Outsourcing Agreement With Matco Electronics Group

OUTSOURCE MANUFACTURING AND PURCHASE AGREEMENT


AGREEMENT made this 30th day of September, 1999 by and between The Matco Electronics Group, Inc., with principal offices at 320 North Jensen Road, Vestal, NY 13850 on behalf of itself and its Affiliates (collectively "MEG"), and General DataComm, Inc., with principal offices at Park Road Extension, Middlebury, CT 06762 ("GDC").


RECITALS:


A. GDC designs, manufactures and markets voice and data communications products for the carrier, corporate and government markets, and MEG is in the business of contract electronics manufacturing, with specific emphasis on and expertise in communications products, with core competency in the areas of printed circuit board fabrication, cable manufacture, raw card manufacture, through-hole production, surface mount technology, plastic injection molding, power supply manufacture and system level configuration;


B. The parties desire to establish a business relationship whereby GDC shall appoint MEG its primary manufacturing vendor, and divest and outsource certain portions of its manufacturing operations to MEG, which will then through one or more of its Affiliates (as defined below) and upon the prior written permission of GDC, which permission shall not be unreasonably withheld, as to such Affiliate and the specific manufacturing facility to be used, manufacture, as required by GDC, certain GDC Products (as defined below) for exclusive sale to GDC;


C. As part of such outsourcing of the GDC manufacturing operations, the parties shall initially perform joint activities to assemble and test the GDC Products at the GDC Naugatuck, CT facility and at MEG facilities. MEG shall complete the transition of such operations to a MEG manufacturing facility or facilities within one hundred twenty (120) days and shall Manufacture (as defined below) the GDC Products. In addition, MEG shall purchase from GDC certain manufacturing equipment, work in process and raw material inventory at the Closing (as defined below);


NOW, THEREFORE in consideration of the mutual promises contained herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows:


1.0 DEFINITIONS AND SCHEDULES


1.1 "Affiliate" means those corporations, companies or other entities directly or indirectly controlled, controlled by or under common control with or by a party hereto. "Control" means ownership or control of more than fifty percent (50%) of the


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outstanding shares or securities (representing the right to vote for the election of directors or other managing authority) of an entity. Such entities shall be deemed to be Affiliates only so long as such ownership or control exists. The MEG Electronics Group, Inc. shall be responsible for the acts and omissions of its Affiliates hereunder.


1.2 "GDC Product(s)" means those products to be Manufactured by MEG hereunder as set forth in Schedule 1.


1.3 "Technical Information" means (i) two (2) sets of applicable manufacturing drawings and documents as shown below and provided by GDC for each GDC Product; and (ii) such other related design and technical documents reasonably available at GDC and necessary to enable MEG to Manufacture the GDC Products (Electronic data/information will be provided if available):


1. Specification of GDC Product;
2. Assembly Drawings and Parts Drawings;
3. Purchase Specifications of Parts and Components;
4. Bill of Materials;
5. Assembly Instructions;
6. Manufacturing Instructions;
7. Test Instructions;
8. Test and Inspection Standards;
9. Test and Operational Software (including both object and
source code);
10. Part and Component Sourcing; and
11. Die and Tool Drawings.


1.4 "Intellectual Property Rights" means all current and future worldwide patents, copyrights, mask work rights, trade secrets, and other intellectual property rights and the documentation or other tangible expression thereof.


1.5 "Transition Period" means, with regard to each GDC Product, the period of time that the GDC Product is manufactured at the GDC Naugatuck, CT facility or is in process of transition to production at MEG facilities.


1.6 "Post-Transition Period" means, with regard to each GDC Product, the period of time that the GDC Product is Manufactured by MEG at a MEG facility.


1.7 The following Schedules are attached hereto, an integral part of this Agreement and incorporated by this reference:


Schedule 1 - GDC Product(s) Specifications
Schedule 2 - Purchase Prices
Schedule 3 - Delivery Performance Requirements
Schedule 4 - Quality Requirements
Schedule 5 - (Deleted)
Schedule 6 - Manufacturing Specifications


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Schedule 7 - Manufacturing Equipment
Schedule 8 - Initial Six Month Forecast (By Quarter)
Schedule 9 - Raw Material Inventory
Schedule 10 - Work in Process Inventory


1.8 "Manufacture", "Manufactured" or "Manufacturing" means, with regard to the performance of by MEG of its obligations hereunder, the performance of the following operations in the order as set forth below:


1. SMT (Surface Mount Technology) Assembly;
2. PTH (Pin Through Hole) Assembly;
3. In-Circuit Testing;
4. Functional Testing;
5. Environmental Stress Screening;


1.9 The "Recitals" above are an integral part of this Agreement as if fully set forth in the body hereto.


2.0 TERM


2.1 "Term" shall mean the period commencing on the Closing Date and ending three (3) years thereafter. The Term may be renewed upon the written agreement of the parties.


