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, 1999.
[ ] 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.)
incorporation or organization)
500 Cardigan Road, Shoreview, Minnesota 55126
- ---------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (651) 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 16, 1999: $103,468,000
Number of shares outstanding as of June 16, 1999: 11,232,816 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 -- 30
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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 May 1999, the Company acquired Environmental Systems Corporation
of Knoxville, Tennessee, a leading supplier of ambient air quality and
continuous emissions monitoring systems -- including sensors, data loggers,
software and system integration -- to environmentally concerned companies,
public utilities and government agencies. For the year ended December 31, 1998,
Environmental Systems Corporation posted net sales of $23 million and $1.9
million in net income after taxes. A Form 8-K was filed on June 10, 1999 with an
explanation of the transaction and corresponding historical and pro forma
financial statements. This addition gives the Company stronger presence in the
outdoor environmental monitoring market which offers excellent potential for the
future.
In October 1998, the Company acquired Amherst Process Instruments,
Inc. of Amherst, Massachusetts, a manufacturer of powder flow and sizing
instruments primarily for the bulk powders and pharmaceuticals markets. It had
sales of approximately $2.5 million in the twelve months prior to acquisition.
This addition enhances the capabilities of the Company by adding products to its
particle research instrumentation line.
In December 1998, the Company entered into a license agreement with
the University of California at Riverside for a new technology and product for
the chemical analysis of environmental pollutants. This new technology allows
the analysis to take place directly without the typical contamination of
particles during the collection process.
PRODUCTS
The Company develops, manufactures and markets measuring and/or
control instruments for a variety of market applications. The Company's business
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 segments. 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.
The discussion that follows describes the business and product lines
under these two segments and shows the percentage contribution to net sales:
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Year Ended March 31
-------------------
Segments 1999 1998 1997
-------- ---- ---- ----
Instruments for the Safety, Comfort & Health of People 75% 68% 72%
Instruments for Productivity and Quality Improvement 25% 32% 28%
---- ---- ----
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 six 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. In December 1998, the
Company received a $3.2 million order for the Ultraviolet Aerodynamic Particle
Sizer(R) Spectrometer (UV-APS), a device which indicates the presence of
bacteria in sampled air, from the US Army with delivery scheduled from late
fiscal 1999 to mid fiscal 2000. This order was the second and largest option in
a contract awarded and announced March 31, 1998.
Also in December 1998, the Company signed a license agreement with
the University of California, Riverside, for a new technology and product for
chemical analysis of airborne particles. For applications of environmental
pollutants, this new technology is a major breakthrough as it allows direct
measurement without the possibility of contamination while collecting the
particles. This instrument is expected to be available for sale in the fourth
quarter of fiscal 2000. The Company does not expect significant revenue for this
technology until late in fiscal year 2000 or early fiscal 2001.
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 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. Shipments of a new line of
instruments for measuring combustion gases in furnaces, water heaters and
boilers began in late fiscal 1999.
Instruments for Industrial Hygiene and Safety
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The Company's instruments in this category are used 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. 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 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. This group recently received ISO 9001 certification so all new product
development will follow ISO 9001 standards.
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 many more. 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.
Outdoor Environmental Monitoring Instruments
Environmental Systems Corporation (ESC), headquartered in of
Knoxville, Tennessee, was acquired on May 26, 1999. ESC specializes in
technology-based products and services relating to environmental monitoring,
power production, and waste management. Applications include continuous stack
emissions monitoring at public utility stations, ambient air quality testing and
meteorological monitoring. Many tests are specifically designed to meet U.S.
Environmental Protection Agency, state and local government and international
agency requirements. ESC also consults in the areas of hazardous, solid and
chemical waste management for government, civil and industrial applications. The
Company believes ESC's technologies and markets are synergistic and will help
the Company to expand further into the outdoor environmental market.
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
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assistance. Ventilators used to assist breathing in intensive care units are the
main product in which these sensors are used.
Through TSI's Alnor subsidiary, fume hood and room pressure monitors
are also 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 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.
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--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 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 control automated test
stand called the Optical Patternator(TM) was introduced during fiscal 1997.
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 manufactured some of the products
for PMS on an OEM basis until December 1998, at which time options were not
renewed. 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
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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.
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 15 percent of
total net sales in fiscal 1999, 14 percent in fiscal 1998 and 12 percent in
fiscal 1997, but accounted for no more than 12 percent of total sales for each
of the prior ten years. The increase in fiscal 1998 was 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, 1999 the Company's backlog included
orders of about $5 million for PortaCount fit testers and $2.3 million for
Ultraviolet Aerodynamic Particle Sizer Spectrometers for U.S. military services,
all scheduled to be shipped during fiscal 2000.
Fiscal 1999 sales for safety, comfort and health instruments
increased by 17 percent over fiscal 1998. This was mainly due to strong sales
for the PortaCount Respirator Fit Tester which benefited from recent changes in
OSHA regulations, sales to the U.S. Army of biodetection equipment used for
rapid detection of airborne bacteria and strong sales activity for our
meteorological instruments.
Productivity and Quality Improvement products decreased 20 percent
from fiscal 1998 to 1999 after experiencing a 16 percent increase from fiscal
1997 to 1998. In response to the slow sales of research instruments sold into
this market, the operations of Aerometrics, a California subsidiary, were
transferred to TSI's Minnesota headquarters and consolidated with an existing
research product line selling to the same market. The Company took a $.03 per
share charge in fiscal 1999 to cover the costs associated with the
consolidation. The increase in fiscal 1998 was attributable primarily to higher
sales of LaserSpeed(R) instruments. However, in fiscal 1999 sales for these same
instruments declined due to slow demand from the wire and cable industries,
primarily from the Pacific Rim markets. Research product sales fluctuate
year-to-year depending on buying trends in this mature market niche.
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Sales to international customers under the Company's two segments
for the periods indicated were as follows:
<TABLE>
<CAPTION>
Year Ended March 31
-------------------
1999 1998 1997
-------------- --------------- ---------------
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>
Segments
--------
Instruments for the Safety,
Comfort & Health of People $14,299 17% $13,516 17% $18,120 23%
Instruments for Productivity
and Quality Improvement $11,499 13% 13,613 17% 12,201 15%
-------------- -------------- ------ ---
Total $25,798 30% 27,129 34% 30,321 38%
</TABLE>
Overall, the Company's fiscal 1999 international sales were 5
percent less than fiscal 1998 international sales. The decline was attributable
to slow sales of both our process controls and research instruments for
productivity and quality improvement. Fiscal 1998 international sales decreased
11 percent compared to fiscal 1997. 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 1999 or 1998.
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 of sales for both fiscal
1999 and 1998 and 12 percent in fiscal 1997. It is uncertain what impact the
weakening of the Asian currencies will have on fiscal 2000.
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 1999 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, 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.
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At March 31, 1999, the Company's backlog of orders was approximately
$19,388,000 compared to $22,408,000 at March 31, 1998 and $25,112,000 at March
31, 1997. The Company estimates that 95% of the 1999 backlog will be shipped by
March 31, 2000.
As of March 31, 1999, about $5 million of the Company's backlog was
due to the aforementioned military contracts for PortaCount fit testers,
compared with $4.8 million and $8.5 million as of March 31, 1998 and 1997,
respectively. The March 31, 1999 backlog also includes a $2.3 million U.S.
military contract for the Company's Ultraviolet Aerodynamic Particle Sizer(R)
Spectrometer. A similar $1.8 million contract was in backlog at March 31, 1998,
but not in 1997.
