-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V7yMGYL9BgQAvJwfCOo/f1NMbJ/c9yfFw6E3GXcQNjJuoG7jQO4JSJKjvI8Gon7b AICqCa3v7s3aKatjSEeJPQ== 0001047469-98-011601.txt : 19980327 0001047469-98-011601.hdr.sgml : 19980327 ACCESSION NUMBER: 0001047469-98-011601 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TENNANT CO CENTRAL INDEX KEY: 0000097134 STANDARD INDUSTRIAL CLASSIFICATION: REFRIGERATION & SERVICE INDUSTRY MACHINERY [3580] IRS NUMBER: 410572550 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-04804 FILM NUMBER: 98573831 BUSINESS ADDRESS: STREET 1: 701 N LILAC DR STREET 2: P O BOX 1452 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6125401200 FORMER COMPANY: FORMER CONFORMED NAME: TENNANT G H CO DATE OF NAME CHANGE: 19700515 10-K405 1 TENNANT 10-K 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, 1997. COMMISSION FILE NUMBER 0-4804 TENNANT COMPANY INCORPORATED IN THE STATE OF MINNESOTA EMPLOYER IDENTIFICATION NUMBER 41-0572550 701 NORTH LILAC DRIVE, P.O. BOX 1452, MINNEAPOLIS, MINNESOTA 55440 TELEPHONE NUMBER 612-540-1208 SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: COMMON STOCK, PAR VALUE $.375 PER SHARE AND PREFERRED SHARE PURCHASE RIGHTS Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] $362,300,138 is aggregate market value of common stock held by non-affiliates as of March 9, 1998. 9,661,337 shares outstanding at March 9, 1998 DOCUMENTS INCORPORATED BY REFERENCE 1997 Annual Report to Shareholders - Part I (Partial), Part II (Partial), and Part IV (Partial) 1998 Proxy - Part III (Partial) TENNANT COMPANY 1997 ANNUAL REPORT FORM 10-K (PURSUANT TO SECURITIES EXCHANGE ACT OF 1934) PART I Part I is included in the Tennant Company 1997 Annual Report to Shareholders (to the extent specific pages are referred to on the Cross Reference Sheet) and is incorporated in this Form 10-K Annual Report by reference, except Item 3 -"Legal Proceedings," of which there were no material legal proceedings pending, and Item 4 - "Submission of Matters to a Vote of Security Holders" during the fourth quarter, of which there were none. GENERAL DEVELOPMENT OF BUSINESS Tennant Company, a Minnesota corporation incorporated in 1909, is a Minneapolis-based company that specializes in the design, manufacture, and sale of non-residential floor maintenance equipment and related products. On February 1, 1994, the Company acquired the business and assets of Castex Industries, Inc., a privately owned manufacturer of commercial floor maintenance equipment. INDUSTRY SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS, AND EXPORT SALES The Company, as described under "General Development of Business," has one business segment. The Company sells its products domestically and internationally. Appropriate financial information is provided in the Company's 1997 Annual Report to Shareholders, page 24, footnote 2. Nearly all of the Company's foreign investment in assets reside within Australia, Canada, Japan, Spain, The Netherlands, the United Kingdom, France, and Germany. While subject to increases or decreases in value over time due to foreign exchange rate movements, these investments are considered to be of low business risk. PRINCIPAL PRODUCTS, MARKETS, AND DISTRIBUTION Products consisting mainly of motorized cleaning equipment and related products, including floor cleaning and preservation products, are sold through a direct sales organization and independent distributors in North America, primarily through a direct sales organization in Australia, France, Spain, The Netherlands, Germany, and the United Kingdom, and through independent distributors in more than 40 foreign countries. Additional information pertaining to products and marketing methods is included in the 1997 Annual Report to Shareholders, pages 4, 5, 6, 7, 8, 9, 10, 11, 12 and 13. RAW MATERIALS AND PURCHASED COMPONENTS The Company has not experienced any significant or unusual problems in the purchase of raw materials or other product components and is not disproportionately dependent upon any single source or supply. The Company has some sole-source vendors for certain components, primarily for automotive and plastic parts. A disruption in supply from such vendors may cause a short-term disruption in the Company's operations. However, the Company believes that it can find alternate sources in the event there is a disruption in supply from such vendors. PATENTS AND TRADEMARKS The Company applies for and is granted United States and foreign patents and trademarks in the ordinary course of business, no one of which is of material importance in relation to the business as a whole. SEASONALITY Although the Company's business is not seasonal in the traditional sense, revenues and earnings tend to concentrate in the fourth quarter of each year reflecting the tendency of customers to increase capital spending during such quarter, and the Company's efforts to close orders and reduce order backlogs. 1 WORKING CAPITAL PRACTICES The Company's working capital practices are described in the 1997 Annual Report to Shareholders, Management's Financial Discussion and Analysis, Financial Position section on pages 15, 16 and 17. MAJOR CUSTOMERS The Company sells its products to a wide variety of customers, no one of which is of material importance in relation to the business as a whole. BACKLOG The Company routinely fills orders within 30 days on the average. Consequently, order backlogs are not indicative of future sales levels. COMPETITIVE POSITION While there is no industry association or industry data, the Company believes, through its own market research, that it is a world-leading manufacturer of floor maintenance equipment. Active competition exists in most geographic areas; however, it tends to originate from different sources in each area, and the Company's market share is believed to exceed that of the leading competitor in many areas. The Company competes primarily on the basis of offering a broad line of high-quality, innovative products supported by an extensive sales/service network in major markets. PRODUCT RESEARCH AND DEVELOPMENT The Company regularly commits what is believed to be an above-average amount of resources to product research and development. These amounts are reported on the Company's 1997 Annual Report to Shareholders, page 24, footnote 3. A description of product development is included in the 1997 Annual Report to Shareholders on pages 4, 5, 6, 7, 8, 9, 10, 11, 12 and 13. ENVIRONMENTAL PROTECTION Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, and is not expected to have, a material effect upon the Company's capital expenditures, earnings or competitive position. EMPLOYMENT Year-end employment is reported in the 1997 Annual Report to Shareholders on page 30. EXECUTIVE OFFICERS OF THE REGISTRANT Richard M. Adams, Vice President Richard M. Adams (50) joined the Company in 1974. He was elected Assistant Controller in 1983 and was named Corporate Controller in 1986. Mr. Adams was named Vice President, Global Accounts in 1993. Mr. Adams is a Certified Public Accountant. The President and Chief Executive Officer of the Company, Roger L. Hale, is the first cousin of Mr. Adams. Mr. Adams is a director of Tennant UK Limited, Holding B.V., Tennant Europe B.V., Tennant Japan, and Castex Incorporated. Bruce J. Borgerding, Deputy General Counsel and Corporate Secretary Bruce J. Borgerding (47) joined the Company in 1988 as Assistant General Counsel. He was named Deputy General Counsel and Corporate Secretary in 1995. Mr. Borgerding is a director of Tennant UK Limited, Tennant Holding B.V., Tennant Europe B.V., Tennant N.V., Tennant Japan, and Tennant Company Far East Headquarters Pte Ltd. Paul E. Brunelle, Vice President Paul E. Brunelle (57) joined the Company in 1965. In 1987 he was elected Vice President of Personnel Resources. Prior to joining the Personnel Resources Department in 1985, he was General Manager of the Company's former Brazilian operations. Mr. Brunelle is the President of the Tennant Company Foundation and a director of Tennant N.V. 2 Janet M. Dolan, Executive Vice President Janet M. Dolan (48) joined the Company in 1986. Ms. Dolan was appointed General Counsel and Secretary in 1987, Vice President in 1990, Senior Vice President in 1995, and Executive Vice President in 1996. She is a director of Castex Incorporated. She is also a director of Donaldson Company, Inc. Roger L. Hale, President and Chief Executive Officer Roger L. Hale (63) joined the Company in 1961. Mr. Hale was named Vice President in 1969 and elected a director in 1969. Mr. Hale was named President and Chief Operating Officer in 1975, and subsequently named Chief Executive Officer in 1976. He also is a director of U.S. Bancorp. Douglas R. Hoelscher, Senior Vice President Douglas R. Hoelscher (59) joined the Company in 1973. He was named Vice President in 1978 and Senior Vice President in 1995. He is a Registered Professional Engineer. John T. Pain, Corporate Controller and Principal Accounting Officer John T. Pain (49) joined the Company in 1984 as Corporate Tax Manager. He was named Assistant Treasurer in 1986 and Corporate Controller and Principal Accounting Officer in 1997. Mr. Pain is a Certified Public Accountant. He is a director of Castex Incorporated and Tennant Company Far East Headquarters Pte Ltd. Keith D. Payden, Vice President Keith D. Payden (50) joined the Company in 1981. He was named Director, Information Services in 1987, Chief Information Officer in 1992, and Vice President in 1993. Richard A. Snyder, Vice President, Treasurer and Chief Financial Officer Richard A. Snyder (58) joined the Company in 1981 as Controller. He was elected Treasurer and Chief Financial Officer in 1982 and named Vice President in 1985. Mr. Snyder is a Certified Public Accountant. He is a director of Tennant N.V. William R. Strang, Vice President William R. Strang (61) joined the Company in 1969. He was named Director, Corporate Marketing in 1987 and Vice President, Corporate Marketing in 1992. Mr. Strang is a director of Tennant Europe B.V., Tennant Holding B.V., Tennant Japan, and Tennant Company Far East Headquarters Pte Ltd. Steven K. Weeks, Vice President Steven K. Weeks (42) joined the Company in 1984. He was named Manager, Global New Business and Marketing Development in 1993, Director of Marketing in 1994, and Vice President, Customer Solutions in 1996. PART II Part II is included in the Tennant Company 1997 Annual Report to Shareholders (to the extent specific pages are referred to on the Cross Reference Sheet) and is incorporated in this Form 10-K Annual Report by reference, except Item 9, "Changes in and Disagreements with Accountants on Accounting and Financial Disclosure," of which there were none. PART III Part III is included in the Tennant Company 1998 Proxy (to the extent specific pages are referred to on the Cross Reference Sheet) and is incorporated in this Form 10-K Annual Report by reference, except Item 13 - "Certain Relationships and Related Transactions," of which there were none, and Item 10 - "Directors and Executive Officers of the Registrant" as it relates to executive officers. Identification of executive officers is included in Part I of this Form 10-K Annual Report. 3 PART IV Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K. A. The following documents are filed as a part of this report: 1. Financial Statements The following consolidated financial statements and independent auditors' report are included on pages 18 through 29 of the Tennant Company 1997 Annual Report to Shareholders and are incorporated in this Form 10-K Annual Report by reference: a. Consolidated Statements of Earnings for each of the years in the three-year period ended December 31, 1997 - page 18. b. Consolidated Balance Sheets as of December 31, 1997 and 1996 - page 19. c. Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1997 - page 20. d. Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended December 31, 1997 - page 21. e. Independent Auditors' Report of KPMG Peat Marwick LLP - page 22. f. Notes to Consolidated Financial Statements - pages 23 through 29. 2. Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts (Dollars in Thousands)
Additions Balance at charged to Deductions beginning costs and from Balance at Allowance for doubtful accounts of year expenses reserves (1) end of year --------------------------------------------------------------------------------------------------------- Year ended December 31, 1997 2,506 1,901 1,105 3,302 Year ended December 31, 1996 2,611 1,160 1,265 2,506 Year ended December 31, 1995 2,609 803 801 2,611
(1) Accounts determined to be uncollectible and charged against reserve, net of collections on accounts previously charged against reserves. All other schedules are omitted as the required information is inapplicable or because the required information is presented in the Consolidated Financial Statements in the Tennant Company 1997 Annual Report to Shareholders. 3. Exhibits
Item # Description Method of Filing ------ ----------- ---------------- 3i Articles of Incorporation Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement No. 33-62003, Form S-8, dated August 22, 1995. 3ii By-Laws Incorporated by reference to Exhibit 4.2 to the Company's Registration Statement No. 33-59054, Form S-8, dated March 2, 1993. 4 10.1 Tennant Company 1988 Stock Incorporated by reference to Exhibit b.1 to the Incentive Plan Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 10.2 Tennant Company 1992 Stock Incorporated by reference to Exhibit 4.4 to the Incentive Plan Company's Registration Statement No. 33-59054, Form S-8 dated March 2, 1993. 10.3 Tennant Company Restricted Incorporated by reference to Exhibit 4.5 to the Stock Plan for Nonemployee Company's Registration Statement No. 33-59054, Directors Form S-8, dated March 2, 1993. 10.4 Tennant Company 1995 Stock Incorporated by reference to Exhibit 4.4 to the Incentive Plan Company's Registration Statement No. 33-62003, Form S-8, dated August 22, 1995. 10.5 Tennant Company Restricted Incorporated by reference to Exhibit 10.2 to the Stock Plan for Nonemployee Company's 1995 Second Quarter 10-Q filing dated Directors, as amended and August 8, 1995. restated effective January 1, 1995 10.6 Tennant Company Excess Incorporated by reference to Exhibit 10.4 to the Benefit Plan, as amended Company's Annual Report on Form 10-K for the fiscal and restated effective year ended December 31, 1994. January 1, 1994 10.7 Management Agreement with Incorporated by reference to Exhibit 10.7 to the Steven K. Weeks dated Company's Annual Report on Form 10-K for the fiscal November 19, 1996 year ended December 31, 1996. 10.8 Management Agreement with Incorporated by reference to Exhibit 10.8 to the Tom Vander Bie dated Company's Annual Report on Form 10-K for the November 19, 1996 fiscal year ended December 31, 1996. 10.9 Management Agreement with Incorporated by reference to Exhibit 10.6 to the Richard M. Adams dated Company's Annual Report on Form 10-K for the fiscal December 10, 1993 year ended December 31, 1993. 10.10 Management Agreement with Incorporated by reference to Exhibit 10.7 to the Paul E. Brunelle dated Company's Annual Report on Form 10-K for the fiscal December 8, 1987 year ended December 31, 1993. 10.11 Amendment to Management Incorporated by reference to Exhibit 10.8 to the Agreement with Company's Annual Report on Form 10-K for the fiscal Paul E. Brunelle dated year ended December 31, 1993. June 21, 1989 10.12 1993 Amendment to Management Incorporated by reference to Exhibit 10.9 to the Agreement with Company's Annual Report on Form 10-K for the fiscal Paul E. Brunelle dated year ended December 31, 1993. December 10, 1993 10.13 Management Agreement with Incorporated by reference to Exhibit b.5 to the Janet M. Dolan dated Company's Annual Report on Form 10-K for the fiscal June 21, 1989 year ended December 31, 1992. 10.14 1993 Amendment to Management Incorporated by reference to Exhibit 10.11 to the Agreement with Janet M. Dolan Company's Annual Report on Form 10-K for the fiscal dated December 10, 1993 year ended December 31, 1993. 10.15 Management Agreement with Incorporated by reference to Exhibit b.8 to the Roger L. Hale dated Company's Annual Report on Form 10-K for the fiscal March 10, 1987 year ended December 31, 1992. 10.16 Amendment to Management Incorporated by reference to Exhibit b.9 to the Agreement with Roger L. Hale Company's Annual Report on Form 10-K for the fiscal dated June 21, 1989 year ended December 31, 1992. 5 10.17 1993 Amendment to Management Incorporated by reference to Exhibit 10.14 to the Agreement with Roger L. Hale Company's Annual Report on Form 10-K for the fiscal dated December 10, 1993 year ended December 31, 1993. 10.18 Management Agreement with Incorporated by reference to Exhibit b.10 to the Douglas R. Hoelscher dated Company's Annual Report on Form 10-K for the fiscal March 10, 1987 year ended December 31, 1992. 10.19 Amendment to Management Incorporated by reference to Exhibit b.11 to the Agreement with Douglas R. Company's Annual Report on Form 10-K for the fiscal Hoelscher dated June 21, 1989 year ended December 31, 1992. 10.20 1993 Amendment to Management Incorporated by reference to Exhibit 10.18 to the Agreement with Douglas R. Company's Annual Report on Form 10-K for the fiscal Hoelscher dated year ended December 31, 1993. December 10, 1993 10.21 Management Agreement with Incorporated by reference to Exhibit 10.19 to the Keith D. Payden dated Company's Annual Report on Form 10-K for the fiscal December 10, 1993 year ended December 31, 1993. 10.22 Management Agreement with Incorporated by reference to Exhibit b.12 to the Richard A. Snyder dated Company's Annual Report on Form 10-K for the fiscal March 10, 1987 year ended December 31, 1992. 10.23 Amendment to Management Incorporated by reference to Exhibit b.13 to the Agreement with Richard A. Company's Annual Report on Form 10-K for the fiscal Snyder dated June 22, 1989 year ended December 31, 1992. 10.24 1993 Amendment to Management Incorporated by reference to Exhibit 10.22 to the Agreement with Richard A. Company's Annual Report on Form 10-K for the fiscal Snyder dated year ended December 31, 1993. December 10, 1993 10.25 Management Agreement with Incorporated by reference to Exhibit 10.23 to the William R. Strang dated Company's Annual Report on Form 10-K for the fiscal December 10, 1993 year ended December 31, 1993. 10.26 Asset Purchase Agreement Incorporated by reference to Exhibit 2.1 to the dated January 27, 1994, Company's Current Report on Form 8-K dated between Tennant Company, February 15, 1994. Castex Industries, Inc., Wayne Investment Corp. and Wayne A. Streuer 13.1 Portions of 1997 Annual Filed herewith electronically. Report to Shareholders 6 21.1 Subsidiaries of the Registrant Tennant Company has the following subsidiaries: Tennant Holding B.V. is a wholly owned subsidiary organized under the laws of the Netherlands in 1991. A legal reorganization occurred in 1991 whereby Tennant N.V. became a participating interest of Tennant Holding B.V. Tennant N.V. had previously been a wholly owned subsidiary organized under the laws of the Netherlands in 1970. Tennant Maintenance Systems, Limited, was a wholly owned subsidiary, organized under the laws of the United Kingdom until October 29, 1992, at which time Tennant Holding B.V. acquired 100% of its stock from Tennant Company. The name was formally changed to Tennant UK Limited on or about October 16, 1996. Castex Incorporated, is a wholly owned subsidiary organized under the laws of the state of Michigan. The results of these operations have been consolidated into the financial statements, as indicated therein. 23.1 Independent Auditors' Filed herewith electronically. Report and Consent 27.1 Financial Data Schedule Filed herewith electronically.
