UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Information Required in Proxy Statement
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant |X|
Filed by a Party other than the Registrant |_|
Check the appropriate box:
|_| Preliminary Proxy Statement
|_| Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
|X| Definitive Proxy Statement
|_| Definitive Additional Materials
|_| Soliciting Material Pursuant to ss.240.14a-12
TSI INCORPORATED
----------------
(Name of Registrant as Specified in Its Charter)
----------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
|_| No fee required.
|_| Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
______________________________
(2) Aggregate number of securities to which transaction applies:
______________________________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:_____________________________
(4) Proposed maximum aggregate value of transaction:
______________________________
(5) Total fee paid:
______________________________
|X| Fee paid previously with preliminary materials.
|_| Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
______________________________
<PAGE>
(2) Form, Schedule or Registration Statement No.:
______________________________
(3) Filing Party:
______________________________
(4) Date Filed:
______________________________
<PAGE>
Dear Shareholder:
The Board of Directors of TSI Incorporated is pleased to announce that it
has approved a merger in which TSI and JJF Acquisition, Inc. will merge, with
TSI being the surviving corporation (the "Merger"). Under the Merger, each share
of TSI's outstanding common stock, other than shares owned by John J. Fauth and
his affiliates, will be converted into the right to receive $15.25 in cash.
As you know, the Board of Directors has been working diligently for more
than a year to enhance shareholder value. In that process, we considered a
number of alternatives, including repurchasing shares, seeking minority
investment by a third party, undertaking a leveraged recapitalization,
distributing a special dividend, selling assets or business lines, merging, and
remaining independent and growing internally and by acquisition. Over the past
several months, our financial advisors approached 123 potential parties. After
careful consideration of numerous alternatives and extensive negotiations, the
Board of Directors concluded that a proposal from Minneapolis businessman John
J. Fauth, in which each TSI shareholder will receive $15.25 per share, was the
best alternative for our shareholders and other constituencies, including our
employees and community.
The Board of Directors of TSI and a special committee of TSI's
non-employee directors (the "Special Committee") determined that the right to
receive $15.25 in cash for each share of TSI common stock is fair to, and in the
best interests of, TSI shareholders. The Board of Directors of TSI and the
Special Committee unanimously recommend that shareholders vote in favor of the
Merger. You are cordially invited to attend a special meeting of TSI
shareholders to vote on the adoption of the Merger.
Your Vote Is Very Important: If approved, this transaction will provide
for a sale of TSI at a price of $15.25 per share.
Whether or not you plan to attend the Special Meeting, please take the
time to vote on the proposal submitted by completing and mailing the enclosed
proxy card to us. Please sign, date and mail your proxy card indicating how you
wish to vote. If you fail to return your proxy card, the effect will be a vote
against the Merger.
The date, time and place for the Special Meeting is:
May 3, 2000
9:00 a.m. Central Daylight Time
Four Points Sheraton Hotel
1330 Industrial Boulevard
Minneapolis, Minnesota 55413
The enclosed Proxy Statement provides you with detailed information about
the Merger. In addition, you may obtain information about TSI from documents
filed with the Securities and Exchange Commission. We encourage you to read this
entire document carefully.
Sincerely,
James E. Doubles
Chief Executive Officer
<PAGE>
The Merger has not been approved or disapproved by the Securities and Exchange
Commission (the "SEC") or any state securities regulators nor has the SEC or any
state securities regulator passed upon the fairness or merits of the Merger or
upon the accuracy or adequacy of the information contained in this Proxy
Statement. Any representation to the contrary is unlawful.
This Proxy Statement is dated March 24, 2000, and is first being mailed to
shareholders on or about March 24, 2000.
2
<PAGE>
TSI INCORPORATED
500 Cardigan Road
Shoreview, Minnesota 55126
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
to be held on May 3, 2000
To the Shareholders of TSI Incorporated:
Notice is hereby given that a special meeting of the shareholders (the
"Special Meeting") of TSI Incorporated ("TSI" or the "Company") will be held at
the Four Points Sheraton Hotel, 1330 Industrial Boulevard, Minneapolis,
Minnesota 55413 on May 3, 2000 at 9:00 a.m. Central Daylight Time, to consider
and vote upon a proposal recommended by the Board of Directors of TSI and a
special committee of TSI's non-employee directors to approve and adopt a plan of
merger in accordance with the Agreement and Plan of Merger, dated January 10,
2000 (the "Merger Agreement"), among TSI, JJF Acquisition, Inc. ("Newco"), a
Minnesota corporation, John J. Fauth and JJF Group, Inc., parent of Newco ("JJF
Group"). The Merger Agreement provides that (i) Newco will be merged with and
into TSI (the "Merger"), with TSI being the surviving corporation and (ii) each
shareholder of TSI (other than JJF Group, Newco and shareholders who properly
exercise their dissenters' rights under Minnesota law) will become entitled to
receive $15.25 in cash for each outstanding share of TSI common stock (the "TSI
Common Stock"), owned immediately prior to the Merger. A copy of the Merger
Agreement is attached as Annex A to the accompanying proxy statement (the "Proxy
Statement"). The Merger Agreement is also described in the attached Proxy
Statement.
The Board of Directors of the Company has fixed the close of business on
March 22, 2000 as the record date for determination of shareholders entitled to
notice of, and to vote at, the Special Meeting and any adjournment(s) and
postponement(s) of the Special Meeting. A complete list of the shareholders
entitled to vote at the Special Meeting or any adjournments or postponements of
the Special Meeting will be available at and during the Special Meeting.
You have the unconditional right to revoke your proxy at any time prior to
its use at the Special Meeting by:
o attending the Special Meeting and voting in person,
o delivering to TSI prior to the vote at the Special Meeting a duly
executed proxy with a later date than your original proxy, or
o giving written notice of revocation to TSI addressed to Ms. Laura J.
Cochrane, Secretary, TSI Incorporated, 500 Cardigan Road, Shoreview,
Minnesota 55126 prior to the vote at the Special Meeting.
3
<PAGE>
If you return a proxy without specifying a choice on the proxy, the proxy
will be voted "FOR" the Merger. Additional information regarding the Special
Meeting is in the attached Proxy Statement.
Under Minnesota law, holders of shares of TSI Common Stock have the right
to dissent from the Merger and to receive payment of the fair value of their
shares upon compliance with the Minnesota Business Corporation Act (the "MBCA").
This right is explained more fully under "The Merger - Dissenters' Rights" in
the accompanying Proxy Statement. The dissenters' rights provisions of the MBCA
are attached to the Proxy Statement as Annex C.
Whether or not you expect to attend the Special Meeting in person, please
complete, sign, date and return the accompanying proxy card without delay in the
enclosed postage prepaid envelope. The proxy is revocable and will not be used
if you are present and vote in person. If you receive more than one proxy card
because you own shares registered in different names, or at different addresses,
please sign and return each proxy card.
By order of the Board of Directors,
James E. Doubles
Chief Executive Officer
Shoreview, Minnesota
March 24, 2000
IMPORTANT
Please do not send your TSI Common Stock certificates at this time. If the
Merger is approved at the Special Meeting, you will be sent instructions
regarding the surrender of your stock certificates and how to receive payment
for your shares.
4
<PAGE>
TABLE OF CONTENTS
Page
----
SUMMARY TERM SHEET QUESTIONS AND ANSWERS ABOUT THE MERGER.................. 7
SUMMARY.................................................................... 11
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA............................ 16
INFORMATION CONCERNING TSI COMMON STOCK.................................... 17
THE SPECIAL MEETING........................................................ 18
Date, Place, Time and Purpose.............................................. 18
Matters to Be Considered at the Meeting; Effect of Approval of
Merger Agreement......................................................... 18
Record Date; Voting at the Meeting......................................... 18
Vote Required.............................................................. 19
Solicitation, Revocation and Use of Proxies................................ 19
Surrender of Share Certificates............................................ 20
SPECIAL FACTORS............................................................ 21
Background of the Merger................................................... 21
Reasons for the Merger and Recommendation of the Board of Directors........ 25
The Board's Recommendation................................................. 27
Opinion of the Company's Financial Advisor................................. 27
Certain Effects of the Merger.............................................. 37
Certain Federal Income Tax Consequences.................................... 37
THE MERGER................................................................. 39
Treatment of TSI Common Stock and Options.................................. 39
Employment by TSI.......................................................... 39
Indemnification............................................................ 39
Conduct of TSI's Business After the Merger................................. 40
Effective Time............................................................. 40
Regulatory Requirements.................................................... 40
Dissenters' Rights......................................................... 41
Financing.................................................................. 43
Expenses of the Transaction................................................ 44
THE MERGER AGREEMENT....................................................... 44
Representations and Warranties............................................. 44
Certain Covenants.......................................................... 44
No Solicitation of Transactions; Right to Enter Into a Superior Proposal... 45
Directors and Officers of TSI Following the Merger......................... 46
Indemnification............................................................ 46
Cooperation and Reasonable Efforts......................................... 46
Conditions to Consummation of Merger....................................... 47
Termination................................................................ 48
Termination Fees........................................................... 49
Amendment and Waiver....................................................... 49
5
<PAGE>
Expenses................................................................... 49
Guaranty................................................................... 50
Voting Agreement........................................................... 50
INTERESTS OF CERTAIN PERSONS IN THE MERGER................................. 50
Stay-in-Place Agreements................................................... 51
Indemnification............................................................ 51
Treatment of Options....................................................... 51
Fees Payable to Financial Advisor.......................................... 52
DIRECTORS AND EXECUTIVE OFFICERS........................................... 53
BUSINESS AND OPERATIONS OF TSI............................................. 54
Development of the Business................................................ 54
Recent Corporate Developments.............................................. 54
Products................................................................... 55
Instruments For the Safety, Comfort and Health of People................... 55
Instruments For Productivity and Quality Improvement....................... 57
Raw Materials and Parts.................................................... 57
Customers.................................................................. 58
Marketing.................................................................. 59
Competition................................................................ 60
Research and Product Development........................................... 60
Patents and Licenses....................................................... 61
Employees.................................................................. 61
Properties................................................................. 61
Legal Proceedings.......................................................... 62
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENT DATA.................. 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION..................................................... 63
OWNERSHIP OF TSI COMMON STOCK.............................................. 70
SHAREHOLDER PROPOSALS...................................................... 73
WHERE YOU CAN FIND MORE INFORMATION........................................ 73
INDEPENDENT AUDITORS....................................................... 74
OTHER MATTERS.............................................................. 74
ANNEX A
Agreement and Plan of Merger............................................... A-1
ANNEX B
Fairness Opinion of William Blair.......................................... B-1
ANNEX C
Sections 302A.471 and 302A.473 of the Minnesota Business Corporation Act... C-1
6
<PAGE>
SUMMARY TERM SHEET
QUESTIONS AND ANSWERS ABOUT THE MERGER
Why should TSI merge with Newco?
The Merger represents good value to shareholders. The Merger provides cash
for each share of common stock of TSI (the "TSI Common Stock") at a premium of
approximately 96% over the closing price on November 25, 1998, the day that Mr.
Fauth approached two members of the Board of Directors concerning an
acquisition, and a premium of approximately 34.3% over the average closing price
for the four-week period immediately preceding the date that TSI first made any
public announcement regarding the Merger. The Board of Directors of TSI and a
special committee comprised of non-employee directors of TSI (the "Special
Committee") have unanimously determined that the Merger and the consideration to
be received is fair to, and is in the best interests of, the shareholders of the
Company. See "Special Factors - Reasons for the Merger and Recommendation of the
Board of Directors." Three of the eight members of the Board of Directors are
employed by the Company and two have agreements with the Company that contain
job protection provisions that will be triggered by the Merger. See "Interests
of Certain Persons in the Merger - Stay-in-Place Agreements."
Who are Newco, JJF Group and John Fauth?
JJF Acquisition, Inc. ("Newco") is a wholly owned subsidiary of JJF Group,
Inc. ("JJF Group"). These entities were formed by John J. Fauth, a Minneapolis
businessman, to acquire TSI and are owned by him. Mr. Fauth's principal
occupation is as the Chairman and CEO of Churchill Industries, Inc., an
industrial holding company, and the Chairman of Churchill Capital, Inc., an
investment management firm, both of which are based in Minneapolis, Minnesota.
Mr. Fauth and his companies have successfully purchased, owned and operated 29
companies, including two public companies that he has previously acquired in
friendly transactions. These are DICKEY-john Corporation, a manufacturer of
electronics and sensing devices acquired in 1988, and Sterner Lighting Systems,
Inc., a manufacturer of lighting solutions acquired in 1989.
Who is guaranteeing the obligations of Newco?
Mr. Fauth is personally guaranteeing that JJF Group and Newco will perform
their respective obligations under the Merger Agreement.
What will the shareholders receive in exchange for TSI Common Stock?
Each share of TSI Common Stock, other than shares owned by Newco, JJF
Group and shareholders who have demanded and satisfied the procedures relating
to dissenters' rights, will be converted automatically into the right to receive
$15.25 per share, without interest. See "The Merger - Ownership of Capital
Stock" and "Do I Send In My Stock Certificates Now?"
7
<PAGE>
Where and when is the Special Meeting?
The Special Meeting of TSI shareholders and adjournments or postponements
of the Special Meeting will be held at 9:00 a.m., Central Daylight Time, on May
3, 2000 at the Four Points Sheraton Hotel, 1330 Industrial Boulevard,
Minneapolis, Minnesota 55413 (the "Special Meeting").
How will I be taxed on the Merger?
For U.S. Federal income tax purposes, the receipt of cash by holders of
TSI Common Stock will be a taxable transaction. In general, shareholders that
are not tax-exempt will be taxed on the difference between their basis in their
TSI shares and the cash received. All shareholders are urged to consult their
tax advisors to determine the effect of the Merger under federal tax law (or
foreign tax law where applicable), and under their own state and local tax laws.
See "Special Factors - Certain Federal Income Tax Consequences."
What will happen to TSI after the Merger?
If the Merger is approved by TSI shareholders and consummated, TSI Common
Stock will no longer be publicly traded and members of the general public will
therefore no longer own TSI common stock. TSI will be a wholly owned subsidiary
of JJF Group. After the Merger, shares of TSI Common Stock will no longer be
quoted on the Nasdaq National Market System ("Nasdaq"). See "Information
Concerning TSI Common Stock."
Will my cash payment be affected by changes in TSI's stock price between now and
the Special Meeting.
No. The cash payment of $15.25 in cash for each share of TSI Common Stock
will not change even if the market price of TSI Common Stock changes before the
Merger is completed. For other factors to consider, see "Information Concerning
TSI Common Stock."
Are there risks to be considered?
The Merger is contingent upon, among other things, shareholder approval,
fewer than 15% of shareholders exercising dissenter's rights, and governmental
approvals. If any of these or other conditions are not satisfied, or for some
other reason the transaction does not close, TSI's stock would be subject to
market risks.
Are TSI shareholders entitled to dissenters' rights?
Yes. Under the Minnesota Business Corporation Act ("MBCA"), TSI
shareholders are entitled to dissenters' rights. If the rules governing the
exercise of dissenters' rights are not strictly followed, a shareholder's
dissenters' rights may be lost. For a description of these rights and how to
satisfy the requirements of the MBCA, see "The Merger - Dissenters' Rights" and
Annex C.
8
<PAGE>
Who can vote at the Special Meeting?
Holders of TSI Common Stock at the close of business on March 22, 2000
(the "Record Date") may vote at the Special Meeting. Each share of TSI Common
Stock is entitled to one vote.
What vote is required?
The Merger must be approved by the holders of a majority of the shares of
TSI Common Stock outstanding on the Record Date. On the Record Date, there were
11,377,241 shares of TSI Common Stock outstanding.
What will happen to options to purchase TSI common stock and will management
shareholders be treated differently from other shareholders?
Each option to purchase TSI Common Stock which is outstanding immediately
prior to the closing of the Merger (the "Effective Time") will be canceled,
whether or not such option is vested or exercisable. Each holder of an option
that is canceled will receive a cash payment equal to the product of (a) the
difference between $15.25 and the option exercise price multiplied by (b) the
number of shares subject to the option, less applicable withholding taxes.
Management shareholders that hold options will be treated the same as other
shareholders who hold options. See "Interests of Certain Persons in the Merger -
Treatment of Options."
If my shares of TSI common stock are held in "street name" by my broker, will my
broker vote my shares for me?
No. The law does not allow your broker to vote your shares of TSI Common
Stock on the Merger at the Special Meeting without your direction. You should
follow the instructions from your broker on how to vote your shares. Shares that
are not voted because you do not instruct your broker are called "broker
non-votes," and will have the effect of a vote "AGAINST" the Merger.
If I send in my proxy card but forget to indicate my vote, how will my shares be
voted?
If you sign and return your proxy card but do not indicate how to vote
your shares at the Special Meeting, the shares represented by your proxy will be
voted "FOR" the Merger.
What if I don't return my proxy card?
Since it takes a majority of the shares outstanding to approve the Merger,
not returning your proxy card is the same as voting against the Merger.
9
<PAGE>
What should I do now to vote at the Special Meeting?
Sign, mark and mail your proxy card indicating your vote on the Merger in
the enclosed return envelope as soon as possible, so that your shares of TSI
Common Stock can be voted at the Special Meeting.
May I change my vote after I mail my proxy card?
Yes. You may change your vote at any time before your proxy is voted at
the Special Meeting. You can do this in three ways:
o You can send TSI a written statement that you revoke your proxy,
which to be effective must be received by TSI at its executive
offices prior to the vote at the Special Meeting; or
o You can send TSI a new proxy card prior to the vote at the Special
Meeting, which to be effective must be received by TSI prior to the
vote at the Special Meeting; or
o You can attend the Special Meeting and vote in person. Your
attendance alone will not revoke your proxy. You must attend the
Special Meeting and cast your vote at the Special Meeting.
Send any revocation of a proxy or new proxy card to the Secretary of TSI
at the address on the cover of this Proxy Statement. If your shares are held in
street name, you must follow the directions provided by your broker to vote your
shares or to change your instructions.
Do I send in my stock certificates now?
No. If the Merger is completed, you will receive written instructions for
delivering your stock certificates representing TSI Common Stock in order to
receive $15.25 per share cash payment from the paying agent, Norwest Bank
Minnesota, N.A. ("Norwest"). Norwest has been appointed as paying agent in
connection with the Merger. Do not send your stock certificates now.
Who can help answer my questions?
If you have any questions about the Merger, please call Robert Gallagher,
Chief Financial Officer at 651-490-2756. In addition, you may contact our proxy
solicitor, Corporate Investor Communications, Inc. toll-free at 877-977-6196.
10
<PAGE>
SUMMARY
Throughout this Proxy Statement the term "Merger" means the merger between
JJF Acquisition, Inc., a Minnesota corporation ("Newco"), and TSI Incorporated,
a Minnesota corporation ("TSI" or the "Company"), with TSI being the surviving
corporation (the "Surviving Corporation"). The term "Merger Agreement" means the
Agreement and Plan of Merger dated as of January 10, 2000, among TSI, Newco, JJF
Group, Inc. ("JJF Group"), parent of Newco, and John J. Fauth ("Mr. Fauth"). A
copy of the Merger Agreement is attached as Annex A to this Proxy Statement.
This summary may not contain all of the information that is important to
you. For a more complete understanding of the Merger and the other information
contained in this Proxy Statement, you should read this entire Proxy Statement
carefully, as well as the additional documents to which it refers. For
instructions on obtaining more information, see "Where You Can Find More
Information."
THE PARTIES
TSI ....................TSI.is a diversified, precision instrumentation company.
The principal executive offices of TSI are located at
500 Cardigan Road, Shoreview, Minnesota 55126 and its
telephone number is (651) 483-0900.
Newco ..................Newco is a Minnesota corporation and wholly owned
subsidiary of JJF Group that was initially formed for
the purpose of acquiring and holding TSI Common Stock.
JJF Group intends to acquire TSI by merging Newco into
TSI. Newco has no other operations.
JJF Group ..............JJF Group is a Minnesota corporation formed by Mr. Fauth
for the purpose of acquiring TSI. JJF Group is the sole
shareholder of Newco. The principal executive offices
and telephone number for JJF Group are the same as those
stated below for Mr. Fauth.
John J. Fauth ..........Mr. Fauth is the sole shareholder of JJF Group. He is
the Chairman and CEO of Churchill Industries, Inc. (an
industrial holding company) and the Chairman of
Churchill Capital, Inc. (an investment management firm),
both of which are based in Minneapolis, Minnesota. Mr.
Fauth's offices are located at 3100 Metropolitan Centre,
333 South 7th Street, Minneapolis, Minnesota 55402 and
his telephone number is (612) 673-6700. Mr. Fauth is
personally guaranteeing the performance of the
obligations of Newco and JJF Group under the Merger
Agreement.
11
<PAGE>
THE MERGER AND THE SPECIAL MEETING
Reasons The Board believes that $15.25 per share of TSI Common
for the Merger .......Stock represents good value to TSI shareholders. The
Board of Directors and the Special Committee believe
that it is fair to, and in the best interests of, TSI
shareholders to accept $15.25 per share (the "Common
Payment") in cash for their shares, a price determined
by the financial advisor to the Board to be fair to
TSI's shareholders. The price represents a 96% premium
over the $7.78 per share closing price of TSI Common
Stock on November 25, 1998, the date on which Mr. Fauth
approached two members of the Board of Directors about
the possibility of an acquisition. The price is also a
34.3% premium over the average closing price for the
four-week period immediately preceding the date on which
TSI first publicly announced the Merger. See "Special
Factors - Background of the Merger" and "Special Factors
- Reasons for the Merger and Recommendation of the Board
of Directors."
Recommendation of The Board and its Special Committee, vote "FOR" the
the Special Committee proposal to approve the Merger. See "Special Factors -
and Board of Background comprised of five non-employee members of the
Directors ............of the Merger" and "Special Factors - Reasons for the
Merger and Recommendation of Board, have unanimously
approved the Merger and recommended that the Board of
Directors." Two of the TSI shareholders eight members of
the Board of Directors have agreements with the Company
containing job protection provisions that will be
triggered by the Merger. See "Interests of Certain
Persons in the Merger - Stay-in-Place Agreements."
Date, Place and Time This Proxy Statement is furnished to holders of shares
of the Special of TSI Common Stock for use at the Special Meeting in
Meeting ..............connection with the approval of the Merger. The Special
Meeting will be held at the Four Points Sheraton Hotel,
1330 Industrial Boulevard, Minneapolis, Minnesota 55413
on May 3, 2000 at 9:00 a.m. Central Daylight Time, and
at any adjournments or postponements of the Special
Meeting.
Record Date, Voting The Company has set a record date for determining those
At the Meeting .......shareholders who are entitled to notice of and to vote
at the Special Meeting. The Record Date is March 22,
2000 (the "Record Date"). See "The Special Meeting -
Record Date; Voting at the Meeting."
Total Value to TSI The total value to TSI Shareholders of the Merger is
Shareholders of the expected to be approximately $163 million, consisting of
Merger ...............approximately $158 million in cash to be paid for shares
of TSI Common Stock other than shares owned by Mr. Fauth
and his affiliates, based on the number of shares of TSI
Common Stock outstanding on the Record Date, and
approximately $5 million in cash to be paid to holders
of stock options.
12
<PAGE>
Options ................Each option to purchase TSI Common Stock outstanding
immediately prior to the Effective Time (whether or not
the option is vested or exercisable) will be canceled.
Each holder of an option that is canceled will receive a
cash payment equal to the product of (a) the difference
between $15.25 and the option exercise price multiplied
by (b) the total number of shares subject to the option,
less any applicable withholding taxes. See "Interests of
Certain Persons in the Merger - Treatment of Options."
Interest of Certain In June 1999 the Company entered into Stay-In-Place
Persons in the Agreements with each of James E. Doubles, Lowell D.
Merger ...............Nystrom and an executive officer who is not a member of
the Board of Directors. Under these agreements, these
individuals are entitled to certain severance payments
in the event that in a one or two-year period after a
change in control, his employment is terminated or
constructively terminated without cause. Consummation of
the Merger will constitute a change of control of TSI
within the meaning of these agreements. The Merger
Agreement also provides that indemnification insurance
will be maintained for TSI's officers and directors, and
indemnification provisions in TSI's current Articles of
Incorporation and bylaws will be continued, for six
years after the Merger. See "Interest of Certain Persons
in the Merger" for further information.
Dissenters' Rights .....Under the MBCA, TSI's shareholders are entitled to
assert dissenters' rights. The obligation of Newco to
merge with TSI is subject to the condition that holders
of no more than 15% of the outstanding shares of TSI
Common Stock exercise dissenters' rights in accordance
with the MBCA. Newco may waive this condition. See "The
Merger - Dissenters' Rights" and Annex C.
THE MERGER AGREEMENT
Conditions to the The Merger will be completed only if a number of
Merger ...............conditions are met or waived by TSI, Newco and JJF
Group, as applicable. These conditions include, among
other things:
o TSI shareholders approve the Merger;
o Holders of not more than 15% of the outstanding
shares of TSI Common Stock exercise dissenters'
rights under the MBCA;
o No judgment, injunction or order prohibiting the
Merger exists;
o All necessary governmental approvals are obtained;
and
13
<PAGE>
o No director of TSI breaches the voting agreement
with Newco and JJF Group which requires that each
director vote his respective shares of TSI Common
Stock in favor of approval and adoption of the
Merger Agreement and Merger.
Financing the Merger ...Mr. Fauth and Newco have advised the Company that they
intend to finance the Merger by means of a combination
of approximately $65 million in equity, $100 million in
senior debt and $15 million in subordinated debt. The
equity portion of the financing is expected to consist
of cash and contribution by Mr. Fauth to JJF Group of
1,009,000 shares of TSI stock owned by him, which under
the Merger Agreement would be canceled without receipt
of any payment. U.S. Bank has issued to JJF Group
commitment letters to provide the senior debt and
unsecured subordinated debt. The senior debt would be
loaned by a syndicate of banks arranged by U.S. Bank
acting as agent and one of the banks, and would be
secured by a security interest in substantially all of
TSI's assets. The U.S. Bank commitment letters are
subject to customary conditions.
Superior Proposals TSI may accept another offer under certain
and Termination circumstances. However, TSI must pay JJF Group $5
Fee ..................million if the Merger Agreement is terminated in the
event that:
o TSI abandons the Merger Agreement or the Merger
Agreement is terminated by TSI prior to the
Special Meeting because TSI has entered into a
definitive agreement concerning another
acquisition proposal that TSI's Board of Directors
has determined in good faith, after consultation
with outside legal counsel, is superior to the
Merger ("Superior Proposal"). See "The Merger
Agreement - No Solicitations of Transactions;
Right to Enter Into a Superior Proposal"; or
o JJF Group terminates the Merger Agreement because
there has been a material misrepresentation or
material breach on the part of TSI in the
representations, warranties or covenants of TSI
set forth in the Merger Agreement, or because
there has been a material failure by TSI to comply
with its obligations under the Merger Agreement
which breach or failure has not been cured by TSI
within the time limits specified in the Merger
Agreement.
JJF Group is obligated to pay TSI a $5 million
termination fee under certain circumstances. See "The
Merger Agreement - Termination."
14
<PAGE>
Amending or Waiving The Merger Agreement may be amended or its conditions
Terms of the precedent to closing waived at any time before or after
Merger Agreement .....the Special Meeting. However, any amendment or waiver
that reduces the consideration payable to shareholders,
changes the form or timing of such consideration, or
changes any other terms and conditions of the Merger
Agreement, may not be made after the Special Meeting
without the further approval of TSI's shareholders if
the changes, alone or in the aggregate, will materially
adversely affect TSI's shareholders.
Federal Income Tax The receipt of cash by holders of TSI Common Stock will
Consequences .........be a taxable transaction. All shareholders are urged to
consult their own tax advisors to determine the effect
of the Merger on the shareholder under federal law, and
under their own state and local tax laws. See "Special
Factors - Certain Federal Income Tax Consequences."
Regulatory and Other than compliance with the Hart-Scott-Rodino
Third-Party Antitrust Improvements Act of 1976, no material
Approvals ............regulatory approvals are required. Failure to obtain
non-material governmental consents will not prevent
completion of the Merger. See "The Merger - Regulatory
Requirements."
TSI Common Stock The closing price of TSI Common Stock on January 7,
Information ..........2000, which was the trading day immediately preceding
TSI's announcement that it had signed the Merger
Agreement, was $12.13. The closing price of TSI Common
Stock on March 23, 2000, which was the last trading day
for which a closing sales price was available before
this Proxy Statement was mailed, was $14.6875 per share.
Opinion of Financial William Blair & Company L.L.C. ("William Blair"),
Advisor ..............financial advisor to the Board of Directors, has
provided an opinion to the Board of Directors that the
cash price of $15.25 per share provided in the Merger
Agreement is fair, from a financial point of view, to
holders (other than JJF Group or Newco) of TSI Common
Stock. The full text of William Blair's written opinion,
which sets forth the assumptions made, the matters
considered, the scope and limitations of the review
undertaken and the procedures followed by William Blair
in rendering such opinion, is attached to this Proxy
Statement as Annex B. William Blair's opinion was
provided for the information and assistance of the Board
of Directors and is not a recommendation as to how TSI
shareholders should vote at the Special Meeting. TSI
shareholders are urged to, and should, read William
Blair's opinion carefully and in its entirety. See
"Special Factors - Opinion of the Company's Financial
Advisor." William Blair will receive a fee customary for
this type of transaction if the Merger is consummated.
See "Interests of Certain Persons in the Merger - Fees
Payable to the Financial Advisor."
