-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IM6JONDHCB16inuEDT6qf96jeUo3T9RRZdWPfKyDXOqWrteWUZxK8+JkhbBgHJoH B/3DBhn2as5PRCf9EXElig== 0000950124-01-001289.txt : 20010315 0000950124-01-001289.hdr.sgml : 20010315 ACCESSION NUMBER: 0000950124-01-001289 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TECUMSEH PRODUCTS CO CENTRAL INDEX KEY: 0000096831 STANDARD INDUSTRIAL CLASSIFICATION: AIR COND & WARM AIR HEATING EQUIP & COMM & INDL REFRIG EQUIP [3585] IRS NUMBER: 381093240 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-00452 FILM NUMBER: 1567941 BUSINESS ADDRESS: STREET 1: 100 E PATTERSON ST CITY: TECUMSEH STATE: MI ZIP: 49286 BUSINESS PHONE: 5174238411 MAIL ADDRESS: STREET 1: 100 EAST PATTERSON STREET CITY: TECUMSEH STATE: MI ZIP: 49286 10-K405 1 k60223e10-k405.txt ANNUAL REPORT ON FORM 10-K405 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 COMMISSION FILE NUMBER 0-452 TECUMSEH PRODUCTS COMPANY (Exact Name of Registrant as Specified in its Charter) MICHIGAN 38-1093240 (State of Incorporation) (I.R.S. Employer Identification No.) 100 EAST PATTERSON STREET 49286 TECUMSEH, MICHIGAN (Zip Code) (Address of Principal Executive Offices)
Registrant's telephone number, including area code: (517) 423-8411 Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- None None
Securities Registered Pursuant to Section 12(b) of the Act: Class B Common Stock, $1.00 par Value Class A Common Stock, $1.00 par Value Class B Common Stock Purchase Rights Class A Common Stock Purchase Rights Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Registrant disclaims the existence of control and, accordingly, believes that as of March 1, 2001 all of the 5,453,486 shares of its Class B Common Stock, $1.00 par value, then issued and outstanding, were held by non-affiliates of Registrant. Certain shareholders, which, as of March 1, 2001, held an aggregate of 2,279,108 shares of Class B Common Stock might be regarded as "affiliates" of Registrant as that word is defined in Rule 405 under the Securities Exchange Act of 1934, as amended. If such persons are "affiliates," the aggregate market value as of March 1, 2001 (based on the closing price of $47.94 per share, as reported on the Nasdaq Stock Market on such date) of 3,174,738 shares then issued and outstanding held by non-affiliates was approximately $152,196,940. Numbers of shares outstanding of each of the Registrant's classes of Common Stock at March 1, 2001: Class B Common Stock, $1.00 Par Value: 5,453,846 Class A Common Stock, $1.00 Par Value: 13,406,938 Certain information in the definitive proxy statement to be used in connection with the Registrant's 2001 Annual Meeting of Shareholders has been incorporated herein by reference in Part III hereof. The Index to Exhibits is located on page 47. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Executive Officers of the Registrant........................ 10 Item 2. Properties.................................................. 10 Item 3. Legal Proceedings........................................... 10 Item 4. Submission of Matters to a Vote of Security Holders......... 11 PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters....................................... 12 Item 6. Selected Financial Data..................................... 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 13 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 22 Item 8. Financial Statements and Supplementary Data................. 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 44 PART III Item 10. Directors and Executive Officers of the Company............. 44 Item 11. Executive Compensation...................................... 44 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 44 Item 13. Certain Relationships and Related Transactions.............. 44 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................... 45 Signatures............................................................ 46 Index to Exhibits..................................................... 47
3 PART I ITEM 1. BUSINESS GENERAL Tecumseh Products Company (the "Company") is a full line, independent global manufacturer of hermetic compressors for air conditioning and refrigeration products, gasoline engines and power train components for lawn and garden applications, and pumps. The Company believes it is one of the largest independent producers of hermetically sealed compressors in the world, as well as one of the world's leading manufacturers of small gasoline engines and power train products used in lawn and garden applications. The Company also produces a variety of pump products with a wide range of applications. The Company's products are sold in countries all around the world. The Company groups its products into three principal industry segments: Compressor Products, Engine and Power Train Products and Pump Products. Compressor Products include a broad range of air conditioning and refrigeration compressors, as well as refrigeration condensing units. The Company's compressor products range from fractional horsepower models used in small refrigerators and dehumidifiers to large compressors used in unitary air conditioning applications. The Company sells compressors in all four compressor market segments: (i) household refrigerators and freezers; (ii) room air conditioners; (iii) commercial and residential unitary central air conditioning systems; and (iv) commercial refrigeration applications including freezers, dehumidifiers, water coolers and vending machines. The Company sells compressors to original equipment manufacturers ("OEMs") and aftermarket distributors. Engine and Power Train Products consist of (i) two- and four-cycle gasoline engines for use in a wide variety of lawn and garden applications and other consumer and light commercial applications and (ii) transmissions, transaxles and related parts for use principally in lawn and garden tractors and riding lawn mowers. The Company sells engine and power train products to OEMs and aftermarket distributors. Pump Products include (i) small submersible pumps used in a wide variety of industrial, commercial, and consumer applications and (ii) heavy duty centrifugal type pumps used in the construction, mining, agricultural, marine, and transportation industries. The Company sells pump products to distributors, mass merchants and OEMs. FOREIGN OPERATIONS AND SALES In recent years, international sales and manufacturing have become increasingly important to the Company's business as a whole. In 2000, sales to customers outside the United States represented approximately 46% of total consolidated net sales. In addition to North American operations, compressor products are produced in Brazil, France and India, while engines are produced in Italy. Products sold outside the United States are manufactured at both U.S. and foreign plants. Tecumseh do Brasil, Ltda. ("Tecumseh do Brasil"), the Company's Brazilian compressor subsidiary, sells its products principally in Latin America, North America, Europe and the Middle East. The Brazilian operation represents a significant portion of the Company's compressor business. In 2000, total sales generated by Tecumseh do Brasil amounted to over 27% of total Compressor Products segment sales. Brazilian operating income amounted to approximately 66% of total Compressor Products segment operating income and approximately 36% of consolidated operating income for the year, exclusive of nonrecurring items. The Company's European compressor subsidiary, Tecumseh Europe, S.A. ("Tecumseh Europe"), generally sells the compressor products it manufactures in Europe, the Middle East, Africa, Latin America and Asia. The Company also has two manufacturing facilities in India which produce air conditioning and refrigeration compressors for the Indian appliance markets. During 2000, the Company closed its older refrigeration compressor plant and relocated operations to a new production facility in nearby Ballabgarh, 1 4 India. In connection with these actions, the Company recorded a $6.0 million charge to provide for the cost of a workforce reduction program. In the engine business, the Company has two principal markets. The North American market is served by the Company's U.S. manufacturing operations. The European market is served by the manufacturing operations of the Company's Italian engine subsidiary, Tecumseh Europa, S.p.A. ("Tecumseh Europa"), and to a lesser extent, by U.S. export sales. Tecumseh Europa produces light-weight engines primarily for lawn and garden applications along with some utility applications. The Company's dependence on sales in foreign countries entails certain commercial and political risks, including currency fluctuations, unstable economic or political conditions in some areas and the possibility of U.S. government embargoes on sales to certain countries. The Company's foreign manufacturing operations are subject to other risks as well, including governmental expropriation, governmental regulations which may be disadvantageous to businesses owned by foreign nationals and instabilities in the workforce due to changing political and social conditions. These considerations are especially significant in the context of the Company's Brazilian operations given the importance of Tecumseh do Brasil's performance to the Company's total operating results. INDUSTRY SEGMENT AND GEOGRAPHIC LOCATION INFORMATION The results of operations and other financial information by industry segment and geographic location (including the footnotes thereto) for each of the years ended December 31, 2000, 1999 and 1998 appear under the caption "Business Segment Data" in Note 6 to the Consolidated Financial Statements which appear in Part II, Item 8, of this report, "Financial Statements and Supplementary Data." This information along with the written discussion in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the caption "Results of Operations" in this report should be read in conjunction with the business segment information presented in the following sections entitled: Compressor Products, Engine and Power Train Products and Pump Products. COMPRESSOR PRODUCTS The Compressor Products segment is the Company's largest business segment. A compressor is a device that compresses a refrigerant gas. When the gas is later permitted to expand, it absorbs and transfers heat, producing a cooling effect, which forms the basis for a wide variety of refrigeration and air conditioning products. All of the compressors produced by the Company are hermetically sealed. The Company's current compressor line consists primarily of reciprocating and rotary designs with a limited number of scroll models. Product Line The Company manufactures and sells a variety of traditional, reciprocating piston compressors suitable for use in all four compressor market segments. This line of compressors range in size from approximately 12 horsepower models used in unitary air conditioning applications to small fractional horsepower models used in refrigerators, dehumidifiers and vending machines. Rotary compressors ranging from 5,000 to 18,000 BTU/hour are produced by the Company for room and mobile air conditioning applications. These compressors generally provide increased operating efficiency, lower equipment space requirements, and reduced sound levels when compared to reciprocating piston models. Scroll compressors generally offer improved energy efficiency and reduced noise levels compared to traditional reciprocating designs and are generally preferred by OEMs for certain products, including unitary central air conditioning systems and certain commercial applications. The Company has a scroll compressor product line for the unitary air conditioning market and sold limited quantities of these compressors in 1999 and 2000. From 1994 to 1996, the Company invested approximately $55 million dollars in a scroll compressor manufacturing facility in Tecumseh, Michigan. In 1996, unacceptable field testing results led to the abandonment of that particular design. Since then, several new designs, intended to serve primarily 2 5 commercial applications, have been under development and testing. Based on test results and customer demand for these products, the Company plans on offering only limited quantities of these compressors for sale in the coming year. No significant manufacturing or marketing efforts are expected in 2001. In 1998, the Company recorded a fourth quarter asset impairment charge of $45.0 million ($28.8 million or $1.35 per share net of tax) to reduce the carrying amount of assets dedicated to the production of scroll compressors to estimated fair market value. Based on the Company's expected manufacturing costs, existing market conditions and an anticipated lengthy introduction period, it was estimated that the future cash flows from the scroll product line would not be sufficient to cover the carrying amount of the Company's buildings, tooling, machinery and equipment dedicated to its production. The amount of the asset impairment charge represented the difference between the carrying value of the scroll compressor long-lived assets and the estimated fair value of those assets at that time, based on an independent appraisal. Manufacturing Operations Compressor Products manufactured in the Company's U.S. plants accounted for approximately 54% of 2000 compressor sales. The balance was produced at the Company's manufacturing facilities in Brazil, France and India. The compressor operations are substantially vertically integrated, and the Company manufactures a significant portion of its component needs internally, including electric motors, metal stampings and glass terminals. Raw materials are purchased from a variety of non-affiliated suppliers. The Company utilizes multiple sources of supply and the required raw materials and components are generally available in sufficient quantities. Sales and Marketing The Company markets its U.S., Brazilian and Indian built compressors under the "Tecumseh" brand and French built compressors under the "Tecumseh Europe-L'Unite Hermetique" brand. The Company sells its compressor products in North America primarily through its own sales staff. Major OEM customers are assigned to sales staff on an account basis. Other customers (smaller commercial OEMs) are served by sales personnel assigned to specified geographic regions, and sales to aftermarket customers are made through independent sales representatives. The Company's U.S. International division and the Brazilian, French and Indian subsidiaries each have their own sales staff. In certain foreign markets, the Company also uses local independent sales representatives and distributors. Substantially all of the Company's sales of compressor products for room air conditioners and for household refrigerators and freezers are to original equipment manufacturers. Sales of compressor products for unitary central air conditioning systems and commercial applications include substantial sales to both OEM and distributor customers. The Company has over 1,200 customers for compressor products, the majority of which are commercial customers. In 2000, the two largest customers for compressor products accounted for 7.8% and 4.1%, respectively, of total segment sales, or 4.3% and 2.3%, respectively, of consolidated net sales. Loss of either of these customers could have a material adverse effect on the results of operations of the Compressor Products segment and, at least temporarily, on the Company's business as a whole. Generally, the Company does not enter into long-term contracts with its customers in this segment. However, the Company does pursue long-term agreements with selected major customers where a business relationship has existed for a substantial period of time. In 2000, approximately 35% of the Compressor Products produced by the Company in its U.S. plants were exported to foreign countries. The Company exports to over 60 countries. Over three-quarters of these exported products were sold in the Far and Middle East. Competition All of the compressor market segments in which the Company operates are highly competitive. Participants compete on the basis of delivery, efficiency, noise level, price and reliability. The Company 3 6 competes not only with other independent compressor producers but also with manufacturers of end products that have internal compressor manufacturing operations. North American Operations The domestic unitary air conditioning compressor market consists of OEMs and a significant compressor aftermarket. The Company competes primarily with two U.S. manufacturers, Copeland Corporation, a subsidiary of Emerson Electric, Inc., and Bristol Compressors, Inc., a subsidiary of York International Corporation. Copeland Corporation enjoys a larger share of the domestic unitary air conditioning compressor business than either Bristol Compressors, Inc. or the Company. Over the last several years there has been an industry trend toward the use of scroll compressors in the high efficiency segment of the unitary air conditioning market. Copeland Corporation and other compressor manufacturers have had scroll compressors as part of their product offerings for some time. Along with its own manufacturing capabilities, Copeland Corporation is also a member of the Alliance Scroll manufacturing joint venture with two major U.S. central air conditioning manufacturers, Lennox International Inc. and American Standard's Trane air conditioning division. Carrier Corporation, a subsidiary of United Technologies and a major original equipment manufacturer, has a joint venture to produce scroll compressors with Bristol Compressors, Inc. As discussed in the product line section, the Company offered a limited line of scroll compressor models for sale in 2000, and scroll compressors will be sold in limited quantities in 2001 through the Company's Cool Products aftermarket division. The Company continues to believe that the scroll compressor is important to maintaining a position in the unitary air conditioning and commercial refrigeration markets and it continues to pursue development of the scroll compressor in a manner that limits risk to the Company. In the domestic room air conditioning compressor market, the Company competes primarily with foreign companies, which export compressors to the United States but also have U.S. manufacturing capabilities. The Company also competes to a lesser extent with U.S. manufacturers. Competitors include Matsushita Electric Industrial Corporation, Rotorex, Inc., Sanyo Electric Trading Company, L.G. Electronics, Inc., Mitsubishi, Daikin, and others. The Company has increasingly struggled with price competition from foreign companies during the last two years. Downward pressure on prices, particularly in the room air conditioning market, has continued due to world over-capacity and a market flooded by cheap Asian products both in North America and in Europe. In the domestic markets for water coolers, dehumidifiers, vending machines, refrigerated display cases and other commercial refrigeration products, the Company competes primarily with compressor manufacturers from the Far East, Europe and South America, and to a lesser extent, the United States. Competitors include Matsushita Electric Industrial Corporation, Danfoss, Inc., Embraco, S.A., Copeland Corporation and others. In 2000, the Company's sales of commercial refrigeration products decreased approximately 4% compared to 1999 sales levels largely due to a decline in the demand for equipment used in the beverage marketing and vending segment. The household refrigerator and freezer market is vertically integrated with many white good producers manufacturing a substantial portion of their compressor needs. The Company's competitors include AB Electrolux, Matsushita Electric Industrial Corporation, Embraco, S.A., Danfoss, Inc., and others. The Company has an extensive product line in this market which includes both reciprocating piston and rotary type compressors with a reputation for reliable field performance. In light of the domestic competition and world over-capacity situation, the Company began in late 1999 to evaluate possible courses of action to consolidate North American compressor manufacturing capacity. The objective was to reduce the cost structure of the Company's domestically produced compressor models and improve the quality performance, thereby offering a more competitively priced product to our customers. As a result, the Company announced during the first quarter of 2000 its intent to close its Somerset, Kentucky compressor manufacturing facility and relocate production to other existing North American manufacturing facilities. The closing of this facility will result in the termination of approximately 895 employees, 810 of 4 7 whom are collectively bargained, hourly employees and 85 of whom are salaried employees. In connection with this decision, an $18.8 million nonrecurring charge was recorded in the first quarter of 2000. This amount is comprised of $9.5 million in employee severance, group insurance, pension and workers' compensation costs. The balance of $9.3 million represents plant closure costs and the write-down of obsolete and non-usable equipment. Certain equipment and product lines have been or are in the process of being transferred to other facilities. All manufacturing operations at Somerset are scheduled to cease by March 31, 2001 with total plant decommissioning to be completed by August 31, 2001. In addition to the Somerset plant closing charge, the Company recorded an $8.7 million asset impairment charge to reduce the carrying amount of assets dedicated to the production of certain large reciprocating compressors used in the unitary air conditioning market. Because of the significantly reduced demand for this product and the high costs associated with its manufacture, the Company has determined that future estimated cash flows from this product line would not be sufficient to cover the carrying amount of the assets dedicated to the production of this unit. Accordingly, the difference between the carrying value of the assets and the estimated fair value of the assets based on an independent appraisal was recorded as an asset impairment charge. European Operations Tecumseh Europe sells the major portion of its manufactured compressors in Western Europe, and competes in those markets primarily with several large European manufacturers, some of which are captive suppliers, and to a lesser but increasing extent, with manufacturers from the Far East and Brazil. Competitors include AB Electrolux, Embraco, S.A., Danfoss, Inc. and others. Tecumseh Europe produces compressors primarily for the commercial refrigeration market. In 2000, Tecumseh Europe experienced a decline in sales from 1999 levels largely due to foreign currency translation losses combined with reduced demand and price competition in its domestic market. In response to competitive pressures, Tecumseh Europe is taking a more global approach to its manufacturing process by importing less expensive compressor kits and condensing units from the Company's Brazilian facility to be assembled in France and offered for sale in Europe, Asia and the Far East. Tecumseh Europe has also developed and implemented a number of cost-cutting initiatives and improvements in its marketing and customer service programs. Brazilian Operations Tecumseh do Brasil competes directly with Embraco, S.A. in Brazil and with Embraco and several other foreign manufacturers in Latin America. Historically, Tecumseh do Brasil has sold the major portion of its manufactured compressors in Latin America, North America, Europe and the Middle East. The devaluation of the Brazilian Real in early 1999 set the stage for Tecumseh do Brasil to better compete in foreign markets, resulting in approximately 61% of its 2000 and 70% of its 1999 production being exported. In spite of increased sales, operating margins came under some pressure in the second half of 2000 as the favorable effects of the 1999 Brazilian currency devaluation began to wane and upward pricing pressure on manufacturing costs began to appear. Indian Operations Tecumseh Products India, Ltd. has two compressor manufacturing facilities in India, which sell to regional markets. Major competitors include the Indian manufacturers Kirloskar Copeland Ltd., Carrier Aircon Ltd., Godrej, Videocon, BPL and others. Tecumseh Products India, Ltd. produces compressors for the air conditioning and refrigerator and freezer markets. In 2000, approximately 28% of its sales were made to a single customer, and the loss of this customer would have a significant impact on the results of operations of this facility, and to a lesser extent, on the consolidated results of the Company as a whole. During 2000, Tecumseh Products India, Ltd. began the process of closing its old refrigeration compressor plant and relocating manufacturing operations to its newly constructed plant in Ballabgarh, India. As a result of the move to the new facility, the Company estimated it would need approximately 600 fewer employees 5 8 than at the older facility. Accordingly, the Company put in place a voluntary retirement program to facilitate the workforce reduction. A $6.0 million charge covering the estimated cost of this plan was recorded during the first quarter of 2000. At December 31, 2000, the targeted workforce reduction was substantially completed. The move to the new facility did not come without incident. As a consequence of the move and the workforce reduction plan, hourly employees at the older facility began a lengthy work stoppage which severely impacted operating results for the first half of the year. Additionally, plant start-up costs and expenses associated with the development of a new compressor line negatively affected operating results. Operating losses in India were approximately $5.0 million worse in 2000 than in 1999. However, fourth quarter results were in line with previous years, indicating improvement at the new plant. Research Ongoing research and development is another method in which the Company strives to meet its competition. The ability to successfully bring new products to market in a timely manner has rapidly become a critical factor in competing in the compressor products business as a result of, among other things, the imposition of energy efficiency standards and environmental regulations including those related to refrigerant requirements. These factors are discussed below. Regulatory Requirements Chlorofluorocarbon compounds ("CFCs"), the primary refrigerants used in household refrigerators and freezers and in commercial refrigeration equipment, have been identified as one of the leading factors causing depletion of the earth's ozone layer. Under a 1992 international agreement, production of CFCs in developed countries was phased out January 1, 1996. The Company began producing compressors using alternative refrigerants (approved by the U.S. government) for the commercial refrigeration market in late 1992 and for the refrigerator and freezer market during 1994. The Company believes that its rapid development of products using non-CFC refrigerant technology has improved its competitive position in these markets. Hydrochlorofluorocarbon compounds ("HCFCs") are used as a refrigerant in air conditioning systems. Under a 1992 international agreement, HCFCs will be banned from new equipment beginning in 2010. Some European countries began HCFC phase-outs as early as 1998, and a number of European countries have plans to eliminate the use of HCFCs during 2002. Within the last several years, the Company has approved and released a number of compressor models utilizing U.S. government approved hydrofluorocarbons, ("HFC") refrigerants, which are considered more environmentally safe than the preceding refrigeration compounds. HFCs are also currently under global scrutiny and subject to possible future restrictions. In the last few years, there has been an even greater political and consumer movement, particularly from northern European countries, toward the use of hydrocarbons ("HCs") as alternative refrigerants, moving further away from the use of chlorine (which depletes the ozone layer of our atmosphere) and the use of fluorine (which contributes to the "green-house" effect). Both Tecumseh do Brasil and Tecumseh Europe have compressor products available for sale that utilize hydrocarbon refrigerants. Hydrocarbons are flammable compounds and have not been approved by the U.S. government for air conditioning or household refrigerator and freezer applications. It is not presently possible to estimate the level of expenditures which will be required to meet future industry requirements or the effect on the Company's competitive position. The U.S. National Appliance Energy Conservation Act of 1987 (the "NAECA") requires higher energy efficiency ratings on room air conditioners manufactured after October 1, 2000 and on household refrigerator/freezers manufactured after July 1, 2001. Proposed energy efficiency requirements for unitary air conditioners were published in the U.S. in January 2001 to be effective in the year 2006. The European manufacturing community issued new energy efficiency directives effective January 1, 2000 that lowered the acceptable level of energy consumption for refrigerators and freezers. These efficiency ratings apply to the overall performance of the specific appliance, of which the compressor is one component. The Company has ongoing projects aimed at improving the efficiency levels of its compressor products and 6 9 plans to have products available to meet known energy efficiency requirements as determined by our customers. Some of the Company's compressor products already meet or exceed the new energy efficiency standards. It is not presently possible to estimate the level of expenditures which will be required to meet the new standards or the effect on the Company's competitive position. ENGINE AND POWER TRAIN PRODUCTS Small gasoline engines account for a majority of the net sales of the Company's Engine and Power Train Products segment. These are used in a broad variety of consumer products, including lawn mowers (both riding and walk-behind types), snow throwers, small lawn and garden tractors, small power devices used in outdoor chore products, generators, pumps and certain self-propelled vehicles. The Company manufactures gasoline engines, both two- and four-cycle types, with aluminum die cast bodies ranging in size from 2 through 22 horsepower and with cast iron bodies ranging in size from 12 through 18 horsepower. The Company's power train products include transmissions, transaxles and related parts used principally in lawn and garden tractors and riding lawn mowers. Manufacturing Operations The Company manufactures engines and related components in its five plants in the United States and one plant in Italy. All of the Company's power train products are manufactured in one facility in the United States. Operations of the Company in this segment are partially vertically integrated as the Company produces most of its plastic parts and carburetors, as well as a substantial portion of the aluminum die-castings used in its engines and power train products. Sales and Marketing The Company markets its Engine and Power Train Products worldwide under the "Tecumseh" and "Peerless" brands. A substantial portion of the Company's engines are incorporated into lawn mowers sold under brand labels, including the "Craftsman" brand of Sears, as well as other name brands sold through "do it yourself" home centers, mass merchandisers and lawn and garden specialty retailers. A majority of the Company's Engine and Power Train Products are sold directly to OEMs. The Company also sells engines and parts to its authorized dealers and distributors, who service its engines both in the United States and abroad. Marketing of Engine and Power Train Products is handled by the Company's own sales staff and by local sales representatives in certain foreign countries. North America and Europe are the principal markets for lawn and garden products. In 1999, the Engine and Power Train Products Group enjoyed increased sales of engines for portable generator applications as a result of Year 2000 concerns, and increased sales of engines for snow throwers due to the heavy snowfall in certain areas of North America. In 2000, engine demand shifted toward a market heavily dependent on lower margin lawn and garden applications. As fears over Year 2000 uncertainties subsided, the demand for portable power generators almost completely disappeared. Additionally, excess purchases of engines and over-building of generators left significant quantities of inventory in the pipeline and on retail shelves. While there has been some recent evidence that these excess inventories are being worked off and that generator demand will return to more normal levels, it is highly unlikely that generator demand will return to 1999 levels. In addition to the precipitous decline in sales of engines for portable power generation, sales of engines for snow thrower applications, where the company has a significant share of the market, were down approximately 18% from 1999 levels. In 2000, the three largest (direct ship) customers for Engine and Power Train Products accounted for 25.9%, 22.0% and 15.8%, respectively, of segment sales, or 9.6%, 8.2% and 5.9%, respectively, of consolidated net sales. The engines provided to one of these customers are incorporated into end consumer products that are sold by Sears. Total sales to Sears and Sears affiliated suppliers in 2000 and 1999 amounted to 28.6% and 20.5%, respectively, of segment sales, or 10.6% and 8.3%, respectively, of consolidated net sales. Loss of any of this segment's three largest customers, and/or the loss of Sears as a retail distributor, would have a material 7 10 adverse effect on the results of operations of this segment and, at least temporarily, on the Company and its business as a whole. Competition The Company believes it is the largest consolidated producer of engines and transmissions for the outdoor power equipment industry. However, it remains the second largest producer of small gasoline engines for lawn and garden applications in the world. The largest such producer, with a broader product range, is Briggs & Stratton Corporation. Other producers of small gasoline engines include Kohler Corporation, Toro Company and Honda Corporation, among others. Competition in the Company's engine business is based principally on price, service, product performance and features and brand recognition. As mass merchandisers have captured a larger portion of the sales of lawn and garden products in the United States, price competition and the ability to offer customized styling and feature choices have become even more important. The Company believes that it competes effectively on these bases. New Environmental Standards During 2000, the U.S. Environmental Protection Agency ("EPA") finalized Phase II emission standards for handheld small off-road engines which include the two-cycle engines produced by the Company. The Company already produces competitively priced engines that comply with the current EPA and California Air Resources Board ("CARB") Standards. Phase II emission standards also have been finalized for non-handheld four-cycle engines. Phase-in of the rules for non-handheld four-cycle engines will take place between the 2001 and 2006 model years. It is not possible at this time to determine the related costs of compliance with these standards, nor the impact on the competitive position of the Company. The state of California began enforcing the CARB Tier II Emission Standards effective January 1, 2000. A broad range of the Company's engines have been certified to comply with these emission standards. Several states are in the process of, or debating the merits of, adopting the CARB Tier II Emission Standards. It is not possible at this time to determine the effect of this change in regulatory requirements on the competitive position or consolidated results of the Company. PUMP PRODUCTS The Company manufactures and sells submersible pumps, centrifugal pumps and related products through its two subsidiaries, Little Giant Pump Company ("Little Giant") and MP Pumps, Inc. ("MP Pumps"). Little Giant pumps are used in a broad range of commercial, industrial, and consumer products, including (1) heating, (2) ventilating and cooling, (3) parts washers, (4) machine tools, (5) evaporative coolers, (6) sump pumps, (7) statuary fountains, (8) water gardening and (9) waste management. Little Giant's products are sold worldwide to OEMs, distributors and mass retailers. Sales and marketing is executed through Little Giant's own sales management and through manufacturers' representatives under the "Little Giant" brand name. The pump industry is highly fragmented, with many relatively small producers competing for sales. Little Giant has been particularly successful in competing in the pump industry by targeting specific market niches where opportunities exist and then designing and marketing corresponding products. In the last three years, the "Little Giant" brand name has become more associated with consumer products due to the success of the subsidiary's water-gardening product line. However, the focus of this pump manufacturer has long been in the commercial and industrial market channels of the pump industry, and Little Giant is pursuing these markets through the development of complete pump systems utilizing larger pump models. In the third quarter of 2000, Little Giant entered the residential waste water collection, transfer, and disposal market by acquiring the assets of Interon Corporation. Sales into this market will be under the "Little Giant" and "Interon" brand names. 8 11 MP Pumps manufactures and sells a variety of centrifugal pumps ranging in capacity from 15 to 1,500 gallons per minute, that are used in the agricultural, marine and transportation industries, and in a variety of commercial and industrial applications and end products. MP Pumps sells both to OEMs, which incorporate its pumps into their end products, and through an extensive network of market segmented distributors located throughout the United States. The distributors within the network both engineer and sell pump products to end users and small OEMs. A limited number of pumps are also sold to departments and agencies of the U.S. government. MP Pumps markets both custom and standard catalog product through its own sales staff. Pumps sold through distribution channels are branded under the "MP" and "Flomax" registered trade names. Some pumps are privately labeled for specific customer use. BACKLOG AND SEASONAL VARIATIONS Most of the Company's production is against short-term purchase orders, and backlog is not significant. Both Compressor Products and Engine and Power Train Products are subject to some seasonal variation. Generally, the Company's sales and operating profit are stronger in the first two quarters of the year than in the last two quarters. PATENTS, LICENSES AND TRADEMARKS The Company owns a substantial number of patents, licenses and trademarks and deems them to be important to certain lines of its business; however, the success of the Company's overall business is not considered primarily dependent on them. In the conduct of its business, the Company owns and uses a variety of registered trademarks, the most familiar of which is the trademark consisting of the word "Tecumseh" in combination with a Native American Indian head symbol. RESEARCH AND DEVELOPMENT The Company must continually develop new and improved products in order to compete effectively and to meet evolving regulatory standards in all of its major lines of business. The Company spent approximately $28.1, $30.2 and $31.5 million during 2000, 1999, and 1998, respectively, on research activities relating to the development of new products and the development of improvements to existing products. None of this research was customer sponsored. EMPLOYEES On December 31, 2000, the Company employed approximately 17,800 persons, 57% of which were employed in foreign locations. Approximately 3,500 of the U.S. employees were represented by labor unions, with no more than approximately 1,300 persons represented by the same union contract. The majority of foreign location personnel are represented by national trade unions. The number of the Company's employees is subject to some seasonal variation; during 2000, the maximum number of persons employed was approximately 19,700 and the minimum was 17,500. Overall, the Company believes it generally has a good relationship with its employees. 9 12 EXECUTIVE OFFICERS OF THE REGISTRANT The following are the executive officers of the Company.
