FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 29, 1995 OR [ ] 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 0-8141 NORSTAN, INC. ------------------------------------------------------------------- (Exact name of registrant as specified in its charter) MINNESOTA 41-0835746 ------------------------------- ----------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 605 NORTH HIGHWAY 169, TWELFTH FLOOR, PLYMOUTH, MINNESOTA 55441 ------------------------------------------------------------------- 612/420-1100 ------------------------------------------------------- (Registrant's telephone number, including area code) 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 . --- --- On September 5, 1995, there were 4,221,341 shares outstanding of the registrant's common stock, par value $.10 per share, its only class of equity securities. PART 1. FINANCIAL INFORMATION ITEM 1. NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED (In thousands, except per share amounts) THREE MONTHS ENDED -------------------- July 29, July 30, 1995 1994 -------- -------- REVENUES: Sale of products and systems $40,670 $34,188 Telecommunications services 30,435 27,430 Financial services 1,296 1,206 ------- ------- Total revenues 72,401 62,824 ------- ------- COST OF SALES: Products and systems 30,458 25,861 Telecommunications services 20,954 16,657 Financial services 571 570 ------- ------- Total cost of sales 51,983 43,088 ------- ------- GROSS MARGIN 20,418 19,736 Selling, General & Administrative Expenses 17,680 17,404 ------- ------- OPERATING INCOME 2,738 2,332 Interest Expense (398) (351) Interest and Other Income, Net 49 24 ------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES 2,389 2,005 Provision for Income Taxes 956 802 ------- ------- NET INCOME $ 1,433 $ 1,203 ------- ------- ------- ------- NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE $ .32 $ .28 ------- ------- ------- ------- WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 4,474 4,328 ------- ------- ------- ------- The accompanying notes to the consolidated financial statements are an integral part of these statements. NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) July 29, April 30, 1995 1995 ----------- --------- (Unaudited) (Audited) ASSETS CURRENT ASSETS: Cash $ 3,364 $ 1,308 Accounts receivable, net of allowances for doubtful accounts of $911 and $804 56,290 51,779 Current lease receivables 13,329 14,122 Inventories 10,509 11,137 Costs and estimated earnings in excess of billings of $17,254 and $16,691 12,002 10,926 Prepaid income taxes 3,801 3,634 Prepaid expenses, deposits and other 3,011 2,331 -------- -------- TOTAL CURRENT ASSETS 102,306 95,237 -------- -------- PROPERTY AND EQUIPMENT: Furniture, fixtures and equipment 67,955 64,652 Less-accumulated depreciation and amortization (35,037) (32,885) -------- -------- NET PROPERTY AND EQUIPMENT 32,918 31,767 -------- -------- OTHER ASSETS: Lease receivables, net of current maturities 26,506 26,381 Franchise rights and other intangible assets, net of amortization of $3,574 and $3,435 7,741 7,904 Other 572 420 -------- -------- TOTAL OTHER ASSETS 34,819 34,705 -------- -------- $170,043 $161,709 -------- -------- -------- -------- The accompanying notes to the consolidated financial statements are an integral part of these balance sheets. NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) July 29, April 30, 1995 1995 ----------- --------- (Unaudited) (Audited) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 59 $ 93 Current maturities of discounted lease rentals 10,710 11,449 Accounts payable 14,373 16,467 Accrued- Salaries and wages 7,274 10,841 Deferred revenue 15,637 15,045 Warranty costs 1,712 1,756 Other liabilities 5,878 5,118 Income taxes payable 1,146 158 Billings in excess of costs and estimated earnings of $10,773 and $10,121 3,443 2,127 -------- -------- TOTAL CURRENT LIABILITIES 60,232 63,054 -------- -------- LONG-TERM DEBT, net of current maturities 28,560 16,465 DISCOUNTED LEASE RENTALS, net of current maturities 13,905 16,313 DEFERRED INCOME TAXES 8,954 8,893 -------- -------- SHAREHOLDERS' EQUITY: Common stock - $.10 par value; 20,000,000 authorized shares; 4,221,341 and 4,215,441 shares issued and outstanding 422 422 Capital in excess of par value 26,144 26,031 Retained earnings 32,920 31,486 Unamortized cost of stock (197) (149) Foreign currency translation adjustments (897) (806) -------- -------- TOTAL SHAREHOLDERS' EQUITY 58,392 56,984 -------- -------- $170,043 $161,709 -------- -------- -------- -------- The accompanying notes to the consolidated financial statements are an integral part of these balance sheets. NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (In thousands) THREE MONTHS ENDED ----------------------- July 29, July 30, 1995 1994 -------- -------- OPERATING ACTIVITIES: Net income $ 1,433 $ 1,203 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation and amortization 2,490 2,226 Deferred income taxes (111) 607 Changes in operating items: Accounts receivable (4,543) (868) Inventories 618 (1,576) Costs and estimated earnings in excess of billings (1,091) (1,742) Prepaid expenses, deposits and other (680) (188) Accounts payable (2,076) 2,041 Accrued liabilities (2,235) (1,603) Billings in excess of costs and estimated earnings 1,317 (249) Income taxes payable 989 - ------- ------- Net Cash Used For Operating Activities (3,889) (149) ------- ------- INVESTING ACTIVITIES: Additions to property and equipment, net (3,501) (3,472) Investment in lease contracts (3,918) (3,309) Collections from lease contracts 4,559 3,794 Other, net (134) (96) ------- ------- Net Cash Used For Investing Activities (2,994) (3,083) ------- ------- FINANCING ACTIVITIES: Borrowings under revolving credit agreements 35,590 36,180 Repayments under revolving credit agreements (23,495) (30,370) Repayments of long-term debt (34) (31) Borrowings on discounted lease rentals - 1,684 Repayments of discounted lease rentals (3,138) (3,059) Proceeds from sale of common stock 21 - ------- ------- Net Cash Provided By Financing Activities 8,944 4,404 ------- ------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (5) (2) ------- ------- NET INCREASE IN CASH 2,056 1,170 CASH, BEGINNING OF PERIOD 1,308 755 ------- ------- CASH, END OF PERIOD $ 3,364 $ 1,925 ------- ------- ------- ------- The accompanying notes to the consolidated financial statements are an integral part of these statements. NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JULY 29, 1995 UNAUDITED The information furnished in this report is unaudited and reflects all adjustments, which are normal recurring adjustments, and which in the opinion of management, are necessary to present fairly the operating results for the interim periods. The operating results for the interim periods presented are not necessarily indicative of the operating results to be expected for the full fiscal year. This report should be read in conjunction with the Company's most recent "Annual Report on Form 10-K." PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. FOREIGN CURRENCY - For the Company's foreign operations, assets and liabilities are translated at exchange rates as of the balance sheet date, and revenues and expenses are translated at average exchange rates prevailing during the period. Translation adjustments are recorded as a separate component of shareholders' equity. NORSTAN FINANCIAL SERVICES, INC. (NFS) - NFS provides financing for customers of the Company. Leases are accounted for as sales-type leases for consolidated financial reporting purposes. Condensed unaudited statements of operations of NFS are as follows (in thousands): THREE MONTHS ENDED ---------------------- July 29, July 30, 1995 1994 ---------- --------- Revenues $ 1,171 $ 1,139 Interest expense (487) (518) Other expenses (244) (306) ------- ------- Income before provision for income taxes 440 315 Provision for income taxes (176) (126) ------- ------- Net income $ 264 $ 189 ------- ------- ------- ------- SUPPLEMENTAL CASH FLOWS INFORMATION - Supplemental disclosure of cash flows information is as follows (in thousands): THREE MONTHS ENDED --------------------- July 29, July 30, 1995 1994 -------- -------- Cash paid for: Interest $1,001 $ 868 Income taxes 69 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SUMMARY During the quarter ended July 29, 1995, the Company's net income improved compared to the quarter ended July 30, 1994, increasing 19.1% to $1,433,000, or $.32 per common share, compared to $1,203,000, or $.28 per common share. RESULTS OF OPERATIONS The Company's revenues consist of revenues from the sales of products and systems, telecommunications services and financial services. Revenues from the sale of products and systems result from the sale of new products and upgrades, as well as refurbished equipment. Revenues from telecommunications services result primarily from communications maintenance services, moves, adds and changes and long distance service. Financial services revenues result primarily from leasing activities. The following table sets forth, for the periods indicated, certain items from the Company's consolidated statements of operations. SELECTED CONSOLIDATED FINANCIAL DATA DOLLAR AMOUNTS AS A PERCENTAGE OF REVENUES PERCENTAGE Three Months Ended INCREASE ------------------------------- ---------------- July 29, July 30, Fiscal 1995 1994 1996 VS 1995 ------------ ----------- ---------------- REVENUES: Sales of Products and Systems 56.2% 54.4% 19.0% Telecommunications Services 42.0% 43.7% 11.0% Financial Services 1.8% 1.9% 7.5% ------------ ----------- Total Revenues 100.0% 100.0% 15.2% COST OF SALES 71.8% 68.6% 20.6% ------------ ----------- GROSS MARGIN 28.2% 31.4% 3.5% SELLING, GENERAL & ADMINISTRATIVE EXPENSES 24.4% 27.7% 1.6% ------------ ----------- OPERATING INCOME 3.8% 3.7% 17.4% Interest Expense ( 0.5% ) ( 0.5% ) 13.4% ------------ ----------- INCOME BEFORE PROVISION FOR INCOME TAXES 3.3% 3.2% 19.2% Provision for Income Taxes 1.3% 1.3% 19.2% ------------ ----------- NET INCOME 2.0% 1.9% 19.1% ------------ ----------- ------------ ----------- The following table sets forth, for the periods indicated, the gross margin percentages for sales of products and