exv10w6






EXHIBIT 10.6




DEVELOPMENT AGREEMENT




     DEVELOPMENT AGREEMENT (this “Agreement”) effective as of August 20, 2009 (the “Effective
Date”), is entered into between FALLBROOK TECHNOLOGIES INC., a Delaware corporation (“Fallbrook”),
having a place of business at 9444 Waples St., Suite 410, San Diego, California 92121 and
HYDRO-GEAR LIMITED PARTNERSHIP, an Illinois limited partnership (“HG” or “Hydro-Gear”) having a
place of business at 1411 S. Hamilton St., Sullivan, Illinois 61951. Fallbrook and HG are referred
to individually as a “Party” and collectively as the “Parties.” The Parties agree as follows:


1. Background. In order to develop a specific application of the NuVinci® continuously
variable technology for use in a *** zero turn radius mower application, the Parties desire that
Fallbrook perform certain engineering and development services in accordance with this Agreement.
Simultaneous with the Parties entering into this Agreement, the parties are also entering into a
Manufacturing License Agreement of even date herewith (the “License Agreement”). Words and terms
not otherwise defined in this Agreement shall have the definitions assigned thereto in the License
Agreement.



2. Services. Fallbrook shall use its commercially reasonable efforts to complete the work
and achieve the objectives under the Development Program set forth in Appendix I (collectively, the
“Services”) in a timely manner.



3. Exclusivity. During the term of this Agreement (a) Fallbrook shall not entertain offers
for, solicit, or enter into any agreements with a third party for the development,
commercialization or purchase of a traction drive CVT or IVT for use in the Field, and (b) HG shall
not entertain offers for, solicit, or enter into any agreements with a third party for the
development, commercialization or purchase of a traction drive CVT or IVT for use in the Field.



4. Compensation. HG shall pay to Fallbrook the payments set forth on Appendix 1 in
accordance with the payment schedule set forth on Appendix 1. Failure by HG to timely pay
Fallbrook amounts owing under Appendix 1 shall be a material breach of this Agreement. If any such
failure is not cured within thirty (30) days after HG receives notice of such material breach, then
Fallbrook shall have the right to terminate this Agreement pursuant to Section 6.2.



5. Disclaimer of Warranty. Limitation of Damages. HG acknowledges and agrees that the
Services are not the only way in which the NuVinci technology could be embodied and therefore
except with respect to any fees that Fallbrook may refund to HG in accordance with the terms set
forth on Appendix 1, FALLBROOK SHALL HAVE NO LIABILITY UNDER THIS AGREEMENT ARISING FROM, RELATED
TO, OR CONNECTED WITH THE DEVELOPMENT, SALE AND/OR USE OF ANY PRODUCTS DEVELOPED UNDER THIS
AGREEMENT. FALLBROOK EXPRESSLY DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE
SERVICES AND RESULTING DELIVERABLES, INCLUDING BUT NOT LIMITED TO, ANY WARRANTIES OF
MERCHANTABILITY AND/OR FITNESS FOR ANY PARTICULAR PURPOSE. NEITHER PARTY SHALL BE LIABLE TO THE
OTHER PARTY FOR ANY INDIRECT, SPECIAL, OR CONSEQUENTIAL DAMAGES, LOST REVENUE, LOST PROFITS, OR
LOST OPPORTUNITY ARISING FROM, RELATED TO, OR CONNECTED WITH THE SERVICES OR RESULTING



 

*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.




 









 




DELIVERABLES EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY THEREOF. FALLBROOK’S MAXIMUM
LIABILITY TO HG OR ANY THIRD PARTY ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT SHALL NOT
EXCEED THE AMOUNTS PAID BY HG HEREUNDER, EXCEPT IN THE CASE OF FALLBROOK’S WILLFUL MISCONDUCT.



6. Term and Termination.




     6.1 Term. The term of this Agreement shall commence on the Effective Date and shall,
unless earlier terminated as provided herein, continue until the earlier of (a) completion of the
Development Program, or (b) termination as provided for in Appendix 1.



     6.2 Termination. A Party may terminate this Agreement immediately for a material
breach by the other Party if the other Party’s material breach of any provision of this Agreement
is not cured within thirty (30) days after the date of such Party’s written notice of breach.



