exv10w5






EXHIBIT 10.5




MANUFACTURING LICENSE AGREEMENT




     MANUFACTURING LICENSE 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”) 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.”



     WHEREAS, the Parties entered into that certain Development Agreement of even date herewith
(the “Development Agreement”) for the development of a product based on Fallbrook’s NuVinci®
continuously variable transmission technology (the “NuVinci Technology”).



     WHEREAS, HG desires to obtain an exclusive license to the NuVinci Technology for Products in
the Field (as each term is defined below), all on the terms and conditions set forth in this
Agreement.



     NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants herein
contained, the Parties agree as follows:



1. DEFINITIONS




     1.1 “Affiliate” shall mean, with respect to any entity, any other entity that directly
or indirectly controls, is controlled by, or is under common control with, such entity. An entity
shall be regarded as in control of another entity if it owns, or directly or indirectly controls,
at least fifty percent (50%) of the voting stock or other ownership interest of the other entity,
or if it directly or indirectly possesses the power to direct or cause the direction of the
management and policies of the other entity by any means whatsoever.



     1.2 “Bill of Materials” shall mean the list of parts associated solely with the
Product (as defined below) as agreed to from time to time by the Parties.



     1.3 “Confidential Information” shall mean (a) all information of any kind whatsoever,
and all tangible and intangible embodiments thereof of any kind whatsoever, that is disclosed by a
Party (the “Discloser”) to the other Party (the “Recipient”) under this Agreement or the
Development Agreement and is marked, identified as or otherwise acknowledged to be confidential at
the time of disclosure (provided that information regarding the Product Developments shall be the
Confidential Information of Fallbrook), and (b) the terms of this Agreement and the Development
Agreement. Notwithstanding the foregoing, Confidential Information described in clause (a) above
shall not include information which the Recipient can establish by written documentation (i) has
been publicly known prior to disclosure of such information by the Discloser, (ii) has become
publicly known, without fault on the part of the Recipient, subsequent to disclosure of such
information by the Discloser, (iii) has been received by the Recipient at any time from a source,
other than the Discloser, rightfully having possession of and the right to disclose such
information, (iv) has been independently developed by the Recipient (other than Product
Developments) without reference to the Confidential Information,



 









 




or (v) has been otherwise known by the Recipient prior to disclosure of such information by
the Discloser.




     1.4 “Field” shall mean residential and commercial lawn tractors and mowers.



     1.5 “Licensed IP Rights” shall mean, collectively (a) all patents and other
intellectual property now or hereafter owned by Fallbrook that claim or relate to the NuVinci
Technology, and (b) all of Fallbrook’s rights in and to the Product Developments.



     1.6 “Licensed Mark” means, collectively, (a) Fallbrook’s NuVinci trademark, (b) the
respective stylistic marks and distinctive logotypes for such trademark, and (c) other marks and
logotypes as Fallbrook may from time to time develop for NuVinci products during the course of this
Agreement, except for any such marks or logotypes which are specifically developed by Fallbrook for
a field other than the Field.



     1.7 “License Effective Date” shall mean the date upon which Fallbrook delivers the
final prototype of the Product which meets the duty cycle and cost targets as provided under the
Development Agreement.



     1.8 “Net Sales” shall mean, with respect to any Other Product, revenue from the sales
of any Other Product that is attributable to the Product only, as determined in Section 4.2.3.



     1.9 “Other Products” shall mean all products that (a) incorporate a Product and
(b) are not Residential Products or ZTR Products.



     1.10 “Product” shall mean a continuous variable transmission CVT/IVT variator
incorporating the NuVinci Technology for use in the Field. The Product does not include the
housing, the upstream gearing, the downstream gearing or any other parts to which the Parties
agree.



     1.11 “Product Cost” shall mean the projected cost of the Bill of Materials for the
Product that is utilized by HG in its annual forecast for its business plan prior to each year of
production. The cost of parts for the Product purchased from third parties shall include only
material cost to HG for the part, net of all ancillary costs such as, but not limited to, freight,
duties, insurance, customs and handling charges. The cost of parts for the Product made by HG
shall include the material costs, direct labor costs and direct process costs incurred by HG to
make the part.



