-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, qlanuPmw+DNuievu7gIX32mdx+oebAjBZcDlgNfl3+pzy5Uit3pJQg0mwrtd6S2/ XrkSr63UVIUMQTYTGytHtA== 0000912057-95-001615.txt : 19950616 0000912057-95-001615.hdr.sgml : 19950616 ACCESSION NUMBER: 0000912057-95-001615 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950323 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: TENNANT CO CENTRAL INDEX KEY: 0000097134 STANDARD INDUSTRIAL CLASSIFICATION: REFRIGERATION & SERVICE INDUSTRY MACHINERY [3580] IRS NUMBER: 410572550 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-04804 FILM NUMBER: 95522674 BUSINESS ADDRESS: STREET 1: 701 N LILAC DR STREET 2: P O BOX 1452 CITY: MINNEAPOLIS STATE: MN ZIP: 55440 BUSINESS PHONE: 6125401200 FORMER COMPANY: FORMER CONFORMED NAME: TENNANT G H CO DATE OF NAME CHANGE: 19700515 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994. 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 ] $162,863,249 is aggregate market value of common stock held by non- affiliates as of March 6, 1995. 4,938,471 shares outstanding at March 6, 1995 DOCUMENTS INCORPORATED BY REFERENCE 1994 Annual Report to Shareholders - Part I (Partial), Part II (Partial), and Part IV (Partial) 1995 Proxy - Part III (Partial) TENNANT COMPANY 1994 ANNUAL REPORT FORM 10-K (PURSUANT TO SECURITIES EXCHANGE ACT OF 1934) PART I Part I is included in the Tennant Company 1994 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 1994 Annual Report to Shareholders, page 24, footnote 3. Nearly all of the Company's foreign investment in assets reside within Australia, Canada, Japan, Spain, The Netherlands, the United Kingdom, 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 primarily sold through a direct sales organization in North America, Australia, France, Spain, The Netherlands, Germany, and the United Kingdom, and through independent distributors in more than 60 foreign countries. Additional information pertaining to products and marketing methods is included in the 1994 Annual Report to Shareholders, pages 4, 5, 9, 11 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 vendor or source of supply. 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. WORKING CAPITAL PRACTICES The Company's working capital practices are described in the 1994 Annual Report to Shareholders, Management's Financial Discussion and Analysis, Financial Position section on pages 16 and 17. 1 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 1994 Annual Report to Shareholders, page 23, footnote 2. A description of product development is included in the 1994 Annual Report to Shareholders on pages 4, 5, 9, 11 and 13. ENVIRONMENTAL PROTECTION Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had, and is not expected to have, a material effect upon the Company's capital expenditures, earnings or competitive position. EMPLOYMENT Year-end employment is reported in the 1994 Annual Report to Shareholders on page 30. EXECUTIVE OFFICERS OF THE REGISTRANT Richard M. Adams, Vice President Richard M. Adams (47) joined the Company in 1974. Mr. Adams was elected Assistant Controller in 1983 and was named Corporate Controller in 1986, and Vice President in 1993. Mr. Adams is a Certified Public Accountant. The President and Chief Executive Officer of the Company, Roger L. Hale, is the first cousin of Mr. Adams. Mr. Adams is a director of Tennant Maintenance Systems, Ltd., Tennant Holding B.V., Tennant Europe B.V., and Tennant Japan. Bruce J. Borgerding, Deputy General Counsel and Corporate Secretary Bruce J. Borgerding (44) 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 Maintenance Systems, Ltd., Tennant Holding B.V., Tennant Europe B.V., Tennant N.V., and Tennant Japan. Paul E. Brunelle, Vice President Paul E. Brunelle (54) joined the Company in 1965. In 1987 he was elected Vice President of Personnel Resources. Prior to joining the Personnel Resources Department in 1985, he was General Manager of the Company's former Brazilian operations. Mr. Brunelle is the President of the Tennant Company Foundation and a director of Tennant N.V. Janet M. Dolan, Senior Vice President and General Counsel Janet M. Dolan (45) joined the Company in 1986. Ms. Dolan was appointed General Counsel and Secretary in 1987, Vice President in 1990, and Senior Vice President in 1995. 2 Roger L. Hale, President and Chief Executive Officer Roger L. Hale (60) joined the Company in 1961. Mr. Hale was named Vice President in 1969 and elected a director in 1969. Mr. Hale was named President and Chief Operating Officer in 1975, and subsequently named Chief Executive Officer in 1976. He also is a director of Dayton Hudson Corporation and First Bank System, Inc. Douglas R. Hoelscher, Senior Vice President Douglas R. Hoelscher (56) joined the Company in 1973. He was named Vice President in 1978 and Senior Vice President in 1995. He is a Registered Professional Engineer. Mahedi A. Jiwani, Corporate Controller and Principal Accounting Officer Mahedi A. Jiwani (46) joined the Company in 1983 as a Financial Analyst. He was named Manager of Planning and Analysis in 1987, Assistant Controller in 1989, Corporate Controller in 1994, and Principal Accounting Officer in 1995. Mr. Jiwani is a Certified Public Accountant. Keith D. Payden, Vice President Keith D. Payden (47) joined the Company in 1981. He was named Director, Information Services in 1987, Chief Information Officer in 1992, and Vice President in 1993. Richard A. Snyder, Vice President, Treasurer and Chief Financial Officer Richard A. Snyder (55) 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 and a director of Tennant N.V. William R. Strang, Vice President William R. Strang (59) joined the Company in 1969. He was named Director, Corporate Marketing in 1987 and Vice President, Corporate Marketing in 1992. Mr. Strang is a director of Tennant Europe B.V., Tennant Holding B.V., and Tennant Japan. PART II Part 11 is included in the Tennant Company 1994 Annual Report to Shareholders (to the extent specific pages are referred to on the Cross Reference Sheet) and is incorporated in this Form 10-K Annual Report by reference, except Item 9, "Changes in and Disagreements with Accountants on Accounting and Financial Disclosure," of which there were none. PART III Part III is included in the Tennant Company 1995 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 1O-K Annual Report. PART IV Item 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K. A. The following documents are filed as a part of this report: 1 . Financial Statements The following consolidated financial statements and independent auditors' report are included on pages 18 through 29 of the Tennant Company 1994 Annual Report to Shareholders and are incorporated in this Form 10-K Annual Report by reference: a. Consolidated Statements of Earnings for each of the years in the three-year period ended December 31, 1994 - page 18. 3 b. Consolidated Balance Sheets as of December 31, 1994 and 1993 - page 19. c. Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 1994 - page 20. d. Consolidated Statements of Shareholders' Equity for each of the years in the three-year period ended December 31, 1994 - page 21. e. Independent Auditors' Report of KPMG Peat Marwick LLP - page 22. f. Notes to Consolidated Financial Statements - pages 23 through 29. 2. Financial Statement Schedules All 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 1994 Annual Report to Shareholders. 3. Exhibits
Item # Description Method of Filing ------ ----------- ---------------- 3.1 Restated Articles of Incorporation and Incorporated by reference to Exhibits 4.1 and Bylaws of the Company 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 Incorporated by reference to Exhibit b.1 to the Plan Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 10.2 Tennant Company 1992 Stock Incentive Incorporated by reference to Exhibit 4.4 to the Plan Company's Registration Statement No. 33-59054, Form S-8 dated March 2, 1993. 10.3 Tennant Company Restricted Stock Plan Incorporated by reference to Exhibit 4.5 to the for Nonemployee Directors Company's Registration Statement No. 33-59054, Form S-8 dated March 2, 1993. 10.4 Tennant Company Excess Benefit Plan, Filed herewith electronically. as amended and restated effective January 1, 1994 10.5 Management Agreement with Richard M. Incorporated by reference to Exhibit 10.6 to the Adams dated December 10, 1993 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.6 Management Agreement with Paul E. Incorporated by reference to Exhibit 10.7 to the Brunelle dated December 8, 1987 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.7 Amendment to Management Agreement Incorporated by reference to Exhibit 10.8 to the with Paul E. Brunelle dated June 21, 1989 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.8 1993 Amendment to Management Incorporated by reference to Exhibit 10.9 to the Agreement with Paul E. Brunelle dated Company's Annual Report on Form 10-K for the December 10, 1993 fiscal year ended December 31, 1993. 10.9 Management Agreement with Janet M. Incorporated by reference to Exhibit b.5 to the Dolan dated June 21, 1989 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 4 10.10 1993 Amendment to Management Incorporated by reference to Exhibit 10.11 to the Agreement with Janet M. Dolan dated Company's Annual Report on Form 10-K for the December 10, 1993 fiscal year ended December 31, 1993. 10.11 Management Agreement with Roger L. Incorporated by reference to Exhibit b.8 to the Hale dated March 10, 1987 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 10.12 Amendment to Management Agreement Incorporated by reference to Exhibit b.9 to the with Roger L. Hale dated June 21, 1989 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 10.13 1993 Amendment to Management Incorporated by reference to Exhibit 10.14 to the Agreement with Roger L. Hale dated Company's Annual Report on Form 10-K for the December 10, 1993 fiscal year ended December 31, 1993. 10.14 Management Agreement with Douglas R. Incorporated by reference to Exhibit b.10 to the Hoelscher dated March 10, 1987 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992. 10.15 Amendment to Management Agreement Incorporated by reference to Exhibit b.11 to the with Douglas R. Hoelscher dated June 21, Company's Annual Report on Form 10-K for the 1989 fiscal year ended December 31, 1992. 10.16 1993 Amendment to Management Incorporated by reference to Exhibit 10.18 to the Agreement with Douglas R. Hoelscher Company's Annual Report on Form 10-K for the dated December 10, 1993 fiscal year ended December 31, 1993. 10.17 Management Agreement with Keith D. Incorporated by reference to Exhibit 10.19 to the Payden 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 Richard A. Incorporated by reference to Exhibit b.12 to the Snyder 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 Incorporated by reference to Exhibit b.13 to the with Richard A. Snyder dated June 22, Company's Annual Report on Form 10-K for the 1989 fiscal year ended December 31, 1992. 10.20 1993 Amendment to Management Incorporated by reference to Exhibit 10.22 to the Agreement with Richard A. Snyder Company's Annual Report on Form 10-K for the dated December 10, 1993 fiscal year ended December 31, 1993. 10.21 Management Agreement with William R. Incorporated by reference to Exhibit 10.23 to the Strang dated December 10, 1993 Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993. 10.22 Asset Purchase Agreement dated Incorporated by reference to Exhibit 2.1 to the January 27, 1994, between Tennant Company's Current Report on Form 8-K dated Company, Castex Industries, Inc., Wayne February 15, 1994. Investment Corp. and Wayne A. Streuer 13.1 Portions of 1994 Annual Report to Filed herewith electronically. Shareholders 5 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. Contract Applications, Inc., a wholly owned subsidiary organized under the laws of the state of Minnesota, was incorporated on November 15, 1984, became operational in January 1985, and was dissolved in 1993. 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' Consent Filed herewith electronically. 27.1 Financial Data Schedule Filed herewith electronically.
