SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 26, 1999
TSI INCORPORATED
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(Exact name of registrant as specified in its charter)
MINNESOTA
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(State or other jurisdiction of incorporation)
0-2958 41-0843524
- ------------------------ ---------------------------------
(Commission File Number) (IRS Employer Identification No.)
500 CARDIGAN ROAD, SHOREVIEW, MINNESOTA 55126
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (651) 483-0900
--------------
N/A
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(Former name or former address, if changed since last report)
ITEM 2. ACQUISITION OR DISPOSTION OF ASSETS
Pursuant to the Agreement and Plan of Merger dated May 11, 1999, which is
attached hereto as an exhibit, Registrant, on June 1, 1999, purchased the stock
of Environmental Systems Corporation (a Tennessee Corporation). The closing took
place on May 26, 1999. Environmental Systems Corporation (ESC) specializes in
technology-based products and services relating to environmental monitoring,
power production, and waste management. In its fiscal year ended December 31,
1998, sales were approximately $22.9 million. ESC is headquartered in Knoxville,
Tennessee, with subsidiaries in eastern Europe and Asia.
The acquisition price of $25,000,000 was paid in cash. The consideration paid
was determined by arms-length negotiations between Registrant and Environmental
Systems Corporation. No prior relationships existed between Registrant and
Environmental Systems Corporation or their shareholders, directors, officers,
and associates. To finance the acquisition, the Registrant used its existing
cash along with bank financing of approximately $15,000,000 made available under
a credit agreement with U.S. Bank of Minneapolis, MN. The initial term of the
debt will be short-term with the ability to extend the term for periods not to
exceed five years. The interest rate on the debt is the lesser of either the
reference rate or approximately 1.2% over the CD rate or Eurodollar rate.
The acquisition will be accounted for by the purchase method of accounting. The
amount of the purchase price that exceeded the fair market value of identified
assets will be allocated to goodwill that will be amortized over twenty years.
Registrant intends to continue the business previously conducted by
Environmental Systems Corporation substantially similar as before Registrant's
acquisition.
The description contained in this 8-K and in the press release attached hereto
as Exhibit 99 does not purport to be complete and is qualified in its entirety
by reference to the Merger Agreement, a copy of which is attached hereto as
Exhibit 2 and is incorporated by reference herein.
ITEM 7. FINANCIAL STATEMENTS, PROFORMA FINANCIAL INFORMATION AND EXHIBITS
The following financial information is being filed in order to satisfy
the financial statement information requirement for this report.
(a) Financial Statements of Environmental Systems Corporation
(ESC)
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1998
and 1997 (Audited) and March 31, 1999 (Unaudited)
Consolidated Statements of Income for the Years Ended
December 31, 1998 and 1997 (Audited) and for the
Three Months Ended March 31, 1999 and 1998
(Unaudited)
Consolidated Statements of Shareholders' Equity for
the Years Ended December 31, 1998 and 1997 (Audited)
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998, and 1997 (Audited) and for
the Three Months Ended March 31, 1999 and 1998
(Unaudited)
Notes to Financial Statements
(b) Pro Forma Financial Information
2
Description of the Unaudited Pro Forma Combined
Financial Information of ESC and TSI Incorporated.
Unaudited Pro Forma Condensed Combined Statement of
Operations for the Year Ended March 31, 1999,
including notes to pro forma statement of operations.
Unaudited Pro Forma Condensed Balance Sheet as of
March 31, 1999, including notes to pro forma balance
sheet.
(c) Exhibits
2 Agreement and Plan of Merger dated May 11, 1999, between TSI
Incorporated, TSI Tennessee, Inc. and Environmental Systems
Corporation.
23 Consent of Independent Auditors
99 Press release disclosing the execution of the merger agreement
Information contained herein may contain forward looking statements
that involve risks and uncertainties with respect to the fair value of
assets acquired, the amount of liabilities assumed, the allocation of
the purchase price to the tangible and intangible assets acquired, and
otherwise. These forward looking statements include the words
"believes", "expects", "anticipates" and similar expressions. These
forward looking statements involve certain risks and uncertainties,
including those related to general economic and business conditions,
changes in market conditions and competitive pressures. In addition,
the purchase price allocation includes preliminary estimates based upon
TSI's initial review of the assets and liabilities acquired. The final
allocation of the purchase price will be based in part on an
independent valuation. There can be no assurance that the final
purchase price allocation will be consistent with the allocation
reflected in the accompanying unaudited pro forma combined financial
information.
