<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998. COMMISSION FILE NUMBER 0-4804
TENNANT COMPANY
INCORPORATED IN THE STATE OF MINNESOTA EMPLOYER IDENTIFICATION NUMBER 41-0572550
701 NORTH LILAC DRIVE, P.O. BOX 1452, MINNEAPOLIS, MINNESOTA 55440
TELEPHONE NUMBER 612-540-1208
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
COMMON STOCK, PAR VALUE $.375 PER SHARE
AND
PREFERRED SHARE PURCHASE RIGHTS
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes X No
-------- --------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
/X/
$333,933,248.25 is aggregate market value of common stock held by
non-affiliates as of March 8, 1999.
9,086,119 shares outstanding at March 8, 1999
DOCUMENTS INCORPORATED BY REFERENCE
1998 Annual Report to Shareholders - Part I (Partial), Part II (Partial), and
Part IV (Partial)
1999 Proxy - Part III (Partial)
<PAGE>
TENNANT COMPANY
1998
ANNUAL REPORT
FORM 10-K
(PURSUANT TO SECURITIES EXCHANGE ACT OF 1934)
PART I
Part I is included in the Tennant Company 1998 Annual Report to Shareholders
(to the extent specific pages are referred to on the Cross Reference Sheet)
and is incorporated in this Form 10-K Annual Report by reference, except Item
3 - "Legal Proceedings," of which there were no material legal proceedings
pending, and Item 4 - "Submission of Matters to a Vote of Security Holders"
during the fourth quarter, of which there were none.
GENERAL DEVELOPMENT OF BUSINESS
Tennant Company, a Minnesota corporation incorporated in 1909, is a
Minneapolis-based company that specializes in the design, manufacture, and
sale of non-residential floor maintenance equipment and related products. On
February 1, 1994, the Company acquired the business and assets of Castex
Industries, Inc., a privately owned manufacturer of commercial floor
maintenance equipment.
INDUSTRY SEGMENTS, FOREIGN AND DOMESTIC OPERATIONS, AND EXPORT SALES
The Company, as described under "General Development of Business," has one
business segment. The Company sells its products domestically and
internationally. Appropriate financial information is provided in the
Company's 1998 Annual Report to Shareholders, page 23, footnote 2. Nearly all
of the Company's foreign investment in assets reside within Australia,
Canada, Japan, Spain, The Netherlands, the United Kingdom, France, and
Germany. While subject to increases or decreases in value over time due to
foreign exchange rate movements, these investments are considered to be of
low business risk.
PRINCIPAL PRODUCTS, MARKETS, AND DISTRIBUTION
Products consisting mainly of motorized cleaning equipment and related
products, including floor cleaning and preservation products, are sold
through a direct sales organization and independent distributors in North
America, primarily through a direct sales organization in Australia, France,
Spain, The Netherlands, Germany, and the United Kingdom, and through
independent distributors in more than 40 foreign countries. Additional
information pertaining to products and marketing methods is included in the
1998 Annual Report to Shareholders, pages 4, 5, 6, 7, 8, 9, 10, 11, 12 and 13.
RAW MATERIALS AND PURCHASED COMPONENTS
The Company has not experienced any significant or unusual problems in the
purchase of raw materials or other product components and is not
disproportionately dependent upon any single source or supply. The Company
has some sole-source vendors for certain components, primarily for automotive
and plastic parts. A disruption in supply from such vendors may cause a
short-term disruption in the Company's operations. However, the Company
believes that it can find alternate sources in the event there is a
disruption in supply from such vendors.
PATENTS AND TRADEMARKS
The Company applies for and is granted United States and foreign patents and
trademarks in the ordinary course of business, no one of which is of material
importance in relation to the business as a whole.
SEASONALITY
Although the Company's business is not seasonal in the traditional sense,
revenues and earnings tend to concentrate in the fourth quarter of each year
reflecting the tendency of customers to increase capital spending during such
quarter, and the Company's efforts to close orders and reduce order backlogs.
1
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WORKING CAPITAL PRACTICES
The Company's working capital practices are described in the 1998 Annual
Report to Shareholders, Management's Financial Discussion and Analysis,
Financial Position section on page 16.
MAJOR CUSTOMERS
The Company sells its products to a wide variety of customers, no one of
which is of material importance in relation to the business as a whole.
BACKLOG
The Company routinely fills orders within 30 days on the average.
Consequently, order backlogs are not indicative of future sales levels.
COMPETITIVE POSITION
While there is no industry association or industry data, the Company
believes, through its own market research, that it is a world-leading
manufacturer of floor maintenance equipment. Active competition exists in
most geographic areas; however, it tends to originate from different sources
in each area, and the Company's market share is believed to exceed that of
the leading competitor in many areas. The Company competes primarily on the
basis of offering a broad line of high-quality, innovative products supported
by an extensive sales/service network in major markets.
PRODUCT RESEARCH AND DEVELOPMENT
The Company regularly commits what is believed to be an above-average amount
of resources to product research and development. These amounts are reported
on the Company's 1998 Annual Report to Shareholders, page 23, footnote 3. A
description of product development is included in the 1998 Annual Report to
Shareholders on pages 7, 9, 10, 11, and 12.
ENVIRONMENTAL PROTECTION
Compliance with federal, state and local provisions regulating the discharge
of materials into the environment, or otherwise relating to the protection of
the environment, has not had, and is not expected to have, a material effect
upon the Company's capital expenditures, earnings or competitive position.
EMPLOYMENT
Year-end employment is reported in the 1998 Annual Report to Shareholders on
page 32.
EXECUTIVE OFFICERS OF THE REGISTRANT
Richard M. Adams, Vice President
Richard M. Adams (51) joined the Company in 1974. He was elected Assistant
Controller in 1983 and was named Corporate Controller in 1986. Mr. Adams
was named Vice President, Global Accounts in 1993. Mr. Adams is a Certified
Public Accountant. The Chairman and Chief Executive Officer of the Company,
Roger L. Hale, is the first cousin of Mr. Adams. Mr. Adams is a director of
Tennant UK Limited, Tennant Holding B.V., Tennant Europe B.V., Tennant
Import B.V., Tennant Japan, and Castex Incorporated.
Bruce J. Borgerding, Deputy General Counsel and Corporate Secretary
Bruce J. Borgerding (48) joined the Company in 1988 as Assistant General
Counsel. He was named Deputy General Counsel and Corporate Secretary in
1995. Mr. Borgerding is a director of Tennant UK Limited, Tennant Holding
B.V., Tennant Europe B.V., Tennant Import B.V., Tennant N.V., Tennant
Japan, and Tennant Company Far East Headquarters Pte Ltd.
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Paul E. Brunelle, Vice President
Paul E. Brunelle (58) joined the Company in 1965. In 1987 he was elected
Vice President of Personnel Resources. Prior to joining the Personnel
Resources Department in 1985, he was General Manager of the Company's
former Brazilian Operations. Mr. Brunelle is President of the Tennant
Company Foundation. Mr. Brunelle retired as of December 31, 1998.
Janet M. Dolan, President and Chief Operating Officer
Janet M. Dolan (49) joined the Company in 1986. Ms. Dolan was appointed
General Counsel and Secretary in 1987, Vice President in 1990, Senior Vice
President in 1995, Executive Vice President in 1996, President and Chief
Operating Officer and a director in 1998. She is a director of Castex
Incorporated. She is also a director of Donaldson Company, Inc.
Thomas J. Dybsky, Vice President
Thomas J. Dybsky (49) joined the Company in 1998 as Vice President of
Personnel Resources. Mr. Dybsky is a director of Tennant N.V.
Roger L. Hale, Chairman and Chief Executive Officer
Roger L. Hale (64) joined the Company in 1961. Mr. Hale was named Vice
President in 1969 and elected a director in 1969. Mr. Hale was named
President and Chief Operating Officer in 1975, Chief Executive Officer in
1976, and Chairman in 1998. He is also a director of U.S. Bancorp.
Douglas R. Hoelscher, Senior Vice President
Douglas R. Hoelscher (60) joined the Company in 1973. He was named Vice
President in 1978 and Senior Vice President of Industrial Markets in 1995.
He is a Registered Professional Engineer.
James H. Moar, Senior Vice President
James H. Moar (50) joined the Company in 1998 as Senior Vice President of
Industrial Markets.
Dean A. Niehus, Corporate Controller and Principal Accounting Officer
Dean A. Niehus (41) joined the Company in 1998.
John T. Pain, Vice President, Treasurer and Chief Financial Officer
John T. Pain (50) joined the Company in 1984 as Corporate Tax Manager. He
was named Assistant Treasurer in 1986, Corporate Controller and Principal
Accounting Officer in 1997, and Vice President, Treasurer, and Chief
Financial Officer in 1998. Mr. Pain is a Certified Public Accountant. He is
a director of Castex Incorporated, Tennant N.V., and Tennant Company Far
East Headquarters Pte Ltd.
Keith D. Payden, Vice President
Keith D. Payden (51) joined the Company in 1981. He was named Director,
Information Services in 1987, Chief Information Officer in 1992, and Vice
President in 1993.
Richard A. Snyder, Vice President
Richard A. Snyder (59) joined the Company in 1981 as Controller. He was
elected Treasurer and Chief Financial Officer in 1982 and named Vice
President in 1985. Mr. Snyder is a Certified Public Accountant. Mr. Snyder
retired as of December 31, 1998.
William R. Strang, Vice President
William R. Strang (62) joined the Company in 1969. He was named Director,
Corporate Marketing in 1987 and Vice President, Asia/Export/Australia in
1992. Mr. Strang is a director of Tennant Europe B.V., Tennant Holding
B.V., Tennant Japan, and Tennant Company Far East Headquarters Pte Ltd.
Steven K. Weeks, Vice President
Steven K. Weeks (43) joined the Company in 1984. He was named Manager,
Global New Business and Marketing Development in 1993, Director of
Marketing in 1994, and Vice President, Customer Solutions in 1996.
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PART II
Part II is included in the Tennant Company 1998 Annual Report to Shareholders
(to the extent specific pages are referred to on the Cross Reference Sheet)
and is incorporated in this Form 10-K Annual Report by reference, except Item
9, "Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure," of which there were none.
Item 7 - Y2K Project Overview
Tennant's company-wide Year 2000 Project (Project) is proceeding on schedule.
Tennant's Project is divided into four major sections: Applications Systems,
Systems Infrastructure, External Agents (suppliers/partners/distributors/
customers) and Embedded Systems (manufacturing and facilities). General
Project phases common to all sections are: 1) inventorying Year 2000 items;
2) assigning priorities to identified items; 3) assessing the Year 2000
compliance of items determined to be material to the company; 4) repairing or
replacing material items that are determined not to be Year 2000 compliant;
5) testing material items; and 6) designing and implementing contingency and
business continuation plans. Material items are those believed by the
company to have risk involving the safety of individuals that may cause
damage to either property or the environment, or affect revenues.
Progress status is as follows:
<TABLE>
<CAPTION>
% Complete Estimated
as of 12/31/98 Completion
-------------- ----------
<S> <C> <C>
Applications Systems 90% 2nd Quarter 1999
Systems Infrastructure 80% 2nd Quarter 1999
External Agents 75% 2nd Quarter 1999
Embedded Systems 80% 1st Quarter 1999
</TABLE>
A more detailed description of activities is as follows:
Applications Systems - In 1994, in order to improve access to business
information through common integrated computing systems across the Company,
Tennant began a worldwide business systems replacement project with systems
that use programs from SAP America, Inc. (SAP). The new systems are expected
to make approximately 80% of the Company business systems Year 2000
compliant. European applications systems are completely installed, and the
North American Industrial systems are 80% implemented. The remaining non-SAP
business software is in the process of being upgraded to Year 2000
compliance. The North American Commercial systems remediation was completed
in September of 1998. Contingency planning for Application Systems is in
process and will be completed by mid-year 1999. Our activity also includes
assessment and remediation of nonmission critical personal systems. Initial
survey and assessment work is expected to be completed by first quarter 1999,
with repair and remediation activities being continuous with estimated
completion second quarter 1999.
Systems Infrastructure - The Infrastructure section consists of hardware and
system software other than Applications Software. Activity in this area is
continuous with the majority being addressed and tested in conjunction with
project and regular replacement programs. Contingency planning is in process
and should be complete by the second quarter of 1999.
4
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Item 7 - Y2K Project Overview (cont.)
External Agents (Suppliers/Partners/Distributors/Customers) - The primary
activity in this section involves the process of identifying and prioritizing
critical suppliers, customers, distributors, and other partners at the direct
interface level and communicating with them about their plans and progress in
addressing the Year 2000 problem. The initial survey activity has been
completed and detailed evaluations of the most critical third parties have
been initiated. These evaluations will be followed by selective follow-up
contact, and development of contingency plans is in process, with expected
completion by the end of the first quarter 1999.
Embedded Systems (Manufacturing and Facilities) - This area focuses on the
hardware and software associated with embedded computer chips that are used
in the operation of all facilities operated by the company. Survey and
prioritization activities are complete. In addition, our activities have
included the evaluation of Year 2000 dependencies in embedded chips produced
in our own products all of which have been certified to be compliant.
COSTS
The total cost associated with the required modifications to become Year 2000
compliant is not expected to be material to the Company's financial position.
The core of the Company's IT investments have been focused on building new
capability while satisfying Year 2000 requirements. The estimated total cost
of the planned SAP activities through 1999 is approximately $20 million of
which $16 million has been expended. Funding for Year 2000 specific
activities are estimated at $950,000 of which $400,000 has been expended.
Funding for both SAP and Y2K activities is integrated with operational
budgets, with IT funding for fiscal year 1999 estimated to be at the same
levels as fiscal year 1998.
In January 1999, Tennant Company completed the purchase of Paul Andra KG.
Activities associated with Year 2000 certification are now underway using the
same process as outlined for Tennant Company. We expect a comprehensive
analysis and action plan to be completed by the end of the first quarter 1999.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
The statements in this report are forward-looking statements and are not
meant as historical facts. As discussed above, many factors are involved in
this project which contain risk and uncertainty and are beyond the control of
the Company. Included in this are the actions of suppliers, distributors,
customers, and other partners.
PART III
Part III is included in the Tennant Company 1999 Proxy (to the extent
specific pages are referred to on the Cross Reference Sheet) and is
incorporated in this Form 10-K Annual Report by reference, except Item 13 -
"Certain Relationships and Related Transactions," of which there were none,
and Item 10 - "Directors and Executive Officers of the Registrant" as it
relates to executive officers. Identification of executive officers is
included in Part I of this Form 10-K Annual Report.
5
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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 30 of the Tennant
Company 1998 Annual Report to Shareholders and are incorporated in
this Form 10-K Annual Report by reference:
a. Consolidated Statements of Earnings and Comprehensive Earnings
for each of the years in the three-year period ended December 31,
1998 - page 18.
b. Consolidated Balance Sheets as of December 31, 1998 and 1997 -
page 19.
c. Consolidated Statements of Cash Flows for each of the years in
the three-year period ended December 31, 1998 - page 20.
d. Consolidated Statements of Shareholders' Equity for each of the
years in the three-year period ended December 31, 1998 - page 21.
e. Independent Auditors' Report of KPMG Peat Marwick LLP - page 30.
f. Notes to Consolidated Financial Statements - pages 22 through 29.
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
(Dollars in Thousands)
<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
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998 3,302 944 1,290 2,956
Year ended December 31, 1997 2,506 1,901 1,105 3,302
Year ended December 31, 1996 2,611 1,160 1,265 2,506
</TABLE>
(1) Accounts determined to be uncollectible and charged against reserve, net
of collections on accounts previously charged against reserves.
<TABLE>
<CAPTION>
Additions
Balance at charged to Deductions
beginning costs and from Balance at
Warranty Reserves of year expenses reserves end of year
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998 1,998 4,023 4,060 1,961
Year ended December 31, 1997 1,750 3,679 3,431 1,998
Year ended December 31, 1996 1,637 3,160 3,047 1,750
</TABLE>
<TABLE>
<CAPTION>
Additions
Balance at charged to Deductions
Reserve for Inventory beginning costs and from Balance at
Obsolescence of year expenses reserves end of year
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998 1,012 593 697 908
Year ended December 31, 1997 1,014 739 741 1,012
Year ended December 31, 1996 1,035 499 520 1,014
</TABLE>
All other schedules are omitted as the required information is inapplicable
or because the required information is presented in the Consolidated
Financial Statements in the Tennant Company 1998 Annual Report to
Shareholders.
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3. Exhibits
<TABLE>
<CAPTION>
Item # Description Method of Filing
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<S> <C> <C>
3i Articles of Incorporation Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement No. 33-62003, Form
S-8, dated August 22, 1995.
3ii By-Laws Incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement No. 33-59054, Form
S-8, dated March 2, 1993.
10.1 Tennant Company 1988 Stock Incentive Plan Incorporated by reference to Exhibit b.1 to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
10.2 Tennant Company 1992 Stock Incentive Plan Incorporated by reference to Exhibit 4.4 to the
Company's Registration Statement No. 33-59054, Form
S-8 dated March 2, 1993.
10.3 Tennant Company Restricted Stock Plan for Incorporated by reference to Exhibit 4.5 to the
Nonemployee Directors Company's Registration Statement No. 33-59054, Form
S-8, dated March 2, 1993.
10.4 Tennant Company 1995 Stock Incentive Plan Incorporated by reference to Exhibit 4.4 to the
Company's Registration Statement No. 33-62003, Form
S-8, dated August 22, 1995.
10.5 Tennant Company Restricted Stock Plan for Incorporated by reference to Exhibit 10.2 to the
Nonemployee Directors, as amended and restated Company's 1995 Second Quarter 10-Q filing dated
effective January 1, 1995 August 8, 1995.
10.6 Tennant Company Excess Benefit Plan, as amended Incorporated by reference to Exhibit 10.4 to the
and restated effective January 1, 1994 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994.
10.7 Management Agreement with Steven K. Weeks dated Incorporated by reference to Exhibit 10.7 to the
November 19, 1996 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.
10.8 Management Agreement with Tom Vander Bie dated Incorporated by reference to Exhibit 10.8 to the
November 19, 1996 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.
10.9 Management Agreement with Richard M. Adams dated Incorporated by reference to Exhibit 10.6 to the
December 10, 1993 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.
10.10 Management Agreement with Paul E. Brunelle dated Incorporated by reference to Exhibit 10.7 to the
December 8, 1987 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.
10.11 Amendment to Management Agreement with Paul E. Incorporated by reference to Exhibit 10.8 to the
Brunelle dated June 21, 1989 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.
10.12 1993 Amendment to Management Agreement with Paul Incorporated by reference to Exhibit 10.9 to the
E. Brunelle dated December 10, 1993 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.
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10.13 Management Agreement with Janet M. Dolan dated Incorporated by reference to Exhibit b.5 to the
June 21, 1989 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
10.14 1993 Amendment to Management Agreement with Incorporated by reference to Exhibit 10.11 to the
Janet M. Dolan dated December 10, 1993 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.
10.15 Management Agreement with Roger L. Hale dated Incorporated by reference to Exhibit b.8 to the
March 10, 1987 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
10.16 Amendment to Management Agreement with Roger L. Incorporated by reference to Exhibit b.9 to the
Hale dated June 21, 1989 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
10.17 1993 Amendment to Management Agreement with Incorporated by reference to Exhibit 10.14 to the
Roger L. Hale dated December 10, 1993 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.
10.18 Management Agreement with Douglas R. Hoelscher Incorporated by reference to Exhibit b.10 to the
dated March 10, 1987 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
10.19 Amendment to Management Agreement with Douglas Incorporated by reference to Exhibit b.11 to the
R. Hoelscher dated June 21, 1989 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
10.20 1993 Amendment to Management Agreement with Incorporated by reference to Exhibit 10.18 to the
Douglas R. Hoelscher dated December 10, 1993 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.
10.21 Management Agreement with Keith D. Payden dated Incorporated by reference to Exhibit 10.19 to the
December 10, 1993 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.
10.22 Management Agreement with Richard A. Snyder Incorporated by reference to Exhibit b.12 to the
dated March 10, 1987 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
10.23 Amendment to Management Agreement with Richard Incorporated by reference to Exhibit b.13 to the
A. Snyder dated June 22, 1989 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
10.24 1993 Amendment to Management Agreement with Incorporated by reference to Exhibit 10.22 to the
Richard A. Snyder dated December 10, 1993 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.
10.25 Management Agreement with William R. Strang Incorporated by reference to Exhibit 10.23 to the
dated December 10, 1993 Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.
10.26 Asset Purchase Agreement dated January 27, 1994, Incorporated by reference to Exhibit 2.1 to the
between Tennant Company, Castex Industries, Company's Current Report on Form 8-K dated February
Inc., Wayne Investment Corp. and Wayne A. 15, 1994.
Streuer
10.27 Management Agreement with James H. Moar dated Filed herewith electronically.
July 13, 1998
10.28 Management Agreement with Thomas J. Dybsky dated Filed herewith electronically.
September 28, 1998
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10.29 Tennant Company Non-Employee Director Stock Filed herewith electronically.
Option Plan
10.30 Tennant Company 1998 Management Incentive Plan Filed herewith electronically.
13.1 Portions of 1998 Annual Report to Shareholders Filed herewith electronically.
21.1 Subsidiaries of the Registrant
Tennant Company has the following subsidiaries:
Tennant Holding B.V. is a wholly owned
subsidiary organized under the laws of the
Netherlands in 1991. A legal reorganization
occurred in 1991 whereby Tennant N.V. became a
participating interest of Tennant Holding B.V.
Tennant N.V. had previously been a wholly owned
subsidiary organized under the laws of the
Netherlands in 1970. Tennant Maintenance
Systems, Limited, was a wholly owned subsidiary,
organized under the laws of the United Kingdom
until October 29, 1992, at which time Tennant
Holding B.V. acquired 100% of its stock from
Tennant Company. The name was formally changed
to Tennant UK Limited on or about October 16,
1996. Castex Incorporated, is a wholly owned
subsidiary organized under the laws of the state
of Michigan. The results of these operations
have been consolidated into the financial
statements, as indicated therein.
23.1 Independent Auditors' Report and Consent Filed herewith electronically.
27.1 Financial Data Schedule Filed herewith electronically.
</TABLE>
B. Reports on Form 8-K
There were no reports filed on Form 8-K during the quarter ended
December 31, 1998.
9
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CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM 10-K REFERENCED LOCATION
- --------- ---------- --------
<S> <C> <C>
Part I, Item 1 - Business 1998 Annual Report to Shareholders Exhibit 13.1
a. General Pages 2 to 13
b. Lines of business, industry segments and Page 23, footnote 2
foreign and domestic operations
c. Working capital practices Page 16
d. Product research and development Pages 7, 9, 10, 11 and 12
Page 23, footnote 3
e. Employment Page 32
Part I, Item 2 - Properties 1998 Annual Report to Shareholders Exhibit 13.1
Page 24, footnote 7
Page 25, footnote 9
Inside back cover
Part II, Item 5 - Market for 1998 Annual Report to Shareholders Exhibit 13.1
the Registrant's Common a. Principal market Inside back cover
Equity and Related b. Quarterly data Page 23, footnote 4
Shareholder Matters Inside back cover
c. Number of shareholders Inside back cover
d. Dividends Page 23, footnote 4
Inside back cover
Part II, Item 6 - Selected 1998 Annual Report to Shareholders Exhibit 13.1
Financial Data Pages 32 and 33
Part II, Item 7 - Management's 1998 Annual Report to Shareholders Exhibit 13.1
Discussion and Analysis of Pages 14 to 17
Financial Condition and
Results of Operations
Part II, Item 8 - Financial 1998 Annual Report to Shareholders Exhibit 13.1
Statements and Supplementary Pages 18 to 30
Data
Part III, Item 10 - Directors 1999 Proxy Pages 4 to 7
and Executive Officers of the
Registrant
Part III, Item 11 - Executive 1999 Proxy Pages 8 to 14
Compensation
Part III, Item 12 - Security 1999 Proxy Pages 2 and 3
Ownership of Certain
Beneficial Owners and
Management
</TABLE>
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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
<TABLE>
<S> <C>
By -
------------------------------------- By -
Roger L. Hale, Chairman, CEO -----------------------------
and Board of Directors Andrew Czajkowski
Board of Directors
Date - March 25, 1999
Date - March 25, 1999
By - By -
------------------------------------ -----------------------------
Janet M. Dolan, President, COO Delbert W. Johnson
and Board of Directors Board of Directors
Date - March 25, 1999 Date - March 25, 1999
By -
-----------------------------
By - Pamela K. Knous
------------------------------------ Board of Directors
John T. Pain
Vice President, Treasurer, and Date - March 25, 1999
Chief Financial Officer
By -
Date - March 25, 1999 -----------------------------
William I. Miller
By - Board of Directors
------------------------------------
Dean A. Niehus Date - March 25, 1999
Corporate Controller and
Principal Accounting Officer
By -
Date - March 25, 1999 -----------------------------
Edwin L. Russell
By - Board of Directors
------------------------------------
Arthur D. Collins, Jr.
Board of Directors Date - March 25, 1999
Date - March 25, 1999
By -
------------------------------------
David C. Cox
Board of Directors
Date - March 25, 1999
</TABLE>
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MANAGEMENT AGREEMENT
AGREEMENT entered into as of July 13, 1998, by and between Tennant Company,
a Minnesota corporation (the "Company"), and James H. Moar (the "Employee").
