-----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, AtTePZR5KXKc9q5Bp+4YOFSQqmdyBWDkBgF9AlF0Ls7wUpDpKR9kQnhy7sRiwn4R wHtvSRvH+iKx+snmtrIvUA== 0001047469-99-011250.txt : 19990326 0001047469-99-011250.hdr.sgml : 19990326 ACCESSION NUMBER: 0001047469-99-011250 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 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: 99572129 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 FORM 10-K405 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998. COMMISSION FILE NUMBER 0-4804 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/ $333,933,248.25 is aggregate market value of common stock held by non-affiliates as of March 8, 1999. 9,086,119 shares outstanding at March 8, 1999 DOCUMENTS INCORPORATED BY REFERENCE 1998 Annual Report to Shareholders - Part I (Partial), Part II (Partial), and Part IV (Partial) 1999 Proxy - Part III (Partial) TENNANT COMPANY 1998 ANNUAL REPORT FORM 10-K (PURSUANT TO SECURITIES EXCHANGE ACT OF 1934) PART I Part I is included in the Tennant Company 1998 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 1998 Annual Report to Shareholders, page 23, 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 1998 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 1998 Annual Report to Shareholders, Management's Financial Discussion and Analysis, Financial Position section on page 16. 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 1998 Annual Report to Shareholders, page 23, footnote 3. A description of product development is included in the 1998 Annual Report to Shareholders on pages 7, 9, 10, 11, and 12. 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 1998 Annual Report to Shareholders on page 32. EXECUTIVE OFFICERS OF THE REGISTRANT Richard M. Adams, Vice President Richard M. Adams (51) 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 Chairman 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, Tennant Holding B.V., Tennant Europe B.V., Tennant Import B.V., Tennant Japan, and Castex Incorporated. Bruce J. Borgerding, Deputy General Counsel and Corporate Secretary Bruce J. Borgerding (48) 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 Import B.V., Tennant N.V., Tennant Japan, and Tennant Company Far East Headquarters Pte Ltd. 2 Paul E. Brunelle, Vice President Paul E. Brunelle (58) 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 President of the Tennant Company Foundation. Mr. Brunelle retired as of December 31, 1998. Janet M. Dolan, President and Chief Operating Officer Janet M. Dolan (49) joined the Company in 1986. Ms. Dolan was appointed General Counsel and Secretary in 1987, Vice President in 1990, Senior Vice President in 1995, Executive Vice President in 1996, President and Chief Operating Officer and a director in 1998. She is a director of Castex Incorporated. She is also a director of Donaldson Company, Inc. Thomas J. Dybsky, Vice President Thomas J. Dybsky (49) joined the Company in 1998 as Vice President of Personnel Resources. Mr. Dybsky is a director of Tennant N.V. Roger L. Hale, Chairman and Chief Executive Officer Roger L. Hale (64) 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, Chief Executive Officer in 1976, and Chairman in 1998. He is also a director of U.S. Bancorp. Douglas R. Hoelscher, Senior Vice President Douglas R. Hoelscher (60) joined the Company in 1973. He was named Vice President in 1978 and Senior Vice President of Industrial Markets in 1995. He is a Registered Professional Engineer. James H. Moar, Senior Vice President James H. Moar (50) joined the Company in 1998 as Senior Vice President of Industrial Markets. Dean A. Niehus, Corporate Controller and Principal Accounting Officer Dean A. Niehus (41) joined the Company in 1998. John T. Pain, Vice President, Treasurer and Chief Financial Officer John T. Pain (50) joined the Company in 1984 as Corporate Tax Manager. He was named Assistant Treasurer in 1986, Corporate Controller and Principal Accounting Officer in 1997, and Vice President, Treasurer, and Chief Financial Officer in 1998. Mr. Pain is a Certified Public Accountant. He is a director of Castex Incorporated, Tennant N.V., and Tennant Company Far East Headquarters Pte Ltd. Keith D. Payden, Vice President Keith D. Payden (51) 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 Richard A. Snyder (59) 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. Mr. Snyder retired as of December 31, 1998. William R. Strang, Vice President William R. Strang (62) joined the Company in 1969. He was named Director, Corporate Marketing in 1987 and Vice President, Asia/Export/Australia 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 (43) 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. 3 PART II Part II is included in the Tennant Company 1998 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. Item 7 - Y2K Project Overview Tennant's company-wide Year 2000 Project (Project) is proceeding on schedule. Tennant's Project is divided into four major sections: Applications Systems, Systems Infrastructure, External Agents (suppliers/partners/distributors/ customers) and Embedded Systems (manufacturing and facilities). General Project phases common to all sections are: 1) inventorying Year 2000 items; 2) assigning priorities to identified items; 3) assessing the Year 2000 compliance of items determined to be material to the company; 4) repairing or replacing material items that are determined not to be Year 2000 compliant; 5) testing material items; and 6) designing and implementing contingency and business continuation plans. Material items are those believed by the company to have risk involving the safety of individuals that may cause damage to either property or the environment, or affect revenues. Progress status is as follows:
% Complete Estimated as of 12/31/98 Completion -------------- ---------- Applications Systems 90% 2nd Quarter 1999 Systems Infrastructure 80% 2nd Quarter 1999 External Agents 75% 2nd Quarter 1999 Embedded Systems 80% 1st Quarter 1999
A more detailed description of activities is as follows: Applications Systems - In 1994, in order to improve access to business information through common integrated computing systems across the Company, Tennant began a worldwide business systems replacement project with systems that use programs from SAP America, Inc. (SAP). The new systems are expected to make approximately 80% of the Company business systems Year 2000 compliant. European applications systems are completely installed, and the North American Industrial systems are 80% implemented. The remaining non-SAP business software is in the process of being upgraded to Year 2000 compliance. The North American Commercial systems remediation was completed in September of 1998. Contingency planning for Application Systems is in process and will be completed by mid-year 1999. Our activity also includes assessment and remediation of nonmission critical personal systems. Initial survey and assessment work is expected to be completed by first quarter 1999, with repair and remediation activities being continuous with estimated completion second quarter 1999. Systems Infrastructure - The Infrastructure section consists of hardware and system software other than Applications Software. Activity in this area is continuous with the majority being addressed and tested in conjunction with project and regular replacement programs. Contingency planning is in process and should be complete by the second quarter of 1999. 4 Item 7 - Y2K Project Overview (cont.) External Agents (Suppliers/Partners/Distributors/Customers) - The primary activity in this section involves the process of identifying and prioritizing critical suppliers, customers, distributors, and other partners at the direct interface level and communicating with them about their plans and progress in addressing the Year 2000 problem. The initial survey activity has been completed and detailed evaluations of the most critical third parties have been initiated. These evaluations will be followed by selective follow-up contact, and development of contingency plans is in process, with expected completion by the end of the first quarter 1999. Embedded Systems (Manufacturing and Facilities) - This area focuses on the hardware and software associated with embedded computer chips that are used in the operation of all facilities operated by the company. Survey and prioritization activities are complete. In addition, our activities have included the evaluation of Year 2000 dependencies in embedded chips produced in our own products all of which have been certified to be compliant. COSTS The total cost associated with the required modifications to become Year 2000 compliant is not expected to be material to the Company's financial position. The core of the Company's IT investments have been focused on building new capability while satisfying Year 2000 requirements. The estimated total cost of the planned SAP activities through 1999 is approximately $20 million of which $16 million has been expended. Funding for Year 2000 specific activities are estimated at $950,000 of which $400,000 has been expended. Funding for both SAP and Y2K activities is integrated with operational budgets, with IT funding for fiscal year 1999 estimated to be at the same levels as fiscal year 1998. In January 1999, Tennant Company completed the purchase of Paul Andra KG. Activities associated with Year 2000 certification are now underway using the same process as outlined for Tennant Company. We expect a comprehensive analysis and action plan to be completed by the end of the first quarter 1999. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS The statements in this report are forward-looking statements and are not meant as historical facts. As discussed above, many factors are involved in this project which contain risk and uncertainty and are beyond the control of the Company. Included in this are the actions of suppliers, distributors, customers, and other partners. PART III Part III is included in the Tennant Company 1999 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. 5 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 30 of the Tennant Company 1998 Annual Report to Shareholders and are incorporated in this Form 10-K Annual Report by reference: a. Consolidated Statements of Earnings and Comprehensive Earnings for each of the years in the three-year period ended December 31, 1998 - page 18. b. Consolidated Balance Sheets as of December 31, 1998 and 1997 - page 19. c. Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1998 - page 20. d. Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended December 31, 1998 - page 21. e. Independent Auditors' Report of KPMG Peat Marwick LLP - page 30. f. Notes to Consolidated Financial Statements - pages 22 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, 1998 3,302 944 1,290 2,956 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
(1) Accounts determined to be uncollectible and charged against reserve, net of collections on accounts previously charged against reserves.
Additions Balance at charged to Deductions beginning costs and from Balance at Warranty Reserves of year expenses reserves end of year - ------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1998 1,998 4,023 4,060 1,961 Year ended December 31, 1997 1,750 3,679 3,431 1,998 Year ended December 31, 1996 1,637 3,160 3,047 1,750
Additions Balance at charged to Deductions Reserve for Inventory beginning costs and from Balance at Obsolescence of year expenses reserves end of year - ------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1998 1,012 593 697 908 Year ended December 31, 1997 1,014 739 741 1,012 Year ended December 31, 1996 1,035 499 520 1,014
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 1998 Annual Report to Shareholders. 6 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. 10.1 Tennant Company 1988 Stock Incentive Plan Incorporated by reference to Exhibit b.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 10.2 Tennant Company 1992 Stock Incentive Plan Incorporated by reference to Exhibit 4.4 to the Company's Registration Statement No. 33-59054, Form S-8 dated March 2, 1993. 10.3 Tennant Company Restricted Stock Plan for Incorporated by reference to Exhibit 4.5 to the Nonemployee Directors Company's Registration Statement No. 33-59054, Form S-8, dated March 2, 1993. 10.4 Tennant Company 1995 Stock Incentive Plan Incorporated by reference to Exhibit 4.4 to the Company's Registration Statement No. 33-62003, Form S-8, dated August 22, 1995. 10.5 Tennant Company Restricted Stock Plan for Incorporated by reference to Exhibit 10.2 to the Nonemployee Directors, as amended and restated Company's 1995 Second Quarter 10-Q filing dated effective January 1, 1995 August 8, 1995. 10.6 Tennant Company Excess Benefit Plan, as amended Incorporated by reference to Exhibit 10.4 to the and restated effective January 1, 1994 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994. 10.7 Management Agreement with Steven K. Weeks dated Incorporated by reference to Exhibit 10.7 to the November 19, 1996 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. 10.8 Management Agreement with Tom Vander Bie dated Incorporated by reference to Exhibit 10.8 to the November 19, 1996 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1996. 10.9 Management Agreement with Richard M. Adams dated Incorporated by reference to Exhibit 10.6 to the December 10, 1993 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.10 Management Agreement with Paul E. Brunelle dated Incorporated by reference to Exhibit 10.7 to the December 8, 1987 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.11 Amendment to Management Agreement with Paul E. Incorporated by reference to Exhibit 10.8 to the Brunelle dated June 21, 1989 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.12 1993 Amendment to Management Agreement with Paul Incorporated by reference to Exhibit 10.9 to the E. Brunelle dated December 10, 1993 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 7 10.13 Management Agreement with Janet M. Dolan dated Incorporated by reference to Exhibit b.5 to the June 21, 1989 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 10.14 1993 Amendment to Management Agreement with Incorporated by reference to Exhibit 10.11 to the Janet M. Dolan dated December 10, 1993 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.15 Management Agreement with Roger L. Hale dated Incorporated by reference to Exhibit b.8 to the March 10, 1987 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 10.16 Amendment to Management Agreement with Roger L. Incorporated by reference to Exhibit b.9 to the Hale dated June 21, 1989 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 10.17 1993 Amendment to Management Agreement with Incorporated by reference to Exhibit 10.14 to the Roger L. Hale dated December 10, 1993 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.18 Management Agreement with Douglas R. Hoelscher Incorporated by reference to Exhibit b.10 to the dated March 10, 1987 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 10.19 Amendment to Management Agreement with Douglas Incorporated by reference to Exhibit b.11 to the R. Hoelscher dated June 21, 1989 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 10.20 1993 Amendment to Management Agreement with Incorporated by reference to Exhibit 10.18 to the Douglas R. Hoelscher dated December 10, 1993 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.21 Management Agreement with Keith D. Payden dated Incorporated by reference to Exhibit 10.19 to the December 10, 1993 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.22 Management Agreement with Richard A. Snyder Incorporated by reference to Exhibit b.12 to the dated March 10, 1987 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 10.23 Amendment to Management Agreement with Richard Incorporated by reference to Exhibit b.13 to the A. Snyder dated June 22, 1989 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 10.24 1993 Amendment to Management Agreement with Incorporated by reference to Exhibit 10.22 to the Richard A. Snyder dated December 10, 1993 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.25 Management Agreement with William R. Strang Incorporated by reference to Exhibit 10.23 to the dated December 10, 1993 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.26 Asset Purchase Agreement dated January 27, 1994, Incorporated by reference to Exhibit 2.1 to the between Tennant Company, Castex Industries, Company's Current Report on Form 8-K dated February Inc., Wayne Investment Corp. and Wayne A. 15, 1994. Streuer 10.27 Management Agreement with James H. Moar dated Filed herewith electronically. July 13, 1998 10.28 Management Agreement with Thomas J. Dybsky dated Filed herewith electronically. September 28, 1998 8 10.29 Tennant Company Non-Employee Director Stock Filed herewith electronically. Option Plan 10.30 Tennant Company 1998 Management Incentive Plan Filed herewith electronically. 13.1 Portions of 1998 Annual Report to Shareholders Filed herewith electronically. 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' Report and Consent Filed herewith electronically. 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, 1998. 9 CROSS REFERENCE SHEET
FORM 10-K REFERENCED LOCATION - --------- ---------- -------- Part I, Item 1 - Business 1998 Annual Report to Shareholders Exhibit 13.1 a. General Pages 2 to 13 b. Lines of business, industry segments and Page 23, footnote 2 foreign and domestic operations c. Working capital practices Page 16 d. Product research and development Pages 7, 9, 10, 11 and 12 Page 23, footnote 3 e. Employment Page 32 Part I, Item 2 - Properties 1998 Annual Report to Shareholders Exhibit 13.1 Page 24, footnote 7 Page 25, footnote 9 Inside back cover Part II, Item 5 - Market for 1998 Annual Report to Shareholders Exhibit 13.1 the Registrant's Common a. Principal market Inside back cover Equity and Related b. Quarterly data Page 23, footnote 4 Shareholder Matters Inside back cover c. Number of shareholders Inside back cover d. Dividends Page 23, footnote 4 Inside back cover Part II, Item 6 - Selected 1998 Annual Report to Shareholders Exhibit 13.1 Financial Data Pages 32 and 33 Part II, Item 7 - Management's 1998 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 1998 Annual Report to Shareholders Exhibit 13.1 Statements and Supplementary Pages 18 to 30 Data Part III, Item 10 - Directors 1999 Proxy Pages 4 to 7 and Executive Officers of the Registrant Part III, Item 11 - Executive 1999 Proxy Pages 8 to 14 Compensation Part III, Item 12 - Security 1999 Proxy Pages 2 and 3 Ownership of Certain Beneficial Owners and Management
10 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 - ------------------------------------- By - Roger L. Hale, Chairman, CEO ----------------------------- and Board of Directors Andrew Czajkowski Board of Directors Date - March 25, 1999 Date - March 25, 1999 By - By - ------------------------------------ ----------------------------- Janet M. Dolan, President, COO Delbert W. Johnson and Board of Directors Board of Directors Date - March 25, 1999 Date - March 25, 1999 By - ----------------------------- By - Pamela K. Knous ------------------------------------ Board of Directors John T. Pain Vice President, Treasurer, and Date - March 25, 1999 Chief Financial Officer By - Date - March 25, 1999 ----------------------------- William I. Miller By - Board of Directors ------------------------------------ Dean A. Niehus Date - March 25, 1999 Corporate Controller and Principal Accounting Officer By - Date - March 25, 1999 ----------------------------- Edwin L. Russell By - Board of Directors ------------------------------------ Arthur D. Collins, Jr. Board of Directors Date - March 25, 1999 Date - March 25, 1999 By - ------------------------------------ David C. Cox Board of Directors Date - March 25, 1999
11 EX-10.27 2 EXHIBIT 10.27 MANAGEMENT AGREEMENT AGREEMENT entered into as of July 13, 1998, by and between Tennant Company, a Minnesota corporation (the "Company"), and James H. Moar (the "Employee"). WITNESSETH: WHEREAS, the Employee is a key member of the management of the Company and has heretofore devoted substantial skill and effort to the affairs of the Company, and the Board of Directors of the Company desires to recognize the significant personal contribution that the Employee has made to further the best interests of the Company and its stockholders; and WHEREAS, it is desirable and in the best interests of the Company and its stockholders to continue to obtain the benefits of the Employee's services and attention to the affairs of the Company; and WHEREAS, it is desirable and in the best interests of the Company and its stockholders to provide inducement for the Employee (A) to remain in the service of the Company in the event of any proposed or anticipated change in control of the Company and (B) to remain in the service of the Company in order to facilitate an orderly transition in the event of a change in control of the Company; and WHEREAS, it is desirable and in the best interests of the Company and its stockholders that the Employee be in a position to make judgments and advise the Company with respect to proposed changes in control of the Company without regard to the possibility that Employee's employment may be terminated without compensation in the event of certain changes in control of the Company; and WHEREAS, the Employee desires to be protected in the event of certain changes in control of the Company; and WHEREAS, for the reasons set forth above, the Company and the Employee desire to enter into this Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, the Company and the Employee agree as follows: 1. EMPLOYMENT. The Employee shall remain in the employ of the Company for the term of this Agreement (the "Term"), and during the Term, the Employee shall have such title, duties, responsibilities and authority, and receive such remuneration and fringe benefits, as the Board of Directors of the Company shall from time to time provide for the Employee; provided, however, that either the Employee or the Company may terminate the employment of the Employee at any time prior to the expiration of the Term, with or without Cause and for any reason whatever, upon at least 30 days' prior written notice to the other party, subject to the right of the Employee to receive any payment and other benefits that may be due pursuant to the terms and conditions of paragraph 2 of this Agreement. -1- 2. RIGHTS TO PAYMENT FOLLOWING CHANGE IN CONTROL. For purposes of this paragraph 2, an "Event" shall be deemed to have occurred if: A. a majority of the directors of the Company shall be persons other than persons (i) for whose election proxies shall have been solicited by the Board of Directors of the Company or (ii) who are then serving as directors appointed by the Board of Directors to fill vacancies on the Board of Directors caused by death or resignation (but not by removal) or to fill newly created directorships, B. 30% or more of the outstanding voting stock of the Company is acquired or beneficially owned (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended, or any successor rule thereto (the "Exchange Act")) by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), provided, however, that the following acquisitions and beneficial ownership shall not constitute Events pursuant to this paragraph 2B: (i) any acquisition or beneficial ownership by the Company or a subsidiary of the Company or (ii) any acquisition or beneficial ownership by any employee benefit plan (or related trust) sponsored or maintained by the Company or one or more of its subsidiaries, (iii) any acquisition or beneficial ownership by the Employee or any group that includes the Employee, or (iv) any acquisition or beneficial ownership by a parent corporation or its wholly-owned subsidiaries, as long as they shall remain wholly-owned subsidiaries, of 100% of the outstanding voting stock of the Company as a result of a merger or statutory share exchange which complies with paragraph 2C(i)(2) or the exception in paragraph 2C(ii) hereof in all respects, C. the shareholders of the Company approve a definitive agreement or plan to (i) merge or consolidate the Company with or into another corporation (other than (1) a merger or consolidation with a subsidiary of the Company or (2) a merger in which (a) the Company is the surviving corporation, (b) no outstanding voting stock of the Company (other than fractional shares) held by shareholders immediately prior to the merger is converted into cash, securities, or other property (except (I) voting stock of a parent corporation owning directly, or indirectly through wholly-owned subsidiaries, both beneficially and of record 100% of the voting stock of the Company immediately after the merger or (II) cash upon the exercise by holders of voting stock of the Company of statutory dissenters' rights), -2- (c) the persons who were the beneficial owners, respectively, of the outstanding common stock and outstanding voting stock of the Company immediately prior to such merger beneficially own, directly or indirectly, immediately after the merger, more than 70% of, respectively, the then outstanding common stock and the then outstanding voting stock of the surviving corporation or its parent corporation, and (d) if voting stock of the parent corporation is exchanged for voting stock of the Company in the merger, all holders of any class or series of voting stock of the Company immediately prior to the merger have the right to receive substantially the same per share consideration in exchange for their voting stock of the Company as all other holders of such class or series), (ii) exchange, pursuant to a statutory exchange of shares of voting stock of the Company held by shareholders of the Company immediately prior to the exchange, shares of one or more classes or series of voting stock of the Company for cash, securities or other property, except for (a) voting stock of a parent corporation of the Company owning directly, or indirectly through wholly-owned subsidiaries, both beneficially and of record 100% of the voting stock of the Company immediately after the statutory share exchange if (I) the persons who were the beneficial owners, respectively, of the outstanding common stock and outstanding voting stock of the Company immediately prior to such statutory share exchange own, directly or indirectly, immediately after the statutory share exchange more than 70% of, respectively, the then outstanding common stock and the then outstanding voting stock of such parent corporation, and (II) all holders of any class or series of voting stock of the Company immediately prior to the statutory share exchange have the right to receive substantially the same per share consideration in exchange for their voting stock of the Company as all other holders of such class or series or (b) cash with respect to fractional shares of voting stock of the Company or payable as a result of the exercise by holders of voting stock of the Company of statutory dissenters' rights, (iii) sell or otherwise dispose of all or substantially all of the assets of the Company (in one transaction or a series of transactions), or (iv) liquidate or dissolve the Company, unless a majority of the voting stock (or the voting equity