-----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, GIorR0rkrpXYVCeYC4osntNnBYoYTTmz3+ErLigJMKGwSSF0D9IBWswFQ54L8Odp 6hKrz4qurbW+ZJRbYq793w== 0000950124-07-005848.txt : 20071114 0000950124-07-005848.hdr.sgml : 20071114 20071114161504 ACCESSION NUMBER: 0000950124-07-005848 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20070930 FILED AS OF DATE: 20071114 DATE AS OF CHANGE: 20071114 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: 071245013 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 k21582e10vq.txt QUARTERLY REPORT 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 September 30, 2007 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, an accelerated filer, or a 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 Exchange 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 September 30, 2007 -------------- --------------------------------- 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
Page ---- Part I. Financial Information (unaudited) Item 1. Financial Statements (unaudited) Consolidated Condensed Balance Sheets (unaudited).............. 3 Consolidated Condensed Statements of Operations (unaudited).... 4 Consolidated Condensed Statements of Cash Flows (unaudited).... 5 Notes to Consolidated Condensed Financial Statements........... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 24 Item 3. Quantitative and Qualitative Disclosures About Market Risk ..................................................... 42 Item 4. Controls and Procedures................................... 43 Part II. Other Information........................................... 45 Item 5. Other Information......................................... 45 Item 6. Exhibits.................................................. 45 Signatures........................................................... 46 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)
SEPTEMBER 30, December 31, (Dollars in millions, except share data) 2007 2006 ------------- ------------ ASSETS Current Assets: Cash and cash equivalents $ 57.2 $ 81.9 Accounts receivable, trade, less allowance for doubtful accounts of $7.1 in 2007 and $10.1 in 2006 162.2 219.5 Inventories 204.0 353.4 Deferred and recoverable income taxes 45.3 40.6 Recoverable non-income taxes 30.9 33.6 Assets held for sale 39.2 -- Other current assets 16.7 4.4 -------- -------- Total current assets 555.5 733.4 Property, plant, and equipment, net 373.1 552.4 Goodwill 19.8 127.0 Other intangibles -- 53.0 Prepaid pension expense 209.0 202.5 Assets held for sale 17.1 -- Recoverable non-income taxes 98.1 63.6 Other assets 49.3 50.8 -------- -------- Total assets $1,321.9 $1,782.7 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable, trade $ 175.2 $ 216.0 Short-term borrowings 68.6 163.2 Liabilities held for sale 19.4 -- Accrued liabilities 116.1 130.1 -------- -------- Total current liabilities 379.3 509.3 Long-term debt 34.7 217.3 Deferred income taxes 30.5 28.6 Other postretirement benefit liabilities 150.3 166.0 Product warranty and self-insured risks 16.0 13.6 Pension liabilities 15.7 14.9 Liabilities held for sale 2.2 -- Other non-current liabilities 34.4 34.6 -------- -------- Total liabilities 663.1 984.3 -------- -------- Stockholders' Equity Class A common stock, $1 par value; authorized 75,000,000 shares; issued and outstanding 13,401,938 shares in 2007 and 2006 13.4 13.4 Class B common stock, $1 par value; authorized 25,000,000 shares; issued and outstanding 5,077,746 shares in 2007 and 2006 5.1 5.1 Paid in capital 11.0 3.7 Retained earnings 543.7 726.3 Accumulated other comprehensive income 85.6 49.9 -------- -------- Total stockholders' equity 658.8 798.4 -------- -------- Total liabilities and stockholders' equity $1,321.9 $1,782.7 ======== ========
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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------- (Dollars in millions, except per share data) 2007 2006 2007 2006 ------- -------- -------- -------- Net sales $ 336.1 $ 319.5 $1,043.2 $1,004.6 Cost of sales 302.5 305.5 953.6 953.9 Selling and administrative expenses 27.6 33.8 97.1 103.8 Impairments, restructuring charges, and other items 26.2 8.4 25.3 11.6 ------- ------- -------- -------- Operating loss (20.2) (28.2) (32.8) (64.7) Interest expense (6.6) (5.7) (25.5) (16.8) Interest income and other, net 1.1 2.3 4.8 10.6 ------- ------- -------- -------- Loss from continuing operations before taxes (25.7) (31.6) (53.5) (70.9) Tax expense (benefit) (3.1) 6.7 (6.3) (2.9) ------- ------- -------- -------- Loss from continuing operations (22.6) (38.3) (47.2) (68.0) Income (loss) from discontinued operations, net of tax (54.6) 0.5 (135.0) 51.5 ------- ------- -------- -------- Net loss ($77.2) ($37.8) ($182.2) ($16.5) ======= ======= ======== ======== Basic and diluted earnings (loss) per share* Loss from continuing operations ($1.23) ($2.07) ($2.55) ($3.68) Income (loss) from discontinued operations, net of tax (2.95) 0.02 (7.30) 2.79 ------- ------- -------- -------- Net loss per share ($4.18) ($2.05) ($9.85) ($0.89) ======= ======= ======== ======== Weighted average shares (in thousands) 18,480 18,480 18,480 18,480 ------- ------- -------- -------- Cash dividends declared per share $ 0.00 $ 0.00 $ 0.00 $ 0.00 ------- ------- -------- --------
* On April 9, 2007, we issued a warrant to our Second Lien lender to purchase 1,390,944 shares of our Class A Common Stock, which is equivalent to 7% of our fully diluted common stock. This warrant is not included in diluted earnings per share for the three and nine month periods ended September 30, 2007, as the effect would be antidilutive. 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)
NINE MONTHS ENDED SEPTEMBER 30, ------------------ (Dollars in millions) 2007 2006 ------- -------- Cash Flows from Operating Activities: Cash used by operating activities ($24.5) ($129.4) Cash Flows from Investing Activities: Proceeds from sale of assets 205.9 132.4 Capital expenditures (5.9) (45.6) Business acquisition -- (2.0) ------- -------- Cash provided by investing activities 200.0 84.8 ------- -------- Cash Flows from Financing Activities: Debt amendment costs (2.9) -- Repayment of Senior Guaranteed Notes -- (250.0) Repayment of Industrial Development Revenue Bonds -- (10.5) Proceeds (repayments) from First Lien Credit Agreement, net (82.8) 147.5 Proceeds from Second Lien Credit Agreement -- 100.0 Repayments of Second Lien Credit Agreement (100.0) (45.4) Other borrowings (repayments), net (16.1) 45.6 ------- -------- Cash used in financing activities (201.8) (12.8) ------- -------- Effect of exchange rate changes on cash 1.6 (0.5) ------- -------- Decrease in cash and cash equivalents (24.7) (57.9) Cash and Cash Equivalents: Beginning of period 81.9 116.6 ------- -------- End of period $ 57.2 $ 58.7 ======= ======== *Depreciation and Amortization 40.1 54.0 Supplemental Schedule of Noncash Investing and Financing Activities: Warrant issued in conjunction with debt financing 7.3
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, 2006 consolidated 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 our Annual Report for the fiscal year ended December 31, 2006. Due to the seasonal nature of certain product lines, the results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year. On March 28, 2007, our Brazilian engine subsidiary, TMT Motoco, was granted permission by the Brazilian court to pursue a judicial restructuring, which is similar to U.S. Chapter 11 bankruptcy protection. TMT Motoco filed its restructuring plan with the court on May 28, and the court is currently evaluating this plan. The facility suspended operations on the date it filed for the judicial restructuring, and it has not been determined whether or when it will re-open in the future. We are currently in negotiations with our creditors, as well as a third party who is seeking to re-open the facility. If these negotiations prove successful, we would release our shares in exchange for the assumption of liabilities by that third party. The outcome of such negotiations is uncertain, and would require the cooperation of the buyer of the remainder of our Engine & Power Train business. If such arrangements were not to be completed, the most likely outcome would be the declaration of bankruptcy by the Brazilian court, and a subsequent liquidation of the assets. TMT Motoco was removed from our consolidated balance sheets effective March 28, 2007, and TMT Motoco is now being accounted for under the equity method. The following is a summary of the assets, liabilities and equity of TMT Motoco at September 30, 2007:
September 30, (Dollars in millions) 2007 ------------- Accounts receivable, net $ 0.2 Inventories 21.7 Other current assets 8.8 Property, plant and equipment, net 70.9 ------ Total Assets $101.6 ====== Accounts payable, trade $ 8.3 Other current liabilities 99.0 ------ Total Liabilities 107.3 Shareholders' Deficit (5.7) ------ Total Liabilities and Shareholders' Deficit $101.6 ======
While TMT Motoco had no impact on our consolidated net loss for the three months ended September 30, 2007, losses associated with TMT Motoco of $9.1 million, including interest expense, were included in our consolidated net loss for the three month period ended September Page 6 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 30, 2006. Losses of $3.5 million and $16.3 million, including interest expense, were included in our consolidated net loss for the nine months ended September 30, 2007 and 2006, respectively. 2. Liquidity and Management Plans Management has implemented a financial plan for 2007 which reflects improvements in operating income approximating $94 million over that reported for the year ended December 31, 2006. For the period ended September 30, 2007, we fell short against our financial plan projections by $36.9 million, after consideration for the classification of the Electrical Components Group as discontinued operations. This variance was attributable to volume shortfalls in our Engine Group, impairments of Engine Group assets in accordance with the expected sale price of the business segment, unfavorable currency exchange rates, and professional fees in excess of those projected in the 2007 plan. After consideration for the impact of the sale of portions of our business, we no longer expect to achieve our original financial plan. However, after completing the sale of the majority of the Electrical Components business operation and the Engine & Power Train business, as well as the announced sale of the Automotive & Specialty operations, we believe we have generated sufficient liquidity to fund our remaining operations. As referenced above, during the second quarter of 2007, our Board of Directors approved a plan to sell our Electrical Components business segment. On August 31, 2007, we completed an agreement with Regal Beloit Corporation, selling the Residential & Commercial and Asia Pacific operations of this business segment to Regal Beloit for $220 million in cash, subject to customary closing adjustments. Net proceeds of this sale transaction at closing were approximately $199 million. The proceeds were utilized to repay our Second Lien lender in full, including principal, prepayment penalties and fees, and both cash and paid in kind ("PIK") interest. The remainder of the proceeds, or approximately $93.6 million, was applied to reduce the outstanding balance on our First Lien debt. In order to close the sale transaction with Regal Beloit, on August 27, 2007 we entered into amendments to modify the credit agreements with our First Lien lenders to permit actions necessary to prepare the asset for sale, in accordance with the terms of the purchase agreement. The principal terms of this amendment were described in a Current Report on Form 8-K that we filed on August 31, 2007, and the amendment is filed herein as Exhibit 4.1. Among other things, the amendment deleted the minimum adjusted EBITDA and fixed charge covenants for the third and fourth quarters of 2007. However, beginning in 2008, the fixed charge covenant will once again apply. On October 22, 2007, we signed a Definitive Stock Purchase Agreement to sell our Engine & Power Train business operations to affiliates of Platinum Equity, LLC for $51 million in cash, subject to customary adjustments at closing. The principal terms of this agreement were disclosed in a Current Report on Form 8-K that we filed on October 26, 2007. The transaction was completed on November 9, 2007, and the proceeds were used to repay the balance remaining to our First Lien lender, effectively eliminating all of our domestic debt. In order to close the sale transaction with Platinum Equity, on November 8, 2007 we entered into an additional amendment to modify our First Lien Credit Agreement. The amendment is filed herein as Exhibit 4.2. The principal terms of the amendment reduced the minimum availability Page 7 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) covenant to $30 million, and reduced the total facility size to $75 million. As a result, after completion of the sale transaction, we had cash balances in the U.S. of approximately $21.6 million and U.S availability under our First Lien Credit Agreement of approximately $19.8 million. With respect to our liquidity, in addition to the factors described above, we consider it necessary that our Brazilian compressor subsidiary, Tecumseh do Brasil ("TdB"), secures normal credit terms, including long term committed credit lines. While we have been successful to date in obtaining sufficient lending arrangements to meet the operational needs of TdB, the majority of its credit lines are not committed lines with lives beyond one year. We consider the restoration of normal credit terms for TdB to be essential to ensuring that it continues to maintain adequate liquidity. Refer to the Executive Summary in Part 1, Item 2 of this report for further discussion of the issues related to TdB's credit agreements. Although the EBITDA and fixed charge covenants for our domestic credit agreement have been waived for the remainder of 2007, such covenants will again apply beginning with the first quarter of 2008. At this time, we do not expect to be in compliance with these covenants. While we also do not expect to have a need to borrow under the credit agreement in the foreseeable future, we consider it prudent to have a stand-by credit arrangement, and accordingly, we have been exploring new financing arrangements for our North American operations. Our expectation that we will not need to borrow in North America in the foreseeable future is based upon the expectation of the completion of remaining asset sales described elsewhere in this report, as well as the completion of the reversion of our terminated salaried pension plan, as is further discussed in Note 8. Despite the improved liquidity created through the generation of these various sources of proceeds, and the elimination of our domestic debt, current economic conditions, including the weakness of the U.S. dollar versus currencies such as the Brazilian Real, indicate that we will generate limited amounts of cash until further restructuring activities are implemented or economic conditions improve. While we believe that we have adequate liquidity to implement these changes over a reasonable time horizon, there can be no assurance that such improvements will ultimately be adequate if economic conditions continue to deteriorate and we are not successful in generating free cash flow. Refer to Note 2, "Liquidity and Management Plans," in our Annual Report on Form 10-K for the year ended December 31, 2006, for a discussion of the risks associated with shortfalls to our plan and our covenant targets. 3. Discontinued Operations and Sale of Businesses During the second quarter of 2007, our Board of Directors approved a plan to sell our Electrical Components business segment. On August 31, 2007, we completed an agreement with Regal Beloit Corporation, selling the Residential & Commercial and Asia Pacific operations of this business segment to Regal Beloit for $199 million in net cash proceeds. As a result of final adjustments made at the closing of this transaction, additional losses on the sale transaction of $11.3 million were recorded in the third quarter of 2007. On November 1, 2007, we signed an agreement to sell our Automotive & Specialty business operations to affiliates of Sun Capital Partners Group V, LLC for $10 million in cash, subject to Page 8 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) customary adjustments at closing. As a result of the agreement, we reduced the carrying value of the assets held for sale by $26.7 million, to reflect the net proceeds expected to be realized upon consummation of the transaction. Calculations of impairments or other expense on pending sale transactions are based on best estimates, and may require further adjustment upon final closing. The assets of the remaining businesses within the Electrical Components business segment have been classified as held for sale as of September 30, 2007. The segment's results for the three and nine months ended September 30, 2007 and 2006 are included in income (loss) from discontinued operations. Interest expense of $21.5 million and $4.3 million was allocated to discontinued operations for the three months ended September 30, 2007 and 2006, and interest expense of $30.9 million and $12.5 million was allocated to the nine months ended September 30, 2007 and 2006. As noted above, due to the elimination of our second lien debt in the third quarter of 2007, interest costs of $21.1 million and $30.9 million associated with that debt were reclassified to loss from discontinued operations for the three and nine months ended September 30, 2007, respectively. $17.8 million in costs associated with the Second Lien debt, which we retired during the quarter, were expensed as part of the interest costs allocated to discontinued operations during the period. Our First and Second Lien credit agreements required the proceeds from the Residential & Commercial and Asia Pacific sale to be utilized to repay our second lien credit agreement, as well as a substantial portion of our outstanding first lien debt. Following is a summary of loss from discontinued operations related to the Electrical Components segment for the three months ended September 30, 2007 and 2006:
Three Months Three Months Ended Ended (Dollars in millions) September 30, September 30, 2007 2006 ------------- ------------- Net sales $ 81.0 $109.3 Cost of sales 64.7 101.9 Selling and administrative expenses 6.5 7.9 Impairments, restructuring charges, and other items 26.3 -- ------ ------ Operating loss (16.5) (0.5) Interest expense, including allocated interest (21.6) (4.5) ------ ------ Loss from discontinued operations before income taxes (38.1) (5.0) Tax provision (benefit) 0.4 1.4 Loss from discontinued operations, net of tax ($38.5) ($6.4) ------ ------ Loss on disposal ($18.6) -- Tax provision (benefit) on loss (2.0) -- ------ ------ Loss on disposal, net (16.6) -- ------ ------ Loss from discontinued operations ($55.1) ($6.4) ------ ------
Page 9 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Following is a summary of income (loss) from discontinued operations related to the Electrical components segment for the nine months ended September 30, 2007 and 2006:
Nine Months Nine Months Ended Ended September 30, September 30, (Dollars in millions) 2007 2006 ------------- ------------- Net sales $ 286.0 $ 325.3 Cost of sales 252.5 296.4 Selling and administrative expenses 23.3 26.2 Impairments, restructuring charges, and other items 96.4 2.4 -------- ------- Operating income (loss) (86.2) 0.3 Interest expense, including allocated interest (31.3) (13.2) -------- ------- Loss from discontinued operations before income taxes (117.5) (12.9) Tax provision (benefit) -- (0.8) -------- ------- Loss from discontinued operations, net of tax ($117.5) ($12.1) -------- ------- Loss on disposal ($18.6) -- Tax provision (benefit) on loss (2.0) -- -------- ------- Loss on disposal, net (16.6) -- -------- ------- Loss from discontinued operations ($134.1) ($12.1) -------- -------
During the third quarter of 2007, we also sold Manufacturing Data Systems Inc., a small subsidiary not associated with any of our major business segments. Sales of $0.1 million and profit of $0.5 million were recorded for the three months ended September 30, 2007, and sales of $0.8 million and losses of $0.9 million were recorded for the nine months ended September 30, 2007. Sales of $0.6 million and losses of $0.6 million were recorded for the three month period ended September 30, 2006, and sales of $1.9 million and losses of $1.5 million were recorded for the nine months ended September 30, 2006. Based upon the completion of the sale of the Engine & Power Train business segment on November 9, 2007, these operations will be reported as discontinued operations beginning with our reporting of results for the fourth quarter of 2007. On April 21, 2006, we completed the sale of our 100% ownership interest in Little Giant Pump Company for $120.7 million. Its results for the three and nine months ended September 30, 2006 are included in loss from discontinued operations. Interest expense of $2.9 million was allocated to discontinued operations for the nine months ended September 30, 2006 because our financing agreements required the proceeds from the sale to be utilized to repay portions of our debt. Page 10 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Following is a summary of income (loss) from discontinued operations related to Little Giant Pump Company for the nine months ended September 30, 2006:
Nine Months Ended September 30, (Dollars in millions) 2006 ------------- Net sales $ 32.9 Cost of sales 23.9 Selling and administrative expenses 6.9 ------ Operating income 2.1 Interest expense allocated (2.9) ------ Loss from discontinued operations before income taxes (0.8) Tax provision 0.2 ------ Loss from discontinued operations, net of tax ($1.0) ------ Gain on disposal 77.9 Tax provision on gain 11.8 ------ Gain on disposal, net 66.1 ------ Income from discontinued operations $ 65.1 ======
While no sales were reported for Little Giant Pump Company for the three months ended September 30, 2006, a gain on the disposal of the business of $7.5 million was recorded. The following table summarizes income (loss) from discontinued operations, net of tax, for the three and nine months ended September 30, 2007 and 2006:
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- -------------- (Dollars in millions, except per share data) 2007 2006 2007 2006 ----- ---- ------ ----- Electrical Components segment (55.1) (6.4) (134.1) (12.1) Manufacturing Data Systems, Inc. 0.5 (0.6) (0.9) (1.5) Little Giant Pump Company -- 7.5 -- 65.1 ----- ---- ------ ----- Income (loss) from discontinued operations, net of tax (54.6) 0.5 (135.0) 51.5 ===== ==== ====== =====
Page 11 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) The following summary balance sheet information is derived from the businesses that are classified as held for sale as of September 30, 2007, which management believes is representative of the net assets of the business held for disposal. This balance sheet information includes the Automotive & Specialty business operations, other operations within the Electrical Components Group, and other long-lived assets that were held for sale at September 30, 2007.
SEPTEMBER 30, (Dollars in millions) 2007 ------------- ASSETS: Current Assets: Accounts receivable, net $19.9 Inventories 18.4 Other current assets 0.9 ----- Total current assets held for sale $39.2 Property, plant, and equipment, net 17.1 Other assets 0.2 ----- Total assets held for sale $56.5 ===== LIABILITIES: Current Liabilities: Accounts payable, trade $14.9 Accrued liabilities 4.5 ----- Total current liabilities held for sale $19.4 Deferred income taxes 2.2 ----- Total liabilities held for sale 21.6 ===== Net assets held for sale $34.9 =====
Page 12 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 4. Comprehensive Income
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------- ---------------- 2007 2006 2007 2006 (Dollars in millions) ------ ------ ------- ------- Net loss ($77.2) ($37.8) ($182.2) ($16.5) Other comprehensive income (loss): Foreign currency translation adjustments: Reclassifications included in net loss due to sale of business, net of tax (5.0) -- (5.0) -- Currency translation adjustments, net of tax 13.3 (2.4) 43.2 26.4 (Loss) gain on derivatives, net of tax (2.0) 0.4 1.6 (2.2) Curtailment, net of tax (Note 8) (0.5) -- (4.0) -- Unrealized loss on investment holdings, net of tax -- -- -- (0.2) Less: Reclassification adjustment for gains (losses) realized in net loss, net of tax -- -- -- (3.6) ------ ------ ------- ------- Total comprehensive (loss) income ($71.4) ($39.8) ($146.4) $ 3.9 ====== ====== ======= =======
5. Inventories
SEPTEMBER 30, December 31, (Dollars in millions) 2007 2006 ------------- ------------ Raw material $ 95.9 $159.0 Work in progress 29.9 60.1 Finished goods 70.7 121.5 Supplies 7.5 12.8 ------ ------ Total inventories $204.0 $353.4 ====== ======
$92.6 million of the inventory balance at December 31, 2006 was attributable to the Electrical Components business segment. At September 30, 2007, inventory balances associated with the remaining operations within the Electrical Components Group were included with assets held for sale. Page 13 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 6. Business Segments We have two reportable segments based on the criteria set forth in SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information": Compressor Products and Engine & Power Train Products. Previously, we also reported an Electrical Component Products segment; however, as a result of the decision made by our Board of Directors to sell all of the businesses associated with that segment, its operations are no longer reported in continuing operations before tax. Net sales and operating income (loss) by segment for the periods indicated are as follows:
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, BUSINESS SEGMENT DATA ----------------- ------------------- (Dollars in millions) 2007 2006 2007 2006 ------- ------- -------- -------- Net sales: Compressor Products $ 278.4 $ 230.8 $ 864.7 $ 755.6 Engine & Power Train Products 53.8 85.2 165.9 237.6 Other (a) 3.9 3.5 12.6 11.4 ------- ------- -------- -------- Total Net Sales $ 336.1 $ 319.5 $1,043.2 $1,004.6 ======= ======= ======== ======== Operating income (loss): Compressor Products $ 7.1 ($6.5) $ 28.4 ($3.7) Engine & Power Train Products 0.1 (9.2) (16.4) (38.9) Other (a) 0.7 0.6 2.4 2.2 Corporate expenses (1.9) (4.7) (21.9) (12.7) Impairments, restructuring charges, and other items (26.2) (8.4) (25.3) (11.6) ------- ------- -------- -------- Total operating loss from continuing operations (20.2) (28.2) (32.8) (64.7) Interest expense (6.6) (5.7) (25.5) (16.8) Interest income and other, net 1.1 2.3 4.8 10.6 ------- ------- -------- -------- Loss from continuing operations before taxes ($25.7) ($31.6) ($53.5) ($70.9) ======= ======= ======== ========
(a) "Other" consists of non-reportable business segments. A business within that segment, Manufacturing Data Systems Inc., was sold and reclassified to discontinued operations during the third quarter of 2007. Sales of $0.1 million and profit of $0.5 million were recorded for the three months ended September 30, 2007, and sales of $0.8 million and losses of $0.9 million were recorded for the nine months ended September 30, 2007. Sales of $0.6 million and losses of $0.6 million were recorded for the three month period ended September 30, 2006, and sales of $1.9 million and losses of $1.5 million were recorded for the nine months ended September 30, 2006. Page 14 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 7. Goodwill and Other Intangible Assets At September 30, 2007, goodwill by segment consisted of the following:
COMPRESSOR COMPRESSOR ELECTRICAL EUROPE INDIA COMPONENTS TOTAL ---------- ---------- ---------- ------ Balance at 1/1/2007 $11.2 $7.0 $108.8 $127.0 Foreign currency translation 0.8 0.8 2.6 4.2 Impairment -- -- (39.3) (39.3) Sale of Residential & Commercial and Asia Pacific operations -- -- (72.1) (72.1) ----- ---- ------ ------ Balance at 9/30/2007 $12.0 $7.8 -- $ 19.8 ===== ==== ====== ======
In light of the classification of the Electrical Components business as a discontinued operation as of the end of the second quarter, we performed an interim analysis of the fair value of the business unit at June 30, 2007. We utilized the final purchase price agreed upon with Regal Beloit as an indication of fair market valuation of the Residential & Commercial and Asia Pacific operations of the Electrical Components business. With respect to the remaining divisions of the Electrical Components business, we considered initial indications of interest from potential acquirers of those businesses to evaluate the overall marketplace value of the business unit. Based on the outcome of this analysis, we determined that $39.3 million of the goodwill balance associated with the Electrical Components business had become impaired. The remainder of the goodwill balance associated with the Electrical Components business was associated with the Residential & Commercial operations and was included with the sale to Regal Beloit, which was completed on August 31. We also performed a fair value analysis of the other long-lived assets of the Electrical Components business segment, and determined that $3.4 million of the intangible assets associated with the Automotive & Specialty division of the Electrical Components business had become impaired. All of the other intangible assets of the Company were associated with the Residential & Commercial operations and were included with the sale to Regal Beloit, which was completed on August 31. At December 31, 2006, goodwill by segment consisted of the following:
COMPRESSOR COMPRESSOR ELECTRICAL EUROPE INDIA COMPONENTS OTHER TOTAL ---------- ---------- ---------- ----- ------ Balance at 1/1/2006 $10.0 $6.9 $108.9 $ 5.1 $130.9 Sale of Little Giant Pump Company -- -- -- (5.1) (5.1) Foreign currency translation 1.2 0.1 (0.1) -- 1.2 ----- ---- ------ ----- ------ Balance at 12/31/2006 $11.2 $7.0 $108.8 $ 0.0 $127.0
On April 21, 2006, the Company completed the sale of its 100% ownership in Little Giant Pump Company. The only other changes in goodwill during 2006 were due to foreign currency fluctuations. Page 15 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 8. Pension and Other Postretirement Benefit Plans Components of net periodic benefit (income) cost are as follows:
PENSION OTHER BENEFITS BENEFITS --------------- --------------- THREE MONTHS THREE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, --------------- --------------- 2007 2006 2007 2006 ------ ------ ------ ------ Service Cost $ 1.6 $ 2.1 $ 0.8 $ 0.8 Interest Cost 5.7 5.4 1.5 2.4 Expected return on plan assets (11.3) (11.1) (0.1) -- Amortization of prior service costs (0.1) 0.1 (2.8) (1.2) Amortization of net gain -- (0.1) -- -- Curtailment (income) cost -- -- (2.0) -- ------ ------ ------ ------ Net periodic benefit (income) cost ($4.1) ($3.6) ($2.6) $ 2.0 Curtailment gain - discontinued operations -- (1.0) -- (7.5) ------ ------ ------ ------ Total Pension (Income) Expense ($4.1) ($4.6) ($2.6) ($5.5) ====== ====== ====== ======
PENSION OTHER BENEFITS BENEFITS ---------------- ---------------- NINE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------- ---------------- 2007 2006 2007 2006 ------ ------- ------- ------ Service Cost $ 6.0 $ 6.8 $ 2.7 $ 2.5 Interest Cost 16.9 15.9 5.6 7.3 Expected return on plan assets (33.9) (33.4) (0.2) -- Amortization of prior service costs (0.4) 0.4 (8.0) (3.7) Amortization of net gain -- (0.1) -- (0.1) Curtailment (income) cost 3.8 -- (12.7) -- ------ ------- ------ ------ Net periodic benefit (income) cost ($7.6) ($10.4) ($12.6) $ 6.0 Curtailment gain - discontinued operations -- (1.0) -- (7.5) ------ ------- ------- ------ Total Pension (Income) Expense ($7.6) ($11.4) ($12.6) ($1.5) ====== ======= ======= ======
As a result of the completion of the previously announced closure of our Engine & Power Train facility in New Holstein, Wisconsin and the associated curtailment of other postretirement ("OPEB") benefits of its employees, we recognized a net gain of $2.0 million in the third quarter of 2007. The curtailment gain realized for OPEB consists of a $1.4 million reduction in liabilities and a reduction of $0.6 million in prior service costs, which was recognized in accumulated other comprehensive income upon the adoption of SFAS 158 in 2006. We also expect to recognize a net gain of $4.9 million in the fourth quarter due to the curtailment of this plan. In addition to this net curtailment Page 16 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) gain, future pension and retiree health care expense will decrease by $0.9 million per quarter. As we complete the divestitures of the business units within our Electrical Components and Engine & Power Train business segments, we expect that further curtailment gains will also be recognized. In the first quarter of 2007, we announced revisions to our Salaried Retirement Plan. The original Plan is substantially over-funded. We expect that this conversion will make net cash available in late 2007 or 2008 to the Company of approximately $55 million, while still fully securing the benefits under the old Plan and funding the new Plan, without additional annual contributions, for six to eight future years. The pension reversion will adversely affect the Company's results of operations due to the recognition of the cost of the termination, estimated to be $20 million, as well as a reduction in net period income. The reduction in income, however, has been more than mitigated by other actions taken to reduce the overall cost of benefits and due to personnel reductions. We expect to contribute $0.1 million to our pension plans in 2007. 9. Guarantees and Warranties A portion of accounts receivable at our Brazilian, European, and Indian compressor subsidiaries are sold without recourse. The amount of these receivables sold at September 30, 2007 and December 31, 2006 were $81.1 million and $46.5 million, respectively. We estimate the fair value of the contingent liability related to these receivables to be $0.5 million, which is included in operating profit (loss) and allowance for doubtful accounts. Changes in the carrying amount and accrued product warranty costs for the nine months ended September 30, 2007 and 2006 are summarized as follows:
Nine Months Nine Months Ended Ended September 30, September 30, (Dollars in millions) 2007 2006 ------------- ------------- Balance at January 1 $26.2 $29.4 Settlements made (in cash or in kind) (9.2) (11.5) Current year accrual 6.4 12.9 Adjustments to preexisting warranties (2.6) (0.7) Effect of foreign currency translation 0.4 0.2 Reclassification to held for sale* (2.0) -- Sale of Little Giant Pump Company -- (2.7) ----- ----- Balance at September 30 $19.2 $27.6 ===== =====