15
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data for the Company. The Company received proceeds from the sale of the Handar
assets of $11.8 million. The selected historical consolidated financial data
should be read in conjunction with the unaudited condensed consolidated
financial statements, audited consolidated financial statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" sections appearing elsewhere in this Proxy Statement. The interim
data for the nine months ended December 31, 1999 and 1998, in the opinion of
management of the Company, contains all adjustments necessary for a fair
presentation of such information. The results of operations for the nine months
ended December 31, 1999 and consolidated statements of financial position as of
December 31, 1999, should not be taken as indicative of future operating results
or financial position for the full year ending March 31, 2000.
TSI Incorporated
Selected Historical Consolidated Financial Data
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Nine Months Ended
December 31, Year Ended March 31,
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
OPERATIONS STATEMENT DATA (In thousands, except percentages and per share amounts)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $81,884 $63,873 $85,352 $81,012 $80,240 $69,233 $48,903
- ----------------------------------------------------------------------------------------------------------------------------
Gross profit 43,550 35,634 48,194 45,085 44,971 38,491 28,566
- ----------------------------------------------------------------------------------------------------------------------------
Percent of sales 53.2% 55.8 56.5% 55.7% 56.0% 55.6% 58.4%
- ----------------------------------------------------------------------------------------------------------------------------
Operating expenses 30,439 27,943 37,015 35,670 34,246 30,355 23,853
- ----------------------------------------------------------------------------------------------------------------------------
Percent of sales 37.2% 43.8% 43.4% 44.1% 42.6% 43.9% 48.8%
- ----------------------------------------------------------------------------------------------------------------------------
Operating income 13,111 7,691 11,179 9,415 10,725 8,136 4,714
- ----------------------------------------------------------------------------------------------------------------------------
Percent of sales 16.0% 12.0% 13.1% 11.6% 13.4% 11.8% 9.6%
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings 12,992 5,391 7,782 6,826 7,213 5,482 3,432
- ----------------------------------------------------------------------------------------------------------------------------
Percent of sales 15.9% 8.4% 9.1% 8.4% 9.0% 7.9% 7.0%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $1.15 $.47 $.69 $.59 $.64 $.51 $.33
- ----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 1.13 .47 .68 .58 .62 .49 .32
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
At December 31, As of March 31,
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and equivalents $9,887 $10,495 $ 13,437 $9,386 $7,695 $688 $9,552
- ----------------------------------------------------------------------------------------------------------------------------
Working capital 28,928 31,346 32,172 31,243 26,006 18,498 16,855
- ----------------------------------------------------------------------------------------------------------------------------
Total assets 89,019 58,688 60,968 57,834 50,878 42,512 32,167
- ----------------------------------------------------------------------------------------------------------------------------
Long-term debt 1,966 0 0 0 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 62,429 48,406 49,394 47,443 41,320 33,598 26,342
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
INFORMATION CONCERNING TSI COMMON STOCK
As of the Record Date, there were approximately 11,377,241 shares of TSI
Common Stock outstanding and approximately 587 shareholders of record of TSI
Common Stock. TSI Common Stock is traded on the over-the-counter market under
the symbol TSII. The following table sets forth for the quarterly periods the
high and low closing sales prices as quoted on Nasdaq, and dividends declared.
All prices are without retail markups, markdowns or commissions.
Sale Price
Dividends ----------
Declared High Low
-------- ---- ---
Fiscal year ended March 31, 1998
First Quarter ....................... $.025 $10.38 $8.75
Second Quarter ...................... .025 11.00 8.75
Third Quarter ....................... .030 10.88 9.00
Fourth Quarter ...................... .030 10.38 7.63
Fiscal year ended March 31, 1999
First Quarter ....................... .030 9.00 7.31
Second Quarter ...................... .030 9.25 6.88
Third Quarter ....................... .030 9.13 6.63
Fourth Quarter ...................... .030 9.13 7.50
Fiscal year ending March 31, 2000
First Quarter ....................... .030 12.00 7.50
Second Quarter ...................... .030 14.94 11.25
Third Quarter ....................... .030 12.75 10.38
The Company has a policy of paying dividends quarterly in May, August,
November and February on TSI Common Stock. Dividends have been paid each year
since 1975. As of February 2000, the quarterly dividend rate was $.03 per share.
On January 7, 2000, the trading day before the public announcement of
entering into the Merger, the high and low sales prices for the TSI Common Stock
were $12.13 and $11.50, respectively, as quoted on Nasdaq. The closing sales
price for TSI Common Stock on January 7, 2000 was $12.13 per share. The closing
price of TSI Common Stock on March 23, 2000, which was the last trading day for
which a closing sales price was available before this Proxy Statement was
mailed, was $14.6875 per share.
17
<PAGE>
THE SPECIAL MEETING
Date, Place, Time and Purpose
This Proxy Statement is being furnished to TSI shareholders in connection
with the solicitation of proxies by the Board of Directors of TSI for use at the
Special Meeting to be held at the Four Points Sheraton Hotel, 1330 Industrial
Boulevard, Minneapolis, Minnesota 55413 on May 3, 2000 at 9:00 a.m. Central
Daylight Time, and any adjournments and postponements of the Special Meeting. At
the Special Meeting, holders of TSI Common Stock of record as of the close of
business on the Record Date will be eligible to vote upon the recommendation of
TSI's Board of Directors and the Special Committee to approve and adopt a plan
of merger in accordance with the Merger Agreement, pursuant to which (i) Newco
will be merged with TSI, with TSI being the Surviving Corporation, and (ii) each
outstanding share of TSI Common Stock will be canceled and converted
automatically into the right to receive $15.25 in cash, payable to the holder of
such share, without interest, other than shares of TSI Common Stock held by
Newco, JJF Group and shareholders who are entitled to, and who have perfected,
their dissenters' rights.
This Proxy Statement and the accompanying form of proxy are first being
mailed on or about March 24, 2000, to all shareholders of record as of the
Record Date.
Matters to Be Considered at the Meeting; Effect of Approval of Merger Agreement
At the Special Meeting, holders of TSI Common Stock as of the Record Date
will be asked to consider and vote upon a proposal to approve and adopt the
Merger Agreement.
Under Minnesota law, a plan of merger involving a Minnesota corporation
must initially be approved by the affirmative vote of a majority of the board of
directors of the corporation prior to submission of the plan to such
corporation's shareholders. In accordance with Minnesota law, the Board of
Directors of the Company has unanimously approved the Merger Agreement and has
directed that it be submitted to the shareholders for their approval.
The Board of Directors and the Special Committee have approved the Merger
Agreement and recommends that the shareholders vote "FOR" approval and adoption
of the Merger Agreement.
Record Date; Voting at the Meeting
The Board of Directors has fixed the close of business on March 22, 2000
as the Record Date for the determination of the shareholders entitled to notice
of, and to vote, at the Special Meeting and any adjournments and postponements
of the Special Meeting. On the Record Date, there were 11,377,241 shares of TSI
Common Stock outstanding, which shares were held by approximately 587
shareholders of record. Shares of TSI Common Stock are the only authorized and
outstanding voting securities of the Company. Each holder of TSI Common Stock as
of the Record Date is entitled to cast one vote per share,
18
<PAGE>
exercisable in person or by properly executed proxy, upon each matter properly
submitted for the vote of the shareholders at the Special Meeting. Votes at the
Special Meeting will be tabulated by an Inspector of Election appointed by TSI.
A majority of the shares of TSI Common Stock issued and outstanding and
entitled to vote, present in person or represented by proxy, will constitute a
quorum for the transaction of business at the Special Meeting. If a quorum is
not present, the Special Meeting may be adjourned from time to time, until a
quorum is present. Abstentions and broker non-votes are counted as present for
purposes of determining the presence of a quorum at the Special Meeting for the
transaction of business.
The TSI Board of Directors and the Special Committee have determined that
the right to receive $15.25 in cash for each share of TSI Common Stock is fair
to, and in the best interests of, TSI shareholders. However, any holder of
record of TSI Common Stock as of the Record Date who, prior to the vote on the
Merger at the Special Meeting, makes a written demand by following the
procedures prescribed by Sections 302A.471 and 302A.473 of the MBCA, has the
right to payment of the "fair value" of such shares by TSI, as the Surviving
Corporation in the Merger, in lieu of receiving the consideration provided under
the Merger Agreement (the "Dissenters' Rights"). A summary of the procedures
relating to the exercise of Dissenters' Rights under Minnesota laws included in
this Proxy Statement under "The Merger - Dissenters' Rights" and the full text
of Sections 302A.471 and 302A.473 of the MBCA is included as Annex C hereto. The
obligation of Newco to merge into TSI is subject to the condition that holders
of no more than 15% of the outstanding shares of TSI Common Stock satisfy the
MBCA's procedures to properly exercise and perfect Dissenters' Rights. Newco may
waive this condition. See "The Merger - Dissenters' Rights."
Vote Required
Approval of the principal terms of the Merger Agreement requires the
affirmative vote of holders of a majority of the outstanding shares of TSI
Common Stock entitled to vote at the Special Meeting. A failure to vote, an
abstention from voting, or a broker non-vote, will have the same legal effect as
a vote cast against approval of the Merger and the Merger Agreement. Brokers,
and in many cases nominees, will not have discretionary power to vote on the
proposals to be presented at the Special Meeting. Accordingly, beneficial owners
of shares must instruct their brokers or nominees how to vote their shares at
the Special Meeting.
Solicitation; Proxy Solicitor, Revocation and Use of Proxies
TSI will bear all expenses of the solicitation of proxies in connection
with this Proxy Statement, including the cost of preparing and mailing this
Proxy Statement. TSI will reimburse brokers, fiduciaries, custodians and other
nominees for reasonable out-of-pocket expenses incurred in sending this Proxy
Statement and other proxy materials to, and obtaining instructions relating to
such materials from, beneficial owners of TSI Common
19
<PAGE>
Stock. TSI shareholder proxies may be solicited by directors, officers and
employees of the Company in person or by telephone, facsimile or by other means
of communication.
TSI has hired Corporate Investor Communications, Inc. ("CIC") to assist in
soliciting proxies in connection with the Special Meeting. TSI has agreed to pay
CIC a fee of $6,000 plus reimbursement of expenses in connection with their
engagement to solicit proxies for the Special Meeting.
A shareholder giving a proxy has the power to revoke it at any time before
it is exercised by (i) filing with the Secretary of TSI written notice revoking
it before the vote at the Special Meeting; (ii) executing a proxy with a later
date; or (iii) attending the Special Meeting and voting in person. Any written
notice of revocation should be delivered to TSI Incorporated, 500 Cardigan Road,
Shoreview, Minnesota 55126, Attention: Secretary. Subject to proper revocation,
all shares of TSI Common Stock represented at the Special Meeting by properly
executed proxies received by TSI will be voted in accordance with the
instructions contained in such proxies. Executed, but unmarked proxies will be
voted "FOR" approval of the Merger.
Surrender of Share Certificates
Norwest Bank Minnesota, N.A. ("Norwest") has been designated to act as
paying agent for the benefit of holders of shares of TSI Common Stock in
connection with the Merger. JJF Group will deposit with Norwest an irrevocable
letter of credit allowing Norwest to draw funds to pay TSI shareholders.
Promptly after the date on which the transactions contemplated by the
Merger Agreement are consummated (the "Closing Date"), Norwest will send to each
holder of shares of TSI Common Stock a letter of transmittal (the "Letter of
Transmittal") and instructions for use in effecting the surrender of stock
certificates. The Letter of Transmittal will specify that the delivery will be
effected, and risk of loss and title will pass, only upon delivery of the stock
certificates representing shares of TSI Common Stock to Norwest. Norwest will
receive a fee which TSI expects will be approximately $16,000 as compensation
for its services, plus reimbursement of its out-of-pocket expenses in connection
with such services. TSI has agreed to indemnify Norwest against certain
liabilities arising out of or in connection with its engagement.
Each holder of a share of TSI Common Stock that has been converted into
the right to receive the cash payment of $15.25 per share, upon surrender to
Norwest of a stock certificate or certificates representing such shares,
together with a properly completed Letter of Transmittal covering such shares,
shall receive the cash payment. Until so surrendered, each such stock
certificate will, after the Effective Time, represent for all purposes only the
right to receive such cash payment. No interest will be paid or will accrue on
the cash payment.
If any portion of the cash payment is to be paid to a person other than
the registered holder of the stock certificate surrendered in exchange therefor,
the stock certificate so
20
<PAGE>
surrendered must be properly endorsed or otherwise be in proper form for
transfer. In addition, the person requesting such payment must pay to Norwest
any transfer or other taxes required as a result of such payment, or establish
that such tax has been paid or is not applicable. Beginning six months after the
Closing Date, holders of TSI Common Stock who have not surrendered their stock
certificates will be entitled to look to JJF Group only as general creditors for
payment of their claim for cash.
If any stock certificates representing shares of TSI Common Stock have not
been surrendered within six months after the Closing Date, any cash in respect
of such stock certificates will, to the extent permitted by applicable law,
become the property of JJF Group upon demand. In addition, if any cash in
respect of certificates representing shares of TSI Common Stock would, prior to
the six months after the Effective Time, otherwise escheat to or become the
property of a governmental entity, such cash will, to the extent permitted by
applicable law, become the property of JJF Group upon demand. To the fullest
extent permitted by law, neither JJF Group nor Norwest will be liable to any
holder of a share of TSI Common Stock or to any other person for any cash
payment delivered in respect of such share to a public official pursuant to any
applicable abandoned property, escheat or similar law.
At and after the Closing Date, there will be no further registration of
transfers of TSI Common Stock on the records of TSI or its transfer agent. From
and after the Closing Date, the holders of TSI Common Stock will cease to have
any rights with respect to such shares except as provided in the Merger
Agreement or applicable law.
The matters to be considered at the Special Meeting are of great
importance to the shareholders of TSI.
Shareholders are urged to read and carefully consider the information
presented in this Proxy Statement and to complete, date and sign the
accompanying proxy card and return it promptly to TSI in the enclosed
postage-prepaid envelope.
SPECIAL FACTORS
Background of the Merger
The Company's Board of Directors has been aware of Mr. Fauth's interest in
the Company for more than a year. On November 25, 1998, two non-employee Board
members met with Mr. Fauth. These members reported on their meeting with Mr.
Fauth at the December 10, 1998 Board meeting and Mr. Fauth's interest was
discussed. At its March 26, 1999 Board meeting, the Board discussed Mr. Fauth's
March 11, 1999 letter in which he proposed taking the Company private, the
Company's five-year projections for revenue, earnings and earnings per share,
data on the Company's stock history for a two-year period, and information
submitted by management outlining various valuation methods and providing
preliminary estimates of the Company's stock value. After discussion, the
Company's Board determined it needed further study of the matter, and
21
<PAGE>
management was directed to bring advisors to the April Board meeting who could
give an educational presentation and provide insights on means of enhancing
stockholder value.
At the April 23, 1999 Board meeting, a principal of William Blair &
Company, L.L.C. ("William Blair"), an investment banking firm, made a
presentation on possible ways to enhance stockholder value. He also discussed
market statistics of various companies, including measurement and control
instrumentation companies. Following that presentation, the Board unanimously
agreed to reject Mr. Fauth's overture. The Board agreed that remaining as an
independent public company was in the long-term best interest of the Company's
stockholders.
On May 13, 1999, two attorneys representing Mr. Fauth met with the
Company's counsel. They advised the Company's counsel that Mr. Fauth did not
intend to accept the Board's decision to remain an independent public company
and that Mr. Fauth intended to pursue the matter aggressively.
Mr. Fauth's interest in the Company was again discussed at the May 27,
1999, Board meeting, at which time it was concluded that William Blair would be
retained to advise the Board. The Board also scheduled a meeting in mid-June to
address the revised strategic and operational plans of the Company for the next
three to five years in light of the May 26, 1999, acquisition of Environmental
Systems Corporation.
By letter dated June 14, 1999, Mr. Fauth proposed to acquire the Company
for $12.50 per share, subject to various contingencies (the "Fauth June Offer").
The Board carefully considered this proposal at the already scheduled June 16,
1999, Board meeting. At this meeting, William Blair, which was already scheduled
to make a comprehensive presentation regarding the Company and its options, also
provided the Board with a preliminary analysis of Mr. Fauth's June Offer. After
considering the many factors detailed in the Company's proxy statement for the
Company's 1999 Annual Meeting, the Board voted unanimously to reject Mr. Fauth's
June Offer.
On June 16, 1999, Mr. Fauth and entities affiliated with him publicly
announced and initiated a proxy contest in connection with the 1999 Annual
Meeting. Mr. Fauth and his affiliates sought to replace three current members of
the Board, including the Company's Chairman, President and Chief Executive
Officer, James E. Doubles, with himself and two executives of his affiliated
corporations. Mr. Fauth and his affiliates also asked the Company's stockholders
to approve a number of changes to the Company's Articles of Incorporation and
Bylaws. On July 9, 1999, Mr. Fauth and his affiliates announced the commencement
of a tender offer for all shares of TSI common stock at $14.00 per share (the
"Fauth Tender Offer"). Approval of Mr. Fauth's proxy proposals were conditions
to consummation of the Fauth Tender Offer.
On July 15, 1999, the Company's Board met with representatives of William
Blair and the Company's counsel to consider the Fauth Tender Offer. At this
special meeting, the Company's Board of Directors unanimously determined to
reject the Fauth Tender Offer, based upon the Board's determination that the
offer was not in the best
22
<PAGE>
interest of the Company and its stockholders. The Board considered the Fauth
Tender Offer to be highly contingent and without adequate assurances that
financing would be available to carry it out. In addition, the Board concluded
that acceptance of the Fauth Tender Offer and the Fauth proxy proposals would
make it extremely difficult for the Company to seek out alternative transactions
at a greater value.
Accordingly, based upon its deliberations over the preceding six months,
as summarized above, the Board of Directors unanimously recommended that the
Company's stockholders reject the offer and not tender their shares. In reaching
its determinations and recommendations described above, the Board of Directors
considered a number of factors, including those set forth in the Company's proxy
statement for the 1999 Annual Meeting.
At the annual meeting on July 22, 1999, as reconvened on August 3, 1999,
the shareholders rejected the six proposals presented by Mr. Fauth and
re-elected the directors nominated by the Board of Directors. At the annual
meeting of directors, William Blair representatives reported on its activities
with respect to the evaluation of strategic alternatives and the Board
instructed William Blair to continue its activities in this area. The Fauth
Tender Offer expired on August 11, 1999 with the conditions not having been
satisfied and no shares accepted for payment. Mr. Fauth's tender offer was not
renewed.
Additional Board meetings were held on August 17, September 22, October
28, November 8, and November 18. During this period, William Blair continued to
evaluate and report to the Board with respect to various strategic and financial
alternatives, including the following:
- Share repurchase by the Company;
- Minority investment by a third party;
- Leverage recapitalization/special dividend;
- Joint venture with a strategic partner;
- Sale of assets or a segment of the business;
- A merger of equals; or
- Remain independent and grow internally and by acquisition.
At the Board's direction, William Blair also approached 67 strategic and
56 financial buyers with respect to a potential acquisition. Forty-four of the
parties executed a confidentiality agreement and received a confidential
memorandum on the Company. Three of these submitted indications of interest and
one visited the Company's data room and attended a management presentation. The
Company and its investment bankers advised the potential acquirers that any
offer had to be in excess of the $14.00 per share previously proposed by Mr.
Fauth in the tender offer. Ultimately, none of the three parties who had
indicated interest in submitting a proposal made a formal offer. The two
financial buyers indicated that the price was too high and the strategic buyer
concluded that there were insufficient synergies between that buyer's existing
business and the Company's business.
23
<PAGE>
Accordingly, William Blair was authorized to encourage Mr. Fauth to submit
a final and best offer and to revise the terms of his offer to remove various
provisions which the Board of Directors found objectionable. On December 2,
1999, Mr. Fauth increased his price to $15 per share, agreed to become
personally a party to the Merger Agreement, agreed to remove any contingency
based on financing, and agreed to pay $5 million to the Company if he could not
close the transaction because of the lack of financing. Details of this proposal
were discussed by counsel for the parties and Mr. Fauth submitted a formal
proposal to the Company's Board of Directors on December 3, 1999. At the Board's
request, Mr. Fauth also provided a letter outlining the financing which he
proposed to close the transaction. This financing contemplated a total purchase
price of approximately $180 million, of which $65 million would be provided as
equity by Mr. Fauth and $115 million would be provided as debt from financial
institutions.
At a meeting held on December 6, 1999, the Board met to discuss Mr.
Fauth's revised offer. It concluded that the price should be increased and that
there were other provisions in the proposed Merger Agreement which should be
revised. In particular, the directors strongly objected to a provision in the
proposed Merger Agreement which provided a $5 million breakup fee payable by the
Company to Mr. Fauth in the event that the Company's shareholders failed to
approve the merger. A negotiating team, consisting of Board member Donald
Sullivan and Richard Flint of the Gray, Plant, Mooty, Mooty & Bennett, P.A. law
firm, the Company's outside counsel, was appointed to meet with Mr. Fauth.
The negotiating team communicated the Board's position to Mr. Fauth and
his advisors at a meeting on December 10, 1999. Mr. Fauth responded on December
16, 1999. Among other things, Mr. Fauth indicated that he would delete the
provision requiring a termination fee in the event that the transaction was not
approved by the shareholders or did not close by an agreed outside drop-dead
date if the Board unanimously approved and recommended the transaction to the
shareholders and the Company agreed to hire a proxy solicitation firm to
encourage shareholders to vote for the Merger.
The negotiating team reported back to the Board of Directors at a special
meeting held on December 20, 1999. At that meeting, the Board concluded that
while significant progress had been made, the price should be increased and
additional information needed to be provided regarding Mr. Fauth's capacity to
provide the financing referred to in his December 3, 1999 letter. An expanded
negotiation team, consisting of Messrs. Doubles, Sullivan, and Flint, was
designated to communicate the Board's position to Mr. Fauth and his advisors.
The negotiating team met with Mr. Fauth and his advisors on December 22, 1999.
On December 30, 1999, Mr. Fauth offered to raise his price to $15.25 per share
if the proposed acquisition was unanimously approved by the Board and each
director agreed to vote his shares in favor of the Merger pursuant to voting
agreements.
On January 7, 2000, the Board of Directors met to review and act upon the
terms of Mr. Fauth's revised offer. At the beginning of the Board meeting, the
Board appointed a Special Committee pursuant to MBCA Section 302A.673 consisting
of directors Carlson, Levesque, Roering, Sullivan and Whalen, to consider the
Merger. None of these directors
24
<PAGE>
was then or had been within the previous five years an officer or employee of
the Company. The Board meeting was then adjourned while the Special Committee
met separately with its own independent counsel. After the Special Committee
meeting ended, the Board meeting was reconvened. William Blair delivered to the
Board of Directors a draft of its written opinion that the proposed merger was
fair, from a financial point of view, to TSI's shareholders (other than JJF
Group and Newco). William Blair also reviewed in detail the factors underlying
its opinion. See "Special Factors - Opinion of the Company's Financial Advisor."
The draft Merger Agreement was also reviewed in detail as were the voting
agreements being requested of the various Board members. Various changes were
suggested in the draft Merger Agreement and these were communicated by telephone
to Mr. Fauth who agreed to accept the changes. Mr. Fauth's ability to obtain
financing was discussed in detail and it was agreed that the Company would have
the right to terminate the Merger Agreement if Mr. Fauth did not provide a bank
commitment letter by January 31, 2000.
The Board meeting was then adjourned to allow the Special Committee to
meet and formulate its decision. Upon reconvening of the full Board meeting, the
Special Committee reported that it unanimously recommended approval of the
Merger and Merger Agreement, and entering into the voting agreements. Following
this report, the Board of Directors unanimously approved the Merger Agreement
and authorized the Chief Executive Officer of the Company to execute and deliver
the Merger Agreement on behalf of the Company.
On the morning of January 10, 2000, the Merger Agreement was executed and
delivered, and the Company announced the signing of the Merger Agreement. See
"Special Factors - Reasons for the Merger and Recommendation of the Board of
Directors." Subsequently, on February 1, 2000, after receiving the commitment
letters from Mr. Fauth's bank, the Board of Directors ratified the execution of
the Merger Agreement and voting agreement as executed, and determined that the
commitment letters were satisfactory.
Reasons for the Merger and Recommendation of the Board of Directors
In reaching its decision to enter into the Merger Agreement, the Board of
Directors of the Company considered a number of factors, including the
following:
1. The Board of Directors, with the assistance of its financial advisor
and management, undertook an extensive investigation of strategic alternatives,
including seeking offers of greater value and undertaking further discussions
with Mr. Fauth and his representatives since the beginning of calendar 1999.
William Blair contacted a broad group of 67 potential strategic buyers and 56
potential financial buyers. An extensive confidential memorandum was distributed
to 44 of these potential buyers who signed confidentiality agreements. None of
these parties submitted an offer at a price higher than Mr. Fauth's.
2. The $15.25 price to be paid by JJF Group was increased by $2.75 per
share, or 22%, from Mr. Fauth's initial $12.50 per share proposal. In addition,
many of the contingencies previously included in the $14 tender offer were
removed.
25
<PAGE>
3. Mr. Fauth indicated his intention to continue the Company as an
independent company headquartered in Minnesota, and he stated that he intended
to use it as a platform to grow and to acquire other companies. He also
indicated he does not intend to unduly leverage the Company, and plans to
continue the Company's research and development activities but with a greater
emphasis on market-driven product development rather than basic research.
4. The Board received the input of numerous shareholders, many of whom
expressed their opinion that the Company should be sold at the present time at
the highest price obtainable. Others expressed the view that a sale should occur
only if a fair price could be achieved at this time. There were others who
stated that the Company should remain as an independent company.
5. The financial presentation of William Blair (including the assumptions
and methodologies underlying its analyses and presentations of the stand-alone
value of the Company) made to the Board of Directors and the opinion of William
Blair to the effect that, as of January 7, 2000, the cash payment of $15.25 per
share was fair from a financial point of view as described under "Special
Factors - Opinion of the Company's Financial Advisor."
6. The premium which the cash payment represents over the historical and
recent market prices for shares of TSI Common Stock, as described under "Special
Factors - Opinion of the Company's Financial Advisor" and "Information
Concerning TSI Common Stock."
7. Management's discussion with the Board of Directors concerning the
current conditions of the Company and the industry in which it operates, and
management's projections as to the most likely financial results to be achieved
over the next several years, were also considered. While these projections were
for a significant increase in the Company's sales and profits, there was a
serious question whether such increases, if they were achieved, would be
reflected in the public stock price.
8. A review of strategic alternatives to increase shareholder value
convinced the Board that the preferable alternatives were to sell at the present
time or to remain an independent company.
9. A review of the terms and conditions of the Merger Agreement, including
the fact that the Merger Agreement permits the Company's Board of Directors, in
the exercise of its fiduciary duties, under certain conditions, to furnish
information to, or engage in negotiations with, third parties in response to
unsolicited acquisition proposals, and to terminate the Merger Agreement if the
Company's Board of Directors determined that a superior proposal (a "Superior
Proposal") has been made, subject to payment of a break-up fee (see "The Merger
Agreement - Termination Fees").
26
<PAGE>
10. The likelihood that Newco will be able to complete the Merger (see
"The Merger Agreement - Termination"), including the fact that JJF Group must
pay TSI a termination fee of $5 million in the event the Merger is not
consummated due to JJF Group and Newco not obtaining financing to consummate the
transactions contemplated by the Merger Agreement.
11. Consideration of the cost to the Company, distraction of management,
and possible adverse effect upon employee morale and Company relationships with
its suppliers and customers if the acquisition efforts of Mr. Fauth continued
for an extended period.
12. A review of the Company's business, management, financial performance
and condition, strategic objectives, prospects and competitive position.
In approving the Merger, the Board of Directors was aware that as a result
of the Merger, TSI Common Stock will no longer be publicly traded.
The foregoing discussion of the information and factors considered by the
Board of Directors is not intended to be exhaustive. In view of the wide variety
of factors considered in connection with its evaluation of the proposed Merger,
the Board of Directors did not find it practical to, and did not, quantify or
otherwise attempt to assign relative weights to the specific factors considered
in reaching its determination. Individual members of the Board of Directors may
have given differing weights to differing factors.
The Board's Recommendation
The Board of Directors of the Company, following the unanimous
recommendation to it by the members of the Special Committee, has unanimously
approved the Merger Agreement, the Merger and the transactions contemplated by
the Merger Agreement and recommends that the shareholders vote "FOR" approval
and adoption of the Merger Agreement and the Merger. The Board believes that the
consideration to be received by unaffiliated TSI shareholders is fair and in the
best interests of TSI shareholders.
Opinion of the Company's Financial Advisor
William Blair has acted as financial advisor to the Company in connection
with the Merger and has assisted the Company's Board of Directors in their
examination of the fairness, from a financial point of view, of the cash
consideration to be received by shareholders in the Merger. The consideration
offered by Mr. Fauth resulted from negotiations between the Company and Mr.
Fauth and was not initially determined by William Blair.
William Blair was retained by the Board of Directors to: (i) render
certain financial advisory and investment banking services in connection with
the Company's analysis of its strategic options to enhance shareholder value
including, without limitation, evaluating possible acquisitions of other
companies, a possible corporate restructuring or recapitalization, and a
possible business combination (through tender offer, merger, sale
27
<PAGE>
or exchange of stock, sale of all or a substantial part of its assets or
otherwise) of the Company with another party (collectively, the "Possible
Transaction") and (ii) render an opinion as to the fairness, from a financial
point of view, to the holders of TSI Common Stock of the consideration to be
received by such stockholders in the Possible Transaction (the "Opinion").
