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, 1997.
[ ] 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
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(State or other jurisdiction of (I.R.S. Employee Identification No.)
incorporated 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 June 2, 1997: $87,023,920.
Number of shares outstanding as of June 2, 1997: 11,487,325 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 - 36
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 and has acquired or developed additional technologies
in order to address the needs of several markets to become a diversified,
precision instrumentation company.
Recent Corporate Developments
On October 31, 1996 the Company acquired Zimmer GmbH of Rossdorf,
Germany, a $1.8 million manufacturer of instruments for non-contact dimensional
measurement. This addition enhances the capabilities of the Company by adding
product lines to its instrumentation for materials manufacturing and quality
improvement instrumentation.
As of December 31, 1996, the operations of Transducer Research, Inc. at
Aurora, Illinois were closed with the electro-chemical sensor development and
manufacturing moved and integrated into operations at the Company's Shoreview,
Minnesota headquarters facilities. This was done to improve efficiency but costs
aggregating about $400,000 were incurred in the third and fourth quarters of
fiscal 1997.
PRODUCTS
The Company develops, manufactures and markets measuring and/or control
instruments for a variety of market applications. The Company's business
operates under one segment which is referred to as precision instrumentation for
industry and research. This business is characterized by many "niche" markets,
where one of the Company's many basic measuring technologies fits the
measurement needs in different industrial and research applications.
The applications for the Company's products can best 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
Improvement (industrial processes). Both of these cross numerous industries.
When outlining the Company's business in prior 10-K reports, two
classes of products have been described. As more technologies, sensor types and
applications have been acquired, developed and pursued, these two classes - flow
measuring and surface motion instruments and particle and gas measuring
instruments - no longer serve to clearly describe the Company's products. Hence,
the description for this fiscal 1997 10-K report has been restructured. The
discussion that follows describes the business and product lines under the two
general market drivers - Safety, Comfort & Health of People and Productivity and
Quality Improvement.
The percentage contribution to net sales under these two major market
drivers for the periods indicated was as follows:
Year Ended March 31,
Major Market Drivers 1997 1996 1995
-------------------- ---- ---- ----
Instruments for the Safety, Comfort & Health of People 67% 66% 68%
Instruments for Productivity and Quality Improvement 33% 34% 32%
---- ---- ----
100% 100% 100%
Safety, Comfort and Health instruments recorded a 19 percent increase in net
sales in fiscal 1997 as compared with fiscal 1996, while net sales of
Productivity and Quality Improvement instruments increased 9 percent during the
same period. This caused a small shift in fiscal 1997 in the percentage of total
net sales toward the Safety, Comfort and Health area, mainly due to increased
sales of PORTACOUNT(R) fit testers for military applications. There was a shift
in fiscal 1996 from fiscal 1995, in the percentage of total net sales toward the
Productivity and Quality Improvement market area due mostly to increased sales
of fluid mechanics instrumentation and adding one of the two major acquisitions
made during fiscal 1996. Refer to Management's Discussion and Analysis of
Results of Operations and Financial Condition on pages 12 and 15 of the
Company's 1997 Annual Report to Shareholders for further discussion about
changes in net sales under each of these two market drivers.
INSTRUMENTS FOR THE SAFETY, COMFORT AND HEALTH OF PEOPLE
TSI instruments that enhance the Safety, Comfort and Health of People
are described under four headings or categories:
Analytical and Research Instruments
This category is being described first because the Company's earliest
products for this area starting in 1966 were for research applications. The
development of many of the basic technologies occurred in research instruments
and the categories that follow often describe instruments that use these
technologies to make instruments packages for more specific industrial
applications.
The Company has developed a line of analytical and research instruments
which are used for measurement and characterization of very small particles,
usually referred to as sub-micron particles or aerosols. These instruments are
designed to monitor contamination levels, to make measurements in aerosol
generation studies, to study air pollution levels in buildings or in outside air
and to measure the size distribution of various aerosols. Many of the Company's
particle 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.
Specifically, this line of instruments includes the following key
products:
- - Scanning Mobility Particle Sizer (SMPS) - to measure size distributions
of sub-micron particles using electrostatic and optical technology.
- - Aerodynamic Particle Sizer(R) (APS) Spectrometer - for size
distribution of airborne particles in larger size ranges using
electro-optics technology.
- - Condensation Particle Counter (CPC) - for detecting and counting
extremely small particles using optics and condensation technology.
- - Nephelometer - an instrument used for research on global warming and
effects of particles in the atmosphere using optical technology.
- - Vibrating Orifice (and other) Particle Generators - for making
controlled samples of aerosols for further research and testing using
vibration and atomizers.
During fiscal 1995, 1996 and 1997, the Company received contracts to
develop and produce APS instruments for the U.S. Army and Canadian Army, adding
the use of fluorescence sensors to indicate composition. This is for detecting
the presence of bio-hazard material in the air. Work has continued during fiscal
1997 and there are expectations for a U.S. Army production contract to be
received in fiscal 1998 to manufacture this instrument - called the UV-APS
detector.
The Company introduced a new commercial version of the APS during
fiscal 1997 and continues to expand research and development funding to enhance
other existing instruments and develop new instruments to maintain its
leadership in this market category.
Monitoring and Control Instruments for Heating, Ventilating and Air Conditioning
(HVAC)
These instruments are used to measure or control air flow, air
distribution, relative humidity, pressure, dew point, temperature, particle
concentration and concentration of gases for purposes of enhancing HVAC system
performance. Some applications in this category are also referred to as "Indoor
Air Quality" instrumentation.
The key instruments in this line include:
- - VelociCalc(TM), VelociCheck(TM), CompuFlow(TM)and Velometer(TM) -
portable monitors for air velocity. Various models also measure flow
rates, temperature, humidity and pressure.
- - Sureflow(TM), PresSura(TM), EverWatch(TM) and AirGard(TM) - monitors
and controllers to measure and control the air velocity and flow rate
in fume hoods and room pressure in laboratories and hospital rooms.
- - Balometer(TM) and AccuBalance - monitors are used to measure air flow
to balance the distribution of air within and between rooms.
- - DP-CALC(TM), Prezzurgard(TM) and MicroManometer are electronic pressure
measuring instruments used for a variety of applications from air
distribution to filter testing.
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 differential meters, temperature with thermocouples and
pyrometers, dew-point with condensation detectors and micromanometers for
pressure measurements. Alnor velocity and fume hood control products expanded
the Company's product lines and marketing channels for HVAC applications, making
the Company more competitive globally.
In fiscal 1997 the Company introduced a new line of PresSura room
pressure controllers, the DP-CALC pressure monitor, enhanced AccuBalance air
distribution monitor and improved performance of several other products.
Additional development and new product introductions are expected in fiscal 1998
adding gas monitoring instruments and new air velocity meters.
Instruments for Industrial Hygiene and Safety
The Company's instruments in this category are mainly for monitoring
potential problems in the air people breathe. This application is also sometimes
referred to as part of "Indoor Air Quality". Product lines for this category
have expanded in the last few years as the Company has applied its basic
technologies in the areas of air velocity measurement and fine particle
measurement. Also, applications have expanded with the addition of gas detecting
sensors through the acquisition of Transducer Research, Inc. in fiscal 1993.
During fiscal 1995, 1996 and 1997, portable instruments were introduced to
measure various indoor air quality parameters including levels of carbon dioxide
to indicate the "sick building" syndrome. Instruments were also added for
measuring dust concentrations, carbon monoxide in industrial settings and high
concentrations of carbon dioxide encountered in food and beverage industries.
Development work is continuing to add other gas detecting instruments to these
product lines.
The major instruments in this category are:
- - PortaCount(TM) - an instrument that uses particle sensing techniques to
measure for leaks in face masks and respirators that result from
inadequate fit. The products are used in commercial applications where
people may be at risk from exposure to hazardous environments. This
product has been fully developed and successfully marketed
commercially, starting in fiscal 1987. During fiscal 1993, the product
was packaged for military use for the U.S. Army and U.S. Marines for
fit testing of their gas masks and production of the military version
has continued through fiscal 1997. Shipments for fiscal 1998 are
continuing under additional contracts from German and U.S. defense
agencies. Work is continuing to extend the applications of the
PortaCount device to more commercial users such as health care workers,
firefighters, etc.
- - Q-Trac(TM) - a monitor for diagnosing inadequate ventilation commonly
referred to at the "sick building" syndrome. It measures carbon
dioxide, carbon monoxide, humidity and temperature.
- - DustTrac(TM) - a monitor for measuring dust concentrations in working
environments using optical techniques.
- - RespiCon(TM) - a personal monitor for detecting exposure to respirable
particles in the size ranges that could represent health hazards. This
product was introduced in May, 1997.
The Company's air velocity and air distributor products are also sold
to customers in this category.
Meteorological and Hydrological Instruments
With the acquisition in 1986 of Handar, in Sunnyvale, California, many
measurement techniques were added to the Company's outdoor environmental
measurement capabilities used globally to monitor atmospheric parameters such as
wind, humidity, temperature, visibility, cloud height, soil moisture, snow,
rain, etc., for reporting aviation weather, forecasting wildfires and floods,
monitoring the impact of pollution on natural resources and various other
applications. Complete systems measure, collect, store, and transmit data via
telephone, radio, and satellite. In fiscal 1996, a major new flow sensing
technology was introduced to improve on the widely-used cup-and-vane anemometer
for measuring 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.
