-----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, IDtZA+rZZZdQX8p53ph76QQl2hbXXn9RRO316zn90saY3m5ywMoROfK8wkO0JxII 0DrzndSNhmP9H7ljgZRzKg== 0000950124-02-000852.txt : 20020415 0000950124-02-000852.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950124-02-000852 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020315 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: 1934 Act SEC FILE NUMBER: 000-00452 FILM NUMBER: 02576830 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 k67190e10-k405.txt FORM 10-K PURSUANT TO ITEM 405 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 2001 COMMISSION FILE NUMBER 0-452 TECUMSEH PRODUCTS COMPANY (Exact Name of Registrant as Specified in its Charter) MICHIGAN 38-1093240 (State of Incorporation) (I.R.S. Employer Identification No.) 100 EAST PATTERSON STREET TECUMSEH, MICHIGAN 49286 (Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (517) 423-8411
SECURITIES REGISTERED PURSUANT TO SECURITIES REGISTERED PURSUANT TO SECTION 12(b) of the Act: SECTION 12(g) of the Act: Name of Each Exchange Title of Each Class on Which Registered - ----------------------- ----------------------- None None 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, 2002 all of the 5,077,746 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, 2002, held an aggregate of 2,279,544 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, 2002 (based on the closing price of $51.04 per share, as reported on the Nasdaq Stock Market on such date) of 2,798,202 shares then issued and outstanding held by non-affiliates was approximately $142,820,230. Numbers of shares outstanding of each of the Registrant's classes of Common Stock at March 1, 2002: Class B Common Stock, $1.00 Par Value: 5,077,746 Class A Common Stock, $1.00 Par Value: 13,401,938 Certain information in the definitive proxy statement to be used in connection with the Registrant's 2002 Annual Meeting of Shareholders has been incorporated herein by reference in Part III hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Executive Officers of Registrant............................ 9 Item 2. Properties.................................................. 9 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......................................... 11 Item 6. Selected Financial Data..................................... 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 13 Item 7A. Quantitative and Qualitative Disclosures about Market 20 Risk........................................................ Item 8. Financial Statements and Supplementary Data................. 22 Item 9. Changes in and Disagreements with Accountants on Accounting 44 and Financial Disclosure.................................... 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 44 Management.................................................. Item 13. Certain Relationships and Related Transactions.............. 44 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 44 8-K......................................................... Signatures............................................................ 45
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 2001, 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 and, since May 2001, in the Czech Republic. 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 2001, total sales generated by Tecumseh do Brasil amounted to 27% of total Compressor Products segment sales. Brazilian operating income amounted to approximately 77% of total Compressor Products segment operating income and approximately 53% 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. 1 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. In May 2001 the Company established MOTOCO a.s. ("MOTOCO") which acquired the assets of an engine manufacturing facility in the Czech Republic. MOTOCO produces primarily larger engines and engine components for export to the U.S. market. 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, 2001, 2000 and 1999 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 that is sold in limited quantities. MANUFACTURING OPERATIONS Compressor Products manufactured in the Company's U.S. plants accounted for approximately 50% of 2001 compressor sales. The balance was produced at the Company's manufacturing facilities in Brazil, France 2 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 most significant of which are commercial customers. In 2001, the two largest customers for compressor products accounted for 7.0% and 3.2%, respectively, of total segment sales, or 4.0% and 1.9%, 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 2001, approximately 30% 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 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, American Standard's Trane air conditioning division and Lennox International, Inc. Carrier Corporation, a subsidiary of United Technologies 3 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 offers only a limited line of scroll compressor models for sale 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. 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 has continued to take actions begun in late 1999 to consolidate North American compressor manufacturing capacity. The objective is 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. In the third quarter of 2001, the Company offered an early retirement incentive to eligible Corporate, North American Compressor and Engine & Power Train Group employees. Two hundred fifty (250) employees, representing approximately 78% of those eligible, or approximately 20% of the total salaried workforce in the eligible groups, elected early retirement. The cost of providing the pension and healthcare benefits associated with this plan amounted to $29.3 million pretax ($18.9 million net of tax) for the Company as a whole and has been recorded as a nonrecurring charge in the third quarter of 2001. Ongoing cost savings to the Company from this action are estimated to be in a range of $10-12 million annually. Approximately one half of the retirees and the estimated savings are attributable to the North American Compressor Group. During 2001, the Company substantially completed the closing of its Somerset, Kentucky compressor manufacturing facility and relocated the production to other existing North American manufacturing facilities as announced in early 2000. In connection with this decision an $18.8 million nonrecurring charge was recorded in the first quarter of 2000. Included in this charge was $9.5 million in employee severance and other employee related costs associated with the termination of approximately 895 employees, and $9.3 million represents plant closure costs and the write-down of obsolete and non-usable equipment. In addition to the Somerset plant closing charge, the Company recorded an $8.7 million asset impairment charge in 2000 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 4 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. 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 64%, 61% and 70% of its production being exported in 2001, 2000 and 1999, respectively. 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 2001, approximately 34% 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. closed its old refrigeration compressor plant and relocated manufacturing operations to its newly constructed plant in Ballabgarh, India. A $6.0 million charge covering the estimated cost of this action was recorded during the first quarter of 2000. However, the move to the new facility did not come without incident. As a consequence of the move and related workforce reduction, 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. While operations in India continue to suffer greatly from a lack of production volume, operating losses improved by approximately $4.5 million in 2001 due to the non-recurrence of the 2000 events. 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. 5 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 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 that 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, one plant in Italy, and as of May 2001, one plant in the Czech Republic. 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. During the fourth quarter of 2001 the Company recognized a nonrecurring charge of $6.1 million ($3.9 million net of tax) related primarily to the transfer of certain engine and component part production from domestic facilities to the Company's facilities in the Czech Republic. Also, as noted under "North American Operations" for the Compressor Group, the Company offered an early retirement incentive to eligible Corporate, North American Compressor and Engine & Power Train Group employees. Approximately half of the 250 employees electing early retirement were attributable to the Engine & Power Train Group. 6 Sales in this segment can be significantly affected by environmental factors affecting the respective selling seasons for the various types of equipment. For example, snow thrower sales, and therefore the demand for the Company's applicable engine, show a strong correlation with the amount of snow fall received. Similarly, the frequency of weather-related and other interruptions to power supplies or the perceived threat of interruptions, affect the demand for generators. Factors such as these are largely unpredictable, yet greatly influence the year-to-year demand for engine 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 and garden and other consumer products 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 2001, the three largest (direct ship) customers for Engine and Power Train Products accounted for 24.0%, 21.8% and 14.8%, respectively, of segment sales, or 8.3%, 7.5% and 5.1%, respectively, of consolidated net sales. Some of the engines provided to these customers are incorporated into end consumer products that are sold by Sears. Total sales to Sears and Sears affiliated suppliers in 2001 and 2000 amounted to 23.5% and 28.6%, respectively, of segment sales, or 8.1% and 10.6%, respectively, of consolidated net sales. The year over year reduction in the percentage of sales to Sears and Sears affiliated suppliers is due to a substantial decline in participation in their walk behind lawn mower segment, partially offset by increased volume in the snow thrower segment. Loss of any of this segment's three largest customers, and/or the loss of Sears as a retail distributor, would have a material 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 7 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" and "Interon" brand names. 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. 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. 8 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 $27.6, $28.1 and $30.2 million during 2001, 2000, and 1999, 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, 2001, the Company employed approximately 16,000 persons, 63% of which were employed in foreign locations. Approximately 2,600 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, however, during 2001 the number of employees generally declined as cost reduction actions were implemented. The maximum number of persons employed was approximately 18,000 and the minimum was 16,000. Overall, the Company believes it generally has a good relationship with its employees. 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, 80............ Chairman of the Board of Directors Since 1966 Todd W. Herrick, 59............... President and Chief Executive Officer Since 1974 David W. Kay, 53.................. Vice President, Treasurer, and Chief Financial Since 2001 Officer(1) Michael R. Forman, 55............. Vice President and Corporate Director of Human Since 2001 Resources(2)
- --------------- (1) Last five years of business experience -- Corporate Controller, Tecumseh Products Company 1999 to 2001. Corporate Controller, RTI International Metals, Inc. (formerly RMI Titanium Company) 1986 to 1999. (Employed with Tecumseh Products Company since 1999.) (2) Last five years of business experience -- Assistant Director of Corporate Human Resources, Tecumseh Products Company 1990 to 2001. (Employed with Tecumseh Products Company since 1990.) ITEM 2. PROPERTIES The Company's headquarters are located in Tecumseh, Michigan, approximately 50 miles southwest of Detroit. At December 31, 2001 the Company had 32 principal properties worldwide occupying approximately 9.4 million square feet with the majority, approximately 8.0 million square feet, devoted to manufacturing. Twelve facilities with approximately 3.8 million square feet were located in six 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......................................... 6,216,000 Engine and Power Train Products............................. 2,647,000 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 9 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. In May 2000, the EPA issued a Record of Decision ("ROD") selecting the remedy for the Site. The Company is one of several named PRP's in the proposed cleanup action. The EPA has estimated the cost of cleanup at $40.9 million. 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 EPA has indicated its intent to address the site in two phases, with the plant site and upper river constituting the first phase and the middle and lower river and harbor being the second phase. The Company anticipates entering into a Consent Decree concerning the performance of remedial design and remedial action for the plant site, the upper river and the flood plain soils, deferring for an unspecified period any action regarding Phase II. At December 31, 2001 and December 31, 2000, the Company had accrued $28.7 and $30.3 million, respectively, for estimated costs associated with the cleanup of this site. The actual cost will be governed by numerous factors including the requirements of the WDNR, and may be greater or lower than the amount accrued. 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 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. The Company has undertaken remediation of soils in a source area on the east side of its Grafton facility. 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 requested that the Company join it in a cooperative effort to investigate and clean up PCB contamination in the watershed of the south branch of the Manitowoc River, downstream of the Company's New Holstein, Wisconsin facility. Despite the fact that the WDNR's investigation does not establish the parties responsible for the PCB contamination, the WDNR has indicated that it believes the Company is a source and that it expects the Company to participate in the cleanup. The Company has participated in the first phase of a cooperative cleanup, consisting of joint funding of the removal of soils and sediments in the source area near its facility. The next phase of the cooperative effort is scheduled to occur in 2002 involving a stream segment downstream of the source area. The Company has provided for these costs. Although participation in a cooperative remedial effort after 2002 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 10 may be necessary with regard to such other sites. At December 31, 2001 and 2000, the Company had accrued $36.1 million and $40.1 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 2001 to a vote of security holders through the solicitation of proxies or otherwise. 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, 2002 were approximately 556 for Class A common stock and 539 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 2001
SALES PRICE ------------------------------------- CLASS A CLASS B CASH ----------------- ----------------- DIVIDENDS QUARTER ENDED HIGH LOW HIGH LOW DECLARED - ------------- ------- ------- ------- ------- --------- March 31 .................................... $54.000 $38.750 $50.750 $36.250 $0.32 June 30 ..................................... 53.450 43.500 47.950 40.438 0.32 September 30 ................................ 52.990 40.800 47.890 38.820 0.32 December 31 ................................. 52.530 41.120 49.600 39.500 0.32
