Page F-8
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS FOR THE
FISCAL YEAR ENDED MARCH 31, 1998
10
Eleven-Year
Financial Data
ELEVEN-YEAR FINANCIAL SUMMARY(1)
(thousands of dollars unless otherwise indicated)
1998 1997 1996 1995 1994 1993 1992
OPERATIONS
NET SALES $81,012 $80,240 $69,233 $48,903 $43,979 $40,589 $40,293
GROSS PROFIT 45,085 44,971 38,491 28,566 25,301 22,877 22,880
% OF SALES 55.7 56.0 55.6 58.4 57.5 56.4 56.8
RESEARCH AND DEVELOPMENT 11,554 10,939 8,993 7,196 6,360 5,847 6,112
% OF SALES 14.3 13.6 13.0 14.7 14.5 14.4 15.2
SG & A 24,116 23,307 21,362 16,657 15,076 14,885 14,494
% OF SALES 29.8 29.0 30.9 34.1 34.3 36.7 36.0
OPERATING INCOME 9,415 10,725 8,136 4,714 3,864 2,145 2,275
% OF SALES 11.6 13.4 11.8 9.6 8.8 5.3 5.6
NET EARNINGS 6,826 7,213 5,482 3,432 3,199 2,344 1,830
% OF SALES 8.4 9.0 7.9 7.0 7.3 5.8 4.5
EARNINGS PER SHARE
BASIC .59 .64 .51 .33 .31 .23 .17
DILUTED .58 .62 .49 .32 .31 .22 .16
FINANCIAL POSITION
CURRENT RATIO 4.0 3.7 3.1 3.9 3.8 3.6 3.9
WORKING CAPITAL $31,243 $26,006 $18,498 $16,855 $15,783 $13,365 $14,615
TOTAL ASSETS 57,834 50,878 42,512 32,167 28,450 25,661 25,894
LONG-TERM DEBT 0 0 0 0 0 0 888
SHAREHOLDERS' EQUITY 47,443 41,320 33,598 26,342 22,839 20,335 19,918
SHAREHOLDERS' EQUITY PER SHARE 4.06 3.59 3.00 2.53 2.24 1.98 1.86
OTHER DATA
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT(2) $ 1,526 $ 2,293 $ 3,931 $ 3,124 $ 1,204 $ 1,138 $ 1,204
DEPRECIATION AND AMORTIZATION 2,192 2,096 1,739 1,282 1,274 1,143 1,161
BACKLOG OF ORDERS 22,408 25,112 30,007 11,364 12,514 6,109 8,393
RETURN ON AVERAGE SHAREHOLDERS' EQUITY (%) 15.4 19.3 18.3 14.0 14.8 11.7 9.4
RETURN ON AVERAGE TOTAL ASSETS (%) 12.6 15.4 15.0 11.3 12.2 9.4 7.0
1 Data are based on results from continuing operations where applicable.
Applicable earnings, stock and dividends declared per share data for all years
shown have been retroactively adjusted to reflect the two-for-one stock split
effective August 16, 1996 and the three-for-two stock splits effective August
17, 1994 and May 28, 1991.
2 In fiscal 1996 and 1995, a major plant expansion and remodeling project
accounted for $2.5 million and $1.7 million, respectively, as part of the
Additions to Property, Plant and Equipment.
11
Investor
Information
[WIDE TABLE CONTINUED FROM ABOVE]
1991 1990 1989 1988
OPERATIONS
NET SALES $39,660 $35,916 $33,733 $29,294
GROSS PROFIT 23,491 21,402 19,444 17,047
% OF SALES 59.2 59.6 57.6 58.2
RESEARCH AND DEVELOPMENT 5,538 4,535 4,461 4,813
% OF SALES 14.0 12.6 13.2 16.4
SG & A 14,167 13,548 12,068 10,308
% OF SALES 35.7 37.7 35.8 35.2
OPERATING INCOME 3,786 3,319 2,915 1,926
% OF SALES 9.5 9.2 8.6 6.6
NET EARNINGS 2,660 2,295 1,927 1,518
% OF SALES 6.7 6.4 5.7 5.2
EARNINGS PER SHARE
BASIC .25 .21 .17 .14
DILUTED .24 .20 .17 .14
FINANCIAL POSITION
CURRENT RATIO 3.2 3.4 3.4 3.7
WORKING CAPITAL $13,275 $12,461 $12,609 $10,969
TOTAL ASSETS 26,681 24,900 23,675 21,361
LONG-TERM DEBT 965 1,202 838 1,085
SHAREHOLDERS' EQUITY 18,943 17,800 16,073 14,562
SHAREHOLDERS' EQUITY PER SHARE 1.77 1.61 1.45 1.33
OTHER DATA
ADDITIONS TO PROPERTY, PLANT AND EQUIPMENT(2) $ 1,057 $ 1,439 $ 782 $ 871
DEPRECIATION AND AMORTIZATION 1,128 1,193 1,127 954
BACKLOG OF ORDERS 9,803 7,418 6,724 6,959
RETURN ON AVERAGE SHAREHOLDERS' EQUITY (%) 14.5 13.6 12.6 10.9
RETURN ON AVERAGE TOTAL ASSETS (%) 10.7 9.6 8.7 7.4
STOCK AND DIVIDEND DATA
TSI common stock is traded in the National Market System of the NASDAQ
over-the-counter market under the symbol TSII. Stock price quotations are
printed daily in the Wall Street Journal and other major newspapers. During the
fiscal year ended March 31, 1998, average trading volume of TSI common stock was
360,000 shares per month, based on NASDAQ records.
There were 11,409,858 shares of TSI common stock outstanding as of June 2,
1998 of which 18.9 percent were owned by officers and directors of TSI. There
were 689 shareholders of record on that date and an additional number of about
2,600 shareholders for whom security firms act as nominees.
The range of market prices as reported by the NASDAQ, dividends declared and
the trailing 12-month closing price/earnings ratio for each quarterly period are
shown in the table below. TSI has a policy of paying dividends quarterly in May,
August, November and February. Dividends have been paid each year since 1975. As
of June 2, 1998, the quarterly dividend rate was $.03 per share.
