Distribution Agreement

DISTRIBUTION AGREEMENT





This Distribution Agreement (the "Agreement") is entered as of

, 1997 by and between Com21, Inc. ("Com21"), a Delaware corporation, with its principal place of business at 7 50 Tasman Drive, Milpitas, California 95035 and Philips Public Telecommunication Systems ("Philips"), a division of Philips Electronics Australia Ltd., an Australian corporation, with its principal place of business at Monash Gateway, 745 Springvale Road, Mulgrave, VIC 3170 Australia.





1. Com21 intends to enable and drive development of broadband services through high speed delivery of information over Hybrid Fiber Coax ("HFC") cable networks.



2. Com21 is developing cable modems based on subscriber equipment technology related to broadband services over HFC cable networks and a headend distribution system for use in such cable networks.



3. Philips Broadband Networks, part of Philips Electronics, N.V. is involved in the data over cable market, through its Affiliate (defined below), Philips, as a systems integrator and distributor of an end-to-end product solution.



4. Philips wishes to be a distributor of Com21 data cable modems and Com 21 headend distribution systems in the Territory (defined below) and serve as the marketing and technical lead-house for such distribution with involvement of other entities within the Philips Broadband Networks organization, including Affiliates of Phili ps' national sales organizations and value added resellers.





NOW, THEREFORE, the parties agree as follows:



1. DEFINITIONS.



1.1 "Affiliate" means any entity directly or indirectly controlling, controlled by or under common control with that party where control means the ownership or control, directly or indirectly, of more than fifty percent (50%) of all of the voting powers of the shares (or other securities or rights) entitled to vote for the election of directors or oth er governing authority or otherwise having power to control such entity's general activities, but only for so long as such ownership or control shall continue.





1.2 "Com21 Cable Modem" means the Com21 subscriber-end data over cable modem, as described in Exhibit A (Com21 Products) attached hereto.



1.3 "Com21 End User" means an End User who has purchased or been quoted a Com21 Product directly from Com21.





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1.4 "Com21 Headend" means the headend controller unit developed by Com21, as described in Exhibit A (Com21 Products).



1.5 "Com21 Products" means collectively the Com21 Cable Modem, Com21 Headend and Com21 Software.



1.6 "Com21 Software" means the Com21 Network Management Applications Programs in object code form and related documentation provided by Com21, as described in Exhibit A (Com21 Products) and firmware contained in the Com21 Products.



1.7 "Effective Date" means the date this Agreement is executed by the last party to execute this Agreement as indicated below.



1.8 "End User" means a cable owner or operator, multiple systems operator, program provider or any holding company or affiliate thereof.



1.9 "First Level Support" means the class of service provided to End Users in which technical support staff is competent to answer technical inquiries regarding the Com21 Products, perform remedial hardware determination and installation and configura t ion support of the Com21 Products, identify the cause of a problem, replicate the problem at either the End User site or Phillips test facility, and implement a solution for a problem which is not the result of an Error (as such term is defined in Exhibit D). In the case of an Error, the technical staff is competent to identify the source of the Error and create a reproducible test case and document the details of the Error for escalation to Com21.



1.10 "Territory" means the world, excluding the Republic of South Korea and the Democratic Peoples' Republic of Korea (North Korea).



2. APPOINTMENT; TERRITORY; COM21 PRODUCTS.



2.1 Appointment. Subject to all the terms and conditions of this Agreement, Com21 hereby appoints Philips for th e term of this Agreement as a non-exclusive distributor of the Com21 Products only within the Territory. Com21 Products distributed by Philips for further distribution may be distributed only through subdistributors who have been pre-approved in writing b y Com21 and who are bound in writing to all the restrictions on Philips contained in this Agreement. Com21 agrees not to distribute Com21 Products directly to any End User located outside of North America to whom Philips has previously supplied a Com21 Pro d uct; provided that Com21 shall not be restricted from distributing Com21 Products to (a) any original equipment manufacturer or (b) any End User that objects to obtaining the Com21 Products from Philips for reasons relating to service or support despite C o m21's good faith efforts to encourage such End User to purchase the Com21 Products from Philips. Nothing in this Agreement, however, shall be construed as limiting in any manner Com21's marketing or distribution activities within North America or its mark eting activities or appointment of other dealers, distributors, licensees or agents anywhere in the world.



