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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, 1998 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
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Securities Registered Pursuant to Section 12(b) of the Act: Securities Registered Pursuant to Section 12(g) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered Class B Common Stock, $1.00 Par Value
------------------- ---------------------- Class A Common Stock, $1.00 Par Value
None None Class B Common Stock Purchase Rights
Class A Common Stock Purchase Rights
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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 5, 1999 all of the 5,470,146 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 5, 1999, held an aggregate
of 2,279,300 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 5, 1999 (based on the closing price of $44.00 per share, as
reported on the NASDAQ Stock Market on such date) of the 3,190,846 shares then
issued and outstanding held by non-affiliates was approximately $140,397,224.
Numbers of shares outstanding of each of the Registrant's classes of
Common Stock at March 12, 1999:
Class B Common Stock, $1.00 Par Value: 5,470,146
Class A Common Stock, $1.00 Par Value: 15,138,838
Certain information contained in the Registrant's Annual Report to Shareholders
for the year ended December 31, 1998 has been incorporated herein by reference
in Parts I and II hereof. Certain information in the definitive proxy statement
to be used in connection with the Registrant's 1999 Annual Meeting of
Shareholders has been incorporated herein by reference in Part III hereof. The
Exhibit Index is located on page 24.
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TABLE OF CONTENTS
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Item Page
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PART I
1. Business 2
Executive Officers of the Registrant 11
2. Properties 12
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 13
PART II
5. Market for the Company's Common Equity and Related Stockholder Matters 14
6. Selected Financial Data 14
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
7A. Quantitative and Qualitative Disclosures About Market Risk 14
8. Financial Statements and Supplementary Data 14
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 14
PART III
10. Directors and Executive Officers of the Company 15
11. Executive Compensation 15
12. Security Ownership of Certain Beneficial Owners and Management 15
13. Certain Relationships and Related Transactions 15
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 16
Signatures 22
Exhibit Index 24
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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 the largest independent
producer 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 an extensive
line of pumps. Products are sold in over 100 countries 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 1998, sales to customers
outside the United States represented approximately 46% of total consolidated
net sales. In addition to North American operations,
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compressor products are produced in Brazil, France and India, while engines are
produced in Italy.
Products sold outside the United States are manufactured at both U.S. and
foreign plants. 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.
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 Company also has two manufacturing
facilities in India which produce air conditioning and refrigeration compressors
for the Indian appliance markets.
In the engine business, the Company's two principal markets are North America,
which is generally served by the Company's U.S. manufacturing operations, and
Europe, which is served both by the manufacturing operations of the Company's
European engine subsidiary, Tecumseh Europa, S.p.A. ("Tecumseh Europa") in
Italy, and to a lesser extent, by U.S. export sales.
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 work force 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.
COMPRESSOR PRODUCTS
The Compressor Products segment is the Company's largest business segment. A
compressor is a device which compresses a refrigerant gas. When the gas is later
permitted to expand, it absorbs and transfers heat, and produces 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 includes
reciprocating and rotary designs.
PRODUCT LINE
The Company manufactures and sells a wide variety of traditional, reciprocating
compressors suitable for use in all four compressor market segments. These range
in size from 12.5 HP compressors for unitary air conditioning applications to
small fractional HP compressors for refrigerators, dehumidifiers and vending
machines.
The Company also produces rotary compressors ranging from 5,000 to 18,000 BTU/hr
for use in room and mobile air conditioning applications. Rotary compressors
generally provide increased
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operating efficiency, lower equipment space requirements, and reduced sound
levels when compared to reciprocating designs.
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 believes that successful
development of a commercially saleable scroll is necessary to maintain its
participation in the unitary compressor market.
The Company has made several design efforts in an attempt to develop a
commercially acceptable scroll compressor product. Over the last five years, the
Company has invested approximately $55 million dollars in a scroll compressor
facility in Tecumseh, Michigan. After experiencing setbacks and unacceptable
testing results, the original scroll compressor design was abandoned, and a new
design was developed. During 1998, the Company made substantial progress in the
development of the re-designed scroll compressor, and in 1999, the Company
anticipates offering for sale its new scroll product in very limited quantities.
However, the Company believes it will take some time before a decision is
reached to produce a scroll compressor product line in viable commercial
quantities. The Company anticipates that a substantial additional investment
will be required to move forward with the decision to produce the scroll
compressor in quantities sufficient to sustain profitability.
Due to the lengthy introduction period involving limited production and based on
expected manufacturing costs and market conditions surrounding the scroll
compressor, the Company estimated that the future cash flows from this product
line would not be sufficient to cover the carrying amount of the Company's
assets dedicated for scroll production. Accordingly, the Company recorded an
asset impairment charge of $45 million against these assets in 1998. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Nonrecurring Charge" and Note 13 of the Notes to Consolidated
Financial Statements in the Company's Annual Report to Shareholders for the year
ended December 31, 1998 for a discussion of the impact of the asset impairment
loss on the Company's financial condition and results of operations.
MANUFACTURING OPERATIONS
Compressor Products manufactured in the Company's U.S. plants accounted for
approximately 53% of 1998 compressor sales. The balance was produced at the
Company's manufacturing facilities in Brazil, France and India. The compressor
operations are substantially vertically integrated, and the Company manufactures
a significant portion of its component needs internally, including electric
motors, metal stampings and glass terminals. Raw materials are purchased from a
variety of non-affiliated suppliers. The Company utilizes multiple sources of
supply and the required raw materials and components are generally available in
sufficient quantities.
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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, (aftermarket wholesalers and smaller
commercial OEM's) are served by sales personnel assigned to specified geographic
regions. The Company's U.S. Export division and 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 OEMs. Sales of
Compressor Products for unitary central air conditioning systems and commercial
applications include substantial sales to both OEM and distributor customers.
The Company has over 1,200 customers for Compressor Products, the majority of
which are commercial customers. In 1998, the two largest customers for
Compressor Products accounted for 7.9% and 4.9%, respectively, of segment sales,
or 4.7% and 2.9%, 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 present
business relationships with all major customers have existed for a substantial
period of time.
In 1998, 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
100 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,
which have internal compressor manufacturing 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.
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Over the last several years there has been an industry trend toward the use of
scroll compressors in 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 and a major OEM, has a
joint venture to produce scroll compressors with Bristol Compressors, Inc.
As discussed in the product line section, the Company has made a significant
investment in a scroll compressor facility in Tecumseh, Michigan and stands
ready to offer a scroll compressor product for sale in limited quantities in
1999. Because the Company believes that the scroll compressor is important to
maintaining its position in the unitary air conditioning market, it plans to
pursue the development of the scroll compressor in a manner that limits risk to
the Company. The strategy will be to enter the market slowly with the intention
of limiting the exposure to technical problems and with the intention of
controlling the operating losses.
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. and others.
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
white good producers manufacturing a substantial portion of their compressor
needs. The non-captive portion of the household refrigerator and freezer segment
is substantially dominated by Far Eastern manufacturers, which export
compressors to the United States but are also increasing U.S. manufacturing
capabilities. Non-captive and captive competitors include Matsushita Electric
Industrial Corporation, Embraco S.A., Danfoss, Inc., AB Electrolux and others.
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.
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Tecumseh do Brasil sells the major portion of its manufactured compressors in
Brazil and other Latin American countries and competes directly with Embraco
S.A. in Brazil and with Embraco and several other foreign manufacturers in Latin
America.
The Company has two compressor manufacturing subsidiaries in India, Tecumseh
Products India, Ltd. and Tecumseh India Private, Ltd., which sell to regional
markets. Major competitors include the Indian manufacturers Kirloskar Copeland
Ltd., Carrier Aircon Ltd., Godrej, Videocon, BPL and others.
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. These factors are discussed below.
NEW 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 U.S. government has
approved several replacement refrigerants, including HFC-134a, HFC-404A, and
HFC-507, among others. The Company began producing compressors using alternative
refrigerants 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 product using non-CFC refrigerant technology has improved its
competitive position in these markets. Hydrochlorofluorocarbon compounds
("HCFCs") are used as a refrigerant in air conditioning systems. Under a 1992
international agreement, HCFCs will be banned from new equipment beginning in
2010. However, some European countries began HCFC phase-outs as early as 1998.
The Company believes the replacement of HCFCs will accelerate due to the
expected availability of alternative refrigerants with better performance
characteristics than HCFCs. It is not presently possible to estimate the level
of expenditures which will be required to meet industry needs or the effect on
the Company's competitive position.
The U.S. National Appliance Energy Conservation Act of 1987 (the "NAECA") will
require higher energy efficiency ratings on room air conditioners manufactured
after October 1, 2000 and on household refrigerator/freezers manufactured after
July 1, 2000. Energy efficiency requirements for unitary air conditioners are
expected to be published in October 2000 to be effective in the year 2005. The
European Community is expected to announce energy efficiency directives for
refrigerators and freezers effective January 1, 2000. The Company has on-going
projects aimed at improving the efficiency levels of its compressor products
and plans to have products available to meet known energy efficiency
requirements. Some of the Company's compressor products already meet or exceed
the new energy efficiency standards. It is not presently possible to estimate
the level of expenditures which will be required to meet the new standards or
the effect on the Company's competitive position.
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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 17 horsepower and with
cast iron bodies ranging in size from 12 through 18 horsepower. The Company's
power train products include transmissions, transaxles and related parts used
principally in lawn and garden tractors and riding lawn mowers.
MANUFACTURING OPERATIONS
The Company manufactures engines and related components in its five plants in
the United States and one plant in Italy. All of the Company's power train
products are manufactured in one facility in the United States. Operations of
the Company in this segment are partially vertically integrated as the Company
produces most of its plastic parts and carburetors, as well as a substantial
portion of the aluminum die-castings used in its engines and power train
products.
SALES AND MARKETING
The Company markets its Engine and Power Train Products worldwide under the
"Tecumseh" and "Peerless" brands. A substantial portion of the Company's engines
are incorporated into lawn mowers sold under brand labels, including the
"Craftsman" brand of Sears, Roebuck and Co.
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 1998, the two largest customers for Engine and Power Train Products accounted
for 28.3% and 18.5%, respectively, of segment sales, or 9.6% and 6.3%,
respectively, of consolidated net sales. Loss of either of this segment's two
largest customers 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. There are no long-term contracts between the Company and
its major customers, but the present business relationships have existed for a
substantial period of time.
COMPETITION
The Company believes it is the second largest producer of small gasoline engines
in the world and that 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.
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Competition in the Company's engine business is based principally on price,
service, product performance and features. 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 EMISSION STANDARDS
The U.S. Environmental Protection Agency ("EPA") is in the process of final rule
development of Phase II emission standards for utility engines which include the
two- and four-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. The Phase II standards will be
finalized in early 1999 for the four-cycle line and in mid-2000 for the
two-cycle line. Phase-in of the rules will take place between the 2001 and 2006
model years.
The state of California will begin to enforce the CARB Tier II Emission
Standards effective January 1, 2000, at which time all rotary mower and
lightweight vertical shaft utility engines will require overhead valve
technology in the state of California.
It is not currently possible to determine the related costs of compliance with
these standards, nor the impact of these standards on the competitive position
of the Company.
PUMP PRODUCTS
The Company manufactures and sells centrifugal pumps and related products
through its subsidiary, Little Giant Pump Company ("Little Giant"). 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 and (8) water gardening. Little Giant's products are sold worldwide to
OEMs, distributors and mass retailers. Sales and marketing is executed through
Little Giant's own sales staff and manufacturer's representatives under the
"Little Giant" brand name.
The Company's other pump subsidiary, MP Pumps Inc. ("MP Pumps"), manufactures
and sells a variety of centrifugal pumps ranging in capacity from 15 to 3,700
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 distributors located
throughout the United States, which sell to end-users. A limited number of pumps
are also sold to departments and agencies of the U.S. government. Most of MP
Pumps' products are sold in the United States. MP Pumps markets its products
through its own sales staff under the "MP Pumps" brand name.
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The pump industry is highly fragmented, with many relatively small producers
competing for sales. Little Giant has been particularly successful in competing
in this industry by targeting specific market niches where opportunities exist
and then designing and marketing corresponding products.
BACKLOG, CUSTOMERS AND SEASONAL VARIATIONS
Most of the Company's production is against short-term purchase orders, and
backlog is not significant.
In 1998, 12.5% of consolidated sales represented engine and compressor sales to
customers under the common control of AB Electrolux. Engine and power train
product sales to Sears and Sears related suppliers amounted to 10.0% of 1998
consolidated sales.
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 of its lines of business; however, the
success of the Company's overall business is not considered primarily dependent
on them. In the conduct of its business, the Company owns and uses a variety of
registered trademarks, the most familiar of which is the trademark consisting of
the word "Tecumseh" in combination with a Native American Indian head symbol.
