FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO ______.
Commission File Number 0-2958.
TSI INCORPORATED
(Exact name of registrant as specified in its charter)
Minnesota 41-0843524
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
500 Cardigan Road, Shoreview, Minnesota 55126
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (612) 483-0900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
National Association of Securities Dealers
Automated Quotation System (NASDAQ) Common Stock, $10 par Value
(Name of each exchange on which registered) (Title of each class)
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]
Aggregate market value of the voting stock held by non-affiliates of registrant
as of May 31, 1996: $96,977,139..
Number of shares outstanding as of May 31, 1996: 5,612,544 shares of Common
Stock, $.10 par value.
Documents incorporated by reference: See Index of Exhibits, Financial Statement
Schedules and Reports on Form 8-K, located at pages 19 and F-1 of this report.
Total number of pages including cover - 33
PART I
Item 1. BUSINESS
Development of the Business
The Company was founded in 1961 as a manufacturer of scientific
measuring instruments for research applications. In 1968, the Company went
public under the name Thermo-Systems Inc. and in 1976 became TSI Incorporated.
In recent years, the Company has applied its research instrumentation technology
to industrial applications in order to address the needs of a variety of market
niches and became a diversified, precision instrumentation company.
Recent Corporate Developments
On May 1, 1995, the Company acquired Alnor Instrument Company in the
Chicago area, an $8.5 million manufacturer of instruments for air flow and
indoor air quality monitoring. This firm is synergetic with the Company's flow
measuring instruments, especially for measurements of velocity and other comfort
factors in building spaces for heating, ventilation and air conditioning
performance.
On October 1, 1995, the Company acquired Aerometrics, Inc. of
Sunnyvale, Ca., a $7 million manufacturer of instruments for fluid mechanics and
particle measurements in sprays. This addition enhances the capabilities of the
Company by adding product lines in both flow measuring and particle measuring
instruments.
Products
The Company develops, manufactures and markets two classes of measuring
instruments for a variety of market applications. The first involves the
measurements of fluid flow characteristics of gases and liquids and surface
motion of solid materials. The second involves measuring the presence of and
certain characteristics of small particles and/or gases in fluids or fluid
flows, such as those found in air pollution studies, workplace environments,
clean rooms or industrial processes. The Company's business is characterized by
many "niche" markets, wherein the utilization of a few basic measuring
technologies can satisfy the measurement needs in many different industrial and
research applications.
The applications for the Company's products can also be described by
considering two general market areas or drivers. These are the safety, comfort
and health of people (the working environment) and productivity and quality
improvements (industrial processes). Both of these cross numerous industries.
The percentage contribution to net sales for the Company's two classes
of products for the periods indicated was as follows:
Year Ended March 31,
Classes of Products 1996 1995 1994
------------------- ---- ---- ----
Flow measuring and surface motion instruments 65% 61% 64%
Particle & gas measuring instruments 35% 39% 36%
---- ---- ----
100% 100% 100%
Particle and gas measuring instruments recorded a 25 percent increase in net
sales in fiscal 1996 as compared with fiscal 1995, while net sales of fluid flow
and surface motion instruments increased 53 percent during the same period.
There was a shift in fiscal 1996 in the percentage of total net sales toward
fluid flow and surface motion instruments, mainly due to the two major
acquisitions made during fiscal 1996, which added more to this product class.
Also, sales of Portacount fit testers under a U.S. Army contract were lower in
fiscal 1996 than in fiscal 1995, which lowered the sales increase of particle
and gas measuring instruments.
Flow Measuring and Surface Motion Instruments
Product Technologies
The Company's flow and surface motion measuring instruments utilize
several measurement techniques, including thermal anemometry, laser-Doppler
velocimetry, particle-image velocimetry and several other techniques used in
certain types of products.
Thermal technology has been used in the Company's flow measuring
instruments since its earliest products were developed. A probe containing a
small electrically heated element is exposed to a flow. The cooling effect of
the flow on the element provides a measure of the velocity and/or flow rate in
gas or liquid. The instrument can then portray the flow rate in an analog
display or convert it into a digital signal for further processing by a
computer. The output signal can be used to monitor, analyze or control the flow
or velocity within a flow channel or process. The Company maintains an ongoing
development program to further enhance this technology and add companion
products and software for convenient signal analysis and data interpretation.
For over 20 years, the Company has been developing and producing
various flow measuring and surface motion measuring instruments which utilize a
laser based technology, generally called laser-Doppler velocimetry (using lasers
manufactured by others). These instruments use a laser beam and optical
measurement technique to measure velocity and movement, rather than a probe as
used with the thermal instruments. The laser instruments are used to obtain
measurements in locations where a probe would be destroyed or is undesirable
because it would disturb the flow of the liquid or gas being measured. This
technology continues to be enhanced in a variety of ways to meet new
applications. Reducing the size, increasing the ruggedness of instruments,
improving accuracy, improving signal processing techniques and allowing for more
than one measurement to be taken at a point in time are some of these
enhancements. Also, the Company has developed and is selling a variety of
user-friendly software packages to expand and enhance the application of these
instruments.
Through engineering development work, licensing and acquisition of
product lines, the Company has added the capability of providing instruments and
software packages that measure or map flow patterns over an area of flow around
objects, ect., by visual means. This area is referred to as particle-image
velocimetry because the technique is based on the simultaneous tracking of the
movement of numerous particles in the flow stream. Optical techniques are used
to show images of the flow patterns. This area has been emerging as an important
addition to flow measuring and analysis capability which the Company expects to
continue growing over the next few years.
With the acquisition in 1986 of Handar, in Sunnyvale, California, other
measurement techniques were added to the Company's capabilities, including "cup
and vane" and propeller-type wind speed measuring devices, for measuring the
characteristics of air and air flow. In fiscal 1996, a major new flow sensing
technology was introduced to improve on the widely-used cup-and-vane anemometer
for measuring wind speed and direction in outdoor environments. This patented
sensor utilizes ultrasonic technologies, involves no moving parts and can be
heated to prevent ice buildup when used at low temperatures.
The fiscal 1996 acquisition of Alnor Instrument Company added to the
Company's measurement technologies in the area of velocity using small
propellers and pressure differentials, temperature with thermocouple and
pyrometers, dew-point with condensation detectors and micromanometers for
pressure measurement.
Product Applications
Research applications for the Company's instruments tend to cover many
different industries and are usually the earliest application of any new
measuring technique. This research aspect of the Company's business continues to
point toward more specific industrial applications that become larger market
niches. Several industrially oriented flow measuring and surface motion market
niches have been pursued by the Company over the years using the Company's
developed and acquired basic technologies. These products and niches are
changing with time as continuing product improvements and new applications are
found.
Productivity and quality improvement applications of flow measuring and
surface motion instruments include:
- The Company's line of research and analytical instruments for
fluid mechanics, including thermal anemometers, laser-Doppler
velocimeters and particle image velocimeters are mostly used
for productivity and quality improvement of customers'
products and processes, such as imaging of velocity and
turbulence in wind tunnels, ducts and pipes and measurements
and imaging in gas turbine engines and automotive exhaust
gases to improve efficiency or lower pollution and noise.
- A major industrial application is an instrument line using
laser and optical techniques to measure surface speed and
length of aluminum, steel and similar materials for industrial
process control. This product line is performing well for
measurements in rolling mills and similar metals forming
operations. Applications to other materials processing have
also been developed including measurement of speed, length and
diameter in textile, fiber, paper and similar manufacturing.
Additional engineering work has been done during the past year
to adapt these instruments to measurement of speed and length
for wire and cable manufacturing.
Safety, comfort and health applications of flow measuring and surface
motion instruments include measurements of air speed or flow in building spaces
for heating, ventilation and air conditioning work; and measurement of air
movement and other parameters in the atmosphere. An outline of product lines and
niches for safety, comfort and health applications include the following:
- - A line of portable air velocity instruments to monitor air flow and air
movement in offices and industrial spaces. Ongoing development work has
added accuracy and convenience to these products and in fiscal 1996 the
Alnor acquisition added more products to this line of instruments,
making the Company more globally competitive for a wider range of
applications and prices.
- - Air flow sensors using thermal sensing techniques to monitor and/or
control air flow through laboratory fume hoods. A similar device
measures and controls static pressure in laboratories and other
controlled rooms like hospital isolation rooms by controlling the air
flow through the space. Engineering development work has continued
during the past year in order to improve performance of energy saving
and safety enhancement devices for hospital isolation rooms as well as
laboratories. These product lines were also broadened by the addition
of room pressure monitors manufactured by Alnor Instrument Company.
- - A new generation data collection platform used to collect and transmit
meteorological and environmental data was introduced during fiscal
1992. This platform is used in conjunction with the Company's
meteorology and related monitoring systems for outdoor environmental
measurements. During the past year additional software capability has
been added to enhance performance and to broaden applications to other
than meteorological and hydrological data collections.
- - Instruments that determine cloud height and visibility in moving air
masses using laser and optical techniques. These products are used for
meteorological applications at airports and other open areas. While
these products have been manufactured and sold for a number of years,
additional engineering work to enhance performance and broaden
applicability continued during fiscal 1996.
Particle and Gas Measuring Instruments
Product Technologies
The Company's particle and gas measuring instruments utilize a number
of different techniques to analyze various characteristics of small particles in
gases and liquids as well as the presence and amount of various gases in air. A
variety of instruments are offered to detect, measure, sample, generate and
count small particles and to detect and measure other gases in air.
With the acquisition of Transducer Research, Incorporated in fiscal
1993, the Company added to its particle measuring product lines the capability
for detection of gases that are important in measuring indoor air quality and
various toxic or polluting gases in outdoor environments.
In fiscal 1994, the Company's product lines for monitoring
contamination levels in clean rooms were sold to Particle Measuring Systems,
Inc. (PMS) of Boulder, Colorado. The Company is continuing, until December, 1998
or longer, subject to options, to manufacture some of the products for PMS on an
Original Equipment Manufacturer (OEM) basis.
During fiscal 1994, based on licensed technology, a new analytical
instrument, called a nephelometer, was introduced for measuring the presence of
particles in the atmosphere that affect the penetration of the sun's rays,
related to global warming research.
During fiscal 1995 and 1996, the Company received contracts to produce
its Aerodynamic Particle Size (APS) for the U.S. Army and U.S. Navy to be used
as an early detection device for sensing the presence of bio-hazard material in
the air. These contracts have continued during fiscal 1996 and included funding
for development work to further enhance the capabilities of the APS for these
applications.
