UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-8141
NORSTAN, INC.
(Exact name of registrant as specified in its chapter)
MINNESOTA 41-0835746
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(State of incorporation) (I.R.S. Employer identification No.)
605 NORTH HIGHWAY 169, TWELFTH FLOOR, PLYMOUTH, MINNESOTA 55441
(Address of principal executive offices)
The Company's phone number: 612-513-4500
The Company's internet address: www.norstan.com
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK ($.10 PAR VALUE PER SHARE)
COMMON STOCK PURCHASE RIGHTS
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of June 30, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant, computed by reference to the average high
and low prices on such date as reported by the NASDAQ National Market System
was $86,162,099.
As of June 30, 1997, there were outstanding 9,426,503 shares of the registrant's
common stock, par value $.10 per share, its only class of equity securities.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed within
120 days after the end of the fiscal year covered by this report are
incorporated by reference into Part III hereof.
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. Business............................................................................. 1
Market Trends...................................................................... 2
Competitive Strengths.............................................................. 3
Growth Strategy.................................................................... 4
Products and Services.............................................................. 4
Acquisitions....................................................................... 7
Marketing and Sales................................................................ 7
Customers and Customer Service..................................................... 8
Suppliers: Relationship with Siemens............................................... 8
Backlog............................................................................ 9
Competition........................................................................ 9
Canadian Operations................................................................ 9
Government Regulation.............................................................. 10
Employees.......................................................................... 10
General............................................................................ 11
ITEM 2. Properties........................................................................... 12
ITEM 3. Legal Proceedings.................................................................... 12
ITEM 4. Submission of Matters to a Vote of Security Holders.................................. 12
PART II
ITEM 5. Market for the Company's Common Equity and Related Stockholder Matters............... 13
ITEM 6. Selected Consolidated Financial Data................................................. 14
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Fiscal Years 1997, 1996, and 1995.............................. 15
ITEM 8. Financial Statements and Supplementary Data.......................................... 20
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure........................................................................ 41
PART III
ITEM 10. Directors and Executive Officers of the Registrant................................... 41
ITEM 11. Executive Compensation............................................................... 41
ITEM 12. Security Ownership of Certain Beneficial Owners and Management....................... 41
ITEM 13. Certain Relationships and Related Transactions....................................... 41
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 42
SIGNATURES..................................................................................... 43
i
PART I
ITEM 1. BUSINESS.
Norstan, Inc. (the Company) is a single-source technology provider
creating integrated voice, video, and data solutions for customers primarily
in 18 states and throughout Canada. The Company was incorporated in 1960 as
a Minnesota corporation. Norstan Communications, Inc. (NCI) (formerly
Norstan Communications Systems, Inc.) was incorporated in 1974. Norstan
Financial Services, Inc. (NFS) (formerly Norstan Financial Corporation) was
incorporated in 1979. Norstan/Electronic Engineering Company was
incorporated in 1985 and merged into NCI in December 1988.
Norstan/Communication Consultants, Inc. (N/CCI) was incorporated in 1988 and
merged into NCI in May of 1990. Norstan Network Services, Inc. (NNS) was
incorporated in 1991. Norstan Network Services, Inc. of New Hampshire and
Norstan Canada Inc. (NCDA) were incorporated in 1992. Connect Computer
Company (Connect) was merged into an acquisition subsidiary and as the
surviving corporation became a wholly owned subsidiary of the Company in June
1996. Norstan International, Inc. (NII) was incorporated in 1997.
Norstan entered the communications business in 1973, has been a
distributor of Siemens ROLM Communications, Inc. (ROLM) communications
equipment since 1976 and has historically derived a substantial majority of
its revenues from the sale of telephone systems, communications maintenance
services and moves, adds and changes, which are modifications to customers'
communications systems. In 1997, ROLM's name was changed to Siemens Business
Communication Systems, Inc. (Siemens). In recent years, the Company has
expanded the array of products and services it provides to include those of
Aspect Telecommunications Corporation (Aspect), Compression Labs,
Incorporated (CLI), PictureTel Corporation (PictureTel), Sprint
Communications Company L.P. (Sprint), Octel Communications Corporation
(Octel) and others.
In addition to providing the equipment and related support required
for a specific installation, Norstan offers a variety of services, including
communications maintenance services, moves, adds and changes, leasing, long
distance service, network integration, outsourcing and facilities management
services. These services, which provide the Company with an important source
of recurring revenue, were approximately 49% of the Company's total revenues
for fiscal 1997.
Norstan's marketing strategy is to increase sales to its existing
customer base by capturing a larger portion of each customer's communication
and information systems budget. Generally, the first product sold to a
customer is a telephone system. Upon selling a system, Norstan's
representatives typically sign the customer to a service contract. Norstan
believes the high quality of its customer service supports ongoing marketing
efforts, as satisfied customers are more likely to choose Norstan to supply
additional communications products and services. In order to focus marketing
efforts effectively, Norstan's sales representatives strive to understand
each customer's business, enabling them to recommend communications solutions
that improve the flow of information and productivity. For example, a sales
representative may recommend voice messaging and videoconferencing equipment
to expand communications channels, reduce dependence on support personnel and
reduce the need for costly travel. For customers with a high volume of
calls, Norstan may recommend interactive voice response products, which allow
customers to access information via a touch tone telephone, or sophisticated
call centers which interface with the customer's computer system and direct
calls automatically to available personnel. For those customers who wish to
avoid the complexity and training required to operate and maintain their own
communications system and the technology risk associated with owning
communications equipment, Norstan provides complete communications
outsourcing and facilities management services.
The Company focuses its sales efforts on customer locations with
100 or more users and those customers with complex communications
requirements. The Company's wide array of products and services enables it
to offer single-source solutions to customers' communications needs. Current
customers of the Company include BP America Inc., Best Buy Co., Inc., Blue
Cross/Blue Shield, First Bank System, Inc., 3M Company, Harley-Davidson,
Inc., The Limited Stores, as well as many hospitals and a number of
government agencies in Minnesota, Iowa, Wisconsin, Ohio, Arizona and other
states and provinces.
1
MARKET TRENDS
Norstan believes that as markets become more global, information driven
and competitive, businesses are placing an increasing emphasis on rapid and
comprehensive communications technology to improve employee productivity and
customer service. As a result, businesses are looking to a variety of new
technologies to enhance the performance of their communications systems and
to increase the speed, accuracy and availability of information. Norstan
believes that several trends contribute to a favorable market outlook for
communications systems integrators offering a broad range of products and
services such as those offered by the Company:
- CONTINUED MODEST GROWTH IN MARKET FOR PBX TELEPHONE SYSTEMS.
According to MultiMedia Telecommunications Association (MTA) and
Telecommunications Industry Association (TIA), national trade
associations, the United States market for private branch exchange
(PBX) telephone systems grew from $2.8 billion in 1994 to
$3.6 billion in 1996. Over this same period, the average price per
telephone line increased from an estimated $553 to $580, while the
number of lines shipped increased from 5.1 million to 6.3 million.
These trade associations also project the market for PBX telephone
systems to grow at a compound annual rate of 8.9% from $3.6 billion
in 1996 to approximately $5.1 billion in 2000, representing an
increase in the number of lines shipped to over 8.3 million and an
increase in the average price per line to $619.
- GROWTH OF NEW COMMUNICATIONS PRODUCTS AND MARKETS. Over the past
several years, a variety of new communications technologies have
emerged which enhance the capabilities of traditional telephone
systems making businesses more efficient and productive.
Manufacturers such as Aspect, CLI and Octel have introduced products,
including call centers, voice response units, videoconferencing
systems and voice messaging products, that improve the performance
and efficiency of communications systems. Industry sources expect the
number of communications technologies to continue to grow. The
United States market for call processing equipment, including call
centers, voice messaging and interactive voice response products, was
estimated at $5.4 billion in 1996 and is projected to grow at a
compound annual rate of 10.6% between 1996 and 2000. Further,MTA and
TIA estimate that the market for videoconferencing products in which
the Company competes was approximately $3.7 billion in 1996 and is
projected to grow at a compound annual rate of 34.5% between 1996 and
2000.
- CONVERGENCE OF VOICE, VIDEO AND DATA MARKETS. Since the
introduction of local and wide area computer networks, the market for
data communications has grown rapidly and comprises a growing portion
of the overall communications market. The data communications and
networking equipment market was estimated at $32.3 billion in 1996 and
is projected to grow at a compound annual rate of 15% between 1996
and 2000. As the prevalence of computer networks continues to
increase, and voice, video, and data are increasingly transmitted in
a digital format using the same networks, Norstan believes that demand
for services related to the integration of voice, video and data
networks will continue to increase.
- INCREASING COMPLEXITY OF MANAGING COMMUNICATIONS SYSTEMS.
Management believes businesses are increasingly turning to
communications systems integrators who are capable of providing a
single point of contact for communications needs. As the number and
complexity of communications technologies grow, United States
businesses have increasingly sought to narrow their vendor base to
those who offer a broad range of communications products and services,
which has led to consolidation among such vendors.
2
COMPETITIVE STRENGTHS
The Company believes it possesses and is developing a number of
competitive strengths that will help it achieve its goal of becoming one of
the premier providers of integrated communications systems solutions in the
United States and Canada. These strengths include:
- ACCESS TO LEADING VOICE, VIDEO AND DATA PRODUCTS AND SERVICES. Norstan
maintains relationships with leading communications technology
manufacturers and service providers, including Siemens, Aspect, CLI,
PictureTel, Sprint and Octel. In addition, through its data
communications business, the Company has access to products and
services offered by Novell, Inc. (Novell), Cisco Systems, Inc.
(Cisco), Network Equipment Technologies, Inc. (NET), Microsoft
Corporation (Microsoft), Intel Corporation (Intel), Adtran, Inc.
(Adtran), Compaq Computer Corporation (Compaq) and Lotus Development
Corporation (Lotus). Norstan's knowledge of these technologies and
ability to remarket, support and integrate them into communications
solutions meeting diverse customer requirements, enables the Company
to provide its customers with integrated approaches to solving
communications issues. Further, Norstan's strong distribution network
enhances its access to leading technologies by offering a low cost
distribution alternative for established manufacturers, as well as for
manufacturers that lack the critical mass necessary to establish a
direct sales force in specific markets.
- INDEPENDENT SINGLE SOURCE SUPPLIER. Unlike companies that manufacture
communications equipment, Norstan's independence permits it to select
products on the basis of merit and to distribute a wide range of
products from a number of manufacturers. This independence also
enables Norstan to respond quickly to changing customer needs by
taking advantage of new technologies as they become available,
without incurring product development risk.
- CUSTOMER SERVICE. Norstan is committed to providing a
high level of customer service by exceeding its customers'
expectations. Customer satisfaction surveys, conducted by an
outside firm contracted by Norstan, indicate that 94% of Norstan's
customers are satisfied with the overall service and support they
receive. This level of satisfaction has increased, rising from 86%
in 1988 to the current level. The Company coordinates its customer
service response through three remote diagnostic and dispatch
centers which handle over 430,000 service calls per year.
- DISTRIBUTION EXPERTISE. Norstan believes it has access
to a wide array of leading communications products and is
continuing to develop the internal expertise necessary to provide
communications products and services on an integrated basis. The
availability of distribution rights for many communications
products, such as PBX systems and call centers, is limited, making
it difficult for many communications systems integration companies
to offer the range of products and services that Norstan offers.
In addition, the capital and training requirements necessary to
offer such products and services on an integrated basis are
substantial. Norstan believes that its access to leading products,
established distribution network and large customer base, together
with its continuing development of communications systems
integration expertise, have positioned the Company to continue to
expand the portion of its revenues derived from the integration of
communications products and services.
- MANAGED SERVICES. As communications and information
systems become more complex, businesses are finding it more cost
effective to outsource some or all of their communications, data,
and call center needs. Norstan offers its customers a wide array of
managed communication and information services with outsourcing and
facilities management agreements. Norstan may provide a customer
all system equipment including PBX, local and wide area networks,
servers, voice messaging and conferencing equipment, staffing, both
management and administrative support, allowing the customer to
concentrate on their core competencies. Norstan believes the
managed services solution, whether fully turnkey or simple support
of internal staff, provides its customers with a single source for
the management of their voice, data, and call center environments.
