<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 28, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-8141
NORSTAN, INC.
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(Exact name of registrant as specified in its charter)
MINNESOTA 41-0835746
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6900 WEDGWOOD ROAD, SUITE 150, MAPLE GROVE, MINNESOTA 55311
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612/420-1100
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
------ ------
On March 6, 1995, there were 4,215,412 shares outstanding of the registrant's
common stock, par value $.10 per share, its only class of equity securities.
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1.
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ ------------------------
January 28, January 29, January 28, January 29,
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Sale of products and systems $45,203 $29,862 $119,941 $ 85,579
Telecommunications services 28,207 25,205 85,749 73,531
Financial services 1,202 1,151 3,744 3,220
------- ------- -------- --------
Total revenues 74,612 56,218 209,434 162,330
------- ------- -------- --------
COST OF SALES:
Products and systems 33,374 21,711 89,500 61,184
Telecommunications services 18,228 15,386 53,999 44,798
Financial services 589 471 1,718 1,267
------- ------- -------- --------
Total cost of sales 52,191 37,568 145,217 107,249
------- ------- -------- --------
GROSS MARGIN 22,421 18,650 64,217 55,081
Selling, General &
Administrative Expenses 18,897 15,767 54,912 47,325
------- ------- -------- --------
OPERATING INCOME 3,524 2,883 9,305 7,756
Interest Expense (406) (189) (1,122) (607)
Interest and Other Income
(Expense), Net - 32 54 (83)
------- ------- -------- ---------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE AND
PROVISION FOR INCOME TAXES 3,118 2,726 8,237 7,066
Provision for Income Taxes 1,247 1,118 3,295 2,897
------- ------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 1,871 1,608 4,942 4,169
Cumulative Effect of Change in
Accounting for Income Taxes - - - (375)
------- ------- -------- --------
NET INCOME $ 1,871 $ 1,608 $ 4,942 $ 3,794
------- ------- -------- --------
------- ------- -------- --------
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE:
Income before Cumulative Effect of
Accounting Change $ .43 $ .38 $ 1.14 $ .99
Cumulative Effect of Change in
Accounting for Income Taxes - - - (.09)
------- ------- -------- --------
INCOME PER SHARE $ .43 $ .38 $ 1.14 $ .90
------- ------- -------- --------
------- ------- -------- --------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 4,371 4,268 4,348 4,228
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
January 28, April 30,
1995 1994
----------- ---------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,192 $ 755
Accounts receivable, net of allowances for
doubtful accounts of $1,077 and $685 49,970 43,255
Current lease receivables 14,284 14,245
Inventories 15,099 11,766
Costs and estimated earnings in excess of
billings of $12,751 and $14,731 13,982 15,040
Prepaid income taxes 3,134 2,835
Prepaid expenses, deposits and other 2,704 1,777
-------- --------
TOTAL CURRENT ASSETS 100,365 89,673
-------- --------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment 59,229 50,768
Less-accumulated depreciation
and amortization (32,855) (26,573)
-------- --------
NET PROPERTY AND EQUIPMENT 26,374 24,195
-------- --------
OTHER ASSETS:
Lease receivables, net of current maturities 27,804 27,697
Franchise rights and other intangible assets,
net of amortization of $3,287 and $2,893 7,923 7,658
Other 569 439
-------- --------
TOTAL OTHER ASSETS 36,296 35,794
-------- --------
$163,035 $149,662
-------- --------
-------- --------
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these balance sheets.
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
January 28, April 30,
1995 1994
----------- ---------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 227 $ 229
Current maturities of discounted lease rentals 12,478 11,470
Accounts payable 14,862 13,951
Accrued-
Salaries and wages 9,192 9,081
Deferred revenue 15,789 13,582
Warranty costs 1,791 1,501
Other liabilities 3,762 3,907
Income taxes payable 434 -
Billings in excess of costs and estimated
earnings of $10,665 and $6,092 4,579 2,991
-------- --------
TOTAL CURRENT LIABILITIES 63,114 56,712
-------- --------
LONG-TERM DEBT, net of current maturities 18,970 18,218
DISCOUNTED LEASE RENTALS, net of current maturities 18,591 18,845
DEFERRED INCOME TAXES 8,418 8,229
------- --------
SHAREHOLDERS' EQUITY:
Common stock - $.10 par value;
20,000,000 authorized shares;
4,212,312 and 4,070,792 shares
issued and outstanding 421 407
Capital in excess of par value 25,583 24,132
Retained earnings 29,366 24,423
Unamortized cost of stock compensation (162) (291)
Foreign currency translation adjustments (1,266) (1,013)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 53,942 47,658
-------- --------
$163,035 $149,662
-------- --------
-------- --------
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these balance sheets.
