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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997. COMMISSION FILE NUMBER 0-4804
TENNANT COMPANY
INCORPORATED IN THE STATE OF MINNESOTA EMPLOYER IDENTIFICATION NUMBER 41-0572550
701 NORTH LILAC DRIVE, P.O. BOX 1452, MINNEAPOLIS, MINNESOTA 55440
TELEPHONE NUMBER 612-540-1208
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK, PAR VALUE $.375 PER SHARE
AND
PREFERRED SHARE PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. [ X ]
$362,300,138 is aggregate market value of common stock held by
non-affiliates as of March 9, 1998.
9,661,337 shares outstanding at March 9, 1998
DOCUMENTS INCORPORATED BY REFERENCE
1997 Annual Report to Shareholders - Part I (Partial), Part II (Partial), and
Part IV (Partial)
1998 Proxy - Part III (Partial)
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TENNANT COMPANY
1997
ANNUAL REPORT
FORM 10-K
(PURSUANT TO SECURITIES EXCHANGE ACT OF 1934)
PART I
Part I is included in the Tennant Company 1997 Annual Report to Shareholders
(to the extent specific pages are referred to on the Cross Reference Sheet)
and is incorporated in this Form 10-K Annual Report by reference, except Item
3 -"Legal Proceedings," of which there were no material legal proceedings
pending, and Item 4 - "Submission of Matters to a Vote of Security Holders"
during the fourth quarter, of which there were none.
GENERAL DEVELOPMENT OF BUSINESS
Tennant Company, a Minnesota corporation incorporated in 1909, is a
Minneapolis-based company that specializes in the design, manufacture, and
sale of non-residential floor maintenance equipment and related products. On
February 1, 1994, the Company acquired the business and assets of Castex
Industries, Inc., a privately owned manufacturer of commercial floor
maintenance equipment.
INDUSTRY SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS, AND EXPORT SALES
The Company, as described under "General Development of Business," has one
business segment. The Company sells its products domestically and
internationally. Appropriate financial information is provided in the
Company's 1997 Annual Report to Shareholders, page 24, footnote 2. Nearly all
of the Company's foreign investment in assets reside within Australia,
Canada, Japan, Spain, The Netherlands, the United Kingdom, France, and
Germany. While subject to increases or decreases in value over time due to
foreign exchange rate movements, these investments are considered to be of
low business risk.
PRINCIPAL PRODUCTS, MARKETS, AND DISTRIBUTION
Products consisting mainly of motorized cleaning equipment and related
products, including floor cleaning and preservation products, are sold
through a direct sales organization and independent distributors in North
America, primarily through a direct sales organization in Australia, France,
Spain, The Netherlands, Germany, and the United Kingdom, and through
independent distributors in more than 40 foreign countries. Additional
information pertaining to products and marketing methods is included in the
1997 Annual Report to Shareholders, pages 4, 5, 6, 7, 8, 9, 10, 11, 12 and 13.
RAW MATERIALS AND PURCHASED COMPONENTS
The Company has not experienced any significant or unusual problems in the
purchase of raw materials or other product components and is not
disproportionately dependent upon any single source or supply. The Company
has some sole-source vendors for certain components, primarily for automotive
and plastic parts. A disruption in supply from such vendors may cause a
short-term disruption in the Company's operations. However, the Company
believes that it can find alternate sources in the event there is a
disruption in supply from such vendors.
PATENTS AND TRADEMARKS
The Company applies for and is granted United States and foreign patents and
trademarks in the ordinary course of business, no one of which is of material
importance in relation to the business as a whole.
SEASONALITY
Although the Company's business is not seasonal in the traditional sense,
revenues and earnings tend to concentrate in the fourth quarter of each year
reflecting the tendency of customers to increase capital spending during such
quarter, and the Company's efforts to close orders and reduce order backlogs.
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WORKING CAPITAL PRACTICES
The Company's working capital practices are described in the 1997 Annual
Report to Shareholders, Management's Financial Discussion and Analysis,
Financial Position section on pages 15, 16 and 17.
MAJOR CUSTOMERS
The Company sells its products to a wide variety of customers, no one of
which is of material importance in relation to the business as a whole.
BACKLOG
The Company routinely fills orders within 30 days on the average.
Consequently, order backlogs are not indicative of future sales levels.
COMPETITIVE POSITION
While there is no industry association or industry data, the Company
believes, through its own market research, that it is a world-leading
manufacturer of floor maintenance equipment. Active competition exists in
most geographic areas; however, it tends to originate from different sources
in each area, and the Company's market share is believed to exceed that of
the leading competitor in many areas. The Company competes primarily on the
basis of offering a broad line of high-quality, innovative products supported
by an extensive sales/service network in major markets.
PRODUCT RESEARCH AND DEVELOPMENT
The Company regularly commits what is believed to be an above-average amount
of resources to product research and development. These amounts are reported
on the Company's 1997 Annual Report to Shareholders, page 24, footnote 3. A
description of product development is included in the 1997 Annual Report to
Shareholders on pages 4, 5, 6, 7, 8, 9, 10, 11, 12 and 13.
ENVIRONMENTAL PROTECTION
Compliance with federal, state and local provisions regulating the discharge
of materials into the environment, or otherwise relating to the protection of
the environment, has not had, and is not expected to have, a material effect
upon the Company's capital expenditures, earnings or competitive position.
EMPLOYMENT
Year-end employment is reported in the 1997 Annual Report to Shareholders on
page 30.
EXECUTIVE OFFICERS OF THE REGISTRANT
Richard M. Adams, Vice President
Richard M. Adams (50) joined the Company in 1974. He was elected
Assistant Controller in 1983 and was named Corporate Controller in 1986.
Mr. Adams was named Vice President, Global Accounts in 1993. Mr. Adams is
a Certified Public Accountant. The President and Chief Executive Officer
of the Company, Roger L. Hale, is the first cousin of Mr. Adams. Mr. Adams
is a director of Tennant UK Limited, Holding B.V., Tennant Europe B.V.,
Tennant Japan, and Castex Incorporated.
Bruce J. Borgerding, Deputy General Counsel and Corporate Secretary
Bruce J. Borgerding (47) joined the Company in 1988 as Assistant General
Counsel. He was named Deputy General Counsel and Corporate Secretary in
1995. Mr. Borgerding is a director of Tennant UK Limited, Tennant Holding
B.V., Tennant Europe B.V., Tennant N.V., Tennant Japan, and Tennant Company
Far East Headquarters Pte Ltd.
Paul E. Brunelle, Vice President
Paul E. Brunelle (57) joined the Company in 1965. In 1987 he was elected
Vice President of Personnel Resources. Prior to joining the Personnel
Resources Department in 1985, he was General Manager of the Company's
former Brazilian operations. Mr. Brunelle is the President of the Tennant
Company Foundation and a director of Tennant N.V.
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Janet M. Dolan, Executive Vice President
Janet M. Dolan (48) joined the Company in 1986. Ms. Dolan was appointed
General Counsel and Secretary in 1987, Vice President in 1990, Senior Vice
President in 1995, and Executive Vice President in 1996. She is a director
of Castex Incorporated. She is also a director of Donaldson Company, Inc.
Roger L. Hale, President and Chief Executive Officer
Roger L. Hale (63) joined the Company in 1961. Mr. Hale was named Vice
President in 1969 and elected a director in 1969. Mr. Hale was named
President and Chief Operating Officer in 1975, and subsequently named Chief
Executive Officer in 1976. He also is a director of U.S. Bancorp.
Douglas R. Hoelscher, Senior Vice President
Douglas R. Hoelscher (59) joined the Company in 1973. He was named Vice
President in 1978 and Senior Vice President in 1995. He is a Registered
Professional Engineer.
John T. Pain, Corporate Controller and Principal Accounting Officer
John T. Pain (49) joined the Company in 1984 as Corporate Tax Manager.
He was named Assistant Treasurer in 1986 and Corporate Controller and
Principal Accounting Officer in 1997. Mr. Pain is a Certified Public
Accountant. He is a director of Castex Incorporated and Tennant Company
Far East Headquarters Pte Ltd.
Keith D. Payden, Vice President
Keith D. Payden (50) joined the Company in 1981. He was named Director,
Information Services in 1987, Chief Information Officer in 1992, and Vice
President in 1993.
Richard A. Snyder, Vice President, Treasurer and Chief Financial Officer
Richard A. Snyder (58) joined the Company in 1981 as Controller. He was
elected Treasurer and Chief Financial Officer in 1982 and named Vice
President in 1985. Mr. Snyder is a Certified Public Accountant. He is a
director of Tennant N.V.
William R. Strang, Vice President
William R. Strang (61) joined the Company in 1969. He was named Director,
Corporate Marketing in 1987 and Vice President, Corporate Marketing in
1992. Mr. Strang is a director of Tennant Europe B.V., Tennant Holding
B.V., Tennant Japan, and Tennant Company Far East Headquarters Pte Ltd.
Steven K. Weeks, Vice President
Steven K. Weeks (42) joined the Company in 1984. He was named Manager,
Global New Business and Marketing Development in 1993, Director of
Marketing in 1994, and Vice President, Customer Solutions in 1996.
PART II
Part II is included in the Tennant Company 1997 Annual Report to Shareholders
(to the extent specific pages are referred to on the Cross Reference Sheet)
and is incorporated in this Form 10-K Annual Report by reference, except Item
9, "Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure," of which there were none.
PART III
Part III is included in the Tennant Company 1998 Proxy (to the extent
specific pages are referred to on the Cross Reference Sheet) and is
incorporated in this Form 10-K Annual Report by reference, except Item 13 -
"Certain Relationships and Related Transactions," of which there were none,
and Item 10 - "Directors and Executive Officers of the Registrant" as it
relates to executive officers. Identification of executive officers is
included in Part I of this Form 10-K Annual Report.
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PART IV
Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
A. The following documents are filed as a part of this report:
1. Financial Statements
The following consolidated financial statements and independent
auditors' report are included on pages 18 through 29 of the Tennant
Company 1997 Annual Report to Shareholders and are incorporated in
this Form 10-K Annual Report by reference:
a. Consolidated Statements of Earnings for each of the years in
the three-year period ended December 31, 1997 - page 18.
b. Consolidated Balance Sheets as of December 31, 1997 and 1996
- page 19.
c. Consolidated Statements of Cash Flows for each of the years in
the three-year period ended December 31, 1997 - page 20.
d. Consolidated Statements of Shareholders' Equity for each of
the years in the three-year period ended December 31, 1997 -
page 21.
e. Independent Auditors' Report of KPMG Peat Marwick LLP - page 22.
f. Notes to Consolidated Financial Statements - pages 23 through 29.
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
(Dollars in Thousands)
<TABLE>
<CAPTION>
Additions
Balance at charged to Deductions
beginning costs and from Balance at
Allowance for doubtful accounts of year expenses reserves (1) end of year
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Year ended December 31, 1997 2,506 1,901 1,105 3,302
Year ended December 31, 1996 2,611 1,160 1,265 2,506
Year ended December 31, 1995 2,609 803 801 2,611
</TABLE>
(1) Accounts determined to be uncollectible and charged against
reserve, net of collections on accounts previously charged
against reserves.
All other schedules are omitted as the required information is
inapplicable or because the required information is presented in the
Consolidated Financial Statements in the Tennant Company 1997 Annual
Report to Shareholders.
3. Exhibits
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Item # Description Method of Filing
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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.
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10.1 Tennant Company 1988 Stock Incorporated by reference to Exhibit b.1 to the
Incentive Plan Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
10.2 Tennant Company 1992 Stock Incorporated by reference to Exhibit 4.4 to the
Incentive Plan Company's Registration Statement No. 33-59054, Form
S-8 dated March 2, 1993.
10.3 Tennant Company Restricted Incorporated by reference to Exhibit 4.5 to the
Stock Plan for Nonemployee Company's Registration Statement No. 33-59054,
Directors Form S-8, dated March 2, 1993.
10.4 Tennant Company 1995 Stock Incorporated by reference to Exhibit 4.4 to the
Incentive Plan Company's Registration Statement No. 33-62003,
Form S-8, dated August 22, 1995.
10.5 Tennant Company Restricted Incorporated by reference to Exhibit 10.2 to the
Stock Plan for Nonemployee Company's 1995 Second Quarter 10-Q filing dated
Directors, as amended and August 8, 1995.
restated effective
January 1, 1995
10.6 Tennant Company Excess Incorporated by reference to Exhibit 10.4 to the
Benefit Plan, as amended Company's Annual Report on Form 10-K for the fiscal
and restated effective year ended December 31, 1994.
January 1, 1994
10.7 Management Agreement with Incorporated by reference to Exhibit 10.7 to the
Steven K. Weeks dated Company's Annual Report on Form 10-K for the fiscal
November 19, 1996 year ended December 31, 1996.
10.8 Management Agreement with Incorporated by reference to Exhibit 10.8 to the
Tom Vander Bie dated Company's Annual Report on Form 10-K for the
November 19, 1996 fiscal year ended December 31, 1996.
10.9 Management Agreement with Incorporated by reference to Exhibit 10.6 to the
Richard M. Adams dated Company's Annual Report on Form 10-K for the fiscal
December 10, 1993 year ended December 31, 1993.
10.10 Management Agreement with Incorporated by reference to Exhibit 10.7 to the
Paul E. Brunelle dated Company's Annual Report on Form 10-K for the fiscal
December 8, 1987 year ended December 31, 1993.
10.11 Amendment to Management Incorporated by reference to Exhibit 10.8 to the
Agreement with Company's Annual Report on Form 10-K for the fiscal
Paul E. Brunelle dated year ended December 31, 1993.
June 21, 1989
10.12 1993 Amendment to Management Incorporated by reference to Exhibit 10.9 to the
Agreement with Company's Annual Report on Form 10-K for the fiscal
Paul E. Brunelle dated year ended December 31, 1993.
December 10, 1993
10.13 Management Agreement with Incorporated by reference to Exhibit b.5 to the
Janet M. Dolan dated Company's Annual Report on Form 10-K for the fiscal
June 21, 1989 year ended December 31, 1992.
10.14 1993 Amendment to Management Incorporated by reference to Exhibit 10.11 to the
Agreement with Janet M. Dolan Company's Annual Report on Form 10-K for the fiscal
dated December 10, 1993 year ended December 31, 1993.
10.15 Management Agreement with Incorporated by reference to Exhibit b.8 to the
Roger L. Hale dated Company's Annual Report on Form 10-K for the fiscal
March 10, 1987 year ended December 31, 1992.
10.16 Amendment to Management Incorporated by reference to Exhibit b.9 to the
Agreement with Roger L. Hale Company's Annual Report on Form 10-K for the fiscal
dated June 21, 1989 year ended December 31, 1992.
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10.17 1993 Amendment to Management Incorporated by reference to Exhibit 10.14 to the
Agreement with Roger L. Hale Company's Annual Report on Form 10-K for the fiscal
dated December 10, 1993 year ended December 31, 1993.
10.18 Management Agreement with Incorporated by reference to Exhibit b.10 to the
Douglas R. Hoelscher dated Company's Annual Report on Form 10-K for the fiscal
March 10, 1987 year ended December 31, 1992.
10.19 Amendment to Management Incorporated by reference to Exhibit b.11 to the
Agreement with Douglas R. Company's Annual Report on Form 10-K for the fiscal
Hoelscher dated June 21, 1989 year ended December 31, 1992.
10.20 1993 Amendment to Management Incorporated by reference to Exhibit 10.18 to the
Agreement with Douglas R. Company's Annual Report on Form 10-K for the fiscal
Hoelscher dated year ended December 31, 1993.
December 10, 1993
10.21 Management Agreement with Incorporated by reference to Exhibit 10.19 to the
Keith D. Payden dated Company's Annual Report on Form 10-K for the fiscal
December 10, 1993 year ended December 31, 1993.
10.22 Management Agreement with Incorporated by reference to Exhibit b.12 to the
Richard A. Snyder dated Company's Annual Report on Form 10-K for the fiscal
March 10, 1987 year ended December 31, 1992.
10.23 Amendment to Management Incorporated by reference to Exhibit b.13 to the
Agreement with Richard A. Company's Annual Report on Form 10-K for the fiscal
Snyder dated June 22, 1989 year ended December 31, 1992.
10.24 1993 Amendment to Management Incorporated by reference to Exhibit 10.22 to the
Agreement with Richard A. Company's Annual Report on Form 10-K for the fiscal
Snyder dated year ended December 31, 1993.
December 10, 1993
10.25 Management Agreement with Incorporated by reference to Exhibit 10.23 to the
William R. Strang dated Company's Annual Report on Form 10-K for the fiscal
December 10, 1993 year ended December 31, 1993.