* At September 30, 2007, balances for the Electrical Components business segment were removed from our consolidated balance sheet and reclassified as held for sale. At March 31, 2007, balances for TMT Motoco were removed from our consolidated balance sheet. At September 30, 2007, $13.4 million was included in current liabilities and $5.8 million was included in non-current liabilities. Page 17 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 10. Debt Through the second quarter of 2007, our domestic credit facilities consisted of a financing package that included a $250 million First Lien Credit Agreement and a $100 million Second Lien Credit Agreement. On August 27, 2007, we entered into an amendment to our First Lien Credit Agreement, in anticipation of the closing of the sale transaction for the Residential & Commercial and Asia Pacific operations of the Electrical Components business segment. Among other things, the amendment deleted the minimum adjusted EBITDA and fixed charge coverage covenants for the third and fourth quarters of 2007, and reduced the lenders' total commitment from $250 million to $175 million. The amendment also imposed a new covenant requiring us to maintain a minimum of $50 million in credit availability; after giving effect to the existing $10 million availability reserve, we are in effect required to maintain a minimum of $60 million of credit availability. Consistent with the terms of the original First Lien Credit Agreement, the amendment provides for security interests in substantially all of our assets, and places limits on additional foreign borrowings and fees paid for professional services. We paid the first lien lender fees totaling $425,000 in connection with the amendment. Our First Lien Credit Agreement expires in November 2009. The interest rate of our outstanding borrowings under the First Lien Credit Agreement was 7.9% at September 30, 2007. On August 31, 2007, we paid off the entire balance associated with our Second Lien Credit Agreement effective with the closing of the sale of portions of our Electrical Components business segment as referenced above. At September 30, 2007, we had outstanding letters of credit of $6.7 million and the capacity for additional borrowings under the borrowing base formula of $25.2 million in the U.S. and $89.7 million in foreign jurisdictions under our $175 million First Lien Credit Agreement. On November 8, 2007 we entered into an additional amendment to modify our First Lien Credit Agreement, in anticipation of the closing of the sale transaction of the Engine & Power Train business. The principle terms of the amendment reduced the covenant requiring us to maintain minimum levels of availability under the line of credit to $30 million, and reduced the total facility size to $75 million. As a result, after completion of the transaction, we had cash balances in the U.S. of approximately $21.6 million, and U.S availability under our First Lien Credit Agreement of approximately $19.8 million. We paid the first lien lender fees totaling $36,000 in connection with the amendment. In addition, we have various borrowing arrangements at our foreign subsidiaries to support working capital needs and government sponsored borrowings that provide advantageous lending rates. During the quarter, we had net repayments on these arrangements totaling $16.1 million. Our weighted average interest rate for all borrowings, including foreign borrowings, is 8.8%. Although our Second Lien debt has been eliminated, the former lender still possesses a warrant to purchase 1,390,944 shares of Class A Common Stock, which is equivalent to 7% of our fully diluted common stock. This warrant, valued at $7.3 million or $5.29 per share, expires in April of 2012. The costs associated with this warrant, while originally accounted for as additional interest to be expensed over the remaining terms of the credit agreement, were accelerated upon full repayment of the debt, and resulted in expense of $6.2 million in the third quarter of 2007, which is included in the loss from discontinued operations. Page 18 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) In accordance with the amendments discussed above, we are currently in compliance with the covenants of our domestic debt agreement. After giving effect to the sale transactions and the negative impacts of continued unfavorable currency movements, we do not expect to be in compliance with the fixed charge covenant of our First Lien credit agreement at March 31, 2008. However, we do not expect to have any amounts outstanding under the agreement at that time. In anticipation of this condition, we are pursuing a stand-by credit facility under a new collateralized arrangement, although we would not expect to require any outstanding borrowings to fund current operations. 11. Environmental Matters We are involved in a number of environmental sites where we are either responsible for or participating in a cleanup effort. We had accrued $3.0 million and $3.3 million at September 30, 2007 and December 31, 2006 respectively for environmental remediation. Although these liabilities are associated with locations included with our Engine & Power Train business segment, we will retain these liabilities after the sale of that business segment, which is expected to be completed in the fourth quarter of 2007. As these matters continue toward final resolution, amounts in excess of those already provided may be necessary to discharge us from our obligations for these sites. Such amounts, depending on their magnitude 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. For additional information on our potential environmental liabilities, including the Sheboygan River and Harbor Superfund and Hayton Area Remediation Project sites, see Note 11 to the Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2006. 12. Income Taxes Under Accounting Principles Board Opinion No. 28, "Interim Financial Reporting," we are required to adjust our effective tax rate for each quarter to be consistent with the estimated annual effective tax rate. We are also required to record the tax impact of certain discrete items (unusual or infrequently occurring), including changes in judgment about valuation allowances and effects of changes in tax laws or rates in the interim period in which they occur. In addition, income taxes are allocated between continuing, discontinued operations and other comprehensive income in accordance with SFAS No. 109, "Accounting for Income Taxes," particularly paragraph 140, which states that all items, including discontinued operations, should be considered for purposes of determining the amount of tax benefit that results from a loss from continuing operations and that could be allocated to continuing operations. SFAS No. 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 discontinued operations, tax expense is first allocated to the other sources of income, with a related benefit recorded in continuing operations. For the three and nine month periods ended September 30, 2007, we reported losses from continuing operations and discontinued operations, but income in other comprehensive income. Pursuant to SFAS No. 109, Paragraph 140, we allocated income taxes between continuing operations, discontinued operations and OCI. The consolidated condensed statement of operations reflects a $6.3 million income tax benefit for the nine months ended September 30, 2007 and a $2.9 million income tax benefit for the nine months ended September 30, 2006. Both Page 19 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) periods reflect tax benefits in the statement of operations and tax expense in other comprehensive income. At September 30, 2007 and December 31, 2006, full valuation allowances were recorded against deferred tax assets for those tax jurisdictions in which we believe it is not more likely than not that the deferred taxes will be realized. During the quarter ended June 30, 2007, the valuation allowance related to the Europe subsidiary of our Compressor business segment was released, since management now believes that realization of their deferred tax assets is more likely than not. The net impact of this change decreased income tax by $0.4 million in the second quarter. On July 12, 2007, the State of Michigan enacted the Michigan Business Tax (MBT) as a replacement for the Single Business Tax (SBT), which expires at the end of 2007. The MBT is effective on January 1, 2008 and is comprised of two components: an income tax and a modified gross receipts tax. The two components of the MBT are accounted for in accordance with the provisions of SFAS No. 109. As a result of the MBT enactment, we recorded a one-time income tax expense of approximately $2.2 million in the quarter ended September 30, 2007. We adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" (FIN 48) on January 1, 2007. FIN 48 clarifies the accounting and reporting for uncertainties in income tax positions. This interpretation prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. As a result of adopting FIN 48, an increase in tax reserves and a decrease of retained earnings of $0.4 million were recorded. Upon adoption, the liability for income taxes associated with uncertain tax positions at January 1, 2007 was $3.0 million. In addition, consistent with the provisions of FIN 48, we reclassified $1.8 million of income tax liabilities from current to non-current income taxes, because payment of cash is not anticipated within one year of the balance sheet date. At September 30, 2007, the amount of gross unrecognized tax benefits, and therefore the amount that would favorably affect the effective income tax rate in future periods, was $3.0 million. Interest and penalties related to income tax liabilities are included in income tax expense. The balance of accrued interest and penalties recorded in the Consolidated Balance Sheet at January 1, 2007 was $1.1 million; of this amount, $0.7 million was reclassified from current to non-current liabilities upon adoption of FIN 48. Accrued interest and penalties for the three and nine months ended September 30, 2007 was reduced by $0.7 million and $0.9 million, respectively. The impact of FIN 48 for the first nine months of 2007 is a benefit of $1.8 million; we recognized this benefit due to the expiration of the statue of limitations on a tax issue. We have open tax years from primarily 2003 to 2006, with various significant taxing jurisdictions including the U.S., Canada, France and Brazil. In the U.S., our federal income tax returns through 2002 have been examined by the Internal Revenue Service. In addition, 2003 and 2004 U.S. federal income tax returns are currently under review. At September 30, 2007, we anticipate a decrease in the total amount of unrecognized tax benefits within the next twelve months of approximately $0.6 million. Page 20 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 13. Commitments and Contingencies A lawsuit filed against us and other defendants alleged 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 sought an injunction, compensatory and punitive damages, and attorneys' fees. On March 30, 2007, the Court entered an order dismissing the complaint subject to the ability to re-plead certain claims, pursuant to a detailed written order to follow. We expect the plaintiffs will appeal the dismissal order, and that even if it is upheld, they will re-plead their claims to the extent permitted by the order. While we believe we have meritorious defenses and intend to assert them vigorously, there can be no assurance that we will prevail. We also may pursue settlement discussions. It is not possible to reasonably estimate the amount of our ultimate liability, if any, or the amount of any future settlement, but the amount could be material to our financial position, consolidated results of operations and cash flows. Although this claim is related to our Engine & Power Train segment, our purchase agreement for the sale of this business requires us to retain the responsibility for the eventual outcome of this lawsuit. We are 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 and asbestos-related claims, incidental to our business. Although their ultimate outcome cannot be predicted with certainty, and some may be disposed of unfavorably to us, management does not believe that the disposition of these other matters will have a material adverse effect on our consolidated financial position or results of operations. 14. Impairments, Restructuring Charges, and Other Items We recorded expense of $26.2 million in impairments, restructuring charges, or other items in the three months ended September 30, 2007, and expense of $25.3 million in the nine months ended September 30, 2007. In light of the agreement reached on October 22, 2007 to sell the assets of our Engine & Power Train business segment to Platinum Equity LLC, we performed an interim analysis of the fair value of the assets of the business unit at September 30, 2007. We utilized the final purchase price agreed upon with Platinum Equity as our indication of the fair market valuation of the business. As a result, we recorded an impairment to the long-term assets of the business segment of $28.1 million. Further adjustment to the loss on sale may result due to post-closing adjustments to the purchase price pursuant to the agreement. As a result of the previously announced closure of our Engine & Power Train facility in New Holstein, Wisconsin and the associated curtailment of pension and retiree benefits of its employees, we recognized a net gain of $2.0 million in the third quarter of 2007. A net gain of $6.9 million related to this pension curtailment was also recognized in the second quarter of 2007. In addition, we recorded $5.7 million in obsolescence charges in the second quarter associated with the completion of our lawn and garden selling season and the cessation of business sourced from Brazil at the Engine & Power Train group. The remaining charges primarily related to reductions in force executed during the second quarter across several of our business units. We recognized asset impairment charges of $8.4 million and $11.6 million for the three and nine months ended September 30, 2006, respectively. In the third quarter of 2006, we incurred asset impairment and restructuring charges of $8.4 million related to the Engine & Power Train business for the write-down of assets that had become idled as part of the segment's overall restructuring Page 21 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) program. During the second quarter of 2006, we incurred asset impairment and other charges of $2.6 million related to the Engine & Power Train business for the consolidation of transmission production into a single U.S. facility. The remainder of the 2006 impairment charges related to the completion of programs initiated in 2005. 15. Recently Issued Accounting Pronouncements Fair Value Measurements In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements" ("SFAS 157), to provide enhanced guidance for using fair value to measure assets and liabilities. The Standard also expands disclosure requirements for assets and liabilities measured at fair value, how fair value is determined, and the effect of fair value measurements on earnings. The Standard applies whenever other authoritative literature requires (or permits) certain assets or liabilities to be measured at fair value but does not expand the use of fair value. SFAS 157 is effective beginning January 1, 2008. We are currently evaluating the impact of this pronouncement on our consolidated financial statements. Fair Value Option for Financial Assets and Financial Liabilities In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits entities to choose to measure financial assets and liabilities (except for those that are specifically exempted from SFAS 159) at fair value. The election to measure a financial asset or liability at fair value can be made on an instrument-by-instrument basis and is irrevocable. The difference between carrying value and fair value at the election date is recorded as a transition adjustment to opening retained earnings. Subsequent changes in fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. At this time, we do not intend to adopt SFAS 159. 16. Recoverable Non-income Taxes We pay various value-added taxes in jurisdictions outside of the United States. These include taxes levied on material purchases, fixed asset purchases, and various social taxes. The majority of these taxes are creditable when goods are sold to customers domestically or against income taxes due. Since the taxes are recoverable upon completion of these procedures, they are recorded as assets upon payment of the taxes. Historically, due to the concentration of exports, such taxes were typically credited against income taxes due. However, with reduced profitability, primarily in Brazil, we must seek refunds via procedures that can be lengthy. As a result, there has been a substantial increase in the balance of these recoverable taxes. We have instituted these procedures, which include audits of the recoverable amounts that are currently underway. We currently expect to recover the majority of these balances in the second half of 2008. Page 22 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Following is a summary of the recoverable non-income taxes recorded on our balance sheet at September 30, 2007 and December 31, 2006:
SEPTEMBER 30, December 31, (Dollars in millions) 2007 2006 ------------- ------------ Brazil $118.9 $88.2 India 9.1 9.0 All other 1.0 -- ------ ----- Total recoverable non-income taxes $129.0 $97.2 ====== =====
At September 30, 2007, $30.9 million was included in current assets and $98.1 million was included in non-current assets. 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 Executive Summary Our business has recently centered around three business segments: hermetically sealed compressors, small gasoline engine and power train products, and fractional horsepower motors. However, over the course of 2007, we have successfully executed a strategy to divest operations that were not considered to be core to our ongoing business strategy. To that end, we have sold the Residential & Commercial and Asia Pacific portions of our Electrical Components business segment, and have also sold our Engine & Power Train business segment. In addition, we have signed an agreement to sell the Automotive & Specialty portion of our Electrical Components business. Upon completion of this transaction, which we anticipate will occur before the end of the year, we will be primarily focused on our compressor business. As we evolve from a diversified manufacturer to a compressor business, our manufacturing presence in international locations becomes a much greater proportion of our overall business. Based on results through the first three quarters of 2007, approximately 80% of our compressor manufacturing activity takes place outside the United States, primarily in Brazil, France, and India (which comprise approximately 41%, 27% and 12% of total compressor manufacturing, respectively). Accordingly, our consolidated financial results are increasingly sensitive to changes in foreign currency exchange rates. Changes in the Brazilian Real have been especially adverse to our results of operations; during the first three quarters of 2007, the Brazilian Real strengthened by 14.0%, and in the period from January 1, 2006 to September 30, 2007 the Real strengthened by 21.4%. Recent movement in the Indian Rupee has also had an unfavorable effect on our results of operations, as the Rupee strengthened by 10.1% during the first nine months of 2007. We have developed strategies to mitigate or partially offset these impacts, 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. To a lesser extent, we have also entered into foreign currency forward purchases to mitigate the effect of fluctuations in the Indian Rupee. However, these hedging programs only reduce exposure to currency movements over the limited time frame of three to fifteen months. Ultimately, long term changes in currency exchange rates have lasting effects on the relative competitiveness of operations located in certain countries versus competitors located in different countries. Only one major competitor in the compressor segment faces similar exposure to the Real. Other competitors, particularly those with operations in countries where the currency has been substantially pegged to the U.S. dollar, currently enjoy a pronounced cost advantage over our primary compressor operations. Our foreign manufacturing operations are subject to many other 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. Due to the high material content of copper (and, to a lesser extent, aluminum) in compressor products, our results of operations are very sensitive to the prices of these commodities. Overall, commodity prices increased very rapidly during 2005, 2006 and into 2007. Due to competitive markets, we are typically not able to quickly recover these cost increases through price increases and other cost savings. From January 1, 2006 through October 31, 2007, the price of copper increased by approximately 60.4%. While we have been proactive in addressing the volatility of these costs, including executing forward purchase contracts to cover more than 75% of our anticipated copper 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 requirements for 2007, continued rapid escalation of these costs would nonetheless have an adverse affect on our results of operations both in the near and long term. Aside from our efforts to manage increasing commodity costs with forward purchase contracts, we have executed other strategies to mitigate or partially offset the impact of these rising costs, which include aggressive cost reduction actions, cost optimization engineering strategies, selective out-sourcing of components where internal supplies are not cost competitive, 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, including seeking mechanisms that would result in more timely adjustment of pricing in reaction to changing material costs. While we believe that our mitigation strategies have 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. As we raise prices to cover cost increases, it is possible that customers may react by choosing to purchase their requirements from alternative suppliers. Any increases in cost that could not be recovered through increases in selling prices would make it more difficult for us to achieve our business plans. Notwithstanding these specific challenges to our business, our operating results are also 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 deflationary pricing in many of the product lines 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 restructuring programs involve significant costs, in both financial and human terms. In addition, many of our markets are subject to macroeconomic trends, which expand and contract, and other external factors which affect demand for our products, such as weather. International sales are important to our business, with sales to customers outside the United States representing approximately 79% of total compressor net sales in 2006. We sell compressors in over 110 countries throughout the world. Our dependence on sales in foreign countries entails certain commercial and political risks, including currency fluctuations as discussed above, 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. Upon completion of the divestitures of the business operations discussed above, we have eliminated all our domestic debt. Accordingly, interest expense for our business in the foreseeable future will be substantially reduced. Based on the amount of domestic debt we held prior to the sale of businesses, we expect that its elimination will reduce our annualized interest expense by approximately $22 million. However, challenges will remain with respect to our ability to maintain appropriate levels of liquidity, particularly those driven by currency exchange and commodity pricing as discussed above. With expected further weakness of the U.S. dollar versus key currencies such as the Brazilian Real and the Indian Rupee we expect that we will generate a limited amount of cash until further restructuring activities are implemented or economic conditions improve. As part of our strategy to maintain sufficient liquidity, we are currently negotiating a new financing arrangement for our North American based activities, and seeking longer term committed financing arrangements in Brazil. In addition, we Page 25 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS are generating other sources of cash through activities such as the termination and reversion of our vastly over-funded pension plans and collection of refundable non-income taxes in Brazil. While we believe that these and other activities will produce adequate liquidity to implement our business strategy over a reasonable time horizon, there can be no assurance that such improvements will ultimately be adequate if economic conditions continue to deteriorate. In addition, while our business dispositions have improved our liquidity, each of the sale agreements provide for certain retained liabilities or indemnities, including liabilities that relate to environmental issues and product warranties. While we currently believe we have adequately provided for such contingent liabilities, future events could result in the recognition of additional liabilities that could consume available liquidity and management attention. 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 "Adequacy of Liquidity," "Outlook," and "Cautionary Statements Relating To Forward-Looking Statements" below. Page 26 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 SEPTEMBER 30, (dollars in millions) 2007 % 2006 % ------ ----- ------ ----- Net sales $336.1 100.0% $319.5 100.0% Cost of sales 302.5 90.0% 305.5 95.6% Selling and administrative expenses 27.6 8.2% 33.8 10.6% Impairments, restructuring charges, and other items 26.2 7.8% 8.4 2.6% ------ ------ Operating loss (20.2) (6.0%) (28.2) (8.8%) Interest expense (6.6) (2.0%) (5.7) (1.8%) Interest income and other, net 1.1 0.3% 2.3 0.7% ------ ------ Loss from continuing operations before taxes (25.7) (7.6%) (31.6) (9.9%) Tax (benefit) expense (3.1) (0.9%) 6.7 2.1% ------ ------ Loss from continuing operations ($22.6) (6.7%) ($38.3) (12.0%) ====== ======
Three Months Ended September 30, 2007 vs. Three Months Ended September 30, 2006 Consolidated net sales from continuing operations in the third quarter of 2007 increased to $336.1 million from $319.5 million in 2006. Sales increases attributable to the Compressor segment ($47.6 million, of which $22.0 was due to the effect of currency translation) were offset by a substantial decline ($31.4 million) in sales in the Engine & Power Train segment. The remaining increase of $0.4 million was attributable to businesses that are not associated with our reportable business segments. Cost of sales was $302.6 million in the three months ended September 30, 2007, as compared to $305.5 million in the three months ended September 30, 2006. As a percentage of net sales, cost of sales was 90.0% and 95.6% in the third quarters of 2007 and 2006, respectively. Efficiency improvements and overhead reductions, particularly at the Engine & Power Train segment, were offset by unfavorable foreign currency exchange rates and higher commodity costs. Selling, general and administrative ("SG&A") expenses were $27.6 million in the three months ended September 30, 2007, as compared to $33.8 million in the three months ended September 30, 2006. As a percentage of net sales, selling, general and administrative expenses were 8.2% and 10.6% in the third quarters of 2007 and 2006, respectively. Reductions in SG & A were in part attributable to overhead cost improvements that resulted from our restructuring efforts over the past year, including $2.0 million in savings at the Engine & Power Train group. Costs associated with professional fees improved by $4.0 million, primarily due to reductions in fees paid to AlixPartners. $1.8 million was expensed in the third quarter of 2007 for AlixPartners services, including the services of James Bonsall, while $5.5 million was incurred in the third quarter of 2006 for their consulting services provided to our Engine & Power Train business. Expense of $26.2 million was recorded in impairments, restructuring charges or other items in the three months ended September 30, 2007, compared to charges of $8.4 million in the three months ended Page 27 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS September 30, 2006. As a result of the agreement signed on October 22, 2007 to sell the assets of our Engine & Power Train business segment to Platinum Equity LLC, we performed an interim analysis of the fair value of the assets of the business unit at September 30, 2007. We utilized the final purchase price agreed upon with Platinum as our indication of the fair market valuation of the business. As a result, we impaired the long-term assets of the business segment by $28.1 million. In contrast, as a result of the previously announced closure of our Engine & Power Train facility in New Holstein, Wisconsin and the associated curtailment of pension and retiree benefits of its employees, we recognized a net gain of $2.0 million in the third quarter of 2007. In the third quarter of 2006 we incurred charges of $8.4 million related to the Engine & Power Train business for the write-down of assets that had become idled under the segment's overall restructuring program. Interest expense amounted to $6.6 million in the third quarter of 2007 compared to $5.7 million in the third quarter of 2006. The increase is primarily attributable to higher interest rates in our foreign subsidiaries. Interest income and other, net was $1.1 million in the third quarter of 2007 compared to $2.3 million in the third quarter of 2006. The decline was attributable to lower cash deposits outside the U.S. The consolidated condensed statement of operations reflects a $3.1 million income tax benefit for the third quarter of 2007 and a $6.7 million income tax expense for the third quarter of 2006. Income taxes are recorded pursuant to SFAS No. 109, "Accounting for Income Taxes," and are applied on a jurisdiction by jurisdiction basis. In the three months ended September 30, 2007, we recorded federal taxes benefits on net losses from continuing and discontinued operations, but federal tax expense based on income in other comprehensive income ("OCI"). In the three months ended September 30, 2006, we reported federal tax benefits on losses from continuing operations, but federal tax expense on income in OCI, as well as on income from discontinued operations. These allocations are in accordance with the requirements of SFAS No. 109, paragraph 140. Since we pay taxes in various states there is also an expense recorded in the U.S. that is related to separate company state tax liabilities, including state tax expense that is recorded in discontinued operations. On July 12, 2007, the State of Michigan enacted the Michigan Business Tax (MBT) as a replacement for the Single Business Tax (SBT), which expires at the end of 2007. The MBT is effective on January 1, 2008 and is comprised of two components: an income tax and a modified gross receipts tax. The two components of the MBT are accounted for in accordance with the provisions of SFAS No. 109. As a result of the MBT enactment, we recorded a one-time income tax expense of approximately $2.2 million in the quarter ended September 30, 2007. As of September 30, 2007, the valuation allowance of $2.8 million related to the Europe subsidiary of our Compressor business segment was released, since this business now has cumulative three year income and management believes that realization of the deferred tax asset is more likely than not. Net loss from continuing operations in the third quarter of 2007 was $22.6 million ($1.22 per share) as compared to net loss of $38.3 million ($2.07 per share) in the third quarter of 2006. The improvement was the result of the factors described above. Reportable Operating Segments The segment financial information presented in this report is for our two reportable operating segments for the periods presented: Compressor and Engine & Power Train. Previously, we also reported an Page 28 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Electrical Components product segment; however, as a result of the decision made by our Board of Directors to sell all of the businesses associated with that segment, its operations are no longer reported in continuing operations before tax. 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 ("U.S. 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 U.S. 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 6 in the Notes to our Consolidated Condensed Financial Statements. Compressor Products Third quarter 2007 sales in the Compressor segment increased to $278.4 million from $230.8 million in the prior year. $22.0 million of the $47.6 million increase in sales was due to the effects of foreign currency translation. Sales increases in this segment were led by the commercial product lines (up $27.5 million), an increase of 26.2%. Sales increases were also reported in residential air conditioning product lines (up $14.7 million or 67.7%) and refrigeration and freezer product lines (up $5.3 million or 5.9%). The majority of these increases were attributable to pricing advances and foreign currency translation. Compressor business income for the third quarter of 2007 was $7.1 million compared to an operating loss of $6.5 million in the third quarter of 2006. The $13.6 million improvement was attributable to the net favorable impact of volume and pricing changes ($20.1 million) and productivity and other improvements ($4.8 million). Including the effects of favorable hedging activities, the price of copper and other commodities also contributed favorably to results by approximately $2.1 million in the third quarter of 2007. These year-on-year improvements were partially offset by unfavorable foreign currency exchange rates ($13.4 million). For the third quarter, the Brazilian Real was on average 9.0% stronger against the U.S. Dollar in 2007 versus 2006. Engine & Power Train Products Engine & Power Train business sales were $53.8 million in the third quarter of 2007 compared to $85.2 million for the same period a year ago. Declines were led by engines for snowthrowers (down $31.0 million), a decline of 50.0%. This decline was due to the carryover of excess inventories from the prior season by our customers and retailers, as well as conservative buying patterns by those same customers as we enter the current selling season. The remaining decreases in the Engine & Power Train Group were spread across multiple product lines. Despite the decline in sales volume, the Engine & Power Train business recorded an operating profit of $0.1 million for the third quarter of 2007, compared to a loss of $9.2 million during the same period a Page 29 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS year ago. Productivity, purchasing and other improvements accounted for $15.1 million of the favorable results. As well, losses associated with TMT Motoco of $6.9 million in the third quarter of 2006 were not repeated in 2007. In addition, while $5.5 million in fees were paid to AlixPartners in the third quarter of 2006, no such expense was recorded in the same period of 2007. These improvements to third quarter 2007 results were offset by the impact of volume declines of $18.2 million. Nine Months Ended September 30, 2007 vs. Nine Months Ended September 30, 2006
NINE MONTHS ENDED SEPTEMBER 30, (dollars in millions) 2007 % 2006 % -------- ----- -------- ----- Net sales $1,043.2 100.0% $1,004.6 100.0% Cost of sales 953.6 91.4% 953.9 95.0% Selling and administrative expenses 97.1 9.3% 103.8 10.3% Impairments, restructuring charges, and other items 25.3 2.4% 11.6 1.1% -------- -------- Operating loss (32.8) (3.1%) (64.7) (6.4%) Interest expense (25.5) 2.4% (16.8) 1.7% Interest income and other, net 4.8 0.5% 10.6 1.0% -------- -------- Loss from continuing operations before taxes (53.5) (5.1%) (70.9) (7.1%) Tax benefit (6.3) (0.6%) (2.9) (0.3%) -------- -------- Loss from continuing operations ($47.2) (4.5%) ($68.0) (6.8%) ======== ========
Consolidated net sales from continuing operations in the first nine months of 2007 increased to $1,043.2 million from $1,004.6 million in 2006. Excluding the increase in sales due to the effects of currency fluctuation of $53.5 million, sales for the first three quarters of 2007 decreased by $14.9 million or 1.5%. Sales increases of $109.1 million attributable to the Compressor segment were offset by a decline of $71.7 million in sales in the Engine & Power Train segment. The remaining increase of $1.2 million was attributable to businesses that are not associated with our reportable business segments. Cost of sales was $953.6 million in the nine months ended September 30, 2007, as compared to $953.9 million in the nine months ended September 30, 2006. As a percentage of net sales, cost of sales was 91.4% and 95.0% in the first nine months of 2007 and 2006, respectively. Productivity and purchasing improvements contributed favorably to 2007 results; however, these favorable results were offset by unfavorable foreign currency rates and higher commodity costs. Selling and administrative expenses were $97.1 million in the nine months ended September 30, 2007, as compared to $103.8 million in the nine months ended September 30, 2006. As a percentage of net sales, selling and administrative expenses were 9.3% and 10.3% in the first nine months of 2007 and 2006, respectively. Cost reductions were primarily attributable to reduced salary and wage expense as a result of lower headcounts when compared to the same period of 2006. Expense of $25.3 million was recorded in impairments, restructuring charges and other items in the nine months ended September 30, 2007, compared to expense of $11.6 million in the nine months ended September 30, 2006. In light of the agreement signed on October 22, 2007 to sell the assets of our Engine & Power Train business segment to Platinum Equity LLC, we performed an interim analysis of the fair value of the assets of the business unit at September 30, 2007. We utilized the final Page 30 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS purchase price agreed upon with Platinum as our indication of the fair market valuation of the business. As a result, we impaired the long-term assets of the business segment by $28.1 million. In contrast, as a result of the previously announced closure of our Engine & Power Train facility in New Holstein, Wisconsin and the associated curtailment of pension and retiree benefits of its employees, we recognized a net gain of $8.9 million in the second and third quarters of 2007. We also recorded $5.7 million in obsolescence charges in the second quarter associated with the completion of our lawn and garden selling season and the cessation of business sourced from Brazil at the Engine & Power Train group, The remaining charges primarily related to reductions in force executed during the second quarter across several of our business units. During the third quarter of 2006, we incurred asset impairment and restructuring charges of $8.4 million related to the Engine & Power Train business for the write-down of assets that had become idled as part of the segment's overall restructuring program, and $2.3 million for the consolidation of transmission production into a single U.S. facility. First quarter 2006 charges amounted to $0.6 million and were the result of the continuation of previously announced programs. Interest expense amounted to $25.5 million in the first nine months of 2007 compared to $16.8 million in the first nine months of 2006. The increase was primarily related to higher average interest rates associated with our current borrowing arrangements as compared to the same period in 2006. Interest income and other, net was $4.8 million in the first nine months of 2007 compared to $10.6 million in the first nine months of 2006. In 2006, we recognized a gain of $3.6 million ($2.6 million net of tax or $0.14 per share) on the sale of our interest in Kulthorn Kirby Public Company Limited, a manufacturer of compressors based in Thailand during the first quarter. 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 remainder of the decrease in 2007 was due to lower interest income on lower cash balances. The consolidated statement of operations reflects a $6.3 million income tax benefit for the first nine months of 2007 and a $2.9 million income tax benefit for the first nine months of 2006. Income taxes are recorded pursuant to SFAS No. 109, "Accounting for Income Taxes." The first nine months of 2007 reflects a tax benefit in both continuing and discontinued operations, and a tax expense in OCI. The first nine months of 2006 reflects a tax benefit in the statement of operations and tax expense in OCI and discontinued operations. The $6.3 million tax benefit in the nine months ended September 30, 2007 included a U.S. Federal tax benefit of $11.6 million in continuing operations, and a foreign tax expense of $2.8 million ($5.6 million in foreign taxes less the $2.8 million reversal of the European valuation allowance). in addition, since we pay taxes in various states there was also $0.3 million in expense recorded in the U.S. that was related to separate company state tax liabilities. As well, as a result of the MBT enactment described above, we recorded a one-time income tax expense of approximately $2.2 million in the quarter ended September 30, 2007. At September 30, 2007 and December 31, 2006, full valuation allowances are recorded for net operating loss carryovers for those tax jurisdictions in which the Company believes it is not more likely than not that the deferred taxes will be realized. Page 31 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS The net loss from continuing operations in the first nine months of 2007 was $47.2 million ($2.55 per share) as compared to a net loss of $68.0 million ($3.68 per share) in the first nine months of 2006. The change was primarily the result of the factors described above. Compressor Products Compressor business sales in the first nine months of 2007 increased to $864.7 million from $755.6 million in the first nine months of 2006. Excluding the increase in sales due to the effects of foreign currency translation of $53.5 million, sales increased by 7.4% in the first nine months of 2007. Sales increases in this segment were led by the commercial product lines (up $52.7 million), an increase of 15.1%. Sales increases were also reported in refrigeration and freezer product lines (up $46.4 million or 17.2%), while residential air conditioning declined (down $5.8 million or 5.7%). The majority of the increases were attributable to pricing advances and foreign currency translation. In the aggregate, the remainder of the compressor product lines increased by $15.8 million. Operating income for the nine months ended September 30, 2007 amounted to $28.4 million compared to operating loss of $3.7 million for the first nine months of 2006. The higher operating income was attributable to price advances and volume impacts ($62.0 million) and productivity, purchasing, and other improvements ($20.8 million). These improvements were offset by unfavorable currency exchange impacts ($35.2 million) and higher commodity costs ($15.5 million). Through the first nine months of 2007, the Brazilian Real was on average 8.7% stronger against the U.S. Dollar compared to the same period in 2006, and the average price of copper increased by 7.5% over the same period. Engine & Power Train Products Engine & Power Train sales through the first nine months of 2007 amounted to $165.9 million compared to $237.6 million in the same period of 2006. The decline in sales for the first nine months of the year was primarily due to the lower sales of $38.4 million or 48.9% in engines for snowthrowers. This decline was due to the carryover of excess inventories from the prior season by our customers, as well as conservative buying patterns by those same customers as we enter the current selling season. Sales of engines for walk behind and riding mowers declined by $19.3 million or 23.1% when compared to the first nine months of 2006. Reductions in both walk behind and riding mower engines were a result of our disruption in supply from TMT Motoco in Brazil, as customers sought alternative supply sources. Engines for generators were also down by $10.3 million, a decline of 70.5%, due to lack of significant hurricane or other storm activity in recent months. The remaining decreases in the Engine & Power Train Group were spread across multiple product lines. For the first nine months of 2007, the business incurred an operating loss of $16.4 million compared to an operating loss of $38.9 million in 2006. Productivity, purchasing, and other improvements of $25.8 million contributed to the favorable result; in addition, fees paid to AlixPartners for their assistance in implementing restructuring efforts were reduced by $18.8 million year-on-year. As well, losses associated with TMT Motoco of $8.8 million through three quarters of 2006 were not repeated in 2007. These improvements were offset by the effect of volume declines and pricing impacts of $27.4 million. In addition, a gain of $3.5 million was recorded in the first nine months of 2006 on the sale of our facility in Douglas, Georgia, whereas no similar gain was realized in 2007. Page 32 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 11 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. We had accrued $3.0 million and $3.3 million at September 30, 2007 and December 31, 2006, 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. Management Changes On August 1, 2007, we announced the appointment of Edwin "Ed" L. Buker as our permanent Chief Executive Officer. Mr. Buker's appointment was effective on August 13, 2007. The principal terms of our employment agreement with Mr. Buker were disclosed in a Current Report on Form 8-K that we filed on August 6, 2007. Given that a significant portion of Mr. Buker's compensation will be based upon performance objectives, we cannot say with certainty whether his compensation costs will be greater than or less than fees paid to AlixPartners during the tenure of Mr. James Bonsall as our principal executive officer. 