A new generation data collection platform or Datalogger used to collect
and transmit meteorological and environmental data was introduced during fiscal
1992. During the past year additional software capability has been added to the
Datalogger to enhance performance and to broaden applications to other than
meteorological and hydrological data collections.
While these products have been manufactured and sold for a number of
years, additional engineering work is continuing to improve and add new sensors,
data collection platforms and communication devices to enhance performance and
broaden applicability.
OEM Products
Commonly referred to as "original equipment manufacturer" (OEM) this
category includes sensors and devices sold to other manufacturers to be
incorporated in their products. TSI has for several years supplied flow sensors
to monitor flow in medical products used for respiratory assistance. The main
product in which these sensors are used is referred to as a "ventilator" used to
assist breathing in intensive care units. This category has been a small part of
the Company's business (about 2% in fiscal 1997), but is expanding because more
customers have adopted the Company's sensors for health-care applications in
respiratory devices.
OEM type sales are also being made to customers for the
electro-chemical sensors that were acquired in 1993 with Transducer Research
Inc. (TRI). These are mainly being pursued for a few applications where the
unique capability of the TRI sensors provides an advantage. Otherwise these
sensors are built for use in the Company's own gas detecting instruments.
Through its Alnor subsidiary, fume hood and room pressure monitors are
being sold on an OEM basis to manufacturers of fume hood cabinets and HVAC
control companies.
While there is no assurance that significant growth will occur, the
Company plans to continue developing OEM type sales for its sensors when they
can be applied in the products of other manufacturers. This often requires
engineering development work to adapt to customer requirements.
INSTRUMENTS FOR PRODUCTIVITY AND QUALITY IMPROVEMENT
TSI instruments for Productivity and Quality Improvement help customers
worldwide to enchance the competitive position of their processes and products.
Research Instruments
As with the safety, comfort and health products, the first products
to describe are those used for research and testing because these were the
Company's first technologies, actually starting with the founding of the Company
in 1961. Since then, many industrial products have grown out of technology
developed for research and this is expected to continue.
Fluid mechanics (or flow related) measuring instruments represent the
main product line for research applications. Fluid mechanics measurements are
mostly used for productivity and quality improvement of customers' products and
processes. Examples are imaging of velocity and turbulence in wind tunnels,
duct, pipes and imaging in engines and automotive exhaust gases to improve
efficiency or lower pollution and noise.
The Company's flow measuring instruments utilize several measurement
techniques including thermal anemometry, laser-Doppler velocimetry,
phase-Doppler particle analysis, particle-image velocimetry used in research
products as outlined below:
- Thermal Anemometers - 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 a 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.
- Laser-Doppler Velocimeters - For over 20 years, the Company has been
developing and producing various flow 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 techniques 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.
- Particle Image Velocimetry - 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 providing users with a visual output of the flow speed and
direction around an object in, for example, a wind tunnel. These products are
referred to as particle-image velocimeters 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 of flow measuring and analysis capability
which the Company expects to continue growing over the next few years.
- Phase-Doppler Particle Analysis - 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. This technology, which expands on laser-Doppler Velocimetry
technology, is referred to as phase-Doppler particle analysis.
Non-Contact Monitoring and Control in Materials Processing
Under the trade name LaserSpeed(TM), the Company produces an instrument
line using lasers and optical techniques to measure surface speed and length of
aluminum, steel and similar materials in manufacturing processes. This product
line performs well for measurements in rolling mills and similar metals forming
operations. Applications to other materials processing have also been developed.
The LaserSpeed instruments measure very precisely with no physical contact with
the materials, providing customers with savings in material cost by reducing
scrap and improvements in quality through better process control. Additional
engineering work was done during fiscal 1996 and 1997 to develop the LaserSpeed
CB100 and CB 150 instruments to measure speed and length of fiber, wire and
cable during manufacturing. Further development work is continuing to enhance
these devices, lower product costs and expand to other materials manufacturing
processes.
In fiscal 1997, a German company, Zimmer GmbH, was acquired which added
new non- contact measuring techniques for diameter, width and alignment
measurement in industrial processes.
Instruments For Quality Control Testing
The Company's line of automated test stands sold under the trade name
CertiTest(TM) are products used to 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. Development work occurred in fiscal 1997 to
enhance and broaden the filter testing product line.
Instruments were added with the Aerometrics acquisition in fiscal 1996
to measure the speed and concentration of droplets in industrial sprays to
assure uniform quality of manufacturing of devices such as fuel injectors. A
quality control automated test stand called the Patternator(TM) was introduced
during fiscal 1997 and engineering work is continuing to deliver the first units
during fiscal 1998.
OEM Products
In fiscal 1994, some of 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 to manufacture some
of the products for PMS on an OEM basis until December, 1998 or longer, subject
to options. These instruments monitor 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 and 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 1997 added to performance capabilities of these instrument
lines.
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 U.S. defense customers accounted for about 12 percent of total
net sales in fiscal 1997, 10 percent in fiscal 1996 and 15 percent in fiscal
1995, but accounted for no more than 10 percent of total sales for each of the
prior nine years. The increases in fiscal 1995 and fiscal 1997 were mainly due
to sales of PortaCount respirator fit testers under U.S. military contracts. The
decrease in fiscal 1996 was due to a 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 extent, educational sales. While there are
some developmental contracts and sales made to many different U.S. government
agencies of many different products, the Company's major government sales in
recent years have been products related to protection of military personnel from
bio-hazard materials. These sales are made on a contractual basis one year at a
time. There is no assurance that these sales will continue or that the
government will not cancel such contracts if they should decide to do so
(however, incurred costs would normally be reimbursed). As of March 31, 1997 the
Company's backlog included orders of about $8.5 million for PortaCount fit
testers for U.S. military services, all of which is scheduled to be shipped
during fiscal 1998.
Sales to international customers under the Company's two major market
drivers, as a percentage of the Company's net sales, were as follows for the
periods indicated:
Year Ended March 31
Major Market Drivers 1997 1996 1995
-------------------- ---- ---- ----
Instruments for the Safety, Comfort & Health of People 22% 17% 13%
Instruments for Productivity and Quality Improvement 16% 19% 18%
--- --- ---
38% 36% 31%
Overall, the Company's fiscal 1997 international net sales increased about 21
percent compared to fiscal 1996, with international sales of Safety, Comfort and
Health products increasing 49 percent and international sales of Productivity
and Quality Improvement products decreasing 1 percent. The increase in fiscal
1997 for Safety, Comfort and Health products was mainly due to a $6.8 million
German Army contract for the Company's PortaCount fit testers. Sales increases
of other product lines were offset by a decrease in shipments of meteorological
instruments by the Company's Handar subsidiary because in fiscal 1996, shipments
of approximately $2.5 million were made to Brazil which were not repeated in
fiscal 1997. The decrease in fiscal 1997 for Productivity and Quality
Improvement products was attributable to lower sales of the Company's fluid
mechanics research instruments, mostly in Asian markets, which decrease was
almost offset by increased sales of the other product lines under this market
driver, leaving the 1 percent decrease. Fluid mechanics research product line
sales are not expected to experience any continuing downward trend but could
continue to fluctuate from year-to-year corresponding with buying patterns in
this mature market niche.
From fiscal 1995 to fiscal 1996 international sales increased about
65 percent. The Company's fiscal 1996 export sales increased in part from two
acquisitions mentioned before. Without these two acquisitions the international
sales increase would have been 45 percent, with sales of Safety, Comfort and
Health instruments increasing 68 percent (with the largest factor coming from
increased international sales at Handar, along with increases in all the other
major product lines); and with sales of Productivity and Quality Improvement
instruments increasing 28 percent (most of which came from increases in sales of
fluid mechanics products).
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 1997 Annual Report to Shareholders (Exhibit 13, page F-8).
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, 1997, the Company's backlog of orders was approximately
$25,122,000 compared to $30,007,000 at March 31, 1996 and $11,364,000 at March
31, 1995. The Company estimates that over 95% of the 1997 backlog will be
shipped by March 31, 1998.
As of March 31, 1997, about $8.5 million of the Company's backlog was
due to the aforementioned military contracts for PortaCount fit testers,
compared with $12 million as of March 31, 1996.
COMPETITION
The Company's products compete with products utilizing difference
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 technologies and 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 markets replace those where needs
have changed, as well as its ability to grow by adding more markets.