B. Reports on Form 8-K There were no reports filed on Form 8-K during the quarter ended December 31, 1997. 7 CROSS REFERENCE SHEET
FORM 10-K REFERENCED LOCATION - --------- ---------- -------- Part I, Item 1 - Business 1997 Annual Report to Shareholders Exhibit 13.1 Pages 2, 3, 4, 5, 6, 7, 8, 9, 10, a. General 11, 12 and 13 b Lines of business, industry segments and Page 24, footnote 2 foreign and domestic operations c. Working capital practices Pages 15, 16 and 17 d. Product research and development Pages 4, 5, 7, 8, 10, 11 and 13 Page 24, footnote 3 e. Employment Page 30 Part I, Item 2 - Properties 1997 Annual Report to Shareholders Exhibit 13.1 Page 25, footnote 7 Page 26, footnote 9 Inside back cover Part II, Item 5 - Market for 1997 Annual Report to Shareholders Exhibit 13.1 the Registrant's Common a. Principal market Inside back cover Equity and Related b. Quarterly data Page 24, footnote 4 Shareholder Matters Inside back cover c. Number of shareholders Inside back cover d. Dividends Page 24, footnote 4 Inside back cover Part II, Item 6 - Selected 1997 Annual Report to Shareholders Exhibit 13.1 Financial Data Pages 30 and 31 Part II, Item 7 - Management's 1997 Annual Report to Shareholders Exhibit 13.1 Discussion and Analysis of Pages 14 to 17 Financial Condition and Results of Operations Part II, Item 8 - Financial 1997 Annual Report to Shareholders Exhibit 13.1 Statements and Supplementary Pages 18 to 29 Data Part III, Item 10 - Directors 1998 Proxy Pages 3 to 7 and Executive Officers of the Registrant Part III, Item 11 - Executive 1998 Proxy Pages 8 to 14 Compensation Part III, Item 12 - Security 1998 Proxy Pages 2 and 5 Ownership of Certain Beneficial Owners and Management
8 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. TENNANT COMPANY By - /s/ Roger L. Hale By - /s/ William A. Hodder Roger L. Hale, President, William A. Hodder Chief Executive Officer, Board of Directors and Board of Directors Date - March 26, 1998 Date - March 26, 1998 By - /s/ Delbert W. Johnson By - /s/ Richard A. Snyder Delbert W. Johnson Richard A. Snyder Board of Directors Vice President, Treasurer, and Chief Financial Officer Date - March 26, 1998 Date - March 26, 1998 By - /s/ William I. Miller William I. Miller By - /s/ John Pain Board of Directors John T. Pain Corporate Controller and Date - March 26, 1998 Principal Accounting Officer By - /s/ Edwin L. Russel Date - March 26, 1998 Edwin L. Russell Board of Directors By - /s/ Arthur D. Collins, Jr. Arthur D. Collins, Jr. Date - March 26, 1998 Board of Directors Date - March 26, 1998 By - /s/ Davic C. Cox David C. Cox Board of Directors Date - March 26, 1998 By - /s/ Andrew P. Czajkowski Andrew P. Czajkowski Board of Directors Date - March 26, 1998 9 EX-13.1 2 EXHIBIT 13.1 TO OUR SHAREHOLDERS 1997 was a fine year at Tennant: sales up 8% to $372 million, earnings per diluted share rose 15% to $2.41, and operating margin increased to 9.7% from 9.2% the prior year. All this occurred in the face of an exceptionally strong dollar, which reduced translated sales by $8.4 million and net earnings by an estimated $1.8 million, or 18 cents per share. We obviously were helped a great deal by very good economic conditions in the U.S., improving conditions in Europe, and no big problems in the rest of the world. However, the most satisfying part of 1997's results was that they reflected the significant changes going on at Tennant. MEETING THE PREEMINENCE 2000 CHALLENGES Tennant is both an old company--started in 1870--and a new, revitalized company--starting in 1992. At that time, we had come through 10 tough years for U.S. manufacturers. We had a respectable record, had improved our product quality, invested in new products and information technology, kept the balance sheet strong, and raised the dividend every year. But we had not grown as much as we would have liked, nor had we reached our full profit-making potential. In 1992, we set goals for the year 2000, called "Preeminence 2000" or "P-2000" for short, aimed at greater customer satisfaction, stronger growth, and higher profitability. P-2000 led us to challenge each area of our business and take action to improve. The results have been falling in place each year and are very satisfying: - - For industrial equipment, our core business, we dramatically increased the pace of new product development, bringing great value to the marketplace and putting relentless pressure on our competitors. These new and updated products have been outstanding successes, giving more features and benefits at lower prices, and so far sales have exceeded our forecasts. In 1998, we will release four new products: a record for us and a near impossible pace for our competition. - - For commercial equipment, our P-2000 challenge led to the very successful Castex acquisition in early 1994, followed by the smaller acquisition of Eagle in late 1994. Although these companies were solid contributors from the start, the first couple of years were devoted to integration issues that are now behind us. More recently, we have been able to focus on commercial equipment growth in large corporate accounts and international markets, with very good results. - - Floor coatings, which now represent about 6% of our total revenues, also went through a transformation as part of P-2000. We got out of the contracting business and established solid partner relationships with independent contractors throughout the U.S., Mexico, and Canada. Our overall floor coatings growth since 1992 has been 9% compounded, and our progress in the second half of 1997 gives us encouragement that 1998 will be an excellent year for this profitable piece of our company. What is most important about all this is that it was not happenstance. It was the result of a determination to evolve from a good company to a great one by: - - World-class customer satisfaction, resulting from exciting new products, outstanding customer service, and careful monitoring of our customer service processes. - - Energized, well-trained and well-supported employees at all levels. After all, how can - ------------------------------------------------------------------------------ [Photo of former Tennant Company President, George T. Pennock] George T. Pennock 1912 - 1998 We note with great sadness the passing of George Pennock, grandson of our founder and former President and Chairman of Tennant. During his 43-year career at Tennant, George Pennock embedded in our culture a great regard for employees, sound financial policies, and a spirit of Internationalism which are core values for us today. We will all miss his wit, wisdom, and business acumen. - ------------------------------------------------------------------------------ 2 customers be happy if our employees are not? Along that line, we were very honored to be on FORTUNE Magazine's list of the "100 Best Companies in America to Work For." - - Strategic use of information technology based on a companywide "enterprise" computer system (SAP's R/3). We now are starting the fourth year of this five-year project. By year-end, a number of significant parts of this comprehensive system will be in full, day-to-day use. - - Outstanding financial strength. Our balance sheet is strong; our ratios are excellent. In 1997, we raised the dividend for the 26th consecutive year, returned $21 million to shareholders in the form of dividends and stock repurchases, funded $17 million of capital equipment purchases, and increased cash on hand by 60% to $16 million. ORGANIZATIONAL CHANGE A major project in the past few years has been developing greater bench strength in top management. We are a specialized company with a very strong position in various nonresidential floor cleaning niches. Because our greatest opportunities lie in leveraging our products and markets, we needed to focus on broadening and deepening our management base. 1996 was consumed with a market and organizational study. This resulted in some reorganization in the fall of 1996. The distraction of this change is behind us, and the new teams are working well together. 1997 results reflect this, and 1998 should benefit even further. CAPITALIZING ON THE OPPORTUNITIES OF 1998 In short, 1997 was a very satisfying year at Tennant. Economic conditions were good and specific measures we had taken in the previous few years positioned us to "make hay while the sun shines." Will the sun be shining in 1998? We believe it will in North America. Our products, people, and processes, combined with continued although somewhat more modest economic growth, will keep the momentum going. In Europe, we had an excellent year in 1997. The many organizational and process changes made in 1995 and 1996 settled down and now are working to our advantage. We believe European economic conditions in 1998 are improving, and we are ready to benefit from them. Asia is the cloud on the horizon. Only 5% of our total revenues came from this region in 1997. In the future, we expect stronger growth because we recently increased our long-term commitment there by opening an office and warehouse in Singapore, and established partnerships to promote our commercial floor care products through common distribution. Some areas of our business, especially industrial equipment, will have a tougher time in 1998 in such countries as Korea, Malaysia, and Thailand. However, our overall strategy is very straightforward: - - Support our distribution in every way possible. - - Continue to build better products and processes for this vital part of the world. This strategy has served us well in Mexico, where we now are stronger than ever. It will serve us well in Asia, which will be a great growth market for us as we enter the 21st century. We finished 1997 with somewhat higher backlogs and strong order growth in key markets. With this in mind, and the consensus view that the Asian financial crisis will have only a modest effect on the world's major economies, we believe Tennant is positioned to achieve another year of record financial performance, creating above-average value for our shareholders. [Photo of Tennant Company President] Roger L. Hale President, Chief Executive Officer March 25, 1998 3 TENNANT AT A GLANCE Tennant's vision is to work for a cleaner and safer world. Our broad product lines, global sales and service networks, partnerships with complementary companies, and ability to offer total customer solutions will help us achieve our mission: - - To be the preeminent company in nonresidential floor maintenance equipment, floor coatings and related offerings. - - To create above-average value for shareholders.
- -------------------------------------------------------------------------------- PRODUCT LINES PRODUCTS - -------------------------------------------------------------------------------- INDUSTRIAL FLOOR Products to clean MAINTENANCE EQUIPMENT surfaces with vehicle and heavy foot traffic such as: - factories, [Photo of Industrial warehouses, Floor Maintenance stadiums, airport Equipment] hangars, parking garages, and outside areas. - sweepers and scrubbers: - walk-behinds - indoor riders - outdoor vehicles - -------------------------------------------------------------------------------- COMMERCIAL FLOOR Products to clean MAINTENANCE EQUIPMENT surfaces with foot traffic such as: - schools, hospitals, office buildings, [Photo of Commercial supermarkets, retail Floor Maintenance outlets and airport Equipment] terminals. - walk-behind scrubbers and sweepers, carpet extractors, burnishers, buffers, polishers, and other specialized equipment. - -------------------------------------------------------------------------------- FLOOR COATINGS Products that treat, repair, and upgrade concrete and wood floors. [Photo of Factory Specialty products are Floor] available for areas with chemical exposure or odor-sensitivity. Generally used in industrial settings such as factories and warehouses. Applied by customer or authorized contractor. - --------------------------------------------------------------------------------
4 [Pie chart showing breakdown of 1997 sales into Europe (15%), World Export (11%), and North America Sales (74%). North America Sales are broken out further into Commercial (18%), Industrial (50%), and Floor Coatings (8%). Europe Sales are broken out into Commercial (2%), and Industrial (13%). World Export Sales are broken out into Commercial (2%) and Industrial (9%).] 1997 SALES
COMPETITIVE GROWTH MARKETS SALES/SERVICE STRENGTHS STRATEGIES - -------------------------------------------------------------------------------- World market for Direct Market leadership Maintain product equipment and sales/service in worldwide. leadership. aftermarket the United States, estimated at $750 Australia, Canada, Broadest line of Capitalize on million. France, Germany, quality products unique direct The Netherlands, resulting from sales/service Market share Spain, and the industry-leading force in eight greater than 50% United Kingdom. commitment to countries and in segments such innovation and strong distributor as manufacturing, Well-established, quality. network in 45 warehousing, full-service others. distribution, and distributor Strong government. network in 45 sales/service Offer total floor other countries support on a cleaning including Japan worldwide basis. solutions. and most countries in Europe not Manufacturing served directly. facilities in the United States and Europe. - -------------------------------------------------------------------------------- World market for Broad geographic Strong position in Expand and upgrade equipment and coverage in North North American an already broad aftermarket America through a market. product line. estimated at $2 full-service billion. distributor Complete line of Target large network. quality products national/ Sold under Castex, with a history of multinational Nobles, Eagle, and Expanding full- innovation. businesses with a Tennant brand service focus on continued names, depending distributor Reputation for rapid growth on the product and network providing a high internationally. geographic area. internationally. level of support to distributors. Offer total floor Among the leaders cleaning in North America; solutions. small but rapidly growing internationally. - -------------------------------------------------------------------------------- North American Sold by Tennant's Broad line of Continue to market for direct sales force coatings, sealers, develop leading- industrial in North America and resurfacers edge products and coatings estimated as a complementary including an services. at $150 million, product to environmentally excluding industrial floor safe floor coating Provide application labor. maintenance system (Eco- application equipment. Coatings-TM- and support that Market share Eco-Prep-TM-). enables expected estimated at about Also sold by results whether one-sixth of total Tennant's In-house chemistry customers apply market, but higher independent lab that the coating in coatings contractor formulates themselves or have segment. network. products and it done by an oversees their authorized production and contractor. application. Offer total floor cleaning solutions. - --------------------------------------------------------------------------------
