Outsourcing Agreement

OUTSOURCING AGREEMENT


BETWEEN


INTERNATIONAL BUSINESS MACHINES CORPORATION


AND


MANUFACTURERS' SERVICES WESTERN U.S. OPERATIONS, INC.


EFFECTIVE DATE


JUNE 1, 1998


---------- [*] = Information redacted pursuant to a confidential treatment request. An unredacted version of this exhibit has been filed separately with the Commission.


IBM Confidential


OUTSOURCING BASE AGREEMENT


This Outsourcing Base Agreement and the five (5) attachments listed below which are hereby incorporated by reference ("Agreement") is entered into by and between International Business Machines Corporation, a corporation incorporated under the laws of New York, U.S.A., having an office for the transaction of business at 8501 IBM Drive, Charlotte, North Carolina 28262 ("IBM"), and Manufacturers' Services Western US Operations, Inc., a corporation incorporated under the laws of California, U.S.A., having an office for the transaction of business at 5600 Mowry School Road, Newark, CA 94560 ("MSL").


WHEREAS, IBM desires to sell certain IBM assets and transition services to MSL and MSL desires to purchase certain IBM assets and transition services from IBM in order for MSL to manufacture and sell products to IBM, and


WHEREAS, MSL desires to employ certain IBM personnel and lease certain IBM space in Charlotte, North Carolina, and IBM desires to make available certain IBM personnel and lease certain IBM space to MSL in order for MSL to manufacture and sell products to IBM, and


WHEREAS, MSL desires to manufacture and sell products to IBM and IBM desires to purchase such products,


NOW THEREFORE, in consideration of the promises contained herein, IBM and MSL (each a "Party" and together the "Parties") agree to the following terms and conditions:


The Parties agree that this Agreement regarding this transaction consists of:


a) the Outsourcing Base Agreement


b) Attachment 1: Statement of Work and its Product Attachments, Appendices,
and Supplements


c) Attachment 2: Employee list and Benefits Information


d) Attachment 3: Asset List


e) Attachment 4: Expense Participation


f) Attachment 5: Equipment and Program Loan List


g) Agreement for Exchange of Confidential Information Number 4998S60076


h) IBM Purchase Orders


i) IBM Customer Orders


j) Equipment and Program Loan Agreement


The following is a related agreement between MSL and IBM:


IBM Corporation (Landlord) and MSL (Tenant) Lease Agreement


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By signing below, the Parties agree to the terms of this Agreement. Once signed, 1) any signed reproduction of this Agreement made by reliable means (for example, photocopy or facsimile) is considered an original, and 2) all products and services delivered by either Party to the other under this Agreement are subject to the terms and conditions of this Agreement.


Agreed to: Agreed to: Manufacturers' Services Western U.S. International Business Machines Operations, Inc. Corporation


By: /s/ Kevin C. Melia By: /s/ R. G. Richter
-------------------- --------------------------
Authorized Signature Authorized Signature


Name: Kevin C. Melia Name: R. G. Richter
------------------ ------------------------


Date: May 5, 1998 Date: May 5, 1998
------------------ ------------------------


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SECTION 1.0 DEFINITIONS........................................ Page 4