Competitive forces vary in accordance with the various markets into
which the Company sells products. Competition can best be described by starting
with the two major market drivers and further categorizing product types in each
area 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 market
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>
COMPANY'S
COMPETITORS MARKET SHARE
Major Minor Significant Minor
Product Type Int'l Domestic Int'l Domestic Share Share
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Instruments for the Safety, Comfort & Health of People
ANALYTICAL AND
RESEARCH 2 2 more more X*
than 6 than 6
HVAC
Air Distribution 3 2 more more X*
than 6 than 6
Lab/Room Air
Flow Control - 3 2 3 X*
INDUSTRIAL HYGIENE
& SAFETY
Respirator Fit Test 1 - - 2 X
Indoor Air Quality 2 4 more more X*
than 6 than 6
METEOROLOGY/
ENVIRONMENTAL
MONITORING 4 3 more more X*
than 6 than 6
OEM** ** - - X*
Instruments for Productivity & Quality Improvement
RESEARCH 1 - 4 2 X
NON-CONTACT MATERIAL
PROCESSING 3 - 2 1 X*
QUALITY CONTROL
Filter Testing - 1 2 - X
Spray Measurements 1 - 2 2 X
OEM** ** X*
*Market share varies considerably by specific product within the market category
**OEM sales are normally made under specific contracts mainly in areas where the
Company has unique applicable technology so competition is not usually the
major issue.
</TABLE>
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 emphassis 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 form time to time. This type of contract
work generally related 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 1997, the Company spent approximately $10,939,000 (13.6% of
net sales) in research and product development activities, compared to
$8,993,000 (13.0% of net sales) and $7,196,000 (14.7% of net sales) in fiscal
1996 and 1995, 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, 1997, the Company had 516 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 fee. 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, which added 58,000 square feet of
space in fiscal 1996. The project for the third part 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 expansion
and remodeling project resulted in a facility that is ideally suited for the
Company's diversified product lines and markets. As of March 31, 1997, the
productive capacity of this building is estimated to be from 30 to 50 percent
higher than fiscal 1997 levels, depending on the type of increased business
encountered. This is because growth of analytical and research products sales
requires more engineering support, making second shift production less feasible
than for higher volume industrially oriented products. The Company owns
additional land at the same location on which to build as much as 80,000 square
feet of additional space in the future as required.
The Company also leases space for subsidiary operations which has in
each case been modified to suit requirements.
Item 3. LEGAL PROCEEDINGS
No material legal proceedings were pending or threatened against the
Company or its subsidiaries as of March 31, 1997.
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, 1997, 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 1997 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 years 1993 through 1997 on page 10 of the Company's 1997 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 1997 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 1997 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 1997 Annual Report to Shareholders:
Schedule VIII: Valuation and Qualifying Accounts, page F-4.
Schedule X: Supplementary Income Statement Information, page F-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 1997, 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 64 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 56 President and Chief Operating Officer
since 1992 and a Director. Executive
Vice President and Chief Operating
Officer from 1989 to 1992.
Lowell D. Nystrom 61 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 1997
Annual Meeting of Shareholders, dated June 20, 1997, which is
incorporated herein by reference.
(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 1997 Annual Meeting of Shareholders, dated
June 20, 1997, 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 1997 Annual Meeting of Shareholders, dated June 20,
1997, 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 1997 Annual Meeting of Shareholders,
dated June 20, 1997, under the caption "Principal Shareholders".
Item 13. 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 1997.
(c) Exhibits included herein:
Exhibit 3a: Restated Articles of Incorporation as
amended in November, 1984, October, 1986 and
July, 1996, 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, July 25, 1988.
Exhibit 10.b* TSI Incorporated Stock Option Plan of 1988,
incorporated by reference from Form S-8,
File No. 33-20627, August 22, 1989.
Exhibit 10.c* TSI Incorporated Stock Option Plan of 1992,
incorporated by reference from Form S-8,
File No. 33-66194, July 19, 1993.
Exhibit 10.d* TSI Incorporated Stock Purchase Plan of
1994, incorporated by reference from Form
S-8, File No. 33-86468, November 17, 1994.
Exhibit 10.e Registration Statement No. 333-19049 on Form
S-3, filed with the Securities and Exchange
Commission on December 31, 1996, for sale of
TSI shares by a certain shareholder.
Exhibit 11: Computation of Per Share Earnings.
Exhibit 13: The Company's 1997 Annual Report to
Shareholders for the fiscal year ended March
31, 1997.
Exhibit 21: Subsidiaries of the Company
Exhibit 23: Consent of Independent Auditors
Exhibit 27: Financial Data Table
Exhibit 99: Forward Looking Statements
- ----------------
*Indicates management contract or compensation plan or arrangement required to
be filed as an exhibit.
SIGNATURES
Pursuant to the requirement 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, 1997 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 behalf 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, 1997
- ------------------------ (Principal Executive Officer) -------------
Leroy M. Fingerson
/s/ Lowell D. Nystrom Vice President, Chief Financial Officer June 26, 1997
- ------------------------ and a Director (Principal Financial and -------------
Lowell D. Nystrom Accounting Officer)
/s/ James E. Doubles President, Chief Operating Officer and June 26, 1997
- ------------------------ Director -------------
James E. Doubles
/s/ Robert F. Gallagher Controller and Corporate Officer June 26, 1997
- ------------------------ (Principal Accounting Officer) -------------
Robert F. Gallagher
/s/ John F. Carlson Director June 26, 1997
- ------------------------ -------------
John F. Carlson
/s/ Frank D. Dorman Director June 26, 1997
- ------------------------ -------------
Frank D. Dorman
/s/ Joseph C. Levesque Director June 26, 1997
- ------------------------ -------------
Joseph C. Levesque
/s/ Donald M. Sullivan Director June 26, 1997
- ------------------------ -------------
Donald M. Sullivan
/s/ Kenneth J. Roering Director June 26, 1997
- ------------------------ -------------
Kenneth J. Roering
/s/ Lawrence J. Whalen Director June 26, 1997
- ------------------------ -------------
Lawrence J. Whalen
</TABLE>
page F-1
TSI INCORPORATED 10-K
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, 1997. 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 1997 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.
<TABLE>
<CAPTION>
Annual Report Page 10-K Page
------------------ ---------
<S> <C> <C>
Quarterly Financial Information (Unaudited) 16 -
Consolidated Statements of Earnings for the Years Ended -
March 31, 1997, 1996 and 1995 16
Consolidated Balance Sheets - March 31, 1997 and 1996 17 -
Consolidated Statements of Cash Flows for the Years Ended
March 31, 1997, 1996 and 1995 18 -
Consolidated Statements of Shareholders' Equity for Years
Ended March 31, 1997, 1996 and 1995 19 -
Notes to Consolidated Financial Statements 19 -
Independent Auditors' Report 24 -
C. INDEPENDENT AUDITORS' REPORT ON - F-3
SCHEDULES
</TABLE>
page F-2
D. CONSOLIDATED SCHEDULES
Schedule Description 10-K Page
- -------- ----------- ---------
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.
page F-3
Independent Auditors' Report
The Board of Directors and Shareholders
TSI Incorporated:
Under date of May 16, 1997, we reported on the consolidated balance sheets of
TSI Incorporated and subsidiaries as of March 31, 1997 and 1996 and the related
consolidated statements of earnings, shareholders' equity and cash flows for
each of the years in the three-year period ended March 31, 1997 as contained in
the 1997 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 1997. 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 16, 1997
page F-4
<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 to 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, 1997
Deducted from
Asset Accounts:
Allowance for
doubtful accounts: $267,000 $ 17,000 $ 4,000* $ 13,000 $275,000
Year ended
March 31, 1996
Deducted from
Asset Accounts:
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 $102,000 $142,000
- -------------
*Added in acquisitions
</TABLE>
page F-5
Schedule X: SUPPLEMENTARY INCOME STATEMENT INFORMATION
TSI INCORPORATED AND SUBSIDIARIES
- --------------------------------------------------------------------------------
COL. A COL. B
================================================================================
Charged to Costs and Expenses
Item Year Ended March 31
1997 1996 1995
- --------------------------------------------------------------------------------
Advertising $1,568,000 $1,664,000 $1,086,000
- --------------------------------------------------------------------------------
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.
