Exclusive Distribution Agreement

THE MATERIAL HAS BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT AND SUCH MATERIAL HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.


EXCLUSIVE DISTRIBUTION AGREEMENT


This EXCLUSIVE DISTRIBUTION AGREEMENT ("AGREEMENT") is made as of the 28th day of February, 1997, ("EFFECTIVE DATE"), by and between:


(a) CREATIVE TECHNOLOGY LTD. ("CREATIVE"), a Singapore corporation having a principal office at 67 Ayer Rajah Crescent #03-18, Republic of Singapore 139950; and


(b) CAMBRIDGE SOUNDWORKS, INC., a Massachusetts corporation ("CSW"), having a principal place of business at 311 Needham Street, Newton, MA 02164.


RECITALS

WHEREAS, Creative is in the business of distributing computer equipment and related products, including computer software;


WHEREAS, CSW has developed certain speaker technology that may be used in conjunction with Creative s products;


WHEREAS, the parties have entered into that COMMON STOCK AND WARRANT PURCHASE AGREEMENT ("PURCHASE AGREEMENT") dated even date herewith, and to which this Agreement is an exhibit;


NOW, THEREFORE, in consideration of the mutual representations, warranties, conditions and covenants set forth below and in the Purchase Agreement, the parties agree as follows:


AGREEMENT
SECTION 1: CERTAIN DEFINITIONS


"AFFILIATE" shall mean an entity that controls, is controlled by or is under common control with such party. For purposes of this definition, the term "control" means ownership, directly or indirectly, of more than 19.99% of the voting stock of the entity, or in the case of a non-corporate or non-public entity, an equivalent ownership interest (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise).


"CREATIVE FACILITIES" shall mean: (i) Dublin, Ireland; (ii) Singapore; and (iii) Fremont, California, which list may be amended upon mutual agreement of the parties.


"CSW MARKS" shall mean all trademarks, service marks, logos and other distinctive brand features of CSW that are used in or relate to the CSW Multimedia Products, including, without limitation, the trademarks, service marks and logos described in EXHIBIT A hereto.


"CSW MULTIMEDIA PRODUCTS" shall mean all current and future speakers and speaker systems developed by or for CSW, including but not limited to, those products currently marketed by CSW as SoundWorks-TM-, MicroWorks-TM-, and PCWorks-TM-, and which speakers and speaker systems are primarily designed or marketed to interface, support, be compatible or used with, or which may be incorporated or integrated into computers, computer systems, or operating systems therefor, including without limitation, PC or Macintosh operating systems.


"DISTRIBUTION MARKETS" shall mean all distribution channels, consumer markets, retail markets and all other markets, EXCEPT: (i) existing or future CSW wholly owned or franchised CSW retail storefronts (for clarification purposes, retail storefronts do not include stores within stores); (ii) CSW wholly owned catalog sales distribution channels; and (iii) existing or future CSW wholly owned and operated Internet sites; PROVIDED, HOWEVER, CSW cannot distribute to users accessing CSW s Internet site via any third party Internet site.


"DOCUMENTATION" shall mean all user manuals, training materials, and other documentation provided by CSW in support of CSW Multimedia Products, as such is made available by CSW.


"EPIDEMIC FAILURES" shall mean that percentage of units of CSW Multimedia Products accepted by Creative in a Purchase Order therefor which fails to operate in accordance with performance specifications applicable to such CSW Multimedia Products.


"EXTRAORDINARY OPPORTUNITIES" shall mean unique nonrecurring catalog sales, advertising and other marketing opportunities that are reasonably expected to yield unusually high CSW Multimedia Products exposure and CSW brand exposure (for example, exposure similar to that yielded by the CSW/Marlboro relationship or the contemplated CSW/American Express relationship), and which opportunities are not then being pursued by Creative. Notwithstanding the foregoing, in no event shall any Extraordinary Opportunities be for sale of CSW Multimedia Products in the Distribution Markets that involve any entity with which Creative is then engaged or is demonstrably working to engage in marketing, distribution, or any other business relationship or activities (including, without limitation, retailers, resellers or distributors).