STOCK DATA
Trailing
Market Range Dividend 12-Month
Fiscal 1998 High Low Close Declared P/e RatiO
- -----------------------------------------------------------------------
Fourth Quarter $10 3/8 7 5/8 8 3/4 $ .030 15.1
Third Quarter 10 7/8 9 10 .030 18.2
Second Quarter 11 8 3/4 9 3/8 .025 15.6
First Quarter 10 3/8 8 3/4 9 1/2 .025 16.1
Trailing
Market Range Dividend 12-Month
Fiscal 1997 High Low Close Declared P/e Ratio
- -----------------------------------------------------------------------
Fourth Quarter $12 1/2 9 1/4 9 1/2 $ .025 15.3
Third Quarter 12 1/8 8 1/2 11 1/2 .025 17.2
Second Quarter 10 5/8 7 8 1/2 .020 13.1
First Quarter 11 3/4 8 1/8 9 1/2 .020 16.4
DIVIDENDS PER SHARE
(DOLLARS)
[BAR CHART]
1988 .023
1989 .025
1990 .034
1991 .042
1992 .054
1993 .054
1994 .054
1995 .060
1996 .070
1997 .090
1998 .110
12
Management's
Discussion
and Analysis
NET SALES
(MILLIONS OF DOLLARS)
[BAR CHART]
Safety, Comfort Productivity
and Health and Quality
of People Improvement
1994 44.0 37% 63%
1995 48.9 32% 68%
1996 69.2 34% 66%
1997 80.2 33% 67%
1998 81.0 36% 64%
INTERNATIONAL SALES
(PERCENT OF SALES)
[BAR CHART]
1994 31%
1995 31%
1996 36%
1997 38%
1998 33%
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
INTRODUCTION
The following discussion supplements the information presented in the
consolidated financial statements beginning on page 16. Additional data are
given in the Eleven-Year Financial Data table on pages 10 and 11.
NET SALES Net sales totaled $81,012,000 in fiscal 1998, an increase of 1 percent
from $80,240,000 in fiscal 1997, which was 15.9 percent above fiscal 1996 sales
of $69,233,000. The Net Sales graph on this page shows how sales have grown
under the Company's major market drivers over the past five years.
In fiscal 1998, sales of products for Safety, Comfort and Health of People
represented 64 percent of total sales compared with 67 percent of total sales in
fiscal 1997. In actual dollars, these sales declined 4 percent from fiscal 1997
to fiscal 1998. The decrease was due to:
* Lower PORTACOUNT(R) respirator and gas mask fit tester sales for military
applications.
* A slowdown in sales of meteorologic and hydrologic instruments for outdoor
monitoring due to delays in obtaining certain contracts.
* Continued reduction in R&D contracts supporting electrochemical sensor
development.
These declines were partially offset by increases in sales of analytical
instruments for diagnostics and research as well as indoor air quality monitors.
The increases from fiscal 1996 to fiscal 1997 included higher PORTACOUNT
fit tester sales for military applications, partially offset by decreased sales
of meteorologic and hydrologic instruments. In fiscal 1998, approximately $8.4
million in sales came from contracts with the U.S. Army for PORTACOUNT fit
testers for respirators and gas masks, down from $12.5 million in fiscal 1997
when the Company was shipping to both the U.S. and German Armies. In fiscal
1996, the Company shipped approximately $3.0 million of this product for
military use.
Sales of products for Productivity and Quality Improvement increased 11
percent, accounting for 36 percent of total sales compared with 33 percent in
fiscal 1997. Increased fiscal 1998 sales came from:
* LaserSpeed(R) speed and length instruments for the wire and cable industry.
* Diameter and flaw detection gauges for the wire and cable industry. These
products were obtained in the Target acquisition in July, 1997. See Note J on
page 23 for more information on this acquisition.
* Fluid mechanics instruments. These instruments had experienced a decline in
fiscal 1997.
These increases were partially offset by reduced revenue from sales of
instruments for testing and research and from contract-supported research by our
Aerometrics subsidiary. During fiscal 1998, the Company experienced significant
turnover at this subsidiary, affecting its ability to produce instruments and
complete contract-supported research.
For fiscal 1997, sales of Productivity and Quality Improvement products
were affected by the Aerometrics, Inc. and Zimmer GmbH acquisitions. Excluding
these acquisitions, sales of Productivity and Quality Improvement products
decreased 11 percent during fiscal 1997, mostly due to the lower sales of fluid
mechanics instruments.
Domestic net sales increased 8 percent, or $4.0 million, during fiscal
1998. The Company's international net sales decreased 11 percent to $27.1
million in fiscal 1998, which was 33 percent of consolidated net sales.
International sales were $30.3 million,
13
Management's
Discussion
and Analysis
GROSS PROFIT MARGIN
(PERCENT OF SALES)
[BAR CHART]
1994 57.5%
1995 58.4%
1996 55.6%
1997 56.0%
1998 55.7%
R&D EXPENDITURES
(PERCENT OF SALES)
[BAR CHART]
1994 14.5%
1995 14.7%
1996 13.0%
1997 13.6%
1998 14.3%
or 38 percent of sales, and $24.8 million, or 36 percent, in fiscal 1997 and
1996, respectively. Lower international sales during fiscal 1998 were due mainly
to:
* The completion of a German Army contract for PORTACOUNT fit testers at the
end of fiscal 1997.
* A decrease in business in the Pacific Rim region due to the weakening of
Asian currencies.
Sales to the Pacific Rim represented 10%, 12% and 14% of net sales in
fiscal years 1998, 1997 and 1996, respectively. It is uncertain what impact the
weakening of Asian currencies will have on fiscal 1999.
Sales to federal and state agencies, including defense, comprised 21
percent of the Company's net sales for fiscal 1998, compared with 22 and 21
percent for fiscal 1997 and 1996, respectively. Due to the Company's diverse
line of products, sales occur in a wide range of U.S. and state government
agencies and, except for specific contracts, the level of governmental sales
tends to be stable as a percentage of sales. The level of government contracts
in backlog at March 31, 1998 and March 31, 1997 were similar and, consequently,
the percentage of sales to government agencies in fiscal 1999 are expected to be
similar to fiscal 1998.
GROSS PROFIT Gross profit was $45,085,000 in fiscal 1998, or 55.7 percent of net
sales, compared with $44,971,000, or 56.0 percent of net sales, in fiscal 1997
and $38,491,000, or 55.6 percent, in fiscal 1996. Gross profit margins are
expected to be at a similar percentage of net sales in fiscal 1999.
OPERATING EXPENSES Research and product development expenses were 14.3 percent
of net sales in fiscal 1998, compared to 13.6 percent for fiscal 1997 and 13.0
percent in fiscal 1996. The Company's strong commitment to long-term growth
through research and product development has continued to generate new products
and enhance product lines in the Company's key market niches. This is expected
to result in sales growth in future years. For the past ten years, the Company's
research and product development expenses have ranged from approximately 12 to
15 percent of net sales. Fiscal 1999 research and development expenses are
expected to be in the lower end of this range.