page F-6
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, 997
21 Subsidiaries of the Company F-9
23 Auditors' Consent F-10
27 Financial Data Table
99 Forward Looking Statement F-11
page F-7
<TABLE>
<CAPTION>
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
TSI INCORPORATED AND SUBSIDIARIES
Year Ended March 31
PRIMARY 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Average shares outstanding 11,279,447 10,716,830 10,301,024
Net effect of dilutive stock options, based on the
treasury stock method using average market price 429,086 458,460 314,381
---------- ---------- ----------
TOTAL 11,708,533 11,175,290 10,616,342
---------- ---------- ----------
Net Earnings $7,213,248 $5,482,040 $3,432,079
---------- ---------- ----------
Per Share Amounts $.62 $.49 $.32
---- ---- ----
FULLY DILUTED
Average shares outstanding 11,279,447 10,716,830 10,302,024
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 427,371 638,978 314,318
---------- ---------- ----------
TOTAL 11,706,818 11,355,808 10,616,342
---------- ---------- ----------
Net Earnings $7,213,248 $5,482,040 $3,432,079
---------- ---------- ----------
Per Share Amounts $.62 $.48 $.32
---- ---- ----
</TABLE>
page F-8
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS FOR THE
FISCAL YEAR ENDED MARCH 31, 1997
ELEVEN-YEAR FINANCIAL DATA
<TABLE>
<CAPTION>
ELEVEN-YEAR FINANCIAL SUMMARY(1)
(thousands of dollars unless otherwise indicated)
1997 1996 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C> <C>
Operations
Net Sales $80,240 $69,233 $48,903 $43,979 $40,589 $40,293 $39,660
Gross Profit 44,971 38,491 28,566 25,301 22,877 22,880 23,491
% of Sales 56.0 55.6 58.4 57.5 56.4 56.8 59.2
Research and Development 10,939 8,993 7,196 6,360 5,847 6,112 5,538
% of Sales 13.6 13.0 14.7 14.5 14.4 15.2 14.0
SG & A 23,307 21,362 16,657 15,076 14,885 14,494 14,167
% of Sales 29.0 30.9 34.1 34.3 36.7 36.0 35.7
Operating Income 10,725 8,136 4,714 3,864 2,145 2,275 3,786
% of Sales 13.4 11.8 9.6 8.8 5.3 5.6 9.5
Net Earnings 7,213 5,482 3,432 3,199 2,344 1,830 2,660
% of Sales 9.0 7.9 7.0 7.3 5.8 4.5 6.7
Earnings Per Share .62 .49 .32 .31 .23 .17 .24
Financial Position
Current Ratio 3.7 3.1 3.9 3.8 3.6 3.9 3.2
Working Capital $26,006 $18,498 $16,855 $15,783 $13,365 $14,615 $13,275
Total Assets 50,878 42,512 32,167 28,450 25,661 25,894 26,681
Long-term Debt 0 0 0 0 0 888 965
Shareholders' Equity 41,320 33,598 26,342 22,839 20,335 19,918 18,943
Shareholders' Equity Per Share 3.59 3.00 2.53 2.24 1.98 1.86 1.77
Other Data
Weighted Avg. Number of Shares(thousands)(2) 11,709 11,175 10,616 10,364 10,533 11,141 11,089
Additions To Property, Plant and Equipment(3) $ 2,293 $ 3,931 $ 3,124 $ 1,204 $ 1,138 $ 1,204 $ 1,057
Depreciation and Amortization 2,096 1,739 1,282 1,274 1,143 1,161 1,128
Backlog of Orders 25,112 30,007 11,364 12,514 6,109 8,393 9,803
Return on Beginning Shareholders' Equity (%) 21.5 20.8 15.0 15.7 11.8 9.7 14.9
Return on Average Total Assets (%) 15.4 15.0 11.3 12.2 9.4 7.0 10.7
(WIDE TABLE CONTINUED FROM ABOVE)
1990 1989 1988 1987
$35,916 $33,733 $29,294 $23,080
21,402 19,444 17,047 13,399
59.6 57.6 58.2 58.1
4,535 4,461 4,813 3,551
12.6 13.2 16.4 15.4
13,548 12,068 10,308 7,587
37.7 35.8 35.2 32.9
3,319 2,915 1,926 2,261
9.2 8.6 6.6 9.8
2,295 1,927 1,518 1,620
6.4 5.7 5.2 7.0
.21 .18 .14 .15
3.4 3.4 3.7 3.5
$12,461 $12,609 $10,969 $ 9,892
24,900 23,675 21,361 20,300
1,202 838 1,085 1,835
17,800 16,073 14,562 13,344
1.61 1.45 1.33 1.21
11,398 11,173 11,242 11,227
$ 1,439 $ 782 $ 871 $ 707
1,193 1,127 954 926
7,418 6,724 6,959 5,670
14.3 13.2 11.4 13.6
9.6 8.7 7.4 8.9
(1) Data are based on results from continuing operations where applicable.
Applicable earnings, stock and dividends declared per share data for
all years shown have been retroactively adjusted to reflect the
two-for-one stock split effective August 16, 1996 and 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 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.
</TABLE>
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, 1997, average trading volume of TSI common stock was
481,000 shares per month, based on NASDAQ records and adjusted for the
two-for-one stock split effective August 16, 1996.
There were 11,487,325 shares of TSI common stock outstanding as of June
2, 1997 (adjusted for the two-for-one split declared July 18, 1996) of which 18
percent were owned by officers and directors of TSI. There were 674 shareholders
of record on that date and an additional number of about 1,200 shareholders for
whom security firms act as nominees.
The range of market prices as reported by the 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 June 2, 1997, the quarterly dividend rate was
$.025 per share.
STOCK DATA
Trailing
Market Range Dividend 12-Month
FISCAL 1997 High Low Close Declared P/E Ratio
FOURTH QUARTER $12 1/2 9 1/4 9 1/2 $ .025 15.3
THIRD QUARTER 12 1/8 8 1/2 11 1/2 .025 17.2
SECOND QUARTER 10 5/8 7 8 1/2 .020 13.0
FIRST QUARTER 11 3/4 8 1/8 9 1/2 .020 16.4
Trailing
Market Range Dividend 12-Month
FISCAL 1996 High Low Close Declared P/E Ratio
FOURTH QUARTER $ 9 3/16 7 8 7/8 $ .020 18.1
THIRD QUARTER 7 3/8 5 1/4 7 .020 21.2
SECOND QUARTER 6 4 1/8 5 5/8 .015 19.7
FIRST QUARTER 4 3/4 4 1/8 4 1/2 .015 14.8
[BAR GRAPH]
DIVIDENDS PER SHARE
(dollars)
1987 .018
1988 .023
1989 .025
1990 .034
1991 .042
1992 .054
1993 .054
1994 .054
1995 .060
1996 .070
1997 .090
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. Additional data are
given in the Eleven-Year Financial Data table on pages 10 and 11. The Company's
Board of Directors declared a two-for-one stock split in the form of a stock
dividend, effective August 16, 1996. Earnings per share data for all prior years
have been restated to reflect this split.
RESULTS OF OPERATIONS
[BAR GRAPH]
NET SALES
(millions of dollars)
Safety, Comfort Productivity
and Health and Quality
of People Improvement Net Sales
1993 60% 40% 40.6
1994 63% 37% 44.0
1995 68% 32% 48.9
1996 66% 34% 69.2
1997 67% 33% 80.2
NET SALES Net sales totaled $80,240,000 in fiscal 1997, an increase of
15.9 percent from $69,233,000 in fiscal 1996, which was 41.6 percent above
fiscal 1995 sales of $48,903,000. The Net Sales graph on this page shows how
sales have grown under the Company's two major market drivers over the past five
years.
In fiscal 1997, sales of products for Safety, Comfort and Health of
People increased 19 percent, and represented 67 percent of total sales, compared
with 66 percent of total sales in fiscal 1996. The fiscal 1997 increase was due
to increased PORTACOUNT(R) fit tester sales, partially offset by a decrease in
sales of meteorologic and hydrologic instruments for outdoor monitoring and a
decrease in R&Dcontracts supporting electrochemical sensor development at
Transducer Research Incorporated. The increases from fiscal 1995 to fiscal 1996
included indoor air quality instruments, meteorologic and hydrologic instruments
and analytical instruments for research and testing.
In fiscal 1997, about $12.5 million in sales came from contracts with
the U.S. Army and the German Army for PORTACOUNT(R) fit testers for respirators
and gas masks, up from $3.0 million in fiscal 1996, and also up from $5.0
million in fiscal 1995.
[BAR GRAPH]
INTERNATIONAL SALES
(percent of sales)
1993 38%
1994 31%
1995 31%
1996 36%
1997 38%
Sales of Products for Productivity and Quality Improvement increased 9
percent, becoming 33 percent of total sales. In fiscal 1996, this area
represented 34 percent of total sales. Increased fiscal 1997 sales came from
LaserSpeed(R) speed and length instrumentation, partially offset by decreased
sales of fluid mechanics instruments, which had experienced an increase in
fiscal 1996.
For fiscal 1997, sales of Productivity and Quality Improvement products
were affected by the Aerometrics, Inc. acquisition in October 1995 and the
Zimmer GmbH acquisition in October 1996. Without these acquisitions, sales of
Productivity and Quality Improvement products decreased 11 percent during fiscal
1997, mostly due to the lower sales of fluid mechanics instruments.
The Company's international net sales increased 21 percent, or $5.5
million to $30.3 million in fiscal 1997, which was 38 percent of sales. In
fiscal 1996, international sales were $24.8 million, or 36 percent of sales, and
$13.7 million, or 31 percent, in fiscal 1995. Domestic net sales increased 12
percent, or $5.4 million, during fiscal 1997. Higher international sales during
fiscal 1997 were due mainly to the sale of PORTACOUNT fit testers under a German
Army contract.
[BAR GRAPH]
GROSS PROFIT MARGIN
(percent of sales)
1993 56.4%
1994 57.5%
1995 58.4%
1996 55.6%
1997 56.0%
Sales to government agencies represent a significant portion of the
Company's sales. Due to the Company's diverse line of products, sales occur in a
wide range of U.S. and state government agencies and, except for specific
contracts, the level of governmental sales tends to be stable as a percentage of
sales. Sales to federal and state agencies, including defense, comprised 22
percent of the Company's net sales for fiscal 1997, compared with 21 and 32
percent for fiscal 1996 and 1995, respectively. A major contributor to the
higher percentage of government sales which occurred during fiscal 1995 was a
relatively higher level of shipments of PORTACOUNT fit testers under U.S.
military contracts. With similar government contracts in backlog for shipments
in fiscal 1998, sales to government agencies in fiscal 1998 are expected to run
at a percentage level similar to that of fiscal 1997.