William Blair was hired based on its qualifications and expertise in providing
advice to companies in merger and acquisition transactions, as well as its
reputation as a nationally recognized investment banking firm. Pursuant to a
letter agreement dated June 15, 1999, the fee payable to William Blair for its
role in rendering its Opinion to the Board of Directors was $300,000. This fee
was payable upon delivery of the Opinion, regardless of the conclusion reached
by William Blair in its Opinion. William Blair will receive a fee for its role
as financial advisor upon the closing of the Merger in the amount of 1.25% of
the total consideration, as defined in the letter agreement dated June 15, 1999,
less quarterly retainer payments totaling $50,000 and the $300,000 fee paid for
rendering the Opinion. Furthermore, TSI has agreed to reimburse William Blair
for certain out-of-pocket expenses and to indemnify William Blair for certain
liabilities arising in connection with William Blair's Opinion.
At the request of TSI, on January 7, 2000, William Blair delivered an oral
Opinion to the Board of Directors, which was subsequently confirmed in writing
to the Board of Directors as of such date, that, based upon and subject to the
matters set forth in its written Opinion as of such date, the cash price of
$15.25 per share of TSI Common Stock to be paid in the Merger to the holders of
TSI Common Stock (other than JJF Group or Newco) was fair, from a financial
point of view to such holders. The full text of the written Opinion of William
Blair, dated January 7, 2000, is set forth as Annex B to this Proxy Statement
and describes the assumptions made, matters considered and limits on the scope
of the review undertaken. TSI shareholders are urged to read the Opinion
carefully and in its entirety.
William Blair's Opinion addresses only the fairness of the consideration
to be received in the Merger, from a financial point of view, by the
shareholders of TSI (other than JJF Group or Newco) and does not constitute a
recommendation to any shareholder of TSI as to how such shareholder should vote
with respect to the approval of the Merger.
In addition to the analytical methodologies employed, the cash payment
offered by Mr. Fauth is the result of a marketing process which included
contacting 123 potential strategic and financial acquirers for the Company. Upon
a review of indications received and discussions with potential acquirers, the
$15.25 cash payment represented the highest price among all parties contacted.
In rendering its Opinion, William Blair assumed and relied upon the
accuracy and completeness of the financial and other information obtained from
public sources or provided to it by the Company, and William Blair has not
assumed responsibility for any independent verification of such information or
undertaken any obligation to verify such information. In addition, with respect
to the financial forecasts and projections of the Company used in William
Blair's analysis, the Company's management informed William Blair that such
forecasts and projections represent management's best current judgment of the
future financial performance of the Company on a stand-alone basis, and William
Blair
28
<PAGE>
assumed that the projections had been reasonably prepared based on such current
judgment. William Blair assumed no responsibility for, and expresses no view as
to, such forecasts and projections or the assumptions on which they were based.
William Blair also took into account its assessment of general economic,
market, financial and other conditions and its experience in similar
transactions, as well as its experience in securities valuation in general.
William Blair's Opinion is necessarily based upon regulatory, economic, market,
financial and other conditions, as well as information made available to William
Blair as of January 7, 2000. The regulatory, economic, market, financial and
other conditions and the information made available to William Blair, could only
be evaluated by William Blair on the date of the Opinion.
In connection with its Opinion, William Blair reviewed a draft of the
Merger Agreement, as well as certain financial and other information that was
publicly available or furnished to William Blair by TSI, including certain
internal financial analyses, financial forecasts, reports and other information
prepared by the management of TSI. William Blair held discussions with members
of TSI's management concerning TSI's historical and current operations,
financial condition and prospects. In addition, William Blair examined:
1. A Company prepared analysis of the pro forma effects of the
Environmental Systems Corporation acquisition, effective June 1, 1999 and
the divestiture of the Company's wholly owned subsidiary, Handar,
effective October, 1, 1999.
2. Information regarding publicly available financial terms of certain
other business combinations William Blair deemed relevant.
3. The financial position and operating results of the Company compared
with those of certain other publicly traded companies William Blair deemed
relevant.
4. Current and historical market prices and trading volumes of the common
stock of the Company.
5. Certain publicly available financial and stock market data relating to
selected public companies that William Blair deemed relevant.
6. Information regarding percentage premiums paid for public companies
over trading market prices prior to the announcement of an acquisition or
merger transaction of relevant size.
7. Certain other publicly available information on the Company.
William Blair also conducted such other financial studies, analyses and
investigations and reviewed such other factors as William Blair deemed
appropriate for
29
<PAGE>
the purposes of rendering its Opinion. William Blair also considered the process
that resulted in the negotiation of the merger agreement, including its
discussions with 123 potential acquirers and its review of various strategic and
financial alternatives available to the Company.
The following summarizes the material factors considered and principal
financial analyses performed by William Blair to arrive at its Opinion. William
Blair performed certain procedures, including each of the financial analyses
described below, and reviewed with the management and Board of Directors of TSI
the assumptions upon which such analyses were based, and other factors. The
summary set forth below does not purport to be a complete description of the
analyses performed or factors considered by William Blair in this regard.
Summaries of Valuation Analyses. In connection with its Opinion, William
Blair performed certain valuation analyses, including:
o a comparison with selected publicly traded companies comparable to TSI;
o an analysis of selected comparable acquisition transactions;
o a premium analysis;
o a discounted cash flow analysis; and
o a leveraged acquisition analysis.
These analyses are summarized below. Financial information set forth below for
TSI represents information for the latest twelve months ("LTM") ended September
30, 1999 and reflects pro forma effects of the Environmental Systems Corporation
acquisition, effective June 1, 1999 and the divestiture of the Company's
wholly-owned subsidiary, Handar, effective October 1, 1999, as provided by
management of the Company.
Analysis of Selected Publicly Traded Companies Comparable to TSI. William
Blair reviewed and compared certain financial information relating to TSI to
corresponding financial information, ratios and public market multiples for 12
publicly traded companies with operations in the measurement and control
instrumentation industry that William Blair deemed relevant. For purpose of
analyses, the 12 companies were divided into two groups: Large Capitalization
Industry Participants (equity market capitalization greater than $1.0 billion)
and Small Capitalization Industry Participants (equity market capitalization
less than $1.0 billion). The five selected companies in the Large Capitalization
Industry Participants group consisted of (i) Danaher Corp., (ii) Johnson
Controls Inc., (iii) Parker-Hannifin Corp., (iv) Tektronix Inc., and (v) Thermo
Instrument Systems. The seven selected companies in the Small Capitalization
Industry Participants group consisted of (i) Analogic Corp., (ii) BEI
Technologies Inc., (iii) Moore Products Co., (iv) MTS Systems Corp., (v)
Thermedics Detection Inc., (vi) Thermo Optek Corp., and (vii) Veeco Instruments
Inc. William Blair selected these companies because they are publicly traded
companies that engage in businesses reasonably comparable to those of TSI.
Although William Blair compared the trading multiples of the selected companies
at the date of William Blair`s Opinion to the implied merger multiples of TSI,
none of the selected companies is identical to TSI. Accordingly, any
30
<PAGE>
analysis of the selected publicly traded companies necessarily involved complex
consideration and judgments concerning the differences in financial and
operating characteristics and other factors that would necessarily affect the
analysis of the trading multiples of the selected publicly traded companies.
Among the information considered were sales, operating income ("EBIT"),
earnings before interest, taxes, depreciation and amortization ("EBITDA"), net
income, earnings per share ("EPS"), gross profit margins, EBIT margins and net
income margins, growth in sales and net income, return on assets and equity, and
capital structure. The multiples and ratios for TSI and the comparable companies
were based on the most recent publicly available financial information and on
EPS consensus estimates for 1999 and 2000 from First Call Corporation, and used
the closing share prices as of January 4, 2000.
William Blair calculated the multiples of market equity value ("Equity
Value") to net income, as well as multiples of Equity Value plus book value of
total debt less cash and equivalents ("Enterprise Value") to LTM sales, LTM
EBITDA and LTM EBIT. William Blair then compared these multiples to the relevant
TSI multiples implied by the terms of the Merger. Information regarding the
multiples implied by the terms of the Merger compared to the multiples from
William Blair's analyses of selected comparable publicly traded companies is set
forth in the following table.
31
<PAGE>
TSI Implied
Merger Comparable Company
Multiple(1) Multiples Multiple Range
- --------------------------------------------------------------------------------
Mean Median Low High
---- ------ --- ----
Large Capitalization Industry Participants
Enterprise Value to LTM Sales 1.8x 1.2x 1.1x 0.4x 2.1x
Enterprise Value to LTM EBITDA 9.3x 8.0x 7.7x 4.7x 11.9x
Enterprise Value to LTM EBIT 11.5x 10.9x 10.5x 7.1x 15.3x
Equity Value to LTM Net Income 17.2x 18.0x 16.8x 12.8x 25.4x
Equity Value to Calendar Estimate
1999 Net Income 17.7x 18.8x 15.7x 12.3x 27.9x
Equity Value to Calendar Estimate
2000 Net Income 14.4x 15.7x 14.2x 10.8x 21.2x
Small Capitalization Industry Participants
Enterprise Value to LTM Sales 1.8x 1.6x 1.4x 0.6x 3.5x
Enterprise Value to LTM EBITDA 9.3x 10.9x 9.3x 4.7x 20.7x
Enterprise Value to LTM EBIT 11.5x 15.5x 15.7x 6.7x 24.1x
Equity Value to LTM Net Income 17.2x 22.0x 21.6x 9.8x 35.9x
Equity Value to Calendar Estimate
1999 Net Income 17.7x 22.1x 21.9x 13.2x 31.4x
Equity Value to Calendar Estimate
2000 Net Income 14.4x 16.3x 16.8x 8.8x 22.5x
- ----------
(1) LTM represents the latest 12 months ended September 30, 1999.
Analysis of Selected Comparable Acquisition Transactions. William Blair
performed an analysis of selected recent merger or acquisition transactions in
the measurement and control instrumentation industry. The selected transactions
were chosen based on William Blair's judgment that they were generally
comparable, in whole or in part, to the proposed transaction. In total William
Blair examined 16 transactions that were announced between January 1, 1997 and
December 31, 1999, including acquisitions for stock, cash or some combination
thereof. The selected transactions were not intended to be representative of the
entire range of possible transactions in the measurement and control
instrumentation industry. The 16 transactions examined were (acquired company /
acquirer):
32
<PAGE>
o Core Industries Inc. / United Dominion Industries Ltd.
o Daniel Industries Inc. / Emerson Electric Co.
o Digital Instruments Inc. / Veeco Instruments Inc.
o Dynatech Corporation / Clayton, Dubilier & Rice Inc.
o Elsag Bailey Process Automation N.V. / ABB Asea Brown Boveri Ltd.
o Eurotherm PLC / Siebe PLC
o Fluke Corporation / Danaher Corp.
o Gems Sensors Inc. / Danaher Corp.
o General Signal / SPX Corporation
o Hach Co. / Danaher Corp.
o Honeywell Inc. / Allied Signal Inc.
o Instron Corp. / Kirtland Capital Partners
o Measurex Corp. / Honeywell Inc.
o Microdyne Corp. / L-3 Communications Holdings
o Perkin-Elmer Instruments Div. / EG&G Inc.
o Total Control Products Inc. / GE Fanuc Automation North America
Although William Blair compared the transaction multiples of these
companies to the implied purchase multiples of TSI, none of the selected
acquired companies is identical to TSI. Accordingly, any analysis of the
comparable acquisition transactions necessarily involved complex considerations
and judgments concerning the differences in financial and operating
characteristics and other factors that would necessarily affect the acquisition
value of TSI versus the acquisition values of the companies in the comparable
acquisition transactions. William Blair reviewed the consideration paid in such
transactions in terms of the Enterprise Value of such transactions as a multiple
of sales, EBITDA and EBIT for the latest twelve months prior to the announcement
of such transactions. Additionally, William Blair reviewed the consideration
paid in such transactions in terms of the price paid for the common stock
("Equity Purchase Price") in such transactions as a multiple of net income for
the latest twelve months prior to the announcement of such transactions.
Information regarding the multiples implied by the terms of the Merger compared
to the multiples from William Blair's analyses of selected comparable
acquisition transactions is set forth in the following table:
TSI Implied
Merger Comparable Acquisitions
Multiple(1) Multiples Multiple Range
- --------------------------------------------------------------------------------
Mean Median Low High
---- ------ --- ----
Enterprise Value to LTM Sales 1.8x 1.7x 1.5x 0.8x 3.5x
Enterprise Value to LTM EBITDA 9.3x 10.6x 10.5x 5.8x 14.8x
Enterprise Value to LTM EBIT 11.5x 14.7x 13.3x 7.6x 31.8x
Equity Purchase Price to LTM Net
Income 17.2x 22.8x 21.0x 16.0x 34.9x
- ----------
(1) Represents the latest 12 months ended September 30, 1999.
33
<PAGE>
Premium Analysis. In addition to evaluating multiples paid in transactions
in the measurement and control instrumentation industry, William Blair
considered, for 13 public transactions (including acquisitions for stock, cash
or some combination thereof), the premiums paid over each company's stock price
prior to the announcement of a transaction (the "Comparable Acquisition Premium
Analysis"). Furthermore, William Blair reviewed 1,594 public transactions
(excluding banks and REITS), which were announced from January 1, 1995 to
December 31, 1999, for the premiums paid over each company's stock price prior
to the announcement of a transaction (the "Merger Premium Analysis"). William
Blair noted that the reasons for, and circumstances surrounding, each of the
transactions reviewed were diverse and that the premiums fluctuate among
different industry sectors and based on perceived growth, synergies, strategic
value and the type of consideration utilized in the transaction. The premium
analyses conducted by William Blair indicated the following:
34
<PAGE>
<TABLE>
<CAPTION>
TSI Implied TSI Implied
Merger Merger Premium Range
Premium Premiums (1) Premiums (2)
- -------------------------------------------------------------------------------------------------
% % % %
Mean Median Low High
---- ------ --- ----
<S> <C> <C> <C> <C> <C> <C>
Comparable Acquisition
Premium Analysis
One Day Premium 49.7% 25.8% 35.8 31.2 8.5 104.2
One Week Premium 42.7% 29.8% 41.7 40.7 12.1 89.4
Four Week Premium 68.3% 29.8% 38.0 33.3 12.3 75.1
Merger Premium Analysis
1998 - 1999
One Day Premium 49.7% 25.8% 30.4 24.2 NA NA
One Week Premium 42.7% 29.8% 37.7 30.4 NA NA
Four Week Premium 68.3% 29.8% 43.3 36.5 NA NA
1995 - 1997
One Day Premium 49.7% 25.8% 28.3 23.2 NA NA
One Week Premium 42.7% 29.8% 33.7 28.0 NA NA
Four Week Premium 68.3% 29.8% 40.0 34.7 NA NA
</TABLE>
- ----------
(1) Premium based on TSI closing stock price of $10.38 on June 16, 1999 (the
date of the initial JJF Group, Inc. public announcement).
(2) Premium based on TSI closing stock price of $12.13 on January 7, 2000.
Discounted Cash Flow Analysis. Using a discounted cash flow analysis, William
Blair estimated the net present value of the unleveraged free cash flows that
the Company could produce on a stand-alone basis from fiscal 2000 through fiscal
2004 if the Company's projections through 2004 were achieved. Unleveraged free
cash flow is defined as EBIT after taxes plus depreciation and amortization less
capital expenditures and working capital. In calculating the "terminal value,"
William Blair assumed multiples of Enterprise Value to EBITDA ranging from 7.0x
to 9.0x in fiscal 2004, which multiples William Blair believed to be appropriate
for such an analysis. The annual and terminal free cash flows were discounted to
determine a net present value of the unleveraged equity value of the Company.
Discount rates in a range of 13.0% to 15.0% were chosen based upon an analysis
of the weighted average cost of capital for TSI and for the publicly traded
Small Capitalization comparable group of companies described above. The
discounted cash flow analysis conducted by William Blair produced implied equity
values for the Company ranging from $183.1 million to $239.3 million.
35
<PAGE>
Leveraged Acquisition Analysis. William Blair analyzed the feasibility of
a leveraged acquisition at the $15.25 per share cash payment by estimating the
investment returns for sources of equity and debt and comparing those to
expected industry returns. For purposes of this analysis, William Blair utilized
the anticipated capital structure of the Company as a private company as
proposed by JJF Group. In calculating the terminal value, William Blair assumed
multiples of Enterprise Value to EBITDA ranging from 7.0x to 9.0x in fiscal
2004, which multiples William Blair believed to be appropriate for such an
analysis. William Blair noted that based on this analysis of the $15.25 per
share Common Payment, estimated investment returns to debt and equity investors
in the contemplated JJF Group transaction would be within a range of expected
industry returns. The leveraged acquisition analysis conducted by William Blair
indicated the following:
Results of Leveraged Acquisition
--------------------------------
Common Payment $15.25
Equity Returns (1) 23.5%
Subordinated Debt Returns(1) 17.5%
- ----------
(1) Based on terminal value multiple of 8.0x EBITDA.
Conclusion. The foregoing is a summary of the material aspects of the
financial analyses used by William Blair in connection with rendering its
Opinion. The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
the analyses as a whole, could create an incomplete view of the processes
underlying William Blair's Opinion. In arriving at its Opinion, William Blair
considered the results of all such analyses. The analyses were prepared solely
for the purposes of William Blair providing its Opinion as to the fairness of
the cash payment to TSI shareholders, from a financial point of view, to the
holders of TSI Common Stock (other than JJF Group or Newco), and do not purport
to be appraisals or necessarily reflect the prices at which businesses or
securities actually may be sold. Any analysis of the fairness of the cash
payment to be offered in the Merger, from a financial point of view, to the
holders of TSI Common Stock (other than JJF Group or Newco), involves complex
considerations and judgments concerning the valuation analyses utilized.
Analyses based upon forecasts of future results are not necessarily indicative
of actual future results, which may be significantly more or less favorable than
those suggested by such analyses. The estimates prepared by management of the
Company and utilized by William Blair were developed solely for purposes of its
analyses and the presentations to the TSI Board of Directors and reflected
computations of the potential values through the application of various
generally accepted valuation techniques. Such estimates may not reflect actual
market values, and do not necessarily reflect values which may be realized if
any other assets of TSI are sold. William Blair has not made or obtained an
independent appraisal or valuation of the assets, liabilities or
36
<PAGE>
solvency of TSI. William Blair's Opinion and the related presentation to the TSI
Board on January 7, 2000, was one of many factors taken into consideration by
the TSI Board in making its determination to approve the Merger. The foregoing
summary does not purport to be a complete description of the analyses performed
by William Blair.
William Blair's Opinion is for the use and benefit of the TSI Board of
Directors in its consideration of the transaction contemplated by the Merger
Agreement. This Opinion is not intended to be, and does not constitute, a
recommendation to any shareholder as to how such shareholder should vote with
respect to the Merger. William Blair was not requested to opine as to, and its
Opinion does not in any manner address, TSI's underlying business decision to
proceed with or effect the Merger, or the relative merits of the Merger as
compared to any alternative business strategies which might exist for TSI or the
effect of any other transaction in which TSI might engage.
In the ordinary course of its business, William Blair may trade TSI Common
Stock for the accounts of its customers. William Blair does not hold, for its
own account, any shares of TSI Common Stock.
Certain Effects of the Merger
Current TSI shareholders will not have an opportunity to continue their
equity interest in TSI after the Merger. Upon completion of the Merger, TSI
Common Stock will no longer be quoted on Nasdaq, trading information will no
longer be available and the registration of TSI Common Stock under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), will be
terminated.
The receipt of cash pursuant to the Merger will be a taxable transaction.
See "Special Factors - Certain Federal Income Tax Consequences."
Certain Federal Income Tax Consequences
The following discussion is a general summary of the material United
States federal income tax consequences of the Merger. This discussion is based
upon the Internal Revenue Code of 1986, as amended (the "Code"), regulations
promulgated by the United States Treasury Department, judicial authorities, and
current rulings and administrative practice of the Internal Revenue Service (the
"Service"), as currently in effect, all of which are subject to change at any
time, possibly with retroactive effect. This discussion does not address all
aspects of federal income taxation that might be relevant to particular holders
of TSI Common Stock in light of their status or personal investment
circumstances; nor does it discuss the consequences to such holders who are
subject to special treatment under the federal income tax laws such as foreign
persons, dealers in securities, regulated investment companies, life insurance
companies, other financial institutions, tax-exempt organizations, pass-through
entities, taxpayers who hold TSI Common Stock as part of a "straddle," "hedge"
or "conversion transaction" or who have a "functional currency" other than the
United States dollar or to persons who have received their TSI Common Stock as
37
<PAGE>
compensation. Further, this discussion does not address the state, local or
foreign tax consequences of the Merger.
For United States federal income tax purposes the Merger of Newco with and
into TSI will be treated as an exchange of TSI Common Stock for the cash in the
Merger by its holders.
The receipt of the cash payment of $15.25 per share by holders of TSI
Common Stock will be a taxable transaction for federal income tax purposes. Each
holder's gain or loss per share will be equal to the difference between $15.25
and the holder's basis per share in the TSI Common Stock. Except as provided in
the following paragraph, if a holder holds TSI Common Stock as a capital asset,
the gain or loss from the exchange will be a capital gain or loss. This gain or
loss will be long-term if the holder's holding period is more than twelve
months. Under current law, net long-term capital gains of individuals are
subject to a maximum federal income tax rate of 20% (not taking into account any
phase-out of tax benefits such as personal exemptions and certain itemized
deductions) whereas the maximum federal income tax rate on ordinary income and
net short-term capital gains (i.e., gain on capital assets held for not more
than twelve months) of an individual is currently 39.6% (not taking into account
any phase-out of tax benefits such as personal exemptions and certain itemized
deductions). For corporations, capital gains and ordinary income are taxed at
the same maximum rate of 35%. Capital losses are currently deductible only to
the extent of capital gains plus, in the case of taxpayers other than
corporations, $3,000 of ordinary income ($1,500 in the case of married
individuals filing separate returns). In the case of individuals and other
non-corporate taxpayers, capital losses that are not currently deductible may be
carried forward to other years, subject to certain limitations. In the case of
corporations, capital losses that are not currently deductible may generally be
carried back to each of the three years preceding the loss year and forward to
each of the five years succeeding the loss year, subject to certain limitations.
A holder of TSI Common Stock may be subject to backup withholding at the
rate of 31% with respect to payments of cash consideration received pursuant to
the Merger, unless the holder (a) provides a correct taxpayer identification
number ("TIN") in the manner required or (b) is a corporation or other exempt
recipient and, when required, demonstrates this fact. To prevent the possibility
of backup federal income tax withholding on payments made to certain holders
with respect to shares of TSI Common Stock pursuant to the Merger, each holder
must provide the disbursing agent with his or her correct TIN by completing a
Form W-9 or Substitute Form W-9. A holder of TSI Common Stock who does not
provide Norwest with his or her correct TIN may be subject to penalties imposed
by the Service, as well as backup withholding. Any amount withheld under these
rules will be creditable against the holder's federal income tax liability. TSI
(or its agent) will report to the holders of TSI Common Stock and the Service
the amount of any "reportable payments," as defined in Section 3406 of the Code,
and the amount of tax, if any, withheld with respect thereto.
The foregoing discussion is for general information only and is not a complete
description of all of the potential tax consequences that may occur as a result
of the Merger. TSI shareholders should therefore consult their tax advisors
regarding the
38
<PAGE>
federal tax consequences of the merger, as well as the tax consequences arising
under the laws of any state, local or other jurisdiction of the above described
transactions.
THE MERGER
The following is a summary of the Merger Agreement, a copy of which is
attached as Annex A to this Proxy Statement and is incorporated herein by
reference. Such summary is qualified in its entirety by reference to the Merger
Agreement. Shareholders are urged to review the Merger Agreement carefully in
its entirety.
Treatment of TSI Common Stock and Options
At the time of the Merger:
(a) each share of TSI Common Stock outstanding as of the Record Date
(other than shareholders who have perfected their dissenters' rights and shares
owned by Mr. Fauth and his affiliates) will be canceled and converted into the
right to receive $15.25 per share in cash;
(b) all outstanding options to purchase TSI Common Stock (the "TSI Stock
Options"), whether or not then vested or exercisable, will be canceled and
thereafter the former holder thereof will be entitled to a payment from TSI
(subject to any applicable withholding taxes, as the case may be) equal to the
product of (i) the total number of shares of TSI Common Stock subject to such
TSI Stock Option and (ii) the difference between $15.25 and the option exercise
price for such TSI Stock Option, payable in cash immediately following the
Merger; and
(c) Each share of Newco Common Stock will be canceled and converted into
one share of common stock of TSI.
Employment by TSI
TSI will be the Surviving Corporation in the Merger, and employees of TSI
prior to the Merger will be TSI employees after the Merger.
Indemnification
Subject to any limitation imposed under applicable law, all rights to
indemnification available to the present and former officers and directors of
TSI and its subsidiaries in respect of acts or omissions occurring prior to the
Merger will remain available to the maximum extent provided under TSI's Articles
of Incorporation and By-laws as in effect on the date of the Merger Agreement.
For a period of six years after the Merger, JJF Group and TSI will
maintain officers' and directors' liability insurance in respect of acts or
omissions occurring prior to the
39
<PAGE>
Merger covering each person currently covered by TSI's officers' and directors'
liability insurance policy on terms substantially equivalent to those of the
current policy.
The Company's Articles of Incorporation contain provisions eliminating a
director's personal liability for monetary damages to the Company and its
shareholders arising from a breach of a director's fiduciary duty except for
liability (i) for any breach of the director's duty of loyalty to the Company or
its shareholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; or (iii) for any
transaction from which the director derived an improper personal benefit.
Conduct of TSI's Business After the Merger
It is anticipated that neither TSI nor Newco will change the composition
of management immediately following the Merger, except that Mr. Fauth will
become Chairman of the Board of TSI.
Other than the transactions contemplated by the Merger Agreement and the
proposed financing, the Company does not have, nor does it anticipate, any plans
or proposals which would result in a sale or transfer of a material amount of
assets.
Effective Time
The Merger will become effective (referred to as the "Effective Time")
upon the filing of a certificate of merger with the Minnesota Secretary of State
or at such later time as may be specified in the certificate of merger. The
Effective Time is currently expected to occur as soon as practicable after the
Special Meeting, subject to approval of the principal terms of the Merger
Agreement at the Special Meeting and satisfaction or waiver of the terms and
conditions set forth in the Merger Agreement.
Regulatory Requirements
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), certain acquisition transactions may not be consummated unless
notice has been given and certain information furnished to the Antitrust
Division of the United States Department of Justice (the "Antitrust Division")
and the Federal Trade Commission (the "FTC") and specified waiting period
requirements have been satisfied, unless earlier termination has been granted.
The Company and Newco each filed with the Antitrust Division and the FTC a
Notification and Report Form with respect to the Merger on March 15, 2000. As of
the date of this Proxy Statement, the FTC has not yet notified the Company and
Newco that the waiting period under the HSR Act had been terminated. The Merger
may not be consummated until, among other things, the waiting period under the
HSR Act has been terminated. At any time before or after the Effective Time, and
despite termination of the HSR Act waiting period, the Antitrust Division or any
state could take such action under the antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin consummation of
the Merger. Private parties also may seek to take legal action under the
antitrust laws under certain circumstances.
40
<PAGE>
Dissenters' Rights
Sections 302A.471 and 302A.473 of the MBCA entitle any shareholder who
objects to the Merger and who follows the procedures prescribed by Section
302A.473 to receive in lieu of the $15.25 cash payment, a cash payment equal to
the "fair value" of such shareholder's shares of TSI Common Stock. Set forth
below is a summary of the procedures relating to the exercise of such
dissenters' rights. This summary does not purport to be a complete statement of
dissenters' rights and is qualified in its entirety by reference to Sections
302A.471 and 302A.473 of the MBCA, which are reproduced in full as Annex C to
this Proxy Statement.
Any shareholder contemplating the possibility of dissenting from the
Merger should carefully review the text of Annex C (particularly the specified
procedural steps required to perfect dissenters' rights, which are complex) and
should also consult legal counsel. Such rights will be lost if the procedural
requirements of Section 302A.473 of the MBCA are not fully and precisely
satisfied.
Under the MBCA, any shareholder who (i) files with the Company before the
Special Meeting written notice of his or her intent to demand the fair value for
his or her shares of TSI Common Stock if the Merger is consummated and becomes
effective and (ii) does not vote his or her shares of TSI Common Stock at the
Special Meeting in favor of the proposal to approve the Merger will be entitled,
if the Merger is approved and effected, to receive a cash payment equal to the
fair value of such shareholder's shares of TSI Common Stock upon compliance with
the applicable statutory procedural requirements. While a shareholder who votes
for the Merger will have no dissenters' rights under the MBCA, the failure by
any shareholder to vote against the proposal to approve the Merger will not in
and of itself constitute a waiver of such rights.
Written notice of a shareholder's intent to demand payment for such
shareholder's shares of Common Stock must be filed with the Company at: 500
Cardigan Road, Shoreview, Minnesota 55126, Attn: Corporate Secretary, before the
vote on the Merger at the Special Meeting. A vote against the Merger at the
Special Meeting will not constitute the notice required under the MBCA. A
shareholder who does not satisfy each of the requirements of Sections 302A.471
and 302A.473 of the MBCA is not entitled to payment for such shareholder's
shares of TSI Common Stock under the dissenters' rights provisions of the MBCA
and will be bound by the terms of the Merger Agreement if the Merger is
consummated.
If the Merger is approved at the Special Meeting, the Company must send
written notice to all shareholders who have given written notice of dissent and
not voted in favor of the Merger a notice containing:
o the address where the demand for payment and certificates must be
sent and the date by which they must be received,
41
<PAGE>
o any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received,
o a form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents,
acquired the shares (or an interest in them) and to demand payment,
and
o a copy of the provisions of the MBCA set forth in Annex C with a
brief description of the procedures to be followed under those
provisions.