2.2 Territorial Restrictions. Philips may distribute Com21 Products only to persons and entities located and taking delivery within the Territory. Philips acknowledges and



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understands that Com21 has granted Dacom International and Dacom, Inc. exclusive rights to distribute the Com21 Products in the Republic of South Korea and, when distribution becomes legally permissible, in the Democratic Peoples' Republic of Korea (North Korea) (the "Excluded Territory") pursuant to that certain Distribution and Manufacturing License Agreement by and among Com21, Dacom I n ternational and Dacom, Inc. dated June 26, 1996. No distribution of a Com21 Product shall be made by Philips, any Affiliate or subdistributor to any person or entity where Philips knows or has reason to believe that the ultimate end user of such Com21 Pro duct is located within the Excluded Territory and any such distribution will result in immediate termination of this Agreement.



2.3 Com21 Products. Com21 reserves the right to change, modify or discontinue any Com21 Product in its sole discretion at any time. Com21 shall have the right to discontinue any Com21 Product in its sole discretion, provided that Com21 makes available to Philips a functionally similar product. Any such modified, changed or functionally similar product shall be a Com21 Pro d uct hereunder. Com21 will notify Philips as soon as practicable, but in no event less than ninety (90) days, of any plans to discontinue a Com21 Product. Following such notice, Com21 and Philips will discuss the customer and business impact of such Com21 Product discontinuation. Com21 will use commercially reasonable efforts to fulfill all orders by Philips, accepted by Com21, of the discontinued Com21 Product.



2.3.1 New Com21 Products. Com21 will use commercially reasonable efforts to no tify Philips of the development of any update, enhancement or improvement of a Com21 Product or a new Com21 Product (each, a "New Com21 Product"). Com21 will, in its sole discretion, provide Philips beta versions of New Com21 Products when Com21 first mak e s such beta versions available for distribution. Each New Com21 Product will be made generally available to Philips as a Com21 Product, subject to the terms and conditions hereof, at the same time as such Com21 Product is made generally available in the U nited States by Com21. The Com21 Product list as per Exhibit A will be maintained with all New Com21 Products.



2.3.1.1 Test Products. Com21 agrees to provide to Philips, for no longer than four (4) months, as a bailee, one (1) unit of each New Com21 Product to perform qualification testing. All New Com21 Products furnished by Com21 to Philips under this Section 2.3.1.1 (Test Products) ("Bailed Property") shall: (i) be clearly marked or tagged as Com21's property; (ii) be and r e main personal property and not become a fixture to real property; (iii) be subject to inspection by Com21 at any time; (iv) be used only for qualification testing by Philips; (v) be kept free of liens and encumbrances; (vi) be kept separate from other mat e rials, tools or property of or held by Philips; (vii) not be modified in any manner by Philips; and (viii) shall be stored in a safe place and environment. In the event Philips uses the Bailed Property for any purpose other than to conduct qualification t e sting as specified herein without Com21's prior written consent, Philips agrees to purchase such Bailed Property at Com21's list price for such Bailed Property. Com21 shall retain all rights, title and interest in and to the Bailed Property and Philips ag r ees to treat and maintain the Bailed Property with at least the same degree of care as Philips uses with respect to its own valuable equipment. Philips shall bear all risk of loss or damage to the Bailed Property until it is returned to Com21. Upon Com21' s request, Philips shall promptly return and deliver all Bailed Property to Com21 in good condition, normal wear and tear excepted, without cost to Com21 (exclusive of freight costs); Com21 shall determine the manner and procedure for returning the Bailed Property and



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shall pay the corresponding freight costs. Philips waives any legal or equitable right it may have to withhold the Bailed Property and Philips agrees to exe cute all documents or instruments evidencing Com21's ownership of the Bailed Property as Com21 may from time to time request.



2.4 Software License. The appointment granted in Section 2.1 (Appointment) above includes a non-exclusive, non-transfera ble, non-sublicensable (except as provided in Section 2.4.1 below) license to (i) use the Com21 Software solely to operate and support Com21 Cable Modems and Com21 Headends and (ii) distribute the Com21 Software, but only for use with Com21 Cable Modems a nd Com21 Headends, subject to the terms and conditions set forth in this Agreement. All copies of the Com21 Software and of any software or firmware contained in the Com21 Products are licensed for distribution only and not sold.



