UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED NOVEMBER 1, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 0-8141
NORSTAN, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0835746
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
605 NORTH HIGHWAY 169, TWELFTH FLOOR, PLYMOUTH, MINNESOTA 55441
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(address of principal executive offices)
TELEPHONE (612) 513-4500 FAX (612) 513-4537 INTERNET WWW.NORSTAN.COM
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(Registrant's telephone number, facsimile number, Internet address)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
----- -----
On December 3, 1997, there were 9,689,372 shares outstanding of the registrant's
common stock, par value $.10 per share, its only class of equity securities.
PART I. FINANCIAL INFORMATION
ITEM 1.
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1997 1996 1997 1996
----------- ----------- ----------- -----------
REVENUES
Global Services $ 52,546 $ 45,758 $ 100,594 $ 86,683
Communication Systems 56,719 48,483 101,931 98,303
Financial Services 1,657 1,412 3,838 2,898
----------- ----------- ----------- -----------
Total Revenues 110,922 95,653 206,363 187,884
----------- ----------- ----------- -----------
COST OF SALES
Global Services 37,133 32,830 72,089 62,913
Communication Systems 42,730 35,194 75,545 71,465
Financial Services 625 524 1,209 1,070
----------- ----------- ----------- -----------
Total Cost of Sales 80,488 68,548 148,843 135,448
----------- ----------- ----------- -----------
GROSS MARGIN 30,434 27,105 57,520 52,436
Selling, General
& Administrative Expenses 24,399 21,944 47,556 44,123
----------- ----------- ----------- -----------
OPERATING INCOME 6,035 5,161 9,964 8,313
Interest Expense (847) (520) (1,441) (761)
Interest and Other Income (Expense),
Net 69 (28) 116 (21)
----------- ----------- ----------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 5,257 4,613 8,639 7,531
Provision for Income Taxes 2,155 1,937 3,542 3,163
----------- ----------- ----------- -----------
NET INCOME $ 3,102 $ 2,676 $ 5,097 $ 4,368
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ .31 $ .28 $ .52 $ .47
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 9,877 9,416 9,737 9,369
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
The accompanying notes are an integral part of these consolidated
financial statements.
1
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
NOVEMBER 1, APRIL 30,
1997 1997
----------- -----------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash $ 1,821 $ 5,147
Accounts receivable, net of allowances for doubtful
accounts of $1,770 and $1,783 94,751 76,027
Current lease receivables 16,548 19,595
Inventories 10,805 7,636
Costs and estimated earnings in excess of billings of
$12,090 and $11,948 24,345 11,556
Deferred income tax benefits 7,103 3,954
Prepaid expenses, deposits and other 3,529 2,925
----------- -----------
TOTAL CURRENT ASSETS 158,902 126,840
----------- -----------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment 102,837 93,895
Less-accumulated depreciation and amortization (56,302) (48,409)
----------- -----------
NET PROPERTY AND EQUIPMENT 46,535 45,486
----------- -----------
OTHER ASSETS:
Lease receivables, net of current portion 30,826 29,775
Goodwill, net of amortization of $6,875 and $5,749 45,729 21,958
Other 505 114
----------- -----------
TOTAL OTHER ASSETS 77,060 51,847
----------- -----------
$ 282,497 $ 224,173
----------- -----------
----------- -----------
The accompanying notes are an integral part of these consolidated
balance sheets.
