-----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, PG+SCLevGBQOIr4A5/lA2O/CQDjlBRnXsQ/GcRzm0FN+3tPy2+dy7+g1VE4MqdrD o1m3/kvTayOcPUF1z1XjBw== 0000950124-08-001236.txt : 20080314 0000950124-08-001236.hdr.sgml : 20080314 20080314163159 ACCESSION NUMBER: 0000950124-08-001236 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20071231 FILED AS OF DATE: 20080314 DATE AS OF CHANGE: 20080314 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-00452 FILM NUMBER: 08689877 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-K 1 k24815e10vk.txt ANNUAL REPORT FOR FISCAL YEAR ENDED DECEMBER 31, 2007 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2007 Commission File Number 0-452 TECUMSEH PRODUCTS COMPANY (Exact Name of Registrant as Specified in its Charter) Michigan 38-1093240 (State of Incorporation) (I.R.S. Employer Identification No.) 100 East Patterson Street Tecumseh, Michigan 49286 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (517) 423-8411 Securities Registered Pursuant to Securities Registered Pursuant to Section 12(b) of the Act: Section 12(g) of the Act: None
Name of Each Exchange Title of Each Class on Which Registered - ------------------------------------- --------------------------- Class B Common Stock, $1.00 Par Value The Nasdaq Stock Market LLC Class A Common Stock, $1.00 Par Value The Nasdaq Stock Market LLC Class B Common Stock Purchase Rights The Nasdaq Stock Market LLC Class A Common Stock Purchase Rights The Nasdaq Stock Market LLC
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X] 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark if the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ] (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] Certain shareholders, which, as of June 30, 2007, held an aggregate of 790,088 shares of Registrant's Class A Common Stock and 2,216,244 shares of its Class B Common Stock might be regarded as "affiliates" of Registrant as that word is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. If such persons are "affiliates," the aggregate market value as of June 30, 2007 (based on the closing prices of $15.71 per Class A share and $14.86 per Class B share, as reported on the Nasdaq Stock Market on such date) of 12,611,850 Class A shares and 2,861,502 Class B shares held by non-affiliates was $240,654,083. Numbers of shares outstanding of each of the Registrant's classes of Common Stock at February 22, 2008: Class B Common Stock, $1.00 Par Value: 5,077,746 Class A Common Stock, $1.00 Par Value: 13,401,938 Certain information in the definitive proxy statement to be used in connection with the Registrant's 2008 Annual Meeting of Shareholders has been incorporated herein by reference in Part III hereof. ================================================================================ TABLE OF CONTENTS
Page PART I Item 1. Business......................................................................................... 5 Item 1A. Risk Factors..................................................................................... 11 Item 1B. Unresolved Staff Comments........................................................................ 15 Item 2. Properties....................................................................................... 15 Item 3. Legal Proceedings................................................................................ 15 Item 4. Submission of Matters to a Vote of Security Holders.............................................. 17 PART II Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities............................................................................. 18 Item 6. Selected Financial Data.......................................................................... 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 20 Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................... 41 Item 8. Financial Statements and Supplementary Data...................................................... 46 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 85 Item 9A. Controls and Procedures.......................................................................... 85 Item 9B. Other Information................................................................................ 87 PART III Item 10. Directors and Executive Officers of the Company.................................................. 89 Item 11. Executive Compensation........................................................................... 89 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters... 89 Item 13. Certain Relationships and Related Transactions, and Director Independence........................ 89 Item 14. Principal Accountant Fees and Services .......................................................... 89 PART IV Item 15. Exhibits and Financial Statement Schedules....................................................... 90 Signatures................................................................................................... 98
i PART I ITEM 1. BUSINESS GENERAL Tecumseh Products Company (the "Company") is a full-line, independent, global manufacturer of hermetically sealed compressors for residential and commercial refrigerators, freezers, water coolers, dehumidifiers, window air conditioning units and residential and commercial central system air conditioners and heat pumps. We believe we are one of the world's largest independent producers of hermetically sealed compressors. Our products are sold in countries all around the world. Our compressor products include a broad range of air conditioning and refrigeration compressors, as well as condensing units and complete refrigeration systems. Our compressor products range from fractional horsepower models used in small refrigerators and dehumidifiers to large compressors used in unitary air conditioning applications. We sell compressors that are used in four types of product lines: (i) commercial refrigeration applications including freezers, dehumidifiers, display cases and vending machines; (ii) household refrigerators and freezers; (iii) commercial and residential unitary central air conditioning systems; and (iv) room air conditioners. We sell compressors to original equipment manufacturers ("OEMs") and aftermarket distributors. We formerly operated an Engine & Power Train Electrical Component business, as well as an Electrical Component business. During 2007, we sold our entire Engine & Power Train business, and the majority of the Electrical Component business. The remaining portions of the Electrical Component business are classified as held for sale. The Company is a Michigan corporation organized in 1930. FOREIGN OPERATIONS AND SALES International sales and manufacturing are extremely important to our business as a whole. In 2007, sales from continuing operations to customers outside the United States represented approximately 80% of total consolidated net sales. Products sold within and outside the United States are manufactured in locations throughout the world including Brazil, France, India and Malaysia. Our dependence on sales in foreign countries entails certain commercial and political risks, including currency fluctuations, unstable economic or political conditions in some areas and the possibility of U.S. government embargoes on sales to certain countries. Our foreign manufacturing operations are subject to other risks as well, including governmental expropriation, governmental regulations that may be disadvantageous to businesses owned by foreign nationals and instabilities in the workforce due to changing political and social conditions. These considerations are especially significant in the context of our Brazilian operations, given the importance of Tecumseh do Brasil's performance to our total operating results. COMPRESSOR PRODUCT LINES A compressor is a device that compresses a refrigerant gas. When the gas is later permitted to expand, it absorbs and transfers heat, producing a cooling effect, which forms the basis for a wide variety of refrigeration and air conditioning products. All of the compressors we produce are hermetically sealed. Our current compressor line consists primarily of reciprocating and rotary designs; in addition, we have recently introduced a growing line of scroll models. 5 We manufacture and sell compressor and refrigeration systems that are used in four types of end products throughout the world - (i) commercial refrigeration applications including freezers, dehumidifiers, display cases and vending machines; (ii) household refrigerators and freezers; (iii) commercial and residential unitary central air conditioning systems; and (iv) room air conditioners. Our lines of compressors range in size from approximately 5,000 - 72,000 BTU/hour models used in stationary and mobile air conditioning applications to 350 - 1,500 BTU/hour models used in household refrigerators/freezers, along with 200 to 72,000 BTU/hour models for commercial refrigeration applications, such as ice makers, vending machines, food service equipment, display cases and refrigerated walk-in cold rooms. We produce reciprocating compressors in the 200 - 72,000 BTU/hour for all temperature ranges. We produce rotary compressors ranging from 5,000 to 32,000 BTU/hour for room and mobile air conditioning applications, as well as certain commercial refrigeration applications. Rotary compressors generally provide increased operating efficiency, lower equipment space requirements, and reduced sound levels when compared to reciprocating piston models. We have also started offering customers our scroll compressor and condensing units utilizing scroll compressors especially designed for demanding commercial refrigeration applications. The addition of scroll compressors to our product portfolio provides greater versatility and options to our customers in a wider range of applications and performance conditions. We are offering the scroll compressor in the aftermarket product lines of the business, and are providing samples to original equipment manufacturers. We also produce value-added sub-assemblies and complete refrigeration systems that utilize our compressors as components. Such products include indoor and outdoor condensing units, and multi-cell units and complete refrigeration systems that use both single speed and variable speed AC/DC powered compressors. These products are sold to both OEM and aftermarket distributors. MANUFACTURING OPERATIONS We manufacture our products from facilities located in the United States, Canada, Brazil, France, India and Malaysia. In addition, we have a joint venture in China. Of our foreign manufacturing sources, our Brazilian compressor subsidiary is the largest. It operates two manufacturing facilities producing the Company's broadest product offerings, with an installed capacity of approximately 17 million compressors. Products produced in Brazil are sold throughout the world. Significant devaluations of the Brazilian Real in 1999 and 2002 set the stage for these operations to better compete in foreign markets, resulting in approximately 59%, 66%, and 66% of its production being exported in 2007, 2006 and 2005, respectively. However, from the beginning of 2007 to the end of 2007 the Brazilian Real appreciated against the U.S. Dollar by 17.2%, and since the beginning of 2006 the Real has strengthened by 24.3%. This strengthening of the Real has continued over more than a five year period, and represents a significant departure from historical devaluation trends. We also continue to manufacture products in North America in facilities in Tupelo, Mississippi and Ontario, Canada. However, over the past several years we have been consolidating the number of facilities operated in North America due to both cost competitiveness with low cost countries as well as the relocation of our customers' operations to low cost countries. During 2008 we will complete the closure of two additional facilities in the United States, leaving just one remaining facility in Tupelo, Mississippi. Installed capacity in Tupelo is approximately 6 million compressors. The Company also currently operates four manufacturing facilities in France. Like North America, the Company is actively restructuring these operations, through consolidation into fewer facilities 6 and by moving production to lower cost countries. During 2008 we expect to cease production in one of these facilities. These facilities have aggregate capacity of 5 million units. The Company operates two manufacturing facilities in India with a current total capacity of 4 million units. However, given the current cost structure of our Indian production and the potential growth of the Indian market, we are expanding production capacity in India. Our compressor manufacturing operations are vertically integrated and we manufacture a significant portion of our component needs internally, including electric motors and metal stampings. Raw materials are purchased from a variety of non-affiliated suppliers. We utilize multiple sources of supply and the required raw materials and components are generally available in sufficient quantities, although the costs of commodity raw materials have increased substantially in recent years and are expected to remain volatile in the future. Given changes in relative currency values versus the dollar and the ability to source components more cheaply we expect that we will be decreasing the amount of vertical integration over the next several years. These actions may involve the recognition of impairments and other costs as such plans are adopted. SALES AND MARKETING We market our North American, Brazilian and Indian built compressors under the "Tecumseh" brand and French built compressors under the "L'Unite Hermetique by Tecumseh" brand. Other brands under which we market include "SILENSYS by Tecumseh" and VECTOR by Tecumseh." We sell our compressor products in North America primarily through our own sales staff, although sales to aftermarket customers are also made through independent sales representatives. In certain foreign markets, we also use local independent sales representatives and distributors. A substantial portion of our sales of compressor products for room air conditioners and for household refrigerators and freezers are to OEMs. Sales of compressor products for unitary central air conditioning systems and commercial refrigeration applications also include substantial sales to both OEM and distributor customers. We have over 1,200 customers for compressor products, the most significant of which are customers for commercial compressor products. In 2007, the two largest customers for compressor products accounted for 7.9% and 6.0%, respectively, of consolidated net sales. Loss of either of these customers could have a material adverse effect on our results of operations. Generally, we do not enter into long-term contracts with our customers. However, we do pursue long-term agreements with selected major customers where a business relationship has existed for a substantial period of time. COMPETITION All of the compressor markets in which we operate are highly competitive. Participants compete on the basis of delivery, efficiency, noise level, price and reliability. We compete not only with other independent compressor producers but also with manufacturers of end products that have internal compressor manufacturing operations. North American Markets The domestic unitary air conditioning compressor market consists of OEMs and a significant compressor aftermarket. We compete primarily with three U.S. manufacturers; Copeland Corporation, a 7 subsidiary of Emerson Electric, Inc., Danfoss, Inc., and Bristol Compressors, Inc., a subsidiary of Johnson Controls. Copeland Corporation enjoys a larger share of the domestic unitary air conditioning compressor business than either Bristol Compressors, Inc. or Tecumseh. Over the last several years there has been an industry trend toward the use of scroll compressors in the high efficiency applications of the unitary air conditioning market, led by Copeland Corporation. Our competition has had scroll compressors as part of their product offerings for some time. Along with its own manufacturing capabilities, Copeland Corporation is also a member of the Alliance Scroll manufacturing joint venture with two major U.S. central air conditioning manufacturers, American Standard's Trane air conditioning division and Lennox International, Inc. We believe that the rotary and scroll compressors are important to maintaining a position in the unitary air conditioning and commercial refrigeration markets, and we continue to pursue development of both technologies. While we are in the early stages of offering scroll compressors to our customers, over the course of 2007 we have successfully released product into North America, both as part of Tecumseh condensing units and systems as well as for aftermarket distribution. We continue to broaden our product offerings for the scroll and expect to expand our product outreach to Europe, South America, and Asia with scroll samples beginning in the second half of 2008. In the domestic room air conditioning compressor market, we compete primarily with foreign companies, as a majority of room air conditioners are now manufactured outside the United States. We also compete to a lesser extent with U.S. manufacturers. Competitors include Matsushita Electric Industrial Corporation, Sanyo Electric Trading Company, L.G. Electronics, Inc., Mitsubishi, Daikin, and others. We have increasingly struggled with price competition from foreign companies during the last several years. Downward pressure on prices, particularly in the room air conditioning market, has continued due to global manufacturing over-capacity and available supply of inexpensive Asian products both in North America and in Europe. In the domestic markets for water coolers, dehumidifiers, vending machines, refrigerated display cases and other commercial refrigeration products, we compete primarily with compressor manufacturers from the Far East, Europe and South America and to a lesser extent, the United States. Competitors include Matsushita Electric Industrial Corporation, Danfoss, Inc., Embraco, S.A., Copeland Corporation, ACC and others. The household refrigerator and freezer market is vertically integrated with many appliance producers manufacturing a substantial portion of their compressor needs. Our competitors include ACC Group, Matsushita Electric Industrial Corporation, Embraco, S.A., Danfoss, Inc., and others. We sell our products in over 110 countries. In 2007, approximately 24% of the compressor products produced in our North American operations were exported to foreign countries. Latin American Markets Unlike North American and European markets, the markets in Latin America still have some degrees of protection from outside competition, including import duties. Accordingly, markets exist for products serving all four of the types of applications. Tecumseh competes directly with Embraco, S.A. in Brazil and the two competitors account for a majority of the share of compressors sold in Latin America. However, this level of protection is slowly being reduced and the strength of the Brazilian currency is making foreign imports cheaper despite the presence of duties. As a result, Asian manufacturers are beginning to capture additional share, and importation of the end products containing compressors has begun to reduce local demand for compressors, particularly in the room air conditioning product line. 8 European Markets The largest portion of the European market is commercial refrigeration, followed by household refrigeration and freezers. Like North America, our primary competitors in both of these product lines include ACC Group, Embraco, S.A., Danfoss, Inc., Emerson and a growing number of producers from the Far East. European markets face the same competitive factors as those in North America, including foreign competition and a shrinking local customer base as OEM's move operations to low cost countries. East Asian and Middle Eastern markets Like Brazil, the East Asian/Middle Eastern market still has some levels of protection for domestic manufactures, including import duties. This is particularly the case in India, where these sales are concentrated. In addition, given the absence of a robust cold chain in the region, the majority of the market is for product used in air conditioning and household refrigerators. Major competitors include the Indian manufacturers Copeland / Emerson., Carrier Aircon Ltd., Godrej, Videocon, BPL and others. In addition, there are fewer end product manufacturers in India. Accordingly, in 2007, approximately 24.0% and 23.2% of our sales in East Asian and Middle Eastern markets were made to our two largest customers respectively and the loss of these customers would have a significant impact on the results of operations of this facility, and to a lesser extent, on the consolidated results of the Company as a whole. Regulatory Requirements Hydrochlorofluorocarbon compounds ("HCFCs") are still used as a refrigerant in many air conditioning systems. Under a 1992 international agreement, HCFCs will be banned from new equipment beginning in 2010. Some European countries began HCFC phase-outs as early as 1998, and some have fully eliminated the use of HCFCs. Within the last several years, we have approved and released a number of compressor models utilizing U.S. government approved hydrofluorocarbons ("HFC") refrigerants such as R410A, which are considered more environmentally safe than the preceding refrigeration compounds. HFCs are also currently under global scrutiny and subject to possible future restrictions. In the last few years, there has been an even greater political and consumer movement, particularly from northern European countries, toward the use of hydrocarbons ("HCs") and CO(2) as alternative refrigerants, moving further away from the use of chlorine (which depletes the ozone layer of the atmosphere) and the use of fluorine (which contributes to the "green-house" effect). Hydrocarbons are flammable compounds and have not been approved by the U.S. government for air conditioning or household refrigerator and freezer applications. CO(2) is still in limited production and is used in niche markets. It is not presently possible to estimate the level of expenditures that will be required to meet future industry requirements or the effect on our competitive position. Nonetheless, we expect that our product development process will address these changes in a timely manner. The U.S. National Appliance Energy Conservation Act of 1987 (the "NAECA") requires specified energy efficiency ratings on room air conditioners and household refrigerator/freezers. Proposed energy efficiency requirements for unitary air conditioners were published in the U.S. in January 2001 and became effective in January 2006. The European and Brazilian manufacturing communities have issued energy efficiency directives that specify the acceptable level of energy consumption for refrigerators and freezers. These efficiency ratings apply to the overall performance of the specific appliance, of which the compressor is one component. We have ongoing projects 9 aimed at improving the efficiency levels of our compressor products and have products available to meet known energy efficiency requirements as determined by our customers. GEOGRAPHIC LOCATION INFORMATION The results of operations and other financial information by geographic location for each of the years ended December 31, 2007, 2006 and 2005 appear under the caption "Business Segment Information" in Note 9 to the Consolidated Financial Statements which appear in Part II, Item 8, of this report, "Financial Statements and Supplementary Data," and that information is incorporated by reference into this Item 1. BACKLOG AND SEASONAL VARIATIONS Most of our production is against short-term purchase orders and order backlog is not significant. Compressor products are subject to some seasonal variation among individual product lines. In particular, sales for compressor products are higher in the first and second quarters (for customer needs prior to the commencement of warmer weather in the northern hemisphere, for both residential air conditioning products and commercial applications). This seasonal effect is somewhat, though not completely, offset by sales volumes in the southern hemisphere. Depending on relative performance among the groups, and external factors such as foreign currency changes and global weather, trends can vary. In the past three years, consolidated sales in the aggregate have not exhibited any pronounced seasonal trend. PATENTS, LICENSES AND TRADEMARKS We own a substantial number of patents, licenses and trademarks and deem them to be important to certain lines of our business; however, the success of our overall business is not considered primarily dependent on them. In the conduct of our business, we own and use a variety of registered trademarks, the most familiar of which is the trademark consisting of the word "Tecumseh" in combination with a Native American Indian head symbol. RESEARCH AND DEVELOPMENT The ability to successfully bring new products to market in a timely manner has rapidly become a critical factor in competing in the compressor products business as a result of, among other things, the imposition of energy efficiency standards and environmental regulations including those related to refrigerant requirements as discussed above. We must continually develop new and improved products in order to compete effectively and to meet evolving regulatory standards in all of our major product lines. We spent approximately $28.1 million, $36.7 million, and $30.6 million during 2007, 2006, and 2005, respectively, on research activities relating to the development of new products and the development of improvements to existing products. None of this research was customer sponsored. EMPLOYEES On December 31, 2007, we employed approximately 10,300 persons, 87% of whom were employed in foreign locations. Approximately 210 of the U.S. employees were represented by labor unions, with no more than 150 persons covered by the same union contract. The majority of foreign location personnel are represented by national trade unions. The number of our employees is subject to some seasonal variation. During 2007, the maximum number of persons employed was approximately 13,400 (occurring while we still owned the Engine & Power Train and Electrical Components 10 groups) and the minimum was approximately 10,300. Overall, we believe we generally have a good relationship with our employees. OTHER MATTERS On March 6, 2007, the Company and three members of its board of directors were named as subjects of a lawsuit filed by Todd W. Herrick, our former Chief Executive Officer, and Herrick Foundation (a Michigan non-profit corporation) in the Circuit Court for the County of Lenawee, Michigan. The lawsuit sought to overturn actions taken by our board of directors at their February 28, 2007 meeting. On March 15, 2007, the Company filed a separate lawsuit in the United States District Court for the Eastern District of Michigan against Todd W. Herrick, Herrick Foundation and its Board of Trustees (consisting of Todd Herrick, Kent Herrick and Michael Indenbaum), and Toni Herrick (a trustee along with Todd Herrick of various Herrick trusts) (collectively, "Herrick entities") seeking the suspension of the Herrick entities' stock voting rights. On April 2, 2007, a settlement agreement was signed by the Company, the three members of the board of directors named in the suit, and the Herrick entities, fully settling both lawsuits. The terms of the settlement agreement were disclosed in a Current Report on Form 8-K that we filed on April 10, 2007. Under the terms of the settlement agreement, the Herrick entities must vote in accordance with the recommendations of the entire Board of Directors with regard to Board nominees. This settlement agreement expires the day following our 2008 Annual Meeting of Shareholders, scheduled for April 30. At that time, the Herrick entities will be entitled to exercise any and all rights of shareholders as provided by the Company's bylaws. On March 10, 2008, our Board of Directors received a letter from the Herrick Foundation in which the Foundation requested, among other things, that the Board form a committee to explore a possible sale of Tecumseh and take various actions to change the Company's corporate governance posture, including seeking shareholder approval at Tecumseh's 2008 annual shareholders meeting to eliminate provisions contained in the Company's amended certificate of incorporation that protect Class A shareholders. On March 10, 2008, the Herrick Foundation filed with the SEC a Form 13D which among other disclosures includes a copy of the letter received by the Board. On March 11, 2008, Edwin L. Buker, Chairman of the Board, Chief Executive Officer and President of Tecumseh, sent a letter to The Herrick Foundation stating that the requests contained in the foundation's March 10 letter will be appropriately considered by the Board in due course, consistent with its fiduciary duties. Mr. Buker further advised The Herrick Foundation that neither the foundation nor any of its representatives or affiliates has been authorized by Tecumseh to pursue a sale of, or any other transaction involving, Tecumseh. AVAILABLE INFORMATION We provide public access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to these reports filed with or furnished to the Securities and Exchange Commission (SEC) under the 1934 Act. These documents may be accessed free of charge through our website at the following address: http://www.tecumseh.com/investor.htm. These documents are provided as soon as practicable after filing with the SEC, although not generally on the same day. These documents may also be found at the SEC's website at http://www.sec.gov. 11 ITEM 1A. RISK FACTORS Set forth below and elsewhere in this Annual Report on Form 10-K are some of the principal risks and uncertainties that could cause our actual business results to differ materially from any forward-looking statements contained in this Report. These risk factors should be considered in addition to our cautionary comments concerning forward-looking statements in this Report, including statements related to markets for our products and trends in our business that involve a number of risks and uncertainties. Our separate section in Item 7 below, "Disclosure Regarding Forward-Looking Statements," should be considered in addition to the following statements. WE ARE SUBJECT TO CURRENCY EXCHANGE RATE AND OTHER RELATED RISKS. We conduct operations in many areas of the world involving transactions denominated in a variety of currencies. We are subject to currency exchange rate risk to the extent that our costs are denominated in currencies other than those in which we earn revenues. In particular, this situation exists for us with respect to our Brazilian operations, which have costs denominated in the Brazilian Real, but the majority of its sales (approximately 60%) denominated in other currencies, particularly the U.S. dollar and the Euro. Only one major competitor 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 cost advantage over our business. In the aggregate, approximately 80% of our total compressor sales are outside the U.S. Our Brazilian, European and Indian operations comprised approximately 41%, 28% and 11% of total 2007 compressor sales respectively. In addition, since our financial statements are denominated in U.S. dollars, changes in currency exchange rates between the U.S. dollar and other currencies have had, and will continue to have, an impact on our earnings. While we customarily enter into currency hedging instruments to partially mitigate these risks, we cannot assure that currency exchange rate fluctuations will not adversely affect our results of operations and financial condition, particularly over the long term. In addition, while the use of currency hedging instruments may provide us with short-term protection from adverse fluctuations in currency exchange rates, by utilizing these instruments we potentially forego the benefits that might result from favorable fluctuations in currency exchange rates. We also face risks arising from the imposition of exchange controls and currency devaluations. Exchange controls may limit our ability to convert foreign currencies into U.S. dollars or to remit dividends and other payments by our foreign subsidiaries or businesses located in or conducted within a country imposing controls. Currency devaluations result in a diminished value of funds denominated in the currency of the country instituting the devaluation. Actions of this nature, if they occur or continue for significant periods of time, could have an adverse effect on our results of operations and financial condition in any given period. MATERIAL COST INFLATION COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. We are experiencing material cost inflation in a number of our businesses. The most significant inflationary impact to the business has been the price of copper, a major cost component of compressors, which has increased by over 40% since the beginning of 2006. We currently hold more than 62% of our total projected copper requirements for 2008 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. We also expect the cost of steel and other purchased materials to be more costly in 2008 versus 2007. We are striving for greater productivity improvements and implementing increases in selling prices 12 to help mitigate cost increases in copper and other base materials including aluminum, steel, and resins, as well as other input costs including ocean freight, fuel, health care and insurance. We also are continuing to implement operational initiatives in order to continuously reduce our costs. We cannot assure you, however, that these actions will be successful to manage our costs or increase our productivity. Continued cost inflation or failure of our initiatives to generate cost savings or improve productivity may negatively impact our results of operations. WE MAY NOT MAINTAIN OUR CURRENT LEVEL OF LIQUIDITY. Upon completion of the divestitures of the business operations as previously discussed, we eliminated all our domestic debt. However, challenges remain with respect to our ability to maintain appropriate levels of liquidity, particularly those driven by currency exchange and commodity pricing. 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 in the final phases of 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 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. ANY FUTURE DIVESTITURES OF NON-CORE PORTIONS OF THE BUSINESS MAY RESULT IN FURTHER LOSSES ON THE SALE OF ASSETS. While we divested the majority of our non-core business operations in 2007, certain remaining portions of the Electrical Components business are still classified as held for sale. While management believes that the assets associated with these businesses are appropriately recorded at their fair value, further impairments associated with their eventual sale or expenses associated with the sale transaction could occur, and could have an adverse effect on our results of operations and financial condition in any given period. OUR BUSINESSES OPERATE IN HIGHLY COMPETITIVE MARKETS. Our businesses generally face substantial competition in each of their respective markets. We compete on the basis of product design, quality, availability, performance, customer service and price. Present or future competitors may have greater financial, technical or other resources which could put us at a disadvantage in the affected business or businesses. We cannot assure you that these and other factors will not have a material adverse effect on our results of operations. In particular, we operate in environments where worldwide productive capacities exceed global demand and customers and competitors are establishing new productive capacities in low cost countries, including China. These trends have resulted in the need for us to restructure our operations by removing excess capacities, lowering our cost of purchased inputs and shifting productive capacities to low cost countries in order to improve our overall cost structure, restore margins and 13 improve our competitive position in our major markets. There is no guarantee that these initiatives, which have included plant closures, headcount reductions, expanded operations in low-cost countries (including China and India) and global sourcing initiatives, will be successful in setting the stage for improvement in profitability in the future. OUR RESULTS OF OPERATIONS MAY BE NEGATIVELY IMPACTED BY LITIGATION. Our business exposes us to potential litigation, especially product liability suits that are inherent in the design, manufacture, and sale of our products. These claims can be expensive to defend and can divert the attention of management and other personnel for significant periods of time, regardless of the ultimate outcome. As we self-insure a portion of product liability claims, an unsuccessful defense of a product liability claim or series of successful claims could materially and adversely affect our product reputation and our financial condition, results of operations, and cash flows. Even if we are successful in defending against a claim relating to our products, claims of this nature could cause our customers to lose confidence in our products and our Company. WE ARE EXPOSED TO POLITICAL, REGULATORY, ECONOMIC, AND OTHER RISKS THAT ARISE FROM OPERATING A MULTINATIONAL BUSINESS. Sales outside of North America, including export sales from North American businesses, accounted for approximately 76% of our net sales in 2007. Further, certain of our businesses obtain raw materials and finished goods from foreign suppliers. Accordingly, our business is subject to the political, economic and other risks that are inherent in operating in numerous countries. These risks include: - the difficulty of enforcing agreements and collecting receivables through foreign legal systems; - required compliance with a variety of foreign laws and regulations; - trade protection measures and import or export licensing requirements; - tax rates in certain foreign countries that exceed those in the U.S. and the imposition of withholding requirements on foreign earnings; - the imposition of tariffs, exchange controls or other restrictions; - difficulty in staffing and managing widespread operations and the application of foreign labor regulations; - the protection of intellectual property in foreign countries; and - changes in general economic and political conditions in countries where we operate, particularly in emerging markets. Our business success depends in part on our ability to anticipate and effectively manage these and other risks. OUR OPERATIONS AND PRODUCTS ARE SUBJECT TO EXTENSIVE ENVIRONMENTAL LAWS AND ENERGY REGULATIONS. Our plants and operations are subject to increasingly stringent environmental laws and regulations in all of the countries in which we operate, including laws and regulations governing emissions to air, discharges to water and the generation, handling, storage, transportation, treatment and disposal of 14 waste materials. These regulations can vary widely across the countries in which we do business. While we believe that we are in compliance in all material respects with these environmental laws and regulations, we cannot assure that we will not be adversely impacted by costs, liabilities or claims with respect to existing, previously divested, or subsequently acquired operations, under either present laws and regulations or those that may be adopted or imposed in the future. We are also subject to laws requiring the cleanup of contaminated property. If a release of hazardous substances occurs at or from any of our current or former properties or at a landfill or another location where we have disposed of hazardous materials, we may be held liable for the contamination and the amount of such liability could be material. In addition, governmental regulations affect the types of refrigerants that may be utilized in our products, and this global scrutiny continues to evolve over time. We have continued to address these changes in regulation by approving and releasing new models that meet governmental and consumer requirements. We also strive to have our products meet requirements for energy efficiency, which can vary substantially across the global communities in which we sell our products. Future legislation may require substantial levels of expenditure to meet industry requirements, which could have a material adverse effect on our business, results of operations and financial condition. WE MAY BE ADVERSELY IMPACTED BY WORK STOPPAGES AND OTHER LABOR MATTERS. As of December 31, 2007, we employed approximately 10,300 persons worldwide. Approximately 210 of our U.S. employees are represented by various unions under collective bargaining agreements with various unions. The majority of the nearly 9,000 people we employ in foreign locations are represented by national trade unions. While we have no reason to believe that we will be impacted by work stoppages and other labor matters, we cannot assure you that future issues with our labor unions will be resolved favorably or that we will not encounter future strikes, further unionization efforts or other types of conflicts with labor unions or our employees. Any of these factors may have an adverse effect on us or may limit our flexibility in dealing with our workforce. In addition, many of our customers have unionized work forces. Work stoppages or slow-downs experienced by our customers could result in slow-downs or closures at vehicle assembly plants where our engines are installed. If one or more of our customers experience a material work stoppage, it could have a material adverse effect on our business, results of operations and financial condition. OUR PRODUCTS ARE SUBJECT TO RECALL FOR PERFORMANCE RELATED ISSUES. We incur product recall costs when we decide, either voluntarily or involuntarily, to recall a product through a formal campaign to solicit the return of specific products due to a known or suspected performance issue. Costs typically include the cost of the product, part or component being replaced, customer cost of the recall and labor to remove and replace the defective part or component. When a recall decision is made, we estimate the cost of the recall and record a charge to earnings in that period. In making this estimate, judgment is required as to the quantity or volume to be recalled, the total cost of the recall campaign, the ultimate negotiated sharing of the cost between us and the customer and, in some cases, the extent to which the supplier of the part or component will share in the recall cost. As a result, these estimates are subject to change. Due to the nature of these actions, several recalls experienced simultaneously or one of particular significance could materially and adversely affect our financial condition, results of operation and cash flows. INCREASED OR UNEXPECTED PRODUCT WARRANTY CLAIMS COULD ADVERSELY AFFECT US. We provide our customers a warranty on products we manufacture. Our warranty generally provides that products will be free from defects for periods ranging from 12 months to 36 months. If a product fails to comply with the warranty, we may be obligated, at our expense, to correct any defect by 15 repairing or replacing the defective product. Although we maintain warranty reserves in an amount based primarily on the number of units shipped and on historical and anticipated warranty claims, there can be no assurance that future warranty claims will follow historical patterns or that we can accurately anticipate the level of future warranty claims. An increase in the rate of warranty claims or the occurrence of unexpected warranty claims could materially and adversely affect our financial condition, results of operations and cash flows. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Our headquarters are located in Tecumseh, Michigan, approximately 50 miles southwest of Detroit. At December 31, 2007 we had 25 properties worldwide (7 of which were classified as idled and held for sale) occupying approximately 6.1 million square feet (1.4 million idled) with the majority, approximately 4.5 million square feet, devoted to manufacturing. 12 facilities with approximately 4.1 million square feet (of which 2 facilities and 0.7 million square feet were idled) were located in four countries outside the United States. All owned and leased properties are suitable, well maintained and equipped for the purposes for which they are used. We recently announced that we will be relocating our global headquarters to a facility near Ann Arbor, Michigan. We expect this move to commence in June of 2008, and be completed by the end of the year. ITEM 3. LEGAL PROCEEDINGS JUDICIAL RESTRUCTURING FOR BRAZILIAN ENGINE MANUFACTURING SUBSIDIARY On March 22, 2007, TMT Motoco, our Brazil-based engine manufacturing subsidiary, filed a request in Brazil for court permission to pursue a judicial restructuring. The requested protection under Brazilian bankruptcy law is similar to a U.S. filing for Chapter 11 protection in that during such a restructuring TMT Motoco would remain in possession of its assets and its creditors could not impose an involuntary restructuring on it. TMT's restructuring request was granted by the court on March 28, 2007. 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. 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. ENVIRONMENTAL PROCEEDINGS Although the locations described below that have been affected by environmental proceedings were associated with our Engine & Power Train business, which we sold during 2007, we have retained certain potential liabilities that may arise in connection with these locations. We have been named by the U.S. Environmental Protection Agency ("EPA") as a potentially responsible party ("PRP") in connection with the Sheboygan River and Harbor Superfund Site in Wisconsin. In 2003, with the cooperation of the EPA, the Company and Pollution Risk Services, LLC ("PRS") entered into a Liability Transfer and Assumption Agreement (the "Liability Transfer 16 Agreement"). Under the terms of the Liability Transfer Agreement, PRS assumed all of our responsibilities, obligations and liabilities for remediation of the entire Site and the associated costs, except for certain specifically enumerated liabilities. The EPA has the authority to enforce its Consent Decree directly with PRS. Also, as required by the Liability Transfer Agreement, we purchased Remediation Cost Cap insurance, with a 30 year term, in the amount of $100.0 million and Environmental Site Liability insurance in the amount of $20.0 million. While we believe such insurance coverage will provide sufficient assurance for completion of the responsibilities, obligations and liabilities assumed by PRS under the Liability Transfer Agreement, these arrangements do not constitute a legal discharge or release of our liabilities with respect to the Site. In conjunction with the Liability Transfer Agreement, we completed the transfer of title to the Sheboygan Falls, Wisconsin property to PRS. We continue to maintain an additional reserve of $0.5 million to reflect our potential environmental liability arising from operations at the Site, including potential residual liabilities not assumed by PRS pursuant to the Liability Transfer Agreement. We have also been voluntarily participating in a cooperative effort to investigate and cleanup polychlorinated biphenyl ("PCB") contamination in the watershed of the south branch of the Manitowoc River, at and downstream from our New Holstein, Wisconsin facility. In 2004, the Company and TRC Companies and TRC Environmental Corporation (collectively, "TRC") entered into a Consent Order with the WDNR relating to this effort known as the Hayton Area Remediation Project ("HARP"). Concurrently, the Company and two of its subsidiaries and TRC entered into an Exit Strategy Agreement (the "Agreement"), whereby we transferred to TRC substantially all of our obligations to complete the HARP remediation pursuant to the Consent Order and in accordance with applicable environmental laws and regulations. As required by the Agreement, we also purchased a Pollution Legal Liability Select Cleanup Cost Cap Policy (the "Policy"). The term of the Policy is 20 years with an aggregate combined policy limit of $41 million. We believe that the Policy provides additional assurance that the responsibilities, obligations, and liabilities transferred and assigned by us and assumed by TRC under the Agreement will be completed. Although the arrangements with TRC and the WDNR do not constitute a legal discharge or release of our liabilities, we believe that the specific work substitution provisions of the Consent Order and the broad coverage terms of the Policy, collectively, are sufficient to satisfy substantially all of our environmental obligations with respect to the HARP remediation. In cooperation with the WDNR, we also conducted an investigation of soil and groundwater contamination at our Grafton, Wisconsin plant. It was determined that contamination from petroleum and degreasing products used at the plant were contributing to an off-site groundwater plume. We began remediation of soils in 2001 on the east side of the facility. Additional remediation of soils began in the fall of 2002 in two other areas on the plant site. At both December 31, 2007 and 2006, we had accrued $2.2 million for the total estimated cost associated with the investigation and remediation of the on-site contamination. Investigation efforts related to the potential off-site groundwater contamination have to date been limited in their nature and scope. The extent, timing and cost of off-site remediation requirements, if any, are not presently determinable. In addition to the above-mentioned sites, we are also currently participating with the EPA and various state agencies at certain other sites to determine the nature and extent of any remedial action that may be necessary with regard to such other sites. At December 31, 2007 and 2006, we had accrued a total of $3.0 million and $3.3 million, respectively, for environmental remediation, including, at both dates, $0.5 million relating to the Sheboygan River and Harbor Superfund Site and $2.2 million respectively relating to the Grafton site. 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 amount and timing, could be material to reported net income in the particular quarter or period that they are recorded. In addition, the 17 ultimate resolution of these matters, either individually or in the aggregate, could be material to the consolidated financial statements. HORSEPOWER LABEL LITIGATION A lawsuit filed against us and other defendants in Circuit Court in Illinois alleges that the horsepower labels on the products the plaintiffs purchased were inaccurate. Although this lawsuit was associated with our Engine & Power Train business, which we sold in 2007, we have retained any potential liabilities that may arise in connection with this action. The plaintiffs seek certification of a class of all persons in the United States who, beginning January 1, 1995 through the present, purchased a lawnmower containing a two stroke or four stroke gas combustible engine up to 20 horsepower that was manufactured by defendants. The complaint seeks an injunction, compensatory and punitive damages and attorneys' fees. On March 30, 2007, the Court entered an order dismissing Plaintiffs' complaint, subject to the ability to re-plead certain claims pursuant to a detailed written order to follow. 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. OTHER LITIGATION 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, 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of 2007 to a vote of security holders through the solicitation of proxies or otherwise. 18 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our Class A and Class B common stock trades on The Nasdaq Stock Market LLC under the symbols TECUA and TECUB, respectively. Total shareholders of record as of February 22, 2008 were approximately 305 for Class A common stock and 300 for Class B common stock. We have no current expectation to pay dividends. As of the date of this report, we have no equity securities authorized for issuance under compensation plans. We did not repurchase any of our equity securities during 2007. MARKET PRICE AND DIVIDEND INFORMATION Range of Common Stock Prices and Dividends for 2007
Sales Price -------------------------------------- Class A Class B Cash ----------------- ------------------ Dividends Quarter Ended High Low High Low Declared - ------------- ------- ------- -------- ------- ----------- March 31 ......... $ 18.21 $ 9.31 $ 17.39 $ 9.25 $ - June 30 .......... 16.38 9.81 15.71 9.76 - September 30 ..... 23.77 15.83 21.78 14.41 - December 31 ...... 25.93 15.47 22.79 13.97 -
Range of Common Stock Prices and Dividends for 2006
Sales Price -------------------------------------- Class A Class B Cash ----------------- ------------------ Dividends Quarter Ended High Low High Low Declared - ------------------ ------- ------- -------- ------- --------- March 31 ......... $ 25.66 $ 21.45 $ 22.53 $ 18.42 $ - June 30 .......... 25.32 17.02 21.77 15.14 - September 30 ..... 21.16 13.83 18.15 13.44 - December 31 ...... 18.91 14.62 18.34 14.71 -
19 ITEM 6. SELECTED FINANCIAL DATA The following is a summary of certain of our financial information. Prior year results related to the Statements of Operations have been restated to reflect the reclassification of the Electrical Components Group, the Engine & Power Train Group, and Manufacturing Data Systems, Inc. as discontinued operations. (Dollars in millions, except per share data)
YEARS ENDED DECEMBER 31, --------------------------------------------------------------- 2007 2006 2005 2004 2003 ------------ ---------- ---------- ---------- --------- Net sales ............................................ $ 1,133.4 $ 1,017.7 $ 924.6 $ 892.2 $ 808.4 Cost of sales and operating expenses ................. 1,011.7 943.2 822.9 742.6 687.1 Selling and administrative expenses .................. 109.5 99.2 94.1 105.3 72.0 Impairments, restructuring charges, and other items ................................................ 7.2 2.4 4.3 2.4 29.5 ----------- ---------- --------- ---------- --------- Operating income (loss) .............................. 5.0 (27.1) 3.3 41.9 19.8 Interest expense ..................................... (22.3) (19.4) (3.0) (19.3) (21.3) Interest income and other, net ....................... 6.2 10.9 9.0 13.0 21.0 ----------- ---------- --------- ---------- --------- Income (loss) before taxes ........................... (11.1) (35.6) 9.3 35.6 19.5 Tax provision (benefit) .............................. (8.2) 12.5 27.5 12.7 5.5 ----------- ---------- --------- ---------- --------- Net income (loss) from continuing operations ......... (2.9) (48.1) (18.2) 22.9 14.0 ----------- ---------- --------- ---------- --------- Income (loss) from discontinued operations, net of ... (175.2) (32.2) (205.3) (12.8) (13.9) tax Net income (loss) .................................... $ (178.1) $ (80.3) $ (223.5) $ 10.1 $ 0.1 =========== ========== ========= ========== ========= Basic and diluted (loss) earnings per share:* (Loss) earnings per share from continuing operations ........................................... $ (0.16) $ (2.60) $ (0.98) $ 1.24 $ 0.76 Loss per share from discontinued operations, net of tax ............................................. (9.48) (1.75) (11.11) (0.69) (0.75) ----------- ---------- --------- ---------- --------- Basic and diluted (loss) earnings per share .......... $ (9.64) $ (4.35) $ (12.09) $ 0.55 $ 0.01 =========== ========== ========= ========== ========= Cash dividends declared per share .................... -- -- $ 0.64 $ 1.28 $ 1.28 Weighted average number of shares outstanding (in thousands) ......................................... 18,480 18,480 18,480 18,480 18,480 Cash and cash equivalents ............................ $ 76.8 $ 81.9 $ 116.6 $ 227.9 $ 344.6 Working capital ...................................... 128.4 226.3 402.0 505.7 545.5 Net property, plant and equipment .................... 353.3 552.4 578.6 554.8 554.6 Total assets ......................................... 1,164.9 1,782.7 1,800.5 2,062.8 2,105.8 Long-term debt ....................................... 3.3 217.3 283.0 317.3 327.6 Stockholders' equity ................................. 745.9 798.4 814.4 1,018.3 1,004.8 Capital expenditures ................................. 3.0 62.1 113.3 84.0 82.8 Depreciation and amortization ........................ 43.1 80.1 92.3 102.9 97.6