WITNESSETH:
WHEREAS, the Employee is a key member of the management of the Company and
has heretofore devoted substantial skill and effort to the affairs of the
Company, and the Board of Directors of the Company desires to recognize the
significant personal contribution that the Employee has made to further the best
interests of the Company and its stockholders; and
WHEREAS, it is desirable and in the best interests of the Company and its
stockholders to continue to obtain the benefits of the Employee's services and
attention to the affairs of the Company; and
WHEREAS, it is desirable and in the best interests of the Company and its
stockholders to provide inducement for the Employee (A) to remain in the service
of the Company in the event of any proposed or anticipated change in control of
the Company and (B) to remain in the service of the Company in order to
facilitate an orderly transition in the event of a change in control of the
Company; and
WHEREAS, it is desirable and in the best interests of the Company and its
stockholders that the Employee be in a position to make judgments and advise the
Company with respect to proposed changes in control of the Company without
regard to the possibility that Employee's employment may be terminated without
compensation in the event of certain changes in control of the Company; and
WHEREAS, the Employee desires to be protected in the event of certain
changes in control of the Company; and
WHEREAS, for the reasons set forth above, the Company and the Employee
desire to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, the Company and the Employee agree as follows:
1. EMPLOYMENT. The Employee shall remain in the employ of the Company for
the term of this Agreement (the "Term"), and during the Term, the Employee
shall have such title, duties, responsibilities and authority, and receive such
remuneration and fringe benefits, as the Board of Directors of the Company shall
from time to time provide for the Employee; provided, however, that either the
Employee or the Company may terminate the employment of the Employee at any time
prior to the expiration of the Term, with or without Cause and for any reason
whatever, upon at least 30 days' prior written notice to the other party,
subject to the right of the Employee to receive any payment and other benefits
that may be due pursuant to the terms and conditions of paragraph 2 of this
Agreement.
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2. RIGHTS TO PAYMENT FOLLOWING CHANGE IN CONTROL. For purposes of this
paragraph 2, an "Event" shall be deemed to have occurred if:
A. a majority of the directors of the Company shall be persons other than
persons
(i) for whose election proxies shall have been solicited by the
Board of Directors of the Company or
(ii) who are then serving as directors appointed by the Board of
Directors to fill vacancies on the Board of Directors caused by
death or resignation (but not by removal) or to fill newly
created directorships,
B. 30% or more of the outstanding voting stock of the Company is acquired
or beneficially owned (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended, or any successor rule thereto (the
"Exchange Act")) by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act),
provided, however, that the following acquisitions and beneficial
ownership shall not constitute Events pursuant to this paragraph 2B:
(i) any acquisition or beneficial ownership by the Company or a
subsidiary of the Company or
(ii) any acquisition or beneficial ownership by any employee benefit
plan (or related trust) sponsored or maintained by the Company
or one or more of its subsidiaries,
(iii) any acquisition or beneficial ownership by the Employee or any
group that includes the Employee, or
(iv) any acquisition or beneficial ownership by a parent corporation
or its wholly-owned subsidiaries, as long as they shall remain
wholly-owned subsidiaries, of 100% of the outstanding voting
stock of the Company as a result of a merger or statutory share
exchange which complies with paragraph 2C(i)(2) or the
exception in paragraph 2C(ii) hereof in all respects,
C. the shareholders of the Company approve a definitive agreement or plan
to
(i) merge or consolidate the Company with or into another
corporation (other than (1) a merger or consolidation with a
subsidiary of the Company or (2) a merger in which
(a) the Company is the surviving corporation,
(b) no outstanding voting stock of the Company (other than
fractional shares) held by shareholders immediately
prior to the merger is converted into cash, securities,
or other property (except (I) voting stock of a parent
corporation owning directly, or indirectly through
wholly-owned subsidiaries, both beneficially and of
record 100% of the voting stock of the Company
immediately after the merger or (II) cash upon the
exercise by holders of voting stock of the Company of
statutory dissenters' rights),
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<PAGE>
(c) the persons who were the beneficial owners,
respectively, of the outstanding common stock and
outstanding voting stock of the Company immediately
prior to such merger beneficially own, directly or
indirectly, immediately after the merger, more than 70%
of, respectively, the then outstanding common stock and
the then outstanding voting stock of the surviving
corporation or its parent corporation, and
(d) if voting stock of the parent corporation is exchanged
for voting stock of the Company in the merger, all
holders of any class or series of voting stock of the
Company immediately prior to the merger have the right
to receive substantially the same per share
consideration in exchange for their voting stock of the
Company as all other holders of such class or series),
(ii) exchange, pursuant to a statutory exchange of shares of voting
stock of the Company held by shareholders of the Company
immediately prior to the exchange, shares of one or more
classes or series of voting stock of the Company for cash,
securities or other property, except for (a) voting stock of a
parent corporation of the Company owning directly, or
indirectly through wholly-owned subsidiaries, both beneficially
and of record 100% of the voting stock of the Company
immediately after the statutory share exchange if (I) the
persons who were the beneficial owners, respectively, of the
outstanding common stock and outstanding voting stock of the
Company immediately prior to such statutory share exchange own,
directly or indirectly, immediately after the statutory share
exchange more than 70% of, respectively, the then outstanding
common stock and the then outstanding voting stock of such
parent corporation, and (II) all holders of any class or series
of voting stock of the Company immediately prior to the
statutory share exchange have the right to receive
substantially the same per share consideration in exchange for
their voting stock of the Company as all other holders of such
class or series or (b) cash with respect to fractional shares
of voting stock of the Company or payable as a result of the
exercise by holders of voting stock of the Company of statutory
dissenters' rights,
(iii) sell or otherwise dispose of all or substantially all of the
assets of the Company (in one transaction or a series of
transactions), or
(iv) liquidate or dissolve the Company, unless a majority of the
voting stock (or the voting equity interest) of the surviving
corporation or its parent corporation or of any corporation (or
other entity) acquiring all or substantially all of the assets
of the Company (in the case of a merger, consolidation or
disposition of assets) or the Company or its parent corporation
(in the case of a statutory share exchange) is, immediately
following the merger, consolidation, statutory share exchange
or disposition of assets, beneficially owned by the Employee or
a group of persons, including the Employee, acting in concert,
or
D. (i) the Company enters into an agreement in principle or a
definitive agreement relating to an Event described in clause
A, B or C above which ultimately results in such an Event
described in clause A, B or C hereof,
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<PAGE>
(ii) a tender or exchange offer or proxy contest is commenced which
ultimately results in an Event described in clause A or B
hereof, or
(iii) there shall be an involuntary termination or Constructive
Involuntary Termination of employment of Employee, and Employee
reasonably demonstrates that such event (x) was requested by a
third party that has previously taken other steps reasonably
calculated to result in an Event described in clause A, B or C
above and which ultimately result in an Event described in
clause A, B or C hereof or (y) otherwise arose in connection
with or in anticipation of an Event described in clause A, B or
C above that ultimately occurs.
If any Event shall occur during the Term of this Agreement, then the Employee
shall be entitled to receive from the Company or its successor (which term as
used herein shall include any person acquiring all or substantially all of the
assets of the Company) a cash payment and other benefits on the following basis
(unless the Employee's employment by the Company is terminated voluntarily or
involuntarily prior to the occurrence of the earliest Event to occur (the "First
Event"), in which case the Employee shall be entitled to no payment or benefits
under this paragraph 2):
(a) If at the time of, or at any time after, the occurrence of the First
Event and prior to the end of the Transition Period, the employment of
the Employee with the Company is voluntarily or involuntarily
terminated for any reason (unless such termination is a voluntary
termination by the Employee other than a Constructive Involuntary
Termination or is on account of the death or Disability of the
Employee or is a termination by the Company for Cause), the Employee
(or the Employee's legal representative, as the case may be), subject
to the limitations set forth in paragraph 2(e),
(i) shall be entitled to receive from the Company or its successor,
upon such termination of employment with the Company or its
successor, a cash payment in an amount equal to A) three times
the average annual compensation payable by the Company and
includible in the gross income for Federal Income Tax purposes
of the Employee during the shorter of the period consisting of
the most recent five completed taxable years of the Employee
ending before the First Event (other than an Event described in
clause D of this paragraph 2 unless the Employee is terminated
prior to the occurrence of an Event described in clause A, B or
C of this paragraph 2) or that portion of such period during
which the Employee was employed by the Company, less B $1.00,
such payment to be made to the Employee by the Company or its
successor in a lump sum at the time of such termination of
employment; and
(ii) shall be entitled until the end of the Transition Period to
participate in any health, disability and life insurance plan
or program in which the Employee was entitled to participate
immediately prior to the First Event as if he or she were an
employee of the Company until the end of the Transition Period
(except, with respect to health insurance coverage, for those
portions remaining until the end of the Transition Period that
duplicate health insurance coverage that is in place for the
Employee under any other policy provided at the expense of
another employer); provided however, that in the event that the
Employee's participation in any such health, disability or life
insurance plan or program is
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<PAGE>
barred, the Company, at its sole cost and expense, shall
arrange to provide the Employee with benefits substantially
similar to those which the Employee is entitled to receive
under such plan or program.
(b) The payments provided for in this paragraph 2 shall be in addition to
any salary or other remuneration otherwise payable to the Employee on
account of employment by the Company or one or more of its
subsidiaries or its successor (including any amounts received prior to
such termination of employment for personal services rendered after
the occurrence of the First Event) but shall be reduced by any
severance pay which the Employee receives from the Company, its
subsidiaries or its successor under any other policy or agreement of
the Company in the event of involuntary termination of Employee's
employment.
(c) The Company shall also pay to the Employee all legal fees and expenses
incurred by the Employee as a result of such termination, including,
but not limited to, all such fees and expenses, if any, incurred in
contesting or disputing any such termination or in seeking to obtain
or enforce any right or benefit provided by this Agreement.
(d) In the event that at any time from the date of the First Event until
the end of the Transition Period,
(i) the Employee shall not be given substantially equivalent or
greater title, duties, responsibilities and authority or
substantially equivalent or greater salary and other
remuneration and fringe benefits (including paid vacation), in
each case as compared with the Employee's status immediately
prior to the First Event, other than for Cause or on account of
Disability,
(ii) the Company shall have failed to obtain assumption of this
Agreement by any successor as contemplated by paragraph 4(b)
hereof,
(iii) the Company shall require the Employee to relocate to any place
other than a location within twenty-five miles of the location
at which the Employee performed his duties immediately prior to
the First Event or, if the Employee performed such duties at
the Company's principal executive offices, the Company shall
relocate its principal executive offices to any location other
than a location within twenty-five miles of the location of the
principal executive offices immediately prior to the First
Event, or
(iv) the Company shall require that the Employee travel on Company
business to a substantially greater extent than required
immediately prior to the First Event,
a termination of employment with the Company by the Employee thereafter
shall constitute a Constructive Involuntary Termination.
(e) Notwithstanding any provision to the contrary contained herein except
the last sentence of this paragraph 2(e), if the lump sum cash payment
due and the other benefits to which the Employee shall become entitled
under paragraph 2(a) hereof, either alone or together with other
payments in the nature of compensation to the Employee which are
contingent on a change in the ownership or effective control of the
Company or in the ownership of a substantial portion of the assets of
the
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<PAGE>
Company or otherwise, would constitute a "parachute payment" as
defined in Section 280G of the Internal Revenue Code of 1986 (the
"Code") or any successor provision thereto, such lump sum payment
and/or such other benefits and payments shall be reduced (but not
below zero) to the largest aggregate amount as will result in no
portion thereof being subject to the excise tax imposed under
Section 4999 of the Code (or any successor provision thereto) or being
non-deductible to the Company for Federal Income Tax purposes pursuant
to Section 280G of the Code (or any successor provision thereto). The
Employee in good faith shall determine the amount of any reduction to
be made pursuant to this paragraph 2(e) and shall select from among
the foregoing benefits and payments those which shall be reduced. No
modification of, or successor provision to, Section 280G or
Section 4999 subsequent to the date of this Agreement shall, however,
reduce the benefits to which the Employee would be entitled under this
Agreement in the absence of this paragraph 2(e) to a greater extent
than they would have been reduced if Section 280G and Section 4999 had
not been modified or superseded subsequent to the date of this
Agreement, notwithstanding anything to the contrary provided in the
first sentence of this paragraph 2(e).
(f) The Employee shall not be required to mitigate the amount of any
payment or other benefit provided for in paragraph 2 by seeking other
employment or otherwise, nor (except as specifically provided in
paragraph 2(a)(ii)) shall the amount of any payment or other benefit
provided for in paragraph 2 be reduced by any compensation earned by
the Employee as the result of employment by another employer after
termination, or otherwise.
(g) The obligations of the Company under this paragraph 2 shall survive
the termination of this Agreement.
3. DEFINITION OF CERTAIN TERMS.
(a) As used herein, the term "person" shall mean an individual,
partnership, corporation, estate, trust or other entity.
(b) As used herein, the term "Cause" shall mean, and be limited to,
(i) willful and gross neglect of duties by the Employee or (ii) an act
or acts committed by the Employee constituting a felony and
substantially detrimental to the Company or its reputation.
(c) As used herein, the term "Disability" shall mean the Employee's
absence from his duties with the Company on a full time basis for 180
consecutive business days, as a result of the Employee's incapacity
due to physical or mental illness, unless within 30 days after written
notice pursuant to paragraph 1 hereof is given following such absence,
the Employee shall have returned to the full time performance of his
duties.
(d) As used herein, the term "voting stock" shall mean all outstanding
shares of capital stock entitled to vote generally in the election of
directors, considered for purposes of this Agreement as one class, and
all references to percentages of the voting stock shall be deemed to
be references to percentages of the total voting power of the voting
stock.
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<PAGE>
(e) As used herein, the term "Transition Period" shall mean the three-year
period commencing on the date of the earliest to occur of an Event
described in clause A, B or C of paragraph 2 hereof (the "Commencement
Date") and ending on the third anniversary of the Commencement Date.
4. SUCCESSORS AND ASSIGNS.
(a) This Agreement shall be binding upon and inure to the benefit of the
successors, legal representatives and assigns of the parties hereto;
provided, however, that the Employee shall not have any right to
assign, pledge or otherwise dispose of or transfer any interest in
this Agreement or any payments hereunder, whether directly or
indirectly or in whole or in part, without the written consent of the
Company or its successor.
(b) The Company will require any successor (whether direct or indirect, by
purchase of a majority of the outstanding voting stock of the Company
or all or substantially all of the assets of the Company, or by
merger, consolidation or otherwise), by agreement in form and
substance satisfactory to the Employee, to assume expressly and agree
to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such agreement prior
to the effectiveness of any such succession (other than in the case of
a merger or consolidation) shall be a breach of this Agreement and
shall entitle the Employee to compensation from the Company in the
same amount and on the same terms as the Employee would be entitled
hereunder if the Employee terminated his employment on account of a
Constructive Involuntary Termination, except that for purposes of
implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the date of termination. As used in
this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid
which is required to execute and deliver the agreement provided for in
this paragraph 4(b) or which otherwise becomes bound by all the terms
and provisions of this Agreement by operation of law.
5. GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of Minnesota.
6. NOTICES. All notices, requests and demands given to or made pursuant
hereto shall be in writing and shall be delivered or mailed to any such party at
its address which:
(a) In the case of the Company shall be:
Tennant Company
701 N. Lilac Drive
Minneapolis, Minnesota 55440
Attention: Chief Executive Officer
(b) In the case of the Employee shall be:
James H. Moar
495 Summit Avenue
St. Paul, MN 55102
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<PAGE>
Either party may, by notice hereunder, designate a changed address. Any notice,
if mailed properly addressed, postage prepaid, registered or certified mail,
shall be deemed to have been given on the registered date or that date stamped
on the certified mail receipt.
7. SEVERABILITY; SEVERANCE. In the event that any portion of this
Agreement is held to be invalid or unenforceable for any reason, it is hereby
agreed that such invalidity or unenforceability shall not affect the other
portions of this Agreement and that the remaining covenants, terms and
conditions or portions hereof shall remain in full force and effect, and any
court of competent jurisdiction may so modify the objectionable provision as to
make it valid, reasonable and enforceable. In the event that any benefits to
the Employee provided in this Agreement are held to be unavailable to the
Employee as a matter of law, the Employee shall be entitled to severance
benefits from the Employer, in the event of an involuntary termination or
Constructive Involuntary Termination of employment of the Employee (other than a
termination on account of the death or Disability of the Employee or a
termination for Cause) during the term of this Agreement occurring at the time
of or following the occurrence of an Event, at least as favorable to the
Employee (when taken together with the benefits under this Agreement that are
actually received by the Employee) as the most advantageous benefits made
available by the Employer to employees of comparable position and seniority to
the Employee during the five-year period prior to the First Event.
8. TERM. This Agreement shall commence on the date of this Agreement and
shall terminate, and the Term of this Agreement shall end, on the later of
(A) December 31, 1998, provided that such period shall be automatically
extended for one year and from year to year thereafter until notice of
termination is given by the Employer or the Employee to the other party hereto
at least 60 days prior to December 31, 1998 or the one-year extension period
then in effect, as the case may be, or (B) if the Commencement Date occurs prior
to December 31, 1998 (or prior to the end of the extension year then in effect
as provided for in clause (A) hereof), the third anniversary of the Commencement
Date.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
TENNANT COMPANY
By
---------------------------
------------------------------
James H. Moar
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MANAGEMENT AGREEMENT
AGREEMENT entered into as of September 28, 1998, by and between Tennant
Company, a Minnesota corporation (the "Company"), and Thomas J. Dybsky (the
"Employee").
WITNESSETH:
WHEREAS, the Employee is a key member of the management of the Company and
has heretofore devoted substantial skill and effort to the affairs of the
Company, and the Board of Directors of the Company desires to recognize the
significant personal contribution that the Employee has made to further the best
interests of the Company and its stockholders; and
WHEREAS, it is desirable and in the best interests of the Company and its
stockholders to continue to obtain the benefits of the Employee's services and
attention to the affairs of the Company; and
WHEREAS, it is desirable and in the best interests of the Company and its
stockholders to provide inducement for the Employee (A) to remain in the service
of the Company in the event of any proposed or anticipated change in control of
the Company and (B) to remain in the service of the Company in order to
facilitate an orderly transition in the event of a change in control of the
Company; and
WHEREAS, it is desirable and in the best interests of the Company and its
stockholders that the Employee be in a position to make judgments and advise the
Company with respect to proposed changes in control of the Company without
regard to the possibility that Employee's employment may be terminated without
compensation in the event of certain changes in control of the Company; and
WHEREAS, the Employee desires to be protected in the event of certain
changes in control of the Company; and
WHEREAS, for the reasons set forth above, the Company and the Employee
desire to enter into this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, the Company and the Employee agree as follows:
1. EMPLOYMENT. The Employee shall remain in the employ of the Company for
the term of this Agreement (the "Term"), and during the Term, the Employee
shall have such title, duties, responsibilities and authority, and receive such
remuneration and fringe benefits, as the Board of Directors of the Company shall
from time to time provide for the Employee; provided, however, that either the
Employee or the Company may terminate the employment of the Employee at any time
prior to the expiration of the Term, with or without Cause and for any reason
whatever, upon at least 30 days' prior written notice to the other party,
subject to the right of the Employee to receive any payment and other benefits
that may be due pursuant to the terms and conditions of paragraph 2 of this
Agreement.
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<PAGE>
2. RIGHTS TO PAYMENT FOLLOWING CHANGE IN CONTROL. For purposes of this
paragraph 2, an "Event" shall be deemed to have occurred if:
A. a majority of the directors of the Company shall be persons other than
persons
(i) for whose election proxies shall have been solicited by the
Board of Directors of the Company or
(ii) who are then serving as directors appointed by the Board of
Directors to fill vacancies on the Board of Directors caused by
death or resignation (but not by removal) or to fill newly
created directorships,
B. 30% or more of the outstanding voting stock of the Company is acquired
or beneficially owned (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended, or any successor rule thereto (the
"Exchange Act")) by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act),
provided, however, that the following acquisitions and beneficial
ownership shall not constitute Events pursuant to this paragraph 2B:
(i) any acquisition or beneficial ownership by the Company or a
subsidiary of the Company or
(ii) any acquisition or beneficial ownership by any employee benefit
plan (or related trust) sponsored or maintained by the Company
or one or more of its subsidiaries,
(iii) any acquisition or beneficial ownership by the Employee or any
group that includes the Employee, or
(iv) any acquisition or beneficial ownership by a parent corporation
or its wholly-owned subsidiaries, as long as they shall remain
wholly-owned subsidiaries, of 100% of the outstanding voting
stock of the Company as a result of a merger or statutory share
exchange which complies with paragraph 2C(i)(2) or the
exception in paragraph 2C(ii) hereof in all respects,
C. the shareholders of the Company approve a definitive agreement or plan
to
(i) merge or consolidate the Company with or into another
corporation (other than (1) a merger or consolidation with a
subsidiary of the Company or (2) a merger in which
(a) the Company is the surviving corporation,
(b) no outstanding voting stock of the Company (other than
fractional shares) held by shareholders immediately prior
to the merger is converted into cash, securities, or
other property (except (I) voting stock of a parent
corporation owning directly, or indirectly through
wholly-owned subsidiaries, both beneficially and of
record 100% of the voting stock of the Company
immediately after the merger or (II) cash upon the
exercise by holders of voting stock of the Company of
statutory dissenters' rights),
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<PAGE>
(c) the persons who were the beneficial owners, respectively,
of the outstanding common stock and outstanding voting
stock of the Company immediately prior to such merger
beneficially own, directly or indirectly, immediately
after the merger, more than 70% of, respectively, the
then outstanding common stock and the then outstanding
voting stock of the surviving corporation or its parent
corporation, and
(d) if voting stock of the parent corporation is exchanged
for voting stock of the Company in the merger, all
holders of any class or series of voting stock of the
Company immediately prior to the merger have the right to
receive substantially the same per share consideration in
exchange for their voting stock of the Company as all
other holders of such class or series),
(ii) exchange, pursuant to a statutory exchange of shares of voting
stock of the Company held by shareholders of the Company
immediately prior to the exchange, shares of one or more
classes or series of voting stock of the Company for cash,
securities or other property, except for (a) voting stock of a
parent corporation of the Company owning directly, or
indirectly through wholly-owned subsidiaries, both beneficially
and of record 100% of the voting stock of the Company
immediately after the statutory share exchange if (I) the
persons who were the beneficial owners, respectively, of the
outstanding common stock and outstanding voting stock of the
Company immediately prior to such statutory share exchange own,
directly or indirectly, immediately after the statutory share
exchange more than 70% of, respectively, the then outstanding
common stock and the then outstanding voting stock of such
parent corporation, and (II) all holders of any class or series
of voting stock of the Company immediately prior to the
statutory share exchange have the right to receive
substantially the same per share consideration in exchange for
their voting stock of the Company as all other holders of such
class or series or (b) cash with respect to fractional shares
of voting stock of the Company or payable as a result of the
exercise by holders of voting stock of the Company of statutory
dissenters' rights,
(iii) sell or otherwise dispose of all or substantially all of the
assets of the Company (in one transaction or a series of
transactions), or
(iv) liquidate or dissolve the Company, unless a majority of the
voting stock (or the voting equity interest) of the surviving
corporation or its parent corporation or of any corporation (or
other entity) acquiring all or substantially all of the assets
of the Company (in the case of a merger, consolidation or
disposition of assets) or the Company or its parent corporation
(in the case of a statutory share exchange) is, immediately
following the merger, consolidation, statutory share exchange
or disposition of assets, beneficially owned by the Employee or
a group of persons, including the Employee, acting in concert,
or
D. (i) the Company enters into an agreement in principle or a
definitive agreement relating to an Event described in clause
A, B or C above which ultimately results in such an Event
described in clause A, B or C hereof,
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<PAGE>
(ii) a tender or exchange offer or proxy contest is commenced which
ultimately results in an Event described in clause A or B
hereof, or
(iii) there shall be an involuntary termination or Constructive
Involuntary Termination of employment of Employee, and Employee
reasonably demonstrates that such event (x) was requested by a
third party that has previously taken other steps reasonably
calculated to result in an Event described in clause A, B or C
above and which ultimately result in an Event described in
clause A, B or C hereof or (y) otherwise arose in connection
with or in anticipation of an Event described in clause A, B or
C above that ultimately occurs.