2
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
NOVEMBER 1, APRIL 30,
1997 1997
----------- -----------
(Unaudited) (Audited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 3,349 $ 389
Current maturities of discounted lease rentals 13,351 13,878
Accounts payable 26,043 24,486
Deferred revenue 18,308 18,680
Accrued -
Salaries and wages 13,769 13,065
Warranty costs 2,092 2,348
Other liabilities 17,469 10,333
Income taxes payable 410 388
Billings in excess of costs and estimated earnings of $10,190
and $12,829 5,688 5,789
----------- -----------
TOTAL CURRENT LIABILITIES 100,479 89,356
----------- -----------
LONG-TERM DEBT, net of current maturities 56,810 18,284
DISCOUNTED LEASE RENTALS, net of current maturities 23,336 24,043
DEFERRED INCOME TAXES 8,335 8,120
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock - $.10 par value; 40,000,000 authorized
shares; 9,689,372 and 9,387,458 shares issued and
outstanding 969 939
Capital in excess of par value 39,194 34,556
Retained earnings 55,290 50,192
Unamortized cost of stock (634) (142)
Foreign currency translation adjustments (1,282) (1,175)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 93,537 84,370
----------- -----------
$ 282,497 $ 224,173
----------- -----------
----------- -----------
The accompanying notes are an integral part of these consolidated
balance sheets.
3
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
SIX MONTHS ENDED
--------------------------
NOVEMBER 1, NOVEMBER 2,
1997 1996
----------- -----------
OPERATING ACTIVITIES:
Net Income $ 5,097 $ 4,368
Adjustments to reconcile net income to net cash used for
operating activities:
Depreciation and amortization 9,430 7,228
Deferred income taxes 9 85
Changes in operating items, net of effects from acquisitions:
Accounts receivable (16,275) (9,696)
Inventories (3,198) (76)
Costs and estimated earnings in excess of billings (12,808) (10,554)
Prepaid expenses, deposits and other (454) (108)
Accounts payable 1,165 5,008
Deferred revenue (392) (772)
Accrued liabilities (6,305) (661)
Income taxes payable (192) 968
Billings in excess of costs and estimated earnings (95) (549)
----------- -----------
Net cash used for operating activities (24,018) (4,759)
----------- -----------
INVESTING ACTIVITIES:
Additions to property and equipment, net (8,686) (11,011)
Cash paid for acquisitions, net of cash acquired (11,450) (11,794)
Investment in lease contracts (10,468) (13,007)
Collections from lease contracts 12,433 10,620
Other, net (240) 511
----------- -----------
Net cash used for investing activities (18,411) (24,681)
----------- -----------
FINANCING ACTIVITIES:
Repayment of debt assumed in acquisition (2,013) (1,743)
Borrowings under revolving credit agreements 138,595 135,350
Repayments under revolving credit agreements (99,890) (110,625)
Borrowings of discounted lease rentals 6,898 13,211
Repayments of discounted lease rentals (8,123) (6,423)
Borrowings of long-term debt 8,855 105
Repayments of long-term debt (6,022) (181)
Proceeds from sale of common stock 773 1,091
----------- -----------
Net cash provided by financing activities 39,073 30,785
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 30 26
----------- -----------
NET (DECREASE) INCREASE IN CASH (3,326) 1,371
CASH, BEGINNING OF PERIOD 5,147 1,133
----------- -----------
CASH, END OF PERIOD $ 1,821 $ 2,504
----------- -----------
----------- -----------
The accompanying notes are an integral part of these consolidated
financial statements.
4
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 1, 1997
UNAUDITED
The information furnished in this report is unaudited and reflects all
adjustments which are normal recurring adjustments and, which in the opinion of
management, are necessary to fairly present the operating results for the
interim periods. The operating results for the interim periods presented are
not necessarily indicative of the operating results to be expected for the full
fiscal year. This report should be read in conjunction with the Company's most
recent "Annual Report on Form 10-K."
PRINCIPLES OF CONSOLIDATION -
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
FOREIGN CURRENCY -
For the Company's foreign operations, assets and liabilities are translated at
exchange rates as of the balance sheet date, and revenues and expenses are
translated at average exchange rates prevailing during the period. Translation
adjustments are recorded as a separate component of shareholders' equity.
