Document:

Exhibit 10.22
    

    
      PHASE II & PHASE III PURCHASE AGREEMENT
    

    
           1.  Products Covered by
      Agreement.  This Agreement concerns the purchase and sale of the PHASE
      II and PHASE III PRODUCTS as defined in Exhibit E (hereinafter called
      "Product"), manufactured to the Specifications.
    

    
            2.   Purchase and Sale of
      Product. Seller will, to the extent properly and accurately forecasted and
      ordered by Buyer as provided in the next paragraph, use commercially reasonable
      efforts to supply the Products to Buyer. Buyer will purchase ninety percent
      (90%) of Buyer's and its Affiliates' ("Affiliate" means any company of which
      Buyer holds a greater than fifty percent (50%) ownership interest) requirements
      for Product. It is understood that Buyer will not purchase [****] from Seller.
      [****] Seller understands that Buyer makes no guarantee as to the quantity of
      Product it will require, however, Buyer agrees that it will undertake the Phase
      II activities set forth in Exhibit A ("Phase II Activities").
    

    
            Buyer's initial forecasted annual
      requirements will be attached hereto as Exhibit B as of September 1,
      2001. Buyer agrees to update the annual forecast (four [4] quarters) on a
      quarterly basis. Such forecast of such requirements provided to Seller by Buyer
      shall be non-binding, and Seller acknowledges that it shall not be entitled to
      and shall not rely on such forecasts/estimates as binding commitments unless
      they are expressly stated as such by Buyer in writing. Seller shall not be
      obligated to supply Buyer with more than one hundred fifty percent (150%) of
      the initial projection for a particular quarter, unless agreed to in writing.
      Buyer's forecasts and orders shall reflect its good-faith expectations of
      customer demand and Buyer shall act in a commercially reasonable manner to
      schedule orders to avoid creating production capacity problems for Seller.
    

    
            3.   Exclusive Caterpillar
      Rights. For a period of seven (7) years from the Effective Date of this
      Agreement, and provided this Agreement has not been terminated, ACTIVE POWER
      agrees not to license any PROGRAM INTELLECTUAL PROPERTY nor ACTIVE POWER's
      BACKGROUND INTELLECTUAL PROPERTY that is solely developed for a Product, to
      [****]. The parties shall review and update Exhibit C from time to time
      or upon either party's request. Before the end of such seven-year period,
      ACTIVE POWER will, at CATERPILLAR's option, discuss the possibility of a
      mutually agreeable extension of such FIELD OF USE exclusivity. During such
      seven-year period, if any, and provided this Agreement has not been terminated,
      ACTIVE POWER shall, at CATERPILLAR's option and provided that CATERPILLAR
      [****]. However, nothing contained in this Agreement, shall restrict ACTIVE
      POWER with respect to making, using, selling, marketing, licensing or
      exploiting products other than Product.
    

    
      [****]
    

    
           4.   Price Containment.
      Both Seller and Buyer are committed to controlling and reducing costs, and both
      recognize that effective cost control is of the essence to this Agreement.
      While this Agreement is in effect, Seller will maintain a cost control and
      reduction program with respect to Product, and will review costs on a regular
      basis for progress toward the objective of maintaining or reducing Seller's
      prices to Buyer. A constant interaction between Buyer's and Seller's
      engineering personnel is essential. All documented mutually agreed cost
      savings, through the efforts of Buyer or Seller, will be shared on a 50/50
      basis. Any cost savings gained without the efforts of Buyer and not mutually
      agreed to in writing will be owned by Seller. Any cost increases must be
      documented and approved by Buyer.
    

    
            5.   Product Prices. The
      OEM Prices and volume earned discounts are as shown in Exhibit E. [****]
      Seller and Buyer agree to renegotiate prices and discounts as necessary or
      appropriate to respond to market conditions. After eighteen (18) months from
      the Effective date of this Agreement, Exhibit E may
    

    
      **Confidential treatment has been requested for the portions of this
      agreement marked by asterisks. Omitted material for which confidential
      treatment has been requested has been filed separately with the Securities and
      Exchange Commission.**
    

    
    
      be modified from time to time upon sixty (60) days written notice from
      the Seller; provided, however, that Buyer may terminate this Agreement within
      thirty (30) days after receipt of notice of such price increase if such
      increase is unacceptable to Buyer. Seller agrees and acknowledges that should
      such prices exceed the lowest Product prices provided to any other customer of
      Seller purchasing Product at similar (or reduced) volume levels and making only
      similar or reduced commitments (including, but not limited to, time
      commitments), such prices to Buyer shall be automatically adjusted to reflect
      any lower pricing provided to such other customers.
    

    
           6.   Product Training and
      Support.
    

    
                a. In order
      to provide sufficient warranty support for the Product, Buyer's service
      training personnel will successfully complete Seller's certified training
      course in order to become competent to a level equivalent to Seller's certified
      service technicians. Seller shall provide such training for up to five (5)
      scheduled classes and for a maximum of ten (10) students per class. Such
      training shall be given at Seller's facilities free of charge for the first
      five (5) scheduled classes of the term of this Agreement and at Seller's
      published prices for any remaining training. Buyer shall be responsible for its
      own travel expenses as incurred for such training at Seller's facilities.
    

    
                b. Seller
      will provide sales and marketing support to Buyer's key dealers, as requested
      and identified by Buyer and agreed to by the Seller.
    

    
           7.   Term. The initial
      term of this Agreement shall be seven (7) years, commencing as of January 1,
      2000, (the "Effective Date"). This Agreement shall automatically be extended
      for additional terms of six (6) months each unless either party gives written
      notice to terminate at least three (3) months prior to the end of the initial
      term or any additional term, or unless otherwise terminated pursuant to the
      provisions hereof.
    