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
January 28, January 29,
1995 1994
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 4,942 $ 3,794
Adjustments to reconcile net income to net
cash provided by operating activities-
Depreciation and amortization 7,585 6,046
Deferred income taxes (110) (504)
Cumulative effect of change in accounting
for income taxes - 375
Changes in operating items,
net of effects from acquisition:
Accounts receivable (6,183) 1,380
Inventories (3,013) (6,412)
Costs and estimated earnings in excess
of billings 1,041 (4,749)
Prepaid expenses, deposits and other (903) (944)
Accounts payable 163 1,817
Accrued liabilities 2,175 64
Billings in excess of costs and estimated
earnings 1,599 (135)
Income taxes payable 715 1,166
-------- --------
Net Cash Provided By
Operating Activities 8,011 1,898
-------- --------
INVESTING ACTIVITIES:
Cash paid for acquisition (726) -
Additions to property and equipment, net (8,944) (5,063)
Investment in lease contracts (12,758) (15,656)
Collections from lease contracts 12,535 10,357
Other, net (99) 38
-------- --------
Net Cash Used For Investing
Activities (9,992) (10,324)
-------- --------
FINANCING ACTIVITIES:
Repayment of short-term debt (424) -
Borrowings under revolving credit agreements 89,660 77,665
Repayments under revolving credit agreements (88,815) (75,898)
Repayments of long-term debt (95) (145)
Borrowings on discounted lease rentals 9,059 12,791
Repayments of discounted lease rentals (8,273) (6,679)
Repurchase of common stock - (41)
Proceeds from sale of common stock 1,309 1,362
-------- --------
Net Cash Provided By Financing Activities 2,421 9,055
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (3) 4
-------- --------
NET INCREASE IN CASH 437 633
CASH, BEGINNING OF PERIOD 755 1,219
-------- --------
CASH, END OF PERIOD $ 1,192 $ 1,852
-------- --------
-------- --------
</TABLE>
The accompanying notes to the consolidated financial statements are an integral
part of these statements.
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 28, 1995
UNAUDITED
The information furnished in this report is unaudited and reflects all
adjustments, which are normal recurring adjustments, and which in the opinion of
management, are necessary to present fairly the operating results for the
interim periods. The operating results for the interim periods presented are
not necessarily indicative of the operating results to be expected for the full
fiscal year. This report should be read in conjunction with the Company's most
recent "Annual Report on Form 10-K."
PRINCIPLES OF CONSOLIDATION -
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
FOREIGN CURRENCY -
For the Company's foreign operations, assets and liabilities are translated at
exchange rates as of the balance sheet date, and revenues and expenses are
translated at average exchange rates prevailing during the period. Translation
adjustments are recorded as a separate component of shareholders' equity.
NORSTAN FINANCIAL SERVICES, INC. (NFS) -
NFS provides financing for customers of the Company. Leases are accounted for
as sales-type leases for consolidated financial reporting purposes. Condensed
unaudited statements of operations of NFS are as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------
January 28, January 29,
1995 1994
---------- ----------
<S> <C> <C>
Revenues $ 3,514 $ 3,112
Interest expense (1,526) (1,196)
Other expenses (920) (1,227)
------- -------
Income before provision
for income taxes 1,068 689
Provision for income taxes (427) (282)
------- -------
Net income $ 641 $ 407
------- -------
------- -------
</TABLE>
<PAGE>
SUPPLEMENTAL CASH FLOWS INFORMATION -
Supplemental disclosure of cash flows information is as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------
January 28, January 29,
1995 1994
---------- ----------
<S> <C> <C>
Cash paid for:
Interest $2,733 $1,840
Income taxes 2,553 2,176
</TABLE>
<PAGE>
ACCOUNTING FOR INCOME TAXES -
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
The Company adopted SFAS No. 109 as of May 1, 1993 and recorded a $375,000
charge to consolidated net income in fiscal year 1994 for the cumulative effect
of the change in method of accounting for income taxes.
STOCK OFFERING -
Effective November 16, 1994, the Company's Board of Directors authorized the
filing of a registration statement with the Securities and Exchange Commission
to register an anticipated offering of up to 1,000,000 shares of common stock
(excluding an over-allotment option of up to 150,000 shares to be granted to the
underwriters). Due to a decline in the market, this registration statement was
withdrawn from the Securities and Exchange Commission effective January 10,
1995. During the quarter ended January 28, 1995, the Company recorded
approximately $200,000 in expenses associated with this equity offering.
ACQUISITION -
In November 1994, the Company acquired certain assets and assumed certain
liabilities of Toronto-based Renaissance Investments Ltd. Renaissance, a
technology planning and integration services company, specializes in local and
wide area networks and graphical user interfaces, and has been operating under
the name of Renaissance Connects since 1990. The purchase price of the assets
was approximately $726,000, plus certain incentive payments contingent upon the
future operating performance of the acquired business. In addition, the Company
repaid approximately $424,000 of short-term bank obligations assumed in this
acquisition.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
During the quarter ended January 28, 1995, the Company's net income improved
compared to the quarter ended January 29, 1994, increasing 16.4% to $1,871,000,
or $.43 per common share, compared to $1,608,000, or $.38 per common share. For
the nine month period ended January 28, 1995, the Company's net income was
$4,942,000, or $1.14 per common share, compared to $3,794,000 or $.90 per common
share, for the same period last year. 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
$.09 per share, in fiscal year 1994 for the cumulative effect of the change in
method of accounting for income taxes.
