FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______.
Commission File Number 0-2958.
TSI INCORPORATED
----------------
(Exact name of registrant as specified in its charter)
Minnesota 41-0843524
--------- ----------
(State or other jurisdiction of (I.R.S. Employee Identification No.)
incorporation or organization)
500 Cardigan Road, Shoreview, Minnesota 55126
- ---------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (651) 483-0900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
National Association of Securities Dealers
Automated Quotation System (Nasdaq) Common Stock, $10 par Value
----------------------------------- ---------------------------
(Name of each exchange on which registered) (Title of each class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting stock held by non-affiliates of registrant
as of June 16, 1999: $103,468,000
Number of shares outstanding as of June 16, 1999: 11,232,816 shares of Common
Stock, $.10 par value.
Documents incorporated by reference: See Index of Exhibits, Financial Statement
Schedules and Reports on Form 8-K, located at pages 18 and F-1 of this report.
Total number of pages including cover -- 30
2
PART I
Item 1. BUSINESS
DEVELOPMENT OF THE BUSINESS
The Company was founded in 1961 as a manufacturer of scientific
measuring instruments for research applications. In 1968, the Company went
public under the name Thermo-Systems Inc. and in 1976 became TSI Incorporated.
In recent years, the Company has applied its research instrumentation technology
to industrial applications and has acquired or developed additional technologies
to address the needs of several markets in order to become a diversified,
precision instrumentation company.
RECENT CORPORATE DEVELOPMENTS
In May 1999, the Company acquired Environmental Systems Corporation
of Knoxville, Tennessee, a leading supplier of ambient air quality and
continuous emissions monitoring systems -- including sensors, data loggers,
software and system integration -- to environmentally concerned companies,
public utilities and government agencies. For the year ended December 31, 1998,
Environmental Systems Corporation posted net sales of $23 million and $1.9
million in net income after taxes. A Form 8-K was filed on June 10, 1999 with an
explanation of the transaction and corresponding historical and pro forma
financial statements. This addition gives the Company stronger presence in the
outdoor environmental monitoring market which offers excellent potential for the
future.
In October 1998, the Company acquired Amherst Process Instruments,
Inc. of Amherst, Massachusetts, a manufacturer of powder flow and sizing
instruments primarily for the bulk powders and pharmaceuticals markets. It had
sales of approximately $2.5 million in the twelve months prior to acquisition.
This addition enhances the capabilities of the Company by adding products to its
particle research instrumentation line.
In December 1998, the Company entered into a license agreement with
the University of California at Riverside for a new technology and product for
the chemical analysis of environmental pollutants. This new technology allows
the analysis to take place directly without the typical contamination of
particles during the collection process.
PRODUCTS
The Company develops, manufactures and markets measuring and/or
control instruments for a variety of market applications. The Company's business
is referred to as precision instrumentation for industry and research. This
business is characterized by many "niche" markets, where one of the Company's
many basic measuring technologies fits the measurement needs in different
industrial and research applications.
The applications for the Company's products can best be described by
considering two segments. These are the Safety, Comfort and Health of People
(the working environment) and Productivity and Quality Improvement (industrial
processes). Both of these cross numerous industries.
The discussion that follows describes the business and product lines
under these two segments and shows the percentage contribution to net sales:
3
Year Ended March 31
-------------------
Segments 1999 1998 1997
-------- ---- ---- ----
Instruments for the Safety, Comfort & Health of People 75% 68% 72%
Instruments for Productivity and Quality Improvement 25% 32% 28%
---- ---- ----
100% 100% 100%
INSTRUMENTS FOR THE SAFETY, COMFORT AND HEALTH OF PEOPLE
TSI instruments that enhance the Safety, Comfort and Health of
People are described under six headings or categories:
Analytical and Research Instruments
The Company's earliest products, starting in 1966, were for research
applications. The development of many of the basic technologies used in TSI
products occurred in research instruments, and the following often describes
products that apply these technologies to specific industrial applications.
The Company has developed a line of analytical and research
instruments which are used to measure and characterize very small particles,
usually referred to as submicron particles or aerosols. These instruments are
designed to monitor contamination levels, to make measurements in aerosol
generation studies, to study air pollution levels in buildings or in outside air
and to measure the size distribution of various aerosols. In December 1998, the
Company received a $3.2 million order for the Ultraviolet Aerodynamic Particle
Sizer(R) Spectrometer (UV-APS), a device which indicates the presence of
bacteria in sampled air, from the US Army with delivery scheduled from late
fiscal 1999 to mid fiscal 2000. This order was the second and largest option in
a contract awarded and announced March 31, 1998.
