIONS 44 F CLEANING SPECIFICATIONS 49
-ii- LEASE AND LEASE AGREEMENT, dated as of October 24, 2001, between ROUTE 206 ASSOCIATES, a New Jersey partnership, with offices at 520 Route 22, P.O. Box 6872, Bridgewater, NJ 08807 (the "Landlord"), and TOLLGRADE ACQUISITION COMPANY, a Delaware corporation, with an office at 493 Nixon Road, Cheswick, PA 15024 (the "Tenant"). Subject to all the terms and conditions set forth below, the Landlord and the Tenant hereby agree as follows: 1. Definitions. Certain terms and phrases used in this Agreement (generally those whose first letters are capitalized) are defined in Exhibit E attached hereto and, as used in this Agreement, they shall have the respective meanings assigned or referred to in that exhibit. 2. Lease of the Leased Premises. 2.1. The Landlord shall, and hereby does, lease to the Tenant, and the Tenant shall, and hereby does, accept and lease from the Landlord, the Leased Premises during the Term. The Leased Premises consist of 18,778 square feet of gross rentable floor space on the second floor of 685 Route 202/206, Bridgewater, New Jersey as more fully described in the definition of Leased Premises set forth in Exhibit E attached hereto. 2.2. The Landlord shall, and hereby does, grant to the Tenant, and the Tenant shall, and hereby does, accept from the Landlord, the non-exclusive right to use the Common Facilities during the Term for itself, its employees, other agents and Guests in common with the Landlord, any tenants of Other Leased Premises, any of their respective employees, other agents and guests and such other persons as the Landlord may, in the Landlord's sole discretion, determine from time to time. 2.3. Tenant shall have access to the Leased Premises 24 hours a day, seven days a week. Outside of regular business hours, access shall be controlled by a card access system maintained by the Landlord in accord with Landlord's uniform rules and procedures. Tenant may install a separate access control system at the entrance to the Leased Premises provided that an access card or pass number is given to the Landlord for access by the cleaning service, the Landlord's personnel and the fire department. 3. Rent. 3.1. The Tenant shall punctually pay the Rent for the Leased Premises for the Term to the Landlord in the amounts and at the times set forth below, without bill or other demand and without any offset, deduction or, except as may be otherwise specifically set forth in this Agreement, abatement whatsoever. 3.2. The Basic Rent for the Leased Premises during the Initial Term shall be at the rate per year set forth below.
- ------------------------------------------------------------------------------- YEARS ANNUAL RATE MONTHLY INSTALLMENTS - ------------------------------------------------------------------------------- one through five $450,912 $37,576 - -------------------------------------------------------------------------------
The annual rate of Basic Rent for the Leased Premises during any Renewal Term shall be calculated as set forth in subsection 6.1.4 of this Agreement for the respective Renewal Term. 3.3. The Tenant shall punctually pay the applicable Basic Rent in equal monthly installments in advance on the first day of each month during the Term, with the exception of Basic Rent for the first full calendar month of the Initial Term and for any period of less than a full calendar month at the beginning of the Term. The Tenant shall pay the Basic Rent for the first full calendar month of the Initial Term upon execution and delivery of this Agreement. The Tenant shall punctually pay the Basic Rent for a period of less than a full calendar month at the beginning of the Term on the Commencement Date. 3.4. The Basic Rent and the Additional Rent for any period of less than a full calendar month shall be prorated. In the event that any installment of Basic Rent cannot be calculated by the time payment is due, such portion as is then known or calculable shall be then due and payable; and the balance shall be due upon the Landlord's giving notice to the Tenant of the amount of the balance due. 3.5. The Additional Rent for the Leased Premises during the Term shall be promptly paid by the Tenant in the respective amounts and at the respective times set forth in this Agreement. 3.6. That portion of any amount of Rent or other amount due under this Agreement which is not paid on the day it is first due shall incur a late charge equal to the sum of: (i) five percent of that portion of any amount of Rent or other amount due under this Agreement which is not paid on the day it is first due and (ii) interest on that portion of any amount of Rent or other amount due under this Agreement which is not paid on the day it is first due at the Base Rate(s) in effect from time to time plus two additional percentage points from the day such portion is first due through the day of receipt thereof by the Landlord. Any such late charge due from the Tenant shall be due immediately. Anything hereinabove contained to the contrary notwithstanding, it is expressly understood and agreed that no late charge shall be imposed if Rent is not paid by the fifth day of the month provided that if Rent is not paid by the fifth day of the month more than twice in any twelve month period then, thereafter, the late charge shall be imposed if Rent is not paid by the first day of the month. 4. Term. 4.1. The Initial Term shall commence on the Commencement Date and shall continue for five years from the beginning of the Initial Year, unless sooner terminated in accordance with section 24 of this Agreement. The Term shall commence on the Commencement Date and shall continue until the later of the conclusion of the Initial Term or the conclusion of any Renewal Term, unless sooner terminated in accordance with section 24 of this Agreement. 4.2. Unless one or more of the conditions contemplated by subsection 4.3 of this Agreement occurs, the Commencement Date shall be the later of: 4.2.1. the Target Date; or 4.2.2. the date that the last of each of the following conditions set forth in this subsection 4.2.2 of the Agreement that is specifically applicable shall have occurred: 4.2.2.1. if the Leased Premises is being prepared exclusively by contractors selected and retained by the Landlord, the date the Leased Premises can first be legally occupied for its intended use; 4.2.2.2. preparation of the Leased Premises in accordance with the Tenant Plan is substantially completed (except for (i) any long lead time items that may be required that can not be delivered to the Leased Premises in sufficient time to be incorporated into the work in proper sequence and (ii) any preparation work that is not being performed exclusively by contractors selected and retained by the Landlord); and -2- 4.2.2.3. the Landlord can deliver actual and exclusive possession of the Leased Premises, free of rubbish and debris, to the Tenant (except for any contractors not selected and retained by the Landlord and their rubbish and debris); and 4.2.2.4. Landlord has secured a Certificate of Occupancy from the public authority with jurisdiction over the Leased Premises. If the Certificate of Occupancy is a temporary certificate then Landlord shall satisfy the conditions in a timely manner even though the Commencement Date has occurred. 4.3. In the event one or more of the conditions contemplated by this subsection 4.3 of the Agreement occurs, notwithstanding anything to the contrary set forth in subsection 4.2 of this Agreement, the Commencement Date shall be the earliest applicable date specified below: 4.3.1. the Target Date in the event the Tenant does not timely: (i) deliver the Tenant Plan to the Landlord by the Tenant Plan Due Date and (ii) sign and return the notice contemplated by the last sentence of subsection 5.4 of this Agreement to the Landlord and (iii) make the initial payment contemplated by the next to last sentence of subsection 5.4 of this Agreement to the Landlord; or 4.3.2. the date that the last of the conditions set forth in subsection 4.2.2 of this Agreement that is specifically applicable shall have occurred if (i) the Tenant shall have requested the Landlord or any contractors selected and retained by the Landlord to complete their work before the Target Date and (ii) they shall have done so. 4.4. Once it is ascertained in accordance with subsections 4.2 and 4.3 of this Agreement, the Landlord shall give prompt notice of the Commencement Date to the Tenant; and if the Tenant does not object thereto by notice given to the Landlord within 10 days of the Landlord's notice, the date set forth in the Landlord's notice shall thereafter be conclusively presumed to be the Commencement Date. 5. Preparation of the Leased Premises. 5.1. Unless previously accomplished, within one week after execution and delivery of this Agreement, the Tenant shall give notice to the Landlord including therewith each of the following: 5.1.1. a conceptual drawing, as detailed as practicable, of the proposed Tenant Plan; and 5.1.2. an itemized list, as detailed as practicable, of the types and quantities of materials, supplies, equipment and work to be incorporated into the Tenant Plan by the Tenant. 5.2. Unless previously accomplished, within two weeks after receipt of the notice contemplated by subsection 5.1, the Landlord shall give notice to the Tenant of the Landlord's contractors' estimated unit prices to build out the Leased Premises, including unit prices for each item included in that notice as to which sufficient information has been provided by the Tenant in that notice. 5.3. If, at or prior to the execution and delivery of this Agreement, the Tenant shall not have requested the Landlord in writing to provide the Tenant Plan, the Tenant shall deliver the complete Tenant Plan to the Landlord not later than the Tenant Plan Due Date. The Tenant Plan shall be at the Tenant's expense. 5.4. Within two weeks after receipt of the Tenant Plan, the Landlord shall give notice to the Tenant of the Landlord's price to the Tenant to supply or perform, or both, the work contemplated by the Tenant Plan being provided by the Landlord or the Landlord's contractors. Such price shall include 7% overhead and 7% profit of the Landlord's contractors' aggregate price in excess of the Allowance as the Landlord's -3- general contracting fee and shall be net of any credit for work being provided by the Landlord without charge to the Tenant in accordance with the Work Letter. If acceptable to the Tenant, the Tenant shall sign a copy of the notice and return it to the Landlord, together with payment of 33-1/3% of the excess over the Allowance, if any, within three business days after it was given authorizing the Landlord and the Landlord's contractors to supply or perform the work contemplated by both the Tenant Plan and the notice at the price set forth in the notice. The Tenant shall pay the balance of such price to the Landlord in proportion to the progress of such work, as and when billed by the Landlord at convenient intervals, with payment of any remaining final balance due from the Tenant prior to the Commencement Date. Tenant shall have the right to review the line items in the bids taken by the Landlord. 5.5. If Landlord's price is not acceptable to the Tenant, the Tenant shall attempt to negotiate an acceptable price within the next three business days. If the parties are unable to agree then the Tenant may engage its own contractors to perform the work provided that Tenant shall be required to utilize the services of the HVAC contractor used by the Landlord in the Building. In this event, the Commencement Date shall be the Target Date. Landlord shall advance the Allowance ratably as the work progresses with a 10% retainage. The balance shall be paid prior to the Commencement Date. 5.6. If the price is less than the Allowance, the Landlord shall pay the balance of the Allowance toward the cost of equipment, fixtures and other installations by the Tenant in the Leased Premises. 5.7. During the period that Landlord is fitting-up the Leased Premises for Tenant, Tenant may move in its furniture, furnishings, equipment and supplies into the Leased Premises and may install its Wiring provided that (i) the furniture, furnishings, equipment and supplies may only be moved in after the carpet is installed; (ii) no personnel may move in and commence operations in the Leased Premises until after a certificate of occupancy is issued; (iii) Tenant shall assume full responsibility for anything which it places in the Leased Premises and shall indemnify, defend and hold harmless Landlord from any loss, liability and expense which arises from Tenant's actions or those of its agents, servants, employees, invitees and contractors. If any of Tenant's operations interfere with the progress of Landlord's work, Tenant shall cease such operations forthwith until Landlord advises that such operations may be resumed. 6. Options. 6.1. Tenant is hereby granted one option to renew this Lease for one five year period upon the following terms and conditions: 6.1.1. At the time of the exercise of the option to renew and at the time of said renewal, the Tenant shall not be in default in accordance with the terms and provisions of this Lease, and shall occupy and be in operation at the entire Leased Premises pursuant to this Lease. 6.1.2. Notice of the exercise of the option shall be sent to the Landlord in writing at least nine (9) months before the expiration of the initial term. 6.1.3. The renewal term shall be for a period of five years to commence at the expiration of the initial term, and all of the terms and conditions of this Agreement, other than the amount of Annual Rent, shall apply during any such renewal term. 6.1.4. Subject to the last sentence of this paragraph, the Annual Rent to be paid during the renewal term shall equal the fair market rental value of the Leased Premises if the same were available for lease to the public. If the parties are unable to agree on the fair market rental value of the Leased Premises, the parties shall each appoint one appraiser who shall in turn appoint a third independent appraiser and the determination of said three appraisers shall be binding on the parties. In no event, however, shall the annual basic rent -4- payable by Tenant during the renewal period be less than the annual basic rent payable by Tenant during the immediately preceding twelve months. 6.2. Tenant is granted a right of first offer (the "Right of First Offer") on the following terms. 6.2.1. If Landlord desires to lease the space contiguous to the Leased Premises shown on Exhibit B (the "Contiguous Space"), Landlord shall notify Tenant in writing of the proposed commencement date. The rental rate and the other economic terms shall be substantially similar to the terms contained in this Lease. Tenant shall notify Landlord in writing within five (5) days after Tenant's receipt of such notice from Landlord as to whether or not Tenant elects to lease such space. If Tenant either notifies Landlord that Tenant does not wish to lease such space, or Tenant fails to so notify Landlord within such five (5) day period, then Tenant's Right of First Offer shall cease and Landlord may let such space without giving Tenant any further notice thereof. 6.2.2. Tenant's notice exercising the Right of First Offer shall constitute a binding commitment to lease the specified space on substantially the same terms and conditions as are set forth in this Lease as modified by the terms set forth in Landlord's notice. The term of the lease for the original Leased Premises shall be extended to conform to the term offered by Landlord for the new leased premises. Tenant's Proportionate Share and the total rentable area of the Leased Premises shall be increased accordingly. Landlord and Tenant shall execute and deliver an amendment of this Lease to confirm the exercise of Tenant's Right of First Offer. 6.2.3. The Right of First Offer set forth in this Article, is personal to Tenant named herein and may not be assigned or transferred by Tenant. 6.3. In the event the Tenant assigns this Agreement or sublets, or licenses the use or occupancy of, the Leased Premises or any portions thereof in accordance with section 17 of this Agreement or otherwise, or attempts to do so: 6.3.1. any Option to Renew which the Tenant has theretofore properly exercised with respect to a Renewal Term that has not yet actually commenced shall be rescinded, if the Landlord so elects by notice to the Tenant, to the same extent as if it had not been exercised at all; 6.3.2. any Option to Renew or any other type of option or optional right exercisable by the Tenant not theretofore timely and otherwise properly exercised by the Tenant shall thereupon expire; and 6.3.3. if the Right of First Offer has not theretofore been exercised, the Right of First Offer shall expire. 6.4. If the Leased Premises is being prepared exclusively by contractors selected and retained by the Landlord and the Leased Premises cannot be legally occupied for the intended use on or before April 11, 2002, then Tenant may terminate this Agreement by written notice effective fifteen (15) days after service thereof. This is the Termination Option. If Landlord completes and delivers the Leased Premises within the fifteen day period after service of the notice then the notice shall automatically be withdrawn and this Agreement shall continue in full force and effect as though the notice had not been served. If the Leased Premises cannot be legally occupied for the intended use on or before February 11, 2002, the Tenant shall be entitled to one (1) day of rent abatement for each day after -5- February 11, 2002 until the Leased Premises are delivered to the Tenant; and, if the Leased Premises cannot be legally occupied for the intended use on or before March 11, 2002, the Tenant shall be entitled to two (2) day of rent abatement for each day after March 11, 2002 until the Leased Premises are delivered to the Tenant. Notwithstanding the foregoing provisions of this subsection 6.4, the dates of February 11, March 11, and April 11 shall be extended, day for day, for each day that the Tenant Plan is delivered to Landlord after the Tenant Plan Due Date. 6.5. Even though the Commencement Date has occurred, Landlord shall satisfy all punch list items identified by Tenant in a list provided within five (5) business days after it takes occupancy of the Leased Premises and Landlord shall also correct any latent defects that are identified by Tenant and reported to Landlord in writing within the one year period after the Commencement Date. If there is any dispute concerning punchlist items, latent defects or the resolution thereof, the dispute shall be resolved by Rotwein and Blake, the Tenant's architect. 7. Use and Occupancy. 7.1. The Tenant shall continuously occupy and use the Leased Premises during the Term exclusively as its general offices. Tenant may have a computer room with special heating and cooling units which run 24 hours a day. The Landlord shall install a separate meter at Tenant's expense and Tenant shall pay the electric charge associated with the operation of the special heating and cooling units based upon the meter readings. The units shall be maintained by Landlord, at its expense, for the first six months after the Commencement Date and, thereafter, by Tenant, at its own expense. 7.2. In connection with the Tenant's use and occupancy of the Leased Premises and use of the Common Facilities, the Tenant shall observe, and the Tenant shall cause the Tenant's employees, other agents and Guests to observe, each of the following: 7.2.1. the Tenant shall not do, or permit or suffer the doing of, anything which might have the effect of creating an increased risk of, or damage from, fire, explosion or other casualty; 7.2.2. the Tenant shall not do, or permit or suffer the doing of, anything which would have the effect of (a) increasing any premium for any liability, property, casualty or excess coverage insurance policy otherwise payable by the Landlord or any tenant of Other Leased Premises or (b) making any such types or amounts of insurance coverage unavailable or less available to the Landlord or any tenant of Other Leased Premises; 7.2.3. to the extent they are not inconsistent with this Agreement, the Tenant and the Tenant's employees, other agents and Guests shall comply with the Building Rules and Regulations attached hereto as Exhibit D, and with any changes made therein by the Landlord if, with respect to any such changes, the Landlord shall have given notice of the particular changes to the Tenant and such changes shall not materially adversely affect the conduct of the Tenant's business in the Leased Premises; 7.2.4. the Tenant and the Tenant's employees, other agents and Guests shall not create, permit or continue any Nuisance in or around the Leased Premises, the Other Leased Premises, the Building, the Common Facilities and the Property; 7.2.5. The Tenant and the Tenant's employees, other agents and Guests shall not permit the Leased Premises to be regularly occupied by more than one individual per 200 square feet of usable floor space of the Leased Premises; 7.2.6. the Tenant and the Tenant's employees, other agents and Guests shall comply with all Federal, state and local statutes, ordinances, rules, regulations and orders as they pertain to the Tenant's use and occupancy of the Leased Premises, to the conduct of the Tenant's business and to the use of the Common Facilities, except that this subsection shall not -6- require the Tenant to make any structural changes that may be required thereby that are generally applicable to the Building as a whole; 7.2.7. the Tenant and the Tenant's employees, other agents and Guests shall comply with the requirements of the Board of Fire Underwriters (or successor organization) and of any insurance carriers providing liability, property, casualty or excess insurance coverage regarding the Property, the Building, the Common Facilities or any portions thereof, and any other improvements on the Property, except that this subsection shall not require the Tenant to make any structural changes that may be required thereby that are generally applicable to the Building as a whole; 7.2.8. the Tenant and the Tenant's employees, other agents and Guests shall not bring or discharge any material or substance (solid liquid or gaseous) which is a Hazardous Substance, or conduct any activity, in or on the Property, the Building, the Common Facilities or the Leased Premises that shall have been identified: (i) by the scientific community, or (ii) by any Federal, state or local statute (including, without limiting the generality of the foregoing, the Spill Compensation and Control Act (58 N.J.S.A. 10-23.11 et seq.); the Industrial Site Recovery Act ("ISRA")(13 N.J.S.A. 1 K-6 et seq.); the Resource Conservation and Recovery Act of 1976 (42 U.S.C. 6901 et seq.) as amended; the Comprehensive Environmental Response Compensation and Liability Act of 1980 (42 U.S.C. 9601 et seq.); the Federal Water Pollution Control Act/Clean Water Act (33 U.S.C. 1251 et seq.); the Clean Water Act (33 U.S.C. 1251 et seq.); the Clean Air Act (42 U.S.C. 7401 et seq.); the Toxic Substances Control Act (15 U.S.C. 2601 et seq.); the Hazardous Materials Transportation Act (49 U.S.C. 5101 et seq.) and the Safe Drinking Water Act (42 U.S.C. 300f through 300j) as amended, and the regulations adopted and publications promulgated pursuant to said laws; and in any revisions or successor codes as toxic or hazardous to health or to the environment ("Environmental Laws"). As used herein, "Hazardous Substance" means any material or substance which is toxic, ignitable, reactive, or corrosive; or which is defined as "hazardous waste", "extremely hazardous waste" or a "hazardous substance" by Environmental Laws; or which is an asbestos, polychlorinated biphenyl or a petroleum product; or which is regulated by Environmental Laws; 7.2.9. the Tenant and the Tenant's employees, other agents and Guests shall not draw electricity in the Leased Premises in excess of the rated capacity of the electrical conductors and safety devices including, without limiting the generality of the foregoing, circuit breakers and fuses, by which electricity is distributed to and throughout the Leased Premises and, without the prior written consent of the Landlord in each instance, shall not connect any fixtures, appliances or equipment to the electrical distribution system serving the Building and the Leased Premises other than typical professional office equipment such as minicomputers, microcomputers, typewriters, copiers, telephone systems, coffee machines and table top microwave ovens, none of which, considered individually and in the aggregate, overall and per fused or circuit breaker protected circuit, shall exceed the above limits; 7.2.10. on a timely basis the Tenant shall pay directly and promptly to the respective taxing authorities any taxes (other than Taxes) charged, assessed or levied exclusively on the -7- Leased Premises or arising exclusively from the Tenant's use and occupancy of the Leased Premises; and 7.2.11. the Tenant shall not initiate any appeal or contest of any assessment or collection of Taxes for any period without, in each instance, the prior written consent of the Landlord which, without being deemed unreasonable, the Landlord may withhold if the Building was not 90% occupied by paying tenants throughout that period or if the Tenant is not joined by tenants of Other Leased Premises that leased throughout that period, and that are then leasing, at least 80% of all Other Leased Premises, determined by their gross rentable floor space. 8. Utilities, Services, Maintenance and Repairs. 8.1. The Landlord shall provide or arrange for the provision of: 8.1.1. such maintenance and repair of the Building (except the Leased Premises and Other Leased Premises); the Common Facilities; and the heating, ventilation and air conditioning systems (but not including supplemental cooling, whether supplemental cooling units are found in the Leased Premises or not), any plumbing systems and the electrical systems in the Building, the Common Facilities, the Leased Premises and Other Leased Premises as is customarily provided for first class office buildings in the immediate area. Provided that Tenant complies with the use limitations set forth in this Agreement and provided further that no law or regulation prohibits the same, the heating and cooling system shall maintain inside occupied space conditions of 70 degrees F when the outside air temperature is 13 degrees F dry bulb and 78 degrees F dry bulb and 50% relative humidity when outside conditions are 90 degrees F dry bulb and 75 degrees F wet bulb; 8.1.2. maintenance and repair of the Leased Premises, except for refinishing walls and wall treatments, base, ceilings, floor treatments and doors in general from time to time or for gouges, spots, marks, damage or defacement caused by anyone other than the Landlord, its employees and other agents, and except for the Tenant's furniture, furnishings, equipment and other property; 8.1.3. such garbage removal from the Building and the Common Facilities and such janitorial services for the Building, the Leased Premises and Other Leased Premises as is customarily provided for first class office buildings in the immediate area including on-site day porter; 8.1.4. the electricity required for the operation of the Building, the Property and the Common Facilities during Regular Business Hours and, on a reduced service basis, during other than Regular Business Hours, and, at all times, the electricity required for the Leased Premises; 8.1.5. such heat, ventilation and air conditioning (but not including supplemental cooling, whether supplemental cooling units are found in the Leased Premises or not) for the Building, the Leased Premises and Other Leased Premises as is customarily provided for first class office buildings in the immediate area for the comfortable use of the Building during Regular Business Hours. (Customary cooling shall be determined without reference to the existence of such supplemental cooling units.); 8.1.6. water (including heated water) to the Building and, if the appropriate plumbing has been installed therein, to the Leased Premises; 8.1.7. sewage disposal for the Building; -8- 8.1.8. passenger elevator service for the Building; 8.1.9. snow clearance from, and sweeping of, Parking Facilities and private access roads which are part of the Property or the Common Facilities and adequate lighting of the Parking Facilities until 11:00 P.M., Monday through Friday; and 8.1.10. the maintenance of landscaping which is part of the Property or the Common Facilities. 8.2. Except as specifically set forth in subsection 8.1 of this Agreement, the Tenant shall maintain and repair the Leased Premises and keep the Leased Premises in as good condition and repair, reasonable wear and use excepted, as the Leased Premises are upon the completion of any improvements contemplated by section 5 of this Agreement. 9. Allocation of the Expense of Utilities, Services, Maintenance, Repairs and Taxes. 9.1. All Tenant Electric Charges shall be borne by the Tenant. It is agreed that the Tenant Electric Charges are $1.50 per square foot per year, subject to the provisions of subsection 10.10 of this Agreement. 9.2. Between the Commencement Date and the end of the No Pass Through Period, the Tenant's Share of all Operational Expenses and Taxes incurred during such period shall be borne by the Landlord. 9.3. Between the day after the end of the No Pass Through Period and the end of the Term, the Tenant's Share of Operational Expenses and Taxes incurred during each annual or shorter period ending on (a) December 31 of each year and (b) the end of the Term shall be borne as follows: 9.3.1. the Tenant's Share of: Operational Expenses and Taxes incurred during each such period of 12 months (or shorter period), up to the amounts of Base Year Operational Expenses and Base Year Taxes, respectively (or proportional amount thereof for periods shorter than 12 months), shall be borne by the Landlord; and 9.3.2. the Tenant's Share of the amounts by which Operational Expenses and Taxes incurred during each such period of 12 months (or shorter period) exceed Base Year Operational Expenses and Base Year Taxes, respectively (or proportional amount thereof for periods shorter than 12 months) shall be allocated to, and borne by, the Tenant as more specifically set forth in section 10 of this Agreement. 10. Computation and Payment of Allocated Expenses of Utilities, Services, Maintenance, Repairs, Taxes and Capital Expenditures. 10.1. The Tenant shall promptly pay the following additional amounts to the Landlord at the respective times set forth below: 10.1.1. commencing with the first day after the end of the No Pass Through Period, and on the first day of each month thereafter during the Term, one-twelfth of the Tenant's Share of the amount by which Taxes for the then current calendar year exceeds Base Year Taxes, computed in accordance with subsection 10.5 of this Agreement. When Landlord knows of facts which cause a revision of the estimate, it may serve a revised estimate and, for the balance of the current calendar year, the estimated payments shall be made accordingly; 10.1.2. within 20 days of the Landlord's giving notice to the Tenant after the close of each calendar year closing during the Term, commencing with the first calendar year closing -9- after the close of the No Pass Through Period, and after the end of the Term, the Tenant's Share of the difference between the Landlord's previously projected amount of Taxes for such period and the actual amount of Taxes for such period, in either case in excess of Base Year Taxes, computed in accordance with subsection 10.6 of this Agreement (unless such difference is a negative amount, in which case the Landlord shall credit such difference against any amounts next due from the Tenant under subsections 10.1.1 and 10.5 of this Agreement); 10.1.3. commencing with the first day after the end of the No Pass Through Period, and on the first day of each month thereafter during the Term, one-twelfth of the Tenant's Share of the amount by which Operational Expenses for the then current calendar year exceed Base Year Operational Expenses, computed in accordance with subsection 10.7 of this Agreement. When Landlord knows of facts which cause a revision of the estimate, it may serve a revised estimate and, for the balance of the current calendar year, the estimated payments shall be made accordingly; 10.1.4. within 20 days of the Landlord's giving notice to the Tenant after the close of each calendar year closing during the Term, commencing with the first calendar year closing after the close of the No Pass Through Period, and after the end of the Term, the Tenant's Share of the difference between the Landlord's previously projected amount of Operational Expenses for such period and the actual amount of Operational Expenses for such period, in either case in excess of Base Year Operational Expenses, computed in accordance with subsection 10.8 of this Agreement (unless such difference is a negative amount, in which case the Landlord shall credit such difference against any amounts next due from the Tenant under subsections 10.1.3 and 10.7 of this Agreement); 10.1.5. commencing with the first day of the first month after the Landlord gives any notice contemplated by subsection 10.9 of this Agreement to the Tenant and continuing on the first day of each month thereafter until the earlier of (a) the end of the Term or (b) the last month of the useful life set forth in the respective notice, one-twelfth of the Tenant's Share of any Annual Amortized Capital Expenditure, computed in accordance with subsection 10.9 of this Agreement; 10.1.6. on the first day of each month during the Term, the monthly Tenant Electric Charges, set forth in section 9.1 of this Agreement as the same may be revised in accordance with subsection 10.10 of this Agreement; and 10.1.7. promptly as and when billed therefor by the Landlord, the amount of any expense which would otherwise fall within the definition of Operational Expenses, but which is specifically paid or incurred by the Landlord for operation and maintenance of the Building, the Common Facilities or the Property outside Regular Business Hours at the specific request of the Tenant or the amount of any expenditure incurred for maintenance or repair of damage to the Building, the Common Facilities, the Property, the Leased Premises or the Other Leased Premises caused directly or indirectly, in whole or in part, by the active or passive negligence or intentional act of the Tenant or any of its employees, other agents or Guests. 10.2. "Operational Expenses" means all expenses paid or incurred by the Landlord in connection with the Property, the Building, the Common Facilities and any other improvements on the Property and their operation and maintenance (other than Taxes (which are separately allocated -10- to the Tenant in accordance with subsections 10.1.1 and 10.1.2 of this Agreement), Capital Expenditures (which are separately allocated to the Tenant in accordance with subsection 10.1.5 of this Agreement) and those expenses contemplated by subsections 10.1.6 and 10.1.7 of this Agreement)) including, without limiting the generality of the foregoing: 10.2.1. Utilities Expenses; 10.2.2. the expense of providing the services, maintenance and repairs contemplated by subsection 8.1 of this Agreement, whether furnished by the Landlord's employees or by independent contractors or other agents; 10.2.3. wages, salaries, fees and other compensation and payments and payroll taxes and contributions to any social security, unemployment insurance, welfare, pension or similar fund and payments for other fringe benefits required by law or union agreement (or, if the employees or any of them are not represented by a union, then payments for benefits comparable to those generally required by union agreement in first class office buildings in the immediate area which are unionized) made to or on behalf of any employees of Landlord performing services rendered in connection with the operation and maintenance of the Building, the Common Facilities and the Property, including, without limiting the generality of the foregoing, elevator operators, elevator starters, window cleaners, porters, janitors, maids, miscellaneous handymen, watchmen, persons engaged in patrolling and protecting the Building, the Common Facilities and the Property, carpenters, engineers, firemen, mechanics, electricians, plumbers, other tradesmen, other persons engaged in the operation and maintenance of the Building, Common Facilities and Property, Building superintendent and assistants, Building manager, and clerical and administrative personnel; 10.2.4. the uniforms of all employees and the cleaning, pressing and repair thereof; 10.2.5. premiums and other charges incurred by Landlord with respect to all insurance relating to the Building, the Common Facilities and the Property and the operation and maintenance thereof, including, without limitation: property and casualty, fire and extended coverage insurance, including windstorm, flood, hail, explosion, other casualty, riot, rioting attending a strike, civil commotion, aircraft, vehicle and smoke insurance; public liability insurance; elevator, boiler and machinery insurance; excess liability coverage insurance; use and occupancy insurance; workers' compensation and health, accident, disability and group life insurance for all employees; casualty rent insurance and such other insurance with such limits as may, from time to time, be customary for office buildings or which Landlord may be required to secure by mortgage lenders; 10.2.6. sales and excise taxes and the like upon any Operational Expenses and Capital Expenditures; 10.2.7. management fees of any independent managing agent for the Property, the Building or the Common Facilities; and if there shall be no independent managing agent, or if the managing agent shall be a person affiliated with the Landlord, the management fees that would customarily be charged for the management of the Property, the Building and the Common Facilities by an independent, first class managing agent in the immediate area; 10.2.8. the cost of replacements for tools, supplies and equipment used in the operation, service, maintenance, improvement, inspection, repair and alteration of the Building, the Common Facilities and the Property; -11- 10.2.9. the cost of repainting or otherwise redecorating any part of the Building or the Common Facilities; 10.2.10. decorations for the lobbies and other Common Facilities in the Building; 10.2.11. the cost of licenses, permits and similar fees and charges related to operation, repair and maintenance of the Building, the Property and the Common Facilities; and 10.2.12. any and all other expenditures of the Landlord in connection with the operation, alteration, repair or maintenance of the Property, the Common Facilities or the Building as a first-class office building and facilities in the immediate area which are properly treated as an expense fully deductible as incurred in accordance with generally applied real estate accounting practice. In determining Base Year Operational Expenses, Landlord may adjust any line item which, when compared to the same line item for the year prior to the Base Year, has increased at a rate which is more than double the increase in the Index at the end of the year prior to the Base Year compared to the Index at the end of the Base Year. In such event, the actual expense incurred for the line item in the Base Year shall be adjusted to equal the amount incurred for the same line item for the year prior to the Base Year multiplied by the sum of one plus the percentage increase in the Index for the one year period. 10.3. "Capital Expenditures" means the following expenditures incurred or paid by the Landlord in connection with the Property, the Building, the Common Facilities and any other improvements on the Property: 10.3.1. all costs and expenses incurred by the Landlord in connection with retro-fitting the entire Building or the Common Facilities, or any portion thereof, to comply with any change in Federal, state or local statute, rule, regulation, order or requirement which change takes effect after the effective date of this Agreement; 10.3.2. all costs and expenses incurred by the Landlord to replace any parts of the Property, the Building or the Common Facilities if Landlord, in the reasonable exercise of its judgment determines that the amortized cost of replacement will be less than the cost of maintenance and repair of the replaced item or if the item cannot be repaired and must be replaced; and 10.3.3. all costs and expenses incurred by the Landlord in connection with the installation of any energy, labor or other cost saving device or system on the Property or in the Building or the Common Facilities. 10.4. Neither "Operational Expenses" nor "Capital Expenditures" shall include any of the following. 10.4.1. principal or interest on any mortgage indebtedness on the Property, the Building or any portion thereof; 10.4.2. any capital expenditure, or amortized portion thereof, other than those included in the definition of Capital Expenditures set forth in subsection 10.3 above; 10.4.3. expenditures for any leasehold improvement which is made in connection with the preparation of any portion of the Building for occupancy by a new tenant or which is not made generally to or for the benefit of the Leased Premises and all Other Leased Premises or generally to the Building or the Common Facilities; -12- 10.4.4. to the extent the Landlord actually receives proceeds of property and casualty insurance policies on the Building, other improvements on the Property or the Common Facilities, expenditures for repairs or replacements occasioned by fire or other casualty to the Building or the Common Facilities; 10.4.5. expenditures for repairs, replacements or rebuilding occasioned by any of the events contemplated by section 16 of this Agreement; 10.4.6. expenditures for costs, including advertising and leasing commissions, incurred in connection with efforts to lease portions of the Building and to procure new tenants for the Building, specifically excluding any and all legal or other expenses incurred in connection with enforcing the terms of any leases with other tenants; 10.4.7. expenditures for the salaries and benefits of the executive officers, if any, of the Landlord; and 10.4.8. depreciation (as that term is used in the accounting sense in the context of generally applied real estate accounting practice) of the Building, the Common Facilities and any other improvement on the Property. 10.5. As soon as practicable after the close of the No Pass Through Period and December 31 of each year thereafter, any portion of which is during the Term, the Landlord shall furnish the Tenant with a notice setting forth: 10.5.1. Taxes billed, or if a bill has not then been received for the entire period, the Landlord's projection of Taxes to be billed, for the then current calendar year; 10.5.2. the amount of Base Year Taxes; 10.5.3. the amount, if any, by which item 10.5.1 above exceeds item 10.5.2 above; and 10.5.4. the Tenant's Share of item 10.5.3 above. 10.6. As soon as practicable after December 31 of each year during the Term and after the end of the Term, the Landlord shall furnish the Tenant with a notice setting forth: 10.6.1. the actual amount of Taxes for the preceding calendar year in excess of Base Year Taxes (or proportional amount thereof for shorter periods during the Term); 10.6.2. the Landlord's previously projected amount of Taxes for the preceding calendar year in excess of Base Year Taxes (or proportional amount thereof for shorter periods during the Term); 10.6.3. the difference obtained by subtracting item 10.6.2 above from item 10.6.1 above; and 10.6.4. the Tenant's Share of item 10.6.3 above. 10.7. As soon as practicable after the close of the No Pass Through Period and December 31 of each year thereafter, any portion of which is during the Term, the Landlord shall furnish the Tenant with a notice setting forth: 10.7.1. the Landlord's projection of annual Operational Expenses for the current period (if any -13- portion thereof is during the Term); 10.7.2. the amount of the Base Year Operational Expenses; 10.7.3. the amount, if any, by which item 10.7.1 above exceeds item 10.7.2 above; and 10.7.4. the Tenant's Share of item 10.7.3 above. 10.8. As soon as practicable after December 31 of each year during the Term and after the end of the Term, the Landlord shall furnish the Tenant with a notice setting forth: 10.8.1. the actual amount of Operational Expenses for the preceding calendar year in excess of Base Year Operational Expenses (or proportional amount thereof for shorter periods during the Term); 10.8.2. the Landlord's previously projected amount of Operational Expenses for the preceding calendar year in excess of Base Year Operational Expenses (or proportional amount thereof for shorter periods during the Term); 10.8.3. the difference obtained by subtracting item 10.8.2 above from item 10.8.1 above; and 10.8.4. the Tenant's Share of item 10.8.3 above. 10.9. As soon as practicable after incurring any Capital Expenditure, the Landlord shall furnish the Tenant with a notice setting forth: 10.9.1. a description of the Capital Expenditure and the subject thereof; 10.9.2. the date the subject of the respective Capital Expenditure was first placed into service and the period of useful life selected by the Landlord in connection with the determination of the Annual Amortized Capital Expenditure; 10.9.3. the amount of the Annual Amortized Capital Expenditure; and 10.9.4. the Tenant's Share of item 10.9.3 above. 10.10. From time to time after the Commencement Date, the Landlord may furnish the Tenant with a notice setting forth its estimate of Tenant Electric Charges per month. Unless the Tenant desires to question the Landlord's then most recent estimate of Tenant Electric Charges exclusively in the manner set forth below, the Landlord's then most recent estimate shall be binding and shall continue in effect until any question raised by the Tenant is otherwise resolved in accordance with this subsection 10.10 of the Agreement. If the Tenant desires to question the Landlord's estimate of Tenant Electric Charges, the Tenant shall give notice to the Landlord of its desire. Upon receipt of the Tenant's notice, the Landlord shall obtain, at the Tenant's expense, a reputable, independent electrical engineer's formal written estimate and computation of the Tenant Electric Charges. The engineer's estimate and computation of Tenant Electric Charges shall thereupon control for a 12 month period commencing with the date as of which it is given effect as to Tenant Electric Charges, and until the Landlord furnishes the Tenant with a subsequent notice setting forth its estimate of Tenant Electric Charges per month, except to the extent that the Landlord may increase them in proportion to increases in Utilities Expenses during the same period. 10.11. Within 30 days after the Landlord gives any notice enumerated in subsections 10.5 through 10.10 of this Agreement, the Tenant or the Tenant's authorized agent, upon one week's prior notice to the -14- Landlord, may inspect the Landlord's books and records, as they pertain to the particular expense in question, at the Landlord's office regarding the subject of any such notice to verify the amount(s) and calculation(s) thereof. After payment of the Tenant's Share in accordance with the provisions of section 10 of this Agreement, no further audit shall be conducted with respect to Operational Expenses, Taxes, Capital Expenditures, Base Year Operational Expenses or Base Year Taxes except with respect to items which may have been questioned within the 30-day period. Tenant agrees that no audit will be conducted by an auditor engaged, in whole or in part, on a contingent fee basis. If an audit is conducted, the Landlord shall have the right to verify that the provisions of this prohibition have been satisfied. 10.12. The mere enumeration of an item within the definitions of Operational Expenses and Capital Expenditures in subsections 10.2 and 10.3 of this Agreement, respectively, shall not be deemed to create an obligation on the part of the Landlord to provide such item unless the Landlord is affirmatively required to provide such item elsewhere in this Agreement. 11. Leasehold Improvements, Fixtures and Trade Fixtures. All leasehold improvements to the Leased Premises, fixtures installed in the Leased Premises and the blinds and floor treatments or coverings shall be the property of the Landlord, regardless of when, by which party or at which party's cost the item is installed. Movable furniture, furnishings, trade fixtures and equipment of the Tenant which are in the Leased Premises shall be the property of the Tenant, except as may otherwise be set forth in section 23 of this Agreement. 12. Alterations, Improvements and Other Modifications by the Tenant. 12.1. The Tenant shall not make any alterations, improvements or other modifications to the Leased Premises which effect structural changes in the Building or any portion thereof, change the functional utility or rental value of the Leased Premises or, except as may be contemplated by section 5 of this Agreement prior to the Commencement Date, affect the mechanical, electrical, plumbing or other systems installed in the Building or the Leased Premises. 12.2. The Tenant shall not make any other alterations, improvements or modifications to the Leased Premises, the Building or the Property or make any boring in the ceiling, walls or floor of the Leased Premises or the Building unless the Tenant shall have first: 12.2.1. furnished to the Landlord detailed, New Jersey architect-certified construction drawings, construction specifications and, if they pertain in any way to the heating, ventilation and air conditioning or other systems of the Building, related engineering design work and specifications regarding, the proposed alterations, improvements or other modifications; 12.2.2. not received a notice from the Landlord objecting thereto in any respect within 30 days of the furnishing thereof (which shall not be deemed the Landlord's affirmative consent for any purpose); 12.2.3. obtained any necessary or appropriate building permits or other approvals from the Municipality and, if such permits or other approvals are conditional, satisfied all conditions to the satisfaction of the Municipality; and 12.2.4. met, and continued to meet, all the following conditions with regard to any contractors selected by the Tenant and any subcontractors, including materialmen, in turn selected by any of them: 12.2.4.1. the Tenant shall have sole responsibility for payment of, and shall pay, such -15- contractors; 12.2.4.2. the Tenant shall have sole responsibility for coordinating, and shall coordinate, the work to be supplied or performed by such contractors, both among themselves and with any contractors selected by the Landlord; 12.2.4.3. the Tenant shall not permit or suffer the filing of any notice of construction lien claim or other lien or prospective lien by any such contractor or subcontractor with respect to the Property, the Common Facilities, the Building or any other improvements on the Property; and if any of the foregoing should be filed by any such contractor or subcontractor, the Tenant shall forthwith obtain and file the complete discharge and release thereof or provide such payment bond(s) from a reputable, financially sound institutional surety as will, in the opinions of the Landlord, the holders of any mortgage indebtedness on, or other interest in, the Property, the Building, the Common Facilities or any other improvements on the Property, or any portions thereof, and their respective title insurers, be adequate to assure the complete discharge and release thereof; 12.2.4.4. prior to any such contractor's entering upon the Property, the Building or the Leased Premises or commencing work the Tenant shall have delivered to the Landlord (a) all the Tenant's certificates of insurance set forth in section 14 of this Agreement, conforming in all respects to the requirements of section 14 of this Agreement, except that the effective dates of all such insurance policies shall be prior to any such contractor's entering upon the Property, the Building or the Leased Premises or commencing work (if any work is scheduled to begin before the Commencement Date) and (b) similar certificates of insurance from each of the Tenant's contractors providing for coverage in equivalent amounts, together with their respective certificates of workers' compensation insurance, employer's liability insurance and products-completed operations insurance, the latter providing coverage in at least the amount required for the Tenant's comprehensive general public liability and excess insurance; 12.2.4.5. each such contractor shall be a party to collective bargaining agreements with those unions that are certified as the collective bargaining agents of all bargaining units of such contractor, of which all such contractor's workpersons shall be members in good standing; 12.2.4.6. each such contractor shall perform its work in a good and workpersonlike manner and shall not interfere with or hinder the Landlord or any other contractor in any manner; 12.2.4.7. there shall be no labor dispute of any nature whatsoever involving any such contractor or any workpersons of such contractor or the unions of which they are members with anyone; and if such a labor dispute exists or comes into existence the Tenant shall forthwith, at the Tenant's sole cost and expense, remove all such contractors and their workpersons from the Building, the Common Facilities and the Property; and 12.2.4.8. the Tenant shall have the sole responsibility for the security of the Leased Premises and all contractors' materials, equipment and work, regardless of whether their work is in progress or completed. -16- 12.3. After the Commencement Date, the Tenant shall not apply any wall covering (except latex based flat paint) or other treatment to the walls of the Leased Premises without the prior written consent of the Landlord. 13. Landlord's Rights of Entry and Access. The Landlord and its authorized agents shall have the following rights of entry and access to the Leased Premises: 13.1. In case of any emergency or threatened emergency, at any time for any purpose which the Landlord reasonably believes under such circumstances will serve to prevent, eliminate or reduce the emergency, or the threat thereof, or damage or threatened damage to persons and property. 13.2. Upon at least one day's prior verbal advice to the Tenant, at any time for the purpose of erecting or constructing improvements, modifications, alterations and other changes to the Building or any portion thereof, including, without limiting the generality of the foregoing, the Leased Premises, the Common Facilities or the Property or for the purpose of repairing, maintaining or cleaning them, whether for the benefit of the Landlord, the Building, all tenants of Other Leased Premises in the Building, or one or more tenants of Other Leased Premises, or others. In connection with any such improvements, modifications, alterations, other changes, repairs, maintenance or cleaning, the Landlord may close off such portions of the Property, the Building and the Common Facilities and interrupt such services as may be necessary to accomplish such work, without liability to the Tenant therefor and without such closing or interruption being deemed an eviction or constructive eviction or requiring an abatement of Rent. However, in accomplishing any such work, the Landlord shall endeavor not to materially interfere with the Tenant's use and enjoyment of the Leased Premises or the conduct of the Tenant's business and to minimize interference, inconvenience and annoyance to the Tenant. 13.3. At all reasonable hours for the purpose of operating, inspecting or examining the Building, including the Leased Premises, or the Property. 13.4. At any time after the Tenant has vacated the Leased Premises, for the purpose of preparing the Leased Premises for another tenant or prospective tenant. 13.5. If practicable by appointment with the Tenant, at all reasonable hours for the purpose of showing the Building to prospective purchasers, mortgagees and prospective mortgagees and prospective ground lessees and lessors. 13.6. If practicable by appointment with the Tenant, at all reasonable hours during the last nine months of the Term for the purpose of showing the Leased Premises to prospective tenants thereof. 13.7. The mere enumeration of any right of the Landlord within this section 13 of the Agreement shall not be deemed to create an obligation on the part of the Landlord to exercise any such right unless the Landlord is affirmatively required to exercise such right elsewhere in this Agreement. 14. Liabilities and Insurance Obligations. 