     1.12 “Product Developments” shall have the meaning set forth in Section 7.1 below.



     1.13 “Residential Products” shall mean products that (a) incorporate a Product and
(b) are designed for residential lawn and garden tractors and mowers.



     1.14 “Territory” shall mean worldwide.



     1.15 “Third Party” shall mean any person or entity that is not a Party, an Affiliate
or a Representative (as defined in Section 6.1 below).



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     1.16 “Transaxle” shall mean the Product, the housing, the upstream/downstream gearing,
controls and other parts and assemblies required to commercialize the Product in the Field.



     1.17 “ZTR Products” shall mean products that incorporate a Product and are designed
for commercial Zero Turn Radius lawn and garden mowers and tractors.



2. REPRESENTATIONS AND WARRANTIES




     Each Party hereby represents and warrants to the other Party as follows:



     2.1 Existence. Such Party is duly organized, validly existing and in good standing
under the laws of the state in which it is formed.



     2.2 Authorization and Enforcement of Obligations. Such Party (a) has the power and
authority and the legal right to enter into this Agreement and to perform its obligations
hereunder, and (b) has taken all necessary action on its part to authorize the execution and
delivery of this Agreement and the performance of its obligations hereunder. This Agreement has
been duly executed and delivered on behalf of such Party, and constitutes a legal, valid, binding
obligation, enforceable against such Party in accordance with its terms, except as may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors’ rights generally and subject to general principles of equity.



     2.3 No Consents. All necessary consents, approvals and authorizations of all
governmental authorities and other persons or entities required to be obtained by such Party in
connection with this Agreement have been obtained.



     2.4 No Conflict. The execution and delivery of this Agreement and the performance of
such Party’s obligations hereunder (a) do not conflict with or violate any requirement of
applicable laws or regulations, and (b) do not conflict with, or constitute a default under, and is
not limited in any way by, any contractual obligation or any other obligation or commitment to any
third party.



3. LICENSE GRANT




     3.1 Licenses. As of the License Effective Date, Fallbrook hereby grants HG (a) an
exclusive license (without the right to grant sublicenses) under the Licensed IP Rights in the
Territory to make, use, offer for sale, sell and import Products solely for use in the Field, and
(b) a nonexclusive license (without the right to grant sublicenses) in the Territory to reproduce,
use and display the Licensed Marks on Transaxles manufactured by HG in the exercise of its rights
under clause (a) above. Notwithstanding the foregoing, Fallbrook would retain the rights to make
and use Products in the Field solely for R&D purposes and not in anticipation of commercialization
other than with HG.



     3.2 Conversion Option. If HG and Fallbrook mutually agree in writing to convert this
Agreement into a joint venture, then the Parties shall agree upon a written process to terminate
this Agreement and create a joint venture to which Fallbrook would grant a license on similar terms
as those contained herein.



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     3.3 No Implied Licenses. Except as otherwise provided in this Agreement, under no
circumstances shall HG, as a result of this Agreement, obtain any ownership interest or other right
in any invention, discovery, composition or other technology, or in any patent right or other
intellectual property right, of Fallbrook (including without limitation those owned, controlled or
developed by Fallbrook at any time pursuant to this Agreement).



4. FEES AND CONSIDERATION




     4.1 License Fee. HG shall pay to Fallbrook a license fee of *** within five (5) business days following the date of the first production of a
Product. If HG does not make such payment within thirty (30) days after the date of the first
production of a Product, then this Agreement shall immediately terminate.



     4.2 Royalty. HG shall pay to Fallbrook royalties as follows:



          4.2.1 For each ZTR Product sold by or on behalf of HG or its Affiliates, HG shall pay to
Fallbrook *** .




          4.2.2 For each Residential Product sold by or on behalf of HG or its Affiliates, HG shall pay
to Fallbrook *** .




          4.2.3 For each Other Product sold by or on behalf of HG or its Affiliates, unless otherwise
agreed to by the Parties, HG shall pay to Fallbrook a royalty equal to *** of the sales price of
the Product included in such Other Product, to be determined by multiplying the percentage cost
content of the Product compared to the whole Transaxle constituting such Other Product, by the net
sales price of the Transaxle constituting such Other Product.