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on behalf of the
undersigned thereunto duly authorized.
Dated: June 10, 1999
TSI INCORPORATED
By /s/ James E. Doubles
-------------------------------
James E. Doubles
Chief Executive Officer
4
Item 7(a) Financial Statements of Business Acquired
Report of Independent Auditors
Board of Directors
Environmental Systems Corporation
We have audited the accompanying consolidated balance sheets of
Environmental Systems Corporation and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of income,
shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the
financial statements of ECM ECO Monitoring, a.s., or ECM ECO Monitoring
(Thailand) Co., Ltd., majority-owned subsidiaries, which statements
reflect total assets of $1,587,930 and $2,051,036 and total liabilities
of $777,830 and $1,259,574 as of December 31, 1998 and 1997,
respectively, and total revenues of $3,319,493 and $2,612,131
respectively, for the years then ended. Those statements were audited
by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for ECM ECO Monitoring,
a.s., and ECM ECO Monitoring (Thailand) Co., Ltd., is based solely on
the report of the other auditors.
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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors,
the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Environmental
Systems Corporation and subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for the years
ended in conformity with generally accepted accounting principles.
/s/ Coulter & Justus, P.C.
February 25, 1999, except for
Note 11, as to which the
date is May 12, 1999
5
ENVIRONMENTAL SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS (ALL #S ROUNDED TO NEAREST THOUSAND)
DECEMBER 31, DECEMBER 31, MARCH 31,
1998 1997 1999
-----------------------------------------------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,778,000 $ 3,978,000 $ 3,360,000
Trade accounts and notes receivable, less allowance
For uncollectible accounts of $607,000 in 1998
and $514,000 in 1997 and $607,000 in 1999 4,777,000 4,376,000 5,269,000
Other receivables 97,000 84,000
Refundable income taxes 107,000 - -
-
Costs and estimated earnings in excess of billings
on uncompleted contracts 1,345,000 851,000 1,190,000
Total inventories 930,000 996,000 1,175,000
Deferred income taxes 390,000 367,000 390,000
Prepaid expenses and other current assets 29,000 42,000 176,000
------ ------ -------
Total current assets 10,453,000 10,694,000 11,560,000
---------- ---------- ----------
Property, Plant and Equipment
Land 651,000 651,000 651,000
Buildings and improvements 2,281,000 1,104,000 2,281,000
Technical equipment 2,670,000 2,397,000 2,756,000
Car and trucks 244,000 129,000 262,000
Office equipment 1,277,000 1,006,000 1,253,000
Leasehold improvements 32,000 30,000 27,000
Construction in progress 144,000 1,184,000 151,000
------- --------- -------
7,299,000 6,501,000 7,381,000
--------- --------- ---------
Less allowances for depreciation and amortization (2,436,000) (1,830,000) (2,558,000)
---------- ---------- ----------
Net property, plant and equipment 4,863,000 4,671,000 4,823,000
Note receivable 225,000 225,000 225,000
Other assets 156,000 410,000 125,000
------- ------- -------
Total assets $15,697,000 $16,000,000 $16,733,000
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,177,000 $ 1,339,000 $ 1,050,000
Billings in excess of costs and estimated earnings
on uncompleted contracts 3,332,000 4,979,000 3,469,000
Accrued compensation 1,117,000 1,088,000 185,000
Income tax payable - 189,000 -
Other accrued expenses 276,000 340,000 1,671,000
Current portion of long-term debt 153,000 153,000 153,000
------- ------- -------
Total current liabilities 6,055,000 8,088,000 6,528,000
Other liabilities:
Deferred income taxes 160,000 207,000 160,000
Long-term debt, less current portion 1,840,000 2,032,000 1,840,000
Minority interests in subsidiaries 241,000 227,000 241,000
------- ------- -------
Total other liabilities 2,241,000 2,466,000 2,241,000
--------- --------- ---------
6
Total liabilities 8,296,000 10,554,000 8,769,000
--------- ---------- ---------
Shareholders' equity:
Common stock, no par value:
Authorized shares--5,000,000
Issued and outstanding shares--1,606,092 528,000 528,000 534,000
Retained earnings 7,010,000 5,084,000 7,567,000
Accumulated other comprehensive income--foreign
currency translation adjustments (137,000) (166,000) (137,000)
-------- -------- --------
Total shareholders' equity 7,401,000 5,446,000 7,964,000
--------- --------- ---------
Total liabilities and shareholders' equity $15,697,000 $16,000,000 $16,733,000
=========== =========== ===========