14.1. The Tenant shall, at the Tenant's own expense, purchase before the Commencement Date, and maintain in full force and effect throughout the Term and any other period during which the Tenant may have possession of the Leased Premises, the following types of insurance coverage from financially sound and reputable insurers, licensed by the State of New Jersey to provide such insurance and acceptable to the Landlord, in the minimum amounts set forth below, each of which insurance policies shall be for the benefit of, and shall name the Landlord, the Landlord's managing agent and mortgagees and ground -17- lessors known to the Tenant, if any, of the Building, the Common Facilities, the Property or any interest therein, their successors and assigns as additional persons insured, and none of which insurance policies shall contain a "co-insurance" clause: 14.1.1. commercial general liability insurance (including "broad form and contractual liability" coverage) and excess ("umbrella") insurance which, without limiting the generality of the foregoing, considered together shall insure against such risks as bodily injury, death and property damage, with a combined single limit of not less than $3,000,000.00 for each occurrence; and 14.1.2. "all-risks" property insurance covering the Leased Premises in an amount sufficient, as determined by the Landlord from time to time, to cover the replacement costs for all Tenant's alterations, improvements, fixtures and personal property located in or on the Leased Premises. 14.2. With respect to risks: 14.2.1. as to which this Agreement requires either party to maintain insurance, or 14.2.2. as to which either party is effectively insured and for which risks the other party may be liable, 14.2.3. the party required to maintain such insurance and the party effectively insured shall use its best efforts to obtain a clause, if available from the respective insurer, in each such insurance policy expressly waiving any right of recovery, by reason of subrogation to such party's rights or otherwise, the respective insurer might otherwise have or obtain against the other party, so long as such a clause can be obtained in the respective insurance policy without additional premium cost. If such a clause can be obtained in the respective insurance policy, but only at additional premium cost, such party shall, by notice to the other party, promptly advise the other party of such fact and the amount of the additional premium cost. If the other party desires the inclusion of such a clause in the notifying party's respective insurance policy, the other party shall, within 10 days of receipt of the notifying party's notice, by notice advise the notifying party of its desire and enclose therewith its check in the full amount of the additional premium cost; otherwise the notifying party need not obtain such a clause in the respective insurance. 14.3. Each party hereby waives any right of recovery against the other party for any and all damages for property losses and property damages which are actually insured by either party, but only to the extent: 14.3.1. that the waiver set forth in this subsection 14.3 does not cause or result in any cancellation of, or diminution in, the insurance coverage otherwise available under any applicable insurance policy; 14.3.2. of the proceeds of any applicable insurance policy (without adjustment for any deductible amount set forth therein) actually received by such party for such respective loss or damages; and 14.3.3. the substance of the clause contemplated by subsection 14.2 of this Agreement is actually and effectively set forth in the respective insurance policy. The waiver set forth in this subsection 14.3 of the Agreement shall not apply with respect to liability insurance policies (as opposed to property and casualty insurance policies). -18- 14.4. The Tenant hereby waives any right of recovery it might otherwise have against the Landlord for losses and damages caused actively or passively, in whole or in part, by any of the risks the Tenant is required to insure against in accordance with subsections 14.1.1 or 14.1.2 of this Agreement, unless such waiver would cause or result in a cancellation of, or diminution in, the coverage of the Tenant's policies of insurance against such risks. 14.5. The Landlord shall have no liability whatsoever to the Tenant or the Tenant's employees, other agents or Guests or anyone else for any death, bodily injury, property loss or other damages suffered by any of them or any of their property which is not caused directly, exclusively and entirely by the active gross negligence or intentional misconduct of the Landlord without the intervention or contribution of any other cause or contributing factor whatsoever. 14.6. Each policy of insurance required under subsection 14.1 of this Agreement shall include provisions to the effect that: 14.6.1. no act or omission of the Tenant, its employees, other agents or Guests shall result in a loss of insurance coverage otherwise available under such policy to any person required to be named as an additional insured in accordance with subsection 14.1 of this Agreement; and 14.6.2. the insurance coverage afforded by such policy shall not be diminished, cancelled, permitted to expire or otherwise terminated for any reason except upon 30 days' prior written notice from the insurer to every person required to be named as an additional insured in accordance with subsection 14.1 of this Agreement. 14.7. With respect to each type of insurance coverage referred to in subsection 14.1 of this Agreement, prior to the Commencement Date the Tenant shall cause its insurer(s) to deliver to the Landlord the certificate(s) of the insurer(s) setting forth the name and address of the insurer, the name and address of each additional insured, the type of coverage provided, the limits of the coverage, any deductible amounts, the effective dates of coverage and that each policy under which coverage is provided affirmatively includes provisions to the effect set forth in subsection 14.6 of this Agreement. In the event any of such certificates indicates a coverage termination date earlier than the end of the Term or the end of any other period during which the Tenant may have possession of the Leased Premises, no later than 10 days before any such coverage termination date, the Tenant shall deliver to the Landlord respective, equivalent, new certificate(s) of the insurer(s). 15. Casualty Damage to Building or Leased Premises. 15.1. In the event of any damage to the Building or any portion thereof by fire or other casualty, with the result that the Leased Premises are rendered unusable, in whole or in part, then, unless the Building is destroyed or so damaged that the Landlord does not intend to rebuild the same, the Landlord shall, within 30 business days of the casualty, determine the period of time required to restore the Building and the Leased Premises (but not including the improvements constructed or installed prior to the Term or during the Term in excess of the original allowance for the same). 15.1.1. If, in Landlord's opinion, the restoration described above will take more than 180 days then either the Landlord or the Tenant may elect to cancel this Agreement effective as of the date of casualty. Notice of such election shall be served upon the other party within the ten-day period following the 30-business day period described above. 15.1.2. If, in Landlord's opinion, the restoration described above will take 180 days or less, then Landlord shall not cancel this Agreement and must restore the Building and the Leased -19- Premises as aforesaid. In either of such events, the Landlord shall cause restoration to proceed diligently and expediently to the extent the Landlord has received proceeds of any property, casualty or liability insurance on the damaged portions (or would have received such proceeds had it obtained such coverage). 15.2. Rent shall abate from the date of the casualty until: 15.2.1. such time as the Leased Premises are again fully usable and be reduced during such period by the amount which bears the same proportion to the Rent otherwise payable during such period as the gross rentable floor space of the Leased Premises which are rendered unusable bears to the gross rentable floor space of the Leased Premises. The restoration of the improvements constructed or installed prior to the Term or during the Term in excess of the original allowance for the same shall be the Tenant's responsibility. Tenant shall make reasonable, good faith efforts to integrate the restoration which is its responsibility with the work which is being performed by Landlord. To the extent that is not feasible, Tenant shall be allowed an additional, reasonable interval to complete its work, not to exceed sixty days and Rent shall abate during the interval required for such restoration. The Landlord shall cooperate with Tenant to integrate the restoration of such improvements during the reconstruction period; or 15.2.2. this Agreement is canceled pursuant to the provisions of subsections 15.1. 15.3. If, in the Landlord's opinion, the restoration described above will take more than 180 days and the Landlord makes the election to cancel set forth in subsection 15.1 above then Landlord, in such event, may proceed with restoration (or non-restoration) in any manner it chooses, without any liability to Tenant. 15.4. The Tenant shall promptly advise the Landlord by the quickest means of communication of the occurrence of any casualty damage to the Building or the Leased Premises of which the Tenant becomes aware. 16. Condemnation. If the Leased Premises, or any portion thereof, or the Building or the Common Facilities, or any substantial portion of any of the foregoing, shall be acquired for any public or quasi-public use or purpose by statute, right of eminent domain or private sale in lieu thereof, with the result the Tenant can not use and occupy the Leased Premises for the purpose set forth in subsection 7.1 of this Agreement, the Tenant hereby waives any claim against the Landlord, the condemning authority or other person acquiring same for the putative value of any leasehold interest or loss of the use of same, except for any right the Tenant might have to make a claim, independent of, and without reference to or having any effect on, any award or claim of the Landlord, against the condemning authority or other acquiring party regarding the value of the Tenant's installed trade fixtures and other installed equipment which are not removable from the Leased Premises or for ordinary and necessary moving expenses occasioned thereby. 17. Assignment or Subletting by Tenant. 17.1. Except as may be specifically set forth in this section 17 of the Agreement, the Tenant shall not: 17.1.1. assign, or purport to assign, this Agreement or any of the Tenant's rights hereunder; 17.1.2. sublet, or purport to sublet, the Leased Premises or any portion thereof; -20- 17.1.3. license, or purport to license, the use or occupancy of the Leased Premises or any portion thereof; 17.1.4. otherwise transfer, or attempt to transfer any interest including, without limiting the generality of the foregoing, a mortgage, pledge or security interest, in this Agreement, the Leased Premises or the right to the use and occupancy of the Leased Premises; or 17.1.5. indirectly accomplish, or permit or suffer the accomplishment of, any of the foregoing by merger or consolidation with another entity, by acquisition or disposition of assets or liabilities outside the ordinary course of the Tenant's business or by acquisition or disposition, by the Tenant's equity owners or subordinated creditors, of any of their respective interests in the Tenant. 17.2. The Tenant shall not assign this Agreement or any of the Tenant's rights hereunder or sublet the Leased Premises or any portion thereof without first giving three months' prior notice to the Landlord of its desire to assign or sublet and requesting the Landlord's consent and without first receiving the Landlord's prior written consent. The Tenant's notice to the Landlord shall include: 17.2.1. the full name, address and telephone number of the proposed assignee or sublessee; 17.2.2. a description of the type(s) of business in which the proposed assignee or sublessee is engaged and proposes to engage; 17.2.3. a description of the precise use to which the proposed assignee or sublessee intends to put the Leased Premises or portion thereof; 17.2.4. the proposed assignee's or subtenant's most recent quarterly and annual financial statements prepared in accordance with generally accepted accounting principles and any other evidence of financial position and responsibility that the Tenant or proposed assignee or sublessee may desire to submit; 17.2.5. by diagram and measurement of the actual square feet of floor space, the precise portion of the Leased Premises proposed to be subject to the assignment of this Agreement or to be sublet; 17.2.6. a complete, accurate and detailed description of the terms of the proposed assignment or sublease including, without limiting the generality of the foregoing, all consideration paid or given, or proposed to be paid or to be given, by the proposed assignee, sublessee or other person to the Tenant and the respective times of payment or delivery; and 17.2.7. any other information reasonably requested by the Landlord. 17.3. By the expiration of the notice period contemplated by subsection 17.2 of this Agreement, the Landlord, in its sole discretion, shall take one of the following actions by notice to the Tenant: 17.3.1. grant consent on the terms and conditions set forth in subsection 17.4 of this Agreement and such other reasonable terms and conditions set forth in the Landlord's notice; 17.3.2. refuse to grant consent for any of the reasons set forth in subsection 17.5 of this Agreement or for any other reasonable reason set forth in the Landlord's notice; or 17.3.3. elect to terminate the Term as of (a) the end of the third full month after the Tenant has -21- given notice of the Tenant's desire to assign or sublet or (b) the proposed effective date of the proposed assignment or sublease, unless Tenant revokes its request to assign or sublet by written notice served upon the Landlord within ten (10) days of receipt of notice of Landlord's election to terminate. 17.4. The Landlord's consent to the Tenant's proposed assignment or sublease, if granted under subsection 17.3.1 of this Agreement, shall be subject to all the following terms and conditions (and to any other terms and conditions permitted by that subsection): 17.4.1. any proposed assignee or sublessee shall, by document executed and delivered forthwith to the Landlord, agree to be bound by all the obligations of the Tenant set forth in this Agreement; 17.4.2. the Tenant shall remain liable under this Agreement, jointly and severally with any proposed assignee or sublessee, for the timely performance of all obligations of the Tenant set forth in this Agreement; 17.4.3. the Tenant shall forthwith deliver to the Landlord manually executed copies of all documents regarding the proposed assignment or sublease and a written, accurate and complete description, manually executed both by the Tenant and the proposed assignee or sublessee, of any other agreement, arrangement or understanding between them regarding the same; 17.4.4. with respect to any consideration or other thing of value received or to be received by the Tenant in connection with any such assignment or sublease (other than those payable in equal monthly installments each month during the proposed term of any such assignment or sublease), the Tenant shall pay to the Landlord one-half of any such amount and one half of the fair market value of any other thing of value within 10 days of receipt of same; and 17.4.5. with respect to any amount payable to the Tenant in equal monthly installments each month during the proposed term of any such assignment or sublease in connection with such assignment or sublease, which amount is in excess of the amount which bears the same ratio to the monthly installment of Rent due from the Tenant as the usable floor space of the Leased Premises subject to the assignment or sublease bears to the usable floor space of the entire Leased Premises, the Tenant shall pay one-half of such excess to the Landlord together with the Tenant's monthly installment of Rent. 17.5. The Landlord's refusal to grant consent under subsection 17.3.2 of this Agreement shall not be deemed an unreasonable withholding of consent if based upon any of the following reasons (or any other reason permitted by that subsection): 17.5.1. the Landlord desires to take one of the other actions enumerated in subsection 17.3 of this Agreement; 17.5.2. there is already another assignee, sublessee or licensee of all or a portion of the Leased Premises; 17.5.3. the proposed sublease is for a term of less than one year; 17.5.4. the proposed sublease is for a term which would expire after the Term; -22- 17.5.5. less than one year remains in the Term as of the proposed effective date of the proposed assignment or sublease; 17.5.6. the general reputation, financial position or ability or type of business of, or the anticipated use of the Leased Premises by, the proposed assignee or proposed sublessee is unsatisfactory to the Landlord or is inconsistent with those of tenants of Other Leased Premises or inconsistent with any commitment made by the Landlord to any such other tenant; 17.5.7. the proposed consideration to be paid to the Tenant during any period of 12 months is less than the amount of the Market Rental Rate divided by the gross rentable floor space of the Leased Premises and multiplied by that portion of the gross rentable floor space of the Leased Premises proposed to be subject to the proposed assignment or sublease; 17.5.8. the gross rentable floor space of the portion of the Leased Premises proposed to be sublet is less than one-third of the gross rentable floor space of the Leased Premises; or 17.5.9. Tenant has advertised or listed the space for subleasing or assignment at a rate which is less than the rate being quoted by Landlord for other available space in the Building. 17.6. The Tenant shall have the right to assign this Agreement or sublet the Leased Premises or portions thereof without the prior written consent of the Landlord and without the application of subsections 17.1 and 17.2 of this Agreement if one of the following is applicable: 17.6.1. the proposed assignee or sublessee is, and continues to be, an Affiliate of the Tenant and the Affiliate relationship was not created to avoid the operation of this section of the Agreement; or 17.6.2. the proposed assignee or sublessee is an entity (a) resulting from the merger or consolidation of the Tenant with or into such entity or (b) purchasing substantially all the assets (subject to substantially all the liabilities) of the Tenant or (c) purchasing substantially all the issued and outstanding capital stock in the Tenant. 18. Signs, Displays and Advertising. 18.1. The Tenant shall have one sign identifying the Landlord's assigned number for the Leased Premises at the principal entrance to the Leased Premises. The Tenant may identify itself in or on each of: the signs at the principal entrance to the Leased Premises, the Building directory and the directory, if any, on the floor of the Building on which the Leased Premises is located. All such signs, and the method and materials used in mounting and dismounting them, shall be in accordance with the Landlord's specifications. All such signs shall be provided and mounted by the Landlord at the Landlord's expense, except that the Tenant shall bear any expense of identifying itself on the sign at the principal entrance to the Leased Premises. 18.2. No other sign, advertisement, fixture or display shall be used by the Tenant on the Property or in the Building or the Common Facilities. Any signs other than those specifically permitted under subsection 18.1 of this Agreement shall be removed promptly by the Tenant or by the Landlord at the Tenant's expense. 19. Quiet Enjoyment. The Landlord is the owner of the Building, the Property and those Common Facilities located on the -23- Property. The Landlord has the right and authority to enter into and execute and deliver this Agreement with the Tenant. So long as an Event of Default shall not have occurred, the Tenant shall and may peaceably and quietly have, hold and enjoy the Leased Premises during the Term in accordance with this Agreement. 20. (Intentionally Omitted). 21. Surrender. 21.1. Upon termination of the Term, or at any other time at which the Landlord, by virtue of any provision of this Agreement or otherwise has the right to re-enter and re-take possession of the Leased Premises, the Tenant shall surrender possession of the Leased Premises; remove from the Leased Premises all property owned by the Tenant or anyone else other than the Landlord; remove from the Leased Premises any alterations, improvements or other modifications to the Leased Premises that the Landlord may request by notice; make any repairs required by such removal; clean the Leased Premises; leave the Leased Premises in as good order and condition as it was upon the completion of any improvements contemplated by section 5 of this Agreement, ordinary wear and use excepted; return all copies of all keys and passes to the Leased Premises, the Common Facilities and the Building to the Landlord; and receive the Landlord's written acceptance of the Tenant's surrender. The Landlord shall not be deemed to have accepted the Tenant's surrender of the Leased Premises unless and until the Landlord shall have executed and delivered the Landlord's written acceptance of surrender to the Tenant, which shall not be unreasonably withheld or delayed. 21.2. Within five (5) business days after the expiration or sooner termination of the Term, Landlord may elect ("Election Right") by written notice to Tenant to: 21.2.1. Retain any or all wiring, cables and similar installations appurtenant thereto installed by Tenant in the risers, ceilings, plenums and electrical closets of the Building ("Wiring"); or 21.2.2. Remove any or all such Wiring and restore the Premises and the Building to the condition existing prior to the installation of the Wiring ("Wire Restoration Work"). Landlord shall perform such Wire Restoration Work at Tenant's sole cost and expense. 21.3. The provisions of this Clause shall survive the expiration or sooner termination of the Lease. 21.4. In the event Landlord elects to retain the Wiring pursuant to subsection 21.2.1 of this Agreement or subsection 21.5 of this Agreement, Tenant covenants that: 21.4.1. Tenant shall be the sole owner of such Wiring, that Tenant shall have good right to surrender such Wiring, and that such Wiring shall be free of all liens and encumbrances; and 21.4.2. All Wiring shall be left in good condition, working order, properly labeled at each end and in each telecommunications/electrical closet and junction box, and in safe condition. 21.5. Notwithstanding the foregoing provisions, no more than thirty (30) days prior to the end of the Term and no less than ten (10) days prior to the end of the Term, Tenant may make a written offer to Landlord to leave the Wiring in place at the end of the Term. If Landlord does not accept the offer within three (3) business days after receipt of the offer, Tenant may remove the Wiring prior to the end of the Term at its expense. If Tenant does not make an offer pursuant to the provisions of this subsection 21.5, then the provisions of subsection 21.2 of this Agreement shall apply. If Tenant makes an offer pursuant to the provisions of this subsection 21.5 which is not accepted by Landlord and Tenant, for any reason, fails -24- to remove the Wiring by the end of the Term, then the provisions of subsection 21.2 of this Agreement shall apply. 22. Events of Default. The occurrence of any of the following events shall constitute an Event of Default under this Agreement: 22.1. the Tenant's failure to pay any installment of Basic Rent or any amount of Additional Rent within ten days after delivery of a notice of delinquency under this subsection 22.1. If Landlord sends such a notice of delinquency three times in any consecutive twelve month period then, thereafter, Tenant's failure to pay Rent when it is first due; 22.2. the Tenant's failure to complete performance of any of the Tenant's obligations under this Agreement (other than those contemplated by subsection 22.1 of this Agreement) within 10 days after the Landlord shall have given notice to the Tenant specifying which of the Tenant's obligations has not been performed and in what respects, unless completion of performance within such period of 10 days is not possible using diligence and expedience, then within a reasonable time of the Landlord's notice so long as the Tenant shall have commenced substantial performance within the first three days of such period of 10 days and shall have continued to provide substantial performance, diligently and expediently, through to completion of performance; 22.3. the discovery that any representation made by the Tenant in this Agreement shall have been inaccurate or incomplete in any material respect either on the date it was made or the date as of which it was made; 22.4. the sale, transfer or other disposition of any interest of the Tenant in the Leased Premises by way of execution or other legal process; 22.5. with the exception of those of the following events to which section 365 of the Bankruptcy Code shall apply in the context of an office lease (in which case subsection 22.6 of this Agreement shall apply): 22.5.1. the Tenant's becoming a "debtor," as that term is defined in section 101 of the Bankruptcy Code; 22.5.2. any time when either the value of the Tenant's liabilities exceed the value of the Tenant's assets or the Tenant is unable to pay its obligations as and when they respectively become due in the ordinary course of business; 22.5.3. the appointment of a receiver or trustee of the Tenant's property or affairs; or 22.5.4. the Tenant's making an assignment for the benefit of, or an arrangement with or among, creditors or filing a petition in insolvency or for reorganization or for the appointment of a receiver; 22.6. in the event of the occurrence of any of the events enumerated in subsection 22.5 of this Agreement to which section 365 of the Bankruptcy Code shall apply in the context of an office lease, the earlier of the bankruptcy trustee's rejection or deemed rejection (as those terms are used in section 365 of the Bankruptcy Code) of this Agreement; or 22.7. the Tenant's abandoning the Leased Premises before expiration of the Term without the prior written consent of the Landlord. -25- 23. Rights and Remedies. 23.1. Upon the occurrence of an Event of Default the Landlord shall have all the following rights and remedies: 23.1.1. to elect to terminate the Term by giving notice of such election, and the effective date thereof, to the Tenant and to receive Termination Damages; 23.1.2. to elect to re-enter and re-take possession of the Leased Premises, without thereby terminating the Term, by giving notice of such election, and the effective date thereof, to the Tenant and to receive Re-Leasing Damages; 23.1.3. if the Tenant remains in possession of the Leased Premises after the Tenant's obligation to surrender the Leased Premises shall have arisen, to remove the Tenant and the Tenant's and any others' possessions from the Leased Premises by any of the following means without any liability to the Tenant therefor, any such liability to the Tenant therefor which might otherwise arise being hereby waived by the Tenant: legal proceedings (summary or otherwise), writ of dispossession and any other means and to receive Holdover Damages and, except in the circumstances contemplated by section 20 of this Agreement, to receive all expenses incurred in removing the Tenant and the Tenant's and any others' possessions from the Leased Premises, and of storing such possessions if the Landlord so elects; 23.1.4. to be awarded specific performance, temporary restraints and preliminary and permanent injunctive relief regarding Events of Default where the Landlord's rights and remedies at law may be inadequate, without the necessity of proving actual damages or the inadequacy of the rights and remedies at law; 23.1.5. to receive all expenses incurred in securing, preserving, maintaining and operating the Leased Premises during any period of vacancy, in making repairs to the Leased Premises, in preparing the Leased Premises for re-leasing and in re-leasing the Leased Premises including, without limiting the generality of the foregoing, any brokerage commissions; 23.1.6. to receive all reasonable attorneys' fees and costs incurred in connection with pursuing any of the Landlord's rights and remedies, including indemnification rights and remedies; 23.1.7. if the Landlord, in its sole discretion, elects to perform any obligation of the Tenant under this Agreement (other than the obligation to pay Rent) which the Tenant has not timely performed, to receive all expenses incurred in so doing; 23.1.8. to elect to pursue any legal or equitable right and remedy available to the Landlord under this Agreement or otherwise; and 23.1.9. to elect any combination, or any sequential combination of any of the rights and remedies set forth in subsection 23.1 of this Agreement. 23.2. In the event the Landlord elects the right and remedy set forth in subsection 23.1.1 of this Agreement, Termination Damages shall be equal to the amount which, at the time of actual payment thereof to the Landlord, is the sum of 23.2.1. all accrued but unpaid Rent; 23.2.2. the present value (calculated using the most recently available (at the time of calculation) -26- published weekly average yield on United States Treasury securities having maturities comparable to the balance of the then remaining Term) of the sum of all payments of Rent remaining due (at the time of calculation) until the date the Term would have expired (had there been no election to terminate it earlier) less the present value (similarly calculated) of all payments of rent to be received through the end of the Term (had there been no election to terminate it earlier) from a lessee, if any, of the Leased Premises at the time of calculation (and it shall be assumed for purposes of such calculations that (i) the amount of future Additional Rent due per year under this Agreement will be equal to the average Additional Rent per month due during the 12 full calendar months immediately preceding the date of any such calculation, increasing annually at a rate of eight percent compounded, (ii) if any calculation is made before the first anniversary of the end of the No Pass Through Period, the average Additional Rent due for any month after the end of the No Pass Through Period will be equal to nine percent of the sum of the Base Year Operational Expenses, Base Year Taxes and Tenant Electric Charges (considered on an annual basis), (iii) if any calculation is made before the beginning of the Base Year, the sum of Base Year Taxes and Base Year Operational Expenses shall be assumed to be $7.50 per gross rentable square foot and (iv) if any calculation is made before the end of the Base Year, Base Year Taxes and Base Year Operational Expenses may be extrapolated based on the year to date experience of the Landlord); 23.2.3. the Landlord's reasonably estimated cost of demolishing any leasehold improvements to the Leased Premises; and 23.2.4. that amount, which as of the occurrence of the Event of Default, bears the same ratio to the costs, if any, incurred by the Landlord (and not paid by the Tenant) in building out the Leased Premises in accordance with section 5 of this Agreement as the number of months remaining in the Term (immediately before the occurrence of the Event of Default) bears to the number of months in the entire Term (immediately before the occurrence of the Event of Default). 23.3. In the event the Landlord elects the right and remedy set forth in subsection 23.1.2 of this Agreement, Re-Leasing Damages shall be equal to the Rent less any rent actually and timely received by the Landlord from any lessee of the Leased Premises or any portion thereof, payable at the respective times that Rent is payable under the Agreement plus the cost, if any, to the Landlord of building out or otherwise preparing the Leased Premises for, and leasing the Leased Premises to, any such lessee. 23.4. In the event the Landlord elects the right and remedy set forth in subsection 23.1.3 of this Agreement, Holdover Damages shall mean damages at the rate per month or part thereof equal to the greater of: (a) one and one-half times one-twelfth of the then Market Rental Rate plus all Additional Rent as set forth in this Agreement or (b) double the average amount of all payments of Rent due under this Agreement during each of the last 12 full calendar months prior to the Landlord's so electing or, in the event the Term shall have terminated by expiration under subsection 24.1.1 of this Agreement, the last full 12 calendar months of the Term, in either case payable in full on the first day of each holdover month or part thereof. 23.5. In connection with any summary proceeding to dispossess and remove the Tenant from the Leased Premises under subsection 23.1.3 of this Agreement, the Tenant hereby waives: 23.5.1. any notices for delivery of possession thereof, of termination, of demand for removal therefrom, of the cause therefor, to cease, to quit and all other notices that might otherwise be required pursuant to 2A N.J.S.A. 18-53 et seq.; and -27- 23.5.2. any right the Tenant might otherwise have to appeal any judgment awarding possession of the Leased Premises to the Landlord. 23.6. The enumeration of rights and remedies in this section 23 of the Agreement is not intended to be exhaustive or exclusive of any rights and remedies which might otherwise be available to the Landlord, or to force an election of one or more rights and remedies to the exclusion of others, concurrently, consecutively or sequentially. On the contrary, each right and remedy enumerated in this section 23 of the Agreement is intended to be cumulative with each other right and remedy enumerated in this section 23 of the Agreement and with each other right and remedy that might otherwise be available to the Landlord; and the selection of one or more of such rights and remedies at any time shall not be deemed to prevent resort to one or more others of such rights and remedies at the same time or a subsequent time, even with regard to the same occurrence sought to be remedied. 23.7. It is expressly understood and agreed that the Landlord shall have no duty to mitigate damages except to appoint a nationally recognized real estate broker to re-let the Leased Premises. In the event the Landlord elects the right and remedy set forth in subsection 23.1.2 of this Agreement, Re-Leasing Damages shall be equal to the Rent less any rent actually and timely received by the Landlord from any lessee of the Leased Premises or any portion thereof, payable at the respective times that Rent is payable under the Agreement plus the cost, if any, to the Landlord of building out or otherwise preparing the Leased Premises for, and leasing the Leased Premises to, any such lessee. 23.8. If (i) an Event of Default has occurred and the Tenant moves out, whether Landlord has terminated or otherwise, or (ii) if Tenant is dispossessed, and, in either of such events, fails to remove any property, machinery, equipment and fixtures or other property prior to such default, dispossess or removal, then and in that event, the said property, machinery, equipment and fixtures or other property shall be deemed, at the option of the Landlord, to be abandoned; or in lieu thereof, at the Landlord's option, the Landlord may remove such property and charge the reasonable cost and expense of removal, storage and disposal to the Tenant, together with an additional twenty one (21%) percent of such costs for Landlord's overhead and profit, which total costs shall be deemed to be additional rent hereunder. The Tenant shall be liable for any damage which it causes in the removal of said property from the Leased Premises. 24. Termination of the Term. 24.1. The Term shall terminate upon the earliest of the following events to occur: 24.1.1. expiration of the Term; 24.1.2. in connection with a transaction contemplated by section 16 of this Agreement, the later of (a) the vesting of the acquiring party's right to possession or (b) the Tenant's vacating the Leased Premises; 24.1.3. under the circumstances contemplated by subsection 15.1 of this Agreement, upon the Tenant's giving prompt notice of the failure of the Landlord to give, on a timely basis, the notice contemplated by subsection 15.1.2 of this Agreement and that the Tenant desires termination of the Term (which termination shall be effective as of the date of the subject casualty with respect to those portions of the Leased Premises rendered untenantable and as of the date of the Tenant's giving notice with respect to those portions of the Leased Premises which were not rendered untenantable); 24.1.4. under the circumstances contemplated by subsection 15.1 of this Agreement, upon the expiration of 20 additional days (without the Landlord's completion of restoration in the -28- interim) after the Tenant shall have given prompt notice that the Landlord has not restored the Leased Premises on a timely basis and that the Tenant desires termination of the Term (which termination shall be effective as of the date of the subject casualty with respect to those portions of the Leased Premises rendered untenantable and as of the date of the Tenant's giving notice with respect to those portions of the Leased Premises which were not rendered untenantable); 24.1.5. the effective date of any election by the Landlord under subsection 17.3.3 of this Agreement in response to the Tenant's notice of the Tenant's desire to assign this Agreement or to sublet all or a portion of the Leased Premises; provided, however, that the Tenant has not revoked its request to assign or sublease as therein provided; 24.1.6. the effective date of any election by the Landlord to terminate the Term under subsection 23.1.1 of this Agreement; or 24.1.7. the effective date of any notice exercising the Termination Option granted to Tenant under subsection 6.4 of this Agreement. 24.2. No termination of the Term shall have the effect of releasing the Tenant from any obligation or liability theretofore or thereby incurred and, until the Tenant shall have surrendered the Leased Premises in accordance with section 21 of this Agreement, from any obligation or liability thereafter incurred. 25. Mortgage and Underlying Lease Priority. 25.1. This Agreement and the estate, interest and rights hereby created for the benefit of the Tenant are, and shall always be, subordinate to any mortgage (other than a mortgage created by the Tenant or a sale, transfer or other disposition by the Tenant in the nature of a security interest in violation of subsections 17.1.4 and 22.5, respectively, of this Agreement) already or afterwards placed on the Property, the Common Facilities, the Building or any estate or interest therein including, without limiting the generality of the foregoing, any new mortgage or any mortgage extension, renewal, modification, consolidation, replacement, supplement or substitution. This Agreement and the estate, interest and rights hereby created for the benefit of the Tenant are, and shall always be, subordinate to any ground lease already or afterwards made with regard to the Property, the Common Facilities, the Building or any estate or interest therein including, without limiting the generality of the foregoing, any new ground lease or any ground lease extension, renewal, modification, consolidation, replacement, supplement or substitution. The provisions of this section 25 of the Agreement shall be self-effecting; and no further instrument shall be necessary to effect any such subordination. Nevertheless, the Tenant hereby consents that any mortgagee or mortgagee's successor in interest may, at any time and from time to time, by notice to the Tenant, subordinate its mortgage to the estate and interest created by this Agreement; and upon the giving of such notice, the subject mortgage shall be deemed subordinate to the estate and interest created by this Agreement regardless of the respective times of execution or delivery of either or of recording the subject mortgage. 25.2. Landlord shall use commercially reasonable efforts to secure a non-disturbance agreement in mortgagee's standard form which provides that Tenant's possession will not be disturbed as long as Tenant is not in default under the terms of the Agreement. 26. Transfer by Landlord. 26.1. The Landlord shall have the right at any time and from time to time to sell, transfer, lease or otherwise dispose of the Property, the Common Facilities or the Building or any of the Landlord's interests therein, or to assign this Agreement or any of the Landlord's rights thereunder. -29- 26.2. Upon giving notice of the occurrence of any transaction contemplated by subsection 26.1 of this Agreement, the Landlord shall thereby be relieved of any obligation that might otherwise exist under this Agreement with respect to periods subsequent to the effective date of any such transaction. If, in connection with any transaction contemplated by subsection 26.1 of this Agreement the Landlord transfers, or makes allowance for, any Security Deposit of the Tenant and gives notice of that fact to the Tenant, the Landlord shall thereby be relieved of any further obligation to the Tenant with regard to any such Security Deposit; and the Tenant shall look solely to the transferee with respect to any such Security Deposit. 26.3. In the event of the occurrence of any transaction contemplated by subsection 26.1 of this Agreement the Tenant, upon written request therefor from the transferee, shall attorn to and become the tenant of such transferee upon the terms and conditions set forth in this Agreement. 26.4. Notwithstanding anything to the contrary that may be set forth in subsections 26.1, 26.2 and 26.3 of this Agreement, in the event any mortgage contemplated by section 25 of this Agreement is enforced by the respective mortgagee pursuant to remedies provided in the mortgage or otherwise provided by law or equity and any person succeeds to the interest of the Landlord as a result of, or in connection with, any such enforcement, the Tenant shall, upon the request of such successor in interest, automatically attorn to and become the Tenant of such successor in interest without any change in the terms or provisions of this Agreement, except that such successor in interest shall not be bound by: (a) any payment of Basic Rent or Additional Rent (exclusive of prepayments in the nature of a Security Deposit) for more than one month in advance or (b) any amendment or other modification of this Agreement which was made without the consent of such mortgagee or such successor in interest; and, upon the request of such successor in interest, the Tenant shall execute, acknowledge and deliver any instrument(s) confirming such attornment. 26.5. If this Agreement and the estate, interest and rights hereby created for the benefit of the Tenant are ever subject and subordinate to any ground lease contemplated by section 25 of this Agreement: 26.5.1. upon the expiration or earlier termination of the term of any such ground lease before the termination of the Term under this Agreement, the Tenant shall attorn to, and become the Tenant of, the lessor under any such ground lease and recognize such lessor as the Landlord under this Agreement for the balance of the Term; and 26.5.2. such expiration or earlier termination of the term of any such ground lease shall have no effect on the Term under this Agreement. 27. Indemnification. 27.1. The Tenant shall, and hereby does, indemnify the Landlord against any and all liabilities, obligations, damages, penalties, claims, costs, charges and expenses including, without limiting the generality of the foregoing, expenses of investigation, defense and enforcement thereof or of the obligation set forth in this section 27 of the Agreement including, without limiting the generality of the foregoing, attorneys' fees, imposed on or incurred by the Landlord in connection with any of the following matters which occurs during the Term: 27.1.1. any matter, cause or thing arising out of the use, occupancy, control or management of the Leased Premises or any portion thereof which is not caused directly, exclusively and entirely by the Landlord's active gross negligence or intentional act without the intervention of any other cause or contributing factor whatsoever; 27.1.2. any negligence or intentional act on the part of the Tenant or any of its employees, other agents or Guests; -30- 27.1.3. any accident, injury or damage to any person or property occurring in or about the Leased Premises which is not caused directly, exclusively and entirely by the Landlord's active gross negligence or intentional act without the intervention of any other cause or contributing factor whatsoever; 27.1.4. any representation made by the Tenant in this Agreement shall have been inaccurate or incomplete in any material respect either on the date it was made or the date as of which it was made; 27.1.5. the imposition of any mechanic's, materialman's or other lien on the Property, the Common Facilities, the Building, the Leased Premises or any portion of any of the foregoing, or the filing of any notice of intention to obtain any such lien, in connection with any alteration, improvement or other modification of the Leased Premises made or authorized by the Tenant (which indemnification obligation shall be deemed to include the Tenant's obligations set forth in subsection 12.2.4.3 of this Agreement); or 27.1.6. any failure on the part of the Tenant to perform or comply with any obligation of the Tenant set forth in this Agreement. 27.2. The Landlord shall, and hereby does, indemnify the Tenant against any and all liabilities, obligations, damages, penalties, claims, costs, charges and expenses including, without limiting the generality of the foregoing, expenses of investigation, defense and enforcement thereof including, without limiting the generality of the foregoing, reasonable attorneys' fees, imposed on or incurred by the Tenant in connection with any matter, cause or thing arising out of the Landlord's negligence or intentional acts which is not caused by the Tenant's negligence or intentional act. 27.3. Payment of indemnification claims shall be due upon giving notice thereof to the party from whom indemnification is due. 27.4. The party seeking indemnification shall promptly give notice of any claim asserted, or action or proceeding commenced, against it as to which it intends to claim indemnification and shall forward copies of all claim or litigation documents received by it. Upon receipt of such notice the party seeking indemnification may, by notice to the other party, participate therein and, to the extent it may desire, assume the defense thereof through independent counsel, reasonably satisfactory to the other party, selected by the party providing indemnification. The other party shall not be bound by any compromise or settlement of any such claim, action or proceeding without its prior written consent. 28. Parties' Liability. 28.1. None of the following occurrences shall constitute a breach of this Agreement by the Landlord, a termination of the Term, an active or constructive eviction or an occurrence requiring an abatement of Rent: 28.1.1. the inability of the Landlord to provide any utility or service to be provided by the Landlord, as described in section 8 of this Agreement which is due to causes beyond the Landlord's control, or to necessary or advisable improvements, maintenance, repairs or emergency, so long as the Landlord uses reasonable efforts and diligence under the circumstances to restore the interrupted service or utility; 28.1.2. any improvement, modification, alteration or other change made to the Property, the Building or the Common Facilities by the Landlord consistently with the Landlord's obligations set forth in subsection 13.2 of this Agreement; and -31- 28.1.3. any change in any Federal, state or local law or ordinance. 28.2. Except for the commencement, duration or termination of the Term (other than under the circumstances contemplated by subsection 15.1 of this Agreement), the Tenant's obligation to make timely payments of Rent, the Tenant's obligation to maintain certain insurance coverage in effect, the Tenant's failure to perform any of its other obligations under this Agreement if such failure has caused loss or damage that can not promptly be cured by subsequent act of the Tenant and the period within which any Option to Renew or any other type of option or optional right exercisable by the Tenant must be exercised, any period of time during which the Landlord or the Tenant is prevented from performing any of its respective obligations under this Agreement because of fire, any other casualty or catastrophe, strikes, lockouts, civil commotion, acts of God or the public enemy, governmental prohibitions or preemptions, embargoes or inability to obtain labor or material due to shortage, governmental regulation or prohibition, shall be added to the time when such performance is otherwise required under this Agreement. 28.3. In the event the Landlord is an individual, partnership, joint venture, association or a participant in a joint tenancy or tenancy in common, the Landlord, the partners, venturers, members and joint owners shall not have any personal liability or obligation under or in connection with this Agreement or the Tenant's use and occupancy of the Leased Premises; but recourse shall be limited exclusively to the Landlord's interest in the Building. 28.4. If, at any time during the Term, the payment or collection of any Rent otherwise due under this Agreement shall be limited, frozen or otherwise subjected to a moratorium by applicable law, and such limitation, freeze or other moratorium shall subsequently be lifted, whether before or after the termination of the Term, such aggregate amount of Rent as shall not have been paid or collected during the Term on account of any such limitation, freeze or other moratorium, shall thereupon be due and payable at once. There shall be added to the maximum period of any otherwise applicable statute of limitation the entire period during which any such limitation, freeze or other moratorium shall have been in effect. 28.5. If this Agreement is executed by more than one person as Tenant, their liability under this Agreement and in connection with the use and occupancy of the Leased Premises shall be joint and several. 28.6. In the event any rate of interest, or other charge in the nature of interest, calculated as set forth in this Agreement would lead to the imposition of a rate of interest in excess of the maximum rate permitted by applicable usury law, only the maximum rate permitted shall be charged and collected. 28.7. The rule of construction that any ambiguities that may be contained in any contract shall be construed against the party drafting the contract shall be inapplicable in construing this Agreement. 29. (Intentionally Omitted). 30. Representations. The Tenant hereby represents and warrants that: 30.1. its Standard Industrial Classification (SIC) code is 3661 and it will promptly give notice of any change therein during the Term to the Landlord; 30.2. no broker or other agent has shown the Leased Premises or the Building to the Tenant, or brought either to the Tenant's attention, except CB Richard Ellis (the "Broker"), whose entire commission therefor is set forth in a separate document and which commission the Tenant understands will be paid by the -32- Landlord directly to the person named; 30.3. the execution and delivery of, the consummation of the transactions contemplated by and the performance of all its obligations under, this Agreement by the Tenant have been duly and validly authorized by its general partners, to the extent required by their partnership agreement and applicable law, if the Tenant is a partnership or, if the Tenant is a corporation, by its board of directors and, if necessary, by its stockholders at meetings duly called and held on proper notice for that purpose at which there were respective quorums present and voting throughout; and no other approval, partnership, corporate, governmental or otherwise, is required to authorize any of the foregoing or to give effect to the Tenant's execution and delivery of this Agreement; and 30.4. the execution and delivery of, the consummation of the transactions contemplated by and the performance of all its obligations under, this Agreement by the Tenant will not result in a breach or violation of, or constitute a default under, the provisions of any statute, charter, certificate of incorporation or bylaws or partnership agreement of the Tenant or any affiliate of the Tenant, as presently in effect, or any indenture, mortgage, lease, deed of trust, other agreement, instrument, franchise, permit, license, decree, order, notice, judgment, rule or order to or of which the Tenant or any affiliate of the Tenant is a party, a subject or a recipient or by which the Tenant, any affiliate of the Tenant or any of their respective properties and other assets is bound. 31. Reservation in Favor of Tenant. Neither the Landlord's forwarding a copy of this document to any prospective tenant nor any other act on the part of the Landlord prior to execution and delivery of this Agreement by the Landlord shall give rise to any implication that any prospective tenant has a reservation, an option to lease or an outstanding offer to lease any premises. 32. Tenant's Certificates and Mortgagee Notice Requirements. 32.1. Promptly upon request of the Landlord at any time or from time to time, but in no event more than five days after the Landlord's respective request, the Tenant shall execute, acknowledge and deliver to the Landlord or its designee an estoppel or other certificate, satisfactory in form and substance to the Landlord and any of its mortgagees, ground lessors or lessees or transferees or prospective mortgagees, ground lessors or lessees or transferees, with respect to any of or all the following matters: 32.1.1. whether this Agreement is then in full force and effect; 32.1.2. whether this Agreement has not been amended, modified, superseded, canceled, repudiated or revoked; 32.1.3. whether the Landlord has satisfactorily completed all construction work, if any, required of the Landlord or contractors selected and retained by the Landlord in connection with readying the Leased Premises for occupancy by the Tenant in accordance with section 5 of this Agreement; 32.1.4. whether the Tenant is then in actual possession of the Leased Premises; 32.1.5. whether the Tenant then has no defenses or counterclaims under this Agreement or otherwise against the Landlord or with respect to the Leased Premises; 32.1.6. whether Landlord is not then in breach of this Agreement in any respect; -33- 32.1.7. whether the Tenant then has no knowledge of any assignment of this Agreement, the pledging or granting of any security interest in this Agreement or in Rent due and to become due under this Agreement; 32.1.8. whether Rent is not then accruing under this Agreement in accordance with its terms; 32.1.9. whether any Rent is not then in arrears; 32.1.10. whether Rent due or to become due under this Agreement has not been prepaid by more than one month; 32.1.11. if the response to any of the foregoing matters is in the negative, a specification of all the precise reasons that necessitated the negative response in each instance; and 32.1.12. any other matter reasonably requested by the Landlord or any of its mortgagees, ground lessors or lessees or transferees or prospective mortgagees, ground lessors or lessees or transferees, including, without limiting the generality of the foregoing, such information as the Landlord may request for purposes of assuring compliance with the Industrial Site Recovery Act (13 N.J.S.A. 1K-6 et seq.), as it may be amended, and any other applicable Federal, state or local statute, ordinance, rule, regulation or order concerned with environmental matters. 32.2. If, in connection with the Landlord's or a prospective transferee's obtaining financing or refinancing of the Property, the Building, the Common Facilities, any portion thereof or any interest therein, the Landlord or a prospective lender shall so request, the Tenant shall furnish to the requesting party within 15 days of the request: 32.2.1. its written consent to any requested modifications of this Agreement provided that, in each such instance, the requested modification does not increase the Rent otherwise due or, in the reasonable judgment of the Tenant, otherwise materially increase the obligations of the Tenant under this Agreement or materially adversely affect the Tenant's leasehold interest created hereby or the Tenant's use and enjoyment of the Leased Premises (except in the circumstances contemplated by section 16 of this Agreement); and 32.2.2. summary financial information regarding its financial position as of the close of its most recently completed fiscal year and its most recently completed interim fiscal period and regarding its results of operations for the periods then ended and comparable year earlier periods, certified by Tenant's chief financial officer to be a complete, accurate and fair presentation of the summary financial information purporting to be set forth therein. 