PERIOD OF SERVICE NAME AND AGE OFFICE OR POSITION HELD AS AN OFFICER - ------------ ----------------------- ----------------- Kenneth G. Herrick, 79... Chairman of the Board of Directors Since 1966 Todd W. Herrick, 58...... President and Chief Executive Officer Since 1974 John H. Foss, 58......... Vice President, Treasurer, and Chief Since 1979 Financial Officer James E. Martinco, 55.... Group Vice President, Engine and Power Since 1998 Train(1)
- ------------------------- (1) Last five years of business experience -- Vice President, Engine and Power Train, Tecumseh Products Company 1996 to 1997; Vice President of Operations and Vice President/General Manager of Engine Products 1990 to 1996. (Employed with Tecumseh Products Company since 1976.) ITEM 2. PROPERTIES The Company's headquarters are located in Tecumseh Michigan, approximately 50 miles southwest of Detroit. At December 31, 2000 the Company had 31 principal properties worldwide occupying approximately 8.7 million square feet with the majority, approximately 7.9 million square feet, devoted to manufacturing. Eleven facilities with approximately 3.4 million square feet were located in five countries outside the United States. The following table shows the approximate amount of space devoted to each of the Company's three principal business segments.
APPROXIMATE FLOOR INDUSTRY SEGMENT AREA IN SQUARE FEET - ---------------- ------------------- Compressor Products................................ 6,290,000 Engine and Power Train Products.................... 1,928,000 Pump Products and Other............................ 442,000
Five domestic facilities, including land, building and certain machinery and equipment were financed and leased through industrial revenue bonds. All owned and leased properties are suitable, well maintained and equipped for the purposes for which they are used. The Company considers that its facilities are suitable and adequate for the operations involved. ITEM 3. LEGAL PROCEEDINGS The Company has been named by the U.S. Environmental Protection Agency ("EPA") as a potentially responsible party ("PRP") in connection with the Sheboygan River and Harbor Superfund Site in Wisconsin. At the direction of the EPA, the Company and its independent environmental consultants conducted a remedial investigation and feasibility study. As a result of this study, the Company believes the most appropriate course of action is active remediation to the upper river near the Company's facility, and that only monitored natural armoring should be required in the middle river and the lower river and harbor. At December 31, 2000 and 1999, the Company had accrued $30.3 and $31.5 million, respectively, for estimated costs associated with the cleanup of this site. In May 1999, the EPA issued a proposed remedial action plan ("PRAP") for the Sheboygan River and Harbor Site. The PRAP proposed remedial action in both the upper river and the harbor, at an estimated cost of approximately $66 million. In August 1999, the Company filed extensive comments in opposition to this proposal. In May 2000, the EPA issued a Record of Decision ("ROD") selecting the remedy for the Site. The selected remedy is similar to the proposed remedy, but the ROD reduces the estimated cost of sediment removal in the upper river and reduces the amount of sediment removal in the harbor, for a total estimated cost of approximately $41 million. Tecumseh continues to oppose many aspects of the remedy. Because EPA is planning to negotiate with Tecumseh and other PRPs concerning implementation of the ROD in two 10 13 phases, with the first phase to begin in early 2001, the ultimate resolution of this matter is likely to take some time. In addition, the Wisconsin Department of Natural Resources ("WDNR") as a Natural Resource Trustee is investigating what additional requirements, if any, the state may have beyond those specified in the EPA plan. The Company is also continuing to explore whether a negotiated resolution of potential liability for natural resource damages would be in the best interest of the Company and its shareholders. The ultimate costs to the Company will be dependent upon factors beyond its control. These factors include the results of further investigations, the details of the remedial actions required by the EPA (in consultation with the WDNR), changes in remedial technologies, the extent of any natural resource damages, and the outcome of any related litigation. Other PRPs may contribute to the costs of any final remediation, and/or natural resource damage claims, regarding the middle river and lower river and harbor portions of the Site. The Company, in cooperation with the WDNR, conducted an investigation of soil and groundwater contamination at the Company's Grafton, Wisconsin plant. It was determined that contamination from petroleum and degreasing products used at the plant are contributing to an off-site ground water plume. Certain test procedures are underway to assess the extent of contamination and to develop remedial options for the site. While the Company has provided for estimated investigation and on-site remediation costs, the extent and timing of future off-site remediation requirements, if any, are not presently determinable. The WDNR has requested that the Company and other interested parties join it in a cooperative effort to clean up PCB contamination in the watershed of the south branch of the Manitowoc River, downstream of the Company's New Holstein, Wisconsin facility. The Company has cooperated to date with the WDNR in investigating the scope of the contamination. Although the WDNR's investigation has not established the parties responsible for the contamination, the WDNR has indicated that it believes the Company is a source of the PCB contamination and that it expects the Company to participate in a cooperative cleanup effort. The Company has provided for preliminary investigation expenses and for a portion of source area remediation costs it is likely to agree to share with federal and state authorities. Although participation in a cooperative remediation effort for the balance of the watershed is under consideration, it is not possible to reasonably estimate the cost of any such participation at this time. In addition to the above mentioned sites, the Company is also currently participating with the EPA and various state agencies at certain other sites to determine the nature and extent of any remedial action, which may be necessary with regard to such other sites. At December 31, 2000 and 1999, the Company had accrued $40.1 million and $42.4 million, respectively for environmental remediation, including the amounts noted above relating to the Sheboygan River and Harbor Superfund Site. As these matters continue toward final resolution, amounts in excess of those already provided may be necessary to discharge the Company from its obligations for these sites. Such amounts, depending on their amount and timing, could be material to reported net income in the particular quarter or period which they are recorded. In addition, the ultimate resolution of these matters, either individually or in the aggregate, could be material to the consolidated financial statements. Various lawsuits and claims, including those involving ordinary routine litigation incidental to its business, to which the Company is a party, are pending, or have been asserted, against the Company. Although the outcome of the various lawsuits and claims asserted or pending against the Company or its subsidiaries cannot be predicted with certainty, some may be disposed of unfavorably to the Company. Management has no reason to believe that the ultimate disposition of these pending legal issues will have a materially adverse effect on the future consolidated financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of 2000 to a vote of security holders through the solicitation of proxies or otherwise. 11 14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS INFORMATION CONCERNING EQUITY SECURITIES The Company's Class A and Class B common stock trades on the Nasdaq Stock Market under the symbols TECUA and TECUB, respectively. Total shareholders of record as of March 1, 2001 were approximately 617 for Class A common stock and 594 for Class B common stock. There were no equity securities sold by the Company during the period covered by this report. MARKET PRICE AND DIVIDEND INFORMATION Range of Common Stock Prices and Dividends for 2000
SALES PRICE ------------------------------------- CLASS A CLASS B CASH ----------------- ----------------- DIVIDENDS QUARTER ENDED HIGH LOW HIGH LOW DECLARED - ------------- ------- ------- ------- ------- --------- March 31..................................... $51.875 $40.313 $46.500 $38.875 $0.32 June 30...................................... 49.125 38.000 46.125 40.188 0.32 September 30................................. 42.250 34.625 41.500 34.750 0.32 December 31.................................. 47.438 35.375 44.625 34.500 0.32
Range of Common Stock Prices and Dividends for 1999
SALES PRICE ------------------------------------- CLASS A CLASS B CASH ----------------- ----------------- DIVIDENDS QUARTER ENDED HIGH LOW HIGH LOW DECLARED - ------------- ------- ------- ------- ------- --------- March 31..................................... $51.500 $41.500 $48.000 $41.813 $0.30 June 30...................................... 67.750 49.500 61.500 43.250 0.30 September 30................................. 66.875 48.625 59.750 45.000 0.30 December 31.................................. 50.250 41.625 45.875 37.500 0.32
12 15 ITEM 6. SELECTED FINANCIAL DATA The following is a summary of certain financial information of the Company.
YEARS ENDED DECEMBER 31 ---------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) Net Sales.................................. $1,649.9 $1,814.3 $1,750.2 $1,728.3 $1,784.6 Cost of sales and operating expenses....... 1,411.4 1,507.4 1,492.8 1,478.7 1,517.8 Selling and administrative expenses........ 118.3 117.6 115.8 104.4 98.5 Nonrecurring (gain) charges................ 33.5 (5.5) 45.0 -- 5.1 -------- -------- -------- -------- -------- Operating Income........................... 86.7 194.8 96.6 145.2 163.2 Interest expense........................... (6.7) (7.9) (6.9) (6.3) (6.4) Interest income and other, net............. 27.9 28.1 27.8 21.9 20.2 Nonrecurring gain.......................... -- 8.6 -- -- -- -------- -------- -------- -------- -------- Income before taxes on income.............. 107.9 223.6 117.5 160.8 177.0 Taxes on income............................ 41.8 81.6 43.3 60.3 64.4 -------- -------- -------- -------- -------- Net income................................. $ 66.1 $ 142.0 $ 74.2 $ 100.5 $ 112.6 ======== ======== ======== ======== ======== Basic and diluted earnings per share....... $ 3.44 $ 7.00 $ 3.47 $ 4.59 $ 5.15 Cash dividends declared per share.......... $ 1.28 $ 1.22 $ 1.20 $ 1.20 $ 1.68 Weighted average number of shares outstanding (in thousands)............... 19,218 20,277 21,366 21,879 21,881 Cash and cash equivalents.................. $ 268.2 $ 270.5 $ 277.7 $ 304.1 $ 277.7 Working capital............................ 602.4 618.6 605.9 554.8 549.7 Net property, plant and equipment.......... 444.7 477.4 508.9 569.7 529.1 Total assets............................... 1,553.1 1,553.3 1,556.2 1,537.4 1,472.6 Long-term debt............................. 14.2 15.6 17.2 17.5 14.4 Stockholders' equity....................... 995.4 1,014.2 995.7 1,000.2 947.5 Capital expenditures....................... 64.0 73.0 64.4 90.6 115.2 Depreciation and amortization.............. 71.2 72.4 74.6 71.1 64.6 Cost of common shares repurchased.......... 39.6 57.7 49.0 1.9 --
Nonrecurring charges and credits: During 2000 the Company recorded a $33.5 million charge ($23.3 million, net of tax) related to the realignment of its North American and Indian compressor manufacturing operations. The 1999 results included credits of $14.1 million ($9.0 million, net of tax) comprised of a $4.6 million gain on the curtailment of employee benefit plans at a closed plant, a $4.0 million gain on an insurance settlement, and an $8.6 million gain from currency hedging at the Company's Brazilian subsidiary. These gains were partially offset by charges for plant closing and environmental costs totaling $3.1 million. During 1998, the Company recorded a $45 million charge ($28.8 million, net of tax) for asset impairment. The 1996 results included a $5.1 million charge ($3.2 million, net of tax) for environmental and litigation costs. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENTS RELATING TO FORWARD LOOKING STATEMENTS The following report should be read in connection with the information contained in the Consolidated Financial Statements and Notes to Consolidated Financial Statements. 13 16 This discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act and are subject to the safe harbor provisions created by that Act. In addition, forward-looking statements may be made orally in the future by or on behalf of the Company. Forward-looking statements can be identified by the use of terms such as "expects," "should," "may," "believes," "anticipates," "will," and other future tense and forward-looking terminology, or by the fact that they appear under the caption "outlook." Investors are cautioned that actual results may differ materially from those projected as a result of certain risks and uncertainties, including, but not limited to, i) changes in business conditions and the economy in general in both foreign and domestic markets; ii) weather conditions affecting demand for air conditioners, lawn and garden products and snow throwers; iii) the extent to which the decline in demand for lawn and garden and utility engines and the unfavorable product mix in that segment of the Company's business will continue, and the success of the Company's ongoing effort to bring costs in line with projected production levels and product mix; iv) financial market changes, including fluctuations in interest rates and foreign currency exchange rates; v) economic trend factors such as housing starts; vi) governmental regulations; vii) availability of materials; viii) actions of competitors; ix) the ultimate cost of resolving environmental matters; x) the extent of any business disruption resulting from the conversion to the Euro; xi) the Company's ability to profitably develop, manufacture and sell both new and existing products; xii) the extent of any business disruption that may result from the restructuring and realignment of the Company's manufacturing operations and the ultimate cost of those initiatives; and xiii) potential political and economic adversities that could adversely affect anticipated sales and production in Brazil. These forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. OVERVIEW Tecumseh Products Company is a full line, independent global manufacturer of hermetic compressors for air conditioning and refrigeration products, gasoline engines and power train components for lawn and garden applications, and pumps. The Company's products are sold in countries all around the world. Products are grouped into three principal industry segments: Compressor Products, Engine and Power Train Products, and Pump Products. Net sales in 2000 amounted to $1,649.9 million, a decrease of approximately 9% from 1999 net sales of $1,814.3 million. Net income for 2000 amounted to $66.1 million, or $3.44 per share compared to net income of $142.0 million, or $7.00 per share in 1999. The earnings results from 2000 include nonrecurring charges totaling $33.5 million ($23.3 million or $1.21 per share net of taxes), while 1999 results included nonrecurring credits of $14.1 million ($9.0 million or $.44 per share). Exclusive of nonrecurring items, net income of $89.4 million ($4.65 per share) in 2000 was approximately 33% lower than net income of $133.0 million ($6.56 per share) in 1999. The lower 2000 results can be attributed to reduced sales and profits in the Company's two major business segments, Compressor Products and Engine and Power Train Products. 14 17 RESULTS OF OPERATIONS Compressor Products 2000 VS. 1999 Worldwide Compressor Products sales amounted to $919.8 million in 2000 compared to $967.0 million in 1999, a decrease of $47.2 million or 4.9%. Compressor Products sales in North America were adversely impacted in 2000 by both reduced demand and accelerating competition in the air conditioning markets. Intense price competition, primarily from Asian producers, continued to negatively impact the room air conditioning market. Additionally, some of the Company's customers purchased finished room air conditioning products from Asia, thereby shrinking the available market. Sales in India were down from 1999 levels primarily as a result of the effects of a lengthy work stoppage and the difficulties relating to the ramp up of a new production facility. Brazilian results continued to show improvement, although not enough to offset the decreases in North America and India. Brazilian sales increased approximately 20% from 1999 levels reflecting a strengthening local economy and increased export sales, primarily to Europe. Compressor Group operating income, exclusive of nonrecurring items, declined from $91.5 million in 1999 to $65.7 million in 2000. North American results were severely impacted by the loss of volume and continuing erosion of selling prices in the air conditioning markets. Additionally, North American results were adversely affected by reduced fixed cost absorption as a result of lower production volumes and inefficiencies resulting from the transfer of production from the Somerset plant to other production facilities. As a result of the lengthy work stoppage and operating inefficiencies at the new compressor plant, Indian operating income decreased by approximately $5.0 million from 1999 levels. Results from the Brazilian operations continued to contribute the majority of the Compressor Group's operating income. Approximately 66% of the Group's total operating income in 2000 was contributed by the Brazilian operations. Although Brazilian operating income increased by approximately $2.0 million from 1999 levels, margins were under pressure in spite of sales growth. This impact was an expected phenomenon that commenced in the second half of 2000 as the favorable effect of the 1999 Brazilian currency devaluation subsided and upward pressure was placed on manufacturing costs. 1999 VS. 1998 Compressor Products sales declined 7.7% to $967.0 million in 1999 from 1998 sales of $1,048.1 million. Approximately half of this decline was attributable to the translation of sales at lower foreign currency values, primarily the Brazilian Real. The other primary factor leading to the decline in sales was the continued downward pressure on prices brought about by a market flooded with cheap Asian products both in North America and in Europe. Declines in sales of compressors for the commercial refrigeration market were significant in North America and Europe. In spite of lower sales, operating income for the Compressor Products Group, exclusive of nonrecurring items, increased 11% to $91.5 million in 1999 from $82.2 million in 1998. Operating margins improved from 7.8% in 1998 to 9.5% in 1999. This improvement was largely driven by Tecumseh do Brasil, which benefited from increased profit margins resulting from continued cost cutting efforts and the January 1999 devaluation of the Brazilian Real. As a result of the devaluation, margins on the Brazilian operation's U.S. dollar denominated export sales, which accounted for approximately 70% of the unit's 1999 sales, increased significantly when compared to the pre-devaluation results of 1998. Brazilian operating income nearly doubled in 1999 compared to 1998 and more than offset weakness in the European and North American compressor businesses. Indian operations showed improved sales volume in 1999. However, because of competitive pricing pressures in the refrigerator compressor market, and a relatively high level of manufacturing expenses, the Indian operations remained unprofitable. 15 18 Engine and Power Train Products 2000 VS. 1999 Both sales and operating income were significantly reduced in 2000 from 1999's record levels. Sales amounted to $612.8 million in 2000 compared to $734.3 million in 1999. The primary reason behind this reduction was the significant reduction in the sale of medium frame engines used in applications such as portable power generators and snow throwers. The portable power generator business, which was abnormally high in 1999, nearly disappeared in 2000 as the Year 2000 date change fears subsided. As a result, the 2000 sales mix was heavily weighted toward lower priced, low margin lawn and garden applications. Because of the significant decrease in medium frame utility engines and poor product mix, operating income of the Engine and Power Train Group decreased to $45.9 million in 2000 from 1999's record of $93.1 million. The loss of utility engine business and heavy dependence on lawn and garden applications resulted in an excess production capacity situation as well as production imbalances and inefficiencies which negatively impacted profit margins. 1999 VS. 1998 The Engine and Power Train Products Group achieved record results in 1999. Annual sales increased 24% from $592.2 million in 1998 to $734.3 million in 1999. This increase was due primarily to large gains in the sales of medium frame engines for snow throwers and generators. Unit shipments of snow thrower engines increased approximately 80% in 1999 from 1998 levels. Engine demand for electrical power generators was particularly strong, driven not only by normal increases in demand, but also by concerns over the potential year 2000 power situation. Also contributing to this improvement were the combined results of the Italian manufacturing facility and the U.S. transmission production facility, both of which achieved record shipping levels during the year. Operating income grew 63% to $93.1 million in 1999 from $57.2 million in 1998. Group operating profit margins increased from 9.7% in 1998 to 12.7% in 1999, due in large part to the increased production of medium frame engines with greater profit margins. PUMP PRODUCTS Pump Products sales in 2000 amounted to $117.3 million compared to $113.0 million in 1999, an increase of 4%. In 1999, this segment experienced a 3% increase in sales over 1998 sales of $109.9 million. Increased penetration in water gardening markets and increased industrial sales have been largely responsible for this growth. Pump Products operating margins amounted to 14.9% in 2000 compared to 12.5% in 1999. In 2000, operating income of $17.5 million increased 24% from 1999 operating income of $14.1 million. This improvement was due to increased industrial pump contribution margins and reduced expenditures in 2000 for marketing and promotion of the water gardening product line. Operating income in 1999 increased 23% over the 1998 operating income of $11.5 million primarily due to the increased market for water gardening products. During the third quarter of 2000, the Pump segment entered the residential wastewater collection, transfer and disposal market by acquiring the assets of Interon Corporation. This market, while currently in its infancy, is expected to grow rapidly as it provides an economical alternative to conventional gravity wastewater disposal systems. The acquisition of Interon assets did not have a material impact on reported results of operations, financial position or cash flows for the year. NONRECURRING ITEMS In early 2000, the Company recorded $33.5 million in nonrecurring charges ($23.3 million or $1.21 per share, net of tax) related to the restructuring and realignment of its domestic and international compressor manufacturing operations. These amounts included approximately $15.5 million ($12.0 million, net of tax) in severance pay and future benefit costs relating to the announced realignment and manpower reductions in the Company's North American and Indian manufacturing operations, $3.2 million ($2.0 million, net of tax) in 16 19 plant closing and exit costs, and $14.8 million ($9.3 million, net of tax) in asset impairment charges for idled, unusable and/or underutilized equipment. For further information on these restructuring actions, see "Restructuring Actions" below as well as Item 1, "Business--Compressor Products." In 1999, the Company recorded nonrecurring credits amounting to $14.1 million ($9.0 million or $0.44 per share net of tax). An $8.6 million ($5.6 million or $.27 per share net of tax) nonrecurring gain resulting from currency hedging at the Brazilian subsidiary was recorded in the first quarter. A fourth quarter net credit of $5.5 million ($3.4 million or $.17 per share after tax) was comprised of a $4.6 million gain on the curtailment of employee benefit plans at the Company's now closed Acklin Stamping Plant, a gain of $4.0 million resulting from the settlement of insurance claims and a charge for plant closing and environmental costs amounting to $3.1 million. In 1998, the Company recorded a fourth quarter asset impairment charge of $45.0 million ($28.8 million or $1.35 per share net of tax) to reduce the carrying amount of assets dedicated to the production of scroll compressors to estimated fair market value. Based on the Company's expected manufacturing costs, existing market conditions and an anticipated lengthy introduction period, it was estimated that the future cash flows from the scroll product line would not be sufficient to cover the carrying amount of the Company's buildings, tooling, machinery and equipment dedicated to its production. INTEREST INCOME AND INCOME TAX Interest income and other, net amounted to $27.9 million, $28.1 million and $27.8 million in 2000, 1999 and 1998, respectively. The Company's effective income tax rate in 2000 was 38.7% compared to 36.5% in 1999 and 36.9% in 1998. The higher effective tax rate in 2000 was due primarily to the inability to recognize a tax benefit on Indian operating losses. The lower effective tax rate in 1999 when compared to 1998 resulted primarily from increased tax benefits arising from the Company's Foreign Sales Corporation (FSC). LIQUIDITY AND CAPITAL RESOURCES Historically, the Company's primary source of cash has been net cash provided by operations. For the year ended 2000, operating activities generated cash flows of $134.0 million, compared to $163.3 million in 1999. This decrease results primarily from reduced operating results partially offset by lower working capital requirements. Capital expenditures for 2000 amounted to $64.0 million compared to $73.0 million in 1999. Approximately $30.0 million was spent on capacity expansion, primarily in the Brazilian and French compressor facilities along with expenditures to complete the compressor plant in Ballabgarh, India. Approximately $18.0 million was spent on facilities upgrading and capacity expansion in the Company's engine manufacturing plants. The balance of approximately $16 million was spent primarily on facility improvement, consolidation and upgrades in the North American Compressor Operations. Net cash used by financing activities amounted to $66.3 million in 2000 compared to $85.2 million in 1999. During 2000 the Company repurchased 912,500 shares of its Class A common stock for $39.6 million and paid dividends on its common stock amounting to $24.5 million. Net repayments of long-term debt amounted to $2.2 million. In 1999, the Company repurchased 1,087,500 shares of Class A stock at a cost of $57.7 million and paid out dividends totaling $24.7 million. Debt repayments amounted to $2.8 million. The Company continued to preserve its strong liquid financial position by maintaining a cash and