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
11 ITEM 6. SELECTED FINANCIAL DATA The following is a summary of certain financial information of the Company.
YEARS ENDED DECEMBER 31, ---------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) Net Sales.................................. $1,398.9 $1,649.9 $1,814.3 $1,750.2 $1,728.3 Cost of sales and operating expenses....... 1,207.2 1,411.4 1,507.4 1,492.8 1,478.7 Selling and administrative expenses........ 112.1 118.3 117.6 115.8 104.4 Nonrecurring (gain) charges................ 35.4 33.5 (5.5) 45.0 -- -------- -------- -------- -------- -------- Operating income........................... 44.2 86.7 194.8 96.6 145.2 Interest expense........................... (4.1) (6.7) (7.9) (6.9) (6.3) Interest income and other, net............. 20.3 27.9 28.1 27.8 21.9 Nonrecurring gain.......................... -- -- 8.6 -- -- -------- -------- -------- -------- -------- Income before taxes on income.............. 60.4 107.9 223.6 117.5 160.8 Taxes on income............................ 17.6 41.8 81.6 43.3 60.3 -------- -------- -------- -------- -------- Net income................................. $ 42.8 $ 66.1 $ 142.0 $ 74.2 $ 100.5 ======== ======== ======== ======== ======== Basic and diluted earnings per share....... $ 2.30 $ 3.44 $ 7.00 $ 3.47 $ 4.59 Cash dividends declared per share.......... $ 1.28 $ 1.28 $ 1.22 $ 1.20 $ 1.20 Weighted average number of shares outstanding (in thousands)............... 18,607 19,218 20,277 21,366 21,879 Cash and cash equivalents.................. $ 317.6 $ 268.2 $ 270.5 $ 277.7 $ 304.1 Working capital............................ 605.7 602.4 618.6 605.9 554.8 Net property, plant and equipment.......... 431.9 444.7 477.4 508.9 569.7 Total assets............................... 1,519.8 1,553.1 1,553.3 1,556.2 1,537.4 Long-term debt............................. 13.7 14.2 15.6 17.2 17.5 Stockholders' equity....................... 977.7 995.4 1,014.2 995.7 1,000.2 Capital expenditures....................... 65.4 64.0 73.0 64.4 90.6 Depreciation and amortization.............. 72.0 71.2 72.4 74.6 71.1 Cost of common shares repurchased.......... 18.1 39.6 57.7 49.0 1.9
Nonrecurring charges and credits: 2001 net income includes $29.3 million ($18.9 million net of tax) related to the cost of an early retirement incentive program and an asset impairment charge of $6.1 million ($3.9 million net of tax) for unusable equipment due to the transfer of certain engine and component part production from domestic facilities to the Company's facilities in the Czech Republic. 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. 12 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. 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." Readers are cautioned that actual results may differ materially from those projected as a result of certain risks and uncertainties, including, but not limited to, i) changes in business conditions and the economy in general in both foreign and domestic markets and the effect of terrorist activity and armed conflict; 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 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) emerging 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, the ultimate cost of those initiatives; and the amount of savings actually realized; xiii) the extent of savings actually realized from the Company's early retirement program; and xiv) 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 2001 amounted to $1,398.9 million, a decrease of approximately 15% from 2000 net sales of $1,649.9 million. Net income for 2001 amounted to $42.8 million, or $2.30 per share compared to net income of $66.1 million, or $3.44 per share in 2000. The earnings results from 2001 include nonrecurring charges totaling $35.4 million ($22.8 million or $1.23 per share net of taxes), while 2000 results included nonrecurring charges of $33.5 million ($23.3 million or $1.21 per share). Exclusive of nonrecurring items, net income of $65.6 million ($3.53 per share) in 2001 was approximately 27% lower than net income of $89.4 million ($4.65 per share) in 2000. The lower 2001 results can be attributed to reduced sales and profits in all three of the Company's business segments reflecting the generally slower 2001 economy. RESULTS OF OPERATIONS COMPRESSOR PRODUCTS 2001 vs. 2000 Annual Compressor Group sales declined approximately 13% to $804.6 million in 2001 compared to $919.8 million in 2000. While sales declines generally occurred throughout the Company's global operations 13 reflective of the slower worldwide economy, the majority of the decline is attributable to the continuing sea-change that has occurred in the North American room air conditioning market. U.S. based manufacturers of room air conditioners continue to shift the manufacture of completed units to Asia where inexpensive locally produced compressors are readily available. As a result, the Company has lost market share in the room air conditioning market which continues to erode the volume of North American based production. Brazilian sales also declined by approximately 14% reflecting weakness in the local economy and the effects of currency translations. Compressor Group operating income, exclusive of nonrecurring items, was $54.3 million in 2001 compared to $66.5 million in 2000. Operating margins were adversely impacted by a number of factors including lower overall selling prices, reduced fixed cost coverage as a result of lower production volumes and manufacturing inefficiencies. The Company's Brazilian operations continued to be a significant component of worldwide compressor operations. Operating margins in 2001 were consistent with 2000 margins, therefore, increasing the Brazilian operations overall portion of Compressor Group operating profit from 66% in 2000 to 77% in 2001. The Indian operations significantly reduced their operating losses from 2000 levels when margins were adversely impacted by a lengthy work stoppage and start-up costs associated with a new manufacturing plant. 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 $66.5 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. ENGINE AND POWER TRAIN PRODUCTS 2001 vs. 2000 The Engine & Power Train Group's sales and operating income declined for the second straight year with 2001 results significantly below those for 2000. Sales declined from $612.8 million in 2000 to $480.9 million in 2001 reflecting a significant reduction in both engine and transmission sales in the lawn and garden segment, as well as various utility applications, such as portable power generators. While sales of engines used for snow throwers was one of the best seasons in the group's history, they were not enough to offset the demand in other 14 applications. While the sales declines were reflective of the overall economic condition, some portion of the decline is attributable to the Company's declining participation in the walk behind mower segment. As a result of the approximate 22% decline in sales, operating income of $20.0 million in 2001 was dramatically lower than the $46.8 million posted in 2000. These amounts are exclusive of a nonrecurring charge recorded in the fourth quarter of 2001 of $6.1 million ($3.9 million net of tax) related primarily to the transfer of certain engine and component part production from domestic facilities to the Company's newly acquired facilities in the Czech Republic. 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 $46.8 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. PUMP PRODUCTS Pump Products sales in 2001 amounted to $113.4 million compared to $117.3 million in 2000, a slight decrease of 3%. Operating income in 2001 was $11.6 million compared to $14.7 million in 2000. Decreased retail sales activity in the water gardening market, resulting from a soft economy combined with slight decreases in sales for industrial and commercial applications, were primary reasons for the decline in sales and profits in 2001. In 2000, this segment experienced a 4% increase in sales over 1999 sales of $113.0 million. Increased penetration in water gardening markets and increased industrial sales were largely responsible for this growth. Correspondingly, Pump Products operating income increased 4% from $14.1 million in 1999 to $14.7 million in 2000. 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 2000 or 2001. NONRECURRING ITEMS The 2001 results were adversely impacted by $35.4 million ($22.8 million net of tax, or $1.23 per share) in nonrecurring items. During the third quarter of 2001, the Company offered an early retirement incentive plan to eligible Corporate, North American Compressor Group and Engine & Power Train Group employees. Two hundred fifty (250) employees, representing approximately 78% of those eligible, or approximately 20% of the total salaried workforce in the eligible groups, elected early retirement. The cost of providing the pension and healthcare benefits associated with this plan amounted to $29.3 million ($18.9 million net of tax, or $1.02 per share) and has been recorded as a nonrecurring charge in the third quarter. Ongoing cost savings from this action are estimated to be in a range of $10 to $12 million annually. During the fourth quarter of 2001, the charge of $6.1 million ($3.9 million net of tax, or $.21 per share) in the Engine & Power Train business related primarily to the transfer of certain engine and component part production from domestic facilities to the Company's facilities in the Czech Republic. 15 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 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. 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. INTEREST INCOME AND INCOME TAX Interest income and other, net amounted to $20.3 million, $27.9 million, and $28.1 million in 2001, 2000 and 1999, respectively. Excluding the effects of a $5.2 million refund of prior years' U.S. federal income taxes and a $1.3 million charge from the resolution of an income tax issue in Italy, the Company's effective income tax rate in 2001 was 35.6%, compared to 38.7% in 2000 and 36.5% in 1999. The higher effective tax rate in 2000 was due primarily to the inability to recognize a tax benefit on Indian operating losses. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company's primary source of cash has been net cash provided by operations. For the year ended 2001, operating activities generated cash flows of $173.0 million, compared to $134.0 million in 2000. This increase results primarily from lower working capital requirements offset by lower operating results. Capital expenditures for 2001 amounted to $65.4 million compared to $64.0 million in 2000. Approximately $41.5 million was spent on capacity enhancements, new product capabilities and routine upgrades in the Brazilian and French compressor facilities. Approximately $15.5 million was spent primarily on facility improvement, consolidation and upgrades in the North American Compressor Operations. The balance, approximately $8.4 million, was spent on facilities upgrading and capacity expansion in the Company's engine manufacturing plants. In addition, the Company expended $13.4 million in May 2001 for the acquisition of an engine and component manufacturing facility in the Czech Republic. Net cash used by financing activities amounted to $37.0 million in 2001 compared to $66.3 million in 2000. During 2001, the Company repurchased 8,500 shares of Class A stock at a cost of $0.4 million and 392,400 shares of Class B stock at a cost of $17.7 million, and paid dividends totaling $23.8 million. Proceeds from borrowings net of debt repayments amounted to $4.9 million. In 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. The Company continued to preserve its strong liquid financial position by maintaining a cash and cash equivalent balance of $317.6 million at December 31, 2001, compared to $268.2 million at the end of 2000. Working capital was $605.7 million at December 31, 2001 compared to $602.4 million at December 31, 2000. The ratio of current assets to current liabilities was 3.4 in 2001 and 3.2 in 2000. RESTRUCTURING ACTIONS As discussed above, the Company has undertaken several restructuring actions during 2000 and 2001. During the third quarter of 2001, the Company offered an early retirement incentive plan to eligible Corporate, North American Compressor Group and Engine & Power Train Group employees. Two hundred fifty (250) employees, representing approximately 78% of those eligible, or approximately 20% of the total salaried 16 workforce in the eligible groups, elected early retirement. The cost of providing the pension and healthcare benefits associated with this plan amounted to $29.3 million ($18.9 million net of tax) and has been recorded as a nonrecurring charge in the third quarter. Ongoing cost savings from this action are estimated to be in a range of $10 to $12 million annually. The fourth quarter 2001 charge of $6.1 million ($3.9 million net of tax, or $.21 per share) in the Engine & Power Train business related primarily to the transfer of certain engine and component part production from domestic facilities to the Company's facilities in the Czech Republic. In the first quarter of 2000, the Company recorded $33.5 million in nonrecurring 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 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 that 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, 2001, approximately $2.4 million of these restructuring charges remain to be paid or incurred. PROJECTED CASH REQUIREMENTS During 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 can 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, 2002, 392,400 Class B shares and 8,500 Class A shares were repurchased under the current authorization. Future purchases will be considered based on a number of factors, including current stock market conditions, general overall business conditions and currently available cash flows from operations. Depending on these criteria, the Company may or may not repurchase all of the authorized shares. Capital expenditures for 2002 are projected to remain near or slightly below 2001 levels. Approximately two thirds ( 2/3) of the budgeted capital spending is planned for foreign operations to expand product offerings. Additional spending may be required for acquisitions or investments in joint ventures or partnering arrangements should such opportunities be pursued. Working capital requirements, planned capital investment, capacity consolidation, restructuring costs and stock repurchase costs, if any, for 2002 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. 17 INTERNATIONAL OPERATIONS As of December 31, 2001 approximately 41% of the Company's consolidated net sales and 30% of the Company's total assets were outside of North America, primarily in Brazil, France, Italy, India and the Czech Republic. Additionally, during 2001 the Company's North American Compressor Group imported approximately $45.3 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. 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. Effective January 1, 2001, the Company's French and Italian operations successfully converted their accounting and transactional systems to the new Euro currency. The actual costs incurred through December 31, 2001 to convert to Euro compliant systems were approximately $3.0 million. IMPACT OF FOREIGN CURRENCIES Changes in the value of foreign currencies in relation to the U.S. dollar can affect both reported results and the competitiveness of goods produced for export in countries like Brazil. While the Company does hedge some of its short-term forecasted transactions denominated in foreign currencies, the effects of these contracts were not significant in 2001 or 2000. Alternatively, the Company does not generally hedge its net investment in its foreign subsidiaries. During 2001, the U.S. dollar strengthened against most currencies where the Company has operations. As a result the Company's investments in its foreign net assets declined in U.S. dollar value by $19.3 million. 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. 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-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 has 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 18 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, 2001 and 2000 the Company had accrued $36.1 million and $40.1 million, respectively for environmental remediation, including $28.7 and $30.3 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 In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill is no longer amortized, but is subject to impairment testing on at least an annual basis. As of December 31, 2001 the net book value of the Company's goodwill was $45.1 million and goodwill amortization for the year of 2001 was $1.5 million. The Company will adopt SFAS No. 142 on January 1, 2002, as required, and goodwill amortization will be discontinued at that time. The Company has not yet determined the impact this statement will have on its results of operations or financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." This statement, which supersedes SFAS No. 121, addresses accounting and financial reporting for the impairment or disposal of long-lived assets. The Company will adopt SFAS No. 144 on January 1, 2002, as required. The Company does not expect that adoption of this statement will have a material effect on its results of operations or financial position. OUTLOOK Information in this "Outlook" section should be read in conjunction with the cautionary language and discussion of risks included above. Worldwide market conditions in the Company's Compressor and Engine & Power Train Businesses remain weak, but are projected to improve slightly in 2002 when compared to 2001. However, it is highly 19 likely that earnings in the first half of the year will remain below those of 2001 with most improvement coming later in the year. Based upon current market conditions in the walk behind rotary mower segment, including overall customer demand and the Company's order backlog, the Engine and Power Train Group will continue, in the near term, to suffer from a significant over-capacity situation which will continue to depress operating earnings of the Group. In an effort to improve profitability and recapture market share in both the Compressor and Engine & Power Train segments, the Company intends to continue pursuing a strategy of cost reduction through a number of actions, such as consolidation of production facilities, lean manufacturing and continuous improvement measures, designed to improve productivity, product quality and customer acceptance. Additionally, efforts are underway to redesign and expand product offerings to fill in gaps in product lines and/or capabilities. The Company is also exploring and developing new product opportunities involving components, subassemblies and semi-finished or finished goods in a number of markets, both foreign and domestic. These initiatives may be undertaken individually or in connection with others in strategic partnering or similar other arrangements. In connection with these and other initiatives, it is possible that additional restructuring and realignment actions may be taken. Therefore, it is likely that future results will be impacted by one or more nonrecurring charges as these plans are finalized. While the exact amount and timing of these potential charges cannot be accurately predicted, they may affect several periods or years and could be material to the reported results in the particular quarter or year in which they are recorded. 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, 2001 and 2000 were $15.5 and $27.6 million, respectively and the discount rate was 4.8% in 2001 and 6.6% in 2000. 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. 20 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, 2001 and 2000, the Company held a total notional value of $25.8 and $25.0 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. 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 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, 2001 and 2000, the Company held foreign currency forward contracts with a total notional value of $15.0 and $37.2 million, respectively. 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Management........................................ 23 Report of Independent Accountants........................... 24 Financial Statements Consolidated Statements of Income for the years ended December 31, 2001, 2000 and 1999....................... 25 Consolidated Balance Sheets at December 31, 2001 and 2000................................................... 26 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999....................... 28 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2001, 2000 and 1999........... 29 Notes to Consolidated Financial Statements................ 30
