TSI Incorporated
500 Cardigan Road
P.O. Box 64394
St. Paul, MN 55164-0394
[LOGO]==========================================================================
July 2, 1999
Dear Fellow Stockholder:
I am writing to you on behalf of your Board of Directors because your support at
our July 22, 1999 Annual Stockholders' Meeting is very important. You may have
already received correspondence from John J. Fauth or the JJF Group, Inc.
regarding what is becoming a costly and distracting proxy contest. Fauth's
agenda is to force the sale of TSI and take it private. Fauth continues to seek
a hostile takeover even after your Board of Directors, by unanimous vote,
concluded that his proposal was inadequate.
Do not be misled! Fauth would have you believe that your Board has ignored him
and refused to even consider his proposed purchase of TSI. The fact is that
after serious consideration, we have determined that Fauth's proposed purchase
price does not adequately reflect TSI's fair value or prospects based on the
Company's history, strengths, growth plans and a preliminary analysis provided
by an outside investment banking firm. We communicated this to Fauth in a letter
dated June 18, 1999. Be assured that your Board will continue exploring
opportunities for enhancing stockholder value.
Why Should You Reject Fauth's Efforts?
Fauth's agenda is to purchase your Company at a low price so that he alone can
benefit from the strategic plan that TSI's current management team has put in
place and begun to execute. He is trying to take advantage of a company that is
undervalued in the equity market, claiming TSI stock has under-performed market
indices. This is misleading at best. A long-term comparison of TSI's stock price
performance with the Russell 2000 Index as of June 30, 1999 illustrates the
strong performance of your Company:
================================================================================
Russell 2000 Index TSI Incorporated
- --------------------------------------------------------------------------------
Past 5 Years 91% 185%
Past 10 Years 173% 410%
- --------------------------------------------------------------------------------
TSI's stock performance has also exceeded the S&P 500 Index over the past 10
years. The long-term prospects of TSI remain strong.
Of course, as significant owners of TSI stock, your Board is disappointed with
the recent trading price, strengthening our resolve to enhance the strategic and
operational value of your Company.
o We are confident that TSI's strategic plan will fuel even greater growth in
the future. This momentum should attract a broader investment following
that will enhance stockholder value.
<PAGE>
o The fact that we have been able to grow the business historically without
incurring debt should not be viewed as a weakness, but rather demonstrates
the expertise of your current management team. We have used TSI stock to
aid in making acquisitions in the past and foresee doing so in the future.
Our solid balance sheet, along with the ability to issue stock, affords us
the flexibility to swiftly seize strategic acquisition opportunities as
they arise.
o There are many companies with our market capitalization that have proven to
be rewarding investments. Despite Fauth's assertions, there is a portion of
the investment community that is attracted to small capitalization stocks
and thinks that they are excellent vehicles for long-term investors.
o We find offensive and self-serving Fauth's assertion that, "It's [TSI] too
small to be public, it doesn't need the access to capital that being public
entails and it's spending a lot of money to be public in terms of filing
and shareholder relations materials that could be better spent." We reject
the notion that because we keep our shareholders aware of TSI's corporate
developments, we are "wasting" resources. This needless and expensive proxy
contest brought about by Fauth's assault on your Company is a much greater
"waste" of funds.
The Red Chip Review, a Portland, Oregon, research firm that specializes in small
capitalization stocks says, "Rarely do we find a company as fundamentally strong
as TSI." (April 27, 1999)
Why Are Industry Analysts NOT Embracing Fauth's Proposal?
After due consideration, TSI's Board of Directors rejected Fauth's proposal as
inadequate. Several financial analysts concurred:
o Jeff Tryka from The Red Chip Review states, "Historically, it [TSI] is a 20
percent growth company in terms of earnings." (June 1999) Then after
Fauth's proposal the Review stated, "we reaffirm our earlier comments that
the cash offer [made by Fauth] of $12.50 per share is too low." (June 24,
1999)
o Clint Morrison, a stock analyst with the Minneapolis-based brokerage firm
John J. Kinnard, recently reiterated his "BUY" rating on TSI, due to an
"Improved Outlook." "The balance sheet continues to be strong, the company
has consistently generated free cash flow and has paid a dividend for 23
years. It operates in a market that offers plenty of acquisition
opportunities and consolidation opportunities of which the company
continues to take advantage." (June 16, 1999) This same analyst stated, "If
he can't get it [TSI] cheap, he doesn't want it," in reference to Fauth's
proposal. (June 14, 1999)
What are Fauth's True Intentions?