2.4.1 Di stribution Restrictions. No distribution or license of the Com21 Software by Philips shall be made except pursuant to an enforceable written agreement (an "End-User License Agreement") signed by the end-user customer that is at least as protective of Com2 1 and its rights as Com21's standard end-user software license agreement, set forth in Exhibit B (Com21 End-User Software License Agreement) attached hereto. Notwithstanding the foregoing, Philips may include additional terms and/or conditions in an End-Us er License Agreement, but has no obligation hereunder to do so, provided that such additional terms or conditions do not diminish Com21's protections or rights as provided under the Com21 End-User Software License Agreement.



3. INTEROPERABILITY OF OTHER PRODUCTS WITH COM21 SOFTWARE.



3.1 Development by Com21 of Open APIs. Com21 agrees to use commercially reasonable efforts to undertake and complete development of open application programming interfaces ("APIs") for the Com21 Software.



3.2 Development of Interoperable Products. Philips shall have the unrestricted right to develop software that operates with the Com21 Software through the APIs ("Philips Software Applications"). Notwithstanding the foregoing, Philips is not entitled to receive any source code or source documentation to the Com21 Software, except as expressly provided in this Section 3.2. Com21 hereby grants Philips a non-exclusive right, subject to all the terms and conditions of this Agreement, to reproduce and use the APIs to develop Philips Software Applications. Com21 agrees to make available to Philips specifications to facilitate development by Philips of external network management systems, systems management systems and subscriber management software that are int e roperable with the Com21 Software ("Interoperable Software"). If Com21 and Philips decide to undertake development of any Interoperable Software or API jointly, then Com21 agrees to permit Philips to use the Com21 Software source code solely for the limit ed purpose of such joint development under terms and conditions to be set forth in a separate written agreement and executed by the parties.



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4. OWNERSHIP.



4.1 Com21. As between the parties, Com21 retains and shall exclusively own all title to, and except as expressly and unambiguously licensed herein, all rights and interest in the Com21 Software, any and all APIs for the Com21 Software (by whomever produc e d, but excluding Philips Software Applications and Interoperable Software developed solely by or on behalf of Philips), any other software or firmware contained in the Com21 Products, documentation, all modifications, improvements and derivative works (by whomever produced) of the foregoing and all proprietary and intellectual property rights throughout the world in the foregoing. Subject to Section 4.2, Philips hereby makes any assignment necessary to accomplish the foregoing ownership provision. Com21 wi l l have the exclusive right to, and, at Com21's expense, Philips agrees to assist Com21 in every proper way (including, without limitation, becoming a nominal party) to, evidence, record and perfect the assignment and to apply for and obtain recordation of , and from time to time enforce, maintain and defend, such proprietary rights. Philips will execute all documents Com21 may reasonably request for such purposes.





4.2 Philips. As between the parties, Philips shall own all right, title and interest in and to its products (including, without limitation, software and documentation), Interoperable Software and Philips Software Applications developed solely by or on behalf of Philips, all modifications, improvements and derivative works (by whomever pr o duced) of the foregoing and all proprietary and intellectual property rights throughout the world in the foregoing. Com21 shall have no right nor acquire any right whatsoever under this Agreement in any intellectual property of Philips. Subject to Section 4.1, Com21 hereby makes any assignment necessary to accomplish the foregoing ownership provision. Philips will have the exclusive right to, and, at Philips' expense, Com21 agrees to assist Philips in every proper way (including, without limitation, becomi n g a nominal party) to, evidence, record and perfect the assignment and to apply for and obtain recordation of, and from time to time enforce, maintain and defend, such proprietary rights. Com21 will execute all documents Philips may reasonably request for such purposes.