<PAGE>
RESULTS OF OPERATIONS
The Company's revenues consist of revenues from the sales of products and
systems, telecommunications services and financial services. Revenues from the
sale of products and systems result from the sale of new products and upgrades,
as well as refurbished equipment. Revenues from telecommunications services
result primarily from communications maintenance services, moves, adds and
changes and long distance service. Financial services revenues result primarily
from leasing activities. The following table sets forth, for the periods
indicated, certain items from the Company's consolidated statements of
operations.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
DOLLAR AMOUNTS AS A DOLLAR AMOUNTS AS A
PERCENTAGE OF REVENUES PERCENTAGE PERCENTAGE OF REVENUES PERCENTAGE
Three Months Ended INCREASE Nine Months Ended INCREASE
---------------------------- ---------------- ---------------------------- -------------
January 28, January 29, Fiscal January 28, January 29, Fiscal
1995 1994 1995 VS 1994 1995 1994 1995 VS 1994
------------- ------------- ---------------- ------------- ------------- -------------
<S>
REVENUES: <C> <C> <C> <C> <C> <C>
Sales of Products and Systems 60.6% 53.1% 51.4% 57.3% 52.7% 40.2%
Telecommunications Services 37.8% 44.8% 11.9% 40.9% 45.3% 16.6%
Financial Services 1.6% 2.1% 4.4% 1.8% 2.0% 16.3%
------------- ------------- ------------- -------------
Total Revenues 100.0% 100.0% 32.7% 100.0% 100.0% 29.0%
COST OF SALES 69.9% 66.8% 38.9% 69.3% 66.1% 35.4%
------------- ------------- ------------- -------------
GROSS MARGIN 30.1% 33.2% 20.2% 30.7% 33.9% 16.6%
"SELLING, GENERAL & ADMINISTRATIVE"
EXPENSES 25.4% 28.1% 19.9% 26.2% 29.1% 16.0%
------------- ------------- ------------- -------------
OPERATING INCOME 4.7% 5.1% 22.2% 4.5% 4.8% 20.0%
Interest Expense ( 0.5% ) ( 0.3% ) 114.8% ( 0.5% ) ( 0.4% ) 84.8%
Other, Net - - - - - -
------------- ------------- ------------- -------------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE AND
PROVISION FOR INCOME TAXES 4.2% 4.8% 14.4% 4.0% 4.4% 16.6%
Provision for Income Taxes 1.7% 2.0% 11.5% 1.6% 1.8% 13.7%
------------- ------------- ------------- -------------
INCOME BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 2.5% 2.8% 16.4% 2.4% 2.6% 18.5%
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The following table sets forth, for the periods indicated, the gross margin
percentages for sales of products and systems, telecommunications services and
financial services.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------------------- ---------------------------------
January 28, January 29, January 28, January 29,
1995 1994 1995 1994
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
GROSS MARGIN PERCENTAGES
Sales of Products and Systems 26.2% 27.3% 25.4% 28.5%
Telecommunications Services 35.4% 39.0% 37.0% 39.1%
Financial Services 51.0% 59.1% 54.1% 60.7%
</TABLE>
<PAGE>
RESULTS OF OPERATIONS.
REVENUES. Revenues increased 32.7%, to $74,612,000 for the quarter
ended January 28, 1995 as compared to $56,218,000 for the similar period last
year. For the nine months ended January 28, 1995, revenues increased 29.0%, to
$209,434,000 as compared to $162,330,000 for the same period last year. Sales
of products and systems increased $15,341,000, or 51.4% and $34,362,000, or
40.2% in the comparable three and nine month periods ended January 28, 1995,
respectively, as a result of demand for the Company's telephone systems as
well as increased demand for the Company's newer product offerings. During the
nine months ended January 28, 1995 as compared to the nine months ended January
29, 1994, bookings of videoconferencing products increased 70%, bookings of
call processing products increased 38% and bookings of telephone systems
increased 13%. As part of the Company's efforts to broaden its product line to
provide integrated communications solutions to its customers, management's
strategy is to continue to shift the Company's product mix to newer products
such as call processing and videoconferencing equipment.
Revenues from telecommunications services increased $3,002,000, or
11.9% and $12,218,000, or 16.6% in the comparable three and nine month periods
ended January 28, 1995, respectively. Revenues from telecommunications services
have increased following the growth in the sales of telecommunications products
and systems in fiscal 1994 and 1993.
Revenues from financial services increased $51,000, or 4.4% and
$524,000, or 16.3% in the comparable three and nine month periods ended January
28, 1995. This resulted as the Company's net lease receivables increased to
$42,088,000 at January 28, 1995 as compared to $36,447,000 at January 29, 1994.
GROSS MARGIN. The Company's gross margin increased $3,771,000, or
20.2%, to $22,421,000 for the three months ended January 28, 1995 as compared to
$18,650,000 for the three months ended January 29, 1994. For the nine month
period ended January 28, 1995, gross margin increased $9,136,000, or 16.6%, to
$64,217,000 as compared to $55,081,000 for the nine months ended January 29,
1994. As a percent of total revenues, gross margin declined to 30.1% and 30.7%
for the three and nine month periods ended January 28, 1995 as compared to 33.2%
and 33.9% for the three and nine month periods ended January 29, 1994. The
decrease in the gross margin percentage in fiscal 1995 is a result of market
conditions, as well as the changing mix of products which results from the
Company's expanded line of product offerings. The Company expects its gross
margin, as a percentage of total revenues, for the remainder of fiscal 1995 to
continue to be lower than fiscal 1994.
