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, 1998.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______.
Commission File Number 0-2958.
TSI INCORPORATED
(Exact name of registrant as specified in its charter)
Minnesota 41-0843524
(State or other jurisdiction of (I.R.S. 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, 1998: $75,174,840
Number of shares outstanding as of June 2, 1998: 11,409,858 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 18 and F-1 of this report.
Total number of pages including cover -- 35
<PAGE>
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
to address the needs of several markets in order to become a diversified,
precision instrumentation company.
RECENT CORPORATE DEVELOPMENTS
In July 1997, the Company acquired Target Systems, Inc. of Salt Lake
City, Utah, a manufacturer of diameter gauges for the wire and cable industry.
It had sales of approximately $2,900,000 in the twelve months prior to
acquisition. This addition enhances the capabilities of the Company by adding
products to its instrumentation for non-contact monitoring and control in
materials processing.
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.
<PAGE>
The discussion that follows describes the business and product lines
under these two market drivers and shows the percentage contribution to net
sales:
Year Ended March 31
-------------------
Major Market Drivers 1998 1997 1996
-------------------- ---- ---- ----
Instruments for the Safety, Comfort & Health of People 64% 67% 66%
Instruments for Productivity and Quality Improvement 36% 33% 34%
---- ---- ----
100% 100% 100%
INSTRUMENTS FOR THE SAFETY, COMFORT AND HEALTH OF PEOPLE
TSI instruments that enhance the Safety, Comfort and Health of People
are described under five headings or categories:
Analytical and Research Instruments
The Company's earliest products, starting in 1966, were for research
applications. The development of many of the basic technologies used in TSI
products occurred in research instruments, and the following often describes
products that apply these technologies to specific industrial applications.
The Company has developed a line of analytical and research instruments
which are used to measure and characterize very small particles, usually
referred to as submicron 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. During fiscal 1998, the
Company introduced an Ultraviolet Aerodynamic Particle Sizer(R) Spectrometer
(UV-APS) for early warning of biohazards. The Company received a $1.8 million
contract for this device from the US Army with delivery scheduled in early
fiscal 1999. The contract includes options to purchase $4.6 million of
additional instruments for delivery before October 1999.
<PAGE>
Many of the Company's particle measuring instruments are used in
conjunction with computers (manufactured by others) which compile and interpret
the data obtained. The Company develops and sells a variety of user-friendly
software packages to expand and enhance the applications of these instruments.
Technologies developed within this area are used in industrial instruments for
industrial hygiene and safety as well as instruments for quality control and
testing.
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 fall into the area of "Indoor
Air Quality" measurements. These instruments use technology originally developed
in various research instruments and applications. In early fiscal 1999, a line
of instruments for measuring combustion gases in furnaces, water heaters and
boilers was introduced.
Instruments for Industrial Hygiene and Safety
The Company's instruments in this category are mainly to monitor for
potential problems in the air people breathe and to help protect people from
toxic airborne substances. The PortaCount (R) Respirator Fit Tester helps
protect workers and military personnel by testing for the proper fit of
respirators and gas masks. The Company markets the PortaCount in both commercial
and military versions.
Much of this area of application is often referred to as "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. The addition of a line of gas
detection sensors obtained in the acquisition of Transducer Research, Inc. in
fiscal 1993 led to additional product offerings.
This area includes portable instruments that measure various indoor air
quality parameters, including levels of carbon dioxide, a parameter that has
been linked to the "sick building" syndrome. It
<PAGE>
also includes instruments for measuring dust concentrations, carbon monoxide in
industrial settings and the high concentrations of carbon dioxide used in food
and beverage manufacturing. A portable personal gas monitor for use in confined
spaces was introduced in early fiscal 1999. Development work is continuing to
add other gas detection sensors and instruments to these product lines.
Meteorological and Hydrological Instruments
With the 1986 acquisition of Handar, in Sunnyvale, California, an
extensive line of measuring instruments were added to the Company's outdoor
environmental measurement capabilities. They are used globally to monitor
atmospheric parameters such as wind, humidity, temperature, visibility, cloud
height, soil moisture, snow, rain, and many others. Applications include
monitoring weather conditions in remote locations, monitoring aviation weather,
forecasting wildfires and floods, measuring the impact of pollution on natural
resources and various other applications. Complete systems measure, collect,
store, and transmit data via telephone, radio, and satellite. Handar's products
include an ultrasonic wind sensor, an improvement on the cup-and-vane
anemometers widely used to measure wind speed and direction. This patented
sensor utilizes ultrasonic technologies, involves no moving parts and can be
heated to prevent ice buildup when used at low temperatures.
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 for
incorporation into their products. TSI has for several years supplied flow
sensors to monitor flow in medical products used for respiratory assistance.
Ventilators used to assist breathing in intensive care units are the main
product in which these sensors are used.
<PAGE>
Through TSI's Alnor subsidiary, fume hood and room pressure monitors
are sold on an OEM basis to manufacturers of fume hood cabinets and to HVAC
control companies.
INSTRUMENTS FOR PRODUCTIVITY AND QUALITY IMPROVEMENT
TSI instruments for Productivity and Quality Improvement help customers
worldwide to enhance the competitive position of their processes and products.
They are described here under four headings or categories.
Research Instruments
As with the safety, comfort and health products, the first products
described are those used for research and testing, since they 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 include the imaging of flow velocity and turbulence in wind
tunnels, ducts and 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, and particle image velocimetry. These are used in
research products as described below:
--Thermal Anemometers -- Thermal anemometry 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 as it passes the element provides a
measure of the velocity and/or flow rate of the fluid. The instrument provides
the flow rate in an analog display or converts 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
<PAGE>
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. Thermal Anemometry is used in many of the
instruments sold into TSI's industrial markets. The technique is used in many
HVAC instruments, for example, as well as instruments for industrial hygiene and
safety.
--Laser-Doppler Velocimeters -- For over 20 years, the Company has
developed and produced 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. They are used to obtain measurements in
locations where a probe would be destroyed or would disturb the flow of the
fluid 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. The Company also has developed and is selling a variety
of user-friendly software packages to expand and enhance the application of
these instruments. Laser Doppler velocimetry techniques are used in other TSI
instruments for non-contact monitoring and control in material production
processes.
--Particle Image Velocimeters -- Through engineering design, licensing
of technologies and acquisition of product lines, the Company has developed a
line of instruments and software that measure or map flow patterns over an area.
This provides users with a visual output of flow speed and direction, for
example, around an object in a wind tunnel. These products are referred to as
particle-image velocimeters because the technique is based on tracking,
simultaneously, the movement of numerous particles in the flow stream. Optical
techniques are used to show images of the flow patterns. This area has been
emerging as an important addition to TSI's flow measuring and analysis
capabilities, which the Company expects to continue growing over the next few
years.
--Phase-Doppler Particle Analysis -- During fiscal 1996, the Company's
acquisition of Aerometrics, Inc. added significant capability for measuring the
characteristics of spray droplets, such
<PAGE>
as those in fuel injector sprays, personal inhalers, 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(R), the Company produces an instrument
line that employs diode lasers and optical techniques to measure the surface
speed and length of aluminum, steel and similar materials during manufacturing.
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 give precise measurements without
physical contact with the materials. Customers realize savings in material cost
by reducing scrap and in quality improvements through better process control.
LaserSpeed CB100 and CB150 instruments measure the speed and length of extruded
materials such as fiber, wire and cable during manufacturing. Further
development work is continuing to enhance these devices, lower product costs and
expand their use to other materials manufacturing processes.
In fiscal 1998 and 1997, two small acquisitions, one in Germany and one
in the United States, added new non-contact techniques for measuring diameter,
width and materials alignment in industrial processes. These products can be
sold to the same customers and through the same distribution channels as the
LaserSpeed instruments.
Instruments For Quality Control Testing
The Company's line of automated test stands, sold under the trade name
CertiTest(TM), are used to determine the efficiencies of filters and filter
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.
