<PAGE>
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 FEBRUARY 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
---------------------------------------------------------------
(address of principal executive offices)
TELEPHONE (612) 513-4500 FAX (612) 513-4537 INTERNET WWW.NORSTAN.COM
- --------------------------------------------------------------------------------
(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 March 5, 1997, there were 9,359,997 shares outstanding of the registrant's
common stock, par value $.10 per share, its only class of equity securities.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1.
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- -------------------------
FEBRUARY 1, JANUARY 27, FEBRUARY 1, JANUARY 27,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Sales of Products and Systems $ 44,776 $ 45,092 $ 140,864 $ 129,112
Telecommunications Services 47,932 35,216 136,830 99,464
Financial Services 1,367 1,322 4,265 4,161
---------- ---------- ---------- ----------
Total Revenues 94,075 81,630 281,959 232,737
---------- ---------- ---------- ----------
COST OF SALES:
Products and Systems 33,159 33,130 103,585 96,001
Telecommunications Services 34,364 24,748 98,319 69,105
Financial Services 491 570 1,558 1,725
---------- ---------- ---------- ----------
Total Cost of Sales 68,014 58,448 203,462 166,831
---------- ---------- ---------- ----------
GROSS MARGIN 26,061 23,182 78,497 65,906
Selling, General
& Administrative Expenses 20,935 19,032 65,058 55,015
---------- ---------- ---------- ----------
OPERATING INCOME 5,126 4,150 13,439 10,891
Interest Expense (571) (317) (1,332) (1,165)
Interest and Other Income (Expense), Net (11) (11) (32) 65
---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 4,544 3,822 12,075 9,791
Provision for Income Taxes 1,829 1,529 4,992 3,916
---------- ---------- ---------- ----------
NET INCOME $ 2,715 $ 2,293 $ 7,083 $ 5,875
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ .29 $ .26 $ .75 $ .65
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 9,494 9,030 9,409 8,990
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
FEBRUARY 1, APRIL 30,
1997 1996
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 740 $ 1,133
Accounts receivable, net of allowances for doubtful
accounts of $1,412 and $1,079 75,337 55,723
Current lease receivables 15,708 15,316
Inventories 9,736 10,964
Costs and estimated earnings in excess of billings of
$13,413 and $13,528 11,296 5,202
Prepaid income taxes 3,964 3,427
Prepaid expenses, deposits and other 3,382 2,443
----------- -----------
TOTAL CURRENT ASSETS 120,163 94,208
----------- -----------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment 87,840 75,126
Less-accumulated depreciation and amortization (44,828) (40,815)
----------- -----------
NET PROPERTY AND EQUIPMENT 43,012 34,311
----------- -----------
OTHER ASSETS:
Lease receivables, net of current maturities 25,133 24,556
Franchise rights and other intangible assets,
net of amortization of $5,296 and $3,991 22,539 7,421
Other 15 492
----------- -----------
TOTAL OTHER ASSETS 47,687 32,469
----------- -----------
$ 210,862 $ 160,988
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
FEBRUARY 1, APRIL 30,
1997 1996
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 391 $ --
Current maturities of discounted lease rentals 12,551 12,202
Accounts payable 22,787 15,053
Deferred revenue 18,557 17,856
Accrued -
Salaries and wages 9,354 10,424
Warranty costs 2,184 1,655
Other liabilities 7,679 6,880
Income taxes payable 863 668
Billings in excess of costs and estimated earnings of $14,107
and $12,595 6,359 4,571
----------- -----------
TOTAL CURRENT LIABILITIES 80,725 69,309
----------- -----------
LONG-TERM DEBT, net of current maturities 21,979 --
DISCOUNTED LEASE RENTALS, net of current maturities 18,637 15,961
DEFERRED INCOME TAXES 9,783 8,201
----------- -----------
SHAREHOLDERS' EQUITY:
Common stock - $.10 par value; 40,000,000 authorized shares;
9,359,997 and 8,717,538 shares issued and outstanding 936 872
Capital in excess of par value 32,607 27,619
Retained earnings 47,058 39,975
Unamortized cost of stock (161) (94)
Foreign currency translation adjustments (702) (855)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 79,738 67,517
----------- -----------
$ 210,862 $ 160,988
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
UNAUDITED
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------
FEBRUARY 1, JANUARY 27,
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 7,083 $ 5,875
Adjustments to reconcile net income to net cash used by
operating activities:
Depreciation and amortization 9,506 8,443