32.3. If the Landlord or any of its mortgagees gives notice to the Tenant of any of their respective names and addresses from time to time, the Tenant shall give notice to each such mortgagee of any notice of breach or default previously or afterwards given by the Tenant to the Landlord under this Agreement and provide in such notice that if the Landlord has not cured such breach or default within any permissible cure period then such mortgagee shall have the greater of (a) an additional period of 30 days or (b) if such default cannot practically be cured within such period, such additional period as is reasonable under the circumstances, within which to cure such default. Upon request of the Landlord at any time or from time to time, the Tenant shall execute, acknowledge and deliver to the Landlord or its designee an acknowledgment of receipt of any such notice, an acknowledgment of receipt of any notice of assignment of this Agreement or rights hereunder by the Landlord to any of its mortgagees and the Tenant's agreement to the foregoing effect on the respective forms, if any, furnished by the Landlord or the respective mortgagees. -34- 32.4. Approximately (i) 90 days prior to the termination of the Term and (ii) 30 days prior to any relocation of the Tenant from the Leased Premises (as constituted on the Commencement Date), the Tenant shall obtain from the New Jersey Department of Environmental Protection ("NJDEP"), and deliver to the Landlord, the Department's unconditional certificate of non-applicability or approval of the Tenant's negative declaration or clean-up plan, together with copies of all documents furnished to NJDEP in connection with obtaining such certificate or approval. 32.5. In the event evidence of compliance with ISRA is not delivered to the Landlord prior to expiration or earlier termination of the Term, Tenant shall be liable for all costs and expenses incurred by Landlord in enforcing Tenant's obligations hereunder until such time as evidence of compliance with ISRA has been delivered to the Landlord, and together with any costs and expenses, including legal and environmental consultant fees incurred by Landlord in enforcing Tenant's obligations under subsection 7.2.8 and subsection 32.4 of this Agreement. After the Term, Tenant shall nevertheless be obligated to comply with its obligations hereunder. Evidence of compliance, as used herein, shall mean an approved "negative declaration" or a "no further action letter" issued by the NJDEP. Evidence of compliance shall be delivered to the Landlord, together with copies of all submissions made to, and received from, the NJDEP, including all environmental reports, test results and other supporting documentation. In addition, if a Release is caused or permitted by Tenant's Representatives during the Term then, after end of the Term, and because of the difficulty which the Landlord may experience in re-letting the Leased Premises, the Tenant shall remain liable for the payment of the annual rent in effect in the last month of the Term, prorated on a monthly basis (the "Post-Term Rent"). The Post-Term Rent shall no longer be due when and if the only remaining requirement is purely administrative action on the part of the NJDEP or from and after the commencement date of a lease of the Leased Premises to a third party. Additionally, if Tenant fails to commence the process required by subsection 32.4 of this Agreement at least 90 days prior to the expiration of the Term then the Post-Term Rent shall be equal to 150% of the annual rent in effect in the last month of the Term, prorated on a monthly basis. Such Post-Term Rent shall no longer be due when the only remaining requirement is purely administrative action on the part of the NJDEP, evidence of compliance is obtained from the NJDEP or from and after the commencement date of a lease of the Leased Premises to a third party. 33. Waiver of Jury Trial and Arbitration. The parties hereby waive any right they might otherwise have to a trial by jury in connection with any dispute arising out of or in connection with this Agreement or the use and occupancy of the Leased Premises; and they hereby consent to arbitration of any such dispute in Somerset County, New Jersey, in accordance with the rules for commercial arbitration of the American Arbitration Association or successor organization, except that the Landlord, in its sole discretion, may, with respect to any dispute involving either (i) the Landlord's right to re-enter and re-take possession of the Leased Premises or (ii) the determination of money damages following the occurrence of an Event of Default under this Agreement, elect to pursue any of or all its rights in any court of competent jurisdiction. Judgment upon any arbitration award may be entered in any court of competent jurisdiction. 34. Severability. In the event that any provision of this Agreement, or the application of any provision in any instance, shall be conclusively determined by a court of competent jurisdiction to be illegal, invalid or otherwise unenforceable, such determination shall not affect the validity or enforceability of the balance of this Agreement. -35- 35. Notices. All notices contemplated by, permitted or required by this Agreement shall be in writing. All notices required by this Agreement shall be personally delivered or forwarded by recognized overnight carrier or by certified mail-return receipt requested, addressed to the intended party at its address first set forth above or, in the case of notices to the Tenant during the Term or any other period during which the Tenant shall be in possession of the Leased Premises, at the Leased Premises. All notices required under this Agreement shall be deemed given (i) upon delivery by overnight carrier; (ii) upon deposit, properly addressed and postage prepaid, in a postal depository if delivery is by certified mail; or (iii) upon personal delivery to the intended party, regardless of whether delivery shall be refused. Either party, by a notice served in accordance with the foregoing provisions, may change the address to which notices shall be sent. Notices given by an attorney for a party shall be deemed to be notices given by the party. 36. Captions. Captions have been inserted at the beginning of each section of this Agreement for convenience of reference only and such captions shall not affect the construction or interpretation of any such section of this Agreement. 37. Counterparts. This Agreement may be executed in more than one counterpart, each of which shall constitute an original of this Agreement but all of which, taken together, shall constitute one and the same Agreement. 38. Applicable Law. This Agreement and the obligations of the parties hereunder shall be governed by and construed in accordance with the laws of the State of New Jersey. 39. Exclusive Benefit. Except as may be otherwise specifically set forth in this Agreement, this Agreement is made exclusively for the benefit of the parties hereto and their permitted assignees and no one else shall be entitled to any right, remedy or claim by reason of any provision of this Agreement. 40. Successors. This Agreement shall be binding upon the parties hereto and their respective successors and assigns. 41. Amendments. This Agreement contains the entire agreement of the parties hereto, subsumes all prior discussions and negotiations and, except as may otherwise be specifically set forth in this Agreement, this Agreement may not be amended or otherwise modified except by a writing signed by all the parties to this Agreement. 42. Waiver. Except as may otherwise be specifically set forth in this Agreement, the failure of any party at any time or times to require performance of any provision of this Agreement shall in no manner affect the right at a later time to enforce the same. No waiver by any party of any condition, or of the breach of any term, covenant, representation or warranty set forth in this Agreement, whether by conduct or otherwise, in any one or more instances shall be deemed to be or construed as a further or continuing waiver of any such -36- condition or breach, or as a waiver of any other condition or of the breach of any other term, covenant, representation or warranty set forth in this Agreement. The Landlord's acceptance of, or endorsement on, any partial payment of Rent or any late payment of Rent from the Tenant shall not operate as a waiver of the Landlord's right to the balance of the Rent due on a timely basis regardless of any writing to the contrary on, or accompanying, the Tenant's partial payment or the Landlord's putative acquiescence therein. 43. Course of Performance. No course of dealing or performance by the parties, or any of them, shall be admissible for the purpose of obtaining an interpretation or construction of this Agreement at variance with the express language of the Agreement itself. 44. Landlord's Concessions. Notwithstanding anything to the contrary that may be set forth in section 5.4 of this Agreement, (a)(i) if no Event of Default shall have occurred or (ii) if an Event of Default shall have occurred, the Tenant shall have previously cured it in full and the Landlord shall have waived it and (b) if there shall not have been a History of Recurring Events of Default, the Landlord shall credit against any amount otherwise due from the Tenant in accordance with subsection 5.4 of this Agreement an amount equal to the lesser of (i) $375,760 or (ii) such amount as is otherwise due from the Tenant in accordance with subsection 5.4 of this Agreement (the "Allowance"). IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. LANDLORD: ROUTE 206 ASSOCIATES By: /S/ Eugene Schenkman ------------------------------------- Eugene Schenkman Vice President S/K 206 Corp. TENANT: TOLLGRADE ACQUISITION COMPANY By: /S/ Christian L. Allison ------------------------------------- -37- EXHIBIT A [LEASED PREMISES FLOOR SPACE DIAGRAM] -38- EXHIBIT B PROPERTY DESCRIPTION ALL THAT CERTAIN tract or parcel of land located in the Township of Bridgewater, County of Somerset and State of New Jersey more particularly described, as follows: BEGINNING at a point in the westerly sideline of U.S. Route 202-206 said point being the northeasterly corner of a lot of land now or formerly of Fennessey Buick, Inc., as described in Deed Book 1231 page 656, and from said beginning point running thence (1) along a line of partitioning as approved by the Township of Bridgewater South 82 degrees 17 minutes 56 seconds West, a distance of 546.28 feet to a point in the easterly No Access Right-of-Way line of U.S. Interstate Route 287; thence (2) along said right-of-way line, North 23 degrees 02 minutes 52 seconds West, a distance of 155.84 feet to an angle point in said right-of-way line; thence (3) still along said right-of-way line North 20 degrees 29 minutes 57 seconds West, a distance of 543.09 feet to a point, said point being the southwesterly corner of Lot 21, Block 3501, as shown on the official tax map of the Township of Bridgewater, said Lot 21 being also lands now or formerly M & M, Inc. of New Jersey; thence (4) along said Lot 21 and part of Lot 22 now or formerly M. Downey, North 82 degrees 17 minutes 56 seconds East, a distance of 510.83 feet to a point, said point being the northwest corner of Lot 23, Block 3501, now or formerly C. Dudeck; thence (5) along said Lot 23, South 07 degrees 27 minutes 04 seconds East, a distance of 75.00 feet to a point, said point being the southwest corner of said Lot 23; thence (6) still along said Lot 23, North 82 degrees 17 minutes 56 seconds East, a distance of 200.00 feet to a point in the aforementioned westerly sideline of U.S. Route 202-206; thence (7) along said westerly sideline, South 07 degrees 27 minutes 04 seconds East, a distance of 605.04 feet to the point and place of Beginning. Containing 9.512 acres as shown on a "Proposed Partition-Map of Survey, Lot 24, Block 3501", Bridgewater Township, Somerset County, New Jersey, revised July 6, 1967,prepared by Donald H. Stires, P.E. & L.S, Somerville, New Jersey. -39- EXHIBIT C WORK LETTER The following is the Work Letter provided for in the Agreement of which this exhibit is a part. As used in this Agreement, "building standard" shall mean the type and grade of material, equipment or device specified in the Building Plans. The Tenant will include the following information as part of its Tenant Plan: 1. The location and extent of floor loading, if any, in excess of the building standard specified above. 2. Special air conditioning requirements, if any, in excess of the building standard specified above by location and general description of special requirements. 3. Plumbing requirements, if any. 4. Estimated total electrical load, including lighting requirements, lighting switch requirements and electrical outlet requirements, if any, in excess of the building standard specified above and being provided by the Landlord, setting forth the amount of the load, locations and types. -40- EXHIBIT D BUILDING RULES AND REGULATIONS The following are the Building Rules and Regulations adopted in accordance with subsection 7.2.3 of the Agreement of which this exhibit is a part; and the Tenant and the Tenant's employees, other agents and Guests shall comply with these Building Rules and Regulations: 1. The sidewalks, driveways, entrances, passages, courts, lobby, esplanade areas, plazas, elevators, vestibules, stairways, corridors, halls and other Common Facilities shall not be obstructed or encumbered or used for any purpose other than ingress and egress to and from the Leased Premises. Landlord, in its discretion, may tow any vehicle left in the Common Facilities overnight. The Tenant shall not permit or suffer any of its employees, other agents or Guests to congregate in any of the said areas. No doormat of any kind whatsoever shall be placed or left in any public hall or outside any entry door of the Leased Premises. 2. No awnings or other projections shall be attached to the outside walls of the Building. No curtains, drapes, blinds, shades or screens shall be attached to, hung in or used in connection with any window or door of the Leased Premises without the prior written consent of Landlord. If such consent is given, such curtains, drapes, blinds, shades or screens shall be of a quality, type, design and color, and attached in the manner, approved by Landlord. 3. Except as otherwise specifically provided in subsection 18.1 of the Agreement, no sign, insignia, advertisement, object, notice or other lettering shall be exhibited, inscribed, painted or affixed so as to be visible from outside the Leased Premises or the Building. In the event of the violation of the foregoing by the Tenant, the Landlord may remove same without any liability and may charge the expense incurred in such removal to the Tenant. 4. The sashes, doors, skylights, windows, and doors that reflect or admit light and air into the halls, passageways or other public places in the Building shall not be covered or obstructed and no bottles, parcels or other articles shall be placed on the window sills. 5. No showcase or other articles shall be placed in front of or affixed to any part of the Building or the Common Facilities. 6. The lavatories, water and wash closets and other plumbing fixtures shall not be used for any purposes other than those for which they were designed and constructed, and no sweepings, rubbish, rags, acids or other substances shall be thrown or deposited therein. All damages resulting from any misuse thereof shall be repaired at the expense of the Tenant that permitted or suffered the violation hereof by the Tenant, the Tenant's employees, other agents or Guests. 7. The Tenant shall not mark, paint, drill into or in any way deface any part of the Leased Premises, the Building, the Common Facilities or the Property. No boring, cutting or stringing of wires shall be permitted, except with the prior written consent of the Landlord, and as the Landlord may direct. Linoleum and other resilient floor coverings shall be laid so that the same shall not come in direct contact with the floor of the Leased Premises; and if linoleum or other resilient floor coverings are desired, an interlining of builder's deadening felt shall be first affixed to the floor by a paste or other material that is, and will remain, soluble in water. The use of cement or other adhesive material that either is not, or will not remain, soluble in water is prohibited. 8. No bicycles, vehicles, animals, reptiles, fish or birds of any kind shall be brought into or kept in or about the Leased Premises. -41- 9. No noise including, without limiting the generality of the foregoing, music or the playing of musical instruments, recordings, radio or television which, in the reasonable judgment of Landlord, might disturb tenants of Other Leased Premises shall be made or permitted by the Tenant. Nothing shall be done or permitted in the Leased Premises by the Tenant which would impair or interfere with the use or enjoyment of Other Leased Premises by any tenant thereof. Nothing shall be thrown out of the doors, windows or skylights or down the passageways of the Building. 10. The Tenant shall not manufacture any commodity, or prepare or dispense any foods or beverages, tobacco, flowers or other commodities or articles without the prior written consent of the Landlord. 11. Duplicates of keys and passes distributed to the Tenant by the Landlord shall not be made. The Tenant shall provide appropriate security for keys. Nothing shall be done to render any lock inoperable by the Building Grand Master Key. No lock shall be installed without the Landlord's prior written consent; and any lock so installed shall be operable by the Building Grand Master Key. Upon termination of the Term, all keys, passes and duplicates provided by the Landlord to the Tenant, or otherwise procured by the Tenant, shall be returned to the Landlord. Any failure to comply with the foregoing which requires changes in locks, new or additional keys, passes or duplicates or other services of a locksmith shall be paid by the Tenant. 12. All deliveries and removals, and the carrying in or out of any safes, freight, furniture, packages, boxes, crates or any other object or matter of any description shall take place during such hours, in such manner and in such elevators and passageways as the Landlord may determine from time to time. The Landlord reserves the right to inspect all objects and matter being brought into the Building or the Common Facilities and to exclude from the Building and the Common Facilities all objects and matter that violates any of these Building Rules and Regulations or that are contraband. The Landlord may (but shall not be obligated to) require any person leaving the Building or the Common Facilities with any package or object or matter from the Leased Premises to establish his authority from the Tenant to do so. The establishment and enforcement of such a requirement shall not impose any responsibility on the Landlord for the protection of the Tenant against the removal of property from the Leased Premises. The Landlord shall not be liable to the Tenant for damages or loss arising from the admission, exclusion or ejection of any person to or from the Leased Premises or the Building or the Common Facilities under this rule. 13. The Tenant shall not place any object in any portion of the Building that is in excess of the safe carrying or designed load capacity of the structure. 14. The Landlord shall have the right to prohibit any advertising or display of any identifying sign by the Tenant which in the Landlord's judgment tends to impair the reputation of the Building or its desirability; and, on written notice from the Landlord, the Tenant shall refrain from or discontinue such advertising or display of such identifying sign. 15. The Landlord reserves the right to exclude from the Building and the Common Facilities during hours other than Regular Business Hours all persons who do not present a pass thereto signed by both the Landlord and the Tenant. All persons entering or leaving the Building or the Common Facilities during hours other than Regular Business may be required to sign a register. The Landlord will furnish passes to persons for whom the Tenant requests same in writing. The establishment and enforcement of such a requirement shall not impose any responsibility on the Landlord for the protection of the Tenant against unauthorized entry of persons. 16. The Tenant, before closing and leaving the Leased Premises at any time shall see that all lights and appliances generating heat (other than the heating system) are turned off. All entrance doors to the Leased Premises shall be left locked by the Tenant when the Leased Premises are not in use. At any time when the -42- Building or the Common Facilities are locked during hours other than Regular Business Hours, the Building and the Common Facilities locks shall not be defeated by any means, such as by leaving a door ajar. 17. No person shall go upon the roof of the Building without the prior written consent of the Landlord. 18. Any requirements of the Tenant may be attended to only upon application at the office of the Building. The Landlord and its agents shall not perform any work or do any work or do anything outside of the Landlord's obligations under the Agreement except upon special instructions from the Landlord on terms acceptable to the Landlord and the Tenant. 19. Canvassing, soliciting and peddling in the Building and the Common Facilities are prohibited and the Tenant shall cooperate to prevent same. 20. There shall not be used in any space, or in the public halls or other Common Facilities of the Building, in connection with the moving or delivery or receipt of safes, freight, furniture, packages, boxes, crates, paper, office material, or any other matter or thing, any hand trucks or dollies except those equipped with rubber tires, side guards and such other safeguards as the Landlord shall require. No hand trucks shall be used in passenger elevators, and no passenger elevators shall be used for the moving, delivery or receipt of the aforementioned articles. In connection with moving in or out any furniture, furnishings, equipment, heavy articles and heavy packages, the Tenant shall take such precautions as may be necessary to prevent excessive wear and tear in the Building's Common Facilities and the Leased Premises including, without limiting the generality of the foregoing, floor and wall treatments. 21. The Tenant shall not cause or permit any odors of cooking or other processes or any unusual or objectionable odors to emanate from the Leased Premises which might constitute a Nuisance. No cooking shall be done in the Leased Premises other than as specifically permitted in the Agreement. 22. The Landlord reserves the right not to enforce any Building Rule or Regulation against any tenants of Other Leased Premises. The Landlord reserves the right to rescind, amend or waive any Building Rule and Regulation when, in the Landlord's reasonable judgment, it appears necessary or desirable for the reputation, safety, care or appearance of the Building or the preservation of good order therein or the operation of the Building or the comfort of tenants or others in the Building. No rescission, amendment or waiver of any Building Rule and Regulation in favor of one tenant shall operate as a rescission, amendment or waiver in favor of any other tenant. -43- EXHIBIT E DEFINITIONS AND INDEX OF DEFINITIONS In accordance with section 1 of the Agreement of which this exhibit is a part, throughout the Agreement the following terms and phrases shall have the meanings set forth or referred to below: 1. "Additional Rent" means all amounts, other than Basic Rent and any Security Deposit, required to be paid by the Tenant to the Landlord in accordance with this Agreement. 2. An "Affiliate" of any entity means a person or entity controlling, controlled by, or under common control with, that person or entity. 3. "Agreement" means this Lease and Lease Agreement (including exhibits), as it may have been amended. 4. "Allowance" is defined in section 44 of this Agreement. 5. "Annual Amortized Capital Expenditure" means the payment amount determined as an annuity in arrears using the cost incurred by the Landlord for any Capital Expenditure as the present value, the number of years of its useful life (not exceeding 10 years) selected by the Landlord in accordance with generally applied real estate accounting practice as the number of periods and the Base Rate in effect when the respective improvement is first placed into service plus two additional percentage points as the annual rate of interest. 6. "Base Rate" means the prime commercial lending rate per year as announced from time to time by Fleet National Bank at its principal office. 7. "Base Year" means the full calendar year 2002 with respect to Operational Expenses and Taxes. 8. "Base Year Operational Expenses" means Operational Expenses incurred by the Landlord during the Base Year as defined in subsection 10.2 of this Agreement. 9. "Base Year Taxes" means the product of the final assessed value, as the same may subsequently be adjusted in any appeal of the tax assessor's valuation, of the Property, the Building and any other improvements on the Property in the Base Year and the Municipality's lowest tax rate for office buildings and the property on which they stand in effect during the Base Year. 10. "Basic Rent" is defined in subsection 3.2 of this Agreement. 11. "Broker" is defined in subsection 30.2 of this Agreement. 12. "Building" means the office building erected on the Property which is commonly known as 685 Route 202/206, Bridgewater, New Jersey, as it may, in the Landlord's sole discretion, be increased, decreased, modified, altered or otherwise changed from time to time before, during or after the Term. As the Building is presently constructed it is agreed to contain 137,139 gross rentable square feet of floor space. 13. "Capital Expenditure" is defined in subsection 10.3 of this Agreement. 14. "Commencement Date" is defined in section 4 of this Agreement. 15. "Common Facilities" means the areas, facilities and improvements provided by the Landlord in the -44- Building (except the Leased Premises and the Other Leased Premises) and on or about the Property, including, without limiting the generality of the foregoing, the Parking Facilities and access roads thereto, for non-exclusive use by the Tenant in accordance with subsection 2.2 of this Agreement, as they may, in the Landlord's sole discretion, be increased, decreased, modified, altered or otherwise changed from time to time before, during or after the Term, and subject to rights which may be granted to the major tenant to utilize the lobby as a common reception area. 16. "Common Walls" means those walls which separate the Leased Premises from Other Leased Premises. 17. "Election Right" is defined in subsection 21.2 of this Agreement. 18. "Electric Charges" means all the supplying utility's charges for, or in connection with, furnishing electricity including charges determined by actual usage, any seasonal adjustments, demand charges, energy charges, energy adjustment charges and any other charges, howsoever denominated, of the supplying utility, including sales and excise taxes and the like. 19. "Environmental Laws" is defined in subsection 7.2.8 (ii) of this Agreement. 20. "Event of Default" is defined in section 22 of this Agreement. 21. "Expiring Term" means, when used in the context of any Option to Renew, the Term as it is then scheduled to expire (immediately prior to exercise of the next available Option to Renew). 22. The Tenant's "Guests" shall mean the Tenant's licensees, invitees and all others in, on or about the Leased Premises, the Building, the Common Facilities or the Property, either at the Tenant's express or implied request or invitation or for the purpose of soliciting or visiting the Tenant. 23. "Hazardous Substance" is defined in subsection 7.2.8 (ii) of this Agreement. 24. A "History of Recurring Events of Default" means the occurrence of two or more Events of Default (whether or not cured by the Tenant) in any period of 12 months. 25. "Holdover Damages" is defined in subsection 23.4 of this Agreement. 26. "Index" means the "all items" index figure for the New York Northeastern New Jersey average of the Consumer Price Index for all urban wage earners and clerical workers which uses a base period of 1982-84=100, published by the United States Department of Labor, so long as it continues to be published. If the Index is not published for a period of three consecutive months, or if its base period is changed, the term "Index" shall mean that index, as nearly equivalent in purpose, function and coverage as practicable to the original Index, which the Landlord shall have designated by notice to the Tenant. 27. "Initial Term" means the period so designated in subsection 4.1 of this Agreement. 28. "Initial Year" means the first 12 full calendar months of the Initial Term. 29. "Landlord" means the person so designated at the beginning of this Agreement and those successors to the Landlord's interest in the Property and/or the Landlord's rights and obligations under this Agreement contemplated by section 26 of this Agreement. 30. "Leased Premises" means that portion of the interior of the Building (as viewed from the interior of the Leased Premises) bounded by the interior sides of the unfinished floor and the finished ceiling on -45- the floor (as the floors have been designated by the Landlord) of the Building, the centers of all Common Walls and the exterior sides of all walls other than Common Walls, the outline of which floor space is designated on the diagram set forth in Exhibit A attached hereto, which portion contains 18,778 square feet of gross rentable floor space. 31. "Legal Holidays" means New Year's Day, Presidents' Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. 32. "Market Rental Rate" means, at the time of reference, the gross rentable floor space of the Leased Premises multiplied by the greater of: (a) that annual rate of Basic Rent per square foot of gross rentable floor space which is then being quoted by the Landlord for comparable Other Leased Premises (or would then be quoted if comparable Other Leased Premises were then available) or (b) that annual rate of Basic Rent per square foot of gross rentable floor space in effect during the Expiring Term. 33. "Municipality" means Bridgewater, New Jersey, or any successor municipality with jurisdiction over the Property. 34. "No Pass Through Period" means, in the context of Operational Expenses and Taxes, the period beginning on the Commencement Date and ending on the day prior to the first anniversary of the Commencement Date. 35. "Nuisance" means any condition or occurrence which unreasonably or materially interferes with the authorized use and enjoyment of the Other Leased Premises and the Common Facilities by any tenant of Other Leased Premises or by any person authorized to use any Other Leased Premises or Common Facilities. 36. "Operational Expenses" is defined in subsection 10.2 of this Agreement. 37. "Option to Renew" is defined in subsection 6.1 of this Agreement. 38. "Other Leased Premises" means all premises within the Building, with the exception of the Leased Premises, that are, or are available to be, leased to tenants or prospective tenants, respectively. 39. "Parking Facilities" means the parking area adjacent to the Building, which parking area is provided as Common Facilities. The Parking Facilities contain four spaces per 1,000 rentable feet. 40. "Person" includes an individual, a corporation, a partnership, a trust, an estate, an unincorporated group of persons and any group of persons. 41. "Property" means the parcel of land, as it may, in the Landlord's sole discretion, be increased, decreased, modified, altered or otherwise changed from time to time before, during or after the Term, on which the Building is erected. As the Property is presently constituted, it is more particularly described in Exhibit B attached hereto. 42. "Regular Business Hours" means 8:00 A.M. to 6:00 P.M., Monday through Friday, except on Legal Holidays. 43. "Re-Leasing Damages" is defined in subsection 23.3. 44. "Renewal Term" means, at the time of reference, any portion of the Term, other than the Initial Term, as to which the Tenant has properly exercised an Option to Renew which Option to Renew has not -46- been rescinded in accordance with subsection 6.2 of this Agreement. 45. "Rent" means Basic Rent and Additional Rent. 46. "Right of First Offer" is defined in subsection 6.2 of this Agreement. 47. "Target Date" means, upon execution and delivery of this Agreement, the then estimated Commencement Date which is hereby established to be January 1, 2002. 48. "Taxes" means, in any calendar year, the aggregate amount of real property taxes, assessments and sewer rents, rates and charges, state and local taxes, transit taxes and every other governmental charge, whether general or special, ordinary or extraordinary (except corporate franchise taxes and taxes imposed on, or computed as a function of, net income or net profits from all sources and except taxes charged, assessed or levied exclusively on the Leased Premises or arising exclusively from the Tenant's occupancy of the Leased Premises) charged, assessed or levied by any taxing authority with respect to the Property, the Building, the Common Facilities and any other improvements on the Property, less any refunds or rebates (net of expenses incurred in obtaining any such refunds or rebates) of Taxes actually received by the Landlord during such calendar year with respect to any period during the Term for the benefit of the Tenant, tenants of Other Leased Premises and the Landlord. If during the Term there shall be a change in the means or methods of taxing real property generally in effect at the beginning of the Term and another type of tax or method of taxation should be substituted in whole or in part for, or in lieu of, Taxes, the amounts calculated under such other types of tax or by such other methods of taxation shall also be deemed to be Taxes. Until such time as the actual amount of Taxes for any calendar year becomes known, the amount thereof shall be the Landlord's estimate of Taxes for that calendar year. 49. "Tenant" means the person so designated at the beginning of this Agreement. 50. "Tenant Electric Charges" means (a) during Regular Business Hours, Electric Charges attributable to the Tenant's use of electricity in the Leased Premises for purposes other than heating, ventilation and air conditioning provided to the Leased Premises by the Landlord in accordance with subsection 8.1.5 of this Agreement and (b) during other than Regular Business Hours, a charge at the rate of $25.00 per hour or partial hour of use on Saturdays between the hours of 8:00 A.M. and 12:00 P.M. and $50.00 per hour or partial hour of use at other times outside of Regular Business Hours; plus Electric Charges attributable to the Tenant's use of electricity in the Leased Premises for all purposes including, without limiting the generality of the foregoing, heating, ventilation and air conditioning. 51. "Tenant Plan" means construction drawings and related construction specifications regarding the build-out of the Leased Premises (with any construction drawings in a reproducible diazo sepia mylar form) including, without limiting the generality of the foregoing, the information called for by Exhibit C, signed and sealed by a New Jersey-licensed architect, complying in all respects with applicable building and fire codes and insurance underwriting standards in effect and in sufficient detail to permit the Municipality to issue any required building permits and to permit skilled contractors to supply and perform the work called for therein. The Tenant Plan shall not include any specialized computer installations or any telecommunications equipment or facilities. 52. "Tenant Plan Due Date" means November 2, 2001. 53. "Tenant's Share" of any amount means 13.7%. 54. "Term" means the Initial Term plus, at the time of reference, any Renewal Term. -47- 55. "Termination Damages" is defined in subsection 23.2 of this Agreement. 56. "Termination Option" is defined in subsection 6.4 of this Agreement. 57. "Utilities Expenses" means Electric Charges (other than Tenant Electric Charges) and all charges for any other fuel that may be used in providing electricity and services powered by electricity that the Landlord provides in accordance with section 8 of this Agreement to the Building, the Leased Premises, Other Leased Premises, the Common Facilities and the Property, including sales and excise taxes and the like. 58. "Wire Restoration Work" is defined in subsection 21.2.2 of this Agreement. 59. "Wiring" is defined in subsection 21.2.1 of this Agreement. 60. "Work Letter" means Exhibit C attached hereto which generally describes the type of construction of the Building and, unless the Tenant Plan does not require any such respective improvement, those improvements the Landlord will provide or install in the Leased Premises without installation charge to the Tenant in connection with the preparation of the Leased Premises contemplated by section 5 of this Agreement. -48- EXHIBIT F [TABLE OF LANDLORD'S CLEANING RESPONSIBILITIES ON LEASED PROPERTY] -49- EX-10.34 8 j9925501exv10w34.txt LEASE AGREEMENT EXHIBIT 10.34 LEASE AGREEMENT BY AND BETWEEN REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA AND TOLLGRADE COMMUNICATIONS, INC. FOR HARMAR INDUSTRIAL MANOR 491 NIXON ROAD HARMAR TOWNSHIP, PENNSYLVANIA DATED: AUGUST 5, 1993 LEASE AGREEMENT TABLE OF CONTENTS
SECTION 1. PREMISES AND TERM.............................................................................1 A. Premises...........................................................................................1 B. Term...............................................................................................1 C. Expansion..........................................................................................1 SECTION 2. EXTENSION BY MUTUAL CONSENT...................................................................2 SECTION 3. RENT AND ADDITIONAL RENT......................................................................2 A. Rent...............................................................................................2 B. Additional Rent - Real Estate Taxes................................................................3 C. Additional Rent - Maintenance and Operations.......................................................4 D. Payment Provisions.................................................................................6 SECTION 4. UTILITIES.....................................................................................6 SECTION 5. USE...........................................................................................6 SECTION 6. ALTERATIONS...................................................................................7 SECTION 7. MAINTENANCE...................................................................................9 SECTION 8. ASSIGNMENT AND SUBLETTING....................................................................12 SECTION 9. RIGHT OF ENTRY...............................................................................13 SECTION 10. SURRENDER....................................................................................13 SECTION 11. INDEMNIFICATION..............................................................................14 SECTION 12. LIABILITY INSURANCE..........................................................................14 SECTION 13. FIRE AND CASUALTY INSURANCE..................................................................15 SECTION 14. WAIVER OF SUBROGATION........................................................................15 SECTION 15. DAMAGE OR DESTRUCTION OF LEASED PREMISES.....................................................15 SECTION 16. DEFAULT; REMEDIES OF LESSOR..................................................................16 SECTION 17. EMINENT DOMAIN...............................................................................17 SECTION 18. SUBORDINATION OF LEASE.......................................................................18 SECTION 19. ESTOPPEL CERTIFICATE.........................................................................19 SECTION 20. FORCE MAJEURE................................................................................19 SECTION 21. QUIET ENJOYMENT..............................................................................20 SECTION 22. ABANDONMENT OF PREMISES......................................................................20 SECTION 23. NON-WAIVER...................................................................................20 SECTION 24. NOTICES......................................................................................21 SECTION 25. SUCCESSORS AND ASSIGNS.......................................................................21 SECTION 26. ENVIRONMENTAL MATTERS........................................................................21 SECTION 27. GOVERNING LAW................................................................................25
SECTION 28. SEVERABILITY.................................................................................25 SECTION 29. GENDER.......................................................................................25 SECTION 30. OPTION TO RENEW..............................................................................25 SECTION 31. ENTIRE AGREEMENT.............................................................................26 SECTION 32. LESSOR IMPROVEMENT ADVANCE...................................................................26 SECTION 33. HVAC SYSTEM..................................................................................26
EXHIBIT A FLOOR PLAN EXHIBIT B LESSOR'S IMPROVEMENTS LEASE AGREEMENT HARMAR INDUSTRIAL MANOR THIS LEASE, made as of this 5th day of August, 1993, between REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA, hereinafter called "Lessor," and TOLLGRADE COMMUNICATIONS, INC., a Pennsylvania corporation, hereinafter called the "Lessee." SECTION 1. PREMISES AND TERM. A. PREMISES. The Lessor does hereby lease and demise unto the Lessee (i) Suite 101 containing twenty three hundred square feet (2300 sq. ft.) of rental area of finished office space, (ii) Suite 102 containing approximately two thousand square feet (2000 sq. ft.) of rentable area of unfinished office space, (iii) Unit A-1 containing a total of approximately seven thousand seven hundred eighty five square feet (7785 sq. ft.), (iv) Unit A-5 containing two thousand square feet (2000 sq. ft.) of rentable area and (v) Unit A-6 containing twenty five hundred square feet (2500 sq. ft.) of rentable area (the "Premises") in the HARMAR INDUSTRIAL MANOR, (the "Complex"), located in Harmar Township, Allegheny County, Pennsylvania, as identified in EXHIBIT "A." Lessee and its employees and business invitees shall also be entitled to use, in common with others, the sidewalks and parking areas (hereinafter called the "Common Areas"), which areas constitute a part of the Complex. Lessor guarantees that Lessee shall be entitled to seven (7) executive parking spaces in the front parking area, sixty-one (61) parking spaces in the side parking area, plus an additional five (5) parking spaces per 1000 square feet of Premises taken under Lessee's expansion option pursuant to SECTION 1(c) hereof. B. TERM. Subject to the provisions of Section 6 hereof, the term of this Lease shall commence, (the "Commencement Date") and possession shall be given as of 12:01 AM on or about September 1, 1993. The term of this Lease shall expire (the "Expiration Date") at 11:59 PM on December 31, 1998 unless the term is extended hereinafter provided in this Lease. Any other Commencement Date agreeable to the parties hereto shall be evidenced by an amendment to this Lease. C. EXPANSION. Lessee shall have the option to lease certain additional space adjacent to the Premises currently leased to IDC, Inc. (the "IDC Space") and additional areas in the building in which the Premises are located as existing leases in such building expire. With respect to the IDC Space, Lessee shall be entitled to lease such space at any time, upon one hundred twenty (120) days prior notice to Lessor, so long as IDC, Inc. is still the tenant of such space under a lease under a lease under which Lessor has a lease termination right. With respect to other additional areas in the building in which the Premises are located (except for the IDC Space) Lessor shall provide Lessee with notice of the pending expiration of the existing leases. Lessee shall have sixty (60) days from the receipt of Lessor's notice to exercise its option for such space. Expansion into the adjacent warehouse area will be at $4.75 per square foot if such expansion occurs before December 31, 1993 and any other such areas and any space in the adjacent warehouse area after December 31, 1993 shall be at the prevailing market rate. In the event Lessee needs to expand the Premises and Lessor cannot accommodate Lessee's expansion needs, or if Lessee needs additional parking spaces to accommodate its expansion and Lessor cannot accommodate such parking needs as required in SECTION 1(A), Lessee shall have the right to terminate this Lease provided Lessee pays the unamortized portion of Lessor's Improvement Advance plus the portion of the real estate commission referenced in SECTION 31 equal to the balance of the term remaining; PROVIDED, HOWEVER, that if Lessee has, within the prior ninety (90) day period, received notice from Lessor of the availability of additional space, and Lessee did not exercise its option to lease such space, it must give Lessor three (3) months prior notice of its intent to terminate this Lease. SECTION 2. EXTENSION BY MUTUAL CONSENT. If Lessee occupies the Premises after the end of the term, this Lease and all of its terms, provisions, conditions, covenants, waivers, remedies and any and all of Lessor's rights herein specifically given and agreed to, shall be in force for one month thereafter and thereafter from month to month as long as the relationship of Lessor and Lessee continues. SECTION 3. RENT AND ADDITIONAL RENT. A. RENT. As rental ("Base Rent") for the Premises, Lessee shall pay to the Lessor at its office in Pittsburgh beginning on or about September 1, 1993 and on the first business day of each successive calendar month, in advance and without demand, the following sums: If the date on which Base Rent commences is on a day other than the first business day of a calendar month, Lessee shall pay to Lessor with the first complete monthly rental payment due, a pro rata portion to be based on the number of days the Premises are occupied in such partial month after the commencement of rental payments. -2- Months 1-8 $ 3,175.39 9-12 $ 6,350.77 13-64 $ 7,340.35 ------------- TOTAL $432,504.40 B. ADDITIONAL RENT - REAL ESTATE TAXES. In the event the real estate taxes payable by Lessor on the Complex for the period 1995 or any subsequent year of the term hereof, shall exceed the amount payable by Lessor for such taxes for the period of 1994, then Lessee shall pay, in four (4) equal payments payable monthly on the first day of each month following Lessee's receipt of notice of such increase ("Lessee's Tax Responsibility"), an amount equal to that portion of such excess determined annually that the area of the Premises (as shown in EXHIBIT "A"), as may be expanded by time to time, bears to the total rentable area of the Complex (111,600 sq. ft.); provided that, in the event a sale of the Complex or the building in which the Premises are located causes an unusual increase in the tax assessment for the building or the Complex, Lessee shall not be required to pay such unusual increase in taxes. In such event, Lessee's Tax Responsibility for such taxes shall be equal to the amount payable for the prior year's taxes, before the sale resulting in an unusual increase. In the event that Lessee's Tax Responsibility is payable due to an increase in real estate taxes, then on or before February 15, 1994 and on or before February 15 of each year thereafter, Lessor shall furnish Lessee a written statement, with copies of bills from the respective taxing authorities, which statement shall show the computation of such excess for the preceding calendar year. Any special assessment, apart from Lessee's Tax Responsibility, shall be amortized over such reasonable period as is determined by Lessor based upon the nature and extent of the improvement or betterment for which such special assessment is levied. For the purpose of determining the applicability of real estate taxes for each calendar year, in the event that real estate taxes are levied on the basis of a tax year, which does not coincide with a calendar year, then such taxes shall be deemed to apply to each tax year. If at any time during the term hereof the methods of taxation prevailing at the commencement of the term hereof shall be altered so that in lieu of, or as a supplement to, or a substitute for the whole or any part of the real estate taxes or assessments now levied, assessed, or imposed upon the Complex, there shall -3- be levied, assessed, or imposed any form of assessment, tax, license fee, license tax, business license fee, business license tax, excise tax, commercial rental tax, levy, charge, penalty, or other imposition by the federal or state government, any political subdivision, municipality, school district, or other taxing body, which constitutes (1) a tax, levy, assessment, fee, imposition or other charge upon the rent payable hereunder, the Lessor's right to rent or other income from the Complex or upon the Lessor's right to rent or other income from the Complex or upon the Lessor's business of leasing the Complex; or (2) a tax, levy, assessment, fee, imposition or other charge allocable to or measured, in whole or in part, by the area of the Complex or rent payable hereunder; or (3) a tax, levy, assessment, fee, imposition or other charge upon this transaction or any document related thereto, or upon the status of Lessor or Lessee as such; or (4) any tax, levy, assessment, fee, impositions or other charge upon or with respect to the possession, leasing, operating, management, maintenance, alteration, repair, use or occupancy of the Complex; then Lessee's pro rata share of all such taxes, assessments, fees, levies, impositions, charges, or the part thereof so measured or based, which constitute a supplement to the real estate taxes or assessments now levied, assessed or imposed upon the Premises, shall be payable by Lessee as Additional Rent in equal, monthly installments or, in the alternative, as the case maybe, all such taxes, assessments, levies, impositions and charges or the part thereof so measured or based, which are in lieu of or a substitute for the whole or any part of the real estate taxes or assessments now levied, assessed or imposed on the Premises, shall be payable by Lessee as annual rent in equal monthly installments in lieu of that portion part of the annual rent now attributable to the affected portion of the real estate taxes now levied, assessed or imposed on the Premises. Real estate taxes in any such year shall be reduced by the net amount of any tax refund received by Lessor during such year and all payments in such year shall be paid so as to take advantage of any discount. Real estate taxes shall not include any federal, state or local sales, use, franchise, capital stock, inheritance, general income, gift or estate taxes. C. ADDITIONAL RENT - MAINTENANCE AND OPERATIONS. If the expenses for maintaining and operating the Complex during the period beginning September 1, 1994 and ending August 31, 1995, or during each subsequent time period thereafter exceed the expenses for maintaining and operating the Complex during the period beginning September 1, 1993 and ending August 31, 1994, then the Lessee shall pay to the Lessor as Additional Rent the portion of such excess attributable to the Premises, such Additional Rent to be paid in twelve equal monthly installments commencing January 1 of the calendar year -4- immediately succeeding the time period in which such excess occurs; PROVIDED, however, that any such Additional Rent shall not be due and payable beyond the term of this lease. On or before December 15, 1994, and on or before December 15 of each calendar year thereafter, the Lessor shall furnish to the Lessee a written statement showing the computation of such excess, if any, for the preceding applicable time period and showing the amount of Additional Rent for which the Lessee shall be obligated under this paragraph. The portion of any such excess expenses for maintaining and operating the Complex attributable to the Premises shall be prorated based upon the proportion that the area of the Premises (as shown in EXHIBIT "A"), as may be expanded from time to time, bears to the total rentable area of the Complex (111,600 sq. ft.). The term "expenses" for maintaining and operating the Complex shall be deemed to mean those out-of-pocket expenses incurred during such operating year in respect of the operation and maintenance of the Complex in accordance with accepted principles of sound management and generally accepted accounting practices ("GAAP") as applied to the operation and maintenance of first class office/industrial buildings in the metropolitan Pittsburgh area. Such expenses shall include, but not be limited to, premiums for insurance carried by the Lessor. The term "insurance" shall include: fire and extended coverage insurance; vandalism and malicious mischief insurance, boiler insurance; rent insurance; elevator insurance; public liability insurance; and such other insurance policies as may hereafter be deemed appropriate for multiple-tenancy office/industrial buildings. Such expenses shall not include (i) expenses for any capital improvement made to the land or building; (ii) expenses for painting, redecorating or other work which the Lessor performs as a special service for another lessee in the Complex (that is, other than painting, redecorating or other work which is a standard service for the Lessees of the Complex); (iii) expenses for repairs or other work occasioned by fire, windstorm or other insurable casualty; (iv) expenses incurred in leasing or procuring new lessees including lease commissions, advertising expenses and expenses of renovating space for new lessees; (v) legal expenses in enforcing the terms of any lease; (vi) interest or amortization payments on any mortgage; (vii) wages, salaries or other compensation paid to any employees above the grade of building superintendent; (viii) wages, salaries or other compensation paid for clerks or attendants in concessions operated by the Lessor; (ix) fines or penalties resulting from Lessor's violations of law; (x) costs incurred due to the breach by Lessee or any other tenant of the terms of any lease or other agreement; or (xi) any costs involved in the commercial concessions operated by Lessor. -5- Lessor shall maintain books and records of expenses and real estate taxes in accordance with GAAP and sound management practices. Lessor shall provide Lessee with any and all relevant information evidencing any expenses or real estate taxes paid by Lessor which are charged to Lessee as Additional Rent or Lessee's Tax Responsibility. In the event that a review of such information by Lessee discloses that expenses or real estate taxes have been overstated by Lessor for the period reviewed by Lessee, Lessor shall make an adjustment of Additional Rent and/or Lessee's Tax Responsibility to reflect such overstatement. D. PAYMENT PROVISIONS. Lessee hereby covenants and agrees to pay the rent hereby reserved as and when due, and also all sums of money, charges or other amounts required to be paid by the Lessee to the Lessor which shall be "rent" in addition to the rent provided for herein. Nonpayment of additional rent when due shall constitute a default under this Lease, unless being disputed in good faith, to the same extent, and shall entitle the Lessor to the same remedies, as nonpayment of rent. Rent payments shall be made by check payable to the RIDC shall be delivered or mailed, postage prepaid, to: Regional Industrial Development Corporation Post Office Box 360146M Pittsburgh, Pennsylvania 15251-6146 SECTION 4. UTILITIES. Lessee agrees to pay to respective utility companies utility charges for water, electricity, gas and sewage, separately metered to Lessee. In the event Lessee fails to pay the same when due, Lessor shall have the right to pay the same and collect the amount thereof from Lessee in the same manner as Additional Rent. SECTION 5. USE. Lessee will not engage upon the Premises in any trade or occupation which is in violation of law. Lessee shall use the Premises as office/warehouse/light manufacturing space related to its corporate purpose. The Premises are not to be used for rental sales or displays for