3
GROWTH STRATEGY
Norstan has formulated a growth strategy intended to capitalize on its
competitive strengths. This growth strategy is focused on the following
elements:
- INCREASE SALES TO EXISTING CUSTOMERS. Norstan has a
large installed customer base, including approximately 6,500
customer locations covered by service contracts. This base
provides Norstan with the opportunity to capture an increasing
portion of each customer's communications requirements. Most
customers currently purchase only a portion of the products and
services offered by the Company. The cost of selling to existing
customers is generally lower than selling to new customers because
Norstan already understands the customer's business and
communications requirements. Additionally, Norstan's reputation is
already established with the customer, thereby enabling Norstan to
leverage its high level of customer service and more easily sell
new products and services.
- EXPANSION OF THE INSTALLED BASE BY ATTRACTING NEW
CUSTOMERS. Norstan continually works to attract new customers and
employs a specialized sales team focused on selling to non-Norstan
customers. Norstan believes its portfolio of products and
services, expertise in providing turnkey solutions to customers'
communications systems requirements and reputation for high quality
service enhance the Company's ability to attract new customers.
- STRATEGIC PARTNERSHIPS. Norstan continues to establish
strategic partnerships with both hardware and software
manufacturers. These partnerships enable Norstan to expand its
range of products and services and help to ensure continued access
to new products and technologies. In certain instances, strategic
partnerships also enhance Norstan's ability to expand
geographically by providing access to customers outside of the
markets historically served by Norstan.
- STRATEGIC ALLLIANCES. The development of strategic
alliances with related and complimentary vendors allows Norstan to
go to the market with the expertise to provide complete packages of
managed services. By aligning itself with leaders in such fields
as staffing and conferencing, Norstan is able to supplement its
skill sets and better meet customers' expectations.
- ACQUISITION STRATEGY. Norstan is actively seeking to
acquire complementary businesses that will contribute to the
success of Norstan's communications systems integration strategy.
Norstan targets systems integration companies that will provide
either new skills, products and services and/or permit expansion of
the geographic areas which Norstan serves. These acquisitions will
also expand Norstan's customer base, providing additional points of
entry for Norstan's communications products and services. See
"Acquisitions."
PRODUCTS AND SERVICES
The Company's core business has historically been the sale of telephone
systems, communications maintenance services and moves, adds and changes.
From this core business, the Company has expanded its operations and shifted
its product mix to incorporate new products and services, including call
processing products, call center solutions, long distance services,
conferencing products, refurbished equipment, cabling, leasing, outsourcing
and network integration products and services. This array of products and
services allows the Company to provide single source solutions to customers'
communications needs. The Company's three major business segments are:
products and systems, telecommunications services and financial services.
Products and systems include the sale of new products and upgrades, as well
as refurbished equipment and contributed approximately 50.8%, 55.0% and 57.4%
of total revenues in fiscal 1997, 1996 and 1995, respectively.
Telecommunications services include communications maintenance services,
moves, adds and changes, network integration services, and long distance
service and contributed approximately 47.7%, 43.2% and 40.9% of total
revenues in fiscal 1997, 1996 and 1995, respectively. Financial services
revenues result primarily from leasing activities and contributed
approximately 1.5%, 1.8% and 1.7% of total revenues in fiscal 1997, 1996 and
1995, respectively. The products and services included in each of these
segments are discussed below.
4
PRODUCTS AND SYSTEMS
TELEPHONE SYSTEMS. Norstan offers a wide variety of private telephone
systems. These systems are typically comprised of a telephone switch and
individual telephones located at the customer site. A telephone switch is a
device that provides the connection between the customer's internal telephone
lines and the outside telephone network. The telephone switch, typically
owned by the customer, is available in three primary types: PBX, key system
and hybrid key system. PBX switches are generally used for installations of
more than 100 lines and can accommodate up to several thousand telephone
lines. A PBX condenses the number of internal phone lines to a significantly
smaller number of outside trunk lines which connect to the telephone network.
When an incoming call is received, the PBX switches the call to the
appropriate internal telephone extension. When a call is made from within
the business, the PBX determines whether the call is an internal call, in
which case the PBX switches the call to the appropriate internal telephone
extension, or an outgoing call, in which case the PBX directs the call to an
open outside line. The PBX also provides a base platform from which the
customer's telephone system can be upgraded with features such as voice
messaging and caller identification. In contrast to PBX systems, key systems
are relatively inexpensive and appropriate for small installations which
generally require fewer than 50 lines. Each telephone in a key system
displays all outside lines, allowing the user to directly select which
telephone line to use when making a call. Hybrid key systems share
attributes of both PBX systems and key systems and are typically appropriate
for installations requiring approximately 50 to 100 lines. The Company also
offers a number of different telephone models with a variety of features.
Telephone systems range in price from approximately $15,000 for a key system
with relatively few lines and features to over $1.0 million for the largest,
most complex PBX systems.
CALL CENTERS. Call centers are complex systems that can process a large
number of incoming calls per hour and are used by businesses in applications
such as reservation centers, customer support centers and catalog order
centers. Call centers utilize a variety of call processing technologies such
as interactive voice response products, voice messaging and computer
telephony integration (CTI), to maximize the efficiency of a large
call-receiving operation. A call center utilizing an interactive voice
response product can obtain information from a caller via a touch tone
telephone, permitting more detailed information on the caller to be retrieved
from a computer database and be available to an agent when answering the
call. Norstan offers a variety of call center products manufactured by
Aspect, Siemens and Executone which can service from two call-receiving
agents to over eight hundred call-receiving agents. Call centers range in
price from less than $40,000 to over $1.0 million.
CALL PROCESSING. Call processing is comprised of voice messaging and
interactive voice response products. Voice messaging enables verbal
communications to be sent, stored and retrieved at a later time, from a
remote location, or forwarded to other parties by using a touch tone
telephone. Norstan offers integrated voice messaging products from Siemens
and stand alone voice messaging products from Octel and Applied Voice
Technology (AVT) that are compatible with all major PBX systems. Voice
messaging products range in price from approximately $5,000 to $500,000.
Interactive voice response (IVR) products allow a caller to access a
computer database to retrieve or input data by using a touch tone telephone.
IVR products can be utilized in a stand alone application, such as when a
caller uses a touch tone telephone to obtain account information from a bank
or flight schedules from an airline's automated retrieval system. IVR
products can also be utilized in a call center application to route calls and
provide data on the call based on caller input or historical database
information. Norstan began marketing IVR products in 1991 and currently
markets models manufactured by Intervoice and Aspect which range in price
from approximately $20,000 to $250,000.
5
CONFERENCING. The Company offers a robust array of video, voice and
data conferencing products. Videoconferencing allows persons at separate
locations to communicate using cameras, video screens, microphones and
speakers linked over digital networks. Norstan has distributed
videoconferencing equipment manufactured by CLI since July 1991 (as of June
1, 1997, CLI merged with VTEL -Austin, TX). In addition to distributing
CLI/VTEL products within a defined geographic region, the Company provides
installation and service support nationally for those products. In December
1995, the Company began to distribute videoconferencing equipment from
PictureTel, ranging from desktop video to boardroom systems.
Videoconferencing products range in price from approximately $10,000 to over
$100,000. Norstan also distributes Latitude Meeting Place voice/data
conferencing products which allow up to 128 users from anywhere in the world
to conference free of degradation of voice quality. Conferencing products
range in price from $30,000 to $400,000.
REFURBISHED EQUIPMENT. Since 1988, Norstan has engaged in the
refurbishment and resale of previously owned Siemens products. In July 1990,
the Company and Siemens entered into an agreement to refurbish and resell
previously owned Siemens equipment in the United States. This agreement was
renewed for an additional three-year period in October 1993 and subsequently
extended to July 27, 1998. Under the agreement, Siemens pays the Company a
fee for refurbishing the equipment and remarketing separate Siemens
components, and the Company shares in the profit generated by this program.
All refurbished equipment is certified by Siemens and covered by warranty for
up to one year, depending on the type and quantity of equipment purchased.
The Company and Siemens are currently negotiating a new agreement. In April
1993, Norstan expanded its refurbished equipment operations to include the
purchase, refurbishment and resale of previously owned Nortel (formerly
Northern Telecom) equipment. In 1997, the refurbished product line was
expanded to include Iwatsu, Aspect and Isotec products.
TELECOMMUNICATIONS SERVICES
COMMUNICATIONS MAINTENANCE SERVICES. Norstan provides service to its
customers for products it sells on a contract or time and material basis.
Telephone systems generally require a higher level of ongoing communications
maintenance than other products sold by the Company and generate the majority
of communications maintenance revenue. The Company coordinates service
through three remote diagnostic and dispatch centers located in Cleveland,
Minneapolis and Toronto. The Company offers a variety of service contracts
intended to meet the differing needs of customers. List prices for Norstan's
communications maintenance services range from approximately $25 to $65 per
line annually and are based primarily on the capacity and features of the
customer's communications system.
MOVES, ADDS AND CHANGES. Norstan performs moves, adds and changes
related to its customers' telephone systems. Moves, adds and changes consist
of moving telephones to new user locations, adding telephones or expansion
cards in a telephone system and changing system and user features. Moves,
adds and changes are typically scheduled in advance by customers, as compared
to communications maintenance service calls which require prompt response.
DATA COMMUNICATIONS. In November 1993, Norstan formed a strategic
business unit to provide data communications services to customers. Data
communications services consist of consulting, design, integration and
implementation of local area networks, wide area networks, intranets and
internets, client/server environments and other data and image communications
applications. To support these efforts, Norstan provides products and
services offered by Novell, Cisco, NET, Microsoft, Intel, Adtran, Compaq and
Lotus. In October 1994, Norstan expanded its data communications efforts to
include computer telephony integration, which consists of integrating a
database or other data system with a telephone system. For example, a call
center could be integrated with a database so that when a customer calls a
catalog merchant to place an order, that customer's name, address and order
history would automatically be retrieved from the database and displayed on
the call-receiving agent's computer screen. In November 1994, the Company
expanded its data communication services into Canada and in June 1996, the
Company increased its data communication capabilities in the Midwest through
the acquisition of Connect. See "Acquisitions" below. Norstan has
approximately 320 employees focusing on data communications and is actively
recruiting additional employees to continue its expansion into this area.
6
LONG DISTANCE SERVICE. Norstan has provided long distance service since
May 1990. The Company entered into a three-year direct resale agreement with
Sprint in May 1993, whereby Norstan offers customers a full range of long
distance and network services under the Company's private label. In August
1994, the Company and Sprint negotiated a new agreement which runs through
July 1997. The Company and Sprint are currently negotiating a new agreement.
CABLING. Cabling is the infrastructure that provides the pathway for
telephone systems, local area networks, wide area networks and other
communications systems to function. Cabling can be provided on a stand alone
basis or in conjunction with other products and services offered by the
Company.
OUTSOURCING. The Company believes that many businesses do not want to
dedicate internal resources to manage their communications systems and are
therefore contracting with companies who will manage their communications
systems through outsourcing agreements. Norstan provides communications
equipment and trained personnel to act as a customer's communications systems
department, thereby permitting the customer to focus on its primary business.
FINANCIAL SERVICES
LEASING. Norstan provides leasing services to enable its customers to
finance purchases of communications systems. Lease financing supports the
sales process by permitting customized lease structures to meet the needs of
customers and eliminating the need for third party financing. By acting as
lessor, the Company can typically provide lease terms with greater
flexibility than third party financing sources. Norstan also generally
provides communications maintenance services for leased equipment. The
Company currently has approximately 1,250 leases. At the time of inception,
the average lease transaction is approximately $50,000 and has a term of from
36 to 60 months. The Company financed over $31.5 million in customer
equipment purchases for fiscal 1997.
ACQUISITIONS
Norstan is actively seeking to acquire complementary businesses that
will contribute to the success of Norstan's communications systems
integration strategy.
On June 4, 1996, the Company acquired Connect, a provider of consulting,
design and implementation services based in Minneapolis with offices in
Milwaukee and Des Moines. The purchase price of this acquisition was
approximately $15 million plus certain incentive payments contingent upon
future operating performance of Connect.
On November 30, 1994, the Company acquired substantially all of the
assets of Renaissance Investments, Ltd., a technology planning and
integration services company based in Toronto, Ontario, specializing in local
area networks, wide area networks and graphical user interfaces. The
purchase price of this acquisition was approximately $726,000.
MARKETING AND SALES
Norstan has approximately 421 sales and marketing personnel within the
United States and Canada including 300 sales representatives who focus on
either new prospects or selling additional products and services to Norstan's
customer base. Included in the sales force are specialists in the areas of
videoconferencing, call centers, leasing, long distance service and training.