Deferred income taxes 1,643 --
Changes in operating items:
Accounts receivable (15,438) (6,863)
Inventories 1,468 (781)
Costs and estimated earnings in excess of billings (6,083) 2,666
Prepaid expenses, deposits and other (836) (1,082)
Accounts payable 5,311 (2,805)
Deferred revenue 272 2,826
Accrued liabilities (2,111) (423)
Income taxes payable 331 411
Billings in excess of costs and estimated earnings 1,785 1,969
----------- -----------
Net cash provided by operating activities 2,931 10,236
----------- -----------
INVESTING ACTIVITIES:
Cash paid for acquisition, including acquisition costs
and net of cash acquired (11,794) --
Additions to property and equipment, net (16,675) (8,733)
Investment in lease contracts (17,773) (12,822)
Collections from lease contracts 16,849 13,862
Other, net 516 (123)
----------- -----------
Net cash used for investing activities (28,877) (7,816)
----------- -----------
FINANCING ACTIVITIES:
Borrowings under revolving credit agreements 181,775 87,735
Repayments under revolving credit agreements (160,250) (92,150)
Repayment of debt assumed in acquisition (1,743) --
Borrowings of long-term debt 105 --
Repayments of long-term debt (274) (93)
Borrowings of discounted lease rentals 12,502 10,720
Repayments of discounted lease rentals (9,506) (8,962)
Proceeds from sale of common stock 2,943 1,595
----------- -----------
Net cash provided by (used for) financing activities 25,552 (1,155)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1 (7)
----------- -----------
NET (DECREASE) INCREASE IN CASH (393) 1,258
CASH, BEGINNING OF PERIOD 1,133 1,308
----------- -----------
CASH, END OF PERIOD
$ 740 $ 2,566
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
4
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 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 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):
NINE MONTHS ENDED
--------------------------
FEBRUARY 1, JANUARY 27,
1997 1996
----------- -----------
Revenues $ 3,911 $ 3,751
Interest Expense (1,310) (1,407)
Other Expenses (901) (1,004)
----------- -----------
Income before provision for income taxes 1,700 1,340
Provision for income taxes (703) (536)
----------- -----------
Net Income $ 997 $ 804
----------- -----------
----------- -----------
5
<PAGE>
SUPPLEMENTAL CASH FLOW INFORMATION -
Supplemental disclosure of cash flow information is as follows (in thousands):
NINE MONTHS ENDED
--------------------------
FEBRUARY 1, JANUARY 27,
1997 1996
----------- -----------
Cash paid for:
Interest $ 2,936 $ 2,785
Income taxes $ 2,642 $ 3,471
Noncash investing and financing activities:
Stock issued for acquisition $ 2,000 $ --
Non-compete agreements related to acquisition $ 667 $ --
RECENTLY ISSUED ACCOUNTING STANDARD -
Effective May 1, 1996, the Company adopted the provisions of Financial
Accounting Standards Board (FASB) Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(Statement 121), which establishes accounting standards for the recognition and
measurement of impairment of long-lived assets, certain identifiable
intangibles, and goodwill either to be held or disposed of. The adoption of
Statement 121 did not have a material impact on the Company's financial position
or results of operations.
USE OF ESTIMATES -
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
periods presented. Estimates are used for such items as allowances for doubtful
accounts, inventory reserves, depreciable lives of property and equipment,
warranty reserves and other items. Ultimate results could differ from those
estimates.
6
<PAGE>
ACQUISITION -
On June 4, 1996, the Company acquired Connect Computer Company (Connect), in a
transaction accounted for under the purchase method. Connect is a provider of
consulting, design and implementation services for local and wide area networks,
internets and intranets, client server applications and workgroup computing,
with offices in Minneapolis, Milwaukee, and Des Moines.
The acquisition consideration totaled approximately $15 million, consisting of
$8.2 million cash and $2 million of Norstan common stock, as well as $2.7
million paid in exchange for all outstanding Connect stock options, $1.1 million
in bonuses paid to Connect management and employees, and $1 million payable to
certain members of Connect management under non-compete agreements. In
addition, the Company agreed to pay up to $4 million in contingent consideration
over a three year period ending April 30, 1999, if certain operating income
levels are achieved (as of February 1, 1997,
$2 million of such consideration has been accrued). The Company financed the
cash portions of the acquisition through borrowings under its existing credit
facility.