During fiscal 1996 the Company acquired Aerometrics, Inc. which added
significant capability in the area of measuring characteristics of droplets such
as in fuel sprays, inhalants, water sprays, etc. The technology used is referred
to as phase-Doppler particle analysis.
Product Applications
Applications for particle and gas measuring instruments include a
variety of industrial and analytical instruments designed to monitor
contamination levels, to make measurements in aerosol generation studies, to
measure air pollution levels in buildings or in outside air, to measure the size
distribution of various powders, to measure toxic gases at waste sites, to
measure indoor air quality and to test for leaks in filters and similar media.
Many of the Company's particle and gas measuring instruments are used in
conjunction with computers (manufactured by others) which compile and interpret
the data obtained. Also, the Company has continued to develop and sell a variety
of user-friendly software packages to expand and enhance the applications of
these instruments.
Like the flow measuring and surface motion instruments, the Company has
expanded on research and analytical applications of its particle and gas
measuring instruments by pursuing industrially oriented niches over the past
several years.
An outline of these product lines and niches which apply to the area of
safety, comfort and health of people include the following:
- - An instrument that uses particle sensing techniques to measure for
leaks in face masks and respirators that result from inadequate fit,
called the PORTACOUNT(R) fit tester. The products are used in
industrial hygiene applications where people may be at risk from
exposure to hazardous environments. This product has been fully
developed and successfully marketed commercially. During fiscal 1993,
the product was packaged for military use by the U.S. Army and U.S.
Marines for fit testing of their gas masks and starting with fiscal
1994, production of the military version has continued through fiscal
1996. Shipments for fiscal 1997 are continuing under additional
contracts from German and U.S. defense agencies and additional
contracts are expected for periods beyond fiscal 1997.
- - A portable instrument has been added for indoor air quality
measurements to collect data on airborne particles (dust) in industrial
settings where people work.
- - With the addition of gas detecting sensors and instruments to this
product classification through the acquisition of Transducer Research,
Inc. in fiscal 1993, potential applications have expanded. During
fiscal 1995 and 1996, portable instruments were introduced to measure
various indoor air quality parameters including levels of carbon
dioxide to indicate the "sick building syndrome" levels; and to also
measure carbon monoxide. In fiscal 1996 instruments were added to
measure higher concentrations of carbon dioxide encountered in food and
beverage industries. Development work is continuing to add other gas
detecting instruments to these product lines.
For industrial applications where the Company's instruments are used
mainly for productivity and quality improvement:
- - Instruments that determine the efficiencies of filters and media using
particle sensing techniques to measure for leaks. This product line is
used for quality control by filter manufacturers and has been
manufactured and marketed for several years. Additional development
work occurred in fiscal 1996 to enhance and broaden the filter product
testing line.
- - Manufacturing, as an OEM supplier, instruments for monitoring the
particle contamination levels in air and other gases in industrial
clean room applications and residue in ultra-clean water, using
particle sensors that incorporate light scattering optical techniques.
These instruments are used by manufacturers of semiconductor devices,
pharmaceutical products and other products which require very low
contamination levels during critical manufacturing processes. Continued
engineering development in fiscal 1996 added to performance
capabilities of these instrument lines.
- - Instruments added with the Aerometrics acquisition measure the size,
speed and concentration of droplets in industrial sprays to assure
uniform quality of devices such as fuel injectors.
Raw Materials and Parts
The Company purchases most of its electronic components and materials
from suppliers in the United States and, generally, has not experienced problems
with availability. Some materials such as laser diodes and fibers for fiber
optics are imported. Import restrictions could impair availability of some of
these materials. Engineering design of the Company's products does not require
exotic parts or materials and the selection of readily available materials has
been an important design goal. The Company utilizes a vendor certification
program to help maintain the quality and timeliness on incoming parts. The
Company continues to seek and maintain alternative vendors and has generally
been able to locate alternative sources for materials during past periods of
short supply. A severe shortage of electronic parts could impair the Company's
ability to produce certain products but a broad and diversified product line
helps to alleviate this risk.
Customers
The Company sells to a broad range of customers throughout the world.
These customers include many industrial companies, educational institutions,
research organizations and agencies of the United States and foreign
governments.
Sales to defense customers accounted for about 10 percent of total net
sales in fiscal 1996, 15 percent in fiscal 1995 and 12 percent in fiscal 1994,
but accounted for no more than 10 percent of total sales for each of the prior
eight years. The increase in fiscal 1995 and fiscal 1994 were mainly due to
sales of PortaCount fit testers under the aforementioned U.S. military
contracts. The decrease in fiscal 1996 was due to a significantly lower level of
defense sales in the two companies acquired during fiscal 1996 and a lower level
of sales of the PortaCount fit testers to military customers.
Reduction or changes in federal spending may adversely affect the
Company's governmental and, to some extend, education sales. United States
governmental sales may be canceled at the government's convenience
Approximately 64 percent of the Company's sales during fiscal 1995 were
to domestic customers, with the balance of 36 percent to international
customers, mainly in Europe and the Pacific basin. Sales to international
customers consist principally of products manufactured in the United States.
Sales to international customers by classes of products, as a
percentage of the Company's net sales were as follows for the periods indicated:
Year Ended March 31
-------------------
Classes of Products 1996 1995 1994
------------------- ---- ---- ----
Flow measuring and surface motion 26% 23% 22%
Particle and gas measuring instruments 10% 8% 9%
---- ---- ----
36% 31% 31%
Overall, the Company's fiscal 1996 international net sales increased about 65
percent compared to fiscal 1995 and international sales of both product classes
increased at similar rates. From fiscal 1994 to fiscal 1995, international sales
increased about 6 percent and at similar rates for both classes of products. The
Company's fiscal 1996 export sales increased in part from the two acquisitions
previously referenced.
Further segment information about domestic vs foreign operations is
included under Note I of the Notes to Consolidated Financial Statements on page
23 of the Company's 1996 Annual Report to Shareholders (Exhibit 13, page F-8).
The decrease in net sales from fiscal 1994 to 1995 through foreign operations
did not reflect decreases in total foreign sales, but rather a shift toward more
of the foreign sales going through independent distributors. Refer to page 13 of
the Management's Discussion and Analysis of Results of Operations and Financial
Condition for added discussion regarding international sales..
Marketing
The Company markets its products through Company-employed sales
engineers who operate out of offices located in the United States and
international sales offices located in Europe. In addition, independent sales
representatives and distributors represent the Company in other domestic and
international markets. The Company uses promotional catalogs, technical
bulletins, seminars, displays, trade shows, insertions in catalogs of others and
advertising in trade journals to promote its products. The Company's sales
consist primarily of standard products as listed in its catalogs, although the
Company also sells specialized products designed to meet specific customer
requirements.
The nature of the Company's products requires a marketing approach that
is customer application oriented. Accordingly, sales engineers and independent
representatives are technically competent in a variety of engineering and
scientific disciplines as well as trained in the market niches and product lines
on which they concentrate. The sales force provides the Company with information
for development of new products and identification of new markets. In addition
to direct sales efforts and after-sales servicing, the Company provides its
customers with technical support, advice, training and application information
related to the Company's products.
At March 31, 1996, the Company's backlog of orders was approximately
$30,007,000 compared to $11,364,000 at March 31, 1995 and $12,514,000 at March
31, 1994. The Company estimates that over 90% of the 1996 backlog will be
shipped by March 31, 1997.
As of March 31, 1996, about $12 million of the Company's backlog was
due to the aforementioned military contracts for PortaCount fit testers.
Competition
The Company's products compete with products utilizing different
technologies as well as directly competitive products. For example, the
Company's fluid flow measuring instruments which use thermal measurement
techniques compete with instruments utilizing differential pressure or other
measurement techniques. New products could be introduced by competitors that
would make existing Company products obsolete. The Company's ability to compete
is dependent upon its ability to develop or license products in a changing
technological environment. The Company's competitive strength often comes from
its ability to fit instruments to new applications on an ongoing basis such that
new applications or market niches replace those where needs have changed, as
well as its ability to grow by adding more niches.
Competitive forces vary in accordance with the various market niches
into which the Company sells products. Competition can best be described by
starting with the two product classes and further categorizing product types in
each class, as shown in the table that follows. In the table, when "significant
market share" is indicated, it is due to the Company's long term presence in a
niche or because the product is so unique that it may, essentially, be the only
product available to make the measurement required, thus creating its own niche.
The exact number of international competitors is not always known, particularly
in cases where the Company does not have international experience with that
product type. The Company typically confronts the same group of competitors in
about 20% of its total sales.
<TABLE>
<CAPTION>
COMPETITORS COMPANY'S MARKET SHARE
Major Minor Significant Minor
Product Type Int'l Domestic Int'l Domestic Share Share
- --------------------------------------------------------------------------------------------
Flow Measuring and Surface Motion Instruments
- ---------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Flow Research 1 - 4 2 X
Industrial Flow 3 2 more more X*
than 6 than 6
Lab/Room Air
Flow Control - 3 - 3 X*
Surface Motion 2 - 2 1 X
Meteorology/
Environmental
Monitoring 4 3 more more X*
than 6 than 6
Particle & Gas Measuring Instruments
- ------------------------------------
Particle Research 2 2 more more X*
than 6 than 6
Clean Room
Monitoring 3 3 more more X*
than 6 than 6
Respirator
Fit Test 1 - - 2 X
Indoor Air
Quality 2 4 more more X*
than 6 than 6
Spray
Measurements 1 - 2 2 X
Filter Testing - 1 2 - X
- ------
</TABLE>
*Market share varies considerably by specific product within the product type
Research and Product Development
The Company is engaged in research and development activities
principally for the development of proprietary products. These activities, which
occur in all aspects of the Company's business, generally consist of the
development, design and testing of potential new products with emphasis on
applied (as distinct from basic) research. Approximately 75% of the Company's
engineering and technical staff are engaged in research and development
activities on a full-time basis. The Company also engages in some contract
research work for others that varies from time to time. This type of contract
work generally relates to the development of a future instrument or product
enhancements to better meet market needs and applications. In addition, the
Company utilizes various outside consultants in the research and development
area. In fiscal year 1996, the Company spent approximately $8,993,000 (13.0% of
net sales) in research and product development activities, compared to
$7,196,000 (14.7% of net sales) and $6,630,000 (14.5% of net sales) in fiscal
1995 and 1994, respectively.