This category also includes instruments for measuring the speed and
concentration of droplets in industrial sprays to assure uniform manufacturing
quality of devices such as fuel injectors. A quality
<PAGE>
control automated test stand called the Optical Patternator(TM) was introduced
during fiscal 1997, with the first units delivered 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 continues 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 measure residue in
ultra-clean water using particle sensors that incorporate light scattering
optical techniques. They are used by manufacturers of semiconductor devices,
pharmaceutical products and other products which require very low contamination
levels during critical manufacturing processes.
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 of incoming parts. The
Company continues to seek and maintain alternative vendors and has generally
been able to locate alternative sources for materials during 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.
<PAGE>
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 14 percent of total
net sales in fiscal 1998, 12 percent in fiscal 1997 and 10 percent in fiscal
1996, but accounted for no more than 10 percent of total sales for each of the
prior ten years. The increases in fiscal 1998 and fiscal 1997 were mainly due to
sales of PortaCount respirator fit testers under U.S. military contracts.
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 protecting military personnel from
bio-hazard materials. These sales are made on a contractual basis one year at a
time or less. There is no assurance that these sales will continue or that the
government will not cancel such contracts (however, incurred costs would
normally be reimbursed). As of March 31, 1998 the Company's backlog included
orders of about $4.8 million for PortaCount fit testers and $1.8 million for
Ultraviolet Aerodynamic Particle Sizer Spectrometers for U.S. military services,
all scheduled to be shipped during fiscal 1999.
Sales to international customers under the Company's two major market
drivers for the periods indicated were as follows:
<TABLE>
<CAPTION>
Year Ended March 31
-------------------
1998 1997 1996
-------------- --------------- --------------`
Int'l. % of Int'l % of Int'l. % of
Sales Total Sales Total Sales Total
(000) Sales (000) Sales (000) Sales
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Major Market Drivers
--------------------
Instruments for the Safety,
Comfort & Health of People $13,266 16% $17,379 22% $11,647 17%
Instruments for Productivity
and Quality Improvement 13,863 17% 12,941 16% 13,106 19%
------ --- ------ --- ------ ---
Total 27,129 33% 30,320 38% 24,753 36%
</TABLE>
<PAGE>
Overall, the Company's fiscal 1998 international sales were 11 percent less than
fiscal 1997 international sales. Fiscal 1997 international sales increased 22
percent compared to fiscal 1996. The significant fluctuation between the years
is due primarily to sales of Safety, Comfort and Health products.
Included in fiscal 1997 sales of Safety, Comfort and Health products
was a $6.8 million contract for the PortaCount(R) respirator fit tester to the
German Army. There was no similar international contract in either fiscal 1998
or 1996. Consequently, for Safety, Comfort and Health products, international
sales increased 49 percent between fiscal 1997 and 1996 but decreased 24 percent
between fiscal 1998 and 1997.
Productivity and Quality Improvement products increased 7 percent from
fiscal 1997 to 1998 after experiencing a 1 percent decline from fiscal 1996 to
1997. The increase in fiscal 1998 was attributable primarily to higher sales of
LaserSpeed(R) instruments. The decline in international sales in fiscal 1997 was
due to a decline in research product sales. Research product sales fluctuate
year-to-year depending on buying trends in this mature market niche.
Both Safety, Comfort and Health instruments and Productivity and
Quality Improvement instruments have experienced a decline in sales to the
Pacific Rim region, primarily due to a weakening of the economies in that
region. Sales to the Pacific Rim represented 10 percent, 12 percent and 14
percent of sales in fiscal years 1998, 1997 and 1996, respectively. It is
uncertain what impact the weakening of the Asian currencies will have on fiscal
1999.
Further segment information about domestic and foreign operations is
included under Note I of the Notes to Consolidated Financial Statements on page
23 of the Company's 1998 Annual Report to Shareholders (Exhibit 13, page F-8).
Refer to page 12 of the Management's Discussion and Analysis of Results of
Operations and Financial Condition for additional discussion regarding
international sales.
MARKETING
The Company markets its products through Company-employed sales
engineers operating from offices located in the United States, and international
sales offices located in Europe. In addition,
<PAGE>
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 developing new products and identifying 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, 1998, the Company's backlog of orders was approximately
$22,408,000 compared to $25,122,000 at March 31, 1997 and $30,007,000 at March
31, 1996. The Company estimates that over 95% of the 1998 backlog will be
shipped by March 31, 1999.
As of March 31, 1998, about $4.8 million of the Company's backlog was
due to the afore-mentioned military contracts for PortaCount fit testers,
compared with $8.5 million and $12 million as of March 31, 1997 and 1996,
respectively. The March 31, 1998 backlog also includes a $1.8 million U.S.
military contract for the Company's Ultraviolet Aerodynamic Particle Sizer(R)
Spectrometer. There was no similar contract in backlog at March 31, 1997 or
1996.
COMPETITION
The Company's products compete with products utilizing different
technologies as well as directly competitive products. For example, certain of
the Company's measuring instruments which use thermal anemometry 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 on
<PAGE>
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. Also important
is an ability to grow by adding new 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>
COMPETITORS COMPANY'S
----------- 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 - - - 2 X
Indoor Air Quality 2 4 more more X*
than 6 than 6
<PAGE>
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*
</TABLE>
*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.
RESEARCH AND PRODUCT DEVELOPMENT
The Company is engaged in research and development activities
principally for developing proprietary products. These activities, which occur
in all aspects of the Company's business, generally consist of the development,
design and testing of potential new products with emphasis on applied (as
distinct from basic) research. Approximately 75% of the Company's engineering
and technical staff are engaged in research and development activities on a
full-time basis. The Company also engages in some contract research work for
others that varies from time to time. This type of contract work generally
relates to the development of a future instrument or product enhancements to
better meet market needs and applications. In addition, the Company utilizes
various outside consultants in the research and development area. In fiscal year
1998, the Company spent approximately $11,554,000 (14.3% of net sales) in
research and product development activities, compared to $10,939,000 (13.6% of
net sales) and $8,993,000 (13.0% of net sales) in fiscal 1997 and 1996,
respectively.
<PAGE>
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 material adverse effect on
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 on the
Company.
EMPLOYEES
As of March 31, 1998, the Company had 512 employees. The Company's employees are
not represented by a union, except at Alnor Instrument Company, a wholly owned
subsidiary acquired in fiscal 1996, where about 35 production employees are
represented by an in-house union. There has never been a work stoppage due to
labor difficulties and the Company considers its relations with employees to be
satisfactory at all locations.
Item 2. PROPERTIES
The Company's general offices and main manufacturing facilities are
located at 500 Cardigan Road, Shoreview, Minnesota 55126. This building contains
approximately 140,000 square feet. Constructed for the Company, it 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 in fiscal 1981 and the third, 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, 1998, the
productive capacity of this building is estimated to be from 30 to 50 percent
higher than fiscal 1996 levels, depending on the type of increased business
<PAGE>
encountered. The increased production capacity was necessary because of higher
sales of analytical and research products which require 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 it can build up to 80,000 square feet of additional space if
necessary.
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, 1998.
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, 1998, 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 1998 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 1988 through 1998 on pages 10 and 11 of the Company's
1998 Annual Report to Shareholders is incorporated herein by reference.
<PAGE>
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 1998 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 1998 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 1998 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 1998, 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 65 Chairman of the Board of Directors . Dr.
Fingerson was Chief Executive Officer of
the Company from 1961 until July 1997
and Chairman of the Board since 1986.
Dr. Fingerson has announced he will
retire effective at the July 1998 Annual
Meeting.
<PAGE>
James E. Doubles 57 President and Chief Executive Officer
since July 1997 and a Director. Mr.
Doubles was President and Chief
Operating Officer of the Company from
July 1992 to July 1997.
Lowell D. Nystrom 62 Senior Vice President since December
1997 and a Director. Mr. Nystrom was
Vice President, Treasurer and Chief
Financial Officer of the Company from
1961 to December 1997.
Robert F. Gallagher 43 Vice President and Chief Financial
Officer since December 1997. Mr.