such purposes. Product displays will be permitted provided the same cannot be seen outside the Premises. -6- Lessee shall not use or occupy the Premises for any other purpose or business without the prior written consent of Lessor, which consent shall not be unreasonably withheld or delayed. Lessee shall comply with the following rules and regulations covering the use of the Premises and will at all times observe, perform and abide by all rules and regulations from time to time promulgated by Lessor for the common use of the Harmar Industrial Manor the safety, care and cleanliness of the Premises: (i) That it will not obstruct for use of the common areas including the sidewalks and parking lot and that it will keep clean the said common areas. (ii) That it will use the parking area to be provided in the front of the Premises only for visitor parking and executive parking; that the parking area to the side of the Premises shall be used for employee and other parking. (iii) That it will not install or post any exterior signs on or over the Premises except those approved in writing in advance by Lessor. (iv) Nothing shall be placed by the Lessee or its employees on the outside of the Premises or on the windows, window sills or projections. All such rules and regulations shall apply to Lessee and its employees, agents, licensees, invitees, subtenants and contractors. Lessor represents and warrants that such rules and regulations shall also apply to the other tenants in the Complex and that Lessor shall enforce such rules and regulations against such other tenants. Anything in this Lease contained to the contrary notwithstanding, Lessor covenants and represents that the Premises conform to the requirements, laws, rules and regulations imposed, enacted or promulgated by all governments and governmental bodies having jurisdiction over the Complex and the Premises; and that the Premises may lawfully be used for the purposes herein permitted. SECTION 6. ALTERATIONS. Lessee acknowledges and agrees that certain improvements to the Premises are to be completed by Lessor, in compliance with the specifications set forth in Exhibit "B" attached hereto ("Lessor's Improvements"). Lessor represents that to the best of its knowledge and belief after completion of Lessor's Improvements the Complex and the Premises will be suitable for the purposes -7- contemplated by Lessee, as such contemplated purposes have been communicated by Lessee to Lessor. EXHIBIT "A" which is attached hereto and made a part hereof is a "Floor Plan" of the Premises. Lessor shall use its best efforts to complete Lessor's Improvements by September 1, 1993. In the event that Lessor's Improvements are not substantially completed by September 1, 1993, Lessee shall have the option, in its sole discretion, of either: (1) occupying the Premises, allowing the Lease to commence, and having payments of Rent and Additional Rent abated until such time as Lessor's Improvements are substantially complete; or (2) not occupying the Premises, and having the term of the Lease not commence until Lessor's Improvements are substantially complete. Lessor's Improvements and any and all additions, alterations and improvements made by the Lessee ("Lessee's Improvements"), shall be done in a good and workmanlike manner. Prior to the commencement of construction of Lessee's Improvements, Lessee shall furnish to Lessor the plans and specifications of the construction work to be undertaken, shall furnish information as to the equipment to be installed, and shall obtain Lessor's written approval of said plans and specifications, which approval shall not be unreasonably withheld. Lessor shall obtain all necessary permits required by governmental authorities having jurisdiction prior to the commencement of construction of Lessee's Improvements. Lessee's Improvements shall become the property of the Lessor and shall remain upon and be surrendered with the Premises at the expiration or earlier termination of this Lease. It is not intended to include in the expression "additions, alterations and improvements," any mechanical equipment and trade fixtures installed by the Lessee, all of which shall may be removed by Lessee on the termination of this Lease if (i) Lessee is not in default hereunder, (ii) such removal does not damage the Premises, and (iii) any damage that may be occasioned by any such removal shall be repaired by Lessee in a good and workmanlike manner. If Lessor so directs by written notice to Lessee, prior to the expiration of this Lease, or within fifteen (15) days thereafter, the Lessee shall promptly remove all fixtures or mechanical equipment which were placed in the Premises by Lessee and which are designated in said notice. Lessee shall repair any physical damage occasioned by such removal, and in default, thereof, Lessor may effect said removals and repairs at Lessee's expense. -8- Lessee may bring such equipment, furniture, trade fixtures or other personal property into the Premises as may be necessary for its business; PROVIDED, HOWEVER, that Lessee shall first notify Lessor of the type and nature of such personal property to be brought onto the Premises. Should such personal property be of an unusual size, type, or weight, so as to adversely affect the Complex, then Lessor reserves the right to restrict the use of same in the Premises. Lessee will not file, nor will it permit or suffer any contractor or subcontractor, materialman or mechanic or other person under it to file, nor shall any contractor, subcontractor, materialman or mechanic file any mechanics' lien or other liens or claims for work done or materials furnished in or about the Premises against the Premises or the structure of which it is a part. Unless Lessor otherwise agrees, in writing, prior to the commencement of any work on the Premises, Lessee shall file in the office of the Prothonotary of Allegheny County a waiver of the right to file liens which shall be in usual form for such waivers, such form to be approved by the Lessor. Notwithstanding the foregoing, if any mechanics' or other lien shall be filed against the Premises or the Complex purporting to be for labor or material furnished or to be furnished at the request of Lessee, then Lessee shall, at its expense, cause such lien to be discharged of record by payment, bond or otherwise, within thirty (30) days after the filing thereof. If Lessee shall fail to cause such lien to be discharged of record within such ten-day period, or, if such lien is contested by Lessee and Lessee fails to provide adequate security for Lessor's protection; then Lessor may cause such lien to be discharged by payment, bond or otherwise, and Lessee shall, upon demand, reimburse Lessor for all reasonable amounts paid and costs incurred including attorneys' fees, in having such lien discharged of record. The taking of possession of the Premises by Lessee shall establish that the Premises and the Complex were at such time in satisfactory condition, except for Lessor's Improvements, latent defects, order and repair. SECTION 7. MAINTENANCE. A. LESSEE COVENANTS AS FOLLOWS: a. That Lessee will, at its own expense, replace any glass broken on the Premises and repair, restore, or replace all partitions and fixtures that may be installed by it which are damaged or destroyed by any cause. -9- b. That Lessee shall make all nonstructural repairs to the interior of the Premises, including, but not limited to, repairs and replacement of, if necessary, the plumbing and electrical fixtures, the doors and locks, and all maintenance and nominal repairs to the air conditioning and heating equipment. c. That Lessee shall make all repairs and, if necessary the replacement, of any nature to any part of the Premises necessitated by the act or neglect of Lessee. d. That Lessee shall make no modifications to any parts of the structure of the Premises without written approval of Lessor, which approval shall not be unreasonably withheld. This shall be deemed to include the floor slabs, perimeter walls and the roof of the Premises as well as any suspensions from the roof structure. e. That Lessor will keep the exterior of the entire Premises, including adjoining sidewalks free of rubbish, debris, snow or ice, and also in such condition as the Board of Health and Board of Fire Underwriters having authority in such matters may lawfully require. Lessor will ensure that snow and ice removal is done in a timely manner. Lessee further agrees at its sole cost and expense, to perform, fully obey and comply with all ordinances, rules regulations and laws of all public authorities, boards and officers, relating to the maintenance of and occupancy of said Premises. f. That Lessee shall remove no additional, improvements and alterations made by Lessor or by Lessee except as herein provided, and shall not alter the Premises or any part thereof, without in each case the consent of Lessor in writing. Lessee shall, however, have the right, during the term of this Lease, to remove its trade fixtures and mechanical equipment however affixed to the realty, and Lessee covenants promptly to repair any damage caused by any such removal; PROVIDED, HOWEVER, that any such trade fixtures and mechanical equipment, not required to be removed by Lessor pursuant to this Lease, which shall not have been removed by Lessee on the expiration or sooner termination of their term of this Lease or any extended term hereof, shall deemed abandoned by Lessee and shall thereupon become the absolute property of Lessor without compensation to Lessee. Anything herein contained to the contrary notwithstanding, however, it is agreed that the Lessor's consent shall be required for installation of improvements, alterations, or repairs, whether or not such involve alteration to the building structure, and that Lessor will not unreasonably withhold its consent as to the making of other installations, alterations, additions or improvements which are -10- reasonably required for the conduct of Lessee's business on the Premises, provided that such installations, alterations, additions or improvements do not adversely affect the structures upon, or the overall visual environment of the Complex. g. That Lessee shall make, at its sole cost and expense, all repairs necessary to maintain the Premises, pursuant to subparagraphs "a" through "f" hereinabove written, and shall keep the Premises and the fixtures therein in neat and orderly condition. If Lessee refuses or neglects to make such repairs, or fails to diligently prosecute the same to completion, after written notice from Lessor of the need therefore, and after a reasonable time thereafter in which to make the same, Lessor may make such repairs at the expense of Lessee and such expense shall be collectible as Additional Rent. h. That a violation by Lessee, its employees or its agents of any of the covenants above written in subparagraphs "a" through "g" shall be deemed a default under this Lease entitling Lessor to exercise any of the remedies provided for herein. i. That Lessor shall not be liable by reason of any injury to or interference with Lessee's business arising from the making of any repairs, alterations, additions or improvements in or to the Premises or the Complex or to any appurtenances or equipment therein unless such inconvenience, injury, or interference shall be occasioned by the negligence of Lessor, its agents, servants, and/or employees. There shall be no abatement of rent because of such repairs, alterations, additions or improvements, except as provided in SECTION 15 hereof. Lessor shall use its best efforts with respect to repairs, alterations, additions and improvements to avoid depriving Lessee of the use of the Premises and to minimize or eliminate any interference with Lessee's use of the Premises except in cause of damage by fire or other casualty covered by SECTION 15. B. LESSOR COVENANTS AS FOLLOWS: a. That Lessor shall make all structural repairs in, to and about the Premises and all repairs and maintenance of the Complex of which they are a part, which repairs and maintenance are Lessor's responsibility as set forth in this Lease, needed to keep the Premises and the Complex in good and tenantable condition. b. That Lessor shall be responsible for repair and replacement of certain components within those air conditioners and heating units, which were installed by Lessor. Lessor's responsibility for said repairs and replacements shall be contingent upon Lessee obtaining, at Lessee's expense, annual maintenance -11- contracts, which contracts shall require a minimum of semi-annual service calls. Such contracts must be with a reputable heating, ventilating, and air conditioning service company, which company is subject to the reasonable approval of Lessor. Lessor shall not be responsible for any repairs or replacement of any unit without Lessee providing a documented history to Lessor of every service call made during Lessee's occupancy for the unit in question. Lessee shall, upon taking occupancy of the Premises and upon each renewal of said maintenance contract, supply Lessor with a copy of said contract. Lessor's responsibility for maintenance of certain components within those air conditioning and heating units previously installed by Lessor shall be further limited to the repair and replacement of certain components of air conditioners and heating units consisting exclusively of compressor(s), condenser(s), evaporator coil(s), fan housing(s), heat exchanger(s), and motor(s). Except as provided in the preceding paragraph, Lessee shall be responsible for on-going maintenance, repairs, and replacements of components within the air conditioning and heating units serving the Premises. c. That Lessor shall be responsible for the removal of snow from the driveways and parking areas of the Complex. d. That Lessor shall be responsible for the management of all landscaped areas comprising a part of the Complex. If Lessor refuses or neglects to make such repairs for which it has responsibility under this Lease, or fails to diligently prosecute the same to completion, after written notice from Lessee of the need therefore, and after a reasonable time thereafter in which to make the same, Lessee may make such repairs at the expense of Lessor and such expense shall be credited against the rent. In no event shall Lessor be obligated under this SECTION 7 to repair any damage caused by any act, omission or negligence of Lessee or its employees, agents, invitees, licensees, subtenants or contractors. SECTION 8. ASSIGNMENT AND SUBLETTING. Lessee may assign this Lease or sublet all or any part of the Premises with the prior written consent of Lessor, which consent shall not be withheld unreasonably; PROVIDED, HOWEVER, that Lessee shall remain liable for the payment of rent hereunder and the performance of the covenants and conditions contained herein. No consent will be required for any assignment: (1) to any present or future -12- wholly-owned subsidiary or parent of Lessee or (2) to any successor in interest of the entire business of Lessee as a result of merger, consolidation, purchase, assignment, or operation of law. SECTION 9. RIGHT OF ENTRY. Lessor, its employees and agents, shall have the right to enter the Premises with twenty-four (24) hours prior notice to Lessee at all reasonable business hours for the purposes of examining, inspecting or showing the same to prospective purchasers, mortgagees, or during the last six (6) months of the term to prospective tenants, and making such alterations, repairs, improvements or additions to the Premises or to the Complex as are necessary to ensure compliance with the Lease. Prior to Lessor or its employees and agents entering the Premises, Lessor shall provide reasonable notice to Lessee except in the event for an emergency. Nevertheless, if representatives of Lessee shall not be present to open and permit entry into the Premises at any time when such entry by Lessor is necessitated by emergency, then Lessor may enter by means of a master key (or forcibly in the event of an emergency) without such entry constituting an eviction of Lessee or termination of this Lease. SECTION 10. SURRENDER. At the expiration of this Lease or sooner termination of the term of this Lease or any extended term hereof, Lessee shall surrender the Premises to Lessor, together with all additions, alterations and improvements thereto, in broom clean condition and in good order and repair except for ordinary wear and tear for which Lessee is not obligated to make repairs under this Lease. Lessee, however, shall remove all additions, alterations, improvements, installations, trade fixtures or mechanical equipment which Lessor shall have made the election to have removed as provided for in the Lease. Lessee expressly waives to Lessor the benefit of Act No. 20, approved April 6, 1951, entitled "The Lessor and Lessee Act of 1951" requiring three months' notice to vacate the Premises at the end of the term or upon forfeiture of this Lease for breach of its conditions, and covenants and agrees to give up quiet and peaceable possession without further notice form the Lessor or its agent. -13- SECTION 11. INDEMNIFICATION. A. LESSEE. Lessee shall indemnify, hold harmless and defend Lessor from and against any and all costs, expenses (including reasonable counsel fees), liabilities, losses, damages, suits, actions, fines, penalties, claims or demands of any kind and asserted by or on behalf of any person or governmental authority, arising out of or in any way connected with, and Lessor shall not be liable to Lessee on account of, (i) any failure by Lessee to perform any of the agreements, terms, covenants or conditions of this Lease required to be performed by Lessee, (ii) any failure by Lessee to comply with any statutes, ordinances, regulations or orders of any governmental authority relating to the use and occupancy of the Premises and improvements, (iii) any accident, death or personal injury, or damage to or loss or theft of property, which shall occur in or about the Premises except as the same may be caused solely by the negligence or intentional wrongdoing of Lessor, its employees or agents or failure of Lessor to observe its covenants hereunder, or (iv) any loss or damage which Lessee, its agents, or employees, may sustain by reason of any strike, lockout or other labor disturbance, or civil commotion affecting the Lessor or the Complex or any other tenant of the Lessor. B. LESSOR. Lessor shall indemnify, hold harmless and defend Lessee from and against any and all costs, expense (including reasonable counsel fees), liabilities, losses, damages, suits, actions, fines, penalties, claims or demands of any kind and asserted by or on behalf of any person or governmental authority, arising out of or in any way connected with, and Lessee shall not be liable to Lessor on account of, (i) any failure by Lessor to perform any of the agreements, terms, covenants or conditions of this Lease required to be performed by Lessor, (ii) any failure by Lessor to comply with any statutes, ordinances, regulations or orders of any governmental authority relating to the use and occupancy of the Premises and improvements except where Lessee is responsible for compliance therewith, (iii) any accident, death or personal injury, or damage to or loss or theft of property, which shall occur in or about the Premises except as the same may be caused solely by the negligence or intentional wrongdoing of Lessee, its employees or agents or failure of Lessee to observe its covenants hereunder. SECTION 12. LIABILITY INSURANCE. A. LESSEE. Lessee will at Lessee's cost and expense maintain with insurance companies satisfactory to Lessor during the term of this Lease, comprehensive public liability insurance with minimum combined single limits of -14- $1,000,000 for bodily injury liability and property damage liability. Such insurance coverage shall name Lessor as an additional insured, as its interest may appear. Lessee shall deposit with Lessor certificates of such insurance at or prior to the commencement of this Lease and thereafter within ten (10) days prior to the expiration of such policy or policies. B. LESSOR. Lessor will at Lessor's cost and expense maintain with insurance companies satisfactory to Lessor during the term of this Lease, comprehensive public liability insurance with minimum combined single limits of $1,000,000 for bodily injury liability and property damage liability. Lessor will procure and maintain during the term hereof, at its sole cost and expense, insurance against all risks of direct physical loss, including loss by fire, lightning and other risks which at the time are included under "extended coverage" endorsements, in amounts not less than one hundred percent (100%) of the actual replacement value of the Complex exclusive of foundations and excavations. Lessor shall deposit with Lessee certificates of such insurance at or prior to the commencement of this Lease and thereafter within ten (10) days prior to the expiration of such policy or policies. SECTION 13. FIRE AND CASUALTY INSURANCE. Lessee shall not do or suffer to be done any act, matter or thing whereby the fire and casualty insurance carried by Lessor on the Complex of which the Premises are a part shall be suspended or rated as more hazardous than at the commencement of this Lease. In case of breach of this covenant (in addition to all other remedies given to Lessor for breach of any covenants or conditions of this Lease), Lessee agrees to pay as Additional Rent any and all increase of premium for insurance carried by Lessor caused in any way by the actions or occupancy of Lessee. SECTION 14. WAIVER OF SUBROGATION. The parties hereto for themselves and their insurers hereby waive any right of subrogation against the other party. SECTION 15. DAMAGE OR DESTRUCTION OF LEASED PREMISES. In case the structure of which the Premises form a part shall be structurally damaged, to the extent of 50% or more of its value, by fire or other cause then, at the option of the Lessor, to be exercised by a notice in writing sent no later than thirty (30) days after such damage, this Lease shall cease and come to an -15- end as of the date of such damage, and any fixed rent for the unexpired period paid in advance beyond the date of such damage, shall be refunded by Lessor to Lessee. If the said structure shall be damaged to an extent less than 50% of its value, or if the Lessor shall not exercise its aforesaid option, the Lessor, with due diligence, shall restore the structure to a condition equal to its condition before the damage, which will permit the full enjoyment and use of the Premises. A proportion of the fixed rent herein reserved, according to the extent that such damage and its repair shall interfere with the full enjoyment and use of the Premises, shall be suspended and abated from the date of such damage until said structure shall have been so restored. The Lessee shall be obligated to repair, restore or replace trade fixtures and equipment installed by Lessee which may be damaged or destroyed by any cause. SECTION 16. DEFAULT; REMEDIES OF LESSOR. The occurrence of any of the following shall constitute an Event of Default under this Lease: (a) If Lessee shall fail to pay rent or any other sum due hereunder to Lessor when the same is due and payable under the terms of this Lease and such failure shall continue for a period of ten (10) days after written notice thereof has been given to Lessee by Lessor, or (b) the Lessee shall fail to perform any other duty or obligation imposed upon it by this Lease and such failure shall continue for a period of thirty (30) days after written notice thereof has been given to Lessee by Lessor, unless such default cannot be reasonably remedied within thirty (30) days after receipt of Lessor's notice, in which event Lessee shall have such additional time as may be reasonably necessary to remedy such default, or (c) the Lessee shall be adjudged bankrupt, or shall make a general assignment for the benefit of its creditors, or (d) a receiver for any property of Lessee in or upon the Premises is appointed in any action, suit or proceeding by or against Lessee and such appointment shall not be vacated or annulled within sixty (60) days, or (e) the interest of Lessee in the Premises shall be sold under execution or other legal process. Upon the occurrence of an Event of Default, Lessor shall have the right to enter upon the Premises and again have, repossess, and enjoy the same as if this Lease had not been made, and thereupon, at Lessor's option, this Lease shall terminate without prejudice, however, to the right of Lessor to recover from Lessee -16- all rent due and unpaid up to the time of such re-entry. In the event of any such Event of Default and re-entry, if Lessor does not elect to terminate this Lease, Lessor shall make its best effort to relet the Premises for the remainder of the term, for the highest rent then reasonably obtainable, and Lessee shall be liable to Lessor and Lessor shall have the right to recover from Lessee the difference between the rent reserved under this Lease for the remainder of the term and the amount obtained through such reletting plus the costs and expenses reasonably incurred by Lessor in such reletting including, without limitation, the reasonable cost of obtaining possession of the Premises and of any repairs or alterations necessary to repair the same. In the event that the amount obtained through such reletting, plus the reasonable costs and expenses thereof, shall exceed the rent herein reserved, Lessor shall retain such excess and use such excess for its sole purpose. Notwithstanding anything to the contrary contained herein, Lessor expressly waives the benefit to Lessor of any rights it may have under law to distraint of any of Lessee's personal property. Lessee agrees that Lessor's remedies under this Lease are cumulative and the exercise of one remedy does not preclude the exercise of the other remedies. Lessor shall not be deemed to be in default in the performance of any obligation required to be performed by Lessor hereunder unless and until it has failed to perform such obligation within thirty (30) days after written notice thereof from Lessee to Lessor; PROVIDED, HOWEVER, that if the nature of the Lessor's obligation is such that more than thirty (30) days are required for its performance, then Lessor shall not be deemed to be in default if it shall commence such performance within such thirty-day period and thereafter diligently prosecutes the same to completion. SECTION 17. EMINENT DOMAIN. If the whole of the Premises shall be condemned or taken either permanently or temporarily for any public or quasipublic use or purpose, under any statute or by right of eminent domain, or by private purchase in lieu thereof, then in that event, the term of the Lease shall cease and terminate from the date of title vesting in such proceeding or purchase and Lessee shall have no claim against Lessor for the value of any unexpired term of said Lease, and shall release unto Lessor any such claim it may have against the condemnor for such value. In the event a portion only of the Premises or a portion of the Complex containing same shall be so taken (even though the Premises may not have been affected by the taking of some other portion of the Complex containing same), Lessor may elect to terminate this Lease -17- from the date of title vesting in such proceeding or purchase, or Lessor may elect to repair and restore, at its own expense, the portion not taken and thereafter the rent shall be reduced proportionately to the portion of the Premises taken. If Lessor elects to terminate in the event of a partial taking and thereafter restores the Complex and the Premises, Lessee shall have a right of first refusal to relet the Premises, on substantially the same terms as herein provided, except that the rental shall be reduced in proportion to the reduction in the square feet of the Premises and increased by the costs occasioned by the restoration. In the event a substantial portion of the parking area is taken by condemnation or in lieu thereof, and Lessor does not within thirty (30) days following the date of the title vesting in such proceeding or purchase take steps toward providing alternate, nearby parking, Lessee may elect to terminate this Lease by giving written notice of such intention to Lessor within sixty (60) days after the date of title vesting in such proceeding or purchase. Lessee shall have the right to claim and recover from the condemning authority such compensation as may be awarded or recoverable by Lessee in its own right on account of any and all damages to Lessee's improvements, equipment, property furniture, fixtures, leasehold improvements and the fair market value of its business; but Lessee's right(s), as stated hereinabove, shall not include any right to any value attributed to the unexpired term of this Lease if such an award to Lessee would act to reduce Lessor's award. SECTION 18. SUBORDINATION OF LEASE. This Lease is and shall remain subordinate and subject to any mortgage or mortgages which are now or at any time shall be placed upon the freehold interest of Lessor or any part thereof or to any assignment of the interest of Lessor in this Lease. Lessee agrees to execute and deliver to Lessor, without cost, any instrument which may be deemed necessary by Lessor to further effect the subordination of this Lease to any such mortgage, mortgages or assignments, except that such instrument shall provide that, so long as Lessee is not in default hereunder, its possession will not be disturbed nor will its leasehold interest be divested. In the event of a foreclosure of any such mortgage, Lessee hereby agrees that this Lease shall not terminate by reason thereof, and Lessee further agrees to attorn to and to recognize as Lessor hereunder the mortgagee, or any purchaser at a foreclosure sale or any purchaser of the Complex and improvements in lieu thereof, for the balance of the term of this Lease, subject to all the terms and provisions -18- hereof provided, however, any such mortgagee or purchaser, which shall become the Lessor hereunder shall not be: (a) liable for any act or omission of Lessor, (b) subject to any offsets or defenses which Lessee might have against Lessor, (c) bound by any rent or additional rent which Lessee may have paid to Lessor for more than the current month, or (d) bound by any amendment or modifications of said Lease without its consent. SECTION 19. ESTOPPEL CERTIFICATE. Lessee shall, at any time and from time to time, within twenty (20) days following written request from Lessor, execute, acknowledge and deliver to Lessor, as supplied by Lessor, a written statement certifying that this Lease is in full force and effect and unmodified (or, if modified, stating the nature of such modification), certifying the date to which the rent reserved hereunder has been paid, and certifying that there are not, to Lessee's knowledge, any uncured defaults on the part of Lessor hereunder, or specifying such defaults if any are claimed. Any such statement may be relied upon by any prospective purchaser or mortgagee of all or any part of the Complex or real property which the Complex is located. Lessee's failure to deliver such statement within said twenty-day period shall be conclusive upon Lessee that this Lease is in full force and effect and unmodified, and that there are no uncured defaults in Lessor's performance hereunder. SECTION 20. FORCE MAJEURE. In the event that either party shall be delayed or hindered in, or prevented from, the performance of any work, service or other acts required under this Lease to be performed by the party and such delay or hindrance is due to strikes, lockouts, acts of God, governmental restrictions, enemy act, civil commotion, unavoidable fire or other casualty, or other causes of a like nature beyond the control of the party so delayed or hindered, then performance of such work, service or other act shall be excused for a period of such delay and the period for the performance of such work, service or other act shall be extended for a period equivalent to the period of such delay. In no event shall such delay constitute a termination of this Lease. The provisions of this paragraph shall not operate to -19- excuse Lessee from the prompt payment of rent, including such pro rata payments of rent as may be due under Section 20 hereof, after the commencement of the term. Written notice of any such delays, other than temporary or emergency interruptions, shall be given to the other party as well as written notice of the cessation of the same. SECTION 21. QUIET ENJOYMENT. If Lessee shall pay the rent and perform all its other obligations hereunder, Lessor covenants that Lessee shall, during the term hereof, enjoy quiet and peaceable possession of the Premises. SECTION 22. ABANDONMENT OF PREMISES. If the Premises at any time be deserted or closed, Lessor may enter by force, without liability or prosecution or action therefore, and may relet the Premises as Agent of Lessee for any unexpired portion of the term and receive the rent therefore and apply it on this Lease. In the event Lessor relets the Premises, Lessor shall remove and store any of Lessee's personal property, at Lessee's cost. SECTION 23. NON-WAIVER. The failure or delay on the part of either Lessor or Lessee to enforce or exercise at any time any of the provisions of this Lease or any of the irrespective rights or remedies hereunder shall in no way be construed to be a waiver thereof, nor in any way to affect the validity of this Lease or any part hereof, or the right of Lessor or Lessee, as the case may be, to thereafter enforce each and every such provision, right or remedy. No waiver of any breach of this Lease shall be held to be a waiver of any other or subsequent breach. The receipt by Lessor of Rent at a time when the Rent is in default under this Lease shall not be construed as a waiver of such default. The receipt by Lessor of a lesser amount than the Rent due shall not be construed to be other than a payment on account of the Rent then due. No act or thing done by Lessor or Lessor's agents or employees during the term shall be deemed an acceptance or surrender of a surrender of the Premises, and no agreement to accept such a surrender shall be valid unless in writing and signed by Lessor. -20- SECTION 24. NOTICES. Any notice or demand required by the provisions of this Lease to be given to Lessor shall be deemed to have been given adequately if sent by Certified or Registered Mail to Lessor at the following address: 1220 Frick Building, Pittsburgh, PA 15219. Any notice or demand required by the provisions of this Lease to be given to Lessee shall be deemed to have been given adequately if sent by Certified or Registered Mail to Lessee at the following address: Tollgrade Communications, Inc. Harmar Industrial Manor, #101 491 Nixon Road Cheswick, PA 15204 Attention: Christian L. Allison Either party shall have the right to change its address by giving to the other party fifteen (15) days' advance written notice of its intention to make such change and of the substituted address at which any notice or demand may be directed to it. SECTION 25. SUCCESSORS AND ASSIGNS. The respective rights and obligations provided in this Lease shall bind and shall inure to the benefit of the parties hereto, their legal representative, heirs, successors and assigns; PROVIDED, HOWEVER, that no rights shall insure to the benefit of any successor of Lessee (excepting, if applicable, only the personal representative of Lessee's estate), unless Lessor's written consent for the transfer to such successor has first been obtained as provided in SECTION 8. SECTION 26. ENVIRONMENTAL MATTERS. A. For purposes of this Lease: (i) As used herein, the term "Environmental Laws" shall mean any and all federal, state, or local laws, statutes, rules, regulations, ordinances, interstate compacts, or judicial or administrative decrees, orders, decisions, or permits relating to emissions, discharges, releases or threatened releases of pollutants, contaminants or Hazardous Substances into the environment (including, without limitation, ambient air, surface water, ground water or subsurface strata); or otherwise relating to the use, storage, treatment, transportation, manufacture, refinement, handling, -21- production or disposal of such pollutants, contaminants or Hazardous Substances including, without limitation, the following statutes, as amended and judicially and administratively interpreted through the date hereof, and all regulations promulgated thereunder as of such date, including without limitation all comparable statutes, regulations, and interpretations by the Commonwealth of Pennsylvania: the Comprehensive Environmental Response, Compensation and Liability Act, 42 USC 9601 et seq. ("CERCLA"); the Superfund amendments and Reauthorization Act of 1986, 42 USA ("SARA"); the Federal Water Pollution Control Act, USC 1251 et seq. ("FWPCA"); the Clean Air Act, 42 USC 7401 et seq.; the Resource Conservation and Recovery Act, 42 USC 4901 et seq. ("RCRA"); the Safe Drinking Water Act, 42 SC 300f et seq.; the "Toxic Substance Control Act, 15 USC 2601 et seq.; the Clean Water ACT, 33 U.S.C. 1251 et seq.; the National Environmental Policy Act 42 U.S.C. 4321 et seq.; the Hazardous Substances Cleanup Act, 35 Pa. C.S.A. 6020.101 et seq. ("HSCA"); the Clean Streams Law, 35 Pa. C.S.A. 691.1 et seq.; the Solid Waste Management Act, 35 Pa. C.S.A. 6018.101 et seq.; and the Pennsylvania Storage Tank and Spill Prevention Act, Pa Act No. 1989-32; and (ii) As used herein, the term "Hazardous Substance" shall mean any and all elements, compounds, chemical mixtures, contaminants, pollutants, or other substances identified as "Hazardous Substances" under CERCLA, SARA, or HSCA and all comparable statutes and regulations, and any used or unused petroleum products. B. Lessee shall: (i) Not cause or permit any Hazardous Substance to be placed, held, located, released, spilled, transported or disposed of on, under, at or from the Premises or any real estate contiguous thereto in contravention of any Environmental Laws; (ii) Except with respect to matters existing prior to the Commencement Date, contain at or remove from the Premises or perform any other remedial action regarding any Hazardous Substance which Lessee has placed on the Premises, at Lessee's sole cost and expense, if, as and when such containment, removal or other remedial action is required under any legal requirement; (iii) Not permit any subtenant or occupant of the Premises to engage in any activity that could result in any liability, cost or expense to any such subtenant, or occupant, Lessee, Lessor or any other owner of the Premises or any portion thereof or the creation of a lien on the Premises under any Environmental Laws or under any similar applicable law or regulation; -22- (iv) Provide Lessor with written notice (and a copy as may be applicable) of any of the following within ten (10) days thereof: (a) Lessee's obtaining actual knowledge or notice of any kind of the presence, or any actual or threatened release, of any Hazardous Substance on, under, at or from the Premises not authorized or permitted under Environmental Laws; (b) Lessee's receipt or submission, or Lessee's obtaining actual knowledge or notice of any kind, of any report, citation, notice or other communication from or to any federal, state or local government or quasigovernmental authority regarding any Hazardous Substance in any way materially adversely affecting the Premises; or (c) Lessee's obtaining actual knowledge or notice of any kind of the incurrence of any cost or expense by any federal, state or local governmental or quasigovernmental authority or any private party in connection with the assessment, monitoring, containment, removal or remediation of any kind of any Hazardous Substance on, under, at or form the Premises, or of the recording of any lien on the Premises in connection with any such action or Hazardous Substance on, under or at the Premises; and (v) Defend all actions against the Lessor and pay, protect, indemnify and save harmless the Lessor from and against any and all liabilities, losses damages, costs, expenses (including, without limitation, reasonable attorneys' fees and expenses), causes of action, suits, claims, demands or judgments of any nature arising from Lessee's failure to comply with this SECTION 26. The indemnity contained in this SECTION 26 shall survive the expiration or earlier termination of this Lease with respect to the obligations and liabilities of Lessee hereunder, actual or contingent, which have arisen on or prior to such expiration or earlier termination. C. Lessor: (i) Represents and warrants that to the best of its knowledge no Hazardous Substances are present on the Premises prior to the Commencement Date; (ii) Shall contain at or remove from the Premises or perform any other remedial action regarding any Hazardous Substance which have been placed on the Premises prior to the Commencement Date, at Lessor's sole cost and expense, -23- if, as and when such containment, removal or other remedial action is required under any legal requirement; (iii) Shall not permit any tenant or occupant of the Complex to engage in any activity that could result in any liability, cost or expense Lessee or any portion thereof or the creation of a lien on the Premises under any Environmental Laws or under any similar applicable law or regulation; (iv) Shall provide Lessee with written notice (and a copy as may be applicable) of any of the following within ten (10) days thereof: (a) Lessor's obtaining actual knowledge or notice of any kind of the presence, or any actual or threatened release, of any Hazardous Substance on, under, at or from the Premises; (b) Lessor's receipt or submission, or Lessor's obtaining actual knowledge or notice of any kind, of any report, citation, notice or other communication from or to any federal, state or local government or quasigovernmental authority regarding any Hazardous Substance in any way materially adversely affecting the Premises; or (c) Lessor's obtaining actual knowledge or notice of any kind of the incurrence of any cost or expense by any federal, state or local governmental or quasigovernmental authority or any private party in connection with the assessment, monitoring, containment, removal or remediation of any kind of any Hazardous Substance on, under, at or from the Premises, or of the recording of any lien on the Premises in connection with any such action or Hazardous Substance on, under or at the Premises; and (v) Defend all actions against the Lessee and pay, protect, indemnify and save harmless the Lessee from and against any and all liabilities, losses damages, costs, expenses (including, without limitation, reasonable attorneys' fees and expenses), causes of action, suits, claims, demands or judgments of any nature arising from Lessor's failure to comply with this SECTION 26(c). The indemnity contained in this SECTION 26(c) shall survive the expiration or earlier termination of this Lease with respect to the obligations and liabilities of Lessor hereunder, actual or contingent, which have arisen on or prior to such expiration or earlier termination. -24- SECTION 27. GOVERNING LAW. This Lease shall be construed, governed and enforced in accordance with the laws of the Commonwealth of Pennsylvania. SECTION 28. SEVERABILITY. If any provisions of this Lease shall be held to be invalid, void or unenforceable, the remaining provisions hereof shall in no way be affected or impaired and such remaining provisions shall remain in full force and effect. SECTION 29. GENDER. As used in this Lease, the word "person" shall mean and include, where appropriate, an individual, corporation, partnership or other entity; the plural shall be substituted for the singular, and the singular for the plural, where appropriate; and words of any gender shall mean to include any other gender. SECTION 30. OPTION TO RENEW. Lessee shall have the right and option to renew this Lease for two (2) consecutive additional terms for each of five (5) years and two (2) years following expiration of the term hereof (which renewal terms may be exercised in whatever order Lessee deems advisable in its sole discretion, e.g., Lessee may take either the two (2) year term or the five (5) year renewal term immediately following the expiration of the initial term, and then exercise the remaining term thereafter), provided: (i) that this Lease is in full force and effect immediately prior to the date of the commencement of the renewal term; (ii) that the Lessee is not in default under any of the provisions herein; and (iii) that Lessee is in full occupancy of the Premises for its own use and intends to continue such occupancy. Such option shall be exercised by Lessee serving on Lessor written notice to that effect not later than six (6) months prior to the expiration of the initial term. Said renewal shall be upon the same terms, covenants, conditions and limitation as in this Lease provided, except that the monthly rental during the renewal term shall be established at the "going market rate" for comparably improved space in the greater Pittsburgh market area, but in no event shall the monthly rental be less that the Base Rent plus Additional Rent payable to Lessor in the last month of the initial lease term pursuant to SECTION 3 hereof. -25- The notice of election to take the renewal term when given by Lessee shall be irrevocable and shall constitute an agreement between the parties for renewal of this Lease as herein stated. If this Lease or the right of occupancy of the Lessee hereunder shall expire, be terminated, or come to an end pursuant to any of the provisions of this Lease, all rights of Lessee to renew automatically shall be deemed terminated. SECTION 31. ENTIRE AGREEMENT. There are no agreements, representations or understandings between the parties other than those expressed herein. A real estate brokerage commission is payable by Lessor to The Galbreath Company as a result of consummation of this agreement. No modification of the terms hereof shall be binding unless set forth in a writing signed by both parties hereto. SECTION 32. LESSOR IMPROVEMENT ADVANCE. Lessor shall advance the sum of approximately Fifty Thousand Dollars ($50,000) towards construction of Lessor's Improvements to the Premises ("Lessor's Improvement Advance"), which figure shall be finalized within thirty (30) days of the date of execution of this Lease, and verified in writing by Lessor. Lessee shall repay Lessor's Improvement Advance to Lessor in payments amortized at eight percent (8%) over the term of the Lease. All costs above such Lessor Improvement Advance shall be paid by Lessee. SECTION 33. HVAC SYSTEM. Lessor represents that the heating, ventilating and air conditioning ("HVAC") system to serve the Premises, shall provide heating, ventilating and air conditioning throughout the Premises) as follows: (a) Maintain average indoor dry bulb temperatures not less than 70 (degrees)F. during the heating season, whenever the outdoor dry bulb temperature, during Normal Business Hours, is not lower than 0(degrees)F. Relative humidity shall be maintained as high as possible without condensations, but at a range no greater than 40-60% at a room temperature of 75(degrees)F. dry bulb. (b) Maintain average indoor conditions no higher than 78(degrees)F. dry bulb and at a range of 40-60% relative humidity, during the cooling season, whenever -26- the outdoor dry bulb temperature, during Normal Business Hours, is not higher than 95(degrees)F. and the outdoor wet bulb temperature does not exceed 75 (degrees)F. (c) The air-handling systems shall be so designed that outside air shall be introduced into the systems at an average rate of not less than 0.35 cfm per square foot of usable floor space. WITNESS the due execution hereof as of the day and year first above written. ATTEST: REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA /s/ Mark Perrm BY: /s/ Frank Brooks Robinson - --------------------------------- --------------------------------- SECRETARY NAME: Frank Brooks Robinson --------------------------------- TITLE: President --------------------------------- (Corporate Seal) ATTEST: TOLLGRADE COMMUNICATIONS, INC. /s/ Richard T. Cassetti BY: /s/ Christian L. Allison - --------------------------------- ---------------------------------- NAME: CHRISTIAN L. ALLISON ---------------------------------- TITLE: CHIEF OPERATING OFFICER ---------------------------------- -27- EXHIBIT A FLOOR PLAN [FLOOR PLAN OF LEASED PREMISES] -28- EXHIBIT B LESSOR'S IMPROVEMENTS A. General Items (*to be completed at lessor's expense) Clean floors in the printing room area. Clean and replace soiled or damaged ceiling tiles and HVAC vents as required. Clean area where the hot water heater is located. Clean engraving department area and remove ventilation hood. Remove dark room door and vent, create archway opening. B. Main Office. Demo existing office space and add new offices. Reuse doors with glass sidelights. Reuse 2'x4' light fixtures. Clean and relamp. New 2' x 4' fixtures to be added. New doors are 1 3/4" x 3068 solid oak doors. New 2'x 4' ceiling tile. Twenty-six or twenty-eight ounce commercial carpeting and cove base. Electrical outlets, switches, exit lights and emergency lights. Move and install existing kitchen unit. Add Trol-A-Temp system to handle large meetings in Conference Room. Existing HVAC system will be used, with the additional ductwork and diffusers for main offices. Township building permit. C. Warehouse Office Space. Demising wall to separate warehouse is 45' long x 22" high with drywall one side. Ceiling tile, 2' x 4' light fixtures and switches. One (1) 5'0 wide double steel door. Paint all walls and cove base drywalls. HVAC will be supplied by existing rooftop unit. Not included are additional electrical outlets or floor treatment. D. Print Shop - Item breakdown. Remove 20'0 demising wall and dispose. Cut archway in kitchen wall. Patch and paint kitchen walls. Clean VCT in offices and hallway. Paint hallway, composition room, file room and bathrooms. Paint doors and frames. Paint walls in print shop. Seal floors in print shop. Relamp and clean fixtures in print shop. New ballast for light fixtures. -29- EX-10.35 9 j9925501exv10w35.txt FIRST AMENDMENT TO LEASE AGREEMENT EXHIBIT 10.35 FIRST AMENDMENT OF LEASE AGREEMENT THIS FIRST AMENDMENT OF LEASE AGREEMENT, made this 15th day of March 1994, between REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA, a Pennsylvania nonprofit corporation having its principal office in the City of Pittsburgh, Allegheny County, Pennsylvania (hereinafter called the "Lessor"), and TOLLGRADE COMMUNICATIONS, INC., a Pennsylvania corporation (hereinafter called the "Lessee"). WHEREAS, the Lessor and Lessee previously made and entered into that certain Lease Agreement, dated as of August 5, 1993 (hereinafter called the "Lease"), whereby Lessor leased to Lessee, upon the terms and conditions set forth therein, certain office space (the "Premises") located in the HARMAR INDUSTRIAL MANOR (hereinafter called the "Complex"), located in Harmar Township, Allegheny County, Pennsylvania; and WHEREAS, the Lessor and Lessee desire to amend the Lease upon the terms and conditions as set forth herein such that Lessee shall lease from Lessor additional office space in the Complex (hereinafter called the "Amendment to Lease"). NOW THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound hereby, Lessor and Lessee covenant and agree as follows: 1. Incorporation by Reference / Capitalized Terms. The Lease is hereby incorporated into this Amendment of Lease by reference and made an integral part hereof. Any capitalized term used in the Amendment of Lease that is not otherwise defined herein shall have the respective meaning ascribed to it in the Lease. In the event of a conflict between the terms of this Amendment of Lease and the Lease, the terms of this Amendment of Lease shall govern. 2. Premises. The Lessor does hereby lease and demise unto the Lessee Suite 105 containing approximately Two Thousand One Hundred Fifty Four square feet (2,154 sq. ft.) of rentable area of existing office space in the Complex (hereinafter called "First Additional Space"). The First Additional Space is more particularly described on EXHIBIT A, which is attached hereto and made part hereof. The First Additional Space shall be deemed hereafter to be part of the Premises, as that term is defined in the Lease. 3. Commencement Date. The term of this Amendment of Lease shall commence (hereinafter called the "Commencement Date") and possession shall be given as of 12:01 AM on March 15, 1994. The Term of this Amendment of Lease shall expire on the Expiration Date as set forth in the Lease unless the Term is extended as provided in the Lease. 4. Base /Rent. Lessee shall pay to Lessor at its office in Pittsburgh, the sum of One Thousand Three Hundred and Forty Six Dollars ($1,346.00) as monthly rental for the First Additional Space, payable in advance and without demand on or before the first business day of each successive calendar month for the duration of the Term of the Lease, and any renewal thereof (hereinafter called "First Additional Space Base Rent"). If the Commencement Date is on a day other than the first business day of a calendar month, Lessee shall pay to Lessor on the date that the first complete payment of First Additional Space Base Rent is due, a pro rata portion to be based on the number of days the First Additional Space is occupied in such partial month after the Commencement Date. 5. Full Force and Effect. Except as extended and amended hereby, all other terms and conditions of the Lease shall remain unchanged and in full force and effect and applicable to this Amendment of Lease. -2- IN WITNESS WHEREOF, the parties hereto have caused this Amendment of Lease to be duly executed the day and year first above written. ATTEST REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA /s/ Colleen B. Poremski By: /s/ Frank Brooks Robinson - -------------------------------- -------------------------------- Secretary Name: ------------------------------- Title: President ------------------------------ ATTEST: TOLLGRADE COMMUNICATIONS, INC' /s/ Carole A. Mitchell By: /s/ Christian L. Allison - -------------------------------- ------------------------------- Name: CHRISTIAN L. ALLISON ------------------------------- Title: PRESIDENT ------------------------------ EXHIBIT A [FLOOR PLAN OF FIRST ADDITIONAL SPACE] EX-10.36 10 j9925501exv10w36.txt SECOND AMENDMENT TO LEASE AGREEMENT Exhibit 10.36 SECOND AMENDMENT OF LEASE AGREEMENT THIS SECOND AMENDMENT OF LEASE AGREEMENT, made as of this first day of July, 1994, between REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA, a Pennsylvania nonprofit corporation having its principal office in the City of Pittsburgh, Allegheny County, Pennsylvania (hereinafter called the "Lessor"), and TOLLGRADE COMMUNICATIONS, INC., a Pennsylvania corporation (hereinafter called the "Lessee"). WHEREAS, the Lessor and Lessee previously made and entered into that certain Lease Agreement, dated as of August 5, 1993 which was amended by the First Amendment of Lease dated March 15, 1994 (hereinafter collectively called the "Lease"), whereby Lessor leased to Lessee, upon the terms and conditions set forth therein, certain office space (the"Premises") located in the HARMAR INDUSTRIAL MANOR (hereinafter called the "Complex"), located in Harmar Township, Allegheny County, Pennsylvania; and WHEREAS, the Lessor and Lessee desire to amend the Lease upon the terms and conditions as set forth herein such that Lessee shall lease from Lessor additional office space in the Complex (hereinafter called the "Amendment to Lease"). NOW THEREFORE, for good and valuable consideration, the receipt of which is hereby acknowledged, and intending to be legally bound hereby, Lessor and Lessee covenant and agree as follows: 1. Incorporation by Reference / Capitalized Terms. The Lease is hereby incorporated into this Amendment of Lease by reference and made an integral part hereof. Any capitalized term used in the Amendment of Lease that is not otherwise defined herein shall have the respective meaning ascribed to it in the Lease. In the event of a conflict between the terms of this Amendment of Lease and the Lease, the terms of this Amendment of Lease shall govern. 2. Premises. The Lessor does hereby lease and demise unto the Lessee Units D-1* and D-6** in the Complex (hereinafter called the "second and third additional space"). The second and third Additional Spaces are more particularly described on Exhibit "A", which is attached hereto and made part hereof. The second and third Additional Space shall be deemed hereafter to be part of the Premises, as that term is defined in the Lease. * (containing approximately 1,988 rentable square feet) ** (containing approximately 3,593 rentable square feet) 3. Commencement Date. The term of this Amendment of Lease shall commence (hereinafter called the "Commencement Date") and possession shall be given as of 12:01 AM on July 1, 1994. The Term of this Amendment of Lease shall expire on the Expiration Date as set forth in the Lease unless the. Term is extended as provided in the Lease. 