Document:

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).

2

 

     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.

3

 

     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

 

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

4

 

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

 

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

5

 

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,

 

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

6

 

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,

7

 

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

8

 

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

 

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

9

 

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

10

 

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	 	 

13

 

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.

14exv10w6

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

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00168-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00168-of-00352.parquet"}]]