cash equivalent balance of $268.2 million at December 31, 2000, compared to $270.5 million at the end of 1999. Working capital was $602.4 million at December 31, 2000 compared to $618.6 million at December 31, 1999. The ratio of current assets to current liabilities was 3.2 in 2000 and 3.4 in 1999. RESTRUCTURING ACTIONS As discussed above, during the first quarter of 2000, the Company recorded $33.5 million in non-recurring charges ($23.3 million net of tax) related to the restructuring and realignment of its compressor manufacturing operations, both domestically and internationally. The charges consisted primarily of plant 17 20 closing costs including employee termination liabilities, plant decommissioning expenses, the write-off, removal, and storage of obsolete equipment, a workforce reduction charge at the Indian compressor operations, and an asset impairment charge. Included in the $33.5 million charge were cash items of approximately $15.8 million which will be paid from Company funds, and $2.9 million which will be paid from pension plan assets. The balance of $14.8 million was comprised of non-cash items, principally the write down or impairment of long-lived assets. Through December 31, 2000, approximately $4.8 million had been expended on the cash items. The Company anticipates the balance will be paid out in 2001 and 2002. PROJECTED CASH REQUIREMENTS On January 25, 2001, the Company announced its intention to repurchase up to 1.5 million shares of its Class A and Class B common stock in any combination. Purchases are to be made from time to time in the open market through June 30, 2002. This was the fourth stock repurchase program initiated by the Company since November 1997. Through February 28, 2001, 16,300 Class B shares and 3,500 Class A shares were repurchased under the new authorization. Capital expenditures for 2001 are projected to be approximately $75.0 million. Approximately half of the budgeted capital spending is planned for foreign operations, including further capacity enhancements in the Brazilian compressor operations. Of the total planned spending, approximately 50% is budgeted for routine facilities improvement and upgrading, while approximately 35%-40% is planned for capacity expansion and new product development. Working capital requirements, planned capital investment, capacity consolidation, restructuring costs and stock repurchase costs for 2001 are expected to be financed primarily through internally available funds, supplemented, if necessary, by borrowings and other sources of external financing. LONG-TERM LIQUIDITY The Company anticipates that it will be able to continue to fund its long-term liquidity requirements, including capital expenditures and working capital needs, from internally generated funds, supplemented by borrowings and other financing arrangements as required. The Company maintains a $100 million revolving credit facility which is available for general corporate purposes. Other available financing sources include long-term financing arrangements in connection with state sponsored investment incentive programs, short-term borrowing and various other forms of financial instruments to finance foreign working capital requirements and hedge exposure to foreign currency exchange risks. The Company regularly considers various strategic business opportunities including acquisitions. Tecumseh evaluates such potential acquisitions on the basis of their ability to enhance the Company's existing products, operations, or capabilities, as well as provide access to new products, markets and customers. Although no assurances can be given that any acquisition will be consummated, the Company may finance such acquisitions through a number of sources including internally available cash resources, new debt financing, the issuance of equity securities or any combination of the above. INTERNATIONAL OPERATIONS As of December 31, 2000 approximately 41% of the Company's consolidated net sales and 28% of the Company's total assets were outside of North America, primarily in Brazil, France, Italy and India. Additionally, during 2000 the Company's North American Compressor Group imported approximately $62.0 million of compressors and components from the Company's Brazilian subsidiary for sale in North America and for re-export. Management believes that international operations have been, and will continue to be, a significant benefit to overall Company performance. However, the Company's international operations are subject to a number of risks inherent with operating abroad, including, but not limited to, world economic conditions, political instability and currency rate fluctuations. There can be no assurance that these risks will not have a material adverse impact on the Company's foreign or consolidated net sales, or on its results of operations or financial condition. For further information, see Item 7A, "Quantitative and Qualitative Disclosure About Market Risk" and "Euro Conversion" below. 18 21 EURO CONVERSION On January 1, 1999, certain member nations of the European Economic and Monetary Union (EMU) entered into a three-year transition phase during which a common currency called the "Euro" is being introduced in the participating countries. Initially, this new currency is being used for financial transactions, and it will progressively replace the old national currencies that will be withdrawn by July 2002. The transition to the Euro currency will involve changing all currency denominated contracts, budgetary records and financial reporting systems, as well as the simultaneous handling of dual currencies and the conversion of historical data. Some concern and uncertainty still exists regarding the effects that the conversion to the Euro may have on the marketplace. However, as the mandatory compliance date draws nearer, anticipated problems associated with the conversion have lessened. The Company has completed the process of analyzing the potential effects of the conversion on competitive conditions, contracts, currency risks, financial instruments, as well as the accounting and tax consequences of the conversion. The Company's European subsidiaries are in the process of implementing and testing the conversion of data and financial systems to make them Euro currency compliant. The conversion at the Company's French compressor subsidiary is substantially complete, and accounting records are being maintained in Euros. The primary remaining concern is the conversion of manufacturing systems, purchasing systems, historical data bases and system interfaces to handle the reporting in the new Euro currency. The Company estimates that an additional $.5 million will be spent to complete the conversion to Euro compliant systems. The actual costs incurred through December 31, 2000 approximated $2.5 million. IMPACT OF FOREIGN CURRENCIES In January 1999, the Brazilian currency, the Real, was allowed by the Brazilian government to freely rise and fall according to prevailing market conditions. This resulted in a rapid and substantial reduction in market value of the Real, which had been trading at approximately .83 U.S. dollars for each Real at December 31, 1998. At December 31, 1999, the Real was trading at .55 U.S. dollars for each Real. This decline in the market value of the Real had the effect of reducing the U.S. dollar value of the Company's beginning of the year investment in its Brazilian net assets by $43.6 million at December 31, 1999. In anticipation of the devaluation of the Brazilian Real in early 1999, the Company's Brazilian subsidiary invested in a forward exchange contract denominated in U.S. dollars. This hedging contract was settled in the first quarter of 1999 resulting in a nonrecurring gain of $8.6 million ($5.6 million or $.27 per share after tax). Currency fluctuations in Europe have also had a fairly significant impact on the dollar value of the Company's investments in its French (compressor) and Italian (engine) subsidiaries. During 2000, the Company's investment in its European net assets declined in U.S. dollar value by $7.3 and $1.6 million for the French and Italian subsidiaries, respectively. Under applicable accounting standards, translation adjustments relating to the Company's investments in foreign affiliates are reflected in other comprehensive income (part of stockholders' equity) in the period in which they arise. Because of exchange rate differences between the U.S. dollar and the French franc at December 31, 1999, the Company's French subsidiary recorded a $2.3 million pretax ($1.5 million or $.07 per share after tax) charge against income for unrealized losses on forward exchange contracts which did not qualify for hedge accounting (deferral) treatment under the provisions of SFAS No. 52, the accounting standard then in effect. In the third quarter of 2000 the Company adopted the provisions of SFAS No. 133, which changed the method of accounting for unrealized gains and losses on hedging activity. See "New Accounting Standards" below. ENVIRONMENTAL The U.S. Environmental Protection Agency (EPA ) has finalized Phase II emission standards for handheld small off-road engines which include the two-cycle engines produced by the Company. The Company already produces competitively priced engines that comply with current EPA and California Air Resources Board (CARB) Standards. The Phase II standards have been finalized for non-handheld four- 19 22 cycle engines. Phase-in of the rules for non-handheld four-cycle engines will take place between the 2001 and 2006 model years. It is not possible at this time to determine the related costs of compliance, nor the impact on the competitive position of the Company. The state of California began enforcing the CARB Tier II Emission Standards effective January 1, 2000. A broad range of the Company's engines have been certified to comply with these emissions standards. The European Community has adopted new noise standards for engine powered equipment. These standards take effect in two stages: Stage I, January 3, 2002 and Stage II, January 3, 2006. They regulate the sound level of the complete product delivered to the end user. The Company currently supplies engines to and works with equipment manufacturers to assure that their products comply with these standards. In addition to the engine emission standards, the Company is subject to evolving and sometimes conflicting environmental regulations and regulatory requirements governing the types of refrigerants used in refrigeration and air conditioning products. Hydrochlorofluorocarbon compounds ("HCFCs") are used as a refrigerant in air conditioning systems. Under a 1992 international agreement, HCFCs will be banned from new equipment beginning in 2010. Some European countries began HCFC phase-outs as early as 1998, and a number of European countries have plans to eliminate the use of HCFCs during 2002. Within the last several years, the Company has approved and released a number of compressor models utilizing U.S. government approved hydrofluorocarbon ("HFC") refrigerants, which are considered more environmentally safe than the preceding refrigeration compounds. However, HFCs are also currently under global scrutiny and subject to possible future restrictions. Additionally, there has been a movement, particularly from northern European countries, toward the use of hydrocarbons ("HCs") as alternative refrigerants, moving further away from the use of chlorine (which depletes the ozone layer of our atmosphere) and the use of fluorine (which contributes to the "green-house" effect). Both Tecumseh do Brasil and Tecumseh Europe have compressor products available for sale that utilize hydrocarbon refrigerants. Hydrocarbons are flammable compounds and have not been approved by the U.S. government for air conditioning or household refrigerator and freezer applications. It is not presently possible to estimate the level of expenditures which will be required to meet any future industry or governmental regulatory requirements, or the effect on the Company's competitive position. The Company is subject to various federal, state and local laws relating to the protection of the environment, and is actively involved in various stages of investigation or remediation for sites where contamination has been alleged. (See Item 3 "Legal Proceedings" and Note 8 to the Consolidated Financial Statements.) Liabilities, relating to probable remediation activities, are recorded when the costs of such activities can be reasonably estimated based on the facts and circumstances currently known. Difficulties exist estimating the future timing and ultimate costs to be incurred due to uncertainties regarding the status of laws, regulations, levels of required remediation, changes in remediation technology and information available. At December 31, 2000 and 1999 the Company had accrued $40.1 million and $42.4 million, respectively for environmental remediation, including $30.3 and $31.5 million, respectively relating to the Sheboygan River and Harbor Superfund Site. As these matters continue toward final resolution, amounts in excess of those already provided may be necessary to discharge the Company from its obligations for these sites. Such amounts, depending on their amount and timing, could be material to reported net income in the particular quarter or period which they are recorded. In addition, the ultimate resolution of these matters, either individually or in the aggregate, could be material to the consolidated financial statements. For further information on environmental matters, see Item 3, "Legal Proceedings." NEW ACCOUNTING STANDARDS Effective July 1, 2000, the Company adopted Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of transaction. For the Company's foreign currency cash flow hedges, changes in fair value are recognized in stockholders' equity as other comprehensive 20 23 income to the extent the hedge is determined to be effective and until the hedged items are recognized in current earnings. To the extent a hedge is determined to be ineffective, changes in fair value are recognized immediately in current earnings. Prior to the adoption of SFAS No. 133, changes in the value of the Company's derivative financial instruments were recognized in current earnings as required by the provisions of the then existing accounting standards. The changes in fair value of hedges carried in other comprehensive income remain there until the underlying forecasted transaction occurs. Once the underlying transaction is realized, the appropriate gain or loss from the designated derivative hedge is reclassified from other comprehensive income to current earnings along with the underlying transaction. Future results may be affected by changes in the fair value of these instruments. While the amount and timing of these changes cannot be accurately predicted, the Company does not expect these items will have a significant impact on future reported results or financial position. OUTLOOK Information in this "Outlook" section should be read in conjunction with the cautionary language and discussion of risks included above. In the year 2001, growth in sales and profitability in the Brazilian compressor factories should continue as the local economy continues to improve and market share increases in other parts of the world. North American compressor results will continue to face a world over-capacity situation and low-cost foreign competition especially in the room air conditioner market. The Company will continue its efforts to increase competitiveness in world markets by focusing on cost reduction programs, product quality, delivery and service. To achieve these objectives, several restructuring and realignment actions were undertaken in 2000 to increase production efficiency, improve quality and lower costs. The closing of the Somerset compressor manufacturing plant will allow the Company to remove excess production capacity and reorganize remaining capacity into lower cost, more efficient manufacturing centers utilizing concepts such as lean manufacturing techniques and continuous improvement measures. In addition, efforts are underway to fill gaps in product offerings and/or product capabilities. In the Engine and Power Train Group, the emphasis in 2001 will be on improving product mix and developing new markets and engine applications while lowering manufacturing costs. A pending acquisition in Eastern Europe is designed not only to provide a low cost source of engine components and parts, but to also solidify the Company's position as a European engine manufacturer and provide a base for entry into the growing Eastern European markets. Domestically, the Engine and Power Train Group suffers from excess production capacity and production imbalances and inefficiencies resulting from a poor product mix. Efforts are underway to reconfigure domestic production capacity in a manner which will improve cost and production flexibility. In light of the current worldwide market conditions and production capabilities, it is possible that further restructuring actions will be required to improve productivity and lower costs in both the Compressor and Engine and Power Train Groups. To the extent necessary, these restructuring actions will, in all probability, result in further nonrecurring charges against income. While the amount and timing of these potential charges, if any, cannot be estimated with any degree of accuracy, it is possible that they could be recorded over a number of quarterly and annual periods, and could be material to the reported results of the particular quarter or year in which they are recorded. While there can be no assurances or guarantees, management believes that 2001 annual results could equal or exceed those of 2000, although first quarter 2001 results will be well below first quarter 2000 results exclusive of nonrecurring charges. The Company is well positioned to meet the difficult challenges in the coming year, and intends to take aggressive steps to improve profitability and market share. 21 24 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risk during the normal course of business from credit risk associated with accounts receivable and from changes in interest rates, commodity prices and foreign currency exchange rates. The exposure to these risks is managed through a combination of normal operating and financing activities which include the use of derivative financial instruments in the form of foreign currency forward exchange contracts and commodity forward purchasing contracts. Credit Risk--Financial instruments which potentially subject the Company to concentrations of credit risk are primarily cash investments and accounts receivable. The Company places its cash investments in bank deposits and investment grade, short-term debt instruments (predominately commercial paper) with reputable credit-worthy counterparties and, by policy, limits the amount of credit exposure to any one counterparty. The Company uses contemporary credit review procedures to approve customer credit. Customer accounts are actively monitored and collection efforts are pursued within normal industry practice. Management believes that concentrations of credit risk with respect to receivables are somewhat limited due to the large number of customers in the Company's customer base, and their dispersion across different industries and geographic areas. However, in the Engine and Power Train Group the manufacture of small gasoline engine powered lawn and garden equipment is dominated, to a large extent, by three manufacturers. The Company sells to all three of these manufacturers and as a result, a significant portion of the Group's open accounts receivable at any time is comprised of amounts due from these three manufacturers. A portion of export accounts receivable of the Company's Brazilian subsidiary is sold at a discount. Discounted receivable balances in the Brazilian subsidiary at December 31, 2000 and 1999 were $27.6 and $18.0, respectively and the discount rate was 6.6% in 2000 and 7.3% in 1999. The Company maintains an allowance for losses based upon the expected collectability of all accounts receivable, including receivables sold. Interest Rate Risk--The Company is subject to minimal interest rate risk in relation to variable rate, long-term Industrial Development Revenue Bonds and to short-term variable rate borrowings used by our foreign subsidiaries to manage their working capital needs. The Company's debt profile is insignificant compared to the liquid cash assets held by the Company, and if interest rates were to decrease substantially, the Company would simply pay off the debt. The Company is also subject to interest rate risk relating to interest earned on its short-term funds invested. Commodity Price Risk--The Company uses commodity forward purchasing contracts to help control the cost of traded commodities, primarily copper and aluminum, used as raw material in the production of compressor motors and components and engines. Company policy allows local management to contract commodity forwards for a limited percentage of projected raw material requirements up to one year in advance. Commodity contracts at most of the Company's divisions and subsidiaries are essentially purchase contracts designed to fix the price of the commodities during the operating cycle. The Company's practice has been to accept delivery of the commodities and consume them in manufacturing activities. At December 31, 2000 and 1999, the Company held a total notional value of $25.0 and $39.5 million, respectively in commodity forward purchasing contracts. The majority of these contracts were not recorded on the balance sheet as they did not require an initial cash outlay and do not represent a liability until delivery of the commodities are accepted. However, commodity contracts at the Company's French compressor subsidiary are essentially derivative financial instruments designed to hedge the fluctuation in commodity pricing and as such are subject to the provisions of SFAS No. 133. For further information on SFAS No. 133 see "New Accounting Standards" above. Foreign Currency Exchange Risk--The Company is subject to foreign currency exchange exposure for operations whose assets and liabilities are denominated in currencies other than U.S. dollars. On a normal basis, the Company does not attempt to hedge the foreign currency translation fluctuations in the net investments in its foreign subsidiaries. The Company does from time to time enter into short-term forward exchange contracts to sell or purchase foreign currencies at specified rates based on estimated foreign currency cash flows. Company policy allows local management to hedge known receivables or payables and forecasted 22 25 cash flows up to a year in advance. It is the policy of the Company not to purchase financial and/or derivative instruments for speculative purposes. At December 31, 2000 and 1999, the Company held foreign currency forward contracts with a total notional value of $37.2 and $67.5 million, respectively. In the third quarter of 2000, the Company adopted the provisions of SFAS No. 133 which determine the accounting treatment for hedging activities. For further information on the impact of adopting SFAS No. 133 see "New Accounting Standards" above. 23 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Management........................................ 25 Report of Independent Accountants........................... 26 FINANCIAL STATEMENTS Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998....................... 27 Consolidated Balance Sheets at December 31, 2000 and 1999................................................... 28 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998....................... 29 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998........... 30 Notes to Consolidated Financial Statements................ 31
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 24 27 MANAGEMENT'S REPORT To the Shareholders of Tecumseh Products Company Management is responsible for the integrity and objectivity of the financial statements and other information presented in this annual report. The statements were prepared in accordance with generally accepted accounting principles and, where necessary, include certain amounts based on management's best estimate and judgment to reflect the expected effects of events and transactions that have not been completed. All financial information in the annual report is consistent with the financial statements. Management has established and maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management's authorization. These controls are documented by written policies and procedures that are communicated to employees with significant roles in the financial reporting process. This system is continually reviewed, evaluated, and modified to reflect current conditions. The Audit Committee of the Board of Directors, composed of outside Directors, assists the Board of Directors in overseeing and monitoring management's and the independent public accountants' participation in the financial reporting process. The Audit Committee meets regularly with management, the internal auditors, and the independent public accountants. Both the independent public accountants and the internal auditors have unrestricted access to the Audit Committee with and without management's representative present, to discuss the results of their examinations and their opinions on the adequacy of internal accounting controls and quality of financial reporting. The independent public accountants are engaged to express an opinion on the Company's financial statements. Their opinion is based on procedures which they believe to be sufficient to provide reasonable assurance that the financial statements contain no material errors. /s/ Todd W. Herrick Todd W. Herrick President and Chief Executive Officer /s/ John H. Foss John H. Foss Vice President, Treasurer and Chief Financial Officer 25 28 INDEPENDENT ACCOUNTANT'S REPORT To the Shareholders and Board of Directors of Tecumseh Products Company We have audited the accompanying consolidated balance sheets of Tecumseh Products Company and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tecumseh Products Company and Subsidiaries at December 31, 2000 and 1999 and the consolidated results of operations and cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. /s/ Ciulla, Smith & Dale, LLP Ciulla, Smith & Dale, LLP Certified Public Accountants January 26, 2001 Southfield, Michigan 26 29 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- Net Sales................................................... $1,649.9 $1,814.3 $1,750.2 Cost of sales and operating expenses...................... 1,411.4 1,507.4 1,492.8 Selling and administrative expenses....................... 118.3 117.6 115.8 Nonrecurring (gain) charges............................... 33.5 (5.5) 45.0 -------- -------- -------- Operating Income............................................ 86.7 194.8 96.6 Interest expense.......................................... (6.7) (7.9) (6.9) Interest income and other, net............................ 27.9 28.1 27.8 Nonrecurring gain......................................... -- 8.6 -- -------- -------- -------- Income Before Taxes on Income............................... 107.9 223.6 117.5 Taxes on income........................................... 41.8 81.6 43.3 -------- -------- -------- Net Income.................................................. $ 66.1 $ 142.0 $ 74.2 ======== ======== ======== Basic and Diluted Earnings Per Share........................ $ 3.44 $ 7.00 $ 3.47 ======== ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 27 30 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS)
