-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NOMShHducJBbdf78VdN/EprQ3aWeW2LWyRGm/EfuRwOv7wcqn7oRjllHgPIECmSO R0KBwa9Yscudw/Ff7q8uXw== 0000897101-99-001097.txt : 19991117 0000897101-99-001097.hdr.sgml : 19991117 ACCESSION NUMBER: 0000897101-99-001097 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TSI INC /MN/ CENTRAL INDEX KEY: 0000100063 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL [3823] IRS NUMBER: 410843524 STATE OF INCORPORATION: MN FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-02958 FILM NUMBER: 99755230 BUSINESS ADDRESS: STREET 1: 500 CARDIGAN ROAD CITY: SHOREVIEW STATE: MN ZIP: 55126 BUSINESS PHONE: 6514830900 MAIL ADDRESS: STREET 1: 500 CARDIGAN ROAD STREET 2: D CITY: ST PAUL STATE: MN ZIP: 55126-3996 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 10549 Form 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED SEPTEMBER 30, 1999. 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. Employer Identification Number) incorporation or organization) 500 Cardigan Road, Shoreview, Minnesota 55126 - --------------------------------------------- (Address of principal executive offices) 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 proceeding 20 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 number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. Date: October 28, 1999 Number of Common Shares Outstanding: 11,339,322 -1- TSI INCORPORATED FORM 10-Q For the Quarter Ended September 30, 1999 Page ---- PART I FINANCIAL INFORMATION 2 Item 1 Financial Statements Consolidated Statements of Earnings 3 Consolidated Balance Sheets 4 Consolidated Statements of Cash Flows 5 Notes to Consolidated Financial Statements 6-8 Item 2 Management's Discussion and Analysis of Results of Operations and Financial Condition 9-11 PART II OTHER INFORMATION 13 EXHIBIT 11 Computation of Per Share Earnings 15 EXHIBIT 99 Stay-in-Place Agreements 16-30 -2- CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 1999 1998 1999 1998 - ------------------------------------------------------ ------------ ------------ ------------ ------------ Net sales $ 28,680,358 $ 22,945,742 $ 52,380,394 $ 41,528,814 Cost of products sold 13,684,477 10,411,788 24,268,119 18,641,018 - ------------------------------------------------------ ------------ ------------ ------------ ------------ GROSS PROFIT 14,995,881 12,533,954 28,112,275 22,887,796 Operating expenses Research and product development 2,893,977 2,635,685 5,712,135 5,441,986 Selling 5,305,825 4,703,280 10,209,620 9,252,373 Administrative 2,294,505 1,779,186 4,195,825 3,261,692 - ------------------------------------------------------ ------------ ------------ ------------ ------------ 10,494,307 9,118,151 20,117,580 17,956,051 - ------------------------------------------------------ ------------ ------------ ------------ ------------ OPERATING INCOME 4,501,574 3,415,803 7,994,695 4,931,745 Other income (expense) (42,004) 100,254 150,131 259,262 Proxy contest and related costs (344,977) 0 (436,088) 0 - ------------------------------------------------------ ------------ ------------ ------------ ------------ EARNINGS BEFORE INCOME TAXES 4,114,593 3,516,057 7,708,738 5,191,007 Provision for income taxes 1,439,000 1,160,000 2,697,000 1,713,000 - ------------------------------------------------------ ------------ ------------ ------------ ------------ NET EARNINGS $ 2,675,593 $ 2,356,057 $ 5,011,738 $ 3,478,007 ============ ============ ============ ============ BASIC EARNINGS PER COMMON SHARE $ .24 $ .21 $ .45 $ .31 - ------------------------------------------------------ ============ ============ ============ ============ DILUTIVE EARNINGS PER COMMON SHARE $ .23 $ .20 $ .44 $ .30 - ------------------------------------------------------ ============ ============ ============ ============ Weighted average common shares outstanding 11,293,630 11,385,894 11,238,138 11,398,859 Dilutive effect of employee stock options and purchase awards 337,796 167,081 281,864 175,093 ------------ ------------ ------------ ------------ Weighted average common shares outstanding and dilutive shares 11,631,426 11,552,975 11,520,002 11,573,952 ============ ============ ============ ============
See notes to consolidated financial statements. -3- CONSOLIDATED BALANCE SHEETS (Unaudited)
SEPTEMBER 30 March 31 September 30 1999 1999 1998 - -------------------------------------------- ------------ ------------ ------------ ASSETS CURRENT ASSETS Cash and cash equivalents $ 3,437,804 $ 13,437,396 $ 7,530,169 Accounts receivable 23,313,430 14,461,708 18,111,779 Net assets held for sale 3,878,506 0 0 Recoverable income taxes 2,617,009 0 0 Prepaid expenses 675,997 307,852 335,794 Inventories Finished products 2,924,708 3,309,948 2,980,320 Work-in-process 3,198,985 2,530,098 3,148,620 Materials and supplies 9,628,186 9,698,650 9,638,030 - -------------------------------------------- ------------ ------------ ------------ 15,751,879 15,538,696 15,766,970 - -------------------------------------------- ------------ ------------ ------------ TOTAL CURRENT ASSETS 49,674,625 43,745,652 41,744,712 INTANGIBLES AND OTHER ASSETS Goodwill 16,707,385 4,438,845 3,714,339 Note receivable 464,752 451,981 583,323 Deferred income tax benefit 127,661 1,225,246 528,180 Other assets 4,209,472 3,085,388 2,716,289 - -------------------------------------------- ------------ ------------ ------------ 21,509,270 9,201,460 7,542,131 PROPERTY, PLANT AND EQUIPMENT Land 779,278 128,503 128,503 Buildings 6,999,041 3,713,160 3,713,160 Construction in progress 434,014 70,396 43,422 Machinery and equipment 23,651,342 20,444,388 20,355,763 - -------------------------------------------- ------------ ------------ ------------ 31,863,675 24,356,447 24,240,848 Less allowance for depreciation 18,432,001 16,335,860 16,165,788 - -------------------------------------------- ------------ ------------ ------------ 13,431,674 8,020,587 8,075,060 - -------------------------------------------- ------------ ------------ ------------ TOTAL ASSETS $ 84,615,569 $ 60,967,699 $ 57,361,903 ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 10,000,000 $ 0 $ 0 Accounts payable and accrued expenses 12,172,150 5,338,538 4,976,859 Employee compensation 3,751,379 4,411,871 3,297,689 Taxes, other than income taxes 842,114 472,982 467,266 Income taxes payable 927,724 1,349,827 960,411 Current portion of long-term debt 153,333 0 0 - -------------------------------------------- ------------ ------------ ------------ TOTAL CURRENT LIABILITIES 27,846,700 11,573,218 9,702,225 Long-term debt, less current portion 2,004,465 0 0 - -------------------------------------------- ------------ ------------ ------------ TOTAL LIABILITIES 29,851,165 11,573,218 9,702,225 SHAREHOLDERS' EQUITY Common shares, $.10 par value 1,132,613 1,115,179 1,134,931 Additional paid-in capital 12,472,186 11,408,516 11,372,407 Retained earnings 41,431,848 37,094,220 35,223,537 Equity adjustment from translation (272,243) (223,434) (71,197) - -------------------------------------------- ------------ ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 54,764,404 49,394,481 47,659,678 - -------------------------------------------- ------------ ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 84,615,569 $ 60,967,699 $ 57,361,903 ============ ============ ============
See notes to consolidated financial statements. -4- CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED SEPTEMBER 30 1999 1998 - ---------------------------------------------------------------- ------------ ------------ OPERATING ACTIVITIES Net earnings $ 5,011,738 $ 3,478,007 Adjustments to reconcile net earnings to net cash provided by operating activities: Provision for losses on accounts receivable (95,732) 29,923 Depreciation and amortization of property, plant & equipment 1,143,239 935,161 Amortization of intangibles 337,243 279,253 Amortization of goodwill 374,489 120,564 Gain on sale of assets 19,607 1,514 Provision for deferred income tax 2,600,308 (72,011) Changes in operating assets and liabilities: Accounts receivable (1,868,578) (1,633,342) Recoverable income taxes (2,617,009) 0 Prepaid expenses (122,437) (112,081) Inventories (892,461) (250,688) Other assets (74,454) (67,977) Accounts payable and accrued expenses 1,452,900 52,379 Employee compensation payable (498,156) (620,921) Taxes, other than income taxes 223,113 (52,019) Current income taxes payable (209,492) (68,246) Foreign currency translation gain (loss) (33,041) 225,453 - ---------------------------------------------------------------- ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 4,751,277 2,244,969 - ---------------------------------------------------------------- ------------ ------------ INVESTING ACTIVITIES Additions to property, plant and equipment (912,138) (572,155) Proceeds from disposal of property, plant and equipment 6,267 213 Purchase of companies, net of cash acquired (23,661,105) 0 - ---------------------------------------------------------------- ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (24,566,976) (571,942) - ---------------------------------------------------------------- ------------ ------------ FINANCING ACTIVITIES Net proceeds from short-term notes 9,462,317 0 Payment on long-term note (38,334) 0 Proceeds from stock options exercised 601,053 96,544 Proceeds from employee stock purchases 480,051 0 Dividends paid (674,109) (684,570) Purchases of common stock 0 (2,886,875) - ---------------------------------------------------------------- ------------ ------------ NET CASH PROVIDED BY AND USED IN FINANCING ACTIVITIES 9,830,978 (3,474,901) - ---------------------------------------------------------------- ------------ ------------ Effect of exchange rate changes on cash and cash equivalents (14,871) (53,466) - ---------------------------------------------------------------- ------------ ------------ DECREASE IN CASH AND CASH EQUIVALENTS (9,999,592) (1,855,340) - ---------------------------------------------------------------- ------------ ------------ Cash and cash equivalents at beginning of year 13,437,396 9,385,509 - ---------------------------------------------------------------- ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF SIX MONTH PERIOD $ 3,437,804 $ 7,530,169 ============ ============
See notes to consolidated financial statements. -5- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 1999 (Unaudited) Note 1. Basis of Presentation The information included in the accompanying interim financial statements is unaudited. In the opinion of management, all adjustments, consisting of normal recurring accruals necessary for a fair presentation of the results of operations, financial position and cash flows for the interim periods presented have been reflected herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the entire year. Note 2. Earnings Per Share See Exhibit 11, Computation of Per Share Earnings, on page 15 of this document. Note 3. Comprehensive Income Effective fiscal 1999, the Company has adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income". This statement requires companies to classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in-capital in the equity section of the balance sheet, and is effective for the Company's fiscal year ending March 31, 1999. The Company's only item of other comprehensive income is foreign currency translation adjustments. This item is separately displayed in the equity section of the balance sheet. At September 30, comprehensive income, net of tax, differs from net income by the following: Increase (Decrease) ------------------- 1999 1998 ---- ---- Quarter Ended (110,290) 163,088 ======== ======== Six Months Ended 48,809 (213,282) ======== ======== Note 4. Segment Information The Company develops, manufactures, and markets measuring and control instruments for a variety of applications. The Company's products can best be divided into two market segments. These are the Safety, Comfort, and Health segment and the Productivity and Quality Improvement segment. The Safety, Comfort, and Health segment consists of instruments that monitor and control the environment in which people work and live. These include analytical and research instruments used to characterize very small particles, products that monitor indoor air quality, and products that help to protect people from toxic airborne substances. The Productivity and Quality Improvement -6- segment produces instruments that help customers enhance their industrial processes and improve their products. These include flow-related measuring instruments, noncontact measuring devices for manufacturers of metals and wire, filter testers, and instruments for measuring the speed and concentration of droplets in industrial sprays. The Company evaluates performance based on operating profit or loss before other income, interest, and taxes. Revenue from sales between the segments is not material. Three Months Ended September 30, 1999 1998 ---- ---- Net Sales Safety, Comfort, and Health $ 22,918,000 $ 17,129,000 Productivity and Quality Improvement $ 5,762,000 $ 5,817,000 ------------ ------------ $ 28,680,000 $ 22,946,000 ============ ============ Operating Income (Loss) Safety, Comfort, and Health $ 4,215,000 $ 4,631,000 Productivity and Quality Improvement $ 287,000 $ (1,215,000) ------------ ------------ $ 4,502,000 $ 3,416,000 ============ ============ Six Months Ended September 30, 1999 1998 ---- ---- Net Sales Safety, Comfort, and Health $ 41,815,000 $ 30,831,000 Productivity and Quality Improvement $ 10,565,000 $ 10,698,000 ------------ ------------ $ 52,380,000 $ 41,529,000 ============ ============ Operating Income (Loss) Safety, Comfort, and Health $ 7,718,000 $ 7,243,000 Productivity and Quality Improvement $ 277,000 $ (2,311,000) ------------ ------------ $ 7,995,000 $ 4,932,000 ============ ============ Note 5. Proxy Contest and Related Expenses A shareholder made an unsolicited bid for the Company that was rejected by the Company's Board of Directors. The shareholder then initiated a proxy contest to elect an alternate slate to the Company's Board of Directors rather than the incumbents up for re-election as recommended by the Company. In addition, the shareholder's proxy sought changes to the Company's articles and bylaws making it easier for a change of control to occur without the approval of the Company's Board. The Company hired public relations professionals, attorneys, investment bankers, and a proxy solicitor to assist it in its efforts to oppose the shareholder's proxy, which was ultimately defeated. In addition, the Company continues to use these advisors to help review strategic alternatives, including seeking offers of higher value. Costs associated with these advisors have been recorded as incurred and have been reported as a separate line on the consolidated statement of earnings. -7- Note 6. Acquisition of Environmental Systems Corporation Effective June 1, 1999, the Company acquired the stock of Environmental Systems Corporation of Knoxville, Tennessee. Environmental Systems Corporation specializes in technology-based products and services relating to environmental monitoring, power production and waste management. The acquisition was accounted for by the purchase method of accounting. The acquisition price of $25 million was paid in cash. To finance the acquisition, the Company used its existing cash along with bank financing of $15 million made available under its line of credit. The initial debt is short-term with the ability to extend the term for periods not to exceed five years. The debt was paid off on October 1, 1999 using cash from operations and the proceeds from the Handar sale (see Note 7). The Company filed a Form 8-K with pro forma fiscal 1999 financial statements reflecting the acquisition. Note 7. Subsequent Event Effective October 1, 1999, the Company sold the net assets of its wholly owned subsidiary, Handar to an independent third party for $12,469,000. Of the total, $11,200,000 was paid in cash, with the remaining $1,269,000 held in escrow to be paid in two installments of $634,500 on the first two anniversaries of the sale. The Company will record a pre-tax gain on the sale of $8,590,000 in the quarter ended December 31, 1999. -8- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Statements From time to time, in written and oral statements, TSI Incorporated discusses expectations regarding its future performance, including such things as sales and expense trends, global economic issues, future order potentials and Year 2000 risks. These "forward-looking statements" are based on currently available competitive, financial and economic data and the Company's operating plans. They are inherently uncertain, and investors must recognize that events could turn out to be significantly different from expectations. Acquisition of Environmental Systems Corporation Effective June 1, 1999, the Company acquired Environmental Systems Corporation (ESC) of Knoxville, Tennessee for approximately $25 million in cash. Since ESC's operations represent approximately 20 to 25 percent of the Company's total business, ESC's impact, where significant, has been noted below in order to present a more meaningful comparison between periods. Results of Operations Following is a quarterly sales breakdown by segment: Second Quarter -------------- Percent 1999 1998 Change ---- ---- ------ Safety, Comfort, and Health $22,918,000 $17,129,000 34% Productivity and Quality Improvement 5,762,000 5,817,000 (1) ----------- ----------- --- 28,680,000 22,946,000 25 =========== =========== === The increase in sales was due to the June 1, 1999 acquisition of Environmental Systems Corporation (ESC). For the quarter, excluding ESC, sales were essentially flat with the prior year. Year-to-date sales have increased $10,852,000 or 26%. Excluding ESC, year-to-date sales have increased 6.8%. This increase is mostly attributable to increased demand for particle research instruments. Sales to U.S. and state government agencies, including defense, shown as a percent of total sales, were: September 30, 1999 1998 ---- ---- Quarter 21% 25% Year-to-date 23% 23% While the government percentage to total sales is high, the Company sells many different products to a very diverse range of government agencies. Consequently, government sales during the past several years have been quite stable as a percentage of total sales. We consider the current percentages to be within the normal range. -9- International sales rose $1,173,000 or 18 percent for the quarter compared with last year. ESC accounted for $925,000 of the increase with the remainder attributable to various other safety, comfort, and health products. Year-to-date international sales were $3,807,000 above the prior year. This was primarily due to three factors: (1) the addition of ESC, (2) strong sales of particle research products, and (3) sales of process instruments to the metals industry. Order bookings were as follows: Second Quarter Percent -------------- ------- 1999 1998 Change ---- ---- ------ Quarter $30,604,000 $21,651,000 41% Year-to-date $51,488,000 $39,271,000 31% Excluding ESC and Handar (which was sold October 1, 1999) we saw a 12% increase in incoming orders for the quarter and 14% year-to-date. Orders were particularly strong for (1) particle research instruments, and (2) flowmeters sold to the medical industry. Both are within our safety, comfort, and health area. For the six-months ended September 30, 1999 and 1998, Handar had sales of $3,885,000 and $4,278,000, respectively. For the same six-month periods, Handar had bookings of $4,122,000 and $5,127,000 in 1999 and 1998, respectively. These are included in the Company's consolidated financial results. For all of fiscal year 1999, Handar had sales of $9,186,000 and bookings of $7,992,000. Gross profit has ranged between 55.6% and 56.0% over the last three fiscal years. For the quarter it was 52.3%, and 53.7% for the six-months. The lower percentages are due to the acquisition of ESC. ESC's business includes air monitoring systems with a heavy buy/resell component. In addition, ESC does environmental consulting which is more labor intensive than the Company's traditional instrument sales. Consequently, we anticipate the Company's gross margin for the remainder of the current year will be closer to the current quarter's level than historical levels. This will, however, be somewhat dependent on product mix. Research and development costs dropped to 10.1% of sales for the quarter, bringing the year-to-date costs to 10.9% of sales. The Company continues its commitment to growth through development of new technologies and products. Again, these percentages are impacted by the ESC business, which is not as reliant on research and product development spending. Excluding ESC, research and development expenses were near the low end of the historical range. For all of fiscal 2000, research and development expenses are expected to be between 10% and 11% of sales. For the last three years, selling expenses have ranged between 21.6% and 23.3% of sales. Selling expenses were 18.5% of net sales for the second quarter compared to 20.5% last year. For the first six months of fiscal 2000, selling expenses were 19.5% compared to 22.3% a year ago. Excluding ESC, selling expenses were near the low end of the historical range. For all of fiscal 2000, we would expect selling expenses to be between 18.5% and 20% of sales. Administrative expenses were 8.0% of sales for the quarter compared to 7.8% last year. For the first six months of fiscal 2000, administrative expenses were 8.0% compared to 7.9% in fiscal 1999. The -10- Company expects administrative costs to continue within our normal operating range between 7 and 8 percent for the rest of the year. Other income varies depending on foreign currency fluctuations, interest rates and invested cash balances and borrowing levels. The first half of fiscal 2000 included significant interest expense related to borrowings made to acquire ESC. Fiscal 1999 did not include any borrowings. Income taxes represent 35% of pre-tax income this year compared to 33% last year. The increase in the fiscal 2000 tax rate is primarily due to the intangible assets from the ESC acquisition. The intangibles are permanent differences and not deductible for tax purposes. We would expect the rate for the rest of the year to be 34% to 36% exclusive of the Handar gain, depending on our international sales level and the benefit the Company receives from its foreign tax credit. We expect to recognize an effective tax rate of between 41 and 43 percent on the Handar gain. Liquidity and Capital Resources TSI's cash decreased $10,000,000 since March 31, 1999. As shown on the statement of cash flows, the Company generated $4,751,000 of cash from operating activities offset primarily by $912,000 in capital expenditures, and $674,000 in dividends, and cash paid to acquire ESC. The Company had net short-term borrowings of $9,462,000 primarily used to fund the ESC acquisition. At September 30, 1999, the Company had $3,438,000 cash on hand and believes operations will continue to generate sufficient cash to fund current operating needs. Additionally, on October 1, 1999 the Company used the proceeds from the sale of the net assets of its Handar subsidiary to pay-off its bank line of credit. The Company believes it has sufficient borrowing capacity should the need arise. Year 2000 Conversion The Company has reviewed and modified critical information technology ("IT") business systems and believe these systems are Year 2000 compliant. We have tested all major systems and they are compliant. While there may be some unidentified problems, we do not expect any issues that would represent significant business risk. The Company has also identified all non-IT systems and tested systems considered to be critical to the business. Certain of these systems required updating and the Company has made substantially all the updates. An initial list of key third party providers was made and direct discussions have been held in order to determine their state of Year 2000 readiness. Most critical vendors have indicated they will be Year 2000 compliant at various points during calendar 1999 and we will not have a stoppage in the flow of critical goods or services. The Company has extended the number of vendors identified to insure vendors significant to our business were identified and contacted. No problems have been found that we believe represent significant business risk. We believe alternative suppliers can be identified should our current suppliers fail to become Year 2000 compliant. A committee was formed to study current product lines to determine if hardware and software are Year 2000 compliant. We have conducted reviews, using both internal staff and external consultants, to assess our state of Year 2000 readiness. The reviews included reviewing Year 2000 instrumentation -11- testing, critical vendor correspondence, a facility tour, and a questionnaire assessing each operation's readiness. These reviews were completed in July 1999. The Company's products fall into the following categories: YEAR 2000 COMPLIANT - the Company has identified several products and made them Year 2000 compliant. We have responded to customers' requests to provide these upgrades and, in some cases, customers can download updated software from our internet web site to make the products Year 2000 compliant. NON-COMPLIANT INSTRUMENTS OR INSTRUMENTS NOT RELYING ON DATE INFORMATION - the Company has identified several instruments that do not rely on any internal or external date coding. It is anticipated no modification will be required to these instruments. In addition, the Company has fielded several instruments in the past using date information that the Company does not intend making Year 2000 compliant. The Company is responding to specific customer requests on these instruments as well as providing information on our Internet web site. OTHER - there are still some products where the Year 2000 review has not been completed. It is expected the remaining reviews will be completed before the end of calendar 1999. It is anticipated any products not tested to this point will not be made Year 2000 compliant. However, we do not feel this will be a deterrent from the customer purchasing