systems, telecommunications services and financial services. Three Months Ended ------------------------------- July 29, July 30, 1995 1994 ------------ ------------ GROSS MARGIN PERCENTAGES: Sales of Products and Systems 25.1% 24.4% Telecommunications Services 31.2% 39.3% Financial Services 55.9% 52.7% REVENUES. Revenues increased 15.2%, to $72,401,000 for the quarter ended July 29, 1995 as compared to $62,824,000 for the similar period last year. Sales of products and systems increased $6,482,000, or 19.0% for the quarter ended July 29, 1995 as compared to the quarter ended July 30, 1994 as a result of increased demand for the Company's telephone systems, call transaction processing and videoconferencing products. Revenues from telecommunications services increased $3,005,000, or 11.0% for the quarter ended July 29, 1995 as compared to the quarter ended July 30, 1994. Revenues from telecommunications services have increased following the growth in the sales of telecommunications products and systems in fiscal 1995 and 1994. Revenues from financial services increased $90,000, or 7.5% in the three month period ended July 29, 1995 as compared to the three month period ended July 30, 1994. GROSS MARGIN. The Company's gross margin increased $682,000 or 3.5%, to $20,418,000 for the three months ended July 29, 1995 as compared to $19,736,000 for the three months ended July 30, 1994. As a percent of total revenues, gross margin declined to 28.2% for the three month period ended July 29, 1995 as compared to 31.4% for the three month period ended July 30, 1994. The decrease in the gross margin percentage in fiscal 1996 is primarily a result of the changing mix of products which results from the Company's expanded line of product offerings. Gross margin as a percent of revenues for the sale of products and systems was 25.1% for the three month period ended July 29, 1995 as compared to 24.4% for the similar period ended July 30, 1994. Gross margin as a percent of revenues for telecommunications services was 31.2% for the three month period ended July 29, 1995 as compared to 39.3% for the similar period ended July 30, 1994. This decrease resulted primarily from changes in the mix of services and decreased margins applicable to moves, adds and changes. Gross margin as a percent of revenues for financial services was 55.9% for the three month period ended July 29, 1995 as compared to 52.7% for the three month period ended July 30, 1994. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $276,000, or 1.6% for the quarter ended July 29, 1995 as compared to the quarter ended July 30, 1994. This increase resulted primarily from increased expenses necessary to support the increased revenues. As a percent of revenues, selling, general and administrative expenses declined to 24.4% for the three month period ended July 29, 1995 as compared to 27.7% for the similar period ended July 30, 1994. This decrease in selling, general and administrative expenses as a percent of revenues resulted from volume related efficiencies, as sales volume increased without a proportional increase in expenses. The Company expects its selling, general and administrative expenses, as a percent of revenues, for the remainder of fiscal 1996 to continue to be lower than fiscal 1995, although there can be no assurance that this trend will continue. OPERATING INCOME. Operating income increased $406,000, or 17.4%, to $2,738,000 for the quarter ended July 29, 1995 as compared to $2,332,000 for the quarter ended July 30, 1994. As a percent of revenues, operating income increased to 3.8% for the three month period ended July 29, 1995 as compared to 3.7% for the similar period ended July 30, 1994. OTHER COSTS AND EXPENSES. Interest expense increased to $398,000 for the three month period ended July 29, 1995 as compared to $351,000 for the similar period ended July 30, 1994. This increase resulted primarily from increased interest rates (8.75% and 7.25% at July 29, 1995 and July 30, 1994, respectively). Average month end revolving credit balances (excluding amounts borrowed to finance NFS leasing activities) were approximately $22,000,000 for the three months ended July 29, 1995 as compared to approximately $21,000,000 for the three months ended July 30, 1994. The Company's effective tax rate was 40% for the three month periods ended July 29, 1995 and July 30, 1994. The Company's effective tax rate differs from the federal statutory rate primarily due to state income taxes. The provisions for income tax have been recorded based upon management's estimate of the annualized effective tax rate. NET INCOME. Net income was $1,433,000, or $.32 per common share, and $1,203,000, or $.28 per common share, for the quarters ended July 29, 1995 and July 30, 1994, respectively. LIQUIDITY AND CAPITAL RESOURCES WORKING CAPITAL. Working capital increased to $42,074,000 at July 29, 1995 from $32,183,000 at April 30, 1995. The current ratio was 1.70 to 1.0 as of July 29, 1995 as compared to 1.51 to 1.0 as of April 30, 1995. Net cash used for operating activities was $3,889,000 for the three months ended July 29, 1995. For