Patents and Licenses
One or more aspects of several products currently marketed by the
Company are covered by patents owned by the Company or licensed to the Company
by outside inventors. While the Company believes that patent protection is
important to its business, it does not believe that the expiration or
invalidation of any particular patent would have a materially adverse effect
upon its business. All licenses held with respect to technology used by the
Company are believed to be fully enforceable. The loss of any one of several
licenses held by the Company would probably not have significant adverse effect
upon the Company.
Employees
As of March 31, 1996, the Company had 510 employees. The Company's
employees are not represented by a union, except at Alnor Instrument Company, a
wholly owned subsidiary acquired in fiscal 1996, where about 35 production
employees are represented by an in-house union. There has never been a work
stoppage due to labor difficulties and the Company considers its relations with
employees to be satisfactory at all locations.
Item 2. PROPERTIES
The Company's general offices and main manufacturing facilities are
located at 500 Cardigan Road, Shoreview, Minnesota 55126. This building contains
approximately 140,000 square feet. It was constructed for, and has been in use
by the Company since 1976 and is well suited to the Company's operations. This
building was built in three parts, the first being completed in fiscal 1977, the
second part in fiscal 1981 and the third part completed in fiscal 1996. During
fiscal 1996 Company completed a project to build 58,000 square feet of space as
a two story addition, bringing the total to about 140,000 square feet of space
at the Shoreview facility. This project, along with related furnishings, product
equipment and improvements in the existing space had a total cost of about $4
million during fiscal years 1995 and 1996. The Company owns additional land at
the same location on which to build about 80,000 square feet of additional space
in the future as required.
The Company also leases space for subsidiary operations and several
sales offices.
Item 3. LEGAL PROCEEDINGS
No material legal proceedings were pending or threatened against the
Company or its subsidiaries as of March 31, 1996.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year ended
March 31, 1996, for a vote by the shareholders.
PART II
Item 5. MARKET FOR REGISTRANTS' COMMON EQUITY & RELATED MATTERS
The information in the sections titled "Stock and Dividend Data" and
"Stock Data" on page 11 of the Company's 1996 Annual Report to Shareholders is
incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA
The information in the section titled "Eleven-Year Financial Data
Summary" for the year 1992 through 1996 on page 10 of the Company's 1996 Annual
Report to Shareholders is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The information in the section titled "Management Discussion and
Analysis of Results of Operations and Financial Condition" on pages 12 through
15 of the Company's 1996 Annual Report to Shareholders is incorporated herein by
reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and notes thereto on pages 16
through 23 of the Company's 1996 Annual Report to Shareholders is incorporated
herein by reference.
The following supplemental financial data are included herein and
should be read in conjunction with the consolidated financial statements in the
Company's 1996 Annual Report to Shareholders:
Schedule VIII: Valuation and Qualifying Accounts, page F-4.
Schedule X: Supplementary Income Statement Information, page 3F-5
Item 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The information concerning the Company's directors set forth
in the Company's Proxy Statement for 1996 Annual Meeting of
Shareholders, dated June 25, 1996, is incorporated by
reference herein.
(b) The executive officers of the Company are:
Position with the Company
Name Age and Business Experience
---- --- -----------------------
Leroy M. Fingerson 63 Chairman of the Board of Directors and Chief
Executive Officer. Dr. Fingerson has been
Chief Executive Officer of the Company since
1961 and Chairman of the Board since 1986.
James E. Doubles 55 President and Chief Operating Officer since
1992 and a Director. Executive Vice
President and Chief Operating Officer from
1989 to 1992.
Lowell D. Nystrom 60 Vice President, Treasurer and Chief
Financial Officer and a Director. Mr.
Nystrom has been Vice President, Treasurer
and Chief Financial Officer of the Company
since 1961.
(c) Section 16(a). See the Company's Proxy Statement for 1996
Annual Meeting of Shareholders, dated June 25, 1996, which is
incorporated herein by reference, referring to the caption
"Compliance with Section 16(a) of the Securities Exchange Act
of 1934".
(d) There are no family relationships between and among directors
or officers.
(e) Business experience of Directors may be found in the Company's
Proxy Statement for 1996 Annual Meeting of Shareholders, dated
June 25, 1996, which is incorporated herein by reference.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference
from Proxy Statement for 1996 Annual Meeting of Shareholders, dated June 25,
1996, under the caption "Executive Compensation".
Item 12. PRINCIPAL SHAREHOLDERS
The information required by Item 12 is incorporated herein by reference
from the Company's Proxy Statement for 1996 Annual Meeting of Shareholders,
dated June 25, 1996, under the caption "Principal Shareholders".
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) See accompanying Index to Financial Statements on page F-1.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of
fiscal 1996.
(c) Exhibits included herein:
Exhibit 3a: Restated Articles of Incorporation as
amended in November, 1984 and October, 1986,
hereby incorporated by reference.
Exhibit 3b. Restated Bylaws adopted June, 1987, hereby
incorporated by reference.
Exhibit 10.a* TSI Incorporated Incentive Stock
Option Plan of 1982, incorporated by
reference from Form S-8, File No. 1-91697,
June 14, 1984.
Exhibit 10.b:* TSI Incorporated Employee Stock
Purchase Plan of 1987, incorporated by
reference from Form S-8, File No. 33-23247,
July 25, 1988.
Exhibit 10.c:* TSI Incorporated Stock Option Plan of
1988, incorporated by reference from Form
S-8, File No. 33-20627, August 22, 1989.
Exhibit 10.d:* TSI Incorporated Stock Option Plan of
1992, incorporated by reference from Form
S-8, File No. 33-66194, July 19, 1993.
Exhibit 10.e:* TSI Incorporated Stock Purchase Plan
of 1994, incorporated by reference from Form
S-8, File No. 33-86468, November 17, 1994.
Exhibit 11: Computation of Per Share Earnings
Exhibit 13: The Company's 1996 Annual Report to
Shareholders for the fiscal year ended March
31, 1996.
Exhibit 21: Subsidiaries of the Company
Exhibit 23: Consent of Independent Auditors
- -------
* Indicates management contract or compensation plan or arrangement required to
be filed as an exhibit.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: June 26, 1996 TSI INCORPORATED
/s/ Leroy M Fingerson
Leroy M. Fingerson, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange act of 1934, this report
has been signed below by the following persons on behald of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Leroy M. Fingerson Chief Executive Officer and a Director June 26, 1996
Leroy M. Fingerson (Principal Executive Officer)
/s/ Lowell D. Nystrom Vice President, Chief Financial Officer June 26, 1996
Lowell D. Nystrom and a Director (Principal Financial and
Accounting Officer)
/s/ James E. Doubles President, Chief Operating Officer and June 26, 1996
James E. Doubles Director
/s/ Robert F. Gallagher Controller and Corporate Officer June 26, 1996
(Principal Accounting Officer)
/s/ John F. Carlson Director June 26, 1996
John F. Carlson
/ / Frank D. Dorman Director June 26, 1996
Frank D. Dorman
/ / Kenneth J. Roering Director June 26, 1996
Kenneth J. Roering
/s/ Donald M. Sullivan Director June 26, 1996
Donald M. Sullivan
/s/Lawrence J. Whalen Director June 26, 1996
Lawrence J. Whalen
</TABLE>
TSI INCORPORATED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
A. STATEMENTS OF REGISTRANT
No separate financial statements of the Registrant are included herein
as the Registrant is primarily an operating company. All subsidiary
companies are wholly owned, and their indebtedness to any person other
than the Registrant or its consolidated subsidiaries is, in the
aggregate, less than 5% of consolidated assets at March 31, 1996. The
financial statements of the Registrant and all subsidiaries are
included in the consolidated financial statements.
B. CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to the consolidated financial statements in the
Company's 1996 Annual Report to Shareholders which are incorporated
herein by reference in accordance with Rule 12b-23 under the Securities
Exchange Act of 1934 and attached hereto.
Annual
Report 10-K
Page Page
---- ----
Quarterly Financial Information (Unaudited) 16 -
Consolidated Statements of Earnings for the Years Ended 16 -
March 31, 1996, 1995 and 1994
Consolidated Balance Sheets - March 31, 1996 and 1995 17 -
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1996, 1995, and 1994. 18 -
Consolidated Statements of Shareholders' Equity for Years
Ended March 31, 1996, 1995 and 1994. 19 -
Notes to Consolidated Financial Statements 19 -
Independent Auditors' Report 24 -
C. INDEPENDENT AUDITORS' REPORT
ON SCHEDULES - F-3
D. CONSOLIDATED SCHEDULES
Schedule Description
- -------- -----------
VIII Valuation and Qualifying Accounts F-4
X Supplementary Income Statement Information F-5
All schedules except those listed above have been omitted as not required, not
applicable, or the information required therein is contained in the financial
statements or the footnotes thereto.
