Schedule 13D

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vp25+ko98/q8xEdtZ7BIsnf7i2YePBfaoGrjLTnM3pb3gCzqVZTiDNwD63+EoFHn hI6q5PH7WDhlPZhNDcqSAQ== 0001193125-05-214343.txt : 20051102 0001193125-05-214343.hdr.sgml : 20051102 20051102161101 ACCESSION NUMBER: 0001193125-05-214343 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 20051102 DATE AS OF CHANGE: 20051102 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: PECO II INC CENTRAL INDEX KEY: 0000845072 STANDARD INDUSTRIAL CLASSIFICATION: CONSTRUCTION SPECIAL TRADE CONTRACTORS [1700] IRS NUMBER: 341605456 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D SEC ACT: 1934 Act SEC FILE NUMBER: 005-60429 FILM NUMBER: 051173394 BUSINESS ADDRESS: STREET 1: 1376 STATE ROUTE 598 CITY: GALION STATE: OH ZIP: 44833 BUSINESS PHONE: 4194687600 MAIL ADDRESS: STREET 1: 1376 STATE ROUTE 598 CITY: GALION STATE: OH ZIP: 44833 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: Delta Products CORP CENTRAL INDEX KEY: 0001343143 IRS NUMBER: 952843706 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: 4450 CUSHING PARKWAY CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 510-668-5100 MAIL ADDRESS: STREET 1: 4450 CUSHING PARKWAY CITY: FREMONT STATE: CA ZIP: 94538 SC 13D 1 dsc13d.htm SCHEDULE 13D Schedule 13D

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 13D

Under the Securities Exchange Act of 1934

(Amendment No. )

PECO II, INC.

(Name of Issuer)

COMMON SHARES

(Title of Class of Securities)

705221 10 9

(CUSIP Number)

Delta Products Corporation

4405 Cushing Parkway

Fremont, CA 94538

Attention: M.S. Huang

Telephone: (510) 668-5100

Copies to:

Aaron J. Alter, Esq.

Wilson Sonsini Goodrich & Rosati,

Professional Corporation

650 Page Mill Road

Palo Alto, CA 94304

Telephone: (650) 493-9300

(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications)

October 13, 2005

(Date of Event which Requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of §§240.13-1(e), 240.13d-(f) or 240.13d-1(g), check the following box. ¨

Note: Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See §240.13d-7(b) for other parties to whom copies are to be sent.

The remainder of this cover page shall be filled out for a reporting person’s initial filing on this form with respect to a subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page.

The information required on the remainder of this cover page shall not be deemed to be “filed” for the purpose of Section 18 of the Securities Exchange Act of 1934 (“Act”) or otherwise subject to the liabilities of that section of the Act but shall be subject to all other provisions of the Act (however, see the Notes).

CUSIP No. 705221 10 9


1.	Name of Reporting Person. SS or I.R.S. Identification No. of above person. Delta Products Corporation I.R.S. Identification No. 95-28430706
2.	Check the Appropriate Box if a Member of a Group (a) ¨ (b) ¨
3.	SEC Use Only
4.	Source of Funds OO
5.	Check Box if Disclosure of Legal Proceedings Is Required Pursuant to Items 2(d) or 2(e)	¨
6.	Citizenship or Place of Organization California

Number of Shares Beneficially Owned by Each Reporting Person With

7. Sole Voting Power

N/A

8. Shared Voting Power

5,377,557 shares of Common Stock (a)

9. Sole Dispositive Power

N/A

10. Shared Dispositive Power

N/A


11.	Aggregate Amount Beneficially Owned by Each Reporting Person 5,377,557 shares of Common Stock (a)
12.	Check Box if the Aggregate Amount in Row (11) Excludes Certain Shares	¨
13.	Percent of Class Represented by Amount in Row (11) 24.90% (a)
14.	Type of Reporting Person CO

(a)

The 5,377,557 shares of PECO II. Inc. (“PECO”) Common Stock are subject to voting agreements entered into between Delta Products Corporation and certain stockholders of PECO (referred to as the PECO Support Agreements and discussed in Items 3 and 4 below). Delta expressly disclaims beneficial ownership of any of the shares of PECO Common Stock covered by the voting agreements. Based on the number of shares of PECO Common Stock outstanding as of October 12, 2005, the number of shares of PECO Common Stock covered by the voting agreements represents approximately 24.90% of the outstanding shares of PECO Common Stock.

Item 1. Security and Issuer

This statement on Schedule 13D (this “Statement”) relates to the Common Stock, no par value per share, of PECO II, Inc., an Ohio Corporation (“PECO” or “Issuer”). The principal executive offices of PECO are located at 1376 State Route 598, Galion, Ohio.

Item 2. Identity and Background

(a)	The name of the corporation filing this Statement is Delta Products Corporation, a California Corporation (“Delta”).

(b)	The address of the principal business and principal executive office for Delta is 4405 Cushing Parkway, Fremont, CA 94538.

(c)	The principal business of Delta is the manufacture, supply and distribution of telecommunications power system products.

Set forth on Schedule A hereto is (i) the name and citizenship of each of the executive officers and directors of Delta, (ii) the business address of each such person, (iii) the present principal occupation or employment, if any, of each such person, and the name, principal business and address of any corporation or other organization in which such employment is conducted.

(d)	During the last five years, neither Delta, nor, to the best of Delta’s knowledge, any person named on Schedule A hereto, has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors).

(e)

During the last five years, neither Delta, nor, to the best of Delta’s knowledge, any person named on Schedule A hereto, was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws.

Item 3. Source and Amount of Funds or Other Consideration

Pursuant to an Asset Purchase Agreement, dated as of October 13, 2005 (the “Asset Purchase Agreement”), by and between PECO and Delta, and subject to the conditions set forth therein, (x) Delta will sell to PECO certain of its business assets and (y) Delta Electronics, Inc. (“DEI”, an affiliate of Delta) shall grant to PECO certain exclusive rights under a related Supply Agreement to be entered into at Closing (as defined in the Asset Purchase Agreement) between DEI and PECO (the “Supply Agreement”) in exchange for (i) 4,740,375 shares of PECO Common Stock (the “Shares”), (ii) a warrant to purchase, when aggregated with the Shares, up to forty-five percent (45%) of PECO’s issued and outstanding stock at an exercise price of $2.00 per share, with a term of thirty (30) months, a copy of which is attached as Exhibit 1 to this Statement (the “Warrant”), and (iii) the assumption by PECO of certain liabilities, as described in the Asset Purchase Agreement. The Shares and the shares of PECO Common Stock issuable upon exercise of the Warrant will have registration rights, as provided in the form of Registration Rights Agreement to be entered into between Peco and Delta at the Closing (as defined in the Asset Purchase Agreement), a copy of which is attached as Exhibit 2 to this Statement (the “Registration Rights Agreement”).

As a condition and inducement for Delta to enter into the Asset Purchase Agreement and in consideration thereof, certain stockholders of PECO entered into individual voting agreements with Delta (collectively the “PECO Support Agreements”) whereby each such stockholder (collectively, the “PECO Support Agreement Stockholders”) agreed, severally and not jointly, to vote all of the shares of PECO Common Stock beneficially owned by such PECO Support Agreement Stockholder at any PECO stockholders meeting or by any consensual action (i) in favor of the issuance of the Shares and the Warrant pursuant to the Asset Purchase Agreement, (ii) in favor of the Opt-Out Proposal (as defined in the Asset Purchase Agreement and discussed in Item 4(g) below), (iii) in favor of the other transactions contemplated by the Asset purchase Agreement and in favor of any other matter that could reasonably be expected to facilitate consummation of the transactions contemplated by the Asset Purchase Agreement, (iv) against any change in a majority of the members of the Board of Directors of PECO, and (v) against any Adverse Transaction (as defined in the form of PECO Support Agreement). Delta did not pay any consideration to any PECO Support Agreement Stockholder in connection with the execution and delivery of the PECO Support Agreements.

References to, and descriptions of, the Asset Purchase Agreement and the Supply Agreement as set forth in this Schedule 13D are qualified in their entirety by reference to the Asset Purchase Agreement and the Supply Agreement (attached as Exhibit A to the Asset Purchase Agreement) included as Exhibit 2.1 to the Form 8-K filed by PECO on October 19, 2005, which are incorporated by reference herein in their entirety where such references and descriptions appear.

References to, and descriptions of, the Warrant, the Registration Rights Agreement and the PECO Support Agreements as set forth in this Schedule 13D are qualified in their entirety by reference to the form of Common Stock Warrant included as Exhibit 1 to this Statement, the form of Registration Rights Agreement included as Exhibit 2 to this Statement, and the form of PECO Support Agreement included as Exhibit 3 to this Statement, which are incorporated by reference herein in their entirety where such references and descriptions appear.

Item 4: Purpose of Transaction


(a)(b)		The information set forth and incorporated by reference in Item 3 is incorporated by reference herein.

		As described in Item 3 above, this Statement relates to the sale of assets and the grant of certain exclusive rights by Delta and DEI, respectively, to PECO pursuant to the terms of the Asset Purchase Agreement and related Supply Agreement.

		In addition to the transactions contemplated by the Asset Purchase Agreement, at Closing (as defined in the Asset Purchase Agreement), PECO and DEI will enter into the Supply Agreement under which DEI will grant PECO the right to purchase and incorporate modules and other components into PECO’s telecommunications systems and to market, promote and distribute the modules and other DEI technology in U.S. and Canadian markets. Such rights will be exclusive to PECO for a period of twenty-four (24) months. The Supply Agreement also provides that PECO and DEI may collaborate on developing additional technology with respect to system-level design and component-level design. The term of the Supply Agreement is 30 months.

		Pursuant to the PECO Support Agreements, each of the PECO Support Agreement Stockholders has irrevocably appointed Delta, acting through two (2) appointed proxy holders, as such PECO Support Agreement Stockholders’ true and lawful proxy and sole attorney-in-fact with respect to certain prescribed matters related to the Asset Purchase Agreement. Accordingly, Delta has the limited right to vote or deliver a consent with respect to the PECO Common Stock beneficially owned by PECO Support Agreement Stockholders at any PECO stockholders meeting (and any adjournment or postponement thereof) or by any consensual action (i) in favor of the issuance of the Shares and the Warrant pursuant to the Asset Purchase Agreement, (ii) in favor of the Opt-Out Proposal (as defined in the Asset Purchase Agreement and discussed in Item 4(g)), (iii) in favor of the other transactions contemplated by the Asset purchase Agreement and in favor of any other matter that could reasonably be expected to facilitate consummation of the transactions contemplated by the Asset Purchase Agreement, (iv) against any change in a majority of the members of the Board of Directors of PECO, and (v) against any Adverse Transaction (as defined in the form of PECO Support Agreement). The PECO Support Agreement Stockholders may vote their shares of PECO Common Stock on all other matters. Each PECO Support Agreement terminates upon the earlier to occur of (x) the termination of the Asset Purchase Agreement in accordance with its terms; provided, however, that in the event the Asset Purchase Agreement is terminated by PECO pursuant to Section 7.1(g) thereof, the PECO Support Agreements shall remain in full force and effect for a period of six (6) months following the date of any such termination, and (b) the Closing Date (as defined in the Asset Purchase Agreement).

(c)		Not applicable.

(d)		Pursuant to the terms of the Asset Purchase Agreement, as of Closing (as defined therein), an individual designated by Delta shall be appointed to fill PECO’s current Class II vacancy on its Board of Directors. In this regard, as a further condition and inducement for Delta to enter into the Asset Purchase Agreement and in consideration thereof, Delta, PECO and certain significant stockholders of PECO, in their capacity as stockholders of PECO, have executed a Voting Agreement, to be effective as of Closing (as defined in the Asset Purchase Agreement), a copy of which is attached hereto as Exhibit 4 (the “Voting Agreement”), whereby Delta and each such stockholder (collectively, the “Voting Agreement Stockholders”) have agreed to vote all of the shares of PECO Common Stock beneficially owned by such Voting Agreement Stockholder at any PECO stockholders meeting or by any consensual action (i) in favor of electing, in the case of Delta, the individual designated by Delta to stand for election to serve on the PECO Board, and (ii) in favor of electing, in the case of PECO, the individuals nominated by PECO’s Board to stand for election to serve on the PECO Board. The Voting Agreement terminates upon the earlier of: (i) the written agreement of the Delta and PECO, (ii) the date Delta, or any of its affiliates (other than PECO), no longer holds shares of PECO Common Stock or rights to purchase such shares, representing at least five percent (5%) of the outstanding voting stock of PECO, (iii) the date Delta (alone, or together with any of its affiliates (other than PECO)) holds forty-five percent (45%) or greater


		of the then issued and outstanding voting capital stock of PECO, and (iv) the consummation of (x) any a tender offer, exchange offer, merger, consolidation or other business combination of PECO the result of which is that the stockholders of PECO (other than Delta and its affiliates in the case of a tender offer) immediately preceding such transaction hold less than fifty percent (50%) of the equity interests in the surviving or resulting entity of such transaction (or any direct or indirect parent or subsidiary thereof), or (y) the sale of all or substantially all of the assets of PECO. There is no shared voting power pursuant to the terms of the Voting Agreement.

(e)		Other than the issuance of the Shares and the Warrant pursuant to the Asset Purchase Agreement, not applicable.

(f)		Not applicable.

(g)		As a condition to closing the transactions contemplated by the Asset Purchase Agreement, the PECO stockholders must approve an amendment to its Code of Regulations to opt-out of the Ohio Control Share Acquisition Act (referred to in the Asset Purchase Agreement as the “Opt-Out Proposal”).

(h)-(j)		Not applicable.

		References to, and descriptions of, the Asset Purchase Agreement and the Supply Agreement as set forth in this Schedule 13D are qualified in their entirety by reference to the Asset Purchase Agreement and the Supply Agreement (attached as Exhibit A to the Asset Purchase Agreement) included as Exhibit 2.1 to the Form 8-K filed by PECO on October 19, 2005, which are incorporated by reference herein in their entirety where such references and descriptions appear.

		References to, and descriptions of, the Warrant, the PECO Support Agreements and the Voting Agreement as set forth in this Schedule 13D are qualified in their entirety by reference to the form of Common Stock Warrant, the form of PECO Support Agreement and the form of Voting Agreement included as Exhibits 1, 3 and 4, respectively, to this Statement, which are incorporated by reference herein in their entirety where such references and descriptions appear.

Item 5. Interest in Securities of the Issuer


(a)(b)		The information set forth and incorporated by reference in Items 3 and 4 is incorporated by reference herein.

		As a result of the PECO Support Agreements, Delta may be deemed to be the beneficial owner of at least 5,377,557 shares of PECO Common Stock. Such PECO Common Stock constitutes approximately 24.90% of the issued and outstanding shares of PECO Common Stock based on the number of shares of PECO Common Stock outstanding as of October 12, 2005. Delta may be deemed to have the shared power to vote such shares with respect to those matters described above. However, Delta (i) is not entitled to any rights as a stockholder of PECO as to the shares and (ii) disclaims any beneficial ownership of the shares of PECO Common Stock which are covered by the PECO Support Agreements.

		To Delta’s knowledge, no person listed in Schedule A has an ownership interest in PECO.

		Set forth on Schedule B hereto are the names of those stockholders of PECO that have entered into the PECO Support Agreements, and, to the knowledge of Delta, each of their respective present principal occupations or employment, including the name, principal business and address of any corporation or other organization in which such employment is conducted, as well as the aggregate number of beneficially owned shares of PECO Common Stock of each such stockholder as of October 13, 2005.