Also in December 1998, the Company signed a license agreement with
the University of California, Riverside, for a new technology and product for
chemical analysis of airborne particles. For applications of environmental
pollutants, this new technology is a major breakthrough as it allows direct
measurement without the possibility of contamination while collecting the
particles. This instrument is expected to be available for sale in the fourth
quarter of fiscal 2000. The Company does not expect significant revenue for this
technology until late in fiscal year 2000 or early fiscal 2001.
Many of the Company's particle measuring instruments are used in
conjunction with computers (manufactured by others) which compile and interpret
the data obtained. The Company develops and sells a variety of user-friendly
software packages to expand and enhance the applications of these instruments.
Technologies developed within this area are used in instruments for industrial
hygiene and safety as well as instruments for quality control and testing.
Monitoring and Control Instruments for Heating, Ventilating and Air Conditioning
(HVAC)
These instruments are used to measure or control air flow, air
distribution, relative humidity, pressure, dew point, temperature, particle
concentration and concentration of gases for purposes of enhancing HVAC system
performance. Some applications in this category fall into the area of "Indoor
Air Quality" measurements. These instruments use technology originally developed
in various research instruments and applications. Shipments of a new line of
instruments for measuring combustion gases in furnaces, water heaters and
boilers began in late fiscal 1999.
Instruments for Industrial Hygiene and Safety
4
The Company's instruments in this category are used mainly to
monitor for potential problems in the air people breathe and to help protect
people from toxic airborne substances. The PortaCount (R) Respirator Fit Tester
helps protect workers and military personnel by testing for the proper fit of
respirators and gas masks. The Company markets the PortaCount in both commercial
and military versions.
Much of this area of application is often referred to as "Indoor Air
Quality". Product lines for this category have expanded in the last few years as
the Company has applied its basic technologies in the areas of air velocity
measurement and fine particle measurement. This area includes portable
instruments that measure various indoor air quality parameters, including levels
of carbon dioxide, a parameter that has been linked to the "sick building"
syndrome. It also includes instruments for measuring dust concentrations, carbon
monoxide in industrial settings and the high concentrations of carbon dioxide
used in food and beverage manufacturing. A portable personal gas monitor for use
in confined spaces was introduced in early fiscal 1999. Development work is
continuing to add other gas detection sensors and instruments to these product
lines. This group recently received ISO 9001 certification so all new product
development will follow ISO 9001 standards.
Meteorological and Hydrological Instruments
With the 1986 acquisition of Handar, in Sunnyvale, California, an
extensive line of measuring instruments were added to the Company's outdoor
environmental measurement capabilities. They are used globally to monitor
atmospheric parameters such as wind, humidity, temperature, visibility, cloud
height, soil moisture, snow, rain, and many others. Applications include
monitoring weather conditions in remote locations, monitoring aviation weather,
forecasting wildfires and floods, measuring the impact of pollution on natural
resources and many more. Complete systems measure, collect, store, and transmit
data via telephone, radio, and satellite. Handar's products include an
ultrasonic wind sensor, an improvement on the cup-and-vane anemometers widely
used to measure wind speed and direction. This patented sensor utilizes
ultrasonic technologies, involves no moving parts and can be heated to prevent
ice buildup when used at low temperatures.
While these products have been manufactured and sold for a number of
years, additional engineering work is continuing to improve and add new sensors,
data collection platforms and communication devices to enhance performance and
broaden applicability.
Outdoor Environmental Monitoring Instruments
Environmental Systems Corporation (ESC), headquartered in of
Knoxville, Tennessee, was acquired on May 26, 1999. ESC specializes in
technology-based products and services relating to environmental monitoring,
power production, and waste management. Applications include continuous stack
emissions monitoring at public utility stations, ambient air quality testing and
meteorological monitoring. Many tests are specifically designed to meet U.S.
Environmental Protection Agency, state and local government and international
agency requirements. ESC also consults in the areas of hazardous, solid and
chemical waste management for government, civil and industrial applications. The
Company believes ESC's technologies and markets are synergistic and will help
the Company to expand further into the outdoor environmental market.
OEM Products
Commonly referred to as "original equipment manufacturer" (OEM),
this category includes sensors and devices sold to other manufacturers for
incorporation into their products. TSI has for several years supplied flow
sensors to monitor flow in medical products used for respiratory
5
assistance. Ventilators used to assist breathing in intensive care units are the
main product in which these sensors are used.
Through TSI's Alnor subsidiary, fume hood and room pressure monitors
are also sold on an OEM basis to manufacturers of fume hood cabinets and to HVAC
control companies.
INSTRUMENTS FOR PRODUCTIVITY AND QUALITY IMPROVEMENT
TSI instruments for Productivity and Quality Improvement help
customers worldwide to enhance the competitive position of their processes and
products. They are described here under four headings or categories.
Research Instruments
As with the safety, comfort and health products, the first products
described are those used for research and testing, since they were the Company's
first technologies, actually starting with the founding of the Company in 1961.