          4.2.4 In calculating royalties due hereunder, HG shall be entitled to deduct royalties on any
ZTR Product, Residential Product or Other Product which has been returned within three years for
which no Product or equivalent consideration was provided, and on which a royalty had previously
been paid by HG.




     4.3 Payment Reports. Within thirty (30) days after the end of each calendar month
during the term of this Agreement, commencing with the calendar month in which the date of first
production occurs, HG shall furnish to Fallbrook a written report, on a Product-by-Product basis,
setting forth (a) the quantity and type of ZTR Products, Residential Products and Other Products
sold and returned during such calendar month and, with respect to the Other Products, the
calculation of the sales price of the Product included in the Transaxle constituting such Other
Product; (b) the calculation of the royalties, if any, that shall have accrued during such calendar
month; and (c) the withholding taxes, if any, required by law to be deducted with respect to such
sales. HG shall keep complete and accurate records in sufficient detail to enable the amounts
payable hereunder to be determined.



     4.4 Audits. Upon the written request of Fallbrook and not more than once in each
calendar year, HG shall permit an independent certified public accounting firm of nationally





 




			
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recognized standing, selected by Fallbrook and reasonably acceptable to HG, to have access
during normal business hours to such of the records of HG where those records reside as may be
reasonably necessary to verify the accuracy of the payment reports hereunder. If Fallbrook elects
such an audit, the auditor in advance of such inspection shall agree in writing to maintain all of
HG’s information in strict confidence and shall only disclose to Fallbrook whether the amount paid
by HG was accurate, and if for any reason the amount paid was inaccurate, the amount owed to
Fallbrook by HG in the case of an underpayment or the amount to be credited to HG in the case of an
overpayment. The fees charged by such accounting firm shall be paid by Fallbrook; provided,
however, if it is ultimately determined that the royalties payable by HG for such period are more
than one hundred five percent (105%) of the royalties actually paid for such period, then HG shall
pay the reasonable fees and expenses charged by such accounting firm along with the additional
royalties payable.




     4.5 Payment Terms. Payment of royalties under this Agreement shall be due at the time
of each payment report delivered pursuant to Section 4.3, shall be paid in United States dollars
and all such payments shall be originated from a bank located in the United States and made by bank
wire transfer in immediately available funds to such account as Fallbrook shall designate before
such payment is due and shall be considered paid when deposited into the designated account.
Payments due under this Agreement shall be considered late if not received within 30 days of such
due date. Late payments shall accrue interest at the rate of twelve percent (12%) per annum of the
past due amount.



5. MARKETING; COMMERCIALIZATION




     5.1 Efforts. HG shall use its commercially reasonable efforts to develop a market for
Products, and following development of a Product, to promote, market, offer for sale and sell such
Product.



     5.2 Marketing and Sales Plan. No later than *** , HG shall
develop and deliver to Fallbrook a sales plan for the marketing, launch and sale of the Product
that is reasonably acceptable to Fallbrook and sets forth the manner in which HG shall satisfy its
minimum sales requirements as set forth in Section 5.3.



     5.3 Minimum Sales Targets. For each calendar year identified on Exhibit A to this
Agreement, HG shall sell at least the amount of ZTR Product units set forth on Exhibit A as the
applicable minimum sales target. If HG fails to meet the required minimum sales target in any such
year, then HG shall have the right to satisfy up to *** of such minimum sales target (“Deemed
Sales”), by paying additional royalties to Fallbrook, no later than thirty (30) days following the
end of the applicable year, in an amount equal to the royalties which would have been paid upon the
Deemed Sales. Deemed Sales shall be included as sales in determining whether HG has met the
required minimum sales target in any year. Beginning with the third (3rd) year identified on
Exhibit A, if HG fails to meet the required minimum sales target in any such year by *** or less,
then HG shall have the right to satisfy up to *** of such shortfall by paying additional
royalties pursuant to the second sentence of this Section





