Document:

exv10w18

 

Exhibit 10.18

CONFIDENTIAL TREATMENT REQUESTED. CERTAIN PORTIONS OF THIS

DOCUMENT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR

CONFIDENTIAL TREATMENT AND, WHERE APPLICABLE, HAVE BEEN MARKED

WITH AN ASTERISK TO DENOTE WHERE OMISSIONS HAVE BEEN MADE. THE

CONFIDENTIAL MATERIAL HAS BEEN FILED SEPARATELY WITH THE

SECURITIES AND EXCHANGE COMMISSION.

SUPPLY AGREEMENT

          AGREEMENT, made as of April 20, 2007, between ShutterFly, Inc. (“Customer”) and FUJIFILM
U.S.A., Inc. (“Fuji”) (the “Agreement”).

W I T N E S S E T H:

          WHEREAS, Fuji distributes photographic products, including standard and professional color
paper (“Paper”), processing chemistry (“Chemistry”) and the equipment set forth on Exhibit A
attached hereto (“Equipment”); and

          WHEREAS, Customer desires to purchase and Fuji desires to provide all of Customer’s in-house
requirements for Paper and Chemistry exclusively from Fuji, and to purchase Equipment on the terms
set forth in this Agreement solely for use in Customer’s retail web-based operations for the term
hereof; and

          NOW, THEREFORE, Customer and Fuji hereby agree as follows:

     1. Term; Termination.

     1.1 This Agreement shall be in effect for three (3) years, commencing May 1, 2007 (the
“Term”).

     1.2 This Agreement may be terminated prior to expiration of the Term as follows:

          (a) Upon any of the following events either party may give notice of termination, effective
immediately: (i) the other party becomes insolvent or admits its inability to pay its debts
generally as they come due; (ii) any sheriff, marshall, custodian, trustee or receiver is appointed
by order of any court of competent jurisdiction to take charge of or sell any material portion of
the other party’s property; (iii) a case is filed by the other party under the Bankruptcy Code or
any other insolvency law; (iv) a case is filed against the other party without such party’s
application or consent under the Bankruptcy Code or any other insolvency law and such case
continues undismissed for ninety (90) days; (v) the other party makes a general assignment for the
benefit of creditors; or (vi) the other party is dissolved or liquidated or takes any corporate
action for such purpose; or

          (b) Either party may terminate this Agreement if the other shall commit a material breach of
this Agreement and such breach shall continue more than thirty (30) days after written notice of
such breach is given to breaching party.

 

 

     2. Products; Pricing.

          (a) Paper and Chemistry. Customer shall purchase from Fuji or its affiliates all of
Customer’s in-house requirements for Paper (except where Fuji’s Paper is not reasonably compatible
with Customer’s processor or if Fuji is not able to fulfill Customer’s requirements) and Chemistry
(together with Fuji’s Paper, the “Products”) consistent with the pricing terms below and on Exhibit
B attached hereto. The pricing terms set forth below and on Exhibit B attached hereto may be
amended by Fuji from time to time due to improvements in, or changes in the availability of, the
Products, provided, that the price per unit of the Products does not increase. Customer shall use
the Products internally and shall not resell same. This Agreement [*]; accordingly, this Agreement
does not require [*] Fuji’s Paper. However, if chosen, Customer could [*].

          (b) Equipment. The parties hereto agree that Equipment will be provided by Fuji in
accordance with the terms and conditions set forth on Exhibit A attached hereto.

     2.1 Customer shall purchase [*] Paper [*] the applicable list price for an invoice [*], and
shall [*] and mailed to Customer’s billing address. The parties acknowledge that list price [*]
may change from time to time, but Customer’s [*] pricing will remain equivalent to the [*] pricing
[*] offered upon execution of this Agreement.

          In exchange for Customer’s best efforts [*] on Customer’s [*], Customer [*], which is included
in the [*].