Since then, many industrial products have grown out of technology developed for
research and this is expected to continue.
Fluid mechanics (or flow related) measuring instruments represent
the main product line for research applications. Fluid mechanics measurements
are mostly used for productivity and quality improvement of customers' products
and processes. Examples include the imaging of flow velocity and turbulence in
wind tunnels, ducts and pipes, and imaging in engines and automotive exhaust
gases to improve efficiency or lower pollution and noise.
The Company's flow measuring instruments utilize several measurement
techniques including thermal anemometry, laser Doppler velocimetry, phase
Doppler particle analysis, and particle image velocimetry. These are used in
research products as described below:
--Thermal Anemometers -- Thermal anemometry technology has been used
in the Company's flow measuring instruments since its earliest products were
developed. A probe containing a small electrically-heated element is exposed to
a flow. The cooling effect of the flow as it passes the element provides a
measure of the velocity and/or flow rate of the fluid. The instrument provides
the flow rate in an analog display or converts it into a digital signal for
further processing by a computer. The output signal can be used to monitor,
analyze or control the flow or velocity within a flow channel or process. The
Company maintains an ongoing development program to further enhance this
technology and add companion products and software for convenient signal
analysis and data interpretation. Thermal anemometry is used in many of the
instruments sold into TSI's industrial markets. The technique is used in many
HVAC instruments, for example, as well as instruments for industrial hygiene and
safety.
--Laser-Doppler Velocimeters -- For over 20 years, the Company has
developed and produced various flow measuring instruments which utilize a
laser-based technology, generally called laser Doppler velocimetry (using lasers
manufactured by others). These instruments use a laser beam and optical
measurement techniques to measure velocity and movement, rather than a probe as
used with the thermal instruments. They are used to obtain measurements in
locations where a probe would be destroyed or would disturb the flow of the
fluid being measured. This technology continues to be enhanced in a variety of
ways to meet new applications. Reducing the size, increasing the ruggedness of
instruments, improving accuracy, improving signal processing techniques and
allowing for more than one measurement to be taken at a point in time are some
of these enhancements. The Company also has developed and is selling a variety
of user-friendly software packages to expand and enhance the application of
these instruments. Laser Doppler velocimetry techniques are used in other TSI
instruments for non-contact monitoring and control in material production
processes.
6
--Particle Image Velocimeters -- Through engineering design,
licensing of technologies and acquisition of product lines, the Company has
developed a line of instruments and software that measure or map flow patterns
over an area. This provides users with a visual output of flow speed and
direction, for example, around an object in a wind tunnel. These products are
referred to as particle-image velocimeters because the technique is based on
tracking, simultaneously, the movement of numerous particles in the flow stream.
Optical techniques are used to show images of the flow patterns. This area has
been emerging as an important addition to TSI's flow measuring and analysis
capabilities, which the Company expects to continue growing over the next few
years.
--Phase-Doppler Particle Analysis -- During fiscal 1996, the
Company's acquisition of Aerometrics, Inc. added significant capability for
measuring the characteristics of spray droplets, such as those in fuel injector
sprays, personal inhalers, water sprays, etc. This technology, which expands on
laser Doppler velocimetry technology, is referred to as phase Doppler particle
analysis.
Non-Contact Monitoring and Control in Materials Processing
Under the trade name LaserSpeed(R), the Company produces an
instrument line that employs diode lasers and optical techniques to measure the
surface speed and length of aluminum, steel and similar materials during
manufacturing. This product line performs well for measurements in rolling mills
and similar metals forming operations. Applications to other materials
processing have also been developed. The LaserSpeed instruments give precise
measurements without physical contact with the materials. Customers realize
savings in material cost by reducing scrap and in quality improvements through
better process control. LaserSpeed CB100 and CB150 instruments measure the speed
and length of extruded materials such as fiber, wire and cable during
manufacturing. Further development work is continuing to enhance these devices,
lower product costs and expand their use to other materials manufacturing
processes.
In fiscal 1998 and 1997, two small acquisitions, one in Germany and
one in the United States, added new non-contact techniques for measuring
diameter, width and materials alignment in industrial processes. These products
can be sold to the same customers and through the same distribution channels as
the LaserSpeed instruments.
Instruments For Quality Control Testing
The Company's line of automated test stands, sold under the trade
name CertiTest(TM), are used to determine the efficiencies of filters and filter
media using particle sensing techniques to measure for leaks. This product line
is used for quality control by filter manufacturers and has been manufactured
and marketed for several years.
This category also includes instruments for measuring the speed and
concentration of droplets in industrial sprays to assure uniform manufacturing
quality of devices such as fuel injectors. A quality control automated test
stand called the Optical Patternator(TM) was introduced during fiscal 1997.