 




			
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5.3, and shall also be entitled to add any remaining shortfall to the immediately following
year’s minimum sales target, and shall not be in breach of this Section, if HG provides to
Fallbrook a reasonably satisfactory sales plan that demonstrates how HG will achieve the following
year’s increased minimum sales target. Fallbrook shall have the right, as Fallbrook’s sole remedy
for HG’s failure to meet the minimum sales target in any year, to convert HG’s exclusive license
under this Agreement to non-exclusive, which right must be exercised, if at all, within sixty (60)
days after the end of the applicable year.




     5.4 Development Plan. HG shall provide to Fallbrook prior to October 1, 2009 a plan
for the development and production of the Transaxle that is reasonably acceptable to Fallbrook and
that accounts for a production start for the Product as of *** , which shall include at
a minimum the HG Responsibilities and Deliverables provided for in Appendix 1 of the Development
Agreement (the “Development Plan”). Subject to Fallbrook’s performance of the Services under the
Development Agreement, HG shall conduct its obligation under the Development Plan. If HG fails to
conduct its obligations under the Development Plan, then, subject to Fallbrook providing written
notice and an opportunity to cure such failure of at least thirty (30) days, Fallbrook shall have
the right to convert HG’s exclusive license under this Agreement to nonexclusive.



     5.5 Quality System Development. HG shall develop, implement and demonstrate a robust
quality operating system, and require such of its suppliers, capable of providing volume production
levels of the Product to specification while meeting or achieving ISO 9000 or reasonably equivalent
quality standards. HG shall provide Fallbrook with transparency into the quality operating and
manufacturing process of HG, including establishing a process by which Fallbrook can review and
suggest improvement of the quality operating system. HG shall perform the obligations under such
plan and shall achieve the objectives under such plan in order to satisfy commercialization timing,
including tooling purchases and supplier qualification by part. HG shall communicate significant
quality issues relating to the Product to Fallbrook, and Fallbrook agrees to make available its
qualified technicians to assist HG in resolving any such issues, which assistance, if beyond
Fallbrook’s requirements under the Development Agreement, shall be reimbursed at reasonable market
hourly rates for the engineers or technicians requested.



     5.6 Supply Base Development. HG shall develop a sound supply base for the Product and
shall provide Fallbrook with transparency into the cost basis of the Product. HG shall provide
Fallbrook with all information regarding the cost structure, by part if requested, for the Product.
As part of the Development Plan in Section 5.4 above, HG shall provide to Fallbrook a reasonably
acceptable plan for development of a robust supply of parts for the Product by qualified suppliers.
Such supply plan shall layout the reliably predictable production and supply of quality parts in a
timely manner and at a predictable cost. HG shall provide Fallbrook with transparency into the
supply plan and supplier selection, although the decisions for such selection would remain with HG.
HG, in order to achieve volume economic advantage, shall make its supply base reasonably available
for sourcing by Fallbrook or its licensees for any fields of use outside of the Field. Fallbrook
shall use commercially reasonable efforts to provide HG with transparency into Fallbrook’s and its
licensees’ suppliers and the cost basis with such suppliers,





 




			
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and Fallbrook shall use commercially reasonable efforts to make its and its licensees supply
base reasonably available for sourcing by HG.




     5.7 Failure of HG Development Efforts. Failure by HG to hit its development goals
under the Development Plan is a material breach of this Agreement. If any such breach remains
uncured for forty-five (45) days after notification of such breach, then Fallbrook shall have the
right to convert HG’s exclusive license under this Agreement to non-exclusive.