5 [Photo Janet M. Dolan, Executive Vice President] JANET M. DOLAN, EXECUTIVE VICE PRESIDENT "FOR MANY YEARS, NORTH AMERICAN MARKETS WERE CONSIDERED 'MATURE.' THIS WAS TRUE AS LONG AS WE CONCENTRATED ON PRODUCTS RATHER THAN CUSTOMERS. NOW THAT WE ARE FOCUSING MORE ON CUSTOMERS, WE BELIEVE THE OPPORTUNITIES ARE TREMENDOUS." REINVIGORATING OUR APPROACH TO A KEY MARKET Tennant gained leadership in North America by developing a broad line of products known for their quality, then marketing them through a strong direct sales force and distributor network. Several years ago, we began to focus on customer partnerships. While this represented progress, we knew we needed to stretch further. More recently, we decided the best way to reinvigorate our growth would be to eliminate the internal barriers between industrial, commercial, and floor coatings sales and service, which were operating independently of each other, in order to take advantage of cross-selling opportunities. The Industrial Markets and Commercial Markets divisions continue to directly serve their traditional customer base. However, we are testing a program that brings commercial distributors and industrial direct sales and service forces together in order to better market our full product line to both customer groups. In addition, we have established two divisions, Global Markets and Customer Solutions, that market our products and services to specific groups of customers with unique needs not previously met by our product-line focused divisions (e.g., a customer that wants products from more than one of our lines plus support services such as training or advice on cleaning methodologies). By more integration of our products, services, and channels, Tennant will be able to capitalize on many more opportunities than previously. This is being supported by our investment in technology. Soon we will be able to capture more information on our customers, analyze it more effectively, and share it across the company. Our use of technology will enhance our advantage by allowing us to serve customers faster. This is critical as customers demand more from their suppliers. [Photo Richard M. Adams, Vice President] RICHARD M. ADAMS, VICE PRESIDENT "CONTRACTS WITH LARGE NATIONAL/MULTINATIONAL FIRMS OFFER A GROWTH OPPORTUNITY. WE ARE MAKING THESE ACCOUNTS A PRIORITY NOW THAT WE HAVE TWO IMPORTANT ITEMS THESE COMPANIES WANT: A BROAD LINE OF QUALITY PRODUCTS, AND SUPPORT SERVICES AVAILABLE THROUGHOUT NORTH AMERICA." [Photo Tennant Model 7400] This Tennant Model 7400 helps keep the streets of downtown Richmond, Virginia, cleaner and safer. 6 INDUSTRIAL MARKET Tennant is the acknowledged leader in the industrial market, both domestically and internationally. In North America, Tennant holds more than a 50% share of the cleaning equipment market which is about three times that of our nearest competitor. INDUSTRIAL MARKET TRENDS A number of industry trends are returning this to a growth market for us: - - A new growth area for Tennant is in the urban downtown outdoor market. These commercial centers recognize that to attract people and maintain business they need to provide a clean and safe environment in which to work, shop and play. Thousands of quasi-government associations across the country are looking for partners to provide them with the cleaning solutions they need to meet their vision of cleaner and safer urban communities. Tennant is well positioned to be that partner with its extensive product line supported by its nationwide sales and service network. - - Businesses want cleaner and safer indoor and outdoor environments as well. Reasons include a focus on quality, which starts with clean workplaces, and the Environmental Protection Agency's increased environmental regulations which are requiring many businesses to comply with stronger standards for cleanliness. - - Many businesses are outsourcing operational activities. In our case, this is increasing the number of contract cleaners who handle facility maintenance--and are interested in our products. - - Businesses of all kinds are reducing the number of vendors they use. In general, they are looking for suppliers with a broader product offering and, in many cases, a global reach to handle their needs. - - In North America, demand is moving from sweeping (picking up debris only) to sweeping and scrubbing (actually cleaning the surface after it has been swept). This is reflected in Tennant's sales. Twenty years ago scrubbers generated less than 20% of our industrial equipment sales in this market. By 1997, this has increased to more than 50%. - - The demand is increasing for machines that are easier to maintain and operate so people at all skill levels can use them. [Photo Douglas R. Hoelshcer, Senior Vice President] DOUGLAS R. HOELSCHER, SENIOR VICE PRESIDENT "THE INDUSTRIAL GROUP HAS BEEN TENNANT'S LARGEST BUSINESS FOR DECADES. IN 1997, A COMBINATION OF HARD WORK IN DIRECT SALES AND SERVICE, AND AN EXCELLENT NEW PRODUCT PROGRAM, MADE THE NORTH AMERICAN OPERATION THE FASTEST GROWING, TOO." [Photo Tennant Model 7200] The new compact Model 7200 has quickly become one of Tennant's most popular machines. 7 INDUSTRIAL MARKET (CONT'D) OFFER WIDEST LINE OF INDUSTRIAL PRODUCTS These machines clean areas with vehicle or heavy foot traffic. They come in walk-behind and rider units with prices that range from $7,500 to $90,000. Tennant offers three types of products, all of which carry the strongest warranties in the industry: - - SWEEPERS remove wet or dry debris, and control dust during this process. - - SCRUBBERS lay down cleaning solution, scrub the surface, then remove the dirty solution--all in one pass. - - COMBINATION SWEEPER/SCRUBBERS perform both functions at the same time, also in one pass. Industrial products for North America are developed and manufactured in our Minneapolis, Minnesota, facility, which is ISO 9001 quality certified. (Products are also exported from this facility to our various international markets.) We devote an industry-leading amount to product engineering. Through the use of process improvement and technology, we have been able to cut the product development cycle in half in recent years. This has allowed us to introduce no fewer than two and as many as four new or significantly updated products each year. The end result is quite significant--nearly 90% of our 1997 machine sales were generated by products introduced in the last five years. New product introductions this year centered on smaller machines to reach markets where we had not been traditionally as strong. In 1998, we will continue our aggressive product introduction program. UNIQUE DIRECT SALES/SERVICE FORCE For the most part, our competitors use distributors to sell and service their industrial products. Tennant, on the other hand, sells exclusively through a direct sales and service network in North America. This gives us a significant competitive edge in the sale of larger industrial equipment. OUTPERFORMING THE INDUSTRIAL MARKET All of these strategies, backed by a good economy, allowed Tennant to increase its orders of industrial machines in North America by 18% in 1997. This indicates there are many opportunities for growth in this market--and Tennant as the industry leader is capitalizing on them. NORTH AMERICAN INDUSTRIAL EQUIPMENT SALES [Bar Graph] Industrial Sales in Millions
Year North America 1990 120 1991 112 1992 120 1993 130 1994 147 1995 158 1996 166 1997 186
[Photo of Tennant Model 8010] The new Model 8010 doubles cleaning productivity by sweeping and scrubbing at the same time. 8 COMMERCIAL MARKET Tennant holds an estimated 15% share of the North American commercial cleaning equipment market, with most of that through its Castex Inc. subsidiary. Since joining Tennant in 1994, Castex has advanced to being among the top three companies in the market. (On a combined basis, we estimate that the top three competitors hold somewhat more than 50% of the total market.) A number of trends are driving growth in this market: - - Businesses and institutions that directly service the public on their premises are being driven by a consumer preference for clean, safe facilities; and employers are focusing on quality and productivity improvement which begins with a clean workplace. - - There also are two trends specific to the commercial market: - The service sector--the primary purchaser of commercial equipment--is the fastest growing part of the economy. - Businesses want to reduce the potential liability of wet or dirty public places. The commercial floor maintenance industry is experiencing consolidation, which bodes well for Tennant: - - Smaller manufacturers are being acquired by larger firms or closing their doors. This has presented Tennant with acquisition opportunities in recent years, and it has raised entry barriers as the size of competitors has increased. - - Distributors--the main channel for selling and servicing commercial equipment--are undergoing consolidation. This means the ones that remain will be stronger and will [Photo of Thomas J. Vander Bie, President, Castex Incorporated] THOMAS J. VANDER BIE, PRESIDENT, CASTEX INCORPORATED "MORE THAN ANY OTHER COMPANY IN THE INDUSTRY, WE ARE POISED TO SIGNIFICANTLY IMPROVE OUR COMPETITIVE POSITION. WE HAVE THE RIGHT PRODUCTS, PROGRAMS AND RELATIONSHIPS WITH THE BEST DISTRIBUTORS. AS WE BEGIN TO WORK MORE SUCCESSFULLY WITH THE INDUSTRIAL MARKETS DIVISION, NONE OF OUR COMPETITORS WILL BE ABLE TO TOUCH US." [Photo of Eagle Talon 2500 burnisher] The growing contract-cleaning market relies on the Eagle Talon 2500 burnisher. [Photo of Tennant equipment in use] The Speed Gleam scrubber is vital to many retail cleaning operations. 9 COMMERCIAL MARKET (CONT'D) want to work with larger, more stable firms such as Castex. EXPANDING BROAD PRODUCT LINE We offer a complete line of commercial maintenance equipment: - - SWEEPERS AND VACUUMS remove debris or water from virtually any surface. - - AUTOMATIC SCRUBBERS clean grease and grime from hard surfaces, such as floors with tile and grout. These machines remove virtually all of the cleaning solution they apply to the floor, which is critical for avoiding slip-and-fall injuries. They also are easy to operate and maneuver in tight spaces. - - CARPET EXTRACTORS apply a cleaning solution, scrub the carpet, then remove the solution along with any dirt and grime. - - BURNISHERS AND FLOOR MACHINES give scrubbed floors a shiny, high-gloss appearance. Castex products, which range in price from $300 to $7,000, are used by hospitals, schools, shopping malls--any area that has heavy foot traffic. These products are developed and manufactured in our Holland, Michigan, facility. After being acquired by Tennant in 1994, Castex's efforts were focused on a successful integration of product lines and distribution. As a result, engineering efforts concentrated mainly on product maintenance and refinement. This has changed recently and will result in a more agressive product introduction schedule in 1998 and beyond, which will help us gain market share. NORTH AMERICAN COMMERCIAL EQUIPMENT SALES [Bar Graph] Commercial Sales in Millions
Year North America 1990 9.5 1991 12.0 1992 13.0 1993 13.0 1994 4.0 1995 57.5 1996 63.0 1997 66.9
[Photo of Tennant equipment in use] Hotels and motels across North America rely on the Path Maker carpet vacuum. [Photo of Tennant Model Scout 28] The new Scout 28 sweeper can be found in schools throughout the country. 10 FLOOR COATINGS MARKET Tennant holds an estimated 15% share of the North American market for industrial floor coatings, sealers and resurfacers. A competitive edge for Tennant comes from the fact that we offer our coatings as a complementary product to industrial floor cleaning equipment and, in fact, sell through the same direct sales force. FLOOR COATINGS MARKET TRENDS There is a strong interest in coatings because they protect concrete and wood floors from chemicals and wear, they make floors easier to clean, and they create a working environment that improves employee morale and a company's image. DEVELOPING LEADING-EDGE PRODUCTS AND SERVICES Tennant offers a broad product range: - - DURABLE COATINGS for main traffic aisles and loading docks. - - CHEMICAL-RESISTANT COATINGS for floors exposed to corrosive chemicals. - - EPOXY RESURFACERS for damaged floors that need to have their smooth surface restored. - - ENVIRONMENTALLY SAFE COATINGS for odor-sensitive applications, such as food processing facilities. Our unique Eco-Coatings-TM- line combines high durability with little or no solvents. - - ECO-PREP-TM- PROCESS for use by Tennant's authorized contractors to prepare a floor for its new coating. Eco-Prep-TM- machines remove the old coatings quickly and without using solvents. No one else offers as effective an approach. We develop the formulas for our coatings and oversee their production, and we manufacture the Eco-Prep-TM- machines. Our coatings are designed to address the major needs of our customers, which include appearance, coating durability and life, ease of application, and environmental impact. A primary objective of our product development in recent years has been to meet or exceed the increasing government regulations for waste control and emissions, even before these regulations go into effect. FLOOR COATINGS IS A VITAL PART OF TOTAL SOLUTION After experiencing a slow start to the year, our sales have been on a stronger growth track, and we finished the year with record December billings. We believe we can maintain this stronger growth as coatings become a more important part in the total solution Tennant offers its customers. NORTH AMERICAN INDUSTRIAL FLOOR COATINGS SALES [Bar Graph] Floor Coatings Sales in Millions
Year North America 1990 14.3 1991 13.0 1992 14.6 1993 14.8 1994 18.2 1995 20.7 1996 21.4 1997 22.7
[Photo of Steven K. Weeks, Vice President] STEVEN K. WEEKS, VICE PRESIDENT "IN 1997, WE FOCUSED ON LOWERING OUR COSTS, SIMPLIFYING OUR PRODUCT LINE WHILE FILLING IN SOME OF THE GAPS, AND DEVELOPING BETTER SALES TOOLS. WE EXPECT TO BEGIN SEEING THE EFFECTS OF THIS EFFORT IN 1998." [Photo of factory floor] Tennant floor coatings help make this steel manufacturing plant a world-class facility. 11 TENNANT IN INTERNATIONAL MARKETS Tennant has sold its products internationally since the 1950s. No single competitor from the U.S. or any other country has Tennant's broad level of international market penetration in floor maintenance equipment. INTERNATIONAL FLOOR CLEANING TRENDS A number of trends that cross country borders are driving the international market: - - More businesses in various industries are becoming global players and therefore have global demands for the products and services they purchase. - - Many businesses are turning to contract cleaners--local and multinational firms--to handle this non-core operational activity for them. In Europe, for example, contract cleaners hold as much as a 50% market share--much larger than in North America. - - Many businesses--and countries--are interested in cleaner, safer work and public places. However, for some it still remains a concept that must be "sold" to them rather than seen as a business or social need. - - The best-selling industrial products in international markets tend towards the smaller sizes because of narrow aisles and other space constraints. Scrubbing in many areas is not as common as in Europe or North America because the concept of a cleaner, safer environment is in an earlier state of development. INTERNATIONAL SALES [Bar Graph] International Markets Sales in Millions
Floor Year Industrial Commercial Coatings Total 1990 58 0 0 58 1991 58 0 0 58 1992 63 1 0 64 1993 60 3.5 0 63.5 1994 64 5 0 69 1995 79 9 0.6 88.6 1996 82 12 0.2 94.2 1997 81 15.4 0.4 96.8
[Photo Tennant's European Headquarters] Tennant's European headquarters in The Netherlands. [Photo Jan't Hart, Managing Director, Tennant Holding B.V.] JAN 'T HART, MANAGING DIRECTOR, TENNANT HOLDING B.V. "CUSTOMERS AND SUPPLIERS IN EUROPE LIKE TO PARTNER WITH TENNANT. THEY SEE WE HAVE AN INNOVATIVE PRODUCT LINE, HAVE SOPHISTICATED LOGISTICS, AND ARE THE BEST AT USING TECHNOLOGY TO OFFER A TOTAL CLEANING SOLUTION. NONE OF OUR COMPETITORS CAN MATCH ALL OF THIS." [Photo Tennant Model 6080] The Model 6080 walk-behind in use at De Heuvelgaleries shopping center in Eindhoven, The Netherlands. 12 HOW TENNANT DIFFERENTIATES ITSELF INTERNATIONALLY In addition to our size, Tennant has distinguished itself in a number of other ways. One important difference is that nonresidential floor care is our ONLY business. This generates just a portion of our competitors' sales, since they tend to also be in other businesses either only remotely related to floor cleaning or not related at all. Tennant has a broad, innovative product line to serve the needs of both industrial and commercial settings. We have adjusted these products to reflect international needs, such as offering smaller equipment and equipment that meets different noise and pollution standards. We also directly sell and service our products where the market warrants the investment (currently Australia, France, Germany, The Netherlands, Spain and the United Kingdom--in addition to North America). This gives us more flexibility in meeting customers' needs in these larger markets. Tennant also has very strong relationships with distributors in over 45 other countries, including Japan. This strength is reflected in the average length of distribution contracts. Tennant's agreements tend to be in the range of 10 to 14 years versus the industry average of 3 to 4 years. In the coming years, Tennant will be able to provide an advantage no other competitor has: nearly seamless sales and service to multinational companies at their various international sites. We are presenting a uniform product and service offering to customers around the world. This will help us differentiate Tennant from its competitors and expand our global leadership position. [Photo of William R. Strang, Vice President] WILLIAM R. STRANG, VICE PRESIDENT "THERE IS NO HOMOGENEOUS 'INTERNATIONAL' MARKET--EACH COUNTRY IS UNIQUE. THEIR DIRT IS DIFFERENT. THEIR STANDARDS OF CLEANLINESS ARE DIFFERENT. WHAT THEY WANT FROM FLOOR CLEANING MACHINES IS DIFFERENT. OUR CHALLENGE IS TO MAKE SURE OUR SOLUTIONS RELATE TO EACH LOCAL MARKET." [Photo of Tennant Model 6400] The 6400 sweeper's compact size makes it ideal for densely populated markets like Japan. 13 MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - ------------------------------------------------------------------------------- SELECTED INDICATORS OF GROWTH AND PROFITABILITY
CURRENT ECONOMIC CYCLE(a) PREVIOUS ECONOMIC CYCLE(a) CURRENT CYCLE LAST HALF FULL YEAR TO DATE OF CYCLE CYCLE Period Included in Economic Cycle 1997 1991-1997 1987-1990 1982-1990 - -------------------------------------------------------------------------------------------------- Return on Beginning Shareholders' Equity(c) 18.8 17.5 16.6 14.9 Compound Annual Growth (%): Sales -- Nominal +8 +8 +9 +8 -- Real(b) +7 +6 +4 +3 Net Earnings(c) +15 +9 +10 +3 Cash Dividends Per Share +4 +3 +6 +6 Net Operating Assets +2 +10 +4 +5 Growth Period (From-To) 1996-1997 1990-1997 1986-1990 1981-1990