NORSTAN FINANCIAL SERVICES, INC. (NFS) -
NFS provides financing for customers of the Company. Leases are primarily
accounted for as sales-type leases for consolidated financial reporting
purposes. Condensed unaudited statements of operations of NFS are as follows
(in thousands):
SIX MONTHS ENDED
--------------------------
NOVEMBER 1, NOVEMBER 2,
1997 1996
----------- -----------
Revenues $ 3,569 $ 2,608
Interest expense (1,050) (844)
Other expenses (561) (644)
----------- -----------
Income before provision for income taxes 1,958 1,120
Provision for income taxes (803) (470)
----------- -----------
Net income $ 1,155 $ 650
----------- -----------
----------- -----------
5
SUPPLEMENTAL CASH FLOW INFORMATION -
Supplemental disclosure of cash flow information is as follows (in thousands):
SIX MONTHS ENDED
--------------------------
NOVEMBER 1, NOVEMBER 2,
1997 1996
----------- -----------
Cash paid for:
Interest $ 3,017 $ 1,769
Income taxes $ 2,978 $ 1,934
Noncash investing and financing activities:
Stock issued for acquisition $ 3,325 $ 2,000
Obligations assumed in acquisition $ 12,000 $ -
Non-compete agreements related to acquisition $ - $ 667
RECENTLY ISSUED ACCOUNTING STANDARD -
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 third quarter fiscal 1998 at
which time all prior period EPS are to be restated in accordance with SFAS No.
128. If the Company had adopted the pronouncement during this fiscal quarter,
the effect of this accounting change on reported EPS data would have been as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Primary EPS as reported. . . . . $ .31 $ .28 $ .52 $ .47
Effect of SFAS No. 128 . . . . . .01 .01 .02 .02
----------- ----------- ----------- -----------
Basic EPS as restated. . . . . . $ .32 $ .29 $ .54 $ .49
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Fully diluted EPS as reported. . $ - $ - $ - $ -
Effect of SFAS No. 128 . . . . . .31 .28 .52 .47
----------- ----------- ----------- -----------
Diluted EPS as restated. . . . . $ .31 $ .28 $ .52 $ .47
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
6
USE OF ESTIMATES -
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
periods presented. Estimates are used for such items as allowances for doubtful
accounts, inventory reserves, depreciable lives of property and equipment,
warranty reserves and other items. Ultimate results could differ from those
estimates.
RECLASSIFICATIONS -
Certain amounts in the fiscal 1997 financial statements have been reclassified
to conform to the fiscal 1998 presentation, with no impact on previously
reported net income or shareholder's equity.
ACQUISITIONS -
On September 30, 1997, the Company acquired Vadini, Inc. d/b/a PRIMA Consulting,
Inc. (PRIMA), in a transaction accounted for under the purchase method. PRIMA
operates in the information technology consulting business including information
systems planning and development, consulting and programming services for
collaborative computing solutions and enterprise resource planning integration
services. PRIMA has offices in Charlotte, Raleigh and Greensboro, North
Carolina; Cincinnati, Cleveland and Columbus, Ohio; Columbia and Greenville,
South Carolina; Pittsburgh, Pennsylvania; and Richmond, Virginia.
The acquisition consideration totaled approximately $27.5 million, consisting of
$19.5 million in cash, $6.3 million of Norstan common stock ($3.0 million to be
issued January 1998) and $1.7 million paid to certain members of PRIMA
management under non-compete agreements. In addition, the Company agreed to pay
up to $3.5 million in contingent consideration over a three year period ending
April 30, 2000, if certain financial performance targets are achieved. This
transaction resulted in the recording of $24.9 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 facilities. 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.
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.
7
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 November 1, 1997, $2.0 million
of such consideration has been paid). 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.
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-Q. 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.
8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY -
During the quarter ended November 1, 1997 the Company's net income improved
compared to the quarter ended November 2, 1996, increasing 15.9% to $3,102,000,
or $.31 per common share, compared to $2,676,000, or $.28 per common share. For
the six month period ended November 1, 1997, the Company's net income increased
16.7% to $5,097,000, or $.52 per common share, compared to $4,368,000, or $.47
per common share, for the same period last year.
RESULTS OF OPERATIONS -
The Company's revenues consist of revenues from the sale of global services,
communication systems and financial services. Revenues from global services
result primarily from communications maintenance services, information
technology (IT) professional services, moves, adds and changes and long distance
services. Revenues from the sale of communication systems result from the sale
of new products and upgrades, as well as refurbished equipment. 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.