interest) of the surviving corporation or its parent corporation or of any corporation (or other entity) acquiring all or substantially all of the assets of the Company (in the case of a merger, consolidation or disposition of assets) or the Company or its parent corporation (in the case of a statutory share exchange) is, immediately following the merger, consolidation, statutory share exchange or disposition of assets, beneficially owned by the Employee or a group of persons, including the Employee, acting in concert, or D. (i) the Company enters into an agreement in principle or a definitive agreement relating to an Event described in clause A, B or C above which ultimately results in such an Event described in clause A, B or C hereof, -3- (ii) a tender or exchange offer or proxy contest is commenced which ultimately results in an Event described in clause A or B hereof, or (iii) there shall be an involuntary termination or Constructive Involuntary Termination of employment of Employee, and Employee reasonably demonstrates that such event (x) was requested by a third party that has previously taken other steps reasonably calculated to result in an Event described in clause A, B or C above and which ultimately result in an Event described in clause A, B or C hereof or (y) otherwise arose in connection with or in anticipation of an Event described in clause A, B or C above that ultimately occurs. If any Event shall occur during the Term of this Agreement, then the Employee shall be entitled to receive from the Company or its successor (which term as used herein shall include any person acquiring all or substantially all of the assets of the Company) a cash payment and other benefits on the following basis (unless the Employee's employment by the Company is terminated voluntarily or involuntarily prior to the occurrence of the earliest Event to occur (the "First Event"), in which case the Employee shall be entitled to no payment or benefits under this paragraph 2): (a) If at the time of, or at any time after, the occurrence of the First Event and prior to the end of the Transition Period, the employment of the Employee with the Company is voluntarily or involuntarily terminated for any reason (unless such termination is a voluntary termination by the Employee other than a Constructive Involuntary Termination or is on account of the death or Disability of the Employee or is a termination by the Company for Cause), the Employee (or the Employee's legal representative, as the case may be), subject to the limitations set forth in paragraph 2(e), (i) shall be entitled to receive from the Company or its successor, upon such termination of employment with the Company or its successor, a cash payment in an amount equal to A) three times the average annual compensation payable by the Company and includible in the gross income for Federal Income Tax purposes of the Employee during the shorter of the period consisting of the most recent five completed taxable years of the Employee ending before the First Event (other than an Event described in clause D of this paragraph 2 unless the Employee is terminated prior to the occurrence of an Event described in clause A, B or C of this paragraph 2) or that portion of such period during which the Employee was employed by the Company, less B $1.00, such payment to be made to the Employee by the Company or its successor in a lump sum at the time of such termination of employment; and (ii) shall be entitled until the end of the Transition Period to participate in any health, disability and life insurance plan or program in which the Employee was entitled to participate immediately prior to the First Event as if he or she were an employee of the Company until the end of the Transition Period (except, with respect to health insurance coverage, for those portions remaining until the end of the Transition Period that duplicate health insurance coverage that is in place for the Employee under any other policy provided at the expense of another employer); provided however, that in the event that the Employee's participation in any such health, disability or life insurance plan or program is -4- barred, the Company, at its sole cost and expense, shall arrange to provide the Employee with benefits substantially similar to those which the Employee is entitled to receive under such plan or program. (b) The payments provided for in this paragraph 2 shall be in addition to any salary or other remuneration otherwise payable to the Employee on account of employment by the Company or one or more of its subsidiaries or its successor (including any amounts received prior to such termination of employment for personal services rendered after the occurrence of the First Event) but shall be reduced by any severance pay which the Employee receives from the Company, its subsidiaries or its successor under any other policy or agreement of the Company in the event of involuntary termination of Employee's employment. (c) The Company shall also pay to the Employee all legal fees and expenses incurred by the Employee as a result of such termination, including, but not limited to, all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement. (d) In the event that at any time from the date of the First Event until the end of the Transition Period, (i) the Employee shall not be given substantially equivalent or greater title, duties, responsibilities and authority or substantially equivalent or greater salary and other remuneration and fringe benefits (including paid vacation), in each case as compared with the Employee's status immediately prior to the First Event, other than for Cause or on account of Disability, (ii) the Company shall have failed to obtain assumption of this Agreement by any successor as contemplated by paragraph 4(b) hereof, (iii) the Company shall require the Employee to relocate to any place other than a location within twenty-five miles of the location at which the Employee performed his duties immediately prior to the First Event or, if the Employee performed such duties at the Company's principal executive offices, the Company shall relocate its principal executive offices to any location other than a location within twenty-five miles of the location of the principal executive offices immediately prior to the First Event, or (iv) the Company shall require that the Employee travel on Company business to a substantially greater extent than required immediately prior to the First Event, a termination of employment with the Company by the Employee thereafter shall constitute a Constructive Involuntary Termination. (e) Notwithstanding any provision to the contrary contained herein except the last sentence of this paragraph 2(e), if the lump sum cash payment due and the other benefits to which the Employee shall become entitled under paragraph 2(a) hereof, either alone or together with other payments in the nature of compensation to the Employee which are contingent on a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the -5- Company or otherwise, would constitute a "parachute payment" as defined in Section 280G of the Internal Revenue Code of 1986 (the "Code") or any successor provision thereto, such lump sum payment and/or such other benefits and payments shall be reduced (but not below zero) to the largest aggregate amount as will result in no portion thereof being subject to the excise tax imposed under Section 4999 of the Code (or any successor provision thereto) or being non-deductible to the Company for Federal Income Tax purposes pursuant to Section 280G of the Code (or any successor provision thereto). The Employee in good faith shall determine the amount of any reduction to be made pursuant to this paragraph 2(e) and shall select from among the foregoing benefits and payments those which shall be reduced. No modification of, or successor provision to, Section 280G or Section 4999 subsequent to the date of this Agreement shall, however, reduce the benefits to which the Employee would be entitled under this Agreement in the absence of this paragraph 2(e) to a greater extent than they would have been reduced if Section 280G and Section 4999 had not been modified or superseded subsequent to the date of this Agreement, notwithstanding anything to the contrary provided in the first sentence of this paragraph 2(e). (f) The Employee shall not be required to mitigate the amount of any payment or other benefit provided for in paragraph 2 by seeking other employment or otherwise, nor (except as specifically provided in paragraph 2(a)(ii)) shall the amount of any payment or other benefit provided for in paragraph 2 be reduced by any compensation earned by the Employee as the result of employment by another employer after termination, or otherwise. (g) The obligations of the Company under this paragraph 2 shall survive the termination of this Agreement. 3. DEFINITION OF CERTAIN TERMS. (a) As used herein, the term "person" shall mean an individual, partnership, corporation, estate, trust or other entity. (b) As used herein, the term "Cause" shall mean, and be limited to, (i) willful and gross neglect of duties by the Employee or (ii) an act or acts committed by the Employee constituting a felony and substantially detrimental to the Company or its reputation. (c) As used herein, the term "Disability" shall mean the Employee's absence from his duties with the Company on a full time basis for 180 consecutive business days, as a result of the Employee's incapacity due to physical or mental illness, unless within 30 days after written notice pursuant to paragraph 1 hereof is given following such absence, the Employee shall have returned to the full time performance of his duties. (d) As used herein, the term "voting stock" shall mean all outstanding shares of capital stock entitled to vote generally in the election of directors, considered for purposes of this Agreement as one class, and all references to percentages of the voting stock shall be deemed to be references to percentages of the total voting power of the voting stock. -6- (e) As used herein, the term "Transition Period" shall mean the three-year period commencing on the date of the earliest to occur of an Event described in clause A, B or C of paragraph 2 hereof (the "Commencement Date") and ending on the third anniversary of the Commencement Date. 4. SUCCESSORS AND ASSIGNS. (a) This Agreement shall be binding upon and inure to the benefit of the successors, legal representatives and assigns of the parties hereto; provided, however, that the Employee shall not have any right to assign, pledge or otherwise dispose of or transfer any interest in this Agreement or any payments hereunder, whether directly or indirectly or in whole or in part, without the written consent of the Company or its successor. (b) The Company will require any successor (whether direct or indirect, by purchase of a majority of the outstanding voting stock of the Company or all or substantially all of the assets of the Company, or by merger, consolidation or otherwise), by agreement in form and substance satisfactory to the Employee, to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession (other than in the case of a merger or consolidation) shall be a breach of this Agreement and shall entitle the Employee to compensation from the Company in the same amount and on the same terms as the Employee would be entitled hereunder if the Employee terminated his employment on account of a Constructive Involuntary Termination, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date of termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which is required to execute and deliver the agreement provided for in this paragraph 4(b) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 5. GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Minnesota. 6. NOTICES. All notices, requests and demands given to or made pursuant hereto shall be in writing and shall be delivered or mailed to any such party at its address which: (a) In the case of the Company shall be: Tennant Company 701 N. Lilac Drive Minneapolis, Minnesota 55440 Attention: Chief Executive Officer (b) In the case of the Employee shall be: James H. Moar 495 Summit Avenue St. Paul, MN 55102 -7- Either party may, by notice hereunder, designate a changed address. Any notice, if mailed properly addressed, postage prepaid, registered or certified mail, shall be deemed to have been given on the registered date or that date stamped on the certified mail receipt. 7. SEVERABILITY; SEVERANCE. In the event that any portion of this Agreement is held to be invalid or unenforceable for any reason, it is hereby agreed that such invalidity or unenforceability shall not affect the other portions of this Agreement and that the remaining covenants, terms and conditions or portions hereof shall remain in full force and effect, and any court of competent jurisdiction may so modify the objectionable provision as to make it valid, reasonable and enforceable. In the event that any benefits to the Employee provided in this Agreement are held to be unavailable to the Employee as a matter of law, the Employee shall be entitled to severance benefits from the Employer, in the event of an involuntary termination or Constructive Involuntary Termination of employment of the Employee (other than a termination on account of the death or Disability of the Employee or a termination for Cause) during the term of this Agreement occurring at the time of or following the occurrence of an Event, at least as favorable to the Employee (when taken together with the benefits under this Agreement that are actually received by the Employee) as the most advantageous benefits made available by the Employer to employees of comparable position and seniority to the Employee during the five-year period prior to the First Event. 8. TERM. This Agreement shall commence on the date of this Agreement and shall terminate, and the Term of this Agreement shall end, on the later of (A) December 31, 1998, provided that such period shall be automatically extended for one year and from year to year thereafter until notice of termination is given by the Employer or the Employee to the other party hereto at least 60 days prior to December 31, 1998 or the one-year extension period then in effect, as the case may be, or (B) if the Commencement Date occurs prior to December 31, 1998 (or prior to the end of the extension year then in effect as provided for in clause (A) hereof), the third anniversary of the Commencement Date. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. TENNANT COMPANY By --------------------------- ------------------------------ James H. Moar -8- EX-10.28 3 EXHIBIT 10.28 MANAGEMENT AGREEMENT AGREEMENT entered into as of September 28, 1998, by and between Tennant Company, a Minnesota corporation (the "Company"), and Thomas J. Dybsky (the "Employee"). WITNESSETH: WHEREAS, the Employee is a key member of the management of the Company and has heretofore devoted substantial skill and effort to the affairs of the Company, and the Board of Directors of the Company desires to recognize the significant personal contribution that the Employee has made to further the best interests of the Company and its stockholders; and WHEREAS, it is desirable and in the best interests of the Company and its stockholders to continue to obtain the benefits of the Employee's services and attention to the affairs of the Company; and WHEREAS, it is desirable and in the best interests of the Company and its stockholders to provide inducement for the Employee (A) to remain in the service of the Company in the event of any proposed or anticipated change in control of the Company and (B) to remain in the service of the Company in order to facilitate an orderly transition in the event of a change in control of the Company; and WHEREAS, it is desirable and in the best interests of the Company and its stockholders that the Employee be in a position to make judgments and advise the Company with respect to proposed changes in control of the Company without regard to the possibility that Employee's employment may be terminated without compensation in the event of certain changes in control of the Company; and WHEREAS, the Employee desires to be protected in the event of certain changes in control of the Company; and WHEREAS, for the reasons set forth above, the Company and the Employee desire to enter into this Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained herein, the Company and the Employee agree as follows: 1. EMPLOYMENT. The Employee shall remain in the employ of the Company for the term of this Agreement (the "Term"), and during the Term, the Employee shall have such title, duties, responsibilities and authority, and receive such remuneration and fringe benefits, as the Board of Directors of the Company shall from time to time provide for the Employee; provided, however, that either the Employee or the Company may terminate the employment of the Employee at any time prior to the expiration of the Term, with or without Cause and for any reason whatever, upon at least 30 days' prior written notice to the other party, subject to the right of the Employee to receive any payment and other benefits that may be due pursuant to the terms and conditions of paragraph 2 of this Agreement. -1- 2. RIGHTS TO PAYMENT FOLLOWING CHANGE IN CONTROL. For purposes of this paragraph 2, an "Event" shall be deemed to have occurred if: A. a majority of the directors of the Company shall be persons other than persons (i) for whose election proxies shall have been solicited by the Board of Directors of the Company or (ii) who are then serving as directors appointed by the Board of Directors to fill vacancies on the Board of Directors caused by death or resignation (but not by removal) or to fill newly created directorships, B. 30% or more of the outstanding voting stock of the Company is acquired or beneficially owned (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended, or any successor rule thereto (the "Exchange Act")) by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act), provided, however, that the following acquisitions and beneficial ownership shall not constitute Events pursuant to this paragraph 2B: (i) any acquisition or beneficial ownership by the Company or a subsidiary of the Company or (ii) any acquisition or beneficial ownership by any employee benefit plan (or related trust) sponsored or maintained by the Company or one or more of its subsidiaries, (iii) any acquisition or beneficial ownership by the Employee or any group that includes the Employee, or (iv) any acquisition or beneficial ownership by a parent corporation or its wholly-owned subsidiaries, as long as they shall remain wholly-owned subsidiaries, of 100% of the outstanding voting stock of the Company as a result of a merger or statutory share exchange which complies with paragraph 2C(i)(2) or the exception in paragraph 2C(ii) hereof in all respects, C. the shareholders of the Company approve a definitive agreement or plan to (i) merge or consolidate the Company with or into another corporation (other than (1) a merger or consolidation with a subsidiary of the Company or (2) a merger in which (a) the Company is the surviving corporation, (b) no outstanding voting stock of the Company (other than fractional shares) held by shareholders immediately prior to the merger is converted into cash, securities, or other property (except (I) voting stock of a parent corporation owning directly, or indirectly through wholly-owned subsidiaries, both beneficially and of record 100% of the voting stock of the Company immediately after the merger or (II) cash upon the exercise by holders of voting stock of the Company of statutory dissenters' rights), -2- (c) the persons who were the beneficial owners, respectively, of the outstanding common stock and outstanding voting stock of the Company immediately prior to such merger beneficially own, directly or indirectly, immediately after the merger, more than 70% of, respectively, the then outstanding common stock and the then outstanding voting stock of the surviving corporation or its parent corporation, and (d) if voting stock of the parent corporation is exchanged for voting stock of the Company in the merger, all holders of any class or series of voting stock of the Company immediately prior to the merger have the right to receive substantially the same per share consideration in exchange for their voting stock of the Company as all other holders of such class or series), (ii) exchange, pursuant to a statutory exchange of shares of voting stock of the Company held by shareholders of the Company immediately prior to the exchange, shares of one or more classes or series of voting stock of the Company for cash, securities or other property, except for (a) voting stock of a parent corporation of the Company owning directly, or indirectly through wholly-owned subsidiaries, both beneficially and of record 100% of the voting stock of the Company immediately after the statutory share exchange if (I) the persons who were the beneficial owners, respectively, of the outstanding common stock and outstanding voting stock of the Company immediately prior to such statutory share exchange own, directly or indirectly, immediately after the statutory share exchange more than 70% of, respectively, the then outstanding common stock and the then outstanding voting stock of such parent corporation, and (II) all holders of any class or series of voting stock of the Company immediately prior to the statutory share exchange have the right to receive substantially the same per share consideration in exchange for their voting stock of the Company as all other holders of such class or series or (b) cash with respect to fractional shares of voting stock of the Company or payable as a result of the exercise by holders of voting stock of the Company of statutory dissenters' rights, (iii) sell or otherwise dispose of all or substantially all of the assets of the Company (in one transaction or a series of transactions), or (iv) liquidate or dissolve the Company, unless a majority of the voting stock (or the voting equity interest) of the surviving corporation or its parent corporation or of any corporation (or other entity) acquiring all or substantially all of the assets of the Company (in the case of a merger, consolidation or disposition of assets) or the Company or its parent corporation (in the case of a statutory share exchange) is, immediately following the merger, consolidation, statutory share exchange or disposition of assets, beneficially owned by the Employee or a group of persons, including the Employee, acting in concert, or D. (i) the Company enters into an agreement in principle or a definitive agreement relating to an Event described in clause A, B or C above which ultimately results in such an Event described in clause A, B or C hereof, -3- (ii) a tender or exchange offer or proxy contest is commenced which ultimately results in an Event described in clause A or B hereof, or (iii) there shall be an involuntary termination or Constructive Involuntary Termination of employment of Employee, and Employee reasonably demonstrates that such event (x) was requested by a third party that has previously taken other steps reasonably calculated to result in an Event described in clause A, B or C above and which ultimately result in an Event described in clause A, B or C hereof or (y) otherwise arose in connection with or in anticipation of an Event described in clause A, B or C above that ultimately occurs. If any Event shall occur during the Term of this Agreement, then the Employee shall be entitled to receive from the Company or its successor (which term as used herein shall include any person acquiring all or substantially all of the assets of the Company) a cash payment and other benefits on the following basis (unless the Employee's employment by the Company is terminated voluntarily or involuntarily prior to the occurrence of the earliest Event to occur (the "First Event"), in which case the Employee shall be entitled to no payment or benefits under this paragraph 2): (a) If at the time of, or at any time after, the occurrence of the First Event and prior to the end of the Transition Period, the employment of the Employee with the Company is voluntarily or involuntarily terminated for any reason (unless such termination is a voluntary termination by the Employee other than a Constructive Involuntary Termination or is on account of the death or Disability of the Employee or is a termination by the Company for Cause), the Employee (or the Employee's legal representative, as the case may be), subject to the limitations set forth in paragraph 2(e), (i) shall be entitled to receive from the Company or its successor, upon such termination of employment with the Company or its successor, a cash payment in an amount equal to A) three times the average annual compensation payable by the Company and includible in the gross income for Federal Income Tax purposes of the Employee during the shorter of the period consisting of the most recent five completed taxable years of the Employee ending before the First Event (other than an Event described in clause D of this paragraph 2 unless the Employee is terminated prior to the occurrence of an Event described in clause A, B or C of this paragraph 2) or that portion of such period during which the Employee was employed by the Company, less B $1.00, such payment to be made to the Employee by the Company or its successor in a lump sum at the time of such termination of employment; and (ii) shall be entitled until the end of the Transition Period to participate in any health, disability and life insurance plan or program in which the Employee was entitled to participate immediately prior to the First Event as if he or she were an employee of the Company until the end of the Transition Period (except, with respect to health insurance coverage, for those portions remaining until the end of the Transition Period that duplicate health insurance coverage that is in place for the Employee under any other policy provided at the expense of another employer); provided however, that in the event that the Employee's participation in any such health, disability or life insurance plan or program is -4- barred, the Company, at its sole cost and expense, shall arrange to provide the Employee with benefits substantially similar to those which the Employee is entitled to receive under such plan or program. (b) The payments provided for in this paragraph 2 shall be in addition to any salary or other remuneration otherwise payable to the Employee on account of employment by the Company or one or more of its subsidiaries or its successor (including any amounts received prior to such termination of employment for personal services rendered after the occurrence of the First Event) but shall be reduced by any severance pay which the Employee receives from the Company, its subsidiaries or its successor under any other policy or agreement of the Company in the event of involuntary termination of Employee's employment. (c) The Company shall also pay to the Employee all legal fees and expenses incurred by the Employee as a result of such termination, including, but not limited to, all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement. (d) In the event that at any time from the date of the First Event until the end of the Transition Period, (i) the Employee shall not be given substantially equivalent or greater title, duties, responsibilities and authority or substantially equivalent or greater salary and other remuneration and fringe benefits (including paid vacation), in each case as compared with the Employee's status immediately prior to the First Event, other than for Cause or on account of Disability, (ii) the Company shall have failed to obtain assumption of this Agreement by any successor as contemplated by paragraph 4(b) hereof, (iii) the Company shall require the Employee to relocate to any place other than a location within twenty-five miles of the location at which the Employee performed his duties immediately prior to the First Event or, if the Employee performed such duties at the Company's principal executive offices, the Company shall relocate its principal executive offices to any location other than a location within twenty-five miles of the location of the principal executive offices immediately prior to the First Event, or (iv) the Company shall require that the Employee travel on Company business to a substantially greater extent than required immediately prior to the First Event, a termination of employment with the Company by the Employee thereafter shall constitute a Constructive Involuntary Termination. (e) Notwithstanding any provision to the contrary contained herein except the last sentence of this paragraph 2(e), if the lump sum cash payment due and the other benefits to which the Employee shall become entitled under paragraph 2(a) hereof, either alone or together with other payments in the nature of compensation to the Employee which are contingent on a change in the ownership or effective control of the Company or in the ownership of a substantial portion of the assets of the -5- Company or otherwise, would constitute a "parachute payment" as defined in Section 280G of the Internal Revenue Code of 1986 (the "Code") or any successor provision thereto, such lump sum payment and/or such other benefits and payments shall be reduced (but not below zero) to the largest aggregate amount as will result in no portion thereof being subject to the excise tax imposed under Section 4999 of the Code (or any successor provision thereto) or being non-deductible to the Company for Federal Income Tax purposes pursuant to Section 280G of the Code (or any successor provision thereto). The Employee in good faith shall determine the amount of any reduction to be made pursuant to this paragraph 2(e) and shall select from among the foregoing benefits and payments those which shall be reduced. No modification of, or successor provision to, Section 280G or Section 4999 subsequent to the date of this Agreement shall, however, reduce the benefits to which the Employee would be entitled under this Agreement in the absence of this paragraph 2(e) to a greater extent than they would have been reduced if Section 280G and Section 4999 had not been modified or superseded subsequent to the date of this Agreement, notwithstanding anything to the contrary provided in the first sentence of this paragraph 2(e). (f) The Employee shall not be required to mitigate the amount of any payment or other benefit provided for in paragraph 2 by seeking other employment or otherwise, nor (except as specifically provided in paragraph 2(a)(ii)) shall the amount of any payment or other benefit provided for in paragraph 2 be reduced by any compensation earned by the Employee as the result of employment by another employer after termination, or otherwise. (g) The obligations of the Company under this paragraph 2 shall survive the termination of this Agreement. 