Independent Auditors' Report
The Board of Directors and Shareholders
TSI Incorporated
Under date of May 17, 1996, we reported on the consolidated balance sheets of
TSI Incorporated and subsidiaries as of March 31, 1996 and 1995, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the years in the three-year period ended March 31, 1996 as contained in
the 1996 annual report to shareholders. These consolidated financial statement
and our report thereon are incorporated in the annual report on Form 10-K for
the year 1996. In connection with our audits of the aforementioned consolidated
financial statements, we also have audited the related financial statement
schedules as listed in the accompanying index (see Item 8). These financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
Minneapolis, Minnesota /s/ KPMG Peat Marwick LLP
May 17, 1996
<TABLE>
<CAPTION>
Schedule VIII: VALUATION AND QUALIFYING ACCOUNTS
TSI INCORPORATED AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ---------------------------------------------------------------------------------------
Additions
(1) (2) Bad debts
Description Balance Charged to Charged charged Balance of
beginning cost and to other against end of
of Period expenses accounts reserve Period
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended
March 31, 1996
Deducted from
Asset Account:
Allowance for
doubtful accounts: $142,000 $59,000 $96,000* $ 30,000 $267,000
Year ended
March 31, 1995
Deducted from
Asset Accounts:
Allowance for
doubtful accounts: $183,000 $27,000 $34,000 $102,00 $142,000
Year ended
March 31, 1994
Deducted from
Asset Accounts:
Allowance for
doubtful accounts: $133,000 $50,000 -- -- $183,000
- ----------------
*Added in acquisitions
</TABLE>
<TABLE>
<CAPTION>
Schedule X: SUPPLEMENTARY INCOME STATEMENT INFORMATION
TSI INCORPORATED AND SUBSIDIARIES
- --------------------------------------------------------------------------------
COL. A COL. B
- --------------------------------------------------------------------------------
Charged to Costs and Expenses
Item Year Ended March 31,
1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Advertising $1,664,000 $1,086,000 $897,000
- --------------------------------------------------------------------------------
</TABLE>
Amounts for royalties, amortization on intangible assets, taxes other than
payroll and income, and maintenance and repairs are not presented as such
amounts are less than 1% of net sales.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
11 Computation of Per Share Earnings F-7
13 Annual Report to Shareholders for the F-8
fiscal year ended March 31, 1996
21 Subsidiaries of the Company F-9
23 Auditors' Consent F-10
<TABLE>
<CAPTION>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
TSI INCORPORATED AND SUBSIDIARIES
Year Ended March 31
Primary 1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Average shares outstanding 5,358,415 5,151,012 5,083,462
Net effect of dilutive stock options, based
on the treasury stock method using average
market price 229,230 157,159 98,700
---------- ---------- ----------
TOTAL 5,587,645 5,308,170 5,182,162
---------- ---------- ----------
Net Earnings $5,482,040 $3,432,079 $3,199,093
---------- ---------- ----------
Per Share Amounts $ .98 $ .65 $ .62
---------- ---------- ----------
Full Diluted
Average shares outstanding 5,358,415 5,151,012 5,083,462
Net effect of dilutive stock options,
based on the treasury stock method using
the year-end market price, if
higher than the average market price 319,489 175,795 182,451
---------- ---------- ----------
TOTAL 5,677,904 5,326,807 5,265,913
---------- ---------- ----------
Net Earnings $5,482,040 $3,432,079 $3,199,093
---------- ---------- ----------
Per Share Amounts $ .97 $ .64 $ .61
---------- ---------- ----------
</TABLE>
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS FOR THE
FISCAL YEAR ENDED MARCH 31, 1996
ELEVEN-YEAR FINANCIAL DATA (1)
(thousands of dollars unless otherwise indicated)
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
NET SALES $69,233 $48,903 $43,979 $40,589 $40,293 $39,660 $35,916
GROSS PROFIT 38,491 28,566 25,301 22,877 22,880 23,491 21,402
% OF SALES 55.6 58.4 57.5 56.4 56.8 59.2 59.6
RESEARCH AND DEVELOPMENT 8,993 7,196 6,360 5,847 6,112 5,538 4,535
% OF SALES 13.0 14.7 14.5 14.4 15.2 14.0 12.6
SG & A 21,362 16,657 15,076 14,885 14,494 14,167 13,548
% OF SALES 30.9 34.1 34.3 36.7 36.0 35.7 37.7
OPERATING INCOME 8,136 4,714 3,864 2,145 2,275 3,786 3,319
% OF SALES 11.8 9.6 8.8 5.3 5.6 9.5 9.2
NET EARNINGS 5,482 3,432 3,199 2,344 1,830 2,660 2,295
% OF SALES 7.9 7.0 7.3 5.8 4.5 6.7 6.4
EARNINGS PER SHARE .98 .65 .62 .45 .33 .48 .41
FINANCIAL POSITION
CURRENT RATIO 3.1 3.9 3.8 3.6 3.9 3.2 3.4
WORKING CAPITAL $18,498 $16,855 $15,783 $13,365 $14,615 $13,275 $12,461
TOTAL ASSETS 42,512 32,167 28,450 25,661 25,894 26,681 24,900
LONG-TERM DEBT 0 0 0 0 888 965 1,202
SHAREHOLDERS' EQUITY 33,598 26,342 22,839 20,335 19,918 18,943 17,800
SHAREHOLDERS' EQUITY PER SHARE 6.01 5.05 4.47 3.95 3.71 3.54 3.22
OTHER DATA
WEIGHTED AVG. NUMBER OF SHARES (THOUSANDS)(2) 5,588 5,308 5,182 5,266 5,571 5,544 5,699
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT(3) $ 3,931 $ 3,124 $ 1,204 $ 1,138 $ 1,204 $ 1,057 $ 1,439
DEPRECIATION AND AMORTIZATION 1,739 1,282 1,274 1,143 1,161 1,128 1,193
BACKLOG OF ORDER 30,007 11,364 12,514 6,109 8,393 9,803 7,418
RETURN ON BEGINNING SHAREHOLDES' EQUITY(%) 20.8 15.0 15.7 11.8 9.7 14.9 14.3
RETURN ON AVERAGE TOTAL ASSETS(%) 15.0 11.3 12.2 9.4 7.0 10.7 9.6
(TABLE CONTINUED FROM ABOVE)
1989 1988 1987 1986
OPERATIONS
NET SALES $33,733 $29,294 $23,080 $19,377
GROSS PROFIT 19,414 17,047 13,399 11,282
% OF SALES 57.6 58.2 58.1 58.2
RESEARCH AND DEVELOPMENT 4,461 4,813 3,551 3,417
% OF SALES 13.2 16.4 15.4 17.6
SG & A 12,068 10,308 7,587 6,439
% OF SALES 35.8 35.2 32.9 33.2
OPERATING INCOME 2,915 1,926 2,261 1,426
% OF SALES 8.6 6.6 9.8 7.4
NET EARNINGS 1,927 1,518 1,620 1,359
% OF SALES 5.7 5.2 7.0 7.0
EARNINGS PER SHARE .35 .27 .29 .25
FINANCIAL POSITION
CURRENT RATIO 3.4 3.7 3.5 5.2
WORKING CAPITAL $12,609 $10,969 $ 9,892 $10,517
TOTAL ASSETS 23,675 21,361 20,300 16,946
LONG-TERM DEBT 838 1,085 1,835 1,565
SHAREHOLDERS' EQUITY 16,073 14,562 13,344 11,937
SHAREHOLDERS' EQUITY PER SHARE 2.91 2.66 2.42 2.19
OTHER DATA
WEIGHTED AVG. NUMBER OF SHARES (THOUSANDS)(2) 5,586 5,621 5,614 5,549
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT(3) $ 782 $ 871 $ 707 $ 715
DEPRECIATION AND AMORTIZATION 1,127 954 926 767
BACKLOG OF ORDER 6,724 6,959 5,670 4,444
RETURN ON BEGINNING SHAREHOLDES' EQUITY(%) 13.2 11.4 13.6 12.4
RETURN ON AVERAGE TOTAL ASSETS(%) 8.7 7.4 8.9 8.5
</TABLE>
(1) Data are based on results from continuing operations where applicable.
Applicable earnings, stock and dividends declared per share data for all
prior years shown have been retroactively adjusted to reflect the
three-for-two stock splits effective August 17, 1994 and May 28, 1991.
(2) As used for computation of earnings per common share.
(3) In fiscal years 1996 and 1995, a major plant expansion and remodeling
project accounted for $2.5 million and $1.7 million, respectively, as
part of the Additions to Property, Plant and Equipment.
INVESTOR INFORMATION
STOCK AND DIVIDEND DATA
TSI common stock is traded in the National Market System of the NASDAQ
over-the-counter market under the symbol TSII. Stock price quotations are
printed daily in The Wall Street Journal and other major newspapers. During the
fiscal year ended March 31, 1996, average trading volume of TSI common stock was
126,000 shares per month, based on NASDAQ records.
There were 5,612,544 shares of TSI common stock outstanding as of May 31,
1996 of which 19 percent were owned by officers and directors of TSI. There were
574 shareholders of record on that date and an additional number of about 1,100
shareholders for whom securities firms acted as nominees.
The range of market prices as reported by NASDAQ, dividends declared and
the trailing 12-month closing price/earnings ratio for each quarterly period are
shown in the table below. TSI has a policy of paying dividends quarterly in May,
August, November and February. Dividends have been paid each year since 1975. As
of May 31, 1996, the quarterly dividend rate was $.04 per share.
STOCK DATA
Trailing
Market Range Dividend 12-Month
FISCAL 1996 HIGH LOW CLOSE DECLARED P/E RATIO
- ----------- ---- --- ----- -------- ---------
FOURTH QUARTER $18 3/8 14 17 3/4 $ .040 18.1
THIRD QUARTER 15 1/2 8 15 .040 23.5
SECOND QUARTER 12 7 11 1/4 .030 19.7
FIRST QUARTER 9 1/2 7 9 .030 14.8
TRAILING
MARKET RANGE DIVIDEND 12-MONTH
FISCAL 1995 HIGH LOW CLOSE DECLARED P/E RATIO
- ----------- ---- --- ----- -------- ---------
FOURTH QUARTER $ 9 1/2 7 3/4 9 1/8 $ .030 14.0
THIRD QUARTER 9 7 8 1/4 .030 10.0
SECOND QUARTER 9 1/4 5 1/4 8 3/4 .030 10.0
FIRST QUARTER 9 1/8 5 8 1/8 .030 9.5
[BAR CHART]
Dividends Per Share
(dollars)
1986 .035
1987 .035
1988 .045
1989 .049
1990 .067
1991 .083
1992 .107
1993 .107
1994 .107
1995 .120
1996 .140
MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
INTRODUCTION
The following discussion supplements the information presented in the
consolidated financial statements beginning on page 16. This information may be
better understood in several instances by referring to the accompanying graphs.
Additional data are given in the Eleven-Year Financial Data table on pages 10
and 11. The Company's Board of Directors declared a three-for-two stock split in
the form of a stock dividend, effective August 17, 1994. Earnings per share data
for all prior years have been restated to reflect this split.
RESULTS OF OPERATIONS
NET SALES Net sales totaled $69,233,000 in fiscal 1996, an increase of
41.6 percent from $48,903,000 in 1995. Sales in fiscal 1994 were $43,979,000.
All of TSI's basic product lines experienced sales increases in fiscal 1996. The
Net Sales graph on this page shows how sales have grown under the Company's
major market drivers over the past five years.
[bar chart]
Net Sales
(millions of dollars)
Safety, Comfort Productivity
and Health and Quality Net
of People Improvement Sales
1992 55% 45% $40.3
1993 60% 40% $40.6
1994 63% 37% $44.0
1995 68% 32% $48.9
1996 66% 34% $69.2
In fiscal 1996, sales of products for Safety, Comfort and Health of
People increased 38 percent, and represented 66 percent of total sales. These
increases included indoor air quality instruments, indoor air distribution
instruments, meteorologic and hydrologic instruments for outdoor monitoring and
analytical instruments for research and testing involving submicron particles.