* In 2007, we issued a warrant to a lender to purchase 1,390,944 shares of our Class A Common Stock, which is equivalent to 7% of our fully diluted common stock (including both Class A and Class B shares). This warrant is not included in diluted earnings per share for the year ended December 31, 2007, as the effect would be antidilutive. Impairments, restructuring charges, and other items included: 2007 operating net loss included $7.2 million ($0.39 per share) of restructuring, impairment and other charges. $4.2 million of these restructuring charges related to the impairment of long-lived 20 compressor assets in India ($2.2 million) and North America ($2.0 million). These assets were primarily impaired as a result of the global consolidation of our manufacturing operations. We also incurred expense of $1.6 million associated with reductions in force at several of our North American facilities. The remaining charges reflect the impact of net losses on the sale of buildings ($0.5 million) and related charges ($0.9 million) as a result of the consolidation of non-compressor facilities. 2006 operating net loss included $2.4 million ($0.13 per share) of restructuring, impairment and other charges. We recorded these restructuring charges for impairment of long-lived compressor assets ($2.2 million) and related charges ($0.2 million) at two of our facilities in Mississippi. 2005 net loss included $4.3 million ($0.23 per share) of restructuring, impairment and other charges. These charges include $0.9 million recorded by the North American Compressor operations related to moving costs for previously announced actions, and $3.4 million of asset impairment charges for manufacturing equipment idled through facility consolidations and the reduction to fair value of land and buildings associated with closed plants. 2004 net income included $2.4 million ($0.13 per share) of restructuring, impairment and other charges. These charges related to restructuring programs for the North American and Indian compressor facilities. 2003 net income included $29.5 million ($1.60 per share) of restructuring, impairment and other charges. This charge related to an impairment of goodwill associated with our European operations. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENTS RELATING TO FORWARD LOOKING STATEMENTS The following information should be read in connection with the information contained in the Consolidated Financial Statements and Notes to Consolidated Financial Statements. This discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act that are subject to the safe harbor provisions created by that Act. In addition, forward-looking statements may be made orally in the future by or on behalf of us. Forward-looking statements can be identified by the use of terms such as "expects," "should," "may," "believes," "anticipates," "will," and other future tense and forward-looking terminology, or by the fact that they appear under the caption "Outlook." Readers are cautioned that actual results may differ materially from those projected as a result of certain risks and uncertainties, including, but not limited to, i) 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) weather conditions affecting demand for replacement products; iv) availability and cost of materials, particularly commodities, including steel, copper and aluminum, whose cost can be subject to significant variation; v) financial market changes, including fluctuations in interest rates and foreign currency exchange rates; vi) actions of competitors; vii) changes in business conditions and the economy in general in both foreign and domestic markets; viii) the effect of terrorist activity and armed conflict; ix) economic trend factors such as housing starts; x) emerging governmental regulations; xi) the ultimate cost of resolving environmental and legal matters; xii) our ability to profitably develop, manufacture and sell both new and existing products; xiii) the extent of any business disruption that may result from the 21 restructuring and realignment of our manufacturing operations or system implementations, the ultimate cost of those initiatives and the amount of savings actually realized; xiv) the extent of any business disruption caused by work stoppages initiated by organized labor unions; xv) potential political and economic adversities that could adversely affect anticipated sales and production in Brazil; xvi) potential political and economic adversities that could adversely affect anticipated sales and production in India, including potential military conflict with neighboring countries; xvii) the outcome of the judicial restructuring of our Brazilian engine manufacturing subsidiary; xviii) increased or unexpected warranty claims; and xix) 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. EXECUTIVE SUMMARY Until 2007, our business was focused upon three businesses: hermetically sealed compressors, small gasoline engine and power train products, and fractional horsepower motors. Over the course of 2007, we successfully executed a strategy to divest operations that we did not consider to be core to our ongoing business strategy. To that end, we sold the Residential & Commercial, Asia Pacific and Automotive & Specialty portions of our Electrical Components business, and also sold our Engine & Power Train business (with the exception of TMT Motoco, the Brazilian engine facility currently undergoing a judicial restructuring). The remaining portion of our Electrical Components business is included with assets held for sale. As a result of these initiatives, we are now primarily focused on our global compressor business. The compressor business is characterized by global and regional markets that are served by manufacturing locations positioned throughout the world. Accordingly, an increasing portion of our manufacturing presence is in international locations. During 2007, approximately 80% of our compressor manufacturing activity took place outside the United States, primarily in Brazil, France, and India (which comprise approximately 41%, 28% and 11% of total compressor final assembly, respectively). Similarly, approximately 80% of our sales are to destinations outside the U.S. 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 2007, the Brazilian Real strengthened by 17.2%, and in the period from January 1, 2006 to December 31, 2007 the Real strengthened by 24.3%. Recent movement in the Indian Rupee has also had an unfavorable effect on our results of operations, as the Rupee strengthened by 12.8% during 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 to our compressor business 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 cost advantage over our 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. 22 Due to the high material content of copper and steel 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 have increased very rapidly during 2006, 2007 and into 2008. 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 December 31, 2007, the price of copper increased by approximately 40.2%, and steel has increased by 7.4% over the course of 2007. While we have been proactive in addressing the volatility of these costs, including executing forward purchase contracts to cover in excess of 60% of our anticipated copper requirements for 2008, 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 pressures on 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 80% of total compressor net sales in 2007. 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 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 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 23 restructuring activities are implemented or economic conditions improve. As part of our strategy to maintain sufficient liquidity, we are currently in the final phases of 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 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 "Cautionary Statements Relating To Forward-Looking Statements" above, "Results of Operations" below, and "Risk Factors" in Item 1A. 24 RESULTS OF OPERATIONS A summary of our operating results as a percentage of net sales is shown below (dollar amounts in millions): YEAR ENDED DECEMBER 31, 2007 VS. YEAR ENDED DECEMBER 31, 2006
Year Ended December 31, (dollars in millions) 2007 % 2006 % Net sales.................................... $1,133.4 100.0% $1,017.7 100.0% Cost of sales and operating expenses......... 1,011.7 89.3% 943.2 92.7% Selling and administrative expenses.......... 109.5 9.7% 99.2 9.8% Impairments, restructuring charges, and other items...................................... 7.2 0.6% 2.4 0.2% -------- -------- Operating income (loss)...................... 5.0 0.4% (27.1) (2.7%) Interest expense............................. (22.3) (2.0%) (19.4) (1.9%) Interest income and other, net............... 6.2 0.5% 10.9 1.1% -------- -------- Loss before taxes............................ (11.1) (1.0%) (35.6) (3.5%) Tax provision (benefit)...................... (8.2) 0.7% 12.5 (1.2%) -------- -------- Net loss from continuing operations.......... $ (2.9) (0.3%) $ (48.1) (4.7%) ======== ========
Net sales in the year ended December 31, 2007 increased $115.7 million or 11.4% versus the same period of 2006. Excluding the increase in sales due to the effect of changes in foreign currency translation of $81.9 million, net sales increased 3.3% from the prior year. The sales increases were primarily attributable to price advances, which were implemented throughout the year across all product lines except residential air conditioning. The increases in commercial compressors were also associated with higher volumes, with unit sales improving by approximately 6%, due both to increased demand from existing customers and from growth in new markets, particularly in India This increase was offset somewhat by volume declines in refrigeration and freezer compressors (down 1%). In total, full year sales reflected a year-on-year increase of $58.9 million in commercial compressors, an increase of $36.8 million in refrigeration and freezer compressors, and increases in compressors for central air of $10.8 million and residential air conditioning of $3.8 million. The remaining increases were not attributable to any of our major product lines. Gross profit and gross margin were $121.7 million and 10.7% in the year ended December 31, 2007, as compared to $74.5 million and 7.3% in the fiscal year ended December 31, 2006. The majority of this improvement was created by increases in selling price, which improved 2007 results by $75.4 million including volume and mix impacts. These selling price increases helped to offset the unfavorable impacts of currency of $43.7 million and higher commodity costs of $17.2 million. Productivity and purchasing improvements of $9.6 million also contributed to the improved 2007 figure. Net improvements of $21.8 million were also realized in overhead costs, warranty, and improved administrative costs associated with lower headcounts. Gross profit was favorably impacted in both periods by net pension benefit income that was recorded as a result of the over-funding of the majority of our pension plans. This income favorably affected continuing operations by $11.4 million and $10.9 million in 2007 and 2006 respectively. 2007 was also favorably affected by $4.9 million in benefit income related to other postretirement ("OPEB") 25 benefits, while expense of $2.8 million related to OPEB plans was recorded in 2006. Refer to Note 4 in the Consolidated Financial Statements for further discussion of our pension credits. Selling, general and administrative expenses were $10.3 million or 10.4% higher in the fiscal year ended December 31, 2007 compared to the prior fiscal year. However, as a percentage of net sales, selling, general and administrative expenses improved in 2007, at 9.7% and 9.8% in the fiscal years ended December 31, 2007 and December 31, 2006, respectively. Aggregate professional fees were paid for items such as AlixPartners' services, litigation costs, and bank amendments of $19.8 million which are not expected to continue into 2008. As well, the reversal of accruals for non-income taxes in Brazil received in the fourth quarter of 2006 of $6.9 million were not repeated in 2007. These challenges were offset by administrative savings of $11.6 million, primarily realized from restructuring activities. 2007 operating income included $7.2 million ($0.39 per share) of restructuring, impairment and other charges. $4.2 million of these restructuring charges related to the impairment of long-lived compressor assets in India ($2.2 million) and North America ($2.0 million). These assets were primarily impaired as a result of the global consolidation of our manufacturing operations. We also incurred expense of $1.6 million associated with reductions in force at several of our North American facilities. The remaining charges reflect the impact of net losses on the sale of buildings ($0.5 million) and related charges ($0.9 million) as a result of the consolidation of non-compressor facilities. 2006 operating loss included $2.4 million ($0.13 per share) of restructuring, impairment and other charges. We recorded these restructuring charges for impairment of long-lived compressor assets ($2.2 million) and related charges ($0.2 million) at our facilities in Mississippi. Interest expense related to continuing operations amounted to $22.3 million in the fiscal year ended December 31, 2007 compared to $19.4 million in the comparable period of 2006. The increase was primarily related to higher interest rates charged on our foreign borrowings when compared to the prior year. Interest income and other, net amounted to $6.2 million in the fiscal year ended December 31, 2007 compared to $10.9 million in the same period of 2006. In 2006, we recognized a gain of $3.6 million on the sale of our interest in Kulthorn Kirby Public Company Limited, a manufacturer of compressors based in Thailand. The remainder of the decline in 2007 was due to lower interest rates and lower average cash balances. The consolidated statement of operations reflects a $8.2 million income tax benefit for the fiscal year ended December 31, 2007. This benefit reflected a $4.1 current tax provision ($1.3 million U.S. federal and $2.8 million foreign) offset by a $12.3 million deferred tax benefit (consisting of a $13.4 million U.S. federal benefit, a $1.3 million state and local provision, and a foreign benefit of $0.2 million). At December 31, 2007 and 2006, full valuation allowances are recorded for net operating loss carryovers for those tax jurisdictions in which it is more likely than not that these deferred tax assets would not be recoverable. In 2007, the valuation allowance related to our Europe subsidiary 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 2007. Valuation allowances were established against remaining foreign deferred tax assets in Brazil in 2006 (aggregating approximately $5.9 million) due to negative evidence resulting in a determination that it is no longer more likely than not that the assets will be realized. We recorded a tax provision of $12.5 million on a loss of $35.6 million in 2006. 26 The effective tax rate in future periods may vary from the 35% used in prior years based upon changes in the mix of profitability between the jurisdictions where benefits on losses are not provided versus other jurisdictions where provisions and benefits are recognized. In addition, circumstances could change such that additional valuation allowances may become necessary on deferred tax assets in various jurisdictions. Net loss from continuing operations in the fiscal year ended December 31, 2007 was $2.9 million, or $0.16 per share, as compared to a net loss of $48.1 million, or $2.60 per share, in the fiscal year ended December 31, 2006. The improvement was primarily the result of the improved gross margins and other factors as discussed above. YEAR ENDED DECEMBER 31, 2006 VS. YEAR ENDED DECEMBER 31, 2005
Year Ended December 31, (dollars in millions) 2006 % 2005 % Net sales.................................... $1,017.7 100.0% $924.6 100.0% Cost of sales and operating expenses......... 943.2 92.7% 822.9 89.0% Selling and administrative expenses.......... 99.2 9.8% 94.1 10.2% Impairments, restructuring charges, and other items...................................... 2.4 0.2% 4.3 0.5% -------- ------ Operating income (loss)...................... (27.1) (2.7%) 3.3 0.4% Interest expense............................. (19.4) (1.9%) (3.0) (0.3%) Interest income and other, net............... 10.9 1.1% 9.0 1.0% -------- ------ Income (loss) before taxes................... (35.6) (3.5%) 9.3 1.0% Tax provision (benefit)...................... 12.5 (1.2%) 27.5 (3.0%) -------- ------ Net income (loss) from continuing operations. $ (48.1) (4.7%) $(18.2) (2.0%) ======== ======
Net sales in the year ended December 31, 2006 increased $93.1 million or 10.1% versus the same period of 2005, including an increase in sales of $39.6 million resulting from the effect of changes in foreign currency exchange rates. Compressor sales in the fiscal year of 2006 increased 10.1% to $1,002.7 million from $910.9 million in 2005. Excluding the increase in sales due to the effects of foreign currency translation, sales increased by 5.7% in 2006. Full year sales reflected a year-on-year increase in commercial compressors (up $69.8 million), residential air conditioning (up $23.2 million), and refrigeration and freezer compressors (up $21.9 million). While the sales increase was largely attributable to price advances, the increases in residential air conditioning and in refrigeration and freezer compressors were due to higher volumes, with unit sales improving by 25% and 20% respectively. The improvements in compressors for residential air conditioning were attributable to increases in volumes with key OEM's, due in part to new product introductions as well as enhanced customer service programs. The increases in the refrigeration and freezer product lines were primarily in India, where we experienced rapid growth in new and profitable markets. Gross profit and gross margin were $74.5 million and 7.3% in the year ended December 31, 2006, as compared to $101.7 million and 11.0% in the fiscal year ended December 31, 2005. During the fiscal year ended December 31, 2006, the U.S. Dollar was on average 5.3% weaker versus the Brazilian Real and 11.9% weaker versus the Euro than during 2005. Operating margins also deteriorated due to unfavorable commodity costs. Advances in selling prices to offset increases in commodity costs were primarily implemented in the latter half of the year, and were not sufficient to mitigate the increase, with a net unfavorable impact to operating results of $10.8 million. On the other hand, in 27 the fourth quarter of 2006, our Brazilian facility received a favorable court ruling, deeming certain non-income-based taxes it had accrued on its balance sheet as unconstitutional. The reversal of this accrual resulted in a favorable net impact to operating results of $6.6 million for the fourth quarter and full year 2006. The implementation of other productivity improvements over the course of the year also yielded a favorable impact to operating profitability of $2.8 million. Gross profit was favorably impacted in both periods by net pension benefit income that was recorded as a result of the over-funding of the majority of our pension plans. This income totaled $10.9 million and $11.1 million in 2006 and 2005 respectively. Selling, general and administrative expenses were $5.1 million or 5.4% higher in the fiscal year ended December 31, 2006 compared to the prior fiscal year. However, as a percentage of net sales, selling, general and administrative expenses were lower in 2006, at 9.7% and 10.2% in the fiscal years ended December 31, 2006 and December 31, 2005, respectively. The increase in dollar terms was primarily attributable to increased corporate expenses for consulting and auditing costs and the roll-out of our new ERP system. 2006 operating net loss included $2.4 million ($0.13 per share) of restructuring, impairment and other charges. We recorded these restructuring charges for impairment of long-lived compressor assets ($2.2 million) and related charges ($0.2 million) at two of our facilities in Mississippi. The 2005 net loss included $4.3 million ($0.23 per share) of restructuring, impairment and other charges. These charges include $0.9 million recorded by the North American Compressor operations related to moving costs for previously announced actions, and $3.4 million of asset impairment charges for manufacturing equipment idled through facility consolidations and the reduction to fair value of land and buildings associated with closed plants. Interest expense amounted to $19.4 million in the fiscal year ended December 31, 2006 compared to $3.0 million in the comparable period of 2005. The increase was primarily related to higher average interest rates applicable to our borrowings both in the United States and in a number of our foreign locations, in addition to reflecting the impact of the loss of benefit previously provided by interest rate swaps exchanging fixed rates for variable. Interest income and other, net amounted to $10.9 million in the fiscal year ended December 31, 2006 compared to $9.0 million in the same period of 2005. In 2006, we recognized a gain of $3.6 million on the sale of our interest in Kulthorn Kirby Public Company Limited, a manufacturer of compressors based in Thailand. Excluding that gain, the decline of $1.7 million in 2006 was due to lower interest rates and lower average cash balances. We recorded income tax expense of $12.5 million on a loss before taxes of $35.6 million for the fiscal year ended December 31, 2006, as compared with tax expense of $27.5 million on a profit before tax of $9.3 million for the corresponding period in 2005. The unusual result in 2005 was the product of not providing benefits on losses in jurisdictions where the preponderance of negative evidence would indicate that these deferred tax assets would not be recoverable. Net loss from continuing operations in the fiscal year ended December 31, 2006 was $48.1 million, or $2.60 per share, as compared to net loss of $18.2 million, or $0.98 per share, in the fiscal year ended December 31, 2005. The decline was largely the result of the impact of the deferred tax asset valuation allowances described above. Additional factors discussed above contributed to the operating loss experienced, even after excluding the deferred tax asset valuation allowances. 28 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. At December 31, 2007 and December 31, 2006, we had accrued $3.0 million and $3.3 million, respectively, for environmental remediation. As these matters continue toward final resolution, amounts in excess of those already provided may be necessary to discharge our obligations for these sites. Such amounts, depending on their amount and timing, could be material to reported net income in the particular quarter or period in which they are recorded. In addition, the ultimate resolution of these matters, either individually or in the aggregate, could be material to the consolidated financial statements. AlixPartners Engagement We engaged AlixPartners during the third quarter of 2005 to assist in the restructuring plans of the Engine & Power Train business. The plans focused on improving the group's profitability through the elimination of significant duplicate capacity, among other cost reduction efforts. On January 19, 2007, we entered into an addendum to our agreement that, among other things, added additional tasks to be performed, including providing the services of James J. Bonsall, a Managing Director of AlixPartners, to serve as our interim President and Chief Operating Officer until our permanent CEO was appointed. Services provided by AlixPartners to the Company were completed with the closing of the sale of the Automotive & Specialty division of the Electrical Components business in December 2007. 29 During 2007 and 2006, we incurred $5.4 million and $21.1 million respectively related to fees earned by AlixPartners during the year. LIQUIDITY AND CAPITAL RESOURCES Our primary liquidity needs are to fund capital expenditures, service indebtedness and support working capital requirements. In general, our principal sources of liquidity are cash flows from operating activities, when available, and borrowings under available credit facilities. In 2007 and 2006, however, our liquidity was predominantly obtained through proceeds from the sale of non-core businesses. 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 2007 vs. 2006 Cash used by operations amounted to $14.8 million in 2007, as compared to cash used by operations of $94.4 million in 2006. The 2007 results included a net loss of $178.1 million. Accounts receivable decreased by $35.2 million from the beginning of the year. This net decrease was the result of several factors. First, an increase of $32.7 million in the amount of discounted receivables at the end of 2007 compared to 2006 reflected the increasing use of discounting by our European and Indian locations. In addition, when evaluating days to collection for outstanding receivables, there was an improvement of four days to collection as of December 31, 2007 when compared to the end of 2006. The days sales outstanding ("DSO") for compressor operations decreased from 61 at the end of 2006 to 57 at year-end 2007 (before consideration for discounted accounts receivable), due to improved time to collection in North America, Europe, and India. Inventories decreased by $30.2 million since the beginning of the year, reflecting improvements of six days inventory on hand for the compressor operations. These positive working capital results were offset by decreases to accounts payable and other accrued expenses and liabilities (up $51.0 million since the end of 2006). Most of the remainder of the cash adjustments to working capital was due to the effects of foreign currency translation. Cash provided by investing activities was $244.3 million in 2007 versus cash provided by investing activities of $70.9 million for the same period of 2006. $265.3 million in net proceeds were received from the sale of assets during 2007, while $135.0 million in proceeds were recorded in 2006. Net proceeds from asset sales in 2007 included the sale of the Residential & Commercial portions of our Electrical Components business for $199.0 million, the sale of the Engine & Power Train business for $48.9 million, the sale of the Automotive & Specialty division of the Electrical Components business for $8.3 million, the sale of an aircraft for $3.4 million, the sale of other fixed assets for $4.7 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 operations. The entire purchase price was allocated to amortizable intangible assets, which were sold as part of the divestiture of the Electrical Component business 30 operations in 2007. Capital expenditures were reduced by $52.9 million from the prior year, from $62.1 million in 2006 to $9.2 million in 2007. Cash used by financing activities was $237.5 million in 2007 as compared to a use of cash of $9.2 million in the same period of 2006. In 2007, we used the proceeds from the sale of the Electrical Components and Engine & Power Train businesses to pay off the entire balance of both our First and Second Lien Credit Agreements. 2006 vs. 2005 Cash used by operating activities was $94.4 million in the fiscal year of 2006 as compared to cash provided by operations of $16.0 million in 2005. The use of cash in 2006 reflected both our operating loss and net investments in working capital. Included in operating loss for 2006 was the gain on the sale of the Little Giant Pump Company of $49.7 million and the associated gain from the curtailment of its pension plan of $8.5 million. In addition, inventories increased by $18.9 million since the beginning of the year, attributable in part to Oracle implementation issues and inefficient materials management exacerbated by high levels of personnel turnover associated with an Electrical Components facility in Mexico. Accounts receivable in 2006 increased by $7.4 million from the beginning of the year. This increase was the result of receivables, on average, requiring an additional four days to collect as of December 31, 2006 as compared to the end of 2005. This increase was driven in part by the Engine & Power Train business, whose days sales outstanding increased from 50 at the end of the 2005 to 54 as of December 31, 2006. A key customer at the Engine Group, comprising 49% and 50% of its total outstanding accounts receivable balance at the end of 2006 and 2005 respectively, increased its average time to pay by six days over the course of 2006, thus lengthening the average time to collection for that business. Days sales outstanding also increased in the Electrical Components Group, from 52 days at the end of 2005 to 58 days at the end of 2006. A greater percentage of the accounts receivable balance for Electrical Components at the end of 2006 was for automotive customers, who on average pay on more extended payment terms than other customers for the group. The cash used to fund operations, fund capital expenditures and repay amounts originally borrowed under the new debt arrangements was predominantly provided by proceeds from the sale of Little Giant Pump Company. The sale of our 100% ownership interest in Little Giant Pump Company was completed on April 21, 2006 for $120.7 million. Approximately 63% of the gross proceeds were applied against the First Lien borrowing and 37% against the Second Lien borrowing. Average days sales outstanding were 59 days at December 31, 2006 versus 55 days at December 31, 2005, before giving effect to receivables sold. Days inventory on hand were 82 days at December 31, 2006, up from 79 days at December 31, 2005, due to the factors discussed above. Cash flows provided by investing activities were $70.9 million in fiscal 2006 as compared to a use of cash of $109.8 million in 2005. Of the overall change of $180.7 million, $51.2 million was related to lower capital expenditures in 2006 compared to significant new product expansions in India and Brazil in 2005, and $131.5 million related to higher proceeds received from the sale of assets during 2006. Included in such sales was our 100% interest in Little Giant Pump Company for $120.7 million, the sale of our 7% interest in Kulthorn Kirby Public Company Limited stock for $4.7 million and the sale of our former Douglas, Georgia manufacturing facility for $3.5 million. In addition, during the first quarter, we acquired a small Australian-based company, which owned patents related to the manufacturing of certain types of electric motors, which were applicable to both our Electrical Components and Compressor businesses. The entire purchase price was allocated to amortizable intangible assets. 31 Cash flows used in financing activities were $9.2 million in fiscal 2006 as compared to $24.0 million in 2005. During the first quarter 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 (amended in the fourth quarter 2006 to $250 million) and a $100 million Second Lien Credit Agreement (replaced in the fourth quarter of 2006 by a different Second Lien Credit Agreement). During the second quarter 2006, proceeds from the sale of Little Giant Pump Company were used to repay a portion of our borrowings under the First and Second Lien Credit Agreements, based upon formulas contained in the agreements. CREDIT FACILITIES AND CASH ON HAND 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 fiscal years ended December 31, 2007 and December 31, 2006, our average outstanding debt balance was $210.2 million and $373.0 million, respectively. Our weighted average interest rate was 8.9% as of December 31, 2007, as compared to a weighted average rate of 10.0% as of December 31, 2006. The decline in the weighted average rate was attributable to the elimination of our second lien debt in August of 2007. 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. The First and Second Lien Credit Agreements provided for security interests in substantially all of our assets and originally specified quarterly financial covenants related to EBITDA (as defined under the agreement, which provided adjustments for certain items, and hereafter referred to as "Adjusted EBITDA"), capital expenditures, and fixed charge coverage. The Adjusted EBITDA covenant originally applied through September 30, 2007, and a fixed charge coverage covenant applied thereafter. 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. 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. Effective with the closing of the sale of the Residential & Commercial and Asia Pacific operations of the Electrical Components business on August 31, 2007, we paid off the entire balance associated with our Second Lien Credit Agreement and the majority of the balance under our First Lien Credit Agreement. The remainder of the balance under the First Lien Credit Agreement was paid off effective with the closing of the Engine & Power Train business on November 9, 2007. 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 lenders' total 32 commitment from $175 million to $75 million. 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. In addition to our domestic lending arrangement, we have various borrowing arrangements at our foreign subsidiaries to support working capital needs and government sponsored borrowings that provide advantageous lending rates. Our weighted average interest rate for all borrowings, including foreign borrowings, was 8.9% at December 31, 2007. The interest rate on our U.S. credit agreement, had balances been outstanding, would have been 7.5% at December 31, 2007. In accordance with the amendments discussed above, we are currently in compliance with the remaining 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 finalizing arrangements for a stand-by credit facility under a new collateralized arrangement, although we would not expect to require any outstanding borrowings to fund current operations. At December 31, 2007, we had cash balances in North America of approximately $20.7 million, outstanding letters of credit of $6.8 million, and U.S. availability under our First Lien Credit Agreement of approximately $9.4 million. We also had the capacity for additional borrowings of $95.5 million in foreign jurisdictions under our U.S. credit agreement For further discussion of our First and Second Lien Credit Agreements, refer to Note 10, "Debt," of the Notes to the Consolidated Financial Statements. Accounts Receivable Sales Our Brazilian, European, and Indian subsidiaries periodically sell their accounts receivable with financial institutions. Such receivables are factored both without and with limited 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 $79.2 million and $46.5 million as of December 31, 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 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. 33 As a result of the sale of the majority of the Electrical Components business and the Engine & Power Train business, we completely eliminated our domestic debt as of November 9, 2007. Accordingly, we expect our consolidated interest expense in the future to be substantially reduced. Based on the amount of our domestic debt 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 in the final phase of 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 evaluating and executing 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 certain 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 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 $13.9 million. Receipt of such proceeds is dependent upon final resolution of these audits. We continue to believe that we will prevail in sustaining the deduction and carryback, and are in the process of hiring legal counsel to pursue this refund. The timing of the recovery of the refund is uncertain. Finally, we have successfully executed a conversion of our Salaried Retirement Plan to a new Plan. The prior Plan was substantially over-funded. This conversion is expected to yield net cash to the Company in March 2008 of approximately $80 million. The net proceeds were higher than we previously expected because the old plan was able to purchase annuities to fund its future obligations for a lower premium than we had estimated, due in part to the final actuarial assumptions being more favorable than those we used for purposes of our original estimate. The arrangements we have made will fully secure the benefits payable under the old plan and will also fund the new plan, without additional annual contributions, for approximately six to eight future years. In the fourth quarter of 2007, as discussed above, we announced the relocation of the manufacturing operations at our Tecumseh, Michigan facility to other locations in North America. As a result of this consolidation, we will also be executing a reversion of our Hourly pension plan. At December 31, 2007, this Plan reported approximately $90 million in overfunding. We expect that the conversion of this Plan will make net cash available of approximately $45 to $60 million. The timing of the distribution, however, will be dependent on the length of time needed to meet IRS distribution requirements, and could extend to 2009 or later, which further increases the variability of the final distribution amount. As part of addressing the Company's liquidity needs, we made substantially lower levels of capital expenditures in 2007, and expect to continue that trend in 2008. 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. We currently estimate that capital expenditures for 2008 will range from $20 to $25 million. 34 Off-Balance Sheet Arrangements We do not believe we have any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on us; although, as disclosed in Note 13 to the Consolidated Financial Statements, we are contingently liable with respect to some export receivables sold in Brazil, Europe and India, and as disclosed in Note 11, we are contingently liable if costs of remediation of the Sheboygan Falls, Wisconsin plant site were to exceed the $100 million Remediation Cost Cap insurance we purchased. Contractual Obligations We have minimal capital and operating leases, as substantially all employed facilities and equipment are owned. Our payments by period as of December 31, 2007 for our long-term contractual obligations are as follows: Payments by Period (in millions)
Less than 1 Total Year 1-3 Years Other ----- ----------- --------- ----- Debt Obligations $62.8 $59.5 $3.3 -- Interest Payments on Debt (1) 16.8 5.6 11.2 -- Other Long-Term Obligations(2) 1.0 0.4 -- 0.6
(1) Debt levels are assumed to remain constant. Interest rates on debt obligations are assumed to remain constant at the current weighted average rate of 8.9%. (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 The preparation of financial statements requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the period. Management bases its estimates on historical experience and other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Management continually evaluates the information used to make these estimates as our business and the economic environment change. The use of estimates is pervasive throughout our financial statements, but the accounting policies and estimates management considers most critical are as follows: Uncertainty in Income Taxes 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 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. 35 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 December 31, 2007, there is no reduction of deferred tax assets relating to uncertain tax positions. 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 year ended December 31, 2007 were reduced by $0.4 million. The impact of FIN 48 for 2007 was a benefit of $0.9 million. At December 31, 2007, we anticipate a decrease in the total amount of unrecognized tax benefits within the next twelve months in the range of zero to $0.4 million. Impairment of Long-Lived Assets It is our policy to review our long-lived assets for possible impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable. Such events could include loss of a significant customer or market share, the decision to relocate production to other locations within the Company, or the decision to cease production of specific models of product. We recognize losses relating to the impairment of long-lived assets when the future undiscounted cash flows are less than the asset's carrying value or when the assets become permanently idle. Assumptions and estimates used in the evaluation of impairment are consistent with our business plan, including current and future economic trends, the effects of new technologies and foreign currency movements are subject to a high degree of judgment and complexity. All of these variables ultimately affect management's estimate of the expected future cash flows to be derived from the asset or group of assets under evaluation, as well as the estimate of their fair value. Changes in the assumptions and estimates, or our inability to achieve our business plan, may affect the carrying value of long-lived assets and could result in additional impairment charges in future periods. As discussed above, during the years ended December 31, 2007, 2006 and 2005 we recognized impairments of our long-lived assets of $7.2 million, $2.4 million and $4.3 million respectively, related to restructuring activities. As we continue our plans to restructure our business and meet plan operating and liquidity targets, a decision may be reached to sell certain assets for amounts less than the carrying values that were established under a held and used model. Deferred Tax Assets As of December 31, 2007, we had $3.8 million of deferred tax assets recorded on our financial statements related to foreign operations. In periods where such assets are recorded, we are required to estimate whether recoverability of our deferred tax assets is more likely than not, based on forecasts of taxable earnings in the related tax jurisdiction. We use historical and projected future operating results, based upon approved business plans, including a review of the eligible carry-forward period, tax planning opportunities and other relevant considerations. Examples of evidence that we consider when making judgments about the deferred tax valuation includes tax law changes, a history of cumulative losses, and variances in future projected profitability. Full valuation allowances will be maintained against deferred tax assets in the U.S. and other foreign countries until sufficient positive evidence exists to reduce or eliminate them. During the quarter 36 ended June 30, 2007, the valuation allowance related to our European entity 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. In the third quarter of 2006, valuation allowances were established against remaining foreign deferred tax assets in Brazil (aggregating approximately $5.9 million) due to negative evidence (including a continuation of losses recognized during 2006) which resulted in a determination that it was no longer more likely than not that the assets would be realized. Goodwill We have goodwill recorded from acquisitions. These assets are subject to periodic evaluation for impairment when circumstances warrant, or at least once per year. Impairment is tested in accordance with SFAS No. 142, "Goodwill and Other Intangibles" by comparison of the carrying value of the reporting unit to its estimated fair value. As there are not quoted prices for our reporting units, fair value is estimated based upon a present value technique using estimated discounted future cash flows. Intangible assets other than goodwill are also subject to periodic evaluation for impairment and are equally sensitive to changes in the underlying assumptions and estimates. Fair value of our goodwill is estimated based upon a present value technique using discounted future cash flows, forecasted over a five year period, with residual growth rates forecasted at 3.0% to 5.0% thereafter. We use management business plans and projections as the basis for expected future cash flows. In evaluating such business plans for reasonableness in the context of their use for predicting discounted cash flows in our valuation model, we evaluate whether there is a reasonable basis for differences between actual results of the preceding year and projected results for the upcoming years. This methodology can potentially yield significant improvements in growth rates in the first few years of forecast data, due to multiple factors such as improved efficiencies or incremental sales volume opportunities that are deemed to be reasonably likely to be achieved. In the India reporting unit, for example, the goodwill analysis performed at the end of 2007 projected growth rates of approximately 16.7% in 2008, before moderating to a 5.0% residual growth rate. This higher-than-average growth rate is due to the introduction of new product in India. The Europe reporting unit projected growth rates of approximately 8.9% in 2008, adjusted to 3.0% thereafter. Assumptions in estimating future cash flows are subject to a high degree of judgment and complexity. We make every effort to forecast these future cash flows as accurately as possible with the information available at the time the forecast is developed. However, changes in the assumptions and estimates may affect the carrying value of goodwill, and could result in additional impairment charges in future periods. Factors that have the potential to create variances between forecasted cash flows and actual results include but are not limited to (i) fluctuations in sales volumes, which can be driven by multiple external factors, including weather conditions affecting demand; (ii) product costs, particularly commodities such as copper; (iii) currency exchange fluctuations; (iv) acceptance of the Company's pricing actions undertaken in response to rapidly changing commodity prices and other product costs; (v) interest rate fluctuations; and (vii) the intention to continue to operate the reporting unit. Refer to "Cautionary Statements Relating to Forward-Looking Statements" in Item 2 for other factors that have the potential to impact estimates of future cash flows. Consistent with paragraph 24 of SFAS No. 142, "Goodwill and Other Intangible Assets," discount rates utilized in the goodwill valuation analysis are derived from published resources such as Ibbotson. The rates utilized were 11.23% at December 31, 2007 and 8.16% at December 31, 2006 for all business units for which goodwill is currently recorded. For purposes of our 2007 analysis, in light of the Company's transition from a diversified concern to a global compressor operation, we 37 utilized the discount rate from a SIC code specific to our compressor business. Had we utilized the same SIC code that we employed in 2006, the result would have been a discount rate of 10.08%. Operating Profit before tax as a percentage of sales revenue is also a key assumption in the fair value calculation. The range of assumptions used incorporates the anticipated results of the Company's ongoing productivity improvements over the life of the forecast model. The Europe reporting unit forecasted operating profit percentages of 3.0% in 2008 and ranging from 3.1 to 3.5% thereafter, with operating profit in the terminal year forecasted at 3.4%. The India reporting unit forecasted operating profit at 4.6% of sales in 2008 ranging from 3.1% to 4.0% thereafter, with operating profit in the terminal year forecasted at 2.8%. Based on the goodwill analysis performed for the year ended December 31, 2007, changes of 1.0% in the discount rate utilized would increase (decrease) the fair value calculated for the respective business units as follows:
Change in valuation with % Change in valuation 1.0 decrease in with 1.0% increase in discount rate discount rate Europe 4.1 (3.9) India 4.8 (4.6)
Both business units that have goodwill show fair values sufficiently greater than the carrying value such that a 1.0% increase in discount rate does not place the goodwill at or near risk of impairment. While we currently believe that the fair value of both reporting units exceeds carrying value under the discounted cash flow model, materially different assumptions regarding future performance of our reporting units, the selected discount rate or the intention to continue to operate the reporting units could result in significant impairment losses. At December 31, 2007, we had $20.2 million of goodwill recorded in our consolidated financial statements. Accrued and Contingent Liabilities We have established reserves for environmental, warranty and legal contingencies in accordance with SFAS No. 5. We also have liabilities with regard to certain post-closing adjustments related to divested operations, which could be material. A significant amount of judgment and use of estimates is required to quantify our ultimate exposure in these matters. The valuation of reserves for contingencies is reviewed on a quarterly basis at the operating and corporate levels to assure that we are properly reserved. Reserve balances are adjusted to account for changes in circumstances for ongoing issues and the establishment of additional reserves for emerging issues. While management believes that the current level of reserves is adequate, changes in the future could impact these determinations. We are involved in a number of environmental sites where we are either responsible for, or participating in, a cleanup effort. As of December 31, 2007, we had accrued a total of $3.0 million on our balance sheet; we paid approximately $0.1 million in connection with these sites during 2007. For additional information on environmental liabilities, including the Sheboygan River and Harbor Superfund and Hayton Area Remediation Project sites, see Note 11 to the Financial Statements. 38 Employee Related Benefits Significant employee related benefit assumptions include, but are not limited to, the expected rates of return on plan assets, determination of discount rates for re-measuring plan obligations, determination of inflation rates regarding compensation levels and health care cost projections. Differences among these assumptions and our actual return on assets, financial market-based discount rates, and the level of cost sharing provisions will impact future results of operations. We develop our demographics and utilize the work of actuaries to assist with the measurement of employee related obligations. The discount rate assumption is based on investment yields available at year-end on corporate long-term bonds rated AA by Moody's. The expected return on plan assets reflects asset allocations and investment strategy. The inflation rate for compensation levels reflects our actual historical experience. The inflation rate for health care costs is based on an evaluation of external market conditions and our actual experience in relation to those market trends. Assuming no changes in any other assumptions, a 0.5% decrease in the discount rate and the rate of return on plan assets would increase 2007 expense by $1.5 million and $3.0 million, respectively. Due primarily to the significant over-funding of the majority of U.S. pension plans and the resulting favorable return on plan assets, we recognized a net periodic benefit for pensions in our financial statements of $14.2 million and $12.8 million in 2007 and 2006, respectively. In the first quarter of 2007, we announced revisions to our Salaried Retirement Plan. At December 31, 2007, this Plan reported approximately $121 million in overfunding, out of a total of $231 million for all our pension plans that have plan assets in excess of obligations. On May 1, 2007, we implemented a new retirement program for all Tecumseh salaried employees. This conversion, which we expect to complete in March of 2008, will yield cash proceeds to the Company of approximately $80 million. The net proceeds were higher than we previously expected because the old plan was able to purchase annuities to fund its future obligations for a lower premium than we had estimated, due in part to the final actuarial assumptions being more favorable than those we used for purposes of our original estimate. The new retirement program includes both defined benefit and defined contribution plans. A portion of the overfunding for the old plan was utilized to pre-fund the benefits for both of the replacement plans for approximately the next six to eight years. In the fourth quarter of 2007, we announced the relocation of the manufacturing operations at our Tecumseh, Michigan facility to other locations in North America. As a result of this consolidation, we will also be executing a reversion of our Hourly pension plan. At December 31, 2007, this Plan reported approximately $90 million in overfunding. We expect that the conversion of this Plan will make net cash available of approximately $45 to $60 million. The timing of the distribution, however, will be dependent on the length of time needed to meet IRS distribution requirements, and will likely extend to 2009 or later, which further increases the variability of the final distribution amount. See Note 4 of the Notes to Consolidated Financial Statements for more information regarding costs and assumptions for post-employment benefits. 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 39 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 do not currently expect this pronouncement to have an impact 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. We do not currently expect this pronouncement to have an impact on our consolidated financial statements. Noncontrolling Interests in Consolidated Financial Statements In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements," which among other things, provides guidance and establishes amended accounting and reporting standards for a parent company's noncontrolling interest in a subsidiary. We are currently evaluating the impact of adopting the statement, which is effective for fiscal years beginning on or after December 15, 2008. Business Combinations In December 2007, the FASB issued Statement No. 141R, "Business Combinations," ("SFAS No.141R") which replaces SFAS No. 141, Business Combinations. SFAS 141R establishes principles and requirements for how an acquirer entity recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed (including intangibles) and any noncontrolling interests in the acquired entity. We are currently evaluating the impact of adopting the statement, which is effective for fiscal years beginning on or after December 15, 2008. OUTLOOK Information in this "Outlook" section should be read in conjunction with the cautionary statements and discussion of risk factors included elsewhere in this report. The outlook for 2008 is subject to many of the same variables that have negatively impacted us throughout 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. Certain key commodities, including copper, continue to trade at elevated levels compared to recent history. From January 1, 2007 through December 31, 2007, the price of copper increased by approximately 6.2%; since the beginning of 2006, copper prices have increased by 40.2%. We currently hold more than 62% of our total projected copper requirements for 2008 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. In addition, we expect the cost of steel and other purchased materials to be more costly in 2008 versus 2007. In the aggregate, we expect the cost of our purchased materials to be approximately $23 million more expensive than in the prior year. 40 The Brazilian Real and Indian Rupee continue to strengthen against the dollar, and as of December 31, 2007 had strengthened 17.2% and 10.7% respectively since the beginning of the year. While we have considerable forward purchase contracts to cover our exposure to additional fluctuations in value during the year, the average rate expected to be realized, giving consideration to our contracts, will nonetheless have a negative financial impact of $35 million when compared to 2007. As part of our efforts to offset these worsening conditions, to improve profitability and reduce the consumption of capital resources, our plans for 2008 include price increases as needed to cover our increased input costs, additional cost reduction activities including, but not limited to, further employee headcount reductions, consolidation of productive capacity and rationalization of product platforms, and revised sourcing plans. In addition, we estimate that the Company incurred approximately $19 million in professional and other fees during 2007 that will not recur in 2008. After giving recognition to these factors, we believe we will be challenged to maintain 2007 operating profit levels in 2008. In addition, while not currently modeled in our projections, we remain concerned about the general health of the economy and the possibility of recession in the United States, which could further impact expected earnings. As a result of the sale of the majority of the Electrical Components business and the Engine & Power Train business, 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 our domestic debt prior to the sale of businesses, we expect that its elimination will reduce our annualized interest expense by approximately $22 million. In addition, recently we successfully completed the reversion of our Salaried Retirement Plan. The reversion is expected to yield net cash in March 2008 of approximately $80 million. Lastly, we are currently negotiating a new financing arrangement for our North American based activities which will increase our availability of funds, should they become necessary. With these and other activities, we believe we have sufficient liquidity to affect the changes necessary to restore our profitability over the near term. We are also continuing to evaluate our corporate infrastructure in relation to the level of business activity that remains now that the majority of 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 certain idle assets, we expect to realize proceeds of approximately $12 million, with the majority received by the end of the first 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 $13.9 million. Receipt of such proceeds is dependent upon final resolution of these audits, which are currently under dispute with the IRS. We continue to believe that we will prevail in sustaining the deduction and carryback and are in the process of hiring legal counsel to pursue this refund. The timing of the recovery of the refund is uncertain. 41 As a result of the relocation of our manufacturing operations in Tecumseh, Michigan, we will also be executing a reversion of our Hourly pension plan. At December 31, 2007, this Plan reported approximately $90 million in overfunding. We expect that the conversion of this Plan will make net cash available of approximately $45 to $60 million. The timing of the distribution, however, will be dependent on the length of time needed to meet IRS distribution requirements and could extend to 2009 or later, which further increases the variability of the final distribution amount. As part of addressing the Company's liquidity needs, we made substantially lower levels of capital expenditures in 2007, and expect to continue that trend in 2008. 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. We currently estimate that capital expenditures for 2008 will range from $20 to $25 million. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market 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. Credit Risk - Financial instruments which potentially subject us to concentrations of credit risk are primarily cash investments and accounts receivable. We place our cash investments, when available, in bank deposits and investment grade, short-term debt instruments (predominately commercial paper) with reputable credit-worthy counterparties and, by policy, limits the amount of credit exposure to any one counterparty. We use contemporary credit review procedures to approve customer credit. Customer accounts are actively monitored, and collection efforts are pursued within normal industry practice. Management believes that concentrations of credit risk with respect to receivables are somewhat limited due to the large number of customers in our customer base and their dispersion across different industries and geographic areas. A portion of export accounts receivable of our Brazilian, European, and Indian subsidiaries are sold at a discount. Discounted receivables sold in these subsidiaries at December 31, 2007 and 2006 were $79.2 million and $46.5 million, respectively, and the discount rate was 9.1% in 2007 and 7.45% in 2006. We maintain an allowance for losses based upon the expected collectability of all accounts receivable, including receivables sold. Interest Rate Risk - We are subject to interest rate risk, primarily associated with our borrowings. Our $75 million First Lien Credit Agreement, when we have borrowings outstanding against it, 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. Based on our debt balances at December 31, 2007, a 1% increase in interest rates would increase interest expense for the year by approximately $0.6 million. 42 Commodity Price Risk - We use commodity forward purchasing contracts to help control the cost of traded commodities, primarily copper and, to a lesser extent, aluminum. 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 our 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 December 31, 2007 and 2006, we held a total notional value of $64.4 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. Based on our current level of activity, and before consideration for commodity forward purchases, an increase in the price of copper of $100 per metric ton (an increase of 1.5% from 2007 year-end pricing) would adversely affect our operating profit by $1.6 million. Foreign Currency Exchange Risk - 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 our 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 December 31, 2007 and 2006, we held foreign currency forward contracts with a total notional value of $232.7 million and $130.4 million, respectively. Based on our current level of activity, we believe that a $0.10 strengthening of the Brazilian Real against the U.S. Dollar impacts our operating profit by approximately $10 million. 43 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Independent Registered Public Accounting Firm................................................... 45 Financial Statements Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005............. 47 Consolidated Balance Sheets at December 31, 2007 and 2006.............................................. 48 Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005............. 50 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2007, 2006 and 2005... 51 Notes to Consolidated Financial Statements............................................................. 52