4. Base Rent. Lessee shall pay to Lessor at its office in Pittsburgh, the following amounts, as monthly rental, payable in advance and without demand on or before the first business day of each successive calendar month for the duration of the Term of the Lease, and any renewal thereof. For the period July 1, 1994 through September 30, 1994, the sum of FIVE HUNDRED AND EIGHT AND 00/100 DOLLARS ($580.00). For the period October 1, 1994 through December 31, 1998, the sum of ONE THOUSAND SIX HUNDRED TWENTY-EIGHT AND 00/100 DOLLARS ($1,628.00). If the Commencement Date is on a day other than the first business day of a calendar month, Lessee shall pay to Lessor on the date that the first complete payment of First Additional Space Base Rent is due, a pro rata portion to be based on the number of days the First Additional Space is occupied in such partial month after the Commencement Date. 5. Full Force and Effect. Except as extended and amended hereby, all other terms and conditions of the Lease shall remain unchanged and in full force and effect and applicable to this Amendment of Lease. IN WITNESS WHEREOF, the parties hereto have caused this Amendment of Lease to be duly executed the day and year first above written. ATTEST: REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA /s/ Colleen B. Poremski By: /s/ Frank Brooks Robinson - -------------------------------- ---------------------------------- Name: -------------------------------- Title: President ------------------------------- ATTEST: TOLLGRADE COMMUNICATIONS, INC. /s/ Carole A. Mitchell By: /s/ Christian L. Allison - -------------------------------- --------------------------------- Name: CHRISTIAN L. ALLISON -------------------------------- Title: PRESIDENT ------------------------------- -2- EXHIBIT A [FLOOR PLAN OF SECOND AND THIRD ADDITIONAL SPACES] EX-10.37 11 j9925501exv10w37.txt THIRD AMENDMENT TO LEASE AGREEMENT EXHIBIT 10.37 THIRD AMENDMENT OF LEASE AGREEMENT THIS THIRD AMENDMENT OF LEASE, made as of this 15th day of September, 1994, between REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA, a Pennsylvania nonprofit corporation having its principal office in the City of Pittsburgh, Allegheny County, Pennsylvania (hereinafter called the "Lessor"), and TOLLGRADE COMMUNICATIONS, INC., a Pennsylvania corporation (hereinafter called the "Lessee"). WHEREAS, the Lessor and Lessee previously made and entered into that certain Lease Agreement, dated as of August 5, 1993, which was amended by the First Amendment of Lease dated March 15, 1994 and Second Amendment of Lease dated July 1, 1994 (hereinafter collectively called the "Lease"), whereby Lessor leased to Lessee, upon terms and conditions set forth therein, certain space (the "Premises") located in the Harmar Industrial Manor (hereinafter called the "Complex") located in Harmar Township, Allegheny County, Pennsylvania; and WHEREAS, the Lessor and the Lessee desire to amend the Lease upon the terms and conditions set forth herein such that Lessee shall lease from Lessor additional space in the Complex (hereinafter called the "Amendment of Lease"). NOW THEREFORE, for good and valuable consideration, the receipt of which hereby acknowledged, and intending to be legally bound hereby, Lessor and Lessee covenant and agree as follows: 1. Incorporation by Reference/Capitalized Terms. The Lease is hereby incorporated into this Amendment of Lease by reference Third Amendment of Lease that is not otherwise defined herein shall have the respective meaning ascribed to it in the Lease. In the event of a conflict between the terms of this Amendment of Lease and the Lease, the terms of this Amendment of Lease shall govern. 2. Premises. The Lessor does hereby lease and demise unto the Lessee Unit D-4, containing approximately 800 rentable square feet, in the Complex (hereinafter called the "Fourth Additional Space"). The Fourth Additional Space is more particularly described on Exhibit "A", which is attached hereto and made part hereof. The Fourth Additional Space shall be deemed hereafter to be part of the Premises, as that term is defined in the Lease. 3. Commencement Date. The term of the Amendment of Lease shall commence (hereinafter called the "Commencement Date") and possession shall be given as of 12:01 AM on September 15, 1994. The Term of this Amendment of Lease shall expire on the Expiration Date as set forth in the Lease unless the Term is extended as provided in the Lease. 4. Base Rent. Lessee shall pay to Lessor at its office in Pittsburgh, as monthly rental for the Fourth Additional Space, payable in advance and without demand on the first business day of each successive calendar month during the term of the lease, together with any escalations provided in the Lease, the following amounts: For the period September 15, 1994 through September 30, 1994, the sum of ONE HUNDRED FIFTY AND 00/100 DOLLARS ($150.00). For the period October 1, 1994 through December 31, 1998, the sum of THREE HUNDRED AND 00/100 DOLLARS ($300.00). -2- If the Commencement Date is on a day other than the first business day of a calendar month, Lessee shall pay to Lessor on the date that the first complete payment of Fourth Additional Space Base Rent is due, a pro rata portion to be based on the number of days the Fourth Additional Space is occupied in such partial month after the Commencement Date. 5. Full Force and Effect. Except as extended and amended hereby, all other terms and conditions of the Lease shall remain unchanged and in full force and effect and applicable to this Amendment of Lease. IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment of Lease to be executed the day and year first above written. ATTEST: REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA BY /s/ Colleen B. Poremski By /s/ Frank Brooks Robinson ----------------------------- ----------------------------------- Secretary President (Corporate Seal) ATTEST: TOLLGRADE COMMUNICATIONS, INC. By /s/ Renee Sanders By /s/ Christian L. Allison ----------------------------- ----------------------------------- V.P. Acct./Purchasing President -3- EXHIBIT A [FLOOR PLAN OF FOURTH ADDITIONAL SPACE] EX-10.38 12 j9925501exv10w38.txt FOURTH AMENDMENT TO LEASE AGREEMENT EXHIBIT 10.38 FOURTH AMENDMENT OF LEASE AGREEMENT THIS FOURTH AMENDMENT OF LEASE, made as of this 15th day of September, 1994, between REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA, a Pennsylvania nonprofit corporation having its principal office in the City of Pittsburgh, Allegheny County, Pennsylvania (hereinafter called the "Lessor"), and TOLLGRADE COMMUNICATIONS, INC., a Pennsylvania corporation (hereinafter called the "Lessee"). WHEREAS, the Lessor and Lessee previously made and entered into that certain Lease Agreement, dated as of August 5, 1993, which was amended by the First Amendment of Lease dated March 15, 1994, Second Amendment of Lease dated July 1, 1994 and Third Amendment of Lease dated September 15, 1994 (hereinafter collectively called the "Lease"), whereby Lessor leased to Lessee, upon terms and conditions set forth therein, certain space (the "Premises") located in the Harmar Industrial Manor (hereinafter called the "Complex") located in Harmar Township, Allegheny County, Pennsylvania; and WHEREAS, the Lessor and the Lessee desire to amend the Lease upon the terms and conditions set forth herein such that Lessee shall lease from Lessor additional space in the Complex (hereinafter called the "Amendment of Lease"). NOW THEREFORE, for good and valuable consideration, the receipt of which hereby acknowledged, and intending to be legally bound hereby, Lessor and Lessee covenant and agree as follows: 1. Incorporation by Reference/Capitalized Terms. The Lease is hereby incorporated into this Amendment of Lease by reference and made an integral part hereof. Any capitalized term used in the Fourth Amendment of Lease that is not otherwise defined herein shall have the respective meaning ascribed to it in the Lease. In the event of a conflict between the terms of this Amendment of Lease and the Lease, the terms of this Amendment of Lease shall govern. 2. Premises. The Lessor does hereby lease and demise unto the Lessee Units D-2, D-3 and D-5, containing approximately 4,440 rentable square feet, in the Complex (hereinafter called the "Fifth Additional Space"). The Fifth Additional Space is more particularly described on Exhibit "A", which is attached hereto and made part hereof. The Fifth Additional Space shall be deemed hereafter to be part of the Premises, as that term is defined in the Lease. 3. Commencement Date. The term of the Amendment of Lease shall commence (hereinafter called the "Commencement Date") and possession shall be given as of 12:01 AM on October 1, 1994. The Term of this Amendment of Lease shall expire on the Expiration Date as set forth in the Lease unless the Term is extended as provided in the Lease. 4. Base Rent. Lessee shall pay to Lessor at its office in Pittsburgh, as monthly rental for the Fifth Additional Space, payable in advance and without demand on the first business day of each successive calendar month during the term of the lease, together with any escalations provided in the Lease, following amount of ONE THOUSAND SIX HUNDRED SIXTY-FIVE AND 00/100 DOLLARS ($1665.00). If the Commencement Date is on a day other than the first -2- business day of a calendar month, Lessee shall pay to Lessor on the date that the first complete payment of Fifth Additional Space Base Rent is due, a pro rata portion to be based on the number of days the Fifth Additional Space is occupied in such partial month after the Commencement Date. 5. Full Force and Effect. Except as extended and amended hereby, all other terms and conditions of the Lease shall remain unchanged and in full force and effect and applicable to this Amendment of Lease. IN WITNESS WHEREOF, the parties hereto have caused this Fourth Amendment of Lease to be executed the day and year first above written. ATTEST: REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA By /s/ Colleen B. Poremski By /s/ Frank Brooks Robinson ------------------------------ -------------------------- Secretary President (Corporate Seal) ATTEST: TOLLGRADE COMMUNICATIONS, INC. By /s/ Renee Sanders By /s/ Christian L. Allison ------------------------------ ------------------------- V.P. Acct/Purchasing President -3- EXHIBIT A [FLOOR PLAN OF FIFTH ADDITIONAL SPACE] EX-10.39 13 j9925501exv10w39.txt FIFTH AMENDMENT TO LEASE AGREEMENT EXHIBIT 10.39 FIFTH AMENDMENT OF LEASE AGREEMENT THIS FIFTH AMENDMENT OF LEASE AGREEMENT (this "Amendment"), is made and entered into this 6th day of March, 1995, between REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA, ("Lessor"), and TOLLGRADE COMMUNICATIONS, INC. ("Lessee"). WITNESSETH: WHEREAS, Lessor and Lessee entered into a Lease Agreement for certain space in Harmar Industrial Manor in Harmar Township, Allegheny County, Pennsylvania (herein called the "Complex"), dated August 5, 1993, which Lease was amended by the First Amendment of Lease Agreement dated March 15, 1994, Second Amendment of Lease Agreement dated as of July 1, 1994, Third Amendment of Lease Agreement dated as of September 15, 1994 and Fourth Amendment of Lease Agreement made as of September 15, 1994 (hereinafter collectively called the "Lease"); and WHEREAS, Lessee desires to utilize additional space in the Complex in connection with its use of the Premises subject to the Lease; and WHEREAS, Lessor is agreeable to such use of the additional space by the Lessee as long as such use is in accordance with the terms of this Amendment, including certain clarifications to the Lease. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, Lessor and Lessee agree as follows: 1. Recitals. The foregoing recitals are incorporated herein by reference. 2. Incorporation of Lease / Capitalized Terms. This Amendment is hereby incorporated into the Lease by reference and made an integral part thereof. Capitalized terms used herein but not defined herein shall have the meaning given in the Lease. In the event of a conflict between the terms of this Amendment and the Lease, the terms of this Amendment shall govern. 3. IDL. All referenced in Section 1C of the Lease to "IDC" are deleted in their entirety and replaced by the name "IDL". 4. Partial IDL Space. The following sentence is inserted after the second sentence in Section 1C of the Lease: "Lessee shall have the right to lease all such IDL space or a portion of such IDL space, provided, however, if Lessee desires to lease only a portion of the IDL space, Lessee agrees to lease at least 4,000 square feet of such IDL space at a time. Lessee shall, at its own cost and expense, install any partitions in the IDL space which are required on account of Lessee leasing less than all of the IDL space." 5. Utilities. The following sentence is inserted at the end of Section 1C of the Lease: "Any time that Lessee takes additional space in the Complex, Lessee shall, at its sole cost and expense, be responsible to cause the utilities serving such space to be separately metered so that Lessee shall pay all utility charges for the Premises, including any new space so leased, directly. Lessee shall, at its sole cost and expense, additionally separate the gas space heater in Unit D-6 from Lessor's main system. All work done by Lessee pursuant to this Section 1C shall be subject to all applicable laws, rules, regulations and orders and subject to prior review of plans submitted by Lessee to Lessor and consent of Lessor, which shall not be unreasonably withheld." 6. New Space. The Lessor does hereby lease and demise unto the Lessee Suite 104 containing One Thousand One Hundred Fifty (1,150) rentable square feet (the "Space"). The Space is more particularly described on Exhibit A attached hereto and incorporated herein. The Space shall be deemed to be par the Premises under the Lease. 7. Mechanical Equipment. Lessee shall, at its so and expense, be responsible to cause the HVAC duct work serving the Space to be separated from the main system at the Complex and connected to the HVAC system serving the Lessee's Premises. All work done by Lessee hereunder shall be subject to all applicable laws, rules, regulations and orders and subject to prior review of plans submitted by Lessee to Lessor and consent of Lessor, which shall not be unreasonably withheld. Nothing herein shall be interpreted to affect the Lessor's obligations pursuant to Section 33 of the Lease. 8. Commencement Date. The term of this Amendment shall commence and possession shall be given as of 12:01 AM on May 1, 1995 (the "Space Date"). The -2- term of this Amendment shall expire on the Expiration Date as set forth in the Lease, unless sooner terminated or extended in accordance with the terms of the Lease. 9. Base Rent. Lessee shall pay to Lessor at Lessor's office in Pittsburgh, the sum of Seven Hundred Ninety Dollars and Sixty Three Cents ($790.63) as monthly rental for the Space (being the monthly calculation of rental based on $8.25/square foot/year), payable in advance and without demand on or before the first business day of each successive calendar month of the Term of the Lease and any renewal thereof, which rental shall be deemed to be additional Base Rental. 10. Simtronics Space. In connection with the Lessee's option to lease the space in the Complex currently occupied by Simtronics, Lessor and Lessee agree that the rental payable by Lessee upon exercise of such option shall, effective for a period of six (6) months following Simtronics' surrender of possession of such space, be $8.25 per square foot per year. Provided that Lessor has made the Simtronics space available by July 1, 1995, Lessee agrees that it shall exercise its option and lease such space at the rate set forth herein, by means of a separate amendment to the Lease containing such other terms as are mutually acceptable to the parties. 11. Governing Law. This Amendment shall be governed by the laws of the Commonwealth of Pennsylvania. 12. Lease. Except as amended hereby, the Lease shall remain in full force and effect and shall be binding upon the parties hereto and their respective successors and assigns. -3- IN WITNESS WHEREOF, the parties hereto have caused this Amendment of Lease to be duly executed the day and year first above written. Lessor: REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA By: /s/ Frank Brooks Robinson ------------------------------- Name: ----------------------------- Title: President ---------------------------- Lessee: TOLLGRADE COMMUNICATIONS, INC. By: /s/ R. Craig Allison ------------------------------- Name: R. CRAIG ALLISON ----------------------------- Title: COB/CEO ---------------------------- -4- EXHIBIT A [FLOOR PLAN OF SPACE] EX-10.40 14 j9925501exv10w40.txt SIXTH AMENDMENT TO LEASE AGREEMENT EXHIBIT 10.40 SIXTH AMENDMENT TO LEASE THIS SIXTH AMENDMENT TO LEASE (this "Amendment") is made and entered into as of this 18th day of September, 1995, by and between REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA ("Landlord") and TOLLGRADE COMMUNICATIONS, INC. ("Tenant"). WITNESSETH THAT: WHEREAS, Landlord and Tenant entered into a Lease Agreement dated August 5, 1993 (the "Original Lease"); and WHEREAS, the Original Lease was amended by First Amendment of Lease Agreement dated March 15, 1994 (the "First Amendment"), Second Amendment of Lease Agreement dated as of July 1, 1994 (the "Second Amendment"), Third Amendment of Lease Agreement dated as of September 15, 1994 (the "Third Amendment"), Fourth Amendment of Lease Agreement dated as of September 15, 1994 (the "Fourth Amendment") and Fifth Amendment of Lease Agreement dated March 6, 1995 (the "Fifth Amendment"). The Original Lease as amended by the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment and the Fifth Amendment is hereinafter called the "Lease"; and WHEREAS, the parties desire to further amend the Lease in accordance with the terms of this Amendment. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, Landlord and Tenant covenant and agree as follows: 1. The Landlord does hereby lease and demise unto Tenant three hundred sixty (360) square feet of space known as the "lobby area" (the "Lobby Space") in the Building in which the premises are located in as is condition as more particularly shown on Exhibit A. The annual Base Rent for the Lobby Space shall be $8.25/square foot payable in monthly installments of Two Hundred Forty-seven and 50/100 Dollars ($247.50) on the date Base Rent is due under the Lease. Base Rent for the Lobby Space shall be prorated for any partial months. Any improvements to the Lobby Space shall be subject to Landlord's prior written consent and shall be made by Tenant at its sole cost and expense. The plans and specifications for the Lobby Space previously delivered to Landlord are approved in accordance with Section 6 of the Original Lease. The Landlord hereby additionally leases the first floor hall and first floor bathrooms in the Building in which the Premises are located in as is condition to Tenant (the "Hall and Bath Space"). The Lobby Space and the Hall and Bath Space shall be deemed to be part of the "Premises" under the Lease but Section 33 of the Original Lease shall not apply to the Hall and Bath Space. 2. Tenant agrees that it will provide ingress, egress, regress and access to A. M. Castle & Co. through the Premises to the area leased to A. M. Castle & Co. for storage in the building in which the Premises are located during normal business hours. 3. Tenant may install at its sole cost and expense HVAC units in the portion of the Premises known as Units D-2, D-3, D-4 and D-5 (the "D Units"), which shall -2- be the property of Landlord upon termination or expiration of this Lease. In the event that Tenant so chooses to install such HVAC units, all such units shall comply with the specifications and other information in the binder labeled "Tollgrade Communications Proposed Expansion Plan and Cost Estimate" dated August 3, 1995. All work shall be done in a good, workmanlike and lien free manner. All fresh air needed with respect to such HVAC systems shall be taken from outside the Complex. Tenant agrees to provide copies of all paid invoices relating to the installation and acquisition of the HVAC equipment and copies of checks or other confirmation of such payment to Landlord within ten (10) days of paying the same. Tenant further agrees to provide Landlord with such additional documentation or detail as Landlord may reasonably request. In the event that Tenant complies with the requirements of this Section 3, the Base Rent will be reduced so that the cost of acquisition and installation of the HVAC units in Units D-2 through D-5 up to an amount equal to $22,431.27 (the "Cost") will be amortized over a five (5) year period. Accordingly, monthly Base Rent will be reduced by an amount not to exceed $373.85 for up to five (5) years during the Term, as such Term may be extended. The provisions of Section 7(B)(b) and Section 33 of the Original Lease shall not apply to the D Units. Additionally, Section 33 shall not apply to Units D-1, D-5 and D-6 of the Premises. 4. Landlord hereby additionally leases unto Tenant 6,350 square feet of space in the Complex, known as part of the former IDL Space and additionally referred to as Units B-1, B-2, C-1 and C-2 (the "Partial IDL Space") in as is condition, which Partial IDL Space is more particularly shown on Exhibit B attached hereto. Tenant shall pay to -3- Landlord, as rental for the Partial IDL Space, payable in advance and without demand on the first business day of each successive calendar month during the term of the Lease, together with any escalations provided in the Lease (subject to Section 7 hereunder) Four and 75/100 Dollars ($4.75) per square foot of space per year payable in monthly installments of Two Thousand Five Hundred Thirteen and 54/100 ($2,513.54). Delivery of the Partial IDL Space to Tenant and compliance with all provisions of the Lease other than the payment of monthly rental shall occur on the date hereof and commencement of the payment of monthly rental shall occur on October 15, 1995. Monthly rental for any partial month shall be prorated. The Partial IDL Space shall be deemed to be a part of the Premises under the Lease except that Section 7(B)(b) and Section 33 of the Original Lease shall not apply to the Partial IDL Space. Except as provided for below with respect to HVAC, Tenant shall provide plans and specifications for any work or improvements that Tenant plans to undertake in the Partial IDL Space to Landlord for Landlord's prior approval which approval shall not be unreasonably withheld and shall be provided in a timely manner. All such approved work and improvements shall be done in a good, workmanlike and lien free manner. Tenant may install at its own cost and expense HVAC units in the Partial IDL Space, which shall be the property of Landlord upon termination or expiration of this Lease. In the event that Tenant so chooses to install such HVAC units, all such units shall comply with the specifications and other information in the binder labeled "Tollgrade Communications Proposed Expansion Plan and Cost Estimate" dated August 3, 1995. All -4- work shall be done in a good, workmanlike and lien free manner. All fresh air needed by such HVAC systems -shall be taken from outside of the Complex. Tenant agrees to provide copies of all paid invoices relating to installation and acquisition of the HVAC equipment and copies of checks or other confirmation of such payment to Landlord within ten (10) days of paying the same. In the event that Tenant complies with the provisions of this Section 4, the Base Rent for the Partial IDL Space will be reduced so that the cost of acquisition and installation of the HVAC units in the Partial IDL Space up to an amount equal to $24,656.62 (the "IDL Cost") will be amortized over a five (5) year period. Accordingly, Monthly Base Rent for the Partial IDL Space will be reduced by an amount not to exceed $410.94 for up to five (5) years during the Term, as such Term may be extended. 5. Landlord hereby additionally leases unto Tenant 3,865 square feet of space in the Complex, known as the former Simtronics Space and additionally referred to as Suite 201 (the "Simtronics Space") in as is condition, which Simtronics Space is more particularly shown on Exhibit C attached hereto. Tenant shall pay to Landlord, as rental for the Simtronics Space, payable in advance and without demand on the first business day of each successive calendar month during the term of the Lease, together with any escalations provided in the Lease (subject to Section 7 hereof) Eight and 25/100 Dollars ($8.25) per square foot of space per year payable in monthly installments of Two Thousand Six Hundred Fifty-seven and 19/100 Dollars ($2,657.19). Delivery of the Simtronics Space to Tenant shall be on the date hereof and commencement of the payment of monthly rental shall occur on -5- October 1, 1995. Monthly rental for any partial month shall be prorated. The Simtronics Space shall be deemed to be a part of the Premises under the Lease. Tenant shall provide plans and specifications for any work or improvements that Tenant desires to undertake in the Simtronics Space to Landlord for Landlord's prior approval which shall not be unreasonably withheld and shall be provided in a timely manner. All such approved work and improvements shall be done in a good, workmanlike and lien free manner. 6. Landlord and Tenant acknowledge that Landlord has undertaken certain repairs, upgrades and replacements (the "HVAC Repairs") with respect to the HVAC in the Premises. Once the HVAC Repairs are completed to the satisfaction of Landlord and Tenant, which the parties agree to confirm in writing, Tenant agrees that it will undertake its maintenance obligations with respect to the HVAC system as required in Section 7(B)(b) of the Original Lease. In the event that Tenant fails to comply with its maintenance obligations under the Lease, Landlord will have no further responsibility with respect to Section 7(B)(b) or Section 33 of the Original Lease. 7. Lessee's Tax Responsibility and Additional Rent for the Lobby Space, the Partial IDL Space and the Simtronics Space shall relate to increases in those costs in excess of 1996 costs for purposes of Sections 3B and 3C of the Original Lease. 8. This Amendment shall become effective as of August 1, 1995 and possession of the Lobby Space and the Hall and Bath Space shall be made available to Tenant and payment of rental for such space as described in Section 1 shall commence on such date. -6- 9. In the event that Tenant desires to lease any additional warehouse space in the Complex, the Base Rent for such space shall be $4.75/square foot/year if such warehouse space is leased in 1995. If such warehouse space is leased after 1995, the Base Rent/square foot of warehouse space shall be increased by 25cents/square foot for each calendar year after 1995 (so that Base Rent for 1996 would be $5.00/ square foot, for 1997 would be $5.25/square foot, etc.). Such additional warehouse space shall not be subject to Section 33 of the Original Lease when leased by Tenant. 10. Any capitalized terms used herein and not defined herein but defined in the Lease shall have the same definition as provided for in the Lease. 11. Except as specifically amended hereby, the terms and condition of the Lease shall remain in full force and effect and shall be binding on the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed and delivered as of the day and year first above-written. LANDLORD: REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA By: /s/ Frank Brooks Robinson --------------------------------- Title: President ------------------------------ [Signatures continued on following page] -7- [Signatures continued from preceding page] TENANT: TOLLGRADE COMMUNICATIONS, INC. By: /s/ R. Craig Allison --------------------------------- Title: Chairman ------------------------------ -8- EXHIBIT A [FLOOR PLAN OF LOBBY SPACE] EXHIBIT B [FLOOR PLAN OF PARTIAL IDL SPACE] EXHIBIT C [FLOOR PLAN OF SIMTRONICS SPACE] EX-10.41 15 j9925501exv10w41.txt SEVENTH AMENDMENT TO LEASE AGREEMENT EXHIBIT 10.41 SEVENTH AMENDMENT TO LEASE THIS SEVENTH AMENDMENT TO LEASE (this "Amendment") is made and entered into as of this 9th day of July, 1996, by and between REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA ("Landlord") and TOLLGRADE COMMUNICATIONS, INC. ("Tenant"). WITNESSETH THAT: WHEREAS, Landlord and Tenant entered into a Lease Agreement dated August 5, 1993 (the "Original Lease"); and WHEREAS, the Original Lease was amended by First Amendment of Lease Agreement dated March 15, 1994 (the "First Amendment"), Second Amendment of Lease Agreement dated as of July 1, 1994 (the "Second Amendment"), Third Amendment of Lease Agreement dated as of September 15, 1994 (the "Third Amendment"), Fourth Amendment of Lease Agreement dated as of September 15, 1994 (the "Fourth Amendment"), Fifth Amendment of Lease Agreement dated March 6, 1995 (the "Fifth Amendment") and Sixth Amendment to Lease dated September 18, 1995 (the "Sixth Amendment"). The Original Lease as amended by the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment and the Sixth Amendment is hereinafter called the "Lease"; and WHEREAS, the parties desire to further amend the Lease in accordance with the terms of this Amendment. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, Landlord and Tenant covenant and agree as follows: 1. The Landlord additionally leases and demises unto Tenant 3,600 square feet of space in the Complex, known as part of the former IDL space and additionally referred to as "Units B-3 and C-3" (the "Additional Leased Premises") in as is condition, which space is more particularly shown on Exhibit "A" which is attached hereto and made a part hereof. Tenant shall pay to Landlord, as Base Rent for the Additional Leased Premises payable in advance and without demand on the first business day of each successive calendar month during the term of the Lease commencing as of March 1, 1996, together with any escalations provided in the Lease Five and 00/100 Dollars ($5.00) per square foot of space per year payable in monthly installments of One Thousand Five Hundred and 00/100 Dollars ($1,500.00). Delivery of the Additional Leased Premises to Tenant and compliance with all provisions of the Lease occurred on March 1, 1996. Monthly rental for any partial month shall be prorated. The Additional Leased Premises shall be deemed to be part of the Premises under the Lease except that Section 7(B)(b) and Section 33 of the Original Lease shall not apply to the Additional Leased Premises. 2. Effective as of the date of termination of Landlord's Lease with IDL for the Additional IDL Space (as hereinafter defined), which shall in no event be later than August 31, 1996, the Landlord additionally leases and demises unto Tenant 13,200 square feet of space in the Complex, known as part of the former IDL space and additionally referred to as "Units B-4 to B-7" and "Units C-4 to C-7" in as is condition, which space is -2- more particularly shown on Exhibit "A" which is attached hereto and made a part hereof (the "Additional IDL Space"). Landlord shall deliver possession of the Additional IDL Space upon vacation of such space by IDL, Inc. The Additional IDL Space shall be deemed to be part of the Premises under the Lease except that such Additional IDL Space shall not be subject to Section 7(B)(b) and Section 33 of the Original Lease. Tenant shall pay to Landlord, as Base Rent for the Additional IDL Space payable in advance and without demand on the first business day of each successive calendar month during the term of the Lease, the amount of Three Dollars and Seventy-five Cents ($3.75) per square foot of space, payable in monthly installments together with any escalations provided for in the Lease for so long as Tenant uses the Additional IDL Space exclusively for warehouse purposes. Monthly rental for any partial month shall be prorated. To the extent that, after the date Tenant begins occupancy of the Additional IDL Space, there are any improvements to such Additional IDL Space which are made at Landlord's or Tenant's cost and expense, the rental rate agreed to in this paragraph shall be renegotiated by Landlord and Tenant but shall be the rate specified in Section 9 of the Sixth Amendment if the Additional IDL Space is not used exclusively for warehouse purposes. 3. Tenant shall provide plans and specifications for any work or improvements that Tenant plans to undertake in the Additional Leased Premises and Additional IDL Space to Landlord for Landlord's prior approval which approval shall not be unreasonably withheld and shall be provided in a timely manner. All such approved work and improvements shall be done in a good, workmanlike and lien free manner and in accordance with all requirements in the Lease. -3- 4. Any capitalized terms used herein and not defined herein but defined in the Lease shall have the same definition as provided for in the Lease. 5. Except as specifically amended hereby, the terms and conditions of the Lease shall remain in full force and effect and shall be binding on the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed and delivered as of the day and year first above-written. LANDLORD: REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA By: /s/ Frank Brooks Robinson ------------------------------------- Title: President ----------------------------------- TENANT: TOLLGRADE COMMUNICATIONS, INC. By: /s/ Christian L. Allison ------------------------------------- Title: CEO ---------------------------------- -4- EXHIBIT A [FLOOR PLAN OF ADDITIONAL LEASED PREMISES] EX-10.42 16 j9925501exv10w42.txt EIGHTH AMENDMENT TO LEASE AGREEMENT EXHIBIT 10.42 EIGHTH AMENDMENT TO LEASE THIS EIGHTH AMENDMENT OF LEASE (this "Amendment") is made and entered into as of this 13th day of May, 1997, by and between REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA ("Landlord") and TOLLGRADE COMMUNICATIONS, INC. ("Tenant"). WITNESSETH THAT: WHEREAS, Landlord and Tenant entered into a Lease Agreement dated August 5, 1993 (the "Original Lease"); and WHEREAS, the Original Lease was amended by First Amendment of Lease Agreement dated March 15, 1994 (the "First Amendment"), Second Amendment of Lease Agreement dated as of July 1, 1994 (the "Second Amendment"), Third Amendment of Lease of Agreement dated as of September 15, 1994 (the "Third Amendment"), Fourth Amendment of Lease Agreement dated as of September 15, 1994 (the "Fourth Amendment"), Fifth Amendment of Lease Agreement dated as of March 6, 1995 (the "Fifth Amendment"), Sixth Amendment of Lease Agreement dated as of September 18, 1995 (the "Sixth Amendment") and Seventh Amendment to Lease dated July 9, 1996 (the "Seventh Amendment"). The Original Lease as amended by the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment and Seventh Amendment is hereinafter called the "Lease"; and WHEREAS, the parties desire to further amend the Lease in accordance with the terms of this Amendment. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, Landlord and Tenant covenant and agree as follows: 1. The Landlord additionally leases and demises unto Tenant 5,400 square feet of space in the Complex, additionally referred to as Units 8-E, 9-E and 10-E, in its as is condition, which space is more fully shown on Exhibit "A" which is attached hereto and made a part hereof. Tenant shall pay to Landlord as rental for Units 8-E, 9-E and 10-E, in advance and without demand on the first business day of each successive calendar month during the term of the Lease, together with any escalations provided in the Lease the sum of TWO THOUSAND TWO HUNDRED TWENTY-FIVE AND 00/100 DOLLARS ($2,225.00). Delivery of Units 8-E, 9-E and 10-E to Tenant and compliance with all provisions of the Lease shall occur on May 15 1997, unless otherwise agreed between the two parties hereto. Monthly rental for any partial month shall be prorated. Units 8-E, 9-E and 10-E shall be deemed to be part of the Premises under the Lease except that Section 7(B)(b) and Section 33 of the Original Lease do not apply to such space. 2. The Landlord additionally leases and demises unto Tenant 3,280 square feet of space on the second floor of the Complex, additionally referred to as Suite 202, in its as is condition, which space is more particularly shown on Exhibit "B" which is attached hereto and made a part hereof. Tenant shall pay to Landlord as rental for Suite 202, in advance and without demand on the first business day of each successive calendar month during the term of the Lease, together with any escalations provided in the Lease the sum of eight dollars and twenty-five cents ($8.25) per square foot per year, payable in monthly installments of TWO THOUSAND TWO HUNDRED FIFTY-FIVE AND 00/100 DOLLARS ($2,255.00). Delivery of Suite 202 to Tenant and compliance with all provisions of the Lease shall occur on July 15, 1997, unless otherwise agreed between the two parties hereto. Monthly rental for any partial month shall be prorated. 3. Tenant shall provide plans and specifications for any work or improvements that Tenant plans to undertake in Suite 202 or the second floor common area to Landlord for Landlord's prior approval which approval shall not be unreasonably withheld and shall be provided in a timely manner. All such approved work and improvements shall be done in a good, workmanlike and lien free manner and as otherwise required in the Lease.. 4. Landlord and Tenant hereby agree that the Premises shall include an additional 6,445 square feet of hallway and other former common area space (the "Additional Space") now exclusively used by Tenant, provided, however, that Tenant shall not be responsible to pay any Base Rent on such Additional Space as required in Section 3(A) of the Lease and Sections 7(B)(b) and 33 of the Lease shall not apply to the Additional Space. 5. Any capitalized terms used herein and not defined herein but defined in the Lease shall have the same definition as provided for in the Lease. 6. Except as specifically amended hereby, the terms and conditions of the Lease shall remain in full force and effect and shall be binding on the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written. ATTEST: REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA BY: /s/ Colleen B. Poremski BY: /s/ Frank Brooks Robinson ------------------------------- ------------------------------- (Corporate Seal) ATTEST: TOLLGRADE COMMUNICATIONS, INC. BY: /s/ Sara M. Antol BY: /s/ R. Craig Allison ------------------------------- ------------------------------- (Corporate Seal) -2- EXHIBIT A [FLOOR PLAN OF LEASED SPACE] EXHIBIT B [FLOOR PLAN OF LEASED SPACE] EX-10.43 17 j9925501exv10w43.txt NINTH AMENDMENT TO LEASE AGREEMENT EXHIBIT 10.43 NINTH AMENDMENT TO LEASE THIS NINTH AMENDMENT OF LEASE (this "Amendment") is made and entered into as of this 8th day of December, 1998, by and between REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA ("Landlord") and TOLLGRADE COMMUNICATIONS, INC. ("Tenant"). WITNESSETH THAT: WHEREAS, Landlord and Tenant entered into a Lease Agreement dated August 5, 1993 (the "Original Lease"); and WHEREAS, the Original Lease Agreement was amended by First Amendment of Lease Agreement dated March 15, 1994 (the "First Amendment"), Second Amendment of Lease Agreement dated as of July 1, 1994 (the "Second Amendment), Third Amendment of Lease Agreement dated as of September 15, 1994 (the "Third Amendment"), Fourth Amendment of Lease Agreement dated as of September 15, 1994 (the "Fourth Amendment), Fifth Amendment of Lease Agreement dates as of March 6, 1995 (the "Fifth Amendment"), Sixth Amendment of Lease Agreement dated as of September 18, 1995 (the "Sixth Amendment"), Seventh Amendment to Lease Agreement dated July 9, 1996 (the "Seventh Amendment"), and Eighth Amendment of Lease Agreement dated May 13, 1997. The Original Lease as amended by the First Amendment, the Second Amendment, the Third Amendment, the Fourth Amendment, the Fifth Amendment, the Sixth Amendment, Seventh Amendment and Eighth Amendment is hereinafter called the "Lease"; and WHEREAS, the parties desire to further amend the Lease in accordance with the terms of this Amendment; WHEREAS, the term of the Lease will terminate on December 31, 1998; and NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, Landlord and Tenant covenant and agree as follows: 1. The Landlord additionally leases and demises unto Tenant 31,190 square feet of space in the Complex, referred to as UNITS 8-10B-D, 11B-E, 12B-D, AND 13B-C, in its as is condition, for the period commencing September 1, 1998 and continuing throughout the term of this Lease, which space is more fully shown on EXHIBIT "A" which is attached hereto and made a part hereof. Delivery of UNITS 8-10B-D, 11B-E, 12B-D, AND 13B-C to Tenant and compliance with all provisions of the Lease shall occur on September 1, 1998, unless otherwise agreed between the two parties hereto. Tenant shall pay to Landlord rental for UNITS 8-10B-D,11B-E,12B-D, AND 13B-C, in advance and without demand on the first business day of each successive calendar month during the term of the Lease, together with any escalations provided in the Lease. Monthly rental for any partial month shall be prorated. No rent shall be payable for UNITS 8-10B-D, 11B-E,12B-D, AND 13B-C for the period August 10, 1998 through December 31, 1998. Rental for the period from January 1, 1999 through December 31, 2001 shall be as described in Section 3 of this Amendment and, if Tenant exercises the option to renew, rental for the period January 1, 2002 through December 31, 2004 shall be as described in Section 4 of this Amendment. UNITS 8-10B-D, 11B-E, 12B-D, AND 13B-C shall be deemed to be part of the Premises under the Lease except that Section 7(B)(b) and Section 33 of the Original Lease do not apply to such space. Landlord and Tenant hereby agree that the Premises, including UNITS 8-10B-D, 1 1B-E, 12B-D, AND 13B-C, contain a total of 104,400 square feet of space. 2. The lease is hereby extended for a period of three (3) years commencing January 1, 1999 and terminating on December 31, 2001. 3. As rental for the Premises, Tenant shall pay to Landlord as Base Rent for the Premises, payable in advance and without demand on the first business day of each successive calendar month during the term of the Lease commencing as of January 1, 1999, together with any Additional Rent escalations provided in the Lease, the following sums: For the period January 1, 1999 through December 31, 1999, FORTY-FIVE THOUSAND SIX HUNDRED SEVENTY-FIVE AND 00/100 DOLLARS ($45,675.00); For the period January 1, 2000 through December 31, 2000, FORTY-SIX THOUSAND NINE HUNDRED EIGHTY AND 00/100 DOLLARS ($46,980.00); For the period January 1, 2001 through December 31, 2001, FORTY-EIGHT THOUSAND SEVEN HUNDRED TWENTY AND 00/100 DOLLARS ($48,720.00). Contemporaneously herewith, Tenant shall pay to Landlord the sums of $45,675.00, to be held by Landlord as a security deposit, subject to interest payable to Tenant at the rate of three (3%) percent annually on January 15th of each year beginning January 15, 1999, for the faithful payment of the rent coming due under the Lease, and if there is no default under the Lease, said deposit plus interest shall be returned to Tenant within thirty (30) days following termination of this Lease. The monthly rent shall continue to be payable when due, and the security deposit held by Landlord shall not be deemed to cure any future default in payment of the rent by Tenant. Upon mutual consent by Tenant and Landlord, such interest shall be applied to base rent due Landlord under this Lease. 4. Tenant shall have the right and option to renew the term of this Lease for one (1) additional term of three (3) years following the expiration of the term described in Section 2 above, provided (i) that this Lease is full force and effect immediately prior to the date of the commencement of such renewal term; (ii) that the Tenant is not in default under any of the provisions herein or under the Lease; and (iii) that Tenant is in full occupancy of the Premises for its own use and intends to continue such occupancy. The renewal term shall commence January 1, 2002 and terminate December 31, 2004. The renewal term shall be exercised by Tenant serving on Landlord written notice to that effect not later than March 31, 2001. Said renewal shall be upon the same terms, covenants, conditions and limitations as in this Lease provided, except that in the renewal term the monthly Base Rent shall be as follows, in addition to any Additional Rent escalations as outlined in the Lease: For the period January 1, 2002 through December 31, 2002, the sum of FIFTY THOUSAND ONE HUNDRED NINETY-NINE AND 00/100 DOLLARS ($50,199.00); -2- For the period January 1, 2003 through December 31, 2003, the sum of FIFTY-ONE THOUSAND SIX HUNDRED SEVENTY-EIGHT AND 00/100 DOLLARS ($51,678.00); and For the period January 2004 through December 31, 2004, the sum of FIFTY-THREE THOUSAND TWO HUNDRED FORTY-FOUR AND 00/100 DOLLARS ($53,244.00). The notice of election to take the renewal when given by Tenant shall be irrevocable and shall constitute an agreement between the parties for a renewal of this Lease as herein stated. 5. Tenant shall provide plans and specifications for any material work or improvements that Tenant plans to undertake within the Premises to Landlord for Landlord's prior approval which shall not be unreasonably withheld and shall be provided in a timely manner. All such approved work and improvements shall be done in a good, workmanlike and lien free manner and as otherwise required in the Lease. 6. Tenant shall have the option to lease certain additional space adjacent to the Premises currently leased to Westinghouse Electric Company (the "AUTTO Space") to the extent available by notifying Landlord in writing via certified mail of its intent to do so twelve (12) months in advance. Landlord agrees to use its best efforts to make such space available to Tenant upon expiration of such twelve-(12) month notice period. The base rental rate for the AUTTO Space shall be at the then current rate per square foot for the Premises. 7. During the course of the Lease, the parties acknowledge that Tenant has installed, repaired and or replaced, at its sole cost and expense, those heating, ventilation and air conditioning units identified on EXHIBIT B attached hereto and incorporated herein and will install additional units in the additional space rented by Tenant pursuant to this Amendment (such units are hereinafter referred to as the "Tollgrade HVAC Units"). Upon the termination or expiration of the Lease, Landlord shall notify Tenant in writing within eighteen (18) months after such expiration or termination whether Landlord desires to utilize the Tollgrade HVAC Units for subsequent tenants. In the event Landlord elects to utilize the Tollgrade HVAC Units, Landlord shall pay to Tenant that amount which shall be separately agreed to in a letter to be signed by the Landlord and Tenant within sixty (60) days of execution of this Amendment. In the event Landlord does not elect to utilize the Tollgrade HVAC Units, Tenant (Tollgrade and not an unnamed future Tenant or Landlord) may, but shall not be required to, remove the Tollgrade HVAC Units and return those sections of the Premises affected by the installation by the Tollgrade HVAC Units to the condition it was in prior to such installation. If Landlord decides not to utilize the Tollgrade HVAC Units and Tollgrade elects to remove the Tollgrade HVAC Units pursuant to this Section 7, Tollgrade shall remove such units within three months after Landlord provides written notice that it does not desire to utilize the Tollgrade HVAC Units. 8. Landlord is undertaking the provision of additional and reconfigured parking as represented on EXHIBIT C attached hereto and incorporated herein (the "Parking Improvements"). Landlord shall complete all such Parking Improvements on or before December 15, 1998, except for certain landscaping which, due to inclement weather conditions, may be delayed, but such delay shall not extend beyond June 1, 1999. In the event the Parking Improvements are not completed by December 15, 1998, Tenant shall have the following remedies, either of which may be exercised at the -3- option of Tenant: (a) Tenant shall be entitled to obtain or make arrangements for alternative parking sufficient to address its parking needs until such time that the Parking Improvements are completed, and to deduct from rental due under the Lease its actual additional cost of providing such alternative parking after presenting sufficient documentation and supporting calculation to Landlord; or (b) Tenant shall have the right to terminate the Lease on or before January 15, 1999, by providing Landlord written notice of such termination if such Parking Improvements are not completed except for certain landscaping. 9. In addition to completion of the Parking Improvements as set forth in Section 8 above, Landlord also agrees to make available to Tenant up to (489) total parking spaces for the remainder of the term (the current and future shortfall of actual parking spaces compared to the 489 total parking spaces is herein referred to as the "Additional Required Parking") pursuant to the terms set forth herein. Tenant shall provide to Landlord written notice of its need for the Additional Required Parking. Landlord shall provide or construct the requested portion of parking spaces of the Additional Required Parking within six (6) months following receipt of Tenant's notice; provided, however that if construction of the Additional Required Parking requested cannot commence due to inclement weather conditions or in the event asphalt plants are closed for the winter, Landlord shall commence such construction as soon as favorable weather conditions exist and asphalt is available, and diligently complete such construction within six (6) months from such commencement date. From the date Landlord receives Tenant's written notice for the need of the Additional Required Parking requested and for each day thereafter that the Additional Required Parking requested is not available for use by Tenant, Tenant shall be entitled to obtain or make arrangements for additional parking equal to the deficiency in the number of spaces of the Additional Required Parking requested and deduct from any rental due under the Lease its actual additional cost of obtaining the number of deficient additional required parking spaces after presenting sufficient documentation and supporting calculation to Landlord. To the extent Landlord fails to supply to Tenant such Additional Required Parking requested pursuant to the terms of this Section 9, Tenant shall have the following remedies, either of which may be exercised at the option of Tenant: (a) Tenant shall be entitled to continue to obtain or make arrangements for the additional required parking equal to the deficiency in number of spaces of the Additional Required Parking requested and deduct from any rental due under the Lease its actual additional cost of obtaining the number of deficient Additional Required Parking spaces requested after presenting sufficient documentation and supporting calculation to Landlord; or (b) Tenant shall have the right to terminate the Lease within three (3) months after Tenant provides written notice to Landlord that it has failed to supply the Additional Required Parking requested pursuant to this Section 9. 10. Landlord will continue to complete the in progress planned phased roof repair work, of which over one half of the building has already been completed as of the date of this amendment, by December 31, 1998. 11. It is hereby acknowledged by Landlord that (i) since the inception of this Lease, Tenant has substantially increased its rental area in the Complex, and has invested substantial amounts of money and capital to make improvements in the Complex; and (ii) such improvements have essentially converted certain sections of the Complex from a warehouse facility to an office complex. As such, notwithstanding anything set forth in the Original Lease or any subsequent amendments, Landlord hereby agrees to use its best efforts to relet the Complex as an office facility as opposed to a -4- warehouse facility. If Landlord relets the complex as an office facility, then upon the expiration or termination of the Lease, Tenant shall not be required to remove any additions, alterations, improvements, installations, trade fixtures or mechanical equipment installed or constructed by Tenant, and Tenant may surrender the Premises in its then current state. If, after using its best efforts, Landlord fails to rent the Complex as an office facility, but rather a warehouse facility, then Tenant agrees to abide by the Original Lease in connection with the removal of additions, alterations, improvements, installations, trade fixtures or mechanical equipment installed or constructed by Tenant. 12. Landlord acknowledges that (i) Tenant's business operations have substantially increased in size over the term of the Lease; and (ii) it may be difficult for Tenant to find alternate and acceptable office space to move its business operations upon the expiration or termination of the Lease. As such, notwithstanding anything set forth in the Original lease or any subsequent amendments, Landlord agrees that upon the effective date of the expiration or termination of this Lease, Tenant shall have the right and ability, but not the obligation, to holdover and continue to occupy the Premises, , it being acknowledged that such holdover may be necessary in order for Tenant to find alternate and acceptable office space to move its business operations In the event of holdover by Tenant pursuant to this Section 12, all of the terms and conditions of this Lease shall continue to apply, except that the holdover tenancy (the "Holdover Period") shall be set by the Tenant in the holdover notice ("Notice") provided to Landlord. If Tenant continues to occupy the Premises beyond the Holdover Period, all of the terms and conditions of this Lease shall continue to apply except that the tenancy shall be on a month-to-month basis and the monthly rental rate will increase 20% per month; provided, however, that the monthly rental rate shall not exceed twice the rental rate of the last month of the Holdover Period. 13. Any capitalized terms used herein and not defined herein but defined in the Lease shall have the same definition as provided for in the Lease. 14. Except as specifically amended by this Amendment, the terms and conditions of the Lease shall remain in full force and effect and shall be binding on the parties hereto and their respective successors and assigns. In the event of a conflict between the terms of this Amendment and the terms of the Lease, the terms of this Amendment shall govern. -5- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written. ATTEST: REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA BY: /s/ Colleen B. Poremski BY: /s/ Frank Brooks Robinson ----------------------------- ----------------------------- (Corporate Seal) President ATTEST: TOLLGRADE COMMUNICATIONS, INC. BY: /s/ Samuel C. Knoch BY: /s/ Sara M. Antol ----------------------------- ----------------------------- (Corporate Seal) -6- EXHIBIT A [FLOOR PLAN OF LEASED SPACE] EXHIBIT B [TABLE OF HVAC NET BOOK VALUE] EXHIBIT C [MAP OF PARKING LOT OF LEASED SPACE] EX-10.44 18 j9925501exv10w44.txt TENTH AMENDMENT TO LEASE AGREEMENT EXHIBIT 10.44 TENTH AMENDMENT TO LEASE THIS TENTH AMENDMENT OF LEASE (this "Amendment") is made and entered into as of this 15th day of March, 2000, by and between REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA ("Landlord") and TOLLGRADE COMMUNICATIONS, INC. ("Tenant"). WITNESSETH THAT: WHEREAS, Landlord and Tenant entered into a Lease Agreement dated August 5, 1993 (the "Original Lease"); and WHEREAS, the Original Lease Agreement was amended by First Amendment of Lease Agreement dated March 15, 1994 (the "First Amendment"), Second Amendment of Lease Agreement dated as of July 1, 1994 (the "Second Amendment), Third Amendment of Lease Agreement dated as of September 15, 1994 (the "Third Amendment"), Fourth Amendment of Lease Agreement dated as of September 15, 1994 (the "Fourth Amendment), Fifth Amendment of Lease Agreement dated as of March 6, 1995 (the "Fifth Amendment"), Sixth Amendment of Lease Agreement dated as of September 18, 1995 (the "Sixth Amendment"), Seventh Amendment to Lease Agreement dated July 9, 1996 (the "Seventh Amendment"), Eighth Amendment of Lease Agreement dated May 13, 1997 (the "Eighth Amendment") and Ninth Amendment to Lease Agreement dated December 8, 1998 (the "Ninth Amendment") (collectively, with the Original Lease, referred to hereinafter as the "Lease"); and WHEREAS, the parties desire to further amend the Lease in accordance with the terms of this Amendment. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, Landlord and Tenant covenant and agree as follows: 1. The lease is hereby extended for an additional period of one (1) year beyond the term specified in Section 2 of the Ninth Amendment, which additional term shall commence January 1, 2002 and terminate on December 31, 2002. 2. For the period January 1, 2002 through December 31, 2002, Tenant shall pay to Landlord as Base Rent for the Premises, payable in advance and without demand on the first business day of each successive calendar month during such additional period, together with any Additional Rent escalations provided in the Lease, the sum of FORTY-EIGHT THOUSAND SEVEN HUNDRED TWENTY AND 00/100 DOLLARS ($48,720.00) per month. 3. Section 4 of the Ninth Amendment, specifying the renewal options, is hereby replaced in its entirety with the following: 4. "Tenant shall have the right and option to renew the term of this Lease for one (1) additional term of three (3) years following the expiration of the term described in Section 1 above, provided (i) that this Lease is full force and effect immediately prior to the date of the commencement of such renewal term; (ii) that the Tenant is not in default under any of the provisions herein or under the Lease; and (iii) that Tenant is in full occupancy of the Premises for its own use and intends to continue such occupancy. The renewal term shall commence January 1, 2003 and terminate December 31, 2005. The renewal term shall be exercised by Tenant serving on Landlord written notice to that effect not later than March 31, 2002. Said renewal shall be upon the same terms, covenants, conditions and limitations as in this Lease provided, except that in the renewal term the monthly Base Rent shall be as follows, in addition to any Additional Rent escalations as outlined in the Lease: For the period January 1, 2003 through December 31, 2003, the sum of FIFTY THOUSAND ONE HUNDRED NINETY-NINE AND 00/100 DOLLARS ($50,199.00); For the period January 1, 2004 through December 31, 2004, the sum of FIFTY-ONE THOUSAND SIX HUNDRED SEVENTY-EIGHT AND 00/100 DOLLARS ($51,678.00); and For the period January 1, 2005 through December 31, 2005, the sum of FIFTY-THREE THOUSAND TWO HUNDRED FORTY-FOUR AND 00/100 DOLLARS ($53,244.00). The notice of election to take the renewal when given by Tenant shall be irrevocable and shall constitute an agreement between the parties for a renewal of this Lease as herein stated." 5. Any capitalized terms used herein and not defined herein but defined in the Lease shall have the same definition as provided for in the Lease. 6. Except as specifically amended by this Amendment, the terms and conditions of the Lease shall remain in full force and effect and shall be binding on the parties hereto and their respective successors and assigns. In the event of a conflict between the terms of this Amendment and the terms of the Lease, the terms of this Amendment shall govern. -2- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written. ATTEST: REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA BY: /s/ Colleen B. Poremski BY: /s/ Frank Brooks Robinson -------------------------- -------------------------- (Corporate Seal) President ATTEST: TOLLGRADE COMMUNICATIONS, INC. BY: /s/ Samuel C. Knoch BY: /s/ Sara M. Antol -------------------------- -------------------------- (Corporate Seal) Chief Counsel and Secretary -3- EX-10.45 19 j9925501exv10w45.txt ELEVENTH AMENTMENT TO LEASE AGREEMENT EXHIBIT 10.45 ELEVENTH AMENDMENT TO LEASE THIS ELEVENTH AMENDMENT OF LEASE (this "Amendment") is made and entered into as of this 19th day of July, 2000, by and between REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA ("Landlord") and TOLLGRADE COMMUNICATIONS, INC. ("Tenant"). WITNESSETH THAT: WHEREAS, Landlord and Tenant entered into a Lease Agreement dated August 5, 1993 (the "Original Lease"), as subsequently amended by the First, Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, Ninth and Tenth Amendments to Lease (collectively, with the Original Lease, referred to hereinafter as the "Lease"); and WHEREAS, the parties desire to further amend the Lease in accordance with the terms of this Amendment. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and intending to be legally bound hereby, Landlord and Tenant covenant and agree as follows: 1. The Landlord additionally leases and demised unto Tenant Seven Thousand Two Hundred (7,200) square feet of space in the Complex, referred to as Units 12A and 13A, for the period commencing July 1, 2000, and continuing throughout the Term of the Lease, which space is more fully shown on Exhibit "A" attached hereto and made a part hereof (herein referred to as the "Additional Space"). The Additional Space shall be deemed hereafter to be part of the Premises. Delivery of the Additional Space to Tenant shall be in "as is" condition and compliance with all provisions of the Lease (except payment of rental, as specified in Section 2 below, and except that Section 33 of the Original Lease (HVAC System) shall not apply to the additional space) shall be deemed to have taken place on July 1, 2000. 2. As rental for the Additional Space, Tenant shall pay to Landlord as Base Rent in advance beginning on July 1, 2000, and on the first business day of each successive calendar month during the Term of the Lease, together with any Additional Rent escalations as provided under the Lease, the following sums: For the period July 1, 2000, through December 31, 2000, the sum of Three Thousand Two Hundred and Forty Dollars and No Cents ($3,240.00); and For the period January 1, 2001, through December 31, 2002, the sum of Three Thousand Three Hundred and Sixty Dollars and No Cents ($3,360.00). 3. In the event the Lease is renewed for the additional three year term following expiration of the Lease, as provided in Section 4 of the Ninth Amendment of Lease as subsequently amended in the Tenth Amendment of Lease, Tenant shall pay to Landlord as Base Rent during such period, together with any Additional Rent escalations as provided under the Lease, the following sums for the Additional Space: For the period January 1, 2003, through December 31, 2003, the sum of Three Thousand Four Hundred and Sixty Two Dollars and No Cents ($3,462.00); For the period January 1, 2004, through December 31, 2004, the sum of Three Thousand Five Hundred and Sixty Four Dollars and No Cents ($3,564.00); and For the period January 1, 2005, through December 31, 2005, the sum of Three Thousand Six Hundred and Seventy Two Dollars and No Cents ($3,672.00). Such sums shall be in addition to the amounts specified in the Tenth Amendment to Lease for Base Rent for the Premises during such renewal period. 4. Landlord promptly shall cause to be conducted repairs to the roof of the Additional Space, in accordance with that certain Agreement between Landlord and Bums & Scalo Roofing Company, Inc., made as of July 5, 2000, a copy of which is attached hereto as Exhibit "B" and made a part hereof (the "Roof Repair Agreement"), and such further change orders thereto as shall be acceptable to both Landlord and Tenant ("Change Orders"). Upon completion of the roof repairs in accordance with the Roof Repair Agreement and any Change Orders, Tenant shall remit to Landlord the cost said Roof Repair Agreement and Change Orders (altogether, the "Repair Costs") in such timely manner as to allow Landlord to meet the payment schedule established by said Roof Repair Agreement. Concurrently with payment of the Repair Costs by Tenant to Landlord, Landlord shall execute a promissory note in favor of Tenant, substantially in the form attached hereto as Exhibit "C" and made a part hereof, setting forth as the Principal Sum (as defined therein) the full and complete amount of the Repair Costs. 5. Any capitalized terms used herein and not defined herein but defined in the Lease shall have the same definition as provided for in the Lease. 6. Except as specifically amended by this Amendment, the terms and conditions of the Lease shall remain in full force and effect and shall be binding on the parties hereto and their respective successors and assigns. In the event of a conflict between the terms of this Amendment and the terms of the Lease, the terms of this Amendment shall govern. -2- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written. ATTEST: REGIONAL INDUSTRIAL DEVELOPMENT CORPORATION OF SOUTHWESTERN PENNSYLVANIA BY: /s/ Colleen B. Poremski BY: /s/ Frank Brooks Robinson -------------------------- -------------------------- (Corporate Seal) President ATTEST: TOLLGRADE COMMUNICATIONS, INC. BY: /s/ Bradley N. Dinger BY: /s/ Samuel C. Knoch -------------------------- -------------------------- (Corporate Seal) -3- EX-13.1 20 j9925501exv13w1.txt 2002 ANNUAL REPORT TO SHAREHOLDERS EXHIBIT 13.1 [GRAPHIC] Tollgrade Communications, Inc. 2002 Annual Report to Shareholders
