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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-8141
NORSTAN, INC.
(Exact name of registrant as specified in its chapter)
MINNESOTA 41-0835746
(State of incorporation) (I.R.S. Employer identification No.)
5101 SHADY OAK ROAD, MINNETONKA, MINNESOTA 55343
(Address of principal executive offices)
The Company's phone number: 612-352-4000 The Company's internet address: WWW.NORSTAN.COM
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK ($.10 PAR VALUE PER SHARE)
COMMON STOCK PURCHASE RIGHTS
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
As of July 14, 1999, the aggregate market value of the voting stock held
by non-affiliates of the registrant, computed by reference to the average
high and low prices on such date as reported by the Nasdaq National Market
System was approximately $126,941,000.
As of July 14, 1999, there were outstanding 10,791,726 shares of the
registrant's common stock, par value $.10 per share, its only class of equity
securities.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed
within 120 days after the end of the fiscal year covered by this report are
incorporated by reference into Part III hereof.
i
TABLE OF CONTENTS
PART I PAGE
----
ITEM 1. Business..................................................... 1
Summary.................................................... 1
Industry Overview.......................................... 2
The Norstan Solution....................................... 2
Norstan's Business Strategy............................... 3
Norstan's Growth Strategy.................................. 3
Products and Services...................................... 4
Customers.................................................. 7
Strategic Alliances........................................ 7
Sales and Marketing........................................ 7
Customer Service........................................... 8
Locations.................................................. 9
Human Resources............................................ 10
Competition................................................ 10
Intellectual Property Rights............................... 11
Government Regulation...................................... 11
Backlog.................................................... 11
ITEM 2. Properties................................................... 12
ITEM 3. Legal Proceedings............................................ 12
ITEM 4. Submission of Matters to a Vote of Security Holders.......... 12
PART II
ITEM 5. Market for the Company's Common Equity and Related Shareholder
Matters ..................................................... 13
ITEM 6. Selected Consolidated Financial Data......................... 14
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 15
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk.... 21
ITEM 8. Financial Statements and Supplementary Data.................. 22
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 40
PART III
ITEM 10. Directors and Executive Officers of the Registrant........... 40
ITEM 11. Executive Compensation....................................... 40
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 40
ITEM 13. Certain Relationships and Related Transactions............... 40
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K..................................................... 41
SIGNATURES 42
ii
PART I
ITEM 1. BUSINESS.
BUSINESS
SUMMARY
Norstan is a leading provider of communication and information technology
("IT") solutions for over 18,000 customers in the United States, Canada and
England. To address the complex communication requirements of its customers,
Norstan provides a broad range of products and services, including telephone
systems, call center systems, voice processing, network integration, voice
and video conferencing, and facilities management services. Norstan's network
of approximately 700 field technicians and service consultants delivers
communication services to its customers. In addition, the Company provides a
wide array of IT solutions through IT Consulting Services. These solutions
include the design, implementation, maintenance and modification of IT
applications and systems. IT Consulting Services currently employs over 800
consultants and generated a 49% increase in revenues during fiscal year 1999.
As communication and information technologies converge, Norstan's strategy is
to expand the breadth of its IT consulting services offerings to serve as a
single-source provider of leading technology solutions to its customers.
The Company delivers its products and services through three business
units, Global Services, Communication Solutions and Financial Services, which
accounted for 56.8%, 41.6% and 1.6% of Norstan's fiscal year 1999 revenues,
respectively. Global Services includes IT Consulting Services and
Communication Services (see Note 12 to the Company's consolidated financial
statements for financial information concerning each segment's operations).
IT Consulting Services provides IT services including enterprise resource
planning ("ERP") and enterprise resource management ("ERM") package
implementation, Internet/Intranet/E-commerce solutions, multiservice
networking services, strategic advisory services, application development and
infrastructure services and outsourced facilities management. Communication
Services provides customer support services for communication systems,
including maintenance services, systems modifications and long distance
services. Communication Solutions provides a broad array of solutions
including telephone systems, integrated voice processing, call center
technologies and video/audio/data conferencing solutions. Financial Services
supports the sales process by providing customized financing alternatives.
The Company believes that its breadth of product and service offerings
fosters long-term customer relationships, affords cross-selling opportunities
and minimizes the Company's dependence on any single technology or industry.
The Company operates in 73 locations in 63 cities throughout the United
States and Canada (see Note 12 to the Company's consolidated financial
statements for financial information concerning the Company's Canadian
operations). Norstan has served over 18,000 customers across a broad range of
industries in the last three years and focuses its marketing efforts on
middle-market and Fortune 500 companies with complex technology and
communication requirements. Current customers include BP Amoco, IBM, Kellogg
Company, John Deere, US Bancorp, 3M and Harley-Davidson. The Company believes
that its installed base of communication systems customers will offer
extensive opportunities for cross-selling IT consulting services. Management
also believes that IT Consulting Services customers will be a source of
additional communication business. Norstan's strong emphasis on customer
satisfaction is evidenced by a survey of Norstan's communication customers,
in which Norstan received an overall satisfaction rating of 91% in fiscal
year 1999. The Company believes that its outstanding customer service will
enable Norstan to capture a greater portion of each customer's communication
and IT budgets in the future.
Norstan provides leading-edge technologies in both its IT and
communication operations. The Company has established strategic alliances
with leading IT and communication companies that allow Norstan to offer
objective solutions to its customers. IT strategic alliance partners include
IBM, Siebel Systems, Oracle, Lotus, PeopleSoft, Tivoli, Novell and Microsoft.
Communication strategic alliance partners include Siemens, Aspect, VTEL,
PictureTel, Latitude, Cisco Systems, Sprint, Lucent Technologies (formerly
Octel) and Applied Voice Technology.
1
INDUSTRY OVERVIEW
In the current climate of intense global competition and accelerating
technological change, businesses increasingly depend upon technology-based
solutions to enhance their competitive position, and to improve their
productivity and the quality of their products and services. Today's business
environment mandates the availability of efficient voice and video
communication channels and information in formats suited to a wide variety of
users. Accordingly, businesses are looking to a variety of new technologies
to enhance the performance of their communication systems and to allow IT
systems to collect, analyze and communicate information within the enterprise
and among customers and suppliers. An organization's ability to integrate and
deploy new communication and IT technologies in a unified and cost-effective
manner has become critical to competing successfully in today's rapidly
changing business environment.
While organizations recognize the importance of communication and IT
systems in this business environment, the selection, implementation,
customization and maintenance of these systems are becoming more complex and
the resources required to perform these tasks are becoming increasingly
scarce. Faced with a shortage of qualified technical resources and great
demands to implement the latest technology, customers are increasingly
relying on outside vendors to provide the necessary resources. By outsourcing
communication and IT services, companies are able to focus on their core
businesses; access specialized technical skills; implement solutions more
rapidly; benefit from flexible staffing; and reduce the cost of recruiting,
training and retaining communication and IT professionals.
As a result of these factors, demand for IT and communication services
and products has grown significantly. The 1998 worldwide market for IT
services was estimated at $350 billion and is projected to grow to $620
billion by 2002 according to Dataquest, a leading IT market research and
consulting firm. Dataquest also estimates that the market for these services
is projected to grow at a 15% compound annual growth rate. For calendar year
1998, Phillips InfoTech, (InfoTech), a market research firm specializing in
telecommunications market information, estimates that the U.S. market for
switching, networking and application equipment was over $17 billion, and the
U.S. market for telecommunications maintenance and professional services was
estimated to be approximately $4 billion. As customers seek the competitive
advantages that advanced communication and computer telephony integration can
deliver, growth of certain segments of call processing are expected to be
particularly strong. According to InfoTech, between 1998 and 2002, the U.S.
market for voice mail, interactive voice response units, networking
equipment, and other telecommunications peripherals and applications is
expected to grow at a compound annual growth rate of approximately 8%. By
2002, the U.S. market for these associated applications and peripherals is
projected to be over $15 billion.
The markets and technologies for communication equipment and IT
applications and systems continue to converge as communication equipment
migrates from proprietary switches to software-driven systems operating on
standardized computer platforms. As a result, businesses are integrating
their communication and IT systems. In addition, many middle-market and
Fortune 500 companies rely on multiple, often specialized, providers to help
implement and manage their communication and IT systems. The Company believes
that relying on multiple service providers, where there is no distinct
responsible party, creates vendor relationships that are difficult and
expensive to manage and adversely impacts the quality and compatibility of
communication and IT solutions. As previously separate communication and IT
technologies converge and their interoperability increases, more
organizations will seek a unified technology solution. Norstan believes that
these organizations will attempt to reduce costs and management complexity by
establishing relationships with a small number of providers that offer a
broad range of both communication and IT products and services throughout the
full life cycle of a project.
THE NORSTAN SOLUTION
The Company is a single-source provider of a wide range of communication
and IT solutions that enable its customers to compete and succeed in the
global marketplace. The Company has leveraged its established reputation as a
provider of premier communication products and services, along with the
capability of its more than 800 IT consultants, to deliver a unified
communication and IT solution to middle-market and Fortune 500 companies.