- ------------------------------------------------------------------------------- (a) The Company's long-term growth and profitability goals are presented at the end of this section. Growth is measured over a full economic cycle. For purposes of this table, 1991 is considered to have marked the beginning of the current cycle (growth measured from 1990). The previous cycle covered the years 1982 through 1990 (growth measured from 1981). (b) Real sales are determined by adjusting annual reported (nominal) sales for the estimated effects of changes in product pricing and changes in foreign currency rates. (c) Based on reported earnings before extraordinary gain and cumulative effect of accounting change except for 1993, 1992, 1990 and 1989 which have been adjusted to eliminate unusual items, net of income taxes, as described in the Historical Progress Review, footnotes (a) through (d). FINANCIAL RESULTS OF OPERATIONS EARNINGS: For 1997, net earnings were $24.2 million, or $2.41 per diluted share, up 15% from the prior year. Return on sales was 6.5%, and return on beginning shareholders' equity was 18.8%. The reasons for the earnings gain were higher sales, and increases in gross margin and other income. A much stronger U.S. dollar reduced earnings by an estimated $1.8 million, or 18 cents per share. For 1996, net earnings were $21.0 million, or $2.09 per diluted share, up 6% from the prior year. Return on sales was 6.1%, and return on beginning shareholders' equity was 18.4%. The reasons for the earnings gain were higher sales, a relatively low rate of growth for expenses, and an increase in other income. A somewhat stronger U.S. dollar reduced earnings by an estimated $0.6 million, or 6 cents per share. For 1998, management is somewhat cautious in its outlook because of the financial crisis in Asia. However, the Company's sales to the affected countries represented only 5% of total revenue in 1997, and the region's problems are expected to have only a modest effect on the world's major economies. With this in mind and given the fact that 1997 finished with somewhat higher backlogs and continued good order growth in most markets, management believes another year of higher sales and earnings is possible. SALES: For 1997, net sales of $372 million increased 8% from the prior year and backlogs were up $2 million to $13 million. A much stronger U.S. dollar reduced full year sales by $8 million. North American sales of $276 million were up 11% on robust economic conditions and a significant number of new and updated products introduced in 14 recent years. Sales increases by product line were 12% for industrial equipment, 9% for commercial equipment, and 7% for floor coatings. International sales of $96 million, representing 26% of consolidated revenues, increased only 1% in translated U.S. dollars, but were up 9% in local currencies. The strongest local currency increases were in Japan and Australia, and several countries in Europe. For 1996, net sales of $344 million increased 6% from the prior year and backlogs declined by $1 million. A somewhat stronger U.S. dollar reduced full year sales by $3 million. North American sales of $249 million were up 6% on economic conditions that were weak early in the year, especially in the industrial sector, but that improved steadily as the year progressed. Sales increases by product line were 8% for commercial equipment, 5% for industrial equipment, and 2% for floor coatings. International sales of $95 million for 1996, representing 28% of consolidated revenues, increased 5% (up 9% in local currencies). The strongest sales gains were in Japan, France and Australia. PROFIT FROM OPERATIONS: For 1997, profit from operations increased 14% to $36.1 million on an 8% sales increase, resulting in an operating margin of 9.7% versus 9.2% the prior year. Factory capacity use is estimated to have been in the 70% range overall with North American facilities at the upper end of the range. (Some capacity expansion will likely be required within the next several years.) The improvement in operating margin was due to an increase in gross margin to 42.2% from 41.3% the prior year. The improvement was primarily due to a favorable product mix, manufacturing efficiencies on the higher production volume, and a relatively low rate of inflation for costs and expenses. Selling and administrative expenses, as a percent of sales, increased to 32.5% from 32.2% the prior year. The increase was primarily due to higher incentive compensation resulting from an increased growth rate, stronger financial performance, and a significant increase in the market value of the Company's common stock. For 1996, profit from operations increased 5% to $31.6 million on a 6% sales increase, resulting in an operating margin of 9.2% versus 9.3% the prior year. Factory capacity use is estimated to have been in the low 70% range for the year. The change in operating margin was due to a decline in gross margin to 41.3% from 42.9% the prior year. The decline was primarily due to a change in the sales mix to lower margin products and market segments, operational inefficiencies in Europe, and translation effects of the stronger U.S. dollar. Selling and administrative expenses, as a percent of sales, declined to 32.2% in 1996 from 33.7% the prior year. The decline was primarily due to steps taken to substantially slow the rate of expense growth. OTHER INCOME AND EXPENSE: For 1997, the Company recorded other income of $1,542,000 versus $698,000 in the prior year. The primary reasons for the increase were more interest income on a higher level of invested cash and less interest expense on a lower level of debt. Included in other income is $4.7 million of interest income in 1997. Of this amount, $2.4 million is from finance-type leases provided to customers, and $1.5 million is from a loan to the Company's Employee Stock Ownership Plan (ESOP). For 1996, the Company recorded other income of $698,000 versus other expense of $747,000 in the prior year. The primary reasons for the change were a reduction in the discretionary contribution to the Company's charitable foundation, a higher level of interest income, and less interest expense. For 1998, management anticipates a somewhat higher level of net other income than recorded in 1997 due to reductions in foreign currency transaction losses and the discretionary contribution to the Company's charitable foundation. INCOME TAXES: For 1997, the effective tax rate increased to 35.7% primarily because pre-tax earnings were up the most in higher taxing jurisdictions. For 1996, the rate increased to 35.0% from an unusually low 33.2% the prior year. (The 1995 rate was affected by tax losses in several tax jurisdictions and a relatively high level of tax credits.) For 1998, management anticipates an effective tax rate in the mid-35% range. LIQUIDITY AND CAPITAL RESOURCES The Company continues to generate substantial cash flow and was again able to strengthen its financial condition in 1997. 15 FINANCIAL POSITION: Cash and cash equivalents ended 1997 at $16 million, up from $10 million the prior year, and debt was reduced to $23 million, or 15% of capital, from $26 million, or 17% of capital. Based on current operating plans, dividend policy, and stock repurchase authority, management expects cash and debt to decline somewhat by the end of 1998. Working capital, excluding cash and debt, increased by 2% from the prior year-end due to the higher level of business activity. At December 31, 1997, the Company held $1.1 million of unsecured trade receivables from distributors located in Asia and Latin America. Management believes the allowance for doubtful accounts is adequate to cover losses resulting from the Asian financial turmoil. Working capital will likely increase in 1998; however, the percentage change is expected to again be less than sales growth. Property, plant, and equipment, net of accumulated depreciation was about flat compared to the prior year-end. Depreciation expense was $16.2 million, capital spending net of disposals was $16.4 million. The largest categories of capital spending were information technology hardware and software, vehicles (cars, trucks and trailers), industrial products financed with operating leases for customers, product tooling, factory equipment, and a warehouse/distribution center in Michigan that will consolidate several leased facilities in the Great Lakes region. Vehicles represent a large category of spending because of the use of direct sales and service in key industrial markets. For 1998, management expects depreciation expense of about $17 million and capital spending, net of disposals, of about $20 million. This level of capital spending, which is relatively high in a historical sense, reflects the Company's continuing commitment to the increasing use of information technology to enhance its competitive position and resolve "Year 2000" computer systems' issues. DIVIDENDS AND COMMON STOCK: Cash dividends of 72 cents per share were up 4%, the 26th consecutive year of increase. Common diluted shares outstanding averaged 10,031,600 in 1997, a decrease from the prior year's 10,075,800. Outstanding diluted shares at year-end declined 2% to 9,821,100. On May 1, 1997, the Board of Directors authorized the repurchase of 600,000 shares of Company stock. During 1997, the Company repurchased 329,407 shares under this authority and 56,033 shares under a previous authority for an overall average price of $35.26 per share. On February 26, 1998, the Board of Directors canceled the unused authority (approximately 191,000 shares) related to the May 1997 authorization and established a new authority to repurchase up to 600,000 shares of Company stock. IMPACT OF INFLATION: Inflation has not been a significant factor for several years. For 1997, it is estimated that product pricing, on average, was somewhat above the inflation experienced by the Company for costs and expenses. For 1998, management expects that product pricing will be about equal to inflation. The relatively high inflation of the 1970s and early 1980s continues to be reflected in the Company's historical-cost balance sheet in the following ways: - - Inventories are significantly below current replacement cost because they are, for the most part, stated on a last-in, first-out basis. (See "Notes to Consolidated Financial Statements," note 1, for amounts involved.) - - Property, plant, and equipment is stated at historical cost, which is below current replacement value for older assets. These shortcomings of historical-cost financial statements are managed by establishing return-on-investment objectives based on current values for assets. In addition, price indexes are used to estimate real, inflation-adjusted sales which allow for more meaningful measurements of growth over extended periods of time. IMPACT OF CHANGING VALUE OF THE U.S. DOLLAR: Approximately one-third of the Company's sales occur outside of the United States directly or through independent distributors in over 50 countries. Sales in Australia, Canada, Japan, and the European direct-sales countries of Germany, France, Spain, the United Kingdom, and The Netherlands are made in their respective currencies. Sales in other countries, which are generally to distributors, are made in either U.S. dollars or, in Europe, in Dutch guilders. In recent years, the world's key currencies have experienced significant changes in relative value over short periods of time. The U.S. dollar began 1997 on a 16 strong note and continued to rise in value over the remainder of the year. Management estimates the impact of these rate changes by recalculating current-year results using prior-year exchange rates. The resulting difference in results is an approximation of the effect rate changes have under static analysis (i.e., no consideration given to possible reactual changes such as adjusted pricing, volume sensitivity to price changes, etc.). The Company uses hedging arrangements such as forward-exchange and range-forward contracts from time to time to offset short-term changes in currency values. At the end of 1997, the Company had outstanding $6 million of forward-exchange contracts denominated in Canadian and Australian dollars (see "Notes to Financial Statements," note 14). Since these contracts are relatively small in value and are treated as hedges of specific balance sheet monetary amounts denominated in these currencies, or nearly certain product exports to be sold in these currencies, there is only limited potential for impact on the Company's future liquidity. FINANCIAL GOALS AND POLICIES The Company's financial mission is to create value for shareholders by providing an above-average total return. Goals and policies that support this mission are: - - Growth - Annual increases of 8% in sales and at least 10% in earnings per share over a full economic cycle; measured from cycle peak to peak. - - Profitability - Averaging a 20% return on beginning shareholders' equity in the growth years of an economic cycle. - - Financial Policies - Consistent annual dividend increases and maintenance of a sound capital structure with financing debt generally not in excess of 30% of capitalization. Summaries of the Company's financial performance compared with these goals are presented in several graphs and tables included in this report. CHANGES IN LEASING BUSINESS For many years, Tennant provided long-term financing to customers. Arrangements have been made with General Electric Capital Companies (GE Capital) to provide these services beginning January 2, 1998. The Company is also arranging for the sale of its existing financing-related portfolio to GE Capital. (At December 31, 1997, the portfolio consisted of lease-type contracts and financing equipment still owned by Tennant, with a combined net book value of $18 million.) A substantial portion of the portfolio is expected to be sold within the next several months at net book value plus a gross profit on the financed equipment and a portion of future interest, less administrative charges and contingency reserves. It is not possible to determine the impact of this transaction on full-year 1998 net earnings at this time. However, on a year-over-year comparison with 1997, the net gain on the sale will be at least partially offset by the absence of lease financing income for the remainder of 1998. YEAR 2000 COMPUTER SYSTEMS' ISSUES Several years ago, the Company embarked on a major, long-term effort to upgrade its computer systems. For the most part, this involves the companywide installation of SAP's R/3 enterprise system, which is fully year-2000 compliant. This investment, which has been commented on from time to time in public disclosures, was undertaken for strategic reasons such as gaining a competitive edge, improving operating efficiency, and reducing costs. Management believes this new system will substantially resolve the Company's year-2000 date-change issues. While some additional expense directly related to year-2000 issues has been and will continue to be incurred, the estimated amounts involved are not material. SAFE HARBOR STATEMENT This Annual Report contains "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995, which involve risks and uncertainties, including, but not limited to, changing economic and political conditions; changes in governmental spending and budgetary policies, laws, regulations, and trading restrictions; customer product acceptance; competitive factors; and continued access to capital markets. All forecasts and projections in this report are "forward-looking statements" that are based on current information available to management. Actual results could differ materially, both due to the mentioned risk factors and to other factors not so referenced. 17 TENNANT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) PERCENT PERCENT PERCENT ------- ------- ------- Net sales. . . . . . . . . . . . . . $372,428 100.0 $344,433 100.0 $325,368 100.0 Less: Cost of sales. . . . . . . . . . . 215,392 57.8 202,057 58.7 185,668 57.1 Selling and administrative expenses. . . . . . . . . . . . 120,948 32.5 110,745 32.2 109,518 33.7 -------- ---- -------- ---- ------- ---- Profit from operations . . . . . . . 36,088 9.7 31,631 9.2 30,182 9.3 Other income and (expense): Net foreign currency transaction gain (loss). . . . . . . . . . . . (306) (.08) 50 -- (128) -- Interest income. . . . . . . . . . 4,699 1.3 4,259 1.2 4,132 1.3 Interest (expense) . . . . . . . . (2,021) (.5) (2,491) (.7) (2,640) (.8) Miscellaneous income (expense), net . . . . . . . . . . . . . . (830) (.2) (1,120) (.3) (2,111) (.6) -------- ---- -------- ---- ------- ---- Total other income (expense). . 1,542 .5 698 .2 (747) (.2) -------- ---- -------- ---- ------- ---- Profit before income taxes . . . . . 37,630 10.1 32,329 9.4 29,435 9.0 Income tax expense . . . . . . . . . 13,425 3.6 11,302 3.3 9,773 3.0 -------- ---- -------- ---- ------- ---- Net earnings . . . . . . . . . . . . $ 24,205 6.5 $ 21,027 6.1 $ 19,662 6.0 -------- ---- -------- ---- ------- ---- -------- ---- -------- ---- ------- ---- Basic net earnings per share . . . . $ 2.43 $ 2.09 $ 1.98 -------- -------- ------- -------- -------- ------- Diluted net earnings per share . . . $ 2.41 $ 2.09 $ 1.98 -------- -------- ------- -------- -------- -------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 18 TENNANT COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31 1997 1996 ---------- --------- ASSETS Current assets: Cash and cash equivalents. . . . . . . . . . . . . . . . . $ 16,279 $ 9,881 Receivables: Trade, less allowance for doubtful accounts ($2,826 in 1997 and $2,137 in 1996) . . . . . . . . . 68,502 65,581 Installment accounts receivable, net of deferred income from sales finance charges and less allowance for doubtful accounts ($476 in 1997 and $369 in 1996) . . . . . . . . . . . 7,920 7,839 Sundry. . . . . . . . . . . . . . . . . . . . . . . . . 1,739 1,098 ---------- --------- Net receivables . . . . . . . . . . . . . . . . . . . 78,161 74,518 Inventories. . . . . . . . . . . . . . . . . . . . . . . . 40,323 35,264 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . 985 934 Deferred income taxes, current portion . . . . . . . . . . 7,357 5,884 ---------- --------- Total current assets. . . . . . . . . . . . . . . . . 143,105 126,481 Property, plant, and equipment, net of accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . 65,111 65,384 Installment accounts receivable due after one year, net of deferred income from sales finance charges. . . . . 6,337 7,448 Deferred income taxes, long-term portion . . . . . . . . . . 2,257 1,524 Intangible assets. . . . . . . . . . . . . . . . . . . . . . 16,525 17,752 Other assets . . . . . . . . . . . . . . . . . . . . . . . . 535 591 ---------- --------- Total assets. . . . . . . . . . . . . . . . . . . . . $233,870 $219,180 ---------- --------- ---------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current debt . . . . . . . . . . . . . . . . . . . . . . . $ 2,377 $ 3,864 Accounts payable and accrued expenses. . . . . . . . . . . 49,871 41,690 Income taxes payable . . . . . . . . . . . . . . . . . . . 4,901 4,034 ---------- --------- Total current liabilities . . . . . . . . . . . . . . 57,149 49,588 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 20,678 21,824 Long-term employee-related benefits. . . . . . . . . . . . . 21,767 18,528 Other long-term liabilities. . . . . . . . . . . . . . . . . 190 380 ---------- --------- Total liabilities . . . . . . . . . . . . . . . . . . 99,784 90,320 Shareholders' equity: Preferred stock of $.02 par value per share. . . . . . . . -- -- Common stock of $.375 par value per share. . . . . . . . . 3,637 3,737 Additional paid-in capital . . . . . . . . . . . . . . . . -- 3,547 Common stock subscribed. . . . . . . . . . . . . . . . . . 444 703 Unearned restricted shares . . . . . . . . . . . . . . . . (789) (440) Retained earnings. . . . . . . . . . . . . . . . . . . . . 141,656 130,703 Cumulative translation adjustment. . . . . . . . . . . . . 563 2,877 Receivable from ESOP . . . . . . . . . . . . . . . . . . . (11,425) (12,267) ---------- --------- Total shareholders' equity. . . . . . . . . . . . . . 134,086 128,860 ---------- --------- Total liabilities and shareholders' equity. . . . . . $233,870 $219,180 ---------- --------- ---------- ---------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 19 TENNANT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31 1997 1996 1995 -------- -------- ------- CASH FLOW RELATED TO OPERATING ACTIVITIES: Net earnings . . . . . . . . . . . . . . . . . . $24,205 $21,027 $19,662 Adjustments to net earnings to arrive at operating cash flow: Depreciation and amortization . . . . . . . . 17,468 16,387 14,090 Provision for bad debts . . . . . . . . . . . 1,901 1,160 803 Provision for stock plans . . . . . . . . . . 1,608 1,191 1,068 (Gain) loss on sale of property, net. . . . . (716) 557 (531) Provision for deferred taxes. . . . . . . . . (2,391) (959) 588 Increase in receivables . . . . . . . . . . . (7,225) (4,073) (14,515) (Increase) decrease in inventories. . . . . . (6,614) 4,698 (9,024) Increase (decrease) in accounts payable, accrued expenses and other long-term liabilities . . . . . . . . . . . . . . . . 9,142 (1,428) 5,610 Increase in long-term employee-related benefits. . . . . . . . . . . . . . . . . . 3,339 2,397 1,568 Increase (decrease) in income taxes payable . . . . . . . . . . . . . . . . . . 887 3,370 (2,359) (Increase) decrease in other assets . . . . . 386 (216) 478 Other, net. . . . . . . . . . . . . . . . . . (98) 455 396 -------- -------- ------- Net cash flow related to operating activities . . . . . . . . . . . . . . . . . . 41,892 44,566 17,834 CASH FLOW RELATED TO INVESTING ACTIVITIES: Acquisition of NFM, net of cash received (see note 18) . . . . . . . . . . . . . . . -- -- (2,208) Acquisition of property, plant, and equipment . . . . . . . . . . . . . . . . . (20,621) (20,966) (25,222) Acquisition of intangible assets. . . . . . . -- (180) -- Proceeds from disposals of property, plant, and equipment . . . . . . . . . . . . . . . 4,197 3,385 6,105 Settlement of foreign currency hedging contracts . . . . . . . . . . . . . . . . . 934 521 (782) -------- -------- ------- Net cash flow related to investing activities . . . . . . . . . . . . . . . . . . (15,490) (17,240) (22,107) CASH FLOW RELATED TO FINANCING ACTIVITIES: Net changes in current debt . . . . . . . . . (1,561) (14,487) (5,434) Payments to settle long-term debt . . . . . . (553) -- -- Issuance of long-term debt . . . . . . . . . 15 -- 16,782 Principal payment from ESOP . . . . . . . . . 546 495 450 Proceeds from employee stock issues . . . . . 1,842 1,784 1,665 Repurchase of common stock. . . . . . . . . . (13,598) (2,911) -- Dividends paid. . . . . . . . . . . . . . . . (7,125) (6,905) (6,742) -------- -------- ------- Net cash flow related to financing activities . . . . . . . . . . . . . . . . . . (20,434) (22,024) 6,721 Effect of exchange rate changes on cash. . . . . . 430 332 (52) -------- -------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS. . . . . 6,398 5,634 2,396 Cash and cash equivalents at beginning of year . . 9,881 4,247 1,851 -------- -------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . $16,279 $ 9,881 $ 4,247 -------- -------- ------- -------- -------- -------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 20 TENNANT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT COMMON STOCK Beginning balance. . . . . . . . . . . 9,965,437 $ 3,737 9,952,036 $ 3,732 9,838,956 $ 3,690 Issue stock for employee benefit plans and directors . . . . . . . . . 132,154 49 134,229 50 113,080 42 Purchase of common shares. . . . . . . (398,194) (149) (120,828) (45) -- -- --------- -------- --------- -------- --------- -------- Ending balance. . . . . . . . . . . 9,699,397 $ 3,637 9,965,437 $ 3,737 9,952,036 $ 3,732 --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- ADDITIONAL PAID-IN CAPITAL Beginning balance. . . . . . . . . . . $ 3,547 $ 3,166 $ 396 Issue stock for employee benefit plans and directors . . . . . . . . . 3,596 3,247 2,770 Purchase of common shares. . . . . . . (7,143) (2,866) -- -------- -------- -------- Ending balance. . . . . . . . . . . $ -- $ 3,547 $ 3,166 -------- -------- -------- -------- -------- -------- COMMON STOCK SUBSCRIBED Beginning balance. . . . . . . . . . . 21,403 $ 703 29,084 $ 694 21,750 $ 525 Issue stock for employee benefit plans. . . . . . . . . . . . . . . . (21,403) (703) (29,084) (694) (21,750) (525) Subscribe stock for employee benefit plans . . . . . . . . . . . . . . . . 12,191 444 21,403 703 29,084 694 --------- -------- --------- -------- --------- -------- Ending balance. . . . . . . . . . . 12,191 $ 444 21,403 $ 703 29,084 $ 694 --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- UNEARNED RESTRICTED SHARES Beginning balance. . . . . . . . . . . $ (440) $ (276) $ (424) Restricted share activity, net . . . . (349) (164) 148 -------- -------- -------- Ending balance. . . . . . . . . . . $ (789) $ (440) $ (276) -------- -------- -------- -------- -------- -------- RETAINED EARNINGS Beginning balance. . . . . . . . . . . $130,703 $116,396 $103,281 Net earnings . . . . . . . . . . . . . 24,205 21,027 19,662 Dividends paid, $.72, $.69, and $.68, respectively, per common share. . . . (7,125) (6,905) (6,742) Purchase of common shares. . . . . . . (6,306) -- -- Tax benefit on dividends on unallocated ESOP shares. . . . . . . 179 185 195 -------- -------- -------- Ending balance. . . . . . . . . . . $141,656 $130,703 $116,396 -------- -------- -------- -------- -------- -------- CUMULATIVE TRANSLATION ADJUSTMENT Beginning balance. . . . . . . . . . . $ 2,877 $ 3,532 $ 2,743 Net change for year in translation adjustment. . . . . . . . . . . . . . (2,769) (1,065) 1,248 Gain (loss) on foreign currency hedges, net of income taxes of $(279), $(251), and $282, respectively. . . . . . . . 455 410 (459) -------- -------- -------- Ending balance. . . . . . . . . . . $ 563 $ 2,877 $ 3,532 -------- -------- -------- -------- -------- -------- RECEIVABLE FROM ESOP Beginning balance. . . . . . . . . . . $ (12,267) $(13,113) $(13,962) Principal payments . . . . . . . . . . 546 495 450 Shares allocated . . . . . . . . . . . 296 351 399 -------- -------- -------- Ending balance. . . . . . . . . . . $ (11,425) $(12,267) $(13,113) -------- -------- -------- -------- -------- -------- Total shareholders' equity . . . . . . $134,086 $128,860 $114,131 -------- -------- -------- -------- -------- --------
The Company had 30,000,000 authorized shares of common stock as of December 31, 1997, 1996, and 1995. SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 21 MANAGEMENT'S REPORT The Company's management is responsible for the integrity and accuracy of the financial statements. Management believes that the financial statements for the three years ended December 31, 1997, have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances. In preparing the financial statements, management makes informed judgments and estimates where necessary to reflect the expected effects of events and transactions that have not been completed. In meeting its responsibility for the reliability of the financial statements, management relies on a system of internal accounting control. This system is designed to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles. The design of this system recognizes that errors or irregularities may occur and that estimates and judgments are required to assess the relative cost and expected benefits of the controls. Management believes that the Company's accounting controls provide reasonable assurance that errors or irregularities that could be material to the financial statements are prevented or would be detected within a timely period. The Audit Committee of the Board of Directors, which is comprised solely of Directors who are not employees of the Company, is responsible for monitoring the Company's accounting and reporting practices. The Audit Committee meets periodically with management and the independent auditors to discuss internal accounting control, auditing, and financial reporting matters. --------------------------- INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Tennant Company: We have audited the accompanying consolidated balance sheets of Tennant Company and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tennant Company and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Minneapolis, Minnesota February 6, 1998 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER RELATED DATA CONSOLIDATION. The consolidated financial statements include the accounts of Tennant Company and its wholly owned subsidiaries, Castex, Incorporated, and Tennant Holding B.V. All material intercompany transactions and balances have been eliminated. TRANSLATION OF NON-U.S. CURRENCY. Foreign currency denominated assets and liabilities have been translated to U.S. dollars generally at year-end exchange rates, while income and expense items are translated at exchange rates prevailing during the year. Gains or losses resulting from translation are included as a separate component of shareholders' equity. Transaction gains or losses are included in current operations. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVENTORIES. Inventories are valued at the lower of cost (principally on a last-in, first-out basis) or market. Inventories would have been higher than reported, as is shown below, had they been valued using the first-in, first-out method of accounting, which approximates replacement cost. The composition of inventories at December 31 is as follows:
(IN THOUSANDS) 1997 1996 ------- ------- FIFO inventories: Finished goods . . . . . . . . . . . . $27,028 $26,317 Raw materials, parts and work-in-process. . . . . . . . . . . 31,833 26,879 ------- ------- Total FIFO inventories . . . . . . . . . 58,861 53,196 LIFO adjustment. . . . . . . . . . . . . (18,538) (17,932) ------- ------- LIFO inventories . . . . . . . . . . . . $40,323 $35,264 ------- ------- ------- -------
PROPERTY, PLANT, AND EQUIPMENT. Property, plant, and equipment is carried at cost. Expenditures for improvements that add materially to the productive capacity or extend the useful life of an asset are capitalized. DEPRECIATION AND AMORTIZATION. The Company depreciates buildings and improvements by the straight-line method over a 30-year life. Other property, plant, and equipment is depreciated using the straight-line method based on lives of 3 to 10 years. Goodwill and other intangibles are amortized using the straight-line method based on estimated useful lives ranging from 5 to 30 years. PENSION AND PROFIT SHARING PLANS. The Company has pension and profit sharing plans covering substantially all of its employees. Pension plan costs are accrued based on actuarial estimates with the pension cost funded annually. POSTRETIREMENT BENEFITS. The company accounts for postretirement benefits under Statement of Financial Accounting Standards (SFAS) No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. SFAS No. 106 requires an employer to recognize the cost of retiree health benefits over the employees' period of service. RECLASSIFICATIONS. Certain prior years' amounts have been reclassified to conform with the current year presentation. WARRANTY. The Company charges to current operations a provision, based on historical experience, for future warranty claims. Warranty terms on machines range from one to four years. INCOME TAXES. The Company accounts for income taxes under SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. U.S. income taxes are not provided on undistributed earnings of international subsidiaries which are permanently reinvested. At December 31, 1997, earnings permanently reinvested in international subsidiaries not subject to a U.S. income tax provision were $12,537,000. If ever remitted to the Company in a taxable distribution, U.S. income taxes would be substantially offset by available foreign tax credits. EARNINGS PER SHARE. On December 31, 1997, the Company adopted SFAS No. 128, EARNINGS PER SHARE, which establishes new standards for calculating and disclosing earnings per share. All prior period earnings per share data has been restated to conform with the provisions of SFAS No. 128. STOCK-BASED COMPENSATION. The Company accounts for stock-based compensation under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. APB No. 25 requires compensation cost to be recorded on the date of the grant only if the current market price of the underlying stock exceeds the exercise price. Accordingly, no compensation cost has been recognized for stock option plans. The Company has adopted the disclosure-only provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. CASH EQUIVALENTS. The Company considers all highly liquid investments with maturities of three months or less, when purchased, to be cash equivalents. REVENUE RECOGNITION. The Company recognizes revenue when title passes, which is usually upon shipment. DERIVATIVE FINANCIAL INSTRUMENTS. The Company enters into forward exchange contracts principally to hedge the eventual dollar cash flow of foreign currency denominated transactions (principally British pound, Netherlands guilder, Australian dollar, Canadian dollar, and Japanese yen). Gains or losses on forward exchange contracts to hedge foreign currency denominated anticipated sales transactions and net exposed assets are recognized in income on a current basis over the term of the contracts. The Company has elected to treat certain forward exchange contracts as an economic hedge of its net investment in Tennant Holding B.V., a Netherlands-based subsidiary. Gains or losses on such contracts, net of related tax effect, are recognized on a current basis over the term of the contract and are reported as a separate component of shareholders' equity. 23 LONG-LIVED ASSETS. The Company assesses long-lived assets for impairment under SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 121 requires that long-lived assets be assessed for impairment loss recognition when events or circumstances indicate that the carrying amount of the asset may not be recoverable. NEW ACCOUNTING PRONOUNCEMENTS. In 1997, the Company adopted SFAS No. 129, DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE, which consolidates existing disclosure requirements. SFAS No. 129 has no impact on the Company's financial statements. Also in 1997, the Financial Accounting Standards Board issued SFAS No. 130 and SFAS No. 131 which will be adopted by the Company in 1998. SFAS No. 130, REPORTING COMPREHENSIVE INCOME, establishes standards for reporting and displaying the components of comprehensive income. The statement requires additional disclosures, but has no impact on consolidated net earnings. SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, establishes standards for determining operating segments and reporting operating segment information. The Company has not yet evaluated the effects of this pronouncement to determine what changes, if any, to its current reporting format will be required. (2) SEGMENT REPORTING The Company operates in one industry segment which consists of the design, manufacture, and sale of products and services used in the maintenance of nonresidential floors. Financial data by geographic area is before interest expense and elimination of intercompany transactions. North America sales include sales in the United States, Canada and Mexico. Sales in Canada and Mexico comprise less than 10% of consolidated sales and are interrelated with the Company's U.S. operations. Product transfers from North America are generally made at prices that recognize return on investment objectives for both the manufacturing and selling units. Corporate items include general corporate expense and miscellaneous items such as net ESOP income and foundation contribution expense. Corporate assets consist primarily of Company cash and cash equivalents.
