-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nygnkhpp1Goa/vQOaAzW5cxmzJomKs2NxlBHVfGqAL5mQxB2HyOz9a+yTSATB4OW 2rscNNqkkxOA+mx0+cmipw== 0000950124-06-002622.txt : 20060510 0000950124-06-002622.hdr.sgml : 20060510 20060510101050 ACCESSION NUMBER: 0000950124-06-002622 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20060331 FILED AS OF DATE: 20060510 DATE AS OF CHANGE: 20060510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TECUMSEH PRODUCTS CO CENTRAL INDEX KEY: 0000096831 STANDARD INDUSTRIAL CLASSIFICATION: AIR COND & WARM AIR HEATING EQUIP & COMM & INDL REFRIG EQUIP [3585] IRS NUMBER: 381093240 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-00452 FILM NUMBER: 06823690 BUSINESS ADDRESS: STREET 1: 100 E PATTERSON ST CITY: TECUMSEH STATE: MI ZIP: 49286 BUSINESS PHONE: 5174238411 MAIL ADDRESS: STREET 1: 100 EAST PATTERSON STREET CITY: TECUMSEH STATE: MI ZIP: 49286 10-Q 1 k05154e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED MARCH 31, 2006 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 For the quarterly period ended March 31, 2006 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 For the transition period from ______ to ______ COMMISSION FILE NUMBER: 0-452 TECUMSEH PRODUCTS COMPANY (Exact name of registrant as specified in its charter) MICHIGAN 38-1093240 (State of Incorporation) (IRS Employer Identification Number) 100 EAST PATTERSON STREET TECUMSEH, MICHIGAN 49286 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (517) 423-8411 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, or non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act(check one): Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class of Stock Outstanding at March 31, 2006 -------------- ----------------------------- Class B Common Stock, $1.00 par value 5,077,746 Class A Common Stock, $1.00 par value 13,401,938
Page 1 TABLE OF CONTENTS Part I. Financial Information Page Item 1. Financial Statements Consolidated Condensed Balance Sheets ............................... 3 Consolidated Condensed Statements of Operations ..................... 4 Consolidated Condensed Statements of Cash Flows ..................... 5 Notes to Consolidated Condensed Financial Statements ................ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................ 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk ....... 26 Item 4. Controls and Procedures .......................................... 28 Part II. Other Information ..................................................... 30 Signatures ..................................................................... 32 Amendment No. 1 to First Lien Credit Agreement ................................. Exh 4.1 Amendment No. 1 to Second Lien Credit Agreement ................................ Exh 4.2 Management Incentive Plan as amended and restated on March 29, 2006 ............ Exh 10.1 Executive Deferred Compensation Plan adopted on March 29, 2006 ................. Exh 10.2 Director Retention Phantom Share Plan as amended and restated on March 29 ...... Exh 10.3 Certification of CEO Pursuant to Section 302 ................................... Exh 31.1 Certification of CFO Pursuant to Section 302 ................................... Exh 31.2 Certification of CEO Pursuant to Section 906 ................................... Exh 32.1 Certification of CFO Pursuant to Section 906 ................................... Exh 32.2
Page 2 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
(Dollars in millions, except share data) MARCH 31, December 31, ASSETS 2006 2005 ------------ ------------ Current Assets: Cash and cash equivalents $ 82.8 $ 116.6 Accounts receivable, less allowance for doubtful accounts of $10.9 in 2006 and $11.3 in 2005 232.6 211.1 Inventories 348.4 346.8 Deferred and recoverable income taxes 40.0 43.4 Other current assets 91.6 89.2 Assets held for sale 48.3 -- ------------ ------------ Total current assets 843.7 807.1 Property, plant, and equipment, net 590.1 578.6 Goodwill 126.1 130.9 Other intangibles 56.0 54.8 Deferred income taxes 0.5 -- Prepaid pension expense 188.7 185.3 Other assets 50.8 43.8 Assets held for sale 14.7 -- ------------ ------------ Total assets $ 1,870.6 $ 1,800.5 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable, trade $ 201.7 $ 187.3 Income taxes payable 2.3 -- Short-term borrowings 121.2 82.5 Accrued liabilities 133.7 135.3 Liabilities held for sale 15.0 -- ------------ ------------ Total current liabilities 473.9 405.1 Long-term debt 281.8 283.0 Deferred income taxes 16.8 25.0 Other postretirement benefit liabilities 210.6 210.9 Product warranty and self-insured risks 12.6 14.5 Pension liabilities 15.4 15.2 Other non-current liabilities 36.3 32.4 ------------ ------------ Total liabilities 1,047.4 986.1 ------------ ------------ Commitments and contingencies Stockholders' Equity Class A common stock, $1 par value; authorized 75,000,000 shares; issued and outstanding 13,401,938 shares in 2005 and 2004 13.4 13.4 Class B common stock, $1 par value; authorized 25,000,000 shares; issued and outstanding 5,077,746 shares in 2005 and 2004 5.1 5.1 Retained earnings 797.1 806.6 Accumulated other comprehensive income (loss) 7.6 (10.7) ------------ ------------ Total stockholders' equity 823.2 814.4 ------------ ------------ Total liabilities and stockholders' equity $ 1,870.6 $ 1,800.5 ============ ============
The accompanying notes are an integral part of these Consolidated Condensed Financial Statements. Page 3 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED (Dollars in millions, except per share data) MARCH 31, 2006 2005 ------------ ------------ Net sales $ 446.1 $ 440.2 Cost of sales and operating expenses 411.6 412.7 Selling and administrative expenses 45.2 43.4 Impairments, restructuring charges, and other items 0.6 0.1 ------------ ------------ Operating loss (11.3) (16.0) Interest expense (8.4) (6.3) Interest income and other, net 5.0 3.3 ------------ ------------ Loss from continuing operations before taxes (14.7) (19.0) Tax benefit (5.6) (6.5) ------------ ------------ Loss from continuing operations (9.1) (12.5) Income (Loss) from discontinued operations, net of tax (0.5) 0.1 ------------ ------------ Net loss $ (9.6) $ (12.4) ============ ============ Basic and diluted earnings (loss) per share Loss from continuing operations $ (0.49) $ (0.68) Income (Loss) from discontinued operations, net of tax $ (0.03) $ 0.01 ------------ ------------ Net loss $ (0.52) $ (0.67) ============ ============ Weighted average shares (in thousands) 18,480 18,480 ------------ ------------ Cash dividends declared per share $ 0.00 $ 0.32 ------------ ------------
The accompanying notes are an integral part of these Consolidated Condensed Financial Statements. Page 4 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
THREE MONTHS ENDED (Dollars in millions) MARCH 31, 2006 2005 ------------ ------------ Cash Flows from Operating Activities: Cash used by operating activities $ (44.5) $ (67.4) Cash Flows from Investing Activities: Proceeds from sale of assets 9.0 -- Capital expenditures (20.0) (28.7) Business acquisition (2.0) -- ------------ ------------ Cash used in investing activities (13.0) (28.7) ------------ ------------ Cash Flows from Financing Activities: Dividends paid -- (5.9) Repayment of Senior Guaranteed Notes (250.0) (50.0) Repayment of Industrial Development Revenue Bonds (10.5) -- Proceeds from First Lien Credit Agreement 168.3 -- Proceeds from Second Lien Credit Agreement 100.0 -- Other proceeds (repayments), net 16.2 8.5 ------------ ------------ Cash provided by (used in) financing activities 24.0 (47.4) ------------ ------------ Effect of exchange rate changes on cash (0.3) 1.1 ------------ ------------ Decrease in cash and cash equivalents (33.8) (142.4) Cash and Cash Equivalents: Beginning of period 116.6 227.9 ------------ ------------ End of period $ 82.8 $ 85.5 ============ ============
The accompanying notes are an integral part of these Consolidated Condensed Financial Statements. Page 5 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. The consolidated condensed financial statements of Tecumseh Products Company and Subsidiaries (the "Company") are unaudited and reflect all adjustments (including normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the financial position and operating results for the interim periods. The December 31, 2005 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States ("U.S. GAAP"). The consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report for the fiscal year ended December 31, 2005. Due to the seasonal nature of the Company's business, the results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year. 2. Comprehensive Income
(Dollars in millions) THREE MONTHS ENDED MARCH 31, 2006 2005 ------------ ------------ Net loss $ (9.6) $ (12.4) Other comprehensive income (loss): Foreign currency translation adjustments $ 23.2 (6.5) Gain (Loss) on derivatives (0.9) 3.9 Unrealized gain (loss) on investment holdings (3.9) 3.8 ------------ ------------ Total comprehensive income (loss) $ 8.8 $ (11.2) ============ ============
3. Inventories
MARCH 31, DECEMBER 31, (Dollars in millions) 2006 2005 ------------ ------------ Raw material $ 123.2 $ 128.5 Work in progress 84.5 73.3 Finished goods 132.4 136.7 Supplies 8.3 8.3 ------------ ------------ Total inventories $ 348.4 $ 346.8 ============ ============
Page 6 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 4. Business Segments The Company has three reportable segments based on the criteria set forth in SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information": Compressor Products, Electrical Component Products, and Engine & Power Train Products. Previously, the Company also reported a Pump Products business segment; however, as a result of the decision, during the first quarter of 2006, to sell 100% of its ownership in Little Giant Pump Company, such operations are no longer reported in loss from continuing operations before tax. Little Giant operations represented approximately 90% of that previously reported segment. Since the Company's remaining pump business does not meet the definition of a reporting segment as defined by SFAS No. 131, "Segment Reporting," the Company will no longer report a Pump Products segment, and operating results of the remaining pump business are included in Other for segment reporting purposes. Revenues and operating income by segment for the periods indicated are as follows:
BUSINESS SEGMENT DATA THREE MONTHS ENDED (Dollars in millions) MARCH 31, 2006 2005 ------------ ------------ Net sales: Compressor Products $ 251.5 $ 241.0 Electrical Component Products 109.1 100.2 Engine & Power Train Products 80.9 94.9 Other (a) 4.6 4.1 ------------ ------------ Total Net Sales $ 446.1 $ 440.2 ============ ============ Operating income (loss): Compressor Products $ 6.6 $ 8.6 Electrical Component Products 4.9 (1.1) Engine & Power Train Products (18.5) (20.9) Other (a) 0.3 (0.2) Corporate expenses (4.0) (2.3) Impairments, restructuring charges, and other items (0.6) (0.1) ------------ ------------ Total operating loss from continuing operations (11.3) (16.0) Interest expense (8.4) (6.3) Interest income and other, net 5.0 3.3 ------------ ------------ Loss from continuing operations before taxes $ (14.7) $ (19.0) ============ ============
(a) "Other" consists of non-reportable business segments. The Electrical Component Products segment had inter-segment sales of $11.9 million and $16.7 million in the first quarter of 2006 and 2005, respectively. Page 7 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 5. Goodwill and Other Intangible Assets At March 31, 2006, goodwill by segment consisted of the following:
ELECTRICAL COMPRESSOR COMPONENTS PUMPS TOTAL ------------ ------------ ------------ ------------ Balance at 1/1/2006 $ 16.9 $ 108.9 $ 5.1 $ 130.9 Reclassified to held for sale (5.1) (5.1) Foreign Currency Translation 0.3 0.3 ------------ ------------ ------------ ------------ Balance at 3/31/2006 $ 17.2 $ 108.9 $ 0.0 $ 126.1 ============ ============ ============ ============
Other intangible assets consisted of the following:
GROSS CARRYING ACCUMULATED AMORTIZABLE AMOUNT AMORTIZATION NET LIFE ------------ ------------ ------------ ------------ Intangible assets subject to amortization: Customer relationships and contracts $ 39.3 $ 8.6 $ 30.7 6-15 years Technology 12.0 3.6 8.4 5-10 years ------------ ------------ ------------ Total 51.3 12.2 39.1 Intangible assets not subject to amortization: Trade name 16.9 -- 16.9 ------------ ------------ ------------ Total intangible assets $ 68.2 $ 12.2 $ 56.0 ============ ============ ============
The estimated amortization expense over the next five years is $4.2 million for 2006 through 2008 and approximately $3.9 million annually for 2009 through 2010. Amortization expense for the three months ended March 31 was $0.9 million and $1.3 million for 2006 and 2005, respectively. As a result of the acquisition of In Motion Technologies Pty. Ltd. (IMT), the Company recorded an additional technology intangible assets of $2.0 million during the quarter. Page 8 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 6. Pension and Other Postretirement Benefit Plans Components of net periodic benefit (income) cost are as follows:
PENSION BENEFITS OTHER BENEFITS ------------------------------ ------------------------------ THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, MARCH 31, 2006 2005 2006 2005 ------------ ------------ ------------ ------------ Service Cost $ 2.4 $ 2.1 $ 0.8 $ 1.1 Interest Cost 5.3 5.1 2.4 2.6 Expected return on plan assets (11.1) (10.0) -- -- Amortization of prior service costs 0.1 0.1 (1.2) (0.3) Amortization of net gain -- (0.6) -- (0.7) ------------ ------------ ------------ ------------ Net periodic benefit (income) cost $ (3.3) $ (3.3) $ 2.0 $ 2.7 ============ ============ ============ ============
During the second quarter of 2005, the Company announced some changes to certain of its retiree medical benefits. Included among these changes were plans to phase in retiree contributions and raise plan deductibles (both as of January 1, 2006). The Company also implemented plans to eliminate Post-65 prescription drug benefits starting January 1, 2008 and discontinue all retiree medical benefits for anyone hired after January 1, 2006. The Company does not expect to contribute to its pension plans in 2006. 7. Guarantees and Warranties A portion of accounts receivable at the Company's Brazilian subsidiary are sold with recourse. Brazilian receivables sold at March 31, 2006 and December 31, 2005 were $35.2 million and $32.1 million, respectively. The Company estimates the fair value of the contingent liability related to these receivables to be $0.5 million, which is included in operating income and allowance for doubtful accounts. Page 9 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) A provision for estimated future warranty costs and estimated returns for credit relating to warranty are recorded when products are sold and revenue recognized. A reconciliation of the changes in the Company's product warranty liability follows:
Three Months Ended Three Months Ended (Dollars in millions) March 31, 2006 March 31, 2005 ------------------ ------------------ Balance at January 1, 2006 $ 29.4 $ 38.1 Accruals for warranties 4.3 2.6 Settlements made (in cash or in kind) (4.4) (5.5) Effect of foreign currency translation 0.2 (0.3) Reclassification to held for sale (2.7) -- ------------ ------------ Balance at March 31, 2006 $ 26.8 $ 34.9 ============ ============
As of March 31, 2006, $21.3 million was included in accrued liabilities and $5.5 million was included in product warranty and self-insured risks. 8. Debt During the first quarter of 2005, the Senior Guaranteed Notes and Revolving Credit Facility outstanding at December 31, 2005 were replaced by a new financing package that included a $275 million First Lien Credit Agreement and a $100 million Second Lien Credit Agreement. The agreements provide for security interests in substantially all of the Company's assets and specific financial covenants related to EBITDA, capital expenditures, and fixed charge coverage. Additionally, under the terms of the agreements, no dividends can be paid prior to December 31, 2006 and minimum amounts of credit availability are required before dividends can be paid thereafter. The new arrangements bore a weighted average annual interest rate of 9.0% based upon outstanding balances at closing versus the rate of 6.6% applicable to the $250 million Senior Guaranteed Notes. At March 31, 2006, the Company had outstanding letters of credit of $4.8 million. At March 31, 2006, the Company had total availability of $32.8 million under its $275 million First Lien Credit Agreement. As more fully described in Note 14, subsequent to March 31, 2006, the Company sold Little Giant Pump Company and proceeds from the sale were used to repay portions of the new debt arrangements. Approximately, 63% of the proceeds were applied against the First Lien borrowing and 37% against the Second Lien borrowing. After giving affect to the repayments, the weighted average annual interest rate of these borrowings was 8.8%. 9. Environmental Matters The Company has been named by the U.S. Environmental Protection Agency ("EPA") as a potentially responsible party ("PRP") in connection with the Sheboygan River and Harbor Superfund Site in Wisconsin. The EPA has indicated its intent to address the site in two phases, with the Company's Sheboygan Falls plant site and the upper river constituting the first phase ("Phase I") and the middle and lower river and harbor being the second phase ("Phase II"). In May Page 10 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 2003, the Company concluded a Consent Decree with the EPA concerning the performance of remedial design and remedial action for Phase I, deferring for an unspecified period any action regarding Phase II. In March 2003, with the cooperation of the EPA, the Company and Pollution Risk Services, LLC ("PRS") entered into a Liability Transfer and Assumption Agreement (the "Liability Transfer Agreement"). Under the terms of the Liability Transfer Agreement, PRS assumed all of the Company's responsibilities, obligations and liabilities for remediation of the entire Site and the associated costs, except for certain specifically enumerated liabilities. Also, as required by the Liability Transfer Agreement, the Company has purchased Remediation Cost Cap insurance, with a 30-year term, in the amount of $100.0 million and Environmental Site Liability insurance in the amount of $20.0 million. The Company believes such insurance coverage will provide sufficient assurance for completion of the responsibilities, obligations and liabilities assumed by PRS under the Liability Transfer Agreement. On October 10, 2003, in conjunction with the Liability Transfer Agreement, the Company completed the transfer of title to the Sheboygan Falls, Wisconsin property to PRS. The total cost of the Liability Transfer Agreement to the Company, including the cost of the insurance policies, was $39.2 million. The Company recognized a charge of $13.6 million ($8.7 million net of tax) in the first quarter of 2003. The charge consisted of the difference between the cost of the Liability Transfer Agreement and amounts previously accrued for the cleanup. The Company continues to maintain an additional reserve of $0.5 million to reflect its potential environmental liability arising from operations at the Site, including potential residual liabilities not assumed by PRS pursuant to the Liability Transfer Agreement. As the Liability Transfer Agreement was executed prior to the signing of the original Consent Decree for the Phase I work, the original Consent Decree was amended in the fourth quarter of 2005 to include PRS as a signing party. This assigns PRS full responsibility for complying with the terms of the Consent Decree and allows the EPA to enforce the Consent Decree directly with PRS. Prior to the execution of this amendment, U.S. GAAP required that the Company continue to record the full amount of the estimated remediation liability of $39.7 million and a corresponding asset of $39.2 million included in Other Assets in the balance sheet. With the subsequent amendment, the Company has removed the asset and $39.2 million of the liability from the balance sheet. While the Company believes the arrangements with PRS are sufficient to satisfy substantially all of the Company's environmental responsibilities with respect to the Site, these arrangements do not constitute a legal discharge or release of the Company's liabilities with respect to the Site. The actual cost of this obligation will be governed by numerous factors, including, without limitation, the requirements of the WDNR, and may be greater or lower than the amount accrued. With respect to other environmental matters, the Company has been voluntarily participating in a cooperative effort to investigate and cleanup PCB contamination in the watershed of the south branch of the Manitowoc River, at and downstream from the Company's New Holstein, Wisconsin facility. On December 29, 2004, the Company and TRC Companies and TRC Environmental Corporation (collectively, "TRC") entered into a Consent Order with the Wisconsin Department of Natural Resources (the "WDNR") relating to this effort known as the Hayton Area Remediation Project ("HARP"). The Consent Order provides a framework for the completion of the remediation and regulatory closure at HARP. Page 11 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Concurrently, on December 29, 2004, the Company and two of its subsidiaries and TRC entered into an Exit Strategy Agreement (the "Agreement"), whereby the Company transferred to TRC substantially all of its obligations to complete the HARP remediation pursuant to the Consent Order and in accordance with applicable environmental laws and regulations. TRC's obligations under the Agreement include any ongoing monitoring or maintenance requirements and certain off-site mitigation or remediation, if required. TRC will also manage any third-party remediation claims that might arise or otherwise be filed against the Company. As required by the Agreement, the Company also purchased a Pollution Legal Liability Select Cleanup Cost Cap Policy (the "Policy") from American International Specialty Lines Company. The term of the Policy is 20 years with an aggregate combined policy limit of $41 million. The policy lists the Company and TRC as named insureds and includes a number of first and third party coverages for remediation costs and bodily injury and property damage claims associated with the HARP remediation and contamination. The Company believes that the Policy provides additional assurance that the responsibilities, obligations, and liabilities transferred and assigned by the Company and assumed by TRC under the Agreement will be completed. Although the arrangements with TRC and the WDNR do not constitute a legal discharge or release of the Company's liabilities, the Company believes that the specific work substitution provisions of the Consent Order and the broad coverage terms of the Policy, collectively, are sufficient to satisfy substantially all of the Company's environmental obligations with respect to the HARP remediation. The total cost of the exit strategy insured remediation arrangement to Tecumseh was $16.4 million. This amount included $350,000 that was paid to the WDNR pursuant to the Consent Order to settle any alleged liabilities associated with natural resource damages. The charge represented the cost of the agreements less what was previously provided for cleanup costs to which the Company had voluntarily agreed. The Company, in cooperation with the WDNR, also conducted an investigation of soil and groundwater contamination at the Company's Grafton, Wisconsin plant. It was determined that contamination from petroleum and degreasing products used at the plant were contributing to an off-site groundwater plume. The Company began remediation of soils in 2001 on the east side of the facility. Additional remediation of soils began in the fall of 2002 in two other areas on the plant site. At March 31, 2006, the Company had accrued $2.3 million for the total estimated cost associated with the investigation and remediation of the on-site contamination. Investigation efforts related to the potential off-site groundwater contamination have to date been limited in their nature and scope. The extent, timing and cost of off-site remediation requirements, if any, are not presently determinable. In addition to the above-mentioned sites, the Company is also currently participating with the EPA and various state agencies at certain other sites to determine the nature and extent of any remedial action that may be necessary with regard to such other sites. At March 31, 2006 and December 31, 2005, the Company had accrued $3.4 million and $3.5 million, respectively, for environmental remediation. As these matters continue toward final resolution, amounts in excess of those already provided may be necessary to discharge the Company from its obligations for these sites. Such amounts, depending on their amount and timing, could be material to reported net income in the particular quarter or period that they are recorded. In addition, the ultimate resolution of these matters, either individually or in the aggregate, could be material to the consolidated financial statements. Page 12 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 10. Income Taxes The first quarter 2006 consolidated statement of operations reflects a $5.6 million income tax benefit, which was recorded pursuant to SFAS No. 109, "Accounting for Income Taxes." SFAS 109 specifies the allocation method of income taxes between categories of income defined by that statement as those that are included in net income (continuing operations and discontinued operations) and those included in comprehensive income but excluded from net income. SFAS 109 is applied by tax jurisdiction, and in periods in which there is a pre-tax loss from continuing operations and pre-tax income in another category (such as other comprehensive income), tax expense is first allocated to other comprehensive income with a related benefit recorded in continuing operations. The first quarter of 2006 reflects tax benefit in the statement of operations and tax expense in other comprehensive income. At March 31, 2006 and December 31, 2005, full valuation allowances are recorded for net operating loss carryovers for those tax jurisdictions in which the Company is in a cumulative year loss position. 11. Commitments and Contingencies A lawsuit filed against the Company and other defendants alleges that the horsepower labels on the products the plaintiffs purchased were inaccurate. The plaintiffs seek certification of a class of all persons in the United States who, beginning January 1, 1995 through the present, purchased a lawnmower containing a two stroke or four stroke gas combustible engine up to 20 horsepower that was manufactured by defendants. The complaint seeks an injunction, compensatory and punitive damages, and attorneys' fees. No orders have been entered in the case, and there has been limited discovery. While the Company believes it has meritorious defenses and intends to assert them vigorously, there can be no assurance that the Company will prevail. The Company also may pursue settlement discussions. It is not possible to reasonably estimate the amount of the Company's ultimate liability, if any, or the amount of any future settlement, but the amount could be material to the Company's financial position, consolidated results of operations and cash flows. The Company is also the subject of, or a party to, a number of other pending or threatened legal actions involving a variety of matters, including class actions, incidental to its business. Although their ultimate outcome cannot be predicted with certainty, and some may be disposed of unfavorably to the Company, management does not believe that the disposition of these other matters will have a material adverse effect on the consolidated financial position or results of operations of the Company. 12. New Accounting Standards On November 24, 2004, the FASB issued Statement No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4 (FAS 151). The standard adopts the IASB view related to inventories that abnormal amounts of idle capacity and spoilage costs should be excluded from the cost of inventory and expensed when incurred. Additionally, the Board made the decision to clarify the meaning of the term 'normal capacity'. The provisions of FAS 151 are applicable to inventory costs incurred during fiscal years beginning after June 15, 2005. The Company's adoption of this pronouncement during the first quarter of 2006 did not have a material effect. Page 13 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 13. Discontinued Operations During the first quarter of 2006, the Company approved a plan to proceed with a transaction to sell 100% of its ownership interest in its Little Giant Pump Company subsidiary. The net assets of the subsidiary are classified as held for sale at March 31, 2006 and December 31, 2005, and its results for the quarters ended March 31, 2006 and 2005 are included in income (loss) from discontinued operations. Interest expense of $2.3 million and $1.4 million was allocated to discontinued operations for all the periods presented because the Company's new financing package required that the proceeds from the sale be utilized to repay portions of the Company's debt. The Company's remaining pump business does not meet the definition of an operating segment as defined by SFAS No. 131, "Segment Reporting." Accordingly, its operating results are included in Other within the Results by Segment table. Following is a summary of assets and liabilities of Little Giant Pump Company at March 31, 2006 and December 31, 2005, which are reflected in the consolidated balance sheets as held for sale:
March 31, December 31, (Dollars in millions) 2006 2005 ------------ ------------ Accounts receivable, net $ 17.2 $ 13.5 Inventories 30.8 25.7 Other current assets 0.3 0.3 Property, plant and equipment, net 9.6 10.1 Goodwill 5.1 5.1 ------------ ------------ Assets held for sale $ 63.0 $ 54.7 ============ ============ Accounts payable, trade $ 9.6 $ 7.2 Accrued liabilities 5.4 5.5 ------------ ------------ Liabilities held for sale $ 15.0 $ 12.7 ============ ============
Following is a summary of income (loss) from discontinued operations for the quarters ended March 31, 2006 and 2005:
March 31, March 31, (Dollars in millions) 2006 2005 ------------ ------------ Net sales $ 26.8 $ 24.2 Costs of sales and operating expenses 19.2 17.9 Selling and administrative expenses 5.6 4.7 ------------ ------------ Operating income 2.0 1.6 Interest expense allocated 2.3 1.4 ------------ ------------ Income (Loss) from discontinued operations before income taxes (0.3) 0.2 Tax provision 0.2 0.1 ------------ ------------ Income (Loss) from discontinued operations, net of tax $ (0.5) $ 0.1 ============ ============
Page 14 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 14. Subsequent Event During the first quarter of 2006, the Company entered into an agreement to sell its Little Giant Pump Company subsidiary to Franklin Electric Company, Inc. for approximately $121 million, subject to post-closing adjustments. The subsidiary is classified as held for sale at March 31, 2006, and its results for the periods ended March 31, 2006 and 2005 are included in income (loss) from discontinued operations. On April 21, 2006, the Company completed the sale. As required by the Company's new financing package, the proceeds from the sale were used to repay portions of the Company's debt. Page 15 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Executive Summary We are one of the largest independent producers of hermetically sealed compressors in the world, one of the world's leading manufacturers of small gasoline engines and power train products used in lawn and garden applications, and one of the leading manufacturers of fractional horsepower motors for the United States market. Our net sales have grown by approximately $400 million from the year ended December 31, 2001 to the year ended December 31, 2005. The primary source of sales growth was our 2002 acquisition of FASCO Motors, now the key component of our presence in the U.S. fractional horsepower motor market. Our products are sold in countries all over the world. In evaluating our financial condition and operating performance, we focus primarily on profitable sales growth and cash flows, as well as return on invested capital on a consolidated basis. In addition to maintaining and expanding our business with our existing customers in our more established markets, we rely on developing new products and improving our ability to penetrate new markets through enhancements to the functionality, performance and quality of our existing products. For instance, our Compressor Group will introduce a scroll-style compressor to serve commercial refrigeration and air conditioning markets throughout the globe, and it will begin producing a new expanded range rotary compressor in India for global applications, while our Electrical Components Group has expanded its range of Brushless DC ("BLDC") variable speed motor products. To continue to grow sales and improve cash flows, we must successfully bring these products to market in a timely manner and win customer acceptance. International sales are important to our business as a whole with sales to customers outside the United States representing approximately 50% of total consolidated net sales in 2005. The Company's dependence on sales in foreign countries entails certain commercial and political risks, including currency fluctuations, unstable economic or political conditions in some areas and the possibility of various government interventions into trade policy. We have experienced some of these factors and continue to carefully pursue these markets. Our operating results are indicative of the environment that manufacturers face in today's global economy. The addition of new productive capacities in low-cost locations, like China, has resulted in new capacities and deflationary pricing in many of the market segments in which we operate. Like many of our customers and competitors, we have restructured older operations to remain cost competitive, including the movement of productive capacities to low-cost locations or nearer to customer facilities. These restructurings involve significant costs, in both financial and human terms. In addition, many of our markets are subject to macroeconomics trends, which expand and contract, and many overall trends, which affect demand, such as weather. The foreign manufacturing operations we have developed are subject to many risks, including governmental expropriation, governmental regulations that may be disadvantageous to businesses owned by foreign nationals, and instabilities in the workforce due to changing political and social conditions. These considerations are especially significant in the context of our Brazilian operations. The Brazilian compressor operations provided a significant portion of total Compressor Products segment production during 2005, and our Curitiba, Brazil facility is the key future manufacturing site to supply worldwide demand for lawn and garden engines. Page 16 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS As a global manufacturer with production in 11 countries and sales in over 110 countries throughout the world, results are sensitive to changes in foreign currency exchange rates. In total, those movements have not been favorable to us during 2005 and the first three months of 2006. We have developed strategies to mitigate or partially offset the impact, primarily hedging where the risk of loss is greatest. In particular, we have entered into foreign currency forward purchases to hedge the Brazilian export sales denominated in both U.S. Dollars and Euros. Additionally, we have structured local financing relationships as natural hedges. Lastly, commodity prices increased very rapidly during 2004, 2005 and into 2006. Due to competitive markets, we were not able to fully recover these cost increases through price increases and other cost savings. Increases in certain raw material, energy and commodity costs have had a material adverse impact on our operating results during these periods. We have developed strategies to mitigate or partially offset the impact, which include aggressive cost reduction actions, cost optimization engineering strategies, selective in-sourcing of components where we have available capacity, continued consolidation of our supply base, and acceleration of low-cost country sourcing. In addition, the sharing of increased raw material costs has been, and will continue to be, the subject of negotiations with our customers. While we believe that our mitigation strategies eventually will offset a substantial portion of the financial impact of these increased costs, no assurances can be given that the magnitude and duration of these increased costs will not have a continued material adverse impact on our operating results. We are very focused on efforts to help us maintain our ability to compete on cost. Our success in generating cash flow will depend, in part, on our ability to efficiently manage working capital. In this regard, changes in inventory management practices and customer and vendor payment terms had a positive impact on our reported cash flows when comparing the first quarter of 2006 to 2005. In addition, our cash flow is also dependent on our ability to efficiently manage our capital spending. We use cash return on invested capital as a measure of the efficiency with which assets are deployed to increase earnings. Improvements in our return on invested capital will depend on our ability to maintain an appropriate asset base for our business and to increase productivity and operating efficiency. For further information related to other factors that have had, or may in the future have, a significant impact on our business, financial condition or results of operations, see "Cautionary Statements Relating To Forward-Looking Statements" below. Page 17 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations A summary of our operating results as a percentage of net sales is shown below (dollar amounts in millions):
THREE MONTHS ENDED MARCH 31, (dollars in millions) 2006 % 2005 % Net sales $ 446.1 100.0% $ 440.2 100.0% Cost of sales and operating expenses 411.6 92.3% 412.7 93.8% Selling and administrative expenses 45.2 10.1% 43.4 9.9% Impairments, restructuring charges, and other items 0.6 0.1% 0.1 0.0% ------------ ------------ Operating loss (11.3) -2.5% (16.0) -3.6% Interest expense (8.4) 1.9% (6.3) 1.4% Interest income and other, net 5.0 1.1% 3.3 0.7% ------------ ------------ Loss from continuing operations before taxes (14.7) 3.3% (19.0) -4.3% Tax benefit (5.6) -1.3% (6.5) -1.5% ------------ ------------ Loss from continuing operations $ (9.1) 2.0% $ (12.5) -2.8% ============ ============
Three Months Ended March 31, 2006 vs. Three Months Ended March 31, 2005 Consolidated net sales from continuing operations in the first quarter of 2006 increased to $446.1 million from $440.2 million in 2005. Excluding the increase in sales due to the effects of currency fluctuation of $9.1 million, 2006 first quarter sales declined by $3.2 million. While sales improved in the Compressor and Electrical Components segments, declines in sales in the Engine & Power Train segment more than offset the increases. Cost of sales and operating expenses was $411.6 million in the three months ended March 31, 2006, as compared to $412.7 million in the three months ended March 31, 2005. As a percentage of net sales, cost of sales and operating expenses were 92.3% and 93.8% in the first quarters of 2006 and 2005, respectively. The improvement was primarily due to improved operational efficiencies and lower fixed costs associated with plant closures. Also included in cost of sales and operating expenses was the $3.5 million gain from the sale of the Douglas, Georgia engine facility. Selling, general and administrative expenses were $45.2 million in the three months ended March 31, 2006, as compared to $43.4 million in the three months ended March 31, 2005. As a percentage of net sales, selling, general and administrative expenses were 10.1% and 9.9% in the first quarters of 2006 and 2005, respectively. The increase was primarily related to AlixPartners' fees of $9.0 million offset by improved variable selling costs and global headcount reductions. Interest expense amounted to $8.4 million in the first quarter of 2006 compared to $6.3 million in the first quarter of 2005. The increase was primarily related to the higher average interest rates associated with the Company's current borrowing arrangements. Page 18 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest income and other, net was $5.0 million in the first quarter of 2006 compared to $3.3 million in the first quarter of 2005. The impact of lower interest income due to lower cash balances was more than offset by a gain of $3.6 million on the sale of the Company's interest in Kulthorn Kirby Public Company Limited, a manufacturer of compressors based in Thailand. The sale of the stock was completed in conjunction with the end of a licensing agreement between the Company's Compressor operations and Kulthorn Kirby. The first quarter 2006 consolidated statement of operations reflects a $5.6 million income tax benefit, which was recorded pursuant to SFAS No. 109, "Accounting for Income Taxes." SFAS 109 specifies the allocation method of income taxes between categories of income defined by that statement as those that are included in net income (continuing operations and discontinued operations) and those included in comprehensive income but excluded from net income. SFAS 109 is applied by tax jurisdiction, and in periods in which there is a pre-tax loss from continuing operations and pre-tax income in another category (such as other comprehensive income), tax expense is first allocated to other comprehensive income with a related benefit recorded in continuing operations. The first quarter of 2006 reflects tax benefit in the statement of operations and tax expense in other comprehensive income. At March 31, 2006 and December 31, 2005, full valuation allowances are recorded for net operating loss carryovers for those tax jurisdictions in which the Company is in a cumulative year loss position. Net loss from continuing operations in the first quarter of 2006 was $9.1 million, or $0.49 per share, as compared to net loss of $12.5 million, or $0.68 per share, in the first quarter of 2005. The improvement was primarily the result of the factors described above. Reportable Operating Segments The financial information presented below is for our three reportable operating segments for the periods presented: Compressor, Electrical Components, and Engine & Power Train. Financial measures regarding each segment's income (loss) before interest, other expense, income taxes, and impairments, restructuring charges, and other items ("operating income") and income (loss) before interest, other expense and income taxes and impairments, restructuring charges, and other items divided by net sales ("operating margin") are not measures of performance under accounting principles generally accepted in the United States (GAAP). Such measures are presented because we evaluate the performance of our reportable operating segments, in part, based on income (loss) before interest, other expense, income taxes, and impairments, restructuring charges, and other items. These measures should not be considered in isolation or as a substitute for net income, net cash provided by operating activities or other income statement or cash flow statement data prepared in accordance with GAAP or as measures of profitability or liquidity. In addition, these measures, as we determine them, may not be comparable to related or similarly titled measures reported by other companies. For a reconciliation of consolidated income (loss) before interest, other expense and income taxes, impairments, restructuring charges, and other items to income before provision for income taxes, see Note 8, Segment Reporting. Page 19 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Compressor Products First quarter 2006 sales in the Compressor business increased 4.4% to $251.5 million from $241.0 million in the prior year. The increase for the period was mostly attributable to effects of foreign currency translation that increased current quarter sales by $9.2 million. Overall, unit sales volumes were relatively consistent with the prior year with some change in product mix. Compressor business operating income and related margin for the first quarter of 2006 were $6.6 million and 2.6%, respectively, compared to $8.6 million and 3.6% in the first quarter of 2005. The operating income decrease was attributable to an unfavorable product mix and higher material and other input costs offset by productivity improvements. The Brazilian Real that was on average 16% stronger against the U.S. Dollar in the first quarter of 2006 versus 2005, but hedging activities mitigated the financial impact. Electrical Component Products Electrical Components business sales were $109.1 million for the first quarter of 2006, an increase of 8.9% over sales of $100.2 million in the same quarter last year. Volume increases in residential and commercial motor markets of approximately 16%, where HVAC markets were particularly robust, more than compensated for a decrease of approximately 11% in the automotive motor market, as a result of lower build schedules and share losses by the Company's customers at their respective OEM customers. Electrical Components operating income and related margin for the first quarter of 2006 were $4.9 million and 4.5%, respectively, compared to a loss of $1.1 million and (1.1%) in the first quarter of 2005. The improvement was primarily due to higher sales volumes, improved operational efficiencies, and pricing actions taken during 2005. Engine & Power Train Products Engine & Power Train business sales were $80.9 million in the first quarter of 2006 compared to $94.9 million for the same period a year ago, a decrease of 14.8%. The decline in sales for the first quarter was due to the loss of sales into the European market from the Company's former Italian subsidiary. As previously disclosed on December 28, 2005, the Company closed its engine manufacturing operations of its wholly owned subsidiary, Tecumseh Europa S.p.A., located in Turin, Italy. The shutdown was accomplished through an Italian form of court-supervised liquidation. The effects of the liquidation were reflected in the Company's 2005 results. The Italian subsidiary was the primary, but not sole, source of engines for sales in the European market. This decline in unit volumes sold into Europe was partially offset by an increase in volumes sold into the United States that were primarily attributable to the placement of the Company's engines on additional product sku's at existing customers. North American engine unit deliveries were approximately 11% greater than the prior year's first quarter. Engine & Power Train business operating loss and related margin for the first quarter of 2006 were $18.5 million and (22.9%), respectively, compared to a loss of $20.9 million and (22.0%) during the same period a year ago. Included in the 2006 loss were AlixPartners' fees of $9.0 million and a $3.5 million gain from the sale of the Douglas, Georgia engine facility. Exclusive of these two items, Page 20 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS operating results improved by approximately 38%. The improvement reflected lower fixed costs associated with plant closures, higher productivity levels in Brazil, the non-recurrence of costs associated with a transmission recall, and higher U.S. volumes, partially offset by higher commodity and transportation costs and a less favorable value of the Brazilian Real. OTHER MATTERS Environmental Matters We are subject to various federal, state and local laws relating to the protection of the environment and are actively involved in various stages of investigation or remediation for sites where contamination has been alleged. (See Note 10 to the financial statements.) Liabilities relating to probable remediation activities are recorded when the costs of such activities can be reasonably estimated based on the facts and circumstances currently known. Difficulties exist estimating the future timing and ultimate costs to be incurred due to uncertainties regarding the status of laws, regulations, levels of required remediation, changes in remediation technology and information available. At March 31, 2006 and December 31, 2005, we had accrued $3.4 million and $3.5 million, respectively, for environmental remediation. As these matters continue toward final resolution, amounts in excess of those already provided may be necessary to discharge our obligations for these sites. Such amounts, depending on their amount and timing, could be material to reported net income in the particular quarter or period in which they are recorded. In addition, the ultimate resolution of these matters, either individually or in the aggregate, could be material to the consolidated financial statements. AlixPartners Engagement We engaged AlixPartners during the third quarter of 2005 to assist in the restructuring plans of the Engine & Power Train business. These plans include focusing on improving profitability and customer service. We believe the participation by AlixPartners will allow the Company to effect this change in a shorter time frame than it otherwise could have achieved. The plan includes eliminating the significant duplicate capacity, among other cost reduction efforts. During the first quarter of 2006, the Company recognized fees of $9.0 million related to the AlixPartners engagement. LIQUIDITY AND CAPITAL RESOURCES Our primary liquidity needs are to fund capital expenditures, service indebtedness, and support working capital requirements. Our principal sources of liquidity are cash flows from operating activities and borrowings under available credit facilities. A substantial portion of our operating income is generated by foreign operations. As a result, we are dependent on the earnings and cash flows of and the combination of dividends, distributions and advances from our foreign operations to provide the funds necessary to meet our obligations in each of our legal jurisdictions. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions. Cash Flow For the first quarter 2006, cash used by operations amounted to $44.5 million, reflecting both an operating loss and net investments in working capital items. This represented an improvement of $22.9 Page 21 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS million compared to the first quarter 2005, primarily as a result of better management of working capital over the respective quarters as sales were more in line with expectations. Cash used in investing activities was $13.0 million in the first quarter 2006 versus $28.7 million for the same period of 2005. Of the overall decrease, $8.7 million was related to lower capital expenditures due to significant new product expansions in India and Brazil in the prior years, and $9.0 million related to proceeds received from the sale of assets during 2006. Included in such sales were the sale of the Company's 7% interest in Kulthorn Kirby Public Company Limited stock for $4.7 million and the sale of the Company's former Douglas, Georgia manufacturing facility for $3.5 million. In addition, during the first quarter, the Company acquired a small Australian-based company, which owned patents related to the manufacturing of certain types of electric motors, which are applicable to both our Electrical Components, and Compressor segments. The entire purchase price was allocated to intangible assets. Cash flows from financing activities provided cash of $24.0 million in the first quarter of 2006 as compared to using $47.4 million in the quarter of 2005. During 2005, we used existing cash balances to prepay $50 million of our then Senior Guaranteed Notes in order to remain within our debt covenants at March 31, 2005. During the first quarter 2006, the remaining balance of these Senior Guaranteed Notes, our Revolving Credit Facility and our outstanding Industrial Revenue Bonds were replaced by a new financing package that included a $275 million First Lien Credit Agreement and a $100 million Second Lien Credit Agreement. Capitalization In addition to cash provided by operating activities, we use a combination of our revolving credit arrangement under our First Lien Credit Agreement, long-term debt under our Second Lien Credit Agreement, and foreign bank debt to fund our capital expenditures and working capital requirements. For the three months ended March 31, 2006 and March 31, 2005, our average outstanding debt balance was $372.5 million and $363.6 million, respectively. The weighted average long-term interest rate, including the effect of hedging activities, was 7.4% and 4.6% for the respective periods. Among other factors, the change in the weighted average, long-term interest rate for the respective periods reflects the increase in the borrowing rate applicable to our new borrowing arrangements of 8.8% as compared to the original interest rate of 4.6% under our Senior Guaranteed Notes. The Company may also utilize long-term financing arrangements in connection with state investment incentive programs. Accounts Receivable Sales Certain of our Brazilian and Asian subsidiaries periodically sell their accounts receivable with financial institutions. Such receivables are factored with recourse to us and, in most cases, are excluded from accounts receivable in our consolidated balance sheets. The amount of sold receivables excluded from our balance sheet was $35.2 million and $32.1 million as of March 31, 2006 and December 31, 2005, respectively. We cannot provide any assurances that these facilities will be available or utilized in the future. Page 22 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Adequacy of Liquidity Sources Historically, cash flows from operations and borrowing capacity under previous credit facilities were sufficient to meet our long-term debt maturities, projected capital expenditures and anticipated working capital requirements; however, the negative results experienced during 2005 deteriorated to the point where we were not able to remain in compliance with the covenants of the Senior Guaranteed Notes and the Revolving Credit Facility as amended as of August 5, 2005. Accordingly, on February 6, 2006, we replaced the Senior Guaranteed Notes, Revolving Credit Agreement and Industrial Revenue Bonds with a new financing package that included a $275 million first Lien Credit Agreement and a $100 million Second Lien Credit Agreement. The agreements provide for security interests in substantially all of the Company's assets and specific financial covenants related to EBITDA, capital expenditures, and fixed charge coverage. Additionally, under the terms of the agreements, no dividends can be paid prior to December 31, 2006 and minimum amounts of credit availability are required before dividends can be paid thereafter. In addition, subsequent to March 31, 2006, proceeds from the sale of Little Giant Pump Company were used to repay portions of the new debt arrangements. Approximately, 63% of the proceeds was applied against the First Lien borrowing and 37% against the Second Lien borrowing. After giving affect to the repayments, the weighted average annual interest rate of these borrowings was 8.8%. The Company continues to monitor its future expected results in relationship to the financial covenants specified under the terms of the respective borrowing arrangements and the amount of availability of funds provided by the computation of borrowing base. Based upon proceeds provided by the sale of Little Giant and the total availability of funds, we believe the Company has sufficient liquidity to complete its turnaround plans; however, should operating performance fall short of plan, the Company may not remain in compliance with the covenants under the agreements, or have sufficient availability of funds. In this scenario, the Company would need to obtain amendments to the borrowing arrangements. SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES Some of our accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are subject to an inherent degree of uncertainty. They are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers, and information available from other outside sources, as appropriate. Actual results in these areas could differ from our estimates. For a discussion of our significant accounting policies and critical accounting estimates, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Significant Accounting Policies and Critical Accounting Estimates," and Note 1, "Accounting Policies," to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2005. There have been no significant changes to our significant accounting policies or critical accounting estimates during the first three months of 2006. Page 23 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Recently Issued Accounting Pronouncements Inventory Costs The Financial Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs -- an amendment of ARB No. 43, Chapter 4." This statement clarifies the requirement that abnormal inventory-related costs be recognized as current-period charges and requires that the allocation of fixed production overheads to inventory conversion costs be based on the normal capacity of the production facilities. The provisions of this statement are to be applied prospectively to inventory costs incurred during fiscal years beginning after June 15, 2005. The Company's adoption of this pronouncement during the first quarter of 2006 did not have a material effect. OUTLOOK Information in this "Outlook" section should be read in conjunction with the cautionary language and discussion of risks included below. The outlook for the remainder of 2006 is subject to the same variables that negatively impacted the Company throughout 2005. Commodity costs, key currency rates, weather and the overall growth rates of the respective economies around the world are all important to future performance. Overall, the Company does not expect these factors to become any more favorable during the year. In fact, certain key commodities, including copper, aluminum, and steel have risen precipitously in recent months. From January 1, 2006 through April 28, 2006, the prices of copper and aluminum have increased approximately 60% and 21%, respectively. The Company expects 2006 results to reflect only those actions it has been taking to reduce costs and, potentially, the benefits of new product introductions, to the extent they are accepted in the market, and has not assumed any improvements