Product Development Agreement

EXHIBIT 10.19


PRODUCT DEVELOPMENT AGREEMENT


BETWEEN


PATH 1 NETWORK TECHNOLOGIES INC.


AND


BARCONET, N.V.


THIS PRODUCT DEVELOPMENT AGREEMENT ("Agreement") is entered into effective as of February 5, 2001 ("Effective Date") between Path 1 Network Technologies Inc. ("Path 1"), a Delaware corporation located at 3636 Nobel Drive, Suite 275, San Diego, CA 92122, and BarcoNet, N.V. ("BarcoNet"), a Belgian public limited liability company located at Luipaardstraat 12, B-8500 Kortrijk, Belgium (hereinafter collectively "the Parties").


RECITALS


WHEREAS, Path 1 has developed certain proprietary technology ("Technology") and desires to develop a PGA-100 system using the Technology and deliver prototypes thereof (the "Products") to BarcoNet in exchange for the compensation set forth herein; and,


WHEREAS, BarcoNet desires Path 1 to perform certain engineering services in connection with the Product, including the development, testing and delivery of the Product for and to BarcoNet; and,


WHEREAS, BarcoNet desires to manufacture and sell a PGA-100 system based on the prototypes delivered by Path 1 ("BarcoNet Product"); and,


WHEREAS, Path 1 also desires an option to purchase and resell the BarcoNet Product.


NOW, THEREFORE, in consideration of the mutual promises contained herein the Parties agree as follows:


TERMS AND CONDITIONS


1. DEFINITIONS.


1.1 "Acceptance Test" means the test of the Product to be jointly
performed by Path 1 and BarcoNet based on the Acceptance Test Plan.


1.2 "Acceptance Test Plan" or "ATP" means the test criteria and test
procedures mutually agreed upon by the Parties to ensure the Product's
compatibility with the Specifications as set forth in "Exhibit A". The
parties shall use reasonable efforts to ensure that the ATP will be
submitted by BarcoNet and agreed upon by Path 1 on or before March 1,
2001. "Exhibit B", attached hereto, is a requirement set for the proof
of concept.


1.3 "BarcoNet Deliverables" means, collectively or individually, the
Product proof of concept requirements ("Exhibit B"), enclosure design,
delivery of thirty (30) Enclosures, design recommendations, the
Acceptance Test Plan, Customer Furnished Equipment for the Acceptance
Test Plan, and review of all the Bill of Materials.


1.4 "BarcoNet Product" means the PGA-100 system manufactured by BarcoNet
using the Technology from Path 1.


1.5 "Beta Unit" or "Unit" means the Product. More detailed information
on the Beta Unit is contained in Exhibit C to this Agreement.


1.6 "Bill of Materials" or "BOM" means the identification by
manufacturer and model of certain components and subsystems integrated
into the Product and the source from which such materials compliant with
the Specifications may be obtained.


1.7 "Customer Furnished Equipment" means equipment furnished by BarcoNet
or its customers for use by Path 1.


1.8 "Enclosure(s)" means the box provided by BarcoNet for encasement of
the Product.


1.9 "Intellectual Property Rights" means all current and future trade
secrets, copyrights, patents and other patent rights, trademark rights,
service mark rights, mask work rights and any and all other intellectual
property or proprietary rights now known or hereafter recognized in any
jurisdiction.


1.10 "Path 1 Deliverables" means, collectively or individually, the Bill
of Materials, Product requirements, proof of concept (Exhibit B), final
mother and daughter board layout, preliminary BOM, preliminary user's
manual, manufacturing and assembly instructions, acceptance test
plan/procedures, two (2) engineering samples and twenty-five (25) units
of the Product.


1.11 "Path 1 Know-How" means the proprietary techniques, inventions,
practices, methods, knowledge, designs, skill and experience relating to
the Technology and the Product which Path 1 discloses to BarcoNet under
this Agreement.


1.12 "Path 1 Patents" means patents related to the subject matter of this
Agreement issued as of the date hereof and the patents to issue after the
date of this Agreement on patent applications entitled to a filing date
prior to execution of this Agreement related to the subject matter of
this Agreement, including without limitation all foreign counterparts,
all substitutions, extensions, reissues, renewals, divisions,
continuations and continuations in part relating to such patents and
their foreign counterparts, and which are owned or controlled by Path 1
(where "controlled" means licensed-in by Path 1 with a royalty- free
right to grant sublicenses).