RESEARCH AND DEVELOPMENT
The Company must continually develop new and improved products in order to
compete effectively and to meet evolving regulatory standards in all of its
major lines of business. The Company spent approximately $32.4 million, $32.6
million and $30.4 million during 1998, 1997 and 1996 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.
ENVIRONMENTAL LEGISLATION
The Company has been named by the EPA as a potentially responsible party in
connection with the Sheboygan River and Harbor Superfund Site in Wisconsin. The
Company is also participating with the EPA and various state agencies in
investigating possible remedial action that may be necessary at other sites. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Environmental" and Note 8 of the Notes to Consolidated Financial
Statements in the Company's Annual Report to Shareholders for the year ended
December 31, 1998 for a discussion of the impact of these matters on the
Company's financial condition and results of operations. Also see Item 3. Legal
Proceedings.
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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, 1998, 1997 and 1996 appear under the caption "Business
Segment Data" of the Company's Annual Report to Shareholders for the year ended
December 31, 1998 and are incorporated herein by reference.
EMPLOYEES
On December 31, 1998 the Company employed approximately 18,600 persons, 51% of
which were employed in foreign locations. Approximately 3,800 of the U.S.
employees were represented by labor unions, with no more than approximately
2,100 persons represented by the same union. The majority of foreign location
personnel are represented by national trade unions. The number of the Company's
employees is subject to some seasonal variation; during 1998, the maximum number
of persons employed was approximately 18,600 and the minimum was 16,700. The
Company believes it has a good relationship with its employees.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the executive officers of the Company.
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PERIOD OF SERVICE
NAME AND AGE OFFICE OR POSITION HELD AS AN OFFICER
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Kenneth G. Herrick, 77 Chairman of the Board of Directors Since 1966
Todd W. Herrick, 56 President and Chief Executive Officer Since 1974
John H. Foss, 56 Vice President, Treasurer, and Chief Since 1979
Financial Officer
James E. Martinco, 53 Group Vice President, Engine and Since 1998
Power Train (1)
Dennis E. McCloskey, 56 Group Vice President, Compressors (2) Since 1998
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(1) Last five years of business experience--Vice President, Engine and
Power Train, Tecumseh Products Company 1996 to 1997; Vice President of
Operations and Vice President/General Manager of Engine Products 1990
to 1996. (Employed with Tecumseh Products Company since 1976.)
(2) Last five years of business experience--Vice President, Compressors,
Tecumseh Products Company, 1994 to 1997; Group Vice President
Refrigeration and Air Conditioning, Frigidaire Company, 1990 to 1993.
(Employed at Frigidaire since 1976.)
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ITEM 2. PROPERTIES
The Company's headquarters are located in Tecumseh Michigan, approximately 50
miles southwest of Detroit. At December 31, 1998 the Company had 31 principal
properties worldwide occupying approximately 8.5 million square feet with the
majority, approximately 7.8 million square feet devoted to manufacturing. Eleven
facilities with approximately 3.4 million square feet were located in five
countries outside the United States. The following table shows the approximate
amount of space devoted to each of the Company's three principal business
segments.
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Approximate Floor
Industry Segment Area in Square Feet
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Compressor Products 5,998,000
Engine and Power Train Products 1,924,000
Pump Products and Other 550,000
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Five domestic facilities, including land, building and certain machinery and
equipment were financed and leased through industrial revenue bonds. All owned
and leased properties are suitable, well maintained and equipped for the
purposes for which they are used. The Company considers that its facilities are
suitable and adequate for the operations involved.
ITEM 3. LEGAL PROCEEDINGS
The Company has been named by the EPA as a potentially responsible party in
connection with the Sheboygan River and Harbor Superfund Site in Wisconsin. This
matter is discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 8 of the Notes to Consolidated
Financial Statements in the Company's Annual Report to Shareholders for the year
ended December 31, 1998, both of which are incorporated herein by reference. As
discussed in Note 8, the ultimate costs to the Company will be dependent upon
factors beyond its control, such as the scope and methodology of the remedial
action requirements to be established by the EPA (in consultation with the State
of Wisconsin), rapidly changing technology, and the outcome of any related
litigation.
In addition to the matter discussed in the preceding paragraph, the Company is
currently participating with the EPA and various state agencies at certain other
sites to determine the nature and extent, if any, of remedial action which may
be required of the Company with regard to such other sites.
12
<PAGE> 14
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, including those discussed in the immediately preceding paragraph,
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 income from continuing operations of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1998 to a vote of security
holders through the solicitation of proxies or otherwise.
13
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The information under the captions "Financial Summary" and "Information
Concerning Equity Securities" of the Company's Annual Report to Shareholders for
year ended December 31, 1998 is incorporated herein by reference. As of a March
5, 1999, there were 739 holders of record of the Company's Class A common stock
and 707 holders of the Class B common stock. No equity securities were sold by
the Company during the period covered by this report.
ITEM 6. SELECTED FINANCIAL DATA
The information under the caption "Selected Financial Data" of the Company's
Annual Report to Shareholders for the year ended December 31, 1998 is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of the Company's Annual Report to
Shareholders for the year ended December 31, 1998 is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
No information is presented in response to this item because the Company has no
material market risk relating to derivative financial instruments, derivative
commodity instruments, or other financial instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information on pages 17 to 27, inclusive, of the Company's Annual Report to
Shareholders for the year ended December 31, 1998 is incorporated herein by
reference. See Item 14 of this report for financial statement schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
14
<PAGE> 16
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 1999
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.
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 1999 Annual Meeting of Shareholders is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information under the captions "Appendix A - Share Ownership" in the
Company's definitive Proxy Statement relating to its 1999 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 1999
Annual Meeting of Shareholders is incorporated herein by reference.
15
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial statements, notes and report on pages 17 through
27 of the Company's Annual Report to Shareholders for the year
ended December 31, 1998:
- Statements of Consolidated Income for the years ended
December 31, 1998, 1997 and 1996
- Consolidated Statements of Stockholders' Equity for
the years ended December 31, 1998, 1997 and 1996
- Consolidated Balance Sheets as of December 31, 1998
and 1997
- Statements of Consolidated Cash Flows for the years
ended December 31, 1998, 1997 and 1996
- Notes to Consolidated Financial Statements
- Report of Independent Accountants
(2) Financial Statement Schedules:
<TABLE>
<CAPTION>
Schedule Form 10-K
Number Description Page Reference
------ ----------- --------------
<S> <C> <C>
II Valuation and Qualifying Accounts 20
</TABLE>
Schedules other than those listed above are omitted because they are
either not applicable or are not required.
16
<PAGE> 18
(3) Exhibits:
Exhibit
Number Description
------ -----------
(2) (not applicable)
(3)(a) 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 (Commission File No. 0-452) and
incorporated herein by reference)
(3)(b) 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 (Commission File No. 0-452) and
incorporated herein by reference)
(3)(c) 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
(Commission File No. 0-452) and incorporated herein
by reference)
(3)(d) Company's Amended and Restated Bylaws as amended
through October 22, 1997 (filed as Exhibit (3) to
Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1997 (Commission File No.
0-452) and incorporated herein by reference)
(4) [Note: 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.]
(9) (not applicable)
(10)(a) 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 (Commission
File No. 0-452) and incorporated herein by reference)
17
<PAGE> 19
(3) Exhibits (continued):
Exhibit
Number Description
------ -----------
(10)(b) 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 (Commission File No. 0-452) and
incorporated herein by reference)
(10)(c) 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 (Commission File No. 0-452) and
incorporated herein by reference)
(10)(d) Class A Rights Agreement (filed as Exhibit 4 to Form
8-A registering Class A Common Stock Purchase Rights
dated April 22, 1992 (Commission File No. 0-452) and
incorporated herein by reference)
(10)(e) 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 (Commission File
No. 0-452) and incorporated herein by reference)
(10)(f) 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 (Commission File
No. 0-452) and incorporated herein by reference)
(10)(g) 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 (Commission File No.
0-452) and incorporated herein by reference)
(10)(h) 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 (Commission File No. 0-452)
and incorporated herein by reference)
18
<PAGE> 20
(3) Exhibits (continued):
Exhibit
Number Description
------ -----------
(10)(i) 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 (Commission File No. 0-452) and
incorporated herein by reference)
(10)(j) Supplemental Executive Retirement Plan effective
January 1, 1995 (management contract or compensatory
plan or arrangement) (filed as Exhibit (10)(l) to
Annual Report on Form 10-K for the year ended
December 31, 1994 (Commission File No. 0-452) and
incorporated herein by reference)
(10)(k) Outside Directors' Voluntary Deferred Compensation
Plan adopted November 25, 1998 (management contract
or compensatory plan or arrangement)
(10)(l) Voluntary Deferred Compensation Plan adopted November
25, 1998 (management contract or compensatory plan or
arrangement)
(11) (not applicable)
(12) (not applicable)
(13) Portions of Tecumseh Products Company Annual Report
to Shareholders for the year ended December 31, 1998,
incorporated by reference herein
(16) (not applicable)
(18) (not applicable)
(21) Subsidiaries of the Company
(22) (not applicable)
(23) Report and Consent of Certified Public Accountants
(24) (not applicable)
19
<PAGE> 21
(3) Exhibits (continued):
Exhibit
Number Description
------ -----------
(27) Financial Data Schedule
(99) (not applicable)
(b) No Reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this Report.
20
<PAGE> 22
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in millions)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- -------------------------------------------------------------------------------------
Additions
-----------------------
Balance at Charged to Charged to Additions Balance at
Beginning Costs and Other and End of
Description of Period Expenses Accounts (Deductions) Period
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts, deducted from
accounts receivable in the
balance sheet: (A)
1998 $5.7 $1.5 - ($1.1) $6.1
1997 $6.7 $0.1 - ($1.1) $5.7
1996 $6.9 $0.2 - ($0.4) $6.7
</TABLE>
Notes:
(A) Represents the total of accounts charged against the allowance for
doubtful accounts and adjustments from the translation of foreign
currency.
21
<PAGE> 23
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
/s/ TODD W. HERRICK
By
-------------------------------------
Todd W. Herrick
President and Chief Executive Officer
Dated: March 24, 1999
22
<PAGE> 24
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.
<TABLE>
<CAPTION>
Date
Signature Office of signing
--------- ------ ----------
<S> <C> <C>
- --------------------------- Chairman of the March 24, 1999
Kenneth G. Herrick Board of Directors
/s/ TODD W. HERRICK
- --------------------------- President, Chief March 24, 1999
Todd W. Herrick Executive Officer
(Principal Executive
Officer) and Director
/s/ RALPH W. BABB, JR.
- --------------------------- Director March 24, 1999
Ralph W. Babb, Jr.
/s/ PETER M. BANKS
- --------------------------- Director March 24, 1999
Peter M. Banks
/s/ JON E. BARFIELD
- --------------------------- Director March 24, 1999
Jon E. Barfield
/s/ JOHN H. FOSS
- --------------------------- Vice President, Treasurer March 24, 1999
John H. Foss and Chief Financial Officer
(Principal Accounting
and Principal Financial
Officer) and Director
/s/ J. RUSSELL FOWLER
- --------------------------- Director March 24, 1999
J. Russell Fowler
/s/ JOHN W. GELDER
- --------------------------- Director March 24, 1999
John W. Gelder
/s/ STEPHEN L. HICKMAN
- --------------------------- Director March 24, 1999
Stephen L. Hickman
</TABLE>
23
<PAGE> 25
EXHIBIT INDEX
EXHIBIT
NUMBER
- ------
(10)(k) Outside Directors' Voluntary Deferred Compensation Plan
adopted November 25, 1998 (management contract or compensatory
plan or arrangement)
(10)(l) Voluntary Deferred Compensation Plan adopted November 25, 1998
(management contract or compensatory plan or arrangement)
(13) Portions of the Company's Annual Report to Shareholders for
the year ended December 31, 1998, incorporated by reference
herein
(21) Subsidiaries of the Company
(23) Report and Consent of Certified Public Accountants
(27) Financial Data Schedule
24
<PAGE> 1
EXHIBIT 10(K)
TECUMSEH PRODUCTS COMPANY
OUTSIDE DIRECTORS' VOLUNTARY DEFERRED COMPENSATION PLAN
(ADOPTED NOVEMBER 25, 1998)
<PAGE> 2
TECUMSEH PRODUCTS COMPANY
OUTSIDE DIRECTORS' VOLUNTARY DEFERRED COMPENSATION PLAN
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
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........................................4
ARTICLE VII PARTICIPANTS' RIGHTS UNSECURED........................................6
ARTICLE VIII PAYMENT OF DEFERRED COMPENSATION......................................7
ARTICLE IX VALUATION DATE........................................................8
ARTICLE X ALIENATION............................................................8
ARTICLE XI DOMESTIC RELATIONS ORDERS.............................................8
ARTICLE XII TAX WITHHOLDING.......................................................9
ARTICLE XIII PARTICIPANT CONSENT...................................................9
ARTICLE XIV SEVERABILITY.........................................................10
ARTICLE XV AMENDMENT AND TERMINATION............................................10
ARTICLE XVI CHANGE OF CONTROL....................................................11
ARTICLE XVII PLAN ADMINISTRATION..................................................13
ARTICLE XVIII LIMITATIONS OF ACTION................................................15
</TABLE>
-i-
<PAGE> 3
TECUMSEH PRODUCTS COMPANY
OUTSIDE DIRECTORS' VOLUNTARY DEFERRED COMPENSATION PLAN
ARTICLE I
PLAN PURPOSES
1.1 The purpose of this Plan is to provide Eligible Directors of the
Company with a means of deferring directors' fees and other compensation payable
to them for their future services as directors of the Company.