This broad range of offerings enables Norstan to serve as a single-source
provider of communication and IT solutions throughout the entire life cycle
of a project. Norstan's ability to serve as a single-source provider results
in closer integration, reduced risk and greater management control for the
customer. The Company believes that its customer relationships, its
geographic reach and size, and its expertise in providing both communication
and IT solutions will enable it to capitalize on the continuing growth and
convergence of communication and IT needs of middle-market and Fortune 500
companies.
2
NORSTAN'S BUSINESS STRATEGY
The Company's objective is to become a leading provider of communication
and IT offerings to middle-market and Fortune 500 companies. The Company's
strategy to achieve this objective includes the following key elements:
CAPITALIZE ON THE ACCELERATING CONVERGENCE OF COMMUNICATION AND
INFORMATION TECHNOLOGIES. Norstan's established communication expertise,
coupled with its IT consulting capabilities, positions the Company to exploit
the convergence of voice, video and information technologies onto a single
platform. Norstan believes that it is one of the few firms offering this
combination of skills and services, enabling the Company to serve as a
single-source provider of a unified technology solution.
INCREASE FOCUS ON PROVIDING TECHNOLOGY SERVICES. As communication and
information technologies converge, the Company intends to increase its
percentage of revenues derived from technology services, which typically
command higher margins than product sales. Management believes that its
increased focus on technology services will enhance its overall
profitability. Over the last three fiscal years, revenues from Norstan's
Global Services business unit increased at a 26% annual compound growth rate
and accounted for over 56.8% of revenues in fiscal year 1999.
OFFER A BROAD RANGE OF COMMUNICATION AND IT SOLUTIONS. Norstan's broad
range of voice, video and data solutions allows the Company to serve as a
single-source provider for its customers' communication and IT needs. The
ability to provide consulting services, hardware, software, training and
on-going support enables Norstan to offer a unified communication and IT
solution throughout the life cycle of a project. This capability will become
increasingly important as communication and information technologies continue
to converge and customers look to retain a single-source provider for all
their communication and IT needs.
ATTRACT, DEVELOP AND RETAIN HIGHLY SKILLED PROFESSIONALS. The Company
seeks to attract, develop and retain the highest caliber of communication and
IT consultants. Norstan places a strong emphasis on the career development
and training of its IT consultants through its Team Manager program. Team
Managers provide career guidance and ensure that employees maintain skills in
state-of-the-art technologies. Norstan offers a competitive combination of
employee benefits and incentives, including employee stock option and stock
purchase programs, as well as incentive compensation based on the amount
billed by individual consultants.
PROVIDE SUPERIOR CUSTOMER SERVICE. Norstan believes its dedication to
providing service beyond its customers' expectations has produced many
favorable customer relationships and resulted in increased exposure to
potential customers. Norstan's strong emphasis on customer satisfaction is
evidenced by a survey of Norstan's communication customers, in which Norstan
received an overall satisfaction rating of 91% in fiscal year 1999. The
Company believes that its reputation for superior service will lead to
opportunities for cross-selling additional products and services to its
customer base.
OFFER LEADING-EDGE TECHNOLOGIES. Norstan maintains several strategic
alliances with business partners that allow it to offer leading-edge
technologies. IT strategic alliance partners include IBM, Siebel Systems,
Oracle, Lotus, PeopleSoft, Tivoli, Novell and Microsoft. Communication
strategic alliance partners include Siemens, Aspect, VTEL, PictureTel,
Latitude, Cisco Systems, Sprint, Lucent Technologies (formerly Octel) and
Applied Voice Technology. These strategic alliances provide the Company with
access to training, product support and current technology as well as the use
of the "business partner" designation in marketing the Company's products and
services. The Company intends to strengthen its existing alliances and pursue
additional alliances with leading technology companies.
NORSTAN'S GROWTH STRATEGY
To achieve its growth objectives, the Company has adopted the following
strategies:
CONTINUE INTERNAL GROWTH OF NORSTAN IT CONSULTING SERVICES. The Company
seeks to continue the rapid growth of IT Consulting Services by opening
branch locations in targeted geographic markets. During fiscal year 1999, IT
Consulting Services generated 22% internal revenue growth and opened five new
branch locations in San Diego, CA, Kansas City, KS, Detroit, MI, Parsippany,
NJ and Warren, NJ. Driven by customer demand, Norstan will continue to expand
into other geographic markets. In addition, the Company intends to leverage
existing communication locations through cross-selling efforts and the
aggressive recruitment of IT consultants.
PURSUE COMPLEMENTARY IT SERVICES ACQUISITIONS. To capitalize on the
highly fragmented nature of the IT services industry, the Company intends to
grow IT Consulting Services through acquisitions. Building on its experience
of acquiring communication companies over the last ten years, Norstan has
completed four acquisitions of IT services businesses since 1996. The Company
will target additional acquisitions that provide complementary expertise,
expand its domestic and international geographic presence, diversify its
customer base and increase its consulting resources.
3
LEVERAGE EXISTING CUSTOMER RELATIONSHIPS. Norstan intends to grow its
technology services business by leveraging the Company's existing base of
over 18,000 customers. These relationships provide Norstan with significant
advantages in marketing new communication and IT services and solutions.
Management believes the convergence of communication and information
technologies, together with the Company's high level of customer
satisfaction, will position Norstan to become a preferred provider of both
communication and IT solutions.
PRODUCTS AND SERVICES
Norstan provides customers with a single source for a broad range of
communication and IT products and services to design, develop and implement
technology solutions in a variety of customer environments. These products
and services are delivered through three business units, Global Services,
Communication Solutions and Financial Services.
GLOBAL SERVICES. Global Services, which represented 56.8% of the
Company's fiscal year 1999 revenues, consists of two operating groups: IT
Consulting Services and Communication Services. The following table
summarizes the products and services provided by these two groups.
4
GLOBAL SERVICES
IT CONSULTING SERVICES
CATEGORY OF SERVICE DESCRIPTION OF SERVICES
------------------- -----------------------
E-Commerce - Develop E-Commerce and supply chain strategies
- Develop and implement web applications
- Provide Intranet consulting services
- Develop on-line business models
- Provide EDI consulting services
Strategic Advisory Services - Develop strategic IT plans
- Provide business transformation and technology
planning consulting services
- Provide information management consulting
- Provide change management and knowledge
management consulting services
Enterprise Relationship Management - Implement and customize marketing and
sales force automation packaged software solutions
- Develop and implement call center strategies and
solutions
- Provide application portfolio selection and assembly
services
- Develop customer service/field service applications
Enterprise Resource Planning - Implement and customize Oracle and PeopleSoft
packaged software solutions
- Provide data warehousing and business intelligence
consulting services
- Provide application portfolio selection and
services
- Develop and implement web enablement
Application Development & - Design and develop applications
Infrastructure Services - Develop and implement groupware/messaging applications
- Manage and monitor customer's network operations
- Design and implement technical architecture
- Provide standard/custom technical education and training
services
Multiservice Networking - Develop and implement call center solutions
- Integrate computer/telephony applications
- Provide audio, video and data conferencing services
- Provide network communication and architecture
consulting services
- Provide unified messaging and IP telephony consulting
services
Managed Services - Manage networks and systems
- Support and maintain applications
- Perform product procurement and integration
- Manage customer's communication operations
5
COMMUNICATION SERVICES
CATEGORY OF SERVICE DESCRIPTION OF SERVICES
------------------- -----------------------
Communication Maintenance - Provide maintenance services on customers'
Services communication systems hardware
Moves, Adds and Changes - Transfer telephone systems to new user locations
- Add telephones or expansion cards in a telephone system
- Change system and user features
Long Distance Services - Offer a full range of long distance and network
services
COMMUNICATION SOLUTIONS. Communication Solutions, which represented 41.6%
of the Company's fiscal year 1999 revenues, focuses on the design, sale and
implementation of communication and other technology equipment. Communication
Solutions provides the following products and services:
COMMUNICATION SOLUTIONS
CATEGORY OF PRODUCT OR SERVICE DESCRIPTION OF PRODUCTS AND SERVICES
------------------------------ ------------------------------------
Telephone Systems - Design, install and implement PBX systems and other
telephone switching systems
- Supply PBX and other telephone switching systems
Call Center Systems - Design, install and implement call center systems
- Supply call center systems
Call Processing Systems - Design, install and implement voice response and
voice messaging products
- Supply voice response and voice messaging products
Conferencing Systems - Design, install and implement conferencing systems
- Provide audio, video and data conferencing products
Refurbished Equipment - Refurbish and resell previously owned Siemens,
Nortel, Iwatsu, Aspect and Isoetec products
FINANCIAL SERVICES. Financial Services, which represented 1.6% of the
Company's fiscal year 1999 revenues, provides customers with efficient and
competitive financing for the purchase or lease of products and services.
Financial Services supports the sales process by offering customized lease
structures that eliminate the need for third party financing.
6
CUSTOMERS
Norstan focuses its marketing efforts on middle-market and Fortune 500
companies with complex communication and IT requirements. Norstan has served
over 18,000 customers across a broad range of industries over the last three
fiscal years. No single customer accounted for more than 5% of Norstan's
total revenue during any of the last three fiscal years.