B. Reports on Form 8-K There were no reports filed on Form 8-K during the quarter ended December 31, 1994. 6 CROSS REFERENCE SHEET
FORM 10-K REFERENCED LOCATION - --------- ---------- -------- Part I, Item 1 - Business 1994 Annual Report to Shareholders Exhibit 13.1 a. General Pages 2, 3, 4, 5, 7, 9, 11 and 13 b. Lines of business, industry segments Page 24, footnote 3 and foreign and domestic operations c. Working capital practices Pages 16 and 17 d. Product research and development Pages 4, 5, 9, 11 and 13 Page 23, footnote 2 e. Employment Page 30 Part I, Item 2 - Properties 1994 Annual Report to Shareholders Exhibit 13.1 Page 26, footnotes 7 and 9 Inside back cover Part II, Item 5 - Market for 1994 Annual Report to Shareholders Exhibit 13.1 the Registrant's Common a. Principal market Inside back cover Equity and Related b. Quarterly data Page 24, footnote 4 Shareholder Matters Inside back cover c. Number of shareholders Inside back cover d. Dividends Page 24, footnote 4 Inside back cover Part II, Item 6 - Selected 1994 Annual Report to Shareholders Exhibit 13.1 Financial Data Pages 30 and 31 Part II, Item 7 - Management's 1994 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 1994 Annual Report to Shareholders Exhibit 13.1 Statements and Supplementary Pages 18 to 29 Data Part III, Item 10 - Directors 1995 Proxy Pages 3 to 6 and Executive Officers of the Registrant Part III, Item 11 - Executive 1995 Proxy Pages 7 to 12 Compensation Part III, Item 12 - Security 1995 Proxy Pages 2 and 3 Ownership of Certain Beneficial Owners and Management
7 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TENNANT COMPANY By - /s/ Roger L. Hale By - /s/ William A. Hodder ------------------------ ---------------------- Roger L. Hale, President William A. Hodder Chief Executive Officer Board of Directors and Board of Directors Date - March 23, 1995 Date - March 23, 1995 By - /s/ Richard A. Snyder By - /s/ Delbert W. Johnson ---------------------------- ---------------------- Richard A. Snyder Delbert W. Johnson Vice President and Treasurer Board of Directors Chief Financial Officer Date - March 23, 1995 Date - March 23, 1995 By - /s/ Mahedi A. Jiwani By - /s/ William I. Miller ---------------------------- ---------------------- Mahedi A. Jiwani William I. Miller Corporate Controller Board of Directors Principal Accounting Officer Date - March 23, 1995 Date - March 23, 1995 By - /s/ David C. Cox By - /s/ Arthur R. Schulze, Jr. -------------------- --------------------------- David C. Cox Arthur R. Schulze, Jr. Board of Directors Board of Directors Date - March 23, 1995 Date - March 23, 1995 By - /s/ Andrew P. Czajkowski By - /s/ Janice D. Stoney ------------------------- --------------------- Andrew P. Czajkowski Janice D. Stoney Board of Directors Board of Directors Date - March 23, 1995 Date - March 23, 1995 By - /s/ Vernon H. Heath -------------------- Vernon H. Heath Board of Directors Date - March 23, 1995 8 EX-10.4 2 EXHIBIT 10.4 Exhibit 10.4 TENNANT COMPANY EXCESS BENEFIT PLAN (As Amended and Restated Effective January 1, 1994) ARTICLE I GENERAL Sec. 1.1 NAME OF PLAN. The name of the plan set forth herein is "Tennant Company Excess Benefit Plan". It is sometimes referred to herein as the "Plan". Sec.1.2 PURPOSE. The Plan has been established for the following purposes: (a) To provide the additional benefits which would have been provided under the Tennant Company Defined Benefit Retirement Plan (the "Defined Benefit Plan") but for the limitations imposed by Section 415 of the Internal Revenue Code as amended from time to time (the "Code"). By providing such benefits, the Plan is an "excess benefit plan" under Section 3(36) of the Employee Retirement Income Security Act of 1974 ("ERISA"). (b) To provide benefits which would have been payable in the form of Profit Related Retirement, Profit Sharing, or Matching Contributions under the Tennant Company Profit Sharing and Employee Stock Ownership Plan ("Profit Sharing Plan") but for limitations on such contributions resulting from the following provisions of the Code: (1) The $7,000 annual limit on Individual Shelter Contributions under Code section 402(g) (as adjusted for inflation). (2) The deferral percentage limits under Code section 401(k). (3) The limits on employer matching contributions under Code section 401(m). (4) The limit on covered compensation under Code section 401(a)(17). (5) The $30,000 limit on annual additions under Code section 415. Such benefits are paid in the form of immediate cash compensation and therefore are not subject to ERISA requirements. (c) To provide benefits which would have been payable under the Defined Benefit Plan but for the limit on covered compensation imposed by Code section 401(a)(17). By providing such benefits, the Plan provides deferred compensation for a select group of management or highly compensated employees and therefore is exempt from most requirements of ERISA. (d) To provide benefits which would have been payable under the Defined Benefit Plan but for the provision excluding bonuses from Certified Earnings under that Plan. By providing such benefits, the Plan provides deferred compensation for a select group of management or highly compensated employees and therefore is exempt from most requirements of ERISA. Sec. 1.3 DEFINITIONS. Unless otherwise specified herein, capitalized terms used herein with respect to benefits relating to the Defined Benefit Plan shall have the meanings specified in the Defined Benefit Plan as amended from time to time, and capitalized terms used herein with respect to benefits relating to the Profit Sharing Plan shall have the meanings specified in the Profit Sharing Plan as amended from time to time. SEC. 1.4 EFFECT ON PREDECESSOR PLANS. This Plan amends and supersedes any excess benefit plan previously established by the Company. ARTICLE II BENEFITS RELATING TO DEFINED BENEFIT PLAN Sec. 2.1 ELIGIBILITY TO RECEIVE A BENEFIT. If a person's Termination of Employment occurs under circumstances that a benefit is payable under the Defined Benefit Plan to him or his surviving spouse, contingent annuitant, or beneficiary, a benefit shall also be payable under this Plan if the benefit under the Defined Benefit Plan is limited (i) by operation of Sec. 6.11 of said Plan and/or (ii) because of the dollar limit on Certified Earnings taken into account under said Plan (Plan Sec. 2.7(f)) due to Code section 401(a)(17). SEC. 2.2 BENEFIT AMOUNTS. If a person is eligible under Sec. 2.1, a benefit shall be paid to him or his surviving spouse, contingent annuitant, or beneficiary for each month that a benefit is payable to any of them under the Defined Benefit Plan. The monthly amount of said benefit shall be equal to the amount, if any, by which (a) exceeds (b): (a) The monthly amount which would have been payable to the Participant or his surviving spouse, contingent annuitant, or beneficiary under the Defined Benefit Plan for that month if: (1) The limitations imposed by Sec. 6.11 of the Defined Benefit Plan were not applicable, (2) The dollar limit in Sec. 2.7(f) of the Defined Benefit Plan were not applicable, and (3) Bonuses were not excluded from Certified Earnings under Sec. 2.7(a) of the Defined Benefit Plan. (b) The monthly amount actually payable under the Defined Benefit Plan to the Participant or his surviving spouse, contingent annuitant or beneficiary for that month. The amounts under subsections (a) and (b) shall both be determined under the settlement option or form of payment under which benefits are being paid, using the same actuarial equivalent factors and reductions for early commencement of benefits, if any. No benefit shall be paid for any month for which the amount in subsection (b) equals or exceeds the amount in subsection (a). SEC. 2.3 SOURCE OF BENEFITS. All benefits payable hereunder shall be paid by the Company from its general assets. Benefits shall be paid to the Participant during his lifetime. Any benefits payable with respect to a Participant following his death shall be paid to the person or persons, if any, eligible to receive benefits with respect to the Participant under the Defined Benefit Plan. -2- ARTICLE III BENEFITS RELATING TO PROFIT SHARING PLAN Sec. 3.1 ELIGIBILITY TO RECEIVE A BENEFIT. A Participant in the Profit Sharing Plan shall be eligible to receive benefits under this Article III only if one or more of the following conditions is satisfied: (a) Due to operation of Sec. 7.2, 7.3 and/or 7.5 of the Profit Sharing Plan, his Individual Shelter Contributions were limited to an amount less than that the amount he elected. (b) Due to operation of Sec. 7.4 and/or 7.5 of the Profit Sharing Plan, his Matching Contributions were limited to less than the amount provided by Sec. 6.6 and/or 6.7 of the Profit Sharing Plan. (c) Due to operation of Sec. 2.7(e) of the Profit Sharing Plan, his Certified Earnings in excess of the limit under Code section 401(a)(17) were not recognized. (d) The Annual Additions to his Account were limited due to the $30,000 limit in Sec. 7.1(a)(1) of the Profit Sharing Plan, and said limitation resulted in a reduction of his share of Profit Related Retirement, Profit Sharing, and/or Matching Contributions. SEC. 3.2 AMOUNT OF BENEFIT. The amount payable with respect to a particular Plan Year to a Participant who meets the eligibility requirements of Sec. 3.1 for that year shall be equal to the amount, if any, by which the amount in (a) exceeds the amount in (b). (a) The aggregate Profit Related Retirement, Profit Sharing, and Matching Contributions the Participant would have received under the Profit Sharing Plan if none of the limitations referred to in Sec. 3.1(a)- (d) of this Plan were applicable. For this purpose: (1) If a Participant's total Individual Shelter Contributions to the Profit Sharing Plan for a particular Plan Year were less than $7,000 (adjusted for inflation pursuant to Treasury regulations), his Matching Contributions for that year shall be determined on the basis of the Individual Shelter Contributions actually elected by the Participant, rather than on the basis of the maximum Individual Shelter Contributions he could have elected, and on the percentage rate actually received for the match on the actual contributions. (2) If a Participant's total Individual Shelter Contributions to the Profit Sharing Plan for a particular Plan Year were $7,000 (adjusted for inflation pursuant to Treasury regulations), his Matching Contributions for that year shall be the amount he would have received but for said limitations if he had made Individual Shelter Contributions equal to 4% of Certified Earnings, calculated using the percentage rate actually received for the match on Individual Shelter Contributions which were actually made. (b) The amount of Profit Related Retirement, Profit Sharing, and Matching Contributions actually allocated to the Participant under the Profit Sharing Plan after application of the limitations referred to in Sec. 3.1(a)-(d) of this Plan. -3- Sec. 3.3 FORM AND TIMING OF PAYMENT. Amounts payable under Sec. 3.2 will be paid to the Participant by his Participating Employer in cash as promptly as possible after the amounts thereof have been determined. Amounts payable after the Participant's death will be paid to his Beneficiary. ARTICLE IV AMENDMENT OR TERMINATION SEC. 4.1 AMENDMENT. The Company, by action of the Board, may amend the Plan from time to time. SEC. 4.2 TERMINATION. The Company, by action of the Board, may terminate the Plan. SEC. 4.3 PRESERVATION OF BENEFITS. No amendment or termination of the Plan shall have the effect of reducing a Participant's aggregate benefit under Article II of this Plan and the Defined Benefit Plan to less than the amount which would have been payable to him if the amendment or termination had not occurred, said amount to be based solely on his compensation and service prior to the effective date of the amendment or termination. -4- EX-13.1 3 EXHIBIT 13.1 EXHIBIT 13-1 TO OUR SHAREHOLDERS In 1995, Tennant celebrates a number of milestones: its 125th anniversary, 25 years of manufacturing in The Netherlands, and the just completed 25th year as a public company. Mostly what we celebrate are the vision and commitment of those who gave the Company a great past and, we are sure, encourage us to build a greater future. STRONG PROFIT RECOVERY We were able to report a strong improvement in profitability for 1994 on record sales and earnings. Return on beginning shareholders' equity rose to 18.7% from 10.8% the prior year. New products, improved economic conditions, and the successful integration of the Castex acquisition were key contributing factors. Net earnings for 1994 were $15.7 million, or $1.60 per share, up 72% from the prior year's $9.1 million, or $0.93 per share. Results for 1993 included non-recurring charges of $4.1 million pretax, or $2.5 million after tax, primarily related to a planned restructuring of operations to accommodate the pending Castex acquisition. (Note: On February 16, 1995, Tennant announced a two-for-one common stock split effective in April 1995. All references to per share amounts in this report are on a post-split basis.) Sales for the year of $281.7 million were up 27%. In North America, sales increased 33% reflecting the Castex acquisition and good performance by all product lines. Sales overseas were up 13% with all major markets showing increases. FINANCIAL CONDITION STRONG, YEAR OF INVESTMENTS Strong cash flow-$25 million compared with $20 million the prior year-helped us fund $30 million of acquisitions and nearly $20 million of capital spending. Because of the significant investments made in 1994, year-end debt rose to $29 million from $2 million the prior year. Debt, at 23% of capitalization, was still at a relatively conservative level. We raised the dividend in December which resulted in our 23rd consecutive annual increase. This is a record that very few public companies can match. PROGRESS ON STRATEGIES FOR INDUSTRY PREEMINENCE We made good progress in 1994 on our strategies for becoming the preeminent company in nonresidential floor care products. ACCELERATING COMMERCIAL MARKET PENETRATION. Our most significant accomplishment during 1994 was acquiring Castex Industries in February and successfully integrating our Tennant Trend operation into it. The combined operations, headquartered in a new facility in Holland, Michigan, significantly outperformed our expectations. Castex is a leader in commercial carpet care and, through its Nobles product line, a strong player in hard-floor cleaning equipment. The combination of Castex and Tennant Trend places us among the leading companies in the North American commercial equipment market. In December, Castex itself completed an acquisition-Eagle Floor Care, Inc. This gives us a solid foothold in the fast-growing propane burnisher segment of the commercial market. EXPANDING FLOOR COATINGS BUSINESS. The dramatic growth in commercial equipment overshadowed an important 1994 advance-better than 20% growth in our floor coatings business. The new management team has a sound strategy: a strong research team that is broadening an environmentally sound product line, a direct sales force that can't be replicated by anyone else in the business, an expanding team of experienced independent contractors who do the applications, and a total commitment by everyone to customer support and service. Coupled with planned improvements in our information technology base over the next few years, we believe floor coatings has a competitive advantage that will continue to produce strong sales growth. NEW PRODUCT DEVELOPMENT. We expanded our industrial equipment line with major new products. The Model 830, a large outdoor sweeper, and Model 8400, our first combination sweeper/scrubber, contributed to the relatively strong industrial equipment sales gains. Floor coatings contractors benefited from the Eco-Prep-TM- floor preparation system, and Eco-Hard-N- 2 Seal-TM-, an easy-to-apply sealer, was added to the line. The combination of Eco-Prep-TM- and the expanding Eco-Coatings-TM- line allows contractors to prepare floors and apply coatings with virtually no solvent vapors or hazardous waste, a real competitive advantage. EXPANSION OF INTERNATIONAL DISTRIBUTION. For many years, our industrial products have been sold and serviced in France by Stokvis et Fils, an independent distributor. In June, we acquired the Tennant portion of their business. We now have direct sales and service operations in five European countries (Germany, France, Spain, The Netherlands, and the United Kingdom). Europe is an important market for us that is expected to produce above-average growth. Our presence in the European commercial floor maintenance equipment market was also expanded in [Photo] President and Chief Executive Officer Roger L. Hale congratulates Donald Carlton, Corporate Procurement Director, on the selection of Tennant by PURCHASING magazine for their Medal of Professional Excellence for 1994. Tennant, the first non-Fortune 500 company to receive the award, joins a prestigious club of other U.S. manufacturing companies who have won the award, including Motorola, Hewlett Packard, Chrysler, GE and Alcoa. 1994. The Castex acquisition brought with it distribution in several countries that nicely complemented our existing network. 1995 OUTLOOK: THE BEGINNING OF A GREATER FUTURE We have introduced a significant number of new products during the past several years which has considerably strengthened our competitive position. For 1995, we are continuing this trend with the recently announced broad line of industrial walk-behind scrubbers that offers increased value to customers. Sales should also benefit from generally favorable economic conditions worldwide, although we are somewhat concerned about the predicted slowing of the U.S. economy and deteriorating conditions in Mexico and Latin America. Operationally, we are expecting further improvement in the profitability of our commercial equipment business as we begin to realize the full benefits of integration. With all of this in mind, we believe Tennant can achieve another very successful year with improved profitability on record sales and earnings. In late 1993 and mid-year 1994, we were fortunate to be able to add two new directors, Del Johnson, Chairman and CEO of Pioneer Metal Finishing, and Will Miller, Chairman of Irwin Financial Corporation, to our board. George H. Tennant would be astounded by the progress made since he opened his wood products company in Minneapolis in 1870. His legacy of innovation and attention to customers will help Tennant Company reach new heights and continue to share these advances with stockholders. /s/ Roger L. Hale Roger L. Hale President, Chief Executive Officer March 24, 1995 3 TENNANT AT A GLANCE Tennant's vision is to work for a cleaner and safer world by meeting our strategic mission: becoming the preeminent company in nonresidential floor maintenance equipment, floor coatings, and related products. As shown below, Tennant offers a broad product line in the nonresidential floor maintenance industry. The competitive strengths and growth strategies in place for each of our three product lines are focused on reaching our goal: becoming the preeminent company in our industry by the year 2000.
- -------------------------------------------------------------------------------- BUSINESS LINES PRODUCTS - -------------------------------------------------------------------------------- [Photo of Industrial Floor Maintenace Equipment] INDUSTRIAL Products to clean surfaces with FLOOR MAINTENANCE vehicle and heavy foot traffic such EQUIPMENT as: - factories, warehouses, stadiums, airport hangars, parking garages, and outside areas. - sweepers and scrubbers: - walk-behinds - indoor riders - outdoor vehicles - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [Photo of Commercial Floor Maintenance Equipment] COMMERCIAL Products to clean surfaces with FLOOR MAINTENANCE foot traffic such as: EQUIPMENT - office buildings, supermarkets, retail outlets, airport terminals, and hospitals. - small to medium scrubbers and sweepers, carpet extractors, burnishers, buffers, polishers, and other specialized equipment. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [Photo of Factory Floor] FLOOR COATINGS Broad line of sealers, resurfacers, and coatings including environmentally friendly Eco-Coatings-TM-. Usually used in factories and warehouses but available for wide variety of industrial and commercial applications. Applied by customer or by authorized independent contractor. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
4 1994 SALES [Pie Chart] Pie chart showing breakdown of 1994 sales into Europe (14.9%), World Export (10.6%), and North America sales (74.5%). North America sales are broken out further into Commercial (22%), Industrial (69%), and Floor Coatings (9%).
