Manufacturing Service Agreement

Flextronics International Manufacturing Services Contract


This Manufacturing Agreement ("Agreement") is entered into this __day of March 2000 by and between Cabletron Systems, Inc., having a place of business at 35 Industrial Way, Rochester, New Hampshire, its Affiliates and any entities that become former Affiliates after the Effective Date (collectively referred to as "Customer") and Flextronics International USA, Inc, having its place of business at 2090 Fortune Drive, San Jose, California, Flextronics International Ireland, Ltd., having its place of business at Plassey Technological Park, Limerick, Ireland, and their Affiliates (collectively referred to as "Flextronics").


WHEREAS, Flextronics agrees to manufacture and sell to Customer certain Products and provide Customer with related services, and Customer agrees to purchase from Flextronics such Products, all subject to the terms and conditions of this Agreement;


NOW, THEREFORE, the Parties agree as follows:


1.0 DEFINITIONS


Adjusted Overhead Shall mean the Overhead Per Product (the sum of the
Labor Cost and Non-Labor Overhead) calculated for
each Quarter by decreasing the Labor Cost of the
Product from the prior Quarter by five (5%) percent.


Adjusted Price Shall have the meaning set forth in Section 12.3.


Affiliates Shall mean, with respect to any Party, any other
party directly or indirectly controlling, controlled
by, or under common control with such Party. For
purposes of this definition, "control", when used
with respect to any party, means the possession,
directly or indirectly, of the power to direct or
cause the direction of the management and policies of
such party, whether through the ownership of voting
securities, by contract or otherwise; the terms
"controlling" and "controlled" have meanings
correlative to the foregoing.


Asset Purchase Agreement Shall mean the Asset Purchase Agreement executed by
the Parties on January 18, 2000.


Bill of Materials or BOM Shall mean for each Product, the list of all direct
components used to manufacture that Product.


BOM Value For each Product on any specified date, the BOM Value
shall mean the weighted average of the prices
reflected on the most recent invoices that
Flextronics has received for each component on the
BOM in Manufacturing Inventory as of that date.


BOM Value at Closing Shall mean the value of Customer's Manufacturing
Inventory, calculated using the prices on the last
invoice received before the Effective Date for the
relevant components of Customer's Manufacturing
Inventory, with the inventory in the United States
and the inventory in Ireland measured independently.


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Business Days Shall mean weekdays excluding, as applicable, United
States federal or Ireland national holidays when they
are on or are celebrated on weekdays.


Effective Date Shall mean the date of execution of this Agreement.


End of Life Shall mean the announced date on which Customer will
no longer sell a Product to End Customers.


End Customers Shall mean Customer's customers.


Engineering Change Order or ECO Shall mean a written request for a change to a
Product's Manufacturing Specification.


First Rebate Period Shall mean the Rebate Period starting on the
Effective Date and ending August 31, 2000,


Forecast Shall have the meaning set forth in Section 3.1.


Functional Specification Shall mean, for each Product, Customer's written
specification of the minimum operating and
performance characteristics for that Product.


Initial Overhead Shall mean the Overhead Per Product as of the
Effective Date.


Initial Quarter Shall mean the period from the Effective Date until
May 31, 2000.


Intellectual Property Rights Shall mean all patents, copyrights, trademarks, mask
works, trade secrets and other intellectual property
rights.


Inventory Buffer Period Shall mean, for class A Products: 2 weeks; for class
B Products: 4 weeks; and for class C and D Products:
6 weeks.


Labor Cost Shall mean the allocation to each Product of direct
production labor expenses, including fringe benefits,
and the expenses included in Exhibit F incurred by
the Flextronics Product manufacturing organizations
responsible for production, production control,
process engineering, manufacturing training, test
manufacturing engineering, documentation, quality,
industrial engineering and vendor engineering. The
Labor Cost for each Product during the Initial
Quarter for the United States and Ireland is shown on
Exhibit A. The Parties shall agree to an allocation
of Labor Cost to each new product added to Exhibit A
during the Term of this Agreement.


Losses Shall mean all claims, demands, proceedings, losses,
damages, obligations, liabilities, deficiencies,
fines, costs, or expenses (including, without
limitation, reasonable attorneys' fees).


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Manufacturing Inventory Shall mean the inventory of Materials and work-in-
process in connection with the manufacture of
Products, but excluding Product Inventory.


Manufacturing Specification Shall mean, for each Product, Customer's written
specification of the technical and processing
requirements for the development or manufacture of
that Product, including a Bill of Materials, design
specifications, ECOs, schematic drawings, assembly
drawings, process documentation, test specifications,
current revision number, revision history,
workmanship and quality specification, the
identification of required test equipment and a list
of approved vendors of component parts.