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 22 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/ David W. Kay DAVID W. KAY Vice President, Treasurer and Chief Financial Officer 23 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, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000 and the consolidated results of operations and cash flows for each of the three years in the period ended December 31, 2001, 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 25, 2002 Southfield, Michigan 24 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2001 2000 1999 --------- --------- --------- (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) Net Sales................................................... $1,398.9 $1,649.9 $1,814.3 Cost of sales and operating expenses...................... 1,207.2 1,411.4 1,507.4 Selling and administrative expenses....................... 112.1 118.3 117.6 Nonrecurring (gain) charges............................... 35.4 33.5 (5.5) -------- -------- -------- Operating Income............................................ 44.2 86.7 194.8 Interest expense.......................................... (4.1) (6.7) (7.9) Interest income and other, net............................ 20.3 27.9 28.1 Nonrecurring gain......................................... -- -- 8.6 -------- -------- -------- Income Before Taxes on Income............................... 60.4 107.9 223.6 Taxes on Income........................................... 17.6 41.8 81.6 -------- -------- -------- Net Income.................................................. $ 42.8 $ 66.1 $ 142.0 ======== ======== ======== Basic and Diluted Earnings Per Share........................ $ 2.30 $ 3.44 $ 7.00 ======== ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 25 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------- 2001 2000 --------- --------- (DOLLARS IN MILLIONS) ASSETS Current Assets: Cash and cash equivalents................................. $ 317.6 $ 268.2 Accounts receivable, trade, less allowance for doubtful accounts of $7.7 million in 2001 and $6.3 million in 2000................................................... 207.1 265.6 Inventories............................................... 261.9 274.9 Deferred and recoverable income taxes..................... 58.0 56.4 Other current assets...................................... 14.6 17.6 -------- -------- Total current assets................................... 859.5 882.7 -------- -------- Property, Plant, and Equipment, at cost: Land and land improvements................................ 18.7 18.9 Buildings................................................. 170.1 168.2 Machinery and equipment................................... 760.0 807.4 Assets in process......................................... 44.2 41.6 -------- -------- 993.0 1,036.1 Less, accumulated depreciation............................ 561.1 591.4 -------- -------- Property, plant and equipment, net..................... 431.9 444.7 -------- -------- Goodwill, less accumulated amortization of $25.1 million in 2001 and $23.6 million in 2000............................ 45.1 46.8 Deferred income taxes....................................... 29.7 41.1 Prepaid pension expense..................................... 137.3 123.8 Other assets................................................ 16.3 14.0 -------- -------- Total assets...................................... $1,519.8 $1,553.1 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable, trade................................... $ 101.3 $ 123.5 Income taxes payable...................................... 4.2 5.5 Short-term borrowings..................................... 11.6 6.3 Accrued liabilities: Employee compensation.................................. 29.0 34.7 Product warranty and self-insured risks................ 56.7 49.8 Other.................................................. 51.0 60.5 -------- -------- Total current liabilities......................... 253.8 280.3 Long-term debt.............................................. 13.7 14.2 Deferred income taxes....................................... 3.0 -- Other postretirement benefit liabilities.................... 203.0 189.9 Product warranty and self-insured risks..................... 23.9 24.5
The accompanying notes are an integral part of these Consolidated Financial Statements. 26 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
DECEMBER 31, --------------------- 2001 2000 --------- --------- (DOLLARS IN MILLIONS) Accrual for environmental matters........................... 29.4 33.3 Pension liabilities......................................... 15.3 15.5 -------- -------- Total liabilities................................. 542.1 557.7 -------- -------- Stockholders' Equity Class A common stock, $1 par value; authorized 75,000,000 shares; issued 13,401,938 and 13,410,438 shares in 2001 and 2000, respectively................................. 13.4 13.4 Class B common stock, $1 par value; authorized 25,000,000 shares; issued 5,077,746 and 5,470,146 shares in 2001 and 2000, respectively................................. 5.1 5.5 Retained earnings......................................... 1,051.5 1,050.2 Accumulated other comprehensive income (loss)............. (92.3) (73.7) -------- -------- Total stockholders' equity........................ 977.7 995.4 -------- -------- Total liabilities and stockholders' equity........ $1,519.8 $1,553.1 ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 27 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, -------------------------------- 2001 2000 1999 -------- -------- -------- (DOLLARS IN MILLIONS) Cash Flows from Operating Activities: Net Income................................................ $ 42.8 $ 66.1 $142.0 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 72.0 71.2 72.4 Nonrecurring items..................................... 35.4 33.5 -- Accounts receivable.................................... 52.7 (5.8) (29.9) Inventories............................................ 8.7 (14.9) (5.3) Payables and accrued expenses.......................... (23.6) 20.2 10.0 Prepaid pension expense................................ (31.4) (25.3) (22.1) Other.................................................. 16.4 (11.0) (3.8) ------ ------ ------ Cash Provided By Operating Activities................ 173.0 134.0 163.3 ------ ------ ------ Cash Flows from Investing Activities: Business acquisition, net of cash acquired................ (13.4) -- -- Capital expenditures...................................... (65.4) (64.0) (73.0) ------ ------ ------ Cash Used In Investing Activities.................... (78.8) (64.0) (73.0) ------ ------ ------ Cash Flows from Financing Activities: Dividends paid............................................ (23.8) (24.5) (24.7) Proceeds from borrowings.................................. 5.3 1.2 0.5 Repayments of borrowings.................................. (0.4) (3.4) (3.3) Repurchases of common stock............................... (18.1) (39.6) (57.7) ------ ------ ------ Cash Used in Financing Activities.................... (37.0) (66.3) (85.2) ------ ------ ------ Effect of Exchange Rate and Changes on Cash................. (7.8) (6.0) (12.3) ------ ------ ------ Decrease In Cash and Cash Equivalents..................... 49.4 (2.3) (7.2) Cash and Cash Equivalents: Beginning of Period....................................... 268.2 270.5 277.7 ------ ------ ------ End of Period............................................. $317.6 $268.2 $270.5 ====== ====== ======
The accompanying notes are an integral part of these Consolidated Financial Statements. 28 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED CAPITAL IN OTHER TOTAL CLASS A $1 CLASS B $1 EXCESS OF RETAINED COMPREHENSIVE STOCKHOLDERS' PAR VALUE PAR VALUE PAR VALUE EARNINGS INCOME/(LOSS) EQUITY ------------ ------------ ------------ -------- ------------- -------------- (DOLLARS IN MILLIONS) 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 (net of tax benefit of $1.0)..................... (1.5) (1.5) Translation adjustments (net of tax benefit of $25.8).................... (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 (net of tax of $0.1)...... 0.5 0.5 Gain (loss) on derivatives (net of tax benefit of $0.2)..................... (0.3) (0.3) Translation adjustments (net of tax benefit of $7.5)... (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 COMPREHENSIVE INCOME: Net income.................. 42.8 42.8 Minimum pension liability (net of tax of $0.5)...... 0.4 0.4 Gain (loss) on derivatives (net of tax of $0.2)...... 0.3 0.3 Translation adjustments (net of tax benefit of $11.0).................... (19.3) (19.3) -------- TOTAL COMPREHENSIVE INCOME............... 24.2 Cash dividends.............. (23.8) (23.8) Stock repurchase............ (0.4) (17.7) (18.1) ----- ---- ---- -------- ------ -------- BALANCE, DECEMBER 31, 2001...................... $13.4 $5.1 $0.0 $1,051.5 $(92.3) $ 977.7 ===== ==== ==== ======== ====== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 29 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 $70.5, $69.3, and $70.5 million in 2001, 2000 and 1999, respectively. Goodwill -- 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. In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill is no longer amortized, but is subject to impairment testing on at least an annual basis. As of December 31, 2001, the net book value of the Company's goodwill was $45.1 million and goodwill amortization for the year was $1.5 million. The Company will adopt SFAS No. 142 on January 1, 2002, as required, and goodwill amortization will be discontinued at that time. The Company has not yet determined the impact this statement will have on its results of operations or financial position. 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." 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 health, liability and workers' compensation insurance programs. 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 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 18,607,249 in 2001, 19,218,065 in 2000, and 20,276,925 in 1999. Research, Development and Testing Expenses -- Company sponsored research, development, and testing expenses related to present and future products are expensed as incurred and were $27.6, $28.1, and $30.2 million in 2001, 2000 and 1999, 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 2001 presentation. New Accounting Standards -- As discussed above, the FASB issued SFAS No. 142 "Goodwill and Other Intangible Assets." The Company will adopt this statement on January 1, 2002, as required. In accordance with the statement, goodwill amortization will be discontinued and goodwill will be tested at least annually for impairment. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." This statement, which supercedes SFAS No. 121, addresses accounting and financial reporting for the impairment or disposal of long-lived assets. The Company will adopt SFAS No. 144 on January 1, 2002, as required. The Company does not expect that adoption of this statement will have a material effect on it results of operations or financial position. NOTE 2. COMPREHENSIVE INCOME Accumulated other comprehensive income or loss is shown in the Consolidated Statements of Stockholders' Equity and includes the following:
2001 2000 ------ ------ Foreign currency translation adjustments (net of tax of $49.6 million in 2001 and $38.6 million in 2000).......... $(91.7) $(72.4) Minimum pension liability adjustments (net of tax of $0.4 million in 2001 and $0.6 million in 2000)................. (0.6) (1.0) Deferred loss on hedging (net of tax of $0.2 million in 2000)..................................................... 0.0 (0.3) ------ ------ $(92.3) $(73.7) ====== ======
31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. The Company uses September 30 as the measurement date (the date upon which plan assets and obligations are measured) to facilitate the preparation and reporting of pension and postretirement plan data. Information regarding the funded status and net periodic benefit costs are reconciled to or stated as of the fiscal year end of December 31. The following tables provide a reconciliation of the changes in the plans' benefit obligations, fair value of assets and funded status for 2001 and 2000:
PENSION OTHER ----------------- ----------------- 2001 2000 2001 2000 ------- ------- ------- ------- RECONCILIATION OF BENEFIT OBLIGATION Benefit obligation at beginning of period...... $ 270.3 $ 268.8 $ 142.5 $ 129.2 Service cost................................. 6.3 6.6 4.6 4.6 Interest cost................................ 18.3 18.8 9.7 9.1 Actuarial (gain) loss........................ 11.3 (5.7) 6.7 5.4 Curtailment loss............................. 18.0 -- 11.3 -- Benefit payments............................. (21.8) (18.2) (6.4) (5.8) ------- ------- ------- ------- Benefit obligation at measurement date......... $ 302.4 $ 270.3 $ 168.4 $ 142.5 ======= ======= ======= ======= RECONCILIATION OF FAIR VALUE OF PLAN ASSETS Fair value at beginning of period.............. $ 605.0 $ 567.1 Actual return on plan assets................. (15.8) 55.9 Employer contributions....................... -- 0.2 Benefit payments............................. (21.8) (18.2) ------- ------- Fair value at measurement date................. $ 567.4 $ 605.0 ======= ======= FUNDED STATUS Funded status at measurement date.............. $ 264.9 $ 334.7 $(168.4) $(142.5) Unrecognized transition (asset) obligation... (3.9) (6.4) -- -- Unrecognized prior service cost.............. 10.3 11.9 (7.7) (9.1) Unrecognized (gain).......................... (134.0) (216.4) (33.0) (44.3) ------- ------- ------- ------- Prepaid (accrued) benefits..................... $ 137.3 $ 123.8 $(209.1) $(195.9) ======= ======= ======= =======
32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables provide the components of net periodic benefit (income) cost for 2001, 2000 and 1999:
2001 2000 1999 ------ ------ ------ PENSION BENEFITS Service cost............................................. $ 6.3 $ 6.6 $ 7.7 Interest cost............................................ 18.3 18.8 17.8 Expected return on plan assets........................... (43.1) (40.6) (39.2) Amortization of net (gain)............................... (12.9) (9.9) (9.0) Curtailment loss......................................... 18.0 -- 1.0 ------ ------ ------ Net periodic benefit (income)............................ $(13.4) $(25.1) $(21.7) ====== ====== ====== OTHER BENEFITS Service cost............................................. $ 4.6 $ 4.6 $ 5.0 Interest cost............................................ 9.7 9.1 8.9 Curtailment loss (gain).................................. 11.3 -- (5.5) Amortization of net (gain)............................... (6.0) (4.8) (3.5) ------ ------ ------ Net periodic benefit cost................................ $ 19.6 $ 8.9 $ 4.9 ====== ====== ======
Assumptions used in measuring the benefit obligations were:
PENSION OTHER ----------- ----------- 2001 2000 2001 2000 ---- ---- ---- ---- 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 9.00% annual rate of increase in the cost of covered health care benefits was assumed for 2001. The rate was assumed to decrease each year to a rate of 5.25% for 2008 and remain at that rate thereafter. In 2001, the Company offered an early retirement incentive plan to eligible employees which resulted in the recognition of a curtailment loss of $29.3 million. The accumulated other postretirement benefit obligation was increased by $11.3 million and additional pension expense of $18.0 million was recorded. 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............... $20.3 $(15.8) Net postretirement benefit cost............................. 2.1 (1.7)
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 $3.0, $2.9 and $2.7 million in 2001, 2000, and 1999, respectively. The net liability recorded in the consolidated balance sheet was $14.6 and $15.5 million for 2001 and 2000, respectively. Tecumseh France, S.A. has a minimum 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) pension liability of $1.0 million ($0.6 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 $2.9, $3.9 and $3.6 million in 2001, 2000 and 1999, respectively. NOTE 4. INCOME TAXES Consolidated income before taxes consists of the following:
2001 2000 1999 ----- ------ ------ United States............................................... $15.9 $ 56.9 $159.2 Foreign..................................................... 44.5 51.0 64.4 ----- ------ ------ $60.4 $107.9 $223.6 ===== ====== ======
Provision for income taxes consists of the following:
2001 2000 1999 ------ ----- ----- Current: U.S. federal.............................................. $(22.2) $16.4 $40.5 State and local........................................... (0.7) 2.2 5.4 Foreign income and withholding taxes...................... 15.6 20.7 23.4 ------ ----- ----- (7.3) 39.3 69.3 ------ ----- ----- Deferred: U.S. federal.............................................. 25.7 3.1 14.5 Foreign................................................... (0.8) (0.6) (2.2) ------ ----- ----- 24.9 2.5 12.3 ------ ----- ----- Provision for income taxes.................................. $ 17.6 $41.8 $81.6 ====== ===== ===== Income taxes (refunded) paid................................ $ (2.4) $42.4 $78.6 ====== ===== =====
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:
2001 2000 1999 ----- ----- ----- Income taxes at U.S. statutory rate......................... $21.1 $37.8 $78.3 Excess of foreign taxes over the U.S. statutory rate........ 2.0 7.8 2.7 State and local income taxes................................ (0.4) 1.4 3.5 Tax benefits from Foreign Sales Corporation................. (1.7) (1.8) (1.9) Other....................................................... (3.4) (3.4) (1.0) ----- ----- ----- $17.6 $41.8 $81.6 ===== ===== =====
34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Significant components of the Company's deferred tax assets and liabilities as of December 31 were as follows:
2001 2000 ------ ------ Deferred tax assets: Other postretirement liabilities.......................... $ 77.3 $ 72.9 Product warranty and self-insured risks................... 23.3 24.0 Net operating loss carryforwards.......................... 5.7 4.6 Provision for environmental matters....................... 13.4 14.8 Other accruals and miscellaneous.......................... 85.0 41.3 ------ ------ 204.7 157.6 Valuation allowance....................................... (3.2) (0.9) ------ ------ Total deferred tax assets................................. 201.5 156.7 ------ ------ Deferred tax liabilities: Tax over book depreciation................................ 33.3 19.4 Pension................................................... 57.5 45.9 Other..................................................... 39.8 3.4 ------ ------ Total deferred tax liabilities............................ 130.6 68.7 ------ ------ Net deferred tax assets................................... $ 70.9 $ 88.0 ====== ======