- -------------------------------------------------------------------------------------------------------------- MARKETS SALES/SERVICE COMPETITIVE GROWTH STRENGTHS STRATEGIES - -------------------------------------------------------------------------------------------------------------- World market for Direct sales/service Market leadership Maintain product equipment and in the United States, worldwide. leadership through aftermarket Australia, Canada, a steady flow of estimated at over France, Germany, Broadest line of quality new, differentiated $500 million. The Netherlands, products resulting products. Spain, and the from industry-leading Equipment market United Kingdom. commitment to engineering. Focus on achieving share greater than total customer 50% in segments Extensive full- Strong sales/service satisfaction. such as service distributor support. manufacturing, network in over 50 More effective and warehousing, and other countries Manufacturing facilities efficient operations. distribution. including Japan. in the United States and Europe. - -------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- World market for Broad geographic coverage Proven ability to Expand distribution equipment and in the United States introduce quality in all markets. aftermarket estimated through an expanding products with at over $1.5 billion. full-service distributor innovative features. Step up key account network. selling effort. Products sold under Synergy with, and Castex, Nobles, Eagle, Full-service distribution opportunity to benefit Offer cleaning systems and Tennant brand network is being from, industrial based as much on names. established equipment and floor support and service internationally. coatings businesses. as products. Leading position in North America, smaller but rapidly growing positions in Europe and Japan. - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- North American market Sold by Tennant's direct Broad line of sealers, Expand market coverage. for industrial sealers, sales force in North resurfacers, and coatings. resurfacers, and America as a Maximize synergistic coatings estimated at complementary product Environmentally safe opportunities with over $150 million, to industrial floor floor coating system Tennant's other product excluding application maintenance equipment. (Eco-Coatings-TM- and lines. labor. Eco-Prep-TM-). Also sold by independent Lead the industry in Market share estimated contractors. service and speed at over 10% of total through innovation and market, but much higher use of technology. in coatings segment. - --------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------
5 A GREATER FUTURE: PREEMINENCE 2000 VISION: To work for a cleaner and safer world. MISSION: To be the preeminent company in nonresidential floor maintenance equipment, floor coatings, and related product offerings. WHAT "PREEMINENCE" MEANS Our goal is to be the preeminent company in our industry by the year 2000. What does it mean to be "preeminent"? While there is no single criterion, we think a preeminent company has these characteristics: - - Innovation - - Competent and energized employees - - Market-leading product offerings - - High market share - - Profitable growth We believe these conditions can be met at Tennant by developing a broad-based commitment to total quality: - - Customer focus; long-term customer relationships - - Products and services that exceed customer expectations - - Ethical behavior at all times - - Individual and group excellence, respect, empowerment, and open communications - - Supplier partnerships with a mutual goal of excellence MEASURING PROGRESS We have three measures to tell us how well Tennant is doing on its journey to preeminence: CUSTOMER SATISFACTION. We strive to offer quality products and services that will exceed customer expectations. By staying in close contact with customers by surveys and through sales and service reps, we can track customer satisfaction and target our improvement efforts to improve satisfaction. MARKET SHARE. Our goal is to do more than remain the market leader in our traditional niches, such as industrial equipment in North America. We also intend to develop a leading share and become a major force globally in commercial equipment and floor coatings. This should allow us to meet our total Company goal of at least 5% real (inflation-adjusted) annual sales growth over a full economic cycle. RETURN ON INVESTMENT. We are committed to providing an above-average total return to shareholders through reaching our goals of 20% return on beginning shareholders' equity and a dividend payout in the 40% range, with consistent increases over time. Our leading position in global industrial floor maintenance equipment and strong positions in commercial equipment and floor coatings in North America provide a solid base for profitable growth. In 1994, we received an endorsement of our efforts toward preeminence. Tennant won PURCHASING magazine's Medal of Professional Excellence. Ours is the first non-Fortune 500 company to receive this honor-none of the 10 prior award recipients had less than $1 billion in annual purchasing budgets. The magazine selected Tennant because of our early and ongoing quality efforts, understanding of the connection between good supplier relations and quality products, and including suppliers in our product development teams. [Photo of Roger Hale] 7 INDUSTRIAL FLOOR MAINTENANCE EQUIPMENT Tennant's industrial floor maintenance equipment business has long been recognized as the global leader in the industry. High market share and steady long-term growth provide a solid base for efforts to achieve the total Company mission of preeminence. Industrial floor maintenance equipment cleans areas with vehicle or heavy foot traffic. Sweeping and scrubbing products range in size and price from smaller, walk-behind units selling for under $10,000, to larger rider units with prices generally falling between $20,000 and $40,000, but with some units up to $85,000. Our products have a solid reputation for quality and performance, enabling us to offer the best warranties in the industry. A stepped-up product development effort begun in 1991 has resulted in a steady flow of new products over the past several years, and more introductions are planned for 1995 and beyond. MARKETS SERVED The worldwide market for industrial equipment and aftermarket parts and supplies exceeds $500 million annually. North America, while accounting for nearly 50% of these revenues, is the most mature market. Generally speaking, international markets are growing more rapidly as the concept of clean, safe work environments and public places takes hold as it has in North America. Tennant's market share is highest in North America, especially in industrial segments such as manufacturing, warehousing, and transportation. We also have a strong presence in other segments such as government, retailing, and contract cleaning. International market shares tend to be somewhat lower than North America, but there are exceptions such as Australia where we have a high share. For this reason and the fact that international markets are not as well developed, we look for higher growth internationally. Our strongest competitive advantage is direct sales and service. About 85% of total industrial revenue comes from eight countries where Tennant is represented by nearly 500 sales and service employees (United States, Australia, Canada, France, Germany, Spain, the United Kingdom, and The Netherlands, where European operations are based). A well-established and highly skilled distributor network provides coverage in over 50 other countries, including Japan. GROWTH STRATEGIES Strategies for maintaining our industry leadership and achieving future growth include: - - Maintain product leadership: Tennant will continue to commit an industry-leading amount to product engineering. The objective is a steady flow of new, differentiated products that can be customized to meet a broad range of customer needs. (The recently introduced line of walk-behind scrubbers is a prime example; one basic model can be configured in twelve quite different ways to precisely meet virtually any cleaning need.) Product quality will continue to receive our utmost attention. - - Strive for total customer satisfaction: We are focused on achieving excellence in every aspect of doing business, from product design and manufacturing, to sales and service, aftermarket support, credit and collections, attitudes over the telephone, and troubleshooting. Product quality and functionality are not enough; the customer is looking at the total relationship with vendors. Our goal, simply stated, is to achieve total customer satisfaction. - - Achieve more effective and efficient operations: In order to consistently provide superior value to our customers, major attention is being focused on key operating activities including product development, order fulfillment, and direct sales. The techniques of cross-functional process reengineering are being applied, with the desired outcomes being speed, flexibility, and efficiency. Reengineered processes will make extensive use of information technology. 9 COMMERCIAL FLOOR MAINTENANCE EQUIPMENT Prior to 1994, Tennant had a small but growing position in the commercial floor maintenance equipment market. As a result of the February 1994 Castex acquisition and the successful integration of Tennant Trend (our former commercial equipment subsidiary) with Castex, we have become a leading company in the North American market. Commercial machines clean floors with heavy foot traffic, including offices, supermarkets, and hospitals. The Castex product line, which is now one of the most complete in the industry, ranges in size and price from small upright vacuum cleaners that sell for about $300 to walk-behind scrubbers at up to $8,000. Within this price range is a complete assortment of commercial cleaning equipment including carpet extractors, burnishers, wet/dry vacs, and floor polishers. Product offerings include: - - WALK-BEHIND SCRUBBERS remove grease and grime from hard floors, including grouted tile, and are easy to maneuver in tight places. - - CARPET EXTRACTORS apply a cleaning solution, scrub, then remove the solution to leave carpets clean. - - BURNISHERS AND FLOOR MACHINES give floors a shiny, high-gloss look. - - SWEEPERS AND WET/DRY VACS sweep, vacuum and pick up water or debris from any surface. Near the end of 1994, Castex acquired Eagle Floor Care, a company that manufactures a line of propane burnishers. This gives us a solid foothold in this rapidly growing segment of the market. MARKETS SERVED The worldwide market for commercial floor maintenance equipment exceeds $1.5 billion annually. In the United States, the majority of commercial products are sold through independent distributors. Castex now has one of the broadest distribution networks in the country, which we support through a network of manufacturer's reps. This arrangement provides one of the most effective sales-support organizations in the industry. Internationally, Castex products are being sold through distributors in several European countries and in Japan. These businesses are still in a startup phase but are growing rapidly. GROWTH STRATEGIES Strategies for reaching our goal of industry preeminence include: - - Expand distribution: Our objective is to rapidly expand distributor-based distribution, especially in international markets. A broad product line and focus on support and service are aiding this effort, and acquisition or alliance is a possibility in certain markets. - - Step up key account selling effort: We are targeting large, generally national, accounts for direct selling, frequently in conjunction with Tennant's industrial sales effort. In terms of national account selling, maintaining good relations with our distributor network is critical, and they are frequently called upon to provide after-sale service and support. - - Offer cleaning systems based as much on support and service as products: We are expanding our offering of broad-based cleaning systems that combine equipment with supplies, chemicals, responsive service, and support. Advice on how to effectively and efficiently clean floors is also included. 11 INDUSTRIAL FLOOR COATINGS Floor coatings is Tennant's oldest product line--Tennant has offered some type of floor coatings since the early 1930s. Customers are coming to understand that a treated floor is easier to keep clean, lasts longer, and is safer for their employees. We can repair and upgrade eroded floors with epoxy resurfacers to give them a new surface. We can coat floors with urethanes to improve their looks and function. Once coated, the customer can maintain these floors with Tennant's industrial or commercial floor maintenance equipment. Our environmentally friendly Eco-Coatings-TM- product line and Eco-Prep-TM- machines lead the industry in innovation. This unique combination allows floors to be prepared and coated without solvent vapors or hazardous waste. MARKETS SERVED While floor coatings can be used in industrial and commercial applications, Tennant's focus has been on the industrial market--in particular, those industries currently served by Tennant's direct sales force. These generally include manufacturing, warehousing, and government. Until recently, our geographic scope has been limited to the United States, Canada, and the Maquiladoras area in northern Mexico. We estimate that over $150 million is being spent annually in these markets for sealers, resurfacers, and coatings, excluding application labor. Our customers have two choices in how to apply our products. They can apply the materials themselves, or they can hire a contractor to do the application. The current trend is definitely towards contractor applied. To ensure we are well positioned to succeed in the marketplace, we have, during the past several years, built a network of over 100 application contractors. Our top contractors have been awarded the status of Tennant Authorized Contractor. They are the premier applicators in the industry and are committed to grow with us. Our products, our direct sales force, and our outstanding contractor network give us a unique competitive advantage. GROWTH STRATEGIES Strategies for reaching our goal of industry preeminence include: - - Expand market coverage: Within our current geographic scope of North America, we are putting greater focus on industries that have a relatively low level of coverage by Tennant's direct sales force such as chemicals, electronics, and new construction. Internationally, we are extending our scope into Europe, Japan, and other key export markets. - - Take advantage of opportunities for synergy with Tennant's other two closely related product lines: Tennant is in the unique position of being able to provide the total range of floor maintenance products to every customer it serves. This means the sales representative for any one of our product lines can provide the customer access to the entire Tennant product line. We significantly and efficiently increase our market presence by leveraging resources and sharing leads across the three businesses. This capability is a unique and very important corporate asset. - - Lead the industry in service and speed through innovation and technology: Tennant's Floor Coatings Division, as a part of a much larger company with two other closely related businesses, has a significant advantage over most competitors. We have the corporate resources to develop a world-class logistics system, a customer feedback channel, an 800 answer line, and other state-of-the-art processes. We will use these capabilities to set the standard for service in our industry. 13 MANAGEMENT'S FINANCIAL DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- SELECTED INDICATORS OF GROWTH AND PROFITABILITY
CURRENT ECONOMIC CYCLE(a) PREVIOUS ECONOMIC CYCLE(a) CURRENT CYCLE FULL LAST HALF YEAR TO DATE CYCLE OF CYCLE 1994 1991-1994 1982-1990 1987-1990 - ---------------------------------------------------------------------------------------------------------- Compound Annual Growth (%): Sales - Real(b) +24 +5 +3 +4 - Nominal +27 +7 +8 +9 Earnings Per Share(c) +35 +5 +5 +12 Cash Dividends Per Share +2 +2 +6 +6 Net Operating Assets +45 +11 +5 +4 Return on Beginning Shareholders' Equity(c) 18.7 16.2 14.9 16.6 (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 a new cycle (growth measured from 1990). The previous cycle covered the years 1982 through 1990 (growth measured from 1981). (b) Real sales were determined by adjusting reported (nominal) sales for the effects of changes in product pricing, foreign currency exchange rate moves, and applicable accounting changes. (c) Based on reported earnings before extraordinary gain and cumulative effect of accounting change except for 1993, 1992, 1990 and 1989 which have been adjusted to eliminate unusual items, net of income taxes, as described in the Historical Progress Review, footnotes (a) through (d).