10.26 Asset Purchase Agreement Incorporated by reference to Exhibit 2.1 to the
dated January 27, 1994, Company's Current Report on Form 8-K dated
between Tennant Company, February 15, 1994.
Castex Industries, Inc.,
Wayne Investment Corp. and
Wayne A. Streuer
13.1 Portions of 1997 Annual Filed herewith electronically.
Report to Shareholders
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21.1 Subsidiaries of the Registrant
Tennant Company has the
following subsidiaries:
Tennant Holding B.V. is
a wholly owned
subsidiary organized
under the laws of the
Netherlands in 1991. A
legal reorganization
occurred in 1991 whereby
Tennant N.V. became a
participating interest
of Tennant Holding B.V.
Tennant N.V. had
previously been a wholly
owned subsidiary
organized under the laws
of the Netherlands in
1970. Tennant
Maintenance Systems,
Limited, was a wholly
owned subsidiary,
organized under the laws
of the United Kingdom
until October 29, 1992,
at which time Tennant
Holding B.V. acquired
100% of its stock from
Tennant Company.
The name was formally
changed to Tennant UK
Limited on or about
October 16, 1996. Castex
Incorporated, is a wholly
owned subsidiary organized
under the laws of the state
of Michigan. The results of
these operations have
been consolidated into
the financial
statements, as indicated
therein.
23.1 Independent Auditors' Filed herewith electronically.
Report and Consent
27.1 Financial Data Schedule Filed herewith electronically.
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B. Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended
December 31, 1997.
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CROSS REFERENCE SHEET
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FORM 10-K REFERENCED LOCATION
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Part I, Item 1 - Business 1997 Annual Report to Shareholders Exhibit 13.1
Pages 2, 3, 4, 5, 6, 7, 8, 9, 10,
a. General 11, 12 and 13
b Lines of business, industry segments and Page 24, footnote 2
foreign and domestic operations
c. Working capital practices Pages 15, 16 and 17
d. Product research and development Pages 4, 5, 7, 8, 10, 11 and 13
Page 24, footnote 3
e. Employment Page 30
Part I, Item 2 - Properties 1997 Annual Report to Shareholders Exhibit 13.1
Page 25, footnote 7
Page 26, footnote 9
Inside back cover
Part II, Item 5 - Market for 1997 Annual Report to Shareholders Exhibit 13.1
the Registrant's Common a. Principal market Inside back cover
Equity and Related b. Quarterly data Page 24, footnote 4
Shareholder Matters Inside back cover
c. Number of shareholders Inside back cover
d. Dividends Page 24, footnote 4
Inside back cover
Part II, Item 6 - Selected 1997 Annual Report to Shareholders Exhibit 13.1
Financial Data Pages 30 and 31
Part II, Item 7 - Management's 1997 Annual Report to Shareholders Exhibit 13.1
Discussion and Analysis of Pages 14 to 17
Financial Condition and
Results of Operations
Part II, Item 8 - Financial 1997 Annual Report to Shareholders Exhibit 13.1
Statements and Supplementary Pages 18 to 29
Data
Part III, Item 10 - Directors 1998 Proxy Pages 3 to 7
and Executive Officers of the
Registrant
Part III, Item 11 - Executive 1998 Proxy Pages 8 to 14
Compensation
Part III, Item 12 - Security 1998 Proxy Pages 2 and 5
Ownership of Certain
Beneficial Owners and
Management
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
TENNANT COMPANY
By - /s/ Roger L. Hale By - /s/ William A. Hodder
Roger L. Hale, President, William A. Hodder
Chief Executive Officer, Board of Directors
and Board of Directors
Date - March 26, 1998
Date - March 26, 1998
By - /s/ Delbert W. Johnson
By - /s/ Richard A. Snyder Delbert W. Johnson
Richard A. Snyder Board of Directors
Vice President, Treasurer, and
Chief Financial Officer Date - March 26, 1998
Date - March 26, 1998 By - /s/ William I. Miller
William I. Miller
By - /s/ John Pain Board of Directors
John T. Pain
Corporate Controller and Date - March 26, 1998
Principal Accounting Officer
By - /s/ Edwin L. Russel
Date - March 26, 1998 Edwin L. Russell
Board of Directors
By - /s/ Arthur D. Collins, Jr.
Arthur D. Collins, Jr. Date - March 26, 1998
Board of Directors
Date - March 26, 1998
By - /s/ Davic C. Cox
David C. Cox
Board of Directors
Date - March 26, 1998
By - /s/ Andrew P. Czajkowski
Andrew P. Czajkowski
Board of Directors
Date - March 26, 1998
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TO OUR SHAREHOLDERS
1997 was a fine year at Tennant: sales up 8% to $372 million, earnings per
diluted share rose 15% to $2.41, and operating margin increased to 9.7% from
9.2% the prior year. All this occurred in the face of an exceptionally strong
dollar, which reduced translated sales by $8.4 million and net earnings by an
estimated $1.8 million, or 18 cents per share. We obviously were helped a
great deal by very good economic conditions in the U.S., improving conditions
in Europe, and no big problems in the rest of the world. However, the most
satisfying part of 1997's results was that they reflected the significant
changes going on at Tennant.
MEETING THE PREEMINENCE 2000 CHALLENGES
Tennant is both an old company--started in 1870--and a new, revitalized
company--starting in 1992. At that time, we had come through 10 tough years
for U.S. manufacturers. We had a respectable record, had improved our product
quality, invested in new products and information technology, kept the
balance sheet strong, and raised the dividend every year. But we had not
grown as much as we would have liked, nor had we reached our full
profit-making potential.
In 1992, we set goals for the year 2000, called "Preeminence 2000" or
"P-2000" for short, aimed at greater customer satisfaction, stronger growth,
and higher profitability. P-2000 led us to challenge each area of our
business and take action to improve. The results have been falling in place
each year and are very satisfying:
- - For industrial equipment, our core business, we dramatically increased the
pace of new product development, bringing great value to the marketplace
and putting relentless pressure on our competitors. These new and updated
products have been outstanding successes, giving more features and benefits
at lower prices, and so far sales have exceeded our forecasts. In 1998, we
will release four new products: a record for us and a near impossible pace
for our competition.
- - For commercial equipment, our P-2000 challenge led to the very successful
Castex acquisition in early 1994, followed by the smaller acquisition of
Eagle in late 1994. Although these companies were solid contributors from
the start, the first couple of years were devoted to integration issues
that are now behind us. More recently, we have been able to focus on
commercial equipment growth in large corporate accounts and international
markets, with very good results.
- - Floor coatings, which now represent about 6% of our total revenues, also
went through a transformation as part of P-2000. We got out of the
contracting business and established solid partner relationships with
independent contractors throughout the U.S., Mexico, and Canada. Our
overall floor coatings growth since 1992 has been 9% compounded, and our
progress in the second half of 1997 gives us encouragement that 1998 will
be an excellent year for this profitable piece of our company.
What is most important about all this is that it was not happenstance. It
was the result of a determination to evolve from a good company to a great
one by:
- - World-class customer satisfaction, resulting from exciting new products,
outstanding customer service, and careful monitoring of our customer
service processes.
- - Energized, well-trained and well-supported employees at all levels. After
all, how can
- ------------------------------------------------------------------------------
[Photo of former Tennant Company President, George T. Pennock]
George T. Pennock
1912 - 1998
We note with great sadness the passing of George Pennock, grandson of our
founder and former President and Chairman of Tennant. During his 43-year career
at Tennant, George Pennock embedded in our culture a great regard for employees,
sound financial policies, and a spirit of Internationalism which are core values
for us today.
We will all miss his wit, wisdom, and business acumen.
- ------------------------------------------------------------------------------
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customers be happy if our employees are not? Along that line, we were very
honored to be on FORTUNE Magazine's list of the "100 Best Companies in
America to Work For."
- - Strategic use of information technology based on a companywide "enterprise"
computer system (SAP's R/3). We now are starting the fourth year of this
five-year project. By year-end, a number of significant parts of this
comprehensive system will be in full, day-to-day use.
- - Outstanding financial strength. Our balance sheet is strong; our ratios are
excellent. In 1997, we raised the dividend for the 26th consecutive year,
returned $21 million to shareholders in the form of dividends and stock
repurchases, funded $17 million of capital equipment purchases, and
increased cash on hand by 60% to $16 million.
ORGANIZATIONAL CHANGE
A major project in the past few years has been developing greater bench
strength in top management. We are a specialized company with a very strong
position in various nonresidential floor cleaning niches. Because our
greatest opportunities lie in leveraging our products and markets, we needed
to focus on broadening and deepening our management base. 1996 was consumed
with a market and organizational study. This resulted in some reorganization
in the fall of 1996. The distraction of this change is behind us, and the new
teams are working well together. 1997 results reflect this, and 1998 should
benefit even further.
CAPITALIZING ON THE OPPORTUNITIES OF 1998
In short, 1997 was a very satisfying year at Tennant. Economic conditions
were good and specific measures we had taken in the previous few years
positioned us to "make hay while the sun shines."
Will the sun be shining in 1998? We believe it will in North America. Our
products, people, and processes, combined with continued although somewhat
more modest economic growth, will keep the momentum going. In Europe, we had
an excellent year in 1997. The many organizational and process changes made
in 1995 and 1996 settled down and now are working to our advantage. We
believe European economic conditions in 1998 are improving, and we are ready
to benefit from them.
Asia is the cloud on the horizon. Only 5% of our total revenues came from
this region in 1997. In the future, we expect stronger growth because we
recently increased our long-term commitment there by opening an office and
warehouse in Singapore, and established partnerships to promote our
commercial floor care products through common distribution. Some areas of our
business, especially industrial equipment, will have a tougher time in 1998
in such countries as Korea, Malaysia, and Thailand. However, our overall
strategy is very straightforward:
- - Support our distribution in every way possible.
- - Continue to build better products and processes for this vital part of the
world.
This strategy has served us well in Mexico, where we now are stronger than
ever. It will serve us well in Asia, which will be a great growth market for
us as we enter the 21st century.
We finished 1997 with somewhat higher backlogs and strong order growth in
key markets. With this in mind, and the consensus view that the Asian
financial crisis will have only a modest effect on the world's major
economies, we believe Tennant is positioned to achieve another year of record
financial performance, creating above-average value for our shareholders.
[Photo of Tennant Company President]
Roger L. Hale
President, Chief Executive Officer
March 25, 1998
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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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
PRODUCT LINES PRODUCTS
- --------------------------------------------------------------------------------
<S> <C> <C>
INDUSTRIAL FLOOR Products to clean
MAINTENANCE EQUIPMENT surfaces with vehicle and
heavy foot traffic such
as:
- factories,
[Photo of Industrial warehouses,
Floor Maintenance stadiums, airport
Equipment] hangars, parking
garages, and outside
areas.
- sweepers and
scrubbers:
- walk-behinds
- indoor riders
- outdoor vehicles
- --------------------------------------------------------------------------------
COMMERCIAL FLOOR Products to clean
MAINTENANCE EQUIPMENT surfaces with foot
traffic such as:
- schools, hospitals,
office buildings,
[Photo of Commercial supermarkets, retail
Floor Maintenance outlets and airport
Equipment] terminals.
- walk-behind
scrubbers and
sweepers, carpet
extractors,
burnishers, buffers,
polishers, and other
specialized
equipment.
- --------------------------------------------------------------------------------
FLOOR COATINGS Products that treat,
repair, and upgrade
concrete and wood floors.
[Photo of Factory Specialty products are
Floor] available for areas with
chemical exposure or
odor-sensitivity.
Generally used in
industrial settings such
as factories and
warehouses.
Applied by customer or
authorized contractor.
- --------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
[Pie chart showing breakdown of 1997 sales into Europe (15%), World Export
(11%), and North America Sales (74%). North America Sales are broken out further
into Commercial (18%), Industrial (50%), and Floor Coatings (8%). Europe
Sales are broken out into Commercial (2%), and Industrial (13%). World Export
Sales are broken out into Commercial (2%) and Industrial (9%).]
1997 SALES
<TABLE>
<CAPTION>
COMPETITIVE GROWTH
MARKETS SALES/SERVICE STRENGTHS STRATEGIES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
World market for Direct Market leadership Maintain product
equipment and sales/service in worldwide. leadership.
aftermarket the United States,
estimated at $750 Australia, Canada, Broadest line of Capitalize on
million. France, Germany, quality products unique direct
The Netherlands, resulting from sales/service
Market share Spain, and the industry-leading force in eight
greater than 50% United Kingdom. commitment to countries and
in segments such innovation and strong distributor
as manufacturing, Well-established, quality. network in 45
warehousing, full-service others.
distribution, and distributor Strong
government. network in 45 sales/service Offer total floor
other countries support on a cleaning
including Japan worldwide basis. solutions.
and most countries
in Europe not Manufacturing
served directly. facilities in the
United States and
Europe.
- --------------------------------------------------------------------------------
World market for Broad geographic Strong position in Expand and upgrade
equipment and coverage in North North American an already broad
aftermarket America through a market. product line.
estimated at $2 full-service
billion. distributor Complete line of Target large
network. quality products national/
Sold under Castex, with a history of multinational
Nobles, Eagle, and Expanding full- innovation. businesses with a
Tennant brand service focus on continued
names, depending distributor Reputation for rapid growth
on the product and network providing a high internationally.
geographic area. internationally. level of support
to distributors. Offer total floor
Among the leaders cleaning
in North America; solutions.
small but rapidly
growing
internationally.
- --------------------------------------------------------------------------------
North American Sold by Tennant's Broad line of Continue to
market for direct sales force coatings, sealers, develop leading-
industrial in North America and resurfacers edge products and
coatings estimated as a complementary including an services.
at $150 million, product to environmentally
excluding industrial floor safe floor coating Provide
application labor. maintenance system (Eco- application
equipment. Coatings-TM- and support that
Market share Eco-Prep-TM-). enables expected
estimated at about Also sold by results whether
one-sixth of total Tennant's In-house chemistry customers apply
market, but higher independent lab that the coating
in coatings contractor formulates themselves or have
segment. network. products and it done by an
oversees their authorized
production and contractor.
application.
Offer total floor
cleaning
solutions.
- --------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
[Photo Janet M. Dolan, Executive Vice President]
JANET M. DOLAN,
EXECUTIVE VICE PRESIDENT
"FOR MANY YEARS, NORTH AMERICAN MARKETS WERE CONSIDERED 'MATURE.' THIS WAS TRUE
AS LONG AS WE CONCENTRATED ON PRODUCTS RATHER THAN CUSTOMERS. NOW THAT WE ARE
FOCUSING MORE ON CUSTOMERS, WE BELIEVE THE OPPORTUNITIES ARE TREMENDOUS."
REINVIGORATING OUR APPROACH TO A KEY MARKET
Tennant gained leadership in North America by developing a broad line of
products known for their quality, then marketing them through a strong direct
sales force and distributor network. Several years ago, we began to focus on
customer partnerships. While this represented progress, we knew we needed to
stretch further.
More recently, we decided the best way to reinvigorate our growth would be
to eliminate the internal barriers between industrial, commercial, and floor
coatings sales and service, which were operating independently of each other,
in order to take advantage of cross-selling opportunities.
The Industrial Markets and Commercial Markets divisions continue to
directly serve their traditional customer base. However, we are testing a
program that brings commercial distributors and industrial direct sales and
service forces together in order to better market our full product line to
both customer groups. In addition, we have established two divisions, Global
Markets and Customer Solutions, that market our products and services to
specific groups of customers with unique needs not previously met by our
product-line focused divisions (e.g., a customer that wants products from
more than one of our lines plus support services such as training or advice
on cleaning methodologies).
By more integration of our products, services, and channels, Tennant will
be able to capitalize on many more opportunities than previously. This is
being supported by our investment in technology. Soon we will be able to
capture more information on our customers, analyze it more effectively, and
share it across the company. Our use of technology will enhance our advantage
by allowing us to serve customers faster. This is critical as customers
demand more from their suppliers.
[Photo Richard M. Adams, Vice President]
RICHARD M. ADAMS,
VICE PRESIDENT
"CONTRACTS WITH LARGE NATIONAL/MULTINATIONAL FIRMS OFFER A GROWTH OPPORTUNITY.
WE ARE MAKING THESE ACCOUNTS A PRIORITY NOW THAT WE HAVE TWO IMPORTANT ITEMS
THESE COMPANIES WANT: A BROAD LINE OF QUALITY PRODUCTS, AND SUPPORT SERVICES
AVAILABLE THROUGHOUT NORTH AMERICA."
