Turnkey Service And Purchase Agreement

TURNKEY SERVICE AND PURCHASE AGREEMENT



This Agreement is effective as of August 31, 1999 and is between Cobalt Networks, Inc., a California corporation ("Cobalt"), having offices located at 555 Ellis Street, Mountain View, CA, 94043 and SMTC Manufacturing Corporation, a California corporation ("SMTC"), having office at 2302 Trade Zone Blvd, San Jose, CA 95131.







A. Cobalt is a developer and marketer of network appliances and SMTC is a provider of turnkey contract manufacturing and order fulfillment services to technology companies.



B. Cobalt wishes to utilize A services to manufacture Cobalt's network appliance products and fulfill orders for such products and SMTC wishes to provide such services to Cobalt.



In consideration of the premises and mutual covenants contained herein, the parties agree as follows:



1. DEFINITIONS



1.1 "Assembly" means a hardware reference design and associated

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documentation which provides the design and associated bill of materials

for a Cobalt network appliance product to enable SMTC to manufacture such

product for Cobalt and package such product for shipment to customers.



1.2 "Board" means a fully assembled printed circuit board subassembly for

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a Cobalt network appliance product.



1.3 "A" means an engineering change order or notice from Cobalt

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requiring a change in the Assembly for a particular Cobalt network

appliance product.



1.4 "Finished Good" means a fully assembled Cobalt network appliance

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product packaged and ready to ship to a customer.



1.5 "Intellectual Property Rights" means all intellectual or proprietary

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rights, including but not limited to, copyrights, moral rights, patent

rights (including patent applications and disclosures), rights of privacy,

mask work rights, and trade secret rights, recognized in any country or

jurisdiction in the world.



1.6 "Product" means a particular Cobalt network appliance product listed

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on Appendix A, which Appendix also sets forth the initial prices and

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material costs applicable to each such Product.



1.7 "Manufacturing Site" means the SMTC manufacturing site selected by

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mutual agreement of Cobalt and SMTC to manufacture and assemble Boards. The

initial manufacturing site will be the SMTC facility in San Jose, CA.



2.0 APPOINTMENT



2.1 Appointment. Cobalt hereby appoints, and SMTC hereby accepts

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appointment, as an independent, nonexclusive contract manufacturer and

order fulfillment service for all Cobalt Products.

3.0 SPECIAL PURCHASE ORDER PROCEDURE FOR FIRST 90 DAYS



3.1 Special Purchase Order. On the effective date of this Agreement,

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Cobalt shall place a firm written purchase order (the "Special Purchase

Order") to purchase Finished Goods for delivery to Cobalt customers during

the first 90 days of this Agreement (the "Initial Term"). The purchase

order will specify the number of Finished Goods of a particular Product

which Cobalt desires to purchase, the requested date(s) for availability of

such Finished Goods for delivery to Cobalt customers and the prices

applicable to such Finished Goods. The Special Purchase Order is non-



3.2 Rescheduling; Increased Quantities. Cobalt may reschedule the monthly

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portion of the Special Purchase Order once per month by giving written

notice to SMTC, provided that the rescheduled date for availability to

Cobalt customers is within thirty (30) days of the originally scheduled

date. During the Initial Term, Cobalt may increase the quantity of Finished

Goods ordered for a particular month upon written notice to SMTC prior to

the end of the preceding month; provided, however, that SMTC will not be

obligated to accept any portion of a purchase order which is more than

100% above the amount originally ordered for a particular month. SMTC will

confirm acceptance of this increase in writing within 5 days. For the

purposes of this Agreement, months shall be calculated from the effective

date of this Agreement.





4.0 BUILD-TO-ORDER AND ORDER FULFILLMENT







4.1 Rolling Forecast. On the effective date of this Agreement and on each

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monthly anniversary thereafter, Cobalt shall provide SMTC with a six (6)

month rolling forecast of requirements for Boards for each Product in the

form attached hereto as Appendix B (the "Forecast"). The Forecast will be

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non-binding; provided, however, that commencing with the Forecast delivered

on the third monthly anniversary of this Agreement, the first month of each

Forecast will be binding. Cobalt is liable for all completed Boards covered

by Notices (defined in Section 4.3) and work in process Boards covered by a

binding Forecast. A list of the completed Boards covered by Notices and the

work in process Boards shall be provided by SMTC if requested in writing by





4.2 Manufacturing; Inventory of Assembly Components. During the term of

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this Agreement, SMTC shall direct its Manufacturing Site to manufacture and