    
           8.   Warranty.
    

    
                 a. Seller
      warrants that each Product shall be in conformity with the Specifications and
      shall be free from defects in material and workmanship.
    

    
                 b. Except as
      provided below, Seller will provide Buyer with the same warranty, under the
      same terms and conditions (including, without limitation, disclaimers), as
      Buyer provides to its customers procuring electric power generation products
      (as attached as Exhibit F); provided, however, that Seller's warranty to
      Buyer shall be for a one-year period from the date of delivery to the end-user,
      notwithstanding any longer warranty period in Buyer's warranty. If Buyer
      performs travel labor (up to four hours), Seller shall reimburse such
      documented, customary and reasonable expenses incurred by Buyer on behalf of
      the Product provided such labor is performed by an employee of Buyer or one of
      its dealers that has been competently trained with respect to the Product. A
      quarterly written statement of Buyer's actual costs for providing warranty
      services to its customers, including notice of specific Product failures, and
      summary information on the causes of such failure, will be sent by Buyer to
      Seller.
    

    
                c. Within
      twelve (12) months from the Effective Date of this Agreement, Buyer shall
      inventory and maintain appropriate spares to provide its standard level of
      service.
    

    
                d. Claims or
      Buyer's "Product Improvement Programs" (PIP), "Product Support Programs" (PSP),
      "Extended Warranty" and other policy actions are to be negotiated on a
      case-by-case basis by both parties and documented in writing as signed by both
      parties. Participation in these programs will be based on an amount mutually
      agreed to by Seller and Buyer.
    

    
      2
    

    
    
           THE FOREGOING WARRANTIES SHALL BE
      SELLER'S SOLE LIABILITY WITH REGARD TO THE PRODUCTS.
    

    
           9.   Indemnification.
      Except to the extent covered by the indemnity from Buyer below, Seller agrees
      to indemnify, defend, and hold Buyer harmless against and from all claims,
      demands, liabilities, loss, damage, cost, and expense, of whatsoever nature
      paid to a third party or incurred in the defense (i) arising from a claim that
      the Product infringes on intellectual property right of a third party or (ii)
      arising from the injury or death of any person or loss or damage to property
      directly due to, any defect of design, material, or workmanship of Product or
      failure of Product to conform with the Specifications, provided Seller is
      promptly notified of any and all such threats, claims or proceedings related
      thereto and given reasonable assistance and the opportunity to assume sole
      control over defense and settlement; Seller shall not be responsible for any
      settlement it does not approve of in writing. The indemnity provided in this
      Section shall be Buyer's sole and exclusive remedy for any claim of
      infringement related to the Product.
    

    
            Buyer agrees to indemnify, defend, and
      hold Seller harmless against and from all claims, demands, liabilities, loss,
      damage, cost, and expense, of whatsoever nature paid to a third party or
      incurred in the defense of a claim arising on account of Buyer's (i)
      misrepresentation of the Product or providing unauthorized representations or
      warranties to its customers, (ii) modifications to the Product or (iii)
      negligence or other fault of products or services of Buyer.
    

    
            10.   Indemnity
      Restrictions. SELLER MAKES NO WARRANTY OR REPRESENTATION WITH RESPECT TO,
      (a) determining whether the Product will achieve the results desired by Buyer
      or any third person, (b) selecting, procuring, installing, operating and
      maintaining complementary equipment to insure correct operation of the Product,
      and (c) ensuring the accuracy of any configuration design or implementation
      that utilizes the Product. In the event of any alteration or attachment to the
      Product not authorized by Seller, Seller shall have no liability or
      responsibility to Buyer for: (a) any hardware, software, equipment, or services
      provided by any persons other than Seller; (b) the proper functioning of the
      Product if the alteration or attachment is the cause of the malfunction; or (c)
      damage caused by any alteration or attachment to the Product.
    

    
           11.   Insurance. Seller
      agrees to keep in full force and effect, at its sole expense, during the term
      of this Agreement and for a period of ten (10) years thereafter, at least the
      insurance coverage described below with insurance companies acceptable to
      Buyer. The limits set forth are minimum limits and shall not be construed to
      limit Seller's liability. All cost and deductible amounts shall be for the sole
      account of Seller. All policies required by Buyer pursuant to this Agreement
      shall name Buyer as an additional insured (per ISO Endorsement #CG 2026 or its
      equivalent) and waive subrogation rights in favor of Caterpillar. All policies
      required shall also be designated as primary coverage to any similar coverage
      carried by Caterpillar.
    

    
      Seller shall not provide Product hereunder until all insurance as
      required hereunder has been obtained, and certificates have been submitted to
      and accepted by Buyer.
    

    
      The required coverage shall be: Commercial General Liability Insurance
      (Occurrence Coverage) including products, completed operations, contractual
      liability coverage of indemnities contained in this contract, with a minimum
      combined single limit of liability of five million dollars ($5,000,000) for
      each occurrence for bodily injury and property damage. Such policy shall
      contain provisions that provide at least thirty (30) days prior written notice
      of any cancellation, non-renewal, or reduction in coverage to Buyer. Seller
      shall deliver Certificates of Insurance in a form satisfactory to Buyer
      evidencing the existence of such policy.
    

    
      3
    

    
    
           12.   Termination by
      Buyer. Buyer may terminate this Agreement at any time, in the event:

    

    
                  a.
      Quality - Products consistently and materially fail to meet the Specifications
      as defined herein or as hereafter agreed to by Buyer and Seller, or fails to
      achieve status as a Caterpillar certified supplier within twenty-four (24)
      months of the Effective Date of this Agreement.
    

    
                  b.
      Delivery - Seller is substantially and continuously failing to meet Buyer's
      Firm Orders with respect to mutually agreed shipment dates. Seller shall
      provide to Buyer a written schedule of Seller's standard lead times for
      delivery of Products from the date Orders are accepted by Seller. Such schedule
      for lead times shall be updated by Seller on a regular basis to reflect any
      modifications thereto.
    

    
                
        c. Competitiveness - Seller fails to be responsive to the
      marketplace or fails to remain competitive on a worldwide basis with other
      manufacturers of comparable parts in terms of price.
    

    
                
        d. Default Generally - Material default by Seller in any material
      obligation hereunder owed by Seller to Buyer.
    