If any Event shall occur during the Term of this Agreement, then the Employee
shall be entitled to receive from the Company or its successor (which term as
used herein shall include any person acquiring all or substantially all of the
assets of the Company) a cash payment and other benefits on the following basis
(unless the Employee's employment by the Company is terminated voluntarily or
involuntarily prior to the occurrence of the earliest Event to occur (the "First
Event"), in which case the Employee shall be entitled to no payment or benefits
under this paragraph 2):
(a) If at the time of, or at any time after, the occurrence of the First
Event and prior to the end of the Transition Period, the employment of
the Employee with the Company is voluntarily or involuntarily
terminated for any reason (unless such termination is a voluntary
termination by the Employee other than a Constructive Involuntary
Termination or is on account of the death or Disability of the
Employee or is a termination by the Company for Cause), the Employee
(or the Employee's legal representative, as the case may be), subject
to the limitations set forth in paragraph 2(e),
(i) shall be entitled to receive from the Company or its successor,
upon such termination of employment with the Company or its
successor, a cash payment in an amount equal to A) three times
the average annual compensation payable by the Company and
includible in the gross income for Federal Income Tax purposes
of the Employee during the shorter of the period consisting of
the most recent five completed taxable years of the Employee
ending before the First Event (other than an Event described in
clause D of this paragraph 2 unless the Employee is terminated
prior to the occurrence of an Event described in clause A, B or
C of this paragraph 2) or that portion of such period during
which the Employee was employed by the Company, less B $1.00,
such payment to be made to the Employee by the Company or its
successor in a lump sum at the time of such termination of
employment; and
(ii) shall be entitled until the end of the Transition Period to
participate in any health, disability and life insurance plan
or program in which the Employee was entitled to participate
immediately prior to the First Event as if he or she were an
employee of the Company until the end of the Transition Period
(except, with respect to health insurance coverage, for those
portions remaining until the end of the Transition Period that
duplicate health insurance coverage that is in place for the
Employee under any other policy provided at the expense of
another employer); provided however, that in the event that the
Employee's participation in any such health, disability or life
insurance plan or program is
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barred, the Company, at its sole cost and expense, shall
arrange to provide the Employee with benefits substantially
similar to those which the Employee is entitled to receive
under such plan or program.
(b) The payments provided for in this paragraph 2 shall be in addition to
any salary or other remuneration otherwise payable to the Employee on
account of employment by the Company or one or more of its
subsidiaries or its successor (including any amounts received prior to
such termination of employment for personal services rendered after
the occurrence of the First Event) but shall be reduced by any
severance pay which the Employee receives from the Company, its
subsidiaries or its successor under any other policy or agreement of
the Company in the event of involuntary termination of Employee's
employment.
(c) The Company shall also pay to the Employee all legal fees and expenses
incurred by the Employee as a result of such termination, including,
but not limited to, all such fees and expenses, if any, incurred in
contesting or disputing any such termination or in seeking to obtain
or enforce any right or benefit provided by this Agreement.
(d) In the event that at any time from the date of the First Event until
the end of the Transition Period,
(i) the Employee shall not be given substantially equivalent or
greater title, duties, responsibilities and authority or
substantially equivalent or greater salary and other
remuneration and fringe benefits (including paid vacation), in
each case as compared with the Employee's status immediately
prior to the First Event, other than for Cause or on account of
Disability,
(ii) the Company shall have failed to obtain assumption of this
Agreement by any successor as contemplated by paragraph 4(b)
hereof,
(iii) the Company shall require the Employee to relocate to any place
other than a location within twenty-five miles of the location
at which the Employee performed his duties immediately prior to
the First Event or, if the Employee performed such duties at
the Company's principal executive offices, the Company shall
relocate its principal executive offices to any location other
than a location within twenty-five miles of the location of the
principal executive offices immediately prior to the First
Event, or
(iv) the Company shall require that the Employee travel on Company
business to a substantially greater extent than required
immediately prior to the First Event,
a termination of employment with the Company by the Employee thereafter
shall constitute a Constructive Involuntary Termination.
(e) Notwithstanding any provision to the contrary contained herein except
the last sentence of this paragraph 2(e), if the lump sum cash payment
due and the other benefits to which the Employee shall become entitled
under paragraph 2(a) hereof, either alone or together with other
payments in the nature of compensation to the Employee which are
contingent on a change in the ownership or effective control of the
Company or in the ownership of a substantial portion of the assets of
the
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Company or otherwise, would constitute a "parachute payment" as
defined in Section 280G of the Internal Revenue Code of 1986 (the
"Code") or any successor provision thereto, such lump sum payment
and/or such other benefits and payments shall be reduced (but not
below zero) to the largest aggregate amount as will result in no
portion thereof being subject to the excise tax imposed under
Section 4999 of the Code (or any successor provision thereto) or being
non-deductible to the Company for Federal Income Tax purposes pursuant
to Section 280G of the Code (or any successor provision thereto). The
Employee in good faith shall determine the amount of any reduction to
be made pursuant to this paragraph 2(e) and shall select from among
the foregoing benefits and payments those which shall be reduced. No
modification of, or successor provision to, Section 280G or
Section 4999 subsequent to the date of this Agreement shall, however,
reduce the benefits to which the Employee would be entitled under this
Agreement in the absence of this paragraph 2(e) to a greater extent
than they would have been reduced if Section 280G and Section 4999 had
not been modified or superseded subsequent to the date of this
Agreement, notwithstanding anything to the contrary provided in the
first sentence of this paragraph 2(e).
(f) The Employee shall not be required to mitigate the amount of any
payment or other benefit provided for in paragraph 2 by seeking other
employment or otherwise, nor (except as specifically provided in
paragraph 2(a)(ii)) shall the amount of any payment or other benefit
provided for in paragraph 2 be reduced by any compensation earned by
the Employee as the result of employment by another employer after
termination, or otherwise.
(g) The obligations of the Company under this paragraph 2 shall survive
the termination of this Agreement.
3. DEFINITION OF CERTAIN TERMS.
(a) As used herein, the term "person" shall mean an individual,
partnership, corporation, estate, trust or other entity.
(b) As used herein, the term "Cause" shall mean, and be limited to,
(i) willful and gross neglect of duties by the Employee or (ii) an act
or acts committed by the Employee constituting a felony and
substantially detrimental to the Company or its reputation.
(c) As used herein, the term "Disability" shall mean the Employee's
absence from his duties with the Company on a full time basis for 180
consecutive business days, as a result of the Employee's incapacity
due to physical or mental illness, unless within 30 days after written
notice pursuant to paragraph 1 hereof is given following such absence,
the Employee shall have returned to the full time performance of his
duties.
(d) As used herein, the term "voting stock" shall mean all outstanding
shares of capital stock entitled to vote generally in the election of
directors, considered for purposes of this Agreement as one class, and
all references to percentages of the voting stock shall be deemed to
be references to percentages of the total voting power of the voting
stock.
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(e) As used herein, the term "Transition Period" shall mean the three-year
period commencing on the date of the earliest to occur of an Event
described in clause A, B or C of paragraph 2 hereof (the "Commencement
Date") and ending on the third anniversary of the Commencement Date.
4. SUCCESSORS AND ASSIGNS.
(a) This Agreement shall be binding upon and inure to the benefit of the
successors, legal representatives and assigns of the parties hereto;
provided, however, that the Employee shall not have any right to
assign, pledge or otherwise dispose of or transfer any interest in
this Agreement or any payments hereunder, whether directly or
indirectly or in whole or in part, without the written consent of the
Company or its successor.
(b) The Company will require any successor (whether direct or indirect, by
purchase of a majority of the outstanding voting stock of the Company
or all or substantially all of the assets of the Company, or by
merger, consolidation or otherwise), by agreement in form and
substance satisfactory to the Employee, to assume expressly and agree
to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such agreement prior
to the effectiveness of any such succession (other than in the case of
a merger or consolidation) shall be a breach of this Agreement and
shall entitle the Employee to compensation from the Company in the
same amount and on the same terms as the Employee would be entitled
hereunder if the Employee terminated his employment on account of a
Constructive Involuntary Termination, except that for purposes of
implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the date of termination. As used in
this Agreement, "Company" shall mean the Company as hereinbefore
defined and any successor to its business and/or assets as aforesaid
which is required to execute and deliver the agreement provided for in
this paragraph 4(b) or which otherwise becomes bound by all the terms
and provisions of this Agreement by operation of law.
5. GOVERNING LAW. This Agreement shall be construed in accordance with
the laws of the State of Minnesota.
6. NOTICES. All notices, requests and demands given to or made pursuant
hereto shall be in writing and shall be delivered or mailed to any such party at
its address which:
(a) In the case of the Company shall be:
Tennant Company
701 N. Lilac Drive
Minneapolis, Minnesota 55440
Attention: Chief Executive Officer
(b) In the case of the Employee shall be:
Thomas J. Dybsky
30 Blue Jay Lane
North Oaks, MN 55127
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Either party may, by notice hereunder, designate a changed address. Any notice,
if mailed properly addressed, postage prepaid, registered or certified mail,
shall be deemed to have been given on the registered date or that date stamped
on the certified mail receipt.
7. SEVERABILITY; SEVERANCE. In the event that any portion of this
Agreement is held to be invalid or unenforceable for any reason, it is hereby
agreed that such invalidity or unenforceability shall not affect the other
portions of this Agreement and that the remaining covenants, terms and
conditions or portions hereof shall remain in full force and effect, and any
court of competent jurisdiction may so modify the objectionable provision as to
make it valid, reasonable and enforceable. In the event that any benefits to
the Employee provided in this Agreement are held to be unavailable to the
Employee as a matter of law, the Employee shall be entitled to severance
benefits from the Employer, in the event of an involuntary termination or
Constructive Involuntary Termination of employment of the Employee (other than a
termination on account of the death or Disability of the Employee or a
termination for Cause) during the term of this Agreement occurring at the time
of or following the occurrence of an Event, at least as favorable to the
Employee (when taken together with the benefits under this Agreement that are
actually received by the Employee) as the most advantageous benefits made
available by the Employer to employees of comparable position and seniority to
the Employee during the five-year period prior to the First Event.
8. TERM. This Agreement shall commence on the date of this Agreement and
shall terminate, and the Term of this Agreement shall end, on the later of
(A) December 31, 1998, provided that such period shall be automatically
extended for one year and from year to year thereafter until notice of
termination is given by the Employer or the Employee to the other party hereto
at least 60 days prior to December 31, 1998 or the one-year extension period
then in effect, as the case may be, or (B) if the Commencement Date occurs prior
to December 31, 1998 (or prior to the end of the extension year then in effect
as provided for in clause (A) hereof), the third anniversary of the Commencement
Date.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
TENNANT COMPANY
By
-----------------------
--------------------------
Thomas J. Dybsky
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TENNANT COMPANY
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
1. PURPOSE. The purpose of this Non-Employee Director Stock Option
Plan (the "Plan") is to promote the interests of Tennant Company, a Minnesota
corporation (the "Company"), and its shareholders by providing non-employee
directors of the Company with an opportunity to acquire a proprietary
interest in the Company and thereby provide an additional incentive to put
forth maximum effort for the continued success and growth of the Company. In
addition, the opportunity to acquire a proprietary interest in the Company
will aid in attracting and retaining non-employee directors of outstanding
ability.
2. ADMINISTRATION.
(a) GENERAL. This Plan shall be administered by a the Company's
Board of Directors (the "Board"). The Board shall have the
power, subject to the limitations contained in this Plan, to fix
any terms and conditions for the grant or exercise of any award
under this Plan. Subject to the provisions of this Plan, the
Board may from time to time adopt such rules for the
administration of this Plan as it deems appropriate. The
decision of the Board on any matter affecting this Plan or the
rights and obligations arising under this Plan or any award
granted hereunder, shall be final, conclusive and binding upon
all persons, including without limitation the Company,
shareholders and optionees.
(b) INDEMNIFICATION. To the full extent permitted by law, (i) no
member of the Board shall be liable for any action or
determination taken or made in good faith with respect to this
Plan or any award granted hereunder and (ii) the members of
the Board shall be entitled to indemnification by the Company
against and from any loss incurred by such member or person by
reason of any such actions and determinations.
3. SHARES. The shares that may be made subject to options granted
under this Plan shall be authorized and unissued shares of Common Stock of
the Company, par value $.375 per share ("Shares," and each individually a
"Share"), and they shall not exceed 150,000 Shares in the aggregate, subject
to adjustment as provided in paragraph 12, below, except that, if any option
lapses or terminates for any reason before such option has been completely
exercised, the Shares covered by the unexercised portion of such option may
again be made subject to options granted under this Plan.
4. ELIGIBLE PARTICIPANTS. Stock options may be granted under this Plan
to any director of the Company who is not an employee of the Company or any
parent or subsidiary thereof (a "non-employee director"). References herein to
"employed," "employment" and similar terms (except "employee") shall refer to
the providing of services as a director.
5. TERMS AND CONDITIONS OF DIRECTOR OPTIONS.
(a) DISCRETIONARY GRANTS. Subject to the terms and conditions of
this Plan, the Board may, from time to time during the term of
this Plan, grant to any non-employee director options to
purchase such number of Shares of the Company on such terms
and conditions as the Board may determine. In determining the
non-employee directors to whom options shall be granted and
the number of Shares to be covered by each option, the Board
may take into account the nature of the services rendered by
the respective non-employee directors, their present and
potential contributions to the success of the Company, and
such other factors as the Board in its sole discretion may
deem relevant. The date and time of approval by the Board of
the granting of an option shall be considered the date and the
time of the grant of such option. The maximum number of Shares
subject to options that may be granted to any one non-employee
director under the Plan in any fiscal year of the Company
(including options granted under subparagraph 5(b)) may not
exceed 10,000 Shares (subject to adjustment pursuant to
paragraph 12 hereof).
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(b) SCHEDULED GRANTS. Effective January 1, 1997, the Company shall
grant to each non-employee director who is serving in such
capacity on January 1, 1997, an option to purchase 1,000
Shares. On the day following each annual meeting of the
shareholders of the Company (commencing with the annual
meeting to be held in 1997), the Company shall grant to each
then incumbent non-employee director an option to purchase
2,000 Shares. With respect to any non-employee director who is
elected or appointed to the Board on a date other than the
date of an annual meeting of shareholders, the Company shall
grant to such non-employee director on the day following his
or her first being so elected or appointed to the Board an
option to purchase a number of shares equal to the product
(rounded up to the next 100 shares) obtained by multiplying
2,000 by a fraction (x) the numerator of which is the number
of days from the date such non-employee director is first
elected or appointed to the Board to the date of the next
scheduled annual meeting of shareholders and (y) the
denominator of which is 365. Subject to the limitation
contained in subparagraph 5(a) as to the maximum annual
aggregate grant to any one individual, the Board may increase
or decrease the number of shares to be granted to non-employee
directors on any date pursuant to this said paragraph 5(b).
(c) PURCHASE PRICE. The purchase price of each Share subject to an
option granted pursuant to this paragraph 5 shall be 100% of
the Fair Market Value of a Share on the date of grant.
(d) VESTING. With respect to any option granted under subparagraph
5(a), the option agreement provided for in paragraph 6
relating to such option shall specify when such option shall
become exercisable. With respect to any option granted under
subparagraph 5(b), such option shall become exercisable
cumulatively as to 25% of the shares subject thereto on the
date of each of the first through the fourth annual meetings
of shareholders of the Company following the date of grant
thereof or, with respect to options granted on any date other
than the day following an annual meeting of shareholders, on
each of the first through the fourth anniversaries of the date
of grant. Notwithstanding the foregoing or the provisions of
any option agreement, the Board may, in its sole discretion,
declare at any time that any option granted under this Plan
shall be immediately exercisable.
(e) TERMINATION. Each option granted pursuant to this paragraph 5
shall expire, and all rights to purchase Shares thereunder
shall terminate, on the earliest of:
(i) ten years after the date such option is granted or on
such date prior thereto as may be fixed by the Board on
or before the date such option is granted;
(ii) the expiration of the period after the termination of
the optionee's service as a non-employee director within
which the option is exercisable as specified in
paragraph 9(b) (provided that the Board may, in any
option agreement provided for in paragraph 6 or by Board
action with respect to any outstanding option, extend
the periods specified in paragraph 9(b)); or
(iii) the date, if any, fixed for cancellation pursuant to
paragraph 10(c) or 11 below.
6. OPTION AGREEMENTS. All options granted under this Plan shall be
evidenced by a written agreement in such form or forms as the Board may from
time to time determine.
7. FAIR MARKET VALUE. For purposes of this Plan, the "Fair Market
Value" of a Share at a specified date shall, unless otherwise expressly
provided in this Plan, mean the closing sale price of a Share on the date
immediately preceding such date or, if no sale of Shares shall have occurred
on that date, on the next preceding day on which a sale of Shares occurred,
on the Composite Tape for New York Stock Exchange listed shares or, if Shares
are not quoted on the Composite Tape for New York Stock Exchange listed
shares, on the NASDAQ National Market or any similar system then in use or,
if Shares are not included in the NASDAQ National Market or any similar
system then in use, the mean between the closing "bid" and the closing
"asked" quotation of a Share on the date immediately preceding the date as of
which such Fair Market Value is being determined, or, if no closing bid or
asked quotation is made on that date, on the next preceding day on which a
quotation is made, on the NASDAQ SmallCap Market or any similar system then
in use, provided that if the Shares in question are not quoted on any such
system, Fair Market Value shall be what the Board determines in good faith to
be 100% of the market value of a Share as of the
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<PAGE>
date in question. Notwithstanding anything stated in this paragraph 7, if the
applicable securities exchange or system has closed for the day by the time
the determination is being made, all references in this paragraph to the date
immediately preceeding the date in question shall be deemed to be references
to the date in question.
8. MANNER OF EXERCISE OF OPTIONS. A person entitled to exercise an
option granted under this Plan may, subject to its terms and conditions and
the terms and conditions of this Plan, exercise it in whole at any time, or in
part from time to time, by delivery to the Company at its principal executive
office, to the attention of its Vice President, Personnel Resources, of
written notice of exercise, specifying the number of Shares with respect to
which the option is being exercised. The purchase price of the Shares with
respect to which an option is being exercised shall be payable in full at the
time of exercise, provided that, to the extent permitted by law, the holder
of an option may simultaneously exercise an option and sell all or a portion
of the Shares thereby acquired pursuant to a brokerage or similar
relationship and use the proceeds from such sale to pay the purchase price of
such Shares. The purchase price of each Share on the exercise of any option
shall be paid in full in cash (including check, bank draft or money order)
or, at the discretion of the person exercising the option, by delivery to the
Company of unencumbered Shares, by a reduction in the number of Shares
delivered upon exercise of the option, or by a combination of cash and such
Shares (in each case such Shares having an aggregate Fair Market Value on the
date of exercise equal to the amount of the purchase price being paid through
such delivery or reduction of Shares); provided, however, that no person
shall be permitted to pay any portion of the purchase price with Shares if
the Board, in its sole discretion, determines that payment in such manner is
undesirable. The granting of an option to a person shall give such person no
rights as a shareholder except as to Shares issued to such person.
9. TRANSFERABILITY AND TERMINATION OF EMPLOYMENT.
(a) TRANSFERABILITY. During the lifetime of an optionee, only such
optionee or his or her guardian or legal representative may
exercise options granted under this Plan, and no option
granted under this Plan shall be assignable or transferable by
the optionee otherwise than by will or the laws of descent and
distribution or pursuant to a domestic relations order as
defined by the Code or Title I of the Employee Retirement
Income Security Act, or the rules thereunder; provided,
however, that any optionee may transfer a non-statutory stock
option granted under this Plan to a member or members of his
or her immediate family (i.e., his or her children,
grandchildren and spouse) or to one or more trusts for the
benefit of such family members or partnerships in which such
family members are the only partners, if (i) the option
agreement with respect to such options expressly so provides
either at the time of initial grant or by amendment to an
outstanding option agreement and (ii) the optionee does not
receive any consideration for the transfer. Any options held
by any such transferee shall continue to be subject to the
same terms and conditions that were applicable to such options
immediately prior to their transfer and may be exercised by
such transferee only as and to the extent that such option has
become exercisable and has not terminated in accordance with
the provisions of the Plan and the applicable option
agreement. For purposes of any provision of this Plan relating
to notice to an optionee or to vesting or termination of an
option upon the death, disability or termination of employment
of an optionee, the references to "optionee" shall mean the
original grantee of an option and not any transferee.
(b) TERMINATION OF EMPLOYMENT. In the event that an optionee
ceases to be employed as a non-employee director by reason of
(i) death,
(ii) disability preventing continued service,
(iii) retirement from the Board in accordance with the policy
of the Company, if any, on retirement of non-employee
directors then in effect, or
(iv) termination of service as a non-employee director by
reason of (x) resignation at the request of the Board
(other than for gross misconduct, as determined by the
Board) (y) the director's failure to have been nominated
for re-election to the Board (unless such failure
results from the non-employee director's unwillingness
to continue to serve) or to have been re-elected by the
shareholders of the Company, or
(v) the director's removal by the shareholders of the Company
then any option granted to such optionee that was not previously
exercisable shall become immediately exercisable in full if the
optionee shall have been continuously employed by the
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Company or a parent or subsidiary thereof between the date such
option was granted and the date of such termination of service
and such option shall continue to be exercisable for five years
after termination of such optionee's employment. If an
optionee's employment terminates in any manner other than as
provided for in the preceding sentence, any option granted to
such optionee shall terminate immediately upon such termination
of employment.
(c) RIGHT TO TERMINATE EMPLOYMENT. Nothing contained in this Plan,
or in any option granted pursuant to this Plan, shall confer
upon any optionee any right to continued employment by the
Company or limit in any way the right of the Company to
terminate such optionee's employment at any time.
(d) EXPIRATION DATE. In no event shall any option be exercisable
at any time after the time it shall have expired in accordance
with paragraph 5(e) of this Plan. When an option is no longer
exercisable, it shall be deemed to have lapsed or terminated
and will no longer be outstanding.
10. CHANGE IN CONTROL.
(a) For purposes of this Plan, a "Change in Control" of the
Company shall be deemed to occur if any of the following occur:
(i) Any "person" (as such term is used in Section 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) acquires or becomes a "beneficial
owner" (as defined in Rule 13d-3 or any successor rule
under the Exchange Act), directly or indirectly, of
securities of the Company representing 30% or more of the
combined voting power of the Company's then outstanding
securities entitled to vote generally in the election of
directors ("Voting Securities"), provided, however, that
the following shall not constitute a Change in Control
pursuant to this paragraph (a)(1):
(A) any acquisition or beneficial ownership by the
Company or a Subsidiary;
(B) any acquisition or beneficial ownership by any
employee benefit plan (or related trust) sponsored or
maintained by the Company or one or more of its
Subsidiaries;
(C) any acquisition or beneficial ownership by any
corporation with respect to which, immediately
following such acquisition, more than 70% of both the
combined voting power of the Company's then
outstanding Voting Securities and the Shares of the
Company is then beneficially owned, directly or
indirectly, by all or substantially all of the
persons who beneficially owned Voting Securities and
Shares of the Company immediately prior to such
acquisition in substantially the same proportions as
their ownership of such Voting Securities and Shares,
as the case may be, immediately prior to such
acquisition;
(ii) A majority of the members of the Board of Directors of
the Company shall not be Continuing Directors.
"Continuing Directors" shall mean: (A) individuals who,
on the date hereof, are directors of the Company, (B)
individuals elected as directors of the Company
subsequent to the date hereof for whose election proxies
shall have been solicited by the Board of Directors of
the Company or (C) any individual elected or appointed
by the Board of Directors of the Company to fill
vacancies on the Board of Directors of the Company
caused by death or resignation (but not by removal) or
to fill newly-created directorships;
(iii) Approval by the shareholders of the Company of a
reorganization, merger, or consolidation of the Company
or a statutory exchange of outstanding Voting Securities
of the Company, unless immediately following such
reorganization, merger, consolidation, or exchange, all
or substantially all of the persons who were the
beneficial owners, respectively, of Voting Securities
and Shares of the Company immediately prior to such
reorganization, merger, consolidation, or exchange
beneficially own, directly or indirectly, more than 70%
of, respectively, the combined voting power of the then
outstanding voting securities entitled to vote generally
in the election of directors and the then outstanding
shares of common stock, as the case may be, of the
corporation resulting from such reorganization, merger,
consolidation,
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or exchange in substantially the same proportions as their
ownership, immediately prior to such reorganization,
merger, consolidation, or exchange, of the Voting
Securities and Stock of the Company, as the case may be;
or
(iv) Approval by the shareholders of the Company of (x) a
complete liquidation or dissolution of the Company or
(y) the sale or other disposition of all or
substantially all of the assets of the Company (in one
or a series of transactions), other than to a
corporation with respect to which, immediately following
such sale or other disposition, more than 70% of,
respectively, the combined voting power of the then
outstanding voting securities of such corporation
entitled to vote generally in the election of directors
and the then outstanding shares of common stock of such
corporation is then beneficially owned, directly or
indirectly, by all or substantially all of the persons
who were the beneficial owners, respectively, of the
Voting Securities and Shares of the Company immediately
prior to such sale or other disposition in substantially
the same proportions as their ownership, immediately
prior to such sale or other disposition, of the Voting
Securities and Shares of the Company, as the case may be.
(b) ACCELERATION OF VESTING. Notwithstanding anything in
subparagraph 5(d) above to the contrary, if a Change of
Control of the Company shall occur, then, without any action
by the Board, each option granted under this Plan and not
already exercised in full or otherwise terminated, expired or
canceled shall become immediately exercisable in full.
(c) CASH PAYMENT. If a Change in Control of the Company shall
occur, then, so long as a majority of the members of the Board
are Continuing Directors, the Board, in its sole discretion,
and without the consent of the holder of any option affected
thereby, may determine that some or all outstanding options
shall be canceled as of the effective date of any such Change
in Control and that the holder or holders of such canceled
options shall receive, with respect to some or all of the
Common Shares subject to such options, as of the date of such
cancellation, cash in an amount, for each Share subject to an
option, equal to the excess of the per Share Fair Market Value
of such Shares immediately prior to such Change in Control of
the Company over the exercise price per Share of such options.