1.2 The Company intends that the Plan be an unfunded, non-qualified
deferred compensation plan and that payments under the Plan shall be, when paid
or otherwise made available to Participants, deductible pursuant to Section 162
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 "Beneficiary" means any person(s) or legal entity(ies) designated
by the Participant or otherwise determined in accordance with Section 5.4.
2.2 "Board" means the Board of Directors of the Company.
2.3 "Committee" means the Governance and Executive Compensation
Committee of the Company's Board, or such other committee as the Company's Board
may subsequently appoint to administer the Plan.
2.4 "Company" means Tecumseh Products Company, a Michigan corporation,
and its successors and assigns.
2.5 "Compensation" means the amount payable to a Participant for
serving as a director of the Company, including amounts payable for attending
board meetings and for serving on any committee, but excluding any amounts
payable for reimbursement of expenses.
2.6 "Deferral Period" means the total period of time, expressed in
Plan Years, for which the Participant has elected to defer Compensation.
2.7 "Deferred Compensation" means Compensation deferred pursuant to
the Plan.
2.8 "Deferred Compensation Account" means the individual account
maintained under the Plan for a Participant as determined under ARTICLE VI.
<PAGE> 4
2.9 "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, an example of which is attached hereto as EXHIBIT 1.
2.10 "Director" means a member of a Board.
2.11 "Eligible Director" means an individual who, at the relevant time,
is a Director but is not also an employee of the Company. Where the context so
requires, this term shall also include a former Eligible Director for whom the
Committee maintains a Deferred Compensation Account under the Plan.
2.12 "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.
2.13 "Participant" for any Plan Year means an Eligible Director 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.
2.14 "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.
2.15 "Plan" means the Tecumseh Products Company Outside Directors'
Voluntary Deferred Compensation Plan as embodied herein and as amended from time
to time by the Company's Board.
2.16 "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.
2.17 "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 a company, to provide for the
payment of non-qualified deferred compensation benefits to its directors, will
not be taxed to directors at the time contributions are made, but instead, at
the time the benefits are received or otherwise made available to the director.
2.18 "Subsidiary" means any of the Company's present subsidiary
corporations or any corporation which becomes a controlled subsidiary of the
Company.
2.19 "Tecumseh Share" means a share of the Company's Class A Common
Stock ($1.00 par value per share).
2.20 "Termination Date" means, for each Participant, the earliest date
on which (due to death, disability or any other reason) he or she is no longer
an Eligible Director.
2.21 "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
-2-
<PAGE> 5
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 notify Eligible Directors of their eligibility to defer Compensation under
the Plan during the following Plan Year. Also, the Committee shall promptly
notify newly-elected or newly-appointed Eligible Directors of their eligibility
to defer Compensation under 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,
a 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.
4.2 New Participant. Notwithstanding Section 4.1, a newly-appointed
or newly-elected Director who becomes an Eligible Director 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 being notified of eligibility under Section
4.1.
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 10% Increments. The minimum amount which may be
deferred by a Participant for any Plan Year is 10% of Compensation. Deferrals in
excess of the minimum amount shall be in further 10% increments of Compensation.
-3-
<PAGE> 6
ARTICLE V
GENERAL PROVISIONS
5.1 No Right to Payment Except as Provided in Plan. No Participant or
Beneficiary shall have any right to any payment or benefit hereunder except to
the extent provided in the Plan.
5.2 Future Term as a Director. Nothing in the Plan or any Deferred
Compensation Election Form shall obligate any Eligible Director or Participant
to continue as a director of the Company, or to accept any nomination for a
future term as such a director, or require the Company to nominate or cause the
nomination of any Eligible Director or Participant for a future term as a
director of the Company.
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 Company or the Committee to see to the application of such
payment, unless prior to such payment claim is made therefore by a duly
appointed legal representative. Payments made pursuant to such power shall
operate as a complete discharge of the Company 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 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 which he elected to defer which otherwise
would have been paid to the Participant during the subsequent Plan Year. Such
amount shall be credited (as of the date such amount would otherwise have been
paid to the
-4-
<PAGE> 7
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.
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
-5-
<PAGE> 8
Sections 6.2, 6.3 and/or 6.8. 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 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.
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 Company. Therefore, the right of a Participant to receive any distribution
hereunder shall be an unsecured claim against the general assets of the Company.
7.2 No Actual Investment Required. Subject to ARTICLE XVI and Section
17.1, no assets of the Company 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 Company 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 Company's 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.
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ARTICLE VIII
PAYMENT OF DEFERRED COMPENSATION
8.1 Payment of Benefits. Subject to Section 8.1(a), when, and at the
same time, a Participant elects to defer Compensation for any particular Plan
Year, he shall concurrently elect, on the Deferred Compensation Election Form,
when the portion of his Deferred Compensation Account balance attributable to
such current Plan Year deferral shall be paid, which shall be as soon as
practicable, and not more than 30 days after the first business day of the
calendar month which follows either:
(i) the Participant's Termination Date; or
(ii) the date the Participant attains a selected age (maximum of age
75)
whichever the Participant shall elect on his Deferred Compensation Election
Form. The date elected is hereinafter referred to as the "Benefit Payment Date".
The Valuation Date to be used for such payment shall be the last business day of
the calendar month that precedes the Benefit Payment Date. Notwithstanding the
Participant's Investment Option(s) or the Benefit Payment Date previously
elected by him, in the case of a Participant's death before his Benefit Payment
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.
8.1(a) 365-Day Minimum Deferral Period. Notwithstanding the time for
the payment of benefits pursuant to Section 8.1, such payment 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.
If payment of any portion of a Participant's benefit is delayed more than 30
days following the Benefit Payment Date, the amount that is not paid on the
Benefit Payment Date shall be credited with interest on the same basis as the
Corporate Bond Investment Option during the period of delay.
8.2 Payment Method. Payment of benefits shall be made in a single
lump-sum payment, by check, on the Benefit Payment Date.
8.3 Change of Prior Elections. Subject to the consent of the
Committee, a Participant may file a request to change any prior election with
respect to the timing of payment of benefits (Section 8.1). 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.
8.4 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
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<PAGE> 10
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 1/10 unit.
ARTICLE IX
VALUATION DATE
9.1 Valuation. As of each Valuation Date, the Deferred Compensation
Account of each Participant shall be valued by the Committee. The current value,
and the change in value from the prior valuation (whether positive or negative),
shall be communicated in writing to each Participant within 45 days after each
Valuation Date.
ARTICLE X
ALIENATION
10.1 Anticipation, alienation, sale, transfer, assignment, pledge,
levy, garnishment or other encumbrance of any payments from or benefits held
under the Plan shall not be permitted or recognized, and to the extent permitted
by law, no such payments or benefits shall be subject to legal process or
attachment for the payment of any claim of any person entitled to receive the
same.
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.
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<PAGE> 11
(ii) The Company'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 Company or Committee has been provided
with satisfactory evidence that the Company and the Committee are
released from any further claim with respect to such amounts, in
any case in which (a) the Company 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 Company 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 Company or Committee from the obligation
to comply with the judgment, decree, or order.
(iii) The Company and/or 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 Company
or Committee to incur such expense, the amount of the expense may
be charged against the Participant's Deferred Compensation
Account and thereby reduce the Company's obligation to pay
benefits to the Participant. In the course of any proceeding
relating to divorce, separation, or child support, the Company
and/or 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 The Company may withhold and deduct from any amounts due to a
Participant any legally required amounts necessary to satisfy Federal, state or
local withholding taxes which may be due in connection with payment of benefits
under the Plan.
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
Company's 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.
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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 Company's Board, may at any time terminate the Plan.
15.2 Board May Amend. Subject to all other provisions of this Plan, the
Company's Board may at any time modify or amend any or all of the provisions of
the Plan.
15.3 Fiduciary Guidelines. Notwithstanding Sections 6.8, 15.1 and 15.2,
the Company's 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 Company's 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 Company's Board terminates the Plan,
the Committee shall give written notice to each Participant that his Deferred
Compensation Account balance will be distributed at the time 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 Company's
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.
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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 Company's 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
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 Company. 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 Company 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 Company 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,
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<PAGE> 14
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 Company's 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 are disposed of pursuant to a partial or complete
liquidation, a spin-off, a sale of assets or otherwise; 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 Company's Board on the date
this Plan is adopted by such Board and has not terminated membership on
such Board, or (2) is recommended to Company shareholders for election
or appointed to the Company's Board of Directors by at least
three-quarters of the Continuing Directors.
ii) "Person" shall mean a person as defined in Section 3(a)(9)
of the 1934 Act, "beneficial ownership" shall be determined in
accordance with Rule 13d-3 promulgated under the 1934 Act or any
successor regulation, the term "group" shall mean a group as described
in Rule 13d-5 promulgated under the 1934 Act or any successor
regulation, and the formation of a group hereunder shall have the
effect described in paragraph (b) of said Rule 13d-5 or any successor
regulation. Anything hereinabove to the contrary notwithstanding,
however: (a) relationships by blood, adoption or marriage between or
among two or more persons shall not be deemed to constitute any of such
persons a member of a group with any other such persons; (b) action
taken or agreed to be taken by any person acting in his official
capacity as an officer or director of the Company shall not be deemed
to constitute such person a member of a group with any other person,
and (c) formation of a group shall not constitute an acquisition by the
group (or any member thereof) of beneficial ownership of any shares of
the Company's Class B ("voting") common stock beneficially owned by any
member of such group and acquired by such group member in an Excluded
Acquisition.
iii) "Excluded Acquisition" means any acquisition of shares of
voting common stock from the Company (whether or not for consideration)
or from any person
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<PAGE> 15
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 Company's 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 Company.
17.7 Claims. Claims for benefits under the Plan shall be made in
writing to the Committee. The Participant (or Beneficiary) may furnish the
Committee with any written material he believes necessary to perfect his claim.
17.8 Claims Review. A person whose claim for benefits under the Plan
has been denied, or his duly authorized representative, may request a review
upon written application to the Committee, may review pertinent documents, and
may submit issues and comments in writing. The claimant's written request for
review must be submitted to the Committee within 60 days after receipt by the
claimant of written notification of the denial of a claim. A decision by the
Committee shall be made promptly, and not later than 60 days after the
Committee's receipt of a request for review, unless special circumstances
require an extension of time for proceeding, in which case a decision shall be
rendered as soon as possible, but not later than 120 days after receipt of the
request for review. The decision on review shall be in writing, shall include
reasons for the decision, may include specific reference to the pertinent
provision of the
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<PAGE> 16
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 Company's Board or Committee shall be limited to a
determination of whether it was arbitrary and capricious or constituted an abuse
of discretion, within the guidelines of Firestone Tire & Rubber Co. v. Bruch,
489 U.S. 101 (1989). In the event the Participant or his/her beneficiary shall
retain legal counsel and/or incur other costs and expenses in connection with
enforcement of any of the Participant's rights under the Plan, the Participant
or beneficiary shall not be entitled to recover from the Company any attorneys
fees, costs or expenses in connection with the enforcement of such rights
(including enforcement of any arbitration award in court) regardless of the
final outcome; except that the arbitrators in their discretion may award
reasonable attorneys fees and reasonable costs to the Participant in an
arbitration initiated by the Participant to enforce the Participant's rights
under the Plan, provided the Participant is the prevailing party in such
arbitration.
17.9(a) Any arbitration shall be conducted as follows:
(i) The arbitrators shall follow the Commercial arbitration
Rules of the American Arbitration Association, except as otherwise
provided herein. The arbitrators shall substantially comply with the
rules of evidence; shall grant essential but limited discovery; shall
provide for the exchange of witness lists and exhibit copies; and shall
conduct a pretrial and consider dispositive motions. Each party shall
have the right to request the arbitrators to make findings of specific
factual issues.
(ii) The arbitrators shall complete their proceedings and
render their decision within 40 days after submission of the dispute to
them, unless both parties agree to an extension. Each party shall
cooperate with the arbitrators to comply with procedural time
requirements and the failure of either to do so shall entitle the
arbitrators to extend the arbitration proceedings accordingly and to
impose sanctions on the party responsible for the delay, payable to the
other party. In the event the arbitrators do not fulfill their
responsibilities on a timely basis, either party shall have the right
to require a replacement and the appointment of new arbitrators.