Gallagher was Controller for the Company
from October 1989 to December 1997.
(c) Section 16(a). See the Company's Proxy Statement for 1998
Annual Meeting of Shareholders, dated June 18, 1998, 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 1998 Annual Meeting of Shareholders, dated
June 18, 1998, 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 1998 Annual Meeting of Shareholders, dated June 18,
1998, 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 1998 Annual Meeting of Shareholders,
dated June 18, 1998, 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.
<PAGE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of
fiscal 1998.
(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 11: Computation of Per Share Earnings.
Exhibit 13: The Company's 1998 Annual Report to
Shareholders for the fiscal year ended March
31, 1998.
Exhibit 21: Subsidiaries of the Company.
Exhibit 23: Auditors' Consent.
Exhibit 99: Forward Looking Statements
Exhibit 27: Financial Data Table.
- --------------
*Indicates management contract or compensation plan or arrangement required to
be filed as an exhibit.
<PAGE>
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 25,1998 TSI INCORPORATED
/s/James E. Doubles
-------------------
James E. Doubles, 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:
Signature Title Date
/s/ Leroy M. Fingerson Chairman of the Board and a Director June 25,1998
- ------------------------
Leroy M. Fingerson
/s/ James E. Doubles President, Chief Executive Officer and June 25,1998
- ------------------------ Director (Principal Executive Officer)
James E. Doubles
/s/ Lowell D. Nystrom Senior Vice President and a Director June 25,1998
- ------------------------
Lowell D. Nystrom
/s/ Robert F. Gallagher Vice President and Chief Financial June 25,1998
- ------------------------ Officer (Principal Financial and
Robert F. Gallagher Accounting Officer)
/s/ John F. Carlson Director June 25,1998
- ------------------------
John F. Carlson
/s/ Frank D. Dorman Director June 25,1998
- ------------------------
Frank D. Dorman
/s/ Joseph C. Levesque Director June 25,1998
- ------------------------
Joseph C. Levesque
/s/ Donald M. Sullivan Director June 25,1998
- ------------------------
Donald M. Sullivan
/s/ Kenneth J. Roering Director June 25,1998
- ------------------------
Kenneth J. Roering
/s/ Lawrence J. Whalen Director June 25,1998
- ------------------------
Lawrence J. Whalen
<PAGE>
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, 1998. 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 1998 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 16 -
March 31, 1998, 1997 and 1996
Consolidated Balance Sheets - March 31, 1998 and 1997 17 -
Consolidated Statements of Cash Flows for the Years Ended 18 -
March 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for Years 19 -
Ended March 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements 19 -
Independent Auditors' Report 24 -
C. INDEPENDENT AUDITORS' REPORT ON - F-3
SCHEDULES
</TABLE>
<PAGE>
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>
page F-3
Independent Auditors' Report
The Board of Directors and Shareholders
TSI Incorporated:
Under date of May 14, 1998, we reported on the consolidated balance sheets of
TSI Incorporated and subsidiaries as of March 31, 1998 and 1997 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, 1998 as contained in
the 1998 annual report to shareholders. These consolidated financial statements
and our report thereon are incorporated in the annual report on Form 10-K for
the year 1998. 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 14, 1998
<PAGE>
page F-4
SCHEDULE VIII; VALUATION AND QUALIFYING ACCOUNTS
TSI INCORPORATED AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- ----------------------------------------------------------------------------------------------
Additions
(1) (2) Bad debts
Description Balance Charged to Charged to charged Balance
beginning cost and to other against at end of
of period expenses accounts reserve period
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended
March 31, 1998
Deducted from
Asset Accounts:
Allowance for
doubtful accounts: $275,000 $ 29,000 $ 0 $24,000 $280,000
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
</TABLE>
- -------------
*Added in acquisitions
<PAGE>
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
1998 1997 1996
- --------------------------------------------------------------------------------
Advertising $1,555,000 $1,568,000 $1,664,000
- --------------------------------------------------------------------------------
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>
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, 1998
21 Subsidiaries of the Company F-9
23 Auditors' Consent F-10
99 Forward Looking Statement F-11
27 Financial Data Table
Page F-7
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
TSI INCORPORATED AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended March 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
BASIC
Weighted average common
shares outstanding 11,598,580 11,279,447 10,716,830
----------- ----------- -----------
Net earnings $ 6,825,978 $ 7,213,248 $ 5,482,040
----------- ----------- -----------
Basic earnings per common share $ 0.59 $ 0.64 $ 0.51
=========== =========== ===========
DILUTED
Weighted average common
shares outstanding 11,598,580 11,279,447 10,716,830
----------- ----------- -----------
Dilutive effect of employee stock options
and purchase awards--based on the
treasury stock method 271,350 429,086 458,460
----------- ----------- -----------
Weighted average common shares
outstanding and dilutive shares 11,869,930 11,708,533 11,175,290
----------- ----------- -----------
Net earnings $ 6,825,978 $ 7,213,248 $ 5,482,040
----------- ----------- -----------
Diluted earnings per common share $ 0.58 $ 0.62 $ 0.49
=========== =========== ===========
</TABLE>
Page F-8
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS FOR THE
FISCAL YEAR ENDED MARCH 31, 1998
10
Eleven-Year
Financial Data
ELEVEN-YEAR FINANCIAL SUMMARY(1)
(thousands of dollars unless otherwise indicated)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
NET SALES $81,012 $80,240 $69,233 $48,903 $43,979 $40,589 $40,293
GROSS PROFIT 45,085 44,971 38,491 28,566 25,301 22,877 22,880
% OF SALES 55.7 56.0 55.6 58.4 57.5 56.4 56.8
RESEARCH AND DEVELOPMENT 11,554 10,939 8,993 7,196 6,360 5,847 6,112
% OF SALES 14.3 13.6 13.0 14.7 14.5 14.4 15.2
SG & A 24,116 23,307 21,362 16,657 15,076 14,885 14,494
% OF SALES 29.8 29.0 30.9 34.1 34.3 36.7 36.0
OPERATING INCOME 9,415 10,725 8,136 4,714 3,864 2,145 2,275
% OF SALES 11.6 13.4 11.8 9.6 8.8 5.3 5.6
NET EARNINGS 6,826 7,213 5,482 3,432 3,199 2,344 1,830
% OF SALES 8.4 9.0 7.9 7.0 7.3 5.8 4.5
EARNINGS PER SHARE
BASIC .59 .64 .51 .33 .31 .23 .17
DILUTED .58 .62 .49 .32 .31 .22 .16
FINANCIAL POSITION
CURRENT RATIO 4.0 3.7 3.1 3.9 3.8 3.6 3.9
WORKING CAPITAL $31,243 $26,006 $18,498 $16,855 $15,783 $13,365 $14,615
TOTAL ASSETS 57,834 50,878 42,512 32,167 28,450 25,661 25,894
LONG-TERM DEBT 0 0 0 0 0 0 888
SHAREHOLDERS' EQUITY 47,443 41,320 33,598 26,342 22,839 20,335 19,918
SHAREHOLDERS' EQUITY PER SHARE 4.06 3.59 3.00 2.53 2.24 1.98 1.86
OTHER DATA
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT(2) $ 1,526 $ 2,293 $ 3,931 $ 3,124 $ 1,204 $ 1,138 $ 1,204
DEPRECIATION AND AMORTIZATION 2,192 2,096 1,739 1,282 1,274 1,143 1,161
BACKLOG OF ORDERS 22,408 25,112 30,007 11,364 12,514 6,109 8,393
RETURN ON AVERAGE SHAREHOLDERS' EQUITY (%) 15.4 19.3 18.3 14.0 14.8 11.7 9.4
RETURN ON AVERAGE TOTAL ASSETS (%) 12.6 15.4 15.0 11.3 12.2 9.4 7.0
</TABLE>
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 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.