3. DEFINITION OF CERTAIN TERMS. (a) As used herein, the term "person" shall mean an individual, partnership, corporation, estate, trust or other entity. (b) As used herein, the term "Cause" shall mean, and be limited to, (i) willful and gross neglect of duties by the Employee or (ii) an act or acts committed by the Employee constituting a felony and substantially detrimental to the Company or its reputation. (c) As used herein, the term "Disability" shall mean the Employee's absence from his duties with the Company on a full time basis for 180 consecutive business days, as a result of the Employee's incapacity due to physical or mental illness, unless within 30 days after written notice pursuant to paragraph 1 hereof is given following such absence, the Employee shall have returned to the full time performance of his duties. (d) As used herein, the term "voting stock" shall mean all outstanding shares of capital stock entitled to vote generally in the election of directors, considered for purposes of this Agreement as one class, and all references to percentages of the voting stock shall be deemed to be references to percentages of the total voting power of the voting stock. -6- (e) As used herein, the term "Transition Period" shall mean the three-year period commencing on the date of the earliest to occur of an Event described in clause A, B or C of paragraph 2 hereof (the "Commencement Date") and ending on the third anniversary of the Commencement Date. 4. SUCCESSORS AND ASSIGNS. (a) This Agreement shall be binding upon and inure to the benefit of the successors, legal representatives and assigns of the parties hereto; provided, however, that the Employee shall not have any right to assign, pledge or otherwise dispose of or transfer any interest in this Agreement or any payments hereunder, whether directly or indirectly or in whole or in part, without the written consent of the Company or its successor. (b) The Company will require any successor (whether direct or indirect, by purchase of a majority of the outstanding voting stock of the Company or all or substantially all of the assets of the Company, or by merger, consolidation or otherwise), by agreement in form and substance satisfactory to the Employee, to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession (other than in the case of a merger or consolidation) shall be a breach of this Agreement and shall entitle the Employee to compensation from the Company in the same amount and on the same terms as the Employee would be entitled hereunder if the Employee terminated his employment on account of a Constructive Involuntary Termination, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the date of termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which is required to execute and deliver the agreement provided for in this paragraph 4(b) or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. 5. GOVERNING LAW. This Agreement shall be construed in accordance with the laws of the State of Minnesota. 6. NOTICES. All notices, requests and demands given to or made pursuant hereto shall be in writing and shall be delivered or mailed to any such party at its address which: (a) In the case of the Company shall be: Tennant Company 701 N. Lilac Drive Minneapolis, Minnesota 55440 Attention: Chief Executive Officer (b) In the case of the Employee shall be: Thomas J. Dybsky 30 Blue Jay Lane North Oaks, MN 55127 -7- Either party may, by notice hereunder, designate a changed address. Any notice, if mailed properly addressed, postage prepaid, registered or certified mail, shall be deemed to have been given on the registered date or that date stamped on the certified mail receipt. 7. SEVERABILITY; SEVERANCE. In the event that any portion of this Agreement is held to be invalid or unenforceable for any reason, it is hereby agreed that such invalidity or unenforceability shall not affect the other portions of this Agreement and that the remaining covenants, terms and conditions or portions hereof shall remain in full force and effect, and any court of competent jurisdiction may so modify the objectionable provision as to make it valid, reasonable and enforceable. In the event that any benefits to the Employee provided in this Agreement are held to be unavailable to the Employee as a matter of law, the Employee shall be entitled to severance benefits from the Employer, in the event of an involuntary termination or Constructive Involuntary Termination of employment of the Employee (other than a termination on account of the death or Disability of the Employee or a termination for Cause) during the term of this Agreement occurring at the time of or following the occurrence of an Event, at least as favorable to the Employee (when taken together with the benefits under this Agreement that are actually received by the Employee) as the most advantageous benefits made available by the Employer to employees of comparable position and seniority to the Employee during the five-year period prior to the First Event. 8. TERM. This Agreement shall commence on the date of this Agreement and shall terminate, and the Term of this Agreement shall end, on the later of (A) December 31, 1998, provided that such period shall be automatically extended for one year and from year to year thereafter until notice of termination is given by the Employer or the Employee to the other party hereto at least 60 days prior to December 31, 1998 or the one-year extension period then in effect, as the case may be, or (B) if the Commencement Date occurs prior to December 31, 1998 (or prior to the end of the extension year then in effect as provided for in clause (A) hereof), the third anniversary of the Commencement Date. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. TENNANT COMPANY By ----------------------- -------------------------- Thomas J. Dybsky -8- EX-10.29 4 EXHIBIT 10.29 TENNANT COMPANY NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN 1. PURPOSE. The purpose of this Non-Employee Director Stock Option Plan (the "Plan") is to promote the interests of Tennant Company, a Minnesota corporation (the "Company"), and its shareholders by providing non-employee directors of the Company with an opportunity to acquire a proprietary interest in the Company and thereby provide an additional incentive to put forth maximum effort for the continued success and growth of the Company. In addition, the opportunity to acquire a proprietary interest in the Company will aid in attracting and retaining non-employee directors of outstanding ability. 2. ADMINISTRATION. (a) GENERAL. This Plan shall be administered by a the Company's Board of Directors (the "Board"). The Board shall have the power, subject to the limitations contained in this Plan, to fix any terms and conditions for the grant or exercise of any award under this Plan. Subject to the provisions of this Plan, the Board may from time to time adopt such rules for the administration of this Plan as it deems appropriate. The decision of the Board on any matter affecting this Plan or the rights and obligations arising under this Plan or any award granted hereunder, shall be final, conclusive and binding upon all persons, including without limitation the Company, shareholders and optionees. (b) INDEMNIFICATION. To the full extent permitted by law, (i) no member of the Board shall be liable for any action or determination taken or made in good faith with respect to this Plan or any award granted hereunder and (ii) the members of the Board shall be entitled to indemnification by the Company against and from any loss incurred by such member or person by reason of any such actions and determinations. 3. SHARES. The shares that may be made subject to options granted under this Plan shall be authorized and unissued shares of Common Stock of the Company, par value $.375 per share ("Shares," and each individually a "Share"), and they shall not exceed 150,000 Shares in the aggregate, subject to adjustment as provided in paragraph 12, below, except that, if any option lapses or terminates for any reason before such option has been completely exercised, the Shares covered by the unexercised portion of such option may again be made subject to options granted under this Plan. 4. ELIGIBLE PARTICIPANTS. Stock options may be granted under this Plan to any director of the Company who is not an employee of the Company or any parent or subsidiary thereof (a "non-employee director"). References herein to "employed," "employment" and similar terms (except "employee") shall refer to the providing of services as a director. 5. TERMS AND CONDITIONS OF DIRECTOR OPTIONS. (a) DISCRETIONARY GRANTS. Subject to the terms and conditions of this Plan, the Board may, from time to time during the term of this Plan, grant to any non-employee director options to purchase such number of Shares of the Company on such terms and conditions as the Board may determine. In determining the non-employee directors to whom options shall be granted and the number of Shares to be covered by each option, the Board may take into account the nature of the services rendered by the respective non-employee directors, their present and potential contributions to the success of the Company, and such other factors as the Board in its sole discretion may deem relevant. The date and time of approval by the Board of the granting of an option shall be considered the date and the time of the grant of such option. The maximum number of Shares subject to options that may be granted to any one non-employee director under the Plan in any fiscal year of the Company (including options granted under subparagraph 5(b)) may not exceed 10,000 Shares (subject to adjustment pursuant to paragraph 12 hereof). 1 (b) SCHEDULED GRANTS. Effective January 1, 1997, the Company shall grant to each non-employee director who is serving in such capacity on January 1, 1997, an option to purchase 1,000 Shares. On the day following each annual meeting of the shareholders of the Company (commencing with the annual meeting to be held in 1997), the Company shall grant to each then incumbent non-employee director an option to purchase 2,000 Shares. With respect to any non-employee director who is elected or appointed to the Board on a date other than the date of an annual meeting of shareholders, the Company shall grant to such non-employee director on the day following his or her first being so elected or appointed to the Board an option to purchase a number of shares equal to the product (rounded up to the next 100 shares) obtained by multiplying 2,000 by a fraction (x) the numerator of which is the number of days from the date such non-employee director is first elected or appointed to the Board to the date of the next scheduled annual meeting of shareholders and (y) the denominator of which is 365. Subject to the limitation contained in subparagraph 5(a) as to the maximum annual aggregate grant to any one individual, the Board may increase or decrease the number of shares to be granted to non-employee directors on any date pursuant to this said paragraph 5(b). (c) PURCHASE PRICE. The purchase price of each Share subject to an option granted pursuant to this paragraph 5 shall be 100% of the Fair Market Value of a Share on the date of grant. (d) VESTING. With respect to any option granted under subparagraph 5(a), the option agreement provided for in paragraph 6 relating to such option shall specify when such option shall become exercisable. With respect to any option granted under subparagraph 5(b), such option shall become exercisable cumulatively as to 25% of the shares subject thereto on the date of each of the first through the fourth annual meetings of shareholders of the Company following the date of grant thereof or, with respect to options granted on any date other than the day following an annual meeting of shareholders, on each of the first through the fourth anniversaries of the date of grant. Notwithstanding the foregoing or the provisions of any option agreement, the Board may, in its sole discretion, declare at any time that any option granted under this Plan shall be immediately exercisable. (e) TERMINATION. Each option granted pursuant to this paragraph 5 shall expire, and all rights to purchase Shares thereunder shall terminate, on the earliest of: (i) ten years after the date such option is granted or on such date prior thereto as may be fixed by the Board on or before the date such option is granted; (ii) the expiration of the period after the termination of the optionee's service as a non-employee director within which the option is exercisable as specified in paragraph 9(b) (provided that the Board may, in any option agreement provided for in paragraph 6 or by Board action with respect to any outstanding option, extend the periods specified in paragraph 9(b)); or (iii) the date, if any, fixed for cancellation pursuant to paragraph 10(c) or 11 below. 6. OPTION AGREEMENTS. All options granted under this Plan shall be evidenced by a written agreement in such form or forms as the Board may from time to time determine. 7. FAIR MARKET VALUE. For purposes of this Plan, the "Fair Market Value" of a Share at a specified date shall, unless otherwise expressly provided in this Plan, mean the closing sale price of a Share on the date immediately preceding such date or, if no sale of Shares shall have occurred on that date, on the next preceding day on which a sale of Shares occurred, on the Composite Tape for New York Stock Exchange listed shares or, if Shares are not quoted on the Composite Tape for New York Stock Exchange listed shares, on the NASDAQ National Market or any similar system then in use or, if Shares are not included in the NASDAQ National Market or any similar system then in use, the mean between the closing "bid" and the closing "asked" quotation of a Share on the date immediately preceding the date as of which such Fair Market Value is being determined, or, if no closing bid or asked quotation is made on that date, on the next preceding day on which a quotation is made, on the NASDAQ SmallCap Market or any similar system then in use, provided that if the Shares in question are not quoted on any such system, Fair Market Value shall be what the Board determines in good faith to be 100% of the market value of a Share as of the 2 date in question. Notwithstanding anything stated in this paragraph 7, if the applicable securities exchange or system has closed for the day by the time the determination is being made, all references in this paragraph to the date immediately preceeding the date in question shall be deemed to be references to the date in question. 8. MANNER OF EXERCISE OF OPTIONS. A person entitled to exercise an option granted under this Plan may, subject to its terms and conditions and the terms and conditions of this Plan, exercise it in whole at any time, or in part from time to time, by delivery to the Company at its principal executive office, to the attention of its Vice President, Personnel Resources, of written notice of exercise, specifying the number of Shares with respect to which the option is being exercised. The purchase price of the Shares with respect to which an option is being exercised shall be payable in full at the time of exercise, provided that, to the extent permitted by law, the holder of an option may simultaneously exercise an option and sell all or a portion of the Shares thereby acquired pursuant to a brokerage or similar relationship and use the proceeds from such sale to pay the purchase price of such Shares. The purchase price of each Share on the exercise of any option shall be paid in full in cash (including check, bank draft or money order) or, at the discretion of the person exercising the option, by delivery to the Company of unencumbered Shares, by a reduction in the number of Shares delivered upon exercise of the option, or by a combination of cash and such Shares (in each case such Shares having an aggregate Fair Market Value on the date of exercise equal to the amount of the purchase price being paid through such delivery or reduction of Shares); provided, however, that no person shall be permitted to pay any portion of the purchase price with Shares if the Board, in its sole discretion, determines that payment in such manner is undesirable. The granting of an option to a person shall give such person no rights as a shareholder except as to Shares issued to such person. 9. TRANSFERABILITY AND TERMINATION OF EMPLOYMENT. (a) TRANSFERABILITY. During the lifetime of an optionee, only such optionee or his or her guardian or legal representative may exercise options granted under this Plan, and no option granted under this Plan shall be assignable or transferable by the optionee otherwise than by will or the laws of descent and distribution or pursuant to a domestic relations order as defined by the Code or Title I of the Employee Retirement Income Security Act, or the rules thereunder; provided, however, that any optionee may transfer a non-statutory stock option granted under this Plan to a member or members of his or her immediate family (i.e., his or her children, grandchildren and spouse) or to one or more trusts for the benefit of such family members or partnerships in which such family members are the only partners, if (i) the option agreement with respect to such options expressly so provides either at the time of initial grant or by amendment to an outstanding option agreement and (ii) the optionee does not receive any consideration for the transfer. Any options held by any such transferee shall continue to be subject to the same terms and conditions that were applicable to such options immediately prior to their transfer and may be exercised by such transferee only as and to the extent that such option has become exercisable and has not terminated in accordance with the provisions of the Plan and the applicable option agreement. For purposes of any provision of this Plan relating to notice to an optionee or to vesting or termination of an option upon the death, disability or termination of employment of an optionee, the references to "optionee" shall mean the original grantee of an option and not any transferee. (b) TERMINATION OF EMPLOYMENT. In the event that an optionee ceases to be employed as a non-employee director by reason of (i) death, (ii) disability preventing continued service, (iii) retirement from the Board in accordance with the policy of the Company, if any, on retirement of non-employee directors then in effect, or (iv) termination of service as a non-employee director by reason of (x) resignation at the request of the Board (other than for gross misconduct, as determined by the Board) (y) the director's failure to have been nominated for re-election to the Board (unless such failure results from the non-employee director's unwillingness to continue to serve) or to have been re-elected by the shareholders of the Company, or (v) the director's removal by the shareholders of the Company then any option granted to such optionee that was not previously exercisable shall become immediately exercisable in full if the optionee shall have been continuously employed by the 3 Company or a parent or subsidiary thereof between the date such option was granted and the date of such termination of service and such option shall continue to be exercisable for five years after termination of such optionee's employment. If an optionee's employment terminates in any manner other than as provided for in the preceding sentence, any option granted to such optionee shall terminate immediately upon such termination of employment. (c) RIGHT TO TERMINATE EMPLOYMENT. Nothing contained in this Plan, or in any option granted pursuant to this Plan, shall confer upon any optionee any right to continued employment by the Company or limit in any way the right of the Company to terminate such optionee's employment at any time. (d) EXPIRATION DATE. In no event shall any option be exercisable at any time after the time it shall have expired in accordance with paragraph 5(e) of this Plan. When an option is no longer exercisable, it shall be deemed to have lapsed or terminated and will no longer be outstanding. 