In fiscal 1995, this area represented 68 percent of total sales.
In fiscal 1996, about $3.0 million in sales of Safety, Comfort and Health
products came from contracts with the U.S. Army for PortaCount(R) fit testers
for respirators and gas masks, down from $5.0 million in fiscal 1995 and also
down from $3.5 million in fiscal 1994.
Products for Productivity and Quality Improvement increased 49 percent,
becoming 34 percent of total sales. In fiscal 1995, this area represented 32
percent of total sales. Increased fiscal 1996 sales of Productivity and Quality
products occurred for fluid mechanics instruments, which had experienced a
decrease in fiscal 1995. Sales of LaserSpeed(R) speed and length instrumentation
and sales of automated test stands for filter testing showed increases as well.
For fiscal 1996, sales of Safety, Comfort and Health products were
increased by the Alnor Instrument Company acquisition in May, 1995 and sales of
Productivity and Quality products were increased by the Aerometrics, Inc.
acquisition in October, 1995. Without these acquisitions, sales of Safety,
Comfort and Health products grew 15 percent and sales of Productivity and
Quality products grew 21 percent during fiscal 1996.
[bar chart]
International Sales
(percent of sales)
1992 40
1993 38
1994 31
1995 31
1996 36
The Company's international net sales increased 65 percent, or $9.8
million to $24.8 million, which was 36 percent of sales in fiscal 1996 compared
to $15.0 million, or 31 percent of sales, in fiscal 1995 and $13.7 million, or
31 percent in fiscal 1994. Domestic net sales increased 31 percent, or $10.5
million, during fiscal 1996. Higher international sales during fiscal 1996 came
in each of the major product lines. Without the two previously-referenced
acquisitions, which had a lower percentage of international sales, the increase
in international sales would have been 45 percent in fiscal 1996, representing
38 percent of total sales.
Since sales to government agencies represent a significant portion of the
Company's sales, it is important to consider the potential effects of changes in
government spending. Sales to federal and state agencies, including defense,
comprised 21 percent of the Company's net sales for fiscal 1996, compared with
32 and 29 percent for fiscal 1995 and 1994, respectively. This decrease for
fiscal 1996 was due to lower sales of PortaCount Respirator Fit Testers under
contracts with the U.S. Army, a significantly larger increase in international
sales than domestic sales and a normally lower percentage of sales to government
agencies for the two acquisitions made during fiscal 1996. Due to the Company's
diverse line of products, sales occur in a wide range of U.S. and state
government agencies. A major contributor to the higher percentage of government
sales which occurred during fiscal 1995 and 1994, was shipments on the
previously-mentioned military contracts. With similar contracts in backlog for
higher shipments in fiscal 1997, sales to government agencies could run at a
higher percentage of the total for fiscal 1997 compared to fiscal 1996.
[bar chart]
Gross Profit Margin
(percent of sales)
1992 58.8%
1993 56.4%
1994 57.5%
1995 58.4%
1996 55.6%
GROSS PROFIT Gross Profit was $38,491,000 in fiscal 1996, or 55.6 percent
of net sales, compared with $28,566,000, or 58.4 percent of net sales in fiscal
1995 and $25,301,000, or 57.5 percent, in fiscal 1994. Over the past several
years, the Company's gross profit rate has generally been in a range of about 57
to 60 percent. In fiscal 1996, gross profit was below that range, mainly due to
the newly acquired companies, which normally operate with a lower gross margin
as well as lower operating expenses. If these two acquisitions are not included,
gross profit margin would be 58.6 percent of sales for fiscal 1996. Hence, with
the two new acquisitions included, the gross profit rate in the future may be 2
to 3 percent lower, as a percentage of sales.
[bar chart]
R&D Expenditures
(percent of sales)
1992 15.2%
1993 14.4%
1994 14.5%
1995 14.7%
1996 13.0%
OPERATING EXPENSES Research and product development expenses were 13.0
percent of net sales in fiscal 1996, as compared to 14.7 percent for 1995 and
14.5 percent in fiscal 1994. Research and development expenses would have been
13.9 percent of sales without the two 14 Management's Discussion and Analysis
referenced acquisitions. For the past eight years, the Company's research and
product development expenses have ranged from about 12 to 15 percent of net
sales. Fiscal 1997 research and development expenses are expected to again be in
this range. The company has a strong commitment to long-term growth through
research and product development, which has continued to enhance product
offerings in most of the Company's market niches during the past five years, and
is expected to also result in sales growth in future years.
[bar chart]
Selling & Administrative
Expenditures
(percent of sales)
1992 36.0%
1993 36.7%
1994 34.3%
1995 34.1%
1996 30.9%
Selling expenses were 23.3 percent of net sales in fiscal 1996, 26.4
percent in fiscal 1995 and 26.1 percent in fiscal 1994. Fiscal 1996 selling
expenses would have been 24.7 percent of sales without the two acquisitions,
which is a lower percentage than recent years, mainly due to a faster rate of
sales increase without an accompanying increase in fixed costs.
Administrative expenses were 7.6 percent in fiscal 1996, compared to 7.7
percent in fiscal 1995 and 8.1 percent in fiscal 1994. The Company expects
administrative costs to continue in a normal range of 7 to 9 percent for fiscal
1997.
[bar chart]
Operating Income
(millions of dollars)
1992 2.27
1993 2.15
1994 3.86
1995 4.71
1996 8.14
OTHER INCOME Other income totaled $298,000 in fiscal 1996, compared with
$409,000 in fiscal 1995 and $835,000 in fiscal 1994. Other income was lower in
fiscal 1996 mainly due to lower investment income because cash balances and
interest rates were lower. The major element of other income in fiscal 1995 was
investment income, while the major factor in fiscal 1994 was net gain from the
divestiture of the Company's product line for clean room monitoring.
PROVISION FOR INCOME TAXES The provision for income taxes was $2,952,000,
or 35 percent of pretax earnings in fiscal 1996. This compares to provisions of
$1,691,000, or 33 percent of pretax earnings, in fiscal 1995, and $1,500,000, or
32 percent of pretax earnings, in fiscal 1994. The fiscal 1997 effective tax
rate is expected to again be in the range of 33 to 35 percent of pretax
earnings, assuming no significant changes in the tax laws. See Note G on page 22
for additional information.
[bar chart]
Net Earnings
(millions of dollars)
1992 1.83
1993 2.34
1994 3.20
1995 3.43
1996 5.48
NET EARNINGS Net Earnings were $5,482,000, or $.98 per share, in fiscal
1996. This was an increase of 59.7 percent from $3,432,000, or $.65 per share,
in fiscal 1995 and $3,199,000, or $.62 per share in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
CASH AND CASH EQUIVALENTS Cash and cash equivalents decreased by
$8,863,000 during fiscal 1996 to $688,000 at March 31, 1996. The major factors
in the decrease were the $5.8 million of cash used in making two major
acquisitions and $3.9 million of additions to property, plant and equipment,
about $2.5 million of which was for the completion of a new addition and
remodeling of the Company's headquarters building.
Net cash provided by operating activity totaled $596,000 in fiscal 1996,
compared with $5,841,000 in fiscal 1995 and $4,503,000 in fiscal 1994.
Significant decreases in cash provided by operating activities in fiscal 1996
came from increased receivables and inventories. Receivables increased
significantly due to timing of collection on the military contracts previously
mentioned and higher sales volume, particularly near the end of the fiscal
period. Inventory increased due to the large increase in backlog of orders and
purchases made to fulfill longer-term contracts.
[bar chart]
Current Ratio
1992 3.9
1993 3.6
1994 3.8
1995 3.9
1996 3.1
Management believes internally-generated funds and short-term borrowings
on existing credit lines will provide adequate resources to support operations
through fiscal 1997.
CURRENT ASSETS AND LIABILITIES Accounts receivable increased by
$8,801,000 to $15,534,000 at March 31, 1996. This increase in fiscal 1996 came
from $3,566,000 added by the two acquisitions referenced previously and the
remaining $5,235,000 mostly from significantly higher sales rates.
Working capital rose $1,643,000 to $18,498,000 at March 31, 1996. The
current ratio was 3.1 compared to 3.9 at the end of fiscal 1995.
The Company has two short-term lines of credit totaling $2,500,000.
During the second half of fiscal 1996, following the Aerometrics, Inc.
acquisition, the Company borrowed amounts up to $1,500,000 against one of these
lines of credit to fund short-term cash fluctuations, but there were no loan
balances as of March 31, 1996. The Company had no long-term debt at March 31,
1996 or 1995.
[bar chart]
Long-Term Debt-to-Equity-Ratio
1992 .044
1993 0
1994 0
1995 0
1996 0
STOCK REPURCHASE As of March 31, 1996, the Company has authority to
repurchase a total of 223,300 shares under plans previously approved by its
Board of Directors. No shares were repurchased during fiscal 1996 or fiscal
1995.
IMPACT OF ACCOUNTING STANDARDS
The Company was not required to nor chose to adopt any new accounting
standards during fiscal 1996 that had any significant impact on the financial
statements. In fiscal 1997, the Company intends to adopt the disclosure
provisions of the Financial Accounting Standards Board Statement No. 123,
accounting for Stock-Based Compensation, while continuing to account for options
and other stock-based compensation using the intrinsic value-based method.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
TSI Incorporated and Subsidiaries
YEAR ENDED MARCH 31 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net sales $69,233,244 $48,902,605 $43,978,899
Cost of products sold 30,741,891 20,336,422 18,678,155
----------- ----------- -----------
GROSS PROFIT 38,491,353 28,566,183 25,300,744
Operating expenses
Research and product development 8,992,519 7,195,547 6,360,384
Selling 16,134,498 12,907,365 11,494,774
Administrative 5,227,992 3,749,488 3,581,515
----------- ----------- -----------
30,355,009 23,852,400 21,436,673
----------- ----------- -----------
OPERATING INCOME 8,136,344 4,713,783 3,864,071
Other income -- Note C 297,696 409,296 835,022
----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 8,434,040 5,123,079 4,699,093
Provision for income taxes -- Note G 2,952,000 1,691,000 1,500,000
----------- ----------- -----------
NET EARNINGS $ 5,482,040 $ 3,432,079 $ 3,199,093
=========== =========== ===========
EARNINGS PER COMMON SHARE $ .98 $ .65 $ .62
=========== =========== ===========
Weighted average number of shares for
computation of earnings per common share 5,587,645 5,308,170 5,182,163
</TABLE>
See notes to consolidated financial statements
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL INFORMATION
TSI Incorporated and Subsidiaries (Unaudited)
Following is a summary of unaudited quarterly results (see Note D).