OEM Products
In fiscal 1994, some of the Company's product lines for monitoring
contamination levels in clean rooms were sold to Particle Measuring Systems,
Inc. (PMS) of Boulder, Colorado. The Company manufactured some of the products
for PMS on an OEM basis until December 1998, at which time options were not
renewed. These instruments monitor the particle contamination levels in air and
other gases in industrial clean room applications and measure residue in
ultra-clean water using particle sensors that incorporate light scattering
optical techniques. They are used by
7
manufacturers of semiconductor devices, pharmaceutical products and other
products which require very low contamination levels during critical
manufacturing processes.
RAW MATERIALS AND PARTS
The Company purchases most of its electronic components and
materials from suppliers in the United States and, generally, has not
experienced problems with availability. Some materials, such as laser diodes and
fibers for fiber optics, are imported. Import restrictions could impair
availability of some of these materials. Engineering design of the Company's
products does not require exotic parts or materials and the selection of readily
available materials has been an important design goal. The Company utilizes a
vendor certification program to help maintain the quality and timeliness of
incoming parts. The Company continues to seek and maintain alternative vendors
and has generally been able to locate alternative sources for materials during
periods of short supply. A severe shortage of electronic parts could impair the
Company's ability to produce certain products, but a broad and diversified
product line helps to alleviate this risk.
CUSTOMERS
The Company sells to a broad range of customers throughout the
world. These customers include many industrial companies, educational
institutions, research organizations and agencies of the United States and
foreign governments.
Sales to U.S. defense customers accounted for about 15 percent of
total net sales in fiscal 1999, 14 percent in fiscal 1998 and 12 percent in
fiscal 1997, but accounted for no more than 12 percent of total sales for each
of the prior ten years. The increase in fiscal 1998 was mainly due to sales of
PortaCount respirator fit testers under U.S. military contracts.
Reduction or changes in federal spending may adversely affect the
Company's governmental and, to some extent, educational sales. While there are
some developmental contracts and sales made to many different U.S. government
agencies of many different products, the Company's major government sales in
recent years have been products related to protecting military personnel from
bio-hazard materials. These sales are made on a contractual basis one year at a
time or less. There is no assurance that these sales will continue or that the
government will not cancel such contracts (however, incurred costs would
normally be reimbursed). As of March 31, 1999 the Company's backlog included
orders of about $5 million for PortaCount fit testers and $2.3 million for
Ultraviolet Aerodynamic Particle Sizer Spectrometers for U.S. military services,
all scheduled to be shipped during fiscal 2000.
Fiscal 1999 sales for safety, comfort and health instruments
increased by 17 percent over fiscal 1998. This was mainly due to strong sales
for the PortaCount Respirator Fit Tester which benefited from recent changes in
OSHA regulations, sales to the U.S. Army of biodetection equipment used for
rapid detection of airborne bacteria and strong sales activity for our
meteorological instruments.
Productivity and Quality Improvement products decreased 20 percent
from fiscal 1998 to 1999 after experiencing a 16 percent increase from fiscal
1997 to 1998. In response to the slow sales of research instruments sold into
this market, the operations of Aerometrics, a California subsidiary, were
transferred to TSI's Minnesota headquarters and consolidated with an existing
research product line selling to the same market. The Company took a $.03 per
share charge in fiscal 1999 to cover the costs associated with the
consolidation. The increase in fiscal 1998 was attributable primarily to higher
sales of LaserSpeed(R) instruments. However, in fiscal 1999 sales for these same
instruments declined due to slow demand from the wire and cable industries,
primarily from the Pacific Rim markets. Research product sales fluctuate
year-to-year depending on buying trends in this mature market niche.
8
Sales to international customers under the Company's two segments
for the periods indicated were as follows:
Year Ended March 31
-------------------
1999 1998 1997
-------------- --------------- ---------------
Int'l. % of Int'l. % of Int'l. % of
Sales Total Sales Total Sales Total
(000) Sales (000) Sales (000) Sales
-------------- --------------- ---------------
Segments
--------
Instruments for the Safety,
Comfort & Health of People $14,299 17% $13,516 17% $18,120 23%
Instruments for Productivity
and Quality Improvement $11,499 13% 13,613 17% 12,201 15%
-------------- -------------- ------ ---
Total $25,798 30% 27,129 34% 30,321 38%
Overall, the Company's fiscal 1999 international sales were 5
percent less than fiscal 1998 international sales. The decline was attributable
to slow sales of both our process controls and research instruments for
productivity and quality improvement. Fiscal 1998 international sales decreased
11 percent compared to fiscal 1997. Included in fiscal 1997 sales of Safety,
Comfort and Health products was a $6.8 million contract for the PortaCount(R)
respirator fit tester to the German Army. There was no similar international
contract in either fiscal 1999 or 1998.