- -------------------------------------------------------------------------------- FINANCIAL RESULTS OF OPERATIONS EARNINGS: For 1994 net earnings were $15.7 million or $1.60 per share (adjusted for April 1995 stock split; see "Notes to Consolidated Financial Statements," note 18), up 72% from the prior year. Return on sales was 5.6%, and return on beginning shareholders' equity was 18.7%. Key causes for the improvement in earnings and profitability were strong sales gain aided by better economic conditions and new products, the successful integration of the February 1994 Castex acquisition (see "Notes to Consolidated Financial Statements," note 17), and the effect of restructuring charges on 1993 earnings. For 1993, net earnings were $9.1 million, or $0.93 per share (adjusted for April 1995 stock split), down 1% from the prior year. Return on sales was 4.1%, and return on beginning shareholders' equity was 10.8%. The 1993 results include pretax restructuring charges of $4.1 million ($2.5 million net of taxes) primarily related to restructuring of operations to accommodate the pending acquisition of Castex Industries. Results were also affected by the severe recessions in Europe and Japan. For 1995, the Company believes it can achieve another year of earnings growth based on generally favorable economic conditions, the 14 strength of the significant number of new products introduced in the past several years, and further improvement in the commercial equipment business profitability as the full benefits of integrated operations are realized. SALES: For 1994, net sales of $282 million increased 27% from the prior year. Sales were affected by the February 1994 Castex acquisition (see "Notes to Consolidated Financial Statements," note 17). A weaker dollar increased reported sales by $0.8 million and backlogs increased by $3 million. North American sales of $209 million in 1994 were up 33% on a strong economy that benefited all product lines. Commercial floor maintenance equipment sales more than tripled from the prior year due to the acquisition and marketplace acceptance of the new Castex. Industrial floor maintenance equipment sales increased 12% on the strength of several new products. Floor coatings sales were up 23% due to expansion of the authorized contractor network and several innovative products. Overseas sales of $72 million, or 25% of the 1994 consolidated revenues, increased 13%. Excluding the effect of a 1993 change in fiscal year-end for the European operations and a weaker U.S. dollar, local currency sales increased 21% on recovering economies in Europe and Japan, and strong results in other key areas with new products being a factor. For 1993, net sales of $221 million increased 3% from the prior year. A stronger dollar decreased reported sales by $3.5 million, and backlogs increased $2 million from 1992's relatively low level. North American sales in 1993 of $158 million increased 4% in an economy that started weak but gained momentum as the year went on. Commercial floor maintenance equipment sales declined 1%. Industrial floor maintenance equipment sales increased 8% on the strength of several new products. Sales of floor coating materials, excluding labor which was discontinued as a product offering in 1992, increased 1%. Overseas sales of $63 million in 1993, or 29% of consolidated revenues, increased 1%. Excluding the effect of a change in fiscal year-end for European operations and a stronger U.S. dollar, local currency sales were down 4% on recession-affected economies in Europe and Japan. PROFIT FROM OPERATIONS: For 1994, profit from operations of $24.1 million was up 56% from the prior year's operating profit before restructuring charges. Key causes of the improvement were the strong sales gains aided by improved economic conditions and new products, and the successful integration of the Castex acquisition. Factory capacity use is estimated to have finished the year at about 70%. For 1993, profit from operations of $11.3 million was down 30% from the prior year. Key causes of the decline were restructuring charges of $4.1 million, recessions in Europe and Japan, and temporarily lower margins on new industrial products. In total, these items reduced profit from operations by over 50% from 1992. Factory capacity use is estimated to have been in the mid-60% range. OTHER INCOME AND EXPENSES: For 1994, other net expense of $43,000 declined from the prior year's other net income of $1.6 million due to interest expense on debt related to the Castex acquisition and an increase in the Company's contribution to the Tennant Foundation. The Company's primary source of interest income is from financing-type leases to industrial customers. Of the $3.8 million in interest income reported in 1994, $1.9 million is from financing-type leases to industrial customers, and $1.6 million is from the Company's Employee Stock Ownership Plan (ESOP). (The ESOP income was partially offset by $0.9 million of ESOP expense that is included in "miscellaneous expense.") INCOME TAXES: For 1994, the effective tax rate of 34.7% increased from an unusually low rate of 15 29.4% in 1993. The 1993 tax rate was below the normal level due primarily to a 1993 change in tax law that reinstated, retroactively to mid-1992, tax credits related to research and development activities (see "Notes to Consolidated Financial Statements," note 5). The Company expects the long-term effective tax rate to be within a range of 34% to 37%. LIQUIDITY AND CAPITAL RESOURCES The Company's financial condition remained strong throughout 1994. Year-end debt increased to $29 million, or 23% of capital, from $2 million primarily due to the Castex acquisition. Net cash flow from operations of $25 million was up from $20 million in 1993. For 1995, debt is expected to decrease somewhat by year-end. While net cash flow from operations is expected to increase, capital spending, as explained below, will be somewhat above normal. Substantially all of the planned restructuring and integration of Tennant Trend's operations with Castex were completed in 1994. In January 1995 Tennant Trend's factory/office building was sold for net proceeds of $1.5 million. FINANCIAL POSITION: Cash and cash equivalents finished 1994 at $1.9 million, down slightly from the prior year. Cash is being managed at as low a level as possible by using any accumulation to pay down short-term debt. Year-end 1994 working capital (current assets less current liabilities, excluding cash and current debt) increased $12 million, or 30% over prior year-end. Essentially all of the increase is attributable to the Castex acquisition. Property, plant, and equipment, net of accumulated depreciation, increased by $10 million. Capital spending (net of disposals and excluding acquisition additions) was $19 million. Included in capital spending is $6 million for a new office and factory for Castex. Other categories of capital spending include, in order of magnitude, information technology hardware and software, vehicles, product tooling, and factory equipment. (Vehicles tend to represent a large category of investment for the Company due to the extensive use of direct sales and service forces in key markets.) For 1995, capital spending (net of disposals) of about $18 million is expected. The Company is increasing information technology spending to enhance its competitive position by better serving customers and improving operating efficiency. DIVIDENDS AND COMMON STOCK: Cash dividends, adjusted for the April 1995 stock split, of $0.65 per share increased 2%, resulting in the 23rd consecutive year of increase. Common stock outstanding, adjusted for the April 1995 stock split, averaged 9,826,000 shares in 1994, down slightly from the prior year. In recent years the Company has been purchasing and retiring its common stock in order to maintain shares outstanding at about 9.8 million. This practice has been discontinued effective January 1, 1995. On February 16, 1995, the Company announced a 2-for-1 stock split effective April 26, 1995, for shareholders of record April 12, 1995 (see "Notes to Consolidated Financial Statements," note 18). IMPACT OF INFLATION: Inflation has not been a significant factor for the Company for several years. Effective product pricing for 1994 was about equal to the estimated effect of inflation on costs and expenses. For 1995, the Company is expecting prices for raw material and purchased componentry to increase somewhat more than in recent years due to rising inflation. At this point, it appears that Tennant's 1995 product pricing will be somewhat below estimated inflation. The relatively high inflation of the 1970s and early 1980s continues to be reflected in the Company's historical cost financial statements in the following ways: 16 Inventories do not reflect current replacement cost as they are principally 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. This shortcoming of historical cost financial statements is managed by establishing return-on-investment objectives based on current values for these assets. In addition, price indexes are used to calculate real (inflation- adjusted) sales which allow for more meaningful measurements of growth over extended periods of time. IMPACT OF CHANGING VALUE OF THE U.S. DOLLAR: The Company operates internationally with 30% of sales occurring outside of the United States. For 1994, the ten largest international markets, based on end-user sales value, were Australia, Canada, France, Germany, Japan, Mexico, The Netherlands, Saudi Arabia, Spain, and the United Kingdom. The Company's products are sold in over 60 countries. For a number of years, the U.S. dollar has experienced significant changes in value against other world currencies over relatively short periods, sometimes even within the same year as it did in 1994. For the Company, a weaker dollar is generally advantageous because it lowers the foreign currency cost of U.S. exported products, and increases the dollar value of sales and earnings denominated in foreign currencies. However, the cost of international-sourced materials and components used in the U.S., which is not significant at this time, is affected in the opposite direction. It is impossible to determine the true impact of changes in value of the U.S. dollar; however, the direct effect on sales and earnings can be estimated. For 1994, the U.S. dollar was strong early in the year but then weakened considerably. The net effect for the full year was not material. For 1993, a significant strengthening of the U.S. dollar reduced sales by $3.5 million, and earnings by $0.4 million, or $0.09 per share. FINANCIAL OBJECTIVES AND GOALS The Company's financial mission is to provide an above-average total return to shareholders. Goals and policies that support this objective are: - - Growth - 5% real (inflation-adjusted). To be achieved over a full economic cycle; measured from cycle peak to peak. - - Profitability - 20% return on beginning shareholders' equity. To be achieved in the growth years of an economic cycle. - - Dividend - Payout generally in the 40% range with consistent increases over time. - - Capital structure - Financing debt generally not in excess of 30% of capitalization. Summaries of the Company's financial performance relative to the stated goals are presented in the various graphs and tables included in this report. 17 TENNANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS Years ended December 31 OF EARNINGS 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) PERCENT Percent Percent ------- ------- ------- Net sales . . . . . . . . . . . . . . . . . $281,685 100.0 $221,002 100.0 $214,863 100.0 Less: Cost of sales. . . . . . . . . . . . . . . 162,360 57.6 126,071 57.0 121,792 56.7 Selling and administrative expenses. . . . 95,201 33.8 79,508 36.0 76,942 35.8 Restructuring charges. . . . . . . . . . . -- -- 4,090 1.9 -- -- -------- ----- -------- ----- -------- ----- Profit from operations . . . . . . . . . . . 24,124 8.6 11,333 5.1 16,129 7.5 Other income and (expense): Net foreign currency transaction (loss). . (371) (.1) (415) (.2) (495) (.2) Interest income. . . . . . . . . . . . . . 3,807 1.3 3,583 1.6 3,619 1.7 Interest (expense) . . . . . . . . . . . . (1,677) (.6) (509) (.2) (540) (.3) Miscellaneous income (expense), net. . . . (1,802) (.6) (1,064) (.5) (720) (.4) -------- ----- -------- ----- -------- ----- Total other income (expense) . . . . . . (43) -- 1,595 .7 1,864 .8 -------- ----- -------- ----- -------- ----- Profit before income taxes, extraordinary gain, and cumulative effect of accounting change . . . . . . . . . . . . . . . . . . 24,081 8.6 12,928 5.8 17,993 8.3 Income tax expense . . . . . . . . . . . . . 8,346 3.0 3,802 1.7 4,803 2.2 -------- ----- -------- ----- -------- ----- Earnings before extraordinary gain and cumulative effect of accounting change . . 15,735 5.6 9,126 4.1 13,190 6.1 Extraordinary gain, net of income taxes of $208. . . . . . . . . . . . . . . . . . -- -- -- -- 395 .2 Cumulative effect of accounting change, net of income taxes of $2,558. . . . . . . -- -- -- -- (4,356) (2.0) -------- ----- -------- ----- -------- ----- Net earnings . . . . . . . . . . . . . . . . $ 15,735 5.6 $ 9,126 4.1 $ 9,229 4.3 -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- -------- ----- Earnings per share: Earnings before extraordinary gain and cumulative effect of accounting change. $ 1.60 $ .93 $ 1.34 Extraordinary gain. . . . . . . . . . . . -- -- .04 Cumulative effect of accounting change . -- -- (.44) -------- -------- -------- Net earnings per share. . . . . . . . . . $ 1.60 $ .93 $ .94 -------- -------- -------- -------- -------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 18 TENNANT COMPANY AND SUBSIDIARIES
December 31 CONSOLIDATED BALANCE SHEETS 1994 1993 - ----------------------------------------------------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ASSETS Current assets: Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,851 $ 2,675 Receivables: Trade, less allowance for doubtful accounts ($2,294 in 1994 and $1,041 in 1993). . . . 51,350 35,132 Installment accounts receivable, net of deferred income from sales finance charges and less allowance for doubtful accounts ($315 in 1994 and $454 in 1993) . . . . . . 6,036 5,028 Sundry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,824 1,007 -------- -------- Net receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59,210 41,167 Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,985 22,893 Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 696 712 Deferred income taxes, current portion . . . . . . . . . . . . . . . . . . . . . . . . . . 6,068 6,305 -------- -------- Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,810 73,752 Property, plant, and equipment, net of accumulated depreciation. . . . . . . . . . . . . . 56,552 46,622 Installment accounts receivable due after one year, net of deferred income from sales finance charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,353 5,055 Deferred income taxes, long-term portion . . . . . . . . . . . . . . . . . . . . . . . . . 944 747 Intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,287 1,797 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 888 661 -------- -------- Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $182,834 $128,634 -------- -------- -------- -------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,008 $ 1,190 Accounts payable and accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 40,115 28,537 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,942 1,120 -------- -------- Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,065 30,847 Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,300 1,103 Employee retirement-related benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,460 12,591 Other long-term liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 760 -- -------- -------- Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,585 44,541 Commitments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- Shareholders' equity: Preferred stock of $.02 par value per share. . . . . . . . . . . . . . . . . . . . . . . -- -- Common stock of $.375 par value per share. . . . . . . . . . . . . . . . . . . . . . . . 3,690 1,842 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396 1,873 Common stock subscribed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 525 -- Unearned restricted shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (424) (312) Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103,281 93,733 Cumulative translation adjustment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,743 1,773 Receivable from ESOP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,962) (14,816) -------- -------- Total shareholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,249 84,093 -------- -------- Total liabilities and shareholders' equity. . . . . . . . . . . . . . . . . . . . . . $182,834 $128,634 -------- -------- -------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 19 TENNANT COMPANY AND SUBSIDIARIES
