<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED JANUARY 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
COMMISSION FILE NUMBER 0-8141
NORSTAN, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0835746
------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5101 SHADY OAK ROAD, MINNETONKA, MINNESOTA 55343-4100
-----------------------------------------------------
(address of principal executive offices)
TELEPHONE (612) 352-4000 FAX (612) 352-4949 INTERNET www.norstan.com
- ------------------------------------------------------------------------------
(Registrant's telephone number, facsimile number, Internet address)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X . No .
---- ----
On March 3, 1999, there were 10,700,141 shares outstanding of the
registrant's common stock, par value $0.10 per share, its only class of
equity securities.
1
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PART I. FINANCIAL INFORMATION
ITEM 1.
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
JANUARY 30, JANUARY 31, JANUARY 30, JANUARY 31,
1999 1998 1999 1998
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
REVENUES
Global Services
IT Consulting Services $ 35,536 $ 25,187 $ 102,256 $ 62,254
Communication Services 34,593 30,967 99,856 94,494
--------- --------- --------- ---------
Total Global Services 70,129 56,154 202,112 156,748
Communication Solutions 39,492 53,979 144,584 155,910
Financial Services 1,888 1,634 5,716 5,472
--------- --------- --------- ---------
TOTAL REVENUES 111,509 111,767 352,412 318,130
--------- --------- --------- ---------
COST OF SALES
Global Services
IT Consulting Services 24,872 18,577 68,343 45,148
Communication Services 23,945 21,717 68,281 67,235
--------- --------- --------- ---------
Total Global Services 48,817 40,294 136,624 112,383
Communication Solutions 34,911 38,971 110,006 114,516
Financial Services 735 596 2,229 1,805
--------- --------- --------- ---------
TOTAL COST OF SALES 84,463 79,861 248,859 228,704
--------- --------- --------- ---------
GROSS MARGIN 27,046 31,906 103,553 89,426
Selling, General
& Administrative Expenses 30,399 24,923 93,829 72,479
Restructuring Charges 1,522 -- 1,522 --
--------- --------- --------- ---------
OPERATING INCOME (LOSS) (4,875) 6,983 8,202 16,947
Interest Expense (1,169) (1,242) (3,421) (2,683)
Other Income, Net (110) 55 314 171
--------- --------- --------- ---------
INCOME (LOSS) BEFORE TAXES (6,154) 5,796 5,095 14,435
Income Tax (Benefit) Provision (2,676) 2,521 2,217 6,063
--------- --------- --------- ---------
NET INCOME (LOSS) $ (3,478) $ 3,275 $ 2,878 $ 8,372
--------- --------- --------- ---------
--------- --------- --------- ---------
NET INCOME (LOSS) PER SHARE -
BASIC $ (0.33) $ 0.33 $ 0.28 $ 0.87
--------- --------- --------- ---------
--------- --------- --------- ---------
DILUTED $ (0.33) $ 0.33 $ 0.27 $ 0.86
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE SHARES -
BASIC 10,572 9,780 10,420 9,599
--------- --------- --------- ---------
--------- --------- --------- ---------
DILUTED 10,572 10,011 10,527 9,780
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
1
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 30, APRIL 30,
1999 1998
------------ ----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,924 $ 1,869
Accounts receivable, net of allowances for doubtful
accounts of $1,732 and $1,171 95,856 97,206
Current lease receivables 21,321 18,751
Inventories 19,363 10,008
Costs and estimated earnings in excess of billings of
$22,213 and $17,335 22,565 19,091
Deferred income tax benefits - 2,488
Prepaid expenses, deposits and other 5,268 2,575
Prepaid income taxes 9,438 5,533
----------- ----------
TOTAL CURRENT ASSETS 175,735 157,521
----------- ----------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment 91,918 75,712
Less-accumulated depreciation and amortization (44,458) (37,713)
----------- ----------
NET PROPERTY AND EQUIPMENT 47,460 37,999
----------- ----------
OTHER ASSETS:
Lease receivables, net of current portion 39,304 34,998
Goodwill, net of amortization of $10,225 and $7,979 40,716 43,206
Other 1,727 1,884
----------- ----------
TOTAL OTHER ASSETS 81,747 80,088
----------- ----------
$ 304,942 $ 275,608