The Company's share of accumulated unremitted earnings of foreign subsidiaries at December 31, 2001 and 2000 was $245.7 and $225.3 million, respectively. At December 31, 2001, the Company had net operating loss carryforwards attributable to foreign operations for income tax purposes of $15.9 million which expire from 2002 to 2008 if not offset against future taxable income. NOTE 5. INVENTORIES The components of inventories at December 31, were:
2001 2000 ------ ------ Raw materials and work in process........................... $137.1 $148.6 Finished goods.............................................. 108.3 110.1 Supplies.................................................... 16.5 16.2 ------ ------ $261.9 $274.9 ====== ======
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. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. The prior year segment operating income has been restated to conform to the current year presentation. The effect on segment income was not material. 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. INDUSTRY SEGMENT INFORMATION
2001 2000 1999 -------- -------- -------- External customer sales: Compressor Products.................................. $ 804.6 $ 919.8 $ 967.0 Engine & Power Train Products........................ 480.9 612.8 734.3 Pump Products........................................ 113.4 117.3 113.0 -------- -------- -------- Total external customer sales..................... $1,398.9 $1,649.9 $1,814.3 ======== ======== ======== Operating income: Compressor Products.................................. $ 54.3 $ 66.5 $ 91.5 Engine & Power Train Products........................ 20.0 46.8 93.1 Pump Products........................................ 11.6 14.7 14.1 Corporate and consolidating items.................... (6.3) (7.8) (9.4) Nonrecurring items................................... (35.4) (33.5) 5.5 -------- -------- -------- Total operating income............................ $ 44.2 $ 86.7 $ 194.8 ======== ======== ======== Reconciliation to income before taxes: Operating income..................................... $ 44.2 $ 86.7 $ 194.8 Other non-operating income........................... -- -- 8.6 Interest income, net................................. 16.2 21.2 20.2 -------- -------- -------- Income before taxes............................... $ 60.4 $ 107.9 $ 223.6 ======== ======== ========
36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2001 2000 1999 -------- -------- -------- Assets: Compressor Products.................................. $ 575.2 $ 612.1 $ 646.3 Engine & Power Train Products........................ 255.0 312.2 322.0 Pump Products........................................ 58.0 61.6 60.0 Corporate and consolidating items.................... 631.6 567.2 525.0 -------- -------- -------- Total assets...................................... $1,519.8 $1,553.1 $1,553.3 ======== ======== ======== Capital expenditures: Compressor Products.................................. $ 53.1 $ 43.4 $ 50.3 Engine & Power Train Products........................ 10.0 18.3 20.5 Pump Products........................................ 1.6 1.9 2.0 Corporate............................................ 0.7 0.4 0.2 -------- -------- -------- Total capital expenditures........................ $ 65.4 $ 64.0 $ 73.0 ======== ======== ======== Depreciation and amortization: Compressor Products.................................. $ 49.4 $ 50.1 $ 52.7 Engine & Power Train Products........................ 19.9 18.8 17.6 Pump Products........................................ 1.7 1.7 1.5 Corporate............................................ 1.0 0.6 0.6 -------- -------- -------- Total depreciation and amortization............... $ 72.0 $ 71.2 $ 72.4 ======== ======== ========
GEOGRAPHIC SEGMENT INFORMATION
CUSTOMER SALES BY DESTINATION ------------------------------ 2001 2000 1999 -------- -------- -------- North America United States........................................ $ 748.5 $ 897.6 $1,032.8 Other North America.................................. 70.1 71.2 85.2 -------- -------- -------- Total North America.................................... 818.6 968.8 1,118.0 South America.......................................... 134.8 161.7 129.5 Europe................................................. 247.0 270.6 306.9 Middle East and Asia................................... 198.5 248.8 259.9 -------- -------- -------- $1,398.9 $1,649.9 $1,814.3 ======== ======== ========
NET LONG-LIVED ASSETS ------------------------------ 2001 2000 1999 -------- -------- -------- United States.......................................... $ 265.5 $ 292.3 $ 317.6 Brazil................................................. 76.7 70.4 71.7 Rest of world.......................................... 89.7 82.0 88.1 -------- -------- -------- $ 431.9 $ 444.7 $ 447.4 ======== ======== ========
37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7. DEBT
2001 2000 ----- ----- 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 6.7% in 2001 and 7.1% in 2000.......................... $10.9 $ 5.6 Current maturities of long-term debt........................ 0.7 0.7 ----- ----- Total short-term borrowings............................ $11.6 $ 6.3 ===== ===== Long-term debt consists of the following: Unsecured borrowings, primarily with banks, by foreign subsidiaries with interest at 6.0% and maturing in 2002 through 2012........................................... $ 1.2 $ 1.0 Variable rate Industrial Development Revenue Bonds payable in quarterly installments from 2002 to 2021............ 13.2 13.9 ----- ----- 14.4 14.9 Less current maturities of long-term debt................. 0.7 0.7 ----- ----- Total long-term debt................................... $13.7 $14.2 ===== =====
Scheduled maturities of long-term debt for each of the five years subsequent to December 31, 2001 are as follows: 2002........................................................ $ 0.7 2003........................................................ 1.1 2004........................................................ 1.1 2005........................................................ 0.7 2006 and thereafter......................................... 10.8 ----- $14.4 =====
Interest paid was $3.3 million in 2001, $3.4 million in 2000, and $3.9 million in 1999. 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, 2001, 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. In May 2000, the EPA issued a Record of Decision ("ROD") selecting the remedy for the Site. The Company is one of several named PRP's in the proposed cleanup action. The EPA has estimated the cost of cleanup at $40.9 million. 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 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 EPA has indicated its intent to address the site in two phases, with the plant site and upper river constituting the first phase and the middle and lower river and harbor being the second phase. The Company anticipates entering into a Consent Decree concerning the performance of remedial design and remedial action for the plant site, the upper river and the flood plain soils, deferring for an unspecified period any action regarding Phase II. At December 31, 2001 and December 31, 2000, the Company had accrued $28.7 and $30.3 million, respectively, for estimated costs associated with the cleanup of this site. The actual cost will be governed by numerous factors including the requirements of the WDNR, and may be greater or lower than the amount accrued. 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 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. The Company has undertaken remediation of soils in a source area on the east side of its Grafton facility. 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 requested that the Company join it in a cooperative effort to investigate and clean up PCB contamination in the watershed of the south branch of the Manitowoc River, downstream of the Company's New Holstein, Wisconsin facility. Despite the fact that the WDNR's investigation does not establish the parties responsible for the PCB contamination, the WDNR has indicated that it believes the Company is a source and that it expects the Company to participate in the cleanup. The Company has participated in the first phase of a cooperative cleanup, consisting of joint funding of the removal of soils and sediments in the source area near its facility. The next phase of the cooperative effort is scheduled to occur in 2002 involving a stream segment downstream of the source area. The Company has provided for these costs. Although participation in a cooperative remedial effort after 2002 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, 2001 and 2000, the Company had accrued $36.1 million and $40.1 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. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, 2001 and 2000:
2001 2000 ---------------- ----------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ----- -------- ------ Cash & cash equivalents............................ 317.6 317.6 $268.2 $268.2 Short-term borrowings.............................. 11.6 11.6 5.6 5.6 Long-term debt..................................... 13.6 13.6 14.9 14.9 Foreign currency contracts......................... 0.3 0.4 (1.4) (1.9) Commodity contracts................................ -- (0.5) -- (0.1)
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, 2001 will mature within six months. All such instruments held at December 31, 2000 matured in 2001. 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. During 2001, the remaining $0.3 million was reclassified to earnings. 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. 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 $13.0 million and $33.0 million at December 31, 2001 and 2000, respectively. The Company's other foreign subsidiaries had contracts for the purchase of $2.0 million and $4.2 million at December 31, 2001 and 2000, respectively. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 cost of sales. 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, 2001 and 2000 were $25.8 and $25.0 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, 2001 and 2000 were $15.5 and $27.6 million, respectively, and the discount rate was 4.8% in 2001 and 6.6% in 2000. 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, 2001, 13,401,938 shares of Class A common stock and 5,077,746 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 2001, the Company repurchased and retired 3,008,500 shares of Class A common stock, and 392,400 shares of Class B common stock, at a cost of approximately $166.5 million. The existing authority permits the purchase of an additional 1,099,100 shares of Class A or Class B in any combination. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 12. NONRECURRING ITEMS 2001 The 2001 results were adversely impacted by $35.4 million ($22.8 million net of tax, or $1.23 per share) in nonrecurring items. During the third quarter of 2001, the Company offered an early retirement incentive plan to eligible Corporate, North American Compressor Group and Engine & Power Train Group employees. Two hundred fifty (250) employees, representing approximately 78% of those eligible, or approximately 20% of the total salaried workforce in the eligible groups, elected early retirement. The cost of providing the pension and healthcare benefits associated with this plan amounted to $29.3 million ($18.9 million net of tax) and has been recorded as a nonrecurring charge in the third quarter. Ongoing cost savings from this action are estimated to be in a range of $10 to $12 million annually. During the fourth quarter of 2001, the charge of $6.1 million ($3.9 million net of tax, or $.21 per share) in the Engine & Power Train business related primarily to the transfer of certain engine and component part production from domestic facilities to the Company's facilities in the Czech Republic. 2000 In 2000, the Company recorded $33.5 million in nonrecurring charges ($23.3 million 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. As of December 31, 2001 approximately $2.4 million of these restructuring items remained to be paid or incurred. 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. At December 31, 2001, this program was substantially complete. The plant closing and exit costs relate to the facility in Somerset, Kentucky which was permanently closed. Production has been transferred to other facilities. 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. NOTE 13. BUSINESS ACQUISITION In May 2001, the Company acquired an engine manufacturing facility in the Czech Republic for $14.9 million. This transaction was accounted for as an asset purchase. The Results of operations for this facility since the acquisition are included in the Company's statement of consolidated income. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 14. QUARTERLY FINANCIAL DATA
QUARTER --------------------------------- FIRST SECOND THIRD FOURTH TOTAL ------ ------ ------ ------ -------- 2001 Net Sales...................................... $404.7 $382.0 $313.1 $299.1 $1,398.9 Gross profit................................... 49.3 57.6 20.4 29.0 156.3 Net income..................................... $ 14.0 $ 17.5 $ 5.2 $ 6.1 $ 42.8 ====== ====== ====== ====== ======== Basic and diluted earnings per share........... $ 0.74 $ 0.94 $ 0.28 $ 0.33 $ 2.30 ====== ====== ====== ====== ======== 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 ====== ====== ====== ====== ========
43 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 2002 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 S-K. 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 2002 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 2002 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 2002 Annual Meeting of Shareholders is incorporated herein by reference. 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 2001 No Reports on Form 8-K were filed by the Company during the last quarter of the period covered by this Report. (c) Exhibits The exhibits listed on the Index to Exhibits are filed herewith or are incorporated herein by reference. 44 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 By: /s/ TODD W. HERRICK ------------------------------------ Todd W. Herrick President and Chief Executive Officer March 15, 2002 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.
DATE SIGNATURE OFFICE OF SIGNING --------- ------ ---------- /s/ KENNETH G. HERRICK Chairman of the Board of Directors March 15, 2002 ------------------------------------------------ Kenneth G. Herrick /s/ TODD W. HERRICK President, Chief Executive Officer March 15, 2002 ------------------------------------------------ (Principal Executive Officer) and Todd W. Herrick Director /s/ RALPH W. BABB JR. Director March 15, 2002 ------------------------------------------------ Ralph W. Babb Jr. /s/ PETER M. BANKS Director March 15, 2002 ------------------------------------------------ Peter M. Banks /s/ JON E. BARFIELD Director March 15, 2002 ------------------------------------------------ Jon E. Barfield /s/ J. RUSSELL FOWLER Director March 15, 2002 ------------------------------------------------ J. Russell Fowler /s/ JOHN W. GELDER Director March 15, 2002 ------------------------------------------------ John W. Gelder /s/ STEPHEN L. HICKMAN Director March 15, 2002 ------------------------------------------------ Stephen L. Hickman /s/ DAVID W. KAY Vice President, Treasurer and March 15, 2002 ------------------------------------------------ Chief Financial Officer (Principal David W. Kay Accounting and Principal Financial Officer) and Director
45 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 here 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 February 27, 2002 are filed herewith. 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 Fourth Amendment to Amended and Restated Class B Rights Agreement, dated as of August 22, 2001, between Tecumseh Products Company and State Street Exhibit Number Description Bank and Trust Company, N.A., as successor Class B Rights Agent, filed as Exhibit 4.4 to Form 8-A/A Amendment No. 5 dated September 19, 2001 to Form 8-A registering Common Stock Purchase Rights dated January 23, 1991, is incorporated herein by reference. 10.6 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. 10.7 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. 10.8 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. 10.9 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. 10.10 Fourth Amendment to Class A Rights Agreement, dated as of August 22, 2001, between Tecumseh products Company and State Street Bank and Trust Company, N.A., as successor Class A Rights Agent, filed as Exhibit 4.4 to Form 8-A/A Amendment No. 4 dated September 19, 2001 to Form 8-A registering Class A Common Stock Purchase Rights dated April 22, 1992, is incorporated herein by reference 10.11 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. 10.12 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. 10.13 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. 10.14 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. Exhibit Number Description 10.15 Fifth Amendment to Management Incentive Plan effective November 22, 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, 2000, is incorporated herein by reference. 10.16 Amended and Restated Supplemental Executive Retirement Plan effective June 27, 2001 (management contract or compensatory plan or arrangement) is filed herewith. 10.17 First Amendment to the Supplemental Executive Retirement Plan adopted September 26, 2001 is filed herewith. 10.18 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. 10.19 Amended and Restated Voluntary Deferred Compensation Plan effective November 28, 2001 (management contract or compensatory plan or arrangement) is filed herewith. 10.20 Description of Voluntary Early Retirement Program effective July 2, 2001 (management contract or compensatory plan or arrangement) is filed herewith. 21 Subsidiaries to the Company EX-3.4 3 k67190ex3-4.txt AMENDED AND RESTATED BYLAWS EXHIBIT 3.4 AMENDED AND RESTATED BYLAWS OF TECUMSEH PRODUCTS COMPANY ARTICLE I MEETINGS SECTION 1. PLACE OF MEETING. Any or all meetings of the shareholders, and of the board of directors, of this Corporation may be held within or without the State of Michigan provided that no meeting shall be held at a place other than the registered office in Michigan, except pursuant to Bylaw or resolution adopted by the board of directors. SECTION 2. ANNUAL MEETING OF SHAREHOLDERS. An annual meeting of the shareholders shall be held in each calendar year on the last Wednesday of April of such calendar year at 10:30 a.m., local time, or at such other date and time as shall be determined from time to time by the board of directors, for the election of directors and for the transaction of such other business as may come before such annual meeting. SECTION 3. NOTICE OF ANNUAL MEETING OF SHAREHOLDERS. Except as otherwise provided in the Michigan Business Corporation Act, as amended from time to time (the "Act"), at least ten (10) but not more than sixty (60) days prior to the date fixed by Section 2 of this Article for the holding of the annual meeting of shareholders, written notice of the time, place, and purposes of such meeting shall be given either personally or by mail, as hereinafter provided, to each shareholder entitled to vote at such meeting. SECTION 4. BUSINESS AT ANNUAL MEETINGS. At an annual meeting of the shareholders of the Corporation, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a shareholder. For business to be properly brought before an annual meeting by a shareholder, if such business relates to the election of directors of the Corporation, the procedures in Article IV, Section 2, of these Bylaws must be complied with. If such business relates to any other matter, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to the Secretary and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided however that in the event that the annual meeting is called for a date that is not within 20 days before or after such anniversary date, such notice by the shareholder in order to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting is mailed or public disclosure of the date of the annual meeting is made, whichever first occurs. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting containing all material information relating thereto and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the shareholder, and (d) any material interest of the shareholder in such business. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 4. The officer presiding over the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 4, and if he or she should so determine, the presiding officer shall so declare to the meeting that any such business not properly brought before the meeting shall not be transacted. SECTION 5. SPECIAL MEETINGS OF SHAREHOLDERS. A special meeting of the shareholders, for any purpose or purposes proper for shareholder action and specified in the notice of such meeting, may be called at any time by the Chairman of the Board of Directors or, during the absence or disability of the Chairman of the Board of Directors or while that office is vacant, by the President (or, during the absence or disability of both the Chairman of the Board of Directors and the President or while both such offices are vacant, by the Vice-Chairman of the Board of Directors) and shall be so called at the request in writing of a majority of the board of directors or of shareholders entitled to vote not less than an aggregate of fifty percent (50%) of the outstanding shares of the Corporation having the right to vote at such special meeting. Any such request shall state the purpose or purposes of the proposed meeting. The method by which such meeting may be called is as follows: upon receipt of a specification in writing setting forth the date and objects of such proposed special meeting, signed by the Chairman of the Board of Directors or, during the absence or disability of the Chairman of the Board of Directors or while that office is vacant, by the President (or, during the absence or disability of both the Chairman of the Board of Directors and the President or while both such offices are vacant, by the Vice-Chairman of the Board of Directors) or of a request by a majority of the board of directors, or by shareholders as above provided, the Secretary of this Corporation shall prepare, sign, and mail the notices requisite to such meeting. SECTION 6. NOTICE AND BUSINESS AT SPECIAL MEETINGS OF SHAREHOLDERS. At least ten (10) but not more than sixty (60) days prior to the date fixed for the holding of any special meeting of shareholders, written notice of the time, place, and purposes of such meeting shall be given either personally or by mail, as hereinafter provided, to each shareholder entitled to vote at such meeting. The business transacted at any such special meeting, other than procedural matters and matters relating to the conduct of the meeting, shall be limited to the purpose or purposes set forth in the notice. The officer presiding at the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 6, and if he or she should so determine, such presiding officer shall so declare to the meeting that any business not properly brought before the meeting shall not be transacted. SECTION 7. ORGANIZATION MEETING OF BOARD. At the place of holding the annual meeting of shareholders, and immediately following the same, the board of directors, as constituted upon final adjournment of such annual meeting, shall convene for the purpose of election of officers and transacting any other business properly brought before it, provided, that the organization meeting in any year may be held at a different time and place than that herein provided by consent of a majority of the directors of such new board. No notice of such meeting shall be necessary to the newly elected directors in order to legally constitute the meeting, provided a quorum -2- shall be present, unless the meeting is not held at the place of holding and immediately following the annual meeting of shareholders. SECTION 8. REGULAR MEETINGS OF BOARD. Regular meetings of the board of directors shall be held not less frequently than once in each month other than July and December, and at such time and place as the board of directors shall from time to time determine. No notice of regular meetings of the board of directors shall be required. SECTION 9. SPECIAL MEETING OF BOARD. Special meetings of the board of directors may be called by the Chairman of the Board of Directors or, during the absence or disability of the Chairman of the Board of Directors or, while that office is vacant, by the President (or, during the absence or disability of both the Chairman of the Board of Directors and the President or while both such offices are vacant, by the Vice-Chairman of the Board of Directors) at any time by means of notice of the time and place thereof to each Director given not less than twenty-four (24) hours before the time such special meeting is to be held, but action taken at any such meeting shall not be invalidated for want of notice if such notice shall be waived as hereinafter provided. SECTION 10. NOTICES AND MAILING. All notices required to be given by any provision of these Bylaws shall state the authority pursuant to which they are issued (as, "by order of the Chairman of the Board of Directors" or "by order of the President" or "by order of the Vice-Chairman of the Board of Directors" or "by request of the board of directors" or "by request of shareholders," as the case may be) and shall bear the written or printed signature of the Secretary. Every notice to a shareholder shall be plainly addressed to the sendee at such shareholder's last address appearing upon the original or duplicate stock ledger of this Corporation. Every notice to a director shall be plainly addressed to the sendee at his last address appearing on the records of this Corporation. Every notice by mail shall be deemed duly served when the same has been deposited in the United States mail with postage fully prepaid so addressed to the sendee. Written notice may also be given in person or by telegram, telecopy, telex, radiogram, cablegram, or mailgram, and such notice shall be deemed duly given when the recipient receives the notice personally or when notice, so addressed to the sendee, has been delivered to the company, or to the equipment, transmitting such notice. SECTION 11. WAIVER OF NOTICE. Notice of the time, place, and purpose of any meeting of the shareholders or of the board of directors may be waived in writing, either before or after such meeting has been held. Any and all requirements of the laws of the State of Michigan, and of the Articles of Incorporation, and of the Bylaws with respect to the calling of any meeting of the shareholders or of the board of directors may be waived in writing, either before or after such meeting has been held. Neither the business to be transacted at, nor the purpose of, a regular or special meeting of the board of directors need be specified in the waiver of notice of the meeting. SECTION 12. PROCEDURAL MATTERS. At each meeting of the shareholders, the officer presiding over the meeting shall fix and announce the date and time of the opening and the closing of the polls for each matter upon which the shareholders will vote at the meeting and shall determine the order of business and all other matters of procedure. Except to the extent inconsistent with any such rules and regulations as adopted by the board of directors, such presiding officer may establish rules, which need not be in writing, to maintain order for the conduct of the meeting, including, without limitation, restricting attendance to bona fide shareholders of record and their proxies and -3- other persons in attendance at the invitation of the Board or such presiding officer and making rules governing speeches and debates. The presiding officer acts in his or her absolute discretion and his or her rulings are not subject to appeal. ARTICLE II QUORUM SECTION 1. QUORUM OF SHAREHOLDERS. A majority of the outstanding shares of this Corporation entitled to vote, present by the record holders thereof in person or by proxy, shall constitute a quorum at any meeting of the shareholders. SECTION 2. QUORUM OF DIRECTORS. A majority of the members of the board of directors then in office shall constitute a quorum for transaction of business. ARTICLE III VOTING, ELECTIONS AND PROXIES SECTION 1. WHO IS ENTITLED TO VOTE. Except as the Articles of Incorporation of this Corporation otherwise provide, each shareholder of this Corporation shall, at every meeting of the shareholders, be entitled to one vote in person or by proxy for each share of capital stock of this Corporation held by such shareholder, subject, however, to the full effect of the limitations imposed by the fixed record date for determination of shareholders set forth in Section 2 of this Article. SECTION 2. RECORD DATE FOR DETERMINATION OF SHAREHOLDERS. For the purpose of determining shareholders entitled to notice of and to vote at a meeting of shareholders or an adjournment of a meeting, the board of directors may fix a record date, which shall not precede the date on which the resolution fixing the record date is adopted by the board. The date shall not be more than sixty (60) nor less than ten (10) days before the date of the meeting. If a record date is not fixed, the record date for determination of shareholders entitled to notice of or to vote at a meeting of shareholders shall be the close of business on the day next preceding the day on which notice is given, or if no notice is given, the day next preceding the day on which the meeting is held. When a determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders has been made as provided in this Section, the determination applies to any adjournment of the meeting, unless the board of directors fixes a new record date under this Section for the adjourned meeting. For the purpose of determining shareholders entitled to receive payment of a share dividend or distribution, or allotment of a right, or for the purpose of any other action, the board of directors may fix a record date, which shall not precede the date on which the resolution fixing the record date is adopted by the board. The date shall not be more than sixty (60) days before the payment of the share dividend or distribution or allotment of a right or other action. If a record date is not fixed, the record date shall be the close of business on the day on which the resolution of the board of directors relating to the corporate action is adopted. SECTION 3. PROXIES. No proxy shall be deemed operative unless and until signed by the shareholder and filed with the Corporation. In the absence of limitation to the contrary contained in the proxy, the same shall extend to all meetings of the shareholders and shall remain in force three years from its date and no longer. -4- SECTION 4. VOTE BY SHAREHOLDER CORPORATION. Any other corporation owning voting shares in this Corporation may vote upon the same by the President of such shareholder corporation, or by proxy appointed by him or, in absence of the President and his proxy, by its Treasurer or, in their absence, by its Secretary. The board of directors of such shareholder corporation may appoint some other person to vote such shares. SECTION 5. INSPECTORS OF ELECTION. The board of directors, in advance of a shareholders' meeting, may appoint one (1) or more inspectors of election to act at the meeting or any adjournment thereof. If inspectors are not so appointed, the person presiding at a shareholders' meeting may, and on request of a shareholder entitled to vote thereat shall, appoint one (1) or more inspectors. In case a person appointed fails to appear or act, the vacancy may be filled by appointment made by the board of directors in advance of the meeting or at the meeting by the person presiding thereat. The inspectors shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes or ballots, hear and determine challenges and questions arising in connection with the right to vote, count and tabulate votes or ballots, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the person presiding at the meeting or a shareholder entitled to vote thereat, the inspectors shall make and execute a written report to the person presiding at the meeting of any of the facts found by them and matters determined by them. The report shall be prima facie evidence of the facts stated and of the vote as certified by the inspectors. ARTICLE IV BOARD OF DIRECTORS SECTION 1. NUMBER AND TERM OF DIRECTORS. The business and affairs of the Corporation shall be managed by a board of directors composed of not less than nine (9) nor more than twelve (12) members. The number of directors which shall constitute the board of directors at any given time shall be determined by resolution of the board of directors; provided, however, that in the absence of an express determination by the board of directors, the number of directors, until changed by the board, shall be that number of directors elected at the most recently held annual meeting of shareholders and, provided further, that no decrease in the number of directors constituting the whole board of directors shall shorten the term of any then incumbent director. At each annual meeting of shareholders, the shareholders shall elect directors to hold office until the succeeding annual meeting. The board of directors may thereafter increase the number of directors from time to time up to a maximum of twelve (12) and may then fill the vacancies resulting from such increase as provided by Section 3 of this Article IV. A director shall hold office for the term for which he or she is elected and until his or her successor is elected and qualified, or until his or her resignation or removal. Directors need not be shareholders. SECTION 2. NOMINATIONS. Nominations for election to the board of directors at a meeting of shareholders may be made by the board of directors or by a committee thereof, or by any shareholder of the Corporation entitled to vote for the election of directors at such meeting. Such nominations, other than those made by or on behalf of the board of directors, shall be made by notice in writing delivered or mailed by first class United States mail, postage prepaid, to the Secretary of -5- the Corporation, and received (1) in the case of an annual meeting, not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting of the shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within 20 days before or after such anniversary date, such notice by the shareholder in order to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting is mailed or public disclosure of the date of the annual meeting is made, whichever first occurs, or (2) in the case of a special meeting of shareholders called for the purpose of electing directors, not later than the close of business on the tenth day following the day on which notice of the date of the special meeting is mailed or public disclosure of the date of the special meeting is made, whichever first occurs. Such notice shall set forth (a) as to each proposed nominee (i) the name, date of birth, business address, and residence address of such nominee, (ii) the principal occupation or employment of such nominee during the past five years, (iii) the number of shares of stock of the Corporation which are beneficially owned by such nominee, and (iv) any other information concerning such nominee that must be disclosed as to nominees in proxy solicitations pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to be named as a nominee and to serve as a director if elected), and (b) as to the shareholder giving the notice (i) the name and address of such shareholder, as they appear on the Corporation's books, (ii) the class or classes and number(s) of shares of the Corporation which are beneficially owned by such shareholder, (iii) a description of all arrangement or understandings between such shareholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such shareholder, and (iv) any other information relating to such shareholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. At the request of the board of directors, any person nominated by the board of directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 2 of the Bylaws. The officer presiding over a meeting of shareholders may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he or she should so determine, the presiding officer shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 3. VACANCIES. Unless otherwise limited by the articles of incorporation, if a vacancy, including a vacancy resulting from an increase in the number of directors, occurs in the board of directors, the vacancy may be filled as follows: (a) The shareholders may fill the vacancy at an annual meeting of shareholders or a special meeting called for such purpose. (b) The board may fill the vacancy. (c) If the directors remaining in office constitute fewer than a quorum of the board of directors, they may fill the vacancy by the affirmative vote of a majority of all the directors remaining in office. -6- SECTION 4. ACTION BY UNANIMOUS WRITTEN CONSENT. Action required or permitted to be taken under authorization voted at a meeting of the board of directors or a committee of the board of directors, may be taken without a meeting if, before or after the action, all members of the board then in office or of the committee consent to the action in writing. The written consents shall be filed with the minutes of the proceedings of the board of directors or committee. The consent has the same effect as a vote of the board of directors or committee for all purposes. SECTION 5. POWER TO ELECT OFFICERS. The board of directors shall elect a Chairman of the Board of Directors, a President, a Secretary, and a Treasurer and may elect a Vice-Chairman of the Board of Directors, a Secretary of the Board of Directors, a Chairman of the Board of Directors Emeritus, and one or more Vice-Presidents, Assistant Secretaries, and Assistant Treasurers. None of said officers, except the Chairman of the Board of Directors, the President, and the Vice-Chairman of the Board of Directors, need be a member of the board of directors, but a Vice-President who is not a director shall not succeed to or fill the office of Chairman of the Board of Directors or President. Any two of the aforementioned offices, except those of Chairman of the Board of Directors and President, of Chairman of the Board of Directors and Vice-Chairman of the Board of Directors, or of President and Vice-President, may be held by the same person, but no officer shall execute, acknowledge, or verify any instrument or document in more than one capacity. SECTION 6. POWER TO APPOINT OTHER OFFICERS AND AGENTS. The board of directors shall have power to appoint such other officers and agents as the board may deem necessary for transaction of the business of the Corporation. SECTION 7. REMOVAL OF OFFICERS AND AGENTS. Any officer or agent may be removed by the board of directors, with or without cause, whenever in the judgment of the board the business interests of the corporation will be served thereby. SECTION 8. POWER TO FILL VACANCIES. The board shall have power to fill any vacancy in any office occurring from any reason whatsoever. SECTION 9. DELEGATION OF POWERS. For any reason deemed sufficient by the board of directors, whether occasioned by absence or otherwise, the board may delegate all or any of the powers and duties of any officer to any other officer or director, but no officer or director shall execute, acknowledge, or verify any instrument or document in more than one capacity. SECTION 10. POWER TO APPOINT EXECUTIVE AND OTHER COMMITTEES. The board of directors shall have power to appoint by resolution an Executive Committee composed of two or more directors who, to the extent provided in such resolution and except as otherwise provided in the Act, shall have and may exercise the authority of the board of directors in the management of the business of the Corporation between meetings of the board. The board of directors may also designate one or more other committees, each such committee to consist of one or more of the