Flextronics International Manufacturing Services

EXHIBIT 10.8


EXECUTION COPY


[CONFIDENTIAL TREATMENT]


FLEXTRONICS INTERNATIONAL MANUFACTURING SERVICES CONTRACT


This Manufacturing Agreement ("Agreement") is entered into this 1st 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 Shall mean a written request for a change to or ECO 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 Shall mean all patents, copyrights, trademarks, Rights 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).


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


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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.


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


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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.


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


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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 Shall mean that period starting on the Effective Period 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.


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.


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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 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


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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 re ...