These specialists partner with the sales representatives to provide
integrated communications systems solutions for Norstan's customers.
7
Norstan's sales representatives and specialists use a comprehensive
approach in evaluating each customer's communications needs and implementing
solutions. The sales representative begins with a detailed needs analysis of
the customer's current and future communications requirements. After
determining the customer's needs, Norstan proposes solutions to satisfy
current and anticipated requirements. Norstan's operations teams then work
with the customer to plan the installation of purchased technologies and
identify required training. By planning the precise requirements of each
installation, Norstan's specialists are able to install, test and bring new
equipment on-line with minimal service interruption. Finally, Norstan
provides an ongoing support program tailored to meet the customer's specific
application requirements incorporating remote diagnostics, in-field service
and support, additional training and help desk support from Norstan's
customer support representatives.
Norstan uses a variety of methods to communicate with customers and
prospect for new customers. The Company publishes semi-annual news magazines
describing available products and services, organizational changes and other
company news. Customers also receive product and service updates from
Norstan's sales representatives, field technicians and customer support
representatives. The Company pursues new customer opportunities through
in-person sales calls, telemarketing and advertising. Norstan also regularly
receives referrals from equipment manufacturers and customers, as well as
unsolicited requests for proposals for products and services.
CUSTOMERS AND CUSTOMER SERVICE
Norstan focuses its marketing initiatives on customers with 100 or more
users and those customers with complex communications requirements. The
Company believes that providing service exceeding customers' expectations, or
"legendary" customer service, is an important element of its ability to
compete effectively in the communications market. Norstan maintains a highly
trained force of service technicians, design engineers and customer support
representatives who provide on-site and remote service and support. Customer
satisfaction surveys, conducted by an outside firm contracted by Norstan,
indicate that 94% of Norstan's customers are satisfied with the overall
service and support they receive. This level of satisfaction has increased,
rising from 86% in 1988 to the current level. Norstan coordinates its
customer service response through three remote diagnostics and dispatch
centers located in Cleveland, Minneapolis and Toronto. These centers handle
over 430,000 service calls per year, approximately 44% of which are addressed
remotely. For calls requiring immediate on-site service and support, Norstan
promptly dispatches a service technician. Overall, Norstan has over 135
employees devoted primarily to providing customer service out of the service
centers.
The Company sells products and services across many industry segments,
including banking, government, insurance, health care, manufacturing,
publishing, public utilities, transportation and retail. Current customers
of the Company include BP America Inc., Best Buy Co., Inc., Blue Cross/Blue
Shield, First Bank System, Inc., 3M Company, Harley-Davidson, Inc., The
Limited Stores, as well as many hospitals and a number of government agencies
in Minnesota, Iowa, Wisconsin, Ohio, Arizona and other states and provinces.
In addition, through an agreement entered into in August 1993 with the
Midwest Higher Education Consortium, the Company has agreed to provide
certain videoconferencing equipment at specified terms to all state agencies
in the states of Illinois, Kansas, Michigan, Minnesota, Missouri, Nebraska,
Ohio and Wisconsin. This agreement designates Norstan as a recommended
vendor, but does not require any purchases by state agencies. No single
customer accounted for more than 5% of the Company's total revenue for fiscal
years 1997, 1996 or 1995.
SUPPLIERS: RELATIONSHIP WITH SIEMENS
Norstan's principal suppliers include Siemens, Aspect, CLI, PictureTel,
Sprint and Octel. In addition, the Company distributes complementary
communications products that fit specific segments in the marketplace such as
hybrid key systems and personal computer-based voice processing and
videoconferencing systems, as well as data communications products from
Novell, Newbridge, Bay Networks, Compaq, Lotus and others. In addition, the
Company has distribution arrangements with several manufacturers of other
products and services, as well as business partnerships that provide
technical support to complement Norstan's expertise.
8
Norstan has been a distributor of Siemens communications equipment since
1976 and is Siemens' largest independent distributor. Siemens is the third
largest manufacturer of PBX systems in the United States, accounting for an
estimated 13% of United States sales of PBX systems in 1996, behind Lucent
Technologies and Nortel (formerly Northern Telecom) which accounted for an
estimated 30% and 28%, respectively. In July 1993, the Company executed a
new distributor agreement with Siemens, which has a term extending through
July 1998 and automatically renews for additional one-year periods, unless
terminated upon 90 days' notice prior to each renewal date. Pursuant to this
agreement, Norstan is the exclusive distributor of Siemens communications
equipment in Minnesota, Wisconsin, Iowa, North Dakota, South Dakota, Ohio,
Kentucky, Arizona, New Mexico, Oklahoma, Louisiana, Nevada, Texas, Arkansas,
Mississippi, Florida, Alabama, parts of Nebraska, as well as all of Canada.
In the event this agreement expires without renewal, Norstan is entitled to
receive parts, certain software upgrades and technical support for ten years
to enable Norstan to continue providing service to its customers with Siemens
products. In addition, Norstan and Siemens have an agreement under which
Norstan is an authorized agent for the refurbishment and sale of previously
owned Siemens equipment in the United States. This agreement also runs
through July 1998. The Company and Siemens are currently negotiating a new
agreement. The Company believes that any interruption of its business
relationship with Siemens would have a material adverse effect on its
business.
BACKLOG
As of April 30, 1997, the Company had signed contracts for products and
services aggregating approximately $47.3 million, substantially all of which
are expected to be fulfilled by the end of fiscal 1998. As of April 30,
1996, the Company had signed contracts aggregating approximately $46.9
million, substantially all of which were fulfilled by the end of fiscal 1997.
The usual time period between the execution of a contract and the completion
of the installation is one to six months, depending on the size and
complexity of the system.
COMPETITION
The communications industry is intensely competitive and rapidly
changing. In general, the Company competes on the basis of breadth of product
offering, system capability and reliability, service, support and price.
Many of the Company's competitors, including AT&T and Lucent, the seven
Regional Bell Holding Companies (RHCs) and Nortel, have longer operating
histories and significantly greater financial, technical, sales, marketing
and other resources, as well as greater name recognition and larger
distribution networks, than the Company. The passage of the
Telecommunications Act of February 1996 has enabled a number of entities with
greater resources to enter and compete in industries from which they were
previously precluded. Also, as a result of this legislation, many business
reorganizations are occurring. These changes in the regulatory environment
could potentially affect the Company's ability to compete successfully.
The Company also competes with a number of companies offering data
systems integration services, many of which have greater financial and other
resources than the Company. These companies could also attempt to increase
their presence in other segments of the communications market in which the
Company competes by introducing additional products or services targeted for
these market segments. There can be no assurance that the Company will be
able to compete successfully or that competition will not have a material
adverse effect on the Company's business, operating results and financial
condition.
CANADIAN OPERATIONS
In April 1992, Norstan acquired substantially all of the assets of the
Siemens' communications business of IBM Canada Limited. Approximately 8%,
11% and 10% of the Company's revenues were generated by its Canadian
operations for fiscal 1997, 1996 and 1995, respectively. On November 30,
1994, the Company acquired substantially all of the assets of Renaissance
Investments, Ltd.
9
GOVERNMENT REGULATION
Except for the sale of long distance service, the Company is not subject
to any government regulations which have a material impact on its operations.
Effective May 1, 1992, the Company became a direct reseller of long distance
network services and accordingly became subject to certain state tariff
regulations throughout the United States. The Company is currently
registered and certified to provide interstate services in all 50 states and
intrastate services in 46 states, and is currently pursuing certification for
intrastate services in two additional states. The Company is also subject to
FCC regulations which require the filing of federal tariffs.
EMPLOYEES
The Company's U.S. operations had a total of 2,167 employees as of April
30, 1997, consisting of 367 sales and marketing personnel, 1,367 operations,
service and installation employees, and 433 administrative employees. Of
these employees, approximately 150 are covered by collective bargaining
agreements. The Company considers relations with its employees to be good and
has not experienced any work stoppages.
The Company's Canadian operations had a total of 206 employees as of
April 30, 1997, consisting of 54 sales and marketing personnel, 103
operations, service and installation employees, and 49 administrative
personnel. The Company considers relations with the Canadian employees to be
good and has not experienced any work stoppages.
10
GENERAL
RAW MATERIALS
The Company purchases all the equipment that it markets and installs and
does not engage in any manufacturing operations. The most important
components utilized by the Company are the telecommunications systems and
electronic telephone sets supplied by Siemens. Purchases of such equipment
from Siemens account for the major portion of total equipment purchases. The
other parts and components utilized, such as telephones, electrical
components, wire and speakers, substantially all of which are purchased in
conjunction with Siemens telecommunications systems, are purchased from a
number of suppliers. It is anticipated that such other parts and components,
which are purchased pursuant to purchase orders rather than long term
contracts, will be readily available from present suppliers or, if necessary,
from alternate qualified manufacturers.
NFS is a financial service organization and uses no raw materials.
PATENTS
The Company and its subsidiaries have no patents, trademarks, licenses,
franchises or concessions that are of material importance to their business
with the exception of distributor agreements between the Company and Siemens,
and between the Company and other suppliers.
SEASONAL NATURE OF BUSINESS
Historically, operating results indicate that both revenues and earnings
generally increase in each quarter as each fiscal year progresses. This
results from seasonal performance of the Company and its employees as well as
from seasonal demands of the Company's customers.
WORKING CAPITAL PRACTICES
The Company and its subsidiaries have no special practices relating to
working capital items.
RESEARCH AND DEVELOPMENT
The Company and its subsidiaries do not engage in any material research
or development activities.
EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL PROTECTION REGULATION
Not applicable.
EFFECTS OF INFLATION
Market conditions have generally permitted the Company to adjust its
pricing to reflect increases in labor and product costs due to inflation.
Inflation has not had a significant impact on operating results during the
past three years.
11
ITEM 2. PROPERTIES.
The executive offices of the Company and its subsidiaries are located in
Plymouth, Minnesota, where the Company leases approximately 53,400 square
feet of office space. The Company also has corporate offices in Maple Grove,
Minnesota, Brecksville, Ohio, and Phoenix, Arizona, where the Company leases
approximately 64,000, 61,250 and 34,400 square feet of office space,
respectively. In addition to the space above, the Company leases sales and
service offices in 38 other cities within the United States. In Canada, the
Company leases approximately 30,400 square feet of office space in North
York, Ontario, which serves as its Canadian headquarters. In addition, the
Company also leases sales and service offices in eight other cities within
the Canadian provinces of Alberta, Ontario, Quebec and British Columbia. The
Company believes that the above mentioned facilities are adequate and
suitable for its current needs.
ITEM 3. 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 business, operating results and financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders
during the last quarter of the fiscal year covered by this report.
12
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's common stock is traded on the National Over-the-Counter
market and is listed on the national market system of the National
Association of Securities Dealers' Automated Quotations System ("NASDAQ")
under the symbol "NRRD". The following table sets forth the high and low
quotations for the Company's common stock as reported by NASDAQ for each
quarterly period during the two most recent fiscal years(1):
FISCAL YEAR ENDED APRIL 30, 1997: HIGH LOW
First Quarter 19 1/2 13 1/8
Second Quarter 20 1/4 15
Third Quarter 18 3/4 15 1/2
Fourth Quarter 17 1/4 13 3/4
FISCAL YEAR ENDED APRIL 30, 1996: HIGH LOW
First Quarter 12 5/8 10 7/8
Second Quarter 13 12 1/8
Third Quarter 13 11 1/2
Fourth Quarter 13 7/8 12 1/4
(1) 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 high and low quotations presented above.
The quotations reflect prices between dealers and do not include retail
mark-ups, mark-downs or commissions, and do not necessarily represent actual
transactions.
As of June 30, 1997, there were approximately 1,600 holders of record of
the Company's common stock.
RESTRICTIONS ON THE PAYMENT OF DIVIDENDS
The Company has not recently declared or paid any cash dividends on the
common stock and does not intend to pay cash dividends on the common stock in
the foreseeable future. The Company currently expects to retain earnings to
finance expansion of its business. In addition, the Company's current
revolving long-term credit agreement prohibits the payment of cash dividends
without the prior written consent of the lenders thereunder.