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, when available, and borrowings under available credit facilities. A substantial portion of our operating income can be generated by foreign operations. In those circumstances, 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 nine months of 2007, cash used by operations amounted to $24.5 million, reflecting a net loss of $182.2 million offset by adjustments to working capital of $157.7 million. Accounts receivable decreased by $8.6 million from the beginning of the year. This net decrease was the result of several Page 33 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS factors. The seasonality of the Company's sales patterns resulted in higher sales in the third quarter of the year when compared to the fourth quarter of 2006. More specifically, sales in the last two months of the respective quarters - - which is a primary driver of the accounts receivable balance - increased by $39.2 million in the August 1 to September 30, 2007 period when compared to November and December of 2006. However, an increase of $34.6 million in the amount of discounted receivables across the two periods offset these higher sales when comparing the net receivables balances. In addition, when evaluating days to collection for outstanding receivables, there was an improvement of four days to collection as of September 30, 2007 when compared to the end of 2006. This decrease was driven by the Compressor segment, whose days sales outstanding ("DSO") decreased from 61 at the end of the year to 54 at September 30 (before consideration for discounted accounts receivable at the segment's foreign subsidiaries), due primarily to improved time for collection in North America and Europe. The Engine & Power Train segment, however, increased its DSO, from 53 at the end of the year to 68 as of September 30. DSO trends at the Engine Group were driven primarily by North America, increasing by 16 days when compared to the end of 2006. The increase is related to sales of snowthrower engines; extended terms are provided to those customers to accommodate their cash flow requirements, by allowing adequate lead time for purchase of snowthrower engines ahead of snowthrower sales to end customers. The net impact of these fluctuations was a decrease in DSO from 60 days at the end of 2006 to 56 days at the end of the third quarter of 2007. Inventories decreased by $49.8 million since the beginning of the year, reflecting improvements in days inventory on hand at the Compressor (five days) and Engine & Power Train (eight days) business segments. Decreases to accounts payable and other accrued expenses and liabilities (down $32.0 million since January 1, 2007) were also included in working capital adjustments. Most of the remainder of the cash adjustments to working capital was due to the effects of foreign currency translation. In evaluating its balance sheet metrics, the Company considers the days sales outstanding and days inventory on hand metrics to be more relevant when comparing year-over-year periods than when comparing the current period to year-end, as it removes any seasonality of our sales patterns from the comparison. Average days sales outstanding were 56 days at September 30, 2007 versus 60 days at September 30, 2006, before giving effect to receivables sold. Days inventory on hand were 71 days at September 30, 2007, down from 81 days at September 30, 2006, due to improving management of inventory balances. Cash provided by investing activities was $200.0 million in the first nine months of 2007 versus cash provided by investing activities of $84.8 million for the same period of 2006. $132.4 million in proceeds were received from the sale of assets during 2006, while $205.9 million in proceeds were recorded in the first nine months of 2007. Asset sales in 2007 included the sale of our Residential & Commercial product lines for $199.0 in net proceeds, the sale of an aircraft for $3.4 million, the sale of other fixed assets for $2.5 million, and the sale of Manufacturing Data Systems, Inc. for $1.0 million. Included in the 2006 sales was the sale of Little Giant Pump Company for $120.7 million, 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, the Company acquired a small Australian-based company in the first quarter of 2006, which owned patents related to the manufacturing of certain types of electric motors, which were applicable to both our Electrical Components and Compressor segments. The entire purchase price was allocated to amortizable intangible assets, which were sold as part of the divestiture of the Electrical Component business Page 34 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS operations in 2007. Capital expenditures were reduced by $39.7 million from the prior year, from $45.6 million in 2006 to $5.9 million in 2007. Cash used by financing activities was $201.8 million in the first nine months of 2007 as compared to a use of cash of $12.8 million in the same period of 2006. During the third quarter of 2007, we used the proceeds from the sale of our residential & commercial product lines to pay off the entire balance of our Second Lien Credit Agreement and the majority of the balance under our First Lien Credit Agreement. During the first quarter of 2006, the remaining outstanding balances of our Senior Guaranteed Notes, Revolving Credit Facility and Industrial Revenue Bonds were replaced by a new financing package that included a $275 million First Lien Credit Agreement (later revised to $175 million) and a $100 million Second Lien Credit Agreement. Capitalization In addition to cash provided by operating activities when available, we use a combination of our revolving credit arrangement under our First Lien Credit Agreement and foreign bank debt to fund our capital expenditures and working capital requirements. For the nine months ended September 30, 2007 and the full year ended December 31, 2006, our average outstanding debt balance was $265.2 million (excluding debt for TMT Motoco) and $373.0 million, respectively. The weighted average long-term interest rate, including the effect of hedging activities, was 8.8% and 10.0% at September 30, 2007 and December 31, 2006, respectively. Accounts Receivable Sales Certain of our Brazilian, Asian, and European subsidiaries periodically sell their accounts receivable to financial institutions. Such receivables are factored with recourse to us and are excluded from accounts receivable in our consolidated balance sheets. The amount of sold receivables excluded from our balance sheet was $81.1 million and $46.5 million as of September 30, 2007 and December 31, 2006, respectively. We cannot provide any assurances that these facilities will be available or utilized in the future. 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, in 2006 and through the third quarter of 2007 cash flows from operations were negative and we had to rely on existing cash balances, proceeds from credit facilities and asset sales to fund our needs. Through the second quarter of 2007, our main domestic credit facilities were provided under a $250 million First Lien Credit Agreement and a $100 million Second Lien Credit Agreement. On August 27, 2007, we entered into an amendment to our First Lien Credit Agreement, in anticipation of the closing of the sale of the Residential & Commercial and Asia Pacific operations to Regal Beloit Corporation. The principal terms of this amendment were described in a Current Report on Form 8-K dated August 31, 2007, and the amendment is filed herein as Exhibit 4.1. Among other things, the amendment deleted the minimum adjusted EBITDA and fixed charge coverage covenants for the third and fourth quarters of 2007 and reduced the lenders' total commitment from $250 million to $175 million. The amendment also imposed a new covenant requiring us to maintain a minimum of $50 million in credit availability; after giving effect to a $10 million availability reserve, we were in effect required to maintain Page 35 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS a minimum of $60 million of credit availability. Consistent with the terms of the original First Lien Credit Agreement, the amendment provides for security interests in substantially all of our assets, and places limits on additional foreign borrowings and fees paid for professional services. We paid the first lien lender fees totaling $425,000 in connection with the amendment. As of September 30, 2007, the weighted average annual interest rate on our First Lien credit agreement was 7.9%. Under the terms of the First Lien Credit Agreement, as of September 30, 2007 we had the capacity for additional borrowings under the borrowing base formula of $114.9 million ($25.2 million in the U.S. and $89.7 million in foreign jurisdictions). The First Lien Credit Agreement expires in November, 2009. On August 31, 2007, we paid off the entire balance associated with our Second Lien Credit Agreement, effective with the closing of the sale of portions of our Electrical Components business segment as referenced above. Net proceeds of this sale transaction at closing were approximately $199 million. The proceeds were utilized to repay our Second Lien lender in full, including principal, prepayment penalties and fees, and both cash and PIK interest. The remainder of the proceeds, or approximately $93.6 million, was utilized to reduce the outstanding balance on our First Lien debt. On November 8, 2007 we entered into an additional amendment to modify our First Lien Credit Agreement, in anticipation of the closing of the sale transaction of the Engine & Power Train business. The amendment is filed herein as Exhibit 4.2. The principal terms of the amendment reduced the covenant requiring us to maintain minimum levels of availability under the line of credit to $30 million, and reduced the total facility size to $75 million. As a result, after completion of the transaction, we had cash balances in the U.S. of $21.6 million, and U.S availability under our First Lien Credit Agreement of approximately $19.8 million. We paid the First Lien lender fees totaling $36,000 in connection with the amendment. In addition, we have various borrowing arrangements at our foreign subsidiaries to support working capital needs and government sponsored borrowings that provide advantageous lending rates. During the quarter, we had net repayments on these arrangements totaling $16.1 million. Our weighted average interest rate for all borrowings, including foreign borrowings, was 8.8% at September 30, 2007. Although our Second Lien debt has been eliminated, the former lender still possesses a warrant to purchase 1,390,944 shares of Class A Common Stock, which is equivalent to 7% of our fully diluted common stock. This warrant, valued at $7.3 million or $5.29 per share, expires in April of 2012. Based on the terms of the warrant, the exercise price is currently calculated at $6.05 per share. The final exercise price could be lower if the closing price of our common stock drops below $9.31 per share on or before March 27, 2008. The costs associated with this warrant, while originally accounted for as additional interest to be expensed over the remaining terms of the credit agreement, were accelerated upon full repayment of the debt, and resulted in expense of $6.2 million in the third quarter of 2007, which is included in the loss from discontinued operations. In March of 2007, our Brazilian engine subsidiary, TMT Motoco, was granted permission by the Brazilian courts to pursue a judicial restructuring, similar to a U.S. filing for Chapter 11 bankruptcy protection. The TMT Motoco filing in Brazil constituted an event of default with our domestic lenders. On April 9, 2007 we obtained amendments to our First and Second Lien Credit Agreements that cured the cross-defaults triggered by the filing in Brazil. We paid $625,000 in fees, plus expenses, to the First Lien lender on April 9, 2007 upon execution of the April 9 amendment, and fees of $750,000, plus expenses, to the Second Lien lender. Page 36 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS In accordance with the amendments discussed above, we are currently in compliance with the covenants of our domestic debt agreement. After giving effect to the sale transactions and the negative impacts of continued unfavorable currency movements, we do not expect to be in compliance with the fixed charge covenant of our First Lien credit agreement at March 31, 2008. However, we do not expect to have any amounts outstanding under the agreement at that time. In anticipation of this condition, we are pursuing a stand-by credit facility under a new collateralized arrangement, although we would not expect to require any outstanding borrowings under that arrangement to fund current operations. As a result of the judicial restructuring, all the debt associated with TMT Motoco ($96.1 million) has been removed from our Consolidated Balance Sheet at September 30, 2007. After giving effect to this reclassification, as well as the amendments to the First and Second Lien agreements, our payments by period as of September 30, 2007 for our long-term contractual obligations are as follows:
Payments by Period (in millions) -------------------------------------- Less than Total 1 Year 1-3 Years Other ------ --------- --------- ----- Debt Obligations $103.3 $68.6 $34.7 -- Interest Payments on Debt (1) 27.3 9.1 18.2 -- Other Long-Term Obligations(2) 1.0 0.6 -- 0.4
- - (1) Debt levels are assumed to remain constant. Interest rate debt obligations are assumed to remain constant at the current weighted average rate of 8.8%. - - (2) Other long-term obligations included in the above table consist solely of reserves for uncertain tax positions recognized under FIN 48. 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, 2006. In addition to the significant accounting policies described in our Annual Report on Form 10-K for the period ended December 31, 2006, we adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" (FIN 48) on January 1, 2007. FIN 48 clarifies the accounting and reporting for uncertainties in income tax law. This interpretation prescribes Page 37 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. As a result of adopting FIN 48, an increase in tax reserves and a decrease of retained earnings of $0.4 million was recorded. Upon adoption, the liability for income taxes associated with uncertain tax positions at January 1, 2007 was $3.0 million. In addition, consistent with the provisions of FIN 48, we reclassified $1.8 million of income tax liabilities from current to non-current income taxes, because payment of cash is not anticipated within one year of the balance sheet date. At September 30, 2007, the amount of gross unrecognized tax benefits, and therefore the amount that would favorably affect the effective income tax rate in future periods, was $3.0 million. Interest and penalties related to income tax liabilities are included in income tax expense. The balance of accrued interest and penalties recorded in the Consolidated Balance Sheet at January 1, 2007 was $1.1 million; of this amount, $0.7 million was reclassified from current to non-current liabilities upon adoption of FIN 48. Accrued interest and penalties for the three and nine months ended September 30, 2007 were reduced by $0.7 million and $0.9 million, respectively. The impact of FIN 48 for the first nine months of 2007 was a benefit of $1.8 million. At September 30, 2007, we anticipate a decrease in the total amount of unrecognized tax benefits within the next twelve months of approximately $0.6 million. Recently Issued Accounting Pronouncements Fair Value Measurements In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements" ("SFAS 157"), to provide enhanced guidance for using fair value to measure assets and liabilities. The Standard also expands disclosure requirements for assets and liabilities measured at fair value, how fair value is determined, and the effect of fair value measurements on earnings. The Standard applies whenever other authoritative literature requires (or permits) certain assets or liabilities to be measured at fair value, but does not expand the use of fair value. SFAS 157 is effective beginning January 1, 2008, and we are currently evaluating the impact of this pronouncement on our consolidated financial statements. Fair Value Option for Financial Assets and Financial Liabilities In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits entities to choose to measure financial assets and liabilities (except for those that are specifically exempted from SFAS 159) at fair value. The election to measure a financial asset or liability at fair value can be made on an instrument-by-instrument basis and is irrevocable. The difference between carrying value and fair value at the election date is recorded as a transition adjustment to opening retained earnings. Subsequent changes in fair value are recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. At this time, we do not intend to adopt SFAS 159. OUTLOOK Information in this "Outlook" section should be read in conjunction with the cautionary language and discussion of risks included below. Page 38 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS The outlook for the fourth quarter of 2007 is subject to the same variables that have negatively impacted us throughout 2006 and the first nine months of 2007. 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, we do not expect these factors to become any more favorable in the foreseeable future; in fact, as we complete our transition from a diversified manufacturer to a compressor business, we expect our business to become more sensitive to key risks, particularly commodity pricing and currency exchange rates. Certain key commodities, including copper and aluminum, continue to trade at elevated levels compared to recent history. From January 1, 2006 through October 31, 2007, the price of aluminum increased approximately 7.8%, and the price of copper increased 60.4% in the same time frame. In the first nine months of 2007 alone, copper prices escalated by 27.2%. While copper forward purchase contracts obtained prior to the cost increase have allowed us to maintain costs consistent with, or slightly better than, our 2007 business plan, future costs are expected to continue to rise. We currently hold approximately 70% of our total projected copper requirements for the remainder of 2007 in the form of forward purchase contracts, which will provide us with substantial (though not total) protection from further price increases during the year but also will detract from our ability to benefit from any price decreases. The continued escalation of copper prices through 2007 and into 2008 and beyond could have a long-term unfavorable impact on our results of operations, if adequate pricing increases cannot be obtained from our customers. The Brazilian Real strengthened 25.5% against the U.S. dollar from January 1, 2006 to October 31, 2007. From July 1 through September 30, 2007, the Real strengthened by 4.7%. Recently, we have also been unfavorably affected by the strengthening of the Indian Rupee, which strengthened by 8.0% in the second and third quarters of 2007. Net of currency hedging activities, this continued strengthening of the Real and the recent strengthening of the Rupee affected our operating results unfavorably by approximately $19.8 million during the first nine months when compared to our 2007 plan. As a result, we expect the operating results of our compressor business to be slightly unfavorable in the fourth quarter of 2007 when compared to the results of the comparable 2006 period. Improvements in our North American Compressor operations, primarily due to higher sales volumes and overhead cost improvements, will be offset by lower results in Brazil that are attributable to the stronger Real. As part of our efforts to improve profitability and reduce the consumption of capital resources, we continue to seek price increases to cover our increased input costs, and expect that further employee headcount reductions, consolidation of productive capacity and rationalization of product platforms will be necessary. We believe that such actions will contribute to restoring our profitability, will help to mitigate such negative external factors as currency fluctuation and increased commodity costs, and will result in improved operating performance in the remainder of 2007 and forward. As a result of the sale of portions of the Electrical Components business segment as well as the Engine & Power Train business, and the impending sale of the Automotive & Specialty business operations, we completely eliminated our domestic debt as of November 9, 2007. As a result, we expect our consolidated interest expense in the future to be substantially reduced. Based on the amount of domestic debt we held prior to the sale of businesses, we expect that its elimination will reduce our annualized interest expense by approximately $22 million. However, challenges will remain with respect to our ability to maintain appropriate levels of liquidity, particularly those driven by currency exchange and commodity pricing as discussed above. With expected further weakness of the U.S. dollar versus key currencies such as the Brazilian Real, we expect that we will generate a limited Page 39 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS amount of cash until further restructuring activities are implemented, or economic conditions improve. As part of our strategy to maintain sufficient liquidity, we are currently negotiating a new financing arrangement for our North American based activities, and seeking longer term committed financing arrangements in Brazil. In addition, we are generating other sources of cash through various activities as noted below. We are also engaged in the process of re-evaluating our corporate infrastructure in relation to the level of business activity that remains after our restructuring programs are completed. Such actions could result in further restructuring and/or asset impairment charges in the foreseeable future, and, accordingly, could have a significant effect on our consolidated financial position and future operating results. We are evaluating further potential sales of product lines, divisions, and various idle assets of the Company, including real estate, equipment, and Company aircraft. The proceeds from any such sales would be used to improve our liquidity. With respect to idle assets, we expect to realize proceeds of approximately $12 million, which we expect to receive in full by the second quarter of 2008. We recently announced our intent to close one of our U.S. operating facilities, located in Tecumseh, Michigan. The costs associated with this closure will be dependent on the outcome of negotiations with our union. The closure, once completed, is expected to reduce annual costs by $5.6 million. We are in the process of finalizing the audit of our 2003 tax year, the resolution of which is expected to result in the refund of federal income taxes previously paid of approximately $13.0 million. Receipt of such proceeds is dependent upon final resolution of these audits, estimated to occur within approximately six months. Finally, we are in the process of executing a conversion of our Salaried Retirement Plan to a new Plan. The existing Plan is substantially over-funded. We expect that this conversion will make net cash available in late 2007 or 2008 to the Company of approximately $55 million, while still fully securing the benefits under the old Plan and funding the new Plan, without additional annual contributions, for six to eight future years. The pension reversion will adversely affect the Company's results of operations due to the recognition of the cost of the termination, estimated to be $20 million, as well as a reduction in net period income. The reduction in income, however, has been more than mitigated by other actions taken to reduce the overall cost of benefits and due to personnel reductions. Taking into account the cost of all retiree benefits, both pensions and other post-retirement benefits, total expected income to be recognized in 2008, other than curtailment gains and losses and excluding potential changes in actuarial assumptions, is expected to be approximately $16 million versus $14 million in 2007. As part of addressing the Company's liquidity needs, we have made substantially lower levels of capital expenditures to date in 2007, and expect to continue that trend throughout the remainder of the year. Capital expenditures in 2007 are projected to be approximately $54 million less than in 2006 and $105.3 million less than in 2005. Looking ahead, we expect capital expenditures in 2008 and beyond to remain at levels far less than historical averages, due to the elimination of non-core businesses and due to a shift away from capital intensive vertical integration to higher levels of outside sourcing of components from suppliers located in low cost countries. Page 40 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 report 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) our ability to maintain adequate liquidity in total and within each foreign operation; ii) the success of our ongoing effort to bring costs in line with projected production levels and product mix; iii) our success in consummating the transaction for the sale of our Automotive & Specialty business, or the timing for doing so; (iv) weather conditions affecting demand for air conditioners; v) availability and cost of materials, particularly commodities, including steel, copper and aluminum, whose cost can be subject to significant variation; vi) financial market changes, including fluctuations in interest rates and foreign currency exchange rates; vii) actions of competitors; viii) changes in business conditions and the economy in general in both foreign and domestic markets; ix) the effect of terrorist activity and armed conflict; x) economic trend factors such as housing starts; xi) emerging governmental regulations; xii) the ultimate cost of resolving environmental and legal matters; xiii) our ability to profitably develop, manufacture and sell both new and existing products; xiv) 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; xv) the extent of any business disruption caused by work stoppages initiated by organized labor unions; xvi) potential political and economic adversities that could adversely affect anticipated sales and production in Brazil; xvii) potential political and economic adversities that could adversely affect anticipated sales and production in India, including potential military conflict with neighboring countries; xviii) the outcome of the judicial restructuring of our Brazilian engine manufacturing subsidiary; xix) increased or unexpected warranty claims; and xx) 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 41 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are 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 our risk management activities do not totally eliminate these risks. Consequently, these fluctuations can have a significant effect on results. A discussion of our policies and procedures regarding the management of market risk and the use of derivative financial instruments was provided in our Annual Report on Form 10-K in Item 7A and in Notes 1 and 13 of the Notes to Consolidated Financial Statements. We do not utilize financial instruments for trading or other speculative purposes. There have been no changes in these policies or procedures during the first nine months of 2007. We are 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, we do not attempt to hedge the foreign currency translation fluctuations in the net investments in its foreign subsidiaries. We do, 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 management to hedge known receivables or payables and forecasted cash flows up to a year in advance. It is our policy not to purchase financial and/or derivative instruments for speculative purposes. At September 30, 2007 and December 31, 2006, we held foreign currency forward contracts with a total notional value of $98.4 million and $130.4 million, respectively. We have a particularly concentrated exposure to the Brazilian Real. Based on our current level of activity, and excluding any mitigation as the result of hedging activities, we believe that a strengthening in the value of the Real of 0.10 per U.S. Dollar negatively impacts our operating profit by approximately $10 million on an annual basis. We use commodity forward purchasing contracts to help control the cost of traded commodities, namely copper and aluminum, used as raw material in the production of motors, electrical components and engines. Company policy allows management to contract commodity forwards for a limited percentage of projected raw material requirements up to fifteen months 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. Our practice has been to accept delivery of the commodities and consume them in manufacturing activities. At September 30, 2007 and December 31, 2006, the Company held a total notional value of $60.4 million and $62.1 million, respectively, in commodity forward purchasing contracts. 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. We are subject to interest rate risk, primarily associated with our borrowings of $103.3 million at September 30, 2007. Our $175 million First Lien Credit Agreement is variable-rate debt. Our remaining borrowings consist of variable-rate borrowings by our foreign subsidiaries. While changes in interest rates do not affect the fair value of our 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 $1.0 million. Page 42 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 4 CONTROLS AND PROCEDURES Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit 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 our management, including our 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, we carried out an evaluation, under the supervision and with the participation of our Disclosure Committee and management, including the President and Chief Executive Officer and our 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, our President and Chief Executive Officer along with our Vice President, Treasurer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2007. As outlined in management's annual report as of December 31, 2006, the Company did not maintain effective controls over the completeness and accuracy of interim income taxes. Specifically, the Company did not maintain effective controls to ensure the completeness and accuracy of (i) state income tax expense associated with a division accounted for as a discontinued operation in 2006, (ii) the effective tax rates applied to foreign operations, and (iii) the allocation of federal income tax expense between continuing and discontinued operations. This control deficiency resulted in the restatement of the Company's 2005 quarterly consolidated financial statements, the consolidated financial statements for the first and second quarters of 2006 and adjustments to the consolidated financial statements for the third quarter of 2006, affecting accrued liabilities, tax expense (benefit), and income from discontinued operations, net of tax. Additionally, this control deficiency could have resulted in a misstatement of the aforementioned accounts that would result in a material misstatement of the Company's interim and annual consolidated financial statements that would not be prevented or detected. Accordingly, management determined that as of December 31, 2006, this control deficiency represented a material weakness. Management believes that this material weakness has been remediated as of September 30, 2007. We have corrected our methodologies to comply with generally accepted accounting principles. We have also instituted additional review procedures relating to these processes that include additional management reviews and review by our outside tax advisors prior to the finalization of the income tax provision for the period. However, management has not yet completed testing of its updated procedures. Changes In Internal Control Over Financial Reporting As noted above, management believes that the material weakness that existed as of December 31, 2006 related to the calculation of interim period income taxes has been remediated. During the three months ended September 30, 2007, there have been no other changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Page 43 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 4 CONTROLS AND PROCEDURES 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 our 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 44 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION - On November 8, 2007, we entered into an amendment to our domestic first lien credit agreement. We entered into the amendment in anticipation of closing the previously announced sale of our Engine & Power Train business operations. The principal terms of the amendment reduced the minimum availability covenant to $30 million, and reduced the total facility size to $75 million. The amendment is filed herein as Exhibit 4.2. We paid the first lien lenders fees totaling $36,000 in connection with the amendment. - On November 9, 2007, we completed our previously announced sale transaction with Platinum Equity, LLC ("Platinum"), selling Platinum our Engine & Power Train business operations for $51 million in cash. The purchase agreement is filed herewith as Exhibit 10.1. We used the proceeds of the transaction to pay in full the outstanding debt associated with our first lien credit agreement. ITEM 6. EXHIBITS
(a) Exhibit Number Description ------- ----------- 4.1 Amendment No. 6 to First Lien Credit Agreement dated as of August 27, 2007 by and among Tecumseh Products Company, certain Lenders and Issuers listed therein, and Citicorp USA, Inc. as Administrative Agent and Collateral Agent 4.2 Amendment No. 7 to First Lien Credit Agreement dated as of November 8, 2007 by and among Tecumseh Products Company, certain Lenders and Issuers listed therein, and Citicorp USA, Inc. as Administrative Agent and Collateral Agent 10.1 Purchase Agreement dated as of October 22, 2007 by and between Snowstorm Acquisition Corporation and Tecumseh Products Company. (NOTE: Schedules, annexes, and exhibits are omitted. The registrant agrees to furnish supplementally a copy of any omitted schedule, annex, or exhibit to the Securities and Exchange Commission upon request.) 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 45 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: November 14, 2007 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 46 EX-4.1 2 k21582exv4w1.txt AMENDMENT NO. 6 TO FIRST LIEN CREDIT AGREEMENT Exhibit 4.1 AMENDMENT NO. 6 TO FIRST LIEN CREDIT AGREEMENT AMENDMENT NO. 6 (this "Amendment"), dated as of August 27, 2007, 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 the same has heretofore been amended, as amended hereby, and as it 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, in connection with the contemplated sale of the Borrower's Electrical Segment (or portions thereof), the Borrower has informed the Administrative Agent and the Lenders of its desire to enter into certain internal restructuring transactions; and WHEREAS, the Borrower has requested that the Administrative Agent and the Lenders constituting the Requisite Lenders consent to certain amendments to the Credit Agreement in connection therewith; and WHEREAS, the Borrower has requested, and the Administrative Agent and each Lender signatory to an Acknowledgement and Consent has agreed to consent to certain amendments of the Credit Agreement on the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants and provisions hereinafter contained, the parties hereto hereby agree as follows: SECTION 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. SECTION 2. AMENDMENT TO THE CREDIT AGREEMENT. As of the Sixth 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 terms in alphabetical order: "A&S Sale" means any potential sale of the automotive and specialty segment of the Electrical Unit, it being understood that any such sale shall require the separate consent of the Administrative Agent and Requisite Lenders. "Amendment No. 6 to the Credit Agreement" means that certain Amendment No. 6 to the First Lien Credit Agreement, dated as of August 27, 2007, entered into by the Borrower, the Administrative Agent and the Lenders party thereto. "Fasco" means Fasco Industries, Inc., a Delaware corporation and a Wholly-Owned Subsidiary of the Borrower. "Fasco Australia" means Fasco Australia Pty. Ltd., a company formed under the laws of Australia and a Wholly-Owned Subsidiary of the Borrower. "Fasco Escrow Agreements" means each of the escrow agreements executed and delivered by the Borrower pursuant to the provisions of the Fasco Purchase Agreement. "Fasco Escrow Funds" means those funds held by the escrow agent pursuant to the terms of the Fasco Escrow Agreements, not to exceed $18,000,000 in the aggregate. "Fasco Purchase Agreement" means that certain purchase agreement dated as of July 3, 2007 among the Borrower and certain Subsidiaries, as sellers, and Regal Beloit Corporation, as purchaser. "Fasco Restructurings" means and includes taking such actions as may be necessary or advisable in furtherance of any and all of (i) the conversion of certain intercompany indebtedness, charges and other payables owed by the Thai Subsidiary to the Borrower, Fasco Australia and Fasco into equity of the Thai Subsidiary, (ii) the conversion of certain intercompany indebtedness, charges and other payables owed by Fasco Australia to Fasco and the Thai Subsidiary into equity of Fasco Australia, (iii) the conversion of the debt evidenced by the Thai Intercompany Note into equity of the Thai Subsidiary, (iv) the sale by each of Fasco and Von Weise Gear Company of all of their respective automotive and specialty assets to Tecumseh Canada Holding Company and the purchase by Tecumseh Canada Holding Company of such assets, and (v) as among the Borrower and its Subsidiaries, such other conversion, restructuring or repayment of intercompany indebtedness, charges or payables, restructuring of share or asset ownership or other actions including name changes for each Subsidiary with "Fasco" in its name, as may be necessary or advisable in furtherance of the closing of the Fasco Sale and in preparation for any permitted A&S Sale. "Fasco Sale" means the closing of the transactions contemplated by the Fasco Purchase Agreement. "Fasco Sale Documents" means the Fasco Purchase Agreement and the Fasco Escrow Agreements. "Thai Intercompany Note" means that certain Promissory Note dated as of February 15, 2006 issued by the Thai Subsidiary in the initial principal amount of $8,600,000. (b) Section 1.1 of the Credit Agreement is hereby amended by deleting the grid appearing in the definition of "Applicable Margin" in its entirety and inserting the following in lieu thereof: 2
