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 August 3, 1996
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.
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(Exact name of registrant as specified in its charter)
MINNESOTA 41-0835746
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
605 NORTH HIGHWAY 169, TWELFTH FLOOR, PLYMOUTH, MINNESOTA 55441
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612-513-4500
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(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 .
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On September 4, 1996, there were 8,937,118 shares outstanding of the
registrant's common stock, par value $.10 per share, its only class of equity
securities.
PART I. FINANCIAL INFORMATION
ITEM 1.
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share amounts)
Three Months Ended
-----------------------
August 3, July 29,
1996 1995
-------- --------
REVENUES:
Sales of Products and Systems $45,746 $40,670
Telecommunications Services 45,099 30,435
Financial Services 1,386 1,296
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Total Revenues 92,231 72,401
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COST OF SALES:
Products and Systems 33,332 30,458
Telecommunications Services 33,125 20,954
Financial Services 443 571
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Total Cost of Sales 66,900 51,983
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GROSS MARGIN 25,331 20,418
Selling, General
& Administrative Expenses 22,180 17,680
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OPERATING INCOME 3,151 2,738
Interest Expense (241) (398)
Interest and Other Income, Net 7 49
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INCOME BEFORE PROVISION FOR
INCOME TAXES 2,917 2,389
Provision for Income Taxes 1,225 956
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NET INCOME $ 1,692 $ 1,433
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------- -------
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ .18 $ .16
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WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 9,323 8,948
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The accompanying notes are an integral part of these
consolidated financial statements.
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
August 3, April 30,
1996 1996
-------- --------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash $ 2,617 $ 1,133
Accounts receivable, net of allowances
for doubtful accounts of $1,262 and $1,079 66,531 55,723
Current lease receivables 14,784 15,316
Inventories 10,057 10,964
Costs and estimated earnings in excess of
billings of $18,991 and $13,528 11,259 5,202
Prepaid income taxes 3,702 3,427
Prepaid expenses, deposits and other 3,193 2,443
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TOTAL CURRENT ASSETS 112,143 94,208
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PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment 83,407 75,126
Less-accumulated depreciation and amortization (45,730) (40,815)
-------- --------
NET PROPERTY AND EQUIPMENT 37,677 34,311
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OTHER ASSETS:
Lease receivables, net of current maturities 24,099 24,556
Goodwill, net of amortization of $4,330 and
$3,991 21,382 7,421
Other 28 492
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TOTAL OTHER ASSETS 45,509 32,469
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$195,329 $160,988
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-------- --------
The accompanying notes are an integral part of these
consolidated financial statements.
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
August 3, April 30,
1996 1996
-------- --------
(Unaudited) (Audited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 394 $ --
Current maturities of discounted lease
rentals 11,086 12,202
Accounts payable 22,156 15,053
Deferred revenue 17,420 17,856
Accrued -
Salaries and wages 8,524 10,424
Warranty costs 1,619 1,655
Other liabilities 5,711 6,880
Income taxes payable 1,299 668
Billings in excess of costs and estimated
earnings of $11,858 and $12,595 5,360 4,571
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TOTAL CURRENT LIABILITIES 73,569 69,309
-------- --------
LONG-TERM DEBT, net of current maturities 28,287 --
DISCOUNTED LEASE RENTALS, net of current
maturities 13,900 15,961
DEFERRED INCOME TAXES 8,256 8,201
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SHAREHOLDERS' EQUITY:
Common stock - $.10 par value; 40,000,000
authorized shares; 8,937,118 and 8,717,538
shares issued and outstanding 894 872
Capital in excess of par value 29,737 27,619
Retained earnings 41,667 39,975
Unamortized cost of stock (16) (94)
Foreign currency translation adjustments (965) (855)
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TOTAL SHAREHOLDERS' EQUITY 71,317 67,517
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$195,329 $160,988
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-------- --------
The accompanying notes are an integral part of these
consolidated financial statements.