(d) LIMITATION ON CHANGE IN CONTROL PAYMENTS. Notwithstanding
anything in subparagraph 10(b) or 10(c) above or paragraph 11
below to the contrary, if, with respect to an optionee, the
acceleration of the exercisability of an option or the payment
of cash in exchange for all or part of an option as provided
in subparagraph 10(b) or 10(c) above or paragraph 11 (which
acceleration or payment could be deemed a "payment" within the
meaning of Section 280G(b)(2) of the Code), together with any
other payments which such optionee has the right to receive
from the Company or any corporation which is a member of an
"affiliated group" (as defined in Section 1504(a) of the Code
without regard to Section 1504(b) of the Code) of which the
Company is a member, would constitute a "parachute payment"
(as defined in Section 280G(b)(2) of the Code), then such
acceleration of exercisability and payments pursuant to
subparagraph 10(b) or 10(c) above or paragraph 11 shall be
reduced to the largest amount as, in the sole judgment of the
Board, will result in no portion of such payments being
subject to the excise tax imposed by Section 4999 of the Code.
11. DISSOLUTION, LIQUIDATION, MERGER. In the event of (a) the proposed
dissolution or liquidation of the Company; (b) a proposed sale of
substantially all of the assets of the Company; or (c) a proposed merger,
consolidation of the Company with or into any other entity, regardless of
whether the Company is the surviving corporation, or a proposed statutory
share exchange with any other entity (the actual effective date of the
dissolution, liquidation, sale, merger, consolidation or exchange being
herein called an "Event"), the Board may, but shall not be obligated to,
either (i) if the Event is a merger, consolidation or statutory share
exchange, make appropriate provision for the protection of outstanding
options granted under this Plan by the substitution, in lieu of such options,
of options to purchase appropriate voting common stock (the "Survivor's
Stock") of the corporation surviving any such merger or consolidation or, if
appropriate, the parent corporation of the Company or such surviving
corporation, or, alternatively, by the delivery of a number of shares of the
Survivor's Stock which has a Fair Market Value as of the effective date of
such merger, consolidation or statutory share exchange equal to the product
of (x) the excess of (A) the Event Proceeds per Share (as hereinafter defined)
covered by the option as of such effective date over (B) the exercise
5
<PAGE>
price per Share of the Shares subject to such option, times (y) the number of
Shares covered by such option or (ii) declare, at least twenty days prior to
the Event, and provide written notice to each optionee of the declaration,
that each outstanding option, whether or not then exercisable, shall be
canceled at the time of, or immediately prior to the occurrence of, the Event
(unless it shall have been exercised prior to the occurrence of the Event).
In connection with any declaration pursuant to clause (ii) of the preceding
sentence, the Board may, but shall not be obligated to, cause payment to be
made, within twenty days after the Event, in exchange for each canceled
option to each holder of an option that is canceled, of cash equal to the
amount (if any), for each Share covered by the canceled option, by which the
Event Proceeds per Share (as hereinafter defined) exceeds the exercise price
per Share covered by such option. At the time of any declaration pursuant to
clause (ii) of the first sentence of this paragraph 11, each option that has
not previously expired pursuant to subparagraph 5(e)(i) or 5(e)(ii) of this
Plan or been canceled pursuant to paragraph 10(c) of this Plan shall
immediately become exercisable in full and each holder of an option shall
have the right, during the period preceding the time of cancellation of the
option, to exercise his or her option as to all or any part of the Shares
covered thereby. In the event of a declaration pursuant to clause (ii) of the
first sentence of this paragraph 11, each outstanding option granted pursuant
to this Plan that shall not have been exercised prior to the Event shall be
canceled at the time of, or immediately prior to, the Event, as provided in
the declaration, and this Plan shall terminate at the time of such
cancellation, subject to the payment obligations of the Company provided in
this paragraph 11. Notwithstanding the foregoing, no person holding an option
shall be entitled to the payment provided in this paragraph 11 if such option
shall have expired pursuant to subparagraph 5(e)(i) or 5(e)(ii) of this Plan
or been canceled pursuant to paragraph 10(c) of this Plan. For purposes of
this paragraph 11, "Event Proceeds per Share" shall mean the cash plus the
market value, as determined in good faith by the Board, of the non-cash
consideration to be received per Share by the shareholders of the Company
upon the occurrence of the Event.
12. ADJUSTMENTS. In the event of any reorganization, merger,
consolidation, recapitalization, liquidation, reclassification, stock
dividend, stock split, combination of shares, rights offering, or
extraordinary dividend or divestiture (including a spin-off), or any other
change in the corporate structure or Shares of the Company, the Board (or if
the Company does not survive any such transaction, the Board of Directors of
the surviving corporation) may, without the consent of any holder of an
option, make such adjustment as it determines in its discretion to be
appropriate as to the number and kind of securities subject to and reserved
under this Plan and, in order to prevent dilution or enlargement of rights of
participants in this Plan, the number and kind of securities issuable upon
exercise of outstanding options and the exercise price thereof.
13. COMPLIANCE WITH LEGAL REQUIREMENTS. No certificate for Shares
distributable under this Plan shall be issued and delivered unless the
issuance of such certificate complies with all applicable legal requirements
including, without limitation, compliance with the provisions of applicable
state securities laws, the Securities Act of 1933, as amended, and the
Exchange Act.
14. GOVERNING LAW. To the extent that federal laws do not otherwise
control, this Plan and all determinations made and actions taken under this
Plan shall be governed by the laws of the State of Minnesota, without regard
to the conflicts of law provisions thereof, and construed accordingly.
15. AMENDMENT AND DISCONTINUANCE OF PLAN. The Board may at any time
amend, suspend or discontinue this Plan; provided, however, that no amendment
to this Plan shall, without the consent of the holder of the option, alter or
impair any option previously granted under this Plan. To the extent
considered necessary to comply with applicable provisions of the Code, any
such amendments to this Plan may be made subject to approval by the
shareholders of the Company.
16. TERM.
(a) EFFECTIVE DATE. This Plan shall be effective as of January 1,
1997, provided that this Plan is approved and ratified by the
affirmative vote of the holders of a majority of the
outstanding Shares present or represented and entitled to vote
in person or by proxy at a meeting of the shareholders of the
Company no later than May 31, 1997. Any options granted
hereunder prior to such shareholder approval shall be subject
to such shareholder approval. If this Plan is not so approved
by such holders, any options granted under this Plan subject
to such approval shall be null and void and this Plan shall
not take effect.
(b) TERMINATION. This Plan shall remain in effect until all Shares
subject to it are distributed or this Plan is terminated under
paragraph 15 above.
6
<PAGE>
TENNANT COMPANY
1998 MANAGEMENT INCENTIVE PLAN
1. PURPOSE. The purpose of the Tennant Company 1998 Management Incentive Plan
(the "Plan") is to provide incentives to the senior executives of Tennant
Company (the "Company") and its subsidiaries to produce a superior return
to the stockholders of the Company and to encourage such executives to
remain in the employ of the Company and its subsidiaries. Amounts paid
pursuant to the Plan are intended to qualify as performance-based
compensation within the meaning of Section 162(m) of the Internal Revenue
Code, as amended (the "Code").
2. DEFINITIONS.
2.1 The terms defined in this section are used (and capitalized) elsewhere
in the Plan.
a. "Annual Profits" means the consolidated income before interest
expense and income taxes of the Company for the Performance
Period, before the provision for incentive compensation earned
pursuant to this Plan and before extraordinary items. For
purposes of this calculation, (i) changes in generally accepted
accounting principles which occur during the fiscal year, and
(ii) discontinued operation and restructuring costs, as computed
in accordance with generally accepted accounting principles,
shall be taken into account to the extent determined by the
Committee.
b. "Award" means an award payable to a Participant pursuant to
Section 4 hereof.
c. "Board" means the Board of Directors of the Company.
d. "Committee" means the Executive Compensation Committee of the
Board, or such other Board committee as may be designated by the
Board to administer the Plan.
e. "Company" means Tennant Company, a Minnesota corporation. For
purposes of the provisions of this Plan relating to employment of
a Participant with the Company, the term "Company" shall include
any subsidiary of the Company, 50% or more of the voting stock of
which is directly or indirectly owned by the Company.
f. "Disability" means a medical condition that the Committee has
determined renders a Participant unable to perform the normal
duties of the Participant's position with the Company. The
Committee may, in its sole discretion, obtain a medical opinion
from a physician selected by the Committee before any
determination of Disability is made.
g. "Effective Date" means the date specified in Section 5.
h. "Eligible Employee" means any key employee of the Company or a
subsidiary thereof.
i. "Fair Market Value" of a Share as of a date means the closing
price on the preceding day on the Nasdaq National Market System
or, if no trading in Shares occurred on such day on the Nasdaq
National Market System, the closing price of a Share on the most
recent day on which such trading occurred.
j. "Participant" means an Eligible Employee designated by the
Committee to participate in the Plan for a designated Performance
Period.
k. "Performance Period" means the Company's fiscal year.
1
<PAGE>
l. "Retirement" means termination of employment (i) after attaining
age 55 for a reason other than death or Disability, provided that
no less than 6 months' prior written notice is given to the
Company, or (ii) with the approval of the Committee.
m. "Share" means a Share of common stock of the Company, par value
$.375 per share (as such par value may be adjusted from time to
time).
2.2 GENDER AND NUMBER. Except when otherwise indicated by context,
reference to the masculine gender shall include, when used, the
feminine gender and any term used in the singular shall also include
the plural.
3. ADMINISTRATION.
3.1 AUTHORITY OF COMMITTEE. The Committee shall administer the Plan. The
Committee's interpretation of the Plan and of any Awards made under
the Plan shall be final and binding on all persons with an interest
therein. The Committee shall have the power to establish rules to
administer the Plan and to change such rules.
3.2 INDEMNIFICATION. To the full extent permitted by law, (i) no member
of the Committee shall be liable for any action or determination taken
or made in good faith with respect to the Plan or any Award made under
the Plan, and (ii) the members of the Committee shall be entitled to
indemnification by the Company with regard to such actions.
4. AWARDS.
4.1 ALLOCATION OF AWARDS. Within 90 days following the commencement of
each Performance Period, the Committee may select such Eligible
Employees as it deems appropriate for participation in the Plan.
Eligible Employees selected for participation will be entitled to
receive an award of incentive compensation based on the attainment of
performance targets selected by the Committee consisting of one or
more of the following: earnings or earnings per share before income
tax (profit before taxes); net earnings or net earnings per share
(profit after taxes); inventory; total or net operating asset
turnover; accounts receivable (measured in terms of days sales
outstanding); operating expenses; operating profit; total shareholder
return; return on equity; pre-tax and pre-interest expense return on
average invested capital, which may be expressed on a current value
basis; operating profit before taxes or operating profit after taxes
less a capital charge for net assets; sales growth; or economic
profit. Any such targets may relate to one or any combination of two
or more of corporate, group, unit, division, affiliate or individual
performance.
4.2 MAXIMUM AMOUNT OF AWARDS. The total amount of Awards pursuant to this
Plan for any Performance Period shall not exceed 10% of the Annual
Profits generated by the Company during such Performance Period.
4.3 ADJUSTMENTS. No Participant shall be entitled to receive an Award in
any Performance Period that exceeds 3% of the Annual Profits generated
by the Company during such Performance Period. The Committee shall
reduce the Award payable to any Participant to comply with this
limitation. In addition, the Committee is authorized at any time
during or after a Performance Period, in its sole and absolute
discretion, to reduce or eliminate an Award payable to any Participant
for any other reason, including changes in the position or duties of
any Participant with the Company or any subsidiary of the Company
during the Performance Period, whether due to any termination of
employment (including death, Disability, Retirement, or termination
with or without cause) or otherwise. No reduction in an Award made to
any Participant shall increase the amount of the Award to any other
Participant.
4.4 PAYMENT OF AWARDS: Following the completion of each Performance
Period, the Committee shall certify in writing the degree to which the
performance targets were attained and the Awards payable to
Participants. Awards shall be paid in such form (cash or Shares) and
at such times as the Committee may provide. The number of Shares
available for use in payment of Awards under this Plan shall be
100,000, subject to adjustment, as provided in Section 12. If a
Participant's employment with the Company terminates by reason of
Retirement, death or Disability, then a prorated portion of any Award
2
<PAGE>
relating to the Performance Period in which the Participant's
employment terminates and the unpaid portion of any Award
relating to any prior Performance Period shall be paid as and to the
extent provided in such procedures as may from time to time be
approved by the Committee. If a Participant's employment with the
Company terminates for any reason other than Retirement, death or
Disability, then such Participant's Awards, including the unpaid
portion of any Award relating to any prior Performance Period, shall
be canceled and no payment will be made with respect thereto. If any
payment with respect to an Award is made in Shares, it shall be made
in whole Shares only (with fractions of a Share being paid in cash),
and the number of Shares shall be the amount of the payment divided by
the Fair Market Value of a Share on the payment date.
5. EFFECTIVE DATE OF THE PLAN. The Plan shall become effective as of
January 1, 1998; provided that the Plan is approved and ratified by the
stockholders of the Company at a meeting thereof held no later than May 31,
1998. The Plan shall remain in effect until it has been terminated
pursuant to Section 8.
6. RIGHT TO TERMINATE EMPLOYMENT. Nothing in the Plan shall confer upon any
Participant the right to continue in the employment of the Company or any
Subsidiary or affect any right which the Company or any Subsidiary may have
to terminate the employment of a Participant with or without cause.
7. TAX WITHHOLDING. The Company shall have the right to withhold from
payments under the Plan to a Participant or other person an amount
sufficient to cover any required withholding taxes. If the Company
withholds Shares to cover such taxes, the number of Shares withheld shall
be the number of whole Shares determine by dividing the amount of such
taxes by the Fair Market Value of a Share on the payment date and rounding
the result to the next whole Share.
8. AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN. The Board may at any
time terminate, suspend or modify the Plan and the terms and provisions of
any Award theretofore awarded to any Participant which has not been paid.
Amendments are subject to approval of the stockholders of the Company only
if such approval is necessary to maintain the Plan in compliance with the
requirements of Section 162(m) of the Code, its successor provisions or any
other applicable law or regulation. No grant may be given during any
suspension of the Plan or after its termination.
9. UNFUNDED PLAN. The Plan shall be unfunded and the Company shall not be
required to segregate any assets that may at any time be represented by
Awards under the Plan.
10. OTHER BENEFIT AND COMPENSATION PROGRAMS. Neither the adoption of the Plan
by the Board nor its submission to the stockholders of the Company shall be
construed as creating any limitation on the power of the Board to adopt
such other incentive arrangements as it may deem necessary. Payments
received by a Participant under an Award made pursuant to the Plan shall
not be deemed a part of a Participant's regular recurring compensation for
purposes of the termination, indemnity or severance pay law of any state or
country and shall not be included in, nor have any effect on, the
determination of benefits under any other employee benefit plan, contract
or similar arrangement provided by the Company or any Subsidiary unless
expressly so provided by such other plan, contract or arrangement, or
unless the Committee expressly determines that an Award or portion of an
Award should be included to accurately reflect competitive compensation
practices or to recognize that an Award has been made in lieu of a portion
of the competitive cash compensation.
11. GOVERNING LAW. To the extent that Federal laws do not otherwise control,
the Plan and all determinations made and actions taken pursuant to the Plan
shall be governed by the laws of Minnesota and construed accordingly.
12. ADJUSTMENT FOR CHANGES IN CAPITALIZATION. Appropriate adjustments in the
aggregate number and type of Shares available for use in payment of Awards
under this Plan may be made by the Committee in its sole discretion to give
effect to adjustments made in the number or type of Shares through a
fundamental change, recapitalization, reclassification, stock dividend,
stock split, stock combination, or other relevant change, provided that
fractional Shares shall be rounded to the nearest whole Share.
3
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
%
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997 Change
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FOR THE YEAR
Net sales.................................................. $389,388 $372,428 5
Profit from operations..................................... $ 37,349 $ 36,088 3
% of net sales......................................... 9.6% 9.7%
Net earnings............................................... $ 25,325 $ 24,205 5
% of net sales......................................... 6.5% 6.5%
Return on beginning shareholders' equity............... 18.9% 18.8%
Average shares outstanding................................. 9,500 10,032 (5)
PER SHARE OF COMMON STOCK
Basic net earnings......................................... $ 2.67 $ 2.43 10
Diluted net earnings....................................... $ 2.67 $ 2.41 11
Dividends per share........................................ $ .74 $ .72 3
Shareholders' equity per share (ending).................... $ 14.25 $ 13.65 4
AT YEAR-END
Total assets............................................... $239,098 $233,870 2
Net operating assets....................................... $161,607 $157,141 3
Shareholders' equity....................................... $131,267 $134,086 (2)
Total financing debt....................................... $ 30,340 $ 23,055 32
Ratio of total financing debt to total capital............. 18.8% 14.7%
</TABLE>
[GRAPH]
NET SALES
(Dollars in Millions)
<TABLE>
<CAPTION>
Year Net Sales
<S> <C>
1994 281.7
1995 325.4
1996 344.4
1997 372.3
1998 389.4
</TABLE>
[GRAPH]
RETURN ON BEGINNING EQUITY
<TABLE>
<CAPTION>
Year Return on Beginning Equity
<S> <C>
1994 18.7%
1995 20.4%
1996 18.4%
1997 18.8%
1998 18.9%
</TABLE>
[GRAPH]
DILUTED EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Diluted Earnings per Share
<S> <C>
1994 1.6
1995 1.98
1996 2.09
1997 2.41
1998 2.67
</TABLE>
1
<PAGE>
TO OUR SHAREHOLDERS
Despite record sales and profits, 1998 was a challenging year for Tennant,
just as it was for very many U.S. manufacturers. The Asian crisis had severe,
direct effects. We experienced a significant drop in sales, both in Asian
markets and in our export markets, as the effect of the Asian crisis spread to
export markets. It also had an indirect effect. We experienced a slowdown in
sales to our domestic customers who also are major suppliers to the Asian and
export markets. Additionally, the U.S. dollar's strength in the first nine
months of the year dampened our results in such areas as Canada, Australia,
Japan and Europe.
That was the bad news. The good news was that Europe's economic recovery
was a good atmosphere for our revitalized European organization. Additionally,
the North American economy, though soft in manufacturing sectors later in the
year, was generally solid. Also, our strong push into outside cleaning markets
gave us new opportunities to serve governmental and other customers with outside
cleaning needs. The result was a 5% increase in sales to $389 million, an 11%
increase in earnings per share to $2.67, and return on beginning equity of
18.9%.
Tennant's direct exposure in Asia was only 5% of total revenues in 1997, a
relatively good year for us there. But in 1998, that business dropped by nearly
30%, despite some gains in China and with our commercial equipment business in
Japan. More important to us was the indirect impact of "Asian contagion" on
foreign markets, such as Australia, and on North American manufacturing sectors
which are traditionally strong customers for us. When Asian airlines pull back
their orders to Boeing, the subsequent ripple effect dampens our orders from
Boeing and dozens of its suppliers. When foreign steel floods into U.S. markets,
our U.S. steel customers slow down their cleaning equipment purchases.
For many years, we have been lessening our dependence on North American
manufacturing customers, and we made another giant stride this year with the
Model 830, Series II, and ATLV 4300 units designed from the ground up to serve
outside markets. These products have been well received and helped us to grow
and to show record sales and profits for the year.
Our timing for outside markets is especially good. The long period of
growth in the U.S. has led to economic strength at all levels of government.
Concurrent with this is the drive to revitalize downtown areas. Thus, local
municipalities are spending more money to solve cleaning problems, and "business
improvement districts" (BID's) are springing up throughout the country. These
organizations receive modest governmental support, but are basically groups of
business owners who recognize that clean, well-kept downtown areas attract
tourists and shoppers. Our vision of "working for a cleaner, safer world"
strongly supports these current trends in outside markets.
1998 was an exciting year for us in Europe. After many years of economic
stagnation, 1998 showed economic growth in most countries. In previous years,
when European economic conditions were relatively weak, Tennant had installed a
major new computer system (SAP), consolidated logistics, and strengthened our
sales, service and customer support organizations. These moves, together with
excellent new industrial and commercial products, positioned us well to take
advantage of better economic conditions. The result was local currency growth of
12% for sales and even stronger growth for earnings. In December, we announced
our intent to purchase Paul Andra, K.G., known in the market as Sorma, a German
manufacturer of commercial floor cleaning equipment. Although Sorma sells $27
million of products into many different countries, over 75% of its business is
in Germany and Austria. We believe that to be a leader in the commercial
equipment business in Europe, we must first have a strong position in Germany;
we now have that position. We also believe we can extend the complementary Sorma
and Tennant products into many different countries.
In North America, one of our greatest opportunities to serve customers lies
in leveraging the strengths of our industrial, commercial and floor coatings
business. We have over 400 direct industrial sales and service reps,
approximately 400 commercial distributors and 25 authorized coatings
contractors.
2
<PAGE>
Developing ways for all our floor maintenance experts to work together to help
customers be cleaner and safer is a major effort for us these days. In 1998, we
successfully piloted, in selected geographies, a project in which our industrial
sales reps and commercial distributors partnered to better serve customers. The
result is more of our total product line gets to more of our customers. We
expect these partnerships to expand rapidly in 1999 and 2000.
Speaking of 2000, will we be ready for the millennium or will the Y2K bug
bite us? We believe we will be ready. We are substantially through our SAP
enterprise conversions, and we have remediated those few areas which will not
have the new system in and settled by December 31, 1999. Because we started to
replace our old systems five years ago for strategic reasons, very little of our
Y2K work is wasted, redundant work. We are beginning to benefit from our new
systems now, and we have been able to absorb these expenses while still
improving operating margins over the implementation period.
Of course, the big challenge in 1998 has been in Asia. Our strategy has
been consistent and simple: work with our partners to help them get through
these tough times so that we will all be ready when better times return. The
result is that we have retained all of our excellent distribution, and no
competitor can now rival our ability to serve the Asian markets.
As we look forward to 1999, we look back on 1998 as a year with many
challenges, but also with record sales and profits. During the year, we grew in
most markets and withstood the economic storms from Asia. We advanced our
technology greatly, and we added excellent new executives from outside Tennant.
We especially note the many contributions of Dick Snyder, CFO, and Paul
Brunelle, Vice President of Personnel Resources, who retired after long careers
at Tennant.
At the May 1998 Shareholders' Meeting, long-time Director Bill Hodder,
former CEO of Donaldson Co., retired from our Board after 23 years of invaluable
service. Shareholders and employees alike benefited from his wise counsel and
excellent judgment. Joining our Board in May 1998 was Pamela Knous, Executive
Vice President and CFO of SUPERVALU INC., the leading food distribution company
in America. At a special Board meeting on December 1, 1998, Janet Dolan,
President and Chief Operating Officer of Tennant, was also named to our Board.
By Board action on March 1, 1999, the Directors named Ms. Dolan CEO of
Tennant effective April 5, 1999, thus replacing Roger Hale after 23 years in the
position. Mr. Hale will remain as a Director and Chairman, assuming reelection
to the Board at the May Shareholders' Meeting.
[PHOTOGRAPH]
Photo of Janet M. Dolan, President - Chief Executive Officer and Roger L.
Hale, Chairman
/s/ Janet Dolan /s/ Roger L. Hale
Janet Dolan Roger L. Hale
President - Chairman
Chief Executive Officer
March 25, 1999
3
<PAGE>
TENNANT AT A GLANCE
Tennant's vision is to work for a cleaner and safer world. Our broad
product lines, global sales and service networks, partnerships with
complementary companies, and ability to offer total customer solutions will help
us achieve our mission:
- To be the preeminent company in nonresidential floor maintenance
equipment, floor coatings and related offerings.
- To create above-average value for shareholders.
- --------------------------------------------------------------------------------
TYPES OF PRODUCTS
INDUSTRIAL
FLOOR MAINTENANCE
EQUIPMENT
[PHOTOGRAPH]
Photo of Industrial Floor Maintenance Equipment
APPLICATION
Products to clean surfaces with vehicle and heavy foot traffic such as:
- - factories, warehouses, stadiums, airport hangars, parking garages, and
outside areas.
- - sweepers and scrubbers:
- walk-behinds
- indoor riders
- outdoor vehicles
- --------------------------------------------------------------------------------
TYPES OF PRODUCTS
COMMERCIAL
FLOOR MAINTENANCE
EQUIPMENT
[PHOTOGRAPH]
Photo of Commercial Floor Maintenance Equipment
APPLICATION
Products to clean surfaces with foot traffic such as:
- - schools, hospitals, office buildings, supermarkets, retail outlets and airport
terminals.
- - walk-behind scrubbers and sweepers, carpet extractors, burnishers, buffers,
polishers, and other specialized equipment.
- --------------------------------------------------------------------------------
TYPES OF PRODUCTS
FLOOR COATINGS
[PHOTOGRAPH]
Photo of Factory Floor
APPLICATION
Products that treat, repair, and upgrade concrete and wood floors. Specialty
products are available for areas with chemical exposure or odor-sensitivity.