(IN THOUSANDS) 1997 1996 1995 -------- -------- -------- NET SALES North America Customer sales . . . . . . . . . . . $275,834 $248,703 $235,168 Transfers to Europe and other international areas. . . . . 51,231 43,898 39,056 -------- -------- -------- Total North America. . . . . . . . . $327,065 $292,601 $274,224 Europe customer sales. . . . . . . . . 57,387 58,196 56,889 Other international customer sales . . 39,207 37,534 33,311 Eliminations . . . . . . . . . . . . . (51,231) (43,898) (39,056) -------- -------- -------- Total . . . . . . . . . . . . . . . . . $372,428 $344,433 $325,368 -------- -------- -------- -------- -------- -------- PROFIT BEFORE INCOME TAXES North America. . . . . . . . . . . . . $ 34,029 $ 28,734 $ 26,716 Europe . . . . . . . . . . . . . . . . 5,168 3,960 4,264 Other international. . . . . . . . . . 1,687 3,009 4,254 Corporate items, interest expense, and eliminations. . . . . . (3,254) (3,374) (5,799) -------- -------- -------- Total . . . . . . . . . . . . . . . . . $ 37,630 $ 32,329 $ 29,435 -------- -------- -------- -------- -------- -------- TOTAL ASSETS Identifiable assets North America. . . . . . . . . . . . $176,284 $170,010 $166,309 Europe . . . . . . . . . . . . . . . 37,842 38,857 43,368 Other international. . . . . . . . . 7,898 7,038 5,575 Corporate assets and eliminations. . . 11,846 3,275 498 -------- -------- -------- Total . . . . . . . . . . . . . . . . . $233,870 $219,180 $215,750 -------- -------- -------- -------- -------- --------
3) COSTS AND EXPENSES Engineering, research and development, maintenance and repairs, warranty, and bad debt expenses were charged to operations for the three years ended December 31, 1997, as follows:
(IN THOUSANDS) 1997 1996 1995 ------- ------- ------- Engineering, research and development. . . . . . . . . . . . . . $13,470 $12,773 $12,695 Maintenance and repairs. . . . . . . . . $ 5,718 $ 5,740 $ 5,239 Warranty . . . . . . . . . . . . . . . . $ 4,981 $ 4,579 $ 5,191 Bad debts. . . . . . . . . . . . . . . . $ 1,901 $ 1,160 $ 803
(4) CONSOLIDATED QUARTERLY DATA* (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net Sales Gross Profit ------------------------------- ------------------------------ % % Quarter 1997 1996 Change 1997 1996 Change -------- -------- ------ -------- -------- ------ First. . . . . . . . . . . . . . . . . . $ 83,026 $ 76,823 8 $ 34,149 $ 32,767 4 Second . . . . . . . . . . . . . . . . . 93,359 86,794 8 39,770 35,790 11 Third. . . . . . . . . . . . . . . . . . 90,570 83,816 8 38,298 34,197 12 Fourth . . . . . . . . . . . . . . . . . 105,473 97,000 9 44,819 39,622 13 -------- -------- -------- -------- Year . . . . . . . . . . . . . . . . . . $372,428 $344,433 8 $157,036 $142,376 10 -------- -------- -------- -------- -------- -------- -------- --------
Net Earnings Earnings Per Share ------------------------------- ------------------------------ % Quarter 1997 1996 Change 1997 1996 -------- -------- ------ -------- -------- First. . . . . . . . . . . . . . . . . . $ 4,407 $ 3,984 11 $ .43 $ .40 Second . . . . . . . . . . . . . . . . . 6,417 5,165 24 .63 .51 Third. . . . . . . . . . . . . . . . . . 5,972 5,010 19 .60 .50 Fourth . . . . . . . . . . . . . . . . . 7,409 6,868 8 .75 .68 -------- -------- -------- -------- Year . . . . . . . . . . . . . . . . . . $ 24,205 $ 21,027 15 $2.41 $2.09 -------- -------- -------- -------- -------- -------- -------- --------
* Regular quarterly dividends aggregated $.72 per share in 1997 ($.18 per share for all quarters) and $.69 per share in 1996 ($.17 per share for the first three quarters and $.18 for the fourth quarter). (5) INCOME TAXES In 1997, 1996, and 1995 the Company recognized tax benefits of $179,000, $185,000, and $195,000, respectively, relating to dividends paid on unallocated shares held by the Company's ESOP and miscellaneous charges (credits) of $279,000, $251,000, and $(282,000), respectively, by direct allocations to shareholders' equity. Income tax expense for the three years ended December 31, 1997, is as follows:
(IN THOUSANDS) Current Deferred Total ------- -------- ------- 1997 Federal. . . . . . . . . . . $10,868 $(1,702) $ 9,166 Foreign. . . . . . . . . . . 3,135 (35) 3,100 State. . . . . . . . . . . . 1,458 (299) 1,159 ------- ------- ------- $15,461 $(2,036) $13,425 ------- ------- ------- ------- ------- ------- 1996 Federal. . . . . . . . . . . $ 8,808 $ (784) $ 8,024 Foreign. . . . . . . . . . . 2,286 (76) 2,210 State. . . . . . . . . . . . 967 101 1,068 ------- ------- ------- $12,061 $ (759) $11,302 ------- ------- ------- ------- ------- ------- 1995 Federal. . . . . . . . . . . $ 7,323 $ 39 $ 7,362 Foreign. . . . . . . . . . . 1,169 126 1,295 State. . . . . . . . . . . . 992 124 1,116 ------- ------- ------- $ 9,484 $ 289 $ 9,773 ------- ------- ------- ------- ------- -------
24 Income tax expense differed from the amounts computed by applying the U.S. federal income tax rate of 35%, as a result of the following:
(IN THOUSANDS) 1997 1996 1995 ------- ------- ------- Tax at statutory rate. . . . . . . . . . $13,171 $11,304 $10,293 Increases (decreases) in taxes from: State and local taxes, net of federal benefit. . . . . . . . . . . 754 694 726 Effect of foreign taxes. . . . . . . . 314 363 (78) Research and development credit. . . . (239) (324) (344) Effect of foreign sales corporation. . (668) (667) (737) Other, net . . . . . . . . . . . . . . 93 (68) (87) ------- ------- ------- Income tax expense . . . . . . . . . . . $13,425 $11,302 $ 9,773 ------- ------- ------- ------- ------- -------
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996, are presented below:
(IN THOUSANDS) 1997 1996 ------- ------- Deferred tax assets: Inventories, principally due to additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986 and changes in inventory reserves . . . . . . . . . . . . . . . . $ 1,394 $ 1,209 Employee wages and benefits, principally due to accruals for financial reporting purposes . . . 12,307 10,093 Warranty reserves accrued for financial reporting purposes . . . . . . . . . . . . . . . . 934 723 Accounts receivable, principally due to allowance for doubtful accounts and change in tax accounting method for equipment rentals. . . . . . . . . . . . . . . 183 565 Other. . . . . . . . . . . . . . . . . . . . . . . . 817 647 ------- ------- Total deferred tax assets . . . . . . . . . . . . $15,635 $13,237 ------- ------- ------- ------- Deferred tax liabilities: Property, plant, and equipment, principally due to differences in depreciation and related gains. . . . . . . . . . . . . . . . . . . $ 5,385 $ 5,259 Goodwill . . . . . . . . . . . . . . . . . . . . . . 632 480 Deferred gain, hedge of forward foreign exchange contracts . . . . . . . . . . . . . . . . 4 90 ------- ------- Total deferred tax liabilities. . . . . . . . . . $ 6,021 $ 5,829 ------- ------- ------- ------- Net deferred tax asset . . . . . . . . . . . . . . . . $ 9,614 $ 7,408 ------- ------- ------- -------
The Company has determined that a valuation allowance for the deferred tax assets is not required since it is likely that they will be realized through future reversals of existing taxable temporary differences and future taxable income. Income taxes paid were $14,839,000, $8,714,000, and $11,256,000, in 1997, 1996, and 1995, respectively. (6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at December 31 consist of the following:
(IN THOUSANDS) 1997 1996 ------- ------- Trade accounts payable . . . . . . . . . . . . . . . . $16,632 $15,446 Employee profit sharing. . . . . . . . . . . . . . . . 3,856 2,906 Wages, bonuses, and commissions. . . . . . . . . . . . 17,534 13,732 Taxes, other than income taxes . . . . . . . . . . . . 3,289 3,777 Other . . . . . . . . . . . . . . . . . . . . . . . . 8,560 5,829 ------- ------- Total . . . . . . . . . . . . . . . . . . . . . . . . $49,871 $41,690 ------- ------- ------- -------
(7) PROPERTY, PLANT, AND EQUIPMENT AND RELATED ACCUMULATED DEPRECIATION Property, plant, and equipment and related accumulated depreciation at December 31 consist of the following:
(IN THOUSANDS) 1997 1996 -------- -------- Land . . . . . . . . . . . . . . . . . . . . . . . . $ 3,553 $ 3,341 Buildings and improvements . . . . . . . . . . . . . . 25,914 26,587 Machinery and equipment. . . . . . . . . . . . . . . . 123,112 117,835 Construction in progress . . . . . . . . . . . . . . . 4,023 1,159 -------- -------- Total property, plant, and equipment . . . . . . . . . 156,602 148,922 Less accumulated depreciation. . . . . . . . . . . . . (91,491) (83,538) -------- -------- Net property, plant, and equipment . . . . . . . . . . $ 65,111 $ 65,384 -------- -------- -------- --------
Buildings and improvements include office, warehouse, or manufacturing facilities in suburban Minneapolis, Minnesota; Holland, Michigan; London, England; and Uden, The Netherlands. (8) INVESTMENTS AS LESSOR The Company leases floor maintenance equipment to customers under sales-type and operating leases. Noncancelable terms for sales-type leases range from six months to five years, and terms for operating leases range from one month to five years. All leases provide for minimum lease payments and require the lessees to pay executory costs. Minimum future lease payments to be received during the years ended December 31 are as follows:
Sales-Type Operating (IN THOUSANDS) Leases Leases ---------- --------- 1998 $ 8,295 $ 608 1999 4,567 233 2000 1,997 54 2001 685 8 2002 208 5 ---------- --------- Total $15,752 $ 908 ---------- --------- ---------- ---------
25 The Company's investment in equipment related to operating leases as of December 31 is as follows:
(IN THOUSANDS) 1997 1996 ------- ------ Cost . . . . . . . . . . . . . . . . . . . $4,792 $4,782 Less accumulated depreciation. . . . . . . (1,970) (1,381) ------- ------ Net investment . . . . . . . . . . . . . . $2,822 $3,401 ------- ------ ------- ------
The Company's net investment in sales-type leases at December 31 is as follows:
(IN THOUSANDS) 1997 1996 ------- ------- Minimum lease payments receivable. . . . . $15,752 $16,781 Less allowance for doubtful accounts . . . (476) (369) ------- ------- Net minimum lease payments receivable. . . 15,276 16,412 Estimated unguaranteed residual value. . . 1,104 1,288 Less deferred income . . . . . . . . . . . (2,757) (3,143) ------- ------- Net investment in sales-type leases. . . . $13,623 $14,557 ------- ------- ------- -------
(9) COMMITMENTS The Company leases office and warehouse facilities, vehicles and office equipment under operating lease agreements which include both monthly and longer-term arrangements. Leases with initial terms of one year or more expire at various dates through 2006 and generally provide for extension options. Rentals under the leasing agreements (exclusive of real estate taxes, insurance, and other expenses payable under the leases) amounted to $3,273,000, $2,873,000, and $2,656,000, in 1997, 1996, and 1995, respectively. The aggregate lease commitments with an initial term of one year or more at December 31, 1997, were $6,571,000 with minimum rentals for the periods as follows:
(IN THOUSANDS) 1998 $2,339 1999 1,648 2000 1,017 2001 643 2002 489 2003 and beyond 435 ------ Total $6,571 ------ ------
(10) SHORT-TERM BORROWINGS Short-term bank borrowings at December 31, 1997 and 1996, were $666,000 and $2,530,000, respectively. In addition to the short-term bank borrowings, current debt includes the current portion of long-term debt and mortgages associated with the relocation of employees. The weighted-average interest rates on the above short-term bank borrowings at December 31, 1997 and 1996, were 4.5% and 5.7%, respectively. This interest rate represents the weighted-average rate for the respective period and is calculated using the actual interest costs, exclusive of commitment fees, and month-end average outstanding debt. The Company has available lines of credit with banks in the amount of $20,607,000 which includes a $15,000,000 line of credit requiring the Company to pay .2% per year commitment fee on the line of credit. This fee is recorded by the Company as interest expense. In addition, the Company has outstanding letters of credit with banks in the amount of $2,700,000 at December 31, 1997. (11) LONG-TERM DEBT Long-term debt at December 31 consists of the following:
(IN THOUSANDS) 1997 1996 ------- ------- Bank loan at 8.8%, due in 1997 . . . . . $ -- $ 1,339 Bank loan at 4.0%, due in 1998 . . . . . 567 650 Bank loan at 7.0%, due in 1998 . . . . . 1,144 -- Bank loan at 7.2%, due in 1998 . . . . . -- 1,174 Bank loan at 8.7%, due in 1999 . . . . . 678 -- Note at 8.09%, due in 2000 . . . . . . . 5,000 5,000 Notes at 8.56%, due in 2001. . . . . . . 5,000 5,000 Note at 7.21%, due in 2003 . . . . . . . 5,000 5,000 Note at 7.84%, due in 2005 . . . . . . . 5,000 5,000 Less current portion . . . . . . . . . . (1,711) (1,339) ------- ------- Total. . . . . . . . . . . . . . . . . . $20,678 $21,824 ------- ------- ------- -------
The notes were issued in 1994 and 1995 under an agreement the Company has with Prudential Insurance Company of America. The aggregate principal payments of long-term debt for the next five years and beyond are as follows:
(IN THOUSANDS) 1998 $ 1,711 1999 678 2000 5,000 2001 5,000 2202 -- 2003 and beyond 10,000 ------- Total $22,389 ------- -------
During 1997, 1996, and 1995, the Company paid total long-term and short-term interest costs of $2,019,000, $2,473,000, and $2,657,000, respectively. (12) FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's short-term financial instruments are valued at their carrying amounts in the consolidated balance sheets, which are reasonable estimates of their fair value due to the short maturity of the instruments. The Company's foreign currency forward exchange contracts are valued at fair market value, which is the amount the Company would receive or pay to terminate the contracts at the reporting date. The fair market value of the Company's long-term debt approximates cost, based on the borrowing rates currently available to the Company for bank loans with similar terms and remaining maturities. 26 (13) POSTRETIREMENT BENEFITS The Company provides certain health care benefits for substantially all of its U.S. retired employees. Eligibility for those benefits is based upon a combination of years of service with the Company and age upon retirement from the Company. The periodic postretirement benefit cost under SFAS No. 106 for the three years ended December 31, 1997, is as follows:
(IN THOUSANDS) 1997 1996 1995 ------ ------ ---- Service costs. . . . . . . . . . . . . . $ 334 $ 330 $205 Interest costs . . . . . . . . . . . . . 703 699 645 ------ ------ ---- Net postretirement costs . . . . . . . . $1,037 $1,029 $850 ------ ------ ---- ------ ------ ----
The actuarial present value of benefit obligations at December 31 is as follows:
(IN THOUSANDS) 1997 1996 ------- ------ Retirees eligible for benefits . . . . . $ 2,592 $2,661 Dependents of retirees eligible for benefits. . . . . . . . . . . . . . . . 1,467 1,620 Active employees fully eligible. . . . . 1,125 1,071 Active employees not fully eligible. . . 6,196 5,639 Unrecognized net loss. . . . . . . . . . (683) (1,039) ------- ------ Accrued postretirement benefit cost. . . $10,697 $9,952 ------- ------ ------- ------