(c)		On October 18, 2005, Mr. M.S. Huang, President of Delta Products Corporation, purchased 20,000 shares of PECO’s common stock in a series of open-market transactions effected through a broker, as follows (the settlement date for each of the following purchase transactions was October 21, 2005): 12,328 shares purchased at $1.50 per share; 6,872 shares purchased at $1.57 per share; 600 shares purchased at $1.49 per share; and 200 shares purchased at $1.52 per share. To the knowledge of Delta, as of the date hereof, no other transactions in the class of securities reported have been effected by any person named pursuant to Item 2 during the past 60 days.

(d)		To the knowledge of Delta, no other person has the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the shares of PECO Common Stock covered by the PECO Support Agreements.

(e)		Not applicable.


		References to, and descriptions of, the PECO Support Agreements as set forth in this Schedule 13D are qualified in their entirety by reference to the form of the PECO Support Agreement included as Exhibit 3 to this Statement, which is incorporated by reference herein in its entirety where such references and descriptions appear.

Item 6. Contracts, Arrangements, Understandings or Relationships with Respect to Securities of the Issuer

The information set forth and incorporated by reference in Items 3, 4 and 5 is incorporated by reference herein.

Other than the Asset Purchase Agreement and the exhibits thereto, including the Warrant, the Registration Rights Agreement, the PECO Support Agreements and the Voting Agreement, to the knowledge of Delta, there are no contracts, arrangements, understandings or relationships among the persons named in Item 2 and between such persons and any person with respect to any securities of PECO, including but not limited to transfer or voting of any of the securities, finder’s fees, joint ventures, loan or option arrangements, puts or calls, guarantees of profits, division of profits or loss or the giving or withholding of proxies.

Item 7. Material to Be Filed as Exhibits

The following documents are filed as exhibits to this Statement:

Form of Common Stock Warrant to be executed by Peco at the Closing (as defined in the Asset Purchase Agreement).

Form of Registration Rights Agreement to be executed by Peco and Delta at the Closing (as defined in the Asset Purchase Agreement).

Support Agreement and Irrevocable Proxy, dated as of October 13, 2005, among Delta Products Corporation, PECO II, Inc. and the stockholders of PECO listed on Exhibit A thereto.

Voting Agreement, dated as of October 13, 2005, among Delta Products Corporation, PECO II, Inc. and the stockholders of PECO listed on Exhibit A-1 thereto.

Signature

After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this Statement is true, complete and correct. Pursuant to Rule 13d-1(k)(l), agreement that the attached Schedule 13D is filed on behalf of the entity named below is hereby expressed:


Date: November 1, 2005

By: /s/ M.S. HUANG
Name /Title:		M.S. Huang
		President
		Delta Products Corporation

SCHEDULE A

DIRECTORS AND EXECUTIVE OFFICERS OF

DELTA PRODUCTS CORPORATION

The following table sets forth the name and citizenship, business address and present principal occupation or employment of each executive officer and director of Delta Products Corporation. Each person set forth on this Schedule A is a United States citizen. The business address of each person set forth on this Schedule A is: c/o Delta Products Corporation, 4405 Cushing Parkway, Fremont, CA 94538.


Name of Executive Officer		Title and Present Principal Occupation
M.S. Huang		President and Chief Executive Officer

Yao C.H. Chou		Sr. VP Corporate Administration and Secretary

Sheryl Chen		Chief Financial Officer

Name of Director		Title and Present Principal Occupation
M.S. Huang		President and Chief Executive Officer

Yao C.H. Chou		Sr. VP Corporate Administration and Secretary

Graham Hunter		VP Sales/Marketing, Power Systems

SCHEDULE B

PECO II, INC. STOCKHOLDERS PARTY TO PECO SUPPORT AGREEMENTS

The following table sets forth the name, current business address and present principal occupation or employment of each stockholder of PECO II, Inc. that has entered into a PECO Support Agreement in connection with the Asset Purchase Agreement, as well as the aggregate number of beneficially owned shares of PECO Common Stock of each such stockholder as of October 13, 2005. Except as otherwise indicated below, each stockholder set forth on this Schedule B is an employee of PECO II, Inc. and is a U.S. citizen. Except as otherwise indicated below, the business address of each such person is c/o 1376 State Route 598, Galion, Ohio, 44833.


Name	Present Principal Occupation or Employment	Beneficially Owned Shares
Matthew P. Smith	Member of the Board of Directors of PECO	183,407

Matthew P. Smith and Linda H. Smith	Mr. Smith is a member of the Board of Directors of PECO; Mrs. Smith is retired	1,441,950 (shared voting)

Ashwood I, LLC (ATTN: Matthew P. Smith)	Mr. Smith is a member of the Board of Directors of PECO	1,000,000 (shared voting)

Ashwood II, LLC (ATTN: Matthew P. Smith)	Mr. Smith is a member of the Board of Directors of PECO	500,000 (shared voting)

Green Family Trust 03/16/1995, James L. Green and M. Janet Green, Trustees	Mr. Green is a member of the Board of Directors of PECO; Mrs. Green is retired	2,177,200 (shared voting)

Jim Green & Mary Green TR UA 05/09/01 Green Charitable Trust	Mr. Green is a member of the Board of Directors of PECO; Mrs. Green is retired	75,000 (shared voting)

EX-1 2 dex1.htm FORM OF COMMON STOCK WARRANT Form Of Common Stock Warrant

EXHIBIT 1

FORM OF COMMON STOCK WARRANT

Exhibit F to Asset Purchase Agreement

COMMON STOCK WARRANT

THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THIS WARRANT MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH WARRANT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS.

WARRANT TO PURCHASE SHARES OF COMMON STOCK

This Warrant is issued to Delta Products Corporation, a California corporation (the “Holder”), by PECO II, Inc., an Ohio corporation (the “Company”), pursuant to the terms of that certain Asset Purchase Agreement dated as of October 13, 2005 (the “Asset Purchase Agreement”) and is effective as of [•] 2005 (“the Issuance Date”).

1. Purchase of Shares. Subject to the terms and conditions hereinafter set forth, the holder of this Warrant is entitled, upon surrender of this Warrant and delivery of a duly executed Notice of Exercise (in the form attached hereto as Exhibit A), together with the applicable Exercise Price, at the principal office of the Company (or at such other place as the Company shall notify the Holder in writing), to purchase from the Company up to the number of fully paid and nonassessable Shares (as defined below) that equals the Warrant Coverage Amount (as defined below).

2. Definitions.

(a) Affiliates. The “affiliate” of any Person means any Person that controls, is controlled by, or is under common control with such Person. As used herein, the term “control” (including the terms “controlling”, “controlled by” and “under common control with”) means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities or other interests, by contract or otherwise.

(b) Asset Shares. The “Asset Shares” shall mean 4,740,375 shares of the Company’s common stock, representing the number of Shares issued to the Holder pursuant to Section 2.1 of the Asset Purchase Agreement.

(c) Exercise Date. The “Exercise Date” shall mean the respective date on which the Holder exercises this Warrant pursuant to the terms hereof.

(d) Exercise Price. The “Exercise Price” shall be $2.00 per Share (as adjusted pursuant to the terms hereof).

(e) Exercise Period. This Warrant shall be exercisable, in whole or in part, at any time and from time to time during the term commencing on the Issuance Date and ending at 5:00 p.m. Eastern Standard Time on [•], 2008, the date that is 30 months from the Issuance Date.

(f) Outstanding Shares. The term “Outstanding Shares” means all issued and outstanding shares of capital stock of the Company as of the date that is the five (5) business days prior to the Exercise Date; provided, however, that in the event the Exercise Date is within five (5) business days of the Issuance Date, the measurement date shall be the Issuance Date (and shall include the Asset Shares).

(g) Person. The term “Person” means any individual, corporation, partnership, firm, association, joint venture, joint stock company, trust, unincorporated organization or other entity.

(h) Registration Rights Agreement. The term “Registration Rights Agreement” means that certain Registration Rights Agreement entered into between the Company and the Holder as of the date of this Warrant, a copy of which is attached to this Warrant as Exhibit C.

(i) Required Warrant Coverage Amount. The term “Required Warrant Coverage Amount” shall mean that number of Shares that is determined by application of the following formula: (x) the quotient of (i) the Outstanding Shares minus the Asset Shares, divided by (ii) 0.55, minus (y) the Outstanding Shares, and (z) rounded to the nearest whole share.

(j) Shares. The term “Shares” shall mean shares of the Company’s common stock.

(k) Warrant. The term “Warrant” as used herein shall include this Warrant, and any warrants delivered in substitution or exchange therefor as provided herein.

(l) Warrant Coverage Amount. The term “Warrant Coverage Amount” shall mean that number of Shares that is equal to (x) the Required Warrant Coverage Amount minus (y) that number of Shares previously issued prior to the respective Exercise Date upon any partial exercise of this Warrant by any holder hereof.

3. Method of Exercise. While this Warrant remains outstanding and exercisable in accordance with Section 2 above, the Holder may exercise, in whole or in part, the purchase rights evidenced hereby. Such exercise shall be effected by:

(a) the surrender of the Warrant, together with a Notice of Exercise (in the form attached hereto as Exhibit A) to the Secretary of the Company at its principal offices; and

(b) the payment to the Company of a cash amount (payable by check or wire transfer or cancellation of indebtedness) equal to the aggregate Exercise Price for the number of Shares being purchased.

4. Certificates for Shares. As promptly as practicable on or after the Exercise Date and in any event within ten (10) days thereafter, the Company, at its expense, shall issue and deliver to the Holder a certificate or certificates for the number of Shares issuable upon such exercise. In the event that this Warrant is exercised in part, the Company, at its expense, will execute and deliver a new Warrant of like tenor exercisable for the number of Shares for which this Warrant may then be exercised.

5. Issuance of Shares. The Company covenants that the Shares, when issued pursuant to the exercise of this Warrant, will be duly and validly issued, fully paid and nonassessable and free from all taxes, liens, and charges with respect to the issuance thereof.

6. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant, but in lieu of such fractional shares the Company shall make a cash payment therefor on the basis of the Exercise Price then in effect.

7. Replacement of Warrant. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and substance to the Company or, in the case of mutilation, on surrender and cancellation of this Warrant, the Company at the Holder’s expense shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor and amount.

8. Adjustment of Exercise Price and Number of Shares. The number of and kind of securities purchasable upon exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time as follows:

(a) Subdivisions, Combinations and Other Issuances. If the Company shall at any time prior to the expiration of this Warrant subdivide the Shares, by split-up or otherwise, or combine its Shares, or issue additional shares of its capital stock as a dividend with respect to the Shares, the number of Shares issuable on the exercise of this

Warrant shall forthwith be proportionately increased in the case of a subdivision or stock dividend, or proportionately decreased in the case of a combination. Appropriate adjustments shall also be made to the Exercise Price payable per share, but the aggregate Exercise Price payable for the total number of Shares purchasable under this Warrant (as adjusted) shall remain the same. Any adjustment under this Section 8(a) shall become effective at the close of business on the date the subdivision or combination becomes effective, or as of the record date of such dividend, or in the event that no record date is fixed, upon the making of such dividend.

(b) Reclassification, Reorganization and Consolidation. In case of any reclassification, capital reorganization, or change in the capital stock of the Company (other than as a result of a subdivision, combination, or stock dividend provided for in Section 8(a) above), then the Company shall make appropriate provision so that the Holder shall have the right at any time prior to the expiration of this Warrant to purchase, at a total price equal to that payable upon the exercise of this Warrant, the kind and amount of shares of stock and other securities and property receivable in connection with such reclassification, reorganization, or change by a holder of the same number of Shares as were purchasable by the Holder immediately prior to such reclassification, reorganization, or change. In any such case appropriate provisions shall be made with respect to the rights and interest of the Holder so that the provisions hereof shall thereafter be applicable with respect to any shares of stock or other securities and property deliverable upon exercise hereof, and appropriate adjustments shall be made to the purchase price per share payable hereunder, provided the aggregate purchase price shall remain the same.

(c) Notice of Adjustment. When any adjustment is required to be made in the number or kind of shares purchasable upon exercise of the Warrant, or in the Exercise Price, the Company shall promptly notify the Holder of such event and of the number of Shares or other securities or property thereafter purchasable upon exercise of this Warrant.

9. Reservation of Stock. The Company covenants that during the term this Warrant is exercisable, the Company will reserve from its authorized and unissued Shares a sufficient number of Shares to provide for the issuance of Shares upon the exercise of this Warrant and, from time to time, will take all steps necessary to amend its charter documents to provide sufficient reserves of Shares issuable upon exercise of the Warrant and will refrain from effecting any amendment to its charter documents which in any manner would adversely affect the rights or privileges of the Holder hereunder.

10. Warrants Transferable.

(a) Subject to compliance with the terms and conditions of this Section 10, this Warrant and all rights hereunder are transferable by the Holder, in whole or in part, without charge to the Holder (except for transfer taxes), upon surrender of this Warrant properly endorsed or accompanied by written instructions of transfer in the form attached hereto as Exhibit B. Any such transferee of this Warrant shall be deemed to be a “Holder” hereunder, shall be subject to all of the rights, preferences, privileges and obligations of this Warrant.

(b) Prior to any proposed sale, assignment, or transfer of this Warrant (other than a transfer not involving a change in beneficial ownership), unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the Holder shall give written notice to the Company of its intention to effect such transfer, sale or assignment. Each such notice shall describe the manner and circumstances of the proposed transfer, sale or assignment in sufficient detail, and if requested by the Company, Holder shall have furnished, a written opinion of legal counsel who shall be, and whose legal opinion shall be, reasonably satisfactory to the Company, addressed to the Company, to the effect that the proposed transfer of the Warrant may be effected without registration under the Securities Act.

(c) Notwithstanding anything to the contrary set forth in Section 10(a), Holder may not transfer this Warrant to an unaffiliated Person without the prior written consent of the Company. Holder may transfer this Warrant in whole or in part, to any of its affiliates without such prior written consent, provided such transfer is in compliance with Sections 10(a) and 10(b) and the transferee agrees in writing to be bound by the terms of this Warrant, a copy of which writing shall be provided to the Company.

11. Rights of Shareholders. The Holder shall not be entitled, as a Warrant holder, to vote or receive dividends or be deemed the holder of the Shares or any other securities of the Company which may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter

submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value, consolidation, merger, conveyance, or otherwise) until the Warrant shall have been exercised in accordance with the terms hereof; provided, however, that in the event:

(a) the Company shall take a record of the holders of its Shares (or other stock or securities at the time receivable upon the exercise of this Warrant) for the purpose of entitling them to receive any dividend or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or to receive any other right; or

(b) of any capital reorganization of the Company, any stock split or subdivision, or reverse stock split or combination, or any similar event involving the Shares, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation, or any sale, transfer or other conveyance of all or substantially all of the assets of the Company to another corporation; or

(c) of any voluntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will deliver to the Holder a notice specifying, as the case may be, (A) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (B) the date on which a record is to be taken for determining shareholders entitled to vote upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Shares (or such stock or securities at the time receivable upon the exercise of this Warrant) shall be entitled to exchange their Shares (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be delivered at least ten (10) business days prior to the date therein specified.