Norstan customers include the following:
IT CONSULTING SERVICES
3M Harley-Davidson Nationwide Insurance
Acer Invacare Old Mutual
American Electric Power John Deere State Farm Insurance
American Express Kellogg Company StorageTek
Becton Dickinson Lucent Technologies SuperValu
Grand Metropolitan Michelin Williams-Sonoma
COMMUNICATION SERVICES AND COMMUNICATION SOLUTIONS
American Freightways Cargill Imation
BP Amoco Fortis Insurance Medtronic
Best Buy Harley-Davidson Marquette University
CIBC IBM US Bancorp
STRATEGIC ALLIANCES
The Company believes that its relationships with a wide range of leading
technology companies position Norstan to deliver the appropriate solution to
each customer. IT strategic alliance partners include IBM, Siebel Systems,
Oracle, Lotus, PeopleSoft, Tivoli, Novell and Microsoft. In addition, Siebel
Systems, a leading customer care and sales automation software provider, has
granted Premier Consulting Partner status to Connaissance Consulting (a
majority-owned Norstan affiliate).
Communication strategic alliance partners include Siemens, Aspect, VTEL,
PictureTel, Latitude, Cisco Systems, Sprint, Lucent Technologies (formerly
Octel) and Applied Voice Technology. In addition, the Company distributes
complementary communication products that fit specific segments of the
marketplace. These include hybrid switching systems, personal computer-based
voice processing and video conferencing systems, as well as data
communication products from Novell, Newbridge and others.
Norstan has been a distributor of Siemens communication equipment since
1976 and is Siemens' largest independent distributor in North America. The
term of the current distributor agreement with Siemens, signed in January
1999, is five years. Norstan and Siemens have also renewed an agreement
through July 27, 2003 under which Norstan is an authorized agent for the
refurbishment and sale of previously owned Siemens equipment.
SALES AND MARKETING
Norstan has approximately 500 sales and marketing personnel within the
United States and Canada. The sales force includes product and service
specialists with expertise in IT consulting services, video conferencing,
call centers, communication services, education and training, and other
areas. These specialists partner with the sales representatives who have
primary responsibility for the customer relationship to develop integrated
technology solutions which address the specific technology needs of Norstan's
customers. Norstan uses several techniques to pursue new customer
opportunities, including telemarketing, seminars, participation in trade
shows and advertising. Norstan also maintains a new account sales team to
pursue new customer prospects.
Norstan's sales representatives and specialists use a comprehensive
approach to evaluate each customer's technology needs. The sales
representative begins with a detailed analysis of the customer's current and
future communication and IT systems requirements. After determining the
customer's needs, the sales representative and product specialist develop a
solution that satisfies current and anticipated requirements. Norstan's
consulting and operations teams then work with the customer to plan the
delivery and implementation of the solution and to identify required
training. By planning the precise requirements of each phase of the solution
delivery, Norstan's specialists are able to minimize service interruption for
the customer. Norstan also provides an ongoing support program tailored to
meet the customer's specific application requirements that incorporates
remote diagnostics, in-field service and support, additional training and
help desk support from Norstan's customer support representatives.
7
Norstan's marketing strategy is to capture a larger portion of existing
customers' communication and IT budgets and to identify and develop new
customer relationships. In particular, the Company believes that its
installed base of communication systems customers offers extensive
opportunities for the marketing of IT consulting services. Management also
believes that Norstan IT Consulting Services will be a source of additional
communication business. Norstan anticipates that its high quality customer
service will support ongoing marketing efforts, as satisfied customers are
more likely to choose Norstan to supply additional communication and IT
products and services.
CUSTOMER SERVICE
Norstan believes that providing exceptional customer service is an
important element of its ability to compete effectively in the communication
and IT marketplace. Norstan has invested heavily in new technology that is
designed to enable the Company to resolve a substantial portion of customer
support and service issues quickly and remotely. Norstan coordinates its
customer service response through three remote diagnostics and dispatch
centers located in the Minneapolis, Cleveland and Toronto areas. In fiscal
year 1999, these centers handled over 170,000 customer calls with
approximately 53% of the service-related calls addressed remotely. Only 18%
of customer calls were resolved remotely in fiscal year 1994. The Company's
goal for fiscal year 2000 is to resolve in excess of 55% of service calls
remotely. For calls requiring immediate on-site service and support, Norstan
maintains a highly trained force of service technicians, design engineers and
customer support representatives.
Norstan has approximately 120 employees in its three remote diagnostics
and dispatch centers devoted primarily to providing customer service and has
over 400 service technicians in the field. With Norstan's remote problem
resolution capability and its highly trained staff of technicians, Norstan is
able to promptly resolve customer support requests. Norstan's commitment to
customer service is evidenced by a recent survey of Norstan's Communication
customers that found an overall satisfaction rating of 91% in fiscal year
1999.
8
LOCATIONS
The Company currently supports its IT Consulting Services, Communication
Services and Communication Solutions customers with locations in the United
States and Canada. Driven by customer demand, Norstan will continue to add
new IT Consulting Services branches during fiscal year 2000. The Company
maintains the following 73 locations in 63 cities:
IT CONSULTING SERVICES
Atlanta, GA Des Moines, IA Phoenix, AZ
Baltimore, MD Detroit, MI Pittsburgh, PA
Champaign, IL Greensboro, NC Raleigh, NC
Charlotte, NC Greenville, SC Richmond, VA
Chicago, IL Indianapolis, IN San Diego, CA
Cincinnati, OH Kansas City, KS San Francisco, CA
Cleveland, OH Milwaukee, WI St. Louis, MO
Columbia, SC Minneapolis, MN Warren, NJ
Columbus, OH Omaha, NE
Denver, CO Parsippany, NJ
COMMUNICATION SERVICES AND COMMUNICATION SOLUTIONS
Albuquerque, NM Edmonton, Alberta Oklahoma City, OK
Amarillo, TX El Paso, TX Omaha, NE
Appleton, WI Fargo, ND Ottawa, Ontario
Austin, TX Las Vegas, NV Phoenix, AZ
Baton Rouge, LA Lexington, KY Pittsburgh, PA
Birmingham, AL Little Rock, AR Rochester, MN
Calgary, Alberta London, Ontario Shreveport, LA
Cedar Rapids, IA Louisville, KY Sioux Falls, SD
Chicago, IL Lubbock, TX Springdale, AR
Cincinnati, OH Madison, WI Toledo, OH
Cleveland, OH Milwaukee, WI Toronto, Ontario
Columbus, OH Minneapolis, MN Tucson, AZ
Davenport, IA Mobile, AL Tulsa, OK
Dayton, OH Montreal, Quebec Vancouver, British Columbia
Des Moines, IA New Orleans, LA Winnipeg, Manitoba
9
HUMAN RESOURCES
As of April 30, 1999, Norstan had 2,657 regular employees, of which over
800 were IT consulting personnel and approximately 700 were communication
field technicians and service consultants. U.S. operations totaled 2,471
employees, including approximately 100 who are covered by collective
bargaining agreements. The Company's Canadian operations had a total of 186
employees.
The Company's success depends in large part on its ability to attract,
develop, motivate and retain highly skilled IT consultants. Qualified
technical employees are in great demand and are likely to remain a limited
resource for the foreseeable future. To retain these resources, Norstan
places a strong emphasis on the career development and training of its IT
consultants and has implemented several unique programs, including its Team
Manager initiative. Team Managers ensure that employee skills remain current
with the industry and that the employee is given adequate development
experiences to create a fulfilling work environment. Norstan also offers a
competitive combination of employee benefits and incentives, including
employee stock options, stock purchase programs and an attractive
revenue-sharing arrangement whereby an individual consultant's base
compensation is supplemented with a percentage of the revenue that the
individual bills.
Norstan also dedicates significant resources to recruiting consultants
with specific technical and industry expertise. In connection with its hiring
efforts, the Company employs internal recruiters and relies on personal and
business contacts to recruit professionals through referrals, contacts at
trade shows and job fairs.
The Company uses formal training programs to further develop its
professional resources. The Company also uses mentoring by placing junior IT
professionals under the guidance of senior IT professionals on certain
customer engagements. In addition, in order to expand the skills and develop
the careers of the Company's consultants and technical staff, the Company
maintains access to computer-based training resources covering 450 course
topics.
COMPETITION
The communication industry is intensely competitive and rapidly changing.
Norstan's primary competitors in this area include Lucent Technologies,
Nortel and the RBOCs. Many of its competitors have longer operating
histories, greater financial and human resources, and greater name
recognition than Norstan. The passage of the Telecommunications Act of 1996
has fostered competition by providing access to a number of entities that
were previously precluded from the industry. As a result of this legislation,
the pace of consolidation in the industry has accelerated. These changes in
the regulatory environment could potentially affect Norstan's ability to
compete successfully.
The market for IT services includes a large number of competitors, is
subject to rapid change and is highly competitive. Primary competitors
include participants from a variety of market segments, including national
accounting firms, systems consulting and implementation firms, application
software firms, service groups of computer equipment companies, facilities
management companies, general management consulting firms and programming
companies. Many of these competitors have significantly greater financial,
technical and marketing resources and greater name recognition than the
Company. In addition, the Company competes with its customers' internal
resources, particularly when these resources represent a fixed cost to the
customer. Such competition may impose additional pricing pressures on the
Company.