    
      Notwithstanding the above, Buyer may terminate pursuant o Subsections
      (a), (b), (c) or (d) above only if Seller has failed to cure such default
      within sixty (60) days after written notice thereof has been received by
      Seller.
    

    
           13.   Termination by
      Seller. Seller may terminate this Agreement at any time in the event Buyer
      breaches this Agreement and fails to cure such breach within sixty (60) days
      (or ten days in the case of non-payment) after written notice thereof has been
      received by Buyer.
    

    
           14.   Licenses. As between
      the parties, Seller shall own all rights, title and interest in and to the
      Product except as otherwise provided in the "Phase II Development and Phase III
      Feasibility Study Agreement" and the "Phase III Development Agreement." In the
      event that this Agreement is terminated by Buyer pursuant to Section 12(b) and
      only while Buyer remains in full compliance with the provisions of this
      Agreement prior to termination and following termination as such surviving
      provisions shall apply, Seller hereby grants to Buyer, effective as of such
      termination date, a nonexclusive, worldwide, royalty-bearing license (including
      the right to sublicense to Buyer's Affiliates) to make, have made, use and/or
      sell Product. The foregoing license shall only be effective for the eighteen
      (18) months beginning with the date of termination, and Buyer shall pay a
      royalty of one thousand two hundred fifty dollars ($1,250) per delivered
      megajoule per published rating by Seller for each Phase II Product. The same
      shall apply to Phase III Product, except that Buyer shall pay a royalty of
      thirteen dollars ($13) per kVA for each Phase III Product.
    

    
      Each of Buyer and Seller grant to the other party an irrevocable,
      perpetual, nonexclusive, worldwide, royalty-free license (including the right
      to sublicense to such other party's Affiliates) to make, have made, use, sell
      and otherwise exploit during and/or after the term of this Agreement any
      modifications, improvements, inventions, know-how, ideas or suggestions made
      with respect to the other party's Confidential Information by such party's
      employees who have had access to such Confidential Information. If something
      ceases to be considered Confidential Information, licenses granted with respect
      thereto while such information was deemed Confidential Information, will be
      unaffected.
    

    
           15.   Parts Support.
      During the term of this Agreement or following any termination hereof, other
      than termination by Seller due to a breach by Buyer, Seller shall provide, or
      at its option cause to be provided, such quantities of parts to Buyer as Buyer
      may request from time to time for a period of five (5) years from the date of
      the last customer shipment made by Seller under this Agreement of the
      applicable Product release, at a price not to exceed Seller's then-current
      prices provided to other customers under
    

    
      4
    

    
    
      similar terms and conditions, provided such parts are reasonably and
      commercially available to Seller. If for any reason Seller is unable to provide
      parts to Buyer pursuant to its obligations under this Section 15, Seller grants
      to Buyer a nonexclusive, perpetual, worldwide royalty bearing license to make,
      have made, use and/or sell such parts utilizing Seller's proprietary designs.
      The foregoing license is subject to a royalty of six percent (6%) of the
      applicable price set forth in Seller's most current Catalog Spares Pricing
      List.
    

    
           16.   Use of Other Supply
      Sources. Nothing in this Agreement shall prevent Buyer from seeking other
      sources for alternatives to the Product to the extent Seller's production
      capacity continuously and substantially fails to meet Buyer's Firm Orders.
    

    
           17.   Change in Ownership and
      Control. During the life of this Agreement, if there is a change in the
      ownership and control of either party, the other party shall have the option of
      terminating this Agreement immediately by giving written notice thereof within
      ten (10) days of being notified of the occurrence of such change of control;
      provided that if a party provides advance notice of a bona fide proposed change
      of control (including the identity of the principal owners after such change of
      control occurs) the other party will within ten (10) days provide written
      notification to the first party as to whether it will exercise such termination
      right if the change of control occurs. For purposes of this Section 17, a
      change in the ownership and control of either Buyer or Seller or a parent
      company of either party shall be deemed to have occurred if and only if and
      when any one or more persons (excluding existing investors) acting in concert
      individually or jointly is or becomes a beneficial owner, directly or
      indirectly, of securities representing more than fifty percent (50%) of the
      combined voting power of all then outstanding securities of Seller or Buyer or
      the parent company of either party.
    

    
           18.   Shipping
      Instructions/Terms and Conditions. Orders will be placed under Buyer's
      blanket purchase order(s). This Agreement shall supersede Buyer's standard
      purchase order terms (other than the terms under the following sections: "Work
      on Buyer's Premises" and "Property Furnished to Seller by Buyer", which terms
      shall be deemed to be incorporated herein by reference and made a part hereof)
      or any terms stated in any acknowledgment forms or other forms utilized by
      Seller or Buyer. Such orders shall specify the quantity, part number and
      description, unit price, requested ship date, destination, and Buyer's freight
      carrier and account number with the carrier. Orders shall be subject to
      acceptance by Seller ("Firm Orders"). No modification to this Agreement will be
      stated on an order. All Products shall be shipped F.O.B. Seller's facility in
      Austin, Texas. Title and risk of loss to Product shall pass to Buyer upon
      delivery to the carrier at the F.O.B. point. Buyer shall designate a carrier.
      Any special freight charges shall be Seller's responsibility if necessary to
      meet not more than one hundred fifteen percent (115%) of Buyer's projected
      quarterly requirements.
    

    
           19.   Inspection. Product
      is subject to Buyer's inspection, testing and approval. Buyer, at its option,
      may reject or refuse to accept any Product which does not meet the requirements
      of the warranty set forth herein. Buyer's right to reject shall expire one (1)
      year after the date of shipment. Prior to returning any Product, Buyer shall
      notify Seller of its intent to reject, and Seller may within thirty (30) days
      correct any such defect. Items rejected by Buyer will be returned to Seller at
      Seller's expense, and Seller agrees to refund to Buyer any payments (including
      but not limited to shipment expense) made by Buyer for such Product. Payment by
      Buyer for any Product shall not be deemed an acceptance thereof. Acceptance of
      any Product shall not relieve Seller from any of its obligations,
      representations or warranties hereunder or with respect thereto.
    