from currencies or commodity costs. Given the recent escalation in commodity costs, realization of net improvement in total results, which is largely expected in the latter half of the year, will greatly depend on the Company's ability to pass on to its customers the cost of these sizeable commodity price increases, which are hedged to a lesser extent in the later months of the year. With respect to each of the Company's segments, results in the Compressor Group are expected to lag the results of 2005 throughout the year. The Electrical Components Group, which has demonstrated monthly year over year improvement since August of 2005, is expected to continue its improvement through 2006. The Engine and Power Train business has taken several major steps to eliminate overcapacity and costs that will benefit 2006, with the most significant improvements expected in the fourth quarter of the year. The Company will continue to focus its efforts on improving the profitability and competitiveness of its worldwide operations. It is likely that additional production relocation and consolidation initiatives will take place during 2006 that could have an effect on the consolidated financial position and future results of operations of the Company. In addition, the Company continues to evaluate potential acquisitions, joint ventures and dispositions that could improve the overall competitiveness and financial position of the Company and enhance its product offerings. Such transactions could also have an effect on future results of operations. Page 24 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING STATEMENTS This discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act that are subject to the safe harbor provisions created by that Act. In addition, forward-looking statements may be made orally in the future by or on behalf of us. Forward-looking statements can be identified by the use of terms such as "expects," "should," "may," "believes," "anticipates," "will," and other future tense and forward-looking terminology, or by the fact that they appear under the caption "Outlook." Readers are cautioned that actual results may differ materially from those projected as a result of certain risks and uncertainties, including, but not limited to, i) changes in business conditions and the economy in general in both foreign and domestic markets; ii) the effect of terrorist activity and armed conflict; iii) weather conditions affecting demand for air conditioners, lawn and garden products, portable power generators and snow throwers; iv) the success of our ongoing effort to bring costs in line with projected production levels and product mix; v) financial market changes, including fluctuations in interest rates and foreign currency exchange rates; vi) economic trend factors such as housing starts; vii) emerging governmental regulations; viii) availability and cost of materials, particularly commodities, including steel, copper and aluminum, whose cost can be subject to significant variation; ix) actions of competitors; x) the ultimate cost of resolving environmental and legal matters; xi) our ability to profitably develop, manufacture and sell both new and existing products; xii) the extent of any business disruption that may result from the restructuring and realignment of our manufacturing operations or system implementations, the ultimate cost of those initiatives and the amount of savings actually realized; xiii) potential political and economic adversities that could adversely affect anticipated sales and production in Brazil; xiv) potential political and economic adversities that could adversely affect anticipated sales and production in India, including potential military conflict with neighboring countries; xv) our ability to reduce a substantial amount of costs in the Engine & Power Train group associated with excess capacity, and xvi) the ongoing financial health of major customers. These forward-looking statements are made only as of the date of this report, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. Page 25 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to risk during the normal course of business from credit risk associated with accounts receivable and from changes in interest rates, commodity prices, and foreign currency exchange rates. The exposure to these risks is managed through a combination of normal operating and financing activities which include the use of derivative financial instruments in the form of foreign currency forward exchange contracts and commodity forward purchasing contracts. Fluctuations in commodity prices and foreign currency exchange rates can be volatile, and the Company's risk management activities do not totally eliminate these risks. Consequently, these fluctuations can have a significant effect on results. A discussion of the Company's policies and procedures regarding the management of market risk and the use of derivative financial instruments was provided in its Annual Report on Form 10-K in Item 7A and in Notes 1 and 12 of the Notes to Consolidated Financial Statements. The Company does not utilize financial instruments for trading or other speculative purposes. There have been no changes in these policies or procedures during the first quarter of 2006. The Company is subject to foreign currency exchange exposure for operations whose assets and liabilities are denominated in currencies other than U.S. Dollars. On a normal basis, the Company does not attempt to hedge the foreign currency translation fluctuations in the net investments in its foreign subsidiaries. The Company does, from time to time, enter into short-term forward exchange contracts to sell or purchase foreign currencies at specified rates based on estimated foreign currency cash flows. Company policy allows local management to hedge known receivables or payables and forecasted cash flows up to a year in advance. It is the policy of the Company not to purchase financial and/or derivative instruments for speculative purposes. At March 31, 2006 and December 31, 2005, the Company held foreign currency forward contracts with a total notional value of $127.5 million and $173.0 million, respectively. The Company uses commodity forward purchasing contracts to help control the cost of traded commodities, primarily copper and aluminum, used as raw material in the production of motors, electrical components and engines. Company policy allows local management to contract commodity forwards for a limited percentage of projected raw material requirements up to one year in advance. Commodity contracts at most of the Company's divisions and subsidiaries are essentially purchase contracts designed to fix the price of the commodities during the operating cycle. The Company's practice has been to accept delivery of the commodities and consume them in manufacturing activities. At March 31, 2006 and December 31, 2005, the Company held a total notional value of $33.8 million and $61.8 million, respectively, in commodity forward purchasing contracts. The majority of these contracts were not recorded on the balance sheet as they did not require an initial cash outlay and do not represent a liability until delivery of the commodities is accepted; however, commodity contracts at the Company's French compressor subsidiary are essentially derivative financial instruments designed to hedge the fluctuation in commodity pricing and, as such, are subject to the provisions of SFAS No. 133, as amended by SFAS 149. The Company is subject to interest rate risk, primarily associated with its borrowings of $403 million at March 2006. The Company's $275 million First Lien Credit Agreement and $100 million Second Lien Credit agreement are variable-rate debt. The Company has entered into variable to fixed interest rate swaps with notional amounts totaling $100 million. The Company's remaining borrowings consists of variable-rate borrowings by its foreign subsidiaries. This resulted in 25% of the Company's total debt at March 31, 2006 being fixed-rate. While changes in interest rates impact the fair value of the fixed rate debt, there is no impact to earnings and cash flow because the Company intends to hold these obligations to maturity unless refinancing conditions are favorable. Alternatively, while changes in Page 26 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK interest rates do not affect the fair value of the Company's variable-interest rate debt, they do affect future earnings and cash flows. A 1% increase in interest rates would increase interest expense for the year by approximately $3.0 million. Page 27 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 4 CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its President and Chief Executive Officer and Vice President, Treasurer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the fiscal quarter covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's Disclosure Committee and management, including the President and Chief Executive Officer and the Company's Vice President, Treasurer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon such evaluation, the Company's President and Chief Executive Officer along with the Company's Vice President, Treasurer and Chief Financial Officer concluded that the Company's disclosure controls and procedures which were identified as not effective as of December 31, 2005 because of the material weakness discussed below, have not yet been fully corrected and are, therefore, not effective as of March 31, 2006. In light of the material weakness, the Company performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly state in all material respects our financial condition, results of operations and cash flows for the periods presented. As outlined in management's annual report as of December 31, 2005, the Company did not maintain effective controls over user access rights to certain financial application systems which could affect accounts receivable and revenue, inventory and cost of goods sold, and accounts payable and other financial statement accounts at a number of its locations. Specifically, the control deficiencies demonstrated an inadequate design of access security policies and segregation of duties requirements as well as a lack of independent monitoring of user access to financial application programs and data. Individually, these deficiencies were evaluated as representing a more than remote likelihood that a misstatement that is more than inconsequential, but less than material, could occur; however, when aggregated, these deficiencies could result in a misstatement to the financial statement accounts, resulting in a material misstatement to the consolidated financial statements that would not be prevented or detected. The Company has implemented additional controls to remediate this material weakness. These controls include, but are not limited to, additional levels of reviews of transactions, additional reviews of changes to financial applications and data by those with access to both, and reassignment of responsibilities to provide for better segregation of duties. While specific efforts have been undertaken to address the segregation of duties and system access issues within each of the affected locations, the Company has not completed its process to verify the adequacy of the measures taken and ensure these steps had completely addressed the previously identified concerns. The Company has also made progress with respect to its implementation of a common, global ERP system, which represents the long-term solution to these deficiencies as well as a significant improvement to the overall internal control structure of the Company. The system implementation includes improved controls over access to financial application programs and data, independent Page 28 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 4 CONTROLS AND PROCEDURES monitoring of users having unrestricted access to financial application programs and data, and provides for improved segregation of duties. On April 1, 2006, five of nine locations, scheduled for implementation during 2006, went live. All remaining locations are expected to go live before the end of 2007. Changes In Internal Control Over Financial Reporting As noted above, the Company is in the process of implementing a new global ERP system. Location implementations began in the first quarter of 2005 and the Company's remaining locations are expected to go live during 2006 and 2007. During this time period, there will be significant changes in internal controls over financial reporting at the operations affected. The Company believes it has designed adequate controls into the new system and will begin testing their application at each location after their respective go-live dates. There have been no changes in the Company's internal controls over financial reporting that occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Limitations On The Effectiveness Of Controls And Procedures Management of the Company, including the chief executive officer and chief financial officer, does not expect that the Company's disclosure controls and procedures or internal control over financial reporting will detect or prevent all error and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system's objective will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are detected. In addition, projection of any evaluation of the effectiveness of internal control over financial reporting to future periods is subject to the risk that controls may become inadequate because of changes in condition, or that the degree of compliance with policies and procedures included in such controls may deteriorate. Page 29 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Shareholders of Tecumseh Products Company was held on April 26, 2006. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934, and there was no solicitation in opposition to management's solicitation. (a) All of management's nominees for directors as listed in the proxy statement were elected with the following votes:
Votes Votes Director For Withheld ------------ ------------ Peter M. Banks 4,303,096 353,124 Jon E. Barfield 4,088,770 567,450 Todd W. Herrick 4,626,030 30,190 Albert A. Koch 4,085,855 570,365 David M. Risley 4,088,825 567,395
(b) The selection of PricewaterhouseCoopers to serve as the independent auditor of Tecumseh Products Company was approved.
Votes Votes Votes For Against Abstain ------------ ------------ ------------ Ratification of PricewaterhouseCoopers as independent accountants 4,654,519 497 1,204
ITEM 5. OTHER INFORMATION On May 5, 2006 (effective as of February 6, 2006) we entered into amendments to our First Lien Credit Agreement and Second Lien Credit Agreement to clarify that our Brazilian subsidiaries' practice of selling receivables under programs administered by the Brazilian Central Bank is permitted under each agreement's covenant limiting the indebtedness we can incur. For more detailed information, please see the copies of the amendments filed as exhibits to this report. ITEM 6. EXHIBITS Exhibit (a) Number Description 4.1 Amendment No. 1 to First Lien Credit Agreement dated May 5, 2006 by and among Tecumseh Products Company and certain Lenders and Issuers listed therein and Citicorp USA, Inc. as Administrative Agent and Collateral Agent 4.2 Amendment No. 1 to Second Lien Credit Agreement dated May 5, 2006 by and among Tecumseh Products Company and certain Lenders listed therein and Citicorp USA, Inc. as Administrative Agent and Collateral Agent 10.1 Management Incentive Plan as amended and restated on March 29, 2006, effective as of January 1, 2005 in part and as of January 1, 2006 in part (management contract or compensatory plan or arrangement) 10.2 Executive Deferred Compensation Plan adopted on March 29, 2006, effective as of January 1, 2005 (management contract or compensatory plan or arrangement) Page 30 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART II. OTHER INFORMATION 10.3 Director Retention Phantom Share Plan as amended and restated on March 29, 2006, effective as of January 1, 2005 (management contract or compensatory plan or arrangement) 31.1 Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Page 31 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TECUMSEH PRODUCTS COMPANY ------------------------- (Registrant) Dated: May 9, 2006 BY: /s/ JAMES S. NICHOLSON --------------------- ---------------------------------------- James S. Nicholson Vice President, Treasurer and Chief Financial Officer (on behalf of the Registrant and as principal financial officer) Page 32 Exhibit Index ITEM 6. EXHIBITS Exhibit (a) Number Description 4.1 Amendment No. 1 to First Lien Credit Agreement dated May 5, 2006 by and among Tecumseh Products Company and certain Lenders and Issuers listed therein and Citicorp USA, Inc. as Administrative Agent and Collateral Agent 4.2 Amendment No. 1 to Second Lien Credit Agreement dated May 5, 2006 by and among Tecumseh Products Company and certain Lenders listed therein and Citicorp USA, Inc. as Administrative Agent and Collateral Agent 10.1 Management Incentive Plan as amended and restated on March 29, 2006, effective as of January 1, 2005 in part and as of January 1, 2006 in part (management contract or compensatory plan or arrangement) 10.2 Executive Deferred Compensation Plan adopted on March 29, 2006, effective as of January 1, 2005 (management contract or compensatory plan or arrangement) 10.3 Director Retention Phantom Share Plan as amended and restated on March 29, 2006, effective as of January 1, 2005 (management contract or compensatory plan or arrangement) 31.1 Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. EX-4.1 2 k05154exv4w1.txt AMENDMENT NO. 1 TO FIRST LIEN CREDIT AGREEMENT DATED MAY 5, 2006 EXHIBIT 4.1 AMENDMENT NO. 1 TO FIRST LIEN CREDIT AGREEMENT AMENDMENT NO. 1 (this "Amendment"), dated as of May 5, 2006, among TECUMSEH PRODUCTS COMPANY, a Michigan corporation (the "Borrower"), the Lenders party hereto, and CITICORP USA, INC., as administrative agent and collateral agent for the Lenders and the Issuers (in such capacities, the "Administrative Agent"), amends certain provisions of the FIRST LIEN CREDIT AGREEMENT, dated as of February 6, 2006 (as further amended hereby and as the same may be further amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the financial institutions from time to time party thereto as lenders (the "Lenders"), the financial institutions from time to time party thereto as issuing banks (the "Issuers") and the Administrative Agent. WITNESSETH: WHEREAS, the Borrower's Brazilian Subsidiaries have entered into or may in the future enter into receivables financing transactions whereby the Brazilian Subsidiaries discount or sell, either with or without recourse under Brazilian law, export receivables pursuant to and in accordance with one or more programs administered by the Brazilian Central Bank (the "Brazilian Receivables Transactions"); WHEREAS, as the Brazilian Receivables Transactions may constitute an Off-Balance Sheet Liability, which constitutes Indebtedness, the incurrence of which may be prohibited by Section 8.1 of the Credit Agreement; and WHEREAS, the Borrower has requested, and the Lenders and the Administrative Agent have agreed (i) to amend Section 8.1 of the Credit Agreement to permit the Brazilian Subsidiaries to enter into the Brazilian Receivables Transactions and (ii) to waive any Default or Event of Default that may have arisen in connection with such transaction; NOW, THEREFORE, in consideration of the premises and the mutual covenants and provisions hereinafter contained, the parties hereto hereby agree as follows: 1. DEFINED TERMS. Capitalized terms used herein and not defined herein but defined in the Credit Agreement are used herein as defined in the Credit Agreement. 2. AMENDMENT TO THE CREDIT AGREEMENT. As of the First Amendment Effective Date (as defined in Section 4), the Credit Agreement is hereby amended as follows: (a) Section 1.1 of the Credit Agreement is hereby amended by adding the following defined term in alphabetical order: "Brazilian Receivables Transactions" means a transaction whereby the Brazilian Subsidiaries discount or sell, either with or without recourse under Brazilian law, export receivables pursuant to and in accordance with one or more programs administered by the Brazilian Central Bank. (b) Clause (k) of Section 8.1 of the Credit Agreement is hereby amended in its entirety as follows: (k) Indebtedness (not otherwise permitted under this Section 8.1) incurred (i) in connection with the Brazilian Receivables Transactions; provided, however, that the Dollar Equivalent of the aggregate outstanding principal amount (or equivalent repurchase obligation) of 1 all such Indebtedness incurred pursuant to this clause (i) shall not exceed $150,000,000 at any time and (ii) by any Material Foreign Subsidiary (other than in connection with the Brazilian Receivables Transactions mentioned in clause (i) above); provided, however, that the Dollar Equivalent of the aggregate outstanding principal amount of all such Indebtedness incurred pursuant to this clause (ii) shall not exceed $25,000,000 at any time; and 3. WAIVER. The Lenders party hereto, constituting the Requisite Lenders, hereby waive any Default or Event of Default that may have arisen as a result of the Brazilian Receivables Transactions. 4. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS AMENDMENT. This Amendment shall become effective, as of February 6, 2006, on the date (the "First Amendment Effective Date") when the Administrative Agent shall have received all of the following, each of which shall be in form and substance satisfactory to the Administrative Agent: (a) this Amendment, executed by the Borrower, the Administrative Agent and the Requisite Lenders; (b) the Consent of Guarantors (attached hereto), executed by each Guarantor; and (c) such additional documentation as the Administrative Agent or the Requisite Lenders may reasonably require. 5. REPRESENTATIONS AND WARRANTIES. On and as of the date hereof, and as of the First Amendment Effective Date, after giving effect to this Amendment, the Borrower hereby represents and warrants to the Lenders as follows: (a) Each of the representations and warranties contained in Article IV of the Credit Agreement, the other Loan Documents or in any certificate, document or financial or other statement furnished at any time under or in connection therewith are true and correct in all material respects on and as of the date as if made on and as of such date, except to the extent that such representations and warranties specifically relate to a specific date, in which case such representations and warranties shall be true and correct in all material respects as of such specific date; and (b) No Default or Event of Default has occurred and is continuing. 6. CONTINUING EFFECT; NO OTHER AMENDMENTS. Except as expressly amended hereby, all of the terms and provisions of the Credit Agreement and the other Loan Documents are and shall remain in full force and effect. The amendments and consents contained herein shall not constitute an amendment or a waiver of any other provision of the Credit Agreement or the other Loan Documents or for any other purpose except as expressly set forth herein. 7. LOAN DOCUMENTS. This Amendment is deemed to be a "Loan Document" for the purposes of the Credit Agreement. 8. COSTS AND EXPENSES. The Borrower agrees to pay on demand all reasonable and documented out-of-pocket costs and expenses of the Administrative Agent in connection with the preparation, execution and delivery of this Amendment and other instruments and documents to be 2 delivered pursuant hereto, including the reasonable and documented fees and out-of-pocket expenses of counsel for the Administrative Agent with respect thereto. 9. GOVERNING LAW; COUNTERPARTS; MISCELLANEOUS. (a) This Amendment shall be governed by, and construed and interpreted in accordance with, the law of the State of New York. (b) This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. (c) Section captions used in this Amendment are for convenience only and shall not affect the construction of this Amendment. (d) From and after the First Amendment Effective Date, all references in the Credit Agreement to the "Agreement" shall be deemed to be references to such Agreement as modified hereby and this Amendment and the Credit Agreement shall be read together and construed as a single instrument. [signature pages follow] 3 IN WITNESS WHEREOF, the undersigned parties have executed this Amendment No. 1 to the Credit Agreement to be effective for all purposes as of the First Amendment Effective Date. Borrower TECUMSEH PRODUCTS COMPANY as Borrower By: /s/ JAMES S. NICHOLSON ------------------------------------ Name: James S. Nicholson Title: Vice President, Treasurer & CFO Administrative Agent CITICORP USA, INC., as Administrative Agent, Collateral Agent, Dollar Swing Loan Lender, Issuer and as a Lender By: /s/ SEBASTIEN DELASNERI ------------------------------------ Name: Sebastien Delasneri Title: Vice President Lenders CITICORP USA, INC., as Lender By: /s/ SEBASTIEN DELASNERI ------------------------------------ Name: Sebastien Delasneri Title: Vice President JPMORGAN CHASE BANK, N.A. as Thai Swing Loan Lender and as a Lender By: /s/ JEFFREY W. SWARTZ ------------------------------------ Name: Jeffrey W. Swartz Title: Vice President BANK OF AMERICA, N.A. as Documentation Agent and Lender By: /s/ EDWARD M. BARTKOWSKI ------------------------------------ Name: Edward M. Bartkowski Title: Senior Vice President [SIGNATURE PAGE TO AMENDMENT NO. 1 TO FIRST LIEN CREDIT AGREEMENT] LASALLE BANK MIDWEST N.A. as a Lender By: /s/ GREG GENTRY ------------------------------------ Name: Greg Gentry Title: First Vice President COMERICA BANK as a Lender By: /s/ CATHERINE MEISTER YOUNG ------------------------------------ Name: Catherine Meister Young Title: Vice President WELLS FARGO FOOTHILL, LLC as a Lender By: /s/ JUAN BARRERA ------------------------------------ Name: Juan Barrera Title: Vice President ABLECO FINANCE LLC on behalf of itself and its affiliates as a Lender By: /s/ KEVIN GENDA ------------------------------------ Name: Kevin Genda Title: Senior Vice President NORTH FORK BUSINESS CAPITAL CORPORATION as a Lender By: /s/ ARI KAPLAN ------------------------------------ Name: Ari Kaplan Title: Vice President GENERAL ELECTRIC CAPITAL CORPORATION as a Lender By: /s/ DWAYNE COKER ------------------------------------ Name: Dwayne Coker Title: Duly Authorized Signatory [SIGNATURE PAGE TO AMENDMENT NO. 1 TO FIRST LIEN CREDIT AGREEMENT] CONSENT OF GUARANTORS Dated as of May 5, 2006 Each of the undersigned companies, as a Guarantor under the Guaranty dated February 6, 2006 (the "Guaranty") in favor of the Secured Parties under the Credit Agreement referred to in the foregoing Amendment, hereby consents to such Amendment and hereby confirms and agrees that notwithstanding the effectiveness of such Amendment, the Guaranty is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects, except that, on and after the effectiveness of such Amendment, each reference in the Guaranty to the "Credit Agreement", "thereunder", "thereof" or words of like import shall mean and be a reference to the Credit Agreement, as amended by such Amendment. [Signature pages follow] IN WITNESS WHEREOF, the parties hereto have consented to this Amendment No. 1, as of the date first written above. CONVERGENT TECHNOLOGIES INTERNATIONAL, INC. TECUMSEH TRADING COMPANY EVERGY, INC. FASCO INDUSTRIES, INC. MANUFACTURING DATA SYSTEMS, INC. M. P. PUMPS, INC. TECUMSEH CANADA HOLDING COMPANY TECUMSEH COMPRESSOR COMPANY TECUMSEH POWER COMPANY VON WEISE GEAR COMPANY as U.S. Guarantors By: /s/ JAMES S. NICHOLSON --------------------------------------- Name: James S. Nicholson Title: Vice President and Treasurer EUROMOTOR, INC. as U.S. Guarantor By: /s/ JAMES S. NICHOLSON --------------------------------------- Name: James S. Nicholson Title: Vice President HAYTON PROPERTY COMPANY, LLC TECUMSEH DO BRASIL USA, LLC as U.S. Guarantors By: /s/ JAMES S. NICHOLSON --------------------------------------- Name: James S. Nicholson Title: President TECUMSEH PRODUCTS OF CANADA LIMITED, as Canadian Guarantor By: /s/ JAMES S. NICHOLSON --------------------------------------- Name: James S. Nicholson Title: Vice President FASCO MOTORS COMPANY, as Canadian Guarantor By: /s/ JAMES S. NICHOLSON --------------------------------------- Name: James S. Nicholson Title: Vice President [SIGNATURE PAGE TO GUARANTOR CONSENT TO AMENDMENT NO. 1 TO FIRST LIEN CREDIT AGREEMENT] EX-4.2 3 k05154exv4w2.txt AMENDMENT NO. 1 TO SECOND LIEN CREDIT AGREEMENT DATED MAY 5, 2006 EXHIBIT 4.2 AMENDMENT NO. 1 TO SECOND LIEN CREDIT AGREEMENT AMENDMENT NO. 1 (this "Amendment"), dated as of May 5, 2006, among TECUMSEH PRODUCTS COMPANY, a Michigan corporation (the "Borrower"), the Lenders party hereto, and CITICORP USA, INC., as administrative agent and collateral agent for the Lenders (in such capacities, the "Administrative Agent"), amends certain provisions of the SECOND LIEN CREDIT AGREEMENT, dated as of February 6, 2006 (as further amended hereby and as the same may be further amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the financial institutions from time to time party thereto as lenders (the "Lenders") and the Administrative Agent. WITNESSETH: WHEREAS, the Borrower's Brazilian Subsidiaries have entered into or may in the future enter into receivables financing transactions whereby the Brazilian Subsidiaries discount or sell, either with or without recourse under Brazilian law, export receivables pursuant to and in accordance with one or more programs administered by the Brazilian Central Bank (the "Brazilian Receivables Transactions"); WHEREAS, as the Brazilian Receivables Transactions may constitute an Off-Balance Sheet Liability, which constitutes Indebtedness, the incurrence of which may be prohibited by Section 8.1 of the Credit Agreement; and WHEREAS, the Borrower has requested, and the Lenders and the Administrative Agent have agreed (i) to amend Section 8.1 of the Credit Agreement to permit the Brazilian Subsidiaries to enter into the Brazilian Receivables Transactions and (ii) to waive any Default or Event of Default that may have arisen in connection with such transaction; NOW, THEREFORE, in consideration of the premises and the mutual covenants and provisions hereinafter contained, the parties hereto hereby agree as follows: 1. DEFINED TERMS. Capitalized terms used herein and not defined herein but defined in the Credit Agreement are used herein as defined in the Credit Agreement. 