DECEMBER 31, -------------------- 2000 1999 -------- -------- ASSETS Current Assets: Cash and cash equivalents................................. $ 268.2 $ 270.5 Accounts receivable, trade, less allowance for doubtful accounts of $6.3 million in 2000 and $6.5 million in 1999.................................................... 265.6 268.6 Inventories............................................... 274.9 266.3 Deferred and recoverable income taxes..................... 56.4 44.2 Other current assets...................................... 17.6 24.7 -------- -------- Total current assets............................... 882.7 874.3 -------- -------- Property, Plant, and Equipment, at cost: Land and land improvements................................ 18.9 19.9 Buildings................................................. 168.2 167.4 Machinery and equipment................................... 807.4 788.7 Assets in process......................................... 41.6 46.5 -------- -------- 1,036.1 1,022.5 Less, accumulated depreciation............................ 591.4 545.1 -------- -------- Property, plant and equipment, net................. 444.7 477.4 -------- -------- Excess of cost over acquired net assets, less accumulated amortization of $23.6 million in 2000 and $21.8 million in 1999...................................................... 46.8 48.2 Deferred income taxes....................................... 41.1 39.2 Prepaid pension expense..................................... 123.8 98.6 Other assets................................................ 14.0 15.6 -------- -------- Total assets....................................... $1,553.1 $1,553.3 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable, trade................................... $ 123.5 $ 120.0 Income taxes payable...................................... 5.5 2.6 Short-term borrowings..................................... 6.3 7.9 Accrued liabilities: Employee compensation................................... 34.7 38.1 Product warranty and self-insured risks................. 36.4 33.5 Other................................................... 73.9 53.6 -------- -------- Total current liabilities.......................... 280.3 255.7 Long-term debt.............................................. 14.2 15.6 Other postretirement benefit liabilities.................... 189.9 188.4 Product warranty and self-insured risks..................... 24.5 28.8 Accrual for environmental matters........................... 33.3 35.6 Pension liabilities......................................... 15.5 15.0 -------- -------- Total liabilities.................................. 557.7 539.1 -------- -------- Stockholders' Equity Class A common stock, $1 par value; authorized 75,000,000 shares; issued 13,410,438 and 14,322,938 shares in 2000 and 1999, respectively.................................. 13.4 14.3 Class B common stock, $1 par value; authorized 25,000,000 shares; issued 5,470,146 shares in 2000 and 1999........ 5.5 5.5 Retained earnings......................................... 1,050.2 1,047.3 Accumulated other comprehensive income (loss)............. (73.7) (52.9) -------- -------- Total stockholders' equity......................... 995.4 1,014.2 -------- -------- Total liabilities and stockholders' equity......... $1,553.1 $1,553.3 ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 28 31 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 -------- -------- -------- Cash Flows from Operating Activities: Net income................................................ $ 66.1 $142.0 $ 74.2 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................ 71.2 72.4 74.6 Nonrecurring items................................... 33.5 -- 45.0 Accounts receivable.................................. (5.8) (29.9) (50.0) Inventories.......................................... (14.9) (5.3) (15.1) Payables and accrued expenses........................ 20.2 10.0 23.4 Prepaid pension expense.............................. (25.3) (22.1) (18.1) Other................................................ (11.0) (3.8) (3.4) ------ ------ ------ Cash Provided By Operating Activities............. 134.0 163.3 130.6 ------ ------ ------ Cash Flows from Investing Activities: Capital expenditures...................................... (64.0) (73.0) (64.4) ------ ------ ------ Cash Used In Investing Activities................. (64.0) (73.0) (64.4) ------ ------ ------ Cash Flows from Financing Activities: Dividends paid............................................ (24.5) (24.7) (25.6) Proceeds from borrowings.................................. 1.2 0.5 5.4 Repayments of borrowings.................................. (3.4) (3.3) (23.9) Repurchases of common stock............................... (39.6) (57.7) (49.0) ------ ------ ------ Cash Used In Financing Activities................. (66.3) (85.2) (93.1) ------ ------ ------ Effect of Exchange Rate Changes on Cash..................... (6.0) (12.3) 0.5 ------ ------ ------ Decrease In Cash And Cash Equivalents..................... (2.3) (7.2) (26.4) Cash and Cash Equivalents: Beginning of Period............................... 270.5 277.7 304.1 ------ ------ ------ End of Period..................................... $268.2 $270.5 $277.7 ====== ====== ======
The accompanying notes are an integral part of these Consolidated Financial Statements. 29 32 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DOLLARS IN MILLIONS)
COMMON STOCK ACCUMULATED --------------------------- CAPITAL OTHER TOTAL CLASS A CLASS B IN EXCESS OF RETAINED COMPREHENSIVE STOCKHOLDERS' $1 PAR VALUE $1 PAR VALUE PAR VALUE EARNINGS INCOME/(LOSS) EQUITY ------------ ------------ ------------ -------- ------------- ------------- BALANCE, DECEMBER 31, 1997.............. $16.4 $ 5.5 $28.0 $ 958.0 $ (7.7) $1,000.2 COMPREHENSIVE INCOME: Net income.............................. 74.2 74.2 Translation adjustments................. (4.1) (4.1) TOTAL COMPREHENSIVE INCOME...... 70.1 Cash dividends.......................... (25.6) (25.6) Stock repurchase........................ (1.0) (28.0) (20.0) (49.0) ----- ----- ----- -------- ------ -------- BALANCE, DECEMBER 31, 1998.............. 15.4 5.5 0.0 986.6 (11.8) 995.7 COMPREHENSIVE INCOME: Net income.............................. 142.0 142.0 Minimum pension liability............... (1.5) (1.5) Translation adjustments................. (39.6) (39.6) TOTAL COMPREHENSIVE INCOME...... 100.9 Cash dividends.......................... (24.7) (24.7) Stock repurchase........................ (1.1) (56.6) (57.7) ----- ----- ----- -------- ------ -------- BALANCE, DECEMBER 31, 1999.............. 14.3 5.5 0.0 1,047.3 (52.9) 1,014.2 COMPREHENSIVE INCOME: Net income.............................. 66.1 66.1 Minimum pension liability............... 0.5 0.5 Gain (loss) on derivatives.............. (0.3) (0.3) Translation adjustments................. (21.0) (21.0) TOTAL COMPREHENSIVE INCOME...... 45.3 Cash dividends.......................... (24.5) (24.5) Stock repurchase........................ (0.9) (38.7) (39.6) ----- ----- ----- -------- ------ -------- BALANCE, DECEMBER 31, 2000.............. $13.4 $ 5.5 $ 0.0 $1,050.2 $(73.7) $ 995.4 ===== ===== ===== ======== ====== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 30 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS) NOTE 1 ACCOUNTING POLICIES Business Description--Tecumseh Products Company (the "Company") is a full line, independent global manufacturer of hermetic compressors for air conditioning and refrigeration products, gasoline engines and power train components for lawn and garden applications, and pumps. The Company's products are sold in countries all around the world. Principles of Consolidation--The consolidated financial statements include the accounts of the Company and its subsidiaries. The Company's investments in unconsolidated affiliates are generally accounted for on the equity basis. All significant intercompany transactions and balances have been eliminated. Foreign Currency Translation--All of the Company's foreign subsidiaries use the local currency of the country of operation as the functional currency. Assets and liabilities are translated into U.S. dollars at year-end exchange rates while revenues and expenses are translated at average monthly exchange rates. The resulting translation adjustments are recorded in other comprehensive income or loss, a component of stockholders' equity. Realized foreign currency transaction gains and losses are included in current income. Cash Equivalents--Cash equivalents consist of commercial paper and other short-term investments that are readily convertible into cash. Inventories--Inventories are valued at the lower of cost or market, generally on the first-in, first-out basis. Property, Plant and Equipment--Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred. For financial statement purposes, depreciation is determined using the straight-line method at rates based upon the estimated useful lives of the assets. Depreciation expense was $69.3, $70.5, and $72.3 million in 2000, 1999 and 1998, respectively. Excess of Cost Over Acquired Net Assets--Assets and liabilities related to business combinations accounted for as purchases are recorded at fair value. Goodwill, the excess of cost over the net tangible assets acquired is amortized on a straight-line basis over its estimated useful life, principally over a forty year period. The Company periodically re-evaluates the recoverability of goodwill based on undiscounted cash flows whenever significant events or changes occur which might impair recoverability. Management believes there has been no impairment of goodwill as reflected in its Consolidated Financial Statements. Revenue Recognition--Revenues from the sale of the Company's products are recognized upon passage of title to the customer, which in most cases, coincides with shipment of the products. Derivative Financial Instruments--Derivative financial instruments are occasionally utilized by the Company to manage risk exposure to movements in foreign exchange rates. The Company, from time to time, enters into forward exchange contracts to obtain foreign currencies at specified rates based on expected future cash flows for each currency. The premium or discount on the contracts is amortized over the life of the contract. Changes in the value of derivative financial instruments are measured at the balance sheet date and recognized in current earnings or other comprehensive income depending on whether the derivative is designated as part of a hedge transaction and, if it is, the type of transaction. The Company does not hold derivative financial instruments for trading purposes. See Note 10 for discussion of adoption of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." Product Warranty--Provision is made for the estimated cost of maintaining product warranties at the time the product is sold. Self-Insured Risks--Provision is made for the estimated costs of known and anticipated claims under the deductible portions of the Company's liability and workers' compensation insurance policies. In addition, provision is made for the estimated cost of postemployment benefits. Environmental Expenditures--Expenditures for environmental safekeeping are expensed or capitalized as appropriate. Costs associated with remediation activities are expensed. Liabilities relating to probable 31 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) remedial activities are recorded when the costs of such activities can be reasonably estimated and are not discounted or reduced for possible recoveries from insurance carriers. Earnings Per Share--Basic and diluted earnings per share are equivalent. Earnings per share are computed based on the weighted average number of common shares outstanding for the periods reported. The weighted average number of common shares used in the computations was 19,218,065 in 2000, 20,276,925 in 1999, and 21,365,958 in 1998. Research, Development And Testing Expenses--Company sponsored research, development, and testing expenses related to present and future products are expensed as incurred and were $28.1, $30.2, and $31.5 million in 2000, 1999 and 1998, respectively. Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts during the reporting period and at the date of the financial statements. Significant estimates include accruals for product warranty, self-insured risks, pension and postretirement benefit obligations and environmental matters. Actual results could differ materially from those estimates. Reclassifications--Certain amounts included in the prior years' financial statements have been reclassified to conform to the 2000 presentation. NOTE 2 COMPREHENSIVE INCOME Accumulated other comprehensive income or loss is shown in the Consolidated Statements of Stockholders' Equity and includes the following:
2000 1999 ------ ------ Foreign currency translation adjustments (net of tax of $38.6 million in 2000 and $31.1 million in 1999).......... $(72.4) $(51.4) Minimum pension liability adjustments (net of tax of $.6 million in 2000 and $1.0 million in 1999)................. (1.0) (1.5) Deferred loss on hedging (net of tax of $.2 million)........ (0.3) -- ------ ------ $(73.7) $(52.9) ====== ======
NOTE 3 PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS The Company has defined benefit retirement plans that cover substantially all domestic employees. Plans covering salaried employees generally provide pension benefits that are based on average earnings and years of credited service. Plans covering hourly employees generally provide pension benefits of stated amounts for each year of service. The Company sponsors a retiree health care benefit plan, including retiree life insurance, for eligible salaried employees and their eligible dependents. At certain divisions, the Company also sponsors retiree health care benefit plans for hourly retirees and their eligible dependents. The retiree health care plans, which are unfunded, provide for coordination of benefits with Medicare and any other insurance plan covering a participating retiree or dependent, and have lifetime maximum benefit restrictions. Some of the retiree health care plans are contributory, with some retiree contributions adjusted annually. The Company has reserved the right to interpret, change or eliminate these health care benefit plans. At the beginning of 1999, the Company changed the measurement date (the date upon which plan assets and obligations are measured) from December 31 to September 30 to facilitate the preparation and reporting of pension and postretirement plan data. Information regarding the funded status and net periodic benefit costs are reconciled to or stated as of the fiscal year end of December 31. 32 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables provide a reconciliation of the changes in the plans' benefit obligations, fair value of assets and funded status for 2000 and 1999:
PENSION OTHER --------------- --------------- 2000 1999 2000 1999 ------ ------ ------ ------ RECONCILIATION OF BENEFIT OBLIGATION Benefit obligation at beginning of period.......... $268.8 $277.5 $129.2 $144.0 Service cost..................................... 6.6 7.7 4.6 5.0 Interest cost.................................... 18.8 17.8 9.1 8.9 Actuarial (gain) loss............................ (5.7) (21.8) 5.4 (17.4) Curtailment (gain) loss.......................... -- 1.0 -- (5.5) Benefit payments................................. (18.2) (13.4) (5.8) (5.8) ------ ------ ------ ------ Benefit obligation at measurement date............. $270.3 $268.8 $142.5 $129.2 ====== ====== ====== ======
PENSION OTHER --------------- ----------------- 2000 1999 2000 1999 ------ ------ ------- ------- RECONCILIATION OF FAIR VALUE OF PLAN ASSETS Fair value at beginning of period................ $567.1 $572.4 Actual return on plan assets................... 55.9 8.0 Employer contributions......................... 0.2 0.1 Benefit payments............................... (18.2) (13.4) ------ ------ Fair value at measurement date................... $605.0 $567.1 ====== ====== FUNDED STATUS Funded status at measurement date................ $334.7 $298.3 $(142.5) $(129.2) Unrecognized transition (asset) obligation..... (6.4) (8.8) -- -- Unrecognized prior service cost................ 11.9 13.5 (9.1) (10.4) Unrecognized (gain)............................ (216.4) (204.4) (44.3) (53.2) ------ ------ ------- ------- Prepaid (accrued) benefits....................... $123.8 $ 98.6 $(195.9) $(192.8) ====== ====== ======= =======
The following tables provide the components of net periodic benefit cost for 2000, 1999 and 1998:
2000 1999 1998 ------ ------ ------ PENSION BENEFITS Service cost............................................. $ 6.6 $ 7.7 $ 6.6 Interest cost............................................ 18.8 17.8 17.4 Expected return on plan assets........................... (40.6) (39.2) (34.8) Amortization of net (gain)............................... (9.9) (9.0) (7.3) Curtailment loss......................................... -- 1.0 -- ------ ------ ------ Net periodic benefit cost................................ $(25.1) $(21.7) $(18.1) ====== ====== ====== OTHER BENEFITS Service cost............................................. $ 4.6 $ 5.0 $ 4.6 Interest cost............................................ 9.1 8.9 9.0 Curtailment (gain)....................................... -- (5.5) -- Amortization of net (gain)............................... (4.8) (3.5) (3.8) ------ ------ ------ Net periodic benefit cost................................ $ 8.9 $ 4.9 $ 9.8 ====== ====== ======
33 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Assumptions used in measuring the benefit obligations were:
PENSION OTHER ------------- ----------- 2000 1999 2000 1999 ----- ----- ---- ---- Discount rate........................................... 7.25% 7.25% 7.25% 7.25% Long-term rate of: Compensation increases................................ 5.00% 5.00% N/A N/A Return on plan assets................................. 7.50% 7.50% N/A N/A
For measurement purposes a 6.19% annual rate of increase in the cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease each year to a rate of 5.25% for 2004 and remain at that rate thereafter. In 1999, the Company closed its Acklin Stamping plant which resulted in the recognition of a net curtailment gain of approximately $4.5 million. The accumulated other postretirement benefit obligation was reduced by $5.5 million (income effect) and additional pension expense of $1.0 million was recorded. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one percentage point change in assumed health care cost trend rates would have the following effects:
+1% -1% ----- ------ Accumulated postretirement benefit obligation............... $17.8 $(17.0) Net postretirement benefit cost............................. 2.6 (2.0)
The Company's foreign subsidiaries provide for defined benefits that are generally based on earnings at retirement date and years of credited service. The combined expense for these unfunded plans was $2.9, $2.7 and $2.9 million in 2000, 1999 and 1998, respectively. The net liability recorded in the consolidated balance sheet was $15.5 and $15.0 million for 2000 and 1999, respectively. Tecumseh France, S.A. has a minimum pension liability of $1.6 million ($1.0 million net of tax effects) which is recognized in accumulated other comprehensive income. The Company has defined contribution retirement plans that cover substantially all domestic employees. The combined expense for these plans was $3.9, $3.6 and $3.1 million in 2000, 1999 and 1998, respectively. NOTE 4 INCOME TAXES Consolidated income before taxes consists of the following:
2000 1999 1998 ------ ------ ------ United States.............................................. $ 56.9 $159.2 $ 65.9 Foreign.................................................... 51.0 64.4 51.6 ------ ------ ------ $107.9 $223.6 $117.5 ====== ====== ======
34 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Provision for income taxes consists of the following:
2000 1999 1998 ----- ----- ----- Current: U.S. federal.............................................. $16.4 $40.5 $35.6 State and local........................................... 2.2 5.4 5.0 Foreign income and withholding taxes...................... 20.7 23.4 16.0 ----- ----- ----- 39.3 69.3 56.6 ----- ----- ----- Deferred: U.S. federal.............................................. 3.1 14.5 (13.2) Foreign................................................... (0.6) (2.2) (0.1) ----- ----- ----- 2.5 12.3 (13.3) ----- ----- ----- Provision for income taxes.................................. $41.8 $81.6 $43.3 ===== ===== ===== Income taxes paid........................................... $42.4 $78.6 $52.7 ===== ===== =====
A reconciliation between the actual income tax expense provided and the income tax expense computed by applying the statutory federal income tax rate of 35% to income before tax is as follows:
2000 1999 1998 ----- ----- ----- Income taxes at U.S. statutory rate......................... $37.8 $78.3 $41.1 Excess of foreign taxes over the U.S. statutory rate........ 7.8 2.7 .1 State and local income taxes................................ 1.4 3.5 3.2 Tax benefits from Foreign Sales Corporation................. (1.8) (1.9) (1.0) Other....................................................... (3.4) (1.0) (.1) ----- ----- ----- $41.8 $81.6 $43.3 ===== ===== =====
Significant components of the Company's deferred tax assets and liabilities as of December 31 were as follows:
2000 1999 ------ ------ Deferred tax assets: Other postretirement liabilities.......................... $ 72.9 $ 72.2 Product warranty and self-insured risks................... 24.0 21.9 Net operating loss carryforwards.......................... 4.6 0.9 Provision for environmental matters....................... 14.8 15.7 Other accruals and miscellaneous.......................... 41.3 38.7 ------ ------ 157.6 149.4 Valuation allowance....................................... (.9) (1.2) ------ ------ Total deferred tax assets......................... 156.7 148.2 ------ ------ Deferred tax liabilities: Tax over book depreciation................................ 19.4 25.7 Pension................................................... 45.9 36.7 Other..................................................... 3.4 3.6 ------ ------ Total deferred tax liabilities.................... 68.7 66.0 ------ ------ Net deferred tax assets........................... $ 88.0 $ 82.2 ====== ======
The Company's share of accumulated unremitted earnings of foreign subsidiaries at December 31, 2000 and 1999 was $225.3 and $203.1 million, respectively. 35 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 2000, the Company had net operating loss carryforwards attributable to foreign operations for income tax purposes of $12.0 million which expire from 2001 to 2007 if not offset against future taxable income. NOTE 5 INVENTORIES The components of inventories at December 31, were:
2000 1999 ------ ------ Raw materials and work in process........................... $148.6 $151.7 Finished goods.............................................. 110.1 96.1 Supplies.................................................... 16.2 18.5 ------ ------ $274.9 $266.3 ====== ======
NOTE 6 BUSINESS SEGMENT DATA In accordance with Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company has identified three reportable operating segments. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker(s) in deciding how to allocate resources and in assessing performance. The Company's three reportable operating segments are defined as follows: Compressor Products--Manufacturing and marketing of a full line of hermetic compressors for residential and commercial air conditioning and refrigeration products. Engine & Power Train Products--Manufacturing and marketing of gasoline engines and power train components for lawn and garden and utility applications. Pump Products--Manufacturing and marketing centrifugal, sump and small submersible pumps for industrial, commercial, marine and agricultural applications. The accounting policies of the reportable segments are the same as those described in Note 1 of Notes to the Consolidated Financial Statements. External customer sales by geographic area are based upon the destination of products sold. The Company has no single customer that accounts for 10% or more of consolidated net sales. Long-lived assets by geographic area are based upon the physical location of the assets. 36 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INDUSTRY SEGMENT INFORMATION
2000 1999 1998 -------- -------- -------- External customer sales: Compressor Products....................................... $ 919.8 $ 967.0 $1,048.1 Engine & Power Train Products............................. 612.8 734.3 592.2 Pump Products............................................. 117.3 113.0 109.9 -------- -------- -------- Total external customer sales..................... $1,649.9 $1,814.3 $1,750.2 ======== ======== ======== Operating income: Compressor Products....................................... $ 65.7 $ 91.5 $ 82.2 Engine & Power Train Products............................. 45.9 93.1 57.2 Pump Products............................................. 17.5 14.1 11.5 Corporate and consolidating items......................... (8.9) (9.4) (9.3) Nonrecurring items........................................ (33.5) 5.5 (45.0) -------- -------- -------- Total operating income............................ $ 86.7 $ 194.8 $ 96.6 ======== ======== ======== Reconciliation to income before taxes: Operating income.......................................... $ 86.7 $ 194.8 $ 96.6 Other non-operating income................................ -- 8.6 -- Interest income, net...................................... 21.2 20.2 20.9 -------- -------- -------- Income before taxes............................... $ 107.9 $ 223.6 $ 117.5 ======== ======== ======== Assets: Compressor Products....................................... $ 612.1 $ 646.3 $ 713.6 Engine & Power Train Products............................. 312.2 322.0 290.1 Pump Products............................................. 61.6 60.0 60.6 Corporate and consolidating items......................... 567.2 525.0 491.9 -------- -------- -------- Total assets...................................... $1,553.1 $1,553.3 $1,556.2 ======== ======== ======== Capital expenditures: Compressor Products....................................... $ 43.4 $ 50.3 $ 45.8 Engine & Power Train Products............................. 18.3 20.5 16.1 Pump Products............................................. 1.9 2.0 1.5 Corporate................................................. 0.4 0.2 1.0 -------- -------- -------- Total capital expenditures........................ $ 64.0 $ 73.0 $ 64.4 ======== ======== ======== Depreciation and amortization Compressor Products....................................... $ 50.1 $ 52.7 $ 56.0 Engine & Power Train Products............................. 18.8 17.6 16.8 Pump Products............................................. 1.7 1.5 1.2 Corporate................................................. 0.6 0.6 0.6 -------- -------- -------- Total depreciation and amortization............... $ 71.2 $ 72.4 $ 74.6 ======== ======== ========
37 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) GEOGRAPHIC SEGMENT INFORMATION
CUSTOMER SALES BY DESTINATION ------------------------------ 2000 1999 1998 -------- -------- -------- North America United States............................................. $ 897.6 $1,032.8 $ 948.5 Other North America....................................... 71.2 85.2 81.6 -------- -------- -------- Total North America......................................... 968.8 1,118.0 1,030.1 South America............................................... 161.7 129.5 180.8 Europe...................................................... 270.6 306.9 290.5 Middle East and Asia........................................ 248.8 259.9 248.8 -------- -------- -------- $1,649.9 $1,814.3 $1,750.2 ======== ======== ========