    
            20.   Prices and
      Payments. Prices set forth in Exhibit E do not include installation,
      freight and handling charges, or applicable taxes, and Buyer shall be
      responsible for all such charges and taxes with respect to the Products and the
      shipment thereof. All payments shall be made by Buyer in accordance with the
      terms of Buyer's then-current standard settlement schedule. All payments due
      hereunder shall be
    

    
      5
    

    
    
      paid to Seller in United States dollars in the United States. Unless
      Buyer furnishes a proper exemption certificate, Buyer shall be charged for all
      taxes, however designated, levied or based on this Agreement or the Product.
    

    
           21.   Force Majeure.
      Neither Buyer nor Seller shall be liable for any delay in or failure of
      performance of their respective obligations hereunder if such performance is
      rendered impossible or impracticable by reason of fire, explosion, earthquake,
      accident, breakdown, strike, drought, embargo, war, riot, act of God or public
      enemy, an act of governmental authority, agency or entity, shortage of raw
      materials, or other contingency, delay, failure or cause, beyond the reasonable
      control of the part whose performance is affected, irrespective of whether such
      contingency is specified herein or is presently occurring or anticipated by
      either party. Upon the occurrence of any event covered by this provision,
      Seller and Buyer shall make every effort to continue to maintain as much as
      possible the supplier-customer relationship established under this Agreement.
      However, in the event Buyer or Seller is unable to meet its obligations
      hereunder because of the conditions described above and such inability
      continued for a period of two (2) months, the other party shall have the right
      to terminate this Agreement upon thirty (30) days prior written notice.
    

    
           22.   Assignment/Applicable
      Law. Except to an entity that acquires all or substantially all the
      business or assets of a party, this Agreement is not assignable by either party
      without the written consent of the other party and will be governed by and
      construed in accordance with the laws of the State of New York without regard
      to the conflict of laws provisions thereof.
    

    
           23.   Entire Agreement.
      This Agreement and the Exhibits hereto constitute the entire agreement and
      understanding between the parties with respect to the subject matters herein
      and therein, and supersede and replace any prior agreements and understandings
      whether oral or written, between them with respect to such matters. Without
      limiting the generality of the foregoing, it is understood that this Agreement
      supersedes and replaces the Phase II Purchase Agreement which superseded and
      replaced the Phase II Purchase Agreement Terms and Conditions attached as
      Exhibit B to the Phase II Development and Phase III Feasibility Study
      Agreement dated as of January 22, 1999. Any additional or different terms of
      any related purchase order, confirmation, acknowledgment, shipping instruction
      form or similar form of Buyer or Seller even if signed by the parties after the
      date hereof, shall have no force or effect.
    

    
           24.   Waiver. The
      provisions of this Agreement may be waived, altered, amended, or repealed in
      whole or in part only upon the written consent of all parties to this
      Agreement. The waiver by either party of any breach of this Agreement shall not
      be deemed or construed as a waiver of any other breach, whether prior,
      subsequent or contemporaneous, of this Agreement.
    

    
           25.   Severability.
      Invalidation of any of the provisions contained herein, or the application of
      such invalidation thereof to any person, by legislation, judgment or court
      order shall in no way affect any of the other provisions hereof or the
      application thereof to any other person, and the same shall remain in full
      force and effect, unless enforcement as so modified would be unreasonable or
      grossly inequitable under all the circumstances or would frustrate the purposes
      hereof.
    

    
            26.   Counterparts.
      Section headings contained herein are for ease of reference only and shall not
      be given substantive effect. This Agreement may be signed in one or more
      counterparts, each to be effective as an original.
    

    
      6
    

    
    
           27.   Limitation of
      Liability. NEITHER PARTY SHALL BE LIABLE FOR ANY SPECIAL, INCIDENTAL,
      INDIRECT OR CONSEQUENTIAL DAMAGES ARISING OUT OF THE SUBJECT MATTER OF THIS
      AGREEMENT, OR BUYER'S COST OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES.
    

    
           28.   Confidential
      Information.
    

    
                  
      a. In connection with work under this Agreement, a party ("TRANSMITTING PARTY")
      may deliver PROPRIETARY INFORMATION relating directly to the business or
      technology of the other party ("RECEIVING PARTY"). The RECEIVING PARTY may not
      use the PROPRIETARY INFORMATION except as necessary to perform its obligations
      under this Agreement, will protect the confidentiality of the PROPRIETARY
      INFORMATION with at least the same degree of care as it protects its own
      confidential information, and will not disclose any such PROPRIETARY
      INFORMATION without the express written consent of the TRANSMITTING PARTY.
      "PROPRIETARY INFORMATION" includes any process, system, formula, pattern,
      model, device compilation, or other information: (i) not known by the RECEIVING
      PARTY prior to this Agreement or known by the RECEIVING PARTY prior to this
      Agreement but having restriction on its use or disclosure; and (ii) not
      generally known by others (unless so know through some fault of the RECEIVING
      PARTY). PROPRIETARY INFORMATION does not include knowledge, skills or
      information which is generally known in Seller's or Buyer's trade or
      profession.
    

    
                  b.
      Each party agrees that it will neither (i) disclose to the other party or any
      of its employees information in confidence belonging to a third party; nor (ii)
      knowingly, in the performance of the work hereunder, produce anything that
      embodies information under confidential restriction, or is covered by a patent,
      patent application, copyright, trade secret, or other intellectual property
      right owned by a third party.
    

    
                  
      c. Nothing in this Agreement shall be construed as preventing either party from
      independent development, provided that PROPRIETARY INFORMATION is handled in
      accordance with paragraph 28(a).
    

    
                
        d. Should the RECEIVING PARTY be required to disclose PROPRIETARY
      INFORMATION by governmental or judicial order, the RECEIVING PARTY will give
      the TRANSMITTING PARTY prompt notice of any such order and will comply with any
      protective order imposed on such disclosure.
    