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 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>
COMPANY'S
COMPETITORS MARKET SHARE
----------- ------------
Major Minor
------------------- -------------------- Significant Minor
Product Type Int'l Domestic Int'l Domestic Share Share
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Instruments for the Safety, Comfort & Health of People
- ------------------------------------------------------
ANALYTICAL AND
RESEARCH 1 2 more more X*
than 6 than 6
HVAC
Air Distribution 1 4 more more X*
than 6 than 6
Lab/Room Air
Flow Control 3 1 2 3 X*
INDUSTRIAL HYGIENE
& SAFETY
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Respirator Fit Test - - - 1 X
Indoor Air Quality 4 4 more more X*
than 6 than 6
Combustible Gases 3 5 more more X
than 6 than 6
METEOROLOGY/
ENVIRONMENTAL
MONITORING 4 4 more more X*
than 6 than 6
OUTDOOR
ENVIRONMENTAL
MONITORING 1 1 1 more X*
than 6
OEM** ** - - X*
Instruments for Productivity & Quality Improvement
- --------------------------------------------------
RESEARCH - 1 4 2 X
NON-CONTACT MATERIAL
PROCESSING - 4 2 more X
than 6
QUALITY CONTROL
Filter Testing - 1 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 a 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
1999, the Company spent approximately $11,154,000 (13.1 percent of net sales) in
research and product development activities, compared to $11,554,000
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(14.3 percent of net sales) and $10,939,000 (13.6 percent of net sales) in
fiscal 1998 and 1997, respectively.
PATENTS AND LICENSES
One or more aspects of several products currently marketed by the
Company are covered by patents owned by the Company or licensed to the Company
by outside inventors. While the Company believes that patent protection is
important to its business, it does not believe that the expiration or
invalidation of any particular patent would have a 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.
During fiscal 1999, the Company licensed the exclusive rights for
the development of an Aerosol Time-of-Flight Mass Spectrometer (ATOFMS) from the
University of California-Riverside. An ATOFMS will detect the chemical
composition of each aerosol particle that it samples into its inlet. This will
allow users to trace airborne particles in the atmosphere to their sources. The
agreement expires in 2017 when the underlying patent expires. Also during fiscal
1999, the Company signed an exclusive license agreement with the Canadian
Department of National Defence for fluorescent technology currently used in its
biodetection instrument sold under aforementioned contract to the U.S. Army. The
license runs until the underlying patent expires in 2017.
EMPLOYEES
As of March 31, 1999, the Company had 495 employees. The Company's employees are
not represented by a union, although Alnor Instrument Company, a wholly owned
subsidiary acquired in fiscal 1996, had about 35 production employees
represented by an in-house union up until December 31, 1998 when its members
voted to dissolve the 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, 1999, 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
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, 1999.
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, 1999, for a vote by the shareholders.
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<PAGE>
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 1999 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 1989 through 1999 on pages 10 and 11 of the Company's
1999 Annual Report to Shareholders is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The information in the section titled "Management's Discussion and
Analysis of Results of Operations and Financial Condition" on pages 12 through
15 of the Company's 1999 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 24 of the Company's 1999 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 1999 Annual Report to Shareholders:
Schedule II: 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 1999 is incorporated by
reference herein.
(b) The executive officers of the Company are:
Name Age Position with the Company and Business Experience
- -------------------------------------------------------------------------------
James E. Doubles 58 Chairman since July 1998 and a Director. President
and Chief Executive Officer since July 1997,
President and Chief Operating Officer of the
Company from July 1992 until July 1997.
Lowell D. Nystrom 63 Senior Vice President since December 1997 and a
Director. Mr. Nystrom was Vice President,
13
<PAGE>
Treasurer and Chief Financial Officer of the
Company from 1961 to December 1997.
Robert F. Gallagher 44 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 1999
Annual Meeting of Shareholders, dated on or about June 30,
1999 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 1999 Annual Meeting of Shareholders, dated
on or about June 30, 1999 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 1999 Annual Meeting of Shareholders, dated on
or about June 30, 1999, 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 1999 Annual Meeting of
Shareholders, dated on or about June 30, 1999, under the caption "Principal
Shareholders".
Item 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) See accompanying Index to Financial Statements on page F-1.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of
fiscal 1999. The Company filed a Form 8-K on June 10, 1999
reflecting the acquisition of Environmental Systems
Corporation.
(c) Exhibits included herein:
Exhibit 3a: Restated Articles of Incorporation as amended
in November, 1984, October, 1986 and July,
1996, hereby incorporated by reference.
14
<PAGE>
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 1999 Annual Report to
Shareholders for the fiscal year ended March
31, 1999.
Exhibit 21: Subsidiaries of the Company.
Exhibit 23: Auditors' Consent.
Exhibit 99: Forward Looking Statements.
Exhibit 27: Financial Data Schedule.
- ------------
*Indicates management contract or compensation plan or arrangement required to
be filed as an exhibit.
15
<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, 1999 TSI INCORPORATED
/s/ James E. Doubles
--------------------
James E. Doubles
Chairman, President & 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/James E. Doubles Chairman, President, Chief Executive June 25, 1999
- ------------------- Officer and Director -------------
James E. Doubles (Principal Executive Officer)
/s/Lowell D. Nystrom Senior Vice President and a Director June 25, 1999
- -------------------- -------------
Lowell D. Nystrom
/s/Robert F. Gallagher Vice President and Chief Financial June 25, 1999
- ---------------------- Officer (Principal Financial and -------------
Robert F. Gallagher Accounting Officer)
/s/John F. Carlson Director June 25, 1999
- ------------------ -------------
John F. Carlson
/s/Frank D. Dorman Director June 25, 1999
- ------------------ -------------
Frank D. Dorman
/s/Joseph C. Levesque Director June 25, 1999
- --------------------- -------------
Joseph C. Levesque
/s/Donald M. Sullivan Director June 25, 1999
- --------------------- -------------
Donald M. Sullivan
/s/Kenneth J. Roering Director June 25, 1999
- --------------------- -------------
Kenneth J. Roering
/s/Lawrence J. Whalen Director June 25, 1999
- --------------------- -------------
Lawrence J. Whalen
16
<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, 1999. 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 1999 Annual Report to Shareholders which are incorporated
herein by reference in accordance with Rule 12b-23 under the Securities
Exchange Act of 1934 and attached hereto.
Annual
Report
Page 10-K Page
---- ---------
Quarterly Financial Information (Unaudited) 16 -
Consolidated Statements of Earnings for the Years
Ended March 31, 1999, 1998 and 1997 16 -
Consolidated Balance Sheets - March 31, 1999 and 1998 17 -
Consolidated Statements of Cash Flows for the Years
Ended March 31, 1999, 1998 and 1997 18 -
Consolidated Statements of Shareholders' Equity for
Years Ended March 31, 1999, 1998 and 1997 19 -
Notes to Consolidated Financial Statements 19 -
Independent Auditors' Report 24 -
C. INDEPENDENT AUDITORS' REPORT ON - F-3
FINANCIAL STATEMENT SCHEDULES
17
<PAGE>
page F-2
D. CONSOLIDATED SCHEDULES
Schedule Description 10-K Page
- -------- ----------- ---------
II 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.
18
<PAGE>
page F-3
Independent Auditors' Report on Financial Statement Schedules
The Board of Directors and Shareholders
TSI Incorporated:
Under date of May 7, 1999, except as to Note K which is as of May 26, 1999, we
reported on the consolidated balance sheets of TSI Incorporated and subsidiaries
as of March 31, 1999 and 1998 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, 1999 as contained in the 1999 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 1999. 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.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
May 7, 1999, except as to Note K
which is as of May 26, 1999
19
<PAGE>
page F-4
SCHEDULE II; VALUATION AND QUALIFYING ACCOUNTS
TSI INCORPORATED AND SUBSIDIARIES
- --------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------------------------------------------------
Additions
(1) (2) Bad debts
Description Balance Charged to Charged Charged Balance
beginning cost and to other against end of
of period expenses accounts reserve period
- --------------------------------------------------------------------------------
Year ended
March 31, 1999
Deducted from
Asset Accounts
Allowance for
doubtful accounts: $280,000 $132,000 $ 0 $127,000 $285,000
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
- -------------
*Added in acquisitions
20
<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
1999 1998 1997
- --------------------------------------------------------------------------------
Advertising $1,676,000 $1,555,000 $1,568,000
- --------------------------------------------------------------------------------
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.