Years ended December 31 CONSOLIDATED STATEMENTS OF CASH FLOWS 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS) CASH FLOW RELATED TO OPERATING ACTIVITIES: Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,735 $ 9,126 $ 9,229 Adjustments to accrual earnings to arrive at operating cash flow: Depreciation and amortization. . . . . . . . . . . . . . . . . . . 13,121 10,987 10,241 Provision for bad debts. . . . . . . . . . . . . . . . . . . . . . 1,088 701 736 Provision for stock plans. . . . . . . . . . . . . . . . . . . . . 1,730 854 1,818 (Gain) loss on sale of property, net . . . . . . . . . . . . . . . 83 (571) (315) Provision for deferred taxes . . . . . . . . . . . . . . . . . . . 325 (1,646) (2,491) Increase in receivables. . . . . . . . . . . . . . . . . . . . . . (13,997) (4,262) (3,682) Increase in inventories. . . . . . . . . . . . . . . . . . . . . . (3,576) (370) (2,694) Increase in accounts payable and accrued expenses. . . . . . . . . 8,628 2,610 2,722 Increase in employee retirement-related benefits . . . . . . . . . 821 1,989 8,654 Increase (decrease) in income taxes payable. . . . . . . . . . . . 1,841 835 (3,567) Increase in other assets . . . . . . . . . . . . . . . . . . . . . (440) (62) (1,257) Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 249 (96) ------- ------- ------- Net cash flow related to operating activities. . . . . . . . . . . . 25,419 20,440 19,298 CASH FLOW RELATED TO INVESTING ACTIVITIES: Acquisition of Castex and Eagle, net of cash received. . . . . . . (28,180) -- -- Acquisition of property, plant, and equipment. . . . . . . . . . . (18,972) (13,079) (12,950) Acquisition of intangible assets . . . . . . . . . . . . . . . . . -- (1,076) (2,198) Proceeds from disposals of property, plant, and equipment. . . . . 1,437 1,684 1,452 Settlement of foreign currency hedging contracts . . . . . . . . . (881) 384 (1,204) ------- ------- ------- Net cash flow related to investing activities. . . . . . . . . . . . (46,596) (12,087) (14,900) CASH FLOW RELATED TO FINANCING ACTIVITIES: Net changes in current debt. . . . . . . . . . . . . . . . . . . . 20,438 (166) 972 Payments to settle long-term debt . . . . . . . . . . . . . . . . (40) (1,813) (140) Issuance of long-term debt . . . . . . . . . . . . . . . . . . . . 6,300 -- 1,154 Principal payment from ESOP. . . . . . . . . . . . . . . . . . . . 409 371 337 Proceeds from employee stock issues. . . . . . . . . . . . . . . . 1,484 1,510 1,864 Repurchase of common stock . . . . . . . . . . . . . . . . . . . . (1,854) (2,858) (1,551) Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . (6,386) (6,288) (5,982) ------- ------- ------- Net cash flow related to financing activities. . . . . . . . . . . . 20,351 (9,244) (3,346) Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . 2 54 111 ------- ------- ------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . (824) (837) 1,163 Cash and cash equivalents at beginning of year . . . . . . . . . . . . 2,675 3,512 2,349 ------- ------- ------- CASH AND CASH EQUIVALENTS AT END OF YEAR . . . . . . . . . . . . . . . $ 1,851 $ 2,675 $ 3,512 ------- ------- ------- ------- ------- -------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 20 TENNANT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS Years ended December 31 OF SHAREHOLDERS' EQUITY 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) SHARES AMOUNT Shares Amount Shares Amount COMMON STOCK (a) Beginning balance . . . . . . . . . . . . 4,912,663 $ 1,842 4,911,542 $ 1,842 4,867,286 $ 1,825 Issue stock for employee benefit plans . . 49,487 19 70,021 26 79,417 30 Purchase of common shares. . . . . . . . . (42,672) (16) (68,900) (26) (35,161) (13) Stock split adjustment . . . . . . . . . . 4,919,478 1,845 -- -- -- -- --------- -------- --------- -------- --------- -------- Ending balance. . . . . . . . . . . . . 9,838,956 $ 3,690 4,912,663 $ 1,842 4,911,542 $ 1,842 --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- ADDITIONAL PAID-IN CAPITAL (a) Beginning balance. . . . . . . . . . . . . $ 1,873 $ 1,752 $ -- Issue stock for employee benefit plans . . 2,206 2,953 3,290 Purchase of common shares. . . . . . . . . (1,838) (2,832) (1,538) Stock split adjustment . . . . . . . . . . (1,845) -- -- -------- -------- -------- Ending balance. . . . . . . . . . . . . $ 396 $ 1,873 $ 1,752 -------- -------- -------- -------- -------- -------- COMMON STOCK SUBSCRIBED (a) Beginning balance. . . . . . . . . . . . . -- $ -- 13,395 $ 574 33,165 $ 1,194 Issue stock for employee benefit plans . . -- -- (13,395) (574) (33,165) (1,194) Subscribe stock for employee benefit plans . . . . . . . . . . . . . . . . . . 10,875 525 -- -- 13,395 574 Stock split adjustment . . . . . . . . . . 10,875 -- -- -- -- -- --------- -------- --------- -------- --------- -------- Ending balance . . . . . . . . . . . . . 21,750 $ 525 -- $ -- 13,395 $ 574 --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- UNEARNED RESTRICTED SHARES Beginning balance. . . . . . . . . . . . . $ (312) $ (97) $ (111) Issue stock award plan grants. . . . . . . (112) (215) 14 -------- -------- -------- Ending balance . . . . . . . . . . . . . $ (424) $ (312) $ (97) -------- -------- -------- -------- -------- -------- RETAINED EARNINGS Beginning balance. . . . . . . . . . . . . $ 93,733 $ 90,687 $ 87,236 Net earnings . . . . . . . . . . . . . . . 15,735 9,126 9,229 Dividends paid, $.65, $.64, and $.61, respectively, per common share. . . . . . (6,386) (6,288) (5,982) Tax benefit on dividends on unallocated ESOP shares . . . . . . . . . . . . . . . 199 208 204 -------- -------- -------- Ending balance . . . . . . . . . . . . . $103,281 $ 93,733 $ 90,687 -------- -------- -------- -------- -------- -------- CUMULATIVE TRANSLATION ADJUSTMENT Beginning balance. . . . . . . . . . . . . $ 1,773 $ 5,765 $ 3,000 Net change for year in translation adjustment. . . . . . . . . . . . . . . . 1,529 (4,022) 2,773 Gain (loss) on foreign currency hedges, net of income taxes of $342, $18, and $11, respectively . . . . . . . . . . . . (559) 30 (8) -------- -------- -------- Ending balance . . . . . . . . . . . . . $ 2,743 $ 1,773 $ 5,765 -------- -------- -------- -------- -------- -------- RECEIVABLE FROM ESOP Beginning balance. . . . . . . . . . . . . $(14,816) $(15,673) $(16,531) Principal payments . . . . . . . . . . . . 409 371 337 Shares allocated . . . . . . . . . . . . . 445 486 521 -------- -------- -------- Ending balance . . . . . . . . . . . . . $(13,962) $(14,816) $(15,673) -------- -------- -------- -------- -------- -------- TOTAL SHAREHOLDERS' EQUITY . . . . . . . . $ 96,249 $ 84,093 $ 84,850 -------- -------- -------- -------- -------- -------- The Company had 15,000,000 authorized shares of common stock as of December 31, 1994, 1993, and 1992. (a) Adjusted for two-for-one stock split effective April 26, 1995.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 21 MANAGEMENT'S REPORT The Company's management is responsible for the integrity and accuracy of the financial statements. Management believes that the financial statements for the three years ended December 31, 1994, 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, 1994 and 1993, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1994. 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, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in notes 1, 5, and 12 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS, and Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES, in 1992. /s/ KPMG Peat Marwick KPMG Peat Marwick LLP Minneapolis, Minnesota February 8, 1995, except as to note 18, which is as of February 16, 1995 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER RELATED DATA CONSOLIDATION. The consolidated financial statements include the accounts of Tennant Company and its wholly owned subsidiaries, Castex, Incorporated, Tennant Holding B.V., and Contract Applications, Inc. The operations of Contract Applications, Inc., are included through the time of its dissolution in 1993. Effective in fiscal year 1993, Tennant Holding B.V. acquired 100% of the outstanding shares of Tennant Maintenance Systems from Tennant Company and changed their fiscal year-end from September 30 to November 30. Accordingly, the consolidated 1993 financial statements include a 14-month period for Tennant Holding B.V.'s operations. The effect of this change on the Company's consolidated financial statements was immaterial. All material intercompany transactions and balances have been eliminated. TRANSLATION OF NON-U.S. CURRENCY. Non-U.S. 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. ECONOMIC HEDGE OF NET INVESTMENT IN TENNANT HOLDING B.V. The Company has elected to treat certain forward exchange contracts as an economic hedge of its net investment in Tennant Holding B.V. Accordingly, gains or losses on such transactions net of their related tax effect are being reported as a separate component of shareholders' equity (see note 13). INVENTORIES. Inventories are valued at the lower of cost (principally on a last-in, first-out basis) or market. Had all inventories been valued using the first-in, first-out method of inventory accounting, inventories would have been $16,680,000 and $16,819,000 higher than reported at December 31, 1994 and 1993, respectively. The composition of inventories at December 31 is as follows:
(IN THOUSANDS) 1994 1993 ------ ------ FIFO inventories: Finished goods. . . . . . . . $21,491 $21,585 All other . . . . . . . . . . 26,174 18,127 LIFO adjustment . . . . . . . . . (16,680) (16,819) ------- ------- LIFO inventories . . . . . . . . . $30,985 $22,893 ------- ------- ------- -------
The category "All other" includes production-related raw materials, parts and supplies, and work-in-process. The Company's accounting system does not permit a further breakdown of this category of inventories. 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. WARRANTY. The Company charges to current operations a provision, based on historical experience, for future warranty claims. 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. INCOME TAXES. In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES. Under the asset and liability method of Statement 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company adopted Statement 109 in the fourth quarter of 1992 and has applied the provisions of Statement 109 retroactively to January 1, 1992. There is no cumulative effect of the change in method of accounting for income taxes as of January 1, 1992, and the Company elected not to restate prior interim period financial statements due to immateriality. U.S. income taxes are not provided on undistributed earnings of international subsidiaries which are permanently reinvested. At December 31, 1994, earnings permanently reinvested in international subsidiaries not subject to U.S. income tax provision were $4,143,000. If ever remitted to the Company in a taxable distribution, U.S. income taxes would be substantially offset by available foreign tax credits. EARNINGS PER SHARE. Earnings per share are determined on the basis of the weighted average number of shares outstanding during the period. RECLASSIFICATIONS. Certain prior years' amounts have been reclassified to conform with current year presentation. CASH EQUIVALENTS. The Company considers all highly liquid investments with maturities of three months or less, when purchased, to be cash equivalents. (2) COSTS AND EXPENSES Engineering, research and development, maintenance and repairs, and bad debt expenses were charged to operations for the three years ended December 31, 1994, as follows:
(IN THOUSANDS) 1994 1993 1992 ------ ------ ------ Engineering, research and development . . . . . . . $11,674 $11,445 $11,906 Maintenance and repairs. . . . $ 4,658 $ 4,366 $ 4,336 Bad debts. . . . . . . . . . . $ 1,088 $ 701 $ 736
23 (3) SEGMENT REPORTING The Company has one business segment which consists of the design, manufacture, and sale of non-residential floor maintenance equipment and related products. The tables below set forth the information about North American and International operations for the three years ended December 31, 1994:
1994 -------------------------------------- North Interna- Elimina- Consoli- (IN THOUSANDS) American tional tions dated -------- ------- -------- -------- Net sales . . . . . . . . . . $240,517 71,718 (30,550) $281,685 -------- ------ ------ -------- -------- ------ ------ -------- Profit from operations . . . . $ 17,618 6,668 (162) $ 24,124 -------- ------ ------ -------- -------- ------ ------ -------- Profit before income taxes . . . . . . . . . . . . $ 17,760 6,483 (162) $ 24,081 -------- ------ ------ -------- -------- ------ ------ -------- Net earnings . . . . . . . . . $ 11,611 4,208 (84) $ 15,735 -------- ------ ------ -------- -------- ------ ------ -------- Identifiable assets . . . . . $169,045 32,623 (18,834) $182,834 -------- ------ ------ -------- -------- ------ ------ -------- 1993 -------------------------------------- North Interna- Elimina- Consoli- (IN THOUSANDS) American tional tions dated -------- -------- -------- -------- Net sales . . . . . . . . . . $180,524 63,398 (22,920) $221,002 -------- ------ ------ -------- -------- ------ ------ -------- Profit from operations . . . . $ 7,247 3,743 343 $ 11,333 -------- ------ ------ -------- -------- ------ ------ -------- Profit before income taxes . . . . . . . . . . . . $ 9,322 3,263 343 $ 12,928 -------- ------ ------ -------- -------- ------ ------ -------- Net earnings . . . . . . . . . $ 6,689 2,236 201 $ 9,126 -------- ------ ------ -------- -------- ------ ------ -------- Identifiable assets . . . . . $120,541 26,744 (18,651) $128,634 -------- ------ ------ -------- -------- ------ ------ -------- 1992 -------------------------------------- North Interna- Elimina- Consoli- (IN THOUSANDS) American tional tions dated -------- -------- -------- -------- Net sales . . . . . . . . . . $175,470 63,041 (23,648) $214,863 -------- ------ ------ -------- -------- ------ ------ -------- Profit from operations . . . . $ 8,516 7,867 (254) $ 16,129 -------- ------ ------ -------- -------- ------ ------ -------- Profit before income taxes, extraordinary gain, and cumulative effect of accounting change . . . . . . $ 10,766 7,481 (254) $ 17,993 -------- ------ ------ -------- -------- ------ ------ -------- Earnings before extraordinary gain and cumulative effect of accounting change . . . . . . $ 8,181 5,150 (141) $ 13,190 -------- ------ ------ -------- -------- ------ ------ -------- Extraordinary gain (note 16) . . . . . . . . . . $ 95 300 -- $ 395 -------- ------ ------ -------- -------- ------ ------ -------- Cumulative effect of accounting change (note 12) . . . . . . . $ (4,356) -- -- $ (4,356) -------- ------ ------ -------- -------- ------ ------ -------- Net earnings . . . . . . . . . $ 3,920 5,450 (141) $ 9,229 -------- ------ ------ -------- -------- ------ ------ -------- Identifiable assets . . . . . $118,564 35,639 (25,215) $128,988 -------- ------ ------ -------- -------- ------ ------ --------
Included in North American sales are export sales of $30,550,000, $22,920,000, and $23,648,000, for the years ended December 31, 1994, 1993, and 1992, respectively. International operations does not include cost or asset allocations from corporate overhead. ----------------------------------------- (4) CONSOLIDATED QUARTERLY DATA* (UNAUDITED)
Net Sales Gross Profit Net Earnings -------------------------- -------------------------- -------------------------------------------- (000) (000) (000) Per Share** -------------------------- -------------------------- -------------------------- -------------- % % % Quarter 1994 1993 Change 1994 1993 Change 1994 1993 Change 1994 1993 -------- -------- ------ -------- -------- ------ -------- -------- ------ ---- ---- First . . . . $ 58,441 $ 47,045 24 $ 24,884 $19,651 27 $ 2,660 $ 499 433 $ .27 $ .05 Second . . . . 70,784 55,149 28 29,688 24,017 24 4,225 3,063 38 .43 .31 Third . . . . 71,309 53,846 32 29,808 22,610 32 3,902 3,182 23 .40 .32 Fourth . . . . 81,151 64,962 25 34,945 28,653 22 4,948 2,382 108 .50 .24 -------- -------- -------- ------- ------- ------- ----- ----- Year . . . . . $281,685 $221,002 27 $119,325 $94,931 26 $15,735 $ 9,126 72 $1.60 $ .93 -------- -------- -------- ------- ------- ------- ----- ----- -------- -------- -------- ------- ------- ------- ----- ----- *Regular quarterly dividends after stock split adjustment aggregated $.65 per share in 1994 ($.16 per share for the first three quarters and $.17 for the fourth quarter) and $.64 per share in 1993 ($.16 per share per quarter). Included in results for 1993 are pretax restructuring charges of $4,090,000--$600,000 in the second quarter and $3,490,000 in the fourth quarter (net of taxes $372,000 and $2,164,000, respectively). **Adjusted for two-for-one stock split effective April 26, 1995.