Gross margin as a percent of revenues for the sale of products and
systems was 26.2% and 25.4% for the three and nine month periods ended January
28, 1995 as compared to 27.3% and 28.5% for the comparable periods ended January
29, 1994. These decreases are primarily the result of market conditions and the
Company's changing mix of products.
Gross margin as a percent of revenues for telecommunications services
was 35.4% and 37.0% for the three and nine month periods ended January 28, 1995
as compared to 39.0% and 39.1% for the comparable periods ended January 29,
1994. These decreases result primarily from changes in the mix of services and
decreased margins applicable to long distance services.
<PAGE>
Gross margin as a percent of revenues for financial services was 51.0%
and 54.1% for the three and nine month periods ended January 28, 1995 as
compared to 59.1% and 60.7% for the three and nine month periods ended January
29, 1994. These decreases result primarily from increased borrowing costs in a
rising interest rate environment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3,130,000, or 19.9% for the quarter ended
January 28, 1995 as compared to the quarter ended January 29, 1994. For the
nine months ended January 28, 1995, selling, general and administrative expenses
increased $7,587,000, or 16.0% as compared to the similar period last year.
These increases resulted primarily from increased expenses necessary to support
the increased revenues. As a percent of revenues, selling, general and
administrative expenses declined to 25.4% and 26.2% for the three and nine month
periods ended January 28, 1995 as compared to 28.1% and 29.1% for the similar
periods ended January 29, 1994. These decreases in selling, general and
administrative expenses as a percent of revenues resulted from volume related
efficiencies, as sales volume increased without a proportional increase in
expenses. The Company expects its selling, general and administrative expenses,
as a percent of revenues, for the remainder of fiscal 1995 to continue to be
lower than fiscal 1994, although there can be no assurance that this trend will
continue.
OPERATING INCOME. Operating income increased $641,000, or 22.2%, to
$3,524,000 for the quarter ended January 28, 1995 as compared to $2,883,000 for
the quarter ended January 29, 1994. For the nine months ended January 28, 1995,
operating income increased $1,549,000, or 20.0%, to $9,305,000, as compared to
$7,756,000 for the similar period last year. These increases resulted primarily
from increased overall sales volume and improved performance by the Company's
Canadian operations. As a percent of revenues, operating income declined to
4.7% and 4.5% for the three and nine month periods ended January 28, 1995 as
compared to 5.1% and 4.8% for the similar periods ended January 29, 1994. These
decreases resulted from a decline in the Company's gross margin as a percent of
revenue, which was partially offset by selling, general and administrative
expense efficiencies. In addition, the Company invested approximately
$1,000,000, or 0.5% of revenues, during the first nine months of fiscal 1995 in
the start-up of its cabling and data communications businesses.
OTHER COSTS AND EXPENSES. Interest expense increased to $406,000 and
$1,122,000 for the three and nine month periods ended January 28, 1995 as
compared to $189,000 and $607,000 for the similar periods ended January 29,
1994. These increases resulted primarily from increased overall borrowing
requirements and the rising interest rate environment. Average month end
revolving credit balances (excluding amounts borrowed to finance NFS leasing
activities) were approximately $21,000,000 for the nine months ended January 28,
1995 as compared to approximately $14,400,000 for the nine months ended January
29, 1994.
<PAGE>
The Company's effective tax rate was 40% for the three and nine month
periods ended January 28, 1995 as compared to an effective tax rate of 41% for
the similar periods ended January 29, 1994. The Company's effective tax rate
differs from the federal statutory rate primarily due to state income taxes.
The provisions for income tax have been recorded based upon management's
estimate of the annualized effective tax rate.
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE. Income before
the cumulative effect of the change in accounting for income taxes was
$1,871,000, or $.43 per common share, and $1,608,000, or $.38 per common share,
for the quarters ended January 28, 1995 and January 29, 1994. Income before the
cumulative effect of the change in accounting for income taxes was $4,942,000,
or $1.14 per common share, and $4,169,000, or $.99 per common share, for the
nine month periods ended January 28, 1995 and January 29, 1994.
ACCOUNTING CHANGE. 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 $.09 per share,
in the first quarter of fiscal 1994 for the cumulative effect of the change in
method of accounting for income taxes.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. Working capital increased to $37,251,000 at
January 28, 1995 from $32,961,000 at April 30, 1994. The current ratio was 1.59
to 1.0 as of January 28, 1995 as compared to 1.58 to 1.0 as of April 30, 1994.
Net cash provided by operating activities was $8,011,000 for the nine months
ended January 28, 1995. For the nine months ended January 28, 1995, net income
of $4,942,000, depreciation and amortization of $7,585,000, decreased costs and
estimated earnings in excess of billings of $1,041,000, increased accrued
liabilities of $2,175,000 and increased billings in excess of costs and
estimated earnings of $1,599,000, more than offset increased accounts receivable
of $6,183,000 and increased inventories of $3,013,000. For the nine months
ended January 28, 1995, the general increase in balance sheet items resulted
from increased business activity and revenues over the prior period.
CAPITAL RESOURCES. In October 1994, the Company entered into a
$35,000,000 unsecured revolving long-term credit agreement with certain banks.