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
2
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
JANUARY 30, APRIL 30,
1999 1998
----------- ----------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 73 $ 3,257
Current maturities of discounted lease rentals 18,464 14,758
Accounts payable 23,584 24,135
Deferred revenue 20,858 19,953
Accrued -
Salaries and wages 6,770 15,123
Warranty costs 1,786 1,776
Other liabilities 5,729 10,509
Deferred Income Taxes 560 -
Billings in excess of costs and estimated earnings of $17,634
and $16,390 8,325 9,442
----------- ----------
TOTAL CURRENT LIABILITIES 86,149 98,953
----------- ----------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 78,567 52,440
DISCOUNTED LEASE RENTALS, NET OF CURRENT MATURITIES 28,642 20,883
DEFERRED INCOME TAXES 6,864 5,661
----------- ----------
SHAREHOLDERS' EQUITY:
Common stock - $0.10 par value; 40,000,000 authorized shares;
10,700,141 and 9,963,716 shares issued and outstanding 1,070 996
Capital in excess of par value 50,620 44,741
Retained earnings 57,252 54,048
Unamortized cost of stock (2,197) (641)
Foreign currency translation adjustments (2,025) (1,473)
----------- ----------
TOTAL SHAREHOLDERS' EQUITY 104,720 97,671
----------- ----------
$ 304,942 $ 275,608
----------- ----------
----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
3
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------------
JANUARY 30, JANUARY 31,
1999 1998
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 2,878 $ 8,372
Adjustments to reconcile net income to net cash used for
operating activities:
Restructuring charge 1,552 --
Restructuring charges paid (2,494) --
Depreciation and amortization 14,372 14,977
Deferred income taxes 4,224 518
Changes in operating items, net of effects from acquisitions:
Accounts receivable 3,174 (17,711)
Inventories (9,258) (4,752)
Costs and estimated earnings in excess of billings (3,600) (11,707)
Prepaid expenses, deposits and other (2,497) (2,851)
Accounts payable (946) (380)
Deferred revenue 566 1,131
Accrued liabilities (13,066) (11,283)
Income taxes payable / receivable (3,758) (933)
Billings in excess of costs and estimated earnings (1,084) 4,756
---------- ----------
NET CASH USED FOR OPERATING ACTIVITIES (9,937) (19,863)
---------- ----------
INVESTING ACTIVITIES:
Additions to property and equipment, net (19,702) (14,402)
Cash paid for acquisitions, net of cash acquired 15 (20,450)
Investment in lease contracts (26,636) (17,452)
Collections from lease contracts 19,584 17,310
Other, net (633) (13)
---------- ----------
NET CASH USED FOR INVESTING ACTIVITIES (27,372) (35,007)
---------- ----------
FINANCING ACTIVITIES:
Repayment of debt assumed in acquisitions (1,267) (2,013)
Borrowings of long-term debt 248,464 189,745
Repayments of long-term debt (225,244) (139,365)
Borrowings of discounted lease rentals 26,416 13,472
Repayments of discounted lease rentals (14,869) (11,789)
Proceeds from sale of common stock 3,837 2,873
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 37,337 52,923
---------- ----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 27 10
---------- ----------
NET INCREASE (DECREASE) IN CASH 55 (1,937)
CASH, BEGINNING OF PERIOD 1,869 5,147
---------- ----------
CASH, END OF PERIOD $ 1,924 $ 3,210
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 30, 1999
UNAUDITED
The information furnished in this report is unaudited and reflects all
adjustments which are normal recurring adjustments and, which in the opinion of
management, are necessary to fairly present the operating results for the
interim periods. The operating results for the interim periods presented are not
necessarily indicative of the operating results to be expected for the full
fiscal year. This report should be read in conjunction with the Company's most
recent "Annual Report on Form 10-K."
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
FOREIGN CURRENCY
For the Company's foreign operations, assets and liabilities are translated
at exchange rates as of the balance sheet date, and revenues and expenses are
translated at average exchange rates prevailing during the period. Translation
adjustments are recorded as a separate component of shareholders' equity.