All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 44 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders Tecumseh Products Company We have audited the accompanying consolidated balance sheet of Tecumseh Products Company and subsidiaries (the "Company") as of December 31, 2007, and the related consolidated statements of operations, cash flows and stockholders' equity for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tecumseh Products Company and subsidiaries as of December 31, 2007, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 6 to the consolidated financial statements, the Company adopted Financial Accounting Standards Board Interpretation No.48 "Accounting for Uncertainty in Income Taxes" effective January 1, 2007. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Tecumseh Products Company and subsidiaries' internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 14, 2008 expressed an unqualified opinion. Grant Thornton LLP Southfield, Michigan March 14, 2008 45 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of Tecumseh Products Company: In our opinion, the consolidated balance sheet as of December 31, 2006 and the related consolidated statements of operations, of stockholders' equity and of cash flows for each of two years in the period ended December 31, 2006 present fairly, in all material respects, the financial position of Tecumseh Products Company and its subsidiaries at December 31, 2006, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 4 to the consolidated financial statements, the Company changed the manner in which it accounts for defined benefit pension and other postretirement plans effective December 31, 2006. PricewaterhouseCoopers LLP Detroit, MI April 9, 2007, except for Note 2 as to which the date is March 14, 2008 46 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data) FOR THE YEARS ENDED DECEMBER 31, ------------------------------------ 2007 2006 2005 -------- -------- ------ Net sales.................................................. $1,133.4 $1,017.7 $ 924.6 Cost of sales and operating expenses................... 1,011.7 943.2 822.9 Selling and administrative expenses.................... 109.5 99.2 94.1 Impairments, restructuring charges, and other items.... 7.2 2.4 4.3 -------- -------- ------ Operating income (loss).................................... 5.0 (27.1) 3.3 Interest expense....................................... (22.3) (19.4) (3.0) Interest income and other, net......................... 6.2 10.9 9.0 -------- -------- ------ (Loss) income from continuing operations before taxes...... (11.1) (35.6) 9.3 Tax (benefit) provision ............................... (8.2) 12.5 27.5 -------- -------- ------ Net loss from continuing operations........................ $ (2.9) $ (48.1) $(18.2) Loss from discontinued operations, net of tax (175.2) (32.2) (205.3) -------- -------- ------ Net income (loss) $ (178.1) $ (80.3) $(223.5) ======== ======== ======= Basic and diluted loss per share*:......................... Loss from continuing operations $ (0.16) $ (2.60) ($0.98) Loss from discontinued operations, net of tax (9.48) (1.75) (11.11) -------- -------- ------ Net loss per share $ (9.64) $ (4.35) $(12.09) ======== ======== ======= Weighted average shares (in thousands)..................... 18,480 18,480 18,480 ======== ======== ======= Cash dividends declared per share.......................... $ 0.00 $ 0.00 $0.64 ======== ======== =======
* In 2007, we issued a warrant to a lender to purchase 1,390,944 shares of our Class A Common Stock, which is equivalent to 7% of our fully diluted common stock (including both Class A and Class B shares). This warrant is not included in diluted earnings per share for the year ended December 31, 2007, as the effect would be antidilutive. The accompanying notes are an integral part of these Consolidated Financial Statements. 47 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share data) DECEMBER 31, --------------------- 2007 2006 -------- -------- ASSETS Current Assets: Cash and cash equivalents....................................................... $ 76.8 $ 81.9 Restricted cash................................................................. 6.8 -- Short term investments.......................................................... 5.0 -- Accounts receivable, trade, less allowance for doubtful accounts of $5.7 million in 2007 and $10.1 million in 2006...................................... 93.2 219.5 Inventories..................................................................... 152.0 353.4 Deferred and recoverable income taxes........................................... 10.7 40.6 Deferred and recoverable non-income taxes....................................... 19.5 33.6 Assets held for sale............................................................ 21.9 -- Other current assets............................................................ 11.8 4.4 -------- -------- Total current assets.................................................... 397.7 733.4 -------- -------- Property, Plant, and Equipment, net................................................ 353.3 552.4 Goodwill ........................................................................ 20.2 127.0 Other intangibles ................................................................. -- 53.0 Prepaid pension expense............................................................ 233.4 202.5 Deferred and recoverable income taxes.............................................. 13.9 Recoverable non-income taxes....................................................... 102.2 63.6 Other assets....................................................................... 44.2 50.8 -------- -------- Total assets............................................................ $1,164.9 $1,782.7 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable, trade......................................................... $ 123.0 $ 216.0 Short-term borrowings........................................................... 59.5 163.2 Liabilities held for sale....................................................... 2.6 -- Accrued liabilities: Employee compensation...................................................... 31.1 35.2 Product warranty and self-insured risks.................................... 17.2 37.9 Other...................................................................... 35.9 57.0 -------- -------- Total current liabilities............................................... 269.3 509.3 Long-term debt..................................................................... 3.3 217.3 Deferred income taxes.............................................................. 10.2 28.6 Other postretirement benefit liabilities........................................... 74.3 166.0 Product warranty and self-insured risks............................................ 10.0 13.6 Accrual for environmental matters.................................................. 2.9 1.3 Pension liabilities................................................................ 14.8 14.9 Other ........................................................................... 34.2 33.3 -------- -------- Total liabilities....................................................... 419.0 984.3 -------- -------- 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................................................................ 547.9 726.3 Accumulated other comprehensive income .......................................... 168.5 49.9 -------- -------- Total stockholders' equity................................................ 745.9 798.4 -------- -------- Total liabilities and stockholders' equity................................ $1,164.9 $1,782.7 ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 48 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions) FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2007 2006 2005 -------- -------- ---------- Cash Flows from Operating Activities: Net loss ....................................................... $ (178.1) $ (80.3) $ (223.5) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization ........................... 55.5 80.1 92.3 Non-cash restructuring charges and other items .......... 15.9 30.9 115.0 Impairment of long-lived assets ......................... 126.5 -- -- Loss (Gain) on sale of discontinued operations .......... 3.2 (49.7) -- Loss (Gain) on disposal of property and equipment ....... 1.0 (5.6) 2.4 Accounts receivable ..................................... 35.2 (7.4) 7.3 Inventories ............................................. 30.2 (18.9) 39.3 Payables and accrued expenses ........................... (51.0) 1.2 0.7 Employee retirement benefits ............................ (37.7) (24.2) (16.9) Deferred and recoverable taxes .......................... (19.8) 7.1 41.5 Other ................................................... 4.3 (27.6) (42.1) -------- -------- -------- Cash (Used in) Provided by Operating Activities ..... (14.8) (94.4) 16.0 -------- -------- -------- Cash Flows from Investing Activities: Capital expenditures ........................................... (9.2) (62.1) (113.3) Short term investments ......................................... (5.0) -- -- Restricted cash ................................................ (6.8) -- -- Business acquisitions, net of cash acquired .................... -- (2.0) -- Proceeds from sale of assets ................................... 265.3 135.0 3.5 -------- -------- -------- Cash Provided by (Used In) Investing Activities ..... 244.3 70.9 (109.8) -------- -------- -------- Cash Flows from Financing Activities: Dividends paid ................................................. -- -- (11.8) Debt issuance / amendment costs ................................ (2.5) (14.4) -- Repayment of Senior Guaranteed Notes ........................... -- (250.0) (50.0) Repayment of Industrial Development Revenue Bonds .............. -- (10.5) -- Proceeds from First Lien credit agreement ...................... 261.4 230.2 -- Repayments of First Lien credit agreement ...................... (374.5) (117.1) -- Proceeds from old Second Lien credit agreement ................. -- 100.0 -- Repayments of old Second Lien credit agreement ................. -- (100.0) -- Proceeds from new Second Lien credit agreement ................. -- 100.0 -- Repayments of new Second Lien credit agreement ................. (100.0) -- -- Other borrowings, (repayments), net ............................ (21.9) 52.6 37.8 -------- -------- -------- Cash Used In Financing Activities ................... (237.5) (9.2) (24.0) -------- -------- -------- Effect of Exchange Rate Changes on Cash ............................ 2.9 (2.0) 6.5 -------- -------- -------- Decrease In Cash and Cash Equivalents .......................... (5.1) (34.7) (111.3) Cash and Cash Equivalents: Beginning of Period ................................. 81.9 116.6 227.9 -------- -------- -------- End of Period ....................................... $ 76.8 $ 81.9 $ 116.6 ======== ======== ======== Supplemental Schedule of Noncash Investing and Financing Activities: Shareholder Option issued in conjunction with debt refinancing $ 3.7 Warrant issued in conjunction with debt financing 7.3 Paid-In-Kind Interest 0.2 Cash paid for interest 37.1 47.2 35.9 Cash paid for taxes 3.3 1.6 (7.7)
The accompanying notes are an integral part of these Consolidated Financial Statements. 49 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in millions)
ACCUMULATED OTHER TOTAL CLASS A CLASS B PAID IN RETAINED COMPREHENSIVE STOCKHOLDERS' $1 PAR VALUE $1 PAR VALUE CAPITAL EARNINGS INCOME/(LOSS) EQUITY ------------ ------------ ------- --------- ------------- ------------ BALANCE, DECEMBER 31, 2004........................ $ 13.4 $ 5.1 -- $ 1,042.0 $ (42.2) $ 1,018.3 COMPREHENSIVE INCOME (LOSS): Net loss.......................................... (223.5) (223.5) Unrealized gain on investment holdings (net of tax of $0.0) ..................................... 4.1 4.1 Minimum pension liability (net of tax of $0.0).... 0.2 0.2 Gain on derivatives (net of tax of $4.4) ......... 8.1 8.1 Translation adjustments (net of tax of $0.0)...... 19.0 19.0 ----------- TOTAL COMPREHENSIVE LOSS...................... (192.1) Cash dividends.................................... (11.8) (11.8) ------------ ------------ ------- --------- ------------- ----------- BALANCE, DECEMBER 31, 2005........................ 13.4 5.1 -- 806.7 (10.8) 814.4 COMPREHENSIVE INCOME (LOSS): Net loss.......................................... (80.3) (80.3) Unrealized loss on investment holdings (net of tax of $0.0) ..................................... (4.0) (4.0) Loss on derivatives (net of tax of $2.8) ......... (6.3) (6.3) Translation adjustments (net of tax of $7.6)...... 31.3 31.3 ----------- TOTAL COMPREHENSIVE LOSS...................... (59.3) Shareholder Option* 3.7 3.7 Impact of the adoption of FAS 158 for pension plans (net of tax of $0.0) 39.6 39.6 ------------ ------------ ------- --------- ------------- ----------- BALANCE, DECEMBER 31, 2006........................ $ 13.4 $ 5.1 $ 3.7 $ 726.4 $ 49.8 $ 798.4 Net loss.......................................... (178.1) (178.1) Impact of adoption of FIN 48 (0.4) (0.4) Gain on derivatives (net of tax of $0.0) ......... 0.1 0.1 Translation adjustments (net of tax of $3.0)...... 28.4 28.4 ----------- TOTAL COMPREHENSIVE LOSS...................... (150.0) Shareholder Warrant 7.3 7.3 Postretirement and postemployment benefits (net of tax of $0.5) (see Note 4) 90.2 90.2 ------------ ------------ ------- --------- ------------- ----------- BALANCE, DECEMBER 31, 2007........................ $ 13.4 $ 5.1 $ 11.0 $ 547.9 $ 168.5 $ 745.9 ============ ============ ======= ========= ============= ===========
* Some of the Company's major shareholders (Herrick foundation, of which former Chairman Emeritus Todd W. Herrick and Director Kent B. Herrick are members of the Board of Trustees, and two Herrick family trusts, of which Todd W. Herrick is one of the trustees) entered into option agreements with a lender to induce the lender to make financing available to the Company. These option agreements, valued at $3.7 million, were recorded as loan origination fees and the expense was included with the loss from discontinued operations upon repayment of the loan. The accompanying notes are an integral part of these Consolidated Financial Statements. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS) NOTE 1. ACCOUNTING POLICIES Business Description - Tecumseh Products Company (the "Company") is a full line, independent global manufacturer of hermetic compressors for residential and commercial refrigerators, freezers, water coolers, dehumidifiers, window air conditioning units and residential and commercial central system air conditioners and heat pumps. We formerly operated an Engine & Power Train Electrical Component business, as well as an Electrical Component business. During 2007, we sold our entire Engine & Power Train business, and the majority of the Electrical Component business. The remaining portions of the Electrical Component business are classified as held for sale. Principles of Consolidation - The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated. Foreign Currency Translation - All of our foreign subsidiaries use the local currency of the country of operation as the functional currency. Assets and liabilities are translated into U.S. dollars at year-end exchange rates while revenues and expenses are translated at average monthly exchange rates. The resulting translation adjustments are recorded in other comprehensive income or loss, a component of stockholders' equity. Realized foreign currency transaction gains and losses are included in cost of sales and operating expenses and amount to a net gain of $1.6 million in 2007, a net gain of $6.3 million in 2006, and a net loss of $3.6 million in 2005. Cash and Cash Equivalents - Cash equivalents consist of commercial paper and other short-term investments that are readily convertible into cash with original maturities of three months or less. Restricted cash represents cash deposits related to letters of credit. Cash and cash equivalents in foreign locations amounted to $62.4 million and $38.5 million at December 31, 2007 and 2006, respectively. Short term investments - Investments with a maturity of greater than three months to one year are classified as short-term investments. Investments with maturities beyond one year may be classified as short-term if the Company reasonably expects the investment to be realized in cash or sold or consumed during the normal operating cycle of the business. Investments available for sale are recorded at market value using the specific identification method. Investments held to maturity are measured at amortized cost in the statement of financial position if it is the Company's intent and ability to hold those securities to maturity. Any unrealized gains and losses on available for sale securities are reported as other comprehensive income as a separate component of shareholders' equity until realized or until a decline in fair value is determined to be other than temporary. At December 31, 2007, we held auction-rate securities valued at $5.0 million. Inventories - Inventories are valued at the lower of cost or market, on the first-in, first-out basis. Cost in inventory includes purchased parts and materials, direct labor and applied manufacturing overhead. Property, Plant and Equipment - Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred. For financial statement purposes, depreciation is determined using the straight-line method at rates based 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS) upon the estimated useful lives of the assets, which generally range from 15 to 40 years for buildings and from 2 to 12 years for machinery, equipment and tooling. Goodwill - In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill deemed to have indefinite life is no longer amortized but is subject to impairment testing on at least an annual basis. We perform our annual impairment testing during the fourth quarter each year. The impairment test compares the estimated fair value of the reporting unit to its carrying value to determine if there is any potential impairment. If the estimated fair value is less than the carrying value, an impairment loss is recognized to the extent that the estimated fair value of the goodwill within the reporting unit is less than the carrying value. See Note 5 for additional disclosures related to goodwill. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Revenue Recognition - Revenues from the sale of our products are recognized once the risk and rewards of ownership have transferred to the customers, which, in most cases, coincide with shipment of the products. For other cases involving export sales, title transfers either when the products are delivered to the port of embarkation or received at the port of the country of destination. Shipping and Handling - Shipping and handling fee revenue is not significant. Shipping and handling costs are included in cost of goods sold. Income Taxes - Income taxes are accounted for using the liability method under which deferred income taxes are determined based upon the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities, as measured by the currently enacted tax rates. Derivative Financial Instruments - Derivative financial instruments are utilized to manage risk exposure to movements in foreign exchange rates and commodity prices. We enter into forward exchange contracts to obtain foreign currencies at specified rates based on expected future cash flows for each currency. Changes in the value of derivative financial instruments are measured at the balance sheet date and recognized in current earnings or other comprehensive income depending on whether the derivative is designated as part of a hedge transaction and, if it is, the type of transaction. We do not hold derivative financial instruments for trading purposes. Product Warranty - Provision is made for the estimated cost of maintaining product warranties at the time the product is sold based upon historical claims experience by product line. Self-Insured Risks - Provision is made for the estimated costs of known and anticipated claims under the deductible portions of our health, liability and workers' compensation insurance programs. In addition, provision is made for the estimated cost of post-employment benefits. Environmental Expenditures - Expenditures for environmental remediation are expensed or capitalized, as appropriate. Costs associated with remediation activities are expensed. Liabilities relating to probable remedial activities are recorded when the costs of such activities can be reasonably estimated and are not discounted or reduced for possible recoveries from insurance carriers. Earnings (Loss) Per Share - Basic and diluted earnings (loss) per share are currently equivalent. 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. However, this warrant is not included in diluted earnings per share for the year ended December 31, 2007, as the effect would be antidilutive. Earnings (loss) per share are computed based on the weighted average number of common shares outstanding for the periods reported. The weighted average number of common shares used in the computations was 18,479,684 in 2007, 2006 and 2005. Research, Development and Testing Expenses - Company sponsored research, development and testing expenses related to present and future products are expensed as incurred and were $28.1 million, $33.8 million, and $28.1 million in 2007, 2006 and 2005, respectively. Such expenses consist primarily of salary and material costs and are included in cost of sales and operating expenses. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts during the reporting period and at the date of the financial statements. Significant estimates include accruals for product warranty, deferred tax assets, self-insured risks, pension and postretirement benefit obligations and environmental matters, as well as the evaluation of goodwill and long-lived asset impairment. Actual results could differ materially from those estimates. NOTE 2. DISCONTINUED OPERATIONS Electrical Components During the second quarter of 2007, our Board of Directors approved a plan to sell the assets of our Electrical Components business. On August 31, 2007, we completed an agreement to sell the Residential & Commercial and Asia Pacific operations of this business for $220 million in gross proceeds. On November 1, 2007, we signed an agreement to sell our Automotive & Specialty business operations for $10 million in cash, subject to 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 in the third quarter of 2007, to reflect the net proceeds expected to be realized upon consummation of the transaction. The sale transaction closed on December 7, 2007. The assets of the remaining businesses within the Electrical Components business have been classified as held for sale as of December 31, 2007. The results for Electrical Components for the years ended December 31, 2007 and 2006 are included in the loss from discontinued operations. Engine & Power Train On October 22, 2007, we signed a Definitive Stock Purchase Agreement to sell our Engine & Power Train business operations for $51 million in cash, subject to customary adjustments at closing. The transaction was completed on November 9, 2007. As a result of the agreement, we reduced the carrying value of the long lived assets of the business by $28.1 million in the third quarter of 2007, reflecting the net proceeds expected to be realized upon the completion of the sale. Favorable adjustments of $1.8 million, attributable to post-closing adjustments to the purchase price pursuant to the agreement, were recorded in the fourth quarter. Interest expense of $36.0 million, $18.2 million, and $14.0 million was allocated to discontinued operations for the years ended December 31, 2007, 2006 and 2005, respectively, related to operations divested in 2007. Approximately $17.8 million in deferred financing costs associated with the Second Lien debt, which we retired during the third quarter 2007, were expensed as part of the interest costs allocated to discontinued operations during that 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. The remainder of the balance under the First Lien Credit agreement was repaid upon the closing of the sale of the Engine & Power Train business on November 9, 2007. 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Following is a summary of loss from discontinued operations related to the Electrical Components for the years ended December 31, 2007, 2006 and 2005:
(Dollars in millions) FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2007 2006 2005 -------- -------- -------- Sales $ 306.6 $ 429.9 $ 410.1 Cost of Sales 277.0 399.3 367.6 Selling and administrative expenses 25.7 35.3 35.0 Impairments, restructuring charges, and other items 96.5 2.9 109.6 -------- -------- -------- Operating loss (92.6) (7.6) (102.1) Interest income (expense) 0.1 -- (0.5) -------- -------- -------- Loss on disposal (5.5) -- -- -------- -------- -------- Loss from discontinued operations before income taxes $ (98.0) $ (7.6) $ (102.6) ======== ======== ========
Following is a summary of income (loss) from discontinued operations related to the Engine & Power Train business for the years ended December 31, 2007, 2006 and 2005:
(Dollars in millions) FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2007 2006 2005 -------- -------- -------- Sales $ 185.9 $ 319.0 $ 404.1 Cost of Sales 185.3 329.5 442.8 Selling and administrative expenses 16.4 43.3 36.4 Impairments, restructuring charges, and other items 26.0 27.0 4.5 -------- -------- -------- Operating loss (41.8) (80.8) (79.6) Interest income (expense) 0.1 (8.1) (6.7) -------- -------- -------- Gain on disposal 1.8 -- -- -------- -------- -------- Loss from discontinued operations before income taxes $ (39.9) $ (88.9) $ (86.3) ======== ======== ========
During the third quarter of 2007, we also sold Manufacturing Data Systems Inc., a small subsidiary not associated with any of our major business operations. Sales of $0.8 million and pretax losses of $0.9 million were recorded for the year ended December, 2007. Sales of $2.5 million and pretax losses of $2.2 million were recorded for the year ended December 31, 2006, and sales of $1.9 million and pretax losses of $5.9 million were recorded for the year ended December 31, 2005. 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 year ended December 31, 2006 are included in loss from discontinued operations. Interest expense of $2.9 and $6.3 million was allocated to discontinued operations for the years ended December 31, 2006 and 2005 respectively related to the Little Giant divestiture, because our financing agreements required the proceeds from the sale to be utilized to repay portions of our debt. 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Following is a summary of income (loss) from discontinued operations related to Little Giant Pump Company for the years ended December 31, 2006 and 2005:
Year Ended Year Ended December 31, December 31, (Dollars in millions) 2006 2005 ------------ ------------ Net sales $ 32.9 $ 106.3 Cost of sales 23.9 77.6 Selling and administrative expenses 6.9 19.2 -------- -------- Operating income 2.1 9.5 Interest expense allocated 2.9 6.3 -------- -------- (Loss) gain from discontinued operations before income taxes (0.8) 3.2 -------- -------- Gain on disposal 78.0 -- -------- -------- Income from discontinued operations $ 77.2 $ 3.2 ======== ========
The following table summarizes income (loss) from discontinued operations, net of tax, for the years ended December 31, 2007, 2006 and 2005:
(Dollars in millions) FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2007 2006 2005 -------- -------- -------- Electrical Components $ (98.0) $ (7.6) $ (102.6) Engine & Power Train (39.9) (88.9) (86.3) Manufacturing Data Systems, Inc. (0.9) (2.2) (5.9) Little Giant Pump Company -- 77.2 3.2 Allocated interest expense related to 2007 divestitures (36.0) (18.2) (14.0) Tax (provision) benefit (0.4) 7.5 0.3 -------- -------- -------- Loss from discontinued operations, net of tax $ (175.2) $ (32.2) $ (205.3) ======== ======== ========
56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The following summary balance sheet information is derived from the businesses that are classified as held for sale as of December 31, 2007, which management believes is representative of the net assets of the business held for disposal. This balance sheet information includes remaining operations within the Electrical Components Group, and other long-lived assets that were held for sale at December 31, 2007.
(Dollars in millions) DECEMBER 31, 2007 ------------ ASSETS: Current Assets: Accounts receivable, net $ 2.1 Inventories 7.9 Property, plant, and equipment, net 11.9 ------- Total assets held for sale $ 21.9 ======= LIABILITIES: Current Liabilities: Accounts payable, trade $ 2.2 Accrued liabilities 0.4 ------- Total current liabilities held for sale $ 2.6 ======= Net assets held for sale $ 19.3 =======
NOTE 3. ACCUMULATED OTHER COMPREHENSIVE INCOME Accumulated other comprehensive income is shown in the Consolidated Statements of Stockholders' Equity and includes the following:
(in millions) 2007 2006 -------- -------- Foreign currency translation adjustments $ 36.2 $ 8.0 Gain (loss) on derivatives 2.5 2.4 Postretirement and postemployment benefits: Prior Service Credit 82.4 36.6 Net Actuarial Gain 47.7 3.3 Net Transition Obligation (0.3) (0.4) -------- -------- Total postretirement and postemployment benefits 129.8 39.5 -------- -------- $ 168.5 $ 49.9 ======== ========
NOTE 4. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS The Company has defined benefit retirement plans that cover substantially all domestic employees. Plans covering salaried employees generally provide pension benefits that are based on average earnings and years of credited service. Plans covering hourly employees generally provide pension benefits of stated amounts for each year of service. We sponsor a retiree health care benefit plan, including retiree life insurance, for eligible salaried employees and their eligible dependents. At certain divisions, we also sponsor retiree health care benefit plans for hourly retirees and their eligible dependents. The retiree health care plans, which are unfunded, provide for coordination of benefits with Medicare and any other insurance plan covering a participating retiree or dependent, and have lifetime maximum benefit restrictions. Some of the retiree health care plans are 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) contributory, with some retiree contributions adjusted annually. We have reserved the right to interpret, change or eliminate these health care benefit plans. On September 29, 2006, SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" (SFAS 158) was issued. SFAS 158 requires companies to recognize the funded status of their defined postretirement benefit plans as a net asset or liability on the balance sheet. Each overfunded plan is recognized as an asset and each unfunded or underfunded plan is recognized as a liability. Any unrecognized past service cost, experience gains/losses, or transition obligations are reported as a component of accumulated other comprehensive income in stockholders' equity. SFAS 158 was effective with balance sheets reported as of December 31, 2006, and its impact on our balance sheet was material, resulting in an increase to net assets and shareholders' equity of $39.6 million. The adoption of SFAS 158 has no impact on our net earnings, cash flow, liquidity, debt covenants, or plan funding requirements. We currently use September 30 as the measurement date (the date upon which plan assets and obligations are measured) to facilitate the preparation and reporting of pension and postretirement plan data. Information regarding the funded status and net periodic benefit costs is reconciled to or stated as of the fiscal year end of December 31. No significant events took place between September 30 and December 31 that would have materially impacted the assumptions utilized at the measurement date. SFAS 158 eliminates a company's ability to select a date to measure plan assets and obligations that is prior to its year-end balance sheet date. This provision of SFAS 158 will become effective with our fiscal year ended December 31, 2008. Amounts recognized for both U.S.-based and foreign pension and OPEB plans in the consolidated balance sheets and in accumulated other comprehensive income as of December 31 consist of:
(in millions) PENSION BENEFIT OTHER BENEFIT ---------------------- ------------------------ 2007 2006 2007 2006 ------ ------ ------- ------- Amounts recognized in the consolidated balance sheets: Prepaid pension asset $233.4 $202.5 -- -- Accrued pension liability (14.8) (15.9) (82.1) (176.5) ------ ------ ------- ------- Net amount recognized $218.6 $186.6 $ (82.1) $(176.5) ====== ====== ======= ======= Accumulated other comprehensive income: Prior Service Credit (3.8) (1.7) (78.6) (34.9) ------ ------ ------- ------- Net Actuarial Gain (20.1) (2.4) (27.6) (0.9) ------ ------ ------- ------- Net Transition Obligation 0.3 0.4 -- -- ------ ------ ------- ------- Total postretirement and postemployment benefits $(23.6) $ (3.7) $(106.2) $ (35.8) ====== ====== ======= =======
58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The net periodic benefit (credit) cost of the postretirement plan for the years ended December 31 was:
PENSION BENEFIT OTHER BENEFIT ------------------ ------------------- (in millions) 2007 2006 2007 2006 ------- ------ ------- ------- Accumulated other comprehensive income: Prior Service Credit $ (2.1) $ (1.7) $ (43.7) $ (34.9) ------- ------ ------- ------- Net Actuarial Gain (17.7) (2.4) (26.7) (0.9) ------- ------ ------- ------- Net Transition Obligation (0.1) 0.4 -- -- ------- ------ ------- ------- Total postretirement and postemployment benefits $ (19.9) $ (3.7) $ (70.4) $ (35.8) ======= ====== ======= =======
The estimated net experience gain and prior service credit that will be adjusted from accumulated other comprehensive income into pension expense over the 2008 fiscal year are $2.1 million and $7.0 million, respectively. The following tables provide a reconciliation of the changes in the United States based pension and postretirement plans' benefit obligations, fair value of assets and funded status for 2007 and 2006:
PENSION BENEFIT OTHER BENEFIT ------------------- ------------------- (in millions) 2007 2006 2007 2006 ------- ------- ------- ------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of period....... $ 410.6 $ 423.1 $ 175.2 $ 194.5 Service cost ................................. 8.2 10.2 3.2 3.9 Interest cost ................................ 22.7 22.5 6.8 10.3 Plan change .................................. 1.3 -- (59.8) -- Actuarial gain ............................... (8.8) (14.9) (27.7) (15.2) Curtailment gain ............................. (2.8) (1.7) (11.2) (8.2) Benefit payments ............................. (33.5) (28.6) (7.7) (10.1) Special termination benefits ................. 1.8 -- -- -- Effect of changes in exchange rate ........... 2.6 -- -- -- ------- ------- ------- ------- Benefit obligation at measurement date ......... $ 402.1 $ 410.6 $ 78.8 $ 175.2 ======= ======= ======= ======= CHANGE IN PLAN ASSETS Fair value at beginning of period .............. $ 598.4 $ 596.1 Actual return on plan assets ................. 52.2 29.6 Employer contributions ....................... 0.5 0.1 Benefit payments ............................. (32.2) (27.4) Effect of changes in exchange rate ........... 0.1 -- ------- ------- Fair value at measurement date ................. $ 619.0 $ 598.4 ======= =======
As a result of the sale of the Residential & Commercial division of our Electrical Components business in August of 2007, and the associated curtailment of the pension and other postretirement ("OPEB") benefits of its employees, we recognized a net gain of $2.8 million for pension and an expense of $0.6 million for OPEB in the fourth quarter of 2007. As a result of the completion of the previously announced closure of our Engine & Power Train facility in New Holstein, Wisconsin and the associated plan changes and curtailment of the OPEB benefits of its employees, we recognized a net gain of $41.5 million over the course of 2007. $29.6 million of the gain is related to a plan change associated with the elimination of future retiree medical benefits, while $11.9 million relates to the curtailment associated with the active employees affected 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) by the closure of the facility. In addition to the curtailment gain, based on current actuarial assumptions, all future pension and retiree health care expense will decrease by $0.9 million per quarter. We also recorded other gains of $30.2 million related to OPEB plan changes during 2007. These plan changes related to the elimination of certain drug benefits effective February 1, 2007. Due to the completion of the divestitures of the Engine & Power Train business and the Automotive & Specialty division of our Electrical Components business in the fourth quarter of 2007, we expect that further curtailment gains will also be recognized in 2008. The actual amount of these gains will be dependent on the outcome of actuarial assumptions associated with each curtailment, which are currently under evaluation. The following table provides the funded status of the plans for 2007 and 2006:
PENSION BENEFITS OTHER BENEFITS ------------------- -------------------- (in millions) 2007 2006 2007 2006 ------- ------- ------- -------- FUNDED STATUS Funded status at measurement date .... $ 216.8 $ 186.5 $ (78.8) $ (175.2) ------- ------- ------- -------- Net amount recognized ............... $ 216.8 $ 186.5 $ (78.8) $ (175.2) ======= ======= ======= ========
The accumulated benefit obligation for all defined benefit pension plans was $389.3 million and $378.1 million at September 30, 2007 and 2006, respectively. Information for pension plans with an accumulated benefit obligation in excess of plan assets:
SEPTEMBER 30, ----------------- (in millions) 2007 2006 ------ ------ Projected benefit obligation ... $ 19.0 $ 17.8 Accumulated benefit obligation . 19.0 10.9 Fair value of plan assets ...... 3.3 3.0
Components of net periodic benefit (income) cost during the year:
PENSION BENEFITS OTHER BENEFITS -------------------- ------------------ (in millions) 2007 2006 2007 2006 ------- -------- ------- ------ Service cost ........................................... $ 8.2 $ 10.2 $ 3.2 $ 3.9 Interest cost .......................................... 22.7 22.5 6.8 10.3 Expected return on plan assets ......................... (45.4) (45.1) -- -- Amortization of net gain ............................... 0.7 (0.2) (0.4) (0.1) Amortization of actuarial transition obligation......... 0.1 0.1 -- -- Amortization of unrecognized prior service costs........ (0.5) 1.0 (10.4) (4.9) Additional income due to curtailments .................. -- (1.3) (17.6) (7.5) ------- -------- ------- ------ Net periodic benefit (income) cost ..................... $ (14.2) $ ($12.8) $ (18.4) $ 1.7 ======= ======== ======= ======
60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) ADDITIONAL INFORMATION ASSUMPTIONS Weighted-average assumptions used to determine benefit obligations;
PENSION BENEFITS OTHER BENEFITS -------------------------- ------------------------- 2007 2006 2007 2006 --------- ----- ---------- ----- U.S.-Based Plans - at September 30, Discount rate ...................... 6.03-6.27% 5.69% 5.21-6.20% 5.63% Rate of compensation increase ...... 4.25% 4.25% N/A N/A Europe-Based Plans - at December 31, 2007 2006 2007 2006 Discount rate ...................... 4.80% 4.10% N/A N/A Rate of compensation increase ...... 2.10% 2.10% N/A N/A India-Based Plans - at December 31, 2007 2006 2007 2006 Discount rate ...................... 7.50% 8.25% N/A N/A Rate of compensation increase ...... 5.50% 5.00% N/A N/A
Weighted-average assumptions used to determine net periodic benefit costs for the years ended December 31:
PENSION BENEFITS OTHER BENEFITS -------------------------- ------------------------- 2007 2006 2007 2006 --------- ----- ---------- ------ U.S.-Based Plans: Discount rate .............................. 5.56-5.71% 5.50% 5.39-5.69% 5.50% Expected long-term return on plan assets ... 7.50% 7.50% N/A N/A Rate of compensation increase .............. 4.25% 4.25% N/A N/A Europe.-Based Plans: 2007 2006 2007 2006 Discount rate .............................. 4.80% 4.10% N/A N/A Expected long-term return on plan assets ... N/A N/A N/A N/A Rate of compensation increase .............. 2.10% 2.10% N/A N/A India.-Based Plans: 2007 2006 2007 2006 Discount rate .............................. 7.50% 8.25% N/A N/A Expected long-term return on plan assets ... 9.00% 8.20% N/A N/A Rate of compensation increase .............. 5.50% 5.00% N/A N/A
The expected long-term return, variance, and correlation of return with other asset classes are determined for each class of assets in which the plan is invested. That information is combined with the target asset allocation to create a distribution of expected returns. The selected assumption falls within the best estimate range, which is the range in which it is reasonably anticipated that the actual results are more likely to fall than not. 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Assumed health care cost trend rates:
SEPTEMBER 30, ------------------------ 2007 2006 --------- ---------- Health care cost trend rate assumed for next year .................................. 8.5-12.0% 9.5-13.5% Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)... 5.0% 5.0% Year that the rate reaches the ultimate trend rate ................................. 2015-2016 2015-2016
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The health care cost trend rates are based on an evaluation of external market conditions and adjusted to reflect our actual experience in relation to those market trends. A one-percentage-point increase in the assumed health care cost trend rate would increase the postretirement benefit obligation by $7.8 million, and a one-percentage-point decrease in the assumed health care cost trend rate would decrease the postretirement benefit obligation by $6.7 million. Plan Assets The following table provides pension plan asset allocations:
PLAN ASSETS AT SEPTEMBER 30, ---------------------------- 2007 2006 ---------- --------------- ASSET CATEGORY: Debt securities ......... 23% 49% Equity securities ....... 28% 51% Cash* ................... 49% -- --- --- Total ................ 100% 100% === ===
* The cash balances as of September 30, 2007 were due to the anticipated reversion of our Salaried Retirement plan. In the first quarter of 2007, we announced revisions to this Plan. At December 31, 2007, this Plan reported approximately $121 million in overfunding, out of a total of $231 million for all our pension plans that have plan assets in excess of obligations. On May 1, 2007, we implemented a new retirement program for all Tecumseh salaried employees. This conversion, which is expected to be completed in March of 2008, yielded cash proceeds to the Company of approximately $80 million, which represents gross proceeds of $100 million net of excise tax of $20 million. The new retirement program includes both defined benefit and defined contribution plans. A portion of the overfunding for the old plan was utilized to pre-fund the benefits for both of the replacement plans for approximately the next six to eight years. The estimated impact will amount to net expense of $11 million. This net expense results from the recognition of $20 million of federal excise tax that is levied on the gross amount of cash returned to the Company, net of recognition of previously deferred actuarial gains of $9 million dollars. The $100 million in gross proceeds from the reversion generates a tax gain that will be fully offset against our existing NOL carryforwards. In addition, we expect a reduction in net period income. 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 $12 million versus $15 million in 2007. 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Our investment objective is to provide pension payments. This is accomplished by investing the estimated payment obligations into fixed income portfolio where maturities match the expended benefit payments. This portfolio consists of investments rated "A" or better by Moody's or Standard & Poor's. Funds in excess of the estimated ten-year payment obligations are invested in equal proportions in a separate bond portfolio and an equity portfolio. Equity securities include Tecumseh Products Company common stock in the amounts of $3.5 million (0.6% of total plan assets) at both September 30, 2007 and 2006. We expect to make contributions of $0.3 million to our pension plans in 2008. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid.
(in millions) PROJECTED BENEFIT PROJECTED BENEFIT PAYMENTS PAYMENTS FROM FROM POSTRETIREMENT MEDICAL PENSION PLANS AND LIFE INSURANCE PLANS ------------------------------------------------------- GROSS CLAIMS EXPECTED SUBSIDY ------------ ---------------- YEAR 2008 .................. $ 25.2 $ 7.9 $ 0.1 2009 .................. 26.0 6.5 0.1 2010 .................. 26.1 6.7 0.1 2011 .................. 26.0 6.8 0.1 2012 .................. 26.0 6.6 0.1 Aggregate for 2013-2017 129.6 29.9 0.6
FOREIGN PENSION PLANS Our foreign subsidiaries provide for defined benefits that are generally based on earnings at retirement date and years of credited service. The net pension and OPEB liability recorded in the consolidated balance sheet was $14.1 million and $13.3 million for 2007 and 2006, respectively. Our foreign subsidiaries also record liabilities for certain retirement benefits that are not defined benefit plans. The net liability for those other postretirement employee benefit plans recorded in the consolidated balance sheet was $1.5 million for both 2007 and 2006. The combined expense for these plans was $1.7 million and $1.5 million in 2007 and 2006, respectively. DEFINED CONTRIBUTION PLANS We have defined contribution retirement plans that cover substantially all domestic employees. The combined expense for these plans was $2.2 million and $2.4 million in 2007 and 2006, respectively. NOTE 5. GOODWILL Our primary goodwill relates to the assignment of purchase price following the acquisition of certain of our subsidiaries. We account for these assets under SFAS 142, "Goodwill and Other Intangible Assets," subjecting the recorded amounts to impairment testing on at least an annual basis. SFAS 142 requires that we estimate the fair value of the reporting unit as compared to its recorded book value. If the estimated fair value is less than the book value, then an impairment is deemed to have occurred. As required by SFAS 142, we measure the amount of goodwill impairment by allocating the estimated fair value to the tangible and intangible assets within the reporting unit. 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) We traditionally conduct our annual assessment of impairment in the fourth quarter by comparing the carrying value of our reporting units to their estimated fair value. Estimated fair value of our goodwill is estimated based upon a present value technique using discounted future cash flows, forecasted over a five year period, with residual growth rates forecasted at 3.0% to 5.0% thereafter. We use management business plans and projections as the basis for expected future cash flows. In evaluating such business plans for reasonableness in the context of their use for predicting discounted cash flows in our valuation model, we evaluate whether there is a reasonable basis for differences between actual results of the preceding year and projected results for the upcoming years. This methodology can potentially utilize significant improvements in growth rates in the first few years of forecast data, due to multiple factors such as projected improved efficiencies or incremental sales volume opportunities that are deemed to be reasonably likely to be achieved. Assumptions in estimating future cash flows are subject to a high degree of judgment and complexity. We make every effort to forecast these future cash flows as accurately as possible with the information available at the time the forecast is developed. However, changes in the assumptions and estimates may affect the carrying value of goodwill, and could result in additional impairment charges in future periods. Factors that have the potential to create variances between forecasted cash flows and actual results include but are not limited to (i) acceptance of the Company's pricing actions undertaken in response to rapidly changing commodity prices and other product costs; (ii) product costs, particularly commodities such as copper; (iii) currency exchange fluctuations; (iv) successful implementation of our plan to increase or enhance productivity; (v) fluctuations in sales volumes, which can be driven by multiple external factors, including weather conditions affecting demand; (vi) interest rate fluctuations; and (vii) the intention to continue to operate the reporting unit. Refer to "Cautionary Statements Relating to Forward-Looking Statements" in Item 2 for other factors that have the potential to impact estimates of future cash flows. Discount rates utilized in the goodwill valuation analysis are derived from published resources such as Ibbotson. The rates utilized were 11.23% at December 31, 2007 and 8.16% at December 31, 2006 respectively for all business units for which goodwill is currently recorded. For purposes of our 2007 analysis, in light of the Company's transition from a diversified concern to a global compressor business, we utilized the discount rate from a SIC code specific to our compressor business. Had we utilized the same SIC code as was employed in 2006, the result would have been a discount rate of 10.08%. Based on the goodwill analysis performed for the year ended December 31, 2007, changes of 1.0% in the discount rate utilized would increase (decrease) the fair value calculated for the respective business units as follows:
Change in valuation with Change in valuation 1.0% decrease in with 1.0% increase in discount rate discount rate Europe $4.1 $(3.9) India 4.8 (4.6)
Both business units that have goodwill show a fair value sufficiently greater than the carrying value such that a 1.0% increase in discount rate does not place the goodwill at or near risk of impairment. 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Pretax operating profit as a percentage of sales revenue is also a key assumption in the fair value calculation. The range of assumptions used incorporates the anticipated results of our ongoing productivity improvements over the life of the forecast model. The Europe reporting unit forecasted operating profit percentages of 3.0% in 2008 and ranging from 3.1 to 3.5% thereafter, with operating profit in the terminal year forecasted at 3.4%. The India reporting unit forecasted operating profit at 4.6% of sales in 2008 ranging from 3.1% to 4.0% thereafter, with operating profit in the terminal year forecasted at 2.8%. On April 21, 2006, we completed the sale of our 100% ownership in Little Giant Pump Company, for which we had recorded $5.1 million in goodwill. The only other changes in goodwill during 2006 were due to foreign currency fluctuations. In light of the classification of the Electrical Components business as a discontinued operation as of the end of the second quarter of 2007, we performed an interim analysis of the fair value of the business unit at June 30. 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. The only other changes in goodwill during 2007 were due to foreign currency fluctuations. The changes in the carrying amount of goodwill by reporting unit follow:
ELECTRICAL (in millions) EUROPE INDIA COMP. PUMPS TOTAL ------ ------ ---------- ------ ------ Balance at Jan. 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 Dec. 31, 2006 ............... 11.2 7.0 108.8 -- 127.0 ------ ------ -------- ------ ------ Impairment ............................. -- -- (39.3) -- (39.3) Sale of Residential & Commercial and Asia Pacific operations ................ -- -- (72.1) -- (72.1) Foreign currency translation ........... 1.2 0.8 2.6 -- 4.6 ------ ------ -------- ------ ------ Balance at Dec. 31, 2007 ............... $ 12.4 $ 7.8 -- -- $ 20.2 ====== ====== ======== ====== ======
65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 6. INCOME TAXES Consolidated income (loss) from continuing operations before taxes consists of the following:
(in millions) 2007 2006 2005 ------ ------ ----- U.S. ...... $(29.5) $(24.6) $ 6.9 Foreign ... 18.4 (11.0) 2.4 ------ ------ ----- $(11.1) $(35.6) $ 9.3 ====== ====== =====
Provision for (benefit from) income taxes from continuing operations consists of the following:
(in millions) 2007 2006 2005 ------ ------ ------ Current: U.S. federal ........................................... $ 1.3 $ 1.0 $(14.9) State and local ........................................ -- -- (0.5) Foreign income and withholding taxes ................... 2.8 2.6 6.8 ------ ------ ------ 4.1 3.6 (8.6) ------ ------ ------ Deferred: U.S. federal ........................................... (13.4) -- 32.2 State and Local ........................................ 1.3 -- -- Foreign ................................................ (0.2) 8.9 3.9 ------ ------ ------ (12.3) 8.9 36.1 ------ ------ ------ Provision for (benefit from) income taxes from continuing operations .............................................. $ (8.2) $ 12.5 $ 27.5 ====== ====== ====== Income taxes paid, net .................................. $ 3.3 $ 1.6 $ (7.7) ====== ====== ======
A reconciliation between the actual income tax expense (benefit) provided and the income tax expense (benefit) computed by applying the statutory federal income tax rate of 35% to income before tax is as follows:
(in millions) 2007 2006 2005 ------ ------ ------ Income taxes (benefit) at U.S. statutory rate ......... $ (3.9) $(12.5) $ 3.3 Foreign tax differential (and withholding tax) ........ 0.6 5.0 7.1 Change in valuation allowance ......................... (3.5) 9.7 14.2 State and local income taxes .......................... 1.3 -- (0.5) Medicare reimbursement ................................ -- -- (0.8) Federal credits ....................................... -- -- (0.8) Expiration of statute on uncertain tax positions....... (2.2) -- -- Other ................................................. (0.5) 10.3 5.0 ------ ------ ------ $ (8.2) $ 12.5 $ 27.5 ====== ====== ======
66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Deferred income taxes reflect the effect of temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements. Provisions are also made for estimated taxes which may be incurred on the remittance of subsidiaries' undistributed earnings, none of which are deemed to be permanently reinvested. Significant components of our deferred tax assets and liabilities as of December 31 were as follows:
(in millions) 2007 2006 ------ ------ Deferred tax assets: Other postretirement liabilities ....................................... $ 22.1 $ 65.6 Product warranty and self-insured risks ................................ 8.4 14.5 Net operating loss carryforwards ....................................... 231.8 88.6 Translation adjustments ................................................ 0.5 (13.3) Tax credit carryovers .................................................. 53.8 47.1 Other accruals and miscellaneous ....................................... 37.2 73.5 ------ ------ 353.8 276.0 Valuation allowance .................................................... (229.5) (119.4) ------ ------ Total deferred tax assets .............................................. 124.3 156.6 ------ ------ Deferred tax liabilities: Tax over book depreciation ............................................. 21.1 32.1 Pension ................................................................ 75.8 73.3 Unremitted foreign earnings ............................................ 20.6 36.1 Intangibles ............................................................ -- 16.9 Other .................................................................. 5.1 -- ------ ------ Total deferred tax liabilities ......................................... 122.6 158.4 ------ ------ Net deferred tax (liabilities) assets .................................. $ 1.7 $ (1.8) ====== ====== Deferred tax detail is included in the consolidated balance sheet as follows: Tax assets (including refundable of $13.9 and $13.8) ................... $ 24.6 $ 40.6 Non-current deferred tax liabilities ................................... 10.2 28.6 ------ ------ Total .................................................................. $ 14.4 $ 12.0 ====== ======
At December 31, 2007, we had the following loss carryforwards:
Carryforward amount Expiration U.S. Federal $ 578.0 2025 to 2027 U.S. State 366.5 2008 to 2027 Brazil 65.9 None India 17.0 None Federal Capital Loss 44.4 2012