NET LONG-LIVED ASSETS ------------------------------ 2000 1999 1998 -------- -------- -------- United States............................................... $ 292.3 $ 317.6 $ 336.3 Brazil...................................................... 70.4 71.7 82.5 Rest of world............................................... 82.0 88.1 90.1 -------- -------- -------- $ 444.7 $ 477.4 $ 508.9 ======== ======== ========
NOTE 7 DEBT
2000 1999 ----- ----- Short-term borrowings consist of the following: Borrowings by foreign subsidiaries under revolving credit agreements, advances on export receivables and overdraft arrangements with banks used in the normal course of business; weighted average interest rate of 7.1% in 2000 and 4.1% in 1999.......................... $ 5.6 $ 7.2 Current maturities of long-term debt...................... 0.7 0.7 ----- ----- Total short-term borrowings....................... $ 6.3 $ 7.9 ===== ===== Long-term debt consists of the following: Unsecured borrowings, primarily with banks, by foreign subsidiaries with interest at 6.0% and maturing in 2001 through 2012........................................... $ 1.0 $ 1.7 Variable rate Industrial Development Revenue Bonds payable in quarterly installments from 2001 to 2021............ 13.9 14.6 ----- ----- 14.9 16.3 Less current maturities of long-term debt................. 0.7 0.7 ----- ----- Total long-term debt.............................. $14.2 $15.6 ===== =====
Scheduled maturities of long-term debt for each of the five years subsequent to December 31, 2000 are as follows: 2001........................................................ $ 0.7 2002........................................................ 0.7 2003........................................................ 1.1 2004........................................................ 1.0 2005 and thereafter......................................... 11.4 ----- $14.9 =====
Interest paid was $3.4 million in 2000, $3.9 million in 1999, and $4.0 million in 1998. 38 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company maintains a $100 million revolving credit facility for general corporate purposes. The facility has a three-year term which may be extended annually with the consent of the participating banks. Under the facility, the Company may select among various interest rate arrangements. As of December 31, 2000, the Company had not made any borrowings under this facility. NOTE 8 ENVIRONMENTAL MATTERS The Company has been named by the U.S. Environmental Protection Agency ("EPA") as a potentially responsible party ("PRP") in connection with the Sheboygan River and Harbor Superfund Site in Wisconsin. At the direction of the EPA, the Company and its independent environmental consultants conducted a remedial investigation and feasibility study. As a result of this study, the Company believes the most appropriate course of action is active remediation to the upper river near the Company's facility, and that only monitored natural armoring should be required in the middle river and the lower river and harbor. At December 31, 2000 and December 31, 1999, the Company had accrued $30.3 and $31.5 million, respectively for estimated costs associated with the cleanup of this site. In May 2000 the EPA issued its Record of Decision ("ROD") for the Sheboygan River and Harbor Superfund Site. The Company is one of several named PRPs in the proposed cleanup action. The EPA has estimated the cost of cleanup at $40.9 million. The cost to the Company could be more or less than that depending on a number of factors including the accuracy of EPA estimates, the results of further investigations required by the ROD, changes in technology, the extent of contributions by other PRPs, and other factors beyond the Company's control. The Company believes that the EPA's remedy, as specified in the ROD, goes well beyond what is environmentally protective and cost-effective for the site and largely ignores the results of the multi-million dollar remedial investigation and feasibility study that the Company performed under EPA oversight. Additionally, the Wisconsin Department of Natural Resources ("WDNR"), as a Natural Resource Trustee, is investigating what additional requirements, if any, the state may have beyond those specified under the ROD. The ultimate costs to the Company for potential natural resource damage claims is currently not determinable and would be dependent upon factors beyond its control. These factors include the results of future investigations required by the ROD, potential changes to the remedial action requirements established by the EPA (in consultation with the WDNR), required cleanup standards, rapidly changing remediation technology, the extent of any natural resource damages, and the outcome of any related litigation. Other PRPs may contribute to the costs of any final remediation, and/or natural resource damage claims, regarding the middle river and lower river and harbor portions of the Site. The Company, in cooperation with the WDNR, conducted an investigation of soil and groundwater contamination at the Company's Grafton, Wisconsin plant. It was determined that contamination from petroleum and degreasing products used at the plant are contributing to an off-site groundwater plume. Certain test procedures are underway to assess the extent of contamination and to develop remedial options for the site. While the Company has provided for estimated investigation and on-site remediation costs, the extent and timing of future off-site remediation requirements, if any, are not presently determinable. The WDNR and the Company's environmental engineers have been concurrently investigating PCB contamination in the watershed of the south branch of the Manitowoc River, downstream of the Company's New Holstein, Wisconsin engine plant. The Company has cooperated to date with the WDNR in investigating the scope of the contamination. Although the WDNR's investigation has not established the parties responsible for the contamination, the WDNR has indicated that it believes the Company is a source of the PCB contamination and that it expects the Company to participate in a cooperative cleanup effort. The Company has provided for investigation expenses and for a portion of source area remediation costs that it is likely to agree to share with federal and state authorities. Although participation in a cooperative remediation effort for the balance of the watershed is under consideration, it is not possible to reasonably estimate the cost of any such participation at this time. 39 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In addition to the above mentioned sites, the Company is also currently participating with the EPA and various state agencies at certain other sites to determine the nature and extent of any remedial action, which may be necessary with regard to such other sites. At December 31, 2000 and December 31, 1999, the Company had accrued $40.1 million and $42.4 million, respectively for environmental remediation, including the amounts noted above relating to the Sheboygan River and Harbor Superfund Site. As these matters continue toward final resolution, amounts in excess of those already provided may be necessary to discharge the Company from its obligations for these sites. Such amounts, depending on their amount and timing, could be material to reported net income in the particular quarter or period in which they are recorded. In addition, the ultimate resolution of these matters, either individually or in the aggregate, could be material to the consolidated financial statements. NOTE 9 COMMITMENTS AND CONTINGENCIES Various lawsuits and claims, including those involving ordinary routine litigation incidental to its business, to which the Company is a party, are pending, or have been asserted, against the Company. Although the outcome of these matters cannot be predicted with certainty, and some of them may be disposed of unfavorably to the Company, management has no reason to believe that their disposition will have a materially adverse effect on the consolidated financial position or results of operations of the Company. NOTE 10 FINANCIAL INSTRUMENTS The following table presents the carrying amounts and the estimated fair values of financial instruments at December 31, 2000 and 1999:
2000 1999 ----------------- ----------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------ -------- ------ Cash & cash equivalents........................... $268.2 $268.2 $270.5 $270.5 Short-term borrowings............................. 5.6 5.6 7.2 7.2 Long-term debt.................................... 14.9 14.9 16.3 16.3 Foreign currency contracts........................ (1.4) (1.9) (2.3) (2.3) Commodity contracts............................... -- (.1) -- 4.4
The carrying amount of cash equivalents approximates fair value due to their liquidity and short-term maturities. The carrying value of the Company's debt approximates fair value due to the variable interest rate on the majority of the debt. The fair values of foreign currency and commodity contracts reflect the differences between the contract prices and the forward prices available on the balance sheet date. The Company does not utilize financial instruments for trading or other speculative purposes. The Company generally does not hedge the net investment in its subsidiaries. All derivative financial instruments held at December 31, 2000 will mature within six months. All such instruments held at December 31, 1999 matured in 2000. Effective July 1, 2000, the Company adopted Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). The adoption of SFAS No. 133 resulted in an insignificant impact on reported earnings and an unrealized loss of $1.6 million, net of tax, classified in accumulated other comprehensive income. By December 31, 2000, the Company had reclassified $1.3 million of this loss to earnings leaving a balance of $.3 million in other comprehensive income for its outstanding foreign currency cash flow hedge contracts. The Company's derivative financial instruments consist of foreign currency forward exchange contracts. These contracts are recognized on the balance sheet at their fair value, which is the estimated amount at which they could be settled based on forward market exchange rates. The Company's foreign subsidiaries use forward exchange contracts to hedge foreign currency receivables, payables, and other known and forecasted transactional exposures for periods consistent with the expected cash flow of the underlying transactions. The contracts generally mature within one year and are designed to limit exposure to exchange rate fluctuations. 40 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On the date a forward exchange contract is entered into, it is designated as a foreign currency cash flow hedge. Subsequent changes in the fair value of the contract that is highly effective and qualifies as a foreign currency cash flow hedge are recorded in other comprehensive income. The Company's French subsidiary had contracts for the sale of $33.0 million and $60.5 million at December 31, 2000 and 1999, respectively. The Company's other foreign subsidiaries had contracts for the purchase of $4.2 million and $7.0 million at December 31, 2000 and 1999, respectively. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as foreign currency hedges to specific forecasted transactions. The Company formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively, as discussed below. The Company discontinues hedge accounting prospectively when the derivative is (1) determined to be no longer effective in offsetting the fair value of the cash flows of a hedged item; (2) sold, terminated, or exercised; (3) dedesignated as a hedge instrument, because it is unlikely that a forecasted transaction will occur. When hedge accounting is discontinued, the derivative will be carried at its fair value on the balance sheet, with changes in its fair value recognized in current period earnings. Any related gains or losses that were accumulated in other comprehensive income will be recognized immediately in earnings. The Company uses commodity forward purchasing contracts to help control the cost of commodities (copper and aluminum) used in the production of compressor motors and components and engines. Company policy allows local managers to contract commodity forwards for a limited percentage of raw material requirements up to one year in advance. These contracts are not recorded in the balance sheet as they do not require an initial cash outlay and do not represent a liability until delivery of the commodity. Commodity forwards outstanding at December 31, 2000 and 1999 were $25.0 and $39.5 million, respectively. A portion of export accounts receivable at the Company's Brazilian subsidiary are sold at a discount. Discounted Brazilian receivable balances at December 31, 2000 and 1999 were $27.6 and $18.0 million, respectively, and the discount rate was 6.6% in 2000 and 7.3% in 1999. NOTE 11 STOCKHOLDERS' EQUITY The shares of Class A common stock and Class B common stock are substantially identical except as to voting rights. Class A common stock has no voting rights except the right to i) vote on any amendments that could adversely affect the Class A Protection Provision in the articles of incorporation and ii) vote in other limited circumstances, primarily involving mergers and acquisitions, as required by law. A Shareholders' Rights Plan is in effect for each class of stock. These plans protect shareholders against unsolicited attempts to acquire control of the Company that do not offer an adequate price to all shareholders. The rights are not currently exercisable, but would become exercisable at an exercise price of $180 per share, subject to adjustment, if certain events occurred relating to a person or group acquiring or attempting to acquire 10% or more of the outstanding shares of Class B common stock. The rights have no voting or dividend privileges and are attached to, and do not trade separately from, the Class A and Class B common stock. The rights expire on August 25, 2009. As of December 31, 2000, 13,410,438 shares of Class A common stock and 5,470,146 shares of Class B common stock were reserved for future exercise under the plans. On January 25, 2001 the Company announced an extension of its share repurchase program, begun in 1997, for the Class A and Class B common stock. Under the program, the Company is authorized to repurchase up to an additional one and one half million Class A and/or Class B shares on the open market through June 30, 2002, depending upon market conditions and other factors. The repurchase program is expected to be financed primarily through internally available funds. In fiscal years 1997 through 2000, the Company repurchased and retired 3,000,000 shares of Class A common stock at a cost of approximately $148.4 million. 41 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12 NONRECURRING ITEMS 2000 Management, in an effort to better meet changing customer requirements, reduce production costs and improve overall productivity and product quality, has undertaken a number of strategic initiatives designed to consolidate, streamline and realign production capabilities in its compressor manufacturing operations, both domestically and internationally. As a result of these initiatives, in early 2000, the Company recorded $33.5 million in nonrecurring charges ($23.3 million or $1.21 per share, net of tax) related to the restructuring and realignment of its domestic and international compressor manufacturing operations. Included in this charge was $15.5 million in severance pay and other employee related costs, $3.2 million in plant closing and exit costs, and $14.8 million in asset impairment charges for idled, unusable and/or underutilized equipment. Through December 31, 2000 the Company has paid or incurred $19.6 million of the $33.5 million restructuring charges. The $15.5 million charge for severance pay and other employee related costs involves the termination of approximately 895 employees due to the closing of the compressor manufacturing plant in Somerset, Kentucky and 600 employees in India caused by the transfer of production to a new facility. Through December 31, 2000 the Company had expended $4.8 million affecting approximately 550 employees. Management anticipates that this program will be completed by the third quarter of 2001. The plant closing and exit costs relate to the facility in Somerset, Kentucky. No amounts have been expended as of December 31, 2000. Management estimates that the plant will be permanently closed and production transferred to other facilities by the third quarter of 2001. The asset impairment charge represents write-downs to net realizable value of equipment dedicated to the production of a discontinued compressor model and equipment no longer needed in the restructured manufacturing operations. 1999 In the first quarter of 1999, the Company recorded a nonrecurring gain of $8.6 million ($5.6 million or $.27 per share after tax) from currency hedging at the Company's Brazilian subsidiary. During the fourth quarter of 1999, the Company recorded a net $5.5 million ($3.4 million or $.17 per share) nonrecurring gain which consisted of a $4.6 million gain from the curtailment of employee benefit plans at a closed plant, a $4.0 million gain on an insurance settlement and offsetting charges for plant closing and environmental costs totaling $3.1 million. 1998 In the fourth quarter of 1998, the Company recorded a nonrecurring charge for an impairment loss of $45.0 million ($28.8 million or $1.35 per share after taxes) on the equipment dedicated to the production of scroll compressors. Due to the lengthy introduction period involving limited production, expected manufacturing costs and probable market conditions, it was determined that future cash flows would not be sufficient to recover the carrying value of the scroll compressor long-lived assets. Accordingly, the assets were adjusted to fair value based on an independent appraisal. 42 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 13 QUARTERLY FINANCIAL DATA
QUARTER --------------------------------- FIRST SECOND THIRD FOURTH TOTAL ------ ------ ------ ------ -------- 2000 Net sales........................................ $476.2 $466.4 $348.8 $358.5 $1,649.9 Gross profit..................................... 42.6 73.4 43.2 45.8 205.0 Net income....................................... $ 9.0 $ 28.5 $ 13.8 $ 14.8 $ 66.1 ====== ====== ====== ====== ======== Basic and diluted earnings per share............. $ 0.46 $ 1.47 $ 0.73 $ 0.79 $ 3.44 ====== ====== ====== ====== ======== 1999 Net sales........................................ $489.4 $503.6 $407.8 $413.5 $1,814.3 Gross profit..................................... 83.5 87.8 70.3 70.8 312.4 Net income....................................... $ 42.5 $ 39.6 $ 30.4 $ 29.5 $ 142.0 ====== ====== ====== ====== ======== Basic and diluted earnings per share............. $ 2.05 $ 1.95 $ 1.51 $ 1.48 $ 7.00 ====== ====== ====== ====== ========
43 46 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information pertaining to directors under the caption "Election of Directors" in the Company's definitive Proxy Statement relating to its 2001 Annual Meeting of Shareholders is incorporated herein by reference. Information regarding executive officers required by Item 401 of Regulation S-K is furnished in Part I of this report. No information is required to be reported pursuant to Item 405 of Regulation SK. ITEM 11. EXECUTIVE COMPENSATION The information under the captions "Appendix B--Executive Compensation," "Compensation Committee Interlocks and Insider Participation" and "Election of Directors--Director Compensation" in the Company's definitive Proxy Statement relating to its 2001 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the caption "Appendix A--Share Ownership" in the Company's definitive Proxy Statement relating to its 2001 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Compensation Committee Interlocks and Insider Participation" in the Company's definitive Proxy Statement relating to its 2001 Annual Meeting of Shareholders is incorporated herein by reference. 44 47 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) and (2) Financial Statements See "Financial Statements" (3) See Index to Exhibits (b) Report on Form 8-K filed in the fourth quarter of 2000 On October 4, 2000, the Company filed a report on Form 8-K reporting under Item 5, "Other Events," the issuance of a press release regarding third quarter 2000 earnings. (c) Exhibits The exhibits listed on the Index to Exhibits are filed herewith or are incorporated herein by reference. 45 48 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TECUMSEH PRODUCTS COMPANY Dated: March 14, 2001 By /s/ TODD W. HERRICK ---------------------------------------------------- Todd W. Herrick President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE OFFICE DATE OF SIGNING --------- ------ --------------- /s/ KENNETH G. HERRICK Chairman of the Board of March 14, 2001 ------------------------------------------------------ Directors Kenneth G. Herrick /s/ TODD W. HERRICK President, Chief Executive March 14, 2001 ------------------------------------------------------ Officer (Principal Todd W. Herrick Executive Officer) and Director /s/ RALPH W. BABB, JR. Director March 14, 2001 ------------------------------------------------------ Ralph W. Babb, Jr. /s/ PETER M. BANKS Director March 14, 2001 ------------------------------------------------------ Peter M. Banks /s/ JON E. BARFIELD Director March 14, 2001 ------------------------------------------------------ Jon E. Barfield /s/ JOHN H. FOSS Vice President, Treasurer March 14, 2001 ------------------------------------------------------ and Chief Financial John H. Foss Officer (Principal Accounting and Principal Financial Officer) and Director /s/ J. RUSSELL FOWLER Director March 14, 2001 ------------------------------------------------------ J. Russell Fowler /s/ JOHN W. GELDER Director March 14, 2001 ------------------------------------------------------ John W. Gelder /s/ STEPHEN L. HICKMAN Director March 14, 2001 ------------------------------------------------------ Stephen L. Hickman
46 49 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 The Company's Restated Articles of Incorporation as in effect prior to April 22, 1992, filed as Exhibit (3) to Annual Report on Form 10-K for the year ended December 31, 1991, are incorporated herein by reference. 3.2 Certificate of Amendment to the Company's Restated Articles of Incorporation adopted April 22, 1992, filed as Exhibit B-5 to Form 8 Amendment No. 1 dated April 22, 1992 to Form 10 Registration Statement dated April 24, 1965, is incorporated herein by reference. 3.3 Certificate of Amendment to the Company's Restated Articles of Incorporation adopted April 27, 1994, filed as Exhibit (4)(c) to Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1994, is incorporated herein by reference. 3.4 Company's Amended and Restated Bylaws as amended through April 16, 2000, filed as Exhibit (3) to Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2000, are incorporated herein by reference. 4 No instruments defining the rights of holders of long-term debt are being filed because no such instrument authorizes a total amount of securities which exceeds 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company hereby agrees to furnish a copy of any such instrument to the Commission upon request. 10.1 Amended and Restated Class B Rights Agreement, filed as Exhibit 4 to Form 8 Amendment No. 1 dated April 22, 1992 to Form 8-A registering Common Stock Purchase Rights dated January 23, 1991, is incorporated herein by reference. 10.2 Amendment No. 1 to Amended and Restated Class B Rights Agreement, filed as Exhibit 4 to Form 8 Amendment No. 2 dated October 2, 1992 to Form 8-A registering Common Stock Purchase Rights dated January 23, 1991, is incorporated herein by reference. 10.3 Amendment No. 2 to Amended and Restated Class B Rights Agreement, filed as Exhibit 4 to Form 8-A/A Amendment No. 3 dated June 22, 1993 to Form 8-A registering Common Stock Purchase Rights dated January 23, 1991, is incorporated herein by reference. 10.4 Third Amendment to Amended and Restated Class B Rights Agreement, filed as Exhibit 4.2 to Current Report on Form 8-K filed August 26, 1999, is incorporated herein by reference. 10.5 Class A Rights Agreement, filed as Exhibit 4 to Form 8-A registering Class A Common Stock Purchase Rights dated April 22, 1992, is incorporated herein by reference. 10.6 Amendment No. 1 to Class A Rights Agreement, filed as Exhibit 4 to Form 8 Amendment No. 1 dated October 2, 1992 to Form 8-A registering Class A Common Stock Purchase Rights dated April 22, 1992, is incorporated herein by reference. 10.7 Amendment No. 2 to Class A Rights Agreement, filed as Exhibit 4 to Form 8-A/A Amendment No. 2 dated June 22, 1993 to Form 8-A registering Class A Common Stock Purchase Rights dated April 22, 1992, is incorporated herein by reference. 10.8 Third Amendment to Class A Rights Agreement, filed as Exhibit 4.1 to Current Report on Form 8-K filed August 26, 1999, is incorporated herein by reference. 10.9 Description of Death Benefit Plan (management contract or compensatory plan or arrangement), filed as Exhibit (10)(f) to Annual Report on Form 10-K for the year ended December 31, 1992, is incorporated herein by reference. 10.10 Management Incentive Plan, as amended through November 22, 1995 (management contract or compensatory plan or arrangement), filed as Exhibit (10)(h) to Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference.
50
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.11 Third Amendment to Management Incentive Plan, adopted January 22, 1997 (management contract or compensatory plan or arrangement), filed as Exhibit (10)(i) to Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 10.12 Fourth Amendment to Management Incentive Plan effective January 1, 2000 (management contract or compensatory plan or arrangement), filed as Exhibit 10.12 to the Annual Report on Form 10-K for the year ended December 31, 1999, is incorporated herein by reference. 10.13 Fifth Amendment to Management Incentive Plan effective November 22, 2000 (management contract or compensatory plan or arrangement), filed herewith. 10.14 Supplemental Executive Retirement Plan effective January 1, 1995 (management contract or compensatory plan or arrangement), filed as Exhibit (10)(l) to Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. 10.15 Outside Directors' Voluntary Deferred Compensation Plan adopted November 25, 1998 (management contract or compensatory plan or arrangement), filed as Exhibit (10)(k) to Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated herein by reference. 10.16 Voluntary Deferred Compensation Plan adopted November 25, 1998 (management contract or compensatory plan or arrangement), filed as Exhibit (10)(l) to Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated herein by reference. 10.17 First Amendment to Voluntary Deferred Compensation Plan effective January 1, 2000 (management contract or compensatory plan or arrangement), filed as exhibit 10.16 to the Annual Report on Form 10-K for the year ended December 31, 1999, as incorporated herein by reference. 10.18 Second Amendment to Voluntary Deferred Compensation Plan adopted November 22, 2000 (management contract or compensatory plan or arrangement), filed herewith. 21 Subsidiaries of the Company.