A shareholder who is sent such a notice and who wishes to assert
dissenters' rights must demand payment and deposit his or her certificates with
the Company within 30 days after such notice is given. Prior to the Effective
Time, a shareholder exercising dissenters' rights retains all other rights of a
shareholder. From and after the Effective Time, dissenting shareholders will no
longer be entitled to any rights of a shareholder, including, but not limited
to, the right to receive notice of meetings, to vote at any meetings or to
receive dividends, and will only be entitled to any rights of appraisal as
provided by the MBCA. If any such holder of TSI Common Stock fails to perfect or
effectively withdraws or loses this right, his or her shares of TSI Common Stock
shall thereupon be deemed to have been converted into the right to receive the
$15.25 per share pursuant to the Merger Agreement.
After the Effective Time or upon receipt of a valid demand for payment,
whichever is later, the Company must remit to each dissenting shareholder who
complied with the requirements of the MBCA the amount the Company estimates to
be the fair value of such shareholder's shares of TSI Common Stock, plus
interest accrued from the Effective Time to the date of payment. The payment
also must be accompanied by certain financial data relating to the Company, the
Company's estimate of the fair value of the shares and a description of the
method used to reach such estimate, and a copy of the applicable provisions of
the MBCA with a brief description of the procedures to be followed in demanding
supplemental payment. If a dissenting shareholder believes that the amount
remitted is less than the fair value of such shares plus interest, such
dissenting shareholder may give written notice to the Company, within 30 days
after the Company mails its remittance, of his or her own estimate of the fair
value of the shares, plus interest, and demand payment of the difference.
If the Company receives a demand from a dissenting shareholder to pay such
difference, it shall, within 60 days after receiving the demand, either pay to
the dissenting shareholder the amount demanded or agreed to by the dissenting
shareholder after discussion with the Company or file in court a petition
requesting that the court determine the fair value of the shares.
The court may appoint one or more appraisers to receive evidence and make
recommendations to the court on the amount of the fair value of the shares. The
court will determine whether the dissenting shareholder has complied with the
requirements of Section 302A.473 of the MBCA and will determine the fair value
of the shares, taking into account any and all factors the court finds relevant,
computed by any method or
42
<PAGE>
combination of methods that the court, in its discretion, sees fit to use. The
fair value of the shares as determined by the court is binding on all dissenting
shareholders.
Costs of the court proceeding shall be determined by the court and
assessed against the Company, except that part or all of the costs may be
assessed against any dissenting shareholders whose actions in demanding
supplemental payments are found by the court to be arbitrary, vexatious or not
in good faith.
If the court finds that the Company did not substantially comply with the
relevant provisions of the MBCA, the court may assess the fees and expenses, if
any, of attorneys or experts as the court deems equitable against the Company.
Such fees and expenses may also be assessed against any party in bringing the
proceedings if the court finds that such party has acted arbitrarily,
vexatiously or not in good faith, and may be awarded to a party injured by those
actions. The court may award, in its discretion, fees and expenses of an
attorney for the dissenting shareholders out of the amount awarded to such
shareholders, if any.
A shareholder of record may assert dissenters' rights as to fewer than all
of the shares registered in such shareholder's name only if he or she dissents
with respect to all shares beneficially owned by any one beneficial shareholder
and notifies the Company in writing of the name and address of each person on
whose behalf he or she asserts dissenters' rights. The rights of such a partial
dissenting shareholder are determined as if the shares as to which he or she
dissents and his or her other shares were registered in the names of different
shareholders.
Under Subdivision 4 of Section 302A.471 of the MBCA, a shareholder has no
right, at law or in equity, to set aside the approval of the Merger Agreement or
the consummation of the Merger except if such adoption or consummation was
fraudulent with respect to such shareholder or the Company.
Financing
Mr. Fauth and Newco have advised the Company that they intend to finance
the Merger by means of a combination of approximately $65 million in equity,
$100 million in senior debt and $15 million in subordinated debt. The equity
portion of the financing is expected to consist of $50 million in cash and
contribution by Mr. Fauth to JJF Group of 1,009,000 shares of TSI Common Stock
owned by him, which under the Merger Agreement would be canceled without receipt
of any payment. U.S. Bank has issued to JJF Group a commitment letter to provide
the senior debt in the form of $30 million in a six year revolving credit
facility, $50 million in term debt being amortized over six years and $20
million in term debt being amortized over seven years. The senior debt would be
loaned by a syndicate of banks arranged by U.S. Bank acting as agent and one of
the banks, and would be secured by a security interest in substantially all of
the Company's assets. The interest rate applicable to the senior debt would
initially be one and one-half percentage points above the then current prime
rate or three percentage points above the then current London Interbank Offered
Rate ("LIBOR"), and after twelve months the
43
<PAGE>
applicable interest rates could remain the same or decline depending on the
ratio of the Company's total interest bearing debt to its EBITDA.
U.S. Bank has also issued to JJF Group a commitment letter to provide the
$15 million in subordinated debt, which would be unsecured and would mature in
seven years and six months. The interest on the subordinated debt would be paid
in cash at the rate of 12% per annum for the first five years, with a deferred
financing fee.
The U.S. Bank commitment letters contain customary conditions, which
include but are not limited to such conditions as the absence of any material
adverse change in the business or financial condition of the Company, the
absence of certain kinds of litigation, the contribution of the anticipated
equity, the absence of any material adverse change in the loan syndication
market or financial markets generally and evidence of compliance with
environmental laws.
Expenses of the Transaction
As a result of the proposed Merger, the Company will incur various costs,
currently estimated at approximately $2,475,000 in connection with consummating
the Merger. These costs consist of approximately $80,000 of legal and accounting
fees and costs, approximately $65,000 for printing costs, filing fees, proxy
solicitor fees and expenses associated with the Special Meeting, and
approximately $2,000,000 to $2,330,000 of advisory fees payable to William Blair
as financial advisor (inclusive of out-of-pocket expenses). The exact timing,
nature and amount of these costs are subject to change. See "Special Factors -
Opinion of the Company's Financial Advisor" and "Interests of Certain Persons in
the Merger - Fees Payable to Financial Advisor" for a description of the fees to
be paid to William Blair in connection with its engagement.
THE MERGER AGREEMENT
The following is a brief summary of certain material provisions of the
Merger Agreement that have not been previously discussed. This summary does not
purport to be complete and is qualified in its entirety by reference to the
Merger Agreement, which is attached to this Proxy Statement as Annex A and is
incorporated herein by reference.
Representations and Warranties
The Merger Agreement contains customary representations and warranties of
TSI relating to its business, operations and financial condition. The Merger
Agreement also contains customary representations and warranties of Newco and
JJF Group relating to its business and the financing for the Merger.
Certain Covenants
The Merger Agreement provides, among other things, that:
44
<PAGE>
o JJF Group and TSI will use their respective reasonable best efforts
to obtain any necessary authorizations, consents and approvals of
any governmental or regulatory body;
o TSI will not take any action or enter into any transaction outside
the ordinary course of business;
o TSI will permit representatives of JJF Group and its affiliates to
have reasonable access to TSI's premises, properties, personnel,
books, and records, contracts and documents;
o TSI and JJF Group will give prompt written notice to the other of
any event which could reasonably be expected to cause a breach of
its respective representations, warranties or covenants;
o TSI and JJF Group will hold in strict confidence any confidential or
proprietary data or information of the other;
o the Surviving Corporation will continue to provide through December
31, 2000 to employees at TSI and its subsidiaries non-incentive type
fringe benefits which in the aggregate are substantially comparable
to those currently provided;
o with respect to any benefit plans in which any employees of TSI and
its subsidiaries first become eligible to participate in on or after
the Effective Time ("New Plans") but prior to December 31, 2000, the
Surviving Corporation will (1) waive all pre-existing conditions,
exclusions and waiting periods with respect to participation and
coverage requirements under any such New Plans, to the extent such
waiver is permissible under the New Plans, and (2) recognize service
of the employees of TSI and its subsidiaries accrued prior to the
Effective Time in determining eligibility to participate and vesting
credit in the New Plans; and
o the Surviving Corporation will pay or provide to employees of TSI
and its subsidiaries for the fiscal year ending March 31, 2000 the
incentive compensation program benefits which such persons have or
will accrue in the ordinary course for that fiscal year under
existing programs.
No Solicitation of Transactions; Right to Enter Into a Superior Proposal
The Merger Agreement provides that TSI will not (whether directly or
indirectly through advisors, agents or other intermediaries) engage in any
discussions or negotiations with, or provide non-public information to, any
third party proposing to make or believed to be contemplating a "Takeover
Proposal" to the Company. A Takeover Proposal includes a proposal for (a) any
acquisition of a substantial equity interest in the Company or any subsidiary;
(b) any acquisition of a substantial portion of assets of the Company or any
subsidiary or a product line or line of business of the Company or any
subsidiary; or (c) any merger or other business combination involving TSI, other
than the acquisition of TSI by JJF Group.
The non-solicitation provision contained in the Merger Agreement permits
the Company, its subsidiaries and their directors and officers to participate in
discussions and negotiations regarding, furnish information with respect to,
assist or participate in or
45
<PAGE>
facilitate in any other manner, any effort or attempt by a third party to do or
seek a Takeover Proposal to the extent required by the fiduciary obligations of
the Board of Directors, as determined in good faith by a majority of the members
of the Board following the receipt of advice of outside legal counsel. If any
such activities result in a Takeover Proposal which the Board of Directors
reasonably concludes is superior to the Merger (a "Superior Proposal"), the
Board of Directors may recommend such Superior Proposal to the Company's
stockholders, and withdraw its recommendation of the Merger Agreement and the
Merger. In such event, the Merger Agreement, with minor exceptions, shall be of
no further force and effect once the Company pays a $5 million termination fee
to JJF Group See "- Termination Fees" below.
Directors and Officers of TSI Following the Merger
The officers of TSI immediately prior to the Effective Time together with
Mr. Fauth who will become Chairman of the Board will be the initial officers of
the Surviving Corporation. The Directors of the Surviving Corporation will be
Mr. Fauth, James E. Doubles and John C. Kopchik, each to hold office in
accordance with the Articles of Incorporation and the by-laws of the Surviving
Corporation. See "The Merger - Conduct of TSI's Business After the Merger."
Indemnification
Pursuant to the terms of the Merger Agreement, and subject to any
limitation imposed from time to time under applicable law, all rights of
indemnification available to the present and former officers and directors of
TSI and its subsidiaries in respect of acts or omissions occurring prior to the
Effective Time, shall remain available to the maximum extent provided under
TSI's Articles of Incorporation and By-laws, as in effect on the date of the
execution of the Merger Agreement.
For a period of six years after the Effective Time, JJF Group through the
Surviving Corporation will provide officers' and directors' liability insurance
in respect of acts or omissions occurring prior to the Effective Time covering
each such person currently covered by TSI's officers' and directors' liability
insurance policy on terms with respect to coverage and amount substantially
equivalent to those of such policy currently in effect.
Cooperation and Reasonable Efforts
Pursuant to the Merger Agreement, and subject to certain conditions and
limitations described therein, the parties have agreed to cooperate with each
other and to use their respective reasonable best efforts to take all action
under the terms of the Merger Agreement and to do all things necessary, proper
or advisable in order to consummate and make effective the transactions
contemplated by the Merger Agreement.
46
<PAGE>
Conditions to Consummation of Merger
The respective obligations of TSI, Newco and JJF Group to consummate the
Merger are subject to the satisfaction or waiver of the following conditions:
o the representations and warranties made by each party contained in the
Merger Agreement will be true and correct in all material respects at and as of
the Effective Time, except for those representations and warranties which
address matters only as of a particular date (which will have been true and
correct as of such date);
o the Merger Agreement will have been adopted by the shareholders of TSI
in accordance with Minnesota law;
o each of TSI, JJF Group and Newco will have performed and complied with
all of its respective covenants under the Merger Agreement in all material
respects;
o there will not be any judgment, order, decree or injunction in effect
preventing consummation of the Transactions; and
o all applicable waiting periods (and any extensions thereof) under the
HSR Act will have expired or otherwise been terminated and the parties will have
received all other authorizations, consents and approvals of governmental or
regulatory bodies in connection with the execution, delivery and performance of
the Merger Agreement.
In addition, the obligations of JJF Group and Newco to consummate the
Merger are further subject to the satisfaction by TSI or waiver by JJF Group and
Newco of the following conditions:
o the holders of not more than 15% of the outstanding shares of TSI
Common Stock shall have exercised dissenters' rights in accordance
with the MBCA;
o since September 30, 1999 there shall not have occurred any event
which has a material adverse effect on the Company, except as
expressly disclosed;
o all consents, approvals, authorizations, orders or permits required
to be obtained by TSI, JJF Group or Newco shall have been obtained,
except for those as to which the failure to obtain the same would
not have a material adverse effect on the Company;
o JJF Group and Newco shall have received an opinion of Gray, Plant,
Mooty, Mooty & Bennett, P.A., counsel to TSI, addressed to JJF Group
in the form specified in the Merger Agreement;
o no director of TSI has breached the voting agreement with Newco and
JJF Group providing that each director will vote his respective
shares of TSI
47
<PAGE>
Common Stock in favor of the approval and adoption of the Merger
Agreement and Merger.
Termination
The Merger Agreement may be terminated at any time prior to the Effective
Time (notwithstanding any approval of the Merger Agreement by the shareholders
of TSI):
(a) by mutual consent of the Board of Directors of TSI and JJF Group;
(b) by either TSI or JJF Group, in the event that the Merger fails to
receive requisite shareholder approval;
(c) subject to TSI's right to cure, by JJF Group if there has been a
material misrepresentation or material breach on the part of TSI in the
representations, warranties or covenants of TSI set forth in the Merger
Agreement, or if there has been any material failure by TSI to comply with its
obligations under the Merger Agreement;
(d) by TSI if there has been a material misrepresentation or material
breach on the part of JJF Group or Newco in the representations, warranties or
covenants of JJF Group or Newco set forth in the Merger Agreement, or if there
has been any material failure by JJF Group or Newco to comply with their
obligations under the Merger Agreement;
(e) by JJF Group if TSI's Board of Directors withdraws its unanimous
recommendation that shareholders approve the Merger Agreement and the Merger;
(f) by TSI upon written notice to JJF Group at any time prior to the
Special Meeting if TSI has entered into a definitive agreement in connection
with a Superior Proposal and makes simultaneous payment to JJF Group of the
termination fee; or
(g) by either TSI or JJF Group if the consummation of the Merger will not
have occurred on or before June 30, 2000, unless the failure results from a
breach of the Merger Agreement by the party seeking to terminate the Merger
Agreement.
The party desiring to terminate the Merger Agreement will give written
notice of such termination to the other party in accordance with the terms
thereof.
In the event of termination of the Merger Agreement, no party shall have
any liability or further obligation to any other party except for the following:
(a) a party that is in material breach of its representations, warranties or
covenants under the Merger Agreement shall be liable for damages incurred by the
other parties to the extent that such damages are proximately caused by such
breach, and if any legal action is instituted to enforce or interpret the terms
of the Merger Agreement the prevailing party in such action shall be entitled,
in addition to any other relief to which such party is entitled, to
reimbursement of its actual attorney fees; (b) TSI shall pay a $5 million
termination fee to
48
<PAGE>
JJF Group under certain circumstances; and (c) JJF Group shall pay a $5 million
termination fee to TSI under certain circumstances.
Termination Fees
In accordance with the terms of the Merger Agreement, TSI must pay JJF
Group a $5 million termination fee, if the Merger Agreement is terminated for
any of the following reasons:
(i) if the Merger Agreement is abandoned by TSI or terminated by TSI
with written notice to JJF Group at any time prior to the Special
Meeting because TSI has entered into a definitive agreement in
connection with a Superior Proposal;
(ii) if the Merger Agreement is terminated by JJF Group because there has
been a material misrepresentation or material breach on the part of
TSI in the representations, warranties or covenants of TSI set forth
in the Merger Agreement, or if there has been any material failure
by TSI to comply with its obligations under the Merger Agreement
which breach or failure has not been cured within the time limits
specified in the Merger Agreement; or
(iii) if the Merger Agreement is terminated by JJF Group because TSI's
Board of Directors withdraws its unanimous recommendation to the
shareholders to approve the Merger Agreement.
In the event the Merger is not consummated due to JJF Group and Newco not
obtaining financing for the $15.25 per share purchase price, then the Merger
Agreement shall terminate and JJF Group, Newco and Mr. Fauth shall be jointly
and severally liable to pay TSI a termination fee of $5 million.
Amendment and Waiver
The Merger Agreement may be amended or its conditions precedent to closing
waived at any time before or after the Special Meeting, but if after the Special
Meeting no amendment or waiver shall be made without the further approval of
TSI's shareholders which reduces the consideration payable to the shareholders,
changes the form or timing of such consideration or changes any other terms and
conditions of the Merger Agreement if the changes, alone or in the aggregate,
will materially adversely affect the shareholders. Any amendment to the Merger
Agreement must be in writing and signed by all of the parties.
Expenses
Except as otherwise described in "- Termination Fees" and "- Surrender and
Payment of Shares" above, costs and expenses incurred in connection with the
Merger will be paid by the party incurring such cost or expense. In the event
the Merger is
49
<PAGE>
consummated, the Surviving Corporation will be responsible for the payment of
all of the expenses incurred by or fees due to William Blair, legal counsel and
independent auditors.
Guaranty
Mr. Fauth has personally guaranteed the obligations of JJF Group and Newco
under the Merger Agreement.
Voting Agreement
Each of the directors of TSI has entered into a voting agreement with
Newco and JJF Group, dated as of January 10, 2000, whereby each director agreed
to vote his respective shares of TSI Common Stock in favor of the Merger
Agreement and Merger. The directors of TSI own in the aggregate 1,251,155 shares
of TSI Common Stock, which together with the 1,009,000 shares of TSI Common
Stock currently owned by Mr. Fauth represents approximately 19.9% of the issued
and outstanding shares of TSI Common Stock.
Under the terms of the voting agreement, each director agreed to vote in
favor of the Merger and against any proposal for any recapitalization, merger
(other than the Merger), sale of assets or other business combination between
TSI and any person or entity other than JJF Group or Newco. The voting agreement
is binding on the director only in his capacity as a shareholder of TSI and not
with respect to voting as a director of TSI. In addition, the voting agreement
applies only to the number of shares of TSI Common Stock the director owns as of
the date of the voting agreement, and not with respect to shares of TSI Common
Stock acquired after the date of the voting agreement. A director may not sell,
transfer, assign, hypothecate or otherwise dispose of, or create or permit any
encumbrance on his shares of TSI Common Stock while the voting agreement is in
effect subject to certain exceptions specified in the voting agreement. The
voting agreement terminates at the time of the termination of the Merger
Agreement.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the Merger, TSI shareholders should be aware that the
directors, officers and certain members of management of the Company have
interests in the Merger in addition to their interests solely as shareholders of
the Company, as described below.
50
<PAGE>
Stay-In-Place Agreements
TSI does not have long-term employment contracts with its executive
officers. In June 1999, the Company entered into stay-in-place agreements with
two executive officers who are members of the Board of Directors (Messrs.
Doubles and Nystrom) and one other executive officer (Mr. Gallagher). These
agreements were designed to encourage the executive officers' continued
employment with TSI, notwithstanding offers which may come to them during Mr.
Fauth's actions to acquire the Company. Under the terms of the agreements, in
the event of a change of control of TSI, each of these executive officers will
be entitled to receive a lump sum severance payment upon a constructive
discharge of their employment without cause. Consummation of the Merger will
result in a change of control of TSI within the meaning of the agreements.
With respect to Mr. Doubles, the severance payment would be equal to two
years compensation and fringe benefits if he is constructively discharged
without cause within one year of a change of control, and one year compensation
and fringe benefits if he is constructively discharged without cause between one
and two years after the change of control. With respect to Messrs. Gallagher and
Nystrom, the severance payment would be equal to one year compensation and
fringe benefits if a constructive discharge without cause is within one year of
a change of control, and six months compensation and fringe benefits if a
constructive discharge without cause is between one and two years of the change
in control. A constructive discharge without cause within one year after the
Merger would require payments estimated at $626,000, $184,000 and $124,000 for
Messrs. Doubles, Gallagher and Nystrom, respectively.
Indemnification
The Merger Agreement provides that TSI's officers and directors will have
rights to indemnification for all acts or omissions occurring prior to the
Merger to the extent currently available under TSI's Articles of Incorporation
and By-laws. For six years after the Merger, the Surviving Corporation will
provide officers' and directors' liability insurance to such persons for acts
and omissions occurring before the Merger. The Securities and Exchange
Commission advises that indemnification for securities law violations is against
public policy and may be unenforceable.
Treatment of Options
At the time of the Merger, each TSI Stock Option outstanding immediately
prior to the Effective Time, whether or not then vested or exercisable, will be
canceled and thereafter the former holder thereof shall be entitled by having
held such TSI Stock Option only to a payment from the Surviving Corporation
(subject to any applicable withholding taxes, as the case may be) equal to the
product of (i) the total number of shares of TSI Common Stock subject to such
TSI Stock Option and (ii) the difference between $15.25 and the option exercise
price for such TSI Stock Option, payable in cash immediately following the
Merger.
51
<PAGE>
Executive officers and directors of TSI hold TSI Stock Options to purchase
the following number of shares of TSI Common Stock and will receive the
following amounts of cash as a result of the exchange:
Number of Cash Amount
Name of Executive Officer or Director Options to be Received($)
------------------------------------- ------- -----------------
John F. Carlson 4,500 21,795
Joseph C. Levesque 6,000 31,080
Kenneth J. Roering 4,500 21,795
Donald M. Sullivan 0 0
Lawrence J. Whalen 4,500 21,795
Frank D. Dorman 11,050 111,832
James E. Doubles 87,775 549,967
Robert F. Gallagher 43,464 293,080
Lowell D. Nystrom 59,803 497,851
Fees Payable to the Financial Advisor
As compensation for its services as financial advisor to the Company, the
Company has paid William Blair two quarterly retainer payments totaling $50,000
and will pay William Blair a fee of approximately $2,000,000 to $2,230,000
(equal to 1.25% of total consideration as defined in the Company's fee agreement
with William Blair) upon the consummation of the Merger, less the $50,000
retainer payments and $300,000 fairness opinion fee previously paid. In
addition, the Company will reimburse William Blair for its reasonable
out-of-pocket expenses incurred in connection with the performance of its
services. See "Special Factors - Opinion of the Company's Financial Advisor."
52
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of the Record Date
concerning the Company's directors and executive officers:
Name Position with Company
---- ---------------------
James E. Doubles............... Chairman of the Board, President and
Chief Executive Officer
Robert F. Gallagher............ Vice President and Chief Financial Officer
Lowell D. Nystrom.............. Senior Vice President and Director
John F. Carlson................ Director
Frank D. Dorman................ Director
Joseph C. Levesque............. Director
Kenneth J. Roering............. Director
Lawrence J. Whalen............. Director
Donald M. Sullivan ... Director
Unless otherwise noted below, each person discussed below has engaged in
his principal occupation for more than the past five years.
James E. Doubles - Chairman, President and CEO since July 1998. President
and Chief Executive Officer of TSI since July 1997, President and Chief
Operating Officer of TSI from 1992 until July 1997.
Robert F. Gallagher - Vice President and Chief Financial Officer since
December 1997. Previous to this appointment, Mr. Gallagher was TSI's Controller
from 1989 to December 1997.
Lowell D. Nystrom - Senior Vice President of TSI since December 1997; Vice
President, and a Director, Treasurer and Chief Financial Officer of TSI from
1961 to December 1997.
John F. Carlson - Chairman, Excorp Medical, Inc., a medical technology
company since 1996. Mr. Carlson was Chairman and CEO of Cray Research, Inc. from
1993 to May 1995, and an officer and director of Cray Research, Inc., for more
than five years through May 1995. Mr. Carlson is a director of Ancor
Communications, Inc..
Frank D. Dorman - Part-time employee of TSI and Consultant to
Biomedicus-Medtronics for more than five years. Prior to February 1997, Mr.
Dorman was a part-time Scientist at the University of Minnesota for more than
five years.
Joseph C. Levesque - Chairman, President and Chief Executive Officer of
Aetrium Incorporated for more than five years. Aetrium, Inc. is a manufacturer
of electro-mechanical devices for automatic testing and handling processes in
semiconductor manufacturing.
53
<PAGE>
Kenneth J. Roering - Paul S. Gerot Chair in Marketing, Professor of
Marketing in the Carlson School of Management at the University of Minnesota for
more than five years. Mr. Roering is a director of Arctic Cat, Inc., Sheldahl,
Inc., and Transport Corporation of America.
Lawrence J. Whalen - Retired since January 1999. From June 1994 until
December 1998, Principal, Lawrence Whalen Associates, Management Consultant
specializing in medical products and high technology businesses. Mr. Whalen was
Chief Executive Officer of Minneapolis Children's Medical Center, a tertiary
care pediatric hospital, from March 1992 to June 1994.
Donald M. Sullivan - Self-employed consultant since February 1999.
Chairman of MTS Systems Corporation, a manufacturer of factory automation and
testing equipment, from March 1998 to February 1999; President and Chief
Executive Officer of MTS Systems Corporation for more than five years until
March 1998. Mr. Sullivan is a director of Transview Space Incorporated and NT
International.
BUSINESS AND OPERATIONS OF TSI
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
Effective October 1999, the Company sold the assets of its Handar
subsidiary to the U.S. subsidiary of Vaisala Oyj, headquartered in Helsinki,
Finland. Handar manufactures instruments for meteorological and hydrological
measuring applications. The $12.1 million cash transaction was included in TSI's
fiscal third quarter, ending December 31, 1999. The Company realized an
after-tax gain of approximately $4.7 million, or $.41 per share, from the sale.
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
54
<PAGE>
forma financial statements. This addition gives the Company a stronger presence
in the outdoor environmental monitoring market which offers excellent potential
for the future.
Products
The Company develops, manufactures and markets measuring and/or control
instruments for a variety of market applications. The applications for the
Company's products can best be described by considering two segments: Safety,
Comfort and Health of People (the working environment); and Productivity and
Quality Improvement (industrial processes). These two segments' contribution to
net sales is shown below.
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%
Nine Months Ended
December 31,
---------------------
Segments 1999 1998
- -------- ---- ----
Instruments for the Safety, Comfort & Health of People 79% 75%
Instruments for Productivity and Quality Improvement 21% 25%
--- ---
100% 100%
Instruments For the Safety, Comfort and Health of People
TSI instruments that enhance the Safety, Comfort and Health of People are
described under five categories:
Analytical and Research Instruments
The Company's analytical and research instruments are used to measure and
characterize very small particles called 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.
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.
55
<PAGE>
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. 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
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 and the level of ultra-fine particles, that have 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.
Outdoor Environmental Monitoring Instruments
Environmental Systems Corporation (ESC), headquartered in 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.
OEM Products
Commonly referred to as "original equipment manufacturer" (OEM), this
category includes sensors and devices sold to other manufacturers for
incorporation into their products. TSI has for several years supplied flow
sensors to monitor flow in medical products used for respiratory assistance.
Ventilators used to assist breathing in intensive care units are the main
product in which these sensors are used.
56
<PAGE>
Instruments For Productivity and Quality Improvement
TSI instruments for Productivity and Quality Improvement help customers
enhance the competitive position of their processes and products. They are
described here under three categories.
Research Instruments
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.
Non-Contact Monitoring and Control in Materials Processing
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. The
LaserSpeed instruments give precise measurements without physical contact with
the materials, and can measure the speed and length of extruded materials such
as fiber, wire and cable during manufacturing.
Instruments For Quality Control Testing
The Company's line of automated test stands, sold under the trade name
CertiTestTM, 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.
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. 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
57
<PAGE>
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 global customers including 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. For the
nine-month periods ended December 31, 1999 and 1998, sales to defense customers
were 11% and 14%, respectively. The percentage decline for the nine months ended
December 31, 1999 compared with the same year-ago period was primarily due to
the acquisition of ESC, which does not have significant sales to defense
customers. Actual dollar sales to defense customers for these nine-month periods
were similar.
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 December 31, 1999 the Company's backlog included
orders of about $5 million for PortaCount fit testers for U.S. military
services, all scheduled to be shipped by May 2001.
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. Int'l. Int'l.
Sales % of Sales % of Sales % of
----- Total ----- Total ----- 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>
58
<PAGE>
Nine Months Ended December 31,
------------------------------
1999 1998
---------------- ----------------
Int'l. Int'l.
Sales % of Sales % of
----- Total ----- Total
(000) Sales (000) Sales
---------------- ----------------
Segments
Instruments for the Safety,
Comfort & Health of
People $14,947 18% $10,045 16%
Instruments for Productivity
and Quality Improvement 9,944 12% 8,416 13%
------- --- ------- ---
Total 24,891 30% 18,461 29%
For the nine months ended December 31, 1999 international sales increased 35%
compared to the same year-ago period. The Company saw increased international
demand across all its product lines, but particularly in our research
instruments for small or submicron particles.
Overall, the Company's fiscal 1999 international sales were 5 percent less
than in fiscal 1998. 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,
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. For the nine months ended December 31, 1999 and 1998,
sales to the Pacific Rim were 7% and 12%, respectively. The decline was
primarily due to (1) an increased sales denominator from the acquisition of ESC,
which had nominal sales in the Pacific Rim, and (2) increases in the Company's
business in other regions of the world. On a dollar basis, Pacific Rim sales
declined approximately $600,000 in a period-to-period comparison for the
nine-months ended December 31, 1999 and 1998. It is uncertain what impact Asian
currencies will have on fiscal 2001.
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
and the internet to promote its products. The Company's sales consist primarily
of standard products as listed in its catalogs, although
59
<PAGE>
the Company also sells specialized products designed to meet specific customer
requirements.