9
SELECTED CONSOLIDATED FINANCIAL DATA
DOLLAR AMOUNTS AS A DOLLAR AMOUNTS AS A
PERCENTAGE OF REVENUES PERCENTAGE PERCENTAGE OF REVENUES PERCENTAGE
THREE MONTHS ENDED INCREASE SIX MONTHS ENDED INCREASE
-------------------------- ------------- -------------------------- -------------
NOVEMBER 1, NOVEMBER 2, FISCAL NOVEMBER 1, NOVEMBER 2, FISCAL
1997 1996 1998 VS. 1997 1997 1996 1997 VS. 1996
----------- ----------- ------------- ----------- ----------- -------------
REVENUES:
Global Services 47.4% 47.8% 14.8% 48.7% 46.1% 16.1%
Communication Systems 51.1% 50.7% 17.0% 49.4% 52.3% 3.7%
Financial Services 1.5% 1.5% 17.4% 1.9% 1.6% 32.4%
----------- ----------- ------------- ----------- ----------- -------------
Total Revenues 100.0% 100.0% 16.0% 100.0% 100.0% 9.8%
COST OF SALES 72.6% 71.7% 17.4% 72.1% 72.1% 9.9%
----------- ----------- ------------- ----------- ----------- -------------
GROSS MARGIN 27.4% 28.3% 12.3% 27.9% 27.9% 9.7%
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 22.0% 22.9% 11.2% 23.1% 23.5% 7.8%
----------- ----------- ------------- ----------- ----------- -------------
OPERATING INCOME 5.4% 5.4% 16.9% 4.8% 4.4% 19.9%
Interest Expense and Other, Net (0.7%) (0.6%) 42.0% (0.6%) (0.4%) 69.5%
----------- ----------- ------------- ----------- ----------- -------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 4.7% 4.8% 14.0% 4.2% 4.0% 14.7%
Provision for Income Taxes 1.9% 2.0% 11.2% 1.7% 1.7% 12.0%
----------- ----------- ------------- ----------- ----------- -------------
NET INCOME 2.8% 2.8% 15.9% 2.5% 2.3% 16.7%
----------- ----------- ------------- ----------- ----------- -------------
----------- ----------- ------------- ----------- ----------- -------------
The following table sets forth, for the periods indicated, the gross margin
percentages for global services, communication systems and financial
services.
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------- --------------------------
NOVEMBER 1, NOVEMBER 2, NOVEMBER 1, NOVEMBER 2,
1997 1996 1997 1996
----------- ----------- ----------- -----------
GROSS MARGIN PERCENTAGES:
Global Services 29.3% 28.3% 28.3% 27.4%
Communication Systems 24.7% 27.4% 25.9% 27.3%
Financial Services 62.3% 63.0% 68.5% 63.2%
10
RESULTS OF OPERATIONS
REVENUES. Revenues increased 16.0%, to $110,922,000 for the quarter
ended November 1, 1997, as compared to $95,653,000 for the similar period last
year. For the six month period ended November 1, 1997, revenues increased 9.8%,
to $206,363,000 as compared to $187,884,000 for the same period last year.
Revenues from global services increased $6,788,000, or 14.8% and $13,911,000, or
16.1% in the comparable three and six month periods ended November 1, 1997 and
November 2, 1996, respectively. This growth was led by IT professional services
which includes the results of recently acquired PRIMA and the continued growth
of Connect, which was acquired in June 1996. Revenues from other traditional
telecommunications services were relatively unchanged for the comparable six
month periods.
Sales of communication systems increased $8,236,000, or 17.0%, and
$3,628,000, or 3.7%, during the comparable three and six month periods ended
November 1, 1997, and November 2, 1996, respectively. These increases reflect a
rebound from the slower product sales of the first quarter of fiscal 1998.
Revenues from financial services increased $245,000, or 17.4%, and increased
$940,000, or 32.4%, during the comparable three and six month periods ended
November 1, 1997 and November 2, 1996, respectively.