          Customer shall purchase [*] Paper [*] the applicable list price for an invoice [*]. No [*]
applies to [*] Paper

     2.2 [*]: (a) For optimized truckload lot size shipments of 4 inch x 1750 foot rolls of bulk
[*] Paper in production pallets of same surface from Fuji’s manufacturing facility located in
Greenwood, South Carolina to Customer’s, Hayward, CA or Charlotte, NC facilities (or any other new
Customer facilities that may open in the United States over the next three (3) years of the
Agreement), there shall be a [*]. (b) For optimized truckload lot size shipments of full
production pallets of same size and surface Paper (other than 4” x 1750’ rolls) from Fuji’s
manufacturing facility located in Greenwood, South Carolina to Customer’s, Hayward, CA facilities,
there shall be [*] (together with subsection (a) of this Section 2.2, the “[*]”). A guide for
planning direct shipment from Fuji’s manufacturing facility located in Greenwood, South Carolina to
Customer’s California and North Carolina facilities (or any other new Customer facilities that may
open in the United States over the next three (3) years of the Agreement) is attached as Exhibit C
hereto.

          For shipments of Paper from Fuji’s distribution centers to Customer, there shall be no [*].
Notwithstanding the foregoing, Paper orders of $1,000 or more shall include surface freight charges
in the Billing Price. The [*], if earned, will be calculated on a quarterly basis and remitted to
Customer within thirty (30) days of calculation in the form of a credit issued to Customer.

 

			
	[*]	 	Confidential treatment requested

 

 

     2.3 All payments shall be due net sixty (60) days from invoice. Freight will be prepaid by
Fuji on shipments of $1,000 or more.

     3. Warranty and Product Return Policy.

          (a) This Agreement does not in any way expand or supersede any warranty of Fuji with respect
to the quality or performance of any product, all of which warranties if any, are enclosed with
such products or set forth in the terms of sale that apply to such products. ANY SUCH WARRANTY (IF
ANY) IS EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED (INCLUDING, WITHOUT
LIMITATION, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE). FUJI SHALL NOT BE
LIABLE FOR SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES.

          (b) Full credit or replacement will be made only for Products found to be defective in
manufacture, labeling or packaging but such Products may be returned only if the defects are
reported to the Fujifilm Regional Distribution Center serving the Customer’s account within ten
days after receipt of the Products and written authorization is given to return such Products.

     4. Arbitration. All disputes, controversies or differences which arise between the
parties, out of or in relation to or in connection with this Agreement, which cannot be amicably
settled shall be finally settled by arbitration before an arbitrator pursuant to the rules of the
American Arbitration Association. Arbitration may be commenced at any time by the party seeking
resolution by giving written notice to the other party that such dispute has been referred to
arbitration pursuant to the terms of this Section. Arbitration requested by Customer shall be
conducted in New York, New York and arbitration requested by Fuji shall be conducted in San
Francisco, California. The arbitrator shall be selected by the mutual Agreement of the parties,
but if the parties do not so agree within twenty (20) days after the date of the arbitration
notice, the arbitrator shall be selected pursuant to the rules of the American Arbitration
Association. Any award rendered by the arbitrator shall be conclusive and binding upon the
parties. This provision for arbitration shall be specifically enforceable by the parties and the
decision of the arbitrator in accordance herewith shall be final and binding and there shall be no
right of appeal therefrom.

     5. General.

     5.1. Except as provided herein, neither party hereto may assign its rights or delegate its
obligations hereunder without the prior consent of the other party. Any such purported assignment
or delegation, in the absence of such consent, will be void and without effect.

     5.2 Neither party shall be responsible or liable in any way for failure or delay in carrying
out the terms of this Agreement resulting from any cause or circumstances beyond its reasonable
control, including but not limited to, fire, flood, war, labor difficulties, interruption of
transit, accident, explosion, civil commotion, and acts of any governmental authority. No such
failure or delay shall terminate this Agreement, and each party shall complete its obligations
hereunder as promptly as reasonably practicable following cessation of the cause or circumstances of such
failure or delay.

 

 

     5.3 The waiver, express or implied, by either party of any right hereunder will not constitute
a waiver of any other right.