FISCAL 1996 1ST QTR 2ND QTR 3RD QTR 4TH QTR TOTAL
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET SALES $13,769,918 $14,573,940 $20,730,421 $20,158,965 $69,233,244
GROSS PROFIT 7,920,078 8,256,366 10,871,066 11,443,843 38,491,353
NET EARNINGS 744,102 750,844 1,874,967 2,112,127 5,482,040
NET EARNINGS PER SHARE .14 .14 .33 .37 .98
Fiscal 1995
- ----------------------------------------------------------------------------------------------------
Net Sales $11,983,020 $12,159,348 $13,715,960 $11,044,277 $48,902,605
Gross Profit 7,297,019 7,224,284 7,920,823 6,124,057 28,566,183
Net Earnings 936,015 942,177 1,290,089 263,798 3,432,079
Net Earnings Per Share .18 .18 .24 .05 .65
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
TSI Incorporated and Subsidiaries
MARCH 31 1996 1995
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 688,055 $ 9,551,552
Accounts receivable, less allowance of
$237,000 and $142,000, respectively 15,533,541 6,732,602
Prepaid expenses 310,483 222,629
Inventories
Finished products 2,462,381 1,699,460
Work-in-process 1,782,462 1,124,753
Materials and supplies 6,635,571 3,349,073
----------- -----------
10,880,414 6,173,286
----------- -----------
TOTAL CURRENT ASSETS 27,412,493 22,680,069
INTANGIBLES AND OTHER ASSETS
Goodwill, net of accumulated amortization of
$682,000 and $566,000, respectively 2,991,222 1,726,915
Note receivable 610,000 610,000
Deferred income tax benefit 721,020 289,073
Other assets 2,377,558 1,389,129
----------- -----------
6,699,800 4,015,117
PROPERTY, PLANT AND EQUIPMENT
Land 128,503 128,503
Buildings 3,564,863 1,039,070
Construction in progress 236,747 1,819,482
Machinery and equipment 16,301,710 12,310,360
----------- -----------
20,231,823 15,297,415
Less allowance for depreciation 11,831,980 9,825,402
----------- -----------
8,399,843 5,472,013
----------- -----------
TOTAL ASSETS $42,512,136 $32,167,199
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses -- Note H $ 4,863,403 $ 2,867,214
Employee compensation 3,118,417 2,505,273
Taxes, other than income taxes 306,227 272,957
Income taxes payable 626,139 179,998
----------- -----------
TOTAL CURRENT LIABILITIES 8,914,186 5,825,442
DEFERRED INCOME TAXES -- Note G -- --
----------- -----------
TOTAL LIABILITIES 8,914,186 5,825,442
SHAREHOLDERS' EQUITY -- Notes D and E
Common shares, $.10 par value--authorized 8,000,000 shares,
issued and outstanding 1996--5,590,828 shares;
1995--5,212,058 shares 559,083 521,206
Additional paid-in capital 8,800,846 6,002,771
Retained earnings 24,202,036 19,471,422
Equity adjustment from translation 35,985 346,358
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 33,597,950 26,341,757
Commitments and contingencies -- Note B
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $42,512,136 $32,167,199
=========== ===========
</TABLE>
See notes to consolidated financial statements
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
TSI Incorporated and Subsidiaries
YEAR ENDED MARCH 31 1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 5,482,040 $ 3,432,079 $ 3,199,093
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for losses on accounts receivable 29,845 40,696 49,934
Depreciation and amortization of property, plant and equipment 1,572,218 1,165,923 1,157,575
Amortization of goodwill 166,885 116,257 116,257
(Gain) loss on sale of assets 12,603 1,286 (5,274)
Provision for deferred income taxes (313,000) (169,943) (346,342)
Income tax benefit from stock plans 254,000 67,060 55,333
Changes in operating assets and liabilities:
Accounts receivable (5,234,609) 1,516,775 543,709
Prepaid expenses 64,572 36,280 (47,545)
Inventories (2,569,069) (151,307) (908,808)
Other assets 461,571 (387,352) 127,588
Accounts payable and accrued expenses 266,133 157,218 27,422
Employee compensation 247,366 462,843 298,056
Taxes, other than income taxes 33,270 (51,458) 17,862
Current income taxes payable 446,141 (354,024) 168,621
Foreign currency translation (gain) loss (324,024) (41,431) 49,035
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 595,942 5,840,902 4,502,516
----------- ----------- -----------
INVESTING ACTIVITIES
Decrease (increase) in current investments -- 1,618,771 (1,618,771)
Additions to property, plant and equipment (3,931,011) (3,124,261) (1,204,113)
Proceeds from disposal of property, plant and equipment 15,196 23,610 56,715
Purchase of companies, net of cash acquired (5,817,721) -- --
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (9,733,536) (1,481,880) (2,766,169)
----------- ----------- -----------
FINANCING ACTIVITIES
Payment on short-term notes (343,326) -- --
Proceeds from stock options exercised 863,075 230,173 211,589
Proceeds from employee stock purchases 421,394 308,143 300,327
Dividends paid (699,057) (602,251) (543,931)
Purchases of common stock -- -- (744,937)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 242,086 (63,935) (776,952)
----------- ----------- -----------
Effect of exchange rate changes on cash and cash equivalents 32,011 51,964 (10,496)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,863,497) 4,347,051 948,899
----------- ----------- -----------
Cash and cash equivalents at beginning of year 9,551,552 5,204,501 4,255,602
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 688,055 $ 9,551,552 $ 5,204,501
=========== =========== ===========
Interest paid $ 24,000 $ 75,000 $ 5,000
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
TSI Incorporated and Subsidiaries
Equity
Common Shares Additional Adjustment
------------- Paid-In Retained from
Shares Amount Capital Earnings Translation
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance March 31, 1993 $ 3,428,177 $ 342,818 $ 5,152,545 $ 14,587,358 $ 252,414
Net earnings for year ended March 31, 1994 -- -- -- 3,199,093
Cash dividends paid ($.107 per share) -- -- -- (543,931)
Current year translation adjustment -- -- -- -- 26,541
Employee stock purchases 34,284 3,428 296,899
Stock options exercised 32,760 3,276 208,313
Income tax benefit from stock plans -- -- 55,333
Shares repurchased and retired (89,500) (8,950) (135,061) (600,926)
------------ ------------ ------------ ------------ ------------
Balance March 31, 1994 3,405,721 340,572 5,578,029 16,641,594 278,955
Net earnings for year ended March 31, 1995 -- -- -- 3,432,079
Cash dividends paid ($.120 per share) -- -- -- (602,251)
Current year translation adjustment -- -- -- -- 67,403
Employee stock purchases 52,706 5,271 302,872
Stock options exercised 42,979 4,298 225,875
Income tax benefit from stock plans -- -- 67,060
Stock split adjustment--Note D 1,710,652 171,065 (171,065)
------------ ------------ ------------ ------------ ------------
Balance March 31, 1995 5,212,058 521,206 6,002,771 19,471,422 346,358
Net earnings for year ended March 31, 1996 -- -- -- 5,482,040
Cash dividends paid ($.14 per share) -- -- -- (699,057)
Current year translation adjustment -- -- -- -- (310,373)
Employee stock purchases 56,639 5,664 415,730
Stock options exercised 177,230 17,723 872,728
Income tax benefit from stock plans -- -- 254,000
Stock issued in purchase 146,789 14,679 1,258,275
Shares exchanged upon option exercise (1,888) (189) (2,658) (52,369)
------------ ------------ ------------ ------------ ------------
BALANCE MARCH 31, 1996 $ 5,590,828 $ 559,083 $ 8,800,846 $ 24,202,036 $ 35,985
============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
---- NOTES ----
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TSI Incorporated and Subsidiaries March 31, 1996
NOTE A --DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: The Company is a worldwide supplier of innovative
sensors and instrumentation systems. The Company's instruments serve customers
in industry and research--with applications ranging from monitoring air quality
to controlling industrial processes. The Company's products address two major,
growing market needs:
--Safety, Comfort and Health of People
--Productivity and Quality Improvement.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of TSI and its wholly-owned subsidiaries after elimination of
significant intercompany accounts and transactions.
CASH EQUIVALENTS: Cash equivalents of $8,256,000 at March 31, 1995, consist
of short-term highly liquid investments with maturity periods of less than three
months from date of purchase. There were no cash equivalents at March 31, 1996.
INVENTORIES: Inventories are valued at cost which is not in excess of
market. Inventories valued under the last-in, first-out (LIFO) method were
$6,475,000 and $4,702,000 at March 31, 1996 and 1995, respectively. Inventories
valued under the first-in, first-out (FIFO) method were $4,405,000 and
$1,471,000 at March 31, 1996 and 1995, respectively. If the first-in, first-out
(FIFO) method of inventory valuation had been used by the Company, inventories
would have been approximately $1,514,000 and $1,661,000 higher than reported at
March 31, 1996 and 1995, respectively.
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
includes amortization of capitalized lease obligations on the Company's
manufacturing plant and related components of equipment and fixtures, provided
on the straight line method for book purposes. Depreciation on other machinery
and equipment is provided using accelerated methods for the first half of the
asset life and the straight line method for the second half of the asset life.
At March 31, 1995, the Company was constructing an addition to its building
in Shoreview, Minnesota. A portion of the cost is being funded through Tax
Increment Financing (TIF). At March 31, 1996 and 1995, the estimated portion to
be funded through the TIF has been reflected as a note receivable offsetting the
project costs.
INTANGIBLE ASSETS: Goodwill represents the excess of the purchase price
over the fair value of net assets acquired and is amortized on a straight-line
basis over periods up to 40 years. Goodwill balances are reviewed to determine
that the unamortized balances are recoverable. In evaluating the recoverability,
the following factors, among others, are considered: a significant change in the
factors used to determine the amortization period, an adverse change in legal
factors or in the business climate, a transition to a new product or service
strategy, a significant change in the customer base, and a realization of failed
marketing efforts. If the unamortized balance is believed to be unrecoverable,
the Company recognizes an impairment charge necessary to reduce the unamortized
balance to the amount of cash flows expected to be generated over the remaining
life. If the acquired entity has been integrated into other operations and cash
flows cannot be separately measured, the Company recognizes an impairment charge
necessary to reduce the unamortized balance to its estimated fair value. The
amount of impairment is charged to earnings in the current period.