FISCAL QUARTER ENDING FISCAL QUARTER ENDING ON OR BEFORE 12/31/07 AFTER 12/31/07 ---------------------- ---------------------- BASE RATE EURODOLLAR BASE RATE EURODOLLAR QUARTERLY AVAILABLE CREDIT LOANS RATE LOANS LOANS RATE LOANS - -------------------------- --------- ---------- --------- ---------- Greater than or equal to $150,000,000 1.00% 2.00% 1.25% 2.25% Less than $150,000,000 and greater than or equal to $50,000,000 1.25% 2.25% 1.50% 2.50% Less than $50,000,000 1.50% 2.50% 1.75% 2.75%
(c) Section 2.5 of the Credit Agreement is hereby amended by inserting at the end of the paragraph the following language: On the Sixth Amendment Effective Date, the Revolving Credit Commitment of all Lenders shall be reduced ratably by an amount equal to $75,000,000. After giving effect to such reduction, the Revolving Credit Commitments shall be $175,000,000. (d) Section 5.1 of the Credit Agreement is hereby amended in its entirety as follows: Section 5.1 Minimum Fixed Charge Coverage Ratio The Borrower shall maintain a Fixed Charge Coverage Ratio, determined on the last day of each Fiscal Quarter set forth below for the four Fiscal Quarters ending on such date, of at least the minimum ratio set forth below opposite such Fiscal Quarter:
Minimum Fixed Fiscal Quarter Charge Ratio -------------- ------------ March 31, 2008 1.15 to 1 June 30, 2008 1.15 to 1 September 30, 2008 1.20 to 1 December 31, 2008 1.20 to 1 March 31, 2009 1.20 to 1 June 30, 2009 1.20 to 1 September 30, 2009 1.25 to 1
(e) Section 5.2 of the Credit Agreement is hereby amended in its entirety as follows: Section 5.2 Intentionally Reserved (f) Article VII (Affirmative Covenants) of the Credit Agreement is hereby amended by inserting the following new Section 7.21 immediately after the existing Section 7.20 and a new Section 7.22 after Section 7.21, each to read as follows: Section 7.21 Minimum Available Credit 3 Beginning on the day immediately following the effective date of the Fasco Sale, the Borrower shall maintain a minimum Available Credit of not less than $50,000,000; provided, however, that if at any time, the Agents and the Lenders consent to an A&S Sale, beginning on the day immediately following the effective date of such A&S Sale, the Borrower shall maintain a minimum Available Credit of not less than $50,000,000 minus the amount, if any, by which (x) that portion of the Available Credit created solely by the inclusion of the assets subject to such A&S Sale in the Borrowing Base immediately prior to the consummation of such A&S Sale exceeds (y) the Net Cash Proceeds of such A&S Sale. Section 7.22 Fasco Sale The Borrower shall close the transactions contemplated by the Fasco Sale Documents by September 30, 2007. (g) Article VIII (Negative Covenants) of the Credit Agreement is hereby amended by deleting Section 8.4(i) in its entirety and inserting the following in lieu thereof: So long as no Default or Event of Default is continuing or would result from any such Asset Sale hereunder, and so long as such Asset Sale is made for Fair Market Value, payable in cash, the sale of certain Real Property and other assets set forth on Schedule 8.4(b). (h) Schedule 8.4(b) is hereby amended by adding that certain property set forth on Annex I hereto. SECTION 3. WAIVER AND CONSENT. As of the Sixth Amendment Effective Date, (a) the Collateral Agent, the Administrative Agent, and each Lender signatory to an Acknowledgement and Consent hereby consents to the Borrower and the applicable Subsidiaries entry into, and the consummation of the transactions contemplated by, the Fasco Restructurings and the Fasco Sale Documents and waives any Defaults or Events of Default arising solely from the consummation of such transactions, on any date on or prior to the effective date of such transactions, it being understood that no consent is granted hereby with respect to any A&S Sale. (b) the Administrative Agent and each Lender signatory to an Acknowledgement and Consent hereby consents to granting of a first priority security interest to the purchaser under the Fasco Sale Documents (the "Fasco Purchaser") with respect to, and only with respect to, the Fasco Escrow Funds, and only for such time as the Fasco Escrow Funds are held pursuant to the Fasco Escrow Agreements (each a "Purchaser Lien" and collectively the "Purchaser Liens"), it being understood that (i) by such consent neither the Administrative Agent nor any Lender waives any rights or interest such parties may have with respect to the Fasco Escrow Funds, if any, except as specifically provided in this Section 3 and (ii) with respect to any such Fasco Escrow Funds owing to the Borrower upon completion of the Fasco Sale and expiration of the terms of the Fasco Escrow Agreements, such funds shall be returned to the Borrower and any security interest and lien over such funds in favor of the Collateral Agent on behalf of the Secured Parties pursuant to the Loan Documents shall, unless such security interest 4 and lien has been released or otherwise terminated prior thereto, automatically continue with the same priority as was in effect prior to the Sixth Amendment Effective Date. (c) the Collateral Agent and each Lender signatory to an Acknowledgement and Consent hereby acknowledges and agrees, with respect to the Purchaser Liens and the Senior Lien (as defined in the Intercreditor Agreement) on such Fasco Escrow Funds, whether under the Credit Agreements or any extension of credit during the term of one or more of the Fasco Escrow Agreements, that notwithstanding the date, manner or order of grant, attachment or perfection of any Senior Lien or Purchaser Lien and notwithstanding any provisions of the UCC or any other applicable Requirement of Law or any other circumstance whatsoever: (i) any Purchaser Lien on all or any portion of such Fasco Escrow Funds shall be senior and prior in all respects to any Senior Lien on such Fasco Escrow Funds and shall remain so, whether or not such Purchaser Lien is junior or subordinate to any other obligation or any Lien securing any other obligation, in each case, for so long as such Fasco Escrow Funds are held under the Fasco Escrow Agreements; and (ii) any Senior Lien on all or any portion of such Fasco Escrow Funds shall be junior and subordinate in all respects to the Purchaser Liens on such Fasco Escrow Funds, in each case, for so long as such Fasco Escrow Funds are held under the Fasco Escrow Agreements. (d) Subject to the immediately following sentence, and with respect to each and every disbursement of all or a portion of the Fasco Escrow Funds to a party other than the Borrower or a Subsidiary, the Collateral Agent hereby releases, effective immediately upon any such disbursement, any Lien upon that portion of the Fasco Escrow Funds so disbursed. The foregoing notwithstanding, the Senior Lien upon the Fasco Escrow Funds, if any, shall, unless such lien has been released or otherwise terminated prior thereto, (x) remain a valid and perfected Lien upon the Fasco Escrow Funds at all times while held in escrow pursuant to the Fasco Escrow Agreements or disbursed to the Borrower or a Subsidiary and (y) not be released unless and until such funds are actually disbursed to a party other than the Borrower or a Subsidiary in accordance with the Fasco Escrow Agreements. SECTION 4. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS AMENDMENT. This Amendment shall become effective as of the date first written above on the date (the "Sixth Amendment Effective Date") when the Administrative Agent shall have received all of the following: (a) Certain Documents. The Administrative Agent shall have received each of the following, in form and substance satisfactory to the Administrative Agent: (i) this Amendment, executed by the Borrower and the Administrative Agent; (ii) an Acknowledgement and Consent, in the form attached hereto as Exhibit A, duly executed by each of the Requisite Lenders; 5 (iii) the Consent of Guarantors, in the form attached hereto as Exhibit B, executed by each Guarantor; (iv) Waiver No. 2 to the Second Lien Credit Agreement, executed by the Borrower, the Second Lien Agent and the Lenders party thereto; (v) The Fee Letter, dated as of the date hereof, executed by the Borrower; and (vi) such additional documentation as the Administrative Agent or the Requisite Lenders may reasonably require. (b) Payment of Fees, Costs and Expenses. The Administrative Agent shall have received payment of all fees, costs and expenses as required by Sections 8 and 9 hereof, including, without limitation, all fees, costs and expenses of the Administrative Agent (including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent) in connection with this Amendment, the Credit Agreement and each other Loan Document. (c) Representations and Warranties. Each of the representations and warranties contained in Section 5 below shall be true and correct. (d) No Default or Event of Default. After giving effect to this Amendment and Waiver No. 2 to the Second Lien Credit Agreement, no Default or Event of Default shall have occurred and be continuing. SECTION 5. REPRESENTATIONS AND WARRANTIES. On and as of the date hereof, and as of the Sixth Amendment Effective Date, after giving effect to this Amendment and Waiver No. 2 to the Second Lien Credit Agreement, 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. SECTION 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, waivers 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. 6 SECTION 7. LOAN DOCUMENTS. This Amendment is deemed to be a "Loan Document" for the purposes of the Credit Agreement. SECTION 8. FEES. As consideration for the execution of this Amendment, the Borrower agrees to pay on the Sixth Amendment Effective Date to the Administrative Agent, for the account of each Lender from which the Administrative Agent shall have received (by facsimile or otherwise) an executed Acknowledgement and Consent with respect to this Amendment by 5:00 p.m. (New York time) on August 24, a fee equal to 0.10% of such Lender's Revolving Commitment then in effect. SECTION 9. COSTS AND EXPENSES. The Borrower agrees to pay on demand on the Sixth Amendment Effective Date 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. SECTION 10. 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 Sixth 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. (e) Delivery of an executed signature page of this Amendment by facsimile or by email in portable document format (.pdf) shall be effective as delivery of an original manually executed counterpart hereof. [signature pages follow] 7 IN WITNESS WHEREOF, the undersigned parties have executed this Amendment No. 6 to the Credit Agreement to be effective for all purposes as of the Sixth Amendment Effective Date. Borrower TECUMSEH PRODUCTS COMPANY as Borrower By: /s/ James S. Nicholson Name: James S. Nicholson Title: Vice President, Treasurer and Chief Financial Officer [SIGNATURE PAGE TO AMENDMENT NO. 6 TO FIRST LIEN CREDIT AGREEMENT] Administrative Agent CITICORP USA, INC. as Administrative Agent, Collateral Agent, Swing Loan Lender, Issuer and as a Lender By: /s/ Keith R. Gerding ------------------------------------ Name: Keith R. Gerding Title: Director and Vice President [SIGNATURE PAGE TO AMENDMENT NO. 6 TO FIRST LIEN CREDIT AGREEMENT] ANNEX I ANNEX I REAL PROPERTY 3869 Research Park Drive Ann Arbor, Michigan 3885 Research Park Drive Ann Arbor, Michigan 2500 Tecumseh Way Corinth, Mississippi 100 Research Parkway Dundee, Michigan 881 Main Street Pawtucket, Rhode Island Calumet County Wisconsin (Hayton) 900 North Street Grafton, Wisconsin 227 CDF Boulevard Shannon, Mississippi 38868 OTHER ASSETS That certain 2001 Raytheon Aircraft Company B300 aircraft bearing Manufacturer's Serial Number FL-281 and U.S. Registration No. N552TP with two (2) Pratt and Whitney PT6A-60A engines bearing Manufacturer's Serial Numbers PCE-PK0302 and PCE-PK0301 All of the assets of Manufacturing Data Systems, Inc., a Michigan corporation All of the assets of Evergy, Inc., a Delaware corporation, utilized in the Vitrus line of business as shown on the schedules to the asset purchase agreement pursuant to which such assets are sold. [ANNEX I TO AMENDMENT NO. 6 TO FIRST LIEN CREDIT AGREEMENT] EXHIBIT A ACKNOWLEDGEMENT AND CONSENT To: CITICORP USA, INC., as Administrative Agent 388 Greenwich Street, 19th Floor New York, New York 10013 RE: TECUMSEH PRODUCTS COMPANY Reference is made to the CREDIT AGREEMENT, dated as of February 6, 2006, as amended (as the same may be further amended, supplemented, restated or otherwise modified from time to time, the "Credit Agreement"), among TECUMSEH PRODUCTS COMPANY, a Michigan corporation (the "Borrower"), the Lenders and Issuers party thereto and CITICORP USA, INC. ("Citicorp"), as administrative agent and collateral agent for the Lenders and the Issuers (in such capacity, the "Administrative Agent"). Unless otherwise specified herein, all capitalized terms used in this Acknowledgment and Consent shall have the meanings ascribed to such terms in the Credit Agreement. The Borrower has requested that the Lenders consent to the terms and provisions of Amendment No. 6 to First Lien Credit Agreement (the "Amendment"), the form of which is attached hereto. Pursuant to Section 11.1(a) (Amendments, Waivers, Etc.) of the Credit Agreement, the undersigned Lender hereby consents to the terms and provisions of the Amendment and authorizes the Administrative Agent to execute and deliver such Amendment on its behalf. Very truly yours, ---------------------------------------- [Name of Lender] By: ------------------------------------ Name Title: Dated as of August ____, 2007 [EXHIBIT A TO AMENDMENT NO. 6 TO FIRST LIEN CREDIT AGREEMENT] EXHIBIT B CONSENT OF GUARANTORS Dated as of August 27, 2007 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] [EXHIBIT B - CONSENT OF GUARANTORS TO AMENDMENT NO. 6 TO FIRST LIEN CREDIT AGREEMENT] EXHIBIT B IN WITNESS WHEREOF, the parties hereto have consented to this Amendment No. 6, 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: Vice President [EXHIBIT B - CONSENT OF GUARANTORS TO AMENDMENT NO. 6 TO FIRST LIEN CREDIT AGREEMENT] TECUMSEH PRODUCTS OF CANADA LIMITED, as Canadian Guarantor By: James S. Nicholson ------------------------------------ Name: James S. Nicholson Title: Vice President and Treasurer FASCO MOTORS COMPANY, As Canadian Guarantor By: James S. Nicholson ------------------------------------ Name: James S. Nicholson Title: Vice President [EXHIBIT B - CONSENT OF GUARANTORS TO AMENDMENT NO. 6 TO FIRST LIEN CREDIT AGREEMENT] EX-4.2 3 k21582exv4w2.txt AMENDMENT NO. 7 TO FIRST LIEN CREDIT AGREEMENT Exhibit 4.2 AMENDMENT NO. 7 TO FIRST LIEN CREDIT AGREEMENT AMENDMENT NO. 7 (this "Amendment"), dated as of November 8, 2007, 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 the same has heretofore been amended, as amended hereby, and as it 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 has requested the Administrative Agent and the Lenders constituting the Requisite Lenders reduce the existing Revolving Credit Commitment to $75,000,000; WHEREAS, the Borrower has requested that the Administrative Agent and the Lenders constituting the Requisite Lenders reduce the Minimum Available Credit set forth in Section 7.21 (Minimum Available Credit) to $30,000,000; and WHEREAS, the Borrower has requested that the Administrative Agent and the Lenders constituting the Requisite Lenders consent to certain amendments to the Credit Agreement in connection therewith; WHEREAS, the Borrower has requested, and the Administrative Agent and each Lender signatory to an Acknowledgement and Consent has agreed to consent to certain amendments of the Credit Agreement on the terms and subject to the conditions set forth herein; NOW, THEREFORE, in consideration of the premises and the mutual covenants and provisions hereinafter contained, the parties hereto hereby agree as follows: SECTION 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. SECTION 2. AMENDMENT TO THE CREDIT AGREEMENT. As of the Seventh Amendment Effective Date (as defined in Section 3), the Credit Agreement is hereby amended as follows: (a) Section 1.1 of the Credit Agreement is hereby amended by adding the following defined terms in alphabetical order: "Amendment No. 7 to the Credit Agreement" means that certain Amendment No. 7 to the First Lien Credit Agreement, dated as of November 8, 2007, entered into by the Borrower, the Administrative Agent and the Lenders party thereto. "Engine Sale" means the sale by Borrower, pursuant to the Engine Sale Documents, of the capital stock of each of Tecumseh Power Company, a Delaware corporation and a Subsidiary of Borrower, Motoco a.s., a corporation formed under the laws of the Czech Republic and a Subsidiary of the Borrower, and Tecumseh Power International Limited, a corporation formed under the laws of the United Kingdom and a Subsidiary of Tecumseh Power Company. "Engine Sale Documents" means that certain Stock Purchase Agreement dated as of October 22, 2007 by and between Tecumseh Products Company and Snowstorm Acquisition Corporation. (b) Section 2.5 of the Credit Agreement is hereby deleted in its entirety and the following shall be inserted in lieu thereof: Section 2.5 Reduction and Termination of the Revolving Credit Commitments The Borrower may, upon at least three Business Days' prior notice to the Administrative Agent, terminate in whole or reduce in part ratably the unused portions of the respective Revolving Credit Commitments of the Revolving Credit Lenders; provided, however, that each partial reduction shall be in an aggregate amount of not less than $3,000,000 or an integral multiple of $1,000,000 in excess thereof. On the Seventh Amendment Effective Date, the Revolving Credit Commitment of all Lenders shall be reduced ratably by an amount equal to $100,000,000. After giving effect to such reduction, the Revolving Credit Commitments shall be $75,000,000. (c) Article VII (Affirmative Covenants) of the Credit Agreement is hereby amended by deleting the existing Section 7.21 and inserting the following in lieu thereof: Section 7.21 Minimum Available Credit Beginning on the day immediately following the Seventh Amendment Effective Date (as defined in Amendment No. 7), the Borrower shall maintain a minimum Available Credit of not less than $30,000,000; provided, however, that if at any time, the Agents and the Lenders consent to an A&S Sale (as defined in Amendment No. 6), beginning on the day immediately following the effective date of such A&S Sale, the Borrower shall maintain a minimum Available Credit of not less than $30,000,000 minus the amount, if any, by which (x) that portion of the Available Credit created solely by the inclusion of the assets subject to such A&S Sale in the Borrowing Base immediately prior to the consummation of such A&S Sale exceeds (y) the Net Cash Proceeds of such A&S Sale. SECTION 3. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS AMENDMENT. This Amendment shall become effective as of the date first written above on the date (the "Seventh Amendment Effective Date") when the Administrative Agent shall have received all of the following: (a) Certain Documents. The Administrative Agent shall have received each of the following, in form and substance satisfactory to the Administrative Agent: (i) this Amendment, executed by the Borrower and the Administrative Agent; (ii) an Acknowledgement and Consent, in the form attached hereto as Exhibit A, duly executed by each of the Requisite Lenders; (iii) the Consent of Guarantors, in the form attached hereto as Exhibit B, executed by each Guarantor; (iv) the fully executed Engine Sale Documents along with a certificate of a Responsible Officer of the Borrower certifying to the consummation of the Engine Sale in accordance with Engine Sale Documents; and (v) such additional documentation as the Administrative Agent or the Requisite Lenders may reasonably require. (b) Payment of Fees, Costs and Expenses. The Administrative Agent shall have received payment of all fees, costs and expenses as required by Sections 7 and 8 hereof, including, without limitation, all fees, costs and expenses of the Administrative Agent (including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent) in connection with this Amendment, the Credit Agreement and each other Loan Document. (c) Representations and Warranties. Each of the representations and warranties contained in Section 4 below shall be true and correct. (d) No Default or Event of Default. No Default or Event of Default shall have occurred and be continuing. SECTION 4. REPRESENTATIONS AND WARRANTIES. On and as of the date hereof, and as of the Seventh Amendment Effective Date, 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. SECTION 5. 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, waivers 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. SECTION 6. LOAN DOCUMENTS. This Amendment is deemed to be a "Loan Document" for the purposes of the Credit Agreement. SECTION 7. FEES. As consideration for the execution of this Amendment, the Borrower agrees to pay on the Seventh Amendment Effective Date to the Administrative Agent, for the account of each Lender from which the Administrative Agent shall have received (by facsimile or otherwise) an executed Acknowledgement and Consent with respect to this Amendment by 5:00 p.m. (New York time) on November 8, 2007, a fee equal to 0.025% of such Lender's Revolving Commitment (for avoidance of doubt, for purposes of this Section 7, the applicable Revolving Credit Commitments shall be $175,000,000). SECTION 8. COSTS AND EXPENSES. The Borrower agrees to pay on demand on the Seventh Amendment Effective Date 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. SECTION 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 Seventh 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. (e) Delivery of an executed signature page of this Amendment by facsimile or by email in portable document format (.pdf) shall be effective as delivery of an original manually executed counterpart hereof. [signature pages follow] IN WITNESS WHEREOF, the undersigned parties have executed this Amendment No. 7 to the Credit Agreement to be effective for all purposes as of the Seventh Amendment Effective Date. Borrower TECUMSEH PRODUCTS COMPANY as Borrower By: /s/ James S. Nicholson Name: James S. Nicholson Title: Vice President, Treasurer and Chief Financial Officer [SIGNATURE PAGE TO AMENDMENT NO. 7 TO FIRST LIEN CREDIT AGREEMENT] Administrative Agent CITICORP USA, INC. as Administrative Agent, Collateral Agent, Swing Loan Lender, Issuer and as a Lender By: /s/ Keith R. Gerding Name: Keith R. Gerding Title: Director and Vice President [SIGNATURE PAGE TO AMENDMENT NO. 7 TO FIRST LIEN CREDIT AGREEMENT] EXHIBIT A ACKNOWLEDGEMENT AND CONSENT To: CITICORP USA, INC., as Administrative Agent 388 Greenwich Street, 19th Floor New York, New York 10013 RE: TECUMSEH PRODUCTS COMPANY Reference is made to the CREDIT AGREEMENT, dated as of February 6, 2006, as amended (as the same may be further amended, supplemented, restated or otherwise modified from time to time, the "Credit Agreement"), among TECUMSEH PRODUCTS COMPANY, a Michigan corporation (the "Borrower"), the Lenders and Issuers party thereto and CITICORP USA, INC. ("Citicorp"), as administrative agent and collateral agent for the Lenders and the Issuers (in such capacity, the "Administrative Agent"). Unless otherwise specified herein, all capitalized terms used in this Acknowledgment and Consent shall have the meanings ascribed to such terms in the Credit Agreement. The Borrower has requested that the Lenders consent to the terms and provisions of Amendment No. 7 to First Lien Credit Agreement (the "Amendment"), the form of which is attached hereto. Pursuant to Section 11.1(a) (Amendments, Waivers, Etc.) of the Credit Agreement, the undersigned Lender hereby consents to the terms and provisions of the Amendment and authorizes the Administrative Agent to execute and deliver such Amendment on its behalf. Very truly yours, ---------------------------------------- [Name of Lender] By: ------------------------------------ Name Title: Dated as of November ____, 2007 [EXHIBIT A TO AMENDMENT NO. 7 TO FIRST LIEN CREDIT AGREEMENT] EXHIBIT B CONSENT OF GUARANTORS Dated as of November__, 2007 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] [EXHIBIT B - CONSENT OF GUARANTORS TO AMENDMENT NO. 7 TO FIRST LIEN CREDIT AGREEMENT] EXHIBIT B IN WITNESS WHEREOF, the parties hereto have consented to this Amendment No. 7, as of the date first written above. CONVERGENT TECHNOLOGIES INTERNATIONAL, INC. TECUMSEH TRADING COMPANY EVERGY, INC. FASCO INDUSTRIES, 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: Vice President [EXHIBIT B - CONSENT OF GUARANTORS TO AMENDMENT NO. 7 TO FIRST LIEN CREDIT AGREEMENT] TECUMSEH PRODUCTS OF CANADA LIMITED, as Canadian Guarantor By: /s/ James S. Nicholson Name: James S. Nicholson Title: Vice President and Treasurer VON WEISE OF CANADA COMPANY (F/K/A FASCO MOTORS COMPANY), As Canadian Guarantor By: /s/ James S. Nicholson Name: James S. Nicholson Title: Vice President [EXHIBIT B - CONSENT OF GUARANTORS TO AMENDMENT NO. 7 TO FIRST LIEN CREDIT AGREEMENT] EX-10.1 4 k21582exv10w1.txt PURCHASE AGREEMENT Exhibit 10.1 ================================================================================ STOCK PURCHASE AGREEMENT BY AND BETWEEN TECUMSEH PRODUCTS COMPANY AND SNOWSTORM ACQUISITION CORPORATION OCTOBER 22, 2007 ================================================================================ TABLE OF CONTENTS ARTICLE I DEFINITIONS AND INTERPRETATIONS.................................. 1 Section 1.1 Definitions............................................... 1 Section 1.2 Interpretations........................................... 11 ARTICLE II PURCHASE AND SALE............................................... 12 Section 2.1 Purchase and Sale of Target Companies..................... 12 Section 2.2 Intercompany Accounts Receivable and Accounts Payable..... 12 Section 2.3 Purchase Price............................................ 12 Section 2.4 Closing................................................... 12 Section 2.5 Deliveries at Closing..................................... 13 Section 2.6 Working Capital Adjustment................................ 14 Section 2.7 Allocation................................................ 16 ARTICLE III SELLER'S REPRESENTATIONS AND WARRANTIES........................ 16 Section 3.1 Organization; Good Standing............................... 16 Section 3.2 Authorization of Transaction.............................. 16 Section 3.3 Noncontravention.......................................... 17 Section 3.4 Title to Target Shares.................................... 17 Section 3.5 Capitalization............................................ 17 Section 3.6 Financial Statements; Undisclosed Liabilities............. 18 Section 3.7 Assets.................................................... 18 Section 3.8 Subsequent Events......................................... 18 Section 3.9 Material Contracts........................................ 19 Section 3.10 Intellectual Property..................................... 20 Section 3.11 Real Property............................................. 21 Section 3.12 Tax Matters............................................... 22 Section 3.13 Legal Compliance; Permits................................. 23 Section 3.14 Litigation................................................ 23 Section 3.15 Product Warranty.......................................... 24 Section 3.16 Product Liability......................................... 24 Section 3.17 Customers and Suppliers................................... 24 Section 3.18 Environmental, Health and/or Safety Matters............... 24 Section 3.19 Labor and Employment Matters.............................. 25 Section 3.20 Employees Benefit Plans................................... 25 Section 3.21 Brokers' Fees............................................. 28 Section 3.22 Transactions With Affiliates.............................. 28 Section 3.23 Insurance................................................. 28 Section 3.24 Accounts Receivable....................................... 28 Section 3.25 Inventory................................................. 28 Section 3.26 Disclaimer of Other Representations and Warranties........ 28 ARTICLE IV BUYER'S REPRESENTATIONS AND WARRANTIES.......................... 29 Section 4.1 Organization of Buyer..................................... 29 Section 4.2 Authorization of Transaction.............................. 29
i Section 4.3 Noncontravention.......................................... 29 Section 4.4 Litigation................................................ 29 Section 4.5 Brokers' Fees............................................. 30 Section 4.6 Sufficient Funds.......................................... 30 Section 4.7 Investment................................................ 30 Section 4.8 Guaranty.................................................. 30 Section 4.9 Disclaimer of Other Representations and Warranties........ 30 ARTICLE V PRE-CLOSING COVENANTS............................................ 30 Section 5.1 Efforts; Cooperation...................................... 30 Section 5.2 Preservation of Business.................................. 31 Section 5.3 Operation of Business..................................... 31 Section 5.4 Notice of Developments.................................... 31 Section 5.5 Notice of Supplemental Disclosure......................... 32 Section 5.6 No Alternative Proposals.................................. 32 Section 5.7 Access.................................................... 32 Section 5.8 Press Releases and Public Announcements................... 33 Section 5.9 Pre-Closing Asset Transfers............................... 33 Section 5.10 Pre-Closing Employment Transfers.......................... 33 Section 5.11 Credit Support Requirements............................... 33 ARTICLE VI OTHER COVENANTS................................................. 34 Section 6.1 Cooperation............................................... 34 Section 6.2 Further Assurances........................................ 34 Section 6.3 Payments; Transition Services; Run-Off.................... 34 Section 6.4 Use of Name............................................... 35 Section 6.5 Access; Enforcement; Litigation Support................... 35 Section 6.6 Non-Competition........................................... 36 Section 6.7 Non-Solicitation of Employees............................. 36 Section 6.8 Covered Employees......................................... 37 Section 6.9 Transfer Taxes............................................ 38 Section 6.10 Tax Matters............................................... 39 Section 6.11 Insurance................................................. 40 Section 6.12 Bulk Transfer Laws........................................ 40 Section 6.13 Acknowledgements.......................................... 40 ARTICLE VII CONDITIONS TO OBLIGATION TO CLOSE.............................. 40 Section 7.1 Conditions to Buyer's Obligations......................... 40 Section 7.2 Conditions to Seller's Obligations........................ 41 Section 7.3 No Frustration of Closing Conditions...................... 42 ARTICLE VIII INDEMNIFICATION............................................... 42 Section 8.1 Survival of Representations and Warranties................ 42 Section 8.2 Indemnification Provisions for Buyer's Benefit............ 42 Section 8.3 Indemnification Provisions for Seller's Benefit........... 43 Section 8.4 Matters Involving Third Parties........................... 44 Section 8.5 Limitation on Indemnification; Calculation of Damages..... 45
ii Section 8.6 Claims and Payment; Treatment of Payments................. 47 Section 8.7 Exclusive Remedy.......................................... 47 ARTICLE IX TERMINATION..................................................... 47 Section 9.1 Termination of Agreement.................................. 47 Section 9.2 Effect of Termination..................................... 48 ARTICLE X MISCELLANEOUS.................................................... 49 Section 10.1 Expenses.................................................. 49 Section 10.2 Entire Agreement.......................................... 49 Section 10.3 Incorporation of Annexes, Exhibits and Disclosure Schedules.............................................. 49 Section 10.4 Amendments and Waivers.................................... 49 Section 10.5 Succession and Assignment................................. 49 Section 10.6 Notices................................................... 50 Section 10.7 Governing Law............................................. 51 Section 10.8 Submission to Jurisdiction; Service of Process............ 51 Section 10.9 Waivers of Jury Trial..................................... 51 Section 10.10 Specific Performance...................................... 51 Section 10.11 Severability.............................................. 51 Section 10.12 No Third Party Beneficiaries.............................. 52 Section 10.13 Mutual Drafting........................................... 52 Section 10.14 Disclosure Schedule....................................... 52 Section 10.15 Headings; Table of Contents............................... 52 Section 10.16 Counterparts; Facsimile Signatures........................ 52