    
           29.   Compliance with
      Laws. Both parties represent that they have complied, and during the
      performance of this Agreement, will continue to comply with the provisions of
      all applicable laws and regulations from which liability may accrue to the
      other party for any violation thereof.
    

    
           30.   Confidentiality.
      Except with respect to potential investors and/or acquirers, the terms of this
      Agreement as well as its existence shall be kept confidential and not disclosed
      by either party without the express written consent of the other party.
    

    
      [Signature page follows.]
    

    
      7
    

    
    
      The parties have caused this Agreement to be signed in duplicate by their
      duly-authorized representatives.
    

    	ACTIVE POWER, INC.	CATERPILLAR, INC.
	 	 
	By: /s/ Joseph F. Pinkerton	By: /s/ Jim Parker 
	Name: Joseph F. Pinkerton	Name: Jim Parker 
	Title: President & CEO	Title: Director of Electric Power
	 	 
	 	 
	 	By: /s/ Paul Pearson 
	 	Name: Paul Pearson 
	 	Title: Purchasing Manager
	 	Date: October 12, 2001 

    
      EXHIBIT A
    

    
      PHASE II & PHASE III MARKETING ACTIVITIES
    

    	Buyer will conduct a product launch with appropriate marketing
        subsidiaries and dealers.
	 Buyer will create appropriate sales binder for above training or
        launch.
	 Buyer will effect pricing and price list literature for the program
        for all appropriate worldwide marketing subsidiaries and dealers.
	 Buyer will announce product to dealers. 
	Buyer will effect a Caterpillar Product News announcement.
	Buyer will create product brochures for product promotion.
	Buyer will create product specification sheets. 
	Buyer will enter appropriate performance and specifications into its
        online Technical Marketing Information (TMI) systems.
	Buyer will make adequate technical drawings available to its
        dealers.
	Buyer will effect a public product announcement of the phase II
        product that will include reference to the new Caterpillar UPS product and its
        use of the Active Power flywheel energy storage system.
	Buyer will create a product promotional video. 
	Buyer will include the product where appropriate in its
        marketing/specification software.
	 Buyer will promote the product internally to its worldwide marketing
        subsidiaries. 
	Buyer will effect the above in all languages deemed appropriate by
        Buyer.

    
      
        Implementation of the foregoing Marketing Activities is dependent upon
        Buyer receiving adequate product and technical information from Seller
      

    

    
      EXHIBIT B
    

    
      Forecast (to be provided as of September 1, 2001)
    

     

    
       EXHIBIT C 
    

    
       BUYER'S COMPETITOR LIST 
    

    
      [****]
    

    

    
      **Confidential treatment has been requested for the portions of this
      agreement marked by asterisks. Omitted material for which confidential
      treatment has been requested has been filed separately with the Securities and
      Exchange Commission.**
    

    
    
       EXHIBIT D 
    

    
       MINIMUM PURCHASE COMMITMENT 
    

    
      [****]
    

    

    
      **Confidential treatment has been requested for the portions of this
      agreement marked by asterisks. Omitted material for which confidential
      treatment has been requested has been filed separately with the Securities and
      Exchange Commission.**
    

     

    
      EXHIBIT E
    

    
      [****]
    

    

    
      **Confidential treatment has been requested for the portions of this
      agreement marked by asterisks. Omitted material for which confidential
      treatment has been requested has been filed separately with the Securities and
      Exchange Commission.**Exhibit 10.23
    

    
      PHASE III PRODUCT DEVELOPMENT AGREEMENT
    

    
           This DEVELOPMENT AGREEMENT ("Agreement") is
      effective as of September 1, 2001 ("Effective Date"), by and between Active
      Power, 11525 Stonehollow Drive, Suite 110, Austin, Texas 78758("ACTIVE POWER")
      and Caterpillar Inc., 100 N.E. Adams Street, Peoria, Illinois 61629-6490
      ("CATERPILLAR").
    

    
           1.   DEFINITIONS
    

    
           For purposes of this AGREEMENT, the
      following definitions shall apply:
    

    
                a)   
      "AFFILIATE" means any company, corporation, partnership or other business
      entity, which is more than fifty percent (50%) or more owned, directly or
      indirectly, by a party to this AGREEMENT.
    

    
                b)
         "BACKGROUND INTELLECTUAL PROPERTY" shall be all INTELLECTUAL
      PROPERTY incorporated into the PHASE III PRODUCT other than that which is
      defined as PROGRAM INTELLECTUAL PROPERTY.
    

    
                c)
         "FIELD OF USE" shall mean earth-moving equipment,
      construction equipment, mining equipment, forestry equipment, engines, engine
      generator sets, agricultural equipment, paving equipment, components for all
      such equipment and all reasonable extensions thereof which are mutually agreed
      in writing by the parties hereto.
    

    
                d)
         "INTELLECTUAL PROPERTY" includes, without limitation,
      inventions, whether or not patentable, copyrights, computer software and
      accompanying documentation, specifications, know how and original works of
      authorship. INTELLECTUAL PROPERTY includes PROPRIETARY INFORMATION.
    

    
                e)
         "PROGRAM INTELLECTUAL PROPERTY" means INTELLECTUAL PROPERTY
      that is created, made, conceived or reduced to practice in performance of work
      under the PROGRAM (identified as PROGRAM INTELLECTUAL PROPERTY in the box on
      the right side of Exhibit E to this Agreement).ACTIVE POWER agrees to
      review with CATERPILLAR prior to ACTIVE POWER developing any product rated
      below 300kVA that uses PROGRAM INTELLECTUAL PROPERTY, as shown in Exhibit
      E.
    

    
                f)
         "PROGRAM" shall mean the efforts of CATERPILLAR or ACTIVE
      POWER to develop PHASE III PRODUCTS.PHASE III PRODUCTS are those products
      identified as such in Exhibit E to the Phase II and Phase III Purchase
      Agreement and expressly do not include any product rated at less than 300 kVA.
    