ISSUANCE OF UNREGISTERED SECURITIES
The Company issued 137,758 unregistered shares of its common stock on
June 4, 1996, as part of the purchase price paid for Connect Computer
Company. These shares had a fair market value of $2,000,000 and were issued
to Connect shareholders (21 shareholders). These shares are being held in
escrow on behalf of each Connect shareholder until June 4, 1998. During this
escrow period, the shareholders have all the rights of a shareholder,
including the right to vote such shares, however, they may not sell,
transfer, pledge or otherwise encumer the shares. Such shares were issued in
an exempt transaction pursuant to Section 4(2) of the Securities Act of 1933
as a transaction by an issuer not involving a public offering. There were no
underwriters involved in this transaction.
13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data set forth below as of and for
each of the fiscal years in the five-year period ended April 30, 1997 have
been derived from the Company's consolidated financial statements, which have
been audited by Arthur Andersen LLP, independent public accountants. The
selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the notes thereto
included elsewhere in this report.
FISCAL YEARS ENDED APRIL 30,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenues.................................................... $398,075 $321,364 $290,245 $231,899 $195,856
Cost of sales............................................... 289,560 229,980 202,107 155,676 128,228
-------- -------- -------- -------- --------
Gross margin................................................ 108,515 91,384 88,138 76,223 67,628
Selling, general and administrative expenses................ 89,310 75,973 74,725 65,137 58,609
-------- -------- -------- -------- --------
Operating income............................................ 19,205 15,411 13,413 11,086 9,019
Interest expense............................................ (1,866) (1,351) (1,587) (832) (841)
Interest and other income (expense), net.................... (22) 89 (54) (106) 323
-------- -------- -------- -------- --------
Income before cumulative effect of accounting change and
provision for income taxes................................ 17,317 14,149 11,772 10,148 8,501
Provision for income taxes.................................. 7,100 5,660 4,709 4,161 3,401
-------- -------- -------- -------- --------
Income before cumulative effect of accounting change........ 10,217 8,489 7,063 5,987 5,100
Cumulative effect of change in accounting for income
taxes (1)................................................. -- -- -- (375) --
-------- -------- -------- -------- --------
Net income.................................................. $ 10,217 $ 8,489 $ 7,063 $ 5,612 $ 5,100
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income per common and common equivalent share:
Income before cumulative effect of accounting change...... $ 1.08 $ .94 $ .81 $ .70 $ .62
Cumulative effect of change in accounting for income
taxes (1)............................................... -- -- -- (.04) --
-------- -------- -------- -------- --------
Net income per share (2).................................... $ 1.08 $ .94 $ .81 $ .66 $ .62
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average number of common and common equivalent
shares outstanding (2)................................... 9,435 9,028 8,750 8,504 8,166
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
AS OF APRIL 30,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital............................................. $ 37,484 $ 24,899 $ 32,183 $ 32,961 $ 19,160
Total assets................................................ 224,173 160,988 161,709 149,662 120,731
Long-term debt, net of current maturities................... 18,284 -- 16,465 18,218 11,555
Discounted lease rentals, net of current maturities......... 24,043 15,961 16,313 18,845 12,785
Shareholders' equity........................................ 84,370 67,517 56,984 47,658 40,594
Cash dividends declared and paid............................ -- -- -- -- --
- ------------------------
(1) On May 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." As a result, the
Company recorded a one-time charge of $375,000, or $.04 per share, in
fiscal 1994 for the cumulative effect of the change in method of
accounting for income taxes.
(2) 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 selected consolidated financial data
presented above.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Norstan is a full service communications systems provider creating
integrated voice, video, and data solutions for customers primarily in 18
states and throughout Canada. Norstan entered the communications business in
1973 and has historically derived a substantial majority of its revenues from
the sale of telephone systems, communications maintenance services and moves,
adds and changes. Norstan's growth has resulted from acquisitions and
geographic expansion as well as from offering a broadening range of products
and services including network integration services.
Over the past several years, Norstan has expanded its offering of
products and services to include refurbished equipment, call processing
products, videoconferencing equipment, long distance service and cabling.
Recently, the Company has further expanded its products and services to
include data communications applications, network integration and complete
management of customers' communications systems through outsourcing
agreements.
In June 1996, the Company acquired all of the common stock of Connect
Computer Company (Connect) for consideration of approximately $15 million.
This acquisition represented revenue of over $33 million in fiscal 1997,
leading the growth of the Company's integration services.
Norstan offers leasing services to its customers through a wholly owned
subsidiary. Norstan believes its ability to provide lease financing to
customers supports the sales process by permitting customized lease
structures to meet the needs of customers and by eliminating the need for
third party financing.
Approximately 49% of fiscal 1997 revenues were derived from the sale of
services, including communications maintenance services, moves, adds and
changes, long distance service, network integration services, and leasing.
Management believes that services provide the Company with an important
source of recurring revenue.
15
RESULTS OF OPERATIONS
The Company's revenues consist of the sales of products and systems,
telecommunications services and financial services. Products and systems
revenues 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 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 expressed as a percentage
of total revenues.
FISCAL YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
Revenues:
Sales of products and systems................ 50.8% 55.0% 57.4%
Telecommunications services.................. 47.7 43.2 40.9
Financial services........................... 1.5 1.8 1.7
--- --- ---
Total revenues............................. 100.0 100.0 100.0
Cost of sales.................................. 72.7 71.6 69.6
--- --- ---
Gross margin................................... 27.3 28.4 30.4
Selling, general and administrative expenses... 22.5 23.6 25.8
--- --- ---
Operating income............................... 4.8% 4.8% 4.6%
--- --- ---
--- --- ---
Net income..................................... 2.6% 2.6% 2.4%
--- --- ---
--- --- ---
The following table sets forth, for the periods indicated, the gross margin
percentages for sales of products and systems, telecommunications services and
financial services.
FISCAL YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
Gross margin percentage:
Sales of products and systems............... 25.9% 26.3% 26.1%
Telecommunications services................. 27.6 29.8 35.4
Financial services.......................... 64.2 60.6 53.8
FISCAL YEARS ENDED APRIL 30, 1997, 1996 AND 1995
REVENUES. Total revenues were $398.1 million, $321.4 million and $290.2
million for the fiscal years ended April 30, 1997, 1996 and 1995,
respectively, representing an increase of 23.9% for fiscal 1997 as compared
to fiscal 1996 and an increase of 10.7% for fiscal 1996 as compared to fiscal
1995.
Sales of products and systems increased $25.2 million, or 14.2%, for
fiscal 1997 as compared to fiscal 1996, and $10.3 million, or 6.2%, for
fiscal 1996 as compared to fiscal 1995. The increases for fiscal 1997 and
1996 as compared to prior years, result primarily from increased sales volume
in refurbished equipment, cabling operations and videoconferencing.
Revenues from telecommunications services increased $51.1 million, or
36.8% for fiscal 1997 as compared to fiscal 1996, and $20.2 million, or
17.0%, for fiscal 1996 as compared to fiscal 1995. The increases in fiscal
1997 and 1996 result primarily from the growth in network integration
services including the Connect acquisition. In addition, the growth in the
Company's installed base of customers and expanded array of products and
services has led to increased activity in communication maintenance services,
moves, adds, and changes. The Company also achieved significant growth in
revenues from long distance services and outsourcing arrangements.
Revenues from financial services increased $394,000, or 7.0%, for
fiscal 1997 as compared to fiscal 1996, and $634,000, or 12.7%, for fiscal
1996 as compared to fiscal 1995. The increase in revenues from financial
services in both years is attributable to the increased size of the Company's
leasing base, which is derived primarily from sales of products and systems.
16
GROSS MARGIN. The Company's gross margin was $108.5 million, $91.4
million, and $88.1 million, for the fiscal years ended April 30, 1997, 1996
and 1995, respectively. As a percent of total revenues, gross margin was
27.3% for fiscal 1997 compared to 28.4% for fiscal 1996 and 30.4% for fiscal
1995. Gross margin as a percent of revenues for the sale of products and
systems was 25.9% for fiscal 1997 as compared to 26.3% for fiscal 1996 and
26.1% for fiscal 1995. These changes in the gross margin percentages from the
sale of products and systems are primarily the result of shifts in the
product mix and competitive market conditions.
Gross margin as a percent of revenues for telecommunications services
was 27.6% for fiscal 1997 as compared to 29.8% for fiscal 1996 and 35.4% for
fiscal 1995. The decrease in gross margin for fiscal 1997 as compared to
1996 is primarily due to lower gross margins in the network integration
services provided by Connect, relative to the Company's other services.
However, operating margins generated by Connect have been higher than the
Company's other service lines. The decrease for fiscal 1996 as compared to
fiscal 1995 resulted from changes in the mix of services, increased service
support costs, additional training and development costs required to support
the Company's expanded line of product offerings, as well as from decreased
margin percentages attributable to moves, adds and changes.
Gross margin as a percent of revenues for financial services was 64.2%
for fiscal 1997 as compared to 60.6% for fiscal 1996 and 53.8% for fiscal
1995. The increase in gross margin percentage for fiscal 1997 as compared to
fiscal 1996 and fiscal 1996 as compared to fiscal 1995, is the result of
decreasing interest rates.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $89.3 million, $76.0 million and $74.7 million
for the fiscal years ended April 30, 1997, 1996 and 1995, respectively,
representing an increase of 17.6% for fiscal 1997 as compared to fiscal 1996
and 1.7% for fiscal 1996 as compared to fiscal 1995. As a percent of
revenues, selling, general and administrative expenses declined to 22.5% for
fiscal 1997 as compared to 23.6% for fiscal 1996 and 25.7% for fiscal 1995.
These decreases as a percentage of revenues resulted from continued efforts
to contain costs and volume related efficiencies, as sales volume increased
without proportional increases in expenses. Additionally, in fiscal 1996,
the Company shifted certain administrative resources to an operational and
product line support function; the related costs were included in cost of
sales for fiscal 1996.
OTHER COSTS AND EXPENSES. Interest expense was $1.9 million for fiscal
1997 as compared to $1.4 million for fiscal 1996 and $1.6 million for fiscal
1995. Weighted average interest rates under the Company's revolving
long-term credit agreements were 7.5% for fiscal 1997 as compared to 8.2% for
fiscal 1996 and 7.8% for fiscal 1995. Average month end borrowings
outstanding under the Company's revolving long-term credit agreements
(excluding amounts borrowed to finance leasing activities) were $24.5 million
for fiscal 1997, $15.8 million for fiscal 1996 and $20.9 million for fiscal
1995.
The Company's effective income tax rate was 41% for fiscal 1997 and 40%
for fiscal 1996 and fiscal 1995. The Company's effective tax rate differs
from the federal statutory rate primarily due to state income taxes.
NET INCOME. Net income was $10.2 million or $1.08 per share in 1997,
$8.5 million or $.94 per share in 1996, and $7.1 million or $.81 per share in
1995.
17
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $37.5 million at April 30, 1997 from $24.9
million at April 30, 1996. Net cash provided by operating activities was
$18.7 million for the fiscal year ended April 30, 1997 as compared to $28.0
million for fiscal year 1996. For the fiscal year ended April 30, 1997, net
income of $10.2 million, depreciation and amortization of $17.0 million,
increased accounts payable and accrued liabilities of $9.6 million, decreased
inventories of $3.5 million, and increased billings in excess of costs and
estimated earnings of $1.2 million were partially offset by increased costs
and estimated earnings in excess of billings of $6.4 million and increased
accounts receivable of $16.3 million.
Working capital decreased to $24.9 million at April 30, 1996 from $32.2
million at April 30, 1995. Net cash provided by operating activities was
$28.0 million for the fiscal year ended April 30, 1996 as compared to $20.2
million for the fiscal year 1995. For the fiscal year ended April 30, 1996,
net income of $8.5 million, depreciation and amortization of $12.5 million,
decreased costs and estimated earnings in excess of billings of $5.7 million,
increased deferred revenue of $2.8 million and increased billings in excess
of costs and estimated earnings of $2.4 million were only partially offset by
increased accounts receivable of $4.0 million.
Capital expenditures for fiscal 1997 were $24.2 million as compared to
$14.4 million in fiscal 1996 and $17.3 million in fiscal 1995. These
expenditures were primarily for telecommunications equipment used as spare
parts, computer equipment, facility expansion and telecommunication equipment
used in outsourcing arrangements. The Company expects capital expenditures
in fiscal 1998 to be approximately $20 to $25 million.