     5.4 All notices, consents, approvals, or other communications hereunder shall be in writing
and shall be deemed given if delivered personally or sent by overnight courier service, or sent by
facsimile or e-mail, promptly confirmed by overnight courier service, as set forth above, addressed
to the parties at the following addresses (or at such other address for a party as shall be
specified by like notice, provided that notice of a change of address shall effective only upon
receipt):

	 	 	 	 	 
	 

	 	If to Fuji:
	 	If to Customer:
	 
	 	 	 	 
	 

	 	FUJIFILM U.S.A., Inc.
	 	Shutterfly, Inc.
	 

	 	200 Summit Lake Drive
	 	2800 Bridge Parkway
	 

	 	Valhalla, New York 10595
	 	Redwood City, CA 94065
	 

	 	Attention: Doug Fachnie
	 	Attn: Chief Financial Officer
	 

	 	Fax: 914-789-8696
	 	Fax: 650-654-1299
	 

	 	Email: dfachnie@fujifilm.com
	 	Email:srecht@shutterfly.com
	 
	 	 	 	 
	 

	 	with copies to (which shall
	 	with copies to (which shall
	 

	 	not constitute notice):
	 	not constitute notice):
	 
	 	 	 	 
	 

	 	FUJIFILM Holdings America Corporation
	 	Shutterfly, Inc.
	 

	 	200 Summit Lake Drive
	 	2800 Bridge Parkway
	 

	 	Valhalla, New York 10595
	 	Redwood City, CA 94065
	 

	 	Attention: Legal Division
	 	Attn: Legal
	 

	 	Fax: (914) 789 8514
	 	Fax: 650-654-1299
	 

	 	Email: jfile@fujifilm.com
	 	Email: legal@shutterfly.com

Any notice, consent, approval and other communication shall be deemed given, in the case of
overnight courier service, on the next business day following its deposit with the courier, and, in
the case of facsimile or e-mail, upon transmission if confirmed by courier as set forth above.

     5.5 The validity, construction and performance of this Agreement will be governed by and
interpreted in accordance with the laws of the State of New York (excluding its rules of conflict
of laws other than Section 5-1401 of the New York General Obligations Law).

     5.6 This Agreement supersedes all prior oral and written communications between the parties
hereto concerning, and constitute their sole and exclusive understanding with respect to, the
subject matter hereof. This Agreement may not be amended except by a writing signed by both
parties hereto.

 

 

[SIGNATURE PAGE FOLLOWS]

 

 

          IN WITNESS WHEREOF, the parties, intending to be legally bound, have caused this Agreement to
be executed by their duly authorized representatives as of the date and year first above written.

	 	 	 	 	 	 	 	 	 
	FUJIFILM U.S.A., INC.	 	 	 	SHUTTERFLY, INC.
	 
	 	 	 	 	 	 	 	 
	By:

	 	/s/ Hiro Saki
	 	 	 	By:
	 	/s/ Stephen E. Recht
	 

	 	 
	 	 	 	 	 	 
	Name:

	 	Hiro Sakai
	 	 	 	Name:
	 	Stephen E. Recht
	Title:

	 	Senior Executive Vice President
	 	 	 	Title:
	 	Chief Financial Officer

 

 

EXHIBIT A

Customer Name indicated on Agreement:   
       ShutterFly, Inc.

Date Agreement Commences:  
          
          
            
      Customer Initials:   
                 

FUJIFILM U.S.A., Inc., 200 Summit Lake Drive, Valhalla, New York 10595-1356, hereinafter
referred to as “ Fuji”, agrees to sell to ShutterFly, Inc. with main offices at 2800 Bridge
Parkway, Redwood City, CA, hereinafter referred to as “Customer”, and Customer agrees to purchase
from Fuji, the Product(s) (as hereinafter defined), upon the terms and conditions herein set forth.

In consideration for Fuji’s agreement to provide Customer temporarily with the Product(s) (as
listed below) at no additional charge, Customer agrees to the terms and conditions set forth
herein, in addition to the terms and conditions set forth in the Agreement.