[BAR GRAPH]
R&D EXPENDITURES
(percent of sales)
1993 14.4%
1994 14.5%
1995 14.7%
1996 13.0%
1997 13.6%
GROSS PROFIT Gross profit was $44,971,000 in fiscal 1997, or 56.0
percent of net sales, compared with $38,491,000, or 55.6 percent of net sales,
in fiscal 1996 and $28,566,000, or 58.4 percent, in fiscal 1995. Gross profit
margins for fiscal 1997 and 1996 were below fiscal 1995, mainly due to the
acquisition of two companies in fiscal 1996 which normally operate with a lower
gross margin, as well as lower operating expenses than the rest of the Company.
OPERATING EXPENSES Research and product development expenses were 13.6
percent of net sales in fiscal 1997, as compared to 13.0 percent for fiscal 1996
and 14.7 percent in fiscal 1995. The company has a strong commitment to
long-term growth through research and product development, which has continued
to enhance and generate new products and product lines in the Company's key
markets. This is expected to also result in sales growth in future years. For
the past nine years, the Company's research and product development expenses
have ranged from about 12 to 15 percent of net sales. Fiscal 1998 research and
development expenses are expected to again be in this range.
[BAR GRAPH]
SELLING & ADMINSTRATIVE
EXPENDITURES
(percent of sales)
1993 36.7%
1994 34.3%
1995 34.1%
1996 30.9%
1997 29.0%
Selling expenses were 21.7 percent of net sales in fiscal 1997, 23.3
percent in fiscal 1996 and 26.4 percent in fiscal 1995. Fiscal 1997 selling
expenses were at a lower percentage than recent years, mainly due to a faster
rate of sales increase without an accompanying increase in fixed costs. While
selling expenses have decreased as a percentage of sales for several years, this
is not expected to continue as a trend in fiscal 1998.
Administrative expenses were 7.4 percent of sales in fiscal 1997,
compared to 7.6 percent in fiscal 1996 and 7.7 percent in fiscal 1995. The
Company expects administrative costs to continue in a normal range of 7 to 9
percent for fiscal 1998.
[BAR GRAPH]
OPERATING INCOME
(millions of dollars)
1993 2.15
1994 3.86
1995 4.71
1996 8.14
1997 10.7
OTHER INCOME Other income totaled $372,000 in fiscal 1997, compared
with $298,000 in fiscal 1996 and $409,000 in fiscal 1995. Other income was
higher in fiscal 1997 mainly due to higher investment income because cash
balances were higher.
PROVISION FOR INCOME TAXES The provision for income taxes was
$3,884,000, or 35 percent of pretax earnings in fiscal 1997. This compares to
provisions of $2,952,000, or 35 percent of pretax earnings, in fiscal 1996, and
$1,691,000, or 33 percent of pretax earnings, in fiscal 1995. The fiscal 1998
effective tax rate is expected to again be approximately 35 percent of pretax
earnings, assuming no significant changes in the tax laws. See Note G on page 22
for additional information.
NET EARNINGS Net earnings were $7,213,000, or $.62 per share in fiscal
1997. This was an increase of 31.6 percent from $5,482,000, or $.49 per share in
fiscal 1996, which was an increase of 59.7 percent above the $3,432,000, or $.32
per share, in fiscal 1995.
[BAR GRAPH]
NET EARNINGS
(millions of dollars)
1993 2.34
1994 3.20
1995 3.43
1996 5.48
1997 7.21
LIQUIDITY AND CAPITAL RESOURCES
CASH AND CASH EQUIVALENTS Cash and cash equivalents increased by
$7,007,000 during fiscal 1997 to $7,695,000 at March 31, 1997. The major factor
in the cash increase was net earnings of $7.2 million. Other significant
contributions from operating activities were depreciation and amortization and
decreased receivables, partially offset by higher inventories. Cash used for
additions to property plant and equipment was $2.3 million and $1.1 million was
used for an acquisition. Dividend payments increased by $316,000 to $1,015,000.
Net cash provided by operating activities totaled $10,008,000 in fiscal
1997, compared with $596,000 in fiscal 1996, and $5,841,000 in fiscal 1995.
Significant decreases in cash provided by operating activities in fiscal 1996
came from increased receivables and inventories due to higher sales volume and
the large increase in backlog of orders and purchases made to fulfill
longer-term contracts. Because of these contracts and higher sales levels,
inventory increases carried over into fiscal 1997.
Management believes internally-generated funds and short-term
borrowings on existing credit lines will provide adequate resources to support
operations through fiscal 1998.
CURRENT ASSETS AND LIABILITIES Accounts receivable decreased by
$1,608,000 to $14,257,000 at March 31, 1997. This decrease in fiscal 1997
corresponded with faster collection on major contracts and lower shipments
during the fourth quarter.
Inventories increased $2,422,000 to $13,302,000 at March 31, 1997,
corresponding with higher sales rates in general, but also lower shipments in
the fourth quarter.
[BAR GRAPH]
CURRENT RATIO
1993 3.6
1994 3.8
1995 3.9
1996 3.1
1997 3.7
Working capital rose $7,508,000 to $26,006,000 at March 31, 1997. The
current ratio was 3.7 compared to 3.1 at the end of fiscal 1996.
The Company has two short-term lines of credit totaling $2,500,000 and
had no outstanding loans during fiscal 1997. During fiscal 1996, the Company
borrowed amounts up to $1,500,000 against one of these lines of credit to fund
short-term needs for an acquisition, but there were no loan balances as of March
31, 1996. The Company had no long-term debt at March 31, 1997 or 1996.
STOCK REPURCHASE As of March 31, 1997, the Company has authority to
repurchase a total of 446,600 shares under plans previously approved by its
Board of Directors. No shares were repurchased during fiscal 1997 or fiscal
1996.
IMPACT OF ACCOUNTING STANDARDS
In fiscal 1997, the Company adopted the disclosure provisions of the
Financial Accounting Standards Board Statement No. 123, accounting for
Stock-Based Compensation. See Note E on page 21 for information regarding the
results of this analysis.
FORWARD-LOOKING STATEMENTS
The Company believes that this report contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
that are subject to certain risks and uncertainties.
Forward-looking statements represent the Company's expectations or
beliefs concerning future events, including the following: any statements
regarding future sales and gross profit percentages, any statements regarding
the continuation of historical trends, any statements regarding the sufficiency
of the Company's cash balances and cash generated from operating and financing
activities for the Company's future liquidity and capital resource needs, any
statements regarding the effect of regulatory changes, the success of
development and enhancement of the Company's products, the adequacy of the
Company's facilities, potential acquisitions, and any statements regarding the
future of the instrumentation industry and the various parts of the
instrumentation markets in which the Company conducts its business. The Company
cautions that any forward-looking statements made by the Company in this report
or in other announcements made by the Company are further qualified by important
factors that could cause actual results to differ materially from those in the
forward-looking statements, including, without limitations, the factors set
forth on Exhibit 99 to the Company's report on Form 10K for the fiscal year
ended March 31, 1997.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
TSI Incorporated and Subsidiaries
YEAR ENDED MARCH 31 1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Net sales $ 80,239,622 $ 69,233,244 $ 48,902,605
Cost of products sold 35,268,412 30,741,891 20,336,422
--------------- --------------- ---------------
GROSS PROFIT 44,971,210 38,491,353 28,566,183
Operating expenses
Research and product development 10,939,276 8,992,519 7,195,547
Selling 17,394,017 16,134,498 12,907,365
Administrative 5,913,086 5,227,992 3,749,488
--------------- --------------- ---------------
34,246,379 30,355,009 23,852,400
--------------- --------------- ---------------
OPERATING INCOME 10,724,831 8,136,344 4,713,783
Other income -- Note C 372,417 297,696 409,296
--------------- --------------- ---------------
EARNINGS BEFORE INCOME TAXES 11,097,248 8,434,040 5,123,079
Provision for income taxes -- Note G 3,884,000 2,952,000 1,691,000
--------------- --------------- ---------------
NET EARNINGS $ 7,213,248 $ 5,482,040 $ 3,432,079
=============== =============== ===============
EARNINGS PER COMMON SHARE $.62 $.49 $.32
=============== =============== ===============
Weighted average number of shares for
computation of earnings per common share 11,708,533 11,175,290 10,616,340
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL INFORMATION
TSI Incorporated and Subsidiaries (Unaudited)
Following is a summary of unaudited quarterly results (see Note D).