Materials Shall mean the component line items on any Product's
Bill of Materials, which are collectively assembled
according to the Manufacturing Specifications to
produce that Product.


Net Sales For a period, shall mean (x) the sum of (a) the total
amount invoiced to Customer for Products delivered in
the period, (b) the total amount of any rebate
pursuant to Section 12.6 for Rebate Periods in that
period, (c) any inventory fee imposed under Section
5.1 on Product Inventory held in that period, and (d)
any other fees or payments (other than payments for
Products) that Flextronics receives under this
Agreement in the period; minus (y) any returns of
Product in the period.


Non-Labor Overhead Shall mean the allocation to each Product of expenses
incurred by the Flextronics organizations responsible
for the purchasing, receiving and inspection of
Materials, maintenance of Material stockrooms and the
shipment of Products, and the following organizations
that support the manufacture of Products: personnel,
information services and finance and administration.
The Non-Labor Overhead for each Product during the
Initial Quarter for the United States and Ireland is
shown on Exhibit A. The Parties shall agree to an
allocation of Non-Labor Overhead to each new product
added to Exhibit A during the Term of this Agreement.


Operating Profit Shall mean Flextronics' operating profit generated
from the manufacture and sale of Products to Customer
during the relevant period. Operating Profit shall be
calculated consistent with Flextronics' past
practices by deducting the following costs from Net
Sales: net material cost, direct labor, production
overhead, production support, manufacturing support,
material overhead and SG&A. The calculation of
Operating Profit shall not include any deduction for
interest, taxes, sales and marketing expenses or any
other corporate charges or allocations.


Overhead Per Product Shall mean the sum of the Labor Cost and Non-Labor
Overhead allocated to each Product.


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Packing Specifications Shall mean, for each Product, Customer's written
specification of the minimum packaging and packing
requirements for storing or shipping that Product.


Parties Shall mean Flextronics and Customer, each of which
may be referred to as a `Party."


Products Those Customer products listed by model number on
Exhibit A to this Agreement that Flextronics has
purchased from Customer or will manufacture for
Customer pursuant to the terms of this Agreement. The
class (A, B, C or D) of each Product shall also be
indicated on Exhibit A. Additional Customer products
may be added to Exhibit A at any time during the term
of this Agreement by written agreement of Customer
and Flextronics.


Product Inventory Shall mean the inventory of finished Products
manufactured by Flextronics in accordance with the
Manufacturing Specifications.


Purchase Orders Shall mean written purchase orders submitted to
Flextronics by Customer under this Agreement, each of
which shall reference this Agreement and contain the
model number of each Product, the quantity of each
Product, the revision number, and delivery
requirements including dates and ship-to locations.


Quarter Shall mean the three-month periods that comprise the
quarters of Customer's fiscal year, with the
respective Quarters commencing on the first days of
March, June, September and December of each year.


Quarterly Review Meeting Shall have the meaning set forth in Section 2.2.


Rebate Period Shall mean each of the following two-Quarter time
periods: (i) the Effective Date through August 31,
2000; (ii) September 1, 2000 through February 28,
2001; (iii) March 1, 2001 through August 31, 2001;
and (iv) September 1, 2001 through February 28, 2002.


Rebate Share Shall mean, for each Rebate Period, as follows: (i)
the Effective Date through August 31, 2000: 0.50;
(ii) September 1, 2000 through February 28, 2001:
0.25; (iii) March 1, 2001 through August 31, 2001:
0.125; and (iv) September 1, 2001 through
February 28, 2002: 0.125.


Repair Fee Schedule Shall have the meaning set forth in Section 13.9.


Repair Facilities Shall mean (a) for Returned Products located in the
Americas, the Flextronics facility located in
Rochester, New Hampshire, (b) for Returned Products
located outside the Americas, the Flextronics
facility located in Ireland, or (c) any other
Flextronics facility to which the parties mutually
agree.


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Repair Services Shall mean revision level upgrade, refurbishment,
scrapping and other related Product repair support
and maintenance services Flextronics will provide
Customer.


Repair Warranty Shall have the meaning set forth in Section 13.10.


Repair Warranty Period The Repair Warranty Period for a Repaired Product
shall be the greater of (i) 90 days from Flextronics'
delivery of the Repaired Product to Customer or to
its End Customer or (ii) the remainder of the
Product's original Warranty Period.


Repaired Product Shall mean a Returned Product on which Flextronics
has provided Repair Services and which is not
scrapped before being returned to Customer or to its
End Customer.


Repricing BOM Value Shall mean the BOM Value as of the first day of each
Quarter after the Initial Quarter.


Repricing Notice Shall have the meaning set forth in Section 12.3.