[Photo Tennant Model 7400]
This Tennant Model 7400 helps keep the streets of downtown Richmond,
Virginia, cleaner and safer.
6
<PAGE>
INDUSTRIAL MARKET
Tennant is the acknowledged leader in the industrial market, both
domestically and internationally. In North America, Tennant holds more than a
50% share of the cleaning equipment market which is about three times that of
our nearest competitor.
INDUSTRIAL MARKET TRENDS
A number of industry trends are returning this to a growth market for us:
- - A new growth area for Tennant is in the urban downtown outdoor market.
These commercial centers recognize that to attract people and maintain
business they need to provide a clean and safe environment in which to
work, shop and play. Thousands of quasi-government associations across the
country are looking for partners to provide them with the cleaning
solutions they need to meet their vision of cleaner and safer urban
communities. Tennant is well positioned to be that partner with its
extensive product line supported by its nationwide sales and service
network.
- - Businesses want cleaner and safer indoor and outdoor environments as well.
Reasons include a focus on quality, which starts with clean workplaces, and
the Environmental Protection Agency's increased environmental regulations
which are requiring many businesses to comply with stronger standards for
cleanliness.
- - Many businesses are outsourcing operational activities. In our case, this
is increasing the number of contract cleaners who handle facility
maintenance--and are interested in our products.
- - Businesses of all kinds are reducing the number of vendors they use. In
general, they are looking for suppliers with a broader product offering
and, in many cases, a global reach to handle their needs.
- - In North America, demand is moving from sweeping (picking up debris only)
to sweeping and scrubbing (actually cleaning the surface after it has been
swept). This is reflected in Tennant's sales. Twenty years ago scrubbers
generated less than 20% of our industrial equipment sales in this market.
By 1997, this has increased to more than 50%.
- - The demand is increasing for machines that are easier to maintain and
operate so people at all skill levels can use them.
[Photo Douglas R. Hoelshcer, Senior Vice President]
DOUGLAS R. HOELSCHER,
SENIOR VICE PRESIDENT
"THE INDUSTRIAL GROUP HAS BEEN TENNANT'S LARGEST BUSINESS FOR DECADES. IN 1997,
A COMBINATION OF HARD WORK IN DIRECT SALES AND SERVICE, AND AN EXCELLENT NEW
PRODUCT PROGRAM, MADE THE NORTH AMERICAN OPERATION THE FASTEST GROWING, TOO."
[Photo Tennant Model 7200]
The new compact Model 7200 has quickly become one of Tennant's most popular
machines.
7
<PAGE>
INDUSTRIAL MARKET (CONT'D)
OFFER WIDEST LINE OF INDUSTRIAL PRODUCTS
These machines clean areas with vehicle or heavy foot traffic. They come
in walk-behind and rider units with prices that range from $7,500 to $90,000.
Tennant offers three types of products, all of which carry the strongest
warranties in the industry:
- - SWEEPERS remove wet or dry debris, and control dust during this process.
- - SCRUBBERS lay down cleaning solution, scrub the surface, then remove the
dirty solution--all in one pass.
- - COMBINATION SWEEPER/SCRUBBERS perform both functions at the same time, also
in one pass.
Industrial products for North America are developed and manufactured in
our Minneapolis, Minnesota, facility, which is ISO 9001 quality certified.
(Products are also exported from this facility to our various international
markets.)
We devote an industry-leading amount to product engineering. Through the
use of process improvement and technology, we have been able to cut the
product development cycle in half in recent years. This has allowed us to
introduce no fewer than two and as many as four new or significantly updated
products each year. The end result is quite significant--nearly 90% of our
1997 machine sales were generated by products introduced in the last five
years.
New product introductions this year centered on smaller machines to reach
markets where we had not been traditionally as strong.
In 1998, we will continue our aggressive product introduction program.
UNIQUE DIRECT SALES/SERVICE FORCE
For the most part, our competitors use distributors to sell and service
their industrial products. Tennant, on the other hand, sells exclusively
through a direct sales and service network in North America. This gives us a
significant competitive edge in the sale of larger industrial equipment.
OUTPERFORMING THE INDUSTRIAL MARKET
All of these strategies, backed by a good economy, allowed Tennant to
increase its orders of industrial machines in North America by 18% in 1997.
This indicates there are many opportunities for growth in this market--and
Tennant as the industry leader is capitalizing on them.
NORTH AMERICAN INDUSTRIAL EQUIPMENT SALES
[Bar Graph]
Industrial Sales in Millions
<TABLE>
<CAPTION>
Year North America
<S> <C>
1990 120
1991 112
1992 120
1993 130
1994 147
1995 158
1996 166
1997 186
</TABLE>
[Photo of Tennant Model 8010]
The new Model 8010 doubles cleaning productivity by sweeping and scrubbing at
the same time.
8
<PAGE>
COMMERCIAL MARKET
Tennant holds an estimated 15% share of the North American commercial
cleaning equipment market, with most of that through its Castex Inc.
subsidiary. Since joining Tennant in 1994, Castex has advanced to being among
the top three companies in the market. (On a combined basis, we estimate that
the top three competitors hold somewhat more than 50% of the total market.)
A number of trends are driving growth in this market:
- - Businesses and institutions that directly service the public on their
premises are being driven by a consumer preference for clean, safe
facilities; and employers are focusing on quality and productivity
improvement which begins with a clean workplace.
- - There also are two trends specific to the commercial market:
- The service sector--the primary purchaser of commercial equipment--is
the fastest growing part of the economy.
- Businesses want to reduce the potential liability of wet or dirty
public places.
The commercial floor maintenance industry is experiencing consolidation,
which bodes well for Tennant:
- - Smaller manufacturers are being acquired by larger firms or closing their
doors. This has presented Tennant with acquisition opportunities in recent
years, and it has raised entry barriers as the size of competitors has
increased.
- - Distributors--the main channel for selling and servicing commercial
equipment--are undergoing consolidation. This means the ones that remain
will be stronger and will
[Photo of Thomas J. Vander Bie, President, Castex Incorporated]
THOMAS J. VANDER BIE,
PRESIDENT, CASTEX INCORPORATED
"MORE THAN ANY OTHER COMPANY IN THE INDUSTRY, WE ARE POISED TO SIGNIFICANTLY
IMPROVE OUR COMPETITIVE POSITION. WE HAVE THE RIGHT PRODUCTS, PROGRAMS AND
RELATIONSHIPS WITH THE BEST DISTRIBUTORS. AS WE BEGIN TO WORK MORE SUCCESSFULLY
WITH THE INDUSTRIAL MARKETS DIVISION, NONE OF OUR COMPETITORS WILL BE ABLE TO
TOUCH US."
[Photo of Eagle Talon 2500 burnisher]
The growing contract-cleaning market relies on the Eagle Talon 2500 burnisher.
[Photo of Tennant equipment in use]
The Speed Gleam scrubber is vital to many retail cleaning operations.
9
<PAGE>
COMMERCIAL MARKET (CONT'D)
want to work with larger, more stable firms such as Castex.
EXPANDING BROAD PRODUCT LINE
We offer a complete line of commercial maintenance equipment:
- - SWEEPERS AND VACUUMS remove debris or water from virtually any surface.
- - AUTOMATIC SCRUBBERS clean grease and grime from hard surfaces, such as
floors with tile and grout. These machines remove virtually all of the
cleaning solution they apply to the floor, which is critical for avoiding
slip-and-fall injuries. They also are easy to operate and maneuver in tight
spaces.
- - CARPET EXTRACTORS apply a cleaning solution, scrub the carpet, then remove
the solution along with any dirt and grime.
- - BURNISHERS AND FLOOR MACHINES give scrubbed floors a shiny, high-gloss
appearance.
Castex products, which range in price from $300 to $7,000, are used by
hospitals, schools, shopping malls--any area that has heavy foot traffic.
These products are developed and manufactured in our Holland, Michigan,
facility.
After being acquired by Tennant in 1994, Castex's efforts were focused on
a successful integration of product lines and distribution. As a result,
engineering efforts concentrated mainly on product maintenance and
refinement. This has changed recently and will result in a more agressive
product introduction schedule in 1998 and beyond, which will help us gain
market share.
NORTH AMERICAN COMMERCIAL EQUIPMENT SALES
[Bar Graph]
Commercial Sales in Millions
<TABLE>
<CAPTION>
Year North America
<S> <C>
1990 9.5
1991 12.0
1992 13.0
1993 13.0
1994 4.0
1995 57.5
1996 63.0
1997 66.9
</TABLE>
[Photo of Tennant equipment in use]
Hotels and motels across North America rely on the Path Maker carpet vacuum.
[Photo of Tennant Model Scout 28]
The new Scout 28 sweeper can be found in schools throughout the country.
10
<PAGE>
FLOOR COATINGS MARKET
Tennant holds an estimated 15% share of the North American market for
industrial floor coatings, sealers and resurfacers. A competitive edge for
Tennant comes from the fact that we offer our coatings as a complementary
product to industrial floor cleaning equipment and, in fact, sell through the
same direct sales force.
FLOOR COATINGS MARKET TRENDS
There is a strong interest in coatings because they protect concrete and
wood floors from chemicals and wear, they make floors easier to clean, and
they create a working environment that improves employee morale and a
company's image.
DEVELOPING LEADING-EDGE PRODUCTS AND SERVICES
Tennant offers a broad product range:
- - DURABLE COATINGS for main traffic aisles and loading docks.
- - CHEMICAL-RESISTANT COATINGS for floors exposed to corrosive chemicals.
- - EPOXY RESURFACERS for damaged floors that need to have their smooth surface
restored.
- - ENVIRONMENTALLY SAFE COATINGS for odor-sensitive applications, such as food
processing facilities. Our unique Eco-Coatings-TM- line combines high
durability with little or no solvents.
- - ECO-PREP-TM- PROCESS for use by Tennant's authorized contractors to prepare
a floor for its new coating. Eco-Prep-TM- machines remove the old coatings
quickly and without using solvents. No one else offers as effective an
approach.
We develop the formulas for our coatings and oversee their production, and
we manufacture the Eco-Prep-TM- machines.
Our coatings are designed to address the major needs of our customers,
which include appearance, coating durability and life, ease of application,
and environmental impact. A primary objective of our product development in
recent years has been to meet or exceed the increasing government regulations
for waste control and emissions, even before these regulations go into effect.
FLOOR COATINGS IS A VITAL PART OF TOTAL SOLUTION
After experiencing a slow start to the year, our sales have been on a
stronger growth track, and we finished the year with record December
billings. We believe we can maintain this stronger growth as coatings become
a more important part in the total solution Tennant offers its customers.
NORTH AMERICAN INDUSTRIAL FLOOR COATINGS SALES
[Bar Graph]
Floor Coatings Sales in Millions
<TABLE>
<CAPTION>
Year North America
<S> <C>
1990 14.3
1991 13.0
1992 14.6
1993 14.8
1994 18.2
1995 20.7
1996 21.4
1997 22.7
</TABLE>
[Photo of Steven K. Weeks, Vice President]
STEVEN K. WEEKS,
VICE PRESIDENT
"IN 1997, WE FOCUSED ON LOWERING OUR COSTS, SIMPLIFYING OUR PRODUCT LINE WHILE
FILLING IN SOME OF THE GAPS, AND DEVELOPING BETTER SALES TOOLS. WE EXPECT TO
BEGIN SEEING THE EFFECTS OF THIS EFFORT IN 1998."
[Photo of factory floor]
Tennant floor coatings help make this steel manufacturing plant a world-class
facility.
11
<PAGE>
TENNANT IN INTERNATIONAL MARKETS
Tennant has sold its products internationally since the 1950s. No single
competitor from the U.S. or any other country has Tennant's broad level of
international market penetration in floor maintenance equipment.
INTERNATIONAL FLOOR CLEANING TRENDS
A number of trends that cross country borders are driving the
international market:
- - More businesses in various industries are becoming global players and
therefore have global demands for the products and services they purchase.
- - Many businesses are turning to contract cleaners--local and multinational
firms--to handle this non-core operational activity for them. In Europe,
for example, contract cleaners hold as much as a 50% market share--much
larger than in North America.
- - Many businesses--and countries--are interested in cleaner, safer work and
public places. However, for some it still remains a concept that must be
"sold" to them rather than seen as a business or social need.
- - The best-selling industrial products in international markets tend towards
the smaller sizes because of narrow aisles and other space constraints.
Scrubbing in many areas is not as common as in Europe or North America
because the concept of a cleaner, safer environment is in an earlier state
of development.
INTERNATIONAL SALES
[Bar Graph]
International Markets Sales in Millions
<TABLE>
<CAPTION>
Floor
Year Industrial Commercial Coatings Total
<S> <C> <C> <C> <C>
1990 58 0 0 58
1991 58 0 0 58
1992 63 1 0 64
1993 60 3.5 0 63.5
1994 64 5 0 69
1995 79 9 0.6 88.6
1996 82 12 0.2 94.2
1997 81 15.4 0.4 96.8
</TABLE>
[Photo Tennant's European Headquarters]
Tennant's European headquarters in The Netherlands.
[Photo Jan't Hart, Managing Director, Tennant Holding B.V.]
JAN 'T HART,
MANAGING DIRECTOR,
TENNANT HOLDING B.V.
"CUSTOMERS AND SUPPLIERS IN EUROPE LIKE TO PARTNER WITH TENNANT. THEY SEE WE
HAVE AN INNOVATIVE PRODUCT LINE, HAVE SOPHISTICATED LOGISTICS, AND ARE THE BEST
AT USING TECHNOLOGY TO OFFER A TOTAL CLEANING SOLUTION. NONE OF OUR COMPETITORS
CAN MATCH ALL OF THIS."
[Photo Tennant Model 6080]
The Model 6080 walk-behind in use at De Heuvelgaleries shopping center in
Eindhoven, The Netherlands.
12
<PAGE>
HOW TENNANT DIFFERENTIATES ITSELF INTERNATIONALLY
In addition to our size, Tennant has distinguished itself in a number of
other ways. One important difference is that nonresidential floor care is our
ONLY business. This generates just a portion of our competitors' sales, since
they tend to also be in other businesses either only remotely related to
floor cleaning or not related at all.
Tennant has a broad, innovative product line to serve the needs of both
industrial and commercial settings. We have adjusted these products to
reflect international needs, such as offering smaller equipment and equipment
that meets different noise and pollution standards.
We also directly sell and service our products where the market warrants
the investment (currently Australia, France, Germany, The Netherlands, Spain
and the United Kingdom--in addition to North America). This gives us more
flexibility in meeting customers' needs in these larger markets. Tennant also
has very strong relationships with distributors in over 45 other countries,
including Japan. This strength is reflected in the average length of
distribution contracts. Tennant's agreements tend to be in the range of 10 to
14 years versus the industry average of 3 to 4 years.
In the coming years, Tennant will be able to provide an advantage no other
competitor has: nearly seamless sales and service to multinational companies
at their various international sites. We are presenting a uniform product and
service offering to customers around the world. This will help us
differentiate Tennant from its competitors and expand our global leadership
position.
[Photo of William R. Strang, Vice President]
WILLIAM R. STRANG,
VICE PRESIDENT
"THERE IS NO HOMOGENEOUS 'INTERNATIONAL' MARKET--EACH COUNTRY IS UNIQUE. THEIR
DIRT IS DIFFERENT. THEIR STANDARDS OF CLEANLINESS ARE DIFFERENT. WHAT THEY WANT
FROM FLOOR CLEANING MACHINES IS DIFFERENT. OUR CHALLENGE IS TO MAKE SURE OUR
SOLUTIONS RELATE TO EACH LOCAL MARKET."
[Photo of Tennant Model 6400]
The 6400 sweeper's compact size makes it ideal for densely populated markets
like Japan.
13
<PAGE>
MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
SELECTED INDICATORS OF GROWTH AND PROFITABILITY
<TABLE>
<CAPTION>
CURRENT ECONOMIC CYCLE(a) PREVIOUS ECONOMIC CYCLE(a)
CURRENT CYCLE LAST HALF FULL
YEAR TO DATE OF CYCLE CYCLE
Period Included in Economic Cycle 1997 1991-1997 1987-1990 1982-1990
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Return on Beginning Shareholders' Equity(c) 18.8 17.5 16.6 14.9
Compound Annual Growth (%):
Sales -- Nominal +8 +8 +9 +8
-- Real(b) +7 +6 +4 +3
Net Earnings(c) +15 +9 +10 +3
Cash Dividends Per Share +4 +3 +6 +6
Net Operating Assets +2 +10 +4 +5
Growth Period (From-To) 1996-1997 1990-1997 1986-1990 1981-1990
</TABLE>
- -------------------------------------------------------------------------------
(a) The Company's long-term growth and profitability goals are presented at the
end of this section. Growth is measured over a full economic cycle. For
purposes of this table, 1991 is considered to have marked the beginning of
the current cycle (growth measured from 1990). The previous cycle covered
the years 1982 through 1990 (growth measured from 1981).