     6.3 Effect of Expiration or Termination. The definitions contained in this Agreement
and the rights and obligations contained in this Section and Sections 5, 6.3 and 7 shall survive
any termination or expiration of this Agreement.


7. Miscellaneous.




     7.1 Notices. Any consent, notice or report required or permitted to be given or made
under this Agreement by one of the Parties to the other shall be in writing and addressed to such
other Party at its address indicated below, or to such other address as the addressee shall have
last furnished in writing to the addressor, and shall be effective upon receipt by the addressee.



	 	 	 	 	 
	 

	 	If to Fallbrook:
	 	Fallbrook Technologies Inc.
	 

	 	 	 	9444 Waples St., Suite 410
	 

	 	 	 	San Diego, California 92121
	 

	 	 	 	Attention: President
	 
	 	 	 	 
	 

	 	If to HG:
	 	Hydro-Gear, Inc.
	 

	 	 	 	1411 S. Hamilton St.
	 

	 	 	 	Sullivan, Illinois 61951
	 

	 	 	 	Attention: Ray Hauser
	 
	 	 	 	 
	 

	 	With a copy to:
	 	Vedder Price P.C.
	 

	 	 	 	222 N. LaSalle Street
	 

	 	 	 	Chicago, IL 60606
	 

	 	 	 	Attention: John R. Obiala






     7.2 Assignment. Neither this Agreement nor any right or obligation hereunder may be
assigned or otherwise transferred (whether voluntarily, by operation of law or otherwise), without
the prior express written consent of the other Party; provided, however, that either Party may,
without such consent, assign this Agreement and its rights and obligations hereunder in connection
with the transfer or sale of all or substantially all of its business or assets related to this
Agreement, or in the event of its merger, consolidation, change in control or other similar



2









 




transaction. Any permitted assignee shall assume all obligations of its assignor under this
Agreement.




     7.3 Applicable Law. This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware, without regard to the conflicts of law principles thereof.



     7.4 Entire Agreement. This Agreement and the License Agreement contain the entire
understanding of the Parties with respect to the subject matter hereof. All express or implied
representations, agreements and understandings, either oral or written, heretofore made are
expressly superseded by this Agreement and the License Agreement.



     7.5 Independent Contractors. Each Party hereby acknowledges that the Parties shall be
independent contractors and that the relationship between the Parties shall not constitute a
partnership, joint venture or agency. Neither Party shall have the authority to make any
statements, representations or commitments of any kind, or to take any action, which shall be
binding on the other Party, without the prior consent of the other Party to do so.



     7.6 Waiver. The waiver by a Party of any right hereunder, or of any failure to
perform or breach by the other Party hereunder, shall not be deemed a waiver of any other right
hereunder or of any other breach or failure by the other Party hereunder whether of a similar
nature or otherwise.



     7.7 Force Majeure. Neither Party shall be held liable or responsible to the other
Party nor be deemed to have defaulted under or breached this Agreement for failure or delay in
fulfilling or performing any term of this Agreement to the extent, and for so long as, such failure
or delay is caused by or results from causes beyond the reasonable control of the affected Party
including but not limited to fire, floods, embargoes, war, acts of war (whether war be declared or
not), insurrections, riots, civil commotions, strikes, lockouts or other labor disturbances, acts
of God or acts, omissions or delays in acting by any governmental authority or the other Party.



     7.8 Counterparts. This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute one and the same
instrument.



     7.9 Injunctive Relief. It is agreed that money damages would not be a sufficient
remedy for any breach of Section 3 of this Agreement and that the non-breaching Party shall be
entitled to injunctive relief, specific performance and/or any other appropriate equitable remedy
for any such breach. Such remedies shall not be deemed to be the exclusive remedy of the
non-breaching Party for any breach of Section 3 of this Agreement but shall be in addition to all
other remedies available to the non-breaching Party at law or in equity.



3









 





     IN WITNESS WHEREOF, the Parties have executed this Agreement effective as of the Effective
Date.



	 	 	 	 	 	 	 	 	 	 	 
	FALLBROOK TECHNOLOGIES INC.	 	 	 	HYDRO-GEAR LIMITED PARTNERSHIP	 	 
	 	 	 	 	 	 	By: Hydro-Gear, Inc.	 	 
	 