Pro forma information for this acquisition has not been disclosed as such
information was not materially different from the Company's results of
operations.
STOCK SPLIT -
On June 20, 1996, the Company's Board of Directors approved a two-for-one stock
split effected in the form of a stock dividend. The stock split has been
retroactively reflected in the accompanying consolidated financial statements
and related notes. All share and per share data have been restated to reflect
the stock split.
FORWARD-LOOKING STATEMENTS AND
FACTORS THAT MAY AFFECT FUTURE RESULTS -
From time to time, the Company may publish forward-looking statements relating
to such matters as anticipated financial performance, business prospects,
technological developments, new products, and similar matters. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements.
The risks and uncertainties that may affect the operations, performance,
developments and results of the Company's business include the following:
national and regional economic conditions; pending and future legislation
affecting the telecommunications industry; the Company's operations in Canada;
market acceptance of the Company's products and services; the Company's
continued ability to provide integrated communications solutions for customers
in a dynamic industry, as well as other competitive factors.
Because these and other factors could affect the Company's operating results,
past financial performance should not necessarily be considered as a reliable
indicator of future performance, and investors should not use historical trends
to anticipate future period results.
7
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY -
During the quarter ended February 1, 1997 the Company's net income improved
compared to the quarter ended January 27, 1996, increasing 18.4% to $2,715,000,
or $.29 per common share, compared to $2,293,000, or $.26 per common share. For
the nine month period ended February 1, 1997, the Company's net income increased
20.6% to $7,083,000, or $.75 per common share, compared to $5,875,000 or $.65
per common share, for the same period last year.
RESULTS OF OPERATIONS -
The Company's revenues consist of revenues from the sale of products and
systems, telecommunications services and financial services. Revenues from the
sale of products and systems result from the sale of new products and upgrades,
as well as refurbished equipment. Revenues from telecommunications services
result primarily from communications maintenance services, moves, adds and
changes, network integration services and long distance services. Financial
services revenues result primarily from leasing activities. The following table
sets forth, for the periods indicated, certain items from the Company's
consolidated statements of operations.
8
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
DOLLAR AMOUNTS AS A DOLLAR AMOUNTS AS A
PERCENTAGE OF REVENUES PERCENTAGE PERCENTAGE OF REVENUES PERCENTAGE
---------------------------- INCREASE ---------------------------- INCREASE
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 1, JANUARY 27, FISCAL FEBRUARY 1, JANUARY 27, FISCAL
1997 1996 1997 VS. 1996 1997 1996 1997 VS. 1996
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Sales of Products and Systems 47.6% 55.2% (0.7%) 50.0% 55.5% 9.1%
Telecommunications Services 51.0% 43.1% 36.1% 48.5% 42.7% 37.6%
Financial Services 1.4% 1.7% 3.4% 1.5% 1.8% 2.5%
------------- ------------- ------------- ------------- ------------- -------------
Total Revenues 100.0% 100.0% 15.2% 100.0% 100.0% 21.1%
COST OF SALES 72.3% 71.6% 16.4% 72.2% 71.7% 22.0%
------------- ------------- ------------- ------------- ------------- -------------
GROSS MARGIN 27.7% 28.4% 12.4% 27.8% 28.3% 19.1%
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 22.3% 23.3% 10.0% 23.1% 23.6% 18.3%
------------- ------------- ------------- ------------- ------------- -------------
OPERATING INCOME 5.4% 5.1% 23.5% 4.8% 4.7% 23.4%
Interest Expense and Other,
Net (0.6%) (0.4%) 77.4% (0.5%) (0.5%) 24.0%
------------- ------------- ------------- ------------- ------------- -------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 4.8% 4.7% 18.9% 4.3% 4.2% 23.3%
Provision for Income Taxes 1.9% 1.9% 19.6% 1.8% 1.7% 27.5%
------------- ------------- ------------- ------------- ------------- -------------
NET INCOME 2.9% 2.8% 18.4% 2.5% 2.5% 20.6%
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
</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
-------------------------- --------------------------
FEBRUARY 1, JANUARY 27, FEBRUARY 1, JANUARY 27,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
GROSS MARGIN PERCENTAGES:
Sales of Products and Systems 25.9% 26.5% 26.5% 25.6%
Telecommunications Services 28.3% 29.7% 28.1% 30.5%
Financial Services 64.1% 56.9% 63.5% 58.5%
</TABLE>
9
<PAGE>
RESULTS OF OPERATIONS
REVENUES. Revenues increased 15.2%, to $94,075,000 for the quarter
ended February 1, 1997 as compared to $81,630,000 for the similar period last
year. For the nine months ended February 1, 1997, revenues increased 21.1%, to
$281,959,000 as compared to $232,737,000 for the same period last year. For the
three and nine month periods ended February 1, 1997, sales of products and
systems decreased $316,000, or less than 1.0%, and increased $11,752,000, or
9.1%, as compared to the three and nine month periods ended January 27, 1996,
respectively.