12. Notices. All notices, requests, demands, claims, and other communications hereunder shall be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly delivered (x) three (3) business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, (y) one business day after it is sent for next business day delivery via a reputable nationwide overnight courier service or (y) on the date sent after transmission by facsimile with written confirmation, in each case to the intended recipient as set forth below:


If to Holder:		Copies to:
Delta Products Corporation 4405 Cushing Pkwy. Fremont, CA 94538-6475 Attention: Yao C.H. Chou Fax: 510-498-8879		Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, CA 94304 Attention: Aaron J. Alter, Esq. Fax: 650-493-6811

If to the Company:		Copy to:
PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833 Attention: President and Chief Executive Officer Fax: 419-468-9164		Porter Wright Morris & Arthur LLP Huntington Center 41 South High Street Columbus, OH 43215-6194 Attention: Curtis A. Loveland Fax: 614-227-2100

Any party may give any notice, request, demand, claim or other communication hereunder using any other means (including Personal delivery, expedited courier, messenger service, telex, ordinary mail or electronic mail), but no such notice, request, demand, claim or other communication shall be deemed to have been duly given unless and until it actually is received by the party for whom it is intended. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth.

13. Registration Rights Agreement. Subject to Section 9(c) of the Registration Rights Agreement, the Shares issuable upon exercise of this Warrant shall be subject to and shall have the rights, preferences and privileges set forth in the Registration Rights Agreement. In any event, the Shares issued upon exercise of this Warrant shall be subject to Section 2 of the Registration Rights Agreement (to the extent applicable).

14. Governing Law. This Warrant and all actions arising out of or in connection with this Warrant shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the conflicts of law provisions of the State of Delaware or of any other state.

15. Counterparts. This Warrant may be executed in counterparts, each of which shall be deemed to be an original, but all of which, taken together, shall constitute one and the same agreement.

16. Descriptive Headings. The descriptive headings used herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Warrant.

17. No Impairment. The Company will not, through any voluntary action, avoid or seek to avoid the observance or performance of any terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holders hereunder.

18. Severability. Any term or provision of this Warrant that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. The parties shall use their commercially reasonable efforts to replace such void or unenforceable provision of this Warrant with a valid and enforceable provision that will achieve, to the greatest extent possible, the economic, business and other purposes of such void or unenforceable provision.

19. Amendments. This Agreement may not be amended, changed, supplemented, waived or otherwise modified or terminated, except upon the execution and delivery of a written agreement executed by the Company and the Holder.

20. No Waiver. The failure of any party hereto to exercise any right, power or remedy provided under this Warrant or otherwise available in respect hereof at law or in equity, or to insist upon compliance by any other party hereto with its obligations hereunder, and any custom or practice of the parties at variance with the terms hereof, shall not constitute a waiver by such party of its right to exercise any such or other right, power or remedy or to demand such compliance.

21. Succession and Assignment. This Warrant shall be binding upon and shall inure to the benefit of the Company and Holder and their respective successors and permitted assigns.

22. Exclusive Jurisdiction. With respect to any matter based upon or arising out of this Warrant or the transactions contemplated hereby that seeks temporary or injunctive relief or specific performance, each of the parties (a) irrevocably consents to the exclusive jurisdiction and venue of the state courts of the State of Delaware located in New Castle County, (b) agrees that process may be served upon them in any manner authorized by the laws of the State of Delaware for such Persons, (c) waives the defense of an inconvenient forum and covenants not to assert or plead any objection which they might otherwise have to such jurisdiction, venue and such process, and (d) agrees that a final judgment in such legal proceeding shall be final, binding and enforceable in any court of competent jurisdiction. Each party agrees not to commence any legal proceedings subject to this Section 22 except in such courts.

23. Binding Arbitration.

(a) Each party irrevocably agrees and acknowledges that, subject only to Section 22 above, any claim, dispute, controversy or other matter based upon, arising out of or relating to this Warrant or the transactions contemplated hereby, including (i) as to the existence, validity, enforceability or interpretation of any such claim, (ii) the performance, breach, waiver or termination of any provision in dispute, (iii) any such claim in tort, or (iv) any such claim raising questions of law, in each case, whether arising before or after termination of this Warrant (each a “Disputed Claim”), shall be resolved, as between the parties, exclusively and solely by binding arbitration in accordance with Section 23(b).

(b) Any Disputed Claim shall be resolved exclusively and solely by binding arbitration pursuant to the Commercial Arbitration Rules of the American Arbitration Association (the “Rules”) and in accordance with the following: (a) there shall be three (3) arbitrators, one of whom shall be a member of the American College of Trial Lawyers (who shall chair the arbitration panel) and one of whom shall be a certified public accountant; (b) the arbitration shall take place in Wilmington, Delaware, and in no other place; (c) the arbitration shall be conducted in accordance with the procedural laws of the U.S. Federal Arbitration Act, to the extent not inconsistent with the Rules or this Section 23(b); (d) subject to legal privileges, each party shall be entitled to conduct discovery in accordance with the Federal Rules of Civil Procedure; (e) at the arbitration hearing, each party shall be permitted to make written and oral presentations to the arbitration panel, to present testimony and written evidence and to examine witnesses; (f) the arbitration panel shall have the power to grant temporary or permanent injunctive relief and to order specific performance; (g) the arbitration panel shall have the power to order either party to pay, or to allocate between the parties, the fees and expenses of the arbitrators and of the American Arbitration Association and to order either party to pay all or a portion of the other party’s attorneys’ fees and expenses incurred in connection with a Disputed Claim and the arbitration; and (h) the arbitration panel shall issue a written decision explaining the bases for the final ruling, and such decision shall be final and binding on the parties hereto, and not subject to appeal, and enforceable in any court of competent jurisdiction.

24. Other Remedies; Specific Performance.

(a) Other Remedies. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Warrant were not performed in accordance with their specific terms or were otherwise breached.

(b) Specific Performance. It is accordingly agreed that the parties shall be entitled to seek an injunction or injunctions to prevent breaches of this Warrant and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which they are entitled at law or in equity.

[Signature Page Follows]

Issued this day of , 2005.


PECO II, INC.

By:
Name:		John G. Heindel
Title:		President and Chief Executive Officer

EXHIBIT A

NOTICE OF EXERCISE


TO:		[COMPANY]


		Attention: President

1. The undersigned hereby elects to purchase Shares of pursuant to the terms of the attached Warrant, by means of a cash payment, and tenders herewith payment in full for the purchase price of the shares being purchased, together with all applicable transfer taxes, if any.

2. Please issue a certificate or certificates representing said Shares in the name of the undersigned or in such other name as is specified below:



		(Name)


		(Address)

3. The undersigned hereby represents and warrants as of the date indicated below that it: (a) is an “accredited investor” within the meaning of Rule 501 promulgated under the Securities Act of 1933; (b) is acquiring the Shares for investment intent for the undersigned’s own account, not as a nominee or agent, and not with a view to the distribution or resale of any part thereof; (c) is able to fend for itself, can bear the economic risk of investment and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the Shares; and (d) the Shares issued upon exercise of the Warrant are subject to the restrictions set forth in Section 2 of the Registration Rights Agreement (to the extent applicable).



				(Signature)

				(Name)

(Date)				(Title)

EXHIBIT B

FORM OF TRANSFER

(To be signed only upon transfer of Warrant)

FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto the right represented by the attached Warrant to purchase shares of of [COMPANY] to which the attached Warrant relates, and appoints Attorney to transfer such right on the books of , with full power of substitution in the premises.

Dated:



(Signature must conform in all respects to name of Holder as specified on the face of the Warrant)

Address:

Signed in the presence of:

ASSUMPTION OF WARRANT BY TRANSFEREE

The undersigned hereby assumes the rights transferred above and agrees that as of the date hereof and hereafter, it is bound by the terms of the attached Warrant as a Holder thereunder.


[NAME OF TRANSFEREE]

[Name and Title]

Date:

EXHIBIT C

REGISTRATION RIGHTS AGREEMENT

EX-2 3 dex2.htm FORM OF REGISTRATION RIGHTS AGREEMENT Form Of Registration Rights Agreement

EXHIBIT 2

FORM OF REGISTRATION RIGHTS AGREEMENT

Exhibit C to Asset Purchase Agreement

REGISTRATION RIGHTS AGREEMENT

This REGISTRATION RIGHTS AGREEMENT (this “Agreement”) is made and entered into as of , 2005, by and among PECO II, Inc., an Ohio corporation (the “Company”), and Delta Products Corporation, a California corporation (“Shareholder”). This Agreement shall become effective on the Closing Date of the Asset Agreement (as defined below).

RECITALS

A. In connection with the Asset Purchase Agreement by and among the Company and Shareholder dated October 13, 2005 (the “Asset Agreement”), the Company has agreed, upon the terms and subject to the conditions of the Asset Agreement, to issue and sell to Shareholder (i) 4,740,375 shares of the Company’s Common Stock (the “Asset Shares”), and (ii) a warrant exercisable to purchase additional shares of the Company’s Common Stock (as exercised collectively, the “Warrant Shares”) in the form attached to the Asset Agreement as Exhibit F (the “Warrant”).

B. To induce Shareholder to execute and deliver the Asset Agreement, the Company has agreed to provide certain registration rights under the Securities Act of 1933, as amended (the “Securities Act”), and the rules and regulations thereunder, and applicable state securities laws.

NOW THEREFORE, the Company and Shareholder hereby agree as follows:

DEFINITIONS

1. Definitions. Capitalized terms used and not otherwise defined herein that are defined in the Asset Agreement shall have the meanings given such terms in the Asset Agreement. As used in this Agreement, the following terms shall have the following meanings:

“Common Stock” means the Company’s common stock, without par value.

“Effectiveness Date” means the earlier of (i) with respect to (x) the Initial Registration Statement, the date that is sixty (60) days following the Closing Date, and (y) any Subsequent Registration Statement, the date that is sixty (60) days following the related Qualified Exercise Date, and (ii) five (5) Business Days following the date that the SEC notifies the Company that it will not review the Registration Statement or that the Company may request effectiveness of the Registration Statement.

“Exchange Act” means the Exchange Act of 1934, as amended, or any similar federal statute and the rules and regulations of the SEC thereunder, all as the same shall be in effect at the time.

“Holder” means any holder of Registrable Securities or Registrable Warrant Securities.

“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an investigation or partial proceeding, such as a deposition), whether commenced or threatened.

“Prospectus” means the prospectus included in a Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A promulgated under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities or Registrable Warrant Securities, as the case may be, covered by a Registration Statement, and all other amendments and supplements to the prospectus, including post-effective amendments, and all material incorporated by reference or deemed to be incorporated by reference in such Prospectus.

“Qualified Exercise Date” means the date on which the holder of the Warrant purchases, by exercise thereof pursuant to its terms, Registrable Warrant Securities having a market value (based on the average closing sale price of the Common Stock as reported on the Nasdaq Capital Market (or such other exchange on which the Common Stock is then listed) for the five (5) trading days prior to the date of such exercise) of greater than $250,000.

“Registrable Securities” means the Asset Shares plus the first 12,928,297 shares of Common Stock issuable upon exercise of the Warrant, together with any other securities issued or issuable upon any stock split, dividend, recapitalization, merger, consolidation or similar event with respect thereto. As to any particular Registrable Securities, such securities shall cease to be Registrable Securities when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (b) they shall have been distributed to the public pursuant to Rule 144 (or any successor provision) under the Securities Act, (c) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of them shall not require registration or qualification of them under the Securities Act or any similar state law then in force, or (d) they shall have ceased to be outstanding.

“Registrable Warrant Securities” means the shares of Common Stock issued upon any exercise of the Warrant (excluding such shares of Common Stock included within the Registrable Securities), together with any other securities issued or issuable upon any stock split, dividend, recapitalization, merger, consolidation or similar event with respect thereto. As to any particular Registrable Warrant Securities, once issued such securities shall cease to be Registrable Warrant Securities, when (a) a registration statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such registration statement, (b) they shall have been distributed to the public pursuant to Rule 144 (or any successor provision) under the Securities Act, (c) they shall have been otherwise transferred, new certificates for them not bearing a legend restricting further transfer shall have been delivered by the Company and subsequent disposition of them shall not require registration or qualification of them under the Securities Act or any similar state law then in force, or (d) they shall have ceased to be outstanding.

“Registration Statement” means any registration statement required to be filed hereunder, including the Prospectus, amendments and supplements to such registration statement or Prospectus, including pre- and post-effective amendments, all exhibits thereto, and all material incorporated by reference or deemed to be incorporated by reference in the registration statement.

“Restricted Securities” means the securities of the Company required to bear the legend set forth in Section 2(b) hereof.

“Rule 144” means Rule 144 promulgated by the SEC pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same purpose and effect as such Rule.

“Rule 145” means Rule 145 promulgated by the SEC pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same purpose and effect as such Rule.

“Rule 415” means Rule 415 promulgated by the SEC pursuant to the Securities Act, as such Rule may be amended from time to time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same purpose and effect as such Rule.

“Selling Expenses” means all underwriting discounts, selling and brokerage commissions and stock transfer taxes applicable to the sale of Registrable Securities or Registrable Warrant Securities and fees and disbursements of counsel for any Selling Shareholder (other than the fees and disbursements of counsel included in the registration expenses set forth in Section 6).

RESTRICTIONS ON TRANSFER

2. Transferability.

(a) The Asset Shares and the Warrant Shares (collectively referred to as the “Securities”) shall not be sold, assigned, or transferred except upon the conditions specified in this Section 2, which conditions are intended to ensure compliance with the provisions of the Securities Act.

(b) Each certificate representing the Securities shall (unless otherwise permitted by the provisions of Section 2(c) below) be stamped or otherwise imprinted with the following legend, together with any other legends that may be required by state or federal securities laws:

THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS.

Each Holder hereby consents to the Company making a notation on its records and giving instructions to any transfer agent of the Restricted Securities in order to implement the restrictions on transfer established in this Section 2.

(c) Prior to any proposed sale, assignment, or transfer of any Restricted Securities (other than (i) a transfer not involving a change in beneficial ownership, or (ii) in transactions involving the distribution of Restricted Securities by a Holder to any of its affiliates, subject to compliance with applicable securities laws), unless there is in effect a registration statement under the Securities Act covering the proposed transfer, the Holder shall give written notice to the Company of its intention to effect such transfer, sale or assignment. Each such notice shall describe the manner and circumstances of the proposed transfer, sale or assignment in sufficient detail, and if requested by the Company, Holder shall have furnished, a written opinion of legal counsel who shall be, and whose legal opinion shall be, reasonably satisfactory to the Company, addressed to the Company, to the effect that the proposed transfer of the Restricted Securities may be effected without registration under the Securities Act. Each certificate evidencing the Restricted Securities transferred as above provided shall bear, except if such transfer is made pursuant to Rule 144(k) or pursuant to an effective Registration Statement, the appropriate restrictive legend specified in Section 2(b) above.

(d) Covenant Regarding Exchange Act Filings. With a view to making available to Holders the benefits of Rule 144 promulgated under the Securities Act, and any other rules or regulations of the SEC which

may at any time permit Holders to sell any Restricted Securities without registration, the Company agrees to use its best efforts to file with the SEC in a timely manner all reports and other documents required to be filed under the Exchange Act.