	 	 	 	 	 	 	 	 	 	 
	By 

Name:

	 	/s/ William Klehm
 

William G. Klehm
	 	 
	 	By

Name:
	 	/s/ Ray Hauser
 

Ray Hauser
	 	 
	Title:

	 	CEO/Chairman
	 	 	 	Title:
	 	President	 	 






4









 





APPENDIX 1




DEVELOPMENT PROGRAM



Production-Intent Design Development of NuVinci® IVT for a Commercial ZTR Mower




INTRODUCTION




     This proposal addresses scope, cost and schedule for the development of a production-intent
design of a NuVinci infinitely variable transmission Product (IVT) for use in a *** Zero Turn
Radius mower (ZTR) application. Fallbrook is responsible for the development of the Product (IVT)
suitable for use in the designated application that meets the designated cost targets and
performance criteria.



     Hydro-Gear Responsibilities




     Hydro-Gear is responsible for the development of the mating Transaxle suitable for the
designated application. [Figure 1] Hydro-Gear will develop and deliver to Fallbrook by
*** a reasonably acceptable plan for the development of the Transaxle and its start of
production on or before the first day of *** , subject to Fallbrook’s performance under the
Development Program. Hydro-Gear’s project schedule will include delivery milestones that
correspond closely with milestones for Fallbrook’s development of the Product (IVT). In order to
maintain continuity between the teams and ensure a quality design, Hydro-Gear will present concept
layouts and hold design reviews on the same schedule as the Product (IVT) design throughout the
project. Both companies will design appropriate assembly tools needed for prototype assembly and
installation of the final prototype design into the target application. Hydro-Gear will also
perform against the Development Program in order to support Fallbrook’s development of a Product
(IVT) that meets the cost target.



     Hydro-Gear is responsible for the manufacturing of the Product (IVT), housings,
upstream/downstream gearing, controls and other related parts/assemblies required to commercialize
the Transaxle.



     Hydro-Gear will develop and deliver to Fallbrook no later than *** , a reasonably
acceptable sales plan for the marketing, launch and sale of the Transaxle assembly in order to
achieve volume requirements.



TERMS




     Product (IVT)



     The Product (IVT) includes specifically the core power transfer components (planets, rings,
idler, axial force mechanism, bearings, and related components), the Product (IVT) mounting
structure, bypass, lubrication and internal cooling features (excludes external case features) and
an internal shift mechanism capable of interfacing with an actuator or shift control linkage in
conformance with the agreed upon Product Specification and layout. [Figure 1] Development of this
linkage is expected to be a collaborative effort with Hydro-Gear. The Product (IVT) must have a
bill of material part cost of less than *** .



 


*** Portions of this page have been omitted pursuant to a request for Confidential Treatment filed separately with the Commission.




5









 







Figure 1 — Division of Responsibility








     Design Control During the Development Program



     The controlling models and drawings for the Product (IVT) will reside on the Fallbrook servers
until such time agreed to by the parties. The controlling models and drawings for the Transaxle
will reside on the Hydro-Gear servers. Both parties will maintain adequate design control and
tracking of changes necessary to insure proper use of data. After the Final Design Review, all
Product (IVT) design changes must be approved in writing by Hydro-Gear.



     Design Reviews




     Both Fallbrook and Hydro-Gear will identify and make available skilled individuals necessary
to adequately assess and validate the results of each design review. Reviews will be scheduled in
advance to provide sufficient time to prepare and coordinate selected individuals. The Product
Specification, progress to each phase, costs and technical concerns will be discussed at each
design review.



     Testing




     Fallbrook is responsible for the acquisition and maintenance of the test equipment, fixtures
and instrumentation used at its facility to validate the Product (IVT) to the reliability standards
defined in the Product Specification. Hydro-Gear will be responsible for the acquisition and
maintenance of the test equipment, fixtures and instrumentation used at its facility to validate
the Transaxle to the specified reliability standards.



     Changes




     Actual costs associated with changes after prototype release will be born by the party
requesting the changes, unless otherwise agreed to by the Parties. Changes that affect the other
party’s prototype hardware will be changed or replaced at the expense of the party making the
change, unless otherwise agreed to by the Parties. Actual costs associated with revisions to the



6









 





Product Specification will be born by the party requesting the change, unless otherwise agreed
to by the Parties.