"INTELLECTUAL PROPERTY RIGHTS" shall mean trade secrets, patents, copyrights, trademarks, know-how, mask works, moral rights, and similar rights of any type under the laws of any governmental authority, domestic or foreign including all applications and registrations relating to any of the foregoing.


"OEM CUSTOMERS" shall mean the companies set forth on EXHIBIT E attached hereto, as such Exhibit may be amended from time to time in writing by mutual agreement of the parties.


SECTION 2: APPOINTMENT AND LICENSE GRANT


2.1 GRANT OF DISTRIBUTION RIGHTS. For the term of this Agreement and during the Sell-Off Period (as defined in Section 10.3 below), and subject to the terms and conditions of this Agreement, and the rights expressly reserved by CSW herein, CSW grants to Creative and its Affiliates an exclusive, worldwide, royalty-free, right and license, with a right to sublicense (solely as necessary to exercise its rights granted hereunder), to use, sell, distribute, market, import, export, perform, transmit, and have used, sold, distributed, marketed, imported, exported, performed and transmitted the CSW Multimedia Products and related Documentation in the Distribution Markets.


2.2 LIMITATIONS ON EXCLUSIVITY. As a matter of clarification, the exclusivity provisions of Section 2.1 do not apply to: (i) existing or future CSW wholly owned or franchised CSW retail storefronts (for clarification purposes, retail storefronts do not include stores within stores); (ii) CSW wholly owned catalog sales distribution channels; (iii) existing or future CSW wholly owned and operated Internet sites; PROVIDED, HOWEVER, CSW cannot distribute to users accessing CSW s Internet site via any third party Internet site; (iv) CSW s current obligations under the agreement in effect as of the Effective Date with IBM (the "IBM AGREEMENT"), with respect to the Model 25 IBM Aptiva subwoofer product; and (v) OEM Customers. The parties will use their commercially reasonable efforts to negotiate and discuss the sales and marketing efforts relating to the integration into or bundling and shipment of CSW Multimedia Product by any OEM Customer. In any event, CSW agrees that, to the extent it enters into any distribution agreement with an OEM Customer, such agreement can only be for the sale or distribution of a CSW Multimedia Product if such CSW Multimedia Product is sold to an end-user together with a "Personal Computer System" (defined as a computer system consisting of, at a minimum, an x86 or Pentium-compatible microprocessor-based motherboard together with a hard disk drive, power supply, and memory system, assembled in a casing).


2.3 EXTRAORDINARY OPPORTUNITIES.


(a) CSW shall give prior written notice by facsimile, pursuant to Section 10.1 herein, to Creative of all Extraordinary Opportunities it wishes to exploit. Notwithstanding the exclusivity provisions of Section 2.1, CSW may exploit up to two Extraordinary Opportunities during each Period (as defined in Section 10.4(a) herein) following the Effective Date without prior written approval by Creative and may exploit any additional Extraordinary Opportunities in excess of such two-per-Period limitation upon prior written approval by Creative. In the event that Creative does not respond to CSW s written notice within five business days of receipt of such notice, then approval of such Extraordinary Opportunity by Creative shall be deemed to have been given.


(b) Any sales of CSW Multimedia Products in connection with CSW s participation in or exploitation of an Extraordinary Opportunity shall be subject to the price protection and price reduction provisions set forth in Section 4.2 below.