21
<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, 1999
21 Subsidiaries of the Company F-9
23 Auditors' Consent F-10
99 Forward Looking Statements F-11
27 Financial Data Schedule
22
page F-7
EXHIBIT 11
COMPUTATION OF PER SHARE EARNINGS
TSI INCORPORATED AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended March 31
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
BASIC
Weighted average common
shares outstanding 11,317,117 11,598,580 11,279,447
----------- ----------- -----------
Net earnings $ 7,781,578 $ 6,825,978 $ 7,213,248
----------- ----------- -----------
Basic earnings per common share $ .69 $ .59 $ .64
=========== =========== ===========
DILUTED
Weighted average common
shares outstanding 11,317,117 11,598,580 11,279,447
----------- ----------- -----------
Dilutive effect of employee stock options
and purchase awards--based on the
treasury stock method 164,956 271,350 429,086
----------- ----------- -----------
Weighted average common shares
outstanding and dilutive shares 11,482,073 11,869,930 11,708,533
----------- ----------- -----------
Net earnings $ 7,781,578 $ 6,825,978 $ 7,213,248
----------- ----------- -----------
Diluted earnings per common share $ .68 $ .58 $ .62
=========== =========== ===========
</TABLE>
Page F-8
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS FOR THE
FISCAL YEAR ENDED MARCH 31, 1999
10
ELEVEN-YEAR FINANCIAL DATA
ELEVEN-YEAR FINANCIAL SUMMARY(1)
(thousands of dollars unless otherwise indicated)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net Sales $85,352 $81,012 $80,240 $69,233 $48,903 $43,979 $40,589
Gross Profit 48,194 45,085 44,971 38,491 28,566 25,301 22,877
% of Sales 56.5 55.7 56.0 55.6 58.4 57.5 56.4
Research and Development 11,154 11,554 10,939 8,993 7,196 6,360 5,847
% of Sales 13.1 14.3 13.6 13.0 14.7 14.5 14.4
SG & A 25,861 24,116 23,307 21,362 16,657 15,076 14,885
% of Sales 30.3 29.8 29.0 30.9 34.1 34.3 36.7
Operating Income 11,179 9,415 10,725 8,136 4,714 3,864 2,145
% of Sales 13.1 11.6 13.4 11.8 9.6 8.8 5.3
Net Earnings 7,782 6,826 7,213 5,482 3,432 3,199 2,344
% of Sales 9.1 8.4 9.0 7.9 7.0 7.3 5.8
Earnings Per Share
Basic .69 .59 .64 .51 .33 .31 .23
Diluted .68 .58 .62 .49 .32 .31 .22
FINANCIAL POSITION
Current Ratio 3.8 4.0 3.7 3.1 3.9 3.8 3.6
Working Capital $32,172 $31,243 $26,006 $18,498 $16,855 $15,783 $13,365
Total Assets 60,968 57,834 50,878 42,512 32,167 28,450 25,661
Long-term Debt 0 0 0 0 0 0 0
Shareholders' Equity 49,394 47,443 41,320 33,598 26,342 22,839 20,335
Shareholders' Equity Per Share 4.43 4.06 3.59 3.00 2.53 2.24 1.98
OTHER DATA
Additions to Property, Plant and Equipment(2) $ 1,436 $ 1,526 $ 2,293 $ 3,931 $ 3,124 $ 1,204 $ 1,138
Depreciation and Amortization 2,158 2,192 2,096 1,739 1,282 1,274 1,143
Backlog of Orders 19,388 22,408 25,112 30,007 11,364 12,514 6,109
Return On Average Shareholders' Equity (%) 16.1 15.4 19.3 18.3 14.0 14.8 11.7
Return On Average Total Assets (%) 13.1 12.6 15.4 15.0 11.3 12.2 9.4
</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 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
<TABLE>
<CAPTION>
1992 1991 1990 1989
<S> <C> <C> <C>
$40,293 $39,660 $35,916 $33,733
22,880 23,491 21,402 19,444
56.8 59.2 59.6 57.6
6,112 5,538 4,535 4,461
15.2 14.0 12.6 13.2
14,494 14,167 13,548 12,068
36.0 35.7 37.7 35.8
2,275 3,786 3,319 2,915
5.6 9.5 9.2 8.6
1,830 2,660 2,295 1,927
4.5 6.7 6.4 5.7
.17 .25 .21 .17
.16 .24 .20 .17
3.9 3.2 3.4 3.4
$14,615 $13,275 $12,461 $12,609
25,894 26,681 24,900 23,675
888 965 1,202 838
19,918 18,943 17,800 16,073
1.86 1.77 1.61 1.45
$ 1,204 $ 1,057 $ 1,439 $ 782
1,161 1,128 1,193 1,127
8,393 9,803 7,418 6,724
9.4 14.5 13.6 12.6
7.0 10.7 9.6 8.7
</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, 1999, average trading volume of TSI common stock was
477,000 shares per month, based on Nasdaq records.
There were 11,166,793 shares of TSI common stock outstanding as of May 27,
1999, of which 12.9 percent were owned by officers and directors of TSI. There
were 633 shareholders of record on that date and an additional number of about
2,960 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 May 27, 1999, the quarterly dividend rate was $.03 per share.
STOCK DATA
TRAILING
MARKET RANGE DIVIDEND 12-MONTH
FISCAL 1999 HIGH LOW CLOSE DECLARED P/E RATIO
- --------------------------------------------------------------------------------
Fourth Quarter $9-1/8 7-1/2 8-1/8 $.030 11.9
- --------------------------------------------------------------------------------
Third Quarter 9-1/8 6-5/8 8-3/4 .030 13.9
- --------------------------------------------------------------------------------
Second Quarter 9-1/4 6-7/8 7-3/8 .030 12.3
- --------------------------------------------------------------------------------
First Quarter 9 7-5/16 8-1/8 .030 14.8
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
DIVIDENDS PER SHARE
[BAR CHART]
1989 $.025
1990 .034
1991 .042
1992 .054
1993 .054
1994 .054
1995 .060
1996 .070
1997 .090
1998 .110
1999 .120
<PAGE>
12
MANAGEMENT'S DISCUSSION AND ANALYSIS
[PHOTO]
ROBERT F. GALLAGHER,
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
INTERNATIONAL SALES
(PERCENT OF SALES)
[BAR CHART]
1995 31%
1996 36%
1997 38%
1998 33%
1999 30%
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
Following is a sales breakdown:
Fiscal Year Ended March 31,
1999 1998 1997
---- ---- ----
Safety, Comfort and Health $64,416,000 $54,954,000 $57,753,000
Productivity and Quality Improvement 20,936,000 26,058,000 22,487,000
----------- ----------- -----------
Total $85,352,000 $81,012,000 $80,240,000
=========== =========== ===========
The percentage increase (decrease) from the prior year is as follows:
Fiscal Year Ended March 31,
1999 1998
---- ----
Safety, Comfort and Health 17% (5%)
Productivity and Quality Improvement (20%) 16%
Total 5% 1%
COMPARISON OF FISCAL 1999 AND 1998
The increase in fiscal 1999 sales was due to strong demand for our safety,
comfort and health instruments, particularly the PORTACOUNT(R) respirator fit
tester, which benefited from recent changes in OSHA regulations. The year also
saw significant sales of biodetection equipment used for rapid detection of
airborne bacteria to the U.S. Army and strong sales activity for our
meteorological instrumentation.