the three months ended July 29, 1995, net income of $1,433,000, depreciation and amortization of $2,490,000, increased billings in excess of costs and estimated earnings of $1,317,000, and other sources in total were offset by increased accounts receivable of $4,543,000, decreased accounts payable of $2,076,000 and decreased accrued liabilities of $2,235,000. As of July 29, 1995, the general increase in balance sheet items result from the continued growth of the Company. CAPITAL RESOURCES. In October 1994, the Company entered into a $35,000,000 unsecured revolving long-term credit agreement with certain banks. Under this agreement, the total credit facility of $35,000,000 is reduced by $750,000 per fiscal quarter effective January, 1995. As of July 29, 1995, the total capacity of the credit facility was $32,750,000. Borrowings under this agreement are due May 2, 1998 and bear interest at a bank's reference rate (8.75% and 9.00% at July 29, 1995 and April 30, 1995, respectively), except for LIBOR, CD and commercial paper based options which generally bear interest at a rate lower than the bank's reference rate. The Company is able to borrow up to $15,000,000 of this credit facility in the form of commercial paper. In addition, Norstan Financial Services, Inc. (NFS) is able to borrow up to $8,000,000 of this facility from Norstan, Inc. Total consolidated borrowings under this agreement were $28,560,000 and $16,465,000 at July 29, 1995 and April 30, 1995, respectively. There was $1,546,000 borrowed on the account of NFS at July 29, 1995, as compared to $322,000 borrowed on the account of NFS at April 30, 1995. Borrowings by the Company in fiscal 1996 and 1995 have been for working capital and general corporate purposes, to invest in property and equipment, as well as to borrow funds for NFS. Capital expenditures for the three months ended July 29, 1995 were $3,501,000 as compared to $3,472,000 for the similar period last year. These expenditures were primarily for telecommunications equipment used as spare parts, computer equipment and facility expansion. The Company has also made a significant investment in lease contracts with its customers. The investment made in lease contracts totaled $3,918,000 for the three months ended July 29, 1995 as compared to $3,309,000 for the similar period last year. Net lease receivables decreased to $39,835,000 at July 29, 1995 as compared to $40,503,000 at April 30, 1995. Norstan Financial Services, Inc. (NFS) and Norstan Canada Inc. utilize their lease receivables and corresponding underlying equipment to borrow funds from financial institutions at fixed rates on a nonrecourse or recourse basis by discounting the stream of future lease payments. Proceeds from discounting are presented on the consolidated balance sheet as discounted lease rentals. Interest rates on these credit agreements range from 6% to 10%, and payments are generally due in varying monthly installments through October 2000. Payments due financial institutions on a monthly basis are made from monthly collections of lease receivables from customers. Discounted lease rentals as of July 29, 1995 and April 30, 1995 consisted of the following (in thousands): July 29, April 30, 1995 1995 ------------ ------------ Nonrecourse borrowings $21,594 $24,712 Recourse borrowings 3,021 3,050 ------- ------- Total discounted lease rentals 24,615 27,762 Less-current maturities (10,710) (11,449) --------- --------- $13,905 $16,313 ------- ------- ------- ------- Included in the recourse borrowings as described above are recourse amounts to Norstan, Inc. of $957,000 as of July 29, 1995 and $986,000 as of April 30, 1995. Management of the Company believes that a combination of cash generated from operations, existing bank facilities and additional borrowing capacity, in aggregate, are adequate to meet the anticipated liquidity and capital resource requirements of its business. Sources of additional financing, if needed, may include further debt financing or the sale of equity or other securities. Part II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in legal actions in the ordinary course of its business. Although the outcomes of any such legal actions cannot be predicted, in the opinion of management there is no legal proceeding pending against or involving the Company for which the outcome is likely to have a material adverse effect upon the consolidated financial position or results of operations of the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Exhibit 11. Statement Regarding Computation of Earnings Per Share. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter for which this report is filed. S I G N A T U R E S Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORSTAN, INC. --------------------------------- Registrant Date: September 12, 1995 By /s/ Paul Baszucki ---------------------------- Paul Baszucki Co-Chairman of the Board and Chief Executive Officer Date: September 12, 1995 By /s/ Richard Cohen ---------------------------- Richard Cohen Vice Chairman of the Board and Chief Financial Officer (Principal Financial and Accounting Officer)