REGISTRATION RIGHTS

3. Shelf Registration.

(a) Promptly following (and in no event more than ten business days after) each of (i) the Closing Date, and (ii) any Qualified Exercise Date, the Company shall prepare and file with the SEC a Registration Statement covering the resale of (x) in the case of the Closing Date (the “Initial Registration Statement”), all of the Registrable Securities, and (y) in the case of a Qualified Exercise Date (a “Subsequent Registration Statement”), all of the Registrable Warrant Securities issued in connection with the related exercise of the Warrant, in each case for an offering to be made on a continuous basis pursuant to Rule 415. In the event any Warrant Shares are outstanding prior to the effectiveness of the Initial Registration Statement, such Registrable Warrant Securities shall be registered for resale pursuant to the Initial Registration Statement; provided, however, that nothing in this sentence shall be construed to mean that the Company is otherwise relieved of its continuing obligations to register Registrable Warrant Securities as contemplated by Section 3(a)(ii)(y) above. Notwithstanding anything to the contrary, the maximum number of Subsequent Registration Statements the Company shall be required to file pursuant to this Section 3(a) shall be one such Registration Statement in any twelve-month period.

(b) The Registration Statements required hereunder shall be on Form S-3, or its successor form, except if the Company is not then eligible to register for resale the Registrable Securities or Registrable Warrant Securities on Form S-3, in which case the Registration Statement shall be on Form S-1, or its successor form or other appropriate form that is substantially similar to Form S-1. The Registration Statements required hereunder shall contain substantially the “Plan of Distribution” attached hereto as Exhibit A. Subject to the terms of this Agreement, the Company shall use its commercially reasonable efforts to cause each Registration Statement to be declared effective under the Securities Act not later than the applicable Effectiveness Date, and shall use its commercially reasonable efforts to keep the Registration Statements continuously effective under the Securities Act until the date when all Registrable Securities or Registrable Warrant Securities, as the case may be, covered by the Registration Statement (i) have been sold pursuant to Rule 144, (ii) have been sold pursuant to an effective registration statement, or (iii) have been sold or may be sold without volume restrictions pursuant to Rule 144 (the “Effectiveness Period”).

(c) The respective Holders, other than transferee Holders who are not entitled to registration rights under Section 9(c), shall be named as the selling shareholders (collectively, the “Selling Shareholders”) in the respective Registration Statement and the related Prospectus in such a manner as to permit such Persons to deliver such Prospectus to purchasers of Registrable Securities or Registrable Warrant Securities, as the case may be, in accordance with applicable law. None of the Company’s shareholders, other than the Selling Shareholders, shall have the right to sell any of the Company’s securities pursuant to any Registration Statement effected pursuant to Section 3(a).

(d) No Selling Shareholder may participate in any underwritten distribution under a Registration Statement filed pursuant to this Section 3, unless such Selling Shareholder (i) agrees to sell its Registrable Securities or Registrable Warrant Securities, as the case may be, on the basis provided in any underwriting arrangements approved by Holders of a majority of the Registrable Securities and/or Registrable Warrant Securities covered by the applicable Registration Statement, (ii) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of such underwriting arrangements, and (iii) agrees to pay its pro rata share of all underwriting discounts and commissions and other fees and expenses of investment bankers and any manager or managers of such underwriting and legal expenses of the underwriter applicable with respect to Registrable Securities and Registrable Warrant Securities, in each case to the extent not payable by the Company pursuant to the terms of this Agreement.

4. Registration Procedures

In connection with the Company’s registration obligations under this Agreement, with respect to each such Registration Statement:

(a) Prior to the filing of the Registration Statement or any related Prospectus or any amendment or supplement thereto, the Company shall furnish to the Shareholder (or its Designee, who shall be an affiliate of the Shareholder (the “Designee”)) and its counsel copies of all such documents proposed to be filed (including documents incorporated or deemed incorporated by reference to the extent requested by such Person). The Shareholder (or its Designee) and its counsel shall have the right to provide comments to such Registration Statement to the Company within five (5) business days of the Shareholder’s (or its Designee’s) receipt of such Registration Statement. The Company shall use commercially reasonable efforts to reflect in the Registration Statement or any such Prospectus or any amendments or supplements thereto, such comments, if any, the Shareholder (or its Designee) or its counsel shall reasonably propose.

(b) Subject to Section 4(i), the Company shall prepare and file with the SEC such amendments and supplements to the Registration Statement (including any Exchange Act documents incorporated by reference in such Registration Statement) and the Prospectus used in connection with such Registration Statement as may be necessary to keep the Registration Statement effective as required herein and to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by the Registration Statement; and use commercially reasonable efforts to comply with the provisions of the Securities Act applicable to it with respect to the disposition of all Registrable Securities or Registrable Warrant Securities, as the case may be, covered by the Registration Statement in accordance with the intended methods of disposition by the sellers thereof set forth in the Registration Statement as so amended or such Prospectus as so supplemented. Subject to Section 4(i), the Company shall use commercially reasonable efforts to respond to comments of the SEC with respect to the Registration Statement with seven (7) business days of receipt thereof.

(c) As promptly as reasonably practicable, the Company shall give notice to each Selling Shareholder and its counsel: (i) when any Prospectus, Prospectus supplement, Registration Statement or amendment to the Registration Statement has been filed with the SEC and, with respect to the Registration Statement or any post-effective amendment, when the same has been declared effective, (ii) of any written request, following the effectiveness of the Registration Statement under the Securities Act, by the SEC or any other federal or state governmental authority for amendments or supplements to the Registration Statement or related Prospectus or for additional information, (iii) of the issuance by the SEC or any other federal or state governmental authority of any stop order suspending the effectiveness of the Registration Statement or the initiation or written threat of any proceedings for that purpose, (iv) of the receipt by the Company of any notification with respect to the suspension of the qualification or exemption from qualification of any of the Registrable Securities or Registrable Warrant Securities, as the case may be, for sale in any jurisdiction or the initiation or the written threat of any proceeding for such purpose, (v) of the occurrence of a Material Event (but not the nature of or details concerning such Material Event) and (vi) of the determination by the Company that a post-effective amendment to the Registration Statement or Prospectus supplement will be filed with the SEC, which notice may, at the discretion of the Company (or as required pursuant to Section 4(i)), state that it constitutes a Deferral Notice, in which event the provisions of Section 4(i) shall apply.

(d) The Company shall use commercially reasonable efforts to avoid the issuance of, or, if issued, obtain the withdrawal of (i) any order suspending the effectiveness of the Registration Statement, or (ii) any suspension of the qualification (or exemption from qualification) of any of the Registrable Securities or Registrable Warrant Securities, as the case may be, for sale in any jurisdiction.

(e) The Company shall furnish to each Selling Shareholder, without charge, at least one conformed copy of the Registration Statement and each amendment thereto, including financial statements and schedules, all documents incorporated or deemed to be incorporated therein by reference to the extent requested by a Selling Shareholder, and all exhibits to the extent requested by a Selling Shareholder (including those previously furnished or incorporated by reference) promptly after the filing of such documents with the SEC.

(f) The Company shall promptly deliver to each Selling Shareholder, without charge, as many copies of the Prospectus or Prospectuses (including each form of prospectus) and each amendment or supplement thereto as such Selling Shareholder may reasonably request in connection with resales by such Selling Shareholder of Registrable Securities or Registrable Warrant Securities, as the case may be. Subject to the terms of this Agreement, the Company hereby consents to the use of such Prospectus and each amendment or supplement thereto by each Selling Shareholder in connection with the offering and sale of the Registrable Securities or Registrable Warrant Securities, as the case may be, covered by such Prospectus and any amendment or supplement thereto.

(g) The Company shall use commercially reasonable efforts to register and qualify the Registrable Securities or Registrable Warrant Securities, as the case may be, held by the Selling Shareholders covered by the Registration Statement under such securities or blue sky laws of such states as may be reasonably necessary or advisable to enable each Selling Shareholder to consummate the disposition of the Registrable Securities or Registrable Warrant Securities, as the case may be, held by such Selling Shareholder in such states; provided, that the Company shall not be required to qualify generally to do business in any jurisdiction where it is not then so qualified, subject the Company to any material tax in any such jurisdiction where it is not then so subject or file a general consent to service of process in any such jurisdiction.

(h) If requested by a Selling Shareholder, the Company shall cooperate with such Selling Shareholder to facilitate the timely preparation and delivery of certificates representing Registrable Securities or Registrable Warrant Securities, as the case may be, to be delivered to a transferee pursuant to the Registration Statement and to enable such Registrable Securities or Registrable Warrant Securities, as the case may be, to be in such denominations and registered in such names as any such Selling Shareholder may request.

(i) Upon (i) the issuance by the SEC of a stop order suspending the effectiveness of the Registration Statement or the initiation of proceedings with respect to the Registration Statement under Section 8(d) or 8(e) of the Securities Act; (ii) such time as the Registration Statement or related Prospectus omits information required to be contained therein; (iii) the occurrence of any event or the existence of any fact or circumstance or the passage of time as a result of which the Registration Statement shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, or any Prospectus shall contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading (a “Material Event”); or (iv) the occurrence, existence or pendency of any corporate development that, in the reasonable discretion of the board of directors of the Company, makes it detrimental to the Company for the Registration Statement and the related Prospectus to be available, (A) in the case of clauses (ii) and (iii) above, subject to the next sentence, the Company shall as promptly as practicable prepare and file, if necessary pursuant to applicable law, a post-effective amendment to the Registration Statement or a supplement to the related Prospectus or any document incorporated therein by reference or file any other required document that would be incorporated by reference into the Registration Statement and Prospectus so that (x) all information required to be contained in the Registration Statement or related Prospectus is contained or incorporated reference therein, or (y) the Registration Statement does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading, and such Prospectus does not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in each case, as thereafter delivered to the purchasers of the Registrable Securities or Registrable Warrant Securities, as the case may be, being sold thereunder, and, in the case of a post-effective amendment to a Registration Statement, subject to the next sentence, use commercially reasonable efforts to cause it to be declared effective as promptly as is reasonably practicable, and (B) the Company shall give notice to each Selling Shareholder, counsel for such Selling Shareholder and underwriter, if any, that the availability of the Registration Statement is suspended (a “Deferral Notice”) and, upon receipt of any Deferral Notice, each Selling Shareholder agrees not to sell any Registrable Securities or Registrable Warrant Securities, as the case may be, pursuant to the Registration Statement until such Selling Shareholder’s receipt of copies of the supplemented or amended Prospectus or amended Registration Statement, or until it is advised in writing by the Company that the Prospectus may be used, and has received copies of any additional or supplemental filings that are incorporated or deemed incorporated by reference in such Prospectus. The Company will use commercially reasonable efforts to ensure that the use of the Prospectus may be resumed (x) in the case of clauses (i)-(iii) above, as promptly as is

reasonably practicable, and (y) in the case of clause (iv) above, as soon as in the reasonable discretion of the board of directors of the Company, such suspension is no longer appropriate. The Company shall be entitled to exercise its right under this Section 4(i) with respect to clauses (ii), (iii) and (iv) above, to suspend the availability of the Registration Statement or any Prospectus, for no more than 45 days in any single period (or 60 days in the event of a Material Event pursuant to which the Company has delivered a second notice as specified below) and no more than 90 days during any 12-month period (each a “Deferral Period”). Notwithstanding the foregoing, in the case of a Material Event relating to an acquisition or a probable acquisition or financing, recapitalization, business combination or other similar transaction, the Company may deliver to the Selling Shareholders a second notice, which shall have the effect of extending the Deferral Period by up to an additional 15 days, or such shorter period of time as is specified in such second notice.

(j) The Company may require each Selling Shareholder to furnish to the Company a certified statement as to the number of securities of the Company beneficially owned by such Selling Shareholder and, if required by the SEC, the person thereof that has voting and dispositive control over the securities.

5. Company Registration.

(a) If the Company shall determine to register any of its securities either for its own account or the account of a security holder or holders, other than (i) a registration pursuant to Section 3 above, (ii) a registration relating solely to employee benefit plans, including any registration statement on Form S-8, (iii) a registration relating to the offer and sale of debt securities, (iv) a registration relating to a corporate reorganization or other Rule 145 transaction, including any registration statement on Form S-4, or (v) a registration on any registration form that does not permit secondary sales, the Company shall (x) promptly give written notice of the proposed registration to all Holders; and (y) use its commercially reasonable efforts to include in such Registration Statement (and any related qualification under blue sky laws or other compliance) and in any underwriting involved therein, all of such Registrable Securities or Registrable Warrant Securities as are specified in a written request or requests made by any Holder received by the Company within ten (10) business days after such written notice from the Company is mailed or delivered. Such written request may specify all or a part of a Holder’s Registrable Securities or Registrable Warrant Securities.

(b) If the registration of which the Company gives notice is for a registered public offering involving an underwriting, the Company shall so advise the Holders as a part of the written notice given. In such event, the right of any Holder to registration pursuant to this Section 5, shall be conditioned upon such Holder’s participation in such underwriting and the inclusion of such Holder’s Registrable Securities and/or Registrable Warrant Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall (together with the Company and any other holders of securities of the Company with registration rights to participate therein distributing their securities through such underwriting) enter into an underwriting agreement in customary form with the representative of the underwriter or underwriters selected by the Company. Notwithstanding any other provision of this Section 5(b), if the underwriters advise the Company in writing that marketing factors require a limitation on the number of shares to be underwritten, the underwriters may (subject to the limitations set forth below) exclude all or limit the number of Registrable Securities and/or Registrable Warrant Securities to be included in, the registration and underwriting. The Company shall so advise all holders of securities requesting registration, and the number of shares of securities that are entitled to be included in the registration and underwriting shall be allocated, as follows: (i) first, to the Company for securities being sold for its own account, (ii) second, to the Holders requesting to include Registrable Securities and/or Registrable Warrant Securities in such Registration Statement, on a pro rata basis (based on each such Holder’s pro rata percentage of the aggregate Registrable Securities and Registrable Warrant Securities held by all such participating Holders), and (iii) third, to the other selling shareholders requesting to include securities in such registration statement. If a Person who has requested inclusion in such registration as provided above does not agree to the terms of any such underwriting, such person shall be excluded therefrom by written notice from the Company or the underwriter. The securities so excluded shall be withdrawn from such Registration Statement. If shares are so withdrawn from the Registration Statement and if the number of shares of Registrable Securities and/or Registrable Warrant Securities to be included in such Registration Statement was previously reduced as a result of marketing factors, the Company shall then offer to all persons who have retained the right to include securities in the Registration Statement the right to include additional securities in the Registration Statement in an aggregate amount equal to the number of shares so withdrawn, with such shares to be allocated among the persons requesting additional inclusion, in the manner set forth above.

(c) The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 5 prior to the effectiveness of such Registration Statement whether or not any Holder has elected to include securities in such registration.

6. Registration Expenses. All fees and expenses incident to the performance of or compliance with this Agreement by the Company shall be borne by the Company whether or not any Registrable Securities or Registrable Warrant Securities are sold pursuant to a Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses (A) with respect to filings required to be made with the trading market on which the Common Stock is then listed for trading, and (B) in compliance with applicable state securities or blue sky laws), (ii) printing expenses (including, without limitation, expenses of printing certificates for Registrable Securities and Registrable Warrant Securities and of printing prospectuses if the printing of prospectuses is reasonably requested by the holders of a majority of the Registrable Securities and Registrable Warrant Securities included in the Registration Statement), (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company and fees and disbursements, not to exceed $5,000 per Registration Statement, of counsel to the Shareholder (or its Designee), (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other Persons retained by the Company in connection with the consummation of the transactions contemplated by this Agreement. In addition, the Company shall be responsible for all of its internal expenses incurred in connection with the consummation of the transactions contemplated by this Agreement (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit and the reasonable fees and expenses incurred in connection with the listing of the Registrable Securities or Registrable Warrant Securities, as the case may be, on any securities exchange as required hereunder. All Selling Expenses related to securities registered on behalf of a Selling Shareholder shall be borne by the holder of such securities.