these instruments because it will only affect the dating information and not the performance of the instrument. There can be no assurance regarding the customers' response to any Year 2000 issues we have yet to identify. Our Year 2000 compliance program is being carried out with internal staff without significant additional outside expenditures. However, Year 2000 issues have accelerated approximately 10 to 15 percent of our capital purchases by one to two years. For example, during the third quarter of fiscal 1999, the Company replaced the main IBM AS400 computer system at corporate headquarters with one meeting the requirements of Year 2000. Additionally, the Company made similar replacements at its domestic subsidiaries during the fourth quarter of fiscal 1999. Foreign subsidiary systems comprise a small portion of the overall system and their systems are currently under review. It is expected this review will be completed by early December 1999. The Company estimates that historical and future costs associated with its Year 2000 program will not exceed $200,000 annually for fiscal years 1998 through 2000. Such costs are expensed as incurred. Management does not believe the focus on Year 2000 compliance has caused us to ignore other types of upgrades to any critical systems. Failure to complete upgrades to existing systems, or third party providers being unable to supply us with inventory, could result in the company being unable to ship certain products. However, management believes the remaining system changes required can be readily implemented well before January 1, 2000 and, therefore, will not subject the Company to significant business risks. The Company has developed a corporate contingency plan to mitigate possible disruptions in services or business operations. Additional contingency plans will be developed within the operating units during the remainder of calendar 1999 and the company will monitor the need for implementing such plans. -12- PART II. OTHER INFORMATION Item 6. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 11 - Computation of Per Share Earnings Exhibit 27 - Financial Data Schedule Exhibit 99 - Stay-in-Place Agreements (b) Reports on Form 8-K: No reports on Form 8-K have been filed by the Registrant during the quarter for which this report is being filed. -13- 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. Registrant: TSI Incorporated Date: November 15, 1999 By: /s/ James E. Doubles ------------------------- James E. Doubles President & CEO Date: November 15, 1999 By: /s/ Robert F. Gallagher ------------------------- Robert F. Gallagher Vice President & CFO -14- EX-11 2 COMPUTATION OF PER SHARE EARNINGS EXHIBIT 11 TSI Incorporated Computation of Per Share Earnings
Three Months Ended Six Months Ended September 30 September 30 1999 1998 1999 1998 --------------------- --------------------- BASIC Weighted average common shares outstanding 11,293,630 11,385,895 11,238,138 11,398,859 ----------- ----------- ----------- ----------- Net Earnings $ 2,675,593 $ 2,356,057 $ 5,011,738 $ 3,478,007 ----------- ----------- ----------- ----------- Basic earnings per common share $ .24 $ .21 $ .45 $ .31 =========== =========== =========== =========== DILUTED Weighted average common shares outstanding 11,293,630 11,385,894 11,238,138 11,398,859 ----------- ----------- ----------- ----------- Dilutive effect of employee stock options and purchase awards--based on the treasury stock method 337,796 167,081 281,864 175,093 ----------- ----------- ----------- ----------- Weighted average common shares outstanding and dilutive shares 11,631,426 11,552,975 11,520,002 11,573,952 ----------- ----------- ----------- ----------- Net Earnings $ 2,675,593 $ 2,356,057 $ 5,011,738 $ 3,478,007 ----------- ----------- ----------- ----------- Diluted earnings per common share $ .23 $ .20 $ .44 $ .30 =========== =========== =========== ===========
-15- EX-99 3 STAY IN PLACE AGREEMENT EXHIBIT 99 STAY IN PLACE AGREEMENT OF JAMES E. DOUBLES This Stay in Place Agreement (the "Agreement") between TSI Incorporated, a Minnesota corporation (the "Company"), and James E. Doubles (the "Executive") is effective as of June 16, 1999. BACKGROUND A. The Company believes it is in its best interests and its stockholders' best interests to retain the services of the Executive in the event of a threat or occurrence of a Change in Control (as defined in Section 2.1 below) and to ensure his continued dedication and efforts in such event. B. In order to induce the Executive to remain an employee of the Company, particularly in the event of a threat or the occurrence of a Change in Control, the Company desires to enter into this Agreement with the Executive to provide him with certain benefits if a Constructive Discharge, as defined in Section 2.2 below, or a Termination Without Good Cause, as defined in Section 2.3 below, occurs within two years following a Change in Control of the Company. AGREEMENT In consideration of the foregoing premises and the covenants contained in this Agreement, the parties agree as follows: 1. TERM OF AGREEMENT. Subject to the conditions set forth in Section 4, this Agreement shall continue until December 31, 2000; provided, however, that if a Change in Control occurs on or before December 31, 2000, this Agreement shall continue in full force and effect for two years thereafter. 2. DEFINITIONS. 2.1 CHANGE IN CONTROL. For the purposes of this Agreement, "Change in Control" shall mean any one of the following: (a) a "Change in Control" of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (b) the sale, lease, transfer, conveyance or other disposition (pursuant to a sale of assets, a merger or consolidation or similar transaction, in one or a series of related transactions, of all or substantially all of the assets of the Company taken as a whole to any "person" (as defined below)) or a merger, consolidation or similar transaction to which the Company is a party if, following the effective date of such merger, consolidation or similar transaction, the individuals and entities who were stockholders of the Company, as applicable, immediately prior to the effective date of such merger or consolidation have beneficial ownership (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act) of less than 50% of the combined voting power of the surviving corporation following the effective date of such merger or consolidation; (c) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) that, as of the date hereof, does not own 30% or more of the Company and becomes the "beneficial -16- owner" (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the then outstanding securities of the applicable entity; (d) any "person" (as such is used in Sections 13(d) and 14(d) of the Exchange Act) becomes, through or pursuant to a "tender offer," as that term is used in the Exchange Act and Regulations promulgated by the Securities and Exchange Commission thereunder, the "beneficial owner" (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the then outstanding securities of the applicable entity; (e) a majority of the Board of Directors is not made up of individuals who are members of the Board of Directors as of the effective date of this Agreement; (f) the adoption by the Company of a plan providing for the liquidation or dissolution of the Company. 2.2 CONSTRUCTIVE DISCHARGE. A "Constructive Discharge" will be deemed to have occurred if, after a Change in Control: (a) the Company, its successors or assigns, assigns the Executive a position, duties, responsibilities or status that are less desirable to the Executive than the Executive's position, duties, responsibilities and/or status immediately prior to the Change in Control; (b) there is an adverse change in the titles or offices the Executive held immediately prior to the Change in Control; (c) the Company, its successors or assigns, relocates the Executive to a location that is more than 30 miles from the Company's current headquarters in Shoreview, Minnesota; (d) the Company reduces the Executive's base salary, cash or stock performance bonus, or fringe benefits or fails to pay the Executive any material compensation or benefits to which the Executive is entitled within ten days of the date due; or (e) the Company breaches any of its obligations under this Agreement or any other Agreement with the Executive. 2.3 TERMINATION WITHOUT GOOD CAUSE. For purposes of this Agreement, "Termination Without Good Cause" shall be deemed to exist if after a Change in Control the Executive is terminated by the Company for any reason other than "Good Cause." "Good Cause" shall be deemed to be (a) the conviction of the Executive, by a court of competent jurisdiction, of a felony committed by the executive during the term of this Agreement; (b) the written confession by the Executive of a felony committed during the term of this Agreement; or (c) the conviction of or written confession by the Executive to the embezzlement or misappropriation of funds of the Company, which embezzlement or misappropriation was committed by the Executive during the term of this Agreement. 