configure Finished Goods per Notices and have Finished Goods available for

delivery to Cobalt's customers at all times. SMTC agrees to provide upside

flexibility of [***] additional demand during [***] period, based on a

[***] average of rolling demand forecasts provided to SMTC by Cobalt. SMTC

shall at all times maintain sufficient quantities of Assembly components in

inventory to timely manufacture such Finished Goods determined by Cobalt

Notices. In addition, during each month for which the Forecast has become

binding, SMTC shall order a sufficient number of the long lead time items,

including those items set forth on Appendix C, within the lead times as

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would enable it to manufacture a number of Finished Goods in the second and

third months of such Forecast corresponding to the number of Boards in the

Forecast for such months. SMTC shall stock pile Boards at the Manufacturing

site for assembly into Finished Goods per Cobalt Notice. SMTC shall use its

best efforts to reduce the Assembly component supplier lead times and shall

promptly notify Cobalt of any change in such lead times. Cobalt may elect

to purchase Assembly components and consign them to SMTC for assembly into

Finished Goods.





4.3 Customer Supplied Components. In the event that Cobalt supplies

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components to SMTC, these components are being purchased by SMTC with

terms of payment of [***] days. The pricing for such customer

supplied components are set forth in Appendix A. In the event that the

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components have not been consumed by Cobalt





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requirements within [***] of receipt, SMTC has the right to return these

parts to Cobalt for immediate credit or, as an alternative, to mutually

agree to extend payment terms for an additional period until all components

are consumed in assemblies shipped to Cobalt. Cobalt remains liable for the

Cobalt unique components until they are consumed by assemblies build and

shipped by Cobalt.





4.4 Order Fulfillment. Cobalt shall have sole responsibility for

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soliciting and accepting orders from its customers for Finished Goods and

shall invoice its customers directly for Finished Goods ordered from

Cobalt. Cobalt shall provide SMTC with an order tracking number, customer

name, shipping address, method of shipping and promised delivery date for

each order accepted by Cobalt from a customer of the Products in the form

of notice or any other mechanism agreed to by Cobalt and SMTC (a "Notice").

SMTC shall fulfill each customer order to meet the promised delivery date

set forth in the Notice form. SMTC shall provide a variety of shipping

options for Cobalt's customers and shall ship Finished Goods to customers

at the most favorable rate available to SMTC for the chosen shipping

option. To the extent that Cobalt's customer has specific shipping

instructions or routing guides, SMTC shall ship Finished Goods to Cobalt's

customers in accordance with the specific shipping instructions or routing

guides. All freight, federal, state, and local sales, use, excise, and

similar taxes and charges arising in connection with the sale and delivery

of the Products to Cobalt's customers shall be borne by Cobalt. All

expenses relating to interfacing Cobalt's MRP system with SMTC shall be

borne by SMTC.





4.5 System Interfaces. SMTC shall be responsible for the expenses related

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to the interface between Cobalt's MRP system and SMTC's systems, including

all data transmission lines mutually agreed upon and any related costs for

wiring required at the SMTC manufacturing facility. SMTC shall not be

responsible for the cost of any Cobalt specific hardware, such as servers,

computers and printers.





4.6 Inspection. Cobalt shall inspect the first production run of Boards

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and Finished Goods at the Manufacturing site and verify conformance

requirements, which may include Cobalt engineering or manufacturing

inspection. After Cobalt has reviewed the first Boards and authorized their

release to production, SMTC shall use its best efforts to ensure that the

Manufacturing Site maintains conformance to Assembly requirements.



SMTC will provide incoming and outgoing inspection, assembly and test

methods consistent with generally accepted industry standards and/or Cobalt

specific inspection requirements mutually agreed to by both parties. The

incoming inspection includes, but is not limited to, component level





4.7 Designated Suppliers. SMTC will issue purchase orders for Assembly and

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Boards to Suppliers Listed on Appendix D, and for Assembly components to

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the suppliers listed on Cobalt Approved Vendor List. SMTC shall only

purchase Assembly components specified and approved by Cobalt. Any changes

in Assembly components or suppliers are subject to Cobalt's advance written



4.8 Returns. SMTC shall not accept any returns of Finished Goods from

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Cobalt customers unless authorized by Cobalt in writing pursuant to

the return material authorization procedures set forth on Appendix E.