In 2008, the $100 million in gross proceeds from the reversion of our Salaried Retirement plan will generate a tax gain that will be fully offset against our existing NOL carryforwards. 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Foreign tax credit and research credit carryforwards of approximately $53.4 million will expire from 2012 through 2017. Furthermore, we also had various state tax credit carryovers of $0.9 million, which expire at various dates from 2008 to 2020. Income taxes are recorded pursuant to SFAS No. 109, "Accounting for Income Taxes," which specifies the allocation method of income taxes between categories of income defined by that statement as those that are included in net income (continuing operations and discontinued operations) and those included in comprehensive income but excluded from net income. SFAS 109 is applied by tax jurisdiction, and in periods in which there is a pre-tax loss from continuing operations and pre-tax income in another category (such as other comprehensive income or discontinued operations), tax expense is allocated to the other sources of income with a related benefit recorded in continuing operations. The full year results of 2007 reflected a tax benefit in continuing operations, tax expense in other comprehensive income and no US federal income tax impact for discontinued operations. We evaluate our deferred income taxes quarterly to determine if valuation allowances are required or should be adjusted. SFAS 109 requires that companies assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence, both positive and negative, using a "more likely than not" standard. The valuation allowance for deferred tax assets relates to all net U.S. federal deferred tax assets, state deferred tax assets and certain tax assets arising in foreign tax jurisdictions, and in the judgment of management, these tax assets are not likely to be realized in the foreseeable future. The valuation allowance increased by $110.1 million and $29.2 million in 2007 and 2006 respectively. The 2007 change is the result of the release of a valuation allowance for our operations in France of $3.8 million, $133.0 million for current year losses and credits and a net decrease of $19.1 million in the balance of other deferred tax assets. The 2006 change is the result of a valuation allowance of $5.9 million established against remaining tax assets in Brazil and $25.7 million for current year losses and credits which are reflected in the provision and a net decrease of $2.4 million in the balance of other deferred tax assets. Upon adoption of FIN 48 as of January 1, 2007, we recognized an increase of $0.4 million in the liability for unrecognized tax benefits as a cumulative effect of a change in accounting principle, with a corresponding change to retained earnings. At January 1, 2007, we had $1.9 million of total gross unrecognized tax benefits, of which $1.9 million represents the amount of unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. At December 31, 2007, the amount of gross unrecognized tax benefits before valuation allowances and the amount that would favorably affect the effective income tax rate in future periods after valuation allowances was $0.9 million. At December 31, 2007, there is no reduction of deferred tax assets relating to uncertain tax positions. We accrue interest and penalties related to unrecognized tax benefits in our provision for income taxes. At December 31, 2007, we had accrued interest and penalties of $0.7 million. The tax reserves relate to transfer pricing and state tax nexus, and the entire amount would have an impact on our effective tax rate. We expect a decrease in the range of zero to $0.4 million in the unrecognized tax benefits in the next twelve months. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(in millions) Balance at January 1, 2007 ........ $1.9 Lapse of statute of limitations ... (0.9) ---- Balance at December 31, 2007 ...... $1.0 ====
We file U.S., state and foreign income tax returns in jurisdictions with varying statues of limitations. We are currently under audit for our U.S. federal income tax returns for 2003 and 2004. The years 2004 through 2007 generally remain subject to examination by most state tax authorities. In significant foreign jurisdictions, tax years before 2003 are no longer subject to audit. NOTE 7. INVENTORIES The components of inventories at December 31 were:
(in millions) 2007 2006 ------ ------ Raw materials ...... $ 79.6 $159.0 Work in progress ... 9.0 60.1 Finished goods ..... 54.8 121.5 Supplies ........... 8.6 12.8 ------ ------ $152.0 $353.4 ====== ======
$194.9 million of the inventory balance at December 31, 2006 was associated with the Electrical Components and Engine & Power Train businesses, as well as Manufacturing Data Systems, Inc. NOTE 8. PROPERTY, PLANT AND EQUIPMENT, NET The components of property, plant and equipment, net are as follows:
DECEMBER 31, --------------------- (Dollars in millions, except share data) 2007 2006 -------- -------- Land and land improvements ........... $ 21.6 $ 31.9 Buildings ............................ 121.9 204.4 Machinery and equipment .............. 935.9 1,239.1 -------- -------- 1,079.4 1,475.4 Less accumulated depreciation ...... 730.6 945.2 -------- -------- 348.8 530.2 Assets in process .................... 4.5 22.2 -------- -------- Property, plant and equipment, net ... $ 353.3 $ 552.4 -------- --------
$194.2 million of the net property, plant and equipment at December 31, 2006 was associated with the Electrical Components and Engine & Power Train businesses. NOTE 9. BUSINESS SEGMENTS Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker(s) in 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) deciding how to allocate resources and in assessing performance. The accounting policies of the reportable segments are the same as those described in Note 1 of Notes to the Consolidated Financial Statements. In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," we previously reported three operating segments; Compressor Products, Electrical Components, and Engine & Power Train. However, as a result of the sale of the majority of the Electrical Components business and the entire Engine & Power Train business during 2007, these segments are no longer reported. The remaining unsold businesses within Electrical Components are included in discontinued operations. Until 2006, we also reported a Pump Products business segment; however, as a result of the decision, during the first quarter of 2006, to sell 100% of our ownership in Little Giant Pump Company, such operations are no longer reported in income (loss) from continuing operations before tax. Little Giant operations represented approximately 90% of that previously reported segment. Since our remaining pump business does not meet the definition of a reporting segment as defined by SFAS 131, we no longer report a Pump Products segment, and operating results of the remaining pump business are included in Other for segment reporting purposes. Another business within Other, Manufacturing Data Systems Inc., was sold and reclassified to discontinued operations during the third quarter of 2007. External customer sales by geographic area are based upon the destination of products sold. We have no single customer that accounts for 10% or more of consolidated net sales. Long-lived assets by geographic area are based upon the physical location of the assets. 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) BUSINESS SEGMENT INFORMATION (in millions)
2007 2006 2005 -------- -------- -------- External customer sales: Compressor Products ..................................................... $1,116.8 $1,002.7 $ 910.9 Other ................................................................... 16.6 15.0 13.7 -------- -------- -------- Total external customer sales ..................................... $1,133.4 $1,017.7 $ 924.6 ======== ======== ======== Operating income (loss): Compressor Products ..................................................... $ 45.2 $ (4.5) $ 18.8 Other ................................................................... 3.1 2.7 3.4 Corporate and consolidating items ....................................... (36.1) (22.9) (14.6) Impairments, restructuring charges, and other items (see Note 15) ................................................................... (7.2) (2.4) (4.3) -------- -------- -------- Total operating income (loss) ..................................... $ 5.0 $ (27.1) $ 3.3 ======== ======== ======== Reconciliation to income (loss) from continuing operations before taxes: Operating income (loss) ................................................. $ 5.0 $ (27.1) $ 3.3 Interest expense and other, net ......................................... (16.1) (8.5) 6.0 -------- -------- -------- Income (loss) from continuing operations before taxes ............. $ (11.1) $ (35.6) $ 9.3 ======== ======== ======== Assets: Compressor Products ..................................................... $ 833.4 $ 738.6 $ 678.7 Electrical Component Products ........................................... -- 412.4 389.9 Engine & Power Train Products ........................................... -- 237.3 294.8 Corporate and consolidating items ....................................... 302.3 387.1 374.2 Assets held for sale .................................................... 21.9 -- -- Other ................................................................... 7.3 7.3 62.9 -------- -------- -------- Total assets ...................................................... $1,164.9 $1,782.7 $ 1800.5 ======== ======== ======== Capital expenditures: Compressor Products ..................................................... $ 2.7 $ 37.9 $ 68.4 Electrical Component Products ........................................... -- 4.7 7.7 Engine & Power Train Products ........................................... -- 7.7 18.9 Corporate and consolidating items ....................................... 0.1 11.7 17.8 Other ................................................................... 0.2 0.1 0.5 -------- -------- -------- Total capital expenditures ........................................ $ 3.0 $ 62.1 $ 113.3 ======== ======== ======== Depreciation and amortization: Compressor Products ..................................................... $ 36.2 $ 33.4 $ 48.5 Electrical Component Products ........................................... -- 19.4 21.0 Engine & Power Train Products ........................................... -- 18.3 18.8 Corporate and consolidating items ....................................... 6.6 0.4 2.2 Other ................................................................... 0.3 8.6 1.8 -------- -------- -------- Total depreciation and amortization ............................... $ 43.1 $ 80.1 $ 92.3 ======== ======== ========
71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) GEOGRAPHIC INFORMATION (in millions)
2007 2006 2005 -------- -------- -------- Customer Sales by Destination North America United States .................. $ 228.5 $ 225.6 $ 231.0 Other North America ............ 41.1 29.7 29.2 -------- -------- -------- Total North America ................ 269.6 255.3 260.2 -------- -------- -------- Brazil ......................... 194.1 143.3 128.2 Other South America ............ 121.7 92.8 80.7 -------- -------- -------- Total South America ................ 315.8 236.1 208.9 Europe ............................. 322.7 337.1 284.9 Middle East and Asia ............... 225.3 189.2 170.6 -------- -------- -------- $1,133.4 $1,017.7 $ 924.6 ======== ======== ========
2007 2006 2005 -------- -------- -------- Net Fixed Assets United States ...................... $ 67.0 $ 165.1 $ 211.1 Brazil ............................. 206.7 248.2 234.2 Rest of world ...................... 79.6 139.1 133.3 -------- -------- -------- $ 353.3 $ 552.4 $ 578.6 ======== ======== ========
NOTE 10. DEBT
(in millions) 2007 2006 ------ ------ Short-term borrowings consist of the following: Borrowings by foreign subsidiaries under revolving credit agreements, advances on export receivables and overdraft arrangements with banks used in the normal course of business; interest rate at December 31 of 9.0% in 2007 and 8.2% in 2006 ............................................................ $ 55.7 $ 80.6 Current maturities of long-term debt .................................................... 3.8 82.6 ------ ------ Total short-term borrowings ......................................................... $ 59.5 $163.2 ====== ====== Long-term debt consists of the following: Unsecured borrowings, primarily with banks, by foreign subsidiaries with interest rate at December 31 of 11.0% in 2007 and 9.2% in 2006 and maturing in 2008 through 2012 .................................................... $ 7.1 $ 85.6 First Lien Credit Agreement, interest rate as of December 31 of 7.5% in 2007 and 7.4% in 2006, maturing November, 2009 ............................................ -- 113.1 Second Lien Credit Agreement, 13.5% interest rate as of December 31, 2006, maturing November, 2009 .......................................................... -- 100.0 ------ ------ 298.7 Plus: Unamortized net premiums (*) .................................................. -- 1.2 Less: Current maturities of long-term debt .......................................... (3.8) (82.6) ------ ------ Total long-term debt ......................................................... $ 3.3 $217.3 ====== ======
(*) We refinanced these obligations on February 6, 2006. The Senior Guaranteed Notes, Revolving Credit Facility, and Industrial Development Revenue Bonds were replaced by a new financing package that included a $275 million First Lien Credit Agreement (amended to $250 million in the fourth quarter of 2006, $175 million in the third quarter of 2007 and $75 million 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) in the fourth quarter of 2007) and a $100 million Second Lien Credit Agreement (replaced in the fourth quarter of 2006 by a different Second Lien Credit Agreement, and repaid in the fourth quarter of 2007). The agreements provided for security interests in certain of our assets and specific financial covenants related to EBITDA, capital expenditures and fixed charge coverage. Additionally under the terms of the agreements (prior to later amendments), no dividends could be paid prior to December 31, 2006 and minimum amounts of credit availability were required thereafter. The First Lien Credit Agreement as originally structured was available for five years and bore interest at LIBOR plus a margin tied to excess availability. The Second Lien Credit Agreement as originally structured had a seven year term and bore interest at LIBOR plus 7.5%. The weighed average interest rate at funding was 9%. The repayment of the Senior Guaranteed Notes, Revolving Credit Facility and Industrial Revenue Bonds was accounted for as an extinguishment of debt, and $0.9 million of unamortized debt issuance costs net of unamortized gains from related swap agreements were written off to interest expense. Costs of $7.0 million associated with the origination of our new lending arrangements were capitalized and were amortized as interest expense over the terms of the agreements until the outstanding balances of those loans were paid off. At that time, the remainder of the capitalized loan costs was written off to interest expense (which is included in discontinued operations), as is further discussed below. The First and Second Lien Credit Agreements provided for security interests in substantially all of our assets and originally specified quarterly financial covenants related to EBITDA (as defined under the agreement, which provided adjustments for certain items, and hereafter referred to as "Adjusted EBITDA"), capital expenditures, and fixed charge coverage. The Adjusted EBITDA covenant originally applied through September 30, 2007, and a fixed charge coverage covenant applied thereafter. On August 27, 2007, we entered into an amendment to our First Lien Credit Agreement. 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. Effective with the closing of the sale of the Residential & Commercial and Asia Pacific operations of the Electrical Components business on August 31, 2007, we paid off the entire balance associated with our Second Lien Credit Agreement and the majority of the balance under our First Lien Credit Agreement. The remainder of the balance under the First Lien Credit Agreement was paid off effective with the closing of the Engine & Power Train business on November 9, 2007. 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 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) minimum levels of availability under the line of credit to $30 million, and reduced the lenders' total commitment from $175 million to $75 million. At December 31, 2007, we had cash balances in North America of approximately $20.7 million, outstanding letters of credit of $6.8 million, and U.S. availability under our First Lien Credit Agreement of approximately $9.4 million. We also had the capacity for additional borrowings of $95.5 million in foreign jurisdictions under the First Lien Credit Agreement. The interest rate on our First Lien Credit Agreement, had balances been outstanding, would have been 7.5% at December 31, 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. 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 addition to our domestic credit agreement, we have various borrowing arrangements at our foreign subsidiaries to support working capital needs and government sponsored borrowings which provide advantageous lending rates. Our weighted average interest rate for all borrowings, including foreign borrowings, was 8.9% at December 31, 2007. 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. Scheduled maturities of debt for each of the five years subsequent to December 31, 2007 are as follows: (in millions) 2008................................................................................. $ 59.5 2009................................................................................. 2.2 2010 ................................................................................ 1.1 Thereafter........................................................................... -- ------- $ 62.8 =======
Cash interest paid was $37.1 million in 2007, $47.2 million in 2006, and $35.9 million in 2005. NOTE 11. ENVIRONMENTAL MATTERS Although the locations described below that have been affected by environmental proceedings were associated with our Engine & Power Train business, which we sold during 2007, we have retained any potential liabilities that may arise in connection with these locations. The Company has been named by the U.S. Environmental Protection Agency ("EPA") as a potentially responsible party ("PRP") in connection with the Sheboygan River and Harbor Superfund Site in Wisconsin. The EPA has indicated its intent to address the site in two phases, with our 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Sheboygan Falls plant site and the upper river constituting the first phase ("Phase I") and the middle and lower river and harbor being the second phase ("Phase II"). In 2003, we concluded a Consent Decree with the EPA concerning the performance of remedial design and remedial action for Phase I, deferring for an unspecified period any action regarding Phase II. In 2003, with the cooperation of the EPA, the Company and Pollution Risk Services, LLC ("PRS") entered into a Liability Transfer and Assumption Agreement (the "Liability Transfer Agreement"). Under the terms of the Liability Transfer Agreement, PRS assumed all of our responsibilities, obligations and liabilities for remediation of the entire Site and the associated costs, except for certain specifically enumerated liabilities. Also, as required by the Liability Transfer Agreement, we purchased Remediation Cost Cap insurance, with a 30 year term, in the amount of $100.0 million and Environmental Site Liability insurance in the amount of $20.0 million. We believe such insurance coverage will provide sufficient assurance for completion of the responsibilities, obligations and liabilities assumed by PRS under the Liability Transfer Agreement. In conjunction with the Liability Transfer Agreement, we completed the transfer of title to the Sheboygan Falls, Wisconsin property to PRS. We continue to maintain an additional reserve of $0.5 million to reflect our potential environmental liability arising from operations at the Site, including potential residual liabilities not assumed by PRS pursuant to the Liability Transfer Agreement. In 2005, PRS assumed full responsibility for complying with the terms of the Consent Decree, which allows the EPA to enforce the Consent Decree directly with PRS. While we believe the arrangements with PRS are sufficient to satisfy substantially all of our environmental responsibilities with respect to the Site, these arrangements do not constitute a legal discharge or release of our liabilities with respect to the Site. The actual cost of this obligation will be governed by numerous factors, including, without limitation, the requirements of the Wisconsin Department of Natural Resources (the "WDNR"), and may be greater or lower than the amount accrued. With respect to other environmental matters, we have been voluntarily participating in a cooperative effort to investigate and cleanup PCB contamination in the watershed of the south branch of the Manitowoc River, at and downstream from our New Holstein, Wisconsin facility. In 2004, the Company and TRC Companies and TRC Environmental Corporation (collectively, "TRC") entered into a Consent Order with the WDNR relating to this effort known as the Hayton Area Remediation Project ("HARP"). The Consent Order provides a framework for the completion of the remediation and regulatory closure at HARP. Concurrently, the Company and two of its subsidiaries and TRC entered into an Exit Strategy Agreement (the "Agreement"), whereby we transferred to TRC substantially all of our obligations to complete the HARP remediation pursuant to the Consent Order and in accordance with applicable environmental laws and regulations. TRC's obligations under the Agreement include any ongoing monitoring or maintenance requirements and certain off-site mitigation or remediation, if required. TRC will also manage any third-party remediation claims that might arise or otherwise be filed against us. As required by the Agreement, we also purchased a Pollution Legal Liability Select Cleanup Cost Cap Policy (the "Policy") from American International Specialty Lines Company. The term of the Policy is 20 years with an aggregate combined policy limit of $41 million. The policy lists us and TRC as named insureds and includes a number of first and third party coverages for remediation costs and bodily injury and property damage claims associated with the HARP remediation and contamination. We believe that the Policy provides additional assurance that the responsibilities, obligations, and liabilities transferred and assigned by us and assumed by TRC under the Agreement will be completed. Although the arrangements with TRC and the WDNR do not constitute a legal 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) discharge or release of our liabilities, we believe that the specific work substitution provisions of the Consent Order and the broad coverage terms of the Policy, collectively, are sufficient to satisfy substantially all of our environmental obligations with respect to the HARP remediation. In cooperation with the WDNR, we also conducted an investigation of soil and groundwater contamination at our Grafton, Wisconsin plant. It was determined that contamination from petroleum and degreasing products used at the plant were contributing to an off-site groundwater plume. We began remediation of soils in 2001 on the east side of the facility. Additional remediation of soils began in the fall of 2002 in two other areas on the plant site. At both December 31, 2007 and 2006, we had accrued $2.2 million for the total estimated cost associated with the investigation and remediation of the on-site contamination. Investigation efforts related to the potential off-site groundwater contamination have to date been limited in their nature and scope. The extent, timing and cost of off-site remediation requirements, if any, are not presently determinable. In addition to the above-mentioned sites, we are also currently participating with the EPA and various state agencies at certain other sites to determine the nature and extent of any remedial action that may be necessary with regard to such other sites. At December 31, 2007 and 2006, we had accrued a total of $3.0 million and $3.3 million, respectively, for environmental remediation, including $0.5 million in each period relating to the Sheboygan River and Harbor Superfund Site and $2.2 million in both 2007 and 2006 respectively relating to the Grafton site. NOTE 12. COMMITMENTS AND CONTINGENCIES 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, incidental to our business. Although their ultimate outcome cannot be predicted with certainty, and some may be disposed of unfavorably to us, management considers that appropriate reserves have been established and 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. A lawsuit filed against us and other defendants alleges that the horsepower labels on the products the plaintiffs purchased were inaccurate. The plaintiffs seek certification of a class of all persons in the United States who, beginning January 1, 1995 through the present, purchased a lawnmower containing a two stroke or four stroke gas combustible engine up to 20 horsepower that was manufactured by defendants. The complaint seeks an injunction, compensatory and punitive damages, and attorneys' fees. On March 30, 2007, the Court entered an order dismissing Plaintiffs' complaint subject to the ability to re-plead certain claims, pursuant to a detailed written order to follow. 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. 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 13. FINANCIAL INSTRUMENTS The following table presents the carrying amounts and the estimated fair values of financial instruments at December 31, 2007 and 2006:
2007 2006 ------------------ ------------------ CARRYING FAIR CARRYING FAIR (in millions) AMOUNT VALUE AMOUNT VALUE - ------------- -------- ------ -------- ------ Cash and cash equivalents ...... $ 88.6 $ 88.6 $ 81.9 $ 81.9 Short-term borrowings .......... 59.5 59.5 163.2 163.2 Long-term debt ................. 3.3 3.3 217.3 217.3 Foreign currency contracts ..... 7.8 7.8 5.5 5.5 Commodity contracts ............ -- (0.5) -- (1.1)
The carrying amount of cash equivalents approximates fair value due to their liquidity and short-term maturities. The carrying value of any variable interest rate debt approximates fair value. The fair values of foreign currency and commodity contracts reflect the differences between the contract prices and the forward prices available at the balance sheet date. We do not utilize financial instruments for trading or other speculative purposes. We generally do not hedge the net investment in our subsidiaries. All derivative financial instruments held at December 31, 2007 will mature within twelve months. All such instruments held at December 31, 2006 matured in 2007. Our derivative financial instruments consist of foreign currency forward exchange contracts. These contracts are recognized on the balance sheet at their fair value, which is the estimated amount at which they could be settled based on forward market exchange rates. Our foreign subsidiaries use forward exchange contracts to hedge foreign currency receivables, payables, and other known and forecasted transactional exposures for periods consistent with the expected cash flow of the underlying transactions. The contracts generally mature within one year and are designed to limit exposure to exchange rate fluctuations. On the date a forward exchange contract is entered into, it is designated as a foreign currency cash flow hedge. Subsequent changes in the fair value of the contract that is highly effective and qualifies as a foreign currency cash flow hedge are recorded in other comprehensive income. Our European subsidiaries had contracts for the sale of $29.2 million and $13.5 million at December 31, 2007 and 2006, respectively. Our India subsidiary had contracts for the sale of $20.3 million and $2.1 million at 2007 and 2006, respectively. Finally, the Brazilian subsidiaries had contracts for the sale of $183.3 million and $114.8 million at December 31, 2007 and 2006, respectively. We use commodity forward purchasing contracts to help control the cost of commodities (primarily copper and, to a lesser extent, aluminum) used in the production of compressor motors and components and engines. Company policy allows managers to contract commodity forwards for a limited percentage of raw material requirements up to fifteen months in advance. These contracts are not recorded in the balance sheet as they do not require an initial cash outlay and do not represent a liability until delivery of the commodity. Commodity forwards outstanding at December 31, 2007 and 2006 were $64.4 million and $62.1 million, respectively. A portion of accounts receivable at our Brazilian, European, and Indian subsidiaries are sold with limited recourse and without recourse at a discount. Our Brazilian subsidiary also sells portions of its 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) accounts receivable with recourse. Sold receivable balances at December 31, 2007 and 2006 were $79.2 million and $46.5 million, respectively, and the discount rate was 9.1% in 2007 and 7.45% in 2006. We estimate the fair value of the contingent liability related to these receivables to be $0.5 million, which is included in operating income and allowance for doubtful accounts. 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 14. WARRANTIES Reserves are recorded on the Consolidated Balance Sheet to reflect our contractual liabilities relating to warranty commitments to customers. Warranty coverage is provided for a period of twenty months to two years from date of manufacture for compressors; ninety days to three years from date of purchase for electrical components, and one year from date of delivery for engines. An estimate for warranty expense is recorded at the time of sale, based on historical warranty return rates and repair costs. Changes in the carrying amount and accrued product warranty costs for the years ended December 31, 2007 and 2006 are summarized as follows:
(in millions) Balance at January 1, 2006 ............................ $ 26.7 Current year accruals for warranties .................. 16.5 Adjustments to preexisting warranties ................. (0.8) Settlements of warranty claims (in cash or in kind) ... (16.5) Effect of foreign currency translation ................ 0.3 ------- Balance at December 31, 2006 .......................... $ 26.2 ======= Current year accruals for warranties .................. 7.5 Adjustments to preexisting warranties ................. 0.4 Settlements of warranty claims (in cash or in kind) ... (9.3) Effect of foreign currency translation ................ 0.4 Sale of businesses / reclass to held for sale* ........ (15.5) ------- Balance at December 31, 2007 .......................... $ 9.7 =======
* Reflects the impact of the sale of the Engine & Power Train business, the sale of portions of the Electrical Components business, and the classification of the remaining Electrical Components business as held for sale. At December 31, 2007, $8.7 million was included in current liabilities and $1.0 million was included in non-current liabilities. NOTE 15. STOCKHOLDERS' EQUITY The shares of Class A common stock and Class B common stock are substantially identical except as to voting rights. Class A common stock has no voting rights except the right to i) vote on any amendments that could adversely affect the Class A Protection Provision in the articles of incorporation and ii) vote in other limited circumstances, primarily involving mergers and acquisitions, as required by law. A Shareholders' Rights Plan is in effect for each class of stock. These plans protect shareholders against unsolicited attempts to acquire control of the Company that do not offer an adequate price to all shareholders. The rights are not currently exercisable, but would become exercisable at an exercise price of $180 per share, subject to adjustment, if certain events occurred relating to a person 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) or group acquiring or attempting to acquire 10% or more of the outstanding shares of Class B common stock. The rights have no voting or dividend privileges and are attached to, and do not trade separately from, the Class A and Class B common stock. The rights expire on August 25, 2009. As of December 31, 2007, 13,401,938 shares of authorized but unissued Class A common stock and 5,077,746 shares of authorized but unissued Class B common stock were reserved for future exercise under the plans. We have no current expectation to resume payment of dividends. In April of 2007, as part of the amendment to our Second Lien credit agreements, we granted a warrant to purchase a number of shares of Class A Common Stock equal to 7% of our fully diluted common stock. This warrant, valued at $7.3 million, expires five years from the date of the execution of the amendment to the Second Lien credit agreement. In 2006, certain of the Company's major shareholders (Herrick foundation, of which former Chairman Emeritus Todd W. Herrick and Director Kent B. Herrick are members of the Board of Trustees, and two Herrick family trusts, of which Todd W. Herrick is one of the trustees) entered into option agreements with a lender to induce the lender to make financing available to the Company. These option agreements, valued at $3.7 million, were recorded as loan origination fees, and the expense was included with the loss from discontinued operations upon repayment of the loan. 80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 16. IMPAIRMENTS, RESTRUCTURING CHARGES, AND OTHER ITEMS 2007 2007 operating net loss included $7.2 million ($0.39 per share) of restructuring, impairment and other charges. $4.2 million of these restructuring charges related to the impairment of long-lived compressor assets in India ($2.2 million) and North America ($2.0 million). These assets were primarily impaired as a result of the global consolidation of our manufacturing operations. We also incurred expense of $1.6 million associated with reductions in force at several of our North American facilities. The remaining charges reflect the impact of net losses on the sale of buildings ($0.5 million) and related charges ($0.9 million) as a result of the consolidation of corporate and other non-compressor facilities. 2006 2006 net loss included $2.4 million ($0.13 per share) of restructuring, impairment and other charges. We recorded these restructuring charges for impairment of long-lived compressor assets ($2.2 million) and related charges ($0.2 million) at two of its facilities in Mississippi. 2005 2005 results were adversely impacted by a total of $4.3 million ($0.23 per share) of restructuring, impairment and other charges. The charges include $0.9 million recorded by the North American Compressor operations related to additional moving costs for previously announced actions and $3.4 million of asset impairment charges for manufacturing equipment idled through facility consolidations and the reduction of carrying value of closed plants to fair value. NOTE 17. 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 the necessary refund procedures, which include audits of the recoverable amounts that are currently underway. We currently expect to recover more than half of the outstanding refundable taxes within the second half of 2008, and the remainder in 2009. 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Following is a summary of the recoverable non-income taxes recorded on our balance sheet at December 31, 2007 and 2006:
DECEMBER 31, December 31, (Dollars in millions) 2007 2006 - --------------------- ------------ ------------ Brazil $114.5 $88.2 India 7.2 9.0 ------ ----- Total recoverable non-income taxes $121.7 $97.2 ====== =====
At December 31, 2007, $19.5 million was included in current assets and $102.2 million was included in non-current assets. NOTE 18. NEW ACCOUNTING STANDARDS Accounting for Uncertainty in Income Taxes 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 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 December 31, 2007, there is no reduction of deferred tax assets relating to uncertain tax positions. 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 year ended December 31, 2007 were reduced by $0.4 million. The impact of FIN 48 for 2007 was a benefit of $0.9 million. At December 31, 2007, we anticipate a decrease in the total amount of unrecognized tax benefits within the next twelve months in the range of zero to $0.4 million. 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 do not currently expect this pronouncement to have an impact on our consolidated financial statements. 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 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. We do not currently expect this pronouncement to have an impact on our consolidated financial statements. Noncontrolling Interests in Consolidated Financial Statements In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements," which among other things, provides guidance and establishes amended accounting and reporting standards for a parent company's noncontrolling interest in a subsidiary. We are currently evaluating the impact of adopting the statement, which is effective for fiscal years beginning on or after December 15, 2008. Business Combinations In December 2007, the FASB issued Statement No. 141R, "Business Combinations," ("SFAS No.141R") which replaces SFAS No. 141, Business Combinations. SFAS 141R establishes principles and requirements for how an acquirer entity recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed (including intangibles) and any noncontrolling interests in the acquired entity. We are currently evaluating the impact of adopting the statement, which is effective for fiscal years beginning on or after December 15, 2008. 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 19. QUARTERLY FINANCIAL DATA - UNAUDITED
QUARTER --------------------------------------------------- (in millions, except per share data) FIRST SECOND THIRD FOURTH TOTAL --------- --------- --------- --------- --------- 2007 Net sales ..................................... $ 293.8 $ 301.2 $ 282.3 $ 256.1 $ 1,133.4 Gross profit .................................. 29.8 31.1 29.7 31.1 121.7 --------- --------- --------- --------- --------- Net income (loss) ............................. (16.8) (88.2) (77.2) 4.1 (178.1) ========= ========= ========= ========= ========= Basic and diluted earnings (loss) per share ... $ (0.91) $ (4.77) $ (4.18) $ 0.22 $ (9.64) ========= ========= ========= ========= ========= 2006 (A) Net sales ..................................... $ 255.6 $ 277.1 $ 234.3 $ 250.7 $ 1,017.7 Gross profit .................................. 29.0 14.0 11.8 19.7 74.5 --------- --------- --------- --------- --------- Net income (loss) ............................. (12.6) 33.9 (37.8) (63.8) (80.3) ========= ========= ========= ========= ========= Basic and diluted earnings (loss) per share ... $ (0.68) $ 1.83 $ (2.04) $ (3.46) $ (4.35) ========= ========= ========= ========= =========
(a) Restated to reflect the reclassification of the Electrical Components Group, the Engine & Power Train Group, and Manufacturing Data Systems, Inc. as discontinued operations. 84 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. 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 year 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, and as of December 31, 2007, our President and Chief Executive Officer along with our Vice President, Treasurer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2007. Management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed 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. Management has assessed the effectiveness of its internal control over financial reporting as of December 31, 2007. In making its assessment, management used the criteria described in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on these criteria, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2007. The effectiveness of the Company's internal control over financial reporting as of December 31, 2007 has been audited by Grant Thornton LLP, our independent registered public accounting firm, as stated in their report which is included in Item 8 of this report on Form 10-K. 85 CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There have been no changes in our internal control over financial reporting that occurred during the fourth quarter of 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS AND PROCEDURES Management of the Company, including the Chief Executive Officer and Chief Financial Officer, does not expect that 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. Our independent registered public accounting firm, Grant Thornton LLP, has issued an attestation report on our internal control over financial reporting. Their report appears below. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Tecumseh Products Company We have audited Tecumseh Products Company and subsidiaries' internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control -- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Tecumseh Products Company and subsidiaries' management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on Tecumseh Products Company and subsidiaries' internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 86 A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Tecumseh Products Company and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control -- Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Tecumseh Products Company and subsidiaries as of December 31, 2007, and the related consolidated statements of operations, cash flows and stockholders' equity for the year then ended and our report dated March 14, 2008 expressed an unqualified opinion. Grant Thornton LLP Southfield, Michigan March 14, 2008 ITEM 9B. OTHER INFORMATION None. 87 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY EXECUTIVE OFFICERS OF THE COMPANY The following are our executive officers:
PERIOD OF SERVICE NAME AND AGE OFFICE OR POSITION HELD AS AN OFFICER - ------------ ----------------------- ----------------- Edwin L. Buker, 54 President and Chief Executive Officer (1) Since August 13, 2007 James S. Nicholson, 46 Vice President, Treasurer, and Chief Financial Since 2003 Officer (2) James Wainright, 53 Vice President of Global Operations (3) Since October 8, 2007
(1) Last five years of business experience - Present position since August 13, 2007. President and Chief Executive Officer of Citation Corporation, a leading supplier of metal components based in Birmingham, Alabama, 2002 - 2007. (2) Last five years of business experience - Present position since 2004. Corporate Controller, Tecumseh Products Company 2002 - 2004. (3) Last five years of business experience - Present position since October 8, 2007. Senior Vice President of Operations, A.O. Smith Corporation - Electrical Products Division, 2001 - 2007. The information pertaining to directors required by Item 401 of Regulation S-K will be set forth under the caption "Proposal 1: Election of Directors" in our definitive Proxy Statement relating to our 2008 Annual Meeting of Shareholders and is incorporated herein by reference. The information required to be reported pursuant to Item 405 of Regulation S-K will be set forth under the caption "Appendix A - Share Ownership - Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive Proxy Statement relating to our 2008 Annual Meeting of Shareholders and is incorporated herein by reference. We have adopted a Code of Ethics for Financial Managers, which applies to our Chief Executive Officer, Chief Financial Officer, Corporate Controller, Director of Corporate Compliance, and Director of Financial Reporting, and the controller or principal accounting manager of each business unit, as well as a Code of Conduct for All Directors, Officers, and Employees and an Ethics Reporting Policy. Current copies of both codes and the reporting policy are posted at the Investor Relations section of our website at www.tecumseh.com. 88 The information required to be reported pursuant to paragraphs (d)(4) and (d)(5) of Item 407 of Regulation S-K will be set forth under the caption "Audit Committee" in our definitive Proxy Statement relating to our 2008 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the captions "Appendix B - Executive Compensation," and the information under the sub-captions "Compensation Committee Interlocks and Insider Participation" and "Compensation Committee Report" under the caption "Compensation Committee" in our definitive Proxy Statement relating to our 2008 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information under the caption "Appendix A - Share Ownership" in our definitive Proxy Statement relating to our 2008 Annual Meeting of Shareholders is incorporated herein by reference. No information is required to be reported pursuant to Item 201(d) of Regulation S-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE The information under the sub-captions "Director Independence" and "Related Party Transactions" under the caption "Corporate Governance" and the information under the sub-caption "Compensation Committee Interlocks and Insider Participation" under the caption "Compensation Committee" in our definitive Proxy Statement relating to our 2008 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information under the caption "Appendix C -- Audit and Non-Audit Fees" in our definitive Proxy Statement relating to our 2008 Annual Meeting of Shareholders is incorporated herein by reference. 89 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) (1) and (2) Financial Statements See "Financial Statements" (3) See Index to Exhibits (See Item 15 (b), below) (b) Exhibits
EXHIBIT NO. DESCRIPTION 2.1 Purchase Agreement dated as of July 3, 2007 among Regal Beloit Corporation, Tecumseh Products Company, Fasco Industries, Inc., and Motores Fasco de Mexico, S. de R.L. de C.V. (incorporated by reference to Exhibit 2 to registrant's Current Report on Form 8-K filed September 7, 2007, File No. 0-452) [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.] 2.2 Purchase Agreement dated as of October 22, 2007 by and between Snowstorm Acquisition Corporation and Tecumseh Products Company (incorporated by reference to Exhibit 10.1 to registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, File No. 0-452) [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.] 2.3* Contribution and Purchase Agreement dated as of November 1, 2007 among Tecumseh Products Company, Von Weise USA, Inc., Specialty Motors Operations, Inc., and Specialty Motors Holding Corp. [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.] 3.1 Restated Articles of Incorporation of Tecumseh Products Company (incorporated by reference to Exhibit (3) to registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No. 0-452) 3.2 Certificate of Amendment to the Restated Articles of Incorporation of Tecumseh Products Company (incorporated by reference to Exhibit B-5 to registrant's Form 8 Amendment No. 1 dated April 22, 1992 to Form 10 Registration Statement dated April 24, 1965, File No. 0-452)
90 3.3 Certificate of Amendment to the Restated Articles of Incorporation of Tecumseh Products Company (incorporated by reference to Exhibit (4)(c) to registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, File No. 0-452) 3.4 Amended and Restated Bylaws of Tecumseh Products Company as amended through December 17, 2007 (incorporated by reference to Exhibit 3.1 to registrant's Current Report on Form 8-K, filed December 21, 2007, File No. 0-452) 4.1 First Lien Credit Agreement dated February 6, 2006 by and among Tecumseh Products Company and certain Lenders and Issuers listed therein and Citicorp USA, Inc. as Administrative Agent and Collateral Agent (incorporated by reference to Exhibit 4.1 to registrant's Current Report on Form 8-K filed February 9, 2006, File No. 0-452) 4.2 Amendment No. 1 dated May 5, 2006 to First Lien Credit Agreement (incorporated by reference to Exhibit 4.1 to registrant's Current Report on Form 8-K filed March 31, 2006, File No. 0-452) 4.3 Amendment No. 2 dated November 3, 2006 to First Lien Credit Agreement (incorporated by reference to Exhibit 4.1 to registrant's Current Report on Form 8-K filed November 8, 2006, File No. 0-452) 4.4 Amendment No. 3 dated November 13, 2006 to First Lien Credit Agreement (incorporated by reference to Exhibit 4.1 to registrant's Current Report on Form 8-K filed November 15, 2006, File No. 0-452) 4.5 Amendment No. 4 dated December 7, 2006 to First Lien Credit Agreement (incorporated by reference to Exhibit 4.1 to registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, File No. 0-452) 4.6 Amendment No. 5 dated April 9, 2007 to First Lien Credit Agreement (incorporated by reference to Exhibit 4.1 to registrant's Current Report on Form 8-K filed April 10, 2007, File No. 0-452) 4.7 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 (incorporated by reference to Exhibit 4.1 to registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, File No. 0-452). 4.8 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(incorporated by reference to Exhibit 4.2 to registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2007, File No. 0-452).
91 Note: Other instruments defining the rights of holders of long-term debt are not filed because the total amount authorized thereunder does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. The registrant hereby agrees to furnish a copy of any such agreement to the Commission upon request. 9 Not applicable 10.1 Amended and Restated Class B Rights Agreement (incorporated by reference to Exhibit 4 to Form 8 Amendment No. 1 dated April 22, 1992 to Form 8-A registering Common Stock Purchase Rights dated January 23, 1991, File No. 0-452) 10.2 Amendment No. 1 to Amended and Restated Class B Rights Agreement (incorporated by reference to Exhibit 4 to Form 8 Amendment No. 2 dated October 2, 1992 to Form 8-A registering Common Stock Purchase Rights dated January 23, 1991, File No. 0-452) 10.3 Amendment No. 2 to Amended and Restated Class B Rights Agreement (incorporated by reference to Exhibit 4 to Form 8-A/A Amendment No. 3 dated June 22, 1993 to Form 8-A registering Common Stock Purchase Rights dated January 23, 1991, File No. 0-452) 10.4 Amendment No. 3 to Amended and Restated Class B Rights Agreement (incorporated by reference to Exhibit 4.2 to registrant's Current Report on Form 8-K as filed August 26, 1999, File No. 0-452) 10.5 Amendment No. 4 to Amended and Restated Class B Rights Agreement, dated as of August 22, 2001, between Tecumseh Products Company and State Street Bank and Trust Company, N.A., as successor Class B Rights Agent (incorporated by reference to Exhibit 4.4 to Form 8-A/A Amendment No. 5 dated September 19, 2001 to Form 8-A registering Common Stock Purchase Rights dated January 23, 1991, File No. 0-452) 10.6 Amendment No. 5 to Amended and Restated Class B Rights Agreement, dated as of July 15, 2002, between Tecumseh products Company, State Street Bank and Trust Company, N.A. as the existing agent, and Equiserve Trust Company, N.A. as successor Class B Rights Agent (incorporated by reference to Exhibit 10.6 to registrant's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 0-452) 10.7 Class A Rights Agreement (incorporated by reference to Exhibit 4 to Form 8-A registering Class A Common Stock Purchase Rights dated April 22, 1992, File No. 0-452)
92 10.8 Amendment No. 1 to Class A Rights Agreement (incorporated by reference to Exhibit 4 to Form 8 Amendment No. 1 dated October 2, 1992 to Form 8-A registering Class A Common Stock Purchase Rights dated April 22, 1992, File No. 0-452) 10.9 Amendment No. 2 to Class A Rights Agreement (incorporated by reference to Exhibit 4 to Form 8-A/A Amendment No. 2 dated June 22, 1993 to Form 8-A registering Class A Common Stock Purchase Rights dated April 22, 1992, File No. 0-452) 10.10 Amendment No. 3 to Class A Rights Agreement (incorporated by reference to Exhibit 4.1 to registrant's Current Report on Form 8-K filed August 26, 1999, File No. 0-452) 10.11 Amendment No. 4 to Class A Rights Agreement dated as of August 22, 2001, between Tecumseh products Company and State Street Bank and Trust Company, N.A., as successor Class A Rights Agent (incorporated by reference to Exhibit 4.4 to Form 8-A/A Amendment No. 4 dated September 19, 2001 to Form 8-A registering Class A Common Stock Purchase Rights dated April 22, 1992, File No. 0-452) 10.12 Amendment No. 5 to Class A Rights Agreement, dated as of July 15, 2002, between Tecumseh products Company, State Street Bank and Trust Company, N.A. as the existing agent, and Equiserve Trust Company, N.A. as successor Class A Rights Agent (incorporated by reference to Exhibit 10.12 to registrant's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 0-452) 10.13 Description of Death Benefit Plan (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit (10)(f) to registrant's Annual Report on Form 10-K for the year ended December 31, 1992, File No. 0-452) 10.14 Key employee bonus plan(management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.1 to registrant's Current Report on Form 8-K filed April 16, 2007, File No. 0-452) 10.15* Annual Incentive Plan adopted December 17, 2007 (management contract or compensatory plan or arrangement) 10.16 Long-Term Term Incentive Cash Award Plan adopted March 4, 2008 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.1 to registrant's Current Report on Form 8-K filed March 10, 2008, File No. 0-452) 10.17 Form of Award Agreement (Phantom Shares) under Long-Term Incentive Cash Award Plan (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.2 to registrant's Current Report on Form 8-K filed March 10, 2008, File No. 0-452)
93 10.18 Form of Award Agreement (SARs) under Long-Term Incentive Cash Award Plan (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.3 to registrant's Current Report on Form 8-K filed March 10, 2008, File No. 0-452) 10.19 Amended and Restated Supplemental Executive Retirement Plan effective June 27, 2001 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.16 to registrant's Annual Report on Form 10-K for the year ended December 31, 2001, File No. 0-452) 10.20 Amendment No. 1 to the Supplemental Executive Retirement Plan adopted September 26, 2001 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.17 to registrant's Annual Report on Form 10-K for the year ended December 31, 2001, File No. 0-452) 10.21 Outside Directors' Voluntary Deferred Compensation Plan adopted November 25, 1998 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit (10)(k) to registrant's Annual Report on Form 10-K for the year ended December 31, 1998, File No. 0-452) 10.22 Amendment No. 1 to Outside Directors' Voluntary Deferred Compensation Plan adopted August 28, 2002 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.21 to registrant's Annual Report on Form 10-K for the year ended December 31, 2002, File No. 0-452) 10.23 Executive Deferred Compensation Plan adopted on March 29, 2006, effective as of January 1, 2005 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.2 to registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 0-452) 10.24 Director Retention Phantom Share Plan as amended and restated on March 29, 2006 effective as of January 1, 2005 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.3 to registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, File No. 0-452) 10.25* Outside Directors' Deferred Stock Unit Plan adopted December 17, 2007 effective as of January 1, 2008 (management contract or compensatory plan or arrangement) 10.26 Employment Agreement dated as of August 1, 2007 with Edwin L. Buker (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.1 to registrant's Current Report on Form 8-K filed August 6, 2007, File No. 0-452) 10.27 First Amendment dated as of March 4, 2008 to Employment Agreement dated as of August 1, 2007 with Edwin L. Buker (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.4 to registrant's Current Report on Form 8-K filed March 10, 2008, File No. 0-452)
94 10.28 Severance Agreement with James S. Nicholson dated March 29, 2007 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.2 to registrant's Current Report on Form 8-K filed January 25, 2007, File No. 0-452) [Note: superseded by Change in Control and Severance Agreement.] 10.29* Letter dated September 17, 2007 and accompanying term sheet setting forth terms of employment of James Wainright (management contract or compensatory plan or arrangement) 10.30 Form of Change in Control and Severance Agreement (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.5 to registrant's Current Report on Form 8-K filed March 10, 2008, File No. 0-452) 10.31 List of executive officers with Change in Control and Severance Agreements (incorporated by reference to Exhibit 10.6 to registrant's Current Report on Form 8-K filed March 10, 2008, File No. 0-452) 10.32 Liability Transfer and Assumption Agreement for Sheboygan River and Harbor Superfund Site dated March 25, 2003, by and between Tecumseh Products Company and Pollution Risk Services, LLC (incorporated by reference to Exhibit 10.1 to registrant's Current Report on Form 8-K filed April 9, 2003, File No. 0-452) 10.33 Consent Order entered into on December 9, 2004 with Wisconsin Department of Natural Resources and TRC Companies, Inc. (incorporated by reference to Exhibit 10.26 to registrant's Annual Report on Form 10-K for the year ended December 31, 2004, File No. 0-452) 10.34 Exit Strategy Agreement dated December 29, 2004 with TRC Companies, Inc. (incorporated by reference to Exhibit 10.27 to registrant's Annual Report on Form 10-K for the year ended December 31, 2004, File No. 0-452) 10.35 Stock Purchase Agreement dated as of March 17, 2006 between Tecumseh Products Company and Franklin Electric Co, Inc. relating to Little Giant Pump Company (schedules and exhibits omitted) (incorporated by reference to Exhibit 10-1 to registrant's Current Report on Form 8-K filed March 21, 2006, File No. 0-452) 10.36 Out-of-Court Restructuring Agreement dated November 21, 2006 among Tecumseh Products Company, Tecumseh Power Company, TMT Motoco do Brasil, Ltda., and the banks named therein (incorporated by reference to Exhibit 10.1 to registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, File No. 0-452) 10.37 Agreement with AP Services, LLC and AlixPartners, LLP dated December 7, 2006 (incorporated by reference to Exhibit 10.1 to registrant's Current Report on Form 8-K filed December 14, 2006, File No. 0-452)