2.4 LIMITED TRADEMARK LICENSE GRANT. For the term of this Agreement and for the Sell-Off Period (as defined in Section 10.3 below), CSW grants to Creative and its Affiliates the exclusive, worldwide, royalty-free right and license to use the CSW Marks, subject to the provisions of the license agreement between Henry Kloss and CSW, including but not limited to


"By Henry Kloss", alone or in combination with any and Creative marks or any other mark selected and used by Creative, on CSW Multimedia Products, and in marketing, advertising, packaging, and other promotional materials and related documentation relating to CSW Multimedia Products, in the Distribution Market. In addition, CSW agrees and acknowledges that Creative may use any mark selected by Creative and to which Creative has legal rights, on or in connection with the CSW Multimedia Products and any marketing or promotional materials related to such CSW Multimedia Products. Creative agrees that, to the extent provided by CSW, it will use commercially reasonable efforts to comply with CSW s reasonable style and appearance guidelines, which shall be provided to Creative by CSW within sixty (60) days of the Effective Date. Creative and CSW will each use its best efforts to mutually agree on all the initial logos for each of the CSW Multimedia Product lines, PROVIDED, HOWEVER, that in the event that Creative and CSW are unable to agree on an initial logo within 30 days following the first presentation of the initial logo by either party, Creative shall have the right to determine such initial logo, so long as such initial logo adheres to the style and appearance guidelines provided to Creative by CSW pursuant to this Section 2.4.


SECTION 3: RESPONSIBILITIES OF THE PARTIES


3.1 END-USER SUPPORT OBLIGATIONS. Creative will provide installation assistance, technical training for end-users and first level support and maintenance services for CSW Multimedia Products; PROVIDED, HOWEVER, that CSW shall in any event be fully responsible for performing its warranty obligations set forth in Section 7 hereto.


3.2 TITLE AND RISK OF LOSS. Title to all CSW Multimedia Products, including the media on which any software is reproduced (but not any Intellectual Property Rights with respect to such software), shall pass to Creative, and all risk of loss of or damage to CSW Multimedia Products shall pass to Creative, upon delivery by CSW of such CSW Multimedia Products to the Creative Facility designated by Creative on the applicable purchase order.


3.3 PRIOR MARKETING COMMITMENTS. CSW shall be solely responsible and liable for all existing and planned marketing commitments in existence as of the Effective Date, including, without limitation, those commitments listed on EXHIBIT C, and, except as expressly permitted under Section 2.2 hereto, CSW shall not enter into any marketing commitments with respect to the CSW Multimedia Products after the Effective Date. In no event shall Creative be liable for any marketing, sales, or other commitments relating to CSW Multimedia Products that is not: (i) in writing; and (ii) authorized in writing by an authorized representative of Creative.


3.4 CSW FIRST PRIORITY. Creative acknowledges and agrees that CSW has the right of first priority to bid for rights to manufacture for Creative Labs, Inc. ("CLI") CSW Two-Piece Products for CLI upgrade kits and for CLI retail products. In no way shall the provisions of this Section 3.4 be construed as creating any obligation of Creative or its Affiliates to grant any such manufacturing rights to CSW.


3.5 TRAINING. For each CSW Multimedia Product, CSW shall promptly provide training, promotional and marketing materials (including without limitation, training manuals, product documentation, promotional literature and merchandising kits) and other materials as mutually


agreed upon by the parties at Creative s California offices or other locations as mutually agreed upon by the parties.


SECTION 4: PRICING AND PURCHASE ORDERS


4.1 PURCHASE ORDERS.


(a) Creative shall submit purchase orders to CSW on Creative s standard form, substantially in the form attached in EXHIBIT B (a "CREATIVE PURCHASE ORDER"). Each such Creative Purchase Order shall include, at a minimum: (i) description of CSW Multimedia Products, as designated by Creative; (ii) applicable price, as mutually agreed to by the parties prior to submission of such purchase order; (iii) mutually agreed upon delivery schedule; (iv) ship to location, which shall be one of the Creative Facilities. To the extent that any provision of the form of Creative Purchase Order is inconsistent with the exclusivity provisions of Section 2.1 above, the provisions of this Agreement shall control. Forecasts for Creative Purchase Orders shall be submitted to CSW six months in advance of intended delivery for planning purposes. To the extent that the terms of the Creative Purchase Order are in conflict or are inconsistent with the terms of this Agreement or are otherwise inapplicable, the terms of this Agreement shall govern.


