Amendment 1
Amendment 1a
Amendment 2
 
                  Sauer Inc.
 
 
                 1998 Long-Term Incentive Plan
 
 
                 (Effective April 22, 1998)
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Contents
 
 
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Article 1. Establishment, Objectives, and Duration                           1
 
Article 2. Definitions                                                       1
 
Article 3. Administration                                                    5
 
Article 4. Shares Subject to the Plan and Maximum Awards                     6
 
Article 5. Eligibility and Participation                                     7
 
Article 6. Stock Options                                                     7
 
Article 7. Stock Appreciation Rights                                         9
 
Article 8. Restricted Stock                                                 11
 
Article 9. Performance Units and Performance Shares                         12
 
Article 10. Other Incentive Awards                                          14
 
Article 11. Performance Measures                                            14
 
Article 12. Beneficiary Designation                                         15
 
Article 13. Deferrals                                                       15
 
Article 14. Rights of Employees                                             16
 
Article 15. Change in Control                                               16
 
Article 16. Amendment, Modification, and Termination                        17
 
Article 17. Withholding                                                     17
 
Article 18. Indemnification                                                 18
 
Article 19. Successors                                                      18
 
Article 20. Legal Construction                                              18
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Sauer Inc.
1998 Long-Term Incentive Plan
 
Article 1. Establishment, Objectives, and Duration
 
      1.1 Establishment of the Plan. Sauer Inc., a Delaware corporation
(hereinafter referred to as the "Company"), hereby establishes an incentive
compensation plan to be known as the "Sauer Inc. 1998 Long-Term Incentive Plan"
(hereinafter referred to as the "Plan"), as set forth in this document. The Plan
permits the grant of Non-qualified Stock Options, Incentive Stock Options, Stock
Appreciation Rights, Restricted Stock, Performance Shares and Performance Units,
and Other Incentive Awards.
 
      Subject to approval by the Company's stockholders, the Plan shall be
effective as of April 22, 1998 (the "Effective Date") and shall remain in effect
as provided in Section 1.3 hereof.
 
      1.2 Objectives of the Plan. The objectives of the Plan are to optimize the
profitability and growth of the Company through incentives which are consistent
with the Company's goals and which link and align the personal interests of
Participants to those of the Company's stockholders; to provide Participants
with an incentive for excellence in individual performance; and to promote
teamwork among Participants.
 
      The Plan is further intended to provide flexibility to the Company in its
ability to motivate, attract, and retain the services of Participants who make
significant contributions to the Company's success and to allow Participants to
share in the success of the Company.
 
      1.3 Duration of the Plan. The Plan shall commence on the Effective Date,
as described in Section 1.1 hereof, and shall remain in effect, subject to the
right of the Board of Directors to amend or terminate the Plan at any time
pursuant to Article 16 hereof, until all Shares subject to it shall have been
purchased or acquired according to the Plan's provisions. However, in no event
may an Award be granted under the Plan on or after April 21, 2008.
 
Article 2. Definitions
 
      Whenever used in the Plan, the following terms shall have the meanings set
forth below, and when the meaning is intended, the initial letter of the word
shall be capitalized:
 
      2.1   "Award" means, individually or collectively, a grant under this Plan
            of Non-qualified Stock Options, Incentive Stock Options, Stock
            Appreciation Rights, Restricted Stock, Performance Shares or
            Performance Units, or Other Incentive Awards.
 
      2.2   "Award Agreement" means an agreement entered into by the Company and
            a Participant evidencing and setting forth the terms and provisions
            applicable to an Award granted under this Plan, in such form as the
            Committee may, from time to time, approve.
 
 
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      2.3   "Beneficial Owner" or "Beneficial Ownership" shall have the meaning
            ascribed to such term in Rule 13d-3 of the General Rules and
            Regulations under the Exchange Act.
 
      2.4   "Board" or "Board of Directors" means the Board of Directors of the
            Company.
 
      2.5   "Change in Control" of the Company means, and shall be deemed to
            have occurred upon, any of the following events:
 
            (a)   Any Person (other than those Persons in control of the Company
                  as of the Effective Date, or other than a trustee or other
                  fiduciary holding securities under an employee benefit plan of
                  the Company, or a corporation owned directly or indirectly by
                  the stockholders of the Company in substantially the same
                  proportions as their ownership of stock of the Company)
                  becomes the Beneficial Owner, directly or indirectly, of
                  securities of the Company representing thirty percent (30%) or
                  more of the combined voting power of the Company's then
                  outstanding securities; or
 
            (b)   During any period of two (2) consecutive years (not including
                  any period prior to the Effective Date), individuals who at
                  the beginning of such period constitute the Board (and any new
                  Director, whose election by the Company's stockholders was
                  approved by a vote of at least two-thirds (2/3) of the
                  Directors then still in office who either were Directors at
                  the beginning of the period or whose election or nomination
                  for election was so approved), cease for any reason to
                  constitute a majority thereof; or
 
            (c)   The stockholders of the Company approve: (i) a plan of
                  complete liquidation of the Company; or (ii) an agreement for
                  the sale or disposition of all or substantially all the
                  Company's assets; or (iii) a merger, consolidation, or
                  reorganization of the Company with or involving any other
                  corporation, other than a merger, consolidation, or
                  reorganization that would result in the voting securities of
                  the Company outstanding immediately prior thereto continuing
                  to represent (either by remaining outstanding or by being
                  converted into voting securities of the surviving entity) at
                  least fifty percent (50%) of the combined voting power of the
                  voting securities of the Company (or such surviving entity)
                  outstanding immediately after such merger, consolidation, or
                  reorganization.
 
                  However, in no event shall a "Change in Control" be deemed to
            have occurred, with respect to a Participant, if the Participant is
            part of a purchasing group which consummates the Change-in-Control
            transaction. A Participant shall be deemed "part of a purchasing
            group" for purposes of the preceding sentence if the Participant is
            an equity participant in the purchasing company or group (except for
            (i) passive ownership of less than one percent (1%) of the stock of
            the purchasing company; or (ii) ownership of equity participation in
            the purchasing company or group which is otherwise not
 
 
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            significant, as determined prior to the Change in Control by a
            majority of the nonemployee continuing Directors).
 
      2.6   "Code" means the Internal Revenue Code of 1986, as amended from time
            to time.
 
      2.7   "Committee" means the Compensation Committee of the Board, or such
            other committee appointed by the Board to administer the Plan, as
            described in Article 3 herein.
 
      2.8   "Company" means Sauer Inc., a Delaware corporation, as well as any
            successor to the Company as provided in Article 19 herein.
 
      2.9   "Director" means any individual who is a member of the Board of
            Directors of the Company.
 
      2.10  "Disability" shall have the meaning ascribed to such term in the
            Participant's governing long-term disability plan.
 
      2.11  "Effective Date" shall have the meaning ascribed to such term in
            Section 1.1 hereof.
 
      2.12  "Employee" means any employee of the Company or its Subsidiaries.
            Nonemployee Directors shall not be considered Employees under this
            Plan unless specifically designated otherwise.
 
      2.13  "Exchange Act" means the Securities Exchange Act of 1934, as amended
            from time to time, or any successor Act thereto.
 
      2.14  "Fair Market Value" shall be determined on the basis of the closing
            sale price on the New York Stock Exchange or, if there is no such
            sale on the relevant date, then on the last previous day on which a
            sale was reported. If the Shares are not traded on the New York
            Stock Exchange, Fair Market Value shall be determined by the
            Committee in its absolute discretion, such amount to be calculated
            pursuant to the formula established under the Sauer Inc. 1996
            Phantom Share Plan, which formula is hereby incorporated by
            reference and made a part hereof.
 