The Company's backlog of orders was $38.4 million at December 31, 1999
compared with $25.6 million at December 31, 1998. The increase was primarily due
to the acquisition of ESC, which represents $18.5 million of the December 31,
1999 backlog. This was offset by reductions from the sale of Handar,
representing $1.9 million of the December 31, 1998 backlog, and a $3.5 million
lower backlog for the Company's Ultraviolet Aerodynamic Particle Sizer(R)
Spectrometer sold to the U.S. Army.
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 80% of the December 31, 1999 backlog will
be shipped by March 31, 2001.
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 included 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 has competitors it considers significant to various portions
of its business but no single competitor for the majority of the business. Each
product line has at least one major domestic and one international competitor
along with several minor competitors throughout the world. Competition is
strongest in the HVAC and Industrial Hygiene and Safety product lines.
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 50% of the Company's engineering and technical
staff are engaged in
60
<PAGE>
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 contract work generally involves development of a future instrument or
product enhancements to better meet market needs and applications. The Company
also utilizes various outside consultants in the research and development area.
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
help users 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 Defense for fluorescent technology currently used in its
biodetection instrument sold under an aforementioned contract to the U.S. Army.
The license runs until the underlying patent expires in 2017.
Employees
As of December 31, 1999, the Company had 658 employees. The Company's
employees are not represented by a union. 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.
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.
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. With the acquisition of
ESC during the nine months ended December 31, 1999, the Company also acquired
two additional buildings, with approximately 53,000 combined square feet in
Tennessee.
61
<PAGE>
The Company also leases space for subsidiary operations which has in each
case been modified to suit requirements.
Legal Proceedings
No material legal proceedings were pending or threatened against the
Company or its subsidiaries as of December 31, 1999.
62
<PAGE>
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENT DATA
The following selected financial data should be read and reviewed in conjunction
with the Company's 10-Q for the period ended December 31, 1999 and the 10-K for
the year ended March 31, 1999. These have been electronically filed with the SEC
and are available in EDGAR. See "Where You Can Find More Information."
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Nine Months Ended
December 31, Year Ended March 31,
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
OPERATIONS STATEMENT DATA (In thousands, except percentages and per share amounts)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $81,884 $63,873 $85,352 $81,012 $80,240 $69,233 $48,903
- ----------------------------------------------------------------------------------------------------------------------------
Gross profit 43,550 35,634 48,194 45,085 44,971 38,491 28,566
- ----------------------------------------------------------------------------------------------------------------------------
Percent of sales 53.2% 55.8% 56.5% 55.7% 56.0% 55.6% 58.4%
- ----------------------------------------------------------------------------------------------------------------------------
Operating Expenses 30,439 27,943 37,015 35,670 34,246 30,355 23,853
- ----------------------------------------------------------------------------------------------------------------------------
Percent of sales 37.2% 43.8% 43.4% 44.1% 42.6% 43.9% 48.8%
- ----------------------------------------------------------------------------------------------------------------------------
Operating income 13,111 7,691 11,179 9,415 10,725 8,136 4,714
- ----------------------------------------------------------------------------------------------------------------------------
Percent of sales 16.0% 12.0% 13.1% 11.6% 13.4% 11.8% 9.6%
- ----------------------------------------------------------------------------------------------------------------------------
Net earnings 12,992 5,391 7,782 6,826 7,213 5,482 3,432
- ----------------------------------------------------------------------------------------------------------------------------
Percent of sales 15.9% 8.4% 9.1% 8.4% 9.0% 7.9% 7.0%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $1.15 $.47 $.69 $.59 $.64 $.51 $.33
- ----------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 1.13 .47 .68 .58 .62 .49 .32
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
At December 31, As of March 31,
- ----------------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
- ----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents $9,887 $10,495 $13,347 $9,386 $7,695 $688 $9,552
- ----------------------------------------------------------------------------------------------------------------------------
Working capital 28/,928 31,346 32,172 31,243 26,006 18,498 16,855
- ----------------------------------------------------------------------------------------------------------------------------
Total Assets 89,019 58,688 60,968 57,834 50,878 42,512 32,167
- ----------------------------------------------------------------------------------------------------------------------------
Long-term debt 1,966 0 0 0 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity 62,429 48,406 49,394 47,443 41,320 33,598 26,342
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
INTRODUCTION
The following discussion supplements the information presented in the
consolidated financial statements beginning on page 16 of the Company's 1999
Annual Report. Additional data are given in the Eleven-Year Financial Data table
on pages 10 and 11 of the Company's 1999 Annual Report.
63
<PAGE>
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 years 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%
Nine Months Ended December 31,
------------------------------
Percent
1999 1998 Increase
---- ---- --------
Safety, Comfort and Health $64,795,000 $48,045,000 35%
Productivity and Quality Improvement 17,089,000 15,828,000 8%
----------- ----------- ---
Total $81,884.000 $63,873,000 28%
=========== =========== ===
Comparison of the Nine Months Ended December 31, 1999 and 1998
The increase in sales of Safety, Comfort and Health products for the nine months
ended December 31, 1999 was primarily due to the acquisition of ESC effective
June 1, 1999. Exclusive of the acquisition, sales in this area increased 3
percent compared with the same year-ago period. The Company saw a weakening in
demand for the PORTACOUNT(R) respirator fit tester, which had benefited from
changes in OSHA regulations in 1998. Sales of meteorological instrumentation
also declined with the sale of our Handar subsidiary, effective October 1, 1999.
Stronger demand for the Company's flow sensors and research products for
submicron particles and biodetection equipment used for rapid detection of
airborne bacteria offset these declines.
The increase in sales of Productivity and Quality Improvement instruments
resulted from shipping some of the March 31, 1999 backlog of our research
instruments sold into this market. It also benefited from the acquisition of a
small German company that sells process control instruments to the metals
industry, effective in June 1999.
International sales increased $6,430,000 to $24,891,000 for the nine-months
ended December 31, 1999 compared to $18,461,000 in the same year-ago period. The
increase is attributable to stronger demand across most all product lines except
for meteorological
64
<PAGE>
instruments, due to the sale of Handar, and research instruments sold into the
Productivity and Quality Improvement market.
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 changes in OSHA regulations as noted above. The
year also saw significant sales of biodetection equipment used for rapid
detection of airborne bacteria to the U.S. Army along with strong sales activity
for our meteorological instrumentation.
Increases in Safety, Comfort and Health instruments were substantially offset by
slower sales in Productivity and Quality Improvement instruments. The Company
experienced declines in sales of research instruments sold into this market as
well as 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:
o Lower PORTACOUNT respirator and gas mask fit tester sales for military
applications.
o A slowdown in sales of meteorologic and hydrologic instruments for outdoor
monitoring due to delays in obtaining certain contracts.
o 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:
o LaserSpeed(R) speed and length instruments for the wire and cable
industry.
o Diameter and flaw detection gauges for the wire and cable industry,
products obtained in the Target Systems acquisition in July, 1997.
o 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
PORTACOUNT fit testers to the German Army. There was not a similar order in
fiscal 1998.
65
<PAGE>
Government Sales
For the nine months ended December 31, 1999 and 1998, sales to U.S. and state
government agencies, including defense, as a percent of total sales were 22 and
19 percent, respectively. The decline in the period-to-period percentage is
attributable to the sale of Handar effective October 1, 1999. Historically, well
over half Handar's meteorological instruments were sold to government customers.
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 prior to the Handar sale. After taking the
Handar sale into consideration, the percentage for the nine months ended
December 31, 1999 appears to be at the high end of the normal range for the
ongoing business.
GROSS PROFIT
Gross profit for the periods presented were as follows (dollar amounts in
thousands):
--------------------
Nine Months Ended
December 31, Year Ended March 31,
------------ --------------------
1999 1998 1999 1998 1997
Gross profit $43,550 $35,634 $48,194 $45,085 $44,971
Percent of sales 53.2% 55.8% 56.5% 55.7% 56.0%
--------------------
Historically, our gross profit percentage has varied only slightly depending on
the product mix and has ranged between 55.7 and 56.5 percent over the last three
completed fiscal years. Comparing the nine months ended December 31, 1999 to the
same year-ago period, we see a significant decline in the gross profit
percentage, from 55.8 to 53.2 percent. This is driven largely by ESC's business
having large buy/resell and consultative components, which have lower gross
profit margins. For all of fiscal 2000, we would expect the gross profit
percentage to be in the range of 51 to 53 percent.
OPERATING EXPENSES
Research and product development for the periods presented were as follows
(dollar amounts in thousands):
--------------------
Nine Months Ended
December 31, Year Ended March 31,
------------ --------------------
1999 1998 1999 1998 1997
R&D expense $8,232 $8,071 $11,154 $11,554 $10,939
Percent of sales 10.0% 12.6% 13.1% 14.3% 13.6%
--------------------
66
<PAGE>
Historically, our research and development expenses have ranged between 13 to 15
percent of sales. The lower percent in the period ended December 31, 1999 is due
mainly to two factors: a conscious effort by the Company to be more selective in
its development efforts and, secondly, the acquisition of ESC, whose business
requires minimal research and development. 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. We would expect the research
and development percentage for all of fiscal 2000 to be similar to the
nine-month percentage.
Selling expenses for the periods presented were as follows (dollar amounts in
thousands):
--------------------
Nine Months Ended
December 31, Year Ended March 31,
------------ --------------------
1999 1998 1999 1998 1997
Selling expense $15,542 $14,752 $19,498 $18,148 $17,394
Percent of sales 19.0% 23.1% 22.8% 22.4% 21.7%
--------------------
Historically, selling expenses vary slightly depending on the product mix and
sales volume. Again, for the nine-months ended December 31, 1999, the
percentages are influenced by the acquisition of ESC, which has lower selling
expenses as a percent of sales than the Company as a whole. For all of fiscal
2000, we expect selling expenses to be between 18.5 and 19.0 percent.
Administrative expenses for the periods presented were as follows (dollar
amounts in thousands):
--------------------
Nine Months Ended
December 31, Year Ended March 31,
------------ --------------------
1999 1998 1999 1998 1997
Administrative expense $6,666 $5,120 $6,363 $5,969 $5,913
Percent of sales 8.1% 8.0% 7.5% 7.5% 7.4%
--------------------
Over the past several years, administrative expenses have ranged between 7 and 9
percent of sales. The Company expects administrative costs to continue in this
normal range of 7 to 9 percent for all of fiscal 2000.
67
<PAGE>
OTHER INCOME
Other income for the periods presented were as follows (dollar amounts in
thousands):
--------------------
Nine Months Ended
December 31, Year Ended March 31,
------------ --------------------
1999 1998 1999 1998 1997
Other income $8,466 $356 $435 $798 $372
--------------------
The December 31, 1999 period includes an $8.2 million gain from the sale of the
Company's Handar subsidiary. 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 and other events.
PROVISION FOR INCOME TAXES
The provision for income taxes was as follows (dollar amounts in thousands):
--------------------
Nine Months Ended
December 31, Year Ended March 31,
------------ --------------------
1999 1998 1999 1998 1997
Income tax provision $8,044 $2,656 $3,832 $3,387 $3,884
Percent of pre-tax
earnings 38.2% 33% 33.0% 33.0% 35.0%
--------------------
Historically, the Company's effective tax rate has ranged between 33 and 35
percent of sales. The December 31, 1999 effective rate increase was primarily
due to a higher recorded effective rate on the Handar gain and because of the
non-deductible goodwill associated with the ESC acquisition. The fiscal 2000
effective tax rate is expected to be approximately 38 to 39 percent of pretax
earnings, assuming no significant changes in the tax laws.
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 identify modifications
68
<PAGE>
that may be required to deal with the Euro conversion. To date, the Company has
modified its US accounting systems to allow it to bill in Euros. 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.
Liquidity and Capital Resources
CASH AND CASH EQUIVALENTS
Cash and cash equivalents decreased by $3,550,000 during the nine-months ended
December 31, 1999. A major factor in the decrease was the $23,661,000 spent on
acquisitions and $1,737,000 on additions to property plant and equipment. These
were partially offset by $10,653,000 of cash generated from operations and
$11,462,000 of gross proceeds from the Handar sale.
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:
o Higher fourth quarter net sales resulting in increased receivables,
o 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 in May 1999, TSI increased its
bank credit available to $20 million. If the merger is not approved, management
believes internally generated funds and the additional credit facility will
provide adequate resources to support operations through fiscal 2001.
STOCK REPURCHASE
As of December 31, 1999, the Company has authority to repurchase a total of
742,000 shares under plans approved by its Board of Directors. The Company did
not repurchase any shares in the nine months ended December 31, 1999. 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.
69
<PAGE>
Market Risk
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
Management's discussion portion of this Proxy Statement 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:
future sales and gross profit percentages; the continuation of historical
trends; 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; 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 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 Proxy Statement 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.
OWNERSHIP OF TSI COMMON STOCK
The following table sets forth information regarding the beneficial
ownership of TSI Common Stock as of March 22, 2000, by (i) each person or
group that is known by the Company to be the beneficial owner of more than
5% of the outstanding shares of TSI Common Stock, (ii) each of the
executive officers and directors of the Company and (iii) all executive
officers and directors of the Company as a group. Information with respect
to beneficial ownership is based upon information furnished by such
persons to the Company.
70
<PAGE>
Amount and Nature of Percent of Outstanding
Name Beneficial Ownership Shares
- ---- -------------------- ----------------------
John J. Fauth 1,009,000 8.9
3100 Metropolitan Centre
33 South Seventh Street
Minneapolis, MN 55402
Leroy M. Fingerson 647,182(1) 5.7
1612 Oak Avenue
Arden Hills, MN 55112
Mairs and Power, Inc. 618,500 5.4
332 Minnesota Street
Suite W-2062
St. Paul, MN 55101
Lowell D. Nystrom 496,128(2) 4.4
500 Cardigan Road
Shoreview, MN 55126
Frank D. Dorman 467,157(3) 4.1
500 Cardigan Road
Shoreview, MN 55126
James E. Doubles 147,485(4) 1.3
500 Cardigan Road
Shoreview, MN 55126
Robert F. Gallagher 55,205(5) 0.5
500 Cardigan Road
Shoreview, MN 55126
Donald M. Sullivan 44,000 0.4
500 Cardigan Road
Shoreview, MN 55126
71
<PAGE>
Kenneth J. Roering 35,250(6) 0.3
500 Cardigan Road
Shoreview, MN 55126
Lawrence J. Whalen 33,000(6) 0.3
500 Cardigan Road
Shoreview, MN 55126
John F. Carlson 24,548(6) 0.2
500 Cardigan Road
Shoreview, MN 55126
Joseph C. Levesque 6,000(7) ---
500 Cardigan Road
Shoreview, MN 55126
All directors and executive 1,308,773 11.5
officers as a group (9
persons)
(1) Includes 58,589 shares of TSI Common Stock which Dr. Fingerson has the
right to acquire under currently exercisable stock options.
(2) Includes (i) 57,181 shares of TSI Common Stock that Mr. Nystrom has the
right to acquire under currently exercisable stock options, (ii) 117,757
shares of TSI Common Stock held of record by Mr. Nystrom's spouse and
(iii) 115,000 shares held of record by trusts of which Mr. Nystrom is the
trustee. Mr. Nystrom disclaims beneficial ownership of the 115,000 shares
held of record by such trusts.
(3) Includes 10,247 shares of TSI Common Stock that Mr. Dorman has the right
to acquire under currently exercisable stock options.
(4) Includes 73,485 shares of TSI Common Stock which Mr. Doubles has the right
to acquire under currently exercisable stock options.
(5) Includes 36,367 shares of TSI Common Stock which Mr. Gallagher has the
right to acquire under currently exercisable stock options.
(6) Includes 4,500 shares of TSI Common Stock that these outside director the
right to acquire under currently exercisable stock options.
(7) Includes 6,000 shares of TSI Common Stock that Mr. Levesque has the right
to acquire under currently exercisable stock options.
72
<PAGE>
SHAREHOLDER PROPOSALS
The matters to be considered at the Special Meeting are limited to that
set forth in the Notice of Special Meeting accompanying this Proxy Statement.
Any shareholder proposal intended to be considered for inclusion in the
proxy statement for presentation at the 2000 Annual Meeting must be received by
TSI by March 4, 2000. The 2000 Annual Meeting will be held only if the Merger is
not consummated. Assuming there is a meeting, the proposal must be in accordance
with the provisions of SEC Rule 14a-8. It is suggested that the proposal be
submitted by certified mail, return receipt requested.
Shareholders who intend to present a proposal at the 2000 Annual Meeting
(if any) without including such proposal in TSI's proxy statement must provide
TSI notice of such proposal no later than May 18, 2000. TSI reserves the right
to reject, rule out of order, or take other appropriate action with respect to
any proposal that does not comply with these and other applicable requirements.
If TSI's 2000 Annual Meeting is held and the Company does not receive
notice prior to May 18, 2000 of any matters to be raised by shareholders, the
persons named in TSI's proxy cards for that Annual Meeting will have the
discretion to vote the proxies on such matters in accordance with their best
judgment.
WHERE YOU CAN FIND MORE INFORMATION
TSI files annual, quarterly and current reports, proxy statements and
other information with the SEC. The annual reports include TSI's audited
financial statements. You may read and copy any reports, statements or other
information that TSI files at the SEC's public reference rooms which are located
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the SEC's regional offices located at: Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, New York 10048. Copies of such materials are also available
from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington D.C. 20549 at prescribed rates. Copies of such materials may also be
accessed through the SEC Internet web site at http://www.sec.gov. Once the
Merger is completed, TSI will no longer be subject to the reporting requirements
of the Exchange Act.
You should rely only on the information contained or incorporated by
reference in this Proxy Statement to vote your shares of TSI Common Stock at the
Special Meeting. Neither TSI nor Newco has authorized anyone to provide you with
information that is different from what is contained in this Proxy Statement.
This Proxy Statement is dated March 24, 2000. You should not assume that
the information contained in this Proxy Statement is accurate as of any date
other than such date, and the mailing of this Proxy Statement to shareholders
will not create any implication to the contrary.
73
<PAGE>
INDEPENDENT AUDITORS
The Company's financial statements for the year ended March 31, 1999 have
been audited by KPMG LLP, independent auditors.
Representatives of KPMG LLP will have an opportunity to make a statement
at the Special Meeting and will be available at the Special Meeting to answer
appropriate questions asked by TSI shareholders.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors does not
intend to bring any other business before the Special Meeting of TSI
shareholders and, so far as is known to the Board of Directors, no matters are
to be brought before the Special Meeting except as specified in the notice of
Special Meeting. However, as to any other business that may properly come before
the Special Meeting, the proxy holders intend to vote the proxies in respect
thereof in accordance with the recommendation of the Board of Directors and the
Special Committee.
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT, (hereinafter, together with the Exhibits annexed hereto the
"Agreement") made and entered into as of the 10th day of January, 2000, by and
among JJF GROUP, INC. a Minnesota corporation ("Purchaser"), JJF ACQUISITION,
INC., a corporation and a wholly-owned subsidiary of Purchaser ("Newco"), JOHN
J. FAUTH, a resident of Minnesota ("FAUTH") and TSI INCORPORATED, a Minnesota
corporation (the "Company").
RECITALS
The Boards of Directors of Purchaser and Newco and the Board of Directors
of the Company, deeming it advisable for the mutual benefit of Purchaser, Newco
and the Company and their respective stockholders that Purchaser acquire the
Company by the merger of the Company and Newco under the terms and conditions
hereinafter set forth (the "Merger"), have approved this Agreement and Plan of
Merger (the "Agreement").
NOW, THEREFORE, in consideration of mutual covenants, agreements,
representations and warranties herein contained, the parties hereby agree that
the Company and Newco shall be merged and that the terms and conditions of the
Merger and the mode of carrying the same into effect shall be as follows:
SECTION 1. PLAN OF MERGER.
1.1 Actions to be Taken. Upon performance of all of the covenants and
obligations of the parties contained herein and upon fulfillment (or waiver) of
all of the conditions to the obligations of the parties contained herein, at the
Effective Time of the Merger (as hereinafter defined) and pursuant to the
Business Corporation Act of the State of Minnesota (the "MBCA"), the following
shall occur:
(a) Newco shall be merged with and into the Company, which shall be
the surviving corporation (the "Surviving Corporation"). The separate existence
and corporate organization of Newco shall cease at the Effective Time of the
Merger, and thereupon the Company and Newco shall be a single corporation, the
name of which shall be TSI Incorporated. The Company, as the Surviving
Corporation, shall succeed, insofar as permitted by law, to all of the rights,
assets, liabilities and obligations of Newco in accordance with the MBCA.
(b) The Articles of Incorporation of Newco shall be the articles of
incorporation of the Surviving Corporation until amended as provided by law.
(c) The By-Laws of Newco shall be the by-laws of the Surviving
Corporation until amended as provided by law.
A-1
<PAGE>
(d) Until changed in accordance with the articles of incorporation
and by-laws of the Surviving Corporation, James E. Doubles, John J. Fauth and
John C. Kopchik shall be the directors of the Surviving Corporation.
(e) Until changed in accordance with the articles of incorporation
and by-laws of the Surviving Corporation, the following persons shall be the
officers of the Surviving Corporation:
Name Office
John J. Fauth Chairman
James E. Doubles President & CEO
Lowell D. Nystrom Senior V. P. of Business Development
Robert F. Gallagher Vice President and Chief Financial Officer
Jugal Agarwal Vice President of Technology
Laura J. Cochrane Secretary and Corporate Counsel
(f) As soon as practicable after the terms and conditions of this
Agreement have been satisfied, and upon consummation of the closing referred to
in Section 8 hereof (the "Closing"), articles of merger consistent with this
Agreement in the form prescribed by, and properly executed in accordance with,
the MBCA and the BCL, in form and substance satisfactory to the parties hereto
(the "Articles of Merger"), shall be filed with the Secretary of State of the
State of Minnesota. The Merger shall become effective on the date and time on
which the Articles of Merger are properly filed with such Secretary of State
pursuant to the MBCA, and if the Articles are not filed the same time then the
Merger shall become effective on the later of the two times of filing, or at
such later time as the Company and Purchaser shall agree and shall specify in
the Articles of Merger. As used in this Agreement, the "Effective Time of the
Merger" shall mean such time.
1.2 Common Stock of Surviving Corporation. As of the Effective Time of the
Merger, each one share of the issued and outstanding shares of common stock of
Newco shall, by virtue of the Merger and without any action on the part of
Purchaser be converted into one share of the common stock of the Surviving
Corporation. Each share shall be fully paid and non-assessable.
1.3 Definitions. For purposes of this Agreement, the following terms shall
have the following meanings:
(a) The term "Company Common Stock" shall mean the Company's common
stock of $.10 par value per share.
A-2
<PAGE>
(b) The term "Stockholder" shall mean a holder of the Company Common
Stock, and the term "Stockholders" shall refer to all of the holders of stock of
the Company.
(c) The term "Number of Outstanding Common Shares" shall be the
number of issued and outstanding shares of the Company Common Stock at the
Effective Time of the Merger.
(d) The term "Common Payment" shall mean Fifteen Dollars and
Twenty-Five Cents ($15.25) which is the amount per share of Company Common Stock
which will be paid by Purchaser at Closing for distribution to the holders of
outstanding shares of Company Common Stock after the Effective Time of Merger.
1.4 Cancellation of Conversion of Company Common Stock. As of the
Effective Time of the Merger, by virtue of the Merger and without any action on
the part of any shareholder of the Company:
(a) Treasury Shares. Any share of the Company Common Stock held in
the treasury of the Company, shall be canceled and retired. No cash, securities
or other consideration shall be paid or delivered in exchange for such Company
Common Stock under this Agreement.
(b) Conversion. Except as provided herein with respect to Dissenting
Shares (as hereinafter defined) and shares canceled pursuant to Section 1.4(a)
hereof, at the Effective Time of the Merger, each share of Company Common Stock
which is issued and outstanding shall be converted into the right to receive a
cash payment in an amount equal to the Common Payment; provided, however, that
each share of Company Common Stock which is owned by the Purchaser or Newco as
of the Effective Time of the Merger shall be canceled without any consideration
being issued therefor. (Hereinafter the cash payments to be received by holders
of certificates representing shares of Company Common Stock are sometimes
referred to as the "Common Cash Conversion Amounts".)
(c) Surrender of Certificates. After the Effective Time of the
Merger, each holder of an outstanding certificate or certificates theretofore
representing shares of Company Common Stock converted pursuant to Section 1.4(b)
hereof ("Company Common Stock Certificates"), upon surrender thereof to
Purchaser as provided herein, shall be entitled to receive in exchange therefor
the amounts provided in Section 1.4(b), without interest. Until so surrendered,
each outstanding Company Common Stock Certificate shall be deemed for all
purposes to represent the Common Cash Conversion Amounts for the shares
represented by the Certificate.
Whether or not a Company Common Stock Certificate is surrendered,
from and after the Effective Time of the Merger, such Certificate shall under no
circumstances evidence, represent or otherwise constitute any stock or other
interest
A-3
<PAGE>
whatsoever in the Company, the Surviving Corporation or any other person, firm
or corporation.
(d) Dissenters. The shares of Company Common Stock held by those
shareholders of the Company who have timely and properly exercised their
dissenters' rights in accordance with the provisions of the MBCA applicable to
dissenters' rights (the "Appraisal Laws") are referred to herein as "Dissenting
Common Shares". Each Dissenting Common Share, the holder of which, as of the
Effective Time of the Merger, has not effectively withdrawn or lost his
dissenters' rights under the Appraisal Laws, shall not be converted into or
represent a right to receive the Common Cash Conversion Amounts in the Merger,
but the holder thereof shall be entitled only to such rights as are granted by
the Appraisal Laws. Each holder of Dissenting Common Shares who becomes entitled
to payment for his Company Common Stock pursuant to the provisions of the
Appraisal Laws shall receive payment therefor from the Surviving Corporation
from funds provided by Purchaser (but only after the amount thereof shall have
been agreed upon or finally determined pursuant to such provisions). If any
holder of Dissenting Common Shares shall effectively withdraw or lose his
dissenters' rights under the Appraisal Laws, such Dissenting Common Shares shall
be converted into the right to receive the Common Cash Conversion Amounts in
accordance with the provisions hereof.
1.5 Options. Prior to the Effective Time of the Merger, all options,
warrants, or other rights (including without limitation rights under the TSI
Incorporated Stock Option Plan of 1992 and the Company's Employee Stock Purchase
Plan) to purchase or acquire shares of Company Common Stock (hereinafter
collectively "Options") which are outstanding and unexercised shall be
exercised, or if not exercised shall be canceled as of the Effective Time of the
Merger, so that at the Effective Time of the Merger there shall be no
outstanding and unexercised outstanding Options with respect to the Company
Common Stock. At the Effective Time of the Merger, the Purchaser and Newco shall
cause the Company to pay to each holder of an Option which has not been
exercised (including Options which were not exercisable or vested immediately
prior to the Effective Time), a payment equal to the difference per share
between the exercise price of the Option and the Common Payment, and the holder
of the Option shall surrender the Option to the Company.
1.6 Payment of Merger Consideration.
(a) At the Closing, and in any event no later than the Effective
Time of the Merger, Purchaser shall deposit with Norwest Bank Minnesota, N.A.
(the "Payment Agent") for the benefit of the holders of Company Common Stock, in
cash (or an irrevocable letter of credit in the form set forth as Schedule
1.6(a) issued by U.S. Bank National Association for the benefit of the Payment
Agent permitting daily draws by the Payment Agent as needed to pay Stockholders)
in an amount equal to the aggregate Common Cash Conversion Amounts (such cash is
hereinafter referred to as the "Payment Fund") payable in exchange for all
outstanding shares of Company Common Stock.
A-4
<PAGE>
(b) As soon as reasonably practicable after the Effective Time, the
Payment Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of Company Common Stock (the "Certificates"):
(i) A letter of transmittal, which shall specify that delivery shall
be effected and risk of loss and title to the Certificates shall pass only
upon delivery of the Certificates to the Payment Agent, and which shall be
in such form and have such other provisions as Purchaser and the Company
may reasonably specify; and
(ii) Instructions on how to surrender the Certificates in exchange
for the Common Cash Conversion Amounts. Upon surrender to the Payment
Agent of a Certificate for cancellation, together with such letter of
transmittal duly executed, the holder of such Certificate shall be
entitled to receive in exchange therefor a check representing the Common
Cash Conversion Amounts which such holder has the right to receive
pursuant to the provisions of this Section 1.4, and the Certificate so
surrendered shall forthwith be canceled. In the event that a transfer of
ownership of shares of Company Common Stock is not registered in the
transfer of records of the Company, payment of the Common Cash Conversion
Amounts may be made to a transferee if the Certificate representing such
shares is presented to the Payment Agent accompanied by all documents
required to evidence and effect such transfer and by evidence that any
applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 1.6, each Certificate shall be deemed at any
time after the Effective Time of the Merger to represent only the right to
receive upon such surrender the Common Cash Conversion Amounts as
contemplated by this Section 1.6.
(c) In the event that any Certificate shall have been lost, stolen
or destroyed, the Payment Agent shall issue in exchange therefor, upon the
making of an affidavit of that fact by the holder thereof, such Common Cash
Conversion Amounts may be required pursuant to this Agreement; provided,
however, that the Purchaser or the Payment Agent may, in its discretion, require
the delivery of a suitable bond or indemnity.
(d) All Common Cash Conversion Amounts paid upon the surrender for
exchange of Company Common Stock in accordance with the terms hereof shall be
deemed to have been paid in full satisfaction of all rights pertaining to such
Company Common Stock.
(e) Any portion of the Payment Fund which remains undistributed to
the Stockholders of the Company for six (6) months after the Effective Time of
the Merger shall be delivered to Purchaser upon demand, and any Stockholders who
have not
A-5
<PAGE>
theretofore complied with this Section 1.6 shall thereafter look only to
Purchaser for payment of their claim for the Common Cash Conversion Amounts.
(f) Neither Purchaser nor the Surviving Corporation shall be liable
to any holder of Company Common Stock for cash from the Payment Fund delivered
to a public official pursuant to applicable abandoned property escheat or
similar law.