The assumed annual rate of future increases in per capita cost of health care benefits was 8.6% for 1998, declining gradually to 5.25% in 2023 and after. Increasing the health care cost trend rate by 1% in each year would increase the accumulated benefit obligation by $276,000 as of December 31, 1997, and the aggregate of the service and interest costs by $29,000. The discount rates used in determining the accumulated benefit obligation in 1997, 1996, and 1995, were 6.75%, 7.0%, and 7.0%, respectively. (14) FOREIGN CURRENCY CONTRACTS The Company entered into several guilder forward exchange contracts for the purpose of hedging the net investment in Tennant Holding B.V., a Netherlands-based subsidiary. As of December 31, 1997, there were no outstanding guilder contracts. In 1997, 1996, and 1995, the Company recognized gains (losses), net of related tax effect, as a separate component of shareholders' equity of $455,000, $410,000, and $(459,000), respectively. The Company entered into yen forward exchange contracts to hedge anticipated sales transactions. As of December 31, 1997, there were no outstanding yen contracts. In 1997, 1996, and 1995, the Company recognized gains of $0, $50,000, and $370,000, respectively. The Company also entered into forward exchange contracts to hedge net exposed assets in Australia, Canada, and Japan. As of December 31, 1997, the Company had four outstanding contracts totaling $6,239,000. These contracts will mature in 1998 and bear rates of .6555 U.S. dollars per Australian dollar, 1.4020 to 1.4370 Canadian dollars per U.S. dollar, and 129.55 Japanese yen per U.S. dollar. In 1997, 1996, and 1995, the Company recognized gains (losses) of $715,000, $198,000, and $(93,000), respectively. (15) COMMON AND PREFERRED STOCK AND ADDITIONAL PAID-IN CAPITAL The Company is authorized to issue an aggregate of 31,000,000 shares; 30,000,000 were designated as Common Stock, having a par value of $.375 per share, and 1,000,000 were designated as Preferred Stock, having a par value of $.02 per share. The Board of Directors was authorized to establish one or more series of Preferred Stock, setting forth the designation of each such series, and fixing the relative rights and preferences of each such series. On November 19, 1996, the Board of Directors approved a Shareholder Rights Plan allowing a dividend of one preferred share purchase right for each outstanding Common Share of the par value of $.375 per share of the Company. Each Right entitles the registered holder to purchase from the Company one one-hundredth of a Series A Junior Participating Preferred Share of the par value of $.02 per share of the Company at a price of $100 per one one-hundredth of a Preferred Share, subject to adjustment. The Rights are not exercisable or transferable apart from the common stock until the earlier of: (i) the close of business on the fifteenth day following a public announcement that a person or group of affiliated or associated persons has become an "Acquiring Person" (i.e., has become, subject to certain exceptions, the beneficial owner of 20% or more of the outstanding Common Shares), or (ii) the close of business on the fifteenth day following the commencement or public announcement of a tender offer or exchange offer the consummation of which would result in a person or group of affiliated or associated persons becoming, subject to certain exceptions, the beneficial owner of 20% or more of the outstanding Common Shares (or such later date as may be determined by the Board of Directors of the Company prior to a person or group of affiliated or associated persons becoming an Acquiring Person). At no time do the rights have any voting power. The rights may be redeemed by the Company for $.01 per right at any time prior to (and, in certain circumstances, within twenty days after) a person or group acquiring 20% or more of the common stock. The 20% thresholds do not apply to stock ownership by or on behalf of employee benefit plans. Under certain circumstances, the Board of Directors may exchange the rights for the Company's common stock or reduce the 20% thresholds to not less than 10%. The Rights will expire on December 23, 2006, unless extended or earlier redeemed or exchanged by the Company. (16) STOCK PLANS, BONUSES, PENSIONS, AND PROFIT SHARING The Company has four plans under which stock-based compensation grants are provided annually. The 1992 Stock Incentive Plan ("1992 Plan") and the 1995 Stock Incentive Plan ("1995 Plan") provide for stock-based compensation grants to executives and key employees of the Company. The 1993 Directors Restricted Plan ("1993 Plan") provides for the annual retainer in the form of restricted shares to the non-employee Directors of the Company. The 1997 Director's Option Plan ("1997 Plan") provides for stock option grants to non-employee Directors of the Company. The maximum number of shares that can be awarded under the respective plans is 500,000, 500,000, 50,000 and 150,000, respectively. Grants under the 1992 Plan may be in the form of restricted and performance-related shares. Grants under the 1995 Plan may be in the form of restricted, performance-related and stock option shares. The grant size under both plans is determined by the Compensation Committee of the Board of Directors. 27 Restricted shares are granted annually and typically have a two- or three-year restriction period from the effective date of the grant. During the restricted period, the restricted shares may not be sold or transferred, but the shares entitle the participants to dividend and voting rights. In 1997, 1996, and 1995, respectively, 28,000, 26,000, and 18,000 restricted shares were granted. The weighted-average fair value of stock on the grant date was $31.35, $24.57, and $23.55 per share in 1997, 1996, and 1995, respectively. Performance-related shares are granted annually and are payable if the Company achieves certain financial performance goals over each four-year period following the grant. In 1997, 1996, and 1995, respectively, 34,000, 46,000, and 35,000 performance shares were granted. The weighted-average fair value of stock on the grant date was $26.75, $23.25, and $23.56 per share in 1997, 1996, and 1995, respectively. Under the 1995 Plan and the 1997 Plan, 10-year fixed stock options are granted annually at a price equal to the stock's fair market value on the date of the grant. Options are exercisable on a cumulative basis at a rate of 25% per year. The fair value of options at the date of grant is estimated using the Black-Scholes option pricing model with the following weighted-average assumptions used for the 1997, 1996 and 1995 grants, respectively: dividend yield of 2.6%, 2.6% and 2.6%; expected volatility of 19%,18% and 22%; risk-free interest rates of 6.2%, 5.5% and 7.4%; and expected life of option of five years. A summary of the status of the Company's stock option transactions during 1997, 1996 and 1995 is shown below:
Weighted-Average Shares Exercise Price ------- ---------------- 1997 ------------------------- Outstanding at beginning of year . . . . 184,000 $23.24 Granted. . . . . . . . . . . . . . . . . 207,000 27.61 Exercised. . . . . . . . . . . . . . . . (66,000) 23.64 Forfeited. . . . . . . . . . . . . . . . (5,000) 25.46 ------- ------ Outstanding at end of year . . . . . . . 320,000 $25.46 ------- ------ ------- ------ Exercisable at year-end. . . . . . . . . 54,000 $27.50 ------- ------ ------- ------ 1996 ------------------------- Outstanding at beginning of year . . . . 101,000 $23.69 Granted. . . . . . . . . . . . . . . . . 83,000 22.68 Exercised. . . . . . . . . . . . . . . . -- -- Forfeited. . . . . . . . . . . . . . . . -- -- ------- ------ Outstanding at end of year . . . . . . . 184,000 $23.24 ------- ------ ------- ------ Exercisable at year-end. . . . . . . . . 25,000 $23.69 ------- ------ ------- ------ 1995 ------------------------- Outstanding at beginning of year . . . . -- -- Granted. . . . . . . . . . . . . . . . . 101,000 $23.69 Exercised. . . . . . . . . . . . . . . . -- -- Forfeited. . . . . . . . . . . . . . . . -- -- ------- ------ Outstanding at end of year . . . . . . . 101,000 $23.69 ------- ------ ------- ------ Exercisable at year-end. . . . . . . . . -- --
The weighted-average fair value of each option granted was $6.11, $4.53 and $6.22 in 1997, 1996 and 1995, respectively. At December 31, 1997, outstanding options had exercise prices between $22.00 and $37.50 per share and a weighted-average contractual life of eight years. In 1997, 1996, and 1995, respectively, expenses of $6,192,000, $2,731,000, and $2,310,000, were charged to operations for restricted and performance-related awards. The Company has adopted the disclosure-only provision of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Had stock-based compensation cost, determined consistent with the provisions of SFAS No. 123, been charged to the Company's net earnings, net earnings per share would have been reduced to the pro forma amounts indicated below (dollars in Thousands, except per share amounts):
1997 1996 1995 ------- ------- ------- Net earnings - as reported . . . . . . . $24,205 $21,027 $19,662 Net earnings - pro forma . . . . . . . . 23,798 20,869 19,468 Diluted net earnings per share - as reported. . . . . . . . . . . . . . 2.41 2.09 1.98 Diluted net earnings per share - pro forma. . . . . . . . . . . . . . . 2.37 2.07 1.96
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts, because additional awards in future years are anticipated. The Company also has a matching contribution program available to all employees who make 401(k) contributions. Under this program, the Company makes matching contributions up to a maximum of 4% of an employee's earnings. Employee contributions invested in Company common stock are matched at the rate of 35%, and contributions not invested in Company common stock are matched at the rate of 15%. Expenses related to matching contributions were $689,000, $695,000, and $635,000 in 1997, 1996, and 1995, respectively. The Company has a Defined Benefit Pension Plan (available to most U.S. employees). Plan benefits are based on the employee's years of service and compensation during the highest five consecutive years of service of the final ten years of employment. The Company's policy has been to fund this plan to the maximum allowed by ERISA rules. Contributions are intended to provide benefits attributed to service to date, and for service-related benefits expected to be earned in the future. Net pension expense for the three years ended December 31, 1997, is as follows:
(IN THOUSANDS) 1997 1996 1995 ------ ------ ------ Service cost . . . . . . . . . . . . . . $1,635 $1,557 $1,245 Interest cost. . . . . . . . . . . . . . 1,176 1,046 884 Actual return on plan assets (increase) decrease. . . . . . . . . . (4,620) (2,304) (5,521) Deferred gain (loss) . . . . . . . . . . 2,752 665 3,932 Amortization of transition asset . . . . (46) (46) (46) ------ ------ ------ Net periodic pension expense . . . . . . $ 897 $ 918 $ 494 ------ ------ ------ ------ ------ ------
28 The assumptions used in determining the actuarial present value of the projected benefit obligation at December 31 are as follows:
1997 1996 1995 ---- ---- ---- Weighted-average discount rate . . . . . 6.75% 7.0% 7.0% Rate of increase in future compensation . . . . . . . . . . . . . 5.25% 5.5% 5.5% Expected long-term rate of return on plan assets . . . . . . . . . . . . 9.75% 10.0% 10.0%
The funded status of the plan and the amount recognized at December 31 are as follows:
(IN THOUSANDS) 1997 1996 ------- ------- Actuarial present value of benefit obligation: Vested benefits. . . . . . . . . . . . $10,402 $ 8,579 Nonvested benefits . . . . . . . . . . 316 229 ------- ------- Accumulated benefit obligation . . . . . 10,718 8,808 Effect of projected future compensation increases. . . . . . . . . . . . . . . 9,147 8,580 ------- ------- Projected benefit obligation . . . . . . 19,865 17,388 Plan assets, primarily listed equity securities, at fair value using the market-related value method . . . . . . . . . . . . . (23,872) (19,575) ------- ------- Plan assets in excess of projected benefit obligation . . . . . . . . . . . . . . (4,007) (2,187) Unrecognized prior service cost. . . . . (379) (412) Unrecognized net gain. . . . . . . . . . 10,155 7,428 Unrecognized transition asset. . . . . . 542 587 ------- ------- Net pension obligation . . . . . . . . . $ 6,311 $ 5,416 ------- ------- ------- -------
Retirement benefits for eligible employees in foreign locations are funded principally through either annuity or government programs. During 1990, the Company established a leveraged Employee Stock Ownership Plan (ESOP) by amending its Profit Sharing Plan to add ESOP features. The ESOP covers substantially all domestic employees following completion of one year of service. The shares required for the Company's matching contribution program, as well as the Company's Profit Sharing Plan, are provided principally by the Company's ESOP, supplemented as needed by newly issued shares. The Company makes annual contributions to the ESOP equal to the ESOP's debt service less dividends received by the ESOP. All dividends received by the ESOP are used to pay debt service. The ESOP shares initially were pledged as collateral for its debt. As the debt is repaid, shares are released from collateral and allocated to employees who made 401(k) contributions that year, as well as to profit sharing participants, based on the proportion of debt service paid in the year. The Company accounts for the ESOP in accordance with EITF Issue 89-8, Expense Recognition for Employee Stock Ownership Plans. Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheets. As shares are released from collateral, the Company reports compensation expense equal to the cost of the shares to ESOP. ESOP shares are considered outstanding in EPS computations, and dividends on allocated and unallocated shares are recorded as a reduction of retained earnings. The Company's cash contribution to the ESOP during 1997, 1996, and 1995 was $1,263,000, $1,303,000, and $1,307,000, respectively. Accrued expenses in excess of benefits provided to employees through the ESOP, which were charged to miscellaneous expense, were $138,000, $542,000, and $778,000, in 1997, 1996, and 1995, respectively. Interest earned and received on the Company loan to the ESOP was $1,496,000, $1,550,000, and $1,598,000, in 1997, 1996, and 1995, respectively. Dividends on the Company shares held by the ESOP used for debt service were $787,000, $755,000, and $738,000 in 1997, 1996, and 1995, respectively. At December 31, 1997, the ESOP indebtedness to the Company, which bears an interest rate of 10.05% and is due December 31, 2009, was $14,751,000. The ESOP shares as of December 31 were as follows:
1997 1996 1995 ------- ------- ------- Allocated shares . . . . . . . . . . . . 329,324 280,974 229,578 Shares released for allocation . . . . . 40,241 38,971 40,781 Unreleased shares. . . . . . . . . . . . 599,501 649,121 698,707 ------- ------- ------- Total ESOP shares. . . . . . . . . . . . 969,066 969,066 969,066 ------- ------- ------- ------- ------- -------
For the years ended December 31, 1997, 1996, and 1995, the Company charged to operations $15,166,000, $10,555,000, and $9,567,000, respectively, for expense of all stock, bonus, pension, and profit sharing plans. (17) EARNINGS PER SHARE Basic and diluted earnings per share under SFAS No. 128 for the three years ended December 31, 1997, are as follows:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) For the Year Ended 1997 ------------------------------------ Income Shares Per-Share (Numerator) (Denominator) Amount ----------- -------------- --------- Basic earnings per share . . . . . . . . $24,205 9,954 $2.43 Effect of dilutive securities: Fixed stock options. . . . . . . . . . 24 Performance-related shares . . . . . . 54 ------ Diluted earnings per share . . . . . . . $24,205 10,032 $2.41 ------- ------ ----- ------- ------ ----- For the Year Ended 1996 ------------------------------------ Basic earnings per share . . . . . . . . $21,027 10,042 $2.09 Effect of dilutive securities: Fixed stock options. . . . . . . . . . 5 Performance-related shares . . . . . . 29 ------ Diluted earnings per share . . . . . . . $21,027 10,076 $2.09 ------- ------ ----- ------- ------ ----- For the Year Ended 1995 ------------------------------------ Basic earnings per share . . . . . . . . $19,662 9,924 $1.98 Effect of dilutive securities: Fixed stock options. . . . . . . . . . 3 Performance-related shares . . . . . . 15 ----- Diluted earnings per share . . . . . . . $19,662 9,942 $1.98 ------- ----- ----- ------- ----- -----