10. CHANGE IN CONTROL. (a) For purposes of this Plan, a "Change in Control" of the Company shall be deemed to occur if any of the following occur: (i) Any "person" (as such term is used in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) acquires or becomes a "beneficial owner" (as defined in Rule 13d-3 or any successor rule under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors ("Voting Securities"), provided, however, that the following shall not constitute a Change in Control pursuant to this paragraph (a)(1): (A) any acquisition or beneficial ownership by the Company or a Subsidiary; (B) any acquisition or beneficial ownership by any employee benefit plan (or related trust) sponsored or maintained by the Company or one or more of its Subsidiaries; (C) any acquisition or beneficial ownership by any corporation with respect to which, immediately following such acquisition, more than 70% of both the combined voting power of the Company's then outstanding Voting Securities and the Shares of the Company is then beneficially owned, directly or indirectly, by all or substantially all of the persons who beneficially owned Voting Securities and Shares of the Company immediately prior to such acquisition in substantially the same proportions as their ownership of such Voting Securities and Shares, as the case may be, immediately prior to such acquisition; (ii) A majority of the members of the Board of Directors of the Company shall not be Continuing Directors. "Continuing Directors" shall mean: (A) individuals who, on the date hereof, are directors of the Company, (B) individuals elected as directors of the Company subsequent to the date hereof for whose election proxies shall have been solicited by the Board of Directors of the Company or (C) any individual elected or appointed by the Board of Directors of the Company to fill vacancies on the Board of Directors of the Company caused by death or resignation (but not by removal) or to fill newly-created directorships; (iii) Approval by the shareholders of the Company of a reorganization, merger, or consolidation of the Company or a statutory exchange of outstanding Voting Securities of the Company, unless immediately following such reorganization, merger, consolidation, or exchange, all or substantially all of the persons who were the beneficial owners, respectively, of Voting Securities and Shares of the Company immediately prior to such reorganization, merger, consolidation, or exchange beneficially own, directly or indirectly, more than 70% of, respectively, the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors and the then outstanding shares of common stock, as the case may be, of the corporation resulting from such reorganization, merger, consolidation, 4 or exchange in substantially the same proportions as their ownership, immediately prior to such reorganization, merger, consolidation, or exchange, of the Voting Securities and Stock of the Company, as the case may be; or (iv) Approval by the shareholders of the Company of (x) a complete liquidation or dissolution of the Company or (y) the sale or other disposition of all or substantially all of the assets of the Company (in one or a series of transactions), other than to a corporation with respect to which, immediately following such sale or other disposition, more than 70% of, respectively, the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and the then outstanding shares of common stock of such corporation is then beneficially owned, directly or indirectly, by all or substantially all of the persons who were the beneficial owners, respectively, of the Voting Securities and Shares of the Company immediately prior to such sale or other disposition in substantially the same proportions as their ownership, immediately prior to such sale or other disposition, of the Voting Securities and Shares of the Company, as the case may be. (b) ACCELERATION OF VESTING. Notwithstanding anything in subparagraph 5(d) above to the contrary, if a Change of Control of the Company shall occur, then, without any action by the Board, each option granted under this Plan and not already exercised in full or otherwise terminated, expired or canceled shall become immediately exercisable in full. (c) CASH PAYMENT. If a Change in Control of the Company shall occur, then, so long as a majority of the members of the Board are Continuing Directors, the Board, in its sole discretion, and without the consent of the holder of any option affected thereby, may determine that some or all outstanding options shall be canceled as of the effective date of any such Change in Control and that the holder or holders of such canceled options shall receive, with respect to some or all of the Common Shares subject to such options, as of the date of such cancellation, cash in an amount, for each Share subject to an option, equal to the excess of the per Share Fair Market Value of such Shares immediately prior to such Change in Control of the Company over the exercise price per Share of such options. (d) LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding anything in subparagraph 10(b) or 10(c) above or paragraph 11 below to the contrary, if, with respect to an optionee, the acceleration of the exercisability of an option or the payment of cash in exchange for all or part of an option as provided in subparagraph 10(b) or 10(c) above or paragraph 11 (which acceleration or payment could be deemed a "payment" within the meaning of Section 280G(b)(2) of the Code), together with any other payments which such optionee has the right to receive from the Company or any corporation which is a member of an "affiliated group" (as defined in Section 1504(a) of the Code without regard to Section 1504(b) of the Code) of which the Company is a member, would constitute a "parachute payment" (as defined in Section 280G(b)(2) of the Code), then such acceleration of exercisability and payments pursuant to subparagraph 10(b) or 10(c) above or paragraph 11 shall be reduced to the largest amount as, in the sole judgment of the Board, will result in no portion of such payments being subject to the excise tax imposed by Section 4999 of the Code. 11. DISSOLUTION, LIQUIDATION, MERGER. In the event of (a) the proposed dissolution or liquidation of the Company; (b) a proposed sale of substantially all of the assets of the Company; or (c) a proposed merger, consolidation of the Company with or into any other entity, regardless of whether the Company is the surviving corporation, or a proposed statutory share exchange with any other entity (the actual effective date of the dissolution, liquidation, sale, merger, consolidation or exchange being herein called an "Event"), the Board may, but shall not be obligated to, either (i) if the Event is a merger, consolidation or statutory share exchange, make appropriate provision for the protection of outstanding options granted under this Plan by the substitution, in lieu of such options, of options to purchase appropriate voting common stock (the "Survivor's Stock") of the corporation surviving any such merger or consolidation or, if appropriate, the parent corporation of the Company or such surviving corporation, or, alternatively, by the delivery of a number of shares of the Survivor's Stock which has a Fair Market Value as of the effective date of such merger, consolidation or statutory share exchange equal to the product of (x) the excess of (A) the Event Proceeds per Share (as hereinafter defined) covered by the option as of such effective date over (B) the exercise 5 price per Share of the Shares subject to such option, times (y) the number of Shares covered by such option or (ii) declare, at least twenty days prior to the Event, and provide written notice to each optionee of the declaration, that each outstanding option, whether or not then exercisable, shall be canceled at the time of, or immediately prior to the occurrence of, the Event (unless it shall have been exercised prior to the occurrence of the Event). In connection with any declaration pursuant to clause (ii) of the preceding sentence, the Board may, but shall not be obligated to, cause payment to be made, within twenty days after the Event, in exchange for each canceled option to each holder of an option that is canceled, of cash equal to the amount (if any), for each Share covered by the canceled option, by which the Event Proceeds per Share (as hereinafter defined) exceeds the exercise price per Share covered by such option. At the time of any declaration pursuant to clause (ii) of the first sentence of this paragraph 11, each option that has not previously expired pursuant to subparagraph 5(e)(i) or 5(e)(ii) of this Plan or been canceled pursuant to paragraph 10(c) of this Plan shall immediately become exercisable in full and each holder of an option shall have the right, during the period preceding the time of cancellation of the option, to exercise his or her option as to all or any part of the Shares covered thereby. In the event of a declaration pursuant to clause (ii) of the first sentence of this paragraph 11, each outstanding option granted pursuant to this Plan that shall not have been exercised prior to the Event shall be canceled at the time of, or immediately prior to, the Event, as provided in the declaration, and this Plan shall terminate at the time of such cancellation, subject to the payment obligations of the Company provided in this paragraph 11. Notwithstanding the foregoing, no person holding an option shall be entitled to the payment provided in this paragraph 11 if such option shall have expired pursuant to subparagraph 5(e)(i) or 5(e)(ii) of this Plan or been canceled pursuant to paragraph 10(c) of this Plan. For purposes of this paragraph 11, "Event Proceeds per Share" shall mean the cash plus the market value, as determined in good faith by the Board, of the non-cash consideration to be received per Share by the shareholders of the Company upon the occurrence of the Event. 12. ADJUSTMENTS. In the event of any reorganization, merger, consolidation, recapitalization, liquidation, reclassification, stock dividend, stock split, combination of shares, rights offering, or extraordinary dividend or divestiture (including a spin-off), or any other change in the corporate structure or Shares of the Company, the Board (or if the Company does not survive any such transaction, the Board of Directors of the surviving corporation) may, without the consent of any holder of an option, make such adjustment as it determines in its discretion to be appropriate as to the number and kind of securities subject to and reserved under this Plan and, in order to prevent dilution or enlargement of rights of participants in this Plan, the number and kind of securities issuable upon exercise of outstanding options and the exercise price thereof. 13. COMPLIANCE WITH LEGAL REQUIREMENTS. No certificate for Shares distributable under this Plan shall be issued and delivered unless the issuance of such certificate complies with all applicable legal requirements including, without limitation, compliance with the provisions of applicable state securities laws, the Securities Act of 1933, as amended, and the Exchange Act. 14. GOVERNING LAW. To the extent that federal laws do not otherwise control, this Plan and all determinations made and actions taken under this Plan shall be governed by the laws of the State of Minnesota, without regard to the conflicts of law provisions thereof, and construed accordingly. 15. AMENDMENT AND DISCONTINUANCE OF PLAN. The Board may at any time amend, suspend or discontinue this Plan; provided, however, that no amendment to this Plan shall, without the consent of the holder of the option, alter or impair any option previously granted under this Plan. To the extent considered necessary to comply with applicable provisions of the Code, any such amendments to this Plan may be made subject to approval by the shareholders of the Company. 16. TERM. (a) EFFECTIVE DATE. This Plan shall be effective as of January 1, 1997, provided that this Plan is approved and ratified by the affirmative vote of the holders of a majority of the outstanding Shares present or represented and entitled to vote in person or by proxy at a meeting of the shareholders of the Company no later than May 31, 1997. Any options granted hereunder prior to such shareholder approval shall be subject to such shareholder approval. If this Plan is not so approved by such holders, any options granted under this Plan subject to such approval shall be null and void and this Plan shall not take effect. (b) TERMINATION. This Plan shall remain in effect until all Shares subject to it are distributed or this Plan is terminated under paragraph 15 above. 6 EX-10.30 5 EXHIBIT 10.30 TENNANT COMPANY 1998 MANAGEMENT INCENTIVE PLAN 1. PURPOSE. The purpose of the Tennant Company 1998 Management Incentive Plan (the "Plan") is to provide incentives to the senior executives of Tennant Company (the "Company") and its subsidiaries to produce a superior return to the stockholders of the Company and to encourage such executives to remain in the employ of the Company and its subsidiaries. Amounts paid pursuant to the Plan are intended to qualify as performance-based compensation within the meaning of Section 162(m) of the Internal Revenue Code, as amended (the "Code"). 2. DEFINITIONS. 2.1 The terms defined in this section are used (and capitalized) elsewhere in the Plan. a. "Annual Profits" means the consolidated income before interest expense and income taxes of the Company for the Performance Period, before the provision for incentive compensation earned pursuant to this Plan and before extraordinary items. For purposes of this calculation, (i) changes in generally accepted accounting principles which occur during the fiscal year, and (ii) discontinued operation and restructuring costs, as computed in accordance with generally accepted accounting principles, shall be taken into account to the extent determined by the Committee. b. "Award" means an award payable to a Participant pursuant to Section 4 hereof. c. "Board" means the Board of Directors of the Company. d. "Committee" means the Executive Compensation Committee of the Board, or such other Board committee as may be designated by the Board to administer the Plan. e. "Company" means Tennant Company, a Minnesota corporation. For purposes of the provisions of this Plan relating to employment of a Participant with the Company, the term "Company" shall include any subsidiary of the Company, 50% or more of the voting stock of which is directly or indirectly owned by the Company. f. "Disability" means a medical condition that the Committee has determined renders a Participant unable to perform the normal duties of the Participant's position with the Company. The Committee may, in its sole discretion, obtain a medical opinion from a physician selected by the Committee before any determination of Disability is made. g. "Effective Date" means the date specified in Section 5. h. "Eligible Employee" means any key employee of the Company or a subsidiary thereof. i. "Fair Market Value" of a Share as of a date means the closing price on the preceding day on the Nasdaq National Market System or, if no trading in Shares occurred on such day on the Nasdaq National Market System, the closing price of a Share on the most recent day on which such trading occurred. j. "Participant" means an Eligible Employee designated by the Committee to participate in the Plan for a designated Performance Period. k. "Performance Period" means the Company's fiscal year. 1 l. "Retirement" means termination of employment (i) after attaining age 55 for a reason other than death or Disability, provided that no less than 6 months' prior written notice is given to the Company, or (ii) with the approval of the Committee. m. "Share" means a Share of common stock of the Company, par value $.375 per share (as such par value may be adjusted from time to time). 2.2 GENDER AND NUMBER. Except when otherwise indicated by context, reference to the masculine gender shall include, when used, the feminine gender and any term used in the singular shall also include the plural. 3. ADMINISTRATION. 3.1 AUTHORITY OF COMMITTEE. The Committee shall administer the Plan. The Committee's interpretation of the Plan and of any Awards made under the Plan shall be final and binding on all persons with an interest therein. The Committee shall have the power to establish rules to administer the Plan and to change such rules. 3.2 INDEMNIFICATION. To the full extent permitted by law, (i) no member of the Committee shall be liable for any action or determination taken or made in good faith with respect to the Plan or any Award made under the Plan, and (ii) the members of the Committee shall be entitled to indemnification by the Company with regard to such actions. 4. AWARDS. 4.1 ALLOCATION OF AWARDS. Within 90 days following the commencement of each Performance Period, the Committee may select such Eligible Employees as it deems appropriate for participation in the Plan. Eligible Employees selected for participation will be entitled to receive an award of incentive compensation based on the attainment of performance targets selected by the Committee consisting of one or more of the following: earnings or earnings per share before income tax (profit before taxes); net earnings or net earnings per share (profit after taxes); inventory; total or net operating asset turnover; accounts receivable (measured in terms of days sales outstanding); operating expenses; operating profit; total shareholder return; return on equity; pre-tax and pre-interest expense return on average invested capital, which may be expressed on a current value basis; operating profit before taxes or operating profit after taxes less a capital charge for net assets; sales growth; or economic profit. Any such targets may relate to one or any combination of two or more of corporate, group, unit, division, affiliate or individual performance. 4.2 MAXIMUM AMOUNT OF AWARDS. The total amount of Awards pursuant to this Plan for any Performance Period shall not exceed 10% of the Annual Profits generated by the Company during such Performance Period. 4.3 ADJUSTMENTS. No Participant shall be entitled to receive an Award in any Performance Period that exceeds 3% of the Annual Profits generated by the Company during such Performance Period. The Committee shall reduce the Award payable to any Participant to comply with this limitation. In addition, the Committee is authorized at any time during or after a Performance Period, in its sole and absolute discretion, to reduce or eliminate an Award payable to any Participant for any other reason, including changes in the position or duties of any Participant with the Company or any subsidiary of the Company during the Performance Period, whether due to any termination of employment (including death, Disability, Retirement, or termination with or without cause) or otherwise. No reduction in an Award made to any Participant shall increase the amount of the Award to any other Participant. 4.4 PAYMENT OF AWARDS: Following the completion of each Performance Period, the Committee shall certify in writing the degree to which the performance targets were attained and the Awards payable to Participants. Awards shall be paid in such form (cash or Shares) and at such times as the Committee may provide. The number of Shares available for use in payment of Awards under this Plan shall be 100,000, subject to adjustment, as provided in Section 12. If a Participant's employment with the Company terminates by reason of Retirement, death or Disability, then a prorated portion of any Award 2 relating to the Performance Period in which the Participant's employment terminates and the unpaid portion of any Award relating to any prior Performance Period shall be paid as and to the extent provided in such procedures as may from time to time be approved by the Committee. If a Participant's employment with the Company terminates for any reason other than Retirement, death or Disability, then such Participant's Awards, including the unpaid portion of any Award relating to any prior Performance Period, shall be canceled and no payment will be made with respect thereto. If any payment with respect to an Award is made in Shares, it shall be made in whole Shares only (with fractions of a Share being paid in cash), and the number of Shares shall be the amount of the payment divided by the Fair Market Value of a Share on the payment date. 5. EFFECTIVE DATE OF THE PLAN. The Plan shall become effective as of January 1, 1998; provided that the Plan is approved and ratified by the stockholders of the Company at a meeting thereof held no later than May 31, 1998. The Plan shall remain in effect until it has been terminated pursuant to Section 8. 6. RIGHT TO TERMINATE EMPLOYMENT. Nothing in the Plan shall confer upon any Participant the right to continue in the employment of the Company or any Subsidiary or affect any right which the Company or any Subsidiary may have to terminate the employment of a Participant with or without cause. 7. TAX WITHHOLDING. The Company shall have the right to withhold from payments under the Plan to a Participant or other person an amount sufficient to cover any required withholding taxes. If the Company withholds Shares to cover such taxes, the number of Shares withheld shall be the number of whole Shares determine by dividing the amount of such taxes by the Fair Market Value of a Share on the payment date and rounding the result to the next whole Share. 8. AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN. The Board may at any time terminate, suspend or modify the Plan and the terms and provisions of any Award theretofore awarded to any Participant which has not been paid. Amendments are subject to approval of the stockholders of the Company only if such approval is necessary to maintain the Plan in compliance with the requirements of Section 162(m) of the Code, its successor provisions or any other applicable law or regulation. No grant may be given during any suspension of the Plan or after its termination. 9. UNFUNDED PLAN. The Plan shall be unfunded and the Company shall not be required to segregate any assets that may at any time be represented by Awards under the Plan. 10. OTHER BENEFIT AND COMPENSATION PROGRAMS. Neither the adoption of the Plan by the Board nor its submission to the stockholders of the Company shall be construed as creating any limitation on the power of the Board to adopt such other incentive arrangements as it may deem necessary. Payments received by a Participant under an Award made pursuant to the Plan shall not be deemed a part of a Participant's regular recurring compensation for purposes of the termination, indemnity or severance pay law of any state or country and shall not be included in, nor have any effect on, the determination of benefits under any other employee benefit plan, contract or similar arrangement provided by the Company or any Subsidiary unless expressly so provided by such other plan, contract or arrangement, or unless the Committee expressly determines that an Award or portion of an Award should be included to accurately reflect competitive compensation practices or to recognize that an Award has been made in lieu of a portion of the competitive cash compensation. 11. GOVERNING LAW. To the extent that Federal laws do not otherwise control, the Plan and all determinations made and actions taken pursuant to the Plan shall be governed by the laws of Minnesota and construed accordingly. 12. ADJUSTMENT FOR CHANGES IN CAPITALIZATION. Appropriate adjustments in the aggregate number and type of Shares available for use in payment of Awards under this Plan may be made by the Committee in its sole discretion to give effect to adjustments made in the number or type of Shares through a fundamental change, recapitalization, reclassification, stock dividend, stock split, stock combination, or other relevant change, provided that fractional Shares shall be rounded to the nearest whole Share. 3 EX-13.1 6 EXHIBIT 13.1 FINANCIAL HIGHLIGHTS
% (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 Change - ----------------------------------------------------------------------------------------------------------------- FOR THE YEAR Net sales.................................................. $389,388 $372,428 5 Profit from operations..................................... $ 37,349 $ 36,088 3 % of net sales......................................... 9.6% 9.7% Net earnings............................................... $ 25,325 $ 24,205 5 % of net sales......................................... 6.5% 6.5% Return on beginning shareholders' equity............... 18.9% 18.8% Average shares outstanding................................. 9,500 10,032 (5) PER SHARE OF COMMON STOCK Basic net earnings......................................... $ 2.67 $ 2.43 10 Diluted net earnings....................................... $ 2.67 $ 2.41 11 Dividends per share........................................ $ .74 $ .72 3 Shareholders' equity per share (ending).................... $ 14.25 $ 13.65 4 AT YEAR-END Total assets............................................... $239,098 $233,870 2 Net operating assets....................................... $161,607 $157,141 3 Shareholders' equity....................................... $131,267 $134,086 (2) Total financing debt....................................... $ 30,340 $ 23,055 32 Ratio of total financing debt to total capital............. 18.8% 14.7%
[GRAPH] NET SALES (Dollars in Millions)
Year Net Sales 1994 281.7 1995 325.4 1996 344.4 1997 372.3 1998 389.4
[GRAPH] RETURN ON BEGINNING EQUITY
Year Return on Beginning Equity 1994 18.7% 1995 20.4% 1996 18.4% 1997 18.8% 1998 18.9%
[GRAPH] DILUTED EARNINGS PER SHARE
Year Diluted Earnings per Share 1994 1.6 1995 1.98 1996 2.09 1997 2.41 1998 2.67
1 TO OUR SHAREHOLDERS Despite record sales and profits, 1998 was a challenging year for Tennant, just as it was for very many U.S. manufacturers. The Asian crisis had severe, direct effects. We experienced a significant drop in sales, both in Asian markets and in our export markets, as the effect of the Asian crisis spread to export markets. It also had an indirect effect. We experienced a slowdown in sales to our domestic customers who also are major suppliers to the Asian and export markets. Additionally, the U.S. dollar's strength in the first nine months of the year dampened our results in such areas as Canada, Australia, Japan and Europe. That was the bad news. The good news was that Europe's economic recovery was a good atmosphere for our revitalized European organization. Additionally, the North American economy, though soft in manufacturing sectors later in the year, was generally solid. Also, our strong push into outside cleaning markets gave us new opportunities to serve governmental and other customers with outside cleaning needs. The result was a 5% increase in sales to $389 million, an 11% increase in earnings per share to $2.67, and return on beginning equity of 18.9%. Tennant's direct exposure in Asia was only 5% of total revenues in 1997, a relatively good year for us there. But in 1998, that business dropped by nearly 30%, despite some gains in China and with our commercial equipment business in Japan. More important to us was the indirect impact of "Asian contagion" on foreign markets, such as Australia, and on North American manufacturing sectors which are traditionally strong customers for us. When Asian airlines pull back their orders to Boeing, the subsequent ripple effect dampens our orders from Boeing and dozens of its suppliers. When foreign steel floods into U.S. markets, our U.S. steel customers slow down their cleaning equipment purchases. For many years, we have been lessening our dependence on North American manufacturing customers, and we made another giant stride this year with the Model 830, Series II, and ATLV 4300 units designed from the ground up to serve outside markets. These products have been well received and helped us to grow and to show record sales and profits for the year. Our timing for outside markets is especially good. The long period of growth in the U.S. has led to economic strength at all levels of government. Concurrent with this is the drive to revitalize downtown areas. Thus, local municipalities are spending more money to solve cleaning problems, and "business improvement districts" (BID's) are springing up throughout the country. These organizations receive modest governmental support, but are basically groups of business owners who recognize that clean, well-kept downtown areas attract tourists and shoppers. Our vision of "working for a cleaner, safer world" strongly supports these current trends in outside markets. 1998 was an exciting year for us in Europe. After many years of economic stagnation, 1998 showed economic growth in most countries. In previous years, when European economic conditions were relatively weak, Tennant had installed a major new computer system (SAP), consolidated logistics, and strengthened our sales, service and customer support organizations. These moves, together with excellent new industrial and commercial products, positioned us well to take advantage of better economic conditions. The result was local currency growth of 12% for sales and even stronger growth for earnings. In December, we announced our intent to purchase Paul Andra, K.G., known in the market as Sorma, a German manufacturer of commercial floor cleaning equipment. Although Sorma sells $27 million of products into many different countries, over 75% of its business is in Germany and Austria. We believe that to be a leader in the commercial equipment business in Europe, we must first have a strong position in Germany; we now have that position. We also believe we can extend the complementary Sorma and Tennant products into many different countries. In North America, one of our greatest opportunities to serve customers lies in leveraging the strengths of our industrial, commercial and floor coatings business. We have over 400 direct industrial sales and service reps, approximately 400 commercial distributors and 25 authorized coatings contractors. 