Under this agreement, the total credit facility of $35,000,000 is reduced by
$750,000 per fiscal quarter effective January, 1995. As of January 28, 1995,
the total capacity of the credit facility was $34,250,000. Borrowings under
this agreement are due May 2, 1998 and bear interest at a bank's reference rate
(8.50% and 6.75% at January 28, 1995 and April 30, 1994, respectively), except
for LIBOR, CD and commercial paper based options which generally bear interest
at a rate lower than the bank's reference rate. The Company is able to borrow
up to $15,000,000 of this credit facility in the form of commercial paper. In
addition, Norstan Financial Services, Inc. (NFS) is able to borrow up to
$8,000,000 of this facility from Norstan, Inc. Total consolidated borrowings
under this agreement were $18,970,000 and $18,125,000 at January 28, 1995 and
April 30, 1994, respectively. There were no borrowings on the account of NFS at
January 28, 1995, as compared to $431,000 borrowed on the account of NFS at
April 30, 1994. Borrowings by the Company in fiscal 1995 and 1994 have been for
working capital and general corporate purposes, to invest in property and
equipment, as well as to borrow funds for NFS, while borrowings for NFS have
been used to invest in additional lease contracts.
Capital expenditures for the nine months ended January 28, 1995
were $8,944,000 as compared to $5,063,000 for the similar period last year.
These expenditures were primarily for telecommunications equipment used as
spare parts, computer equipment and facility expansion. The Company has also
made a significant investment in lease contracts with its customers. The
investment made in lease contracts totaled $12,758,000 for the nine months
ended January 28, 1995 as compared to $15,656,000 for the similar period last
year. Net lease receivables increased to $42,088,000 at January 28, 1995 as
compared to $41,942,000 at April 30, 1994.
Norstan Financial Services, Inc. (NFS) and Norstan Canada Inc. utilize
their lease receivables and corresponding underlying equipment to borrow funds
from financial institutions at fixed rates on a nonrecourse or recourse basis by
discounting the stream of future lease payments. Proceeds
<PAGE>
from discounting are presented on the consolidated balance sheet as discounted
lease rentals. Interest rates on these credit agreements range from 6% to 10%,
and payments are generally due in varying monthly installments through October
2000. Payments due financial institutions on a monthly basis are made from
monthly collections of lease receivables from customers.
Discounted lease rentals as of January 28, 1995 and April 30, 1994
consisted of the following (in thousands):
<TABLE>
<CAPTION>
January 28, April 30,
1995 1994
----------- ---------
<S> <C> <C>
Nonrecourse borrowings $28,001 $25,918
Recourse borrowings 3,068 4,397
------- -------
Total discounted lease rentals 31,069 30,315
Less-current maturities (12,478) (11,470)
------- -------
$18,591 $18,845
------- -------
------- -------
</TABLE>
In addition to the recourse as described previously, recourse to
Norstan, Inc. relative to discounted lease rentals was limited to $1,004,000 as
of January 28, 1995 and $782,000 as of April 30, 1994.
Effective November 16, 1994, the Company's Board of Directors
authorized the filing of a registration statement with the Securities and
Exchange Commission to register an anticipated offering of up to 1,000,000
shares of common stock (excluding an over-allotment option of up to 150,000
shares to be granted to the underwriters). Due to a decline in the market,
this registration statement was withdrawn from the Securities and Exchange
Commission effective January 10, 1995.
Management of the Company believes that a combination of cash to be
generated from operations, existing bank facilities and available borrowing
capacity, in aggregate, are adequate to meet the anticipated liquidity and
capital resource requirements of its business. Sources of additional financing,
if needed, may include further debt financing or the sale of equity or other
securities.
<PAGE>
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of its
business. Although the outcomes of any such legal actions cannot be
predicted, in the opinion of management there is no legal proceeding
pending against or involving the Company for which the outcome is
likely to have a material adverse effect upon the consolidated
financial position or results of operations of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 10. Employment Agreement between Norstan, Inc. and Max Mayer.
Exhibit 11. Statement Regarding Computation of Earnings Per Share.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for which this
report is filed.
<PAGE>
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.
[ta]NORSTAN, INC.
---------------------------------
Registrant
Date: March 13, 1995 By /s/ Paul Baszucki
------------------------------
Paul Baszucki
Vice Chairman of the Board
and Chief Executive Officer
Date: March 13, 1995 By /s/ Richard Cohen
------------------------------
Richard Cohen
Vice Chairman of the Board
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
<PAGE>
EXHIBIT 10
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made effective as of the 23rd day of January, 1995, by
and between MAX MAYER of Lexington, Massachusetts, ("Executive") and NORSTAN,
INC., a Minnesota corporation (the "Company"),
W I T N E S S E T H:
WHEREAS, the Company wishes to employ Executive as President and Chief
Operating Officer of Norstan, Inc.; and
WHEREAS, the Company wishes to enter into an agreement with Executive
governing the terms and conditions of his employment, and Executive is willing
to be employed on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises, and of the mutual
covenants hereinafter set forth, the parties do hereby agree as follows:
1. EMPLOYMENT PERIOD. The Company agrees to employ Executive, and
Executive agrees to serve in the full-time employ of the Company, for the period
(the "Employment Period") beginning on the date of this Agreement and ending on
January 23, 1997; PROVIDED, that on January 23, 1996, and on each January 23
thereafter ("Renewal Date"), the Employment Period shall automatically be
extended to the date which is 24 months after such Renewal Date unless, not
later than such Renewal Date, the Company gives Executive written notice that
the Employment Period shall not be so extended; PROVIDED FURTHER, that in the
event of a "Change in Control" (as defined in paragraph 7.e. below), the
Employment Period shall automatically be extended to the date which is 36 months
after the date on which the Change in Control occurs. Notwithstanding the
foregoing, in no event shall the Employment Period continue beyond the earliest
to occur of the date of Executive's 65th birthday, the date as of which
Executive's employment is terminated pursuant to paragraph 4 or paragraph 7, or
the date of the Executive's death.
