EXHIBIT 10(u)
CUMMINS ENGINE COMPANY, INC.
EXECUTIVE RETENTION PLAN
___________________________
(Effective as of October 10, 1995)
__________________________________
The Board of Directors of Cummins Engine Company, Inc. ("the Company")
has determined that it is in the best interests of the Company and its
shareholders to assure that the Company will have the continued
dedication of its executives, notwithstanding the possibility, threat
or occurrence of a Change of Control (as defined below) on the
Company. The Board of Directors ("the Board") believes it is
imperative to diminish the inevitable distraction of the executives by
virtue of the personal uncertainties and risks created by a pending or
threatened Change of Control and to encourage the executives' full
attention and dedication to the Company currently and in the event of
any threatened or pending Change of Control and to provide the
executives with updated compensation and benefits arrangements upon a
Change of Control which ensure that the compensation and benefits
expectations of the executives will be satisfied and which are
competitive with those of other major U.S. industrial corporations.
In order to accomplish these objectives, the Board has caused the
Company to adopt this Cummins Engine Company, Inc. Executive Retention
Plan ("the Plan").
This Plan is in addition to but separate and distinct from and does
not supersede or amend the Company's Key Employee Compensation
Protection Plan, effective as of April 3, 1984 ("the 1984 Plan").
Therefore, in the event of a Change of Control, amounts are payable
under the terms of the 1984 Plan and this Plan. This Plan does,
however, supersede any other severance pay or salary continuance plan
or program adopted by the Company to retain and protect its employees
in the event of a Change of Control.
1. Definitions. In addition to other terms defined elsewhere herein,
the following terms shall have the following meanings, such meanings
to be equally applicable to both the singular and plural forms of the
terms defined.
(a) "Change of Control" means the occurrence of any of the following:
(i) any person becomes the beneficial owner, directly or
indirectly, of securities of the Company having at least 25
percent of the voting power of the Company's then
outstanding securities;
(ii) the shareholders of the Company shall approve any
merger or other business combination of the Company or a
subsidiary of the Company, sale of the Company's assets or
combination of the foregoing transactions (a "Transaction")
other than a Transaction immediately following which the
shareholders of the Company immediately prior to the
Transaction and any trustee or fiduciary of any Company
employee benefit plan own at least 50 percent of the voting
securities of the surviving company (or its parent)
immediately following the Transaction;
(iii) within any 24 month period, the persons who were
directors immediately before the beginning of such period
(the "Incumbent Directors") shall cease (for any reason
other than death) to constitute at least a majority of the
Board or the board of directors of a successor to the
Company. For this purpose, any director who was not a
director at the beginning of such period shall be deemed to
be an Incumbent Director if such director was elected to the
Board by, or on the recommendation of or with the approval
of, at least two-thirds of the directors who then qualified
as Incumbent Directors (so long as such director was not
nominated by a person who has entered into an agreement to
affect a Change of Control).
(b) "Designated Officers" means certain officers of the Company
designated by the Board from time-to-time to receive payments and
benefits as described in paragraph 2(a) of the Plan.
(c) "Key Employee" means an employee of the Company or any of its
subsidiaries whose salary grade classification is 10 or higher (or
equivalent subsidiary salary grade classification) and who is not an
officer.
(d) "Officer" means an officer of the Company who is not a
Designated Officer.
(e) "Participant" means a Designated Officer, Officer or Key
Employee, as the context requires.
(f) "Termination for Cause" means a termination of a
Participant's employment by the Company due to (i) the willful and
continued failure of the Participant to perform substantially the
Participant's duties with the Company or one of its affiliates (other
than any such failure resulting from incapacity due to physical or
mental illness), after a written demand for substantial performance is
delivered to the Participant by the Board or the Chief Executive
Officer of the Company which specifically identifies the manner in
which the Board or Chief Executive Officer believes that the
Participant has not substantially performed the Participant's duties
or (ii) the willful engaging by the Participant in illegal conduct or
gross misconduct which is materially and demonstrably injurious to the
Company.