ENVIRONMENTAL SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (ALL #s ROUNDED TO NEAREST THOUSAND)
YEAR ENDED THREE MONTHS ENDED
-----------------------------------------------------------------------
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1998 1997 1999 1998
------------------------------------ ---------------------------------
(Unaudited) (Unaudited)
Revenues:
Operating revenues $22,901,000 $19,372,000 $5,311,000 $4,959,000
Interest and other income 249,000 803,000 27,000 41,000
------------------------------------ ---------------------------------
Total revenues 23,150,000 20,175,000 5,338,000 5,000,000
Costs and expenses:
Operating 12,418,000 9,792,000 2,409,000 2,370,000
General and administrative 6,795,000 5,677,000 1,861,000 1,603,000
Research and development 961,000 870,000 225,000 209,000
------------------------------------ ---------------------------------
Total costs and expenses 20,174,000 16,339,000 4,495,000 4,182,000
------------------------------------ ---------------------------------
Income before income taxes and minority interest
in earnings of consolidated subsidiaries 2,976,000 3,836,000 843,000 818,000
Provision for income taxes 1,042,000 1,249,000 287,000 278,000
------------------------------------ ---------------------------------
Income before minority interest in earnings of
consolidated subsidiaries 1,934,000 2,587,000 556,000 540,000
Minority interest in earnings of consolidated (8,000) (36,000) - -
subsidiaries
-----------------------------------------------------------------------
Net income $ 1,926,000 $ 2,551,000 $ 556,000 $ 540,000
==================================== =================================
7
ENVIRONMENTAL SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (ALL #s ROUNDED TO NEAREST
THOUSAND)
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK EARNINGS INCOME TOTAL
------------------------------------------------------------------------
Balance at January 1, 1997 $923,000 $5,529,000 $ (12,000) $6,440,000
Purchase and retirement of 1,395,463 shares
of common stock held by ESOP (395,000) (2,996,000) - (3,391,000)
Comprehensive income:
Net income - 2,551,000 - 2,551,000
Foreign currency translation adjustments - - (154,000) (154,000)
------------------
Net comprehensive income 2,397,000
------------------------------------------------------------------------
Balance at December 31, 1997 528,000 5,084,000 (167,000) 5,446,000
Comprehensive income:
Net income - 1,926,000 - 1,926,000
Foreign currency translation adjustments - - 30,000 30,000
------------------
Net comprehensive income 1,955,000
------------------------------------------------------------------------
Balance at December 31, 1998 $528,000 $7,010,000 $(137,000) $7,401,000
========================================================================
ENVIRONMENTAL SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (ALL #s ROUNDED TO NEAREST THOUSAND)
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31 MARCH 31,
1998 1997 1999 1998
------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net income $1,926,000 $2,551,000 $556,000 $540,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 889,000 398,000 122,000 95,000
Provision for deferred income taxes (benefit) (70,000) (67,000) - -
Gain on sale of investment - (254,000) - -
(Gain) loss on disposal of equipment and improvements (1,000) 3,000 - -
Provision for losses on accounts receivable 108,000 85,000 - -
Changes in operating assets and liabilities, net of effects
of acquisition:
Receivables (535,000) (261,000) (289,000) 197,000
Refundable income taxes (107,000) -
Inventories 53,000 (297,000) (244,000) (279,000)
Costs and estimated earnings in excess of
billings on uncompleted contracts (494,000) (390,000) 155,000 200,000
Other assets 22,000 (164,000) (116,000) 989,000
Trade accounts payable (150,000) 254,000 (127,000) (244,000)
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,649,000) (747,000) 137,000 (422,000)
8
Accrued compensation 30,000 303,000 (932,000) 107,000
Income taxes payable (189,000) (127,000) - -
Minority interest in subsidiary 15,000 (31,000) - -
Other liabilities (66,000) 68,000 1,396,000 (906,000)
--------------------------------------------------------------------------
Net cash provided by (used in) operating activities (218,000) 1,325,000 658,000 277,000
FINANCING ACTIVITIES
Proceeds of stock options exercised - 6,000 -
Purchase of common stock held by ESOP - (3,391,000) - -
Principal payments on long-term debt (192,000) (115,000) - (46,000)
--------------------------------------------------------------------------
Net cash used in financing activities (192,000) (3,506,000) 6,000 (46,000)
INVESTING ACTIVITIES