2. DUTIES. During the Employment Period, Executive shall serve as
President and Chief Operating Officer of Norstan, Inc., or, except as otherwise
provided in this Agreement, in such other executive positions as the Board of
Directors of the Company shall from time to time determine. Executive shall
perform such executive and managerial duties consistent with such positions as
the Chief Executive Officer of the Company shall from time to time direct.
Executive shall devote his best efforts and all of his business time and
attention (except for usual vacation periods and reasonable periods of illness
or other incapacity) to the business of the company and its subsidiaries.
3. COMPENSATION. During the Employment Period, Executive shall be
compensated as follows:
<PAGE>
a. SALARY. Executive shall be paid a salary at a rate which is not
less than $250,000 per year, exclusive of bonuses, if any, which may from time
to time be awarded to Executive pursuant to any authorized bonus, incentive, or
similar plan maintained by the Company. Executive's salary shall be paid in
equal, semi-monthly installments.
b. EXPENSES. Executive shall be reimbursed for all reasonable
business expenses incurred in the performance of his duties pursuant to this
Agreement, to the extent such expenses are substantiated and are consistent with
the general policies of the Company and its subsidiaries relating to the
reimbursement of expenses of executive officers.
c. FRINGE BENEFITS. In addition to any other compensation provided
under this Agreement, Executive shall be entitled to participate, during the
Employment Period, in any and all pension, profit sharing, and other employee
benefit plans or fringe benefit programs which are from time to time maintained
by the Company for its executive officers, in accordance with the provisions of
such plans or programs as are from time to time in effect.
d. DEDUCTIONS AND WITHHOLDING. All Compensation and other benefits
payable to or on behalf of Executive pursuant to this Agreement shall be subject
to such deductions and withholding as may be agreed to by Executive or required
by applicable law.
4. DISABILITY. If, during the Employment Period, Executive shall become
incapacitated by accident or illness and, in the opinion of the Board of
Directors of the Company, shall be unable to perform the duties of the positions
he then occupies for a period of 150 consecutive days, the Company shall have
the right to terminate the Employment Period effective at any time after such
150 day period of disability by giving 30 days advance written notice to
Executive. If the Employment Period is thus terminated, Executive shall not be
entitled to receive any compensation or other benefits pursuant to this
Agreement, other than compensation or benefits accrued through the effective
date of such termination.
5. DEATH. If Executive shall die during the Employment Period without
having breached any of the terms of this Agreement, his base salary (at the rate
in effect at the time of his death) shall be continued for a period of 12 months
to the beneficiary named in the last written instrument signed by Executive for
the purposes of this Agreement and received by the Company prior to his death.
If Executive fails to name a beneficiary, such amounts shall be paid to his
estate.
6. OTHER BENEFITS. The compensation provisions of this Agreement shall
be in addition to, and not in derogation or diminution of, any benefits that
Executive or his beneficiaries may be entitled to receive under the provisions
of any pension, profit sharing, disability, or other employee benefit plan now
or hereafter maintained by the Company.
2
<PAGE>
7. TERMINATION.
a. The Company may terminate Executive's employment for cause upon
60 days prior written notice to Executive. Such notice shall specify in
reasonable detail the nature of the cause and, during such 60 day period,
Executive shall have the opportunity to cure the stated cause. If Executive
fails to cure a stated cause, the Employment Period shall terminate at the end
of the 60 day notice period, but without prejudice to Executive's right to
contest the existence of any stated cause and/or to contest the fact that the
cause has not been cured. For the purposes of this Agreement, cause shall mean
any conduct by Executive involving dishonesty or moral turpitude or any failure
by Executive to comply with the terms of this Agreement in any material respect.
b. If the Company terminates Executive's employment for cause, or if
Executive voluntarily terminates his employment under circumstances other than
those specified in paragraphs 7.c. or 12.a., Executive shall not be entitled to
receive any compensation or other benefits pursuant to this Agreement, other
than compensation or benefits accrued through the effective date of such
termination.
c. If, after a "Change in Control" (as such term is defined in
subparagraph 7.e. below), and prior to the expiration of the then current
extension of the Employment Period, (i) Executive voluntarily terminates his
employment because he has been reassigned to a position of lesser rank or
status, or because he has been transferred to a location which is more than 25
miles from his previous principal place of employment, or because his base
salary has been reduced, or because his benefits have been reduced (unless such
reduction is made uniformly in a plan of general application to all of the
Company's eligible employees), or (ii) the Company terminates Executive's
employment for reasons other than those specified in paragraph 4 or subparagraph
7.a. of this Agreement, then Executive shall continue to receive his base salary
and fringe benefits for the remainder of the then current extension of the
Employment Period or, if longer, for a period of 24 months. In the event of a
"Change in Control" all stock options shall immediately vest.