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
Three Months Ended
-----------------------
August 3, July 29,
1996 1995
-------- --------
OPERATING ACTIVITIES:
Net Income $ 1,692 $ 1,433
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 3,478 2,490
Deferred income taxes 358 (111)
Changes in operating items:
Accounts receivable (6,751) (4,543)
Inventories 1,129 618
Costs and estimated earnings in excess of
billings (6,062) (1,091)
Prepaid expenses, deposits and other (653) (680)
Accounts payable 4,711 (2,076)
Deferred revenue (824) 601
Accrued liabilities (5,432) (2,836)
Income taxes payable 773 989
Billings in excess of costs and estimated
earnings 797 1,317
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Net cash used for operating activities (6,784) (3,889)
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INVESTING ACTIVITIES:
Cash paid for acquisition, including
acquisition costs and net of cash acquired (11,794) --
Additions to property and equipment, net (4,370) (3,501)
Investment in lease contracts (1,167) (3,918)
Collections from lease contracts 2,117 4,559
Other, net 499 (134)
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Net cash used for investing activities (14,715) (2,994)
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FINANCING ACTIVITIES:
Borrowings under revolving credit agreements 80,300 35,590
Repayments under revolving credit agreements (52,650) (23,495)
Repayment of debt assumed in acquisition (1,743) --
Borrowings of long-term debt 105 --
Repayments of long-term debt (88) (34)
Repayments of discounted lease rentals (3,150) (3,138)
Proceeds from sale of common stock 214 21
-------- --------
Net cash provided by financing activities 22,988 8,944
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EFFECT OF EXCHANGE RATE CHANGES ON CASH (5) (5)
-------- --------
NET INCREASE IN CASH 1,484 2,056
CASH, BEGINNING OF PERIOD 1,133 1,308
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CASH, END OF PERIOD $ 2,617 $ 3,364
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The accompanying notes are an integral part of these
consolidated financial statements.
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 3, 1996
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
-----------------------
August 3, July 29,
1996 1995
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Revenues $1,336 $1,171
Interest Expense (419) (487)
Other Expenses (361) (244)
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Income before provision for income taxes 556 440
Provision for income taxes (234) (176)
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Net Income $ 322 $ 264
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SUPPLEMENTAL CASH FLOW INFORMATION -
Supplemental disclosure of cash flow information is as follows (in thousands):
Three Months Ended
-----------------------
August 3, July 29,
1996 1995
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Cash paid for:
Interest $ 899 $1,001
Income taxes $ 89 $ 69
Noncash investing and financing activities:
Stock issued for acquisition $2,000 $ --
Non-compete agreements related to acquisition $ 667 $ --
RECENTLY ISSUED ACCOUNTING STANDARD -
Effective May 1, 1996, the Company adopted the provisions of Financial
Accounting Standards Board (FASB) Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(Statement 121), which establishes accounting standards for the recognition and
measurement of impairment of long-lived assets, certain identifiable
intangibles, and goodwill either to be held or disposed of. The adoption of
Statement 121 did not have a material impact on the Company's financial position
or results of operations.
USE OF ESTIMATES -
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
periods presented. Estimates are used for such items as allowances for doubtful
accounts, inventory reserves, depreciable lives of property and equipment,
warranty reserves and other items. Ultimate results could differ from those
estimates.
ACQUISITION -
On June 4, 1996, the Company acquired Connect Computer Company (Connect), in a
transaction accounted for under the purchase method. Connect is a provider of
consulting, design and implementation services for local and wide area networks,
internets and intranets, client server applications and workgroup computing,
with offices in Minneapolis, Milwaukee, and Des Moines.
The acquisition consideration totaled approximately $15 million, consisting of
$8.2 million cash and $2 million of Norstan common stock, as well as $2.7
million paid in exchange for all outstanding Connect stock options, $1.1 million
in bonuses paid to Connect management and employees, and $1 million payable to
certain members of Connect management under non-compete agreements. In
addition, the Company agreed to pay up to $4 million in contingent consideration
over a three year period ending April 30, 1999, if certain operating income
levels are achieved. The Company financed the cash portions of the acquisition
through borrowings under its existing credit facility.
Pro forma information in the year of acquisition for this acquisition has not
been disclosed as such information was not materially different from the
Company's results of operations.
STOCK SPLIT -
On June 20, 1996, the Company's Board of Directors approved a two-for-one stock
split effected in the form of a stock dividend. The stock split has been
retroactively reflected in the accompanying consolidated financial statements
and related notes. All share and per share data have been restated to reflect
the stock split.
FACTORS THAT MAY AFFECT FUTURE RESULTS -
Certain statements regarding the Company's operations, performance and results
for fiscal 1997 discussed in this report are forward-looking and therefore are
subject to certain risks and uncertainties. There are a number of factors that
could affect the Company's future operating results, including national and
regional economic conditions; pending and future legislation affecting the
telecommunications industry; the Company's operations in Canada; market
acceptance of the Company's products and services; the Company's continued
ability to provide integrated communications solutions for customers in a
dynamic industry, as well as other competitive factors.