GROSS MARGIN. The Company's gross margin increased $3,329,000, or
12.3%, to $30,434,000 for the three months ended November 1, 1997 as compared to
$27,105,000 for the three months ended November 2, 1996. For the six month
period ended November 1, 1997, gross margin increased $5,084,000, or 9.7%, to
$57,520,000 as compared to $52,436,000 for the similar period ended November 2,
1996. As a percent of total revenues, gross margin was 27.4% and 27.9% for the
three and six month periods ended November 1, 1997 as compared to 28.3% and
27.9% for the comparable three and six month periods ended November 2, 1996.
Gross margin as a percent of revenues for global services was 29.3%
and 28.3% for the three and six month periods ended November 1, 1997, as
compared to 28.3% and 27.4% for the comparable periods ended November 2, 1996.
These increases reflect the change in mix of services Norstan provides. As IT
professional services become a more integral component of Norstan's business,
global services' margins are expected to continue to improve.
Gross margin as a percent of revenues for the sale of communication
systems was 24.7% and 25.9% for the three and six month periods ended November
1, 1997 as compared to 27.4% and 27.3% for the similar periods ended November 2,
1996. These decreases are generally the result of non-transferable increases in
product costs, additional use of subcontractors and overtime due to high levels
of installations, and change in the mix of products sold. The current gross
margin percentages in communication systems are in line with margins experienced
at the end of the prior fiscal year and are expected to be maintained in future
periods.
Gross margin as a percent of revenues for financial services was 62.3%
and 68.5% for the three and six month periods ended November 1, 1997, and 63.0%
and 63.2% for the similar periods ended November 2, 1996.
11
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (SG&A) expenses increased $2,455,000, or 11.2%, for the quarter
ended November 1, 1997 as compared to the quarter ended November 2, 1996. For
the six months ended November 1, 1997, SG&A expenses increased $3,433,000, or
7.8%, as compared to the similar period last year. As a percent of revenues,
SG&A expenses decreased to 22.0% and 23.1% for the three and six month periods
ended November 1, 1997 as compared to 22.9% and 23.5% for the similar periods
ended November 2, 1996. These improvements in SG&A as a percent of revenue are
expected to be maintained or improved going forward as the benefits of process
improvements and continued cost control efforts are realized.
OPERATING INCOME. Operating income increased $874,000, or 16.9%, to
$6,035,000 for the quarter ended November 1, 1997 as compared to $5,161,000 for
the quarter ended November 2, 1996. For the six months ended November 1, 1997,
operating income increased $1,651,000, or 19.9%, to $9,964,000, as compared to
$8,313,000 for the similar period last year. As a percent of revenues,
operating income was 5.4% for the three month periods ended November 1, 1997,
and November 2, 1996. For the comparable six month periods ended November 1,
1997 and November 2, 1996, operating income as a percent of revenues increased
to 4.8% from 4.4%.
OTHER COSTS AND EXPENSES. Interest expense increased to $847,000 as
compared to $520,000 for the three month periods ended November 1, 1997 and
November 2, 1996, respectively. For the six month period ended November 1, 1997
interest expense increased to $1,441,000 from $761,000 for the similar period
last year. These increases were primarily a result of higher borrowing levels
under revolving credit agreements relating to the PRIMA and Connect acquisitions
and other working capital requirements.
The Company's effective tax rate was 41.0% for the three and six month
periods ended November 1, 1997 as compared to 42.0% for the similar periods
ended November 2, 1996. The Company's effective tax rate differs from the
federal statutory rate primarily due to the effect of non-deductible goodwill
amortization and state income taxes. The provisions for income taxes have been
recorded based upon management's estimate of the annualized effective tax rate.
NET INCOME. Net income was $3,102,000, or $.31 per common share, and
$2,676,000, or $.28 per common share, for the quarters ended November 1, 1997
and November 2, 1996, respectively. Net income was $5,097,000, or $.52 per
common share, and $4,368,000, or $.47 per common share, for the six month
periods ended November 1, 1997 and November 2, 1996, respectively.