6. CONFIDENTIALITY




     6.1 Confidential Information. During the term of this Agreement and following the
expiration or earlier termination of this Agreement, a Party (the “Recipient”) that receives
Confidential Information from the other Party (the “Discloser”) shall maintain in confidence all
such Confidential Information and shall not disclose such Confidential Information to any third
party without express written permission of the Discloser except on a need-to-know basis to those
directors, officers, employees, consultants, contractors or prospective permitted assignees
(collectively, “Representatives”), to the extent such disclosure is reasonably necessary in
connection with the Recipient’s activities as expressly authorized by this Agreement and provided
Recipient’s Representatives have been made aware of and have agreed to be bound by the terms of
this section. Recipient will be liable to Discloser for breach of the terms hereof by Recipient’s
Representatives. Recipient shall not use the Confidential Information except for the purposes of
this Agreement. The confidentiality obligations contained in this Section shall not apply to the
extent that the Recipient is required to disclose information by law, order or regulation of a
governmental agency or a court of competent jurisdiction.



     6.2 Terms of this Agreement. Except as otherwise provided herein, during the term of
this Agreement and for a period of five (5) years thereafter, neither Party shall disclose any
terms or conditions of this Agreement to any Third Party without the prior consent of the other
Party. Notwithstanding the foregoing, (a) prior to execution of this Agreement, the Parties have
agreed in writing upon the substance of information that can be used to describe the terms of this
transaction, and each Party may disclose such information, as modified by mutual agreement from
time to time, without the other Party’s consent, and (b) Fallbrook shall have the right to disclose
to Third Parties the granting to “a manufacturer” of a commercial license in a given Field of Use,
following the date that HG has paid the applicable Commercial License Fee for such Field of Use.



7. INTELLECTUAL PROPERTY




     7.1 Assignment and Communication of Product Developments. Fallbrook shall solely own
all right, title and interest in and to any inventions, discoveries, enhancements, improvements,
technology, software, data or information (whether or not patentable), and all patent and other
intellectual property rights therein, in each case that are made or conceived by employees or
agents of Fallbrook, HG or both in connection with the Development Agreement or this Agreement and
constitute the Product or an improvement or modification to the Product (collectively, the “Product
Developments”). HG hereby sells, assigns and transfers to Fallbrook all of HG’s right, title and
interest to such Product Developments. HG shall solely own all right, title and interest in and to
any inventions, discoveries, enhancements, improvements, technology,



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software, data or information (whether or not patentable), and all patent and other
intellectual property rights therein, in each case that is made or conceived by employees or agents
of HG under this Agreement or the Development Agreement or otherwise, and in each case which does
not constitute a Product Development. Each party shall regularly, but not less frequently than
monthly, disclose to the other party all Product Developments and provide to the other party all
information concerning the Product Developments reasonably requested by the other party. HG will
have sole right to determine whether it will incorporate any Product Developments, or any design
changes proposed by Fallbrook, into the Product.




     7.2 Trademark.



          7.2.1 All right, title, and interest in and to the Licensed Marks, other than HG’s right to
use as described in Section 3.1, above, shall remain with Fallbrook. During the term of this
Agreement and thereafter, HG will not contest Fallbrook’s exclusive right, title and interest in
and to, or the validity of, the Licensed Marks. In addition, HG will not in any manner represent
that it has any interest in the Licensed Marks, except for the limited license provided herein.
Use of the Licensed Marks by HG shall not confer upon HG any right, title or interest in or to the
Licensed Marks, except for the limited license provided for herein, and all such use by HG of the
Licensed Marks, including any goodwill generated therefrom, shall inure to the sole benefit of and
be on behalf of Fallbrook.




          7.2.2 HG may incorporate the Licensed Marks on the Transaxle at HG’s sole discretion and shall
incorporate the Licensed Marks on marketing, promotional and sales literature relating to the
Product. HG agrees that use by HG of the Licensed Marks, as provided herein, shall be in
accordance with all applicable law and regulations, shall conform with all written style and other
guidelines provided by Fallbrook from time to time, shall be of high quality and standards and
shall not adversely affect the good name of Fallbrook including for example, and not limitation,
usage of the Licensed Marks on Products not conforming to the quality standards provided in Section
5.5. HG will not use any marks or names confusingly similar to the Licensed Marks. HG shall not
(i) use any other trademark, service mark or trade name on the materials or in close proximity to
any Licensed Mark other than any HG trademark, service mark or trade name or (ii) combine the marks
so as to possibly create a unitary composite mark.