95 10.38 First addendum dated January 19, 2007 to agreement with AP Services, LLC dated December 7, 2006 (incorporated by reference to Exhibit 10.1 to registrant's Current Report on Form 8-K filed January 25, 2007, File No. 0-452) 10.39 Settlement and Release Agreement dated as of April 2, 2007 among Tecumseh Products Company; Herrick Foundation; Todd W. Herrick and Toni Herrick, each in their capacity as trustee for specified Herrick family trusts; Todd W. Herrick, Kent B. Herrick, and Michael Indenbaum, each in their capacity as members of the Board of Trustees of Herrick Foundation; Todd W. Herrick, Kent B. Herrick, Michael Indenbaum, and Toni Herrick, each in their individual capacities; and Albert A. Koch, Peter Banks, and David M. Risley, each in their capacity as directors of Tecumseh Products Company (incorporated by reference to Exhibit 10.3 to registrant's Current Report on Form 8-K filed April 10, 2007, File No. 0-452) 10.40 Warrant to Purchase Class A Common Stock of Tecumseh Products Company issued to Tricap Partners II L.P. on April 9, 2007 (incorporated by reference to Exhibit 10.1 to registrant's Current Report on Form 8-K filed April 10, 2007, File No. 0-452) 10.41 Registration Rights Agreement dated as of April 9, 2007 between Tecumseh Products Company and Tricap Partners II L.P. (incorporated by reference to Exhibit 10.2 to registrant's Current Report on Form 8-K filed April 10, 2007, File No. 0-452) 11 Not applicable 12 Not applicable 13 Not applicable 14 Not applicable 16 Not applicable 18 Not applicable 21* Subsidiaries of the Company 22 Not applicable 23 Not applicable 24* Power of Attorney 31.1* Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a). 31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
96 32.1* Certification of President and Chief Executive Officer pursuant to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. 32.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. 33. Not applicable 34 Not applicable 35 Not applicable 99 Not applicable 100 Not applicable
* Filed herewith (c) Financial Statement Schedules None. 97 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 Date: March 14, 2008 By /s/ Edwin L. Buker ------------------------------- Edwin L. Buker President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE OFFICE DATE OF SIGNING --------- ------ --------------- /s/ EDWIN L. BUKER President and Chief Executive Officer March 14, 2008 Edwin L. Buker (Principal Executive Officer) /s/ JAMES S. NICHOLSON Vice President, Treasurer and March 14, 2008 James S. Nicholson Chief Financial Officer (Principal Accounting and Principal Financial Officer) * Director March 14, 2008 Peter M. Banks * Director March 14, 2008 William E. Aziz * Director March 14, 2008 Kent B. Herrick * Director March 14, 2008 Jeffry N. Quinn * Director March 14, 2008 David M. Risley * Director March 14, 2008 Steven J. Lebowski
*By: /s/ JAMES S. NICHOLSON James S. Nicholson Attorney-in-Fact EX-2.3 2 k24815exv2w3.txt CONTRIBUTION AND PURCHASE AGREEMENT Exhibit 2.3 ---------- CONTRIBUTION AND PURCHASE AGREEMENT AMONG TECUMSEH PRODUCTS COMPANY, VON WEISE USA, INC., SPECIALTY MOTORS OPERATIONS, INC. AND SPECIALTY MOTORS HOLDING CORP. ---------- Dated as of November 1, 2007 TABLE OF CONTENTS
PAGE ---- ARTICLE 1 SECTION 351 TRANSACTIONS WITH AUTO SPECIALTY................... 2 1.1 Von Weise Contribution and Sale to Auto Specialty............... 2 1.2 Consideration to Von Weise...................................... 2 1.3 Purchaser One Cash Contribution to Auto Specialty............... 3 1.4 Consideration to Purchaser One.................................. 3 1.5 Assumption of Liabilities....................................... 3 1.6 Tax Reporting................................................... 3 1.7 Funding of Auto Specialty....................................... 4 ARTICLE 2 SALE AND PURCHASE OF THE TCH SHARES, THE 0.001% EQUITY PARTICIPATION AND THE DIRECT PURCHASED ASSETS.................. 4 2.1 Sale and Purchase of the TCH Shares............................. 4 2.2 Sale and Purchase of the 0.001% Equity Participation............ 4 2.3 Sale and Purchase of the Direct Purchased Assets................ 4 2.4 Assumption of Liabilities....................................... 4 ARTICLE 3 PURCHASE PRICE AND PAYMENT..................................... 5 3.1 Purchase Price.................................................. 5 3.2 Adjustment of Initial Purchase Price............................ 5 3.3 Payment of Initial Purchase Price and Adjusted Purchase Price... 6 3.4 Auto Specialty Escrow........................................... 6 3.5 Withholding Taxes............................................... 7 ARTICLE 4 CLOSING AND TERMINATION........................................ 7 4.1 Closing Date.................................................... 7 4.2 Termination of Agreement........................................ 7 4.3 Procedure Upon Termination...................................... 8 4.4 Effect of Termination........................................... 8 4.5 Termination of Agreement by Seller in Default................... 8 ARTICLE 5 THE VON WEISE AUTO SPECIALTY PREFERRED STOCK................... 9 5.1 Auto Specialty Restated Certificate............................. 9 5.2 Sale of Nonqualified Preferred Stock in Auto Specialty.......... 9
TABLE OF CONTENTS (CONTINUED)
PAGE ---- ARTICLE 6 SECOND CLOSING DATE TRANSACTIONS............................... 9 6.1 Second Closing Date Transactions................................ 9 ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF THE SELLER................... 10 7.1 Organization and Good Standing.................................. 10 7.2 Authorization of Agreement...................................... 10 7.3 Capitalization.................................................. 11 7.4 Subsidiaries.................................................... 11 7.5 Corporate Records............................................... 12 7.6 Conflicts; Consents of Third Parties............................ 12 7.7 Ownership and Transfer of Direct Purchased Assets, the TCH Shares and the 0.001% Equity Participation...................... 13 7.8 Financial Statements............................................ 13 7.9 No Undisclosed Liabilities...................................... 13 7.10 Absence of Certain Developments................................. 14 7.11 Certain Tax Matters............................................. 15 7.12 Real Property................................................... 16 7.13 Tangible Personal Property...................................... 18 7.14 Technology and Intellectual Property............................ 18 7.15 Customers and Suppliers......................................... 19 7.16 Employee Benefits............................................... 20 7.17 Labor........................................................... 21 7.18 Litigation...................................................... 22 7.19 Compliance with Laws; Permits................................... 22 7.20 Environmental Matters........................................... 22 7.21 Material Contracts.............................................. 23 7.22 Previous Sales; Warranties...................................... 25 7.23 Related Parties................................................. 25 7.24 Competition Act (Canada)........................................ 25 7.25 Financial Advisors.............................................. 26 7.26 No Other Representations or Warranties.......................... 26
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PAGE ---- ARTICLE 8 REPRESENTATIONS AND WARRANTIES OF PURCHASER.................... 26 8.1 Organization and Good Standing.................................. 26 8.2 Authorization of Agreement...................................... 26 8.3 Conflicts; Consents of Third Parties............................ 27 8.4 Litigation...................................................... 27 8.5 Investment Intention............................................ 27 8.6 Investigation................................................... 27 ARTICLE 9 COVENANTS...................................................... 28 9.1 Access to Management............................................ 28 9.2 Restructuring................................................... 28 9.3 Conduct of Business Pending the Closing......................... 28 9.4 Employee Matters................................................ 30 9.5 Retiree Medical Plan............................................ 32 9.6 Preservation of Records......................................... 32 9.7 Publicity....................................................... 33 9.8 Use of Name..................................................... 33 9.9 Insurance....................................................... 33 9.10 Reasonable Commercial Efforts................................... 33 9.11 Contacts with Suppliers, Employees and Customers................ 34 9.12 Seller Commitments.............................................. 34 9.13 Intellectual Property Covenants................................. 34 9.14 Notification.................................................... 35 9.15 Nonsolicitation................................................. 35 9.16 Restrictive Covenants........................................... 35 9.17 Canada Escrow................................................... 37 9.18 Assignment and Assumption Agreement (Invensys).................. 37 9.19 JMAS Waste Water Discharge Permit............................... 37 ARTICLE 10 CONDITIONS TO CLOSING......................................... 37 10.1 Condition Precedent to Obligations of Purchaser................. 37
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PAGE ---- 10.2 Condition Precedent to Obligations of Seller.................... 39 10.3 Conditions to Each Party's Obligations.......................... 39 10.4 No Frustration of Closing Conditions............................ 39 ARTICLE 11 DOCUMENTS TO BE DELIVERED..................................... 39 11.1 Documents to be Delivered by the Seller......................... 39 11.2 Documents to be Delivered by the Purchaser...................... 41 11.3 Documents to be Delivered by Auto Specialty..................... 42 ARTICLE 12 INDEMNIFICATION............................................... 42 12.1 Indemnification................................................. 42 12.2 Limitations on Indemnification for Breaches of Representations and Warranties.................................................. 43 12.3 Survival of Representations and Warranties and Covenants........ 43 12.4 General Indemnification Procedures.............................. 44 12.5 Tax Matters..................................................... 45 12.6 Exclusive Remedies.............................................. 50 12.7 Adjustments for Certain Payments................................ 50 12.8 Treatment of Indemnity Payments................................. 50 12.9 Cooperation regarding Seller Post-Closing Matters............... 50 ARTICLE 13 MISCELLANEOUS................................................. 51 13.1 Certain Definitions............................................. 51 13.2 Payment of Transfer Taxes....................................... 61 13.3 Excluded Assets................................................. 61 13.4 Expenses........................................................ 61 13.5 Further Assurances.............................................. 61 13.6 Governing Law................................................... 61 13.7 Submission to Jurisdiction; Consent to Service of Process....... 61 13.8 Entire Agreement; Amendments and Waivers........................ 62 13.9 Table of Contents and Headings.................................. 62 13.10 Notices......................................................... 62 13.11 Severability.................................................... 63
-iv- TABLE OF CONTENTS (CONTINUED)
PAGE ---- 13.12 Binding Effect; No Third Party Beneficiaries; Assignment........ 63 13.13 Disclosure Schedules............................................ 64 13.14 Rules of Construction........................................... 64 13.15 Counterparts.................................................... 64
-v- TABLE OF ANNEXES, EXHIBITS AND SCHEDULES Schedules Schedule 1.1.2 - Juarez Inventory Schedule 1.1.3 - El Paso Inventory Schedule 1.1.4 - Trade Accounts Receivable and Trade Accounts Payable Schedule 1.1.6 - Juarez Fixed Assets Schedule 2.3 - Direct Purchased Assets Schedule 3.1.2 - Allocation Schedule 3.3.1 - Seller Accounts Schedule 7.4 - Subsidiaries Schedule 7.5 - Corporate Records Schedule 7.6.1 - Conflicts Schedule 7.6.2 - Required Consents and Approvals - Seller Schedule 7.8 - Financial Statements Schedule 7.9 - Undisclosed Liabilities Schedule 7.10 - Certain Developments Schedule 7.11 - Tax Matters Schedule 7.11.5 - Tax Exceptions Schedule 7.12 - Company Properties Schedule 7.13 - Tangible Personal Property Schedule 7.14.1 - Registered Patents, Trademarks and Copyrights (and Applications therefor) Included in A&S Intellectual Property Schedule 7.14.2 - Third Party Owners of A&S Intellectual Property Schedule 7.14.3 - Assignments, Transfers, Conveyances or Encumbrances of A&S Intellectual Property Schedule 7.14.4 - Challenges to Validity and Enforceability of A&S Intellectual Property Schedule 7.14.5 - Third Party Infringement on or Violation of A&S Intellectual Property Schedule 7.14.6 - IP/Technology Used and Not Owned by TCH to Be Licensed to TCH Schedule 7.14.6 - IP/Technology Used and Not Owned by TCH Subject to Third-Party Licenses Schedule 7.14.7 - TCH Royalty Obligations Schedule 7.14.8 - Alleged Infringements of Third Party Trademark, Copyright or Trade Secret Rights Schedule 7.15 - Ten Largest Customers Schedule 7.16 - Thirty Largest Suppliers/Vendors Schedule 7.16.1 - Employee Benefit Plans Schedule 7.16.2 - Transferred Benefit Plans Schedule 7.16.4 - Transferred Benefit Plan Exceptions Schedule 7.16.7 - Canadian Registered Plans Schedule 7.17.1 - Labor or Collective Bargaining Agreements Schedule 7.17.4 - Labor Complaints or Charges Schedule 7.17.5 - Labor Reductions -vi- Schedule 7.18 - Litigation Schedule 7.19 - Compliance with Laws; Permits Schedule 7.20 - Environmental Matters Schedule 7.20.8 - Environmental Contracts Schedule 7.21.2 - Material Contracts Schedule 7.21.3 - Contract Exceptions Schedule 7.22 - Previous Sales; Warranties Schedule 7.23 - Related Parties Schedule 8.3.2 - Required Consents and Approvals - Purchaser Schedule 9.2 - Conduct of the Business Pending the Closing Schedule 9.4.1 - Employee Matters Schedule 9.12 - Seller Commitments Schedule 10.1.4 - Required Third Party Consents Schedule 10.1.7 - Related Party Transactions -vii- Annexes Annex A - TCH, Motores and Auto Specialty Annex B - Accounting Principles -viii- Exhibits Exhibit A Von Weise Auto Specialty Assignment and Assumption Agreement Exhibit B Von Weise Purchaser One Assignment and Assumption Agreement Exhibit C Auto Specialty Escrow Agreement Exhibit D Auto Specialty Restated Certificate Exhibit E Canadian Escrow Agreement Exhibit F Assignment and Assumption Agreement (Invensys) Exhibit G Master Global Manufacture and Supply Agreement (Tecumseh Power Company) Exhibit H Transition Services Agreement Exhibit I JCI Supply Agreement Exhibit J Eaton Rapids Real Property Deed Exhibit K Stranded Cash Supplemental Agreement -ix- CONTRIBUTION AND PURCHASE AGREEMENT CONTRIBUTION AND PURCHASE AGREEMENT, dated as of November 1, 2007 (this "Agreement"), by and among Specialty Motors Operations, Inc., a corporation organized and existing under the laws of State of Delaware ("Purchaser One"), Specialty Motors Holding Corp., a corporation organized and existing under the laws of the State of Delaware ("Purchaser Two" and together with Purchaser One, the "Purchaser"), Tecumseh Products Company, a corporation organized and existing under the laws of the State of Michigan ("Tecumseh"), and Von Weise USA, Inc., a corporation organized and existing under the laws of the State of Delaware ("Von Weise" and together with Tecumseh, the "Seller"). RECITALS: A. Seller desires to contribute, transfer, convey, assign, and deliver certain assets associated with the Automotive and Specialty DC motors and gear motors business of Seller (the "Business") to Auto Specialty (defined below), and Seller desires to sell to Purchaser, and Purchaser desires to purchase from the Seller, the Business through a series of transactions, as more particularly described herein; B. In a transaction intended to be a tax-free capital contribution under Section 351(a) of the Code: 1. Von Weise shall, in exchange for cash and nonqualified preferred stock of Auto Specialty Products, Inc., a corporation organized and existing under the laws of State of Delaware ("Auto Specialty"), as more particularly described herein: (a) contribute, transfer, convey, assign and deliver to Auto Specialty one (1) equity participation representative of 99.999% of the issued, outstanding and paid equity interest of TPC Motores de Mexico S. de R.L. de C.V., a sociedad de responsabilidad limitad de capital variable organized under the laws of Mexico ("Motores"); (b) contribute, transfer, convey, assign and deliver to Auto Specialty certain assets associated with the Business; and (c) sell, transfer, convey, assign and deliver to Auto Specialty certain other assets associated with the Business; and 2. Purchaser One shall, in exchange for common stock in Auto Specialty, make a cash contribution to Auto Specialty, as more particularly described herein; C. Von Weise shall sell, transfer, convey, assign and deliver to Purchaser One certain assets associated with the Business; D. Tecumseh shall sell, transfer, convey, assign and deliver to Purchaser One all of the issued and outstanding shares of the capital stock of Tecumseh Canada Holding Company, a corporation organized and existing under the laws of the State of Delaware ( "TCH"); and -1- E. Tecumseh shall sell, transfer, convey, assign and deliver to Purchaser Two one (1) equity participation representative of 0.001% of the issued, outstanding and paid equity interest of Motores; and F. Certain terms used in this Agreement are defined in Section 13.1. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements hereinafter contained, the parties hereby agree as follows: ARTICLE 1 SECTION 351 TRANSACTIONS WITH AUTO SPECIALTY 1.1 Von Weise Contribution and Sale to Auto Specialty. In a manner intended to be a tax-free capital contribution under Section 351(a) of the Code, on the Closing Date, Von Weise shall: 1.1.1 contribute, transfer, convey, assign and deliver to Auto Specialty one (1) equity participation representative of 99.999% of the issued, outstanding and paid equity interest in Motores (the "99.999% Equity Participation"); 1.1.2 contribute, transfer, convey, assign and deliver to Auto Specialty the raw material inventory on temporary importation in Juarez, Mexico as specified on Schedule 1.1.2 (the "Juarez Inventory"); 1.1.3 contribute, transfer, convey, assign and deliver to Auto Specialty the inventory located in El Paso, Texas as specified on Schedule 1.1.3 (the "El Paso Inventory"); 1.1.4 contribute, transfer, convey, assign and deliver to Auto Specialty the Trade Accounts Receivable and Trade Accounts Payable as specified on Schedule 1.1.4 (the "Trade Accounts Receivable and Trade Accounts Payable"); 1.1.5 contribute, transfer, convey, assign and deliver to Auto Specialty the Eaton Rapids Real Property; and 1.1.6 sell, transfer, convey, assign and deliver to Auto Specialty for a purchase price of One Dollar ($1.00), the fixed assets and work in process on temporary importation in Juarez, Mexico as specified on Schedule 1.1.6 (the "Juarez Fixed Assets"). 1.2 Consideration to Von Weise. In consideration of the assets contributed and sold by Von Weise pursuant to Section 1.1 (collectively, the "Von Weise 351 Assets"), on the Closing Date, Auto Specialty shall: 1.2.1 issue to Von Weise one hundred (100) shares of nonqualified preferred stock of Auto Specialty (the "Von Weise Auto Specialty Preferred Stock"); and -2- 1.2.2 make a cash payment to Von Weise in the amount of Four Million Nine Hundred Thousand Dollars ($4,900,000.00) (the "Auto Specialty Cash Payment"). 1.3 Purchaser One Cash Contribution to Auto Specialty. In a manner intended to be a tax-free capital contribution under Section 351(a) of the Code, on the Closing Date, Purchaser One shall make a cash contribution to Auto Specialty in the amount of Five Hundred Thousand Dollars ($500,000.00) (the "Purchaser One Cash Contribution to Auto Specialty"). 1.4 Consideration to Purchaser One. In consideration of the contribution specified in Section 1.3, on the Closing Date, Auto Specialty shall issue to Purchaser One five hundred (500) shares of common stock of Auto Specialty. 1.5 Assumption of Liabilities. Auto Specialty shall, in accordance with an Assignment and Assumption Agreement in the form attached hereto as Exhibit A (the "Von Weise Auto Specialty Assignment and Assumption Agreement"), assume and agree at Closing to pay, timely perform and discharge, in accordance with their respective terms: (a) all liabilities relating to or arising out of the Von Weise 351 Assets from and after Closing; and (b) the other liabilities specified therein, which shall not include any employment-related liabilities of Von Weise incurred prior to the Closing Date. 1.6 Tax Reporting. 1.6.1 The Seller and Purchaser shall, and shall cause Auto Specialty to, treat the transactions described in this ARTICLE 1 as a tax-free contribution described in Section 351(a) of the Code, and not take a position inconsistent with such characterization (the "Tax Characterization") in the preparation of financial statements, the filing of any Tax Returns or in the course of any audit by any Governmental Body, Tax review or Tax proceeding relating to any Tax Returns. 1.6.2 The Seller and Purchaser shall cause Von Weise and Auto Specialty to make an election under Section 362(e)(2)(c)(ii) of the Code and regulations thereunder. 1.6.3 Seller shall be free to settle and resolve any Tax matter (including, the Tax Characterization) under audit by any Governmental Body, Tax review or Tax proceeding relating to any Tax Return, in its sole discretion, at any time, so long as Seller does not take a position, settle or resolve the audit, Tax review or Tax proceeding in a manner inconsistent with the Tax Characterization. 1.6.4 In the event that Seller is unable to settle and resolve any Tax matter involving an audit by any Governmental Body, Tax Review or Tax proceeding without taking a position inconsistent with the Tax Characterization and the Tax matter in question may be appealed (an "Unsettled Tax Matter"), Seller shall deliver written notice to Purchaser informing Purchaser of the Unsettled Tax Matter (a "Notice of Unsettled Tax Matter") within fifteen (15) days following Seller's receipt of notice of the Unsettled Tax Matter. Purchaser may require Seller to appeal the Unsettled Tax Matter (if such an appeal can be undertaken in good faith and in compliance with all applicable Laws), by -3- delivering written notice to Seller within fifteen (15) days following Purchaser's receipt of the Notice of Unsettled Tax Matter. Purchaser shall reimburse Seller for all of Seller's reasonable out-of-pocket costs and expenses incurred in connection with any such appeal. At any time during an appeal of an Unsettled Tax Matter, Seller may resolve and settle such matter in a manner consistent with Section 1.6.3. In the event Purchaser fails to deliver a notice to Seller in response to a Notice of Unsettled Tax Matter, Seller shall be free without restriction of any kind to resolve and settle the Unsettled Tax Matter in a manner consistent or inconsistent with the Tax Characterization. 1.7 Funding of Auto Specialty. On the Closing Date, Purchaser shall cause Auto Specialty to receive cash in an amount sufficient to enable Auto Specialty to make the Auto Specialty Cash Payment to Von Weise (the "Funding of Auto Specialty"). ARTICLE 2 SALE AND PURCHASE OF THE TCH SHARES, THE 0.001% EQUITY PARTICIPATION AND THE DIRECT PURCHASED ASSETS 2.1 Sale and Purchase of the TCH Shares. Upon the terms and subject to the conditions contained herein, on the Closing Date, in consideration of the Final Purchase Price, Tecumseh shall sell, assign, transfer, convey and deliver to Purchaser One all of the issued and outstanding shares of the capital stock of TCH (the "TCH Shares"). 2.2 Sale and Purchase of the 0.001% Equity Participation. Upon the terms and subject to the conditions contained herein, on the Closing Date, in consideration of the Final Purchase Price, Tecumseh shall sell, assign, transfer, convey and deliver to Purchaser Two one (1) equity participation representative of 0.001% of the issued, outstanding and paid equity interest of Motores (the "0.001% Equity Participation"). 2.3 Sale and Purchase of the Direct Purchased Assets. Upon the terms and subject to the conditions contained herein, on the Closing Date, in consideration of the Final Purchase Price, Von Weise shall sell, assign, transfer, convey and deliver the assets specified on Schedule 2.3 (the "Direct Purchased Assets"). 2.4 Assumption of Liabilities. Purchaser One shall, in accordance with an Assignment and Assumption Agreement in the form attached hereto as Exhibit B (the "Von Weise Purchaser One Assignment and Assumption Agreement"), assume and agree at Closing to pay, timely perform and discharge, in accordance with their respective terms, all liabilities relating to or arising out of the Direct Purchased Assets from and after Closing, which shall not include any employment-related liabilities of Von Weise incurred prior to the Closing Date. -4- ARTICLE 3 PURCHASE PRICE AND PAYMENT 3.1 Purchase Price. 3.1.1 The initial purchase price for the TCH Shares, the 0.001% Equity Participation and the Direct Purchased Assets shall be an amount equal to the sum of (a) Five Million Dollars ($5,000,000) minus (b) the Estimated Working Capital Difference (the "Initial Purchase Price"). The Initial Purchase Price is subject to adjustment by the Adjustment Amount (the result being, the "Final Purchase Price") pursuant to Section 3.1.2. The Initial Purchase Price and the Adjustment Amount shall be payable as provided in Section 3.3. All amounts set forth in this Agreement shall be in U.S. Dollars, unless otherwise stated. 3.1.2 The Initial Purchase Price and the Final Purchase Price shall be allocated among the TCH Shares, the 0.001% Equity Participation and the Direct Purchased Assets in the manner set forth in Schedule 3.1.2. The Purchaser and the Seller shall report an allocation of the Final Purchase Price among the Direct Purchased Assets, the TCH Shares and the 0.001% Equity Participation in a manner consistent with Schedule 3.1.2 and shall not take any position inconsistent therewith in the preparation of financial statements, the filing of any Tax Returns or in the course of any audit by any Governmental Body, Tax review or Tax proceeding relating to any Tax Returns. 3.2 Adjustment of Initial Purchase Price. 3.2.1 Within one hundred twenty (120) calendar days following the Closing Date (the "Adjustment Period"), the Purchaser shall prepare, or cause to be prepared, and deliver to Seller a statement of Working Capital of the Business as of the close of business on the Closing Date (the "Closing Date Working Capital"). The Closing Date Working Capital shall be prepared in accordance with the Accounting Principles. 3.2.2 The statement of Closing Date Working Capital shall be final and binding on the parties unless Seller shall, within thirty (30) days following the delivery of the statement of Closing Date Working Capital, deliver to the Purchaser written notice of objection (the "Objection Notice") with respect to the statement of Closing Date Working Capital. The Objection Notice shall specify in reasonable detail the disputed items on the statement of Closing Date Working Capital (which shall be limited to whether the statement of Closing Date Working Capital was prepared in accordance with the Accounting Principles and is accurate) and describe in reasonable detail the basis for the disputed items, including the data that forms the basis thereof, and include the Seller's draft of the statement of Closing Date Working Capital. During the 30-day period following the Purchaser's delivery of the statement of Closing Date Working Capital to the Seller, the Purchaser shall grant the Seller reasonable access during normal business hours to the books and records of TCH and each Subsidiary relevant to the preparation of such statement. -5- 3.2.3 If the Objection Notice is delivered, the parties shall consult with each other with respect to the disputed items and attempt in good faith to resolve the dispute. If the parties are unable to reach an agreement within thirty (30) days after delivery of the Objection Notice, either the Purchaser or Seller may refer any unresolved disputed items to Duff & Phelps, LLC (the "Unrelated Firm"). The Unrelated Firm shall be directed to render a written report as promptly as practicable and, in any event, within thirty (30) days on the unresolved disputed items and to resolve only those issues of dispute set forth in the Objection Notice. The Unrelated Firm shall resolve such issues of dispute in accordance with the Accounting Principles. The resolution of the dispute by the Unrelated Firm shall be final and binding on the parties. The fees and expenses of the Unrelated Firm shall be shared by the Seller and the Purchaser in proportion to the aggregate differences between their respective calculations of Closing Date Working Capital as embodied in the Purchaser's draft of the statement of Working Capital and the Seller's draft of the statement of Working Capital, as applicable, and the Closing Date Working Capital as finally determined by the Unrelated Firm. 3.2.4 Upon final determination of the Closing Date Working Capital, the Initial Purchase Price shall be decreased dollar for dollar to the extent the Closing Date Working Capital is less than the Estimated Working Capital (the "Adjusted Purchase Price"). The difference between the Initial Purchase Price and the Adjusted Purchase Price (the "Adjustment Amount"), shall be paid by Seller to Purchaser. Payment of the Adjustment Amount shall be made in accordance with Section 3.3.2 and 3.3.3. Until paid, the Adjustment Amount shall bear interest determined by computing simple interest on the Adjustment Amount from the Closing Date to the date of payment(s) at the rate of interest announced publicly by Citibank, N.A. from time to time as its "reference rate" (on the basis of a 365-day year). 3.3 Payment of Initial Purchase Price and Adjusted Purchase Price. 3.3.1 At the Closing, the Purchaser shall pay to the Seller an amount equal to the Initial Purchase Price by wire transfer of immediately available funds to an account or accounts designated by the Seller on Schedule 3.3.1. 3.3.2 Within five (5) Business Days after the final determination of Closing Date Working Capital in accordance with Section 3.2, the Adjustment Amount as determined in accordance with Section 3.2.4 shall be paid. 3.3.3 Payment of the Adjustment Amount shall be made by wire transfer of immediately available funds to an account or accounts designated by the Purchaser not later than two (2) days after the final determination of Closing Date Working Capital. 3.4 Auto Specialty Escrow. In addition, at the Closing, in anticipation of the Second Closing Date transactions described in ARTICLE 6: 3.4.1 Von Weise shall deliver a certificate representing one hundred (100) shares of common stock of Auto Specialty (the "Von Weise Auto Specialty Common Stock") to Miller, Canfield, Paddock and Stone, P.L.C. (the "Auto Specialty -6- Escrow Agent"), which shall hold such certificate in escrow (the "Auto Specialty Escrow") pursuant to the terms of an escrow agreement, the form of which is attached as Exhibit C (the "Auto Specialty Escrow Agreement"). 3.4.2 Purchaser One shall deliver to the Auto Specialty Escrow Agent the sum of Fifty Thousand Dollars ($50,000.00), which shall be held pursuant to the terms and conditions of the Auto Specialty Escrow Agreement (the "Purchaser One Auto Specialty Escrow Deposit"); and 3.4.3 Auto Specialty shall deliver to the Auto Specialty Escrow Agent the sum of Fifty Thousand Dollars ($50,000.00), which shall be held pursuant to the terms and conditions of the Auto Specialty Escrow Agreement (the "Auto Specialty Escrow Deposit"). 3.5 Withholding Taxes. Notwithstanding anything in this Agreement to the contrary, Purchaser shall be entitled to withhold and deduct from the consideration otherwise payable pursuant to this Agreement such amounts as Purchaser is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign Tax law. To the extent that amounts are so withheld and paid over to the appropriate Tax authority, such amounts shall be treated for all purposes of this Agreement as having been paid to the Person in respect of which such deduction or withholding was made. ARTICLE 4 CLOSING AND TERMINATION 4.1 Closing Date. The closing of the transactions described in ARTICLE 1 and ARTICLE 2 (the "Closing") shall take place at the offices of Miller, Canfield, Paddock and Stone, P.L.C., located at 840 West Long Lake Road, Suite 200, Troy, Michigan, 48098 at 10:00 a.m., local time, on the 2nd Business Day after the conditions to closing set forth in Section 10.1, Section 10.2 and Section 10.3 (other than those to be satisfied at the Closing, which shall be satisfied or waived at the Closing) have been satisfied or waived by the party entitled to waive such condition, or on such other date after such satisfaction or waiver and at such other time and place upon which the Seller and the Purchaser shall agree (which time and place are designated as the "Closing Date"). 4.2 Termination of Agreement. This Agreement may be terminated prior to the Closing as follows: 4.2.1 At the election of the Purchaser on or after December 14, 2007, if the Closing shall not have occurred by the close of business on such date, provided that Purchaser is not in default of its obligations hereunder; 4.2.2 At the election of the Seller on or after December 14, 2007, if the Closing shall not have occurred by the close of business on such date; -7- 4.2.3 by mutual written consent of the Seller and the Purchaser; 4.2.4 by the Purchaser, if TCH or the Seller has breached or failed to perform any of its representations, warranties, covenants or agreements contained in this Agreement, which breach or failure to perform would cause the conditions set forth in Section 10.1 not to be satisfied and cannot be cured, or if curable, is not cured within thirty (30) days after written notice of such breach is given to the Seller by the Purchaser; 4.2.5 by the Seller, if the Purchaser has breached or failed to perform any of its representations, warranties, covenants or agreements contained in this Agreement, which breach or failure to perform would cause the conditions set forth in Section 10.2 not to be satisfied and cannot be cured, or if curable, is not cured within thirty (30) days after written notice of such breach is given to the Purchaser by the Seller; or 4.2.6 at the election of either the Seller or the Purchaser if there shall be in effect a final nonappealable Order of a Governmental Body of competent jurisdiction restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated hereby. 4.3 Procedure Upon Termination. In the event the Purchaser or the Seller, or both, elect to terminate this Agreement pursuant to Section 4.2, written notice thereof shall promptly be given to the other party, and this Agreement shall terminate, and the transactions specified in ARTICLE 1, ARTICLE 2 and ARTICLE 6 shall be abandoned, without further action by the Purchaser or the Seller. If this Agreement is terminated as provided herein each party shall redeliver all documents, work papers and other material of the other party relating to the transactions contemplated hereby, whether obtained before or after the execution hereof. 4.4 Effect of Termination. In the event this Agreement is validly terminated as provided herein, then each of the parties shall be relieved of their duties and obligations arising under this Agreement after the date of such termination and such termination shall be without liability to the Purchaser, TCH, the Subsidiaries, or the Seller; provided, however, that the obligations of the parties set forth in Section 9.7 shall survive any such termination and shall be enforceable hereunder notwithstanding such termination; provided, further, that nothing in this Section 4.4 shall relieve the Purchaser or Seller of any liability for a breach of this Agreement except as specified in Section 4.5. 4.5 Termination of Agreement by Seller in Default. If Seller terminates this Agreement pursuant to the provisions of Section 4.2.2 and Seller is in default of its obligations pursuant to in Section 9.10 this Agreement, whether or not Purchaser has previously delivered a written notice under Section 4.2.4, then in lieu of any other action, claim or remedy provided under this Agreement, at law or in equity, Purchaser shall be entitled to a cash payment of Seven Hundred Fifty Thousand Dollars ($750,000) from Seller as liquidated damages arising from such termination (the "Liquidated Damages"). For the avoidance of doubt, Seller shall not be required to pay the Liquidated Damages to Purchaser unless Seller is in default under the provisions of -8- Section 9.10, regardless of whether any other defaults shall have occurred. The parties hereby agree and stipulate that the amount of the Liquidated Damages constitutes reasonable compensation for the time and effort of Purchaser with respect to the transactions contemplated by this Agreement and does not amount to a penalty or forfeiture. Seller shall pay to Purchaser the Liquidated Damages within thirty (30) days after the delivery of written notice by Purchaser referencing this Section 4.5 and demanding payment of the Liquidated Damages. Upon the making and receipt of such payment under this Section 4.5, Seller shall have no further obligation of any kind and Purchaser shall have no claim for Losses of any kind resulting from the termination of this Agreement. ARTICLE 5 THE VON WEISE AUTO SPECIALTY PREFERRED STOCK 5.1 Auto Specialty Restated Certificate. On or immediately prior to the Closing Date, Seller shall cause to be filed with the Secretary of State of the State of Delaware, the Amended and Restated Certificate of Incorporation of Auto Specialty in the form attached hereto as Exhibit D ("Auto Specialty Restated Certificate"). 5.2 Sale of Nonqualified Preferred Stock in Auto Specialty. Auto Specialty shall have the right to purchase from Von Weise, and Von Weise shall have the right to sell to Auto Specialty, for a purchase price of One Hundred Thousand Dollars ($100,000.00) the Von Weise Auto Specialty Preferred Stock pursuant to the terms and conditions of the Auto Specialty Restated Certificate and the bylaws of Auto Specialty. ARTICLE 6 SECOND CLOSING DATE TRANSACTIONS 6.1 Second Closing Date Transactions. At 12:01 a.m. on the second day after the Closing Date (the "Second Closing Date"), Seller and Purchaser shall cause the following transactions to occur in accordance with the Auto Specialty Escrow Agreement: 6.1.1 Purchase of Auto Specialty Common Stock by Purchaser One. Purchaser One shall purchase from Von Weise fifty (50) shares of Von Weise Auto Specialty Common Stock represented by a certificate held in escrow pursuant to the Auto Specialty Escrow Agreement. To effectuate such purchase, on the Second Closing Date, the Auto Specialty Escrow Agent shall: 6.1.1.1 disburse to Von Weise from the Auto Specialty Escrow on behalf of Purchaser One the sum of Fifty Thousand Dollars ($50,000.00); and 6.1.1.2 deliver to Purchaser One from the Auto Specialty Escrow on behalf of Von Weise a certificate representing fifty (50) shares of Von Weise Auto Specialty Common Stock. -9- 6.1.2 Repurchase of Auto Specialty Common Stock by Auto Specialty. Auto Specialty shall repurchase from Von Weise fifty (50) shares of Von Weise Auto Specialty Common Stock held in escrow pursuant to the Auto Specialty Escrow Agreement. To effectuate such repurchase, on the Second Closing Date, the Auto Specialty Escrow Agent shall: 6.1.2.1 disburse to Von Weise from the Auto Specialty Escrow on behalf of Auto Specialty the sum of Fifty Thousand Dollars ($50,000.00); and 6.1.2.2 deliver to Auto Specialty from the Auto Specialty Escrow on behalf of Von Weise a certificate representing fifty (50) shares of Von Weise Auto Specialty Common Stock. ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF THE SELLER The Seller hereby represents and warrants to the Purchaser, as of the date of this Agreement and as of the Closing Date, that: 7.1 Organization and Good Standing. Tecumseh, Von Weise, TCH and Auto Specialty are each corporations organized, validly existing and in good standing under the laws of the jurisdiction of its organization as set forth above or on Annex A and each has all requisite corporate power and authority to own, lease and operate its properties and to carry on the Business as now conducted. TCH is duly qualified to do business as a foreign corporation under the laws of each jurisdiction in which it owns or leases real property and each other jurisdiction in which the conduct of its Business or the ownership of its assets requires such qualification and where the failure to be so qualified would have a Company Material Adverse Effect. 7.2 Authorization of Agreement. Seller has all requisite power, authority and legal capacity to execute and deliver this Agreement and each other agreement, document, instrument or certificate contemplated by this Agreement or to be executed by Seller in connection with the consummation of the transactions contemplated by this Agreement (together with this Agreement, the "Seller Documents"), and to consummate the transactions contemplated hereby and thereby. This Agreement has been, and each of the Seller Documents will be at or prior to the Closing, duly and validly executed and delivered by Seller and (assuming the due authorization, execution and delivery by the other parties hereto and thereto) this Agreement constitutes, and each of the other Seller Documents when so executed and delivered will constitute, legal, valid and binding obligations of Seller, enforceable in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). -10- 7.3 Capitalization. 7.3.1 The (i) authorized capital stock, (ii) par value per share (if any), and (iii) number of issued and outstanding shares of capital stock of TCH and the owner of such shares are as set forth on Annex A. No shares of capital stock of TCH are held by TCH as treasury stock. 7.3.2 The (i) authorized capital stock, (ii) par value per share (if any), and (iii) number of issued and outstanding shares of capital stock of Auto Specialty and the owner of such shares are as set forth on Annex A. No shares of capital stock of the Auto Specialty are held by Auto Specialty as treasury stock. 7.3.3 The (i) authorized equity interest, and (ii) number of outstanding shares of equity participations representative of equity interest of Motores and the owners of such equity participations, are as set forth on Annex A. No equity interest of Motores is held as treasury stock. Tecumseh, which owns the 0.001% Equity Participation, and Von Weise, which owns the 99.999% Equity Participation, collectively own all of the outstanding equity interest in Motores. 7.3.4 All of the equity interest of Motores, all of the TCH Shares and all of the shares of Auto Specialty were duly authorized for issuance and are validly issued, fully paid and non-assessable. There is no existing option, warrant, call, right, commitment or other agreement of any character to which Seller, TCH, Auto Specialty or Motores is a party requiring, and there are no securities of TCH, Auto Specialty or Motores outstanding which upon conversion or exchange would require, the issuance, sale or transfer of any additional shares of capital stock or other equity securities of TCH, Auto Specialty or Motores or other securities convertible into, exchangeable for or evidencing the right to subscribe for or purchase shares of capital stock or other equity securities of TCH, Auto Specialty or Motores. Neither Seller, TCH, Auto Specialty nor Motores is a party to any voting trust or other voting agreement with respect to any of the TCH Shares, the shares of Auto Specialty or equity interest of Motores or to any agreement relating to the issuance, sale, redemption, transfer or other disposition of the capital stock (or other equity) of TCH, Auto Specialty or Motores other than the right of first refusal of TCH for the acquisition of the 99.999% Equity Participation and the 0.001% Equity Participation provided in the bylaws of Motores and/or under applicable Mexican Law, which has been fully waived by TCH prior to the Closing. 7.4 Subsidiaries. Schedule 7.4 hereto sets forth the name of each Subsidiary and, with respect to each Subsidiary, the jurisdiction in which it is incorporated or organized, the number of shares or other equity securities of its authorized capital stock or equity interest, the number and class of shares or equity securities thereof duly issued and outstanding, the names of all stockholders or other equity owners and the number of shares of stock owned by each stockholder or the amount of equity owned by each equity owner. Except as set forth on Schedule 7.4, none of TCH or any Subsidiary own, directly or indirectly, any capital stock or other equity or ownership interest, or have any obligations to acquire any capital stock or other equity or ownership interests, in any Person. All of the outstanding shares of capital stock or other -11- equity interest of each Subsidiary are validly issued (to the extent applicable), fully paid and non-assessable, and the shares or other equity interest shown on Schedule 7.4 as being owned by TCH or the Seller are owned by TCH or Seller free and clear of any and all Liens of any kind whatsoever, except as set forth on Schedule 7.4. No shares of capital stock or other equity interest are held by any Subsidiary as treasury stock. There is no existing option, warrant, call, commitment or agreement to which any Subsidiary is a party requiring, and there are no convertible securities of any Subsidiary outstanding which upon conversion would require, the issuance of any additional shares of capital stock or other equity interests of any Subsidiary or other securities convertible into shares of capital stock or other equity interests of any Subsidiary or other equity security of any Subsidiary. With respect to any Subsidiary which is shown on Schedule 7.4 as having shares or other equity interests owned by a Person other than TCH, each such Person has no rights as a shareholder or holder of other equity interests in any Subsidiary, whether by Contract, Subsidiary charter document or otherwise, other than rights which are available to a shareholder or holder of other equity interests existing by operation of applicable Law other than those that have been waived by such Person. Each Subsidiary is a duly organized and validly existing corporation or other entity in good standing (to the extent applicable) under the laws of the jurisdiction of its organization and is duly qualified to do business under the laws of (i) each jurisdiction in which it owns or leases real property and (ii) each other jurisdiction in the United States and Canada in which the conduct of its business or the ownership of its assets requires such qualification and where the failure to be so qualified would have a material adverse effect on the Subsidiary and each such jurisdiction described in (i) and (ii) above is set forth on Schedule 7.4. Each Subsidiary has all requisite power and authority to own its properties and carry on its business as presently conducted. 7.5 Corporate Records. The Seller has made available to the Purchaser true, correct and complete copies of the certificate of incorporation and bylaws or comparable organizational documents of TCH and each Subsidiary. The Motores' corporate registries, including its respective registry of shareholders' or partners' meetings and its respective shares' or equity interest's registry, and all other corporate documents which are necessary pursuant to the General Law of Commercial Companies (Ley General de Sociedades Mercantiles), are duly kept by Motores up-to-date, and recorded or in process of recording with the corresponding public registry, if applicable, in all material respects. Schedule 7.5 contains a current list of all of the general powers-of-attorney granted by Motores, which are in effect. 7.6 Conflicts; Consents of Third Parties. 7.6.1 Except as set forth in Schedule 7.6.1, none of the execution and delivery by the Seller of this Agreement and the other Seller Documents, the consummation of the transactions contemplated hereby or thereby, or compliance by the Seller with any of the provisions hereof or thereof will: (i) conflict with, or result in the breach of, any provision of the certificate of incorporation or similar document or bylaws or estatutos sociales or other similar document of TCH, Von Weise or any Subsidiary; (ii) conflict with, violate, result in the breach or termination of, or constitute a default under any note, bond, mortgage, indenture, license, agreement or other instrument or -12- obligation to which TCH, Von Weise or any Subsidiary is a party or by which it or any of its properties or assets is bound or affected; (iii) violate any statute, rule, regulation, Order or decree of any Governmental Body or authority by which TCH, Von Weise, Auto Specialty or any Subsidiary is bound or affected; or (iv) result in or require the creation or imposition of any Lien upon the properties or assets or capital stock or other equity interest of TCH, Von Weise or any Subsidiary, except that Seller's lender shall have a Lien on the Von Weise Auto Specialty Preferred Stock. 7.6.2 Except for the consents and notices set forth on Schedule 7.6.1 and except as set forth on Schedule 7.6.2, no material consent, waiver, approval, Order, Permit or authorization of, or declaration or filing with, or notification to, any Person or Governmental Body is required to be obtained or made on the part of Seller, TCH, Auto Specialty or any Subsidiary in connection with the execution and delivery of this Agreement or the other Seller Documents, or the compliance by the Seller, TCH or any Subsidiary as the case may be, with any of the provisions hereof or thereof. 7.7 Ownership and Transfer of Direct Purchased Assets, the TCH Shares and the 0.001% Equity Participation. Von Weise is the record and beneficial owner of the Direct Purchased Assets and Tecumseh is the record and beneficial owner of the TCH Shares and the 0.001% Equity Participation, free and clear of any and all Liens. Seller has the corporate power and authority to sell, transfer, assign, convey and deliver the Direct Purchased Assets, the TCH Shares and the 0.001% Equity Participation as provided in this Agreement, and such delivery will convey to the Purchaser title and ownership to the Direct Purchased Assets, the TCH Shares and the 0.001% Equity Participation, free and clear of any and all Liens. 7.8 Financial Statements. Attached hereto as Schedule 7.8 is a copy of the pro forma unaudited combined financial statements of the Business as of June 30, 2007. Such financial statements are collectively referred to herein as the "Financial Statements." The Financial Statements have been prepared in accordance with the Accounting Principles. The Financial Statements fairly present, in all material respects, the financial condition and results of operations of the Business, as of and for the periods to which they relate. For the purposes hereof, the pro forma unaudited combined balance sheet of the Business, which is included in the Financial Statements, as of June 30, 2007 is referred to as the "Balance Sheet" and June 30, 2007 is referred to as the "Balance Sheet Date" with respect to TCH to which it relates. 7.9 No Undisclosed Liabilities. Except as otherwise disclosed on Schedule 7.9, neither TCH nor any of the Subsidiaries had any Indebtedness, obligations or liabilities of any kind whatsoever, except: (a) liabilities reflected in the Balance Sheet; and (b) liabilities incurred in the ordinary course of business consistent with past practice since the Balance Sheet Date, none of which has had a Company Material Adverse Effect. Neither TCH nor any of the Subsidiaries will have any Indebtedness as of the Closing Date. -13- 7.10 Absence of Certain Developments. Except as contemplated by or in connection with this Agreement or as permitted by Section 5.1, Section 9.2 or set forth on Schedule 7.10, since the Balance Sheet Date: 7.10.1 there has not been any damage, destruction or loss not covered by insurance, with respect to the property and assets of TCH or any Subsidiary having a replacement cost of more than One Hundred Thousand Dollars ($100,000) for any single loss or Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate; 7.10.2 there has not been any declaration, setting aside or payment of any dividend or other distribution in respect of any shares of capital stock of, or other equity interest in, TCH or any Subsidiary or any repurchase, redemption or other acquisition by the Seller or TCH or any Subsidiary of any outstanding shares of capital stock or other securities of, or other ownership interest in, TCH or any Subsidiary; 7.10.3 there has not been any material change by TCH or any Subsidiary in accounting or Tax reporting principles, methods or policies; 7.10.4 neither TCH nor any Subsidiary has entered into any transaction or Contract involving the expenditure of more than One Hundred Thousand Dollars ($100,000) or conducted its business other than in the ordinary course of business consistent with past practice; 7.10.5 neither TCH nor any Subsidiary has made any loans, advances or capital contributions to, or investments in, any Person or paid any fees or expenses to the Seller or any Affiliate of Seller other than in the ordinary course of business consistent with past practice; 7.10.6 neither TCH nor any Subsidiary has mortgaged, pledged or subjected to any Lien any asset, or acquired any assets or sold, assigned, transferred, conveyed, leased or otherwise disposed of any of its assets for which the aggregate consideration paid or payable in any individual transaction was in excess of One Hundred Thousand Dollars ($100,000), except for sales of inventory and disposition of obsolete equipment, in each case in the ordinary course of business consistent with past practice; 7.10.7 neither TCH nor any Subsidiary has canceled or compromised any debt or claim with a value, individually or in the aggregate, exceeding One Hundred Thousand Dollars ($100,000) or amended, canceled, terminated, relinquished, waived or released any Contract or right involving the expenditure of more than One Hundred Thousand Dollars ($100,000); 7.10.8 neither TCH nor any Subsidiary has made or committed to make any capital expenditures or capital additions or betterments in excess of One Hundred Thousand Dollars ($100,000) other than in the ordinary course of business; 7.10.9 neither TCH nor any Subsidiary has instituted or settled any Legal Proceeding in which equitable relief was sought or in which claimed damages exceeded One Hundred Thousand Dollars ($100,000); -14- 7.10.10 there has not been any increase in the compensation payable or to become payable to any Employee, except for hourly or non-officer salaried employees made in the ordinary course of business, consistent with past practices nor any other change in any employment Contract; and 7.10.11 there has not been any establishment or amendment of any benefit plan implemented or to be implemented by TCH or any Subsidiary. 7.11 Certain Tax Matters. Except as set forth on Schedule 7.11: 7.11.1 (i) All material Tax Returns required to be filed by or on behalf of TCH, Auto Specialty or any Subsidiary have been filed in a timely manner (within any applicable extension periods), (ii) all such Tax Returns are correct and complete in all material respects, (iii) all material Taxes relating to TCH and its Subsidiaries with respect to taxable periods covered by such Tax Returns, and all other Taxes for which TCH or its Subsidiaries is liable, whether or not reflected on a Tax Return, have been timely paid in full or will be timely paid or remitted in full by the due date thereof and the provision for Taxes due (as opposed to any reserve for deferred Taxes established to reflect temporary differences between book and Tax income) on the most recent Financial Statements reflect an appropriate reserve for all unpaid Taxes of TCH and its Subsidiaries for all taxable periods and portions thereof through the date of such Financial Statements, being current Taxes not yet due and payable, and (iv) with respect to any Taxes of TCH or any Subsidiary, no Liens for Taxes have been filed with respect to the assets of TCH or any Subsidiary and no material claims are being asserted in writing; 7.11.2 (i) No property of TCH or any Subsidiary is "tax exempt use property" within the meaning of Section 168(h) of the Code or "tax exempt bond financed property" within the meaning of Section 168(g) of the Code and (ii) neither TCH nor any Subsidiary is a party to any lease made pursuant to Section 168(f)(8) of the Internal Revenue Code of 1954; 7.11.3 TCH and each Subsidiary has complied in all material respects with all applicable laws, rules and regulations relating to the payment and withholding of Taxes and has duly and timely withheld from employee salaries, wages and other compensation, and from payments to non-residents of Canada for purposes of the Income Tax Act (Canada), and has paid over to the appropriate taxing authorities all amounts required to be so withheld and paid over for all periods under all applicable laws; 7.11.4 Seller has made available to Purchaser complete copies of (i) all material income or franchise Tax Returns of TCH and each Subsidiary (or, in the case of Tax Returns filed for an affiliated group, the portion of such consolidated Tax Returns relating to TCH and each Subsidiary) relating to the taxable periods ending after December 31, 2003 and (ii) the portions of any audit report issued within the last three (3) years relating to any Taxes due from TCH and each Subsidiary; 7.11.5 As of the date hereof, except as specified on Schedule 7.11.5, no Tax Return of TCH or any Subsidiary is under audit or examination, or any reassessment -15- or proposal reassessment, by any taxing authority, and no written or unwritten notice of such an audit or examination has been received by TCH or any Subsidiary. No issues have been raised in any examination by any taxing authority with respect to TCH or any Subsidiary which, by application of similar principles, reasonably could be expected to result in a proposed deficiency for any other period not so examined. Each material deficiency resulting from any audit or examination relating to Taxes, for which TCH or any Subsidiary is or could be liable, by any taxing authority has been timely paid. The relevant statute of limitations is closed with respect to the federal Tax Returns of Seller and TCH for all years through 2002. Except as specified on Schedule 7.11.5, there are no outstanding agreements or waivers extending, or having the effect of extending, the statutory period of limitation applicable to any Tax Returns required to be filed with respect to Seller, TCH or any Subsidiary; 7.11.6 Neither TCH nor any Subsidiary (i) has made any payments, is not obligated to make any payments, or is not a party to any agreement that under certain circumstances could require it to make any payments that are not deductible under Section 280G of the Code; (ii) is a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code; (iii) has participated in or cooperated with an international boycott within the meaning of Section 999 of the Code; (iv) is a party to any joint venture, partnership or other arrangement that is treated as a partnership for federal income Tax purposes; or (v) has received or is subject to any written ruling of a taxing authority related to Taxes or has entered into any written and legally binding agreement with a taxing authority relating to Taxes. There are no accounting method changes, or proposed or threatened accounting method changes, of TCH or any Subsidiary that could give rise to an adjustment under Section 481 of the Code for periods after the Closing Date. TCH does not have any liability for Taxes of any Person or entity other than TCH or such Subsidiary (w) except with regard to the consolidated return group with Seller as the parent of such group, under Section 1.1502-6 of the Treasury regulations (or any similar provision of state, local or foreign Law), (x) as a transferee or successor, (y) by contract or (z) otherwise, for any taxable period for which the applicable statute of limitations is not closed; 7.11.7 Neither TCH nor any Subsidiary is a party to any Tax sharing or similar agreement or arrangement (whether or not written) pursuant to which it will have any obligation to make any payments after the Closing; 7.11.8 None of the TCH Shares, the 0.001% Equity Participation or the 99.999% Equity Participation are "taxable Quebec property" for purposes of the Taxation Act (Quebec); and 7.12 Real Property. Schedule 7.12 sets forth a complete list of (i) all real property and interests in real property necessary to the continued operation of TCH and each Subsidiary, taken as a whole, owned in fee by the Schedule 7.12 Company or Subsidiary with which it is identified (individually, an "Owned Property" and collectively, the "Owned Properties"), and (ii) all real property and interests in real property necessary to the continued operation of TCH and each Subsidiary, taken as a whole, leased by TCH or the Subsidiary with which it is identified pursuant to a lease, -16- sublease, license or other agreement, and all amendments and modifications thereto (individually, a "Real Property Lease" and the real properties specified in such leases, together with the Owned Properties, being referred to herein individually as a "Company Property" and collectively as the "Company Properties") as lessee or lessor. 