Selling expenses were 22.4 percent of net sales in fiscal 1998, 21.7
percent in fiscal 1997, and 23.3 percent in fiscal 1996. Fiscal 1999 selling
expenses are expected to be in a similar range.
Administrative expenses were 7.4 percent of sales in fiscal 1998 and 1997,
compared to 7.6 percent in fiscal 1996. The Company expects administrative costs
to continue in a normal range of 7 to 9 percent for fiscal 1999.
OTHER INCOME Other income totaled $798,000 in fiscal 1998, compared with
$372,000 in fiscal 1997 and $298,000 in fiscal 1996. Other income was higher in
fiscal 1998 mainly due to higher investment income due to higher cash balances.
PROVISION FOR INCOME TAXES The provision for income taxes was $3,387,000, or
33 percent of pretax earnings in fiscal 1998. This compares to provisions of
$3,884,000, or 35 percent of pretax earnings, in fiscal 1997, and $2,952,000, or
35 percent of pretax earnings, in fiscal 1996. The fiscal 1999 effective tax
rate is expected to again be in the range of 33 to 35 percent of pretax
earnings, assuming no significant changes in the tax laws. See Note G on page 22
for additional information.
14
Management's
Discussion
and Analysis
SELLING & ADMINISTRATIVE
EXPENDITURES
(PERCENT OF SALES)
[BAR CHART]
1994 34.3%
1995 34.1%
1996 30.9%
1997 29.0%
1998 29.8%
OPERATING INCOME
(MILLIONS OF DOLLARS)
[BAR CHART]
1994 3.86%
1995 4.71%
1996 8.14%
1997 10.7%
1998 9.4%
NET EARNINGS Net earnings were $6,826,000, or $.58 per diluted share in fiscal
1998. This was a decrease of 5.4 percent from $7,213,000, or $.62 per diluted
share, in fiscal 1997, which was an increase of 31.6 percent from $5,482,000, or
$.49 per diluted share, in fiscal 1996.
YEAR 2000 DATE CONVERSION We have established processes for evaluating the risks
and costs associated with preparing our systems and applications for the year
2000. Most of the costs and expenses related to the conversion and testing
represent internal information technology resources that have been redeployed
from other projects and are expected to return to these projects upon
completion.
Based on assessments completed to date, and compliance plans in process,
the Company does not expect the year 2000 issue, including the costs of making
its critical systems and applications compliant, will have a material effect on
its business operations, consolidated financial condition, cash flows or results
of operations.
LIQUIDITY AND CAPITAL RESOURCES
CASH AND CASH EQUIVALENTS Cash and cash equivalents increased by $1,691,000
during fiscal 1998 to $9,386,000 at March 31, 1998. The major factor in the cash
increase was net earnings of $6.8 million. Other significant contributions from
operating activities were depreciation and amortization, partially offset by
increased receivables and higher inventories. Cash used for additions to
property plant and equipment was $1,526,000, and $732,000 was used for an
acquisition. Dividend payments increased by $260,000 to $1,275,000.
Net cash provided by operating activities totaled $5,080,000 in fiscal
1998, compared with $10,008,000 in fiscal 1997 and $596,000 in fiscal 1996. The
decrease in cash provided by operating activities in fiscal 1998 was primarily a
result of:
* Higher fourth quarter net sales resulting in increased receivables.
* Increased inventory due to the timing of purchases for new product
introductions and the addition of the diameter and flaw detection gauges for
the wire and cable industry obtained in the Target acquisition in July, 1997.
Significant decreases in cash provided by operating activities in fiscal
1996 came from increased receivables and inventories resulting from a higher
sales volume and the large increase in backlog of orders and purchases made to
fulfill longer-term contracts.
Management believes internally-generated funds and short-term borrowings on
existing credit lines will provide adequate resources to support operations
through fiscal 1999.
CURRENT ASSETS AND LIABILITIES Accounts receivable increased by $2,250,000 to
$16,508,000 at March 31, 1998. This increase in fiscal 1998 was the result of
higher net sales during the fourth quarter.
Inventories increased $2,214,000 to $15,516,000 at March 31, 1998 due to
the timing of purchases for new product introductions and inventory purchased
for diameter and flaw detection gauges acquired in the July, 1997 Target
acquisition.
Working capital rose $5,237,000 to $31,243,000 at March 31, 1998. The
current ratio was 4.0 compared to 3.7 at the end of fiscal 1997.
15
Management's
Discussion
and Analysis
CURRENT RATIO
[BAR CHART]
1994 3.8%
1995 3.9%
1996 3.1%
1997 3.7%
1998 4.0%
NET EARNINGS
(MILLIONS OF DOLLARS)
[BAR CHART]
1994 3.20%
1995 3.43%
1996 5.48%
1997 7.21%
1998 6.83%
The Company has two short-term lines of credit totaling $2,500,000 and had
no outstanding loans during fiscal 1998 or 1997. The Company had no long-term
debt at March 31, 1998 or 1997.
STOCK REPURCHASE As of March 31, 1998, the Company has authority to repurchase a
total of 1,360,000 shares under plans approved by its Board of Directors,
including a 1 million share authorization announced on March 31, 1998. The
Company repurchased 100,000 shares during the fiscal year ended March 31, 1998
and 275,000 in early April, 1998. No shares were repurchased during fiscal 1997.
The Company has no present plans to acquire all the authorized shares or to
repurchase shares at any prescribed rate over time.
IMPACT OF ACCOUNTING STANDARDS
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share. All prior periods presented have
been restated to reflect the provisions of this standard. In fiscal 1999, the
Company intends to adopt SFAS No. 130, Disclosures about Segments of the
Enterprise and Related Information, and SFAS No. 131, Reporting Comprehensive
Income. Both SFAS No.130 and No. 131 effect presentation of certain financial
information and are not expected to have a material impact.
FORWARD-LOOKING STATEMENTS
The Company believes that this report contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, that are subject
to certain risks and uncertainties.
Forward-looking statements represent the Company's expectations or beliefs
concerning future events, including the following: any statements regarding
future sales and gross profit percentages, any statements regarding the
continuation of historical trends, any statements regarding the sufficiency of
the Company's cash balances and cash generated from operating and financing
activities for the Company's future liquidity and capital resource needs, any
statements regarding the effect of regulatory changes, the success of
development and enhancement of the Company's products, the adequacy of the
Company's facilities, potential acquisitions, and any statements regarding the
future of the instrumentation industry and the various parts of the
instrumentation markets in which the Company conducts its business. The Company
cautions that any forward-looking statements made by the Company in this report
or in other announcements made by the Company are further qualified by important
factors that could cause actual results to differ materially from those in the
forward-looking statements, including, without limitations, the factors set
forth on Exhibit 99 to the Company's report on Form 10K for the fiscal year
ended March 31, 1998.