    
           2.   PROGRAM
    

    
           This Agreement governs Phase III
      development. Notwithstanding anything contained in this Agreement and subject
      to the restrictions in the PHASE I Purchase Agreement and PHASE II & Phase
      III Purchase Agreement, nothing contained herein shall preclude ACTIVE POWER
      from selling or otherwise disposing of products other than PHASE II OR PHASE
      III PRODUCTS.
    

    
    
      EXHIBIT 10.23
    

    
                a)
         PHASE III
    

    
                     (i)
         The parties shall cooperate to develop PHASE III PRODUCT
      as defined on Exhibit E to the Phase II & Phase III Purchase
      Agreement.  ACTIVE POWER shall be responsible for the design and
      development of the PHASE III PRODUCT, except that CATERPILLAR shall be
      responsible for the design and development of [****]. The PHASE III
      PRODUCT specification and requirements are detailed in Exhibit A
      ("Specifications").
    

    
                     (ii)
         The parties will cooperate with one another to design,
      develop and test the PHASE III PRODUCT for possible use with CATERPILLAR
      generator sets. ACTIVE POWER will make one prototype that conforms with the
      Specifications.If the parties mutually agree on any changes to the
      Specifications during the development process, such changes shall be
      incorporated into the Specifications and be attached to, and become part of,
      this Agreement. The parties will test this prototype, at a mutually, reasonably
      agreed upon site, for compliance with the Specifications (except for the
      Specification relating to reliability target) stated in Exhibit A.
      Each party will document and report to the other party the results of such
      tests performed on such prototype together with any comments concerning design
      changes, further development, and the like.  CATERPILLAR will accept or
      reject the PHASE III PRODUCT prototype within sixty (60) calendar days
      after testing begins at the site selected by CATERPILLAR (however, if
      CATERPILLAR fails to indicate a testing location within sixty (60) days after
      ACTIVE POWER has completed Milestone 2 (as set forth in Exhibit C), the
      testing site shall be ACTIVE POWER's site in Austin Texas); failure to give
      notice of acceptance or rejection will constitute acceptance. CATERPILLAR may
      reject the PHASE III PRODUCT only if it fails in some respect to meet the
      Specifications (except for the Specification relating to reliability target)
      stated in Exhibit A. If CATERPILLAR properly rejects the
      PHASE III PRODUCT, ACTIVE POWER may correct the failures and when it
      believes that it has made the necessary corrections and has notified
      CATERPILLAR, the parties will again test the PHASE III prototype and the
      acceptance/rejection/correction provisions above shall be reapplied until the
      PHASE III PRODUCT is accepted; provided, however, if a correction to a
      deliverable that is rejected by CATERPILLAR for failure to meet a Specification
      (except for the Specification relating to reliability target) set forth in
      Exhibit A is not accepted,Caterpillar may terminate this Agreement. The
      day on which CATERPILLAR accepts the PHASE III PRODUCT shall be deemed the
      "Acceptance Date". After the Acceptance Date, CATERPILLAR may purchase
      additional prototypes at a price per prototype defined by the pricing for Phase
      III Product in Exhibit B. Any prototypes shall be provided to
      CATERPILLAR on an "AS IS" basis.
    

    
                     (iii)
         Within ninety (90) days following the Acceptance Date,
      CATERPILLAR shall have the option of purchasing such PHASE III PRODUCTS
      pursuant to the provisions of the Phase II & Phase III Purchase Agreement
      specified in Exhibit B hereto. In the event of conflict between this
      Agreement and the Phase II & Phase III Purchase Agreement, this Agreement
      shall control. Caterpillar may exercise such Phase III Purchase Option by
      providing written notice to Active Power of such exercise within the aforesaid
      90-day period. ACTIVE POWER will cooperate with CATERPILLAR during reliability
      testing to meet the reliability targets.
    

    
           3.   PHASE III COSTS
    

    
                a)   
      Unless otherwise stated in this Agreement or later mutually agreed to in
      writing specifically referencing this Agreement, each party will bear its own
      costs incurred in the PROGRAM.
    

    
      2
    

    
      ** Confidential treatment has been requested for the portions of this
      agreement marked by asterisks. Omitted material for which confidential
      treatment has been requested has been filed separately with the Securities and
      Exchange Commission.**
    

    
    
                b)   
      CATERPILLAR agrees to pay ACTIVE POWER for co-ownership of PROGRAM INTELLECTUAL
      PROPERTY the sum of $5,000,000 (five million dollars). The payments shall be
      made in installments, each installment being due and payable upon the objective
      satisfaction of each of the five milestones in the payment schedule listed in
      Exhibit C ("Milestones"). Other than the payments specified above,
      CATERPILLAR shall not be responsible for any other payments or funding, and
      ACTIVE POWER shall bear all its costs for participating in this Program, or any
      part thereof. CATERPILLAR shall bear its own costs for participating in this
      program, or any part thereof.
    

    
                c)
         Upon receipt of ACTIVE POWER'S correct itemized invoice(s)
      and after objective satisfaction of each Milestone, CATERPILLAR will pay ACTIVE
      POWER in accordance with such invoice.
    

    
                d)
         ACTIVE POWER will contribute at least $5,000,000 in kind to
      the design, development and testing of the PHASE III PRODUCT, as shown in
      quarterly reports and documents to CATERPILLAR. CATERPILLAR may suspend
      its payments if such quarterly reports and documents are not of sufficient
      detail to allow CATERPILLAR to reasonably ascertain the specifics of such
      ACTIVE POWER contributions, including amounts of payments and descriptions of
      work performed.   
    

    
                e)
         ACTIVE POWER will provide quarterly status reports to
      CATERPILLAR relating to the pursuit and achievement of the Milestones.
    