Generally used in industrial settings such as factories and warehouses.
Applied by customer or authorized contractor.
- --------------------------------------------------------------------------------
4
<PAGE>
[PIE CHART]
Pie chart showing breakdown of 1998 sales into North America (76%),
Europe (16%), and Other International (8%). North America Sales are broken
out further into Commercial (18%), Floor Coatings (6%), and Industrial (52%).
Europe Sales are broken out into Commercial (2%) and Industrial (14%). Other
International Sales are broken out into Commercial (2%) and Industrial (6%).
1998 SALES
SALES/SERVICE
INDUSTRIAL FLOOR MAINTENANCE EQUIPMENT
Direct sales/service in the United States, Australia, Canada, France, Germany,
The Netherlands, Spain, and the United Kingdom.
Well-established, full-service distributor network in 45 other countries
including Japan and most countries in Europe not served directly.
- --------------------------------------------------------------------------------
COMMERCIAL FLOOR MAINTENANCE EQUIPMENT
Broad geographic coverage in North America through
a full-service distributor network.
Expanding full-service distributor network internationally.
- --------------------------------------------------------------------------------
FLOOR COATINGS
Sold by Tennant's direct sales force in North America as a complementary product
to industrial floor maintenance equipment.
Also sold by Tennant's authorized contractor network.
- --------------------------------------------------------------------------------
MARKETS
INDUSTRIAL FLOOR MAINTENANCE EQUIPMENT
World market for equipment and aftermarket estimated at $750 million.
Market share greater than 50% in segments such as manufacturing, warehousing,
distribution, and government.
- --------------------------------------------------------------------------------
COMMERCIAL FLOOR MAINTENANCE EQUIPMENT
World market for equipment and aftermarket estimated at $2 billion.
Sold under Castex, Nobles, Eagle, and Tennant brand names, depending on the
product and geographic area.
Among the leaders in North America; small but rapidly growing internationally.
- --------------------------------------------------------------------------------
FLOOR COATINGS
North American market for industrial coatings estimated at $150 million,
excluding application labor.
Market share estimated at about one-sixth of total market, but higher in
coatings segment.
- --------------------------------------------------------------------------------
GLOBAL TRENDS
- - Growing concern for the environment.
- - Growing concern for health and safety.
- - Emerging nations focusing more on attracting global companies and greater
tourism.
GROWTH DRIVERS
- - Movement toward higher standards of cleanliness and improved cleaning
methods.
- - Customers are looking for ways to reduce labor costs.
- - More businesses are outsourcing cleaning activities.
- - More companies are reducing their number of vendors and are centralizing
their buying.
- - Industry consolidation, especially regarding commercial equipment
distributors.
- - Demand for floors that are easy to clean and provide an appearance that
enhances a company's image.
5
<PAGE>
[PHOTOGRAPH]
Photo of Castex equipment in use
LEVERAGING STRENGTHS TO ACHIEVE GREATER GROWTH
WHILE TENNANT HAS BEEN IN BUSINESS FOR 128 YEARS, OUR OPPORTUNITIES FOR
LONG-TERM GROWTH HAVE NEVER BEEN BETTER. WE BELIEVE TENNANT CAN CAPITALIZE ON
POSITIVE GLOBAL TRENDS BY LEVERAGING THE STRENGTHS WE BUILT INTO THE COMPANY
DURING THESE YEARS.
POSITIVE GLOBAL TRENDS AND GROWTH DRIVERS
Three trends are creating a greater demand for Tennant's products
worldwide:
- - CONCERN FOR THE ENVIRONMENT. The push for cleaner air, water and land is
creating demand for outdoor sweeping and indoor scrubbing equipment, and
environmentally safe floor coatings.
- - CONCERN FOR HEALTH AND SAFETY. Around the world, people want to feel cleaner
and safer--in the streets and in the buildings where they live, shop and
work. Employers and city governments realize that providing this kind of
environment is good for business--attracting more desirable employees,
customers and residents. This creates demand for outdoor sweeping and litter
pickup, indoor sweeping and scrubbing, and coated floors.
[PHOTOGRAPH]
Photo of floor coating on concrete floor
Tennant products meet the needs of a diverse marketplace: from vacuums for
carpeting, coatings for concrete, to rugged sweepers for warehouse or factory
floors.
- - BENEFIT FROM ECONOMIC DEVELOPMENT. Emerging nations want to
industrialize--because attracting global companies can raise their standard
of living. Local governments in these and developing countries want to
attract investments--from tourism to industry. This creates demand for floor
cleaning equipment for airports, hospitality and retail areas, in addition
to industrial complexes.
In addition to the global trends, there are a number of specific growth
drivers that bode well for continued expansion.
- - OUTSOURCING. More customers are outsourcing their cleaning activities to
contract cleaners who then become our customers. Their major needs are
labor-saving products and services. Tennant is well positioned to serve them
with our breadth of products and extensive network of service providers.
- - VENDOR CONSOLIDATION. More customers are consolidating purchases with fewer
suppliers. They are seeking a one-stop source to meet their cleaning
equipment needs. Tennant is that source.
[PHOTOGRAPH]
Photo of Tennant equipment in use
6
<PAGE>
- - IMPROVED CLEANING METHODS. Customers want improved methods of cleaning,
moving from just sweeping to sweeping and scrubbing. They also want better
coatings on their floors. Tennant's commitment to lead the industry in
innovation means we are offering the latest in cleaning technology and
coatings.
- - LABOR COST REDUCTION. Customers want to reduce their labor costs by using
cleaning equipment and chemicals that are easy to operate or apply and that
improve the productivity of their cleaning staffs. Multitask functionality
and ease of use are key drivers of Tennant's new product development
process.
- - PROTECTED FLOORS THAT ENHANCE IMAGE. A growing number of customers want the
benefit of floor coatings, which protect their floors from chemicals and
wear, make their floors easier to clean, and create a better working
environment to improve employee morale and enhance their image. Tennant is a
leader in industrial coatings.
- - INDUSTRY CONSOLIDATION. Industry consolidation among commercial distributors
is resulting in fewer, stronger firms that want to work with larger, more
stable manufacturers such as Tennant.
These trends and drivers are "raising the bar" for standards of cleanliness
and safety--indoors and out. As this happens, the use of cleaning equipment,
coatings and supplies increases which expands the demand for Tennant's products.
STRENGTH: MARKET SEGMENT POSITION--INDUSTRY LEADERSHIP IN NORTH AMERICA
Tennant has more than a 50% market share in industrial products, ranks in
the top tier of commercial products, and has a leading share of the urethane
floor coatings market. This leadership was built not only on product innovation
and quality, but excellent distribution and service.
All of Tennant's competitors sell their products primarily through
distributors. In North America, Tennant is unique with three product sales
channels:
- - MORE THAN 400 DIRECT INDUSTRIAL SALES AND SERVICE REPRESENTATIVES. No
competitor can duplicate this advantage, which generates about 70% of
Tennant's North American industrial sales. The direct sales and service
force also helps pull through sales of aftermarket products: brushes,
supplies, etc. This gives Tennant tremendous knowledge of customer needs as
well as earnings stability.
[PHOTOGRAPH]
Photo of Tennant Service Representative
More than 400 direct industrial sales and service representatives give Tennant a
distinct competitive advantage.
7
<PAGE>
[PHOTOGRAPH]
Photo of Tennant Model 5100 Scrubber
Global demand for commercial products, like this 5100 scrubber in use in The
Netherlands, represents a key growth opportunity for Tennant.
- - ABOUT 400 COMMERCIAL PRODUCTS DISTRIBUTORS. These partners like the
price/value relationship on Tennant's products. In 1999, we will be
expanding our efforts to leverage our commercial distributors and direct
sales and service forces in order to better market our full product line to
all customer groups.
- - 25 AUTHORIZED FLOOR COATINGS CONTRACTORS. They are trained to market and
apply Tennant's products. They also can assist customers in selecting
Tennant equipment to maintain their newly refurbished floors.
This multichannel approach gives Tennant the broadest and deepest sales and
service coverage in the industry. We believe this unique combination of sales
channels will help us gain market share, as each can offer Tennant's full line
of products. The direct sales/service and distribution model also is one that
will translate well into international markets--a goal for us in coming years.
STRENGTH: MARKET SEGMENT POSITION--GOOD INTERNATIONAL MARKET PENETRATION
No single competitor from the U.S. or any other country has Tennant's level
of international industrial market penetration. We have a leading share in most
of the countries we reach with our industrial products, and we are rapidly
gaining share in those markets where we have introduced our commercial products.
As a result, international markets provide about one-fourth of our annual
revenues.
Tennant differentiates itself internationally in several ways.
Nonresidential floor care is our only business--it accounts for only a portion
for most of our competitors. We sell our industrial products directly in six
countries: Australia, France, Germany, The Netherlands, Spain and the United
Kingdom, and we have established a direct presence in Far East Asia. We also
have very strong relations with distributors in 45 others.
Opportunities abound for us in these markets. For example, we are a
relative newcomer to the international commercial equipment business. While we
have made significant gains in recent years through internal growth in Europe
and Japan, we are still a relatively small player. In 1999, we have augmented
this by acquiring Paul Andra, K.G., a well-respected German commercial products
manufacturer. Paul Andra sells its products primarily in the Germanic countries,
and this significantly increases our commercial critical mass there.
We believe expanding international markets--and the market share gains
we are making there--will help Tennant achieve stronger growth.
8
<PAGE>
STRENGTH: EFFECTIVELY REACHING NICHE MARKETS
The global market for industrial and commercial equipment and floor
coatings is about $2.7 billion in annual sales, with North America generating
40% of this. The market is growing at 3-8% a year, depending upon the geographic
and market niche. By leveraging our strengths--and targeting faster-growing
niche markets in addition to the overall commercial products market--Tennant
will be able to increase sales at or above the higher end of its industry's
growth rate. Two of the niche markets we have targeted are outdoor cleaning and
contract cleaners.
While Tennant's equipment has been used in the outdoors for years, we only
recently began to design products specifically for this purpose. Our current
line ranges from a small litter picker, the Model 4300 introduced this year, to
street-sweeper size, our Model 830-II. We plan to continue introducing outdoor
machines to fill in this product line for the next several years.
Another area of focus is contract cleaning. Businesses around the world are
increasingly outsourcing their floor maintenance. This is especially true in
Europe and Asia, but it is a developing trend in North America as well. We
believe growth opportunities abound in all geographies.
Tennant is particularly suited to serve this market. Contract cleaners'
most critical need is "up-time." Our complete line of high-quality products and
broad service and support network help them maximize their productivity.
SALES GROWTH
[CHART]
<TABLE>
<CAPTION>
1990 1998
<S> <C> <C>
Core Sales 202 281.5
Commercial Equipment 9.5 86.8
Outdoor 21.1
</TABLE>
[Photograph]
Photo of Outdoor product Model 830-II
Outdoor products, like this Model 830-II, are in high demand as communities make
their streets and sidewalks "cleaner and safer."
9
<PAGE>
[PHOTOGRAPH]
Photo of Tennant Model 6100 micro-rider sweeper
Tennant's new 6100 micro-rider sweeper is perfect for worldwide markets,
particularly Europe and the Far East, where wide-open spaces are limited.
STRENGTH: BROAD PRODUCT LINES
Tennant is the only company in its industry that offers a full range of
industrial, commercial and floor coatings products.
- - SUPERIOR INDUSTRIAL FLOOR MAINTENANCE EQUIPMENT.
Tennant became an industry leader in industrial equipment because we
offered a broad line of quality products through a direct sales force and
distributor network.
These machines clean areas with vehicle or heavy foot traffic. They
range from walk-behind to rider units, generally priced from $7,500 to
$90,000. Tennant offers three basic types of equipment--all carrying the
strongest warranties offered in the industry:
SWEEPERS remove wet or dry debris, while controlling dust.
SCRUBBERS lay down a cleaning solution, scrub the surface, then remove
the dirty solution--all in one pass.
COMBINATION SWEEPER/SCRUBBERS do both at the same time, in one pass.
- - GROWING LINE OF COMMERCIAL FLOOR MAINTENANCE EQUIPMENT.
We realized our industrial expertise also could bring success in the
faster-growing commercial equipment market. Tennant entered this market area
through developing products in-house and by making acquisitions.
Commercial equipment is used in any area with foot traffic. Tennant's
line, which is priced from $3,000 to $8,000, includes:
SWEEPERS AND VACUUMS to remove debris from virtually any surface.
AUTOMATIC SCRUBBERS to clean grease and grime from hard surfaces--floors
with tile and grout, for example. These machines remove virtually all of
the
[PHOTOGRAPH]
Photo of Tennant Portapac Vacuum
Innovative, small commercial products like the new Portapac complement
Tennant's core industrial product line.
10
<PAGE>
cleaning solution they apply, which is critical for avoiding slip-and-fall
accidents. They also are known for ease of operation and their ability to
maneuver in tight places.
CARPET EXTRACTORS apply a cleaning solution, scrub the carpet, then
remove the solution along with any dirt and grime.
BURNISHERS AND FLOOR MACHINES give scrubbed floors a shiny, high-gloss
appearance.
- - STRONG FLOOR COATINGS LINE.
While our greatest growth opportunities will come from leveraging
industrial and commercial products, both are complemented by our strong line
of floor coatings products.
Tennant offers a broad range of these products:
DURABLE COATINGS for main traffic aisles and loading docks.
CHEMICAL-RESISTANT COATINGS for floors exposed to corrosive chemicals.
EPOXY RESURFACERS for restoration of damaged floors.
ENVIRONMENTALLY SAFE COATINGS for odor-sensitive applications, such as
food processing facilities. Our unique Eco-Coatings-TM- line combines
high durability using little or no solvents.
ECO-PREP-TM- PROCESS for use by Tennant's authorized contractors to
prepare a floor for its new coating. Eco-Prep-TM- machines remove the
old coatings quickly and without using solvents.
We develop the formulas for our coatings and oversee their production, and
we manufacture the Eco-Prep-TM- machines.
[PHOTOGRAPH]
Photo of floor coating on aircraft hangar floor
Tennant's floor coatings are popular in hangars where reflected light is a
necessity for under-craft maintenance.
PRODUCTS INTRODUCED IN 1998
INDUSTRIAL
- - 6100 new Small Rider Sweeper
- - 6500/6550 Midsize Sweeper replacement
- - 8200/8210 new Midsize Sweeper/Scrubber
- - 830-II Outdoor Sweeper replacement
- - ATLV 4300 new All-Terrain Litter Vacuum
COMMERCIAL
- - Frontier Carpet Extractor
- - Sentry-TM- Carpet Maintainer
- - Viper Dual Motor Upright Vacuum
FTM
- - Reformulated products to meet new national VOC regulations
11
<PAGE>
[PHOTOGRAPH]
Photo of Tennant Model 4300 All-Terrain Litter Vacuum
New patents, like the one pending for the unique nozzle on the 4300 All-Terrain
Litter Vacuum, are commonplace at Tennant.
[PHOTOGRAPH]
Photo of Castex Sentry Carpet Maintainer
The new Sentry-TM-machine is a prime example of successful new product
development for the commercial cleaning marketplace.
STRENGTH: NEW PRODUCT DEVELOPMENT
We continue to refresh our product line by devoting an industry-leading
amount to product engineering. This averaged 4% of sales for the past five
years.
We not only upgrade existing products but design new ones to reach niche
markets Tennant did not previously serve.
One example is the new Model 4300 All-Terrain Litter Vacuum, for the
outdoor sweeping market. This machine features Tennant's standard innovations,
such as an ergonomic cab and ease of use. It also has a patent pending on a
unique nozzle, designed to reach litter in hard-to-clean places, such as fences
and planters.
By using process improvements and new technologies, Tennant has
successfully cut its industrial product development cycle in half. (We believe
no competitor can equal our speed-to-market for new products.) This allowed us
to double the number of annual product introductions while holding engineering
costs virtually flat in constant dollars. We are sharing this aggressive product
development focus with the commercial and floor coatings areas.
Another example of our successful product development is the new model
Sentry-TM-.
STRENGTH: INVESTMENT IN TECHNOLOGY
Technology is fast becoming a competitive advantage for Tennant. This
resulted from our multiyear commitment in 1994 to totally upgrade our computer
systems and introduce technology into nearly all aspects of our business. We had
three goals:
- - To link all Tennant's operations and customer information to help improve
customer service,
- - To increase the efficiency and effectiveness of our operations, and
- - Achieve Year 2000 compliance.
Our approach was a significant investment in companywide installation of
SAP's R/3 enterprise system. In 1998, we began seeing the benefits from this
process. We now have
12
<PAGE>
converted substantially all of our European systems. In North America, we began
receiving better, faster information on our customers and their orders. Our
longer-term goal is to use this information more effectively in the design of
products and services to meet customer needs. Additionally, we will deliver more
detailed information to our sales force to help them sell more effectively and
better support customers. We also will be better able to use technology to
create cross-functional and transglobal teams thereby leveraging Tennant's human
resources. We expect to see the full benefits from this investment over the next
several years.
STRENGTH: STRONG FINANCIAL CONDITION
Tennant has the financial strength to continue funding our worldwide market
leadership. The company generates strong cash flow and has a low amount of debt.
(See Management's Financial Discussion and Analysis for a more in-depth review.)
The first priority is to invest in our business to achieve profitable
growth. Cash in excess of this investment will be returned to shareholders in
the form of dividends and a continuing share repurchase program.
At the beginning of 1998, we adopted a shareholder value-based financial
reporting system--"economic value management." We did this to ensure Tennant
continues to create shareholder wealth--or "economic profit." We also tied a
significant portion of management's incentive compensation to our economic
profit performance. Our goal is to closely align management and shareholder
interests.
TENNANT IS NO LONGER A COMPANY WITH THREE GOOD BUT SEPARATE PRODUCT
LINES. WE ARE LEVERAGING THE STRENGTHS IN EACH OF THESE AREAS INTO GREATER
GROWTH OPPORTUNITIES FOR ALL. THIS WILL HELP US REACH OUR MISSION: TO BE THE
PREEMINENT COMPANY IN NONRESIDENTIAL FLOOR MAINTENANCE EQUIPMENT, FLOOR COATINGS
AND RELATED PRODUCTS, AND TO CREATE ABOVE-AVERAGE VALUE FOR SHAREHOLDERS.
FINANCIAL LEVERAGE
[CHART]
<TABLE>
<CAPTION>
94 95 96 97 98
<S> <C> <C> <C> <C> <C>
Long-Term Debt 5 15 14.1 13.2 14.3
Short-Term Debt 18.3 11.2 2.5 1.5 4.5
Goaled Range (low) 20 20 20 20 20
Goaled Range (high) 25 25 25 25 25
</TABLE>
DIVIDENDS AND SHARE
REPURCHASES
[CHART]
<TABLE>
<CAPTION>
94 95 96 97 98
<S> <C> <C> <C> <C> <C>
Cash Dividends 6.386 6.742 6.905 7.125 7.0
Share Repurchases 1.854 0.0 2.91 13.598 27.071
</TABLE>
ECONOMIC PROFIT
[CHART]
<TABLE>
<CAPTION>
94 95 96 97 98
<S> <C> <C> <C> <C> <C>
Economic Profit (millions) .7 2.4 1.7 4 4.9
</TABLE>
13
<PAGE>
MANAGEMENT'S FINANCIAL
DISCUSSION AND ANALYSIS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SELECTED INDICATORS OF GROWTH AND PROFITABILITY
CURRENT ECONOMIC CYCLE(a) PREVIOUS ECONOMIC CYCLE(a)
CURRENT CYCLE LAST HALF FULL
YEAR TO DATE OF CYCLE CYCLE
Period Included in Measurement 1998 1991-1998 1987-1990 1982-1990
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Return on Beginning Shareholders' Equity(b) 19 18 17 15
Compound Annual Growth (%)(a):
Sales +5 +8 +9 +8
Net Earnings(b) +5 +9 +10 +3
Earnings Per Share (Diluted)(b) +11 +9 +9 +5
Net Operating Assets +3 +9 +4 +5
</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) Based on reported earnings before extraordinary gain and cumulative effect
of accounting change except for 1993, 1992, 1990 and 1989 which have been
adjusted to eliminate unusual items, net of income taxes, as described in
the Historical Progress Review, footnotes (a) through (d).
FINANCIAL RESULTS OF OPERATIONS
EARNINGS: For 1998, net earnings were $25.3 million, up 5% from the prior
year. Earnings per diluted share of $2.67 were up 11%. Return on sales was 6.5%,
and return on beginning shareholders' equity was 18.9%. The reasons for the
earnings gain were higher sales, and increases in gross margin and other income.
The direct effects of a stronger U.S. dollar in the first nine months of the
year reduced earnings by an estimated $1.3 million, or 14 cents per share.
For 1997, net earnings were $24.2 million, up 15% from the prior year.
Earnings per diluted share of $2.41 were up 15%. Return on sales was 6.5%, and
return on beginning shareholders' equity was 18.8%. The reasons for the earnings
gain were higher sales, and increases in gross margin and other income. The
direct effects of a much stronger U.S. dollar reduced earnings by an estimated
$1.8 million, or 18 cents per share.
SALES: For 1998, net sales of $389 million increased 5% from the prior year
and backlogs declined by $4 million to $9 million. A stronger U.S. dollar
reduced full year sales by $5 million.
North American sales of $293 million were up 6% on economic conditions that
were quite strong early in the year, but weakened as the year progressed. North
American sales growth by product line was: 9% for industrial equipment and 3%
for commercial equipment; and a decrease of 2% for floor coatings. Industrial
product growth was due primarily to unit volume growth and was significantly
supported by the introduction of new and updated products. Among the new product
introductions were two products targeted at the outdoor market which accounted
for about a third of the unit volume increase. Growth in commercial equipment
sales was primarily the result of price increases, and the decline in floor
coatings sales was primarily a decline in unit volume.
European sales of $63 million, representing 16% of consolidated revenues,
increased 10% in translated U.S. dollars and were up 12% in local currencies.
Local
14
<PAGE>
currency sales growth of industrial equipment was slightly stronger than
commercial equipment and, in both product lines, sales growth was due primarily
to a unit volume increase. Other international sales of $33 million,
representing 9% of consolidated revenues, decreased 15% in translated U.S.
dollars and 10% in local currencies. Sales of industrial equipment declined $8
million, due primarily to a unit volume decline in Asia. Partially offsetting
this decline was an increase in commercial equipment sales of $2 million, or
28%. The increase was also due to an increase in unit volume.
For 1997, net sales of $372 million increased 8% from the prior year and
backlogs increased by $2 million. A much stronger U.S. dollar reduced full year
sales by $8 million. North American sales of $276 million were up 11% on robust
economic conditions and a significant number of new and updated products
introduced in recent years. Sales increases by product line were 12% for
industrial equipment, 9% for commercial equipment, and 7% for floor coatings.
European sales of $57 million, representing 15% of consolidated revenues,
decreased 1% but were up 9% in local currencies. Other international sales of
$39 million, representing 11% of consolidated revenues, increased 4% and were up
10% in local currencies.
PROFIT FROM OPERATIONS: For 1998, profit from operations increased 3% to
$37.3 million and operating margin was 9.6% versus 9.7% the prior year. Factory
capacity use is estimated to have been in the 70% range overall with North
American facilities at the upper end of the range. Some capacity expansion will
likely be required within the next several years.
Gross margin improved to 42.6% from 42.2% the prior year. The improvement
was due primarily to a relatively low rate of inflation for costs and expenses,
and price increases in North America on industrial and commercial equipment.
Selling and administrative expenses, as a percent of sales, increased to
33.0% from 32.5% the prior year. The increase in rate was due substantially to
increased investment in information technology primarily in connection with the
implementation of an enterprise resource planning system. Investment in
information technology is expected to level off in 1999 as implementation of the
major elements of software nears completion. In addition, for 1999 the Company
is adopting a change in accounting treatment for software developed for internal
use under Statement of Position 98-1 issued by the American Institute of
Certified Public Accountants (AICPA). Under this change in accounting treatment,
the cost of developing software for internal use must be capitalized. The
estimated costs to be capitalized in 1999 are approximately $1 million.
For 1997, profit from operations increased 14% to $36.1 million, and
operating margin was 9.7% versus 9.2% the prior year. Factory capacity use is
estimated to have been in the low 70% range for the year. The improvement in
operating margin was due to an increase in gross margin to 42.2% from 41.3% the
prior year. The improvement was due primarily to a favorable product mix,
manufacturing efficiencies on a higher production volume, and a relatively low
rate of inflation for costs and expenses. Selling and administrative expenses,
as a percent of sales, increased to 32.5% from 32.2% the prior year. The
increase was due primarily to higher incentive compensation resulting from
improved financial results and a significant increase in the market value of the
Company's stock.
OTHER INCOME AND EXPENSE: For 1998, the Company recorded other income of
$1.7 million versus $1.5 million in the prior year. The primary reasons for the
increase were a reduction in the discretionary contribution to the Company's
charitable foundation and a foreign currency transaction gain this year versus a
loss the prior year.
Included in other income is $3.8 million of interest income. Of this
amount, $1.3 million is from finance-type leases provided to customers, and $1.4
million is from a loan to the Company's Employee Stock Ownership Plan.
For 1997, the Company recorded other income of $1.5 million versus $0.7
million in the prior year. The primary reasons for the increase were more
interest income on a higher level of invested cash and less interest expense on
a lower level of debt.