(g) No interest will be paid or will accrue on any cash payable
pursuant to Section 1.6.
(h) The Payment Agent shall invest any cash included in the Payment
Fund as directed by Purchaser on a daily basis, with such investments to be made
only in short-term U.S. government obligations. Any interest or other income
resulting from these investments shall promptly be paid to Purchaser. Purchaser
shall promptly reimburse any losses which may have resulted from such
investments so that at all times Payment Agent shall hold the full amount
necessary to make the payments required hereunder.
(i) Each of the Surviving Corporation and Purchaser shall be
entitled to deduct and withhold from the consideration otherwise payable to this
Agreement to any holder of shares of Company Common Stock such amounts as it is
required to deduct and withhold with respect to the making of such payment under
the provisions of the Internal Revenue Code and the rules and regulations
promulgated thereunder, or under any provision of state, local or foreign tax
law. To the extent that amounts are so withheld by Surviving Corporation or
Purchaser (or Payment Agent at the direction of Purchaser), as the case may be,
such withheld amounts shall be treated for all purposes of this Agreement as
having been paid to the holder of the shares of Company Common Stock in respect
of which deduction withholding was made.
(j) Purchaser shall pay all fees and expenses of the Payment Agent.
l.7 Stock Transfer Books. The stock transfer books of the Company shall be
closed immediately upon the Effective Time of the Merger and there shall be no
further registration of transfers of shares of Company Common Stock thereafter
on the records of the Company.
1.8 Further Assurances. From time to time, on and after the Effective Time
of the Merger, as and when requested by Purchaser or its successors or assigns,
the proper officers and directors of the Company immediately before the
Effective Time of the Merger, the officers and directors of the Surviving
Corporation at the time of the request, or other proper officers or directors,
shall, at Purchaser's expense, and for and on behalf and in the name of the
Company, or otherwise, execute and deliver all such deeds, bills of sale,
assignments and other instruments and shall take or cause to be taken such
further or other reasonable actions as Purchaser or their respective successors
or assigns may deem necessary or desirable in order to confirm or record or
otherwise transfer to the Surviving Corporation title to and possession of all
the properties, rights, privileges,
A-6
<PAGE>
powers, franchises and immunities of the Company and otherwise to carry out
fully the provisions and purposes of this Agreement.
1.9 Voting Agreements. The parties acknowledge that concurrently with and
as a condition to the Purchaser and Newco's willingness to enter into this
Agreement, the Purchaser and Newco have entered into Voting Agreements (the
"Voting Agreements") with certain of the Company's Stockholders, in their
capacity as Stockholders, providing that each of these Stockholders will vote
certain shares of Company Common Stock owned by such Stockholders in favor of
the approval and adoption of this Agreement and the Merger.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
As used herein, the "Disclosure Letter" shall mean the Disclosure Letter
delivered by the Company to Purchaser. The Disclosure Letter shall refer to the
representation or warranty to which exceptions or matters disclosed therein
relate; provided, however that an exception or matter disclosed with respect to
one representation or warranty shall also be deemed disclosed with respect to
each other warranty to which the exception or matter reasonably relates. Except
as set forth in the Disclosure Letter, the Company hereby represents and
warrants to Purchaser and Newco that all of the statements contained in this
Section 2 are true and correct as of the date of this Agreement (or if made as
of a specified date, as of such date). As provided in Section 7.2(a), it is a
condition precedent to the Purchaser's and Newco's obligations that such
statements are true and correct as of the Closing (or if made as of a specified
date, as of such date), except as qualified by any amendment to the Disclosure
Letter which is acceptable to Purchaser.
The representations and warranties are as follows:
2.1 Organization and Qualifications of the Company. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Minnesota with full corporate power and corporate authority to
own or lease its properties and to conduct its business in the manner and in the
places where such properties are owned or leased or such business is currently
conducted or proposed to be conducted. The copies of the Company's Articles of
Incorporation as amended to date, certified by the Minnesota Secretary of State,
and the Company's by-laws, as amended to date, certified by the Company's
Secretary, and heretofore delivered to Purchaser, are complete and correct, and
no amendments thereto are pending. The Company is not in violation of any term
of its Articles of Incorporation or bylaws. The Company is duly qualified to do
business as a foreign corporation in the states listed in the Disclosure Letter
and it is not required to be licensed or qualified to conduct its business or
own its property in any other jurisdiction except where the failure to be so
licensed or qualified would not have a Material Adverse Effect on the Company
Group.
A-7
<PAGE>
2.2 Capital Stock of the Company: Beneficial Ownership.
(a) The authorized capital stock of the Company consists of
30,000,000 shares of Common Stock, par value $.10 per share, of which, as of
October 28, 1999, 11,339,322 were outstanding, fully paid and non-assessable and
of which 18,660,678 shares are authorized but unissued. No class of capital
stock of the Company is entitled to preemptive rights. Since October 28, 1999 to
the date of this Agreement, there have been no issuances of shares of the Stock
of the Company other than issuances of shares pursuant to options or rights
outstanding under the Benefit Plans of the Company as described in the
Disclosure Letter. All issued and outstanding shares of the Stock of the Company
are duly authorized, validly issued, fully paid and nonassessable. No other
classes of stock are authorized.
(b) Except for the options described in the Disclosure Letter (the
"Outstanding Options"), there now are no outstanding options, warrants, rights,
commitments, preemptive rights or agreements of any kind for the issuance or
sale of, or outstanding securities convertible into, any additional shares of
capital stock of any class of the Company. No bonds, debentures, notes or other
indebtedness of the Company having the right to vote on any matters on which
Stockholders may vote are issued or outstanding. Following the Effective Time of
the Merger, no holder of Outstanding Options will have any right to receive
shares of Company Common Stock or any other consideration upon exercise of such
Outstanding Options and all such Outstanding Options shall cease to exist as of
the Effective Time of the Merger.
(c) None of the Company's capital stock has been issued in material
violation of any federal or state securities laws. Except as set forth in the
Disclosure Letter, there are no voting trusts, voting agreements, proxies or
other agreements, instruments or undertakings with respect to the voting of the
Company Shares to which the Company is a party.
2.3 Subsidiaries. Except for the subsidiaries referenced in the Disclosure
Letter (the "Subsidiaries" and individually a "Subsidiary"), the Company does
not have any direct or indirect subsidiaries. The Company's foreign Subsidiaries
consist of a German Subsidiary and a Swedish Subsidiary and of the foreign
Subsidiaries (the "ESC Foreign Subsidiaries") owned by Environmental Systems
Corporation, all as described in further detail in the Disclosure Letter. Except
as listed in the Disclosure Letter and except for the shares of stock in the
Subsidiaries, the Company does not own any securities issued by any other
business organization or governmental authority, except United States, state,
and municipal government securities, bank certificates of deposit, or money
market accounts acquired as investments in the ordinary course of its business,
and, except as set forth in the Disclosure Letter, neither the Company nor any
of its Subsidiaries owns or has any direct or indirect ownership interest in or
control over any other corporation, partnership, joint venture, or entity of any
kind.
A-8
<PAGE>
All of the issued and outstanding shares of stock of the Subsidiaries are
owned by the Company, or, where specified in the Disclosure Letter, by a
Subsidiary or in the case of certain foreign Subsidiaries by the persons who are
identified (together with the number of shares of Subsidiary capital stock
owned) in the Disclosure Letter. There are no outstanding options, warrants,
rights, commitments, preemptive rights or agreements of any kind for the
issuance or sale of, or outstanding securities convertible into, any additional
shares of stock of any class of the Subsidiaries.
In the case of each Subsidiary, the Disclosure Letter specifies the
Subsidiary's jurisdiction of incorporation, its authorized capital stock, the
number of shares which are issued and outstanding, and the entity which owes
such shares, whether the Company or another Subsidiary.
Each Subsidiary is duly organized, validly existing and in good standing
under the laws of its jurisdiction of incorporation and has the necessary
corporate power and corporate authority to own or lease its properties, except
for any noncompliance with the foregoing representation which may exist in the
case of the ESC Foreign Subsidiaries, which noncompliance will not have a
Material Adverse Effect on the Company Group. Copies of each Subsidiary's
organizational documents, as amended to date, have been made available for
review by purchaser. Each Subsidiary (i) is not in violation of any of the terms
of its organizational documents, and (ii) is duly qualified to do business as a
foreign corporation in the jurisdictions listed in the Disclosure Letter, and is
not required to be licensed or qualified to conduct its business or its property
in any other Jurisdiction, except where such violation, or where the failure to
be so licensed or qualified, would not have a Material Adverse Effect on the
Company Group.
In this Agreement the Company and the Subsidiaries are sometimes referred
to as the "Company Group."
2.4 Authority of the Company; Consents; Approvals; Fairness Opinion.
(a) The Company has full right, authority and power to enter into
this Agreement and to carry out the transactions contemplated hereby, subject in
the case of consummation of the Merger to the receipt of the Stockholder
Approval as described below. The execution, delivery and performance by the
Company of this Agreement have been duly authorized by all necessary corporate
action, including (i) unanimous approval by the Company's Board of Directors and
(ii) unanimous approval by a special committee of the Company's Board of
Directors formed in accordance with Minn. Stat. 302A.673, subd. 1(d), subject to
the approval of this Agreement and the transactions contemplated hereby by the
Stockholders in accordance with the MBCA and the Articles of Incorporation and
by-laws of the Company ("Stockholder Approval"). This Agreement constitutes a
valid and binding obligation of the Company, enforceable in accordance with its
terms, except as such enforceability may be limited by general equity principles
(regardless of whether such enforceability is considered in a proceeding at
equity or at law).
A-9
<PAGE>
The execution, delivery and performance by the Company of this Agreement:
(i) does not and will not violate any provision of the Articles of
Incorporation or by-laws of the Company, or the charter documents of any
Subsidiary;
(ii) except as would not have a Material Adverse Effect on the
Company Group, and subject to obtaining the Required Consents, as defined
below, does not and will not violate any laws of the United States or any
state or other jurisdiction applicable to the Company Group or require the
Company Group to obtain any approval, consent or waiver of, or make any
filing with, any person or entity (governmental or otherwise) that has not
been obtained or made (other than Stockholder Approval); and
(iii) except as would not have a Material Adverse Effect on the
Company Group, and subject to obtaining the Required Consents, and except
as set forth in the Disclosure Letter, does not and will not result in a
breach of, constitute a default under, accelerate any obligation under, or
give rise to a right of termination of any indenture or loan or credit
agreement or any other material agreement, contract, instrument, mortgage,
lien, lease, permit, authorization, order, writ, judgment, injunction,
decree, determination or arbitration award to which any member of the
Company Group is a party or by which the property of any member of the
Company Group is bound or affected, or result in the creation or
imposition of any mortgage, pledge, lien, security interest or other
charge or encumbrance on the assets of any member of the Company Group.
(b) Except for filings, consents, permits and approvals that may be
required under, and other requirements under, the Securities Act, the Exchange
Act, the HSR Act and the filing of documentation to effectuate the Merger
(collectively, the "Required Consents"), no filing with or notice to, and no
permit or approval of, any Governmental Entity is necessary for the execution
and delivery by the Company of this Agreement and its performance of the
transactions contemplated hereby (collectively, the "Required Consents"). All
such Required Consents are listed in the Disclosure Letter.
(c) The Company has received a written opinion from William Blair &
Company LLC which has not been withdrawn (the "Fairness Opinion"), a copy of
which is being provided to Purchaser herewith, to the effect that the
consideration to be received by the Stockholders hereunder is fair to the
Stockholders (other than the Purchaser and Newco) from a financial point of
view, and such Opinion is acceptable in form and substance to the Company's
Board of Directors.
(d) The Company's Board of Directors, at a meeting duly called and
held, has (i) unanimously determined that this Agreement and the Merger are fair
to and
A-10
<PAGE>
in the best interests of the Stockholders, (ii) unanimously approved the Merger
in compliance with the MBCA and any other applicable law, and (iii) unanimously
resolved to recommend that Stockholders approve this Agreement and the Merger. A
committee of the Company's Board of Directors formed in accordance with Minn.
Stat. 302A.673, subd. 1(d) has unanimously approved the Merger in compliance
with Minn. Stat. 302A.673. None of the aforesaid actions by the Company's Board
of Directors or the committee of the Company's Board of Directors has been
amended, rescinded or modified.
2.5 Filings With the SEC. The Company has made all filings with the SEC
that it has been required to make since March 31, 1998 under the Securities Act
and the Securities Exchange Act (collectively the "Public Reports"). Each of the
Public Reports complied with the Securities Act and the Securities Exchange Act
in all material respects. None of the Public Reports, as of their respective
dates, contained any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements made therein, in light
of the circumstances under which they were made, not misleading. The Company has
delivered to the Purchaser a correct and complete copy of each Public Report
(together with all exhibits and schedules thereto and as amended to date).
2.6 Financial Statements. The Public Reports filed by the Company include
Quarterly Reports on Form 10-Q for the fiscal quarters ended June 30, 1999 and
September 30, 1999 (the "Most Recent Fiscal Quarter End"), and an Annual Report
on Form 10-K for the fiscal year ended March 31, 1999. The financial statements
included in or incorporated by reference into these Public Reports (including
the related notes and schedules) have been prepared in accordance with the books
and records of the Company and with GAAP applied on a consistent basis
throughout the periods covered thereby and present fairly in all material
respects the financial condition of the Company and its Subsidiaries as of the
indicated dates and the results of operations of the Company and its
Subsidiaries for the indicated periods; PROVIDED, however that the interim
statements are subject to normal year-end adjustments and do not include all
footnotes.
Since the Most Recent Quarter End, the Company and its Subsidiaries
conducted their respective businesses only in the ordinary and usual course,
consistent with past practice, and have not incurred any liabilities that are of
a nature that would be required to be disclosed on a balance sheet of the
Company and its Subsidiaries or the footnotes thereto where said balance sheet
was prepared in conformity with GAAP, other than (i) liabilities incurred in the
ordinary course of business, and (ii) liabilities that would not, individually
or in the aggregate, have a Material Adverse Effect on the Company Group.
2.7 Real Estate. Except as listed in the Disclosure Letter, no member of
the Company Group owns any real estate, and no member of the Company Group has
owned any real estate since March 31, 1996.
In the case of each parcel of real property owned by the Company or any
Subsidiary, except as listed in the Disclosure Letter:
A-11
<PAGE>
(a) the owner identified on the Disclosure Letter has good and
marketable title to the parcel of real property, free and clear of any security
interest, easement, covenant, or other restriction except for installments of
special assessments not yet delinquent, recorded easements, covenants and other
restrictions, and utility easements, building restrictions, zoning restrictions
and other easements and restrictions which do not affect materially and
adversely the current use or occupancy of the property subject thereto;
(b) there are no pending, or to the knowledge of the Company,
threatened condemnation proceedings, lawsuits or administrative actions relating
to any such parcel which materially and adversely affect the current use,
occupancy or value thereof;
(c) to the knowledge of the Company, the legal description for the
parcel contained in the deed thereof describes such parcel fully and adequately,
the buildings and improvements are located within the boundary lines of the
described parcels of land and are not in violation of applicable setback
requirements, zoning laws and ordinances where such violation would materially
and adversely affect the current use or occupancy thereof;
(d) there are no leases, subleases, or other agreements granting to
any party or parties the right to use or occupancy of any portion of the parcel
of real property;
(e) there are no outstanding options or rights of first refusal to
purchase the parcel of real property, or any portion thereof or interest
therein;
(f) there are no parties (other than members of the Company Group)
in possession of the parcel of real property, other than tenants under any
leases disclosed in the Disclosure Letter, which tenants are in possession of
the space to which they are entitled; and
(g) the Company will make available to a representative of the
Purchaser a copy of each material survey or material title insurance policy that
are in the possession of the Company or a Subsidiary for each parcel of real
property owned by the Company or any Subsidiary.
Except for leases to which any ESC Foreign Subsidiary is a party where the
total annual rental payable under any such lease is $25,000 or less, no member
of the Company Group leases any real estate other than pursuant to the leases
(the "Real Estate Leases") listed in the Disclosure Letter. True and complete
copies of the Real Estate Leases have been provided to or made available to
Purchaser for review.
In the case of each Real Estate Lease, the member of the Company Group
party to said Real Estate Lease, and to the knowledge of the Company, the other
party thereto, is not in default under the Real Estate Lease.
A-12
<PAGE>
Except as set forth in the Disclosure Letter, no consent is required under
any of the Real Estate Leases in connection with the transactions contemplated
by this Agreement.
2.8 Taxes.
(a) The Company has paid or caused to be paid all federal taxes, and
all material state, local, foreign, and other taxes, including, without
limitation, income taxes, estimated taxes, alternative minimum taxes, excise
taxes, sales taxes, use taxes, value-added taxes, gross receipts taxes,
franchise taxes, capital stock taxes, employment and payroll-related taxes,
withholding taxes, stamp taxes, transfer taxes, windfall profit taxes,
environmental taxes and property taxes, whether or not measured in whole or in
part by net income, and all deficiencies, or other additions to tax, interest,
fines and penalties (collectively, "Taxes"), owed or required to be paid by any
member of the Company Group through the date hereof, and will pay all Taxes
required to be paid by any member of the Company Group through the Closing Date,
except for Taxes not yet due which are properly accrued on the balance sheet for
the Most Recent Fiscal Quarter End in accordance with GAAP.
(b) The Company has in accordance with applicable law filed all
federal, and all material state, local and foreign tax returns required to be
filed by any member of the Company Group through the date hereof, and, to the
knowledge of the Company, all such returns correctly set forth the amount of any
Taxes or losses relating to the applicable period. A list of all federal, state,
local and foreign income tax returns filed with respect to the Company Group for
taxable periods ended on or after March 31, 1996 is set forth in the Disclosure
Letter, and said Letter indicates those returns which have been audited or which
currently are the subject of an audit. For each taxable period of the Company
Group ended on or after March 31, 1996, the Company has made available to
Purchaser correct and complete copies of all federal, state, local and foreign
income tax returns, examination reports and statements of deficiencies filed by,
assessed against or agreed to by the Company.
(c) Neither the Internal Revenue Service (the "IRS") nor any other
governmental authority, domestic or foreign, is now asserting or, to the
knowledge of the Company, threatening to assert, against the Company Group any
deficiency or claim for additional Taxes. Since March 31, 1996 no claim has been
made by any governmental entity in a jurisdiction where any member of the
Company Group does not file reports and returns asserting that any member of the
Company Group is or may be subject to taxation by that jurisdiction in amounts
which would be material to the Company Group. There are no security interests on
any of the assets of any member of the Company Group that arose in connection
with any failure (or alleged failure) to pay any Taxes. Except as set forth in
the Disclosure Letter, since March 31, 1996, no member of the Company Group has
ever entered into a closing agreement pursuant to Section 7121 of the Internal
Revenue Code of 1986, as amended (the "Code").
A-13
<PAGE>
(d) Except as set forth in the Disclosure Letter, since March 31,
1996, there has not been any audit of any tax return filed by any member of the
Company Group, no such audit is in progress, and no member of the Company Group
has been notified by any tax authority that any such audit is contemplated or
pending. Except as set forth in the Disclosure Letter, no extension of time with
respect to any date on which a tax return was or is to be filed by any member of
the Company Group is in force, and no waiver or agreement by any member of the
Company Group is in force for the extension of time for the assessment or
payment of any Taxes.
(e) Except as set forth in the Disclosure Letter, since March 31,
1996 the Company and each other member of the Company Group has never been (and
has never had any liability for unpaid Taxes because it once was) a member of an
"affiliated group" (as defined in Section 1504(a) of the Code) other than a
group of which the Company is the parent. Except as set forth in the Disclosure
Letter, the Company and each other member of the Company Group has never filed,
and has never been required to file, a consolidated, combined or unitary tax
return with any other entity. No member of the Company Group is a party to any
tax sharing or tax indemnity agreement.
(f) For purposes of this Agreement, all references to Sections of
the Code shall include any predecessor provisions to such Sections.
(g) No member of the Company Group has made an election under
Section 341 (f) of the Code.
2.9 Intellectual Property.
For purpose of this Agreement, "Intellectual Property" shall mean
trademarks and service marks currently used by the Company Group and
applications to register such marks; patents and applications to register
patents; trade names currently used by the Company Group; copyrights; Internet
domain names, trade names, designs and logos; computer software and the source
code and object code related thereto; and confidential information, know-how,
inventions, methodologies and trade secrets held for use or used in the business
of a member of the Company Group. The Disclosure Letter contains a list
identifying each patent, patent application, registered trademark and registered
copyright held by any member of the Company Group and each material license of
Intellectual Property to which any member of the Company Group is a party
(except licenses granted to customers in the ordinary course of business).
Except as would not have a Material Adverse Effect on the Company Group:
(a) Each of the Company and its Subsidiaries owns or is licensed or
otherwise has the right to use all Intellectual Property used in or necessary
for the conduct of its business as currently conducted;
(b) The use or ownership of any such Intellectual Property by the
Company and its Subsidiaries does not infringe on or otherwise violate the
A-14
<PAGE>
rights of any third persons, and the products and services provided by the
Company and its subsidiaries and their respective operations do not infringe the
intellectual or proprietary rights of any third persons;
(c) In the case of any license or agreements for material
Intellectual Property, the member of the Company or party to such license
agreements is in compliance therewith in all material respects and is not in
default trader such license agreements;
(d) To the knowledge of the Company, no third party is infringing
upon or challenging the right of any member of the Company Group to material
Intellectual Property of said member; and
(e) Since March 31, 1996, no member of the Company Group has
received any written notice of any pending claim with respect to any
Intellectual Property used by such member.
2.10 Material Contracts.
(a) The Disclosure Letter attached hereto lists, and the Company has
made available to Purchaser, true and complete copies of all material contracts
or other obligations (the "Material Contracts") to which any member of the
Company Group is a party or by which it is bound, including those of the
following types:
(i) Employment agreements and any other material contracts
with or loans to any of the Company Group's shareholders, officers,
directors, employees, consultants, distributors or sales representatives;
(ii) Any Benefit Plans, except for Benefit Plans maintained by
any of the ESC Foreign Subsidiaries where such Plans maintained by the ESC
Foreign Subsidiaries will not give rise to a Material Adverse Effect on
the Company Group;
(iii) Any material contracts with customers;
(iv) Any deeds of trust, mortgages, conditional sales
contracts, security agreements, pledge agreements, trust receipts, or any
other agreements or arrangements whereby any assets of the Company Group
are subject to a lien, encumbrance, charge or other restriction;
(v) Any loan agreements, letters of credit or lines of credit;
A-15
<PAGE>
(vi) Any contracts restricting in a material respect any
member of the Company Group from doing business or competing in any area;
(vii) Other than purchase orders issued or received in the
ordinary course of business, any contracts calling for aggregate payments
in excess of $100,000 which are not terminable without material cost or
liability on notice of 90 days or less;
(viii) Any joint venture, partnership, limited liability
company or limited partnership agreement;
(ix) Any guarantees of the obligations of any other party
(including other members of the Company Group) except those resulting from
the endorsement of customer checks deposited for collection;
(x) Any other contracts which may have a material impact on
the Company Group's assets, results of operations or financial condition;
and
(xi) Any commitment to enter into any of the foregoing.
In the case of each Material Contract, the member of the Company
Group party thereto has not received notice of any default under any such
contracts, obligations or commitments, and is not in default under any such
contracts, obligations or commitments, where such default would have a Material
Adverse Effect on the Company Group. To the knowledge of the Company, no other
party to each Material Contract is in default where such default would have a
Material Adverse Effect on the Company Group.
Except as set forth in the Disclosure Letter, no consent is required
under any of the Material Contracts in connection with the transactions
contemplated by this Agreement.
2.11 Litigation. Except as set forth in the Disclosure Letter or in the
Public Reports, there are no legal, administrative, arbitration or other
proceedings or claims pending or, to the knowledge of the Company, threatened
against any member of the Company Group, nor is any member of the Company Group
subject to any existing judgments, where such proceedings, claims or judgments
are reasonably likely to have a Material Adverse Effect on the Company Group. No
member of the Company Group is operating under or subject to, or in default with
respect to, any order, writ, injunction or decree of any court or federal,
state, municipal or other governmental department, commission, board, agency or
instrumentality, domestic or foreign which has a Material Adverse Effect on the
Company Group.
A-16
<PAGE>
2.12 Compliance with Applicable Laws; Environmental Matters.
(a) Laws. Except as set forth in the Disclosure Letter or as
disclosed in the Public Reports, the operations, assets and properties of each
member of the Company Group are in compliance with all federal, foreign, state,
county, and municipal laws, ordinances, regulations, rules, reporting
requirements, judgments, orders and decrees applicable to the conduct of
business of the Company Group and to the assets owned, used or occupied by it
(collectively referred to hereinafter as the "General Laws"), including without
limitation all applicable foreign, federal, state, county and municipal laws,
ordinances, regulations, rules, reporting requirements, judgments, orders,
decrees and requirements of common law concerning or relating to the protection
of health and the environment (collectively referred to hereinafter as the
"Environmental Laws"), except for non-compliance that would not have a Material
Adverse Effect on the Company Group. No member of the Company Group has received
any notice of violation, citation, complaint, request for information, order,
directive, compliance schedule or other similar enforcement order, or any other
notice from any administrative or governmental agency or entity, indicating that
it was not or currently is not in compliance with the Environmental Laws and
General Laws, except for noncompliance that would not have a Material Adverse
Effect on the Company Group, and to the knowledge of the Company, no such item
is threatened.
(b) Environmental Laws. Except where noncompliance would not have a
Material Adverse Effect on the Company Group, all businesses and operations of
the Company Group are in compliance with any: (i) judgments, orders, decrees,
awards or directives, of any court, arbitrator or administrative or governmental
agency or entity binding any member of the Company Group and concerning
compliance with the Environmental Laws; and (ii) consent decrees, administrative
orders, settlement agreements or other settlement documents entered into by any
member of the Company Group with any administrative or governmental agency or
entity concerning compliance with the Environmental Laws.
(c) Hazardous Materials. Except where no Material Adverse Effect on
the Company Group would result therefrom, the assets owned, leased or operated
by the Company Group (to the knowledge of the Company in the case of real
property leased by the Company Group, it being understood in addition that no
representation is made with respect to portions of the real property not
actually leased and utilized by a member of the Company Group) are free of all
materials designated as hazardous substances, wastes, hazardous materials,
pollutants or contaminants under any Environmental Laws (collectively,
"Hazardous Materials") other than Hazardous Materials which are properly stored
and licensed as required by applicable law, and are free of physical conditions
which violate any Environmental Laws. Except where no Material Adverse Effect on
the Company Group would result therefrom, no Hazardous Materials used or
generated by any member of the Company Group have been treated, stored,
transported or disposed of in violation of any Environmental Laws.
A-17
<PAGE>
(d) LICENSES AND PERMITS. The Disclosure Letter lists material
permits, licenses and other authorizations issued by administrative or
governmental agencies or entities under the General Laws and the Environmental
Laws or otherwise required for the conduct of the Company Group's business as
presently conducted which are held by the Company Group ("Licenses and
Permits"). The Licenses and Permits include all such permits which are necessary
to the Company Group's business and operations as presently conducted and the
Company Group is and has been in compliance with the terms and conditions of the
Licenses and Permits where noncompliance would have a Material Adverse Effect on
the Company.
2.13 Finder's or Investment Banker's Fee. No agent, broker, investment
banker, financial advisor or similar person is or will be entitled to any
broker's or finder's fee or any other commission or similar fee in connection
with this Agreement or the Merger, other than William Blair & Company. The
Company has provided to Purchaser a true and complete copy of all agreements
providing for any commission, fee or expense payment to William Blair & Company.
2.14 ERISA and Employment Matters.
(a) The Disclosure Letter contains a true and complete list of all
Benefit Plans of the Company Group, except for Benefit Plans maintained by any
of the ESC Foreign Subsidiaries where such Plans maintained by the ESC Foreign
Subsidiaries will not give rise to a Material Adverse Effect on the Company
Group.
(b) The Company has delivered or made available to Purchaser a
current, accurate and complete copy of each Benefit Plan and of any material
agreements or documents related to such Benefit Plan such as trust agreements or
funding instruments, the most recent determination letter, the most recent
summary plan description, and, for the three (3) most recent years, the Form
5500 and attached Schedules.
(c) Except where there would be no Material Adverse Effect on the
Company Group, (i) each Benefit Plan is administered in accordance with its
terms and in compliance in all material respects with the applicable provisions
of ERISA, the Code and other applicable laws, rules and regulations; (ii) no
actions, suits or claims, other than the routine claims for benefits in the
ordinary course of business, are pending against any Plan, or, to the knowledge
of the Company, threatened, except as set forth in the Disclosure Letter; (in)
there have been no prohibited transactions, within the meaning of the Code and
ERISA, which would subject the Company Group to any material taxes, penalties or
other liabilities with respect to any Plan.
(d) Since March 31, 1996 neither the Company nor any other member of
the Company Group has ever maintained or contributed to a defined benefit
pension plan or a multi employer plan (within the meaning of Section 4001(a)(3)
of ERISA).
A-18
<PAGE>
(e) No member of the Company Group maintains any pension plan within
the meaning of Section 3(2)(A) of ERISA, except for the TSI Incorporated
Employee Retirement and Profit Sharing Plan (the "TSI Plan") which is maintained
by TSI and certain Subsidiaries, and for the Environmental Systems Corporation
401(k) Retirement Plan (the "ESC Plan"; hereinafter the TSI Plan and the ESC
Plan are sometimes collectively referred to as the "Retirement Plans"). The
Retirement Plans are qualified within the meaning of Section 401(a) of the Code.