	 	 	 	 	 
	 	 	PRODUCT	 
	PRODUCT(S) DESCRIPTION	 	PRICE	 
	[*]
	 	[*]     USD
	[*]
	 	[*]     USD
	[*]
	 	[*]     USD

General Terms and Conditions. The term of this Exhibit A shall coincide with the term of the
Agreement. During the term of the Agreement, Customer shall be solely responsible for the upkeep
and maintenance of the Product(s), and if returned to Fuji, shall return the Product(s) in the same
condition in which it was received from Fuji, ordinary wear and tear excepted.

Title to the Product(s) shall remain with Fuji, and such Product(s) shall be returned promptly to
Fuji upon the expiration of the Term (as defined in the Agreement) or earlier termination of the
Agreement, unless Customer elects to purchase such Product(s). Customer shall be entitled to
purchase such Product(s) at the end of the Term or, if both Fuji and Customer mutually consent to
the earlier termination of the Agreement, prior to the end of the Term. In the event Customer so
elects to purchase such Product(s), Customer shall provide written notice thereof to Fuji, after
which Fuji shall invoice Customer for such Product(s) with payment terms of Net 30 days from date
of invoice. The purchase price set forth in such invoice shall be (i) at the applicable Product
Price set forth above if Customer elects to purchase such Product(s) prior to the end of the Term
by mutual consent of the parties or (ii) a price mutually agreed upon by Customer and Fuji if
Customer elects to purchase such Product(s) at the end of the Term. Prices and terms stated in
this Exhibit A are subject to change by Fuji at any time upon thirty (30) days’ prior written
notice to Customer.

Customer hereby authorizes Fuji to execute on its behalf and file a UCC-1 to evidence its retention
of a security interest in the applicable Product.

Customer shall not reproduce, modify or otherwise alter the Product(s), or remove such Product(s)
from the address indicated above, without the express written consent of Fuji.

This Exhibit A does not in any way expand or supersede any warranty of Fuji with respect to the
quality or performance of the Product(s), all of which warranties, if any, are enclosed with such
products when shipped or set forth in the terms of sale that apply to such Products. ANY SUCH
WARRANTY (IF ANY) IS EXCLUSIVE AND IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED (INCLUDING,
WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE). FUJI
SHALL NOT BE LIABLE FOR SPECIAL, CONSEQUENTIAL OR INCIDENTAL DAMAGES ARISING FROM THE PRODUCT(S).

Upon notice by Fuji that Customer breached any of the terms or provisions set forth in the
Agreement, including any failure to pay or to purchase all of its Paper and Chemistry requirements
from Fuji, or upon the reasonable demand of Fuji, Customer shall promptly return to Fuji, or
contact Fuji’s sales representative to arrange for the

 

			
	[*]	 	Confidential treatment requested

 

 

removal of, the Product(s) listed above. In the event Customer does not return, or make such
arrangements for removal of, the Product(s), Fuji may, subject to applicable law, take all actions
necessary to repossess such Product(s), with Customer bearing all reasonable costs thereof incurred
by Fuji in connection with such actions. In addition to any and all other damages permitted by law
or herein, Customer shall become liable to Fuji for payment of rent on each item of the Product(s)
at a rate of $200 per day, commencing five days from the date upon which notice of repossession is
sent by Fuji and continuing until such time as Fuji is allowed to regain possession of the
Product(s).

 

 

EXHIBIT B

CONFIDENTIAL SHUTTERFLY.COM

CHEMICAL PRICE

	 	 	 	 	 	 	 	 	 	 	 
	FUJIFILM	 	Future	 	 	 	 	 	 	 	 
	Material	 	FUJIFILM	 	 	 	Package	 	 	 	[*] Invoice
	#	 	Material #	 	Product Name	 	Unit	 	Unit Makes	 	Price
	[*]

[*]

[*]

[*]

[*]

	 	[*]

[*]

[*]

[*]

[*]
	 	[*]

[*]

[*]

[*]

[*]
	 	55 Gallon Drum

55 Gallon Drum

55 Gallon Drum

55 Gallon Drum

1 Gallon Bottle
	 	212 Gallons

220 Gallons

220 Gallons

7040 Gallons
	 	[*]

[*]

[*]

[*]

[*]

 

			
	[*]	 	Confidential treatment requested

 

 

EXHIBIT C

Truckload Configuration Guideline

For shipments from Fujifilm manufacturing, Greenwood, South Carolina

     Bulk Packaged Product:

     Bulk Packaged paper is in light tight bags only, no protective corrugated shipper provided.