7.12.1 TCH and each Subsidiary identified on Schedule 7.12 has good and marketable fee title to all Owned Property with which it is identified, free and clear of all encroachments by or onto any Owned Property and free and clear of all Liens of any nature whatsoever except: (i) Liens set forth on Schedule 7.12, and (ii) Permitted Exceptions. Except as set forth on Schedule 7.12, (i) no condemnation, eminent domain, environmental, zoning, or other land use regulation proceedings against any of the Owned Property is pending or, to the knowledge of TCH, threatened, (ii) there are no leases, subleases, licenses, concessions or other agreements, written or oral, granting to any Person the right of use or occupancy of any portion of such Owned Property, and (iii) there are no outstanding options or rights of first refusal to purchase such Owned Property, or any portion thereof or interest therein. 7.12.2 The Real Property Leases are in full force and effect with respect to TCH and each Subsidiary identified on Schedule 7.12 with which they are individually identified, and to the knowledge of TCH, with respect to any third party thereto. TCH and each Subsidiary identified on Schedule 7.12 has a valid and enforceable leasehold interest under each of the Real Property Leases with which it is identified, free and clear of all Liens other than Permitted Exceptions, subject to applicable bankruptcy, insolvency, reorganization, moratorium, concurso mercantil and similar laws affecting creditors' rights and remedies generally and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding at law or in equity). Neither TCH nor any Subsidiary is in default in any material respect under any of such Real Property Leases, or has received any written notice of any default or event that with notice or lapse of time, or both, would constitute a default by TCH or Subsidiary under any of the Real Property Leases. True, complete and correct copies of the Real Property Leases have been delivered or made available to the Purchaser. Except as set forth on Schedule 7.12, (i) the other party to such Real Property Lease is not an Affiliate of, and otherwise does not have any economic interest in, Seller, TCH or the Subsidiaries; (ii) the transaction does not require the consent of or notice to any other party to the Real Property Leases, will not result in a breach or default under the Real Property Leases, will not give rise to any recapture or similar rights, and will not otherwise cause any of the Real Property Leases not to be legal, valid, binding enforceable and in full force and effect on identical terms following the Closing; (iii) no security deposit or portion thereof deposited with respect to any Real Property Lease has been applied in respect of a breach or default under any Real Property Lease which has not been re-deposited in full; (iv) none of the Real Property Leases have been leased, subleased, licensed or otherwise assigned to a third party by Seller, TCH or the Subsidiaries, and the Seller, TCH or the Subsidiaries have not collaterally assigned or granted any other security interest in such Real Property Lease or any interest therein to any other Person; and (v) there are no outstanding termination fees related to any Real Property Leases that have expired or been terminated. -17- 7.12.3 To the Knowledge of Seller, there are no agreements, orders, licenses, Permits, or other directives issued by a Governmental Body which require any change in the present use or operation of the Company Property. 7.13 Tangible Personal Property. Except as set forth on Schedule 7.13, TCH and each Subsidiary (i) has good and valid title to all tangible personal property that is currently employed by it in the conduct of its business as presently conducted and which is material to the conduct by TCH and each Subsidiary of its business, free and clear of all Liens other than Permitted Exceptions and (ii) upon consummation of the transactions contemplated by this Agreement, will be entitled to continue to use all such tangible personal property. 7.14 Technology and Intellectual Property. 7.14.1 Schedule 7.14.1 lists all patents, registered copyrights, registered trademarks, tradenames, material common law trademarks and pending applications therefor included in the A&S Intellectual Property. 7.14.2 Except as shown in Schedule 7.14.2, to the Knowledge of Seller, TCH or a Subsidiary is the sole and exclusive owner of the A&S Intellectual Property, and no other Person has made any written claim of ownership with respect to the A&S Intellectual Property 7.14.3 Except as shown in Schedule 7.14.3, to the Knowledge of Seller, neither TCH nor any Subsidiary has previously assigned, transferred, conveyed, licensed or otherwise encumbered its right, title and interest in the A&S Intellectual Property. 7.14.4 Except as shown in Schedule 7.14.4 or as noted in Schedule 7.14.1, to the Knowledge of Seller, the A&S Intellectual Property is valid, is not invalid or unenforceable in whole or in part and is not the subject of any challenge. 7.14.5 Except as shown in Schedule 7.14.5, to the Knowledge of Seller, no third party is currently violating or infringing upon any of TCH's or Subsidiary's rights in the A&S Intellectual Property. 7.14.6 TCH and each one of the Subsidiaries owns or otherwise possesses (or at the time of Closing will possess) valid and enforceable rights to use all Intellectual Property and Technology currently used in the Business as conducted up to and through the date of this Agreement. Schedule 7.14.6.1 sets forth a list of licenses currently used in the Business that will not be owned or otherwise possessed by TCH or any Subsidiary after the Closing. Schedule 7.14.6.2 lists all other material license agreements granting to TCH or each Subsidiary any material right to use any Intellectual Property or Technology other than software that is available through "shrink wrap" or similar widely available commercial end user licenses. 7.14.7 Except as shown in Schedule 7.14.7, neither TCH nor any Subsidiary is under any obligation to pay any royalties or similar payments in connection with any license to TCH or Subsidiary. -18- 7.14.8 Except as shown in Schedule 7.14.8, to the Knowledge of Seller: (i) the Business as it is currently conducted does not violate or infringe any Intellectual Property rights of any third party, and (ii) no claim of infringement, misappropriation, violation of any Intellectual Property rights of any other Person has been made or asserted, or, to the Knowledge of Seller, threatened in respect of the operation of the Business, and to the Knowledge of Seller, there is no basis for such a claim. 7.14.9 Since July 1996, Von Weise has maintained a policy requiring each salaried employee to execute, and to the Knowledge of Seller, Von Weise, TCH and each Subsidiary is in the regular practice of having each salaried employee execute a written contract transferring all of his or her rights, title and ownership in and to any Intellectual Property created for Von Weise, TCH or any Subsidiary in their entirety and irrevocably to Von Weise. 7.14.10 Since July 1996, Von Weise has maintained a policy requiring salaried employees with access to confidential and/or proprietary information to execute, and to the Knowledge of Seller, Von Weise, TCH and each Subsidiary is in the regular practice of having each salaried employee execute a confidentiality agreement, restricting access to any confidential and/or proprietary information to only those who have a need to know this information. 7.15 Customers and Suppliers. Schedule 7.15 sets forth a list of the ten (10) largest customers of TCH and Subsidiaries on a consolidated basis, measured by dollar volume for each of the year ended December 31, 2006 and the six months ended June 30, 2007. To the Knowledge of Seller, except as shown on Schedule 7.15, since January 1, 2007, none of such customers has given the Seller, TCH or any Subsidiary notice terminating, canceling, or threatening to terminate or cancel (or materially reduce business under) any Contract or relationship with respect to the Business or with TCH or any Subsidiary (or otherwise advising the Seller of such actions or intentions), other than purchase orders or releases of purchase orders in the ordinary course of business. Schedule 7.15 sets forth a list of the thirty (30) largest suppliers/vendors of TCH and Subsidiaries on a consolidated basis, measured by dollar volume for each of the year ended December 31, 2006 and the six months ended June 30, 2007. To the Knowledge of Seller, except as shown on Schedule 7.15, since January 1, 2007, none of such suppliers has given the Seller, TCH or any Subsidiary notice terminating, canceling, or threatening to terminate or cancel (or materially reduce business under) any Contract or relationship with respect to the Business or with TCH or any Subsidiary (or otherwise advising the Seller of such actions or intentions), other than purchase orders or releases of purchase orders in the ordinary course of business. 7.16 Employee Benefits. 7.16.1 Schedule 7.16.1 sets forth all material "employee benefit plans," (as defined in Section 3(3) of ERISA), as well as any other programs, policies or arrangements providing retirement, severance, vacation, sick leave, disability, medical, or life insurance benefits, bonuses or incentive compensation, or any other material compensation other than direct wages or salaries, maintained by TCH or any Subsidiary -19- or to which TCH or any Subsidiary contributed or were obligated to contribute thereunder on behalf of current or former employees of TCH or any Subsidiary within the last three (3) plan years preceding the Closing Date (the "Benefit Plans"). 7.16.2 True, correct and complete copies of the following documents, with respect to each of the Benefit Plans, if applicable, have been made available or delivered to the Purchaser: (i) any plans and related trust documents or insurance or annuity contracts, and amendments thereto; and (ii) with respect to Benefit Plans that are sponsored or maintained by TCH or a Subsidiary or will be assumed hereunder by the Purchaser on and after the Closing Date ("Transferred Benefit Plans") or from which a transfer of assets or liabilities to a plan maintained by the Purchaser is contemplated under this Agreement: (a) the two most recent Forms 5500, if applicable; (b) the last IRS determination letter, if applicable; (c) the most recent actuarial report, if applicable; and (d) summary plan descriptions or any comparable documents required under the law of any foreign Governmental Body. Schedule 7.16.2 sets forth all Transferred Benefit Plans. 7.16.3 The Benefit Plans intended to qualify under Section 401 of the Code are so qualified and the trusts maintained pursuant thereto are exempt from federal income taxation under Section 501 of the Code, and nothing has occurred with respect to the operation of the Benefit Plans which is reasonably likely to cause the loss of such qualification or exemption or the imposition of any material liability, penalty or tax under ERISA or the Code. Seller has provided or made available to Purchaser a written description of any operational, document or other failure with respect to a Transferred Benefit Plan that has been corrected in the last three (3) years under any correction program maintained by the Internal Revenue Service, the Department of Labor or the Pension Benefit Guaranty Corporation. 7.16.4 Except as set forth in Schedule 7.16.4, the Transferred Benefit Plans have been maintained in accordance with their terms and with all provisions of all applicable Laws, except where the failure to do so would not result in any material liability. No material actions, suits, claims or disputes (other than routine claims for benefits) are pending or, to the Knowledge of Seller, threatened with respect to any Transferred Benefit Plan. No audits, inquiries, reviews, proceedings, claims or demands involving any Transferred Benefit Plan are pending with any Governmental Body. 7.16.5 No Benefit Plan is a "multiemployer pension plan" as defined in Section 3(37) of ERISA or a "multi-employer pension plan", as defined under applicable Canadian federal or provincial pension standards legislation. No Transferred Benefit Plan is a single-employer pension plan subject to the termination liability requirements of Title IV of ERISA or a plan providing deferred compensation subject to Section 409A of the Code. 7.16.6 All contributions to any Transferred Benefit Plans required to be made by TCH or any Subsidiary and any payment under any Transferred Benefit Plans (except those to be made from a trust qualified under Sections 401(a) and 501(a) of the -20- Code) required to be made by TCH or any Subsidiary for any period ending before the Closing Date have been paid, and to the extent unpaid, are reflected on the Balance Sheet. 7.16.7 Schedule 7.16.7 identifies each Benefit Plan that is a "registered pension plan", as defined in subsection 248(1) of the Income Tax Act (Canada) (each such plan referred to herein as a "Canadian Registered Plan"). 7.16.8 Each Canadian Registered Plan is registered under the Income Tax Act (Canada) and applicable pension standards legislation and nothing has occurred with respect to the administration of any such plan which is reasonably likely to cause the loss of such registration or the imposition of any liability, penalty or Tax under the Income Tax Act (Canada) or applicable pension standards legislation. 7.16.9 No event has occurred respecting any Canadian Registered Plan which would have entitled any Person to cause the wind-up or termination of such plan in whole or in part. 7.17 Labor. 7.17.1 Except as set forth on Schedule 7.17.1, neither TCH nor any Subsidiary is party to any labor or collective bargaining agreement and there are no labor or collective bargaining agreements which pertain to employees of TCH or such Subsidiary. The Seller has delivered or otherwise made available to the Purchaser true, correct and complete copies of the labor or collective bargaining agreements listed on Schedule 7.17.1, together with all amendments, modifications or supplements thereto. 7.17.2 No labor organization or group of employees of TCH or any Subsidiary has made, in writing, a pending demand for recognition, and there are no representation proceedings or petitions seeking a representation proceeding presently pending or, to the Knowledge of Seller, threatened to be brought or filed with the National Labor Relations Board or other labor relations tribunal. 7.17.3 There are no strikes, work stoppages, unfair labor practice charges, slowdowns or lockouts or, to the Knowledge of Seller, except for routine union grievances arising in the ordinary course of business, grievances or other labor disputes pending or overtly threatened against or involving TCH or any Subsidiary. 7.17.4 Except as set forth on Schedule 7.17.4, there are no charges or complaints in federal or state court, before the Equal Employment Opportunity Commission or the Department of Labor or any state or local agency of similar jurisdiction, by or on behalf of any employee or group of employees of TCH or any Subsidiary or before any other labor board, tribunal or agency of similar jurisdiction, or any complaints or charges that have been communicated to the Seller, TCH or any Subsidiary in accordance with any internal complaint mechanism by or on behalf of any employee or group of employees of TCH or any Subsidiary regarding alleged violations of labor or employment law. -21- 7.17.5 Except as set forth on Schedule 7.17.5, none of the Seller, TCH or any Subsidiary has taken in the past twelve (12) months, and none will take prior to the Closing Date, any action related to TCH or any Subsidiary that would constitute a mass layoff, a mass termination, or a plant closing, or which would otherwise trigger notice requirements or liability under applicable law concerning reductions in force or any similar law in any applicable jurisdictions. 7.17.6 TCH and each Subsidiary are in material compliance with all applicable Laws respecting employment, employment practices and standards, occupational health and safety, terms and conditions of employment, wages and hours, overtime, occupational health and safety, human rights, labor relations, pay equity and workers compensation. 7.18 Litigation. Except as set forth on Schedule 7.18, (a) there is no Legal Proceeding pending or, to the Knowledge of Seller, threatened (i) against TCH or any Subsidiary or (ii) seeking to prevent or challenge the transactions contemplated hereby, (b) there are no unsatisfied judgments, orders or decrees against TCH or any Subsidiary, and (c) there are no injunctions against TCH or any Subsidiary or which otherwise limit the operation of the Business. 7.19 Compliance with Laws; Permits. Except as set forth on Schedule 7.19, TCH and each Subsidiary are in material compliance with all Laws applicable to TCH or such Subsidiary or to the conduct of the Business or operations of TCH or such Subsidiary or the use of its properties (including any leased property) and assets. All material governmental Permits and approvals from state, provincial, federal, municipal or local authorities which are required for TCH and each Subsidiary to operate the Business have been issued. 7.20 Environmental Matters. Except as set forth on Schedule 7.20 hereto: 7.20.1 TCH, each Subsidiary and the operations of the Business are in material compliance with all applicable Environmental Laws; 7.20.2 TCH and each Subsidiary have all material Environmental Permits that are required to be obtained under applicable Environmental Law for the ownership, use and operation of the Business as currently conducted; all such Environmental Permits are maintained, no appeal or any other action is outstanding or threatened to revoke any such Environmental Permit and TCH and each Subsidiary are in material compliance with all terms and conditions of all such Environmental Permits; 7.20.3 to the Knowledge of Seller, none of TCH or any Subsidiary has received written notice of any actual or threatened civil, criminal or administrative action, suit, demand, claim, Lien, hearing, notice of violation, proceeding, or investigation relating to the Business alleging any violation of or liability pursuant to Environmental Law that has not been fully remedied as of the date of this Agreement; -22- 7.20.4 to the Knowledge of Seller, in the past three (3) years, there has not been a Release of Hazardous Materials on or beneath any Owned Property in quantities or concentrations that could reasonably require Remedial Action under applicable Environmental Laws; 7.20.5 in the past three (3) years, to the Knowledge of Seller, the Seller, TCH and each Subsidiary have responded to all material written requests addressed to any of them from Governmental Bodies pursuant to Environmental Laws for material information relating to the operation of the Business; 7.20.6 to the Knowledge of Seller, in the past three (3) years, none of Seller, TCH or any Subsidiary has received written notice of any actual or threatened claim alleging that any current or former employee of the Business in the course of his or her employment has been exposed to any Hazardous Materials generated, produced or used by the Business in concentrations exceeding those permitted under applicable Environmental Laws; 7.20.7 none of the Owned Properties contains any: (i) underground storage tanks, (ii) underground injection wells, (iii) septic tanks in which process wastewater or any Hazardous Materials have been disposed, or (iv) any asbestos in a condition that constitutes a violation of applicable Environmental Laws, or (v) any equipment that contains polychlorinated biphenyls; 7.20.8 except as specified on Schedule 7.20.8, to the Knowledge of Seller, there is no Contract in connection with the Business that obligates TCH or any Subsidiary to pay to, reimburse, guarantee, pledge, defend, indemnify or hold harmless any Person for or against material liabilities arising under Environmental Laws from the operation of the Business; and 7.20.9 the Seller has delivered or made available to Purchaser complete copies of all material environmental reports, studies, audits, notices, orders and claims made in the past three (3) years relating to the currently and formerly owned Real Property. 7.21 Material Contracts. 7.21.1 "Material Contract" shall mean each Contract to which TCH or any Subsidiary is a party or is subject, or by which any of their respective assets are bound: (i) for the performance of services by TCH or any Subsidiary, or the sale of goods or materials by TCH or any Subsidiary, in each case that involves or would reasonably be expected to involve payments to TCH or any Subsidiary in excess of Five Hundred Thousand Dollars ($500,000), in the aggregate, other than customary purchaser orders made in the ordinary course of business; (ii) for the purchase of services, goods or materials by TCH or any Subsidiary, in each case that involves or would reasonably be expected to involve -23- payments by TCH or any Subsidiary in excess of Five Hundred Thousand Dollars ($500,000), in the aggregate, other than customary sales orders made in the ordinary course of business; (iii) that involves or would reasonably be expected to involve payments by TCH or any Subsidiary in excess of Five Hundred Thousand Dollars ($500,000), in the aggregate and which: (A) requires TCH or any Subsidiary to purchase its total requirements of any product or service from a third party; or (B) that contains "take or pay" provisions; (iv) that is a note, debenture, other evidence of Indebtedness, guarantee, loan, credit or financing agreement or instrument for money borrowed to which TCH or any Subsidiary is a party (whether as borrower, guarantor or lender) or under which any Liens exist; (v) that continues for a period of twelve months or more from the date hereof and provides for payments to or by TCH or any of its Subsidiaries exceeding Five Hundred Thousand Dollars ($500,000) (except for Contracts disclosed pursuant to subparagraphs (i) and (ii) above); (vi) that is (A) an employment, severance or termination Contract, excluding oral Contracts with employees for "at will" employment, or (B) a consulting, commission, or sales representative Contract, except for any consulting, commission or sales representative Contract that is terminable at-will by TCH or any Subsidiary without liability to TCH or any Subsidiary; (vii) that is a partnership or joint venture Contract; (viii) for capital expenditures or leasehold improvements from and after the date of this Agreement in excess of One Hundred Thousand Dollars ($100,000); (ix) that restricts or purports to restrict the right of TCH or any Subsidiary to engage in any line of business, acquire any property, develop or distribute any product or provide any service, or to compete with any Person or solicit any employee or customer of any Person; (x) with a Governmental Body; (xi) with any current or former officer or director; (xii) that relates to the acquisition or disposition of any material business (whether by merger, sale of stock, sale of assets or otherwise); (xiii) that creates or involves any agency relationship, distribution arrangement or franchise relationship; and -24- (xiv) that is a Tax allocation or sharing Contract. 7.21.2 Set forth on Schedule 7.21.2 is a complete and accurate list of each Material Contract as of the date of this Agreement. Each Material Contract is in full force and effect and valid and enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting or relating to creditors' rights generally, and the availability of injunctive relief and other equitable remedies. 7.21.3 Except as set forth in Schedule 7.21.3, neither TCH nor any Subsidiary is, and to the Knowledge of Seller, no other party thereto is, in material default in the performance, observance or fulfillment of any obligation, covenant, condition or other term contained in any Material Contract, and neither TCH nor any Subsidiary has given or received written notice to or from any Person relating to any such alleged or potential default that has not been cured. Except as set forth on Schedule 7.21.3, to the Knowledge of Seller, no event has occurred that, with or without the giving of notice or lapse of time, or both, would conflict with or result in a material violation or breach of, or give any Person the right to exercise any material remedy under or accelerate the performance of, or cancel, terminate or modify, any Material Contract. 7.22 Previous Sales; Warranties. Except as set forth on Schedule 7.22, to the Knowledge of Seller, none of TCH or any Subsidiary has breached any express or implied warranties in connection with the sale or distribution of goods or the performance of services, except for breaches that, individually and in the aggregate, are consistent with the past practices of the Business. 7.23 Related Parties. Except as set forth on Schedule 7.23, none of TCH or any Subsidiary is a party to any Contract or transaction with, or any other commitment to, (i) the Seller or any Affiliate thereof or any partner, trustee, or beneficiary of the Seller or any Affiliate thereof, (ii) any director or officer of TCH or any Subsidiary, or (iii) any corporation or other entity in which any of such Persons, directly or indirectly, has an equity, partnership, or similar interest, other than passive ownership of less than 1% of any class of securities of any publicly traded company. Following the Closing, except as disclosed on Schedule 7.23, none of the foregoing Persons will have any interest in any property used by TCH or any Subsidiary. 7.24 Competition Act (Canada). For purposes of determining whether a pre-merger notification is required under the Canadian Competition Act R.S.C. 1985, c.C-34, as amended, neither (a) the aggregate value of the assets in Canada owned by TCH and each Subsidiary collectively; nor (b) the gross revenues from sales in or from Canada generated from such assets, exceeds CAD$50 million as determined pursuant to the Notifiable Transactions Regulations, SOR/87-348. 7.25 Financial Advisors. Except for Rothschild Inc., no Person has acted, directly or indirectly, as a broker, finder or financial advisor for the Seller in connection with the transactions contemplated by this Agreement and no Person is -25- entitled to any fee or commission or like payment in respect thereof. The Seller shall be responsible for the fees of Rothschild Inc. 7.26 No Other Representations or Warranties. Except for the representations and warranties contained in this ARTICLE 7, neither Seller, TCH nor any Subsidiary makes any representations or warranties, and the Seller and TCH and each Subsidiary hereby disclaim any other representations or warranties, whether made by the Seller, TCH, any Subsidiary, or any of their respective officers, directors, employees, agents or representatives, with respect to the execution and delivery of this Agreement or any Seller Document, or the transactions contemplated hereby, notwithstanding the delivery or disclosure to Purchaser or its representatives of any documentation or other information with respect to any one or more of the foregoing. ARTICLE 8 REPRESENTATIONS AND WARRANTIES OF PURCHASER Each Purchaser, jointly and severally, hereby represents and warrants to the Seller that: 8.1 Organization and Good Standing. Each Purchaser is a corporation organized, validly existing and in good standing under the laws of the State of Delaware. 8.2 Authorization of Agreement. Each Purchaser has all requisite power and authority to execute and deliver this Agreement and each other agreement, document, instrument or certificate contemplated by this Agreement or to be executed by such Purchaser in connection with the consummation of the transactions contemplated hereby and thereby (together with this Agreement, the "Purchaser Documents"), and to consummate the transactions contemplated hereby and thereby. The execution, delivery and performance by each Purchaser of this Agreement and each Purchaser Document have been duly authorized by all necessary corporate action on behalf of each Purchaser. This Agreement has been, and each Purchaser Document will be at or prior to the Closing, duly executed and delivered by each Purchaser, as applicable, and (assuming the due authorization, execution and delivery by the other parties hereto and thereto) this Agreement constitutes, and each Purchaser Document when so executed and delivered will constitute, legal, valid and binding obligations of each Purchaser, as applicable, enforceable against each Purchaser in accordance with their respective terms, subject to applicable bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium and similar laws affecting creditors' rights and remedies generally, and subject, as to enforceability, to general principles of equity, including principles of commercial reasonableness, good faith and fair dealing (regardless of whether enforcement is sought in a proceeding at law or in equity). 8.3 Conflicts; Consents of Third Parties. 8.3.1 None of the execution and delivery by each Purchaser of this Agreement and the other Purchaser Documents, the consummation of the transactions -26- contemplated hereby, or the compliance by each Purchaser with any of the provisions hereof or thereof will (i) conflict with, or result in the breach of, any provision of the certificate of incorporation or bylaws or comparable organizational documents of such Purchaser, (ii) conflict with, violate, result in the breach of, or constitute a default under any note, bond, mortgage, indenture, license, agreement or other obligation to which such Purchaser is a party or by which such Purchaser or its properties or assets are bound or (iii) violate any statute, rule, regulation, Order or decree of any Governmental Body or authority by which such Purchaser is bound, except, in the case of clauses (ii) and (iii), for such violations, breaches or defaults as would not, individually or in the aggregate, have a material adverse effect on the ability of such Purchaser to consummate the transactions contemplated by this Agreement. 8.3.2 Except as set forth on Schedule 8.3.2, no consent, waiver, approval, Order, Permit or authorization of, or declaration or filing with, or notification to, any Person or Governmental Body is required on the part of either Purchaser in connection with the execution and delivery of this Agreement or the Purchaser Documents or the compliance by each Purchaser with any of the provisions hereof or thereof. 8.4 Litigation. There are no Legal Proceedings pending or, to the Knowledge of Purchaser, threatened, that are reasonably likely to prohibit or adversely affect the ability of the Purchaser to enter into this Agreement or consummate the transactions contemplated hereby. 8.5 Investment Intention. Purchaser is acquiring the Direct Purchased Assets, the TCH Shares and the 0.001% Equity Participation for its own account, for investment purposes only and not with a view to the distribution (as such term is used in Section 2(11) of the Securities Act of 1933, as amended (the "Securities Act")) thereof. Each Purchaser understands that the TCH Shares have not been registered under the Securities Act and cannot be sold unless subsequently registered under the Securities Act or an exemption from such registration is available. 8.6 Investigation. Each Purchaser further acknowledges and agrees that the only representations, warranties, covenants and agreements made by Seller are the representations, warranties, covenants, and agreements made in this Agreement and Seller makes no express or implied representation or warranty with respect to TCH or any Subsidiary, the Business or otherwise or with respect to any other information provided by the Seller or their Affiliates or representatives including as to (a) merchantability or fitness for any particular use, (b) the operation of the Business by each Purchaser after the Closing in any manner, or (c) the probable success or profitability of the ownership, use or operation of TCH and Subsidiaries by each Purchaser after the Closing. -27- ARTICLE 9 COVENANTS 9.1 Access to Management. From the date of this Agreement until the Closing Date, the Seller shall, and the Seller shall cause the officers, employees, consultants, agents, accountants, attorneys and other representatives of TCH and each Subsidiary to, provide the Purchaser and the Purchaser's representatives, reasonable access during normal business hours to TCH's and its Subsidiaries' properties, books, Contracts, employees and records, and the Seller and TCH shall furnish promptly to the Purchaser all documents, records and information relating to the Business as the Purchaser and its representatives may reasonably request. The Purchaser shall make all such access requests to James Bonsall as Seller's designated representative or such other persons as shall be designated by Mr. Bonsall from time to time. 9.2 Restructuring. Prior to Closing, Tecumseh shall cause Von Weise and TCH to enter into and consummate the transactions contemplated by that certain Asset Purchase Agreement by and between Von Weise and TCH (the "Restructuring"), whereby TCH shall purchase from Von Weise for a purchase price of One Dollar ($1.00): 9.2.1.1 all of the issued and outstanding shares of capital stock of Von Weise Gear Company; 9.2.1.2 certain fixed assets associated with the Business and located in Nappanee, Indiana and Eaton Rapids, Michigan; 9.2.1.3 the Nappanee Real Property; 9.2.1.4 the Intellectual Property associated with the Business; 9.2.1.5 the goodwill associated with the Business; and 9.2.2 the executory Contracts associated with the Business, excluding the JCI Contracts. 9.3 Conduct of Business Pending the Closing. 9.3.1 After the date of this Agreement and prior to the Closing, except: (i) as contemplated in Schedule 9.2 hereto, (ii) as contemplated by this Agreement, (iii) as required by applicable Law or (iv) with the prior written consent of the Purchaser, the Seller shall, and shall cause TCH and each Subsidiary, respectively, to: 9.3.1.1 conduct the Business of TCH or such Subsidiary only in the ordinary course consistent with past practice; and 9.3.1.2 use reasonable efforts to (i) preserve the present Business operations, organization (including, without limitation, management and the sales -28- force) and goodwill of TCH and such Subsidiary and (ii) preserve the present relationship with Persons having business dealings with TCH or such Subsidiary. 9.3.2 After the date of this Agreement and prior to the Closing, except as (i) as contemplated in Schedule 9.2 hereto, (ii) contemplated by this Agreement, (iii) required by applicable Law; (iv) undertaken in connection with the Restructuring or any refinancing in the ordinary course of business; or (v) with the prior written consent of the Purchaser, which shall not be unreasonably withheld, the Seller shall not, and neither TCH nor any Subsidiary shall: 9.3.2.1 declare, set aside, make or pay any dividend or other distribution in respect of the capital stock or other equity or ownership interests of TCH or such Subsidiary or repurchase, redeem or otherwise acquire any outstanding shares of the capital stock or other securities, or other ownership interests in, TCH or Subsidiary; 9.3.2.2 transfer, issue, sell, deliver, pledge, grant or dispose of any shares of capital stock or other securities or equity interest of TCH or such Subsidiary or grant options, warrants, calls or other rights to purchase or otherwise acquire shares of the capital stock or other securities or other equity interest of TCH or such Subsidiary; 9.3.2.3 effect any recapitalization, reclassification, stock split or like change in the capitalization of TCH or such Subsidiary; 9.3.2.4 amend the certificate of incorporation or bylaws or comparable organizational documents of TCH or such Subsidiary; 9.3.2.5 except for trade payables and for Indebtedness for borrowed money incurred in the ordinary course of business and consistent with past practice, borrow monies for any reason or draw down on any line of credit or debt obligation, or become the guarantor, surety, endorser or otherwise liable for any debt, obligation or liability (contingent or otherwise) of any other Person; 9.3.2.6 subject to any Lien (except for Liens that do not materially impair the use of the property subject thereto in the Business as presently conducted and Permitted Exceptions) any of the properties or assets (whether tangible or intangible) of TCH or such Subsidiary; 9.3.2.7 acquire any properties or assets or sell, assign, transfer, convey, lease or otherwise dispose of any of the properties or assets (except for fair consideration in the ordinary course of business consistent with past practice) of TCH or such Subsidiary for which the aggregate consideration paid or payable in any individual transaction is in excess of One Hundred Thousand Dollars ($100,000); -29- 9.3.2.8 adopt a plan or agreement of, or resolutions providing for or authorizing, complete or partial liquidation, dissolution, merger, consolidation, restructuring or other reorganization; 9.3.2.9 enter into any transaction or Contract involving the expenditure of more than One Hundred Thousand Dollars ($100,000) or conduct its business other than in the ordinary course of business consistent with past practice; 9.3.2.10 make any material change in accounting or Tax reporting principles, methods or policies; 9.3.2.11 make or commit any capital expenditures or capital additions or betterments in excess of Two Hundred Fifty Thousand Dollars ($250,000) other than in the ordinary course of business; 9.3.2.12 institute or settle any Legal Proceedings in which equitable relief is sought or in which claimed damages exceed Two Hundred Fifty Thousand Dollars ($250,000), it being understood and agreed by the parties that Seller shall have the right in its sole and uncontrolled discretion to litigate and/or settle the JCI Litigation in whatever manner it deems appropriate; 9.3.2.13 increase the compensation payable or to become payable to any Employee, except for hourly or non-officer salaried employees made in the ordinary course of business, consistent with past practices nor any other change in any written employment Contract; 9.3.2.14 establish or amend any benefit plan implemented or to be implemented by TCH or any Subsidiary; 9.3.2.15 make any loans, advances or capital contributions to, or investments in, any Person or paid any fees or expenses to the Seller or any Affiliate of Seller other than in the ordinary course of business consistent with past practice; 9.3.2.16 cancel or compromise any debt or claim with a value, individually or in the aggregate, exceeding One Hundred Thousand Dollars ($100,000) or amend, cancel, terminate, relinquish, waive or release any Contract or right involving the expenditure of more than One Hundred Thousand Dollars ($100,000); or 9.3.2.17 agree to take any action prohibited by this Section 9.2. 9.4 Employee Matters. 9.4.1 The Purchaser acknowledges that following the purchase of the TCH Shares, the Subsidiaries will continue to employ all of the individuals employed by the Subsidiaries as of the Closing Date (including those individuals on vacation and on any Approved Absence, as defined below). In addition, at Closing, the Purchaser shall, -30- through TCH, hire and employ all of the individuals listed on Schedule 9.4.1(i) (including those individuals on vacation and on any Approved Absence, as defined below, on such date but excluding those whose return to active employment is not reasonably contemplated to occur within ninety (90) days after the Closing Date, other than those on military leave) (individually an "Employee" and collectively, the "Employees"); provided, that any such individual listed on Schedule 9.4.1(ii) who is on any Approved Absence as of the Closing Date whose return to active employment is not reasonably contemplated to occur within ninety (90) days after the Closing Date, other than those on military leave, but who subsequently becomes available to return to work (or, if disabled, is cleared to return to work) within twelve (12) months after the Closing Date will be offered employment by the Purchaser through TCH at such time and, if such offer is accepted, the Purchaser through TCH will hire and employ such individual, and such individual shall thereafter be deemed an Employee; provided, further, that subject to applicable Law, this Section 9.4.1 shall not require the Purchaser or TCH or the Subsidiaries to continue the employment of any Employee for any specified period after the Closing Date. "Approved Absence" means an approved leave of absence (including active military service), short term and long term disability (including employees on workers' compensation). 9.4.2 All Transferred Benefit Plans that are sponsored or maintained by TCH or a Subsidiary shall remain the responsibility of TCH or Subsidiary on and after the Closing Date. With respect to all other Benefit Plans that are not Transferred Benefit Plans, the Seller shall retain all of the duties and obligations under all such plans, and the Purchaser shall assume no liability or obligations under such plans, except as contemplated in Section 9.4.6. 9.4.3 On the Closing Date, Purchaser agrees to provide, and shall cause TCH and each Subsidiary to provide each Employee, while employed by TCH or Subsidiary, as the case may be, with a base salary or wage rate that is not less than his or her base salary or wage rate in effect immediately prior to the Closing Date (or, as applicable, immediately prior to his or her Approved Absence). The Purchaser shall provide or cause TCH or Subsidiary, as the case may be, to provide, each Employee with employee benefits (other than defined benefit pension and retiree medical benefits) that are similar to employee benefits provided by private companies of similar size and nature. In no event shall Purchaser reduce the wages or benefits provided to the employees of Von Weise of Canada Company in a manner that violates the requirements of applicable Law. 9.4.4 With respect to the Purchaser's employee benefit plans, programs and arrangements covering or otherwise benefiting any of the Employees on or after the Closing Date (other than any non-qualified retirement or deferred compensation plans or equity-based compensation plans), service with Von Weise, Seller, TCH or a Subsidiary shall be counted for purposes of eligibility to participate, 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, TCH or a Subsidiary, as the case may be, prior to the Closing Date. -31- 9.4.5 With respect to any benefit plans of the Purchaser providing welfare benefits of the type described in Section 3(1) of ERISA to Employees on and after the Closing Date, such plans shall grant credit for amounts paid by the Employees (including applicable deductibles, copays, annual out-of-pocket limits or similar costs) under corresponding Benefit Plans during the portion of the applicable plan year preceding the Closing Date and shall 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 Benefit Plans. On the Closing Date and each month thereafter for the remainder of the plan year, the Seller shall provide the Purchaser with information regarding the amount of deductibles, copays, out-of-pocket limits or similar costs incurred by each Employee during the portion of the plan year preceding such date. 9.4.6 Effective as of, or as soon as practical after, the Closing Date, the Purchaser shall cover, or cause TCH to cover, Employees who are not otherwise covered under a Transferred Benefit Plan that is an employee pension plan under a defined contribution plan and trust intended to qualify under Sections 401(a) and (k) and Section 501(a) of the Code (the "Purchaser DC Plan"). The Employees' account balances under Seller's Salaried Retirement Savings Plan and Seller's Retirement Savings Plan for the Non-Union Hourly Rated Employees of the Fasco Business to the Purchaser DC Plan, including unpaid loan balances, shall be directly transferred to the Purchaser DC Plan in a trust-to-trust transfer. Seller and Purchaser shall reasonably cooperate in good faith to effect such transfers or distributions as soon as practicable after the Closing Date. 9.5 Retiree Medical Plan. The Seller shall, on and after the Closing Date, continue to provide retiree medical coverage under its Retiree Medical Plan for Fasco Employees to individuals and their eligible spouses and dependents who are receiving retiree medical benefits as of the Closing Date ("Company Retirees"); provided, however, that the Seller may, at any time, in Seller's sole discretion (subject to applicable Laws), revise or terminate the medical coverage as applicable to such Company Retirees at the same time and in the same manner that such coverage is revised or terminated with respect to all other similarly-situated individuals under the Retiree Medical Plan for Fasco Employees. 9.6 Preservation of Records. Subject to Section 12.5.2.3 (relating to the preservation of Tax records) and Section 12.9.1.2 (relating to the Seller Post-Closing Matters), the Seller and the Purchaser agree that each of them shall preserve and keep the records held by it relating to the Business of TCH and each Subsidiary for a period of five (5) years from the Closing Date and shall make such records and personnel available to the other as may be reasonably required by such party in connection with, among other things, any insurance claims by, Legal Proceedings against or governmental investigations of the Seller or the Purchaser or any of their Affiliates or in order to enable the Seller or the Purchaser to comply with their respective obligations under this Agreement and each other agreement, document or instrument contemplated hereby or thereby. In the event the Seller or the Purchaser wishes to destroy such records within five (5) years of the Closing Date, such party shall first give ninety (90) days prior written notice to the other and such other party shall have the right at its option and -32- expense, upon prior written notice given to such party within that ninety (90) day period, to take possession of the records. 9.7 Publicity. Neither the Seller nor the Purchaser shall issue any press release or public announcement concerning this Agreement or the transactions contemplated hereby without obtaining the prior written approval of the other party hereto, which approval will not be unreasonably withheld or delayed, unless, based upon advice of their respective legal counsel, disclosure is otherwise required by applicable Law or by the applicable rules of any stock exchange or national quotation system on which the Purchaser or the Seller list securities, provided that, to the extent required by applicable Law, the party intending to make such release shall use its commercially reasonable efforts consistent with such applicable Law to consult with the other party with respect to the text thereof. 9.8 Use of Name. From and after Closing, Purchaser agrees that it shall cause TCH and each Subsidiary not to make any use of any A&S Mark. Purchaser shall cause TCH and each Subsidiary to remove, strike over or otherwise obliterate all A&S Marks from all materials owned by TCH and each Subsidiary, including, without limitation, any vehicles, business cards, schedules, stationery, packaging materials, displays, signs, promotional materials, manuals, forms, computer software, TCH's and each Subsidiary's website, and other materials in any form or media. Seller hereby grants to Purchaser a limited and royalty free license to continue the use of the A&S Marks existing on the A&S Mark Termination Date for the life of dies, tooling, molds, and machinery and equipment as presently used in the Business. 9.9 Insurance. The Purchaser acknowledges and agrees that, upon Closing, all insurance coverage provided in relation to TCH and each Subsidiary as being maintained by the Seller or its Affiliates (other than TCH and Subsidiaries) (whether such policies are maintained with third party insurers or with the Seller or its Affiliates (other than TCH and Subsidiaries)) shall cease and no further coverage shall be available to TCH or any Subsidiary as an Affiliate under any such policies; provided, however, any insurance policies of the Seller or its Affiliates providing coverage for any claims occurring prior to the Closing (whether or not reported prior to the Closing) shall be assigned, or otherwise made available, to TCH or the applicable Subsidiary solely with respect to such claim(s). After the Closing Date, the Seller shall retain any and all rights to any insurance coverage available to the Seller and TCH and each Subsidiary on or before the Closing Date, pursuant to insurance policies issued to the Seller. 9.10 Reasonable Commercial Efforts. Upon the terms and subject to the conditions set forth in this Agreement, each of the parties agrees to use its reasonable commercial efforts to take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper or advisable to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement, including the following: (i) the taking of all acts necessary to cause the conditions to Closing to be satisfied as promptly as practicable, (ii) the obtaining of all necessary actions or nonactions, waivers, consents and approvals from Governmental Bodies and the making of all necessary -33- registrations and filings (if any, including filings with Governmental Bodies) and the taking of all steps as may be necessary to obtain an approval or waiver from, or to avoid an action or proceeding by any Governmental Body, (iii) the obtaining of all necessary consents, approvals, waivers or estoppel certificates from third parties, (iv) the defending of any lawsuits or other Legal Proceedings, whether judicial or administrative, challenging this Agreement or the consummation of the transactions contemplated hereby, including seeking to have any stay or temporary restraining order entered by any court or other Governmental Body vacated or reversed, and (v) the execution and delivery of any additional instruments necessary to consummate the transactions contemplated by, and to fully carry out the purposes of, this Agreement. Between the date of this Agreement and the Closing Date, Seller and Purchaser shall negotiate in good faith to determine what additional services, if any, would be provided by Seller under Annex A to the Transition Services Agreement. 9.11 Contacts with Suppliers, Employees and Customers. Without the prior written consent of Seller, Purchaser shall not contact any suppliers to, employees of, or customers of, TCH or any Subsidiary in connection with or pertaining to any subject matter of this Agreement. 9.12 Seller Commitments. Purchaser acknowledges and agrees that, on or before the date that is ninety (90) days following the Closing Date, Purchaser shall cause the Commitments listed on Schedule 9.12 hereto made by Seller and its Affiliates (other than TCH or Subsidiaries) with respect to the activities (financial or otherwise) of TCH to be terminated or settled or replaced by an alternate Commitment from a party other than Seller or its Affiliates (excluding TCH and Subsidiaries). For purposes of the foregoing, "Commitment" shall mean any financial commitment or support, including, without limitation, performance bonds, parent company guarantees, bid bonds, bank guarantees or similar instruments. 9.13 Intellectual Property Covenants. To the extent that the Seller transfers any Intellectual Property or Technology that does not relate to TCH and Subsidiaries and is necessary to the conduct of the business of Seller or its Affiliates (other than TCH) as conducted up to and through the Closing Date, after reasonable written notice by the Seller to the Purchaser, the Purchaser agrees to use commercially reasonable efforts to transfer that Intellectual Property or Technology back to the Seller and/or its Affiliates or, if that Intellectual Property or Technology is used by TCH and Subsidiaries, to grant the Seller and/or its Affiliates a perpetual, nonexclusive, transferable, sublicensable, fully paid license to use that Intellectual Property or Technology to the extent that the Purchaser has the right to make such grant. To the extent that the Seller fails to transfer to the Purchaser any Intellectual Property or Technology that is necessary to the conduct of the Business of TCH and Subsidiaries as conducted up to and through the Closing Date, after reasonable written notice by the Purchaser to the Seller, the Seller agrees to use commercially reasonable efforts to transfer that Intellectual Property or Technology to the Purchaser, or if that Intellectual Property or Technology is used by the Seller, to grant the Purchaser a perpetual, nonexclusive, transferable, sublicensable, fully paid license to use that Intellectual Property or Technology to the extent that the Seller has the right to make such grant. -34- 9.14 Notification. Between the date of this Agreement and the Closing Date, Seller on the one hand and Purchaser on the other hand shall use its best efforts to promptly notify the other party in writing if, to the Knowledge of Seller or to the Knowledge of Purchaser, as the case may be, it becomes aware of any fact or condition that causes or constitutes a breach of any of such party's representations and warranties under this Agreement, or that otherwise would have been required to be disclosed on the Schedules to this Agreement if such information had been obtained or so known on the date hereof. Should any such fact or condition require any change in any Schedule previously delivered by a party under this Agreement, such party will promptly deliver to the other party a supplement to the subject Schedule(s) specifying such change. During the same period, Seller on the one hand and the Purchaser on the other hand shall use its best efforts to promptly notify the other party of the occurrence of any breach of any of its covenants in this ARTICLE 9 or of the occurrence of any event that may make the satisfaction of the conditions in ARTICLE 10 impossible or unlikely. The delivery of any such notice or supplement shall not amend or supplement this Agreement and shall not constitute a waiver of any condition to Closing in ARTICLE 10 hereof. 9.15 Nonsolicitation. Until the earlier of (a) the Closing Date or (b) the termination of this Agreement pursuant to Section 4.2, neither the Seller, nor TCH, nor any of their respective Subsidiaries or Affiliates will, directly or indirectly, and the Seller and TCH will direct their advisors, agents and other representatives not to (i) solicit, initiate or encourage any proposal or offer from any Person or enter into any agreement or accept any offer relating to any (A) reorganization, liquidation, dissolution or recapitalization of TCH or any of its Subsidiaries, (B) merger or consolidation involving TCH or any of its Subsidiaries, (C) purchase or sale of all or substantially all of the assets or capital stock of TCH or any of its Subsidiaries, or (D) similar transaction or business combination involving TCH or any of its Subsidiaries; or (ii) assist or participate in any effort or attempt by any Person to do or seek to do any of the foregoing. For the avoidance of doubt, in no event shall the above language be construed to prevent Seller at any time from undertaking the Restructuring or from refinancing its business operations. 9.16 Restrictive Covenants. 9.16.1 The Seller covenants that, commencing on the Closing Date and ending on the third anniversary of the Closing Date (the "Non-Competition Period"), the Seller shall not, and it shall cause its Affiliates not to, engage in, directly or indirectly, in any capacity, or have any direct or indirect ownership or financial interest in, or permit the Seller's or any such Affiliate's name to be used in connection with, any business anywhere in the world which is engaged, either directly or indirectly, in the business of developing, manufacturing, marketing or selling any products or equipment which are competitive with products or equipment manufactured, marketed or sold by TCH or any of its Subsidiaries on the Closing Date (the "Restricted Business"); provided, however, that the foregoing shall not prohibit (a) the ownership of securities of corporations which are listed on a national securities exchange or traded in the national over-the-counter market in an amount which shall not exceed 5% of the outstanding shares of any such corporation; or (b) any Seller or Affiliate of any Seller from engaging in any Existing Business Activities. It is recognized that the Restricted Business is expected to be -35- conducted throughout the world and that more narrow geographical limitations of any nature on this non-competition covenant and the non-solicitation covenants set forth in Section 9.16.2 and Section 9.16.3 and the non-use covenant set forth in Section 9.16.4 are therefore not appropriate. 