FISCAL 1997 1ST QTR 2ND QTR 3RD QTR 4TH QTR TOTAL
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET SALES $19,497,118 $19,314,726 $22,329,666 $19,098,112 $80,239,622
GROSS PROFIT 10,983,529 10,840,404 12,403,540 10,743,737 44,971,210
NET EARNINGS 1,872,946 1,609,300 2,193,098 1,537,904 7,213,248
EARNINGS PER COMMON SHARE .16 .14 .19 .13 .62
Fiscal 1996
- ---------------------------------------------------------------------------------------------------------------
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
Earnings per common share .07 .07 .17 .18 .49
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
TSI Incorporated and Subsidiaries
MARCH 31 1997 1996
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,694,998 $ 688,055
Accounts receivable, less allowance of $275,000 and $237,000, respectively 14,256,692 15,533,541
Prepaid expenses 310,276 310,483
Inventories
Finished products 2,908,537 2,462,381
Work-in-process 2,486,856 1,782,462
Materials and supplies 7,906,912 6,635,571
------------- -------------
13,302,305 10,880,414
------------- -------------
TOTAL CURRENT ASSETS 35,564,271 27,412,493
INTANGIBLES AND OTHER ASSETS
Goodwill, net of accumulated amortization of $867,000 and $682,000, respectively 3,001,796 2,991,222
Note receivable 595,577 610,000
Deferred income taxes--Note G 498,020 721,020
Other assets 2,420,050 2,377,558
------------- -------------
6,515,443 6,699,800
PROPERTY, PLANT AND EQUIPMENT
Land 128,503 128,503
Buildings 3,586,992 3,564,863
Construction in progress 183,229 236,747
Machinery and equipment 18,244,708 16,301,710
------------- -------------
22,143,432 20,231,823
Less allowance for depreciation 13,344,806 11,831,980
------------- -------------
8,798,626 8,399,843
------------- -------------
TOTAL ASSETS $ 50,878,340 $ 42,512,136
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses -- Note H $ 4,963,795 $ 4,863,403
Employee compensation 3,904,546 3,118,417
Taxes, other than income taxes 442,247 306,227
Income taxes payable 247,354 626,139
------------- -------------
TOTAL CURRENT LIABILITIES 9,557,942 8,914,186
LONG-TERM DEBT -- --
------------- -------------
TOTAL LIABILITIES 9,557,942 8,914,186
SHAREHOLDERS' EQUITY -- Notes D and E
Common shares, $.10 par value-authorized 30,000,000 shares, issued and
outstanding 1997--11,495,728 shares; 1996--11,181,656 shares 1,149,573 559,083
Additional paid-in capital 9,724,365 8,800,846
Retained earnings 30,400,007 24,202,036
Equity adjustment from translation 46,453 35,985
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 41,320,398 33,597,950
Commitments and contingencies -- Note B
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 50,878,340 $ 42,512,136
============= =============
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
TSI Incorporated and Subsidiaries
YEAR ENDED MARCH 31 1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 7,213,248 $ 5,482,040 $ 3,432,079
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for losses on accounts receivable 12,994 29,845 40,696
Depreciation and amortization of property, plant and equipment 1,910,831 1,572,218 1,165,923
Amortization of goodwill 184,832 166,885 116,257
Loss on sale of assets 34,393 12,603 1,286
Provision for deferred income taxes 223,000 (313,000) (169,943)
Income tax benefit from stock plans 220,000 254,000 67,060
Changes in operating assets and liabilities:
Accounts receivable 1,607,998 (5,234,609) 1,516,775
Prepaid expenses 207 64,572 36,280
Inventories (2,093,263) (2,569,069) (151,307)
Other assets 252,153 461,571 (387,352)
Accounts payable and accrued expenses 29,364 266,133 157,218
Employee compensation 714,831 247,366 462,843
Taxes, other than income taxes 111,827 33,270 (51,458)
Current income taxes payable (378,785) 446,141 (354,024)
Foreign currency translation loss (35,726) (324,024) (41,431)
------------- ------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,007,904 595,942 5,840,902
------------- ------------- -------------
INVESTING ACTIVITIES
Decrease in current investments -- -- 1,618,771
Additions to property, plant and equipment (2,293,445) (3,931,011) (3,124,261)
Proceeds from disposal of property, plant and equipment 903 15,196 23,610
Purchase of companies, net of cash acquired (1,081,764) (5,817,721) --
NET CASH USED IN INVESTING ACTIVITIES (3,374,306) (9,733,536) (1,481,880)
------------- ------------- -------------
FINANCING ACTIVITIES
Payment on short-term notes -- (343,326) --
Proceeds from stock options exercised 626,318 863,075 230,173
Proceeds from employee stock purchases 667,691 421,394 308,143
Dividends paid (1,015,277) (699,057) (602,251)
------------- ------------- -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 278,732 242,086 (63,935)
------------- ------------- -------------
Effect of exchange rate changes on cash and cash equivalents 94,613 32,011 51,964
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 7,006,943 (8,863,497) 4,347,051
------------- ------------- -------------
Cash and cash equivalents at beginning of year 688,055 9,551,552 5,204,501
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 7,694,998 $ 688,055 $ 9,551,552
============= ============= =============
See notes to consolidated financial statements.
</TABLE>
<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, 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 ($.06 per share) (602,251)
Current year translation adjustment 67,403
Employee stock purchases 52,706 5,271 302,872
Stock options exercised 42,979 4,298 225,875
Income tax benefit from stock plans 67,060
Stock split adjustment--Note D 1,710,652 171,065 (171,065)
---------- ---------- ---------- ----------- ---------
Balance March 31, 1995 5,212,058 521,206 6,002,771 19,471,422 346,358
Net earnings for year ended March 31, 1996 5,482,040
Cash dividends paid ($.07 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
Net earnings for year ended March 31, 1997 7,213,248
Cash dividends paid ($.09 per share) (1,015,277)
Current year translation adjustment 10,468
Employee stock purchases 92,414 9,241 658,450
Stock options exercised 186,717 18,672 607,646
Income tax benefit from stock plans 220,000
Stock split adjustment--Note D 5,625,769 562,577 (562,577)
---------- ---------- ---------- ----------- ---------
BALANCE MARCH 31, 1997 11,495,728 $1,149,573 $9,724,365 $30,400,007 $ 46,453
========== ========== ========== =========== =========
See notes to consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TSI Incorporated and Subsidiaries March 31, 1997
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 $4,003,000 at March 31, 1997
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
$7,986,000 and $6,475,000 at March 31, 1997 and 1996, respectively. Inventories
valued under the first-in, first-out (FIFO) method were $5,316,000 and
$4,405,000 at March 31, 1997 and 1996, respectively. If the first-in, first-out
(FIFO) method of inventory valuation had been used by the Company, inventories
would have been approximately $1,276,000 and $1,514,000 higher than reported at
March 31, 1997 and 1996, 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.
Asset lives are generally as follows:
Buildings and improvements 7-40 years
Machinery and equipment 5-10 years
The Company completed an addition to its building in Shoreview,
Minnesota during fiscal 1996. A portion of the cost is funded through Tax
Increment Financing (TIF). At March 31, 1997 and 1996, 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 discounted 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.
STOCK-BASED COMPENSATION: The Company accounts for stock-based
compensation under Accounting Principles Board Opinion No. 25 (APB No. 25),
ACCOUNTING FOR STOCKS ISSUED TO EMPLOYEES. Accordingly, no compensation cost had
been recognized for its stock-based compensation plans. The Company has adopted
the disclosure requirements under Statement of Financial Accounting Standards
(SFAS) No. 123, ACCOUNTING AND DISCLOSURE OF STOCK-BASED COMPENSATION.
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 SFASNo. 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.
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.
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, 1997, the Company had outstanding forward contracts of
$800,000 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, 1997.
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 $769,000, $686,000 and
$394,000 in 1997, 1996, and 1995, respectively. Future minimum lease obligations
each fiscal year under noncancelable operating leases are $740,000 in 1998,
$708,000 in 1999, $454,000 in 2000, $352,000 in 2001, $275,000 in 2002, and
$332,000 in subsequent years.
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, 1997, neither credit
line had an outstanding balance. However, the total available funds were reduced
by outstanding standby letters of credit totaling $54,000 issued against these
two facilities. Additionally, the Company had contingent liabilities of $806,000
in the form of performance and foreign customs guarantees.
NOTE C -OTHER INCOME
YEAR ENDED MARCH 31 1997 1996 1995
---------- ---------- ----------
Interest income $ 221,000 $ 111,000 $ 426,000
Interest expense (15,000) (24,000) (75,000)
Foreign currency transaction
gains (losses) (40,000) 42,000 (9,000)
Other 206,000 169,000 67,000
---------- ---------- ----------
$ 372,000 $ 298,000 $ 409,000
========== ========== ==========
NOTE D - SHAREHOLDERS' EQUITY
On July 18, 1996, the Board of Directors declared a two-for-one stock
split in the form of a stock dividend paid to shareholders. On July 21, 1994,
the Board of Directors declared a three-for-two stock split. For each share
issued in connection with the stock splits, an amount equal to the par value of
$.10 was transferred to the common shares amount from additional paid-in capital
in fiscal years 1997 and 1995. These transfers are 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 these
stock splits.
NOTE E - STOCK OPTIONS AND STOCK PURCHASE PLAN
The Company uses APBNo. 25 to account for its stock option plans.
Accordingly, no compensation cost has been recognized for its stock option plan
and its stock purchase plan. Had compensation cost for the Company's stock-based
compensation plans been determined in accordance with SFAS No. 123, the
Company's pro forma net earnings and earnings per common share would have been
as follows:
1997 1996
----------- -----------
Net earnings
As reported $ 7,213,000 $ 5,482,000
Pro forma $ 7,042,000 $ 5,426,000
Earnings per common share
As reported $.62 $.49
Pro forma $.60 $.49
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscals 1997 and 1996: dividend yield of 1.0
percent; expected volatility of 25 percent; risk-free rates of approximately 6.5
percent; and expected lives of one to four-and-one-half years.