3.0 SCOPE


3.1 MEG shall be GDC's primary outsource manufacturing vendor for (i) the GDC surface mount technology manufacturing ("SMT") and (ii) all other manufacturing currently outsourced by GDC to third parties (the "Third Party Outsource"), both subject to the following conditions:


3.1.1 MEG is not in breach of any of its material obligations
hereunder;


3.1.2 GDC shall at all times have the right to outsource to third
parties up to fifteen percent (15%) of the total dollar volume
of its manufacturing requirements in any manner and proportion
of GDC Products and Third Party Outsource products of its
choosing;


3.1.3 MEG must qualify for each product of Third Party Outsource
prior to the commencement of the Manufacture of such product.
"Qualify" means that (i) the Third Party Outsource product must
be within the specific MEG core competencies of either printed
circuit board fabrication, cable manufacturing, through-hole
production, SMT or plastic injection molding, (ii) MEG must
build a specific number of each such products (as reasonably
determined by GDC)for inspection by GDC with regard to quality
and conformance to specifications,


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(iii) GDC must approve such products as to quality and
conformance to technical specifications and delivery
requirements in writing, (iv) the MEG quoted Purchase Price for
such products must be no more than the then current price
charged GDC by the third party manufacturer, and (v) MEG must
comply with any unique, mandatory requirements for such products
(see subsection 3.1.4 below).


3.1.4 In the event a product of Third Party Outsource or a GDC
Product has or subsequently develops a unique or mandatory
requirement and MEG cannot meet such requirement, GDC shall
have the right to continue to outsource (or to award) the
manufacture of such product to third parties, and such
production shall not be included in the GDC total dollar volume
manufacturing requirements for purposes of calculating the 15%
threshold above. By way of example and not limitation, the
obligation to manufacture a product within a particular
country, or to provide a product within a particular high
tariff country at a specific low price are both unique,
mandatory requirements.


3.1.5 In the event GDC terminates this Agreement in part for breach
of MEG with regard to a specific GDC Product in accordance with
Section 22.3.2 below, then GDC shall have the right to award
the manufacture of such GDC product to any third party and such
production shall not be included in the GDC total dollar volume
manufacturing requirements for purposes of calculating the 15%
threshold above.


3.1.6 MEG shall purchase from each manufacturer of the Third Party
Outsource products that MEG has qualified for, all raw material
inventory and WIP of such manufacturer that can be used in the
Manufacture by MEG of the qualified product. Excess material,
outside of component lead time, will be reviewed by MEG and
procured as required to support GDC's forecast.


3.2 The initial price quoted by MEG for each Third Party Outsource product shall be reviewed in accordance with the Purchase Price formula set forth below in Section 12.1, at the point which is six (6) months after MEG is Manufacturing at least eighty five percent (85%) of the GDC requirement for such product, not to exceed twelve (12) months from the date GDC provided to MEG the Technical Information for such product for qualification purposes. Except to the extent caused by unusual or unexpected market price fluctuations, and then only upon the mutual agreement of the parties, any revised price resulting from such review shall not exceed the price paid by GDC to the former manufacturer for such product. The "price paid by GDC" shall be the contract price between GDC and the former manufacturer at the time of the commencement of Manufacture by MEG.


3.3 To the extent in the possession of GDC, GDC shall provide to MEG, as soon as practical after the Closing Date, all Technical Information and the current turn key price, material and labor with regard to each Third Party Outsource product reasonably required by MEG in order to qualify for such products; however, MEG acknowledges that GDC


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requires that such requests do not pose a burden to its staff during the Transition Period, nor provide any advance notice to its current Third Party Outsource manufacturers of the relationship hereof, and both factors can affect the time required by GDC to gather and deliver such Technical Information. MEG also acknowledges that it is the requirement of GDC that the MEG qualification of Third Party Outsource products does not cause either party to be distracted from the initial goal of transitioning the SMT production to MEG during the Transition Period. It is the intention of the parties that MEG commence production of those qualified Third Party Outsource Products approximately six (6) months after the Closing Date, and the parties will work together towards such goal; however, the actual commencement date may be earlier or later as agreed by the parties.