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows (in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------------
JANUARY 30, 1999 JANUARY 31, 1998
----------------- ----------------
<S> <C> <C>
Cash paid for:
Interest $ 5,652 $ 4,761
Income taxes $ 1,617 $ 4,985
Non-cash investing and financing activities:
Stock issued for acquisition $ 114 $ 6,325
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the periods presented. Estimates are used for such items as allowances
for doubtful accounts, inventory reserves, depreciable lives of property and
equipment, warranty reserves and others. Ultimate results could differ from
those estimates.
5
<PAGE>
EARNINGS PER SHARE DATA
In the fiscal year ended April 30, 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS No. 128"),
which established new guidelines for computing and presenting earnings per share
data ("EPS"), and retroactively restated EPS for all prior periods. SFAS No. 128
requires presentation of basic and diluted EPS. Basic EPS is computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the period. Diluted EPS reflects potential dilution from
outstanding stock options and other securities using the treasury stock method.
The adoption of SFAS No.128 did not have a significant effect on previously
reported EPS information for the periods presented.
A reconciliation of EPS calculations under SFAS No. 128 is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- ------------------------------
JANUARY 30, JANUARY 31, JANUARY 30, JANUARY 31,
1999 1998 1999 1998
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net income (loss) $ (3,478) $ 3,275 $ 2,878 $ 8,372
--------- ------- ------- -------
--------- ------- ------- -------
Weighted average common
Shares outstanding - Basic 10,572 9,780 10,420 9,599
Effect of stock option and
Benefit plans -- 231 107 181
--------- ------- ------- -------
Weighted average common
Shares outstanding - Diluted 10,572 10,011 10,527 9,780
--------- ------- ------- -------
--------- ------- ------- -------
Net income (loss) per share -
Basic $ (0.33) $ 0.33 $ 0.28 $ 0.87
--------- ------- ------- -------
--------- ------- ------- -------
Diluted $ (0.33) $ 0.33 $ 0.27 $ 0.86
--------- ------- ------- -------
--------- ------- ------- -------
</TABLE>
Effective May 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting in the
financial statements all changes in equity during a period, except those
resulting from investments by and distributions to owners. For the Company,
comprehensive income represents net income adjusted for foreign currency
translation adjustments. Comprehensive income, as defined by SFAS No. 130, was a
loss of approximately $3.3 million and income of approximately $2.8 million for
the three month periods ended January 30, 1999 and January 31, 1998,
respectively. For the nine month periods ended January 30, 1999 and January 31,
1998 comprehensive income was approximately $2.3 million and $7.8 million,
respectively.
The Company adopted Statement of Position ("SOP") 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use," effective
May 1, 1997. The SOP requires the Company to capitalize certain costs incurred
in connection with developing or obtaining internal-use software. The Company
capitalized approximately $6.8 million of costs associated with internal-use
software developed or obtained during the nine months ended January 30, 1999.
RESTRUCTURING CHARGES
During the quarter ended January 30, 1999, the Company recorded a
restructuring charge of $1.5 million relating to a workforce reduction announced
early in the quarter. This resource reduction in the communications business was
made to bring the Company's expense structure in line with anticipated growth.
The restructuring charge reflects the costs of severance and other employment
termination benefits.
6
<PAGE>
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
relates 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).
ACQUISITIONS
On September 30, 1997, the Company acquired PRIMA Consulting, Inc. (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 Company paid acquisition consideration aggregating
approximately $27.5 million, consisting of $19.5 million in cash, $6.3 million
of Norstan 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, 1998). This transaction resulted in the recording of
$24.9 million in goodwill and other intangible assets, which are being amortized
on a straight-line basis over fifteen years and three years, respectively.
In June 1998, Wordlink, Inc. (Wordlink) was merged with and into a wholly
owned subsidiary of the Company 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 business
clients operating in a multi-vendor network environment. The merger agreement
provided for the conversion of all outstanding shares of Wordlink common stock
and all vested options into 420,539 shares of Norstan common stock valued at
approximately $10.3 million. Unvested options to purchase shares of Wordlink
common stock were converted into Norstan stock options. Wordlink's stockholders'
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' financial statements.