(f) Except as set forth in the Disclosure Letter, the consummation
of the transactions contemplated by this Agreement will not, alone or together
with any other event, (i) entitle any employee of any member of the Company
Group to a bonus, severance pay or any other payment, or (ii) accelerate the
time of payment or vesting of, or increase the amount of, compensation due to
any such employee, except as will or may occur under the Company's stock option
plans, copies of which have been made available to Purchaser.
2.15 Labor Matters.
(a) No member of the Company Group is delinquent in payments to any
of its employees for any wages, salaries, commissions, bonuses, or other direct
compensation for any services performed for it to the date hereof or amounts
required to be reimbursed to such employees.
(b) Except as listed in the Disclosure Letter, there are no current
or, to the knowledge of the Company, threatened, organizational activities or
demands for recognition by labor organizations seeking to represent employees of
any member of the Company Group and no such activities have occurred during the
past twelve (12) months. Except as listed in the Disclosure Letter, there are no
grievances, complaints, or charges that have been filed against any member of
the Company Group under any dispute resolution procedure that are outstanding
that would have a Material Adverse Effect on the Company Group. No collective
bargaining agreement is in effect or is currently being or is about to be
negotiated by any member of the Company Group. Except where there would be no
Material Adverse Effect on the Company Group, the Company has not received
notice to indicate that any of the employment policies or practices of any
member of the Company Group is currently being audited or investigated by any
federal, state, local or foreign government agency.
2.16 Authority Relative to Agreements; Enforceability. This Agreement and
the transactions contemplated hereby have been approved by a majority of the
Company's "Continuing Directors" as defined in, and in the manner required by,
Article XI of the Articles of Incorporation of the Company. The approval of this
Agreement and the Merger at the Shareholders Meeting by the affirmative vote of
a majority of all outstanding shares of Company Common Stock as of the record
date for the Shareholders Meeting will constitute approval of this Agreement and
the Merger by the shareholders of the Company.
A-19
<PAGE>
2.17 Affiliate Transactions. Except as disclosed in the Disclosure Letter,
there are no material contracts, commitments, agreements, arrangements or other
transactions between any member of the Company Group and (i) any officer or
director of any member of the Company Group; (ii) any record or beneficial owner
of five (5) percent or more of the voting securities of the Company; or (iii)
any affiliate (as such term is defined in Regulation 12b-2 promulgated trader
the Exchange Act) of any such officer, director or beneficial owner.
2.18 Year 2000 Compliance. The disclosure contained in the Company's
quarterly report on Form 10-Q for the quarter ended September 30, 1999 does not
contain any material misstatement or omission regarding the status of the
Company's Year 2000 readiness. Except as would not have a Material Adverse
Effect on the Company Group, the products and services supplied by the Company
or its Subsidiaries since January 1, 1999 (i) are "Year 2000 Compliant", in that
they will perform in a consistent manner regardless of whether the date is
before, on or after January 1, 2000, or (ii) are not Year 2000 Compliant, but
the customer has been advised or is aware of this fact, and has chosen to
purchase the product or service notwithstanding the fact that it is not Year
2000 Compliant. The Company Group will not suffer a Material Adverse Effect
after September 30, 1999 from customer claims that the products and services of
the Company and Subsidiaries sold or provided prior to January 1, 1999 are not
Year 2000 Compliant.
SECTION 3. COVENANTS OF THE COMPANY.
3.1 Making of Covenants and Agreements. The Company hereby makes the
covenants and agreements set forth in this Section 3.
3.2 Conduct of Business. Except as set forth in the Disclosure Letter,
between the date of this Agreement and the Closing Date, the Company Group, and
each member thereof, will, unless consented to in writing by Purchaser:
(a) conduct its business only in the ordinary course and consistent
with prior practices;
(b) except for capital expenditures provided for in the Company's
fiscal 2000 budget, refrain from making any capital expenditures in excess of
$100,000 in the aggregate, and from mortgaging, pledging, subjecting to a lien
or otherwise encumbering any of its properties or assets;
(c) refrain from incurring any contingent liability as a guarantor
or otherwise with respect to the obligations of others, and from incurring any
other obligations or liabilities except in the ordinary course of business;
(d) refrain from making any change in its Articles of Incorporation
or By-Laws;
A-20
<PAGE>
(e) refrain from declaring, setting aside or paying any dividend or
other distribution with respect to its capital stock, or making any direct or
indirect redemption, purchase or other acquisition of its capital stock, except
for normal quarterly dividends paid by the Company to its stockholders or
dividends paid by Subsidiaries in the ordinary course of their business
consistent with past practice;
(f) except to the extent required under any existing agreements and
any existing employee and director Benefit Plans (including existing severance
plans or arrangements) as in effect on the date of this Agreement, refrain from
paying bonuses to, or increasing the compensation or fringe benefits of, any of
its directors, officers or employees, except for increases in salary or wages of
employees of the Company Group in the ordinary course of business in accordance
with past practice, and refrain from granting any severance or termination pay
and refrain from entering into, or amending, any employment, consulting or
severance agreement or arrangement with any present or former director, officer
or other employee of the Company Group;
(g) except as may be required as a result of any change in law or in
GAAP, refrain from changing any of the accounting practices or principles used
by the Company Group;
(h) refrain from making any tax election and from settling or
compromising any material federal, state, local or foreign tax liability or
dispute;
(i) refrain from authorizing for issuance, issuing, selling,
granting, delivering, pledging or encumbering any shares of the Stock or any
other equity or voting security of the Company or any of the Subsidiaries,
except for issuances of stock pursuant to outstanding options in effect on the
date hereof and pursuant to the TSI Incorporated Employee Stock Purchase Plan of
1994, and refrain from issuing or granting any options, warrants, calls,
commitments, subscriptions for rights to purchase or acquire any shares or
securities from any member of the Company Group, except that after the date of
this Agreement and prior to the Closing the Company may issue in the ordinary
course of business to newly hired employees options to purchase not more than a
total of 15,000 shares of Company Common Stock for all such newly hired
employees, in each case at an exercise price per share which is not less than
the fair market value per share on the date the option is granted;
(j) refrain from any sale or other transfer of the assets of any
member of the Company Group, except in the ordinary course of business in a
manner consistent with past practice;
(k) refrain from reclassifying, combining, splitting, subdividing or
redeeming, purchasing or otherwise acquiring directly or indirectly any of the
Company's capital stock;
A-21
<PAGE>
(l) refrain from adopting a plan of complete or partial liquidation,
dissolution, merger, consolidation, restructuring or recapitalization or other
reorganization of any member of the Company Group;
(m) refrain making any change in the Company's borrowing
arrangements;
(n) use its reasonable efforts to prevent any change with respect to
its management and supervisory personnel and banking arrangements;
(o) use its reasonable efforts to keep intact its business
organization, to keep available its present officers and employees and to
preserve the goodwill of all suppliers, customers, independent contractors and
others having business relations with it;
(p) have in effect and maintain at all times all insurance of the
kind, in the amount and with the insurers set forth in the Disclosure Letter or
equivalent insurance with any substitute insurers approved in writing by
Purchaser;
(q) except as required to conform to applicable law, refrain from
entering into or making any change in the Retirement Plans and from materially
amending or terminating any other existing Benefit Plan, or adopting any new
Benefit Plan;
(r) refrain from acquiring control or ownership of any other
corporation, association, joint venture, partnership, limited liability company,
business trust or other business entity, or control or ownership of all or a
substantial portion of the assets of the foregoing, and from entering into any
agreement providing for any of the foregoing;
(s) except in the ordinary course of business, refrain from entering
into any material licensing arrangement or other material contract;
(t) refrain from settling any pending litigation in a manner that is
materially adverse to the Company Group and from commencing any
(u) refrain from agreeing to or committing in writing to carry out
any action which is prohibited by the foregoing provisions, or which would cause
any of the representations or warranties in this Agreement to be untrue in any
material respect.
3.3 Stockholders Meeting. The Company will call a special meeting of its
Stockholders (the "Shareholders Meeting") to be held as soon as reasonably
practicable in order that its Stockholders may consider and vote upon this
Agreement and approval of the Merger in accordance with the MBCA. The Company
will prepare and file as promptly as possible with the SEC preliminary proxy
materials under the Securities and Exchange Act relating to the Shareholders
Meeting; PROVIDED that the preliminary proxy materials need not be filed until
the commitment letter referred to in
A-22
<PAGE>
Section 9.1(g) has been delivered. The Company will use its reasonable best
efforts, after consultation with Purchaser, to respond to the comments of the
SEC thereon and will make any further filings (including amendments and
supplements) in connection therewith that may be necessary. Purchaser agrees to
provide the Company with whatever information and assistance in connection with
said filings that the Company may reasonably request. Except as otherwise
permitted under Section 3.4, the Company will include in the Proxy Statement the
recommendation of the Company's Board of Directors that the Stockholders of the
Company vote in favor of the approval and adoption of this Agreement, the Merger
and the transactions contemplated hereby. The Company will employ a nationally
recognized proxy solicitation firm to assist in disseminating proxy materials,
contacting Shareholders to solicit proxies to vote in favor of the approval and
adoption of this Agreement, and performing the services customarily performed by
such firms in transactions of this type.
The final Company proxy materials will comply with the Exchange Act in all
material respects, and will not contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements made
therein, in light of the circumstances under which they will be made, not
misleading; provided, however, that the Company makes no representation or
warranty with respect to any information that the Purchaser will supply
specifically for use in said proxy materials.
3.4 Exclusivity. For purposes of this Agreement, the term "Takeover
Proposal" shall mean any proposal for a merger or other business combination
involving the Company or any Subsidiary, or for the acquisition of a substantial
equity interest in the Company or any Subsidiary, a substantial portion of the
assets of the Company or any Subsidiary or a product line or line of business of
the Company or any Subsidiary, other than as contemplated by this Agreement. The
Company shall promptly advise Purchaser orally and in writing of any "Takeover
Proposal" or of any proposal, or inquiry reasonably likely to result in a
Takeover Proposal.
Each member of the Company Group shall not, directly or indirectly,
whether through its officers, directors, Stockholders, agents, representatives,
or otherwise, engage in any discussions or negotiations with, or provide any
non-public information to, any person or entity making, proposing to make or
believed to be contemplating a Takeover Proposal to the Company; provided,
however, that the Company, its Subsidiaries, and their directors and officers
will remain free to participate in any discussions or negotiations regarding,
furnish any information with respect to, assist or participate in, or facilitate
in any other manner, any effort or attempt by any third party to do or seek any
of the foregoing to the extent required by the fiduciary obligations of the
Board of Directors of the Company, as determined in good faith by a majority of
the members thereof following the receipt of advice of outside legal counsel. In
the event that any such activities result in a Takeover Proposal which the Board
of Directors of the Company reasonably concludes is superior to the transaction
contemplated by this Agreement ("Superior Proposal"), nothing contained in this
Agreement will prevent the Board of Directors of the Company from recommending
such Superior Proposal to the Company's Stockholders, and from withdrawing any
recommendation of this Agreement and the
A-23
<PAGE>
transactions contemplated hereby. In the event that the Merger contemplated by
this Agreement is not consummated because of a Superior Proposal, and the
transaction contemplated by the Superior Proposal is not consummated, the Board
of Directors of the Company agrees to negotiate in good faith with the Purchaser
with a view toward consummating a transaction with the Purchaser as contemplated
by this Agreement; provided, however, that the obligation created by this
sentence shall not apply if the Company has paid Purchaser the termination fee
provided for in Section 9.3.
3.5 Authorization from Others. Prior to the Closing Date, the Company will
use its reasonable best efforts to obtain all authorizations, consents and
permits of others required to permit the consummation by the Company of the
transactions contemplated by this Agreement.
3.6 Notice of Default. Promptly upon the occurrence of, or promptly upon
the Company becoming aware of the impending or threatened occurrence of, any
event which would cause or constitute a breach or default, or would have caused
or constituted a breach or default had such event occurred or been known to the
Company prior to the date hereof, of any of the representations, warranties or
covenants of the Company contained in or referred to in this Agreement, the
Company shall give written notice thereof to Purchaser.
3.7 Consummation of Agreement. Except as otherwise permitted under Section
3.4, the Company shall use its reasonable best efforts to perform and fulfill
all conditions and obligations on its part to be performed and fulfilled under
this Agreement, to the end that the transactions contemplated by this Agreement
shall be fully carried out.
3.8 Confidentiality. The Company agrees that each of the Company, the
Subsidiaries and the Company's and Subsidiaries' officers, directors and
Representatives will hold in strict confidence, and will not use, any
confidential or proprietary data or information obtained from Purchaser with
respect to its business or financial condition except for the purpose of
evaluating, negotiating and completing the transaction contemplated hereby.
Information generally known in Purchaser's industry or which has been disclosed
to the Company by third parties which have a right to do so shall not be deemed
confidential or proprietary information for purposes of this Agreement. If the
transaction contemplated by this Agreement is not consummated, the Company will
return to Purchaser (or certify that it has destroyed) all copies of such data
and information, including but not limited to financial information, customer
lists, business and corporate records, worksheets, test reports, tax returns,
lists, memoranda, and other documents prepared by or made available to the
Company in connection with the transaction.
3.9 Access to Records and Properties. Purchaser may, prior to the Closing
Date, through its employees, agents and representatives, make or cause to be
made a detailed review of the business and financial condition of the Company
Group and make or cause to be made such investigation as it deems necessary or
advisable of the properties, assets, businesses, books and records of each
member of the Company Group.
A-24
<PAGE>
The Company agrees to assist Purchaser in conducting such review and
investigation and will provide, and will cause its or their representatives and
independent public accountants to provide, Purchaser and its employees, agents
and representatives full access to, and complete information concerning, all
aspects of the businesses of the Company Group, including their respective
books, records (including tax returns filed or in preparation), projections,
personnel and premises, and any documents (including any documents filed on a
confidential basis) included in any report filed with any governmental agency
(but excluding records not normally provided by independent public accountants
to third party buyers). Purchaser and Newco shall use their reasonable best
efforts to minimize any disruption to the business of the Company Group.
3.10 Notification Regarding Dissenters' Shares. The Company shall give
Purchaser (i) prompt notice of any notice of intent to demand fair value for any
shares of Company Common Stock, withdrawals of such notices, and any other
instruments served pursuant to the Appraisal Laws and received by the Company,
and (ii) the opportunity to direct any negotiations and proceedings with respect
to demands for fair value for shares of Company Common Stock under the Appraisal
Laws. The Company shall not, without the prior written consent of Purchaser,
voluntarily make any payment with respect to any demands for fair value for
shares of Company Common Stock or offer to settle or settle any such demands.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER AND NEWCO.
4.1 Organization of Purchaser and Newco. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Minnesota with full corporate power and authority to own or lease its properties
and to conduct its business in the manner and in the places where such
properties are owned or leased or such business is conducted by it. Newco is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Minnesota with full corporate power and authority to own or
lease its properties and to conduct its business in the manner and in the places
where such properties are owned or leased or such business is conducted by it.
Each of Purchaser and Newco has delivered to the Company true and complete
copies of its Articles of Incorporation and Bylaws as currently in effect.
4.2 Authority of Purchaser and Newco. Each of Purchaser and Newco has full
right, authority and power to enter into this Agreement and each agreement,
document and instrument to be executed and delivered by it pursuant to this
Agreement and to carry out the transactions contemplated hereby. The execution,
delivery and performance by each of Purchaser and Newco of this Agreement and
each such other agreement, document and instrument have been duly authorized by
all necessary corporate action of Purchaser and Newco and no other action on the
part of Purchaser or Newco is required in connection therewith. This Agreement
and each other agreement, document and instrument executed and delivered by each
of Purchaser and Newco pursuant to this Agreement constitute, or when executed
and delivered will constitute, valid and binding obligations of Purchaser or
Newco, as applicable, enforceable in
A-25
<PAGE>
accordance with their terms, except as such enforceability may be limited by
general equity principles (regardless of whether such enforceability is
considered in a proceeding at equity or at law). The execution, delivery and
performance by each of Purchaser and Newco of this Agreement and each such
agreement, document and instrument:
(a) do not and will not violate any provision of the Articles of
Incorporation or Bylaws of each of Purchaser and Newco;
(b) except as would not have a Material Adverse Effect on Purchaser
or Newco, and subject to obtaining the Required Consents, do not and will not
violate any laws, rules, or regulations of the United States or of any state or
any other jurisdiction applicable to Purchaser or Newco or require Purchaser or
Newco to obtain any approval, consent, or waiver of, or make any filing with,
any person or entity (governmental or otherwise) which has not been obtained or
made; and
(c) except as would not have a Material Adverse Effect on Purchaser
or Newco, and subject to obtaining the Required Consents, do not and will not
result in a breach of, constitute a default under, accelerate any obligation
under, or give rise to a right of termination of any indenture, loan, or credit
agreement, or any other agreement, mortgage, lease, permit, order, judgment, or
decree to which Purchaser or Newco is a party and which is material to the
business and financial condition of Purchaser and its affiliated organizations
on a consolidated basis.
4.3 Litigation. There is no litigation pending or, to Purchaser's
knowledge, threatened against Purchaser or Newco which would prevent or hinder
the consummation of the transactions contemplated by this Agreement.
4.4 Consents and Approvals. Except for the Required Consents, no filing
with or notice to, and no permit or approval of, any Governmental Entity is
necessary for the execution and delivery by Purchaser and Newco of this
Agreement and their performance of the transactions contemplated hereby.
4.5 Financing. Purchaser, Newco and Fauth's financing for the amounts to
be paid under this Agreement will be substantially as set forth in Fauth's
letter dated December 3, 1999 to the Company's Board of Directors. The equity
portion of the financing referred to in that letter will not involve any
guaranty by the Surviving Corporation or pledge of its assets.
SECTION 5. COVENANTS OF PURCHASER.
5.1 Making of Covenants and Agreement. Purchaser hereby makes the
covenants and agreements set forth in this Section 5.
5.2 Authorization from Others. Prior to the Closing Date, Purchaser and
Newco will use their reasonable efforts to obtain all authorizations, consents
and permits
A-26
<PAGE>
of others required to permit the consummation by Purchaser and Newco of the
transactions contemplated by this Agreement.
5.3 Confidentiality; Nonsolicitation. Purchaser agrees that, unless and
until the Closing has been consummated:
(a) Purchaser and its officers, directors, and representatives will
hold in strict confidence, and will not use any confidential or proprietary data
or information obtained from the Company Group with respect to the business or
financial condition of the Company Group except for the purpose of evaluating,
negotiating and completing the transaction contemplated hereby. Information
generally known in the industries of the Company Group or which has been
disclosed to Purchaser by third parties which have a right to do so shall not be
deemed confidential or proprietary information for purposes of this Agreement.
If the transaction contemplated by this Agreement is not consummated, Purchaser
will return to the Company (or certify that it has destroyed) all copies of such
data and information, including but not limited to financial information,
customer lists, business and corporate records, worksheets, test reports, tax
returns, lists, memoranda, and other documents prepared by or made available to
Purchaser in connection with the transaction.
(b) During the period commencing on the date hereof and ending three
(3) years from the date hereof, Purchaser and its affiliates shall not employ,
nor solicit or make offers of employment to, any individuals who are presently
employed by any member of the Company Group or who become employed by any member
of the Company Group during the time period between the date hereof and the date
of termination of this Agreement.
5.4 Notice of Default. Promptly upon the occurrence of, or promptly upon
Purchaser or Newco becoming aware of the impending or threatened occurrence of,
any event which would cause or constitute a breach or default, or which would
have caused or constitute a breach or default had such event occurred or been
known to Purchaser or Newco prior to the date hereof, of any of the
representations, warranties or covenants of the Purchaser and Newco contained in
or referred to in this Agreement, Purchaser shall given written notice thereof
to the Company.
5.5 Consummation of Agreement. Each of Purchaser and Newco shall use its
reasonable efforts to perform and fulfill all conditions and obligations on the
part of either to be performed and fulfilled under this Agreement, to the end
that the transactions contemplated by this Agreement shall be fully carried out.
5.6 Indemnification; Directors and Officers Insurance.
(a) Purchaser and Newco agree that all rights to indemnification for
acts or omissions occurring prior to the Effective Time of the Merger now
existing in favor of the current and former directors or officers of the Company
Group (the "Indemnified Parties") as provided in the respective articles or
certificates of
A-27
<PAGE>
incorporation or bylaws of the Company Group, or by statute, shall survive the
Merger and shall continue in full force and effect in accordance with their
terms.
(b) For six (6) years from the Effective Time of the Merger,
Purchaser shall maintain in effect (i) the indemnification provisions of the
Company's current articles of incorporation and bylaws as they relate to its
current directors and officers, and (ii) directors and officers liability
insurance or insurance policies with substantially equivalent coverage covering
those persons who are currently covered by the Company's directors and officers
liability insurance policy, a copy of which has been delivered to Purchaser.
(c) This Section 5.6 shall survive the consummation of the Merger
and is intended to benefit the Indemnified Parties, and shall be binding upon
all successors and assigns of the Purchaser and Newco.
5.7 Employee Benefits. Purchaser agrees that after the Effective Time of
the Merger and until December 31, 2000, the Surviving Corporation will provide
the persons employed by members of the Company Group immediately prior to the
Effective Time, with non-incentive type fringe benefits which in the aggregate
are substantially comparable to those currently provided by the Company Group,
which are described in Section 5.7 of the Disclosure Letter.
With respect to any benefit plans in which any employees of the Company
Group first become eligible to participate on or after the Effective Time of the
Merger ("New Plans") but prior to December 31, 2000, Purchaser shall (i) waive
all pre-existing conditions, exclusions and waiting periods with respect to
participation and coverage requirements under any such New Plans, to the extent
such waiver is permissible under the New Plans of Purchaser, and (ii) recognize
service of the employees of the Company Group with the Company Group accrued
prior to the Effective Time of the Merger in determining eligibility to
participate and vesting credit in any New Plans. Vacation entitlement of the
Company Group employees accrued as of the Effective Time of the Merger shall not
be reduced and will apply after the Effective Time of the Merger.
Purchaser agrees that after the Effective Time of the Merger the Surviving
Corporation will pay or provide for the fiscal year ending March 31, 2000, to
the persons employed by members of the Company Group immediately prior to the
Effective Time, the incentive compensation program benefits which such persons
have or will accrue, or to which they have or will become entitled, in the
ordinary course for that fiscal year under the incentive compensation programs
which are described in Section 5.7 of the Disclosure Letter; provided, that the
Company Group does not prior to the Effective Time of the Merger expand such
programs or the class or classes of employees entitled to such programs.
5.8 Redundancies. Employees of the Company Group whose jobs are eliminated
as a result of the consummation of the transactions contemplated under this
Agreement shall receive severance payments in the amounts due under the
severance
A-28
<PAGE>
policy of Purchaser (but in no event shall the amounts paid be less than the
amounts due under the Company's severance policy as currently in effect), which
is one week of severance pay for each year of service, except that Messrs.
Doubles, Gallagher, Nystrom, Agarwal and Ms. Cochrane shall be entitled to the
respective benefits provided by the "Stay in Place Agreements" between each of
them and the Company which have been delivered to the Purchaser.
SECTION 6. MUTUAL COVENANTS.
6.1 HSR Matters. Each party hereto shall make an appropriate filing of a
Notification and Report Form pursuant to the HSR Act with respect to the
transactions contemplated hereby as promptly as practicable after the date
hereof. Each such filing shall request early termination of the waiting periods
imposed by the HSR Act. Each party hereby agrees to use its reasonable best
efforts to cause a termination of the waiting period under the HSR Act without
the entry by a court of competent jurisdiction of an order enjoining the
consummation of the transactions contemplated hereby at as early a date as
possible. Each party also agrees to respond promptly to all investigatory
requests as may be made by the government. In the event that a Request for
Additional Information is issued under the HSR Act, each party agrees to furnish
all information required and to comply substantially with such Request as soon
as is practicable after its receipt thereof so that any additional applicable
waiting period under the HSR Act may commence. Each party will keep the other
party apprized of the status of any inquiries made of such party by the
Department of Justice, Federal Trade Commission or any other governmental agency
or authority or members of their respective staffs with respect to this
Agreement or the transactions contemplated hereby. All filing fees to be paid by
Purchaser or the Company in connection with filing Notification and Report Forms
pursuant to the HSR Act shall be paid one-half by the Purchaser and one-half by
the Company.
6.2 Public Announcements. The parties hereto will consult with one another
before issuing any press release or otherwise making any public statements with
respect to the transactions contemplated by this Agreement, and shall not issue
any such press release or make any such public statement prior to such
consultation, except to the extent that such consultation may be prohibited by
applicable law or that such a disclosure or release is required by obligations
pursuant to law or to any listing agreement with Nasdaq as determined by the
Company.
SECTION 7. CONDITIONS.
7.1 Conditions to the Obligations of Each Party. The obligations of each
of Purchaser, Newco and the Company to consummate this Agreement and the
transactions contemplated hereby are subject to the fulfillment, prior to or at
the Closing, of the following conditions precedent:
A-29
<PAGE>
(a) Stockholder Approval. The Company shall have obtained the
required Stockholder Approval of this Agreement and the transactions
contemplated hereby.
(b) HSR Act. The waiting period (and any extension thereof)
applicable to the Merger under the HSR Act shall have been terminated or shall
have expired.
(c) No Injunctions or Restraints; Illegality. No Governmental entity
or federal or state court of competent jurisdiction shall have enacted, issued,
enforced or entered any statute, rule, regulation, executive order, decree,
judgment, injunction or other order which is in effect and which prevents or
prohibits consummation of the Merger or any other material transactions
contemplated in this Agreement, and no Governmental entity shall institute any
action or proceeding before any United States court or other Governmental body
seeking to enjoin, restrain or otherwise prohibit consummation of the
transactions contemplated by this Agreement, which action or proceeding remains
pending at what would otherwise be the Closing Date.
7.2 Conditions to the Obligations of Purchaser and Newco. The obligations
of Purchaser and Newco to consummate this Agreement and the transactions
contemplated hereby are subject to the fulfillment, prior to or at the Closing,
of the following conditions precedent:
(a) Representations; Warranties. Each of the representations and
warranties of the Company contained in Section 2 shall be true and correct in
all material respects as of the date of this Agreement and as of the Closing
Date as though made on and as of the Closing (it being understood that
representations and warranties that speak as of a particular date must continue
to be thus true and correct as of the date as of which they speak), except as
qualified by any amendment to the Disclosure Letter which is acceptable to
Purchaser, and the Company shall have delivered to the Purchaser a certificate,
dated the Closing Date, signed by the Company's chief executive officer to the
foregoing effect.
(b) Covenants. The Company shall, on or before the Closing, have
performed in all material respects all of its obligations hereunder which by the
terms hereof are to be performed on or before the Closing, except where the
failure to perform would not have a Material Adverse Effect on the Company Group
or Purchaser.
(c) No Material Change. Since the date of the Most Recent Fiscal
Quarter End, there shall not have occurred any event which has a Material
Adverse Effect on the Company, except as expressly disclosed in this Agreement
or the Disclosure Letter.
(d) Consents. All of the consents, approvals, authorizations,
approvals, orders or permits required to be obtained by the Company, Purchaser
or
A-30
<PAGE>
Newco shall have been obtained, except for those as to which the failure to
obtain the same would not have a Material Adverse Effect on the Company.
(e) Dissenting Shares. As of the Closing Date, no more than 15
percent (15%) of the issued and outstanding shares of Company Common Stock shall
be eligible for treatment as Dissenting Shares hereunder.
(f) Legal Opinion. The Purchaser and Newco shall have received at
the Closing an opinion of Gray, Plant, Mooty, Mooty & Bennett, P.A., legal
counsel to the Company, addressed to Purchaser and in the form of Schedule
7.2(g) of this Agreement.
(g) No Breach of Voting Agreements. The Voting Agreements shall be
in full force and effect and none of the shareholders which are party to the
Voting Agreements shall have breached or given Purchaser and Newco any notice of
any intention to breach the Voting Agreements.
Notwithstanding the foregoing, if within thirty (30) days (the "Cure
Period") following notice to the Company of the existence of any condition
enumerated in this Section 7.2, the condition or conditions disclosed in the
notice have been cured or corrected or otherwise have ceased to exist, then this
Section shall not relieve Purchaser and Newco of their obligations to proceed
with the consummation of this Agreement and the transactions contemplated
hereby.
7.3 Conditions to Obligations of the Company. The obligation of the
Company to consummate this Agreement and the transactions contemplated hereby is
subject to the fulfillment, prior to or at the Closing, of the following
conditions precedent:
(a) Representations and Warranties. Each of the representations and
warranties of Purchaser and Newco contained in Section 4 shall be true and
correct in all material respects as though made on and as of the Closing.
(b) Covenants. Purchaser shall, on or before the Closing, have
performed all of its obligations hereunder which by the terms hereof are to be
performed on or before the Closing; and Purchaser shall have delivered to the
Company and the Stockholders a certificate of the President of Purchaser dated
on the Closing to such effect.
SECTION 8. CLOSING; CLOSING DATE.
Unless this Agreement shall have been terminated and the Merger herein
contemplated shall have been abandoned pursuant to a provision of Section 9
hereof and subject to compliance with the conditions hereto (but after extension
by any Cure Period provided in Section 7.2, if applicable), a closing (the
"Closing") will be held on the date of the Shareholders Meeting, or as soon
thereafter as the conditions in Section 7 have been satisfied or waived, or on
such other date which is mutually acceptable to Purchaser
A-31
<PAGE>
and the Company, at the offices of legal counsel to the Purchaser commencing at
11:00 A.M. At the Closing, Purchaser will deliver to the Payment Agent the
irrevocable letter of credit referred to in Section 1.6(a), the Company will
make the payment with respect to Options referred to in Section 1.5, any
documents required hereunder will be exchanged by the parties, and, immediately
thereafter, the Articles of Merger will be filed by Newco and the Company with
the Secretary of State of the State of Minnesota. The date on which the Closing
occurs is herein referred to as the Closing Date.