REVENUE RECOGNITION: The Company recognizes sales when the product is
shipped and revenue on research and development contracts using the
percentage-of-completion method of accounting.
USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
INCOME TAXES: The provision for income taxes is based on earnings before
income taxes reported for financial statement purposes. Included in the
provision are deferred taxes which result from transactions that are reported in
different periods for financial statement and income tax purposes. The Company
adopted the asset and liability method for computing its deferred taxes as
specified by Financial Accounting Standard No. 109 (FAS 109) "Accounting for
Income Taxes." Under the asset and liability method, deferred taxes are based on
the difference between the financial statement and tax basis of assets and
liabilities and the enacted tax rates that will be in effect when these
differences reverse. Deferred tax expense represents the change in the deferred
tax liability during the year.
EARNINGS PER COMMON SHARE: Earnings per common share is primary earnings
per share, computed by dividing net earnings by the weighted average number of
shares outstanding during the year, including any dilutive effect of shares
issuable under terms of the stock option or the employee stock purchase plans.
Primary and fully diluted earnings per share are substantially the same.
Earnings per share data for fiscal 1994 have been adjusted to reflect the stock
split discussed in Note D.
FOREIGN CURRENCY: Foreign currency assets and liabilities are translated
into U.S. dollars using the exchange rates in effect at the balance sheet date.
Results of operations are generally translated using the average exchange rates
in effect throughout the period. The effects of exchange rate fluctuations on
translation of assets and liabilities are reported as an equity adjustment from
translation in shareholders' equity.
Foreign currency transaction gains (losses) are included in other income as
set forth in Note C.
The Company hedges foreign receivables and backlog against fluctuations in
currency values. Hedge transactions involve the purchase of forward and option
contracts for the delivery of foreign currencies in exchange for U.S. dollars at
a future date which corresponds to the collection of the related receivables.
Gains and losses on forward and option contracts and the related foreign
receivables are recognized simultaneously in other income. Market value changes
of forward and option contracts hedging backlog are deferred until the sale
transaction is complete.
At March 31, 1996, the Company had outstanding forward contracts of
$2,258,000 and had no outstanding option contracts. These contracts have
maturity dates of less than a year. Deferred market value changes on forward
contracts hedging backlog were not significant at March 31, 1996.
RECENT ACCOUNTING PRONOUNCEMENT: In October 1995 the Financial Accounting
Standard Board issued Statement No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. In the fiscal year ended March 31, 1997, the Company intends to
adopt the disclosure provisions of the statement while continuing to account for
options and other stock-based compensation using the intrinsic value-based
method.
NOTE B --LEASE COMMITMENTS AND LINES OF CREDIT
The Company leases office, plant facilities and equipment under operating
leases ranging from two to ten years.
Rental expense for all operating leases was $686,000, $394,000 and $489,000
in 1996, 1995, and 1994, respectively. Future minimum lease obligations each
fiscal year under noncancelable operating leases are $786,000 in 1997, $537,000
in 1998, $506,000 in 1999, $230,000 in 2000, and $180,000 in 2001; all lease
obligations will be fulfilled in 2001.
The Company has unsecured short-term lines of credit totaling $2,500,000
available under two agreements. The interest rate on the $2,000,000 line is the
lesser of either the reference rate or 1.15% over the Federal Funds rate. The
rate on the $500,000 line of credit is the lesser of the reference rate or 1.50%
over the Federal Funds rate. As of March 31, 1996, neither credit line had an
outstanding balance. However, the total available funds were reduced by
outstanding standby letters of credit totaling $168,000 issued against these two
facilities. Additionally, the Company had contingent liabilities of $705,000 in
the form of performance and foreign customs guarantees.
NOTE C -- OTHER INCOME
YEAR ENDED MARCH 31 1996 1995 1994
--------- --------- ---------
Interest income $ 111,000 $ 426,000 $ 137,000
Foreign currency transaction gains (losses) 42,000 (9,000) (10,000)
Gain on disposal of product line -- -- 704,000
Provision for loss on long-term note -- -- (167,000)
Other 145,000 (8,000) 171,000
--------- --------- ---------
$ 298,000 $ 409,000 $ 835,000
========= ========= =========
In December, 1993 the Company sold its microcontamination product line to
Particle Measuring Systems (PMS), adding approximately $479,000 ($.09 per share)
to fiscal 1994 net earnings. The Company has a five year agreement with PMS
whereby it will continue to manufacture certain products.
NOTE D -- SHAREHOLDERS' EQUITY
On July 21, 1994, the Board of Directors declared a three-for-two stock
split in the form of a stock dividend paid to shareholders of record on August
1, 1995, distributed August 17, 1995. For each share issued in connection with
the stock split, an amount equal to the par value of $.10 was transferred to the
common shares amount from additional paid-in capital in fiscal 1995. This
transfer is reflected in the Consolidated Statements of Shareholders' Equity.
All other references in the financial statements and related notes to per share
information, stock options, weighted average number of shares, as well as the
number of common shares outstanding for all prior years presented, have been
retroactively adjusted to reflect this stock split.
NOTE E -- STOCK OPTIONS AND STOCK PURCHASE PLAN
Stock options have been granted to employees, officers and directors under
incentive stock option plans adopted in 1982, 1988, and 1992. No new options
will be granted under the 1982 or 1988 plans. Under all plans, incentive stock
options are generally granted at prices not less than fair market value at date
of grant. Options granted under the 1982 and 1988 plans become exercisable 40%
after two years and increase 20% per year until exercisable in full after five
years. Options granted under the 1992 plan become exercisable one-third after
one year and increase one-third per year until exercisable in full after three
years. Stock options and shares reserved for grant are as follows (see Note D):
<TABLE>
<CAPTION>
1982 Plan 1988 Plan 1992 Plan
--------- --------- ---------
Available Shares Available Shares Available Shares
for Grant Granted for Grant Granted for Grant Granted Price Per Share
--------- ------- --------- ------- --------- ------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance March 31, 1993 -- 75,038 -- 274,200 26,341 123,659 $2.70 to 7.00
Reserved 102,845
Granted (119,476) 119,476 5.33 to 8.59
Exercised (26,625) (22,050) (465) 3.39 to 7.00
Canceled (3,375) (22,875) 3,000 (3,000) 3.86 to 7.00
-------- ------- ------- ------- -------- --------
Balance March 31, 1994 -- 45,038 -- 229,275 12,710 239,670
Reserved 102,172
Granted (46,324) 46,324 8.58 to 9.00
Exercised (13,613) (27,000) (10,266) 2.77 to 7.25
Canceled (5,925) 4,525 (4,525) 6.33 to 8.58
-------- ------- ------- ------- -------- --------
Balance March 31, 1995 -- 31,425 -- 196,350 73,083 271,203
Reserved 104,241 --
Granted (106,904) 106,904 8.88 to 16.75
Exercised (19,575) (122,350) (35,305) 2.77 to 9.12
Canceled (2,850) 5,750 (5,750) 6.33 to 9.00
-------- ------- ------- ------- -------- --------
Balance March 31, 1996 -- 11,850 -- 71,150 76,170 337,052
======== ======= ======= ======= ======== ========
Exercisable:
March 31, 1995 31,425 166,995 158,893 $2.77 to $ 8.67
March 31, 1996 11,850 71,150 215,571 2.77 to 9.56
</TABLE>
On July 21, 1994, the Company adopted the Employee Stock Purchase Plan of
1994. This Plan authorized the issuance of a total of 300,000 shares over the
life of the Plan. Shares may be purchased at 85% of market value. As of March
31, 1996, 191,495 shares remain reserved for grant and 51,866 shares are
subscribed but unissued under this plan. There are no shares issued or
subscribed under the Employee Stock Purchase Plan of 1987 adopted on July 16,
1987. No further shares will be sold under the 1987 plan. An aggregate of
739,583 shares are reserved for issuance under stock option and Employee Stock
Purchase Plans.
NOTE F -- PROFIT SHARING PLAN
The Company has trusteed profit sharing and 401(k) plans which cover
substantially all of its employees. The profit sharing plan calls for a minimum
contribution of 4% in fiscals 1996 and 1995 and 3% in fiscal 1994 of credited
compensation for all eligible participants so long as sufficient profits are
generated in that year. In addition, if average return on assets exceeds 12%, an
additional 15% of pretax profits above this level are paid to eligible
participants. The expense relating to these plans, based on return on assets and
credited compensation, was $1,619,000, $1,104,000 and $838,000 in 1996, 1995 and
1994, respectively.
<TABLE>
<CAPTION>
NOTE G -- INCOME TAXES
YEAR ENDED MARCH 31 1996 1995 1994
Provision for Income Taxes
<S> <C> <C> <C>
Current Federal $ 2,908,000 $ 1,860,943 $ 1,656,342
Deferred (federal and state) (313,000) (169,943) (346,342)
State 357,000 -- 190,000
----------- ----------- -----------
$ 2,952,000 $ 1,691,000 $ 1,500,000
=========== =========== ===========
Deferred Income Tax Provisions:
Depreciation $ 8,000 $ (55,487) $ (45,824)
Inventory obsolescence 17,000 (15,722) (78,282)
Safe harbor leases (48,000) (155,297) (87,893)
Deferred research and development costs -- 54,587 4,137
Reserve on note receivable -- -- (87,164)
Net operating loss--foreign subsidiary (47,000) (225,732) --
Valuation allowance (226,000) 225,732 --
Other (17,000) 1,976 (51,316)
----------- ----------- -----------
$ (313,000) $ (169,943) $ (346,342)
=========== =========== ===========
Reconciliation of the Statutory Federal Income Tax Rate to the Company's
Effective Tax Rate:
Statutory rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State income tax, net of federal tax benefit 2.8 -- 2.7
Foreign Sales Corporation tax exempt income (2.1) (1.4) (4.0)
Research and development credit -- (.8) (.6)
Net operating loss--foreign subsidiary -- (4.4) --
Valuation allowance (2.7) 4.4 --
Other 3.0 1.2 (.2)
----------- ----------- -----------
Effective Tax Rate 35.0% 33.0% 31.9%
=========== =========== ===========
Earnings Before Income Taxes:
Domestic $ 8,352,230 $ 5,698,030 $ 3,901,855
Foreign 81,810 (574,951) 797,238
----------- ----------- -----------
$ 8,434,040 $ 5,123,079 $ 4,699,093
=========== =========== ===========
Income Taxes Paid (net of refunds received) $ 2,451,948 $ 2,187,703 $ 1,633,378
=========== =========== ===========
</TABLE>
As of March 31, 1996, the Company had a deferred tax benefit of $721,000,
including such items as depreciation, inventory valuation adjustments, safe
harbor leases, deferred research and development costs and vacation pay accruals
and net operating loss carryovers.