Cash restricted for buildings 2,300,000 - -
Proceeds from sale of investment - 284,000 - -
Issuance of note receivable - (225,000) - -
Proceeds from sales of property, plant and equipment 4,000 65,000 - -
Purchases of property, plant and equipment (837,000) (3,205,000) (82,000) (221,000)
Purchase of Southern Testing Services, Inc. - (588,000) - -
--------------------------------------------------------------------------
Net cash used in investing activities (833,000) (1,370,000) (82,000) (221,000)
Effect of exchange rate changes on cash and
cash equivalents 43,000 (7,000) - -
--------------------------------------------------------------------------
Net decrease in cash and cash equivalents (1,200,000) (3,558,000) 582,000 10,000
Cash and cash equivalents at beginning of year 3,978,000 7,536,000 2,778,000 3,978,000
--------------------------------------------------------------------------
Cash and cash equivalents at end of year $2,778,000 $3,978,000 $3,360,000 $3,988,000
==========================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 118,000 $ 100,000
Income taxes 1,407,000 1,474,000
Environmental Systems Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
1. Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Environmental Systems Corporation ("the Company") and its majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation. Net income (loss) from a majority-owned Slovakian
subsidiary, ECM ECO Monitoring, a.s. ("ECM"), included in the consolidated
statements of income totaled $63,000 for 1998 and $176,000 for 1997. Net loss
from a majority-owned subsidiary in Thailand, ECM ECO Monitoring (Thailand) Co.,
Ltd. ("ECM-Thailand"), included in the consolidated statement of income totaled
$(83,000) in 1998 and $(25,000) in 1997.
9
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Accordingly, actual results
could differ from those estimates.
MINORITY INTEREST
Minority interest represents the minority shareholders' proportionate share of
the equity and the income or loss of certain consolidated subsidiaries,
primarily ECM and ECM-Thailand. The Company owns 70% of the outstanding shares
of ECM and 78.8% of the outstanding shares of ECM-Thailand. ECM also owns the
majority interest in certain other consolidated subsidiaries.
The Company also owns 100% of the outstanding shares of Waste Conversion
Systems, Inc. ("WCS"). During October 1997, WCS purchased 100% of the
outstanding shares of Southern Testing Services, Inc. ("STS"). This acquisition
was accounted for by the purchase method; therefore, results of STS operations
were included in the financial statements beginning on the date of acquisition.
The purchase price of $588,000 was allocated to accounts receivable of
$244,000, technical equipment of $644,000, liabilities assumed of $55,000 and
deferred income tax liabilities of $244,000.
FOREIGN CURRENCY TRANSLATION
In accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation," the financial statements of ECM and ECM-Thailand are
translated using exchange rates in effect at year-end for assets and liabilities
and average exchange rates during the year for results of operations. The
related translation adjustments are reported as a separate component of
shareholders' equity.
INDUSTRY
The Company is engaged in providing services and systems and in the design,
manufacturing and marketing of environmental monitoring devices for large
utilities and governmental agencies and, therefore, generally does not require
collateral for receivables.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial statements as of March 31, 1999 and for the
three months ended March 31, 1999 and 1998 have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the disclosures required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments considered necessary for a fair presentation have
been included. Results for interim periods are not necessarily indicative of
results for the entire year.
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are stated at cost. The Company computes depreciation
principally by the straight-line method over the estimated useful lives of the
assets.
REVENUES
The Company recognizes revenues from contracts under the
percentage-of-completion method, measured by the percentage of costs incurred to
date to estimated total costs for each contract. This method is used because
management considers it to be the best available measure of progress on the
contracts. Because of inherent uncertainties in estimating costs, it is at least
reasonably possible that the estimates used will change within the near term.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor and supplies.