2 Developing ways for all our floor maintenance experts to work together to help customers be cleaner and safer is a major effort for us these days. In 1998, we successfully piloted, in selected geographies, a project in which our industrial sales reps and commercial distributors partnered to better serve customers. The result is more of our total product line gets to more of our customers. We expect these partnerships to expand rapidly in 1999 and 2000. Speaking of 2000, will we be ready for the millennium or will the Y2K bug bite us? We believe we will be ready. We are substantially through our SAP enterprise conversions, and we have remediated those few areas which will not have the new system in and settled by December 31, 1999. Because we started to replace our old systems five years ago for strategic reasons, very little of our Y2K work is wasted, redundant work. We are beginning to benefit from our new systems now, and we have been able to absorb these expenses while still improving operating margins over the implementation period. Of course, the big challenge in 1998 has been in Asia. Our strategy has been consistent and simple: work with our partners to help them get through these tough times so that we will all be ready when better times return. The result is that we have retained all of our excellent distribution, and no competitor can now rival our ability to serve the Asian markets. As we look forward to 1999, we look back on 1998 as a year with many challenges, but also with record sales and profits. During the year, we grew in most markets and withstood the economic storms from Asia. We advanced our technology greatly, and we added excellent new executives from outside Tennant. We especially note the many contributions of Dick Snyder, CFO, and Paul Brunelle, Vice President of Personnel Resources, who retired after long careers at Tennant. At the May 1998 Shareholders' Meeting, long-time Director Bill Hodder, former CEO of Donaldson Co., retired from our Board after 23 years of invaluable service. Shareholders and employees alike benefited from his wise counsel and excellent judgment. Joining our Board in May 1998 was Pamela Knous, Executive Vice President and CFO of SUPERVALU INC., the leading food distribution company in America. At a special Board meeting on December 1, 1998, Janet Dolan, President and Chief Operating Officer of Tennant, was also named to our Board. By Board action on March 1, 1999, the Directors named Ms. Dolan CEO of Tennant effective April 5, 1999, thus replacing Roger Hale after 23 years in the position. Mr. Hale will remain as a Director and Chairman, assuming reelection to the Board at the May Shareholders' Meeting. [PHOTOGRAPH] Photo of Janet M. Dolan, President - Chief Executive Officer and Roger L. Hale, Chairman /s/ Janet Dolan /s/ Roger L. Hale Janet Dolan Roger L. Hale President - Chairman Chief Executive Officer March 25, 1999 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. - -------------------------------------------------------------------------------- TYPES OF PRODUCTS INDUSTRIAL FLOOR MAINTENANCE EQUIPMENT [PHOTOGRAPH] Photo of Industrial Floor Maintenance Equipment APPLICATION Products to clean surfaces with vehicle and heavy foot traffic such as: - - factories, warehouses, stadiums, airport hangars, parking garages, and outside areas. - - sweepers and scrubbers: - walk-behinds - indoor riders - outdoor vehicles - -------------------------------------------------------------------------------- TYPES OF PRODUCTS COMMERCIAL FLOOR MAINTENANCE EQUIPMENT [PHOTOGRAPH] Photo of Commercial Floor Maintenance Equipment APPLICATION Products to clean surfaces with foot traffic such as: - - schools, hospitals, office buildings, supermarkets, retail outlets and airport terminals. - - walk-behind scrubbers and sweepers, carpet extractors, burnishers, buffers, polishers, and other specialized equipment. - -------------------------------------------------------------------------------- TYPES OF PRODUCTS FLOOR COATINGS [PHOTOGRAPH] Photo of Factory Floor APPLICATION Products that treat, repair, and upgrade concrete and wood floors. Specialty products are 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] Pie chart showing breakdown of 1998 sales into North America (76%), Europe (16%), and Other International (8%). North America Sales are broken out further into Commercial (18%), Floor Coatings (6%), and Industrial (52%). Europe Sales are broken out into Commercial (2%) and Industrial (14%). Other International Sales are broken out into Commercial (2%) and Industrial (6%). 1998 SALES SALES/SERVICE INDUSTRIAL FLOOR MAINTENANCE EQUIPMENT Direct sales/service in the United States, Australia, Canada, France, Germany, The Netherlands, Spain, and the United Kingdom. Well-established, full-service distributor network in 45 other countries including Japan and most countries in Europe not served directly. - -------------------------------------------------------------------------------- COMMERCIAL FLOOR MAINTENANCE EQUIPMENT Broad geographic coverage in North America through a full-service distributor network. Expanding full-service distributor network internationally. - -------------------------------------------------------------------------------- FLOOR COATINGS Sold by Tennant's direct sales force in North America as a complementary product to industrial floor maintenance equipment. Also sold by Tennant's authorized contractor network. - -------------------------------------------------------------------------------- MARKETS INDUSTRIAL FLOOR MAINTENANCE EQUIPMENT World market for equipment and aftermarket estimated at $750 million. Market share greater than 50% in segments such as manufacturing, warehousing, distribution, and government. - -------------------------------------------------------------------------------- COMMERCIAL FLOOR MAINTENANCE EQUIPMENT World market for equipment and aftermarket estimated at $2 billion. Sold under Castex, Nobles, Eagle, and Tennant brand names, depending on the product and geographic area. Among the leaders in North America; small but rapidly growing internationally. - -------------------------------------------------------------------------------- FLOOR COATINGS North American market for industrial coatings estimated at $150 million, excluding application labor. Market share estimated at about one-sixth of total market, but higher in coatings segment. - -------------------------------------------------------------------------------- GLOBAL TRENDS - - Growing concern for the environment. - - Growing concern for health and safety. - - Emerging nations focusing more on attracting global companies and greater tourism. GROWTH DRIVERS - - Movement toward higher standards of cleanliness and improved cleaning methods. - - Customers are looking for ways to reduce labor costs. - - More businesses are outsourcing cleaning activities. - - More companies are reducing their number of vendors and are centralizing their buying. - - Industry consolidation, especially regarding commercial equipment distributors. - - Demand for floors that are easy to clean and provide an appearance that enhances a company's image. 5 [PHOTOGRAPH] Photo of Castex equipment in use LEVERAGING STRENGTHS TO ACHIEVE GREATER GROWTH WHILE TENNANT HAS BEEN IN BUSINESS FOR 128 YEARS, OUR OPPORTUNITIES FOR LONG-TERM GROWTH HAVE NEVER BEEN BETTER. WE BELIEVE TENNANT CAN CAPITALIZE ON POSITIVE GLOBAL TRENDS BY LEVERAGING THE STRENGTHS WE BUILT INTO THE COMPANY DURING THESE YEARS. POSITIVE GLOBAL TRENDS AND GROWTH DRIVERS Three trends are creating a greater demand for Tennant's products worldwide: - - CONCERN FOR THE ENVIRONMENT. The push for cleaner air, water and land is creating demand for outdoor sweeping and indoor scrubbing equipment, and environmentally safe floor coatings. - - CONCERN FOR HEALTH AND SAFETY. Around the world, people want to feel cleaner and safer--in the streets and in the buildings where they live, shop and work. Employers and city governments realize that providing this kind of environment is good for business--attracting more desirable employees, customers and residents. This creates demand for outdoor sweeping and litter pickup, indoor sweeping and scrubbing, and coated floors. [PHOTOGRAPH] Photo of floor coating on concrete floor Tennant products meet the needs of a diverse marketplace: from vacuums for carpeting, coatings for concrete, to rugged sweepers for warehouse or factory floors. - - BENEFIT FROM ECONOMIC DEVELOPMENT. Emerging nations want to industrialize--because attracting global companies can raise their standard of living. Local governments in these and developing countries want to attract investments--from tourism to industry. This creates demand for floor cleaning equipment for airports, hospitality and retail areas, in addition to industrial complexes. In addition to the global trends, there are a number of specific growth drivers that bode well for continued expansion. - - OUTSOURCING. More customers are outsourcing their cleaning activities to contract cleaners who then become our customers. Their major needs are labor-saving products and services. Tennant is well positioned to serve them with our breadth of products and extensive network of service providers. - - VENDOR CONSOLIDATION. More customers are consolidating purchases with fewer suppliers. They are seeking a one-stop source to meet their cleaning equipment needs. Tennant is that source. [PHOTOGRAPH] Photo of Tennant equipment in use 6 - - IMPROVED CLEANING METHODS. Customers want improved methods of cleaning, moving from just sweeping to sweeping and scrubbing. They also want better coatings on their floors. Tennant's commitment to lead the industry in innovation means we are offering the latest in cleaning technology and coatings. - - LABOR COST REDUCTION. Customers want to reduce their labor costs by using cleaning equipment and chemicals that are easy to operate or apply and that improve the productivity of their cleaning staffs. Multitask functionality and ease of use are key drivers of Tennant's new product development process. - - PROTECTED FLOORS THAT ENHANCE IMAGE. A growing number of customers want the benefit of floor coatings, which protect their floors from chemicals and wear, make their floors easier to clean, and create a better working environment to improve employee morale and enhance their image. Tennant is a leader in industrial coatings. - - INDUSTRY CONSOLIDATION. Industry consolidation among commercial distributors is resulting in fewer, stronger firms that want to work with larger, more stable manufacturers such as Tennant. These trends and drivers are "raising the bar" for standards of cleanliness and safety--indoors and out. As this happens, the use of cleaning equipment, coatings and supplies increases which expands the demand for Tennant's products. STRENGTH: MARKET SEGMENT POSITION--INDUSTRY LEADERSHIP IN NORTH AMERICA Tennant has more than a 50% market share in industrial products, ranks in the top tier of commercial products, and has a leading share of the urethane floor coatings market. This leadership was built not only on product innovation and quality, but excellent distribution and service. All of Tennant's competitors sell their products primarily through distributors. In North America, Tennant is unique with three product sales channels: - - MORE THAN 400 DIRECT INDUSTRIAL SALES AND SERVICE REPRESENTATIVES. No competitor can duplicate this advantage, which generates about 70% of Tennant's North American industrial sales. The direct sales and service force also helps pull through sales of aftermarket products: brushes, supplies, etc. This gives Tennant tremendous knowledge of customer needs as well as earnings stability. [PHOTOGRAPH] Photo of Tennant Service Representative More than 400 direct industrial sales and service representatives give Tennant a distinct competitive advantage. 7 [PHOTOGRAPH] Photo of Tennant Model 5100 Scrubber Global demand for commercial products, like this 5100 scrubber in use in The Netherlands, represents a key growth opportunity for Tennant. - - ABOUT 400 COMMERCIAL PRODUCTS DISTRIBUTORS. These partners like the price/value relationship on Tennant's products. In 1999, we will be expanding our efforts to leverage our commercial distributors and direct sales and service forces in order to better market our full product line to all customer groups. - - 25 AUTHORIZED FLOOR COATINGS CONTRACTORS. They are trained to market and apply Tennant's products. They also can assist customers in selecting Tennant equipment to maintain their newly refurbished floors. This multichannel approach gives Tennant the broadest and deepest sales and service coverage in the industry. We believe this unique combination of sales channels will help us gain market share, as each can offer Tennant's full line of products. The direct sales/service and distribution model also is one that will translate well into international markets--a goal for us in coming years. STRENGTH: MARKET SEGMENT POSITION--GOOD INTERNATIONAL MARKET PENETRATION No single competitor from the U.S. or any other country has Tennant's level of international industrial market penetration. We have a leading share in most of the countries we reach with our industrial products, and we are rapidly gaining share in those markets where we have introduced our commercial products. As a result, international markets provide about one-fourth of our annual revenues. Tennant differentiates itself internationally in several ways. Nonresidential floor care is our only business--it accounts for only a portion for most of our competitors. We sell our industrial products directly in six countries: Australia, France, Germany, The Netherlands, Spain and the United Kingdom, and we have established a direct presence in Far East Asia. We also have very strong relations with distributors in 45 others. Opportunities abound for us in these markets. For example, we are a relative newcomer to the international commercial equipment business. While we have made significant gains in recent years through internal growth in Europe and Japan, we are still a relatively small player. In 1999, we have augmented this by acquiring Paul Andra, K.G., a well-respected German commercial products manufacturer. Paul Andra sells its products primarily in the Germanic countries, and this significantly increases our commercial critical mass there. We believe expanding international markets--and the market share gains we are making there--will help Tennant achieve stronger growth. 8 STRENGTH: EFFECTIVELY REACHING NICHE MARKETS The global market for industrial and commercial equipment and floor coatings is about $2.7 billion in annual sales, with North America generating 40% of this. The market is growing at 3-8% a year, depending upon the geographic and market niche. By leveraging our strengths--and targeting faster-growing niche markets in addition to the overall commercial products market--Tennant will be able to increase sales at or above the higher end of its industry's growth rate. Two of the niche markets we have targeted are outdoor cleaning and contract cleaners. While Tennant's equipment has been used in the outdoors for years, we only recently began to design products specifically for this purpose. Our current line ranges from a small litter picker, the Model 4300 introduced this year, to street-sweeper size, our Model 830-II. We plan to continue introducing outdoor machines to fill in this product line for the next several years. Another area of focus is contract cleaning. Businesses around the world are increasingly outsourcing their floor maintenance. This is especially true in Europe and Asia, but it is a developing trend in North America as well. We believe growth opportunities abound in all geographies. Tennant is particularly suited to serve this market. Contract cleaners' most critical need is "up-time." Our complete line of high-quality products and broad service and support network help them maximize their productivity. SALES GROWTH [CHART]
1990 1998 Core Sales 202 281.5 Commercial Equipment 9.5 86.8 Outdoor 21.1
[Photograph] Photo of Outdoor product Model 830-II Outdoor products, like this Model 830-II, are in high demand as communities make their streets and sidewalks "cleaner and safer." 9 [PHOTOGRAPH] Photo of Tennant Model 6100 micro-rider sweeper Tennant's new 6100 micro-rider sweeper is perfect for worldwide markets, particularly Europe and the Far East, where wide-open spaces are limited. STRENGTH: BROAD PRODUCT LINES Tennant is the only company in its industry that offers a full range of industrial, commercial and floor coatings products. - - SUPERIOR INDUSTRIAL FLOOR MAINTENANCE EQUIPMENT. Tennant became an industry leader in industrial equipment because we offered a broad line of quality products through a direct sales force and distributor network. These machines clean areas with vehicle or heavy foot traffic. They range from walk-behind to rider units, generally priced from $7,500 to $90,000. Tennant offers three basic types of equipment--all carrying the strongest warranties offered in the industry: SWEEPERS remove wet or dry debris, while controlling dust. SCRUBBERS lay down a cleaning solution, scrub the surface, then remove the dirty solution--all in one pass. COMBINATION SWEEPER/SCRUBBERS do both at the same time, in one pass. - - GROWING LINE OF COMMERCIAL FLOOR MAINTENANCE EQUIPMENT. We realized our industrial expertise also could bring success in the faster-growing commercial equipment market. Tennant entered this market area through developing products in-house and by making acquisitions. Commercial equipment is used in any area with foot traffic. Tennant's line, which is priced from $3,000 to $8,000, includes: SWEEPERS AND VACUUMS to remove debris from virtually any surface. AUTOMATIC SCRUBBERS to clean grease and grime from hard surfaces--floors with tile and grout, for example. These machines remove virtually all of the [PHOTOGRAPH] Photo of Tennant Portapac Vacuum Innovative, small commercial products like the new Portapac complement Tennant's core industrial product line. 10 cleaning solution they apply, which is critical for avoiding slip-and-fall accidents. They also are known for ease of operation and their ability to maneuver in tight places. 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. - - STRONG FLOOR COATINGS LINE. While our greatest growth opportunities will come from leveraging industrial and commercial products, both are complemented by our strong line of floor coatings products. Tennant offers a broad range of these products: DURABLE COATINGS for main traffic aisles and loading docks. CHEMICAL-RESISTANT COATINGS for floors exposed to corrosive chemicals. EPOXY RESURFACERS for restoration of damaged floors. ENVIRONMENTALLY SAFE COATINGS for odor-sensitive applications, such as food processing facilities. Our unique Eco-Coatings-TM- line combines high durability using 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. We develop the formulas for our coatings and oversee their production, and we manufacture the Eco-Prep-TM- machines. [PHOTOGRAPH] Photo of floor coating on aircraft hangar floor Tennant's floor coatings are popular in hangars where reflected light is a necessity for under-craft maintenance. PRODUCTS INTRODUCED IN 1998 INDUSTRIAL - - 6100 new Small Rider Sweeper - - 6500/6550 Midsize Sweeper replacement - - 8200/8210 new Midsize Sweeper/Scrubber - - 830-II Outdoor Sweeper replacement - - ATLV 4300 new All-Terrain Litter Vacuum COMMERCIAL - - Frontier Carpet Extractor - - Sentry-TM- Carpet Maintainer - - Viper Dual Motor Upright Vacuum FTM - - Reformulated products to meet new national VOC regulations 11 [PHOTOGRAPH] Photo of Tennant Model 4300 All-Terrain Litter Vacuum New patents, like the one pending for the unique nozzle on the 4300 All-Terrain Litter Vacuum, are commonplace at Tennant. [PHOTOGRAPH] Photo of Castex Sentry Carpet Maintainer The new Sentry-TM-machine is a prime example of successful new product development for the commercial cleaning marketplace. STRENGTH: NEW PRODUCT DEVELOPMENT We continue to refresh our product line by devoting an industry-leading amount to product engineering. This averaged 4% of sales for the past five years. We not only upgrade existing products but design new ones to reach niche markets Tennant did not previously serve. One example is the new Model 4300 All-Terrain Litter Vacuum, for the outdoor sweeping market. This machine features Tennant's standard innovations, such as an ergonomic cab and ease of use. It also has a patent pending on a unique nozzle, designed to reach litter in hard-to-clean places, such as fences and planters. By using process improvements and new technologies, Tennant has successfully cut its industrial product development cycle in half. (We believe no competitor can equal our speed-to-market for new products.) This allowed us to double the number of annual product introductions while holding engineering costs virtually flat in constant dollars. We are sharing this aggressive product development focus with the commercial and floor coatings areas. Another example of our successful product development is the new model Sentry-TM-. STRENGTH: INVESTMENT IN TECHNOLOGY Technology is fast becoming a competitive advantage for Tennant. This resulted from our multiyear commitment in 1994 to totally upgrade our computer systems and introduce technology into nearly all aspects of our business. We had three goals: - - To link all Tennant's operations and customer information to help improve customer service, - - To increase the efficiency and effectiveness of our operations, and - - Achieve Year 2000 compliance. Our approach was a significant investment in companywide installation of SAP's R/3 enterprise system. In 1998, we began seeing the benefits from this process. We now have 12 converted substantially all of our European systems. In North America, we began receiving better, faster information on our customers and their orders. Our longer-term goal is to use this information more effectively in the design of products and services to meet customer needs. Additionally, we will deliver more detailed information to our sales force to help them sell more effectively and better support customers. We also will be better able to use technology to create cross-functional and transglobal teams thereby leveraging Tennant's human resources. We expect to see the full benefits from this investment over the next several years. STRENGTH: STRONG FINANCIAL CONDITION Tennant has the financial strength to continue funding our worldwide market leadership. The company generates strong cash flow and has a low amount of debt. (See Management's Financial Discussion and Analysis for a more in-depth review.) The first priority is to invest in our business to achieve profitable growth. Cash in excess of this investment will be returned to shareholders in the form of dividends and a continuing share repurchase program. At the beginning of 1998, we adopted a shareholder value-based financial reporting system--"economic value management." We did this to ensure Tennant continues to create shareholder wealth--or "economic profit." We also tied a significant portion of management's incentive compensation to our economic profit performance. Our goal is to closely align management and shareholder interests. TENNANT IS NO LONGER A COMPANY WITH THREE GOOD BUT SEPARATE PRODUCT LINES. WE ARE LEVERAGING THE STRENGTHS IN EACH OF THESE AREAS INTO GREATER GROWTH OPPORTUNITIES FOR ALL. THIS WILL HELP US REACH OUR MISSION: TO BE THE PREEMINENT COMPANY IN NONRESIDENTIAL FLOOR MAINTENANCE EQUIPMENT, FLOOR COATINGS AND RELATED PRODUCTS, AND TO CREATE ABOVE-AVERAGE VALUE FOR SHAREHOLDERS. FINANCIAL LEVERAGE [CHART]
94 95 96 97 98 Long-Term Debt 5 15 14.1 13.2 14.3 Short-Term Debt 18.3 11.2 2.5 1.5 4.5 Goaled Range (low) 20 20 20 20 20 Goaled Range (high) 25 25 25 25 25
DIVIDENDS AND SHARE REPURCHASES [CHART]
94 95 96 97 98 Cash Dividends 6.386 6.742 6.905 7.125 7.0 Share Repurchases 1.854 0.0 2.91 13.598 27.071
ECONOMIC PROFIT [CHART]
94 95 96 97 98 Economic Profit (millions) .7 2.4 1.7 4 4.9
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 Measurement 1998 1991-1998 1987-1990 1982-1990 -------------------------------------------------------------------------------------------------------------- Return on Beginning Shareholders' Equity(b) 19 18 17 15 Compound Annual Growth (%)(a): Sales +5 +8 +9 +8 Net Earnings(b) +5 +9 +10 +3 Earnings Per Share (Diluted)(b) +11 +9 +9 +5 Net Operating Assets +3 +9 +4 +5