<PAGE>
11
Investor
Information
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
1991 1990 1989 1988
<S> <C> <C> <C> <C>
OPERATIONS
NET SALES $39,660 $35,916 $33,733 $29,294
GROSS PROFIT 23,491 21,402 19,444 17,047
% OF SALES 59.2 59.6 57.6 58.2
RESEARCH AND DEVELOPMENT 5,538 4,535 4,461 4,813
% OF SALES 14.0 12.6 13.2 16.4
SG & A 14,167 13,548 12,068 10,308
% OF SALES 35.7 37.7 35.8 35.2
OPERATING INCOME 3,786 3,319 2,915 1,926
% OF SALES 9.5 9.2 8.6 6.6
NET EARNINGS 2,660 2,295 1,927 1,518
% OF SALES 6.7 6.4 5.7 5.2
EARNINGS PER SHARE
BASIC .25 .21 .17 .14
DILUTED .24 .20 .17 .14
FINANCIAL POSITION
CURRENT RATIO 3.2 3.4 3.4 3.7
WORKING CAPITAL $13,275 $12,461 $12,609 $10,969
TOTAL ASSETS 26,681 24,900 23,675 21,361
LONG-TERM DEBT 965 1,202 838 1,085
SHAREHOLDERS' EQUITY 18,943 17,800 16,073 14,562
SHAREHOLDERS' EQUITY PER SHARE 1.77 1.61 1.45 1.33
OTHER DATA
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT(2) $ 1,057 $ 1,439 $ 782 $ 871
DEPRECIATION AND AMORTIZATION 1,128 1,193 1,127 954
BACKLOG OF ORDERS 9,803 7,418 6,724 6,959
RETURN ON AVERAGE SHAREHOLDERS' EQUITY (%) 14.5 13.6 12.6 10.9
RETURN ON AVERAGE TOTAL ASSETS (%) 10.7 9.6 8.7 7.4
</TABLE>
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, 1998, average trading volume of TSI common stock was
360,000 shares per month, based on NASDAQ records.
There were 11,409,858 shares of TSI common stock outstanding as of June 2,
1998 of which 18.9 percent were owned by officers and directors of TSI. There
were 689 shareholders of record on that date and an additional number of about
2,600 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, 1998, the quarterly dividend rate was $.03 per share.
STOCK DATA
Trailing
Market Range Dividend 12-Month
Fiscal 1998 High Low Close Declared P/e RatiO
- -----------------------------------------------------------------------
Fourth Quarter $10 3/8 7 5/8 8 3/4 $ .030 15.1
Third Quarter 10 7/8 9 10 .030 18.2
Second Quarter 11 8 3/4 9 3/8 .025 15.6
First Quarter 10 3/8 8 3/4 9 1/2 .025 16.1
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 13.1
First Quarter 11 3/4 8 1/8 9 1/2 .020 16.4
DIVIDENDS PER SHARE
(DOLLARS)
[BAR CHART]
1988 .023
1989 .025
1990 .034
1991 .042
1992 .054
1993 .054
1994 .054
1995 .060
1996 .070
1997 .090
1998 .110
<PAGE>
12
Management's
Discussion
and Analysis
NET SALES
(MILLIONS OF DOLLARS)
[BAR CHART]
Safety, Comfort Productivity
and Health and Quality
of People Improvement
1994 44.0 37% 63%
1995 48.9 32% 68%
1996 69.2 34% 66%
1997 80.2 33% 67%
1998 81.0 36% 64%
INTERNATIONAL SALES
(PERCENT OF SALES)
[BAR CHART]
1994 31%
1995 31%
1996 36%
1997 38%
1998 33%
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.
NET SALES Net sales totaled $81,012,000 in fiscal 1998, an increase of 1 percent
from $80,240,000 in fiscal 1997, which was 15.9 percent above fiscal 1996 sales
of $69,233,000. The Net Sales graph on this page shows how sales have grown
under the Company's major market drivers over the past five years.
In fiscal 1998, sales of products for Safety, Comfort and Health of People
represented 64 percent of total sales compared with 67 percent of total sales in
fiscal 1997. In actual dollars, these sales declined 4 percent from fiscal 1997
to fiscal 1998. The decrease was due to:
* Lower PORTACOUNT(R) respirator and gas mask fit tester sales for military
applications.
* A slowdown in sales of meteorologic and hydrologic instruments for outdoor
monitoring due to delays in obtaining certain contracts.
* Continued reduction in R&D contracts supporting electrochemical sensor
development.
These declines were partially offset by increases in sales of analytical
instruments for diagnostics and research as well as indoor air quality monitors.
The increases from fiscal 1996 to fiscal 1997 included higher PORTACOUNT
fit tester sales for military applications, partially offset by decreased sales
of meteorologic and hydrologic instruments. In fiscal 1998, approximately $8.4
million in sales came from contracts with the U.S. Army for PORTACOUNT fit
testers for respirators and gas masks, down from $12.5 million in fiscal 1997
when the Company was shipping to both the U.S. and German Armies. In fiscal
1996, the Company shipped approximately $3.0 million of this product for
military use.
Sales of products for Productivity and Quality Improvement increased 11
percent, accounting for 36 percent of total sales compared with 33 percent in
fiscal 1997. Increased fiscal 1998 sales came from:
* LaserSpeed(R) speed and length instruments for the wire and cable industry.
* Diameter and flaw detection gauges for the wire and cable industry. These
products were obtained in the Target acquisition in July, 1997. See Note J on
page 23 for more information on this acquisition.
* Fluid mechanics instruments. These instruments had experienced a decline in
fiscal 1997.
These increases were partially offset by reduced revenue from sales of
instruments for testing and research and from contract-supported research by our
Aerometrics subsidiary. During fiscal 1998, the Company experienced significant
turnover at this subsidiary, affecting its ability to produce instruments and
complete contract-supported research.
For fiscal 1997, sales of Productivity and Quality Improvement products
were affected by the Aerometrics, Inc. and Zimmer GmbH acquisitions. Excluding
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.
Domestic net sales increased 8 percent, or $4.0 million, during fiscal
1998. The Company's international net sales decreased 11 percent to $27.1
million in fiscal 1998, which was 33 percent of consolidated net sales.
International sales were $30.3 million,
<PAGE>
13
Management's
Discussion
and Analysis
GROSS PROFIT MARGIN
(PERCENT OF SALES)
[BAR CHART]
1994 57.5%
1995 58.4%
1996 55.6%
1997 56.0%
1998 55.7%
R&D EXPENDITURES
(PERCENT OF SALES)
[BAR CHART]
1994 14.5%
1995 14.7%
1996 13.0%
1997 13.6%
1998 14.3%
or 38 percent of sales, and $24.8 million, or 36 percent, in fiscal 1997 and
1996, respectively. Lower international sales during fiscal 1998 were due mainly
to:
* The completion of a German Army contract for PORTACOUNT fit testers at the
end of fiscal 1997.
* A decrease in business in the Pacific Rim region due to the weakening of
Asian currencies.
Sales to the Pacific Rim represented 10%, 12% and 14% of net sales in
fiscal years 1998, 1997 and 1996, respectively. It is uncertain what impact the
weakening of Asian currencies will have on fiscal 1999.
Sales to federal and state agencies, including defense, comprised 21
percent of the Company's net sales for fiscal 1998, compared with 22 and 21
percent for fiscal 1997 and 1996, respectively. 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. The level of government contracts
in backlog at March 31, 1998 and March 31, 1997 were similar and, consequently,
the percentage of sales to government agencies in fiscal 1999 are expected to be
similar to fiscal 1998.
GROSS PROFIT Gross profit was $45,085,000 in fiscal 1998, or 55.7 percent of net
sales, compared with $44,971,000, or 56.0 percent of net sales, in fiscal 1997
and $38,491,000, or 55.6 percent, in fiscal 1996. Gross profit margins are
expected to be at a similar percentage of net sales in fiscal 1999.