SECTION 2.0 ORDER OF PRECEDENCE................................ Page 5


SECTION 3.0 SCOPE OF WORK...................................... Page 6


SECTION 4.0 TERM............................................... Page 6


SECTION 5.0 TERMINATION........................................ Page 6


SECTION 6.0 PAYMENT............................................ Page 9


SECTION 7.0 AUDIT.............................................. Page 10


SECTION 8.0 PURCHASE OF ASSETS................................. Page 11


SECTION 9.0 PERSONNEL.......................................... Page 12


SECTION 10.0 LEASE OF PREMISES................................. Page 13


SECTION 11.0 MANUFACTURING, FULFILLMENT, AND INTEGRATION....... Page 13


SECTION 12.0 TRANSITION SERVICES............................... Page 13


SECTION 13.0 INTELLECTUAL AND INDUSTRIAL PROPERTY.............. Page 13


SECTION 14.0 WARRANTIES........................................ Page 15


SECTION 15.0 INDEMNIFICATION AND LIMITATION OF LIABILITY....... Page 18


SECTION 16.0 GENERAL........................................... Page 19


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SECTION 1.0 DEFINITIONS


1.1 "Effective Date" shall mean the time when the Parties have acknowledged in
the certificate to be provided pursuant to Sections 14.1 and 14.2 that
approval has been obtained for all Governmental Actions required by all
Government Authorities necessary for each of the Parties to perform its
obligations under this Agreement including expiration or early termination
of the waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended.


1.2 "Execution Date" shall mean the date this Agreement is signed by
authorized representatives of both Parties.


1.3 "Days" shall mean business days as followed by a particular Work Center
(as defined below).


1.4 "Delivery Date" shall mean the committed ship date on the IBM Customer
Order or as specified by IBM.


1.5 "GMSV" shall mean Global Manufacturers' Services Valencia S.A. (an MSL
Related Company in Spain).


1.6 "Governmental Actions" shall mean any authorizations, consents, approvals,
waivers, exceptions, variances, franchises, permissions, permits, and
licenses of, and filings and declarations with Governmental Authorities


1.7 "Governmental Authority" shall mean any United States federal, state or
local, or other non-US court, governmental or administrative agency or
commission or other governmental agency, authority, instrumentality or
regulatory body.


1.8 "IBM Customer Order" shall mean orders from IBM and IBM customers that
will trigger the MSL fulfillment, manufacturing and/or integration
processes to meet the requested Delivery Date. Only orders received via
IBM's AAS, GEMS, EOSE, IPLS, IPRS, Q-Ship or an IBM Purchase Order shall
be authorization for MSL to build Products or provide services under this
Agreement.


1.9 "IBM" shall mean International Business Machines Corporation, Armonk, New
York, USA, and its Subsidiaries.


1.10 "Integration" shall mean a service associated with fulfillment for IBM
Customer Orders that require special treatment. Special treatment usually
consists of taking IBM and third party products and configuring the total
system to meet the integration statement of work.


1.11 "Miscellaneous Equipment Specification" ("MES") shall mean a set of Parts
used to upgrade Products.


1.12 "MSL Related Companies" shall mean Manufacturers' Services Limited
(Delaware, USA) and its Subsidiaries, including Global Manufacturers'
Services Valencia S.A.


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1.13 "Parts" shall mean parts, components, subassemblies and other materials
used by MSL to fulfill orders for IBM. Parts shall also include the
following:


(a) IBM Parts are those Parts which are purchased by MSL from
IBM,.


(b) IBM Designated Parts are those Parts purchased by MSL from IBM
nominated suppliers,


(c) IBM Consigned Parts are those Parts owned by IBM or IBM
customers which are consigned to MSL, and


(d) MSL Procured Parts are those Parts which are directly procured
by MSL and are other than IBM Parts or IBM Designated Parts.


1.14 "Products" shall mean Parts, a MES, machine types, request for price
quotation ("RPQ's"), model numbers and feature types purchased by IBM
under this Agreement and as further described in the Product Attachments.


1.15 "Product Attachment" shall mean Attachments A through G of the Statement
of Work and Exhibit 1 to Supplement 1 of the Statement of Work to this
Agreement which describes the details of a specific transaction or series
of transactions. Product Attachments are incorporated into and made a part
of this Agreement.


1.16 "Product Group" shall mean those Products relating to a particular
division's Product Attachment, each of which may include more than one
Product family.


1.17 "Purchase Order" shall mean a general order issued by IBM in which IBM
Customer Orders will be placed from IBM or its customers to MSL. Such
Customer Orders shall specify Products to be delivered to IBM, and shall
include Product identification, Delivery Dates, quantity and
specifications.