     Program Schedule




     Below is a summary of the project plan and expected schedule that Hydro-Gear will pay
Fallbrook:



	 	 	 	 	 	 	 	 	 	 	 	 	 
	ACTIVITY	 	 	 	 	 	DATE DUE	 	PAYMENT
	Project Start with contract signing
	 	 	 	 	 	 	08-31-2009	 	 	 	 	 
	FALLBROOK R&D Activity begins and addresses
	 	 	 	 	 	 	*	**	 	 	*	**
	Product (IVT) lubrication, cold temperature
performance and skew shift performance in ZTR
mower application issues
	 	 	 	 	 	 	 	 	 	 	 	 
	Product Specification Development
	 	 	 	 	 	 	*	**	 	 	 	 
	HG Transaxle Development Plan
	 	 	 	 	 	 	*	**	 	 	*	**
	Product Specification Approval
	 	Gate 1	 	 	*	**	 	 	 	 
	Concept Design and Development
	 	 	 	 	 	 	*	**	 	 	*	**
	 
	 	 	 	 	 	 	*	**	 	 	*	**
	Concept Design Review & Selection (CDR)
	 	Gate 2	 	 	*	**	 	 	 	 
	Detailed Design Development and DFMEA
	 	 	 	 	 	 	*	**	 	 	*	**
	 
	 	 	 	 	 	 	*	**	 	 	*	**
	Preliminary Design Review (PDR), DFMEA Review
	 	Gate 3	 	 	*	**	 	 	 	 
	 
	 	 	 	 	 	 	*	**	 	 	*	**
	Conclusion of Fallbrook R&D Activities
	 	 	 	 	 	 	*	**	 	 	*	**
	Final Design Review (FDR) and Product ( IVT) Cost
	 	Gate 4*	 	 	*	**	 	 	 	 
	Limit Review
	 	 	 	 	 	 	 	 	 	 	 	 
	Prototype Fabrication and Assembly Release
	 	 	 	 	 	 	*	**	 	 	*	**
	 
	 	 	 	 	 	 	*	**	 	 	*	**
	 
	 	 	 	 	 	 	*	**	 	 	*	**
	Delivery of *** functional samples
	 	Gate 5	 	 	*	**	 	 	 	 
	Design Validation & Testing
	 	 	 	 	 	 	*	**	 	 	*	**
	 
	 	 	 	 	 	 	*	**	 	 	*	**
	 
	 	 	 	 	 	 	*	**	 	 	*	**
	Preliminary Design Validation Review and Final
	 	Gate 6*	 	 	*	**	 	 	 	 
	Product (IVT) Cost Limit Review
	 	 	 	 	 	 	 	 	 	 	 	 
	Release of Long Lead-time Tooling
	 	 	 	 	 	 	*	**	 	 	*	**
	 
	 	 	 	 	 	 	*	**	 	 	*	**
	Design Validation Review
	 	Gate 7	 	 	*	**	 	 	 	 
	 
	 	 	 	 	 	 	*	**	 	 	*	**
	Production Tooling Release
	 	 	 	 	 	 	*	**	 	 	 	 
	Production Validation & Testing
	 	 	 	 	 	 	 	 	 	 	 	 
	Begin Production Component Validation Testing
	 	 	 	 	 	 	*	**	 	 	 	 
	HG Marketing and Sales Plan
	 	 	 	 	 	 	*	**	 	 	 	 
	Production Validation and Production Launch Review
	 	Gate 8	 	 	*	**	 	 	 	 
	Start of Production (License Fee from License
Agreement)
	 	 	 	 	 	 	*	**	 	 	*	**








 




			
	***	 	Portions of this page have been omitted pursuant to a request for Confidential
Treatment filed separately with the Commission.




7









 










     At each Gate, if the defined Activity has not been satisfied, then the project and
subsequent payments do not proceed unless agreed in writing by Hydro-Gear or until the Activity is
completed, then remaining schedules adjust according to the delay.