VENDOR AGREEMENTS
Under its agreement with Siemens, the Company purchases certain
communications equipment and products for field application and installation.
The parties have entered into a five year agreement that is effective for the
period of July 1998 through July 2003.
BUSINESS SEGMENTS
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," effective April 30, 1998. Adoption of this
statement required the Company to provide the disclosure of segment information
but did not require significant changes in the way geographic information was
disclosed.
The Company operates in three business segments, Global Services,
Communication Solutions, and Financial Services. Due to the Company's continuing
expansion and growth in the area of IT
7
<PAGE>
consulting services, financial results for Global Services are now reported
as (i) IT Consulting Services and (ii) Communication Services. Interim
disclosures under SFAS No. 131 are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
--------------------------------------------------------------------------------
JANUARY 30, 1999 JANUARY 31, 1998
--------------------------------------- -------------------------------------
OPERATING OPERATING
REVENUES INCOME (LOSS) REVENUES INCOME (LOSS)
---------------- ------------------- -------------- ------------------
<S> <C> <C> <C> <C>
Global Services:
IT Consulting Services $ 35,536 $ 1,065 $ 25,187 $ 1,515
Communication Services 34,593 1,884 30,967 1,596
---------------- ------------------- -------------- ------------------
Total Global Services 70,129 2,949 56,154 3,111
Communication Solutions 39,492 (8,615) 53,979 2,629
Financial Services 1,888 791 1,634 1,243
---------------- ------------------- -------------- ------------------
Totals $ 111,509 $ (4,875) $111,767 $ 6,983
---------------- ------------------- -------------- ------------------
---------------- ------------------- -------------- ------------------
<CAPTION>
FOR THE NINE MONTHS ENDED
--------------------------------------------------------------------------------
JANUARY 30, 1999 JANUARY 31, 1998
--------------------------------------- -------------------------------------
OPERATING OPERATING
REVENUES INCOME (LOSS) REVENUES INCOME (LOSS)
---------------- ------------------- -------------- -------------------
<S> <C> <C> <C> <C>
Global Services:
IT Consulting Services $ 102,256 $ 3,755 $ 62,254 $ 4,688
Communication Services 99,856 7,581 94,494 4,717
---------------- ------------------- -------------- -------------------
Total Global Services 202,112 11,336 156,748 9,405
Communication Solutions 144,584 (5,908) 155,910 4,340
Financial Services 5,716 2,774 5,472 3,202
---------------- ------------------- -------------- -------------------
Totals $ 352,412 $ 8,202 $318,130 $ 16,947
---------------- ------------------- -------------- -------------------
---------------- ------------------- -------------- -------------------
</TABLE>
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, product pricing, management of growth, integration of acquisitions,
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 information technology 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.
8
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Norstan is a technology services company providing IT and communication
systems solutions to customers in the United States, Canada and England.
Headquartered in Minneapolis, Minnesota, with sales and service offices located
throughout the United States and Canada, the Company sells its products and
services to a wide variety of customers across numerous industries.
The Company provides IT consulting and communication services,
communications and technology products and financing alternatives through its
three business units, Global Services, Communication Solutions (formerly known
as Communication Systems) and Financial Services.
SUMMARY
During the quarter ended January 30, 1999, the Company incurred a net loss
of $3.5 million or $0.33 per common share, as compared to net income of $3.3
million or $0.33 per common share for the quarter ended January 31, 1998. For
the nine month period ended January 30, 1999, net income decreased to $2.9
million, or $0.27 per common share, compared to $8.4 million, or $0.86 per
common share for the similar period ended January 31, 1998. All per share
figures reflect diluted rather than basic EPS.