d. If, other than caused by a Change in Control, the Company
terminates Executive's employment at any time prior to the expiration of the
initial or then current extension of the Employment Period for reasons other
than those specified in paragraph 4 or subparagraph 7.a. of this Agreement, then
Executive shall continue to receive his base salary and fringe benefits for a
period of 12 months.
e. For the purposes of this Agreement, a Change in Control shall be
deemed to occur when and if, during the Employment Period:
(i) any Person (as that term is used in sections 13(d) and 14(d)
of the Securities Exchange Act of 1934) other than the Company becomes
the beneficial owner, directly or indirectly, of securities of the
Company
3
<PAGE>
representing more than 20% of the voting power of all of the then
outstanding securities of the Company; or
(ii) persons who, at the beginning of any period, constitute the
Board of Directors of the Company cease, at the end of such period, to
constitute at least a majority thereof, unless the nomination of each
new director was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the beginning of
such period.
8. COMPETITION.
a. During the Employment Period, Executive will not, except with the
express written consent of the Chief Executive Officer of the Company, become
engaged in, or permit his name to be used in connection with any business other
than the businesses of the Company and its subsidiaries, whether or not such
other business is a competitive business.
b. Executive covenants and agrees that for a period of 12 months
after the termination of the Employment Period, or for such longer period as
Executive is receiving payments pursuant to paragraph 7, he will not, except
with the express written consent of the Chief Executive Officer of the Company,
engage directly or indirectly in, or permit his name to be used in connection
with any competitive business in the geographic area serviced by the Company.
Executive further covenants and agrees for a period of 12 months from the date
of termination of his employment hereunder not to solicit or assist anyone else
in the solicitation of, any of the Company's then-current employees to terminate
their employment with the Company and to become employed by any business
enterprise with which the Executive may then be associated, affiliated or
connected.
c. For the purposes of this paragraph 8: (i) the phrase, "engage
directly or indirectly in" shall encompass: (A) all of Executive's activities
whether on his own account or as an employee, director, officer, agent,
consultant, independent contractor, or partner of or in any person, firm, or
corporation (other than the Company and its subsidiaries), or (B) Executive's
ownership of more than 10% of the voting stock of any corporation, 5% or more of
the gross income of which is derived from any business or businesses in which
Executive may not then engage; and (ii) the phrase "competitive business" shall
mean: (A) the sale of telephone, telecommunications, or similar equipment, or
(B) any other business in which the Company or its subsidiaries is then engaged.
9. CONFIDENTIAL INFORMATION. Executive agrees that he will not, without
the prior written consent of the Board of Directors of the Company, during the
term or after termination of his employment under this Agreement, directly or
indirectly disclose to any individual, corporation, or other entity (other than
the Company or any subsidiary thereof, their officers, directors, or employees
entitled to such information, or to any other person or entity to whom such
information is regularly disclosed in the normal course of the
4
<PAGE>
Company's business) or use for his own or such another's benefit, any
information, whether or not reduced to written or other tangible form, which:
a. is not generally known to the public or in the industry;
b. has been treated by the Company or any of its subsidiaries as
confidential or proprietary; and
c. is of competitive advantage to the Company or any of its
subsidiaries and in the confidentiality of which the Company or
any of its subsidiaries has a legally protectable interest.
Information which becomes generally known to the public or in the industry, or
in the confidentiality of which the Company and its subsidiaries cease to have a
legally protectable interest, shall cease to be subject to the restrictions of
this paragraph.
10. ENFORCEMENT. If, at the time of enforcement of any provision of
paragraphs 8 or 9, a court shall hold that the period, scope, or geographical
area restrictions stated therein are unreasonable under circumstances then
existing, the maximum period, scope, or geographical area reasonable under the
circumstances shall be substituted for the stated period, scope, or area. In
the event of a breach by Executive of any of the provisions of paragraphs 8 or
9, the Company may, in addition to any other rights and remedies existing in its
favor, apply to any court of law or equity of competent jurisdiction for
specific performance and/or injunctive or other relief in order to enforce or
prevent any violations of the provisions hereof.
11. PAYMENT OF COSTS. If any action or law or in equity is necessary to
enforce or interpret the terms of this agreement, the prevailing party shall be
entitled to reasonable attorneys fees, costs and necessary disbursements in
addition to any other relief to which it may be entitled. In addition, if a
dispute arises regarding a termination of Executive's employment after a Change
in Control and Executive obtains a final judgment in his favor from a court of
competent jurisdiction from which no appeal may be taken, whether because the
time to do so has expired or otherwise, or his claim is settled by the Company
prior to the rendering of such a judgment, all reasonable legal fees and
expenses incurred by Executive in contesting or disputing any such termination,
in seeking to obtain or enforce any right or benefit provided for in this
Agreement, or in otherwise pursing his claim will be promptly paid by the
Company, with interest thereon at the highest Minnesota statutory rate for
interest on judgments against private parties, from the date of payment thereof
by Executive to the date of reimbursement to him by the Company.