2.4 SUCCESSORS AND ASSIGNS. For purposes of this Agreement, "Successors and Assigns" shall mean a corporation or other entity or person acquiring all or substantially all the stock, assets, and/or business of the Company (including this Agreement) whether by agreement, operation of law, or otherwise. 3. MANDATORY PAYMENTS. If a Constructive Discharge or Termination Without Good Cause occurs within two years following a Change in Control, the Company, its successors or assigns, shall pay the Executive the full amount of the accrued but unpaid salary and fringe benefits he has earned through his last day of employment plus a cash bonus equal to a pro rata portion of 20% of salary, plus a cash payment (calculated on the basis of his rate of salary then in effect) for all unused vacation time which he may have accrued and any unpaid reimbursement expenses he is entitled to receive as of his last day of employment. In addition, if a Constructive Discharge or Termination Without Good Cause occurs within one year of the -17- Change in Control, the Company shall make a severance payment to the Executive equal to twice the then current annual salary and fringe benefits plus cash bonus equal to 40% of that annual salary, or if a Constructive Discharge or Termination Without Good Cause occurs more than one year but less than two years following the Change in Control, the Company shall make a severance payment to the Executive equal to the then current annual salary and fringe benefits plus cash bonus equal to 20% of that annual salary. All of the above amounts (except for unpaid salary and vacation which shall be paid immediately) shall be paid to the Executive within 30 days of his last day of employment. The Company's obligation to make these payments to the Executive is subject to fulfillment of all the conditions described in Section 4. 4. CONDITIONS PRECEDENT TO PAYMENT OF COMPENSATION. Payments of the compensation under Section 3 is contingent on the Executive satisfying both of the following conditions: (a) the Executive does not voluntarily resign his employment (absent a Constructive Discharge that arises after a Change in Control occurs), and (b) after a Change in Control occurs, the Executive does not have his employment Terminated for Good Cause. 5. RESTRICTIVE COVENANTS. 5.1 NONCOMPETITION. Executive agrees that, as a condition of receiving benefits under this Agreement, he/she will not, without prior written consent of the Company which will not be unreasonably withheld, render service directly or indirectly to any competing organization, wherever located, for a period of 18 months following the Date of Constructive Discharge or Termination Without Good Cause, in connection with the design, implementation, development, manufacture, marketing, sale, merchandising, leasing, servicing or promotion of any product, process, system or service of any person, firm, corporation, organization other than Company, in existence or under development, which utilizes a trade secret, competes with, or has a usage allied to, a product, process, system, or service produced, developed, or used by Company. Executive agrees that violation of this covenant not to compete with Company shall be considered a breach of this Agreement. 5.2 CONFIDENTIALITY. Executive further agrees and acknowledges his/her existing obligations that at all times during and subsequent to his/her employment with Company, he/she will not divulge or appropriate to his/her own use or the uses of others any trade secret or Company confidential information pertaining to the business of Company, or any of its subsidiaries, obtained during his/her employment by Company or any of its subsidiaries. 5.3 NONSOLICITATION OF EMPLOYEES. Executive further agrees that, during his/her employment with Company and for a period of 18 months following the Date of Constructive Discharge or Termination Without Good Cause, Executive will not, directly or indirectly, solicit or induce, or attempt to solicit or induce, any employee, current or future, of Company to leave Company for any reason whatsoever, or hire any current or future employee of Company without the Company's prior written consent. 5.4 COOPERATION. Notwithstanding the foregoing, Executive agrees to cooperate, for a period up to four months, to the extent reasonably requested by Company, in an orderly transfer of the responsibilities of Executive to his/her successor. Unless otherwise agreed by Company and Executive, such cooperation shall consist of consulting services only at a rate of six days per month for the first two months and three days per month for the last two months and shall not require full-time employment. Any reasonable expenses incurred by Executive in connection with such services shall be advanced or reimbursed to Executive, as the parties may agree. 5.5 ACKNOWLEDGEMENT OF PERFORMANCE. Executive acknowledges that irreparable damage would occur to the Company in the event any of the provisions of this Section 5 were not performed in accordance with their specific terms or were otherwise breached. Accordingly, the Company shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Section 5 and to enforce specifically the terms and provisions hereof in any court of competent jurisdiction in the United States of America or any state thereof, in addition to any other remedy to which the Company may be -18- entitled at law or in equity. 6. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the Company, its Successors and Assigns, and the Company shall require any Successors and Assigns to expressly assume and agree to perform the Company's obligation under this Agreement. Neither this Agreement nor any right or interest thereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal representative. 7. NOTICES. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, to the recipient at the address indicated below: To the Company: TSI Incorporated 500 Cardigan Road P.O. Box 64394 St. Paul, MN 55164-0394 Attention: Human Resource Department To the Executive: James E. Doubles 9055 N 55 St. Lake Elmo, MN 55042 or such other address or to the attention of such other persons as the recipient party shall have specified by prior written notice to the sending party. 8. WAIVER. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 9. GOVERNING LAW; PAYMENT OF EXPENSES. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Minnesota without giving effect to the conflict of laws principles thereof. Any action brought by any party to this Agreement shall be brought and maintained in a court of competent jurisdiction in Ramsey County in the State of Minnesota. If it is determined that any party has acted in bad faith in bringing or defending its rights hereunder, such party shall reimburse the prevailing party its expenses in bringing or defending such action, including reasonable legal fees. 10. SEVERABILITY. To the extent any provision of this Agreement shall be invalid or unenforceable, it shall be considered deleted from this Agreement and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. The Executive acknowledges the uncertainty of the law in this respect and expressly stipulates that this Agreement be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its -19- express terms) possible under applicable law. 11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings, and arrangements, oral or written, between the parties hereto with respect to the subject matter covered by this Agreement. The parties have executed this Agreement on August 17, 1999, effective as of the day and year first above written. TSI INCORPORATED By /s/ Kenneth J. Roering ---------------------- Kenneth J. Roering Chairman of the Committee of Outside Directors /S/ James E. Doubles ------------------------------------------------------- James E. Doubles -20- Exhibit STAY IN PLACE AGREEMENT OF LOWELL D. NYSTROM This Stay in Place Agreement (the "Agreement") between TSI Incorporated, a Minnesota corporation (the "Company"), and Lowell D. Nystrom (the "Executive") is effective as of June 16, 1999. BACKGROUND A. The Company believes it is in its best interests and its stockholders' best interests to retain the services of the Executive in the event of a threat or occurrence of a Change in Control (as defined in Section 2.1 below) and to ensure his continued dedication and efforts in such event. B. In order to induce the Executive to remain an employee of the Company, particularly in the event of a threat or the occurrence of a Change in Control, the Company desires to enter into this Agreement with the Executive to provide him with certain benefits if a Constructive Discharge, as defined in Section 2.2 below, or a Termination Without Good Cause, as defined in Section 2.3 below, occurs within two years following a Change in Control of the Company. AGREEMENT In consideration of the foregoing premises and the covenants contained in this Agreement, the parties agree as follows: 1. TERM OF AGREEMENT. Subject to the conditions set forth in Section 4, this Agreement shall continue until December 31, 2000; provided, however, that if a Change in Control occurs on or before December 31, 2000, this Agreement shall continue in full force and effect for two years thereafter. 