      2.15  "Freestanding SAR" means an SAR that is granted independently of any
            Options, as described in Article 7 herein.
 
      2.16  "Incentive Stock Option" or "ISO" means an option to purchase Shares
            granted under Article 6 herein and which is designated as an
            Incentive Stock Option and which is intended to meet the
            requirements of Code Section 422.
 
      2.17  "Insider" shall mean an individual who is, on the relevant date, an
            officer, director, or ten percent (10%) beneficial owner of any
            class of the Company's equity securities that
 
 
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            is registered pursuant to Section 12 of the Exchange Act, all as
            defined under Section 16 of the Exchange Act.
 
      2.18  "Named Executive Officer" means a Participant who, as of the date of
            vesting and/or payout of an Award, as applicable, is one of the
            group of "covered employees," as defined in the regulations
            promulgated under Code Section 162(m), or any successor statute.
 
      2.19  "Nonemployee Director" means a Director who is not also an Employee.
 
      2.20  "Non-qualified Stock Option" or "NQSO" means an option to purchase
            Shares granted under Article 6 herein and which is not intended to
            meet the requirements of Code Section 422.
 
      2.21  "Option" means an Incentive Stock Option or a Non-qualified Stock
            Option, as described in Article 6 herein.
 
      2.22  "Option Price" means the price at which a Share may be purchased by
            a Participant pursuant to an Option.
 
      2.23  "Other Incentive Award" means an award granted pursuant to Article
            10 hereof.
 
      2.24  "Participant" means any individual selected to receive an Award by
            the Committee in accordance with Article 5 and who has an
            outstanding Award granted under the Plan.
 
      2.25  "Performance-Based Exception" means the performance-based exception
            from the tax deductibility limitations of Code Section 162(m).
 
      2.26  "Performance Period" means the time period during which performance
            goals must be achieved with respect to an Award, as determined by
            the Committee.
 
      2.27  "Performance Share" means an Award granted to a Participant, as
            described in Article 9 herein.
 
      2.28  "Performance Unit" means an Award granted to a Participant, as
            described in Article 9 herein.
 
      2.29  "Period of Restriction" means the period during which the transfer
            of Shares of Restricted Stock is limited in some way (based on the
            passage of time, the achievement of performance goals, or upon the
            occurrence of other events as determined by the Committee, at its
            discretion), and the Shares are subject to a substantial risk of
            forfeiture, as provided in Article 8 herein.
 
 
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      2.30  "Person" shall have the meaning ascribed to such term in Section
            3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
            thereof, including a "group" as defined in Section 13(d) thereof.
 
      2.31  "Restricted Stock" means an Award granted to a Participant pursuant
            to Article 8 herein.
 
      2.32  "Retirement" means the normal retirement date on which a Participant
            qualifies for full retirement benefits under the Company's qualified
            retirement plan, as identified by the Committee.
 
      2.33  "Shares" means the shares of Common Stock of the Company.
 
      2.34  "Stock Appreciation Right" or "SAR" means an Award, granted alone or
            in connection with a related Option, designated as an SAR, pursuant
            to the terms of Article 7 herein.
 
      2.35  "Subsidiary" means any corporation, limited liability company,
            partnership, joint venture, affiliate, or other entity in which the
            Company has a majority voting interest.
 
      2.36  "Tandem SAR" means an SAR that is granted in connection with a
            related Option pursuant to Article 7 herein, the exercise of which
            shall require forfeiture of the right to purchase a Share under the
            related Option (and when a Share is purchased under the Option, the
            Tandem SAR shall similarly be canceled).
 
Article 3. Administration
 
      3.1 The Committee. The Plan shall be administered by the Board, the
Committee, or by any other committee appointed by the Board. The Board may
delegate to the Committee any or all of the administration of the Plan. Any such
Committee shall be comprised entirely of Nonemployee Directors who meet the
applicable requirements of a "nonemployee director" under Rule 16b-3 of the
General Rules and Regulations under the Exchange Act and of an "outside
director" under Section 162(m) of the Code. To the extent that the Board has
delegated to the Committee any authority and responsibility under the Plan, all
applicable references to the Board in the Plan shall be to the Committee. To the
extent that the Board has not delegated to the Committee any authority and
responsibility under the Plan or has delegated such authority and responsibility
to any other committee appointed by the Board, all applicable references to the
Committee in the Plan shall be to the Board or other committee, as applicable.
The Committee shall have the authority to delegate administrative duties to
officers or Directors of the Company.
 
      3.2 Authority of the Committee. Except as limited by law or by the
Certificate of Incorporation or Bylaws of the Company, and subject to the
provisions herein, the Committee shall have full power to select from eligible
persons as described in Section 5.1, those persons who shall participate in the
Plan; determine the sizes and types of Awards; determine the terms and
conditions of Awards in a manner consistent with the Plan; construe and
interpret the Plan and any agreement or instrument entered into under the Plan;
establish, amend, or waive rules and regulations for the
 
 
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Plan's administration; and (subject to the provisions of Article 16 herein)
amend the terms and conditions of any outstanding Award to the extent such terms
and conditions are within the discretion of the Committee as provided in the
Plan. Further, the Committee shall make all other determinations which may be
necessary or advisable for the administration of the Plan. As permitted by law,
the Committee may delegate its authority as identified herein.
 
      3.3 Decisions Binding. All determinations and decisions made by the
Committee pursuant to the provisions of the Plan and all related orders and
resolutions of the Committee shall be final, conclusive, and binding on all
persons, including the Company, its stockholders, Employees, Participants, and
their estates and beneficiaries.
 
Article 4. Shares Subject to the Plan and Maximum Awards
 
      4.1 Number of Shares Available for Grants. Subject to adjustment as
provided in Section 4.3 herein, the number of Shares hereby reserved for
issuance under the Plan shall be two million four hundred thousand (2,400,000).
However, the aggregate maximum number of Shares of Restricted Stock which may be
granted pursuant to Article 8 shall be one million two hundred thousand
(1,200,000). Shares issued pursuant to the Plan may be either authorized and
unissued Shares or issued Shares which have been reacquired by the Company, or
any combination thereof.
 
      Unless and until the Committee determines that an Award to a Named
Executive Officer shall not be designed to comply with the Performance-Based
Exception, the following rules shall apply to grants of such Awards under the
Plan:
 
      (a)   Stock Options. The maximum aggregate number of Shares that may be
            granted in the form of Stock Options, pursuant to Awards granted in
            any one fiscal year to any one Participant shall be two hundred
            thousand (200,000).
 
      (b)   SARs. The maximum aggregate number of Shares that may be granted in
            the form of Stock Appreciation Rights, pursuant to Awards granted in
            any one fiscal year to any one Participant shall be two hundred
            thousand (200,000).
 
      (c)   Restricted Stock. The maximum aggregate number of Shares that may be
            granted in the form of Restricted Stock, pursuant to Awards granted
            in any one fiscal year to any one Participant shall be fifty
            thousand (50,000).
 
      (d)   Performance Shares/Performance Units/Other Incentive Awards. The
            maximum aggregate payout (determined as of the end of the applicable
            Performance Period) with respect to Awards of Performance Shares,
            Performance Units, or Other Incentive Awards granted in any one
            fiscal year to any one Participant shall not exceed the value of
            fifty thousand (50,000) Shares.
 
 
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      4.2 Lapsed Awards. If any Award granted under this Plan is canceled,
terminates, expires, or lapses for any reason, any Shares subject to such Award
again shall be available for the grant of an Award under the Plan.
 