Both Safety, Comfort and Health instruments and Productivity and
Quality Improvement instruments have experienced a decline in sales to the
Pacific Rim region, primarily due to a weakening of the economies in that
region. Sales to the Pacific Rim represented 10 percent of sales for both fiscal
1999 and 1998 and 12 percent in fiscal 1997. It is uncertain what impact the
weakening of the Asian currencies will have on fiscal 2000.
Further segment information about domestic and foreign operations is
included under Note I of the Notes to Consolidated Financial Statements on page
23 of the Company's 1999 Annual Report to Shareholders (Exhibit 13, page F-8).
Refer to page 12 of the Management's Discussion and Analysis of Results of
Operations and Financial Condition for additional discussion regarding
international sales.
MARKETING
The Company markets its products through Company-employed sales
engineers operating from offices located in the United States and international
sales offices located in Europe. In addition, independent sales representatives
and distributors represent the Company in other domestic and international
markets. The Company uses promotional catalogs, technical bulletins, seminars,
displays, trade shows, insertions in catalogs of others and advertising in trade
journals to promote its products. The Company's sales consist primarily of
standard products as listed in its catalogs, although the Company also sells
specialized products designed to meet specific customer requirements.
The nature of the Company's products requires a marketing approach
that is customer application oriented. Accordingly, sales engineers and
independent representatives are technically competent in a variety of
engineering and scientific disciplines as well as trained in the market niches
and product lines on which they concentrate. The sales force provides the
Company with information for developing new products and identifying new
markets. In addition to direct sales efforts and after-sales servicing, the
Company provides its customers with technical support, advice, training and
application information related to the Company's products.
9
At March 31, 1999, the Company's backlog of orders was approximately
$19,388,000 compared to $22,408,000 at March 31, 1998 and $25,112,000 at March
31, 1997. The Company estimates that 95% of the 1999 backlog will be shipped by
March 31, 2000.
As of March 31, 1999, about $5 million of the Company's backlog was
due to the aforementioned military contracts for PortaCount fit testers,
compared with $4.8 million and $8.5 million as of March 31, 1998 and 1997,
respectively. The March 31, 1999 backlog also includes a $2.3 million U.S.
military contract for the Company's Ultraviolet Aerodynamic Particle Sizer(R)
Spectrometer. A similar $1.8 million contract was in backlog at March 31, 1998,
but not in 1997.
COMPETITION
The Company's products compete with products utilizing different
technologies as well as directly competitive products. For example, certain of
the Company's measuring instruments which use thermal anemometry techniques
compete with instruments utilizing differential pressure or other measurement
techniques. New technologies and products could be introduced by competitors
that would make existing Company products obsolete. The Company's ability to
compete is dependent on its ability to develop or license products in a changing
technological environment. The Company's competitive strength often comes from
its ability to fit instruments to new applications on an ongoing basis such that
new applications or markets replace those where needs have changed.
Also important is an ability to grow by adding new markets.
Competitive forces vary in accordance with the various markets into
which the Company sells products. Competition can best be described by starting
with the two major market drivers and further categorizing product types in each
area as shown in the table that follows. In the table, when "significant market
share" is indicated, it is due to the Company's long term presence in a market
niche or because the product is so unique that it may, essentially, be the only
product available to make the measurement required, thus creating its own niche.
The exact number of international competitors is not always known, particularly
in cases where the Company does not have international experience with that
product type. The Company typically confronts the same group of competitors in
about 20% of its total sales.
COMPANY'S
COMPETITORS MARKET SHARE
----------- ------------
Major Minor
------------------- -------------------- Significant Minor
Product Type Int'l Domestic Int'l Domestic Share Share
- --------------------------------------------------------------------------------------------------------
Instruments for the Safety, Comfort & Health of People
- ------------------------------------------------------
ANALYTICAL AND
RESEARCH 1 2 more more X*
than 6 than 6
HVAC
Air Distribution 1 4 more more X*
than 6 than 6
Lab/Room Air
Flow Control 3 1 2 3 X*
INDUSTRIAL HYGIENE
& SAFETY
10
Respirator Fit Test - - - 1 X
Indoor Air Quality 4 4 more more X*
than 6 than 6
Combustible Gases 3 5 more more X
than 6 than 6
METEOROLOGY/
ENVIRONMENTAL
MONITORING 4 4 more more X*
than 6 than 6
OUTDOOR
ENVIRONMENTAL
MONITORING 1 1 1 more X*
than 6
OEM** ** - - X*
Instruments for Productivity & Quality Improvement
- --------------------------------------------------
RESEARCH - 1 4 2 X
NON-CONTACT MATERIAL
PROCESSING - 4 2 more X
than 6
QUALITY CONTROL
Filter Testing - 1 2 - X
OEM** ** X*
*Market share varies considerably by specific product within the market
category.