(b) Real sales are determined by adjusting annual reported (nominal) sales for
the estimated effects of changes in product pricing and changes in foreign
currency rates.
(c) Based on reported earnings before extraordinary gain and cumulative effect
of accounting change except for 1993, 1992, 1990 and 1989 which have been
adjusted to eliminate unusual items, net of income taxes, as described in
the Historical Progress Review, footnotes (a) through (d).
FINANCIAL RESULTS OF OPERATIONS
EARNINGS: For 1997, net earnings were $24.2 million, or $2.41 per diluted
share, up 15% from the prior year. Return on sales was 6.5%, and return on
beginning shareholders' equity was 18.8%. The reasons for the earnings gain
were higher sales, and increases in gross margin and other income. A much
stronger U.S. dollar reduced earnings by an estimated $1.8 million, or 18
cents per share.
For 1996, net earnings were $21.0 million, or $2.09 per diluted share, up
6% from the prior year. Return on sales was 6.1%, and return on beginning
shareholders' equity was 18.4%. The reasons for the earnings gain were higher
sales, a relatively low rate of growth for expenses, and an increase in other
income. A somewhat stronger U.S. dollar reduced earnings by an estimated $0.6
million, or 6 cents per share.
For 1998, management is somewhat cautious in its outlook because of the
financial crisis in Asia. However, the Company's sales to the affected
countries represented only 5% of total revenue in 1997, and the region's
problems are expected to have only a modest effect on the world's major
economies. With this in mind and given the fact that 1997 finished with
somewhat higher backlogs and continued good order growth in most markets,
management believes another year of higher sales and earnings is possible.
SALES: For 1997, net sales of $372 million increased 8% from the prior
year and backlogs were up $2 million to $13 million. A much stronger U.S.
dollar reduced full year sales by $8 million.
North American sales of $276 million were up 11% on robust economic
conditions and a significant number of new and updated products introduced in
14
<PAGE>
recent years. Sales increases by product line were 12% for industrial
equipment, 9% for commercial equipment, and 7% for floor coatings.
International sales of $96 million, representing 26% of consolidated
revenues, increased only 1% in translated U.S. dollars, but were up 9% in
local currencies. The strongest local currency increases were in Japan and
Australia, and several countries in Europe.
For 1996, net sales of $344 million increased 6% from the prior year and
backlogs declined by $1 million. A somewhat stronger U.S. dollar reduced full
year sales by $3 million. North American sales of $249 million were up 6% on
economic conditions that were weak early in the year, especially in the
industrial sector, but that improved steadily as the year progressed. Sales
increases by product line were 8% for commercial equipment, 5% for industrial
equipment, and 2% for floor coatings. International sales of $95 million for
1996, representing 28% of consolidated revenues, increased 5% (up 9% in local
currencies). The strongest sales gains were in Japan, France and Australia.
PROFIT FROM OPERATIONS: For 1997, profit from operations increased 14% to
$36.1 million on an 8% sales increase, resulting in an operating margin of
9.7% versus 9.2% the prior year. Factory capacity use is estimated to have
been in the 70% range overall with North American facilities at the upper end
of the range. (Some capacity expansion will likely be required within the
next several years.)
The improvement in operating margin was due to an increase in gross margin
to 42.2% from 41.3% the prior year. The improvement was primarily due to a
favorable product mix, manufacturing efficiencies on the higher production
volume, and a relatively low rate of inflation for costs and expenses.
Selling and administrative expenses, as a percent of sales, increased to
32.5% from 32.2% the prior year. The increase was primarily due to higher
incentive compensation resulting from an increased growth rate, stronger
financial performance, and a significant increase in the market value of the
Company's common stock.
For 1996, profit from operations increased 5% to $31.6 million on a 6%
sales increase, resulting in an operating margin of 9.2% versus 9.3% the
prior year. Factory capacity use is estimated to have been in the low 70%
range for the year. The change in operating margin was due to a decline in
gross margin to 41.3% from 42.9% the prior year. The decline was primarily
due to a change in the sales mix to lower margin products and market
segments, operational inefficiencies in Europe, and translation effects of
the stronger U.S. dollar. Selling and administrative expenses, as a percent
of sales, declined to 32.2% in 1996 from 33.7% the prior year. The decline
was primarily due to steps taken to substantially slow the rate of expense
growth.
OTHER INCOME AND EXPENSE: For 1997, the Company recorded other income of
$1,542,000 versus $698,000 in the prior year. The primary reasons for the
increase were more interest income on a higher level of invested cash and
less interest expense on a lower level of debt.
Included in other income is $4.7 million of interest income in 1997. Of
this amount, $2.4 million is from finance-type leases provided to customers,
and $1.5 million is from a loan to the Company's Employee Stock Ownership
Plan (ESOP).
For 1996, the Company recorded other income of $698,000 versus other
expense of $747,000 in the prior year. The primary reasons for the change
were a reduction in the discretionary contribution to the Company's
charitable foundation, a higher level of interest income, and less interest
expense.
For 1998, management anticipates a somewhat higher level of net other
income than recorded in 1997 due to reductions in foreign currency
transaction losses and the discretionary contribution to the Company's
charitable foundation.
INCOME TAXES: For 1997, the effective tax rate increased to 35.7%
primarily because pre-tax earnings were up the most in higher taxing
jurisdictions.
For 1996, the rate increased to 35.0% from an unusually low 33.2% the
prior year. (The 1995 rate was affected by tax losses in several tax
jurisdictions and a relatively high level of tax credits.)
For 1998, management anticipates an effective tax rate in the mid-35%
range.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to generate substantial cash flow and was again able
to strengthen its financial condition in 1997.
15
<PAGE>
FINANCIAL POSITION: Cash and cash equivalents ended 1997 at $16 million,
up from $10 million the prior year, and debt was reduced to $23 million, or
15% of capital, from $26 million, or 17% of capital. Based on current
operating plans, dividend policy, and stock repurchase authority, management
expects cash and debt to decline somewhat by the end of 1998.
Working capital, excluding cash and debt, increased by 2% from the prior
year-end due to the higher level of business activity. At December 31, 1997,
the Company held $1.1 million of unsecured trade receivables from
distributors located in Asia and Latin America. Management believes the
allowance for doubtful accounts is adequate to cover losses resulting from
the Asian financial turmoil. Working capital will likely increase in 1998;
however, the percentage change is expected to again be less than sales growth.
Property, plant, and equipment, net of accumulated depreciation was about
flat compared to the prior year-end. Depreciation expense was $16.2 million,
capital spending net of disposals was $16.4 million. The largest categories
of capital spending were information technology hardware and software,
vehicles (cars, trucks and trailers), industrial products financed with
operating leases for customers, product tooling, factory equipment, and a
warehouse/distribution center in Michigan that will consolidate several
leased facilities in the Great Lakes region. Vehicles represent a large
category of spending because of the use of direct sales and service in key
industrial markets.
For 1998, management expects depreciation expense of about $17 million and
capital spending, net of disposals, of about $20 million. This level of
capital spending, which is relatively high in a historical sense, reflects
the Company's continuing commitment to the increasing use of information
technology to enhance its competitive position and resolve "Year 2000"
computer systems' issues.
DIVIDENDS AND COMMON STOCK: Cash dividends of 72 cents per share were up
4%, the 26th consecutive year of increase. Common diluted shares outstanding
averaged 10,031,600 in 1997, a decrease from the prior year's 10,075,800.
Outstanding diluted shares at year-end declined 2% to 9,821,100.
On May 1, 1997, the Board of Directors authorized the repurchase of
600,000 shares of Company stock. During 1997, the Company repurchased 329,407
shares under this authority and 56,033 shares under a previous authority for
an overall average price of $35.26 per share. On February 26, 1998, the Board
of Directors canceled the unused authority (approximately 191,000 shares)
related to the May 1997 authorization and established a new authority to
repurchase up to 600,000 shares of Company stock.
IMPACT OF INFLATION: Inflation has not been a significant factor for
several years. For 1997, it is estimated that product pricing, on average,
was somewhat above the inflation experienced by the Company for costs and
expenses. For 1998, management expects that product pricing will be about
equal to inflation.
The relatively high inflation of the 1970s and early 1980s continues to be
reflected in the Company's historical-cost balance sheet in the following
ways:
- - Inventories are significantly below current replacement cost because they
are, for the most part, stated on a last-in, first-out basis. (See "Notes
to Consolidated Financial Statements," note 1, for amounts involved.)
- - Property, plant, and equipment is stated at historical cost, which is below
current replacement value for older assets.
These shortcomings of historical-cost financial statements are managed by
establishing return-on-investment objectives based on current values for
assets. In addition, price indexes are used to estimate real,
inflation-adjusted sales which allow for more meaningful measurements of
growth over extended periods of time.
IMPACT OF CHANGING VALUE OF THE U.S. DOLLAR: Approximately one-third of
the Company's sales occur outside of the United States directly or through
independent distributors in over 50 countries. Sales in Australia, Canada,
Japan, and the European direct-sales countries of Germany, France, Spain, the
United Kingdom, and The Netherlands are made in their respective currencies.
Sales in other countries, which are generally to distributors, are made in
either U.S. dollars or, in Europe, in Dutch guilders.
In recent years, the world's key currencies have experienced significant
changes in relative value over short periods of time. The U.S. dollar began
1997 on a
16
<PAGE>
strong note and continued to rise in value over the remainder of the year.
Management estimates the impact of these rate changes by recalculating
current-year results using prior-year exchange rates. The resulting
difference in results is an approximation of the effect rate changes have
under static analysis (i.e., no consideration given to possible reactual
changes such as adjusted pricing, volume sensitivity to price changes, etc.).
The Company uses hedging arrangements such as forward-exchange and
range-forward contracts from time to time to offset short-term changes in
currency values. At the end of 1997, the Company had outstanding $6 million
of forward-exchange contracts denominated in Canadian and Australian dollars
(see "Notes to Financial Statements," note 14). Since these contracts are
relatively small in value and are treated as hedges of specific balance sheet
monetary amounts denominated in these currencies, or nearly certain product
exports to be sold in these currencies, there is only limited potential for
impact on the Company's future liquidity.
FINANCIAL GOALS AND POLICIES
The Company's financial mission is to create value for shareholders by
providing an above-average total return. Goals and policies that support this
mission are:
- - Growth - Annual increases of 8% in sales and at least 10% in earnings per
share over a full economic cycle; measured from cycle peak to peak.
- - Profitability - Averaging a 20% return on beginning shareholders' equity in
the growth years of an economic cycle.
- - Financial Policies - Consistent annual dividend increases and maintenance
of a sound capital structure with financing debt generally not in excess of
30% of capitalization.
Summaries of the Company's financial performance compared with these goals
are presented in several graphs and tables included in this report.
CHANGES IN LEASING BUSINESS
For many years, Tennant provided long-term financing to customers.
Arrangements have been made with General Electric Capital Companies
(GE Capital) to provide these services beginning January 2, 1998. The Company
is also arranging for the sale of its existing financing-related portfolio to
GE Capital. (At December 31, 1997, the portfolio consisted of lease-type
contracts and financing equipment still owned by Tennant, with a combined net
book value of $18 million.) A substantial portion of the portfolio is
expected to be sold within the next several months at net book value plus a
gross profit on the financed equipment and a portion of future interest, less
administrative charges and contingency reserves. It is not possible to
determine the impact of this transaction on full-year 1998 net earnings at
this time. However, on a year-over-year comparison with 1997, the net gain on
the sale will be at least partially offset by the absence of lease financing
income for the remainder of 1998.
YEAR 2000 COMPUTER SYSTEMS' ISSUES
Several years ago, the Company embarked on a major, long-term effort to
upgrade its computer systems. For the most part, this involves the
companywide installation of SAP's R/3 enterprise system, which is fully
year-2000 compliant. This investment, which has been commented on from time
to time in public disclosures, was undertaken for strategic reasons such as
gaining a competitive edge, improving operating efficiency, and reducing
costs. Management believes this new system will substantially resolve the
Company's year-2000 date-change issues. While some additional expense
directly related to year-2000 issues has been and will continue to be
incurred, the estimated amounts involved are not material.
SAFE HARBOR STATEMENT
This Annual Report contains "forward-looking statements" as defined in the
Private Securities Litigation Reform Act of 1995, which involve risks and
uncertainties, including, but not limited to, changing economic and political
conditions; changes in governmental spending and budgetary policies, laws,
regulations, and trading restrictions; customer product acceptance;
competitive factors; and continued access to capital markets. All forecasts
and projections in this report are "forward-looking statements" that are
based on current information available to management. Actual results could
differ materially, both due to the mentioned risk factors and to other
factors not so referenced.