     If at Gate 1 the Product Specification cannot be mutually agreed upon, then Fallbrook shall
return to Hydro-Gear any payments it has received as part of this Development Agreement and any
prototypes, test vehicles and other property owned by Hydro-Gear in its possession, Hydro-Gear
shall return any property of Fallbrook in its possession, and this Agreement shall immediately
terminate.



     *If at Gate 4 Hydro-Gear suspects that the Product (IVT) has less than an 80% confidence level
that the Product (IVT) will achieve the defined duty cycle and/or the maximum cost target of ***, or if at Gate 6 Hydro-Gear suspects that the Product (IVT) has less than a 100% confidence level
that the Product (IVT) will achieve the defined duty cycle and/or the maximum cost target of ***, then Fallbrook shall analyze whatever failures occur, provide a report of analysis and remedial
actions, and redesign appropriate parts and deliver such new or repair parts as necessary in order
to continue development.



     If such Fallbrook initiated remedial actions again fail in a material manner to achieve the
design duty cycle or Product (IVT) cost target, then Fallbrook shall analyze the resulting failure
and develop a remediation and recovery plan. If Hydro-Gear does not accept the recovery plan,
which acceptance shall not be unreasonably withheld, then Fallbrook shall return to Hydro-Gear any
payments it has received as part of this Development Agreement and any Transaxle prototypes, test
vehicles and other property purchased or otherwise provided by Hydro-Gear in its possession,
Hydro-Gear shall return any prototypes of the Product (IVT) it has in its possession and this
Agreement shall immediately terminate.



     Notwithstanding the foregoing, if at any Gate HG fails to provide its written approval or
acceptance, or a written description supporting its contention of how the required performance was
not achieved for the subject Gate, within 30 days of receipt of written notice from Fallbrook of
completion of applicable development, then the required performance for such Gate shall be deemed
to be satisfied.



     If the Parties disagree on whether a requirement of the Product Specification was actually
achieved, then both company’s CEOs shall meet and confer for a period of up to at least 30 days in
order to attempt to resolve the disagreement or otherwise reach terms under which the companies can
proceed.



RESPONSIBILITIES AND DELIVERABLES




FALLBROOK R&D ACTIVITY




     Scope: This effort is intended to provide guidance for the production-intent Product (IVT).
It will include testing different configurations targeted at key cost saving measures, as well as
failure mode evaluation, performance and durability. A detailed test plan will be developed which
will include the following if appropriate under the specification:



 


*** Portions of this page have been omitted pursuant to a request for Confidential
Treatment filed separately with the Commission.








8









 









     • Characterization of performance with external coolers removed (relying on
convective cooling)




     • Characterization of performance with the pump removed (relying on splash
lubrication)




     • Characterization of performance with varied lubrication levels




     • Thermal testing, particularly characterization of performance after cold soak




     • Characterization of steady state and dynamic shift performance through
different loads and speeds. Modifications to existing prototype hardware will be made to
incorporate skew shifting methodology.




     • Testing as needed based on failure modes and potential design improvements



     Hydro-Gear Responsibilities and Deliverables:




     • Provide one test vehicle for use at Fallbrook for the target application




     • Support test effort with feedback on specific performance requirements and
evaluation of test results.



     Fallbrook Responsibilities and Deliverables:




     • Develop a detailed test plan to guide the R&D effort.




     • Operate and maintain necessary test equipment, fixtures and instrumentation
throughout the duration of the test effort.




     • Fabricate, assemble and test prototype test articles.




     • Summarize and report data and conclusions to the Fallbrook and Hydro-Gear team.



PRODUCT SPECIFICATION ACTIVITY




     Scope: Fallbrook will work closely with Hydro-Gear to document operational requirements and
establish a Product Specification for the production Product (IVT). It shall reference detailed
operating duty cycles provided by Hydro-Gear for the target application. Minimum thresholds will
be established for each key design parameter. The Product Specification will include at a minimum:




     • Product (IVT) Application Information




     • Reliability Requirements



9









 






     • Performance Duty Cycle




     • Technical Requirements




     • Product (IVT) Cost of *** or less



     Hydro-Gear Responsibilities and Deliverables:




     • Document Product Specification and maintain change control




     • Define Application Information




     • Establish Reliability Requirements which conforms to industry standards




     • Establish the Technical Requirements for the Product (IVT)