3A.0 CLOSING


3A.1 The closing (the "Closing") under this Agreement shall be held on September 30, 1999 (the "Closing Date"). The Closing shall take place at the headquarters of GDC in Middlebury, CT or at such other place as the parties may agree. At the Closing, (i) GDC shall deliver to MEG such documentation as is necessary to transfer title, (including releases of all liens, encumbrances, and all required consents), to the Manufacturing Equipment and that certain portion of the GDC raw material inventory and Work In Process Inventory from GDC to MEG, and (ii) MEG shall pay and deliver to GDC the purchase price for such equipment and inventory in the amount and form as specified below.


3A.2 The obligation of GDC to close is conditional subject to the receipt by GDC of the consent to this Agreement by its lenders.


4.0 REPRESENTATIONS, WARRANTIES, AND COVENANTS OF MEG


MEG represents and warrants to GDC as follows:


4.1 MEG has the requisite expertise to perform the Manufacturing of the GDC products and shall commit sufficient resources to meet its obligations hereunder.


4.2 The MEG Electronics Group Inc. is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and each Affiliate performing Manufacturing hereunder shall be duly organized, validly existing, and in good standing under the laws of the state of its incorporation or organization, and MEG and each Affiliate shall be duly qualified and in good standing to perform such Manufacturing in the jurisdiction where GDC Products shall be Manufactured.


4.3 MEG shall at all times comply with all federal, state and local laws and regulations applicable to and in connection with the performance of its obligations hereunder.


4.4 All MEG facilities used to Manufacture GDC Products are and shall at all times be ISO 9002 certified.


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4.5 The financial statements of the MEG Electronics Group Inc., including its Affiliates, dated December 31, 1998 delivered to GDC on September 8, 1999 are correct and complete and accurately present the financial condition and results of operations of MEG and its Affiliates as of and for the year ending on December 31, 1998, and were prepared in accordance with generally accepted accounting principles. Since December 31, 1998 there has been no material adverse change to the financial condition of MEG. MEG shall deliver to GDC within ninety (90) days following the closing of each MEG fiscal year, financial statements (audited, if available) for such fiscal year.


4.6 There are no actions or proceedings pending or threatened against MEG or its Affiliates and MEG has no knowledge or belief of any pending, threatened or imminent litigation, governmental investigations or claims, complaints, actions or prosecutions involving MEG or any Affiliate which if adversely determined would impair their ability to perform hereunder.


4.7 MEG is not a party to any collective bargaining agreement at any MEG facility that will be used to Manufacture GDC Products. MEG's relationship with its employees at all such facilities is excellent and there are and have been no strikes, lockouts, other work stoppages, picketing or labor disputes during the past five (5) years in which MEG or any of its Affiliates or manufacturing facilities are or were involved, and no event has transpired or is contemplated which has had or will have a material adverse effect on the relationship between MEG and its employees.


4.8 There shall be no liens pending or threatened against the GDC Products Manufactured hereunder by MEG and all shall be delivered to GDC free and clear of all liens, claims and encumbrances.


4.9 The representations, warranties, and covenants of MEG above are in addition to and not in lieu of any other representations, warranties, and covenants of MEG set forth elsewhere in this Agreement.


5.0 PURCHASE AND SALE OF MANUFACTURING EQUIPMENT


5.1 GDC agrees to sell to and transfer to MEG, and MEG agrees to purchase from GDC at the Closing, subject to the terms and conditions herein, the manufacturing equipment set forth in Schedule 7 (the "Manufacturing Equipment").


5.2 As the purchase price for the Manufacturing Equipment, MEG shall pay to GDC at the Closing the amount of Three Million One Hundred Thousand Dollars ($3,100,000.00) in cash payable by wire transfer in accordance with wire transfer instructions provided MEG prior to the Closing.