(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) 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 1998, net earnings were $25.3 million, up 5% from the prior year. Earnings per diluted share of $2.67 were up 11%. Return on sales was 6.5%, and return on beginning shareholders' equity was 18.9%. The reasons for the earnings gain were higher sales, and increases in gross margin and other income. The direct effects of a stronger U.S. dollar in the first nine months of the year reduced earnings by an estimated $1.3 million, or 14 cents per share. For 1997, net earnings were $24.2 million, up 15% from the prior year. Earnings per diluted share of $2.41 were up 15%. 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. The direct effects of a much stronger U.S. dollar reduced earnings by an estimated $1.8 million, or 18 cents per share. SALES: For 1998, net sales of $389 million increased 5% from the prior year and backlogs declined by $4 million to $9 million. A stronger U.S. dollar reduced full year sales by $5 million. North American sales of $293 million were up 6% on economic conditions that were quite strong early in the year, but weakened as the year progressed. North American sales growth by product line was: 9% for industrial equipment and 3% for commercial equipment; and a decrease of 2% for floor coatings. Industrial product growth was due primarily to unit volume growth and was significantly supported by the introduction of new and updated products. Among the new product introductions were two products targeted at the outdoor market which accounted for about a third of the unit volume increase. Growth in commercial equipment sales was primarily the result of price increases, and the decline in floor coatings sales was primarily a decline in unit volume. European sales of $63 million, representing 16% of consolidated revenues, increased 10% in translated U.S. dollars and were up 12% in local currencies. Local 14 currency sales growth of industrial equipment was slightly stronger than commercial equipment and, in both product lines, sales growth was due primarily to a unit volume increase. Other international sales of $33 million, representing 9% of consolidated revenues, decreased 15% in translated U.S. dollars and 10% in local currencies. Sales of industrial equipment declined $8 million, due primarily to a unit volume decline in Asia. Partially offsetting this decline was an increase in commercial equipment sales of $2 million, or 28%. The increase was also due to an increase in unit volume. For 1997, net sales of $372 million increased 8% from the prior year and backlogs increased by $2 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 recent years. Sales increases by product line were 12% for industrial equipment, 9% for commercial equipment, and 7% for floor coatings. European sales of $57 million, representing 15% of consolidated revenues, decreased 1% but were up 9% in local currencies. Other international sales of $39 million, representing 11% of consolidated revenues, increased 4% and were up 10% in local currencies. PROFIT FROM OPERATIONS: For 1998, profit from operations increased 3% to $37.3 million and operating margin was 9.6% versus 9.7% 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. Gross margin improved to 42.6% from 42.2% the prior year. The improvement was due primarily to a relatively low rate of inflation for costs and expenses, and price increases in North America on industrial and commercial equipment. Selling and administrative expenses, as a percent of sales, increased to 33.0% from 32.5% the prior year. The increase in rate was due substantially to increased investment in information technology primarily in connection with the implementation of an enterprise resource planning system. Investment in information technology is expected to level off in 1999 as implementation of the major elements of software nears completion. In addition, for 1999 the Company is adopting a change in accounting treatment for software developed for internal use under Statement of Position 98-1 issued by the American Institute of Certified Public Accountants (AICPA). Under this change in accounting treatment, the cost of developing software for internal use must be capitalized. The estimated costs to be capitalized in 1999 are approximately $1 million. For 1997, profit from operations increased 14% to $36.1 million, and operating margin was 9.7% versus 9.2% the prior year. Factory capacity use is estimated to have been in the low 70% range for the year. 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 due primarily to a favorable product mix, manufacturing efficiencies on a 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 due primarily to higher incentive compensation resulting from improved financial results and a significant increase in the market value of the Company's stock. OTHER INCOME AND EXPENSE: For 1998, the Company recorded other income of $1.7 million versus $1.5 million in the prior year. The primary reasons for the increase were a reduction in the discretionary contribution to the Company's charitable foundation and a foreign currency transaction gain this year versus a loss the prior year. Included in other income is $3.8 million of interest income. Of this amount, $1.3 million is from finance-type leases provided to customers, and $1.4 million is from a loan to the Company's Employee Stock Ownership Plan. For 1997, the Company recorded other income of $1.5 million versus $0.7 million 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. For 1999, management anticipates approximately $1.0 million less net other income than recorded in 1998 due to reductions in interest earned on finance-type leases. The reduction in finance lease income is due to the outsourcing of the product financing function which occurred during 1998. 15 INCOME TAXES: For 1998, the effective tax rate declined somewhat to 35.2% from 35.7% the prior year. Both years were within the expected range. For 1999, management anticipates the effective tax rate will continue in the 35% range. LIQUIDITY AND CAPITAL RESOURCES The Company continues to generate substantial cash flow and was again able to strengthen its financial condition in 1998. FINANCIAL POSITION: Cash flow from operations in 1998 was $42.9 million compared to $41.9 million in 1997. Investment in net operating assets at December 31, 1998, of $162 million increased 3% from the end of the prior year, due primarily to a $6 million rise in inventories resulting from a slowdown in orders late in 1998. Inventory levels are expected to decline during 1999. Accounts receivable balances at the end of 1998 declined $.9 million. This was due to the outsourcing of the product financing business, which declined $3.7 million, and was partially offset by an increase in trade receivables (see additional comments later in this section). At year-end, the Company held $0.7 million of unsecured trade receivables from customers in Southeast Asia and Latin America. Management believes the allowance for doubtful accounts is adequate to cover losses, if any, resulting from financial turmoil in these markets. For 1999, net operating assets will likely increase; however, the percentage increase is expected to again be less than sales growth. Capital spending, net of disposals, totaled $17.2 million in 1998 compared to $16.4 million in 1997. Depreciation expense in 1998 was $16.5 million compared to $16.2 million in 1997. The largest categories of capital spending were information technology hardware and software, vehicles, product tooling and factory equipment. Vehicles represent a large category of investment because of the need for cars, trucks and trailers by the direct sales and service forces in key industrial markets. DEBT: In 1998, debt increased to $30 million, or 19% of capital, from $23 million, or 15% of capital. The increase in debt resulted from the accounting treatment given to the Company's decision to outsource the leasing of its products and disposal of previously written lease-type contracts (see additional comments later in this section). Based on current operating plans, dividend policy, and stock repurchase authority, management expects cash flow to remain strong during the year, but cash balances to decline somewhat by the end of 1999. DIVIDENDS AND COMMON STOCK: Cash dividends of 74 cents per share were up 3%, the 27th consecutive year of increase. Common diluted shares outstanding averaged 9,500,000 in 1998, a decrease from the prior year's 10,032,000. Outstanding diluted shares of 9,211,000 at year-end declined by 6% due to share repurchases during the year. During 1998, the Company repurchased 676,572 shares at an average price of $40.01 per share. As of December 31, 1998, authority existed to repurchase 496,568 shares under an authorization granted by the Board of Directors on October 2, 1998. IMPACT OF INFLATION: Inflation has not been a significant factor for several years. For 1998, it is estimated that product pricing, on average, was greater than the inflation experienced by the Company for costs and expenses. For 1999, 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 and economic profit objectives based on current values for assets, and price indexes are used to estimate real, inflation-adjusted sales. These adjustments allow for more meaningful measurements of growth and profitability over extended periods of time. IMPACT OF CHANGING VALUE OF THE U.S. DOLLAR: Approximately one-fourth of the Company's sales occur outside of the United States directly or through independent distributors in over 50 countries. Sales in 16 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. 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 1998, the Company had outstanding $7.0 million of forward-exchange contracts (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, 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 in the form of an above-average total return. Goals and policies that support this mission are: - - Growth - Annual increases of 8% in sales and 10% in earnings per share over a full economic cycle; measured from cycle peak to peak. - - Profitability - 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. Cash in excess of that needed to grow the business and meet dividend commitments is generally returned to shareholders in the form of share repurchases. 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 were made with General Electric Capital Companies (GE Capital) to provide these services beginning January 2, 1998. The Company also arranged for the transfer of its existing financing-related portfolio to GE Capital at various times during 1998. 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. Under the terms of the transfer of the lease portfolio to GE Capital, the Company was required under FASB 125 to report the transfer as a loan and as a retained ownership of the financing contracts. As customers make their financing payments to GE Capital, the Company reports those payments as interest and a recovery of principal, and records a concurrent reduction in the loan. A substantial part of the outstanding finance receivables will be paid by customers during the year following the transfers to GE Capital. At the end of 1998, the remaining balance of gross receivables on contracts transferred to GE Capital was approximately $8.5 million; this amount is expected to decline to approximately $3.3 million by the end of 1999. YEAR 2000 COMPUTER SYSTEMS' ISSUES Several years ago, the Company embarked on a major 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. Management believes this new system will substantially resolve the Company's year-2000 date-change issues. For additional information, refer to Part 1 of the Company's Form 10K SEC filing for 1998. SORMA ACQUISITION During December 1998, the Company announced its intention to purchase Paul Andra, K.G., known in the market as Sorma, a German manufacturer of commercial floor maintenance equipment. The acquisition was completed during January 1999 (see "CEO's Letter," page 2, and "Notes to Financial Statements," note 18). SAFE HARBOR STATEMENT This Annual Report contains various forward-looking statements involving risks and uncertainties. These include economic and currency conditions as well as market and competitive factors. For additional information concerning factors that could materially affect actual results, refer to Part 1 of the Company's Form 10K SEC filing for 1998. 17 TENNANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND Years ended December 31 COMPREHENSIVE EARNINGS 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Percent Percent Percent ------- ------- ------- Net sales........................................ $ 389,388 100.0 $372,428 100.0 $344,433 100.0 Less: Cost of sales................................. 223,589 57.4 215,392 57.8 202,057 58.7 Selling and administrative expenses........... 128,450 33.0 120,948 32.5 110,745 32.2 --------- ----- -------- ----- -------- ----- Profit from operations........................... 37,349 9.6 36,088 9.7 31,631 9.2 Other income and (expense): Net foreign currency transaction gain (loss).. 139 -- (306) (.1) 50 -- Interest income............................... 3,771 1.0 4,699 1.3 4,259 1.2 Interest (expense)............................ (2,292) (.6) (2,021) (.5) (2,491) (.7) Miscellaneous income (expense), net........... 125 -- (830) (.2) (1,120) (.3) --------- ----- -------- ----- -------- ----- Total other income ......................... 1,743 .4 1,542 .5 698 .2 --------- ----- -------- ----- -------- ----- Profit before income taxes....................... 39,092 10.0 37,630 10.1 32,329 9.4 Income tax expense............................... 13,767 3.5 13,425 3.6 11,302 3.3 --------- ----- -------- ----- -------- ----- Net earnings..................................... $ 25,325 6.5 $ 24,205 6.5 $ 21,027 6.1 --------- ----- -------- ----- -------- ----- --------- ----- -------- ----- -------- ----- Comprehensive earnings adjustment for foreign currency, net of tax.................. $ 1,024 $ (2,314) $ (655) --------- -------- --------- Comprehensive earnings........................... $ 26,349 $ 21,891 $ 20,372 Basic net earnings per share..................... $ 2.67 $ 2.43 $ 2.09 --------- -------- -------- --------- -------- -------- Diluted net earnings per share................... $ 2.67 $ 2.41 $ 2.09 --------- -------- -------- --------- -------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 18 TENNANT COMPANY AND SUBSIDIARIES
December 31 CONSOLIDATED BALANCE SHEETS 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS Current assets: Cash and cash equivalents..................................................................... $ 17,693 $ 16,279 Receivables: Trade, less allowance for doubtful accounts ($2,855 in 1998 and $2,826 in 1997)............. 71,386 68,502 Installment accounts receivable, net of deferred income from sales finance charges and less allowance for doubtful accounts ($101 in 1998 and $476 in 1997).................. 4,153 7,920 Sundry...................................................................................... 1,696 1,739 -------- -------- Net receivables........................................................................... 77,235 78,161 Inventories................................................................................... 46,162 40,323 Prepaid expenses.............................................................................. 878 985 Deferred income taxes, current portion........................................................ 8,900 7,357 -------- -------- Total current assets...................................................................... 150,868 143,105 Property, plant, and equipment, net of accumulated depreciation.................................. 66,640 65,111 Installment accounts receivable due after one year, net of deferred income from sales finance charges.................................................................... 2,843 6,337 Deferred income taxes, long-term portion......................................................... 2,657 2,257 Intangible assets................................................................................ 15,631 16,525 Other assets .................................................................................... 459 535 -------- -------- Total assets.............................................................................. $239,098 $233,870 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current debt.................................................................................. $ 7,302 $ 2,377 Accounts payable and accrued expenses......................................................... 52,086 48,837 Income taxes payable.......................................................................... 1,421 4,901 -------- -------- Total current liabilities................................................................. 60,809 56,115 Long-term debt................................................................................... 23,038 20,678 Long-term employee-related benefits.............................................................. 23,984 22,801 Other long-term liabilities...................................................................... -- 190 -------- -------- Total liabilities......................................................................... 107,831 99,784 Shareholders' equity: Preferred stock of $.02 par value per share................................................... -- -- Common stock of $.375 par value per share..................................................... 3,421 3,637 Additional paid-in capital.................................................................... -- -- Common stock subscribed....................................................................... 425 444 Unearned restricted shares.................................................................... (307) (789) Retained earnings............................................................................. 136,730 141,656 Accumulated other comprehensive income........................................................ 1,587 563 Receivable from ESOP.......................................................................... (10,589) (11,425) -------- -------- Total shareholders' equity................................................................ 131,267 134,086 -------- -------- Total liabilities and shareholders' equity................................................ $239,098 $233,870 -------- -------- -------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 19 TENNANT COMPANY AND SUBSIDIARIES
Years ended December 31 CONSOLIDATED STATEMENTS OF CASH FLOWS 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) CASH FLOW RELATED TO OPERATING ACTIVITIES: Net earnings.................................................................. $25,325 $24,205 $21,027 Adjustments to net earnings to arrive at operating cash flow: Depreciation and amortization............................................... 17,550 17,468 16,387 Provision for bad debts..................................................... 944 1,901 1,160 Provision for stock plans................................................... 1,357 1,608 1,191 (Gain) loss on sale of property, net........................................ (442) (716) 557 Provision for deferred taxes................................................ (1,961) (2,391) (959) (Increase) decrease in receivables.......................................... 4,077 (6,364) (4,073) (Increase) decrease in inventories.......................................... (5,369) (6,614) 4,698 Increase (decrease) in accounts payable, accrued expenses and other long-term liabilities............................................... 3,278 8,281 (1,428) Increase in long-term employee-related benefits............................. 1,152 3,339 2,397 Increase (decrease) in income taxes payable................................. (3,476) 887 3,370 (Increase) decrease in other assets......................................... 337 386 (216) Other, net.................................................................. 118 (98) 455 ------- ------- ------- Net cash flow related to operating activities................................. 42,890 41,892 44,566 CASH FLOW RELATED TO INVESTING ACTIVITIES: Acquisition of property, plant, and equipment............................... (23,389) (20,621) (20,966) Acquisition of intangible assets............................................ -- -- (180) Proceeds from disposals of property, plant, and equipment................... 6,168 4,197 3,385 Settlement of foreign currency hedging contracts............................ -- 934 521 ------- ------- ------- Net cash flow related to investing activities................................. (17,221) (15,490) (17,240) CASH FLOW RELATED TO FINANCING ACTIVITIES: Net changes in current debt................................................. 6,468 150 (14,487) Payments to settle long-term debt .......................................... (2,480) (2,264) -- Issuance of long-term debt ................................................. 58 15 -- Long-term proceeds from transfer of leased assets........................... 3,038 -- -- Principal payment from ESOP................................................. 599 546 495 Proceeds from employee stock issues......................................... 2,039 1,842 1,784 Repurchase of common stock.................................................. (27,071) (13,598) (2,911) Dividends paid.............................................................. (6,941) (7,125) (6,905) ------- ------- ------- Net cash flow related to financing activities................................. (24,290) (20,434) (22,024) Effect of exchange rate changes on cash.......................................... 35 430 332 ------- ------- ------- NET INCREASE IN CASH AND CASH EQUIVALENTS........................................ 1,414 6,398 5,634 Cash and cash equivalents at beginning of year................................... 16,279 9,881 4,247 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR......................................... $17,693 $16,279 $ 9,881 ------- ------- ------- ------- ------- -------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 20 TENNANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS Years ended December 31 OF SHAREHOLDERS' EQUITY 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Shares Amount Shares Amount Shares Amount COMMON STOCK Beginning balance....................... 9,699,397 $ 3,637 9,965,437 $ 3,737 9,952,036 $ 3,732 Issue stock for employee benefit plans and directors.................... 100,135 38 132,154 49 134,229 50 Purchase of common shares............... (676,572) (254) (398,194) (149) (120,828) (45) --------- -------- --------- -------- --------- -------- Ending balance........................ 9,122,960 $ 3,421 9,699,397 $ 3,637 9,965,437 $ 3,737 --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- ADDITIONAL PAID-IN CAPITAL Beginning balance....................... $ -- $ 3,547 $ 3,166 Issue stock for employee benefit plans and directors.................... 2,817 3,596 3,247 Purchase of common shares............... (2,817) (7,143) (2,866) -------- -------- -------- Ending balance........................ $ -- $ -- $ 3,547 -------- -------- -------- -------- -------- -------- COMMON STOCK SUBSCRIBED Beginning balance....................... 12,191 $ 444 21,403 $ 703 29,084 $ 694 Issue stock for employee benefit plans.. (12,191) (444) (21,403) (703) (29,084) (694) Subscribe stock for employee benefit plans.................................. 10,605 425 12,191 444 21,403 703 --------- -------- --------- -------- --------- -------- Ending balance........................ 10,605 $ 425 12,191 $ 444 21,403 $ 703 --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- UNEARNED RESTRICTED SHARES Beginning balance....................... $ (789) $ (440) $ (276) Restricted share activity, net.......... 482 (349) (164) -------- -------- -------- Ending balance........................ $ (307) $ (789) $ (440) -------- -------- -------- -------- -------- -------- RETAINED EARNINGS Beginning balance....................... $141,656 $130,703 $116,396 Net earnings............................ 25,325 24,205 21,027 Dividends paid, $.74, $.72, and $.69, respectively, per common share......... (6,941) (7,125) (6,905) Purchase of common shares............... (24,000) (6,306) -- Tax benefit on ESOP and stock plans..... 690 179 185 -------- -------- -------- Ending balance........................ $136,730 $141,656 $130,703 -------- -------- -------- -------- -------- -------- ACCUMULATED OTHER COMPREHENSIVE INCOME Beginning balance....................... $ 563 $ 2,877 $ 3,532 Net change for year in translation adjustment............................. 1,024 (2,769) (1,065) Gain (loss) on foreign currency hedges, net of income taxes of $0, $(279), and $(251), respectively............... -- 455 410 -------- -------- -------- Ending balance........................ $ 1,587 $ 563 $ 2,877 -------- -------- -------- -------- -------- -------- RECEIVABLE FROM ESOP Beginning balance....................... $(11,425) $ (12,267) $(13,113) Principal payments...................... 599 546 495 Shares allocated........................ 237 296 351 -------- -------- -------- Ending balance........................ $(10,589) $ (11,425) $(12,267) -------- -------- -------- -------- -------- -------- Total shareholders' equity.............. $131,267 $134,086 $128,860 -------- -------- -------- -------- -------- --------
The Company had 30,000,000 authorized shares of common stock as of December 31, 1998, 1997, and 1996. SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 21 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) 1998 1997 ------- ------- FIFO inventories: Finished goods............................. $32,895 $27,028 Raw materials, parts and work-in-process... 32,162 31,833 ------- ------- Total FIFO inventories........................ 65,057 58,861 LIFO adjustment............................... (18,895) (18,538) ------- ------- LIFO inventories.............................. $46,162 $40,323 ------- ------- ------- -------
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. 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. 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, 1998, earnings permanently reinvested in international subsidiaries not subject to a U.S. income tax provision were $16,633,000. If ever remitted to the Company in a taxable distribution, U.S. income taxes would be substantially offset by available foreign tax credits. STOCK-BASED COMPENSATION. The Company accounts for stock-based compensation for employees 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. EARNINGS PER SHARE. Basic earnings per share excludes dilution and is computed by dividing the income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share includes conversion shares consisting of stock options and performance-related shares. 22 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 1998, the Financial Accounting Standards Board issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which requires the Company to recognize all derivatives on the balance sheet at fair value. The Company is in the process of determining what effect this pronouncement has on consolidated net earnings. Also in 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE, which will be adopted by the Company in 1999. SOP 98-1 requires that certain costs related to the development or purchase of internal-use software be capitalized and amortized over the estimated useful life of the software. The estimated costs to be capitalized in 1999 are approximately $1 million. (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) 1998 1997 1996 -------- -------- -------- NET SALES North America Customer sales..................... $293,231 $275,834 $248,703 Transfers to Europe and other international areas........ 43,368 51,231 43,898 -------- -------- -------- Total North America................ $336,599 $327,065 $292,601 Europe customer sales................ 62,855 57,387 58,196 Other international customer sales... 33,302 39,207 37,534 Eliminations......................... (43,368) (51,231) (43,898) -------- -------- -------- Total.................................. $389,388 $372,428 $344,433 -------- -------- -------- -------- -------- -------- PROFIT BEFORE INCOME TAXES North America........................ $ 30,736 $ 34,029 $ 28,734 Europe............................... 6,615 5,168 3,960 Other international.................. 3,643 1,687 3,009 Corporate items, interest income, interest expense, and eliminations. (1,902) (3,254) (3,374) -------- -------- -------- Total.................................. $ 39,092 $ 37,630 $ 32,329 -------- -------- -------- -------- -------- -------- TOTAL ASSETS Identifiable assets North America...................... $172,748 $176,284 $170,010 Europe............................. 41,100 37,842 38,857 Other international................ 11,428 7,898 7,038 Corporate assets and eliminations.... 13,822 11,846 3,275 -------- -------- -------- Total.................................. $239,098 $233,870 $219,180 -------- -------- -------- -------- -------- --------
(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, 1998, as follows:
(IN THOUSANDS) 1998 1997 1996 ------- ------- ------- Engineering, research and development................ $14,224 $13,470 $12,773 Maintenance and repairs....... $ 6,071 $ 5,856 $ 5,740 Warranty...................... $ 5,959 $ 4,981 $ 4,579 Bad debts..................... $ 944 $ 1,901 $ 1,160
(4) CONSOLIDATED QUARTERLY DATA* (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net Sales Gross Profit --------------------------- -------------------------- % % Quarter 1998 1997 Change 1998 1997 Change -------- -------- ------ -------- -------- ------ First...... $ 88,721 $ 83,026 7 $ 37,276 $ 34,149 9 Second..... 99,220 93,359 6 42,054 39,770 6 Third...... 96,116 90,570 6 40,652 38,298 6 Fourth..... 105,331 105,473 -- 45,817 44,819 2 -------- -------- -------- -------- Year....... $389,388 $372,428 5 $165,799 $157,036 6 -------- -------- -------- -------- -------- -------- -------- -------- Net Earnings Diluted Earnings Per Share --------------------------- -------------------------- % Quarter 1998 1997 Change 1998 1997 -------- -------- ------ -------- -------- First....... $ 5,243 $ 4,407 19 $ .54 $ .44 Second...... 6,718 6,417 5 .70 .63 Third....... 6,308 5,972 6 .67 .60 Fourth...... 7,056 7,409 (5) .76 .74 -------- -------- ----- ----- Year........ $ 25,325 $ 24,205 5 $2.67 $2.41 -------- -------- ----- ----- -------- -------- ----- -----
