UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED NOVEMBER 2, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 0-8141
NORSTAN, INC.
(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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(address of principal executive offices)
TELEPHONE (612) 513-4500 FAX (612) 513-4537 INTERNET www.norstan.com
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(Registrant's telephone number, facsimile number, Internet address)
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 December 5, 1996, there were 9,233,737 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 Six Months Ended
---------------------- ----------------------
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
----------- --------- --------- ----------
REVENUES:
Sales of Products and Systems $ 47,348 $ 43,351 $ 96,088 $ 84,020
Telecommunications Services 46,793 33,812 88,898 64,248
Financial Services 1,512 1,542 2,898 2,838
----------- --------- --------- ----------
Total Revenues 95,653 78,705 187,884 151,106
----------- --------- --------- ----------
COST OF SALES:
Products and Systems 34,683 32,414 70,425 62,871
Telecommunications Services 33,240 23,402 63,955 44,356
Financial Services 625 583 1,068 1,155
----------- --------- --------- ----------
Total Cost of Sales 68,548 56,399 135,448 108,382
----------- --------- --------- ----------
GROSS MARGIN 27,105 22,306 52,436 42,724
Selling, General
& Administrative Expenses 21,944 18,303 44,123 35,983
----------- --------- --------- ----------
OPERATING INCOME 5,161 4,003 8,313 6,741
Interest Expense (520) (450) (761) (848)
Interest and Other Income
(Expense), Net (28) 27 (21) 76
----------- --------- --------- ----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 4,613 3,580 7,531 5,969
Provision for Income Taxes 1,937 1,432 3,163 2,388
----------- --------- --------- ----------
NET INCOME $ 2,676 $ 2,148 $ 4,368 $ 3,581
----------- --------- --------- ----------
----------- --------- --------- ----------
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ .28 $ .24 $ .47 $ .40
----------- --------- --------- ----------
----------- --------- --------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 9,416 8,990 9,369 8,969
----------- --------- --------- ----------
----------- --------- --------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
November 2, April 30,
1996 1996
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(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash $ 2,504 $ 1,133
Accounts receivable, net of allowances for doubtful
accounts of $1,412 and $1,079 69,631 55,723
Current lease receivables 16,411 15,316
Inventories 11,300 10,964
Costs and estimated earnings in excess of billings
of $15,371 and $13,528 15,765 5,202
Prepaid income taxes 3,644 3,427
Prepaid expenses, deposits and other 2,653 2,443
------------ ----------
TOTAL CURRENT ASSETS 121,908 94,208
------------ ----------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment 90,210 75,126
Less-accumulated depreciation and amortization (49,077) (40,815)
------------ ----------
NET PROPERTY AND EQUIPMENT 41,133 34,311
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OTHER ASSETS:
Lease receivables, net of current maturities 25,926 24,556
Franchise rights and other intangible assets,
net of amortization of $4,797 and $3,991 21,069 7,421
Other 14 492
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TOTAL OTHER ASSETS 47,009 32,469
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$ 210,050 $ 160,988
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The accompanying notes are an integral part of these consolidated balance
sheets.
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
November 2, April 30,
1996 1996
------------ ----------
(Unaudited) (Audited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 384 $ --
Current maturities of discounted lease rentals 13,862 12,202
Accounts payable 22,506 15,053
Deferred revenue 17,526 17,856
Accrued -
Salaries and wages 12,114 10,424
Warranty costs 1,973 1,655
Other liabilities 6,579 6,880
Income taxes payable 1,505 668
Billings in excess of costs and estimated earnings
of $16,145 and $12,595 4,034 4,571
------------ ----------
TOTAL CURRENT LIABILITIES 80,483 69,309
------------ ----------
LONG-TERM DEBT, net of current maturities 25,279 --
DISCOUNTED LEASE RENTALS, net of current maturities 21,141 15,961
DEFERRED INCOME TAXES 7,896 8,201
------------ ----------
SHAREHOLDERS' EQUITY:
Common stock - $.10 par value; 40,000,000 authorized
shares; 9,233,737 and 8,717,538 shares issued
and outstanding 923 872
Capital in excess of par value 30,767 27,619
Retained earnings 44,343 39,975
Unamortized cost of stock (179) (94)
Foreign currency translation adjustments (603) (855)
------------ ----------
TOTAL SHAREHOLDERS' EQUITY 75,251 67,517
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$ 210,050 $ 160,988
------------ ----------
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The accompanying notes are an integral part of these consolidated balance
sheets.