------------------------------------------ (5) INCOME TAXES As discussed in note 1, the Company adopted Statement 109 as of January 1, 1992. There was no cumulative effect as a result of the change in method of accounting. Prior years' financial statements have not been restated to apply the provisions of Statement 109. Total income tax expense for the three years ended December 31, 1994, was allocated as follows:
(IN THOUSANDS) 1994 1993 1992 ------ ------ ------- Income from operations . $8,346 $3,802 $ 4,803 Extraordinary gain . . . $ -- $ -- $ 208 Cumulative effect of accounting change . . . $ -- $ -- $(2,558)
24 In addition to the above, in 1994, 1993, and 1992 the Company recognized tax benefits of $199,000, $208,000, and $204,000, respectively, relating to dividends paid on unallocated shares held by the Company's ESOP and miscellaneous charges (credits) of $(342,000), $142,000, and $11,000, respectively, by direct allocations to shareholders' equity. Income tax expense, excluding tax on the extraordinary gain and the cumulative effect of the accounting change in 1992, for the three years ended December 31, 1994, is as follows:
(IN THOUSANDS) Current Deferred Total ------- -------- ------ 1994 Federal . . . . $6,324 $ (61) $6,263 Foreign . . . . 1,348 (16) 1,332 State . . . . . 716 35 751 ------ ------- ------ $8,388 $ (42) $8,346 ------ ------- ------ ------ ------- ------ 1993 Federal . . . . $3,603 $ (933) $2,670 Foreign . . . . 1,122 (304) 818 State . . . . . 482 (168) 314 ------ ------- ------ $5,207 $(1,405) $3,802 ------ ------- ------ ------ ------- ------ 1992 Federal . . . . $1,990 $ 90 $2,080 Foreign . . . . 2,495 (260) 2,235 State . . . . . 551 (63) 488 ------ ------- ------ $5,036 $ (233) $4,803 ------ ------- ------ ------ ------- ------
Income tax expense attributable to income before extraordinary gain and the cumulative effect of accounting change was $8,346,000, $3,802,000, and $4,803,000 for the years ended December 31, 1994, 1993, and 1992, respectively, and differed from the amounts computed by applying the U.S. federal income tax rate of 35%, 34.4%, and 34%, respectively, as a result of the following:
(IN THOUSANDS) 1994 1993 1992 ------ ------ ------ Tax at statutory rate. . . . . . . . . . $8,417 $4,447 $6,118 Increases (decreases) in taxes from: State and local taxes, net of federal benefit . . . . . . . . . . 488 206 322 Effect of foreign taxes . . . . . . . 10 (223) (182) Research and development credit . . . (467) (463) (100) Effect of foreign sales corporation . (372) (223) (255) Completion of examinations by tax authorities . . . . . . . . . . -- -- (1,040) Other, net . . . . . . . . . . . . . 270 58 (60) ------ ------ ------ Income tax expense . . . . . . . . . . . $8,346 $3,802 $4,803 ------ ------ ------ ------ ------ ------
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1994 and 1993, are presented below:
(IN THOUSANDS) 1994 1993 -------- ------- 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 . . . . . . . . . . . . . . . . . $ 1,417 $ 1,311 Employee wages and benefits, principally due to accruals for financial reporting purposes . . . . 7,843 6,806 Warranty reserves accrued for financial reporting purposes . . . . . . . . . . . . . . . . . 522 396 Accounts receivable, principally due to allowance for doubtful accounts and change in tax accounting method for equipment rentals . . . . . . . . . . . . . . . . 699 594 Restructuring reserves. . . . . . . . . . . . . . . . . 145 1,161 Other . . . . . . . . . . . . . . . . . . . . . . . . . 693 807 ------- ------- Total deferred tax assets . . . . . . . . . . . . . $11,319 $11,075 ------- ------- ------- ------- Deferred tax liabilities: Property, plant, and equipment, principally due to differences in depreciation and related gains . . . . . . . . . . . . . . . . . . . . $ 4,119 $ 4,011 Goodwill and other intangibles . . . . . . . . . . . . 142 -- Deferred gain, hedge of forward foreign exchange contracts. . . . . . . . . . . . . . . . . . 46 12 ------- ------- Total deferred tax liabilities . . . . . . . . . . . $ 4,307 $ 4,023 ------- ------- ------- ------- Net deferred tax asset . . . . . . . . . . . . . . . . . . . $ 7,012 $ 7,052 ------- ------- ------- -------
The Company has determined that a valuation allowance for the deferred tax assets is not required since it is likely that the deferred tax assets will be realized through future reversals of existing taxable temporary differences and future taxable income. Income taxes paid were $5,961,000, $4,608,000, and $8,016,000 in 1994, 1993, and 1992, respectively. (6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at December 31 consist of the following:
(IN THOUSANDS) 1994 1993 ------- ------- Trade accounts payable . . . . . . . . . . . . . . . . . . . $14,624 $ 9,470 Employee profit sharing. . . . . . . . . . . . . . . . . . . 3,781 1,741 Wages, bonuses, and commissions . . . . . . . . . . . . . . 12,576 8,342 Taxes, other than income taxes . . . . . . . . . . . . . . . 3,573 2,307 Restructuring. . . . . . . . . . . . . . . . . . . . . . . . 525 3,270 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,036 3,407 ------- ------- $40,115 $28,537 ------- ------- ------- -------
During 1994, the Company incurred severance payments and other restructuring expenditures which were applied against the restructuring reserve. 25 (7) PROPERTY, PLANT, AND EQUIPMENT AND RELATED ACCUMULATED DEPRECIATION Property, plant, and equipment and related accumulated depreciation at December 31 consist of the following:
(IN THOUSANDS) 1994 1993 1992 -------- -------- -------- Land . . . . . . . . . . . . . . $ 3,511 $ 2,710 $ 2,954 Buildings and improvements . . . 27,861 20,527 21,014 Machinery and equipment. . . . . 89,603 86,540 80,835 Construction in progress . . . . 1,409 1,354 71 -------- -------- -------- Total property, plant, and equipment . . . . . . . . . 122,384 111,131 104,874 Less accumulated depreciation. . . . . . . . . . (65,832) (64,509) (59,444) -------- -------- -------- Net property, plant, and equipment. . . . . . . $ 56,552 $ 46,622 $ 45,430 -------- -------- -------- -------- -------- --------
Buildings and improvements include office, warehouse, or manufacturing facilities in suburban Minneapolis, Minnesota; Holland, Michigan; London, England; and Uden, The Netherlands. (8) INVESTMENTS AS LESSOR The Company leases floor maintenance equipment to customers under sales-type and operating leases. Noncancelable terms for sales-type leases range from six months to five years, and terms for operating leases range from one month to one year. All leases provide for minimum lease payments and require the lessees to pay executory costs. Minimum future lease payments to be received during the years ended December 31 are as follows:
Sales-Type Operating (IN THOUSANDS) Leases Leases ---------- --------- 1995 $ 6,382 $414 1996 4,537 -- 1997 2,142 -- 1998 635 -- 1999 209 -- ------- ---- Total $13,905 $414 ------- ---- ------- ----
The Company's investment in equipment related to operating leases as of December 31 is as follows:
(IN THOUSANDS) 1994 1993 ------ ------ Cost $3,519 $3,130 Less accumulated depreciation (950) (840) ------ ------ $2,569 $2,290 ------ ------ ------ ------
The Company's net investment in sales-type leases at December 31 is as follows:
(IN THOUSANDS) 1994 1993 ------- ------- Minimum lease payments receivable . . . . . $13,905 $11,191 Less allowance for doubtful accounts . . . . (315) (454) ------- ------- Net minimum lease payments receivable . . . 13,590 10,737 Estimated unguaranteed residual value . . . 1,295 1,316 Less deferred income . . . . . . . . . . . . (2,763) (2,234) ------- ------- Net investment in sales-type leases . . . . $12,122 $ 9,819 ------- ------- ------- -------
(9) COMMITMENTS The Company leases office and warehouse facilities in all major geographic areas it serves 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 1999 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 $2,447,000, $2,080,000, and $1,766,000, in 1994, 1993, and 1992, respectively. The aggregate lease commitments with initial terms of one year or more at December 31, 1994, were $3,600,000 with minimum rentals for the periods as follows:
(IN THOUSANDS) 1995 $1,991 1996 798 1997 562 1998 213 1999 36 ------ Total $3,600 ------ ------
(10) SHORT-TERM BORROWINGS Short-term bank borrowings at December 31, 1994, 1993, and 1992, were $21,552,000, $1,073,000, and $1,329,000, respectively. In addition to the short-term bank borrowings, current debt includes the current portion of long-term debt and mortgages associated with the relocation of employees. The Company has available lines of credit with banks in the amount of $39,400,000 which include a $7,000,000 line of credit requiring the Company to pay 3/8% per year commitment fee on the unused portion and a $25,000,000 line of credit requiring the Company to pay an annual commitment fee of $60,000. These fees are recorded by the Company as interest expense. The Company had short-term and long-term borrowings under these arrangements at December 31, 1994 and 1993, of $24,057,000 and $2,176,000, respectively. 26 (11) LONG-TERM DEBT Long-term debt at December 31 consists of the following:
(IN THOUSANDS) 1994 1993 ------ ------ Industrial development revenue bonds at variable interest rates with annual installments due in 1994. . . . $ -- $ 40 Bank loan at 9.5%, due in 1995 . . . . . . . 569 520 Bank loan at 9.6%, due in 1995 . . . . . . . 637 583 Bank loan at 8.68% due in 1997 . . . . . . . 1,300 -- Notes at 8.56% due in 2001 . . . . . . . . . 5,000 -- Less: Current portion . . . . . . . . . . . . . (1,206) (40) ------ ------ $6,300 $1,103 ------ ------ ------ ------
The notes were issued in 1994 under an agreement the Company has with Prudential Insurance Company of America. The aggregate principal payments of long-term debt for the next five years and beyond are as follows:
(IN THOUSANDS) 1995 $1,206 1996 -- 1997 1,300 1998 -- 1999 -- 2000 and beyond 5,000 ------ $7,506 ------ ------
During 1994, 1993, and 1992, the Company paid total long-term and short-term interest costs of $1,557,000, $509,000, and $478,000, respectively. (12) POSTRETIREMENT BENEFITS The Company provides certain health care benefits for substantially all of its U.S. retired employees. Eligibility for those benefits is based upon a combination of years of service with the Company and age upon retirement from the Company. During the fourth quarter of 1992, the Company adopted Statement of Financial Accounting Standards No. 106, EMPLOYERS' ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (SFAS 106), retroactive to January 1, 1992. SFAS 106 requires an employer to recognize the cost of retiree health benefits over the employees' period of service. The cumulative effect as of January 1, 1992, of adopting SFAS 106 was a one-time charge to net earnings of $4,356,000, net of a deferred income tax benefit of $2,558,000. The change also decreased pretax earnings in 1992 by $513,000. The periodic postretirement benefit cost under SFAS 106 for the three years ended December 31, 1994, was as follows:
(IN THOUSANDS) 1994 1993 1992 ---- ---- ---- Service costs . . . . . . . . . . $315 $219 $218 Interest costs . . . . . . . . . . 638 566 533 Amortization and deferrals . . . . 18 -- -- ---- ---- ---- Net postretirement costs . . . . . . . . . . . . . . $971 $785 $751 ---- ---- ---- ---- ---- ----
The actuarial present value of benefit obligations at December 31 is as follows:
(IN THOUSANDS) 1994 1993 ------ ------ Retirees eligible for benefits. . . . . . . . . . . . . . . $2,339 $2,290 Dependents of retirees eligible for benefits . . . . . . . . 1,674 2,295 Active employees fully eligible. . . . . . . . . . . . 721 685 Active employees not fully eligible. . . . . . . . . . . . 4,119 4,495 Unrecognized net loss. . . . . . . . . (75) (1,707) ------ ------ Accrued postretirement benefit obligation. . . . . . . . . . $8,778 $8,058 ------ ------ ------ ------