Because these and other factors could affect the Company's operating results,
past financial performance should not necessarily be considered as a reliable
indicator of future performance, and investors should not use historical trends
to anticipate future period results.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY -
During the quarter ended August 3, 1996, the Company's net income improved
compared to the quarter ended July 29, 1995, increasing 18% to $1,692,000, or
$.18 per common share, compared to $1,433,000, or $.16 per common share.
RESULTS OF OPERATIONS -
The Company's revenues consist of revenues from the sale 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, long distance services, and network integration services. 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
----------------------- -------------
August 3, July 29, Fiscal
1996 1995 1997 VS 1996
--------- -------- ------------
REVENUES:
Sales of Products and Systems 49.6% 56.2% 12.5%
Telecommunications Services 48.9% 42.0% 48.2%
Financial Services 1.5% 1.8% 6.9%
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Total Revenues 100.0% 100.0% 27.4%
COST OF SALES 72.5% 71.8% 28.7%
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GROSS MARGIN 27.5% 28.2% 24.1%
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 24.1% 24.4% 25.5%
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OPERATING INCOME 3.4% 3.8% 15.1%
Interest Expense and Other, Net (0.3%) (0.5%) (32.6%)
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INCOME BEFORE PROVISION FOR
INCOME TAXES 3.1% 3.3% 22.1%
Provision for Income Taxes 1.3% 1.3% 28.1%
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NET INCOME 1.8% 2.0% 18.1%
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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
-----------------------
August 3, July 29,
1996 1995
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GROSS MARGIN PERCENTAGES:
Sales of Products and Systems 27.1% 25.1%
Telecommunications Services 26.6% 31.2%
Financial Services 68.0% 55.9%
RESULTS OF OPERATIONS
REVENUES. Revenues increased 27.4%, to $92,231,000 for the quarter ended
August 3, 1996 as compared to $72,401,000 for the quarter ended July 29, 1995.
Sales of products and systems increased $5,076,000, or 12.5% for the quarter
ended August 3, 1996 as compared to the similar period last year.
Revenues from telecommunications services increased $14,664,000, or 48.2%
in the three month period ended August 3, 1996 as compared to the similar period
last year. Revenues from telecommunications services generally have increased
following the growth in the sales of telecommunications products and systems.
However, in fiscal 1996 as compared to 1995, inclusion of Connect Computer's
results of operations accounted for approximately 40% of the increase in
telecommunications services revenues. Revenues from financial services
increased $90,000, or 6.9% during the three month period ended August 3, 1996 as
compared to the similar period last year.
GROSS MARGIN. The Company's gross margin increased $4,913,000, or 24.1%,
to $25,331,000 for the three months ended August 3, 1996 as compared to
$20,418,000 for the three months ended July 29, 1995. As a percent of total
revenues, gross margin declined to 27.5% for the three month period ended August
3, 1996 as compared to 28.2% for the similar period last year.
Gross margin as a percent of revenues for the sale of products and systems
was 27.1% for the three month period ended August 3, 1996 as compared to 25.1%
for the similar period ended July 29, 1995. This change in the gross margin
percentage from the sale of products and systems is primarily the result of
shifts in the mix of products sold. Gross margin as a percent of revenues
for telecommunications services was 26.6% for the three month period ended
August 3, 1996 as compared to 31.2% for the similar period ended July 29, 1995.
This decrease resulted from changes in the mix of services provided, decreased
margins attributable to moves, adds and changes as well as the impact of
relatively lower gross margins from Connect Computer Company. Gross margin as a
percent of revenues for financial services was 68.0% for the three month period
ended August 3, 1996 as compared to 55.9% for the similar period ended July 29,
1995. This change results from changing borrowing costs in a dynamic interest
rate environment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $4,500,000, or 25.5% for the quarter ended
August 3, 1996 as compared to the quarter ended July 29, 1995. As a percent of
revenues, selling, general and administrative expenses declined to 24.1% for the
three month period ended August 3, 1996 as compared to 24.4% for the similar
period ended July 29, 1995. The overall decrease in selling, general and
administrative expenses as a percent of revenues resulted from volume related
efficiencies, as sales volume increased without a proportionate increase in
expenses. These efficiencies were offset by approximately $200,000 of goodwill
amortization related to the acquisition of Connect.
OPERATING INCOME. Operating income increased $413,000, or 15.1%, to
$3,151,000 for the quarter ended August 3, 1996 as compared to $2,738,000 for
the quarter ended July 29, 1995. As a percent of revenues, operating income
decreased to 3.4%, for the three month period ended August 3, 1996 as compared
to 3.8% for the similar period ended July 29, 1995.
OTHER COSTS AND EXPENSES. Interest expense decreased to $241,000 for the
three month period ended August 3, 1996 as compared to $398,000 for the similar
period ended July 29, 1995.