17
<PAGE>
TENNANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) PERCENT PERCENT PERCENT
------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . $372,428 100.0 $344,433 100.0 $325,368 100.0
Less:
Cost of sales. . . . . . . . . . . 215,392 57.8 202,057 58.7 185,668 57.1
Selling and administrative
expenses. . . . . . . . . . . . 120,948 32.5 110,745 32.2 109,518 33.7
-------- ---- -------- ---- ------- ----
Profit from operations . . . . . . . 36,088 9.7 31,631 9.2 30,182 9.3
Other income and (expense):
Net foreign currency transaction
gain (loss). . . . . . . . . . . . (306) (.08) 50 -- (128) --
Interest income. . . . . . . . . . 4,699 1.3 4,259 1.2 4,132 1.3
Interest (expense) . . . . . . . . (2,021) (.5) (2,491) (.7) (2,640) (.8)
Miscellaneous income (expense),
net . . . . . . . . . . . . . . (830) (.2) (1,120) (.3) (2,111) (.6)
-------- ---- -------- ---- ------- ----
Total other income (expense). . 1,542 .5 698 .2 (747) (.2)
-------- ---- -------- ---- ------- ----
Profit before income taxes . . . . . 37,630 10.1 32,329 9.4 29,435 9.0
Income tax expense . . . . . . . . . 13,425 3.6 11,302 3.3 9,773 3.0
-------- ---- -------- ---- ------- ----
Net earnings . . . . . . . . . . . . $ 24,205 6.5 $ 21,027 6.1 $ 19,662 6.0
-------- ---- -------- ---- ------- ----
-------- ---- -------- ---- ------- ----
Basic net earnings per share . . . . $ 2.43 $ 2.09 $ 1.98
-------- -------- -------
-------- -------- -------
Diluted net earnings per share . . . $ 2.41 $ 2.09 $ 1.98
-------- -------- -------
-------- -------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
<PAGE>
TENNANT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
---------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . $ 16,279 $ 9,881
Receivables:
Trade, less allowance for doubtful accounts
($2,826 in 1997 and $2,137 in 1996) . . . . . . . . . 68,502 65,581
Installment accounts receivable, net of deferred
income from sales finance charges
and less allowance for doubtful accounts
($476 in 1997 and $369 in 1996) . . . . . . . . . . . 7,920 7,839
Sundry. . . . . . . . . . . . . . . . . . . . . . . . . 1,739 1,098
---------- ---------
Net receivables . . . . . . . . . . . . . . . . . . . 78,161 74,518
Inventories. . . . . . . . . . . . . . . . . . . . . . . . 40,323 35,264
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . 985 934
Deferred income taxes, current portion . . . . . . . . . . 7,357 5,884
---------- ---------
Total current assets. . . . . . . . . . . . . . . . . 143,105 126,481
Property, plant, and equipment, net of accumulated
depreciation . . . . . . . . . . . . . . . . . . . . . . . 65,111 65,384
Installment accounts receivable due after one year,
net of deferred income from sales finance charges. . . . . 6,337 7,448
Deferred income taxes, long-term portion . . . . . . . . . . 2,257 1,524
Intangible assets. . . . . . . . . . . . . . . . . . . . . . 16,525 17,752
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 535 591
---------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . . $233,870 $219,180
---------- ---------
---------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current debt . . . . . . . . . . . . . . . . . . . . . . . $ 2,377 $ 3,864
Accounts payable and accrued expenses. . . . . . . . . . . 49,871 41,690
Income taxes payable . . . . . . . . . . . . . . . . . . . 4,901 4,034
---------- ---------
Total current liabilities . . . . . . . . . . . . . . 57,149 49,588
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 20,678 21,824
Long-term employee-related benefits. . . . . . . . . . . . . 21,767 18,528
Other long-term liabilities. . . . . . . . . . . . . . . . . 190 380
---------- ---------
Total liabilities . . . . . . . . . . . . . . . . . . 99,784 90,320
Shareholders' equity:
Preferred stock of $.02 par value per share. . . . . . . . -- --
Common stock of $.375 par value per share. . . . . . . . . 3,637 3,737
Additional paid-in capital . . . . . . . . . . . . . . . . -- 3,547
Common stock subscribed. . . . . . . . . . . . . . . . . . 444 703
Unearned restricted shares . . . . . . . . . . . . . . . . (789) (440)
Retained earnings. . . . . . . . . . . . . . . . . . . . . 141,656 130,703
Cumulative translation adjustment. . . . . . . . . . . . . 563 2,877
Receivable from ESOP . . . . . . . . . . . . . . . . . . . (11,425) (12,267)
---------- ---------
Total shareholders' equity. . . . . . . . . . . . . . 134,086 128,860
---------- ---------
Total liabilities and shareholders' equity. . . . . . $233,870 $219,180
---------- ---------
---------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
TENNANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
CASH FLOW RELATED TO OPERATING ACTIVITIES:
Net earnings . . . . . . . . . . . . . . . . . . $24,205 $21,027 $19,662
Adjustments to net earnings to arrive at
operating cash flow:
Depreciation and amortization . . . . . . . . 17,468 16,387 14,090
Provision for bad debts . . . . . . . . . . . 1,901 1,160 803
Provision for stock plans . . . . . . . . . . 1,608 1,191 1,068
(Gain) loss on sale of property, net. . . . . (716) 557 (531)
Provision for deferred taxes. . . . . . . . . (2,391) (959) 588
Increase in receivables . . . . . . . . . . . (7,225) (4,073) (14,515)
(Increase) decrease in inventories. . . . . . (6,614) 4,698 (9,024)
Increase (decrease) in accounts payable,
accrued expenses and other long-term
liabilities . . . . . . . . . . . . . . . . 9,142 (1,428) 5,610
Increase in long-term employee-related
benefits. . . . . . . . . . . . . . . . . . 3,339 2,397 1,568
Increase (decrease) in income taxes
payable . . . . . . . . . . . . . . . . . . 887 3,370 (2,359)
(Increase) decrease in other assets . . . . . 386 (216) 478
Other, net. . . . . . . . . . . . . . . . . . (98) 455 396
-------- -------- -------
Net cash flow related to operating
activities . . . . . . . . . . . . . . . . . . 41,892 44,566 17,834
CASH FLOW RELATED TO INVESTING ACTIVITIES:
Acquisition of NFM, net of cash received
(see note 18) . . . . . . . . . . . . . . . -- -- (2,208)
Acquisition of property, plant, and
equipment . . . . . . . . . . . . . . . . . (20,621) (20,966) (25,222)
Acquisition of intangible assets. . . . . . . -- (180) --
Proceeds from disposals of property, plant,
and equipment . . . . . . . . . . . . . . . 4,197 3,385 6,105
Settlement of foreign currency hedging
contracts . . . . . . . . . . . . . . . . . 934 521 (782)
-------- -------- -------
Net cash flow related to investing
activities . . . . . . . . . . . . . . . . . . (15,490) (17,240) (22,107)
CASH FLOW RELATED TO FINANCING ACTIVITIES:
Net changes in current debt . . . . . . . . . (1,561) (14,487) (5,434)
Payments to settle long-term debt . . . . . . (553) -- --
Issuance of long-term debt . . . . . . . . . 15 -- 16,782
Principal payment from ESOP . . . . . . . . . 546 495 450
Proceeds from employee stock issues . . . . . 1,842 1,784 1,665
Repurchase of common stock. . . . . . . . . . (13,598) (2,911) --
Dividends paid. . . . . . . . . . . . . . . . (7,125) (6,905) (6,742)
-------- -------- -------
Net cash flow related to financing
activities . . . . . . . . . . . . . . . . . . (20,434) (22,024) 6,721
Effect of exchange rate changes on cash. . . . . . 430 332 (52)
-------- -------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS. . . . . 6,398 5,634 2,396
Cash and cash equivalents at beginning of year . . 9,881 4,247 1,851
-------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . $16,279 $ 9,881 $ 4,247
-------- -------- -------
-------- -------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
TENNANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS
OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
Beginning balance. . . . . . . . . . . 9,965,437 $ 3,737 9,952,036 $ 3,732 9,838,956 $ 3,690
Issue stock for employee benefit
plans and directors . . . . . . . . . 132,154 49 134,229 50 113,080 42
Purchase of common shares. . . . . . . (398,194) (149) (120,828) (45) -- --
--------- -------- --------- -------- --------- --------
Ending balance. . . . . . . . . . . 9,699,397 $ 3,637 9,965,437 $ 3,737 9,952,036 $ 3,732
--------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- --------
ADDITIONAL PAID-IN CAPITAL
Beginning balance. . . . . . . . . . . $ 3,547 $ 3,166 $ 396
Issue stock for employee benefit
plans and directors . . . . . . . . . 3,596 3,247 2,770
Purchase of common shares. . . . . . . (7,143) (2,866) --
-------- -------- --------
Ending balance. . . . . . . . . . . $ -- $ 3,547 $ 3,166
-------- -------- --------
-------- -------- --------
COMMON STOCK SUBSCRIBED
Beginning balance. . . . . . . . . . . 21,403 $ 703 29,084 $ 694 21,750 $ 525
Issue stock for employee benefit
plans. . . . . . . . . . . . . . . . (21,403) (703) (29,084) (694) (21,750) (525)
Subscribe stock for employee benefit
plans . . . . . . . . . . . . . . . . 12,191 444 21,403 703 29,084 694
--------- -------- --------- -------- --------- --------
Ending balance. . . . . . . . . . . 12,191 $ 444 21,403 $ 703 29,084 $ 694
--------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- --------
UNEARNED RESTRICTED SHARES
Beginning balance. . . . . . . . . . . $ (440) $ (276) $ (424)
Restricted share activity, net . . . . (349) (164) 148
-------- -------- --------
Ending balance. . . . . . . . . . . $ (789) $ (440) $ (276)
-------- -------- --------
-------- -------- --------
RETAINED EARNINGS
Beginning balance. . . . . . . . . . . $130,703 $116,396 $103,281
Net earnings . . . . . . . . . . . . . 24,205 21,027 19,662
Dividends paid, $.72, $.69, and $.68,
respectively, per common share. . . . (7,125) (6,905) (6,742)
Purchase of common shares. . . . . . . (6,306) -- --
Tax benefit on dividends on
unallocated ESOP shares. . . . . . . 179 185 195
-------- -------- --------
Ending balance. . . . . . . . . . . $141,656 $130,703 $116,396
-------- -------- --------
-------- -------- --------
CUMULATIVE TRANSLATION ADJUSTMENT
Beginning balance. . . . . . . . . . . $ 2,877 $ 3,532 $ 2,743
Net change for year in translation
adjustment. . . . . . . . . . . . . . (2,769) (1,065) 1,248
Gain (loss) on foreign currency hedges,
net of income taxes of $(279), $(251),
and $282, respectively. . . . . . . . 455 410 (459)
-------- -------- --------
Ending balance. . . . . . . . . . . $ 563 $ 2,877 $ 3,532
-------- -------- --------
-------- -------- --------
RECEIVABLE FROM ESOP
Beginning balance. . . . . . . . . . . $ (12,267) $(13,113) $(13,962)
Principal payments . . . . . . . . . . 546 495 450
Shares allocated . . . . . . . . . . . 296 351 399
-------- -------- --------
Ending balance. . . . . . . . . . . $ (11,425) $(12,267) $(13,113)
-------- -------- --------
-------- -------- --------
Total shareholders' equity . . . . . . $134,086 $128,860 $114,131
-------- -------- --------
-------- -------- --------
</TABLE>
The Company had 30,000,000 authorized shares of common stock as of
December 31, 1997, 1996, and 1995.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
<PAGE>
MANAGEMENT'S REPORT
The Company's management is responsible for the integrity and accuracy of the
financial statements. Management believes that the financial statements for
the three years ended December 31, 1997, have been prepared in conformity
with generally accepted accounting principles appropriate in the
circumstances. In preparing the financial statements, management makes
informed judgments and estimates where necessary to reflect the expected
effects of events and transactions that have not been completed.
In meeting its responsibility for the reliability of the financial
statements, management relies on a system of internal accounting control.
This system is designed to provide reasonable assurance that assets are
safeguarded and transactions are executed in accordance with management's
authorization and recorded properly to permit the preparation of financial
statements in accordance with generally accepted accounting principles. The
design of this system recognizes that errors or irregularities may occur and
that estimates and judgments are required to assess the relative cost and
expected benefits of the controls. Management believes that the Company's
accounting controls provide reasonable assurance that errors or
irregularities that could be material to the financial statements are
prevented or would be detected within a timely period.
The Audit Committee of the Board of Directors, which is comprised solely of
Directors who are not employees of the Company, is responsible for monitoring
the Company's accounting and reporting practices. The Audit Committee meets
periodically with management and the independent auditors to discuss internal
accounting control, auditing, and financial reporting matters.
---------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Tennant Company:
We have audited the accompanying consolidated balance sheets of Tennant
Company and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Tennant
Company and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 6, 1998
22
<PAGE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
------- -------
<S> <C> <C>
FIFO inventories:
Finished goods . . . . . . . . . . . . $27,028 $26,317
Raw materials, parts and
work-in-process. . . . . . . . . . . 31,833 26,879
------- -------
Total FIFO inventories . . . . . . . . . 58,861 53,196
LIFO adjustment. . . . . . . . . . . . . (18,538) (17,932)
------- -------
LIFO inventories . . . . . . . . . . . . $40,323 $35,264
------- -------
------- -------
</TABLE>
PROPERTY, PLANT, AND EQUIPMENT. Property, plant, and equipment is carried at
cost. Expenditures for improvements that add materially to the productive
capacity or extend the useful life of an asset are capitalized.
DEPRECIATION AND AMORTIZATION. The Company depreciates buildings and
improvements by the straight-line method over a 30-year life. Other property,
plant, and equipment is depreciated using the straight-line method based on
lives of 3 to 10 years. Goodwill and other intangibles are amortized using
the straight-line method based on estimated useful lives ranging from 5 to 30
years.
PENSION AND PROFIT SHARING PLANS. The Company has pension and profit sharing
plans covering substantially all of its employees. Pension plan costs are
accrued based on actuarial estimates with the pension cost funded annually.
POSTRETIREMENT BENEFITS. The company accounts for postretirement benefits
under Statement of Financial Accounting Standards (SFAS) No. 106, EMPLOYERS'
ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. SFAS No. 106
requires an employer to recognize the cost of retiree health benefits over
the employees' period of service.
RECLASSIFICATIONS. Certain prior years' amounts have been reclassified to
conform with the current year presentation.
WARRANTY. The Company charges to current operations a provision, based on
historical experience, for future warranty claims. Warranty terms on machines
range from one to four years.
INCOME TAXES. The Company accounts for income taxes under SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under SFAS No.
109, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
U.S. income taxes are not provided on undistributed earnings of international
subsidiaries which are permanently reinvested. At December 31, 1997, earnings
permanently reinvested in international subsidiaries not subject to a U.S.
income tax provision were $12,537,000. If ever remitted to the Company in a
taxable distribution, U.S. income taxes would be substantially offset by
available foreign tax credits.
EARNINGS PER SHARE. On December 31, 1997, the Company adopted SFAS No. 128,
EARNINGS PER SHARE, which establishes new standards for calculating and
disclosing earnings per share. All prior period earnings per share data has
been restated to conform with the provisions of SFAS No. 128.
STOCK-BASED COMPENSATION. The Company accounts for stock-based compensation
under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees. APB No. 25 requires compensation cost to be recorded on
the date of the grant only if the current market price of the underlying
stock exceeds the exercise price. Accordingly, no compensation cost has been
recognized for stock option plans. The Company has adopted the
disclosure-only provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION.
CASH EQUIVALENTS. The Company considers all highly liquid investments with
maturities of three months or less, when purchased, to be cash equivalents.
REVENUE RECOGNITION. The Company recognizes revenue when title passes, which
is usually upon shipment.
DERIVATIVE FINANCIAL INSTRUMENTS. The Company enters into forward exchange
contracts principally to hedge the eventual dollar cash flow of foreign
currency denominated transactions (principally British pound, Netherlands
guilder, Australian dollar, Canadian dollar, and Japanese yen). Gains or
losses on forward exchange contracts to hedge foreign currency denominated
anticipated sales transactions and net exposed assets are recognized in
income on a current basis over the term of the contracts. The Company has
elected to treat certain forward exchange contracts as an economic hedge of
its net investment in Tennant Holding B.V., a Netherlands-based subsidiary.
Gains or losses on such contracts, net of related tax effect, are recognized
on a current basis over the term of the contract and are reported as a
separate component of shareholders' equity.
23
<PAGE>
LONG-LIVED ASSETS. The Company assesses long-lived assets for impairment
under SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 121 requires that
long-lived assets be assessed for impairment loss recognition when events or
circumstances indicate that the carrying amount of the asset may not be
recoverable.
NEW ACCOUNTING PRONOUNCEMENTS. In 1997, the Company adopted SFAS No. 129,
DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE, which consolidates
existing disclosure requirements. SFAS No. 129 has no impact on the Company's
financial statements. Also in 1997, the Financial Accounting Standards Board
issued SFAS No. 130 and SFAS No. 131 which will be adopted by the Company in
1998. SFAS No. 130, REPORTING COMPREHENSIVE INCOME, establishes standards for
reporting and displaying the components of comprehensive income. The
statement requires additional disclosures, but has no impact on consolidated
net earnings. SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION, establishes standards for determining operating segments
and reporting operating segment information. The Company has not yet
evaluated the effects of this pronouncement to determine what changes, if
any, to its current reporting format will be required.
(2) SEGMENT REPORTING
The Company operates in one industry segment which consists of the design,
manufacture, and sale of products and services used in the maintenance of
nonresidential floors.
Financial data by geographic area is before interest expense and elimination
of intercompany transactions. North America sales include sales in the United
States, Canada and Mexico. Sales in Canada and Mexico comprise less than 10%
of consolidated sales and are interrelated with the Company's U.S.
operations. Product transfers from North America are generally made at prices
that recognize return on investment objectives for both the manufacturing and
selling units. Corporate items include general corporate expense and
miscellaneous items such as net ESOP income and foundation contribution
expense. Corporate assets consist primarily of Company cash and cash
equivalents.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
NET SALES
North America
Customer sales . . . . . . . . . . . $275,834 $248,703 $235,168
Transfers to Europe and
other international areas. . . . . 51,231 43,898 39,056
-------- -------- --------
Total North America. . . . . . . . . $327,065 $292,601 $274,224
Europe customer sales. . . . . . . . . 57,387 58,196 56,889
Other international customer sales . . 39,207 37,534 33,311
Eliminations . . . . . . . . . . . . . (51,231) (43,898) (39,056)
-------- -------- --------
Total . . . . . . . . . . . . . . . . . $372,428 $344,433 $325,368
-------- -------- --------
-------- -------- --------
PROFIT BEFORE INCOME TAXES
North America. . . . . . . . . . . . . $ 34,029 $ 28,734 $ 26,716
Europe . . . . . . . . . . . . . . . . 5,168 3,960 4,264
Other international. . . . . . . . . . 1,687 3,009 4,254
Corporate items, interest
expense, and eliminations. . . . . . (3,254) (3,374) (5,799)
-------- -------- --------
Total . . . . . . . . . . . . . . . . . $ 37,630 $ 32,329 $ 29,435
-------- -------- --------
-------- -------- --------
TOTAL ASSETS
Identifiable assets
North America. . . . . . . . . . . . $176,284 $170,010 $166,309
Europe . . . . . . . . . . . . . . . 37,842 38,857 43,368
Other international. . . . . . . . . 7,898 7,038 5,575
Corporate assets and eliminations. . . 11,846 3,275 498
-------- -------- --------
Total . . . . . . . . . . . . . . . . . $233,870 $219,180 $215,750
-------- -------- --------
-------- -------- --------
</TABLE>
3) COSTS AND EXPENSES
Engineering, research and development, maintenance and repairs, warranty, and
bad debt expenses were charged to operations for the three years ended
December 31, 1997, as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Engineering, research and
development. . . . . . . . . . . . . . $13,470 $12,773 $12,695
Maintenance and repairs. . . . . . . . . $ 5,718 $ 5,740 $ 5,239
Warranty . . . . . . . . . . . . . . . . $ 4,981 $ 4,579 $ 5,191
Bad debts. . . . . . . . . . . . . . . . $ 1,901 $ 1,160 $ 803
</TABLE>
(4) CONSOLIDATED QUARTERLY DATA* (UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net Sales Gross Profit
------------------------------- ------------------------------
% %
Quarter 1997 1996 Change 1997 1996 Change
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
First. . . . . . . . . . . . . . . . . . $ 83,026 $ 76,823 8 $ 34,149 $ 32,767 4
Second . . . . . . . . . . . . . . . . . 93,359 86,794 8 39,770 35,790 11
Third. . . . . . . . . . . . . . . . . . 90,570 83,816 8 38,298 34,197 12
Fourth . . . . . . . . . . . . . . . . . 105,473 97,000 9 44,819 39,622 13
-------- -------- -------- --------
Year . . . . . . . . . . . . . . . . . . $372,428 $344,433 8 $157,036 $142,376 10
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Net Earnings Earnings Per Share
------------------------------- ------------------------------
%
Quarter 1997 1996 Change 1997 1996
-------- -------- ------ -------- --------
<S> <C> <C> <C> <C> <C>
First. . . . . . . . . . . . . . . . . . $ 4,407 $ 3,984 11 $ .43 $ .40
Second . . . . . . . . . . . . . . . . . 6,417 5,165 24 .63 .51
Third. . . . . . . . . . . . . . . . . . 5,972 5,010 19 .60 .50
Fourth . . . . . . . . . . . . . . . . . 7,409 6,868 8 .75 .68
-------- -------- -------- --------
Year . . . . . . . . . . . . . . . . . . $ 24,205 $ 21,027 15 $2.41 $2.09
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
* Regular quarterly dividends aggregated $.72 per share in 1997 ($.18 per
share for all quarters) and $.69 per share in 1996 ($.17 per share for
the first three quarters and $.18 for the fourth quarter).