The Company has also made a significant investment in lease contracts
with its customers. The additional investment made in lease contracts in
fiscal 1997 totaled $31.5 million. Net lease receivables increased to $49.4
million at April 30, 1997 from $39.9 million at April 30, 1996. The Company
expects to make an additional investment in lease contracts in fiscal 1998 of
approximately $25 to $30 million. The Company utilizes its lease receivables
and corresponding underlying equipment to borrow funds from financial
institutions 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. Discounted lease
rentals, including recourse borrowings of $592,000, totaled $37.9 million at
April 30, 1997. Interest rates on these credit agreements at April 30, 1997
ranged from 6.0% to 10.0%, while payments are due in varying monthly
installments through June 2003. Payments due to financial institutions are
made from monthly collections of lease receivables from customers.
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
$15.0 million, consisting of $12.0 million cash and $2.0 million of Norstan
common stock, and $1.0 million payable to certain members of Connect
management under non-compete agreements. In addition, the Company has agreed
to pay up to $4.0 million in contingent consideration over a three year
period ending April 30, 1999, if certain operating income levels are achieved
(as of April 30, 1997, $2.0 million of such consideration has been accrued).
This transaction resulted in the recording of $16.4 million in goodwill which
is being amortized on a straight-line basis over 15 years.
The Company has a $40.0 million unsecured revolving long-term credit
agreement with certain banks. Up to $15.0 million of borrowings under this
agreement may be in the form of commercial paper and up to $8.0 million and
$6.0 million may be used to support the leasing activities of NFS and Norstan
Canada, respectively. Borrowings under this agreement are due July 31, 1999
and bear interest at a bank's reference rate (8.50% and 8.25% at April 30,
1997 and April 30, 1996, respectively), except for LIBOR, CD and commercial
paper based options which generally bear interest at a rate lower than the
bank's reference rate. Total consolidated borrowings were $17,920,000 at
April 30, 1997. There were no borrowings under this agreement at April 30,
1996. There were no borrowings on account of NFS or Norstan Canada under
this agreement at April 30, 1997 or April 30, 1996.
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.
18
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective May 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No.
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
SFAS No. 121 did not have a material impact on the Company's financial
position or results of operations.
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share"(SFAS No. 128), which changes the way companies
calculate their earnings per share data (EPS). SFAS No. 128 replaces primary
EPS with basic EPS. Basic EPS is computed by dividing reported earnings by
weighted average shares outstanding, excluding potentially dilutive
securities. Fully diluted EPS, termed diluted EPS under SFAS No. 128, is also
to be disclosed. The Company is required to adopt SFAS No. 128 in fiscal
1998 at which time all prior year EPS are to be restated in accordance with
SFAS No. 128. If the Company had adopted the pronouncement during fiscal
1997, the effect of this accounting change on reported EPS data would have
been as follows:
YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
Primary EPS as reported...................... $ 1.08 $ .94 $ .81
Effect of SFAS No. 128....................... .04 .06 .05
--------- --------- ---------
Basic EPS as restated........................ $ 1.12 $ 1.00 $ .86
--------- --------- ---------
--------- --------- ---------
Fully diluted EPS as reported................ $ -- $ -- $ --
Effect of SFAS No. 128....................... 1.08 .94 .81
--------- --------- ---------
Diluted EPS as restated...................... $ 1.08 $ .94 $ .81
--------- --------- ---------
--------- --------- ---------
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 including those in this Form 10-K.. 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.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS: PAGE
Report of Independent Public Accountants ............................. 21
Consolidated Statements of Operations for the years ended
April 30, 1997, 1996 and 1995 ..................................... 22
Consolidated Balance Sheets as of April 30, 1997 and 1996............. 23
Consolidated Statements of Shareholders' Equity for the years ended
April 30, 1997, 1996 and 1995...................................... 25
Consolidated Statements of Cash Flows for the years ended
April 30, 1997, 1996 and 1995...................................... 26
Notes to Consolidated Financial Statements............................ 27
Selected Quarterly Financial Data (unaudited)......................... 40
FINANCIAL STATEMENT SCHEDULES:
All schedules have been omitted as not required, not applicable or
because the information to be presented is included in the consolidated
financial statements and related notes.
20
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Norstan, Inc.:
We have audited the accompanying consolidated balance sheets of Norstan, Inc.
(a Minnesota corporation) and Subsidiaries as of April 30, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended April 30, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Norstan, Inc. and
Subsidiaries as of April 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended April 30, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
June 3, 1997
21
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED APRIL 30,
----------------------------
1997 1996 1995
-------- -------- --------
REVENUES:
Sale of products and systems.............................. $202,199 $176,992 $166,675
Telecommunications services............................... 189,847 138,737 118,569
Financial services........................................ 6,029 5,635 5,001
-------- -------- --------
Total revenues.......................................... 398,075 321,364 290,245
-------- -------- --------
COST OF SALES:
Products and systems...................................... 149,860 130,363 123,158
Telecommunications services............................... 137,540 97,396 76,641
Financial services........................................ 2,160 2,221 2,308
-------- -------- --------
Total cost of sales..................................... 289,560 229,980 202,107
-------- -------- --------
GROSS MARGIN................................................ 108,515 91,384 88,138
Selling, general and administrative expenses expenses..... 89,310 75,973 74,725
-------- -------- --------
OPERATING INCOME............................................ 19,205 15,411 13,413
Interest expense.......................................... (1,866) (1,351) (1,587)
Interest and other income (expense), net.................. (22) 89 (54)
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 17,317 14,149 11,772
Provision for income taxes................................ 7,100 5,660 4,709
-------- -------- --------
NET INCOME.................................................. $ 10,217 $ 8,489 $ 7,063
-------- -------- --------
-------- -------- --------
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE........... $ 1.08 $ .94 $ .81
-------- -------- --------
-------- -------- --------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING........................................ 9,435 9,028 8,750
-------- -------- --------
-------- -------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
22
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
APRIL 30,
------------------
1997 1996
-------- --------
CURRENT ASSETS:
Cash...................................................... $ 5,147 $ 1,133
Accounts receivable, net of allowances for doubtful
accounts of $1,783 and $1,079........................... 76,027 55,723
Current lease receivables................................. 19,595 15,316
Inventories............................................... 7,636 10,964
Costs and estimated earnings in excess of billings of
$11,948 and $13,528..................................... 11,556 5,202
Deferred income tax benefits.............................. 3,954 3,427
Prepaid expenses, deposits and other...................... 2,925 2,443
-------- --------
TOTAL CURRENT ASSETS.................................... 126,840 94,208
-------- --------
PROPERTY AND EQUIPMENT:
Machinery and equipment................................... 93,895 75,126
Less-accumulated depreciation and amortization............ (48,409) (40,815)
-------- --------
NET PROPERTY AND EQUIPMENT.............................. 45,486 34,311
-------- --------
OTHER ASSETS:
Lease receivables, net of current portion................. 29,775 24,556
Goodwill, net of amortization of $5,749 and $3,991........ 21,958 7,421
Other..................................................... 114 492
-------- --------
TOTAL OTHER ASSETS...................................... 51,847 32,469
-------- --------
$224,173 $160,988
-------- --------
-------- --------
The accompanying notes are an integral part of these consolidated balance
sheets.
23
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY
APRIL 30,
------------------
1997 1996
-------- --------
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 389 $ -
Current maturities of discounted lease rentals............ 13,878 12,202
Accounts payable.......................................... 24,486 15,053
Deferred revenue.......................................... 18,680 17,856
Accrued -
Salaries and wages...................................... 13,065 10,424
Warranty costs.......................................... 2,348 1,655
Other liabilities....................................... 10,333 6,880
Income taxes payable...................................... 388 668
Billings in excess of costs and estimated earnings of
$12,829 and $12,595................................... 5,789 4,571
-------- --------
TOTAL CURRENT LIABILITIES............................. 89,356 69,309
-------- --------
LONG-TERM DEBT,
NET OF CURRENT MATURITIES................................. 18,284 -
DISCOUNTED LEASE RENTALS,
NET OF CURRENT MATURITIES................................. 24,043 15,961
DEFERRED INCOME TAXES....................................... 8,120 8,201
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 10)
SHAREHOLDERS' EQUITY:
Common stock - $.10 par value; 40,000,000 authorized
shares; 9,387,458 and 8,717,538 shares issued and
outstanding............................................. 939 872
Capital in excess of par value............................ 34,556 27,619
Retained earnings......................................... 50,192 39,975
Unamortized cost of stock................................. (142) (94)
Foreign currency translation adjustments.................. (1,175) (855)
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................ 84,370 67,517
-------- --------
$224,173 $160,988
-------- --------
-------- --------
The accompanying notes are an integral part of these consolidated balance
sheets.
24
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED APRIL 30
(IN THOUSANDS)
COMMON STOCK CAPITAL FOREIGN
-------------------- IN EXCESS UNAMORTIZED CURRENCY
OUTSTANDING OF PAR RETAINED COST OF TRANSLATION
SHARES AMOUNT VALUE EARNINGS STOCK ADJUSTMENTS
----------- ------ --------- -------- ----------- -----------
BALANCE - APRIL 30, 1994................ 4,071 $407 $24,132 $24,423 $(291) $(1,013)
Stock issued for employee benefit
plans................................. 144 15 1,899 - 142 -
Foreign currency translation
adjustments........................... - - - - - 207
Net income.............................. - - - 7,063 - -
----- ------ --------- -------- ----------- -----------
BALANCE - APRIL 30, 1995................ 4,215 422 26,031 31,486 (149) (806)
Stock issued for employee benefit
plans................................. 144 14 2,024 - 55 -
Foreign currency translation
adjustments........................... - - - - - (49)
Effect of two-for-one stock split....... 4,359 436 (436) - - -
Net income.............................. - - - 8,489 - -
----- ------ --------- -------- ----------- -----------
BALANCE - APRIL 30, 1996................ 8,718 872 27,619 39,975 (94) (855)
Stock issued for employee benefit
plans................................. 531 53 4,951 - (48) -
Stock issued for acquisition............ 138 14 1,986 - - -
Foreign currency translation
adjustments........................... - - - - - (320)
Net income.............................. - - - 10,217 - -
----- ------ --------- -------- ----------- -----------
BALANCE - APRIL 30, 1997................ 9,387 $939 $34,556 $50,192 $(142) $(1,175)
----- ------ --------- -------- ----------- -----------
----- ------ --------- -------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial
statements.
25
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
OPERATING ACTIVITIES:
Net income................................................ $ 10,217 $ 8,489 $ 7,063
Adjustments to reconcile net income to net cash provided
by operating activities -
Depreciation and amortization........................... 16,964 12,517 10,830
Deferred income taxes................................... (45) (465) (132)
Changes in operating items, net of acquisition effects:
Accounts receivable................................... (16,319) (3,961) (7,807)
Inventories........................................... 3,532 167 1,034
Costs and estimated earnings in excess of billings.... (6,371) 5,715 4,150
Prepaid expenses, deposits and other.................. (386) (111) (503)
Accounts payable and accrued liabilities.............. 9,561 (151) 4,567
Deferred revenue...................................... 468 2,815 1,405
Billings in excess of costs and estimated earnings.... 1,223 2,445 (866)
Income taxes payable.................................. (144) 510 448
--------- --------- ---------
Net cash provided by operating activities............... 18,700 27,970 20,189
--------- --------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment, net.................. (24,219) (14,385) (17,313)
Cash paid for acquisitions, net of cash acquired.......... (11,794) - (726)
Investment in lease contracts............................. (31,545) (17,622) (16,246)
Collections from lease contracts.......................... 21,949 18,240 17,746
Other, net................................................ 314 (178) 13
--------- --------- ---------
Net cash used for investing activities.................. (45,295) (13,945) (16,526)
--------- --------- ---------
FINANCING ACTIVITIES:
Repayment of short-term debt.............................. - - (423)
Repayment of debt assumed in acquisition.................. (1,743) - -
Borrowings under revolving credit agreements.............. 227,715 112,435 122,950
Repayments under revolving credit agreements.............. (209,795) (128,900) (124,610)
Borrowings on discounted lease rentals.................... 22,396 13,173 9,056
Repayments of discounted lease rentals.................... (12,583) (12,767) (11,631)
Borrowings of other long-term debt........................ 105 - -
Repayments of other long-term debt........................ (366) (93) (229)
Proceeds from sale of common stock........................ 3,017 1,615 1,353
Tax benefits from shares issued to employees.............. 1,869 340 412
--------- --------- ---------
Net cash provided by (used for) financing activities.... 30,615 (14,197) (3,122)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (6) (3) 12
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH............................. 4,014 (175) 553
CASH, BEGINNING OF YEAR..................................... 1,133 1,308 755
--------- --------- ---------
CASH, END OF YEAR........................................... $ 5,147 $ 1,133 $ 1,308
--------- --------- ---------
--------- --------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
26
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS:
Norstan, Inc. (Norstan or the Company) manages the operations of its
subsidiaries, Norstan Communications, Inc. (NCI), Norstan Canada Inc. (NCDA),
Connect Computer Company (Connect), Norstan Financial Services, Inc. (NFS),
Norstan Network Services, Inc. (NNS), Norstan Network Services, Inc. of New
Hampshire, and Norstan International, Inc. (NII).