Pro forma net earnings reflect only options granted in fiscals 1997 and
1996. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net earnings amount
because compensation cost is reflected over the option's vesting period and
compensation for options granted prior to April 1, 1995, is not considered.
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. Employee 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. Management incentive options are immediately exercisable
in full. Stock options and shares reserved for grant are as follows (see Note
D):
<TABLE>
<CAPTION>
1982 Plan 1988 Plan 1992 Plan
--------- --------- ---------
Shares Shares Shares Weighted Average
Available Shares Available Shares Available Shares of Exercise
for Grant Granted for Grant Granted for Grant Granted Price of Shares
--------- ------- --------- ------- --------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance March 31, 1994 -- 90,076 -- 458,550 25,420 479,340 $2.96
Reserved 204,344
Granted (92,648) 92,648 4.38
Exercised (27,226) (54,000) (20,532) 2.26
Canceled (11,850) 9,050 (9,050) 3.70
--------- ------- --------- ------- --------- ------- -------
Balance March 31, 1995 -- 62,850 -- 392,700 146,166 542,406 3.02
Reserved 208,482
Granted (213,808) 213,808 3.30
Exercised (39,150) (244,700) (70,610) 2.51
Canceled (5,700) 17,500 (17,500) 4.01
--------- ------- --------- ------- --------- ------- -------
Balance March 31, 1996 -- 23,700 -- 142,300 158,340 668,104 4.28
Reserved 223,633
Granted (120,716) 120,716 9.41
Exercised (18,900) (64,620) (140,400) 2.89
Canceled (1,200) 14,088 (14,088) 5.19
--------- ------- --------- ------- --------- ------- -------
Balance March 31, 1997 -- 4,800 -- 76,480 275,345 634,332 5.55
========= ======= ========= ======= ========= ======= =======
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options as of March 31, 1997:
<TABLE>
<CAPTION>
Weighted Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exerciseable Exercise Price
- --------------- ----------- ---------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$1.39 to $3.50 165,030 2.18 $ 3.15 165,030 $ 3.15
$4.29 to $5.69 331,950 4.02 4.52 290,799 4.42
$8.00 to $9.19 145,504 5.59 8.42 77,138 8.42
$10.00 73,128 6.82 10.00 -- --
------- -------
715,612 532,967
======= =======
</TABLE>
On July 21, 1994, the Company adopted the Employee Stock Purchase Plan
of 1994. This Plan authorized the issuance of a total of 600,000 shares over the
life of the Plan. Shares may be purchased at 85% of market value. As of March
31, 1997, 310,247 shares remain reserved for grant and 84,061 shares are
subscribed but unissued under this plan. An aggregate of 1,385,265 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% 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 $2,094,000, $1,619,000
and $1,104,000 in 1997, 1996, and 1995, respectively.
NOTE G - INCOME TAXES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Earnings Before Income Taxes:
Domestic $10,374,000 $ 8,352,000 $ 6,095,000
Foreign 723,000 82,000 (972,000)
----------- ----------- -----------
$11,097,000 $ 8,434,000 $ 5,123,000
=========== =========== ===========
Provision for Income Taxes:
Current federal $ 3,209,000 $ 2,908,000 $ 1,861,000
U.S. deferred (federal and state) (50,000) (40,000) (170,000)
Foreign deferred 273,000 (273,000) --
Current state 452,000 357,000 --
----------- ----------- -----------
$ 3,884,000 $ 2,952,000 $ 1,691,000
=========== =========== ===========
Income Taxes Paid (net of refunds received) $ 3,716,000 $ 2,452,000 $ 2,188,000
=========== =========== ===========
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 2.9 2.8 --
Foreign Sales Corporation tax exempt income (3.3) (2.1) (1.4)
Net operating loss--foreign subsidiary -- -- (4.4)
Valuation allowance -- (2.7) 4.4
Other 1.4 3.0 .4
----------- ----------- -----------
Effective Tax Rate 35.0% 35.0% 33.0%
=========== =========== ===========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets and (liabilities) as of March 31,
1997, and March 31, 1996, were as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred Tax Assets
Inventory obsolescence and timing differences $ 367,000 $ 380,000
Reserves for bad debts 58,000 45,000
Reserves for warranty expense 116,000 26,000
Foreign net operating loss carryforward -- 273,000
Reserve for long-term note receivable -- 187,000
Accrued compensation 357,000 328,000
Other 46,000 42,000
---------- ----------
Total deferred tax assets $ 944,000 $1,281,000
---------- ----------
Deferred Tax Liabilities
Property and equipment (373,000) (449,000)
Other (73,000) (111,000)
---------- ----------
Total deferred tax liabilities $ (446,000) $ (560,000)
---------- ----------
Net Deferred Income Taxes $ 498,000 $ 721,000
========== ==========
</TABLE>
NOTE H - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
YEAR ENDED MARCH 31 1997 1996
------------- -------------
Trade accounts payable $ 2,487,000 $ 2,590,000
Deferred revenue 212,000 264,000
Commissions and royalties payable 851,000 890,000
Other accounts payable and accrued expenses 1,414,000 1,119,000
------------- -------------
$ 4,964,000 $ 4,863,000
============= =============
NOTE I - SEGMENT INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net Sales
Domestic operations
Unaffiliated domestic customers $ 49,919,000 $ 44,480,000 $ 33,938,000
Unaffiliated foreign customers 18,657,000 18,708,000 12,415,000
Intercompany 7,685,000 3,365,000 1,134,000
------------- ------------- -------------
76,261,000 66,553,000 47,487,000
Foreign operations
Unaffiliated customers 11,664,000 6,045,000 2,664,000
Intercompany 29,000 455,000 400,000
------------- ------------- -------------
11,693,000 6,500,000 3,064,000
Eliminations (7,714,000) (3,820,000) (1,648,000)
------------- ------------- -------------
Net Sales $ 80,240,000 $ 69,233,000 $ 48,903,000
============= ============= =============
Earnings Before Income Taxes
Domestic operations $ 11,405,000 $ 8,729,000 $ 6,496,000
Foreign operations 725,000 82,000 (972,000)
Eliminations (1,033,000) (377,000) (401,000)
------------- ------------- -------------
Earnings Before Income Taxes $ 11,097,000 $ 8,434,000 $ 5,123,000
============= ============= =============
Assets
Domestic operations $ 58,831,000 $ 53,323,000 $ 35,994,000
Foreign operations 3,630,000 4,689,000 2,603,000
Eliminations (11,583,000) (15,500,000) (6,430,000)
------------- ------------- -------------
Total Assets $ 50,878,000 $ 42,512,000 $ 32,167,000
============= ============= =============
</TABLE>
The Company's domestic operations export products to unaffiliated
foreign customers in many countries, including exports to the Pacific Basin
which represented approximately 12%, 14%, and 14% of net sales in 1997, 1996,
and 1995, 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 27%, 25%, and
36% of net sales in 1997, 1996, and 1995, respectively. Sales directly to
federal and state agencies, including defense, during the same three years were
22%, 21%, and 32% 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 $.50 $.36
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, 1997 and 1996, 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, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TSI
Incorporated and subsidiaries as of March 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Minneapolis, Minnesota
May 16, 1997
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,KPMGPeat 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
page F-9
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Company Jurisdiction Ownership
- ------------------------------------------------------------------------------
Aerometrics, Inc. Minnesota 100%
Alnor Instrument Company Minnesota 100%
Handar California 100%
TSI Foreign Sales Corporation Barbados, West Indies 100%
TSI France Inc. Minnesota 100%
TSI GmbH Germany 100%
TSI/TPM Minnesota 100%
page F-10
EXHIBIT 23
AUDITORS' CONSENT
The Board of Director
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. 33-2220627 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 1993, 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, and the Registration Statement No.
333-19049 on Form S-3, filed with the Securities and Exchange Commission on
December 31, 1996 for sale of TSI shares by a certain selling shareholder; of
our reports dated May 16 , 1997, relating to the consolidated balance sheets of
TSI Incorporated and subsidiaries as of March 31, 1997 and 1996 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, 1997, which reports appear in or are incorporated by reference
in the March 31, 1997 annual report on Form 10-K of TSI Incorporated.
Minneapolis, Minnesota
June 25, 1997 /s/ KPMG Peat Marwick LLP
page F-11
EXHIBIT 99
FORWARD LOOKING STATEMENTS
The Company is filing this cautionary statement to take advantage of
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. This Form 10-K, any Form 10-Q, the Company's Annual Report to
Shareholders, or any Form 8-K of the Company, news releases or any other written
or oral statements made by or on behalf of the Company may include
forward-looking statements which reflect the current views of the Company
regarding future developments, as future events and future financial
performance. The words "believe", "expect", "anticipate", "intends", "estimate",
"forecast", "plans", "seeks", "trends", "project" and similar expressions
identify forward-looking statements.