OPERATING EXPENSES Research and product development expenses were 14.3 percent
of net sales in fiscal 1998, compared to 13.6 percent for fiscal 1997 and 13.0
percent in fiscal 1996. The Company's strong commitment to long-term growth
through research and product development has continued to generate new products
and enhance product lines in the Company's key market niches. This is expected
to result in sales growth in future years. For the past ten years, the Company's
research and product development expenses have ranged from approximately 12 to
15 percent of net sales. Fiscal 1999 research and development expenses are
expected to be in the lower end of this range.
Selling expenses were 22.4 percent of net sales in fiscal 1998, 21.7
percent in fiscal 1997, and 23.3 percent in fiscal 1996. Fiscal 1999 selling
expenses are expected to be in a similar range.
Administrative expenses were 7.4 percent of sales in fiscal 1998 and 1997,
compared to 7.6 percent in fiscal 1996. The Company expects administrative costs
to continue in a normal range of 7 to 9 percent for fiscal 1999.
OTHER INCOME Other income totaled $798,000 in fiscal 1998, compared with
$372,000 in fiscal 1997 and $298,000 in fiscal 1996. Other income was higher in
fiscal 1998 mainly due to higher investment income due to higher cash balances.
PROVISION FOR INCOME TAXES The provision for income taxes was $3,387,000, or
33 percent of pretax earnings in fiscal 1998. This compares to provisions of
$3,884,000, or 35 percent of pretax earnings, in fiscal 1997, and $2,952,000, or
35 percent of pretax earnings, in fiscal 1996. The fiscal 1999 effective tax
rate is expected to again be in the range of 33 to 35 percent of pretax
earnings, assuming no significant changes in the tax laws. See Note G on page 22
for additional information.
<PAGE>
14
Management's
Discussion
and Analysis
SELLING & ADMINISTRATIVE
EXPENDITURES
(PERCENT OF SALES)
[BAR CHART]
1994 34.3%
1995 34.1%
1996 30.9%
1997 29.0%
1998 29.8%
OPERATING INCOME
(MILLIONS OF DOLLARS)
[BAR CHART]
1994 3.86%
1995 4.71%
1996 8.14%
1997 10.7%
1998 9.4%
NET EARNINGS Net earnings were $6,826,000, or $.58 per diluted share in fiscal
1998. This was a decrease of 5.4 percent from $7,213,000, or $.62 per diluted
share, in fiscal 1997, which was an increase of 31.6 percent from $5,482,000, or
$.49 per diluted share, in fiscal 1996.
YEAR 2000 DATE CONVERSION We have established processes for evaluating the risks
and costs associated with preparing our systems and applications for the year
2000. Most of the costs and expenses related to the conversion and testing
represent internal information technology resources that have been redeployed
from other projects and are expected to return to these projects upon
completion.
Based on assessments completed to date, and compliance plans in process,
the Company does not expect the year 2000 issue, including the costs of making
its critical systems and applications compliant, will have a material effect on
its business operations, consolidated financial condition, cash flows or results
of operations.
LIQUIDITY AND CAPITAL RESOURCES
CASH AND CASH EQUIVALENTS Cash and cash equivalents increased by $1,691,000
during fiscal 1998 to $9,386,000 at March 31, 1998. The major factor in the cash
increase was net earnings of $6.8 million. Other significant contributions from
operating activities were depreciation and amortization, partially offset by
increased receivables and higher inventories. Cash used for additions to
property plant and equipment was $1,526,000, and $732,000 was used for an
acquisition. Dividend payments increased by $260,000 to $1,275,000.
Net cash provided by operating activities totaled $5,080,000 in fiscal
1998, compared with $10,008,000 in fiscal 1997 and $596,000 in fiscal 1996. The
decrease in cash provided by operating activities in fiscal 1998 was primarily a
result of:
* Higher fourth quarter net sales resulting in increased receivables.
* Increased inventory due to the timing of purchases for new product
introductions and the addition of the diameter and flaw detection gauges for
the wire and cable industry obtained in the Target acquisition in July, 1997.
Significant decreases in cash provided by operating activities in fiscal
1996 came from increased receivables and inventories resulting from a higher
sales volume and the large increase in backlog of orders and purchases made to
fulfill longer-term contracts.
Management believes internally-generated funds and short-term borrowings on
existing credit lines will provide adequate resources to support operations
through fiscal 1999.
CURRENT ASSETS AND LIABILITIES Accounts receivable increased by $2,250,000 to
$16,508,000 at March 31, 1998. This increase in fiscal 1998 was the result of
higher net sales during the fourth quarter.
Inventories increased $2,214,000 to $15,516,000 at March 31, 1998 due to
the timing of purchases for new product introductions and inventory purchased
for diameter and flaw detection gauges acquired in the July, 1997 Target
acquisition.
Working capital rose $5,237,000 to $31,243,000 at March 31, 1998. The
current ratio was 4.0 compared to 3.7 at the end of fiscal 1997.
<PAGE>
15
Management's
Discussion
and Analysis
CURRENT RATIO
[BAR CHART]
1994 3.8%
1995 3.9%
1996 3.1%
1997 3.7%
1998 4.0%
NET EARNINGS
(MILLIONS OF DOLLARS)
[BAR CHART]
1994 3.20%
1995 3.43%
1996 5.48%
1997 7.21%
1998 6.83%
The Company has two short-term lines of credit totaling $2,500,000 and had
no outstanding loans during fiscal 1998 or 1997. The Company had no long-term
debt at March 31, 1998 or 1997.
STOCK REPURCHASE As of March 31, 1998, the Company has authority to repurchase a
total of 1,360,000 shares under plans approved by its Board of Directors,
including a 1 million share authorization announced on March 31, 1998. The
Company repurchased 100,000 shares during the fiscal year ended March 31, 1998
and 275,000 in early April, 1998. No shares were repurchased during fiscal 1997.
The Company has no present plans to acquire all the authorized shares or to
repurchase shares at any prescribed rate over time.
IMPACT OF ACCOUNTING STANDARDS
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share. All prior periods presented have
been restated to reflect the provisions of this standard. In fiscal 1999, the
Company intends to adopt SFAS No. 130, Disclosures about Segments of the
Enterprise and Related Information, and SFAS No. 131, Reporting Comprehensive
Income. Both SFAS No.130 and No. 131 effect presentation of certain financial
information and are not expected to have a material impact.
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, 1998.
<PAGE>
16
Financial Statements
CONSOLIDATED STATEMENTS OF EARNINGS
TSI Incorporated and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1998 1997 1996
- ------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Net sales $ 81,012,384 $ 80,239,622 $ 69,233,244
Cost of products sold 35,927,534 35,268,412 30,741,891
- ------------------------------------------------------------- ------------- ------------- -------------
GROSS PROFIT 45,084,850 44,971,210 38,491,353
Operating expenses
Research and product development 11,553,734 10,939,276 8,992,519
Selling 18,147,723 17,394,017 16,134,498
Administrative 5,968,509 5,913,086 5,227,992
- ------------------------------------------------------------- ------------- ------------- -------------
35,669,966 34,246,379 30,355,009
- ------------------------------------------------------------- ------------- ------------- -------------
OPERATING INCOME 9,414,884 10,724,831 8,136,344
Other income -- Note C 798,094 372,417 297,696
- ------------------------------------------------------------- ------------- ------------- -------------
EARNINGS BEFORE INCOME TAXES 10,212,978 11,097,248 8,434,040
Provision for income taxes -- Note G 3,387,000 3,884,000 2,952,000
- ------------------------------------------------------------- ------------- ------------- -------------
NET EARNINGS $ 6,825,978 $ 7,213,248 $ 5,482,040
============= ============= =============
BASIC EARNINGS PER COMMON SHARE $.59 $.64 $.51
- ------------------------------------------------------------- ============= ============= =============
DILUTED EARNINGS PER COMMON SHARE $.58 $.62 $.49
- ------------------------------------------------------------- ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,598,580 11,279,447 10,716,830
Dilutive effect of employee stock options and purchase awards 271,350 429,086 458,460
------------- ------------- -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING AND DILUTIVE
SHARES 11,869,930 11,708,533 11,175,290
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
QUARTERLY FINANCIAL INFORMATION
TSI Incorporated and Subsidiaries (Unaudited)
Following is a summary of unaudited quarterly results. Due to the nature of
the weighted average number of shares calculation, the sum of basic earnings per
common share for the four fiscal 1998 quarters does not equal the fiscal 1998
total basic earnings per common share amount (see Note D).