Norstan is a full service communications systems provider creating
integrated voice, video and data communications solutions for customers
primarily in 18 states and throughout Canada. Norstan is the largest
independent distributor of private communications systems and application
products manufactured by Siemens Business Communication Systems, Inc.
(Siemens), formerly Siemens ROLM Communications Inc. (ROLM) and has
historically derived a substantial majority of its revenues from the sale of
telephone systems, communications maintenance services and moves, adds and
changes. The Company's products and services also include call processing
products, long distance services, video/audio conferencing products,
refurbished equipment, cabling, leasing, outsourcing and data integration
products and services. NFS provides financing for the Company's customers.
The Company sells its products and services to a wide variety of customers
and industries. A substantial portion of the Company's operations are located
in the Mideast, Midwest and Southwestern regions of the United States.
Under its agreement with Siemens, the Company purchases communications
equipment and products for field application and installation. The current
distributor agreement with Siemens extends through July 1998. The Company
believes that any interruption of its business relationship with Siemens
would have a material adverse effect on its business.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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.
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 others. Ultimate results could
differ from those estimates.
REVENUE RECOGNITION:
Revenues from the sale of products and systems, including new products
and upgrades, as well as revenues generated from the secondary equipment
market, are recognized upon performance of contractual obligations, which is
generally upon installation or shipment. Revenues for certain installation
contracts are recognized under the percentage of completion method of
accounting for long-term contracts. Revenues from telecommunications
services, including maintenance/service revenues, moves, adds, and changes
(MAC) revenues, revenues from the resale of long distance services, and
network integration services, are recognized as the services are provided.
Financial services revenues are recognized over the life of the related lease
receivables using the effective interest method. In addition, the Company
grants credit to customers and generally does not require collateral or any
other security to support amounts due.
27
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INVENTORIES:
Inventories include purchased parts and equipment and are stated at the
lower of cost, determined on a first-in, first-out basis, or realizable
market value.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and include expenditures which
increase the useful lives of existing property and equipment. Maintenance,
repairs and minor renewals are charged to operations as incurred. Generally,
when property and equipment is disposed of, the related cost and accumulated
depreciation are removed from the respective accounts and any gain or loss is
reflected in the results of operations. For capitalized telecommunications
equipment used as spare parts, the composite depreciation method is used
whereby the cost of property retired less any salvage is charged against
accumulated depreciation and no gain or loss is recognized. The net book
value of capitalized telecommunications equipment was $16,605,000 and
$14,933,000 as of April 30, 1997 and 1996, respectively. Machinery and
equipment is depreciated over the estimated useful lives of two to ten years
under the straight-line method for financial reporting purposes. Accelerated
methods of depreciation are used for income tax reporting.
GOODWILL:
Goodwill is being amortized on a straight-line basis over 15 - 20 years.
The Company periodically evaluates whether events or circumstances have
occurred which may indicate that the remaining estimated useful lives may
warrant revision or that the remaining goodwill balance may not be fully
recoverable. In the event that factors indicate that the goodwill in question
should be evaluated for possible impairment, a determination of the overall
recoverability would be made.
FOREIGN CURRENCY:
For the Company's foreign operations, assets and liabilities are
translated at year-end exchange rates, and revenues and expenses are
translated at average exchange rates prevailing during the year. Translation
adjustments are recorded as a separate component of shareholders' equity.
INCOME TAXES:
Deferred income taxes are provided for differences between the financial
reporting basis and tax basis of the Company's assets and liabilities at
currently enacted tax rates.
SHARE DATA AND STOCK SPLIT:
Net income per common and common equivalent share is based on the
weighted average number of shares of common stock outstanding during the
year, adjusted for the dilutive effect of common stock equivalents.
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.
28
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosure of cash flow information is as follows (in
thousands):
YEARS ENDED APRIL 30,
----------------------
1997 1996 1995
------ ------ ------
Cash paid for:
Interest........................................ $3,996 $3,608 $3,650
Income taxes.................................... 4,995 5,218 3,911
Non-cash investing and financing activities:
Stock issued for acquisition.................... $2,000 $ - $ -
Non-compete agreements related to acquisition... 667 - -
RECENTLY ISSUED ACCOUNTING STANDARDS:
Effective May 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS No. 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
SFAS No. 121 did not have a material impact on the Company's financial
position or results of operations.
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share" (SFAS No. 128), which changes the way companies
calculate their earnings per share data (EPS). SFAS No. 128 replaces primary
EPS with basic EPS. Basic EPS is computed by dividing reported earnings by
weighted average shares outstanding, excluding potentially dilutive
securities. Fully diluted EPS, termed diluted EPS under SFAS No. 128, is also
to be disclosed. The Company is required to adopt SFAS No. 128 in fiscal
1998 at which time all prior year EPS are to be restated in accordance with
SFAS No. 128. If the Company had adopted the pronouncement during fiscal
1997, the effect of this accounting change on reported EPS data would have
been as follows:
YEARS ENDED APRIL 30,
---------------------
1997 1996 1995
----- ----- -----
Primary EPS as reported......................... $1.08 $ .94 $ .81
Effect of SFAS No. 128.......................... .04 .06 .05
----- ----- -----
Basic EPS as restated........................... $1.12 $1.00 $ .86
----- ----- -----
----- ----- -----
Fully diluted EPS as reported................... $ - $ - $ -
Effect of SFAS No. 128.......................... 1.08 .94 .81
----- ----- -----
Diluted EPS as restated......................... $1.08 $ .94 $ .81
----- ----- -----
----- ----- -----
29
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - 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 $15.0 million,
consisting of $12.0 million in cash, $2.0 million of Norstan common stock and
$1.0 million payable to certain members of Connect management under
non-compete agreements. In addition, the Company agreed to pay up to $4.0
million in contingent consideration over a three year period ending April 30,
1999, if certain financial performance targets are achieved (as of April 30,
1997, $2.0 million of such consideration has been accrued). This transaction
resulted in the recording of $16.4 million in goodwill which is being
amortized on a straight-line basis over 15 years. The Company financed the
cash portions of the acquisition through borrowings under its existing credit
facility. Pro forma information in the year of acquisition has not been
disclosed as such information was not materially different from the Company's
results of operations.
NOTE 4 - SUMMARIZED FINANCIAL INFORMATION OF NFS:
NATURE OF BUSINESS:
NFS provides financing for the Company's customers and has financed
customer equipment purchases from the Company in the amounts of $30,409,000,
$15,385,000, and $14,415,000 during fiscal years ended April 30, 1997, 1996
and 1995, respectively. Leases are primarily accounted for as sales-type
leases for financial reporting purposes.
Summarized financial information of NFS is as follows (in thousands):
BALANCE SHEETS
ASSETS
AS OF APRIL 30,
----------------
1997 1996
------- -------
Cash and other.................................... $ 694 $ 1,595
Lease receivables, net............................ 47,234 35,321
------- -------
$47,928 $36,916
------- -------
------- -------
LIABILITIES AND SHAREHOLDER'S EQUITY
Discounted lease rentals.......................... $35,906 $25,132
Other liabilities................................. 5,442 6,787
Shareholder's equity.............................. 6,580 4,997
------- -------
$47,928 $36,916
------- -------
------- -------
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED APRIL 30,
-----------------------------
1997 1996 1995
------- ------- -------
Interest and other income............... $ 5,417 $ 5,081 $ 4,656
Interest expense........................ (1,770) (1,788) (2,017)
Other expenses.......................... (1,204) (1,454) (1,037)
------- ------- -------
Income before provision for income
taxes............................... 2,443 1,839 1,602
Provision for income taxes............ 859 394 629
------- ------- -------
Net income.............................. $ 1,584 $ 1,445 $ 973
------- ------- -------
------- ------- -------
30
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - SUMMARIZED FINANCIAL INFORMATION OF NFS (CONTINUED):
The components of lease receivables outstanding are summarized as
follows (in thousands):
AS OF APRIL 30,
------------------
1997 1996
-------- --------
Gross lease receivables........................... $ 52,124 $ 38,484
Residual values................................... 8,634 7,390
Less:
Unearned income................................. (11,679) (8,803)
Allowance for financing losses.................. (1,845) (1,750)
-------- --------
Total lease receivables - net..................... 47,234 35,321
Less - current maturities......................... (18,894) (14,157)
-------- --------
Long-term lease receivables....................... $ 28,340 $ 21,164
-------- --------
-------- --------
The aggregate amount of gross lease receivables maturing in each of the
five years following April 30, 1997 is as follows (in thousands):
YEARS ENDING APRIL 30, AMOUNT
- -------------------------------------------------- -------
1998.............................................. $19,332
1999.............................................. 14,891
2000.............................................. 9,560
2001.............................................. 5,528
2002 and thereafter............................... 2,813
-------
$52,124
-------
-------
The consolidated balance sheets as of April 30, 1997 and 1996 also include
$9,642,000 and $6,602,000, respectively, of net lease receivables from customers
of NCI and NCDA.
NOTE 5 - DEBT OBLIGATIONS:
LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
AS OF APRIL 30,
----------------
1997 1996
------- -------
Bank Financing:
Revolving Credit Agreement...................... $ 6,920 $ -
Certificates of Deposit......................... 11,000 -
Capital Lease Obligations......................... 753 -
------- -------
Total Long-Term Debt.............................. 18,673 -
Less - Current Maturities......................... 389 -
------- -------
$18,284 $ -
------- -------
------- -------
31
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - DEBT OBLIGATIONS (CONTINUED):
BANK FINANCING:
The Company has 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
NFS and NCDA, respectively. Borrowings under this agreement are due July
31, 1999, and bear interest at the banks' reference rate (8.50% at April 30,
1997), 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 April 30, 1997, were
$17,920,000. There were no borrowings under this agreement at April 30,
1996. There were no borrowings on account of NFS or NCDA at April 30, 1997,
or April 30, 1996. Annual commitment fees on the unused portions of the
credit facility are .25%.
Under the agreement, the Company is required to maintain minimum levels
of tangible net worth and certain other financial ratios. The Company has
complied with or has obtained the appropriate waivers for such requirements
as of and for the year ended April 30, 1997.
SHORT-TERM BORROWINGS:
In addition to borrowing funds under its revolving credit agreement, the
Company periodically borrows funds from banks on a short-term basis for
working capital purposes. There were no short-term borrowings outstanding as
of April 30, 1997 or 1996. Short-term borrowing amounts during fiscal years
1997 and 1996 were as follows :
1997 1996
---------- -------
Maximum amount outstanding during the year........ $2,325,000 -
Average borrowings during the year................ $ 29,600 -
Weighted average interest rates during the year... 8.36% -
NOTE 6 - DISCOUNTED LEASE RENTALS:
NFS and NCDA 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 recorded 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 June 2003.
Discounted lease rentals of NFS and NCDA consisted of the following (in
thousands):
AS OF APRIL 30,
----------------
1997 1996
------- -------
Nonrecourse borrowings............................ $37,329 $26,467
Recourse borrowings............................... 592 1,696
------- -------
Total discounted lease rentals.................... 37,921 28,163
Less - current maturities....................... (13,878) (12,202)
------- -------
$24,043 $15,961
------- -------
------- -------
In addition to the recourse to NFS and/or NCDA as described above,
recourse to Norstan, Inc. relative to discounted lease rentals was limited to
$418,000 as of April 30, 1997 and $883,000 as of April 30, 1996.