      4.3 Adjustments in Authorized Shares. In the event of any change in
corporate capitalization, such as a stock split, or a corporate transaction,
such as any merger, consolidation, separation, including a spin-off, or other
distribution of stock or property of the Company, any reorganization (whether or
not such reorganization comes within the definition of such term in Code Section
368) or any partial or complete liquidation of the Company, such adjustment
shall be made in the number and class of Shares which may be delivered under
Section 4.1 herein, in the number and class of and/or price of Shares subject to
outstanding Awards granted under the Plan, and in the Award Limits set forth in
subsections 4.1(a) through (d) herein, as may be determined to be appropriate
and equitable by the Committee, in its sole discretion, to prevent dilution or
enlargement of rights; provided, however, that the number of Shares subject to
any Award shall always be a whole number.
 
Article 5. Eligibility and Participation
 
      5.1 Eligibility. Persons eligible to participate in this Plan include all
Employees and officers of the Company or its Subsidiaries, including Employees
who reside in countries other than the United States of America, provided,
however, that ISOs shall be granted only to Employees.
 
      5.2 Actual Participation. Subject to the provisions of the Plan, the
Committee from time to time, shall, in its discretion, select from all eligible
persons those to whom Awards shall be granted and shall determine the nature and
amount and other terms and conditions of each Award. In making such
determinations, the Committee may consider the position and responsibilities of
the Participant, the nature and value to the Company of his or her services and
accomplishments, his or her present and potential contribution to the Company,
and such other factors as the Committee may deem relevant.
 
Article 6. Stock Options
 
      6.1 Grant of Options. Subject to the terms and provisions of the Plan,
Options may be granted to Participants in such number, and upon such terms, and
at any time and from time to time, as shall be determined by the Committee in
its absolute discretion. No Employee may be granted ISOs under the Plan which
would result in Shares with an aggregate Fair Market Value (measured on the date
of grant) of more than $100,000 first becoming exercisable in any one calendar
year.
 
      6.2 Award Agreement. Each Option grant shall be evidenced by an Award
Agreement that shall specify the Option Price, the duration of the Option, the
number of Shares to which the Option pertains, and such other provisions as the
Committee shall determine. The Option Agreement also shall specify whether the
Option is intended to be an ISO within the meaning of Code Section 422, or an
NQSO whose grant is intended not to fall under the provisions of Code Section
422.
 
 
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      6.3 Option Price. Unless otherwise designated by the Committee at the time
of grant, the Option Price for each grant of an NQSO under this Plan shall be at
least equal to one hundred percent (100%) of the Fair Market Value of a Share on
the date the NQSO is granted. The Option Price for each grant of an ISO under
this Plan shall be at least equal to one hundred percent of the Fair Market
Value of a Share on the date the ISO is granted, provided, however, in the event
that an ISO is granted to an Employee who possesses more than 10% of the total
combined voting power of all classes of stock of the Company, taking into
account the attribution rules of Code Section 422(d), the Option price for each
grant of such an ISO shall be determined by the Committee on the date of grant
and shall not be less than 110% of the Fair Market Value of a Share on the date
of grant.
 
      6.4 Duration of Options. Each Option granted to a Participant shall expire
at such time as the Committee shall determine at the time of grant; provided,
however, that: (a) no ISO shall be exercisable later than the tenth anniversary
date of its grant, and (b) unless otherwise designated by the Committee at the
time of grant, no NQSO shall be exercisable later than the tenth anniversary
date of its grant. Any Option not exercised within these time periods shall
automatically terminate at the expiration of such period.
 
      6.5 Exercise of Options. Subject to the other provisions of this Article
6, options granted under this Article 6 shall be exercisable at such times and
be subject to such restrictions and conditions as the Committee shall in each
instance approve, which need not be the same for each grant or for each
Participant, provided, however, that in the event ISOs are granted to an
Employee who possesses more than 10% of the total combined voting power of all
classes of stock of the Company, taking into account the attribution rules of
Code Section 422(d), such ISOs shall not be exercisable later than the fifth
anniversary of their grant.
 
      6.6 Payment. Options granted under this Article 6 shall be exercised by
the delivery of a written notice of exercise to the Company, setting forth the
number of Shares with respect to which the Option is to be exercised,
accompanied by full payment for the Shares.
 
      The Option Price upon exercise of any Option shall be payable to the
Company in full either: (a) in cash or its equivalent, or (b) by tendering
previously acquired Shares having an aggregate Fair Market Value at the time of
exercise equal to the total Option Price (provided that the Shares which are
tendered must have been held by the Participant for at least six (6) months
prior to their tender to satisfy the Option Price), or (c) by a combination of
(a) and (b).
 
      The Committee also may allow cashless exercise as permitted under Federal
Reserve Board's Regulation T, subject to applicable securities law restrictions,
or by any other means which the Committee determines to be consistent with the
Plan's purpose and applicable law.
 
      As soon as practicable after receipt of a written notification of exercise
and full payment, the Company shall deliver to the Participant, in the
Participant's name, Share certificates in an appropriate amount based upon the
number of Shares purchased under the Option(s).
 
 
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      6.7 Restrictions on Share Transferability. The Committee may impose such
restrictions on any Shares acquired pursuant to the exercise of an Option
granted under this Article 6 as it may deem advisable, including, without
limitation, restrictions under applicable federal securities laws, under the
requirements of any stock exchange or market upon which such Shares are then
listed and/or traded, and under any blue sky or state securities laws applicable
to such Shares.
 
      6.8 Termination of Employment. Each Participant's Option Award Agreement
shall set forth the extent to which the Participant shall have the right to
exercise the Option following termination of the Participant's employment with
the Company and/or its Subsidiaries, provided, however, that an ISO shall not be
exercisable later than three months following the termination of the Employee's
employment with the Company and/or its Subsidiaries, or later than one year if
the termination is due to disability. Such provisions shall be determined in the
sole discretion of the Committee, shall be included in the Award Agreement
entered into with each Participant, need not be uniform among all Options issued
pursuant to this Article 6, and may reflect distinctions based on the reasons
for termination of employment.
 
      6.9 Nontransferability of Options.
 
            (a) Incentive Stock Options. No ISO granted under the Plan may be
      sold, transferred, pledged, assigned, or otherwise alienated or
      hypothecated, other than by will or by the laws of descent and
      distribution. Further, all ISOs granted to a Participant under the Plan
      shall be exercisable during his or her lifetime only by such Participant.
 
            (b) Non-qualified Stock Options. Except as otherwise determined by
      the Committee and provided in a Participant's Award Agreement, no NQSO
      granted under this Article 6 may be sold, transferred, pledged, assigned,
      or otherwise alienated or hypothecated, other than by will or by the laws
      of descent and distribution. Further, except as otherwise determined by
      the Committee and provided in a Participant's Award Agreement, all NQSOs
      granted to a Participant under this Article 6 shall be exercisable during
      his or her lifetime only by such Participant.
 
Article 7. Stock Appreciation Rights
 
      7.1 Grant of SARs. Subject to the terms and conditions of the Plan, SARs
may be granted to Participants at any time and from time to time as shall be
determined by the Committee. The Committee may grant Freestanding SARs, Tandem
SARs, or any combination of these forms of SAR.
 
      Subject to the terms and provisions of the Plan, the Committee shall have
absolute discretion in determining the number of SARs granted to each
Participant (subject to Article 4 herein) and in determining the terms and
conditions pertaining to such SARs.
 
      Unless otherwise designated by the Committee at the time of grant, the
grant price of a Freestanding SAR shall be at least equal to one hundred percent
(100%) of the Fair Market Value of
 
 
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a Share on the date of grant of the SAR. The grant price of Tandem SARs shall
equal the Option Price of the related Option.
 