The assumed annual rate of future increases in per capita cost of health care benefits was 10.3% in 1995, declining gradually to 6.5% in 2020 and after. Increasing the health care cost trend by 1% in each year would increase the accumulated benefit obligation by $172,000 at December 31, 1994, and the aggregate of the service and interest cost by $14,000 for 1994. The discount rate used in determining the accumulated benefit obligation in 1994, 1993, and 1992 was 8.0%, 7.0%, and 7.5%, respectively. (13) FOREIGN CURRENCY CONTRACTS The Company has entered into several guilder forward exchange contracts for the purpose of hedging the net investment in Tennant Holding B.V. As of December 31, 1994, there were seven outstanding contracts totaling $9,812,000. These contracts will mature in 1995 and bear rates ranging from 1.6675 to 1.7972 guilders per dollar. The Company also enters into yen foreign currency option contracts to hedge anticipated sales transactions. Gains and losses on contracts are recognized in income on a current basis over the term of the contract. As of December 31, 1994, there were eight outstanding yen contracts totaling $4,000,000. These contracts will mature in 1995 and bear rates ranging from 95.06 to 98.00 yen per dollar. The Company also had two other outstanding forward hedging contracts totaling $2,198,000 as of December 31, 1994, relating to some of the Company's other foreign operations. (14) COMMON AND PREFERRED STOCK AND ADDITIONAL PAID-IN CAPITAL The Company is authorized to issue 1,000,000 shares of preferred stock with a par value of $.02 per share, none of which had been issued as of December 31, 1994 or 1993. Each share of the Company's outstanding common stock is accompanied by one preferred share purchase right. Each right entitles the registered holder to purchase from the Company one-twentieth of a share of junior participating preferred stock, $.02 par value, for $75.00. The rights are not exercisable or transferable apart from the common stock until a person or group has acquired 20% or more, or makes a tender offer to acquire 20% or more, of the Company's outstanding common stock. If, in certain circumstances, the Company is acquired in a 27 merger or other business combination transaction, or if an acquiring person purchases at least 20% of the Company's common stock, each right will entitle the holder (except, in certain circumstances, an acquiring person) to receive, upon exercise, common stock of either the Company or the acquiring person having a value equal to two times the exercise price of the right. At no time do the rights have any voting power. The rights may be redeemed by the Company for $.05 per right at any time prior to (and, in certain circumstances, within twenty days after) a person or group acquires 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 expire on December 23, 1996. (15) STOCK PLANS, BONUSES, PENSIONS, AND PROFIT SHARING The Company has a Stock Incentive Plan under which restricted and performance-related shares are awarded each year to designated employees (management and senior managerial personnel). Under this plan, restricted shares are awarded annually with a two-year restriction period. Performance-related shares are also awarded annually and are payable if the Company achieves certain business performance goals within a four-year period. In 1994, 1993, and 1992, respectively, expenses of $2,432,000, $199,000, and $1,025,000 were charged to operations for restricted and performance-related awards. The Company also has a matching contribution program available to all employees who make Individual Shelter Contributions. Under this program, the Company makes matching contributions up to a maximum of 4% of an employee's certified earnings. For 1994, 1993, and 1992, employee contributions that were invested in Company common stock were matched at the rate of 35%, and contributions not invested in Company common stock were matched at the rate of 15%. Expenses related to matching contributions were $544,000, $471,000, and $426,000 in 1994, 1993, and 1992, respectively. The Company has a Defined Benefit Pension Plan (available to most U.S. employees). Plan benefits are based on the employee's years of service and compensation during the highest five consecutive years of service of the final ten years of employment. The Company's policy has been to fund this plan to the maximum allowed by ERISA rules. Contributions are intended to provide not only for benefits attributed to service to date, but also for service-related benefits expected to be earned in the future. A curtailment to the Defined Benefit Pension Plan occurred as a result of closing Tennant Trend in 1994. The reduction in employment produced a pretax gain of $751,000 ($496,000 net of taxes). Net pension expense for the three years ended December 31, 1994, was as follows:
(IN THOUSANDS) 1994 1993 1992 ------ ------ ------ Service cost . . . . . . . . . . . . . $1,359 $1,539 $1,423 Interest cost . . . . . . . . . . . . 756 866 724 Actual return on plan assets (increase) decrease . . . . . . . . 180 (1,811) 421 Deferred gain (loss) . . . . . . . . . (1,495) 694 (1,372) Amortization of transition asset . . . . . . . . . . . . . . . (46) (46) (46) Less Tennant Trend curtailment gain . . . . . . . . . . (751) -- -- ------ ------ ------ Net periodic pension expense . . . . . . . . . . . . . . $ 3 $1,242 $1,150 ------ ------ ------ ------ ------ ------
The assumptions used in determining the actuarial present value of the projected benefit obligation at December 31 are as follows:
1994 1993 1992 ------ ------ ------ Weighted average discount rate . . . . . . . . . . . . 8.0% 7.0% 8.2% Rate of increase in future compensation . . . . . . . . 6.5% 5.5% 6.7%
The expected long-term rate of return on plan assets in 1994, 1993, and 1992 was 11.0%, 10.0%, and 11.2%, respectively. The funded status of the plan and the amount recognized at December 31 are as follows:
(IN THOUSANDS) 1994 1993 ------- -------- Actuarial present value of benefit obligation: Vested benefits . . . . . . . . . . . . . . $ 4,512 $ 4,564 Nonvested benefits. . . . . . . . . . . . . 210 343 ------- ------- Accumulated benefit obligation . . . . . . . . . 4,722 4,907 Effect of projected future compensation increases. . . . . . . . . . . . . . . . . . . 6,120 5,873 ------- ------- Projected benefit obligation . . . . . . . . . . 10,842 10,780 Plan assets, primarily listed equity securities, at fair value using the market-related value method . . . . . . . . . . . . . . . . . (12,132) (12,650) ------- ------- Plan assets in excess of projected benefit obligation . . . . . . . . . . . . . . . . . . (1,290) (1,870) Unrecognized prior service cost. . . . . . . . . (354) (361) Unrecognized net gain. . . . . . . . . . . . . . 4,978 5,517 Unrecognized transition asset. . . . . . . . . . 679 725 ------- ------- Net pension obligation . . . . . . . . . . . . . $ 4,013 $ 4,011 ------- ------- ------- -------
Retirement benefits for eligible employees in foreign locations are funded principally through either annuity or government programs. During 1990, the Company established a leveraged Employee Stock Ownership Plan (ESOP) by amending its Profit Sharing Plan to add ESOP features. The ESOP covers substantially all domestic employees following completion of one year of service. 28 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 ESOP in accordance with EITF Issue 89-8. Accordingly, the shares pledged as collateral are reported as unearned ESOP shares in the consolidated balance sheet. As shares are released from collateral, the Company reports compensation expense equal to the cost of the shares to ESOP. Allocated and unallocated ESOP shares are considered outstanding in EPS computations. Dividends on allocated and unallocated shares are recorded as a reduction of retained earnings. The Company cash contribution to the ESOP during 1994, 1993, and 1992 was $1,349,000, $1,362,000, and $1,406,000, respectively. Accrued expenses in excess of benefits provided to employees through the ESOP which were charged to miscellaneous expense were $908,000, $874,000, and $937,000 in 1994, 1993, and 1992, respectively. Interest earned and received on the Company loan to the ESOP was $1,642,000, $1,682,000, and $1,719,000 in 1994, 1993, and 1992, respectively. Dividends on the Company shares held by the ESOP used for debt service were $703,000, $697,000, and $652,000 in 1994, 1993, and 1992, respectively. At December 31, 1994, the ESOP indebtedness to the Company, which bears an interest rate of 10.05% and is due December 31, 2009, was $16,241,000. The ESOP shares as of December 31, after adjustment for the two-for-one stock split, were as follows:
1994 1993 1992 ------- ------- ------- Allocated shares . . . . . . . . . . . 179,262 128,618 80,180 Shares released for allocation . . . . 41,540 42,654 41,584 Unreleased shares. . . . . . . . . . . 748,264 797,794 847,302 ------- ------- ------- Total ESOP shares. . . . . . . . . . . 969,066 969,066 969,066 ------- ------- ------- ------- ------- -------
For the years ended December 31, 1994, 1993, and 1992, the Company charged to operations $9,821,000, $4,759,000, and $7,168,000, respectively, for expense of all stock, bonus, pension, and profit sharing plans. (16) EXTRAORDINARY GAIN Net earnings in 1992 include an extraordinary gain of $395,000 (net of income taxes of $208,000) due to insurance settlements related to the 1988 fire that destroyed a portion of the Company's European manufacturing facilities located in Uden, The Netherlands. (17) ACQUISITIONS On February 1, 1994, the Company acquired the business and net assets of Castex Industries, Inc. ("Castex"), a private corporation, for an aggregate consideration of $26,800,000. Castex manufactures carpet cleaning equipment and small, hard-floor cleaning equipment in Holland, Michigan. The purchase price was allocated to the acquired assets and assumed obligations based on their fair market values. The purchase price and related acquisition costs exceeded fair market values by $17,469,000. This amount has been recorded as goodwill and is being amortized on a straight-line basis over 30 years. In addition, Tennant acquired land and improvements for $597,000 in cash and entered into a five-year noncompetition agreement for $950,000, payable in five annual installments in arrears, and a ten-year confidentiality agreement for $50,000 in cash. These agreements are being amortized on a straight-line basis over the contract lives. The transaction has been accounted for using the purchase method of accounting, and as such, the Company's 1994 results of operations include Castex earnings since the acquisition date. Listed below are unaudited pro forma results for the years ended December 31, 1994 and 1993, assuming the transaction was consummated at the beginning of each of the respective fiscal years (dollars in thousands, except per share amounts):
1994 1993 -------- -------- Net sales. . . . . . . . . . . . . . . $284,092 $252,123 Net earnings . . . . . . . . . . . . . $ 15,793 $ 10,227 Net earnings per share . . . . . . . . $ 1.61 $ 1.04
On December 29, 1994, the Company acquired the business and net assets of Eagle Floor Care, Inc. ("Eagle"), a privately owned manufacturer of commercial floor maintenance equipment in Adairsville, Georgia. The acquisition does not have a material impact on operations. (18) SUBSEQUENT EVENT On February 16, 1995, the Board of Directors declared a two-for-one stock split effective April 26, 1995, for shareholders of record on April 12, 1995. For each share to be issued in connection with the stock split, an amount equal to the par value of $.375 was transferred to the common stock amount from additional paid-in capital retroactive to December 31, 1994. This transfer is reflected on the consolidated statements of shareholders' equity as a stock split adjustment in 1994. All share and per share data in this report have been retroactively adjusted to reflect this stock split. On February 16, 1995, the Board of Directors also approved that effective April 26, 1995, the Company is authorized to issue an aggregate of 31,000,000 shares, 30,000,000 of which shall be designated as Common Stock, having a par value of $.375 per share, and 1,000,000 of which shall be designated as Preferred Stock having a par value of $.02 per share. The Board of Directors is 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. 29 TENNANT COMPANY AND SUBSIDIARIES HISTORICAL PROGRESS REVIEW (PRESENTS 11 YEARS OF DATA PLUS 1981 AS BASE YEAR FOR LONG-TERM GROWTH MEASUREMENT.) - --------------------------------------------------------------------------------
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) 1994 1993 1992 1991 ----------- ----------- ----------- ----------- Net sales. . . . . . . . . . . . . . . . . . . . . . . . . $ 281,685 221,002 214,863 198,575 Cost of sales. . . . . . . . . . . . . . . . . . . . . . . $ 162,360 126,071 121,792 112,147 Gross margin -- % . . . . . . . . . . . . . . . . . . . . 42.4 43.0 43.3 43.5 Selling and administrative expenses. . . . . . . . . . . . $ 95,201 79,508 76,942 69,707 % of net sales. . . . . . . . . . . . . . . . . . . . . 33.8 36.0 35.8 35.1 Profit from operations . . . . . . . . . . . . . . . . . . $ 24,124 11,333(a) 16,129 16,721 % of net sales. . . . . . . . . . . . . . . . . . . . . 8.6 5.1 7.5 8.4 Other income and (expense) . . . . . . . . . . . . . . . . $ (43) 1,595 1,864 1,800 Income tax expense . . . . . . . . . . . . . . . . . . . . $ 8,346 3,802 4,803 6,529 % of earnings before income taxes. . . . . . . . . . . . 34.7 29.4 26.7 35.3 Earnings before extraordinary gain and cumulative effect of accounting change . . . . . . . . . . . . . . . $ 15,735 9,126(a) 13,190(b) 11,992 % of net sales . . . . . . . . . . . . . . . . . . . . . 5.6 4.1 6.1 6.0 Return on beginning shareholders' equity --% . . . . . . 18.7 10.8(a) 17.2(b) 16.4 Net earnings . . . . . . . . . . . . . . . . . . . . . . . $ 15,735 9,126 9,229 11,992 PER SHARE DATA(f) Earnings before extraordinary gain and cumulative effect of accounting change . . . . . . . . . . . . . . . $ 1.60 .93(a) 1.34(b) 1.21 Net earnings . . . . . . . . . . . . . . . . . . . . . . . $ 1.60 .93 .94 1.21 Cash dividends . . . . . . . . . . . . . . . . . . . . . . $ .65 .64 .61 .60 Shareholders' equity (ending). . . . . . . . . . . . . . . $ 9.78 8.56 8.64 7.87 YEAR-END FINANCIAL POSITION Cash and cash equivalents. . . . . . . . . . . . . . . . . $ 1,851 2,675 3,512 2,349 Total current assets . . . . . . . . . . . . . . . . . . . $ 98,810 73,752 74,741 66,028 Property, plant, and equipment, net . . . . . . . . . . . $ 56,552 46,622 45,430 40,730 Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 182,834 128,634 128,988 111,644 Current liabilities excluding current debt . . . . . . . . $ 43,057 29,657 28,848 30,700 Current ratio excluding current debt . . . . . . . . . . . 2.3 2.5 2.6 2.2 Long-term liabilities excluding long-term debt . . . . . . $ 14,220 12,591 10,691 2,281 Financing debt Current. . . . . . . . . . . . . . . . . . . . . . . . . $ 23,008 1,190 1,492 197 Long-term . . . . . . . . . . . . . . . . . . . . . . . $ 6,300 1,103 3,107 1,853 Total as % of total capital . . . . . . . . . . . . . 23.3 2.7 5.1 2.6 Shareholders' equity . . . . . . . . . . . . . . . . . . . $ 96,249 84,093 84,850 76,613 CASH FLOW(e) Increase (Decrease) Related to operating activities. . . . . . . . . . . . . . $ 25,419 20,440 19,298 22,409 Related to investing activities. . . . . . . . . . . . . . $ (46,596) (12,087) (14,900) (6,104) Related to financing activities. . . . . . . . . . . . . . $ 20,351 (9,244) (3,346) (15,336) OTHER DATA Interest income. . . . . . . . . . . . . . . . . . . . . . $ 3,807 3,583 3,619 3,828 Interest expense . . . . . . . . . . . . . . . . . . . . . $ 1,677 509 540 568 Depreciation and amortization expense. . . . . . . . . . . $ 13,121 10,987 10,241 8,730 Net expenditures for property, plant, and equipment. . . . $ 17,535 11,395 11,498 6,695 Number of employees at year-end. . . . . . . . . . . . . . 