32
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - DISCOUNTED LEASE RENTALS (CONTINUED):
Aggregate maturities of discounted lease rentals as of April 30, 1997
are as follows (in thousands):
YEARS ENDING APRIL 30, AMOUNT
- -------------------------------------------------- -------
1998.............................................. $13,878
1999.............................................. 10,832
2000.............................................. 6,828
2001.............................................. 4,285
2002 and thereafter............................... 2,098
-------
$37,921
-------
-------
NOTE 7 - INCOME TAXES:
The domestic and foreign components of income before the provision for
income taxes are as follows (in thousands):
YEARS ENDED APRIL 30,
-------------------------
1997 1996 1995
------- ------- -------
Domestic.......................................... $16,215 $13,365 $11,363
Foreign........................................... 1,102 784 409
------- ------- -------
$17,317 $14,149 $11,772
------- ------- -------
------- ------- -------
The provision (benefit) for income taxes consisted of the following (in
thousands):
YEARS ENDED APRIL 30,
-------------------------
1997 1996 1995
------- ------- -------
Current
Domestic........................................ $ 7,361 $ 5,656 $ 4,325
Foreign......................................... (216) 469 516
------- ------- -------
7,145 6,125 4,841
------- ------- -------
Deferred
Domestic........................................ (572) (235) 179
Foreign......................................... 527 (230) (311)
------- ------- -------
(45) (465) (132)
------- ------- -------
Provision for income taxes...................... $ 7,100 $ 5,660 $ 4,709
------- ------- -------
------- ------- -------
The differences between the effective tax rate and income taxes computed
using the federal statutory rate were as follows:
YEARS ENDED APRIL 30,
-------------------------
1997 1996 1995
------- ------- -------
Federal statutory rate............................ 35% 35% 35%
State income taxes, net of federal tax benefit.... 5 4 4
Other, net........................................ 1 1 1
------- ------- -------
41% 40% 40%
------- ------- -------
------- ------- -------
33
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - INCOME TAXES (CONTINUED):
The Company has recorded the following net deferred income taxes as of
April 30 (in thousands):
1997 1996
------- --------
Current deferred income tax benefits.............. $ 4,865 $ 3,782
Current deferred income taxes..................... (911) (355)
-------- --------
Net current deferred income tax benefits........ 3,954 3,427
-------- --------
Noncurrent deferred income tax benefits........... 24,765 18,499
Noncurrent deferred income taxes.................. (32,655) (26,476)
Valuation allowance............................... (230) (224)
-------- --------
Net noncurrent deferred income taxes............ (8,120) (8,201)
-------- --------
Net deferred income taxes....................... $ (4,166) $ (4,774)
-------- --------
-------- --------
The tax effects of significant temporary differences representing
deferred tax assets and liabilities are as follows as of April 30 (in
thousands):
1997 1996
---------- ----------
Accelerated depreciation.......................... $ (30,613) $ (24,281)
Amortization of intangible assets................. (497) (774)
Capital leases.................................... (596) (581)
Operating leases.................................. 21,990 16,400
Long-term contract costs.......................... (147) 319
Inventory reserves................................ 143 400
Allowance for doubtful accounts................... 1,470 1,111
Vacation reserves................................. 1,226 991
Warranty reserves................................. 748 450
Tax credits and carryforwards..................... 100 -
Self insurance reserv............................. 578 377
Other, net........................................ 1,662 1,038
Valuation allowance............................... (230) (224)
---------- ----------
Net deferred tax liabilities.................... $ (4,166) $ (4,774)
---------- ----------
---------- ----------
NOTE 8 - STOCK OPTIONS AND STOCK PLANS:
The 1986 Long-Term Incentive Plan of Norstan, Inc. (1986 Plan) provides
for the granting of non-qualified stock options, incentive stock options, and
restricted stock. The 1986 Plan, as amended in fiscal 1994, provides for a
maximum of 1,600,000 shares to be granted to key employees in the form of
stock options or restricted stock. As of September 20, 1995, no additional
grants are to be issued under the 1986 Plan.
The Norstan, Inc. 1995 Long-Term Incentive Plan (1995 Plan) permits the
granting of non-qualified stock options, incentive stock options, stock
appreciation rights and restricted stock, providing for a maximum of
1,200,000 shares to be granted as performance awards and other stock-based
awards. These options are granted at a price equal to the market price on
the date of grant, exercisable at 20% per year and expiring after ten years.
At April 30, 1997, 877,500 shares were available for future grants.
34
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - STOCK OPTIONS AND STOCK PLANS (CONTINUED):
The Restated Non-Employee Directors' Stock Plan (Directors' Plan)
provides for a maximum of 292,000 shares to be granted. Options for 20,000
shares are to be granted to each non-employee director of the Company upon
election as a director at a price equal to the market price on the date of
grant, exercisable at 20% per year and expiring after ten years. In addition
to the granting of options, the Directors' Plan provides for the payment of
an annual retainer to each non-employee director. On the date of each annual
meeting of shareholders, each non-employee director is to receive an annual
retainer paid in shares of common stock of the Company. The annual retainer
paid to each non-employee director at the September 1995 and 1996 annual
meeting of shareholders was $10,000 or 800 shares, and $12,000 or 700 shares,
respectively (based on the fair market value of the shares on the date of the
meetings). As of April 30, 1997, 12,000 shares had been issued as an annual
retainer to non-employee directors and 120,000 shares were available for
future grant/payment under the Directors' Plan.
Shares subject to option are summarized as follows:
1995 PLAN 1986 PLAN DIRECTORS' PLAN
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
STOCK AVERAGE STOCK AVERAGE STOCK AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- ---------------- ---------- ---------------- ---------- ----------------
BALANCE - APRIL 30, 1994...... - $ - 680,424 $ 3.16 140,000 $ 3.86
Options granted........... - - 110,000 9.24 - -
Options canceled.......... - - (17,172) 3.04 - -
Options exercised......... - - (128,852) 3.01 - -
---------- ---------------- ---------- ---------------- ---------- ----------------
BALANCE - APRIL 30, 1995...... - - 644,400 4.23 140,000 3.86
Options granted........... - - 225,000 11.87 20,000 12.50
Options canceled.......... - - (29,400) 9.18 - -
Options exercised......... - - (162,100) 2.84 - -
---------- ---------------- ---------- ---------------- ---------- ----------------
BALANCE - APRIL 30, 1996...... - - 677,900 6.88 160,000 4.94
Options granted........... 310,500 $ 15.01 - - - -
Options canceled.......... - - (96,000) 9.62 - -
Options exercised......... - - (296,100) 3.49 (120,000) 3.24
---------- ---------------- ---------- ---------------- ---------- ----------------
BALANCE - APRIL 30, 1997...... 310,500 $ 15.01 285,800 $ 9.49 40,000 $ 10.06
---------- ---------------- ---------- ---------------- ---------- ----------------
---------- ---------------- ---------- ---------------- ---------- ----------------
OPTIONS EXERCISABLE AT:
April 30, 1995.............. - $ - 472,836 $ 2.93 132,000 $ 3.64
---------- ---------------- ---------- ---------------- ---------- ----------------
---------- ---------------- ---------- ---------------- ---------- ----------------
April 30, 1996.............. - $ - 375,936 $ 4.23 140,000 $ 4.00
---------- ---------------- ---------- ---------------- ---------- ----------------
---------- ---------------- ---------- ---------------- ---------- ----------------
April 30, 1997.............. - $ - 103,036 $ 7.43 28,000 $ 9.02
---------- ---------------- ---------- ---------------- ---------- ----------------
---------- ---------------- ---------- ---------------- ---------- ----------------
35
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - STOCK OPTIONS AND STOCK PLANS (CONTINUED):
Additional information regarding options outstanding/exercisable at
April 30, 1997 is as follows:
NUMBER OF WEIGHTED WEIGHTED NUMBER OF WEIGHTED
OPTIONS EXERCISE AVERAGE AVG REMAINING OPTIONS AVERAGE
OUTSTANDING PRICE RANGE EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
------------ ---------------- ---------------- ------------------ ------------ ----------------
1995 Plan 310,500 $ 15.00 - $16.00 $ 15.01 9.25 YEARS - $ -
------------ ---------------- ---------------- ------------------ ------------ ----------------
------------ ---------------- ---------------- ------------------ ------------ ----------------
1986 Plan 33,600 $ 2.63 - $3.38 $ 3.29 1.45 years 24,276 $ 3.26
33,200 $ 4.25 - $5.00 $ 4.48 4.01 years 19,760 $ 4.63
36,000 $ 6.88 - $9.75 $ 7.74 6.41 years 24,000 $ 7.46
183,000 $ 11.88 $ 11.88 8.11 years 35,000 $ 11.88
------------ ---------------- ---------------- ------------------ ------------ ----------------
285,800 $ 2.63 - $11.88 $ 9.49 6.63 YEARS 103,036 $ 7.43
------------ ---------------- ---------------- ------------------ ------------ ----------------
------------ ---------------- ---------------- ------------------ ------------ ----------------
Directors' Plan 20,000 $ 7.62 $ 7.62 5.67 years 20,000 $ 7.62
20,000 $ 12.50 $ 12.50 8.33 years 8,000 $ 12.50
------------ ---------------- ---------------- ------------------ ------------ ----------------
40,000 $ 7.62 - $12.50 $ 10.06 7.00 YEARS 28,000 $ 9.02
------------ ---------------- ---------------- ------------------ ------------ ----------------
------------ ---------------- ---------------- ------------------ ------------ ----------------
The Company has awarded restricted stock grants to selected employees
under the 1986 Plan and the 1995 Plan. Recipients of restricted stock awards
under these plans were not required to make any payments for the stock or
provide consideration other than the rendering of services. Shares of stock
awarded under the plans are subject to certain restrictions on transfer and
all or part of the shares awarded to an employee may be subject to forfeiture
upon the occurrence of certain events, including termination of employment.
Through April 30, 1997, 140,706 shares and 12,000 shares have been awarded
under the 1986 Plan and the 1995 Plan, respectively. The fair market value
of the shares granted under these plans is generally amortized over a four
year period. Amortization of $70,000, $137,000, and $74,000 has been charged
to operations in 1997, 1996 and 1995, respectively.
The Company has maintained an Employee Stock Purchase and Bonus Plan
(the Employee Stock Plan) since 1980 which allows employees to set aside up
to 10% of their earnings for the purchase of shares of the Company's common
stock. Shares are purchased annually under the Employee Stock Plan at a
price equal to 85% of the market price on the last day of the calendar year.
During fiscal 1997, 126,260 shares were issued under this plan and, at April
30, 1997, 584,586 shares were available for future issuance.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized in the accompanying statements of operations. Had
compensation cost been recognized based on the fair values of options at the
grant dates consistent with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income and net income per common
share would have been decreased to the following pro forma amounts:
YEARS ENDED APRIL 30,
-----------------------
1997 1996
--------- -------
Net income.......................... As reported $ 10,217 $ 8,489
Pro forma 9,360 7,964
Net income per common share.........
As reported $ 1.08 $ 0.94
Pro forma 0.99 0.88
36
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - STOCK OPTIONS AND STOCK PLANS (CONTINUED):
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to May 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The weighted average fair values of options granted and Employee Stock
Plan shares were as follows:
EMPLOYEE
1995 PLAN 1986 PLAN DIRECTORS' PLAN STOCK PLAN
--------- --------- --------------- ----------
Fiscal 1996 grants - $6.49 $7.29 $2.15
Fiscal 1997 grants $7.95 - - $2.96
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in fiscal 1996 and 1997:
YEARS ENDED APRIL 30,
----------------------
1997 1996
---------- ---------
Risk-free interest rate........................... 6.28% 5.74%
Expected life of options.......................... 7 years 7 years
Expected life of Employee Stock Plan shares....... 1 year 1 year
Expected volatility............................... 35% 57%
Expected dividend yield........................... - -
The tax benefits associated with the exercise of stock options or
issuance of shares under the Company's stock option plans, not related to
expenses recognized for financial reporting purposes, have been credited to
capital in excess of par value in the accompanying consolidated balance
sheets.
37
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - 401(k) PLAN:
The Company has adopted the Norstan, Inc. Incentive Savings Plan, a
401(k) profit-sharing plan (the 401(k) Plan) covering substantially all
full-time employees. Eligible employees may elect to defer up to 15% of
their eligible compensation. The Company may make discretionary matching
contributions of up to 6% of each plan participant's eligible compensation.
Company contributions to the 401(k) Plan were $1,554,000, $1,267,000 and
$1,078,000 for the years ending April 30, 1997, 1996 and 1995, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
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.
OPERATING LEASE COMMITMENTS:
The Company and its subsidiaries conduct a portion of their operations
in leased facilities. Most of the leases require payment of maintenance,
insurance, taxes and other expenses in addition to the minimum annual
rentals. Lease expense, as recorded in the accompanying consolidated
statements of operations, was $10,914,000 in 1997, $10,501,000 in 1996, and
$8,661,000 in 1995.