Revenues from telecommunications services increased $12,716,000, or
36.1%, and $37,366,000, or 37.6%, in the comparable three and nine month
periods ended February 1, 1997 and January 27, 1996, respectively. Revenues
from telecommunications services generally have increased following the
growth in the sales of telecommunications products and systems. However, in
fiscal 1997, inclusion of Connect Computer's results of operations accounted
for approximately 80% and 65% of the increase in telecommunications services
revenues for the three and nine month periods ended February 1, 1997,
respectively. Revenues from financial services increased $45,000 or 3.4%,
and $104,000 or 2.5%, during the three and nine month periods ended February
1, 1997, respectively, as compared to the similar periods ended January 27,
1996.
During the second quarter ended November 2, 1996, the Company
reclassified as sales of products and systems approximately $3,000,000 in
revenues which were previously reported during the first quarter as
telecommunications services. This reclassification is reflected in the revenues
as listed for the nine months ended February 1, 1997 and had no impact on total
revenues or net income as previously reported for the first and second quarters
ended August 3, 1996 and November 2, 1996.
GROSS MARGIN. The Company's gross margin increased $2,879,000 or
12.4%, to $26,061,000 for the three months ended February 1, 1997 as compared to
$23,182,000 for the three months ended January 27, 1996. For the nine month
period ended February 1, 1997, gross margin increased $12,591,000, or 19.1%, to
$78,497,000 as compared to $65,906,000 for the similar period ended January 27,
1996. As a percent of total revenues, gross margin was 27.7% and 28.4% for the
three month periods ended February 1, 1997 and January 27, 1996, respectively.
For the nine month periods ended February 1, 1997 and January 27, 1996, gross
margin as a percent of revenues was 27.8% and 28.3%, respectively.
Gross margin as a percent of revenues for the sale of products and
systems was 25.9% and 26.5% for the three and nine month periods ended
February 1, 1997, respectively, and 26.5% and 25.6% for the comparable
periods ended January 27, 1996, respectively. Gross margin as a percent of
revenues for telecommunications services was 28.3% and 28.1% for the three
and nine month periods ended February 1, 1997, respectively, and 29.7% and
30.5% for the comparable periods ended January 27, 1996, respectively. The
respective increases and decreases in gross margin as a percent of revenues
for the sale of products and systems and telecommunications services were
generally the result of changes in the mix of products sold and services
provided. Gross margin as a percent of revenues for financial services was
64.1% and 63.5% for the three and nine month periods ended February 1, 1997,
respectively, and 56.9% and 58.5% for the similar periods ended January 27,
1996, respectively.
10
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1,903,000, or 10%, for the quarter ended
February 1, 1997 as compared to the quarter ended January 27, 1996. For the
nine months ended February 1, 1997, selling, general and administrative expenses
increased $10,043,000, or 18.3%, as compared to the similar period last year.
As a percent of revenues, selling, general and administrative expenses declined
to 22.3% and 23.1% for the three and nine month periods ended February 1, 1997,
respectively, as compared to 23.3% and 23.6% for the similar periods ended
January 27, 1996, respectively. These decreases in selling, general and
administrative expenses as a percent of revenues resulted from ongoing control
of these expenses and volume related efficiencies, as sales volume increased
without a proportionate increase in expenses. These efficiencies were offset by
approximately $365,000 and $875,000 of goodwill amortization related to the
acquisition of Connect for the three and nine month periods ended February 1,
1997, respectively.