Exhibit A - Form of License Agreement Exhibit B - Form of Transition Services Agreement Exhibit C - Form of IP Assignment Agreement Annex A - Accounting Principles Annex B - Business Financial Statements Disclosure Schedule iii STOCK PURCHASE AGREEMENT This STOCK PURCHASE AGREEMENT (this "Agreement") is entered into as of October 22, 2007, by and between TECUMSEH PRODUCTS COMPANY, a corporation formed under the laws of the State of Michigan ("Seller"), and SNOWSTORM ACQUISITION CORPORATION, a corporation formed under the laws of the State of Delaware ("Buyer"). Seller and Buyer are referred to collectively herein as the "Parties". WITNESSETH: WHEREAS, Seller directly owns all of the issued and outstanding capital stock of Tecumseh Power Company, a corporation formed under the laws of the State of Delaware ("Power"), and Motoco a.s., a corporation formed under the laws of the Czech Republic ("Motoco" and together with Power, the "Target Companies"), and Power directly owns all of the issued and outstanding capital stock of Tecumseh Power International Limited, a corporation formed under the laws of the United Kingdom ("Power UK" and together with the Target Companies, each a "Company" and collectively the "Companies"); WHEREAS, Seller operates a small engine and transmission manufacturing, assembly and marketing business that manufactures, assembles and/or markets engines, transmissions and carburetors for snow, lawn and garden, generator and tractor applications through the Companies (the "Business"); WHEREAS, Seller wishes to sell, and Buyer wishes to buy, the outstanding capital stock of the Target Companies on the terms and subject to the conditions set forth herein; and WHEREAS, concurrently with the execution of this Agreement, and as a condition to the willingness of Seller to enter into this Agreement, Buyer has delivered to Seller the Guaranty (the "Guaranty") of Platinum Equity Capital Partners, L.P., an affiliate of Buyer (the "Investor"), dated as of the date hereof, pursuant to which the Investor has guaranteed to Seller the performance of Buyer's obligations hereunder on the terms and subject to the conditions set forth therein. NOW, THEREFORE, in consideration of the mutual promises herein made, and in consideration of the representations, warranties and covenants herein contained, the Parties agree as follows. ARTICLE I DEFINITIONS AND INTERPRETATIONS Section 1.1 Definitions. For purposes of this Agreement: "Accounting Principles" means the consistently applied accounting methods, principles and calculations of the Companies pursuant to which the Financial Statements were prepared, which are set forth in Annex A hereto, and include GAAP. A specific method, principle or calculation specified in Annex A hereto is intended to be applied in a consistent manner (to the extent applicable) in accordance with such specific method, principle or calculation as has been used by the Companies in the preparation of the Financial Statements. For purposes of any application of GAAP hereunder with the other Accounting Principles, where there shall be any inconsistency between any specific Accounting Principles set forth in Annex A hereto and GAAP, such specific Accounting Principles shall control and GAAP shall be applied on a basis consistent with those specific Accounting Principles. "Affiliate" has the meaning set forth in Rule 12b-2 of the regulations promulgated under the Exchange Act. "Agreement" has the meaning set forth in the preamble. "Alternative Proposal" means a proposal or offer from any Person (other than Buyer or any of its Affiliates or Representatives) for the acquisition of the Target Shares or all or any material part of the Business; provided, however, that, notwithstanding anything to the contrary contained herein, a proposal or offer from any Person relating to the direct or indirect acquisition of the stock, assets or businesses of Seller or any of its businesses other than the Business shall not constitute an Alternative Proposal so long as the transactions contemplated thereby would not expressly be conditioned on the termination of this Agreement and the obligations of Seller hereunder would continue or be assumed by the Person making such proposal or offer upon consummation of the transactions contemplated thereby. "Approved Absence" means an approved leave of absence (including active military service), short term and long term disability (including employees on workers' compensation). "Basket" has the meaning set forth in Section 8.5(a). "Business" has the meaning set forth in the recitals. "Business Day" means any day other than a Saturday, a Sunday or a day on which banks located in New York, New York shall be authorized or required by law to close. "Buyer" has the meaning set forth in the preamble. "Buyer DC Plan" has the meaning set forth in Section 6.8(e). "Buyer Indemnified Party" has the meaning set forth in Section 8.2. "Call Period" means the period from the date hereof until the earlier to occur of (x) the eleventh (11th) Business Day following the date hereof or (y) the first day on which the Investor shall have received the proceeds of all capital calls made to consummate the transactions contemplated hereby. "Cash" means cash, cash equivalents and liquid investments, net of any outstanding checks or drafts written against such amounts. "Closing" has the meaning set forth in Section 2.4. "Closing Date" has the meaning set forth in Section 2.4. 2 "Code" means the Internal Revenue Code of 1986. "Companies" has the meaning set forth in the recitals. "Company Plan" has the meaning set forth in Section 3.20(a). "Conclusive Net Working Capital Statement" has the meaning set forth in Section 2.6(b). "Confidentiality Agreement" means the letter agreement, dated as of June 19, 2007, by and between Seller and Platinum Equity Advisors, LLC, an affiliate of Buyer, regarding the terms and conditions on which Seller would make available certain information to Platinum Equity Advisors, LLC. "Contamination" has the meaning set forth in the definition of Environmental Liabilities. "Contract" means any binding agreement, contract, lease, sublease, indenture, mortgage, instrument, guaranty, loan or credit agreement, note, bond, customer order, purchase order, franchise, dealer and distributorship agreement, supply agreement, development agreement, joint venture agreement, promotion agreement, partnership agreement or other binding arrangement, understanding or commitment, whether written or oral. "Continuing Intercompany Accounts" has the meaning set forth in Section 2.2(b). "Covered Employee" means any officer or employee of the Companies (including officers or employees on leave of absence), excluding all employees who are subject to the Pre-Closing Employment Transfers. For the avoidance of doubt, James J. Bonsall shall not be deemed a Covered Employee for purposes of this Agreement. "Credit Support Requirements" means standby letters of credit, guarantees, indemnity bonds, performance bonds, bid bonds, and any other financial commitment or credit support instruments issued by third parties, Seller or any of Seller's Subsidiaries other than a Company on behalf of Seller, any Company or any of Seller's other Subsidiaries regarding the Business. "Czech Facility" means all land, together with all buildings, structures, improvements and fixtures located thereon, and all easements and other rights appurtenant thereto, located at Krizikova 1, 370 01 Ceske Budejovice, Czech Republic. "Damages" has the meaning set forth in Section 8.2. "Decree" means any judgment, decree, ruling, injunction, assessment, attachment, undertaking, award, charge, writ, executive order, administrative order or any other order of any Governmental Entity. "Disclosure Schedule" has the meaning set forth in Article III. "Disclosure Supplement" has the meaning set forth in Section 5.5. "Disputed Item" has the meaning set forth in Section 2.6(b). 3 "Disregarded Intercompany Accounts" has the meaning set forth in Section 2.2(a). "Dunlap Facility" means all land, together with all buildings, structures, improvements and fixtures located thereon, and all easements and other rights appurtenant thereto, located at 510 Tram Trail Road, Dunlap, Tennessee. "Effective Time" has the meaning set forth in Section 2.4. "Employee Benefit Plan" means any "employee benefit plan" (as such term is defined in Section 3(3) of ERISA) and any other employee benefit plan, program or arrangement of any kind, whether or not subject to ERISA. "Environmental, Health and/or Safety Requirements" means, as enacted and in effect on or prior to the Closing Date, all federal, state, local and foreign statutes, regulations, ordinances and other provisions having the force or effect of law, all judicial and administrative orders, determinations, directives or permit requirements, all contractual obligations, and all common law concerning public health and safety, worker health and safety, pollution or protection of the environment, including all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control or cleanup of any Hazardous Materials. "Environmental Liabilities" means, with respect to or relating to any facility, any claim or Liability (contingent or otherwise) of any kind or nature or the duty to indemnify, defend or reimburse any Person with respect to: (i) the presence at any time of any Hazardous Materials prior to, on or following the Closing Date in the soil, groundwater, surface water, air or building materials of such facility ("Contamination"); (ii) the migration at any time prior to, on or after the Closing Date of Contamination to any other real property, or the soil, groundwater, surface water, air or building materials thereof; (iii) any activity involving Hazardous Materials conducted on such facility at any time prior to, on or following the Closing Date; (iv) the exposure of any Person to Hazardous Materials in the course of or as a consequence of any activity involving Hazardous Materials conducted on such facility at any time prior to, on or following the Closing Date or to Contamination, without regard to whether any health effect of the exposure has been manifested as of the Closing Date; (v) the violation of any Environmental, Health and/or Safety Requirements in connection with the operations of any business at such facility at any time prior to, on or following the Closing Date; or (vi) any actions or proceedings brought or threatened by any third party with respect to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974. "ERISA Affiliate" means any entity that is treated as a single employer with any Company pursuant to Code Section 414(b) or 414(c) or ERISA Section 4001(a)(15). "Exchange Act" means the Securities Exchange Act of 1934. "Financial Statements" has the meaning set forth in Section 3.6(a). "Former Facilities" means all land, together with all buildings, structures, improvements and fixtures located thereon, and owned or leased by Seller or any of its Subsidiaries with respect 4 to the Business other than the Present Facilities. For avoidance of doubt, the Grafton Facility and the New Holstein Facility shall be deemed Former Facilities. "GAAP" means United States generally accepted accounting principles. "Grafton Facility" means all land, together with all buildings, structures, improvements and fixtures located thereon, and all easements and other rights appurtenant thereto, located at 900 North Street, Grafton, Wisconsin. "Grafton Settlement Agreement" has the meaning set forth in Section 5.10. "Grafton Union Contract" has the meaning set forth in Section 5.10. "Governmental Entity" means any federal, state, local or foreign governmental or regulatory authority, agency, commission, court, body or other governmental entity. "Guaranty" has the meaning set forth in the recitals. "Hazardous Materials" means any hazardous materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise or radiation. "HMO" has the meaning set forth in Section 3.20(a)(vii). "Horsepower Litigation" means the litigation titled as Ronnie Phillips et al. v. Sears Roebuck Corporation et. al., No.04-L-334 (20th Judicial Circuit, St. Clair County, IL). "Indebtedness" means, as of any date of determination, without duplication, (a) the principal amount of all indebtedness of a Company for borrowed money as of such date and any unpaid interest thereon as of such date, (b) the principal amount of any other indebtedness of a Company as of such date which is evidenced by a note, bond, letter of credit, debenture or similar instrument and any unpaid interest thereon as of such date, (c) all capital lease obligations of a Company as of such date, in each case determined in accordance with GAAP, and (d) pension or other similar post-retirement liabilities. "Indemnified Party" has the meaning set forth in Section 8.4(a). "Indemnifying Party" has the meaning set forth in Section 8.4(a). "Initial Purchase Price" has the meaning set forth in Section 2.3. "Intellectual Property" means (a) all patents and patent applications, together with all reissuances, continuations, continuations-in-part, extensions and reexaminations thereof; (b) all trademarks, service marks, trade dress, logos, slogans, trade names and Internet domain names, together with all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith; (c) all copyrightable works, all copyrights, and all applications, registrations and renewals in connection therewith; (d) all trade secrets, including inventions, 5 know-how, formulas, compositions, methods, manufacturing and production processes and techniques and technology, whether or not patentable; and (e) all computer software. "Inventory" shall mean the inventory (including raw materials, work in process and finished goods) of the Companies. "Investor" has the meaning set forth in the recitals. "IP Assignment Agreement" has the meaning set forth in Section 2.5(a)(iv). "IRS" means the Internal Revenue Service. "Knowledge" of a Person (and other words of similar import) means the actual knowledge, after reasonable inquiry, of (i) with respect to Seller, James J. Bonsall, Randy Butler, Thomas Drainville, Daryl P. McDonald, James S. Nicholson, Michael Taylor, Earl Johnson or Gregg Neumeyer, and (ii) with respect to Buyer, any executive officer or division manager of Buyer. "Leased Real Property" means all leasehold or subleasehold estates and other rights to use or occupy any land, buildings, structures, improvements, fixtures, or other interest in real property that is leased by any of the Companies. "Leases" means all leases, subleases, licenses, concessions and other agreements, including all amendments, extensions, renewals, guaranties, and other agreements with respect thereto, pursuant to which any of the Companies holds any Leased Real Property. "Liability" means any liability or obligation of whatever kind or nature (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether liquidated or unliquidated and whether due or to become due), including any liability for Taxes. "License Agreement" has the meaning set forth in Section 2.5(a)(ii). "Lien" means any mortgage, pledge, lien, encumbrance, charge, security interest, option, right of first refusal, easement, mortgage, license to third party, security agreement or other encumbrance or restriction on the use or transfer of any property. "Litigation" means any action, cause of action, suit, claim, investigation, audit, demand, hearing or proceeding, whether civil, criminal, administrative or arbitral by or before any Governmental Entity. "Material Adverse Effect" means, when used with respect to a Person or the Business, any effect or change that individually or in the aggregate (i) would be, or would reasonably be likely to be, materially adverse to the business, assets, financial condition, operating results or operations of the Person and its Subsidiaries (taken as a whole) or the Business as presently conducted, as appropriate; provided, however, that no effects or changes arising or related to any of the following shall be deemed to constitute, and none of the following shall be taken into account in determining whether there has been, a Material Adverse Effect when used with respect to the Business or the Companies: (a) general business or economic conditions in North 6 America or Europe; (b) general business or economic conditions affecting the industry in which such Person or the Business, as appropriate, operates; (c) national or international political or social conditions, including the engagement by any country in North America or Europe in hostilities, whether or not pursuant to the declaration of a national emergency or war, or the occurrence of any military or terrorist attack in any country in North America or Europe, or any of its territories, possessions or diplomatic or consular offices or upon any military installation, equipment or personnel of any country in North America or Europe; (d) financial, banking, credit, currency or securities markets (including any disruption thereof or any decline in the price of securities generally or any market or index); (e) changes in law or in United States of America generally accepted accounting principles, except to the extent that, in the case of (a), (b), (c) or (e), such Person or the Business, as appropriate, is disproportionately affected thereby; (f) any action contemplated by this Agreement or any other Related Agreement; (g) the announcement or pendancy of this Agreement, (h) any failure of either Party hereto to provide its consent to the taking of any action otherwise provided hereunder, (i) any commodity prices or (j) the operational performance of the Business in September 2007 and through the Closing as reflected in any financial statements covering any such period to the extent impacted from the reasons, changes or effects disclosed to Buyer on or before the date hereof and set forth in Section 3.8 of the Disclosure Schedule, including any differences in revenue, costs or earnings for such month or period when compared against any forecasts for such month or period or historical operational results for any period, or (ii) would, or would be reasonably likely to, materially adversely affect the ability of such Person to consummate the transactions contemplated by this Agreement or the other Related Agreements on a timely basis. "Material Contact" has the meaning set forth in Section 3.9. "Most Recent Balance Sheet" means the balance sheet for the Most Recent Fiscal Month End. "Most Recent Financial Statements" has the meaning set forth in Section 3.6(a). "Most Recent Fiscal Month End" has the meaning set forth in Section 3.6(a). "Most Recent Fiscal Year End" has the meaning set forth in Section 3.6(a). "Motoco" has the meaning set forth in the recitals. "Net Working Capital" means (i) the (A) trade accounts receivable plus inventories of the Business plus (B) unrestricted Cash of the Business (including Cash in the United Kingdom and the Czech Republic) not distributed or paid pursuant to the third sentence of Section 5.3, less (C) trade accounts payable of the Business as determined in accordance with the Accounting Principles, which have been used in preparing the illustrative determination of the Net Working Capital included in Part B of Annex A hereto, minus (ii) the amount of Indebtedness (to the extent not already included in clause (i)(B) above). Notwithstanding anything to the contrary, all Disregarded Intercompany Accounts shall be disregarded and all Continuing Intercompany Accounts shall be included for purposes of determining the Net Working Capital. "Neutral Arbitrator" has the meaning set forth in Section 2.6(b). 7 "New Holstein Facility" means all land, together with all buildings, structures, improvements and fixtures located thereon, and all easements and other rights appurtenant thereto, located at 1604 Michigan Avenue, New Holstein, Wisconsin. "Ordinary Course of Business" means the ordinary course of business consistent with past custom and practice of the Business. "Outside Date" has the meaning set forth in Section 9.1(c)(i). "Owned Real Property" means all land, together with all buildings, structures, improvements, and fixtures located thereon, and all easements and other rights and interests appurtenant thereto, owned by any of the Companies. "Party" has the meaning set forth in the preamble. "PBGC" has the meaning set forth in Section 3.20(a)(iv). "Permitted Lien" means (a) Liens for Taxes not yet delinquent or which are being contested in good faith by appropriate proceedings (excluding Liens arising under ERISA or Code Section 412); (b) mechanic's, workmen's, repairmen's, warehousemen's, carrier's or other similar Liens, including all statutory liens, arising or incurred in the Ordinary Course of Business if the obligations secured thereby are not past due or are being contested in good faith; (c) with respect to leased or licensed personal property, the terms and conditions of the lease or license applicable thereto; (d) with respect to real property, zoning, building codes and other land use laws regulating the use or occupancy of such real property or the activities conducted thereon which are imposed by any Governmental Entity having jurisdiction over such real property which are not violated by the current use or occupancy of such real property or the operation of the Business, except where any such violation would not reasonably be expected to individually or in the aggregate materially impair the use or operation of the affected property or the conduct of the Business thereon as it is currently being conducted; (e) easements, covenants, conditions, restrictions and other similar matters affecting title to real property and other encroachments and title and survey defects that do not or would not materially impair the use or occupancy of such real property in the operation of the Business taken as a whole; and (f) other Liens, none of which, individually or in the aggregate, materially impairs the use or operations of the affected asset or the conduct of the Business therewith as it is currently being used and conducted. "Person" means an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization or any other entity, including any Governmental Entity or any group of any of the foregoing or the media. "Post-Closing Net Working Capital Statement" has the meaning set forth in Section 2.6(a). "Power" has the meaning set forth in the recitals. "Power UK" has the meaning set forth in the recitals. 8 "Pre-Closing Asset Transfers" has the meaning set forth in Section 5.9. "Pre-Closing Employment Transfers" has the meaning set forth in Section 5.10. "Pre-Closing Tax Period" has the meaning set forth in Section 6.10(c). "Present Facilities" means the Czech Facility, the Dunlap Facility, the Salem Facility and the UK Facility. "Purchase Price" has the meaning set forth in Section 2.3. "Related Agreements" means this Agreement, the License Agreement, the IP Assignment Agreement, the Transition Services Agreement and all other Contracts, schedules, certificates or other documents being delivered pursuant to or in connection with this Agreement, the License Agreement, the IP Assignment Agreement or the Transition Services Agreement. "Representative" of a Person means the Person's controlled Affiliates and the officers, directors, managers, employees, advisors, representatives (including its legal counsel, financial advisors and accountants) and agents of the Person and/or its controlled Affiliates. "Resolution Period" has the meaning set forth in Section 2.6(b). "Response Action" has the meaning set forth in Section 8.5(l). "Retained Plans" has the meaning set forth in Section 6.8(h). "Salem Facility" means all land, together with all buildings, structures, improvements and fixtures located thereon, and all easements and other rights appurtenant thereto, located at 1555 S. Jackson Street, Salem, Indiana. "Securities Act" means the Securities Act of 1933. "Seller" has the meaning set forth in the preamble. "Seller Indemnified Party" has the meaning set forth in Section 8.3. "Seller Marks" has the meaning set forth in Section 6.4(a). "Seller Plan" means any material Employee Benefit Plan that Seller or any of its Subsidiaries other than the Companies maintains or to which Seller or any of its Subsidiaries other than the Companies contributes or has any obligation to contribute and each retention, incentive, change in control, profit sharing, deferred compensation, savings or pension plan sponsored by any of Seller or any of its Subsidiaries other than the Companies or to which Seller or any of its Subsidiaries other than the Companies is a party, in each case with respect to the Covered Employees. For the sake of clarity, no Company Plan shall be considered to be a Seller Plan. "Sourced Engines Product Warranty Damages" has the meaning set forth in Section 8.2(g). 9 "Sourced Engines Special Basket" has the meaning set forth in Section 8.5(b). "Subsidiary" means, with respect to any Person, any corporation, limited liability company, partnership, association or other business entity of which, directly or indirectly, (i) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof, or (ii) if a limited liability company, partnership, association or other business entity (other than a corporation), a majority of partnership or other similar ownership interest thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more Subsidiaries of that Person or a combination thereof and for this purpose, a Person or Persons owns a majority ownership interest in such a business entity (other than a corporation) if such Person or Persons shall be allocated a majority of such business entity's gains or losses or shall be or control any managing director or general partner of such business entity (other than a corporation). "Target Net Working Capital Amount" has the meaning set forth in Section 2.6(c). "Target Companies" has the meaning set forth in the recitals. "Target Shares" means all of the issued and outstanding shares of capital stock of each of the Target Companies. "Tax" or "Taxes" means (i) any federal, state, local or foreign income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, windfall profits, environmental (including taxes under Section 59A of the Code), customs duties, capital stock, franchise, profits, withholding, social security (or similar), unemployment, disability, real property, personal property, sales, use, transfer, registration, value added, alternative or add-on minimum, estimated or other tax of any kind whatsoever, whether computed on a separate or consolidated, unitary or combined basis or in any other manner, (ii) any interest, penalty or addition with respect to any item in clause (i), whether disputed or not, (iii) any successor or transferee liability in respect of any items described in clauses (i) and/or (ii) under Treasury Regulation 1502-6 (or any similar provision of state, local or foreign law); and (iv) any amounts payable under any tax sharing agreement or contractual arrangements. "Tax Return" means any return, declaration, report, claim for refund or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. "Third Party Claim" has the meaning set forth in Section 8.4(a). "Transfer Tax" has the meaning set forth in Section 6.10. "Transferred Plan" means, to the extent set forth in Section 6.8(g) of the Disclosure Schedule if required to be set forth thereon (as it relates to the materiality thereof), any Company Plan sponsored or maintained by the Companies or which will be assumed hereunder by Buyer (including pursuant to Section 6.8(f)) as a result of the transactions contemplated hereby. 10 "Transition Services Agreement" has the meaning set forth in Section 2.5(a)(iii). "TMT" means TMT Motoco do Brazil Ltda., a corporation incorporated under the laws of Brazil and a Subsidiary of Seller. "UK Facility" means all land, together with all buildings, structures, improvements and fixtures located thereon, and all easements and other rights appurtenant thereto, located at 152-154 Commercial Road, Staines, Middlesex, United Kingdom. "WARN Act" has the meaning set forth in Section 3.19. Section 1.2 Interpretations. Unless otherwise indicated herein to the contrary: (a) When a reference is made in this Agreement to an Article, Section, Annex, Exhibit, Schedule, clause or subclause, such reference shall be to an Article, Section, Annex, Exhibit, Schedule, clause or subclause of this Agreement. (b) The words "include," "includes" or "including" and other words or phrases of similar import, when used in this Agreement, shall be deemed to be followed by the words "without limitation." (c) The words "hereof," "herein" and "hereunder" and words of similar import, when used in this Agreement, refer to this Agreement as a whole and not to any particular provision of this Agreement. (d) The word "if" and other words of similar import shall be deemed in each case to be followed by the phrase "and only if." (e) The use of "or" herein is not intended to be exclusive. (f) Unless the context otherwise requires, the phrase "relating to the Business" and other phrases of similar import will be deemed to mean "primarily relating to the operation of the Business." (g) The definitions contained in this Agreement are applicable to the singular as well as the plural forms of such terms. Whenever the context may require, any pronouns used herein shall include the corresponding masculine, feminine or neuter forms, and the singular form of names and pronouns shall include the plural and vice versa. (h) All terms defined in this Agreement have their defined meanings when used in any certificate or other document made or delivered pursuant hereto, unless otherwise defined therein. (i) Any reference herein to law or to a legal requirement (or, with respect to any statute, ordinance, code, rule or regulation, any provision thereof) shall be deemed to include reference to all laws and or to such legal requirement and any legal requirement promulgated thereunder (or provision thereof, as applicable), including any successor thereto, respectively, as may be amended from time to time. 11 (j) References herein to a Person are also to its permitted successors and assigns. Any reference herein to a Governmental Entity shall be deemed to include reference to any successor thereto. (k) Any reference herein to "Dollars" or "$" shall mean United States dollars. (l) References in this Agreement to materials or information "furnished to Buyer" and other phrases of similar import include all materials or information made available to Buyer or its Representatives in the data room prepared by Seller or provided to Buyer or its Representatives, including in response to requests for materials or information. ARTICLE II PURCHASE AND SALE Section 2.1 Purchase and Sale of Target Companies. On the terms and subject to the conditions of this Agreement, Buyer will purchase from Seller, and Seller agrees to sell, transfer, assign, convey and deliver to Buyer at the Closing all of the Target Shares free and clear of all Liens for the consideration specified in this Article II. Section 2.2 Intercompany Accounts Receivable and Accounts Payable. (a) All intercompany accounts receivable, intercompany accounts payable and other obligations due and owing between any of Seller or any of its Affiliates (other than the Companies), on the one hand, and any Company, on the other hand, other than the Continuing Intercompany Accounts (collectively, the "Disregarded Intercompany Accounts"), shall be cancelled or otherwise disregarded in perpetuity in a manner that does not give rise to any adverse Tax consequences to any Company or to Buyer (including any cancellation of debt income) beginning immediately prior to the Closing. (b) All intercompany accounts receivable, intercompany accounts payable and other obligations due and owing between any of Seller or any of its Affiliates (other than the Companies), on the one hand, and any Company, on the other hand, of the kind described on Section 2.2 of the Disclosure Schedule (collectively, the "Continuing Intercompany Accounts") shall remain unaffected by the Closing and shall remain in effect thereafter. Buyer shall, or shall cause the Companies to, remit payment of the full amount of the payables portion of all Continuing Intercompany Accounts to Seller, and Seller shall remit payment of the full amount of the receivables portion of all Continuing Intercompany Accounts to the Companies, in either case within ninety (90) calendar days following the Closing. Section 2.3 Purchase Price. Buyer agrees to pay to Seller at the Closing an amount equal to Fifty-One Million United States Dollars ($51,000,000) (the "Initial Purchase Price" and as further adjusted by the payment contemplated by Section 2.6(c), if any, the "Purchase Price"), by wire transfer or other immediately available funds to an account or accounts designated by Seller prior to the Closing Date. Section 2.4 Closing. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at offices of Kirkland & Ellis LLP located at 153 East 53rd Street, New York, New York (or such other location as shall be mutually agreed upon by Seller 12 and Buyer) commencing at 10:00 a.m. local time on a date (the "Closing Date") that is no later than the second (2nd) Business Day following the date on which all conditions to the obligations of Seller and Buyer to consummate the transactions contemplated hereby set forth in Article VII (other than conditions with respect to actions Seller and/or Buyer will take at the Closing itself, but subject to the satisfaction or waiver of those conditions) have been satisfied or waived, or on such other date as shall be mutually agreed upon by Seller and Buyer prior thereto; provided, however, that, without Buyer's consent otherwise, if the Call Period has not ended at the time of such satisfaction or waiver of such conditions, the Closing shall occur on the first (1st) Business Day following the Call Period (subject in each case to the satisfaction or waiver of the conditions to the obligations of Seller and Buyer to consummate the transactions contemplated hereby set forth in Article VII) or, if such conditions are not so satisfied or waived as of such date, as otherwise determined pursuant to this sentence without giving effect to this proviso. The Closing of the transactions contemplated hereby shall be deemed to have occurred at 11:59 p.m. (Central time) on the Closing Date (the "Effective Time"). Section 2.5 Deliveries at Closing. (a) At the Closing, Seller will deliver to Buyer the following duly executed documents and other items: (i) certificates representing all of the Target Shares, duly endorsed or accompanied by stock transfer powers; (ii) a Trademark License and Coexistence Agreement substantially in the form of Exhibit A hereto (the "License Agreement"); (iii) a Transition Services Agreement substantially in the form of Exhibit B hereto (the "Transition Services Agreement"); (iv) an Intellectual Property Assignment and License Agreement substantially in the form of Exhibit C hereto (the "IP Assignment Agreement"); (v) a certificate to the effect that each of the conditions specified in Section 7.1(a) and Section 7.1(b) is satisfied; (vi) a copy of Seller's and each Company's certificate of incorporation or other similar organizational document certified as of a date on or within 15 calendar days before the Closing Date by the Secretary of State of the State of Michigan or a similar Governmental Entity (provided, however, that no such certified organizational document shall be required with respect to Motoco and Power UK); (vii) a copy of a certificate of good standing of Seller and each Company issued as of a date on or within 15 calendar days before the Closing Date by the Secretary of State of the State of Michigan or a similar Governmental Entity (provided, however, that no such certificate shall be required with respect to Motoco and Power UK); (viii) a non-foreign affidavit dated as of the Closing Date, sworn under penalty of perjury and in form and substance required under Treasury Regulations issued 13 pursuant to Section 1445 of the Code, stating that Seller is not a "foreign person" as defined in Section 1445 of the Code; (ix) the resignation, effective as of the Closing, of each director (other than, at the election of Buyer, of Motoco) or person holding a similar position on the equivalent governing body and each officer of each Company (but only as to such position and without limiting Section 6.8); provided that such resignation does not result in any severance obligation; (x) evidence of the receipt of all third party consents or sublicenses from third parties and notices to or from third parties that are required to be delivered or obtained pursuant to Section 7.1(c) and delivered by Seller; and (xi) an acknowledgement of the receipt of the Initial Purchase Price. (b) At the Closing, Buyer will deliver to Seller the following duly executed documents and other items: (i) the License Agreement; (ii) the Transition Services Agreement; (iii) the IP Assignment Agreement; (iv) a certificate to the effect that each of the conditions specified in Section 7.2(a) and Section 7.2(b) are satisfied; (v) a copy of Buyer's certificate of incorporation certified as of a date on or within 15 calendar days before the Closing Date by the Secretary of State of the State of Delaware; (vi) a copy of a certificate of good standing of Buyer issued as of a date on or within 15 calendar days before the Closing Date by the Secretary of State of the State of Delaware; (vii) the Initial Purchase Price; and (viii) evidence of the receipt of all third party consents or sublicenses from third parties and notices to or from third parties that are required to be delivered or obtained pursuant to Section 7.2(c) and delivered by Buyer. Section 2.6 Working Capital Adjustment. (a) Post-Closing Net Working Capital Statement. Within one hundred twenty (120) calendar days after the Closing Date, Buyer shall cause to be prepared and delivered to Seller a statement setting forth the Net Working Capital as of the Effective Time, and the components and calculation thereof, as of the Effective Time giving effect to the transactions contemplated hereby prepared in accordance with the Accounting Principles (the "Post-Closing Net Working Capital Statement"). 14 (b) Determination of Conclusive Net Working Capital. Seller will have sixty (60) calendar days following the receipt of the Post-Closing Net Working Capital Statement to review the Post-Closing Net Working Capital Statement. During such time (and, in the case of clause (x) below, during the Resolution Period, if applicable), (x) without limiting Section 6.5, Buyer shall give Seller and its Representatives access to all books, records, facilities and personnel of Buyer and its Subsidiaries (including the Companies and the Business) as reasonably necessary to undertake such review and (y) Seller may dispute any items set forth on the Post-Closing Net Working Capital Statement (or specific calculations or methods contemplated thereby). Unless Seller delivers written notice(s) to Buyer of dispute thereof on or prior to the sixtieth (60th) calendar day after Seller's receipt of the Post-Closing Net Working Capital Statement, Seller will be deemed to have accepted and agreed to the Post-Closing Net Working Capital Statement and such statement will be final, binding and conclusive. If Seller notifies Buyer in writing of disputed items contained in the Post-Closing Net Working Capital Statement (or specific calculations or methods contemplated thereby) within such sixty (60) calendar day period, for thirty (30) calendar days following delivery of such notice by Seller to Buyer (the "Resolution Period"), Buyer and Seller shall attempt in good faith to resolve their differences with respect to the disputed items (the "Disputed Items"). Any resolution by Buyer and Seller during the Resolution Period as to any Disputed Items shall be set forth in writing and will be final, binding and conclusive. If Buyer and Seller do not resolve all Disputed Items by the end of the Resolution Period, then all Disputed Items remaining in dispute will be submitted within thirty (30) calendar days after the expiration of the Resolution Period to a national independent accounting firm as is mutually acceptable to Buyer and Seller (the "Neutral Arbitrator"). The Neutral Arbitrator shall act as an arbitrator to determine only those Disputed Items remaining in dispute as of the end of the Resolution Period. In resolving such Disputed Items, the Neutral Arbitrator may not assign a value to any Disputed Item greater than the greatest value for such Disputed Item claimed by either Party or less than the lowest value for such Disputed Item claimed by either Party upon presentment to the Neutral Arbitrator. All fees and expenses relating to the work, if any, to be performed by the Neutral Arbitrator will be allocated between Buyer and Seller in the same proportion that the aggregate amount of the Disputed Items so submitted to the Neutral Arbitrator that is unsuccessfully disputed by each such Party (as finally determined by the Neutral Arbitrator) bears to the total amount of such Disputed Items so submitted. In addition, Buyer and Seller shall give the Neutral Arbitrator access to all books, records, facilities and personnel of such Party as reasonably necessary to perform its function as arbitrator. Buyer and Seller shall use their commercially reasonable efforts to cause the Neutral Arbitrator to deliver to Buyer and Seller a written determination (such determination to include a work sheet setting forth all material calculations and methods used in arriving at such determination) of the Disputed Items submitted to the Neutral Arbitrator within thirty (30) calendar days of receipt of such Disputed Items, which determination will be final, binding and conclusive and upon which judgment may be entered. The final, binding and conclusive Post-Closing Net Working Capital Statement based either upon agreement, deemed agreement by Buyer and Seller and/or the written determination delivered by the Neutral Arbitrator in accordance with this Section 2.6(b) will be the "Conclusive Net Working Capital Statement." (c) Post-Closing Adjustment. If the amount of Net Working Capital on the Conclusive Net Working Capital Statement is less than Sixty-Eight Million United States Dollars ($68,000,000) (the "Target Net Working Capital Amount"), Seller shall pay Buyer the amount of 15 the difference no later than the fifth (5th) Business Day following the date on which Buyer and Seller agree, or are deemed to have agreed to, or the Neutral Arbitrator delivers, the Conclusive Net Working Capital Statement. If the amount of Net Working Capital on the Conclusive Net Working Capital Statement equals or exceeds the Target Net Working Capital Amount, no payment shall be made pursuant to this Section 2.6. Section 2.7 Allocation. Seller and Buyer shall agree on the allocation of the Purchase Price amongst the Target Shares within forty-five (45) calendar days after the Closing Date. Buyer and Seller shall report, act and file Tax Returns in all respects and for all purposes consistent with such allocation. Neither Buyer nor Seller shall take any position (whether in audits, tax returns or otherwise) which is inconsistent with such allocation unless required to do so by applicable law. ARTICLE III SELLER'S REPRESENTATIONS AND WARRANTIES Seller represents and warrants to Buyer that the statements contained in this Article III are true and correct, except as set forth in the disclosure schedule accompanying this Agreement (the "Disclosure Schedule"), which is further described in Section 10.14. The Disclosure Schedule will be arranged in paragraphs corresponding to the Sections contained in this Article III and Article V. Section 3.1 Organization; Good Standing. (a) Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Michigan and has all requisite corporate power and authority to own, lease and operate its assets and to carry on its business as now being conducted. (b) Each Company is duly organized, validly existing and, other than with respect to Motoco and Power UK, in good standing under the laws of the jurisdiction of its incorporation or formation and has all requisite corporate or similar power and authority to own, lease and operate its assets and to carry on its business as now being conducted. (c) The copies of Seller's and each Company's articles of incorporation and bylaws or other equivalent governing documents, each as amended to date and each heretofore made available to Buyer and/or its agents, are complete and correct, and no amendments thereto are pending. Section 3.2 Authorization of Transaction. (a) Seller has full power and authority to execute and deliver this Agreement and all other agreements contemplated hereby to which it is a party and to perform its obligations hereunder and thereunder. (b) The execution, delivery and performance of this Agreement and all other agreements contemplated hereby to which Seller is a party have been duly authorized by Seller. 