Subject to this competitive environment, the Company competes on the
basis of: (i) the depth and breadth of services and products offered; (ii)
the ability to integrate IT and communication systems as the related
technologies continue to converge; (iii) its reputation for providing
superior customer service; and (iv) the number and strength of customer
relationships.
10
INTELLECTUAL PROPERTY RIGHTS
The Company relies upon a combination of nondisclosure and other
contractual arrangements with certain key employees, and trade secret,
copyright and trademark laws to protect its proprietary rights and the
proprietary rights of third parties from whom the Company licenses
intellectual property. Norstan enters into confidentiality agreements with
certain of its employees and limits the distribution of proprietary
information.
GOVERNMENT REGULATION
Except for the sale of long distance service, the Company is not subject
to any government regulations that have a material impact on its operations.
Effective May 1, 1992, the Company became a direct reseller of long distance
network services and accordingly became subject to certain state tariff
regulations throughout the United States. The Company is currently registered
and certified to provide interstate services in all 50 states and intrastate
services in 49 states. The Company is also subject to FCC regulations, which
require the filing of federal tariffs.
BACKLOG
As of April 30, 1999, the Company had signed contracts for
telecommunications products aggregating approximately $47.3 million,
substantially all of which are expected to be fulfilled by the end of fiscal
2000. As of April 30, 1998, the Company had signed contracts aggregating
approximately $46.2 million, substantially all of which were fulfilled by the
end of fiscal 1999. The usual time period between the execution of a contract
and the completion of the installation is one to six months, depending on the
size and complexity of the system.
11
ITEM 2. PROPERTIES.
The executive offices of the Company are located in Minnetonka,
Minnesota, where the Company leases approximately 234,000 square feet of
office space. The Company also has area headquarters in Brecksville, Ohio,
and Phoenix, Arizona, where the Company leases approximately 61,250 and
34,400 square feet of office space, respectively. In addition to the space
above, the Company leases sales and service offices in 52 other cities within
the United States. In Canada, the Company leases approximately 36,000 square
feet of office space in Toronto, Ontario, which serves as its Canadian
headquarters. The Company also leases sales and service offices in seven
other cities within the Canadian provinces of Alberta, Manitoba, Ontario,
Quebec and British Columbia. The Company believes that the above-mentioned
facilities are adequate and suitable for its current needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in legal actions in the ordinary course of its
business. Although the outcomes of any such legal actions cannot be
predicted, in the opinion of management there is no legal proceeding pending
against or involving the Company for which the outcome is likely to have a
material adverse effect upon the business, operating results and financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders
during the last quarter of the fiscal year covered by this report.
12
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's common stock is traded on the National Over-the-Counter
market and is listed on the national market system of the National
Association of Securities Dealers' Automated Quotations System ("NASDAQ")
under the symbol "NRRD". The following table sets forth the high and low sale
prices for the Company's common stock as reported by NASDAQ for each
quarterly period during the two most recent fiscal years:
HIGH LOW
-------- --------
FISCAL YEAR ENDED APRIL 30, 1999:
First Quarter.......................... 26 3/16 22 3/4
Second Quarter......................... 23 5/16 13 1/8
Third Quarter.......................... 18 5/8 11 5/8
Fourth Quarter......................... 12 9/16 8
FISCAL YEAR ENDED APRIL 30, 1998:
First Quarter.......................... 18 1/2 14
Second Quarter......................... 25 1/2 17 1/2
Third Quarter.......................... 25 1/2 22
Fourth Quarter......................... 29 21 7/8
The quotations reflect prices between dealers and do not include retail
mark-ups, mark-downs or commissions, and do not necessarily represent actual
transactions.
As of July 14, 1999, there were 2,979 holders of record of the Company's
common stock.
RESTRICTIONS ON THE PAYMENT OF DIVIDENDS
The Company has not recently declared or paid any cash dividends on the
common stock and does not intend to pay cash dividends on the common stock in
the foreseeable future. The Company currently expects to retain earnings to
finance expansion of its business. In addition, the Company's current
revolving long-term credit agreement prohibits the payment of cash dividends
without the prior written consent of the lenders thereunder.
13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data set forth below as of and for each
of the fiscal years in the five-year period ended April 30, 1999 have been
derived from the Company's consolidated financial statements, which have been
audited by Arthur Andersen LLP, independent public accountants. The selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and the notes thereto included elsewhere
in this report.
FISCAL YEARS ENDED APRIL 30,
-------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES
Global Services
IT Consulting Services ................. $ 137,878 $ 92,746 $ 54,467 $ 14,426 $ 7,931
Communication Services ................. 136,130 127,197 131,596 121,971 110,638
--------- --------- --------- --------- ---------
Total Global Services ................ 274,008 219,943 186,063 136,397 118,569
Communication Solutions .................. 200,738 228,979 205,983 179,332 166,675
Financial Services ....................... 7,963 7,443 6,029 5,635 5,001
--------- --------- --------- --------- ---------
TOTAL REVENUES ....................... 482,709 456,365 398,075 321,364 290,245
--------- --------- --------- --------- ---------
COST OF SALES
Global Services
IT Consulting Services ................. 90,858 66,457 43,315 11,000 6,417
Communication Services ................. 92,460 89,550 93,880 86,669 70,224
--------- --------- --------- --------- ---------
Total Global Services ................ 183,318 156,007 137,195 97,669 76,641
Communication Solutions .................. 151,382 168,965 150,204 130,090 123,158
Financial Services ....................... 2,970 2,444 2,160 2,221 2,308
--------- --------- --------- --------- ---------
TOTAL COST OF SALES .................. 337,670 327,416 289,559 229,980 202,107
--------- --------- --------- --------- ---------
GROSS MARGIN ............................... 145,039 128,949 108,516 91,384 88,138
Selling, general and administrative expenses 128,665 103,709 89,311 75,973 74,725
Restructuring charges ...................... 1,522 14,667 -- -- --
--------- --------- --------- --------- ---------
OPERATING INCOME ........................... 14,852 10,573 19,205 15,411 13,413
Interest expense ........................... (4,886) (3,909) (1,866) (1,351) (1,587)
Interest and other income (expense), net ... 460 (18) (22) 89 (54)
--------- --------- --------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES ... 10,426 6,646 17,317 14,149 11,772
Provision for income taxes ................. 4,536 2,791 7,100 5,660 4,709
--------- --------- --------- --------- ---------
NET INCOME ................................. $ 5,890 $ 3,855 $ 10,217 $ 8,489 $ 7,063
========= ========= ========= ========= =========
NET INCOME PER SHARE:
BASIC .......................... $ 0.56 $ 0.40 $ 1.12 $ 1.00 $ 0.86
========= ========= ========= ========= =========
DILUTED ........................ $ 0.56 $ 0.39 $ 1.08 $ 0.94 $ 0.82
========= ========= ========= ========= =========
WEIGHTED AVERAGE SHARES:
BASIC .......................... 10,473 9,719 9,140 8,526 8,242
========= ========= ========= ========= =========
DILUTED ........................ 10,537 9,917 9,418 8,985 8,621
========= ========= ========= ========= =========
AS OF APRIL 30,
-------------------------------------------------------------
BALANCE SHEET DATA: 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
Working capital............................................ $ 78,239 $ 58,568 $ 37,484 $ 24,899 $ 32,183
Total assets............................................... 308,516 275,608 224,173 160,988 161,709
Long-term debt, net of current maturities.................. 61,411 52,440 18,284 -- 16,465
Discounted lease rentals, net of current maturities........ 32,604 20,883 24,043 15,961 16,313
Shareholders' equity....................................... 109,335 97,671 84,370 67,517 56,984
Cash dividends declared and paid........................... -- -- -- -- --
On June 20, 1996, the Company's Board of Directors approved a two-for-one stock
split effected in the form of a stock dividend. The stock split has been
retroactively reflected in the selected consolidated financial data
presented above.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Norstan is a leading provider of communication and information technology
("IT") solutions for over 18,000 customers in the United States, Canada and
England. To address the complex communication requirements of its customers,
Norstan provides a broad range of products and services, including telephone
systems, call center systems, voice processing, network integration, voice and
video conferencing, and facilities management services. Norstan's network of
approximately 700 field technicians and service consultants delivers
communication services to its customers. In addition, the Company provides a
wide array of IT solutions through IT Consulting Services. These solutions
include the design, implementation, maintenance and modification of IT
applications and systems. IT Consulting Services currently employs over 800
consultants and generated a 49% increase in revenues during fiscal year 1999. As
communication and information technologies converge, Norstan's strategy is to
expand the breadth of its IT consulting services offerings to serve as a
single-source provider of leading technology solutions to its customers.
The Company delivers its products and services through three business units,
Global Services, Communication Solutions and Financial Services, which accounted
for 56.8%, 41.6% and 1.6% of Norstan's fiscal year 1999 revenues, respectively.