2. AMENDMENT TO THE CREDIT AGREEMENT. As of the First Amendment Effective Date (as defined in Section 4), the Credit Agreement is hereby amended as follows: (a) Section 1.1 of the Credit Agreement is hereby amended by adding the following defined term in alphabetical order: "Brazilian Receivables Transactions" means a transaction whereby the Brazilian Subsidiaries discount or sell, either with or without recourse under Brazilian law, export receivables pursuant to and in accordance with one or more programs administered by the Brazilian Central Bank. (b) Clause (k) of Section 8.1 of the Credit Agreement is hereby amended in its entirety as follows: (k) Indebtedness (not otherwise permitted under this Section 8.1) incurred (i) in connection with the Brazilian Receivables Transactions; provided, however, that the Dollar Equivalent of the aggregate outstanding principal amount (or equivalent repurchase obligation) of all such Indebtedness incurred pursuant to this clause (i) shall not exceed $150,000,000 at any 1 time and (ii) by any Material Foreign Subsidiary (other than in connection with the Brazilian Receivables Transactions mentioned in clause (i) above); provided, however, that the Dollar Equivalent of the aggregate outstanding principal amount of all such Indebtedness incurred pursuant to this clause (ii) shall not exceed $25,000,000 at any time; and 3. WAIVER. The Lenders party hereto, constituting the Requisite Lenders, hereby waive any Default or Event of Default that may have arisen as a result of the Brazilian Receivables Transactions. 4. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS AMENDMENT. This Amendment shall become effective, as of February 6, 2006, on the date (the "First Amendment Effective Date") when the Administrative Agent shall have received all of the following, each of which shall be in form and substance satisfactory to the Administrative Agent: (a) this Amendment, executed by the Borrower, the Administrative Agent and the Requisite Lenders; (b) the Consent of Guarantors (attached hereto), executed by each Guarantor; and (c) such additional documentation as the Administrative Agent or the Requisite Lenders may reasonably require. 5. REPRESENTATIONS AND WARRANTIES. On and as of the date hereof, and as of the First Amendment Effective Date, after giving effect to this Amendment, the Borrower hereby represents and warrants to the Lenders as follows: (a) Each of the representations and warranties contained in Article IV of the Credit Agreement, the other Loan Documents or in any certificate, document or financial or other statement furnished at any time under or in connection therewith are true and correct in all material respects on and as of the date as if made on and as of such date, except to the extent that such representations and warranties specifically relate to a specific date, in which case such representations and warranties shall be true and correct in all material respects as of such specific date; and (b) No Default or Event of Default has occurred and is continuing. 6. CONTINUING EFFECT; NO OTHER AMENDMENTS. Except as expressly amended hereby, all of the terms and provisions of the Credit Agreement and the other Loan Documents are and shall remain in full force and effect. The amendments and consents contained herein shall not constitute an amendment or a waiver of any other provision of the Credit Agreement or the other Loan Documents or for any other purpose except as expressly set forth herein. 7. LOAN DOCUMENTS. This Amendment is deemed to be a "Loan Document" for the purposes of the Credit Agreement. 8. COSTS AND EXPENSES. The Borrower agrees to pay on demand all reasonable and documented out-of-pocket costs and expenses of the Administrative Agent in connection with the preparation, execution and delivery of this Amendment and other instruments and documents to be delivered pursuant hereto, including the reasonable and documented fees and out-of-pocket expenses of counsel for the Administrative Agent with respect thereto. 2 9. GOVERNING LAW; COUNTERPARTS; MISCELLANEOUS. (a) This Amendment shall be governed by, and construed and interpreted in accordance with, the law of the State of New York. (b) This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. (c) Section captions used in this Amendment are for convenience only and shall not affect the construction of this Amendment. (d) From and after the First Amendment Effective Date, all references in the Credit Agreement to the "Agreement" shall be deemed to be references to such Agreement as modified hereby and this Amendment and the Credit Agreement shall be read together and construed as a single instrument. [signature pages follow] 3 IN WITNESS WHEREOF, the undersigned parties have executed this Amendment No. 1 to the Credit Agreement to be effective for all purposes as of the First Amendment Effective Date. Borrower TECUMSEH PRODUCTS COMPANY as Borrower By: /s/ JAMES S. NICHOLSON ------------------------------------ Name: James S. Nicholson Title: Vice President, Treasurer & CFO Administrative Agent CITICORP USA, INC., as Administrative Agent and Collateral Agent By: /s/ SEBASTIEN DELASNERIE ------------------------------------ Name: Sebastien Delasnerie Title: Vice President Lenders ABLECO FINANCE LLC, on behalf of itself and its affiliates as a Lender By: /s/ KEVIN GENDA ------------------------------------ Name: Kevin Genda Title: Senior Vice President JPMORGAN CHASE BANK, N.A., as a Lender By: /s/ JEFFREY W. SWARTZ ------------------------------------ Name: Jeffrey W. Swartz Title: Vice President WHITNEY PRIVATE DEBT FUND, L.P., as a Lender By: Whitney Private Debt GP, LLC, Its General Partner By: /s/ KEVIN J. CURLEY ------------------------------------ Name: Kevin J. Curley Title: Attorney-in-Fact [SIGNATURE PAGE TO AMENDMENT NO. 1 TO FIRST LIEN CREDIT AGREEMENT] NORTH AMERICAN COMPANY FOR LIFE AND HEALTH INSURANCE as a Lender By: /s/ KAITLIN TRINH ------------------------------------ Name: Kaitlin Trinh Title: Director MIDLAND NATIONAL LIFE INSURANCE COMPANY as a Lender By: /s/ KAITLIN TRINH ------------------------------------ Name: Kaitlin Trinh Title: Director ORPHEUS FUNDING LLC as a Lender By: /s/ KAITLIN TRINH ------------------------------------ Name: Kaitlin Trinh Title: Director SANDS POINT FUNDING LTD. as a Lender By: /s/ KAITLIN TRINH ------------------------------------ Name: Kaitlin Trinh Title: Director KENNECOTT FUNDING LTD. as a Lender By: /s/ KAITLIN TRINH ------------------------------------ Name: Kaitlin Trinh Title: Director GREEN LANE CLO LTD. as a Lender By: /s/ KAITLIN TRINH ------------------------------------ Name: Kaitlin Trinh Title: Director CYRUS OPPORTUNITIES MASTER FUND II, LTD, as a Lender By: /s/ ROBERT A. NISI ------------------------------------ Name: Robert A. Nisi Title: Partner, Chief Operating Officer [SIGNATURE PAGE TO AMENDMENT NO. 1 TO SECOND LIEN CREDIT AGREEMENT] CONSENT OF GUARANTORS Dated as of May 5, 2006 Each of the undersigned companies, as a Guarantor under the Guaranty dated February 6, 2006 (the "Guaranty") in favor of the Secured Parties under the Credit Agreement referred to in the foregoing Amendment, hereby consents to such Amendment and hereby confirms and agrees that notwithstanding the effectiveness of such Amendment, the Guaranty is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects, except that, on and after the effectiveness of such Amendment, each reference in the Guaranty to the "Credit Agreement", "thereunder", "thereof" or words of like import shall mean and be a reference to the Credit Agreement, as amended by such Amendment. [Signature pages follow] IN WITNESS WHEREOF, the parties hereto have consented to this Amendment No. 1, as of the date first written above. CONVERGENT TECHNOLOGIES INTERNATIONAL, INC. TECUMSEH TRADING COMPANY EVERGY, INC. FASCO INDUSTRIES, INC. MANUFACTURING DATA SYSTEMS, INC. M. P. PUMPS, INC. TECUMSEH CANADA HOLDING COMPANY TECUMSEH COMPRESSOR COMPANY TECUMSEH POWER COMPANY VON WEISE GEAR COMPANY as U.S. Guarantors By: /s/ JAMES S. NICHOLSON ------------------------------------ Name: James S. Nicholson Title: Vice President and Treasurer EUROMOTOR, INC. as U.S. Guarantor By: /s/ JAMES S. NICHOLSON ------------------------------------ Name: James S. Nicholson Title: Vice President HAYTON PROPERTY COMPANY, LLC TECUMSEH DO BRASIL USA, LLC as U.S. Guarantors By: /s/ JAMES S. NICHOLSON ------------------------------------ Name: James S. Nicholson Title: President TECUMSEH PRODUCTS OF CANADA LIMITED, as Canadian Guarantor By: /s/ JAMES S. NICHOLSON ------------------------------------ Name: James S. Nicholson Title: Vice President FASCO MOTORS COMPANY, as Canadian Guarantor By: /s/ JAMES S. NICHOLSON ------------------------------------ Name: James S. Nicholson Title: Vice President [SIGNATURE PAGE TO GUARANTOR CONSENT TO AMENDMENT NO. 1 TO SECOND LIEN CREDIT AGREEMENT] EX-10.1 4 k05154exv10w1.txt MANAGEMENT INCENTIVE PLAN EXHIBIT 10.1 TECUMSEH PRODUCTS COMPANY MANAGEMENT INCENTIVE PLAN The following document sets forth the terms of the Plan as amended and restated effective January 1, 2005 and also includes identified provisions taking effect January 1, 2006. I. Purposes of the Plan The purposes of the Tecumseh Products Company Management Incentive Plan (the "Plan") are to provide a means to attract, reward and retain strong management, to encourage teamwork among members of management and excellence in the performance of their individual responsibilities, and to align the interests of key managers participating in the Plan with the interests of shareholders by offering an incentive compensation vehicle that is based upon the growth in shareholders' equity and the value and profitability of Tecumseh Products Company. II. Definitions In this Plan, the following terms shall have the meanings set forth below: (a) "Account" means the cumulative record of an Employee's Phantom Share allocations as adjusted in the manner described in the Plan. The cash portion of a Phantom Share allocation for 2000 through 2005 shall be fully vested as of the Allocation Date and shall not become part of an Employee's Account. (b) "Allocation Date" means the December 31st as of which a Phantom Share allocation is made on behalf of an Employee pursuant to this Plan. (c) "Board" means the Board of Directors of the Company. (d) "Cash Award" means the portion of an award paid in cash for 2006 and subsequent calendar years. (e) "Committee" means the Governance, Compensation and Nominating Committee of the Board, or such other committee as the Board may subsequently appoint to administer the Plan. All the Directors serving on the Committee at any given time shall be "Non-Employee Directors", as that term is used in Securities and Exchange Commission Rule 16b-3 (or any successor regulation) as in effect at such time ("Rule 16b-3"), and the number of Directors serving on the Committee at any given time shall be no less than the minimum number then required by Rule 16b-3. (f) "Class A Common Stock" means the Class A Common Stock, $1.00 par value per share, of the Company. (g) "Class B Common Stock" means the Class B Common Stock, $1.00 par value per share, of the Company. (h) "Company" means Tecumseh Products Company, a Michigan corporation. (i) "Employee" means a person who is employed by an Employer and who has been selected by the Committee to participate in the Plan. (j) "Employer" means the Company, any of its present subsidiary corporations, any corporation which becomes a controlled subsidiary of the Company provided the Committee determines to extend coverage thereto, and/or any successor(s) to such corporation(s). The Committee shall be deemed to have extended coverage to a subsidiary if an employee of such subsidiary is given an allocation or award under this Plan. (k) "Phantom Share" means an allocation credited to an Employee's Account and maintained in such Account together with any prior or subsequent allocations made on behalf of such Employee. The value of an Employee's Account shall be adjusted from time to time, as provided in the Plan. An allocation of Phantom Shares shall confer only such rights as are specified in the Plan. Employees who receive Phantom Share allocations shall not (as a consequence of such allocations) be treated as shareholders under the Articles of Incorporation or By-Laws of the Company or under applicable law. (l) "Phantom Share allocation" or "allocation" includes, where the context so requires, the cash portion of an allocation awarded for Class Years 2000 through 2005, as provided by Article VI. (m) Termination of Employment means the date upon which an Employee has a separation from service determined under the Separation From Service rules and procedures described in attached Exhibit A. All Plan references to voluntary or involuntary termination of employment shall be interpreted to refer to a Termination of Employment as so defined. -2- (n) The following terms are defined elsewhere in the Plan: "Class Year"........................ Art. VI(a); "Company Change in Control"......... Art. IX; "Reason"............................ Art. VII(a).
III. Factors to be Considered in Phantom Share Allocations and Post-2005 Cash Awards In making any decisions as to the Employees to whom allocations and/or awards shall be made and as to the amount of each allocation or award, the Committee shall take into account such factors as the duties and responsibilities of the respective Employees, their present and potential contributions to the success of the Employer, and the financial success of the Company during the year. Not later than the end of March of each calendar year with respect to which allocations or awards may be made, the Committee shall establish targeted group allocations and awards and targeted financial results, and may establish targeted individual allocations and awards, for that year. Actual allocations and awards for such calendar year shall be based on the attainment of specified types and combinations of performance measurement criteria, which may differ as to various Employees or classes thereof, and from time to time. Additionally, effective January 1, 2006, criteria for Phantom Share allocations may differ from criteria for Cash Awards. Such criteria may include, without limitation, (i) the attainment of certain performance levels by, and measured against objectives of, the Company, the individual Employee, and/or a group of Employees, (ii) net income growth, (iii) increases in operating efficiency, (iv) completion of specified strategic actions, (v) the recommendation of the Chief Executive Officer, and (vi) such other factors as the Committee shall deem important in connection with accomplishing the purposes of the Plan, provided that any relevant decisions shall be made in its own discretion solely by the Committee. However, no Employee or group of Employees shall receive an actual Phantom Share allocation or Cash Award greater than the applicable targeted individual allocation or award (if any) or group allocation or award for a given year, unless due to extraordinary circumstances the Committee deems it appropriate (in its sole discretion) to make allocations and/or awards to one or more Employees or groups of Employees in excess of his/their targeted individual allocation(s) or award(s). The maximum aggregate number of Phantom Shares that may be awarded and allocated to the accounts of all Employees with respect to any calendar year shall be equal to two percent (2%) of the number of shares of Class A Common Stock which are issued an outstanding on the last day of such calendar year. Such maximum shall not apply to Phantom Shares resulting from deemed -3- reinvestment of amounts corresponding to dividends, pursuant to Article IV, subsection (a)(ii). IV. Valuation of Phantom Share Accounts; Accounting Treatment (a) Except as otherwise provided in (b) below or in Article IX, Accounts shall be valued as follows: (i) Each Phantom Share allocation shall have an initial dollar value at which it shall be credited to the Employee's Account as of the last day of the calendar year for which such allocation was made. Such allocation shall then be converted into a share amount corresponding to the number of whole and fractional (to the nearest hundredth) shares of Class A Common Stock that could be purchased at the price determined as of such date in the manner described in (b) below. (ii) Each Phantom Share, which has been allocated as of the record date applicable to a declared dividend on Class A Common Stock, shall be credited with the amount of any such per-share cash dividend paid to Class A shareholders, and the total amount credited shall thereupon be deemed reinvested in additional Phantom Shares at the Class A Common Stock's closing price on the date said dividend is paid. Any such dividends (and/or additional dividends thereon) shall vest when and only if the associated Phantom Shares vest. (b) The price of Phantom Shares comprising the Account (adjusted pursuant to (c) below) shall be computed as the average of the closing prices of Class A Common Stock on the first trading day of each of the eleven calendar months which precede or coincide with the valuation date; provided that if any stock splits, stock-on-stock dividends or other capital adjustments have occurred during the period beginning with the first such trading day and ending on the valuation date, then the closing prices used in the averaging computation shall also be adjusted as the Committee, in the reasonable exercise of its discretion, believes to be equitable and appropriate. As used in the preceding sentence, a "trading day" is one for which such sale prices are reported on the NASDAQ national market reporting system. (c) If, between the time an award is made and the date an Account is paid, any change shall occur in the market price of the Company's Class A Common Stock outstanding as the result of any stock split or any stock-on-stock dividend, then the number of Phantom Shares in the Account shall be adjusted in proportion to the adjustment in the price of Class A Common Stock. In the event of any other change in the number or character of the outstanding securities of the Company as the result of any recapitalization, -4- reclassification, merger or any analogous change in capitalization or of any distribution to holders of the Company's Class A Common Stock other than a cash or stock dividend, the Committee shall make such adjustments, if any, in the number and/or kind of any Phantom Shares then allocated to the Account or thereafter becoming allocated to the Account as the Committee, in the reasonable exercise of its discretion, believes to be equitable and appropriate. V. Terms and Conditions of Allocations to Accounts Each Phantom Share allocation to the Account of an Employee shall be subject to the following terms and conditions: (a) Each allocation shall continue in effect from the applicable Allocation Date until subsequently paid or forfeited, as hereinafter provided. (b) The Company shall maintain records for each Employee's Account and shall furnish him a summary thereof upon request, but not more frequently than once a year. (c) Except as provided herein with respect to transfers to the Company or another Employer, an Employee's interest in his Account and in the cash portion of any allocation shall not be transferable other than by will or the laws of descent and distribution. During the Employee's lifetime, an Account and the cash portion of any pre-2006 allocation shall be paid only to the Employee, except that, in the event of the Employee's incapacity, the Committee may permit payment to the Employee's guardian or legal representative. The Committee also shall permit the payment, upon the Employee's death, to one or more beneficiaries designated by the Employee in a manner authorized by the Committee, and otherwise to his estate. VI. Vesting and Payment (a) Each allocation or award made by the Company shall be assigned a "Class Year" corresponding to the calendar year in which the Allocation Date occurs. Class Years 1994 -- 1999 -- Phantom Share Allocations for Class Years 1994 -- 1999 (both inclusive) shall be 0% vested in the year for which they are made, and shall not become vested until the fifth December 31 following the end of the Class Year. EXAMPLE: Allocations made with respect to Class Year 1999 shall be 0% vested when allocated, 0% vested on -5- December 31, 2000, 0% vested on December 31, 2001, etc., but shall become 100% vested on December 31, 2004. Class years 2000 -- 2005 -- Allocations for Class Years 2000 and thereafter shall be vested and paid as follows: One-third of each Employee's allocation shall be fully vested as of December 31 in the Class Year for which such allocation is made, one-third of such allocation shall become vested as of the third December 31 following the end of such Class Year and the remaining one-third of such allocation shall become vested as of the fifth December 31 following the end of such Class Year. EXAMPLE: Allocations made with respect to Class Year 2000 shall be one-third vested as of December 31, 2000, one-third vested on December 31, 2003, and the remaining one-third vested on December 31, 2005. Within 60 days following December 31st of 2000 through 2005, the one-third cash portion of each active Employee's allocation, which became vested at the close of the Class Year then ended in accordance with Article VI(a), shall be paid. Class years 2006 and thereafter -- Allocations and awards for Class Years 2006 and thereafter shall be vested and paid as follows: Each Employee's Cash Award shall become fully vested as of December 31 in the Class Year for which such award is made, and shall be paid in cash within 60 days following the close of such Class Year. The Employee's Phantom Share allocation shall be vested as follows: one-half of such allocation shall become vested as of the third December 31st following the end of such Class Year and the remaining one-half of such allocation shall become vested as of the fifth December 31st following the end of such Class Year. EXAMPLE: Phantom Share allocations made with respect to Class Year 2006 shall be one-half vested as of December 31, 2009 and the remaining one-half vested on December 31, 2011. (b) Within 60 days following each December 31st, the portion of each Employee's Phantom Share award for any prior Class Year, which became vested at the close of the Class Year then ended in accordance with Article VI(a), shall be valued in accordance with Article IV(b) and paid. -6- (c) The provisions of Article VII shall generally govern the forfeiture of allocations or awards which are not vested and, in certain circumstances, even those which are otherwise fully vested. Except as otherwise provided in Article VII, allocations to the Account of an Employee shall not be forfeited during his continued employment with an Employer. VII. Retirement and Other Termination of Employment (a) If the employment of an Employee to whom Phantom Share allocations or Cash Awards have been made shall be terminated by his Employer for any Reason denominated below (which shall be determined by the Committee), his entire Account whether or not to any extent otherwise vested shall be forfeited simultaneously with such termination. Such "Reason", for the sole purpose of determining whether an Employee's otherwise vested benefits are to be forfeited, shall be deemed to exist where - (i) The Employee breaches any material written rules, regulations or policies of the Employer now existing or hereafter arising which are uniformly applied to all employees of the Employer or which rules, regulations and policies are promulgated for general application to executives, officers or directors of the Employer; or (ii) The Employee willfully and repeatedly fails to substantially perform the duties of his employment (other than any such failure resulting from his incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to him by his immediate supervisor, which demand specifically identifies the manner in which the supervisor believes that the Employee has not substantially performed his duties; or (iii) The Employee is repeatedly or habitually intoxicated or under the influence of drugs while on the premises of the Employer or while performing his employment duties, after receiving written notice thereof from the Employer, such that the Committee determines in good faith that the Employee is impaired in performing the duties of his employment; or (iv) The Employee is convicted of a felony under state or federal law, or commits a crime involving moral turpitude; or -7- (v) The Employee embezzles any property belonging to the Employer such that he may be subject to criminal prosecution therefor or the Employee intentionally and materially injures the Employer, its personnel or its property. (b) Except as provided in Article VII(c) regarding retirement, if an Employee to whom Phantom Share allocations or Cash Awards have been made shall (i) voluntarily terminate his employment with his Employer or (ii) shall be terminated by his Employer for no reason or for any reason whatsoever (other than for one or more Reasons specified in Article VII(a) and otherwise than as provided for in Article VIII hereof), or (iii) shall separate from service with the Company as determined under the Separation From Service rules and procedures described in Exhibit A, then his Account shall be forfeited according to the vesting schedule of Article VI(a), except for that portion (if any) which the Committee, in its sole and absolute discretion, directs to be vested, subject to any conditions, terms, restrictions or limitations that the Committee shall in its discretion impose. However, the Committee shall not direct vesting of amounts that would otherwise be forfeited after December 31, 2004 unless (and to the extent) permitted by Section 409A of the Internal Revenue Code of 1986, as it may be amended or superseded (the "Code") and/or by regulations (or other guidance) issued under Section 409A. Effective January 1, 2006, amounts so vested in the discretion of the Committee shall be valued and paid within 60 days after the Committee so directs. Additionally, in the event of such a termination, the Committee (in its sole and absolute discretion and upon whatever conditions it determines appropriate) may direct a Phantom Share allocation and/ or a Cash Award to the terminating Employee for the calendar year which includes his date of Termination of Employment. Such an allocation or award shall be fully vested and shall be valued and paid within 60 days after the Committee so directs. Any direction by the Committee pursuant to the foregoing discretionary authority shall be given by the end of the calendar year which includes the termination date (or if termination occurs on or after December 15 of a calendar year, such direction shall be given by January 15 of the following calendar year). (c) Notwithstanding Article VI(a), an Employee's Phantom Share allocations shall be 100% vested as of the first day of the month that includes his Termination of Employment immediately prior -8- to commencing normal or early retirement benefits under the pension or retirement plan sponsored by the Company or by his Employer. However, such vested allocations shall only become payable following the date they would have otherwise vested under Article VI, i.e. within 60 days after the relevant December 31st following each Allocation Date. Additionally, in the event of retirement as described in the preceding sentence, the Committee (in its sole and absolute discretion and upon whatever conditions it determines appropriate) may make a Phantom Share allocation and/or a Cash Award to the terminating Employee for the calendar year which includes his last day of active work immediately prior to retirement. Such an allocation or award shall be fully vested at the date of retirement but shall only become payable following the date it would have otherwise vested under Article VI, i.e. within 60 days after the relevant December 31st following each Allocation Date. (d) Prior to any payment pursuant to (b) or (c), above, the Employee's Account shall be adjusted as provided in Article IV. (e) So long as the Employee shall continue to be an employee of an Employer, his Account shall not be affected by any change of duties or position. Nothing in the Plan shall confer upon any Employee any right to continue in the employ of his or any other Employer or to receive future Cash Awards or Phantom Share allocations or accruals thereon nor shall anything in the Plan interfere