TABLE OF CONTENTS 2002 Financial Highlights ............................ 1 Statement of Management's Letter to Shareholders ............................... 2 Responsibility for Financial Reporting ......... 18 Product Overview ..................................... 4 Report of Independent Accountants ................ 19 Selected Consolidated Financial Data ................. 6 Consolidated Financial Statements ................ 20 Management's Discussion and Notes to the Consolidated Analysis of Results of Operations Financial Statements ........................... 24 and Financial Condition ............................ 7 Shareholder Information ......................... IBC Board of Directors and Officers ................. IBC
2002 Financial Highlights
(In thousands, except per share data and number of employees) December 31, 2001 DECEMBER 31, 2002 OPERATIONS Total Revenues $ 82,239 $ 58,574 - -------------------------------------------------------------------------------------------------- Net Income $ 13,675 $ 3,356 - -------------------------------------------------------------------------------------------------- Earnings Per Share-- Diluted $ 1.02 $ 0.25 - -------------------------------------------------------------------------------------------------- Weighted Average Shares of Common Stock and Equivalents 13,412 13,314 - -------------------------------------------------------------------------------------------------- Number of Employees 341 250 - -------------------------------------------------------------------------------------------------- FINANCIAL POSITION - -------------------------------------------------------------------------------------------------- Total Assets $ 146,630 $ 149,542 - -------------------------------------------------------------------------------------------------- Working Capital $ 67,628 $ 73,189 - -------------------------------------------------------------------------------------------------- Shareholders' Equity $ 140,139 $ 142,356 - --------------------------------------------------------------------------------------------------
REVENUES NET INCOME DILUTED EARNINGS PER SHARE (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS) 1998 $ 46,277 $ 6,967 $0.58 1999 $ 61,111 $ 10,623 $0.89 2000 $114,426 $ 27,495 $2.06 2001 $ 82,239 $ 13,675 $1.02 2002 $ 58,574 $ 3,356 $0.25
1 [PHOTO] Letter to Our Shareholders Dear Shareholders, Sir Francis Bacon, the father of deductive reasoning, wrote, "Prosperity is not without many fears and distastes; and adversity is not without comforts and hopes." While times have been tough for telecom equipment providers like Tollgrade, we are hopeful about our future and comforted by what we accomplished during 2002. During this downdraft, we've worked extremely hard to maintain profitability and generate operating cash; solidify our market positions; win new business, both here and abroad; and set the stage for the future through focused research and development. Our Products For the new Tollgrade investor, let me give you a quick primer on what we do. Our company makes solutions for the centralized testing and monitoring of public telecommunications and cable networks. In laymen's terms, if you're a Regional Bell Operating Company (RBOC) customer with a malfunctioning telephone line, more than likely your service provider uses our system to tell them what's wrong with it. In the cable world, we help CATV companies head off trouble at the pass by monitoring the power supplies that keep their systems running. This is important because it helps our cable customers avoid network shut-downs due to power failures. We also monitor fiber optic nodes and amplifiers, which deliver service to customers. Today, our telco systems test more than 150 million telephone access lines worldwide. We concentrate on the RBOCs, as well as major independent carriers. And Tollgrade products are reaching beyond the voice world to automate and test broadband services such as Digital Subscriber Line service, more commonly referred to as DSL. Recently, we've been helping our customers determine if your voice line can handle DSL service. We hope to establish a similar market position among CATV multiple system operators with our recent acquisition of Acterna, LLC's Cheetah(TM) status and performance monitoring product line, which will bolster our LIGHTHOUSE(R) status monitoring business. By combining Cheetah with our LIGHTHOUSE system, we have established a solid position in cable status and performance monitoring across North America. A Tough 2002 2002 was challenging for everyone serving telephone and cable companies. Our customers experienced severe line loss, cut expenses and reduced capital expenditures. No one knows for sure when this will improve. But by sticking to our knitting, Tollgrade stayed profitable, made cash and won new business. Sales were $58.6 million and we earned $.25 per share. In 2001, our sales were $82.2 million and we earned $1.02 per share. Almost everyone in our industry was affected negatively like this. But we responded to this downturn by making sure that we kept making money while building for the future. In 2002, we maintained a gross profit of 56.3% and put 5.7% of revenue to the bottom line. We also right-sized our business and reduced our quarterly breakeven point, eliminating approximately $3.6 million in annual expenses from the business at the end of 2002. As a result, we generated $17.6 million in cash from operations. The line loss experienced by our customers slowed the deployment of digital loop carrier (DLC) systems. Because our MCU(R) Metallic Channel Units enable DLC lines to be tested, this slowdown in deployment hurt MCU sales. We mitigated those losses somewhat by mounting DLC testability improvement initiatives among our customers through our Services group. Essentially, these initiatives involve ensuring that our customers' test systems are working properly. In some cases, this involves making sure that MCU products are installed in legacy DLC systems. Despite the difficulties in the telecom sector, Tollgrade has always worked hard to try to create value for our shareholders. The market has had its ups and downs, certainly, but comparing our market capitalization of $65.3 million on the day of our initial public offering to our market capitalization of $159.0 million at the end of 2002 still reflects significant growth. [PHOTO] New DSL Business Despite reduced capital expenditures, we won new product business. We landed a DSL prequalification software feature sale during the fourth quarter. So now, two of the four RBOCs are using LoopCare(TM) to improve the rollout of DSL service. We also sold our Benchmark Database (BMDB), a sister feature to our prequalification software, to those same two customers. The BMDB is a store house for DSL prequalification data. 2 We also booked sales of our LoopCare CORBA API and Advanced Test Package features to Baby Bell customers. And, we completed a server port project, which is essentially the re-sale and installation of new servers. In terms of DigiTest(R), we generated Loop Test System (LTS) replacement sales to a major RBOC, and expect a similar project in 2003 for another customer. Because some LTSs are 10-20 years old, our customers replaced them with DigiTest Systems so they would not lose their ability to test their lines if an LTS broke down. Those same DigiTest Systems can also be upgraded with wideband testing to help our customers roll out new services, such as DSL. Many of our non-RBOC customers also chose to take this route. [GRAPHIC] Good International and Independent Sales We also saw activity with independent carriers both here and abroad. Our list of new LoopCare and DigiTest customers has grown with the addition of Century Telephone, PBT, Wesbell, Frontier, nTelos, Florida Digital Networks and the City of Portland. Our new international customers include Albacom (Italy), Easynet (United Kingdom), Batelco (Bahamas) and STC (Kingdom of Saudi Arabia). Many of these sales, specifically to North American independent carriers, were made by bundling LoopCare software and DigiTest hardware sales together to create more attractive value propositions. Our international LoopCare sales were made primarily through our relationship with Lucent Technologies. [GRAPHIC] Cheetah Deal a Lot Like LoopCare In terms of our cable status monitoring business, we added Time Warner as a customer, and maintained business with RCN and Comcast (formerly AT&T BIS), both of which rolled out our new industry-standard HMS software. By acquiring new status and performance monitoring products and customers, and flying under the Cheetah banner, we believe that we will have a solid cable franchise for the future. Our engineers stayed pretty busy in 2002. Despite the fact that we reduced the size of our R&D workforce to control costs, we neared completion of a low-cost method of conducting DSL tests at DLC systems, which are the home of our flagship MCU products. We're combining the wideband capabilities of DigiTest with MCU products already deployed in the field for a truly economical solution for DLC broadband testing. We also worked on new DSL/broadband/IP testing hardware for the edge of the broadband network. At our Bridgewater, New Jersey facility, our corps of former Bell Labs software developers created new LoopCare features that expand the capabilities of our Operation Support System (OSS) product. [GRAPHIC] Into 2003 So what's our plan for 2003? - - We will stay focused on centralized consumer broadband testing, whether it is among telecommunications service providers or cable companies; - - We will seek to help our customers keep their DLC systems and central offices testable; - - We will continue our efforts to harvest DigiTest sales by replacing aging LTS test heads; - - We will work hard to add to our list of independent and international LoopCare and DigiTest customers; - - We will continue to position our systems for automated DSL rollout and begin to ready our customers for testing challenges as networks evolve from circuit- to packet-based; - - We will consolidate our Cheetah and LIGHTHOUSE product lines, making cable status and performance monitoring an even bigger part of our business; and - - We will strive to continue to manage our business conservatively from a financial standpoint, while looking to make further acquisitions like the LoopCare and Cheetah product lines. Make no mistake, times are tough for anyone in the telecom equipment sector. But companies like Tollgrade can not only withstand this Winter of our industry, we can look forward to the warmth of a coming Spring. In 2002, we sought to help customers reduce labor costs and roll out new services by delivering products with solid return-on-investment business cases. Believing this did not just give us comfort, it gave us a lot of hope. Very truly yours, /s/ CHRIS ALLISON Chris Allison Chairman and Chief Executive Officer 3 [GRAPHIC] CONSUMER ACCESS TEST AND MANAGEMENT SOLUTIONS Tollgrade's centralized and remote test systems help telephone companies diagnose problems on their voice-grade lines by measuring their electrical characteristics and analyzing the data. The data is presented to maintenance attendants in an easy-to-understand format so they can explain service problems to troubled customers. We also help telephone companies determine if their lines are suitable for broadband services, such as DSL. These solutions include: - - MCU(R) Test Extension products that access the lines served; - - DigiTest(R) hardware that measures the electrical characteristics of telephone lines; and - - LoopCare(TM), the world's dominant test Operations Support System (OSS), that analyzes the electrical characteristics and converts it to an easy-to-understand diagnosis. [GRAPHIC] [GRAPHIC] [GRAPHIC] [GRAPHIC] BROADBAND EDGE TEST AND MANAGEMENT SOLUTIONS Tollgrade's innovative Broadband Edge solutions are optimized to help service providers quickly and accurately deploy and maintain IP/ATM-based broadband networks. These solutions include: - - A scalable version of our LoopCare Test OSS, which is evolving beyond testing voice lines to testing new broadband services; - - DigiTest EDGE, our new, leading-edge test head platform being developed to qualify and troubleshoot multi-layered broadband services, such as high-speed Internet and Voice-over-IP (VoIP); and - - TELACCORD(R), a simple and cost-effective device use to access the lines to be tested. [GRAPHIC] [GRAPHIC] [GRAPHIC] Our Lines Help Keep Your Lines Open. [GRAPHIC] Virtually every day, you rely on efficient, clear lines of communications. Whether you're exploring the Internet, banking on-line, calling your folks back home, or even checking the latest school closings on TV, chances are good that a Tollgrade product is behind the scenes helping your service provider keep the lines open. However, the average consumer takes for granted the challenges service providers face every day just to keep the communications flowing, much less what it takes to prepare their networks to offer and maintain expanded services. When service is down, consumers simply want to know two things: what's wrong with the line and when it will be fixed. Tollgrade helps providers answer those questions today, while helping them meet tomorrow's challenges. And, we do it with solutions on several fronts: - - While telecom service providers look to expand their networks to offer broadband services, they rely heavily 4 [GRAPHIC] on Tollgrade's incumbent test solutions to tell them if their lines can deliver them. Our telco product lines help them test and manage their existing networks while transparently transitioning to a packet/cell-based architecture. Doing so limits the up-front barriers and costs of aggressively deploying new voice, data and video services. - - When Cable Broadband Multiple System Operators (MSOs) expand their existing video delivery infrastructures to offer digital voice and data services, their need for proactive network management increases. Our cable product lines help them keep a watchful eye on their networks, ensuring the highest possible operational efficiencies and customer responsiveness while minimizing their incremental test and management investments. - - As both telco and cable service providers simultaneously try to accomplish more with fewer resources, keep pace with the latest technologies and meet higher expectations while remaining competitive, they turn to Tollgrade's Professional Services operation to provide single-point-of-contact support for their network's lifecycle. Whether it's software, hardware, services, or the entire suite, Tollgrade Test and Management Solutions help our customers keep their lines open by bringing efficiencies to their everyday network operations. And, as consumer demand drives service providers beyond today's offerings, Tollgrade will be there to help them take the next big leap without missing a step. [GRAPHIC] CABLE BROADBAND TEST AND MONITORING SOLUTIONS Tollgrade's Cheetah(TM) and LIGHTHOUSE(R) Cable Broadband solutions help MSOs ensure that their network power supplies and fiber-optic nodes are working properly. This proactive monitoring allows them to avoid network shut-downs caused by power supply failures. These solutions include: - - Intelligent transponders to detect problems within network power supplies, amplifiers and nodes; - - Modular, multi-port headend controllers (HECs) for aggregating data collected from the transponders; and - - Powerful, scalable system software that uses the data from the HECs to efficiently monitor the status of the power supplies, amplifiers and nodes. [GRAPHIC] [GRAPHIC] [GRAPHIC] [GRAPHIC] PROFESSIONAL SERVICES SPECIALIZED TESTING AND MONITORING EXPERTISE ON CALL ANY TIME Tollgrade complements its hardware and software products with service programs that help our customers maintain their network operations. Our highly experienced Professional Services team is mainly comprised of: - - Former Bell Operating Company technicians and engineers who know how to keep telephone network test systems running: and - - Former CATV technicians and engineers who know how to keep cable networks monitored. Working office-by-office or video-headend-by-video-headend, our professionals serve as "extra sets of arms and legs" by providing highly specialized knowledge of testing and monitoring to help our customers keep their customers happy. Tollgrade's Professional Services programs offer a variety of options that support the planning, implementation, deployment and maintenance phases of a network's lifecycle. These programs have historically resulted in significantly improved overall testability percentages. 5 Selected Consolidated Financial Data The selected consolidated financial data of the Company as of December 31, 1998, 1999, 2000, 2001, 2002 and for the years then ended is derived from audited consolidated financial statements of the Company.
(IN THOUSANDS, EXCEPT PER SHARE DATA AND NUMBER OF EMPLOYEES) YEARS ENDED DECEMBER 31, 1998 1999 2000 2001 2002 - ---------------------------------------------------------------------------------------------------------- STATEMENTS OF OPERATIONS DATA: Revenues: Products $ 46,277 $ 60,031 $ 111,957 $ 77,612 $ 48,146 Services -- 1,080 2,469 4,627 10,428 - ---------------------------------------------------------------------------------------------------------- 46,277 61,111 114,426 82,239 58,574 Cost of sales: Products 19,620 24,298 40,680 33,134 20,800 Services -- 716 1,958 2,555 3,319 Amortization -- -- -- 365 1,464 - ---------------------------------------------------------------------------------------------------------- 19,620 25,014 42,638 36,054 25,583 - ---------------------------------------------------------------------------------------------------------- Gross profit 26,657 36,097 71,788 46,185 32,991 - ---------------------------------------------------------------------------------------------------------- Operating expenses: Selling and marketing 5,704 7,006 12,289 9,160 8,766 General and administrative 4,128 4,723 6,216 4,827 5,489 Research and development 6,880 8,757 12,456 12,428 13,839 Severance and related expense -- -- -- 291 176 - ---------------------------------------------------------------------------------------------------------- Total operating expense 16,712 20,486 30,961 26,706 28,270 - ---------------------------------------------------------------------------------------------------------- Income from operations 9,945 15,611 40,827 19,479 4,721 Other income, net 1,062 949 2,525 2,796 693 - ---------------------------------------------------------------------------------------------------------- Income before taxes 11,007 16,560 43,352 22,275 5,414 Provision for income taxes 4,040 5,937 15,857 8,600 2,057 - ---------------------------------------------------------------------------------------------------------- Net income $ 6,967 $ 10,623 $ 27,495 $ 13,675 $ 3,357 - ---------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE INFORMATION: Net income per common share: (1) Basic $ 0.60 $ 0.92 $ 2.18 $ 1.05 $ 0.26 - ---------------------------------------------------------------------------------------------------------- Diluted $ 0.58 $ 0.89 $ 2.06 $ 1.02 $ 0.25 - ---------------------------------------------------------------------------------------------------------- Weighted average shares of common stock and equivalents: Basic 11,683 11,574 12,636 13,038 13,095 - ---------------------------------------------------------------------------------------------------------- Diluted 11,933 11,959 13,359 13,412 13,314 - ----------------------------------------------------------------------------------------------------------
AS OF DECEMBER 31, 1998 1999 2000 2001 2002 - ---------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA: Working capital $ 40,539 $ 49,958 $ 111,135 $ 67,628 $ 73,189 Total assets 49,865 66,202 131,275 146,630 149,542 Shareholders' equity 45,696 57,504 122,760 140,139 142,356 1998 1999 2000 2001 2002 - ---------------------------------------------------------------------------------------------------------- OTHER DATA: (2) Number of employees at year end 230 282 411 341 250 Average revenue per employee $ 201 $ 217 $ 278 $ 241 $ 234 - ----------------------------------------------------------------------------------------------------------
(1) 1998 includes $.02 per share related to the after-tax effect of net key man life insurance proceeds associated with the death of the Company's former Chairman R. Craig Allison. (2) Data is unaudited and not derived from Company's audited financial statements. 6 Management's Discussion and Analysis of Results of Operations and Financial Condition The following discussion should be read in conjunction with the Selected Consolidated Financial Data and the audited Consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report to Shareholders. CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. The statements contained in this Annual Report to Shareholders, including, but not limited to, those contained in the following Management's Discussion and Analysis of Results of Operations and Financial Condition, which are not historical facts are considered "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements, which may be expressed in a variety of ways, including the use of future or present tense forward-looking terminology such as "believes," "expects," "may," "will," "should," "estimate," "plan" or "anticipates" or the negative thereof, other variations thereon, or compatible terminology, relate to, among other things, projected cash flows used in the valuation of intangible assets, the anticipated results of negotiations for new maintenance service agreements, as well as purchase orders and other customer purchase agreements, the ability to utilize current deferred and refundable tax assets, opportunities which the Services group offers to customers, the potential loss of certain customers, the timing of orders from customers, the effect of consolidations in the markets to which Tollgrade Communications, Inc. (the "Company") sells, the effects of the economic slowdown in the telecommunications and cable industries, the possibility of future provisions for slow moving inventory, and the effect on earnings and cash flows of changes in interest rates. The Company does not undertake any obligation to publicly update any forward-looking statements. These forward-looking statements, and other forward-looking statements contained in other public disclosures of the Company which make reference to the cautionary factors contained in this Annual Report, are based on assumptions that involve risks and uncertainties and are subject to change based on the considerations described below. These risks, uncertainties and other factors may cause actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. Therefore, the Company wishes to caution each reader of this Annual Report to consider the following factors and certain other factors discussed herein and in other past reports including, but not limited to, prior year Annual Reports and Form 10-K reports filed with the Securities and Exchange Commission ("SEC"). The factors discussed herein may not be exhaustive. Therefore, the factors contained herein should be read together with other reports and documents that are filed by the Company with the SEC from time to time, which may supplement, modify, supersede or update the factors listed in this document. General economic conditions and the economic conditions of the telecommunications and cable industries, including the effect of subscriber line loss and competition for the Company's RBOC customers from wireless, cable providers and other carriers entering the local telephone service market, can and have affected the capital budgets of the Company's customers. If such conditions result in a further reduction of such budgets, the Company's revenues could be adversely affected. If the Company's customers find themselves unable to meet their established purchase forecasts and their own growth projections, such customers may further curtail their purchase of the Company's products, which would adversely affect the Company's revenues. If the Company would be unable to establish customer or sales distribution or original equipment manufacturer ("OEM") relationships relating to the new Cheetah(TM) business, it could affect the rate of incoming orders, which would adversely affect sales and revenues. If the financial strength of certain of the Company's major customers should deteriorate or such customers encounter difficulties in accessing capital, the ability of such customers to purchase and pay for the Company's products could be impaired, with a corresponding adverse effect on the Company's revenues. If third parties with whom the Company has entered into sales and marketing partnerships should fail to meet their own performance objectives, customer demand for the Company's products could be adversely affected, which would have an adverse effect on the Company's revenues. Seasonal fluctuations in customer demand for the Company's products can create corresponding fluctuations in period to period revenues, and any increases in the rate of order cancellation by customers could adversely affect future revenues. The carrying value of certain intangible assets, including goodwill, acquired by the Company from Lucent Technologies, Inc. ("Lucent") could be impaired if changing market conditions indicate that lower than anticipated cash flows will be produced by such intangible assets. If the Company encountered a shortage of key manufacturing components from limited sources of supply, or experience manufacturing delays caused by reduced manufacturing capacity or integration issues related to the acquisition of the Cheetah product line, loss of key assembly subcontractors or other factors, the Company's ability to produce and ship its manufactured products could be adversely affected, with an adverse effect upon revenues. The introduction of improved products or services or reduced prices by the Company's competitors could reduce the demand for the Company's products and services and adversely affect revenues. If the Company proves unable to respond effectively to technological change in its industry, such as an evolution of the telephone network from circuit to packet-based, by developing new products and services 7 Management's Discussion and Analysis of Results of Operations and Financial Condition and obtaining customer approval and acceptance of its products and services, demand for the Company's products and services could be adversely affected, which would adversely affect revenues. The Company is dependent on a relatively narrow range of products and a small number of large customers. As a result, the failure of one or a small number of the Company's products to gain or maintain acceptance in the marketplace, or the decision by one or a few of the Company's customers to curtail their purchases of the Company's products could have an adverse effect on revenues. If one or more of a small number of key employees of the Company were to cease to be associated with the Company, the Company's future results could be adversely affected. If the Company is unable to successfully assert and defend its proprietary rights in the technology utilized in its products, its future results could be adversely affected. If third parties were able to successfully assert that the Company's use of technology infringed upon the proprietary rights of others, the future results of the Company could be adversely affected. If one or more of the Company's products were to prove defective, the Company's relationships with its customers could be jeopardized and the Company could be subject to potential liability, adversely affecting the Company's future results. If for any reason demand for the Company's products should continue to decrease, including the successful development of a secondary market for the Company's products by a third party, the Company could continue to find itself with excess inventory and obsolete parts on hand, which could adversely affect future results. Changes in government regulation, such as modification or repeal of The Telecommunications Act of 1996, increasing the costs of doing business by the Company or its customers, or preventing the Company or its customers from engaging in business activities they may wish to conduct could adversely affect the Company's future results. The Company has recently completed several acquisitions and expects to pursue additional acquisitions and new business opportunities in the future as part of its business strategy. If the Company fails to integrate successfully the operations and products of acquired businesses, or if such acquisitions subject the Company to unexpected liabilities and claims, the Company's future results could be adversely affected. The Company's future sales in international markets are subject to numerous risks and uncertainties, including local economic and labor conditions, political instability including terrorism and other acts of war or hostility, unexpected changes in the regulatory environment, trade protection measures, tax laws, the ability of the Company to market current or develop new products suitable for international markets, obtaining and maintaining successful distribution and resale channels and foreign currency exchange rates. Reductions in the demand for or the sales of the Company's products in international markets could adversely affect future results. Overview The Company was organized in 1986, began operations in 1988 and completed its initial public offering in 1995. The Company designs, engineers, markets and supports test system, test access and status and performance monitoring products for the telecommunications and cable television industries. Effective September 30, 2001, the Company purchased certain assets of the LoopCare(TM) product business from Lucent. These assets consisted of LoopCare software base code and developed enhancements, as well as the rights to existing maintenance contracts for the LoopCare software. Effective September 30, 2001, revenues from the sales of software base code and developed enhancements are either reported separately or as part of the Company's revenues attributable to test system products to which they synergistically relate, while the revenues from maintenance contracts are reflected as part of the Company's Services revenues. The Company has determined that its business has one reportable segment in the test assurance industry. All product sales are considered components of the business of testing infrastructure and networks for the telecommunications and cable television industries. Although the Company does internally develop sales results associated with the various product categories, this information is not considered sufficient for segment reporting purposes nor does the chief operating decision maker base his critical decisions or allocate assets solely on this information. The Company's products and services have similar economic characteristics, the same or similar production processes and are sold to similar types or classes of customers in, or entering into, the telecommunications and cable businesses through similar distribution means. The LoopCare software product line business was acquired by the Company to broaden its DigiTest((R)) test platform into a system level offering and as a competitive defense to protect the Company's MCU((R)) and DigiTest products' market share. The Company's proprietary telecommunications test access products enable telephone companies to use their existing line test systems to remotely diagnose problems in "Plain Old Telephone Service" ("POTS") lines containing both copper and fiber optics. The Company's MCU product line, which includes POTS line testing as well as alarm-related products, represented approximately 48% of the Company's revenue for the year ended December 31, 2002. The Company's MCU product line is expected to continue to account for a substantial portion of the Company's revenues. The Company's DigiTest centralized network test system platform, which includes certain LoopCare software base code and developed enhancements, focuses on helping local exchange carriers conduct the full range of fault diagnosis, along with the ability to qualify, deploy and maintain next generation services that include Digital Subscriber Line ("DSL") service and Integrated Services Digital Network ("ISDN") service. The Company's DigiTest system is designed to provide the complete solution for testing POTS and performing local loop prequalification for DSL services. The system currently consists of the comprehensive LoopCare diagnostic software, as well as three integrated pieces of hardware, the Digital Measurement Node ("DMN"), the Digital 8 Management's Discussion and Analysis of Results of Operations and Financial Condition Measurement Unit ("DMU"), and the Digital Wideband Unit ("DWU"). When used in an integrated fashion, the DigiTest system permits local exchange carriers to perform a complete array of central office testing including POTS, DSL line prequalification, bridged tap detection, data rate prediction, and in-service wideband testing. The Company expects to introduce soon its new DigiTest EDGE test head for the evolving broadband network in which integrated digital services are offered. Sales of the DigiTest product line accounted for approximately 14% of the Company's revenue for the year ended December 31, 2002. The Company's LoopCare software products consist primarily of engineered enhancements to the LoopCare base code software, which result in increased connectivity and versatility of LoopCare within the customers' existing quality assurance systems. Sales of stand-alone LoopCare software accounted for approximately 13% of total revenue for the year ended December 31, 2002. The Company's LIGHTHOUSE((R)) cable products consist of a complete cable status monitoring system that provides a broad testing solution for the Broadband Hybrid Fiber Coax distribution system. The status monitoring system includes a host for user interface, control and configuration, a head-end controller for managing network communications and transponders that are strategically located within the cable network to gather status reports from power supplies, line amplifiers and fiber-optic nodes. Sales of the LIGHTHOUSE product line accounted for approximately 5% of the Company's revenue for the year ended December 31, 2002. During 2002, the Company completed its first major central office test system upgrade package delivery, which included hardware resale and services. This project contributed approximately 2% of revenues for the year ended December 31, 2002. The Company's Digital Access Unit ("DAU") provides automated test access of locally non-switched, two wire circuits and helps facilitate the line sharing or the spectral unbundling process for both incumbent ("ILEC") and competitive local exchange carriers ("CLEC"). Although sales of the DAU have been significant in prior years, this product line represented less than 1% of total revenue for 2002. The cornerstones of the Company's Services offerings are the Testability Improvement Initiatives. These services may offer the customer the opportunity to make improvements in testability levels, while training their own staffs in targeted geographic regions over a defined period of time. In this way, the customers' internal repair technicians can make use of automated systems to diagnose and repair subscriber loop problems, thereby automatically eliminating the need for the involvement of several highly trained people. The Services business was considerably expanded upon the acquisition of software maintenance contracts related to the LoopCare software product line. Effective October 11, 2002, however, an RBOC canceled a significant network testability services initiative that had accounted for revenue of approximately $980,000 for the nine months ended September 28, 2002. The cancellation is believed to have considerably reduced ongoing sales of MCU products, that are driven by these testability programs, to this RBOC. Including software maintenance, Services revenue accounted for approximately 14% of the Company's revenue for the year ended December 31, 2002. The Company's primary customers for its telecommunication products and services are the four Regional Bell Operating Companies ("RBOC") as well as major independent telephone companies and certain digital loop carrier ("DLC") equipment manufacturers. For the year ended December 31, 2002, approximately 77% of the Company's total revenue was from sales to these four RBOC customers, the three largest of which individually accounted for approximately 38%, 18% and 14% of the Company's revenue, or a combined 70% of its total revenue. Due to the Company's present dependency on all four of these key customers, the potential loss of one or more of them as a customer or the reduction of orders for the Company's products by any one of them could materially and adversely affect the Company. The Company's operating results have fluctuated and may continue to fluctuate as a result of various factors, including the timing of orders from, shipments to, and acceptance of software by the RBOC customers and significant independent telephone companies. This timing is particularly sensitive to various business factors within each of the RBOC customers, including the RBOC customers' relationships with their various organized labor groups and an increasing tendency for the RBOC customers to place large orders for shipment of hardware and software toward the end of a quarter. In addition, the markets for the Company's products, specifically, LoopCare, DigiTest, LIGHTHOUSE and Cheetah, are highly competitive. The acquisition of AT&T Broadband, one of the Company's primary LIGHTHOUSE and Cheetah customers, by Comcast Corporation may adversely affect sales of product to that customer which contributed almost 4% to revenues for the year ended December 31, 2002. Due to the rapidly evolving market in which these products compete, additional competitors with significant market presence and financial resources could further intensify the competition for these products. The Company believes that recent changes within the telecommunication marketplace, including industry consolidation, as well as the Company's ability to successfully penetrate certain new markets, have required it to grant more favorable terms to some of its customers. In addition, certain customers have consolidated product purchases that have resulted in large bulk orders. As stated earlier, there is an increasing trend, in part in response to some of these discounting programs, for these customers to place large bulk orders toward the end of a quarter for shipment of large quantities of hardware and software in the last month of the quarter. Although the Company will continue to strive to meet the demands of its customers, which include delivery of quality products at an acceptable price on acceptable terms, there can be no assurances that the Company will be successful in negotiating acceptable terms and conditions in its purchase orders or its customer purchase agreements. Additionally, continuing consolidation efforts among the RBOC customers, providing the RBOCs the ability to consolidate their inventory and product procurement systems, could cause fluctuations or delays in the Company's order patterns. Consolidation in the cable 9 Management's Discussion and Analysis of Results of Operations and Financial Condition industry as well as the adoption of industry standards for transponders to function among various status monitoring systems could cause pricing pressure as well as adversely affect certain customers' deployment of the Company's cable products. In addition, markets for the Company's cable products have been, and may continue to be, difficult for the foreseeable future. The Company cannot predict such future events or business conditions and the Company's results could be adversely affected by these industry trends in the primary markets its serves. International sales were approximately 6.3% of total revenues for the year ended December 31, 2002. The Company believes that certain international markets may offer further opportunities. The addition of the LoopCare software product line, including the Lucent OEM resale arrangement for the LoopCare product, has enhanced the Company's ability to penetrate this market. The Company sold LoopCare software to over a half dozen international customers in 2002 including a large sale bundled with DigiTest products. The Company also enjoys a stream of software maintenance revenue from international sources, primarily from renewal of contracts acquired through the business acquired from Lucent. However, the international telephony markets differ from those found domestically due to the different types and configurations of equipment used by international communication companies to provide services. In addition, certain competitive elements are found internationally which do not exist in the Company's domestic markets. These factors, when combined, have made entrance into these international markets very difficult. From time to time, the Company has utilized the professional services of various marketing consultants to assist in defining the Company's international market opportunities. With the assistance of these consultants and through direct marketing efforts by the Company, it has been determined that its present MCU technology offers limited opportunities in certain international markets for competitive and other technological reasons. The Company continues to actively pursue opportunities for its other products, including its LoopCare software products, in international markets. However, there can be no assurance that any continued efforts by the Company will be successful or that the Company will achieve significant international sales. In addition, Lucent Technologies has reduced its efforts relating to DSL services, which could have an adverse effect on the Company's deployment of LoopCare internationally through the Lucent OEM channel. Furthermore, the international markets introduce the risk of loss from currency fluctuations. While the Company endeavors to price its products in U.S. dollars, this is not always possible. Many international customers are also small and undercapitalized, presenting possible exposure to credit losses to a greater degree than has historically been seen from domestic customers. The exposure was minimal at December 31, 2002. The Company believes that its growth will continue to be affected by the economic slowdown in the telecommunications industry as established RBOC and large ILEC customers strive to further reduce their capital and operating expense budgets which will directly impact RBOC and ILEC ordering patterns and quantities. The Company believes that its RBOC and large ILEC customers are being adversely affected by subscriber line losses and the after-effects of overspending in 1999 and 2000, as well as by competition from cable and wireless carriers and other carriers entering the local telephone service market. In addition, certain emerging carriers continue to be hampered by financial instability caused in large part by a lack of access to capital. Due to this uncertainty, the Company will continue to evaluate its investments in production, marketing and research and development expenses and monitor, control or decrease expense levels, as appropriate. On September 30, 2002, the Company implemented its second work force reduction in two years by eliminating 47 positions, a decision which was intended to generate annual cost savings of approximately $3,600,000. Increases in insurance premiums, including for healthcare and directors and officers' liability insurance, of approximately $600,000 will partially offset these savings. The Company also believes that future growth will depend, in part, on its ability to design and engineer new products and, therefore, the Company spends a significant amount on research and development. Research and development expenses as a percentage of revenues were approximately 24% for the year ended December 31, 2002. Application of Critical Accounting Policies The Company's financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The application of certain of these accounting principles are more critical than others in gaining an understanding of the basis upon which the Company's financial statements have been prepared. The Company deems the following accounting policies to involve critical accounting estimates. Revenue Recognition -- The Company markets and sells POTS and broadband test system hardware, and, since the September 30, 2001 acquisition of LoopCare, related software. The Company follows Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" for hardware sales. This bulletin requires, among other things, that revenue should be recognized only when title has transferred and risk of loss has passed to a customer with the capability to pay, and that there are no significant remaining obligations of the Company related to the sale. The bulk of the Company's hardware sales are made to RBOC and other large customers. Terms of these hardware sales are predominantly FOB shipping point. Revenue is recognized for these customers upon shipment against a valid purchase order. The timing of revenue recognition may require the judgment of management. The Company reduces collection risk by requiring letters of credit or other payment guarantees for significant sales to new customers and/or those in weak financial condition. The Company follows the AICPA's Statement of Position "Software Revenue Recognition" SOP 97-2 and related modifications for software perpetual license fee and maintenance revenue. This statement requires that software license fee revenue be recorded only when evidence of a sales arrangement exists, the software has been delivered, and a customer with the capacity to pay has accepted the software leaving no significant obligations on the part of the Company to perform. The Company requires a customer purchase order or 10 Management's Discussion and Analysis of Results of Operations and Financial Condition other written agreement to document the terms of a software order and written, unqualified acceptance from the customer prior to revenue recognition. In certain limited cases, however, agreements provide for automatic customer acceptance after the passage of time from a pre-determined event and the Company has relied on these provisions for an indication of the timing of revenue recognition. In cases for orders of custom software, or orders that require significant software customization, the Company will employ contract accounting using the percentage-of-completion method, whereby revenue is recognized based on costs incurred to date compared to total estimated contract cost. The revenue for orders with multiple deliverables such as hardware, software and/or installation or other services may be separated into stand-alone fair values if not already documented in the purchase order or agreement and where list prices or other objective evidence of fair value exists to support such allocation, in accordance with the provisions of EITF 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Revenue will not be recognized for any single element until all essential elements are delivered and accepted. LoopCare software customers usually enter into separate agreements for software maintenance upon expiration of the stated software warranty period. Maintenance agreements include software upgrades and bug fixes as they become available; however, newly developed features must be purchased separately. Post-warranty maintenance for new features is either included under the current maintenance agreement without additional charge, and is considered in the maintenance agreement fees, or is separately charged upon expiration of the warranty. Depending on the timing of the enhancement purchase and the length of the maintenance agreement, the Company must evaluate whether a portion of the enhancement right to use fee should be treated as post contract support to be deferred and recognized over the remaining life of the maintenance agreement. Software maintenance revenue is recognized on a straight-line basis over the period the respective arrangements are in effect. Revenue recognition, especially for software products, involves critical judgments and decisions that can result in material effects to reported net income. Intangible Assets and Goodwill -- The Company had net intangible assets of $60.2 million at December 31, 2002 primarily resulting from the acquisition of the LoopCare product line in September 2001. In connection with the acquisition, the Company utilized the transitional guidance of Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" which were issued in July 2001. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and that goodwill, as well as any intangible assets believed to have an indefinite useful life, shall not be amortized for financial reporting purposes. In connection with the assets acquired, intangible assets of $45.8 million were identified, of which capitalized software valued at $7.3 million was determined to have a definite useful life of five years and is being amortized over that period. The remaining identified intangible assets of $38.5 million have been determined to have an indefinite useful life and, along with goodwill of approximately $16.2 million, are not being amortized. An independent valuation consultant assisted the Company in identifying and valuing the acquired intangible assets. As of January 1, 2002, the Company fully adopted the provisions of SFAS No. 142. The Company has determined that it has only one reporting segment and has completed a test for goodwill impairment as of June 29, 2002 and December 31, 2002 by comparing the aggregate market value of the Company's stock with the Company's book carrying value, including goodwill. These tests indicated that there was no impairment of the goodwill carrying value. From time to time after the initial impairment test of goodwill at June 29, 2002 was completed, the market value of the Company's stock temporarily declined to an amount below the Company's book carrying value. Management believes that these cases are reflective of current conditions in the telecommunications and general markets. However, future changes in circumstances, including a sustained decline in the aggregate market value of the Company's stock, could necessitate a reconsideration of whether an impairment of goodwill carrying value has occurred, requiring an alternate testing of the fair value of the Company under guidance of SFAS No. 142. In that event, impairment in value up to the full amount of the goodwill could be determined, resulting in an impairment loss to be recorded in the Company's financial statements. All other intangible assets were tested for impairment of carrying value as of December 31, 2002 using assumptions and techniques employed in the original valuation and following the guidance of SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Specifically, the sum of the projected future cash flows to be derived from the developed product software was compared with the net book carrying value. The impairment test for non-amortizable intangible assets other than goodwill consisted of a comparison of the estimated fair value with carrying amounts. The value of the LoopCare trade name was measured using the relief-from-royalty method and discounted cash flow analyses were employed to test the value of the base software and post warranty maintenance service agreements. These tests indicated that none of the intangible assets had impairment in carrying value. The Company plans to retest these assets annually as of December 31 or more frequently if events or changes in circumstances indicate that assets might be impaired. This testing relative to impairments involved critical accounting estimates. The Company relied upon its financial plan for 2003 and best estimates of revenues and cash flows for later years in measuring current values; however, these expectations may not be realized and future events and market conditions might indicate material impairment of value that could result in material charges to net income. Such a future situation would not, however, in and of itself affect the cash flow or liquidity of the Company. The identified intangible assets include LoopCare RBOC service maintenance agreements valued at $32.0 million. It is believed that these annual agreements 11 Management's Discussion and Analysis of Results of Operations and Financial Condition will be renewed into perpetuity due to their critical importance in the operations of the customers. The Company has entered into new contracts for 2003 with two RBOC customers and is in negotiations with the remaining two RBOC customers whose agreements will expire March 31, 2003. The Company intends to maintain fixed fee arrangements for all contracts. Therefore, the Company believes that the non-amortizing characteristics of these intangible assets will be preserved. However, if new maintenance agreements with the two remaining RBOC customers cannot ultimately be reached, or if an agreement is reached with either customer that results in substantially less revenue to the Company than the current fixed fee agreements, the current fair value of the maintenance service agreements may be determined to be less than the $32.0 million carrying value, perhaps materially so, resulting in a non-cash charge against operating income in 2003 or beyond and/or commencement of amortization of the remaining fair value over its determined useful life. A similar analysis of the fair value of the maintenance service agreements would be required if any of the Company's RBOC customers reduce or terminate their maintenance service agreements for any reason. Inventory Valuation -- The Company utilizes a standard cost system that approximates first-in, first-out costing of the products. Standards are monitored monthly and changes are made on individual parts if warranted; otherwise standard costs are updated on all parts annually, normally in November of each year. The Company evaluates its inventories on a monthly basis for slow moving, excess and obsolete stock on hand. The carrying value of such inventory that is determined not to be realizable is reduced, in whole or in part, by a charge to cost of sales and reduction of the inventory value in the financial statements. The evaluation process, which has been consistently followed, relies in large part on a review of inventory items that have not been sold, purchased or used in production within a one-year period. Management also reviews, where appropriate, inventory products that do not appear on the slow moving report but which may be unrealizable due to discontinuance of products, evolving technologies, loss of certain customers or other known factors. As a result of this comprehensive review process, an adjustment to the reserve for slow moving and obsolete inventory is normally made monthly. Inventory identified as obsolete is also discarded from time to time when circumstances warrant. Inventory realization is considered a critical accounting estimate since it relies in large part on management judgments as to future events and differing judgments could materially affect reported net income. Due to the decline in sales in 2001 and 2002, slow moving inventory increased in volume but included many items believed to be active inventory for active products. This trend resulted not only from slower sales but also from the strong effort to reduce inventory levels in 2001 and 2002 that resulted in reduced manufacturing activity and parts usage. The expense for slow moving and obsolete inventory was $543,129, $299,846 and $2,547,072 for 2000, 2001 and 2002, respectively, while the valuation reserves increased $225,000, $26,000 and $1,231,833, respectively in those years, to a balance at December 31, 2002 of $2,043,833. Income Taxes -- The Company follows the provisions of SFAS No. 109, "Accounting for Income Taxes," in reporting the effects of income taxes in the Company's consolidated financial statements. Deferred tax assets and liabilities are determined based on the "temporary differences" between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. As of December 31, 2002, the Company has recorded net deferred tax assets of $2,689,448, comprised of $1,641,862 resulting from carry forward of state net operating losses, other tax assets of $2,531,833 and deferred tax liabilities of $1,484,247. Total net deferred tax assets decreased by $946,818 in 2002 due to the amortization of intangible assets for tax purposes and are expected to continue to decrease in future years. The timing of the reversal of the deferred tax liabilities and to a large extent the deferred tax assets is dependent upon uncertain future events and can't be assumed to occur in the same tax years. The state net operating loss carryforward relates primarily to stock option deductions in 2000. The majority of this carryforward is subject to state laws that allow a 20-year carry forward period with a $2.0 million limit on deductions in each year. Future realization of the recorded tax assets resulting from both timing differences and carryforward losses is dependent upon the existence of sufficient taxable income in future years. SFAS No. 109 requires that a valuation allowance be recorded against deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized. Management believes that the current business climate in the telecommunications industry is not permanent and that the recorded tax assets will more likely than not be realized in future years, especially for federal tax assets that comprise 90% of the non-carryforward amounts. The Company had federal taxable income in 2002 and expects that will continue. Warranty -- The Company provides warranty coverage on its various products. Terms of coverage range from up to one year on software to two to five years for hardware products. The Company reviews products returned for repair under warranty on a quarterly basis and adjusts the accrual for future warranty costs based upon cumulative returns experience. The Company also evaluates special warranty problems for products with a high return rate to correct the underlying causes and, where deemed necessary, to provide additional warranty expense for expected higher returns of these products. Warranty costs associated with software sales are also accrued based on the projected hours to be incurred during the warranty period (normally three months). The accounting for warranty costs involves critical estimates and judgments that can have a material effect on net income. The warranty accrual increased by $445,000 in 2000, $1,023,000 in 2001 and decreased by $87,480 in 2002 to a balance of $1,980,520 at December 31, 2002. Management expects, unless unforeseen circumstances arise, that this accrual will continue to decrease in 2003 since the moving twenty-four month period of shipments includes fewer shipped units on which the accrual is based due to decreasing sales levels in late 2001 and 2002. 12 Management's Discussion and Analysis of Results of Operations and Financial Condition These areas involving critical accounting estimates are periodically reviewed with the audit committee and, in the case of revenue recognition and valuation of intangible assets, the audit committee has assisted in the development of the corporate policies and procedures followed. Results of Operations Year Ended December 31, 2002 Compared to Year Ended December 31, 2001 Revenues Revenues for the year ended December 31, 2002 were $58.6 million, and were $23.6 million or 28.8% lower than the revenues of $82.2 million for the year ended December 31, 2001. The decrease in revenues primarily resulted from further erosion in unit volume sales of traditional MCU and DigiTest system products, partially offset by an increase in LoopCare software sales and maintenance services. LoopCare products, however, were only available for sale during the final three months of 2001. Sales of the MCU product line in 2002 decreased by approximately $27.7 million, or 49.8%, from the results of the previous year. This decrease in sales was across the board among the RBOC customers and is primarily associated with slowdowns in RBOC capital spending programs to upgrade DLC systems. Further, as the life cycle for the MCU product continues to mature, there is an increasing possibility that customers requirements for certain legacy MCU products may be satisfied. The MCU product line accounted for approximately 47.8% of 2002 revenues. Sales of the Company's DigiTest product line in 2002, including $0.6 million of LoopCare software, decreased by approximately $3.9 million, or 33.0%, from the results of the year ended December 31, 2001. This decrease in DigiTest sales was primarily the result of decreased direct shipments during 2002 to Sprint USA as a result of the discontinuation of its ION project and to Nortel Networks and Choice One Communications. The declines from these customers were offset in part by a major centralized test head replacement and augmentation program at an RBOC. DigiTest sales accounted for approximately 13.6% of 2002 revenues. Sales of stand-alone LoopCare software products in 2002 were approximately $7.5 million, representing 12.8% of total revenues for the year, and were made primarily to two RBOC and various international customers. Gross margins on the LoopCare product line business are substantially higher than other product lines of the Company, and the resulting impact on earnings was material. The Company acquired the LoopCare product line on September 30, 2001; therefore, 2002 included twelve months of LoopCare operations while 2001 included only three months. Services revenues, which includes installation oversight and project management services provided to RBOC customers and fees for LoopCare software maintenance, were approximately $10.3 million in 2002, or 17.7% of total revenues. Services revenues increased $5.7 million in 2002 over the results of the previous year due to the inclusion of LoopCare maintenance fees in 2002 for twelve months compared to three months in 2001. Sales of the Company's LIGHTHOUSE Cable Status Monitoring System increased slightly in 2002 to approximately $3.1 million and 5.3% of total revenue. Strong sales to AT&T Broadband were mostly offset by reduced sales to other cable service providers. During the first quarter of 2003, AT&T Broadband completed a business combination with Comcast Corporation. The effect of the combination on the Company's cable business is uncertain and will be highly dependent upon the strategic direction taken by the combined entity. The magnitude of this effect is likely to be amplified due to the Company's recent acquisition of the Cheetah product line. The Company expects the weakness in its core equipment markets to continue for the foreseeable future as its key customers continue to restrict their capital budgets. The Company expects in the near future to introduce its new DigiTest EDGE test head for the evolving broadband network and continues to invest in research to develop new and improved products to stimulate demand for its hardware products. The Company also continues its strategy to offset declining revenues from traditional MCU and related equipment product lines with LoopCare software license right-to-use fee revenue. These software license products generally have long development and selling cycles, creating possibly significant revenue variations; there, however, can be no assurance that the Company will be successful in the implementation of this strategy. Gross Profit Gross profit for 2002 was $33.0 million compared to $46.2 million for 2001, a decrease of $13.2 million, or 28.6%, from the previous year. Gross profit as a percentage of revenues increased to 56.3% for 2002 compared to 56.2% for 2001. The overall decrease in gross profit resulted primarily from the decreased sales levels. Despite the decline in revenue from 2001, gross margin in 2002 as a percentage of sales remained level due to several offsetting factors including increased costs per unit sold due to substantially lower hardware production, the product mix of hardware sales during 2002 compared to 2001 and a net increase in slow moving and obsolete inventory and warranty costs of approximately $1,191,000 in 2002. These higher costs were offset, however, by changes in the product mix brought about by the acquisition of the LoopCare product line on September 30, 2001. LoopCare products, which enjoy higher gross margins than those earned historically on the Company's other products, contributed 26.3% of sales revenue in 2002 compared to 5.4% in 2001. While the Company will continue to reduce its manufacturing costs and to improve efficiencies, the level of LoopCare revenues will continue to be a determinant factor in gross profit margins in 2003. Selling and Marketing Expense Selling and marketing expenses consist primarily of personnel costs as well as commissions and travel expenses of direct sales and marketing personnel, and costs associated with various promotions and related marketing programs. Selling and marketing expense for 2002 was $8.8 million, or 15.0% of revenues, compared 13 Management's Discussion and Analysis of Results of Operations and Financial Condition to $9.2 million, or 11.1% of revenues for 2001. This decrease of $0.4 million, or 4.3%, is primarily due to lower commissions associated with lower sales levels, and cost reductions in the areas of test and evaluation units, advertising, meetings and seminars and related marketing activities, partially offset by higher salaries and consulting expenses. General and Administrative Expense General and administrative expenses consist primarily of personnel costs for finance, administrative and general management personnel as well as accounting, legal and insurance expenses. General and administrative expense for 2002 was $5.5 million, or 9.4% of revenues, compared to $4.8 million, or 5.9% of revenues for 2001. This increase of $0.7 million, or 13.7%, is primarily attributable to increases in outside professional fees, general insurance and salaries and wages, with the increase in salaries and wages largely related to the LoopCare acquisition. Research and Development Expense Research and development expenses consist primarily of personnel costs and costs associated with the development of new products and technologies, including DigiTest, LIGHTHOUSE and LoopCare software, as well as enhancing features of existing products. Research and development expense for 2002 was $13.8 million, or 23.6% of revenues, compared to $12.4 million, or 15.1% of revenues for 2001. This increase of $1.4 million was due to an increase of $3.3 million, primarily salaries, wages and rent expense, attributable to the LoopCare product line in Bridgewater, New Jersey, which was in operation for only three months in 2001. These increases were offset in part by reductions in other salaries, wages and benefits, travel and materials and supplies; brought about in large part by a reduction in work force at the beginning of the fourth quarter of 2002 for which the Company recorded a pre-tax charge of $175,723. The Company expenses research and development costs as they are incurred. Other Income and Expense Other income, which consists primarily of interest income, was $0.7 million for 2002 compared to $2.8 million for 2001. The decrease of $2.1 million, or 75.2%, is primarily attributable to a decrease in funds available for investment resulting from the $62 million LoopCare acquisition in the fourth quarter of 2001 and to the current low market yields on short term interest bearing investments. Provisions for Income Taxes The Company's effective tax rate for 2002 was 38.0% of income before income taxes, compared to the 38.6% rate in 2001. Net Income and Earnings Per Share For the year ended December 31, 2002, net income was $3.4 million compared to $13.7 million for the year ended December 31, 2001, a decrease of $10.3 million, or 75.5%. Diluted earnings per common share of $.25 for 2002 decreased by 75.5%, or $.77, from the $1.02 earned in 2001. Diluted weighted average shares of common stock and equivalents outstanding were 13,313,676 in 2002 compared to 13,412,037 in 2001. The decrease in the diluted weighted average shares of common stock and equivalents outstanding is primarily the result of a reduction in the dilutive effect of outstanding stock options related to the decrease in weighted average share price of the Company's common stock. As a percentage of revenues, net income for 2002 decreased to 5.7% from 16.6% in 2001. Results of Operations Year Ended December 31, 2001 Compared to Year Ended December 31, 2000 Revenues Revenues for the year ended December 31, 2001 were $82.2 million, and were $32.2 million or 28.1% lower than the revenues of $114.4 million for the year ended December 31, 2000. The decrease in revenues is primarily associated with a decrease in the unit volume sales of traditional MCU products, the Company's DigiTest system, and the Company's LIGHTHOUSE Cable Status Monitoring System, offset slightly by an increase in billings related to the Company's Professional Services business. During 2001, the sales of the Company's MCU product line decreased by approximately $24.6 million, or 30.6%. This decrease in sales of the MCU product line resulted primarily from decreased sales to Qwest as that company's testability initiative matured. In addition, MCU sales decreased to SBC Communications, Inc. (including Ameritech, Pacific Bell and SNET) during 2001 primarily as a result of a slowdown in the rollout of Project Pronto, that company's broadband initiative. Also contributing to the decrease in MCU sales during 2001 were decreased sales of core MCU products to BellSouth and Verizon primarily associated with slowdowns in programs to upgrade select DLC systems within certain regions with MCU technology. The MCU product line accounted for approximately 67.8% of the 2001 revenues. During 2001, the sales of the Company's DigiTest product line, including $2.8 million of LoopCare software, decreased by approximately $6.4 million, or 30.4%. This decrease in DigiTest sales was primarily the result of decreased direct shipments during 2001 to Sprint USA and SBC Telecom, Inc., which is the CLEC subsidiary of SBC. The decline in sales of DigiTest to Sprint occurred in connection with Sprint's decision to discontinue its ION Project, while SBC Telecom, Inc. substantially curtailed its plan for expansion. In addition, reduced sales of DigiTest to Nortel Networks and Lucent for deployment into the domestic CLEC markets, as well as reduced sales to Verizon for the replacement of certain Lucent LTS test head trunks for qualification of copper lines for DSL service, contributed to the overall decrease in DigiTest sales during the current year. This was offset somewhat by direct sales of DigiTest to SBC Communications, Inc. for MLT-1 replacement, as well as sales to Nortel in anticipation of distribution in the international market. Overall, DigiTest sales accounted for approximately 17.8% of 2001 revenues. Revenues from the Company's Services group in 2001 increased by $2.2 million, or 87.4%. This includes $1.7 million of software maintenance 14 Management's Discussion and Analysis of Results of Operations and Financial Condition fees associated with the LoopCare acquisition. Services revenue accounted for 5.6% of 2001 revenues. During 2001, sales of the Company's Digital Access Unit increased by approximately $3.4 million, from $0.6 million in the prior year. This product was developed to provide cost-effective test access in applications where it had not been provided for by the equipment manufacturer, and was primarily being sold to Sprint for use in its recently discontinued ION Project. Overall, sales of the Company's DAU were approximately 4.9% of the Company's revenues for 2001. During 2001, sales of the Company's LIGHTHOUSE Cable Status Monitoring System decreased by approximately $6.8 million, or 69.2%. This decrease was primarily a result of decreased product sales to RCN Corporation and AT&T Broadband as a result of their decisions to delay purchases of cable related equipment. Overall, sales of the LIGHTHOUSE Cable Status Monitoring System accounted for approximately 3.7% of 2001 revenues. Revenues from the LoopCare product line in the three-month period ended December 31, 2001 were $4.5 million, comprised of $2.8 million in license right-to-use fees and $1.7 million of maintenance fees. Gross margins on these revenues are substantially higher than other product lines of the Company, and the resulting impact on earnings was material for this period and for 2001. Offsetting these revenue increases were declines for the year and the fourth quarter in the Company's traditional MCU-related products as less purchasing incentives were offered by the Company as well as a continued general softening in the Company's test access markets. Gross Profit Gross profit for 2001 was $46.2 million compared to $71.8 million for 2000, representing a decrease of $25.6 million, or 35.7%. Gross profit as a percentage of revenues decreased to 56.2% for 2001 compared to 62.7% for 2000. The overall decrease in gross profit resulted primarily from the decreased sales levels, while the decline in gross margin as a percentage of sales was a result of decreased production volumes and associated decreases in cost absorption levels. Selling and Marketing Expense Selling and marketing expense for 2001 was $9.2 million, or 11.1% of revenues, compared to $12.3 million, or 10.7% of revenues for 2000. This decrease of $3.1 million, or 25.5%, is primarily due to a decrease in the number of sales and marketing personnel resulting from a reduction in personnel in April 2001, a decrease in incentives and commissions associated with the lower sales levels, and cost reductions in the areas of advertising, promotion and related marketing activities. General and Administrative Expense General and administrative expense for 2001 was $4.8 million, or 5.9% of revenues, compared to $6.2 million, or 5.4% of revenues for 2000. This decrease of $1.4 million, or 22.3%, is primarily attributable to a decrease in employee recruiting-related expenditures, decreased incentive compensation, as well as a decrease in certain professional service and consulting fees. Research and Development Expense Research and development expense for 2001 was $12.4 million, or 15.1%, of revenues, compared to $12.5 million, or 10.9%, of revenues for 2000. This decrease of $0.1 million was principally due to a reduction of engineering personnel in April 2001, offset by the additional personnel acquired as part of the LoopCare acquisition. The Company expenses all research and development costs as they are incurred. Other Income and Expense Other income, which consists primarily of interest income, was $2.8 million for 2001 compared to $2.5 million for 2000. The increase of $.3 million, or 10.7%, is primarily attributable to an increase in funds available for investment between periods. Provisions for Income Taxes The Company's effective tax rate for 2001 was 38.6% of income before income taxes, compared to the 36.6% rate in 2000. The increase in the effective income tax rate was primarily due to higher relative levels of income taxes associated with expanding business activities. Net Income and Earnings Per Share For the year ended December 31, 2001, net income was $13.7 million compared to $27.5 million for the year ended December 31, 2000, representing a decrease of $13.8 million, or 50.3%. Diluted earnings per common share of $1.02 for 2001 decreased by 50.5%, or $1.04, from the $2.06 earned in 2000. Diluted weighted average shares of common stock and equivalents outstanding were 13,412,037 in 2001 compared to 13,359,270 in 2000. This increase in the diluted weighted average shares of common stock and equivalents outstanding is primarily the result of the effect of stock options exercised in 2001. As a percentage of revenues, net income for 2001 decreased to 16.6% from 24.0% in 2000. Liquidity and Capital Resources The Company had working capital of $73.2 million as of December 31, 2002, an increase of $5.6 million or 8.2% from the $67.6 million of working capital as of December 31, 2001. The increase in working capital is largely a result of income before depreciation and amortization of $7.2 million and the deferral of tax liabilities of $1.2 million, primarily related to the amortization of intangible assets for tax purposes, exceeding capital expenditures of $1.8 million and the purchase of treasury stock of $1.6 million. Significant changes during 2002 in the composite elements of working capital include an $8.1 million decrease in accounts receivable-trade and inventories, excluding changes in reserve accounts, due to the continuing decline in sales activities caused by the severe budget restrictions of telecommunications providers, and corresponding adjustments made by the Company in forecasted production volumes to meet such lowered demands. Further reductions in these assets will be increasingly difficult. Overall, the Company generated cash from operating activities of $17.6 million in 2002, which was primarily invested in short term investments. As of December 31, 2002, the Company had $53.1 million of cash, cash equivalents and short-term investments that are unrestricted and available 15 Management's Discussion and Analysis of Results of Operations and Financial Condition for corporate purposes, including acquisitions and other general working capital requirements. On September 30, 2002, the Company implemented its second work force reduction in two years by targeting 47 positions for elimination, which was intended to generate annual cost savings of approximately $3.6 million. A reserve for severance and related costs of $175,723 was recorded in connection with this reduction. Increases in health insurance and other general insurance of the Company of approximately $600,000 will partially offset these savings in 2003. Effective December 20, 2001, the Company executed a five-year $25.0 million Unsecured Revolving Credit Facility (the "Facility") with a bank. Under the terms of the Facility, the proceeds must be used for general corporate purposes, working capital needs, and in connection with certain acquisitions. The Facility contains certain standard covenants with which the Company must comply, including a minimum fixed charge ratio, a minimum defined level of tangible net worth and a restriction on the amount of capital expenditures that can be made on an annual basis, among others. Commitment fees are payable quarterly at a rate of 0.25% of the unused commitment. The Facility was amended in February 2003 in connection with an acquisition of a new cable product line. See "Subsequent Event" below. As of December 31, 2002 and currently, there are no outstanding borrowings under the Facility, and the Company is in compliance with all debt covenants. Borrowings for working capital are not currently anticipated, as the Company believes its cash reserves and internally generated funds will be sufficient to sustain working capital requirements for the foreseeable future. The Company made capital expenditures of $1.8 million, $3.5 million and $4.1 million in the three years ended December 31, 2002, 2001 and 2000, respectively. The expenditures were primarily related to upgrades to the IT infrastructure, office equipment, test fixtures and development systems, tooling and leasehold improvements and, in 2001, for the acquisition of land adjacent to the Company's current manufacturing facility. Planned capital expenditures for 2003 are approximately $3.0 million. These planned capital projects include test fixtures and development systems, and computer and office equipment. The Board of Directors has authorized the continuation of a share repurchase program first initiated in 1997. Under the current extension, the Company may repurchase a total of one million shares of its common stock before December 31, 2003. Since the initial repurchase program was instituted in April of 1997, and as of December 31, 2002, the Company has repurchased 461,800 shares of common stock. The repurchased shares are authorized to be utilized under certain employee benefit programs. The Company at its discretion will determine the number of shares and the timing of such purchases, which will be made using existing cash and short-term investments. The impact of inflation on both the Company's financial position and the results of operations have been minimal and are not expected to adversely affect 2003 results. The Company's financial position enables it to meet cash requirements for operations and capital expansion programs. Subsequent Event On February 13, 2003, the Company closed on a Purchase and Sale Agreement with Acterna, LLC to acquire certain assets and assume certain liabilities related to Acterna's Cheetah status and performance monitoring product line for $14.3 million in cash. As part of the agreement, contingent purchase consideration of up to $2.4 million in the form of an earn-out, may be payable based on certain 2003 performance targets for the acquired business. The assets consist principally of existing contracts, product inventory, intellectual property, software and related computer equipment, while the liabilities principally relate to warranty obligations. The $14.3 million due at closing was paid from available cash and short-term investments. The Company believes the acquired business will complement and augment its current cable operations and strategically position the Company to be the leading supplier of testing equipment and software for the cable industry. The acquisition will be recorded under the purchase method of accounting and accordingly, the results of operations of the acquired business from February 14, 2003 forward will be included in the consolidated financial statements of the Company. In connection with the acquisition, the Company entered into an amendment to its $25.0 million Unsecured Revolving Credit Facility to maintain compliance with certain base net worth covenants. The purchase price allocation is currently under evaluation and is expected to be finalized by the end of the first quarter. Off-Balance Sheet Arrangements The Company does not engage in transactions or arrangements with unconsolidated or other special purpose entities. Commitments The Company has commitments under various non-cancelable leases; these leases relate primarily to real estate in Cheswick, Pennsylvania, Bridgewater, New Jersey and Sarasota, Florida, which house the Company's operations. Annual rentals due beyond December 31, 2002 under these agreements are $1.4 million in 2003, $1.6 million in both 2004 and 2005, $0.8 million in 2006, $0.4 million in 2007 and $0.1 million in 2008. The Company is also obligated to pay commitment fees under a credit Facility as discussed in the "Liquidity and Capital Resources" section above. The Company also has commitments to provide software maintenance services under agreements generally one year in length and has warranty obligations on products sold in prior periods. Quantitative and Qualitative Disclosures about Market Risk The Company's current investment policy limits its investments in financial instruments to cash and cash equivalents, individual municipal bonds, and corporate and government bonds. The use of financial derivatives and preferred and common stocks is strictly prohibited. The Company believes it minimizes its risk through proper diversification along with the requirements that the securities must be of investment grade with an average rating of "A" or better by Standard & Poor's. The Company holds its investment securities to maturity and believes that earnings and cash flows are not materially affected by changes in interest rates, due to the 16 Management's Discussion and Analysis of Results of Operations and Financial Condition nature and short-term investment horizon for which these securities are invested. Key Ratios The Company's days sales outstanding ("DSOs") in accounts receivable trade, based on twelve months rolling revenue, was 53 and 43 days as of December 31, 2002 and December 31, 2001, respectively. The December 31, 2001 DSOs were unusually low from an historical perspective. The Company's inventory turnover ratio was 1.4 and 1.3 turns for December 31, 2002 and December 31, 2001, respectively. Backlog The Company's backlog consists of firm customer purchase orders and signed software maintenance agreements. As of December 31, 2002, the Company had a backlog of $7.2 million compared to $4.9 million at December 31, 2001. The increase between years is due partially to the timing of signing renewal annual software maintenance contracts with two existing RBOC customers. The backlog at December 31, 2002 includes approximately $3.8 million related to LoopCare software maintenance contracts. Income under these maintenance agreements will be earned and recognized on a straight-line basis over the remaining terms of the underlying agreements, which are usually one year or less. Periodic fluctuations in customer orders and backlog result from a variety of factors, including but not limited to the timing of significant orders and shipments. While these fluctuations could impact short-term results, they are not necessarily indicative of long-term trends in sales of the Company's products. Accounting Pronouncements In July 2001, the FASB issued SFAS No 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 established accounting and reporting standards for business combinations. SFAS No. 142 established accounting and reporting standards for acquired goodwill and other intangible assets, specifically, how they should be treated upon, and subsequent to, their acquisition. Both SFAS No. 141 and SFAS No. 142 are required to be applied in fiscal years beginning after December 15, 2001; however, early adoption is permitted. Both statements contain transitional provisions that require that these statements be applied to all business combinations initiated after June 30, 2001. The Company followed the transitional provisions of SFAS No. 141 and SFAS No. 142 during the fourth quarter of 2001 as it related to its acquisition of the LoopCare product line. The Company adopted the full provisions of these statements on January 1, 2002. The adoption of these standards did not have a material effect on the Company's financial statements. On August 15, 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." On October 4, 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company adopted these statements on January 1, 2003 and such adoption is not expected to have a material effect on the Company's financial statements. In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting For Costs Associated With Exit Or Disposal." SFAS No. 146 nullifies Emerging Tax Issues Task Forces (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." The new Statement requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not believe that this statement will have a material effect on the Company's financial position or results of operations. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 will be effective for any guarantees that are issued or modified after December 31, 2002. The provisions of FIN 45 are not expected to have a material impact on the Company's results of operations or financial position. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition to SFAS No. 123's fair value method of accounting for stock-based employee compensation. This Statement also amends the disclosure provision of SFAS No. 123 and APB No. 28, Interim Financial Reporting, to require disclosure in the summary of significant accounting policies footnote in the financial statements of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The Company has elected to continue to follow the disclosure-only provisions of SFAS No. 123 and adopted the disclosure provisions of SFAS No. 148. On January 17, 2003 the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51" ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for the Company after January 31, 2003 and is not expected to have a material impact on the Company's results of operations or financial condition. The Company has early adopted Emerging Issues Task Force (EITF) Issue 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables," which applies to all deliverables within contractually binding arrangements that include multiple revenue-generating activities. This issue is expected to be finalized in March of 2003. 17 TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES Statement of Management's Responsibility for Financial Reporting The accompanying consolidated financial statements of Tollgrade Communications, Inc. and Subsidiaries have been prepared by management, who are responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and include amounts based on management's best estimates and judgments. Financial information elsewhere in this Annual Report is consistent with that in the financial statements. Management has established and maintains a system of internal controls designed to provide reasonable assurance that assets are safeguarded and that the financial records reflect the authorized transactions of the Company. The system of internal controls includes widely communicated statements of policies and business practices that are designed to require all employees to maintain high ethical standards in the conduct of Company affairs. The internal controls are augmented by organizational arrangements that provide for appropriate delegation of authority and division of responsibility. The financial statements have been audited by PricewaterhouseCoopers LLP, Independent Accountants. As part of their audit of the Company's 2002 financial statements, PricewaterhouseCoopers LLP considered the Company's system of internal controls to the extent they deemed necessary to determine the nature, timing and extent of their audit tests. The Report of Independent Accountants follows. The Board of Directors pursues its responsibility for the Company's financial reporting through its Audit Committee, which is composed entirely of outside directors. The Audit Committee has met periodically with the Independent Public Accountants and management. The Independent Public Accountants had direct access to the Audit Committee, with and without the presence of management representatives, to discuss the results of their audit work and their comments on the adequacy of internal accounting controls and the quality of financial reporting. /s/ CHRISTIAN L. ALLISON Christian L. Allison Chairman and Chief Executive Officer /s/ SAMUEL C. KNOCH Samuel C. Knoch Chief Financial Officer and Treasurer January 22, 2003 18 Report of Independent Accountants To the Board of Directors and Shareholders of Tollgrade Communications, Inc. and Subsidiaries: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of Tollgrade Communications, Inc. and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for long-lived asset impairments, goodwill and other intangible assets in 2002. PRICEWATERHOUSECOOPERS LLP /s/ PRICEWATERHOUSECOOPERS LLP Pittsburgh, Pennsylvania January 22, 2003, except for Note 8, as to which the date is February 7, 2003 and Note 13, as to which the date is February 13, 2003. 19 Tollgrade Communications, Inc. and Subsidiaries Consolidated Balance Sheets
ASSETS December 31, 2001 DECEMBER 31, 2002 - ------------------------------------------------------------------------------------------------------ Current assets: Cash and cash equivalents $ 32,105,845 $ 33,799,284 Short-term investments 6,489,323 19,328,883 Accounts receivable: Trade 9,296,551 7,946,276 Other 320,501 152,290 Inventories 22,183,616 14,092,596 Prepaid expenses and deposits 916,723 1,529,968 Refundable income taxes 1,396,736 637,156 Deferred tax assets 1,116,756 1,404,122 - ------------------------------------------------------------------------------------------------------ Total current assets 73,826,051 78,890,575 Long-term investments 150,000 ---- Property and equipment, net 8,012,546 7,438,870 Deferred tax assets 2,812,987 2,769,573 Intangibles 38,500,000 38,500,000 Goodwill 16,161,763 16,161,763 Capitalized software costs, net 6,935,000 5,539,002 Other assets 231,614 242,115 - ------------------------------------------------------------------------------------------------------ Total assets $ 146,629,961 $ 149,541,898 - ------------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------ Current liabilities: Accounts payable $ 805,398 $ 499,642 Accrued warranty 2,068,000 1,980,520 Accrued expenses 691,697 748,576 Accrued salaries and wages 329,126 543,339 Accrued royalties payable 397,451 322,380 Income taxes payable 1,433,554 1,141,293 Deferred income 472,674 465,887 - ------------------------------------------------------------------------------------------------------ Total current liabilities 6,197,900 5,701,637 Deferred tax liabilities 293,477 1,484,247 - ------------------------------------------------------------------------------------------------------ Total liabilities 6,491,377 7,185,884 Commitments and contingent liabilities -- ---- Shareholders' equity: Preferred stock, $1.00 par value; authorized shares, 10,000,000; issued shares, -0- in 2001 and 2002 -- ---- Common stock, $.20 par value--authorized shares, 50,000,000; issued shares, 13,513,119 in 2001 and 13,552,736 in 2002 2,702,624 2,710,547 Additional paid-in capital 70,010,254 70,489,025 Treasury stock, at cost, 386,800 shares in 2001 and 461,800 shares in 2002 (3,164,975) (4,790,783) Retained earnings 70,590,681 73,947,225 - ------------------------------------------------------------------------------------------------------ Total shareholders' equity 140,138,584 142,356,014 - ------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 146,629,961 $ 149,541,898 - ------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 20 Tollgrade Communications, Inc. and Subsidiaries Consolidated Statements of Operations
Years Ended December 31, 2000 2001 2002 - ------------------------------------------------------------------------------------------------------------------ Revenues: Products $ 111,957,560 $ 77,611,861 $ 48,146,350 Services 2,468,537 4,627,210 10,428,165 - ------------------------------------------------------------------------------------------------------------------ 114,426,097 82,239,071 58,574,515 Cost of sales: Products 40,680,034 33,134,366 20,799,976 Services 1,957,945 2,555,039 3,319,441 Amortization -- 365,000 1,464,098 - ------------------------------------------------------------------------------------------------------------------ 42,637,979 36,054,405 25,583,515 - ------------------------------------------------------------------------------------------------------------------ Gross profit 71,788,118 46,184,666 32,991,000 - ------------------------------------------------------------------------------------------------------------------ Operating expenses: Selling and marketing 12,288,646 9,159,227 8,766,207 General and administrative 6,216,427 4,827,120 5,489,163 Research and development 12,456,337 12,427,859 13,838,719 Severance and related expense -- 291,401 175,723 - ------------------------------------------------------------------------------------------------------------------ Total operating expense 30,961,410 26,705,607 28,269,812 - ------------------------------------------------------------------------------------------------------------------ Income from operations 40,826,708 19,479,059 4,721,188 Other income: Interest and other income 2,525,460 2,796,213 692,592 - ------------------------------------------------------------------------------------------------------------------ Total other income 2,525,460 2,796,213 692,592 - ------------------------------------------------------------------------------------------------------------------ Income before taxes 43,352,168 22,275,272 5,413,780 Provision for income taxes 15,857,000 8,599,825 2,057,236 - ------------------------------------------------------------------------------------------------------------------ Net income $ 27,495,168 $ 13,675,447 $ 3,356,544 - ------------------------------------------------------------------------------------------------------------------ EARNINGS PER SHARE INFORMATION: - ------------------------------------------------------------------------------------------------------------------ Weighted average shares of common stock and equivalents: Basic 12,636,284 13,037,906 13,095,068 Diluted 13,359,270 13,412,037 13,313,676 - ------------------------------------------------------------------------------------------------------------------ Net income per common share: Basic $ 2.18 $ 1.05 $ 0.26 Diluted $ 2.06 $ 1.02 $ 0.25 - ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 21 Tollgrade Communications, Inc. and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity
Additional Preferred Stock Common Stock Paid-in Treasury Retained Shares Amount Shares Amount Capital Stock Earnings Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1999 -- $ -- 12,102,280 $2,420,456 $28,828,568 $(3,164,975) $29,420,066 $57,504,115 Exercise of common stock options -- -- 1,226,984 245,397 11,580,460 -- -- 11,825,857 Tax benefit from exercise of stock options -- -- -- -- 25,934,700 -- -- 25,934,700 Net income -- -- -- -- -- -- 27,495,168 27,495,168 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2000 -- -- 13,329,264 2,665,853 66,343,728 (3,164,975) 56,915,234 122,759,840 Exercise of common stock options -- -- 183,855 36,771 1,626,764 -- -- 1,663,535 Tax benefit from exercise of stock options -- -- -- -- 2,039,762 -- -- 2,039,762 Net income -- -- -- -- -- -- 13,675,447 13,675,447 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2001 -- -- 13,513,119 2,702,624 70,010,254 (3,164,975) 70,590,681 140,138,584 EXERCISE OF COMMON STOCK OPTIONS -- -- 39,617 7,923 270,252 -- -- 278,175 TAX BENEFIT FROM EXERCISE OF STOCK OPTIONS -- -- -- -- 208,519 -- -- 208,519 PURCHASE OF TREASURY STOCK -- -- -- -- -- (1,625,808) -- (1,625,808) NET INCOME -- -- -- -- -- -- 3,356,544 3,356,544 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 2002 -- $ -- 13,552,736 $2,710,547 $70,489,025 $(4,790,783) $73,947,225 $142,356,014 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 22 Tollgrade Communications, Inc. and Subsidiaries Consolidated Statements of Cash Flows
Years Ended December 31, 2000 2001 2002 - ------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 27,495,168 $ 13,675,447 $ 3,356,544 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,910,245 2,692,322 3,799,353 Tax benefit from exercise of stock options 15,044,372 2,039,762 208,519 Refund and utilization of income taxes paid -- 8,369,552 1,742,597 Deferred income taxes (481,541) (442,435) 540,391 Provision for losses on inventories 43,129 299,845 1,231,833 Provision for allowance for doubtful accounts 22,189 175,000 100,000 Changes in assets and liabilities: Decrease (increase) in accounts receivable-- trade (7,932,588) 9,304,092 1,250,275 Decrease (increase) in accounts receivable-- other (478,654) 1,390,808 300,711 Decrease (increase) in inventories (13,906,864) 8,016,021 6,859,187 (Increase) decrease in prepaid expenses and deposits (325,164) 7,875 (613,245) Increase in deferred and refundable tax assets -- (655,323) (576,590) (Decrease) increase in accounts payable 962,559 (1,068,929) (305,756) (Decrease) increase in accrued warranty 445,000 1,023,000 (87,480) Decrease in accrued expenses and deferred income (736,760) (1,103,218) (82,408) (Decrease) increase in accrued royalties payable 348,789 (745,027) (75,071) Increase (decrease) in accrued salaries and wages 603,960 (2,484,307) 214,213 (Decrease) increase in income taxes payable (1,806,671) 796,616 (292,261) - ------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 21,907,169 41,291,101 17,570,812 - ------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Purchase of investments (38,637,741) (29,030,595) (23,057,447) Redemption/maturity of investments 23,848,762 53,546,927 10,367,887 Capital expenditures (4,076,074) (3,528,528) (1,829,679) Investments in other assets -- (231,615) (10,501) Purchase of LoopCare business from Lucent -- (62,028,763) -- - ------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (18,865,053) (41,272,574) (14,529,740) - ------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Purchase of treasury stock -- -- (1,625,808) Proceeds from the exercise of stock options 11,825,857 1,663,535 278,175 - ------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 11,825,857 1,663,535 (1,347,633) - ------------------------------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents 14,867,973 1,682,062 1,693,439 - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at beginning of period 15,555,810 30,423,783 32,105,845 - ------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 30,423,783 $ 32,105,845 $ 33,799,284 - ------------------------------------------------------------------------------------------------------------------ Supplemental disclosure of cash flow information: Cash paid during the year for income taxes $ 3,145,422 $ 6,801,560 $ 1,898,379 Supplemental disclosure of non-cash financing activity: Acquisition related receivable $ -- $ 897,000 $ -- Tax benefit from the exercise of stock options $ 10,890,328 $ -- $ -- - ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. 23 TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION Tollgrade Communications, Inc. (the Company) designs, engineers, markets and supports test system, test access and status monitoring products and test software for the telecommunications and cable television industries. The Company's telecommunications proprietary test access products enable telephone companies to use their existing line test systems to remotely diagnose problems in Plain Old Telephone Service (POTS) lines containing both copper and fiber optics. The Company's test system products, specifically the DigiTest test platform, focus on helping local exchange carriers conduct the full range of fault diagnosis along with the ability to prequalify, deploy and maintain next-generation services including Digital Subscriber Line service. The Company's cable products consist of a complete cable status monitoring system that provides a comprehensive testing solution for the Broadband Hybrid Fiber Coax distribution system. The status monitoring system consists of a host for user interface, control and configuration; a headend controller for managing network communications; and transponders that are strategically located within the cable network to gather status reports from power supplies, line amplifiers and fiber-optic nodes. The Company was organized in 1986 and began operations in 1988. The Company acquired, for cash, the LoopCare product line business, effective September 30, 2001. See Note 2. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions have been eliminated. CASH AND CASH EQUIVALENTS The Company considers highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Substantially all of the Company's cash and cash equivalents are maintained at one financial institution. No collateral or security is provided on these deposits, other than $100,000 of deposits per financial institution which is insured by the Federal Deposit Insurance Corporation. INVESTMENTS Short-term investments at December 31, 2002 and December 31, 2001 consisted of individual municipal bonds stated at cost, which approximated market value. These securities have maturities of one year or less at date of purchase and/or contain a callable provision in which the bonds can be called within one year from date of purchase. Long-term investments are comprised of individual municipal bonds with a maturity of more than one year but less than eighteen months and are stated at amortized cost, which approximated market value. The primary investment purpose is to provide a reserve for future business purposes, including acquisitions and capital expenditures. Realized gains and losses are computed using the specific identification method. The Company classifies its investment in all debt securities as "held to maturity" as the Company has the positive intent and ability to hold the securities to maturity. INVENTORIES Inventories are stated at the lower of cost or market, with cost determined on the first-in, first-out method. The Company provides appropriate reserves for any inventory deemed slow moving or obsolete. PROPERTY AND EQUIPMENT Property and equipment is stated at cost and depreciated on a straight-line method over the estimated useful lives. Leasehold improvements are amortized over the related lease period or the estimated useful life, whichever is shorter. The cost of renewals and betterments that extend the lives or productive capacities of properties is capitalized. Expenditures for normal repairs and maintenance are charged to operations as incurred. The cost of property and equipment retired or otherwise disposed of and the related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is reflected in current operations. PRODUCT WARRANTY The Company records estimated warranty costs on the accrual basis of accounting. These reserves are based on applying historical returns to the current level of product shipments and the cost experience associated therewith. In the case of software, the reserves are based on the expected cost of providing services within the agreed-upon warranty period. Activity in the warranty accrual is as follows:
2001 2002 - ----------------------------------------------------------------------------------------- Balance at the beginning of the period $1,045,000 $ 2,068,000 Accruals for warranties issued during the period 2,099,000 972,000 Accruals related to pre-existing warranties (923,000) (161,000) Settlements during the period (153,000) (898,000) - ----------------------------------------------------------------------------------------- Balance at the end of the period $2,068,000 $ 1,981,000 - -----------------------------------------------------------------------------------------