(5) INCOME TAXES
In 1997, 1996, and 1995 the Company recognized tax benefits of $179,000,
$185,000, and $195,000, respectively, relating to dividends paid on
unallocated shares held by the Company's ESOP and miscellaneous charges
(credits) of $279,000, $251,000, and $(282,000), respectively, by direct
allocations to shareholders' equity.
Income tax expense for the three years ended December 31, 1997, is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) Current Deferred Total
------- -------- -------
<S> <C> <C> <C>
1997
Federal. . . . . . . . . . . $10,868 $(1,702) $ 9,166
Foreign. . . . . . . . . . . 3,135 (35) 3,100
State. . . . . . . . . . . . 1,458 (299) 1,159
------- ------- -------
$15,461 $(2,036) $13,425
------- ------- -------
------- ------- -------
1996
Federal. . . . . . . . . . . $ 8,808 $ (784) $ 8,024
Foreign. . . . . . . . . . . 2,286 (76) 2,210
State. . . . . . . . . . . . 967 101 1,068
------- ------- -------
$12,061 $ (759) $11,302
------- ------- -------
------- ------- -------
1995
Federal. . . . . . . . . . . $ 7,323 $ 39 $ 7,362
Foreign. . . . . . . . . . . 1,169 126 1,295
State. . . . . . . . . . . . 992 124 1,116
------- ------- -------
$ 9,484 $ 289 $ 9,773
------- ------- -------
------- ------- -------
</TABLE>
24
<PAGE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Tax at statutory rate. . . . . . . . . . $13,171 $11,304 $10,293
Increases (decreases) in taxes from:
State and local taxes, net of
federal benefit. . . . . . . . . . . 754 694 726
Effect of foreign taxes. . . . . . . . 314 363 (78)
Research and development credit. . . . (239) (324) (344)
Effect of foreign sales corporation. . (668) (667) (737)
Other, net . . . . . . . . . . . . . . 93 (68) (87)
------- ------- -------
Income tax expense . . . . . . . . . . . $13,425 $11,302 $ 9,773
------- ------- -------
------- ------- -------
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1997 and
1996, are presented below:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Inventories, principally due to additional costs
inventoried for tax purposes pursuant to the
Tax Reform Act of 1986 and changes in
inventory reserves . . . . . . . . . . . . . . . . $ 1,394 $ 1,209
Employee wages and benefits, principally due
to accruals for financial reporting purposes . . . 12,307 10,093
Warranty reserves accrued for financial
reporting purposes . . . . . . . . . . . . . . . . 934 723
Accounts receivable, principally due to
allowance for doubtful accounts and
change in tax accounting method
for equipment rentals. . . . . . . . . . . . . . . 183 565
Other. . . . . . . . . . . . . . . . . . . . . . . . 817 647
------- -------
Total deferred tax assets . . . . . . . . . . . . $15,635 $13,237
------- -------
------- -------
Deferred tax liabilities:
Property, plant, and equipment, principally
due to differences in depreciation and
related gains. . . . . . . . . . . . . . . . . . . $ 5,385 $ 5,259
Goodwill . . . . . . . . . . . . . . . . . . . . . . 632 480
Deferred gain, hedge of forward foreign
exchange contracts . . . . . . . . . . . . . . . . 4 90
------- -------
Total deferred tax liabilities. . . . . . . . . . $ 6,021 $ 5,829
------- -------
------- -------
Net deferred tax asset . . . . . . . . . . . . . . . . $ 9,614 $ 7,408
------- -------
------- -------
</TABLE>
The Company has determined that a valuation allowance for the deferred tax
assets is not required since it is likely that they will be realized through
future reversals of existing taxable temporary differences and future taxable
income.
Income taxes paid were $14,839,000, $8,714,000, and $11,256,000, in 1997,
1996, and 1995, respectively.
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31 consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
------- -------
<S> <C> <C>
Trade accounts payable . . . . . . . . . . . . . . . . $16,632 $15,446
Employee profit sharing. . . . . . . . . . . . . . . . 3,856 2,906
Wages, bonuses, and commissions. . . . . . . . . . . . 17,534 13,732
Taxes, other than income taxes . . . . . . . . . . . . 3,289 3,777
Other . . . . . . . . . . . . . . . . . . . . . . . . 8,560 5,829
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . $49,871 $41,690
------- -------
------- -------
</TABLE>
(7) PROPERTY, PLANT, AND EQUIPMENT AND RELATED ACCUMULATED DEPRECIATION
Property, plant, and equipment and related accumulated depreciation at
December 31 consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
-------- --------
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . . . . . . . . $ 3,553 $ 3,341
Buildings and improvements . . . . . . . . . . . . . . 25,914 26,587
Machinery and equipment. . . . . . . . . . . . . . . . 123,112 117,835
Construction in progress . . . . . . . . . . . . . . . 4,023 1,159
-------- --------
Total property, plant, and equipment . . . . . . . . . 156,602 148,922
Less accumulated depreciation. . . . . . . . . . . . . (91,491) (83,538)
-------- --------
Net property, plant, and equipment . . . . . . . . . . $ 65,111 $ 65,384
-------- --------
-------- --------
</TABLE>
Buildings and improvements include office, warehouse, or manufacturing
facilities in suburban Minneapolis, Minnesota; Holland, Michigan; London,
England; and Uden, The Netherlands.
(8) INVESTMENTS AS LESSOR
The Company leases floor maintenance equipment to customers under sales-type
and operating leases. Noncancelable terms for sales-type leases range from
six months to five years, and terms for operating leases range from one month
to five years. All leases provide for minimum lease payments and require the
lessees to pay executory costs.
Minimum future lease payments to be received during the years ended
December 31 are as follows:
<TABLE>
<CAPTION>
Sales-Type Operating
(IN THOUSANDS) Leases Leases
---------- ---------
<S> <C> <C>
1998 $ 8,295 $ 608
1999 4,567 233
2000 1,997 54
2001 685 8
2002 208 5
---------- ---------
Total $15,752 $ 908
---------- ---------
---------- ---------
</TABLE>
25
<PAGE>
The Company's investment in equipment related to operating leases as of
December 31 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
------- ------
<S> <C> <C>
Cost . . . . . . . . . . . . . . . . . . . $4,792 $4,782
Less accumulated depreciation. . . . . . . (1,970) (1,381)
------- ------
Net investment . . . . . . . . . . . . . . $2,822 $3,401
------- ------
------- ------
</TABLE>
The Company's net investment in sales-type leases at December 31 is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
------- -------
<S> <C> <C>
Minimum lease payments receivable. . . . . $15,752 $16,781
Less allowance for doubtful accounts . . . (476) (369)
------- -------
Net minimum lease payments receivable. . . 15,276 16,412
Estimated unguaranteed residual value. . . 1,104 1,288
Less deferred income . . . . . . . . . . . (2,757) (3,143)
------- -------
Net investment in sales-type leases. . . . $13,623 $14,557
------- -------
------- -------
</TABLE>
(9) COMMITMENTS
The Company leases office and warehouse facilities, vehicles and office
equipment under operating lease agreements which include both monthly and
longer-term arrangements. Leases with initial terms of one year or more
expire at various dates through 2006 and generally provide for extension
options. Rentals under the leasing agreements (exclusive of real estate
taxes, insurance, and other expenses payable under the leases) amounted to
$3,273,000, $2,873,000, and $2,656,000, in 1997, 1996, and 1995, respectively.
The aggregate lease commitments with an initial term of one year or more at
December 31, 1997, were $6,571,000 with minimum rentals for the periods as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998 $2,339
1999 1,648
2000 1,017
2001 643
2002 489
2003 and beyond 435
------
Total $6,571
------
------
</TABLE>
(10) SHORT-TERM BORROWINGS
Short-term bank borrowings at December 31, 1997 and 1996, were $666,000 and
$2,530,000, respectively. In addition to the short-term bank borrowings,
current debt includes the current portion of long-term debt and mortgages
associated with the relocation of employees.
The weighted-average interest rates on the above short-term bank borrowings
at December 31, 1997 and 1996, were 4.5% and 5.7%, respectively. This
interest rate represents the weighted-average rate for the respective period
and is calculated using the actual interest costs, exclusive of commitment
fees, and month-end average outstanding debt.
The Company has available lines of credit with banks in the amount of
$20,607,000 which includes a $15,000,000 line of credit requiring the Company
to pay .2% per year commitment fee on the line of credit. This fee is
recorded by the Company as interest expense.
In addition, the Company has outstanding letters of credit with banks in the
amount of $2,700,000 at December 31, 1997.
(11) LONG-TERM DEBT
Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
------- -------
<S> <C> <C>
Bank loan at 8.8%, due in 1997 . . . . . $ -- $ 1,339
Bank loan at 4.0%, due in 1998 . . . . . 567 650
Bank loan at 7.0%, due in 1998 . . . . . 1,144 --
Bank loan at 7.2%, due in 1998 . . . . . -- 1,174
Bank loan at 8.7%, due in 1999 . . . . . 678 --
Note at 8.09%, due in 2000 . . . . . . . 5,000 5,000
Notes at 8.56%, due in 2001. . . . . . . 5,000 5,000
Note at 7.21%, due in 2003 . . . . . . . 5,000 5,000
Note at 7.84%, due in 2005 . . . . . . . 5,000 5,000
Less current portion . . . . . . . . . . (1,711) (1,339)
------- -------
Total. . . . . . . . . . . . . . . . . . $20,678 $21,824
------- -------
------- -------
</TABLE>
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:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998 $ 1,711
1999 678
2000 5,000
2001 5,000
2202 --
2003 and beyond 10,000
-------
Total $22,389
-------
-------
</TABLE>
During 1997, 1996, and 1995, the Company paid total long-term and short-term
interest costs of $2,019,000, $2,473,000, and $2,657,000, respectively.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's short-term financial instruments are valued at their carrying
amounts in the consolidated balance sheets, which are reasonable estimates of
their fair value due to the short maturity of the instruments. The Company's
foreign currency forward exchange contracts are valued at fair market value,
which is the amount the Company would receive or pay to terminate the
contracts at the reporting date. The fair market value of the Company's
long-term debt approximates cost, based on the borrowing rates currently
available to the Company for bank loans with similar terms and remaining
maturities.
26
<PAGE>
(13) POSTRETIREMENT BENEFITS
The Company provides certain health care benefits for substantially all of
its U.S. retired employees. Eligibility for those benefits is based upon a
combination of years of service with the Company and age upon retirement from
the Company.
The periodic postretirement benefit cost under SFAS No. 106 for the three
years ended December 31, 1997, is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
------ ------ ----
<S> <C> <C> <C>
Service costs. . . . . . . . . . . . . . $ 334 $ 330 $205
Interest costs . . . . . . . . . . . . . 703 699 645
------ ------ ----
Net postretirement costs . . . . . . . . $1,037 $1,029 $850
------ ------ ----
------ ------ ----
</TABLE>
The actuarial present value of benefit obligations at December 31 is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
------- ------
<S> <C> <C>
Retirees eligible for benefits . . . . . $ 2,592 $2,661
Dependents of retirees eligible for
benefits. . . . . . . . . . . . . . . . 1,467 1,620
Active employees fully eligible. . . . . 1,125 1,071
Active employees not fully eligible. . . 6,196 5,639
Unrecognized net loss. . . . . . . . . . (683) (1,039)
------- ------
Accrued postretirement benefit cost. . . $10,697 $9,952
------- ------
------- ------
</TABLE>
The assumed annual rate of future increases in per capita cost of health care
benefits was 8.6% for 1998, declining gradually to 5.25% in 2023 and after.
Increasing the health care cost trend rate by 1% in each year would increase
the accumulated benefit obligation by $276,000 as of December 31, 1997, and
the aggregate of the service and interest costs by $29,000. The discount
rates used in determining the accumulated benefit obligation in 1997, 1996,
and 1995, were 6.75%, 7.0%, and 7.0%, respectively.
(14) FOREIGN CURRENCY CONTRACTS
The Company entered into several guilder forward exchange contracts for the
purpose of hedging the net investment in Tennant Holding B.V., a
Netherlands-based subsidiary. As of December 31, 1997, there were no
outstanding guilder contracts. In 1997, 1996, and 1995, the Company
recognized gains (losses), net of related tax effect, as a separate component
of shareholders' equity of $455,000, $410,000, and $(459,000), respectively.
The Company entered into yen forward exchange contracts to hedge anticipated
sales transactions. As of December 31, 1997, there were no outstanding yen
contracts. In 1997, 1996, and 1995, the Company recognized gains of $0,
$50,000, and $370,000, respectively.
The Company also entered into forward exchange contracts to hedge net exposed
assets in Australia, Canada, and Japan. As of December 31, 1997, the Company
had four outstanding contracts totaling $6,239,000. These contracts will
mature in 1998 and bear rates of .6555 U.S. dollars per Australian dollar,
1.4020 to 1.4370 Canadian dollars per U.S. dollar, and 129.55 Japanese yen
per U.S. dollar. In 1997, 1996, and 1995, the Company recognized gains
(losses) of $715,000, $198,000, and $(93,000), respectively.
(15) COMMON AND PREFERRED STOCK AND ADDITIONAL PAID-IN CAPITAL
The Company is authorized to issue an aggregate of 31,000,000 shares;
30,000,000 were designated as Common Stock, having a par value of $.375 per
share, and 1,000,000 were designated as Preferred Stock, having a par value
of $.02 per share. The Board of Directors was authorized to establish one or
more series of Preferred Stock, setting forth the designation of each such
series, and fixing the relative rights and preferences of each such series.
On November 19, 1996, the Board of Directors approved a Shareholder Rights
Plan allowing a dividend of one preferred share purchase right for each
outstanding Common Share of the par value of $.375 per share of the Company.
Each Right entitles the registered holder to purchase from the Company one
one-hundredth of a Series A Junior Participating Preferred Share of the par
value of $.02 per share of the Company at a price of $100 per one
one-hundredth of a Preferred Share, subject to adjustment. The Rights are not
exercisable or transferable apart from the common stock until the earlier of:
(i) the close of business on the fifteenth day following a public
announcement that a person or group of affiliated or associated persons has
become an "Acquiring Person" (i.e., has become, subject to certain
exceptions, the beneficial owner of 20% or more of the outstanding Common
Shares), or (ii) the close of business on the fifteenth day following the
commencement or public announcement of a tender offer or exchange offer the
consummation of which would result in a person or group of affiliated or
associated persons becoming, subject to certain exceptions, the beneficial
owner of 20% or more of the outstanding Common Shares (or such later date as
may be determined by the Board of Directors of the Company prior to a person
or group of affiliated or associated persons becoming an Acquiring Person).