Global Services includes IT Consulting Services and Communication Services. IT
Consulting Services provides IT services including enterprise resource planning
("ERP") and enterprise resource management ("ERM") package implementation,
Internet/Intranet/E-commerce solutions, multiservice networking services,
strategic advisory services, application development and infrastructure services
and outsourced facilities management. Communication Services provides customer
support services for communication systems, including maintenance services,
systems modifications and long distance services. Communication Solutions
provides a broad array of solutions including telephone systems, integrated
voice processing, call center technologies and video/audio/data conferencing
solutions. Financial Services supports the sales process by providing customized
financing alternatives. The Company believes that its breadth of product and
service offerings fosters long-term customer relationships, affords
cross-selling opportunities and minimizes the Company's dependence on any single
technology or industry.
During fiscal year 1999, Norstan recorded a restructuring charge of $1.5
million relating to a workforce reduction. This resource reduction in the
communications business was made to bring the Company's expense structure in
line with anticipated growth. The restructuring charge related to the costs of
severance and other employment termination benefits.
During fiscal year 1998, Norstan recorded a restructuring charge of $14.7
million in connection with management's plan to reduce costs, consolidate and
reorganize operations, and improve operating efficiencies. Restructuring efforts
focused primarily on the following: (i) consolidation of seven semi-autonomous
geographic sales and service organizations into a single, more focused sales and
operations organization; (ii) the consolidation of 36 warehouses and parts
locations into three strategically located distribution centers; and (iii) the
reorganization and integration of the Company's IT consulting services
operations, including the Norstan Call Center Solutions Group, Connect and
PRIMA, into a single, customer-focused organization. The restructuring charge
related primarily to the write-down of certain assets to their fair market
values ($12.2 million), severance and employee benefit costs ($1.2 million) and
lease termination costs ($1.3 million). Net income and net income per diluted
share before the restructuring charge for the year ended April 30, 1998 were
$12.4 million and $1.25 per share, respectively.
15
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's consolidated
statements of operations expressed as a percentage of total revenues:
YEARS ENDED APRIL 30,
-------------------------------------
REVENUES: 1999 1998 1997
--------- ---------- ---------
Global Services
IT Consulting Services......................... 28.6% 20.3% 13.7%
Communication Services ........................ 28.2 27.9 33.0
--------- ---------- ---------
Total Global Services .................. 56.8 48.2 46.7
Communication Solutions ......................... 41.6 50.2 51.8
Financial Services................................ 1.6 1.6 1.5
--------- ---------- ---------
Total revenues ................................ 100.0 100.0 100.0
Cost of sales:
Global Services
IT Consulting Services......................... 18.8 14.6 10.9
Communication Services......................... 19.2 19.6 23.6
--------- ---------- ---------
Total Global Services........................ 38.0 34.2 34.5
Communication Solutions.......................... 31.4 37.0 37.7
Financial Services................................ 0.6 0.5 0.5
--------- ---------- ---------
Total cost of sales............................ 70.0 71.7 72.7
--------- ---------- ---------
Gross margin........................................ 30.0 28.3 27.3
Selling, general and administrative expenses........ 26.7 22.8 22.5
Restructuring charges............................... 0.3 3.2 --
--------- ---------- ---------
Operating income.................................... 3.0% 2.3% 4.8%
========= ========== =========
Net income.......................................... 1.2% 0.8% 2.6%
========= ========== =========
The following table sets forth the gross margin percentages for Global
Services, Communication Solutions and Financial Services.
YEARS ENDED APRIL 30,
---------------------------------------
1999 1998 1997
----------- ---------- ----------
Gross margin percentage:
Global Services
IT Consulting Services .................... 34.1% 28.3% 20.5%
Communication Services..................... 32.1 29.6 28.7
Total Global Services .................. 33.1 29.1 26.3
Communication Solutions....................... 24.6 26.2 27.1
Financial Services............................ 62.7 67.2 64.2
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUES. Total revenues increased 5.8% to $482.7 million in fiscal year
1999 from $456.4 million in fiscal year 1998.
Revenues from Global Services increased 24.6% to $274.0 million in fiscal
year 1999 from $219.9 million in fiscal year 1998. Revenues from IT Consulting
Services increased 48.7% to $137.9 million in fiscal year 1999 from $92.7
million in fiscal year 1998. This increase was the result of growth in Norstan
Consulting's revenues including (i) internal revenue growth of 22%, (ii)
inclusion of a full year results from PRIMA acquired in September of 1997, and
(iii) inclusion of Wordlink, Inc. results since their acquisition in June of
1998. Revenues from Communication Services increased 7.0% to $136.1 million in
fiscal year 1999 from $127.2 million in fiscal year 1998. The increase in
Communication Services revenues resulted primarily from approximately 25% growth
in network services revenue and 6% growth in service contract revenue.
Revenues from Communication Solutions decreased 12.3% to $200.7 million in
fiscal year 1999 from $229.0 million in fiscal year 1998. The decrease was
primarily attributable to decreased sales volume in the Siemens PBX, call
center, conferencing and cabling product lines which resulted from distractions
in the overall marketing and sales effort during the significant third quarter
restructuring actions.
16
Revenues from Financial Services increased 7.0% to $8.0 million in fiscal
year 1999 from $7.4 million in fiscal year 1998. This increase was primarily
attributable to the increased size of the Company's leasing base.
GROSS MARGIN. The Company's gross margin was $145.0 million and $128.9
million for the fiscal years ended April 30, 1999 and 1998, respectively. As a
percent of total revenues, gross margin was 30.0% for fiscal year 1999 compared
to 28.3% for fiscal year 1998.
Gross margin as a percent of revenues for Global Services was 33.1% for
fiscal year 1999 as compared to 29.1% for fiscal year 1998. The gross margin for
IT Consulting Services increased to 34.1% for fiscal year 1999 from 28.3% for
fiscal year 1998. The improved margin was primarily a result of Norstan
Consulting's increased billing rates and utilization of consultants and a
decreased emphasis on other lower margin IT Consulting Services such as
outsourcing, facilities management and education services. The gross margin for
Communication Services increased to 32.1% for fiscal year 1999 from 29.6% for
fiscal year 1998 in part from the efficiencies and cost savings resulting from
the organizational changes in fiscal years 1998 and 1999.
Gross margin as a percent of revenues for Communication Solutions was 24.6%
for fiscal year 1999 as compared to 26.2% for fiscal year 1998. The decrease in
gross margin for fiscal year 1999 as compared to fiscal year 1998 was primarily
due to cost overruns related to a large government contract which were
recognized in the third quarter of fiscal 1999.
Gross margin as a percent of revenues for Financial Services was 62.7% for
fiscal year 1999 as compared to 67.2% for fiscal year 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 24.1% to $128.7 million in fiscal year 1999
from $103.7 million in fiscal year 1998. As a percent of revenues, selling,
general and administrative expenses increased to 26.7% for fiscal year 1999, as
compared to 22.8% for fiscal year 1998. This increase was primarily the result
of fiscal 1999 investments in the IT Consulting Services business including the
opening of five new consulting branch locations and the startup of Connaissance
Consulting.
RESTRUCTURING CHARGE. During the third quarter of fiscal year 1999, Norstan
recorded a restructuring charge of $1.5 million relating to a workforce
reduction. This resource reduction in the communications business was made to
bring the Company's expense structure in line with anticipated growth. The
restructuring charge related to the costs of severance and other employment
termination benefits.
INTEREST EXPENSE. Interest expense was $4.9 million for fiscal year 1999 as
compared to $3.9 million for fiscal year 1998. This increase was primarily the
result of higher borrowing levels in fiscal year 1999 due to the additional
investments in the IT Consulting Services business, including the operations of
PRIMA and Connaissance Consulting, as well as for working capital purposes.
Average month-end borrowings outstanding under the Company's revolving long-term
credit agreements were $64.9 million for fiscal year 1999 and $46.7 million for
fiscal year 1998. Weighted average interest rates under the Company's revolving
long-term credit agreements were 6.5% for fiscal year 1999 as compared to 7.0%
for fiscal year 1998.
INCOME TAXES. The Company's effective income tax rate was 43.5% for fiscal
year 1999 and 42.0% for fiscal year 1998. The Company's effective tax rate
differs from the federal statutory rate primarily due to state income taxes and
the effect of nondeductible goodwill amortization.
NET INCOME. Net income was $5.9 million or $0.56 per diluted share in fiscal
year 1999, as compared to $3.9 million or $0.39 per diluted share in fiscal year
1998. Net income and net income per diluted share before the restructuring
charge for the year ended April 30, 1998 were $12.4 million and $1.25 per share,
respectively.
FISCAL 1998 COMPARED TO FISCAL 1997
REVENUES. Total revenues increased 14.6% to $456.4 million in fiscal year
1998 from $398.1 million in fiscal year 1997.
Revenues from Global Services increased 18.2% to $219.9 million in fiscal
year 1998 from $186.1 million in fiscal year 1997. Revenues from IT Consulting
Services increased 70.3% to $92.7 million in fiscal 1998 from $54.5 million in
fiscal 1997. This increase was a result of: (i) the acquisition of PRIMA in
September 1997, which contributed $17.9 million of revenue in fiscal 1998, and
(ii) internal revenue growth of 37.5%. Revenues from Communication Services
decreased 3.3% to $127.2 million in fiscal 1998 from $131.6 million in fiscal
1997. The decrease in Communication Services revenues resulted from the sale of
the Company's stand-alone cabling business in June 1997, which contributed
approximately $5.0 million in revenues during fiscal 1997.