1.13 "Path 1 Technology" means (i) the inventions, designs, discoveries
and processes claimed in the Path 1 Patents and (ii) the Path 1 Know-How.


1.14 "Services" means the work and labor necessary for the performance of
the respective obligations of the Parties to this Agreement.


1.15 "Specifications" means the mechanical, engineering, operational
and/or functional descriptions, details and requirements for the Product
as set forth in Exhibit A as the same may be modified as provided herein.
Included are any standards for performance or operation of the item to
which such Specifications pertain.


2. SCOPE OF WORK.


2.1 Services. Upon the terms and conditions set forth in this
Agreement, each party will be responsible for obtaining all of the
technology, labor, material, tooling and facilities necessary for the
completion of its portion of the Services, except as otherwise set forth
in this Agreement.


2.2 Agency Approvals. The Parties agree that Path 1 shall be
responsible for supporting all board level and power supply changes
required to meet CE and UL approval, and BarcoNet shall be responsible
for obtaining the CE and UL approval. Path 1 and BarcoNet agree to form
a joint certification team to obtain any other governmental or necessary
private agency approvals or certification necessary for the Product
and/or the BarcoNet Product in the United States and Belgium and to use
reasonable efforts to obtain such approvals or certifications. The
actual costs and filing fees for the submission for such approvals in the
Unites States and Belgium and such other jurisdictions as the Parties
mutually agree in writing shall be borne by BarcoNet. In order for Path
1 to perform its reasonable efforts obligations hereunder, BarcoNet shall
provide Path 1 with customary English language summaries of the
specifications of each individual jurisdiction's requirements where
agency approval is sought. Each party shall provide all reasonable
assistance to the other for obtaining approvals and certifications for
the Product and/or BarcoNet Product, including use of any relevant
testing, test results, documents, applications and approvals and
certificates with regard to the Product and/or BarcoNet Product. In the
event other governmental or private agency approvals or certifications
are necessary, BarcoNet shall bear the cost of any Path 1 travel,
lodging and related expenses incurred in support of approval activities
in connection with the Product and/or BarcoNet Product. Except as set
forth above, all costs for agency approvals for other jurisdictions shall
be borne fully by the party seeking such approvals, unless otherwise
mutually agreed.


2.3 Bill of Materials Approval. The Bill of Materials shall be subject
to review and approval by BarcoNet, and all component vendors providing
materials set forth on the Bill of Materials shall be subject to
qualification as a vendor to BarcoNet under BarcoNet's standards for
vendor certification then in effect. Such approval shall not be
unreasonably withheld. Notwithstanding anything to the contrary
contained herein, neither such BarcoNet approval nor such vendor
qualification shall be a basis for any rejection of the Product, or
condition precedent to, or a basis for any delay in, acceptance of the
Product hereunder.


2.4 Application Program Interface. Path 1 shall make reasonable efforts
to provide an application program interface to be agreed to by both
BarcoNet and Path 1 that will give BarcoNet the capability to tailor the
Product to specific customer requests. The intent of the application
program interface shall be within the scope and costs of this contract
and shall adhere to the intellectual property rights of Path 1.


3. COMPENSATION; COLLATERAL; INTELLECTUAL PROPERTY RIGHTS.


3.1 Compensation. BarcoNet agrees to pay Path 1 a Non-Recurring
Engineering Fee ("NRE") equal to One-Million Seven-Hundred Thousand
United Stated Dollars (US$1,700,000) as follows:


3.1.1 Two-Hundred Thousand United States Dollars (US$200,000)
previously paid pursuant to the Parties Agreement to Negotiate dated
December 22, 2000 shall be automatically applied to the NRE;


3.1.2 Two-Hundred Thousand United States Dollars (US$200,000) shall
be delivered to the escrow agent (Paul, Hastings, Janowsky and
Walker or other mutually agreed upon escrow agent) upon execution of
this Agreement. BarcoNet will instruct the escrow agent to deliver
the Two-Hundred Thousand United States Dollars (US$200,000) to Path
1 upon mutual agreement of the escrow instructions;


3.1.3 One Million United States Dollars (US$1,000,000) shall be
paid to Path 1 on or before March 1, 2001, following the drafting
and joint acceptance of the Acceptance Test Plan as evidenced by
signatures of each Party's respective Program Managers. This
payment shall constitute an advance which is refundable if the
Product does not pass a satisfactory Acceptance Test by September
15, 2001;


3.1.4 One Hundred Thousand United States Dollars (US$100,000) shall
be paid to Path 1 upon completion of an Acceptance Test now
scheduled for June 8, 2001 and delivery of the first ten (10) Units;
and


3.1.5 Two Hundred Thousand United States Dollars (US$200,000) shall
be paid to Path 1 upon delivery of the remaining fifteen (15) Units
and meeting one of the following two conditions:


- CE & UL approval; or,.
- Fulfilling all required changes on the board and power
supply to support CE and UL certification which BarcoNet
must put forth before August 1, 2001, with a payment date
no earlier than October 1, 2001.