Selling, general and administrative costs are charged to expense as incurred.
Provisions for estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance, job conditions
and estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.
10
The asset, "costs and estimated earnings in excess of billings on uncompleted
contracts," represents revenues recognized in excess of amounts billed. The
liability, "billings in excess of costs and estimated earnings on uncompleted
contracts," represents billings in excess of revenues recognized.
INVENTORIES
Inventories are stated at the lower of average cost or market. Inventories
consisted of the following:
December 31, 1998 December 31, 1997
Supplies $213,000 $222,000
Work in Process 423,000 500,000
Finished Goods 294,000 274,000
------- --------
$930,000 $996,000
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
2. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
DECEMBER 31
1998 1997
-----------------------------------------
Deferred tax assets:
Allowance for accounts receivable $196,000 $163,000
Vacation accruals 173,000 151,000
Warranty reserves 28,000 62,000
Other 89,000 75,000
-----------------------------------------
Total deferred tax assets 486,000 451,000
Deferred tax liabilities:
Tax over book depreciation 249,000 282,000
Prepaid expenses deducted for tax purposes 7,000 9,000
-----------------------------------------
Total deferred tax liabilities 256,000 291,000
-----------------------------------------
Net deferred tax assets, including $390,000 in 1998 and
$367,000 in 1997 classified as current
$230,000 $160,000
=========================================
Significant components of the provision for income tax expense (benefit) are as
follows:
1998 1997
----------------------------------------
Current:
Federal $1,045,000 $1,207,000
State 67,000 109,000
----------------------------------------
Total current 1,112,000 1,316,000
Deferred:
11
Federal (63,000) (60,000)
State (7,000) (7,000)
----------------------------------------
Total deferred (70,000) (67,000)
----------------------------------------
Total income tax expense $1,042,000 $1,249,000
========================================
The reconciliation of income taxes computed at the U.S. federal statutory tax
rates to income tax expense is:
1998 1997
----------------------------------------
Tax at U.S. statutory rates $1,012,000 $1,304,000
State income taxes, net of federal tax benefit 60,000 102,000
Difference in taxes on ECM and ECM-Thailand operations
10,000 (56,000)
Other (net) (39,000) (101,000)
----------------------------------------
Total income tax expense $1,042,000 $1,249,000
========================================
Cumulative undistributed earnings of ECM amounted to approximately $424,000 and
$362,000 at December 31, 1998 and 1997, respectively. Those earnings are
considered to be indefinitely reinvested and, accordingly, no provision for U.S.
federal and state income taxes has been provided thereon. Upon distribution of
those earnings in the form of dividends or otherwise, the Company would be
subject to both U.S. income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to the foreign country. Determination of
the amount of unrecognized deferred U.S. income tax liability is not practicable
because of the complexities associated with its hypothetical calculation.
3. Stock Option Plan
The Company has a non-qualified stock option plan which provides for the
granting of options to key employees and non-employee directors of the Company.
The aggregate number of shares of common stock reserved for issuance under the
plan is 630,000 shares. The option price, number of shares, grant date and
vesting period are determined at the discretion of the Company's board of
directors. Options granted under the plan are exercisable for a period not to
exceed five years from the option grant date. The option price approximates the
fair value of the options at the grant date. A summary of option transactions
during 1998 and 1997 is as follows:
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
---------------------------------------------------
Outstanding at January 1, 1997 395,000 $1.54
Granted 60,000 $2.43
Canceled (30,000) $1.54
------------------------
Outstanding at December 31, 1997 425,000 $1.67
Granted 20,000 $3.50
------------------------
Outstanding at December 31, 1998 445,000 $1.75
========================
Exercisable at December 31, 1998 145,000 $1.60
========================
Available for issuance at December 31, 1998 35,000
========================
A summary of options outstanding as of December 31, 1998, is as follows:
EXERCISE NUMBER OF REMAINING NUMBER OF
PRICE SHARES OUTSTANDING LIFE SHARES EXERCISABLE
-----------------------------------------------------------------------------------------------------
$1.54 270,000 1.58 YEARS 135,000
12
$1.54 95,000 2.58 YEARS -
$2.43 60,000 3.42 YEARS 10,000
$3.50 20,000 4.83 YEARS -
-----------------------------
445,000
=============================
4. Employee Stock Ownership Plan
During 1993, the Company established a leveraged employee stock ownership plan
(ESOP) that covered substantially all employees and bought 1,395,463 shares of
common stock from existing shareholders. The Company accrued annual
contributions to the ESOP equal to the ESOP's debt service, along with
additional amounts determined by the Board of Directors. During 1997, the
Company terminated the ESOP by purchasing and retiring the ESOP shares based on
an independent stock valuation. The value of participant accounts were then
transferred to the Company's profit sharing retirement plan.