17
Revenues from Communication Solutions increased 11.2% to $229.0 million in
fiscal year 1998 from $206.0 million in fiscal year 1997. The increase was
attributable to increased sales volumes in the Siemens PBX, videoconferencing
and refurbished equipment products through sales to new customers as well as
growth with existing customer relationships.
Revenues from Financial Services increased 23.5% to $7.4 million in fiscal
year 1998 from $6.0 million in fiscal year 1997. This increase was primarily
attributable to the increased size of the Company's leasing base.
GROSS MARGIN. The Company's gross margin was $128.9 million and $108.5
million for the fiscal years ended April 30, 1998 and 1997, respectively. As a
percent of total revenues, gross margin was 28.3% for fiscal year 1998 and 27.3%
for fiscal year 1997.
Gross margin as a percent of revenues for Global Services was 29.1% for
fiscal year 1998 compared to 26.3% for fiscal year 1997. The gross margin for IT
Consulting Services increased to 28.3% for fiscal year 1998 from 20.5% for
fiscal year 1997. The improved margin was a result of operating efficiencies
gained as the IT Consulting Services segment continued to grow as well as from
an increased emphasis on time-and-materials engagements. The gross margin for
Communication Services increased to 29.6% for fiscal year 1998 from 28.7% for
fiscal year 1997.
Gross margin as a percent of revenues for Communication Solutions was 26.2%
for fiscal year 1998 as compared to 27.1% for fiscal year 1997. The decrease in
gross margin for fiscal year 1998 as compared to fiscal year 1997 was primarily
due to overall increases in product costs due to changes in the sales mix and
increased labor costs from subcontractors and overtime due to the high level of
installations during 1998. The overall decline in gross margin was partially
offset by improved margins in the sales of refurbished equipment.
Gross margin as a percent of revenues for Financial Services was 67.2% for
fiscal year 1998 as compared to 64.2% for fiscal year 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 16.1% to $103.7 million in fiscal year 1998
from $89.3 million in fiscal year 1997. As a percent of revenues, selling,
general and administrative expenses remained relatively consistent at 22.7% for
fiscal year 1998, as compared to 22.4% for fiscal year 1997.
RESTRUCTURING CHARGE. During fiscal year 1998, Norstan recorded a
restructuring charge of $14.7 million in connection with management's plan to
reduce costs, consolidate and reorganize operations, and improve operating
efficiencies. Restructuring efforts focused primarily on the following: (i)
consolidation of seven semi-autonomous geographic sales and service
organizations into a single, more focused sales and operations organization;
(ii) the consolidation of 36 warehouses and parts locations into three
strategically located distribution centers; and (iii) the reorganization and
integration of the Company's IT consulting services operations, including the
Norstan Call Center Solutions Group, Connect and PRIMA, into a single,
customer-focused organization. The restructuring charge related primarily to the
write-down of certain assets to their fair market values ($12.2 million),
severance and employee benefit costs ($1.2 million) and lease termination costs
($1.3 million).
INTEREST EXPENSE. Interest expense was $3.9 million for fiscal year 1998 as
compared to $1.9 million for fiscal year 1997. This increase was primarily the
result of higher borrowing levels in fiscal year 1998 to fund the PRIMA
acquisition as well as for working capital purposes. Average month-end
borrowings outstanding under the Company's revolving long-term credit agreements
were $46.7 million for fiscal year 1998 and $22.1 million for fiscal year 1997.
Weighted average interest rates under the Company's revolving long-term credit
agreements were 7.0% for fiscal year 1998 as compared to 7.5% for fiscal year
1997.
INCOME TAXES. The Company's effective income tax rate was 42% for fiscal
year 1998 and 41% for fiscal year 1997. The Company's effective tax rate differs
from the federal statutory rate primarily due to state income taxes and the
effect of nondeductible goodwill amortization.
NET INCOME. Net income was $3.9 million or $0.39 per diluted share in fiscal
year 1998, which includes the $14.7 million restructuring charge, representing
$0.86 per diluted share, as compared to $10.2 million or $1.08 per diluted share
in fiscal year 1997. Net income and net income per diluted share before the
restructuring charge for the year ended April 30, 1998 were $12.4 million and
$1.25 per share, respectively.
18
UNAUDITED QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly operating
information for each of the eight quarters in the two year period ending April
30, 1999. This data includes, in the opinion of management, all normal recurring
adjustments necessary for the fair presentation of the information for the
periods presented when read in conjunction with the Company's Consolidated
Financial Statements and related Notes thereto. Results for any previous fiscal
quarter are not necessarily indicative of results for the full year or for any
future quarter. The Company has historically experienced a seasonal fluctuation
in its operating results, with a larger proportion of its revenues and operating
income occurring during the fourth quarter of the fiscal year.
FOR THE QUARTERS ENDED
----------------------------------------------------------------------------------------------------
April 30, January 30, October 31, August 1, April 30, January 31, November 1, August 2,
1999 1999 1998 1998 1998 1998 1997 1997
--------- --------- --------- --------- --------- --------- --------- ---------
Revenues:
Global Services
IT Consulting Services... $ 35,622 $ 35,536 $ 35,045 $ 31,675 $ 30,496 $ 25,186 $ 22,038 $ 15,026
Communication Services... 36,274 34,593 32,897 32,366 32,698 30,968 30,508 33,023
--------- --------- --------- --------- --------- --------- --------- ---------
Total Global Services.. 71,896 70,129 67,942 64,041 63,194 56,154 52,546 48,049
Communication Solutions ... 56,154 39,492 55,037 50,055 73,069 53,979 56,719 45,212
Financial Services......... 2,247 1,888 2,074 1,754 1,971 1,634 1,657 2,181
--------- --------- --------- --------- --------- --------- --------- ---------
Total Revenues......... 130,297 111,509 125,053 115,850 138,234 111,767 110,922 95,442
Cost of Sales................ 88,811 84,463 85,009 79,387 98,711 79,861 80,488 68,356
--------- --------- --------- --------- --------- --------- --------- ---------
Gross Margin................. 41,486 27,046 40,044 36,463 39,523 31,906 30,434 27,086
Selling, General and
Administrative Expenses.... 34,836 30,399 32,593 30,837 31,230 24,923 24,399 23,157
Restructuring Charges ....... -- 1,522 -- -- 14,667 -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Operating Income (Loss)...... 6,650 (4,875) 7,451 5,626 (6,374) 6,983 6,035 3,929
Interest Expense............. (1,465) (1,169) (1,163) (1,089) (1,226) (1,242) (847) (594)
Interest and Other
Income (Expense), net...... 146 (110) 243 181 (190) 55 69 48
--------- --------- --------- --------- --------- --------- --------- ---------
Income (Loss) Before
Income Taxes............... 5,331 (6,154) 6,531 4,718 (7,790) 5,796 5,257 3,383
Provision for Income Taxes... 2,320 (2,676) 2,840 2,052 (3,272) 2,521 2,155 1,387
--------- --------- --------- --------- --------- --------- --------- ---------
Net Income (Loss)............ $ 3,011 $ (3,478) $ 3,691 $ 2,666 $ (4,518) $ 3,275 $ 3,102 $ 1,996
========= ========= ========= ========= ========= ========= ========= =========
Net Income (Loss)
Per Share - Diluted........ $ 0.28 $ (0.33) $ 0.35 $ 0.26 $ (0.45) $ 0.33 $ 0.32 $ 0.21
========= ========= ========= ========= ========= ========= ========= =========
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $6.4 million, $5.5 million and
$18.7 million for fiscal 1999, 1998 and 1997, respectively. Net cash of $38.5
million was used for investing activities in fiscal 1999 which decreased from
fiscal 1998 and 1997 levels of $44.9 million and $45.3 million, respectively.
This lower level of cash used for investing activities was due to decreased
acquisition activity and related cash requirements in fiscal 1999 as compared to
fiscal years 1998 and 1997, offset by increased investments in property and
equipment and lease contracts. Net cash provided by financing activities in
fiscal 1999 was $31.1 million, a decrease as compared to $36.1 million in fiscal
1998 and relatively unchanged as compared to $30.6 million in fiscal 1997. Net
borrowings on long-term debt were significantly lower in fiscal 1999 as compared
to 1998 as a result of the decreased acquisition activity as discussed above,
but were offset by increased discounted lease rental borrowings.
CAPITAL EXPENDITURES. The Company used $26.8 million for capital
expenditures during fiscal year 1999 as compared to $19.9 million in fiscal year
1998 and $24.2 million in fiscal year 1997. These expenditures were primarily
for capitalized costs incurred in connection with obtaining or developing
internal use software, computer equipment, facility expansion and
telecommunications equipment used in outsourcing arrangements and as spare
parts.