5.3 Solely with regard to the Manufacturing Equipment, GDC warrants and represents to MEG to the best of GDC's knowledge:


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5.3.1 The Manufacturing Equipment that is currently used by GDC in
the Manufacture of the GDC Products is in a commercially
reasonable state of repair and operating condition, ordinary
wear and tear and obsolescence excepted and;


5.3.2 GDC will transfer to MEG at the Closing good title to the
Manufacturing Equipment, free and clear of security interests,
mortgages, liens, attachments and encumbrances;


5.3.3 GDC will maintain the Manufacturing Equipment in a
commercially reasonable state of repair and operating
condition, ordinary wear and tear and obsolescence excepted,
until the Manufacturing Equipment is physically shipped to
MEG;


5.3.4 GDC will be responsible for dismantling and safe loading of
all manufacturing equipment purchased by MEG. MEG will pay for
transportation and set-up of the equipment at MEG's
manufacturing facilities.


5.4 GDC makes no other warranties or representations of any kind with regard to the Manufacturing Equipment, either express or implied including, but not limited to, the implied warranties of noninfringement, merchantability and fitness for a particular purpose. Except to the extent caused by MEG, the risk of loss of or damage to the Manufacturing Equipment shall be borne by GDC while such equipment is at the GDC Naugatuck facility.


5A.0 PURCHASE AND SALE OF GDC RAW MATERIAL INVENTORY


5A.1 MEG shall purchase from GDC as needed, raw material from GDC's inventory that meets MEG's production requirements hereunder. A listing of that portion of GDC's raw material inventory to be consumed during the three (3) month period after the Closing Date (determined as of the last Friday prior to the Closing Date) is set forth in Schedule 9 and shall be purchased by MEG from GDC at the Closing. The purchase and utilization of such GDC raw material by MEG for the Manufacture of GDC Products shall at all times have priority over the purchase and utilization by MEG of raw material supplied by third parties. MEG's purchase from GDC during the Term of raw material in excess of or different from the raw material set forth in Schedule 9, MEG shall purchase such material from GDC at a price that is competitive with the best price MEG sources of supply for the same material.


5A.2 "As needed" above means that MEG, in addition to purchasing from GDC at the Closing, such raw material set forth in Schedule 9, shall purchase from GDC such additional raw material as requirements are identified.


5A.3 As the purchase price for the raw material set forth in Schedule 9, MEG shall pay to GDC at the Closing the amount of Four Million Six Hundred Fifty Thousand Seven Hundred Eighty Four Dollars ($4,650,784.00) in cash payable by wire transfer in accordance with wire transfer instructions provided MEG prior the Closing.


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5A.4 To the extent provided to GDC by the suppliers of the raw material above, and assignable by GDC, GDC shall pass through to MEG such raw material warranties. GDC makes no other warranties or representations of any kind with regard to the raw material, either express or implied including, but not limited to, the implied warranties of noninfringement, merchantability and fitness for a particular purpose.


5A.5 No later than January 31, 2000, the parties shall agree upon any post-Closing operating adjustments to be made to the initial purchase of the raw material set forth in Schedule 9 by MEG. Such adjustment shall be determined by comparing the actual amount of the raw material inventory as of the Closing Date to the amount of the raw material inventory as set forth in Schedule 9. The adjustment will be made as a debit or credit adjustment between GDC and MEG.


5A.6 In the event that MEG has material requirements in other areas of its business that can be satisfied (as reasonably determined by MEG) by the purchase from GDC of excess raw material not purchased above, MEG shall purchase such raw material from GDC at a price that is competitive with other MEG sources of supply. MEG shall assist GDC with the disposal of any obsolete and excess raw material not purchased by MEG.


6.0 PURCHASE AND SALE OF WORK IN PROCESS


6.1 GDC agrees to sell to and transfer to MEG, and MEG agrees to purchase from GDC at the Closing, subject to the terms and conditions herein, the material component of the Work in Process ("WIP"). Set forth in Schedule 10 is a listing of WIP as of June 30, 1999.


6.2 As the purchase price for the WIP set forth in Schedule 10, MEG shall pay to GDC at the Closing the amount of One Million One Hundred Thirty Six Thousand Nine Hundred Eighteen Dollars ($1,136,918.00) in cash payable by wire transfer in accordance with wire transfer instructions provided MEG prior the Closing.


6.3 To the extent provided to GDC by the suppliers of the raw material in the WIP above, GDC shall pass through to MEG such raw material warranties. GDC makes no other warranties or representations of any kind with regard to the raw material in the WIP, either express or implied including, but not limited to, the implied warranties of noninfringement, merchantability and fitness for a particular purpose.