directors of the Corporation. Any such other committee, to the extent provided in the resolution of the board of directors creating such committee and except as otherwise provided in the Act, may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace an absent or disqualified member at a meeting of the committee. Any committee, and each member thereof, shall serve at the pleasure of the board of directors. -7- SECTION 11. POWER TO REQUIRE BONDS. The board of directors may require any officer or agent to file with the Corporation a satisfactory bond conditioned for faithful performance of his duties. SECTION 12. COMPENSATION. The compensation of directors, officers, and agents may be fixed by the board. SECTION 13. OATH OF DIRECTORS. Each person who shall be elected a director of this Corporation shall promptly, after being so elected, and before assuming his duties as such director for the term for which he has been so elected, have administered to him, and shall take, in such manner, and at such time and place as the Chairman of the Board of Directors or the President shall determine and decide, an oath substantially as follows: I, ___________________________________, being duly elected to the board of directors of Tecumseh Products Company, do hereby accept such office and solemnly swear or affirm that I, conscientiously, honestly, lawfully, and to the best of my ability, will perform the duties and discharge the responsibilities of a director of this Corporation. SECTION 14. HONORARY MEMBERS OF THE BOARD OF DIRECTORS. There shall be such number of Honorary Members of the board of directors as the board of directors shall from time to time determine and decide. The board of directors may appoint as an Honorary Member of the board of directors any person who at the time of his appointment as such is not, but who at any time prior to his appointment as such has been, a member of the board of directors, as a reward for and in recognition of distinguished service to the Corporation as a member of its board of directors. An Honorary Member of the board of directors shall have the right, but not the obligation, to attend meetings of the board of directors and shall receive for such attendance such fee or other compensation as the board of directors shall from time to time fix and determine. An Honorary Member of the board of directors shall have the right to participate in any discussions and deliberations at any meeting of the board of directors in the same manner and to the same extent as if he were a member of the board of directors but shall have no right to vote on or with respect to any resolution adopted or to be adopted, any business transacted or to be transacted, or any action taken or to be taken by the board of directors at any such meeting. Except as expressly provided herein, an Honorary Member of the board of directors shall have only such authority, and shall perform only such duties, in, or in connection with, the management of the property and affairs of the Corporation and the transaction of its business as the board of directors shall from time to time delegate to him with his consent. SECTION 15. MANDATORY RETIREMENT AGE FOR DIRECTORS. Except as hereinafter provided, no person shall be eligible for election or re-election as a member, other than as an Honorary Member, of the board of directors of the Corporation after he shall have attained the age of 70 years. Each person who attains the age of 70 years during his term as a member, other than an Honorary Member, of the board of directors shall retire as a member of the board of directors of the Corporation not later than at the expiration of any term of office for which he shall have been elected and which began before, and ended after, such person shall have attained the age of 70 years. Notwithstanding the foregoing, any member of the board of directors who has attained the age of 71 -8- years prior to February 24, 1993 shall be eligible for re-election as a member of the board of directors. SECTION 16. PARTICIPATION IN MEETING BY TELEPHONE. By oral or written permission of a majority of the board of directors, a member of the board of directors or of a committee designated by the board may participate in a meeting by means of conference telephone or similar communications equipment through which all persons participating in the meeting can communicate with the other participants. Participation in a meeting pursuant to this Section constitutes presence in person at the meeting. ARTICLE V OFFICERS SECTION 1. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors shall be selected by, and from among the membership of, the board of directors. He shall preside at all meetings of the shareholders and of the board of directors and of any Executive Committee at which he is in attendance. He shall perform such other duties and functions as shall be assigned to him from time to time by the board of directors. Except where by law the signature of the President of this Corporation is required, the Chairman of the Board of Directors shall possess the same power and authority as the President to sign all certificates, contracts, instruments, papers, and documents of every conceivable kind and character whatsoever, in the name of and on behalf of this Corporation, which may be authorized by the board of directors. During the absence or disability of the President, the Chairman of the Board of Directors shall exercise all of the powers and discharge all of the duties of the President. SECTION 2. VICE-CHAIRMAN OF THE BOARD OF DIRECTORS. If the board of directors elects a Vice-Chairman of the Board of Directors, he shall be selected from the membership of the board of directors. During the absence or disability of both the Chairman of the Board of Directors and the President, or while both such offices are vacant, he shall preside at all meetings of the shareholders, of the board of directors, and of any Executive Committee. During the absence or disability of both the President and the Chairman of the Board of Directors, or while both such offices are vacant for any reason, the Vice-Chairman of the Board of Directors shall have and may exercise any and all of the powers and duties of the President and of the Chairman of the Board of Directors. At all other times the Vice-Chairman of the Board of Directors shall be responsible to the Chairman of the Board of Directors and through him (or during the absence or disability of the Chairman of the Board of Directors or while that office is vacant for any reason, directly) to the board of directors for the exercise, performance, and discharge of such powers, duties, and responsibilities as the Chairman of the Board of Directors or the board of directors shall see fit to vest in or delegate to him or which are vested in or imposed upon him by the Bylaws. SECTION 3. PRESIDENT AND CHIEF EXECUTIVE OFFICER. The President shall be selected by, and from among the membership of, the board of directors. He shall be (and may identify himself and execute instruments and other documents using the title of) the Chief Executive Officer of this Corporation and shall, in general, supervise and manage the business affairs of this Corporation, including, but not limited to, any and all duties normally and customarily incident to the office of the President and Chief Executive Officer of a corporation and such other duties and -9- functions as shall be assigned to him from time to time by the board of directors. During the absence or disability of the Chairman of the Board of Directors, or while such office is vacant, the President shall perform all duties and functions, and while so acting shall have all of the powers and authority, of the Chairman of the Board of Directors. SECTION 4. VICE-PRESIDENTS. The board of directors may designate one or more Vice-Presidents as Executive Vice-Presidents. Except as otherwise expressly provided in the Bylaws of this Corporation, or unless the board of directors shall otherwise provide by resolution duly adopted by it, such of the Vice-Presidents as shall have been designated Executive Vice-Presidents and are members of the board of directors in order of their seniority as members of the board of directors (or if no Vice-President who is a member of the board of directors shall have been designated an Executive Vice-President, then such Vice-Presidents as are members of the board of directors specified by the board of directors) shall perform the duties and exercise the power of the President, of the Chairman of the Board of Directors, and of the Vice-Chairman of the Board of Directors during the absence or disability of all of the persons occupying said offices. The Vice-Presidents shall perform such other duties as may be delegated to them by the board of directors, any Executive Committee, the Chairman of the Board of Directors, or the President. SECTION 5. SECRETARY. The Secretary shall attend all meetings of the shareholders and of any Executive Committee and, during the absence or disability of the Secretary of the Board of Directors or while such office is vacant, all meetings of the board of directors, and the Secretary shall preserve in the books of the Corporation true minutes of the proceedings of the shareholders and of any Executive Committee and, during the absence or disability of the Secretary of the Board of Directors or while such office vacant, the minutes of all meetings of the board of directors. He shall safely keep in his custody the seal of the Corporation and shall have authority to affix the same to all instruments where its use is required by statute, bylaw, or resolution. He shall perform such other duties as may be delegated to him by the board of directors, any Executive Committee, the Chairman of the Board of Directors, or the President. SECTION 6. TREASURER. The Treasurer shall have custody of all corporate funds and securities and shall keep in books belonging to the Corporation full and accurate accounts of all receipts and disbursements; he shall deposit all moneys, securities, and other valuable effects in the name of the Corporation in such depositories as may be designated for that purpose by the board of directors. He shall disburse the funds of the Corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the Chairman of the Board of Directors, the President, and the board of directors whenever requested by them an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the board of directors, he shall keep in force a bond, in form, amount, and with a surety or sureties satisfactory to the board of directors, conditioned for faithful performance of the duties of his office, and for restoration to the Corporation in case of his death, resignation, retirement, or removal from office, of all books, papers, vouchers, money, and property of whatever kind in his possession or under his control belonging to the Corporation. He shall perform such other duties as may be delegated to him by the board of directors, any Executive Committee, the Chairman of the Board of Directors, or the President. SECTION 7. ASSISTANT SECRETARY AND ASSISTANT TREASURER. The Assistant Secretary or Assistant Secretaries, in the absence or disability of the Secretary, shall -10- perform the duties and exercise the powers of the Secretary. The Assistant Treasurer or Assistant Treasurers, in the absence or disability of the Treasurer, shall perform the duties and exercise the powers of the Treasurer. Any Assistant Treasurer, if required by the board of directors, shall keep in force a bond as provided in Section 6 of this Article V. SECTION 8. SECRETARY OF THE BOARD OF DIRECTORS. The Secretary of the Board of Directors shall attend all meetings of the board of directors, and shall preserve in books of the Corporation true minutes of all such meetings. He shall have authority to affix the seal of the Corporation to all certificates or other instruments embodying or relating to any resolution adopted by, or proceedings taken at any meeting of, the board of directors of the Corporation. He shall perform such other duties as may be delegated to him by the board of directors. SECTION 9. CHAIRMAN OF THE BOARD OF DIRECTORS EMERITUS. The board of directors may designate as Chairman of the Board of Directors Emeritus any person who at any time prior to such designation has been Chairman of the Board of Directors, and who at the time of his designation as Chairman of the Board of Directors Emeritus is a member of the board of directors of the Corporation, as a reward for and in recognition of distinguished service to this Corporation as Chairman of the Board of Directors. During the absence or disability of the Chairman of the Board of Directors, the Vice-Chairman of the Board of Directors, and the President, or while all such offices are vacant, the Chairman of the Board of Directors Emeritus shall preside at all meetings of the shareholders and of the board of directors. Except where by law the signature of the President of this Corporation is required, the Chairman of the Board of Directors Emeritus shall possess the same power and authority as the President to sign all certificates, contracts, instruments, papers, and documents of every conceivable kind and character whatsoever, in the name of and on behalf of this Corporation, which may be authorized by the board of directors. He shall perform such other duties as may be delegated to him by the board of directors, any Executive Committee, or the President. SECTION 10. CHIEF FINANCIAL OFFICER. As and whenever it determines the same to be appropriate, the board of directors may designate the President, an Executive Vice-President, a Vice-President, or the Treasurer as the Chief Financial Officer of the Corporation, and any such officer so designated (while he continues to hold the office held at the time of such designation and until such designation is revoked or a different officer is so designated by the board of directors) may identify himself and execute instruments and other documents using the title of Chief Financial Officer. ARTICLE VI STOCK AND TRANSFERS SECTION 1. CERTIFICATES FOR SHARES. Every shareholder shall be entitled to a certificate evidencing the shares of the capital stock of the Corporation owned by him, signed by the President or a Vice-President, and by the Secretary, the Treasurer, an Assistant Secretary, or an Assistant Treasurer, under the seal of the Corporation, certifying the number and class of shares, evidenced by such certificate, which certificate may, but need not be, also signed by the Chairman of the Board of Directors, shall be in such manner and form as shall have been approved by the board of directors, and shall set forth such terms and provisions as shall from time to time be required by the laws of the State of Michigan to be set forth in such certificate; provided, that where any such -11- certificate is signed: (i) by a transfer agent or an assistant transfer agent or (ii) by a transfer clerk acting on behalf of this Corporation, and by a registrar, the signature of any such President, Vice-President, Secretary, Assistant Secretary, Treasurer, or Assistant Treasurer, or of the Chairman of the Board of Directors, and the seal of the Corporation, may be a facsimile. SECTION 2. TRANSFERABLE ONLY ON BOOKS OF CORPORATION. Shares shall be transferable only on the books of the Corporation by the person named in the certificate, or by attorney lawfully constituted in writing, and upon surrender of the certificate therefor. A record shall be made of every such transfer and issue. Whenever any transfer is made for collateral security and not absolutely, the fact shall be so expressed in the entry of such transfer. SECTION 3. REGISTERED STOCKHOLDERS. The Corporation shall have the right to treat the registered holder of any share as the absolute owner thereof and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Corporation shall have express or other notice thereof, save as may be otherwise provided by the statutes of Michigan. SECTION 4. TRANSFER AGENT AND REGISTRAR. The board of directors may appoint a transfer agent and a registrar of transfers, and may require all certificates of shares to bear the signature of such transfer agent and of such registrar of transfers, or as the board may otherwise direct. SECTION 5. REGULATIONS. The board of directors shall have power and authority to make all such rules and regulations as the board shall deem expedient regulating the issue, transfer, and registration of certificates for shares in this Corporation. ARTICLE VII DIVIDENDS AND RESERVES SECTION 1. DIVIDENDS. The board of directors shall have the power and authority to declare dividends or other distributions to security holders to the full extent permitted by applicable law. Dividends may be paid in cash or other property of the Corporation, in shares, obligations, or other securities of the Corporation, or in any other form permitted by applicable law. SECTION 2. RESERVES. The board of directors shall have power and authority to set apart such reserve or reserves, for any proper purpose, as the board in its discretion shall approve; and the board shall have power and authority to abolish any reserve created by the board. ARTICLE VIII LIST OF SHAREHOLDERS SECTION 1. LIST OF SHAREHOLDERS ENTITLED TO VOTE. The officer or agent having charge of the stock transfer books for shares of the Corporation shall make and certify a complete list of the shareholders entitled to vote at a shareholders' meeting or any adjournment thereof. The list shall: -12- (a) Be arranged alphabetically within each class and series, with the address of, and the number of shares held by, each shareholder. (b) Be produced at the time and place of the meeting. (c) Be subject to inspection by any shareholder during the whole time of the meeting. (d) Be prima facie evidence as to who are the shareholders entitled to examine the list or to vote at the meeting. ARTICLE IX GENERAL PROVISIONS SECTION 1. CHECKS, ETC. All checks, drafts, and orders for payment of money shall be signed in the name of the Corporation by one or more of such officers or agents as the board of directors shall from time to time designate for that purpose or as shall be designated from time to time by any officer of the Corporation authorized by the board of directors to make such designations. SECTION 2. CONTRACTS, CONVEYANCES, ETC. When the execution of any contract, conveyance, or other instrument has been authorized without specification of the executing officers, the Chairman of the Board of Directors, the President, or any Vice-President, and the Secretary or any Assistant Secretary, may execute the same in the name and behalf of this Corporation and may affix the corporate seal thereto. The board of directors shall have power to designate the officers and agents who shall have authority to execute any instrument in behalf of this Corporation. SECTION 3. VOTING SECURITIES. Unless otherwise directed by the board of directors, the Chairman of the Board of Directors, or the President, or, in the case of their absence or inability to act, the Vice-Presidents, in order of their seniority, shall have full power and authority on behalf of this Corporation to attend and to act and to vote, or to execute in the name or on behalf of this Corporation a consent in writing in lieu of a meeting of shareholders or a proxy authorizing an agent or attorney-in-fact for this Corporation to attend and vote, at any meetings of security holders of corporations in which this Corporation may hold securities, and at such meetings he or his duly authorized agent or attorney-in-fact shall possess and may exercise any and all rights and powers incident to the ownership of such securities and which, as the owner thereof, this Corporation might have possessed and exercised if present. The board of directors by resolution from time to time may confer like power upon any other person or persons. ARTICLE X AMENDMENT SECTION 1. MANNER OF AMENDMENT. The Bylaws of the Corporation may be amended, altered, changed, added to, or repealed, in whole or in part, by the affirmative vote of a majority of the shares of the capital stock of the Corporation entitled to vote thereat, present in person or proxy at any annual or special meeting of the shareholders of the Corporation at which a quorum is present, if notice of the proposed amendment, alteration, change, addition, or repeal is contained in the notice of such meeting. The Bylaws may also be amended, altered, changed, added -13- to, or repealed, in whole or in part, by the affirmative vote of a majority of the board of directors, at any regular meeting of the board of directors at which a quorum is present, or at any special meeting of the board of directors at which a quorum is present if notice of the proposed amendment, alteration, change, addition, or repeal is contained in the notice of such special meeting, unless and to the extent that the power to amend or repeal the Bylaws is reserved exclusively to the shareholders of the Corporation in its Articles of Incorporation. The power and authority of the board of directors to amend, alter, change, add to, or repeal the Bylaws shall extend and be exercisable with respect to not only all or any portion of the Bylaws adopted by the board of directors but also with respect to all or any portion of the Bylaws adopted by the shareholders, provided, however, that the shareholders may, if they elect so to do, prescribe in the Bylaws that any or all of the provisions of the Bylaws adopted by the shareholders shall not be altered or repealed by the board of directors. ARTICLE XI CHAPTER 7B OF MICHIGAN BUSINESS CORPORATION ACT SECTION 1. CHAPTER 7B NOT APPLICABLE. Chapter 7B of the Act (entitled "Control Share Acquisitions") does not apply to control share acquisitions of shares of the Corporation. -14- EX-10.16 4 k67190ex10-16.txt AMENDED AND RESTATED SUPPLEMENTAL EX. RETIREMENT EXHIBIT 10.16 TECUMSEH PRODUCTS COMPANY SUPPLEMENTAL RETIREMENT PLAN (Amended and Restated effective June 27, 2001) ARTICLE I PURPOSE 1.1 Tecumseh Products Company, a Michigan corporation (the "Company"), establishes the Tecumseh Products Company Supplemental Retirement Plan (the "Plan") for the purpose of providing certain management or highly compensated employees with retirement benefits in excess of (or in addition to) those benefits provided under the Tecumseh Products Company Salaried Retirement Plan (the "Retirement Plan"). 