16
Financial Statements
CONSOLIDATED STATEMENTS OF EARNINGS
TSI Incorporated and Subsidiaries
YEAR ENDED MARCH 31 1998 1997 1996
- ------------------------------------------------------------- ------------- ------------- -------------
Net sales $ 81,012,384 $ 80,239,622 $ 69,233,244
Cost of products sold 35,927,534 35,268,412 30,741,891
- ------------------------------------------------------------- ------------- ------------- -------------
GROSS PROFIT 45,084,850 44,971,210 38,491,353
Operating expenses
Research and product development 11,553,734 10,939,276 8,992,519
Selling 18,147,723 17,394,017 16,134,498
Administrative 5,968,509 5,913,086 5,227,992
- ------------------------------------------------------------- ------------- ------------- -------------
35,669,966 34,246,379 30,355,009
- ------------------------------------------------------------- ------------- ------------- -------------
OPERATING INCOME 9,414,884 10,724,831 8,136,344
Other income -- Note C 798,094 372,417 297,696
- ------------------------------------------------------------- ------------- ------------- -------------
EARNINGS BEFORE INCOME TAXES 10,212,978 11,097,248 8,434,040
Provision for income taxes -- Note G 3,387,000 3,884,000 2,952,000
- ------------------------------------------------------------- ------------- ------------- -------------
NET EARNINGS $ 6,825,978 $ 7,213,248 $ 5,482,040
============= ============= =============
BASIC EARNINGS PER COMMON SHARE $.59 $.64 $.51
- ------------------------------------------------------------- ============= ============= =============
DILUTED EARNINGS PER COMMON SHARE $.58 $.62 $.49
- ------------------------------------------------------------- ============= ============= =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 11,598,580 11,279,447 10,716,830
Dilutive effect of employee stock options and purchase awards 271,350 429,086 458,460
------------- ------------- -------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING AND DILUTIVE
SHARES 11,869,930 11,708,533 11,175,290
============= ============= =============
See notes to consolidated financial statements.
QUARTERLY FINANCIAL INFORMATION
TSI Incorporated and Subsidiaries (Unaudited)
Following is a summary of unaudited quarterly results. Due to the nature of
the weighted average number of shares calculation, the sum of basic earnings per
common share for the four fiscal 1998 quarters does not equal the fiscal 1998
total basic earnings per common share amount (see Note D).
FISCAL 1998 1ST QTR 2ND QTR 3RD QTR 4TH QTR TOTAL
- -------------------------------------------------------------------------------------------------------------
NET SALES $19,290,167 $20,685,942 $19,739,440 $21,296,835 $81,012,384
GROSS PROFIT 10,602,617 11,670,072 11,373,891 11,438,270 45,084,850
NET EARNINGS 1,482,254 1,770,616 1,678,017 1,895,091 6,825,978
BASIC EARNINGS PER COMMON SHARE .13 .15 .14 .16 .59
DILUTED EARNINGS PER COMMON SHARE .13 .15 .14 .16 .58
Fiscal 1997
- -------------------------------------------------------------------------------------------------------------
Net sales $19,497,118 $19,314,726 $22,329,666 $19,098,112 $80,239,622
Gross profit 10,983,529 10,840,404 12,403,540 10,743,737 44,971,210
Net earnings 1,872,946 1,609,300 2,193,098 1,537,904 7,213,248
Basic earnings per common share .17 .14 .19 .14 .64
Diluted earnings per common share .16 .14 .19 .13 .62
17
Financial Statements
CONSOLIDATED BALANCE SHEETS
TSI Incorporated and Subsidiaries
MARCH 31 1998 1997
- -------------------------------------------------------------------------------------------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 9,385,509 $ 7,694,998
Accounts receivable, less allowance of $280,000 and $275,000,
respectively 16,508,360 14,256,692
Prepaid expenses 223,713 310,276
Inventories
Finished products 2,883,469 2,908,537
Work-in-process 2,792,730 2,486,856
Materials and supplies 9,840,083 7,906,912
- -------------------------------------------------------------------------------------------- ------------ ------------
15,516,282 13,302,305
- -------------------------------------------------------------------------------------------- ------------ ------------
TOTAL CURRENT ASSETS 41,633,864 35,564,271
INTANGIBLES AND OTHER ASSETS
Goodwill, net of accumulated amortization of $1,151,000 and $917,000,
respectively 3,834,903 3,001,796
Note receivable 632,540 595,577
Deferred income taxes--Note G 456,169 498,020
Other assets 2,878,348 2,420,050
- -------------------------------------------------------------------------------------------- ------------ ------------
7,801,960 6,515,443
PROPERTY, PLANT AND EQUIPMENT
Land 128,503 128,503
Buildings 3,713,160 3,586,992
Construction in progress 51,341 183,229
Machinery and equipment 19,689,035 18,244,708
- -------------------------------------------------------------------------------------------- ------------ ------------
23,582,039 22,143,432
Less allowance for depreciation 15,183,541 13,344,806
- -------------------------------------------------------------------------------------------- ------------ ------------
8,398,498 8,798,626
- -------------------------------------------------------------------------------------------- ------------ ------------
TOTAL ASSETS $ 57,834,322 $ 50,878,340
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses -- Note H 4,924,480 4,963,795
Employee compensation 3,918,610 3,904,546
Taxes, other than income taxes 519,285 442,247
Income taxes payable 1,028,656 247,354
- -------------------------------------------------------------------------------------------- ------------ ------------
TOTAL CURRENT LIABILITIES 10,391,031 9,557,942
SHAREHOLDERS' EQUITY -- Notes D and E
Common shares, $.10 par value-authorized 30,000,000 shares, issued
and outstanding 1998--11,681,386 shares; 1997--11,495,728 shares 1,168,139 1,149,573
Additional paid-in capital 11,394,909 9,724,365
Retained earnings 35,164,722 30,400,007
Equity adjustment from translation (284,479) 46,453
- -------------------------------------------------------------------------------------------- ------------ ------------
TOTAL SHAREHOLDERS' EQUITY 47,443,291 41,320,398
Commitments and contingencies -- Note B
- -------------------------------------------------------------------------------------------- ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 57,834,322 $ 50,878,340
============ ============
See notes to consolidated financial statements.