     • Jointly approve the Product Specification with Fallbrook



     Fallbrook Responsibilities and Deliverables:




     • Support effort with feedback on specific performance requirements and
establishing the Product Specification




     • Jointly approve the Product Specification with Hydro-Gear



PRODUCT (IVT) CONCEPT DESIGN ACTIVITY




     Scope: Create options and select a configuration to proceed to detailed design for the
Product (IVT). This effort will be based upon the target application which the transmission is to
be implemented, and the results of on-going testing of the R&D Activity. This layout effort may
also include dynamic modeling and steady state analysis to characterize key performance parameters
and correlation of analytical results with test data. Hydro-Gear will be responsible for the input
pulley(s) and output gearing as well as the housing interface for a given application; the exact
housing configuration (i.e. single or split housing) will be defined in this phase. For cost
considerations, it is desirable to have a common housing for the Product (IVT) components and
gearing. Fallbrook and Hydro-Gear will develop internal housing interfaces independently as part
of the concept design stage. Additionally, it is anticipated that Fallbrook will develop the User
Interface with significant input and contribution from Hydro-Gear. Decisions will be made in this
phase about specific interfaces between the subassemblies developed by Hydro-Gear and Fallbrook.



     Hydro-Gear Responsibilities and Deliverables:




     • Assist Fallbrook in estimating design cost for each concept




     • Gain understanding of the NuVinci Technology, critical components and cost
drivers



 


*** Portions of this page have been omitted pursuant to a request for Confidential
Treatment filed separately with the Commission.







10









 









     • Participate in the Concept Review meeting at Fallbrook in Austin, Texas




     • Jointly select the preferred concept with Fallbrook to move forward to Detailed
Design



     Fallbrook Responsibilities and Deliverables:




     • Create options for potential Product (IVT) configurations, with feedback on
Duty Cycle and Cost Requirements (risk assessment)




     • Define material/process selection for each Product (IVT) component




     • Host Concept Review meeting at Fallbrook in Austin, Texas




     • Jointly select the preferred concept with Hydro-Gear to move forward to
Detailed Design



PRODUCT (IVT) DETAILED DESIGN ACTIVITY




     Scope: Fallbrook conducts detail design work on the concept selected. Design Failure Mode
and Effects Analysis (DFMEA) will be conducted on the target application. The DFMEA will guide the
design development efforts throughout the project. The design validation test plan will also be
derived from requirements listed in the DFMEA. Hydro-Gear will also conduct a “3P” (Lean Tool =
“Product Preparation Process) event on the selected concept and provide feedback to the design of
both the Product (IVT) and the Transaxle.



     Hydro-Gear Responsibilities and Deliverables:




     • Assist with the DFMEA on the Product (IVT)




     • Conduct “3P” Event on the Assembly (both Product (IVT) and Transaxle) at
Hydro-Gear in Sullivan, Illinois




     • Maintain Costed BOM and initial supplier selection for Product (IVT) components




     • Review sourcing and purchasing processes with Fallbrook and collaborate on
revisions to the design to help achieve cost and quality goals




     • Complete the Design Validation Test Plan




     • Participate in the Preliminary and Final Design Reviews at Fallbrook in Austin,
Texas



     Fallbrook Responsibilities and Deliverables:




     • Complete the R&D Activities prior to the Final Design Review




     • Develop the necessary drawing for the Product (IVT) and components



11









 






     • Conduct DFMEA on the Product (IVT)




     • FEA analysis of the Product (IVT)




     • Conduct a detailed design analysis on the Product (IVT)




     • Assist in establishing the Design Validation Test Plan




     • Host the Preliminary and Final Design Reviews at Fallbrook in Austin, Texas



PRODUCT (IVT) PROTOTYPE ACTIVITY




     Scope: The primary task will be to fabricate at least *** functional Product (IVT)s.
Fallbrook will manage the sourcing, quality and procurement of all hardware for the Product (IVT)s
with input from Hydro-Gear. A budget for prototype hardware has been included in the total cost
associated with this proposal.1 This budget and the quantity of prototypes are based on
a design consisting of ***. Changes in the transmission size and/or design detail may change
prototype costs.