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<PAGE> 17
(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 services as a Director for the
Company, 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
Dated November 25, 1998 By _______________________
Its Vice President and
Chief Financial Officer
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<PAGE> 1
EXHIBIT 10(L)
TECUMSEH PRODUCTS COMPANY
VOLUNTARY DEFERRED COMPENSATION PLAN
(adopted November 25, 1998)
<PAGE> 2
TABLE OF CONTENTS
PAGE
TECUMSEH PRODUCTS COMPANY
VOLUNTARY DEFERRED COMPENSATION PLAN
<TABLE>
<CAPTION>
INDEX
PAGE
----
<S> <C> <C>
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......................................................7
ARTICLE VIII PAYMENT OF DEFERRED COMPENSATION....................................................8
ARTICLE IX VALUATION DATE.....................................................................11
ARTICLE X ALIENATION.........................................................................11
ARTICLE XI DOMESTIC RELATIONS ORDERS..........................................................11
ARTICLE XII TAX WITHHOLDING....................................................................12
ARTICLE XIII PARTICIPANT CONSENT................................................................13
ARTICLE XIV SEVERABILITY.......................................................................13
ARTICLE XV AMENDMENT AND TERMINATION..........................................................13
ARTICLE XVI CHANGE OF CONTROL..................................................................14
ARTICLE XVII PLAN ADMINISTRATION................................................................16
ARTICLE XVIII LIMITATIONS OF ACTION..............................................................18
</TABLE>
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<PAGE> 3
TECUMSEH PRODUCTS COMPANY
VOLUNTARY DEFERRED COMPENSATION PLAN
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.
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.
<PAGE> 4
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.
2.19 "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
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<PAGE> 5
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.
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.
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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 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 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
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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.
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.
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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.
6.10 Election to Convert MIP 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 at 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
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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 365 calendar days 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 365-day restriction will not apply in the situation
where --
- - a Participant has made an election with respect to MIP Phantom Shares
at least 365 days 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 365
days 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 365 days 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.
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
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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.
ARTICLE VIII
PAYMENT OF DEFERRED COMPENSATION
8.1 Commencement of Benefits. Subject to Section 8.1(a), when, and at
the same time, a Participant elects to defer Compensation for any particular
Plan Year, he shall concurrently elect, on the Deferred Compensation Election
Form, when the portion of his Deferred Compensation Account balance attributable
to such current Plan Year deferral shall be paid, which shall be as soon as
practicable, and not more than 30 days after the first business day of the
calendar month which follows:
(i) the date such Participant attains a selected age (maximum of
age 70); or
(ii) retirement when eligible for commencement of early, normal or
late retirement benefits under a qualified defined benefit
plan sponsored by the Employer
whichever the Participant shall elect on his Deferred Compensation Election
Form. The date elected is hereinafter referred to as the "Benefit Payment Date".
The Valuation Date to be used for such payment shall be the last business day of
the calendar month that precedes the Benefit Payment Date.
8.1(a) 365-Day Minimum Deferral Period. Notwithstanding the time for
the commencement of benefits pursuant to Section 8.1, commencement of benefits
will not occur prior to the expiration of a 365-day period beginning the day
after the date on which an election to defer Compensation became effective as
provided in the Plan, unless the Committee determines to reduce or eliminate
such time period.
8.2 Payment Method Election. At the time the Deferred Compensation
Election Form is filed pursuant to ARTICLE IV, Participants must also elect the
method of receiving payment of their Deferred Compensation Account balance upon
the first business day of the Plan Year
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following the expiration of the Deferral Period so elected. Each Participant
shall elect to receive payment of his Deferred Compensation Account either
in:
(i) one lump-sum on the Benefit Commencement Date;
(ii) annual installments, with accrued earnings or losses,
determined in accordance with the Plan provisions
governing the Investment Option(s) selected, over a
specified period (elected in accordance with Section
8.3), beginning on the Benefit Commencement Date; or
(iii) a lump-sum/annual installment combination where a
lump sum equal to 25%, 50% or 75% of the
Participant's Deferred Compensation Account as
specified by the Participant in the Deferred
Compensation Election Form is paid to the Participant
on his Benefit Commencement Date and where the
remaining Deferred Compensation Account balance is
paid in annual installments over a specified period
(elected in accordance with Section 8.3), beginning
on the first anniversary of the Benefit Commencement
Date.
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
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Committee shall establish sub-accounts to keep track of the portions of such
Account that are subject to those different methods or periods.
8.3(a) Automatic Lump Sum Payment.
(i) Notwithstanding the Participant's Investment Option(s) or the
Payment Method and Payment Period Elections previously made by
him pursuant to Sections 8.2 and 8.3, in the case of a
Participant's separation from Employer service for any reason
other than death or retirement when eligible for commencement
of pension benefits from a qualified pension or retirement
plan sponsored by the Employer, his Account balance under this
Plan automatically will be transferred to the Corporate Bond
Investment Option. Such balance with interest shall be paid to
him in a lump sum, as soon as administratively feasible
thereafter, unless the Committee directs a different payment
method and/or payment period.
(ii) Notwithstanding the Participant's Investment Option(s) or the
Payment Method and Payment Period Elections previously made by
him pursuant to Sections 8.2 and 8.3, in the case of a
Participant's death, whether before or after his Benefit
Commencement Date, his Account balance under this Plan
automatically will be 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.
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ARTICLE IX
VALUATION DATE
9.1 Valuation. As of each Valuation Date, the Deferred Compensation
Account of each Participant shall be valued by the Committee. The current value,
and the change in value from the prior valuation (whether positive or negative),
shall be communicated in writing to each Participant within 45 days after each
Valuation Date.
ARTICLE X
ALIENATION
10.1 Anticipation, alienation, sale, transfer, assignment, pledge,
levy, garnishment or other encumbrance of any payments from or benefits held
under the Plan shall not be permitted or recognized, and to the extent permitted
by law, no such payments or benefits shall be subject to legal process or
attachment for the payment of any claim of any person entitled to receive the
same.
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
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proceeding relating to such transfer, (b) the Participant has
been notified of the pendency of such proceeding in the manner
prescribed by law of the jurisdiction in which the proceeding
is pending for service of process in such action or by mail
from the Employer or Committee to the Participant's last known
mailing address, and (c) the Participant fails to obtain an
order of the court in the proceeding relieving the Employer or
Committee from the obligation to comply with the judgment,
decree, or order.
(iii) The Employer and Committee shall not be obligated to defend
against or set aside any judgment, decree, or order described
in subparagraph (i), or any legal order relating to the
garnishment of a Participant's benefits, unless the full
expense of such legal action is borne by the Participant. In
the event that the Participant's action (or inaction)
nonetheless causes the Employer or Committee to incur such
expense, the amount of the expense may be charged against the
Participant's Deferred Compensation Account and thereby reduce
the Employer's obligation to pay benefits to the Participant.
In the course of any proceeding relating to divorce,
separation, or child support, the Employer and Committee shall
be authorized to disclose information relating to the
Participant's Account to the 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.
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ARTICLE XIII
PARTICIPANT CONSENT
13.1 By electing to defer Compensation pursuant to this Plan,
Participants shall be deemed conclusively to have accepted and consented to all
terms of the Plan and all actions or decisions made by the Company, the Board or
the Committee with regard to the Plan. Such terms and consent shall also apply
to, and be binding upon, the Beneficiaries, distributees and personal
representatives and other successors in interest of each Participant.
ARTICLE XIV
SEVERABILITY
14.1 In the event any provision of this Plan would violate applicable
law or serve to invalidate the Plan, that provision shall be deemed to be null
and void, and the Plan shall be construed as if it did not contain the provision
in question.
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 May Amend. Subject to all other provisions of this Plan, the
Board may at any time modify or amend any or all of the provisions of the Plan.
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;
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provided that each Participant's Phantom Share sub-account shall be valued based
upon Phantom Share units being valued by reference to the greater of (a) the
Market Price of Tecumseh Shares on the effective date of such sale, merger or
consolidation, or (b) the value per share, as of such date, of consideration
received by the actual holders of Tecumseh Shares in connection with the sale,
merger or consolidation in question.
ARTICLE XVI
CHANGE OF CONTROL
16.1 Funding of Rabbi Trust. Notwithstanding ARTICLE VII, upon a
"Change of Control" as defined in Section 16.2, the Board is required to cause
the immediate contribution of funds to a newly-created Rabbi Trust (or existing
Rabbi Trust if previously established), i.e., a "Rabbi Trust" established in
accordance with Rev. Proc. 92-64 (or any successor), for the benefit of each
Plan Participant, as beneficiary. If the Committee determines that a Rabbi Trust
is not the appropriate funding mechanism, any other funding mechanism approved
by the Internal Revenue Service as a means to avoid Plan Participants being in
constructive receipt of income 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.
-14-
<PAGE> 17
ii) The first purchase, after December 31, 1998, under a
tender offer or exchange offer for 25% or more of the Company's Class A
Common Stock or Class B Common Stock then outstanding, other than an
offer by:
A) the trustee of any Company-sponsored employee benefit plan,
B) the Company or any of its subsidiaries,
C) Kenneth G. Herrick, his descendants, or trusts for the
benefit of such individuals, or
D) trusts or foundations established by Kenneth G. Herrick or
by any of the descendants or trusts mentioned in (C), above.
iii) The first day on which less than a majority of the total
membership of the Board shall be Continuing Directors;
iv) The effective date of a transaction (or a group of related
transactions) in which more than 50% in fair market value of the assets
of the Company, or of the 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
-15-
<PAGE> 18
said Rule 13d-5 or any successor regulation. Anything hereinabove to
the contrary notwithstanding, however: (a) relationships by blood,
adoption or marriage between or among two or more persons shall not be
deemed to constitute any of such persons a member of a group with any
other such persons; (b) action taken or agreed to be taken by any
person acting in his official capacity as an officer or director of the
Company shall not be deemed to constitute such person a member of a
group with any other person, and (c) formation of a group shall not
constitute an acquisition by the group (or any member thereof) of
beneficial ownership of any shares of the Company's Class B ("voting")
common stock beneficially owned by any member of such group and
acquired by such group member in an Excluded Acquisition.
iii) "Excluded Acquisition" means any acquisition of shares of
voting common stock from the Company (whether or not for consideration)
or from any person by operation of law (including but not limited to
the laws of descent and distribution), by will, by gift or by
foreclosure of a security interest given to secure a bona fide loan, or
any acquisition consummated prior to December 31, 1998.
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.
-16-
<PAGE> 19
17.7 Claims. Claims for benefits under the Plan shall be made in
writing to the Committee. The Participant (or Beneficiary) may furnish the
Committee with any written material he believes necessary to perfect his claim.
17.8 Claims Review. A person whose claim for benefits under the Plan
has been denied, or his duly authorized representative, may request a review
upon written application to the Committee, may review pertinent documents, and
may submit issues and comments in writing. The claimant's written request for
review must be submitted to the Committee within 60 days after receipt by the
claimant of written notification of the denial of a claim. A decision by the
Committee shall be made promptly, and not later than 60 days after the
Committee's receipt of a request for review, unless special circumstances
require an extension of time for proceeding, in which case a decision shall be
rendered as soon as possible, but not later than 120 days after receipt of the
request for review. The decision on review shall be in writing, shall include
reasons for the decision, may include specific reference to the pertinent
provision of the Plan on which the decision is based, and shall be written in a
manner calculated to be understood by the claimant.
17.9 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
-17-
<PAGE> 20
discovery; shall provide for the exchange of witness lists and exhibit
copies; and shall conduct a pretrial and consider dispositive motions.
Each party shall have the right to request the arbitrators to make
findings of specific factual issues.
(ii) The arbitrators shall complete their proceedings and
render their decision within 40 days after submission of the dispute to
them, unless both parties agree to an extension. Each party shall
cooperate with the arbitrators to comply with procedural time
requirements and the failure of either to do so shall entitle the
arbitrators to extend the arbitration proceedings accordingly and to
impose sanctions on the party responsible for the delay, payable to the
other party. In the event the arbitrators do not fulfill their
responsibilities on a timely basis, either party shall have the right
to require a replacement and the appointment of new arbitrators.
(iii) The decision of the arbitrator shall be final and
binding upon the parties and accordingly a judgment by any Circuit
Court of the State of Michigan or any other court of competent
jurisdiction may be entered in accordance therewith.
(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.
-18-
<PAGE> 21
WITNESS execution of this plan document on behalf of the Company by its duly
authorized officer.