For purposes of this definition, no act or failure to act on the part
of the Participant shall be considered "willful" unless it is done, or
omitted to be done, by the Participant in bad faith or without
reasonable belief that the Participant's action or omission was in the
best interests of the Company. Any act, or failure to act, based upon
authority given pursuant to a resolution duly adopted by the Board or
upon the instructions of the Chief Executive Officer or a senior
officer of the Company or based upon the advice of counsel for the
Company shall be conclusively presumed to be done, or omitted to be
done, by the Executive in good faith and in the best interests of the
Company. The cessation of employment of the Participant shall not be
deemed to be a termination for Cause unless and until there shall have
been delivered to the Participant a copy of a resolution duly adopted
by the affirmative vote of not less than three quarters of the entire
membership of the Board at a meeting of the Board called and held for
such purpose (after reasonable notice is provided to the Participant
and the Participant is given an opportunity, together with counsel, to
be heard before the Board), finding that, in the good faith opinion of
the Board, the Participant is guilty of the conduct described in
subparagraph (i) or (ii) above, and specifying the particulars
thereof in detail.
(g) "Termination for Good Reason" means a termination of a
Participant's employment by the Participant within 90 days following
(i) the assignment to the Participant of any duties inconsistent in
any respect with the Participant's position (including status,
offices, titles and reporting requirements), authority, duties or
responsibilities, or any other action by the Company which results in
a diminution in such position, authority, duties or responsibilities,
excluding for this purpose an isolated, insubstantial and inadvertent
action not taken in bad faith and which is remedied by the Company
promptly after receipt of notice thereof given by the Participant,
(ii) the Company's requiring the Participant, to be based at any
office or location other than the location at which the Participant is
based on the effective date of the Change of Control or the Company's
requiring the Participant to travel on Company business to a
substantially greater extent than required immediately prior to the
effective date of the Change of Control, (iii) a reduction in
Participant's annual base salary or participation level or opportunity
in any bonus or other incentive compensation plan or program of the
Company, (iv) a material reduction in the aggregate value of the
pension and welfare benefits provided to Participant from those in
effect on the effective date of the Change of Control (other than a
reduction which is proportionate to the reductions applicable to other
senior participants pursuant to a cost-saving plan that includes all
senior participants) or (v) a material breach of any provision of this
Plan by the Company.
For purposes of this definition, any good faith determination of "Good
Reason" made by the Participant shall be conclusive. Anything in this
Plan to the contrary notwithstanding, a termination by the Participant
for any reason during the 30-day period immediately following the
first anniversary of the effective date of the Change of Control shall
be deemed to be a Termination for Good Reason for all purposes of this
Plan.
(h) "Termination Without Cause" means any termination of the
Participant's employment by the Company other than a Termination for
Cause.
2. Termination Payments. In the event of a Termination Without Cause
or a Termination for Good Reason (in either such case a "Termination")
before a second anniversary of the effective date of any Change of
Control, and in addition to amounts payable and the periods of time
during which benefits continue to be provided under the 1984 Plan, the
Company shall pay to the Participant and provide him or her with the
following:
(a) In the case of a Designated Officer, for a period of twenty-
four (24) months following the date of Termination, the Company shall
continue to pay such Participant's base salary on a monthly basis at
the annual rate in effect immediately prior to the date of Termination
or the effective date of the Change of Control, whichever is higher,
plus eight (8) quarterly bonus payments in the amount of the
Participant's Target Bonus payments as calculated under, and payable
at the times contemplated in, the Company's Senior Executive Bonus
Plan or Target Bonus Plan (each a "Bonus Plan") in effect prior to the
Change of Control and adjusted as provided in the next two sentences.