24 REVENUE RECOGNITION Revenue from product sales is recognized at the time of shipment when both risk of loss and title has transferred to the customer, which coincides with shipment of related products, and collection is reasonably assured. Software license revenue is recognized in accordance with the AICPA's Statement of Position ("SOP") 97-2, "Software Revenue Recognition," SOP 98-9 "Modification of SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions," and Emerging Issues Task Force Issue 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables." Revenue from software license, which is comprised of fees for perpetual licenses derived from contracts with corporate customers, is recognized when persuasive evidence of an arrangement exists, the product is delivered, acceptance by the customer and receipt of a signed notice indicating that no significant Company obligations exist, the fee is fixed or determinable, and collectibility is probable. In cases for orders of custom software, or orders that require significant software customization, the Company will employ contract accounting using the percentage-of-completion method whereby revenue is recognized based on costs incurred to date compared to total estimated contract cost. Revenue from Services (testability consulting) is recognized upon services being rendered. Reimbursement for out-of-pocket costs is recognized as revenue and simultaneously recognized as the cost of product sales. Revenue from Services also includes revenue from maintenance agreements. Maintenance revenue is generally recognized on a straight-line basis over the life of the related agreement, which is typically one year. Customer advances and amounts due from customers in excess of revenue recognized are recorded as deferred income. Revenue for license and royalty fees is recognized when earned. In December 1999, the Staff of the Securities and Exchange Commission issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB 101"), which provides guidance related to revenue recognition. The Company adopted this standard in 2000 and the effect was not material to its business, results of operations and financial condition. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived and intangible assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Intangible assets are reviewed at least annually. Determination of recoverability is based on an estimate of discounted or undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of an impairment loss for long-lived assets and certain identifiable intangible assets that management expects to hold and use is based on the fair value of the assets. RESEARCH AND DEVELOPMENT COSTS Research and development costs to develop or improve hardware-related products are charged to operations as incurred. CAPITALIZED SOFTWARE DEVELOPMENT COSTS Any costs incurred to establish the technological feasibility of software to be sold or otherwise marketed are expensed as research and development costs. Costs incurred subsequent to the establishment of technological feasibility, and prior to the general availability of the product to the public are capitalized and subsequently amortized under the straight-line method. The Company defines technological feasibility as coding and testing in accordance with detailed program designs. There were no software development costs capitalized in 2000 or 2001 and $68,100 was capitalized in 2002. Such costs are being amortized over five years. INCOME TAXES The Company follows the provisions of SFAS No. 109, "Accounting for Income Taxes" (SFAS 109). Under SFAS 109, deferred tax liabilities and assets are determined based on the "temporary differences" between the financial statement carrying amounts and the tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. SEGMENT INFORMATION The Company follows the provisions of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information, Financial Reporting for Segments of a Business." This statement establishes standards for reporting information about operating segments, products and services, geographic areas and major customers in annual and interim financial statements. The Company manages and operates its business as one segment. International sales were 6.3% of revenues in 2002, 5.3% in 2001 and 2.0% in 2000. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain Instruments and Certain Hedging Activities." This statement establishes standards for reporting information about various derivative financial instruments and accounting for their change in fair value. The Company does not hold or issue derivative instruments for hedging purposes and, therefore, this standard does not have a material effect on the consolidated financial position or results of operations of the Company. ACCOUNTING FOR STOCK-BASED COMPENSATION The Company has two stock-based employee compensation plans which are described more fully in Note 5. The Company accounts for these plans under the recognition and measurement provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees." Under these provisions, stock-based employee compensation cost is not reflected in net income for any year, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant. If the Company had elected to recognize compensation 25 cost for these stock options based on the fair value method set forth in SFAS No. 123, "Accounting for Stock-Based Compensation," net income and earnings per share would have reflected the pro forma amounts indicated below:
Years Ended December 31, 2000 2001 2002 - ------------------------------------------------------------------------------------------------- Net income, as reported $ 27,495,168 $ 13,675,447 $ 3,356,544 Deduct: Total stock-based employee compensation expense based on the fair value method for all awards, net of related tax effects 7,761,098 6,943,395 4,626,927 - ------------------------------------------------------------------------------------------------- Pro forma net income $ 19,734,070 $ 6,732,052 $ (1,270,383) Earnings per share: Basic-- as reported $ 2.18 $ 1.05 $ 0.26 Basic-- pro forma $ 1.56 $ 0.52 $ (0.10) - ------------------------------------------------------------------------------------------------- Diluted-- as reported $ 2.06 $ 1.02 $ 0.25 Diluted-- pro forma $ 1.48 $ .50 $ (0.10) - -------------------------------------------------------------------------------------------------
2. ACQUISITION On September 30, 2001, the Company acquired certain assets and assumed certain liabilities of the LoopCare(TM) Product line from Lucent Technologies, Inc. ("Lucent") for approximately $62,029,000 in cash, which includes approximately $2,200,000 of acquisition-related costs. The LoopCare software product integrates with and enhances the value of the Company's core products, resulting in a significant competitive advantage in the marketplace. The assets consisted principally of rights to existing contracts, software and related computer equipment, while the liabilities were principally related to software warranties currently under contract and deferred income which results from customer contractual billings and advances in excess of revenue recognized in income. The Company used available cash and short-term investments to finance the acquisition. LoopCare is the Plain Old Telephone Services ("POTS") test system used universally by the Regional Bell Operating Companies. The LoopCare acquisition was recorded under the purchase method of accounting and, accordingly, the results of operations of the LoopCare business since October 1, 2001 have been included in the consolidated financial statements. The following summarizes the estimated fair values at the date of acquisition: Current assets $ 855,000 Property and equipment, net 307,000 Intangible assets: LoopCare trade name $ 1,300,000 Base software 5,200,000 Developed product software 7,300,000 Post warranty maintenance service agreements 32,000,000 45,800,000 ---------- Goodwill 16,161,763 - ----------------------------------------------------------------------------------- Total assets acquired $ 63,123,763 - ----------------------------------------------------------------------------------- Deferred income (1,076,000) Warranty reserve (19,000) - ----------------------------------------------------------------------------------- Total liabilities assumed (1,095,000) - ----------------------------------------------------------------------------------- NET ASSETS ACQUIRED $ 62,028,763 - -----------------------------------------------------------------------------------
An independent valuation consultant assisted management in its determination of fair value assigned to certain intangible assets other than goodwill. Discounted future cash flow models were utilized where appropriate. The base software has a historically long life cycle and the Company intends to maintain the software and to continue to develop new LoopCare features. Consequently, it was assumed that the base software and the LoopCare trade name have an indefinitely long life. This software has been in use and embedded within the Company's key customers' operating systems for over 25 years. Similarly, the maintenance service agreements are expected to generate revenues into perpetuity and are assumed to have an indefinite life. The developed product software was estimated to have a useful life at acquisition date of approximately five years and the Company believes it can continue to market the product over that period. Rapid development of improved replacement products is not expected due to the relatively small customer base and the cost to develop new software. The Company has utilized the transitional guidance of Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" which were issued in July 2001. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 and that goodwill, as well as any intangible assets believed to have an indefinite useful life, shall not be amortized for financial reporting purposes. Based on the aforementioned and the Company's belief that there are no legal, regulatory, contractual, competitive or economic limitations on the useful lives of the LoopCare trade name, the base software and the maintenance service agreements, these assets are deemed to have an indefinite useful life and, along with goodwill, are not being amortized. In addition, based on the foregoing analysis, the developed product software is being amortized over five years. For tax purposes, the Company is amortizing all intangible assets over 15 years. SFAS No. 142 also provides that entities evaluate the remaining useful lives of intangible assets determined to have indefinite useful lives periodically to determine whether events and circumstances continue to support an indefinite useful life and that such assets be tested at least annually for impairment of value. Any determined impairment in 26 value from the carrying amounts shall result in an impairment loss to the extent of that excess. As of January 1, 2002, the Company fully adopted the provisions of SFAS No. 142. Goodwill was tested for impairment as of June 29, 2002 and December 31, 2002 by comparing the aggregate market value of the Company's stock with the Company's book carrying value, including goodwill. These tests indicated that there was no impairment of goodwill carrying value. All other intangible assets were tested for impairment of carrying value as of December 31, 2002 using assumptions and techniques employed in the original valuation and following the guidance of SFAS No. 144. Specifically, the sum of the projected future cash flows to be derived from the developed product software was compared with the net book carrying value. The impairment test for non-amortizable intangible assets other than goodwill consisted of a comparison of the estimated fair value with carrying amounts. The value of the LoopCare trade name was measured using the relief-from-royalty method and discounted cash flow analyses were employed to test the value of the base software and post-warranty maintenance service agreements. These tests indicated that none of the intangible assets had impairment in carrying value as of December 31, 2002. The Company plans to retest these assets annually as of December 31 or more frequently if events or changes in circumstances indicate that assets might be impaired. The following condensed proforma results of operations reflect the proforma combination of the Company and the acquired LoopCare business as if the combination occurred on January 1, 2001:
(In Thousands, Except Per Share Data) Proforma Historical December 31, 2001 December 31, 2002 - -------------------------------------------------------------------------------------------- Revenues $ 95,629 $ 58,575 - -------------------------------------------------------------------------------------------- Income from operations $ 23,728 $ 4,721 - -------------------------------------------------------------------------------------------- Net income $ 15,610 $ 3,357 - -------------------------------------------------------------------------------------------- Net income per common share: Basic $ 1.20 $ 0.26 - -------------------------------------------------------------------------------------------- Diluted $ 1.16 $ 0.25 - --------------------------------------------------------------------------------------------
The results of operations for the LoopCare product line business included above include the twelve-month periods ending September 30, 2001. Other proforma adjustments include an estimated allocation of selling, general and administrative expenses to the LoopCare operations based upon budgeted costs for 2002 and proforma amortization of the developed product software over five years. Proforma adjustments were also made to take into account the cost of money in connection with the acquisition costs. This was projected by reducing interest income at historical earning rates for working capital deemed to have been available to apply to the acquisition costs and projecting interest expense on borrowed funds for residual acquisition costs at the historical prime rates of interest plus 1.5%. Adjustments were also made to reflect the tax consequences of the foregoing proforma adjustments. The following information is provided regarding the Company's intangible assets:
As of December 31, 2002 Gross Carrying Amount Accumulated Amortization - --------------------------------------------------------------------------------------------------------- Amortized intangible assets: Developed product software $ 7,368,100 $ 1,829,098 - --------------------------------------------------------------------------------------------------------- Unamortized intangible assets: LoopCare trade name $ 1,300,000 Base software 5,200,000 Post warranty maintenance service agreements 32,000,000 - --------------------------------------------------------------------------------------------------------- $ 38,500,000 - ---------------------------------------------------------------------------------------------------------
As of December 31, 2001 Gross Carrying Amount Accumulated Amortization - --------------------------------------------------------------------------------------------------------- Amortized intangible assets: Developed product software $ 7,300,000 $ 365,000 - --------------------------------------------------------------------------------------------------------- Unamortized intangible assets: LoopCare trade name $ 1,300,000 Base software 5,200,000 Post warranty maintenance service agreements 32,000,000 - --------------------------------------------------------------------------------------------------------- $ 38,500,000 - --------------------------------------------------------------------------------------------------------- Estimated amortization expense: For year ended December 31, 2003 $ 1,473,620 For year ended December 31, 2004 $ 1,473,620 For year ended December 31, 2005 $ 1,473,620 For year ended December 31, 2006 $ 1,108,620 For year ended December 31, 2007 $ 9,522 Actual amortization expense: For year ended December 31, 2001 $ 365,000 For year ended December 31, 2002 $ 1,464,098 Actual net income: For year ended December 31, 2001 $ 13,675,447 For year ended December 31, 2002 $ 3,356,544
27 3. INVENTORIES Inventories consisted of the following:
December 31, 2001 DECEMBER 31, 2002 - ----------------------------------------------------------------------------------------------- Raw materials $ 11,697,886 $ 9,726,789 Work in process 6,443,549 4,518,164 Finished goods 5,153,181 2,190,476 - ----------------------------------------------------------------------------------------------- $ 23,294,616 16,435,429 - ----------------------------------------------------------------------------------------------- Reserves for slow moving and obsolete inventory (1,111,000) (2,342,833) - ----------------------------------------------------------------------------------------------- $ 22,183,616 $ 14,092,596 - -----------------------------------------------------------------------------------------------
4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
Years December 31, 2001 DECEMBER 31, 2002 - ----------------------------------------------------------------------------------------------- Test equipment and tooling 3-5 $ 6,617,117 $ 7,414,502 Office equipment and fixtures 5-7 5,853,773 6,716,510 Leasehold improvements 1-6 2,036,329 2,137,786 - ----------------------------------------------------------------------------------------------- $ 14,507,219 $ 16,268,798 Less accumulated depreciation and amortization 8,117,330 10,452,585 - ----------------------------------------------------------------------------------------------- Subtotal $ 6,389,889 $ 5,816,213 - ----------------------------------------------------------------------------------------------- Land $ 1,622,657 $ 1,622,657 - ----------------------------------------------------------------------------------------------- $ 8,012,546 $ 7,438,870 - -----------------------------------------------------------------------------------------------
5. SHAREHOLDERS' EQUITY COMMON STOCK The Company has 50,000,000 authorized shares which have a par value of $.20 per share. As of December 31, 2001 and 2002, there were 13,513,119 and 13,552,736 issued shares, respectively. STOCK REPURCHASE PROGRAM On January 24, 2002, the Company's Board of Directors authorized the continuation of a share repurchase program that was originally initiated on April 22, 1997. Prior to this extension, the Company had repurchased 382,400 shares of common stock. This continuation authorized the Company to repurchase a total of one million shares of its common stock before December 31, 2002. During 2002, the Company bought an additional 75,000 shares for a total of 457,400 shares repurchased under the program and all extensions. On January 22, 2003, the Board of Directors authorized the continuation of the share repurchase program under which the Company may repurchase a total of one million shares of its common stock before December 31, 2003. STOCK COMPENSATION PLANS Under the Company's stock compensation plans, directors, officers and other employees may be granted options to purchase shares of the Company's common stock. The option price on all outstanding options is equal to the fair market value of the stock at the date of the grant, as defined. The options generally vest ratably over a two-year period, with one-third vested upon grant. The Company's option programs cover all employees and are used to attract and retain qualified personnel in all positions. On February 19, 1999, the Board of Directors approved a proposal to increase the number of shares under the 1995 Long-Term Incentive Compensation Plan ("the 1995 Plan") by 230,000 shares, with a corresponding cancellation of a similar number of shares under the 1998 Employee Incentive Compensation Plan ("the 1998 Plan"). The shareholders approved this action on May 6, 1999. On December 14, 2000, the Board of Directors of the Company approved a proposal to increase the number of shares available under the 1998 Plan by 200,000 shares, from 740,000 to 940,000 shares. On May 23, 2001, the shareholders approved an amendment to the Company's 1995 Plan, as adopted by the Board of Directors on January 25, 2001, to increase the number of shares available under the Plan by 275,000 shares, from 2,210,000 to 2,485,000. The aggregate number of shares of the Company's Common Stock which may be issued under the 1995 Plan and the 1998 Plan is 2,485,000 and 940,000 shares, respectively, subject to proportionate adjustment in the event of stock splits and similar events. On January 24, 2002, the Board of Directors approved a proposal to increase the number of shares available under the 1998 Plan by 50,000 shares, from 940,000 to 990,000 shares. That same date, the Board also approved a proposal to increase the number of shares available under the 1995 Plan by 200,000. On May 7, 2002, the shareholders approved an amendment to the 1995 Plan, as adopted by the Board of Directors on January 24, 2002, to increase the number of shares available by 200,000 from 2,485,000 to 2,685,000. The maximum number of shares which may be awarded under the 1995 Plan to any one Named Executive Officer during any calendar year of the life of the plan is 200,000 shares. All full-time active employees of the Company, excluding officers and directors, are eligible to participate in the 1998 Plan. Amendments to the 1998 Plan do not require the approval of the shareholders, but are approved by the Board of Directors. The Company has 28 2,061,767 total shares reserved under the option plans. The shares authorized but not granted under these plans at December 31, 2001 and 2002 were as follows:
Shares Authorized But Not Granted December 31, 2001 DECEMBER 31, 2002 - ----------------------------------------------------------------------------------------------------- 1995 Long-Term Incentive Compensation Plan 161,182 317,211 1998 Employee Incentive Compensation Plan 1,572 26,850 - ----------------------------------------------------------------------------------------------------- Total 162,754 344,061 - -----------------------------------------------------------------------------------------------------
The fair value of the stock options used to compute pro forma net income and earnings per share disclosures is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for 2000, 2001 and 2002: expected volatility of 77.0% in 2000, 87.7% in 2001 and 92.3% in 2002; a risk-free interest rate of 5.83% in 2000, 3.65% in 2001 and 2.67% in 2002; and an expected holding period of four years. Using the Black-Scholes option-pricing model, the weighted average fair value of stock options granted during 2000, 2001 and 2002, is $58.36, $17.84 and $9.52 per share, respectively. Transactions involving stock options under the Company's various stock option plans and otherwise are summarized below:
Weighted Average Number of Shares Range of Option Price Exercise Price - ----------------------------------------------------------------------------------------------------------------- Outstanding, December 31, 1999 2,195,023 6.00000 - 17.25000 $ 9.38 Granted 416,625 51.62500 - 159.18750 95.84 Exercised (1,223,793) 6.00000 - 51.62500 9.59 Cancelled (24,615) 6.00000 - 159.18750 28.96 - ----------------------------------------------------------------------------------------------------------------- Outstanding, December 31, 2000 1,363,240 6.00000 - 159.18750 35.25 Granted 560,650 20.53000 - 38.00000 27.60 Exercised (183,855) 6.00000 - 21.70000 9.05 Cancelled (66,405) 6.00000 - 159.18750 61.00 - ----------------------------------------------------------------------------------------------------------------- Outstanding, December 31, 2001 1,673,630 6.00000 - 159.18750 34.55 Granted 152,000 9.48500 - 24.21000 14.39 Exercised (39,617) 6.00000 - 28.39500 7.02 Cancelled (83,307) 6.00000 - 159.18750 41.29 - ----------------------------------------------------------------------------------------------------------------- OUTSTANDING, DECEMBER 31, 2002 1,702,706 $ 6.00000 - $ 159.18750 $ 33.06 - -----------------------------------------------------------------------------------------------------------------
Weighted Average Options exercisable at: Number of Shares Exercise Price - ----------------------------------------------------------------------------------------------------------------- December 31, 2000 997,680 $ 21.92 December 31, 2001 1,219,648 $ 30.41 DECEMBER 31, 2002 1,454,464 $ 34.90 - -----------------------------------------------------------------------------------------------------------------
The following table summarizes the status of the stock options, outstanding and exercisable, at December 31, 2002:
Stock Options Outstanding Stock Options Exercisable - ----------------------------------------------------------------------------------------------------------------- Number Weighted Average Weighted Weighted Range of Exercise Outstanding Remaining Average Average Prices as of 12/31/02 Contractual Life Exercise Price Shares Exercise Price - ----------------------------------------------------------------------------------------------------------------- $ 6.00000 - $ 7.28130 224,433 5.00 $ 6.87 224,433 $ 6.87 - ----------------------------------------------------------------------------------------------------------------- $ 7.50000 - $ 9.26570 194,955 5.69 8.17 194,955 8.17 - ----------------------------------------------------------------------------------------------------------------- $ 9.48500 - $ 10.31250 178,466 6.31 9.98 146,486 10.08 - ----------------------------------------------------------------------------------------------------------------- $ 11.03130 - $ 13.63000 173,900 5.86 13.04 144,570 12.92 - ----------------------------------------------------------------------------------------------------------------- $ 15.83500 - $ 21.92500 200,334 8.51 19.57 135,011 19.71 - ----------------------------------------------------------------------------------------------------------------- $ 21.51500 - $ 24.21000 24,000 9.14 22.80 8,005 22.80 - ----------------------------------------------------------------------------------------------------------------- $ 28.39500 - $ 28.39500 188,388 8.78 28.40 133,135 28.40 - ----------------------------------------------------------------------------------------------------------------- $ 28.70000 - $ 55.89850 297,670 8.38 42.52 247,309 44.58 - ----------------------------------------------------------------------------------------------------------------- $ 71.87500 - $103.59375 19,000 7.75 100.25 19,000 100.25 - ----------------------------------------------------------------------------------------------------------------- $ 117.34400 - $159.18750 201,560 7.61 122.68 201,560 122.68 - ----------------------------------------------------------------------------------------------------------------- TOTAL 1,702,706 7.12 $ 33.06 1,454,464 $ 34.90 - -----------------------------------------------------------------------------------------------------------------
29 SERIES A JUNIOR PARTICIPATING PREFERRED STOCK PURCHASE RIGHTS In order to protect shareholder value in the event of an unsolicited offer to acquire the Company, on July 23, 1996, the Board of Directors of the Company declared a dividend of one preferred stock purchase right for each outstanding share of the Company's common stock. The dividend was payable on August 15, 1996 to shareholders of record as of that date. The aforementioned rights are exercisable only if a person or group acquires or announces an offer to acquire 20% or more of the Company's common stock. In such an event, each right will entitle shareholders to buy one-hundredth of a share of a new series of preferred stock at an exercise price of $115.00. Each one-hundredth of a share of the new preferred stock has terms designed to make it the economic and voting equivalent of one share of common stock. If a person or group acquires 20% or more of the Company's outstanding common stock, each right not owned by the person or group will entitle its holder to purchase at the right's exercise price a number of shares of the Company's common stock (or, at the option of the Company, the new preferred stock) having a market value of twice the exercise price. Further, at any time after a person or group acquires 20% or more (but less than 50%) of the outstanding common stock, the Board of Directors may at its option, exchange part or all of the rights (other than rights held by the acquiring person or group) for shares of the Company's common or preferred stock on a one-for-one basis. Each right further provides that if the Company is acquired in a merger or other business transaction, each right will entitle its holder to purchase, at the right's exercise price, a number of the acquiring company's common shares having a market value at that time of twice the exercise price. The Board of Directors is entitled to redeem the rights for one cent per right at any time before a 20% position has been acquired. The Board of Directors is also authorized to reduce the 20% thresholds referred to above to not less than 10%. 6. LICENSE AND ROYALTY FEES The Company has entered into several technology license agreements with certain major Digital Loop Carrier (DLC) vendors and major Operation Support System (OSS) equipment manufacturers under which the Company has been granted access to the licensor's patent technology and the right to manufacture and sell the patent technology in the Company's product line. The Company is obligated to pay royalty fees, as defined, through the terms of these license agreements. Under these agreements, license and royalty fees are due only upon purchase of the technology or shipment of units; there are no contingent payment provisions in any of these arrangements. Royalty fees of $2,910,803, $1,832,981 and $889,024 were incurred in 2000, 2001 and 2002, respectively, and are included in cost of product sales in the accompanying consolidated statements of operations. 7. INCOME TAXES The provision for income taxes consisted of the following:
Years Ended December 31, 2000 2001 2002 - ----------------------------------------------------------------------------------------- Current: Federal $ 14,212,441 $ 8,192,841 $ 1,491,245 State 2,126,100 849,419 25,600 - ----------------------------------------------------------------------------------------- 16,338,541 9,042,260 1,516,845 - ----------------------------------------------------------------------------------------- Deferred: Federal (434,521) (355,700) 675,547 State (47,020) (86,735) (135,155) - ----------------------------------------------------------------------------------------- (481,541) (442,435) 540,392 - ----------------------------------------------------------------------------------------- $ 15,857,000 $ 8,599,825 $ 2,057,237 - -----------------------------------------------------------------------------------------
Reconciliations of the federal statutory rate to the effective tax rates are as follows:
Years Ended December 31, 2000 2001 2002 - ----------------------------------------------------------------------------------------- Federal statutory tax rate 35% 35% 34% State income taxes 5 3 (1) Other (3) 1 5 Effective tax rate 37% 39% 38% - -----------------------------------------------------------------------------------------
30 The components of and changes in the deferred tax assets and liabilities recorded in the accompanying balance sheets at December 31, 2001 and 2002 were as follows:
Deferred Deferred December 31, Expense December 31, Expense December 31, 2000 (Credit) Other 2001 (Credit) Other 2002 - ------------------------------------------------------------------------------------------------------------------------------------ DEFERRED TAX ASSETS: Excess of tax basis over book basis for: Property and equipment $ 184,890 $ (160,287) $ -- $ 345,177 $ (4,375) $ -- $ 349,552 Inventory 321,803 (56,162) -- 377,965 72,798 -- 305,167 Reserves recorded for: Warranty 407,550 (398,970) -- 806,520 34,117 -- 772,403 Inventory 423,150 (10,140) -- 433,290 (480,415) -- 913,705 Allowance for doubtful accounts 78,000 (68,250) -- 146,250 (39,000) -- 185,250 Net operating loss carryforward 1,939,656 -- 160,293 1,779,363 (234,500) 372,001 1,641,862 Other 9,025 (32,153) -- 41,178 997 34,425 5,756 - ------------------------------------------------------------------------------------------------------------------------------------ Total deferred tax assets $3,364,074 $3,929,743 $ 4,173,695 - ------------------------------------------------------------------------------------------------------------------------------------ DEFERRED TAX LIABILITIES: Excess of book basis over tax basis for: Goodwill & Intangibles 258,403 (258,403) 1,042,539 (1,300,942) Property and equipment 25,124 (25,124) 148,231 (173,355) Other (9,950) (9,950) (9,950) - ------------------------------------------------------------------------------------------------------------------------------------ Total deferred tax liabilities $ (9,950) $ (293,477) $(1,484,247) - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ Net deferred taxes $3,354,124 $ (442,435) $ 160,293 $3,636,266 $ 540,392 $ 406,426 $ 2,689,448 Reconciliation to the balance sheet: Current portion of deferred tax assets 983,246 1,116,756 1,404,122 Long-term portion of deferred tax liabilities (9,950) (293,477) (1,484,247) - ------------------------------------------------------------------------------------------------------------------------------------ Long-term deferred tax asset $2,380,828 $2,812,987 $ 2,769,573 - ------------------------------------------------------------------------------------------------------------------------------------
The deferred tax asset from net operating loss carryforwards is applicable to Pennsylvania which presently allows a 20-year carryforward with a $2,000,000 limit on deductions each year. Unused carryforward losses will expire in 2020. 8. LINE OF CREDIT Effective December 20, 2001, and amended effective February 7, 2003, the Company executed a five-year $25,000,000 Unsecured Revolving Credit Facility (the "Facility") with a bank. In accordance with the terms of the Facility, the proceeds must be used for general corporate purposes, working capital needs, and in connection with certain acquisitions, as defined. The Facility contains certain standard covenants with which the Company must comply, including a minimum fixed charge ratio, a minimum defined level of tangible net worth and a restriction on the amount of capital expenditures that can be made on an annual basis, among others. Interest is payable on any amounts utilized under the Facility at prime, or the prevailing Euro rate plus 1.0% to 1.5% depending on the fixed charge coverage ratio, at the option of the Company. Commitment fees are paid quarterly at the rate of 0.25% per annum on the average unused commitment. At December 31, 2002, there were no amounts outstanding under the Facility. 9. LEASE COMMITMENTS The Company leases office space and equipment under agreements which are accounted for as operating leases. The office lease for the Cheswick facility expires December 31, 2003 and is extended to December 31, 2005. The equipment leases expire in August 2005 for the Cheswick facility and January 2007 for the Bridgewater facility. The Company is also involved in various month-to-month leases for research and development equipment. In addition, the office lease includes provisions for possible adjustments in annual future rental commitments relating to excess taxes and excess maintenance costs that may occur.
Minimum annual future rental commitments under noncancelable leases as of December 31 are: 2003 .........................................................$ 1,177,234 2004 ......................................................... 1,196,206 2005 ......................................................... 1,190,871 2006 ......................................................... 457,032 2007 ......................................................... 25,965
The rent expense for all lease commitments was $731,320, $890,943 and $1,170,101 in 2000, 2001 and 2002, respectively. 31 10. MAJOR CUSTOMERS, REVENUE CONCENTRATION AND DEPENDENCE ON CERTAIN SUPPLIERS The company designs, engineers, markets and supports test system, test access and status monitoring products for the telecommunications and cable television industries. Sales are concentrated primarily with the four Regional Bell Operating Companies (RBOCs) as well as major independent telephone companies and to certain digital loop carrier equipment manufacturers. Sales are primarily from the Company's metallic channel unit (MCU) product line. The MCU product line accounted for approximately 48% of the Company's net product sales for 2002. The DigiTest product line accounted for approximately 14% of the Company's net product sales for 2002. LoopCare RTU sales accounted for approximately 13% of the Company's net products sales for 2002. Revenue from Services, which includes installation oversight and project management services provided to RBOCs and fees for LoopCare software maintenance, accounted for approximately 18% of the Company's net product sales for 2002. Sales to RBOC customers accounted for approximately 64%, 71% and 77% of the Company's net product sales for fiscal years 2000, 2001 and 2002, respectively. During fiscal year 2000, sales to four RBOC customers individually exceeded 10% of consolidated revenues and on a combined basis, comprised 64% (individually, 29%, 14%, 11% and 10%) of the Company's net product sales. During fiscal years 2001 and 2002, sales to three RBOC customers individually exceeded 10% of consolidated revenues and, on a combined basis, comprised 66% (individually, 38%, 14% and 14%) and 70% (individually, 38%, 18% and 14%) of the Company's net product sales. Sales to a large independent carrier accounted for approximately 12%, 11% and 2% of the Company's net product sales for fiscal years 2000, 2001 and 2002, respectively. Due to the Company's present dependency on RBOC customers, the loss of one or more of the RBOCs as a customer, or the reduction of orders for the Company's products by the RBOCs, could materially and adversely affect the Company. The Company utilizes two key independent subcontractors to perform a majority of the circuit board assembly and in-circuit testing work on its products. The Company also utilizes other subassembly contractors on a more limited basis. The loss of the subcontractors could cause delays in the Company's ability to meet production obligations and could have a material adverse effect on the Company's results of operations. In addition, shortages of raw material to, or production capacity constraints at, the Company's subcontractors could negatively affect the Company's ability to meet its production obligations and result in increased prices for affected parts. Any such reduction may result in delays in shipments of the Company's products or increases in the price of components, either of which could have a material adverse impact on the Company. 11. EMPLOYEE BENEFIT PLANS The Company has a 401(k) benefit plan. Eligible employees, as defined in the plan, may contribute up to 20% of eligible compensation, not to exceed the statutory limit. The Company does not make matching contributions to the plan. 12. SEVERANCE AND RELATED EXPENSE On September 30, 2002, the Company announced its second restructuring program in two years to implement certain cost reduction initiatives which included the elimination of 47 positions, primarily in research and development. The restructuring program resulted in a pre-tax charge for severance, outplacement and other related costs of $175,723 in 2002. The initial restructuring program in April 2001 resulted in a pre-tax charge of $291,000 in 2001 and eliminated approximately 80 positions. 13. SUBSEQUENT EVENT On February 13, 2003, the Company closed on a Purchase and Sale Agreement with Acterna, LLC (Acterna) to acquire certain assets and assume certain liabilities related to Acterna's Cheetah status and performance monitoring product line for $14,300,000 in cash. As part of the agreement, contingent purchase consideration of up to $2,400,000 in the form of an earn-out, may be payable based on certain 2003 performance targets for the acquired business. The assets consist principally of existing contracts, product inventory, intellectual property, software and related computer equipment, while the liabilities principally relate to warranty obligations. The $14,300,000 due at closing was paid from available cash and short-term investments. The Company believes the acquired business will complement and augment its current cable operations and strategically position the Company to be the leading supplier of testing equipment and software for the cable industry. The acquisition will be recorded under the purchase method of accounting and, accordingly, the results of operations of the acquired business from February 14, 2003 forward will be included in the consolidated financial statements of the Company. In connection with the acquisition, the Company entered into an amendment to its $25.0 million Unsecured Revolving Credit Facility to maintain compliance with certain base net worth covenants. The purchase price allocation is currently under evaluation and is expected to be finalized by the end of the first quarter. In connection with the acquisition, the Company entered into a lease for office space to house the acquired business. Minimum payments due under this lease are approximately $200,000 in 2003, $370,500 in each of the years 2004 through 2007 and $123,500 in 2008. 14. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 established accounting and reporting standards for business combinations. SFAS No. 142 established accounting and reporting standards for acquired goodwill and other intangible assets, specifically, how they should be treated upon, and subsequent to, their acquisition. Both SFAS No. 141 and SFAS No. 142 are required to be applied in fiscal years beginning after December 15, 2001; however, early adoption is permitted. SFAS No. 142 statements contain provisions which require that these statements be applied to all business combinations initiated after June 30, 2001. The Company utilized the transitional guidance of SFAS No. 141 and SFAS No. 142 in connection with the LoopCare acquisition on September 30, 2001. The Company adopted the full provisions of these statements on January 1, 2002. The Company 32 does not believe the adoption of these standards will have a material effect on its financial statements. On August 15, 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligation." On October 4, 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Company will adopt these statements on January 1, 2003 and such adoption is not expected to have a material effect on the Company's financial statements. In June 2002, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 146, "Accounting for Costs Associated with Exit or Disposal." SFAS No. 146 nullifies Emerging Tax Issues Task Forces Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)." The new statement requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not believe that this statement will have material effect on the Company. In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that upon issuance of a guarantee, a guarantor must recognize a liability for the fair value of an obligation assumed under a guarantee. FIN 45 also requires additional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 will be effective for any guarantees that are issued or modified after December 31, 2002. The provisions of FIN 45 are not expected to have a material impact on the Company's results of operations or financial position. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." This Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition to SFAS No. 123's fair value method of accounting for stock-based employee compensation. This Statement also amends the disclosure provision of SFAS No. 123 and APB No. 28, "Interim Financial Reporting," to require disclosure in the summary of significant accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. The Company adopted the disclosure provision of SFAS No. 148. On January 17, 2003 the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - an interpretation of ARB No. 51" ("FIN 46"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to certain entities in which equity investors do no have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for the Company after January 31, 2003 and is not expected to have a material impact on the Company's results of operations or financial condition. The Company has early adopted Emerging Issues Task Force (EITF) Issue 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables," which applies to all deliverables within contractually binding arrangements that include multiple revenue-generating activities. This issue is expected to be finalized in March of 2003. 15. SHORT- AND LONG-TERM INVESTMENTS The estimated fair values of the Company's financial instruments are as follows:
December 31, 2001 DECEMBER 31, 2002 ------------------------------------------------------------ Carrying Fair CARRYING FAIR Amount Value AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------- Financial assets: Cash and cash equivalents $ 32,105,845 $ 32,105,845 $ 33,799,284 $ 33,799,284 Short-term and long-term investments 6,639,323 6,658,247 19,328,883 19,257,039 - ------------------------------------------------------------------------------------------------------------- $ 38,745,168 $ 38,764,092 $ 53,128,167 $ 53,056,323 - -------------------------------------------------------------------------------------------------------------
16. PER SHARE INFORMATION Net income per share has been computed in accordance with the provisions of SFAS No. 128, "Earnings Per Share" for all periods presented. On February 10, 2000, the Company's Board of Directors authorized a two-for-one stock split of the Company's common stock, payable in the form of a 100 percent stock dividend. On March 20, 2000, shareholders of record received one additional share of common stock for each share of common stock held of record on February 28, 2000. All share and per share information reflects the two-for-one split of the Company's common stock. SFAS No. 128 requires companies with complex capital structures to report earnings per share on a basic and diluted basis, as defined. Basic earnings per share are calculated on the actual number of weighted average common shares outstanding for the period, while diluted earnings per share must include the effect of any dilutive securities. All prior periods have been restated in accordance with SFAS No. 128. A reconciliation of earnings per share is as follows:
Years Ended December 31, 2000 2001 2002 - -------------------------------------------------------------------------------------------------- Net Income $ 27,495,168 $ 13,675,447 $ 3,356,544 - -------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 12,636,284 13,037,906 13,095,068 - -------------------------------------------------------------------------------------------------- Effect of dilutive securities - stock options 722,986 374,131 218,608 - -------------------------------------------------------------------------------------------------- 13,359,270 13,412,037 13,313,676 - -------------------------------------------------------------------------------------------------- Earnings per share: Basic $ 2.18 $ 1.05 $ 0.26 - -------------------------------------------------------------------------------------------------- Diluted $ 2.06 $ 1.02 $ 0.25 - --------------------------------------------------------------------------------------------------
33 STATEMENTS OF OPERATIONS DATA BY QUARTER The following table presents unaudited quarterly operating results for each of the Company's last eight fiscal quarters. This information has been prepared by the Company on a basis consistent with the Company's audited financial statements and includes all adjustments (consisting only of normal recurring adjustments) that the Company considers necessary for a fair presentation of the data. Such quarterly results are not necessarily indicative of the future results of operations.
(In Thousands, Except Net Income Per Common Share Data) Quarter Ended (Unaudited) March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, 2001 2001 2001 2001 2002 2002 2002 2002 - ---------------------------------------------------------------------------------------------------------------------------- Revenues: Products $ 27,464 $ 21,177 $ 15,077 $ 13,894 $ 14,929 $ 12,018 $ 11,260 $ 9,939 Services 526 599 961 2,541 2,593 2,566 2,692 2,577 - ---------------------------------------------------------------------------------------------------------------------------- 27,990 21,776 16,038 16,435 17,522 14,584 13,952 12,516 Cost of Sales: Products 11,851 9,047 7,158 5,076 6,062 4,880 5,646 4,212 Services 423 517 508 1,107 955 890 868 607 Amortization of intangibles -- -- -- 365 365 365 366 368 - ---------------------------------------------------------------------------------------------------------------------------- 12,274 9,564 7,666 6,548 7,382 6,135 6,880 5,187 - ---------------------------------------------------------------------------------------------------------------------------- Gross Profit 15,716 12,212 8,372 9,887 10,140 8,449 7,072 7,329 - ---------------------------------------------------------------------------------------------------------------------------- Operating Expenses: Selling and marketing 2,450 2,493 2,023 2,194 2,417 2,225 2,163 1,961 General and administrative 1,530 1,062 1,020 1,215 1,526 1,268 1,217 1,478 Research and development 3,360 2,749 2,639 3,681 3,995 3,396 3,370 3,078 Severance and related expense -- 400 -- (109) -- -- -- 176 - ---------------------------------------------------------------------------------------------------------------------------- Total Operating Expense 7,340 6,704 5,682 6,981 7,938 6,889 6,750 6,693 - ---------------------------------------------------------------------------------------------------------------------------- Income from Operations 8,376 5,508 2,690 2,906 2,202 1,560 322 636 Other Income, Net 907 790 801 298 238 200 151 104 - ---------------------------------------------------------------------------------------------------------------------------- Income Before Taxes 9,283 6,298 3,491 3,204 2,440 1,760 473 740 Provision for Income Taxes 3,528 2,494 1,361 1,217 927 669 180 281 - ---------------------------------------------------------------------------------------------------------------------------- Net Income $ 5,755 $ 3,804 $ 2,130 $ 1,987 $ 1,513 $ 1,091 $ 293 $ 459 - ---------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE INFORMATION: Weighted average shares of common stock and equivalents: Basic 12,958 13,028 13,066 13,095 13,099 13,089 13,091 13,091 Diluted 13,377 13,404 13,378 13,472 13,421 13,339 13,217 13,199 Net income per common share: Basic $ 0.44 $ 0.29 $ 0.16 $ 0.15 $ 0.12 $ 0.08 $ 0.02 $ 0.04 Diluted $ 0.43 $ 0.28 $ 0.16 $ 0.15 $ 0.11 $ 0.08 $ 0.02 $ 0.03 - ----------------------------------------------------------------------------------------------------------------------------
o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o COMMON STOCK MARKET PRICES The Company's Common Stock has been included for quotation on The Nasdaq National Market System under the Nasdaq symbol "TLGD" since the initial public offering of the Company's Common Stock in December 1995. The following table sets forth, for the periods indicated, the high and low sales prices for the Common Stock on such market:
High Low - ----------------------------------------------------------------------------- 2001: First Quarter $ 52.50 $ 15.25 Second Quarter 40.35 18.75 Third Quarter 29.35 18.00 Fourth Quarter 34.55 18.45 2002: First Quarter $ 37.80 $ 20.38 Second Quarter 26.20 14.25 Third Quarter 17.31 7.48 Fourth Quarter 14.90 6.77 - -----------------------------------------------------------------------------
At January 31, 2003, the Company had 198 holders of record of its Common Stock and 13,552,736 shares outstanding. The Company has never paid any dividends on its Common Stock and does not expect to pay cash dividends in the foreseeable future. 34 Shareholder Information SHAREHOLDERS ANNUAL MEETING Tollgrade's Annual Meeting of Shareholders will be held at 3:00 p.m. on Tuesday, May 13, 2003 at The Holiday Inn R.I.D.C., 180 Gamma Drive, Pittsburgh, PA 15238. Notice of the meeting and proxy materials were included with this Annual Report. TRANSFER AGENT AND SHAREHOLDER INQUIRIES The Company's transfer agent is Mellon Investor Services, L.L.C. Inquiries concerning transfer requirements, lost certificates and change of address should be directed to: Mellon Investor Services, L.L.C. P.O. Box 3315 South Hackensack, NJ 07606 or: 85 Challenger Road Ridgefield Park, NJ 07660 1-800-756-3353 TDD for Hearing Impaired: 1-800-231-5469 Foreign Shareholders: 201-329-8660 TDD Foreign Shareholders: 201-329-8354 www.melloninvestor.com. All other inquiries should be directed to: Tollgrade Communications, Inc. Investor Relations Department 493 Nixon Road Cheswick, PA 15024 1-800-878-3399 www.tollgrade.com. FORM 10-K A copy of the Tollgrade Communications, Inc. Form 10-K for 2002, which will be filed with the Securities and Exchange Commission during the first quarter of 2003, is available without attachments at no charge upon written request. It is also available at www.tollgrade.com. Inquiries should be directed to the Investor Relations Department, Tollgrade Communications, Inc., 493 Nixon Road, Cheswick, PA 15024. INDEPENDENT AUDITORS PricewaterhouseCoopers LLP, Pittsburgh, Pennsylvania. STOCK MARKET LISTING Tollgrade Communications, Inc. is listed on The Nasdaq Stock Market.(SM) Symbol: TLGD. Board of Directors CHRIS ALLISON Chairman and Chief Executive Officer JAMES J. BARNES Attorney at Law, Reed Smith LLP DANIEL P. BARRY Private Investor DAVID S. EGAN Chief Marketing Officer, Reed Smith LLP RICHARD H. HEIBEL, M.D. Board Certified Cardiologist (retired) ROBERT W. KAMPMEINERT Chairman, President and Chief Executive Officer, Parker/Hunter Incorporated BRIAN C. MULLINS Former Senior Vice President, Chief Financial Officer and Treasurer of Tuscarora Incorporated (retired) ROCCO L. FLAMINIO Non-voting Director Emeritus Executive Council and Officers CHRIS ALLISON Chairman and Chief Executive Officer SARA M. ANTOL General Counsel and Corporate Secretary RICHARD A. BAIR, JR. Executive Vice President, Engineering and Testing DAVID J. BREITER General Manager, Cable Products WYLIE E. ETSCHEID, JR. Executive Vice President of Business Development, Software Products ROCCO L. FLAMINIO Vice Chairman and Chief Technology Officer CAROL M. FRANKLIN Executive Vice President, Software Products SAMUEL C. KNOCH Chief Financial Officer and Treasurer JOSEPH G. O'BRIEN Senior Vice President, Human Resources MARK B. PETERSON President GREGORY L. QUIGGLE Executive Vice President, Marketing MATTHEW J. ROSGONE Executive Vice President, Operations CHARLES J. SHEARER Controller ROGER A. SMITH Executive Vice President, Technology STEPHANIE M.WEDGE Vice President, Professional Services (R) TOLLGRADE, MCU, DigiTest, TELACCORD and LIGHTHOUSE are registered trademarks of Tollgrade Communications, Inc. TM LoopCare and Cheetah are trademarks of Tollgrade Communications, Inc. All other trademarks are the property of their respective owners. (C) 2003 Tollgrade Communications, Inc. All rights reserved. TOLLGRADE(R) CORPORATE HEADQUARTERS 493 Nixon Road, Cheswick, PA 15024 - 1-800-878-3399 - www.tollgrade.com EX-21.1 21 j9925501exv21w1.txt SUBSIDIARIES EXHIBIT 21.1 Subsidiaries Tollgrade Communications, Inc. (DE) 29 EX-23.1 22 j9925501exv23w1.txt CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Registration No. 333-04290, Registration No. 333-52907, Registration No. 333-83007, Registration No. 333-55470, Registration No. 333-65502, Registration No. 333-95965 and Registration No. 333-96969) of Tollgrade Communications, Inc. and Subsidiaries of our report dated January 21, 2002 relating to the financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated January 21, 2002 relating to the financial statement schedule, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Pittsburgh, Pennsylvania March 22, 2002 30 EX-99.1 23 j9925501exv99w1.txt CERTIFICATION OF CHRISTIAN L. ALLISON Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Tollgrade Communications, Inc. (the "Corporation"), hereby certifies that the Corporation's Annual Report on Form 10-K for the year ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. Dated: March 26, 2003 /s/ Christian L. Allison - ---------------------------- Name: Christian L. Allison Title: Chief Executive Officer EX-99.2 24 j9925501exv99w2.txt CERTIFICATION OF SAMUEL C. KNOCH Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Tollgrade Communications, Inc. (the "Corporation"), hereby certifies that the Corporation's Annual Report on Form 10-K for the year ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. Dated: March 26, 2003 /s/ Samuel C. Knoch - -------------------------------- Name: Samuel C. Knoch Title: Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----