      7.2 Exercise of Tandem SARs. Tandem SARs may be exercised for all or part
of the Shares subject to the related Option upon the surrender of the right to
exercise the equivalent portion of the related Option. A Tandem SAR may be
exercised only with respect to the Shares for which its related Option is then
exercisable.
 
      Notwithstanding any other provision of this Plan to the contrary, with
respect to a Tandem SAR granted in connection with an ISO: (i) the Tandem SAR
will expire no later than the expiration of the underlying ISO; (ii) the value
of the payout with respect to the Tandem SAR may be for no more than one hundred
percent (100%) of the difference between the Option Price of the underlying ISO
and the Fair Market Value of the Shares subject to the underlying ISO at the
time the Tandem SAR is exercised; and (iii) the Tandem SAR may be exercised only
when the Fair Market Value of the Shares subject to the ISO exceeds the Option
Price of the ISO.
 
      7.3 Exercise of Freestanding SARs. Freestanding SARs may be exercised upon
whatever terms and conditions the Committee, in its sole discretion, imposes
upon them.
 
      7.4 SAR Agreement. Each SAR grant shall be evidenced by an Award Agreement
that shall specify the grant price, the term of the SAR, and such other
provisions as the Committee shall determine, subject to the terms and provisions
of the Plan.
 
      7.5 Term of SARs. The term of an SAR granted under the Plan shall be
determined by the Committee, in its sole discretion; provided, however, that
unless otherwise designated by the Committee, such term shall not exceed ten
(10) years.
 
      7.6 Payment of SAR Amount. Upon exercise of an SAR, a Participant shall be
entitled to receive payment from the Company in an amount determined by
multiplying:
 
      (a)   The difference between the Fair Market Value of a Share on the date
            of exercise less the grant price; by
 
      (b)   The number of Shares with respect to which the SAR is exercised.
 
      At the discretion of the Committee, the payment upon SAR exercise may be
in cash, in Shares of equivalent value, or in some combination thereof.
 
      7.7 Termination of Employment. Each SAR Award Agreement shall set forth
the extent to which the Participant shall have the right to exercise the SAR
following termination of the Participant's employment with the Company and/or
its Subsidiaries. Such provisions shall be determined in the sole discretion of
the Committee, shall be included in the Award Agreement entered into with
Participants, need not be uniform among all SARs issued pursuant to the Plan,
and may reflect distinctions based on the reasons for termination of employment.
 
 
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      7.8 Nontransferability of SARs. Except as otherwise determined by the
Committee and provided in a Participant's Award Agreement, no SAR granted under
the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution.
Further, except as otherwise determined by the Committee and provided in a
Participant's Award Agreement, all SARs granted to a Participant under the Plan
shall be exercisable during his or her lifetime only by such Participant.
 
Article 8. Restricted Stock
 
      8.1 Grant of Restricted Stock. Subject to the terms and provisions of the
Plan, the Committee, at any time and from time to time, may grant Shares of
Restricted Stock to Participants in such amounts as the Committee shall
determine.
 
      8.2 Restricted Stock Agreement. Each Restricted Stock grant shall be
evidenced by an Award Agreement that shall specify the Period(s) of Restriction,
the number of Shares of Restricted Stock granted, and such other provisions as
the Committee shall determine, subject to the terms and provisions of the Plan.
 
      8.3 Transferability. Except as provided in this Article 8, the Shares of
Restricted Stock granted herein may not be sold, transferred, pledged, assigned,
or otherwise alienated or hypothecated until the end of the applicable Period of
Restriction established by the Committee and specified in the Restricted Stock
Award Agreement, or upon earlier satisfaction of any other conditions, as
specified by the Committee in its sole discretion and set forth in the
Restricted Stock Agreement. All rights with respect to the Restricted Stock
granted to a Participant under the Plan shall be available during his or her
lifetime only to such Participant.
 
      8.4 Other Restrictions. Subject to Article 11 herein, the Committee may
impose such other conditions and/or restrictions on any Shares of Restricted
Stock granted pursuant to the Plan as it may deem advisable including, without
limitation, a requirement that Participants pay a stipulated purchase price for
each Share of Restricted Stock, restrictions based upon the achievement of
specific performance goals (Company-wide, divisional, and/or individual),
time-based restrictions on vesting following the attainment of the performance
goals, and/or restrictions under applicable federal or state securities laws.
 
      The Committee may in its absolute discretion terminate, shorten, or
accelerate any period of restriction or waive any terms or conditions applicable
to all or any portion of a Restricted Stock Award.
 
      The Company shall retain the certificates representing Shares of
Restricted Stock in the Company's possession until such time as all conditions
and/or restrictions applicable to such Shares have been satisfied and such
certificates shall bear an appropriate legend referring to the restrictions
applicable thereto.
 
      If and to the extent that the restrictions and other terms and conditions
applicable to Shares of Restricted Stock are not satisfied, such Shares and any
dividends or other rights applicable thereto
 
 
11
<PAGE>   14
 
shall be forfeited and reacquired by the Company, and all rights of the
Participant shall terminate to the extent of the forfeiture without further
obligation on the part of the Company.
 
      Except as otherwise provided in this Article 8, Shares of Restricted Stock
covered by each Restricted Stock grant made under the Plan shall become freely
transferable by the Participant after the last day of the applicable Period of
Restriction.
 
      8.5 Voting Rights. Unless otherwise designated by the Committee at the
time of grant, Participants holding Shares of Restricted Stock granted hereunder
may exercise full voting rights with respect to those Shares during the Period
of Restriction.
 
      8.6 Dividends and Other Distributions. Unless otherwise designated by the
Committee at the time of grant, Participants holding Shares of Restricted Stock
granted hereunder shall be credited with regular cash dividends paid with
respect to the underlying Shares while they are so held during the Period of
Restriction. The Committee may apply any restrictions to the dividends that the
Committee deems appropriate.
 
      8.7 Termination of Employment. Each Restricted Stock Award Agreement shall
set forth the extent to which the Participant shall have the right to receive
unvested Restricted Shares following termination of the Participant's employment
with the Company and/or its Subsidiaries. Such provisions shall be determined in
the sole discretion of the Committee, shall be included in the Award Agreement
entered into with each Participant, need not be uniform among all Shares of
Restricted Stock issued pursuant to the Plan, and may reflect distinctions based
on the reasons for termination of employment; provided, however, that except in
the cases of terminations connected with a Change in Control and terminations by
reason of death or Disability, the vesting of Shares of Restricted Stock which
qualify for the Performance-Based Exception and which are held by Named
Executive Officers shall occur at the time they otherwise would have, but for
the employment termination.
 
Article 9. Performance Units and Performance Shares
 
      9.1 Grant of Performance Units/Shares. Subject to the terms of the Plan,
Performance Units and/or Performance Shares may be granted to Participants in
such amounts and upon such terms, and at any time and from time to time, as
shall be determined by the Committee. The Committee shall establish at the time
of grant the Performance Period and the performance measures, as described in
Article 11, for each Award.
 
      9.2 Value of Performance Units/Shares. Each Performance Unit shall have an
initial value that is established by the Committee at the time of grant. Each
Performance Share shall have an initial value equal to the Fair Market Value of
a Share on the date of grant. The Committee shall set performance goals in its
absolute discretion which, depending on the extent to which they are met, will
determine the number and/or value of Performance Units/Shares that will be paid
out to the Participant.
 
 
12
<PAGE>   15
 
      9.3 Earning of Performance Units/Shares. Subject to the terms of this Plan
and the Award Agreement, after the applicable Performance Period has ended, the
holder of Performance Units/Shares shall be entitled to receive payout on the
number and value of Performance Units/Shares earned by the Participant over the
Performance Period, to be determined as a function of the extent to which the
corresponding performance goals have been achieved.
 