Future minimum lease payments under noncancelable leases with initial or
remaining terms of one year or more were as follows at April 30, 1997 (in
thousands):
YEARS ENDING APRIL 30, AMOUNT
- -------------------------------------------------- --------
1998.............................................. $ 6,327
1999.............................................. 4,712
2000.............................................. 3,942
2001.............................................. 2,480
2002 and thereafter............................... 3,832
--------
$ 21,293
--------
--------
CUSTOMER COMMITMENTS:
The Company has entered into sales contracts with certain customers
containing future performance obligations. Although the financial impact of
these performance obligations is not determinable, management believes they
will not have a material effect on the future operating results of the
Company.
38
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
SHAREHOLDER RIGHTS PLAN:
In May 1988, the Board of Directors authorized a shareholder rights plan
which provides for a dividend distribution of one right for each outstanding
share of common stock to shareholders of record on June 13, 1988. The rights
will become exercisable in the event, with certain exceptions, an acquiring
party accumulates 20% or more of the voting power of the Company, or the
commencement of a tender or exchange offer which would result in the party
having beneficial ownership of 30% or more of the voting power of the
Company. Each right entitles the holder to purchase from the Company one
share of common stock at $12.50 per share, subject to adjustment. In
addition, upon the occurrence of certain events, holders of the rights will
be entitled to purchase either the Company's common stock at one-fourth of
its market value or stock in an acquiring party at one-half of its market
value.
NOTE 11 - OPERATIONS BY GEOGRAPHIC AREA:
The following table sets forth the Company's operations by geographic
area as of and for the years ended April 30, (in thousands):
1997 1996 1995
--------- --------- ---------
REVENUES:
United States........................ $ 365,796 $ 287,171 $ 262,235
Canada............................... 32,279 34,193 28,010
--------- --------- ---------
$ 398,075 $ 321,364 $ 290,245
--------- --------- ---------
--------- --------- ---------
NET INCOME:
United States........................ $ 9,426 $ 7,943 $ 6,617
Canada............................... 791 546 446
--------- --------- ---------
$ 10,217 $ 8,489 $ 7,063
--------- --------- ---------
--------- --------- ---------
IDENTIFIABLE ASSETS:
United States........................ $ 207,942 $ 142,151 $ 143,443
Canada............................... 16,231 18,837 18,266
--------- --------- ---------
$ 224,173 $ 160,988 $ 161,709
--------- --------- ---------
--------- --------- ---------
39
NORSTAN, INC. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
1997
Revenues...................... $ 92,231 $ 95,653 $ 94,075 $ 116,116
--------- --------- --------- ---------
--------- --------- --------- ---------
Gross margin.................. $ 25,331 $ 27,105 $ 26,061 $ 30,018
--------- --------- --------- ---------
--------- --------- --------- ---------
Operating income.............. $ 3,151 $ 5,161 $ 5,126 $ 5,767
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income.................... $ 1,692 $ 2,676 $ 2,715 $ 3,134
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common and
common equivalent share..... $ .18 $ .28 $ .29 $ .33
--------- --------- --------- ---------
--------- --------- --------- ---------
1996
Revenues...................... $ 72,401 $ 78,705 $ 81,630 $ 88,628
--------- --------- --------- ---------
--------- --------- --------- ---------
Gross margin.................. $ 20,418 $ 22,306 $ 23,182 $ 25,478
--------- --------- --------- ---------
--------- --------- --------- ---------
Operating income.............. $ 2,738 $ 4,003 $ 4,150 $ 4,520
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income.................... $ 1,433 $ 2,148 $ 2,293 $ 2,615
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common and
common equivalent share..... $ .16 $ .24 $ .26 $ .29
--------- --------- --------- ---------
--------- --------- --------- ---------
Throughout each year, the income tax provision is recorded based upon
estimates of the overall expected tax rate for that year.
40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No changes in or disagreements with accountants which required reporting
on Form 8-K have occurred within the two-year period ended April 30, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the directors and executive officers of the
Company, set forth under "Information Concerning Directors, Nominees and
Executive Officers" and under "Compliance with Section 16 (a)" in the
Company's definitive proxy statement for the annual meeting of shareholders
to be held September 23, 1997, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to Executive Compensation set forth under
"Executive Compensation" in the Company's definitive proxy statement for the
annual meeting of shareholders to be held September 23, 1997, other than the
subsections captioned "Report of the Compensation and Stock Option Committee"
and "Performance Graph", is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial
owners and management, set forth under "Beneficial Ownership of Principal
Shareholders and Management" in the Company's definitive proxy statement for
the annual meeting of shareholders to be held September 23, 1997, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related
transactions, set forth under "Information Concerning Directors, Nominees and
Executive Officers" in the Company's definitive proxy statement for the
annual meeting of shareholders to be held September 23, 1997, is incorporated
herein by reference.
41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
l. Financial Statements
See Index to Consolidated Financial Statements and Financial
Statement Schedules on page 20 of this report.
2. Financial Statement Schedules
All schedules to the Consolidated Financial Statements normally
required by the applicable accounting regulations are omitted since
the required information is included in the Consolidated Financial
Statements or the Notes thereto or is not applicable.
3. Exhibits
See Index to Exhibits on page 45 of this report.
(b) REPORTS ON FORMS 8-K.
No reports on Form 8-K were filed by the Company during the last quarter
of the fiscal year covered by this report.
42
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) 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.
Dated: July 22, 1997
NORSTAN, INC.
Registrant
By /s/ David R. Richard
--------------------------
David R. Richard
Chief Executive Officer,
President and Director
By /s/ Kenneth S. MacKenzie
--------------------------
Kenneth S. MacKenzie
Chief Financial Officer
(Principal Financial and
Accounting Officer)
43
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Date
--------- ----
- ----------------------------------
Paul Baszucki
Chairman of the Board
/s/ Richard Cohen July 22, 1997
- ----------------------------------
Richard Cohen
Vice-Chairman of the Board
/s/ David R. Richard July 22, 1997
- ----------------------------------
David R. Richard
CEO, President and Director
/s/ Winston E. Munson July 24, 1997
- ----------------------------------
Winston E. Munson
Secretary and Director
/s/ Dr. Jagdish N. Sheth July 22, 1997
- ----------------------------------
Dr. Jagdish N. Sheth
Director
/s/ Arnold Lehrman July 22, 1997
- ----------------------------------
Arnold Lehrman
Director
/s/ Connie M. Levi July 23, 1997
- ----------------------------------
Connie M. Levi
Director
/s/ Gerald D. Pint July 23, 1997
- ----------------------------------
Gerald D. Pint
Director
/s/ Stanley Schweitzer July 23, 1997
- ----------------------------------
Stanley Schweitzer
Director
/s/ Herbert F. Trader July 23, 1997
- ----------------------------------
Herbert F. Trader
Director
44
EXHIBIT INDEX
Exhibit
No. Description Page
- -------- ----------- ----
3(a) Restated Articles of Incorporation of the Company, as
amended [filed as Exhibit 3(a) to the Company's
Annual Report on Form 10-K for the year ended
April 30, 1988 (File No. 0-8141) and incorporated herein
by reference]; Amendments adopted September 9, 1993 and
June 20, 1996 [filed as Exhibit 3(a) to the Company's
Annual Report on Form 10-K for the year ended April 30,
1996 (File No. 0-8141) and incorporated herein by reference].
3(b) Bylaws of the Company [filed as Exhibit 3(b) to the
Company's Annual Report on Form 10-K for the year ended
April 30, 1993 (File No. 0-8141) and incorporated herein by
reference]; Amendments adopted August 8, 1995 [filed as
Exhibit 3(b) to the Company's Annual Report on Form 10-K
for the year ended April 30, 1996 (File No. 0-8141) and
incorporated herein by reference]; Amendments adopted
September 20, 1995, July 30, 1996 and April 9, 1997.
3(c) Rights Agreement dated May 17, 1988 between Norstan, Inc.
and Norwest Bank Minnesota, N.A. [filed as Exhibit 1 to
the Company's Registration Statement on Form 8-A (File No.
0-8141) and incorporated herein by reference].
10(a) Agreement for ROLM Authorized Distributors, effective
July 27, 1993, between Norstan Communications, Inc. and
ROLM Company [filed as Exhibit 10(a) to the Company's
Annual Report on Form 10-K for the year ended April 30,
1993 (File No. 0-8141) and incorporated herein by
reference].
10(b) Credit Agreement dated as of July 23, 1996, among Norstan,
Inc., First Bank National Association, and Harris Trust and
Savings Bank and the Sumitomo Bank Limited, Chicago
Branch; First Amendment to Credit Agreement dated
October 11, 1996 [filed as Exhibit 10 to the Company's
quarterly report on Form 10-Q for the period ended August 3,
1996 (File No. 0-8141) and incorporated herein by reference].
10(c) Loan and Security Agreement dated April 29, 1993, between
Norstan Financial Services, Inc. and Sanwa Business Credit
Corporation [filed as Exhibit 10(b) to the Company's Current
Report on Form 8-K, dated April 29, 1993 (File No. 0-8141)
and incorporated herein by reference]; First Amendment dated
December 30, 1993 [filed as Exhibit 10(c) to the Company's
Annual Report on Form 10-K for the year ended April 30, 1994
(File No. 0-8141) and incorporated herein by reference].
(1)10(d) 1990 Employee Stock Purchase and Bonus Plan of Norstan,
Inc., as amended [filed as Exhibit 10(d) to the Company's
Annual Report on Form 10-K for the year ended April 30,
1993 (File No. 0-8141) and incorporated herein by reference].
45
Exhibit
No. Description Page
- -------- ----------- ----
(1)10(e) Norstan, Inc. 1986 Long-Term Incentive Plan, as amended
[filed as Exhibit 10(e) to the Company's Annual Report on
Form 10-K for the year ended April 30, 1993 (File No.
0-8141) and incorporated herein by reference]; Amendments
adopted August 8, 1995 and July 30, 1996 [filed as
Exhibit 10(e) to the Company's Annual Report on Form 10-K
for the year ended April 30, 1996 (File No. 0-8141) and
incorporated herein by reference].
(1)10(f) Norstan, Inc. Restated Non-Employee Directors' Stock Plan,
[filed as Exhibit 28.1 to the Company's Registration
Statement on Form S-8 dated September 27, 1995 (File
No. 0-8141) and incorporated herein by reference].
(1)10(g) Norstan, Inc. 1995 Long-Term Incentive Plan [filed as
Exhibit 28.1 to the Company's Registration Statement on
Form S-8 dated September 27, 1995 (File No. 0-8141) and
incorporated herein by reference]; Amendment adopted
July 30, 1996 [filed as Exhibit 10(g) to the Company's Annual
Report on Form 10-K for the year ended April 30, 1996
(File No. 0-8141) and incorporated herein by reference];
Amendment adopted August 16, 1996.
(1)10(h) Employment Agreement dated April 7, 1995 between
Paul Baszucki and the Company [filed as Exhibit 10(h) to the
Company's Annual Report on Form 10-K for the year ended April
30, 1995 (File No. 0-8141) and incorporated herein by
reference].
(1)10(i) Employment Agreement dated April 7, 1995 between Richard
Cohen and the Company [filed as Exhibit 10(i) to the
Company's Annual Report on Form 10-K for the year ended
April 30, 1995 (File No. 0-8141) and incorporated herein by
reference].
(1)10(j) Employment Agreement dated April 30, 1997 between David
R. Richard and the Company.
10(k) Agreement and Plan of Merger dated May 24, 1996 among the
Company, Connect Computer Company and CCC Acquisition
Subsidiary, Inc. [filed as Exhibit 2 to the Company's Current
Report on Form 8-K dated June 4, 1996 (File No. 0-8141) and
incorporated herein by reference].
11 Statement Regarding Computation of Earnings Per Share 47
22 Subsidiaries of Norstan, Inc. 48
23.1 Consent of Independent Public Accountants 49
27 Financial Data Schedule
A copy of any of the exhibits listed or referred to above will be furnished
at a reasonable cost to any shareholder of the Company, upon receipt of a
written request from such person for any such exhibit. Such request should
be sent to Norstan, Inc., 605 North Highway 169, Twelfth Floor, Plymouth,
Minnesota 55441, Attention: Investor Relations.
(1) Items that are management contracts or compensatory plans or
arrangements required to be filed as an exhibit pursuant to Item 14(c) of
this Form 10-K.
46