1.2 The Plan supplements benefits under the Retirement Plan to the extent such benefits are (i) reduced due to the limits of Section 401(a)(17) and Section 415 of the Internal Revenue Code of 1986, as amended (the "Code"), and/or (ii) reduced as a result of a change in the Retirement Plan benefit formula that became effective as of January 1, 1993, or (iii) payable to Participants under the Company's 2001 Voluntary Early Retirement Program. The Plan is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees as described in Sections 201(a)(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). ARTICLE II DEFINITIONS Unless a different meaning is expressly assigned, all capitalized terms used in this Plan have the same meaning as in the Retirement Plan. In addition, the following terms shall have the following meanings unless the context in which the term is used clearly indicates that another or different meaning is intended: 2.1 "Adjusted Retirement Benefits" means the benefits in the form and amount that the Participant or his surviving spouse would have received under the Retirement Plan if -- (i) the limitation on benefits imposed by Section 415 of the Code were disregarded; (ii) Base Compensation were computed without reduction due to the limits of Section 401(a)(17) of the Code; and (iii) such benefits were computed by applying whichever of the following two benefit formulas results in the largest monthly amount when applied to all of the Participant's Benefit Service under the Retirement Plan as of the time benefits become payable under this Plan (subject, however, to the 30 and 35 year limits on service, as described in the formulas; and provided that Formula 1 shall not apply to any Special Participant or to any person who first became a Participant in the Retirement Plan after January 1, 1993): Formula 1 The difference, "A" minus "B", where - "A" represents 1-1/2% of the Participant's Average Monthly Compensation multiplied by his years and fractional years of Benefit Service (provided that no Benefit Service in excess of 35 years shall be included), and "B" represents 1-2/3% of the Participant's Primary Social Security Benefit multiplied by his years and fractional years of Benefit Service (provided that no Benefit Service in excess of 30 years shall be included). However, if "B" as computed pursuant to the preceding sentence exceeds 50% of "A", then "B" shall be reduced to 50% of "A". Formula 2 The amount "G", where "G" represents 1-1/4% of the Participant's Average Monthly Compensation multiplied by his years and fractional years of Benefit Service (provided that no Benefit Service in excess of 35 years shall be included). 2001 Voluntary Early Retirement Program For Participants (including Special Participants) who retire after September 17 but prior to October 1, 2001 under the Company's Voluntary Early Retirement Program ("VERP"): (i) "Average Monthly Compensation" as used under either Formula 1 or 2 (whichever applies) shall mean the Participant's Base Compensation during the most recent full calendar month of active work. (ii) "Benefit Service" as used in "A" under Formula 1 or in Formula 2 shall mean the sum of such Participant's Benefit Service at October 1, 2001 plus five -2- additional years of Benefit Service (but in no event shall more than 35 years of Benefit Service be counted). Maximum "Benefit Service" as used in "B" under Formula 2 shall remain at 30 years. Adjusted Retirement Benefits paid to VERP Participants (including Special Participants) shall not be subject to actuarial adjustment for commencement prior to Normal Retirement Age. Adjusted Retirement Benefits paid to a Special Participant (or his/her surviving spouse) shall terminate with the monthly payment that precedes the Special Participant's 55th birthday. 2.2 "Board" means the Board of Directors of the Company. 2.3 "Retirement Benefits" means benefits in the form and amount actually payable to the Participant or his surviving spouse (if any) under the Retirement Plan. 2.4 The following terms are defined elsewhere in this Plan: "Administration Committee"......... Sec. 9.1; "Code" ............................ Sec. 1.2; "Company" ......................... Sec. 1.1; "ERISA" ........................... Sec. 1.2; "Participating Employer(s)"........ Sec. 3.2; "Plan" ............................ Sec. 1.1; "Reason" .......................... Sec. 6.2; "Retirement Plan" ................. Sec. 1.1; "Special Participant" ............. Sec. 4.1; "Subsidiary" ...................... Sec. 3.1; "VERP" ............................ Sec. 2.1; "Vested" .......................... Sec. 6.1.
ARTICLE III EMPLOYER PARTICIPATION 3.1 If a Subsidiary of the Company wishes to participate in the Plan and its participation is approved by the Administration Committee, the board of directors of the Subsidiary shall adopt a resolution in form and substance satisfactory to the Administration Committee authorizing participation by the Subsidiary in the Plan with respect to its employees. As used herein, the term "Subsidiary" means any corporation at least one-half of whose outstanding voting stock is owned, directly or indirectly, by the Company. 3.2 A Subsidiary participating in the Plan may cease to be a Participating Employer at any time by action of the Administration Committee, or by action of the board of directors of such -3- Subsidiary, which latter action shall be effective not earlier than the date of delivery to the Secretary of the Company of a certified copy of a resolution of the Subsidiary's board of directors taking such action. If the participation in the Plan of a Subsidiary shall terminate, such termination shall not relieve it of any obligations heretofore incurred by it under the Plan except with the approval of the Board of Directors of the Company. The Company and each of its Subsidiaries participating in this Plan are sometimes called "Participating Employer(s)" in this Plan. ARTICLE IV PARTICIPATION 4.1 The persons entitled to benefits under this Plan shall be those Participants in the Retirement Plan whose Base Compensation for the purpose of determining his benefits under the Retirement Plan is limited by Section 401(a)(17), or whose benefit under the Retirement Plan is limited by Section 415 of the Code and who are selected for participation in this Plan by the Administration Committee. Plan Participants are listed on attached Exhibit A. The Plan also covers two additional categories of Participants as described below: (i) Benefits remaining payable to certain Employees and surviving spouses under supplemental executive retirement agreements dated October 19, 1992 (and effective January 1, 1993) have been incorporated in Section 2.1 (Formula 1) of this Plan. Such Employees are listed on attached Exhibit A as "1993 Participants." (ii) Additionally, this Plan shall cover, as "Special Participants," those Employees who are "highly compensated employees" as defined under Section 414(q) of the Code, who have not attained age 55 prior to October 1, 2001 and who retire after September 17 but prior to October 1, 2001 under the VERP. 4.2 A Participant shall cease to participate in this Plan on the earliest of (i) termination of employment, (ii) retirement, (iii) Total and Permanent Disability, (iv) death, (v) withdrawal from participation in the Plan by the Participant's Participating Employer, or (vi) removal of the Participant from participation by the Administration Committee; provided, however, that no such event shall withdraw the right to receive benefits earned and/or vested under this Plan prior to such event, recognizing that the amount of such benefits may increase or decrease over time, depending on the various factors taken into account in computing the benefit. 4.3 The Administration Committee shall promptly notify each Participant in writing of his selection for participation in or -4- removal from or other cessation of participation in this Plan. The Administration Committee shall maintain a record of Participants. ARTICLE V BENEFITS 5.1 Subject to becoming and remaining vested under Article VI, a Participant's benefits under the Plan shall be his Adjusted Retirement Benefits reduced by his Retirement Benefits, with the initial benefit payment(s) to be reduced or eliminated, as described in Section 5.5, on account of any obligations to the Company as described in Section 12.6. For an example showing the computation of benefits under the Plan, see Exhibit B. The Adjusted Retirement Benefits of Participants (including Special Participants) who retire after September 17 but prior to October 1, 2001 under the VERP (but who have not yet attained age 55) shall not be subject to reduction for Retirement Benefits until their Retirement Benefits actually become payable from the Retirement Plan. 5.2 Except as otherwise provided in the Plan in regard to Participants (including Special Participants) who retire under the VERP, any benefits payable pursuant to this Plan shall be paid at the same times and in the same manner and form (using the same actuarial assumptions) as Retirement Benefits are paid to the Participant under the Retirement Plan. A Participant who disputes the amount or timing of such benefits shall file a claim for benefits pursuant to Article XI. 5.3 If a Participant dies before benefits commence under the Retirement Plan, the Participant's surviving spouse (if any) shall be entitled to a survivor benefit under this Plan equal to (a) the survivor benefit provided for in the Retirement Plan calculated as though the Participant's benefit under the Retirement Plan was his Adjusted Retirement Benefit, reduced (when applicable) by (b) the survivor benefit paid to the surviving spouse under the Retirement Plan, with the initial benefit payment(s) to be reduced or eliminated, as described in Section 5.5, on account of any obligations to the Company as described in Section 12.6. Survivor benefits under this Plan shall be paid at the same times and in the same manner and form as survivor benefits are paid under the Retirement Plan, except that in the case of Special Participants, survivor benefits shall also be paid under this Plan following such Participant's date of death until the month preceding the deceased Participant's 55th birthday. Thereafter, no survivor benefits shall be payable under this Plan to the surviving spouse of a deceased Special Participant. The survivor benefit payable until the 55th birthday of a deceased Special Participant shall be determined under the formula of Art. II ss.8(G)(1) of the Retirement Plan unless, prior to his death, the Participant had made an election -5- that such survivor benefit be determined under the formula of Art. II ss.8(G)(2) of the Retirement Plan. Survivor benefits payable to other Participants shall be subject to reduction by the amount of survivor benefit paid to his/her surviving spouse under the Retirement Plan. 5.4 If a Participant dies after benefits under this Plan commence, survivor benefits, if any, shall be paid in accordance with the form of benefit being paid to the Participant at the time of death. 5.5 If a Participant is obligated to the Company as described in Section 12.6 at the time benefits first become payable to the Participant or his spouse under the Plan, then the initial monthly benefit payment(s), net of required withholding taxes, shall be applied in reduction of such obligations until they are fully repaid. Only after such benefits are fully repaid shall payments commence to the Participant or his spouse under the Plan. ARTICLE VI VESTING 6.1 Except as otherwise provided in the Plan, a Participant's entitlement to benefits under the Plan shall become vested on the first day of the calendar month after such Participant has become entitled to a Deferred Benefit under Article VII, Section 2 of the Retirement Plan, or such earlier date as he dies or becomes Totally and Permanently Disabled. As used in the Plan, "vested" refers to the right to receive a benefit calculated pursuant to Section 5.1, recognizing that the amount of such benefit may increase or decrease over time, depending on the various factors taken into account in computing the benefit. The provisions of Sections 6.2 and 6.3 shall govern the forfeiture of benefits which are not vested and, in certain circumstances, even those which had become fully vested. Subject to Section 12.7, a Participant's benefits, to the extent not previously vested, shall become fully vested and payable as of the Participant's Normal Retirement Date. Notwithstanding other Plan provisions, a Participant (including a Special Participant) who elects to retire under the terms of the VERP shall be fully vested, provided he thereafter actually retires after September 17 but prior to October 1, 2001. 6.2 Any unpaid vested benefits shall be forfeited as a result of termination of employment for one or more Reasons specified below, as determined by the Administration Committee. Also, any previously unpaid vested benefits in pay status shall be forfeited for any one or more of the Reasons specified in subsections (iv) and (v) below. Such "Reason," for the sole purpose of determining -6- whether a Participant's otherwise vested benefits are to be forfeited, shall be deemed to exist where - (i) The Participant, after receiving written notice of prior breach from his Participating Employer, again breaches any material written rules, regulations or policies of the Participating Employer now existing or hereafter arising which are uniformly applied to all employees of the Participating Employer or which rules, regulations and policies are promulgated for general application to executives, officers or directors of the Participating Employer; or (ii) The Participant 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 Participant has not substantially performed his duties; or (iii) The Participant is repeatedly or habitually intoxicated or under the influence of drugs while on the premises of the Participating Employer or while performing his employment duties, after receiving written notice thereof from the Participating Employer, such that the Administration Committee determines in good faith that the Participant is impaired in performing the duties of his employment; or (iv) The Participant is convicted of a felony under state or federal law, or commits a crime involving moral turpitude; or (v) The Participant embezzles any property belonging to the Company or any of its Subsidiaries such that he may be subject to criminal prosecution therefor or the Participant intentionally and materially injures the Company or any of its Subsidiaries or their personnel or property. Nothing in this Plan shall alter the at-will nature of the Participant's employment relationship with his Participating Employer. Nothing in this Plan shall confer upon any Participant the right to continue in the employ of the Company or any of its Subsidiaries. -7- 6.3 Except as provided in Section 6.1, if a Participant voluntarily terminates his employment with the Participating Employer or is terminated by the Participating Employer for no reason or for any reason whatsoever, his benefits shall be forfeited, except for that portion (if any) which the Administration Committee, in its sole and absolute discretion, permits him to retain. Nothing in this Plan shall alter the at-will nature of the Participant's employment relationship with his Participating Employer. Nothing in this Plan shall confer upon any Participant the right to continue in the employ of the Company or any of its Subsidiaries. ARTICLE VII SOURCE OF PAYMENT 7.1 Each Participating Employer shall pay the benefits earned by and payable to a Participant under this Plan to the extent that the Participant's benefit is based on compensation paid from the Participating Employer's payroll. Notwithstanding the withdrawal of a Participating Employer from this Plan, it shall continue to be liable for benefits earned by each Participant on its payroll prior to its withdrawal. 7.2 The benefits payable under this Plan shall be paid only from the general funds of each Participating Employer, and each Participant and his surviving spouse shall be no more than unsecured general creditors of the Participating Employer, with no special or prior right to any assets of the Participating Employer for payment of any obligations hereunder. Nothing contained in this Plan or elsewhere shall be deemed to create a trust or escrow of any kind for the benefit of any Participant or any surviving spouse with respect to any assets of any Participating Employer. Any assets (including without limitation insurance policies or annuities) which a Participating Employer chooses to use to pay benefits under this Plan shall constitute general assets of the Participating Employer, shall be subject to the claims of the Participating Employer's general creditors and shall not cause this to be a funded plan within the meaning of any section of ERISA or the Code. No Participant or surviving spouse shall have any prior or special claim to any such asset. 