     4"x1750' and 5"x1150' are examples of bulk packaged product.

     24 pallets required to fill truck trailer on one layer, bulk paper cannot be stacked in
transit.

     Standard manufacturing configuration: one size, same surface per pallet (nominal quantity).

     From time to time, some pallets may be less than nominal quantity for production reasons.

     Color paper in widths of 16 inches or wider are boxed, however, like bulk package, they cannot
be stacked

     without significant risk of product damage in transit.

     Box Packaged Product:

     38 pallets required to fill truck trailer with 3.5 to 12 inch widths in standard 610, 575 or
295 foot lengths, on two layers.

     Color paper in widths of 16 inches or wider are boxed, however, like bulk package, they cannot
be stacked

     without significant risk of product damage in transit.

     Standard manufacturing configuration: one size, same surface per pallet (nominal quantity)

     From time to time, some pallets may be less than nominal quantity for production reasons.

     Mixed Box and Bulk Packaged Product:

     A load bar is used to prevent the second layer of boxed product from falling over onto bulk
product.

     There are 24 pallet spaces on the truck floor. Maximum product weight about 43,000 pounds at
this writing.

     The following are examples of permissible shipment configurations, subject to the restrictions
above and precise weight of products ordered:

	 	 	 	 	 	 	 	 	 	 	 	 	 
	Bulk Pallets	 	Box Pallets	 	Total	 	Weight (Aprox)
	24
	 	 	 	 	 	 	24	 	 	 	38,208	 
	22
	 	 	4	 	 	 	26	 	 	 	39,224	 
	20
	 	 	8	 	 	 	28	 	 	 	40,240	 
	18
	 	 	12	 	 	 	30	 	 	 	41,256	 
	16
	 	 	16	 	 	 	32	 	 	 	42,272	 
	14
	 	 	16	 	 	 	30	 	 	 	39,088	 
	12
	 	 	20	 	 	 	32	 	 	 	40,104	 
	10
	 	 	24	 	 	 	34	 	 	 	41,120	 
	8
	 	 	28	 	 	 	36	 	 	 	42,136	 
	6
	 	 	30	 	 	 	36	 	 	 	41,052	 
	4
	 	 	34	 	 	 	38	 	 	 	42,068	 
	2
	 	 	36	 	 	 	38	 	 	 	40,984	 
	0
	 	 	38	 	 	 	38	 	 	 	39,900	 

- 11 -

 

May 22, 2007

Shutterfly, Inc.

2800 Bridge Parkway

Redwood City, CA 94065

Attn: Chief Financial Officer

To the Chief Financial Officer:

Reference is made to that. certain Supply Agreement between Shutterfly, Inc. (“Shuttertly”) and
Fuji Hunt Photographic Chemicals, Inc., now known as FUJIFILM Hunt Chemicals U.S.A., Inc. (“Fuji
Hunt”), an affiliate of FUIIFILM U.S.A., Inc, (“FUJIFILM”), dated November 22, 2004 and as amended
May 17, 2005 (the “2004 Supply Agreement”).

The parties hereto acknowledge and agree that pursuant to the 2004 Supply Agreement, title to
Rockwell Hitec HV3 Automatic Chemical Mixer #1 passed to Shutterfly on April 22, 2006.
Furthermore, in consideration of executing the Supply Agreement dated April 20, 2007 by and between
Shutterfly and FUJIFILM (the “2007 Supply Agreement”), Fuji Hunt will transfer title to Rockwell
Hitec HV3 Automatic Chemical Mixer #2 on the effective date of the 2007 Supply Agreement.

The parties hereto also acknowledge and agree that the 2004 Supply Agreement shall terminate on the
effective date of the 2007 Supply Agreement.

This Agreement may be executed in any number of counterparts, each of which when executed and
delivered shall be deemed an original and all of which counterparts, when taken together, shall
constitute one and the same agreement.

