SUPPLY AGREEMENT

SUPPLY AGREEMENT

T HIS S UPPLY A GREEMENT (the “Agreement”) is effective as of May  18, 2009 (the “Effective Date”) by and between Delta Electronics, Inc., an R.O.C. corporation having its principal place of business at 186 Ruey Kuang Road, Neihu Taipei 11491 Taiwan, R.O.C. (hereafter referred to as “DEI”), and PECO II, Inc., an Ohio corporation having its principal place of business at 1376 State Highway 598, Galion, Ohio 44833 (hereafter referred to as “PECO”).

W HEREAS , DEI, and PECO entered into a Supply Agreement, dated September 29, 2008, the “Prior Agreement”); and

W HEREAS , each of DEI and  PECO desire to terminate and supersede the Prior Agreement

N OW , T HEREFORE , for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

1.

E XHIBITS AND D EFINITIONS .

1.1

Exhibits .  The following Exhibits are incorporated into and made a part of this Agreement.  These Exhibits may be modified or adjusted as provided for in this Agreement.

1.1.1

Exhibit A – Products

1.1.2

Exhibit B – Pricing

1.1.3

Exhibit C –Minimum Order requirements

1.2

Definitions .   As used in this Agreement, the terms defined below shall have the following meanings:

1.2.1

“ Affiliate ” means any entity which directly or indirectly controls, or is under common control with, or is controlled by, such party.  As used in this definition, “control” (and its correlative meanings, “controlled by” and “under common control with”) shall mean possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through beneficial ownership of securities or other ownership interests, by contract or otherwise).

1.2.2

“ Business Day ” means a day that is not Saturday, Sunday or a statutory or civic holiday in the State of Ohio or any other day on which banking institutions are not required to be open in the State of Ohio.  

1.2.3

“ DEI System ” means a System principally designed and manufactured by DEI as supplied to PECO pursuant to this Agreement.

1.2.4

“ DEI Technology ” means (i) any and all Technology with respect to, related to and/or derived from the Products, and (ii) any and all Technology developed solely by DEI.  For clarification, a PECO System includes DEI Technology because it necessarily incorporates a Module. PECO products that do not include Modules are not covered under this definition.

1.2.5

“ Documentation ” means the user manuals, reference manuals, guides or portions thereof, supplied by DEI to PECO and which DEI may update from time to time.

1.2.6

 “ Intellectual Property Rights ” means any or all of the following and all rights in, arising out of, or associated therewith: (1) all United States and foreign patents and utility models and applications therefor and all reissues, divisions, re-examinations, renewals, extensions,

provisionals, continuations and continuations-in-part thereof, and equivalent or similar rights anywhere in the world in inventions and discoveries including without limitation, invention disclosures; (2) all trade secrets and other rights in know-how and confidential or proprietary information; (3) all copyrights, copyrights registrations and applications therefor and all other rights corresponding thereto throughout the world; (4) all industrial designs and any registrations and applications therefor throughout the world; (5) all rights in World Wide Web addresses and domain names and applications and registrations therefor; (6) all rights in trade names, trade dress, logos, common law trademarks and service marks, trademark and service mark registrations and applications therefor and all goodwill associated therewith throughout the world; and (7) any similar corresponding or equivalent foreign rights to any of the foregoing anywhere in the world, including moral rights.

1.2.7

 “ Modules ” means DEI’s proprietary modules, including converters, rectifiers and inverters, as set forth on Exhibit A.

1.2.8

 “ Order ” means a written description of the name and quantity of Products PECO desires to purchase that is sent to DEI pursuant to Section 3.2.1 hereof.

1.2.9

 “ PECO System ” means a System offered by PECO to PECO customers that incorporates at least one (1) Module and may include the addition of other components purchased from DEI, but exclusive of DEI System.

1.2.10

“ Person ” means any individual, corporation, partnership, firm, association, joint venture, joint stock company, trust, unincorporated organization or other entity, including any governmental entity.

1.2.11

“ Prices ” means the prices for Products as set forth in Exhibit B or any amendment of Exhibit B as shall be agreed to, in writing, by DEI and PECO.