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SMTC shall maintain a cross-ship warehousing area to handle returns and

cross shipments required to replenish failed units. Data on this stock

shall be reported weekly. SMTC shall provide serialization and failure

analysis data to Cobalt for design and customer feedback. In the event of

epidemic failures [to be defined by Cobalt and SMTC], SMTC will reimburse

Cobalt for all reasonable costs associated with maintaining customer

goodwill if the failures are due to a manufacturing defect including, but

not limited to, product logistics, expediting of repairs, and negotiations

with component suppliers





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with prior mutual agreement between the parties. In any event, Cobalt shall

not be entitled to and SMTC shall not be liable for indirect, special,

incidental, or consequential damages of any nature, including but not

limited to loss of profit, promotional or manufacturing expenses, overhead,

injury to reputation or loss of Cobalt customer networks. If the failures

are not due to a SMTC manufacturing defect, SMTC will assist Cobalt as

required in the areas of logistics, expediting of repairs, and negotiations

with component suppliers and will charge for these activities on a cobalt

pre-approved, written basis.



4.9 Product Changes and Discontinuation. Cobalt reserves the right to

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modify or change the Assembly for any of the Products by providing an ECO

to SMTC; provided that Cobalt shall be obligated to reimburse SMTC for the

cost of any applicable charge, including restocking charge, due to the

return of replaced or superceded Assembly components to a vendor or, if

SMTC is unable to return replaced or superceded Assembly components listed

in Appendix C to a vendor, Cobalt shall be obligated to accept such

delivery of, and reimburse SMTC for, such Cobalt unique components. Cobalt

acknowledges that ECOs may result in price changes and changes in the

delivery schedules of Boards and/or Finished Goods. SMTC shall notify

Cobalt of any changes in delivery schedules caused by SMTC's suppliers

under ECO or otherwise. SMTC agrees to respond to Cobalt with the impact of

any ECO on the price, delivery, one time costs and quality of an Assembly

within the following schedule, based on the urgency of the change upon

receipt of the order or notice:





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ECO PRIORITY CODE SMTC RESPONSE TIME

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Emergency 1 business day

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Routine 1 business week

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SMTC and Cobalt will review and mutually agree upon the material impact of

any ECO. All Finished Goods and work-in-process requiring treatment by any

ECO will be considered rework. Cobalt may negotiate price changes caused by

an ECO directly with SMTC. Cobalt shall bear the costs of any assembly

rework or delays prior to delivery if such rework or delay is due to Cobalt

design of Assembly, engineering changes or products or parts that have been

supplied to and/or purchased by SMTC from Cobalt. Such products are listed

in Appendix F.

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5.0 Payment Terms



5.1 Prices. The initial prices for each Product are set forth on Appendix

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A. Cobalt may add additional Products to Appendix A during the term of this

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Agreement. Cobalt shall pay SMTC for each Finished Product shipped by SMTC

to a customer [***] from the date of invoice.





5.2 Price Changes. SMTC shall immediately notify Cobalt in writing of any

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change in price of any Assembly component that increases the total cost of

a Finished Good by more than [***] or any increase of more than [***] in

price of any Assembly component with a cost of [***] or more. In such

event, Cobalt and SMTC shall negotiate an appropriate price change. If

Cobalt and SMTC are unable to agree to a new price, SMTC and/or Cobalt may

delete the affected items from the Assembly and Cobalt may elect to

purchase Assembly components and consign them to SMTC for assembly into

Finished Goods.





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In the event that Cobalt consigns Assembly components to the SMTC, pursuant

to this section, the applicable prices shall be reduced by the listed

material cost of such deleted Assembly components as indicated in Appendix

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A.. SMTC shall warehouse any consigned Assembly components from Cobalt and

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be liable for theft or shrinkage of such Assembly components. SMTC shall

receive a fee for warehousing and handling any Assembly components

consigned by Cobalt as set forth in Appendix A.