**OEM sales are normally made under specific contracts mainly in areas where the
Company has unique applicable technology so competition is not usually a major
issue.
RESEARCH AND PRODUCT DEVELOPMENT
The Company is engaged in research and development activities
principally for developing proprietary products. These activities, which occur
in all aspects of the Company's business, generally consist of the development,
design and testing of potential new products with emphasis on applied (as
distinct from basic) research. Approximately 75% of the Company's engineering
and technical staff are engaged in research and development activities on a
full-time basis. The Company also engages in some contract research work for
others that varies from time to time. This type of contract work generally
relates to the development of a future instrument or product enhancements to
better meet market needs and applications. In addition, the Company utilizes
various outside consultants in the research and development area. In fiscal year
1999, the Company spent approximately $11,154,000 (13.1 percent of net sales) in
research and product development activities, compared to $11,554,000
11
(14.3 percent of net sales) and $10,939,000 (13.6 percent of net sales) in
fiscal 1998 and 1997, respectively.
PATENTS AND LICENSES
One or more aspects of several products currently marketed by the
Company are covered by patents owned by the Company or licensed to the Company
by outside inventors. While the Company believes that patent protection is
important to its business, it does not believe that the expiration or
invalidation of any particular patent would have a material adverse effect on
its business. All licenses held with respect to technology used by the Company
are believed to be fully enforceable. The loss of any one of several licenses
held by the Company would probably not have significant adverse effect on the
Company.
During fiscal 1999, the Company licensed the exclusive rights for
the development of an Aerosol Time-of-Flight Mass Spectrometer (ATOFMS) from the
University of California-Riverside. An ATOFMS will detect the chemical
composition of each aerosol particle that it samples into its inlet. This will
allow users to trace airborne particles in the atmosphere to their sources. The
agreement expires in 2017 when the underlying patent expires. Also during fiscal
1999, the Company signed an exclusive license agreement with the Canadian
Department of National Defence for fluorescent technology currently used in its
biodetection instrument sold under aforementioned contract to the U.S. Army. The
license runs until the underlying patent expires in 2017.
EMPLOYEES
As of March 31, 1999, the Company had 495 employees. The Company's employees are
not represented by a union, although Alnor Instrument Company, a wholly owned
subsidiary acquired in fiscal 1996, had about 35 production employees
represented by an in-house union up until December 31, 1998 when its members
voted to dissolve the union. There has never been a work stoppage due to labor
difficulties and the Company considers its relations with employees to be
satisfactory at all locations.
Item 2. PROPERTIES
The Company's general offices and main manufacturing facilities are
located at 500 Cardigan Road, Shoreview, Minnesota 55126. This building contains
approximately 140,000 square feet. Constructed for the Company, it has been in
use by the Company since 1976 and is well suited to the Company's operations.
This building was built in three parts, the first being completed in fiscal
1977, the second in fiscal 1981 and the third, which added 58,000 square feet of
space, in fiscal 1996. The project for the third part, along with related
furnishings, product equipment and improvements in the existing space, had a
total cost of about $4 million during fiscal years 1995 and 1996. The expansion
and remodeling project resulted in a facility that is ideally suited for the
Company's diversified product lines and markets. As of March 31, 1999, the
productive capacity of this building is estimated to be from 30 to 50 percent
higher than fiscal 1996 levels, depending on the type of increased business
encountered. The increased production capacity was necessary because of higher
sales of analytical and research products which require more engineering
support, making second shift production less feasible than for higher volume,
industrially oriented products. The Company owns additional land at the same
location on which it can build up to 80,000 square feet of additional space if
necessary.
The Company also leases space for subsidiary operations which has in
each case been modified to suit requirements.
Item 3. LEGAL PROCEEDINGS
No material legal proceedings were pending or threatened against the
Company or its subsidiaries as of March 31, 1999.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the year
ended March 31, 1999, for a vote by the shareholders.
12
PART II
Item 5. MARKET FOR REGISTRANTS' COMMON EQUITY & RELATED MATTERS
The information in the sections titled "Stock and Dividend Data" and
"Stock Data" on page 11 of the Company's 1999 Annual Report to Shareholders is
incorporated herein by reference.
Item 6. SELECTED FINANCIAL DATA
The information in the section titled "Eleven-Year Financial data
Summary" for the years 1989 through 1999 on pages 10 and 11 of the Company's
1999 Annual Report to Shareholders is incorporated herein by reference.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
The information in the section titled "Management's Discussion and
Analysis of Results of Operations and Financial Condition" on pages 12 through
15 of the Company's 1999 Annual Report to Shareholders is incorporated herein by
reference.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and notes thereto on pages 16
through 24 of the Company's 1999 Annual Report to Shareholders is incorporated
herein by reference.