In making the calculations under the Bonus Plan, the Participant's
"Base Salary" (as defined therein) shall be the annual rate in effect
immediately prior to the date of Termination or the effective date of
the Change of Control, whichever is higher, and the applicable "Bonus
Factor" (as defined therein) in each case shall be 1.0 without regard
to the Company's actual performance under the performance measures
during the measurement period.
(b) In the case of an Officer or a Key Employee, for a period of
twelve (12) months following the date of Termination, the Company
shall continue to pay such Participant's base salary on a monthly
basis at the annual rate in effect immediately prior to the date of
Termination or the effective date of the Change of Control, whichever
is higher, plus four (4) quarterly bonus payments in the amount of the
Participant's Target Bonus payments as calculated under, and payable
at the times contemplated in, the Company's Target Bonus Plan ("Bonus
Plan") in effect prior to the Change of Control and adjusted as
provided in the next two sentences. In making the calculations under
the Bonus Plan, the Participant's "Base Salary" (as defined therein)
shall be the annual rate in effect immediately prior to the date of
Termination or the effective date of the Change of Control, whichever
is higher, and the applicable "Bonus Factor" (as defined therein) in
each case shall be 1.0 without regard to the Company's actual
performance under the performance measures during the measurement
period.
(c) In addition to the payments described in (a) and (b) above,
the Participant shall continue to be entitled to all benefits and
service credits for benefits under all pension, life insurance,
medical, dental, disability, financial advisory and any other employee
benefit plans, policies, programs and arrangements of the Company
applicable to the Participant as if the Participant were still
employed during an additional two (2) year period in the case of a
Designated Officer and one (1) year period in the case of an Officer
or Key Employee.
(d) If, despite the provisions of paragraph 2(c), benefits or
service credits under any such employee benefit plan may not be
payable or provided under the plan to such Participant or his or her
dependents, beneficiaries and estate because he or she is no longer an
active employee of the Company, the Company itself shall, to the
extent not payable or provided by such plan, pay or provide for
payment of the lump-sum present cash value of such benefits to such
Participant, dependents, beneficiaries and estate (on an after-tax
basis where such benefits if provided through the employee benefit
plan would not be taxable to the Participant).
3. Lump Sum Payment. The Participant may elect, within 60 days
following the date of a Termination, to be paid a lump sum in cash, in
lieu of all termination payments provided in paragraph 2, in any
amount equal to the sum of the following:
(a) an amount equal to salary payments for the number of months
applicable to the Participant as specified in paragraph 2 ("the
Applicable Period") at the monthly rate in effect immediately prior to
the date of Termination or the effective date of the Change of
Control, whichever is higher, and
(b) an amount equal to quarterly bonus payments for the
Applicable Period in the amount of the Participant's Bonus Plan
payments calculated in accordance with the provisions of paragraph
2(a) or 2(b), as applicable.
In the event that a Participant makes an election pursuant to this
paragraph 3 to receive a lump-sum cash payment of the aggregate amount
determined pursuant to paragraph (a) and (b), then, in addition to
such amount, the Participant shall receive (i) in addition to the
benefits to be provided under any pension benefit plan and
supplemental pension plan maintained by the Company, the pension
benefits that would have accrued under such pension benefit plan and
supplemental pension plan if the Participant had remained in the
employ of the Company for the Applicable Period after the date of
Termination, which benefits will be paid concurrently with, and in
addition to, the benefits provided under such pension benefit plan and
supplemental pension plan and (ii) the employee benefits (including,
but not limited to, coverage under any life insurance, medical,
dental, disability and financial advisory arrangements or programs) to
which the Participant would have been entitled under all employee
benefit plans, programs, policies or arrangements maintained by the
Company if the Participant had remained in its employ for the
Applicable Period after the date of Termination, or if elected by the
Participant, the lump-sum present cash value of the amounts described
in such clauses (i) and (ii) (on an after-tax basis where such
benefits if provided through the employee benefit plan would not be
taxable to the Participant). The amounts of any lump-sum payments
described in the preceding sentence shall be determined and such
payments shall be made as soon as possible following the Participant's
election.