7. Indemnification

(a) Indemnification by the Company. The Company shall indemnify and hold harmless each Selling Shareholder, the officers, directors, agents and employees of each of them, each Person who controls any such Selling Shareholder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, agents and employees of each such controlling Person, to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, reasonable attorneys’ fees) and expenses (collectively, “Losses”), as incurred, arising out of or relating to any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any Prospectus or form of prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading, except to the extent, but only to the extent, that (i) such untrue statements or omissions are based solely upon information regarding such Selling Shareholder furnished in writing to the Company by such Selling Shareholder expressly for use therein, or (ii) in the case of an occurrence of an event of the type specified in Section 4(c)(ii), (iii) and (v), the use by such Selling Shareholder of an outdated or defective Prospectus after the Company has notified such Selling Shareholder in writing that the Prospectus is outdated or defective and prior to the receipt by such Selling Shareholder of the Advice contemplated in Section 8(b). The Company shall notify each Selling Shareholder promptly of the institution, threat or assertion of any Proceeding of which the Company is aware in connection with the transactions contemplated by this Agreement.

(b) Indemnification by Selling Shareholders. Each Selling Shareholder shall, severally and not jointly, indemnify and hold harmless the Company, its directors, officers, agents and employees, each Person who controls the Company (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, agents or employees of such controlling Persons, to the fullest extent permitted by applicable law, from and against all Losses, as incurred, to the extent arising out of or based solely upon: (x) such Selling Shareholder’s failure to comply with the prospectus delivery requirements of the Securities Act or (y) any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any Prospectus, or any

form of prospectus, or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that (i) such untrue statement or omission is contained in any information so furnished in writing by such Selling Shareholder to the Company specifically for inclusion in the Registration Statement or such Prospectus, or (ii) in the case of an occurrence of an event of the type specified in Section 4(c)(ii), (iii) and (v), the use by such Selling Shareholder of an outdated or defective Prospectus after the Company has notified such Selling Shareholder in writing that the Prospectus is outdated or defective and prior to the receipt by such Selling Shareholder of the Advice contemplated in Section 8(b). In no event shall the liability of any Selling Shareholder hereunder be greater in amount than the lesser of (i) the aggregate purchase price paid by the Selling Shareholder for the Registrable Securities and Registrable Warrant Securities, and (ii) dollar amount of the net proceeds received by the Selling Shareholder upon the sale of the Registrable Securities or Registrable Warrant Securities giving rise to such indemnification obligation.

(c) Conduct of Indemnification Proceedings. If any Proceeding shall be brought or asserted against any Person entitled to indemnity hereunder (an “Indemnified Party”), such Indemnified Party shall promptly notify the Person from whom indemnity is sought (the “Indemnifying Party”) in writing, and the Indemnifying Party shall have the right to assume the defense thereof, including the employment of counsel reasonably satisfactory to the Indemnified Party and the payment of all fees and expenses incurred in connection with defense thereof; provided, that the failure of any Indemnified Party to give such notice shall not relieve the Indemnifying Party of its obligations or liabilities pursuant to this Agreement, except (and only) to the extent that it shall be finally determined by a court of competent jurisdiction (which determination is not subject to appeal or further review) that such failure shall have prejudiced the Indemnifying Party.

An Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Indemnified Party or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such fees and expenses; (2) the Indemnifying Party shall have failed promptly to assume the defense of such Proceeding and to employ counsel reasonably satisfactory to such Indemnified Party in any such Proceeding; or (3) the named parties to any such Proceeding (including any impleaded parties) include both such Indemnified Party and the Indemnifying Party, and such Indemnified Party shall reasonably believe that a material conflict of interest is likely to exist if the same counsel were to represent such Indemnified Party and the Indemnifying Party (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party shall not have the right to assume the defense thereof and the reasonable fees and expenses of one separate counsel shall be at the expense of the Indemnifying Party). The Indemnifying Party shall not be liable for any settlement of any such Proceeding effected without its written consent, which consent shall not be unreasonably withheld. No Indemnifying Party shall, without the prior written consent of the Indemnified Party, effect any settlement of any pending Proceeding in respect of which any Indemnified Party is a party, unless such settlement includes an unconditional release of such Indemnified Party from all liability on all claims that are the subject matter of such Proceeding.

Subject to the terms of this Agreement, all reasonable fees and expenses of the Indemnified Party (including reasonable fees and expenses to the extent incurred in connection with investigating or preparing to defend such Proceeding in a manner not inconsistent with this Section) shall be paid to the Indemnified Party, as incurred, within ten business days of written notice thereof to the Indemnifying Party; provided, that the Indemnified Party shall promptly reimburse the Indemnifying Party for that portion of such fees and expenses applicable to such actions for which such Indemnified Party is not entitled to indemnification hereunder, determined based upon the relative faults of the parties.

(d) Contribution. If a claim for indemnification under Section 7(a) or 7(b) is unavailable to an Indemnified Party (by reason of public policy or otherwise), then each Indemnifying Party, in lieu of indemnifying such Indemnified Party, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Losses, in such proportion as is appropriate to reflect the relative fault of the Indemnifying Party and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of such Indemnifying Party and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged

untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, such Indemnifying Party or Indemnified Party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include, subject to the limitations set forth in this Agreement, any reasonable attorneys’ or other reasonable fees or expenses incurred by such party in connection with any Proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for in this Section 7 was available to such party in accordance with its terms.

The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 7(d) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 7(d), no Selling Shareholder shall be required to contribute, in the aggregate, the lesser of (i) the aggregate purchase price paid by the Selling Shareholder for the Registrable Securities or Registrable Warrant Securities, as the case may be, and (ii) any amount in excess of the amount by which the net proceeds actually received by the Selling Shareholder from the sale of the Registrable Securities or Registrable Warrant Securities subject to the Proceeding exceeds the amount of any damages that such Selling Shareholder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.

The indemnity and contribution agreements contained in this Section 7 are in addition to any liability that the Indemnifying Parties may have to the Indemnified Parties.

8. Obligations of Selling Shareholders.

(a) Each Selling Shareholder covenants and agrees that it will comply with the prospectus delivery requirements of the Securities Act as applicable to it in connection with sales of Registrable Securities and Registrable Warrant Securities pursuant to any Registration Statement.

(b) Each Selling Shareholder agrees by its acquisition of such Registrable Securities or Registrable Warrant Securities, as the case may be, that, upon receipt of a notice from the Company of the occurrence of any event of the kind described in Section 4(c)(ii)-(v), such Selling Shareholder will forthwith discontinue disposition of such securities under the Registration Statement until such Selling Shareholder’s receipt of the copies of the supplemented or amended Prospectus or amended Registration Statement or until it is advised in writing (the “Advice”) by the Company that the use of the applicable Prospectus may be resumed. The Company may provide appropriate stop orders to enforce the provisions of this paragraph.

(c) Each Selling Shareholder, by such Shareholder’s acceptance of the Registrable Securities or Registrable Warrant Securities, as the case may be, agrees to cooperate with the Company as reasonably requested by the Company in connection with the preparation and filing of Registration Statements hereunder.

9. Miscellaneous.

(a) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the same shall be in writing and signed by the Company and holders of a majority of the Asset Shares and holders of a majority of the shares of Common Stock issued or issuable upon exercise of the Warrant. Any amendment, modification, supplementation, waiver or consent effected in accordance with this paragraph shall be binding upon each holder of any Registrable Securities and Registrable Warrant Securities then outstanding, each future holder of all such securities, and the Company. Any amendment, termination or waiver effected in accordance with this Section 9(a) shall be binding on all parties hereto, even if they do not execute such consent.

(b) Notices. All notices, requests, demands, claims, and other communications hereunder shall be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly delivered (x) three (3) business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, (y) one business day after it is sent for next business day delivery via a reputable nationwide overnight courier service or (y) on the date sent after transmission by facsimile with written confirmation, in each case to the intended recipient as set forth below:


If to Shareholder:		Copies to:

Delta Products Corporation 4405 Cushing Pkwy. Fremont, CA 94538-6475 Attention: Yao C.H. Chou Fax: 510-498-8879		Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, CA 94304 Attention: Aaron J. Alter, Esq. Fax: 650-493-6811

If to a Holder: At such address provided by such Holder to the Company upon execution of a counterpart of this Agreement.


If to Company:		Copy to:

PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833 Attention: President & Chief Executive Officer Fax: 419-468-9164		Porter Wright Morris & Arthur LLP Huntington Center 41 South High Street Columbus, OH 43215-6194 Attention: Curtis A. Loveland Fax: 614-227-2100

Any party may give any notice, request, demand, claim or other communication hereunder using any other means (including personal delivery, expedited courier, messenger service, telex, ordinary mail or electronic mail), but no such notice, request, demand, claim or other communication shall be deemed to have been duly given unless and until it actually is received by the party for whom it is intended. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth.

(c) Transfer of Registration Rights. The rights under this Agreement may be assigned or transferred to a third party in connection with any transfer or assignment by a Holder of all or a portion of the Registrable Securities or Registrable Warrant Securities, provided that (i) such transfer is otherwise effected in accordance with applicable securities laws and the terms of this Agreement, (ii) such transferee acquires at least 100,000 shares of Registrable Securities and/or Registrable Warrant Securities (as adjusted for stock splits, stock dividends, stock combinations and the like), (iii) written notice is promptly given to the Company, and (iv) such transferee agrees in writing to become a party to this Agreement (as a Holder) and be bound by the provisions hereof. Upon request by a transferring Holder, the Company agrees to promptly file any post-effective amendment to any Registration Statement filed pursuant to Section 3 as may be required or necessary in order include any such transferee as a Selling Shareholder under any such Registration Statement.

(d) Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. The parties shall use their commercially reasonable efforts to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the greatest extent possible, the economic, business and other purposes of such void or unenforceable provision.

(e) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of laws of any jurisdictions other than those of the State of Delaware.

(f) Independent Nature of Obligations and Rights. The obligations of each Selling Shareholder hereunder are several and not joint with the obligations of any other Selling Shareholder hereunder, and no Selling Shareholder shall be responsible in any way for the performance of the obligations of any other Selling Shareholder hereunder. Nothing contained herein or in any other agreement or document delivered at any closing, and no action taken by any Selling Shareholder pursuant hereto or thereto, shall be deemed to constitute Selling Shareholder as a partnership, an association, a joint venture or any other kind of entity, or create a presumption that a Selling Shareholder is in any way acting in concert with respect to such obligations or the transactions contemplated by this Agreement. Each Selling Shareholder shall be entitled to protect and enforce its rights, including without limitation the rights arising out of this Agreement, and it shall not be necessary for any other Selling Shareholder to be joined as an additional party in any proceeding for such purpose.

(g) Entire Agreement. This Agreement constitutes the full and entire understanding and agreement between the parties with respect to the subject matter hereof, and any other written or oral agreement relating to the subject matter hereof existing between the parties are expressly cancelled.

(h) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which, taken together, shall constitute one and the same agreement.

(i) Descriptive Headings. The descriptive headings used herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.

(j) No Impairment. The Company will not, through any voluntary action, avoid or seek to avoid the observance or performance of any terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Agreement and in the taking of all such action as may be necessary or appropriate in order to protect the registration rights of the Holders.

(k) Exclusive Jurisdiction. With respect to any matter based upon or arising out of this Agreement or the transactions contemplated hereby that seeks temporary or injunctive relief or specific performance, each of the parties (a) irrevocably consents to the exclusive jurisdiction and venue of the state courts of the State of Delaware located in New Castle County, (b) agrees that process may be served upon them in any

manner authorized by the laws of the State of Delaware for such persons, (c) waives the defense of an inconvenient forum and covenants not to assert or plead any objection which they might otherwise have to such jurisdiction, venue and such process, and (d) agrees that a final judgment in such legal proceeding shall be final, binding and enforceable in any court of competent jurisdiction. Each party agrees not to commence any legal proceedings subject to this Section 9(k) except in such courts.

(l) Binding Arbitration.

(i) Each party irrevocably agrees and acknowledges that, subject only to Section 9(k) above, any claim, dispute, controversy or other matter based upon, arising out of or relating to this Agreement or the transactions contemplated hereby, including (i) as to the existence, validity, enforceability or interpretation of any such claim, (ii) the performance, breach, waiver or termination of any provision in dispute, (iii) any such claim in tort, or (iv) any such claim raising questions of law, in each case, whether arising before or after termination of this Agreement (each a “Disputed Claim”), shall be resolved, as between the parties, exclusively and solely by binding arbitration in accordance with Section 9(l)(2).

(ii) Any Disputed Claim shall be resolved exclusively and solely by binding arbitration pursuant to the Commercial Arbitration Rules of the American Arbitration Association (the “Rules”) and in accordance with the following: (a) there shall be three (3) arbitrators, one of whom shall be a member of the American College of Trial Lawyers (who shall chair the arbitration panel) and one of whom shall be a certified public accountant; (b) the arbitration shall take place in Wilmington, Delaware, and in no other place; (c) the arbitration shall be conducted in accordance with the procedural laws of the U.S. Federal Arbitration Act, to the extent not inconsistent with the Rules or this Section 9(l)(2); (d) subject to legal privileges, each party shall be entitled to conduct discovery in accordance with the Federal Rules of Civil Procedure; (e) at the arbitration hearing, each party shall be permitted to make written and oral presentations to the arbitration panel, to present testimony and written evidence and to examine witnesses; (f) the arbitration panel shall have the power to grant temporary or permanent injunctive relief and to order specific performance; (g) the arbitration panel shall have the power to order either party to pay, or to allocate between the parties, the fees and expenses of the arbitrators and of the American Arbitration Association and to order either party to pay all or a portion of the other party’s attorneys’ fees and expenses incurred in connection with a Disputed Claim and the arbitration; and (h) the arbitration panel shall issue a written decision explaining the bases for the final ruling, and such decision shall be final and binding on the parties hereto, and not subject to appeal, and enforceable in any court of competent jurisdiction.

(m) Other Remedies; Specific Performance.

(i) Other Remedies. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached.

(ii) Specific Performance. It is accordingly agreed that the parties shall be entitled to seek an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which they are entitled at law or in equity.

[Signature Page Follows]

IN WITNESS WHEREOF, the parties have executed this Registration Rights Agreement as of the date first written above.


PECO II, INC.

By:
		John G. Heindel, President & Chief Executive Officer

SHAREHOLDER:

DELTA PRODUCTS CORPORATION

By:
Name:		M.S. Huang
Its:		President

Address:		Delta Products Corporation
		4405 Cushing Pkwy.
		Fremont, CA 94538-6475

[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]

EXHIBIT A

PLAN OF DISTRIBUTION

The selling shareholders of the common stock of Peco II, Inc. (the “Company”) and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on any stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. The selling stockholders may use any one or more of the following methods when selling shares:

•

ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

•

block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

•

purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

•

an exchange distribution in accordance with the rules of the applicable exchange;

•

privately negotiated transactions;

•

settlement of short sales;

•

broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share;

•

a combination of any such methods of sale; or

•

any other method permitted pursuant to applicable law.

The selling shareholders may also sell shares under Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), if available, rather than under this prospectus.

Broker-dealers engaged by the selling shareholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling shareholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated. Each selling shareholder does not expect these commissions and discounts relating to its sales of shares to exceed what is customary in the types of transactions involved.