EX-10.13 2 k60223ex10-13.txt FIFTH AMENDMENT TO MANAGEMENT INCENTIVE PLAN 1 EXHIBIT 10.13 TECUMSEH PRODUCTS COMPANY MANAGEMENT INCENTIVE PLAN [As amended through November 22, 2000] I. Purposes of the Plan The purposes of the Tecumseh Products Company Management Incentive Plan (the "Plan") are to provide a means to attract, reward and retain strong management, to encourage teamwork among members of management and excellence in the performance of their individual responsibilities, and to align the interests of key managers participating in the Plan with the interests of shareholders by offering an incentive compensation vehicle that is based upon the growth in shareholders' equity and the value and profitability of Tecumseh Products Company. II. Definitions In this Plan, the following terms shall have the meanings set forth below: (a) "Account" means the cumulative record of an Employee's Phantom Share allocations as adjusted in the manner described in the Plan. The cash award portion of a Phantom Share allocation for 2000 and subsequent Class Years shall be fully vested as of the Allocation Date and shall not become part of an Employee's Account. (b) "Allocation Date" means the December 31st as of which a Phantom Share allocation is made on behalf of an Employee pursuant to this Plan. (c) "Board" means the Board of Directors of the Company. (d) "Committee" means the Governance and Executive Compensation Committee of the Board, or such other committee as the Board may subsequently appoint to administer the Plan. All the Directors serving on the Committee at any given time shall be "Non-Employee Directors", as that term is used in Securities and Exchange Commission Rule 16b-3 (or any successor regulation) as in effect at such time ("Rule 16b-3"), and the number of Directors serving on the Committee at any given time shall be no less than the minimum number then required by Rule 16b-3. (e) "Class A Common Stock" means the Class A Common Stock, $1.00 par value per share, of the Company. 2 (f) "Class B Common Stock" means the Class B Common Stock, $1.00 par value per share, of the Company. (g) "Company" means Tecumseh Products Company, a Michigan corporation. (h) "Employee" means a person who is employed by an Employer and who has been selected by the Committee to participate in the Plan. (i) "Employer" means the Company, any of its present subsidiary corporations, any corporation which becomes a controlled subsidiary of the Company provided the Committee determines to extend coverage thereto, and/or any successor(s) to such corporation(s). The Committee shall be deemed to have extended coverage to a subsidiary if an employee of such subsidiary is awarded an allocation under this Plan. (j) "Phantom Share" means an allocation credited to an Employee's Account and maintained in such Account together with any prior or subsequent allocations made on behalf of such Employee. The value of an Employee's Account shall be adjusted from time to time, as provided in the Plan. An allocation of Phantom Shares shall confer only such rights as are specified in the Plan. Employees who receive Phantom Share allocations shall not (as a consequence of such allocations) be treated as shareholders under the Articles of Incorporation or By-Laws of the Company or under applicable law. (k) "Phantom Share allocation" or "allocation" includes, where the context so requires, the cash portion of an allocation awarded for 2000 and subsequent Class Years, as provided by Article VI. (l) The following terms are defined elsewhere in the Plan: "Class Year"........................ Art. VI(a); "Company Change in Control"......... Art. IX; "Reason"............................ Art. VII(a). III. Factors to be Considered in Phantom Share Allocations In making any decisions as to the Employees to whom Phantom Share allocations shall be made and as to the amount of each allocation, the Committee shall take into account such factors as the duties and responsibilities of the respective Employees, their present and potential contributions to the success of the Employer, -2- 3 and the financial success of the Company during the year. Not later than the end of April of each calendar year with respect to which allocations may be made, the Committee shall establish targeted group allocations and targeted financial results, and may establish targeted individual allocations, for that year. Actual Phantom Share allocations for such calendar year shall be based on the attainment of specified types and combinations of performance measurement criteria, which may differ as to various Employees or classes thereof, and from time to time. Such criteria may include, without limitation, (i) the attainment of certain performance levels by, and measured against objectives of, the Company, the individual Employee, and/or a group of Employees, (ii) net income growth, (iii) increases in operating efficiency, (iv) completion of specified strategic actions, (v) the recommendation of the Chief Executive Officer, and (vi) such other factors as the Committee shall deem important in connection with accomplishing the purposes of the Plan, provided that any relevant decisions shall be made in its own discretion solely by the Committee. However, no Employee or group of Employees shall receive an actual Phantom Share allocation greater than the applicable targeted individual allocation (if any) or group allocation for a given year, unless due to extraordinary circumstances the Committee deems it appropriate (in its sole discretion) to make allocations to one or more Employees or groups of Employees in excess of his/their targeted individual allocation(s). The maximum aggregate number of Phantom shares that may be awarded and allocated to the accounts of all Employees with respect to any calendar year shall be equal to two percent (2 %) of the number of shares of Class A Common Stock which are issued an outstanding on the last day of such calendar year. Such maximum shall not apply to Phantom Shares resulting from deemed reinvestment of amounts corresponding to dividends, pursuant to Article IV, subsection (a)(ii). IV. Valuation of Phantom Share Accounts; Accounting Treatment (a) Except as otherwise provided in (b) below or in Article IX, Accounts shall be valued as follows: (i) Each Phantom Share allocation shall have an initial dollar value at which it shall be credited to the Employee's Account as of the last day of the calendar year for which such allocation was made. Such allocation shall then be converted into a share amount corresponding to the number of whole and fractional (to the nearest hundredth) shares of Class A Common Stock that could be purchased at the price determined as of such date in the manner described in (b) below. (ii) Each Phantom Share, which has been allocated as of the record date applicable to a declared dividend on Class A -3- 4 Common Stock, shall be credited with the amount of any such per-share cash dividend paid to Class A shareholders, and the total amount credited shall thereupon be deemed reinvested in additional Phantom Shares at the Class A Common Stock's closing price on the date said dividend is paid. Any such dividends (and/or additional dividends thereon) shall vest when and only if the associated Phantom Shares vest. (b) The price of Phantom Shares comprising the Account (adjusted pursuant to (c) below) shall be computed as the average of the closing prices of Class A Common Stock on the first trading day of each of the eleven calendar months which precede or coincide with the valuation date; provided that if any stock splits, stock-on-stock dividends or other capital adjustments have occurred during the period beginning with the first such trading day and ending on the valuation date, then the closing prices used in the averaging computation shall also be adjusted as the Committee, in the reasonable exercise of its discretion, believes to be equitable and appropriate. As used in the preceding sentence, a "trading day" is one for which such sale prices are reported on the NASDAQ national market reporting system. (c) If, between the time an award is made and the date an Account is paid, any change shall occur in the market price of the Company's Class A Common Stock outstanding as the result of any stock split or any stock-on-stock dividend, then the number of Phantom Shares in the Account shall be adjusted in proportion to the adjustment in the price of Class A Common Stock. In the event of any other change in the number or character of the outstanding securities of the Company as the result of any recapitalization, reclassification, merger or any analogous change in capitalization or of any distribution to holders of the Company's Class A Common Stock other than a cash or stock dividend, the Committee shall make such adjustments, if any, in the number and/or kind of any Phantom Shares then allocated to the Account or thereafter becoming allocated to the Account as the Committee, in the reasonable exercise of its discretion, believes to be equitable and appropriate. V. Terms and Conditions of Allocations to Accounts Each Phantom Share allocation to the Account of an Employee shall be subject to the following terms and conditions: (a) Each allocation shall continue in effect for an indefinite period from the applicable Allocation Date until subsequently paid or forfeited, as hereinafter provided. -4- 5 (b) The Company shall maintain records for each Employee's Account and shall furnish him a summary thereof upon request, but not more frequently than once a year. (c) Except as provided herein with respect to transfers to the Company or another Employer, an Employee's interest in his Account and in the cash portion of any allocation shall not be transferable other than by will or the laws of descent and distribution. During the Employee's lifetime, an Account and the cash portion of any allocation shall be paid only to the Employee, except that, in the event of the Employee's incapacity, the Committee may permit payment to the Employee's guardian or legal representative. The Committee also shall permit the payment, upon the Employee's death, to one or more beneficiaries designated by the Employee in a manner authorized by the Committee, and otherwise to his estate. VI. Vesting and Payment (a) Each Phantom Share allocation made by the Company shall be assigned a "Class Year" corresponding to the calendar year in which the Allocation Date occurs. Class Years 1994 - 1999 - Allocations for Class Years 1994 - 1999 (both inclusive) shall be 0% vested in the year for which they are made, and shall not become vested until the fifth December 31 following the end of the Class Year. For example: Allocations made with respect to Class Year 1999 shall be 0% vested when allocated, 0% vested on December 31, 2000, 0% vested on December 31, 2001, etc., but shall become 100% vested on December 31, 2004. Class years 2000 and thereafter - Allocations for Class Years 2000 and thereafter shall be vested as follows: One-third of each Employee's allocation shall be fully vested as of December 31 in the Class Year for which such allocation is made, one-third of such allocation shall become vested as of the third December 31 following the end of such Class Year and the remaining one-third of such allocation shall become vested as of the fifth December 31 following the end of such Class Year. EXAMPLE: Allocations made with respect to Class Year 2000 shall be one-third vested as of December 31, 2000, one-third vested on December 31, 2003, and the remaining one-third vested on December 31, 2005. The provisions of Article VII shall generally govern the forfeiture of allocations which are not vested and, in certain -5- 6 circumstances, even those which are otherwise fully vested. Except as otherwise provided in Article VII, allocations to the Account of an Employee shall not be forfeited during his continued employment with an Employer. (b) Within 60 days following December 31 of 2000 and each subsequent year, (i) the one-third cash portion of each active Employee's allocation, which became vested at the close of the Class Year then ended in accordance with Article VI(a), shall be paid. (ii) the portion of each Employee's Phantom Share award for any prior Class Year, which became vested at the close of the Class Year then ended in accordance with Article VI(a), shall be valued in accordance with Article IV(b) and paid. VII. Retirement and Other Termination of Employment (a) If the employment of an Employee to whom Phantom Share allocations have been made shall be terminated by his Employer for any Reason denominated below (which shall be determined by the Committee), his entire Account whether or not to any extent otherwise vested shall be forfeited simultaneously with such termination of employment. Such "Reason", for the sole purpose of determining whether an Employee's otherwise vested benefits are to be forfeited, shall be deemed to exist where - (i) The Employee breaches any material written rules, regulations or policies of the Employer now existing or hereafter arising which are uniformly applied to all employees of the Employer or which rules, regulations and policies are promulgated for general application to executives, officers or directors of the Employer; or (ii) The Employee willfully and repeatedly fails to substantially perform the duties of his employment (other than any such failure resulting from his incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to him by his immediate supervisor, which demand specifically identifies the manner in which the supervisor believes that the Employee has not substantially performed his duties; or -6- 7 (iii) The Employee is repeatedly or habitually intoxicated or under the influence of drugs while on the premises of the Employer or while performing his employment duties, after receiving written notice thereof from the Employer, such that the Committee determines in good faith that the Employee is impaired in performing the duties of his employment; or (iv) The Employee is convicted of a felony under state or federal law, or commits a crime involving moral turpitude; or (v) The Employee embezzles any property belonging to the Employer such that he may be subject to criminal prosecution therefor or the Employee intentionally and materially injures the Employer, its personnel or its property. Nothing in this Plan shall alter the at-will nature of the Employee's employment relationship with his Employer. Nothing in this Plan shall confer upon any Employee the right to continue in the employ of any Employer. (b) Except as provided in Article VII(c) regarding retirement, if an Employee to whom Phantom Share allocations have been made shall voluntarily terminate his employment with the Employer or shall be terminated by the Employer for no reason or for any reason whatsoever (other than for one or more Reasons specified in Article VII(a) and otherwise than as provided for in Article VIII hereof), then his Account shall be forfeited according to the vesting schedule of Article VI(a), except for that portion (if any) which the Committee, in its sole and absolute discretion, permits him to retain. Additionally, in the event of termination of employment as described in the preceding sentence, the Committee (in its sole and absolute discretion and upon whatever conditions it determines appropriate) may make a Phantom Share allocation to the terminating Employee for the calendar year which includes his date of termination. Nothing in this Plan shall alter the at-will nature of the Employee's employment relationship with his Employer. Nothing in this Plan shall confer upon any Employee the right to continue in the employ of any Employer. (c) Notwithstanding Article VI(a), an Employee's Phantom Share allocations shall be 100% vested as of the first day of the month that includes his last day of active work immediately prior to commencing normal or early retirement under the pension or retirement plan sponsored by his Employer. However, such vested allocations shall only become payable following the date they would have otherwise vested under Article VI, i.e. within 60 days after the third and/or fifth December 31 following each Allocation Date. -7- 8 Additionally, in the event of retirement as described in the preceding sentence, the Committee (in its sole and absolute discretion and upon whatever conditions it determines appropriate) may make a Phantom Share allocation to the terminating Employee for the calendar year which includes his last day of active work immediately prior to retirement. (d) Prior to any payment pursuant to (b) or (c), above, the Employee's Account shall be adjusted as provided in Article IV. (e) So long as the Employee shall continue to be an employee of the Employer, his Account shall not be affected by any change of duties or position. Nothing in the Plan shall confer upon any Employee any right to continue in the employ of the Employer or to receive future Phantom Share allocations or accruals thereon nor shall anything in the Plan interfere with the right of the Employer to terminate an Employee's employment at any time whether or not for cause. The adoption of the Plan shall not constitute a contract between the Company or its subsidiaries and any Employee. No Employee shall receive any right to be granted an award hereunder nor shall any such award be considered as compensation under any other employee benefit plan of the Company except as otherwise determined by the Committee. (f) Any payment or distribution to an Employee under this Plan which is not claimed by the Employee, his beneficiary, or other person entitled thereto within three years after becoming payable shall be forfeited and canceled and shall remain with the Company, and no other person shall have any right thereto or interest therein. The Company shall not have any duty to give notice that amounts are payable under this Plan to any person other than the Employee and his beneficiary (or contingent beneficiary) in the event there are benefits payable after the Employee's death. VIII. Death, Disability or Incapacity of an Employee (a) Any payment or distribution due to an Employee under this plan on account of death or on account of termination of employment for disability or retirement where the terminated Employee dies before receiving the full amount to which he is entitled hereunder, shall be made to the beneficiary and/or contingent beneficiary designated by the Employee to receive such payments in the event of his death, in a written designation of beneficiary filed with the Company prior to his death. In the event of the Employee's failure to file such a designation or its ineffectiveness for any reason such payments shall be made to the Employee's surviving spouse, or if the Employee is not survived by a spouse, in equal shares to his then surviving issue, per stirpes, or if he is not survived by any issue, then to the Employee's estate. -8- 9 (b) Upon the total and permanent disability of an Employee to whom Phantom Shares have been allocated, as determined solely by the Committee, his Account shall become fully vested and payable, and shall be valued in accordance with Article IV(b) as of the end of the year in which the Committee determines that the Employee is totally and permanently disabled; payment shall be made within 60 days after that year-end. Additionally, the Committee (in its sole and absolute discretion and upon whatever conditions it determines appropriate) may make a Phantom Share allocation to the Employee for the calendar year which includes his date of termination of employment due to total and permanent disability. For these purposes, "total and permanent disability" means an impairment or illness of a physical or mental nature, or both, which results in the Employee's being unable to perform the normal duties of his employment consistent with the standards of his Employer for a period of at least ninety (90) consecutive business days. An Employee who is "totally and permanently disabled" within the meaning of the Company's Salaried Retirement Plan shall be deemed to have a "total and permanent disability" under this Plan. (c) Upon the death of an active Employee, his Account shall become fully vested and payable, and shall be valued in accordance with Article IV(b) as of the end of the year in which the Employee's death occurs; payment shall be made within 60 days after that year-end. Additionally, the Committee (in its sole and absolute discretion and upon whatever conditions it determines appropriate) may make a Phantom Share allocation to the Account of the deceased Employee for the calendar year which includes his date of death. Upon the death of a disabled or retired Employee who has not received payment of his entire Account, the undistributed balance of such Account shall be valued in accordance with Article IV(b) as of the end of the year in which the retired Employee's death occurs; payment shall be made within 60 days after that year-end. IX. The Effect of a Company Change in Control (a) Rights under this Plan shall be affected as hereinafter described by a Company Change in Control. A "Company Change in Control," solely for the purposes of this Plan, shall mean one or more of the following events: (i) The acquisition, after December 31, 1994, of beneficial ownership of 25% or more of the Company's Class A Common Stock or Class B Common Stock then outstanding by any person (including a group, within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934 (the "1934 Act")), other than: -9- 10 (A) the trustee of any Company-sponsored employee benefit plan, (B) the Company or any of its subsidiaries, (C) Kenneth G. Herrick, his descendants, or trusts for the benefit of such individuals, or (D) trusts or foundations established by Kenneth G. Herrick or by any of the descendants or trusts mentioned in (C), above. (ii) The first purchase, after December 31, 1994, under a tender offer or exchange offer for 25% or more of the Company's Class A Common Stock or Class B Common Stock then outstanding, other than an offer by: (A) the trustee of any Company-sponsored employee benefit plan, (B) the Company or any of its subsidiaries, (C) Kenneth G. Herrick, his descendants, or trusts for the benefit of such individuals, or (D) trusts or foundations established by Kenneth G. Herrick or by any of the descendants or trusts mentioned in (C), above. (iii) The first day on which less than a majority of the total membership of the Board shall be Continuing Directors; (iv) The effective date of a transaction (or a group of related transactions) in which more than 50 % in fair market value of the assets of the Company, or of the particular subsidiary for which a given Employee's services are principally performed, are disposed of pursuant to a partial or complete liquidation, a spin-off, a sale of assets or otherwise. In the event this provision applies to a particular subsidiary, only those Employees whose services are principally performed for that subsidiary shall be deemed to be affected by such Change in Control; or (v) The date on which the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 51% of the -10- 11 combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger of consolidation. (b) For purposes of this Article IX, the following terms shall have the following meanings: (i) "Continuing Director" shall mean any director of the Company who either (1) is a member of the Board on the date this Plan is adopted by the Board and has not terminated membership on the Board, or (2) is recommended or elected to the Company's Board of Directors by at least three-quarters of the Continuing Directors. (ii) "Person" shall mean a person as defined in Section 3(a)(9) of the 1934 Act, "beneficial ownership" shall be determined in accordance with Rule 13d-3 promulgated under the 1934 Act or any successor regulation, the term "group" shall mean a group as described in Rule 13d-5 promulgated under the 1934 Act or any successor regulation, and the formation of a group hereunder shall have the effect described in paragraph (b) of said Rule 13d-5 or any successor regulation. Anything hereinabove to the contrary notwithstanding, however: (a) relationships by blood, adoption or marriage between or among two or more persons shall not be deemed to constitute any of such persons a member of a group with any other such persons; (b) action taken or agreed to be taken by any person acting in his official capacity as an officer or director of the Company shall not be deemed to constitute such person a member of a group with any other person, and (c) formation of a group shall not constitute an acquisition by the group (or any member thereof) of beneficial ownership of any shares of the Company's Class B ("voting") common stock beneficially owned by any member of such group and acquired by such group member in an Excluded Acquisition. (iii) "Excluded Acquisition" means any acquisition of shares of voting common stock from the Company (whether or not for consideration) or from any person by operation of law (including but not limited to the laws of descent and distribution), by will, by gift or by foreclosure of a security interest given to secure a bona fide loan, or any acquisition consummated prior to January 1, 1994. (c) At the time a Company Change in Control takes effect with respect to an Employer, the Account of each affected Employee shall become fully vested and immediately payable, and the provisions of Article VII(a)(i) and (ii) shall not be effective for three months thereafter with respect to any affected Employee. At the time a Company Change in Control takes effect with respect to the Company, -11- 12 every Employee's Account shall become fully vested and immediately payable, and the provisions of Article VII(a)(i) and (ii) shall not be effective for three months thereafter. (d) If cash or other valuable consideration is paid to holders of Class A Common Stock in connection with a Company Change in Control, then the Company shall pay a like amount of cash for each Phantom Share (determined as set forth in Article IV) held in an Employee's Account (or the cash value per share of noncash consideration) as is received (per share) by the holders of Class A Common Stock. If such payment to the holders of Class A Common Stock is by way of purchase of their Class A Common Stock (or some portion thereof) then a corresponding percentage of each Account shall be deemed to have been paid off in consideration of the above-referenced payment by the Company to Employees. (e) It is this Plan's intent not to make "excess parachute payments," as defined in Section 280G of the Internal Revenue Code of 1986, as it may be amended or superseded (the "Code"), which would be nondeductible for Federal income tax purposes by the Company. Consequently, if payments resulting solely from the operation of this Article would be nondeductible by the Company for Federal income tax purposes due to Section 280G of the Code, as being in excess of reasonable compensation or three times the base amount specified in Section 280G(b)(3), such payments shall be reduced by the smallest amount required so that no payments are nondeductible under Section 280G of the Code. If any payments previously made to or for the benefit of an Employee from this Plan or any other plan or agreement are subsequently determined to be nondeductible because of Section 280G of the Code, such Employee shall be required to promptly repay the Company, at its request, the smallest amount necessary so that, after giving effect to such repayments to the Company, no payments to or for the benefit of the Employee (or the smallest amount possible) will be nondeductible under said Section 280G; provided, however, that any such repayments, adjusted for the time value of such amounts under the principles of Section 1274(b)(4) of the Code, may not exceed the amount of payments originally made from this Plan or any other plan or agreement. The Committee may establish procedures to carry out the provisions of this paragraph. (f) The terms and provisions of this Article IX shall become effective only in the event of a Company Change in Control as defined in this Article of the Plan. X. The Committee As Plan Administrator The Plan shall be administered by the Committee. Subject to the provisions of the Plan, the Committee shall make all decisions -12- 13 concerning Employees to be selected to receive allocations under the Plan, the amount of the allocation to be made to each participating Employee and the time when such allocations shall be made. The Committee's interpretation of the Plan and any action it takes with respect to Phantom Share allocations pursuant thereto shall be final and binding upon all affected parties. The Committee shall have the authority, subject to the provisions of the Plan, to establish, adopt, revise or repeal rules, regulations and procedures with respect to the Plan. XI. Amendment, Suspension, or Termination of the Plan The Committee or the Board may amend this Plan at any time, provided that any amendment by the Committee shall be consistent with the Plan's original design and purpose. No such amendment shall impair rights under the Plan with respect to Phantom Shares allocated prior to the date of such amendment. The Board may at any time terminate or suspend this Plan; provided that no such action shall impair rights under the Plan with respect to Phantom Shares allocated prior to the date of such action; provided also that in the event of termination of the Plan, the Committee (in its sole discretion) may accelerate the time of vesting and/or date of payment applicable to outstanding Accounts. XII. No Guarantee The Company has only a contractual obligation to pay Accounts. The satisfaction of payment obligations is to be made solely out of the general corporate funds of the Company, which shall at all times remain subject to the claims of its creditors. Further, amounts credited to an Employee's Account shall neither be segregated for the purpose of securing the Company's liability nor be held by the Company in trust for the Employee. The Board, upon the recommendation of the Committee, may authorize the creation of trusts or other arrangements to facilitate or ensure payment of the obligations under the Plan, provided that such trusts and arrangements are consistent with the "unfunded" status of the Plan (unless the Committee determines otherwise). An Employee shall have no right, title, or interest whatsoever in or to any investments which the Company may make to aid it in meeting its obligations hereunder. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and the Employee or any other person. To the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of an unsecured general creditor of -13- 14 the Company. All payments to be made hereunder shall be paid in cash from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payments of such amounts. XIII. Restrictions on Transfer of Benefits Neither the Employee nor any other person shall have any right to commute, sell, assign, transfer, alienate, pledge, anticipate, mortgage or otherwise encumber, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, or interest therein which are, and all rights to which are, expressly declared to be unassignable and non-transferable. No part of the amounts payable shall, prior to actual payment, be subject to garnishment, attachment, seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by the Employee or any other person, nor be transferable by operation of law in the event of the Employee's or any other person's bankruptcy or insolvency. Notwithstanding the above, the Company shall have the right to deduct from all amounts paid to, or on behalf of, a Participant any taxes required by law to be withheld in respect of Accounts under this Plan or any reductions under Article XV of this Plan. If FICA taxes become payable due to vesting of an award in circumstances where it is not practicable (or would create a hardship) to withhold the employee's share of taxes from regular paychecks during the remainder of the taxable year, the Committee (or its delegate) may direct the Company to advance the employee's share of FICA taxes as an interest free loan, to be withheld from benefit amounts at the time they first become payable under this Plan. XIV. Protective Provisions An Employee shall cooperate with the Company by furnishing any and all information requested by the Company, taking such physical examinations as the Company may deem necessary, and taking such other relevant actions as may reasonably be required by the Company or Committee for purposes of the Plan. If an Employee neglects or refuses so to cooperate, the Company shall have no further obligation to such Employee or his beneficiaries under the Plan. XV. Obligations to Company If an Employee becomes entitled to a distribution of benefits under the Plan, and if at such time the Employee has outstanding any debt, obligation, or other liability representing an amount -14- 15 owing to the Company, then the Company may offset such amount owed to it against the amount of benefits otherwise distributable. Such determination shall be made by the Company. XVI. Release and Non-Disclosure/Non-Competition Agreements Any payment to an Employee or his beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims against the Company with respect to such payment, and the Company may require such Employee or his beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect. Additionally, as a condition precedent to commencement of payments hereunder, and in consideration of such payments, an Employee may be required to execute and acknowledge a general release of all claims against the Company (and the Employer, if not the Company) in such form as the Company may then require. Upon termination of the Employee's employment, at retirement or otherwise, the Employee (if the Company requires him to do so) shall execute and thereafter perform a Non-competition/Non-disclosure Agreement in such form as the Company may then require. In that event, five per cent (5%) of each payment to the Employee or his beneficiary pursuant to the Plan shall be deemed a payment by the Company for such agreement. XVII. General (a) Titles and headings to the Articles of this Plan are included for convenience only and shall not control the meaning or interpretation of any provision of this Plan. Wherever reasonably necessary in this Plan, pronouns of any gender shall be deemed synonymous, as shall singular and plural pronouns. (b) This Plan shall be governed by and construed, enforced, and administered in accordance with the laws of the State of Michigan excluding any such laws which direct an application of the laws of any other jurisdiction. Subject to Article XVIII, the Company, the Employers and the Committee shall be subject to suit regarding the Plan only in the courts of the State of Michigan, and the Company shall fully indemnify and defend the Board and the Committee with respect to any actions relating to this Plan made in good faith by such bodies or their members. (c) The provisions of this Plan shall be deemed severable and in the event any provision of this Plan is held invalid, void, or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this Plan. Furthermore, the Committee shall have the power to modify such provision to the extent reasonably necessary to make the provision, -15- 16 as so changed, both legal, valid and enforceable as well as compatible with the other provisions of the Plan. (d) Any notice or filing required or permitted to be given under this Plan shall be sufficient if in writing and hand delivered, or sent by registered or certified mail: (a) to the Company or the Committee at the principal office of the Company, directed to the attention of the Chairman of the Committee, and (b) to the Employee at his last known home address on file with the Company's personnel office. Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification. It shall be the Employee's responsibility to inform the Company's personnel office, in writing, of any change in his home address. XVIII. Claims and Disputes (a) Claims for benefits under the Plan shall be made in writing to the Committee. The Employee may furnish the Committee with any written material he believes necessary to perfect his claim. (b) A person whose claim for benefits under the Plan has been denied, or his duly authorized representative, may request a review upon written application to the Committee, may review pertinent documents, and may submit issues and comments in writing. The claimant's written request for review must be submitted to the Committee within sixty (60) days after receipt by the claimant of written notification of the denial of a claim. A decision by the Committee shall be made promptly, and not later than sixty (60) days after the Committee's receipt of a request for review, unless special circumstances require an extension of time for proceeding, in which cases a decision shall be rendered as soon as possible, but not later than one hundred twenty (120) days after receipt of the request for review. The decision on review shall be in writing, shall include reasons for the decision, may include specific reference to the pertinent provision of the Plan on which the decision is based, and shall be written in a manner calculated to be understood by the claimant. (c) Unless otherwise required by law, any controversy or claim arising out of or relating to this Plan or the breach thereof, including in particular any controversy relating to Articles VII or IX, shall be settled by binding arbitration in the City of Tecumseh in accordance with the laws of the State of Michigan by three arbitrators, one of whom shall be appointed by the Company, one by the Employee (or in the event of his prior death, his beneficiary(-ies)), and the third of whom shall be -16- 17 appointed by the first two arbitrators. If the selected (third) arbitrator declines or is unable to serve for any reason, the appointed arbitrators shall select another arbitrator. Upon their failure to agree on another arbitrator, the jurisdiction of the Circuit Court of Lenawee County, Michigan shall be invoked to make such selection. The arbitration shall be conducted in accordance with the commercial arbitration rules of the American Arbitration Association except as hereinabove provided in (d) below. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Review by the arbitrators of any decision, action or interpretation of the Board or Committee shall be limited to a determination of whether it was arbitrary and capricious or constituted an abuse of discretion, within the guidelines of Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). In the event the Employee or his beneficiary shall retain legal counsel and/or incur other costs and expenses in connection with enforcement of any of the Employee's rights under this Plan, the Employee or beneficiary shall not be entitled to recover from the Company any attorneys fees, costs or expenses in connection with the enforcement of such rights (including enforcement of any arbitration award in court) regardless of the final outcome; except that the arbitrators in their discretion may award reasonable attorneys fees and reasonable costs to the Employee in an arbitration initiated by the Employee following a Change in Control, to enforce the Employee's rights under this Plan, provided the Employee is the prevailing party in such arbitration. (d) Any arbitration shall be conducted as follows: (i) The arbitrators shall follow the Commercial arbitration Rules of the American Arbitration Association, except as otherwise provided herein. The arbitrators shall substantially comply with the rules of evidence; shall grant essential but limited discovery; shall provide for the exchange of witness lists and exhibit copies; and shall conduct a pretrial and consider dispositive motions. Each party shall have the right to request the arbitrators to make findings of specific factual issues. (ii) The arbitrators shall complete their proceedings and render their decision within 40 days after submission of the dispute to them, unless both parties agree to an extension. Each party shall cooperate with the arbitrators to comply with procedural time requirements and the failure of either to do so shall entitle the arbitrators to extend the arbitration proceedings accordingly and to impose sanctions on the party responsible for the delay, payable to the other party. In the event the arbitrators do not fulfill their responsibilities on -17- 18 a timely basis, either party shall have the right to require a replacement and the appointment of new arbitrators. (iii) The decision of the arbitrator shall be final and binding upon the parties and accordingly a judgment by any Circuit Court of the State of Michigan or any other court of competent jurisdiction may be entered in accordance therewith. (iv) The costs of the arbitration shall be borne equally by the parties to such arbitration, except that each party shall bear its own legal and accounting expenses relating to its participation in the arbitration. XIX. Limitations of Action Every asserted claim to benefits or right of action by or on behalf of any Employee, past, present, or future, or any spouse, child, beneficiary or legal representative thereof, against the Company or any subsidiary thereof arising out of or in connection with this Plan shall, irrespective of the place where such right of action may arise or be asserted, cease and be barred by the expiration of the earliest of: (i) one year from the date of the alleged act or omission in respect of which such right of action first arises in whole or in part, (ii) one year after the Employee's termination of employment, or (iii) six months after notice is given to or on behalf of the Employee of the amount payable from the Employee's Account under this Plan. WITNESS execution of this plan document on behalf of the Company by its duly authorized officer. TECUMSEH PRODUCTS COMPANY By ----------------------------------- Its President and Chief Executive Officer Dated: , 2000 ----------- -18- EX-10.18 3 k60223ex10-18.txt SECOND AMENDMENT TO VOLUNTARY DEFERRED COMPENSA. 1 EXHIBIT 10.18 TECUMSEH PRODUCTS COMPANY VOLUNTARY DEFERRED COMPENSATION PLAN (as amended through November 22, 2000) 2 TECUMSEH PRODUCTS COMPANY VOLUNTARY DEFERRED COMPENSATION PLAN INDEX
PAGE ---- ARTICLE I PLAN PURPOSES.......................................................................1 ARTICLE II DEFINITIONS.........................................................................1 ARTICLE III ELIGIBILITY.........................................................................3 ARTICLE IV PARTICIPATION.......................................................................3 ARTICLE V GENERAL PROVISIONS..................................................................4 ARTICLE VI DEFERRED COMPENSATION ACCOUNTS......................................................5 ARTICLE VII PARTICIPANTS' RIGHTS UNSECURED......................................................8 ARTICLE VIII PAYMENT OF DEFERRED COMPENSATION....................................................9 ARTICLE IX VALUATION DATE.....................................................................11 ARTICLE X ALIENATION.........................................................................11 ARTICLE XI DOMESTIC RELATIONS ORDERS..........................................................12 ARTICLE XII TAX WITHHOLDING....................................................................13 ARTICLE XIII PARTICIPANT CONSENT................................................................13 ARTICLE XIV SEVERABILITY.......................................................................13 ARTICLE XV AMENDMENT AND TERMINATION..........................................................14 ARTICLE XVI CHANGE OF CONTROL..................................................................14 ARTICLE XVII PLAN ADMINISTRATION................................................................17 ARTICLE XVIII LIMITATIONS OF ACTION..............................................................19
-i- 3 TECUMSEH PRODUCTS COMPANY VOLUNTARY DEFERRED COMPENSATION PLAN [As amended through November 22, 2000] ARTICLE I PLAN PURPOSES 1.1 The purpose of this Plan is to provide eligible officers and Key Employees of the Employer with the opportunity to defer compensation. The Plan is also intended to establish a method for attracting and retaining persons whose abilities, experience and judgement can contribute to the long-term strategic objectives of the Employer. 1.2 The Company intends that the Plan be an unfunded, non-qualified deferred compensation plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees of the Employer, and that payments under the Plan shall be, when paid or otherwise made available to Participants, deductible by the Employer pursuant to Sections 162 and 404(a)(5) of the Internal Revenue Code of 1986, as amended (the "IRC"). ARTICLE II DEFINITIONS As used in this Plan, the following terms shall have the meanings hereinafter set forth: 2.1 "Base Salary" means the annual salary paid to officers and Key Employees of the Employer at regular intervals during the calendar year. 2.2 "Beneficiary" means any person(s) or legal entity(ies) designated by the Participant or otherwise determined in accordance with Section 5.4. 2.3 "Board" means the Board of Directors of the Company. 2.4 "Committee" means the Governance and Executive Compensation Committee of the Board, or such other committee as the Board may subsequently appoint to administer the Plan. 2.5 "Company" means Tecumseh Products Company, a Michigan corporation, and its successors and assigns. 2.6 "Compensation" means Base Salary and other qualifying remuneration paid by the Employer, as the Committee shall determine. 4 2.7 "Deferral Period" means the total period of time, expressed in Plan Years, for which the Participant has elected to defer Compensation. Such Deferral Period shall exclude the period of time beyond the Benefit Commencement Date (as provided in ARTICLE VIII). 2.8 "Deferred Compensation" means Compensation deferred pursuant to the Plan. 2.9 "Deferred Compensation Account" means the individual account maintained under the Plan for a Participant as determined under ARTICLE VI. 2.10 "Deferred Compensation Election Form" means an approved election form that each Participant must execute in accordance with ARTICLE IV in order to participate in the Plan, examples of which are attached hereto as EXHIBITS 1 and 1.1. 2.11 "Director" means a member of the Board. 2.12 "Eligible Participant" means any officer or Key Employee of the Employer designated by the Committee as eligible to participate in the Plan. Where the context so requires, this term shall also include a former officer or Key Employee for whom the Committee maintains a Deferred Compensation Account under the Plan. 2.13 "Employer" means the Company, any of its present subsidiary corporations, any corporation which becomes a controlled subsidiary of the Company provided the Committee determines to extend coverage thereto, and/or any successor(s) to such corporation(s). The Committee shall be deemed to have extended coverage to a subsidiary if an employee of such subsidiary is designated by the Committee as eligible to participate in the Plan. 2.14 "Key Employee" means any executive employee of the Employer that the Committee in its sole discretion decides is sufficiently important to the ongoing business objectives of the Employer. 2.15 "Market Price" of a Tecumseh Share on any given day means that day's closing price per share on the NASDAQ National Market or, if the Tecumseh Shares are not traded on a particular day, the closing NASDAQ price per share on the closest preceding date on which Tecumseh Shares were traded. 2.16 "Participant" for any Plan Year means an Eligible Participant who has elected to defer Compensation in accordance with the procedures set forth in ARTICLE IV and for whom the Committee has established and maintains a separate Deferred Compensation Account. 2.17 "Phantom Share" means a hypothetical or imaginary Tecumseh Share without any of the rights attached to an actual Tecumseh Share, but whose economic value for purposes of the Plan is the same as that of an actual Tecumseh Share. 2.18 "Plan" means the Tecumseh Products Company Voluntary Deferred Compensation Plan as embodied herein and as amended from time to time by the Board. -2- 5 2.19 "Plan Year" means the 12-month calendar year beginning January 1 and ending December 31, or such shorter period, as applicable, in the year the Plan is terminated. 2.20 "Rabbi Trust" means an irrevocable trust, containing certain key provisions, which the Internal Revenue Service would require in order to conclude that contributions made thereto by an employer, to provide for the payment of non-qualified deferred compensation benefits to employees, will not be taxed to employees at the time contributions are made, but instead, at the time the benefits are received or otherwise made available to the employee. 2.21 "Tecumseh Share" means a share of the Company's Class A Common Stock ($1.00 par value per share). 2.22 "Valuation Date" means the last business day of either a calendar year or calendar quarter, as the Committee will determine from time to time, the date on which a Participant's Deferred Compensation Account is valued for purposes of a hardship distribution pursuant to Section 8.8, and any other date specified by the Committee for valuing a Participant's Deferred Compensation Account. The masculine pronoun shall be deemed to include the feminine, and the singular number shall be deemed to include the plural, unless a different meaning is plainly required by the context. ARTICLE III ELIGIBILITY 3.1 Prior to the end of November in each Plan Year, the Committee shall designate the officers and Key Employees who shall be eligible to defer Compensation under the Plan during the following Plan Year. Also, the Committee may from time to time designate newly-hired officers and Key Employees as eligible to defer Compensation under the Plan. The Committee shall promptly notify each eligible officer and Key Employee of his eligibility to participate in the Plan if selected by the Committee. The Committee has total discretion to determine who is eligible to participate on a Plan Year by Plan Year basis. 3.2 Directors who are not also employees of the Employer are not eligible to participate in the Plan. ARTICLE IV PARTICIPATION 4.1 Election to Participate. Subject to Section 4.2, in order to participate in the Plan, in respect of Compensation for a particular Plan Year, an Eligible Participant must make a valid election by executing and filing with the Committee, before the commencement of such Plan Year, a Deferred Compensation Election Form, an example of which is attached hereto as EXHIBIT 1. Such election shall be in addition to the election provided under Section 6.10. -3- 6 4.2 New Participant. Notwithstanding Section 4.1, a newly-hired officer or Key Employee who becomes an Eligible Participant after the first day of the current Plan Year, may elect to participate in the Plan, with respect to future Compensation for such Plan Year, by filing a Deferred Compensation Election Form within 15 days after his initial date of designation or employment, whichever occurs later. 4.3 Election not Revocable. Except as provided in Section 8.5, a Deferred Compensation Election Form, once executed and filed with the Committee, cannot be revoked for such current Plan Year's Compensation elected to be deferred pursuant to such form. 4.4 Vesting. A Participant will be vested in his entire Deferred Compensation Account balance at all times and will not be subject to forfeiture for any reason. 4.5 New Elections Permitted for Each Year. A Participant is not required to defer Compensation for any subsequent Plan Year by reason of having elected to defer Compensation for a current or prior Plan Year. Compensation payable in future Plan Years can only be deferred by filing a Deferred Compensation Election Form for the appropriate Plan Year. 4.6 Deferrals in 5% Increments. The minimum amount which may be deferred by an Eligible Participant for any Plan Year is 5% of Compensation. Deferrals in excess of the minimum amount shall be in further 5% increments of Compensation. Elections to convert MIP Phantom Shares or to defer MIP cash awards pursuant to Section 6.10 are not subject to this Section 4.6. ARTICLE V GENERAL PROVISIONS 5.1 No Right to Payment Except as Provided in Plan. No Participant, or other Eligible Participant or Beneficiary, shall have any right to any payment or benefit hereunder except to the extent provided in the Plan. 5.2 Employment Rights. The employment rights of any Participant or other Eligible Participant shall not be enlarged, guaranteed or affected by reason of the provisions of the Plan. 5.3 Recipient Under a Disability. If the Committee determines that any person to whom a payment is due hereunder is a minor, or is adjudicated incompetent by reason of physical or mental disability, the Committee shall have the power to cause the payments becoming due to such person to be made to the legal guardian for the benefit of the minor or incompetent, without responsibility of the Employer or the Committee to see to the application of such payment, unless prior to such payment claim is made therefor by a duly appointed legal representative. Payments made pursuant to such power shall operate as a complete discharge of the Employer, the Board and the Committee. 5.4 Designation of Beneficiary. Each Participant may designate any person(s) or legal entity(ies), including his estate or a trust, as his Beneficiary under the Plan by filing a written beneficiary designation, in prescribed form, with the Committee. A Participant may at -4- 7 any time revoke or change his designation of Beneficiary by filing a new beneficiary designation with the Committee. If no person or legal entity shall be designated by a Participant as his Beneficiary, or if no designated Beneficiary survives him, his estate shall be his Beneficiary. 5.5 Elections. Any election made or notice given by a Participant pursuant to the Plan shall be in writing to the Committee, or to such representative as may be designated by the Committee for such purpose. Notice shall be deemed to have been made or given on the date received by the Committee or its designated representative. 5.6 Controlling Law. The validity of the Plan or any of its provisions shall be determined under, and it shall be construed and administered according to, the laws of the State of Michigan, without regard to principles of conflicts of law. ARTICLE VI DEFERRED COMPENSATION ACCOUNTS 6.1 Accounts. Upon receipt of a Participant's valid Deferred Compensation Election Form, the Committee shall establish, as a bookkeeping entry only, a Deferred Compensation Account for such Participant. The Committee shall thereafter record in each Participant's Deferred Compensation Account for a particular Plan Year, the amount(s) which he elected to defer which otherwise would have been paid to the Participant during the subsequent Plan Year or Plan Years, as the case may be. Such amount(s) shall be credited (as of the date such amount(s) would otherwise have been paid to the Participant) to one or more of the Investment Option sub-accounts which the Committee shall make available under the Plan. The initial Investment Options are the Phantom Share Investment Option and the Corporate Bond Investment Option. 6.2 Phantom Share Investment Option. Participant elections for this Option shall be reflected in a bookkeeping sub-account, the value of which shall be based upon the performance of Tecumseh Shares. Amounts deferred will be credited to such sub-account as units, each reflecting one Tecumseh Share. Fractional units will also be credited to such sub-account, if applicable. The number of credited units will be determined by dividing the dollar amount of Compensation deferred by the Market Price of a Tecumseh Share on the date such amount would otherwise have been paid to the Participant. Dividends paid on Tecumseh Shares shall be reflected in such sub-account by the crediting of additional units in such sub-account equal to the value of the dividend and based upon the Market Price of a Tecumseh Share on the date such dividend is paid. 6.3 Corporate Bond Investment Option. Participant elections for this Option shall be reflected in a bookkeeping sub-account, the value of which shall be based upon quarterly crediting of earnings based on the current yield of the DJ 20 Bond Index. Amounts deferred will be credited to such sub-account on the date such amount would otherwise have been paid to the Participant. All amounts reflected in this sub-account shall be credited with earnings, compounded quarterly, from the date credited, based on a rate of return equal to the current yield of the DJ 20 Bond Index as of the last business day of the preceding quarter. -5- 8 6.4 Adjustments to Accounts. The value of a Participant's Deferred Compensation Account shall be periodically adjusted for any payments made to such Participant in the form of benefits, hardship distributions, or otherwise. Where adjustment is made to the Phantom Stock sub-account, it shall be reflected in reduction of units determined by the amount paid, divided by the Market Price of a Tecumseh Share on the date of payment. 6.5 Dilutive and Anti-dilutive Transactions Affecting Phantom Shares. The Committee shall make appropriate adjustments to a Participant's Phantom Share Investment Option sub-account where a "capital transaction" or "corporate reorganization" has the effect of changing the economic equivalent number of Phantom Shares units that a Participant has been credited under this Plan. The Committee shall make an adjustment, either positive or negative as the case may be, to each Participant's Phantom Share Investment Option sub-account to ensure that neither unintended economic benefits nor detriments are conferred on a Participant solely by reason of such "capital transaction" or "corporate reorganization." 6.6 No Transfers Among Investment Options. Each deferral of Compensation under the Plan shall remain credited to the Investment Option(s) initially selected by the Participant with respect to deferrals during that Plan Year. However, deferrals during a subsequent Plan Year may be credited to different Investment Options and/or in different proportions than deferrals during prior Plan Years. 6.7 Investment Option Allocation Election. Each Participant may elect to allocate Deferred Compensation for a particular Plan Year among the Investment Options described in Sections 6.2, 6.3 and/or 6.9. However, if more than one Investment Option is selected for a particular Plan Year, such allocation cannot be less than 10% of deferrals during that Plan Year. 6.8 Effects On Other Plans. If, because of a Participant's deferral of Compensation under this Plan, a Participant's retirement benefits in any pension or retirement plan of the Employer (either qualified under IRC Section 401, or not so qualified) are reduced, the Employer shall provide a corresponding supplemental benefit under the Tecumseh Products Company Supplemental Retirement Plan. However, this Section shall not apply to any qualified defined contribution plan, such as a 401(k) plan. 6.9 New Investment Options; Committee Discretion Limited. The Committee may at any time in its sole discretion add an Investment Option or Options. Further, the Committee may eliminate or modify the terms of an existing Investment Option on a prospective basis, so long as the value of a Participant's Plan benefits accrued prior to such modification is not adversely affected thereby. If the Committee materially modifies the terms of an existing Investment Option, it shall promptly notify Participants regarding the details of such modification. Following receipt of such notice, each Participant shall have a period of not less than ten business days within which to elect to convert all or a portion (in 10% increments) of the affected sub-account(s) to any other Investment Option(s) then offered under the Plan, such election to take effect as of the effective date of the material modification. -6- 9 6.10 Election to Convert MIP Awards. Phantom Shares - An Eligible Participant (including a former officer or Key Employee who has a Deferred Compensation Account under the Plan) may, upon written election, choose to convert all or part of his/her Account under the Tecumseh Products Company Management Incentive Plan (the "MIP")), attributable to phantom share allocations ("MIP Phantom Shares") first becoming vested immediately after the end of a Plan Year, into the Phantom Share Investment Option, the Corporate Bond Investment Option, any other Investment Option that the Committee has made available, or a combination of the foregoing, under this Plan. Such conversion privilege is irrevocable (subject to the Participant's right to elect a different Investment Option under Section 6.9) and is subject to all provisions of this Plan. Also, any such written election, as well as any elections under Sections 8.1 - 8.3 with respect to the time, method of payment and payment period for the portion of the Participant's Deferred Compensation Account attributable to such conversion, must be made -- i) at least 9 months prior to the date the Participant becomes vested in the MIP Phantom Shares, and ii) on a Deferred Compensation Election Form, an example of which is attached as EXHIBIT 1.1. However, the above 9-month restriction will not apply in the situation where -- - - a Participant has made an election with respect to MIP Phantom Shares at least 9 months before he would become vested in those Shares under Article VI(a) of the MIP, and - - he subsequently becomes vested in those Shares under any other provision of the MIP before the end of the Plan Year and within 9 months of the date of the original election. In that situation, those MIP Phantom Shares which had been subject to the earlier election, and whose vesting was thereafter accelerated, shall be covered by the earlier election, even though they became vested within 9 months of the election. The conversion shall be effective as of the date the Participant becomes vested in the applicable MIP Phantom Shares. The conversion value of the MIP Phantom Shares used to calculate the number of Phantom Share units to be allocated to the Participant's Phantom Share Investment Option or the dollar amount to be allocated to the Participant's Corporate Bond Investment Option or to any other Investment Option that the Committee has made available shall generally be the value of the applicable MIP Phantom Shares as of the date the Participant became vested in such MIP Phantom Shares as determined under the MIP. However, the number of units allocated to a Participant's Phantom Share sub-account under this Plan as the result of a conversion pursuant to this Section 6.10 shall not be less than A x B, where "A" represents the total number of MIP Phantom Shares being converted and "B" represents the percentage of such converted MIP Phantom Shares being allocated to the Participant's Phantom Share sub-account under this Plan. -7- 10 MIP Cash Awards - Effective for Class Years (as defined in the MIP) beginning on and after January 1, 2000, the MIP was amended to provide that one-third of each annual award under the MIP would be fully vested as of the end of each such Class Year, and paid in cash within 60 days. An eligible Participant who is covered by the MIP may elect to defer all or some portion of a MIP cash award (in 25% increments of the award) by completing, executing and filing with the Committee, prior to a deadline established by the Committee (which shall be before March 31 of such Class Year), the relevant [cash award] portion of the Deferred Compensation Election Form, previously attached hereto as EXHIBIT 1.1. However, for the Class Year that begins January 1, 2000, such election form may be filed within 30 days following the date on which the Board approved the MIP amendment which authorized cash awards under the MIP. Such deferred amounts shall be credited (as of the date such amount(s) would otherwise have been paid to the Participant) to one or more of the Investment Option sub-accounts which the Committee shall make available under the Plan. ARTICLE VII PARTICIPANTS' RIGHTS UNSECURED 7.1 Unsecured Creditors. Amounts credited to a Participant's Deferred Compensation Account shall be dealt with in all respects as working capital of the Employer. Therefore, the right of a Participant to receive any distribution hereunder shall be an unsecured claim against the general assets of the Employer. 