<TABLE>
<CAPTION>
FISCAL 1998 1ST QTR 2ND QTR 3RD QTR 4TH QTR TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET SALES $19,290,167 $20,685,942 $19,739,440 $21,296,835 $81,012,384
GROSS PROFIT 10,602,617 11,670,072 11,373,891 11,438,270 45,084,850
NET EARNINGS 1,482,254 1,770,616 1,678,017 1,895,091 6,825,978
BASIC EARNINGS PER COMMON SHARE .13 .15 .14 .16 .59
DILUTED EARNINGS PER COMMON SHARE .13 .15 .14 .16 .58
Fiscal 1997
- -------------------------------------------------------------------------------------------------------------
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
Basic earnings per common share .17 .14 .19 .14 .64
Diluted earnings per common share .16 .14 .19 .13 .62
</TABLE>
<PAGE>
17
Financial Statements
CONSOLIDATED BALANCE SHEETS
TSI Incorporated and Subsidiaries
<TABLE>
<CAPTION>
MARCH 31 1998 1997
- -------------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,385,509 $ 7,694,998
Accounts receivable, less allowance of $280,000 and $275,000,
respectively 16,508,360 14,256,692
Prepaid expenses 223,713 310,276
Inventories
Finished products 2,883,469 2,908,537
Work-in-process 2,792,730 2,486,856
Materials and supplies 9,840,083 7,906,912
- -------------------------------------------------------------------------------------------- ------------ ------------
15,516,282 13,302,305
- -------------------------------------------------------------------------------------------- ------------ ------------
TOTAL CURRENT ASSETS 41,633,864 35,564,271
INTANGIBLES AND OTHER ASSETS
Goodwill, net of accumulated amortization of $1,151,000 and $917,000,
respectively 3,834,903 3,001,796
Note receivable 632,540 595,577
Deferred income taxes--Note G 456,169 498,020
Other assets 2,878,348 2,420,050
- -------------------------------------------------------------------------------------------- ------------ ------------
7,801,960 6,515,443
PROPERTY, PLANT AND EQUIPMENT
Land 128,503 128,503
Buildings 3,713,160 3,586,992
Construction in progress 51,341 183,229
Machinery and equipment 19,689,035 18,244,708
- -------------------------------------------------------------------------------------------- ------------ ------------
23,582,039 22,143,432
Less allowance for depreciation 15,183,541 13,344,806
- -------------------------------------------------------------------------------------------- ------------ ------------
8,398,498 8,798,626
- -------------------------------------------------------------------------------------------- ------------ ------------
TOTAL ASSETS $ 57,834,322 $ 50,878,340
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses -- Note H 4,924,480 4,963,795
Employee compensation 3,918,610 3,904,546
Taxes, other than income taxes 519,285 442,247
Income taxes payable 1,028,656 247,354
- -------------------------------------------------------------------------------------------- ------------ ------------
TOTAL CURRENT LIABILITIES 10,391,031 9,557,942
SHAREHOLDERS' EQUITY -- Notes D and E
Common shares, $.10 par value-authorized 30,000,000 shares, issued
and outstanding 1998--11,681,386 shares; 1997--11,495,728 shares 1,168,139 1,149,573
Additional paid-in capital 11,394,909 9,724,365
Retained earnings 35,164,722 30,400,007
Equity adjustment from translation (284,479) 46,453
- -------------------------------------------------------------------------------------------- ------------ ------------
TOTAL SHAREHOLDERS' EQUITY 47,443,291 41,320,398
Commitments and contingencies -- Note B
- -------------------------------------------------------------------------------------------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 57,834,322 $ 50,878,340
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
18
Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
TSI Incorporated and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1998 1997 1996
- -------------------------------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 6,825,978 $ 7,213,248 $ 5,482,040
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for losses on accounts receivable 4,334 12,994 29,845
Depreciation and amortization of property, plant and equipment 1,958,454 1,910,831 1,572,218
Amortization of goodwill 233,264 184,832 166,885
Loss on sale of assets (16,407) 34,393 12,603
Provision for deferred income taxes 78,021 223,000 (313,000)
Income tax benefit from stock plans 147,396 220,000 254,000
Changes in operating assets and liabilities:
Accounts receivable (1,912,535) 1,607,998 (5,234,609)
Prepaid expenses 148,918 207 64,572
Inventories (1,528,794) (2,093,263) (2,569,069)
Other assets (142,277) 252,153 461,571
Accounts payable and accrued expenses (953,628) 29,364 266,133
Employee compensation (249,190) 714,831 247,366
Taxes, other than income taxes 77,038 111,827 33,270
Income taxes payable 781,302 (378,785) 446,141
Foreign currency translation loss (371,667) (35,726) (324,024)
- -------------------------------------------------------------------------- ------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,080,207 10,007,904 595,942
- -------------------------------------------------------------------------- ------------ ------------ ------------
INVESTING ACTIVITIES
Additions to property, plant and equipment (1,525,698) (2,293,445) (3,931,011)
Proceeds from disposal of property, plant and equipment 26,174 903 15,196
Purchase of companies, net of cash acquired (732,244) (1,081,764) (5,817,721)
- -------------------------------------------------------------------------- ------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (2,231,768) (3,374,306) (9,733,536)
- -------------------------------------------------------------------------- ------------ ------------ ------------
FINANCING ACTIVITIES
Payment on short-term notes -- -- (343,326)
Proceeds from stock options exercised 467,910 626,318 863,075
Proceeds from employee stock purchases 455,058 667,691 421,394
Dividends paid (1,275,446) (1,015,277) (699,057)
Purchases of common stock (887,056) -- --
- -------------------------------------------------------------------------- ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,239,534) 278,732 242,086
- -------------------------------------------------------------------------- ------------ ------------ ------------
Effect of exchange rate changes on cash and cash equivalents 81,606 94,613 32,011
- -------------------------------------------------------------------------- ------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,690,511 7,006,943 (8,863,497)
- -------------------------------------------------------------------------- ------------ ------------ ------------
Cash and cash equivalents at beginning of year 7,694,998 688,055 9,551,552
- -------------------------------------------------------------------------- ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,385,509 $ 7,694,998 $ 688,055
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
19
Financial Statements
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
TSI Incorporated and Subsidiaries
<TABLE>
<CAPTION>
Equity
Common Shares Additional Adjustment
---------------------- Paid-In Retained from
Shares Amount Capital Earnings Translation
------ ------ ------- -------- -----------
<S> <C> <C> <C> <C> <C>
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 ($.07 per share) (699,057)
Current year translation adjustment (310,373)
Employee stock purchases 56,639 5,664 415,730
Stock options exercised 177,230 17,723 872,728
Income tax benefit from stock plans 254,000
Stock issued in purchase 146,789 14,679 1,258,275
Shares exchanged upon option exercise (1,888) (189) (2,658) (52,369)
---------- ---------- ----------- ----------- -----------
Balance March 31, 1996 5,590,828 599,083 8,800,846 24,202,036 35,985
Net earnings for year ended March 31, 1997 7,213,248
Cash dividends paid ($.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
Net earnings for year ended March 31, 1998 6,825,978
Cash dividends paid ($.11 per share) (1,275,446)
Current year translation adjustment (330,932)
Employee stock purchases 63,467 6,347 448,711
Stock options exercised 126,653 12,665 455,245
Income tax benefit from stock plans 147,396
Stock issued in purchase 95,438 9,544 710,441
Shares repurchased and retired (99,900) (9,990) (91,249) (785,817)
---------- ---------- ----------- ----------- -----------
BALANCE MARCH 31, 1998 11,681,386 $1,168,139 $11,394,909 $35,164,722 $ (284,479)
========== ========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TSI Incorporated and Subsidiaries March 31, 1998
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 $5,561,000 at March 31, 1998 consist of
short-term highly liquid investments with maturity periods of less than three
months from date of purchase. There were cash equivalents of $4,003,000 at March
31, 1997.