(18) ACQUISITIONS On November 6, 1995, the Company acquired the business and net assets of Nobles Floor Machines Limited ("NFM"), the Company's U.K.-based master distributor of commercial floor maintenance equipment. These acquisitions did not have a material impact on operations. 29 TENNANT COMPANY AND SUBSIDIARIES HISTORICAL PROGRESS REVIEW (PRESENTS 10 YEARS OF DATA FOR LONG-TERM GROWTH MEASUREMENT.) - -------------------------------------------------------------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995 ------------ ----------- -------- Net sales. . . . . . . . . . . . . . . . $ 372,428 344,433 325,368 Cost of sales. . . . . . . . . . . . . . $ 215,392 202,057 185,668 Gross margin -- %. . . . . . . . . . . . 42.2 41.3 42.9 Selling and administrative expenses. . . $ 120,948 110,745 109,518 % of net sales. . . . . . . . . . . . 32.5 32.2 33.7 Profit from operations . . . . . . . . . $ 36,088 31,631 30,182 % of net sales. . . . . . . . . . . . 9.7 9.2 9.3 Other income and (expense) . . . . . . . $ 1,542 698 (747) Income tax expense . . . . . . . . . . . $ 13,425 11,302 9,773 % of earnings before income taxes . . 35.7 35.0 33.2 Earnings before extraordinary gain and cumulative effect of accounting change. . . . . . . . . . . . . . . . . $ 24,205 21,027 19,662 % of net sales. . . . . . . . . . . . 6.5 6.1 6.0 Return on beginning shareholders' equity -- %. . . . . . . . . . . . . 18.8 18.4 20.4 Net earnings . . . . . . . . . . . . . . $ 24,205 21,027 19,662 PER SHARE DATA(e) Basic net earnings before extraordinary gain and cumulative effect of accounting change . . . . . . . . . . . $ 2.43 2.09 1.98 Diluted net earnings before extraordinary gain and cumulative effect of accounting change . . . . . . $ 2.41 2.09 1.98 Basic net earnings . . . . . . . . . . . $ 2.43 2.09 1.98 Diluted net earnings . . . . . . . . . . $ 2.41 2.09 1.98 Cash dividends . . . . . . . . . . . . . $ .72 .69 .68 Shareholders' equity (ending). . . . . . $ 13.65 12.86 11.47 YEAR-END FINANCIAL POSITION Cash and cash equivalents. . . . . . . . $ 16,279 9,881 4,247 Total current assets . . . . . . . . . . $ 143,105 126,481 123,508 Property, plant, and equipment, net. . . $ 65,111 65,384 63,724 Total assets . . . . . . . . . . . . . . $ 233,870 219,180 215,750 Current liabilities excluding current debt. . . . . . . . . . . . . . $ 54,772 45,724 44,374 Current ratio excluding current debt . . 2.6 2.8 2.8 Long-term liabilities excluding long-term debt. . . . . . . . . . . . . $ 21,957 18,908 16,747 Financing debt Current . . . . . . . . . . . . . . . $ 2,377 3,864 17,349 Long-term . . . . . . . . . . . . . . $ 20,678 21,824 23,149 Total as % of total capital . . . . 14.7 16.6 26.2 Shareholders' equity . . . . . . . . . . $ 134,086 128,860 114,131 CASH FLOW Increase (Decrease) Related to operating activities. . . . . $ 41,892 44,566 17,834 Related to investing activities. . . . . $ (15,490) (17,240) (22,107) Related to financing activities. . . . . $ (20,434) (22,024) 6,721 OTHER DATA Interest income. . . . . . . . . . . . . $ 4,699 4,259 4,132 Interest expense . . . . . . . . . . . . $ 2,021 2,491 2,640 Depreciation and amortization expense . . . . . . . . . . . . . . . . $ 17,468 16,387 14,090 Net expenditures for property, plant, and equipment. . . . . . . . . . $ 16,425 17,581 19,117 Number of employees at year-end. . . . . 2,019 1,950 1,997 Total direct compensation. . . . . . . . $ 95,099 89,210 86,263 Profit sharing and all other employee benefits . . . . . . . . . . . $ 27,337 22,499 21,887 Average shares outstanding(e). . . . . . 9,910 10,021 9,916 Closing share price at year-end(e) . . . $ 36 3/8 27 1/2 23 7/8 Common stock price range during year(e). . . . . . . . . . . . . . . . $26 1/8-39 5/8 21 1/4-27 1/2 22 1/4- 29 Closing price/earnings ratio(f). . . . . 15.0 13.1 12.1 30 (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) 1994 1993 1992 1991 1990 ------------- ------------ ----------- -------- ------------- Net sales. . . . . . . . . . . . . . . . 281,685 221,002 214,863 198,575 211,503 Cost of sales. . . . . . . . . . . . . . 162,360 126,071 121,792 112,147 121,598 Gross margin -- %. . . . . . . . . . . . 42.4 43.0 43.3 43.5 42.5 Selling and administrative expenses. . . 95,201 79,508 76,942 69,707 70,401 % of net sales. . . . . . . . . . . . 33.8 36.0 35.8 35.1 33.3 Profit from operations . . . . . . . . . 24,124 11,333(a) 16,129 16,721 19,504 % of net sales. . . . . . . . . . . . 8.6 5.1 7.5 8.4 9.2 Other income and (expense) . . . . . . . (43) 1,595 1,864 1,800 374 Income tax expense . . . . . . . . . . . 8,346 3,802 4,803 6,529 4,257 % of earnings before income taxes . . 34.7 29.4 26.7 35.3 21.4 Earnings before extraordinary gain and cumulative effect of accounting change. . . . . . . . . . . . . . . . . 15,735 9,126(a) 13,190(b) 11,992 15,621(c) % of net sales. . . . . . . . . . . . 5.6 4.1 6.1 6.0 7.4 Return on beginning shareholders' equity -- %. . . . . . . . . . . . . 18.7 10.8(a) 17.2(b) 16.4 21.1(c) Net earnings . . . . . . . . . . . . . . 15,735 9,126 9,229 11,992 18,256 PER SHARE DATA(e) Basic net earnings before extraordinary gain and cumulative effect of accounting change . . . . . . . . . . . 1.60 .93(a) 1.34(b) 1.21 1.59(c) Diluted net earnings before extraordinary gain and cumulative effect of accounting change . . . . . . 1.60 .93(a) 1.34(b) 1.21 1.59(c) Basic net earnings . . . . . . . . . . . 1.60 .93(a) .94 1.21 1.85 Diluted net earnings . . . . . . . . . . 1.60 .93(a) .94 1.21 1.85 Cash dividends . . . . . . . . . . . . . .65 .64 .61 .60 .59 Shareholders' equity (ending). . . . . . 9.78 8.56 8.64 7.87 7.43 YEAR-END FINANCIAL POSITION Cash and cash equivalents. . . . . . . . 1,851 2,675 3,512 2,349 1,412 Total current assets . . . . . . . . . . 98,454 73,752 74,741 66,028 67,065 Property, plant, and equipment, net. . . 56,552 46,622 45,430 40,730 42,588 Total assets . . . . . . . . . . . . . . 182,834 128,634 128,988 111,644 114,590 Current liabilities excluding current debt. . . . . . . . . . . . . . 41,959 29,657 28,848 30,700 30,982 Current ratio excluding current debt . . 2.3 2.5 2.6 2.2 2.2 Long-term liabilities excluding long-term debt. . . . . . . . . . . . . 15,318 12,591 10,691 2,281 1,463 Financing debt Current . . . . . . . . . . . . . . . 23,008 1,190 1,492 197 6,986 Long-term . . . . . . . . . . . . . . 6,300 1,103 3,107 1,853 1,995 Total as % of total capital . . . . 23.3 2.7 5.1 2.6 10.9 Shareholders' equity . . . . . . . . . . 96,249 84,093 84,850 76,613 73,164 CASH FLOW Increase (Decrease) Related to operating activities. . . . . 26,754 21,922 20,115 23,777 24,848 Related to investing activities. . . . . (47,931) (13,569) (15,717) (7,472) (8,951) Related to financing activities. . . . . 20,351 (9,244) (3,346) (15,336) (17,746) OTHER DATA Interest income. . . . . . . . . . . . . 3,807 3,583 3,619 3,828 2,672 Interest expense . . . . . . . . . . . . 1,677 509 540 568 1,019 Depreciation and amortization expense . . . . . . . . . . . . . . . . 13,121 10,987 10,241 8,730 8,652 Net expenditures for property, plant, and equipment. . . . . . . . . . 18,870 12,877 12,315 8,063 8,071 Number of employees at year-end. . . . . 1,916 1,707 1,758 1,738 1,800 Total direct compensation. . . . . . . . 76,225 71,507 69,240 65,324 66,364 Profit sharing and all other employee benefits . . . . . . . . . . . 21,116 18,149 19,547 17,917 19,316 Average shares outstanding(e). . . . . . 9,826 9,836 9,832 9,892 9,842 Closing share price at year-end(e) . . . 24 1/8 23 1/2 21 7/16 18 17 1/2 Common stock price range during year(e). . . . . . . . . . . . . . . . 20 15/32-24 1/4 19 3/4-24 1/4 17 1/4-24 3/8 16 1/4-21 1/4 13 7/8-22 1/8 Closing price/earnings ratio(f). . . . . 15.1 19.7 17.4 14.9 13.3 (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) 1989 1988 1987 ------------ ----------- -------- Net sales. . . . . . . . . . . . . . . . 197,078 183,888 166,924 Cost of sales. . . . . . . . . . . . . . 112,511 105,991 95,015 Gross margin -- %. . . . . . . . . . . . 42.9 42.4 43.1 Selling and administrative expenses. . . 64,518 59,646 55,352 % of net sales. . . . . . . . . . . . 32.7 32.4 33.2 Profit from operations . . . . . . . . . 20,049 18,251 16,557 % of net sales. . . . . . . . . . . . 10.2 9.9 9.9 Other income and (expense) . . . . . . . 3,755 1,449 953 Income tax expense . . . . . . . . . . . 9,052 8,126 7,692 % of earnings before income taxes . . 38.0 41.2 43.9 Earnings before extraordinary gain and cumulative effect of accounting change. . . . . . . . . . . . . . . . . 14,752(d) 11,574 9,818 % of net sales. . . . . . . . . . . . 7.5 6.3 5.9 Return on beginning shareholders' equity -- %. . . . . . . . . . . . . 18.9(d) 16.6 15.0 Net earnings . . . . . . . . . . . . . . 14,752 13,263 9,818 PER SHARE DATA(e) Basic net earnings before extraordinary gain and cumulative effect of accounting change . . . . . . . . . . . 1.44(d) 1.09 .92 Diluted net earnings before extraordinary gain and cumulative effect of accounting change . . . . . . 1.44(d) 1.09 .92 Basic net earnings . . . . . . . . . . . 1.44 1.25 .92 Diluted net earnings . . . . . . . . . . 1.44 1.25 .92 Cash dividends . . . . . . . . . . . . . .55 .49 .48 Shareholders' equity (ending). . . . . . 7.52 7.37 6.60 YEAR-END FINANCIAL POSITION Cash and cash equivalents. . . . . . . . 3,175 7,016 3,564 Total current assets . . . . . . . . . . 70,325 76,402 65,960 Property, plant, and equipment, net. . . 40,949 35,616 35,583 Total assets . . . . . . . . . . . . . . 116,179 117,013 105,273 Current liabilities excluding current debt. . . . . . . . . . . . . . 35,408 29,836 25,206 Current ratio excluding current debt . . 2.0 2.6 2.6 Long-term liabilities excluding long-term debt. . . . . . . . . . . . . 4,022 3,757 3,130 Financing debt Current . . . . . . . . . . . . . . . 588 1,722 2,280 Long-term . . . . . . . . . . . . . . 2,111 2,234 2,421 Total as % of total capital . . . . 3.5 4.8 6.3 Shareholders' equity . . . . . . . . . . 74,050 77,998 69,516 CASH FLOW Increase (Decrease) Related to operating activities. . . . . 25,685 18,614 15,651 Related to investing activities. . . . . (8,916) (9,140) (7,156) Related to financing activities. . . . . (20,310) (5,730) (5,861) OTHER DATA Interest income. . . . . . . . . . . . . 2,033 2,023 2,196 Interest expense . . . . . . . . . . . . 597 401 1,017 Depreciation and amortization expense . . . . . . . . . . . . . . . . 8,027 7,900 7,162 Net expenditures for property, plant, and equipment. . . . . . . . . . 9,135 9,121 7,007 Number of employees at year-end. . . . . 1,789 1,726 1,727 Total direct compensation. . . . . . . . 62,401 58,637 54,721 Profit sharing and all other employee benefits . . . . . . . . . . . 17,233 15,245 14,437 Average shares outstanding(e). . . . . . 10,268 10,592 10,640 Closing share price at year-end(e) . . . 17 1/2 13 1/8 11 3/4 Common stock price range during year(e). . . . . . . . . . . . . . . . 12 5/8-18 1/4 11 1/4-16 3/8 8-16 1/2 Closing price/earnings ratio(f). . . . . 13.3 12.0 12.7
(a) 1993 includes pretax restructuring charges of $4,090,000 ($2,536,000 net of taxes). (b) 1992 includes income tax reduction of $1,040,000 due to completion of examinations by tax authorities. (c) 1990 includes income tax reduction of $2,650,000 related to the merger of a subsidiary with the Company. (d) 1989 includes net gain related to sale of land of $1,247,000. (e) Adjusted retroactively for two-for-one stock split effective April 26, 1995. (f) Closing price/earnings ratio is based on closing share price and earnings before extraordinary gain and cumulative effect of accounting change, and adjusted for unusual items referenced in the above footnotes. 31 INVESTOR INFORMATION ANNUAL MEETING The annual meeting of Tennant Company will be held at 10:30 a.m. on Friday, May 8, at the Company's corporate headquarters, 701 North Lilac Drive, Golden Valley, Minnesota. STOCK MARKET INFORMATION Tennant common stock is traded in the National Market System of NASDAQ, under the ticker symbol TANT. As of December 31, 1997, there were approximately 3,500 shareholders of record. QUARTERLY PRICE RANGE (UNAUDITED) The accompanying chart shows the quarterly price range of the Company's shares over the past five years after adjustment for the two-for-one stock split:
First Second Third Fourth ----------------------------------------------------------------------- 1993 20.13-24.25 19.75-22.00 20.75-22.75 20.88-24.25 1994 20.63-24.25 20.47-22.00 21.00-23.38 21.50-24.13 1995 23.13-25.00 23.00-29.00 25.00-27.25 22.25-27.25 1996 21.25-25.00 23.50-26.50 22.00-26.00 22.50-27.50 1997 26.13-28.75 26.75-33.25 33.25-37.50 36.00-39.63
DIVIDEND INFORMATION Cash dividends on Tennant's common stock have been paid for 54 consecutive years, and the Company has increased dividends in each of the last 26 years. Dividends generally are declared each quarter. Following are the record dates anticipated for 1998: June 1, 1998 September 1, 1998 December 16, 1998 DIVIDEND REINVESTMENT OR DIRECT DEPOSIT OPTIONS Shareholders have the option of reinvesting quarterly dividends in additional shares of Company stock, or having dividends deposited directly to a bank account. The Transfer Agent should be contacted for additional information (see below). TRANSFER AGENT AND REGISTRAR Shareholders with a change of address or questions about their account may contact: Norwest Bank Minnesota, N. A. 161 North Concord Exchange P.O. Box 738 St. Paul, MN 55075-0738 612-450-4064 - 1-800-468-9716 10-K OFFER AND OTHER INVESTOR INFORMATION A copy of Tennant's 1997 10-K annual report filed with the Securities and Exchange Commission (which contains no material information not found in this report), and other financial information may be obtained by writing Richard A. Snyder, Treasurer, Tennant Company, P.O. Box 1452, Minneapolis, MN 55440, or calling (612) 540-1341. TENNANT INFORMATION ON THE INTERNET Corporate news releases, product information, financial reports and other company information can be found on Tennant's internet site: www.tennantco.com DIRECTORS ROGER L. HALE, PRESIDENT, CHIEF EXECUTIVE OFFICER ARTHUR D. COLLINS, JR., PRESIDENT, CHIEF OPERATING OFFICER MEDTRONIC, INC., MINNEAPOLIS, MINNESOTA DAVID C. COX, RETIRED PRESIDENT, CHIEF EXECUTIVE OFFICER COWLES MEDIA COMPANY, MINNEAPOLIS, MINNESOTA ANDREW P. CZAJKOWSKI, PRESIDENT, CHIEF EXECUTIVE OFFICER BLUE CROSS & BLUE SHIELD OF MINNESOTA, ST. PAUL, MINNESOTA WILLIAM A. HODDER, RETIRED CHAIRMAN, CHIEF EXECUTIVE OFFICER DONALDSON COMPANY, INC., MINNEAPOLIS, MINNESOTA DELBERT W. JOHNSON, CHAIRMAN, CO-CHIEF EXECUTIVE OFFICER PIONEER METAL FINISHING, MINNEAPOLIS, MINNESOTA WILLIAM I. MILLER, CHAIRMAN IRWIN FINANCIAL CORPORATION, COLUMBUS, INDIANA EDWIN L. RUSSELL, CHAIRMAN, PRESIDENT, CHIEF EXECUTIVE OFFICER MINNESOTA POWER, DULUTH, MINNESOTA OFFICERS ROGER L. HALE, PRESIDENT, CHIEF EXECUTIVE OFFICER JANET M. DOLAN, EXECUTIVE VICE PRESIDENT DOUGLAS R. HOELSCHER, SENIOR VICE PRESIDENT RICHARD M. ADAMS, VICE PRESIDENT PAUL E. BRUNELLE, VICE PRESIDENT KEITH D. PAYDEN, VICE PRESIDENT RICHARD A. SNYDER, VICE PRESIDENT, TREASURER, AND CHIEF FINANCIAL OFFICER WILLIAM R. STRANG, VICE PRESIDENT STEVEN K. WEEKS, VICE PRESIDENT BRUCE J. BORGERDING, DEPUTY GENERAL COUNSEL AND CORPORATE SECRETARY JOHN T. PAIN, CORPORATE CONTROLLER AND PRINCIPAL ACCOUNTING OFFICER MAJOR UNITS CASTEX INCORPORATED, HOLLAND, MICHIGAN Thomas J. Vander Bie, PRESIDENT Local business phone -- (616) 786-2330 TENNANT HOLDING B.V., UDEN, THE NETHERLANDS Jan 't Hart, MANAGING DIRECTOR Local business phone -- 4132-41241 32 EX-23.1 3 EXHIBIT 23.1 [LOGO] 4200 Norwest Center 90 South Seventh Street Minneapolis, MN 55402 INDEPENDENT AUDITORS' REPORT AND CONSENT The Board of Directors and Shareholders Tennant Company: The audits referred to in our report dated February 6, 1998, included the related financial statement schedule for each of the years in the three-year period ended December 31, 1997, included in Item 14.A.2 elsewhere herein. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We consent to incorporation by reference in Registration Statement No. 2-86844 on Form S-8, relating to the Tennant Company Profit Sharing and Employee Stock Ownership Plan, No. 33-59054 on Form S-8 relating to the Tennant Company 1992 Stock Incentive Plan and the Tennant Company Restricted Stock Plan for Nonemployee Directors and No. 33-62003 on Form S-8 relating to the Tennant Company 1995 Stock Incentive Plan of our reports dated February 6, 1998, relating to the consolidated balance sheets of Tennant Company and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997, and the related financial statement schedule, which reports appear in or are incorporated by reference in the December 31, 1997 annual report on Form 10-K of Tennant Company. /s/ KPMG PEAT MARWICK LLP Minneapolis, Minnesota March 23, 1998 EX-27 4 EXHIBIT 27 FDS
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997, PAGES 18 AND 19, FOOTNOTE 2, PAGE 24, AND FOOTNOTE 7, PAGE 25 OF THE COMPANY'S 1997 ANNUAL REPORT TO SHAREHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 16279 0 81463 3302 40323 143105 156602 91491 233870 57149 20678 0 0 3637 130449 233870 372428 372428 215392 215392 0 1901 2021 37630 13425 24205 0 0 0 24205 2.43 2.41
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