7.2 No Actual Investment Required. Subject to ARTICLE XVI and Section 17.1, no assets of the Employer shall in any way be held in trust for, or be subject to, any claim by a Participant or his Beneficiary under the Plan. Further, neither the Employer nor the Committee shall have any duty whatsoever to invest any amounts credited to any Deferred Compensation Accounts established under the Plan. 7.3 Optional Rabbi Trust(s) or Other Arrangement to Facilitate Payment. The Board, upon the recommendation of the Committee, may authorize the creation of one or more Rabbi Trusts or other arrangements to facilitate payment of the obligations under the Plan, provided that such trusts and arrangements are consistent with the "unfunded" status of the Plan. A Participant shall have no right, title, or interest whatsoever in or to any investments which the Company may make to aid it in meeting its obligations hereunder. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company and the Participant or any other person. To the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder are payable in cash from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payments of such amounts. -8- 11 ARTICLE VIII PAYMENT OF DEFERRED COMPENSATION 8.1 Commencement of Benefits. Subject to Section 8.1(a), when, and at the same time, a Participant elects to defer Compensation for any particular Plan Year, he shall concurrently elect, on the Deferred Compensation Election Form, when the portion of his Deferred Compensation Account balance attributable to such current Plan Year deferral shall be paid, which shall be as soon as practicable, and not more than 30 days after the first business day of the calendar month which follows: (i) the date such Participant attains a selected age (maximum of age 70); or (ii) retirement when eligible for commencement of early, normal or late retirement benefits under a qualified defined benefit plan sponsored by the Employer whichever the Participant shall elect on his Deferred Compensation Election Form. The date elected is hereinafter referred to as the "Benefit Payment Date". The Valuation Date to be used for such payment shall be the last business day of the calendar month that precedes the Benefit Payment Date. 8.1(a) 365-Day Minimum Deferral Period. Notwithstanding the time for the commencement of benefits pursuant to Section 8.1, commencement of benefits will not occur prior to the expiration of a 365-day period beginning the day after the date on which an election to defer Compensation became effective as provided in the Plan, unless the Committee determines to reduce or eliminate such time period. 8.2 Payment Method Election. At the time the Deferred Compensation Election Form is filed pursuant to ARTICLE IV, Participants must also elect the method of receiving payment of their Deferred Compensation Account balance upon the first business day of the Plan Year following the expiration of the Deferral Period so elected. Each Participant shall elect to receive payment of his Deferred Compensation Account either in: (i) one lump-sum on the Benefit Commencement Date; (ii) annual installments, with accrued earnings or losses, determined in accordance with the Plan provisions governing the Investment Option(s) selected, over a specified period (elected in accordance with Section 8.3), beginning on the Benefit Commencement Date; or (iii) a lump-sum/annual installment combination where a lump sum equal to 25%, 50% or 75% of the Participant's Deferred Compensation Account as specified by the Participant in the Deferred Compensation Election Form is paid to the Participant on his Benefit Commencement Date and where the remaining Deferred Compensation Account balance is paid in annual installments over a specified period (elected in accordance with Section 8.3), beginning on the first anniversary of the Benefit Commencement Date. -9- 12 8.2(a) Installment Payout Formula. If a Participant selects payment option (i) of Section 8.2, the annual installment amount for a particular Plan Year will be computed as follows: $W = ($X / [Y - Z]) Where W = Installment amount received by Participant in a particular Plan Year. Where X = Participant's Deferred Compensation Account balance at the end of the prior Plan Year. Where Y = Number of years originally elected by Participant for the payment period. Where Z = Number of years in the elected payment period already elapsed. 8.2(b) Lump-Sum/Installment Combination Payout Formula. If a Participant selects payment option (ii) of Section 8.2, the portion of the Deferred Compensation Account balance remaining after the payment of the lump sum on the Benefit Commencement Date to be paid out in any given Plan Year in annual installments will be considered a separate account amount which is computed in the same manner as described in Section 8.2(a). 8.3 Payment Period Election. At the time an Eligible Participant elects on the Deferred Compensation Election Form to be a Participant for any Plan Year, he shall concurrently elect the payment method (lump sum and/or number of years, up to a maximum of 15) over which his Deferred Compensation Account shall be paid out to him from the Plan upon the expiration of the Deferral Period. If a Participant has elected different pay-out methods or periods on his/her Deferred Compensation Election Forms for different years, then the Committee shall establish sub-accounts to keep track of the portions of such Account that are subject to those different methods or periods. 8.3(a) Automatic Lump Sum Payment. (i) Notwithstanding the Participant's Investment Option(s) or the Payment Method and Payment Period Elections previously made by him pursuant to Sections 8.2 and 8.3, in the case of a Participant's separation from Employer service for any reason other than death or retirement when eligible for commencement of pension benefits from a qualified pension or retirement plan sponsored by the Employer, his Account balance under this Plan automatically will be transferred to the Corporate Bond Investment Option. Such balance with interest shall be paid to him in a lump sum, as soon as administratively feasible thereafter, unless the Committee directs a different payment method and/or payment period. (ii) Notwithstanding the Participant's Investment Option(s) or the Payment Method and Payment Period Elections previously made by him pursuant to Sections 8.2 and 8.3, in the case of a Participant's death, whether before or after his Benefit Commencement Date, his Account balance under this Plan automatically will be -10- 13 transferred to the Corporate Bond Investment Option. Such balance with interest shall be paid to his Beneficiary or estate in a lump sum, as soon as administratively feasible after his death, unless the Committee directs a different payment method and/or payment period. 8.4 Payment Denomination. All payments to Participants or others will be paid solely in cash. 8.5 Change of Prior Elections. Subject to the consent of the Committee, an Eligible Participant may file a request to change any prior election with respect to the timing of commencement of benefits (Section 8.1), payment method (Section 8.2) and/or payment period (Section 8.3). Such new election must be filed with the Committee at least 365 days prior to the date on which payment of benefits would commence under either the original or the revised election. Only one such request with respect to any prior election will be approved for any Participant. 8.6 Hardship Withdrawal. Upon application of any Participant and approval thereof by the Committee, the Participant may withdraw, by reason of hardship, part or all of his/her Deferred Compensation Account balance. "Hardship" shall mean an unanticipated emergency situation in the Participant's financial affairs beyond the Participant's control, including illness or an accident involving the Participant, his/her dependents or other members of his/her family, or other significant financial emergency, as determined by the Committee in its sole discretion. If a hardship withdrawal is made from a Participant's Phantom Share sub-account, the Phantom Share units in such sub-account shall be reduced by a number determined by dividing the amount withdrawn by the Market Price of Tecumseh Shares on the trading date preceding the date of withdrawal, rounded to the next-higher one-tenth (1/10) unit. ARTICLE IX VALUATION DATE 9.1 Valuation. As of each Valuation Date, the Deferred Compensation Account of each Participant shall be valued by the Committee. The current value, and the change in value from the prior valuation (whether positive or negative), shall be communicated in writing to each Participant within 45 days after each Valuation Date. ARTICLE X ALIENATION 10.1 Anticipation, alienation, sale, transfer, assignment, pledge, levy, garnishment or other encumbrance of any payments from or benefits held under the Plan shall not be permitted or recognized, and to the extent permitted by law, no such payments or benefits shall be subject to legal process or attachment for the payment of any claim of any person entitled to receive the same. -11- 14 ARTICLE XI DOMESTIC RELATIONS ORDERS 11.1 Notwithstanding ARTICLE X, (i) To the extent required under final judgment, decree or order (including approval of a property settlement agreement) made pursuant to a state domestic relations law, any portion of a Participant's Deferred Compensation Account may be paid or set aside for payment to a spouse, former spouse, or child of the Participant. Where necessary to carry out the terms of such an order, a separate account shall be established with respect to the spouse, former spouse, or child who shall be entitled to make investment selections with respect thereto in the same manner as the Participant; any amount so set aside for a spouse, former spouse, or child shall be paid out in accordance with the Participant's prior elections under Sections 8.2 and 8.3, unless the Committee agrees to a different time and/or form of payment to such recipient(s). Any payment made to a person other than the Participant pursuant to this Section shall be reduced by tax withholding, if required by law; the fact that payment is made to a person other than the Participant may not prevent such payment from being includible in the gross income of the Participant for withholding and income tax reporting purposes. (ii) The Employer's liability to pay benefits to a Participant shall be reduced to the extent that amounts have been paid or set aside for payment to a spouse, former spouse, or child pursuant to subparagraph (i) of this Section. No such transfer shall be effectuated unless the Employer or Committee has been provided with satisfactory evidence that the Employer and the Committee are released from any further claim with respect to such amounts, in any case in which (a) the Employer or Committee has been served with legal process or otherwise joined in a proceeding relating to such transfer, (b) the Participant has been notified of the pendency of such proceeding in the manner prescribed by law of the jurisdiction in which the proceeding is pending for service of process in such action or by mail from the Employer or Committee to the Participant's last known mailing address, and (c) the Participant fails to obtain an order of the court in the proceeding relieving the Employer or Committee from the obligation to comply with the judgment, decree, or order. (iii) The Employer and Committee shall not be obligated to defend against or set aside any judgment, decree, or order described in subparagraph (i), or any legal order relating to the garnishment of a Participant's benefits, unless the full expense of such legal action is borne by the Participant. In the event that the Participant's action (or inaction) nonetheless causes the Employer or Committee to incur such expense, the amount of the expense may be charged against the Participant's Deferred Compensation Account and thereby reduce the Employer's obligation to pay benefits to the Participant. In the course of any proceeding relating to divorce, separation, or child support, the Employer and Committee shall be authorized to disclose information relating to the Participant's Account to the -12- 15 Participant's spouse, former spouse, or child (including the legal representatives of the spouse, former spouse, or child), or to a court. ARTICLE XII TAX WITHHOLDING 12.1 Withholding. Subject to Sections 11.1, 12.2 and 12.3, the Employer shall deduct from all payments under this Plan each Participant's share of any taxes required to be withheld by any Federal, state or local government. The Participants and their Beneficiaries, distributees and personal representatives will bear any and all Federal, foreign, state, local income taxes or any other taxes imposed on Participants or amounts paid under this Plan. 12.2 FICA Taxes. Pursuant to IRC Section 3121(v) and regulations thereunder, Compensation deferred pursuant to this Plan is subject to employment taxes under the Federal Insurance Contributions Act ("FICA") at the time of deferral rather than at the time of distribution to the Participant. Accordingly, at the time of deferral, each Participant will be required to pay to the Employer, either by payroll deduction or check, his share of FICA (including hospital insurance [Medicare]) taxes due and payable; except to the extent the Participant has already reached the maximum compensation levels subject to Old-Age, Survivors, and Disability Insurance ("OASDI") tax at the time Compensation is deferred under the Plan. 12.3 Taxes Due at Deferral Date Other than FICA Taxes. If any of the taxes referred to in Section 12.1 are due at the time of deferral, instead of at the time of payout, each Participant will be required to pay to the Employer, by payroll deduction or check, the Participant's share of any such taxes due and payable. ARTICLE XIII PARTICIPANT CONSENT 13.1 By electing to defer Compensation pursuant to this Plan, Participants shall be deemed conclusively to have accepted and consented to all terms of the Plan and all actions or decisions made by the Company, the Board or the Committee with regard to the Plan. Such terms and consent shall also apply to, and be binding upon, the Beneficiaries, distributees and personal representatives and other successors in interest of each Participant. ARTICLE XIV SEVERABILITY 14.1 In the event any provision of this Plan would violate applicable law or serve to invalidate the Plan, that provision shall be deemed to be null and void, and the Plan shall be construed as if it did not contain the provision in question. -13- 16 ARTICLE XV AMENDMENT AND TERMINATION 15.1 Board May Terminate. Subject to all other provisions of this Plan, the Board, may at any time terminate the Plan. 15.2 Board or Committee May Amend. Subject to all other provisions of this Plan, the Committee or the Board may amend this Plan at any time, provided that any amendment by the Committee shall be consistent with the Plan's original design and purpose. 15.3 Fiduciary Guidelines. Notwithstanding Sections 6.9, 15.1 and 15.2, the Board shall not make amendments or terminate the Plan if such amendments or termination would reduce a Participant's respective balance in his Deferred Compensation Account. Further, the Board shall not make amendments which would in any way eliminate the express requirement in Section 16.1 requiring the establishment and funding of a Rabbi Trust in the event of a Change of Control (as defined at ARTICLE XVI) if one has not previously been established and funded. 15.4 Termination. In the event the Board terminates the Plan, the Committee shall give written notice to each Participant that his Deferred Compensation Account balance will be distributed in the manner initially elected by each Participant pursuant to ARTICLE VIII. Further, pursuant to the responsibility vested with the Committee as stated in Section 17.1, the Committee will evaluate the advisability of establishing a Rabbi Trust--if one does not already exist--in light of the circumstances that caused the Board to terminate the Plan. 15.5 Corporate Successors. The Plan shall not be automatically terminated by a transfer or sale of assets of the Company or by the merger or consolidation of the Company into or with any other corporation or other entity. The Plan will be continued after such sale, merger or consolidation if and to the extent that the transferee, purchaser or successor entity (hereinafter called the "Successor") agrees to continue the Plan. In the event the Plan is not assumed and continued by the Successor, then the Plan shall terminate in accordance with Section 15.4; provided that each Participant's Phantom Share sub-account shall be valued based upon Phantom Share units being valued by reference to the greater of (a) the Market Price of Tecumseh Shares on the effective date of such sale, merger or consolidation, or (b) the value per share, as of such date, of consideration received by the actual holders of Tecumseh Shares in connection with the sale, merger or consolidation in question. ARTICLE XVI CHANGE OF CONTROL 16.1 Funding of Rabbi Trust. Notwithstanding ARTICLE VII, upon a "Change of Control" as defined in Section 16.2, the Board is required to cause the immediate contribution of funds to a newly-created Rabbi Trust (or existing Rabbi Trust if previously established), i.e., a "Rabbi Trust" established in accordance with Rev. Proc. 92-64 (or any successor), for the benefit of each Plan Participant, as beneficiary. If the Committee determines that a Rabbi Trust is not the appropriate funding mechanism, any other funding mechanism approved by the Internal Revenue Service as a means to avoid Plan Participants being in constructive receipt of income -14- 17 can be used in the alternative. The assets of such Rabbi Trust shall at all times be subject to the claims of general creditors of the Employer. Such initial contribution will be equal to the balance in each Participant's Deferred Compensation Account as of the Change of Control date. Further, if the Plan is not terminated upon such Change of Control, the Employer shall continue to contribute to the Rabbi Trust, on a monthly basis, an amount of cash and/or Tecumseh Shares equal to the Compensation being deferred by each Participant after the Change of Control. Also, the Employer shall continue to contribute additional cash and/or Tecumseh Shares as required to maintain the value of the assets of such Rabbi Trust at least equal to the estimated value of future benefits payable under the Plan. 16.2 Change of Control. For purposes of this Plan, a "Change of Control" shall mean one or more of the following events: i) The acquisition, after December 31, 1998, of actual or beneficial ownership of 25% or more of the Company's Class A Common Stock or Class B Common Stock then outstanding by any person (including a group, within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934 (the "1934 Act")), other than: A) the trustee of any Company-sponsored employee benefit plan, B) the Company or any of its subsidiaries, C) Kenneth G. Herrick, his descendants, or trusts for the benefit of such individuals, or D) trusts or foundations established by Kenneth G. Herrick or by any of the descendants or trusts mentioned in (C), above. ii) The first purchase, after December 31, 1998, under a tender offer or exchange offer for 25% or more of the Company's Class A Common Stock or Class B Common Stock then outstanding, other than an offer by: A) the trustee of any Company-sponsored employee benefit plan, B) the Company or any of its subsidiaries, C) Kenneth G. Herrick, his descendants, or trusts for the benefit of such individuals, or D) trusts or foundations established by Kenneth G. Herrick or by any of the descendants or trusts mentioned in (C), above. iii) The first day on which less than a majority of the total membership of the Board shall be Continuing Directors; iv) The effective date of a transaction (or a group of related transactions) in which more than 50% in fair market value of the assets of the Company, or of the -15- 18 particular subsidiary for which a given Participant's services are principally performed, are disposed of pursuant to a partial or complete liquidation, a spin-off, a sale of assets or otherwise. In the event this provision applies to a particular subsidiary, only those Participants whose services are principally performed for that subsidiary shall be deemed to be affected by such Change in Control; or v) The date on which the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 51% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger of consolidation. 16.2a Definitions. For purposes of Section 16.2, the following terms shall have the following meanings: i) "Continuing Director" shall mean any director of the Company who either (1) is a member of the Board on the date this Plan is adopted by the Board and has not terminated membership on the Board, or (2) is recommended to Company shareholders for election or appointed to the Company's Board of Directors by at least three-quarters of the Continuing Directors. ii) "Person" shall mean a person as defined in Section 3(a)(9) of the 1934 Act, "beneficial ownership" shall be determined in accordance with Rule 13d-3 promulgated under the 1934 Act or any successor regulation, the term "group" shall mean a group as described in Rule 13d-5 promulgated under the 1934 Act or any successor regulation, and the formation of a group hereunder shall have the effect described in paragraph (b) of said Rule 13d-5 or any successor regulation. Anything hereinabove to the contrary notwithstanding, however: (a) relationships by blood, adoption or marriage between or among two or more persons shall not be deemed to constitute any of such persons a member of a group with any other such persons; (b) action taken or agreed to be taken by any person acting in his official capacity as an officer or director of the Company shall not be deemed to constitute such person a member of a group with any other person, and (c) formation of a group shall not constitute an acquisition by the group (or any member thereof) of beneficial ownership of any shares of the Company's Class B ("voting") common stock beneficially owned by any member of such group and acquired by such group member in an Excluded Acquisition. iii) "Excluded Acquisition" means any acquisition of shares of voting common stock from the Company (whether or not for consideration) or from any person by operation of law (including but not limited to the laws of descent and distribution), by will, by gift or by foreclosure of a security interest given to secure a bona fide loan, or any acquisition consummated prior to December 31, 1998. -16- 19 ARTICLE XVII PLAN ADMINISTRATION 17.1 Committee. The responsibilities for general administration of the Plan as well as the decisions to establish and fund a Rabbi Trust or other funding medium shall reside with the Committee. 17.2 Determinations of Committee. Subject to the limitations of the Plan or the express powers reserved solely for the Board, the Committee shall from time to time establish rules for the administration and interpretation of the Plan and the transaction of its business. The determination of the Committee shall be conclusive concerning the content, import or meaning of any and all terms in the Plan. 17.3 Majority Vote. Any act which the Plan authorizes or requires the Committee to do may be done by a majority (expressed from time to time by a vote at a meeting or, in lieu thereof, a written consent) and shall constitute the action of the Committee, and shall have the same effect for all purposes as if assented to by all members of the Committee. 17.4 Agents and Employees. The Committee may employ or retain agents and may designate one or more employees of the Company, by name or by position, to perform such clerical, accounting, and other services as the Committee may require in carrying out the provisions of the Plan. 17.5 Authorization of Committee Members. The members of the Committee may authorize one or more of their members to execute or deliver any instrument, make any payment, or perform any other act which the Plan authorizes or requires the Committee to do. 17.6 Costs. Any and all costs in administering this Plan will be paid by the Employer. 17.7 Claims. Claims for benefits under the Plan shall be made in writing to the Committee. The Participant (or Beneficiary) may furnish the Committee with any written material he believes necessary to perfect his claim. 17.8 Claims Review. A person whose claim for benefits under the Plan has been denied, or his duly authorized representative, may request a review upon written application to the Committee, may review pertinent documents, and may submit issues and comments in writing. The claimant's written request for review must be submitted to the Committee within 60 days after receipt by the claimant of written notification of the denial of a claim. A decision by the Committee shall be made promptly, and not later than 60 days after the Committee's receipt of a request for review, unless special circumstances require an extension of time for proceeding, in which case a decision shall be rendered as soon as possible, but not later than 120 days after receipt of the request for review. The decision on review shall be in writing, shall include reasons for the decision, may include specific reference to the pertinent provision of the Plan on which the decision is based, and shall be written in a manner calculated to be understood by the claimant. -17- 20 17.9 Arbitration. Unless otherwise required by law, any controversy or claim arising out of or relating to the Plan or the breach thereof, shall be settled by binding arbitration in the City of Tecumseh in accordance with the laws of the State of Michigan by three arbitrators, one of whom shall be appointed by the Company, one by the Participant (or in the event of his prior death, his beneficiary(ies) or other distributee(s)), and the third of whom shall be appointed by the first two arbitrators. If the selected (third) arbitrator declines or is unable to serve for any reason, the appointed arbitrators shall select another arbitrator. Upon their failure to agree on another arbitrator, the jurisdiction of the Circuit Court of Lenawee County, Michigan shall be invoked to make such selection. The arbitration shall be conducted in accordance with the commercial arbitration rules of the American Arbitration Association except as provided in 17.9(a) below. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. Review by the arbitrators of any decision, action or interpretation of the Board or Committee shall be limited to a determination of whether it was arbitrary and capricious or constituted an abuse of discretion, within the guidelines of Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101 (1989). In the event the Participant or his/her beneficiary shall retain legal counsel and/or incur other costs and expenses in connection with enforcement of any of the Participant's rights under the Plan, the Participant or beneficiary shall not be entitled to recover from the Company any attorneys fees, costs or expenses in connection with the enforcement of such rights (including enforcement of any arbitration award in court) regardless of the final outcome; except that the arbitrators in their discretion may award reasonable attorneys fees and reasonable costs to the Participant in an arbitration initiated by the Participant to enforce the Participant's rights under the Plan, provided the Participant is the prevailing party in such arbitration. 17.9(a) Any arbitration shall be conducted as follows: (i) The arbitrators shall follow the Commercial arbitration Rules of the American Arbitration Association, except as otherwise provided herein. The arbitrators shall substantially comply with the rules of evidence; shall grant essential but limited discovery; shall provide for the exchange of witness lists and exhibit copies; and shall conduct a pretrial and consider dispositive motions. Each party shall have the right to request the arbitrators to make findings of specific factual issues. (ii) The arbitrators shall complete their proceedings and render their decision within 40 days after submission of the dispute to them, unless both parties agree to an extension. Each party shall cooperate with the arbitrators to comply with procedural time requirements and the failure of either to do so shall entitle the arbitrators to extend the arbitration proceedings accordingly and to impose sanctions on the party responsible for the delay, payable to the other party. In the event the arbitrators do not fulfill their responsibilities on a timely basis, either party shall have the right to require a replacement and the appointment of new arbitrators. (iii) The decision of the arbitrator shall be final and binding upon the parties and accordingly a judgment by any Circuit Court of the State of Michigan or any other court of competent jurisdiction may be entered in accordance therewith. -18- 21 (iv) Subject to the provisions of Section 17.9 relating to reasonable attorneys fees and costs in an arbitration, the costs of the arbitration shall be borne equally by the parties to such arbitration, except that each party shall bear its own legal and accounting expenses relating to its participation in the arbitration. ARTICLE XVIII LIMITATIONS OF ACTION 18.1 Every asserted claim to benefits or right of action by or on behalf of any Participant, past, present, or future, or any spouse, child, beneficiary or legal representative thereof, against the Company arising out of or in connection with the Plan shall, irrespective of the place where such right of action may arise or be asserted, cease and be barred by the expiration of the earliest of: (i) one year from the date of the alleged act or omission in respect of which such right of action first arises in whole or in part, (ii) one year after the Participant's termination of employment, or (iii) six months after notice is given to or on behalf of the Participant of the amount payable to or in respect of the Participant under the Plan. WITNESS execution of this plan document on behalf of the Company by its duly authorized officer. TECUMSEH PRODUCTS COMPANY By ------------------------- Its President and Chief Executive Officer Dated: , 2000 --------------- -19- EX-21 4 k60223ex21.txt SUBSIDIARIES OF THE COMPANY 1 EXHIBIT (21) SUBSIDIARIES OF THE COMPANY The following is a list of subsidiaries of the Company as of December 31, 2000 except that certain subsidiaries, the sole function of which is to hold the stock of operating subsidiaries, which in the aggregate do not constitute significant subsidiaries, have been omitted. Subject to the foregoing in each case, 100% of the voting securities (except for directors' qualifying shares, if required) are owned by the subsidiary's immediate parent as indicated by indentation.
STATE OR COUNTRY NAME OF ORGANIZATION - ---- ---------------- MP Pumps, Inc. ............................................. Michigan Tecumseh do Brasil, Ltda. .................................. Brazil Tec Kold International Company, Ltd. ..................... Liechtenstein Tecumseh do Brasil Europe Srl............................. Italy Tecumseh Products Company of Canada, Ltd. .................. Canada Tecumseh Products Company, Engine & Transmission Group, Dunlap Operations, Inc. ......................................... Tennessee Douglas Products, Inc. ..................................... Georgia Tecumseh France S.A. ....................................... France Tecumseh Europe S.A. ..................................... France L'Unite Hermetique-Far East SDN. BHD................... Malaysia Societe Des Moteurs Electriques de Normandie S.A. ..... France Societe Immobiliere De Construction de La Verpilliere........................................... France Tecumseh Services EURL S.A. .............................. France Tecumseh Products Company, International Division, Inc. (FSC)..................................................... Virgin Islands Tecumseh Europa, S.p.A...................................... Italy Societe T.I.G.E.R......................................... France Tecumseh Deutschland GmbH................................. Germany Tecumseh Service France................................... France Tecumseh U.K. Limited..................................... United Kingdom Little Giant Pump Co. ...................................... Oklahoma Trenton Division, Inc. ..................................... Tennessee Vitrus, Inc. ............................................... Rhode Island Tecumseh Products India, Ltd. .............................. India
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