1,916 1,707 1,758 1,738 Total direct compensation. . . . . . . . . . . . . . . . . $ 76,225 71,507 69,240 65,324 Profit sharing and all other employee benefits . . . . . . $ 21,116 18,149 19,547 17,917 Average shares outstanding(f). . . . . . . . . . . . . . . 9,826 9,836 9,832 9,892 Closing share price at year-end(f) . . . . . . . . . . . . $ 24 1/8 23 1/2 21 7/16 18 Common stock price range during year(f). . . . . . . . . . $20 15/32-- 19 3/4-- 17 1/4-- 16 1/4-- 24 1/4 24 1/4 24 3/8 21 1/4 Closing price/earnings ratio(g). . . . . . . . . . . . . . 15.1 19.7 17.4 14.9 (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) Comparable cash flow data is not available prior to 1986 due to a change in reporting requirements. (f) Adjusted retroactively for two-for-one stock split effective April 26, 1995. (g) 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. 30 (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) 1990 1989 1988 1987 ----------- ----------- ----------- ----------- Net sales. . . . . . . . . . . . . . . . . . . . . . . . . $ 211,503 197,078 183,888 166,924 Cost of sales. . . . . . . . . . . . . . . . . . . . . . . $ 121,598 112,511 105,991 95,015 Gross margin -- % . . . . . . . . . . . . . . . . . . . . 42.5 42.9 42.4 43.1 Selling and administrative expenses. . . . . . . . . . . . $ 70,401 64,518 59,646 55,352 % of net sales. . . . . . . . . . . . . . . . . . . . . 33.3 32.7 32.4 33.2 Profit from operations . . . . . . . . . . . . . . . . . . $ 19,504 20,049 18,251 16,557 % of net sales. . . . . . . . . . . . . . . . . . . . . 9.2 10.2 9.9 9.9 Other income and (expense) . . . . . . . . . . . . . . . . $ 374 3,755 1,449 953 Income tax expense . . . . . . . . . . . . . . . . . . . . $ 4,257 9,052 8,126 7,692 % of earnings before income taxes. . . . . . . . . . . . 21.4 38.0 41.2 43.9 Earnings before extraordinary gain and cumulative effect of accounting change. . . . . . . . . . . . . . . $ 15,621(c) 14,752(d) 11,574 9,818 % of net sales . . . . . . . . . . . . . . . . . . . . . 7.4 7.5 6.3 5.9 Return on beginning shareholders' equity --% . . . . . . 21.1(c) 18.9(d) 16.6 15.0 Net earnings . . . . . . . . . . . . . . . . . . . . . . . $ 18,256 14,752 13,263 9,818 PER SHARE DATA(f) Earnings before extraordinary gain and cumulative effect of accounting change. . . . . . . . . . . . . . . $ 1.59(c) 1.44(d) 1.09 .92 Net earnings . . . . . . . . . . . . . . . . . . . . . . . $ 1.85 1.44 1.25 .92 Cash dividends . . . . . . . . . . . . . . . . . . . . . . $ .59 .55 .49 .48 Shareholders' equity (ending). . . . . . . . . . . . . . . $ 7.43 7.52 7.37 6.60 YEAR-END FINANCIAL POSITION Cash and cash equivalents. . . . . . . . . . . . . . . . . $ 1,412 3,175 7,016 3,564 Total current assets . . . . . . . . . . . . . . . . . . . $ 67,065 70,325 76,402 65,960 Property, plant, and equipment, net . . . . . . . . . . . $ 42,588 40,949 35,616 35,583 Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 114,590 116,179 117,013 105,273 Current liabilities excluding current debt . . . . . . . . $ 30,982 35,408 29,836 25,206 Current ratio excluding current debt . . . . . . . . . . . 2.2 2.0 2.6 2.6 Long-term liabilities excluding long-term debt . . . . . . $ 1,463 4,022 3,757 3,130 Financing debt Current. . . . . . . . . . . . . . . . . . . . . . . . . $ 6,986 588 1,722 2,280 Long-term . . . . . . . . . . . . . . . . . . . . . . . $ 1,995 2,111 2,234 2,421 Total as % of total capital. . . . . . . . . . . . . . 10.9 3.5 4.8 6.3 Shareholders' equity . . . . . . . . . . . . . . . . . . . $ 73,164 74,050 77,998 69,516 CASH FLOW(e) Increase (Decrease) Related to operating activities. . . . . . . . . . . . . . $ 24,848 25,685 18,614 15,651 Related to investing activities. . . . . . . . . . . . . . $ (8,951) (8,916) (9,140) (7,156) Related to financing activities. . . . . . . . . . . . . . $ (17,746) (20,310) (5,730) (5,861) OTHER DATA Interest income. . . . . . . . . . . . . . . . . . . . . . $ 2,672 2,033 2,023 2,196 Interest expense . . . . . . . . . . . . . . . . . . . . . $ 1,019 597 401 1,017 Depreciation and amortization expense. . . . . . . . . . . $ 8,652 8,027 7,900 7,162 Net expenditures for property, plant, and equipment . . . $ 8,071 9,135 9,121 7,007 Number of employees at year-end . . . . . . . . . . . . . 1,800 1,789 1,726 1,727 Total direct compensation. . . . . . . . . . . . . . . . . $ 66,364 62,401 58,637 54,721 Profit sharing and all other employee benefits . . . . . . $ 19,316 17,233 15,245 14,437 Average shares outstanding(f). . . . . . . . . . . . . . . 9,842 10,268 10,592 10,640 Closing share price at year-end(f) . . . . . . . . . . . . $ 17 1/2 17 1/2 13 1/8 11 3/4 Common stock price range during year(f). . . . . . . . . . $ 13 7/8-- 12 5/8-- 11 1/4-- 8--16 1/2 22-1/8 18 1/4 16 3/8 Closing price/earnings ratio(g). . . . . . . . . . . . . . 13.3 13.3 12.0 12.7 (DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA) 1986 1985 1984 1981 ----------- ----------- ----------- ----------- Net sales. . . . . . . . . . . . . . . . . . . . . . . . . $ 151,497 136,512 127,197 109,333 Cost of sales. . . . . . . . . . . . . . . . . . . . . . . $ 85,977 78,385 72,541 62,373 Gross margin --% . . . . . . . . . . . . . . . . . . . . . 43.2 42.6 43.0 43.0 Selling and administrative expenses. . . . . . . . . . . . $ 50,145 44,687 40,762 31,761 % of net sales. . . . . . . . . . . . . . . . . . . . . 33.1 32.7 32.0 29.1 Profit from operations . . . . . . . . . . . . . . . . . . $ 15,375 13,440 13,894 15,199 % of net sales. . . . . . . . . . . . . . . . . . . . . 10.1 9.8 10.9 13.9 Other income and (expense) . . . . . . . . . . . . . . . . $ 1,433 1,709 2,117 2,059 Income tax expense . . . . . . . . . . . . . . . . . . . . $ 7,992 6,427 7,048 7,655 % of earnings before income taxes. . . . . . . . . . . . 47.5 42.4 44.0 44.4 Earnings before extraordinary gain and cumulative effect of accounting change. . . . . . . . . . . . . . . $ 8,816 8,722 8,963 9,603 % of net sales . . . . . . . . . . . . . . . . . . . . . 5.8 6.4 7.0 8.8 Return on beginning shareholders' equity -%. . . . . . . 14.7 15.3 16.6 20.6 Net earnings . . . . . . . . . . . . . . . . . . . . . . . $ 8,816 8,722 8,963 9,603 PER SHARE DATA(f) Earnings before extraordinary gain and cumulative effect of accounting change. . . . . . . . . . . . . . . $ .83 .82 .82 .89 Net earnings . . . . . . . . . . . . . . . . . . . . . . . $ .83 .82 .82 .89 Cash dividends . . . . . . . . . . . . . . . . . . . . . . $ .46 .46 .44 .36 Shareholders' equity (ending). . . . . . . . . . . . . . . $ 6.15 5.62 5.26 4.58 YEAR-END FINANCIAL POSITION Cash and cash equivalents. . . . . . . . . . . . . . . . . $ 947 2,660 5,918 2,944 Total current assets . . . . . . . . . . . . . . . . . . . $ 55,627 52,782 52,068 46,789 Property, plant, and equipment, net . . . . . . . . . . . $ 35,037 32,350 25,886 19,244 Total assets . . . . . . . . . . . . . . . . . . . . . . . $ 94,506 89,419 81,584 70,522 Current liabilities excluding current debt . . . . . . . . $ 17,742 16,835 17,907 14,991 Current ratio excluding current debt . . . . . . . . . . . 3.1 3.1 2.9 3.1 Long-term liabilities excluding long-term debt . . . . . . $ 2,744 2,346 575 82 Financing debt Current. . . . . . . . . . . . . . . . . . . . . . . . . $ 1,209 3,447 1,453 1,123 Long-term . . . . . . . . . . . . . . . . . . . . . . . $ 2,766 3,208 1,465 -- Total as % of total capital. . . . . . . . . . . . . . 5.7 10.0 4.9 2.1 Shareholders' equity . . . . . . . . . . . . . . . . . . . $ 65,356 59,912 57,054 52,716 CASH FLOW(e) Increase (Decrease) Related to operating activities. . . . . . . . . . . . . . $ 15,177 -- -- -- Related to investing activities. . . . . . . . . . . . . . $ (8,543) -- -- -- Related to financing activities. . . . . . . . . . . . . . $ (8,446) -- -- -- OTHER DATA Interest income. . . . . . . . . . . . . . . . . . . . . . $ 2,061 2,141 2,576 2,037 Interest expense . . . . . . . . . . . . . . . . . . . . . $ 705 687 288 71 Depreciation and amortization expense. . . . . . . . . . . $ 6,611 5,901 4,942 3,096 Net expenditures for property, plant, and equipment . . . $ 8,543 12,196 10,146 7,494 Number of employees at year-end . . . . . . . . . . . . . 1,728 1,658 1,555 1,623 Total direct compensation. . . . . . . . . . . . . . . . . $ 49,819 43,472 40,991 35,938 Profit sharing and all other employee benefits . . . . . . $ 11,299 9,981 9,776 8,404 Average shares outstanding(f). . . . . . . . . . . . . . . 10,658 10,672 10,894 10,832 Closing share price at year-end(f) . . . . . . . . . . . . $ 12 1/8 11 3/4 10 8 3/8 Common stock price range during year(f). . . . . . . . . . $ 10 9/16-- 9 3/4-- 8 3/8-- 7 1/2-- 13 1/4 12 1/2 10 3/4 11 5/8 Closing price/earnings ratio(g). . . . . . . . . . . . . . 14.7 14.4 12.1 9.5
31 INVESTOR INFORMATION ANNUAL MEETING The annual meeting of Tennant Company will be held at 10:30 a.m. on Thursday, May 4, 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 over-the-counter market, under the ticker symbol TANT. As of December 31, 1994, there were approximately 3,300 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: Caption> First Second Third Fourth ---------------------------------------------------------- 1990 16.75-18.25 17.75-20.88 16.63-22.13 13.88-18.00 1991 16.50-20.00 17.50-21.25 16.75-18.50 16.25-18.38 1992 17.25-22.00 20.00-24.38 21.25-23.75 20.50-23.25 1993 20.13-24.25 19.75-22.00 20.75-22.75 20.88-24.25 1994 20.63-24.25 20.47-22.00 21.00-23.38 21.50-24.13
DIVIDEND INFORMATION Cash dividends on Tennant's common stock have been paid for 51 consecutive years, and the Company has increased dividends in each of the last 23 years. Dividends generally are declared each quarter. Following are the record dates anticipated for the next 12 months: May 31, 1995 August 31, 1995 December 18, 1995 March 4, 1996 TRANSFER AGENT AND REGISTRAR Shareholders with a change of address or questions about their account may contact: Norwest Bank Minnesota, N. A. 161 North Concord Exchange P.O. Box 738 St. Paul, MN 55075-0738 612-450-4064 - 1-800-468-9716 10-K OFFER AND OTHER INVESTOR INFORMATION A copy of Tennant's 1994 10-K annual report filed with the Securities and Exchange Commission (which contains no material information not found in this report), and other financial information may be obtained by writing Richard A. Snyder, Treasurer, Tennant Company, P.O. Box 1452, Minneapolis, MN 55440, or calling (612) 540-1209. DIRECTORS ROGER L. HALE, PRESIDENT, CHIEF EXECUTIVE OFFICER DAVID C. COX, PRESIDENT, CHIEF EXECUTIVE OFFICER COWLES MEDIA COMPANY, MINNEAPOLIS, MINNESOTA ANDREW P. CZAJKOWSKI, PRESIDENT, CHIEF EXECUTIVE OFFICER BLUE CROSS & BLUE SHIELD OF MINNESOTA, ST. PAUL, MINNESOTA VERNON H. HEATH, RETIRED CHAIRMAN AND CHIEF EXECUTIVE OFFICER ROSEMOUNT, INC., EDEN PRAIRIE, MINNESOTA CHAIRMAN AND OWNER ROSEMOUNT OFFICE SYSTEMS, INC., LAKEVILLE, MINNESOTA WILLIAM A. HODDER, CHAIRMAN, CHIEF EXECUTIVE OFFICER DONALDSON COMPANY, INC., MINNEAPOLIS, MINNESOTA DELBERT W. JOHNSON, CHAIRMAN, CHIEF EXECUTIVE OFFICER PIONEER METAL FINISHING, MINNEAPOLIS, MINNESOTA WILLIAM I. MILLER, CHAIRMAN IRWIN FINANCIAL CORPORATION, COLUMBUS, INDIANA ARTHUR R. SCHULZE, JR., RETIRED VICE CHAIRMAN OF THE BOARD GENERAL MILLS, INC., MINNEAPOLIS, MINNESOTA JANICE D. STONEY, RETIRED EXECUTIVE VICE PRESIDENT TOTAL QUALITY MANAGEMENT OF U.S. WEST COMMUNICATIONS, INC., DENVER, COLORADO OFFICERS ROGER L. HALE, PRESIDENT, CHIEF EXECUTIVE OFFICER JANET M. DOLAN, SENIOR VICE PRESIDENT AND GENERAL COUNSEL DOUGLAS R. HOELSCHER, SENIOR VICE PRESIDENT RICHARD M. ADAMS, VICE PRESIDENT PAUL E. BRUNELLE, VICE PRESIDENT KEITH D. PAYDEN, VICE PRESIDENT RICHARD A. SNYDER, VICE PRESIDENT, TREASURER, AND CHIEF FINANCIAL OFFICER WILLIAM R. STRANG, VICE PRESIDENT BRUCE J. BORGERDING, DEPUTY GENERAL COUNSEL AND CORPORATE SECRETARY MAHEDI A. JIWANI, CORPORATE CONTROLLER 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 -- 4132-63955 EX-23.1 4 EXHIBIT 23.1 [PEAT MARWICK LETTERHEAD] INDEPENDENT AUDITORS' CONSENT The Board of Directors Tennant Company: We consent to incorporation by reference in Registration Statements No. 2-86844 on Form S-8, relating to the Tennant Company Profit Sharing and Employee Stock Ownership Plan and 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 of our report dated February 8, 1995, relating to the consolidated balance sheets of Tennant Company and subsidiaries as of December 31, 1994 and 1993 and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1994, which report is incorporated by reference in the December 31, 1994 annual report on Form 10-K of Tennant Company. Our report refers to a change in the method of accounting for income taxes and for postretirement benefits other than pensions in 1992. /s/ KPMG Peat Marwick LLP ---------------------------- March 23, 1995 EX-27 5 EXHIBIT 27.1
5 This schedule contains summary financial information extracted from the Consolidated Statement of Earnings for the year ended December 31, 1994, and the Consolidated Balance Sheet as of December 31, 1994, pages 18 and 19, and footnote 2, page 23, of the Company's 1994 Annual Report to Shareholders, and is qualified in its entirety by reference to such financial statements. 0000097134 TENNANT COMPANY 1,000 YEAR DEC-31-1994 JAN-01-1994 DEC-31-1994 1,851 0 61,819 2,609 30,985 98,810 122,384 65,832 182,834 66,065 6,300 3,690 0 0 92,559 182,834 281,685 281,685 162,360 162,360 0 1,088 1,677 24,081 8,346 15,735 0 0 0 15,735 1.60 1.60
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