18
Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
TSI Incorporated and Subsidiaries
YEAR ENDED MARCH 31 1998 1997 1996
- -------------------------------------------------------------------------- ------------ ------------ ------------
OPERATING ACTIVITIES
Net earnings $ 6,825,978 $ 7,213,248 $ 5,482,040
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Provision for losses on accounts receivable 4,334 12,994 29,845
Depreciation and amortization of property, plant and equipment 1,958,454 1,910,831 1,572,218
Amortization of goodwill 233,264 184,832 166,885
Loss on sale of assets (16,407) 34,393 12,603
Provision for deferred income taxes 78,021 223,000 (313,000)
Income tax benefit from stock plans 147,396 220,000 254,000
Changes in operating assets and liabilities:
Accounts receivable (1,912,535) 1,607,998 (5,234,609)
Prepaid expenses 148,918 207 64,572
Inventories (1,528,794) (2,093,263) (2,569,069)
Other assets (142,277) 252,153 461,571
Accounts payable and accrued expenses (953,628) 29,364 266,133
Employee compensation (249,190) 714,831 247,366
Taxes, other than income taxes 77,038 111,827 33,270
Income taxes payable 781,302 (378,785) 446,141
Foreign currency translation loss (371,667) (35,726) (324,024)
- -------------------------------------------------------------------------- ------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,080,207 10,007,904 595,942
- -------------------------------------------------------------------------- ------------ ------------ ------------
INVESTING ACTIVITIES
Additions to property, plant and equipment (1,525,698) (2,293,445) (3,931,011)
Proceeds from disposal of property, plant and equipment 26,174 903 15,196
Purchase of companies, net of cash acquired (732,244) (1,081,764) (5,817,721)
- -------------------------------------------------------------------------- ------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (2,231,768) (3,374,306) (9,733,536)
- -------------------------------------------------------------------------- ------------ ------------ ------------
FINANCING ACTIVITIES
Payment on short-term notes -- -- (343,326)
Proceeds from stock options exercised 467,910 626,318 863,075
Proceeds from employee stock purchases 455,058 667,691 421,394
Dividends paid (1,275,446) (1,015,277) (699,057)
Purchases of common stock (887,056) -- --
- -------------------------------------------------------------------------- ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,239,534) 278,732 242,086
- -------------------------------------------------------------------------- ------------ ------------ ------------
Effect of exchange rate changes on cash and cash equivalents 81,606 94,613 32,011
- -------------------------------------------------------------------------- ------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,690,511 7,006,943 (8,863,497)
- -------------------------------------------------------------------------- ------------ ------------ ------------
Cash and cash equivalents at beginning of year 7,694,998 688,055 9,551,552
- -------------------------------------------------------------------------- ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9,385,509 $ 7,694,998 $ 688,055
============ ============ ============
See notes to consolidated financial statements.
19
Financial Statements
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
TSI Incorporated and Subsidiaries
Equity
Common Shares Additional Adjustment
---------------------- Paid-In Retained from
Shares Amount Capital Earnings Translation
------ ------ ------- -------- -----------
Balance March 31, 1995 5,212,058 $ 521,206 $ 6,002,771 $19,471,422 $ 346,358
Net earnings for year ended March 31, 1996 5,482,040
Cash dividends paid ($.07 per share) (699,057)
Current year translation adjustment (310,373)
Employee stock purchases 56,639 5,664 415,730
Stock options exercised 177,230 17,723 872,728
Income tax benefit from stock plans 254,000
Stock issued in purchase 146,789 14,679 1,258,275
Shares exchanged upon option exercise (1,888) (189) (2,658) (52,369)
---------- ---------- ----------- ----------- -----------
Balance March 31, 1996 5,590,828 599,083 8,800,846 24,202,036 35,985
Net earnings for year ended March 31, 1997 7,213,248
Cash dividends paid ($.09 per share) (1,015,277)
Current year translation adjustment 10,468
Employee stock purchases 92,414 9,241 658,450
Stock options exercised 186,717 18,672 607,646
Income tax benefit from stock plans 220,000
Stock split adjustment--Note D 5,625,769 562,577 (562,577)
---------- ---------- ----------- ----------- -----------
Balance March 31, 1997 11,495,728 1,149,573 9,724,365 30,400,007 46,453
Net earnings for year ended March 31, 1998 6,825,978
Cash dividends paid ($.11 per share) (1,275,446)
Current year translation adjustment (330,932)
Employee stock purchases 63,467 6,347 448,711
Stock options exercised 126,653 12,665 455,245
Income tax benefit from stock plans 147,396
Stock issued in purchase 95,438 9,544 710,441
Shares repurchased and retired (99,900) (9,990) (91,249) (785,817)
---------- ---------- ----------- ----------- -----------
BALANCE MARCH 31, 1998 11,681,386 $1,168,139 $11,394,909 $35,164,722 $ (284,479)
========== ========== =========== =========== ===========
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TSI Incorporated and Subsidiaries March 31, 1998
NOTE A - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS: The Company is a worldwide supplier of innovative
sensors and instrumentation systems. The Company's instruments serve customers
in industry and research--with applications ranging from monitoring air quality
to controlling industrial processes. The Company's products address two major,
growing market needs:
* Safety, Comfort and Health of People
* Productivity and Quality Improvement.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of TSI and its wholly-owned subsidiaries after elimination of
significant intercompany accounts and transactions.
CASH EQUIVALENTS: Cash equivalents of $5,561,000 at March 31, 1998 consist of
short-term highly liquid investments with maturity periods of less than three
months from date of purchase. There were cash equivalents of $4,003,000 at March
31, 1997.
INVENTORIES: Inventories are valued at cost which is not in excess of market.
Inventories valued under the last-in, first-out (LIFO) method were $9,433,000
and $7,986,000 at March 31, 1998 and 1997, respectively. Inventories valued
under the first-in, first-out (FIFO) method were $6,084,000 and 5,316,000 at
March 31, 1998 and 1997, respectively. If the first-in, first-out (FIFO) method
of inventory valuation had been used by the Company, inventories would have been
approximately $ 935,000 and 1,276,000 higher than reported at March 31, 1998 and
1997, respectively.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is carried at
cost. Expenditures for improvements that add materially to the productive
capacity or extend the useful life of an asset are capitalized. Depreciation
includes amortization of capitalized lease obligations on the Company's
manufacturing plant and related components of equipment and fixtures, provided
on the straight line method for book purposes. Depreciation on other machinery
and equipment is provided using accelerated methods for the first half of the
asset life and the straight line method for the second half of the asset life.