In connection with sales of the shares of common stock or otherwise, the selling shareholders may enter into hedging transactions with broker-dealers, which may in turn engage in short sales of the shares of common stock in the course of hedging in positions they assume. The selling shareholders may also sell shares of common stock short and deliver shares of common stock covered by this prospectus to close out short positions and to return borrowed shares in connection with such short sales. The selling shareholder may also loan or pledge shares of common stock to broker-dealers that in turn may sell such shares.

The selling shareholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may

be deemed to be underwriting commissions or discounts under the Securities Act. Each selling shareholder has informed the Company that it does not have any agreement or understanding, directly or indirectly, with any person to distribute the common stock.

The Company is required to pay certain fees and expenses incurred by the Company incident to the registration of the shares. The Company has agreed to indemnify the selling shareholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

Because selling shareholders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. Each selling shareholder has advised us that they have not entered into any agreements, understandings or arrangements with any underwriter or broker-dealer regarding the sale of the resale shares. There is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the selling shareholders.

We agreed to keep this prospectus effective until the earlier of (i) the date on which the shares may be resold by the selling shareholders without registration and without regard to any volume limitations by reason of Rule 144(e) under the Securities Act or any other rule of similar effect or (ii) all of the shares have been sold pursuant to the prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to our common stock for a period of two business days prior to the commencement of the distribution. In addition, the selling shareholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of our common stock by the selling shareholders or any other person. We will make copies of this prospectus available to the selling shareholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale.

EX-3 4 dex3.htm SUPPORT AGREEMENT AND IRREVOCABLE PROXY Support Agreement And Irrevocable Proxy

EXHIBIT 3

SUPPORT AGREEMENT AND IRREVOCABLE PROXY

Exhibit E to Asset Purchase Agreement

SUPPORT AGREEMENT AND IRREVOCABLE PROXY

THIS SUPPORT AGREEMENT AND IRREVOCABLE PROXY, dated as of October 13, 2005 (this “Agreement”), is entered into by and between PECO II, Inc., an Ohio corporation (the “Company”), Delta Products Corporation, a California corporation (“Seller”) and each of the persons listed on Exhibit A hereto (each a “Significant Holder” and collectively the “Significant Holders”).

RECITALS

WHEREAS, immediately prior to the execution of this Agreement, the Company and Seller entered into an Asset Purchase Agreement of even date herewith (as such agreement may hereafter be amended from time to time, the “Asset Agreement”), a copy of which is attached hereto as Exhibit B, pursuant to which the Company will purchase from Seller the Business Assets and assume the Assumed Liabilities (each as defined in the Asset Agreement) in exchange for a certain number of shares of the Company’s common stock and a warrant to purchase additional shares of the Company’s common stock;

WHEREAS, each Significant Holder beneficially owns that number of shares of common stock, no par value, of the Company set forth opposite such Significant Holder’s name on Exhibit A hereto (such shares, together with any other voting securities of the Company beneficially owned (as defined below) by such Significant Holder, whether heretofore or hereafter acquired, the “Company Shares”);

WHEREAS, as an inducement and a condition to entering into the Asset Agreement, the Company and Seller have requested that each Significant Holder agree, and each Significant Holder hereby does agree, to enter into this Agreement; and

NOW, THEREFORE, in consideration of the foregoing and the mutual premises, representations, warranties, covenants and agreements contained herein, the parties hereto hereby agree as follows:

10. Definitions.

(a) “Issuance Proposal” means the Company’s issuance of the Shares, the Warrant and the Warrant Shares (each as defined in the Asset Agreement) to Seller in accordance with the terms of the Asset Agreement.

(b) “Opt-Out Proposal” means the amendment to Buyer’s Code of Regulations to opt-out of the Ohio Control Share Acquisition Act.

(c) “Acquisition Proposal” means, with respect to the Company, any offer or proposal or public announcement of a proposal or plan, relating to any transaction or series of related transactions involving: (A) any purchase from the Company or acquisition by any Person or “group” (as defined under Section 13(d) of the Exchange Act and the rules and regulations thereunder) of more than a fifteen percent (15%) interest in the total outstanding voting securities of the Company or any of its subsidiaries, directly or indirectly, or any tender offer or exchange offer that if consummated would result in any Person or group beneficially owning fifteen percent (15%) or more of the total outstanding voting securities of the Company or any of its subsidiaries, directly or indirectly, or any merger, consolidation, business combination or similar transaction involving the Company or any of its subsidiaries or (B) any sale, lease (other than in the ordinary course of business), exchange, transfer, license (other than in the ordinary course of business), acquisition or disposition of more than fifteen percent (15%) of the assets of the Company (including its subsidiaries taken as a whole); provided however that the transactions contemplated by the Asset Agreement shall not be deemed to constitute an Acquisition Proposal.

(d) All capitalized terms used but not defined herein shall have the meanings ascribed to them in the Asset Agreement.

11. Voting Agreement.

(a) Each Significant Holder hereby agrees with the Company and Seller that, at any meeting of the Company’s shareholders, however called (including at any adjournment or postponement thereof) and in any consensual action by the Company’s shareholders, each Significant Holder shall vote the Company Shares beneficially owned by such Significant Holder, whether heretofore owned or hereafter acquired: (i) in favor of the Opt-Out Proposal, the Issuance Proposal and the other transactions contemplated by the Asset Agreement and in favor of any other matter that could reasonably be expected to facilitate the consummation of the transactions contemplated by the Asset Agreement; and (ii) against (a) any Acquisition Proposal, (b) any change in a majority of the individuals who, as of the date hereof, constitute the Company’s board of directors (a “Change in Directors”), or (c) any other action which is intended, or could reasonably be expected, to impede, interfere with, delay, postpone or materially adversely affect the consummation of the transactions contemplated by the Asset Agreement (an “Adverse Transaction”). Each Significant Holder shall not enter into any agreement or understanding with any Person the effect of which would be violative of the provisions and agreements contained herein.

(b) For purposes of this Agreement, a Significant Holder shall be deemed to “beneficially own” or to have acquired “beneficial ownership” of a security if such Significant Holder directly or indirectly has such ownership, control or power to (i) vote or direct the voting with respect to such security, or (ii) dispose or to direct the disposition of such security. Company Shares beneficially owned by any Significant Holder shall include securities beneficially owned by all other Persons with whom a Significant Holder would constitute a “group” as within the meaning of Section 13(d)(3) of the Exchange Act, other than parties to this Agreement.

12. Irrevocable Proxy.

(a) Each Significant Holder hereby irrevocably (to the fullest extent permitted by applicable Law) constitutes and appoints Seller, which shall act by and through Austin Tseng and Yao C.H. Chou (each, a “Proxy Holder”), or either of them, with full power of substitution and resubstitution, as its true and lawful proxy and sole attorney-in-fact to vote at any meeting (and any adjournment or postponement thereof) of the Company’s shareholders and in any consensual action by the Company’s shareholders, and to exercise all other voting and related rights with respect to (to the full extent that such Significant Holder is entitled to do so), all Company Shares beneficially owned by such Significant Holder as of the date of such meeting or the taking of any action: (i) in favor of the approval of the Opt-Out Proposal, the Issuance Proposal and the other transactions contemplated by the Asset Agreement and in favor of any other matter that could reasonably be expected to facilitate the consummation of the transactions contemplated by the Asset Agreement, and (ii) against any Acquisition Proposal, Change in Directors or Adverse Transaction. Such proxy shall be limited strictly to the power to vote the Company Shares in the manner set forth in the preceding sentence and shall not extend to any other matters.

(a) The proxy and power of attorney granted herein shall be irrevocable (to the fullest extent permitted by applicable Law) during the term of this Agreement, shall be deemed to be coupled with an interest sufficient in law to support an irrevocable proxy and, upon execution of this Agreement, shall revoke all prior proxies granted by any Significant Holder that conflict with the proxy granted herein. Significant Holder shall not grant any proxy to any Person which conflicts with the proxy granted herein, and any attempt to do so shall be void. The power of attorney granted herein is a durable power of attorney and shall survive the death or incapacity of any Significant Holder.

(b) If any Significant Holder fails for any reason to vote his or her Company Shares in accordance with the requirements of Section 2(a) hereof, then the Proxy Holder shall have the right to vote the Company Shares in accordance with the provisions of this Section 3. The vote of the Proxy Holder shall control in any conflict between his or her vote of such Company Shares and a vote by any Significant Holder of such Company Shares.

13. Director and Officer Matters Excluded. Each of the Company and Seller hereby acknowledges and agrees that no provision of this Agreement shall limit or otherwise restrict any Significant Holder with respect to any act or omission that such Significant Holder may undertake or authorize in his or her capacity as a director or officer of the Company, including, without limitation, any board vote that such Significant Holder may make as a director of the Company with respect to any matter presented to the Company.

14. Other Covenants, Representations and Warranties. Each Significant Holder hereby severally and not jointly represents and warrants to the Company and Seller as follows:

(a) Ownership of Company Shares. As of the date hereof, each Significant Holder is the beneficial owner of the number of Company Shares set forth opposite such Significant Holder’s name on Exhibit A hereto (representing all Company Shares beneficially owned by such Significant Holder), which Company Shares are free and clear of any liens, adverse claims, charges, security interests, pledges or options, proxies, voting trusts or any other encumbrances. With respect to each Significant Holder, Exhibit A also sets forth all options, warrants and other derivative securities convertible into or exercisable for shares of Company capital stock held by such Significant Holder as of the date hereof.

(b) Power; Binding Agreement. Each Significant Holder has sole voting power with respect to the matters set forth in Section 2(a) hereof with respect to all of his or her Company Shares—except in the cases of shared voting power noted in Exhibit A—with no limitations, qualifications or restrictions on such rights. Each Significant Holder has the legal capacity, power and authority to enter into and perform all of its obligations under this Agreement. The execution, delivery and performance of this Agreement by such Significant Holder will not violate any agreement or any court order to which such Significant Holder is a party or is subject including, without limitation, any voting agreement or voting trust. This Agreement has been duly and validly executed and delivered by each Significant Holder.

(c) Restriction on Transfer, Proxies and Non-Interference. Except as expressly contemplated by this Agreement, the Significant Holders shall not, directly or indirectly: (i) offer for sale, sell, transfer, tender, pledge, encumber, assign or otherwise dispose of, or enter into any contract, option or other arrangement or understanding with respect to or consent to the offer for sale, sale, transfer, tender, pledge, encumbrance, assignment or other disposition of (any of the foregoing, a “Transfer”), any or all of the Company Shares or any interest therein; (ii) grant any proxies or powers of attorney or deposit any Company Shares into a voting trust or enter into a voting agreement, in any such case that conflicts with Significant Holder’s obligations hereunder, with respect to any Company Shares; or (iii) take any action that would make any representation or warranty of such Significant Holder contained herein untrue or incorrect or have the effect of preventing or disabling Significant Holder from performing any of Significant Holder’s obligations under this Agreement.

(d) Permitted Transfers. Notwithstanding Section 5(c), each Significant Holder shall have the right to Transfer Company Shares (x) to the extent the transferee shall, as a condition to such transfer, execute an agreement to be bound by the terms and conditions of this Agreement, which agreement must be countersigned and accepted by each of the Company and Seller, or (y) pursuant to the terms of a Rule 10b5-1 trading plan adopted prior to the date of this Agreement.

(e) Stop Transfer. Each Significant Holder hereby covenants to the Company and Seller that such Significant Holder shall not request that the Company register the transfer (book-entry or otherwise) of any certificate or uncertificated interest representing any Company Shares, unless such transfer is made in accordance with the terms of this Agreement.

(f) Quorum. Each Significant Holder further agrees that at any meeting of the Company shareholders, such holder shall, or shall cause the holder of record on any applicable record date to, appear at such meeting or otherwise cause the Company Shares to be counted as present thereat for purposes of establishing a quorum.

(g) Disclosure. Each Significant Holder agrees to permit Company and Seller to publish and disclose in all documents and schedules filed with the SEC, and any press release or other disclosure document that Company or

Seller, in its sole discretion, determines to be necessary or desirable in connection with the transactions contemplated by the Asset Agreement, such Significant Holder’s identity and beneficial ownership of Company Shares and the nature of such Significant Holder’s commitments, arrangements and understandings under this Agreement.

(h) Reliance by the Company and Seller. Each Significant Holder understands and acknowledges that the Company and Seller are entering into the Asset Agreement in reliance upon Significant Holder’s execution and delivery of this Agreement and the accuracy of the representations and warranties made by such Significant Holder herein.

15. Company Shares. In the event of a stock dividend or distribution, or any change in the Company capital stock by reason of any stock dividend, split-up, recapitalization, combination, exchange of shares or the like, the term “Company Shares” shall be deemed to refer to and include the Company Shares as well as all such stock dividends and distributions and any shares into which or for which any or all of the Company Shares may be changed or exchanged. If so requested by Seller, Significant Holder agrees that the Company Shares shall bear a legend stating that such Company Shares are subject to this Agreement.

16. Termination. This Agreement shall terminate upon the earliest to occur of: (a) the termination of the Asset Agreement in accordance with its terms; provided, however, that in the event the Asset Purchase Agreement is terminated by Buyer pursuant to Section 7.1(g) thereof, this Agreement shall remain in full force and effect for a period of six (6) months following the date of any such termination, and (b) the Closing Date. Upon the termination of this Agreement, this Agreement shall forthwith become null and void, and there shall be no liability on the part of any party hereto, except (i) that the provisions of this Section 7 and the provisions of Section 9 shall survive the termination of this Agreement and (ii) nothing herein shall relieve any party from liability for any willful breach hereof.

17. No Ownership Interest. Nothing contained in this Agreement shall be deemed to vest in Seller any direct or indirect ownership of any Company Shares. All rights, ownership and economic benefits of and relating to the Company Shares shall remain vested in and belong to the respective Significant Holder.

18. Miscellaneous.

(a) Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof.

(b) Certain Events. Each Significant Holder agrees that this Agreement and the obligations hereunder shall attach to the Company Shares and shall be binding upon any Person to which legal or beneficial ownership of any Company Shares shall pass, whether by operation of law or otherwise. Notwithstanding any transfer of Company Shares, the transferor shall remain liable for the performance of all of its obligations under this Agreement.

(c) Assignment. With respect to any Significant Holder, this Agreement shall not be assigned by operation of law or otherwise without the prior written consent of Seller; and with respect to the Company and Seller, this Agreement shall not be assigned by operation of law or otherwise without the prior written consent of the other party; provided, however, that Seller may, in its sole discretion, assign its rights and obligations hereunder to any affiliate of Seller. Subject to the foregoing, this Agreement and all of the provisions hereof shall be binding upon and insure to the benefit of the parties hereto and their respective successors and permitted assigns.

(d) Amendments, Waivers, Etc. This Agreement may not be amended, changed, supplemented, waived or otherwise modified or terminated, except upon the execution and delivery of a written agreement executed by the parties hereto.

(e) Notices. All notices, requests, demands, claims, and other communications hereunder shall be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly delivered (x) three (3) business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, (y) one business

day after it is sent for next business day delivery via a reputable nationwide overnight courier service or (y) on the date sent after transmission by facsimile with written confirmation, in each case to the intended recipient as set forth below:


If to a Significant Holder:		To the address set forth beneath such Significant Holder’s name on Exhibit A hereto.