OPERATING INCOME. Operating income increased $976,000, or 23.5%, to
$5,126,000 for the quarter ended February 1, 1997, as compared to $4,150,000 for
the quarter ended January 27, 1996. For the nine months ended February 1, 1997,
operating income increased $2,548,000, or 23.4%, to $13,439,000, as compared to
$10,891,000 for the similar period last year. As a percent of revenues,
operating income increased to 5.4% for the three month period ended February 1,
1997 as compared to 5.1% for the similar period ended January 27, 1996. For the
comparable nine month periods ended February 1, 1997 and January 27, 1996,
operating income as a percent of revenues increased to 4.8% from 4.7%.
OTHER COSTS AND EXPENSES. Interest expense increased to $571,000 as
compared to $317,000 for the three month periods ended February 1, 1997 and
January 27, 1996, respectively. For the nine month period ended February 1,
1997, interest expense increased to $1,332,000 from $1,165,000 for the similar
period last year. Average month end revolving credit balances (excluding
amounts borrowed to finance leasing activities) were approximately $23,600,000
for the nine months ended February 1, 1997 as compared to approximately
$22,500,000 for the nine months ended January 27, 1996.
The Company's effective tax rate was 40.3% and 41.3% for the three and
nine month periods ended February 1, 1997, respectively, as compared to 40% for
the similar periods ended January 27, 1996. The Company's effective tax rate
differs from the federal statutory rate primarily due to amortization of
goodwill and state income taxes. The provisions for income tax have been
recorded based upon management's estimate of the annualized effective tax rate.
NET INCOME. Net income was $2,715,000, or $.29 per common share, and
$2,293,000, or $.26 per common share, for the quarters ended February 1, 1997
and January 27, 1996, respectively. Net income was $7,083,000, or $.75 per
common share, and $5,875,000, or $.65 per common share, for the nine month
periods ended February 1, 1997 and January 27, 1996, respectively.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. Working capital increased to $39,438,000 at
February 1, 1997 from $24,899,000 at April 30, 1996. The current ratio was 1.49
to 1.0 at February 1, 1997 as compared to 1.36 to 1.0 at April 30, 1996.
Operating activities provided net cash of $2,931,000 and $10,236,000 for the
nine months ended February 1, 1997 and January 27, 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 Norstan Financial Services, Inc. (NFS) and
Norstan Canada Inc. (Norstan Canada), respectively. Borrowings under this
agreement are due July 31, 1999, and bear interest at the banks' reference rate
(8.25% at February 1, 1997 and April 30, 1996), except for LIBOR, CD and
commercial paper based options which generally bear interest at a rate lower
than the banks' reference rate. Total consolidated borrowings under this
agreement at February 1, 1997, were $21,525,000. There were no borrowings under
this agreement at April 30, 1996. There were no borrowings on account of NFS or
Norstan Canada at February 1, 1997, or April 30, 1996. Borrowings by the
Company in fiscal 1997 and 1996 have been for working capital and general
corporate purposes, as well as to invest in property and equipment. In
addition, during fiscal 1997 borrowings were made to finance the acquisition of
Connect Computer Company.
Net capital expenditures for the nine months ended February 1, 1997
were $16,675,000 and $8,733,000 for the similar period last year. These
expenditures were primarily for the purchase of telecommunications equipment
which is used as spare parts and for outsourcing arrangements, computer
equipment and other facility expansion. At February 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
investment in lease contracts totaled $17,773,000 for the nine months ended
February 1, 1997 and $12,822,000 for the similar period last year. Net lease
receivables increased to $40,841,000 at February 1, 1997 as compared to
$39,872,000 at April 30, 1996.
In June 1996, the Company acquired all of the common stock of Connect
Computer Company (Connect), a provider of consulting, design and implementation
services. The acquisition consideration totaled approximately $15 million,
consisting of $8.2 million cash and $2 million of Norstan common stock, as well
as $2.7 million paid in exchange for all outstanding Connect stock options, $1.1
million in bonuses paid to Connect management and employees, and $1 million
payable to certain members of Connect management under non-compete agreements.
In addition, the Company has agreed to pay up to $4 million in contingent
consideration over a three year period ending April 30, 1999, if certain
operating income levels are achieved. Based on projected results for fiscal
1997, $2 million of such consideration has been accrued.