*Regular quarterly dividends aggregated $.74 per share in 1998 ($.18 per share for the first two quarters and $.19 per share for the last two quarters) and $.72 per share in 1997 ($.18 per share for all quarters). (5) INCOME TAXES In 1998, 1997, and 1996 the Company recognized tax benefits of $690,000, $179,000, and $185,000, respectively, relating to the Company's ESOP and stock plans and miscellaneous charges (credits) of $0, $279,000, and $251,000, respectively, by direct allocations to shareholders' equity. Income tax expense for the three years ended December 31, 1998, is as follows:
(IN THOUSANDS) Current Deferred Total ------- -------- ------- 1998 Federal................ $10,328 $(1,533) $ 8,795 Foreign................ 3,998 (127) 3,871 State.................. 1,402 (301) 1,101 ------- ------- ------- $15,728 $(1,961) $13,767 ------- ------- ------- ------- ------- ------- 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 ------- ------- ------- ------- ------- -------
23 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) 1998 1997 1996 ------- ------- ------- Tax at statutory rate................... $13,682 $13,171 $11,304 Increases (decreases) in taxes from: State and local taxes, net of federal benefit.................... 715 754 694 Effect of foreign taxes.............. 308 314 363 Research and development credit...... (117) (239) (324) Effect of foreign sales corporation.. (708) (668) (667) Other, net........................... (113) 93 (68) ------- ------- ------- Income tax expense...................... $13,767 $13,425 $11,302 ------- ------- ------- ------- ------- -------
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997, are presented below:
(IN THOUSANDS) 1998 1997 ------- ------- 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................................ $ 1,171 $ 1,394 Employee wages and benefits, principally due to accruals for financial reporting purposes 14,250 12,307 Warranty reserves accrued for financial reporting purposes................................ 918 934 Accounts receivable, principally due to allowance for doubtful accounts and change in tax accounting method for equipment rentals............................. 252 183 Deferred loss, hedge of forward foreign exchange contracts and options.................... 31 -- Other............................................... 1,013 817 ------- ------- Total deferred tax assets........................ $17,635 $15,635 ------- ------- ------- ------- DEFERRED TAX LIABILITIES: Property, plant, and equipment, principally due to differences in depreciation and related gains..................................... $ 5,296 $ 5,385 Goodwill............................................ 782 632 Deferred gain, hedge of forward foreign exchange contracts and options.................... -- 4 ------- ------- Total deferred tax liabilities................... $ 6,078 $ 6,021 ------- ------- ------- ------- Net deferred tax asset................................. $11,557 $ 9,614 ------- ------- ------- -------
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 $18,513,000, $14,839,000, and $8,714,000, in 1998, 1997, and 1996, respectively. (6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at December 31 consist of the following:
(IN THOUSANDS) 1998 1997 ------- ------- Trade accounts payable...................... $15,719 $16,632 Employee profit sharing..................... 4,165 3,856 Wages, bonuses, and commissions............. 21,329 16,500 Taxes, other than income taxes.............. 3,622 3,289 Other....................................... 7,251 8,560 ------- ------- Total....................................... $52,086 $48,837 ------- ------- ------- -------
(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) 1998 1997 -------- -------- Land....................................... $ 3,627 $ 3,553 Buildings and improvements................. 28,212 25,914 Machinery and equipment.................... 131,938 123,112 Construction in progress................... 5,738 4,023 -------- -------- Total property, plant, and equipment....... 169,515 156,602 Less accumulated depreciation.............. (102,875) (91,491) -------- -------- Net property, plant, and equipment......... $ 66,640 $ 65,111 -------- -------- -------- --------
Buildings and improvements include office, warehouse, or manufacturing facilities in suburban Minneapolis, Minnesota; Holland, Michigan; Adairsville, Georgia; 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 ---------- --------- 1999 $ 4,552 721 2000 2,055 206 2001 757 20 2002 269 22 2003 12 -- ------- ------ Total $ 7,645 $ 969 ------- ------ ------- ------
24 The Company's investment in equipment related to operating leases as of December 31 is as follows:
(IN THOUSANDS) 1998 1997 ------ ------ Cost........................................ $ 39 $4,792 Less accumulated depreciation............... (39) (1,970) ------ ------ Net investment.............................. $ -- $2,822 ------ ------ ------ ------
The Company's net investment in sales-type leases at December 31 is as follows:
(IN THOUSANDS) 1998 1997 ------- ------- Minimum lease payments receivable........... $ 7,645 $15,752 Less allowance for doubtful accounts........ (101) (476) ------- ------- Net minimum lease payments receivable....... 7,544 15,276 Estimated unguaranteed residual value....... -- 1,104 Less deferred income........................ (1,452) (2,757) ------- ------- Net investment in sales-type leases......... $ 6,092 $13,623 ------- ------- ------- -------
(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 $2,863,000, $3,273,000, and $2,873,000, in 1998, 1997, and 1996, respectively. The aggregate lease commitments with an initial term of one year or more at December 31, 1998, were $7,307,000 with minimum rentals for the periods as follows:
(IN THOUSANDS) 1999 $2,390 2000 1,935 2001 1,570 2002 907 2003 493 2004 and beyond 12 ------ Total $7,307 ------ ------
(10) SHORT-TERM BORROWINGS Short-term bank borrowings at December 31, 1998 and 1997, were $47,000 and $666,000, respectively. In addition to the short-term bank borrowings, current debt includes the current portion of long-term debt, collateralized borrowings, and mortgages associated with the relocation of employees. The weighted-average interest rates on the above short-term bank borrowings at December 31, 1998 and 1997, were 4.3% and 4.5%, 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 $21,128,000 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. (11) LONG-TERM DEBT Long-term debt at December 31 consists of the following:
(IN THOUSANDS) 1998 1997 ------- ------- Bank loan at 4.0%, due in 1998............... $ -- $ 567 Bank loan at 7.0%, due in 1998............... -- 1,144 Bank loan at 4.0%, due in 1999............... 591 -- Bank loan at 7.9%, due in 1999............... 1,158 -- Bank loan at 8.7%, due in 1999............... -- 678 Bank loan at 5.65%, due in 1999.............. 704 -- Note at 8.09%, due in 2000................... 5,000 5,000 Collateralized loan at 9.6%, due in 2000..... 2,132 -- Notes at 8.56%, due in 2001.................. 5,000 5,000 Collateralized loan at 9.6%, due in 2001..... 679 -- Collateralized loan at 9.6%, due in 2002..... 219 -- Note at 7.21%, due in 2003................... 5,000 5,000 Collateralized loan at 9.6%, due in 2003..... 8 -- Note at 7.84%, due in 2005................... 5,000 5,000 Less current portion......................... (2,453) (1,711) ------- ------- Total........................................ $23,038 $20,678 ------- ------- ------- -------
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) 1999 $ 2,453 2000 7,132 2001 5,679 2202 219 2003 5,008 2004 and beyond 5,000 ------- Total $25,491 ------- -------
During 1998, 1997, and 1996, the Company paid total long-term and short-term interest costs of $2,280,000, $2,019,000, and $2,473,000, 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. 25 (13) PENSIONS AND POSTRETIREMENT BENEFITS 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. Retirement benefits for eligible employees in foreign locations are funded principally through either annuity or government programs. The Company also 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.
Postretirement (IN THOUSANDS) Pension Benefits Medical Benefits ----------------------- ----------------------- 1998 1997 1998 1997 ------- ------- -------- -------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year........................... $19,865 $17,388 $ 11,380 $ 10,990 Service cost...................................................... 1,851 1,635 365 334 Interest cost..................................................... 1,326 1,176 731 703 Actuarial loss/(gain)............................................. 503 (8) 13 (356) Benefits paid..................................................... (229) (326) (386) (291) ------- ------- -------- -------- Benefit obligation at end of year............................... $23,316 $19,865 $ 12,103 $ 11,380 ------- ------- -------- -------- CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year.................... $23,872 $19,575 $ -- $ -- Actual return on plan assets...................................... 12,408 4,621 -- -- Employer contribution............................................. 2 2 386 291 Benefits paid..................................................... (229) (326) (386) (291) ------- ------- -------- -------- Fair value of plan assets at end of year........................ $36,053 $23,872 $ -- $ -- ------- ------- -------- -------- Funded status..................................................... $12,737 $ 4,007 $(12,103) $(11,380) Unrecognized actuarial loss/(gain)................................ (19,892) (10,155) 696 683 Unrecognized transition obligation/(asset)........................ (496) (542) -- -- Unrecognized prior service cost................................... 346 379 -- -- ------- ------- -------- -------- Net amount recognized........................................... $(7,305) $(6,311) $(11,407) $(10,697) ------- ------- -------- -------- ------- ------- -------- -------- Amounts recognized in the statement of financial position consist of: Accrued benefit liability....................................... $(7,377) $(6,324) $(11,407) $(10,697) Intangible asset................................................ 72 13 -- -- ------- ------- -------- -------- Net amount recognized......................................... $(7,305) $(6,311) $(11,407) $(10,697) ------- ------- -------- -------- ------- ------- -------- -------- WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31: Discount rate..................................................... 6.50% 6.75% 6.50% 6.75% Expected return on plan assets.................................... 9.50% 9.75% -- -- Rate of compensation increase..................................... 5.00% 5.25% -- --
For purposes of determining the 1998 postretirement medical net periodic benefit cost, the weighted-average assumed annual rate of future increase in the per capita cost of covered health care benefits was 8.6% for 1998, declining gradually to 5.25% in 2023 and after. For purposes of determining the December 31, 1998, accumulated postretirement benefit obligation, the weighted-average assumed annual rate of future increases in the per capita cost of covered health care benefits was 8.0% for 1999, declining gradually to 5.0% in 2024 and after.
Postretirement (IN THOUSANDS) Pension Benefits Medical Benefits ----------------------- ----------------------- 1998 1997 1998 1997 -------- -------- -------- -------- COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost...................................................... $ 1,852 $ 1,635 $ 365 $ 334 Interest cost..................................................... 1,326 1,176 731 703 Expected return on plan assets.................................... (1,898) (1,670) -- -- Amortization of prior service cost................................ 33 33 -- -- Amortization of transition obligation/(asset)..................... (46) (46) -- -- Recognized actuarial loss......................................... (271) (231) -- -- -------- -------- -------- -------- Net periodic benefit cost....................................... $ 996 $ 897 $ 1,096 $ 1,037 -------- -------- -------- -------- -------- -------- -------- --------
26 The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for the pension plan with accumulated benefit obligations in excess of plan assets were $1,466,000, $983,000, and $0, respectively, as of December 31, 1998, and $1,106,000, $715,000, and $0, respectively, as of December 31, 1997. The health care trend rate assumption does not have a large impact on the plan's liabilities since the Company's liabilities are largely fixed dollar amounts in future years. To illustrate, a one-percentage-point change in assumed health care trend rates would have the following effects:
(IN THOUSANDS) 1-Percentage- 1-Percentage- Point Increase Point Decrease -------------- -------------- Effect on total of service and interest cost components......... $ 30 $ (36) Effect on postretirement benefit obligation............... $315 $(370)
(14) FOREIGN CURRENCY CONTRACTS In 1997 and 1996, 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, 1998, there were no outstanding guilder contracts. In 1998, 1997, and 1996, the Company recognized gains (losses), net of related tax effect, as a separate component of shareholders' equity of $0, $455,000, and $410,000, respectively. The Company entered into yen range forward exchange contracts to hedge anticipated sales transactions. Gains and losses on contracts are recognized in income on a current basis over the term of the contracts. As of December 31, 1998, there was one outstanding yen contract totaling $600,000. In 1998, 1997, and 1996, the Company recognized gains (losses) of $(22,000), $0, and $50,000, respectively. The Company also entered into forward exchange contracts to hedge net exposed assets in Australia, Canada, and Japan. As of December 31, 1998, the Company had three outstanding contracts totaling $6,421,000. These contracts will mature in 1999 and bear rates of .6083 U.S. dollars per Australian dollar, 1.5500 Canadian dollars per U.S. dollar, and 115.90 Japanese yen per U.S. dollar. In 1998, 1997, and 1996, the Company recognized gains (losses) of $(91,000), $715,000, and $198,000, 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, AND PROFIT SHARING The Company has five plans under which stock-based compensation grants are provided annually. The 1992 Stock Incentive Plan ("1992 Plan"), 1995 Stock Incentive Plan ("1995 Plan") and 1998 Management Incentive Plan ("1998 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, 100,000, 50,000 and 150,000, respectively. The grant size under all plans is determined by the Compensation Committee of the Board of Directors. 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 1998, 1997, and 1996, respectively, 12,000, 28,000, and 26,000, restricted shares were granted. The weighted-average fair value of stock on the grant date was $37.85, $31.35, and $24.57 per share in 1998, 1997, and 1996, respectively. Under the 1992 Plan and the 1995 Plan, performance-related shares were granted annually and are payable if the Company achieves certain financial performance goals over each four-year 27 period following the grants. In 1997 and 1996, respectively, 34,000 and 46,000 performance shares were granted. The weighted-average fair value of stock on the grant date was $26.75 and $23.25 per share in 1997 and 1996, respectively. Under the 1998 Plan, performance-related compensation grants were made and are payable in cash or shares. The awards earned are based on achievement of certain financial performance goals in 1998 and payout is over a three-year period following the award year. In 1998, $1,154,000 in grants were made. 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. A summary of the status of the Company's stock option transactions during 1998, 1997 and 1996 is shown below:
Weighted-Average Shares Exercise Price -------- ------------------- 1998 ------------------------------- Outstanding at beginning of year... 320,000 $25.95 Granted............................ 208,300 37.63 Exercised.......................... (73,200) 24.74 Forfeited.......................... (2,500) 29.35 ------- ------ Outstanding at end of year......... 452,600 $31.50 ------- ------ ------- ------ Exercisable at year-end............ 116,100 $31.96 ------- ------ ------- ------ 1997 ------------------------------- Outstanding at beginning of year... 183,800 $23.24 Granted............................ 207,800 27.61 Exercised.......................... (66,400) 23.64 Forfeited.......................... (5,200) 25.46 ------- ------ Outstanding at end of year......... 320,000 $25.95 ------- ------ ------- ------ Exercisable at year-end............ 54,200 $27.50 ------- ------ ------- ------ 1996 ------------------------------- Outstanding at beginning of year... 101,500 $23.69 Granted............................ 82,300 22.68 Exercised.......................... -- -- Forfeited.......................... -- -- ------- ------ Outstanding at end of year......... 183,800 $23.24 ------- ------ ------- ------ Exercisable at year-end............ 25,400 $23.69 ------- ------ ------- ------
The weighted-average fair value of each option granted was $8.35, $6.11 and $4.53 in 1998, 1997 and 1996, respectively. At December 31, 1998, outstanding options had exercise prices between $22.00 and $43.50 per share and a weighted-average contractual life of eight years. The Company has adopted the disclosure-only provision of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. In accordance with SFAS No. 123, the fair value of options at the date of grant is estimated using the Black-Scholes option pricing model. The following weighted-average assumptions were used for the 1998, 1997 and 1996 grants, respectively: dividend yield of 2.0%, 2.6% and 2.6%; expected volatility of 19%, 19% and 18%; risk-free interest rates of 5.5%, 6.2% and 5.5%; and expected life of option of five years. In 1998, 1997, and 1996, respectively, expenses of $5,557,000, $6,192,000, and $2,731,000, were charged to operations for restricted and performance-related awards. 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):
1998 1997 1996 --------- --------- --------- Net earnings - as reported........... $25,325 $24,205 $21,027 Net earnings - pro forma............. $24,511 $23,798 $20,869 Diluted net earnings per share - as reported....................... $ 2.67 $ 2.41 $ 2.09 Diluted net earnings per share - pro forma......................... $ 2.58 $ 2.37 $ 2.07
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 $828,000, $689,000, and $695,000, in 1998, 1997, and 1996, respectively. 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 1998, 1997, and 1996 was $1,241,000, $1,263,000, and $1,303,000, respectively. Accrued expenses in excess of benefits provided to employees through the ESOP, which were charged to miscellaneous expense, were ($292,000), $138,000, and $542,000, in 1998, 1997, and 1996, respectively. Interest earned and received on the Company loan to the ESOP was 28 $1,437,000, $1,496,000, and $1,550,000, in 1998, 1997, and 1996, respectively. Dividends on the Company shares held by the ESOP used for debt service were $797,000, $787,000, and $755,000, in 1998, 1997, and 1996, respectively. At December 31, 1998, the ESOP indebtedness to the Company, which bears an interest rate of 10.05% and is due December 31, 2009, was $14,152,000. The ESOP shares as of December 31 were as follows:
1998 1997 1996 ------- ------- ------- Allocated shares...................... 378,166 329,324 280,974 Shares released for allocation........ 41,052 40,241 38,971 Unreleased shares..................... 549,848 599,501 649,121 ------- ------- ------- Total ESOP shares..................... 969,066 969,066 969,066 ------- ------- ------- ------- ------- -------
For the years ended December 31, 1998, 1997, and 1996, the Company charged to operations $13,657,000, $13,591,000, and $9,068,501, respectively, for expense of all stock, bonus, pension, and profit sharing plans. (17) EARNINGS PER SHARE Basic and diluted earnings per share for the three years ended December 31, 1998, are as follows:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Income Shares Per-Share (Numerator) (Denominator) Amount --------- ----------- -------- For the Year Ended 1998 ------------------------------------- Basic earnings per share.... $25,325 9,471 $2.67 Effect of dilutive securities: Fixed stock options...... 29 ------ Diluted earnings per share.. $25,325 9,500 $2.67 ------- ------ ----- ------- ------ ----- For the Year Ended 1997 ------------------------------------- Basic earnings per share.... $24,205 9,954 $2.43 Effect of dilutive securities: Fixed stock options...... 35 Performance-related shares 43 ------ 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...... 11 Performance-related shares 23 ------ Diluted earnings per share.. $21,027 10,076 $2.09 ------- ------ ----- ------- ------ -----
(18) SUBSEQUENT EVENT - ACQUISITIONS (UNAUDITED) On January 4, 1999, the Company acquired the shares and holdings in associated businesses of Paul Andra KG, a privately owned manufacturer of commercial floor maintenance equipment in Germany. Paul Andra KG sells products principally under the Sorma brand name, including single disk machines, wet/dry vacuum cleaners and vacuumized scrubbers. The acquisitions should result in a strengthened product line and distribution, particularly in Germany. Sales for 1998 of the acquired business were approximately $27,000,000. These acquisitions are not expected to have a material impact on operations. 29 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, 1998, 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, 1998 and 1997, and the related consolidated statements of earnings and comprehensive earnings, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Minneapolis, Minnesota February 9, 1999 30 DIRECTORS [PHOTOGRAPH] Photo of Directors: David Cox, Janet Dolan, Andy Czajkowski David Cox Janet Dolan Andy Czajkowski [PHOTOGRAPH] Photo of Directors: Roger Hale, Del Johnson, Art Collins Roger Hale Del Johnson Art Collins [PHOTOGRAPH] Photo of Directors: Pam Knous, Ed Russell, Will Miller Pam Knous Ed Russell Will Miller 31 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) 1998 1997 ------------- --------------- Net sales.................................................................................. $ 389,388 372,428 Cost of sales.............................................................................. $ 223,589 215,392 Gross margin-- %........................................................................... 42.6 42.2 Selling and administrative expenses........................................................ $ 128,450 120,948 % of net sales........................................................................... 33.0 32.5 Profit from operations..................................................................... $ 37,349 36,088 % of net sales........................................................................... 9.6 9.7 Other income and (expense)................................................................. $ 1,743 1,542 Income tax expense......................................................................... $ 13,767 13,425 % of earnings before income taxes........................................................ 35.2 35.7 Earnings before extraordinary gain and cumulative effect of accounting change.............. $ 25,325 24,205 % of net sales........................................................................ 6.5 6.5 Return on beginning shareholders' equity-- %.......................................... 18.9 18.8 Net earnings............................................................................... $ 25,325 24,205 PER SHARE DATA(e) Basic net earnings before extraordinary gain and cumulative effect of accounting change.... $ 2.67 2.43 Diluted net earnings before extraordinary gain and cumulative effect of accounting change.. $ 2.67 2.41 Basic net earnings......................................................................... $ 2.67 2.43 Diluted net earnings....................................................................... $ 2.67 2.41 Cash dividends............................................................................. $ .74 .72 Shareholders' equity (ending).............................................................. $ 14.25 13.65 YEAR-END FINANCIAL POSITION Cash and cash equivalents.................................................................. $ 17,693 16,279 Total current assets....................................................................... $ 150,868 143,105 Property, plant, and equipment, net........................................................ $ 66,640 65,111 Total assets............................................................................... $ 239,098 233,870 Current liabilities excluding current debt................................................. $ 53,507 53,738 Current ratio excluding current debt....................................................... 2.8 2.7 Long-term liabilities excluding long-term debt............................................. $ 23,984 22,991 Financing debt Current.................................................................................. $ 7,302 2,377 Long-term................................................................................ $ 23,038 20,678 Total as % of total capital........................................................... 18.8 14.7 Shareholders' equity....................................................................... $ 131,267 134,086 CASH FLOW Increase (Decrease) Related to operating activities............................................................ $ 42,890 41,892 Related to investing activities............................................................ $ (17,221) (15,490) Related to financing activities............................................................ $ (24,290) (20,434) OTHER DATA Interest income............................................................................ $ 3,771 4,699 Interest expense........................................................................... $ 2,292 2,021 Depreciation and amortization expense...................................................... $ 17,550 17,468 Net expenditures for property, plant, and equipment........................................ $ 17,221 16,424 Number of employees at year-end............................................................ 2,127 2,019 Total direct compensation.................................................................. $ 102,821 95,099 Profit sharing and all other employee benefits............................................. $ 27,553 27,337 Average shares outstanding(e).............................................................. 9,500 10,032 Closing share price at year-end(e)......................................................... $ 40 1/8 36 3/8 Common stock price range during year(e).................................................... $ 33-45 3/4 26 1/8-39 5/8 Closing price/earnings ratio(f)............................................................ 15.0 15.1 1996 1995 ------------- -------------- Net sales.................................................................................. 