(b) No later than ninety (90) days prior to an intended delivery date (a "DELIVERY DATE"), Creative shall issue a Creative Purchase Order to CSW with respect to the CSW Multimedia Products to be purchased on such Delivery Date; PROVIDED, HOWEVER, that during the period beginning 90 days prior to any given Delivery Date and ending 60 days prior to such Delivery Date, Creative may, at its option, (i) reschedule delivery of all or any portion of the CSW Multimedia Products under the Creative Purchase Order, (ii) increase or decrease the amount of CSW Multimedia Products under the Creative Purchase Order, or (iii) cancel the Creative Purchase Order. In the event that Creative decreases or cancels a Creative Purchase Order pursuant to subdivision (ii) or (iii) above, CSW shall use its best efforts to cancel all materials and commitments to manufacture the CSW Multimedia Products under such Creative Purchase Order, and Creative shall bear the cost of any applicable cancellation fees required to be paid in connection therewith. After the date 60 days prior to its Delivery Date, no Creative Purchase Order may be canceled or otherwise changed without the prior written consent of CSW; PROVIDED, HOWEVER, that such Creative Purchase Order shall be eligible for any applicable price protection or price reduction in accordance with Section 4.2 below.


(c) The amounts payable by Creative to CSW under such Creative Purchase Orders shall be fully credited against the * blanket Creative Purchase Order set forth in Section 6.1 of the Purchase Agreement (the "BLANKET PURCHASE ORDER"). Such Blanket Purchase Order shall be cancelable immediately by Creative (and the * pre-paid amount under the Blanket Purchase Order shall be promptly refunded by CSW) in the event that CSW fails to materially perform any of its obligations, including without limitation its representations and warranties, under this Agreement. The * under such Purchase Agreement shall be applied against Creative Purchase Orders submitted by Creative in the first * following the date that Creative owes payment pursuant to the Creative Purchase Order for CSW Multimedia Products hereunder. Up to * of such * shall be * delivered in the first quarter after such first shipment, with any unused


creditable amount from such first quarter fully creditable against the Creative Purchase Orders delivered in the second quarter. In the event that Creative does not receive credit for the full * during such * period, then CSW shall fully credit, on a dollar-for-dollar basis, future Creative Purchase Orders until Creative has received credit of * for such * prepayment.


4.2 PRICING AND PRICE PROTECTION. CSW will Price Protect (as defined herein) Creative from price reductions on products substantially similar to CSW Multimedia Products licensed hereunder. For purposes of this Agreement, the term "Price Protect" shall mean that for every percentage of CSW retail, catalog, internet or Extraordinary Opportunity price decrease, CSW will (i) credit to Creative s account the same equivalent percentage of the purchase price of CSW Multimedia Products then held by Creative, its Affiliates and their customers in their warehouse, retail, and distribution inventory and (ii) reduce, by the same equivalent percentage, the purchase price of CSW Multimedia Products in transit under Creative Purchase Orders and other unfilled, outstanding Creative Purchase Orders. Any such Price Protection shall be based on the original price charged by CSW. In the event that CSW reduces its estimated street price for any CSW Multimedia Product, CSW will Price Protect Creative, its Affiliates and their customers. In no event shall Creative be charged for CSW Multimedia Products at prices that exceed those charged third parties by CSW for the same or similar CSW Multimedia Products. Notwithstanding the foregoing, CSW, on a case by case basis, may reduce prices at which it regularly offers CSW Multimedia Products in response to individual end-user price matching situations without having to Price Protect Creative, its Affiliates and their customers. Notwithstanding the foregoing, if CSW temporarily reduces the price for any CSW Multimedia Product to a level required to compete with a price change by a regional or national retail chain (for example, MicroCenter, Fry s, Circuit City, Good Guys, CompUSA and Best Buy), then CSW shall have no obligation to Price Protect Creative, its Affiliates and their customers for such price reduction, provided that CSW and Creative will use their best efforts to renegotiate for any future deliveries by CSW to Creative (or its Affiliates or customers) of CSW Multimedia Products under then outstanding Creative Purchase Orders, a price reduction for the CSW Multimedia Products sold to Creative (or its Affiliates or customers). Creative acknowledges that this section is not intended to apply to goods which have been refurbished and sold as "B Goods", so long as such goods are not new products and are refurbished and clearly marked for the end-user as refurbished "B Goods".