INVESTMENT IN LEASE CONTRACTS. The Company has also made a significant
investment in lease contracts with its customers. The additional investment made
in lease contracts in fiscal year 1999 totaled $35.6 million as compared to
$28.0 million in fiscal 1998 and $31.5 million in fiscal 1997. Net lease
receivables increased to $63.0 million at April 30, 1999 from $53.7 million at
April 30, 1998. The Company utilizes its lease receivables and corresponding
underlying equipment to borrow funds from financial institutions on a
nonrecourse basis by discounting the stream of future lease payments. Proceeds
from discounting are presented on the consolidated balance sheet as discounted
lease rentals. Discounted lease rentals totaled $54.2 million at April 30, 1999
as compared to $35.6
19
million at April 30, 1998. Interest rates on these credit agreements at April
30, 1999 ranged from 6.0% to 10.0%, while payments are due in varying monthly
installments through November 2005. Payments due to financial institutions
are made from monthly collections of lease receivables from customers.
CAPITAL RESOURCES. The Company has a $100.0 million unsecured revolving
long-term credit agreement with certain banks. Up to $30.0 million of borrowings
under this agreement may be in the form of commercial paper. In addition,
sublimits exist related to the Company's support of its leasing activities.
Borrowings under this agreement are due May 31, 2001, and bear interest at the
banks' reference rate (7.75% at April 30, 1999), except for LIBOR, CD and
commercial paper based options, which generally bear interest at a rate lower
than the banks' reference rate (5.5% to 6.0% at April 30, 1999). Total
consolidated borrowings under this agreement at April 30, 1998 and 1999 were
$52.4 million and $60.2 million, respectively. There were no borrowings on
account of the Company's leasing activities at April 30, 1998 and 1999. Annual
commitment fees on the unused portions of the credit facility are 0.25%. Under
the agreement, the Company is required to maintain minimum levels of EBITDA and
certain other financial ratios. The Company has complied with or has obtained
the appropriate waivers for such requirements as of April 30, 1999.
Management of the Company believes that a combination of cash generated from
operations, existing bank facilities and additional borrowing capacity, in
aggregate, are adequate to meet the anticipated liquidity and capital resource
requirements of its business. Sources of additional financing, if needed, may
include further debt financing, or the sale of equity or other securities.
ACQUISITIONS
On June 19, 1998, the Company acquired Wordlink in a transaction accounted
for under the pooling-of-interests method. Wordlink delivers network
integration, groupware messaging, Internet/intranet/e-commerce and education
solutions to customers operating in a multi-vendor network environment. The
merger agreement provided for the conversion of all shares of Wordlink common
stock and all vested Wordlink stock options issued and outstanding into 420,539
shares of Norstan common stock valued at approximately $10.3 million. All
outstanding Wordlink unvested stock options were converted into the equivalent
value of Norstan stock options. Wordlink's shareholders' equity and operating
results were not material in relation to the Company's financial statements. As
such, the Company has recorded the combination without restating prior periods'
consolidated statements of operations to reflect the pooling-of-interests
combination.
On September 30, 1997, the Company acquired PRIMA in a transaction accounted
for under the purchase method. PRIMA provides IT consulting services, including
information systems planning and development, consulting and programming
services for collaborative computing solutions, and ERP integration services.
The acquisition consideration totaled approximately $27.5 million, consisting of
$19.5 million in cash, $6.3 million of Common Stock 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 (no amounts were earned as of April 30, 1999). This transaction
resulted in the recording of $24.9 million in goodwill and other intangible
assets that are being amortized on a straight-line basis over fifteen years and
three years, respectively.
On June 4, 1996, the Company acquired 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. The acquisition
consideration totaled approximately $15.0 million, consisting of $12.0 million
in cash, $2.0 million of Common Stock and $1.0 million payable to certain
members of Connect management under non-compete agreements. In addition, the
Company agreed to pay up to $4.0 million in contingent consideration over a
three-year period ending April 30, 1999, if certain financial performance
targets are achieved (as of April 30, 1999, the maximum amount of such
consideration had been paid). This transaction resulted in the recording of
$18.4 million in goodwill and other intangible assets that are being amortized
on a straight-line basis over fifteen years and three years, respectively.
IMPACT OF YEAR 2000
The Company has completed an assessment of the hardware and software in its
internal information systems and has substantially completed the necessary
modifications. The Company is currently testing its critical systems to verify
proper date-handling functionality with respect to year 2000 and thereafter. The
Company is working with its significant suppliers and business partners to
ensure that those parties have appropriate Year 2000 readiness plans, and will
be able to continue to provide products and services to the Company. The Company
is assessing the extent to which its operations are vulnerable should those
organizations fail to properly remediate either their computer systems or their
product offerings.
20
The Company's comprehensive Year 2000 initiative is being managed by a
team of internal staff who expect to complete the Year 2000 initiative in the
fall of 1999. The Company believes it is adequately addressing the Year 2000
issues. It does not believe that the Year 2000 matters discussed above will
have a material impact on its business, financial condition and results of
operations. However, there can be no assurance that the systems of other
companies will not fail, and that such failures would not have an adverse
effect on the Company. In order to mitigate the risk of supplier and business
partner non-compliance, the Year 2000 initiative also includes the creation
of contingency plans, both from technical and business process perspectives.
Based on the Company's assessments to date, the costs of the Year 2000
initiative are estimated to be approximately $2.0 million, of which
approximately $1.4 million has been incurred to date. The costs of the
project and the date on which the Company believes it will complete its Year
2000 initiative are forward-looking statements and are based on management's
best estimates, according to information available through the Company's
assessments to date. However, there can be no assurance that these estimates
will be achieved, and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the retention of these professionals, the ability to
locate and correct all relevant computer codes, and similar uncertainties. At
present the Company has not experienced any significant problems in these
areas.
FORWARD-LOOKING STATEMENTS
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, Year 2000 compliance and
similar matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements including those made in
this document. In order to comply with the terms of the Private Securities
Litigation Reform Act, 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 IT and telecommunications industries; the
Company's business in Canada and England; stability of foreign governments;
market acceptance of the Company's products and services; the Company's
continued ability to provide integrated communication solutions for customers
in a dynamic industry; and other competitive factors. Because these and other
factors could affect the Company's operating results, past financial
performance should not necessarily be considered as a reliable indicator of
future performance, and investors should not use historical trends to
anticipate future period results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
In the ordinary course of business, the Company is exposed to foreign
currency and interest rate risks. These risks primarily relate to the sale of
products to foreign customers and changes in interest rates on the Company's
long-term debt obligations, discounted lease rentals, capital leases and
other long-term debt obligations.
The potential loss from a hypothetical 10% adverse change in foreign
currency rates on the Company's foreign installment contracts at April 30,
1999 would not materially affect the Company's consolidated financial
position, results of operations or cash flows.
The Company's unsecured revolving long-term credit agreement carries
interest rate risk that is generally related to either the banks' reference
rate, LIBOR or CD rates or commercial paper based options. If any of those
rates or options were to change while the Company was borrowing under the
agreement, interest expense would increase or decrease accordingly. As of
April 30, 1999, total consolidated borrowings under this agreement were $60.2
million.
The Company's has no earnings or cash flow exposure due to market risks
on its discounted lease rentals or its capital lease and other long-term debt
obligations as a result of the fixed-rate nature of the lease rentals,
capital leases and the debt. However, interest rate changes would effect the
fair market value of the lease rentals, capital leases and debt. At April 30,
1999, the Company had fixed rate lease rentals of $54.2 million and capital
lease and other long-term debt obligations of $4.2 million.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
PAGE
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants................................................................... 23
Consolidated Statements of Operations for the years ended April 30, 1997, 1998 and 1999.................... 24
Consolidated Balance Sheets as of April 30, 1998 and 1999.................................................. 25
Consolidated Statements of Shareholders' Equity for the years ended April 30, 1997, 1998 and 1999.......... 26
Consolidated Statements of Cash Flows for the years ended April 30, 1997, 1998 and 1999.................... 27
Notes to Consolidated Financial Statements................................................................. 28
FINANCIAL STATEMENT SCHEDULES:
All schedules have been omitted as not required, not applicable or because
the information to be presented is included in the consolidated financial
statements and related notes.