with the right of the Employer to terminate an Employee's employment at any time whether or not for cause. The adoption of the Plan shall not constitute a contract between the Company or its subsidiaries and any Employee. No Employee shall receive any right to be granted an award hereunder nor shall any such award be considered as compensation under any other employee benefit plan of the Company except as otherwise determined by the Committee. (f) Any payment or distribution to an Employee under this Plan which is not claimed by the Employee, his beneficiary, or other person entitled thereto within three years after becoming payable shall be forfeited and canceled and shall remain with the Company, and no other person shall have any right thereto or interest therein. The Company shall not have any duty to give notice that amounts are payable under this Plan to any person other than the Employee and his beneficiary (or contingent beneficiary) in the event there are benefits payable after the Employee's death. (g) Notwithstanding other provisions of this Article VII, any distribution to a "specified employee" must be delayed at least six months following Termination of Employment (or until death, if earlier). (A "specified employee" is one who (i) owns more than 5 percent of the stock of the Company; (ii) owns more than 1 percent of the stock of the Company and has compensation from the Company -9- in excess of $150,000 a year (not indexed); or (iii) is an officer of the Company with compensation in excess of $130,000 a year (indexed)). VIII. Death, Disability or Incapacity of an Employee (a) Any payment or distribution due to an Employee under this plan on account of death or on account of Termination of Employment for disability or retirement where the terminated Employee dies before receiving the full amount to which he is entitled hereunder, shall be made to the beneficiary and/or contingent beneficiary designated by the Employee to receive such payments in the event of his death, in a written designation of beneficiary filed with the Company prior to his death. In the event of the Employee's failure to file such a designation or its ineffectiveness for any reason such payments shall be made to the Employee's surviving spouse, or if the Employee is not survived by a spouse, in equal shares to his then surviving issue, per stirpes, or if he is not survived by any issue, then to the Employee's estate. (b) Upon the total and permanent disability of an Employee to whom Phantom Shares or cash have been allocated, as determined solely by the Committee, his Account shall become fully vested and shall be valued in accordance with Article IV(b) as of the end of the year in which the Committee determines that the Employee is totally and permanently disabled; payment shall be made within 60 days after that year-end. Additionally, the Committee (in its sole and absolute discretion and upon whatever conditions it determines appropriate) may make a Phantom Share allocation and/or a Cash Award to the Employee for the calendar year which includes his date of Termination of Employment due to total and permanent disability. For these purposes, "total and permanent disability" means any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months -- (i) which renders an Employee unable to engage in any substantial gainful activity or (ii), which enables an Employee to receive income replacement benefits for a period of not less than 3 months under an accident and health plan covering Employees of the Employee's Employer, provided that this definition shall be interpreted in accordance with Code Section 409A(a)(2)(A)(v) and regulations and other guidance thereunder. Notwithstanding (i) and (ii), an Employee shall be deemed to have a total and permanent disability when determined to be totally disabled by the Social Security Administration. (c) Upon the death of an active Employee, his Account shall become fully vested and shall be valued in accordance with Article IV(b) as of the end of the year in which the Employee's death -10- occurs; payment shall be made within 60 days after that year-end. Additionally, the Committee (in its sole and absolute discretion and upon whatever conditions it determines appropriate) may make a Phantom Share allocation and/or a Cash Award to the Account of the deceased Employee for the calendar year which includes his date of death. Upon the death of a disabled or retired Employee who has not received payment of his entire Account, the undistributed balance of such Account shall be valued in accordance with Article IV(b) as of the end of the year in which the retired Employee's death occurs; payment shall be made within 60 days after that year-end. IX. The Effect of a Company Change in Control (a) Rights under this Plan shall be affected as hereinafter described by a Company Change in Control. (b) For any portion of an Account becoming vested after December 31, 2004, "Company Change in Control" means a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company, within the meaning of Code Section 409A(a)(2)(A)(v), as more fully described in attached Exhibit B. For other portions of an Account, "Company Change in Control" shall have the meaning set forth in Exhibit C. (c) At the time of a Company Change in Control, the Account of each Employee shall become fully vested and immediately payable, and the provisions of Article VII(a)(i) and (ii) shall not be effective for three months thereafter. At the time of a Change in Control of an Employer which is a controlled subsidiary of the Company, the Committee shall have authority (in its sole and absolute discretion and upon whatever conditions it determines appropriate) to accelerate vesting of all or any part of the Account of an Employee who was principally employed by such Employer at the time of the Change in Control; provided that to the extent such vesting is accelerated, the Plan benefits of such Employee shall become immediately payable. (d) If cash or other valuable consideration is paid to holders of Class A Common Stock in connection with a Company Change in Control, then the Company shall pay a like amount of cash for each Phantom Share (determined as set forth in Article IV) held in an Employee's Account (or the cash value per share of noncash consideration) as is received (per share) by the holders of Class A Common Stock. If such payment to the holders of Class A Common Stock is by way of purchase of their Class A Common Stock (or some portion thereof) then a corresponding percentage of each Account -11- shall be deemed to have been paid off in consideration of the above-referenced payment by the Company to Employees. (e) It is this Plan's intent not to make "excess parachute payments," as defined in Section 280G of the Code, which would be nondeductible for Federal income tax purposes by the Company. Consequently, if payments resulting solely from the operation of this Article would be nondeductible by the Company for Federal income tax purposes due to Section 280G of the Code, as being in excess of reasonable compensation or three times the base amount specified in Section 280G(b)(3), such payments shall be reduced by the smallest amount required so that no payments are nondeductible under Section 280G of the Code. If any payments previously made to or for the benefit of an Employee from this Plan or any other plan or agreement are subsequently determined to be nondeductible because of Section 280G of the Code, such Employee shall be required to promptly repay the Company, at its request, the smallest amount necessary so that, after giving effect to such repayments to the Company, no payments to or for the benefit of the Employee (or the smallest amount possible) will be nondeductible under said Section 280G; provided, however, that any such repayments, adjusted for the time value of such amounts under the principles of Section 1274(b)(4) of the Code, may not exceed the amount of payments originally made from this Plan or any other plan or agreement. The Committee may establish procedures to carry out the provisions of this paragraph. (f) The terms and provisions of this Article IX shall become effective only in the event of a Company Change in Control as defined in this Article of the Plan. X. The Committee As Plan Administrator The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall make all decisions concerning Employees to be selected to receive allocations or awards under the Plan, the amount of the allocation or award to be made to each participating Employee and the time when such allocations or awards shall be made. The Plan will be interpreted and administered by the Committee to maintain intended income tax deferral in accordance with Code Section 409A and regulations and other guidance issued thereunder. Any Committee interpretation of the Plan and any action taken by the Committee with respect to allocations or awards shall be final and binding upon all affected parties. The Committee shall have the authority, subject to the provisions of the Plan, to establish, adopt, revise or repeal rules, regulations and procedures with respect to the Plan. -12- XI. Amendment, Suspension, or Termination of the Plan The Committee or the Board may amend this Plan at any time, provided that any amendment by the Committee shall be consistent with the Plan's original design and purpose. No such amendment shall impair rights under the Plan with respect to Phantom Shares allocated prior to the date of such amendment. The Board may at any time terminate or suspend this Plan; provided that no such action shall impair rights under the Plan with respect to Phantom Shares allocated prior to the date of such action; provided also that in the event of termination of the Plan, the Committee (in its sole discretion) may accelerate the time of vesting and/or date of payment applicable to outstanding Accounts; provided that any acceleration of the date of payment shall be in compliance with Code Section 409A and regulations and other guidance thereunder. XII. No Guarantee The Company has only a contractual obligation to pay Accounts. The satisfaction of payment obligations is to be made solely out of the general corporate funds of the Company, which shall at all times remain subject to the claims of its creditors. Further, amounts credited to an Employee's Account shall neither be segregated for the purpose of securing the Company's liability nor be held by the Company in trust for the Employee. The Board, upon the recommendation of the Committee, may authorize the creation of trusts or other arrangements to facilitate or ensure payment of the obligations under the Plan, provided that such trusts and arrangements are consistent with the "unfunded" status of the Plan (unless the Committee determines otherwise). An Employee shall have no right, title, or interest whatsoever in or to any investments which the Company may make to aid it in meeting its obligations hereunder. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and the Employee or any other person. To the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid in cash from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payments of such amounts. XIII. Restrictions on Transfer of Benefits Neither the Employee nor any other person shall have any right to commute, sell, assign, transfer, alienate, pledge, anticipate, -13- mortgage or otherwise encumber, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, or interest therein which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to garnishment, attachment, seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by the Employee or any other person, nor be transferable by operation of law in the event of the Employee's or any other person's bankruptcy or insolvency. Notwithstanding the above, the Company shall have the right to deduct from all amounts paid to, or on behalf of, an Employee any taxes required by law to be withheld in respect of Accounts under this Plan or any reductions under Article XV of this Plan. If FICA taxes become payable due to vesting of an award in circumstances where it is not practicable (or would create a hardship) to withhold the employee's share of taxes from regular paychecks during the remainder of the taxable year, the Committee (or its delegate) may direct the Company to advance the employee's share of FICA taxes as an interest free loan, to be withheld from benefit amounts at the time they first become payable under this Plan. XIV. Protective Provisions An Employee shall cooperate with the Company by furnishing any and all information requested by the Company, taking such physical examinations as the Company may deem necessary (e.g., to establish disability), and taking such other relevant actions as may reasonably be required by the Company or Committee for purposes of the Plan. If an Employee neglects or refuses so to cooperate, the Company shall have no further obligation to such Employee or his beneficiaries under the Plan. XV. Obligations to Company If an Employee becomes entitled to a distribution of benefits under the Plan, and if at such time the Employee has outstanding any debt, obligation, or other liability representing an amount owing to the Company, then the Company may offset such amount owed to it against the amount of benefits otherwise distributable. Such determination shall be made by the Company. XVI. Release and Non-Disclosure/Non-Competition Agreements Any payment to an Employee or his beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in -14- full satisfaction of all claims against the Company with respect to such payment, and the Company may require such Employee or his beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect. Additionally, as a condition precedent to commencement of payments hereunder, and in consideration of such payments, an Employee may be required to execute and acknowledge a general release of all claims against the Company (and the Employer, if not the Company) in such form as the Company may then require. Upon the Employee's Termination of Employment, at retirement or otherwise, the Employee (if the Company requires him to do so) shall execute and thereafter perform a Non-competition/Non-disclosure Agreement in such form as the Company may then require. In that event, five per cent (5%) of each payment to the Employee or his beneficiary pursuant to the Plan shall be deemed a payment by the Company for such agreement. XVII. General (a) Titles and headings to the Articles of this Plan are included for convenience only and shall not control the meaning or interpretation of any provision of this Plan. Wherever reasonably necessary in this Plan, pronouns of any gender shall be deemed synonymous, as shall singular and plural pronouns. (b) This Plan shall be governed by and construed, enforced, and administered in accordance with the laws of the State of Michigan excluding any such laws which direct an application of the laws of any other jurisdiction. At all times, the Plan will also be interpreted and administered to maintain intended income tax deferral in accordance with Code Section 409A and regulations and other guidance issued thereunder. Subject to Article XVIII, the Company, the Employers and the Committee shall be subject to suit regarding the Plan only in the courts of the State of Michigan, and the Company shall fully indemnify and defend the Board and the Committee with respect to any actions relating to this Plan made in good faith by such bodies or their members. (c) The provisions of this Plan shall be deemed severable and in the event any provision of this Plan is held invalid, void, or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this Plan. Furthermore, the Committee shall have the power to modify such provision to the extent reasonably necessary to make the provision, as so changed, both legal, valid and enforceable as well as compatible with the other provisions of the Plan. (d) Any notice or filing required or permitted to be given under this Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail: (a) to the -15- Company or the Committee at the principal office of the Company, directed to the attention of the Chairman of the Committee, and (b) to the Employee at his last known home address on file with the Company's personnel office. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. It shall be the Employee's responsibility to inform the Company's personnel office, in writing, of any change in his home address. (e) Nothing in this Plan shall alter the at-will nature of the Employee's employment relationship with his Employer. Nothing in this Plan shall confer upon any Employee the right to continue in the employ of any Employer. XVIII. Claims and Disputes (a) Claims for benefits under the Plan shall be made in writing to the Committee. The Employee may furnish the Committee with any written material he believes necessary to perfect his claim. (b) A person whose claim for benefits under the Plan has been denied, or his duly authorized representative, may request a review upon written application to the Committee, may review pertinent documents, and may submit issues and comments in writing. The claimant's written request for review must be submitted to the Committee within sixty (60) days after receipt by the claimant of written notification of the denial of a claim. A decision by the Committee shall be made promptly, and not later than sixty (60) days after the Committee's receipt of a request for review, unless special circumstances require an extension of time for proceeding, in which cases a decision shall be rendered as soon as possible, but not later than one hundred twenty (120) days after receipt of the request for review. The decision on review shall be in writing, shall include reasons for the decision, may include specific reference to the pertinent provision of the Plan on which the decision is based, and shall be written in a manner calculated to be understood by the claimant. (c) Unless otherwise required by law, any controversy or claim arising out of or relating to this Plan or the breach thereof, including in particular any controversy relating to Articles VII or IX, shall be settled by binding arbitration in the City of Tecumseh in accordance with the laws of the State of Michigan by three arbitrators, one of whom shall be appointed by the Company, one by the Employee (or in the event of his prior death, his beneficiary(-ies)), and the third of whom shall be appointed by the first two arbitrators. If the selected (third) -16- arbitrator declines or is unable to serve for any reason, the appointed arbitrators shall select another arbitrator. Upon their failure to agree on another arbitrator, the jurisdiction of the Circuit Court of Lenawee County, Michigan shall be invoked to make such selection. The arbitration shall be conducted in accordance with the commercial arbitration rules of the American Arbitration Association except as hereinabove provided in (d) below. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Review by the arbitrators of any decision, action or interpretation of the Board or Committee shall be limited to a determination of whether it was arbitrary and capricious or constituted an abuse of discretion, within the guidelines of Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). In the event the Employee or his beneficiary shall retain legal counsel and/or incur other costs and expenses in connection with enforcement of any of the Employee's rights under this Plan, the Employee or beneficiary shall not be entitled to recover from the Company any attorneys fees, costs or expenses in connection with the enforcement of such rights (including enforcement of any arbitration award in court) regardless of the final outcome; except that the arbitrators in their discretion may award reasonable attorneys fees and reasonable costs to the Employee in an arbitration initiated by the Employee following a Change in Control, to enforce the Employee's rights under this Plan, provided the Employee is the prevailing party in such arbitration. (d) Any arbitration shall be conducted as follows: (i) The arbitrators shall follow the Commercial arbitration Rules of the American Arbitration Association, except as otherwise provided herein. The arbitrators shall substantially comply with the rules of evidence; shall grant essential but limited discovery; shall provide for the exchange of witness lists and exhibit copies; and shall conduct a pretrial and consider dispositive motions. Each party shall have the right to request the arbitrators to make findings of specific factual issues. (ii) The arbitrators shall complete their proceedings and render their decision within 40 days after submission of the dispute to them, unless both parties agree to an extension. Each party shall cooperate with the arbitrators to comply with procedural time requirements and the failure of either to do so shall entitle the arbitrators to extend the arbitration proceedings accordingly and to impose sanctions on the party responsible for the delay, payable to the other party. In the event the arbitrators do not fulfill their responsibilities on a timely basis, either party shall have the right to require a replacement and the appointment of new arbitrators. -17- (iii) The decision of the arbitrator shall be final and binding upon the parties and accordingly a judgment by any Circuit Court of the State of Michigan or any other court of competent jurisdiction may be entered in accordance therewith. (iv) The costs of the arbitration shall be borne equally by the parties to such arbitration, except that each party shall bear its own legal and accounting expenses relating to its participation in the arbitration. XIX. Limitations of Action Every asserted claim to benefits or right of action by or on behalf of any Employee, past, present, or future, or any spouse, child, beneficiary or legal representative thereof, against the Company or any subsidiary thereof arising out of or in connection with this Plan shall, irrespective of the place where such right of action may arise or be asserted, cease and be barred by the expiration of the earliest of: (i) one year from the date of the alleged act or omission in respect of which such right of action first arises in whole or in part, (ii) one year after the Employee's Termination of Employment, or (iii) six months after notice is given to or on behalf of the Employee of the amount payable from the Employee's Account under this Plan. WITNESS execution of this plan document on behalf of the Company by its duly authorized officer. TECUMSEH PRODUCTS COMPANY By ------------------------------- Its President and Chief Executive Officer Dated: , 2006 ----------- -18- EXHIBIT A Separation From Service A Separation From Service occurs on the date upon which a an Employee separates from service with the Company, as determined in accordance with Code Section 409A and Treasury Regulations promulgated thereunder. A Separation from Service with the Company shall be deemed to occur 1. if an Employee terminates employment with his Employer and does not continue to render services to the Company or any controlled subsidiary of the Company; or 2. if the Employee's Employer ceases to be a controlled Subsidiary of the Company. For purposes of this Plan, an Employee separates from service with the Company if the Employee dies, retires or otherwise has a Termination of Employment with the Company. However, the employment relationship is treated as continuing intact while the Employee is on military leave, sick leave, or other bona fide leave of absence (such as temporary employment by the government) if the period of such leave does not exceed six months, or if longer, so long as the Employee's right to reemployment with the Company is provided either by statute or by contract. If the period of leave exceeds six months and the Employee's right to reemployment is not provided either by statute or by contract, the employment relationship is deemed to terminate on the first date immediately following such six-month period. Whether a Termination of Employment has occurred is determined based on the facts and circumstances. Where an Employee either actually or purportedly continues in the capacity as an Employee, such as through the execution of an employment agreement under which the Employee agrees to be available to perform services if requested, but the facts and circumstances indicate that neither the Company nor the Employee intended for the Employee to provide more than insignificant services to the Company, an Employee will be treated as having a Separation From Service. For purposes of the preceding sentence, the Company and Employee will not be treated as having intended for the Employee to provide insignificant services where the Employee continues to provide services at an annual rate that is at least equal to 20 percent of the services rendered, on average, during the immediately preceding three full calendar years of employment (or, if employed less than three years, such lesser period) and the annual remuneration for such services is at least equal to 20 percent of the average annual remuneration earned during the final three full calendar years of -19- employment (or, if less, such lesser period). Where an Employee continues to provide services to the Company in a capacity other than as an Employee, a separation from service will not be deemed to have occurred if such former Employee is providing services at an annual rate that is 50 percent or more of the services rendered, on average, during the immediately preceding three full calendar years of employment (or if employed less than three years, such lesser period) and the annual remuneration for such services is 50 percent or more of the annual remuneration earned during the final three full calendar years of employment (or if less, such lesser period). For purposes of this paragraph, the annual rate of providing services is determined based upon the measurement used to determine the Employee's base compensation (for example, amounts of time required to earn salary, hourly wages, or payments for specific projects). -20- Exhibit B For any portion of an Account becoming vested after December 31, 2004, "Company Change in Control," solely for the purposes of this Plan, shall mean (and be limited to) any change that qualifies as a change of control event pursuant to Section 409A of the Internal Revenue Code of 1986, as amended, Proposed Treasury Regulation Section 1.409A-3(g)(5), and all subsequent relevant authority, which shall include one or more of the following events: a) a change in the ownership of the Company in compliance with Proposed Treasury Regulation Section 1.409A-3(g)(5)(v) pursuant to which any person or group acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than 50 percent of the total fair market value or total voting power of the stock of such corporation. b) a change in the effective control of the Company pursuant to Proposed Treasury Regulation Section 1.409A-3(g)(5)(vi), pursuant to which either: (1) Any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership (including acquisition of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of stock of the Company possessing 35 percent or more of the total voting power of the stock of such corporation; or (2) A majority of members of the Company's board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Company's board of directors prior to the date of the appointment or election; c) a change in the ownership of a substantial portion of the Company's assets pursuant to Proposed Treasury Regulation Section 1.409A-3(g)(5)(vii) pursuant to which any one person or group acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value (as defined in 1.409A-3(g)(5)(vii)) equal to or more than 40 percent of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions. d) For purposes of this Exhibit B, the following terms shall have the following meanings: -21- i) "person" shall mean a person as defined in Section 3(a)(9) of the 1934 Act. ii) "beneficial ownership" shall be determined in accordance with Rule 13d-3 promulgated under the 1934 Act or any successor regulation. iii) "group" shall mean a group as described in Rule 13d-5 promulgated under the 1934 Act or any successor regulation provided such group falls within the purview of Prop. Treas. Reg. Sections 1.409A-3(g)(v)(B), 1.409A-3(g)(5)(vi)(D), or 1.409A-3(g)(5)(vii)(C), as applicable. The formation of a group hereunder shall have the effect described in paragraph (b) of said Rule 13d-5 or any successor regulation. -22- EXHIBIT C For any portion of an Account becoming vested before January 1, 2005, "Company Change in Control," solely for the purposes of this Plan, shall mean one or more of the following events: (i) The acquisition, after December 31, 1994, of beneficial ownership of 25% or more of the Company's Class A Common Stock or Class B Common Stock then outstanding by any person (including a group, within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934 (the "1934 Act")), other than: (A) the trustee of any Company-sponsored employee benefit plan, (B) the Company or any of its subsidiaries, (C) Kenneth G. Herrick, his descendants, or trusts for the benefit of such individuals, or (D) trusts or foundations established by Kenneth G. Herrick or by any of the descendants or trusts mentioned in (C), above. (ii) The first purchase, after December 31, 1994, under a tender offer or exchange offer for 25% or more of the Company's Class A Common Stock or Class B Common Stock then outstanding, other than an offer by: (A) the trustee of any Company-sponsored employee benefit plan, (B) the Company or any of its subsidiaries, (C) Kenneth G. Herrick, his descendants, or trusts for the benefit of such individuals, or (D) trusts or foundations established by Kenneth G. Herrick or by any of the descendants or trusts mentioned in (C), above. (iii) The first day on which less than a majority of the total membership of the Board shall be Continuing Directors; (iv) The effective date of a transaction (or a group of related transactions) in which more than 50 % in fair market value of the assets of the Company, or of the particular subsidiary for which a given Employee's services are -23- principally performed, are disposed of pursuant to a partial or complete liquidation, a spin-off, a sale of assets or otherwise. In the event this provision applies to a particular subsidiary, only those Employees whose services are principally performed for that subsidiary shall be deemed to be affected by such Change in Control; or (v) The date on which the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 51% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger of consolidation. (b) For purposes of this Exhibit C, the following terms shall have the following meanings: (i) "Continuing Director" shall mean any director of the Company who either (1) is a member of the Board on the date this Plan is adopted by the Board and has not terminated membership on the Board, or (2) is recommended or elected to the Company's Board of Directors by at least three-quarters of the Continuing Directors. (ii) "Person" shall mean a person as defined in Section 3(a)(9) of the 1934 Act, "beneficial ownership" shall be determined in accordance with Rule 13d-3 promulgated under the 1934 Act or any successor regulation, the term "group" shall mean a group as described in Rule 13d-5 promulgated under the 1934 Act or any successor regulation, and the formation of a group hereunder shall have the effect described in paragraph (b) of said Rule 13d-5 or any successor regulation. Anything hereinabove to the contrary notwithstanding, however: (a) relationships by blood, adoption or marriage between or among two or more persons shall not be deemed to constitute any of such persons a member of a group with any other such persons; (b) action taken or agreed to be taken by any person acting in his official capacity as an officer or director of the Company shall not be deemed to constitute such person a member of a group with any other person, and (c) formation of a group shall not constitute an acquisition by the group (or any member thereof) of beneficial ownership of any shares of the Company's Class B ("voting") common stock beneficially owned by any member of such group and acquired by such group member in an Excluded Acquisition. -24- (iii) "Excluded Acquisition" means any acquisition of shares of voting common stock from the Company (whether or not for consideration) or from any person by operation of law (including but not limited to the laws of descent and distribution), by will, by gift or by foreclosure of a security interest given to secure a bona fide loan, or any acquisition consummated prior to January 1, 2005. -25- EX-10.2 5 k05154exv10w2.txt EXECUTIVE DEFERRED COMPENSATION PLAN EXHIBIT 10.2 TECUMSEH PRODUCTS COMPANY EXECUTIVE DEFERRED COMPENSATION PLAN (Effective January 1, 2005) TECUMSEH PRODUCTS COMPANY EXECUTIVE DEFERRED COMPENSATION PLAN INDEX