Increases in safety, comfort and health instruments have been
substantially offset by slower sales in productivity and quality improvement
instruments. The Company experienced a decline in sales of research instruments
sold into this market as well as a decline in sales of industrial process
control products, particularly those sold to the wire and cable industry and
those directed to Pacific Rim markets. In response to the slow sales of research
instruments, the operations of Aerometrics, a California subsidiary, were
transferred to TSI's Minnesota headquarters and consolidated with an existing
research product line selling to the same market. The Company took a $.03 per
share charge to cover the costs associated with this consolidation.
International sales declined $1,331,000, or 5 percent, for fiscal 1999
compared with fiscal 1998. The decline is attributable to slow sales of both our
process controls and research instruments for productivity and quality
improvement.
COMPARISON OF FISCAL 1998 AND 1997
Sales of safety, comfort and health instruments declined 5 percent in
fiscal 1998 compared to fiscal 1997. The decrease was due to:
* Lower PORTACOUNT 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.
Sales of products for productivity and quality improvement increased 16
percent in fiscal 1998 from 1997. The increase 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, products
obtained in the Target Systems acquisition in July 1997.
* Research instruments that experienced a decline in fiscal 1997.
International sales declined $3,192,000, or 11 percent, for fiscal 1998
compared with fiscal 1997. In fiscal 1997, the Company shipped a substantial
number of PORTACOUNTs to the German Army. There was not a similar order in
fiscal 1998.
<PAGE>
13
MANAGEMENT'S DISCUSSION AND ANALYSIS
GOVERNMENT SALES
Sales to U.S. and state government agencies, including defense, as a
percent of total sales, were 21 percent for both fiscal 1999 and 1998 and 22
percent in fiscal 1997. While the government percentage of total sales is high,
the Company sells many different products to a very diverse range of government
agencies. Consequently, government sales during the past several years have been
quite stable as a percentage of total sales. We consider the current percentages
to be within the normal range.
GROSS PROFIT
Gross profit was 56.5 percent for fiscal 1999 and has ranged between 55.7
and 56.5 percent over the last three fiscal years. Our gross profit percentage
varies slightly depending on the product mix. While fiscal 1999 is higher than
previous years, it falls within what is considered to be a normal range for
TSI's products. We do not believe the higher gross margin percentage represents
a trend.
OPERATING EXPENSES
Research and product development expenses were 13.1 percent of net sales
in fiscal 1999, compared to 14.3 percent for fiscal 1998 and 13.6 percent in
fiscal 1997. 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 key market niches. This is expected to result in sales
growth in future years. For the past 10 years, the Company's research and
product development expenses have ranged from 12 to 15 percent of net sales.
Fiscal 2000 research and development expenses are expected to be at the lower
end of this range.
Selling expenses were 22.8 percent of net sales in fiscal 1999, 22.4
percent in fiscal 1998, and 21.7 percent in fiscal 1997. Selling expenses vary
slightly depending on the product mix and sales volume. For fiscal 2000, we
expect selling expenses to be within or near the historical range.
Administrative expenses were 7.5 percent of sales in fiscal 1999 and 7.4
percent in both fiscal 1998 and 1997. The Company expects administrative costs
to continue in a normal range of 7 to 9 percent for fiscal 2000.
OTHER INCOME
Other income totaled $435,000 in fiscal 1999, compared with $798,000 in
fiscal 1998 and $372,000 in fiscal 1997. In fiscal 1999, investment income was
offset by foreign currency transaction losses and a loss on disposal of fixed
assets related to the consolidation of the Aerometrics subsidiary. Other income
rose in fiscal 1998, mainly due to higher investment income from larger cash
balances and foreign currency transaction gains. Other income varies year to
year depending on foreign currency fluctuations, interest rates and invested
cash balances.
PROVISION FOR INCOME TAXES
The provision for income taxes was $3,832,000, or 33 percent of pretax
earnings, in fiscal 1999. This compares to provisions of $3,387,000, or 33
percent of pretax earnings, in fiscal 1998, and $3,884,000, or 35 percent of
pretax earnings, in fiscal 1997. 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.
EURO CURRENCY
On January 1, 1999, certain members of the European Union established
fixed conversion rates between existing ("legacy currencies") and one common
currency--the Euro. The Euro is now traded on currency exchanges and can be used
in business transactions. Beginning in January 2002, new Euro-denominated bills
and coins will be issued, and legacy currencies will be withdrawn from
circulation.
The Company has a significant number of customers as well as operations
located in European Union countries participating in the Euro conversion. While
TSI has not yet experienced a significant impact, the Euro conversion may have
competitive implications on our pricing and marketing strategies, which could be
material in nature. However, any such impact is not known at this time. The
Company has begun to analyze its internal systems (such as payroll, accounting
and financial reporting) to determine what modifications may be required to deal
with the Euro conversion. To date, the systems have not required material
modification and the Company does not expect the cost of any future
modifications to have a material impact on the Company's results of operations
or financial condition.
GROSS PROFIT MARGIN R&D EXPENDITURES
(PERCENT OF SALES) (PERCENT OF SALES)
[BAR CHART] [BAR CHART]
1995 58.4% 1995 14.7%
1996 55.6% 1996 13.0%
1997 56.0% 1997 13.6%
1998 55.7% 1998 14.3%
1999 56.5% 1999 13.1%
<PAGE>
14
MANAGEMENT'S DISCUSSION AND ANALYSIS
SELLING & ADMINISTRATIVE OPERATING INCOME
EXPENDITURES (IN MILLIONS)
(PERCENT OF SALES)
[BAR CHART] [BAR CHART]
1995 34.1% 1995 $ 4.71
1996 30.9% 1996 8.14
1997 29.0% 1997 10.7
1998 29.8% 1998 9.4
1999 30.3% 1999 11.2
LIQUIDITY AND CAPITAL RESOURCES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased by $4,052,000 during fiscal 1999 to
$13,437,000 at March 31, 1999. Net cash provided by operating activities totaled
$13,491,000 in fiscal 1999, compared with $5,080,000 in fiscal 1998 and
$10,008,000 in fiscal 1997. The major factor in the cash increase at March 31,
1999 was net earnings of $7,782,000. Other significant contributions from
operating activities were a reduction in receivables and lower inventories. Cash
used for additions to property, plant and equipment was $1,436,000, and
$2,030,000 was used for an acquisition. Dividend payments increased by $86,000
to $1,361,000. The Company also used $4,935,000 to repurchase common stock.
The relatively low amount of 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 Systems acquisition in
July 1997.
With the acquisition of Environmental Systems Corporation (see Subsequent
Events Section) in May 1999, TSI increased its bank credit available to $20
million. Management believes internally generated funds and the additional
credit facility will provide adequate resources to support operations through
fiscal 2001.
STOCK REPURCHASE
As of March 31, 1999, the Company has authority to repurchase a total of
742,000 shares under plans approved by its Board of Directors. TSI repurchased
618,000 and 100,000 shares during the fiscal years ended March 31, 1999 and
1998, respectively. The Company has no present plans to acquire all the
authorized shares or to repurchase shares at any prescribed rate over time.
YEAR 2000 CONVERSION
The Company has reviewed and modified critical information technology (IT)
business systems and believes these systems are Year 2000 compliant. We are
currently testing these systems to insure they do comply. We expect that testing
and any additional modifications of these systems will be completed by August
1999.
TSI has also identified all non-IT systems and tested those considered to
be critical to the business. Certain of these systems require updating, and the
Company has a schedule to make substantially all the updates by September 1999.