1.2.12

“ Products ” means the Modules and/or DEI Systems as listed in Exhibit A including any improvements, updates, modifications, and derivatives thereof furnished to PECO by DEI or by PECO to DEI during the Term of this Agreement, and any such other DEI products as DEI and PECO shall, from time to time, agree, in writing, to add to Exhibit A.  It is understood that the provision of any such improvements, updates, modifications, and derivatives shall be at DEI’s sole discretion and may be subject to additional fees and/or additional terms and conditions.  Notwithstanding the foregoing, in no event shall “Products” include any products, components, or other assets that are acquired, received, attained, procured or otherwise obtained by DEI in connection with a Transaction occurring during the term hereof.  “Transaction,” as used in this provision above, means any transaction entered into by DEI, whereby DEI (i) acquires any person (or related group of persons) whether by tender or exchange offer made directly to the stockholders, open market purchases or any other transaction or series of transactions, of fifty percent (50%) (or the such lesser percentage as is permitted in those jurisdictions where the maximum percentage permitted by law is lower than 50%) or more of the capital stock entitled to elect the members of the board of directors or other analogous governing body of such entity, (ii) enters into a merger, reverse merger or consolidation with any person (or related group of persons); or (iii) otherwise acquires through asset sale or otherwise all or any portion of the business or assets of any other person.

1.2.13

 “ System ” means a complete self-contained unit (cabinet), capable of providing a primary function and that incorporates one (1) or more subsystems or products.

1.2.14

 “ Technology ” means any or all of the following: (1) works of authorship including, without limitation, computer programs, algorithms, routines, source code and executable code,

2

whether embodied in software or otherwise, and documentation provided for use therewith; (2) inventions (whether or not patentable) and improvements; (3) proprietary and confidential information, including, without limitation, technical data and customer and supplier lists, trade secrets, know how and techniques; (4)  databases, data compilations and collections; (5) processes, tools, devices, methods, prototypes, schematics, bread boards, net lists, mask works, test methodologies and hardware development tools; and (6) all instantiations of the foregoing in any form and embodied in any media.

2.

R IGHTS .

2.1

Rights .

2.1.1

Subject to the terms of this Agreement, DEI grants PECO, and PECO accepts, a nontransferable right to purchase and incorporate Modules into PECO Systems and to market, promote, sell and distribute the Modules, PECO Systems and/or the DEI Systems to PECO customers.  Modules may only be distributed in their unmodified form, as originally received from DEI, or as modified by DEI (except that Modules may be incorporated into PECO Systems as set forth herein).  PECO may modify the DEI Systems (exclusive of Modules) purchased hereunder to conform with the specifications of PECO customers.  

2.1.2

PECO shall ensure that the Products are accurately represented to PECO customers as to quality, function, purpose and compatibility.

2.2

Proprietary Rights; No Modification .  PECO shall not remove, alter, cover or obfuscate any copyright notices or other proprietary rights notices placed on or embedded in the Products by DEI and all Products distributed by PECO shall contain the copyright and other proprietary notices in the same manner in which DEI incorporates such notices on or in the Products.  PECO agrees to take all reasonable steps to protect the Products and Documentation from unauthorized copy or use.  Any source code in the Products represents and embodies trade secrets of DEI or PECO.  Such source code and embodied trade secrets are not licensed to PECO or DEI and any modification, addition, or deletion is strictly prohibited.  PECO or DEI shall not, and shall not allow any Person to, modify, alter, reverse engineer, disassemble or decompile the Products or any portion thereof, and PECO shall use commercially reasonable efforts to enforce such restrictions.    

3.

F ORECASTS , O RDERING , D ELIVERY , AND A CCEPTANCE .

3.1

Forecasts .  On or before the first day of each month (“Forecast Date”) during the Term, PECO shall provide DEI with a non-binding six (6) month rolling Product specific purchase forecast for Orders for the Products.  

3.2

Orders .

3.2.1

Any Order by PECO shall be deemed a firm commitment to take the goods specified and shall be binding upon PECO.  Orders must be received by DEI not less than sixty (60) days prior to the requested shipping date (“Leadtime”).  Orders shall be sent in writing by letter, email or fax, shall specify requested shipping dates and shall be subject to written acceptance by DEI.  PECO may use its standard purchase order form or other document to order Products; however, the terms and conditions of this Agreement shall supersede any different, conflicting, or additional terms on PECO’s order forms and all such terms are hereby specifically objected to and will be of no force or effect.  All Orders must, at a minimum, include the Product name/description, quantity (by Product), and the applicable price, as well as such other information as DEI may reasonably request from time to time.  Further, PECO agrees that it shall not submit an Order for less than the number of units of Product specified in Exhibit C without

3

DEI’s prior written approval.  DEI reserves the right to accept or reject Orders from PECO that are not in accordance with pricing and terms of this Agreement.  Orders or changes to Orders will not be accepted over the telephone.