The following supplemental financial data are included herein and
should be read in conjunction with the consolidated financial statements in the
Company's 1999 Annual Report to Shareholders:
Schedule II: Valuation and Qualifying Accounts, page F-4.
Schedule X: Supplementary Income Statement Information, page F-5.
Item 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The information concerning the Company's directors set forth
in the Company's Proxy Statement for 1999 is incorporated by
reference herein.
(b) The executive officers of the Company are:
Name Age Position with the Company and Business Experience
- -------------------------------------------------------------------------------
James E. Doubles 58 Chairman since July 1998 and a Director. President
and Chief Executive Officer since July 1997,
President and Chief Operating Officer of the
Company from July 1992 until July 1997.
Lowell D. Nystrom 63 Senior Vice President since December 1997 and a
Director. Mr. Nystrom was Vice President,
13
Treasurer and Chief Financial Officer of the
Company from 1961 to December 1997.
Robert F. Gallagher 44 Vice President and Chief Financial Officer since
December 1997. Mr. Gallagher was Controller for
the Company from October 1989 to December 1997.
(c) Section 16(a). See the Company's Proxy Statement for 1999
Annual Meeting of Shareholders, dated on or about June 30,
1999 which is incorporated herein by reference.
(d) There are no family relationships between and among directors
or officers.
(e) Business experience of directors may be found in the Company's
Proxy Statement for 1999 Annual Meeting of Shareholders, dated
on or about June 30, 1999 which is incorporated herein by
reference.
Item 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by
reference from Proxy Statement for 1999 Annual Meeting of Shareholders, dated on
or about June 30, 1999, under the caption "Executive Compensation".
Item 12. PRINCIPAL SHAREHOLDERS
The information required by Item 12 is incorporated herein by
reference from the Company's Proxy Statement for 1999 Annual Meeting of
Shareholders, dated on or about June 30, 1999, under the caption "Principal
Shareholders".
Item 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) See accompanying Index to Financial Statements on page F-1.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of
fiscal 1999. The Company filed a Form 8-K on June 10, 1999
reflecting the acquisition of Environmental Systems
Corporation.
(c) Exhibits included herein:
Exhibit 3a: Restated Articles of Incorporation as amended
in November, 1984, October, 1986 and July,
1996, hereby incorporated by reference.
14
Exhibit 3b: Restated Bylaws adopted June, 1987, hereby
incorporated by reference.
Exhibit 10.a* TSI Incorporated Incentive Stock Option Plan of
1982, incorporated by reference from Form S-8,
File No. 1-91697, July 25, 1988.
Exhibit 10.b* TSI Incorporated Stock Option Plan of 1988,
incorporated by reference from Form S-8, File
No. 33-20627, August 22, 1989.
Exhibit 10.c* TSI Incorporated Stock Option Plan of 1992,
incorporated by reference from Form S-8, File
No. 33-66194, July 19, 1993.
Exhibit 10.d* TSI Incorporated Stock Purchase Plan of 1994,
incorporated by reference from Form S-8, File
No. 33-86468, November 17, 1994.
Exhibit 11: Computation of Per Share Earnings.
Exhibit 13: The Company's 1999 Annual Report to
Shareholders for the fiscal year ended March
31, 1999.
Exhibit 21: Subsidiaries of the Company.
Exhibit 23: Auditors' Consent.
Exhibit 99: Forward Looking Statements.
Exhibit 27: Financial Data Schedule.
- ------------
*Indicates management contract or compensation plan or arrangement required to
be filed as an exhibit.
15
SIGNATURES
Pursuant to the requirement of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: June 25, 1999 TSI INCORPORATED
/s/ James E. Doubles
--------------------
James E. Doubles
Chairman, President & Chief Executive Officer
Pursuant to the requirements of the Securities Exchange act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Signature Title Date
/s/James E. Doubles Chairman, President, Chief Executive June 25, 1999
- ------------------- Officer and Director -------------
James E. Doubles (Principal Executive Officer)
/s/Lowell D. Nystrom Senior Vice President and a Director June 25, 1999
- -------------------- -------------
Lowell D. Nystrom
/s/Robert F. Gallagher Vice President and Chief Financial June 25, 1999
- ---------------------- Officer (Principal Financial and -------------
Robert F. Gallagher Accounting Officer)
/s/John F. Carlson Director June 25, 1999
- ------------------ -------------
John F. Carlson
/s/Frank D. Dorman Director June 25, 1999
- ------------------ -------------
Frank D. Dorman
/s/Joseph C. Levesque Director June 25, 1999
- --------------------- -------------
Joseph C. Levesque
/s/Donald M. Sullivan Director June 25, 1999
- --------------------- -------------
Donald M. Sullivan
/s/Kenneth J. Roering Director June 25, 1999
- --------------------- -------------
Kenneth J. Roering
/s/Lawrence J. Whalen Director June 25, 1999
- --------------------- -------------
Lawrence J. Whalen
16
page F-1
TSI INCORPORATED 10-K
TSI INCORPORATED AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
A. STATEMENTS OF REGISTRANT
No separate financial statements of the Registrant are included herein
as the Registrant is primarily an operating company. All subsidiary
companies are wholly owned, and their indebtedness to any person other
than the Registrant or its consolidated subsidiaries is, in the
aggregate, less than 5% of consolidated assets at March 31, 1999. The
financial statements of the Registrant and all subsidiaries are
included in the consolidated financial statements.
B. CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to the consolidated financial statements in the
Company's 1999 Annual Report to Shareholders which are incorporated
herein by reference in accordance with Rule 12b-23 under the Securities
Exchange Act of 1934 and attached hereto.
Annual
Report
Page 10-K Page
---- ---------
Quarterly Financial Information (Unaudited) 16 -
Consolidated Statements of Earnings for the Years
Ended March 31, 1999, 1998 and 1997 16 -
Consolidated Balance Sheets - March 31, 1999 and 1998 17 -
Consolidated Statements of Cash Flows for the Years
Ended March 31, 1999, 1998 and 1997 18 -
Consolidated Statements of Shareholders' Equity for
Years Ended March 31, 1999, 1998 and 1997 19 -
Notes to Consolidated Financial Statements 19 -
Independent Auditors' Report 24 -
C. INDEPENDENT AUDITORS' REPORT ON - F-3
FINANCIAL STATEMENT SCHEDULES
17
page F-2
D. CONSOLIDATED SCHEDULES
Schedule Description 10-K Page
- -------- ----------- ---------
II Valuation and Qualifying Accounts F-4
X Supplementary Income Statement Information F-5
All schedules except those listed above have been omitted as not required, not
applicable, or the information required therein is contained in the financial
statements or the footnotes thereto.
18
page F-3
Independent Auditors' Report on Financial Statement Schedules
The Board of Directors and Shareholders
TSI Incorporated:
Under date of May 7, 1999, except as to Note K which is as of May 26, 1999, we
reported on the consolidated balance sheets of TSI Incorporated and subsidiaries
as of March 31, 1999 and 1998 and the related consolidated statements of
earnings, cash flows and shareholders' equity for each of the years in the
three-year period ended March 31, 1999 as contained in the 1999 annual report to
shareholders. These consolidated financial statements and our report thereon are
incorporated in the annual report on Form 10-K for the year 1999. In connection
with our audits of the aforementioned consolidated financial statements, we also
have audited the related financial statement schedules as listed in the
accompanying index (see Item 8). These financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
/s/ KPMG Peat Marwick LLP
Minneapolis, Minnesota
May 7, 1999, except as to Note K
which is as of May 26, 1999
19
page F-4
SCHEDULE II; VALUATION AND QUALIFYING ACCOUNTS
TSI INCORPORATED AND SUBSIDIARIES
- --------------------------------------------------------------------------------
COL. A COL. B COL. C COL. D COL. E
- --------------------------------------------------------------------------------
Additions
(1) (2) Bad debts
Description Balance Charged to Charged Charged Balance
beginning cost and to other against end of
of period expenses accounts reserve period
- --------------------------------------------------------------------------------
Year ended
March 31, 1999
Deducted from
Asset Accounts
Allowance for
doubtful accounts: $280,000 $132,000 $ 0 $127,000 $285,000
Year ended
March 31, 1998
Deducted from
Asset Accounts
Allowance for
doubtful accounts: $275,000 $ 29,000 $ 0 $ 24,000 $280,000
Year ended
March 31, 1997
Deducted from
Asset Accounts
Allowance for
doubtful accounts: $267,000 $ 17,000 $ 4,000* $ 13,000 $275,000
- -------------
*Added in acquisitions
20
page F-5
SCHEDULE X: SUPPLEMENTARY INCOME STATEMENT INFORMATION
TSI INCORPORATED AND SUBSIDIARIES
- --------------------------------------------------------------------------------
COL. A COL. B
Charged to Costs and Expenses
Item Year Ended March 31
1999 1998 1997
- --------------------------------------------------------------------------------
Advertising $1,676,000 $1,555,000 $1,568,000
- --------------------------------------------------------------------------------
Amounts for royalties, amortization on intangible assets, taxes other than
payroll and income, and maintenance and repairs are not presented as such
amounts are less than 1% of net sales.
21
page F-6
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
11 Computation of Per Share Earnings F-7
13 Annual Report to Shareholders for the F-8
fiscal year ended March 31, 1999
21 Subsidiaries of the Company F-9
23 Auditors' Consent F-10
99 Forward Looking Statements F-11
27 Financial Data Schedule
22