16 (c) This Agreement constitutes the valid and legally binding obligation of Seller, enforceable against Seller in accordance with its terms and conditions, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity. Section 3.3 Noncontravention. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) conflict with or result in a breach of the certificate of incorporation or bylaws, or other organizational documents, of Seller nor any of the Target Companies, (ii) violate in any material respect any material law or Decree to which Seller or any of the Target Companies is, or its respective assets or properties are, subject in respect of the Business, or (iii) conflict in any material respect with, result in a material breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify in any material respect or cancel, or require any notice under any Material Contract or any material permit held by the Companies. Other than pursuant to antitrust or non-competition laws in jurisdictions outside the United States and filings required under the Exchange Act, Seller is not required to give any material notice to, make any material filing with, or obtain any material authorization, consent or approval of any Governmental Entity in order for Seller to consummate the transactions contemplated by this Agreement or any other Related Agreement. Section 3.4 Title to Target Shares. Each of the Target Shares is held of record and owned beneficially by Seller free and clear of any Liens (other than Permitted Liens). Neither Seller nor any of its Subsidiaries is a party to any option, warrant, purchase right or other Contract (other than this Agreement) that would require Seller or any of its Subsidiaries to sell, transfer, or otherwise dispose of any capital stock or other equity interests of the Companies. Neither Seller nor any of its Subsidiaries is a party to any voting trust, proxy, or other agreement or understanding with respect to the voting of any capital stock or other equity interests of the Companies. Upon the Closing, Buyer will be the record and beneficial owner of all the Target Shares, free and clear of all Liens (other than Liens imposed thereon by Buyer). Section 3.5 Capitalization. (a) Section 3.5 of the Disclosure Schedule sets forth for each of the Companies (i) its name and jurisdiction of incorporation, (ii) the number of authorized shares or other equity interests for each class of its capital stock or other equity interests, and (iii) the number of issued and outstanding shares or other equity interests of each class of its capital stock or other equity interests, the names of the holders thereof, and the number of shares or other equity interests held by each such holder. (b) All of the issued and outstanding Target Shares of the Target Companies have been duly authorized and are validly issued, fully paid, and non-assessable (or of similar status to the extent such status exists with respect to foreign Persons). There are no outstanding or authorized options, commitments, preemptive rights, warrants, purchase rights, subscription rights, conversion rights, exchange rights or other Contracts that provide for the obligation to issue, sell, register or vote, or outstanding securities convertible into or exchangeable for, any shares of capital stock or other equity interests of the Companies. There are no outstanding or 17 authorized stock appreciation, phantom stock, profit participation, or similar rights with respect to any of the Companies. (c) Except for Power UK, none of the Target Companies have any Subsidiaries. All of the outstanding shares of Power UK are owned by Power. Section 3.6 Financial Statements; Undisclosed Liabilities. (a) Attached hereto as Annex B are the following financial statements (collectively the "Financial Statements"): (i) unaudited combined balance sheets, statements of income and statements of cash flow for the Companies as of and for the fiscal year December 31, 2006 (the "Most Recent Fiscal Year End"), and (ii) unaudited combined balance sheets, statements of income and statements of cash flow for the Companies (the "Most Recent Financial Statements") as of and for the eight months ended August 31, 2007 (the "Most Recent Fiscal Month End"). During the periods presented by the Financial Statements, Seller has maintained internal controls in a manner consistent with historical practice except as required by law. The Financial Statements (w) reflect reserves established in accordance with the Accounting Principles, (x) present fairly in all material respects the financial condition of the Companies as of such dates and the results of operations of the Companies for such periods consistent with the Accounting Principles, (y) are correct and complete in all material respects, and (z) are consistent in all material respects with the books and records of the Companies, except in each case as disclosed thereon; provided, however, that the Most Recent Financial Statements are subject to normal-year end adjustments (which are not as of the date hereof, to Seller's Knowledge, material) and lack of footnotes and other presentation items. (b) Except as set forth on the Most Recent Balance Sheet, or except as incurred in the Ordinary Course of Business, since the Most Recent Fiscal Month End, the Companies have not incurred any Liabilities other than (x) those liabilities contemplated hereby or (y) those Liabilities that, individually or in the aggregate are not material to the Business. (c) To Seller's Knowledge, the Companies do not have any Indebtedness. Section 3.7 Assets. Except as set forth herein or as contemplated by the Related Agreements, as of the Closing, the Companies will have good title to, or a valid license to or leasehold interest in, the material tangible assets they use regularly in the conduct of the Business as presently conducted and consistent with past practices, free and clear of all Liens (other than Permitted Liens) and such assets are, in the aggregate, in good working condition, ordinary wear and tear excepted. The Companies have, and as of the Closing will have, all assets required to conduct the Business as conducted presently and as of the Closing Date, consistent with past practices. Section 3.8 Subsequent Events. Except with respect to the transactions contemplated hereby or, as of the Closing, for actions permitted to be taken pursuant to Section 5.3 or taken subject to the receipt of Buyer's consent, since the Most Recent Fiscal Month End, there has not been any Material Adverse Effect on the Business. Without limiting the generality of the foregoing, except with respect to the transactions contemplated hereby (including Section 5.9 and Section 5.10) or, as of the Closing, for actions permitted to be taken pursuant to Section 5.3 18 or taken subject to the receipt of Buyer's consent, since the Most Recent Fiscal Month End, neither Seller nor any of the Companies has: (a) sold, leased, transferred or assigned any material assets related to the Business outside the Ordinary Course of Business; (b) other than with respect to the license of Intellectual Property or Covered Employees (which matters are covered below), entered into or accelerated, terminated, modified or cancelled any Material Contract outside the Ordinary Course of Business; (c) experienced any material damage, destruction or loss not covered by insurance to its property related to the Business as presently conducted (consistent with past practices); (d) entered into any material agreement granting any exclusive license to or transferring or assigning any material Intellectual Property related to the Business; (e) made any capital investment in, or any loan to, any other Person in either case in excess of $100,000 related to the Business; (f) entered into any other material transaction with any of Covered Employee outside the Ordinary Course of Business; (g) entered into any collective bargaining agreement related to any of the Covered Employees or modified the terms of any existing such contract; (h) granted any increase in the base compensation of any the Covered Employees outside the Ordinary Course of Business; (i) adopted or amended any bonus, profit sharing, incentive, severance or other plan, contract or commitment for the benefit of any of the Covered Employees outside the Ordinary Course of Business; (j) made any other material change in employment terms for any of the Covered Employees outside the Ordinary Course of Business; and (k) changed in any material respect the normal business policies of the Business related to the keeping books, accounts or records outside of the Ordinary Course of Business. Section 3.9 Material Contracts. Except as disclosed on Section 3.9 of the Disclosure Schedule and other than the Related Agreements, neither Seller, with respect to the Business, nor any Company is a party or subject to: (a) any Contract for the lease of personal property to or from any Person providing for lease payments unpaid as of the Closing Date in excess of $50,000 per annum; 19 (b) any Contract requiring the purchase of all or substantially all of its requirements for a particular product from a supplier; (c) any Contract for the purchase or sale of raw materials, commodities, supplies, products or other personal property, or for the furnishing or receipt of services, the performance of which will extend over a period of more than one year after the Closing Date or involve unpaid consideration as of the Closing Date in excess of $100,000, but excluding all purchase orders entered into in the Ordinary Course of Business; (d) any Contract pursuant to which the Business sells any products providing for any "most favored nation" pricing or other similar pricing; (e) any Contract providing for a partnership or joint venture; (f) any Contract under which it has created, incurred, assumed or guaranteed any indebtedness for borrowed money to be outstanding as of the Closing Date, or any net finance lease or capitalized lease obligation providing for lease payments unpaid as of the Closing Date, in excess of $100,000; (g) any Contract expressly restricting its ability (or which would, after the Closing, restrict Buyer) from competing or purchasing supplies/raw materials in any geographic region in any material respect; (h) any collective bargaining agreement; or (i) any Contract that is otherwise material to the operation of the Business as currently conducted. The Contracts listed on Section 3.9 of the Disclosure Schedule are referred to as the "Material Contracts." Seller has made available to Buyer and/or its Representatives true and complete copies of the Material Contracts. With respect to each Material Contract: (A) such Material Contract constitutes the valid and legally binding obligation of the Company (or Seller, as applicable) party thereto and, to Seller's Knowledge, the counterparty thereto, is enforceable against such Company (or Seller, as applicable) and, to Seller's Knowledge, the counterparty thereto in accordance with its terms and conditions, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity; and (B) neither the Company (or Seller, as applicable) party thereto nor, to Seller's Knowledge, the counterparty thereto is in material breach or default that presently would permit or give rise to a right of termination, modification or acceleration thereunder or would give rise to contract damages of the Company party thereto in excess of $100,000. No Company is party to any material oral Contract relating to the Business. Section 3.10 Intellectual Property. Section 3.10 of the Disclosure Schedule lists (x) all patents and pending patent applications and all registrations and applications for registration of copyrights, all Internet domain names, and all registered and unregistered (common law) trademarks and service marks owned by Seller or the Companies that are primarily related to the Business as presently conducted and (y) all material licenses of Intellectual Property primarily related to the Business to which Seller or any Company is a party (other than standard, non- 20 customized "off the shelf" software with a replacement cost of less than $25,000), whether as licensor or licensee, for which there is a written license agreement. The Intellectual Property owned by Seller and the Companies, or to which Seller or the Companies has the right of use, includes all of the Intellectual Property used in the Ordinary Course of Business as currently conducted, and there are no other items of Intellectual Property that are necessary for the conduct of the Business in the Ordinary Course of Business. Each item of Intellectual Property listed on Section 3.10 of the Disclosure Schedule is in good standing and subsisting, and is in full force and effect, except for those items of Intellectual Property that expire at the end of their term prior to the Closing Date. To Seller's Knowledge, (a) no use of any Intellectual Property owned by Seller or the Companies and used in the conduct of the Business as presently conducted infringes the Intellectual Property rights of any third party, and (b) no third party is infringing any Intellectual Property owned by the Companies with respect to the Business as presently conducted. No suit, action or proceeding is currently pending or, to Seller's Knowledge, threatened in writing against Seller or the Companies that challenges the ownership or use of any Intellectual Property owned or used by such Person with respect to the Business as presently conducted or asserts that the conduct of the Business as presently conducted infringes any third party's Intellectual Property rights. Section 3.11 Real Property. (a) Section 3.11(a) of the Disclosure Schedule sets forth the address and description of each parcel of Owned Real Property (excluding matters contemplated by Section 5.9). With respect to each such parcel of Owned Real Property, and except for matters that would not materially impact the use of such Owned Real Property: (i) one of the Companies has good and marketable fee simple title, free and clear of all Liens as of the Closing Date (other than Permitted Liens); (ii) none of the Companies has leased or otherwise granted to any Person the right to use or occupy such Owned Real Property or any portion thereof; and (iii) other than the rights of Buyer pursuant to this Agreement, there are no sales contracts or unrecorded options, rights of first offer or rights of first refusal to purchase such Owned Real Property or any portion thereof or interest therein. (b) Section 3.11(b) of the Disclosure Schedule sets forth the address of each parcel of material Leased Real Property (excluding matters contemplated by Section 5.9), and a true and complete list of all Leases for each such parcel of Leased Real Property. With respect to each such Lease: (A) such Lease constitutes the valid and legally binding obligation of the Company party thereto and, to Seller's Knowledge, the counterparty thereto, enforceable against such Company and, to Seller's Knowledge, the counterparty thereto in accordance with its terms and conditions, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity; and (B) neither the Company party thereto nor, to Seller's Knowledge, the counterparty thereto is in material breach or default that would materially impact the use of such Leased Real Property. With respect to each such parcel of Leased Real Property, the Companies have peaceful possession thereof. 21 Section 3.12 Tax Matters. (a) All federal income tax returns and all other material Tax Returns required to have been filed by Seller, the Target Companies and their Subsidiaries have been duly and timely filed, and each such Tax Return was correct and complete in all material respects and have been prepared in substantial compliance with all applicable Laws. No unresolved claim has been made by a Taxing Authority in a jurisdiction where Seller, the Target Companies or any of their Subsidiaries does not file Tax Returns that it is or may be subject to taxation or to a requirement to file Tax Returns in that jurisdiction. (b) All Taxes due and owing by Seller, the Target Companies or any of their Subsidiaries (whether or not shown on any Tax Return) have been paid or will be paid prior to Closing and the Company nor any of its Subsidiaries is not currently delinquent with respect to the payment of any Tax. (c) Seller, the Target Companies and their Subsidiaries have withheld all amounts of Taxes required to be withheld from its employees, agents, contractors, creditors, shareholders and third parties and remitted such amounts to the proper Taxing authorities and filed all federal, state, local and foreign returns and reports with respect to employee income Tax withholding, social security, unemployment, and other similar Taxes, all in compliance with the withholding provisions of the Code, or any prior provision of the Code and other applicable Laws. (d) To the Knowledge of Seller, the Target Companies or any of their Subsidiaries, there is no audit, claim, action, suit, proceeding or investigation currently pending against Seller, the Target Companies or their Subsidiaries in respect of any Taxes nor have Seller or any of the Target Companies or any of their Subsidiaries been informed in writing of the commencement or anticipated commencement of any such activity. There are no Liens on any of the assets of Seller, the Target Companies nor any of their Subsidiaries that arose in connection with any failure (or alleged failure) to pay any Tax, other than Liens for Taxes not yet due and payable. Neither Seller, the Target Companies nor any of their Subsidiaries has waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to a Tax assessment or deficiency. (e) Neither the Target Companies nor any of their Subsidiaries (x) has been a member of any affiliated, consolidated, combined or unitary group filing a consolidated or combined Tax Return (other than a group the common parent of which was Seller) or (y) has any liability for the Taxes of any Person (other than Seller or any of its Subsidiaries) under Reg. Section 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise. Neither Seller or any of the Target Companies or their Subsidiaries is a party to any Tax allocation or sharing agreement. (f) Neither Seller, the Target Companies nor any of their Subsidiaries will be required to include any item of income in, or exclude any item of deduction from, taxable income for any taxable period (or portion thereof) ending after the Closing Date as a result of any: 22 (i) change in method of accounting for a taxable period ending on or prior to the Closing Date; (ii) "closing agreement" as described in Code Section 7121 (or any corresponding or similar provision of state, local or foreign income Tax law) executed on or prior to the Closing Date; (iii) intercompany transactions or any excess loss account described in Treasury Regulations under Code Section 1502 (or any corresponding or similar provision of state, local or foreign income Tax law); (iv) installment sale or open transaction disposition made on or prior to the Closing Date; or (v) prepaid amount received on or prior to the Closing Date. (g) Neither Seller, the Target Companies nor any of their Subsidiaries is a party to any agreement, contract, arrangement, or plan that has resulted or would result, separately or in the aggregate, in the payment of any "excess parachute payment" within the meaning of Code Section 280G (or any corresponding provision of state, local, or foreign Tax law) or in the imposition of an excise Tax under Code Section 4999, (or any corresponding provisions of state, local or foreign Tax law) or (B) will not be fully deductible as a result of Code 162(m) (or any corresponding provision of state, local or foreign Tax law). (h) Neither Seller, the Target Companies nor any of their Subsidiaries has constituted either a "distributing corporation" or a "controlled corporation" in a distribution of stock qualifying for tax free treatment under Section 355 of the Code (i) in the two years prior to the date of this Agreement or (ii) in a distribution which could otherwise constitute part of a "plan" or "series of related transactions" (within the meaning of Section 355(e) of the Code) in connection with the Merger. (i) Neither Seller, the Target Companies nor any of their Subsidiaries has a Permanent Establishment in any jurisdiction outside the United States. (j) Neither Seller, the Target Companies nor any of their Subsidiaries is a party to any "listed transaction" within the meaning of Section 1.6011-4 of the Treasury Regulations or any reportable transaction, within the meaning of Section 6011, Section 6111 and Section 6112 of the Code and the Treasury Regulations thereunder. Section 3.13 Legal Compliance; Permits. To Seller's Knowledge, the Companies are in compliance with all applicable laws, including all permits, registrations, licenses, franchises, certificates and other approvals from Governmental Entities necessary for conduct of the Business as presently conducted. All such permits and approvals are valid and in full force and effect in all material respects. Section 3.14 Litigation. Section 3.14 of the Disclosure Schedule sets forth each instance as of the date hereof in which the Companies (i) are subject to any outstanding Decree 23 or (ii) are a party or, to Seller's Knowledge, are threatened in writing to be made a party to any material Litigation. Section 3.15 Product Warranty. To Seller's Knowledge, substantially all of the products manufactured, sold, leased, and delivered by the Business in the last year have conformed in all material respects with all applicable contractual commitments and all express and implied warranties, and the Companies do not have any material Liability for replacement or repair thereof or other damages in connection therewith (as of the Most Recent Fiscal Month End, subject only to the reserve for product warranty claims set forth on the Most Recent Balance Sheet, and as adjusted for operations and transactions thereafter in accordance with the past custom and practice of the Business). Section 3.15 of the Disclosure Schedule sets forth the spill charts of the Business for 2006 and the first eight months of 2007. Substantially all of the products manufactured, sold, leased or delivered by the Business in the last year are subject to standard terms and conditions of sale or lease, true and complete copies of which have been made available to Buyer as of the date hereof. Section 3.16 Product Liability. To Seller's Knowledge, the Business does not have any material Liability arising out of any injury to individuals or property as a result of the ownership, possession or use of any product manufactured, sold, leased or delivered by the Business. Section 3.17 Customers and Suppliers. Section 3.17 of the Disclosure Schedule lists (i) the ten (10) largest customers (by revenue) of the Business during the eight months ended August 31, 2007 and (ii) the twenty (20) largest suppliers (by cost) of the Business during the eight months ended August 31, 2007. The Companies are not as of the date hereof engaged in any material disputes with any such customer or supplier that would result in a material decrease in the quantity of items purchased from the Business or in the quantity of items made available for purchase by the Business, respectively. Section 3.18 Environmental, Health and/or Safety Matters. (a) To Seller's Knowledge, the Companies are, and during the five (5) years prior to the date hereof have been, in material compliance with all Environmental, Health and/or Safety Requirements with respect to the Present Facilities and/or the Business. In addition to the foregoing, to Seller's Knowledge, the Companies possess all permits, authorizations and approvals required pursuant to applicable Environmental Health and/or Safety Requirements with respect to the Present Facilities and/or Business. (b) To Seller's Knowledge, none of the Companies has, during the five (5) years prior to the date hereof, received any written notice, report or other information (other than any of the foregoing which have been substantially resolved prior to the date hereof) regarding any actual or alleged material violation of Environmental, Health and/or Safety Requirements or any material Liabilities relating to the Present Facilities and/or the Business arising under Environmental, Health and/or Safety Requirements. (c) To Seller's Knowledge, no Hazardous Materials are on, under or migrating from any of the Present Facilities that could reasonably be expected to result in any material Environmental Liabilities. 24 (d) To Seller's Knowledge, neither this Agreement nor the consummation of the transactions contemplated hereby will require the notification to or consent of government agencies or third parties, pursuant to the New Jersey Industrial Site Recovery Act or any other so-called "transaction-triggered" or "responsible property transfer" Environmental, Health and/or Safety Requirements. (e) Seller has made available to Buyer or its Representatives all material environmental site assessments, reports, audits, work plans or similar material documents relating to actual or potential material Environmental Liabilities concerning the Present Facilities or the Business of which Seller has Knowledge. (f) Notwithstanding anything to the contrary set forth herein, the representations and warranties set forth in this Section 3.18 are the exclusive representations and warranties of Seller regarding environmental, health or safety matters, including any arising under Environmental, Health and/or Safety Requirements. Section 3.19 Labor and Employment Matters. (a) Section 3.19 of the Disclosure Schedule contains a complete and accurate list of all Covered Employees as of the date indicated thereon, showing for each such employee their name and job classification. The Companies are in material compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment, including wages and hours, labor relations, employment discrimination, disability rights or benefits, equal opportunity, plant closure and mass layoff - including the Worker Adjustment and Retraining Notification Act of 1988 (the "WARN Act") and similar state laws, affirmative action, leaves of absence, occupational health and safety, workers compensation and unemployment insurance. There are no material controversies, charges of unlawful harassment or discrimination, or complaints or allegations of unlawful harassment or discrimination pending or, to Seller's Knowledge, threatened against any Company. None of the Companies is or for the past three (3) years has been a party to any collective bargaining agreement or relationship applicable to its current or former employees. Seller is in receipt of no petition or notice (written or oral) of any proceedings instituted by an employee or group of employees of the Companies with any labor relations board seeking recognition of a bargaining representative, and, to Seller's Knowledge, no union organizing efforts are underway or being threatened with respect to the employees of any Company. No Company is engaged, and for the past three (3) years has not engaged, in any unfair labor practice. There is, and for the past three (3) years there has been, no strike, slowdown, work stoppage or lockout, or, to Seller's Knowledge, threat thereof, by or with respect to any Company employees. (b) Notwithstanding anything to the contrary set forth herein, the representations and warranties set forth in this Section 3.19 are the exclusive representations and warranties of Seller regarding labor and employment matters. Section 3.20 Employees Benefit Plans. (a) Section 3.20(a) of the Disclosure Schedule lists each (i) material Employee Benefit Plan that any Company maintains, or has maintained, or to which any 25 Company contributes to, or has or could otherwise have any obligation or liability (ii) each retention, incentive, change in control, profit sharing, deferred compensation, employment savings or pension plan or agreement sponsored by any of the Companies or to which any of the Companies is a party, and (iii) each material Transferred Plan, in each case with respect to the Covered Employees (the "Company Plans"). The Companies have no commitments or current plans to establish or enter into any new Company Plan or to modify any Company Plan other than as required by applicable Laws. With respect to each Company Plan: (i) Such plan has been established, maintained, funded and administered in accordance with the terms of such plan and complies in form and in operation in all material respects with all applicable requirements of ERISA, the Code and other applicable law. (ii) All required reports and descriptions (including Form 5500 annual reports), summary annual reports, and summary plan descriptions) have been timely filed and/or distributed in accordance with the applicable requirements of ERISA and the Code in all material respects. (iii) Such plan, if intended to meet the requirements of a "qualified plan" under Section 401(a) of the Code, has received a favorable determination letter from the Internal Revenue Service that such plan is so qualified, and, to Seller's Knowledge, no event has occurred that would result in the loss of such qualified status. (iv) Except as set forth in Section 3.20(a)(iv) of the Disclosure Schedule, none of the Companies or its ERISA Affiliates has maintained, established, sponsored, participated in, contributed to, or otherwise incurred any liability under any: (i) Employee Benefit Plan subject to Title IV of ERISA or Code Section 412 or (ii) "multiemployer plan" within the meaning of Section (3)(37) of ERISA. No Company has incurred any liability under Title IV of ERISA or Code Section 412. With respect to any "defined benefit plan" within the meaning of Section 3(35) of ERISA set forth in Section 3.20(a)(iv) of the Disclosure Schedule: (A) no liability to the Pension Benefit Guaranty Corporation ("PBGC") has been incurred (other than for premiums not yet due); (B) no notice of intent to terminate any such plan has been filed with the PBGC or distributed to participants and no amendment terminating any such plan has been adopted; (C) no proceedings to terminate any such plan have been instituted by the PBGC and no event or condition has occurred which might constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any such plan; (D) no "accumulated funding deficiency," within the meaning of Section 302 of ERISA or Section 412 of the Code, whether or not waived, has been incurred; (E) no "reportable event" within the meaning of Section 4043 of ERISA (for which the 30-day notice requirement has not been waived by the PBGC) has occurred within the last six years; (F) no Lien has arisen under ERISA or the Code on the assets of any Company or ERISA Affiliate; (G) there has been no cessation of operations at a facility subject to the provisions of Section 4062(e) of ERISA within the last six years; and (H) no event has occurred that places participants on actual or constructive notice of the plan's termination. With respect to any multiemployer plan under Section 3(37) of ERISA set forth in Section 3.20(a)(iv) of the Disclosure Schedule: (A) no Company or ERISA Affiliate has experienced a complete or partial withdrawal from such multiemployer plan, and (B) no Company or ERISA Affiliate has been notified by any such multiemployer plan that such 26 multiemployer plan is currently in reorganization or insolvency under and within the meaning of Section 4241 or 4245 of ERISA or that such multiemployer plan intends to terminate or has been terminated under Section 4041A of ERISA. (v) Seller has made available to Buyer correct and complete copies of: (i) all documents setting forth the terms of each Company Plan, including the plan document and any amendments thereto; (ii) the most recent summary plan description together with the summaries of material modifications thereto, if any, required under ERISA; (iii) the most recent IRS determination letter issued with respect to each Company Plan intended to be qualified under Section 401(a) of the Code; (iv) the three most recent annual reports (Form Series 5500 and all schedules and financial statements attached thereto), if any, required under ERISA or the Code; and (v) all correspondence to or from any Governmental Entity relating to any Company Plan. (vi) No material "prohibited transaction," within the meaning of Section 4975 of the Code or Sections 406 and 407 of ERISA, and not otherwise exempt under Section 408 of ERISA, has occurred and, to Seller's Knowledge, no fiduciary (within the meaning of Section 3(21) of ERISA) of any Company Plan subject to Part 4 of Title I of ERISA has committed a breach of fiduciary duty that could subject the Companies to material liability taken as a whole. There are no claims or proceedings pending, or, to Seller's Knowledge, threatened or reasonably anticipated (other than routine claims for benefits), against any Company Plan or against the Companies with respect to any Company Plan. There are no audits, inquiries or proceedings pending or, to Seller's Knowledge, threatened by the IRS, DOL, or the PBGC with respect to any Company Plan. (vii) With respect to each Company Plan which is an employee welfare benefit plan (within the meaning of Section 3(1) of ERISA), all claims incurred by any Company are (i) insured pursuant to a contract of insurance whereby the insurance company bears any risk of loss with respect to such claims; (ii) covered under a contract with a health maintenance organization (an "HMO") pursuant to which the HMO bears the liability for claims or (iii) reflected as a liability or accrued for on the Financial Statements. (viii) No Company Plan provides (except at no cost to any Company), or reflects or represents any liability of the Companies to provide, retiree life insurance, retiree health benefits or other retiree employee welfare benefits to any Person for any reason, except as may be required by Part 6 of Title I of ERISA or other applicable laws. (ix) Neither the execution of this Agreement nor the consummation of the transactions will (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Company Plan, that will or may result (either alone or in connection with any other circumstance or event) in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any Covered Employee. (b) To the extent that any Company Plan constitutes a "non-qualified deferred compensation plan" within the meaning of Section 409A of the Code, such Plan has been 27 operated in reasonable good faith compliance with Section 409A of the Code and IRS Notice 2005-1. (c) Except as disclosed on Section 3.20(c) of the Disclosure Schedule, none of the Companies maintains any Company Plan subject to laws other than those of the United States. (d) Notwithstanding anything to the contrary set forth herein, the representations and warranties set forth in this Section 3.20 are the exclusive representations and warranties of Seller regarding employee benefit matters. Section 3.21 Brokers' Fees. Seller has not entered into any Contract to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement other than Rothschild Inc., which obligations shall be borne by Seller. Section 3.22 Transactions With Affiliates. There are no Contracts between Seller with respect to the Business or any Company, on the one hand, and any Person who is an Affiliate of Seller or any Company, on the other hand, that would be required to be disclosed by the Companies under Item 404 of Regulation S-K promulgated under the Securities Act of 1933 if the Companies were themselves subject to such rule. Section 3.23 Insurance. Seller has made available to Buyer or its Representatives copies of all material insurance policies currently maintained by Seller (with respect to the Business or the Companies) and the Companies, a list of which is set forth on Section 3.23 of the Disclosure Schedules. All policies are in full force and effect and neither Seller nor any Company is in default with respect to its payment obligations under such policies or has received written notice under any such policies regarding the termination or cancellation of any such policy since the Most Recent Fiscal Month End. Section 3.24 Accounts Receivable. All accounts receivable set forth or reflected in the Most Recent Balance Sheet were as of the Most Recent Fiscal Month End presented in accordance with the Accounting Principles with respect to the inclusion of valid and enforceable obligations against the respective account debtors. Section 3.25 Inventory. All Inventory set forth or reflected in the Most Recent Balance Sheet was as of the Most Recent Fiscal Month End presented in accordance with the Accounting Principles with respect to the inclusion of items of a quality and quantity usable or saleable by the Companies. Section 3.26 Disclaimer of Other Representations and Warranties. Except for the representations and warranties contained in this Agreement or expressly contained in any other Related Agreement, neither Seller nor any other Person shall be deemed to have made any representation or warranty, express or implied, including, as to the accuracy or completeness of any information regarding any of Seller, the Business, the Companies, any of Seller's other Affiliates, any of the assets or Liabilities of any of the foregoing or any other matter. Notwithstanding anything herein to the contrary, but without limitation of any representation or warranty expressly contained in this Agreement or any other Related Agreement, SELLER MAKES NO OTHER (AND HEREBY DISCLAIMS EACH OTHER) REPRESENTATION, 28 WARRANTY OR GUARANTY WITH RESPECT TO THE VALUE, CONDITION OR USE OF THE COMPANIES OR THEIR ASSETS, WHETHER EXPRESS OR IMPLIED. ARTICLE IV BUYER'S REPRESENTATIONS AND WARRANTIES. Buyer represents and warrants to Seller that the statements contained in this Article IV are true and correct. Section 4.1 Organization of Buyer. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate or similar power and authority to own, lease and operate its assets and to carry on its business as now being conducted. Section 4.2 Authorization of Transaction. (a) Buyer has full power and authority (including full corporate or other entity power and authority) to execute and deliver this Agreement and all other agreements contemplated hereby to which it is a party and to perform its obligations hereunder and thereunder. (b) The execution, delivery and performance of this Agreement and all other agreements contemplated hereby to which Buyer is a party have been duly authorized by Buyer. (c) This Agreement constitutes the valid and legally binding obligation of Buyer, enforceable against Buyer in accordance with its terms and conditions, subject to applicable bankruptcy, insolvency, moratorium or other similar laws relating to creditors' rights and general principles of equity. Section 4.3 Noncontravention. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (i) conflict with or result in a breach of the certificate of incorporation or bylaws of Buyer, (ii) violate any law or Decree to which Buyer is, or its respective assets or properties are, or (iii) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify or cancel, or require any notice under any Contract to which Buyer is a party or by which it is bound or to which any of its assets is subject, except, in the case of either clause (ii) or (iii), for such conflicts, breaches, defaults, accelerations, rights or failures to give notice as would not, individually or in the aggregate, have a Material Adverse Effect on Buyer. Other than pursuant to antitrust or non-competition laws in jurisdictions outside the United States set forth on Section 5.1(c) of the Disclosure Schedule, Buyer is not required to give any notice to, make any filing with, or obtain any authorization, consent or approval of any Governmental Entity in order for Buyer to consummate the transactions contemplated by this Agreement or any of the other Related Agreement, except where the failure to give notice, file or obtain such authorization, consent or approval would not have a Material Adverse Effect on Buyer. Section 4.4 Litigation. There is no instance in which Buyer (i) is subject to any outstanding Decree or (ii)is a party or, to Buyer's Knowledge, is threatened in writing to be made 29 a party to any Litigation, except for such Decrees or Litigation which would not (A) have a Material Adverse Effect on Buyer, (B) result in any material Liability to Seller or the Companies, or (C) materially prevent, restrict or delay the consummation of the transactions contemplated hereby or any other Related Agreement. Section 4.5 Brokers' Fees. Buyer has not entered into any Contract to pay any fees or commissions to any broker, finder or agent with respect to the transactions contemplated by this Agreement for which Seller or any of its Subsidiaries could become liable or obligated to pay. Section 4.6 Sufficient Funds. As of the Closing, Buyer will have sufficient funds to enable it to pay the Purchase Price hereunder. Section 4.7 Investment. Buyer is not acquiring the Target Shares with a view to or for sale in connection with any distribution thereof within the meaning of the Securities Act. Section 4.8 Guaranty. Concurrently with the execution and delivery of this Agreement, Buyer has delivered to Seller the Guaranty of the Investor. Section 4.9 Disclaimer of Other Representations and Warranties. Except for the representations and warranties contained in this Agreement or expressly contained in any other Related Agreement, Buyer does not make any other representation or warranty. express or implied. ARTICLE V PRE-CLOSING COVENANTS The Parties agree as follows with respect to the period between the execution of this Agreement and the Closing (except as otherwise expressly stated to apply to a different period): Section 5.1 Efforts; Cooperation. (a) Each of the Parties will use its commercially reasonable efforts to take all action and to do all things necessary in order to consummate and make effective the transactions contemplated by this Agreement as promptly as practicable following the date hereof (including satisfaction, but not waiver, of the conditions to the obligations of the Parties to consummate the transactions contemplated hereby set forth in Article VII). (b) Without limiting the generality of Section 5.1(a), Seller will give any notices to third parties, and each of the Parties will reasonably cooperate with the other Party hereto and use its commercially reasonable efforts to obtain any third party consents or sublicenses, in connection with the matters referred to in Section 5.1(b) of the Disclosure Schedule or as are otherwise material and necessary and appropriate to consummate the transactions contemplated hereby. The foregoing shall not require either Party to expend any material amount of money or agree to any material restriction on the operation of its business unless such expenditure or agreement is conditional upon the consummation of the transactions contemplated hereby. 30 (c) Without limiting the generality of Section 5.1(a), each of the Parties will give any notices to, make any filings with, reasonably cooperate with the other Party hereto to, and use its reasonable best efforts to obtain any authorizations, consents, clearances and approvals of Governmental Entities in connection with the matters referred to in Section 5.1(c) of the Disclosure Schedule or as are otherwise material and necessary and appropriate to consummate the transactions contemplated hereby. If a suit or other action is threatened or instituted by any Governmental Entity challenging the validity or legality, or seeking to restrain the consummation of the transactions contemplated by this Agreement, each Party shall use its commercially reasonable efforts to avoid, resist, resolve or, if necessary, defend such suit or action. Section 5.2 Preservation of Business. Except as otherwise contemplated hereby or as required by law, Seller will cause the Companies to use commercially reasonable efforts to keep the Business as presently conducted substantially intact in all material respects, including maintaining its present operations, physical facilities, working conditions and relationships with suppliers, customers and employees. Section 5.3 Operation of Business. Except as contemplated hereby, as set forth on Section 5.3 of the Disclosure Schedule or as required by law, Seller will not, and will cause the Companies not to, engage in any practice, take any action or enter into any transaction with respect to the Business as presently conducted outside the Ordinary Course of Business in any material respects without the written consent of Buyer (which shall not be unreasonably withheld or delayed). Without limiting the generality of the foregoing but subject to the exceptions contemplated by the immediately preceding sentence, Seller (i) will cause the Companies to pay their accounts payable and collect their accounts receivable consistent with the cash management practices of the Business in 2007, and (ii) will not, and will cause the Companies not to, engage in any practice, take any action or enter into any transaction that would have been required to be disclosed as an exception to Section 3.8 if it had occurred prior to the date hereof without the written consent of Buyer (which shall not be unreasonably withheld or delayed). Notwithstanding anything to the contrary set forth herein, within one (1) Business Day prior to the Closing (or as otherwise takes place in the Ordinary Course of Business of the Business), any Company may distribute or pay by way of any dividend or other distribution to its stockholders (and liquidate any cash equivalents or liquid investments to the extent applicable) any or all of its Cash (other than Cash in the United Kingdom and the Czech Republic) except to the extent required to be maintained in any Company pursuant to applicable law. Seller shall not, and shall not cause or permit its Subsidiaries to, transfer any employee of Seller or any of its Subsidiaries other than the Companies to the Companies without Buyer's consent. Seller shall give Buyer prompt notice of the termination of employment of any salaried Covered Employee. Notwithstanding anything to the contrary set forth herein, nothing contained in this Agreement shall give to Buyer, directly or indirectly, rights to control or direct the operations of the Companies or the Business prior to the Closing. Section 5.4 Notice of Developments. Each of Seller and Buyer will give prompt written notice to the other Party of (i) the existence of any fact or circumstance, or the occurrence of any event, of which it has Knowledge which would be reasonably likely to cause a condition to a Party's obligations to consummate the transactions contemplated hereby set forth in Article VII not to be satisfied as of a reasonably foreseeable Closing Date, or (ii) the receipt of any 31 material notice or other material communication from any Governmental Entity or any securities market or securities regulator in connection with the transactions contemplated by this Agreement; provided, however, that the delivery of any such notice pursuant to this Section 5.4 shall not be deemed to amend or supplement this Agreement and the failure to deliver any such notice shall not constitute a waiver of any right or condition to the consummation of the transactions contemplated hereby by either Party. Section 5.5 Notice of Supplemental Disclosure. Without limiting Section 5.4, from and after the date hereof but prior to the fifth (5th) Business Day prior to the Closing Date, Seller may inform Buyer pursuant to this Section 5.5 that any representation or warranty of Seller was or may have been inaccurate when made as of the date hereof, and/or would be or may be inaccurate if made as of the Closing Date, or any covenant with respect to the interim operation of the Business was not or may not have been complied with, and provide a proposed supplement to the Disclosure Schedule delivered as of the date hereof to correct such actual or potential inaccuracy or noncompliance as if set forth on the Disclosure Statement as of the date hereof (a "Disclosure Supplement"). If the inaccuracies or noncompliance contemplated by such Disclosure Supplement is sufficiently material to prevent, after a reasonable period in which to cure such inaccuracy, the satisfaction of the condition set forth in Section 7.1(a) or Section 7.1(b), as appropriate, Buyer may terminate this Agreement prior to the Closing as and to the extent permitted pursuant to Section 9.1(b)(ii) with respect thereto. Any amendment to the Disclosure Schedule by such Disclosure Supplement shall not in any way affect Buyer's rights hereunder. Section 5.6 No Alternative Proposals. Seller will not, and will ensure that none of its Representatives will, (i) solicit, initiate or knowingly encourage the submission of any Alternative Proposal, (ii) participate in any discussions or negotiations regarding, or furnish any material non-public information with respect to, any Alternative Proposal or (iii) enter into any agreement providing for the transaction contemplated by any Alternative Proposal. Section 5.7 Access. (a) Upon request by Buyer, Seller will permit Buyer and its Representatives to have reasonable access during normal business hours, and in a manner so as not to interfere unreasonably with the normal business operations of Seller, to all premises, properties, personnel, records and Contracts of or related to the Business as presently conducted; provided, however, that (i) any requests for such access or furnishing of information shall be made only to James J. Bonsall (or such other Person as Seller shall expressly direct in writing) and Seller shall not be required to provide any Person information or access if Seller reasonably determines in good faith that (w) providing such information or access would reasonably be expected to result in a waiver or breach of any attorney/client privilege, or (x) providing such information or access would reasonably be expected to result in violation of applicable law, and (ii) Buyer shall not, and shall not permit any of its Representatives to, conduct any environmental or workplace sampling or analysis of the sort commonly referred to as Phase II environmental assessment work. (b) Except in response to a request contemplated by Section 5.7(a), during the period from the date hereof and ending on the Closing Date, Buyer shall not, and shall cause its 32 Representatives not to, initiate or maintain contact with any employees, customers, suppliers or licensors of the Companies or the Business in connection with or pertaining to any subject matter of this Agreement except with the prior written consent of Seller. (c) All information obtained pursuant to this Section 5.7 shall be Evaluation Material (as such term is defined in the Confidentiality Agreement) subject to the terms and conditions of the Confidentiality Agreement. Section 5.8 Press Releases and Public Announcements. No Party shall issue any press release or make any public announcement relating to the existence or subject matter of this Agreement without the prior written approval of the other Party; provided, however, that either Party may make any public disclosure it believes in good faith is required by applicable law or any listing or trading agreement concerning its publicly-traded securities (in which case the disclosing Party will use commercially reasonable efforts to advise the other Party prior to making the disclosure to the extent practicable and permissible under applicable law). Section 5.9 Pre-Closing Asset Transfers. At or prior to the Closing, Seller shall, and shall cause the Companies and its other Subsidiaries (if applicable) to, assign, transfer, convey and deliver all right, title and interest in and to, and assume the obligations and liabilities of and under, the assets, properties, facilities, rights and Contracts described in Section 5.9 of the Disclosure Schedule (such transactions, the "Pre-Closing Asset Transfers") pursuant to reasonable and customary agreements, documents and instruments. Seller shall use its commercially reasonable efforts to cause the Pre-Closing Asset Transfers to be consummated at or prior to the Closing and to obtain any required written consent of any third party under, and comply with all provisions of law with respect to, the Pre-Closing Asset Transfers. Section 5.10 Pre-Closing Employment Transfers. Prior to the Closing Date, Seller shall cause the Companies to transfer to Seller or one of its Subsidiaries (other than the Companies) the employees at the Grafton Facility covered by the Grafton Union Contract in connection with the related Pre-Closing Asset Transfer involving the Grafton Facility (such transfer, the "Pre-Closing Employment Transfers"). Prior to the Closing Date, Seller shall cause Power to assign to Seller or one of its Subsidiaries (other than the Companies) and shall, or shall cause such Subsidiary to, assume the Collective Bargaining Agreement between Service Division of Tecumseh Power Company and District No. 10 of the International Association of Machinists, dated June 29, 2004, including all appendices and memorandums of understanding (the "Grafton Union Contract"), and the Settlement Agreement between Service Division of Tecumseh Power Company and District No. 10 of the International Association of Machinists, dated June 28, 2007 (the "Grafton Settlement Agreement"). Seller shall use its commercially reasonable efforts to obtain any required written consent of any third party under and comply with all provisions of law with respect to, the Pre-Closing Employment Transfers. Section 5.11 Credit Support Requirements. Prior to and following the Closing Date, Buyer and Seller shall cooperate to obtain a release in form and substance reasonably satisfactory to Seller with respect to all Credit Support Requirements set forth on Section 5.11 of the Disclosure Schedule. To the extent Buyer is unable to make such arrangements with respect to any Credit Support Requirements prior to the Closing, Buyer shall deliver to Seller at the Closing an indemnification of Seller by Buyer and/or the Target Companies with respect to such Credit 33 Support Requirements, in form and substance reasonably satisfactory to Buyer. Without limiting the generality of the foregoing, within ten (10) Business Days following the Closing, Buyer shall provide replacement guarantees, standby letters of credit or other assurances of payment with respect to all Credit Support Requirements set forth on Section 5.11 of the Disclosure Schedule not already released as contemplated by this Section 5.11, in form and substance satisfactory to Seller and the respective counterparties or beneficiaries sufficient to permit Seller and/or its Subsidiaries (as appropriate) to obtain a release of any obligations under such Credit Support Requirements. ARTICLE VI OTHER COVENANTS Section 6.1 Cooperation. The Parties shall cooperate with each other, and shall use their good faith efforts to cause their respective Representatives to cooperate with each other, to provide an orderly transition of the Business from Seller to Buyer and to minimize the disruption to the Business and each of their respective businesses resulting from the transactions contemplated hereby as requested by either Party and at the requesting Party's sole cost and expense (and without liability of any kind to the other Party cooperating with such request in providing such requested actions other than arising from the cooperating Party's gross negligence, willful misconduct or bad faith in connection therewith). Section 6.2 Further Assurances. In case at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, subject to the terms and conditions of this Agreement, each Party shall take such further action (including the execution and delivery to any other Party of such other reasonable instruments of sale, transfer, conveyance, assignment, assumption and confirmation, providing materials and information) as another Party may reasonably request as shall be reasonably deemed necessary or desirable to transfer, convey and assign to Buyer all of the Target Shares and to carry out the other purposes of this Agreement and at the requesting Party's sole cost and expense. Section 6.3 Payments; Transition Services; Run-Off. (a) Payments. If Seller receives any payment relating to any account receivable outstanding on or after the Closing Date originating from the Business, Seller shall promptly forward and remit such payment to Buyer. Seller shall promptly endorse and deliver to Buyer any cash, checks or other documents received by Seller on account of any such accounts receivable. Seller shall cooperate with Buyer to transfer to Buyer or the Companies at or following the Closing any dedicated account of Seller or any of its Subsidiaries other than the Companies to which accounts receivable are paid with respect to the Business, if any. (b) From and after the Closing and until the one hundred twentieth (120th) calendar days following the date thereof: (i) Referral. Seller will use commercially reasonable efforts to refer all customer or supplier inquiries received by Seller relating to the Business to Buyer. (ii) Services. Without limiting the generality of Section 6.1 and subject to the terms and limitations thereof, Seller shall provide or cause to be provided transition 34 administrative payroll services to Buyer and the Companies as requested by Buyer with respect to the Business. Section 6.4 Use of Name. From and after the Closing and, solely with respect to clause (a) and clause (c) below, except to the extent expressly otherwise provided in the License Agreement: (a) Corporate Names. As soon as commercially practicable after the Closing Date, but in no event more than thirty (30) calendar days thereafter, Buyer shall cause the Companies to (i) amend or terminate any organizational document, business registration, certificate of assumed name and/or d/b/a filings and any other documents as may be necessary to eliminate such Company's right to use, or do business under the "Tecumseh" name and/or any other name or mark owned or used by Seller or any Affiliate of Seller or any other name or mark similar to, or any variations, abbreviations, acronyms or other formatives of or based on or including, any of the foregoing, whether alone or in combination with any other words, phrases or designs (collectively, the "Seller Marks"), and thereafter, not to make any filings that would give any Company the right to use, or do business under any Seller Mark (b) Websites. As soon as commercially practicable after the Closing Date, but in no event more than ninety (90) calendar days thereafter, Buyer shall cause the Companies to remove any content, images and links on any of their Internet pages or websites to the extent related to Seller, any of its Subsidiaries or any of their respective businesses. (c) Use of Marks. Buyer shall, and shall cause the Companies to, (i) use commercially reasonable efforts to remove or sticker over the Seller Marks from all assets of the Companies (including any vehicles, dies, tooling, molds, machinery and equipment, business cards, schedules, stationery, packaging materials, websites, displays, signs, promotional and marketing materials, manuals, forms and computer software), and (ii) cease any and all uses of the Seller Marks prior to or as of the Closing Date, and not commence or otherwise make any uses of any of the Seller Marks thereafter. (d) Affiliation. Buyer shall, and shall cause each of its Affiliates to, cease to hold itself out as having any affiliation with Seller or any of its Affiliates. Section 6.5 Access; Enforcement; Litigation Support. From and after the Closing, upon request by either Party, the other Party will permit the requesting Party and its Representatives to have reasonable access during normal business hours, and in a manner so as not to interfere unreasonably with the normal business operations of the other Party, to all premises, properties, personnel, books and records of or related to the Business, the Companies or any of their assets or liabilities; provided, however, that, for avoidance of doubt, the foregoing shall not require either Party to take any such action if such Party reasonably determines in good faith that (w) providing such information or access would reasonably be expected to result in a waiver or breach of any attorney/client privilege, or (x) providing such information or access would reasonably be expected to result in violation of applicable law. Such access shall be for the purposes of (i) preparing Tax Returns, (ii) complying with the requirements of any Governmental Entity, and (iii) providing reasonable litigation support for the requesting Party, and such other reasonable and customary purposes as the parties shall request from time to time 35 that do not have a material impact on the providing Party. In addition, each Party shall reasonably cooperate with other requests that the other Party or its Representatives may make with respect to contesting or defending against litigation or other proceedings reasonably related to the Business or the Companies for which the requesting Party is prohibited from contesting or raising a defense or taking such other requested action, or unable to contest or raise a defense or taking such other requested action, directly or without such cooperation, including providing such testimony or other assistance, in each such case all at the sole cost and expense of the requesting Party. Each Party agrees to maintain the files or records which are contemplated by the first sentence of this Section 6.5 in a manner consistent in all material respects with its document retention and destruction policies, as in effect from time to time, for six (6) years following the Closing. Section 6.6 Non-Competition. For a period of five (5) years following the Closing, Seller shall not, and shall ensure that none of its Subsidiaries will, directly or indirectly (including as a stockholder, consultant, member or partner) conduct the Business in North America or any other geographic region in which the Companies have facilities as of the date hereof; provided, however, that, for such purposes, no owner of less than five percent (5%) of the outstanding stock or other equity or ownership interests of any Person and no director (or other equivalent position on an equivalent governing body) of any Person shall be deemed to be engaged in the business of such Person solely as a result of holding such stock or such directorship. If a court of competent jurisdiction declares in a final judgment that any term or provision of this Section 6.6 is invalid or unenforceable, Buyer and Seller agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration or area of the term or provision, to delete specific words or phrases or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. Section 6.7 Non-Solicitation of Employees. For a period of twenty-four (24) months following the Closing, Seller shall not, and shall ensure that none of its Subsidiaries will, directly or indirectly, solicit the employment of any Covered Employee as of the date hereof or as of the Closing Date; provided, however, that the foregoing provision shall not prevent Seller or any of its respective Subsidiaries from (x) soliciting any such Covered Employee by a public advertisement placed by it or by a search firm retained by it (provided that the search firm was not instructed or encouraged to target or focus on such Covered Employees) or hiring any Covered Employee responding thereto, or (y) soliciting or hiring any Covered Employee whose employment with the Business was terminated by the Buyer at least three (3) months earlier. If a court of competent jurisdiction declares in a final judgment that any term or provision of this Section 6.7 is invalid or unenforceable, Buyer and Seller agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration or area of the term or provision, to delete specific words or phrases or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. 36 Section 6.8 Covered Employees. (a) Continued Employment. Buyer acknowledges that by purchasing the Target Shares, it shall, through the Companies, employ all of the Covered Employees employed by the Companies (including those individuals on leave) as of the Closing Date; provided, however, that subject to law, this Section 6.8 shall not require Buyer or the Companies to continue the employment of any Covered Employee for any specified period after the Closing Date. (b) Compensation. For a period of twelve (12) months following the Closing Date, Buyer shall provide, and shall cause the Companies to provide, each Covered Employee, while employed by Buyer or any of its Subsidiaries (including the Companies), with compensation and benefits that, in the aggregate, are not materially less than his or her total compensation and benefits (excluding, to the extent permissible by law, equity compensation, defined benefit pension plans and retiree welfare benefits) immediately prior to the Closing Date (or, as applicable, immediately prior to his or her Approved Absence). (c) Service Credit. With respect to Buyer's employee benefit plans, programs and arrangements covering or otherwise benefiting any of the Covered Employees on or after the Closing Date (other than any non-qualified retirement or deferred compensation plans or equity-based compensation plans), service with the Companies shall be counted for purposes of eligibility to participate and vesting, and in determining the level of benefits with respect to vacation and severance, to the same extent such service was counted under the corresponding employee benefit plans, programs, or arrangements of Seller or the Companies prior to the Closing Date. (d) Buyer Welfare Plans. With respect to any benefit plans of Buyer providing welfare benefits of the type described in Section 3(1) of ERISA to Covered Employees on and after the Closing Date, such plans shall, except to the extent restricted by the insurance carriers, (i) grant credit for amounts paid by the Covered Employees (including applicable deductibles, copays, annual out-of-pocket limits or similar costs) under corresponding Company Plans or Seller Plans during the portion of the applicable plan year preceding the Closing Date and (ii) waive any pre-existing condition exclusions, evidence of insurability provisions, waiting period requirements or any similar provisions, to the extent they were waived under corresponding Company Plans or Seller Plans. For each month following the Closing Date and for the remainder of such plan year, upon request by Buyer, Seller shall provide Buyer with information regarding the amount of deductibles, copays, out-of-pocket limits or similar costs incurred by each Covered Employee during the portion of the plan year preceding such date. (e) Buyer DC Plan. Effective as of the Closing Date, Buyer shall cover, or cause the Companies to cover, Covered Employees under a defined contribution plan and trust intended to qualify under Sections 401(a) and (k) and Section 501(a) of the Code (the "Buyer DC Plan"). Buyer shall cause the Buyer DC Plan to permit Covered Employees to make a direct rollover of their account balances under the Tecumseh Products Company Salaried Retirement Savings Plan and any other similar Employee Benefit Plan. Seller and Buyer shall reasonably cooperate in good faith to effect such transfers or distributions as soon as practicable after the Closing Date. 37 (f) Bonus Plans. On and after the Closing Date, Buyer shall assume all of the duties and obligations of Seller and/or the Companies under the Tecumseh Power Key Employee Performance Incentive Plan with respect to Covered Employees who participate in either such plan and under the Transferred Plans that are sponsored and maintained by Seller or any of its Subsidiaries other than the Companies and shall continue or cause to be continued such Transferred Plans on terms and conditions no less favorable to each Covered Employee than those in effect on the Closing Date for the current year. (g) Transferred Plans. All Transferred Plans shall remain the responsibility of and shall be operated by the Companies on and after the Closing Date. All material Transferred Plans are set forth on Section 6.8(g) of the Disclosure Schedule. Buyer shall assume all obligations pursuant to the Transferred Plans as of the Closing. (h) Retained Plans and Liabilities. With respect to the Seller Plans and all Company Plans that are not Transferred Plans, Seller shall retain all of the duties and obligations under all such plans (the "Retained Plans"). For the avoidance of doubt, neither Buyer nor any Company shall be responsible for any payments to any agents, employees or Representatives of Seller or any Company, including any Covered Employee, for change of control bonus, transaction bonus or other similar payments as a result of the transactions contemplated hereby. Neither the Buyer nor, except as set forth on the Financial Statements, the Companies shall have any Liability with respect to any of the Retained Plans. Seller shall assume, indemnify and hold the Companies harmless from all Liabilities associated with the Pre-Closing Employment Transfers, including any obligations under the Grafton Union Contract, the Grafton Settlement Agreement, other collective bargaining agreements and other union contracts, Company Plans, severance or termination pay and applicable laws such as the WARN Act and similar state laws. (i) No Third Party Beneficiaries. The provisions of this Section 6.8 are for the benefit of the Parties only and shall not be construed to grant any rights, as a third party beneficiary or otherwise, to any Person who is not a party to this Agreement, nor shall any provision of this Agreement be deemed to be the adoption of, or an amendment to, any Employee Benefit Plan, or otherwise to limit the right of Seller, the Companies or any Subsidiary to amend, modify or terminate any such Employee Benefit Plan. Nothing in this Agreement shall be interpreted or construed to confer upon any employees any right with respect to continuance of employment by the Companies or Buyer. (j) Transition Services Agreement. To the extent any benefits contemplated by this Section 6.8 to be provided to Covered Employees by Buyer are provided pursuant to the Transition Services Agreement, Buyer's obligations hereunder to provide any such benefit shall be satisfied by the provision of such benefit through the Transition Services Agreement. Section 6.9 Transfer Taxes. Buyer and Seller shall each pay one-half of any stamp, documentary, registration, transfer, added-value or similar Tax, including any sales and transfer taxes, recording charges, and similar fees, taxes or changes imposed on the actual or deemed sale and transfer of any real property to Buyer (a "Transfer Tax"), imposed under applicable law in connection with the transactions contemplated hereby. Seller and Buyer shall cooperate to prepare and timely file any Tax Returns required to be filed in connection with Transfer Taxes described in the immediately preceding sentence. 38 Section 6.10 Tax Matters. (a) Tax-Sharing Agreements. Any tax-sharing agreement between Seller and any of the Target Companies or their Subsidiaries shall be terminated as of the Closing Date. (b) Returns for Periods Through the Closing Date. (i) Seller shall be responsible for the timely filing (taking into account any extensions received from the relevant tax authorities) of all Tax Returns required by law to include the Target Companies, including in a consolidated, combined or unitary Tax Return filed by Seller or any Affiliate (other than the Target Companies and their Subsidiary), with respect to any taxable period ending prior to or including the Closing Date. All Taxes due and payable with respect to such Tax Returns will be paid by Seller as and when required by law. (ii) Buyer shall cause the Target Companies and their Subsidiary to furnish Tax information to Seller for inclusion in any Tax Return described in clause (i) above in accordance with the past custom and practice of the Target Companies and their Subsidiary. (c) Tax Indemnification. Without regard to the limitations set forth in clauses (a), (c) and (d) of Section 8.5, (i) Seller shall indemnify Buyer for any additional Tax owed by Buyer (or any of its Subsidiaries) (including Tax owed by Buyer (or any of its Subsidiaries) due to this indemnification payment) resulting from any Taxes (or the non-payment thereof) of any of Seller, the Target Companies or any of their Subsidiaries for any period ending on or before the Closing Date and the portion through the Closing Date for any taxable period that includes, but does not end on, the Closing Date (the "Pre-Closing Tax Period"); and (ii) Buyer shall indemnify Seller for any additional Tax owed by Seller (or any of its Subsidiaries) (including Tax owed by Seller (or any of its Subsidiaries) due to this indemnification payment) resulting from (A) any transaction engaged in by Buyer, the Target Companies or their Subsidiaries not in the Ordinary Course of Business on the Closing Date after Buyer's purchase of the Target Shares or (B) any action taken by Buyer, or after Closing by any Target Company or any Subsidiary of a Target Company, during or in respect of a taxable year of Seller that precedes or includes the Closing Date not in the Ordinary Course of Business, in each case that affects the amount, timing or character to Seller and its Subsidiaries of any Tax item relating to the Target Companies or their Subsidiaries. (d) Post-Closing Transactions Not in Ordinary Course. Buyer and Seller shall report all transactions not in the Ordinary Course of Business relating to the Target Companies or their Subsidiaries and occurring on the Closing Date after Buyer's purchase of the Target Shares on Buyer's federal income Tax Return to the extent permitted by Reg. Section 1.1502-76(b)(1)(ii)(B). (e) Cooperation. Buyer, on the one hand, and Seller (on behalf of its Affiliates), on the other, agree, in each case to the extent reasonably requested by the other Party and at no cost to the other party, to (i) furnish to the other party in a timely manner information and documents for purposes of preparing any original or amended Tax Returns and contesting or defending any audit, (ii) cooperate in any audit, (iii) retain and provide on demand books, records, documentation or other information relating to any Tax Return until the expiration of the 39 applicable statute of limitations (giving effect to any extension, waiver, or mitigation thereof); and (iv) take such action as such other party may deem appropriate in connection therewith. Section 6.11 Insurance. Buyer acknowledges that, upon Closing, all insurance coverage provided in relation to each Company and the Business that is maintained by Seller or its Affiliates (other than the Companies) (whether such policies are maintained with third party insurers or with Seller or its Affiliates (other than the Companies)) shall cease to provide any coverage to the Companies and the Business and no further coverage shall be available to any Company or the Business as an Affiliate under any such policies. Section 6.12 Bulk Transfer Laws. Buyer and Seller each agrees that neither Party intends to comply with the provisions of any bulk transfer laws of any jurisdiction in connection with the transactions contemplated by this Agreement. Section 6.13 Acknowledgements. Buyer acknowledges that, except as expressly set forth in this Agreement, without limiting the generality of Section 3.26, neither Seller nor any other Person makes any representation or warranty, express or implied, including as to the accuracy or completeness of any information regarding any of Seller, the Business, the Companies, any of Seller's other Affiliates, any of the assets or Liabilities of any of the foregoing or any other matter. Without limiting any representation, warranty or covenant of Seller expressly set forth herein, or Buyer's rights of access set forth herein, Buyer acknowledges that it has waived and hereby waives as a condition to Closing any further due diligence reviews, inspections or examinations with respect to Seller, the Business, the Companies or any of their respective assets or Liabilities or any other matter, including with respect to engineering, environmental, title, survey, financial, operational, regulatory and legal compliance matters. ARTICLE VII CONDITIONS TO OBLIGATION TO CLOSE Section 7.1 Conditions to Buyer's Obligations. Buyer's obligation to consummate the transactions contemplated hereby in connection with the Closing is subject to satisfaction or waiver of the following conditions: (a) the representations and warranties set forth in Article III shall have been true and correct on the date hereof and shall be true and correct at and as of the Closing Date as if made at and as of such time (in either case, except to the extent expressly made as of an earlier date, in which case as of such date as if made at and as of such date), except where the failure of such representations and warranties to be so true and correct (without giving effect to any limitation as to "material," "material adverse effect" or "Material Adverse Effect" set forth therein) has not resulted in a Material Adverse Effect on the Companies; (b) Seller shall have performed