An initial list of critical third-party providers has been made and direct
discussions have been held in order to determine their Year 2000 readiness. Most
of these vendors have indicated they will be Year 2000 compliant at various
points during calendar 1999 and we will not have a stoppage in the flow of
critical goods or services. More recently, the Company expanded the vendor list
to insure all vendors significant to our business are contacted. We believe
alternative suppliers can be identified if our current suppliers fail to become
Year 2000 compliant.
A committee has been formed to assess current product lines to determine
if hardware and software are Year 2000 compliant. We are using both internal
staff and external consultants to conduct reviews which include Year 2000
instrumentation testing, critical vendor correspondence, facility tours and a
questionnaire which assesses each operation's readiness. These reviews will be
completed by July 1999.
TSI's products fall into the following categories:
Year 2000 Compliant--The Company has identified several products and made
them Year 2000 compliant. We have responded to customer requests to provide
these upgrades and, in some cases, customers can download updated software from
our Internet web site to make the products Year 2000 compliant.
Non-compliant instruments or instruments not relying on date
information--TSI has identified several instruments that do not rely on any
internal or external date coding. It is anticipated that no modifications to
these instruments will be required. In addition, the Company has in the past
produced several instruments that use date information TSI does not intend to
make Year 2000 compliant. The Company is responding to specific customer
requests on these instruments as well as providing information on our Internet
web site.
Other--There are still several products where the Year 2000 review has not
been completed. It is expected that reviews will be completed during the second
quarter of fiscal 2000, ending September 30, 1999. Based on the anticipated
results from these reviews, certain products will not be made Year 2000
compliant. However, we do not feel this will deter customers from purchasing
these instruments because only the dating information is affected and not the
performance. There can be no assurance regarding the customer response to any
Year 2000 issues we have yet to identify.
Internal staff is carrying out our Year 2000 compliance program without
significant additional outside expenditures. However, Year 2000 issues have
accelerated approximately 10 to 15 percent of our capital purchases by one to
two years. During the third quarter, the Company replaced the main IBM AS400
computer system
<PAGE>
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
at corporate headquarters with one that meets the requirements of Year 2000. The
Company made similar replacements at its domestic subsidiaries during the fourth
quarter of fiscal 1999. Foreign subsidiary systems comprise a small portion of
the overall system and they are currently under review. We expect this review to
be completed by September 1999. The Company estimates that historical and future
costs associated with its Year 2000 program will not exceed $200,000 annually
for fiscal years 1998 through 2000. Such costs are expensed as incurred.
Management does not believe the focus on Year 2000 compliance has caused us to
ignore other upgrades to any critical systems.
Failure to complete upgrades to existing systems, or third-party providers
being unable to supply us with inventory, could result in the Company being
unable to ship certain products. However, management believes the remaining
system changes required can be readily implemented well before January 1, 2000
and, therefore, will not subject TSI to significant business risks.
The Company has developed a corporate contingency plan to mitigate
possible disruptions in services or business operations. Additional contingency
plans will be developed within the operating divisions during the remainder of
calendar 1999 and the Company will monitor the need for implementing such plans.
TSI acquired Environmental Systems Corporation on May 26, 1999. In the
course of conducting due diligence, the Company endeavored to ascertain whether
or not their products or services, or those of critical suppliers, are Year 2000
ready, and whether or not such suppliers and key customers will be adversely
affected by the Year 2000 issue. While Environmental Systems Corporation has
provided information and made representations and warranties regarding Year 2000
readiness, TSI will need to apply its Year 2000 program steps to fully assess
Environmental System Corporation Year 2000 readiness.
SUBSEQUENT EVENT
The Company announced on May 26, 1999, that it acquired the stock of
Environmental Systems Corporation (ESC) for $25 million in an all-cash
transaction. To finance the acquisition, the Company used its existing cash
along with bank financing of approximately $15,000,000 (see Notes B and K). For
the year ended December 31, 1998, ESC posted net sales of $23 million, with net
earnings of $1.9 million, or 8.3 percent of sales. TSI expects the acquisition
to have a positive effect on sales and earnings for TSI's fiscal 2000, ending
March 31, 2000.
Environmental Systems Corporation specializes in technology-based products
and services related to outdoor environmental monitoring. ESC is internationally
recognized as a leading supplier of ambient air quality and continuous emissions
monitoring systems. ESC offers a comprehensive line of products and services to
a wide variety of environmentally concerned companies, public utilities and
government agencies. Although not directly competitive with any current TSI
activities, ESC operates in markets where a number of our technologies are
potentially synergistic. TSI is already involved in some facets of outdoor
environmental measurement and monitoring, and we feel this is an excellent
opportunity to expand our presence with existing and new products.
MARKET RISK
The Company is exposed to certain market risks related to the debt it
obtained subsequent to March 31, 1999, to finance the acquisition of
Environmental Systems Corporation. This debt is described in Notes B and K. TSI
does not invest in any derivative financial instruments. The Company is also
exposed to certain market risks related to fluctuations in foreign exchange
rates because some sales transactions, and the assets and liabilities of its
foreign subsidiaries, are denominated in foreign currency.
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 TSI'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 TSI'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 business. TSI cautions that any
forward-looking statements 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, 1999.
CURRENT RATIO NET EARNINGS
(IN MILLIONS)
[BAR CHART] [BAR CHART]
1995 3.9 1995 $3.43
1996 3.1 1996 5.48
1997 3.7 1997 7.21
1998 4.0 1998 6.83
1999 3.8 1999 7.78
<PAGE>
16
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF EARNINGS
TSI Incorporated and Subsidiaries
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1999 1998 1997
- ------------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Net sales $85,352,033 $81,012,384 $80,239,622
Cost of products sold 37,158,100 35,927,534 35,268,412
- ------------------------------------------------------ ----------- ----------- -----------
GROSS PROFIT 48,193,933 45,084,850 44,971,210
Operating expenses
Research and product development 11,154,179 11,553,734 10,939,276
Selling 19,498,460 18,147,723 17,394,017
Administrative 6,362,638 5,968,509 5,913,086
- ------------------------------------------------------ ----------- ----------- -----------
37,015,277 35,669,966 34,246,379
- ------------------------------------------------------ ----------- ----------- -----------
OPERATING INCOME 11,178,656 9,414,884 10,724,831
Other income -- Note C 434,922 798,094 372,417
- ------------------------------------------------------ ----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES 11,613,578 10,212,978 11,097,248
Provision for income taxes -- Note G 3,832,000 3,387,000 3,884,000
- ------------------------------------------------------ ----------- ----------- -----------
NET EARNINGS $ 7,781,578 $ 6,825,978 $ 7,213,248
=========== =========== ===========
BASIC EARNINGS PER COMMON SHARE $ .69 $ .59 $ .64
- ------------------------------------------------------ =========== =========== ===========
DILUTED EARNINGS PER COMMON SHARE $ .68 $ .58 $ .62
- ------------------------------------------------------ =========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,317,117 11,598,580 11,279,447
Dilutive effect of employee stock options and purchase
awards 164,956 271,350 429,086
----------- ----------- -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING AND
DILUTIVE SHARES 11,482,073 11,869,930 11,708,533
=========== =========== ===========
</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.