     Further, Hydro-Gear will be required to fabricate and assemble at least *** prototype
Transaxle assemblies to support the Design Validation process. *** of the functional Product
(IVT)/Transaxle assemblies will reside at Fallbrook and the remaining will be at Hydro-Gear for
testing.



     Hydro-Gear Responsibilities and Deliverables:




     • Procure and fabricate the Transaxle Assemblies, excluding the Product (IVT)




     • Jointly assemble Product (IVT)s in the final assemblies




     • Modify Transaxle components excluding the Product (IVT), if necessary, to
achieve required performance



     Fallbrook Responsibilities and Deliverables:




     • Procure and fabricate the Product (IVT)s





 




			
	1	 	Prototyping costs are a function of specific
design details and cannot be known specifically until the final release,
however Fallbrook estimates for a volume of ***, each prototype system will
cost approximately *** . The prototype budget for this project is currently
*** and should cover at least *** units. Any additional prototype parts
will be paid for by Hydro-Gear. Any expense beyond the cost presented in this
proposal will require written approval from Hydro-Gear and Fallbrook. The
Fallbrook machine shop will be among the list of suppliers considered to
minimize cost and manage the schedule.





 




			
	***	 	Portions of this page have been omitted pursuant to a request for
Confidential Treatment filed separately with the Commission.




12









 











     • Fallbrook shall review with Hydro-Gear the prototypes and provide supplementary
information regarding the prototypes including any differences in the prototyped parts or
deliverables from expected production processes or designs and any risks of the prototypes
associated with those differences




     • Functionally test Product (IVT)s to agreed upon specifications prior to
delivery to Hydro-Gear




     • Jointly assemble Product (IVT)s in the final assemblies




     • Modify Product (IVT) components, if necessary, to achieve required performance



PRODUCT (IVT) DESIGN VALIDATION ACTIVITY




     Scope: The prototype final assembly will be tested in accordance with the defined Design
Validation Test Plan to determine if the assembly meets the Product Specification.



     Hydro-Gear Responsibilities and Deliverables:




     • Determine location for each Design Validation test




     • Conduct testing as defined




     • Host the Preliminary and Final Design Validation Reviews at Hydro-Gear in
Sullivan, Illinois




     • If Product (IVT) meets the Duty Cycle and Cost Requirements, then release the
long lead-time tooling




     • Summarize the Design Validation Test Data



     Fallbrook Responsibilities and Deliverables:




     • Work with Hydro-Gear on determining the location for each Design Validation
test




     • Conduct testing as defined




     • Support test effort with feedback and evaluation of test results.




     • Participate in the Preliminary and Final Design Validation Reviews at
Hydro-Gear in Sullivan, Illinois




     • Support Hydro-Gear as needed to develop supply base




     • Summarize the Design Validation Test Data



13









 





     PRODUCT (IVT) PRODUCTION TOOLING RELEASE ACTIVITY




     Scope: Release of production tooling for both the Product (IVT) and Transaxle.



     Hydro-Gear Responsibilities and Deliverables:




     • If Product (IVT) meets the Duty Cycle and Cost Requirements, then release the
remaining tooling



     Fallbrook Responsibilities and Deliverables:




     • Support Hydro-Gear as needed to develop supply base



PRODUCT (IVT) PRODUCTION VALIDATION ACTIVITY




     Scope: The final assembly will be tested in accordance with the defined Production Validation
Test Plan to determine if the Product (IVT)/Transaxle assembly meets the Product Specification.



     Hydro-Gear Responsibilities and Deliverables:




     • Determine location for each Production Validation test




     • Conduct testing as defined




     • Host the Production Validation Review




     • Jointly Summarize the Production Validation Test Data



     Fallbrook Responsibilities and Deliverables:




     • Work with Hydro-Gear on determining the location for each Production Validation
test




     • Conduct testing as defined




     • Support test effort with feedback and evaluation of test results.




     • Participate in the Production Validation Review




     • Support Hydro-Gear as needed to develop supply base




     • Jointly Summarize the Production Validation Test Data


Fallbrook’s obligation is to make at least one full time engineer available to support
Production Validation Activity and Start of Production Activity until 90 days after the
Start of Production.







14









 








START OF PRODUCTION




     Both companies will assist the Production Launch to achieve industry standard quality and
productivity results.




15