    
           4.   CONFIDENTIALITY
    

    
                a)   
      In connection with work under this Agreement, a party ("TRANSMITTING PARTY")
      may deliver PROPRIETARY INFORMATION relating directly to the 
      PHASE III development to the other party ("RECEIVING PARTY"). The
      RECEIVING PARTY may not use the PROPRIETARY INFORMATION except for work
      performed according to this Agreement, will protect the confidentiality of the
      PROPRIETARY INFORMATION with at least the same degree of care as it protects
      its own confidential information and will not disclose any such PROPRIETARY
      INFORMATION, without the express written consent of the TRANSMITTING PARTY.
      "PROPRIETARY INFORMATION" includes any process, system, formula, pattern,
      model, device compilation, or other information:(i) not known by the
      RECEIVING PARTY prior to this Agreement or known by the RECEIVING PARTY prior
      to this Agreement but having restriction on its use or disclosure; and
      (ii) not generally known by others (unless so know through some fault of
      the RECEIVING PARTY). PROPRIETARY INFORMATION does not include knowledge,
      skills or information which is generally known in ACTIVE POWER's or
      CATERPILLAR's trade or profession.
    

    
                b)
         Each party agrees that it will neither (i) disclose to
      the other party or any of its employees information in confidence belonging to
      a third party; nor (ii) knowingly in the performance of the work hereunder
      produce anything that embodies information under confidential restriction, or
      is covered by a patent, patent application, copyright, trade secret, or other
      intellectual property right owned by a third party.
    

    
                c)
         Nothing in this Agreement shall be construed as preventing
      either party from independent development, provided that PROPRIETARY
      INFORMATION is handled in accordance with paragraph 4(a).
    

    
      3
    

    
    
                d)
         Should the RECEIVING PARTY be required to disclose
      PROPRIETARY INFORMATION by governmental or judicial order, the RECEIVING PARTY
      will give the TRANSMITTING PARTY prompt notice of any such order and will
      comply with any protective order imposed on such disclosure.
    

    
           5.   INTELLECTUAL PROPERTY

    

    
                a)
         BACKGROUND INTELLECTUAL PROPERTY shall remain the property of
      the party who created, made, conceived and reduced it to practice.
    

    
                b)
         All PROGRAM INTELLECTUAL PROPERTY shall be jointly owned by
      the parties and may be exploited and/or nonexclusively licensed by either party
      without further consent or accounting to the other party. With respect to all
      rights and ownership in such PROGRAM INTELLECTUAL PROPERTY, the parties will
      mutually discuss whether to obtain or maintain such rights, including, without
      limitation, any patents, trademarks, copyrights, trade secrets, PROPRIETARY
      INFORMATION, and any other proprietary rights therein, and if one refuses to
      take any such joint action requested by the other, the other may proceed at its
      own expense; no such action will change the foregoing ownership provision. A
      party will execute all documents the other may request for such purposes and to
      otherwise assist the other (at the other's expense) for such purposes.
    

    
                c)
         Each of CATERPILLAR and ACTIVE POWER grant to the other party
      an irrevocable, perpetual, nonexclusive, worldwide, royalty free license
      (including the right to sublicense to such other party's Affiliates) to make,
      have made, use, sell and otherwise exploit during and/or after the term of this
      Agreement any modifications, improvements, inventions, know how, ideas or
      suggestions made with respect to the other party's PROPRIETARY INFORMATION by
      such party's employees who have had access to such PROPRIETARY INFORMATION. If
      something ceases to be considered PROPRIETARY INFORMATION, licenses granted
      with respect thereto while such information was deemed PROPRIETARY INFORMATION,
      will be unaffected.
    

    
                d)
         Except as provided in this Agreement or the Exhibits, nothing
      in this Agreement shall be construed as a grant of, or agreement to grant, to
      either party any licenses under intellectual property rights of the other
      party, regardless of whether they are dominant of or subordinate to those
      provided herein.
    

    
           6.   LICENSING JOINTLY OWNED
      INTELLECTUAL PROPERTY
    

    
                a)
         Unless otherwise agreed to by the parties, all licensing
      revenues generated by licensing PROGRAM INTELLECTUAL PROPERTY to third parties
      shall be retained by the licensor of such PROGRAM INTELLECTUAL PROPERTY.
    

    
                b)
         In the event that one party chooses to enforce PROGRAM
      INTELLECTUAL PROPERTY rights against a third party, the other party shall be
      given the opportunity to join in such enforcement prior to its commencement and
      in the event the other party chooses to join, both parties shall equally share
      all costs, including attorneys' fees and share equally all revenues generated
      by the enforcement, including licensing fees, if any. If the other party
      chooses not to join such enforcement, such party shall nevertheless reasonably
      cooperate with the one party in such enforcement (at the other party's
      expense), including joining as a nominal party subject to indemnification by
      such party, but will not be entitled to any proceeds of such enforcement
      activity.
    

    
      4
    

    
    
           7.   NOTICES
    

    
           All notices and invoices pursuant to this
      Agreement shall reference this Agreement and be given in writing to the
      respective party at its address designated below or to such other address as
      may be substituted in writing by that party to the other. All notices shall be
      deemed to be fully given and received if sent by registered or certified mail,
      postage prepaid, return receipt requested.
    

    
      
        Notice to ACTIVE POWER: 
Active Power, Inc. 
Attn: Bill Kainer
        
11525 Stonehollow Drive, Suite 110 
 Austin, Texas 78758
      

      
        Notices to CATERPILLAR:
 Caterpillar Inc.
Attn: Purchasing
        Manager Caterpillar Electric Power 
 Route 29 - P.O. Box 610 

        Mossville, Illinois 61552
      

    

    
           8.
          INDEMNIFICATION
    

    
           Each party shall indemnify, defend and hold
      harmless the other party, its directors, officers, employees and agents, from
      all third party (including a party's employees) claims, demands, liabilities,
      loss, damage, and expense, including costs, and reasonable litigation expenses
      and counsel fees incurred in connection therewith, arising out of injury to or
      death of any person or damage to property proximately caused by the
      indemnifying party's gross negligence or willful acts or omissions which arise
      in connection with the performance of work hereunder while the indemnifying
      party is on premises of the other party. Such indemnity shall be provided
      subject to (a) prompt written notifications of any and all such threats,
      claims, or proceedings related thereto and the other party giving reasonable
      assistance to the indemnifying party in the defense thereof, (b) the
      indemnifying party having sole control of the defense and all related
      settlement negotiations, and (c) such indemnifications shall be limited in the
      case of real or tangible property to the reduction in value or replacement cost
      of such property.
    