4.3 CREATIVE PRICING. Creative is free to set unilaterally its own prices for its distribution of CSW Multimedia Products. No employee or representative of CSW has any authority to establish Creative s resale prices or to inhibit in any way Creative s independent pricing decisions.


SECTION 5: PROPRIETARY RIGHTS


5.1 OWNERSHIP BY CSW. The parties agree that, as between CSW and Creative, CSW owns all proprietary rights, including copyrights, patents and trade secrets, in and to the CSW Multimedia Products, and that, except as provided herein, this Agreement does not constitute a license nor does it transfer ownership of any of these rights.


5.2. LIMITATION ON USE OF SOFTWARE. Creative will use all computer programs, documentation


and information consisting of or containing proprietary information related to CSW Multimedia Products, solely for the purpose of performing under this Agreement. Except as authorized hereunder or as necessary for Creative to fully exercise its rights granted hereunder, Creative will not decompile, disassemble or otherwise reverse engineer the CSW Multimedia Products.


5.3 OWNERSHIP BY CREATIVE. The parties agree that, as between CSW and Creative, Creative owns all proprietary rights, including copyrights, patents, and trade secrets, created by Creative pursuant to this Agreement.


5.4 PROPRIETARY NOTICES. Creative agrees not to remove any copyright, trademark or other proprietary rights notices placed on any CSW Multimedia Products. Creative agrees to place a notice, "by Cambridge SoundWorks," "Cambridge SoundWorks" or a notice substantially equivalent, on packaging and products for the CSW Multimedia Products it distributes pursuant to this Agreement.


SECTION 6: CONFIDENTIALITY


The parties agree that the terms of this Agreement and all information disclosed by the parties during the term of this Agreement, which information satisfies the criteria set forth in the Mutual Non-Disclosure Agreement, dated October 18, 1996 (the "NDA"), executed by the parties hereto, shall be considered Proprietary/Confidential Information under and subject to the provisions of such NDA, a copy of which is attached hereto as EXHIBIT D.


SECTION 7: WARRANTY; EPIDEMIC FAILURE; PRODUCT RETURNS


7.1 WARRANTY. CSW warrants that: (i) upon delivery, the CSW Multimedia Products will be new, and will comply with all Creative approved pricing and product descriptions, specifications, and other printed information relating to the CSW Multimedia Products and in effect as of the date of the applicable Creative Purchase Order; (ii) the CSW Multimedia Products will, for a period of the longer of: (x) * months from the CSW Multimedia Products Delivery Date, or (y) the warranty period offered by CSW retail storefronts, internet sites or catalog for such CSW Multimedia Products or a substantially similar product ("WARRANTY PERIOD"): (a) be free from defects in manufacture, materials, and design; (b) function properly under ordinary use; and (c) perform in accordance with all applicable specifications and documentation for such CSW Multimedia Product; and (iii) title to all CSW Multimedia Products purchased by Creative, no matter where delivered, shall be free and clear of all liens, encumbrances, security interest, or other adverse interests or claims during the Warranty Period. In the event that a CSW Multimedia Products has a defect that constitutes a breach of the warranty set forth in this Section 7.1, and Creative notifies CSW of such breach in writing during the Warranty Period, CSW will, at its option: (x) use its best efforts to repair the defect; (y) accept return of the CSW Multimedia Products or defective component (hardware or software) thereof and provide a replacement of the same CSW Multimedia Product or component. If CSW determines that no appropriate repair or replacement is available within thirty (30) days of CSW s receipt of such returned CSW Multimedia Products, then CSW will issue to Creative a full refund or credit equal to the total amount paid by Creative therefor.


7.2 EPIDEMIC FAILURE. Creative will consider an Epidemic Failure as being a single failure type in * of the CSW Multimedia Products shipped during a three (3) month period, or failure of any t ...