2. DEFINITIONS. 2.1 CHANGE IN CONTROL. For the purposes of this Agreement, "Change in Control" shall mean any one of the following: (a) a "Change in Control" of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (b) the sale, lease, transfer, conveyance or other disposition (pursuant to a sale of assets, a merger or consolidation or similar transaction, in one or a series of related transactions, of all or substantially all of the assets of the Company taken as a whole to any "person" (as defined below)) or a merger, consolidation or similar transaction to which the Company is a party if, following the effective date of such merger, consolidation or similar transaction, the individuals and entities who were stockholders of the Company, as applicable, immediately prior to the effective date of such merger or consolidation have beneficial ownership (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act) of less than 50% of the combined voting power of the surviving corporation following the effective date of such merger or consolidation; (c) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) that, as of the date hereof, does not own 30% or more of the Company and becomes the "beneficial -21- owner" (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the then outstanding securities of the applicable entity; (d) any "person" (as such is used in Sections 13(d) and 14(d) of the Exchange Act) becomes, through or pursuant to a "tender offer," as that term is used in the Exchange Act and Regulations promulgated by the Securities and Exchange Commission thereunder, the "beneficial owner" (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the then outstanding securities of the applicable entity; (e) a majority of the Board of Directors is not made up of individuals who are members of the Board of Directors as of the effective date of this Agreement; (f) the adoption by the Company of a plan providing for the liquidation or dissolution of the Company. 2.2 CONSTRUCTIVE DISCHARGE. A "Constructive Discharge" will be deemed to have occurred if, after a Change in Control: (a) the Company, its successors or assigns, assigns the Executive a position, duties, responsibilities or status that are less desirable to the Executive than the Executive's position, duties, responsibilities and/or status immediately prior to the Change in Control; (b) there is an adverse change in the titles or offices the Executive held immediately prior to the Change in Control; (c) the Company, its successors or assigns, relocates the Executive to a location that is more than 30 miles from the Company's current headquarters in Shoreview, Minnesota; (d) the Company reduces the Executive's base salary, cash or stock performance bonus, or fringe benefits or fails to pay the Executive any material compensation or benefits to which the Executive is entitled within ten days of the date due; or (e) the Company breaches any of its obligations under this Agreement or any other Agreement with the Executive. 2.3 TERMINATION WITHOUT GOOD CAUSE. For purposes of this Agreement, "Termination Without Good Cause" shall be deemed to exist if after a Change in Control the Executive is terminated by the Company for any reason other than "Good Cause." "Good Cause" shall be deemed to be (a) the conviction of the Executive, by a court of competent jurisdiction, of a felony committed by the executive during the term of this Agreement; (b) the written confession by the Executive of a felony committed during the term of this Agreement; or (c) the conviction of or written confession by the Executive to the embezzlement or misappropriation of funds of the Company, which embezzlement or misappropriation was committed by the Executive during the term of this Agreement. 2.4 SUCCESSORS AND ASSIGNS. For purposes of this Agreement, "Successors and Assigns" shall mean a corporation or other entity or person acquiring all or substantially all the stock, assets, and/or business of the Company (including this Agreement) whether by agreement, operation of law, or otherwise. 3. MANDATORY PAYMENTS. If a Constructive Discharge or Termination Without Good Cause occurs within two years following a Change in Control, the Company, its successors or assigns, shall pay the Executive the full amount of the accrued but unpaid salary and fringe benefits he has earned through his last day of employment plus a cash bonus equal to a pro rata portion of 15% of salary, plus a cash payment (calculated on the basis of his rate of salary then in effect) for all unused vacation time which he may have accrued and any unpaid reimbursement expenses he is entitled to receive as of his last day of employment. In addition, if a Constructive Discharge or Termination Without Good Cause occurs within one year of the -22- Change in Control, the Company shall make a severance payment to the Executive equal to the then current annual salary and fringe benefits plus cash bonus equal to 15% of that annual salary, or if a Constructive Discharge or Termination Without Good Cause occurs more than one year but less than two years following the Change in Control, the Company shall make a severance payment to the Executive equal to one-half the then current annual salary and fringe benefits plus cash bonus equal to 7 1/2% of that annual salary. All of the above amounts (except for unpaid salary and vacation which shall be paid immediately) shall be paid to the Executive within 30 days of his last day of employment. The Company's obligation to make these payments to the Executive is subject to fulfillment of all the conditions described in Section 4. 4. CONDITIONS PRECEDENT TO PAYMENT OF COMPENSATION. Payments of the compensation under Section 3 is contingent on the Executive satisfying both of the following conditions: (a) the Executive does not voluntarily resign his employment (absent a Constructive Discharge that arises after a Change in Control occurs), and (b) after a Change in Control occurs, the Executive does not have his employment Terminated for Good Cause. 5. RESTRICTIVE COVENANTS. 5.1 NONCOMPETITION. Executive agrees that, as a condition of receiving benefits under this Agreement, he/she will not, without prior written consent of the Company which will not be unreasonably withheld, render service directly or indirectly to any competing organization, wherever located, for a period of 9 months following the Date of Constructive Discharge or Termination Without Good Cause, in connection with the design, implementation, development, manufacture, marketing, sale, merchandising, leasing, servicing or promotion of any product, process, system or service of any person, firm, corporation, organization other than Company, in existence or under development, which utilizes a trade secret, competes with, or has a usage allied to, a product, process, system, or service produced, developed, or used by Company. Executive agrees that violation of this covenant not to compete with Company shall be considered a breach of this Agreement. 5.2 CONFIDENTIALITY. Executive further agrees and acknowledges his/her existing obligations that at all times during and subsequent to his/her employment with Company, he/she will not divulge or appropriate to his/her own use or the uses of others any trade secret or Company confidential information pertaining to the business of Company, or any of its subsidiaries, obtained during his/her employment by Company or any of its subsidiaries. 5.3 NONSOLICITATION OF EMPLOYEES. Executive further agrees that, during his/her employment with Company and for a period of 9 months following the Date of Constructive Discharge or Termination Without Good Cause, Executive will not, directly or indirectly, solicit or induce, or attempt to solicit or induce, any employee, current or future, of Company to leave Company for any reason whatsoever, or hire any current or future employee of Company without the Company's prior written consent. 