Asset lives are generally as follows:
Buildings and improvements 7-40 years
Machinery and equipment 5-10 years
The Company completed an addition to its building in Shoreview, Minnesota
during fiscal 1996. A portion of the cost is funded through Tax Increment
Financing (TIF). At March 31, 1998 and 1997, the estimated
20
NOTES
NOTE A (CONTINUED)
portion to be funded through the TIF has been reflected as a note receivable
offsetting the project costs.
INTANGIBLE ASSETS: Goodwill represents the excess of the purchase price over
the fair value of net assets acquired and is amortized on a straight-line basis
over periods up to 40 years. Goodwill balances are reviewed to determine that
the unamortized balances are recoverable. In evaluating the recoverability, the
following factors, among others, are considered: a significant change in the
factors used to determine the amortization period, an adverse change in legal
factors or in the business climate, a transition to a new product or service
strategy, a significant change in the customer base, and a realization of failed
marketing efforts. If the unamortized balance is believed to be unrecoverable,
the Company recognizes an impairment charge necessary to reduce the unamortized
balance to the amount of discounted cash flows expected to be generated over the
remaining life. If the acquired entity has been integrated into other operations
and cash flows cannot be separately measured, the Company recognizes an
impairment charge necessary to reduce the unamortized balance to its estimated
fair value. The amount of impairment is charged to earnings in the current
period.
REVENUE RECOGNITION: The Company recognizes sales when the product is shipped
and revenue on research and development contracts using the
percentage-of-completion method of accounting.
STOCK-BASED COMPENSATION: The Company accounts for stock-based compensation
under Accounting Principles Board Opinion No. 25 (APB No. 25), ACCOUNTING FOR
STOCKS ISSUED TO EMPLOYEES. Accordingly, no compensation cost had been
recognized for its stock-based compensation plans. The Company has adopted the
disclosure requirements under Statement of Financial Accounting Standards (SFAS)
No. 123, ACCOUNTING AND DISCLOSURE OF STOCK-BASED COMPENSATION.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
INCOME TAXES: The provision for income taxes is based on earnings before
income taxes reported for financial statement purposes. Included in the
provision are deferred taxes which result from transactions that are reported in
different periods for financial statement and income tax purposes. The Company
adopted the asset and liability method for computing its deferred taxes as
specified by SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Under the asset and
liability method, deferred taxes are based on the difference between the
financial statement and tax basis of assets and liabilities and the enacted tax
rates that will be in effect when these differences reverse.
EARNINGS PER COMMON SHARE: The Company calculates earnings per share in
accordance with SFAS No. 128, EARNINGS PER SHARE. Basic earnings per common
share is computed using the weighted average number of common shares outstanding
during each period. Diluted earnings per common share is computed using the
weighted average number of common shares and dilutive effect of shares issuable
under terms of the stock option or the employee stock purchase plans.
FOREIGN CURRENCY: Foreign currency assets and liabilities are translated into
U.S. dollars using the exchange rates in effect at the balance sheet date.
Results of operations are generally translated using the average exchange rates
in effect throughout the period. The effects of exchange rate fluctuations on
translation of assets and liabilities are reported as an equity adjustment from
translation in shareholders' equity.
Foreign currency transaction gains (losses) are included in other income as
set forth in Note C.
The Company hedges foreign receivables and backlog against fluctuations in
currency values. Hedge transactions involve the purchase of forward and option
contracts for the delivery of foreign currencies in exchange for U.S. dollars at
a future date which corresponds to the collection of the related receivables.
Gains and losses on forward and option contracts and the related foreign
receivables are recognized simultaneously in other income. Market value changes
of forward and option contracts hedging backlog are deferred until the sale
transaction is complete.
At March 31, 1998, the Company had outstanding forward contracts of $785,000
and had no outstanding option contracts. These contracts have maturity dates of
less than a year. Deferred market value changes on forward contracts hedging
backlog were not significant at March 31, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS: The Company intends to adopt SFAS No. 130,
REPORTING COMPREHENSIVE INCOME, in the first quarter of fiscal 1999. SFAS No.
130 establishes the standards for reporting and displaying comprehensive income
as part of a full set of financial statements. This statement requires that all
elements of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. Since this
standard applies only to the presentation of comprehensive income, it will not
have any impact on TSI's results of operations, financial position, or cash
flows.
Beginning with the fiscal 1999 annual report, the Company will adopt SFASNo.
131, DISCLOSURES ABOUT SEGMENTS OF THE ENTERPRISE AND RELATED INFORMATION. SFAS
No. 131 requires segments to be determined based on how management measures
performance and makes decisions about allocating resources.
NOTE B - LEASE COMMITMENTS AND LINES OF CREDIT
The Company leases office, plant facilities, and equipment under operating
leases ranging from two to ten years.
Rental expense for all operating leases was $778,000, $769,000, and $686,000
in 1998, 1997, and 1996, respectively. Future minimum lease obligations each
fiscal year under noncancelable operating leases are $738,000 in 1999, $470,000
in 2000, $381,000 in 2001, $310,000 in 2002, $128,000 in 2003 and $239,000 in
subsequent years.
The Company has unsecured short-term lines of credit totaling $2,500,000
available under two agreements. The interest rate on the $2,000,000 line is the
lesser of either the reference rate or 1.15% over the Federal Funds rate. The
rate on the $500,000 line of credit is the lesser of the reference rate or 1.50%
over the Federal Funds rate. As of March 31, 1998, neither credit line had an
outstanding balance. However, the total available funds were reduced by
outstanding standby letters of credit totaling $36,000 issued against these two
facilities. Additionally, the Company had contingent liabilities of $1,731,000
in the form of performance and foreign customs guarantees.
NOTE C - OTHER INCOME
YEAR ENDED MARCH 31 1998 1997 1996
- ------------------------------------------- ---------- ---------- ----------
Interest income $ 412,000 $ 221,000 $ 111,000
Interest expense (15,000) (15,000) (24,000)
Foreign currency transaction gains (losses) 123,000 (40,000) 42,000
Other 278,000 206,000 169,000
- ------------------------------------------ ---------- ---------- ----------
$ 798,000 $ 372,000 $ 298,000
========== ========== ==========
21
NOTES
NOTE D - SHAREHOLDERS' EQUITY
On July 18, 1996, the Board of Directors declared a two-for-one stock split
in the form of a stock dividend paid to shareholders. For each share issued in
connection with the stock split, an amount equal to the par value of $.10 was
transferred to the common shares amount from additional paid-in capital in
fiscal year 1997. This transfer is reflected in the Consolidated Statements of
Shareholders' Equity. All other references in the financial statements and
related notes to per share information, stock options, weighted average number
of shares, as well as the number of common shares outstanding for all prior
years presented, have been retroactively adjusted to reflect the stock split.