TECUMSEH PRODUCTS COMPANY
Dated: November 25, 1998 By
----------------------------
Its Vice President and
Chief Financial Officer
-19-
<PAGE> 1
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES EXHIBIT 13
- --------------------------------------------------------------------
FINANCIAL SUMMARY
(Dollars in millions except per share data)
<TABLE>
<CAPTION>
1998 (a) 1997
--------------- --------------
<S> <C> <C>
Net sales $1,750.2 $1,728.3
- --------------------------------------------------------------------------------------------
Net income 74.2 100.5
% of net sales 4.2% 5.8%
- --------------------------------------------------------------------------------------------
Capital expenditures 64.4 90.6
- --------------------------------------------------------------------------------------------
Total assets 1,556.2 1,537.4
- --------------------------------------------------------------------------------------------
Average number of shares
outstanding (in thousands) 21,366 21,879
- --------------------------------------------------------------------------------------------
Per share of common stock:
Basic and diluted earnings $3.47 $4.59
Cash dividends declared 1.20 1.20
Book value 47.69 45.80
- --------------------------------------------------------------------------------------------
Average number of employees 17,500 17,400
- --------------------------------------------------------------------------------------------
</TABLE>
(a) The 1998 results include a $45 million nonrecurring charge for asset
impairment. This charge was equivalent to $28.8 million or $1.35 per share after
taxes.
<PAGE> 2
Tecumseh Products Company and Subsidiaries
- --------------------------------------------------------------------------------
BUSINESS SEGMENT DATA
(Dollars In Millions)
INDUSTRY SEGMENT INFORMATION
<TABLE>
<CAPTION>
Engine &
Compressor Power Train Pump Non-recurring Total
1998 Products Products Products Other (1) Charges (2) Consolidated
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales - external customers $ 1,048.1 $ 592.2 $ 109.9 $ -- $ -- $ 1,750.2
Operating income 82.2 57.2 11.5 (9.3) (45.0) 96.6
Net interest income (expense) 10.8 (0.3) 1.9 8.5 -- 20.9
Income before taxes 93.0 56.9 13.4 (0.8) (45.0) 117.5
Assets 800.3 284.6 99.8 371.5 -- 1,556.2
Depreciation & amortization 56.0 16.8 1.2 0.6 -- 74.6
Non-cash asset impairment (45.0) -- -- -- -- (45.0)
Capital expenditures 45.8 16.1 1.5 1.0 -- 64.4
- ------------------------------------------------------------------------------------------------------------------------------------
1997
Sales - external customers $ 1,050.1 $ 576.8 $ 101.4 $ -- $ -- $ 1,728.3
Operating income 82.7 61.9 11.1 (10.5) -- 145.2
Net interest income (expense) 6.3 (0.4) 2.0 7.7 -- 15.6
Income before taxes 89.0 61.5 13.1 (2.8) -- 160.8
Assets 847.4 295.1 92.9 302.0 -- 1,537.4
Depreciation & amortization 54.5 15.3 1.3 -- -- 71.1
Capital expenditures 68.0 21.0 1.6 -- -- 90.6
- ------------------------------------------------------------------------------------------------------------------------------------
1996
Sales - external customers $ 1,126.5 $ 564.1 $ 94.0 $ -- $ -- $ 1,784.6
Operating income 102.7 64.5 11.5 (10.4) (5.1) 163.2
Net interest income (expense) 5.2 (0.6) 2.1 7.1 -- 13.8
Income before taxes 107.9 63.9 13.6 (3.3) (5.1) 177.0
Assets 830.5 298.2 88.3 255.6 -- 1,472.6
Depreciation & amortization 49.3 14.2 1.1 -- -- 64.6
Capital expenditures 77.9 35.3 2.0 -- -- 115.2
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The "Other" column includes corporate related items, consolidating
reclassifications and eliminations, and income and expense items not allocated
to reportable segments.
(2) The 1998 results include a $45 million nonrecurring charge for asset
impairment. This charge was equivalent to $28.8 million or $1.35 per share after
taxes. The 1996 results include a $5.1 million nonrecurring charge for
environmental and litigation costs. This charge was equivalent to $3.3 million
or $.15 per share after taxes
Geographic Segment Information
<TABLE>
<CAPTION>
------------------------------------------------ -----------------------------------------------
External Customer Sales Net Long-Lived Assets
1998 1997 1996 1998 1997 1996
------------------------------------------------ -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States $ 948.5 $ 935.0 $ 975.5 $336.3 $398.2 $388.8
Brazil 121.4 140.7 164.1 82.5 94.4 92.3
Canada 56.8 51.6 54.7 0.7 0.7 1.0
France 51.3 42.5 46.3 40.2 37.7 33.5
India 43.6 11.9 0.7 38.1 27.8 --
Italy 78.5 51.2 50.3 11.1 10.9 13.5
All Other 450.1 495.4 493.0 -- -- --
------------------------------------------------ -----------------------------------------------
Totals $1,750.2 $1,728.3 $1,784.6 $508.9 $569.7 $529.1
================================================ ===============================================
</TABLE>
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 over 100 countries around the
world.
Products are grouped into three principal industry segments: Compressor
Products, Engine and Power Train Products, and Pump Products.
Sales for 1998 were $1,750.2 million, a 1% increase over 1997. Net income
for 1998 amounted to $74.2 million or $3.47 per share. The 1998 results include
a nonrecurring charge for asset impairment ($28.8 million or $1.35 per share).
Excluding the nonrecurring charge, 1998 earnings were $103 million or $4.82 per
share, as compared with 1997 net income of $100.5 million or $4.59 per share.
The principal reason for the improvement in earnings, exclusive of the
nonrecurring charge, was higher interest income, which grew from $21.9 million
in 1997 to $27.8 million in 1998. This growth was the result of high interest
rates earned on the Company's cash balances in Brazil.
NONRECURRING CHARGE
During 1998, the Company made substantial progress in the development of
its scroll compressor product line incorporating several design modifications of
earlier scroll concepts. The new product has been tested favorably in the
Company's laboratories and will soon be offered for sale in limited quantities
and limited configurations. However, based on expected manufacturing costs and
market conditions, and due to an anticipated lengthy introduction period
involving limited production, it is estimated that future cash flows from this
product line will not be sufficient to cover the carrying amount of the
Company's buildings, tooling, machinery and equipment currently dedicated for
scroll production. Accordingly, under applicable accounting standards, the
Company has charged fourth quarter 1998 earnings with a provision of $45 million
($28.8 million or $1.35 per share after tax) to reduce the carrying amount of
those assets to estimated fair market value.
COMPRESSOR PRODUCTS
1998 VS. 1997
The Company's worldwide Compressor Products sales were $1,048.1 million in
1998 as compared to $1,050.1 million in 1997. Sales increased in North America
and Europe reflecting strong economies and good demand for the Company's
commercial refrigeration products. Sales growth of the Company's new operations
in India offset reduced exports to Southeast Asia caused by economic
difficulties in that area of the world. Sales in Brazil declined as the result
of deepening economic problems.
Compressor Products margins in 1998 were 7.8% compared to margins of 7.9%
in 1997. A downward trend in selling prices continued, but was offset by lower
commodity costs and aggressive cost savings programs.
1997 VS. 1996
Worldwide Compressor Products sales were $1,050.1 million in 1997, down 7%
from $1,126.5 million in 1996. In North American markets, improved sales of the
Brazilian-built TP compressor for household refrigeration were more than offset
by a weather-related decline in sales of compressors for room air conditioning
<PAGE> 4
applications, and to a lesser extent weaker sales of unitary air conditioning
compressors. U.S. export sales were flat with the prior year. Sales within
Brazil declined as monetary policy was tightened in an attempt to defend the
Brazilian currency.
Tecumseh Europe improved results in 1997. A weaker French Franc coupled
with extensive cost reduction efforts helped increase our competitive position.
French Franc sales increased contributing to higher margins.
Compressor Products operating margins for 1997 declined to 7.9% as compared
to 9.1% in 1996, largely because of lower Brazilian margins (9.9% in 1997 versus
14.8% in 1996).
ENGINE AND POWER TRAIN PRODUCTS
1998 VS. 1997
Engine and Power Train Products sales for 1998 grew 3% to $592.2 million
compared to 1997 sales of $576.8 million. Unit sales of engines for snow thrower
applications fell nearly 45% reflecting light snowfall in key urban areas of the
country. However, strong demand for walk behind lawn mower engines and engines
for utility applications resulted in total unit sales of engines increasing 14%
for the year.
1998 operating income of the Engine and Power Train segment was $57.2
million, down from $61.9 million earned in 1997. The positive impact of higher
overall sales volume was more than offset by the decline in relatively more
profitable snow thrower engines.
1997 VS. 1996
Engine and Power Train Products sales were $576.8 million, up 2% compared
to 1996. A weather related decline in snow thrower engines was offset by
improved sales of engines for lawn and garden and utility applications.
Operating margins declined from 11.4% in 1996 to 10.7% in 1997 because of
less favorable product mix and start-up costs at the new engine production
facility in Georgia.
PUMP PRODUCTS
Pump Products sales grew 8% in 1998 to a total of $109.9 million after
having enjoyed the same rate of growth in 1997. Increased penetration in water
gardening markets has been largely responsible for this growth. Pump products
margins were 10.5% in 1998 compared to 10.9% in 1997.
FINANCIAL POSITION
The Company continued to maintain a strong and liquid financial position.
During 1998, working capital increased by $51.1 million to $605.9 million. The
ratio of current assets to current liabilities increased to 3.2. Capital
expenditures for 1998 amounted to $64.4 million and included construction of new
facilities in India and additional capacity in Brazil. Capital expenditures for
1999 are expected to be at approximately the same level as in 1998.
During 1997 and 1998 the Company repurchased 1 million shares of its Class
A common stock in open market transactions for the aggregate amount of $50.9
million. The repurchase of up to an additional 1 million shares of Class A
common stock has been authorized through December 31, 1999.
Working capital requirements and planned capital investment and stock
repurchase costs for 1999 are expected to be financed primarily through
<PAGE> 5
internally available funds. The Company may also utilize long-term financing
arrangements in connection with state investment incentives, and may from time
to time utilize short-term borrowings to hedge currency risk and to finance
foreign working capital requirements. The Company maintains a $100 million
revolving credit facility that is available for general corporate purposes.
DEVALUATION OF BRAZILIAN CURRENCY
During early 1999, the Brazilian currency, the Real, was allowed by the
Brazilian government to freely rise and fall according to market conditions.
This resulted in a rapid and substantial reduction in market value to the Real,
which had been trading at approximately .83 U.S. dollars (83 cents) for each
Real at December 31, 1998.
At December 31, 1998, the carrying amount of the Company's investment in
Tecumseh do Brasil was approximately $145 million. Of that amount, approximately
$29 million were denominated in U.S. dollars or otherwise hedged. Because of the
recent devaluation, it is expected that significant translation adjustments will
be recorded in 1999. Under applicable accounting standards, translation
adjustments relating to the Company's investment in Tecumseh do Brasil are
reflected in stockholders' equity in the periods in which the adjustments arise.
Gains and losses on foreign currency transactions and balances denominated in
foreign currencies are recognized in current income.
It is not possible to accurately predict the ultimate effect that the
recent devaluation will have on the Brazilian economy and on the Company's sales
and earnings.
ENVIRONMENTAL
The U.S. Environmental Protection Agency (EPA) is in the process of final
rule development of Phase II emission standards for utility engines which
include the two- and four-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 will be
finalized in early 1999 for the four-cycle line and in mid-2000 for the
two-cycle line. Phase-in of the rules will take place between the 2001 and 2006
model years.
The state of California will begin to enforce the CARB Tier II Emission
Standards effective January 1, 2000, at which time all rotary mower and
lightweight vertical shaft utility engines will require overhead valve
technology in the state of California.
It is not currently possible to determine the related costs of compliance,
nor the impact on the competitive position of the Company.
The Company is subject to various laws relating to the protection of the
environment and is in various stages of investigation or remediation for sites
where contamination has been alleged. (See Note 8 to the financial statements.)
Liabilities relating to probable remediation activities are recorded when the
costs of such activities can be reasonably estimated based on the facts and
circumstances currently known. Difficulties exist estimating the future timing
and ultimate costs to be incurred due to uncertainties regarding the status of
laws, regulations, technology and information available. At December 31, 1998
and 1997 the Company had accrued $43.3 million and $38.4 million, respectively
for environmental remediation.
<PAGE> 6
YEAR 2000 READINESS DISCLOSURE
The Company has reviewed its manufacturing, financial, and administrative
information systems and has determined that it needs to replace or modify
several of its software systems to make them Year 2000 compliant. In addition,
the Company believes that a limited number of non-information technology
systems, such as manufacturing machinery, equipment, and test equipment with
date-sensitive software and embedded microprocessors, may be affected. The
Company has developed a plan for the timely completion of modifications related
to the Year 2000. Principal phases of the plan are: inventorying affected
technology and assessing the impact of the Year 2000 issue; developing solution
plans; modification or replacement; testing; and developing contingency plans.