5.4 COOPERATION. Notwithstanding the foregoing, Executive agrees to cooperate, for a period up to four months, to the extent reasonably requested by Company, in an orderly transfer of the responsibilities of Executive to his/her successor. Unless otherwise agreed by Company and Executive, such cooperation shall consist of consulting services only at a rate of six days per month for the first two months and three days per month for the last two months and shall not require full-time employment. Any reasonable expenses incurred by Executive in connection with such services shall be advanced or reimbursed to Executive, as the parties may agree. 5.5 ACKNOWLEDGEMENT OF PERFORMANCE. Executive acknowledges that irreparable damage would occur to the Company in the event any of the provisions of this Section 5 were not performed in accordance with their specific terms or were otherwise breached. Accordingly, the Company shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Section 5 and to enforce specifically the terms and provisions hereof in any court of competent jurisdiction in the United States of America or any state thereof, in addition to any other remedy to which the Company may be -23- entitled at law or in equity. 6. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the Company, its Successors and Assigns, and the Company shall require any Successors and Assigns to expressly assume and agree to perform the Company's obligation under this Agreement. Neither this Agreement nor any right or interest thereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal representative. 7. NOTICES. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, to the recipient at the address indicated below: To the Company: TSI Incorporated 500 Cardigan Road P.O. Box 64394 St. Paul, MN 55164-0394 Attention: Human Resource Department To the Executive: Lowell D. Nystrom 988 Brenner Ave Roseville, MN 55113 or such other address or to the attention of such other persons as the recipient party shall have specified by prior written notice to the sending party. 8. WAIVER. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 9. GOVERNING LAW; PAYMENT OF EXPENSES. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Minnesota without giving effect to the conflict of laws principles thereof. Any action brought by any party to this Agreement shall be brought and maintained in a court of competent jurisdiction in Ramsey County in the State of Minnesota. If it is determined that any party has acted in bad faith in bringing or defending its rights hereunder, such party shall reimburse the prevailing party its expenses in bringing or defending such action, including reasonable legal fees. 10. SEVERABILITY. To the extent any provision of this Agreement shall be invalid or unenforceable, it shall be considered deleted from this Agreement and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. The Executive acknowledges the uncertainty of the law in this respect and expressly stipulates that this Agreement be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its -24- express terms) possible under applicable law. 11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings, and arrangements, oral or written, between the parties hereto with respect to the subject matter covered by this Agreement. The parties have executed this Agreement on August 17, 1999, effective as of the day and year first above written. TSI INCORPORATED By: /s/ James E. Doubles ------------------------ James E. Doubles, Chairman of the Board /s/ Lowell D. Nystrom ------------------------- Lowell D. Nystrom -25- Exhibit STAY IN PLACE AGREEMENT OF ROBERT F. GALLAGHER This Stay in Place Agreement (the "Agreement") between TSI Incorporated, a Minnesota corporation (the "Company"), and Robert F. Gallagher (the "Executive") is effective as of June 16, 1999. BACKGROUND A. The Company believes it is in its best interests and its stockholders' best interests to retain the services of the Executive in the event of a threat or occurrence of a Change in Control (as defined in Section 2.1 below) and to ensure his continued dedication and efforts in such event. B. In order to induce the Executive to remain an employee of the Company, particularly in the event of a threat or the occurrence of a Change in Control, the Company desires to enter into this Agreement with the Executive to provide him with certain benefits if a Constructive Discharge, as defined in Section 2.2 below, or a Termination Without Good Cause, as defined in Section 2.3 below, occurs within two years following a Change in Control of the Company. AGREEMENT In consideration of the foregoing premises and the covenants contained in this Agreement, the parties agree as follows: 1. TERM OF AGREEMENT. Subject to the conditions set forth in Section 4, this Agreement shall continue until December 31, 2000; provided, however, that if a Change in Control occurs on or before December 31, 2000, this Agreement shall continue in full force and effect for two years thereafter. 2. DEFINITIONS. 2.1 CHANGE IN CONTROL. For the purposes of this Agreement, "Change in Control" shall mean any one of the following: (a) a "Change in Control" of the Company of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (b) the sale, lease, transfer, conveyance or other disposition (pursuant to a sale of assets, a merger or consolidation or similar transaction, in one or a series of related transactions, of all or substantially all of the assets of the Company taken as a whole to any "person" (as defined below)) or a merger, consolidation or similar transaction to which the Company is a party if, following the effective date of such merger, consolidation or similar transaction, the individuals and entities who were stockholders of the Company, as applicable, immediately prior to the effective date of such merger or consolidation have beneficial ownership (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act) of less than 50% of the combined voting power of the surviving corporation following the effective date of such merger or consolidation; (c) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) that, as of the date hereof, does not own 30% or more of the Company and becomes the "beneficial -26- owner" (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the then outstanding securities of the applicable entity; (d) any "person" (as such is used in Sections 13(d) and 14(d) of the Exchange Act) becomes, through or pursuant to a "tender offer," as that term is used in the Exchange Act and Regulations promulgated by the Securities and Exchange Commission thereunder, the "beneficial owner" (as defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the then outstanding securities of the applicable entity; (e) a majority of the Board of Directors is not made up of individuals who are members of the Board of Directors as of the effective date of this Agreement; (f) the adoption by the Company of a plan providing for the liquidation or dissolution of the Company. 2.2 CONSTRUCTIVE DISCHARGE. A "Constructive Discharge" will be deemed to have occurred if, after a Change in Control: (a) the Company, its successors or assigns, assigns the Executive a position, duties, responsibilities or status that are less desirable to the Executive than the Executive's position, duties, responsibilities and/or status immediately prior to the Change in Control; (b) there is an adverse change in the titles or offices the Executive held immediately prior to the Change in Control; (c) the Company, its successors or assigns, relocates the Executive to a location that is more than 30 miles from the Company's current headquarters in Shoreview, Minnesota; (d) the Company reduces the Executive's base salary, cash or stock performance bonus, or fringe benefits or fails to pay the Executive any material compensation or benefits to which the Executive is entitled within ten days of the date due; or (e) the Company breaches any of its obligations under this Agreement or any other Agreement with the Executive. 2.3 TERMINATION WITHOUT GOOD CAUSE. For purposes of this Agreement, "Termination Without Good Cause" shall be deemed to exist if after a Change in Control the Executive is terminated by the Company for any reason other than "Good Cause." "Good Cause" shall be deemed to be (a) the conviction of the Executive, by a court of competent jurisdiction, of a felony committed by the executive during the term of this Agreement; (b) the written confession by the Executive of a felony committed during the term of this Agreement; or (c) the conviction of or written confession by the Executive to the embezzlement or misappropriation of funds of the Company, which embezzlement or misappropriation was committed by the Executive during the term of this Agreement. 