1.18 "Subsidiary" shall mean an entity during the time that more than 50% of
its voting stock (or, if no voting stock, decision-making power) is owned
or controlled, directly or indirectly, by another entity.


1.19 "Services" shall mean any services provided by one Party to the other,
which is not included in the services for specific Products described in
the applicable Product Attachment.


1.20 "Transition Services" shall mean services performed from the Effective
Date of Agreement through December 31, 1998, as described in Supplement 1
to the Statement of Work.


1.21 "Work Center" shall mean the MSL or MSL Related Company plant site
utilized to fulfill the obligations of this Agreement.


SECTION 2.0 ORDER OF PRECEDENCE


This Agreement replaces any prior oral or written communication between the Parties with respect to the subject matter of this Agreement. Order of precedence with regard to any conflict for this Agreement shall be as follows:


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1) Product Attachments


2) Appendices


3) Supplements


4) Statement of Work


5) Outsourcing Base Agreement, Employee List and Benefits
Information, Asset Lists


6) Purchase Orders


Notwithstanding the order of precedence set forth above, the following
sections of the Outsourcing Base Agreement shall not be modified or
superseded by any of the listed documents unless amended by a written
instrument duly executed by an authorized representative of each Party
making specific reference to such section:


i) Sections 5.1 and 5.2 of Termination,


ii) Section 8.0, Purchase of Assets,


iii) Section 13.0, Intellectual and Industrial Property,


iv) Section 14.0, Warranties, and


v) Section 15.0, Indemnification.


SECTION 3.0 SCOPE OF WORK


MSL will perform and manage selected manufacturing, Integration, and other
Services, as well as sell Products to IBM, as stated in the Statement of
Work and its Appendices, Attachments and Supplement for the Retail Store
Solutions ("RS"), Global Embedded Production Solutions ("GEPS"), Finance
Solutions, and other IBM business units.


SECTION 4.0 TERM


This Agreement shall become effective on the Effective Date and shall
continue for a period of [*] unless terminated as provided in Section 5.0.
This Agreement will automatically be renewed for periods of [*] unless
either Party gives [*] months written notice of its intent to terminate
this Agreement. Such renewals shall continue for successive periods under
the same terms and conditions, unless otherwise agreed in writing by both
Parties.


SECTION 5.0 TERMINATION


5.1 Breach


Notwithstanding anything in this Agreement to the contrary, this Agreement
may be terminated by either Party for cause as follows:


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a) in the event of a material breach or default by the other Party of a
material obligation of such Party under the Agreement which is not
remedied within [*] after a written notice is given of such default
or breach;


b) upon the occurrence of any of the following:


i) the other Party resolves to go into voluntary liquidation;


ii) a court orders the other Party to cease doing business;


iii) a receiver or administrative receiver is appointed over the
whole or any part of the assets or property of the other
Party;


iv) the other Party becomes unable to pay its debts because it is
subject to a suspension of payments order, bankruptcy, or
other insolvency proceeding; or


v) substantially all of the shares or assets of one Party are
acquired by an entity that competes directly with the other
Party.


In the case of i to v above, termination may also be effected by serving
notice on the liquidator, administrator, acquirer, or receiver, as the
case may be.


c) notice of the inability of the other Party to perform due to the
existence of a Force Majeure event, as described in Section 16.17 of
this Agreement, which is reasonably determined by the terminating
Party to be a continuing condition.


Provided, however, that no such termination under this section after the
Effective Date shall operate to rescind the transfer of the assets, as
listed in Attachment 3: Asset List, unless IBM terminates this Agreement
pursuant to Section 5.0 for MSL's failure to pay for such assets, in which
case MSL shall return, at its cost, all such assets in MSL's possession at
termination.