<TABLE>
<CAPTION>
Fiscal 1999 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Total
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $18,583,072 $22,945,742 $22,344,082 $21,479,137 $85,352,033
Gross profit 10,353,842 12,533,954 12,746,101 12,560,036 48,193,933
Net earnings 1,121,950 2,356,057 1,913,231 2,390,340 7,781,578
Basic earnings per common share .10 .21 .17 .21 .69
Diluted earnings per common share .10 .20 .17 .21 .68
Fiscal 1998
- -------------------------------------------------------------------------------------------------------------------------
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
</TABLE>
<PAGE>
17
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
TSI Incorporated and Subsidiaries
<TABLE>
<CAPTION>
MARCH 31 1999 1998
- ---------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 13,437,396 $ 9,385,509
Accounts receivable, less allowance of $285,000 and $280,000, respectively 14,461,708 16,508,360
Prepaid expenses 307,852 223,713
Inventories
Finished products 3,309,948 2,883,469
Work-in-process 2,530,098 2,792,730
Materials and supplies 9,698,650 9,840,083
- ---------------------------------------------------------------------------------- ------------ ------------
15,538,696 15,516,282
- ---------------------------------------------------------------------------------- ------------ ------------
TOTAL CURRENT ASSETS 43,745,652 41,633,864
INTANGIBLES AND OTHER ASSETS
Goodwill, net of accumulated amortization of $1,417,000 and $1,151,000,
respectively 4,438,845 3,834,903
Note receivable 451,981 632,540
Deferred income taxes, net--Note G 1,225,246 456,169
Other assets 3,085,388 2,878,348
- ---------------------------------------------------------------------------------- ------------ ------------
9,201,460 7,801,960
PROPERTY, PLANT AND EQUIPMENT
Land 128,503 128,503
Buildings 3,713,160 3,713,160
Construction in progress 70,396 51,341
Machinery and equipment 20,444,388 19,689,035
- ---------------------------------------------------------------------------------- ------------ ------------
24,356,447 23,582,039
Less allowance for depreciation 16,335,860 15,183,541
- ---------------------------------------------------------------------------------- ------------ ------------
8,020,587 8,398,498
- ---------------------------------------------------------------------------------- ------------ ------------
TOTAL ASSETS $ 60,967,699 $ 57,834,322
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses -- Note H $ 5,338,538 $ 4,924,480
Employee compensation 4,411,871 3,918,610
Taxes, other than income taxes 472,982 519,285
Income taxes payable 1,349,827 1,028,656
- ---------------------------------------------------------------------------------- ------------ ------------
TOTAL CURRENT LIABILITIES 11,573,218 10,391,031
SHAREHOLDERS' EQUITY
Common shares, $.10 par value-authorized 30,000,000 shares, issued and
outstanding 1999--11,151,790 shares; 1998--11,681,386 shares 1,115,179 1,168,139
Additional paid-in capital 11,408,516 11,394,909
Retained earnings 37,094,220 35,164,722
Accumulated other comprehensive income - equity adjustment from translation (223,434) (284,479)
- ---------------------------------------------------------------------------------- ------------ ------------
TOTAL SHAREHOLDERS' EQUITY 49,394,481 47,443,291
Commitments and contingencies -- Note B
- ---------------------------------------------------------------------------------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 60,967,699 $ 57,834,322
============ ============
</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 1999 1998 1997
- ----------------------------------------------------------------------- ------------ -------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 7,781,578 $ 6,825,978 $ 7,213,248
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for losses on accounts receivable 5,071 4,334 12,994
Depreciation and amortization of property, plant and equipment 1,891,691 1,958,454 1,910,831
Amortization of intangibles 589,095 433,749 463,854
Amortization of goodwill 266,385 233,264 184,832
(Gain) loss on sale of assets 81,156 (16,407) 34,393
Change in deferred income taxes (350,409) 78,021 223,000
Income tax benefit from stock plans 61,304 147,396 220,000
Changes in operating assets and liabilities:
Accounts receivable 2,321,124 (1,912,535) 1,607,998
Prepaid expenses (56,056) 148,918 207
Inventories 533,183 (1,528,794) (2,093,263)
Other assets (221,091) (576,026) (211,701)
Accounts payable and accrued expenses (203,680) (953,628) 29,364
Employee compensation 441,094 (249,190) 714,831
Taxes, other than income taxes (45,180) 77,038 111,827
Income taxes payable 321,170 781,302 (378,785)
Foreign currency translation gain (loss) 74,175 (371,667) (35,726)
- ----------------------------------------------------------------------- ------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 13,490,610 5,080,207 10,007,904
- ----------------------------------------------------------------------- ------------ ------------ ------------
INVESTING ACTIVITIES
Additions to property, plant and equipment (1,436,387) (1,525,698) (2,293,445)
Proceeds from disposal of property, plant and equipment 867 26,174 903
Purchase of companies, net of cash acquired (2,030,490) (732,244) (1,081,764)
- ----------------------------------------------------------------------- ------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (3,466,010) (2,231,768) (3,374,306)
- ----------------------------------------------------------------------- ------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds from stock options exercised 343,293 467,910 626,318
Proceeds from employee stock purchases -- 455,058 667,691
Dividends paid (1,361,055) (1,275,446) (1,015,277)
Purchases of common stock (4,934,975) (887,056) --
- ----------------------------------------------------------------------- ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (5,952,737) (1,239,534) 278,732
- ----------------------------------------------------------------------- ------------ ------------ ------------
Effect of exchange rate changes on cash and cash equivalents (19,976) 81,606 94,613
- ----------------------------------------------------------------------- ------------ ------------ ------------
INCREASE IN CASH AND CASH EQUIVALENTS 4,051,887 1,690,511 7,006,943
- ----------------------------------------------------------------------- ------------ ------------ ------------
Cash and cash equivalents at beginning of year 9,385,509 7,694,998 688,055
- ----------------------------------------------------------------------- ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,437,396 $ 9,385,509 $ 7,694,998
============ ============ ============
</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, 1996 5,590,828 $ 559,083 $ 8,800,846 $24,202,036 $ 35,985
Net earnings for year ended March 31, 1997 7,213,248
Cash dividends paid ($.09 per share) (1,015,277)
Current year translation adjustment 10,468
Employee stock purchases 92,414 9,241 658,450
Stock options exercised 186,717 18,672 607,646
Income tax benefit from stock plans 220,000
Stock split adjustment--Note D 5,625,769 562,577 (562,577)
----------- ----------- ----------- ----------- ---------
BALANCE MARCH 31, 1997 11,495,728 1,149,573 9,724,365 30,400,007 46,453
Net earnings for year ended March 31, 1998 6,825,978
Cash dividends paid ($.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)
Net earnings for year ended March 31, 1999 7,781,578
Cash dividends paid ($.12 per share) (1,361,055)
Current year translation adjustment 61,045
Stock options exercised 88,607 8,860 346,728 (12,295)
Income tax benefit from stock plans 61,304
Shares repurchased and retired (618,200) (61,820) (394,425) (4,478,730)
----------- ----------- ----------- ----------- ---------
BALANCE MARCH 31, 1999 11,151,793 $ 1,115,179 $11,408,516 $37,094,220 $(223,434)
=========== =========== =========== =========== =========
<CAPTION>
Comprehensive Income 1999 1998 1997
----------- ----------- -----------
Net earnings $ 7,781,578 $ 6,825,978 $ 7,213,248
Current year translation adjustment 61,045 (330,932) 10,468
----------- ----------- -----------
TOTAL COMPREHENSIVE INCOME $ 7,842,623 $ 6,495,046 $ 7,223,716
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TSI Incorporated and Subsidiaries March 31, 1999
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 $5,107,000 at March 31, 1999 consist
of short-term highly liquid investments with maturity periods of less than three
months from date of purchase. There were cash equivalents of $5,561,000 at March
31, 1998.
INVENTORIES: Inventories are valued at cost which is not in excess of
market. Inventories valued under the last-in, first-out (LIFO) method were
$11,281,000 and $9,433,000 at March 31, 1999 and 1998, respectively. Inventories
valued under the first-in, first-out (FIFO) method were $4,258,000 and
$6,084,000 at March 31, 1999 and 1998, respectively. If the first-in, first-out
(FIFO) method of inventory valuation had been used by the Company, inventories
would have been approximately $ 717,000 and $935,000 higher than reported at
March 31, 1999 and 1998, 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, 1999 and 1998, the estimated portion to be funded
through the TIF has been reflected as a note receivable and a reduction to
capitalized project costs.