6.4 No later than January 31, 2000, the parties shall agree upon the post-Closing operating adjustments to be made to the purchase of WIP by MEG. Such adjustment shall be determined by comparing the actual amount of WIP as of the Closing Date to the amount of WIP as set forth in Schedule 10. The adjustment will be made as a debit or credit adjustment between GDC and MEG.


6A.0 START UP FEES


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6A.1 GDC shall pay to MEG at the Closing the amount of One Million One Hundred Thousand Dollars ($1,100,000.00) as an outsourcing start up and administration fee. The amount of this fee shall be offset by and deducted from the amounts due GDC at Closing.


7.0 OPEN PURCHASE ORDERS


7.1 GDC shall retain responsibility for all purchase orders issued to suppliers for the procurement of raw material, that are executory in part or full as of the Closing Date (the "Open POs"). In the event, during the Transition Period, there are production requirements that cannot be satisfied by the Open POs or by inventory purchased by MEG as set forth in Schedules 9 and 10, then GDC shall issue new purchase orders to MEG for such raw material requirements; however GDC reserves the right to issue such purchase orders to other vendors if MEG cannot meet the requirements of the purchase order. The price to GDC for such MEG material shall be as set forth at Section 12.1 (i) below. MEG will work with GDC personnel to manage the transition of future requirements to MEG at MEG facilities.


8.0 TRANSITION PERIOD AND EMPLOYEES


8.1 During the Transition Period, GDC Products will be manufactured at the GDC Naugatuck, CT facility and be in transition to MEG facilities. The GDC employees utilized by GDC to manufacture the GDC Products prior to the Closing Date ("GDC Employees") shall be retained by GDC and shall manufacture the GDC Products under the direction of GDC. MEG and GDC shall work together in good faith during the Transition Period to determine the scope and duration of the services to be provided by the GDC Employees. As GDC Products move from the Transition period to the Post-Transition Period, it shall be the responsibility of GDC at its sole expense and discretion to either terminate the GDC Employees or transfer them to other duties as it so determines.


8.2 There shall be no labor charge to MEG for the services of the GDC Employees during the Transition Period, as the GDC Products manufactured during this period shall be priced to GDC in accordance with the formula set forth below at Section 12.2.


8.3 The following Sections of this Agreement do not apply to GDC Products within the Transition Period: Section 15.1, Product Warranties and Remedies; Section 16.0, Inspection; Section 19.0, Rescheduling and Cancellation; and Section 21.0, Changes To The GDC Products.


9.0 MANUFACTURING LICENSE


9.1 GDC hereby grants to MEG a nonexclusive, worldwide, nontransferable, royalty-free license under all of GDC's Intellectual Property Rights, to use the GDC Technical Information for the sole purpose of Manufacturing the GDC Products, or mutually agreed-upon successor or additional products, for sale to and purchase by GDC hereunder. MEG acknowledges and agrees that all Intellectual Property Rights in the


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GDC Products Manufactured hereunder by MEG are and shall remain at all times the exclusive property of GDC or its vendors and licensors and may be used by MEG solely pursuant to this Agreement, and that MEG shall not become entitled to any Intellectual Property Rights in any such products. MEG shall take all reasonable measures to ensure that all Intellectual Property Rights of GDC in the products remain with GDC.


9.2 All inventions and discoveries and other intellectual property rights specifically with regard to the design and development of the GDC Products, created and/or developed pursuant to or as a result of this Agreement by MEG, shall be the sole and exclusive property of GDC. MEG hereby assigns and conveys, and shall cause its employees and agents to assign and convey to GDC the entire right, title and interest in and to the aforesaid, and shall deliver to GDC signed instruments that may be required to vest in GDC the foregoing.


10.0 MANUFACTURING GOALS AND COST SAVINGS


10.1 MEG shall utilize its core competencies (printed circuit board fabrication, cable manufacture, raw card manufacture, through-hole production, surface mount technology, plastic injection molding, power supply manufacture and system level configuration) as applicable in the performance of its obligations under this Agreement, and acknowledges that the primary goals of GDC hereunder are to (i) lower GDC's cost of acquiring GDC Products as set forth below at Section 10.3 and (ii) increase GDC's and GDC's customers' satisfaction with regard to the quality and timeliness of the Manufacture of such products. MEG shall use its best efforts at all times in the performance of this Agreement to achieve these goals.


10.2 During the Post-Transition Period, fifty percent (50%) of all cost savings created by MEG attributed to GDC Product-specific value added engineering design changes shall be re ...