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
Six Months Ended
------------------------
November 2, October 28,
1996 1995
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OPERATING ACTIVITIES:
Net Income $ 4,368 $ 3,581
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 7,228 5,533
Deferred income taxes 85 113
Changes in operating items:
Accounts receivable (9,696) (2,818)
Inventories (76) (117)
Costs and estimated earnings in excess of billings (10,554) (338)
Prepaid expenses, deposits and other (108) (72)
Accounts payable 5,008 (2,565)
Deferred revenue (772) 826
Accrued liabilities (661) (1,544)
Income taxes payable 968 864
Billings in excess of costs and estimated
earnings (549) (322)
------------ -----------
Net cash (used for) provided by operating
activities (4,759) 3,141
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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 (11,011) (6,631)
Investment in lease contracts (13,007) (9,321)
Collections from lease contracts 10,620 8,817
Other, net 511 (81)
------------ -----------
Net cash used for investing activities (24,681) (7,216)
------------ -----------
FINANCING ACTIVITIES:
Borrowings under revolving credit agreements 135,350 62,330
Repayments under revolving credit agreements (110,625) (51,545)
Repayment of debt assumed in acquisition (1,743) --
Borrowings of long-term debt 105 --
Repayments of long-term debt (181) (69)
Borrowings of discounted lease rentals 13,211 --
Repayments of discounted lease rentals (6,423) (5,729)
Proceeds from sale of common stock 1,091 101
------------ -----------
Net cash provided by financing activities 30,785 5,088
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EFFECT OF EXCHANGE RATE CHANGES ON CASH 26 (3)
------------ -----------
NET INCREASE IN CASH 1,371 1,010
CASH, BEGINNING OF PERIOD 1,133 1,308
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CASH, END OF PERIOD $ 2,504 $ 2,318
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The accompanying notes are an integral part of these consolidated statements.
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 2, 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):
Six Months Ended
--------------------------
November 2, October 28,
1996 1995
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Revenues $ 2,608 $ 2,577
Interest Expense (844) (956)
Other Expenses (644) (646)
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Income before provision for income taxes 1,120 975
Provision for income taxes 470 390
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Net Income $ 650 $ 585
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SUPPLEMENTAL CASH FLOWS INFORMATION -
Supplemental disclosure of cash flows information is as follows (in thousands):
Six Months Ended
--------------------------
November 2, October 28,
1996 1995
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Cash paid for:
Interest $ 1,769 $ 1,881
Income taxes $ 1,934 $ 1,419
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.
FORWARD-LOOKING STATEMENTS AND
FACTORS THAT MAY AFFECT FUTURE RESULTS -
From time to time, the Company may publish forward-looking statements relating
to such matters as anticipated financial performance, business prospects,
technological developments, new products, and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for forward-
looking statements. In order to comply with the terms of the safe harbor, the
Company notes that a variety of factors could cause the Company's actual results
and experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operations, performance, developments and
results of the Company's business include the following: 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 November 2, 1996, the Company's net income improved
compared to the quarter ended October 28, 1995, increasing 24.6% to $2,676,000,
or $.28 per common share, compared to $2,148,000, or $.24 per common share. For
the six month period ended November 2, 1996, the Company's net income increased
22.0% to $4,368,000, or $.47 per common share, compared to $3,581,000 or $.40
per common share, for the same period last year.
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, network integration services and long distance 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 DOLLAR AMOUNTS AS A
PERCENTAGE OF REVENUES PERCENTAGE PERCENTAGE OF REVENUES PERCENTAGE
Three Months Ended INCREASE Six Months Ended INCREASE
----------------------- ------------- ----------------------- --------------
November 2, October 28, Fiscal November 2, October 28, Fiscal
1996 1995 1997 vs. 1996 1996 1995 1997 vs. 1996
---------- ----------- ------------- ---------- ---------- --------------
REVENUES:
Sales of Products and Systems 49.5% 55.1% 9.2% 51.1% 55.6% 14.4%
Telecommunications Services 48.9% 43.0% 38.4% 47.3% 42.5% 38.4%
Financial Services 1.6% 1.9% (1.9%) 1.6% 1.9% 2.1%
---------- ---------- ------------- ---------- ---------- -------------
Total Revenues 100.0% 100.0% 21.5% 100.0% 100.0% 24.3%
COST OF SALES 71.7% 71.7% 21.5% 72.1% 71.7% 25.0%
---------- ---------- ------------- ---------- ---------- -------------