Now, as a next step in his attempt to take control of TSI, Fauth is trying to
remove -- via a proxy contest -- three current, well qualified and dedicated
members of your Board of Directors (including the Chairman and Chief Executive
Officer) and replace them with his own hand-picked nominees. If Fauth succeeds
in electing himself and his two colleagues to your Board, clear conflicts of
interest are inevitable, and that can only be detrimental to TSI's interests.
Since it benefits Fauth to acquire TSI by paying the lowest possible price for
your shares, he and his board nominees have no incentive to create long-lasting
value for the other public shareholders. If Fauth fails to elect a board that
would be favorably
<PAGE>
disposed to his proposal, he may sell and make a quick profit on his recent
purchases at roughly $9.00 per share by putting TSI "in play." This could force
TSI to be sold without regard for the long-term best interests of TSI and our
shareholders.
Furthermore, Fauth offers only vague generalizations about his plans for TSI,
while the track record of another company that he acquired, DICKEY-john
Corporation, includes at least two rounds of recent layoffs, as referenced in
The State Journal-Register of Illinois.
What Can Fauth Bring to TSI?
As a private investor, Fauth cannot bring operational synergies to TSI. His
actions are solely a financial ploy to gain control of the Company. Fauth has
borrowed much of the money to buy the TSI stock he currently holds. He would
have to borrow additional significant sums of money to acquire TSI. Typically
this results in the target company being burdened with onerous debt and interest
charges. Such debt would limit the amount of money we invest in developing new
products for a cleaner and safer environment and for a more efficient workplace.
This debt and the absence of a publicly traded stock would also limit our
ability to grow by acquisition.
Why Does Fauth Want to Change TSI's Articles and Bylaws?
Fauth also is attempting through this proxy contest to change TSI's bylaws and
Articles of Incorporation to make it easier for him or another party to acquire
TSI at less than its fair value. We believe that his proposals, if adopted,
would impede our ability to maximize stockholder value because they reduce your
Board's opportunity to evaluate hostile takeover proposals, study alternatives
and determine what is in stockholders' best interests.
Furthermore, if TSI's anti-takeover provisions are eliminated, including those
provided by Minnesota law, Fauth would be able to take control of TSI through a
combination of stock purchases and proxy contests without the approval of a
majority of the stockholders or your Board of Directors.
What is TSI's Track Record?
Your management team has strategically positioned the Company to reap rewards in
the industries we serve, while at the same time compiling a strong track record,
as exemplified by:
o Annual profits for 36 years running
o Revenue increases for 27 consecutive years
o 19% compound earnings growth over the last five years
o Recent acquisition of a complementary company with $23 million in sales
o Significant commitment to internal growth through research and development
- --------------------------------------------------------------------------------
The Members of Your Current Management Team All Share A Common Interest -
To See TSI's Stock Price Fully Valued In The Marketplace
And To Continue Building A Solid Company
With Growth In Revenues And Earnings.
- --------------------------------------------------------------------------------
<PAGE>
When you look at the issues, the choice is clear. Support your current Board by
signing, dating and mailing the WHITE PROXY CARD in the enclosed postage-paid
envelope and discard Fauth's green proxy card. Time is running short. It is very
important that you vote today, regardless of the number of shares you own.
Thank you for your continued trust and support.
On behalf of your Board of Directors,
/s/ James E. Doubles
James E. Doubles
Chairman, President and
Chief Executive Officer
- --------------------------------------------------------------------------------
IMPORTANT
Regardless of the number of shares of TSI Incorporated you
own, your vote is important. Please vote FOR management's
nominees by signing, dating and mailing the enclosed
WHITE PROXY CARD.
Do not vote the opposition green proxy card, even to
oppose their nominees. If you have done so by
mistake already, you may change your vote
by signing and returning the enclosed WHITE
PROXY CARD. Only your latest dated, properly
executed card will count.
If you own your shares in the name of a brokerage firm, your
shares will not be voted unless you give your broker specific
instructions. So please sign, date and return the enclosed
WHITE PROXY CARD in the postage-paid envelope provided.
If you need assistance in voting your shares, please call our proxy solicitor:
Corporate Investor Communications, Inc.
Toll free: (877) 460-9337
- --------------------------------------------------------------------------------
MAKE THE RIGHT CHOICE - VOTE THE WHITE PROXY CARD