      9.4 Form and Timing of Payment of Performance Units/ Shares. Payment of
earned Performance Units/Shares shall be made in a single lump sum within
seventy-five (75) calendar days following the close of the applicable
Performance Period. Subject to the terms of this Plan, the Committee, in its
sole discretion, may pay earned Performance Units/Shares in the form of cash or
in Shares (or in a combination thereof) which have an aggregate Fair Market
Value equal to the value of the earned Performance Units/Shares at the close of
the applicable Performance Period. Such Shares may be granted subject to any
restrictions deemed appropriate by the Committee.
 
      Prior to the beginning of each Performance Period, Participants may elect
to defer the receipt of Performance Unit/Share payout upon such terms as the
Committee deems appropriate.
 
      At the discretion of the Committee, Participants may be entitled to
receive any dividends declared with respect to Shares which have been earned in
connection with grants of Performance Units and/or Performance Shares which have
been earned, but not yet distributed to Participants. In addition, Participants
may, at the discretion of the Committee, be entitled to exercise their voting
rights with respect to such Shares.
 
      9.5 Termination of Employment Due to Death, Disability, or Retirement. In
the event the employment of a Participant is terminated by reason of death,
Disability, or Retirement during a Performance Period, the Participant shall
receive a prorated payout of the Performance Units/Shares. The prorated payout
shall be determined by the Committee, in its absolute discretion, shall be based
upon the length of time that the Participant held the Performance Units/Shares
during the Performance Period, and shall further be adjusted based on the
achievement of the pre-established performance goals.
 
      Payment of earned Performance Units/Shares shall be made at the time
specified by the Committee in its sole discretion as set forth in the
Participant's Award Agreement. Notwithstanding the foregoing, with respect to
Employees who retire during the Performance Period, payments shall be made at
the same time as payments are made to Participants who did not terminate
employment during the applicable Performance Period.
 
      9.6 Termination of Employment for Other Reasons. In the event that a
Participant's employment terminates for any reason other than those reasons set
forth in Section 9.5 herein, all Performance Units/Shares shall be forfeited by
the Participant to the Company unless determined otherwise by the Committee in
its sole discretion as set forth in the Participant's Award Agreement.
 
      9.7 Nontransferability. Except as otherwise determined by the Committee
and provided in a Participant's Award Agreement, Performance Units/Shares may
not be sold, transferred, pledged,
 
 
13
<PAGE>   16
 
assigned, or otherwise alienated or hypothecated, other than by will or by the
laws of descent and distribution. Further, except as otherwise determined by the
Committee and provided in a Participant's Award Agreement, a Participant's
rights under the Plan shall be exercisable during the Participant's lifetime
only by the Participant or the Participant's legal representative.
 
Article 10. Other Incentive Awards
 
      10.1 Grant of Other Incentive Awards. Subject to the terms and provisions
of the Plan, Other Incentive Awards may be granted to Participants in such
amount, upon such terms, and at any time and from time to time as shall be
determined by the Committee.
 
      10.2 Other Incentive Award Agreement. Each Other Incentive Award grant
shall be evidenced by an Award Agreement that shall specify the amount of the
Other Incentive Award granted, the terms and conditions applicable to such Other
Incentive Award, the applicable Performance Period and performance goals, and
such other provisions as the Committee shall determine, subject to the terms and
provisions of the Plan.
 
      10.3 Nontransferability. Except as otherwise determined by the Committee
and provided in a Participant's Award Agreement, Other Incentive Awards may not
be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution.
 
      10.4 Form and Timing of Payment of Other Incentive Awards. Payment of
Other Incentive Awards shall be made at such times and in such form, either in
cash or in Shares (or a combination thereof) as established by the Committee
subject to the terms of the Plan. Such Shares may be granted subject to any
restrictions deemed appropriate by the Committee. Without limiting the
generality of the foregoing, annual incentive awards may be paid in the form of
Other Incentive Awards (which may or may not be subject to restrictions, at the
discretion of the Committee).
 
Article 11. Performance Measures
 
      Unless and until the Committee proposes for stockholder vote and
stockholders approve a change in the general performance measures set forth in
this Article 11, the attainment of which may determine the degree of payout
and/or vesting with respect to Awards to Named Executive Officers which are
designed to qualify for the Performance-Based Exception, the performance
measure(s) to be used for purposes of granting performance-based Awards shall be
chosen from among the following alternatives:
 
      (a)   Return on Assets ("ROA");
 
      (b)   Cash Flow Return on Investment ("CFROI");
 
      (c)   Earnings Before Interest and Taxes ("EBIT");
 
      (d)   Net Earnings;
 
 
14
<PAGE>   17
 
      (e)   Total Shareholder Return;
 
      (f)   Return on Sales ("ROS");
 
      (g)   Return on Equity ("ROE);
 
      (h)   Economic Value Added;
 
      (i)   Division Operating Income; or
 
      (j)   Return on Net Assets.
 
      The Committee shall have the discretion to adjust the determinations of
the degree of attainment of the pre-established performance goals; provided,
however, that Awards which are designed to qualify for the Performance-Based
Exception, and which are held by Named Executive Officers, may not be adjusted
upward (the Committee shall retain the discretion to adjust such Awards
downward).
 
      In the event that applicable tax and/or securities laws change to permit
Committee discretion to alter the governing performance measures without
obtaining stockholder approval of such changes, the Committee shall have sole
discretion to make such changes without obtaining stockholder approval. In
addition, in the event that the Committee determines that it is advisable to
grant Awards which shall not qualify for the Performance-Based Exception, the
Committee may make such grants without satisfying the requirements of Code
Section 162(m).
 
Article 12. Beneficiary Designation
 
      Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under the Plan is to be paid in case of his or her death before
he or she receives any or all of such benefit. Each such designation shall
revoke all prior designations by the same Participant, shall be in a form
prescribed by the Company, and will be effective only when filed by the
Participant in writing with the Company during the Participant's lifetime. In
the absence of any such designation, benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate.
 
Article 13. Deferrals
 
      The Committee may permit a Participant to defer such Participant's receipt
of the payment of cash or the delivery of Shares that would otherwise be due to
such Participant by virtue of the exercise of an Option or SAR, the lapse or
waiver of restrictions with respect to Restricted Stock, or the satis faction of
any requirements or goals with respect to Performance Units/Shares, Cash Bonus
Awards, or Other Incentive Awards. If any such deferral election is required or
permitted, the Committee shall, in its sole discretion, establish rules and
procedures for such payment deferrals.
 
 
15
<PAGE>   18
 
Article 14. Rights of Employees
 
      14.1 Employment. Nothing in the Plan shall interfere with or limit in any
way the right of the Company to terminate any Participant's employment at any
time, nor confer upon any Participant any right to continue in the employ of the
Company.
 
      For purposes of this Plan, a transfer of a Participant's employment
between the Company and a Subsidiary, or between Subsidiaries, shall not be
deemed to be a termination of employment. Upon such a transfer, the Committee
may make such adjustments to outstanding Awards as it deems appropriate to
reflect the changed reporting relationships.
 
      14.2 Participation. No Employee or officer of the Company or its
Subsidiaries shall have the right to be selected to receive an Award under this
Plan, or, having been so selected, to be selected to receive a future Award.
 
Article 15. Change in Control
 
      15.1 Treatment of Outstanding Awards. Upon the occurrence of a Change in
Control, unless otherwise specifically prohibited under applicable laws, or by
the rules and regulations of any governing governmental agencies or national
securities exchanges:
 
      (a)   Any and all Options and SARs granted hereunder shall become
            immediately exercisable, and shall remain exercisable throughout
            their entire term.
 
      (b)   Any restriction periods and restrictions imposed on Restricted
            Shares shall lapse.
 