3.2 Collateral. Upon receipt of the Section 3.1.3 payment, Path 1 shall
issue one hundred thousand (100,000) shares of its Class A Common Stock
(the "Shares") in the name of BarcoNet into escrow as collateral to
secure its contingent refund obligation under Subsection 3.1.3. Such
Escrow shall be vested with Paul, Hastings, Janowsky and Walker in
Irvine, California, who will also prepare the collateral agreement on
behalf of the Parties to this Agreement. BarcoNet will receive the
Shares from escrow if a successful Acceptance Test has not occurred by
September 15, 2001 and Path 1 has not refunded the Section 3.1.3 payment
by September 15, 2001. In the event a successful Acceptance Test has not
occurred by September 15, 2001 (or such later date as provided in Section
10(a) hereto), BarcoNet shall be entitled to demand that Path 1 register
the Shares for resale on a Form S-3 registration statement and shall
thereafter be entitled to transfer or otherwise dispose of the Shares in
its discretion in accordance with applicable securities law restrictions.
The Shares will be issued with the following restrictive legends:


3.2.1 THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
SATISFACTION OF CERTAIN TERMS SET FORTH IN A PRODUCT DEVELOPMENT
AGREEMENT BETWEEN THE COMPANY AND THE REGISTERED HOLDER, OR SUCH
HOLDER'S PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE
PRINCIPAL OFFICE OF THIS COMPANY. ANY TRANSFER OR ATTEMPTED
TRANSFER OF ANY SHARES IN CONTRAVENTION OF THE TERMS OF THE PRODUCT
DEVELOPMENT AGREEMENT IS VOID WITHOUT THE PRIOR EXPRESS WRITTEN
CONSENT OF THE COMPANY OR THE DECISION OF THE ATTORNEY-ARBITRATOR
REFERRED TO IN SECTION 7.3(d) HEREIN.


3.2.2 THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 ("THE ACT") AND ARE
"RESTRICTED SECURITIES" AS THAT TERM IS DEFINED IN RULE 144 UNDER
THE ACT. THE SHARES MAY NOT BE OFFERED FOR SALE, SOLD OR OTHERWISE
TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT OR PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER THE ACT, THE AVAILABILITY OF WHICH IS TO BE ESTABLISHED TO THE
SATISFACTION OF THE COMPANY.


3.3 Intellectual Property Rights; Royalties. The Parties agree that
Path 1 shall retain all Intellectual Property Rights to the BarcoNet
Product, the Product, the application program interface and the
Technology and retains all rights to manufacture the Product and the
application program interface. BarcoNet hereby agrees to pay Path 1 Base
Royalties based on per unit sales of the BarcoNet Product. The Base
Royalty is based on a BarcoNet Product providing sixty-five (65) program
streams. The Base Royalty is defined in 3.3.1.


3.3.1 Base Royalty. The Base Royalty is defined as the difference
between Twenty-Four Hundred United States Dollars (US$2,400) and the
BOM of the mother and daughter board, excluding power supply,
cables, enclosure packaging and any documentation. For purposes of
determining the Base Royalty, the BOM will be re-costed on an annual
basis. For example, if the value of the BOM is Nineteen Hundred
United States Dollars (US$1,900), the royalty will be equal to Five
Hundred United States Dollars (US$500); or,


3.3.2 Additional Royalty. In the event Path 1 is able to develop a
Product capable of delivering more than sixty-five (65) program
streams, BarcoNet agrees to pay Path 1 an Additional Royalty for
each such enhanced BarcoNet Product. The Additional Royalty will be
calculated by use of the following equation: ((((Number of program
streams x US$100) x (1-customer discount) x 0.4)-US$2,600) x
0.5)))). The Parties agree that the customer discount will not
exceed 15%, unless otherwise mutually agreed in writing by the
Parties.