Returned Products Shall mean Products which Customer has deemed are in
need of Repair Services.


Special Inventory Shall have the meaning set forth in Section 3.5.


Standard Hours Shall mean the industrial engineering time study
value measuring the time it takes to manufacture a
Product, including: assembly and test, process,
setup, and downtime.


Starting BOM Value Shall mean the value of the Customer's Manufacturing
Inventory as of December 21, 1999, calculated using
the prices on the last invoice received before
December 21, 1999, for the relevant components of
Customer's Manufacturing Inventory, with the
inventory in the United States and the inventory in
Ireland measured independently.


Transition Services Period Shall mean that period starting on the Effective Date
and ending on the earlier of (a) the nine-month
anniversary of the Effective Date or (b) the date on
which the Parties have successfully completed the
transition from Customer's manufacturing ERP systems
to Flextronics' manufacturing ERP systems and their
obligations under the Transition Services Agreement
(as defined in Section 5.9 of the Asset Purchase
Agreement).


Unique Materials Shall mean Materials that are custom designed for a
Product or are not otherwise commercially usable or
salable by Flextronics.


Volume Shipment Date Shall mean the date on which Customer accepts a
Product for volume production and shipment of revenue
units to End Customers.


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Warranty Period Unless otherwise agreed by the Parties, the Warranty
Period shall be the shorter of twelve (12) months
from the date the Product is delivered to an End
Customer or fifteen (15) months from the date the
Product is shipped to Customer.


2.0 MANUFACTURING and RELATIONSHIP


2.1 Manufacturing. Flextronics agrees to manufacture Products according to
------------- the Manufacturing Specifications pursuant to Purchase Orders or changes thereto issued by Customer and accepted by Flextronics. All Products manufactured by Flextronics under this Agreement shall be solely at the direction of and for sale to Customer.


2.2 Quarterly Relationship Reviews. Flextronics and Customer agree that their
------------------------------ representatives shall meet during the last month of each of Customer's Quarters within five (5) Business Days of Customer's receipt of the Repricing Notice, and more frequently if reasonably required, to review their relationship and performance under this Agreement ("Quarterly Review Meeting"). These reviews shall consider, among other things, Product pricing and price changes (as provided for in Section 12.3), Manufacturing Specifications, new products, Forecasts, Purchase Orders, and Materials procurement and inventory issues.


2.3 Scheduling Cooperation. The Parties agree to use commercially reasonable
---------------------- efforts to adjust manufacturing load and scheduling among Flextronics' facilities to accommodate Cabletron's national and international Product and revenue requirements.


2.4 Preferred Provider Status - Flextronics. Flextronics shall be Customer's
--------------------------------------- preferred manufacturer of Products during the term of this Agreement provided that Flextronics continues to meet or exceed its price reduction, Product quality and delivery commitments contained in this Agreement. Flextronics shall also be the preferred provider of manufacturing services to Customer with regard to new products and those materials Flextronics is capable of manufacturing. Flextronics shall be invited to quote on all manufacturing opportunities for new products and materials Flextronics is capable of manufacturing, and will be selected provided that Flextronics' offer meets or exceeds the price, quality, delivery and other reasonable and unbiased criteria for acceptance established by the Customer for that opportunity and Flextronics' offer is at least as competitive based upon those criteria as any other bona fide quotation submitted by a third-party alternative provider. Flextronics agrees that in all quotations for the manufacture of new products Flextronics will offer Customer the best prices and terms that it offers other customers for comparable projected volumes. Notwithstanding the provisions of this Section, Customer reserves the unqualified right to have an appropriate amount of its products and materials Flextronics is capable of manufacturing manufactured internally or by third- party manufacturers.


2.5 Manufacturing Transfer. In the event that Customer decides during the term
---------------------- of this Agreement, for the purpose of dual-sourcing or otherwise, to have any Product manufactured internally or by a third-party manufacturer, Flextronics shall cooperate with Customer and provide reasonable assistance to effect the orderly and efficient transfer of the manufacturing of such Product from Flextronics to the Customer or a third party designated by the Customer. This cooperation and assistance shall include but not be limited to: (a) the return to Customer of relevant Manufacturing Specification materials or copies thereof, as appropriate; (b) the transfer of such Manufacturing Inventory and Special Inventory as Customer may request; and (c) the transfer of such Product specific tooling and equipment as Customer may request. Customer shall compensate Flextronics for all costs of such transfer and for any Manufacturing or Special Inventory in accordance with Section 4.3 and provide reasonable compensation to Flextronics for any Product specific tooling and equipment transferred pursuant to this Section.