and complied with its covenants hereunder through the Closing in all material respects; (c) (i) all notices to third parties contemplated by Section 5.1(b) of the Disclosure Schedule to have been delivered on or prior to the Closing shall have been delivered, and all third party consents or sublicenses contemplated by Section 5.1(b) of the Disclosure Schedule to have been received on or prior to the Closing shall have been received in either case 40 only if identified with an asterisk on such schedule that it is intended to be considered for purposes of this Section 7.1(c), and (ii) Buyer shall have received evidence of each of the foregoing reasonably satisfactory to it; (d) (i) all applicable waiting periods (and any extensions thereof) under any antitrust or non-competition law shall have expired or otherwise been terminated and Seller and Buyer shall have received all other authorizations, consents, clearances and approvals of Governmental Entities contemplated by Section 5.1(c) of the Disclosure Schedule to have been received on or prior to the Closing, and (ii) Buyer shall have received evidence of each of the foregoing reasonably satisfactory to it; (e) no material Decree or Litigation shall be pending which would be reasonably expected to (i) prevent consummation of any of the transactions contemplated by this Agreement, or (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation thereof; (f) each delivery contemplated by Section 2.5(a) to be delivered to Buyer shall have been delivered; and (g) since the date hereof, there shall not have been a Material Adverse Effect with respect to the Business. Section 7.2 Conditions to Seller's Obligations. Seller's obligation to consummate the transactions contemplated hereby in connection with the Closing are subject to satisfaction or waiver of the following conditions: (a) the representations and warranties set forth in Article IV shall have been true and correct on the date hereof and shall be true and correct at and as of the Closing Date as if made at and as of such time (in either case, except to the extent expressly made as of an earlier date, in which case as of such date as if made at and as of such date), except where the failure of such representations and warranties to be so true and correct (without giving effect to any limitation as to "material," "material adverse effect" or "Material Adverse Effect" set forth therein) has not resulted in a material adverse effect on the ability of Buyer to consummate the transactions contemplated hereby without material delay or diminution of the benefits hereunder; (b) Buyer shall have performed and complied with its covenants hereunder through the Closing in all material respects; (c) Seller shall have received the third-party consents set forth on Section 7.2(c) of the Disclosure Schedule; (d) (i) all applicable waiting periods (and any extensions thereof) under any antitrust or non-competition law shall have expired or otherwise been terminated and Seller and Buyer shall have received all other authorizations, consents, clearances and approvals of Governmental Entities contemplated by Section 5.1(c) of the Disclosure Schedule to have been received on or prior to the Closing, and (ii) Seller shall have received evidence of each of the foregoing reasonably satisfactory to it; 41 (e) no material Decree or Litigation shall be pending which would be reasonably expected to (i) prevent consummation of any of the transactions contemplated by this Agreement, or (ii) cause any of the transactions contemplated by this Agreement to be rescinded following consummation thereof; (f) with respect to each Credit Support Requirement, Buyer shall have either (i) effected replacement arrangements, in accordance with Section 5.11, reasonably satisfactory to Seller, or (ii) delivered to Seller the indemnification by Buyer and/or the Target Companies in favor of Seller in accordance with Section 5.11; and (g) each delivery contemplated by Section 2.5(b) to be delivered to Seller shall have been delivered. Section 7.3 No Frustration of Closing Conditions. Neither Buyer nor Seller may rely on the failure of any condition to its obligation to consummate the transactions contemplated hereby set forth in Section 7.1 or Section 7.2, as the case may be, to be satisfied if such failure was caused by such Party's failure to use its commercially reasonable efforts to satisfy the conditions to the consummation of the transactions contemplated hereby or other breach of a representation, warranty or covenant hereunder. ARTICLE VIII INDEMNIFICATION Section 8.1 Survival of Representations and Warranties. The representations and warranties of the Parties will survive the Closing and will remain in full force and effect thereafter until the eighteen (18) month anniversary of the Closing Date, after which time they shall be of no further force or effect (other than with respect to claims for indemnity therefor that have been delivered by such anniversary) and upon which no further claim for indemnification may be made with respect to breaches thereof; provided; however, that the representations and warranties set forth in Section 3.1, Section 3.2, Section 3.4, Section 3.5, Section 3.12, Section 4.1 and Section 4.2 shall survive the Closing and remain in full force and effect thereafter until the expiration of the applicable statute of limitations and the representations and warranties set forth in Section 3.26 and Section 4.9 shall survive indefinitely. Each Party acknowledges that it expressly intends to shorten the statute of limitations for claims or causes of action based upon, directly or indirectly, any of the representations and warranties contained in this Agreement as provided in this Section 8.1. Section 8.2 Indemnification Provisions for Buyer's Benefit. Subject to the limits set forth in this Article VIII, from and after the Closing, Seller shall defend and hold Buyer and its Affiliates and their respective officers, directors, stockholders and Representatives (each, a "Buyer Indemnified Party") harmless from and against any and all actual losses, claims, liabilities, debts, damages, fines, penalties, costs (in each case including reasonable out-of-pocket expenses (including reasonable fees and expenses of counsel)) that they incur (collectively, "Damages") as a result of: (a) any misrepresentation or breach of any representation or warranty of Seller set forth in this Agreement or any other Related Agreement (other than the License 42 Agreement, IP Assignment Agreement or the Transition Services Agreement or any other Related Agreement arising under any of the foregoing); (b) any failure to perform any covenant or agreement of Seller set forth in this Agreement or any other Related Agreement (other than the License Agreement, IP Assignment Agreement or the Transition Services Agreement or any other Related Agreement arising under any of the foregoing); or (c) (i) any Environmental Liabilities with respect to the Former Facilities and (ii) any Environmental Liabilities with respect to the Present Facilities arising from the conduct of the Business on or prior to the Closing; (d) any liabilities asserted against Buyer or the Companies pursuant to the judicial restructuring of TMT; (e) any Liability asserted against Buyer or the Companies arising out of any injury to individuals or property as a result of the ownership, possession or use of any Product manufactured, sold, leased or delivered by the Business prior to the Closing, including those Liabilities set forth in or contemplated by Section 3.16 of the Disclosure Schedule (but excluding product warranty claims); (f) any Liability asserted against Buyer or the Companies arising out of the Horsepower Litigation; or (g) any product warranty Liabilities asserted against Buyer or the Companies with respect to engines (other than the LV195, LV156, LV148, OV490 and OV195 models) built at the Dunlap Facility between January 1, 2007 and the Closing Date ("Sourced Engine Product Warranty Damages") other than those Liabilities arising out of or relating to any actions by or at the direction of Buyer or the Companies from and after the Closing (including any modification or alteration to any such engines by or at the direction of Buyer or the Companies from and after the Closing), for avoidance of doubt and without limiting Section 8.5(k) net of any amounts recovered from third party suppliers or other sources with respect to such matters. Section 8.3 Indemnification Provisions for Seller's Benefit. Subject to the limits set forth in this Article VIII, from and after the Closing, Buyer shall defend and hold Seller and its Affiliates and their respective officers, directors, stockholders and Representatives (each, a "Seller Indemnified Party") harmless from and against any and all Damages as a result of: (a) any misrepresentation or breach of any representation or warranty of Buyer set forth in this Agreement or any other Related Agreement (other than the License Agreement, IP Assignment Agreement or the Transition Services Agreement or any other Related Agreement arising under any of the foregoing); (b) any failure to perform any covenant or agreement of Buyer set forth in this Agreement or any other Related Agreement (other than the License Agreement, IP Assignment Agreement or the Transition Services Agreement or any other Related Agreement arising under any of the foregoing); or 43 (c) the ownership or operation of the Business (as presently conducted or as may be conducted from time to time) from and after the Closing Date, including any Environmental Liabilities arising from the conduct of the Business from and after the Closing. Section 8.4 Matters Involving Third Parties. (a) If any third party shall notify any Buyer Indemnified Party or Seller Indemnified Party (the "Indemnified Party") of any matter (a "Third Party Claim") which may reasonably give rise to a claim for indemnification against Seller or Buyer, respectively (the "Indemnifying Party"), pursuant to this Article VIII, the Indemnified Party shall promptly (and in any event within ten (10) Business Days after receiving notice of the Third Party Claim or the commencement of Litigation with respect thereto) notify the Indemnifying Party thereof in writing stating that the Third Party Claim may give rise to a claim for indemnification against the Indemnifying Party and specifying the facts constituting the basis for such claim and the amount, to the extent known, of the claim asserted; provided, however, that no delay on the part of the Indemnified Party in notifying the Indemnifying Party shall relieve the Indemnifying Party from any obligation hereunder unless (and then solely to the extent) the Indemnifying Party thereby is prejudiced. (b) The Indemnifying Party will have the right at any time to assume the defense against the Third Party Claim with counsel of its choice reasonably satisfactory to the Indemnified Party and control the defense of such Third Party Claim so long as the Indemnifying Party conducts such defense actively and diligently. (c) From and after the date that the Indemnifying Party has assumed and is conducting the defense of the Third Party Claim in accordance with Section 8.4(b), (A) the Indemnified Party may retain separate co-counsel at its sole cost and expense and participate in the defense of the Third Party Claim (unless there are separate defenses available to the Indemnified Party that are reasonably likely to be asserted by the Indemnified Party, in which case such costs and expenses shall be borne by the Indemnifying Party); (B) the Indemnifying Party and the Indemnified Party shall cooperate with each other and their respective counsel in connection with the defense, negotiation or settlement of any such Third Party Claim, including providing access to any relevant books and records, properties and Representatives; provided, however, that the foregoing shall not require either Party to waive, or take any action which has the affect of waiving, its attorney-client privilege with respect thereto; (C) the Indemnifying Party will not consent to the entry of any judgment on or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnified Party (which shall not be unreasonably withheld or delayed) unless the judgment or proposed settlement involves only the payment of money damages by the Indemnifying Party and does not impose an injunction or other equitable relief upon the Indemnified Party; and (D) the Indemnified Party will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim without the prior written consent of the Indemnifying Party (which shall not be unreasonably withheld or delayed). (d) In the event that the Indemnifying Party has not assumed the defense of the Third Party Claim after notice thereof within ninety (90) calendar days of the notice of to the Indemnifying Party of the Third Party Claim pursuant to this Section 8.4 (except to the extent 44 that a shorter period of time (not to be less than the greater of (x) twenty (20) Business Days after such notice or (y) five (5) Business Days after notice by the Indemnified Party to the Indemnifying Party that further delay would unreasonably prejudice the Indemnified Party) is required so as to not prejudice the Indemnified Party), (A) the Indemnified Party may defend against the Third Party Claim in any manner it reasonably may deem appropriate (and the Indemnified Party need not consult with, or obtain any consent from, the Indemnifying Party in connection therewith); (B) the Indemnifying Party will reimburse the Indemnified Party promptly and periodically for the costs of defending against the Third Party Claim (including reasonable attorneys' fees and expenses) to the extent such costs are Damages for which the Indemnified Party is actually entitled to indemnification hereunder; and (C) the Indemnifying Party will remain responsible for any costs the Indemnified Party may incur resulting from the Third Party Claim to the extent such costs are Damages for which the Indemnified Party is actually entitled to indemnification hereunder. Section 8.5 Limitation on Indemnification; Calculation of Damages. Notwithstanding anything to the contrary set forth in this Article VIII: (a) No Buyer Indemnified Party or Seller Indemnified Party shall be entitled to recover from Seller or Buyer, respectively, for any claim for indemnity in respect of Damages arising under Section 8.2(a) (other than with respect to Sourced Engines Product Warranty Damages) or Section 8.3(a), respectively, unless and until, and then only to the extent that, the total of all such claims against Seller or Buyer, respectively, in respect of such Damages exceeds one million five hundred thousand United States Dollars ($1,500,000) (the "Basket"), and in such event only to the amount of such excess. (b) No Buyer Indemnified Party shall be entitled to recover from Seller for any claim for indemnity in respect of Damages arising under (x) Section 8.2(g) or (y) solely with respect to Sourced Engines Product Warranty Damages, Section 8.2(a), in either case unless and until, and then only to the extent that, the total of all such claims against Seller in respect of such Damages exceeds two million two hundred thousand United States Dollars ($2,200,000) (the "Sourced Engines Special Basket"), and in such event (x) only to the amount of such excess for such aggregate Damages up to $2,000,000 in excess of the Sourced Engines Special Basket and (y) for aggregate Damages in excess of the sum of $2,000,000 plus the Sourced Engines Special Basket, only to the amount of fifty percent (50%) of such excess of such sum, except in either case as may be limited by Section 8.5(d). (c) No Buyer Indemnified Party or Seller Indemnified Party shall be entitled to recover from Seller or Buyer, respectively, or count toward the Basket, any claim for indemnity in respect of any individual Damage arising under Section 8.2(a) or Section 8.3(a), respectively, unless and until the claim (or series of related claims) against Seller or Buyer, respectively, in respect of such Damage exceeds fifty thousand United States Dollars ($50,000). (d) The Buyer Indemnified Parties and the Seller Indemnified Parties shall not be entitled to recover from Seller or Buyer, respectively, Damages arising under Section 8.2(a) or Section 8.2(g) or Section 8.3(a), respectively, greater than three million, eight hundred and twenty-five thousand United States Dollars ($3,825,000) in the aggregate (for avoidance of 45 doubt, with respect to Buyer Indemnified Parties, to be determined when considering Damages arising under Section 8.2(a) or Section 8.2(g) on a combined basis). (e) No Indemnified Party shall be entitled to recover more than the full amount of any Damage under the provisions of this Agreement in respect of any such Damage. (f) The Buyer Indemnified Parties and the Seller Indemnified Parties shall not be entitled to recover from Seller or Buyer, respectively, Damages that are punitive Damages or consequential, exemplary or special Damages. (g) The Buyer Indemnified Parties shall not be entitled to recover from Seller Damages reflected as a current Liability on the Conclusive Net Working Capital Statement. This Section 8.5(g) shall not serve to limit the recovery of claims for indemnification for Sourced Engines Product Warranty Damages pursuant to Section 8.2(g). (h) The Buyer Indemnified Parties shall not be entitled to recover from Seller Damages arising out of any change in the use of an asset of the Companies or the operation of the Business following the Closing. (i) The Buyer Indemnified Parties and the Seller Indemnified Parties shall not be entitled to recover from Seller or Buyer, respectively, Damages arising under Section 8.2(b) or Section 8.3(b), respectively, that arise from the breach of a covenant in the case of a covenant to be performed on or prior to the Closing (other than Section 2.1), unless the claim for indemnity therefor has been delivered by the eighteen (18) month anniversary of the Closing Date. (j) The amount of any Damages for which indemnification is provided under this Article VIII shall be computed net of any third party insurance proceeds and recoveries in respect of third party indemnification obligations actually received by the Indemnified Party in connection with such Damages. Each Indemnified Party agrees to use its commercially reasonable efforts to obtain recovery in respect of any Damages from any third party insurance or third party indemnity which is available in respect of Damages. If an Indemnified Party receives such insurance proceeds or indemnification recoveries in connection with Damages for which it has been indemnified hereunder, the Indemnified Party shall refund to the Indemnifying Party the amount of such insurance proceeds or indemnification recoveries when received, up to the amount for which indemnification was paid hereunder. (k) Each Indemnified Party shall take all reasonable steps to mitigate any Damages in respect of which a claim could be made under this Article VIII. (l) The Buyer Indemnified Parties shall not be entitled to recover from Seller Damages with respect to any environmental investigation, monitoring, clean-up, containment, restoration, removal or other corrective or response action (each a "Response Action") unless such Response Action is required under applicable Environmental Health and/or Safety Requirements and then only to the extent such Response Action is reasonable, cost effective and employs and is in accordance with risk-based remedial standards and institutional controls to the extent allowed by Environmental Health and/or Safety Requirements, where such standards or controls would not unreasonably interfere with industrial use at the relevant property or facility. 46 Nothing in the foregoing sentence shall be construed as limiting the Buyer Indemnified Parties from recovering from Seller for Response Actions necessary to comply in a reasonably cost-effective manner with Environmental Health and/or Safety Requirements. Seller shall either, at Seller's option, perform or cause to be performed the Response Action, or shall authorize the Buyer Indemnified Parties to perform such Response Action. The Buyer Indemnified Parties shall provide Seller with reasonable access to the relevant property or facility for purposes of completing the Response Action and shall reasonably cooperate with Seller in connection therewith, provided that Seller shall undertake diligent efforts to prevent unreasonable interference with industrial operations upon the relevant property or facility in connection with the Response Action. Seller shall have no obligation to indemnify any of the Buyer Indemnified Parties with respect to any Response Action arising from (a) any conditions of contamination identified through any environmental sampling or analysis, or (b) any report to any governmental authority, in either case which is not required by Environmental Health and/or Safety Requirements. (m) The amount of any Damages for which indemnification is provided under this Article VIII shall be computed net of any Tax benefit of the Indemnified Party with respect to such indemnification based on the Indemnified Party's Tax Liability for the taxable year in which it accrues the indemnification payment, calculated on the basis of the facts and circumstances actually pertaining to the Indemnified Party. Section 8.6 Claims and Payment; Treatment of Payments. On each occasion that any Indemnified Party shall be entitled to indemnification under this Article VIII or Section 6.10(c), the Indemnifying Party shall, at each such time, promptly pay the amount of such indemnification following the receipt of notice of a claim therefor. All notices of claims for indemnification hereunder by any Indemnified Party shall be made with reasonable particularity (including the provisions hereunder on which such claim is based) and shall state the amount of Damages sought thereunder. Any indemnification payments made pursuant to this Agreement shall be treated for tax purposes as an adjustment to the Purchase Price, unless otherwise required by applicable law. Section 8.7 Exclusive Remedy. From and after the Closing, other than in the event of fraud or as provided in Section 6.10(c), the remedies set forth in this Article VIII shall be the sole or exclusive remedy (including with respect to any Environmental Liabilities) of the Indemnified Parties for Damages arising out of a breach of any representations or warranties set forth in this Agreement or any other Related Agreement (other than the License Agreement, the Transition Services Agreement, the IP Assignment Agreement or any other Related Agreement arising under any of the foregoing) or otherwise with respect to the transactions contemplated by this Agreement. ARTICLE IX TERMINATION Section 9.1 Termination of Agreement. The Parties may terminate this Agreement at any time prior to the Closing as provided below: 47 (a) Buyer and Seller may terminate this Agreement by mutual written consent; (b) Buyer may terminate this Agreement by giving written notice to Seller: (i) if the Closing shall not have occurred prior to the date that is four (4) months from the date hereof (the "Outside Date"); provided, however, that the right to terminate this Agreement under this Section 9.1(b)(i) shall not be available to Buyer if its failure to fulfill any obligation under this Agreement (including its obligations set forth in Section 5.1) has been the cause of, or resulted in, the failure of the Closing to have occurred on or before the Outside Date; or (ii) if any event, circumstance, condition, fact or effect has occurred or exists which (A) would result in a failure of a condition to Buyer's obligations to consummate the transactions contemplated hereby set forth in Section 7.1 (unless the failure results primarily from Buyer itself breaching any representation, warranty or covenant set forth in this Agreement), and (B) cannot reasonably be cured prior to the Outside Date; provided, however, that Buyer shall have given Seller written notice, delivered at least ten (10) Business Days prior to such termination stating its intention to terminate this Agreement pursuant to this Section 9.1(b)(ii) and the basis for such termination with reasonable particularity and provided Seller with the opportunity to cure any breach giving rise to the effects set forth in clauses (A) and (B) above during such time; (c) Seller may terminate this Agreement by giving written notice to Buyer: (i) if the Closing shall not have occurred prior to the Outside Date; provided, however, that the right to terminate this Agreement under this Section 9.1(c)(i) shall not be available to Seller if its failure to fulfill any obligation under this Agreement (including its obligations set forth in Section 5.1) has been the cause of, or resulted in, the failure of the Closing to have occurred on or before the Outside Date; or (ii) if any event, circumstance, condition, fact or effect has occurred or exists which (A) would result in a failure of a condition to Seller's obligations to consummate the transactions contemplated hereby set forth in Section 7.2 (unless the failure results primarily from Seller itself breaching any representation, warranty or covenant set forth in this Agreement), and (B) cannot reasonably be cured prior to the Outside Date; provided, however, that Seller shall have given Buyer written notice thereof, delivered at least ten (10) Business Days prior to such termination stating its intention to terminate this Agreement pursuant to this Section 9.1(c)(ii) and the basis for such termination with reasonable particularity and provided Buyer with the opportunity to cure any breach giving rise to the effects set forth in clauses (A) and (B) above during such time. Section 9.2 Effect of Termination. If either Party terminates this Agreement pursuant to Section 9.1, all rights and obligations of the Parties hereunder shall terminate upon such termination and shall become null and void (except that Article I, Section 5.5, Section 5.7(c), Section 6.13, Article X and this Section 9.2 shall survive any such termination) and no Party shall have any Liability to the other Party hereunder; provided, however, that nothing in this 48 Section 9.2 shall relieve either Party from Liability for any willful breach occurring prior to any such termination of any of the representations and warranties or covenants set forth in this Agreement. ARTICLE X MISCELLANEOUS Section 10.1 Expenses. Except as expressly set forth herein, each Party will bear its own costs and expenses (including legal fees and expenses) incurred in connection with this Agreement and the transactions contemplated hereby. For avoidance of doubt, the letter agreement, dated September 13, 2007, by and between Seller and Platinum Equity shall be of no further force and effect as of the execution and delivery of this Agreement and no amounts shall be or become payable to Platinum Equity or any of its Representatives thereunder. Section 10.2 Entire Agreement. This Agreement, the other Related Agreements and the Confidentiality Agreement constitute the entire agreement between the Parties and supersede any prior understandings, agreements or representations (whether written or oral) by or between the Parties, written or oral, with respect to the subject matter hereof. For avoidance of doubt, the letter agreement, dated October 13, 2007 and as extended on October 20, 2007, by and between Seller and Platinum Equity shall be of no further force and effect as of the execution and delivery of this Agreement. Section 10.3 Incorporation of Annexes, Exhibits and Disclosure Schedules. The Annexes and Exhibits to this Agreement and the Disclosure Schedule are incorporated herein by reference and made a part hereof. Section 10.4 Amendments and Waivers. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by each Party except as expressly provided herein. No waiver of any breach of this Agreement shall be construed as an implied amendment or agreement to amend or modify any provision of this Agreement. No waiver by either Party of any default, misrepresentation or breach of warranty or covenant hereunder, whether intentional or not, shall be valid unless the same shall be in writing and signed by the Party making such waiver, nor shall such waiver be deemed to extend to any prior or subsequent default, misrepresentation or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent default, misrepresentation or breach of warranty or covenant. No conditions, course of dealing or performance, understanding or agreement purporting to modify, vary, explain or supplement the terms or conditions of this Agreement shall be binding unless this Agreement is amended or modified in writing pursuant to the first sentence of this Section 10.4 except as expressly provided herein. Except where a specific period for action or inaction is provided herein, no delay on the part of either Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof. Section 10.5 Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests or obligations hereunder without the prior written approval of the other Party, except that Buyer may (provided that it remains liable for its obligations hereunder) assign its rights hereunder (i) to any of its 49 Affiliates, (ii) from and after the Closing, to any successor to the Business, and (iii) to any of its lenders for security purposes. Section 10.6 Notices. All notices, requests, demands, claims and other communications hereunder will be in writing except as expressly provided herein. Any notice, request, demand, claim or other communication hereunder shall be deemed duly given (i) when delivered personally to the recipient; (ii) one (1) Business Day after being sent to the recipient by reputable overnight courier service (charges prepaid); (iii) upon receipt of confirmation of receipt if sent by facsimile transmission; or (iv) three (3) Business Days after being mailed to the recipient by certified or registered mail, return receipt requested and postage prepaid, and addressed to the intended recipient as set forth below: If to Seller: Tecumseh Products Company 100 East Patterson Street Tecumseh, Michigan 49286 Attention: Daryl P. McDonald, Esq. Facsimile: (517) 423-8839 with a copy (which shall not constitute notice to Seller) to: Kirkland & Ellis LLP Citigroup Center 153 East 53rd Street New York, New York 10022 Attention: Thomas W. Christopher, Esq. William B. Sorabella, Esq. Facsimile: (212) 446-6460 If to Buyer: Snowstorm Acquisition Corporation c/o Platinum Equity Advisors, LLC 360 North Crescent Drive, South Building Beverly Hills, California 90210 Attention: Eva M. Kalawski, Esq. Facsimile: (310) 712-1863 with a copy (which shall not constitute notice to Buyer) to: Paul, Hastings, Janofsky & Walker LLP 515 South Flower Street, 25th Floor Los Angeles, California 90071 Attention: Robert A. Miller, Jr., Esq. Facsimile: (213) 627-0705 Any Party may change the address to which notices, requests, demands, claims and other communications hereunder are to be delivered by giving the other Party notice in the manner set forth in this Section 10.6. 50 Section 10.7 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF DELAWARE WITHOUT GIVING EFFECT TO ANY CHOICE OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF DELAWARE OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF DELAWARE. Section 10.8 Submission to Jurisdiction; Service of Process. Each of the Parties irrevocably and unconditionally submits to the exclusive jurisdiction of any state or federal court sitting in New Castle County, Delaware in any Litigation arising out of or relating to this Agreement or any other Related Agreement and agrees that all claims in respect of such Litigation may be heard and determined in any such court. Each Party also agrees not to bring any action or proceeding arising out of or relating to this Agreement or any other Related Agreement in any other court. Each of the Parties irrevocably and unconditionally waives any objection to the laying of venue in, and any defense of inconvenient forum to the maintenance of, any Litigation so brought and waives any bond, surety or other security that might be required of any other Party with respect thereto. Either Party may make service on the other Party by sending or delivering a copy of the process to the Party to be served at the address and in the manner provided for the giving of notices in Section 10.6; provided, however, that nothing in this Section 10.8 shall affect the right of either Party to serve legal process in any other manner permitted by law or in equity. Each Party agrees that a final judgment in any Litigation so brought shall be conclusive and may be enforced by Litigation or in any other manner provided by law or in equity. The Parties intend that all foreign jurisdictions will enforce any Decree of any state or federal court sitting in New Castle County, Delaware in any Litigation arising out of or relating to this Agreement or any other Related Agreement. Section 10.9 Waivers of Jury Trial. EACH PARTY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. Section 10.10 Specific Performance. Each Party acknowledges and agrees that the other Party would be damaged irreparably in the event any provision of this Agreement is not performed in accordance with its specific terms or otherwise breached, so that, in addition to any other remedy that a Party may have under law or equity, a Party shall be entitled to injunctive relief to prevent breaches of the provisions of this Agreement and to enforce specifically this Agreement and the terms and provisions hereof. Section 10.11 Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement. In the event that any of the provisions of this Agreement shall be held by a court or other tribunal of competent jurisdiction to be illegal, invalid or unenforceable, such provisions shall be limited or eliminated only to the minimum extent necessary so that this Agreement shall otherwise remain in full force and effect. 51 Section 10.12 No Third Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any Person other than the Parties and their respective successors and permitted assigns. Section 10.13 Mutual Drafting. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring either Party by virtue of the authorship of any of the provisions of this Agreement. Section 10.14 Disclosure Schedule. All capitalized terms not defined in the Disclosure Schedule shall have the meanings ascribed to them in this Agreement. Buyer shall not be entitled to claim that any fact or combination of facts or circumstance constitutes a breach of any of the representations, warranties or covenants contained in this Agreement if and to the extent that such fact or combination of facts or circumstance has been disclosed in any section of the Disclosure Schedule in a manner sufficient to put a reasonable person on notice of the relevance of the fact or combination of facts or circumstance so disclosed. The inclusion of any item in any section of the Disclosure Schedule (i) does not constitute an admission by Seller, or to otherwise imply, that any such matter is material, is required to be disclosed under this Agreement or falls within relevant minimum thresholds or materiality standards set forth in this Agreement and (ii) does not represent a determination by Seller that such item did not arise in the Ordinary Course of Business. In no event shall any matter in the Disclosure Schedule be deemed or interpreted to expand the scope of the Seller's representations, warranties and/or covenants set forth in this Agreement or any condition to the obligations of either Party to consummate any transaction contemplated hereby. No disclosure in the Disclosure Schedule of a possible breach or violation of any Contract or law shall be construed as a representation or admission that such breach or violation has occurred or exists. The information and disclosures contained in each section of the Disclosure Schedule (but not in the agreements or other documents listed or described on the Disclosure Schedules, or incorporated by reference therein, unless further information upon which relevance can be determined is provided) shall be deemed to be disclosed and incorporated by reference in each other section of the Disclosure Schedule to which the applicability of such disclosure is reasonably apparent as though fully set forth in such other section. All attachments to the Disclosure Schedule are incorporated by reference into the Disclosure Schedule. The information contained in the Disclosure Schedule is in all events provided to Buyer subject to the Confidentiality Agreement. Section 10.15 Headings; Table of Contents. The section headings and the table of contents contained in this Agreement and the Disclosure Schedule are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. Section 10.16 Counterparts; Facsimile Signatures. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. This Agreement or any counterpart may be executed and delivered by facsimile copies, each of which shall be deemed an original. {Remainder of page intentionally left blank.} 52 IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the date first above written. TECUMSEH PRODUCTS COMPANY By: /s/ James Bonsall Name: James Bonsall Title: Executive Vice President Tecumseh Products Co. SNOWSTORM ACQUISITION CORPORATION By: /s/ Eva M. Kalawski Name: Eva M. Kalawski Title: Vice President & Secretary Snowstorm Acquisition EX-31.1 5 k21582exv31w1.txt 302 CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER Exhibit 31.1 RULE 13A-14(A) CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER I, Edwin L. Buker 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 control 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: November 14, 2007 BY: /s/ EDWIN L. BUKER ------------------------------------ Edwin L. Buker President and Chief Executive Officer EX-31.2 6 k21582exv31w2.txt 302 CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 31.2 RULE 13A-14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER I, James S. Nicholson 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 control 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: November 14, 2007 BY: /s/ James S. Nicholson ------------------------------------ James S. Nicholson Vice President, Treasurer and Chief Financial Officer EX-32.1 7 k21582exv32w1.txt 906 CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER Exhibit 32.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER In connection with the quarterly report of Tecumseh Products Company (the "Company") on Form 10-Q for the period ended September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Form 10-Q"), I, Edwin L. Buker, Principal 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, to my knowledge: (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: November 14, 2007 BY: /s/ EDWIN L. BUKER ------------------------------------ Edwin L. Buker President and Chief Executive Officer EX-32.2 8 k21582exv32w2.txt 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER 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 September 30, 2007 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, to my knowledge: (3) 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 (4) 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: November 14, 2007 BY: /s/ JAMES S. NICHOLSON ------------------------------------ James S. Nicholson Vice President, Treasurer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----