3.4 Payment of Royalties. BarcoNet shall pay all royalty payments as
specified in Section 3.3 to Path 1 quarterly, in United States currency
on the last day of April, July, October and January of each year, with
respect to sales made in the just-ended calendar year quarters, each
payment shall be accompanied by a detailed royalty report. Path 1
reserves the right to audit BarcoNet's books and records to the extent
they relate to calculation of royalty payments due to Path 1 hereunder
provided that such audit(s) be conducted not more than twice per year,
during normal business hours, upon fifteen (15) days prior written
notice. Any such inspection will be conducted in a manner that does
not unreasonably interfere with BarcoNet's business activities. Such
inspection shall be at Path 1's expense; however, if the audit reveals
material discrepancies, BarcoNet agrees to pay Path 1 for the reasonable
costs associated with the audit. The books and records audited pursuant
to this Agreement shall not be used by Path 1 or its accountants or other
agents or representatives except as necessary to prove and collect
amounts due and unpaid.


3.5 Non-Exclusive License. Subject to the terms and conditions of this
Agreement, Path 1 hereby grants BarcoNet, a nonexclusive,
nontransferable, worldwide, license to use, reproduce, support,
demonstrate, sell and distribute through single or multiple tiers of
distribution the BarcoNet Product and all end user documentation
delivered as part of or together with the BarcoNet Products or otherwise
provided under this Agreement. This license does not extend to any
modifications of or derivative works based on the BarcoNet Product or the
Product. The license does apply to any improvement and/or upgrade of the
BarcoNet Product or the Product made by Path 1.


3.6 Support Services. Training and support services for the Products
shall be provided as set forth in Section 11.1 hereto. Path 1 agrees to
support BarcoNet in utilization of its own enclosures.


3.7 Purchase Option. The Parties agree that Path 1 shall have an option
to purchase the BarcoNet Products from BarcoNet at a price to be
determined. The Parties agree to use their reasonable efforts in
reaching an agreement regarding the terms and conditions applicable to a
purchase of the Product or BarcoNet Products by Path 1 on or before June
30, 2001.


3.8 Trademark Rights. Path 1 requests and BarcoNet agrees to provide
certain markings and identification, which includes the trademark(s)
and/or trade name of Path 1, on the BarcoNet Products sold to Path 1.
Path 1 acknowledges that initial BarcoNet Product production runs may not
have Path 1 branding, but the Parties anticipate that the BarcoNet
Products sold to Path 1 will display Path 1 trademarks after December 31,
2001. Such markings and identification shall be strictly in accordance
with the requirements of Path 1 as set forth in Path 1's Trademark
Guidelines, as provided to BarcoNet and as may be updated from time to
time by Path 1. BarcoNet is not authorized to use the trademark(s) and
trade names of Path 1 on any products, other than BarcoNet Products
ordered by and delivered to Path 1, or for any other purpose. BarcoNet is
hereby granted a limited trademark license with respect to the Path 1
trademarks set out in the above-mentioned markings and identification,
solely for the above-mentioned use. All other use is prohibited. This
license shall terminate on the earlier of termination of this Agreement
or failure of BarcoNet to maintain the quality requirements set out in
this Agreement or subsequent written communication. BarcoNet shall obtain
no rights to or interest of any kind in any Path 1 trademarks or trade
names other than the limited right to use set out above.


3.9 Indemnification by Path 1. Path 1 shall indemnify and hold BarcoNet
harmless from and against any and all damages, costs and expenses
(including without limitation reasonable attorneys' and expert witness
fees) incurred by BarcoNet in connection with any action, suit,
proceeding, demand, assessment or judgment arising out of or related to
any claims by third parties based on any infringement by the Path 1
trademarks, logos or trade names of any trademark, logo or trade name of
any other person or entity; provided that (i) BarcoNet promptly notifies
Path 1 of such action, claim or proceeding; (ii) Path 1 shall have the
sole right to compromise, settle or defend any such action, claim or
proceeding; provided, however, that Path 1 shall not compromise or settle
any such action, claim, or proceeding in a manner that does not
unconditionally release BarcoNet without BarcoNet's prior written
consent; and (iii) BarcoNet provides Path 1 reasonable assistance at Path
1's request and expense in the defense of such action, claim or
proceeding.


3.10 Indemnification by BarcoNet. BarcoNet shall indemnify and hold
Path 1 harmless from and against any and all damages, costs and expenses
(including without limitation reasonable attorneys' and expert witness
fees) incurred by Path1 in connection with any action, suit, proceeding,
demand, assessment or judgment arising out of or related ...