Critical systems in North America are substantially Year 2000 compliant. The
Company's objective is to have all its critical systems Year 2000 compliant and
to have developed contingency plans by mid 1999. This objective allows time for
further testing and verification of these systems as necessary and the
conversion of less critical systems. The Company is also attempting to gain
assurances from its significant suppliers and customers that they are addressing
this issue to ensure there will be no major interruptions.
The costs of making the required systems changes are estimated to be
approximately $9 million. These costs are generally not incremental to existing
information technology budgets but rather relate to internal resources that were
re-assigned and implementation time tables that were accelerated. As of December
31, 1998 the Company had spent approximately two-thirds of the total projected
cost to be compliant.
If the modifications of the Company's systems, and those of its customers
and suppliers, are not successfully completed on a timely basis, the Year 2000
issue could have a materially adverse impact on the operations of the Company.
It is the Company's belief that the greatest potential risk from the Year 2000
could be its possible inability to meet commitment dates on delivery of product.
Since it is not possible to anticipate all possible future outcomes, especially
when third parties are involved, the amount of any potential liability or lost
revenue cannot be reasonably estimated at this time.
The Company is developing contingency plans for critical applications.
These contingency plans involve, among other actions, manual work-arounds,
increasing inventories, and adjusting staffing strategies.
EURO CONVERSION
On January 1, 1999, certain member nations of the European Economic and
Monetary Union ("EMU") adopted a common currency, the Euro. For a three-year
transition period, both the Euro and individual participants' currencies will
remain in circulation. After January 1, 2002, the Euro will be the sole legal
tender for EMU countries. The adoption of the Euro will affect some of the
Company's financial systems and business applications as the commerce of these
nations will be transacted both in the Euro and the existing national currency.
The Company is currently addressing Euro-related issues and their impact on
information systems, currency exchange rate risk, taxation, contracts,
competition, and pricing. Action plans currently being implemented are expected
to result in compliance with all laws and regulations; however, there can be no
certainty that such plans will be successfully implemented or that external
factors will not have an adverse effect on the Company's operations. Any costs
associated with the adoption of the Euro will be expensed as incurred. The
Company does not expect these costs to be material to its results of operations,
financial condition, or liquidity.
<PAGE> 7
UNCERTAINTIES RELATING TO FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
securities laws. In addition, forward-looking statements may be made orally in
the future by or on behalf of the Company.
Forward-looking statements involve risks and uncertainties, including, but
not limited to, i) changes in business conditions and the economy in general in
both foreign and domestic markets; ii) weather conditions affecting demand for
air conditioners, lawn and garden products and snow throwers; iii) financial
market changes, including interest rates and foreign exchange rates; iv)
economic trend factors such as housing starts; v) governmental regulations; vi)
availability of materials; vii) actions of competitors; viii) the ultimate cost
of environmental remediation; ix) the degree to which the Company and its
principal customers and suppliers are successful in remediating Year 2000
problems; x) the extent of any business disruption resulting from the conversion
to the Euro; and xi) the Company's ability to profitably develop, manufacture
and sell both new and existing products.
<PAGE> 8
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in millions except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
1998 (a) 1997 1996 (b)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $1,750.2 $1,728.3 $1,784.6
Cost of sales and operating expenses 1,492.8 1,478.7 1,517.8
Selling and administrative expenses 115.8 104.4 98.5
Nonrecurring charges 45.0 -- 5.1
- ----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 96.6 145.2 163.2
Interest expense (6.9) (6.3) (6.4)
Interest income and other, net 27.8 21.9 20.2
- ----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME 117.5 160.8 177.0
Taxes on income 43.3 60.3 64.4
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $74.2 $100.5 $112.6
- ----------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED EARNINGS PER SHARE $3.47 $4.59 $5.15
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The 1998 results include a $45 million nonrecurring charge for asset
impairment. This charge was equivalent to $1.35 per share after taxes.
(b) The 1996 results include a $5.1 million nonrecurring charge for
environmental and litigation costs. This charge was equivalent to $.15 per share
after taxes.
The accompanying notes are an integral part of these statements.
<PAGE> 9
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in millions)
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------ ACCUMULATED
CAPITAL OTHER TOTAL
CLASS A CLASS B IN EXCESS RETAINED COMPREHENSIVE STOCKHOLDERS'
$1 PAR VALUE $1 PAR VALUE OF PAR VALUE EARNINGS INCOME/(LOSS) EQUITY
------------ ------------ ------------ -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $16.4 $5.5 $29.9 $808.0 $17.3 $877.1
COMPREHENSIVE INCOME:
Net income 112.6 112.6
Translation adjustments (5.4) (5.4)
TOTAL COMPREHENSIVE INCOME 107.2
Cash dividends (36.8) (36.8)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996 16.4 5.5 29.9 883.8 11.9 947.5
COMPREHENSIVE INCOME:
Net income 100.5 100.5
Translation adjustments (19.6) (19.6)
TOTAL COMPREHENSIVE INCOME 80.9
Cash dividends (26.3) (26.3)
Stock repurchase (1.9) (1.9)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997 16.4 5.5 28.0 958.0 (7.7) 1,000.2
COMPREHENSIVE INCOME:
Net income 74.2 74.2
Translation adjustments (4.1) (4.1)
TOTAL COMPREHENSIVE INCOME 70.1
Cash dividends (25.6) (25.6)
Stock repurchase (1.0) (28.0) (20.0) (49.0)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 $15.4 $5.5 $0.0 $986.6 ($11.8) $995.7
=========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 10
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1998 1997
----------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 277.7 $ 304.1
Accounts receivable, trade, less allowance for doubtful
accounts of $6.1 million in 1998 and $5.7 million in 1997 256.7 207.7
Inventories 275.7 259.4
Deferred income taxes 42.2 38.2
Other current assets 25.5 8.7
---------- ----------
TOTAL CURRENT ASSETS 877.8 818.1
---------- ----------
PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land and land improvements 20.0 18.3
Buildings 177.3 174.8
Machinery and equipment 876.1 845.8
---------- ----------
1,073.4 1,038.9
Less, accumulated depreciation 564.5 469.2
---------- ----------
PROPERTY, PLANT AND EQUIPMENT, net 508.9 569.7
---------- ----------
EXCESS OF COST OVER ACQUIRED NET ASSETS, less accumulated
amortization of $20.0 million in 1998 and $18.2 million in 1997 57.0 56.7
DEFERRED INCOME TAXES 24.6 10.8
PREPAID PENSION EXPENSE 76.5 58.4
OTHER ASSETS 11.4 23.7
---------- ----------
TOTAL ASSETS $ 1,556.2 $ 1,537.4
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 121.5 $ 110.6
Income taxes payable 9.7 9.3
Short-term borrowings 10.6 29.0
Accrued liabilities:
Employee compensation 36.4 30.9
Product warranty and self-insured risks 34.6 32.9
Other 59.1 50.6
---------- ----------
TOTAL CURRENT LIABILITIES 271.9 263.3
LONG-TERM DEBT 17.2 17.5
NON-PENSION POSTRETIREMENT BENEFITS 187.6 182.7
PRODUCT WARRANTY AND SELF-INSURED RISKS 32.5 28.9
ACCRUAL FOR ENVIRONMENTAL MATTERS 36.7 31.6
PENSION LIABILITIES 14.6 13.2
---------- ----------
TOTAL LIABILITIES 560.5 537.2
---------- ----------
STOCKHOLDERS' EQUITY:
Class A common stock, $1 par value; authorized 75,000,000 shares; issued
15,410,438 and 16,370,438 shares in 1998 and 1997, respectively 15.4 16.4
Class B common stock, $1 par value; authorized 25,000,000
shares; issued 5,470,146 shares in 1998 and 1997 5.5 5.5
Capital in excess of par value -- 28.0
Retained earnings 986.6 958.0
Accumulated Other Comprehensive Income(Loss) (11.8) (7.7)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 995.7 1,000.2
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,556.2 $ 1,537.4
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 11
- --------------------------------------------------------------------------------
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 74.2 $ 100.5 $ 112.6
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 74.6 71.1 64.6
Impaired asset write down 45.0 -- --
Accounts receivable (50.0) (6.3) 17.5
Inventories (15.1) 11.9 (16.3)
Payables and accrued expenses 23.4 8.4 (15.0)
Prepaid pension expense (18.1) (11.8) (9.1)
Other (3.4) 12.9 11.8
-------- -------- --------
Cash Provided By Operations 130.6 186.7 166.1
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (64.4) (90.6) (115.2)
Business acquisition, net of cash acquired -- (46.9) --
-------- -------- --------
Cash Used In Investing Activities (64.4) (137.5) (115.2)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (25.6) (26.3) (36.8)
Proceeds from borrowings 5.4 25.3 7.1
Repayments of borrowings (23.9) (11.8) (1.1)
Repurchases of common stock (49.0) (1.9) --
-------- -------- --------
Cash Used In Financing Activities (93.1) (14.7) (30.8)
-------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 0.5 (8.1) (4.0)
-------- -------- --------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (26.4) 26.4 16.1
CASH AND CASH EQUIVALENTS:
Beginning of period 304.1 277.7 261.6
-------- -------- --------
End of period $ 277.7 $ 304.1 $ 277.7
======== ======== ========
</TABLE>
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 over 100 countries 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.
CASH EQUIVALENTS -- Cash equivalents consist of 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.
EXCESS OF COST OVER ACQUIRED NET ASSETS -- Assets and liabilities related
to business combinations accounted for as purchases are recorded at fair value.
The excess of cost over the net tangible assets acquired is being amortized on a
straight-line basis over forty years.
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, and the unrealized gain or
loss on the balance sheet date is recognized in net income. The Company does not
hold derivative financial instruments for trading purposes.
PRODUCT WARRANTY -- Provision is made for the estimated cost of maintaining
product warranties at the time the product is sold.
SELF-INSURED RISKS -- Provision is made for the estimated costs of known
and anticipated claims under the deductible portions of the Company's liability
and workers' compensation insurance policies. In addition, provision is made for
the estimated cost of postemployment benefits at employment separation.
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.
COMPREHENSIVE INCOME - Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which establishes new rules for the reporting and display
of comprehensive income plus all other changes in net assets from non-owner
sources. The adoption of this pronouncement had no impact on the Company's net
income or stockholders' equity. Accumulated other comprehensive income or loss
shown in the consolidated statement of shareholders' equity at December 31,
1998, 1997, and 1996 is solely comprised of accumulated foreign currency
translation adjustments, net of tax effects.
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 were 21,365,958 in 1998, 21,878,995 in
1997, and 21,880,584 in 1996.
RESEARCH, DEVELOPMENT AND TESTING EXPENSES -- Company sponsored research,
development, and testing expenses related to present and future products are
expensed as incurred and were $32.4, $32.6, and $30.4 million in 1998, 1997 and
1996, respectively.
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the
-20-
<PAGE> 13
reported amounts during the reporting period and at the date of the financial
statements. Actual results could differ from those estimates.
RECLASSIFICATIONS -- Certain amounts included in the prior years' financial
statements have been reclassified to conform to the 1998 presentation.
NOTE 2. FOREIGN CURRENCY TRANSLATION
Prior to July 1, 1997 the functional currency of the Company's Brazilian
subsidiary was the U.S. dollar since it operated in a highly inflationary
economy. Accordingly, inventory, plant and equipment and related income
statement items were translated at historical exchange rates while other assets
and liabilities were translated at current exchange rates. The resulting
translation gain (loss) included in net earnings was $(.4) and $2.5 million in
1997 and 1996, respectively.
Effective July 1, 1997 the functional currency of the Company's Brazilian
subsidiary was changed to the local Brazilian currency, as Brazil was then no
longer considered a highly inflationary economy. At December 31, 1997 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 as a component of stockholders' equity:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997
------ -----
<S> <C> <C>
Balance at January 1 $(7.7) $11.9
Effect of balance sheet translations:
Amount (6.8) (28.4)
Tax effect 2.7 8.8
-----------------
Balance at December 31 $(11.8) $(7.7)
=================
</TABLE>
During early 1999, the value of the Brazilian Real was allowed to float
according to market conditions. This resulted in a rapid and substantial
reduction in market value of the Real from its trading value of .83 U.S. dollars
(83 cents) at December 31, 1998.
At December 31, 1998, the carrying amount of the Company's investment in
Tecumseh do Brasil was approximately $145 million. Of that amount, approximately
$29 million were denominated in U.S. dollars or otherwise hedged. Because of the
recent devaluation, it is expected that significant translation adjustments will
be recorded in 1999. Under applicable accounting standards, translation
adjustments relating to the Company's investment in Tecumseh do Brasil are
reflected in other comprehensive income as shown in the Consolidated Statements
of Stockholders' Equity in the periods in which the adjustments arise. Gains and
losses on foreign currency transactions and balances denominated in foreign
currencies are recognized in current income.