12
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. Working capital increased to $58,423,000 at
November 1, 1997 from $37,484,000 at April 30, 1997. The current ratio was 1.58
to 1.0 at November 1, 1997 as compared to 1.42 to 1.0 at April 30, 1997.
Operating activities used net cash of $24,018,000 and $4,759,000 for the six
months ended November 1, 1997 and November 2, 1996, respectively.
CAPITAL RESOURCES. In July 1996, the Company entered into a
$40,000,000 unsecured revolving long-term credit agreement with certain banks.
Up to $15,000,000 of borrowings under this agreement may be in the form of
commercial paper. In addition, up to $8,000,000 and $6,000,000 may be used to
support the leasing activities of NFS and Norstan Canada, respectively.
Borrowings under this agreement are due July 31, 1999, and bear interest at the
banks' reference rate (8.50% at November 1, 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 were $40,000,000 and $17,920,000 at November 1, 1997 and April 30,
1997, respectively. There were no borrowings on account of NFS at November 1,
1997 or April 30, 1997.
In September 1997, the Company entered into an additional $40,000,000
unsecured revolving credit agreement with First Bank N.A. Borrowings under this
agreement are due March 31, 1998, and bear interest at the bank's reference rate
(8.50% at November 1, 1997), except for LIBOR based options which generally bear
interest at a rate lower than the banks' reference rate. Total consolidated
borrowings under this agreement were $16,625,000 at November 1, 1997. This
bridge facility was put in place for 180 days to finance the PRIMA acquisition
along with other general corporate purposes. The Company intends to and has the
ability to refinance this obligation on a long term basis prior to March 31,
1998 and as a result, borrowings under this facility are classified as long term
at November 1, 1997.
Borrowings by the Company in fiscal 1998 and 1997 have been made to
finance the acquisitions of PRIMA and Connect, for working capital and general
corporate purposes, as well as to invest in property and equipment.
Net capital expenditures for the six months ended November 1, 1997
were $8,686,000 and $11,011,000 for the similar period last year. These
expenditures were primarily for the purchase of computer equipment, software,
telecommunications equipment used as spare parts and for outsourcing
arrangements, and other facility expansions. At November 1, 1997, there were
no outstanding material commitments for future capital expenditures. The
Company also has a significant investment in lease contracts with its
customers. The additional investment in lease contracts totaled $10,468,000
for the six months ended November 1, 1997 and $13,007,000 for the similar
period last year. Net lease receivables decreased to $47,374,000 at November
1, 1997 as compared to $49,370,000 at April 30, 1997.
13
In September 1997, the Company acquired all of the common stock of
PRIMA, a provider of information technology consulting services. The
acquisition consideration totaled approximately $27.5 million, consisting of
$19.5 million cash, $6.3 million of Norstan common stock ($3.0 million to be
issued January 1998) and $1.7 million paid to certain members of PRIMA
management under non-compete agreements. In addition, the Company has agreed
to pay up to $3.5 million in contingent consideration over a three year period
ending April 30, 2000, if certain financial performance targets are achieved.
This transaction resulted in the recording of $24.9 million in goodwill, which
is being amortized, on a straight-line basis over 15 years.
In June 1996, the Company acquired all of the common stock of Connect,
a provider of consulting, design and implementation services. The acquisition
consideration totaled approximately $15.0 million, consisting of $12.0 million
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 has 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 November 1, 1997, $2.0 million of such consideration
has been paid). This transaction resulted in the recording of $16.4 million in
goodwill, which is being amortized, on a straight-line basis over 15 years.