For 1999, management anticipates approximately $1.0 million less net other
income than recorded in 1998 due to reductions in interest earned on
finance-type leases. The reduction in finance lease income is due to the
outsourcing of the product financing function which occurred during 1998.
15
<PAGE>
INCOME TAXES: For 1998, the effective tax rate declined somewhat to 35.2%
from 35.7% the prior year. Both years were within the expected range.
For 1999, management anticipates the effective tax rate will continue in
the 35% range.
LIQUIDITY AND CAPITAL RESOURCES
The Company continues to generate substantial cash flow and was again able
to strengthen its financial condition in 1998.
FINANCIAL POSITION: Cash flow from operations in 1998 was $42.9 million
compared to $41.9 million in 1997. Investment in net operating assets at
December 31, 1998, of $162 million increased 3% from the end of the prior year,
due primarily to a $6 million rise in inventories resulting from a slowdown in
orders late in 1998. Inventory levels are expected to decline during 1999.
Accounts receivable balances at the end of 1998 declined $.9 million. This was
due to the outsourcing of the product financing business, which declined $3.7
million, and was partially offset by an increase in trade receivables (see
additional comments later in this section). At year-end, the Company held $0.7
million of unsecured trade receivables from customers in Southeast Asia and
Latin America. Management believes the allowance for doubtful accounts is
adequate to cover losses, if any, resulting from financial turmoil in these
markets. For 1999, net operating assets will likely increase; however, the
percentage increase is expected to again be less than sales growth.
Capital spending, net of disposals, totaled $17.2 million in 1998 compared
to $16.4 million in 1997. Depreciation expense in 1998 was $16.5 million
compared to $16.2 million in 1997. The largest categories of capital spending
were information technology hardware and software, vehicles, product tooling and
factory equipment. Vehicles represent a large category of investment because of
the need for cars, trucks and trailers by the direct sales and service forces in
key industrial markets.
DEBT: In 1998, debt increased to $30 million, or 19% of capital, from $23
million, or 15% of capital. The increase in debt resulted from the accounting
treatment given to the Company's decision to outsource the leasing of its
products and disposal of previously written lease-type contracts (see additional
comments later in this section). Based on current operating plans, dividend
policy, and stock repurchase authority, management expects cash flow to remain
strong during the year, but cash balances to decline somewhat by the end of
1999.
DIVIDENDS AND COMMON STOCK: Cash dividends of 74 cents per share were up
3%, the 27th consecutive year of increase. Common diluted shares outstanding
averaged 9,500,000 in 1998, a decrease from the prior year's 10,032,000.
Outstanding diluted shares of 9,211,000 at year-end declined by 6% due to share
repurchases during the year.
During 1998, the Company repurchased 676,572 shares at an average price of
$40.01 per share. As of December 31, 1998, authority existed to repurchase
496,568 shares under an authorization granted by the Board of Directors on
October 2, 1998.
IMPACT OF INFLATION: Inflation has not been a significant factor for
several years. For 1998, it is estimated that product pricing, on average, was
greater than the inflation experienced by the Company for costs and expenses.
For 1999, management expects that product pricing will be about equal to
inflation.
The relatively high inflation of the 1970s and early 1980s continues to be
reflected in the Company's historical-cost balance sheet in the following ways:
- - Inventories are significantly below current replacement cost because they
are, for the most part, stated on a last-in, first-out basis. (See "Notes
to Consolidated Financial Statements," note 1, for amounts involved.)
- - Property, plant, and equipment is stated at historical cost, which is below
current replacement value for older assets.
These shortcomings of historical-cost financial statements are managed by
establishing return-on-investment and economic profit objectives based on
current values for assets, and price indexes are used to estimate real,
inflation-adjusted sales. These adjustments allow for more meaningful
measurements of growth and profitability over extended periods of time.
IMPACT OF CHANGING VALUE OF THE U.S. DOLLAR: Approximately one-fourth of
the Company's sales occur outside of the United States directly or through
independent distributors in over 50 countries. Sales in
16
<PAGE>
Australia, Canada, Japan, and the European direct-sales countries of Germany,
France, Spain, the United Kingdom, and The Netherlands are made in their
respective currencies. Sales in other countries, which are generally to
distributors, are made in either U.S. dollars or, in Europe, in Dutch guilders.
The Company uses hedging arrangements such as forward-exchange and
range-forward contracts from time to time to offset short-term changes in
currency values. At the end of 1998, the Company had outstanding $7.0 million of
forward-exchange contracts (see "Notes to Financial Statements," note 14). Since
these contracts are relatively small in value and are treated as hedges of
specific balance sheet monetary amounts denominated in these currencies, there
is only limited potential for impact on the Company's future liquidity.
FINANCIAL GOALS AND POLICIES
The Company's financial mission is to create value for shareholders in the
form of an above-average total return. Goals and policies that support this
mission are:
- - Growth - Annual increases of 8% in sales and 10% in earnings per share over
a full economic cycle; measured from cycle peak to peak.
- - Profitability - 20% return on beginning shareholders' equity in the growth
years of an economic cycle.
- - Financial Policies - Consistent annual dividend increases and maintenance
of a sound capital structure with financing debt generally not in excess of
30% of capitalization. Cash in excess of that needed to grow the business
and meet dividend commitments is generally returned to shareholders in the
form of share repurchases.
Summaries of the Company's financial performance compared with these goals
are presented in several graphs and tables included in this report.
CHANGES IN LEASING BUSINESS
For many years, Tennant provided long-term financing to customers.
Arrangements were made with General Electric Capital Companies (GE Capital) to
provide these services beginning January 2, 1998. The Company also arranged for
the transfer of its existing financing-related portfolio to GE Capital at
various times during 1998. At December 31, 1997, the portfolio consisted of
lease-type contracts and financing equipment still owned by Tennant, with a
combined net book value of $18 million. Under the terms of the transfer of the
lease portfolio to GE Capital, the Company was required under FASB 125 to report
the transfer as a loan and as a retained ownership of the financing contracts.
As customers make their financing payments to GE Capital, the Company reports
those payments as interest and a recovery of principal, and records a concurrent
reduction in the loan. A substantial part of the outstanding finance receivables
will be paid by customers during the year following the transfers to GE Capital.
At the end of 1998, the remaining balance of gross receivables on contracts
transferred to GE Capital was approximately $8.5 million; this amount is
expected to decline to approximately $3.3 million by the end of 1999.
YEAR 2000 COMPUTER SYSTEMS' ISSUES
Several years ago, the Company embarked on a major effort to upgrade its
computer systems. For the most part, this involves the companywide installation
of SAP's R/3 enterprise system, which is fully year-2000 compliant. Management
believes this new system will substantially resolve the Company's year-2000
date-change issues. For additional information, refer to Part 1 of the Company's
Form 10K SEC filing for 1998.
SORMA ACQUISITION
During December 1998, the Company announced its intention to purchase Paul
Andra, K.G., known in the market as Sorma, a German manufacturer of commercial
floor maintenance equipment. The acquisition was completed during January 1999
(see "CEO's Letter," page 2, and "Notes to Financial Statements," note 18).
SAFE HARBOR STATEMENT
This Annual Report contains various forward-looking statements involving
risks and uncertainties. These include economic and currency conditions as well
as market and competitive factors. For additional information concerning factors
that could materially affect actual results, refer to Part 1 of the Company's
Form 10K SEC filing for 1998.
17
<PAGE>
TENNANT COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS
OF EARNINGS AND Years ended December 31
COMPREHENSIVE EARNINGS 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Percent Percent Percent
------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................................ $ 389,388 100.0 $372,428 100.0 $344,433 100.0
Less:
Cost of sales................................. 223,589 57.4 215,392 57.8 202,057 58.7
Selling and administrative expenses........... 128,450 33.0 120,948 32.5 110,745 32.2
--------- ----- -------- ----- -------- -----
Profit from operations........................... 37,349 9.6 36,088 9.7 31,631 9.2
Other income and (expense):
Net foreign currency transaction gain (loss).. 139 -- (306) (.1) 50 --
Interest income............................... 3,771 1.0 4,699 1.3 4,259 1.2
Interest (expense)............................ (2,292) (.6) (2,021) (.5) (2,491) (.7)
Miscellaneous income (expense), net........... 125 -- (830) (.2) (1,120) (.3)
--------- ----- -------- ----- -------- -----
Total other income ......................... 1,743 .4 1,542 .5 698 .2
--------- ----- -------- ----- -------- -----
Profit before income taxes....................... 39,092 10.0 37,630 10.1 32,329 9.4
Income tax expense............................... 13,767 3.5 13,425 3.6 11,302 3.3
--------- ----- -------- ----- -------- -----
Net earnings..................................... $ 25,325 6.5 $ 24,205 6.5 $ 21,027 6.1
--------- ----- -------- ----- -------- -----
--------- ----- -------- ----- -------- -----
Comprehensive earnings adjustment for
foreign currency, net of tax.................. $ 1,024 $ (2,314) $ (655)
--------- -------- ---------
Comprehensive earnings........................... $ 26,349 $ 21,891 $ 20,372
Basic net earnings per share..................... $ 2.67 $ 2.43 $ 2.09
--------- -------- --------
--------- -------- --------
Diluted net earnings per share................... $ 2.67 $ 2.41 $ 2.09
--------- -------- --------
--------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
18
<PAGE>
TENNANT COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31
CONSOLIDATED BALANCE SHEETS 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................................................... $ 17,693 $ 16,279
Receivables:
Trade, less allowance for doubtful accounts ($2,855 in 1998 and $2,826 in 1997)............. 71,386 68,502
Installment accounts receivable, net of deferred income from sales finance charges
and less allowance for doubtful accounts ($101 in 1998 and $476 in 1997).................. 4,153 7,920
Sundry...................................................................................... 1,696 1,739
-------- --------
Net receivables........................................................................... 77,235 78,161
Inventories................................................................................... 46,162 40,323
Prepaid expenses.............................................................................. 878 985
Deferred income taxes, current portion........................................................ 8,900 7,357
-------- --------
Total current assets...................................................................... 150,868 143,105
Property, plant, and equipment, net of accumulated depreciation.................................. 66,640 65,111
Installment accounts receivable due after one year, net of deferred income
from sales finance charges.................................................................... 2,843 6,337
Deferred income taxes, long-term portion......................................................... 2,657 2,257
Intangible assets................................................................................ 15,631 16,525
Other assets .................................................................................... 459 535
-------- --------
Total assets.............................................................................. $239,098 $233,870
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current debt.................................................................................. $ 7,302 $ 2,377
Accounts payable and accrued expenses......................................................... 52,086 48,837
Income taxes payable.......................................................................... 1,421 4,901
-------- --------
Total current liabilities................................................................. 60,809 56,115
Long-term debt................................................................................... 23,038 20,678
Long-term employee-related benefits.............................................................. 23,984 22,801
Other long-term liabilities...................................................................... -- 190
-------- --------
Total liabilities......................................................................... 107,831 99,784
Shareholders' equity:
Preferred stock of $.02 par value per share................................................... -- --
Common stock of $.375 par value per share..................................................... 3,421 3,637
Additional paid-in capital.................................................................... -- --
Common stock subscribed....................................................................... 425 444
Unearned restricted shares.................................................................... (307) (789)
Retained earnings............................................................................. 136,730 141,656
Accumulated other comprehensive income........................................................ 1,587 563
Receivable from ESOP.......................................................................... (10,589) (11,425)
-------- --------
Total shareholders' equity................................................................ 131,267 134,086
-------- --------
Total liabilities and shareholders' equity................................................ $239,098 $233,870
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
TENNANT COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Years ended December 31
CONSOLIDATED STATEMENTS OF CASH FLOWS 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOW RELATED TO OPERATING ACTIVITIES:
Net earnings.................................................................. $25,325 $24,205 $21,027
Adjustments to net earnings to arrive at operating cash flow:
Depreciation and amortization............................................... 17,550 17,468 16,387
Provision for bad debts..................................................... 944 1,901 1,160
Provision for stock plans................................................... 1,357 1,608 1,191
(Gain) loss on sale of property, net........................................ (442) (716) 557
Provision for deferred taxes................................................ (1,961) (2,391) (959)
(Increase) decrease in receivables.......................................... 4,077 (6,364) (4,073)
(Increase) decrease in inventories.......................................... (5,369) (6,614) 4,698
Increase (decrease) in accounts payable, accrued expenses and
other long-term liabilities............................................... 3,278 8,281 (1,428)
Increase in long-term employee-related benefits............................. 1,152 3,339 2,397
Increase (decrease) in income taxes payable................................. (3,476) 887 3,370
(Increase) decrease in other assets......................................... 337 386 (216)
Other, net.................................................................. 118 (98) 455
------- ------- -------
Net cash flow related to operating activities................................. 42,890 41,892 44,566
CASH FLOW RELATED TO INVESTING ACTIVITIES:
Acquisition of property, plant, and equipment............................... (23,389) (20,621) (20,966)
Acquisition of intangible assets............................................ -- -- (180)
Proceeds from disposals of property, plant, and equipment................... 6,168 4,197 3,385
Settlement of foreign currency hedging contracts............................ -- 934 521
------- ------- -------
Net cash flow related to investing activities................................. (17,221) (15,490) (17,240)
CASH FLOW RELATED TO FINANCING ACTIVITIES:
Net changes in current debt................................................. 6,468 150 (14,487)
Payments to settle long-term debt .......................................... (2,480) (2,264) --
Issuance of long-term debt ................................................. 58 15 --
Long-term proceeds from transfer of leased assets........................... 3,038 -- --
Principal payment from ESOP................................................. 599 546 495
Proceeds from employee stock issues......................................... 2,039 1,842 1,784
Repurchase of common stock.................................................. (27,071) (13,598) (2,911)
Dividends paid.............................................................. (6,941) (7,125) (6,905)
------- ------- -------
Net cash flow related to financing activities................................. (24,290) (20,434) (22,024)
Effect of exchange rate changes on cash.......................................... 35 430 332
------- ------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................................ 1,414 6,398 5,634
Cash and cash equivalents at beginning of year................................... 16,279 9,881 4,247
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR......................................... $17,693 $16,279 $ 9,881
------- ------- -------
------- ------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
TENNANT COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS Years ended December 31
OF SHAREHOLDERS' EQUITY 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
Beginning balance....................... 9,699,397 $ 3,637 9,965,437 $ 3,737 9,952,036 $ 3,732
Issue stock for employee benefit
plans and directors.................... 100,135 38 132,154 49 134,229 50
Purchase of common shares............... (676,572) (254) (398,194) (149) (120,828) (45)
--------- -------- --------- -------- --------- --------
Ending balance........................ 9,122,960 $ 3,421 9,699,397 $ 3,637 9,965,437 $ 3,737
--------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- --------
ADDITIONAL PAID-IN CAPITAL
Beginning balance....................... $ -- $ 3,547 $ 3,166
Issue stock for employee benefit
plans and directors.................... 2,817 3,596 3,247
Purchase of common shares............... (2,817) (7,143) (2,866)
-------- -------- --------
Ending balance........................ $ -- $ -- $ 3,547
-------- -------- --------
-------- -------- --------
COMMON STOCK SUBSCRIBED
Beginning balance....................... 12,191 $ 444 21,403 $ 703 29,084 $ 694
Issue stock for employee benefit plans.. (12,191) (444) (21,403) (703) (29,084) (694)
Subscribe stock for employee benefit
plans.................................. 10,605 425 12,191 444 21,403 703
--------- -------- --------- -------- --------- --------
Ending balance........................ 10,605 $ 425 12,191 $ 444 21,403 $ 703
--------- -------- --------- -------- --------- --------
--------- -------- --------- -------- --------- --------
UNEARNED RESTRICTED SHARES
Beginning balance....................... $ (789) $ (440) $ (276)
Restricted share activity, net.......... 482 (349) (164)
-------- -------- --------
Ending balance........................ $ (307) $ (789) $ (440)
-------- -------- --------
-------- -------- --------
RETAINED EARNINGS
Beginning balance....................... $141,656 $130,703 $116,396
Net earnings............................ 25,325 24,205 21,027
Dividends paid, $.74, $.72, and $.69,
respectively, per common share......... (6,941) (7,125) (6,905)
Purchase of common shares............... (24,000) (6,306) --
Tax benefit on ESOP and stock plans..... 690 179 185
-------- -------- --------
Ending balance........................ $136,730 $141,656 $130,703
-------- -------- --------
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning balance....................... $ 563 $ 2,877 $ 3,532
Net change for year in translation
adjustment............................. 1,024 (2,769) (1,065)
Gain (loss) on foreign currency hedges,
net of income taxes of $0, $(279),
and $(251), respectively............... -- 455 410
-------- -------- --------
Ending balance........................ $ 1,587 $ 563 $ 2,877
-------- -------- --------
-------- -------- --------
RECEIVABLE FROM ESOP
Beginning balance....................... $(11,425) $ (12,267) $(13,113)
Principal payments...................... 599 546 495
Shares allocated........................ 237 296 351
-------- -------- --------
Ending balance........................ $(10,589) $ (11,425) $(12,267)
-------- -------- --------
-------- -------- --------
Total shareholders' equity.............. $131,267 $134,086 $128,860
-------- -------- --------
-------- -------- --------
</TABLE>
The Company had 30,000,000 authorized shares of common stock as of December 31,
1998, 1997, and 1996.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
21
<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) 1998 1997
------- -------
<S> <C> <C>
FIFO inventories:
Finished goods............................. $32,895 $27,028
Raw materials, parts and work-in-process... 32,162 31,833
------- -------
Total FIFO inventories........................ 65,057 58,861
LIFO adjustment............................... (18,895) (18,538)
------- -------
LIFO inventories.............................. $46,162 $40,323
------- -------
------- -------
</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. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
U.S. income taxes are not provided on undistributed earnings of international
subsidiaries which are permanently reinvested. At December 31, 1998, earnings
permanently reinvested in international subsidiaries not subject to a U.S.
income tax provision were $16,633,000. If ever remitted to the Company in a
taxable distribution, U.S. income taxes would be substantially offset by
available foreign tax credits.
STOCK-BASED COMPENSATION. The Company accounts for stock-based compensation for
employees under Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees. APB No. 25 requires compensation cost to be recorded
on the date of the grant only if the current market price of the underlying
stock exceeds the exercise price. Accordingly, no compensation cost has been
recognized for stock option plans. The Company has adopted the disclosure-only
provisions of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION.
CASH EQUIVALENTS. The Company considers all highly liquid investments with
maturities of three months or less, when purchased, to be cash equivalents.
REVENUE RECOGNITION. The Company recognizes revenue when title passes, which is
usually upon shipment.
DERIVATIVE FINANCIAL INSTRUMENTS. The Company enters into forward exchange
contracts principally to hedge the eventual dollar cash flow of foreign currency
denominated transactions (principally British pound, Netherlands guilder,
Australian dollar, Canadian dollar, and Japanese yen). Gains or losses on
forward exchange contracts to hedge foreign currency denominated anticipated
sales transactions and net exposed assets are recognized in income on a current
basis over the term of the contracts. The Company has elected to treat certain
forward exchange contracts as an economic hedge of its net investment in Tennant
Holding B.V., a Netherlands-based subsidiary. Gains or losses on such contracts,
net of related tax effect, are recognized on a current basis over the term of
the contract and are reported as a separate component of shareholders' equity.
EARNINGS PER SHARE. Basic earnings per share excludes dilution and is computed
by dividing the income available to common shareholders by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share includes conversion shares consisting of stock options and
performance-related shares.
22
<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 1998, the Financial Accounting Standards Board
issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES, which requires the Company to recognize all derivatives on the
balance sheet at fair value. The Company is in the process of determining what
effect this pronouncement has on consolidated net earnings. Also in 1998, the
American Institute of Certified Public Accountants (AICPA) issued Statement of
Position (SOP) 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE, which will be adopted by the Company in 1999. SOP
98-1 requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated useful
life of the software. The estimated costs to be capitalized in 1999 are
approximately $1 million.
(2) SEGMENT REPORTING
The Company operates in one industry segment which consists of the design,
manufacture, and sale of products and services used in the maintenance of
nonresidential floors.
Financial data by geographic area is before interest expense and elimination of
intercompany transactions. North America sales include sales in the United
States, Canada and Mexico. Sales in Canada and Mexico comprise less than 10% of
consolidated sales and are interrelated with the Company's U.S. operations.
Product transfers from North America are generally made at prices that recognize
return on investment objectives for both the manufacturing and selling units.
Corporate items include general corporate expense and miscellaneous items such
as net ESOP income and foundation contribution expense. Corporate assets consist
primarily of Company cash and cash equivalents.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
NET SALES
North America
Customer sales..................... $293,231 $275,834 $248,703
Transfers to Europe and
other international areas........ 43,368 51,231 43,898
-------- -------- --------
Total North America................ $336,599 $327,065 $292,601
Europe customer sales................ 62,855 57,387 58,196
Other international customer sales... 33,302 39,207 37,534
Eliminations......................... (43,368) (51,231) (43,898)
-------- -------- --------
Total.................................. $389,388 $372,428 $344,433
-------- -------- --------
-------- -------- --------
PROFIT BEFORE INCOME TAXES
North America........................ $ 30,736 $ 34,029 $ 28,734
Europe............................... 6,615 5,168 3,960
Other international.................. 3,643 1,687 3,009
Corporate items, interest income,
interest expense, and eliminations. (1,902) (3,254) (3,374)
-------- -------- --------
Total.................................. $ 39,092 $ 37,630 $ 32,329
-------- -------- --------
-------- -------- --------
TOTAL ASSETS
Identifiable assets
North America...................... $172,748 $176,284 $170,010
Europe............................. 41,100 37,842 38,857
Other international................ 11,428 7,898 7,038
Corporate assets and eliminations.... 13,822 11,846 3,275
-------- -------- --------
Total.................................. $239,098 $233,870 $219,180
-------- -------- --------
-------- -------- --------
</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, 1998, as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Engineering, research and
development................ $14,224 $13,470 $12,773
Maintenance and repairs....... $ 6,071 $ 5,856 $ 5,740
Warranty...................... $ 5,959 $ 4,981 $ 4,579
Bad debts..................... $ 944 $ 1,901 $ 1,160
</TABLE>
(4) CONSOLIDATED QUARTERLY DATA* (UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net Sales Gross Profit
--------------------------- --------------------------
% %
Quarter 1998 1997 Change 1998 1997 Change
-------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
First...... $ 88,721 $ 83,026 7 $ 37,276 $ 34,149 9
Second..... 99,220 93,359 6 42,054 39,770 6
Third...... 96,116 90,570 6 40,652 38,298 6
Fourth..... 105,331 105,473 -- 45,817 44,819 2
-------- -------- -------- --------
Year....... $389,388 $372,428 5 $165,799 $157,036 6
-------- -------- -------- --------
-------- -------- -------- --------
<CAPTION>
Net Earnings Diluted Earnings Per Share
--------------------------- --------------------------
%
Quarter 1998 1997 Change 1998 1997
-------- -------- ------ -------- --------
<S> <C> <C> <C> <C> <C>
First....... $ 5,243 $ 4,407 19 $ .54 $ .44
Second...... 6,718 6,417 5 .70 .63
Third....... 6,308 5,972 6 .67 .60
Fourth...... 7,056 7,409 (5) .76 .74
-------- -------- ----- -----
Year........ $ 25,325 $ 24,205 5 $2.67 $2.41
-------- -------- ----- -----
-------- -------- ----- -----
</TABLE>
*Regular quarterly dividends aggregated $.74 per share in 1998 ($.18 per share
for the first two quarters and $.19 per share for the last two quarters) and
$.72 per share in 1997 ($.18 per share for all quarters).
(5) INCOME TAXES
In 1998, 1997, and 1996 the Company recognized tax benefits of $690,000,
$179,000, and $185,000, respectively, relating to the Company's ESOP and stock
plans and miscellaneous charges (credits) of $0, $279,000, and $251,000,
respectively, by direct allocations to shareholders' equity.