9.16.2 The Seller covenants that, during the Non-Competition Period, the Seller shall not, and it shall cause its Affiliates not to, directly or indirectly, solicit or entice, or attempt to solicit or entice, any clients or customers of TCH or any of the Subsidiaries for purposes of diverting their business from TCH or any of the Subsidiaries. 9.16.3 The Seller covenants that, commencing on the Closing Date and ending six months after the Closing Date, the Seller shall not, and it shall cause its Affiliates not to, solicit the employment or engagement of services of, or hire or engage, any Person who is or was employed as an employee, contractor or consultant by TCH or any of the Subsidiaries during such period on a full- or part-time basis. 9.16.4 The Seller recognizes and acknowledges that by reason of its involvement with TCH, the Subsidiaries and the Business, it has had access to confidential and proprietary information relating to TCH, the Subsidiaries, and the Business (the "Protected Information"). The Seller covenants that it will not allow the disclosure of any Protected Information to any Person for any reason whatsoever or at any time whatsoever, unless such information is in the public domain through no wrongful act of the Seller or its Affiliates or such disclosure is required by applicable Law. 9.16.5 The Seller acknowledges that the restrictions contained in this Section 9.16 are reasonable and necessary to protect the legitimate interests of the Purchaser and constitute a material inducement to the Purchaser to enter into this Agreement and consummate the transactions contemplated hereby. The Seller agrees that in the event of a breach or threatened breach of this Section 9.16 by the Seller, the Purchaser shall be entitled to injunctive or other equitable relief in accordance with applicable Law, which relief shall be cumulative and in addition to any other rights or remedies to which the Purchaser may be entitled. 9.16.6 In the event that any covenant contained in this Section 9.16 should ever be adjudicated to exceed the time, geographic, product or service, or other limitations permitted by applicable Law in any jurisdiction, then any court is expressly empowered to reform such covenant, and such covenant shall be deemed reformed, in such jurisdiction to the maximum time, geographic, product or service, or other limitations permitted by applicable Law. The covenants contained in this Section 9.16 and each provision thereof are severable and distinct covenants and provisions. The invalidity or unenforceability of any such covenant or provision as written shall not invalidate or render unenforceable the remaining covenants or provisions hereof, and any such invalidity or unenforceability in any jurisdiction shall not invalidate or render unenforceable such covenant or provision in any other jurisdiction. -36- 9.17 Canada Escrow. The Seller covenants and agrees with the Purchaser as follows: (a) the Seller shall take all reasonable steps to obtain and deliver to the Purchaser on or before the Closing Date a certificate issued by the Minister of National Revenue (Canada) under subsection 116(2) of the Income Tax Act (Canada), in respect of the sale of the TCH Shares, with a certificate limit equal to or greater than the Canadian dollar equivalent of the portion of the Initial Purchase Price allocated to the TCH Shares (the "Share Price") pursuant to Schedule 3.1.2, calculated using the Bank of Canada USD/CAD closing spot rate on the last day preceding the date of this Agreement for which such information is available; (b) if such certificate is not delivered to the Purchaser before the Closing, the Purchaser shall withhold from the Initial Purchase Price payable at the Closing an amount equal to twenty-five percent (25%) of the Share Price, and shall deliver such funds (the "Canadian Escrowed Funds") to Miller, Canfield, Paddock and Stone, LLP to be held and dealt with pursuant to the terms of an escrow agreement, the form of which is attached as Exhibit E (the "Canadian Escrow Agreement"); (c) any subsequent remittance of the Canadian Escrowed Funds to the Seller or to the Receiver General for Canada, in accordance with the terms of the Canadian Escrow Agreement, shall be credited to the Purchaser as a payment to the Seller on account of the Initial Purchase Price; (d) the provisions of this Section 9.17 shall apply mutatis mutandis to any adjustment to the Initial Purchase Price pursuant to Section 3.2; and (e) for purposes of this Section 9.17, any certificate delivered to the Purchaser shall be deemed not to have been delivered unless such certificate is satisfactory to the Purchaser, acting reasonably. 9.18 Assignment and Assumption Agreement (Invensys). Prior to Closing, Seller shall cause Tecumseh and TCH to enter into the Assignment and Assumption Agreement (Invensys) in the form attached hereto as Exhibit F. 9.19 JMAS Waste Water Discharge Permit. Prior to Closing, Seller shall exercise commercially reasonable efforts to obtain a current waste water discharge permit from the Municipal Council for Water and Drainage (JMAS). ARTICLE 10 CONDITIONS TO CLOSING 10.1 Condition Precedent to Obligations of Purchaser. The obligation of the Purchaser to consummate the transactions contemplated by this Agreement is -37- subject to the fulfillment, on or prior to the Closing Date, of the following conditions (which may be waived by the Purchaser in whole or in part to the extent permitted by applicable Law): 10.1.1 The representations and warranties of Seller in this Agreement shall be true and correct in all material respects at and as of the Closing Date with the same force and effect as though made at and as of the Closing Date, except where the failure of the representations and warranties set forth in Sections 7.5, 7.6, 7.10, 7.11, 7.12, 7.13, 7.14, 7.16, 7.21 and 7.23 to be true and correct, individually or in the aggregate, has not had and would not reasonably be expected to have a Company Material Adverse Effect (it being understood that, for purposes of determining the accuracy of such representations and warranties: (i) to the extent that any representation or warranty is made as of a specific date, such representation or warranty shall be true and correct as of such date; (ii) any update to or modification to the Seller's Schedules made after the date of this Agreement shall be disregarded; and (iii) all materiality qualifications contained in such representations and warranties shall be disregarded). 10.1.2 The Seller, Auto Specialty and TCH shall have performed or complied with, in all material respects, all agreements, conditions, and covenants required by this Agreement to be performed or complied with or by them on or before the Closing Date. 10.1.3 There shall not have been any fact, circumstance, or occurrence that has had or would not reasonably be expected to have a Company Material Adverse Effect. 10.1.4 The Seller shall have obtained the third party consents set forth on Schedule 10.1.4. 10.1.5 Purchaser shall have received, at Purchaser's sole cost and expense, commitments for 2006 ALTA Owner's title insurance policies, insuring good and marketable fee simple title, in such amount as Purchaser reasonably determines. 10.1.6 Seller shall have cured by the Closing Date any unpaid custom duties and penalties resulting from the business in Juarez, Mexico as conducted up to the Closing Date. 10.1.7 Each of the related party transactions set forth on Schedule 10.1.7 shall have been terminated or satisfied in full in form and substance satisfactory to the Purchaser, with no continuing or residual liability (including Tax liability) to TCH, its Subsidiaries or the Purchaser. Seller will cause TCH, however, to have on its books on the Closing Date an account receivable from Tecumseh Power Company in an amount not less than the amount such receivable would be if managed in the ordinary course of business, consistent with past practice, and in no event to exceed $3,800,000; the amount of such receivable shall be excluded from the calculation of Closing Date Working Capital. -38- 10.2 Condition Precedent to Obligations of Seller. The obligation of the Seller to consummate the transactions contemplated by this Agreement is subject to the fulfillment, on or prior to the Closing Date, of the conditions (which may be waived by the Seller in whole or in part to the extent permitted by applicable Law) that: (i) the representations and warranties of each Purchaser in this Agreement (A) that are qualified as to materiality shall be true and correct in all respects, and (B) that are not so qualified shall be true and correct in all material respects, at and as of the Closing Date with the same force and effect as though made at and as of the Closing Date (except to the extent that any representation or warranty is made as of a specific date, in which case such representation or warranty shall be true and correct as of such date); (ii) the Purchaser shall have performed or complied with, in all material respects, all agreements, conditions, and covenants required by this Agreement to be performed or complied with or by it on or before the Closing Date; and (iii) the Seller shall have obtained the third party consents set forth on Schedule 10.1.4. 10.3 Conditions to Each Party's Obligations. The respective obligations of each party to effect the transactions contemplated by this Agreement are subject to the fulfillment, on or prior to the Closing Date, of each of the following conditions (any or all of which may be waived by a party in whole or in part to the extent permitted by applicable Law): 10.3.1 The consents, waivers, approvals or other authorizations listed on Schedule 7.6.2 and Schedule 8.3.2 shall have been obtained or otherwise satisfied and any other approvals of Governmental Bodies required to consummate the transactions contemplated hereby shall have been obtained and shall remain in full force and effect and all statutory waiting periods in respect thereof shall have expired. 10.3.2 No Order issued by any court of competent jurisdiction or other Governmental Body restraining, enjoining or otherwise prohibiting the consummation of the transactions contemplated by this Agreement shall be in effect. 10.4 No Frustration of Closing Conditions. Neither Purchaser nor Seller may rely on the failure of any condition to its obligation to consummate the transactions contemplated hereby as set forth in Sections 10.1, 10.2 or 10.3, 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 11 DOCUMENTS TO BE DELIVERED 11.1 Documents to be Delivered by the Seller. At the Closing, the Seller shall deliver, or cause to be delivered, the following: -39- 11.1.1 as it relates to the Direct Purchased Assets, the Von Weise Purchaser One Assignment and Assumption Agreement, duly executed by Von Weise; 11.1.2 as it relates to the Juarez Inventory, the El Paso Inventory, the Trade Accounts Receivable and Trade Accounts Payable and the Juarez Fixed Assets, the Von Weise Auto Specialty Assignment and Assumption Agreement, duly executed by Von Weise; 11.1.3 a deed in the form of Exhibit J for the transfer of the Eaton Rapids Real Property to Auto Specialty, duly executed by Von Weise; 11.1.4 as it relates to Motores, (i) a copy of the resolutions of the partners meeting of Motores authorizing the transfer of the 99.999% Equity Participation from Von Weise to Auto Specialty and authorizing the transfer of the 0.001% Equity Participation from Seller to Purchaser and evidencing the waiver by Seller of its right of first refusal provided in the bylaws of Motores and/or under applicable laws of Mexico; (ii) a certification issued by the sole director of Motores as of the Closing Date, in form and substance satisfactory to Purchaser, stating that the relevant minutes of the partners meeting referred to above have been properly recorded at the partners meeting minutes book of Motores and that the resolutions adopted in such meeting have not been amended, modified, revoked or rescinded and are in full force and effect on and as of the Closing Date; and (iii) a copy of the relevant notation in the partners registry book of Motores, certified by its sole director; 11.1.5 as it relates to the Auto Specialty Escrow Agent, a stock certificate representing the Von Weise Auto Specialty Common Stock; 11.1.6 as it relates to TCH, stock certificates representing all of the TCH Shares, duly endorsed in blank by Tecumseh or accompanied by stock transfer powers; 11.1.7 a written release of all Liens on the TCH Shares, the 0.001% Equity Participation and all of the equity interests and the assets of TCH and each Subsidiary on which Liens have been placed; 11.1.8 a certificate of the Secretary, Assistant Secretary or other officer of Seller, dated the Closing Date, as to the resolutions duly and validly adopted by the board of directors such Seller evidencing its authorization of the execution, delivery and performance of this Agreement and such other documents as may be reasonably necessary to consummate the transactions contemplated by this Agreement; 11.1.9 a Master Global Manufacture and Supply Agreement (Tecumseh Power Company) in the form attached hereto as Exhibit G, duly executed by Tecumseh Power Company (the "Master Global Manufacture and Supply Agreement (Tecumseh Power Company)"); 11.1.10 a Transition Services Agreement in the form attached hereto as Exhibit H, duly executed by the Seller (the "Transition Services Agreement"); -40- 11.1.11 a JCI Supply Agreement in the form attached hereto as Exhibit I, duly executed by the Seller (the "JCI Supply Agreement"); 11.1.12 all personnel records (including medical records), subject to the requirements of applicable Law, of Employees (as defined in Section 9.4.1); 11.1.13 a certificate of the Executive Vice President or other officer of the Seller to the effect set forth in Section 10.1.1, 10.1.2 and 10.1.3; 11.1.14 a certificate, in form and substance reasonably satisfactory to Purchaser, certifying that Seller's sale of the TCH Shares is exempt from withholding pursuant to the Foreign Investment in Real Property Tax Act; 11.1.15 resignations, effective as of the Closing Date, of the directors and officers of TCH and each Subsidiary; and 11.1.16 such other documents as the Purchaser shall reasonably request. 11.2 Documents to be Delivered by the Purchaser. At the Closing, the Purchaser shall deliver the following: 11.2.1 the Initial Purchase Price in accordance with Section 3.1.1; 11.2.2 the Purchaser One Cash Contribution to Auto Specialty in accordance with Section 1.3; 11.2.3 the Purchaser One Auto Specialty Escrow Deposit in accordance with Section 3.4.2; 11.2.4 evidence of the wire transfers of: (i) the Purchaser One Cash Contribution to Auto Specialty; (ii) the Purchaser One Auto Specialty Escrow Deposit; and (iii) the Initial Purchase Price; 11.2.5 evidence of the Funding of Auto Specialty; 11.2.6 the Von Weise Purchaser One Assignment and Assumption Agreement, duly executed by Purchaser One; 11.2.7 a certificate of the Secretary, Assistant Secretary or other officer of Purchaser to the effect set forth in Section 10.2; 11.2.8 a certificate of the Secretary, Assistant Secretary or other officer of Purchaser, dated the Closing Date, as to the resolutions duly and validly adopted by the board of directors of Purchaser evidencing its authorization of the execution, delivery and performance of this Agreement and such other documents as may be reasonably necessary to consummate the transactions contemplated by this Agreement; and 11.2.9 such other documents as the Seller shall reasonably request. -41- 11.3 Documents to be Delivered by Auto Specialty. At Closing, Seller and Purchaser shall cause Auto Specialty to deliver the following, duly executed by Auto Specialty: 11.3.1 to Purchaser One, a stock certificate representing the Purchaser One Auto Specialty Common Stock. 11.3.2 to Von Weise, the Von Weise Auto Specialty Assignment and Assumption Agreement; 11.3.3 to Von Weise, the Auto Specialty Cash Payment; 11.3.4 to Von Weise, a stock certificate representing the Von Weise Auto Specialty Preferred Stock; 11.3.5 to the Auto Specialty Escrow Agent, the Auto Specialty Escrow Deposit; and 11.3.6 evidence of the wire transfers of: (i) the Auto Specialty Cash Payment; and (ii) the Auto Specialty Escrow Deposit. ARTICLE 12 INDEMNIFICATION 12.1 Indemnification. 12.1.1 The Seller hereby agrees to indemnify and hold the Purchaser, TCH and each Subsidiary, and their respective directors, officers, employees, Affiliates, agents, successors and assigns (collectively, the "Purchaser Indemnified Parties") harmless from and against: 12.1.1.1 subject to Sections 12.2 and 12.3, any and all Losses based upon, attributable to or resulting from the failure of any representation or warranty of the Seller set forth in Sections 7.2, 7.3, 7.4, 7.7 or 7.11, or any representation or warranty contained in any certificate delivered by or on behalf of the Seller pursuant to this Agreement, to be true and correct in all material respects as of the date made; 12.1.1.2 any and all Losses based upon, attributable to or resulting from the material breach of any covenant or other agreement on the part of the Seller under this Agreement; 12.1.1.3 any Indebtedness incurred by TCH or any Subsidiary prior to the Closing; 12.1.1.4 any and all Losses based upon, attributable to or resulting from (a) the obligations of Motores as a Seller under that certain "Purchase Agreement -42- among Tecumseh Products Company, Fasco Industries, Inc., Motores Fasco de Mexico and Regal Beloit Corporation" dated July 3, 2007 (the "RBC Purchase Agreement"); and (b) the transactions contemplated by the RBC Purchase Agreement, including any failure of Regal Beloit Corporation to satisfy its obligations under such Purchase Agreement or under any agreement entered into in connection therewith; 12.1.1.5 any and all Losses based upon, attributable to or resulting from the Venmar Litigation; 12.1.1.6 except for any breaches or wrongful acts or omissions by Purchaser under the JCI Supply Agreement, any and all Losses based upon, attributable to or resulting from (i) the JCI Litigation, (ii) any other claim, including any litigation, relating to the subject matter of the JCI Litigation, or (iii) any of the JCI Contracts; and 12.1.1.7 any and all Losses based upon, attributable to or resulting from any Benefit Plan other than a Transferred Benefit Plan. 12.1.2 Subject to Section 12.2, Purchaser hereby agrees to indemnify and hold the Seller, and its respective Affiliates, and their respective directors, officers, employees, agents, successors and assigns harmless from and against: 12.1.2.1 subject to Section 12.3, any and all Losses based upon, attributable to or resulting from the failure of any representation or warranty of the Purchaser set forth in ARTICLE 8, or any representation or warranty contained in any certificate delivered by or on behalf of the Purchaser pursuant to this Agreement, to be true and correct in all material respects as of the date made; and 12.1.2.2 any and all Losses based upon, attributable to or resulting from the material breach of any covenant or other agreement on the part of the Purchaser under this Agreement. 12.2 Limitations on Indemnification for Breaches of Representations and Warranties. An indemnifying party shall not have any liability under Section 12.1.1.1 or 12.1.2.1 for breaches of representations and warranties (except for the representations and warranties set forth in Sections 7.2, 7.3, 7.4, 7.7 and 8.2), for any Losses in excess of an amount equal to the Final Purchase Price (the "Cap"). 12.3 Survival of Representations and Warranties and Covenants. 12.3.1 None of the representations and warranties of Purchaser and Seller contained in this Agreement shall survive the Closing except for the following, which shall survive solely for purposes of ARTICLE 12: 12.3.1.1 the representations and warranties contained in Sections 7.2, 7.3, 7.4, 7.7 and 8.2 shall survive the Closing and remain in effect indefinitely; and -43- 12.3.1.2 the representations and warranties contained in Section 7.11 shall survive the Closing until the applicable statute of limitations period has expired. 12.3.2 Any claim for indemnification with respect to any of such matters which is not asserted by notice given as herein provided relating thereto within such specified period of survival may not be pursued and is hereby irrevocably waived after such time. Any claim for indemnification of a Loss asserted within such period of survival as herein provided will be timely made for purposes hereof. 12.3.3 Unless a specified period is set forth in this Agreement (in which event such specified period will control), the covenants in this Agreement will survive the Closing and remain in effect indefinitely. 12.4 General Indemnification Procedures. 12.4.1 In the event that any Legal Proceedings shall be instituted or any claim or demand ("Claim") shall be asserted by any Person in respect of which payment may be sought under Section 12.1, the indemnified party shall reasonably and promptly cause written notice of the assertion of any Claim of which it has knowledge which is covered by this indemnity to be forwarded to the indemnifying party. Such notice shall identify specifically the basis under which indemnification is sought pursuant to Section 12.1 and enclose true and correct copies of any and all written documents furnished to the indemnified party by the Person that instituted the Claim. Subject to Section 12.4.3, the indemnifying party shall have the right, at its sole option and expense, to be represented by counsel of its choice, which must be reasonably satisfactory to the indemnified party, and to defend against, negotiate, settle or otherwise deal with any Claim which relates to any Losses indemnified against hereunder. If the indemnifying party elects to defend against, negotiate, settle or otherwise deal with any Claim which relates to any Losses indemnified against hereunder, it shall within ten (10) days (or sooner, if the nature of the Claim so requires) notify the indemnified party of its intent to do so. If the indemnifying party elects not to defend against, negotiate, settle or otherwise deal with any Claim which relates to any Losses indemnified against hereunder, fails to notify the indemnified party of its election as herein provided or contests its obligation to indemnify the indemnified party for such Losses under this Agreement, the indemnified party may defend against, negotiate, settle or otherwise deal with such Claim. If the indemnified party defends any Claim, then the indemnifying party shall reimburse the indemnified party for the reasonable expenses of defending such Claim upon submission of periodic bills. If the indemnifying party shall assume the defense of any Claim, the indemnified party may participate, at his or its own expense, in the defense of such Claim; provided, however, that such indemnified party shall be entitled to participate in any such defense with separate counsel at the expense of the indemnifying party (i) if so requested by the indemnifying party to participate, or (ii) if, in the reasonable opinion of counsel to the indemnified party, a conflict or potential conflict exists between the indemnified party and the indemnifying party that would make such separate representation advisable; and provided, further, that the indemnifying party shall not be required to pay for more than one such counsel for all indemnified parties in connection with any Claim. The parties hereto agree to cooperate fully with each other in connection with the defense, -44- negotiation or settlement of any such Claim. The indemnified party shall promptly supply to the indemnifying party copies of all correspondence and documents relating to or in connection with such Claim and keep the indemnifying party fully informed of all developments relating to or in connection with such Claim (including, without limitation, providing to the indemnifying party on request updates and summaries as to the status thereof). 12.4.2 If the indemnifying party assumes the defense of a Claim, (i) no compromise or settlement of such Claim may be effected by the indemnifying party without the indemnified party's consent unless (A) there is no finding or admission of violation of Law or any violation of the rights of any Person and no effect on any other Claims made against the indemnified party, and (B) the sole relief provided is monetary damages that are paid in full by the indemnifying party; and (ii) the indemnified party will have no liability with respect to any compromise or settlement of such claims effected without its consent. 12.4.3 If an indemnified party determines in good faith that there is a reasonable probability that a Claim may adversely affect it or its Affiliates other than as a result of monetary damages, the indemnified party may, by notice to the indemnifying party, assume the exclusive right to defend, compromise or settle such Claim. 12.4.4 After any final judgment or award shall have been rendered by a court, arbitration board or administrative agency of competent jurisdiction and the expiration of the time in which to appeal therefrom, or a settlement shall have been consummated, or the indemnified party and the indemnifying party shall have arrived at a mutually binding agreement with respect to a Claim hereunder, the indemnified party shall forward to the indemnifying party notice of any sums due and owing by the indemnifying party pursuant to this Agreement with respect to such matter and the indemnifying party shall be required to pay all of the sums so due and owing to the indemnified party by wire transfer of immediately available funds within ten (10) Business Days after the date of such notice. 12.4.5 The failure of the indemnified party to give reasonably prompt notice of any Claim shall not release, waive or otherwise affect the indemnifying party's obligations with respect thereto except to the extent that the indemnifying party can demonstrate actual loss and prejudice as a result of such failure. 12.5 Tax Matters. 12.5.1 Tax Indemnification. 12.5.1.1 Subject to the provisions of Section 12.5.7, Seller shall indemnify Purchaser and its Affiliates (including TCH and each Subsidiary) and each of their respective officers, directors, employees, stockholders, agents and representatives and hold them harmless from all liabilities for Excluded Taxes. Notwithstanding the foregoing, Seller shall not indemnify and hold harmless Purchaser and its Affiliates (including TCH and each Subsidiary) or any of their respective officers, directors, -45- employees or agents, from any liability for Taxes attributable to any action taken after the Closing by Purchaser, any of its Affiliates (including TCH and each Subsidiary after the Closing) or any transferee of Purchaser or any of its Affiliates (other than any action expressly required by applicable Law or contemplated by this Agreement) (a "Purchaser Tax Act") or attributable to a breach by Purchaser of its obligations under this Agreement. 12.5.1.2 Subject to the provisions of Section 12.5.7, Purchaser shall, and shall cause TCH and each Subsidiary to, indemnify Seller and its Affiliates and each of their respective officers, directors, employees, stockholders, agents and representatives and hold them harmless from (i) all liability for Taxes of TCH and each Subsidiary for any Straddle Period ending after the Closing Date for that portion of any such Taxes that are not for the Pre-Closing Tax Period (and except to the extent that such Taxes are Excluded Taxes), (ii) all liability for Taxes attributable to a Purchaser Tax Act or to a breach by Purchaser of its obligations under this Agreement; and (iii) all liability for Taxes attributable to a Purchaser Tax Act resulting in the termination or elimination of a deduction, tax abatement or tax credit lawfully claimed by Seller, TCH or a Subsidiary prior to the Closing Date. 12.5.1.3 In the case of any taxable period that includes (but does not end on) the Closing Date (a "Straddle Period"): 12.5.1.3.1 real, personal and intangible property Taxes ("Property Taxes") of TCH and each Subsidiary allocable to the Pre-Closing Tax Period shall be equal to the amount of such Property Taxes for the entire Straddle Period multiplied by a fraction, the numerator of which is the number of days during the Straddle Period that are in the Pre-Closing Tax Period and the denominator of which is the number of days in the Straddle Period; and 12.5.1.3.2 the Taxes (other than Property Taxes) of TCH and each Subsidiary allocable to the Pre-Closing Tax Period shall be computed as if such taxable period ended as of the Effective Time on the Closing Date, applying all exemptions, allowances or deductions (including, but not limited to, depreciation and amortization deductions) applicable to such Pre-Closing Tax Period. 12.5.1.4 For the avoidance of doubt, the obligations in this Section 12.5.1 shall not be subject to the Cap in Section 12.2. 12.5.2 Procedures Relating to Indemnification of Tax Claims. 12.5.2.1 If one party is responsible for the payment of Taxes pursuant to Section 12.5.1 (the "Tax Indemnifying Party"), and the other party (the "Tax Indemnified Party") receives notice of any deficiency, proposed adjustment, assessment, audit, examination, suit, dispute or other claim (a "Tax Claim") with respect to such Taxes, the Tax Indemnified Party shall promptly notify the Tax Indemnifying Party in writing of such Tax Claim. If notice of a Tax Claim is not given to the Tax Indemnifying Party within a sufficient period of time to allow such party effectively to contest such Tax -46- Claim, or in reasonable detail to apprise such party of the nature of the Tax Claim, the Tax Indemnifying Party shall not be liable to the Tax Indemnified Party (or any of its Affiliates or any of their respective officers, directors, employees, stockholders, agents or representatives) to the extent that the Tax Indemnifying Party position is actually prejudiced as a result thereof. 12.5.2.2 With respect to any Tax Claim, the Tax Indemnifying Party shall assume and control all proceedings taken in connection with such Tax Claim (including selection of counsel) and, without limiting the foregoing, may in its sole discretion pursue or forego any and all administrative proceedings with any taxing authority with respect thereto, and may, in its sole discretion, either pay the Tax claimed and sue for a refund or contest the Tax Claim in any permissible manner; provided, however, that in the case of a Tax Claim relating solely to Taxes of TCH or Subsidiary for a Straddle Period or for a Pre-Closing Tax Period which could have a material impact on any taxable period beginning after the Closing Date, Seller and Purchaser shall jointly control all proceedings taken in connection with any such Tax Claim. 12.5.2.3 The Tax Indemnified Party and each of its respective Affiliates shall cooperate with the Tax Indemnifying Party in contesting any Tax Claim, which cooperation shall include the retention and (upon the Tax Indemnifying Party's request) the provision to the Tax Indemnifying Party of records and information which are reasonably relevant to such Tax Claim, and making employees available on a mutually convenient basis to provide additional information or explanation of any material provided hereunder or to testify at proceedings relating to such Tax Claim. 12.5.2.4 In no case shall the Tax Indemnified Party, TCH, the Subsidiaries, or any of their respective officers, directors, employees, stockholders, agents or representatives settle or otherwise compromise any Tax Claim without the Tax Indemnifying Party's prior written consent, which consent shall not be unreasonably delayed or withheld. Neither party shall settle a Tax Claim relating solely to Taxes of TCH or any Subsidiary for a Straddle Period without the other party's prior written consent, which consent shall not be unreasonably delayed or withheld, and the Seller shall not settle a Tax Claim for a Pre-Closing Tax Period which could have a material impact on any taxable period beginning after the Closing Date. 12.5.3 Responsibility for Preparation and Filing of Tax Returns and Amendments. 12.5.3.1 For any taxable period of TCH or Subsidiary that includes (but does not end on) the Closing Date, Purchaser shall timely prepare and file with the appropriate authorities all Tax Returns required to be filed and shall pay all Taxes due with respect to such returns, reports and forms; provided that Seller shall reimburse Purchaser for any amount owed by Seller pursuant to Section 12.5.1.1 with respect to the taxable periods covered by such Tax Returns. All such Tax Returns shall be prepared on a basis consistent with past practice if permissible under applicable Law. Purchaser shall furnish such Tax Returns to Seller for its approval (which approval shall not be unreasonably delayed or -47- withheld) at least twenty (20) days prior to the due date for filing such Tax Returns. 12.5.3.2 For any taxable period of TCH or Subsidiary that ends on or before the Closing Date, Seller shall timely prepare and Purchaser or Seller, as appropriate, shall timely file with the appropriate authorities all Tax Returns required to be filed. Purchaser shall timely furnish tax work papers to Seller upon request in accordance with Seller's past custom and practice if permissible under applicable Law. Seller shall pay all Taxes due with respect to such Tax Returns. Any Tax Returns to be filed by Purchaser, TCH or Subsidiary shall be furnished by Seller to the Purchaser, TCH or such Subsidiary, as the case may be, for its approval (which approval shall not be unreasonably withheld or delayed) at least thirty (30) days in the case of income Tax Returns and five (5) days in the case of all other Tax Returns prior to the due date for filing such Tax Returns and the Purchaser, TCH or such Subsidiary, as the case may be, shall promptly sign and timely file any such approved Tax Return. Purchaser and Seller agree to cause TCH and each Subsidiary to file all Tax Returns for the period including the Closing Date on the basis that the relevant taxable period ended as of the Effective Time on the Closing Date, unless the relevant taxing authority will not accept a Tax Return filed on that basis. 12.5.3.3 Seller shall be responsible for filing any amended, consolidated, combined or unitary Tax Returns for taxable years ending on or prior to the Closing Date. For those jurisdictions in which separate Tax Returns are filed by TCH or any Subsidiary, any required amended Tax Returns shall be prepared by Seller and furnished to the Purchaser, TCH or such Subsidiary, as the case may be, for its approval (which approval shall not be unreasonably withheld or delayed) at least twenty (20) days prior to the due date for filing such Tax Returns, and the Purchaser, TCH or such Subsidiary, as the case may be, shall promptly sign and timely file any such approved amended Tax Return. 12.5.4 Tax Cooperation. 12.5.4.1 Each of Seller, TCH, the Subsidiaries, and Purchaser shall reasonably cooperate, and shall cause their respective Affiliates, officers, employees, agents, auditors and representatives reasonably to cooperate, in preparing and filing all Tax Returns, including maintaining and making available to each other all records necessary in connection with Taxes and in resolving all disputes and audits with respect to all taxable periods. 12.5.4.2 Such cooperation shall include the retention and (upon the other party's request, at the other party's cost and expense, and at the time and place mutually agreed upon by the parties) the provision of records and information that are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder, to the extent such information and/or explanation is readily available and within the control of -48- the party to which such request is made. The responsibility to retain records and information shall include the responsibility to (i) retain such records and information as are required to be retained by any applicable taxing authority and (ii) retain such records and information in machine-readable format where appropriate (to the extent such records and information are in such format as of the Closing Date) such that the requesting party shall be able to readily access such records and information. Purchaser and Seller shall (a) retain all books and records with respect to Tax matters pertinent to TCH, Auto Specialty and each Subsidiary relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by Purchaser or Seller, any extensions thereof) of the respective taxable periods, and shall abide by all record retention arrangements entered into with any taxing authority and shall comply with the provisions of any applicable Law relating to the retention of such books and records, and (b) give the other party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other party so requests, Purchaser, or Seller, as the case may be, shall allow the other party to take possession of such books and records at its sole cost and expense. The requesting party shall reimburse the other party for any reasonable out-of-pocket expenses, or costs of making employees available, upon receipt of reasonable documentation of such expenses or costs. Any information or explanation obtained pursuant to this Section 12.5.4.2 shall be maintained in confidence, except (x) as may be legally required in connection with claims for refund or in conducting or defending any Tax audit or other proceeding or (y) to the extent the disclosing party provides written permission for such disclosure. 12.5.5 Refunds and Credits. 12.5.5.1 Any refunds or credits of Taxes of TCH or Subsidiary for any Pre-Closing Tax Period or that are Excluded Taxes shall be for the account of Seller. Any refunds or credits of TCH or Subsidiary for any taxable period beginning on or after the Closing Date shall be for the account of the Purchaser. Any refunds or credits of Taxes of TCH or Subsidiary for any Straddle Period shall be equitably apportioned between Seller and Purchaser. Purchaser shall, if Seller so requests and at Seller's expense, file for and obtain any refunds or credits, or cause TCH or such Subsidiary to file for and obtain any refunds or credits, to which Seller is entitled under this Section 12.5.5 in the same manner as the filing of returns pursuant to Section 12.5.3. Purchaser shall permit Seller to control the prosecution of any such refund claim in the same manner as contests pursuant to Section 12.5.2. 12.5.5.2 Purchaser shall cause TCH and each Subsidiary to elect, where permitted by applicable Law, to carry forward any Tax asset arising in a taxable period beginning after the Closing Date that would, absent such election, be carried back to a Pre-Closing Tax Period in which TCH or such Subsidiary was included in a consolidated, combined or unitary return with the Seller or its Affiliates. -49- 12.5.6 Tax Sharing Agreements. Any Tax sharing or similar agreement or arrangement (whether or not written) to which TCH or any Subsidiary is a party shall terminate at the Closing. 12.5.7 Joint Transactions. Subject to the obligations of the Seller and the Purchaser under Section 1.6, neither the Seller nor the Purchaser shall be liable to the other, or shall be obligated to provide any indemnification to the other, in respect of the Tax results or consequences of the joint transactions described in ARTICLE 1. 12.6 Exclusive Remedies. 12.6.1 The parties hereto agree that their respective remedies under ARTICLE 12 of this Agreement are their exclusive remedies under this Agreement, including without limitation, any matter based on the inaccuracy, untruth, incompleteness or breach of any representation or warranty of any party hereto contained herein or based on the failure of any covenant, agreement or undertaking herein, and the parties hereto hereby waive any claims with respect to any other right of contribution or indemnity available against any indemnifying party hereunder in such capacity on the basis of common law, statute or otherwise beyond the express terms of this Agreement; provided, however, that this exclusive remedy for damages does not preclude a party from bringing an action for specific performance or other equitable remedy to require a party to perform its obligations under this Agreement or any Seller Document or Purchaser Document or limit any remedy for intentional fraud, willful misrepresentation or willful misconduct with respect to this Agreement, the Schedules to this Agreement or any Seller Document or Purchaser Document; provided, however, that in no event shall Purchaser bring or cooperate with an action for a complete or partial rescission of this Agreement on whatever basis, it being understood that any and all rights to seek such a remedy are hereby irrevocably waived. 12.6.2 Notwithstanding any other provision of this Agreement, the liability for indemnification of any indemnifying party under this Agreement shall not exceed the actual damages of the party entitled to indemnification and shall not include incidental, consequential, indirect, special, punitive, exemplary or other similar damages, other than compensatory damages. 12.7 Adjustments for Certain Payments. Any indemnification payable in accordance with ARTICLE 12 shall be net of any amounts actually received (after deducting related costs and expenses) by the indemnified party for the Losses for which such indemnification payment is made. 12.8 Treatment of Indemnity Payments. Seller and the Purchaser agree that all indemnification payments made in accordance with ARTICLE 12 will be treated by the parties as an adjustment to the Final Purchase Price. 12.9 Cooperation regarding Seller Post-Closing Matters. 12.9.1.1 From and after Closing, Purchaser shall reasonably cooperate, and shall cause TCH, the Subsidiaries, their respective Affiliates, officers, -50- employees, agents, auditors and representatives reasonably to cooperate with Seller, in connection with any matter with respect to which Seller has, or may have, continuing liability from and after Closing, including, without limitation: (a) the Venmar litigation; (b) the JCI Contracts; (c) the JCI Litigation; (d) the JCI Supply Agreement; (e) the RBC Purchase Agreement; and (f) the former employees of Von Weise (the "Seller Post-Closing Matters"). 12.9.1.2 Such cooperation shall include the retention and (upon Seller's request, at Seller's cost and expense, and at the time and place mutually agreed upon by the parties) the provision of records and information that are reasonably relevant to any Seller Post-Closing Matter and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder, to the extent such information and/or explanation is readily available and within the control of Purchaser. Purchaser shall be responsible for retaining records and information for a period of ten (10) years after the Closing Date. Purchaser shall give Seller reasonable written notice prior to transferring, destroying or discarding any such books and records and, if Seller so requests, Purchaser shall allow Seller to take possession of such books and records at Seller's sole cost and expense. Seller shall reimburse Purchaser for any reasonable out-of-pocket expenses, or costs of making employees available, upon receipt of reasonable documentation of such expenses or costs. Any information or explanation obtained pursuant to this Section 12.9.1.2 shall be maintained in confidence, unless such information is in the public domain through no wrongful act of the Seller or its Affiliates or such disclosure is required by applicable Law. ARTICLE 13 MISCELLANEOUS 13.1 Certain Definitions. For purposes of this Agreement, the following terms shall have the meanings specified in this Section 13.1: "0.001% Equity Participation" shall have the meaning set forth in Section 2.2. "99.999% Equity Participation" shall have the meaning set forth in Section 1.1.1. "Accounting Principles" means consistently applied accounting methods, principles and calculations of TCH and Subsidiaries under GAAP and pursuant to which the Financial Statements were prepared and set forth in Annex B. A specific method, principle or calculation under GAAP specified in Annex B, means a calculation made in a consistent manner (to the extent applicable) in accordance with such specific method, principle or calculation used by TCH and Subsidiaries. For purposes of any application of GAAP hereunder, the Accounting Principles shall control and GAAP shall be applied -51- on a basis consistent with those principles reflected by TCH or the applicable Subsidiary in the preparation of its Financial Statements. "Adjusted Purchase Price" shall have the meaning set forth in Section 3.2.4. "Adjustment Amount" shall have the meaning set forth in Section 3.2.4. "Adjustment Period" shall have the meaning set forth in Section 3.2.1. "Affiliate" means, with respect to any Person, any other Person controlling, controlled by or under common control with such Person. "Agreement" shall have the meaning set forth in the preamble to this Agreement. "A&S Intellectual Property" shall mean all Intellectual Property owned by TCH or any Subsidiary (as the case may be). "A&S Mark Termination Date" shall have the meaning set forth in Section 9.8. "A&S Marks" shall mean "Fasco," "Fasco Products," "Fasco DC Motors Division," "Tecumseh" or any service marks, trademarks, trade names, identifying symbols, logos, emblems, signs or insignia related thereto or containing or comprising the foregoing, including any name or mark confusingly similar thereto. "Approved Absence" shall have the meaning set forth in Section 9.4.1. "Auto Specialty" shall have the meaning set forth in the Recitals. "Auto Specialty Cash Payment" shall have the meaning set forth in Section 1.2.2. "Auto Specialty Escrow" shall have the meaning set forth in Section 3.4.1. "Auto Specialty Escrow Agent" shall have the meaning set forth in Section 3.4.1. "Auto Specialty Escrow Agreement" shall have the meaning set forth in Section 3.4.1. "Auto Specialty Escrow Deposit" shall have the meaning set forth in Section 3.4.3. "Auto Specialty Restated Certificate" shall have the meaning set forthz in Section 5.1. "Balance Sheet" shall have the meaning set forth in Section 7.8. "Balance Sheet Date" shall have the meaning set forth in Section 7.8. "Benefit Plans" shall have the meaning set forth in Section 7.16.1. -52- "Business" shall have the meaning set forth in the Recitals. "Business Day" means any day of the year not a Saturday or a Sunday on which national banking institutions in Detroit, Michigan are open to the public for conducting business and are not required or authorized to close. "Canadian Escrow Agreement" shall have the meaning set forth in Section 9.17. "Canadian Escrowed Funds" shall have the meaning set forth in Section 9.17. "Canadian Registered Plan" shall have the meaning set forth in Section 7.16.7. "Cap" shall have the meaning set forth in Section 12.2. "Claim" shall have the meaning set forth in Section 12.4.1. "Closing" shall have the meaning set forth in Section 4.1. "Closing Date" shall have the meaning set forth in Section 4.1. "Closing Date Working Capital" shall have the meaning set forth in Section 3.2.1. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Commitment" shall have the meaning set forth in Section 9.12. "Company Material Adverse Effect" means a material adverse effect on the assets, liabilities, business, financial condition or results of operations of TCH and Subsidiaries (taken as a whole) other than an effect resulting from an Excluded Matter. "Excluded Matters" means any one or more of the following: (i) the effect of any change arising from or related to any market in general in which TCH or any Subsidiary operates (whether in the United States or internationally), the United States economy as a whole, or the international economy, to the extent such change does not have a disproportionate impact on TCH and Subsidiaries; (ii) the effect of any change arising in connection with earthquakes, acts of war, sabotage or terrorism, military actions or escalation thereof; (iii) the effect of any changes in applicable Laws, regulations or accounting rules; or (iv) any effect of the public announcement of this Agreement, the transactions contemplated hereby or the consummation of such transactions. "Company Property" or "Company Properties" shall have the meaning set forth in Section 7.12. "Company Retirees" shall have the meaning set forth in Section 9.5. "Contract" means any contract, agreement, indenture, note, bond, loan, instrument, lease, commitment or other arrangement or agreement. "Direct Purchased Assets" shall have the meaning set forth in Section 2.3. -53- "Eaton Rapids Real Property" means the parcels of real property commonly known as 401 & 402 East Haven Street, 450 Marlin Avenue, and 770 Jackszon Street, Eaton Rapids, Michigan. "Effective Time" shall mean 12:01 a.m. on the Closing Date. "El Paso Inventory" shall have the meaning set forth in Section 1.1.3. "Employees" shall have the meaning set forth in Section 9.4.1. "Environmental Law" means any applicable federal, state, foreign, national, provincial, regional, territorial, municipal or local statute, regulation, ordinance, or rule of common law in effect as of the Closing relating to the protection of the environment including, without limitation, any applicable provisions of the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 et seq.), the Hazardous Materials Transportation Act (49 U.S.C. App. Section 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.), the Clean Water Act (33 U.S.C. Section 1251 et seq.), the Clean Air Act (42 U.S.C. Section 7401 et seq.) the Toxic Substances Control Act (15 U.S.C. Section 2601 et seq.), and the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. Section 136 et seq.), and the regulations promulgated pursuant thereto. "Environmental Permit" means any Permit required pursuant to any Environmental Law for the operation of any of the facilities of the Business. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Estimated Working Capital" means a good faith estimate of the Closing Date Working Capital, prepared and delivered by the Seller to the Purchaser by written notice not less than three (3) days prior to the Closing Date, which estimate shall be reasonably acceptable to the Purchaser. "Estimated Working Capital Difference" means the number of U.S. Dollars (which may be a positive or negative number) equal to the Target Working Capital minus the Estimated Working Capital. "Excluded Assets" shall have the meaning set forth in Section 13.3. "Excluded Taxes" means any liability, obligation or commitment, whether or not accrued, assessed or currently due and payable, (i) for any Taxes of TCH or Subsidiary for any Pre-Closing Tax Period, (ii) as a result of Treasury Regulation Section 1.1502-6(a) (or as a result of being a member of any combined, unitary, or similar group) for Taxes of Seller or any other corporation which has been affiliated with Seller (other than TCH and Subsidiaries) (or as a result of TCH or Subsidiary being a successor to a liability of the Seller or any Affiliate as a result of the operation of law or contract) and (iii) any Taxes arising in a taxable period ending after the Closing Date attributable to an event occurring or a deduction or credit claimed in a Pre-Closing Tax Period. -54- "Existing Business Activities" shall mean the business activities of a Seller or an Affiliate of any Seller described on Schedule 9.16.1. "Funding of Auto Specialty" shall have the meaning set forth in Section 1.7. "Final Purchase Price" shall have the meaning set forth in Section 3.1. "Financial Statements" shall have the meaning set forth in Section 7.8. "GAAP" means consistently applied accounting methods, principles, policies and calculations of TCH and Subsidiaries as provided in the books and records of TCH and Subsidiaries under generally accepted United States accounting principles, and the basis on which the Financial Statements were prepared. "Governmental Body" means any government or governmental or regulatory body thereof, or political subdivision thereof, whether federal, state, provincial, regional, territorial, municipal, local or foreign, or any agency, instrumentality or authority thereof, or any court or arbitrator (public or private). "Hazardous Material" means any substance, material or waste that is characterized, classified or designated under any Environmental Law as hazardous, toxic, pollutant, contaminant or words of similar meaning or effect, including without limitation, petroleum and its by-products, asbestos, and polychlorinated biphenyls. "Indebtedness" means, without duplication, (i) any indebtedness for borrowed money or issued in substitution or exchange for indebtedness for borrowed money, (ii) any obligation evidenced by any note, bond, debenture, or other debt security, (iii) any obligation to pay the deferred purchase price of property or services with respect to which a Person is liable as obligor or otherwise and any installment payment non-compete agreement (other than Trade Accounts Payable and other current liabilities incurred in the ordinary course), (iv) any commitment by which a Person ensures a creditor against loss (including contingent reimbursement obligations with respect to letters of credit), (v) any indebtedness guaranteed in any manner by a Person (including guarantees in the form of an agreement to repurchase or reimburse, but excluding the endorsement of checks or other negotiable instruments for deposit or collection), (vi) any obligations under leases that are capitalized leases as of the Closing Date with respect to which a Person is liable, contingently or otherwise, as obligor, guarantor, or otherwise, or with respect to which obligations a Person ensures a creditor against loss, (vii) any indebtedness secured by an encumbrance on a Person's assets, (viii) any outstanding letter of credit, sight draft, bankers' acceptances, performance bond or similar surety obligation of TCH or any Subsidiary; provided that any such obligation shall only be considered Indebtedness to the extent such obligation has actually been drawn (or circumstances exist which entitle the beneficiary to draw on) at or prior to the Closing Date, and (ix) any interest, principal, prepayment penalty, fees, or expenses to the extent paid in respect of those items listed in clauses (i) through (viii) of this definition. "Initial Purchase Price" shall have the meaning set forth in Section 3.1.1. -55- "Intellectual Property" means all rights under patent, copyright, trademark or trade secret law or any other statutory provision or common law doctrine, including all rights to Technology. "Inventory" shall have the meaning set forth in the Accounting Principles. "IRS" means the Internal Revenue Service of the United States. "JCI Contracts" means, as amended: (i) the Supply Agreement, dated September 30, 2004, by and between Fasco Industries, Inc. and Johnson Controls, Inc.; (ii) the Letter Agreement, dated November 23, 2005, by between Fasco Industries, Inc. and Johnson Controls, Inc.; (iii) the Supply Agreement, dated November 30, 2005, by and between Fasco Industries, Inc. and Johnson Controls, Inc., (iv) the Johnson Controls, Inc. Global Terms and Conditions of Purchase, dated March 12, 2006; (v) the Purchase Order, dated January 3, 2007, issued by Johnson Controls, Inc. to Fasco DC Motors; and (vi) each Supplier Statement of Work (SSOW) issued by Johnson Controls, Inc. pursuant to the foregoing agreements. "JCI Litigation" means Johnson Controls, Inc. v. Fasco Industries, Inc., dba Fasco DC Motors, United States District Court for the Eastern District of Michigan, Case No. 2:07-cv-13649. "JCI Supply Agreement" shall have the meaning set forth in Section 11.1.11. "Juarez Fixed Assets" shall have the meaning set forth in Section 1.1.6. "Juarez Inventory" shall have the meaning set forth in Section 1.1.2. "Knowledge of Purchaser" means the actual knowledge of the senior officers of the Purchaser or other employees of the Purchaser actively involved in the transactions contemplated hereby. "Knowledge of Seller" means the actual knowledge of James Bonsall, James Nicholson, Mark Porto, Daryl McDonald, or Kevin Hein. "Law" means any federal, state, provincial, regional, territorial, municipal, local or foreign law (including common law), statute, code, ordinance, rule, regulation or other requirement. "Legal Proceeding" means any judicial, administrative or arbitral actions, suits, proceedings (public or private), claims or governmental proceedings. "Lien" means any lien, pledge, mortgage, deed of trust, security interest, claim, lease, charge, option, right of first refusal, easement, servitude, transfer restriction under any shareholder or similar agreement, encumbrance or any other restriction or limitation whatsoever. "Liquidated Damages" shall have the meaning set forth in Section 4.5. -56- "Losses" means any and all losses, claims, expenses, damages, judgments, settlements, debts, liabilities, penalties, fines, obligations, interest (including prejudgment interest), costs and expenses (including court costs and reasonable attorneys' fees and expenses and costs of investigation). "Master Global Manufacture and Supply Agreement (Tecumseh Power Company)" shall have the meaning set forth in Section 11.1.9. "Material Contracts" shall have the meaning set forth in Section 7.21.1. "Mexico" means the United Mexican States. "Motores" shall have the meaning set forth in the recitals of this Agreement. "Nappanee Real Property" means the parcel of real property commonly known as 24785 US Hwy 6, Nappanee, Indiana 46550. "Non-Competition Period" shall have the meaning set forth in Section 9.16.1. "Notice of Unsettled Tax Matter" shall have the meaning set forth in Section 1.6.4. "Objection Notice" shall have the meaning set forth in Section 3.2.2. "Order" means any order, injunction, judgment, decree, ruling, writ, assessment or arbitration award. "Owned Property" or "Owned Properties" shall have the meaning set forth in Section 7.12. "Permits" means any approvals, authorizations, consents, licenses, permits or certificates. "Permitted Exceptions" means (i) all defects, exceptions,z restrictions, easements, rights of way and encumbrances set forth on Schedule 7.12; (ii) statutory liens for current taxes, assessments or other governmental charges not yet due and payable or the amount or validity of which is being contested in good faith by appropriate proceedings, provided an appropriate reserve is established therefor; (iii) mechanics', carriers', workers', repairers' and similar Liens arising or incurred in the ordinary course of business; (iv) zoning, entitlement and other land use and environmental regulations by any Governmental Body; (v) all matters caused directly or indirectly by Purchaser; and (vi) such other imperfections in title, charges, easements, restrictions, encumbrances and matters revealed by a plat or plan of survey which do not materially impair the use, value, ownership, operations or occupancy of any Company Property subject thereto or affected thereby, or for which a title insurer chosen by Seller has agreed to provide title insurance coverage. -57- "Person" means any individual, partnership, joint venture, trust, corporation, limited liability entity, unincorporated organization or other entity (including a Governmental Body). "Pre-Closing Tax Period" means, with respect to TCH and each Subsidiary, any Tax period (or portion thereof) ending on or before the Closing Date, and shall include any Taxes imposed as a result of TCH or any Subsidiary leaving a consolidated, combined or unitary group. "Property Taxes" shall have the meaning set forth in Section 12.5.1.3.1. "Protected Information" shall have the meaning set forth in Section 9.16.4. "Purchaser" shall have the meaning set forth in the preamble of this Agreement. "Purchaser DC Plan" shall have the meaning set forth in Section 9.4.6. "Purchaser Documents" shall have the meaning set forth in Section 8.2. "Purchaser Indemnified Parties" shall have the meaning set forth in Section 12.1.1. "Purchaser One Cash Contribution to Auto Specialty" shall have the meaning set forth in Section 1.3. "Purchaser One Auto Specialty Escrow Deposit" shall have the meaning set forth in Section 3.4.2. "Purchaser Tax Act" shall have the meaning set forth in Section 12.5.1.1. "Real Property Lease" shall have the meaning set forth in Section 7.12. "Release" means any release, spill, emission, leaking, pumping, deposit, disposal, discharge, dispersal, or leaching into the indoor or outdoor environment. "Remedial Action" means all actions required pursuant to or by operation of Environmental Laws, by an Order of a Governmental Body enforcing Environmental Laws, or pursuant to an Order of a court of competent jurisdiction, to clean up, remove, treat, contain or otherwise address any Hazardous Material located at, in, on or under real property. "Restricted Business" shall have the meaning set forth in Section 9.16.1. "Restructuring" shall have the meaning set forth in Section 9.2. "Second Closing Date" shall have the meaning set forth in Section 6.1. "Securities Act" shall have the meaning set forth in Section 8.5. -58- "Seller" shall have the meaning set forth in the preamble of this Agreement. "Seller Documents" shall have the meaning set forth in Section 7.2. "Seller Post-Closing Matters" shall have the meaning set forth in Section 12.9.1.1. "Share Price" shall have the meaning set forth in Section 9.17. "Straddle Period" shall have the meaning set forth in Section 12.5.1.3. "Subsidiary" means each entity set forth on Schedule 7.4 attached hereto. "Target Working Capital" means $41,450,000. "Tax Characterization" shall have the meaning set forth in Section 1.6.1. "Tax Claim" shall have the meaning set forth in Section 12.5.2.1. "Tax Indemnified Party" shall have the meaning set forth in Section 12.5.2.1. "Tax Indemnifying Party" shall have the meaning set forth in Section 12.5.2.1. "Tax Return" means all returns, declarations, reports, estimates, information returns and statements required to be filed in respect of any Taxes. "Taxes" means (i) all federal, state, provincial, local or foreign taxes, charges, fees, imposts, levies or other assessments, including, without limitation, all net income, gross receipts, capital, sales, use, good and services, ad valorem, value added, transfer, franchise, profits, inventory, net worth, escheat, unclaimed property, documentary, recapture, alternative minimum, capital stock, license, withholding, payroll, employment, social security, unemployment, excise, severance, stamp, occupation, property and estimated taxes, customs duties, fees, assessments and charges of any kind whatsoever and whether or not validly assessed, including Canada Pension Plan and provincial pension plan, contributions, employment insurance and unemployment insurance payments and workers' compensation premiums, and whether disputed or not, (ii) all interest, penalties, fines, additions to tax or additional amounts imposed by any taxing authority in connection with any item described in clause (i), and (ii) "Tax" shall have the correlative meaning any transferee liability in respect of any items described in clauses (i) and/or (ii). "TCH" shall have the meaning set forth in the recitals of this Agreement. "TCH Shares" shall have the meaning set forth in Section 2.1. "Technology" means, collectively, all designs, formulas, algorithms, procedures, techniques, ideas, know-how, software, tools, inventions, creations, improvements, works of authorship other similar materials relating to TCH and its Subsidiaries' products, and all recordings, graphs, drawings, reports, analyses, other writings, and any other -59- embodiment of the above, in any form, whether or not specifically listed herein, and all related technology used in, incorporated in, embodied in or displayed by any of the foregoing, or used or useful in the design, development, reproduction, maintenance or modification of any of the foregoing. "Trade Accounts Payable" shall have the meaning set forth in the Accounting Principles. "Trade Accounts Receivable and Trade Accounts Payable" shall have the meaning set forth in Section 1.1.4. "Trade Receivables" shall have the meaning set forth in the Accounting Principles. "Transfer Taxes" means all sales, use, transfer, intangible, recordation, documentary stamp, goods and services, value-added, or similar Taxes or charges, of any nature whatsoever. "Transferred Benefit Plans" shall have the meaning set forth in Section 7.16.2. "Transition Services Agreement" shall have the meaning set forth in Section 11.1.10. "Unrelated Firm" shall have the meaning set forth in Section 3.2.3. "Unsettled Tax Matter" shall have the meaning set forth in Section 1.6.4. "U.S. Dollars" or "Dollars" means the legal currency of the United States. "Venmar Litigation" means 42 fire/property loss claims involving Venmar, a Canadian manufacturer of heat recovery ventilators, as further described on Schedule 7.18. "Von Weise" shall have the meaning set forth in the Recitals. "Von Weise 351 Assets" shall have the meaning set forth in Section 1.2. "Von Weise Auto Specialty Assignment and Assumption Agreement" shall have the meaning set forth in Section 1.5. "Von Weise Auto Specialty Common Stock" shall have the meaning set forth in Section 3.4.1. "Von Weise Auto Specialty Preferred Stock" shall have the meaning set forth in Section 1.2.1. "Von Weise Purchaser One Assignment and Assumption Agreement" shall have the meaning set forth in Section 2.4. -60- "Working Capital" means as of the applicable date, Inventory, Trade Receivables, and Trade Accounts Payable prepared on a basis consistent with the Accounting Principles. 