5. SUPPLY TERMS.



5.1 Forecasts. Commencing as soon as practical, but in no event less than sixty (60) days prior to the first date in which Philips' distribution of a Com21 Product is projected to occur, Philips shall delive r to Com21 rolling twelve (12) month forecasts, in writing and updated each calendar quarter, of Philips' anticipated quantity requirements and shipment dates ("Shipment Dates") for such Com21 Product. Com21 may reject any forecast submitted by Philips he r eunder in which the forecasted quantity of a Com21 Product exceeds by one hundred fifty percent (150%) Philips' average forecasted quantity of such Com21 Product during the most recent six (6) month period. If a required forecast is not submitted for a Co m 21 Product, the immediately preceding forecast for that calendar quarter shall become the new forecast. Philips acknowledges that Com21 will use such forecasts to plan manufacturing output of the Com21 Products, however, Com21 acknowledges that such forec asts are not binding and do not commit Philips to purchase any quantity of Com21 Products.



5.2 Purchase Orders. Philips shall order Com21 Products from Com21 by



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submitting a written purchase order (an "Order"), at least ninety (90) days prior to the applicable Shipment Date. Each Order shall identify the Com21 Products and model numbers in the quantities ordered, Shipment Date(s), shipping instructions and any ex port/import information required to enable Com21 to fill the order. Philips shall not submit any order in an amount less than TWO THOUSAND DOLLARS (US$2,000); provided, however, Philips shall use its best commercially reasonable efforts to ensure that eac h order submitted to Com21, except orders of spare parts and emergency orders, is in an amount of not less than TWENTY THOUSAND DOLLARS (US$20,000). Com21 shall accept or reject Orders received from Philips within five (5) days of receipt of such order (th e "Order Acceptance Date"). Com21 shall have no liability to Philips with respect to any Order which is not accepted by Com21, provided that Com21 shall not reject any Order which is made in accordance with all of the terms of this Agreement, where the qua ntity of units of a Com21 Product ordered does not exceed one hundred fifty percent (150%) of Philips' average forecasted quantity of such Com21 Product during the most recent six (6) month period and Com21 has not rejected such forecast.



5.3 Supp ly of Com21 Products. Notwithstanding the provisions of Section 5.2, during the term of this Agreement, subject to the other terms and conditions hereof, Com21 shall use its commercially reasonable efforts, and insofar as practical and consistent with Com 2 1's then current lead time schedule, shipping schedule, access to supplies on acceptable terms and allocation of available products and capacity among Com21 customers, to fill (by full or partial shipment), Philips' Orders accepted by Com21 (i) for foreca s ted quantities of Com21 Products within eight (8) weeks following the Order Acceptance Date and (ii) for unforecasted quantities of Com21 Products not more than twelve (12) weeks following the Order Acceptance Date. Com21 will use its commercially reasona b le efforts to ship such Com21 Products in shorter intervals and, whenever possible, Com21 will fill Philips' Orders with Com21 Products held by Com21 in inventory, provided Com21 has no outstanding obligation to supply such Com21 Products to a third party .



5.3.1 Supply of Common Components. Following the first shipment of "commercial grade" Com21 Products, Com21 will use commercially reasonable efforts to establish and maintain a reasonable quantity of Com21 Product parts or components, t o be mutually agreed upon by Com21 and Philips, for shipment to Philips on a rush basis.



5.4 Delivery. Com21 Products are delivered F.O.B. Com21's plant or other place of shipment and will be shipped by a freight forwarder specified by Philips.



5.5 Order Changes; Rescheduling. Philips may, without charge, increase an Order for any particular Com21 Product provided that Philips gives prior written notice thereof. Com21 will use commercially reasonable efforts to accommodate Philips for a n y Order increase. Cancellation or rescheduling of an Order for a Com21 Product shall be effective only with prior written notice received by Com21 and, to the extent Com21 has incurred costs and/or expenses (excluding general administration and management costs) due to such cancellation or rescheduling, shall be subject to charges not to exceed the charges set forth in the following schedule (charges are based on the price of the portion of the Order that is changed or cancelled), provided Com21 is unable to sell such Com21 Products within a reasonable period of time despite Com21's commercially reasonable efforts. If an Order is rescheduled for shipment more than one hundred twenty (120) days after the originally scheduled Shipment



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Date, or if it is rescheduled twice, it will be deemed cancelled.