Income tax expense for the three years ended December 31, 1998, is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) Current Deferred Total
------- -------- -------
<S> <C> <C> <C>
1998
Federal................ $10,328 $(1,533) $ 8,795
Foreign................ 3,998 (127) 3,871
State.................. 1,402 (301) 1,101
------- ------- -------
$15,728 $(1,961) $13,767
------- ------- -------
------- ------- -------
1997
Federal................ $10,868 $(1,702) $ 9,166
Foreign................ 3,135 (35) 3,100
State.................. 1,458 (299) 1,159
------- ------- -------
$15,461 $(2,036) $13,425
------- ------- -------
------- ------- -------
1996
Federal................ $ 8,808 $ (784) $ 8,024
Foreign................ 2,286 (76) 2,210
State.................. 967 101 1,068
------- ------- -------
$12,061 $ (759) $11,302
------- ------- -------
------- ------- -------
</TABLE>
23
<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) 1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Tax at statutory rate................... $13,682 $13,171 $11,304
Increases (decreases) in taxes from:
State and local taxes, net of
federal benefit.................... 715 754 694
Effect of foreign taxes.............. 308 314 363
Research and development credit...... (117) (239) (324)
Effect of foreign sales corporation.. (708) (668) (667)
Other, net........................... (113) 93 (68)
------- ------- -------
Income tax expense...................... $13,767 $13,425 $11,302
------- ------- -------
------- ------- -------
</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, 1998 and
1997, are presented below:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
------- -------
<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................................ $ 1,171 $ 1,394
Employee wages and benefits, principally due
to accruals for financial reporting purposes 14,250 12,307
Warranty reserves accrued for financial
reporting purposes................................ 918 934
Accounts receivable, principally due to
allowance for doubtful accounts and
change in tax accounting method
for equipment rentals............................. 252 183
Deferred loss, hedge of forward foreign
exchange contracts and options.................... 31 --
Other............................................... 1,013 817
------- -------
Total deferred tax assets........................ $17,635 $15,635
------- -------
------- -------
DEFERRED TAX LIABILITIES:
Property, plant, and equipment, principally
due to differences in depreciation and
related gains..................................... $ 5,296 $ 5,385
Goodwill............................................ 782 632
Deferred gain, hedge of forward foreign
exchange contracts and options.................... -- 4
------- -------
Total deferred tax liabilities................... $ 6,078 $ 6,021
------- -------
------- -------
Net deferred tax asset................................. $11,557 $ 9,614
------- -------
------- -------
</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 $18,513,000, $14,839,000, and $8,714,000, in 1998, 1997,
and 1996, respectively.
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31 consist of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
------- -------
<S> <C> <C>
Trade accounts payable...................... $15,719 $16,632
Employee profit sharing..................... 4,165 3,856
Wages, bonuses, and commissions............. 21,329 16,500
Taxes, other than income taxes.............. 3,622 3,289
Other....................................... 7,251 8,560
------- -------
Total....................................... $52,086 $48,837
------- -------
------- -------
</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) 1998 1997
-------- --------
<S> <C> <C>
Land....................................... $ 3,627 $ 3,553
Buildings and improvements................. 28,212 25,914
Machinery and equipment.................... 131,938 123,112
Construction in progress................... 5,738 4,023
-------- --------
Total property, plant, and equipment....... 169,515 156,602
Less accumulated depreciation.............. (102,875) (91,491)
-------- --------
Net property, plant, and equipment......... $ 66,640 $ 65,111
-------- --------
-------- --------
</TABLE>
Buildings and improvements include office, warehouse, or manufacturing
facilities in suburban Minneapolis, Minnesota; Holland, Michigan; Adairsville,
Georgia; London, England; and Uden, The Netherlands.
(8) INVESTMENTS AS LESSOR
The Company leases floor maintenance equipment to customers under sales-type and
operating leases. Noncancelable terms for sales-type leases range from six
months to five years, and terms for operating leases range from one month to
five years. All leases provide for minimum lease payments and require the
lessees to pay executory costs.
Minimum future lease payments to be received during the years ended December 31
are as follows:
<TABLE>
<CAPTION>
Sales-Type Operating
(IN THOUSANDS) Leases Leases
---------- ---------
<S> <C> <C>
1999 $ 4,552 721
2000 2,055 206
2001 757 20
2002 269 22
2003 12 --
------- ------
Total $ 7,645 $ 969
------- ------
------- ------
</TABLE>
24
<PAGE>
The Company's investment in equipment related to operating leases as of December
31 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
------ ------
<S> <C> <C>
Cost........................................ $ 39 $4,792
Less accumulated depreciation............... (39) (1,970)
------ ------
Net investment.............................. $ -- $2,822
------ ------
------ ------
</TABLE>
The Company's net investment in sales-type leases at December 31 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
------- -------
<S> <C> <C>
Minimum lease payments receivable........... $ 7,645 $15,752
Less allowance for doubtful accounts........ (101) (476)
------- -------
Net minimum lease payments receivable....... 7,544 15,276
Estimated unguaranteed residual value....... -- 1,104
Less deferred income........................ (1,452) (2,757)
------- -------
Net investment in sales-type leases......... $ 6,092 $13,623
------- -------
------- -------
</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 $2,863,000, $3,273,000,
and $2,873,000, in 1998, 1997, and 1996, respectively.
The aggregate lease commitments with an initial term of one year or more at
December 31, 1998, were $7,307,000 with minimum rentals for the periods as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999 $2,390
2000 1,935
2001 1,570
2002 907
2003 493
2004 and beyond 12
------
Total $7,307
------
------
</TABLE>
(10) SHORT-TERM BORROWINGS
Short-term bank borrowings at December 31, 1998 and 1997, were $47,000 and
$666,000, respectively. In addition to the short-term bank borrowings, current
debt includes the current portion of long-term debt, collateralized borrowings,
and mortgages associated with the relocation of employees.
The weighted-average interest rates on the above short-term bank borrowings at
December 31, 1998 and 1997, were 4.3% and 4.5%, respectively. This interest rate
represents the weighted-average rate for the respective period and is calculated
using the actual interest costs, exclusive of commitment fees, and month-end
average outstanding debt.
The Company has available lines of credit with banks in the amount of
$21,128,000 which includes a $15,000,000 line of credit requiring the Company to
pay .2% per year commitment fee on the line of credit. This fee is recorded by
the Company as interest expense.
(11) LONG-TERM DEBT
Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1998 1997
------- -------
<S> <C> <C>
Bank loan at 4.0%, due in 1998............... $ -- $ 567
Bank loan at 7.0%, due in 1998............... -- 1,144
Bank loan at 4.0%, due in 1999............... 591 --
Bank loan at 7.9%, due in 1999............... 1,158 --
Bank loan at 8.7%, due in 1999............... -- 678
Bank loan at 5.65%, due in 1999.............. 704 --
Note at 8.09%, due in 2000................... 5,000 5,000
Collateralized loan at 9.6%, due in 2000..... 2,132 --
Notes at 8.56%, due in 2001.................. 5,000 5,000
Collateralized loan at 9.6%, due in 2001..... 679 --
Collateralized loan at 9.6%, due in 2002..... 219 --
Note at 7.21%, due in 2003................... 5,000 5,000
Collateralized loan at 9.6%, due in 2003..... 8 --
Note at 7.84%, due in 2005................... 5,000 5,000
Less current portion......................... (2,453) (1,711)
------- -------
Total........................................ $23,038 $20,678
------- -------
------- -------
</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>
1999 $ 2,453
2000 7,132
2001 5,679
2202 219
2003 5,008
2004 and beyond 5,000
-------
Total $25,491
-------
-------
</TABLE>
During 1998, 1997, and 1996, the Company paid total long-term and short-term
interest costs of $2,280,000, $2,019,000, and $2,473,000, respectively.
(12) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's short-term financial instruments are valued at their carrying
amounts in the consolidated balance sheets, which are reasonable estimates of
their fair value due to the short maturity of the instruments. The Company's
foreign currency forward exchange contracts are valued at fair market value,
which is the amount the Company would receive or pay to terminate the contracts
at the reporting date. The fair market value of the Company's long-term debt
approximates cost, based on the borrowing rates currently available to the
Company for bank loans with similar terms and remaining maturities.
25
<PAGE>
(13) PENSIONS AND POSTRETIREMENT BENEFITS
The Company has a Defined Benefit Pension Plan (available to most U.S.
employees). Plan benefits are based on the employee's years of service and
compensation during the highest five consecutive years of service of the final
ten years of employment. The Company's policy has been to fund this plan to the
maximum allowed by ERISA rules. Contributions are intended to provide benefits
attributed to service to date, and for service-related benefits expected to be
earned in the future. Retirement benefits for eligible employees in foreign
locations are funded principally through either annuity or government programs.
The Company also provides certain health care benefits for substantially all of
its U.S. retired employees. Eligibility for those benefits is based upon a
combination of years of service with the Company and age upon retirement from
the Company.
<TABLE>
<CAPTION>
Postretirement
(IN THOUSANDS) Pension Benefits Medical Benefits
----------------------- -----------------------
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year........................... $19,865 $17,388 $ 11,380 $ 10,990
Service cost...................................................... 1,851 1,635 365 334
Interest cost..................................................... 1,326 1,176 731 703
Actuarial loss/(gain)............................................. 503 (8) 13 (356)
Benefits paid..................................................... (229) (326) (386) (291)
------- ------- -------- --------
Benefit obligation at end of year............................... $23,316 $19,865 $ 12,103 $ 11,380
------- ------- -------- --------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year.................... $23,872 $19,575 $ -- $ --
Actual return on plan assets...................................... 12,408 4,621 -- --
Employer contribution............................................. 2 2 386 291
Benefits paid..................................................... (229) (326) (386) (291)
------- ------- -------- --------
Fair value of plan assets at end of year........................ $36,053 $23,872 $ -- $ --
------- ------- -------- --------
Funded status..................................................... $12,737 $ 4,007 $(12,103) $(11,380)
Unrecognized actuarial loss/(gain)................................ (19,892) (10,155) 696 683
Unrecognized transition obligation/(asset)........................ (496) (542) -- --
Unrecognized prior service cost................................... 346 379 -- --
------- ------- -------- --------
Net amount recognized........................................... $(7,305) $(6,311) $(11,407) $(10,697)
------- ------- -------- --------
------- ------- -------- --------
Amounts recognized in the statement of financial position consist of:
Accrued benefit liability....................................... $(7,377) $(6,324) $(11,407) $(10,697)
Intangible asset................................................ 72 13 -- --
------- ------- -------- --------
Net amount recognized......................................... $(7,305) $(6,311) $(11,407) $(10,697)
------- ------- -------- --------
------- ------- -------- --------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31:
Discount rate..................................................... 6.50% 6.75% 6.50% 6.75%
Expected return on plan assets.................................... 9.50% 9.75% -- --
Rate of compensation increase..................................... 5.00% 5.25% -- --
</TABLE>
For purposes of determining the 1998 postretirement medical net periodic benefit
cost, the weighted-average assumed annual rate of future increase in the per
capita cost of covered health care benefits was 8.6% for 1998, declining
gradually to 5.25% in 2023 and after. For purposes of determining the December
31, 1998, accumulated postretirement benefit obligation, the weighted-average
assumed annual rate of future increases in the per capita cost of covered health
care benefits was 8.0% for 1999, declining gradually to 5.0% in 2024 and after.
<TABLE>
<CAPTION>
Postretirement
(IN THOUSANDS) Pension Benefits Medical Benefits
----------------------- -----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost...................................................... $ 1,852 $ 1,635 $ 365 $ 334
Interest cost..................................................... 1,326 1,176 731 703
Expected return on plan assets.................................... (1,898) (1,670) -- --
Amortization of prior service cost................................ 33 33 -- --
Amortization of transition obligation/(asset)..................... (46) (46) -- --
Recognized actuarial loss......................................... (271) (231) -- --
-------- -------- -------- --------
Net periodic benefit cost....................................... $ 996 $ 897 $ 1,096 $ 1,037
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
26
<PAGE>
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were $1,466,000, $983,000, and $0, respectively, as of
December 31, 1998, and $1,106,000, $715,000, and $0, respectively, as of
December 31, 1997.
The health care trend rate assumption does not have a large impact on the plan's
liabilities since the Company's liabilities are largely fixed dollar amounts in
future years. To illustrate, a one-percentage-point change in assumed health
care trend rates would have the following effects:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1-Percentage- 1-Percentage-
Point Increase Point Decrease
-------------- --------------
<S> <C> <C>
Effect on total of service and
interest cost components......... $ 30 $ (36)
Effect on postretirement
benefit obligation............... $315 $(370)
</TABLE>
(14) FOREIGN CURRENCY CONTRACTS
In 1997 and 1996, the Company entered into several guilder forward exchange
contracts for the purpose of hedging the net investment in Tennant Holding B.V.,
a Netherlands-based subsidiary. As of December 31, 1998, there were no
outstanding guilder contracts. In 1998, 1997, and 1996, the Company recognized
gains (losses), net of related tax effect, as a separate component of
shareholders' equity of $0, $455,000, and $410,000, respectively.
The Company entered into yen range forward exchange contracts to hedge
anticipated sales transactions. Gains and losses on contracts are recognized in
income on a current basis over the term of the contracts. As of December 31,
1998, there was one outstanding yen contract totaling $600,000. In 1998, 1997,
and 1996, the Company recognized gains (losses) of $(22,000), $0, and $50,000,
respectively.
The Company also entered into forward exchange contracts to hedge net
exposed assets in Australia, Canada, and Japan. As of December 31, 1998, the
Company had three outstanding contracts totaling $6,421,000. These contracts
will mature in 1999 and bear rates of .6083 U.S. dollars per Australian
dollar, 1.5500 Canadian dollars per U.S. dollar, and 115.90 Japanese yen per
U.S. dollar. In 1998, 1997, and 1996, the Company recognized gains (losses)
of $(91,000), $715,000, and $198,000, respectively.
(15) COMMON AND PREFERRED STOCK AND ADDITIONAL PAID-IN CAPITAL
The Company is authorized to issue an aggregate of 31,000,000 shares; 30,000,000
were designated as Common Stock, having a par value of $.375 per share, and
1,000,000 were designated as Preferred Stock, having a par value of $.02 per
share. The Board of Directors was authorized to establish one or more series of
Preferred Stock, setting forth the designation of each such series, and fixing
the relative rights and preferences of each such series.
On November 19, 1996, the Board of Directors approved a Shareholder Rights Plan
allowing a dividend of one preferred share purchase Right for each outstanding
Common Share of the par value of $.375 per share of the Company. Each Right
entitles the registered holder to purchase from the Company one one-hundredth of
a Series A Junior Participating Preferred Share of the par value of $.02 per
share of the Company at a price of $100 per one one-hundredth of a Preferred
Share, subject to adjustment. The Rights are not exercisable or transferable
apart from the common stock until the earlier of: (i) the close of business on
the fifteenth day following a public announcement that a person or group of
affiliated or associated persons has become an "Acquiring Person" (i.e., has
become, subject to certain exceptions, the beneficial owner of 20% or more of
the outstanding Common Shares), or (ii) the close of business on the fifteenth
day following the commencement or public announcement of a tender offer or
exchange offer the consummation of which would result in a person or group of
affiliated or associated persons becoming, subject to certain exceptions, the
beneficial owner of 20% or more of the outstanding Common Shares (or such later
date as may be determined by the Board of Directors of the Company prior to a
person or group of affiliated or associated persons becoming an Acquiring
Person). At no time do the Rights have any voting power. The Rights may be
redeemed by the Company for $.01 per right at any time prior to (and, in certain
circumstances, within twenty days after) a person or group acquiring 20% or more
of the common stock. The 20% thresholds do not apply to stock ownership by or on
behalf of employee benefit plans. Under certain circumstances, the Board of
Directors may exchange the Rights for the Company's common stock or reduce the
20% thresholds to not less than 10%. The Rights will expire on December 23,
2006, unless extended or earlier redeemed or exchanged by the Company.
(16) STOCK PLANS, BONUSES, AND PROFIT SHARING
The Company has five plans under which stock-based compensation grants are
provided annually. The 1992 Stock Incentive Plan ("1992 Plan"), 1995 Stock
Incentive Plan ("1995 Plan") and 1998 Management Incentive Plan ("1998 Plan")
provide for stock-based compensation grants to executives and key employees of
the Company. The 1993 Directors Restricted Plan ("1993 Plan") provides for the
annual retainer in the form of restricted shares to the non-employee Directors
of the Company. The 1997 Director's Option Plan ("1997 Plan") provides for stock
option grants to non-employee Directors of the Company. The maximum number of
shares that can be awarded under the respective plans is 500,000, 500,000,
100,000, 50,000 and 150,000, respectively. The grant size under all plans is
determined by the Compensation Committee of the Board of Directors.
Restricted shares are granted annually and typically have a two- or three-year
restriction period from the effective date of the grant. During the restricted
period, the restricted shares may not be sold or transferred, but the shares
entitle the participants to dividend and voting rights. In 1998, 1997, and 1996,
respectively, 12,000, 28,000, and 26,000, restricted shares were granted. The
weighted-average fair value of stock on the grant date was $37.85, $31.35, and
$24.57 per share in 1998, 1997, and 1996, respectively.
Under the 1992 Plan and the 1995 Plan, performance-related shares were granted
annually and are payable if the Company achieves certain financial performance
goals over each four-year
27
<PAGE>
period following the grants. In 1997 and 1996, respectively, 34,000 and 46,000
performance shares were granted. The weighted-average fair value of stock on the
grant date was $26.75 and $23.25 per share in 1997 and 1996, respectively.
Under the 1998 Plan, performance-related compensation grants were made and are
payable in cash or shares. The awards earned are based on achievement of certain
financial performance goals in 1998 and payout is over a three-year period
following the award year. In 1998, $1,154,000 in grants were made.
Under the 1995 Plan and the 1997 Plan, 10-year fixed stock options are granted
annually at a price equal to the stock's fair market value on the date of the
grant. Options are exercisable on a cumulative basis at a rate of 25% per year.
A summary of the status of the Company's stock option transactions during 1998,
1997 and 1996 is shown below:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
-------- -------------------
1998
-------------------------------
<S> <C> <C>
Outstanding at beginning of year... 320,000 $25.95
Granted............................ 208,300 37.63
Exercised.......................... (73,200) 24.74
Forfeited.......................... (2,500) 29.35
------- ------
Outstanding at end of year......... 452,600 $31.50
------- ------
------- ------
Exercisable at year-end............ 116,100 $31.96
------- ------
------- ------
<CAPTION>
1997
-------------------------------
<S> <C> <C>
Outstanding at beginning of year... 183,800 $23.24
Granted............................ 207,800 27.61
Exercised.......................... (66,400) 23.64
Forfeited.......................... (5,200) 25.46
------- ------
Outstanding at end of year......... 320,000 $25.95
------- ------
------- ------
Exercisable at year-end............ 54,200 $27.50
------- ------
------- ------
<CAPTION>
1996
-------------------------------
<S> <C> <C>
Outstanding at beginning of year... 101,500 $23.69
Granted............................ 82,300 22.68
Exercised.......................... -- --
Forfeited.......................... -- --
------- ------
Outstanding at end of year......... 183,800 $23.24
------- ------
------- ------
Exercisable at year-end............ 25,400 $23.69
------- ------
------- ------
</TABLE>
The weighted-average fair value of each option granted was $8.35, $6.11 and
$4.53 in 1998, 1997 and 1996, respectively. At December 31, 1998, outstanding
options had exercise prices between $22.00 and $43.50 per share and a
weighted-average contractual life of eight years.
The Company has adopted the disclosure-only provision of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. In accordance with SFAS No. 123, the
fair value of options at the date of grant is estimated using the Black-Scholes
option pricing model. The following weighted-average assumptions were used for
the 1998, 1997 and 1996 grants, respectively: dividend yield of 2.0%, 2.6% and
2.6%; expected volatility of 19%, 19% and 18%; risk-free interest rates of 5.5%,
6.2% and 5.5%; and expected life of option of five years. In 1998, 1997, and
1996, respectively, expenses of $5,557,000, $6,192,000, and $2,731,000, were
charged to operations for restricted and performance-related awards. Had
stock-based compensation cost, determined consistent with the provisions of SFAS
No. 123, been charged to the Company's net earnings, net earnings per share
would have been reduced to the pro forma amounts indicated below (dollars in
thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net earnings - as reported........... $25,325 $24,205 $21,027
Net earnings - pro forma............. $24,511 $23,798 $20,869
Diluted net earnings per share -
as reported....................... $ 2.67 $ 2.41 $ 2.09
Diluted net earnings per share -
pro forma......................... $ 2.58 $ 2.37 $ 2.07
</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 $828,000, $689,000, and
$695,000, in 1998, 1997, and 1996, respectively.
During 1990, the Company established a leveraged Employee Stock Ownership Plan
(ESOP) by amending its Profit Sharing Plan to add ESOP features. The ESOP covers
substantially all domestic employees following completion of one year of
service. The shares required for the Company's matching contribution program, as
well as the Company's Profit Sharing Plan, are provided principally by the
Company's ESOP, supplemented as needed by newly issued shares. The Company makes
annual contributions to the ESOP equal to the ESOP's debt service less dividends
received by the ESOP. All dividends received by the ESOP are used to pay debt
service. The ESOP shares initially were pledged as collateral for its debt. As
the debt is repaid, shares are released from collateral and allocated to
employees who made 401(k) contributions that year, as well as to profit sharing
participants, based on the proportion of debt service paid in the year. The
Company accounts for the ESOP in accordance with EITF Issue 89-8, Expense
Recognition for Employee Stock Ownership Plans. Accordingly, the shares pledged
as collateral are reported as unearned ESOP shares in the consolidated balance
sheets. As shares are released from collateral, the Company reports compensation
expense equal to the cost of the shares to ESOP. ESOP shares are considered
outstanding in EPS computations, and dividends on allocated and unallocated
shares are recorded as a reduction of retained earnings.
The Company's cash contribution to the ESOP during 1998, 1997, and 1996 was
$1,241,000, $1,263,000, and $1,303,000, respectively. Accrued expenses in excess
of benefits provided to employees through the ESOP, which were charged to
miscellaneous expense, were ($292,000), $138,000, and $542,000, in 1998, 1997,
and 1996, respectively. Interest earned and received on the Company loan to the
ESOP was
28
<PAGE>
$1,437,000, $1,496,000, and $1,550,000, in 1998, 1997, and 1996, respectively.
Dividends on the Company shares held by the ESOP used for debt service were
$797,000, $787,000, and $755,000, in 1998, 1997, and 1996, respectively. At
December 31, 1998, the ESOP indebtedness to the Company, which bears an interest
rate of 10.05% and is due December 31, 2009, was $14,152,000.
The ESOP shares as of December 31 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Allocated shares...................... 378,166 329,324 280,974
Shares released for allocation........ 41,052 40,241 38,971
Unreleased shares..................... 549,848 599,501 649,121
------- ------- -------
Total ESOP shares..................... 969,066 969,066 969,066
------- ------- -------
------- ------- -------
</TABLE>
For the years ended December 31, 1998, 1997, and 1996, the Company charged to
operations $13,657,000, $13,591,000, and $9,068,501, respectively, for expense
of all stock, bonus, pension, and profit sharing plans.
(17) EARNINGS PER SHARE
Basic and diluted earnings per share for the three years ended December 31,
1998, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------- ----------- --------
For the Year Ended 1998
-------------------------------------
<S> <C> <C> <C>
Basic earnings per share.... $25,325 9,471 $2.67
Effect of dilutive securities:
Fixed stock options...... 29
------
Diluted earnings per share.. $25,325 9,500 $2.67
------- ------ -----
------- ------ -----
<CAPTION>
For the Year Ended 1997
-------------------------------------
<S> <C> <C> <C>
Basic earnings per share.... $24,205 9,954 $2.43
Effect of dilutive securities:
Fixed stock options...... 35
Performance-related shares 43
------
Diluted earnings per share.. $24,205 10,032 $2.41
------- ------ -----
------- ------ -----
<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...... 11
Performance-related shares 23
------
Diluted earnings per share.. $21,027 10,076 $2.09
------- ------ -----
------- ------ -----
</TABLE>
(18) SUBSEQUENT EVENT - ACQUISITIONS (UNAUDITED)
On January 4, 1999, the Company acquired the shares and holdings in associated
businesses of Paul Andra KG, a privately owned manufacturer of commercial floor
maintenance equipment in Germany. Paul Andra KG sells products principally under
the Sorma brand name, including single disk machines, wet/dry vacuum cleaners
and vacuumized scrubbers. The acquisitions should result in a strengthened
product line and distribution, particularly in Germany. Sales for 1998 of the
acquired business were approximately $27,000,000. These acquisitions are not
expected to have a material impact on operations.
29
<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, 1998, have been prepared in conformity with
generally accepted accounting principles appropriate in the circumstances. In
preparing the financial statements, management makes informed judgments and
estimates where necessary to reflect the expected effects of events and
transactions that have not been completed.
In meeting its responsibility for the reliability of the financial statements,
management relies on a system of internal accounting control. This system is
designed to provide reasonable assurance that assets are safeguarded and
transactions are executed in accordance with management's authorization and
recorded properly to permit the preparation of financial statements in
accordance with generally accepted accounting principles. The design of this
system recognizes that errors or irregularities may occur and that estimates and
judgments are required to assess the relative cost and expected benefits of the
controls. Management believes that the Company's accounting controls provide
reasonable assurance that errors or irregularities that could be material to the
financial statements are prevented or would be detected within a timely period.
The Audit Committee of the Board of Directors, which is comprised solely of
Directors who are not employees of the Company, is responsible for monitoring
the Company's accounting and reporting practices. The Audit Committee meets
periodically with management and the independent auditors to discuss internal
accounting control, auditing, and financial reporting matters.
------------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Tennant Company:
We have audited the accompanying consolidated balance sheets of Tennant Company
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of earnings and comprehensive earnings, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tennant Company and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
February 9, 1999
30
<PAGE>
DIRECTORS
[PHOTOGRAPH]
Photo of Directors: David Cox, Janet Dolan, Andy Czajkowski
David Cox
Janet Dolan
Andy Czajkowski
[PHOTOGRAPH]
Photo of Directors: Roger Hale, Del Johnson, Art Collins
Roger Hale
Del Johnson
Art Collins
[PHOTOGRAPH]
Photo of Directors: Pam Knous, Ed Russell, Will Miller
Pam Knous
Ed Russell
Will Miller
31
<PAGE>
TENNANT COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
HISTORICAL PROGRESS REVIEW (PRESENTS 10 YEARS OF DATA FOR LONG-TERM GROWTH MEASUREMENT.)