          7.2.3 Fallbrook shall have the right, but not the obligation, to file in the appropriate
offices, at its own expense, trademark or design applications relating to the Licensed Marks, such
filings to be made in the name of Fallbrook or in the name of any third party selected by
Fallbrook. To assist Fallbrook with its registration of the Licensed Mark in the name of
Fallbrook, HG, at Fallbrook’s request and expense, shall promptly perform any act necessary for
Fallbrook to secure or maintain any and all Fallbrook trademark rights. HG agrees not to register
any Licensed Mark in HG’s name or any confusingly similar trademark in any country, in any
character form, as Fallbrook may determine in its discretion.




          7.2.4 With respect to each Product that HG proposes to offer for sale or sell under this
Agreement, and each marketing, promotional or sales literature relating to the Product that HG
intends to use and which uses or incorporates the Licensed Mark, HG shall first submit to Fallbrook
a sample of such Product or literature for Fallbrook’s prior review and written




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approval or disapproval, which review shall be based upon those standards for all Products and
Licensed Marks that are promulgated by, and as may from time to time be amended by Fallbrook. If
Fallbrook does not disapprove a sample within ten (10) business days after receipt from HG, then
such sample shall be deemed to be approved by HG.




     7.3 Infringement. Each Party shall promptly notify the other Party if it becomes
aware of a third party that is infringing the Licensed IP Rights in the Field. Fallbrook shall
have the first right, but not the obligation, to control the enforcement of Licensed IP Rights in
the Field. If Fallbrook, in its sole discretion, decides to initiate an action or proceeding
against a third party to enforce the Licensed IP Rights in the Field, HG shall cooperate with
Fallbrook in such action or proceeding at Fallbrook’s sole expense.



     If Fallbrook, in its sole discretion, elects not to initiate an action or proceeding to
enforce any patent(s) included in the Licensed IP Rights against a third party infringer within the
Field within three (3) months of receiving notice of such infringement from HG, and if HG has
maintained its exclusive license under this Agreement, then HG shall have the option to terminate
this Agreement, in its sole discretion. If HG does not elect to terminate this Agreement, it shall
have the right, at its sole discretion, to initiate an action or proceeding against such third
party infringer to enforce the subject patent(s) included in the Licensed IP Rights in the Field.



     In the event that HG is entitled to and does elect to initiate an action or proceeding against
a third party infringer to enforce a patent that is part of the Licensed IP Rights in the Field,
Fallbrook shall cooperate with HG in prosecuting such action or proceeding, including but not
limited to, agreeing to be named as a party to any civil action to abate such infringing activity,
provided, however, that (a) HG shall pay all costs arising from such action or proceeding, (b) HG
shall be entitled to place in an escrow account held by an independent third party escrow agent,
and pursuant to an escrow agreement reasonably acceptable to Fallbrook and HG (the “Escrow
Agreement”) that must include at least the terms of this section (including appropriate interest
terms which shall be based upon prevailing market interest rates), royalties due under Section 4.2
up to an amount equal to any actual out-of-pocket costs incurred by HG arising from such action or
proceeding (“Escrow Royalties”), and (c) nothing in this Section shall, nor shall it be
purported to, transfer to HG any right, title, ownership or other interest in or to the Licensed IP
Rights.