7.3 The Board, upon the recommendation of the Administration Committee, may authorize the creation of trusts or other arrangements to facilitate or ensure payment of some or all benefit 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 a Participating Employer may make to aid it in meeting its obligations hereunder. Nothing contained in the Plan, and no action taken pursuant to its provisions, shall -8- create or be construed to create a trust of any kind, or a fiduciary relationship between the Participating Employer and the Participant or any other person. To the extent that any person acquires a right to receive benefits under this Plan, such right shall be no greater than the right of an unsecured general creditor of the Participating Employer. All payments to be made hereunder shall be paid in cash from the general funds of the Participating Employer and no special or separate fund shall be established and no segregation of assets shall be made to assure payments of such amounts. ARTICLE VIII WITHHOLDING 8.1 The Participant and (if applicable) his surviving spouse shall make appropriate arrangements with the Participating Employer by which he was or is employed for the satisfaction of any federal, state or local income tax withholding requirements and federal social security, medicare, or other employment tax requirements applicable to the payment or vesting of benefits. If no other arrangements are made, the Participating Employer may provide, at its discretion, for such withholding and tax payments as may be required. ARTICLE IX ADMINISTRATION OF THE PLAN 9.1 The Plan shall be administered by the Administration Committee which shall have full power, discretion and authority to interpret, construe and administer the Plan and any part thereof, and the Administration Committee's interpretation and construction thereof, and actions thereunder, shall be binding and conclusive on all persons for all purposes. The Administration Committee shall be the Governance and Executive Compensation Committee of the Board, or such other committee as the Board may subsequently appoint to administer the Plan. All actuarial determinations shall be made by the actuary for the Retirement Plan, and the Administration Committee shall be entitled to rely on the good faith determinations of such actuary. Any Participant who is a member of the Administration Committee shall take no part in any discretionary action by the Administration Committee which affects only him. Decisions of the Administration Committee shall be final and binding on all parties who have an interest in the Plan. ARTICLE X AMENDMENT OR TERMINATION OF THE PLAN 10.1 The Board may at any time amend, alter, modify or terminate the Plan; provided, however, that any such action shall not reduce any benefits earned under the Plan prior to such action. -9- In the event of termination of the Plan, the Administration Committee (in its sole discretion) may accelerate the time of vesting and/or date of payment applicable to such benefits. ARTICLE XI CLAIMS AND DISPUTES 11.1 Claims for benefits under the Plan shall be made in writing to the Administration Committee. The Participant may furnish the Administration Committee with any written material he believes necessary to perfect his claim. 11.2 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 Administration 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 Administration Committee within sixty (60) days after receipt by the claimant of written notification of the denial of a claim. A decision by the Administration Committee shall be made promptly, and not later than sixty (60) days after the Administration 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. 11.3 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 VI 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 Participant (or in the event of his prior death, his beneficiary(-ies)), 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 Section 11.4 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 -10- Administration 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 beneficiary shall retain legal counsel and/or incur other costs and expenses in connection with enforcement of any of the Participant's rights under this 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. 11.4 Any arbitration shall be conducted as follows: (a) 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. (b) 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. (c) 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. (d) 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. (e) 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 or any Subsidiary arising out of -11- 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 Participant's termination of employment, or (iii) six months after notice is given to or on behalf of the Participant of the amount of benefits payable under this Plan. ARTICLE XII MISCELLANEOUS 12.1 Governing Law; Indemnification. 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 XI, the Company, the Participating Employers and the Administration 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 Administration Committee with respect to any actions relating to this Plan made in good faith by such bodies or their members. 12.2 Prohibition of Assignment. The benefits provided under Article V of this Plan may not be alienated, assigned, transferred, pledged or hypothecated by any Participant, surviving spouse or other person, at any time, to any person whatsoever. These benefits shall be exempt from the claims of creditors or other claimants and from all orders, decrees, levies, garnishment or executions to the fullest extent allowed by law. 12.3 Severability. 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 Administration Committee shall have the power to modify such provision to the extent reasonably necessary to make the provision, as so changed, both legal, valid and enforceable as well as compatible with the other provisions of the Plan. 12.4 Interpretation. 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. 12.5 Participant Cooperation. A Participant shall cooperate with the Company by furnishing any and all information requested by -12- 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 Administration Committee for purposes of the Plan. If a Participant neglects or refuses so to cooperate, the Company shall have no further obligation to such Participant or his beneficiaries under the Plan, and any Plan benefits accrued prior to such neglect or refusal shall be forfeited. 12.6 Obligations to Company. If any Participant becomes entitled to payment of benefits under this Plan, and if at such time the Participant has outstanding any debt, obligation, or other liability representing an amount owing to the Company or any of its Subsidiaries, then, as provided in Article V, such amounts owed shall be an offset against the amount of benefits payable under this Plan. 12.7 Release and Non-Disclosure/Non-Competition Agreements. As a condition precedent to commencement of benefit payments under the Plan, and in consideration of such payments, a Participant may be required to execute and acknowledge a general release of all claims against the Company (and the Participating Employer, if not the Company) in such form as the Company may then require. Upon termination of the Participant's employment, at retirement or otherwise, the Participant (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 percent (5%) of each payment to the Participant pursuant to the Plan shall be deemed a payment by the Company for such agreement. If the Participant subsequently violates the Non-competition/Non-disclosure Agreement, as determined by the Administration Committee, the Company may suspend payment of Plan benefits to the Participant and any surviving spouse or other beneficiary until such time as there is a final determination that no such violation had occurred. 12.8 No Employment Contract. Nothing in this Plan shall be construed to limit in any way the right of the Company or any other Participating Employer to terminate a Participant's employment at any time for any reason whatsoever; nor shall it be evidence of any agreement or understanding, express or implied, that the Company or any Participating Employer (i) will employ an employee in any particular position or for any particular period of time, (ii) will ensure participation in any incentive program, or (iii) will grant any awards from any such program. -13- 12.9 Effective Date. The changes to the Plan (as amended and restated in this document) shall take effect as of June 27, 2001 pursuant to the Board's approval of such changes on that date. TECUMSEH PRODUCTS COMPANY By _______________________________ Its _________________________ -14- EXHIBIT A Executives selected as Participants in the Tecumseh Products Company Supplemental Retirement Plan: Todd W. Herrick John H. Foss James E. Martinco Dennis McCloskey 1993 Participants: George W. Gatecliff James G. Hammond A-1 EXHIBIT B EXAMPLE OF BENEFIT COMPUTATION: Participant A decides to retire at age 60 and receive a joint and survivor retirement benefit. His Accrued Benefit under the Retirement Plan is $5,469 per month at his Normal Retirement Date. However, there are actuarial reductions for commencing benefits before age 62 and for his wife's survivor benefit, so A's Retirement Benefits (as defined in Section 2.3) will be $4,707 per month. If A's Accrued Benefit were to be calculated under "Formula 1" and "Formula 2" as described in Section 2.1(iii), Formula 1 would produce the largest benefit. If that benefit were not reduced in accordance with Code Sections 401(a)(17) and 415, his Accrued Benefit would be $8,100 per month. Applying the same actuarial reductions, his Adjusted Retirement Benefits (as defined in Section 2.1) would be $6,972 per month. A's benefits under this Plan are initially determined by subtracting his Retirement Benefits from his Adjusted Retirement Benefits; in other words $6,972 minus $4,707 = $2,265. Assuming A has no obligations to the Company pursuant to Section 12.6, no further reductions are required. A's benefits under this Plan are, therefore, $2,265 per month. B-1 EX-10.17 5 k67190ex10-17.txt 1ST AMEMDMENT TO THE SUPPLEMENTAL EX. RETIREMENT EXHIBIT 10.17 AMENDMENT TO TECUMSEH PRODUCTS COMPANY SUPPLEMENTAL RETIREMENT PLAN Tecumseh Products Company (the "Company") amends the Company's Supplemental Retirement Plan (the "Plan") as follows: 1. Section 2.1 of the Plan is amended to read: 2.1 "Adjusted Retirement Benefits" means the benefits in the form and amount that the Participant or his surviving spouse would have received under the Retirement Plan if -- (i) the limitation on benefits imposed by Section 415 of the Code were disregarded; (ii) Base Compensation were computed without reduction due to the limits of Section 401(a)(17) of the Code; and (iii) such benefits were computed by applying whichever of the following two benefit formulas results in the largest monthly amount when applied to all of the Participant's Benefit Service under the Retirement Plan as of the time benefits become payable under this Plan (subject, however, to the 30 and 35 year limits on service, as described in the formulas; and provided that Formula 1 shall not apply to any Special Participant or to any person who first became a Participant in the Retirement Plan after January 1, 1993): Formula 1 The difference, "A" minus "B", where - "A" represents 1-1/2% of the Participant's Average Monthly Compensation multiplied by his years and fractional years of Benefit Service (provided that no Benefit Service in excess of 35 years shall be included), and "B" represents 1-2/3% of the Participant's Primary Social Security Benefit multiplied by his years and fractional years of Benefit Service (provided that no Benefit Service in excess of 30 years shall be included). However, if "B" as computed pursuant to the preceding sentence exceeds 50% of "A", then "B" shall be reduced to 50% of "A". Formula 2 The amount "G", where "G" represents 1-1/4% of the Participant's Average Monthly Compensation multiplied by his years and fractional years of Benefit Service (provided that no Benefit Service in excess of 35 years shall be included). 2001 Voluntary Early Retirement Program For Participants (including Special Participants) who retire after September 17 but prior to October 1, 2001 under the Company's Voluntary Early Retirement Program ("VERP"): "Average Monthly Compensation" as used under either Formula 1 or 2 (whichever applies) shall mean the Participant's Base Compensation during the most recent full calendar month of active work. "Benefit Service" as used in "A" under Formula 1 or in Formula 2 shall mean the sum of such Participant's Benefit Service at October 1, 2001 plus five additional years of Benefit Service (but in no event shall more than 35 years of Benefit Service be counted). Maximum "Benefit Service" as used in "B" under Formula 2 shall remain at 30 years. Adjusted Retirement Benefits paid to VERP Participants (including Special Participants) shall not be subject to actuarial adjustment for commencement prior to Normal Retirement Age. Adjusted Retirement Benefits paid to a Special Participant (or his/her surviving spouse) shall terminate with the monthly payment that precedes the Special Participant's 55th birthday. Interim Early Retirement Benefit Additionally, the Plan shall provide an interim early retirement benefit to any Special Participant who (i) is a key executive officer of the Company who has agreed to retire under the VERP, (ii) is requested by the Board to remain in Company service during a transition period beginning October 1, 2001 and ending not later than ________, 2002, and (iii) agrees to do so. The amount of this interim early retirement benefit payable to such Special Participant (or to his surviving spouse, if applicable) shall be the same as the Participant's Enhanced Early Retirement Benefit under the Retirement Plan (or the corresponding surviving spouse benefit, if applicable) and such benefit shall be payable monthly during the transition period. The interim early retirement benefit shall be in addition to any benefit payable to the Participant (or surviving spouse) under the provisions of this Plan pertaining to the 2001 Voluntary Early Retirement Program. 2. Subsection 4.1(ii) of the Plan is amended to read: (ii) Additionally, this Plan shall cover, as "Special Participants," those Employees who are "highly compensated employees" as defined under Section 414(q) of the Code, who have not attained age 55 prior to October 1, 2001 and who retire after September 17 but prior to October 1, 2001 under the VERP. Also covered as Special Participants are those highly compensated key executives described in the preceding sentence who have agreed to retire prior to October 1, 2001 but subsequently continue to work for the Company after that date pursuant to the request of the Board, during a transition period, as described in Section 2.1 under "Interim Early Retirement Benefit." 3. Except as amended above, the Plan continues in full force and effect. WITNESS execution of this amendment on behalf of the Company. TECUMSEH PRODUCTS COMPANY By /s/ TODD W. HERRICK --------------------------- Its President and Chief Executive Officer Dated: September 26, 2001 -2- EX-10.19 6 k67190ex10-19.txt AMENDED AND RESTATED VOLUNTARY DEFERRED COMPENS. EXHIBIT 10.19 TECUMSEH PRODUCTS COMPANY VOLUNTARY DEFERRED COMPENSATION PLAN (Amended and Restated through November 28, 2001) 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.......................................................................14 ARTICLE XV AMENDMENT AND TERMINATION..........................................................14 ARTICLE XVI CHANGE OF CONTROL..................................................................15 ARTICLE XVII PLAN ADMINISTRATION................................................................17 ARTICLE XVIII LIMITATIONS OF ACTION..............................................................19
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. -1- 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- 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- 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- 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- 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- 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- 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- 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, a date when the portion of his Deferred Compensation Account balance attributable to such current Plan Year deferral shall be paid (or commence to be paid). Such date shall be as soon as practicable, and not more than 30 days after the first business day of the Plan Year following: (i) the date such Participant attains a selected age (maximum of age 70), or (ii) the date of the Participant's 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 Commencement Date". The Valuation Date to be used for such payment shall be the last business day of the Plan Year that precedes the Benefit Commencement 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 -9- 8.3), beginning on the first anniversary of the Benefit Commencement Date. 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. -10- (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 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 -11- to legal process or attachment for the payment of any claim of any person entitled to receive the same. 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 -12- 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 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. -13- 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. 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. -14- 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 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, -15- 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 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 -16- 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. 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 -17- 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. 17.9 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 -18- 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. (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 /s/ TODD W. HERRICK ------------------------------ Its President and Chief Executive Officer Dated: November 28, 2001 --------------------------- -19- EX-10.20 7 k67190ex10-20.txt DESCRIPTION OF VOLUNTARY OF EARLY RETIREMENT EXHIBIT 10.20 DESCRIPTION OF VOLUNTARY EARLY RETIREMENT PROGRAM The Voluntary Early Retirement Program (VERP) was announced to the Company's North American Salaried Employees on July 2, 2001 and, with respect to retirements, was effective October 1, 2001. The VERP was offered to certain North American salaried employees age 50 or older with ten or more years of service, as of September 15, 2001, excluding salaried employees of the Company's Somerset, Kentucky plant, its Little Giant Pump Company and MP Pumps Company subsidiaries, and salaried employees not actively at work on July 1, 2001. The special enhanced retirement benefits offered under this VERP include: - Unreduced and immediate monthly pension benefits at current age, - An increase of up to five years in service (to a maximum of 35 years) when calculating pension. - The opportunity to use current base pay when calculating pension instead of final five year average pay, and - Full retiree medical benefits when retired. EX-21 8 k67190ex21.txt SUBSIDIARIES EXHIBIT 21 Subsidiaries of the Company The following is a list of subsidiaries of the Company as of December 31, 2001 except that certain subsidiaries, the sole function of which is to hold the stock of operating subsidiaries, which in the aggregate do not constitute significant subsidiaries, have been omitted. Subject to the foregoing in each case, 100% of the voting securities (except for directors' qualifying shares, if required) are owned by the subsidiary's immediate parent as indicated by indentation.
STATE OR COUNTRY NAME OF SUBSIDIARIES OF THE COMPANY OF ORGANIZATION - ----------------------------------- --------------- MP Pumps, Inc. Michigan Tecumseh do Brasil, Ltda. Brazil Tecumseh do Brasil Europe Srl. Italy Tecumseh do Brasil USA Delaware Tecumseh Products Company of Canada, ltd. Canada Tecumseh Products Company, Engine & Transmission Group, Dunlap Tennessee Operations, Inc. 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 Company Oklahoma Trenton Division, Inc. Tennessee Vitrus, Inc. Rhode Island Tecumseh Products India, Ltd. India MOTOCO, a.s. Czech Republic
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