INVENTORIES: Inventories are valued at cost which is not in excess of market.
Inventories valued under the last-in, first-out (LIFO) method were $9,433,000
and $7,986,000 at March 31, 1998 and 1997, respectively. Inventories valued
under the first-in, first-out (FIFO) method were $6,084,000 and 5,316,000 at
March 31, 1998 and 1997, respectively. If the first-in, first-out (FIFO) method
of inventory valuation had been used by the Company, inventories would have been
approximately $ 935,000 and 1,276,000 higher than reported at March 31, 1998 and
1997, 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, 1998 and 1997, the estimated
<PAGE>
20
NOTES
NOTE A (CONTINUED)
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 SFAS No. 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: The Company calculates earnings per share in
accordance with SFAS No. 128, EARNINGS PER SHARE. Basic earnings per common
share is computed using the weighted average number of common shares outstanding
during each period. Diluted earnings per common share is computed using the
weighted average number of common shares and dilutive effect of shares issuable
under terms of the stock option or the employee stock purchase plans.
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, 1998, the Company had outstanding forward contracts of $785,000
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, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS: The Company intends to adopt SFAS No. 130,
REPORTING COMPREHENSIVE INCOME, in the first quarter of fiscal 1999. SFAS No.
130 establishes the standards for reporting and displaying comprehensive income
as part of a full set of financial statements. This statement requires that all
elements of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Since this
standard applies only to the presentation of comprehensive income, it will not
have any impact on TSI's results of operations, financial position, or cash
flows.
Beginning with the fiscal 1999 annual report, the Company will adopt SFASNo.
131, DISCLOSURES ABOUT SEGMENTS OF THE ENTERPRISE AND RELATED INFORMATION. SFAS
No. 131 requires segments to be determined based on how management measures
performance and makes decisions about allocating resources.
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 $778,000, $769,000, and $686,000
in 1998, 1997, and 1996, respectively. Future minimum lease obligations each
fiscal year under noncancelable operating leases are $738,000 in 1999, $470,000
in 2000, $381,000 in 2001, $310,000 in 2002, $128,000 in 2003 and $239,000 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, 1998, neither credit line had an
outstanding balance. However, the total available funds were reduced by
outstanding standby letters of credit totaling $36,000 issued against these two
facilities. Additionally, the Company had contingent liabilities of $1,731,000
in the form of performance and foreign customs guarantees.
NOTE C - OTHER INCOME
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1998 1997 1996
- ------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Interest income $ 412,000 $ 221,000 $ 111,000
Interest expense (15,000) (15,000) (24,000)
Foreign currency transaction gains (losses) 123,000 (40,000) 42,000
Other 278,000 206,000 169,000
- ------------------------------------------ ---------- ---------- ----------
$ 798,000 $ 372,000 $ 298,000
========== ========== ==========
</TABLE>
<PAGE>
21
NOTES
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. For each share issued in
connection with the stock split, an amount equal to the par value of $.10 was
transferred to the common shares amount from additional paid-in capital in
fiscal year 1997. This transfer is reflected in the Consolidated Statements of
Shareholders' Equity. All other references in the financial statements and
related notes to per share information, stock options, weighted average number
of shares, as well as the number of common shares outstanding for all prior
years presented, have been retroactively adjusted to reflect the stock split.
NOTE E - STOCK OPTIONS AND STOCK PURCHASE PLAN
The Company uses APB No. 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:
1998 1997
----------- -----------
Net earnings
As reported $ 6,826,000 $ 7,213,000
Pro forma $ 6,387,000 $ 7,042,000
Earnings per common share
As reported using basic shares $.59 $.64
Pro forma using basic shares $.55 $.62
As reported using dilutive shares $.58 $.62
Pro-forma using dilutive shares $.54 $.60
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 1998, 1997, and 1996: dividend yield of
1.0 percent; expected volatility of 17 percent; risk-free rates of approximately
6.5 percent; and expected lives of one to five years.
Pro forma net earnings reflect only options granted in fiscals 1998, 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 op-tions 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:
<TABLE>
<CAPTION>
1982 Plan 1988 Plan 1992 Plan
--------- --------- ---------
Shares Shares Shares Weighted Aver-
Available Shares Available Shares Available Shares age 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, 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
Reserved 229,915
Granted (185,870) 185,870 9.39
Exercised (4,800) (42,980) (80,775) 3.79
Canceled 31,746 (31,746) 6.93
- ----------------------- -------- -------- --------- -------- -------- --------
Balance March 31, 1998 -- -- -- 33,500 351,136 707,681 6.75
======================= ========= ======== ========= ======== ======== ========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options as of March 31, 1998:
<TABLE>
<CAPTION>
Weighted Aver- Weighted Weighted
Range of Number age 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 95,136 1.54 $3.23 85,086 $3.19
$4.29 to $5.69 255,117 3.22 4.40 251,222 4.39
$8.00 to $8.88 220,410 5.41 8.58 106,720 8.41
$9.06 to $9.69 75,042 6.02 9.62 69,041 9.67
$10.00 to $10.25 95,476 5.89 10.07 50,108 10.14
------- -------
741,181 562,177
======= =======
</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, 1998,330,841 shares remain reserved for grant and 0 shares are subscribed
but unissued under this plan. An aggregate of 1,422,936 shares are reserved for
issuance under stock option and Employee Stock Purchase Plans.
<PAGE>
22
NOTES
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 $1,712,000, $2,094,000
and $1,619,000 in 1998, 1997, and 1996, respectively.
NOTE G - INCOME TAXES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1998 1997 1996
- ------------------------------------------------------------------------ ------------ ----------- ------------
<S> <C> <C> <C>
Earnings Before Income Taxes:
Domestic $ 9,928,000 $ 10,374,000 $ 8,352,000
Foreign 285,000 723,000 82,000
- ------------------------------------------------------------------------ ------------ ----------- ------------
$ 10,213,000 $ 11,097,000 $ 8,434,000
Provision for Income Taxes: ============ ============ ============
Current:
U.S. $ 2,887,000 $ 3,209,000 $ 2,908,000
State 357,000 452,000 357,000
Foreign 65,000 -- --
Deferred:
U.S. and state 78,000 (50,000) (40,000)
Foreign -- 273,000 (273,000)
- ------------------------------------------------------------------------ ------------ ------------ ------------
$ 3,387,000 $ 3,884,000 $ 2,952,000
============ ============ ============
Income Taxes Paid (net of refunds received) $ 2,281,000 $ 3,716,000 $ 2,452,000
- ------------------------------------------------------------------------ ============ ============ ============
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 2.7 2.9 2.8
Foreign Sales Corporation tax exempt income (2.4) (3.3) (2.1)
Valuation allowance -- -- (2.7)
Research credit (1.3) (0.2) --
Other 0.2 1.6 3.0
- ------------------------------------------------------------------------ ------------ ------------ ------------
Effective Tax Rate 33.2% 35.0% 35.0%
============ ============ ============
</TABLE>
In fiscal 1998, 1997, and 1996 there was a tax benefit of approximately
$147,000, $220,000, and $254,000, respectively, credited to share-holders'
equity associated with the exercise of stock options and dispositions of stock
purchased through the Employee Stock Purchase Plan.
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,
1998, and March 31, 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
----------- ------------
<S> <C> <C>
Deferred Tax Assets:
Inventory $ 478,000 $ 367,000
Accounts receivable 68,000 58,000
Reserves for warranty expense 59,000 116,000
Federal tax credits 126,000 --
Payroll 271,000 357,000
Other 8,000 46,000
- --------------------------------------------------------- ----------- -----------
Total deferred tax assets $ 1,010,000 $ 944,000
----------- -----------
Deferred Tax Liabilities:
Property and equipment (441,000) (373,000)
Other (113,000) (73,000)
- --------------------------------------------------------- ----------- ----------
Total deferred tax liabilities $ (554,000) $ (446,000)
----------- ----------
Net Deferred Income Taxes $ 456,000 $ 498,000
=========== ===========
</TABLE>
The Company has research credit carryforwards for federal income tax purposes
of approximately $126,000 which expire between the years 2006 and 2012.