NOTE H -- ACCOUNTS PAYABLE AND ACCRUED EXPENSES
YEAR ENDED MARCH 31 1996 1995
---------- ----------
Trade accounts payable $2,590,000 $1,704,000
Deferred revenue 264,000 74,000
Commissions and royalties payable 890,000 457,000
Other accounts payable and accrued expenses 1,119,000 632,000
---------- ----------
$4,863,000 $2,867,000
========== ==========
<TABLE>
<CAPTION>
NOTE I -- SEGMENT INFORMATION
YEAR ENDED MARCH 31 1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Net Sales
Domestic operations
Unaffiliated domestic customers $ 44,480,433 $ 33,937,713 $ 30,278,773
Unaffiliated foreign customers 18,707,924 12,415,020 9,763,496
Intercompany 3,364,789 1,133,602 1,778,942
------------ ------------ ------------
66,553,146 47,486,335 41,821,211
Foreign operations
Unaffiliated customers 6,044,887 2,664,364 3,936,630
Intercompany 455,235 400,426 660,442
------------ ------------ ------------
6,500,122 3,064,790 4,597,072
Eliminations (3,820,024) (1,648,520) (2,439,384)
------------ ------------ ------------
Net Sales $ 69,233,244 $ 48,902,605 $ 43,978,899
============ ============ ============
Net Earnings
Domestic operations $ 8,729,282 $ 6,496,066 $ 5,549,945
Foreign operations 81,810 (971,852) (26,281)
Eliminations (377,052) (401,135) (824,571)
------------ ------------ ------------
Earnings Before Income Taxes 8,434,040 5,123,079 4,699,093
Income taxes (2,952,000) (1,691,000) 1,500,000
------------ ------------ ------------
Net Earnings $ 5,482,040 $ 3,432,079 $ 3,199,093
============ ============ ============
Assets
Domestic operations $ 52,969,517 $ 35,993,803 $ 31,107,195
Foreign operations 4,689,162 2,603,633 2,515,474
Eliminations (15,499,543) (6,430,237) (5,172,656)
------------ ------------ ------------
Total Assets $ 42,159,136 $ 32,167,199 $ 28,450,013
============ ============ ============
</TABLE>
The Company's domestic operations export products to unaffiliated foreign
customers in many countries, including exports to the Pacific Basin which
represented approximately 14%, 14%, and 12% of net sales in 1996, 1995, and
1994, respectively. The Company's foreign operations are located and primarily
sell to unaffiliated customers in Western Europe. Intercompany sales are set at
the standard price to unaffiliated customers less a discount based upon
marketing effort. Sales to educational, research and defense customers, which
are heavily reliant on U.S. government funding, accounted for approximately 25%,
36% and 36% of net sales in 1996, 1995 and 1994, respectively. Sales directly to
federal and state agencies, including defense, during the same three years were
21%, 32% and 29% of net sales.
NOTE J -- BUSINESS COMBINATIONS
Effective May 1, 1995, the Company purchased the assets and liabilities of
Alnor Instruments Company (Alnor) of Skokie, Illinois for cash. Alnor is a maker
of airflow, safety and indoor environmental monitoring products. Effective
October 1, 1995, the Company purchased the assets and liabilities of
Aerometrics, Inc. of Sunnyvale, California for a combination of cash and stock.
Aerometrics is a maker of flow and particle measuring instruments. The Company
paid cash of $5,800,000 and issued 147,000 shares of Company stock for a total
acquisition price of $7,076,000 for both companies. Both acquisitions were
accounted for by the purchase method of accounting and included acquisition of
goodwill of $1,536,000. Goodwill from these acquisitions is being amortized on a
straight-line basis over a period of twenty years. The following represents
summary proforma unaudited results of operations for the twelve months ended
March 31, 1996, and 1995, for the combined operations.
1996 1995
(Unaudited) (Unaudited)
----------------------------
Net sales $73,859,000 $64,639,000
Net earnings $5,632,000 $3,780,000
Earnings per common share $1.01 $.71
REPORTS
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors
and Shareholders
TSI Incorporated:
We have audited the accompanying consolidated balance sheets of TSI
Incorporated and subsidiaries as of March 31, 1996 and 1995, and the related
consolidated statements of earnings, cash flows and shareholders' equity for
each of the years in the three-year period ended March 31, 1996. 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 TSI
Incorporated and subsidiaries as of March 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1996, in conformity with generally accepted accounting
principles.
Minneapolis, Minnesota /s/ KPMG Peat Marwick LLP
May 17, 1996
MANAGEMENT'S REPORT
Management is responsible for the accuracy and objectivity of the data
included in this report. The financial statements have been prepared in
accordance with generally accepted accounting principles using management's best
estimates and judgements where appropriate.
Established accounting procedures and related systems of internal control
provide reasonable assurance that assets are protected, that the accounting
books and records properly reflect all transactions, and that policies and
procedures are implemented by qualified personnel.
The Audit Committee, composed of two members of the Board of Directors who
are not employees of the Company, meets regularly with representatives of
management and the independent auditors to monitor the functioning of the
accounting and control systems and to review the results of the auditing
activities. The Audit Committee recommends independent auditors for appointment
by the Board. The independent auditors have full and free access to the Audit
Committee.
The independent public accounting firm, KPMG Peat Marwick LLP, is retained
to conduct an objective, independent audit of the financial statements.
/s/ Lowell D. Nystrom
Lowell D. Nystrom
Vice President and
Chief Financial Officer
-- CORPORATE DATA --
BOARD OF DIRECTORS AND OFFICERS
JOHN F. CARLSON
DIRECTOR
Former Chairman and CEO of Cray Research, Inc.
FRANK D. DORMAN
DIRECTOR
Scientist
University of Minnesota
Consultant, Biomedicus/Medtronics
JAMES E. DOUBLES
DIRECTOR
President and Chief Operating Officer
TSI Incorporated
LEROY M. FINGERSON
DIRECTOR
Chairman and Chief Executive Officer
TSI Incorporated
LOWELL D. NYSTROM
DIRECTOR
Vice President and Chief Financial Officer
TSI Incorporated
KENNETH J. ROERING
DIRECTOR
Paul S. Gerot Chair in Marketing
and Professor of Marketing
Carlson School of Management
University of Minnesota
DONALD M. SULLIVAN
DIRECTOR
President and Chief Executive Officer
MTS Systems Corporation
LAWRENCE J. WHALEN
DIRECTOR
Former CEO of Minneapolis Children's Hospital
and Management Consultant
LAURA J. COCHRANE
SECRETARY AND COUNSEL
TSI Incorporated
ROBERT F. GALLAGHER
CONTROLLER
TSI Incorporated
SHAREHOLDER INFORMATION
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
Minneapolis, Minnesota
CORPORATE COUNSEL
Gray, Plant, Mooty, Mooty & Bennett, P.A.
Minneapolis, Minnesota
REGISTRAR AND TRANSFER AGENT
Norwest Bank Minnesota, N.A.
South St. Paul, Minnesota
NOTICE OF ANNUAL MEETING
Thursday, July 18, 1996, 3:30 p.m.
TSI Corporate Office
500 Cardigan Road
Shoreview, MN 55126
STOCKHOLDERS WHO CANNOT ATTEND THE MEETING ARE URGED TO EXERCISE THEIR RIGHT TO
VOTE BY PROXY. A PROXY CARD, A PROXY STATEMENT, AND A RETURN ENVELOPE ARE
ENCLOSED FOR THIS PURPOSE.
FORM 10-K
A copy of the Company's Annual Report on Form 10-K filed with the Securities and
Exchange Commission will be sent to any stockholder of record upon request.
STOCK HELD IN STREET NAME
The Company maintains a direct mailing list to insure that stockholders whose
stock is not held in their own names, and other interested persons, receive
annual reports and other information on a timely basis. If you would like your
name added to this list, send your request to Lynn Olson, TSI Incorporated, 500
Cardigan Road, Shoreview, MN 55126-3996.
INVESTOR RELATIONS CONTACT
Inquiries should be directed to:
LOWELL D. NYSTROM
Chief Financial Officer
TSI Incorporated
P.O. Box 64394
St. Paul, MN 55164
(612) 483-0900
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Company Jurisdiction Ownership
- --------------------------------------------------------------------------------
Aerometrics, Inc. Minnesota 100%
Alnor Instrument Company Minnesota 100%
Handar California 100%
TSI Foreign Sales Barbados, West Indies 100%
Corporation
TSI France Inc. Minnesota 100%
TSI GmbH Germany 100%
TSI/TPM Minnesota 100%
Transducer Research, Inc. Minnesota 100%
EXHIBIT 23
AUDITORS' CONSENT
The Board of Directors
TSI Incorporated
We consent to incorporation by reference in Registration Statement No. 1-91697
on Form S-8 filed with the Securities and Exchange Commission on June 14, 1984
for the TSI Incorporated Incentive Stock Option Plan of 1982, Registration
Statement No. 33-23247 on Form S-8, filed with the Security and Exchange
Commission on July 25, 1988 for the TSI Incorporated Employee Stock Purchase
Plan of 1987, Registration Statement No. 33-20627 on Form S-8 filed with the
Securities and Exchange Commission on August 22, 1989 for the TSI
Incorporated Stock Option Plan of 1988, Registration Statement No. 33-66194 on
Form S-8, filed with the Securities and Exchange Commission on July 19, 1993 for
TSI Incorporated Stock Option Plan of 1992, and Registration Statement No.
33-86468 on Form S-8, filed with the Securities and Exchange Commission on
November 17, 1994 for the TSI Incorporated Employee Stock Purchase Plan of 1994,
of our reports dated May 17, 1996, relating to the consolidated balance sheet of
TSI Incorporated and subsidiaries as of March 31, 1996 and 1995 and the related
consolidated statements of earnings, cash flows and shareholders' equity and
financial statement schedules for each of the years in the three-year period
ended March 31, 1996, which reports appear in or are incorporated by reference
in the March 31, 1996 annual report on Form 10-K of TSI Incorporated.
Minneapolis, Minnesota
June 26, 1996 /s/ KPMG Peat Marwick LLP
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