      (c)   The target payout opportunities attainable under all outstanding
            Awards of Performance Units and Performance Shares and Other
            Incentive Awards shall be deemed to have been fully earned for the
            entire Performance Period(s) as of the effective date of the Change
            in Control.
 
The vesting of all Awards denominated in Shares shall be accelerated as of the
effective date of the Change in Control, and there shall be paid out to
Participants within thirty (30) days following the effective date of the Change
in Control a pro rata number of shares based upon an assumed achievement of all
relevant targeted performance goals and upon the length of time within the
Performance Period which has elapsed prior to the Change in Control. Awards
denominated in cash shall be paid pro rata to Participants in cash within thirty
(30) days following the effective date of the Change in Control, with the
pro-ration determined as a function of the length of time within the Performance
Period which has elapsed prior to the Change in Control, and based on an assumed
achievement of all relevant targeted performance goals.
 
      (d)   Subject to Article 16 herein, the Committee shall have the authority
            to make any modifications to the Awards as determined by the
            Committee to be appropriate before the effective date of the Change
            in Control.
 
 
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<PAGE>   19
 
      15.2 Termination, Amendment, and Modification of Change-in-Control
Provisions. Notwithstanding any other provision of this Plan or any Award
Agreement provision, the provisions of this Article 15 may not be terminated,
amended, or modified to affect adversely any Award theretofore granted under the
Plan without the prior written consent of the Participant with respect to said
Participant's outstanding Awards; provided, however, that the Board, upon
recommendation of the Committee, may terminate, amend, or modify this Article 15
at any time and from time to time prior to the date of a Change in Control to
affect Awards not yet granted under the Plan.
 
Article 16. Amendment, Modification, and Termination
 
      16.1 Amendment, Modification, and Termination. The Board may at any time
and from time to time, alter, amend, suspend or terminate the Plan in whole or
in part; provided, however, that unless the Board specifically provides
otherwise, any revision or amendment that would cause the Plan to fail to comply
with any requirement of applicable law, regulation, or rule if such amendment
were not approved by stockholders, shall not be effective unless and until such
approval of stockholders of the Company is obtained.
 
      16.2 Awards Previously Granted. No termination, amendment, or modification
of the Plan shall adversely affect in any material way any Award previously
granted under the Plan, without the written consent of the Participant holding
such Award.
 
      16.3 Compliance with Code Section 162(m). At all times when Code Section
162(m) is applicable, all Awards granted under this Plan shall comply with the
requirements of Code Section 162(m); provided, however, that in the event the
Committee determines that such compliance is not desired with respect to any
Award or Awards available for grant under the Plan, then compliance with Code
Section 162(m) will not be required. In addition, in the event that changes are
made to Code Section 162(m) to permit greater flexibility with respect to any
Award or Awards available under the Plan, the Committee may, subject to this
Article 16, make any adjustments it deems appropriate.
 
Article 17. Withholding
 
      17.1 Tax Withholding. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy federal, state, and local taxes, domestic or foreign,
required by law or regulation to be withheld with respect to any taxable event
arising as a result of this Plan.
 
      17.2 Share Withholding. With respect to withholding required upon the
exercise of Options or SARs, upon the lapse of restrictions on Restricted Stock,
or upon any other taxable event arising as a result of Awards granted hereunder,
Participants may elect, subject to the approval of the Committee, to satisfy the
withholding requirement, in whole or in part, by having the Company withhold
Shares having a Fair Market Value on the date the tax is to be determined equal
to the minimum statutory total tax which could be imposed on the transaction.
All such elections shall be irrevocable, made in writing, signed by the
Participant, and shall be subject to any restrictions or limitations that the
Committee, in its sole discretion, deems appropriate.
 
 
17
<PAGE>   20
 
Article 18. Indemnification
 
      Each person who is or shall have been a member of the Committee, or of the
Board, shall be indemnified and held harmless by the Company against and from
any loss, cost, liability, or expense that may be imposed upon or reasonably
incurred by him or her in connection with or resulting from any claim, action,
suit, or proceeding to which he or she may be a party or in which he or she may
be involved by reason of any action taken or failure to act under the Plan and
against and from any and all amounts paid by him or her in settlement thereof,
with the Company's approval, or paid by him or her in satisfaction of any
judgment in any such action, suit, or proceeding against him or her, provided he
or she shall give the Company an opportunity, at its own expense, to handle and
defend the same before he or she undertakes to handle and defend it on his or
her own behalf. The foregoing right of indemnification shall not be exclusive of
any other rights of indemnification to which such persons may be entitled under
the Company's Articles of Incorporation or Bylaws, as a matter of law, or
otherwise, or any power that the Company may have to indemnify them or hold them
harmless.
 
Article 19. Successors
 
      All obligations of the Company under the Plan with respect to Awards
granted hereunder shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation, or otherwise, of all or substantially all of the business
and/or assets of the Company.
 
Article 20. Legal Construction
 
      20.1 Gender and Number. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine, the plural shall
include the singular, and the singular shall include the plural.
 
      20.2 Severability. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
 
      20.3 Requirements of Law. The granting of Awards and the issuance of
Shares under the Plan shall be subject to all applicable laws, rules, and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
 
      20.4 Securities Law and Tax Law Compliance. With respect to Insiders,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the 1934 Act. To the extent any
provision of the plan or action by the Committee fails to so comply, it shall be
deemed null and void, to the extent permitted by law and deemed advisable by the
Committee.
 
      20.5 Governing Law. To the extent not preempted by federal law, the Plan,
and all agreements hereunder, shall be construed in accordance with and governed
by the laws of the state of Delaware.

 

 
                                    AMENDMENT
                                     TO THE
                    SAUER INC. 1998 LONG-TERM INCENTIVE PLAN
 
         1. Paragraph 16.1 of Article 16 of the Sauer Inc. 1998 Long-Term
Incentive Plan (the "Plan") provides that the Plan may be amended by action of
the Board of Directors of Sauer Inc. (the "Company"). In accordance with the
provisions of that paragraph and pursuant to resolutions duly adopted by the
Board of Directors of the Corporation, the Plan is hereby amended as follows:
 
            (a)           The name of the Plan is hereby changed to the
                     Sauer-Danfoss Inc. 1998 Long-Term Incentive Plan, and
                     wherever the name Sauer Inc. appears in the Plan,
                     there shall be substituted therefor the name
                     "Sauer-Danfoss Inc.".
 
            (b)           Subparagraph (a) of paragraph 2.5 of Article II.
                     Definitions, is amended by adding the following
                     language to such subparagraph immediately following
                     the semicolon and immediately preceding the word "or":
 
                     "provided, however, that a change in control shall
                     not result from (a) Danfoss A/S, or (b) Klaus
                     Murmann, any member or members of his immediate
                     family or any entity or trust a majority of which is
                     owned by Klaus Murmann or a member or members of his
                     immediate family, acquiring securities of
                     Sauer-Danfoss Inc. from the other, either directly,
                     or indirectly by acquiring voting control of Danfoss
                     Murmann Holding A/S or its successor."
 
         2. The changes made by this Amendment shall be subject to, and
effective upon, the completion of the combination of the fluid power business of
Danfoss A/S and the Company.
 
         3. The changes made by this Amendment shall not apply to any Award (as
defined in the Plan) outstanding under the Plan prior to the effective date of
this Amendment.
 