4. Nonexclusivity of Right. Nothing in this Plan shall prevent or
limit any Participant's continuing or future participation in any
plan, program, policy or practice provided by the Company or any of
its affiliated companies and for which the Participant may qualify,
nor shall anything herein limit or otherwise affect such rights as a
Participant may have under any contract or agreement with the Company
or any of its affiliated companies. Amounts which are vested benefits
or which a Participant is otherwise entitled to receive under any
plan, policy, practice or program of or any contract or agreement with
the Company or any of its affiliated companies at or subsequent to a
Change of Control or Termination shall be payable in accordance with
such plan, policy, practice or program or contract or agreement except
as explicitly modified by this Plan.
5. Full Settlement. The Company's obligation to make the payments
provided for in this Plan and otherwise to perform its obligations
hereunder shall not be affected by any set-off, counterclaim,
recoupment, defense or other claim, right or action which the Company
may have against a Participant or others. In no event shall a
Participant be obligated to seek other employment or take any other
action by way of mitigation of the amounts payable to the Participant
under any of the provisions of this Plan and such amounts shall not be
reduced whether or not the Participant obtains other employment. The
Company agrees to pay as incurred, to the full extent permitted by
law, all legal fees and expenses which the Participant may reasonably
incur as a result of any contest (regardless of the outcome thereof)
by the Company, the Participant or others of the validity or
enforceability of, or liability under, any provision of this Plan or
any guarantee of performance hereof (including as a result of any
contest by the Participant about the amount of any payment pursuant to
this Plan), plus in each case interest on any delayed payment at the
applicable federal rate provided for in Section 1274(d) of the
Internal Revenue Code of 1986, as amended ("the Code").
6. Certain Additional Payments. If any payments or benefits paid by
the Company pursuant to this Plan ("Plan Payments") causes such
payments and any other payments (including those under the 1984 Plan)
made in connection with a Change of Control (collectively, the "Total
Payments") to be subject to the tax (the "Excise Tax") imposed by
Section 4999 of the Code, the Company shall pay the Participant an
additional amount (the "Gross-Up Payment") such that the net amount
retained by the Participant, after deduction of any Excise Tax paid or
payable (and not grossed-up under a similar provision of another plan
or program sponsored by the Company) on the Plan Payments and such
other Total Payments and any federal, state and local income tax and
Excise Tax upon the payment provided for by this paragraph 6, shall be
equal to the Plan Payments and such other Total Payments. If any of
such other Total Payments are subject to the Excise Tax without regard
to Plan Payments, a Gross-Up Payment shall be made, but shall only be
equal to the increase in the Excise Tax (plus any federal, state and
local income tax and Excise Tax on such Gross-Up Payment) arising
solely as a result of Plan Payments, payments from the 1984 Plan and
any other plan or program of the Company not providing for Gross-Up
Payments.