     With respect to all monies recovered by HG upon the final judgment or settlement of such
action or proceeding, (i) HG shall first retain the amount of its actual costs and expenses for
prosecuting such action or proceeding, (ii) HG shall then use the remaining proceeds to pay to
Fallbrook an amount equal to the Escrow Royalties plus the amount of interest earned on such Escrow
Royalties under the Escrow Agreement, upon payment of which HG and Fallbrook shall instruct the
independent escrow agent under the Escrow Agreement to release the Escrow Royalties and all
interest earned thereon to HG, and (iii) finally, the remaining proceeds shall be divided
*** to HG and *** to Fallbrook. Notwithstanding the foregoing, if HG either (A) loses
such action, (B) receives a judgment in its favor or enters a





 




			
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settlement agreement under either of which HG would be entitled to an amount that, after
withholding its costs of prosecuting such action, is less than the Escrow Royalties, or (C) HG
ceases to do business, then in each case the independent escrow agent shall be directed by HG and
Fallbrook to pay to Fallbrook an amount of the Escrow Royalties equal to the Escrow Royalties less
any amounts that HG paid to Fallbrook pursuant to clause (ii) of this paragraph, plus all interest
earned on the Escrow Royalties paid to Fallbrook by the independent escrow agent, and the
independent escrow agent shall be directed by HG and Fallbrook to pay any remaining Escrow
Royalties and interest earned thereon to HG.




8. TERM AND TERMINATION




     8.1 Term. The term of this Agreement shall commence on the Effective Date and, unless
earlier terminated pursuant to Sections 8.2 or 8.3, shall continue until the later of a) seven (7)
years from the start of production, and b) December 31, 2018.



     8.2 Termination for Cause. Either Party may terminate this Agreement upon or after
the material breach of this Agreement by the other Party if the other Party has not cured such
material breach within forty-five (45) days after written notice thereof by the non-breaching
Party.



     8.3 Termination Prior to License Effective Date. Either Party shall have the right to
terminate this Agreement prior to the License Effective Date if (a) the Parties are unable to
develop a prototype Product that meets the mutually agreed upon Key Design Parameters under the
Development Agreement, or (b) the Development Agreement expires or terminates or HG otherwise does
not desire to continue the Development Program (as defined in the Development Agreement).



     8.4 Termination by HG. HG shall have the right to terminate this Agreement
immediately if a significant enough number of Fallbrook patents included in the Licensed IP Rights
have been determined to be invalid or unenforceable for any reason by a final judgment of a court
of competent jurisdiction such that there is a material adverse impact on the value of the Licensed
IP Rights to HG.



     8.5 Effect of Expiration or Termination. Expiration or termination of this Agreement
shall not relieve the Parties of any obligation accruing prior to such expiration or termination,
and the provisions of Sections 4.3, 4.4, 6, 7.3 (with respect to Escrow Royalties held in escrow at
the time of termination and their associated obligations), 8.5, 9 and 10 shall survive the
expiration or termination of this Agreement.



     8.6 Sales Subsequent to Termination. In the event that this Agreement is terminated,
then for a period of one-hundred eighty (180) days after termination, (i) HG shall be entitled to
sell its remaining inventory of the Product and (ii) HG shall be entitled to make and sell
additional Product with parts and raw materials for the Product which it has in inventory or for
which it has an existing liability to purchase, provided that in each case HG pays to Fallbrook
royalties as required by Section 4.2.



     8.7 Renewal. A renewal term of seven (7) years is available if HG and Fallbrook agree
upon a development plan for the development and commercialization of a second



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application of the Product in the Field or any other field of use (under which case the
Parties would agree to amend Section 1.5 accordingly) and the minimum volume sales targets for such
second application and all such agreements occur at least ninety (90) days prior to the end of the
term of this Agreement.




9. INDEMNIFICATION




     9.1 HG Indemnification. Subject to Section 9.2, HG shall defend, indemnify and hold
Fallbrook harmless from all losses, liabilities, damages and expenses (including reasonable
attorneys’ fees and costs) resulting from any claims, demands, actions and other proceedings by any
third party to the extent resulting from HG’s commercialization of the Product under this
Agreement, except for any claim covered by Section 9.2.



     9.2 Fallbrook Indemnification. Fallbrook shall defend, indemnify and hold HG harmless
from all losses, liabilities, damages and expenses (including reasonable attorneys’ fees and costs)
resulting from any claims, demands, actions and other proceedings by any third party to the extent
they (i) allege that the design of the Product developed under the Development Agreement and/or
with any Product Development which has been reviewed and approved by Fallbrook in writing infringes
the intellectual property rights of any third party or (ii) contest Fallbrook’s ownership or the
validity of the Licensed IP Rights.