5. Profit Sharing Retirement Plan
The Company has a profit sharing plan covering substantially all employees.
Under the terms of the Plan, the Company's contribution is determined each year
by the Board of Directors. Profit sharing contributions accrued totaled $64,000
in 1998 and $66,000 in 1997.
6. Leases
The Company leases office facilities and general storage facilities under
short-term operating leases. Net rent expense for all operating leases,
including facilities and short-term equipment leases, was as $128,000 in 1998
and $339,000 in 1997.
7. Notes Payable and Long-Term Debt
Long-term debt consists of the following:
DECEMBER 31
1998 1997
--------------------------------------------
Industrial Revenue Bonds (Series 1996A and B) $1,993,000 $2,185,000
Less current portion 153,000 153,000
--------------------------------------------
Long-term portion $1,840,000 $2,032,000
============================================
In December 1996, the Company entered into a loan agreement whereby the Company
received $2,300,000 of the proceeds of Industrial Revenue Bonds issued by the
Industrial Development Board of Knox County, Tennessee. $900,000 in tax-exempt
bonds (the "Series 1996 A Bonds") were used to finance the acquisition,
construction and equipping of a manufacturing facility. $1,400,000 in taxable
bonds (the "Series 1996 B Bonds") were for the purpose of acquiring the office
facility and constructing certain improvements. The Bonds were issued pursuant
to an Indenture of Trust between the Industrial Development Board and First
American National Bank, as Trustee. The loan agreement related to the Bonds is
collateralized by an irrevocable letter of credit issued by a bank ("the
Trustee") for $2,236,000 which expires in December 1999.
The Bonds are remarketed on a weekly basis and bear interest at a variable rate
which cannot exceed the lesser of 12% or the maximum rate allowed by law. The
rate was 4.2% and 5.4% as of December 31, 1998, for the Series 1996 A Bonds and
Series 1996 B Bonds, respectively. The Company has the option to convert to a
fixed interest rate until maturity of the Bonds at the lower of the maximum rate
allowed or at the rate determined by the remarketing agent in accordance
13
with the Indenture of Trust. Conversion from the variable rate requires a
mandatory tender offer to all current holders of the Bonds.
During the variable rate period, any holder of the Bonds may, subject to the
terms of the Indenture of Trust, require the repurchase of all or a portion of
the Bonds at a price equal to the principal amount of the Bonds plus accrued
interest. The Indenture of Trust allows the Trustee to draw upon the letter of
credit for payment of any Bonds not remarketed. The interest rate on the letter
of credit draws is the bank's index rate plus 2%. The Reimbursement Agreement is
collateralized by the land and assignment of future construction.
The Bonds are also subject to optional redemptions at the direction of the
Company. Mandatory redemption is required upon determination of taxability or on
the termination date of the letter of credit at 100% plus accrued interest.
Prior to conversion to a fixed rate, the Bonds may be redeemed during the weekly
rate period on any adjustment date or on any conversion date at 100% of
principal plus accrued interest. If converted to a fixed rate, the Bonds may be
redeemed at redemption prices ranging from 100% to 102% of principal plus
accrued interest based upon the date of redemption. The Reimbursement Agreement
requires quarterly payments to a trust account with the Bank for the purpose of
making optional redemptions of the Bonds. The required future payments as of
December 31, 1998, are summarized as follows:
1999 $ 153,000
2000 153,000
2001 153,000
2002 153,000
2003 153,000
Thereafter 1,227,000
----------
$1,993,000
==========
The Reimbursement Agreement also requires the payments to the Trust account be
used to make optional redemptions of the Bonds at least annually in increments
of $100,000. Principal payments of $192,000 in 1998 and $115,000 in 1997 were
paid to the trust for the Series B Bonds which is held until the Trustee
authorizes redemption of the bonds. As these payments have been made, the debt
outstanding has been reduced accordingly.