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) 1998 1997
------------- ---------------
<S> <C> <C>
Net sales.................................................................................. $ 389,388 372,428
Cost of sales.............................................................................. $ 223,589 215,392
Gross margin-- %........................................................................... 42.6 42.2
Selling and administrative expenses........................................................ $ 128,450 120,948
% of net sales........................................................................... 33.0 32.5
Profit from operations..................................................................... $ 37,349 36,088
% of net sales........................................................................... 9.6 9.7
Other income and (expense)................................................................. $ 1,743 1,542
Income tax expense......................................................................... $ 13,767 13,425
% of earnings before income taxes........................................................ 35.2 35.7
Earnings before extraordinary gain and cumulative effect of accounting change.............. $ 25,325 24,205
% of net sales........................................................................ 6.5 6.5
Return on beginning shareholders' equity-- %.......................................... 18.9 18.8
Net earnings............................................................................... $ 25,325 24,205
PER SHARE DATA(e)
Basic net earnings before extraordinary gain and cumulative effect of accounting change.... $ 2.67 2.43
Diluted net earnings before extraordinary gain and cumulative effect of accounting change.. $ 2.67 2.41
Basic net earnings......................................................................... $ 2.67 2.43
Diluted net earnings....................................................................... $ 2.67 2.41
Cash dividends............................................................................. $ .74 .72
Shareholders' equity (ending).............................................................. $ 14.25 13.65
YEAR-END FINANCIAL POSITION
Cash and cash equivalents.................................................................. $ 17,693 16,279
Total current assets....................................................................... $ 150,868 143,105
Property, plant, and equipment, net........................................................ $ 66,640 65,111
Total assets............................................................................... $ 239,098 233,870
Current liabilities excluding current debt................................................. $ 53,507 53,738
Current ratio excluding current debt....................................................... 2.8 2.7
Long-term liabilities excluding long-term debt............................................. $ 23,984 22,991
Financing debt
Current.................................................................................. $ 7,302 2,377
Long-term................................................................................ $ 23,038 20,678
Total as % of total capital........................................................... 18.8 14.7
Shareholders' equity....................................................................... $ 131,267 134,086
CASH FLOW Increase (Decrease)
Related to operating activities............................................................ $ 42,890 41,892
Related to investing activities............................................................ $ (17,221) (15,490)
Related to financing activities............................................................ $ (24,290) (20,434)
OTHER DATA
Interest income............................................................................ $ 3,771 4,699
Interest expense........................................................................... $ 2,292 2,021
Depreciation and amortization expense...................................................... $ 17,550 17,468
Net expenditures for property, plant, and equipment........................................ $ 17,221 16,424
Number of employees at year-end............................................................ 2,127 2,019
Total direct compensation.................................................................. $ 102,821 95,099
Profit sharing and all other employee benefits............................................. $ 27,553 27,337
Average shares outstanding(e).............................................................. 9,500 10,032
Closing share price at year-end(e)......................................................... $ 40 1/8 36 3/8
Common stock price range during year(e).................................................... $ 33-45 3/4 26 1/8-39 5/8
Closing price/earnings ratio(f)............................................................ 15.0 15.1
<CAPTION>
1996 1995
------------- --------------
<S> <C> <C>
Net sales.................................................................................. 344,433 325,368
Cost of sales.............................................................................. 202,057 185,668
Gross margin-- %........................................................................... 41.3 42.9
Selling and administrative expenses........................................................ 110,745 109,518
% of net sales........................................................................... 32.2 33.7
Profit from operations..................................................................... 31,631 30,182
% of net sales........................................................................... 9.2 9.3
Other income and (expense)................................................................. 698 (747)
Income tax expense......................................................................... 11,302 9,773
% of earnings before income taxes........................................................ 35.0 33.2
Earnings before extraordinary gain and cumulative effect of accounting change.............. 21,027 19,662
% of net sales........................................................................ 6.1 6.0
Return on beginning shareholders' equity-- %.......................................... 18.4 20.4
Net earnings............................................................................... 21,027 19,662
PER SHARE DATA(e)
Basic net earnings before extraordinary gain and cumulative effect of accounting change.... 2.09 1.98
Diluted net earnings before extraordinary gain and cumulative effect of accounting change.. 2.09 1.98
Basic net earnings......................................................................... 2.09 1.98
Diluted net earnings....................................................................... 2.09 1.98
Cash dividends............................................................................. .69 .68
Shareholders' equity (ending).............................................................. 12.86 11.47
YEAR-END FINANCIAL POSITION
Cash and cash equivalents.................................................................. 9,881 4,247
Total current assets....................................................................... 126,481 123,508
Property, plant, and equipment, net........................................................ 65,384 63,724
Total assets............................................................................... 219,180 215,750
Current liabilities excluding current debt................................................. 45,724 44,374
Current ratio excluding current debt....................................................... 2.8 2.8
Long-term liabilities excluding long-term debt............................................. 18,908 16,747
Financing debt
Current.................................................................................. 3,864 17,349
Long-term................................................................................ 21,824 23,149
Total as % of total capital........................................................... 16.6 26.2
Shareholders' equity....................................................................... 128,860 114,131
CASH FLOW Increase (Decrease)
Related to operating activities............................................................ 44,566 17,834
Related to investing activities............................................................ (17,240) (22,107)
Related to financing activities............................................................ (22,024) 6,721
OTHER DATA
Interest income............................................................................ 4,259 4,132
Interest expense........................................................................... 2,491 2,640
Depreciation and amortization expense...................................................... 16,387 14,090
Net expenditures for property, plant, and equipment........................................ 17,581 19,117
Number of employees at year-end............................................................ 1,950 1,997
Total direct compensation.................................................................. 89,210 86,263
Profit sharing and all other employee benefits............................................. 22,499 21,887
Average shares outstanding(e).............................................................. 10,076 9,916
Closing share price at year-end(e)......................................................... 27 1/2 23 7/8
Common stock price range during year(e).................................................... 21 1/4-27 1/2 22 1/4-29
Closing price/earnings ratio(f)............................................................ 13.2 12.1
<CAPTION>
1994 1993
--------------- -------------
<S> <C> <C>
Net sales.................................................................................. 281,685 221,002
Cost of sales.............................................................................. 162,360 126,071
Gross margin-- %........................................................................... 42.4 43.0
Selling and administrative expenses........................................................ 95,201 79,508
% of net sales........................................................................... 33.8 36.0
Profit from operations..................................................................... 24,124 11,333(a)
% of net sales........................................................................... 8.6 5.1
Other income and (expense)................................................................. (43) 1,595
Income tax expense......................................................................... 8,346 3,802
% of earnings before income taxes........................................................ 34.7 29.4
Earnings before extraordinary gain and cumulative effect of accounting change.............. 15,735 9,126(a)
% of net sales........................................................................ 5.6 4.1
Return on beginning shareholders' equity-- %.......................................... 18.7 10.8(a)
Net earnings............................................................................... 15,735 9,126
PER SHARE DATA(e)
Basic net earnings before extraordinary gain and cumulative effect of accounting change.... 1.60 .93(a)
Diluted net earnings before extraordinary gain and cumulative effect of accounting change.. 1.60 .93(a)
Basic net earnings......................................................................... 1.60 .93(a)
Diluted net earnings....................................................................... 1.60 .93(a)
Cash dividends............................................................................. .65 .64
Shareholders' equity (ending).............................................................. 9.78 8.56
YEAR-END FINANCIAL POSITION
Cash and cash equivalents.................................................................. 1,851 2,675
Total current assets....................................................................... 98,454 73,752
Property, plant, and equipment, net........................................................ 56,552 46,622
Total assets............................................................................... 182,834 128,634
Current liabilities excluding current debt................................................. 41,959 29,657
Current ratio excluding current debt....................................................... 2.3 2.5
Long-term liabilities excluding long-term debt............................................. 15,318 12,591
Financing debt
Current.................................................................................. 23,008 1,190
Long-term................................................................................ 6,300 1,103
Total as % of total capital........................................................... 23.3 2.7
Shareholders' equity....................................................................... 96,249 84,093
CASH FLOW Increase (Decrease)
Related to operating activities............................................................ 26,754 21,922
Related to investing activities............................................................ (47,931) (13,569)
Related to financing activities............................................................ 20,351 (9,244)
OTHER DATA
Interest income............................................................................ 3,807 3,583
Interest expense........................................................................... 1,677 509
Depreciation and amortization expense...................................................... 13,121 10,987
Net expenditures for property, plant, and equipment........................................ 18,870 12,877
Number of employees at year-end............................................................ 1,916 1,707
Total direct compensation.................................................................. 76,225 71,507
Profit sharing and all other employee benefits............................................. 21,116 18,149
Average shares outstanding(e).............................................................. 9,826 9,836
Closing share price at year-end(e)......................................................... 24 1/8 23 1/2
Common stock price range during year(e).................................................... 20 15/32-24 1/4 19 3/4-24 1/4
Closing price/earnings ratio(f)............................................................ 15.1 19.7
</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.
32
<PAGE>
<TABLE>
<CAPTION>
1992 1991
--------------- -------------
<S> <C> <C>
Net sales.................................................................................. 214,863 198,575
Cost of sales.............................................................................. 121,792 112,147
Gross margin-- %........................................................................... 43.3 43.5
Selling and administrative expenses........................................................ 76,942 69,707
% of net sales........................................................................... 35.8 35.1
Profit from operations..................................................................... 16,129 16,721
% of net sales........................................................................... 7.5 8.4
Other income and (expense)................................................................. 1,864 1,800
Income tax expense......................................................................... 4,803 6,529
% of earnings before income taxes........................................................ 26.7 35.3
Earnings before extraordinary gain and cumulative effect of accounting change.............. 13,190(b) 11,992
% of net sales........................................................................ 6.1 6.0
Return on beginning shareholders' equity-- %.......................................... 17.2(b) 16.4
Net earnings............................................................................... 9,229 11,992
PER SHARE DATA(e)
Basic net earnings before extraordinary gain and cumulative effect of accounting change.... 1.34(b) 1.21
Diluted net earnings before extraordinary gain and cumulative effect of accounting change.. 1.34(b) 1.21
Basic net earnings......................................................................... .94 1.21
Diluted net earnings....................................................................... .94 1.21
Cash dividends............................................................................. .61 .60
Shareholders' equity (ending).............................................................. 8.64 7.87
YEAR-END FINANCIAL POSITION
Cash and cash equivalents.................................................................. 3,512 2,349
Total current assets....................................................................... 74,741 66,028
Property, plant, and equipment, net........................................................ 45,430 40,730
Total assets............................................................................... 128,988 111,644
Current liabilities excluding current debt................................................. 28,848 30,700
Current ratio excluding current debt....................................................... 2.6 2.2
Long-term liabilities excluding long-term debt............................................. 10,691 2,281
Financing debt
Current.................................................................................. 1,492 197
Long-term................................................................................ 3,107 1,853
Total as % of total capital........................................................... 5.1 2.6
Shareholders' equity....................................................................... 84,850 76,613
CASH FLOW Increase (Decrease)
Related to operating activities............................................................ 20,115 23,777
Related to investing activities............................................................ (15,717) (7,472)
Related to financing activities............................................................ (3,346) (15,336)
OTHER DATA
Interest income............................................................................ 3,619 3,828
Interest expense........................................................................... 540 568
Depreciation and amortization expense...................................................... 10,241 8,730
Net expenditures for property, plant, and equipment........................................ 12,315 8,063
Number of employees at year-end............................................................ 1,758 1,738
Total direct compensation.................................................................. 69,240 65,324
Profit sharing and all other employee benefits............................................. 19,547 17,917
Average shares outstanding(e).............................................................. 9,832 9,892
Closing share price at year-end(e)......................................................... 21 7/16 18
Common stock price range during year(e).................................................... 17 1/4-24 3/8 16 1/4-21 1/4
Closing price/earnings ratio(f)............................................................ 17.4 14.9
<CAPTION>
1990 1989
--------------- -------------
<S> <C> <C>
Net sales.................................................................................. 211,503 197,078
Cost of sales.............................................................................. 121,598 112,511
Gross margin-- %........................................................................... 42.5 42.9
Selling and administrative expenses........................................................ 70,401 64,518
% of net sales........................................................................... 33.3 32.7
Profit from operations..................................................................... 19,504 20,049
% of net sales........................................................................... 9.2 10.2
Other income and (expense)................................................................. 374 3,755
Income tax expense......................................................................... 4,257 9,052
% of earnings before income taxes........................................................ 21.4 38.0
Earnings before extraordinary gain and cumulative effect of accounting change.............. 15,621(c) 14,752(d)
% of net sales........................................................................ 7.4 7.5
Return on beginning shareholders' equity-- %.......................................... 21.1(c) 18.9(d)
Net earnings............................................................................... 18,256 14,752
PER SHARE DATA(e)
Basic net earnings before extraordinary gain and cumulative effect of accounting change.... 1.59(c) 1.44(d)
Diluted net earnings before extraordinary gain and cumulative effect of accounting change.. 1.59(c) 1.44(d)
Basic net earnings......................................................................... 1.85 1.44
Diluted net earnings....................................................................... 1.85 1.44
Cash dividends............................................................................. .59 .55
Shareholders' equity (ending).............................................................. 7.43 7.52
YEAR-END FINANCIAL POSITION
Cash and cash equivalents.................................................................. 1,412 3,175
Total current assets....................................................................... 67,065 70,325
Property, plant, and equipment, net........................................................ 42,588 40,949
Total assets............................................................................... 114,590 116,179
Current liabilities excluding current debt................................................. 30,982 35,408
Current ratio excluding current debt....................................................... 2.2 2.0
Long-term liabilities excluding long-term debt............................................. 1,463 4,022
Financing debt
Current.................................................................................. 6,986 588
Long-term................................................................................ 1,995 2,111
Total as % of total capital........................................................... 10.9 3.5
Shareholders' equity....................................................................... 73,164 74,050
CASH FLOW Increase (Decrease)
Related to operating activities............................................................ 24,848 25,685
Related to investing activities............................................................ (8,951) (8,916)
Related to financing activities............................................................ (17,746) (20,310)
OTHER DATA
Interest income............................................................................ 2,672 2,033
Interest expense........................................................................... 1,019 597
Depreciation and amortization expense...................................................... 8,652 8,027
Net expenditures for property, plant, and equipment........................................ 8,071 9,135
Number of employees at year-end............................................................ 1,800 1,789
Total direct compensation.................................................................. 66,364 62,401
Profit sharing and all other employee benefits............................................. 19,316 17,233
Average shares outstanding(e).............................................................. 9,842 10,268
Closing share price at year-end(e)......................................................... 17 1/2 17 1/2
Common stock price range during year(e).................................................... 13 7/8-22 1/8 12 5/8-18 1/4
Closing price/earnings ratio(f)............................................................ 13.3 13.3
<CAPTION>
1988
----------------
<S> <C>
Net sales.................................................................................. 183,888
Cost of sales.............................................................................. 105,991
Gross margin --%........................................................................... 42.4
Selling and administrative expenses........................................................ 59,646
% of net sales........................................................................... 32.4
Profit from operations..................................................................... 18,251
% of net sales........................................................................... 9.9
Other income and (expense)................................................................. 1,449
Income tax expense......................................................................... 8,126
% of earnings before income taxes........................................................ 41.2
Earnings before extraordinary gain and cumulative effect of accounting change.............. 11,574
% of net sales........................................................................ 6.3
Return on beginning shareholders' equity-- %.......................................... 16.6
Net earnings............................................................................... 13,263
PER SHARE DATA(e)
Basic net earnings before extraordinary gain and cumulative effect of accounting change.... 1.09
Diluted net earnings before extraordinary gain and cumulative effect of accounting change.. 1.09
Basic net earnings......................................................................... 1.25
Diluted net earnings....................................................................... 1.25
Cash dividends............................................................................. .49
Shareholders' equity (ending).............................................................. 7.37
YEAR-END FINANCIAL POSITION
Cash and cash equivalents.................................................................. 7,016
Total current assets....................................................................... 76,402
Property, plant, and equipment, net........................................................ 35,616
Total assets............................................................................... 117,013
Current liabilities excluding current debt................................................. 29,836
Current ratio excluding current debt....................................................... 2.6
Long-term liabilities excluding long-term debt............................................. 3,757
Financing debt
Current.................................................................................. 1,722
Long-term................................................................................ 2,234
Total as % of total capital........................................................... 4.8
Shareholders' equity....................................................................... 77,998
CASH FLOW Increase (Decrease)
Related to operating activities............................................................ 18,614
Related to investing activities............................................................ (9,140)
Related to financing activities............................................................ (5,730)
OTHER DATA
Interest income............................................................................ 2,023
Interest expense........................................................................... 401
Depreciation and amortization expense...................................................... 7,900
Net expenditures for property, plant, and equipment........................................ 9,121
Number of employees at year-end............................................................ 1,726
Total direct compensation.................................................................. 58,637
Profit sharing and all other employee benefits............................................. 15,245
Average shares outstanding(e).............................................................. 10,592
Closing share price at year-end(e)......................................................... 13 1/8
Common stock price range during year(e).................................................... 11 1/4-16 3/8
Closing price/earnings ratio(f)............................................................ 12.0
</TABLE>
33
<PAGE>
INVESTOR INFORMATION
ANNUAL MEETING
The annual meeting of Tennant Company will be held at 10:30 a.m. on Thursday,
May 6, at the Company's corporate headquarters, 701 North Lilac Drive, Golden
Valley, Minnesota.
STOCK MARKET INFORMATION
Tennant common stock is traded in the National Market System of NASDAQ, under
the ticker symbol TANT.
As of December 31, 1998, there were approximately 3,500 shareholders of record.
QUARTERLY PRICE RANGE (UNAUDITED)
The accompanying chart shows the quarterly price range of the Company's shares
over the past five years after adjustment for the two-for-one stock split:
<TABLE>
<CAPTION>
First Second Third Fourth
-------------------------------------------------------
<S> <C> <C> <C> <C>
1994 20.63-24.25 20.47-22.00 21.00-23.38 21.50-24.13
1995 23.13-25.00 23.00-29.00 25.00-27.25 22.25-27.25
1996 21.25-25.00 23.50-26.50 22.00-26.00 22.50-27.50
1997 26.13-28.75 26.75-33.25 33.25-37.50 36.00-39.63
1998 34.75-41.13 40.75-44.81 37.00-44.50 33.00-41.25
</TABLE>
DIVIDEND INFORMATION
Cash dividends on Tennant's common stock have been paid for 55 consecutive
years, and the Company has increased dividends in each of the last 27 years.
Dividends generally are declared each quarter. Following are the record dates
anticipated for 1999:
June 1, 1999 September 1, 1999 December 16, 1999
DIVIDEND REINVESTMENT OR DIRECT DEPOSIT OPTIONS
Shareholders have the option of reinvesting quarterly dividends in additional
shares of Company stock, or having dividends deposited directly to a bank
account. The Transfer Agent should be contacted for additional information (see
below).
TRANSFER AGENT AND REGISTRAR
Shareholders with a change of address or questions about their account may
contact:
Norwest Bank Minnesota, N. A.
161 North Concord Exchange
P.O. Box 738
St. Paul, MN 55075-0738
651-450-4064 - 1-800-468-9716
10-K OFFER AND OTHER INVESTOR INFORMATION
A copy of Tennant's 1998 10-K annual report filed with the Securities and
Exchange Commission (which contains no material information not found in this
report), and other financial information may be obtained by writing John T.
Pain, Treasurer, Tennant Company, P.O. Box 1452, Minneapolis, MN 55440, or
calling (612) 540-1341.
TENNANT INFORMATION ON THE INTERNET
Corporate news releases, product information, financial reports and other
company information can be found on Tennant's internet site:
www.tennantco.com
<PAGE>
DIRECTORS
ROGER L. HALE, CHAIRMAN*
JANET M. DOLAN, PRESIDENT, CHIEF EXECUTIVE OFFICER*
ARTHUR D. COLLINS, JR., PRESIDENT, CHIEF OPERATING OFFICER
MEDTRONIC, INC., MINNEAPOLIS, MINNESOTA
DAVID C. COX, RETIRED PRESIDENT, CHIEF EXECUTIVE OFFICER
COWLES MEDIA COMPANY, MINNEAPOLIS, MINNESOTA
ANDREW P. CZAJKOWSKI, CHIEF EXECUTIVE OFFICER
BLUE CROSS & BLUE SHIELD OF MINNESOTA, ST. PAUL, MINNESOTA
DELBERT W. JOHNSON, CHAIRMAN, CO-CHIEF EXECUTIVE OFFICER
PIONEER METAL FINISHING, MINNEAPOLIS, MINNESOTA
PAMELA K. KNOUS, EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER,
SUPERVALU INC., MINNEAPOLIS, MINNESOTA
WILLIAM I. MILLER, CHAIRMAN
IRWIN FINANCIAL CORPORATION, COLUMBUS, INDIANA
EDWIN L. RUSSELL, CHAIRMAN, PRESIDENT, CHIEF EXECUTIVE OFFICER
MINNESOTA POWER, DULUTH, MINNESOTA
OFFICERS
JANET M. DOLAN, PRESIDENT, CHIEF EXECUTIVE OFFICER*
JAMES H. MOAR, CHIEF OPERATING OFFICER*
DOUGLAS R. HOELSCHER, SENIOR VICE PRESIDENT
RICHARD M. ADAMS, VICE PRESIDENT
THOMAS J. DYBSKY, VICE PRESIDENT
JOHN T. PAIN, VICE PRESIDENT, TREASURER, AND
CHIEF FINANCIAL OFFICER
KEITH D. PAYDEN, VICE PRESIDENT
WILLIAM R. STRANG, VICE PRESIDENT
STEVEN K. WEEKS, VICE PRESIDENT
BRUCE J. BORGERDING, DEPUTY GENERAL COUNSEL AND
CORPORATE SECRETARY
DEAN A. NIEHUS, CORPORATE CONTROLLER AND PRINCIPAL
ACCOUNTING OFFICER
*EFFECTIVE APRIL 5, 1999
MAJOR UNITS
CASTEX INCORPORATED, HOLLAND, MICHIGAN
Thomas J. Vander Bie, PRESIDENT
Local business phone -- (616) 786-2330
TENNANT HOLDING B.V., UDEN, THE NETHERLANDS
Jan 't Hart, MANAGING DIRECTOR
Local business phone -- 4132-41241
<PAGE>
[LETTERHEAD]
INDEPENDENT AUDITORS' REPORT AND CONSENT
The Board of Directors and Shareholders
Tennant Company:
The audits referred to in our report dated February 9, 1999, included the
related financial statement schedule for each of the years in the three-year
period ended December 31, 1998, included in Item 14.A.2 elsewhere herein.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material
respects the information set forth herein.
We consent to incorporation by reference in Registration Statement No.
2-86844 on Form S-8, relating to the Tennant Company Profit Sharing and
Employee Stock Ownership Plan, No. 33-59054 on Form S-8, relating to the
Tennant Company 1992 Stock Incentive Plan and the Tennant Company Restricted
Stock Plan for Nonemployee Directors and No. 33-62003 on Form S-8, relating
to the Tennant Company 1995 Stock Incentive Plan, and No. 333-51531, on Form
S-8, relating to the Castex Incorporated Employees' Retirement Savings Plan
and Trust, of our reports dated February 16, 1999, relating to the
consolidated balance sheets of Tennant Company as of December 31, 1998 and
1997, and the related consolidated statements of earnings and comprehensive
earnings, shareholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1998, and the related financial
statement schedule, which reports appear in or are incorporated by reference
in the December 31, 1998 annual report on Form 10-K of Tennant Company.
/s/ KPMG PEAT MARWICK LLP
Minneapolis, Minnesota
March 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFO EXTRACTED FROM THE CONSOLIDATED
STATEMENT OF EARNINGS AND COMPREHENSIVE EARNINGS FOR THE YEAR ENDED DEC 31, 1998
& THE CONSOLIDATED BALANCE SHEET AS OF DEC 31, 1998, PAGES 18 & 19, FOOTNOTE 2,
PG 23, FOOTNOTE 7, PG 24 OF THE COMPANY'S 1998 ANNUAL REPORT TO SHAREHOLDERS &
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 17,693
<SECURITIES> 0
<RECEIVABLES> 80,191
<ALLOWANCES> 2,956
<INVENTORY> 46,162
<CURRENT-ASSETS> 150,868
<PP&E> 169,515
<DEPRECIATION> 102,875
<TOTAL-ASSETS> 239,098
<CURRENT-LIABILITIES> 60,809
<BONDS> 23,038
0
0
<COMMON> 3,421
<OTHER-SE> 127,846
<TOTAL-LIABILITY-AND-EQUITY> 239,098
<SALES> 389,388
<TOTAL-REVENUES> 389,388
<CGS> 223,589
<TOTAL-COSTS> 223,589
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 944
<INTEREST-EXPENSE> 2,292
<INCOME-PRETAX> 39,092
<INCOME-TAX> 13,767
<INCOME-CONTINUING> 25,325
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,325
<EPS-PRIMARY> 2.67
<EPS-DILUTED> 2.67
</TABLE>