5.2 Rights Upon Termination


a) Upon the expiration or termination for default of this Agreement,
MSL will:


i) within [*] after expiration or receipt of termination notice
for default of this Agreement from IBM, cancel all Parts
purchase orders, and within [*], after such expiration or
termination notice, prepare and submit to IBM a written
inventory in reasonable detail of each of the following items
in MSL's possession as of the date of termination:


1. All Parts and partially completed Products. MSL shall
continue to provide a detailed listing of Parts purchase order
cancellations weekly until all issues are agreed to and resolved by
the Parties.


2. All labeling and packaging material used for Products.


3. All completed Products covered by a Purchase Order not
previously shipped to IBM.


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4. All IBM owned tooling.


ii) assist in the transfer of MSL responsibilities and Products as
described in Attachment 1: Statement Of Work, to IBM or to
another party that IBM designates.


iii) within [*] after expiration or termination of this Agreement,
MSL shall return to IBM all copies of IBM Product
documentation and all copies of any IBM confidential
documents, discs, tapes and other media materials containing
IBM confidential information of IBM.


b) Upon termination by IBM due to a default by MSL pursuant to Section
5.1 above, IBM shall, at its option, elect to do one of the
following:


i) be entitled to terminate all outstanding Purchase Orders
without liability for such termination and purchase MSL's
inventory of Parts, including Parts to be delivered to MSL to
meet IBM's forecasted requirements, subject to the Supply
Flexibility set forth in Appendix 4 to the Statement of Work.
This purchase shall not include any Parts that are cancelable
or otherwise transferable to IBM:


ii) require delivery of all partially completed, and completed
Products and inventory of purchased Parts, and buy them. This
shall include Parts purchased and to be delivered to MSL to
meet IBM's forecasted requirements, subject to the Supply
flexibility set forth in Appendix 4 to the Statement of Work,
but shall not include any Parts that are cancelable or
otherwise transferable to IBM; or


iii) require completion and delivery of any remaining units of
Products on order as of the date of termination including
inventory of purchased Parts and Parts purchased and to be
delivered to MSL to meet IBM's forecasted requirements,
subject to the Supply Flexibility set forth in Appendix 4 to
the Statement of Work, but not including any Parts that are
cancelable or otherwise transferable to IBM, and buy them, in
which case MSL's obligations under 5.2 a) iii will be
suspended until [*] after the appropriate Delivery Date.


c) Upon termination by MSL due to default by IBM, pursuant to Section
5.1 above, MSL shall complete Product(s) on order as of the date of
termination, sell them to IBM, and deliver and sell to IBM Parts
inventory. This shall include Parts purchased and to be delivered to
MSL to meet IBM's forecasted requirements, subject to the Supply
Flexibility set forth in Appendix 4 to the Statement of Work, but
shall not include any Parts that are cancelable or otherwise
transferable to IBM.


5.3 Prices Upon Termination


a) The price for completed Product(s) [*] shall be as described in
Attachment 1; Statement of Work. The Parties agree to negotiate in
good faith the price for partially completed Products, but in no


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event will MSL be required to accept a price for partially completed
Product that is lower than the completed Product price multiplied by
the "percentage of Product completion". Such a percentage shall
equal [*]. In no event will IBM be required to pay more for a
partially completed Product than the price for a completed Product.


[*]


b) The price for Parts, whether in inventory or on order to meet IBM's
forecasted requirements, shall be an amount equal to [*]. This shall
not be applicable to Parts that are cancellable or otherwise
transferable to IBM.


SECTION 6.0 PAYMENT


6.1 IBM to MSL


a) MSL will invoice IBM [*] for all completed Products, after shipping
transactions have been processed by MSL. MSL will invoice IBM [*]
for all Integration work after shipping transactions have been
processed by MSL. For all other Services, MSL will invoice IBM [*].
IBM will pay MSL within [*] Days after receipt of an acceptable
invoice.


b) MSL may offset any amount owed IBM by MSL against any amounts owed
MSL by IBM upon written approval of IBM, provided any such debts
have been generated under this Agreement.