                                          The above Amendment was
                                          duly adopted by resolutions
                                          passed by the Board of
                                          Directors of the Company at
                                          its meeting held on
                                          March ___, 2000
 
 
 
 
                                          -----------------------------------
                                          Kenneth D. McCuskey, Secretary of
                                          the Company

 

 

 
                                    AMENDMENT
                                     TO THE
                SAUER DANFOSS INC. 1998 LONG-TERM INCENTIVE PLAN
 
         1. Paragraph 16.1 of Article 16 of the Sauer-Danfoss Inc. 1998
Long-Term Incentive Plan (the "Plan") provides that the Plan may be amended by
action of the Board of Directors of Sauer-Danfoss Inc. (the "Company"). In
accordance with the provisions of that paragraph and pursuant to resolutions
duly adopted by the Board of Directors of the Corporation, the Plan is hereby
amended as follows:
 
          (a)  The existing subparagraph (c) of paragraph 2.5 of Article 2.
               Definitions is deleted in its entirety and new subparagraphs (c)
               and (d) of said paragraph 2.5 of Article 2. are added to read as
               follows:
 
               "(c) The stockholders of the Company approve a plan of complete
                    liquidation of the Company; or
 
               (d)  The consummation of: (i) the sale or disposition of all or
                    substantially all of the Company's assets; or (ii) a merger,
                    consolidation, or reorganization of the Company with or
                    involving any other corporation or entity, other than a
                    merger, consolidation, or reorganization that would result
                    in the voting securities of the Company outstanding
                    immediately prior thereto continuing to represent (either by
                    remaining outstanding or by being converted into voting
                    securities of the surviving entity) at least fifty percent
                    (50%) of the combined voting power of the voting securities
                    of the Company (or such surviving entity) outstanding
                    immediately after such merger, consolidation, or
                    reorganization."
 
         2. The changes made by this Amendment shall not apply to any Award (as
defined in the Plan) outstanding under the Plan prior to the date this Amendment
was adopted by the Board of Directors of the Company.
 
                    The above Amendment was duly adopted by resolutions passed
                    by the Board of Directors of the Company at its meeting held
                    on December 4, 2002
 
 
                    -----------------------------------
                    Kenneth D. McCuskey, Secretary of
                    the Company
 

 

 

 

Exhibit 10

SECOND AMENDMENT
TO
SAUER-DANFOSS INC. 1998 LONG-TERM INCENTIVE PLAN

WHEREAS, Sauer-Danfoss Inc. (the “Company”) sponsors the Sauer-Danfoss Inc. 1998 Long-Term Incentive Plan (the “Plan”);

WHEREAS, pursuant to Article 3.2 of the Plan, the Compensation Committee (the “Committee”) of the Board of Directors (the “Board”) of the Company administers the Plan and has authority to establish, amend, or waive rules and regulations for the Plan’s administration;

WHEREAS, pursuant to the authority under Article 13 of the Plan, the Committee has previously determined that it is desirable to allow certain Participants the opportunity to elect to defer the receipt of Performance Units to be earned under certain outstanding Performance Unit Award Agreements;

WHEREAS, the Committee has also previously determined that it is desirable to allow such deferral elections to be made at any time prior to the date that is six months prior to the end of the Performance Period (as defined in Article 2.26 of the Plan), as allowed under Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”);

 WHEREAS, the Committee has also previously determined that it is desirable to make certain written amendments to the Plan in order to be compliant with Code Section 409A and that such written amendments, pursuant to IRS Notice 2005-1, Q&A-19(a), and as further amended by Section XI(B) of the Preamble of the Proposed Section 409A Regulations issued on September 29, 2005, are permitted to be made at any time on or before December 31, 2006, and still be deemed to be compliant with Code Section 409A; and

 WHEREAS, pursuant to Article 16.1 of the Plan, the Board may at any time and from time to time, alter, amend, suspend or terminate the Plan in whole or in part.

 NOW, THEREFORE, pursuant to Article 16.1 of the Plan, the Board hereby amends the Plan, effective as of January 1, 2005, in the following particulars:

 

1.    By deleting the second paragraph of Article 9.4 in its entirety and by substituting the following new paragraph as a part thereof:

Prior to the date that is six months prior to the end of the Performance Period, Partici­pants may elect to defer the receipt of Performance Unit/Share payout upon such terms as the Committee deems appropriate.

 



2.             By deleting Article 13 of the Plan in its entirety and substituting the following new Article 13 as a part thereof:

 

Article 13. Deferrals

13.1        General Rule.  The Committee may permit a Participant to defer such Participant’s receipt of the payment of cash or the delivery of Shares that would otherwise be due to such Participant by virtue of the exercise of an Option or SAR, the lapse or waiver of restrictions with respect to Restricted Stock, or the satis­faction of any requirements or goals with respect to Performance Units/Shares, Cash Bonus Awards, or Other Incentive Awards.

13.2        Awards With Performance Periods Ending On or Before December 31, 2004If a Participant wishes to make a deferral election with respect to his or her Award pursuant to Article 13.1, upon receiving the Committee’s approval, such deferral election shall be made in accordance with any rules and procedures established by the Committee.

13.3                        Awards With Performance Periods Ending after December 31, 2004.

(a)                                  Deferral Elections.  If a Participant wishes to make a deferral election with respect to his or her Award pursuant to Article 13.1, upon receiving the Committee’s approval, the Participant shall be entitled to make a deferral with respect to his or her Award by submitting an “Election to Defer Form” as provided by the Company.  For an election to be effective, the Participant must complete the “Election to Defer Form” and return it to the Company no later than the day which immediately precedes the date which is six months before the end of the relevant Performance Period.  For example, for an Award for which the Performance Period is January 1, 2004 through December 31, 2005, an election to defer receipt of such Award must be completed and returned no later than June 30, 2005 (i.e., six months prior to the end of the Performance Period).  The Participant’s deferral election will not change the form of the payout (i.e., cash or Shares) as previously determined by the Committee.

(b)                                 Distribution Elections.

(i)                                     General Timing of Distribution Rules.  At the time the Participant makes a deferral election as permitted under paragraph (a) immediately above, such Participant must also make an initial timing of distribution election. Payment of a Participant’s deferred amounts (including any deferred dividend earnings and interest earnings credits thereon) shall commence as soon as practicable upon the earliest to occur of the following events:

(A)                              the Participant’s death;

(B)                                the Participant’s Disability;

(C)                                a Change in Control of the Company;

2

 



(D)                               an Unforeseeable Emergency;

(E)                                 the six (6) month anniversary following the Participant’s termination from service with the Company or a Subsidiary; or

(F)                                 a specified, fixed date chosen by the Participant that is at least two years following the date on which the Performance Period ends.

(ii)                                  Subsequent Timing of Distribution Election.  A Participant may elect to further extend his or her distribution date previously selected under clause (F) of subparagraph (i) immediately above by filing a new “Election to Defer Form” with the Company that specifies the later fixed date on which the relevant distribution date will occur.  This election to extend the relevant distribution date must be made at least one year before the expiration of the then designated and enforceable distribution date specified by the Participant under clause (F) of subparagraph (i) immediately above.  This subsequent distribution election will not be effective until at least one year after the date on which the subsequent distribution election has been made.  Under the subsequent distribution election, any payment subsequently rescheduled to an extended specified, fixed date must occur at least five years from the date such payment is then scheduled to be made under the then designated and enforceable specified, fixed date election.

Example #1:  Participant elects to receive his 2006 deferred performance unit compensation on March 1, 2009 in a lump sum.  In February, 2008, Participant would like to make a subsequent distribution election to delay receipt of his 2006 deferred performance unit compensation.  Any such subsequent distribution election must be made no later than February 28, 2008 and the earliest revised fixed date for distribution shall be March 1, 2014.

A Participant may make multiple subsequent distribution elections under this subparagraph (ii) but any time requirements set forth herein must be separately satisfied with respect to each subsequent distribution election.