As of December 31, 1998, the Company also has an unused $2,000,000 revolving
line of credit, which expires in June 2000, and an unused $500,000 equipment
line of credit, which expires in June 1999. Interest at the bank's base rate
less 0.82% is payable monthly on any portion of the lines of credit utilized. As
of December 31, 1998, $529,772 of the revolving line of credit secures unused
$530,000 letters of credit with a bank which expire on various dates through
November 1999. The lines of credit are covered under a loan agreement which
requires the Company to, among other things, meet certain financial covenants
and not pay any dividends.
Interest expense was $118,000 in 1998 and $100,000 in 1997.
8. Cash and Cash Equivalents
As of December 31, 1998, the Company has cash and cash equivalents on deposit
with financial institutions and cash funds as follows:
Insured (FDIC) $ 60,000
Uninsured:
Repurchase agreements 283,000
Collateralized by corporate debt securities held by the financial
institution in the financial institution's name 1,232,000
Collateralized by commercial paper held by the financial institution in the
Company's name 1,487,000
ECM cash funds 164,000
ECM-Thailand cash funds 162,000
-----------------------
$3,388,000
=======================
14
The carrying amounts disclosed in the table above represent the financial
institution balances as of December 31, 1998. The corresponding amount recorded
in the December 31, 1998, Consolidated Balance Sheet includes deposits in
transit and is net of outstanding checks.
9. Business Affiliations
The Company is involved in negotiations for future business affiliations with
certain other foreign companies; however, no formal commitments for the
consummation of any such affiliations exist.
10. Changes in Estimates
Revisions in contract profits are made in the year in which circumstances
requiring the revision become known. The effect of changes in estimates of
contract profits was to increase net income by approximately $210,000 in 1998
and $292,000 in 1997 from that which would have been reported had the revised
estimate been used as the basis of recognition of contract profits in the
preceding year.
11. Pending Acquisition
On May 12, 1999, the Company signed a definitive agreement to be acquired by TSI
Incorporated ("TSI") of Shoreview, Minnesota. The closing of the acquisition is
scheduled to take place by the end of May 1999 and is subject to successful
completion of additional due diligence. Upon the closing of the acquisition, the
Company will operate as a wholly-owned subsidiary of TSI.
15
Item 7(b) Pro Forma Financial Information
Pro Forma Condensed Combined Statement of Earnings
Twelve Months Ended March 31, 1999
(Unaudited)
The following unaudited pro forma condensed combined statements of earnings
represents the results of operations of TSI Incorporated and Subsidiaries as if
Environmental Systems Corporation (ESC) had been acquired April 1, 1998, on a
purchase accounting basis. This information should be read in conjunction with
the financial statements of the Registrant and ESC and the related notes
incorporated herein and incorporated by reference.
The accompanying unaudited pro forma financial information is based on the
Company's preliminary review and does not give effect to all adjustments
required to allocate the purchase price. The pro forma financial information is
not intended to reflect actual results of operations had the purchase of ESC
been effective on the date indicated, and is not intended to be indicative of
future results.
(All amounts in thousands)
Historical
-----------------------------------
TSI Environmental Pro Forma Pro Forma
Incorporated Systems Corp. Adjustments Combined
---------------- ------------- ------------------- ----------
Net sales $85,352 $23,942 $109,294
Cost of sales 37,158 13,131 50,289
Operating expenses 37,015 7,946 636 (a) 45,597
----------------------------------- ------------------------------------
Operating Income 11,179 2,865 (636) 13,408
Other income (expenses) 435 128 (1,310) (b) (747)
----------------------------------- ------------------------------------
Earnings before income taxes 11,614 2,993 (1,946) 12,661
Provision for income taxes 3,832 1,051 705 (c) 4,178
----------------------------------- ------------------------------------
Net Earnings $7,782 $1,942 $(1,241) $8,483
Basic earnings per share $0.69 $0.75
Diluted earnings per share $0.68 $0.74
Weighted average number of shares for
computation of basic earnings per share 11,317 11,317
Weighted average number of shares for
computation of dilutive earnings per share 11,482 11,482
16
Notes to Pro Forma Condensed Combined Statement of Earnings
(Dollars in thousands unless otherwise indicated)
(Unaudited)
The following describe the adjustments to the historical information of the
Registrant and ESC to give pro forma effect to the purchase of ESC.