6.2 MSL to IBM


a) MSL will pay IBM within [*] Days of receipt of an acceptable invoice
from IBM.


IBM may offset any amounts owed IBM by MSL against any amounts owed
MSL by IBM under this Agreement, upon written approval of MSL
provided any such debts have been generated under this Agreement


b) Invoices must reference this Agreement by name, date, and Purchase
Order number. Invoices will be sent to the addresses below:


IBM Corporation
Accounts Payable
1701 North Street


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P.O. Box 8098
Endicott, NY. 13760


A copy of the invoice will be sent to:


IBM Corporation
8501 IBM Drive
Charlotte, N.C. 28262-8563
Attn: MSL Project Office


c) Upon IBM request, MSL will send originals and copies of invoices to
other IBM locations.


d) Any amounts owed IBM should be sent to:


IBM
8501 IBM Drive
Charlotte, NC 28262
Attn: MSL Project Office


6.3 Both parties agree to financially contribute to those activities defined
in Attachment 4: Expense Participation and at the stated contribution,
unless otherwise agreed to in writing.


SECTION 7.0 AUDIT


a) IBM may perform process audits at MSL's or an MSL Related Company's
Work Center or MSL's subcontractors' facilities to assure that
identified IBM specifications have been complied with. IBM shall
advise MSL [*] in advance of the scope and method by which such
audits are to be conducted. MSL will be given the opportunity to
comment upon these procedures prior to the audit taking place. For
all identified IBM specifications, MSL will maintain and produce for
IBM process documentation for use in all audits performed by IBM and
will have current copies of said documentation available prior to
the start of an audit.


b) Upon completion of all audits performed, IBM will provide written
documentation to MSL of the audit results in the form of an audit
report. MSL will be required to respond in writing to IBM on the
completion status of all actions and or requirements identified in
the audit report within [*] of receipt of the audit report.


SECTION 8.0 PURCHASE OF ASSETS


a) On the Effective Date, MSL shall purchase all tangible assets listed
in Attachment 3: Asset List, Part 1A and non-capitalized hand tools
used in the manufacture of Products for [*]. Within [*] of the
Effective Date, IBM shall give the tangible assets listed in
Attachment 3: Asset List, Part 1B to MSL. On the Effective Date, MSL
shall purchase


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the assets listed in Attachment 3: Asset List, Part 2 for the amount
stated on the bill of sale for such assets and pay for such assets
in full by or before December 1, 1998 (the "Payment Date").


b) The Parties acknowledge that the assets listed in Attachment 3:
Asset List, are a pro forma listing only and that within 10 (ten)
days of the Effective Date, both parties agree to perform a physical
audit of these assets listed and in IBM's possession as of the
Effective date to ascertain that the assets located during that
physical audit are verified. Within 20 (twenty) days after the
Effective Date, IBM will prepare a listing of the assets in
Attachment 3: Asset List, Part 1B to verify IBM's net book value of
the assets plus [*] for each non-capitalized printer. This listing
shall contain the price for each asset listed separately. MSL shall
notify IBM within 30 (thirty) days of the Effective Date if it does
not wish to receive all of the available tangible assets in
Attachment 3: Asset List, Part 1B by notifying IBM in writing of the
types of equipment it does not wish to receive. IBM shall choose
which equipment MSL will receive based on MSL's chosen equipment
type. The startup and investment expense defined in Attachment 4,
Section 3, shall be reduced by IBM's net book value of the assets in
Part 1B for the equipment accepted by MSL plus [*] for each
non-capitalized printer. In any event, the physical audit for all
assets shall result in a new listing for the assets contemplated
hereunder which listing shall be substituted for the Attachment 3:
Asset List that is attached to this Agreement at the Effective Date.
The amount stated on the bill of sale of the assets listed in Part 2
shall reflect the results of a physical audit and obsolescence
review. Such adjustments shall be subject to the mutual agreement of
the Parties.


c) If by the Payment Date, MSL fails to pay IBM in full for the assets
li ...