12
<PAGE>
Norstan Financial Services, Inc. (NFS) and Norstan Canada Inc. utilize
their lease receivables and corresponding underlying equipment to borrow funds
from financial institutions at fixed rates on a nonrecourse or recourse basis by
discounting the stream of future lease payments. Proceeds from discounting are
presented on the consolidated balance sheets as discounted lease rentals.
Interest rates on these credit agreements range from 6% to 10%, and payments are
generally due in varying monthly installments through September 2002. Payments
due financial institutions on a monthly basis are made from monthly collections
of lease receivables from customers.
Discounted lease rentals consisted of the following (in thousands):
FEBRUARY 1, APRIL 30,
1997 1996
----------- -----------
Nonrecourse borrowings $ 30,581 $ 26,467
Recourse borrowings 607 1,696
----------- -----------
Total discounted lease rentals 31,188 28,163
Less-current maturities (12,551) (12,202)
----------- -----------
$ 18,637 $ 15,961
----------- -----------
----------- -----------
In addition to the recourse as described previously, recourse to
Norstan, Inc. relative to discounted lease rentals was limited to $433,000 as of
February 1, 1997 and $883,000 as of April 30, 1996.
Management of the Company believes that a combination of cash to be
generated from operations, existing bank facilities and available borrowing
capacity, in aggregate, are adequate to meet the anticipated liquidity and
capital resource requirements of its business. Sources of additional financing,
if needed, may include further debt financing or the sale of equity or other
securities.
13
<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 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.
14
<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.
NORSTAN, INC.
---------------------------------------------
Registrant
Date: March 14, 1997 By /s/ Paul Baszucki
-----------------------------------------
Paul Baszucki
Co-Chairman of the Board
and Chief Executive Officer
Date: March 14, 1997 By
-----------------------------------------
Richard Cohen
Vice Chairman of the Board
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
15
<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
------------------------- -------------------------
FEBRUARY 1, JANUARY 27, FEBRUARY 1, JANUARY 27,
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE -
Weighted average number of
issued shares outstanding 9,277 8,522 9,070 8,468
Effect of:
1986 Long-Term Incentive Plan 134 400 229 416
1995 Long-Term Incentive Plan 40 - 23 -
Restated Non-Employee Directors'
Stock Plan 32 96 76 96
Employee Stock Purchase Plan 11 12 11 10
---------- ---------- ---------- ----------
Shares outstanding used to compute
primary earnings per share 9,494 9,030 9,409 8,990
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income $ 2,715 $ 2,293 $ 7,083 $ 5,875
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
PRIMARY EARNINGS PER SHARE $ .29 $ .26 $ .75 $ .65
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
FULLY DILUTED EARNINGS PER SHARE -
Weighted average number of shares
used for primary earnings per share 9,494 9,030 9,409 8,990
Effect of:
1986 Long-Term Incentive Plan - - 1 6
1995 Long-Term Incentive Plan - - 2 -
Restated Non-Employee Directors'
Stock Plan - - 1 2
Employee Stock Purchase Plan - - 1 2
---------- ---------- ---------- ----------
Shares outstanding used to compute
fully diluted earnings per share 9,494 9,030 9,414 9,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income $ 2,715 $ 2,293 $ 7,083 $ 5,875
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
FULLY DILUTED EARNINGS PER SHARE $ .29 $ .26 $ .75 $ .65
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> FEB-01-1997
<CASH> 740
<SECURITIES> 0
<RECEIVABLES> 76,749
<ALLOWANCES> 1,412
<INVENTORY> 9,736
<CURRENT-ASSETS> 120,163
<PP&E> 87,840
<DEPRECIATION> 44,828
<TOTAL-ASSETS> 210,862
<CURRENT-LIABILITIES> 80,725
<BONDS> 40,616
936
0
<COMMON> 0
<OTHER-SE> 78,802
<TOTAL-LIABILITY-AND-EQUITY> 210,862
<SALES> 140,864
<TOTAL-REVENUES> 281,959
<CGS> 103,585
<TOTAL-COSTS> 203,462
<OTHER-EXPENSES> 65,090
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,332
<INCOME-PRETAX> 12,075
<INCOME-TAX> 4,992
<INCOME-CONTINUING> 7,083
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,083
<EPS-PRIMARY> .75
<EPS-DILUTED> .75
</TABLE>