Notice Period

Before Cancellation Rescheduling

Scheduled Shipment Charge Charge

------------------ ------ ------

0 to 30 days [*] [*]



31 to 60 days [*] [*]



60 days and more [*] [*]



5.6 Rejection of Com21 Products in Case of Nonconformity.



5.6.1 Philips may reject any portion of any shipment of Com21 Products which is not conforming in all material respects with the specifications se t forth in Com21's published data sheets applicable to the part numbers set forth in Exhibit A (Com21 Products). In order to reject a shipment, Philips must (i) give written notice to Com21 of Philips' rejection of the shipment within fourteen (14) days o f receipt together with a detailed written indication of the reasons for such rejection and (ii) obtain a Return Materials Authorization ("RMA") number from Com21. After notice of rejection is given, Philips shall cooperate with Com21 in determining whethe r such rejection is justified. If no such notice of rejection is timely received by Com21, Philips shall be deemed to have accepted such shipment of Com21 Products.



5.6.2 Com21 shall specify its preferred shipping method for returned Com2 1 Products and Com21 shall pay all transportation and insurance charges for properly rejected Com21 Products and Philips shall be entitled to a credit in the amount of the purchase price of properly rejected Com21 Products to be applied to future orders. Com21 shall notify Philips promptly as reasonably possible whether Com21 accepts Philips' basis for rejection.



5.6.3 Whether or not Com21 accepts Philips' basis for rejection, Com21 shall use its reasonable efforts, at Philips' request, to provide replacement Com21 Products which shall be purchased by Philips as provided herein.



5.7 Prices. Prices of Com21 Products to Philips payable by Philips are those set forth on Com21's then current price list [*]. Notwithstanding the foreg oing, for Com21 Cable Modems that Philips purchases from Com21 for sale to End Users located in North America, [*]





(i) [*] during the period in which Philips purchases

up to [*] units of the Com21 Cable Modem in

aggregate worldwide;



(ii) [*] during the period in which Philips purchases



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[*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.











than [*] but less than [*] units of the Com21

Cable Modem in aggregate worldwide; or



(iii) [*] during the period in which Philips purchases

more than [*] units of the Com21 Cable Modem in

aggregate worldwide.



The purchase price to Philips of Com21 Headends purchased by Philips for sale to End Users located in North America shall be [*]





Com21 shall advise Philips of the then current price of Com21 Products to Philip s for sales by Philips to End Users in North America in accordance with the provisions of this Section 5.7 and Com21 shall use its good faith efforts to provide Philips with price updates within seven (7) business days after prices are quoted by Com21. No twithstanding anything to the contrary in this Agreement, the foregoing provisions of this Section 5.7 will be applicable to all New Com21 Products listed in Exhibit A, as amended.



5.7.1 Price Changes. Com21 shall have the right, in its s ole discretion, from time to time or at any time, to change the prices of the Com21 Products with ninety (90) days' prior written notice for price increases. New prices will apply to all shipments made after such notice period. Orders placed by Philips wi t hin the notice period shall not exceed one hundred fifty percent (150%) of Philips' average per Order quantities during the previous six (6) month period of Com21 Products affected by the increase, although Orders in excess of such quantities may be made b ut shall be subject to the new increased price. In the event of any price decrease, Com21 will provide Philips with a credit towards future orders equal to the difference between (i) the price paid by Philips for the Com21 Products affected by the decreas e that remain in Philips' inventory upon the effective date of the decrease (not including Com21 Products obtained more than three (3) months before the decrease and Com21 Products obtained more than six (6) months before a price decrease during the first y ear of the term of the Agreement) and (ii) the decreased price for the same amount of such Com21 Products. Prior to any Com21 announcement of a price decrease and upon Com21's request, Philips shall disclose to Com21 in writing Philips' inventory of Com21 Products.



[*] In the event, during the term of this Agreement, Com21 enters into an agreement of similar scope with a third party [*]



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[*] Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions.











5.8 Payment of Purchase Orders. Payment of all Orders shall be made in U.S dollars by wire transfer to the bank account designated below or such other bank and account as may be designated by Com21 in writing from time to time. Terms of payment will be net thirty (30) days from Shipment Date or invoice date, whichever is later, unless Com2 1 at any time determines that Philips' credit is not satisfactory, in which case payment terms shall be by letter of credit satisfactory to Com21. No part of any payment payable to Com21 hereunder may be reduced due to any counterclaim, set-off, adjustment or other right which Philips might have against Com21, any other party or otherwise.





Designated Bank: Silicon Valley Bank

3003 Tasman Drive

Santa Clara, California 95050

Telephone: (408) 654-7400

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