2.6 Preferred Provider Status - Customer. Customer shall be Flextronics'
------------------------------------ preferred provider of network products for internal use in all Flextronics' sites worldwide. Customer shall be invited to quote


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on all future sales opportunities for network products and will be selected provided that Customer's offer meets or exceeds the price, quality, delivery and other reasonable and unbiased criteria for acceptance established by Flextronics for that opportunity, including without limitation that there will be no adverse implications associated with the integration of Customer's product on Flextronics' existing wide area network, and Customer's offer is at least as competitive based upon those criteria as any other bona fide quotation submitted by a third-party alternative provider. Customer agrees that in all quotations for the sale of network products Customer will offer Flextronics the best prices and terms that it offers other customers for comparable projected volumes.


3.0 FORECASTS, PURCHASE ORDERS AND MATERIAL PROCUREMENT


3.1 Forecast. Each week, Customer shall provide Flextronics with a rolling six
-------- (6) month Product order forecast, by week for the first thirteen (13) weeks and monthly for the following three (3) months ("Forecast").


3.2 Purchase Orders. Customer will issue Purchase Orders monthly for Products
--------------- to be manufactured in the subsequent four (4) month period commencing on the date of the Purchase Order. All Purchase Orders shall be submitted to Flextronics at Flextronics' facility in either (i) Rochester, New Hampshire, (ii) Limerick, Ireland, or (iii) any other Flextronics facility to which the Parties mutually agree. Purchase Orders shall be accepted by Flextronics, provided however that Flextronics may reject any Purchase Order (i) if Flextronics cannot reasonably obtain Materials necessary to fulfill a Purchase Order; (ii) if new and unique equipment is required to manufacture the Products; or (iii) if a Purchase Order in the aggregate exceeds the most recent Forecast by 10% for the first month, 20% for the second month, or 30% for the third month. Flextronics shall notify Customer of its rejection of any Purchase Order within five (5) Business Days of receipt of such order in writing, specifying the reason for its rejection and proposing reasonable alternatives.


3.3 The Parties agree that the terms and conditions contained in this Agreement shall prevail over any terms and conditions of any Purchase Order, acknowledgment form or other instrument.


3.4 Each accepted Purchase Order constitutes: (i) a commitment by Flextronics to manufacture the Products described in that Purchase Order; and (ii) an authorization from the Customer to Flextronics to procure, using standard purchasing practices, the Materials and labor necessary to manufacture the Products covered by that Purchase Order.


3.5 In addition, Customer authorizes Flextronics to purchase, in amounts beyond the amount necessary to fill accepted Purchase Orders, labor and Materials: (i) with lead times greater than ninety (90) days at the time the Purchase Order is placed ("Long Lead Time Components") plus 30 days to account for the order, shipment, receipt and manufacturing time and, (ii) purchased in quantities above the required amount for accepted Purchase Orders to achieve price targets ("Economic Order Inventory"), and (iii) purchased in excess of requirements for accepted Purchase Orders because of minimum lot sizes available from manufacturers ("Minimum Order Inventory"). Together these are called "Special Inventory". Flextronics may purchase Long Lead Time Components sufficient to meet all deliveries under the Purchase Orders and Product Forecast in effect at the time the order with the supplier is placed, and may reasonably purchase Minimum Order Inventory even if greater than the amount necessary to meet Purchase Orders and Product Forecast. Economic Order Inventory shall be purchased by Flextronics only with the prior approval of Customer. Flextronics will, from time to time, hold Long Lead Time Components and finished Products in inventory to increase Customer's sourcing flexibility. The components and quantities of all such inventory will be documented in a separate letter and signed by authorized representatives of both Flextronics and Customer.


4.0 SHIPMENTS, SCHEDULE CHANGE, CANCELLATION


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4.1 Shipments. All Products delivered pursuant to the terms of this Agreement
--------- shall be suitably packed for shipment in accordance with Customer's Packing Specifications, marked for shipment to Customer's distribution center, or other agreed location, and delivered to a carrier or forwarding agent. Shipment will be F.O.B. Flextronics' facility at which time risk of loss and title will pass to Customer. All freight, insurance and other shipping expenses, as well as any special packing expenses not included in the price for the Products, will be paid by Customer. If the Product is source inspected by Customer prior to shipment, Customer will inspect goods within five (5) Business Days of its request date.


4.2 Quantity Increases and Shipment Schedule Changes. For any accepted
------------------------------------------------ Purchase Order, Customer may (i) increase the quantity of Products or (ii) reschedule the quantity of Products and their shipment date as follows:


Maximum Allowable Variance From Purchase Order Quantities/Shipment Dates
------------------------------------------------------------------------


# of days before Allowable Maximum Maximum
Shipment Date Quantity Reschedule Reschedule/Cancelable
on Purchase Order Increases Quantity Period
----------------- --------- -------- ...