Management believes the Company will generate sufficient taxable income in
future periods to realize all of the benefits of the Company's deferred tax
assets.
<PAGE>
<TABLE>
<CAPTION>
23
NOTES
NOTE H - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
YEAR ENDED MARCH 31 1998 1997
- ---------------------------------------------------- ------------ ------------
<S> <C> <C>
Trade accounts payable $ 2,570,000 $ 2,487,000
Deferred revenue 99,000 212,000
Commissions and royalties payable 1,186,000 851,000
Other accounts payable and accrued expenses 1,069,000 1,414,000
- ---------------------------------------------------- ------------ ------------
$ 4,924,000 $ 4,964,000
=========== ============
</TABLE>
NOTE I - SEGMENT INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1998 1997 1996
- ---------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Net Sales
Domestic operations
Unaffiliated domestic customers $ 53,958,000 $ 49,919,000 $ 44,480,000
Unaffiliated foreign customers 19,186,000 18,657,000 18,708,000
Intercompany 3,934,000 7,685,000 3,365,000
- ---------------------------------------------------- ------------ ------------ ------------
77,078,000 76,261,000 66,553,000
Foreign operations
Unaffiliated customers 7,868,000 11,664,000 6,045,000
Intercompany 76,000 29,000 455,000
- ---------------------------------------------------- ------------ ------------ ------------
7,944,000 11,693,000 6,500,000
Eliminations (4,010,000) (7,714,000) (3,820,000)
- ---------------------------------------------------- ------------ ------------ ------------
Net Sales $ 81,012,000 $ 80,240,000 $ 69,233,000
============ ============ ============
Earnings Before Income Taxes
Domestic operations $ 11,539,000 $ 11,405,000 $ 8,729,000
Foreign operations 298,000 725,000 82,000
Eliminations (1,624,000) (1,033,000) (377,000)
- ---------------------------------------------------- ------------ ------------ ------------
Earnings Before Income Taxes $ 10,213,000 $ 11,097,000 $ 8,434,000
============ ============ ============
Assets
Domestic operations $ 68,256,000 $ 58,831,000 $ 53,323,000
Foreign operations 4,098,000 3,630,000 4,689,000
Eliminations (14,520,000) (11,583,000) (15,500,000)
- ---------------------------------------------------- ------------ ------------ ------------
Total Assets $ 57,834,000 $ 50,878,000 $ 42,512,000
============ ============ ============
</TABLE>
The Company's domestic operations export products to unaffiliated foreign
customers in many countries, including exports to the Pacific Basin which
represented approximately 11%, 12%, and 14% of net sales in 1998, 1997, and
1996, 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 28%, 27%, and
25% of net sales in 1998, 1997, and 1996, respectively. Sales directly to
federal and state agencies, including defense, during the same three years were
21%, 22%, and 21%, respectively, of net sales.
NOTE J - BUSINESS COMBINATIONS
Effective July 15, 1997, the Company acquired Target Systems, Incorporated of
Salt Lake City, Utah. Target Systems, Incorporated is a manufacturer of diameter
gauges for the wire and cable industry. It had sales of approximately $2,900,000
(unaudited) in the twelve months prior to acquisition. The Company paid cash of
$700,000 and issued 95,438 shares of Company stock for a total acquisition price
of $1,452,000. The acquisition was accounted for by the purchase method of
accounting. Goodwill amounted to $1,074,000, and is being amortized on a
straight-line basis over a period of twenty years.
<PAGE>
24
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, 1998 and 1997, 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, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TSI
Incorporated and subsidiaries as of March 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1998, in conformity with generally accepted accounting
principles.
Minneapolis, Minnesota
May 14, 1998
/s/ KPMG Peat Marwick LLP
MANAGEMENT'S REPORT
Management is responsible for the accuracy and objectivity of the data
included in this report. The financial statements have been prepared in
accordance with generally accepted accounting principles using management's best
estimates and judgements where appropriate.
Established accounting procedures and related systems of internal control
provide reasonable assurance that assets are protected, that the accounting
books and records properly reflect all transactions, and that policies and
procedures are implemented by qualified personnel.
The Audit Committee, composed of two members of the Board of Directors who
are not employees of the Company, meets regularly with representatives of
management and the independent auditors to monitor the functioning of the
accounting and control systems and to review the results of the auditing
activities. The Audit Committee recommends independent auditors for appointment
by the Board. The independent auditors have full and free access to the Audit
Committee.
The independent public accounting firm, KPMG Peat Marwick LLP, is retained
to conduct an objective, independent audit of the financial statements.
/s/ James E. Doubles /s/ Robert F. Gallagher
James E. Doubles Robert F. Gallagher
President and Chief Executive Vice President and Chief Financial
Officer 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%
Transducer Research, Inc. Minnesota 100%
TSI Instruments, Inc. Michigan 100%
page F-10
EXHIBIT 23
AUDITORS' CONSENT
The Board of Directors
TSI Incorporated:
We consent to incorporation by reference in Registration Statement No. 1-91697
on Form S-8 filed with the Securities and Exchange Commission on June 14, 1984,
for the TSI Incorporated Incentive Stock Option Plan of 1982, Registration
Statement No. 33-20627 on Form S-8 filed with the Securities and Exchange
Commission on August 22, 1989, for the TSI Incorporated Stock Option Plan of
1988, Registration Statement No. 33-66194 on Form S-8 filed with the Securities
and Exchange Commission on July 19, 1993, for TSI Incorporated Stock Option Plan
of 1993 and the Registration Statement No. 33-86468 on Form S-8 filed with the
Securities and Exchange Commission on November 17, 1994, for the TSI
Incorporated Employee Stock Purchase Plan of 1994; of our reports dated May 14,
1998, relating to the consolidated balance sheets of TSI Incorporated and
subsidiaries as of March 31, 1998 and 1997, 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, 1998, which reports appear in or are incorporated by reference in the March
31, 1998 annual report on Form 10-K of TSI Incorporated.
Minneapolis, Minnesota
June 23, 1998 /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 1999 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
are 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.
<PAGE>
page F-12
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 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 from, 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 and
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 products sold. 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
<PAGE>
page F-13
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 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 certain practices and operations of domestic and international
customers. While new regulations 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 33%, 38% and 36% of the
Company's net sales in fiscal 1998, 1997 and 1996, respectively, and export
sales could increase as a percentage of net sales in the future. The Company
owns manufacturing operations in Germany. Due to its export sales and, to a
lesser extent, its international manufacturing operations, the Company is
subject to the risks of conducting business internationally. These include
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
<PAGE>
page F-14
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.
RISKS ASSOCIATED WITH INTELLECTUAL PROPERTY. The Company's future
success depends in part upon its proprietary technology. 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
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 9,385,509
<SECURITIES> 0
<RECEIVABLES> 16,788,360
<ALLOWANCES> 280,000
<INVENTORY> 15,516,282
<CURRENT-ASSETS> 41,633,864
<PP&E> 23,582,039
<DEPRECIATION> 15,183,541
<TOTAL-ASSETS> 57,834,322
<CURRENT-LIABILITIES> 10,391,031
<BONDS> 0
0
0
<COMMON> 12,563,048
<OTHER-SE> 34,880,243
<TOTAL-LIABILITY-AND-EQUITY> 57,834,322
<SALES> 81,012,384
<TOTAL-REVENUES> 81,012,384
<CGS> 35,927,534
<TOTAL-COSTS> 35,669,966
<OTHER-EXPENSES> (813,018)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,924
<INCOME-PRETAX> 10,212,978
<INCOME-TAX> 3,387,000
<INCOME-CONTINUING> 6,825,978
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,825,978
<EPS-PRIMARY> .59
<EPS-DILUTED> .58
</TABLE>