For purpose of determining whether any of the payments described above
will be subject to the Excise Tax and the amount of such Excise Tax,
(i) any other payments or benefits received or to be received by the
Executive in connection with a Change of Control of the Company,
whether payable pursuant to the terms of this Plan or any other plan,
arrangement or agreement with the Company, its successors, any person
whose actions result in a Change of Control of the Company or any
corporation affiliated (or which, as a result of the completion of a
transaction causing a Change of Control, will become affiliated) with
the Company within the meaning of Section 1504 of the Code shall be
treated as "parachute payments" within the meaning of Section 280G(b)
(2) of the Code, and all "excess parachute payments" within the
meaning of Section 280G(b) (1) shall be treated as subject to the
Excise Tax, unless in the opinion of tax counsel selected by the
Company's auditors and acceptable to the Participant, the payments (in
whole or in part) do not constitute parachute payments, or such excess
parachute payments (in whole or in part) represent reasonable
compensation for services actually rendered within the meaning of
Section 280G(b) (4) of the Code and are in excess of the base amount
within the meaning of Section 280G(b) (3) of the Code, or are
otherwise not subject to the Excise Tax, (ii) the amount of the
payments that shall be treated as subject to the Excise Tax shall be
equal to the amount of excess parachute payments within the meaning of
Section 280G(b) (1) (after applying clause (i), above), and (iii) the
value of any non-cash benefits or any deferred payment or benefit
shall be determined by the Company's auditors in accordance with the
principles of Section 280G(d) (4) of the Code. For purposes of
determining the amount of the Gross-Up Payment, the Executive shall be
deemed to pay federal income taxes at the highest marginal rate of
federal income taxation in the relevant calendar year and state and
local income taxes at the highest marginal rate of taxation in the
state and locality of the Participant's residence for the relevant
calendar year, net of the maximum reduction in federal income taxes
which could be obtained from deduction of such state and local taxes.
In the event that the Excise Tax is subsequently determined to be less
than the amount taken into account hereunder at the time of payment,
the Participant shall repay to the Company at the time that the amount
of such reduction in Excise Tax is finally determined the portion of
the Gross-Up Payment attributable to such reduction (plus the portion
of the Gross-Up Payment attributable to the Excise Tax and federal and
state and local income tax imposed on the Gross-up Payment being
repaid by the Participant if such repayment results in a reduction in
Excise Tax and/or a federal and state and local income tax deduction)
plus interest on the amount of such repayment at the rate provided in
Section 1274(d) of the Code. In the event that the Excise Tax is
determined to exceed the amount taken into account hereunder at the
time of the Gross-Up Payment (including by reason of any payment the
existence or amount of which cannot be determined at the time of the
Gross-Up Payment), the Company shall make an additional Gross-Up
Payment in respect to such excess at the time that the amount of such
excess is finally determined.
7. Successors. (a) Benefits under this Plan are personal to the
Participant and without the prior written consent of the Company shall
not be assignable by the Participant otherwise than by will or the
laws of descent and distribution. This Plan shall inure to the
benefit of and be enforceable by the Participant's legal
representatives.
(b) This Plan shall inure to the benefit of and be binding upon
the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to
assume expressly and agree to perform this Plan in the same manner and
to the same extent that the Company would be required to perform it if
no such succession had taken place. As used in this Plan, "Company"
shall mean the Company as herein before defined and any successor to
its business and/or assets as aforesaid which assumes and agrees to
perform this Plan by operation of law, or otherwise.
8. Miscellaneous.
(a) This Plan shall be governed by and construed in accordance
with the laws of the State of Indiana, without reference to principles
of conflict of laws. The captions of this Plan are not part of the
provisions hereof and shall have no force or effect. This Plan may
not be amended or modified to reduce any Participant's benefits
otherwise than with the written consent of the Participant or the
Participant's successor or legal representative.
(b) The invalidity or unenforceability of any provision of this
Plan shall not affect the validity or enforceability of any other
provision of this Plan.
(c) The Company may withhold from any amounts payable under this
Plan such federal, state, local or foreign taxes as shall be required
to be withheld pursuant to any applicable law or regulation.
(d) The Participant's failure to insist upon strict compliance
with any provision of this Plan or the failure to assert any right the
Participant may have hereunder, including, without limitation, the
right of the Participant to terminate employment for Good Reason as
defined in paragraph 1(g) of this Plan, shall not be deemed to be a
waiver of such provision or right or any other provision or right of
this Plan.
(e) All the foregoing severance and benefit arrangements shall be
communicated to each Participant in this Plan and shall be generally
described in filings with the Securities and Exchange Commission and
to the shareholders of the Company, all to the extent deemed necessary
or desirable by the Company, in order that each Participant shall be
deemed to have continued his employment with the Company hereafter in
good faith reliance upon this Plan.