At no time do the rights have any voting power. The rights may be redeemed by
the Company for $.01 per right at any time prior to (and, in certain
circumstances, within twenty days after) a person or group acquiring 20% or
more of the common stock. The 20% thresholds do not apply to stock ownership
by or on behalf of employee benefit plans. Under certain circumstances, the
Board of Directors may exchange the rights for the Company's common stock or
reduce the 20% thresholds to not less than 10%. The Rights will expire on
December 23, 2006, unless extended or earlier redeemed or exchanged by the
Company.
(16) STOCK PLANS, BONUSES, PENSIONS, AND PROFIT SHARING
The Company has four plans under which stock-based compensation grants are
provided annually. The 1992 Stock Incentive Plan ("1992 Plan") and the 1995
Stock Incentive Plan ("1995 Plan") provide for stock-based compensation
grants to executives and key employees of the Company. The 1993 Directors
Restricted Plan ("1993 Plan") provides for the annual retainer in the form of
restricted shares to the non-employee Directors of the Company. The 1997
Director's Option Plan ("1997 Plan") provides for stock option grants to
non-employee Directors of the Company. The maximum number of shares that can
be awarded under the respective plans is 500,000, 500,000, 50,000 and
150,000, respectively.
Grants under the 1992 Plan may be in the form of restricted and
performance-related shares. Grants under the 1995 Plan may be in the form of
restricted, performance-related and stock option shares. The grant size under
both plans is determined by the Compensation Committee of the Board of
Directors.
27
<PAGE>
Restricted shares are granted annually and typically have a two- or
three-year restriction period from the effective date of the grant. During
the restricted period, the restricted shares may not be sold or transferred,
but the shares entitle the participants to dividend and voting rights. In
1997, 1996, and 1995, respectively, 28,000, 26,000, and 18,000 restricted
shares were granted. The weighted-average fair value of stock on the grant
date was $31.35, $24.57, and $23.55 per share in 1997, 1996, and 1995,
respectively.
Performance-related shares are granted annually and are payable if the
Company achieves certain financial performance goals over each four-year
period following the grant. In 1997, 1996, and 1995, respectively, 34,000,
46,000, and 35,000 performance shares were granted. The weighted-average fair
value of stock on the grant date was $26.75, $23.25, and $23.56 per share in
1997, 1996, and 1995, respectively.
Under the 1995 Plan and the 1997 Plan, 10-year fixed stock options are
granted annually at a price equal to the stock's fair market value on the
date of the grant. Options are exercisable on a cumulative basis at a rate of
25% per year. The fair value of options at the date of grant is estimated
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for the 1997, 1996 and 1995 grants,
respectively: dividend yield of 2.6%, 2.6% and 2.6%; expected volatility of
19%,18% and 22%; risk-free interest rates of 6.2%, 5.5% and 7.4%; and
expected life of option of five years. A summary of the status of the
Company's stock option transactions during 1997, 1996 and 1995 is shown below:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
------- ----------------
1997
-------------------------
<S> <C> <C>
Outstanding at beginning of year . . . . 184,000 $23.24
Granted. . . . . . . . . . . . . . . . . 207,000 27.61
Exercised. . . . . . . . . . . . . . . . (66,000) 23.64
Forfeited. . . . . . . . . . . . . . . . (5,000) 25.46
------- ------
Outstanding at end of year . . . . . . . 320,000 $25.46
------- ------
------- ------
Exercisable at year-end. . . . . . . . . 54,000 $27.50
------- ------
------- ------
<CAPTION>
1996
-------------------------
<S> <C> <C>
Outstanding at beginning of year . . . . 101,000 $23.69
Granted. . . . . . . . . . . . . . . . . 83,000 22.68
Exercised. . . . . . . . . . . . . . . . -- --
Forfeited. . . . . . . . . . . . . . . . -- --
------- ------
Outstanding at end of year . . . . . . . 184,000 $23.24
------- ------
------- ------
Exercisable at year-end. . . . . . . . . 25,000 $23.69
------- ------
------- ------
<CAPTION>
1995
-------------------------
<S> <C> <C>
Outstanding at beginning of year . . . . -- --
Granted. . . . . . . . . . . . . . . . . 101,000 $23.69
Exercised. . . . . . . . . . . . . . . . -- --
Forfeited. . . . . . . . . . . . . . . . -- --
------- ------
Outstanding at end of year . . . . . . . 101,000 $23.69
------- ------
------- ------
Exercisable at year-end. . . . . . . . . -- --
</TABLE>
The weighted-average fair value of each option granted was $6.11, $4.53 and
$6.22 in 1997, 1996 and 1995, respectively. At December 31, 1997, outstanding
options had exercise prices between $22.00 and $37.50 per share and a
weighted-average contractual life of eight years.
In 1997, 1996, and 1995, respectively, expenses of $6,192,000, $2,731,000,
and $2,310,000, were charged to operations for restricted and
performance-related awards. The Company has adopted the disclosure-only
provision of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Had
stock-based compensation cost, determined consistent with the provisions of
SFAS No. 123, been charged to the Company's net earnings, net earnings per
share would have been reduced to the pro forma amounts indicated below
(dollars in Thousands, except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net earnings - as reported . . . . . . . $24,205 $21,027 $19,662
Net earnings - pro forma . . . . . . . . 23,798 20,869 19,468
Diluted net earnings per share -
as reported. . . . . . . . . . . . . . 2.41 2.09 1.98
Diluted net earnings per share -
pro forma. . . . . . . . . . . . . . . 2.37 2.07 1.96
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts, because additional awards in future years are
anticipated.
The Company also has a matching contribution program available to all
employees who make 401(k) contributions. Under this program, the Company
makes matching contributions up to a maximum of 4% of an employee's earnings.
Employee contributions invested in Company common stock are matched at the
rate of 35%, and contributions not invested in Company common stock are
matched at the rate of 15%. Expenses related to matching contributions were
$689,000, $695,000, and $635,000 in 1997, 1996, and 1995, respectively.
The Company has a Defined Benefit Pension Plan (available to most U.S.
employees). Plan benefits are based on the employee's years of service and
compensation during the highest five consecutive years of service of the
final ten years of employment. The Company's policy has been to fund this
plan to the maximum allowed by ERISA rules. Contributions are intended to
provide benefits attributed to service to date, and for service-related
benefits expected to be earned in the future.
Net pension expense for the three years ended December 31, 1997, is as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Service cost . . . . . . . . . . . . . . $1,635 $1,557 $1,245
Interest cost. . . . . . . . . . . . . . 1,176 1,046 884
Actual return on plan assets
(increase) decrease. . . . . . . . . . (4,620) (2,304) (5,521)
Deferred gain (loss) . . . . . . . . . . 2,752 665 3,932
Amortization of transition asset . . . . (46) (46) (46)
------ ------ ------
Net periodic pension expense . . . . . . $ 897 $ 918 $ 494
------ ------ ------
------ ------ ------
</TABLE>
28
<PAGE>
The assumptions used in determining the actuarial present value of the
projected benefit obligation at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted-average discount rate . . . . . 6.75% 7.0% 7.0%
Rate of increase in future
compensation . . . . . . . . . . . . . 5.25% 5.5% 5.5%
Expected long-term rate of return
on plan assets . . . . . . . . . . . . 9.75% 10.0% 10.0%
</TABLE>
The funded status of the plan and the amount recognized at December 31 are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1997 1996
------- -------
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested benefits. . . . . . . . . . . . $10,402 $ 8,579
Nonvested benefits . . . . . . . . . . 316 229
------- -------
Accumulated benefit obligation . . . . . 10,718 8,808
Effect of projected future compensation
increases. . . . . . . . . . . . . . . 9,147 8,580
------- -------
Projected benefit obligation . . . . . . 19,865 17,388
Plan assets, primarily listed equity securities,
at fair value using the market-related
value method . . . . . . . . . . . . . (23,872) (19,575)
------- -------
Plan assets in excess of projected benefit
obligation . . . . . . . . . . . . . . (4,007) (2,187)
Unrecognized prior service cost. . . . . (379) (412)
Unrecognized net gain. . . . . . . . . . 10,155 7,428
Unrecognized transition asset. . . . . . 542 587
------- -------
Net pension obligation . . . . . . . . . $ 6,311 $ 5,416
------- -------
------- -------
</TABLE>
Retirement benefits for eligible employees in foreign locations are funded
principally through either annuity or government programs.
During 1990, the Company established a leveraged Employee Stock Ownership
Plan (ESOP) by amending its Profit Sharing Plan to add ESOP features. The
ESOP covers substantially all domestic employees following completion of one
year of service. The shares required for the Company's matching contribution
program, as well as the Company's Profit Sharing Plan, are provided
principally by the Company's ESOP, supplemented as needed by newly issued
shares. The Company makes annual contributions to the ESOP equal to the
ESOP's debt service less dividends received by the ESOP. All dividends
received by the ESOP are used to pay debt service. The ESOP shares initially
were pledged as collateral for its debt. As the debt is repaid, shares are
released from collateral and allocated to employees who made 401(k)
contributions that year, as well as to profit sharing participants, based on
the proportion of debt service paid in the year. The Company accounts for the
ESOP in accordance with EITF Issue 89-8, Expense Recognition for Employee
Stock Ownership Plans. Accordingly, the shares pledged as collateral are
reported as unearned ESOP shares in the consolidated balance sheets. As
shares are released from collateral, the Company reports compensation expense
equal to the cost of the shares to ESOP. ESOP shares are considered
outstanding in EPS computations, and dividends on allocated and unallocated
shares are recorded as a reduction of retained earnings.
The Company's cash contribution to the ESOP during 1997, 1996, and 1995 was
$1,263,000, $1,303,000, and $1,307,000, respectively. Accrued expenses in
excess of benefits provided to employees through the ESOP, which were charged
to miscellaneous expense, were $138,000, $542,000, and $778,000, in 1997,
1996, and 1995, respectively. Interest earned and received on the Company
loan to the ESOP was $1,496,000, $1,550,000, and $1,598,000, in 1997, 1996,
and 1995, respectively. Dividends on the Company shares held by the ESOP used
for debt service were $787,000, $755,000, and $738,000 in 1997, 1996, and
1995, respectively. At December 31, 1997, the ESOP indebtedness to the
Company, which bears an interest rate of 10.05% and is due December 31, 2009,
was $14,751,000.
The ESOP shares as of December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Allocated shares . . . . . . . . . . . . 329,324 280,974 229,578
Shares released for allocation . . . . . 40,241 38,971 40,781
Unreleased shares. . . . . . . . . . . . 599,501 649,121 698,707
------- ------- -------
Total ESOP shares. . . . . . . . . . . . 969,066 969,066 969,066
------- ------- -------
------- ------- -------
</TABLE>
For the years ended December 31, 1997, 1996, and 1995, the Company charged to
operations $15,166,000, $10,555,000, and $9,567,000, respectively, for
expense of all stock, bonus, pension, and profit sharing plans.
(17) EARNINGS PER SHARE
Basic and diluted earnings per share under SFAS No. 128 for the three years
ended December 31, 1997, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
For the Year Ended 1997
------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- -------------- ---------
<S> <C> <C> <C>
Basic earnings per share . . . . . . . . $24,205 9,954 $2.43
Effect of dilutive securities:
Fixed stock options. . . . . . . . . . 24
Performance-related shares . . . . . . 54
------
Diluted earnings per share . . . . . . . $24,205 10,032 $2.41
------- ------ -----
------- ------ -----
<CAPTION>
For the Year Ended 1996
------------------------------------
<S> <C> <C> <C>
Basic earnings per share . . . . . . . . $21,027 10,042 $2.09
Effect of dilutive securities:
Fixed stock options. . . . . . . . . . 5
Performance-related shares . . . . . . 29
------
Diluted earnings per share . . . . . . . $21,027 10,076 $2.09
------- ------ -----
------- ------ -----
<CAPTION>
For the Year Ended 1995
------------------------------------
<S> <C> <C> <C>
Basic earnings per share . . . . . . . . $19,662 9,924 $1.98
Effect of dilutive securities:
Fixed stock options. . . . . . . . . . 3
Performance-related shares . . . . . . 15
-----
Diluted earnings per share . . . . . . . $19,662 9,942 $1.98
------- ----- -----
------- ----- -----
</TABLE>
(18) ACQUISITIONS
On November 6, 1995, the Company acquired the business and net assets of
Nobles Floor Machines Limited ("NFM"), the Company's U.K.-based master
distributor of commercial floor maintenance equipment. These acquisitions did
not have a material impact on operations.
29
<PAGE>
TENNANT COMPANY AND SUBSIDIARIES
HISTORICAL PROGRESS REVIEW
(PRESENTS 10 YEARS OF DATA FOR LONG-TERM GROWTH MEASUREMENT.)