2.4 SUCCESSORS AND ASSIGNS. For purposes of this Agreement, "Successors and Assigns" shall mean a corporation or other entity or person acquiring all or substantially all the stock, assets, and/or business of the Company (including this Agreement) whether by agreement, operation of law, or otherwise. 3. MANDATORY PAYMENTS. If a Constructive Discharge or Termination Without Good Cause occurs within two years following a Change in Control, the Company, its successors or assigns, shall pay the Executive the full amount of the accrued but unpaid salary and fringe benefits he has earned through his last day of employment plus a cash bonus equal to a pro rata portion of 15% of salary, plus a cash payment (calculated on the basis of his rate of salary then in effect) for all unused vacation time which he may have accrued and any unpaid reimbursement expenses he is entitled to receive as of his last day of employment. In addition, if a Constructive Discharge or Termination Without Good Cause occurs within one year of the -27- Change in Control, the Company shall make a severance payment to the Executive equal to the then current annual salary and fringe benefits plus cash bonus equal to 15% of that annual salary, or if a Constructive Discharge or Termination Without Good Cause occurs more than one year but less than two years following the Change in Control, the Company shall make a severance payment to the Executive equal to one-half the then current annual salary and fringe benefits plus cash bonus equal to 7 1/2% of that annual salary. All of the above amounts (except for unpaid salary and vacation which shall be paid immediately) shall be paid to the Executive within 30 days of his last day of employment. The Company's obligation to make these payments to the Executive is subject to fulfillment of all the conditions described in Section 4. 4. CONDITIONS PRECEDENT TO PAYMENT OF COMPENSATION. Payments of the compensation under Section 3 is contingent on the Executive satisfying both of the following conditions: (a) the Executive does not voluntarily resign his employment (absent a Constructive Discharge that arises after a Change in Control occurs), and (b) after a Change in Control occurs, the Executive does not have his employment Terminated for Good Cause. 5. RESTRICTIVE COVENANTS. 5.1 NONCOMPETITION. Executive agrees that, as a condition of receiving benefits under this Agreement, he/she will not, without prior written consent of the Company which will not be unreasonably withheld, render service directly or indirectly to any competing organization, wherever located, for a period of 9 months following the Date of Constructive Discharge or Termination Without Good Cause, in connection with the design, implementation, development, manufacture, marketing, sale, merchandising, leasing, servicing or promotion of any product, process, system or service of any person, firm, corporation, organization other than Company, in existence or under development, which utilizes a trade secret, competes with, or has a usage allied to, a product, process, system, or service produced, developed, or used by Company. Executive agrees that violation of this covenant not to compete with Company shall be considered a breach of this Agreement. 5.2 CONFIDENTIALITY. Executive further agrees and acknowledges his/her existing obligations that at all times during and subsequent to his/her employment with Company, he/she will not divulge or appropriate to his/her own use or the uses of others any trade secret or Company confidential information pertaining to the business of Company, or any of its subsidiaries, obtained during his/her employment by Company or any of its subsidiaries. 5.3 NONSOLICITATION OF EMPLOYEES. Executive further agrees that, during his/her employment with Company and for a period of 9 months following the Date of Constructive Discharge or Termination Without Good Cause, Executive will not, directly or indirectly, solicit or induce, or attempt to solicit or induce, any employee, current or future, of Company to leave Company for any reason whatsoever, or hire any current or future employee of Company without the Company's prior written consent. 5.4 COOPERATION. Notwithstanding the foregoing, Executive agrees to cooperate, for a period up to four months, to the extent reasonably requested by Company, in an orderly transfer of the responsibilities of Executive to his/her successor. Unless otherwise agreed by Company and Executive, such cooperation shall consist of consulting services only at a rate of six days per month for the first two months and three days per month for the last two months and shall not require full-time employment. Any reasonable expenses incurred by Executive in connection with such services shall be advanced or reimbursed to Executive, as the parties may agree. 5.5 ACKNOWLEDGEMENT OF PERFORMANCE. Executive acknowledges that irreparable damage would occur to the Company in the event any of the provisions of this Section 5 were not performed in accordance with their specific terms or were otherwise breached. Accordingly, the Company shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Section 5 and to enforce specifically the terms and provisions hereof in any court of competent jurisdiction in the United States of America or any state thereof, in addition to any other remedy to which the Company may be -28- entitled at law or in equity. 6. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the Company, its Successors and Assigns, and the Company shall require any Successors and Assigns to expressly assume and agree to perform the Company's obligation under this Agreement. Neither this Agreement nor any right or interest thereunder shall be assignable or transferable by the Executive, his beneficiaries or legal representatives, except by will or by the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's personal representative. 7. NOTICES. For purposes of this Agreement, notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, to the recipient at the address indicated below: To the Company: TSI Incorporated 500 Cardigan Road P.O. Box 64394 St. Paul, MN 55164-0394 Attention: Human Resource Department To the Executive: Robert F. Gallagher 4292 Norma Avenue Arden Hills, MN 55112 or such other address or to the attention of such other persons as the recipient party shall have specified by prior written notice to the sending party. 8. WAIVER. No provision of this Agreement may be modified, waived, or discharged unless such modification, waiver, or discharge is agreed to in writing and signed by the Executive and the Company. No waiver by either party hereto at any time of any breach by the other party hereto or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 9. GOVERNING LAW; PAYMENT OF EXPENSES. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Minnesota without giving effect to the conflict of laws principles thereof. Any action brought by any party to this Agreement shall be brought and maintained in a court of competent jurisdiction in Ramsey County in the State of Minnesota. If it is determined that any party has acted in bad faith in bringing or defending its rights hereunder, such party shall reimburse the prevailing party its expenses in bringing or defending such action, including reasonable legal fees. 10. SEVERABILITY. To the extent any provision of this Agreement shall be invalid or unenforceable, it shall be considered deleted from this Agreement and the remainder of such provision and of this Agreement shall be unaffected and shall continue in full force and effect. The Executive acknowledges the uncertainty of the law in this respect and expressly stipulates that this Agreement be given the construction which renders its provisions valid and enforceable to the maximum extent (not exceeding its -29- express terms) possible under applicable law. 11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto and supersedes all prior agreements, if any, understandings, and arrangements, oral or written, between the parties hereto with respect to the subject matter covered by this Agreement. The parties have executed this Agreement on August 17, 1999, effective as of the day and year first above written. TSI INCORPORATED By: /s/ James E. Doubles ----------------------- James E. Doubles, Chairman of the Board /s/ Robert F. Gallagher -------------------------- Robert F. Gallagher -30- EX-27 4 FINANCIAL DATA SCHEDULE
5 6-MOS MAR-31-1999 JUL-01-1999 SEP-30-1999 3,437,804 0 23,313,430 675,997 15,751,879 48,755,752 31,863,675 18,432,001 84,615,569 27,846,700 0 0 0 1,132,613 54,764,404 84,615,569 28,680,358 28,680,358 13,684,477 10,494,307 (42,004) 0 0 4,114,593 1,439,000 2,675,593 0 0 0 2,675,593 .24 .23
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