If to the Company:		PECO II, Inc.
		1376 State Route 598
		Galion, Ohio 44833
		Telecopier: (419) 468-9164
		Attention: President & Chief Executive Officer

		with a copy to:

		Porter Wright Morris & Arthur LLP
		Hungtinton Center
		41 South High Street
		Columbus, OH 43215-6194
		Fax: 614-227-2100
		Attention: Curtis A. Loveland

If to Seller:		Delta Products Corporation
		4405 Cushing Pkwy.
		Fremont, CA 94538-6475
		Telecopier: 510-498-8879
		Attention: Yao C.H. Chou

		with a copy to:

		Wilson Sonsini Goodrich & Rosati
		Professional Corporation
		650 Page Mill Road
		Palo Alto, CA 94304-1050
		Fax: (650) 493-6811
		Attention: Aaron J. Alter, Esq.

(f) Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. The parties shall use their commercially reasonable efforts to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the greatest extent possible, the economic, business and other purposes of such void or unenforceable provision.

(g) Further Assurances. From time to time, at the other party’s reasonable request and without further consideration, each Significant Holder shall execute and deliver such additional documents and take all such further lawful action as may be reasonably necessary or desirable to effect or enforce, in the most expeditious manner practicable, the transactions contemplated by and rights granted under this Agreement.

(h) No Waiver. The failure of any party hereto to exercise any right, power or remedy provided under this Agreement or otherwise available in respect hereof at law or in equity, or to insist upon compliance by any other party hereto with its obligations hereunder, and any custom or practice of the parties at variance with the terms hereof, shall not constitute a waiver by such party of its right to exercise any such or other right, power or remedy or to demand such compliance.

(i) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of laws of any jurisdictions other than those of the State of Delaware.

(j) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which, taken together, shall constitute one and the same agreement.

(k) Descriptive Headings. The descriptive headings used herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.

(l) Company Stop Transfer Agreement. The Company hereby acknowledges the restrictions on transfer of the Company Shares contained in Section 5(c) hereof. The Company agrees not to register the transfer (book-entry or otherwise) of any certificate or uncertificated interest representing any Company Shares, unless such transfer is made pursuant to and in compliance with this Agreement. The Company further agrees to instruct its transfer agent not to transfer any certificate or uncertificated interest representing any Company Shares until (i) such transfer agent has received Seller’s consent to such a transfer or (ii) this Agreement has been terminated pursuant to Section 7 hereof.

(m) Exclusive Jurisdiction. With respect to any matter based upon or arising out of this Agreement or the transactions contemplated hereby that seeks temporary or injunctive relief or specific performance, each party (a) irrevocably consents to the exclusive jurisdiction and venue of the state courts of the State of Delaware located in New Castle County, (b) agrees that process may be served upon them in any manner authorized by the laws of the State of Delaware for such persons, (c) waives the defense of an inconvenient forum and covenants not to assert or plead any objection which they might otherwise have to such jurisdiction, venue and such process, and (d) agrees that a final judgment in such legal proceeding shall be final, binding and enforceable in any court of competent jurisdiction. Each party agrees not to commence any legal proceedings subject to this Section 9(m) except in such courts.

(n) Binding Arbitration.

(i) Each party irrevocably agrees and acknowledges that, subject only to Section 9(m) above, any claim, dispute, controversy or other matter based upon, arising out of or relating to this Agreement or the transactions contemplated hereby, including (i) as to the existence, validity, enforceability or interpretation of any such claim, (ii) the performance, breach, waiver or termination of any provision in dispute, (iii) any such claim in tort, or (iv) any such claim raising questions of law, in each case, whether arising before or after termination of this Agreement (each a “Disputed Claim”), shall be resolved, as between the parties, exclusively and solely by binding arbitration in accordance with Section 9(n)(ii).

Federal Rules of Civil Procedure; (e) at the arbitration hearing, each party shall be permitted to make written and oral presentations to the arbitration panel, to present testimony and written evidence and to examine witnesses; (f) the arbitration panel shall have the power to grant temporary or permanent injunctive relief and to order specific performance; (g) the arbitration panel shall have the power to order either party to pay, or to allocate between the parties, the fees and expenses of the arbitrators and of the American Arbitration Association and to order either party to pay all or a portion of the other party’s attorneys’ fees and expenses incurred in connection with a Disputed Claim and the arbitration; and (h) the arbitration panel shall issue a written decision explaining the bases for the final ruling, and such decision shall be final and binding on the parties hereto, and not subject to appeal, and enforceable in any court of competent jurisdiction.

(o) Other Remedies; Specific Performance.

[Signature Pages Follow]

IN WITNESS WHEREOF, the Company, Seller and each Significant Holder have caused this Support Agreement and Irrevocable Proxy to be duly executed as of the day and year first above written.


PECO II, INC.,
an Ohio corporation

By:		/s/ John G. Heindel
Name:		John G. Heindel
Title:		President & Chief Executive Officer

DELTA PRODUCTS CORPORATION,
a California corporation

By:		/s/ M.S. Huang
Name:		M.S. Huang
Title:		President

[Signature Page to Support Agreement]

SIGNIFICANT HOLDERS:

/s/ Matthew P. Smith

Matthew P. Smith

/s/ Linda H. Smith

Linda H. Smith

/s/ Matthew P. Smith

Ashwood I, LLC

By: Matthew P. Smith

/s/ Matthew P. Smith

Ashwood II, LLC

By: Matthew P. Smith

/s/ James L. Green

Green Family Trust 03/16/1995,

James L. Green, Co- Trustee

/s/ M. Janet Green

Green Family Trust 03/16/1995,

M. Janet Green, Co-Trustee

/s/ James L. Green

Jim Green & Mary Green TR UA 05/09/01

Green Charitable Trust,

James L. Green, Co-Trustee

/s/ M. Janet Green

Jim Green & Mary Green TR UA 05/09/01

Green Charitable Trust,

M. Janet Green, Co-Trustee

[Signature Page to Support Agreement]

Exhibit A

SIGNIFICANT HOLDERS


Name	Company Shares Beneficially Owned	Rights to acquire shares of Company capital stock
Matthew P. Smith c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	183,407	-76,907 exercisable options-

Matthew P. Smith and Linda H. Smith c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	1,441,950 (shared voting)	-0-

Ashwood I, LLC ATTN: Matthew P. Smith c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	1,000,000 (shared voting)	-0-

Ashwood II, LLC ATTN: Matthew P. Smith c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	500,000 (shared voting)	-0-

Green Family Trust 03/16/1995, James L. Green and M. Janet Green, Trustees c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	2,177,200 (shared voting)	-0-

Jim Green & Mary Green TR UA 05/09/01 Green Charitable Trust c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	75,000 (shared voting)	-0-

Exhibit B

ASSET PURCHASE AGREEMENT

EX-4 5 dex4.htm VOTING AGREEMENT Voting Agreement

EXHIBIT 4

VOTING AGREEMENT

EXHIBIT D to Asset Purchase Agreement

VOTING AGREEMENT

This Voting Agreement (this “Agreement”) is made as of October 13, 2005 by and among PECO II, Inc., an Ohio corporation (the “Company”), Delta Products Corporation, a California corporation (“Shareholder”), and each of the persons listed on Exhibit A-1 attached hereto (each a “Significant Holder,” and collectively the “Significant Holders”). The Shareholder and the Significant Holders are referred to herein collectively as the “Voting Parties.” This Agreement shall become effective on the Closing Date of the Asset Agreement (as defined below) (the “Effective Date”).

WHEREAS, concurrently herewith, the Company and Shareholder are entering into an Asset Purchase Agreement, dated as of October 13, 2005 (as such agreement may hereafter be amended from time to time, the “Asset Agreement”), a copy of which is attached hereto as Exhibit B, pursuant to which the Company will purchase from Shareholder the Business Assets and assume the Assumed Liabilities (each as defined in the Asset Agreement) in exchange for the issuance to Shareholder of a certain number of shares of the Company’s common stock and a warrant to purchase additional shares of the Company’s common stock.

WHEREAS, as an inducement and a condition to entering into the Asset Agreement, the Company and the Voting Parties have agreed to enter into this Agreement.

NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, and other consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows:

1. Definitions.

(a) Capitalized terms used but not defined herein shall have the meanings ascribed to them in the Asset Agreement.

(b) Other Definitions.

(i) “Vote” shall include any exercise of voting rights whether at an annual or special meeting or in any other manner permitted by applicable law.

(ii) “Company Charter Documents” shall mean the Company’s articles of incorporation and code of regulations as shall be in effect.

(iii) “Class I Director” means those directors of the Company whose term of office expires at the Company’s 2007 annual meeting of shareholders.

(iv) “Class II Director” means those directors of the Company whose term of office expires at the Company’s 2008 annual meeting of shareholders.

(v) “Class III Director” means those directors of the Company whose term of office expires at the Company’s 2006 annual meeting of shareholders.

2. Company Shares. Shareholder and each Selling Holder hereby severally agrees to vote all shares of the Company’s voting securities now or hereafter beneficially owned by such Person (the “Company Shares”) in accordance with the provisions of this Agreement. For purposes of this Agreement, a Person shall be deemed to “beneficially own” or to have acquired “beneficial ownership” of a security if such Person directly or indirectly, through any contract, arrangement, understanding relationship or otherwise, has such ownership, control or power to (i) vote or direct the voting with respect to such security, or (ii) dispose or to direct the disposition of such security. Company

Shares beneficially owned by a Person shall include securities beneficially owned by all other Persons with whom such Person would constitute a “group” as within the meaning of Section 13(d)(3) of the Exchange Act, other than parties to this Agreement. In the event of a stock dividend or distribution, or any change in the Company capital stock by reason of any stock dividend, split-up, recapitalization, combination, exchange of shares or the like, the term “Company Shares” shall be deemed to refer to and include the Company Shares as well as all such stock dividends and distributions and any shares into which or for which any or all of the Company Shares may be changed or exchanged.

3. Company Covenants.

(a) Effective as of the Closing Date, the Company’s board of directors (the “Board”) shall, in compliance with applicable Law and the Company Charter Documents, appoint the Shareholder Designee to fill the existing Class II Director vacancy. The Shareholder Designee shall be designated a Class II Director of the Board.

(b) The Company shall use commercially reasonable efforts to support the election of the Shareholder Designee, and in any event efforts consistent with the Company’s past and current practices regarding the support of other persons standing for election as directors of the Company as part of the Company’s management slate.

4. Election of Board of Directors.

(a) Designation of Directors. The nominees for election to the Company’s Board (each a “Designee”) shall be selected as follows:

(i) For so long as Shareholder, or any of its affiliates (other than the Company), holds Company Shares or the right to acquire Company Shares representing at least 5% of Company’s issued outstanding capital stock, one Designee shall be chosen by the Shareholder, in its sole discretion, provided the Designee shall be reasonably acceptable to the Board (a “Shareholder Designee”), and the Company shall name such individual for election to the Company’s Board as part of the management slate and shall be included in all Company proxy materials relating to the election of directors of the Company.

(ii) The remaining Designees to the Board shall be chosen by the Company’s Board (each a “Company Designee”), and shall be named for election to the Company’s Board as part of the management slate and shall be included in all Company proxy materials relating to the election of directors of the Company.

(b) Current Designees. Subject to Section 4(c), as of the Effective Date, the following individuals are the current Designees:

(i) George J. Dallas, Trygve A. Ivesdal, R. Louis Schneeberger, and Eugene V. Smith are the Company Designees serving as Class I Directors; John G. Heindel, E. Richard Hottenroth and Thomas R. Thomsen are the Company Designees serving as Class II Directors; and James L. Green, Mark R. McBride and Matthew P. Smith are the Company Designees serving as Class III Directors.

(ii) Lanford Liu is the Shareholder Designee and shall serve as a Class II Director.

(i) From time to time during the term of this Agreement, the Company may, in its sole discretion (x) notify Shareholder in writing of an intention to remove from the Board any incumbent Company Designee; or (y) notify Shareholder in writing of an intention to select a new Company Designee to fill a vacancy in any such seat. Any vacancy in a board seat allocated to a Company Designee shall be filled by the Board in accordance with the Company Charter Documents. In the event of such an initiation of a removal or selection of a new Company Designee under this Section 4(c)(i), Shareholder shall vote its shares to cause (A) the removal from the Board of the Company Designee(s) so designated for removal; and (B) the election to the Board of any new Company Designee so nominated.

(ii) From time to time during the term of this Agreement, Shareholder may, in its sole discretion (x) notify the Company in writing of an intention to remove from the Board any incumbent Shareholder Designee; or (y) notify the Company in writing of an intention to select a new Shareholder Designee to fill a vacancy in any such seat. Any vacancy in a board seat allocated to the Shareholder Designee shall be filled only by the Shareholder, in its sole discretion, provided the Shareholder Designee shall be reasonably acceptable to the Board. In the event of such an initiation of a removal or selection of a Shareholder Designee under this Section 4(c)(ii), the Company shall take such reasonable actions as are necessary to facilitate such removals or elections, including, without limitation, calling a special meeting of shareholders and soliciting the votes of the appropriate shareholders, and each Significant Holder shall vote its shares to cause (A) the removal from the Board of the Shareholder Designee so designated for removal; and (B) the election to the Board of any new Shareholder Designee so nominated.

(iii) Shareholder agrees not to bring any proposal before the Company’s shareholders, the intent of which is to remove from the Board without cause a Company Designee. The Company and each Significant Holder severally agrees not to bring any proposal before the Company’s shareholders, the intent of which is to remove from the Board without cause the Shareholder Designee.

(d) Election of Directors.

(i) Each Significant Holder severally agrees to vote all Company Shares (x) at all annual or special meetings of the Company’s shareholders, however called (including any postponement or adjournment thereof), and (y) by any consensual action of shareholders of the Company, in each case, in such a manner as may be necessary to elect (and maintain in office) as a member of the Company’s Board, the Shareholder Designee.

(ii) Shareholder agrees to vote all Company Shares (x) at all annual or special meetings of the Company’s shareholders, however called (including any postponement or adjournment thereof), and (y) by any consensual action of shareholders of the Company, in each case, in such a manner as may be necessary to elect (and maintain in office) as members of the Company’s Board, the Company Designees.

5. Board Observation Rights.

(a) Board Observer. For so long as Shareholder, or any of its affiliates (other than the Company), continues to hold Company Shares or the right to acquire Company Shares representing at least 5% of the Company’s issued outstanding capital stock, Shareholder shall have the right to designate a representative (the “Board Observer”) to attend all meetings of the Board (whether telephonic or otherwise) in a non-voting observer capacity, and the Company shall give the Board Observer copies of all notices, minutes, consents and other materials that it provides to its Directors (the “Materials”); provided, however, that the Board Observer and Shareholder shall agree to hold in confidence and trust all Materials so provided to the same extent as if they were members of the Board; provided, further, that the Board Observer and Shareholder agree to share information gathered from the Materials or to share the Materials only with those directors, officers, employees, agents or representatives of Shareholder on a need-to-know basis.

(b) Initial Board Observer; Change of Board Observer. Shareholder shall appoint Austin Tseng as its initial Board Observer. Shareholder, in its sole discretion, may from time to time change the Board Observer; provided, however, that Shareholder agrees to use commercially reasonable efforts to limit the number of times the Board Observer is changed. Moreover, Shareholder agrees to provide reasonable notice to the Company of a change of its Board Observer prior to the next scheduled meeting of the Board.