     9.3 Mutual Indemnification. Each Party agrees to defend, indemnify and hold the other
Party harmless from all losses, liabilities, damages and expenses (including reasonable attorneys’
fees and costs) resulting from (i) any breach of this Agreement by such Party, or (ii) any
representation or warranty made by such Party not being true and correct in any material respect as
of the Effective Date.



     9.4 Procedure. A Party seeking indemnification under Section 9.1 or 9.2 (for this
Section, “Notifier”) promptly shall notify the other Party (for this Section, “Recipient”) of any
claim, demand, action or other proceeding for which Notifier intends to claim indemnification.
Recipient shall have the right to participate in, and to the extent Recipient so desires jointly
with any other indemnitor similarly noticed, to assume the defense thereof with counsel selected by
Recipient; provided, however, that Notifier shall have the right to retain its own counsel, with
the fees and expenses to be paid by Recipient, if representation of Notifier by the counsel
retained by Recipient would be inappropriate due to actual or potential differing interests between
Notifier and any other party represented by such counsel in such proceedings. Recipient may not
settle or otherwise consent to an adverse judgment in any such claim, demand, action or other
proceeding, that diminishes the rights or interests of Notifier without the prior express written
consent of Notifier. Nevertheless, Recipient shall take such actions in a commercially timely
manner such that Notifier’s business interest or rights are preserved, to the extent reasonably
possible, with respect to the subject matter of the claim for indemnification.



     9.5 Insurance. HG shall maintain product liability insurance in an amount that is at
least two million dollars ($2,000,000.00) or, if greater, in such amount as HG customarily
maintains, which amount may increase or decrease at HG’s sole discretion but shall not decrease
below two million dollars ($2,000,000.00). HG shall maintain such insurance for so long as it



11









 




continues to make or sell any Product, and thereafter for so long as HG customarily maintains
insurance covering the manufacture or sale of its similar products.




10. MISCELLANEOUS




     10.1 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: Secretary
	 
	 	 
	     with copy to:

	 	DLA Piper LLP (US)
	 

	 	4365 Executive Drive, Suite 1100
	 

	 	San Diego, California 92121
	 

	 	Attention: Jake Handy
	 
	 	 
	     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, Illinois 60601
	 

	 	Attention: John R. Obiala






     10.2 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
transaction. Any permitted assignee shall assume all obligations of its assignor under this
Agreement.



     10.3 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.



     10.4 Entire Agreement. This Agreement and the Development 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 Development Agreement.



12









 





     10.5 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.



     10.6 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.



     10.7 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.



     10.8 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.



     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., its general partner	 	 
	 
	 	 	 	 	 	 	 	 
	By

	 	/s/ William G. Klehm
	 	By
	 	/s/ Ray Hauser	 	 
	Name:

	 	 

William G. Klehm
	 	Name:
	 	 

Ray Hauser
	 	 
	Title:

	 	CEO/Chairman
	 	Title:
	 	President	 	 






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EXHIBIT A




Minimum Sales Targets


If the cost of the Bill of Materials, for the ZTR Product for a given year is ***
the minimum sales target for the ZTR Product shall be as follows:




	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Year 5
	 	 	Year 1	 	Year 2	 	Year 3	 	Year 4	 	and thereafter
	Unit Volume
	 	 	*	**	 	 	*	**	 	 	*	**	 	 	*	**	 	 	*	**






     If the cost of the Bill of Materials for the ZTR Product is *** , the minimum sales target for
the ZTR Product shall be as follows:



	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	Year 5
	 	 	Year 1	 	Year 2	 	Year 3	 	Year 4	 	and thereafter
	Unit Volume
	 	 	*	**	 	 	*	**	 	 	*	**	 	 	*	**	 	 	*	**






     In each case, “Year 1” shall mean the first full calendar year following the date of
production of the first ZTR Product and each subsequent year shall be a full calendar year
commencing at the end of the prior year.





 




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






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