- 12 -

 

If the foregoing correctly sets forth our understanding as to the matters covered hereby, please
execute and return to the undersigned the enclosed copy of this letter.

	 	 	 	 	 
	 	 	Very truly yours,
	 
	 	 	 	 
	 	 	FUJIFILM HUNT CHEMICALS U.S.A., INC.
	 
	 	 	 	 
	 

	 	By:
	 	/s/ Guy M. Poisson
	 

	 	 	 	 
	 	 	Name: Guy M. Poisson
	 	 	Title: Director of Credit and Risk Management

	 	 	 	 	 
	ACCEPTED AND AGREED TO:	 	 
	 
	 	 	 	 
	SHUTTERFLY, INC.	 	 
	 
	 	 	 	 
	By:

	 	/s/ Stephen E. Recht	 	 
	 

	 	 	 	 
	Name: Stephen E. Recht	 	 
	Title: Chief Financial Officer	 	 
	 
	 	 	 	 
	FUJIFILM U.S.A., INC.	 	 
	 
	 	 	 	 
	By:
	 	 	 	 
	 

	 	 	 	 
	 
	Name:

	 	 

	 	 
	Title:

	 	 

	 	 
	 

	 	 

	 	 

cc: Shutterfly Legal

- 13 -EX-10.1

 

Exhibit 10.1

AGREEMENT

     This Agreement, made as of the 5 day of July, 2007 by and between
TOLLGRADE COMMUNICATIONS, INC., a Pennsylvania corporation (the “Corporation”) and JOSEPH A.
FERRARA, 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
reorganization that would result in the voting securities of the Corporation

2

 

	 	 	 	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 effect immediately prior to a
Change-in-Control, or any removal of the Executive

3

 

	 	 	 	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 11(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 immediately prior to a
Change-in-Control or executive offices located within 50

4

 

	 	 	 	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)	 	Except as set forth in clause (c) of this Section 4, 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 remuneration 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.

     (c) Contemporaneously with this Agreement, the parties are entering into a letter agreement
pursuant to which Executive may be entitled to certain severance payments in the event Executive’s
employment is terminated by Tollgrade without cause (as defined in such agreement) (the “Severance
Agreement”). It is possible that a termination of Executive’s employment may fall within the scope
of both agreements. In such event, Executive will be entitled to receive the higher of the amount
payable to him under this Section 4 and any amount payable under Section 3 of the

7

 

Severance Agreement, but not the aggregate of such amounts.

     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
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

8

 

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.

     10. Noncompetition. The Executive covenants and agrees that if the Executive
receives payment under Section 4(b)(ii) of this Agreement, then during the Restricted Period, the
Executive shall not in the United States of America, directly or indirectly, whether as principal
or as agent, officer, director, employee, consultant, shareholder or otherwise alone or in
association with any other person, corporation or other entity, engage or participate in, be
connected with, lend credit or money to, furnish consultation or advice or permit the Executive’s
name to used in connection with, any Competing Business. For purposes of this Agreement, the term
“Restricted Period” shall mean a number of years following the termination of Executive’s
employment with the Corporation equal to the number calculated pursuant to Section 4(b)(ii)(A) of
this Agreement, plus any amount of time during such period during which the Executive is in
violation of this provision. For purposes of this Agreement, the term “Competing Business” shall
mean any person, corporation or other entity engaged in the business of selling or attempting to
sell any product or service which competes with (a) products or services sold by the Corporation
within the two (2) years prior to termination of the Executive’s employment or (b) new products of
the Corporation with respect to which the Corporation had allocated engineering resources at the
date of the Executive’s termination to develop such new products.

     11. 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.
	 
	 	(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

9

 

	 	 	 	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 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

10

 

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.

11

 

     IN WITNESS WHEREOF, this Agreement has been executed on the date first above written.

	 	 	 	 	 
	 	TOLLGRADE COMMUNICATIONS, INC.

 	 
	 	By:  	/s/ Joseph O’Brien
 	 

	 	 	 	 	 
	 	/s/ Joseph A. Ferrara
 	 
	 	Joseph A. Ferrara 	 
	 	 	 
	 

12

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