GROSS MARGIN 28.3% 28.3% 21.5% 27.9% 28.3% 22.7%
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 22.9% 23.2% 19.9% 23.5% 23.8% 22.6%
---------- ---------- ------------- ---------- ---------- -------------
OPERATING INCOME 5.4% 5.1% 28.9% 4.4% 4.5% 23.3%
Interest Expense and Other, Net (0.6%) (0.6%) 30.0% (0.4%) (0.5%) 1.3%
---------- ---------- ------------- ---------- ---------- -------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 4.8% 4.5% 28.9% 4.0% 4.0% 26.2%
Provision for Income Taxes 2.0% 1.8% 35.3% 1.7% 1.6% 32.5%
---------- ---------- ------------- ---------- ---------- -------------
NET INCOME 2.8% 2.7% 24.6% 2.3% 2.4% 22.0%
---------- ---------- ------------- ---------- ---------- -------------
---------- ---------- ------------- ---------- ---------- -------------
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 Six Months Ended
------------------------- ------------------------
November 2, October 28, November 2, October 28,
1996 1995 1996 1995
------------ ----------- ----------- -----------
GROSS MARGIN PERCENTAGES:
Sales of Products and Systems 26.7% 25.2% 26.7% 25.2%
Telecommunications Services 29.0% 30.8% 28.1% 31.0%
Financial Services 58.7% 62.2% 63.1% 59.3%
RESULTS OF OPERATIONS
REVENUES. Revenues increased 21.5%, to $95,653,000 for the quarter
ended November 2, 1996 as compared to $78,705,000 for the similar period last
year. For the six months ended November 2, 1996, revenues increased 24.3%, to
$187,884,000 as compared to $151,106,000 for the same period last year. Sales
of products and systems increased $3,997,000, or 9.2%, and $12,068,000, or
14.4%, during the comparable three and six month periods ended November 2, 1996,
respectively.
Revenues from telecommunications services increased $12,981,000, or
38.4% and $24,650,000, or 38.4% in the comparable three and six month periods
ended November 2, 1996, respectively. 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 60% and 55% of the increase in telecommunications services
revenues for the three and six month periods ended November 2, 1996,
respectively. Revenues from financial services decreased $30,000, or 1.9%,
and increased $60,000, or 2.1%, during the comparable three and six month
periods ended November 2, 1996, respectively.
During the quarter ended November 2, 1996, the Company reclassified as
sales of products and systems approximately $3,000,000 in revenues which were
previously reported during the first quarter as telecommunications services.
This reclassification is reflected in the revenues as listed for the six months
ended November 2, 1996 and had no impact on total revenues or net income as
previously reported for first quarter ended August 3, 1996.
GROSS MARGIN. The Company's gross margin increased $4,799,000, or
21.5%, to $27,105,000 for the three months ended November 2, 1996 as compared to
$22,306,000 for the three months ended October 28, 1995. For the six month
period ended November 2, 1996, gross margin increased $9,712,000, or 22.7%, to
$52,436,000 as compared to $42,724,000 for the similar period ended October 28,
1995. As a percent of total revenues, gross margin was 28.3% for the comparable
three month periods ended November 2, 1996 and October 28, 1995, and was 27.9%
and 28.3% for the comparable six month periods ended November 2, 1996 and
October 28, 1995, respectively.
Gross margin as a percent of revenues for the sale of products and
systems was 26.7% for both the three and six month periods ended November 2,
1996 as compared to 25.2% for the similar periods ended October 28,
1995.Gross margin as a percent of revenues for telecommunications services
was 29.0% and 28.1% for the three and six month periods ended November 2,
1996 as compared to 30.8% and 31.0% for the comparable periods ended October
28, 1995, respectively. The respective increases and decreases in gross
margin as a percent of revenues for the sale of products and systems and
telecommunications services were generally the result of changes in the mix
of products sold and services provided. Gross margin as a percent of
revenues for financial services was 58.7% and 63.1% for the three and six
month periods ended November 2, 1996 as compared to 62.2% and 59.3% for the
three and six month periods ended October 28, 1995, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3,641,000, or 19.9%, for the quarter ended
November 2, 1996 as compared to the quarter ended October 28, 1995. For the six
months ended November 2, 1996, selling, general and administrative expenses
increased $8,140,000, or 22.6%, as compared to the similar period last year. As
a percent of revenues, selling, general and administrative expenses declined to
22.9% and 23.5% for the three and six month periods ended November 2, 1996,
respectively, as compared to 23.2% and 23.8% for the similar periods ended
October 28, 1995, respectively. These decreases 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 $300,000 and $500,000
of goodwill amortization related to the acquisition of Connect for the three and
six month periods ended November 2, 1996, respectively.