The Company's effective tax rate was 42% and 40% for the three month
periods ended August 3, 1996 and July 29, 1995, respectively. The increase in
the effective tax rate is a result of the Connect acquisition which resulted in
nondeductible goodwill. 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 $1,692,000, or $.18 per common share, and
$1,433,000, or $.16 per common share, for the quarters ended August 3, 1996 and
July 29, 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. Working capital increased to $38,574,000 at August 3,
1996 from $24,899,000 at April 30, 1996. The current ratio was 1.52 to 1.0 at
August 3, 1996 as compared to 1.36 to 1.0 at April 30, 1996.
CAPITAL RESOURCES. In July 1996, the Company entered into a $40,000,000
unsecured revolving long-term credit agreement with certain banks. Up to
$15,000,000 of borrowings under this agreement may be in the form of commercial
paper. In addition, up to $8,000,000 and $3,000,000 may be used to support the
leasing activities of Norstan Financial Services, Inc. (NFS) and Norstan Canada
Inc. (Norstan Canada), respectively. Borrowings under this agreement are due
July 31, 1999, and bear interest at the banks' reference rate (8.25% at August
3, 1996 and April 30, 1996), except for LIBOR, CD and commercial paper based
options which generally bear interest at a rate lower than the banks' reference
rate. Total consolidated borrowings under this agreement at August 3, 1996, were
$27,650,000. There were no borrowings under this agreement at April 30, 1996.
There were no borrowings on the accounts of NFS or Norstan Canada at August 3,
1996, or April 30, 1996. Borrowings by the Company in fiscal 1997 and 1996 have
been for working capital and general corporate purposes, as well as to invest in
property and equipment. In addition, during fiscal 1997 borrowings were made to
finance the acquisition of Connect Computer Company.
Net capital expenditures for the three months ended August 3, 1996 were
$4,370,000 and $3,501,000 for the similar period last year. These expenditures
were primarily for the purchase of telecommunications equipment used as spare
parts, computer equipment and other facility expansion. At August 3, 1996,
there were no outstanding material commitments for future capital expenditures.
The Company also has a significant investment in lease contracts with its
customers. The investment in lease contracts totaled $1,167,000 for the three
months ended August 3, 1996 and $3,918,000 for the similar period last year.
Net lease receivables decreased to $38,883,000 at August 3, 1996 as compared to
$39,872,000 at April 30, 1996.
In June 1996, the Company acquired all of the common stock of Connect
Computer Company (Connect), a provider of consulting, design and implementation
services. The acquisition consideration totaled approximately $15 million,
consisting of $8.2 million cash and $2 million of Norstan common stock, as well
as $2.7 million paid in exchange for all outstanding Connect stock options, $1.1
million in bonuses paid to Connect management and employees, and $1 million
payable to certain members of Connect management under non-compete agreements.
In addition, the Company has agreed to pay up to $4 million in contingent
consideration over a three year period ending April 30, 1999, if certain
operating income levels are achieved.
NFS and Norstan Canada 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
sheets 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 July 2001. Payments due financial institutions on a
monthly basis are made from monthly collections of lease receivables from
customers.
Discounted lease rentals consisted of the following (in thousands):
August 3, April 30,
1996 1996
-------- --------
Nonrecourse borrowings $ 23,308 $ 26,467
Recourse borrowings 1,678 1,696
--------- ---------
Total discounted lease rentals 24,986 28,163
Less-current maturities (11,086) (12,202)
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$ 13,900 $ 15,961
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In addition to the recourse as described previously, recourse to Norstan,
Inc. relative to discounted lease rentals was limited to $865,000 as of August
3, 1996 and $883,000 as of April 30, 1996.
Management of the Company believes that a combination of cash to be
generated from operations, existing bank facilities and available 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 10. Credit Agreement dated as of July 23, 1996 among
Norstan, Inc., First Bank National Association, Harris
Trust and Savings Bank, The Sumitomo Bank, Limited,
Chicago Branch.
Exhibit 11. Statement Regarding Computation of Earnings Per Share.
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K and Form 8-K/A No. 1 dated
June 4, 1996, pertaining to its acquisition of all the issued and
outstanding capital stock of Connect Computer Company.
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 16, 1996 By /s/ PAUL BASZUCKI
------------------------
Paul Baszucki
Co-Chairman of the Board
and Chief Executive Officer
Date: September 16, 1996 By /s/ RICHARD COHEN
------------------------
Richard Cohen
Vice Chairman of the Board
and Chief Financial Officer
(Principal Financial and
Accounting Officer)