It is not possible to accurately predict the ultimate effect that the recent
devaluation will have on the Brazilian economy and on the Company's sales and
earnings.
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. The Company also sponsors at certain
divisions retiree health care benefit plans for hourly retirees and their
eligible dependents. The retiree health care plans 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 following tables provide a reconciliation of the changes in the plans'
benefit obligations, fair value of assets and funded status for 1998 and 1997:
-21-
<PAGE> 14
<TABLE>
<CAPTION>
(Dollars in millions) Pension Other
------------------------------- ------------------------------
1998 1997 1998 1997
------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Reconciliation of benefit obligation:
Benefit obligation at
January 1 $280.9 $272.9 $139.5 $135.7
Service cost 6.6 6.8 4.6 4.5
Interest cost 17.4 17.6 9.0 8.6
Actuarial (gain) loss (11.0) (.6) (3.8) (4.6)
Benefit payments (16.4) (15.4) (5.3) (4.7)
------------------------------- ------------------------------
Benefit obligation at
December 31 $277.5 $280.9 $144.0 $139.5
=============================== ==============================
Reconciliation of fair value of plan assets:
Fair value at January 1 $502.4 $456.0
Actual return on plan assets 86.2 61.5
Employer contributions .2 .3
Benefit payments (16.4) (15.4)
-------------------------------
Fair value at
December 31 $572.4 $502.4
===============================
Funded status:
Funded status at
December 31 $294.9 $221.5 $(144.0) $(139.5)
Unrecognized transition
(asset) obligation (10.7) (12.8) -- --
Unrecognized prior
service cost 8.6 9.5 (12.2) (13.6)
Unrecognized
(gain) loss (216.3) (159.8) (37.7) (36.0)
------------------------------- ------------------------------
Prepaid (accrued) benefits
$76.5 $58.4 $(193.9) $(189.1)
=============================== ==============================
</TABLE>
The following tables provide the components of net periodic benefit cost for
1998, 1997 and 1996:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Pension Benefits:
Service cost $ 6.6 $ 6.8 $ 6.5
Interest cost 17.4 17.6 16.9
Expected return on plan assets (34.8) (30.9) (28.9)
Net amortization (7.3) (4.6) (3.5)
------------------------------------
Net periodic benefit cost $(18.1) $(11.1) $(9.0)
====================================
Other Benefits:
Service cost $4.6 $4.5 $4.2
Interest cost 9.0 8.6 8.3
Amortization of net (gain) loss (3.8) (3.7) (3.2)
------------------------------------
Net periodic benefit cost $9.8 $9.4 $9.3
====================================
</TABLE>
Assumptions used in measuring the benefit obligations were:
<TABLE>
<CAPTION>
Pension Other
---------------------------- ---------------------------
1998 1997 1998 1997
---------------------------- ---------------------------
<S> <C> <C> <C> <C>
Discount rate 6.5% 6.5% 6.5% 6.5%
</TABLE>
-22-
<PAGE> 15
<TABLE>
Long-term rate of:
<S> <C> <C> <C> <C>
Compensation increases 5.0% 5.0% N/A N/A
Return on plan assets 7.5% 7.5% N/A N/A
</TABLE>
For measurement purposes a 7.25% annual rate of increase in the cost of covered
health care benefits was assumed for 1998. The rate was assumed to decrease each
year to a rate of 5% for 2004 and remain at that rate thereafter.
The health care cost trend rate assumption has a significant effect on the
amounts reported. A 1% change in assumed health care cost trend rates would have
the following effects:
+1% -1%
--------------
Accumulated postretirement benefit obligation $18.4 $(15.2)
Net postretirement benefit cost 2.4 (1.9)
The Company's foreign subsidiaries provide for defined benefits that are
generally based on earnings at retirement date and years of credited service.
The combined expense for these unfunded plans was $2.9, $2.7 and $2.1 million in
1998, 1997 and 1996, respectively. The net liability recorded in the
consolidated balance sheet was $14.6 and $13.2 million for 1998 and 1997,
respectively.
The Company has defined contribution retirement plans that cover
substantially all domestic employees. The combined expense for these plans was
$3.1, $3.4 and $3.5 million in 1998, 1997 and 1996, respectively.
NOTE 4. INCOME TAXES
Consolidated income before taxes consists of the following:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
United States $65.9 $124.6 $131.4
Foreign 51.6 36.2 45.6
------ ------ ------
$117.5 $160.8 $177.0
====== ====== ======
</TABLE>
Provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current:
U.S. federal $ 35.6 $ 37.5 $ 37.4
State and local 5.0 3.8 6.2
Foreign income and
withholding taxes 16.0 9.0 14.0
------- ------- -------
$ 56.6 50.3 57.6
------- ------- -------
Deferred:
U.S. federal ($ 13.2) 8.6 8.5
Foreign (0.1) 1.4 (1.7)
------- ------- -------
( 13.3) 10.0 6.8
------- ------- -------
Provision for income taxes $ 43.3 $ 60.3 $ 64.4
======= ======= =======
Income taxes paid $ 52.7 $ 39.6 $ 61.6
======= ======= =======
</TABLE>
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:
-23-
<PAGE> 16
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income taxes at U.S. statutory rate $41.1 $56.3 $62.0
Excess of foreign taxes over
the U.S. statutory rate .1 2.2 0.9
State and local income taxes 3.2 2.4 4.0
Tax benefits from
Foreign Sales Corporation (1.0) (1.0) (1.6)
Other (.1) 0.4 (0.9)
----- ----- -----
$43.3 $60.3 $64.4
===== ===== =====
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
as of December 31 were as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Non-pension postretirement benefits $71.9 $70.0
Product warranty and self-insured risks 25.2 22.9
Net operating loss carryforwards 2.6 3.0
Provision for environmental matters 16.0 14.2
Other accruals and miscellaneous 27.2 23.8
------ -----
142.9 133.9
Valuation allowance (1.7) (2.6)
------ -----
Total deferred tax assets 141.2 131.3
------ -----
Deferred tax liabilities:
Tax over book depreciation 28.1 45.8
Pension 25.3 19.0
Other 21.0 17.5
------ ------
Total deferred tax liabilities 74.4 82.3
------ ------
Net deferred tax assets $ 66.8 $ 49.0
====== ======
</TABLE>
The Company's share of accumulated unremitted earnings of foreign
subsidiaries at December 31, 1998 and 1997 was $172.9 and $149.1 million,
respectively.
At December 31, 1998, the Company had net operating loss carryforwards
attributable to foreign operations for income tax purposes of $6.7 million which
expire from 1999 to 2006 if not offset against future taxable income. For
financial reporting purposes, a valuation allowance has been established to
offset the deferred tax assets related to those loss carryforwards.
NOTE 5. INVENTORIES
The components of inventories at December 31, were:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997
---- ----
<S> <C> <C>
Raw materials and work in process $176.5 $154.7
Finished goods 81.9 89.1
Supplies 17.3 15.6
------ ------
$275.7 $259.4
====== ======
</TABLE>
-24-
<PAGE> 17
NOTE 6. BUSINESS SEGMENT DATA
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for the year ended December 31,
1998. The adoption of this statement has not changed the number of segments or
the classification of divisions within each of the Company's reportable segments
from prior years.
The Company has three reportable segments based on the similarity of
products produced: Compressor Products, Engine & Power Train Products, and Pump
Products. A full-line of hermetic compressors for residential and commercial air
conditioning and refrigeration products are manufactured and marketed through
the Compressor Products Group. Gasoline engines and power train components for
lawn and garden applications are produced and marketed by the Engine & Power
Train Products Group. The Pump Products Group manufactures and sells
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 Consolidated Financial Statements. Transfers
between segments are accounted for at cost plus a reasonable profit. There were
no accounting changes in the years presented. Under SFAS No. 131, the Geographic
Segment Information has changed from the prior year. All years presented
indicate sales to external customers by country of destination rather than by
geographic area. Under net long lived assets, the Company indicates the location
of its property, plant and equipment net of depreciation by country.
In 1998, consolidated sales included revenues from two major customers. The
Compressor Group and Engine and Power Train Group provided product to Customer A
which represented 13% of consolidated sales. Customer B received product from
the Engine and Power Train Group which represented 10% of consolidated sales.
Business segment data is presented on page 12 of this report.
NOTE 7. DEBT
Short-term debt consists of borrowings by foreign subsidiaries at varying
interest rates under revolving credit agreements, advances on export receivables
and overdraft arrangements with banks used in the normal course of business. The
U.S. dollar equivalent of this debt was $9.8 million (at 8.3%) at December 31,
1998, and $22.6 million (at 7.4%) at December 31, 1997.
Long-term debt consists of the following:
1. Unsecured borrowings, primarily with banks, by foreign subsidiaries with
interest at 7.5%. The U.S. dollar equivalent of these borrowings was
$2.7 and $2.4 million at December 31, 1998 and 1997, respectively.
2. $15.3 million ($16 million in 1997) variable rate Industrial Development
Revenue Bonds (effective interest rate of 6.1% at December 31, 1998)
payable in quarterly installments from 1999 to 2021.
Scheduled maturities of long-term debt outstanding at December 31, 1998, are
as follows: 1999--$ .8 million; 2000--$1.7 million; 2001--$1.6 million;
2002--$.7 million; 2003 and beyond--$13.2 million.
Interest paid was $4.0 million in 1998, $6.5 million in 1997 and $6.4
million in 1996.
The Company has 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,
1998, the Company had not made any borrowings under this facility.
NOTE 8. ENVIRONMENTAL MATTERS
The Company has been named by the EPA as a potentially responsible party in
connection with the Sheboygan River and Harbor Superfund Site in Wisconsin. At
December 31, 1998 and 1997, the Company had an accrual of $33.8 and $29.0
million, respectively, for estimated costs associated with the cleanup of
certain polychlorinated biphenyl (PCB) contamination at
-25-
<PAGE> 18
this Superfund Site. The increase in the accrual during 1998 reflects updated
cost factors offset by insurance settlements received during the year. The
Company has based the estimated cost of cleanup on ongoing engineering studies,
including samples taken in the Sheboygan River, and on assumptions as to the
nature, extent and areas that will have to be remediated. Significant
assumptions underlying the estimated costs are that remediation will involve
innovative technologies, including (but not limited to) bioremediation near the
Company's plant site and along the upper river, and only natural armoring and
bioremediation in the lower river and harbor. The EPA has indicated it expects
to issue a record of decision on the cleanup of the Sheboygan River and Harbor
Site in 1999, but the ultimate resolution of the matter may take much longer.
The ultimate costs to the Company will be dependent upon factors beyond its
control. These factors include the scope and methodology of the remedial action
requirements to be established by the EPA (in consultation with the Wisconsin
Department of Natural Resources (WDNR)), rapidly changing technology, and the
outcome of any related litigation.
The Company, in cooperation with the WDNR, is conducting an investigation of
soil and groundwater contamination at the Company's Grafton, Wisconsin plant.
Certain test procedures are underway to assess the extent of contamination and
to develop remedial options for the site. While the Company has provided for
estimated investigation and on-site remediation costs, the extent and timing of
future off-site remediation requirements, if any, are not presently
determinable.
The WDNR has requested that the Company and other interested parties join it
in a cooperative effort to clean up PCB contamination in the watershed of the
south branch of the Manitowoc River, downstream of the Company's New Holstein,
Wisconsin facility. The Company has cooperated to date with the WDNR in
investigating the scope and range of the contamination. The WDNR has not
identified the parties it believes are responsible for such contamination. The
Company has provided for preliminary investigation expenses. Although
participation in a cooperative remediation effort is under consideration, it is
not possible at this time to reasonably estimate the cost of any such
participation.
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. Based on limited preliminary data and other
information currently available, the Company has no reason to believe that the
level of expenditures for potential remedial action necessary at these other
sites will have a material effect on its financial position.
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 of the Company.
NOTE 10. FINANCIAL INSTRUMENTS
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 investment grade,
short-term debt instruments and limits the amount of credit exposure to any one
commercial issuer. Concentrations of credit risk with respect to receivables are
limited due to the large number of customers in the Company's customer base, and
their dispersion across different industries and geographic areas.
A portion of export accounts receivable of the Company's Brazilian
subsidiary are sold at a discount. Discounted Brazilian export accounts
receivable balances at December 31, 1998 and 1997, respectively, were $15.4
million and $18.1 million with discount rates, respectively of 7.3 percent and
6.2 percent. The Company maintains an allowance for losses based upon the
expected collectability of all accounts receivable, including receivables sold.