(c) Company’s Right to Exclude Board Observer. The Company shall have the right to exclude the Board Observer from any meeting of the Board, or any portion thereof, or to refuse to give the Board Observer access to any Materials, (i) if in the judgment of the Board, the matters to be discussed would impinge the attorney-client privilege, or (iii) a majority of the members of the Board vote to exclude such representative from a meeting, or any portion thereof, or from receiving Materials, or any portion thereof.

(d) Expenses. The Company shall pay all expenses reasonably incurred by either the Shareholder Designee or the Board Observer, but not both, in connection with such Shareholder Designee’s or Board Observer’s attendance at and participation in any meeting of the Board, including, but not limited to travel expenses, in accordance with the Company’s Human Resources Policy – Business Travel, as may be in effect from time-to-time with respect to members of the Board.

6. Representations, Warranties and Other Covenants of Significant Holders. Each Significant Holder hereby severally and not jointly represents and warrants to the Company and to Shareholder as follows:

(a) Ownership of Company Shares. As of the date hereof, each Significant Holder is the beneficial owner of the number of Company Shares set forth opposite such Significant Holder’s name on Exhibit A-1 hereto (representing all Company Shares beneficially owned by such Significant Holder), which Company Shares are free and clear of any liens, adverse claims, charges, security interests, pledges or options, proxies, voting trusts or any other encumbrances. With respect to each Significant Holder, Exhibit A-1 also sets forth all options, warrants and other derivative securities convertible into or exercisable for shares of Company capital stock held by such Significant Holder as of the date hereof.

(b) Power; Binding Agreement. Each Significant Holder has sole voting power regarding the subject matters of this Agreement with respect to all of his or her Company Shares—except in the cases of shared voting power noted in Exhibit A-1—with no limitations, qualifications or restrictions on such rights. Each Significant Holder has the legal capacity, power and authority to enter into and perform all of its obligations under this Agreement. The execution, delivery and performance of this Agreement by such Significant Holder will not violate any agreement or any court order to which such Significant Holder is a party or is subject including, without limitation, any voting agreement or voting trust. This Agreement has been duly and validly executed and delivered by each Significant Holder.

(c) Quorum. Each Significant Holder further agrees that at any meeting of the Company shareholders, such holder shall, or shall cause the holder of record on any applicable record date to, appear at such meeting or otherwise cause the Company Shares to be counted as present thereat for purposes of establishing a quorum.

(d) Disclosure. Each Significant Holder agrees to permit Company and Shareholder to publish and disclose in all documents and schedules filed with the SEC, and any press release or other disclosure document that Company or Shareholder determines to be necessary, such Significant Holder’s identity and beneficial ownership of Company Shares and the nature of such Significant Holder’s commitments, arrangements and understandings under this Agreement.

(e) Survival. Each Significant Holder severally agrees that the foregoing covenants shall be continuing covenants by such Significant Holder during the term of this Agreement, and such Significant Holder shall use his commercially reasonable efforts to take all actions as shall from time to time be necessary to cure any breach or violation thereof.

7. Representations, Warranties and Other Covenants of Shareholder. Shareholder hereby represents and warrants to the Company, as of the Closing, as follows:

(a) Ownership of Company Shares. Subject to the accuracy of the representations and warranties made by the Company in the Asset Agreement, Shareholder is the beneficial owner of the number of Company Shares set forth opposite Shareholder’s name on Exhibit A-2 hereto (representing all Company Shares beneficially owned by Shareholder), which Company Shares are free and clear of any liens, adverse claims, charges, security interests, pledges or options, proxies, voting trusts or any other encumbrances. Exhibit B also sets forth all warrants and other derivative securities convertible into or exercisable for shares of Company capital stock held by Shareholder.

(b) Power; Binding Agreement. Shareholder has sole voting power regarding the subject matters of this Agreement with respect to all of its Company Shares, with no limitations, qualifications or restrictions on such

rights. Shareholder has the legal capacity, power and authority to enter into and perform all of its obligations under this Agreement. The execution, delivery and performance of this Agreement by Shareholder will not violate any agreement or any court order to which such Shareholder is a party or is subject including, without limitation, any voting agreement or voting trust. This Agreement has been duly and validly executed and delivered by Shareholder.

(c) Quorum. Shareholder further agrees that at any meeting of the Company shareholders, Shareholder shall, or shall cause the holder of record on any applicable record date to, appear at such meeting or otherwise cause the Company Shares to be counted as present thereat for purposes of establishing a quorum.

(d) Disclosure. Shareholder agrees to permit the Company to publish and disclose in all documents and schedules filed with the SEC, and any press release or other disclosure document that the Company determines to be necessary, such Shareholder’s identity and beneficial ownership of Company Shares and the nature of such Shareholder’s commitments, arrangements and understandings under this Agreement.

(e) Survival. Shareholder agrees that the foregoing representations, warranties and covenants shall be continuing representations, warranties and covenants by Shareholder during the term of this Agreement, and Shareholder shall use its commercially reasonable efforts to take all actions as shall from time to time be necessary to cure any breach or violation thereof.

8. Termination. This Agreement shall become effective on the Effective Date and shall terminate upon the earlier of: (i) the written agreement of the Company and Shareholder, (ii) the date Shareholder, or any of its affiliates (other than the Company), no longer holds Company Shares or rights to purchase Company Shares, representing at least 5% of the outstanding voting stock of the Company, (iii) the date Shareholder (alone, or together with any of its affiliates (other than the Company)) holds forty-five percent (45%) or greater of the then issued and outstanding voting capital stock of the Company, and (iv) the consummation of (x) any a tender offer, exchange offer, merger, consolidation or other business combination of the Company the result of which is that the shareholders of the Company (other than Shareholder and its affiliates in the case of a tender offer) immediately preceding such transaction hold less than fifty percent (50%) of the equity interests in the surviving or resulting entity of such transaction (or any direct or indirect parent or subsidiary thereof), or (y) the sale of all or substantially all of the assets of the Company. Upon the termination of this Agreement, this Agreement shall forthwith become null and void, and there shall be no liability on the part of any party hereto, except (i) that the provisions of this Section 8 and the provisions of Section 9 shall survive the termination of this Agreement, and (ii) nothing herein shall relieve any party from liability for any intentional breach thereof. In no event shall the termination of this Agreement require the Shareholder Designee to resign from the Board.

9. Miscellaneous.

(a) Successors and Assigns. With respect to the Company, this Agreement shall not be assigned by operation of law or otherwise without the prior written consent of Shareholder, which consent shall not be unreasonably withheld, conditioned or delayed. Subject to the foregoing, this Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns.

(b) Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof.

(c) Amendments. This Agreement may not be amended, changed, supplemented, waived or otherwise modified or terminated, except upon the execution and delivery of a written agreement executed by the parties hereto.

(d) No Waiver. The failure of any party hereto to exercise any right, power or remedy provided under this Agreement or otherwise available in respect hereof at law or in equity, or to insist upon compliance by any other party hereto with its obligations hereunder, and any custom or practice of the parties at variance with the terms hereof, shall not constitute a waiver by such party of its right to exercise any such or other right, power or remedy or to demand such compliance.

(e) Notices. All notices, requests, demands, claims, and other communications hereunder shall be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly delivered (x) three (3) business days after it is sent by registered or certified mail, return receipt requested, postage prepaid, (y) one business day after it is sent for next business day delivery via a reputable nationwide overnight courier service or (y) on the date sent after transmission by facsimile with written confirmation, in each case to the intended recipient as set forth below:


If to a Significant Holder:		To the address set forth beneath such Significant Holder’s name on Exhibit A-1 hereto.

If to the Company:		PECO II, INC.
		1376 State Route 598
		Galion, Ohio 44833
		Fax: 419-468-9164
		Attention: President & CEO

		with a copy to:

		Porter Wright Morris & Arthur LLP
		Hungtinton Center
		41 South High Street
		Columbus, OH 43215-6194
		Fax: 614-227-2100
		Attention: Curtis A. Loveland

If to Shareholder:		Delta Products Corporation
		4405 Cushing Pkwy.
		Fremont, CA 94538-6475
		Attention: Yao C.H. Chou
		Fax: 510-498-8879

		with a copy to:

		Wilson Sonsini Goodrich & Rosati
		Professional Corporation
		650 Page Mill Road
		Palo Alto, CA 94304-1050
		Fax: (650) 493-6811
		Attention: Aaron J. Alter, Esq.

(f) Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. The parties shall use their commercially reasonable efforts to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision that will achieve, to the greatest extent possible, the economic, business and other purposes of such void or unenforceable provision.

(g) Further Assurances. From time to time, at the other party’s reasonable request and without further consideration, each party shall execute and deliver such additional documents and take all such further lawful action as may be reasonably necessary or desirable to effect or enforce, in the most expeditious manner practicable, the provisions of this Agreement.

(h) Governing Law. This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of laws of any jurisdictions other than those of the State of Delaware.

(i) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which, taken together, shall constitute one and the same agreement.

(j) Descriptive Headings. The descriptive headings used herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement.

(k) Exclusive Jurisdiction. With respect to any matter based upon or arising out of this Agreement or the transactions contemplated hereby that seeks temporary or injunctive relief or specific performance, each party (a) irrevocably consents to the exclusive jurisdiction and venue of the state courts of the State of Delaware located in New Castle County, (b) agrees that process may be served upon them in any manner authorized by the laws of the State of Delaware for such persons, (c) waives the defense of an inconvenient forum and covenants not to assert or plead any objection which they might otherwise have to such jurisdiction, venue and such process, and (d) agrees that a final judgment in such legal proceeding shall be final, binding and enforceable in any court of competent jurisdiction. Each party agrees not to commence any legal proceedings subject to this Section 9(k) except in such courts.

(l) Binding Arbitration.

(ii) Any Disputed Claim shall be resolved exclusively and solely by binding arbitration pursuant to the Commercial Arbitration Rules of the American Arbitration Association (the “Rules”) and in accordance with the following: (a) there shall be three (3) arbitrators, one of whom shall be a member of the American College of Trial Lawyers (who shall chair the arbitration panel) and one of whom shall be a certified public accountant; (b) the arbitration shall take place in Wilmington, Delaware, and in no other place; (c) the arbitration shall be conducted in accordance with the procedural laws of the U.S. Federal Arbitration Act, to the extent not inconsistent with the Rules or this Section 9(l)(ii); (d) subject to legal privileges, each party shall be entitled to conduct discovery in accordance with the Federal Rules of Civil Procedure; (e) at the arbitration hearing, each party shall be permitted to make written and oral presentations to the arbitration panel, to present testimony and written evidence and to examine witnesses; (f) the arbitration panel shall have the power to grant temporary or permanent injunctive relief and to order specific performance; (g) the arbitration panel shall have the power to order either party to pay, or to allocate between the parties,

the fees and expenses of the arbitrators and of the American Arbitration Association and to order either party to pay all or a portion of the other party’s attorneys’ fees and expenses incurred in connection with a Disputed Claim and the arbitration; and (h) the arbitration panel shall issue a written decision explaining the bases for the final ruling, and such decision shall be final and binding on the parties hereto, and not subject to appeal, and enforceable in any court of competent jurisdiction.

(m) Other Remedies; Specific Performance.

(i) Other Remedies. Except as otherwise provided herein, any and all remedies herein expressly conferred upon a party will be deemed cumulative with and not exclusive of any other remedy conferred hereby, or by law or equity upon such party, and the exercise by a party of any one remedy will not preclude the exercise of any other remedy. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached.

(ii) Specific Performance. It is accordingly agreed that the parties shall be entitled to seek an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof and thereof, this being in addition to any other remedy to which they are entitled at law or in equity.

[Signature Page Follows]

IN WITNESS WHEREOF, the parties have executed this Voting Agreement as of the date first above written.

PECO II, INC.

an Ohio corporation

/s/ John G. Heindel

John G. Heindel,

President & Chief Executive Officer

DELTA PRODUCTS CORPORATION

a California corporation

/s/ M.S. Huang

Signature of Authorized Signatory

M.S. Huang

Name of Authorized Signatory

President

Title of Authorized Signatory

[Signature Page to Support Agreement]

SIGNIFICANT HOLDERS:

/s/ Matthew P. Smith

Matthew P. Smith

/s/ Linda H. Smith

Linda H. Smith

/s/ Matthew P. Smith

Ashwood I, LLC

By: Matthew P. Smith

/s/ Matthew P. Smith

Ashwood II, LLC

By: Matthew P. Smith

/s/ James L. Green

Green Family Trust 03/16/1995,

James L. Green, Co- Trustee

/s/ M. Janet Green

Green Family Trust 03/16/1995,

M. Janet Green, Co-Trustee

/s/ James L. Green

Jim Green & Mary Green TR UA 05/09/01

Green Charitable Trust,

James L. Green, Co-Trustee

/s/ M. Janet Green

Jim Green & Mary Green TR UA 05/09/01

Green Charitable Trust,

M. Janet Green, Co-Trustee

[Signature Page to Support Agreement]

/s/ Sandra A. Frankhouse

Sandra A. Frankhouse

/s/ Miles A. McIntosh

Miles A. McIntosh

/s/ E. Richard Hottenroth

E. Richard Hottenroth

/s/ Trygve A. Ivesdal

Trygve A. Ivesdal

/s/ Eugene V. Smith

Eugene V. Smith

/s/ George J. Dallas

George J. Dallas

/s/ Mark R. McBride

Mark R. McBride

/s/ R. Lois Schneeberger

R. Louis Schneeberger

/s/ Thomas R. Thomsen

Thomas R. Thomsen

[Signature Page to Voting Agreement]

Exhibit A-1

SIGNIFICANT HOLDERS


Name	Company Shares Beneficially Owned	Options to Purchase Company Shares
Matthew P. Smith c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	183,407	-76,907-

Matthew P. Smith and Linda H. Smith c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	1,441,950 (shared voting)	-0-

Ashwood I, LLC ATTN: Matthew P. Smith c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	1,000,000 (shared voting)	-0-

Ashwood II, LLC ATTN: Matthew P. Smith c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	500,000 (shared voting)	-0-

Green Family Trust 03/16/1995, James L. Green and M. Janet Green, Trustees c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	2,177,200 (shared voting)	-0-

Jim Green & Mary Green TR UA 05/09/01 Green Charitable Trust c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	75,000 (shared voting)	-0-

Sandra A. Frankhouse c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	178,812	52,144 exercisable; 100,000 non-exercisable

Miles A McIntosh c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	200,750	200,753 exercisable; 100,000 non-exercisable


E. Richard Hottenroth c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	111,727	6,477 exercisable; 15,000 non-exercisable

Trygve A. Ivesdal c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	128,037	89,509

Eugene V. Smith c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	505,250	6,477 exercisable; 15,000 non-exercisable

George J. Dallas c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	5,000	5,000 exercisable; 15,000 non-exercisable

Mark R. McBride c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	5,000	5,000 exercisable; 15,000 non-exercisable

R. Louis Schneeberger c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	5,000	5,000 exercisable; 15,000 non-exercisable

Thomas R. Thomsen c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	5,000	5,000 exercisable; 15,000 non-exercisable

Dennis Baughman c/o PECO II, Inc. 1376 State Route 598 Galion, Ohio 44833	91,098	80,000 exercisable; 220,000 non-exercisable

Exhibit A-2

SHAREHOLDER

Name

Company Shares

Beneficially Owned

as of Effective Date

Warrants to Purchase

Company Shares

as of Effective Date

Delta Product Corporation

4405 Cushing Pkwy.

Fremont, CA 94538-6475

Attention: Yao Chao

Fax: 510-498-8879

[To be completed at Closing]

Exhibit B

ASSET PURCHASE AGREEMENT

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