22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Norstan, Inc.:
We have audited the accompanying consolidated balance sheets of Norstan,
Inc. (a Minnesota corporation) and Subsidiaries as of April 30, 1999 and 1998,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended April 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Norstan, Inc. and
Subsidiaries as of April 30, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
1999 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
June 8, 1999
23
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED APRIL 30,
--------------------------------------
1999 1998 1997
--------- --------- ---------
REVENUES
Global Services
IT Consulting Services ...................................... $ 137,878 $ 92,746 $ 54,467
Communication Services ...................................... 136,130 127,197 131,596
--------- --------- ---------
Total Global Services ................................ 274,008 219,943 186,063
Communication Solutions ........................................ 200,738 228,979 205,983
Financial Services ............................................. 7,963 7,443 6,029
--------- --------- ---------
TOTAL REVENUES .............................................. 482,709 456,365 398,075
--------- --------- ---------
COST OF SALES
Global Services
IT Consulting Services ...................................... 90,858 66,457 43,315
Communication Services ...................................... 92,460 89,550 93,880
--------- --------- ---------
Total Global Services ................................ 183,318 156,007 137,195
Communication Solutions ........................................ 151,382 168,965 150,204
Financial Services ............................................. 2,970 2,444 2,160
--------- --------- ---------
TOTAL COST OF SALES ......................................... 337,670 327,416 289,559
--------- --------- ---------
GROSS MARGIN ..................................................... 145,039 128,949 108,516
Selling, general and administrative expenses ................... 128,665 103,709 89,311
Restructuring charges .......................................... 1,522 14,667 --
--------- --------- ---------
OPERATING INCOME ................................................. 14,852 10,573 19,205
Interest expense ............................................... (4,886) (3,909) (1,866)
Interest and other income (expense), net ....................... 460 (18) (22)
--------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES ......................... 10,426 6,646 17,317
Provision for income taxes ..................................... 4,536 2,791 7,100
--------- --------- ---------
NET INCOME ....................................................... $ 5,890 $ 3,855 $ 10,217
========= ========= =========
NET INCOME PER SHARE:
BASIC .................................................. $ 0.56 $ 0.40 $ 1.12
========= ========= =========
DILUTED ................................................ $ 0.56 $ 0.39 $ 1.08
========= ========= =========
WEIGHTED AVERAGE SHARES:
BASIC .................................................. 10,473 9,719 9,140
========= ========= =========
DILUTED ................................................ 10,537 9,917 9,418
========= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
24
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF APRIL 30,
------------------------
1999 1998
---------- ---------
ASSETS
CURRENT ASSETS
Cash................................................................................ $ 867 $ 1,869
Accounts receivable, net of allowances for doubtful accounts of $1,437 and $1,171... 97,446 97,206
Current lease receivables........................................................... 23,299 18,751
Inventories......................................................................... 16,846 10,008
Costs and estimated earnings in excess of billings of $18,508 and $17,335........... 24,389 19,091
Deferred income taxes............................................................... 1,516 2,488
Prepaid expenses, deposits and other................................................ 11,500 8,108
---------- ---------
TOTAL CURRENT ASSETS............................................................. 175,863 157,521
---------- ---------
PROPERTY AND EQUIPMENT
Machinery and equipment............................................................. 97,385 75,712
Less -- accumulated depreciation and amortization................................... (47,656) (37,713)
---------- ---------
NET PROPERTY AND EQUIPMENT........................................................ 49,729 37,999
---------- ---------
OTHER ASSETS
Goodwill, net of accumulated amortization of $11,033 and $7,853..................... 39,994 43,206
Lease receivables, net of current portion........................................... 39,736 34,998
Other............................................................................... 3,194 1,884
---------- ---------
TOTAL OTHER ASSETS................................................................ 82,924 80,088
---------- ---------
$ 308,516 $ 275,608
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt................................................ $ 3,004 $ 3,257
Current maturities of discounted lease rentals...................................... 21,550 14,758
Accounts payable.................................................................... 28,394 24,135
Deferred revenue.................................................................... 20,967 19,953
Accrued liabilities:
Salaries and wages................................................................ 7,950 15,123
Warranty costs.................................................................... 1,795 1,776
Other liabilities................................................................. 5,046 10,509
Billings in excess of costs and estimated earnings of $10,858 and $16,390........... 8,918 9,442
---------- ---------
TOTAL CURRENT LIABILITIES........................................................ 97,624 98,953
LONG-TERM DEBT, net of current maturities............................................. 61,411 52,440
DISCOUNTED LEASE RENTALS, net of current maturities................................... 32,604 20,883
DEFERRED INCOME TAXES................................................................. 7,542 5,661
---------- ---------
COMMITMENTS AND CONTINGENCIES (NOTES 4 AND 11)
SHAREHOLDERS' EQUITY
Common stock -- $.10 par value; 40,000,000 authorized shares; 10,763,726 and
9,963,716 shares issued and outstanding........................................... 1,076 996
Capital in excess of par value...................................................... 51,420 44,741
Retained earnings................................................................... 60,264 54,048
Unamortized cost of stock........................................................... (1,805) (641)
Accumulated other comprehensive income.............................................. (1,620) (1,473)
---------- ---------
TOTAL SHAREHOLDERS' EQUITY....................................................... 109,335 97,671
---------- ---------
$ 308,516 $ 275,608
========== =========
The accompanying notes are an integral part of these
consolidated balance sheets.
25
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ACCUMULATED
-------------------- CAPITAL IN UNAMORTIZED OTHER
SHARES EXCESS OF RETAINED COST OF COMPREHENSIVE
OUTSTANDING AMOUNT PAR VALUE EARNINGS STOCK INCOME TOTAL
--------- --------- --------- ---------- ----------- ------------- ---------
BALANCE, APRIL 30, 1996 .. 8,718 $ 872 $ 27,619 $ 39,975 $ (94) $ (855) $ 67,517
Stock issued for employee
benefit plans ......... 531 53 4,951 -- (48) -- 4,956
Stock issued for
acquisition ........... 138 14 1,986 -- -- -- 2,000
Foreign currency
translation adjustments . -- -- -- -- -- (320) (320)
Net income ............... -- -- -- 10,217 -- -- 10,217
------ --------- --------- --------- -------- --------- ---------
BALANCE, APRIL 30, 1997 .. 9,387 $ 939 $ 34,556 $ 50,192 $ (142) $ (1,175) $ 84,370
Stock issued for employee
benefit plans ......... 258 25 3,892 1 (499) -- 3,419
Stock issued for
acquisition ........... 319 32 6,293 -- -- -- 6,325
Foreign currency
translation adjustments . -- -- -- -- -- (298) (298)
Net income ............... -- -- -- 3,855 -- -- 3,855
------ --------- --------- --------- -------- --------- ---------
BALANCE, APRIL 30, 1998... 9,964 $ 996 $ 44,741 $ 54,048 $ (641) $ (1,473) $ 97,671
Stock issued for employee
benefit plans ......... 379 38 6,607 -- (1,164) -- 5,481
Stock issued for
acquisition ........... 421 42 72 326 -- -- 440
Foreign currency
translation adjustments . -- -- -- -- -- (147) (147)
Net income ............... -- -- -- 5,890 -- -- 5,890
------ --------- --------- --------- -------- --------- ---------
BALANCE, APRIL 30, 1999 .. 10,764 $ 1,076 $ 51,420 $ 60,264 $ (1,805) $ (1,620) $ 109,335
====== ========= ========= ======== ========= ========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
26
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED APRIL 30,
--------------------------------------------
1999 1998 1997
--------- --------- ---------
OPERATING ACTIVITIES
Net income ............................................... $ 5,890 $ 3,855 $ 10,217
Adjustments to reconcile net income to net cash
provided by operating activities:
Restructuring charges ................................. 1,522 14,667 --
Restructuring charges paid............................. (4,469) -- --
Depreciation and amortization ......................... 20,514 21,115 16,964
Deferred income taxes ................................. 2,871 1,944 (45)
Changes in operating items, net of acquisition effects:
Accounts receivable ................................. 1,851 (18,803) (16,319)
Inventories ......................................... (6,672) (2,397) 3,532
Costs and estimated earnings in excess of billings .. (5,272) (7,584) (6,371)
Prepaid expenses, deposits and other ................ (4,338) 498 (386)
Accounts payable .................................... 3,808 (745) 7,047
Deferred revenue .................................... 612 1,291 468
Accrued liabilities ................................. (10,705) (5,823) 2,514
Income taxes payable/receivable ..................... 1,330 (6,136) (144)
Billings in excess of costs and estimated earnings .. (515) 3,665 1,223
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........ 6,427 5,547 18,700
--------- --------- ---------
INVESTING ACTIVITIES
Additions to property and equipment, net ................. (26,760) (19,873) (24,219)
Cash paid for acquisitions, net of cash acquired ......... -- (20,450) (11,794)
Investment in lease contracts ............................ (35,569) (28,049) (31,545)
Collections from lease contracts ......................... 26,234 23,589 21,949
Other, net ............................................... (2,423) (124) 314
--------- --------- ---------
NET CASH USED FOR INVESTING ACTIVITIES ........... (38,518) (44,907) (45,295)
--------- --------- ---------
FINANCING ACTIVITIES
Repayment of debt assumed in acquisition ................. (1,267) (2,013) (1,743)
Borrowings on long-term debt ............................. 282,380 290,181 227,820
Repayments of long-term debt ............................. (273,479) (253,102) (210,161)
Borrowings on discounted lease rentals ................... 36,773 13,472 22,396
Repayments of discounted lease rentals ................... (18,249) (15,717) (12,583)
Proceeds from sale of common stock ....................... 4,620 2,868 3,017
Tax benefits from shares issued to employees ............. 316 385 1,869
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........ 31,094 36,074 30,615
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH .................... (5) 8 (6)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH ............................ (1,002) (3,278) 4,014
CASH, BEGINNING OF YEAR .................................... 1,869 5,147 1,133
--------- --------- ---------
CASH, END OF YEAR .......................................... $ 867 $ 1,869 $ 5,147
========= ========= =========
The accompanying notes are an integral part
of these consolidated financial statements.
27
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS:
Norstan is a leading provider of communication and information technology
("IT") solutions for over 18,000 customers in the United States, Canada and
England. Norstan, Inc. ("Norstan" or the "Company") manages the operations of
its subsidiaries, Norstan Communications, Inc. ("NCI"), Norstan Canada, Ltd.
("NCDA"), Norstan Consulting, Inc. ("NCON") Connaissance Consulting, LLC