12. SUCCESSORS.
a. OF THE COMPANY. The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform
5
<PAGE>
this Agreement in the same manner and to the same extent that the Company would
have been required to perform it if no such succession had taken place. Failure
of the Company to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle Executive to
terminate his employment with the Company and to receive the payments provided
for in subparagraph 7.c. As used in this Agreement, "Company" shall mean the
Company as hereinbefore defined, and any successor to the business and/or assets
of the Company which executes and delivers the agreement provided for in this
paragraph 12 or which otherwise becomes bound by all the terms and provisions of
this Agreement as a matter of law.
b. OF EXECUTIVE. This Agreement shall inure to the benefit of and
shall be enforceable by Executive, his legal representative, or other successors
in interest.
13. GENERAL PROVISIONS.
a. ASSIGNMENTS. Executive's rights and interests under this
Agreement may not be assigned, pledged, or encumbered by him without the
Company's written consent.
b. EFFECT OF HEADINGS. The headings of all of the paragraphs and
subparagraphs of this Agreement are inserted for convenience of reference only,
and shall not affect the construction or interpretation of this Agreement.
c. MODIFICATION, AMENDMENT, WAIVER. No modification, amendment, or
waiver of any provision of this Agreement shall be effective unless approved in
writing by both parties. The failure at any time to enforce any of the
provisions of this Agreement shall in no way be construed as a waiver of such
provisions and shall not affect the right of either party thereafter to enforce
each and every provision of this Agreement in accordance with its terms.
d. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.
e. NO STRICT CONSTRUCTION. The language used in this Agreement
shall be deemed to be the language chosen by the parties hereto to express their
mutual intent, and no rule of strict construction shall be applied against by
person.
f. APPLICABLE LAW. All questions concerning the construction,
validity, and interpretation of this Agreement shall be governed by the laws of
the State of Minnesota.
6
<PAGE>
g. NOTICES. Any notice to be served under this Agreement shall be
in writing and shall be mailed by registered mail, registry fee and postage
prepaid and return receipt requested, addressed:
If to the Company, to:
Norstan, Inc.
6900 Wedgwood Road, Suite 150
Maple Grove, MN 55311-3552
Attention: Chief Executive Officer; or
If to Executive, to:
________________________________________________
________________________________________________
________________________________________________
or to such other place as either party may specify in writing, delivered in
accordance with the provisions of this subparagraph.
h. SURVIVAL. The rights and obligations of the parties shall
survive the term of Executive's employment to the extent that any performance is
required under this Agreement after the expiration or termination of such term.
i. ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement of the parties with respect to the subject matter thereof, and
supersedes all previous agreements between the parties relating to the same
subject matter.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
NORSTAN, INC.
By Paul Baszucki
____________________________
Chief Executive Officer
Max Mayer
_______________________________
Executive
7
<PAGE>
EXHIBIT 11
NORSTAN, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ---------------------------
January 28, January 29, January 28, January 29,
1995 1994 1995 1994
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Primary earnings per share -
Weighted average number of
issued shares outstanding 4,127 4,006 4,089 3,988
Effect of:
1986 Long-Term Incentive Plan 191 214 211 199
1986 Directors' Stock Option Plan 41 38 40 35
Employee Stock Purchase Plan 12 10 8 6
------ ------ ------ ------
Shares outstanding used to compute
primary earnings per share 4,371 4,268 4,348 4,228
------ ------ ------ ------
------ ------ ------ ------
Net income $1,871 $1,608 $4,942 $3,794
------ ------ ------ ------
------ ------ ------ ------
Primary earnings per share$ .43 $ .38 $ 1.14 $ .90
------ ------ ------ ------
------ ------ ------ ------
Fully diluted earnings per share -
Weighted average number of
shares used for primary
earnings per share 4,371 4,268 4,348 4,228
Effect of:
1986 Long-Term Incentive Plan - 7 2 8
1986 Directors' Stock Option Plan - 2 1 2
Employee Stock Purchase Plan - 2 1 3
------ ------ ------ ------
Shares outstanding used to compute
fully diluted earnings per share 4,371 4,279 4,352 4,241
------ ------ ------ ------
------ ------ ------ ------
Net income $1,871 $1,608 $4,942 $3,794
------ ------ ------ ------
------ ------ ------ ------
Fully diluted earnings per share $ .43 $ .38 $ 1.14 $ .89
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1995
<PERIOD-START> MAY-01-1994
<PERIOD-END> JAN-28-1995
<CASH> 1192
<SECURITIES> 0
<RECEIVABLES> 51047
<ALLOWANCES> 1077
<INVENTORY> 15099
<CURRENT-ASSETS> 100365
<PP&E> 59229
<DEPRECIATION> 32855
<TOTAL-ASSETS> 163035
<CURRENT-LIABILITIES> 63114
<BONDS> 37561
<COMMON> 421
0
0
<OTHER-SE> 53521
<TOTAL-LIABILITY-AND-EQUITY> 163035
<SALES> 119941
<TOTAL-REVENUES> 209434
<CGS> 89500
<TOTAL-COSTS> 145217
<OTHER-EXPENSES> 54858
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1122
<INCOME-PRETAX> 8237
<INCOME-TAX> 3295
<INCOME-CONTINUING> 4942
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4942
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
</TABLE>