- -------------------------------------------------------------
<TABLE>
<CAPTION>
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995
------------ ----------- --------
<S> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . $ 372,428 344,433 325,368
Cost of sales. . . . . . . . . . . . . . $ 215,392 202,057 185,668
Gross margin -- %. . . . . . . . . . . . 42.2 41.3 42.9
Selling and administrative expenses. . . $ 120,948 110,745 109,518
% of net sales. . . . . . . . . . . . 32.5 32.2 33.7
Profit from operations . . . . . . . . . $ 36,088 31,631 30,182
% of net sales. . . . . . . . . . . . 9.7 9.2 9.3
Other income and (expense) . . . . . . . $ 1,542 698 (747)
Income tax expense . . . . . . . . . . . $ 13,425 11,302 9,773
% of earnings before income taxes . . 35.7 35.0 33.2
Earnings before extraordinary gain and
cumulative effect of accounting
change. . . . . . . . . . . . . . . . . $ 24,205 21,027 19,662
% of net sales. . . . . . . . . . . . 6.5 6.1 6.0
Return on beginning shareholders'
equity -- %. . . . . . . . . . . . . 18.8 18.4 20.4
Net earnings . . . . . . . . . . . . . . $ 24,205 21,027 19,662
PER SHARE DATA(e)
Basic net earnings before extraordinary
gain and cumulative effect of
accounting change . . . . . . . . . . . $ 2.43 2.09 1.98
Diluted net earnings before
extraordinary gain and cumulative
effect of accounting change . . . . . . $ 2.41 2.09 1.98
Basic net earnings . . . . . . . . . . . $ 2.43 2.09 1.98
Diluted net earnings . . . . . . . . . . $ 2.41 2.09 1.98
Cash dividends . . . . . . . . . . . . . $ .72 .69 .68
Shareholders' equity (ending). . . . . . $ 13.65 12.86 11.47
YEAR-END FINANCIAL POSITION
Cash and cash equivalents. . . . . . . . $ 16,279 9,881 4,247
Total current assets . . . . . . . . . . $ 143,105 126,481 123,508
Property, plant, and equipment, net. . . $ 65,111 65,384 63,724
Total assets . . . . . . . . . . . . . . $ 233,870 219,180 215,750
Current liabilities excluding
current debt. . . . . . . . . . . . . . $ 54,772 45,724 44,374
Current ratio excluding current debt . . 2.6 2.8 2.8
Long-term liabilities excluding
long-term debt. . . . . . . . . . . . . $ 21,957 18,908 16,747
Financing debt
Current . . . . . . . . . . . . . . . $ 2,377 3,864 17,349
Long-term . . . . . . . . . . . . . . $ 20,678 21,824 23,149
Total as % of total capital . . . . 14.7 16.6 26.2
Shareholders' equity . . . . . . . . . . $ 134,086 128,860 114,131
CASH FLOW Increase (Decrease)
Related to operating activities. . . . . $ 41,892 44,566 17,834
Related to investing activities. . . . . $ (15,490) (17,240) (22,107)
Related to financing activities. . . . . $ (20,434) (22,024) 6,721
OTHER DATA
Interest income. . . . . . . . . . . . . $ 4,699 4,259 4,132
Interest expense . . . . . . . . . . . . $ 2,021 2,491 2,640
Depreciation and amortization
expense . . . . . . . . . . . . . . . . $ 17,468 16,387 14,090
Net expenditures for property,
plant, and equipment. . . . . . . . . . $ 16,425 17,581 19,117
Number of employees at year-end. . . . . 2,019 1,950 1,997
Total direct compensation. . . . . . . . $ 95,099 89,210 86,263
Profit sharing and all other
employee benefits . . . . . . . . . . . $ 27,337 22,499 21,887
Average shares outstanding(e). . . . . . 9,910 10,021 9,916
Closing share price at year-end(e) . . . $ 36 3/8 27 1/2 23 7/8
Common stock price range during
year(e). . . . . . . . . . . . . . . . $26 1/8-39 5/8 21 1/4-27 1/2 22 1/4- 29
Closing price/earnings ratio(f). . . . . 15.0 13.1 12.1
30
<PAGE>
<CAPTION>
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
1994 1993 1992 1991 1990
------------- ------------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . 281,685 221,002 214,863 198,575 211,503
Cost of sales. . . . . . . . . . . . . . 162,360 126,071 121,792 112,147 121,598
Gross margin -- %. . . . . . . . . . . . 42.4 43.0 43.3 43.5 42.5
Selling and administrative expenses. . . 95,201 79,508 76,942 69,707 70,401
% of net sales. . . . . . . . . . . . 33.8 36.0 35.8 35.1 33.3
Profit from operations . . . . . . . . . 24,124 11,333(a) 16,129 16,721 19,504
% of net sales. . . . . . . . . . . . 8.6 5.1 7.5 8.4 9.2
Other income and (expense) . . . . . . . (43) 1,595 1,864 1,800 374
Income tax expense . . . . . . . . . . . 8,346 3,802 4,803 6,529 4,257
% of earnings before income taxes . . 34.7 29.4 26.7 35.3 21.4
Earnings before extraordinary gain and
cumulative effect of accounting
change. . . . . . . . . . . . . . . . . 15,735 9,126(a) 13,190(b) 11,992 15,621(c)
% of net sales. . . . . . . . . . . . 5.6 4.1 6.1 6.0 7.4
Return on beginning shareholders'
equity -- %. . . . . . . . . . . . . 18.7 10.8(a) 17.2(b) 16.4 21.1(c)
Net earnings . . . . . . . . . . . . . . 15,735 9,126 9,229 11,992 18,256
PER SHARE DATA(e)
Basic net earnings before extraordinary
gain and cumulative effect of
accounting change . . . . . . . . . . . 1.60 .93(a) 1.34(b) 1.21 1.59(c)
Diluted net earnings before
extraordinary gain and cumulative
effect of accounting change . . . . . . 1.60 .93(a) 1.34(b) 1.21 1.59(c)
Basic net earnings . . . . . . . . . . . 1.60 .93(a) .94 1.21 1.85
Diluted net earnings . . . . . . . . . . 1.60 .93(a) .94 1.21 1.85
Cash dividends . . . . . . . . . . . . . .65 .64 .61 .60 .59
Shareholders' equity (ending). . . . . . 9.78 8.56 8.64 7.87 7.43
YEAR-END FINANCIAL POSITION
Cash and cash equivalents. . . . . . . . 1,851 2,675 3,512 2,349 1,412
Total current assets . . . . . . . . . . 98,454 73,752 74,741 66,028 67,065
Property, plant, and equipment, net. . . 56,552 46,622 45,430 40,730 42,588
Total assets . . . . . . . . . . . . . . 182,834 128,634 128,988 111,644 114,590
Current liabilities excluding
current debt. . . . . . . . . . . . . . 41,959 29,657 28,848 30,700 30,982
Current ratio excluding current debt . . 2.3 2.5 2.6 2.2 2.2
Long-term liabilities excluding
long-term debt. . . . . . . . . . . . . 15,318 12,591 10,691 2,281 1,463
Financing debt
Current . . . . . . . . . . . . . . . 23,008 1,190 1,492 197 6,986
Long-term . . . . . . . . . . . . . . 6,300 1,103 3,107 1,853 1,995
Total as % of total capital . . . . 23.3 2.7 5.1 2.6 10.9
Shareholders' equity . . . . . . . . . . 96,249 84,093 84,850 76,613 73,164
CASH FLOW Increase (Decrease)
Related to operating activities. . . . . 26,754 21,922 20,115 23,777 24,848
Related to investing activities. . . . . (47,931) (13,569) (15,717) (7,472) (8,951)
Related to financing activities. . . . . 20,351 (9,244) (3,346) (15,336) (17,746)
OTHER DATA
Interest income. . . . . . . . . . . . . 3,807 3,583 3,619 3,828 2,672
Interest expense . . . . . . . . . . . . 1,677 509 540 568 1,019
Depreciation and amortization
expense . . . . . . . . . . . . . . . . 13,121 10,987 10,241 8,730 8,652
Net expenditures for property,
plant, and equipment. . . . . . . . . . 18,870 12,877 12,315 8,063 8,071
Number of employees at year-end. . . . . 1,916 1,707 1,758 1,738 1,800
Total direct compensation. . . . . . . . 76,225 71,507 69,240 65,324 66,364
Profit sharing and all other
employee benefits . . . . . . . . . . . 21,116 18,149 19,547 17,917 19,316
Average shares outstanding(e). . . . . . 9,826 9,836 9,832 9,892 9,842
Closing share price at year-end(e) . . . 24 1/8 23 1/2 21 7/16 18 17 1/2
Common stock price range during
year(e). . . . . . . . . . . . . . . . 20 15/32-24 1/4 19 3/4-24 1/4 17 1/4-24 3/8 16 1/4-21 1/4 13 7/8-22 1/8
Closing price/earnings ratio(f). . . . . 15.1 19.7 17.4 14.9 13.3
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
1989 1988 1987
------------ ----------- --------
<S> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . 197,078 183,888 166,924
Cost of sales. . . . . . . . . . . . . . 112,511 105,991 95,015
Gross margin -- %. . . . . . . . . . . . 42.9 42.4 43.1
Selling and administrative expenses. . . 64,518 59,646 55,352
% of net sales. . . . . . . . . . . . 32.7 32.4 33.2
Profit from operations . . . . . . . . . 20,049 18,251 16,557
% of net sales. . . . . . . . . . . . 10.2 9.9 9.9
Other income and (expense) . . . . . . . 3,755 1,449 953
Income tax expense . . . . . . . . . . . 9,052 8,126 7,692
% of earnings before income taxes . . 38.0 41.2 43.9
Earnings before extraordinary gain and
cumulative effect of accounting
change. . . . . . . . . . . . . . . . . 14,752(d) 11,574 9,818
% of net sales. . . . . . . . . . . . 7.5 6.3 5.9
Return on beginning shareholders'
equity -- %. . . . . . . . . . . . . 18.9(d) 16.6 15.0
Net earnings . . . . . . . . . . . . . . 14,752 13,263 9,818
PER SHARE DATA(e)
Basic net earnings before extraordinary
gain and cumulative effect of
accounting change . . . . . . . . . . . 1.44(d) 1.09 .92
Diluted net earnings before
extraordinary gain and cumulative
effect of accounting change . . . . . . 1.44(d) 1.09 .92
Basic net earnings . . . . . . . . . . . 1.44 1.25 .92
Diluted net earnings . . . . . . . . . . 1.44 1.25 .92
Cash dividends . . . . . . . . . . . . . .55 .49 .48
Shareholders' equity (ending). . . . . . 7.52 7.37 6.60
YEAR-END FINANCIAL POSITION
Cash and cash equivalents. . . . . . . . 3,175 7,016 3,564
Total current assets . . . . . . . . . . 70,325 76,402 65,960
Property, plant, and equipment, net. . . 40,949 35,616 35,583
Total assets . . . . . . . . . . . . . . 116,179 117,013 105,273
Current liabilities excluding
current debt. . . . . . . . . . . . . . 35,408 29,836 25,206
Current ratio excluding current debt . . 2.0 2.6 2.6
Long-term liabilities excluding
long-term debt. . . . . . . . . . . . . 4,022 3,757 3,130
Financing debt
Current . . . . . . . . . . . . . . . 588 1,722 2,280
Long-term . . . . . . . . . . . . . . 2,111 2,234 2,421
Total as % of total capital . . . . 3.5 4.8 6.3
Shareholders' equity . . . . . . . . . . 74,050 77,998 69,516
CASH FLOW Increase (Decrease)
Related to operating activities. . . . . 25,685 18,614 15,651
Related to investing activities. . . . . (8,916) (9,140) (7,156)
Related to financing activities. . . . . (20,310) (5,730) (5,861)
OTHER DATA
Interest income. . . . . . . . . . . . . 2,033 2,023 2,196
Interest expense . . . . . . . . . . . . 597 401 1,017
Depreciation and amortization
expense . . . . . . . . . . . . . . . . 8,027 7,900 7,162
Net expenditures for property,
plant, and equipment. . . . . . . . . . 9,135 9,121 7,007
Number of employees at year-end. . . . . 1,789 1,726 1,727
Total direct compensation. . . . . . . . 62,401 58,637 54,721
Profit sharing and all other
employee benefits . . . . . . . . . . . 17,233 15,245 14,437
Average shares outstanding(e). . . . . . 10,268 10,592 10,640
Closing share price at year-end(e) . . . 17 1/2 13 1/8 11 3/4
Common stock price range during
year(e). . . . . . . . . . . . . . . . 12 5/8-18 1/4 11 1/4-16 3/8 8-16 1/2
Closing price/earnings ratio(f). . . . . 13.3 12.0 12.7
</TABLE>
(a) 1993 includes pretax restructuring charges of $4,090,000 ($2,536,000 net
of taxes).
(b) 1992 includes income tax reduction of $1,040,000 due to completion of
examinations by tax authorities.
(c) 1990 includes income tax reduction of $2,650,000 related to the merger
of a subsidiary with the Company.
(d) 1989 includes net gain related to sale of land of $1,247,000.
(e) Adjusted retroactively for two-for-one stock split effective April 26,
1995.
(f) Closing price/earnings ratio is based on closing share price and
earnings before extraordinary gain and cumulative effect of accounting
change, and adjusted for unusual items referenced in the above footnotes.
31
<PAGE>
INVESTOR INFORMATION
ANNUAL MEETING
The annual meeting of Tennant Company will be held at 10:30 a.m. on Friday,
May 8, at the Company's corporate headquarters, 701 North Lilac Drive, Golden
Valley, Minnesota.
STOCK MARKET INFORMATION
Tennant common stock is traded in the National Market System of NASDAQ, under
the ticker symbol TANT.
As of December 31, 1997, there were approximately 3,500 shareholders of
record.
QUARTERLY PRICE RANGE (UNAUDITED)
The accompanying chart shows the quarterly price range of the Company's
shares over the past five years after adjustment for the two-for-one stock
split:
<TABLE>
<CAPTION>
First Second Third Fourth
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993 20.13-24.25 19.75-22.00 20.75-22.75 20.88-24.25
1994 20.63-24.25 20.47-22.00 21.00-23.38 21.50-24.13
1995 23.13-25.00 23.00-29.00 25.00-27.25 22.25-27.25
1996 21.25-25.00 23.50-26.50 22.00-26.00 22.50-27.50
1997 26.13-28.75 26.75-33.25 33.25-37.50 36.00-39.63
</TABLE>
DIVIDEND INFORMATION
Cash dividends on Tennant's common stock have been paid for 54 consecutive
years, and the Company has increased dividends in each of the last 26 years.
Dividends generally are declared each quarter. Following are the record dates
anticipated for 1998:
June 1, 1998 September 1, 1998 December 16, 1998
DIVIDEND REINVESTMENT OR DIRECT DEPOSIT OPTIONS
Shareholders have the option of reinvesting quarterly dividends in additional
shares of Company stock, or having dividends deposited directly to a bank
account. The Transfer Agent should be contacted for additional information
(see below).
TRANSFER AGENT AND REGISTRAR
Shareholders with a change of address or questions about their account may
contact:
Norwest Bank Minnesota, N. A.
161 North Concord Exchange
P.O. Box 738
St. Paul, MN 55075-0738
612-450-4064 - 1-800-468-9716
10-K OFFER AND OTHER INVESTOR INFORMATION
A copy of Tennant's 1997 10-K annual report filed with the Securities and
Exchange Commission (which contains no material information not found in this
report), and other financial information may be obtained by writing Richard
A. Snyder, Treasurer, Tennant Company, P.O. Box 1452, Minneapolis, MN 55440,
or calling (612) 540-1341.
TENNANT INFORMATION ON THE INTERNET
Corporate news releases, product information, financial reports and other
company information can be found on Tennant's internet site:
www.tennantco.com
DIRECTORS
ROGER L. HALE, PRESIDENT, CHIEF EXECUTIVE OFFICER
ARTHUR D. COLLINS, JR., PRESIDENT, CHIEF OPERATING OFFICER
MEDTRONIC, INC., MINNEAPOLIS, MINNESOTA
DAVID C. COX, RETIRED PRESIDENT, CHIEF EXECUTIVE OFFICER
COWLES MEDIA COMPANY, MINNEAPOLIS, MINNESOTA
ANDREW P. CZAJKOWSKI, PRESIDENT, CHIEF EXECUTIVE OFFICER
BLUE CROSS & BLUE SHIELD OF MINNESOTA, ST. PAUL, MINNESOTA
WILLIAM A. HODDER, RETIRED CHAIRMAN, CHIEF EXECUTIVE OFFICER
DONALDSON COMPANY, INC., MINNEAPOLIS, MINNESOTA
DELBERT W. JOHNSON, CHAIRMAN, CO-CHIEF EXECUTIVE OFFICER
PIONEER METAL FINISHING, MINNEAPOLIS, MINNESOTA
WILLIAM I. MILLER, CHAIRMAN
IRWIN FINANCIAL CORPORATION, COLUMBUS, INDIANA
EDWIN L. RUSSELL, CHAIRMAN, PRESIDENT, CHIEF EXECUTIVE OFFICER
MINNESOTA POWER, DULUTH, MINNESOTA
OFFICERS
ROGER L. HALE, PRESIDENT, CHIEF EXECUTIVE OFFICER
JANET M. DOLAN, EXECUTIVE VICE PRESIDENT
DOUGLAS R. HOELSCHER, SENIOR VICE PRESIDENT
RICHARD M. ADAMS, VICE PRESIDENT
PAUL E. BRUNELLE, VICE PRESIDENT
KEITH D. PAYDEN, VICE PRESIDENT
RICHARD A. SNYDER, VICE PRESIDENT, TREASURER, AND
CHIEF FINANCIAL OFFICER
WILLIAM R. STRANG, VICE PRESIDENT
STEVEN K. WEEKS, VICE PRESIDENT
BRUCE J. BORGERDING, DEPUTY GENERAL COUNSEL AND
CORPORATE SECRETARY
JOHN T. PAIN, CORPORATE CONTROLLER AND PRINCIPAL
ACCOUNTING OFFICER
MAJOR UNITS
CASTEX INCORPORATED, HOLLAND, MICHIGAN
Thomas J. Vander Bie, PRESIDENT
Local business phone -- (616) 786-2330
TENNANT HOLDING B.V., UDEN, THE NETHERLANDS
Jan 't Hart, MANAGING DIRECTOR
Local business phone -- 4132-41241
32
<PAGE>
[LOGO]
4200 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
INDEPENDENT AUDITORS' REPORT AND CONSENT
The Board of Directors and Shareholders
Tennant Company:
The audits referred to in our report dated February 6, 1998, included the
related financial statement schedule for each of the years in the
three-year period ended December 31, 1997, included in Item 14.A.2 elsewhere
herein. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
We consent to incorporation by reference in Registration Statement No.
2-86844 on Form S-8, relating to the Tennant Company Profit Sharing and
Employee Stock Ownership Plan, No. 33-59054 on Form S-8 relating to the
Tennant Company 1992 Stock Incentive Plan and the Tennant Company Restricted
Stock Plan for Nonemployee Directors and No. 33-62003 on Form S-8 relating to
the Tennant Company 1995 Stock Incentive Plan of our reports dated February
6, 1998, relating to the consolidated balance sheets of Tennant Company and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of earnings, shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1997, and the related
financial statement schedule, which reports appear in or are incorporated by
reference in the December 31, 1997 annual report on Form 10-K of Tennant
Company.
/s/ KPMG PEAT MARWICK LLP
Minneapolis, Minnesota
March 23, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1997 AND THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997, PAGES 18 AND 19, FOOTNOTE 2,
PAGE 24, AND FOOTNOTE 7, PAGE 25 OF THE COMPANY'S 1997 ANNUAL REPORT TO
SHAREHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 16279
<SECURITIES> 0
<RECEIVABLES> 81463
<ALLOWANCES> 3302
<INVENTORY> 40323
<CURRENT-ASSETS> 143105
<PP&E> 156602
<DEPRECIATION> 91491
<TOTAL-ASSETS> 233870
<CURRENT-LIABILITIES> 57149
<BONDS> 20678
0
0
<COMMON> 3637
<OTHER-SE> 130449
<TOTAL-LIABILITY-AND-EQUITY> 233870
<SALES> 372428
<TOTAL-REVENUES> 372428
<CGS> 215392
<TOTAL-COSTS> 215392
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1901
<INTEREST-EXPENSE> 2021
<INCOME-PRETAX> 37630
<INCOME-TAX> 13425
<INCOME-CONTINUING> 24205
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24205
<EPS-PRIMARY> 2.43
<EPS-DILUTED> 2.41
</TABLE>