INTANGIBLE ASSETS: Goodwill represents the excess of the purchase
<PAGE>
20
NOTES
NOTE A (CONTINUED)
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.
RESEARCH AND DEVELOPMENT: Costs related to research and development are
expensed as incurred.
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 has 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.
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. 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: 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, 1999, the Company had outstanding forward contracts of $578,000
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, 1999.
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.
COMPREHENSIVE INCOME: The Company adopted SFAS No. 130, REPORTING
COMPREHENSIVE INCOME, in fiscal 1999. Comprehensive income is defined as the
change in stockholders' equity resulting from other than stockholder investments
and distributions. For the Company, comprehensive income consists of net
earnings plus changes in foreign currency translation adjustment as displayed in
the accompanying Statements of Stockholders' Equity. Since this standard applies
only to the presentation of comprehensive income, it did not have any impact on
TSI's results of operations, financial position, or cash flows.
SEGMENT INFORMATION: Beginning with the fiscal 1999 annual report, the
Company adopted SFAS No. 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. Since this standard only requires additional disclosures in the
consolidated financial statements, it does not affect the Company's financial
position or results of operations. Disclosures under SFAS No.131 have been
provided for all periods presented.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to
conform to the current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS: SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, effective in fiscal year 2001, establishes
new standards for recognizing all derivatives as either assets or liabilities,
and measuring those instruments at fair value. At the present time, the Company
does not anticipate that SFAS No. 133 will have a material impact on its
financial position or results of operations.
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 $802,000, $778,000, and $769,000
in 1999, 1998, and 1997, respectively. Future minimum lease obligations each
fiscal year under noncancelable operating leases are $831,000 in 2000, $792,000
in 2001, $757,000 in 2002, $440,000 in 2003, and $495,000 in subsequent years.
The Company has unsecured short-term lines of credit totaling $3,000,000
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 $1,000,000 line of credit is the lesser of the reference rate or
1.50% over the Federal Funds rate. As of March 31, 1999, neither credit line had
an outstanding balance. However, the total available funds were reduced by
outstanding standby letters of credit totaling $110,000 issued against these two
facilities. Additionally, the Company had contingent liabilities of $2,273,000
in the form of performance and foreign customs guarantees.
Subsequent to March 31, 1999, the $2,000,000 line of credit was increased to
$20,000,000 to provide financing for the acquisition of Environmental Systems
Corporation. See Note K. The interest rate on the $20,000,000 line is the lesser
of either the reference rate or approximately 1.2% over the CD or Eurodollar
advance rate.
NOTE C - OTHER INCOME
YEAR ENDED MARCH 31 1999 1998 1997
- ------------------------------------------- -------- -------- --------
Interest income $366,000 $412,000 $221,000
Interest expense (1,000) (15,000) (15,000)
Foreign currency transaction gains (losses) (49,000) 123,000 (40,000)
Other 119,000 278,000 206,000
- ------------------------------------------- -------- -------- --------
$435,000 $798,000 $372,000
======== ======== ========
<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 years
presented 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:
1999 1998
---------- ----------
Net earnings
As reported $7,782,000 $6,826,000
Pro forma $7,390,000 $6,387,000
Earnings per common share
As reported using basic shares $ .69 $ .59
Pro forma using basic shares $ .65 $ .55
As reported using dilutive shares $ .68 $ .58
Pro forma using dilutive shares $ .64 $ .54
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 1999, 1998, and 1997: dividend yield of
1.49 percent; expected volatility of 35 percent; risk-free rates of
approximately 5.2 percent; and expected lives of one to six years.
Pro forma net earnings reflect only options granted in fiscal years 1999,
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 options granted prior to April 1, 1995, is not
considered.
Stock options have been granted to employees, officers and directors under
incentive stock option plans adopted in 1988 and 1992. No new options will be
granted under the 1988 plan. 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 1988 plan 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 and 1988 Plans 1992 Plan
------------------- ---------
Shares Shares Weighted Aver-
Available Shares Available Shares age of Exercise
for Grant Granted for Grant Granted Price of Shares
- ----------------------- --------- ------- --------- ------- ----------------
<S> <C> <C> <C> <C> <C>
Balance March 31, 1996 -- 166,000 158,340 668,104 $4.28
Reserved 223,633
Granted (120,716) 120,716 9.41
Exercised (83,520) (140,400) 2.89
Canceled (1,200) 14,088 (14,088) 5.19
- ----------------------- --------- ------- --------- -------
Balance March 31, 1997 -- 81,280 275,345 634,332 5.55
Reserved 229,915
Granted (185,870) 185,870 9.39
Exercised (47,780) (80,775) 3.79
Canceled 31,746 (31,746) 6.93
- ----------------------- --------- ------- --------- -------
Balance March 31, 1998 -- 33,500 351,136 707,681 6.75
Reserved 233,628
Granted (182,086) 182,086 8.10
Exercised (33,500) (56,957) 3.95
Canceled 22,616 (22,616) 8.85
- ----------------------- --------- ------- --------- -------
Balance March 31, 1999 -- 425,294 810,194 7.30
======================= ========= ======= ========= =======
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options as of March 31, 1999:
<TABLE>
<CAPTION>
Weighted Aver- Weighted Weighted
Range of Number age Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.67 to $3.35 47,538 0.9 $3.13 47,538 $3.13
$3.35 to $5.02 212,590 2.1 4.35 212,590 4.35
$6.70 to $8.37 235,217 5.1 8.10 104,167 8.25
$8.37 to $10.05 287,349 5.1 9.24 208,031 9.24
$10.05 to $11.72 27,500 4.2 10.25 14,166 10.25
------- -------
810,194 586,492
======= =======
</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, 1999,260,717 shares remain reserved for grant and 70,124 shares are
subscribed but unissued under this plan. An aggregate of 1,566,329 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 $2,014,000, $1,712,000,
and $2,094,000 in 1999, 1998, and 1997, respectively.
NOTE G - INCOME TAXES
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1999 1998 1997
- ------------------------------------------------------------------ ------------ ------------ ------------
<S> <C> <C> <C>
Earnings Before Income Taxes:
Domestic $ 11,549,000 $ 9,928,000 $ 10,374,000
Foreign 65,000 285,000 723,000
- ------------------------------------------------------------------ ------------ ------------ ------------
$ 11,614,000 $ 10,213,000 $ 11,097,000
============ ============ ============
Provision for Income Taxes:
Current:
U.S $ 3,637,000 $ 2,887,000 $ 3,209,000
State 450,000 357,000 452,000
Foreign 23,000 65,000 --
Deferred:
U.S. and state (278,000) 78,000 (50,000)
Foreign -- -- 273,000
- ------------------------------------------------------------------ ------------ ------------ ------------
$ 3,832,000 $ 3,387,000 $ 3,884,000
============ ============ ============
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 2.6 2.7 2.9
Foreign Sales Corporation tax exempt income (2.5) (2.4) (3.3)
Research credit (0.9) (1.3) (0.2)
Other (0.2) 0.2 1.6
- ------------------------------------------------------------------ ------------ ------------ ------------
Effective Tax Rate 33.0% 33.2% 35.0%
============ ============ ============
</TABLE>
Income taxes paid were $3,725,000 in 1999, $2,281,000 in 1998, and
$3,716,000 in 1997.