3.2.2

DEI will use reasonable efforts to process and ship all Orders in accordance with requested delivery dates.    DEI reserves the right to add, delete from, or modify, upon at least thirty (30) days advance notice to PECO, the design, model or specifications of the Products.  DEI further shall notify PECO one hundred eighty (180) days prior to a discontinuance of manufacture, sales or license of any product covered by this Agreement.  DEI or its Affiliate shall be committed to, at PECO’s expense, supporting parts and technical assistance of discontinued Products ten (10) years from the date any Product is discontinued, provided that the parts for such Products are available in the market.  

3.3

Cancellations and re-scheduling window.

The parties agree that PECO shall be limited to the cancellation liabilities set forth in the table below and that PECO and DEI agree to rescheduling terms in the table below, both in the event of a change by PECO in any purchase order.

3.4

Inspection .  DEI will perform out going inspection and implement Quality Assurance procedures in conformance with product specifications. PECO will perform inspection of Products purchased from DEI, depending on, but not limited to, Product complexity, Product performance history, risk of nonconforming material, direct ship to stock status of DEI, each according to PECO quality procedures.  DEI will be notified as soon as reasonably practicable, normally within three (3) Business Days of receipt but in any event no more than fifteen (15) Business Days  of any nonconforming material found in any Products, whether in receiving inspection or any point within the manufacturing process.  If nonconforming material is identified in a Product, PECO will notify DEI in writing regarding any Products that materially fail to meet DEI’s published Product specifications. Depending on various factors, including but not limited to PECO customers demand or complexity of repairs, PECO and DEI will jointly decide the best method to resolve the nonconformance which may include a return of the Products to DEI, repairs by PECO, or some form of both.  If both DEIC and PECO agree to return Products to DEI, PECO shall request from DEI a return material authorization (a “RMA”), either by e-mail, mail or telefax following a proper explanation of the rejection.  Returns shall be performed in accordance with DEI’s RMA procedure. Upon the condition that DEI agrees, rejected goods should be returned freight prepaid to DEI within ten business days of rejection and receipt from DEI of a return authorization.  As promptly as possible, but not later than sixty (60) days after receipt by DEI of properly rejected Products, DEI shall, at its option and expense, either repair or replace such Products.  The party shipping Products pursuant to this Section 3.4 shall bear the entire risk of loss for Products during shipment.  Any insurance proceeds payable in respect to any loss for any Products to the extent of any loss incurred during shipment shall be paid to the party bearing the risk of loss for such Products to the extent of the loss incurred.  DEI shall reimburse PECO for any costs of transportation incurred by PECO in connection with the return to DEI of properly rejected Products.  In the case of improperly rejected or returned Products, PECO shall pay transportation charges in both directions.  

4

4.

P RICES AND S HIPPING T ERMS .

4.1

Prices. Pricing and shipping terms for products is set forth in Exhibit B. Subject to the provisions of this Section 4, prices shall be firm for the term of this agreement as defined in Section 15.1. After the expiration, DEI may change the prices, upon thirty (30) day written notification to PECO.  During theterm of the agreement, DEI is entitled to change the prices if the material costs increase. Notwithstanding the foregoing, if DEI and PECO mutually agree on specially modified pricing for the Products with respect to a PECO customers  and a specific project, such specially modified pricing shall supersede and replace the pricing for such Products and project as stated in Exhibit B with respect solely to such PECO customers  and project and such specially modified pricing shall remain in effect for the full term of any agreement entered into by PECO and such PECO customers  with respect to such Products and project.  

4.2

Payment Terms . Payment for Product purchased by PECO shall be paid in US dollars to DEI [*] from the date of each invoice.

4.2.1

BUYER shall effect the payment by electronic remittance. In the event that PECO fails to make payment on time for any invoice, DEI reserves the right to stop shipping.

4.2.2

DEI may, at its discretion, declare all sums immediately due and payable in the event of a breach by PECO of any of its material obligations to DEI under this Agreement, including but not limited to, the failure of PECO to comply with credit terms.

4.2.3

Interest shall accrue upon any delinquent payments owed by PECO as to which DEI has made a final written demand for payment, at the maximum rate allowed by London Interbank Offered Rate (LIBOR).  In the event that it becomes necessary for DEI to institute litigation to collect sums owed by PECO, PECO shall be responsible for reasonable attorney’s fees and other costs incurred by DEI in connection with such litigation, if DEI prevails therein.