NOTE E - STOCK OPTIONS AND STOCK PURCHASE PLAN
The Company uses APB No. 25 to account for its stock option plans.
Accordingly, no compensation cost has been recognized for its stock option plan
and its stock purchase plan. Had compensation cost for the Company's stock-based
compensation plans been determined in accordance with SFAS No. 123, the
Company's pro forma net earnings and earnings per common share would have been
as follows:
1998 1997
----------- -----------
Net earnings
As reported $ 6,826,000 $ 7,213,000
Pro forma $ 6,387,000 $ 7,042,000
Earnings per common share
As reported using basic shares $.59 $.64
Pro forma using basic shares $.55 $.62
As reported using dilutive shares $.58 $.62
Pro-forma using dilutive shares $.54 $.60
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscals 1998, 1997, and 1996: dividend yield of
1.0 percent; expected volatility of 17 percent; risk-free rates of approximately
6.5 percent; and expected lives of one to five years.
Pro forma net earnings reflect only options granted in fiscals 1998, 1997,
and 1996. Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net earnings amount
because compensation cost is reflected over the option's vesting period and
compensation for op-tions granted prior to April 1, 1995, is not considered.
Stock options have been granted to employees, officers and directors under
incentive stock option plans adopted in 1982, 1988, and 1992. No new options
will be granted under the 1982 or 1988 plans. Under all plans, incentive stock
options are generally granted at prices not less than fair market value at date
of grant. Employee options granted under the 1982 and 1988 plans become
exercisable 40% after two years and increase 20% per year until exercisable in
full after five years. Options granted under the 1992 plan become exercisable
one-third after one year and increase one-third per year until exercisable in
full after three years. Management incentive options are immediately exercisable
in full. Stock options and shares reserved for grant are as follows:
1982 Plan 1988 Plan 1992 Plan
--------- --------- ---------
Shares Shares Shares Weighted Aver-
Available Shares Available Shares Available Shares age of Exercise
for Grant Granted for Grant Granted for Grant Granted Price of Shares
--------- ------- --------- ------- --------- ------- ---------------
Balance March 31, 1995 -- 62,850 -- 392,700 146,166 542,406 $3.02
Reserved 208,482
Granted (213,808) 213,808 3.30
Exercised (39,150) (244,700) (70,610) 2.51
Canceled (5,700) 17,500 (17,500) 4.01
- ----------------------- -------- -------- --------- -------- -------- --------
Balance March 31, 1996 -- 23,700 -- 142,300 158,340 668,104 4.28
Reserved 223,633
Granted (120,716) 120,716 9.41
Exercised (18,900) (64,620) (140,400) 2.89
Canceled (1,200) 14,088 (14,088) 5.19
- ----------------------- -------- -------- --------- -------- -------- --------
Balance March 31, 1997 -- 4,800 -- 76,480 275,345 634,332 5.55
Reserved 229,915
Granted (185,870) 185,870 9.39
Exercised (4,800) (42,980) (80,775) 3.79
Canceled 31,746 (31,746) 6.93
- ----------------------- -------- -------- --------- -------- -------- --------
Balance March 31, 1998 -- -- -- 33,500 351,136 707,681 6.75
======================= ========= ======== ========= ======== ======== ========
The following table summarizes information concerning outstanding and
exercisable options as of March 31, 1998:
Weighted Aver- Weighted Weighted
Range of Number age Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exerciseable Exercise Price
- --------------- ----------- ---------------- -------------- ------------ --------------
$1.39 to $3.50 95,136 1.54 $3.23 85,086 $3.19
$4.29 to $5.69 255,117 3.22 4.40 251,222 4.39
$8.00 to $8.88 220,410 5.41 8.58 106,720 8.41
$9.06 to $9.69 75,042 6.02 9.62 69,041 9.67
$10.00 to $10.25 95,476 5.89 10.07 50,108 10.14
------- -------
741,181 562,177
======= =======
On July 21, 1994, the Company adopted the Employee Stock Purchase Plan of
1994. This Plan authorized the issuance of a total of 600,000 shares over the
life of the Plan. Shares may be purchased at 85% of market value. As of March
31, 1998,330,841 shares remain reserved for grant and 0 shares are subscribed
but unissued under this plan. An aggregate of 1,422,936 shares are reserved for
issuance under stock option and Employee Stock Purchase Plans.
22
NOTES
NOTE F - PROFIT SHARING PLAN
The Company has trusteed profit sharing and 401(k) plans which cover
substantially all of its employees. The profit sharing plan calls for a minimum
contribution of 4% of credited compensation for all eligible participants so
long as sufficient profits are generated in that year. In addition, if average
return on assets exceeds 12%, an additional 15% of pretax profits above this
level are paid to eligible participants. The expense relating to these plans,
based on return on assets and credited compensation, was $1,712,000, $2,094,000
and $1,619,000 in 1998, 1997, and 1996, respectively.
NOTE G - INCOME TAXES
YEAR ENDED MARCH 31 1998 1997 1996
- ------------------------------------------------------------------------ ------------ ----------- ------------
Earnings Before Income Taxes:
Domestic $ 9,928,000 $ 10,374,000 $ 8,352,000
Foreign 285,000 723,000 82,000
- ------------------------------------------------------------------------ ------------ ----------- ------------
$ 10,213,000 $ 11,097,000 $ 8,434,000
Provision for Income Taxes: ============ ============ ============
Current:
U.S. $ 2,887,000 $ 3,209,000 $ 2,908,000
State 357,000 452,000 357,000
Foreign 65,000 -- --
Deferred:
U.S. and state 78,000 (50,000) (40,000)
Foreign -- 273,000 (273,000)
- ------------------------------------------------------------------------ ------------ ------------ ------------
$ 3,387,000 $ 3,884,000 $ 2,952,000
============ ============ ============
Income Taxes Paid (net of refunds received) $ 2,281,000 $ 3,716,000 $ 2,452,000
- ------------------------------------------------------------------------ ============ ============ ============
Reconciliation of the Statutory Federal Income Tax Rate to the Company's
Effective Tax Rate:
Statutory rate 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
State income tax, net of federal tax benefit 2.7 2.9 2.8
Foreign Sales Corporation tax exempt income (2.4) (3.3) (2.1)
Valuation allowance -- -- (2.7)
Research credit (1.3) (0.2) --
Other 0.2 1.6 3.0
- ------------------------------------------------------------------------ ------------ ------------ ------------
Effective Tax Rate 33.2% 35.0% 35.0%
============ ============ ============
In fiscal 1998, 1997, and 1996 there was a tax benefit of approximately
$147,000, $220,000, and $254,000, respectively, credited to share-holders'
equity associated with the exercise of stock options and dispositions of stock
purchased through the Employee Stock Purchase Plan.