(a) Reflects the following:
(1) Increased amortization of goodwill over 20 years
on a straight line basis 703
(2) Increased amortization of other intangibles for
periods between 10 and 15 years, straight line 133
(3) Increased depreciation resulting from the step-up of
property, plant and equipment, depreciated on a
straight line basis over 20 years 50
(4) Contractual reduction in salary expense (250)
-----
Total $636
(b) Reflects a decrease in the Registrant's interest income estimated
at $350, and an increase in interest expense of approximately $960
resulting from the debt incurred to finance the acquisition. The
interest rate on the new debt of $15 million is assumed to be
6.4%. A change of 1/8% percent in the interest rate would result
in a change in interest expense and net income of $19 and $13
before and after taxes, respectively.
(c) Adjusts the effective income tax rate of the combined entity to
the Registrant's effective income tax Rate. Registrant expects its
effective tax rate to be higher in the future because a
significant portion of the purchase price (goodwill) will be
nondeductible for tax purposes.
17
Pro Forma Condensed Balance Sheet
March 31, 1999
(Unaudited)
(All amounts in thousands)
Historical
----------------------------------------
TSI Environmental Pro Forma Pro Forma
Incorporated Systems Corp. Adjustments Combined
------------------ ------------- ------------- --------------
Assets
Cash and cash equivalents $13,437 $3,360 $(10,851) (a) $5,946
Accounts Receivable, net 14,462 5,503 19,965
Prepaid expense 308 141 449
Inventories 15,539 1,175 16,714
Income taxes receivable 0 0 2,210 (b) 2,210
Intangibles and other assets 9,201 1,867 14,659 (c) 25,727
Property, plant and equipment, net 8,021 4,823 1,000 (c) 13,844
------------------- ----------------
Total assets $60,968 $84,855
=================== ================
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses 5,338 6,461 11,799
Employee compensation 4,412 185 4,597
Taxes, other than income taxes 473 473
Income taxes payable 1,350 1,350
Long term debt and other liabilities 0 2,241 15,000 (d) 17,241
------------------- ----------------
Total Liabilities $11,573 $35,460
------------------- ----------------
Shareholders' Equity
Common shares 1,115 1,115
Additional paid in capital 11,409 11,409
Retained earnings 37,094 37,094
Equity adjustment from translation (223) (223)
------------------- ----------------
Total shareholders' equity $49,395 $49,395
------------------- ----------------
Total liabilities and shareholder's equity $60,968 $84,855
=================== ================
Notes to Pro Forma Balance Sheet
(Dollars in thousands)
(Unaudited)
The accompanying unaudited pro forma financial information is based on the
Company's preliminary review and does not give effect to all adjustments
ultimately required to allocate the purchase price.
The following describe the adjustments to the historical information of the
Registrant and ESC to give pro forma effect to the purchase of ESC.
(a) Reflects the following transactions:
Purchase price paid with existing cash $(10,000)
Bonuses paid to employees and directors that exercised options, net
18
of cash received from such exercise (851)
-----
Total $(10,851)
========
(b) Reflects the estimated income tax refunds due from the exercise of
ESC stock options prior to the acquisition.
(c) To reflect the excess of acquisition cost over the estimated fair
value of net assets acquired (goodwill). The purchase price,
purchase price allocation, and financing of the transaction are
summarized as follows:
Purchase paid as:
Cash $10,000
Proceeds from debt 15,000
------
Total purchase consideration $25,000
=======
Allocated to:
Historical book value of ESC's assets and liabilities
at March 31, 1999 $7,982
Pro forma adjustment due to options exercised:
Effect on cash (851)
Income tax refund 2,210
-----
Total allocated to ESC historical assets and liabilities $9,341
Step up of property, plant and equipment 1,000
Other intangible assets 1,500
Deferred taxes (900)
Goodwill 14,059
------
Total allocation $25,000
=======
(d) Reflects the increased debt incurred to finance the acquisition.
Item 7(c) Exhibits
19