PAGE ---- ARTICLE I PLAN PURPOSES ................................................. 1 ARTICLE II DEFINITIONS .................................................. 1 ARTICLE III ELIGIBILITY ................................................. 4 ARTICLE IV PARTICIPATION ................................................ 4 ARTICLE V GENERAL PROVISIONS ............................................ 5 ARTICLE VI DEFERRED COMPENSATION ACCOUNTS ............................... 6 ARTICLE VII PARTICIPANTS' RIGHTS UNSECURED .............................. 8 ARTICLE VIII PAYMENT OF DEFERRED COMPENSATION ........................... 9 ARTICLE IX VALUATION DATE ............................................... 12 ARTICLE X ALIENATION .................................................... 12 ARTICLE XI DOMESTIC RELATIONS ORDERS .................................... 12 ARTICLE XII TAX WITHHOLDING ............................................. 13 ARTICLE XIII PARTICIPANT CONSENT ........................................ 14 ARTICLE XIV SEVERABILITY ................................................ 14 ARTICLE XV AMENDMENT AND TERMINATION .................................... 14 ARTICLE XVI CHANGE OF CONTROL ........................................... 15 ARTICLE XVII PLAN ADMINISTRATION ........................................ 16 ARTICLE XVIII LIMITATIONS OF ACTION ..................................... 18
-i- TECUMSEH PRODUCTS COMPANY EXECUTIVE DEFERRED COMPENSATION PLAN WHEREAS, Tecumseh Products Company ("Company") previously established and maintained the Tecumseh Products Company Voluntary Deferred Compensation Plan., a nonqualified deferred compensation plan, last amended and restated effective September 25, 2002 (and herein called the "Prior Plan"); and WHEREAS, the Prior Plan was "frozen" effective December 31, 2004, and WHEREAS, the Company desires to continue providing a tax-deferred capital accumulation opportunity to a select group of management or highly compensated Employees through the deferral of compensation in order to encourage the Employees to maintain a long-term relationship with the Company and provide flexibility to the Employee in his or her financial planning; and THEREFORE, the Company hereby establishes the Tecumseh Products Company Executive Deferred Compensation Plan ("Plan") effective January 1, 2005. ARTICLE I PLAN PURPOSES 1.1 The purpose of this Plan is to provide eligible officers and Key Employees of the Employer with the opportunity to defer compensation. The Plan is also intended to establish a method for attracting and retaining persons whose abilities, experience and judgment can contribute to the long-term strategic objectives of the Employer. 1.2 The Company intends that the Plan be an unfunded, non-qualified deferred compensation plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees of the Employer, and that payments under the Plan shall be, when paid or otherwise made available to Participants, deductible by the Employer pursuant to Sections 162 and 404(a)(5) of the Internal Revenue Code of 1986, as amended (the "IRC"). The Plan will be interpreted and administered by the Committee to maintain intended income tax deferral in accordance with IRC Section 409A and regulations and other guidance issued thereunder. ARTICLE II DEFINITIONS As used in this Plan, the following terms shall have the meanings set forth below. The masculine pronoun shall be deemed to include the feminine, and the singular number shall be deemed to include the plural, unless a different meaning is plainly required by the context. 2.1 "Base Salary" means the annual salary paid to officers and Key Employees of the Employer at regular intervals during the calendar year. 2.2 "Beneficiary" means any person(s) or legal entity(ies) designated by the Participant or otherwise determined in accordance with Section 5.4. 2.3 "Board" means the Board of Directors of the Company. 2.4 "Committee" means the Governance, Compensation and Nominating Committee of the Board, or such other committee as the Board may subsequently appoint to administer the Plan. 2.5 "Company" means Tecumseh Products Company, a Michigan corporation, and its successors and assigns. 2.6 "Compensation" means Base Salary and other qualifying remuneration paid by the Employer, as the Committee shall determine. 2.7 "Deferral Period" means the total period of time, expressed in Plan Years, for which the Participant has elected to defer Compensation. Such Deferral Period shall exclude the period of time beyond the Benefit Commencement Date (as defined in Section 8.1(a)). 2.8 "Deferred Compensation" means Compensation deferred pursuant to the Plan. 2.9 "Deferred Compensation Account" means the individual account maintained under the Plan for a Participant as determined in Section 6.1. 2.10 "Deferred Compensation Election Form" means an approved election form that each Participant must execute in accordance with Section 4.1 in order to participate in the Plan. 2.11 "Disability" means any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months: (i) which renders an employee unable to engage in any substantial gainful activity; or (ii), which enables an employee to receive income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the employee's Employer, provided that this definition shall be interpreted in accordance with Code Section 409A(a)(2)(A)(v) and regulations and other guidance thereunder. Notwithstanding (i) and (ii), an employee shall be deemed to have a total and permanent disability when determined to be totally disabled by the Social Security Administration. 2.12 "Director" means a member of the Board. 2.13 "Eligible Participant" means any officer or Key Employee of the Employer designated by the Committee as eligible to participate in the Plan. Where the context so requires, this term shall also include a former officer or former Key Employee for whom the Committee maintains a Deferred Compensation Account under the Plan. 2.14 "Employer" means the Company, any of its present subsidiary corporations, any corporation which becomes a controlled subsidiary of the Company provided the Committee determines to extend coverage thereto, and/or any successor(s) to such corporation(s). The -2- Committee shall be deemed to have extended coverage to a subsidiary if an employee of such subsidiary is designated by the Committee as eligible to participate in the Plan. 2.15 "Investment Option" means the book-keeping sub-account that is made available to Participants by the Committee, under which a Participant may designate a deferral. The initial Investment Options are the Phantom Share Investment Option described in section 6.2 and the Corporate Bond Investment Option described in Section 6.3, but the Committee has discretion to add, eliminate, or modify any Investment Option(s) at any time pursuant to Section 6.9. 2.16 "Key Employee" means any executive employee of the Employer, who is not an officer, that the Committee in its sole discretion decides is sufficiently important to the ongoing business objectives of the Employer. 2.17 "Market Price" of a Tecumseh Share on any given day means that day's closing price per share on the NASDAQ National Market or, if the Tecumseh Shares are not traded on a particular day, the closing NASDAQ price per share on the closest preceding date on which Tecumseh Shares were traded. 2.18 "Participant" for any Plan Year means an Eligible Participant who has elected to defer Compensation in accordance with the procedures set forth in Section 4.1 and for whom the Committee has established and maintains a separate Deferred Compensation Account. 2.19 "Phantom Share" means a hypothetical or imaginary Tecumseh Share without any of the rights attached to an actual Tecumseh Share, but whose economic value for purposes of the Plan is the same as that of an actual Tecumseh Share. 2.20 "Plan" means the Tecumseh Products Company Executive Deferred Compensation Plan as embodied herein and as amended from time to time by the Board. 2.21 "Plan Year" means the 12-month calendar year beginning January 1 and ending December 31, or such shorter period, as applicable, in the year the Plan is terminated. 2.22 "Rabbi Trust" means an irrevocable trust, containing certain key provisions, which the Internal Revenue Service would require in order to conclude that contributions made thereto by an employer, to provide for the payment of non-qualified deferred compensation benefits to employees, will not be taxed to employees at the time contributions are made, but instead, at the time the benefits are received or otherwise made available to the employee. 2.23 "Separation from Service" means the date upon which a Participant has a separation from service determined under the Separation From Service rules and procedures described in attached Exhibit A. 2.24 "Tecumseh Share" means a share of the Company's Class A Common Stock ($1.00 par value per share). 2.25 "Unforeseeable Emergency" means a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant's spouse, or a dependent -3- (as defined in IRC Section 152(a)) of the Participant, loss of the participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The foregoing requirements shall be met only if, as determined under regulations of the U.S. Secretary of the Treasury, the amounts distributed with respect to such an emergency do not exceed the amounts necessary to satisfy such emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such emergency is or may be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant's assets (to the extent the liquidation of such assets would not itself cause severe financial hardship). This subsection (a) shall be interpreted and administered in accordance with IRC Section 409A(a)(2)(B)(ii). 2.26 "Valuation Date" means the last business day of either a calendar year or calendar quarter, as the Committee will determine from time to time, the date on which a Participant's Deferred Compensation Account is valued for purposes of a hardship distribution pursuant to Section 8.6, and any other date specified by the Committee for valuing a Participant's Deferred Compensation Account. ARTICLE III ELIGIBILITY 3.1 Prior to the end of November in each Plan Year, the Committee shall designate the officers and Key Employees who shall be eligible to defer Compensation under the Plan during the following Plan Year. Also, the Committee may from time to time designate newly-hired officers and Key Employees as eligible to defer Compensation under the Plan. The Committee shall promptly notify each eligible officer and Key Employee of his eligibility to participate in the Plan if selected by the Committee. The Committee has total discretion to determine who is eligible to participate on a Plan Year by Plan Year basis. 3.2 Directors who are not also employees of the Employer are not eligible to participate in the Plan. ARTICLE IV PARTICIPATION 4.1 Election to Participate. Subject to Section 4.2, in order to participate in the Plan, in respect of Compensation for a particular Plan Year, an Eligible Participant must make a valid election to defer compensation by executing and filing with the Committee, before the commencement of such Plan Year, a Deferred Compensation Election Form. Such election shall be in addition to the election provided under Section 6.10. An Eligible Participant must specify on the applicable Deferred Compensation Election Form, the amount to be deferred, subject to Section 4.6, and the timing and method of payment, pursuant to Sections 8.1 and 8.2. 4.2 New Participant. Notwithstanding Section 4.1, a newly- hired officer or Key Employee who becomes an Eligible Participant after the first day of the current Plan Year, may elect to participate in the Plan, with respect to future Compensation for such Plan Year, by filing -4- a Deferred Compensation Election Form within 15 days after his initial date of designation or employment, whichever occurs later., provided that (i) deferrals may only be made with respect to amounts earned subsequent to the initial election, and (ii) such initial election shall not be available to an Eligible Participant who is already participating (or previously participated) in another non-qualified deferred compensation plan of the Company which is an account balance plan. 4.3 Election not Revocable. A Deferred Compensation Election Form, once executed and filed with the Committee, cannot be revoked for such current Plan Year's Compensation elected to be deferred pursuant to such form., except that a Participant may modify such election to delay payment or to change the form of payment as permitted in Section 6.10, or may cancel such election to the extent permitted in Section 8.6, in the event of an Unforeseeable Emergency. 4.4 Vesting. A Participant will be vested in his entire Deferred Compensation Account balance at all times and will not be subject to forfeiture for any reason. 4.5 New Elections Required for Each Year. Compensation payable in future Plan Years can only be deferred by filing a Deferred Compensation Election Form for the appropriate Plan Year. A Participant is not required to defer Compensation for any subsequent Plan Year by reason of having elected to defer Compensation for a current or prior Plan Year. 4.6 Deferrals in 5% Increments. The minimum amount which may be deferred by an Eligible Participant for any Plan Year is 5% of Compensation. Deferrals in excess of the minimum amount shall also be in 5% increments of Compensation. Elections to convert MIP Phantom Shares or to defer MIP cash awards pursuant to Section 6.10 are not subject to this Section 4.6. ARTICLE V GENERAL PROVISIONS 5.1 No Right to Payment Except as Provided in Plan. No Participant, or other Eligible Participant or Beneficiary, shall have any right to any payment or benefit hereunder except to the extent provided in the Plan. 5.2 Employment Rights. The employment rights of any Participant or other Eligible Participant shall not be enlarged, guaranteed or affected by reason of the provisions of the Plan. 5.3 Recipient Under a Disability. If the Committee determines that any person to whom a payment is due hereunder is a minor, or is adjudicated incompetent by reason of physical or mental Disability, the Committee shall have the power to cause the payments becoming due to such person to be made to the legal guardian for the benefit of the minor or incompetent, without responsibility of the Employer or the Committee to see to the application of such payment, unless prior to such payment claim is made therefor by a duly appointed legal representative. Payments made pursuant to such power shall operate as a complete discharge of the Employer, the Board and the Committee. -5- 5.4 Designation of Beneficiary. Each Participant may designate any person(s) or legal entity(ies), including his estate or a trust, as his Beneficiary under the Plan by filing a written beneficiary designation, in prescribed form, with the Committee. A Participant may at any time revoke or change his designation of Beneficiary by filing a new beneficiary designation with the Committee. If no person or legal entity shall be designated by a Participant as his Beneficiary, or if no designated Beneficiary survives him, his estate shall be his Beneficiary. 5.5 Elections. Any election made or notice given by a Participant pursuant to the Plan shall be in writing to the Committee, or to such representative as may be designated by the Committee for such purpose. Notice shall be deemed to have been made or given on the date received by the Committee or its designated representative. 5.6 Controlling Law. Except where pre-empted by federal law, the validity of the Plan or any of its provisions shall be determined under, and it shall be construed and administered according to, the laws of the State of Michigan, without regard to principles of conflicts of law. At all times, the Plan will also be interpreted and administered to maintain intended income tax deferral in accordance with IRC Section 409A and regulations and other guidance issued thereunder. ARTICLE VI DEFERRED COMPENSATION ACCOUNTS 6.1 Accounts. Upon receipt of a Participant's valid Deferred Compensation Election Form, the Committee shall establish, as a bookkeeping entry only, a Deferred Compensation Account for such Participant. The Committee shall thereafter record in each Participant's Deferred Compensation Account for a particular Plan Year, the amount(s) which he elected to defer which otherwise would have been paid to the Participant during the subsequent Plan Year or Plan Years, as the case may be. Such amount(s) shall be credited (as of the date such amount(s) would otherwise have been paid to the Participant) to one or more of the Investment Option sub-accounts which the Committee shall make available under the Plan. The initial Investment Options are the Phantom Share Investment Option and the Corporate Bond Investment Option. 6.2 Phantom Share Investment Option. Participant elections for this Option shall be reflected in a bookkeeping sub-account, the value of which shall be based upon the performance of Tecumseh Shares. Amounts deferred will be credited to such sub-account as units, each reflecting one Tecumseh Share. Fractional units will also be credited to such sub-account, if applicable. The number of credited units will be determined by dividing the dollar amount of Compensation deferred by the Market Price of a Tecumseh Share on the date such amount would otherwise have been paid to the Participant. Dividends paid on Tecumseh Shares shall be reflected in such sub-account by the crediting of additional units in such sub-account equal to the value of the dividend and based upon the Market Price of a Tecumseh Share on the date such dividend is paid. 6.3 Corporate Bond Investment Option. Participant elections for this Option shall be reflected in a bookkeeping sub-account, the value of which shall be based upon quarterly -6- crediting of earnings based on the current yield of the Dow Jones Corporate Bond Index (DJCI). Amounts deferred will be credited to such sub-account on the date such amount would otherwise have been paid to the Participant. All amounts reflected in this sub-account shall be credited with earnings, compounded quarterly, from the date credited, based on a rate of return equal to the current yield of the DJCI as of the last business day of the preceding quarter. 6.4 Adjustments to Accounts. The value of a Participant's Deferred Compensation Account shall be periodically adjusted for any payments made to such Participant in the form of benefits, hardship distributions, or otherwise. Where adjustment is made to the Phantom Stock sub-account, it shall be reflected in reduction of units determined by the amount paid, divided by the Market Price of a Tecumseh Share on the date of payment. 6.5 Dilutive and Anti-dilutive Transactions Affecting Phantom Shares. The Committee shall make appropriate adjustments to a Participant's Phantom Share Investment Option sub-account where a "capital transaction" or "corporate reorganization" has the effect of changing the economic equivalent number of Phantom Shares units that a Participant has been credited under this Plan. The Committee shall make an adjustment, either positive or negative as the case may be, to each Participant's Phantom Share Investment Option sub-account to ensure that neither unintended economic benefits nor detriments are conferred on a Participant solely by reason of such "capital transaction" or "corporate reorganization." 6.6 No Transfers Among Investment Options. Each deferral of Compensation under the Plan shall remain credited to the Investment Option(s) initially selected by the Participant with respect to deferrals during that Plan Year. However, deferrals during a subsequent Plan Year may be credited to different Investment Options and/or in different proportions than deferrals during prior Plan Years. 6.7 Investment Option Allocation Election. Each Participant may elect to allocate Deferred Compensation for a particular Plan Year among the Investment Options described in Sections 6.2, 6.3 and/or 6.9. However, if more than one Investment Option is selected for a particular Plan Year, such allocation cannot be less than 10% of deferrals during that Plan Year. 6.8 Effects On Other Plans. If, because of a Participant's deferral of Compensation under this Plan, a Participant's retirement benefits in any pension or retirement plan of the Employer (either qualified under IRC Section 401, or not so qualified) are reduced, the Employer shall provide a corresponding supplemental benefit under the Tecumseh Products Company Supplemental Retirement Plan. However, this Section shall not apply to any qualified defined contribution plan, such as a 401(k) plan. 6.9 New Investment Options; Committee Discretion Limited. The Committee may at any time in its sole discretion add an Investment Option or Options. Further, the Committee may eliminate or modify the terms of an existing Investment Option on a prospective basis, so long as the value of a Participant's Plan benefits accrued prior to such modification is not adversely affected thereby. If the Committee materially modifies the terms of an existing Investment Option, it shall promptly notify Participants regarding the details of such modification. Following receipt of such notice, each Participant shall have a period of not less than ten (10) -7- business days within which to elect to convert all or a portion (in 10% increments) of the affected sub-account(s) to any other Investment Option(s) then offered under the Plan, such election to take effect as of the effective date of the material modification. 6.10 Election to Convert MIP Awards. Phantom Shares - An Eligible Participant who has a Deferred Compensation Account under the Plan may, upon written election, choose to convert all or part of his Account under the Tecumseh Products Company Management Incentive Plan (the "MIP"), attributable to phantom share allocations ("MIP Phantom Shares") first becoming vested immediately after the end of a Plan Year, into the Phantom Share Investment Option, the Corporate Bond Investment Option, any other Investment Option that the Committee has made available, or a combination of the foregoing, under this Plan. Such conversion privilege is irrevocable (subject to the Participant's right to elect a different Investment Option under Section 6.9) and is subject to all provisions of this Plan. Also, any such written election, as well as any elections under Sections 8.1 and 8.2 with respect to the time and method of payment for the portion of the Participant's Deferred Compensation Account attributable to such conversion, must: i) be made at least twelve (12) months prior to the date the Participant becomes vested in the MIP Phantom Shares and may not take effect until at least twelve (12) months after the date on which the election is made; and ii) provide for a minimum deferral of five (5) years after the date when the MIP award became vested and payable, pursuant to a Deferred Compensation Election Form (except in the case of death, Disability, or Unforeseeable Emergency). The conversion value of the MIP Phantom Shares used to calculate the number of Phantom Share units to be allocated to the Participant's Phantom Share Investment Option or the dollar amount to be allocated to the Participant's Corporate Bond Investment Option or to any other Investment Option that the Committee has made available shall generally be the value of the applicable MIP Phantom Shares as of the date the Participant became vested in such MIP Phantom Shares as determined under the MIP. However, the number of units allocated to a Participant's Phantom Share sub-account under this Plan as the result of a conversion pursuant to this Section 6.10 shall not be less than A x B, where "A" represents the total number of MIP Phantom Shares being converted and "B" represents the percentage of such converted MIP Phantom Shares being allocated to the Participant's Phantom Share sub-account under this Plan. MIP Cash Awards - An Eligible Participant who is covered by the MIP may also, upon written election, defer all or some portion of a MIP Cash Award for a particular Class Year (in 25% increments of the award) in the same time and manner as required for Phantom Shares, the relevant Cash Award portion of the Deferred Compensation Election Form. Such deferred amounts shall be credited (as of the date such amount(s) would otherwise have been paid to the Participant) to one or more of the Investment Option sub-accounts which the Committee shall make available under the Plan. -8- ARTICLE VII PARTICIPANTS' RIGHTS UNSECURED 7.1 Unsecured Creditors. Amounts credited to a Participant's Deferred Compensation Account shall be dealt with in all respects as working capital of the Employer. Therefore, the right of a Participant to receive any distribution hereunder shall be an unsecured claim against the general assets of the Employer. 7.2 No Actual Investment Required. Subject to Section 16.1 and Section 17.1, no assets of the Employer shall in any way be held in trust for, or be subject to, any claim by a Participant or his Beneficiary under the Plan. Further, neither the Employer nor the Committee shall have any duty whatsoever to invest any amounts credited to any Deferred Compensation Accounts established under the Plan. 7.3 Optional Rabbi Trust(s) or Other Arrangement to Facilitate Payment. The Board, upon the recommendation of the Committee, may authorize the creation of one or more Rabbi Trusts or other arrangements to facilitate payment of the obligations under the Plan, provided that such trusts and arrangements are consistent with the "unfunded" status of the Plan. A Participant shall have no right, title, or interest whatsoever in or to any investments which the Company may make to aid it in meeting its obligations hereunder. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and the Participant or any other person. To the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder are payable in cash from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payments of such amounts. Notwithstanding the above provisions, no Rabbi Trust assets shall be located or transferred outside of the United States and no property shall be transferred to the Trust by in connection with an adverse change in the Company's financial health. ARTICLE VIII PAYMENT OF DEFERRED COMPENSATION 8.1(a) Commencement of Benefits. Subject to Section 8.1(b), at the time a Participant elects to defer Compensation for any particular Plan Year, he shall concurrently elect, on the Deferred Compensation Election Form, a date when the portion of his Deferred Compensation Account balance attributable to such current Plan Year deferral shall be paid (or commence to be paid) as required in Section 4.1. Such date shall be as soon as practicable, and not more than 30 days after the first business day of the Plan Year following either: (i) the date such Participant attains a selected age (maximum of age 70),; or (ii) the date of the Participant's Separation from Service upon retirement when first eligible for commencement of early, normal or late retirement benefits, or deferred benefits under a qualified defined benefit plan sponsored by the Employer -9- whichever the Participant shall elect on his Deferred Compensation Election Form. The date elected is hereinafter referred to as the "Benefit Commencement Date." The Valuation Date to be used for such payment shall be the last business day of the Plan Year that precedes the Benefit Commencement Date. If the option described in Section 8.1(a)(ii) is selected, but upon the date of a Participant's Separation from Service, he is not eligible for the commencement of deferred benefits, then his Account balance under this Plan will be paid out in a lump sum pursuant to Section 8.3. 8.1(b) 365-Day Minimum Deferral Period. Notwithstanding the time for the commencement of benefits pursuant to Section 8.1(a), commencement of benefits will not occur prior to the expiration of a 365-day period beginning the day after the date on which an election to defer Compensation became effective as provided in the Plan. 8.2(a) Payment Method Election. At the time the Deferred Compensation Election Form is filed pursuant to Section 4.1, Participants must also elect the method of receiving payment of their Deferred Compensation Account balance upon the first business day of the Plan Year following the expiration of the Deferral Period so elected in Section 8.1(a) above. If a Participant has elected different pay-out methods on his Deferred Compensation Election Forms for different years, then the Committee shall establish sub-accounts to keep track of the portions of such Account that are subject to those different methods. Each Participant shall elect to receive payment of his Deferred Compensation Account either in: (i) one lump-sum on the Benefit Commencement Date; (ii) annual installments, with accrued earnings or losses, determined in accordance with the Plan provisions governing the Investment Option(s) selected, over a specified period (not to exceed 15 years), beginning on the Benefit Commencement Date; or (iii) a lump-sum/annual installment combination where a lump sum equal to 25%, 50% or 75% of the Participant's Deferred Compensation Account as specified by the Participant in the Deferred Compensation Election Form is paid to the Participant on his Benefit Commencement Date and where the remaining Deferred Compensation Account balance is paid in annual installments over a specified period (not to exceed 15 years), beginning on the first anniversary of the Benefit Commencement Date. -10- 8.2(b) Installment Payout Formula. If a Participant selects payment option (ii) of Section 8.2(a), the annual installment amount for a particular Plan Year will be computed as follows: $W = ($X / [Y - Z]) Where W = Installment amount received by Participant in a particular Plan Year. Where X = Participant's Deferred Compensation Account balance at the end of the prior Plan Year. Where Y = Number of years originally elected by Participant for the payment period. Where Z = Number of years in the elected payment period already elapsed. 8.2(c) Lump-Sum/Installment Combination Payout Formula. If a Participant selects payment option (iii) of Section 8.2(a), the portion of the Deferred Compensation Account balance remaining after the payment of the lump sum on the Benefit Commencement Date to be paid out in any given Plan Year in annual installments will be considered a separate account amount which is computed in the same manner as described in Section 8.2(b). 8.2(d) Delay of Payments to "Specified Employees." Notwithstanding the foregoing provisions of this Section 8.2, a distribution (or commencement of annual installments) to a "specified employee" shall be delayed until the later of 30 days after the first business day of the Plan year following the Benefit Commencement Date or six months following the date of Separation From Service (or until death, if earlier) and in the case of installments, the second installment will be paid on the anniversary of the first installment, and each subsequent installment will be paid on each such anniversary thereafter. (Specified employees are employees who (i) own more than 5 percent of the stock of the Company; (ii) own more than 1 percent of the stock of the Company and have compensation from the Company in excess of $150,000 a year (not indexed); or (iii) are officers of the Company or the Employer with compensation in excess of $130,000 a year (indexed)). Notwithstanding the foregoing provisions of this Section 6.1(a), a distribution (or commencement of annual installments) to a Specified Employee shall be delayed until the first date of the seventh month following the date of Separation From Service (or until death, if earlier). In the case of installments, the second installment will be paid on the next Payment Date, and each subsequent installment will be paid on each Payment Date thereafter. 8.3 Automatic Lump Sum Payment. Notwithstanding the Participant's Investment Option(s) or the Payment Method Elections previously made by him pursuant to Sections 6.7 and 8.2, in the case of a Participant's Separation From Service for any reason other than retirement when first eligible for commencement of pension benefits or deferred benefits from a qualified -11- defined benefit plan sponsored by the Employer, but including death or Disability, whether before or after his Benefit Commencement Date, his Account balance under this Plan automatically will be transferred to the Corporate Bond Investment Option. Such balance with interest shall be paid to him (or his Beneficiary or estate) in a lump sum, as soon as administratively feasible thereafter. Notwithstanding this Section 8.3, if a Participant elected a distribution of his Deferred Compensation Account upon a fixed age, pursuant to Section 8.1(a), and then Separates From Service, his Account shall be distributed at the time and manner in which he originally selected. 8.4 Payment Denomination. All payments to Participants or others will be paid solely in cash. 8.5 Change of Prior Elections. Subject to the consent of the Committee, an Eligible Participant may file a request to change a prior election to postpone commencement of benefits (Section 8.1(a)), or to change the payment method (Section 8.2 (b)), provided that: (i) such modified election may not take effect until at least twelve (12) months after the date on which the election is made; (ii) the payment (or first installment) with respect to which such election is made must be deferred for a period of at least five (5) years from the date such payment (or first installment) would otherwise have been made, (except in the case of death, Disability, or Unforeseeable Emergency); and (iii) such election may not be made less than twelve (12) months prior to the date of such first scheduled payment. This Section 8.5 shall be interpreted and administered in accordance with IRC Section 409A(a)(4)(C). 8.6 Hardship Withdrawal. General Rule. A Participant may request a distribution from his Deferral Account, prior to commencement of benefits, in the event of an Unforeseeable Emergency. The request to take a distribution shall be made by completing a form provided by and filed with the Committee. The Committee will first require that the Participant cancel all outstanding elective deferrals, deferred pursuant to Section 4.1. If the Committee determines that the requested distribution is for the purpose of meeting an Unforeseeable Emergency in accordance with Section 2.25 of the Plan, and that the requested distribution is necessary to relieve the Unforeseeable Emergency even after the cancellation of outstanding deferral election(s), then the amount determined by the Committee, sufficient to meet the Unforeseeable Emergency in accordance with Section 2.25 of the Plan, shall be paid in a single cash lump sum as soon as practicable. If a hardship withdrawal is made from a Participant's Phantom Share sub-account, the Phantom Share units in such sub-account shall be reduced by a number determined by dividing the amount withdrawn by the Market Price of Tecumseh Shares on the trading date preceding the date of withdrawal, rounded to the next-higher one-tenth (1/10) unit. Once a Participant's deferral election(s) is cancelled pursuant to this Section 8.6, notwithstanding that a distribution might be granted, a Participant may not elect to again defer, pursuant to Section 4.1 of the Plan for at least 12 months from the date that the distribution under this Section is requested. -12- ARTICLE IX VALUATION DATE 9.1 Valuation. As of each Valuation Date, the Deferred Compensation Account of each Participant shall be valued by the Committee. The current value, and the change in value from the prior valuation (whether positive or negative), shall be communicated in writing to each Participant within 45 days after each Valuation Date. ARTICLE X ALIENATION 10.1 Anticipation, alienation, sale, transfer, assignment, pledge, levy, garnishment or other encumbrance of any payments from or benefits held under the Plan shall not be permitted or recognized, and to the extent permitted by law, no such payments or benefits shall be subject to legal process or attachment for the payment of any claim of any person entitled to receive the same. ARTICLE XI DOMESTIC RELATIONS ORDERS 11.1 Notwithstanding Article X, (i) To the extent required under any final judgment, decree or order (including approval of a property settlement agreement), referred to as the "Order," that (i) relates to the provision of child support, alimony payments, or marital property rights; (ii) is made in compliance with Section 409A of the Internal Revenue Code of 1986, as amended and any regulations issued thereunder; and (iii) is made pursuant to a state domestic relations law, any portion of a Participant's Deferred Compensation Account may be paid to a spouse, former spouse or, child or other dependent of the Participant (the "Alternate Payee"). A separate account shall be established with respect to the Alternate Payee, in the same manner as the Participant, and any amount so set aside for an Alternate Payee shall be paid out in a lump sum payment within ninety (90) days of the date of the Order. Any payment made to an Alternate Payee pursuant to this paragraph shall be reduced by required income tax withholding. (i) The Plan's liability to pay benefits to a Participant shall be reduced to the extent that amounts have been paid or set aside for payment to an Alternate Payee pursuant to an Order. No such transfer shall be effectuated unless the Committee has been provided with such an Order. (ii) The Company or the Committee shall not be obligated to defend against or set aside any Order, or any legal order relating to the garnishment of a Participant's benefits, unless the full expense of such legal action is borne by the Participant. In the event that the Participant's action (or inaction) nonetheless causes the Company or the Committee to incur such expense, the amount of the expense may -13- be charged against the Participant's Deferred Compensation Account and thereby reduce the Company's obligation to pay benefits to the Participant. In the course of any proceeding relating to divorce, separation, or child support, the Company or the Committee shall be authorized to disclose information relating to the Participant's Account to the Alternate Payee (including the legal representatives of the Alternate Payee), or to a court. ARTICLE XII TAX WITHHOLDING 12.1 Withholding. Subject to Sections 11.1, 12.2 and 12.3, the Employer shall deduct from all payments under this Plan each Participant's share of any taxes required to be withheld by any Federal, state or local government. The Participants and their Beneficiaries, distributees and personal representatives will bear any and all Federal, foreign, state, local income taxes or any other taxes imposed on Participants or amounts paid under this Plan. 12.2 FICA Taxes. Pursuant to IRC Section 3121(v) and regulations thereunder, Compensation deferred pursuant to this Plan is subject to employment taxes under the Federal Insurance Contributions Act ("FICA") at the time of deferral rather than at the time of distribution to the Participant. Accordingly, at the time of deferral, each Participant will be required to pay to the Employer, either by payroll deduction or check, his share of FICA (including hospital insurance) taxes due and payable; except to the extent the Participant has already reached the maximum compensation levels subject to Old-Age, Survivors, and Disability Insurance ("OASDI") tax at the time Compensation is deferred under the Plan. 12.3 Taxes Due at Deferral Date Other than FICA Taxes. If any of the taxes referred to in Section 12.1 are due at the time of deferral, instead of at the time of payout, each Participant will be required to pay to the Employer, by payroll deduction or check, the Participant's share of any such taxes due and payable. ARTICLE XIII PARTICIPANT CONSENT 13.1 By electing to defer Compensation pursuant to this Plan, Participants shall be deemed conclusively to have accepted and consented to all terms of the Plan and all actions or decisions made by the Company, the Board or the Committee with regard to the Plan. Such terms and consent shall also apply to, and be binding upon, the Beneficiaries, distributees and personal representatives and other successors in interest of each Participant. -14- ARTICLE XIV SEVERABILITY 14.1 In the event any provision of this Plan would violate applicable law or serve to invalidate the Plan, that provision shall be deemed to be null and void, and the Plan shall be construed as if it did not contain the provision in question. ARTICLE XV AMENDMENT AND TERMINATION 15.1 Board May Terminate. Subject to all other provisions of this Plan, the Board, may at any time terminate the Plan. 15.2 Board or Committee May Amend. Subject to all other provisions of this Plan, the Committee or the Board may amend this Plan at any time, provided that any amendment by the Committee shall be consistent with the Plan's original design and purpose. 15.3 Fiduciary Guidelines. Notwithstanding Sections 6.9, 15.1 and 15.2, the Board shall not make amendments or terminate the Plan if such amendments or termination would reduce a Participant's respective balance in his Deferred Compensation Account. Further, the Board shall not make amendments which would in any way eliminate the express requirement in Section 16.1 requiring the establishment and funding of a Rabbi Trust in the event of a Change of Control (as defined at Section 16.1) if one has not previously been established and funded. 15.4 Termination. In the event the Board terminates the Plan, the Committee shall give written notice to each Participant that his Deferred Compensation Account balance will be distributed in the manner initially elected by each Participant pursuant to Article VIII. Further, pursuant to the responsibility vested with the Committee as stated in Section 17.1, the Committee will evaluate the advisability of establishing a Rabbi Trust - if one does not already exist - in light of the circumstances that caused the Board to terminate the Plan. 15.5 Corporate Successors. The Plan shall not be automatically terminated by a transfer or sale of assets of the Company or by the merger or consolidation of the Company into or with any other corporation or other entity. The Plan will be continued after such sale, merger or consolidation if and to the extent that the transferee, purchaser or successor entity (hereinafter called the "Successor") agrees to continue the Plan. In the event the Plan is not assumed and continued by the Successor, then the Plan shall terminate in accordance with Section 15.4; provided that each Participant's Phantom Share sub-account shall be valued based upon Phantom Share units being valued by reference to the greater of (a) the Market Price of Tecumseh Shares on the effective date of such sale, merger or consolidation, or (b) the value per share, as of such date, of consideration received by the actual holders of Tecumseh Shares in connection with the sale, merger or consolidation in question. -15- ARTICLE XVI CHANGE OF CONTROL 16.1 Funding of Rabbi Trust. Notwithstanding Article VII, and subject to the following paragraph, upon a "Change of Control" as defined in attached Exhibit B (i.e., a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company, within the meaning of IRC Section 409A(a)(2)(A)(v)), the Board shall cause the immediate contribution of funds to a newly-created Rabbi Trust (or existing Rabbi Trust if previously established), i.e., a "Rabbi Trust" established in accordance with Rev. Proc. 92-64 (or any successor), for the benefit of each Plan Participant, as beneficiary. If the Committee determines that a Rabbi Trust is not the appropriate funding mechanism, any other funding mechanism approved by the Internal Revenue Service as a means to avoid Plan Participants being in constructive receipt of income can be used in the alternative. Such initial contribution will be equal to the balance in each Participant's Deferred Compensation Account as of the Change of Control date. Further, if the Plan is not terminated upon such Change of Control, the Employer shall continue to contribute to the Rabbi Trust, on a monthly basis, an amount of cash and/or Tecumseh Shares equal to the Compensation being deferred by each Participant after the Change of Control. Also, the Employer shall continue to contribute additional cash and/or Tecumseh Shares as required to maintain the value of the assets of such Rabbi Trust at least equal to the estimated value of future benefits payable under the Plan. Notwithstanding the above provisions, no Rabbi Trust assets shall be located or transferred outside of the United States and no property shall be transferred to the Trust or any other funding mechanism in connection with an adverse change in the Company's financial health. Any assets set aside in the Rabbi Trust shall not be deemed to be the property of the Participant and shall be subject to claims of the creditors of Company. No Participant or Beneficiary shall have any claim against, right to, or security or other interest in, any fund, account or asset of Company from which any payment under the Plan may be made. ARTICLE XVII PLAN ADMINISTRATION 17.1 Committee. The responsibilities for general administration of the Plan as well as the decisions to establish and fund a Rabbi Trust or other funding medium shall reside with the Committee. 17.2 Determinations of Committee. Subject to the limitations of the Plan or the express powers reserved solely for the Board, the Committee shall from time to time establish rules for the administration and interpretation of the Plan and the transaction of its business. The determination of the Committee shall be conclusive concerning the content, import or meaning of any and all terms in the Plan. 17.3 Majority Vote. Any act which the Plan authorizes or requires the Committee to do may be done by a majority (expressed from time to time by a vote at a meeting or, in lieu thereof, -16- a written consent) and shall constitute the action of the Committee, and shall have the same effect for all purposes as if assented to by all members of the Committee. 17.4 Agents and Employees. The Committee may employ or retain agents and may designate one or more employees of the Company, by name or by position, to perform such clerical, accounting, and other services as the Committee may require in carrying out the provisions of the Plan. 17.5 Authorization of Committee Members. The members of the Committee may authorize one or more of their members to execute or deliver any instrument, make any payment, or perform any other act which the Plan authorizes or requires the Committee to do. 17.6 Costs. Any and all costs in administering this Plan will be paid by the Employer. 17.7 Claims. Claims for benefits under the Plan shall be made in writing to the Committee. The Participant (or Beneficiary) may furnish the Committee with any written material he believes necessary to perfect his claim. 17.8 Claims Review. A person whose claim for benefits under the Plan has been denied, or his duly authorized representative, may request a review upon written application to the Committee, may review pertinent documents, and may submit issues and comments in writing. The claimant's written request for review must be submitted to the Committee within 60 days after receipt by the claimant of written notification of the denial of a claim. A decision by the Committee shall be made promptly, and not later than 60 days after the Committee's receipt of a request for review, unless special circumstances require an extension of time for proceeding, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review. The decision on review shall be in writing, shall include reasons for the decision, may include specific reference to the pertinent provision of the Plan on which the decision is based, and shall be written in a manner calculated to be understood by the claimant. 17.9(a) Arbitration. Unless otherwise required by law, any controversy or claim arising out of or relating to the Plan or the breach thereof, shall be settled by binding arbitration in the City of Tecumseh in accordance with the laws of the State of Michigan by three arbitrators, one of whom shall be appointed by the Company, one by the Participant (or in the event of his prior death, his beneficiary(ies) or other distributee(s)), and the third of whom shall be appointed by the first two arbitrators. If the selected (third) arbitrator declines or is unable to serve for any reason, the appointed arbitrators shall select another arbitrator. Upon their failure to agree on another arbitrator, the jurisdiction of the Circuit Court of Lenawee County, Michigan shall be invoked to make such selection. The arbitration shall be conducted in accordance with the commercial arbitration rules of the American Arbitration Association except as provided in 17.9(b) below. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Review by the arbitrators of any decision, action or interpretation of the Board or Committee shall be limited to a determination of whether it was arbitrary and capricious or constituted an abuse of discretion, within the guidelines of Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). In the event the Participant or his beneficiary shall retain -17- legal counsel and/or incur other costs and expenses in connection with enforcement of any of the Participant's rights under the Plan, the Participant or beneficiary shall not be entitled to recover from the Company any attorneys fees, costs or expenses in connection with the enforcement of such rights (including enforcement of any arbitration award in court) regardless of the final outcome; except that the arbitrators in their discretion may award reasonable attorneys fees and reasonable costs to the Participant in an arbitration initiated by the Participant to enforce the Participant's rights under the Plan, provided the Participant is the prevailing party in such arbitration. 17.9(b) Any arbitration shall be conducted as follows: (i) The arbitrators shall follow the Commercial arbitration Rules of the American Arbitration Association, except as otherwise provided herein. The arbitrators shall substantially comply with the rules of evidence; shall grant essential but limited discovery; shall provide for the exchange of witness lists and exhibit copies; and shall conduct a pretrial and consider dispositive motions. Each party shall have the right to request the arbitrators to make findings of specific factual issues. (ii) The arbitrators shall complete their proceedings and render their decision within 40 days after submission of the dispute to them, unless both parties agree to an extension. Each party shall cooperate with the arbitrators to comply with procedural time requirements and the failure of either to do so shall entitle the arbitrators to extend the arbitration proceedings accordingly and to impose sanctions on the party responsible for the delay, payable to the other party. In the event the arbitrators do not fulfill their responsibilities on a timely basis, either party shall have the right to require a replacement and the appointment of new arbitrators. (iii) The decision of the arbitrator shall be final and binding upon the parties and accordingly a judgment by any Circuit Court of the State of Michigan or any other court of competent jurisdiction may be entered in accordance therewith. (iv) Subject to the provisions of Section 17.9(a) relating to reasonable attorneys fees and costs in an arbitration, the costs of the arbitration shall be borne equally by the parties to such arbitration, except that each party shall bear its own legal and accounting expenses relating to its participation in the arbitration. ARTICLE XVIII LIMITATIONS OF ACTION 18.1 Every asserted claim to benefits or right of action by or on behalf of any Participant, past, present, or future, or any spouse, child, beneficiary or legal representative thereof, against the Company arising out of or in connection with the Plan shall, irrespective of the place where such right of action may arise or be asserted, cease and be barred by the expiration of the earliest of: (i) one year from the date of the alleged act or omission in respect of which such right of action first arises in whole or in part, (ii) one year after the Participant's Separation From -18- Service, or (iii) six months after notice is given to or on behalf of the Participant of the amount payable to or in respect of the Participant under the Plan. WITNESS execution of this plan document on behalf of the Company by its duly authorized officer. TECUMSEH PRODUCTS COMPANY By: /s/ TODD W. HERRICK ------------------------------------ Its President and Chief Executive Officer Dated: March 29, 2006 -19- EXHIBIT A Separation From Service A Separation From Service occurs on the date upon which a Participant separates from service with his Employer, as determined in accordance with Code Section 409A and Treasury Regulations promulgated thereunder. A Separation From Service shall be deemed to occur 1. if a Participant terminates employment with his Employer and does not continue to render services to the Company or any controlled subsidiary of the Company; or 2. if the Participant's Employer ceases to be a controlled Subsidiary of the Company. For purposes of this Plan, a Participant separates from service if the Participant dies, retires or otherwise has a Separation From Service with the Employer. However, the employment relationship is treated as continuing intact while the Participant is on military leave, sick leave, or other bona fide leave of absence (such as temporary employment by the government) if the period of such leave does not exceed six months, or if longer, so long as the Participant's right to reemployment with the Employer is provided either by statute or by contract. If the period of leave exceeds six months and the Participant's right to reemployment is not provided either by statute or by contract, the employment relationship is deemed to terminate on the first date immediately following such six-month period. Whether a Separation From Service has occurred is determined based on the facts and circumstances. Where a Participant either actually or purportedly continues in the capacity as a Participant, such as through the execution of an employment agreement under which the Participant agrees to be available to perform services if requested, but the facts and circumstances indicate that neither the Employer nor the Participant intended for the Participant to provide more than insignificant services to the Employer, a Participant will be treated as having a Separation From Service. For purposes of the preceding sentence, the Employer and Participant will not be treated as having intended for the Participant to provide insignificant services where the Participant continues to provide services at an annual rate that is at least equal to 20 percent of the services rendered, on average, during the immediately preceding three full calendar years of employment (or, if employed less than three years, such lesser period) and the annual remuneration for such services is at least equal to 20 percent of the average annual remuneration earned during the final three full calendar years of employment (or, if less, such lesser period). Where a Participant continues to provide services to the Employer in a capacity other than as a Participant, a separation from service will not be deemed to have occurred if such former Participant is providing services at an annual rate that is 50 percent or more of the services rendered, on average, during the immediately preceding three full calendar years of employment (or if employed less than three years, such lesser period) and the annual remuneration for such services is 50 percent or more of the annual remuneration earned during the final three full calendar years of employment (or if less, such lesser period). For purposes of this paragraph, the annual rate of providing services is determined based upon the measurement used to determine the Participant's base compensation (for example, amounts of time required to earn salary, hourly wages or payments for specific projects). -20- EXHIBIT B "Change of Control," solely for the purposes of this Plan, shall mean (and be limited to) any change that qualifies as a change of control event pursuant to Section 409A of the Internal Revenue Code of 1986, as amended, Proposed Treasury Regulation Section 1.409A-3(g)(5), and all subsequent relevant authority, which shall include one or more of the following events: a) a change in the ownership of the Company in compliance with Proposed Treasury Regulation Section 1.409A-3(g)(5)(v) pursuant to which any person or group acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than 50 percent of the total fair market value or total voting power of the stock of such corporation. b) a change in the effective control of the Company pursuant to Proposed Treasury Regulation Section 1.409A-3(g)(5)(vi), pursuant to which either: (1) Any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership (including acquisition of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of stock of the Company possessing 35 percent or more of the total voting power of the stock of such corporation; or (2) A majority of members of the Company's board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Company's board of directors prior to the date of the appointment or election; c) a change in the ownership of a substantial portion of the Company's assets pursuant to Proposed Treasury Regulation Section 1.409A-3(g)(5)(vii) pursuant to which any one person or group acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value (as defined in 1.409A-3(g)(5)(vii)) equal to or more than 40 percent of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions. d) For purposes of this Exhibit B, the following terms shall have the following meanings: i) "person" shall mean a person as defined in Section 3(a)(9) of the 1934 Act. ii) "beneficial ownership" shall be determined in accordance with Rule 13d-3 promulgated under the 1934 Act or any successor regulation. iii) "group" shall mean a group as described in Rule 13d-5 promulgated under the 1934 Act or any successor regulation provided such group falls within the purview of Prop. Treas. Reg. Sections 1.409A-3(g)(v)(B), 1.409A-3(g)(5)(vi)(D), or 1.409A-3(g)(5)(vii)(C), as applicable. The formation of a group hereunder shall have the effect described in paragraph (b) of said Rule 13d-5 or any successor regulation. -21- EX-10.3 6 k05154exv10w3.txt DIRECTOR RETENTION PHANTOM PLAN EXHIBIT 10.3 TECUMSEH PRODUCTS COMPANY DIRECTOR RETENTION PHANTOM STOCK PLAN The following document sets forth the terms of the Plan as amended and restated effective January 1, 2005. Tecumseh Products Company (the "Company") amends and restates its Director Retention Phantom Stock Plan to provide an incentive for outside Directors to remain in service on the Company's Board of Directors so that the Company may continue to benefit from their counsel and dedication, while rewarding their commitment to the Company with deferred income based on the Company's realized return on equity and the stock market performance of the Class A Common Stock of the Company. 