The Company enters into forward exchange contracts to hedge receivables,
payables and other known transactional exposures for periods consistent with the
expected cash flows of the underlying transactions. Foreign exchange contracts
generally mature within one year and
-26-
<PAGE> 19
are designed to limit exposure to exchange rate fluctuations because gains and
losses on the hedged transactions offset gains and losses on these contracts. At
December 31, 1998 and 1997 respectively, the Company had $76.3 million and
$144.3 million in foreign exchange contracts outstanding.
The carrying value of cash and cash equivalents, receivables, accounts
payable and the aggregate value of forward exchange contracts approximates fair
value. The carrying value of short and long-term debt approximates fair value
based on discounting the projected cash flows using market rates available for
similar maturities.
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 Stock 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 $80 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 January 23, 2001. As of
December 31, 1998, 16,410,438 shares of Class A common stock and 5,470,146 share
of Class B common stock were reserved for future exercise under the plans.
On November 25, 1998 the Company announced an extension of its share
repurchase program for the Class A common stock. Under the program, the Company
is authorized to repurchase an additional one million Class A shares on the open
market through December 31, 1999, depending upon market conditions and other
factors. The repurchase program is expected to be financed primarily through
internally available funds. In fiscal years 1997 and 1998, the Company
repurchased and retired 1,000,000 shares of Class A common stock at a cost of
approximately $51.1 million. As of January 29, 1999, and subsequent to December
31, 1998, the Company has repurchased and retired an additional 90,000 shares at
a cost of approximately $4.1 million.
NOTE 12. BUSINESS ACQUISITIONS
In July, 1997 the Company completed the acquisition of two compressor
manufacturing facilities in India for $46.9 million. The transactions were
accounted for as a purchase and the excess of cost over the acquired net assets
is being amortized over 40 years. Results of operations for the last six months
of 1997 are included in the Company's statement of consolidated income.
NOTE 13. ASSET IMPAIRMENT LOSS
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
recorded an impairment loss on the buildings, tooling, machinery and equipment
dedicated to the production of the scroll compressor. Due to the anticipated
lengthy introduction period involving limited production, expected manufacturing
costs and probable market conditions, it is estimated that the future cash flows
from this product line will not be sufficient to cover the carrying value of the
long-lived assets related to that business. Accordingly, the Company recognized
an asset impairment loss of $45 million ($28.8 million or $1.35 per share after
taxes) in the fourth quarter of 1998. This loss is the difference between the
carrying value of the scroll compressor long-lived assets and the estimated fair
value of these assets based on an independent appraisal.
-27-
<PAGE> 20
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 and evaluated and modified to reflect current
conditions.
The Audit Committee of the Board of Directors, composed primarily of
outside Directors, is responsible for monitoring the Company's accounting and
reporting practices. The Audit Committee meets regularly with management, the
internal auditors, and the independent public accountants to review the work of
each and to assure that each is carrying out its responsibilities. 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.
Todd W. Herrick
President and Chief Executive Officer
John H. Foss
Vice President, Treasurer and
Chief Financial Officer
<PAGE> 21
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, 1998 and 1997, and the
related statements of consolidated income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997 and the
consolidated results of operations and cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Ciulla, Smith & Dale, LLP
Certified Public Accountants
January 29, 1999
Southfield, Michigan
<PAGE> 22
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
Dollars in millions except per share data
<TABLE>
<CAPTION>
1998 (a) 1997 1996(b) 1995 1994
-------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $1,750.2 $1,728.3 $1,784.6 $1,716.0 $1,533.4
..........................................................................................................................
Net income before accounting
changes 74.2 100.5 112.6 119.2 120.3
..........................................................................................................................
Cumulative effect of changes
in accounting principles -- -- -- -- --
..........................................................................................................................
Net income (loss) 74.2 100.5 112.6 119.2 120.3
- --------------------------------------------------------------------------------------------------------------------------------
PER SHARE OF COMMON STOCK (f)
Net income before accounting
changes $3.47 $4.59 $5.15 $5.45 $5.50
..........................................................................................................................
Cumulative effect of accounting
changes -- -- -- -- --
..........................................................................................................................
Net income (loss) 3.47 4.59 5.15 5.45 5.50
..........................................................................................................................
Cash dividends declared 1.20 1.20 1.68 1.61 1.35
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents $277.7 $304.1 $277.7 $261.6 $283.2
..........................................................................................................................
Working capital (g) 605.9 554.8 549.7 521.3 504.2
..........................................................................................................................
Net property, plant and equipment 508.9 569.7 529.1 477.0 402.4
..........................................................................................................................
Total assets 1,556.2 1,537.4 1,472.6 1,407.6 1,289.8
..........................................................................................................................
Long-term debt 17.2 17.5 14.4 14.7 9.1
..........................................................................................................................
Stockholders' equity 995.7 1,000.2 947.5 877.1 785.5
- --------------------------------------------------------------------------------------------------------------------------------
OTHER DATA:
Capital expenditures $64.4 $90.6 $115.2 $127.4 $136.2
..........................................................................................................................
Depreciation and amortization 74.6 71.1 64.6 59.2 55.7
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: The above per share amounts have been adjusted as necessary to reflect the
100% stock dividend paid June 30, 1993 and the 100% stock dividend paid May 29,
1992.
(a) The 1998 results include a $45 million nonrecurring charge asset
impairment. This charge was equivalent to $1.35 per share after taxes.
(b) The 1996 results include $5.1 million nonrecurring charge for environmental
and litigation costs. This charge was equivalent to $.15 per share after taxes.
(c) The 1992 results reflect the cumulative effect of adoption of Statement of
Financial Accounting Standards (SFAS) No. 106, Accounting for Non-pension
Postretirement Benefits, and SFAS No. 109, Accounting for Income Taxes.
<PAGE> 23
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1993 1992(c) 1991 1990(d) 1989(e)
------ ------- ------ ------- -------
<S> <C> <C> <C> <C>
$1,314.2 $1,258.5 $1,197.2 $1,318.1 $1,509.8
................................................................................
81.4 52.3 42.5 14.2 82.6
................................................................................
-- (95.0) -- -- --
................................................................................
81.4 (42.7) 42.5 14.2 82.6
- --------------------------------------------------------------------------------
$3.72 $2.39 $1.94 $0.65 $3.77
................................................................................
-- (4.34) -- -- --
................................................................................
3.72 (1.95) 1.94 0.65 3.77
................................................................................
1.15 0.80 0.80 0.80 1.11
- --------------------------------------------------------------------------------
$313.2 $263.6 $256.4 $240.3 $187.2
................................................................................
473.6 420.4 403.1 414.3 397.3
................................................................................
320.4 322.9 324.3 304.9 280.0
................................................................................
1,132.7 1,078.6 1,055.4 1,032.2 1,034.1
................................................................................
11.2 14.4 17.9 23.6 19.9
................................................................................
686.8 639.8 712.8 692.2 682.3
- --------------------------------------------------------------------------------
$51.1 $56.6 $85.8 $64.8 $57.5
................................................................................
52.5 53.6 49.9 49.6 43.9
- --------------------------------------------------------------------------------
</TABLE>
(d) The 1990 results include a nonrecurring provision for environmental cleanup
of $19.2 million after income taxes, or $0.88 per share.
(e) The 1989 results reflect completion of the acquisitions of Tecumseh Europe
S.A. on December 30, 1988 and Tecumseh Europa S.p.A. on July 25, 1989.
(f) Basic and diluted earnings per share are equivalent.
(g) Working capital is the excess of current assets over current liabilities.
<PAGE> 24
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA
(Dollars in millions except per share data)
<TABLE>
<CAPTION>
QUARTER
-------------------------------------------------
FIRST SECOND THIRD FOURTH * TOTAL
----- ------ ----- -------- -----
<S> <C> <C> <C> <C> <C>
1998
Net sales $459.9 $500.4 $397.1 $392.8 $1,750.2
Gross profit 62.5 77.4 53.4 19.1 212.4
Net income $24.9 $33.9 $19.2 ($3.8) $74.2
====== ====== ====== ====== ========
Basic and diluted earnings per share $1.15 $1.57 $0.90 ($0.18) $3.47
====== ====== ====== ====== ========
1997
Net sales $479.6 $480.6 $389.0 $379.1 $1,728.3
Gross profit 72.3 72.5 55.6 49.2 249.6
Net income $31.5 $31.8 $21.9 $15.3 $100.5
====== ====== ====== ====== ========
Basic and diluted earnings per share $1.44 $1.45 $1.00 $0.70 $4.59
====== ====== ====== ====== ========
</TABLE>
* Fourth quarter 1998 results include a $45 million nonrecurring charge asset
impairment. This charge was equivalent to $1.37 per share after taxes in the
fourth quarter. Favorable fourth quarter adjustments to net pension expense
increased 1998 fourth quarter net income by $3.7 million or $.18 per share.
<PAGE> 25
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
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 as of
February 22, 1999 were 7,745 for Class A common stock and 3,833 for Class B
common stock.
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------
Sales Price
-----------------------------------------------
Cash
Class A Class B Dividends
Quarter Ended High Low High Low Declared
- ------------- ------- ----- ------- ----- ---------
<S> <C> <C> <C> <C> <C>
March 31 53 3/4 52 1/2 56 5/8 55 $0.30
June 30 54 5/8 52 1/8 58 3/4 56 3/4 $0.30
September 30 51 49 1/16 52 1/2 51 1/2 $0.30
December 31 46 5/8 44 45 1/4 43 1/4 $0.30
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------
Sales Price
-----------------------------------------------
Class A Class B Cash
------- ------- Dividends
High Low High Low Declared
------- ----- ------- ----- ---------
<S> <C> <C> <C> <C> <C>
March 31 60 56 1/4 56 1/4 53 3/4 $0.30
June 30 60 1/8 53 1/4 56 3/8 50 1/2 $0.30
September 30 60 1/8 55 58 52 $0.30
December 31 57 7/8 46 7/8 58 48 1/4 $0.30
</TABLE>
<PAGE> 1
EXHIBIT (21)
Tecumseh Products Company Report on
Form 10-K for the period ended December 31, 1998
Subsidiaries of the Company
- ---------------------------
The following is a list of subsidiaries of the Company as of December
31, 1998 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.
<TABLE>
<CAPTION>
State or Country
Name of Organization
---- ---------------
<S> <C>
MP Pumps, Inc. Michigan
Ottawa Machine & Tool Co. Michigan
Tecumseh do Brasil, Ltd. Brazil
Tec Kold International Company, Ltd. Lichteinstein
SICOM Europe Srl Italy
Tecumseh Products Company of Canada, Ltd. Canada
Tecumseh Products Company, Engine & Transmission
Group, Dunlap Operations, Inc. Tennessee
Douglas Products, Inc. Georgia
Tecumseh France S.A. France
Tecumseh Europe S.A. France
Societe Des Moteurs Electriques
de Normandie S.A. France
Societe Immobiliere De Construction
de La Verpilliere France
Tecumseh Services EURL France
Tecumseh Products Company, International
Division, Inc. (FSC) Virgin Islands
Tecumseh Europa, S.p.A. Italy
Society T.I.G.E.R. France
Tecumseh Deutschland GmbH Germany
Tecumseh U.K. Limited United Kingdom
Little Giant Pump Co. Oklahoma
Trenton Division, Inc. Tennessee
Vitrus, Inc. Rhode Island
Tecumseh Products India, Ltd. India
Tecumseh India Private, Ltd. India
</TABLE>
<PAGE> 1
EXHIBIT (23)
REPORT AND CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Tecumseh Products Company
We hereby consent to the incorporation by reference in this Annual Report on
Form 10-K of Tecumseh Products Company for the year ended December 31, 1998 of
our report dated January 29, 1999 which appears on page 25 of the Annual Report
to Shareholders for the year ended December 31, 1998.
Our audit also included the related financial schedule for the three years ended
December 31, 1998 listed in Item 14(a). This schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audit. In our opinion, the financial schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
CIULLA, SMITH & DALE, LLP
Southfield, Michigan
January 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 277,700
<SECURITIES> 0
<RECEIVABLES> 262,800
<ALLOWANCES> 6,100
<INVENTORY> 275,700
<CURRENT-ASSETS> 877,800
<PP&E> 1,073,400
<DEPRECIATION> 564,500
<TOTAL-ASSETS> 1,556,200
<CURRENT-LIABILITIES> 271,900
<BONDS> 0
0
0
<COMMON> 20,900
<OTHER-SE> 974,800
<TOTAL-LIABILITY-AND-EQUITY> 1,556,200
<SALES> 1,750,200
<TOTAL-REVENUES> 1,778,000
<CGS> 1,492,800
<TOTAL-COSTS> 1,492,800
<OTHER-EXPENSES> 45,000
<LOSS-PROVISION> 1,500
<INTEREST-EXPENSE> 6,900
<INCOME-PRETAX> 117,500
<INCOME-TAX> 43,300
<INCOME-CONTINUING> 74,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 74,200
<EPS-PRIMARY> 3.47
<EPS-DILUTED> 3.47
</TABLE>