    
           9.     WARRANTY

    

    
           Each party warrants its right to enter into
      this AGREEMENT. Warranties for production units of PHASE III PRODUCTS shall be
      as set forth in Exhibit B.  
    

    
           10.   TERM AND TERMINATION
      
    

    
                a)   
      This PROGRAM shall become effective on the Effective Date of this Agreement and
      shall remain in effect unless terminated in writing by both parties.
    

    
                b)   
      CATERPILLAR may terminate ACTIVE POWER's work under this Agreement by giving
      ACTIVE POWER ninety (90) days written notice in which event ACTIVE POWER shall
      be (i) reimbursed only for work performed and expenses reasonably incurred
      prior to receipt of such notice and (ii) entitled to immediate payment of the
      amount associated with the next milestone. In no event shall the total amount
      paid to ACTIVE POWER exceed the price agreed to herein.
    

    
               c)   
      Upon termination of this Agreement, Paragraphs 4, 5, 6, 7, 8, 9, 10, 11, 12,
      13, and 14 of this Agreement shall survive.
    

    
      5
    

    
    
                d)   If
      the Agreement is terminated and upon and in accordance with the written
      reasonable request of either party (provided such written request is given
      within a reasonable period of time after such termination), but except for
      information covered by the rights granted in Paragraph 5, the other party shall
      promptly return or destroy any tangible information (including all copies
      thereof except as noted below) provided under the PROGRAM by the requesting
      party. However the other party's counsel may retain in a secure location one
      copy each of such tangible information and use them only for ensuring
      compliance with the obligations of Paragraph 5.
    

    
           11.     RELATIONSHIP
      
    

    
            Nothing herein is to imply an agency,
      joint venture or partner relationship between the parties.
    

    
           12.    ASSIGNMENT
      AND GOVERNING LAW 
    

    
            Except to an entity that acquires all or
      substantially all the business or assets of a party, this Agreement is not
      assignable by either party without the written consent of the other party,
      which shall not be unreasonably withheld, and will be governed by and construed
      in accordance with the laws of the State of New York, without regard to the
      conflict of laws provisions thereof.
    

    
           13.     ENTIRE
      UNDERSTANDING 
    

    
            This Agreement and the Exhibits hereto
      constitute the entire agreement and understanding between the parties with
      respect to the subject matters herein and therein, and shall supersede and
      replace any conflicting terms and conditions set forth in any purchase order,
      prior agreement, quotation, proposal, correspondence, or oral discussion
      relating to the subject matter hereof. This Agreement may only be amended by a
      writing signed by both parties, which makes specific reference to the
      provision(s) of this Agreement being modified. Should any provision of this
      Agreement be held invalid, illegal, or unenforceable, the validity of the
      remaining provisions shall not be affected by such holding. This AGREEMENT
      shall be binding upon the heirs, successors, and/or legal representatives of
      the parties.
    

    
           14.     LIMITATION
      OF LIABILITY 
    

    
            NEITHER PARTY SHALL BE LIABLE FOR
      (I) ANY SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES ARISING OUT
      OF THE SUBJECT MATTER OF THIS AGREEMENT OR (II) CATERPILLAR'S COST OF
      PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES.
    

    
      6
    

    
    
           The parties have caused this Agreement to
      be signed in duplicate by their duly authorized representatives on the
      Effective Date.
    

    	 ACTIVE POWER, INC.	CATERPILLAR INC. 
	 	 
	 By: /s/ Joseph F. Pinkerton	By: /s/ Jim Parker
	 Name: Joseph F. Pinkerton	Name: Jim Parker
	Title: President & CEO	Title: Director of Electric Power
	Date: September 12, 2001	Date: October 18, 2001
	 	 
	 	 
	 	 CATERPILLAR INC.
	 	By: /s/ Paul Pearson
	 	Name: Paul Pearson
	 	Title: Purchasing Manager
	 	 Date: October 12, 2001

    
       EXHIBIT A 
    

    
       PRELIMINARY SPECIFICATIONS FOR PHASE III PRODUCT 
    

    
      [****]
    

    

    
      ** Confidential treatment has been requested for the portions of this
      agreement marked by asterisks. Omitted material for which confidential
      treatment has been requested has been filed separately with the Securities and
      Exchange Commission.**
    

    
    
       EXHIBIT B 
    

    
       PURCHASE OF PHASE II & PHASE III PRODUCT TERMS AND CONDITIONS
      
    

    
            The terms and conditions of the Phase II
      & Phase III Purchase Agreement are attached hereto and shall be
      incorporated herein by reference.
    

    
    
      EXHIBIT C
    

    
      PAYMENT MILESTONES
    

    
      [****]
    

    

    
      ** Confidential treatment has been requested for the portions of this
      agreement marked by asterisks. Omitted material for which confidential
      treatment has been requested has been filed separately with the Securities and
      Exchange Commission.**
    

    
    
       EXHIBIT D 
    

    
       CATERPILLAR'S COMPETITOR LIST 
    

    
      [****]
    

    

    
      ** Confidential treatment has been requested for the portions of this
      agreement marked by asterisks. Omitted material for which confidential
      treatment has been requested has been filed separately with the Securities and
      Exchange Commission.**
    

    
    
       EXHIBIT E 
    

    
       PICTORIAL DESCRIPTION OF PROGRAM INTELLECTUAL PROPERTY 
    

    
      [****]
    

    

    
      ** Confidential treatment has been requested for the portions of this
      agreement marked by asterisks. Omitted material for which confidential
      treatment has been requested has been filed separately with the Securities and
      Exchange Commission.**

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