The tax effects of temporary differences that give rise to significant
portions of the Company's deferred tax assets and (liabilities) as of March 31,
1998, and March 31, 1997, were as follows:
1998 1997
----------- ------------
Deferred Tax Assets:
Inventory $ 478,000 $ 367,000
Accounts receivable 68,000 58,000
Reserves for warranty expense 59,000 116,000
Federal tax credits 126,000 --
Payroll 271,000 357,000
Other 8,000 46,000
- --------------------------------------------------------- ----------- -----------
Total deferred tax assets $ 1,010,000 $ 944,000
----------- -----------
Deferred Tax Liabilities:
Property and equipment (441,000) (373,000)
Other (113,000) (73,000)
- --------------------------------------------------------- ----------- ----------
Total deferred tax liabilities $ (554,000) $ (446,000)
----------- ----------
Net Deferred Income Taxes $ 456,000 $ 498,000
=========== ===========
The Company has research credit carryforwards for federal income tax purposes
of approximately $126,000 which expire between the years 2006 and 2012.
Management believes the Company will generate sufficient taxable income in
future periods to realize all of the benefits of the Company's deferred tax
assets.
23
NOTES
NOTE H - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
YEAR ENDED MARCH 31 1998 1997
- ---------------------------------------------------- ------------ ------------
Trade accounts payable $ 2,570,000 $ 2,487,000
Deferred revenue 99,000 212,000
Commissions and royalties payable 1,186,000 851,000
Other accounts payable and accrued expenses 1,069,000 1,414,000
- ---------------------------------------------------- ------------ ------------
$ 4,924,000 $ 4,964,000
=========== ============
NOTE I - SEGMENT INFORMATION
YEAR ENDED MARCH 31 1998 1997 1996
- ---------------------------------------------------- ------------ ------------ ------------
Net Sales
Domestic operations
Unaffiliated domestic customers $ 53,958,000 $ 49,919,000 $ 44,480,000
Unaffiliated foreign customers 19,186,000 18,657,000 18,708,000
Intercompany 3,934,000 7,685,000 3,365,000
- ---------------------------------------------------- ------------ ------------ ------------
77,078,000 76,261,000 66,553,000
Foreign operations
Unaffiliated customers 7,868,000 11,664,000 6,045,000
Intercompany 76,000 29,000 455,000
- ---------------------------------------------------- ------------ ------------ ------------
7,944,000 11,693,000 6,500,000
Eliminations (4,010,000) (7,714,000) (3,820,000)
- ---------------------------------------------------- ------------ ------------ ------------
Net Sales $ 81,012,000 $ 80,240,000 $ 69,233,000
============ ============ ============
Earnings Before Income Taxes
Domestic operations $ 11,539,000 $ 11,405,000 $ 8,729,000
Foreign operations 298,000 725,000 82,000
Eliminations (1,624,000) (1,033,000) (377,000)
- ---------------------------------------------------- ------------ ------------ ------------
Earnings Before Income Taxes $ 10,213,000 $ 11,097,000 $ 8,434,000
============ ============ ============
Assets
Domestic operations $ 68,256,000 $ 58,831,000 $ 53,323,000
Foreign operations 4,098,000 3,630,000 4,689,000
Eliminations (14,520,000) (11,583,000) (15,500,000)
- ---------------------------------------------------- ------------ ------------ ------------
Total Assets $ 57,834,000 $ 50,878,000 $ 42,512,000
============ ============ ============
The Company's domestic operations export products to unaffiliated foreign
customers in many countries, including exports to the Pacific Basin which
represented approximately 11%, 12%, and 14% of net sales in 1998, 1997, and
1996, respectively. The Company's foreign operations are located and primarily
sell to unaffiliated customers in Western Europe. Intercompany sales are set at
the standard price to unaffiliated customers less a discount based upon
marketing effort.
Sales to educational, research and defense customers, which are heavily
reliant on U.S. government funding, accounted for approximately 28%, 27%, and
25% of net sales in 1998, 1997, and 1996, respectively. Sales directly to
federal and state agencies, including defense, during the same three years were
21%, 22%, and 21%, respectively, of net sales.
NOTE J - BUSINESS COMBINATIONS
Effective July 15, 1997, the Company acquired Target Systems, Incorporated of
Salt Lake City, Utah. Target Systems, Incorporated is a manufacturer of diameter
gauges for the wire and cable industry. It had sales of approximately $2,900,000
(unaudited) in the twelve months prior to acquisition. The Company paid cash of
$700,000 and issued 95,438 shares of Company stock for a total acquisition price
of $1,452,000. The acquisition was accounted for by the purchase method of
accounting. Goodwill amounted to $1,074,000, and is being amortized on a
straight-line basis over a period of twenty years.
24
REPORTS
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders TSI Incorporated:
We have audited the accompanying consolidated balance sheets of TSI
Incorporated and subsidiaries as of March 31, 1998 and 1997, and the related
consolidated statements of earnings, cash flows and shareholders' equity for
each of the years in the three-year period ended March 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of TSI
Incorporated and subsidiaries as of March 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1998, in conformity with generally accepted accounting
principles.
Minneapolis, Minnesota
May 14, 1998
/s/ KPMG Peat Marwick LLP
MANAGEMENT'S REPORT
Management is responsible for the accuracy and objectivity of the data
included in this report. The financial statements have been prepared in
accordance with generally accepted accounting principles using management's best
estimates and judgements where appropriate.
Established accounting procedures and related systems of internal control
provide reasonable assurance that assets are protected, that the accounting
books and records properly reflect all transactions, and that policies and
procedures are implemented by qualified personnel.
The Audit Committee, composed of two members of the Board of Directors who
are not employees of the Company, meets regularly with representatives of
management and the independent auditors to monitor the functioning of the
accounting and control systems and to review the results of the auditing
activities. The Audit Committee recommends independent auditors for appointment
by the Board. The independent auditors have full and free access to the Audit
Committee.
The independent public accounting firm, KPMG Peat Marwick LLP, is retained
to conduct an objective, independent audit of the financial statements.
/s/ James E. Doubles /s/ Robert F. Gallagher
James E. Doubles Robert F. Gallagher
President and Chief Executive Vice President and Chief Financial
Officer Officer