The Company wishes to caution readers that any forward-looking
statements made by or on behalf of the Company are subject to uncertainties and
other factors that could cause actual results to differ materially from such
statements. The following important factors, among others, in some cases have
affected, and in the future could affect, the Company's actual results and could
cause its actual results in fiscal 1998 and beyond to differ materially from
those expressed in any forward-looking statements made by, or on behalf of, the
Company. Though the Company has attempted to list the important factors, other
factors may in the future prove to be more important. Factors emerge from time
to time and it is not possible for management to predict all of such factors,
nor can it assess the impact of each such factor on the business or the extent
to which any factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking statements.
Investors are cautioned not to place undue reliance on such
forward-looking statements as they speak only of the Company's opinions at the
time the statement was made. The Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
RISKS ASSOCIATED WITH TECHNOLOGICAL CHANGE AND THE DEVELOPMENT AND
ACCEPTANCE OF NEW PRODUCTS. The markets for the Company's products and services
is characterized by rapid and significant technological change, changing market
conditions, frequent product enhancements and new product introductions and
evolving industry standards. The introduction of products embodying new
technologies or the emergence of new industry trends or standards can render
existing products or products under development obsolete or uncompetitive. The
Company's ability to anticipate changes in technology and industry trends or
standards and successfully develop and introduce new products on a timely basis
will be a significant factor in the Company's ability to grow and remain
competitive. Industry acceptance of new technologies developed by the Company
may be slow to develop due to, among other things, lack of available capital in
some industries, existing regulations written specifically for older
technologies and general unfamiliarity of users with new technologies.
RISK REGARDING GROWTH POTENTIAL. Certain of the markets in which the
Company competes have been flat or declining over the past several years. The
Company has and continues to
F-12
identify a number of strategies it believes will allow it to grow its business,
including developing new applications for its technologies; strengthening its
presence in selected geographic markets; introducing enhanced products; and
acquiring product lines or complementary businesses. No assurance can be given
that the Company will be able to successfully implement its growth strategies,
or that these strategies will result in growth of the Company's business.
RISKS ASSOCIATED WITH COMPETITION. Many of the Company's foreign and
domestic competitors have more extensive engineering, manufacturing, marketing,
financial and personnel resources than the Company; and it believes its success
in competing with other manufacturers of precision instrumentation depends on
its engineering, manufacturing and marketing skills, the price, quality and
reliability of its products, and its delivery and service capabilities. The
Company anticipates increasing pricing pressures from current and future
competitors in certain of the markets for its products. In addition, the Company
believes that technological change, regulatory change and industry consolidation
or new entrants may cause rapid evolution in the competitive environment of the
Company's business, the full scope and nature of which is difficult to predict
at any point in time. Increased competition could result in price reductions,
reduced margins and loss of market share by the Company. There can be no
assurance that the Company will be able to compete successfully with its
existing or new competitors or that competitive pressures faced by the Company
will not materially and adversely affect its business, operating results and
financial condition.
FLUCTUATIONS IN OPERATING RESULTS. Operating results may fluctuate
significantly from quarter to quarter due to several factors, including, without
limitation, the volume and timing of orders form, and shipments to, major
customers, the timing of and the ability to obtain new customer contracts, the
timing of new product announcements, the availability of materials, components,
overall level of capital expenditures by various industries and governments,
market acceptance of new and enhanced versions of the Company's products, and
variations in the mix of sold products. The Company's expense levels are based
in part on expectations of future revenues. If revenue levels in a particular
period do not meet expectations, operating results will be adversely affected.
In addition, the Company's results of operations are sometimes subject to
seasonal factors. The Company historically has experienced a stronger demand for
its products in the third and fourth quarter, primarily as a result of customer
budget cycles. There can be no assurance that these historical seasonal trends
will continue in the future.
RISKS ASSOCIATED WITH ACQUISITIONS. One of the Company's growth
strategies is to supplement its internal growth with the acquisition of
businesses product lines and technologies that complement or augment the
Company's existing product lines. Businesses that the Company has acquired or
may seek to acquire in the future may be marginally profitable or unprofitable.
In order for any acquired businesses to achieve the level of profitability
desired by the Company, the Company must successfully change operations and
improve market penetration. No assurance can be given that the Company will be
successful in this regard. Promising acquisitions are difficult to identify and
complete for a number of reasons, including excessive valuations by sellers and
competition among prospective buyers. There can be no assurance that the Company
will be able to complete pending or future acquisitions. In order to finance any
such acquisitions, it may be necessary for the Company to raise
F-13
additional funds either through public or private financing. Any equity or debt
financing, if available at all, may be on terms which are not favorable to the
Company and may result in dilution to the Company's shareholders.
CHANGING REGULATORY ENVIRONMENT. The Company's sales of instruments
designed to enhance the safety, comfort and health of people in working
environments is subject to regulation in the United States and other
countries.The Company's business in these market areas is dependent upon the
continued growth of concern for the comfort, safety and health of people in the
United States and internationally. Federal and state regulatory agencies
including the Occupational Safety and Health Administration, the Environmental
Protection Agency, the National Institute for Occupational Health and Safety and
others regulate parts of the practices and operations of domestic and
international customers. While new regulators can represent opportunities for
parts of the Company's business, there can be no assurance that regulations will
be adopted when expected, that they will be adopted in the form expected, that
they will be accepted by various industries or that they will be enforced. Also,
changes or cancellation of some regulations could have an adverse affect on the
Company's sales or expected sales.
RISKS OF CAPITAL SPENDING POLICIES AND GOVERNMENT FUNDING. The
Company's customers include industrial companies, laboratories, government
agencies, and public and private research institutions. The capital spending of
these entities can have a significant effect on the demand for the Company's
products. Such spending levels are based on a wide variety of factors, including
the resources available to make such purchases, the spending priorities among
various types of research equipment, public policy, and the effects of different
economic cycles. Any decrease in capital spending by any of the customer groups
that account for a significant portion of the Company's sales could have a
material adverse effect on the Company's business and results of operations.
INTERNATIONAL RISKS. Export sales accounted for 38%, 36% and 31% of the
Company's net sales in fiscal 1997, 1996 and 1995, respectively, and export
sales could increase as a percentage of net sales in the future. The Company
owns manufacturing operations located in Germany. Due to its export sales and to
a lesser extent its international manufacturing operations, the Company is
subject to the risk of conducting business internationally, including unexpected
changes in, or impositions of, legislative or regulatory requirements,
fluctuations in the U.S. dollar, which could materially and adversely affect
U.S. dollar revenues or operating expenses, tariffs and other barriers and
restrictions, potentially longer payment cycles, greater difficulty in accounts
receivable collection, potentially adverse taxes, and the burdens of complying
with a variety of foreign laws and standards. The Company also is subject to
general risks such as political and economic instability and changes in
diplomatic and trade relationships, in connection with its international
operations. There can be no assurance that such factors will not materially and
adversely affect the Company's operations in the future or require the Company
to modify significantly its current business practices. In addition, the laws of
certain foreign countries may not protect the Company's proprietary technology
to the same extent as do the laws of the United States.
F-14
RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY. The Company's future
success depends in part upon its proprietary technology, and although the
Company attempts to protect its proprietary technology through patents,
copyrights and trade secrets, it also believes that its future success will
depend upon product development, technological expertise and distribution
channels. There can be no assurance that the Company will be able to protect its
technology, or that competitors will not be able to develop similar technology
independently. The Company may in the future receive from third parties,
including some of its competitors, notices claiming that it is infringing
third-party patents or other proprietary rights. There can be no assurance that
the Company would prevail in any litigation over third-party claims or that it
would be able to license any valid and infringed patents on commercially
reasonable terms. Furthermore, litigation, regardless of its outcome, could
result in substantial cost to and diversion of effort by the Company. Any
litigation or successful infringement claims by third parties could materially
and adversely affect the Company's business, operating results and financial
condition.
RISK OF FLUCTUATION OF STOCK PRICE. The Company believes factors such
as announcements of new products by the Company or its competitors, quarterly
fluctuations in the Company's financial results, customer contracts awards,
developments in regulation and general conditions in the various markets where
the Company's products are sold have caused and are likely to continue to cause
the market price of the Company's common stock to fluctuate substantially. In
addition, instrumentation company stocks have experienced significant price and
volume fluctuations that often have been unrelated to the operating performance
of such companies. This market volatility may adversely affect the market price
of the Company's common stock.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 7,694,998
<SECURITIES> 0
<RECEIVABLES> 14,531,692
<ALLOWANCES> 275,000
<INVENTORY> 13,302,305
<CURRENT-ASSETS> 35,564,271
<PP&E> 22,143,432
<DEPRECIATION> 13,344,806
<TOTAL-ASSETS> 50,878,340
<CURRENT-LIABILITIES> 9,557,942
<BONDS> 0
0
0
<COMMON> 1,149,573
<OTHER-SE> 40,170,825
<TOTAL-LIABILITY-AND-EQUITY> 50,878,340
<SALES> 80,239,622
<TOTAL-REVENUES> 80,239,622
<CGS> 35,268,412
<TOTAL-COSTS> 34,246,379
<OTHER-EXPENSES> 372,417
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,582
<INCOME-PRETAX> 11,097,248
<INCOME-TAX> 3,884,000
<INCOME-CONTINUING> 7,213,248
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,213,248
<EPS-PRIMARY> .62
<EPS-DILUTED> .62
</TABLE>