NFS and Norstan Canada utilize their lease receivables and
corresponding underlying equipment to borrow funds from financial institutions
at fixed rates generally on a nonrecourse basis by discounting the stream of
future lease payments. Proceeds from discounting are presented on the
consolidated balance sheets as discounted lease rentals. Interest rates on
these credit agreements range from 6% to 10%, and payments are due in varying
monthly installments through August 2005. Payments due financial institutions
on a monthly basis are made from monthly collections of lease receivables from
customers. Discounted lease rentals consisted of the following (in thousands):
NOVEMBER 1, APRIL 30,
1997 1997
----------- -----------
Discounted lease rentals 36,687 37,921
Less-current maturities (13,351) (13,878)
----------- -----------
$ 23,336 $ 24,043
----------- -----------
----------- -----------
Management of the Company believes that a combination of cash to be
generated from operations, existing bank facilities and available borrowing
capacity, in aggregate, are adequate to meet the currently 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. Future growth of the Company is
dependent upon the proper capital being available to support both internal
growth and acquisitions. The Company is currently investigating various
alternative sources of financing, both short-term and long-term, to ensure
that the proper capital structure is in place to meet such future capital
requirements.
YEAR 2000. The Company utilizes software and related technologies
throughout its business that will be affected by the date change in the year
2000. An internal study is currently under way to determine the full scope and
related costs to insure that the Company's systems continue to meet internal
needs and those of its customers. It is anticipated that a substantial portion
of the total cost of resolving this issue will be incurred over the next two
years. Maintenance, modification and certain other costs will be expensed as
incurred, while the costs of new software will be capitalized and amortized over
the software's useful life.
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of its
business. Although the outcomes of any such legal actions cannot be
predicted, in the opinion of management there is no legal proceeding
pending against or involving the Company for which the outcome is
likely to have a material adverse effect upon the consolidated
financial position or results of operations of the Company.
ITEM 2. ISSUANCE OF UNREGISTERED SECURITIES
The Company issued 167,929 unregistered shares of its common stock on
September 30, 1997, as part of the purchase price paid for PRIMA
Consulting. These shares had a fair market value of $3,325,000 and
were issued to the selling shareholder of PRIMA. Of these shares,
119,277 are being held in escrow on behalf of and to support the
selling shareholder's indemnification obligations. These escrow
shares will be released at various times up to March 31, 1999. 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 encumber 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. These shares were subsequently registered with the
filing of Form S-3 on October 15, 1997.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On September 23, 1997, the annual meeting of shareholders of the
Company (the "Annual Meeting") was held.
(b) At the Annual Meeting, the following directors were elected:
Paul Baszucki David R. Richard
Richard Cohen Dr. Jagdish N. Sheth
Connie M. Levi Herbert F. Trader
Gerald D. Pint
15
(c) The following items were voted upon at the Annual Meeting:
(1) Election of Directors:
Name Votes For Votes Withheld
-------------------- --------- --------------
Paul Baszucki 8,449,168 4,712
Richard Cohen 8,448,638 5,242
Connie M. Levi 8,448,859 5,021
Gerald D. Pint 8,449,359 4,521
David R. Richard 8,449,559 4,321
Dr. Jagdish N. Sheth 8,003,016 450,864
Herbert F. Trader 8,449,209 4,671
Abstentions and Broker non-votes relating to the Election of
Directors - 321,950
(2) The shareholders approved the appointment of Arthur Andersen LLP
as independent auditors for the fiscal year ending April 30,
1998. A total of 8,441,137 shares were voted for the appointment
of Arthur Andersen LLP, 5,317 shares were voted against, and
there were a total of 7,426 abstentions and/or broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 10. Credit Agreement dated as of September 25, 1997 by and
between Norstan, Inc., and First Bank National
Association.
Exhibit 11. Statement Regarding Computation of Earnings Per Share.
(b) Reports on Form 8-K.
The Company filed a report on Form 8-K dated October 8, 1997 pertaining
to its acquisition of all the issued and outstanding capital stock of
Vadini, Inc. d/b/a PRIMA Consulting, Inc.
16
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORSTAN, INC.
----------------------------------
Registrant
Date: December 15, 1997 By /s/ David R. Richard
------------------------------
David R. Richard
Chief Executive Officer,
President and Director
Date: December 15, 1997 By /s/ Kenneth S. MacKenzie
------------------------------
Kenneth S. MacKenzie
Chief Financial Officer
(Principal Financial and Accounting Officer)
17