4.3

Taxes .  Prices do not include and are net of any foreign or domestic governmental taxes or charges of any kind that may be applicable to the sale, licensing, marketing, or distribution of the Products, including without limitation excise, sales, use, property, license, value-added taxes, franchise, income, withholding or similar taxes, customs or other import duties or other taxes, tariffs or duties other than taxes. Any such taxes shall be the sole responsibility of PECO.  

5.

O THER O BLIGATIONS OF PECO .  PECO’s obligations under this Agreement shall, without limitation, include the following:

5.1

Services .  PECO shall be solely responsible for order processing, customer service to PECO customers and inventory maintenance.

5.2

Training .  DEI may from time to time conduct training programs. The reasonable costs for attending such training sessions provided by DEI, such as travel and lodging, shall be PECO’s sole responsibility.  

5.3

  Compliance .  PECO acknowledges that it is familiar with and will comply with and be solely responsible for its obligations under all laws, rules and regulations related to distribution and/or sale of the Modules, DEI Systems and/or PECO Systems, as applicable.  PECO shall keep a record of all written and oral complaints concerning the Products.  PECO shall promptly inform DEI of all suspected Product defects, safety problems or any information associated with the safety of the Product and shall promptly notify DEI in writing of any third party dispute involving a Product.

——————————————

* Portions have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidential treatment.

5

5.4

Indemnity .  At DEI’s option and election, PECO shall indemnify, defend and hold  DEI and any of its officers, directors, employees, agents, investors, shareholders, administrators, affiliates, related companies, divisions, subsidiaries, predecessor and successor corporations, and harmless from and against any claims, suits, losses, damages, liabilities, costs and expenses (including reasonable attorney’s fees) incurred by DEI arising from or relating to personal injury, death or property damage, arising out of or related to(i) PECO’s modifications of Products/DEI Systems, (ii) DEI's manufacture of any  Product in compliance with PECO's design, tooling, specification, instruction, and/or using any of PECO's designated or consigned material, component or part, or (iii) abuse, misuse, neglect, repair, alteration, modification, tampering, improper transportation, installation, operation, testing, storage or maintenance; provided that DEI promptly notifies PECO in writing of any such claim and promptly tenders the control of the defense and settlement of any such claim to PECO at PECO’s expense and with PECO’s choice of counsel.  DEI shall cooperate with PECO, at PECO’s expense, in defending or settling such claim and DEI may join in defense with counsel of its choice at its own expense. .

6.

O THER O BLIGATIONS OF DEI .   DEI shall have the following obligations under this Agreement:

6.1

Marketing and Promotion .   DEI shall provide PECO with electronic copies of sales aids, data sheets, product profiles, brochures, and other materials to assist PECO in the promotion and sales of Products.  Additional marketing materials will be made available to PECO in accordance with DEI’s then current policy regarding same.  PECO may copy and/or translate some or all of such literature and advertising copy and incorporate such in its own product literature.  In the event that PECO elects to copy and/or translate materials provided by DEI, all materials provided by Distribution shall include all copyright, trademark and other proprietary legends included in the original material furnished by DEI and DEI shall own all rights in such translations.

6.2

Indemnity .  At PECO’s option and election, DEI shall indemnify, defend and hold the PECO and any of its officers, directors, employees, agents, investors, shareholders, administrators, affiliates, related companies, divisions, subsidiaries, predecessor and successor corporations, and assigns harmless from and against any claims, suits, losses, damages, liabilities, costs and expenses (including reasonable attorney’s fees) incurred by PECO arising from or relating to personal injury, death or property damage, arising out of or related to  unmodified Modules and DEI Systems, as delivered by DEI,; provided that PECO promptly notifies DEI in writing of any such claim and promptly tenders the control of the defense and settlement of any such claim to DEI at DEI’s expense and with DEI’s choice of counsel.  PECO shall cooperate with DEI, at DEI’s expense, in defending or settling such claim and PECO may join in defense with counsel of its choice at its own expense. DEI shall not have any liability for any claim resulting from (i) PECO's modification of a Product, (ii) the combination, operation or use of a modified Product by PECO with any product, data or apparatus, (iii) anything PECO provides to incorporate into a Product, (iv) abuse, misuse, neglect, repair, alteration, modification, tampering, improper transportation, installation, operation, testing, storage or maintenance, or (v) any negligent or willful act, error or omission on the part of PECO, its officer, dir