SECTION 9. TERMINATION.
9.1 Termination and Abandonment. This Agreement may be terminated and the
Merger may be abandoned before the Effective Time of the Merger, notwithstanding
any approval and adoption of this Agreement by the shareholders of the Company
or Newco:
(a) by the mutual consent of the Board of Directors of Purchaser and
the Company; or
(b) by Purchaser or the Company, if the shareholders of the Company
fail to approve the Merger at the Shareholders Meeting; or
(c) subject to the Company's right to cure pursuant to Section 7.2,
by Purchaser if there has been a material misrepresentation or material breach
on the part of the Company in the representations, warranties or covenants of
the Company set forth herein, or if there has been any material failure on the
part of the Company to comply with its obligations hereunder; or by the Company
if there has been a material misrepresentation or material breach on the part of
Purchaser or Newco in the representations, warranties or covenants of Purchaser
Newco set forth herein, or if there has been any material failure on the part of
Purchaser or Newco to comply with their obligations hereunder; or
(d) by Purchaser in the event that the Company's Board of Directors
withdraws its unanimous recommendation that shareholders approve this Agreement
and the Merger; or
(e) by the Company giving written notice to Purchaser at any time
prior to the Shareholder Meeting if the Company has entered into a definitive
agreement in connection with a Superior Proposal as permitted by Section 3.4 and
makes simultaneous payment to Purchaser of the fee referred to in Section
9.3(b); or
(f) by the Company or the Purchaser if the Merger is not effective
by June 30, 2000, except that a party whose breach of this Agreement has caused
a delay in the consummation of the Merger shall not be entitled to terminate
this Agreement pursuant to this Section 9.1(f); or
(g) by the Company if the Purchaser fails to deliver to the Company
a signed commitment letter addressed to the Purchaser from a qualified financial
institution
A-32
<PAGE>
on or before January 31, 2000 which provides for debt financing of $115,000,000.
The commitment letter shall be in customary form and reflecting financial terms
consistent with the letter of December 3, 1999 referenced in Section 4.5. In the
event of termination of this Agreement pursuant to this Section 9.1(g), none of
the parties shall have any liability to any of the other parties pursuant to
this Agreement or otherwise.
9.2 Termination Procedures. The power of termination provided for by this
Section 9 may be exercised for Purchaser or the Company only by its respective
President or, in the absence of the President, by a duly acting Vice President,
and will be effective only after written notice thereof, signed on behalf of the
party for which it is given by a duly authorized officer, shall have been given
to the other. If this Agreement is terminated in accordance with this Section 9,
then the Merger shall be abandoned without further action by the Company,
Purchaser and Newco.
9.3 Liability Upon Termination. In the event of termination or abandonment
of the Merger pursuant to this Section 9, no party hereto shall have any
liability or further obligation to any other party hereto except that:
(a) a party that is in material breach of its representations,
warranties or covenants hereunder shall be liable for damages incurred by the
other parties hereto to the extent that such damages are proximately caused by
such breach, and if any legal action is instituted to enforce or interpret the
terms of this Agreement the prevailing party in such action shall be entitled,
in addition to any other relief to such the party is entitled, to reimbursement
of its actual attorneys fees;
(b) in the event that (i) this Agreement is abandoned by the Company
or terminated by the Company pursuant to Section 9.1(e), or (ii) this Agreement
is terminated or abandoned by the Purchaser pursuant to Section 9.1(c) or (d),
then the Company shall within five business days pay to Purchaser by wire
transfer in immediately available funds a termination fee of $5,000,000. Upon
payment of such termination fee to Purchaser, the Company shall have no further
obligation or liability to the Purchaser, Newco or Fauth under or related to
this Agreement, provided that the provisions of Sections 3.8 and 5.3 hereof
related to confidentiality shall survive and remain in force; and
(c) in the event that the Merger is not consummated due to the
Purchaser and Newco not obtaining financing for the Common Payment, then this
Agreement shall terminate and Purchaser, Newco and Fauth shall be jointly and
severally obligated to pay to the Company a termination fee of $5,000,000. The
payment of such fee in the circumstances provided in the preceding sentence
shall be the sole obligation of Purchaser, Newco and Fauth relating to failure
to obtain such financing, and upon payment of such amount Purchaser, Newco and
Fauth shall have no further obligation or liability to the Company under or
related to this Agreement for failure to obtain such financing, provided that
the provisions of Sections 3.8 and 5.3 hereof concerning confidentiality shall
survive such termination and remain in force.
A-33
<PAGE>
9.4 Effect of Termination. All obligations of the parties hereunder shall
cease upon any termination pursuant to Section 9.1, provided, however, that (a)
the provisions of this Section 9 (Termination), Section 3.8 (Confidentiality),
Section 5.3 (Confidentiality), the last sentence of Section 3.4 (Exclusivity)
and Section 10.2 (Fees and Expenses) hereof shall survive any termination of
this Agreement.
9.5 Amendment. This Agreement may be amended by the parties hereto by
action taken or authorized by their respective Boards of Directors at any time
before or after Stockholder Approval, but after Stockholder Approval no
amendment shall be made without the further approval of the Stockholders of the
Company which reduces the consideration payable to the Stockholders hereunder,
changes the form or timing of such consideration or changes any other terms and
conditions of this Agreement if the changes, alone or in the aggregate, will
materially adversely affect the Stockholders of the Company.
This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.
9.6 Waiver. The Company may extend the time for the performance of any of
the obligations or other acts of Purchaser or Newco hereunder, waive any
inaccuracies in the representations and warranties of Purchaser or Newco
contained herein or in any document delivered pursuant hereto, or waive
compliance by Purchaser with any of the agreements or conditions contained
herein, but no such action may be taken without the further approval of the
Stockholders of the Company which reduces the consideration payable to the
Stockholders hereunder, changes the form or timing of such consideration or
changes any other terms and conditions of this Agreement if the changes, alone
or in the aggregate, would materially adversely affect the Stockholders of the
Company. Any such extension or waiver shall be valid if set forth in an
instrument in writing signed by the Company. Purchaser may extend, on behalf of
itself and Newco, the time for the performance of any of the obligations or
other acts of the Company hereunder, waive any inaccuracies in the
representations and warranties of the Company contained herein or in any
document delivered pursuant hereto, or waive compliance by the Company with any
of the agreements or conditions contained herein. Any such extension or waiver
shall be valid if set forth in an instrument in writing signed by Purchaser.
SECTION 10. MISCELLANEOUS.
10.1 Non-Survival of Representations, Warranties and Agreements. None of
the representations, warranties, covenants and other agreements in this
Agreement or in any instrument delivered pursuant to this Agreement, including
any rights raising out of any breach of such representations, warranties,
covenants and other agreements, shall survive the Effective Time of the Merger,
except only for those covenants and agreements contained herein and therein that
by their terms apply or are to be performed in whole or in part after the
Effective Time of the Merger.
A-34
<PAGE>
10.2 Fees and Expenses. Each of the parties will bear its own expenses in
connection with the negotiation and the consummation of the transactions
contemplated by this Agreement, it being understood that if the Merger is
consummated as provided herein Purchaser and the Company will be responsible for
the expenses of the Company.
10.3 Governing Law. This Agreement shall be construed under and governed
by the internal laws of the State of Minnesota without regard to its conflict of
laws provisions.
10.4 Notices. Any notice, request, demand or other communication required
or permitted hereunder shall be in writing and shall be deemed to have been
given if delivered or sent by facsimile transmission, upon receipt, or if sent
by registered or certified mail, upon the sooner of the date on which receipt is
acknowledged or the expiration of three days after deposit in United States post
office facilities properly addressed with postage prepaid. All notices to a
party will be sent to the addresses set forth below or to such other address or
person as such party may designate by notice to each other party hereunder:
TO PURCHASER: JJF Group, Inc.
333 South 7th Street, Suite 3100
Minneapolis, Minnesota 55402
Attn: John J. Fauth
Facsimile: (612) 673-6703
With a copy to: Lindquist & Vennum P.L.L.P
4200 IDS Center
Minneapolis, Minnesota 55402
Attn: Richard D. McNeil
Facsimile: (612) 371-3211
TO COMPANY: TSI Incorporated (for mailing)
500 Cardigan Road
P.O. Box 64394
St. Paul, MN 55164
500 Cardigan Road
Shoreview, MN 55126
(for deliveries and courier services)
Attn: President, Facsimile: (651) 490-2748
With a copy to: John E. Brower, Esq.
Gray, Plant, Mooty, Mooty & Bennett
3400 City Center
33 South Sixth Street
Minneapolis, MN 55402-3796
Facsimile: (612) 333-0066
A-35
<PAGE>
Any notice given hereunder may be given on behalf of any party by his counsel or
other authorized representatives.
10.5 Entire Agreement. This Agreement, including the Disclosure Letter,
and the other writings specifically identified herein or contemplated hereby, is
complete, reflects the entire agreement of the parties with respect to its
subject matter, and supersedes all previous written or oral negotiations,
commitments and writings, between the parties hereto in respect of the
transactions contemplated herein.
10.6 Assignability; Binding Effect; No Third Party Beneficiaries. This
Agreement shall only be assignable by Purchaser to a corporation or partnership
controlling, controlled by or under common control with Purchaser upon written
notice to the Company, and such assignment shall not relieve Purchaser of any
liability hereunder. This Agreement may not be assigned by the Company without
the prior written consent of Purchaser. This Agreement shall be binding upon and
enforceable by, and shall inure to the benefit of, the parties hereto and their
respective successors and permitted assigns. Nothing in this Agreement, express
or implied, is intended to or shall confer upon any third party any right or
benefit.
10.7 Captions and Gender. The captions in this Agreement are for
convenience of reference only and shall not affect the construction or
interpretation of any term or provision hereof. The use in this Agreement of the
masculine pronoun in reference to a party hereto shall be deemed to include the
feminine or neuter, as the context may require.
10.8 Execution in Counterparts. For the convenience of the parties and to
facilitate execution, this Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same document.
10.9 Submission to Jurisdiction. Each of Purchaser, Newco and the Company
irrevocably agree that any legal action or proceeding with respect to this
Agreement or for recognition and enforcement of any judgment in respect hereof
brought by the other party hereto or its successors or assigns may be brought
and determined in the courts of the State of Minnesota and each of Purchaser,
Newco and the Company hereby irrevocably submits with regard to any such action
or proceeding for itself and in respect to its property, generally and
unconditionally to the nonexclusive jurisdiction of the aforesaid courts.
10.10 Personal Liability; Time of the Essence. This Agreement shall not
create or be deemed to create or permit any personal liability or obligation on
the part of any direct or indirect stockholder of the Company, Newco or
Purchaser, or any officer, director, employee, agent, representative or investor
of any party hereto; provided, however, that Fauth guarantees that Purchaser and
Newco will perform their respective obligations under this Agreement in all
material respects. The parties agree that time is of
A-36
<PAGE>
the essence with regard to all dates and time periods in this Agreement and the
performance of obligations under this Agreement.
10.11 Definitions. As used in this Agreement the following terms shall
have the meaning set forth below, and where said meaning, said term shall be
capitalized:
(a) "Benefit Plan" means any employee benefit plan, program,
arrangement and contract of the Company and its Subsidiaries, including without
limitation, any "employee benefit plan" as defined in Section 3(3) of ERISA and
any stock purchase, stock option, severance, employment, change-in-control,
fringe benefit, bonus, incentive, deferred compensation, and all other employee
benefit plans, agreements or arrangements of the Company and its Subsidiaries.
(b) "Blue Sky Laws" shall mean state securities laws.
(c) "Business Day" means any day other than a day on which there is
no trading on Nasdaq.
(d) "ERISA" means the Employee Retirement Income Securities Act of
1974, as amended.
(e) "Exchange Act" means the Securities Exchange Act or 1934, as
amended.
(f) "GAAP" means United States generally accepted accounting
principles as in effect from time to time.
(g) "Governmental Entity" shall mean any court or tribunal or
administrative governmental or regulatory body, agency or authority.
(h) "HSR Act" shall mean the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
(i) "Material Adverse Effect" means, with respect to any entity, an
effect, individually or in the aggregate, materially adverse to the business,
financial condition or results of operations of such entity and the other
members of its corporate group (which is the Company Group in the case of the
Company and its Subsidiaries), taken as a whole.
(j) "SEC" means the Securities and Exchange Commission.
(k) "Securities Act" means the Securities Act or 1933, as amended.
A-37
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed as of the date set forth above by their duly authorized
representatives.
COMPANY: PURCHASER:
TSI INCORPORATED JJF GROUP, INC.
By /S/ James E. Doubles By /S/ John J. Fauth
-------------------------------- -------------------------------------
Name: James E. Doubles Name:
Title: Chairman, President & C.E.O. Title:
FAUTH: NEWCO:
JJF ACQUISITION, INC.
/S/ John J. Fauth By /S/ John J. Fauth
- ----------------------------------- -------------------------------------
JOHN J. FAUTH Name:
Title:
A-38
<PAGE>
ANNEX B
January 7, 2000
The Board of Directors
TSI Incorporated
500 Cardigan Road
Shoreview, MN 55126
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders (collectively the "Stockholders," other than Fauth or
Newco as herein defined) of the outstanding shares of common stock, par value of
$0.10 per share (the "Common Stock"), of TSI Incorporated (the Company") of the
$15.25 per share in cash (the "Merger Consideration") proposed to be received by
the Stockholders pursuant to the Agreement and Plan of Merger draft dated as of
January 7, 2000 (the "Merger Agreement") by and among JJF Group, Inc.,
("Purchaser"), JJF Acquisition, Inc., a wholly owned subsidiary of Purchaser
("Newco"), John J. Fauth, ("Fauth") and the Company. Pursuant to the terms of
and subject to the conditions set forth in the Merger Agreement, Newco will be
merged with and into the Company, which will be the surviving corporation (the
"Merger") and each share of Common Stock of the Company will be converted into
the right to receive the Merger Consideration upon consummation of the Merger.
In connection with our review of the proposed Merger and the preparation
of our opinion herein, we have examined: (a) the draft Merger Agreement; (b)
audited historical financial statements of the Company for the three years ended
March 31, 1999, 1998 and 1997 and unaudited financial statements of the Company
for the seven months ended October 31, 1999 and for the quarters ended September
30, 1999 and June 30, 1999; (c) certain internal business, operating and
financial information and forecasts of the Company (the "Forecasts"), prepared
by the management of the Company; (d) a Company prepared analysis of the pro
forma effects of the Environmental Systems Corporation acquisition, effective
June 1, 1999 and the divestiture of the Company's wholly-owned subsidiary,
Handar, effective October 1, 1999; (e) information regarding publicly available
financial terms of certain other business combinations we deemed relevant; (f)
the financial position and operating results of the Company compared with those
of certain other publicly traded companies we deemed relevant; (g) current and
historical market prices and trading volumes of the Common Stock of the Company;
(h) certain publicly available financial and stock market data relating to
selected public companies that we considered relevant to our inquiry; (i)
information regarding percentage premiums paid for public companies over trading
market prices prior to the announcement of an acquisition or merger transaction
of relevant size; and (j) certain other publicly available information on the
Company. We have also held discussions with members of the management of the
Company to discuss the foregoing, have considered other matters which we have
deemed relevant to our inquiry and have taken into account such accepted
financial and investment banking procedures and considerations as we have deemed
relevant or appropriate. In connection with our engagement, we: (a) approached
and held discussions with third parties to solicit proposals for the possible
acquisition of the Company; and (b) reviewed and presented to the Board of the
Company various strategic and financial alternatives available to the Company.
B-1
<PAGE>
TSI Incorporated January 7, 2000
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all the information examined
by or otherwise reviewed or discussed with us for purposes of this opinion
including without limitation the Forecasts and the pro forma effects of the
Environmental Systems Corporation acquisition, effective June 1, 1999 and the
divestiture of the Company's wholly-owned subsidiary, Handar, effective October,
1, 1999, as provided by management of the Company. We have not made or obtained
an independent valuation or appraisal of the assets, liabilities or solvency of
the Company. We have been advised by the management of the Company that the
Forecasts examined by us have been reasonably prepared on bases reflecting the
best currently available estimates and judgments of the management of the
Company. In that regard, we have assumed, with your consent that: (a) the
Forecasts will be achieved; (b) all material assets and liabilities (contingent
or otherwise) of the Company are as set forth in the Company's financial
statements or other information made available to us; and (c) the Merger will be
accounted for under the purchase method. We express no opinion with respect to
the Forecasts or the estimates and judgments on which they are based. Our
opinion herein is based upon economic, market, financial and other conditions
existing on, and other information disclosed to us as of, the date of this
letter. It should be understood that, although subsequent developments may
affect this opinion, we do not have any obligation to update, revise or reaffirm
this opinion. In rendering our opinion, we have relied as to all legal matters
on advice of counsel to the Company and have assumed that the Merger will be
consummated on the terms described in the draft Merger Agreement, without any
waiver of any material terms or conditions by the Company.
William Blair & Company has been engaged in the investment banking
business since 1935. We continually undertake the valuation of investment
securities in connection with public offerings, private placements, business
combinations, estate and gift tax valuations and similar transactions. We have
acted as the investment banker to the Company in connection with the Merger and
will receive a fee from the Company for our services, a significant portion of
which is contingent upon consummation of the Merger. In addition, the Company
has agreed to indemnify us against certain liabilities arising out of our
engagement.
Our investment banking services and our opinion were provided for the use
and benefit of the Board of Directors of the Company in connection with its
consideration of the transaction contemplated by the Merger Agreement. Our
opinion is limited to the fairness, from a financial point of view, to the
Stockholders of the Company of the Merger Consideration in connection with the
Merger, and we do not address the merits of the underlying decision by the
Company to engage in the Merger and this opinion does not constitute a
recommendation to any Stockholder as to how such Stockholder should vote on the
proposed Merger. It is understood that this letter may not be disclosed or
otherwise referred to without prior written consent, except that the opinion may
be included in its entirety in a proxy statement mailed to the Stockholders of
the Company and filed with the Securities and Exchange Commission with respect
to the Merger.
Based upon and subject to the foregoing, it is our opinion as investment
bankers that, as of the date hereof, the Merger Consideration to be received by
the Stockholders is fair, from a financial point of view, to such Stockholders.
Very truly yours,
/s/ William Blair & Company, L.L.C.
WILLIAM BLAIR & COMPANY, L.L.C.
B-2
<PAGE>
ANNEX C
Sections 302A.471 and 302A.473 of the Minnesota Business Corporation Act
302A.471. Rights of dissenting shareholders
Subdivision 1. Actions creating rights. A shareholder of a corporation may
dissent from, and obtain payment for the fair value of the shareholder's shares
in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely
affects the rights or preferences of the shares of the dissenting
shareholder in that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the
redemption of the shares, including a provision respecting a sinking
fund for the redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of
the shares to acquire shares, securities other than shares, or
rights to purchase shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a
matter, or to cumulate votes, except as the right may be excluded or
limited through the authorization or issuance of securities of an
existing or new class or series with similar or different voting
rights; except that an amendment to the articles of an issuing
public corporation that provides that section 302A.671 does not
apply to a control share acquisition does not give rise to the right
to obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or
substantially all of the property and assets of the corporation, but not
including a transaction permitted without shareholder approval in section
302A.661, subdivision 1, or a disposition in dissolution described in
section 302A.725, subdivision 2, or a disposition pursuant to an order of
a court, or a disposition for cash on terms requiring that all or
substantially all of the net proceeds of disposition be distributed to the
shareholders in accordance with their respective interests within one year
after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter
322B, to which the corporation is a party, except as provided in
subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter
322B, to which the corporation is a party as the corporation whose shares
will be acquired by
C-1
<PAGE>
the acquiring corporation, if the shares of the shareholder are entitled
to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote
with respect to which the articles, the bylaws, or a resolution approved
by the board directs that dissenting shareholders may obtain payment for
their shares.
Subd. 2. Beneficial owners.
(a) A shareholder shall not assert dissenters' rights as to less
than all of the shares registered in the name of the shareholder, unless
the shareholder dissents with respect to all the shares that are
beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on
whose behalf the shareholder dissents. In that event, the rights of the
dissenter shall be determined as if the shares as to which the shareholder
has dissented and the other shares were registered in the names of
different shareholders.
(b) The beneficial owner of shares who is not the shareholder may
assert dissenters' rights with respect to shares held on behalf of the
beneficial owner, and shall be treated as a dissenting shareholder under
the terms of this section and section 302A.473, if the beneficial owner
submits to the corporation at the time of or before the assertion of the
rights a written consent of the shareholder.
Subd. 3. Rights not to apply.
(a) Unless the articles, the bylaws, or a resolution approved by the
board otherwise provide, the right to obtain payment under this section
does not apply to a shareholder of the surviving corporation in a merger,
if the shares of the shareholder are not entitled to be voted on the
merger.
(b) If a date is fixed according to section 302A.445, subdivision 1,
for the determination of shareholders entitled to receive notice of and to
vote on an action described in subdivision 1, only shareholders as of the
date fixed, and beneficial owners as of the date fixed who hold through
shareholders, as provided in subdivision 2, may exercise dissenters'
rights.
Subd. 4. Other rights. The shareholders of a corporation who have a right
under this section to obtain payment for their shares do not have a right at law
or in equity to have a corporate action described in subdivision 1 set aside or
rescinded, except when the corporate action is fraudulent with regard to the
complaining shareholder or the corporation.
C-2
<PAGE>
302A.473. Procedures for asserting dissenters' rights
Subdivision 1. Definitions.
(a) For purposes of this section, the terms defined in this
subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action referred to in section 302A.471, subdivision 1
or the successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the
effective date of the corporate action referred to in section 302A.471,
subdivision 1, up to and including the date of payment, calculated at the
rate provided in section 549.09 for interest on verdicts and judgments.
Subd. 2. Notice of action. If a corporation calls a shareholder meeting at
which any action described in section 302A.471, subdivision 1 is to be voted
upon, the notice of the meeting shall inform each shareholder of the right to
dissent and shall include a copy of section 302A.471 and this section and a
brief description of the procedure to be followed under these sections.
Subd. 3. Notice of dissent. If the proposed action must be approved by the
shareholders, a shareholder who is entitled to dissent under section 302A.471
and who wishes to exercise dissenters' rights must file with the corporation
before the vote on the proposed action a written notice of intent to demand the
fair value of the shares owned by the shareholder and must not vote the shares
in favor of the proposed action.
Subd. 4. Notice of procedure; deposit of shares.
(a) After the proposed action has been approved by the board and, if
necessary, the shareholders, the corporation shall send to all
shareholders who have complied with subdivision 3 and to all shareholders
entitled to dissent if no shareholder vote was required, a notice that
contains:
(1) The address to which a demand for payment and certificates
of certificated shares must be sent in order to obtain payment and
the date by which they must be received;
(2) Any restrictions on transfer of uncertificated shares that
will apply after the demand for payment is received;
C-3
<PAGE>
(3) A form to be used to certify the date on which the
shareholder, or the beneficial owner on whose behalf the shareholder
dissents, acquired the shares or an interest in them and to demand
payment; and
(4) A copy of section 302A.471 and this section and a brief
description of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply
with any restrictions on transfer of uncertificated shares within 30 days
after the notice required by paragraph (a) was given, but the dissenter
retains all other rights of a shareholder until the proposed action takes
effect.
Subd. 5. Payment; return of shares.
(a) After the corporate action takes effect, or after the
corporation receives a valid demand for payment, whichever is later, the
corporation shall remit to each dissenting shareholder who has complied
with subdivisions 3 and 4 the amount the corporation estimates to be the
fair value of the shares, plus interest, accompanied by:
(1) The corporation's closing balance sheet and statement of
income for a fiscal year ending not more than 16 months before the
effective date of the corporate action, together with the latest
available interim financial statements;
(2) An estimate by the corporation of the fair value of the
shares and a brief description of the method used to reach the
estimate; and
(3) A copy of section 302A.471 and this section, and a brief
description of the procedure to be followed in demanding
supplemental payment.
(b) The corporation may withhold the remittance described in
paragraph (a) from a person who was not a shareholder on the date the
action dissented from was first announced to the public or who is
dissenting on behalf of a person who was not a beneficial owner on that
date. If the dissenter has complied with subdivisions 3 and 4, the
corporation shall forward to the dissenter the materials described in
paragraph (a), a statement of the reason for withholding the remittance,
and an offer to pay to the dissenter the amount listed in the materials if
the dissenter agrees to accept that amount in full satisfaction. The
dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the
deposit of certificates or the imposition of transfer restrictions on
uncertificated shares, it shall return all deposited certificates and
cancel all transfer restrictions. However, the
C-4
<PAGE>
corporation may again give notice under subdivision 4 and require deposit
or restrict transfer at a later time.
Subd. 6. Supplemental payment; demand. If a dissenter believes that the
amount remitted under subdivision 5 is less than the fair value of the shares
plus interest, the dissenter may give written notice to the corporation of the
dissenter's own estimate of the fair value of the shares, plus interest, within
30 days after the corporation mails the remittance under subdivision 5, and
demand payment of the difference. Otherwise, a dissenter is entitled only to the
amount remitted by the corporation.
Subd. 7. Petition; determination. If the corporation receives a demand
under subdivision 6, it shall, within 60 days after receiving the demand, either
pay to the dissenter the amount demanded or agreed to by the dissenter after
discussion with the corporation or file in court a petition requesting that the
court determine the fair value of the shares, plus interest. The petition shall
be filed in the county in which the registered office of the corporation is
located, except that a surviving foreign corporation that receives a demand
relating to the shares of a constituent domestic corporation shall file the
petition in the county in this state in which the last registered office of the
constituent corporation was located. The petition shall name as parties all
dissenters who have demanded payment under subdivision 6 and who have not
reached agreement with the corporation. The corporation shall, after filing the
petition, serve all parties with a summons and copy of the petition under the
rules of civil procedure. Nonresidents of this state may be served by registered
or certified mail or by publication as provided by law. Except as otherwise
provided, the rules of civil procedure apply to this proceeding. The
jurisdiction of the court is plenary and exclusive. The court may appoint
appraisers, with powers and authorities the court deems proper, to receive
evidence on and recommend the amount of the fair value of the shares. The court
shall determine whether the shareholder or shareholders in question have fully
complied with the requirements of this section, and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant, computed by any method or combination of methods that the court, in
its discretion, sees fit to use, whether or not used by the corporation or by a
dissenter. The fair value of the shares as determined by the court is binding on
all shareholders, wherever located. A dissenter is entitled to judgment in cash
for the amount by which the fair value of the shares as determined by the court,
plus interest, exceeds the amount, if any, remitted under subdivision 5, but
shall not be liable to the corporation for the amount, if any, by which the
amount, if any, remitted to the dissenter under subdivision 5 exceeds the fair
value of the shares as determined by the court, plus interest.
Subd. 8. Costs; fees; expenses.
(a) The court shall determine the costs and expenses of a proceeding
under subdivision 7, including the reasonable expenses and compensation of
any appraisers appointed by the court, and shall assess those costs and
expenses against the corporation, except that the court may assess part or
all of those costs and expenses against a dissenter whose action in
demanding payment under subdivision 6 is found to be arbitrary, vexatious,
or not in good faith.
C-5
<PAGE>
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and
expenses of any experts or attorneys as the court deems equitable. These
fees and expenses may also be assessed against a person who has acted
arbitrarily, vexatiously, or not in good faith in bringing the proceeding,
and may be awarded to a party injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters,
if any.
C-6
<PAGE>
TSI Incorporated
Special Meeting of Shareholders
TO VOTE: Mark, sign and date your proxy card and return it in the postage-paid
envelope.
PROXY
TSI INCORPORATED
Proxy Solicited by the Board of Directors for Special Meeting of Stockholders
May 3, 2000
The undersigned stockholder of TSI Incorporated (the "Company") appoints James
E. Doubles, Robert F. Gallagher, Laura J. Cochrane, and each of them, as
attorneys, agents and proxies of the undersigned with full power of substitution
in each of them, to vote in the name and on behalf of the undersigned at the
Special Meeting of Stockholders of the Company to be held on May 3, 2000 at 9:00
a.m. Central Daylight Time, at the Four Points Sheraton Hotel, 1330 Industrial
Boulevard, Minneapolis, Minnesota 55413, and until adjournments thereof, all of
the shares of common stock of the Company which the undersigned would be
entitled to vote if personally present, with the powers the undersigned would
possess if personally present.
To vote in accordance with the Board of Directors' recommendations, just sign
below; no boxes need to be checked. Unless marked otherwise, this proxy will be
voted for approval of the merger of JJF Acquisition, Inc. with and into the
Company and in the discretion of the proxy holder on all other matters.
THE BOARD RECOMMENDS A VOTE "FOR" PROPOSAL 1.
1. APPROVAL OF MERGER of JJF Acquisition, Inc. with and into the Company in
accordance with the Agreement and Plan of Merger dated January 10, 2000.
|_| FOR |_| AGAINST |_| ABSTAIN
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS DIRECTED. IF NO CHOICE IS
SPECIFIED, THIS PROXY WILL BE VOTED "FOR" ITEM 1.
|_| I PLAN TO ATTEND THE MEETING
Address change? Mark box |_| Indicate changes on label.
Dated:
--------------------------------------------------------
(Please insert date)
--------------------------------------------------------
(Signature)
--------------------------------------------------------
(Joint Owner's Signature)
Please sign exactly as your name appears on proxy. When
signing as attorney, guardian, executor, administrator
or trustee, please give title. If the signer is a
corporation, give the full corporate name and sign by a
duly authorized officer, showing the officer's title.
EACH joint owner is requested to sign.
PLEASE EXECUTE AND RETURN THIS PROXY PROMPTLY.
YOUR COOPERATION WILL BE APPRECIATED.