1 DEFINITIONS As used in the Plan, the following terms have the following respective meanings: "Account" has the meaning given in Section 4.1 hereof. "Award" means an allocation of Phantom Shares to the Account of an Eligible Director and shall include the dollar amount authorized for Plan Awards prior to the conversion of such amount into Phantom Share units. "Board" means the Board of Directors of the Company. "Committee" means the Governance, Compensation and Nominating Committee of the Board, or such other committee as the Board may subsequently appoint to administer the Plan. "Determination Date" means, for each Eligible Director, the date on which he or she ceases to be a Director of the Company due to resignation, retirement, death, Disability or other reason, provided that such event is also a "separation from service" with the Company, as determined in accordance with Code Section 409A. If such event is not a "separation from service," then the Determination Date shall be the earliest date following such event when a "separation from service" occurs. "Disability" (or to be "Disabled") means a medically determinable physical or mental impairment which can be expected to result in death or to last for a continuous period of not less than 12 months and causes an Eligible Director to be unable to engage in any substantial gainful activity by reason of such impairment. An Eligible Director shall also be deemed to have a Disability when determined to be totally disabled by the Social Security Administration. "Eligible Director" means, for any relevant time, each individual who at that time is a member of the Board but is not also an officer or employee of the Company or of any subsidiary of the Company. "Market Price" means, for any given date (i) if the Shares are then listed for trading on one or more national securities exchanges (including for this purpose the NASDAQ "National Market"), the average of the high and low sale prices for a Share on the principal such exchange on the date in question (or, if no Shares traded on such exchange on such date, the next preceding date on which such trading occurred); (ii) if (i) is inapplicable but bid and asked prices for Shares are quoted through NASDAQ, the average of the highest bid and lowest asked prices so quoted for a Share on the date in question (or, if no prices for Shares were quoted on that date, the next preceding date on which they were quoted); (iii) if (i) and (ii) are inapplicable but bid and asked prices for Shares are otherwise quoted by one or more broker-dealers known to the Company to be making a market in the Shares, the average of the highest bid and lowest asked prices so quoted on the date in question (or, if no prices were quoted on that date, the next preceding date on which they were quoted); and (iv) if all of the foregoing are inapplicable, the fair market value of a Share on the date in question as determined in good faith by the Committee. "NASDAQ" means the National Association of Securities Dealers, Inc. Automated Quotation System. "Phantom Share" means an allocation credited to the Account of an Eligible Director and maintained in such Account together with any prior or subsequent allocations made on behalf of such Director. An allocation of Phantom Shares shall confer only such rights as are specified in the Plan. Directors who receive allocations of Phantom Share units shall not (as a consequence of such allocations) be treated as shareholders under the Articles of Incorporation or By-Laws of the Company or under applicable law. "Plan" means this Director Retention Phantom Stock Plan. "Plan Year" means the calendar year. "Retainer" means the annual amount payable to an Eligible Director for serving as a Director of the Company during a given year, excluding amounts payable for attendance at meetings of the Board, any amounts payable for serving on or as chair of any committee of the Board and any amounts payable for reimbursement of expenses. "Share(s)" means Class A Common Stock, $1.00 par value per share, of the Company. 2 ADMINISTRATION The Plan shall be administered by the Committee. To the extent consistent with the terms of the Plan, the Committee shall have the power to interpret any Plan provision, to prescribe, amend, and rescind rules and regulations relating to the Plan, and to make all other determinations that it deems necessary or advisable to administer the Plan. The Committee may appoint such agents to assist in administration of the Plan, other than Eligible Directors, as the Committee deems appropriate. The Committee's interpretation of the Plan and any action it takes with respect to allocations of Phantom Share units pursuant thereto shall be final and binding upon all affected parties. 2 3 AWARDS 3.1 The target dollar amount of an Award shall equal the greater of (A) a stated percentage (not to exceed 100%) of each Eligible Director's annual Retainer that will constitute the Award if the Company attains or exceeds a target Return on Equity ("ROE") as established by the Committee from time to time, or (B) $5,000 (without regard to ROE). The actual amount to be used for Awards (the "Award Pool") for a given Plan Year shall be a percentage of the target amount (not to exceed 100%) of the Company's actual ROE for such Plan Year. As used in this Plan, "ROE" means the Company's average annual rate of return on equity for the Plan Year, determined by the same method as the Company uses for other performance measurement purposes (rounded to the nearest one-hundredth of a percent). The Award Pool shall be zero for any Plan Year in which ROE is below a percentage established by the Committee when the Committee establishes the target ROE. Promptly after establishing the target ROE and the minimum ROE (if any) the Committee shall advise the Eligible Directors of such determination(s). Subject to Section 6.3, each Award shall be fully vested when made. 3.2 If an Eligible Director shall die, become Disabled, retire or otherwise terminate service as a Director prior to December 31 of a Plan Year, he or she shall not be entitled to an Award for such Plan Year. If an Eligible Director shall die or become Disabled on or after January 1 but before Awards, if any, are determined pursuant to Section 4.2, the Committee may authorize an Award to him or her or to his or her beneficiary or estate in such amount, if any, as the Committee in its discretion deems appropriate; provided that Awards shall be made under this Section 3.2 only if an Award Pool is established under Section 3.1. 3.3 Beginning with the 2005 Plan Year, each Phantom Share Award made by the Company shall be assigned a "Class Year" corresponding to the Plan Year for which the Award has been made. 4 ACCOUNTS 4.1 For each Eligible Director, the Company shall establish and maintain a bookkeeping account ("Account") in which all Phantom Share units allocable to the Eligible Director due to his or her participation in the Plan shall be credited. 4.2 At the organizational meeting of the Board of Directors which follows the Annual Meeting of Shareholders, the Award (if any) for the preceding Plan Year shall be determined and there shall be allocated to each Eligible Director's Account a number (to four decimal places) of Phantom Share units that is equal to the dollar amount of the Eligible Director's Award, divided by the Market Price on the trading date immediately preceding the allocation date. EXAMPLE: If an Eligible Director is due to receive $10,000 as his/her annual Award pursuant to this Plan, and if the Market Price per Share is $51 on the valuation date, then he or she will receive an allocation of Phantom Share units determined by the formula $10,000 / $51, or 196.0784 Phantom Share units. 3 4.3 On the payment date for any cash dividend or other cash distribution declared upon the Shares, there shall be allocated to each Eligible Director's Account that number (to four decimal places) of Phantom Share units that is equal to the total of units which on the related record date were in the Eligible Director's Account, multiplied by the per Share cash dividend or other distribution, and divided by the Market Price on such payment date. 5 POLICY REGARDING RETIREMENT OF OUTSIDE DIRECTORS 5.1 An Eligible Director shall retire from the Board as provided in the Company's Bylaws, and nothing contained in this Plan shall entitle an Eligible Director to serve beyond the term for which he or she was elected to the Board. Nothing in this Plan shall be construed to restrict the stockholders' right to elect any person a Director of the Company in accordance with the Articles of Incorporation and Bylaws. 6 PAYMENT OF AWARDS 6.1 Subject to the provisions of Sections 6.3 and 6.4, within 30 days after (a) an Eligible Director's Determination Date, or (b) a Company Change of Control, the Company shall pay to the Director an amount in cash equal to: - the number of Phantom Share units then credited to his or her Account based on Awards for Plan Years ending on or before December 31,2004 multiplied by - the Market Price per Share on the Determination Date or date such Company Change of Control shall have occurred, as the case may be. 6.2 Subject to the provisions of Sections 6.3 and 6.4, one-half of each Eligible Director's Award for a Class Year after 2004 shall be payable within 30 days after the third December 31 following the end of such Class Year and the remaining one-half shall be payable within 30 days after the fifth December 31 following the end of such Class Year. In each instance the payment shall be a cash amount equal to the Market Price per Share on the business day preceding the payment date multiplied by the applicable number of Phantom Share units. The "applicable number" in the case of a third year payment is 50% of the units credited to his or her Account for the Class Year in question as of the third December 31 following the end of that Class Year. The "applicable number" in the case of a fifth year payment is the remainder of the units credited to his or her Account for the Class Year in question as of the fifth December 31 following the end of that Class Year. Notwithstanding the above benefit payment schedule, if the Eligible Director's Determination Date or a Company Change in Control should occur prior to a scheduled payment date, then the balance of all awards for post-2004 Class Years shall be paid in a lump within 30 days after such event, using the payment formula described of Section 6.1 as applied to all Phantom Share units then credited to his or her Account. 4 6.3 An Eligible Director's Account shall be forfeited if his or her service on the Board is terminated, voluntarily or otherwise, for any Reason denominated below (which shall be determined by the Committee). Such "Reason," for the sole purpose of determining whether an Eligible Director's Awards are to be forfeited, shall be deemed to exist where - (i) The Eligible Director breaches any material written rules, regulations or policies of the Board, now existing or hereafter arising, which are uniformly applied to all Eligible Directors or which rules, regulations and policies are promulgated for general application to Directors of the Company; or (ii) The Eligible Director willfully and repeatedly fails to substantially perform the duties of his or her tenure (other than any such failure resulting from incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to him by the Board chairperson, which demand specifically identifies the manner in which the chairperson believes that the Eligible Director has not substantially performed such duties; or (iii) The Eligible Director is convicted of a felony under state or federal law, or commits a crime involving moral turpitude; or (iv) The Eligible Director embezzles or misappropriates any property belonging to the Company such that he may be subject to criminal prosecution therefor or the Eligible Director intentionally and materially injures the Company, its personnel or its property. 6.4 If an Eligible Director's Determination Date occurs due to death, or if he or she dies prior to payment pursuant to Section 6.1 or 6.2, then the amount payable shall be paid to the beneficiary or beneficiaries designated in the Eligible Director's written beneficiary designation filed with the Committee, or, if no valid beneficiary designation has been filed, the legally appointed personal representative of the Eligible Director's estate. If no such representative is appointed by the time payment is due, then the Company shall hold the payment without interest until appointment occurs or proper claim for such items otherwise is made of the Company by the person or persons entitled thereto. If the Company is notified that an Eligible Director has been adjudicated mentally incompetent as of the time any amount is payable under the Plan to the Eligible Director, or if it otherwise is demonstrated to the satisfaction of the Committee that such mental incapacity then exists by a person authorized by a durable power of attorney or similar document to attend to the Eligible Director's financial affairs, the any cash so payable shall be delivered to, the Eligible Director's legally appointed guardian or conservator or, if none has been appointed, the holder of such power of attorney or similar document. 6.5 For any portion of an Account becoming vested after December 31, 2004, "Company Change in Control" means a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the Company, within the meaning of Code Section 409A(a)(2)(A)(v), as more fully described in attached Exhibit A. For other portions of an Account, "Company Change in Control" shall have the meaning set forth in attached Exhibit B. 5 7 ADJUSTMENTS In the event of any non-cash dividend or other distribution, or any stock split, reverse stock split, recapitalization, reorganization, split-up, spin-off, merger, consolidation, share exchange, or other like change in the capital or corporate structure of the Company affecting the Shares, there shall be made such adjustment or adjustments (if any) in the number of units credited to the Accounts of Eligible Directors as the Committee determines to be appropriate in light of such event in order to continue to make available the benefits intended by the Plan, but no adjustment shall be required by reason of any sales of Shares or other Company securities by the Company at any price, whether below, or at or above Market Price, and whether by or pursuant to warrant, option, right, conversion right or privilege, or otherwise. 8 MISCELLANEOUS MATTERS 8.1 Accounts are not intended to be and shall not be trust accounts for the benefit of any Eligible Director or other person, nor shall the establishment and maintenance of an Account afford any Eligible Director or other person any right or interest in any asset the Company may determine to earmark for future payment of benefits under the Plan. Rather, benefits payable under the Plan are intended to be unfunded for tax purposes, and the sole right of an Eligible Director or beneficiary or other successor in interest thereof with respect to his or her Account shall be the right as an unsecured general creditor of the Company to claim any cash benefit to which the Eligible Director becomes entitled after his or her Determination Date, pursuant to the terms and conditions of the Plan. 8.2 An Eligible Director's right and interest in his or her Account shall not be subject in any manner to anticipation, alienation, sale, assignment, pledge, encumbrance, attachment, garnishment for the benefit of creditors of the Eligible Director, or other transfer whatsoever, other than by will or the laws of descent and distribution. 8.3 Nothing in the Plan shall obligate any Eligible Director to continue as a Director of the Company or the Company, or to accept any nomination for a future term as such a Director, or require the Company to nominate or cause the nomination of any Eligible Director for a future term as a Director of the Company or the Company. 8.4 This Plan shall be governed by and construed, enforced, and administered in accordance with the laws of the State of Michigan excluding any such laws which direct an application of the laws of any other jurisdiction. At all times, the Plan will also be interpreted and administered to maintain intended income tax deferral in accordance with Code Section 409A and regulations and other guidance issued thereunder. The Company and the Committee shall be subject to suit regarding the Plan only in the courts of the State of Michigan, and the Company shall fully indemnify and defend the Board and the Committee with respect to any actions relating to this Plan made in good faith by such bodies or their members. 6 9 DURATION OF THE PLAN 9.1 The Plan was adopted by the Board on March 29, 2006 pursuant to the Board's resolution of February 23, 2005 (authorizing the changes made in this amended and restated document) and takes effect as of January 1, 2005. 9.2 The Board may at any time and from time to time amend, modify, suspend, or terminate the Plan, except that none of the foregoing actions by the Board shall adversely affect the rights or benefits of an Eligible Director without such Eligible Director's consent. 7 Exhibit A For any portion of an Account becoming vested after December 31, 2004, "Company Change in Control," solely for the purposes of this Plan, shall mean (and be limited to) any change that qualifies as a change of control event pursuant to Section 409A of the Internal Revenue Code of 1986, as amended, Proposed Treasury Regulation Section 1.409A-3(g)(5), and all subsequent relevant authority, which shall include one or more of the following events: a) a change in the ownership of the Company in compliance with Proposed Treasury Regulation Section 1.409A-3(g)(5)(v) pursuant to which any person or group acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than 50 percent of the total fair market value or total voting power of the stock of such corporation. b) a change in the effective control of the Company pursuant to Proposed Treasury Regulation Section 1.409A-3(g)(5)(vi), pursuant to which either: (1) Any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership (including acquisition of beneficial ownership within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934) of stock of the Company possessing 35 percent or more of the total voting power of the stock of such corporation; or (2) A majority of members of the Company's board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Company's board of directors prior to the date of the appointment or election; c) a change in the ownership of a substantial portion of the Company's assets pursuant to Proposed Treasury Regulation Section 1.409A-3(g)(5)(vii) pursuant to which any one person or group acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value (as defined in 1.409A-3(g)(5)(vii)) equal to or more than 40 percent of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions. d) For purposes of this Exhibit A, the following terms shall have the following meanings: i) "person" shall mean a person as defined in Section 3(a)(9) of the 1934 Act. ii) "beneficial ownership" shall be determined in accordance with Rule 13d-3 promulgated under the 1934 Act or any successor regulation. iii) "group" shall mean a group as described in Rule 13d-5 promulgated under the 1934 Act or any successor regulation provided such group falls within the purview of Prop. Treas. Reg. Sections 1.409A-3(g)(v)(B), 1.409A-3(g)(5)(vi)(D), or 1.409A-3(g)(5)(vii)(C), as applicable. The formation of a group hereunder shall have the effect described in paragraph (b) of said Rule 13d-5 or any successor regulation. 8 EXHIBIT B For any portion of an Account becoming vested before January 1, 2005, "Company Change in Control," solely for the purposes of this Plan, shall mean one or more of the following events: (i) The acquisition, after December 31, 2004, of beneficial ownership of 25% or more of the Company's Class A Common Stock or Class B Common Stock then outstanding by any person (including a group, within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934 (the "1934 Act")), other than: (A) the trustee of any Company-sponsored employee benefit plan, (B) the Company or any of its subsidiaries, (C) Kenneth G. Herrick, his descendants, or trusts for the benefit of such individuals, or (D) trusts or foundations established by Kenneth G. Herrick or by any of the descendants or trusts mentioned in (C), above. (ii) The first purchase, after December 31, 2004, under a tender offer or exchange offer for 25% or more of the Company's Class A Common Stock or Class B Common Stock then outstanding, other than an offer by: (A) the trustee of any Company-sponsored employee benefit plan, (B) the Company or any of its subsidiaries, (C) Kenneth G. Herrick, his descendants, or trusts for the benefit of such individuals, or (D) trusts or foundations established by Kenneth G. Herrick or by any of the descendants or trusts mentioned in (C), above. (iii) The first day on which less than a majority of the total membership of the Board shall be Continuing Directors; (iv) The effective date of a transaction (or a group of related transactions) in which more than 50% in fair market value of the assets of the Company are disposed of pursuant to a partial or complete liquidation, a spin-off, a sale of assets or otherwise; or (v) The date on which the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 51% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger of consolidation. 9 (b) For purposes of this Exhibit B, the following terms shall have the following meanings: (i) "Continuing Director" shall mean any Director of the Company who either (1) is a member of the Board on the date this Plan is adopted by the Board and has not terminated membership on the Board, or (2) is recommended or elected to the Company's Board of Directors by at least three-quarters of the Continuing Directors. (ii) "Person" shall mean a person as defined in Section 3(a)(9) of the 1934 Act, "beneficial ownership" shall be determined in accordance with Rule 13d-3 promulgated under the 1934 Act or any successor regulation, the term "group" shall mean a group as described in Rule 13d-5 promulgated under the 1934 Act or any successor regulation, and the formation of a group hereunder shall have the effect described in paragraph (b) of said Rule 13d-5 or any successor regulation. Anything hereinabove to the contrary notwithstanding, however: (a) relationships by blood, adoption or marriage between or among two or more persons shall not be deemed to constitute any of such persons a member of a group with any other such persons; (b) action taken or agreed to be taken by any person acting in his official capacity as an officer or Director of the Company shall not be deemed to constitute such person a member of a group with any other person, and (c) formation of a group shall not constitute an acquisition by the group (or any member thereof) of beneficial ownership of any shares of the Company's Class B ("voting") common stock beneficially owned by any member of such group and acquired by such group member in an Excluded Acquisition. (iii) "Excluded Acquisition" means any acquisition of shares of voting common stock from the Company (whether or not for consideration) or from any person by operation of law (including but not limited to the laws of descent and distribution), by will, by gift or by foreclosure of a security interest given to secure a bona fide loan, or any acquisition consummated prior to January 1, 2005. 10 EX-31.1 7 k05154exv31w1.txt CERTIFICATION OF THE PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 Exhibit 31.1 RULE 13a-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Todd W. Herrick, Chairman, President and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tecumseh Products Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Audit Committee of the registrant's Board of Directors (or persons performing the equivalent function): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: May 9, 2006 BY: /s/ TODD W. HERRICK ------------------------ ------------------------------- Todd W. Herrick Chairman, President, and Chief Executive Officer EX-31.2 8 k05154exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 Exhibit 31.2 RULE 13a-14(a) CERTIFICATION OF CHIEF FINANCIAL OFFICER I, James S. Nicholson, Vice President, Treasurer and Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tecumseh Products Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Audit Committee of the registrant's Board of Directors (or persons performing the equivalent function): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: May 9, 2006 BY: /s/ JAMES S. NICHOLSON ------------------------ ------------------------------- James S. Nicholson Vice President, Treasurer and Chief Financial Officer EX-32.1 9 k05154exv32w1.txt CERTIFICATION OF THE PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER In connection with the quarterly report of Tecumseh Products Company (the "Company") on Form 10-Q for the period ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Form 10-Q"), I, Todd W. Herrick, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 9, 2006 BY: /s/ TODD W. HERRICK ------------------------ ------------------------------- Todd W. Herrick President and Chief Executive Officer EX-32.2 10 k05154exv32w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER In connection with the quarterly report of Tecumseh Products Company (the "Company") on Form 10-Q for the period ended March 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the "Form 10-Q"), I, James S. Nicholson, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: May 9, 2006 BY: /s/ JAMES S. NICHOLSON ------------------------ ------------------------------- James S. Nicholson Vice President, Treasurer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----