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5.3 Price Review on Hard Drives and Memory. Cobalt and SMTC agree to

mutually review pricing on hard drives and memory on a monthly basis. SMTC

will provide pricing for these commodities to Cobalt on or before the

20/th/ day of each calendar month. Acceptance of revised pricing for these

hard drive and memory commodity components is by mutual agreement between

Cobalt and SMTC by no later than the 25/th/ day of each calendar month. The

selling price of assemblies affected by revised hard drive or memory costs

will be adjusted for the calendar month following the cost revision. Any on

hand raw material, work in process, finished goods inventories or material

in transit will have the appropriate debt or credit applied based on the

monthly pricing review.





5.4 Cost Reductions. During the term of this Agreement and any renewal

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period, SMTC shall make reasonable efforts to reduce the cost of each

Product by a minimum of [***] per calendar quarter, excluding Cobalt

consigned Assembly Components. Cobalt and SMTC shall each designate a

representative to coordinate such cost reduction efforts. Cobalt and SMTC

shall review Product cost and quality monthly for existing products and

shall mutually establish costs for new Product(s) as released from Cobalt.

In the event that this Agreement is renewed, Cobalt and SMTC shall

establish the initial costs for the Products during the renewal terms 30

days prior to the start of the renewal period.





5.5 Special Provision for Non Cancelable Items and Boards. In the event

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that this Agreement is terminated for any reason, Cobalt shall reimburse

SMTC for the non-cancelable Assembly components within the leadtimes set

forth on Appendix C, completed and work-in-process Boards covered by a

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binding Forecast, Finished Goods that are in RMA stockroom or under RMA

repair, and past due rework charges outstanding.





5.6 Special Performance Bonuses and Penalties. Cobalt and SMTC agree that

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available-to-promise("ATP"), on time delivery of Finished Goods ("OTD")and

out-of-box audit ("OBA") are critical to Cobalt's customers satisfaction.

SMTC's compensation under this Agreement shall be adjusted monthly after

the Initial Term based on the foregoing criteria in accordance with the

following matrix:





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Type of Cobalt Customer Criteria Cobalt Req. Monthly

ship date (mo. Bonus

ave)

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OEM type customer (larger OTD late or Less than 1 day Add [***]

volumes with scheduled early OBA

delivery over time) Yield Greater than 99.95 Add [***]

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Direct Sales (smaller ATP Less than 2 days Add [***]

immediate ship orders) OBAYield Greater than 99.95% Add [***]



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Type of Cobalt Customer Criteria Penalty

not met



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OEM type customer (larger Greater than 1 day Subtract [***] for every day late

volumes with scheduled or early

delivery over time) Less than 99.95 Subtract [***] for every .05% yield

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Direct Sales (smaller Greater than 2 days Subtract [***] for every day late

immediate ship orders) Less than 99.95 Subtract [***] for every .05% yield

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All time based criteria shall be measured from the time Cobalt submits a

customer's order to SMTC until such customer's Finished Good(s) leaves

SMTC's premises or designated point of distribution. Compensation shall be

adjusted monthly and calculated as a percentage of the total cost of Boards

and Assembly components procured by SMTC for the Finished Goods shipped to

a particular type of customer during a particular month and based on the

average number of days late/early all shipments to such type of customer

were in a particular month. A sample calculation is contained in Appendix

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H. Bonus payments shall be paid quarterly. Penalties shall be payable by

offsetting amounts due SMTC under this Agreement. There is a [***] limit as

to the OTD penalty that may be imposed in a particular quarter. There is a

[***] limit to the ATP penalty that may be imposed in a particular month.

There is a [***] limit to the OBA Yield that may be imposed in a particular

month. Cobalt may conduct OBA audits of packaged Finished Goods at SMTC

shipping facility during normal business hours.





6.0 QUALITY AND GENERAL REPORTING REQUIREMENTS



6.1 SMTC shall provide the following reports or information to Cobalt:





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REPORT / INFORMATION FREQUENCY

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Available to Promise Report Daily

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Final Assembly Schedule Twice Weekly

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FGI Receiving / Shipping Log Daily

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MFG WIP reports (by board type & system level) Twice Weekly

- Qty in 1st OP.

- Qty in 2nd OP.

- Qty in Box Build

- Qty in test

- Qty in Debug

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YIELD reports (by board type & system Ivl) Weekly

- Inspection

- 1/st/ Functional

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