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,
1999, and March 31, 1998, were as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Deferred Tax Assets:
Inventory $ 668,000 $ 478,000
Accounts receivable 59,000 68,000
Accrued compensation 346,000 271,000
Tax credits from acquired companies 111,000 126,000
Net operating losses from acquired companies 497,000 --
Other 69,000 67,000
- ------------------------------------------------------ ----------- -----------
Total deferred tax assets $ 1,750,000 $ 1,010,000
----------- -----------
Deferred Tax Liabilities:
Property and equipment (463,000) (441,000)
Other (62,000) (113,000)
- ------------------------------------------------------ ----------- -----------
Total deferred tax liabilities $ (525,000) $ (554,000)
----------- -----------
Net Deferred Income Taxes $ 1,225,000 $ 456,000
=========== ===========
</TABLE>
At March 31, 1999, the Company had research credit carryforwards for federal
income tax purposes of $111,000 from acquired companies. These credits expire
between the years 2006 and 2018, but are expected to be realized prior to their
expiration. The Company also had net operating loss carryforwards for federal
income tax purposes of $1,773,000 from acquired companies. These losses will
expire between the years 2007 and 2018. Due to limitations on net operating loss
carryforwards under federal tax laws, it is expected that approximately $448,000
of the losses will not be used prior to their expiration. Only the net operating
losses that will be used prior to expiration are included in the deferred asset
amounts listed above.
<PAGE>
23
NOTES
NOTE H - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
YEAR ENDED MARCH 31 1999 1998
- ------------------------------------------------ ---------- ----------
Trade accounts payable $2,148,000 $2,570,000
Deferred revenue 350,000 99,000
Commissions and royalties payable 1,314,000 1,186,000
Other accounts payable and accrued expenses 1,526,000 1,069,000
- ------------------------------------------------ ---------- ----------
$5,338,000 $4,924,000
========== ==========
NOTE I - SEGMENT INFORMATION
The Company develops, manufactures, and markets measuring and control
instruments for a variety of applications. The Company's products can best be
divided into two market segments. These are the Safety, Comfort, and Health
segment and the Productivity and Quality Improvement segment.
The Safety, Comfort, and Health segment consists of instruments that monitor
and control the environment in which people work and live. These include
analytical and research instruments used to characterize very small particles,
products that monitor indoor air quality, and products that help to protect
people from toxic airborne substances.
The Productivity and Quality Improvement segment produces instruments that
help customers enhance their industrial processes and improve their products.
These include flow-related measuring instruments, noncontact measuring devices
for manufacturers of metals and wire, filter testers, and instruments for
measuring the speed and concentration of droplets in industrial sprays.
The Company evaluates performance based on operating profit or loss before
other income, interest, and taxes. Revenue from sales between the segments is
not material.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31 1999 1998 1997
- ----------------------------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Net Sales
Safety, Comfort, and Health $ 64,416,000 $ 54,954,000 $ 57,753,000
Productivity and Quality Improvement 20,936,000 26,058,000 22,487,000
- ----------------------------------------------------- ------------ ------------ ------------
$ 85,352,000 $ 81,012,000 $ 80,240,000
============ ============ ============
Operating Income (Loss)
Safety, Comfort, and Health $ 14,033,000 $ 9,274,000 $ 10,874,000
Productivity and Quality Improvement (2,854,000) 141,000 (149,000)
- ----------------------------------------------------- ------------ ------------ ------------
$ 11,179,000 $ 9,415,000 $ 10,725,000
============ ============ ============
Depreciation and Amortization
Safety, Comfort, and Health $ 1,775,000 $ 1,662,000 $ 1,751,000
Productivity and Quality Improvement 972,000 963,000 809,000
- ----------------------------------------------------- ------------ ------------ ------------
$ 2,747,000 $ 2,625,000 $ 2,560,000
============ ============ ============
Expenditures for Long Lived Assets
Safety, Comfort, and Health $ 676,000 $ 837,000 $ 1,049,000
Productivity and Quality Improvement 278,000 186,000 624,000
Corporate 482,000 503,000 620,000
- ----------------------------------------------------- ------------ ------------ ------------
$ 1,436,000 $ 1,526,000 $ 2,293,000
============ ============ ============
Total Assets
Safety, Comfort, and Health $ 26,938,000 $ 25,448,000 $ 23,723,000
Productivity and Quality Improvement 13,737,000 17,368,000 13,585,000
Corporate 20,293,000 15,018,000 13,570,000
- ----------------------------------------------------- ------------ ------------ ------------
$ 60,968,000 $ 57,834,000 $ 50,878,000
============ ============ ============
GEOGRAPHIC INFORMATION
Net Sales
United States $ 59,554,000 $ 53,883,000 $ 49,919,000
Germany 2,363,000 3,752,000 8,187,000
Japan 4,320,000 4,742,000 5,248,000
Other 19,115,000 18,635,000 16,886,000
- ----------------------------------------------------- ------------ ------------ ------------
$ 85,352,000 $ 81,012,000 $ 80,240,000
============ ============ ============
Long Lived Assets
United States $ 7,587,000 $ 7,969,000 $ 8,332,000
Other 434,000 429,000 467,000
- ----------------------------------------------------- ------------ ------------ ------------
$ 8,021,000 $ 8,398,000 $ 8,799,000
============ ============ ============
</TABLE>
Sales to educational, research, and defense customers, which are heavily
reliant on U.S. government funding, accounted for approximately 27%, 28%, and
27% of net sales in 1999, 1998, and 1997, respectively. Sales directly to
federal and state agencies, including defense, during the same three years were
21%, 21%, and 22%, respectively, of net sales.
<PAGE>
24
NOTES
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.
Effective October 1, 1998, the Company acquired Amherst Process Instruments,
Incorporated of Amherst, Massachusetts. Amherst Process Instruments,
Incorporated is a manufacturer of particle measuring instruments used mainly in
the pharmaceutical industry. It had sales of approximately $2,950,000
(unaudited) in the twelve months prior to acquisition. The acquisition price of
$1,440,000 was paid in cash. The acquisition was accounted for by the purchase
method of accounting. Goodwill amounted to $869,000 and is being amortized on a
straight-line basis over a period of twenty years.
NOTE K - SUBSEQUENT EVENT
On May 26, 1999, the Company purchased the stock of Environmental Systems
Corporation of Knoxville, Tennessee. Environmental Systems Corporation
specializes in technology-based products and services relating to environmental
monitoring, power production, and waste management. The acquisition will be
accounted for by the purchase method of accounting. The acquisition price of
$25,000,000 was paid in cash. To finance the acquisition, the Company used its
existing cash along with bank financing of approximately $15,000,000 made
available under its line of credit. The initial term of the debt will be
short-term with the ability to extend the term for periods not to exceed five
years. Interest expense related to this financing and amortization expense
related to the goodwill from the acquisition are included in the pro forma
numbers presented below. The following represent summary unaudited pro forma
results of operations for the current and prior years for the combined
operations.
YEAR ENDED MARCH 31 (UNAUDITED) 1999 1998
- --------------------------------------------- ------------ ------------
Sales $109,284,000 $101,322,000
Net earnings $8,166,000 $7,652,000
Basic earnings per share $.72 $.66
Diluted earnings per share $.71 $.65
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1999, in conformity with generally accepted accounting
principles.
Minneapolis, Minnesota
May 7, 1999, except as to note K which is as of May 26, 1999.
/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
Chairman, President, and Vice President and
Chief Executive Officer Chief Financial Officer
page F-9
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Company Jurisdiction Ownership
- --------------------------------------------------------------------------------
Aerometrics, Inc. Minnesota 100%
Alnor Instrument Company Minnesota 100%
Environmental Systems Corporation Tennessee 100%
(as of May 26, 1999)
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 7,
1999, except as to Note K which is May 26, 1999, relating to the consolidated
balance sheets of TSI Incorporated and subsidiaries as of March 31, 1999 and
1998, 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, 1999, which reports appear in or are
incorporated by reference in the March 31, 1999 annual report on Form 10-K of
TSI Incorporated.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
June 24, 1999
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 30%, 33% and 38% of
the Company's net sales in fiscal 1999, 1998 and 1997, 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.
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<PERIOD-START> APR-01-1998
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0
0
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