OPERATING INCOME. Operating income increased $1,158,000, or 28.9%, to
$5,161,000 for the quarter ended November 2, 1996 as compared to $4,003,000 for
the quarter ended October 28, 1995. For the six months ended November 2, 1996,
operating income increased $1,572,000, or 23.3%, to $8,313,000, as compared to
$6,741,000 for the similar period last year. As a percent of revenues,
operating income increased to 5.4% for the three month period ended November 2,
1996 as compared to 5.1% for the similar period ended October 28, 1995. For the
comparable six month periods ended November 2, 1996 and October 28, 1995,
operating income as a percent of revenues decreased to 4.4% from 4.5%.
OTHER COSTS AND EXPENSES. Interest expense increased to $520,000 as
compared to $450,000 for the three month periods ended November 2, 1996 and
October 28, 1995, respectively. For the six month period ended November 2, 1996
interest expense decreased to $761,000 from $848,000 for the similar period last
year. Average month end revolving credit balances (excluding amounts borrowed
to finance leasing activities) were approximately $21,500,000 for the six months
ended November 2, 1996 as compared to approximately $23,000,000 for the six
months ended October 28, 1995.
The Company's effective tax rate was 42% for the three and six month
periods ended November 2, 1996 as compared to 40% for the similar periods ended
October 28, 1995. 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 $2,676,000, or $.28 per common share, and
$2,148,000, or $.24 per common share, for the quarters ended November 2, 1996
and October 28, 1995, respectively. Net income was $4,368,000, or $.47 per
common share, and $3,581,000, or $.40 per common share, for the six month
periods ended November 2, 1996 and October 28, 1995, respectively.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. Working capital increased to $41,425,000 at
November 2, 1996 from $24,899,000 at April 30, 1996. The current ratio was 1.51
to 1.0 at November 2, 1996 as compared to 1.36 to 1.0 at April 30, 1996.
Operating activities used net cash of $4,759,000 and provided net cash of
$3,141,000 for the six months ended November 2, 1996 and October 28, 1995,
respectively.
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 $6,000,000 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 November 2, 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 November 2, 1996, were $24,725,000. There were no borrowings under
this agreement at April 30, 1996. There were no borrowings on the accounts of
NFS or Norstan Canada at November 2, 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 six months ended November 2, 1996
were $11,011,000 and $6,631,000 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
November 2, 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
$13,007,000 for the six months ended November 2, 1996 and $9,321,000 for the
similar period last year. Net lease receivables increased to $42,337,000 at
November 2, 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.
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 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 September 2002. 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):
November 2, April 30,
1996 1996
----------- ---------
Nonrecourse borrowings $ 33,340 $ 26,467
Recourse borrowings 1,663 1,696
----------- ---------
Total discounted lease rentals 35,003 28,163
Less-current maturities (13,862) (12,202)
----------- ---------
$ 21,141 $ 15,961
----------- ---------
----------- ---------
In addition to the recourse as described previously, recourse to
Norstan, Inc. relative to discounted lease rentals was limited to $850,000 as of
November 2, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On September 12, 1996, the annual meeting of shareholders of the
Company (the "Annual Meeting") was held.
(b) At the Annual Meeting, the following directors were elected:
Paul Baszucki Winston E. Munson
Richard Cohen Gerald D. Pint
Sidney R. Cohen Stanley H. Schweitzer
Arnold Lehrman Dr. Jagdish N. Sheth
Connie M. Levi Herbert F. Trader
(c) The following items were voted upon at the Annual Meeting*:
(1) Election of Directors:
Name Votes For Votes Withheld
-------------------- ------------ --------------
Paul Baszucki 3,729,467 3,608
Richard Cohen 3,702,003 31,072
Sidney R. Cohen 3,702,203 30,872
Arnold Lehrman 3,729,103 3,972
Connie M. Levi 3,728,768 4,307
Winston E. Munson 3,701,403 31,672
Gerald D. Pint 3,728,768 4,307
Stanley H. Schweitzer 3,729,468 3,607
Dr. Jagdish N. Sheth 3,728,868 4,207
Herbert F. Trader 3,728,868 4,207
Abstentions and Broker non-votes relating to the Election of Directors
- - 267,588
(2) The shareholders approved the appointment of Arthur Andersen LLP as
independent auditors for the fiscal year ending April 30, 1997. A
total of 3,722,500 shares were voted for the appointment of Arthur
Andersen LLP, 3,572 shares were voted against, and there were a total
of 7,003 abstentions and/or broker non-votes.
* The vote totals noted above do not reflect the two-for-one stock split
approved by the Board of Directors on June 20, 1996.
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: December 13, 1996 By
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Paul Baszucki
Co-Chairman of the Board and Chief
Executive Officer
Date: December 13, 1996 By /s/ Richard Cohen
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Richard Cohen
Vice Chairman of the Board and Chief
Financial Officer (Principal Financial
and Accounting Officer)