Notwithstanding the foregoing, subsequent distribution elections must comply, at all times, with Code Section 409A, any regulations issued with respect to Code Section 409A and any other guidance issued the IRS and authoritative on the issue.

3

 



(iii)          General Form of Distribution Rules.

(A)                              Upon Death, Disability, Unforeseeable Emergency or a Change in Control.  In the event of a Participant’s death or Disability, or in the event of an Unforeseeable Emergency, or in the event of a Change in Control of the Company, payment of deferred compensation to a Participant shall be made in a single lump sum in accordance with the timing rules set forth in subparagraph (i) immediately above.

(B)                                Upon Termination of Service or a Specified, Fixed Date.  At the time a Participant makes a deferral election under paragraph (a) immediately above, the Participant must elect the form in which the Participant’s entire account will be distributed if such distribution event occurs due to reason of the Participant’s termination of service or the Participant’s selection of specified, fixed distribution date.  The Participant must elect either:

(I)            A lump sum payment;

(II)                                Annual installment payments over a period not longer than ten years; or

(III)                            A fixed schedule designated by the Participant at the time of making an early payment election as allowed under clause (F) of subparagraph (i) immediately above.

For purposes of the Plan and Code Section 409A, the right to a series of installment payments is to be treated as a right to a series of separate payments.

(iv)                              Subsequent Form of Distribution Election.  A Participant may elect to change his or her form of distribution (i.e., from lump sum to installments or vice versa) by filing an election form with the Committee that specifies the newly elected form of distribution.  This subsequent form of distribution election must be made at least one year before the expiration of the then designated and enforceable distribution date specified by the Participant under clause (F) of subparagraph (i) immediately above.  This subsequent form of distribution election will not be effective until at least one year after the date on which the subsequent form of distribution election has been made.  Under the subsequent form of distribution election, any change in form of distribution (i.e., from lump sum to installments or vice versa) cannot accelerate any payment under the then designated and enforceable form of distribution and shall additionally require an automatic delay in the timing of distribution to five years from the date all such payments are then scheduled to be made under the then designated and enforceable form of distribution election.

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Example #2:  Participant elects to receive his 2006 deferred performance unit compensation on March 1, 2009 in a lump sum.  In February, 2008, Participant would like to change his form of distribution to 10-year installments.  Any such subsequent form of distribution election must be made no later than February 28, 2008 and the earliest date on which the 10-year installment may commence is March 1, 2014.

Example #3:  Participant elects to receive his 2006 deferred performance unit compensation on March 1, 2009 in a 10-year installment.  In February, 2008, Participant would like to change his form of distribution to a lump sum.  Although each installment payment stands on its own for distribution purposes, the entire installment series is viewed as the complete form.  As such, a change from a 10-year installment to a lump sum cannot accelerate any payment under the current 10-year installment series.  Any such subsequent form of distribution election must be made no later than February 28, 2008 and the result is that the earliest date on which the lump sum may be received is March 1, 2024 (i.e., five years after the last payment of the originally schedule 10-year installment, or March 1, 2019).

A Participant may make multiple subsequent form of distribution elections under this subparagraph (iv) but any time requirements set forth herein must be separately satisfied with respect to each subsequent form of distribution election.

Notwithstanding the foregoing, subsequent form of distribution elections must comply, at all times, with Code Section 409A, any regulations issued with respect to Code Section 409A and any other guidance issued by the IRS and authoritative on the issue.

(c)                                  Definitions.  Because of the potential to defer performance unit compensation after December 31, 2004, Code Section 409A only applies to this Article 13.3 of the Plan.  As such, certain definitions within the Plan must be either amended or added to the Plan to be Code Section 409A compliant in the event they are utilized under this Article 13.3.  The following definitions shall be substituted for the definitions in Article 2 or added to the Plan, as the case may be, when necessary for compliance with Code Section 409A:

(i)                                     Change in Control.  Solely for purposes of determining whether a Change in Control has occurred that will require the payout of previously deferred Performance Units under Article 13.3(b), the definition of Change In Control per Article 2.5 of the Plan shall be ignored in its entirety and Change in Control shall be deemed to have the following meaning:

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“Change in Control” of the Company means, and shall be deemed to have occurred upon, any of the following events:

(a)                                  Together with securities of the Company already held by such Person, any Person (other than those Persons already in control of the Company as of the Effective Date, or other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company, or a corporation or other entity owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company) becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total voting power of the Company’s then outstanding securities provided, however, that a change in control shall not result from (a) Danfoss A/S, or (b) Klaus Murmann, any  member or members of his immediate family or any entity or trust a majority of which is owned by Klaus Murmann or a member or members of his immediate family, acquiring securities of Sauer-Danfoss Inc. from the other, either directly, or indirectly by acquiring voting control of Danfoss Murmann Holding A/S or its successor; or

(b)                                 During any period of two (2) consecutive years (not including any period prior to the Effective Date), a majority of the individuals who at the beginning of such period constitute the Board are replaced during such period by individuals whose appointment or election is not endorsed by a majority of the members of the Company’s Board prior to the date of the appointment or election; or

(c)                                  The consummation of a plan of complete liquidation of the Company; or

(d)                                 The sale or disposition of all or substantially all the Company’s assets (i.e., greater than 40% of the total gross fair market value of all of the assets of the Company immediately prior to such sale or disposition) within a 12-month period ending on the date of the most recent sale or disposition; or

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(e)                                  A merger, consolidation, or reorganization of the Company with or involving any other corporation, other than a merger, consolidation, or reorganization that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than fifty percent (50%) of the combined voting power of the voting securities of the Company (or such surviving entity) outstanding immediately after such merger, consolidation, or reorganization.

However, in no event shall a “Change in Control” be deemed to have occurred with respect to a Participant, if the Participant is part of a purchasing group which consummates the Change-in-Control transaction.  A Participant shall be deemed “part of a purchasing group” for purposes of the preceding sentence if the Participant is an equity participant in the purchasing company or group (except for (i) passive ownership of less than one percent (1%) of the stock of the purchasing company; or (ii) ownership of equity participation in the purchasing company or group which is otherwise not significant as determined prior to the Change in Control by a majority of the nonemployee continuing Directors).

Notwithstanding anything to the contrary, this definition of Change in Control must comply, at all times, with Code Section 409A, any regulations issued with respect to Code Section 409A and any other guidance issued the IRS and authoritative on the issue.

(ii)                                  Disability.  Solely for purposes of determining whether a Disability has occurred that will require the payout of previously deferred Performance Units under Article 13.3(b), the definition of Disability per Article 2.10 of the Plan shall be ignored in its entirety and Disability shall be deemed to have the following meaning:

“Disability” means, to the extent permitted under Code Section 409A, Disability as defined in the Company’s Long-Term Disability Plan; provided, however, if Disability cannot, for purposes of Code Section 409A, be defined by reference to the Company’s Long-Term Disability Plan (or if no such plan exists), then Disability means when a Participant is:

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(a)                                  unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, or

(b)                                 by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months, receiving income replacement benefits for a period of not less than three (3) months under the Company’s or any Subsidiary’s accident or health plan covering employees.

(iii)                               Unforeseeable Emergency.  Solely for purposes of determining whether an Unforeseeable Emergency has occurred that will require the payout of previously deferred Perfomance Units under Article 13.3(b), Unforeseeable Emergency shall be deemed to have the following meaning:

“Unforeseeable Emergency” means a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, or a dependent (as defined in Code Section 152(a)) of the Participant, loss of the Participant’s property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant.

IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment as of this 23rd day of August, 2006.

 

SAUER-DANFOSS INC.

 

 

 

 

 

 

 

By:

/s/ James T. Remus

 

Its:

Director-Global Compensation & Benefits

 

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