13.2 Payment of Transfer Taxes. All Transfer Taxes applicable to, or resulting from, the transactions contemplated by this Agreement shall be borne in equal proportion by the Seller and Purchaser. 13.3 Excluded Assets. Prior to the Closing Date, the following assets (the "Excluded Assets") will be transferred from TCH and each Subsidiary to Seller or Seller's designee: 13.3.1 cash; and 13.3.2 any debit balance reflected in any intercompany funding account which, immediately prior to the Closing, will be deemed to be a contribution to capital. 13.4 Expenses. Except as otherwise provided in this Agreement, (a) the Seller (and not TCH) shall pay all fees, costs and expenses incurred by the Seller, TCH or any Subsidiary in connection with (i) the Restructuring, including all fees and expenses of APS Services, and (ii) the negotiation and execution of this Agreement and each other agreement, document and instrument contemplated by this Agreement and the consummation of the transactions contemplated hereby and thereby, and (b) the Purchaser shall pay all fees, costs and expenses incurred by it in connection with the negotiation and execution of this Agreement and each other agreement, document and instrument contemplated by this Agreement and the consummation of the transactions contemplated hereby and thereby. 13.5 Further Assurances. The Seller and the Purchaser each agree to execute and deliver such other documents or agreements and to take such other action as may be reasonably necessary or desirable for the implementation of this Agreement and the consummation of the transactions contemplated hereby. 13.6 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware regardless of the laws that might otherwise govern under applicable principles of conflict of laws thereof. 13.7 Submission to Jurisdiction; Consent to Service of Process. 13.7.1 Subject to Section 3.2.3, the parties hereto hereby irrevocably submit to the exclusive jurisdiction of the state courts of the State of Delaware or the United States District Court located in the District of Delaware over any dispute arising out of or relating to this Agreement or any of the transactions contemplated hereby and each party hereby irrevocably agrees that all claims in respect of such dispute or any suit, action, or proceeding related thereto may be heard and determined in such courts. The parties hereby irrevocably waive, to the fullest extent permitted by applicable Law, any objection which they may now or hereafter have to the laying of venue of any such dispute brought in such court or any defense of inconvenient forum for the maintenance -61- of such dispute. Each of the parties hereto agrees that a judgment in any such dispute may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by Law. 13.7.2 Each of the parties hereto hereby consents to process being served by any party to this Agreement in any suit, action or proceeding by the mailing of a copy thereof in accordance with the provisions of Section 13.10. 13.8 Entire Agreement; Amendments and Waivers. This Agreement (including the schedules hereto) represents the entire understanding and agreement between the parties hereto with respect to the subject matter hereof and can be amended, supplemented or changed, and any provision hereof can be waived, only by written instrument making specific reference to this Agreement signed by the party against whom enforcement of any such amendment, supplement, modification or waiver is sought. No action taken pursuant to this Agreement, including without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representation, warranty, covenant or agreement contained herein. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a further or continuing waiver of such breach or as a waiver of any other or subsequent breach. No failure on the part of any party to exercise, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of such right, power or remedy by such party preclude any other or further exercise thereof or the exercise of any other right, power or remedy. 13.9 Table of Contents and Headings. The table of contents and section headings of this Agreement are for reference purposes only and are to be given no effect in the construction or interpretation of this Agreement. 13.10 Notices. All notices and other communications under this Agreement shall be in writing and shall be deemed given when (i) delivered personally or (ii) mailed by certified or registered mail, return receipt requested, or (iii) sent by FedEx or other nationally recognized express carrier, fee prepaid to the parties (and shall also be transmitted by facsimile to the Persons receiving copies thereof) at the following addresses (or to such other address as a party may have specified by notice given to the other party pursuant to this provision): If to Seller: Tecumseh Products Company 100 E. Patterson Street Tecumseh, Michigan 49286 Attn: Daryl P. McDonald, Esq. Facsimile: (517) 423-8839 -62- With a copy to: Miller, Canfield, Paddock & Stone, P.L.C. 840 West Long Lake Road, Suite 200 Troy, Michigan 48098 Attn: David D. Joswick, Esq. Facsimile: (248) 879-2001 If to Purchaser: Specialty Motors Operations, Inc. 5200 Town Center Circle, Suite 600 Boca Raton, Florida 33486 Telephone number: (561) 394-0550 Facsimile number: (561) 394-0540 Attention: Anuj Singh and C. Deryl Couch With a copy to: Morgan, Lewis & Bockius LLP One Oxford Centre, Thirty-Second Floor Pittsburgh, Pennsylvania 15219 Attn: David A. Gerson and Kimberly A. Taylor Facsimile: (412) 560-7001 13.11 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced under any Law or as a matter of public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated by this Agreement is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties to this Agreement shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated by this Agreement be consummated as originally contemplated to the greatest extent possible. 13.12 Binding Effect; No Third Party Beneficiaries; Assignment. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. Nothing in this Agreement shall create or be deemed to create any third party beneficiary rights in any Person not a party to this Agreement. No assignment of this Agreement or of any rights or obligations hereunder may be made by either the Seller or the Purchaser (by operation of law or otherwise) without the prior written consent of the other parties hereto and any attempted assignment without the required consents shall be void; provided, however, that prior to or after the Closing, the Purchaser may assign all or any part of its rights hereunder to (i) any Affiliate of the Purchaser, provided that no such assignment shall relieve the Purchaser of its obligations hereunder, (ii) any financial institution, lender, or investor providing to the Purchaser debt or equity financing in connection with the transactions contemplated hereby, provided that no such assignment shall relieve the Purchaser of its obligations hereunder, or (iii) any Person that acquires, by purchase of stock, purchase of assets, -63- merger, or other form of transaction, all or substantially all of the business and assets of the Purchaser or its Subsidiaries. 13.13 Disclosure Schedules. Any disclosure with respect to a Section or Schedule of this Agreement shall be deemed to be disclosed for other Sections and Schedules of this Agreement to the extent that such disclosure sets forth facts in sufficient detail so that the relevance of such disclosure would be reasonably apparent to a reader of such disclosure. No reference to or disclosure of any item or other matter in any Section or Schedule of this Agreement shall be construed as an admission or indication that such item or other matter is material or that such item or other matter is required to be referred to or disclosed in this Agreement. 13.14 Rules of Construction. This Agreement shall be governed by the following rules of construction: (a) words in the singular shall be held to include the plural and vice versa, and words of one gender shall be held to include the other gender as the context requires; (b) references to the terms Article, Section, paragraph, Exhibit and Schedule are references to the Articles, Sections, paragraphs, Exhibits and Schedules to this Agreement unless otherwise specified; (c) references to "$" shall mean U.S. dollars; (d) the word "including" and words of similar import shall mean "including without limitation," unless otherwise specified; (e) the word "or" shall not be exclusive; (f) provisions shall apply, when appropriate, to successive events and transactions; (g) the headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement; and (h) this Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting or causing any instrument to be drafted. 13.15 Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties to each such agreement in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by facsimile or e-mail shall be as effective as delivery of a manually executed counterpart of any such agreement. [Signatures follow on next page] -64- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first written above. PURCHASER: SPECIALTY MOTORS OPERATIONS, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ SPECIALTY MOTORS HOLDING CORP. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ SELLER: TECUMSEH PRODUCTS COMPANY By: --------------------------------- Name: ------------------------------- Title: ------------------------------ VON WEISE USA, INC. By: --------------------------------- Name: ------------------------------- Title: ------------------------------ (Signature page to Contribution and Purchase Agreement) EX-10.15 3 k24815exv10w15.txt ANNUAL INCENTIVE PLAN EXHIBIT 10.15 TECUMSEH PRODUCTS COMPANY ANNUAL INCENTIVE PLAN Tecumseh Products Company (the "Company") hereby adopts this Annual Incentive Plan to provide an opportunity for Company executives to earn annual cash incentive compensation so as to: - encourage individual effort and group teamwork; - reward outstanding performance; - provide total cash compensation opportunities that are competitive and that will serve to attract and retain qualified executives; and - focus the attention of executives on the most critical performance criteria. 1. DEFINITIONS As used in this Plan, the following terms have the following respective meanings: "Actual Bonus Percentage" means, for each Eligible Employee for each Plan Year, the percentage calculated as that Eligible Employee's Actual Bonus Percentage for that Plan Year using the methodology established by the Committee pursuant to Section 3.1(d). An Eligible Employee's Actual Bonus Percentage for a given Plan Year cannot exceed two times his or her Target Bonus Percentage. "Board" means the Board of Directors of the Company. "Bonus Amount" means the dollar amount of a cash bonus payable to an Eligible Employee under this Plan. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means the Compensation Committee of the Board or such other committee as the Board may subsequently appoint to administer this Plan. "Company Bonus Pool" means, for any Plan Year, a dollar amount representing the maximum total of all Bonus Amounts payable to all Eligible Employees for that Plan Year under this Plan. The Company Bonus Pool for each Plan Year will be calculated using the methodology established by the Committee pursuant to Section 3.1(a). "Eligible Employee" means, for any given Plan Year, each full-time executive employee of the Company or a subsidiary of the Company who is designated by the Committee as an Eligible Employee for that Plan Year. "Performance Measures" means any one or more of the following: - Net sales - Cost of sales - Gross or net revenues or sales - Gross income - Net income - Operating income - Income from continuing operations - Earnings - EBITDA - EBITDAR - Asset utilization - Expense control - EPS - Cash flow - Free cash flow - Net cash provided by operating activities less net cash used in investing activities - Net operating profit - Debt to equity ratio - Return on shareholder equity - Return on capital - Return on assets - Operating working capital - Average accounts receivable - Economic value added - Customer satisfaction - Operating margin - Profit margin - Price per share of any class of common stock -2- - Sales performance - Sales quota attainment - New sales - Internal revenue growth - Customer retention "Plan" means this Annual Incentive Plan. "Plan Year" means the calendar year. "Target Bonus Percentage" means, for each Eligible Employee for each Plan Year, the percentage determined by the Committee as that Eligible Employee's Target Bonus Percentage for that Plan Year. 2. ADMINISTRATION This Plan is to be administered by the Committee. To the extent consistent with the terms of this Plan, the Committee has the power to interpret any Plan provision, to prescribe, amend, and rescind rules and regulations relating to this Plan, and to make all other determinations that it deems necessary or advisable to administer this Plan. The Committee may appoint such agents to assist in administration of this Plan as the Committee deems appropriate. The Committee's interpretation of this Plan and any action it takes pursuant to this Plan is final and binding on all affected parties. 3. COMMITTEE DETERMINATIONS FOR EACH PLAN YEAR 3.1 Before, or within the first 90 days of each Plan Year, after considering recommendations received from the Company's management and such other matters as the Committee thinks it proper to consider, the Committee will determine for that Plan Year, each of the following: (a) the performance measures and goals to be used for determining the Company Bonus Pool for the Plan Year and the methodology to be used for calculating the Company Bonus Pool after the Plan Year is completed based on the Company's actual performance relative to those performance measures and goals; (b) Eligible Employees; (c) the Target Bonus Percentage for each Eligible Employee; and (d) the Company and individual performance measures and goals to be used for determining each Eligible Employee's Actual Bonus Percentage for the Plan Year and the methodology to be used for calculating each Eligible Employee's Actual Bonus Percentage after the -3- Plan Year is completed based on the Company's and the Eligible Employee's actual performance relative to those performance measures and goals. 3.2 If a full-time employee of the Company or a subsidiary of the Company is hired or promoted during a Plan Year after the Committee has made the determinations specified in Section 3.1 for that Plan Year, and if, in the Committee's opinion, it would be in the Company's best interest to designate that employee as an Eligible Employee for that Plan Year, the Committee may designate that employee as an Eligible Employee for that Plan Year, in which event the Committee will also make the determinations specified in Sections 3.1(c) and 3.1(d) for that Eligible Employee and that Plan Year. Adding additional Eligible Employees under this Section 3.2 will not affect the Committee's previous determinations under Section 3.1(a) for that Plan Year. 4. CALCULATION AND PAYMENT OF BONUS AMOUNTS 4.1 Subject to Section 4.2, the Bonus Amount for each Eligible Employee for a given Plan Year will be equal to the product obtained by multiplying the Eligible Employee's salary for that Plan Year by his Actual Bonus Percentage for that Plan Year. 4.2 If the total of all Bonus Amounts for all Eligible Employees for a given Plan Year calculated pursuant to Section 4.1 would exceed the Company Bonus Pool for that Plan Year, then the Bonus Amount for each Eligible Employee will be reduced to an amount equal to the product obtained by multiplying: (a) the Company Bonus Pool for that Plan Year; by (b) a fraction, (1) the numerator of which is the amount that would have been the Bonus Amount for that Eligible Employee if his or her Bonus Amount were calculated under Section 4.1; and (2) the denominator of which is the amount that would have been the total of all Bonus Amounts for all Eligible Employees if their Bonus Amounts were calculated under Section 4.1. 4.3 After each Plan Year is completed and the applicable performance results are available, the Committee will calculate, for that Plan Year, the Company Bonus Pool, each Eligible Employee's Actual Bonus Percentage, and each Eligible Employee's Bonus Amount and will communicate the results of its calculations to the Board of Directors and to Company management. -4- 4.4 Each Eligible Employee's employer will pay the Eligible Employee his or her Bonus Amount within 2-1/2 months following close of the Plan Year for which the Bonus Amount was earned.. 4.5 Notwithstanding any other provision of this Plan, no person whose employment with the Company or a subsidiary terminates before the last day of a Plan Year for any reason will be eligible to receive any bonus under this Plan in respect of that Plan Year unless the Committee, in its sole discretion, determines otherwise. 5. CODE SECTION 162(M) 5.1 Notwithstanding any other provisions of this Plan: (a) the performance measures used in determining the Bonus Amount payable to any employee who is subject to Code Section 162(m) must consist only of Performance Measures; and (b) the Bonus Amount payable to any employee who is subject to Code Section 162(m) with respect to any Plan Year may not exceed $3,000,000. 5.2 The Board of Directors, in its discretion, may choose to submit for shareholder approval any of the performance measures, goals, calculation methodologies, potential Bonus Amounts, or other information with respect to Bonus Amounts potentially payable under this Plan for any Plan Year to any Eligible Employee who is subject to Code Section 162(m). If shareholder approval is sought and is not received in accordance with Code Section 162(m), then no Bonus Amount will be payable for that Plan Year to the Eligible Employee(s) affected by the failure to obtain that approval. 6. MISCELLANEOUS MATTERS 6.1 Benefits payable under this Plan are intended to be unfunded for tax purposes, and the sole right of an Eligible Employee with respect to his or her Bonus Amount will be the right as an unsecured general creditor of his or her employer. 6.2 Nothing in this Plan requires the Company or any subsidiary to retain any Eligible Employee as an employee or affects in any way any other terms of any Eligible Employee's employment. 6.3 This Plan is to be governed by and construed, enforced, and administered in accordance with the laws of the State of Michigan excluding any such laws that direct an application of the laws of any other jurisdiction. At all times, this Plan will also be interpreted and administered to maintain intended income tax deferral in accordance with Code Section 409A and regulations and other guidance issued under Code Section 409A. The Company and the -5- Committee will be subject to suit regarding this Plan only in the courts of the State of Michigan, and the Company will fully indemnify and defend the Board and the Committee with respect to any actions relating to this Plan taken in good faith by either of those bodies or their members. 6.4 This Plan was adopted by the Board on December 17, 2007, and takes effect as of January 1, 2008. 6.5 The Board may at any time and from time to time amend, modify, suspend, or terminate this Plan. -6- EX-10.25 4 k24815exv10w25.txt OUTSIDE DIRECTORS' DEFERRED STOCK UNIT PLAN EXHIBIT 10.25 TECUMSEH PRODUCTS COMPANY OUTSIDE DIRECTORS' DEFERRED STOCK UNIT PLAN Tecumseh Products Company (the "Company") hereby adopts this Outside Directors' Deferred Stock Unit Plan to provide an incentive for outside Directors to join and remain in service on the Company's Board of Directors so that the Company may benefit from their counsel and dedication, while rewarding their commitment to the Company with deferred income based on the stock market performance of the Company's Class A Common Stock. Under this Plan, each outside director will receive one-half of his or her annual retainer for serving on the Board of Directors (and, if applicable, for serving as Lead Director) in cash and one-half in deferred stock units. 1. DEFINITIONS As used in this Plan, the following terms have the following respective meanings: "1934 Act" means the Securities Exchange Act of 1934, as amended. "Account" is defined in Section 4.1. "Award" means an allocation of Stock Units to the Account of an Eligible Director. References in this Plan to the amount of an award may be either to a dollar amount or to the number of Stock Units. "Board" means the Board of Directors of the Company. "Cash Retainer" means: (a) for each Plan Year and each person who is an Eligible Director on the first day of that Plan Year, the annual amount payable in cash to that Eligible Director for that Plan Year for serving as a Director of the Company and, if applicable, for serving as the Corporation's Lead Director, all determined as of the first day of the Plan Year under the Company's policies as in effect on that day; and (b) for the Plan Year in which a person first becomes an Eligible Director (unless he or she becomes an Eligible Director on the first day of the Plan Year), the amount payable in cash to that Eligible Director for that Plan Year for serving as a Director of the Company and, if applicable, for serving as the Corporation's Lead Director, all determined as of the day the person becomes an Eligible Director under the Company's policies as in effect on that day. EXAMPLE: If a person first becomes an Eligible Director on April 1 of a Plan Year, and if the Company's policies as in effect on that day provide for a $40,000 annual cash retainer for outside directors, that Eligible Director's Cash Retainer would be $30,000 for that Plan Year. The Cash Retainer does not include amounts payable for serving on or as chairman of committees of the Board or for attendance at meetings of the Board or committees or any amounts payable for reimbursement of expenses. "Code" means the Internal Revenue Code of 1986, as amended. "Committee" means the Compensation Committee of the Board or such other committee as the Board may subsequently appoint to administer this Plan. "Company Change in Control," solely for the purposes of this Plan, means (and is limited to) any change that qualifies as a change of control event pursuant to Section 409A of the Code, Treasury Regulation Section 1.409A-3(i)(5), and all subsequent relevant authority, including one or more of the following events: (a) a change in the ownership of the Company in compliance with Treasury Regulation Section 1.409A-3(i)(5)(v) pursuant to which any person or group acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power of the stock of such corporation; (b) a change in the effective control of the Company pursuant to Proposed Treasury Regulation Section 1.409A-3(g)(5)(vi), pursuant to which either: (1) any one person, or more than one person acting as a group, acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition by such person or persons) ownership (including acquisition of beneficial ownership within the meaning of Rule 13d-3 promulgated under the 1934 Act) of stock of the Company possessing 30% or more of the total voting power of the stock of such corporation; or (2) a majority of members of the Board is replaced during any twelve-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board before the date of the appointment or election; or (c) a change in the ownership of a substantial portion of the Company's assets pursuant to Treasury Regulation Section 1.409A-3(i)(5)(vii) pursuant to which any one person or group acquires (or has acquired during the twelve-month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value (as defined in 1.409A-3(i)(5)(vii)) equal to or more than 40% of the total gross fair market value of all of the -2- assets of the Company immediately prior to such acquisition or acquisitions. For purposes of this definition, the following terms have the following meanings: (i) "person" means a person as defined in Section 3(a)(9) of the 1934 Act. (ii) "beneficial ownership" is to be determined in accordance with Rule 13d-3 promulgated under the 1934 Act or any successor regulation; and (iii) "group" means a group as described in Rule 13d-5 promulgated under the 1934 Act or any successor regulation provided such definition satisfies the meaning of group in Treas. Reg. Sections 1.409A-3(i)(v)(B), 1.409A-3(i)(5)(vi)(D), or 1.409A-3(i)(5)(vii)(C), as applicable. The formation of a group under these provisions will have the effect described in paragraph (b) of Rule 13d-5 or any successor regulation. "Determination Date" means, for each Eligible Director, the date on which he or she ceases to be a Director of the Company due to resignation, retirement, death, Disability, or other reason, but only if the event is also a "separation from service" with the Company, as determined in accordance with Code Section 409A. If the event is not a "separation from service," then the Determination Date will be the earliest date following the event when a "separation from service" occurs. "Disability" (or to be "Disabled") means a medically determinable physical or mental impairment that can be expected to result in death or to last for a continuous period of not less than twelve months and that causes an Eligible Director to be unable to engage in any substantial gainful activity by reason of the impairment. An Eligible Director will also be deemed to have a Disability when determined to be totally disabled by the Social Security Administration. "Eligible Director" means, for any relevant time, each individual who at that time is a member of the Board but is not also an officer or employee of the Company or of any subsidiary of the Company. "Market Price" means, for any given date: (a) if the Shares are then listed for trading on one or more national securities exchanges (including the Nasdaq Stock Market), the average of the high and low sale prices for a Share on the principal exchange on the date in question (or, if no Shares traded on the principal exchange on that date, the next preceding date on which trading occurred); -3- (b) if (a) is inapplicable but bid and asked prices for Shares are quoted through NASDAQ, the average of the highest bid and lowest asked prices so quoted for a Share on the date in question (or, if no prices for Shares were quoted on that date, the next preceding date on which they were quoted); (c) if (a) and (b) are inapplicable but bid and asked prices for Shares are otherwise quoted by one or more broker-dealers known to the Company to be making a market in the Shares, the average of the highest bid and lowest asked prices so quoted on the date in question (or, if no prices were quoted on that date, the next preceding date on which they were quoted); and (d) if all of the foregoing are inapplicable, the fair market value of a Share on the date in question as determined in good faith by the Committee; provided that Market Price is determined in accordance with Treasury Regulation Section 1.409A-1(b)(5)(iv). "NASDAQ" means the National Association of Securities Dealers, Inc. Automated Quotation System. "Plan" means this Outside Directors' Deferred Stock Unit Plan. "Plan Year" means the calendar year. "Reason" is defined in Section 6.2. "Share(s)" means Class A Common Stock of the Company. "Stock Unit" means an allocation credited to the Account of an Eligible Director and maintained in such Account together with any prior or subsequent allocations made on behalf of that Director. An allocation of Stock Units confers only those rights specified in this Plan. Directors who receive allocations of Stock Units will not (as a consequence of those allocations) be treated as shareholders under the Articles of Incorporation or Bylaws of the Company or under applicable law. 2. ADMINISTRATION This Plan is to be administered by the Committee. To the extent consistent with the terms of this Plan, the Committee has the power to interpret any Plan provision, to prescribe, amend, and rescind rules and regulations relating to this Plan, and to make all other determinations that it deems necessary or advisable to administer this Plan. The Committee may appoint such agents to assist in administration of this Plan, other than Eligible Directors, as the Committee deems appropriate. The Committee's interpretation of this Plan and any action it takes -4- with respect to allocations of Stock Units pursuant thereto is final and binding on all affected parties. 3. AWARDS 3.1 In addition to his or her Cash Retainer, each person who is an Eligible Director on the first day of each Plan Year will receive an Award for that Plan Year. The dollar amount of the Award will equal 100% of that Eligible Director's Cash Retainer for that Plan Year. 3.2 In addition to his or her Cash Retainer, each person who first becomes an Eligible Director on a day other than the first day of a Plan Year will receive an Award for that Plan Year. The dollar amount of the Award will equal 100% of that Eligible Director's Cash Retainer for that Plan Year. 3.3 Subject to Section 6.2, each Award will be fully vested when made. Subject to Section 6.2, if an Eligible Director dies, becomes Disabled, retires, or otherwise terminates service as a director during a Plan Year, he or she will nevertheless be entitled to his or her entire Award for that Plan Year. 4. ACCOUNTS 4.1 For each Eligible Director, the Company will establish and maintain a bookkeeping account ("Account") in which all Stock Units allocable to the Eligible Director due to his or her participation in this Plan will be credited. 4.2 Effective as of the first day of each Plan Year, there will be allocated to each Eligible Director's Account a number (to four decimal places) of Stock Units that is equal to: (a) the dollar amount of the Eligible Director's Award for that Plan Year; divided by (b) the Market Price on the last trading day before the allocation date. EXAMPLE: If an Eligible Director is due to receive $40,000 as his or her annual Award pursuant to this Plan, and if the Market Price per Share is $21 on the valuation date, then he or she will receive an allocation of Stock Units determined by the formula $40,000 / $21, or 1,904.7619 Stock Units. 4.3 Effective as of the day (unless it is the first day of a Plan Year) on which a person first becomes an Eligible Director, there will be allocated to that Eligible Director's Account a number (to four decimal places) of Stock Units that is equal to: (a) the dollar amount of the Eligible Director's Award for that Plan Year; divided by (b) the higher of-- -5- (1) the Market Price on the last trading day before the allocation date, or (2) the Market Price on the last trading day of the preceding Plan Year. EXAMPLE: If a person first becomes an Eligible Director on October 1 of a Plan Year and is due to receive $10,000 as his or her annual Award pursuant to this Plan for that Plan Year, and if the Market Price per Share was $21 on the last trading day of the preceding Plan Year and $32 on the last trading day before October 1, then he or she will receive an allocation of Stock Units determined by the formula $10,000 / $32, or 312.5 Stock Units. 4.4 On the payment date for any cash dividend or other cash distribution declared on the Shares, there will be allocated to each Eligible Director's Account that number (to four decimal places) of Stock Units that is equal to: (a) the total number of Stock Units that on the related record date were in the Eligible Director's Account; multiplied by (b) the dollar amount per Share of the cash dividend or other distribution; divided by (c) the Market Price on the dividend or distribution payment date. 5. NO EFFECT ON DIRECTOR'S ELECTION OR TERM OF OFFICE Nothing contained in this Plan entitles an Eligible Director to serve beyond the term for which he or she was elected to the Board. Nothing in this Plan is to be construed to restrict the shareholders' right to elect any person a Director of the Company in accordance with the Articles of Incorporation and Bylaws. 6. PAYMENT OF AWARDS 6.1 Subject to the provisions of Sections 6.2 and 6.3, within 30 days after the first to occur of (1) an Eligible Director's Determination Date, or (2) a Company Change of Control, the Company will pay to the Director an amount in cash equal to: (a) the number of Stock Units then credited to his or her Account; multiplied by (b) the Market Price per Share on the Determination Date or the date the Company Change of Control occurred, as the case may be. -6- 6.2 An Eligible Director's Account will be forfeited if his or her service on the Board is terminated, voluntarily or otherwise, for any Reason denominated below (which shall be determined by the Committee). "Reason," for the sole purpose of determining whether an Eligible Director's Awards are to be forfeited, will be deemed to exist where: (a) the Eligible Director breaches any material written rules, regulations, or policies of the Board, now existing or enacted in the future, that are uniformly applied to all Eligible Directors or that are promulgated for general application to Directors of the Company; (b) the Eligible Director willfully and repeatedly fails to substantially perform the duties of his or her tenure (other than any such failure resulting from incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to him or her by the Chairman of the Board, which demand specifically identifies the manner in which the Chairman of the Board believes that the Eligible Director has not substantially performed his or her duties; (c) the Eligible Director is convicted of a felony under state or federal law, or commits a crime involving moral turpitude; or (d) the Eligible Director embezzles or misappropriates any property belonging to the Company such that he may be subject to criminal prosecution, or the Eligible Director intentionally and materially injures the Company, its personnel, or its property. 6.3 If an Eligible Director's Determination Date occurs due to death, or if he or she dies before payment pursuant to Section 6.1, then the amount payable shall be paid to the beneficiary or beneficiaries designated in the Eligible Director's written beneficiary designation filed with the Committee, or if no valid beneficiary designation has been filed, the legally appointed personal representative of the Eligible Director's estate. If no such representative is appointed by the time payment is due, then the Company will hold the payment without interest until appointment occurs or proper claim for the payment otherwise is made of the Company by the person or persons entitled to it. If the Company is notified that an Eligible Director has been adjudicated mentally incompetent as of the time any amount is payable under this Plan to the Eligible Director, or if it otherwise is demonstrated to the satisfaction of the Committee that such mental incapacity then exists by a person authorized by a durable power of attorney or similar document to attend to the Eligible Director's financial affairs, then any cash so payable will be delivered to the Eligible Director's legally appointed guardian or conservator or, if none has been appointed, the holder of the power of attorney or similar document. -7- 7. ADJUSTMENTS In the event of any non-cash dividend or other distribution, or any stock split, reverse stock split, recapitalization, reorganization, split-up, spin-off, merger, consolidation, share exchange, or other like change in the capital or corporate structure of the Company affecting the Shares, there will be made such adjustment or adjustments (if any) in the number of Stock Units credited to the Accounts of Eligible Directors as the Committee determines to be appropriate in light of such event in order to continue to make available the benefits intended by this Plan, but no adjustment will be required by reason of any sales of Shares or other Company securities by the Company at any price, whether below, or at or above Market Price, and whether by or pursuant to warrant, option, right, conversion right or privilege, or otherwise. 8. MISCELLANEOUS MATTERS 8.1 Accounts are not intended to be and will not be trust accounts for the benefit of any Eligible Director or other person, nor will the establishment and maintenance of an Account afford any Eligible Director or other person any right or interest in any asset the Company may determine to earmark for future payment of benefits under this Plan. Rather, benefits payable under this Plan are intended to be unfunded for tax purposes, and the sole right of an Eligible Director or beneficiary or other successor in interest of an Eligible Director with respect to his or her Account shall be the right as an unsecured general creditor of the Company to claim any cash benefit to which the Eligible Director becomes entitled after his or her Determination Date or a Company Change of Control pursuant to the terms and conditions of this Plan. 8.2 An Eligible Director's right and interest in his or her Account are not subject in any manner to anticipation, alienation, sale, assignment, pledge, encumbrance, attachment, garnishment for the benefit of creditors of the Eligible Director, or other transfer whatsoever, except that such right and interest may be transferred by: (a) will or the laws of descent and distribution; or (b) a domestic relations order if the Committee, in its discretion, establishes procedures permitting the Company to honor such an order. 8.3 Nothing in this Plan obligates any Eligible Director to continue as a director of the Company or the Company or to accept any nomination for a future term as director, or requires the Company to nominate or cause the nomination of any Eligible Director for a future term as a director. 8.4 Each Eligible Director will remain responsible for all applicable taxes associated with Awards under this Plan. -8- 8.5 This Plan is to be governed by and construed, enforced, and administered in accordance with the laws of the State of Michigan excluding any such laws that direct an application of the laws of any other jurisdiction. At all times, this Plan will also be interpreted and administered to maintain intended income tax deferral in accordance with Code Section 409A and regulations and other guidance issued under Code Section 409A. The Company and the Committee will be subject to suit regarding this Plan only in the courts of the State of Michigan, and the Company will fully indemnify and defend the Board and the Committee with respect to any actions relating to this Plan taken in good faith by either of those bodies or their members. 8.6 This Plan was adopted by the Board on December 17, 2007 and takes effect as of January 1, 2008. 8.7 The Board may at any time and from time to time amend, modify, suspend, or terminate this Plan, except that none of those actions by the Board can adversely affect the rights or benefits of an Eligible Director without the Eligible Director's consent. -9- EX-10.29 5 k24815exv10w29.txt LETTER DATED SEPTEMBER 17, 2007 EXHIBIT 10.29 EXECUTIVE OFFICES (TECUMSEH LOGO) Ed Buker President and Chief Executive Officer September 17, 2007 Mr. James Wainwright 71 Carnoustie Lane Springboro, OH 45066 Dear Jim: I am pleased you've decided to join Tecumseh Products Company, attached is the "Term Sheet" for the Operating Executive position we have discussed. This has been approved by the Board's Compensation Committee and if you agree, please sign below and fax back to me at (5l7) 423-0200. Upon acceptance, you will receive paperwork for the usual in-hiring process. I believe that your joining our team will be a significant addition to the Company. Best Regards, Ed Buker President and Chief Executive Officer I hereby agree to this letter and term sheet /s/ James E. Wainright - ------------------------------------ --------------------- James E. Wainright Date Attachment Las 100 E Patterson St, Tecumseh, MI 49286 www.tecumseh.com Phone: 517-423-8550/Fax: 517-423-8619 TERM SHEET AUGUST 20, 2007 Company: Tecumseh Products Company Executive: James Wainright Position/Title: Top Operations Executive (exact title yet to be agreed upon) Term of Employment: "At will" employee with no employment agreement and no fixed term, but Executive will be covered by a formal change of control agreement. Compensation: Annual Base Salary: $400,000 payable in accordance with normal payroll practices and procedures of the Company, subject to normal withholdings. Annual Performance Bonus: Target bonus equal to 75 percent of salary paid during the year. The actual bonus earned and paid will be dependent on achievement of Company and individual performance objectives. The maximum bonus opportunity will be set at two (2) times the target. Thus, actual bonuses may range from zero to 150 percent of salary depending on performance achievement. Bonuses will be governed under a bonus plan that will be approved by the Board of Directors and shareholders. The bonus plan will be administered by the Board, or a committee thereof, which will have full and final authority regarding the plan including, among other matters, the establishment of annual performance measures and goals. Annual Long-Term Incentive Grants: Annual grants of long-term incentives with a grant date present value equal to 45 percent of the annual base salary rate plus target bonus then in effect. It is envisioned that such incentives will be granted pursuant to the Tecumseh Long-Term Incentive Plan that was recently approved by the Board of Directors and that will be presented to shareholders for their review and approval early next year. The Plan provides for the grants of stock options, restricted stock, restricted stock units, stock awards
Page 1 of 4 and performance shares/units/awards. The terms and conditions of grants will be established by the Board or a committee thereof at the time of each such grant. In the event shareholders do not approve the Plan, the Company will grant either stock appreciation rights or contingent cash-based performance awards of equivalent value to the executive and will set the specific terms and conditions of each such award at the time of grants, which terms and conditions are expected to mirror those that would have applied to the annual equity grants. Make-Whole Payment. Executive has represented to the Company that as a result of his resignation from his then current employer, in order to accept the Company's offer of employment and become employed by the Company, Executive has become ineligible to receive certain payments he was entitled to receive from his former employer anticipated to be Eighty Four Thousand Dollars ($84,000) the (the "Make-Whole Amount"). Following the Effective Date and subject to Executive's presentation of appropriate documentation to the Company, the Company agrees to pay the Mark-Whole Amount to Executive not later than March 31, 2008. Benefits: Executive will be provided with health, disability and life insurance and retirement, vacation and similar non-cash and non-equity benefits available to other senior executives. Relocation Expenses: The Company will reimburse the Executive for reasonable and documented expenses incurred in connection with relocation to the Detroit, Michigan area. The details of relocation to be discussed prior to expenses being incurred. Compensation Upon Voluntary Termination: Accrued but unpaid annual cash compensation and vacation days, ability to exercise then vested stock options and settlement of then vested restricted stock units. All unvested options and restricted stock units will be cancelled. No provision will be made for severance. Compensation Upon Termination Without Cause: Accrued but unpaid annual cash compensation and vacation days, plus a pro rata bonus for the year of termination, plus one (1) times the annual salary rate then in effect, plus the right to exercise vested stock options for up to 180 days following termination.
Page 2 of 4 Compensation In The Event Of A Change Of Control: In the event of a Change of Control within the Executive's first year of employment, one-half (1/2) of all options and restricted stock granted to the Executive will vest immediately. In the event of a Change of Control following the Executive's first year of employment, all options and restricted stock granted to the Executive will vest immediately. In addition, the failure to offer the Executive an equivalent position in the surviving entity will entitle the Executive to resign and receive additional compensation equal to one times (1) the base salary rate then in effect plus one times (1) the annual target bonus. Compensation Upon Termination For Cause: Accrued but unpaid annual cash compensation and vacation days. All options and restricted stock units, whether or not vested, will be forfeited. Cause means any of the following: (i) the Executives continuing substantial failure to perform his duties for the Company (other than as a result of incapacity due to mental or physical illness) after a written demand is delivered to the Executive by the Company's Board of Directors; (ii) the Executive's willful engaging in illegal conduct or gross misconduct that is materially and demonstrably injurious to the Company; (iii) the Executive's conviction of a felony or his plea of guilty or nolo contendere to a felony, (iv) the Executive's willful and material breach of his confidentiality obligations under local law and/or Tecumseh's code of conduct; or (v) Executive's physical or mental inability to perform his essential job functions even with a reasonable accommodation(s) for not less than 90 consecutive days. Delay Of Severance Payments: To the extent (i) any post-termination payments to which Executive becomes entitled under this Agreement or any agreement or plan referenced herein constitute deferred compensation subject to Section 409A of the Internal Revenue Code of 1986, as amended (the "Code") and (ii) Executive is deemed at the time of such termination of employment to be a "specified employee" under Section 409A of the Code, then such payment will not be made or commence until the earliest of (x) the expiration of the six (6) month period measured from the date of Executive's "separation from service" (as such term is defined in Treasury Regulations under Section 409A of the Code and any other guidance issued under Section 409A of the Code) with the Company; (y) the date Executive becomes "disabled" (as defined in Section 409A of the Code); and (z)
Page 3 of 4 the date of Executive's death following such separation from service. Upon the expiration of the applicable deferral period, any payments which would have otherwise been made during that period (whether in a single sum or in installments) in the absence of this provision (together with reasonable accrued interest) will be paid to Executive or Executive's beneficiary in one lump sum.
EX-21 6 k24815exv21.txt SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES OF THE COMPANY The following is a list of subsidiaries of the Company as of December 31, 2007 except that certain subsidiaries, the sole function of which is to hold the stock of operating subsidiaries, which in the aggregate do not constitute significant subsidiaries, have been omitted. Subject to the foregoing in each case, 100% of the voting securities (except for directors' qualifying shares, if required) are owned by the subsidiary's immediate parent as indicated by indentation.
STATE OR COUNTRY NAME OF SUBSIDIARIES OF THE COMPANY OF ORGANIZATION - ----------------------------------- ---------------- Tecumseh Compressor Company Delaware M.P. Pumps, Inc. Michigan Tecumseh do Brasil, Ltda. Brazil Tecumseh do Brasil Europe Srl. Italy Tecumseh do Brasil USA Delaware Tecumseh Products Company of Canada, Ltd. Canada Tecumseh France S.A. France Tecumseh Services Sarl France Tecumseh Europe SA France Societe Immobiliere de Construction de la Verpilliere France Tecumseh Europe-Far East Sdn. Bhd. Malaysia Tecumseh Products India Private Ltd. India
EX-24 7 k24815exv24.txt POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY WITH RESPECT TO ANNUAL REPORT OF TECUMSEH PRODUCTS COMPANY ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2007 Each of the undersigned, a director or officer of TECUMSEH PRODUCTS COMPANY, appoints each of Edwin L. Buker and James S. Nicholson as his true and lawful attorney and agent to do any and all acts and things and execute any and all instruments which the attorney and agent may deem necessary or advisable in order to enable TECUMSEH PRODUCTS COMPANY to comply with the Securities Exchange Act of 1934, and with any requirements of the Securities and Exchange Commission, in connection with the Annual Report of TECUMSEH PRODUCTS COMPANY on Form 10-K for the year ended December 31, 2007 and any and all amendments thereto, including, but not limited to, power and authority to sign his name (whether on behalf of TECUMSEH PRODUCTS COMPANY, or as a director or officer of TECUMSEH PRODUCTS COMPANY, or otherwise) to such instruments and to such Annual Report and any amendments thereto, and to file them with the Securities and Exchange Commission. The undersigned ratifies and confirms all that either of the attorneys and agents shall do or cause to be done by virtue hereof. Any one of the attorneys and agents shall have, and may exercise, all the powers conferred by this instrument.
Signature Date /s/ EDWIN L. BUKER March 4, 2008 - ---------------------------------------- Edwin L. Buker /s/ JAMES S. NICHOLSON March 4, 2008 - ---------------------------------------- James S. Nicholson /s/ DAVID M. RISLEY March 4, 2008 - ---------------------------------------- David M. Risley /s/ KENT B. HERRICK March 4, 2008 - ---------------------------------------- Kent B. Herrick /s/ PETER M. BANKS March 4, 2008 - ---------------------------------------- Peter M. Banks /s/ JEFFRY N. QUINN March 4, 2008 - ---------------------------------------- Jeffry N. Quinn /s/ STEVEN J. LEBOWSKI March 4, 2008 - ---------------------------------------- Steven J. Lebowski /s/ WILLIAM E. AZIZ March 4, 2008 - ---------------------------------------- William E. Aziz
EX-31.1 8 k24815exv31w1.txt CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) Exhibit 31.1 RULE 13A-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Edwin L. Buker, certify that: 1. I have reviewed this Annual Report on Form 10-K of Tecumseh Products Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Audit Committee of the registrant's Board of Directors (or persons performing the equivalent function): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: March 14, 2008 BY: /s/ EDWIN L. BUKER ------------------------------------------ Edwin L. Buker President and Chief Executive Officer EX-31.2 9 k24815exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A) Exhibit 31.2 RULE 13A-14(a) CERTIFICATION OF CHIEF FINANCIAL OFFICER I, James S. Nicholson, certify that: 1. I have reviewed this Annual Report on Form 10-K of Tecumseh Products Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Audit Committee of the registrant's Board of Directors (or persons performing the equivalent function): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: March 14, 2008 BY: /s/ JAMES S. NICHOLSON -------------------------------------- James S. Nicholson Vice President, Treasurer and Chief Financial Officer EX-32.1 10 k24815exv32w1.txt CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(B) Exhibit 32.1 CERTIFICATION OF CHIEF OPERATING OFFICER In connection with the Annual Report of Tecumseh Products Company (the "Company") on Form 10-K for the period ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Form 10-K"), I, Edwin L. Buker, Chief Operating 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-K 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-K fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 14, 2008 BY: /s/ EDWIN L. BUKER ------------------------------------- Edwin L. Buker President and Chief Executive Officer EX-32.2 11 k24815exv32w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(B) Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER In connection with the Annual Report of Tecumseh Products Company (the "Company") on Form 10-K for the period ended December 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Form 10-K"), 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-K 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-K fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 14, 2008 BY: /s/ JAMES S. NICHOLSON ------------------------------------ James S. Nicholson Vice President, Treasurer, and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----