344,433 325,368 Cost of sales.............................................................................. 202,057 185,668 Gross margin-- %........................................................................... 41.3 42.9 Selling and administrative expenses........................................................ 110,745 109,518 % of net sales........................................................................... 32.2 33.7 Profit from operations..................................................................... 31,631 30,182 % of net sales........................................................................... 9.2 9.3 Other income and (expense)................................................................. 698 (747) Income tax expense......................................................................... 11,302 9,773 % of earnings before income taxes........................................................ 35.0 33.2 Earnings before extraordinary gain and cumulative effect of accounting change.............. 21,027 19,662 % of net sales........................................................................ 6.1 6.0 Return on beginning shareholders' equity-- %.......................................... 18.4 20.4 Net earnings............................................................................... 21,027 19,662 PER SHARE DATA(e) Basic net earnings before extraordinary gain and cumulative effect of accounting change.... 2.09 1.98 Diluted net earnings before extraordinary gain and cumulative effect of accounting change.. 2.09 1.98 Basic net earnings......................................................................... 2.09 1.98 Diluted net earnings....................................................................... 2.09 1.98 Cash dividends............................................................................. .69 .68 Shareholders' equity (ending).............................................................. 12.86 11.47 YEAR-END FINANCIAL POSITION Cash and cash equivalents.................................................................. 9,881 4,247 Total current assets....................................................................... 126,481 123,508 Property, plant, and equipment, net........................................................ 65,384 63,724 Total assets............................................................................... 219,180 215,750 Current liabilities excluding current debt................................................. 45,724 44,374 Current ratio excluding current debt....................................................... 2.8 2.8 Long-term liabilities excluding long-term debt............................................. 18,908 16,747 Financing debt Current.................................................................................. 3,864 17,349 Long-term................................................................................ 21,824 23,149 Total as % of total capital........................................................... 16.6 26.2 Shareholders' equity....................................................................... 128,860 114,131 CASH FLOW Increase (Decrease) Related to operating activities............................................................ 44,566 17,834 Related to investing activities............................................................ (17,240) (22,107) Related to financing activities............................................................ (22,024) 6,721 OTHER DATA Interest income............................................................................ 4,259 4,132 Interest expense........................................................................... 2,491 2,640 Depreciation and amortization expense...................................................... 16,387 14,090 Net expenditures for property, plant, and equipment........................................ 17,581 19,117 Number of employees at year-end............................................................ 1,950 1,997 Total direct compensation.................................................................. 89,210 86,263 Profit sharing and all other employee benefits............................................. 22,499 21,887 Average shares outstanding(e).............................................................. 10,076 9,916 Closing share price at year-end(e)......................................................... 27 1/2 23 7/8 Common stock price range during year(e).................................................... 21 1/4-27 1/2 22 1/4-29 Closing price/earnings ratio(f)............................................................ 13.2 12.1 1994 1993 --------------- ------------- Net sales.................................................................................. 281,685 221,002 Cost of sales.............................................................................. 162,360 126,071 Gross margin-- %........................................................................... 42.4 43.0 Selling and administrative expenses........................................................ 95,201 79,508 % of net sales........................................................................... 33.8 36.0 Profit from operations..................................................................... 24,124 11,333(a) % of net sales........................................................................... 8.6 5.1 Other income and (expense)................................................................. (43) 1,595 Income tax expense......................................................................... 8,346 3,802 % of earnings before income taxes........................................................ 34.7 29.4 Earnings before extraordinary gain and cumulative effect of accounting change.............. 15,735 9,126(a) % of net sales........................................................................ 5.6 4.1 Return on beginning shareholders' equity-- %.......................................... 18.7 10.8(a) Net earnings............................................................................... 15,735 9,126 PER SHARE DATA(e) Basic net earnings before extraordinary gain and cumulative effect of accounting change.... 1.60 .93(a) Diluted net earnings before extraordinary gain and cumulative effect of accounting change.. 1.60 .93(a) Basic net earnings......................................................................... 1.60 .93(a) Diluted net earnings....................................................................... 1.60 .93(a) Cash dividends............................................................................. .65 .64 Shareholders' equity (ending).............................................................. 9.78 8.56 YEAR-END FINANCIAL POSITION Cash and cash equivalents.................................................................. 1,851 2,675 Total current assets....................................................................... 98,454 73,752 Property, plant, and equipment, net........................................................ 56,552 46,622 Total assets............................................................................... 182,834 128,634 Current liabilities excluding current debt................................................. 41,959 29,657 Current ratio excluding current debt....................................................... 2.3 2.5 Long-term liabilities excluding long-term debt............................................. 15,318 12,591 Financing debt Current.................................................................................. 23,008 1,190 Long-term................................................................................ 6,300 1,103 Total as % of total capital........................................................... 23.3 2.7 Shareholders' equity....................................................................... 96,249 84,093 CASH FLOW Increase (Decrease) Related to operating activities............................................................ 26,754 21,922 Related to investing activities............................................................ (47,931) (13,569) Related to financing activities............................................................ 20,351 (9,244) OTHER DATA Interest income............................................................................ 3,807 3,583 Interest expense........................................................................... 1,677 509 Depreciation and amortization expense...................................................... 13,121 10,987 Net expenditures for property, plant, and equipment........................................ 18,870 12,877 Number of employees at year-end............................................................ 1,916 1,707 Total direct compensation.................................................................. 76,225 71,507 Profit sharing and all other employee benefits............................................. 21,116 18,149 Average shares outstanding(e).............................................................. 9,826 9,836 Closing share price at year-end(e)......................................................... 24 1/8 23 1/2 Common stock price range during year(e).................................................... 20 15/32-24 1/4 19 3/4-24 1/4 Closing price/earnings ratio(f)............................................................ 15.1 19.7
(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. 32
1992 1991 --------------- ------------- Net sales.................................................................................. 214,863 198,575 Cost of sales.............................................................................. 121,792 112,147 Gross margin-- %........................................................................... 43.3 43.5 Selling and administrative expenses........................................................ 76,942 69,707 % of net sales........................................................................... 35.8 35.1 Profit from operations..................................................................... 16,129 16,721 % of net sales........................................................................... 7.5 8.4 Other income and (expense)................................................................. 1,864 1,800 Income tax expense......................................................................... 4,803 6,529 % of earnings before income taxes........................................................ 26.7 35.3 Earnings before extraordinary gain and cumulative effect of accounting change.............. 13,190(b) 11,992 % of net sales........................................................................ 6.1 6.0 Return on beginning shareholders' equity-- %.......................................... 17.2(b) 16.4 Net earnings............................................................................... 9,229 11,992 PER SHARE DATA(e) Basic net earnings before extraordinary gain and cumulative effect of accounting change.... 1.34(b) 1.21 Diluted net earnings before extraordinary gain and cumulative effect of accounting change.. 1.34(b) 1.21 Basic net earnings......................................................................... .94 1.21 Diluted net earnings....................................................................... .94 1.21 Cash dividends............................................................................. .61 .60 Shareholders' equity (ending).............................................................. 8.64 7.87 YEAR-END FINANCIAL POSITION Cash and cash equivalents.................................................................. 3,512 2,349 Total current assets....................................................................... 74,741 66,028 Property, plant, and equipment, net........................................................ 45,430 40,730 Total assets............................................................................... 128,988 111,644 Current liabilities excluding current debt................................................. 28,848 30,700 Current ratio excluding current debt....................................................... 2.6 2.2 Long-term liabilities excluding long-term debt............................................. 10,691 2,281 Financing debt Current.................................................................................. 1,492 197 Long-term................................................................................ 3,107 1,853 Total as % of total capital........................................................... 5.1 2.6 Shareholders' equity....................................................................... 84,850 76,613 CASH FLOW Increase (Decrease) Related to operating activities............................................................ 20,115 23,777 Related to investing activities............................................................ (15,717) (7,472) Related to financing activities............................................................ (3,346) (15,336) OTHER DATA Interest income............................................................................ 3,619 3,828 Interest expense........................................................................... 540 568 Depreciation and amortization expense...................................................... 10,241 8,730 Net expenditures for property, plant, and equipment........................................ 12,315 8,063 Number of employees at year-end............................................................ 1,758 1,738 Total direct compensation.................................................................. 69,240 65,324 Profit sharing and all other employee benefits............................................. 19,547 17,917 Average shares outstanding(e).............................................................. 9,832 9,892 Closing share price at year-end(e)......................................................... 21 7/16 18 Common stock price range during year(e).................................................... 17 1/4-24 3/8 16 1/4-21 1/4 Closing price/earnings ratio(f)............................................................ 17.4 14.9 1990 1989 --------------- ------------- Net sales.................................................................................. 211,503 197,078 Cost of sales.............................................................................. 121,598 112,511 Gross margin-- %........................................................................... 42.5 42.9 Selling and administrative expenses........................................................ 70,401 64,518 % of net sales........................................................................... 33.3 32.7 Profit from operations..................................................................... 19,504 20,049 % of net sales........................................................................... 9.2 10.2 Other income and (expense)................................................................. 374 3,755 Income tax expense......................................................................... 4,257 9,052 % of earnings before income taxes........................................................ 21.4 38.0 Earnings before extraordinary gain and cumulative effect of accounting change.............. 15,621(c) 14,752(d) % of net sales........................................................................ 7.4 7.5 Return on beginning shareholders' equity-- %.......................................... 21.1(c) 18.9(d) Net earnings............................................................................... 18,256 14,752 PER SHARE DATA(e) Basic net earnings before extraordinary gain and cumulative effect of accounting change.... 1.59(c) 1.44(d) Diluted net earnings before extraordinary gain and cumulative effect of accounting change.. 1.59(c) 1.44(d) Basic net earnings......................................................................... 1.85 1.44 Diluted net earnings....................................................................... 1.85 1.44 Cash dividends............................................................................. .59 .55 Shareholders' equity (ending).............................................................. 7.43 7.52 YEAR-END FINANCIAL POSITION Cash and cash equivalents.................................................................. 1,412 3,175 Total current assets....................................................................... 67,065 70,325 Property, plant, and equipment, net........................................................ 42,588 40,949 Total assets............................................................................... 114,590 116,179 Current liabilities excluding current debt................................................. 30,982 35,408 Current ratio excluding current debt....................................................... 2.2 2.0 Long-term liabilities excluding long-term debt............................................. 1,463 4,022 Financing debt Current.................................................................................. 6,986 588 Long-term................................................................................ 1,995 2,111 Total as % of total capital........................................................... 10.9 3.5 Shareholders' equity....................................................................... 73,164 74,050 CASH FLOW Increase (Decrease) Related to operating activities............................................................ 24,848 25,685 Related to investing activities............................................................ (8,951) (8,916) Related to financing activities............................................................ (17,746) (20,310) OTHER DATA Interest income............................................................................ 2,672 2,033 Interest expense........................................................................... 1,019 597 Depreciation and amortization expense...................................................... 8,652 8,027 Net expenditures for property, plant, and equipment........................................ 8,071 9,135 Number of employees at year-end............................................................ 1,800 1,789 Total direct compensation.................................................................. 66,364 62,401 Profit sharing and all other employee benefits............................................. 19,316 17,233 Average shares outstanding(e).............................................................. 9,842 10,268 Closing share price at year-end(e)......................................................... 17 1/2 17 1/2 Common stock price range during year(e).................................................... 13 7/8-22 1/8 12 5/8-18 1/4 Closing price/earnings ratio(f)............................................................ 13.3 13.3 1988 ---------------- Net sales.................................................................................. 183,888 Cost of sales.............................................................................. 105,991 Gross margin --%........................................................................... 42.4 Selling and administrative expenses........................................................ 59,646 % of net sales........................................................................... 32.4 Profit from operations..................................................................... 18,251 % of net sales........................................................................... 9.9 Other income and (expense)................................................................. 1,449 Income tax expense......................................................................... 8,126 % of earnings before income taxes........................................................ 41.2 Earnings before extraordinary gain and cumulative effect of accounting change.............. 11,574 % of net sales........................................................................ 6.3 Return on beginning shareholders' equity-- %.......................................... 16.6 Net earnings............................................................................... 13,263 PER SHARE DATA(e) Basic net earnings before extraordinary gain and cumulative effect of accounting change.... 1.09 Diluted net earnings before extraordinary gain and cumulative effect of accounting change.. 1.09 Basic net earnings......................................................................... 1.25 Diluted net earnings....................................................................... 1.25 Cash dividends............................................................................. .49 Shareholders' equity (ending).............................................................. 7.37 YEAR-END FINANCIAL POSITION Cash and cash equivalents.................................................................. 7,016 Total current assets....................................................................... 76,402 Property, plant, and equipment, net........................................................ 35,616 Total assets............................................................................... 117,013 Current liabilities excluding current debt................................................. 29,836 Current ratio excluding current debt....................................................... 2.6 Long-term liabilities excluding long-term debt............................................. 3,757 Financing debt Current.................................................................................. 1,722 Long-term................................................................................ 2,234 Total as % of total capital........................................................... 4.8 Shareholders' equity....................................................................... 77,998 CASH FLOW Increase (Decrease) Related to operating activities............................................................ 18,614 Related to investing activities............................................................ (9,140) Related to financing activities............................................................ (5,730) OTHER DATA Interest income............................................................................ 2,023 Interest expense........................................................................... 401 Depreciation and amortization expense...................................................... 7,900 Net expenditures for property, plant, and equipment........................................ 9,121 Number of employees at year-end............................................................ 1,726 Total direct compensation.................................................................. 58,637 Profit sharing and all other employee benefits............................................. 15,245 Average shares outstanding(e).............................................................. 10,592 Closing share price at year-end(e)......................................................... 13 1/8 Common stock price range during year(e).................................................... 11 1/4-16 3/8 Closing price/earnings ratio(f)............................................................ 12.0
33 INVESTOR INFORMATION ANNUAL MEETING The annual meeting of Tennant Company will be held at 10:30 a.m. on Thursday, May 6, 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, 1998, 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 ------------------------------------------------------- 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 1998 34.75-41.13 40.75-44.81 37.00-44.50 33.00-41.25
DIVIDEND INFORMATION Cash dividends on Tennant's common stock have been paid for 55 consecutive years, and the Company has increased dividends in each of the last 27 years. Dividends generally are declared each quarter. Following are the record dates anticipated for 1999: June 1, 1999 September 1, 1999 December 16, 1999 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 651-450-4064 - 1-800-468-9716 10-K OFFER AND OTHER INVESTOR INFORMATION A copy of Tennant's 1998 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 John T. Pain, 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, CHAIRMAN* JANET M. DOLAN, 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, CHIEF EXECUTIVE OFFICER BLUE CROSS & BLUE SHIELD OF MINNESOTA, ST. PAUL, MINNESOTA DELBERT W. JOHNSON, CHAIRMAN, CO-CHIEF EXECUTIVE OFFICER PIONEER METAL FINISHING, MINNEAPOLIS, MINNESOTA PAMELA K. KNOUS, EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER, SUPERVALU INC., MINNEAPOLIS, MINNESOTA WILLIAM I. MILLER, CHAIRMAN IRWIN FINANCIAL CORPORATION, COLUMBUS, INDIANA EDWIN L. RUSSELL, CHAIRMAN, PRESIDENT, CHIEF EXECUTIVE OFFICER MINNESOTA POWER, DULUTH, MINNESOTA OFFICERS JANET M. DOLAN, PRESIDENT, CHIEF EXECUTIVE OFFICER* JAMES H. MOAR, CHIEF OPERATING OFFICER* DOUGLAS R. HOELSCHER, SENIOR VICE PRESIDENT RICHARD M. ADAMS, VICE PRESIDENT THOMAS J. DYBSKY, VICE PRESIDENT JOHN T. PAIN, VICE PRESIDENT, TREASURER, AND CHIEF FINANCIAL OFFICER KEITH D. PAYDEN, VICE PRESIDENT WILLIAM R. STRANG, VICE PRESIDENT STEVEN K. WEEKS, VICE PRESIDENT BRUCE J. BORGERDING, DEPUTY GENERAL COUNSEL AND CORPORATE SECRETARY DEAN A. NIEHUS, CORPORATE CONTROLLER AND PRINCIPAL ACCOUNTING OFFICER *EFFECTIVE APRIL 5, 1999 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 EX-23.1 7 EXHIBIT 23.1 [LETTERHEAD] INDEPENDENT AUDITORS' REPORT AND CONSENT The Board of Directors and Shareholders Tennant Company: The audits referred to in our report dated February 9, 1999, included the related financial statement schedule for each of the years in the three-year period ended December 31, 1998, 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 herein. 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, and No. 333-51531, on Form S-8, relating to the Castex Incorporated Employees' Retirement Savings Plan and Trust, of our reports dated February 16, 1999, relating to the consolidated balance sheets of Tennant Company as of December 31, 1998 and 1997, and the related consolidated statements of earnings and comprehensive earnings, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, and the related financial statement schedule, which reports appear in or are incorporated by reference in the December 31, 1998 annual report on Form 10-K of Tennant Company. /s/ KPMG PEAT MARWICK LLP Minneapolis, Minnesota March 25, 1999 EX-27.1 8 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFO EXTRACTED FROM THE CONSOLIDATED STATEMENT OF EARNINGS AND COMPREHENSIVE EARNINGS FOR THE YEAR ENDED DEC 31, 1998 & THE CONSOLIDATED BALANCE SHEET AS OF DEC 31, 1998, PAGES 18 & 19, FOOTNOTE 2, PG 23, FOOTNOTE 7, PG 24 OF THE COMPANY'S 1998 ANNUAL REPORT TO SHAREHOLDERS & IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 17,693 0 80,191 2,956 46,162 150,868 169,515 102,875 239,098 60,809 23,038 0 0 3,421 127,846 239,098 389,388 389,388 223,589 223,589 0 944 2,292 39,092 13,767 25,325 0 0 0 25,325 2.67 2.67
-----END PRIVACY-ENHANCED MESSAGE-----