9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
DOLLAR AMOUNTS AS A DOLLAR AMOUNTS AS A
PERCENTAGE OF REVENUES PERCENTAGE PERCENTAGE OF REVENUES PERCENTAGE
THREE MONTHS ENDED INCREASE NINE MONTHS ENDED INCREASE
--------------------------- ------------- ------------------------ -------------
JANUARY 30, JANUARY 31, FISCAL JANUARY 30, JANUARY 31, FISCAL
1999 1998 1999 VS. 1998 1999 1998 1999 VS. 1998
------------ ------------ ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Global Services
IT Consulting Services 31.9% 22.5% 41.1% 29.0% 19.6% 64.3%
Communication Services 31.0% 27.7% 11.7% 28.4% 29.7% 5.7%
-------- -------- -------- -------- -------- --------
Total Global Services 62.9% 50.2% 24.9% 57.4% 49.3% 28.9%
Communication Solutions 35.4% 48.3% (26.8%) 41.0% 49.0% (7.3%)
Financial Services 1.7% 1.5% 15.5% 1.6% 1.7% 4.5%
-------- -------- -------- -------- -------- --------
Total Revenues 100.0% 100.0% (0.2%) 100.0% 100.0% 10.8%
COST OF SALES 75.7% 71.5% 5.8% 70.6% 71.9% 8.8%
-------- -------- -------- -------- -------- --------
GROSS MARGIN 24.3% 28.5% (15.2%) 29.4% 28.1% 15.8%
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 27.3% 22.3% 22.0% 26.6% 22.8% 29.5%
RESTRUCTURING CHARGES 1.4% -- N/A 0.5% -- N/A
-------- -------- -------- -------- -------- --------
OPERATING INCOME (LOSS) (4.4%) 6.2% (170.0%) 2.3% 5.3% (51.6%)
Interest Expense and Other, Net (1.1%) (1.0%) 7.8% (0.9%) (0.8%) 23.7%
-------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAXES (5.5%) 5.2% (206.2%) 1.4% 4.5% 64.7%
Income Tax (Benefit) Provision (2.4%) 2.3% (206.1%) 0.6% 1.9% (63.4%)
-------- -------- -------- -------- -------- --------
NET INCOME (LOSS) (3.1%) 2.9% (206.2%) 0.8% 2.6% (65.6%)
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
The following table sets forth, for the periods indicated, the gross margin
percentages for global services, communication systems and financial services.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------- ------------------------------------
JANUARY 30, JANUARY 31, JANUARY 30, JANUARY 31,
1999 1998 1999 1998
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
GROSS MARGIN PERCENTAGES:
Global Services
IT Consulting Services 30.0% 26.2% 33.2% 27.5%
Communication Services 30.8% 29.9% 31.6% 28.9%
Total Global Services 30.4% 28.2% 32.4% 28.3%
Communication Solutions 11.6% 27.8% 23.9% 26.6%
Financial Services 61.1% 63.5% 61.0% 67.0%
</TABLE>
10
<PAGE>
RESULTS OF OPERATIONS
REVENUES. Revenues decreased less than 1.0% to $111.5 million for the
quarter ended January 30, 1999 as compared to $111.8 million for the prior
year's quarter ended January 31, 1998. For the nine month period ended January
30, 1999, revenues increased 10.8% to $352.4 million as compared to $318.1
million for the similar period last year.
Revenues from Global Services increased $14.0 million or 24.9%, and $45.4
million or 28.9%, during the comparable three and nine month periods ended
January 30, 1999 and January 31, 1998, respectively. Revenues from IT Consulting
Services increased $10.3 million, or 41.1%, and $40.0 million, or 64.3%, during
the comparable three and nine month periods ended January 30, 1999 and January
31, 1998, respectively. These increases were generally the result of: (i) the
inclusion of the results of PRIMA, acquired in September 1997, for the three and
nine month periods ended January 30, 1999; (ii) the merger with Wordlink during
June 1998; and (iii) internal growth. Revenues from Communication Services
increased 11.7% to $34.6 million for the quarter ended January 30, 1999 as
compared to $31.0 million for the prior year quarter. For the nine month period
ended January 30, 1999, Communication Services revenues increased 5.7% to $99.9
million as compared to $94.5 million for the nine month period ended January 31,
1998.
Revenues from Communication Solutions decreased 26.8% to $39.5 million in
the quarter ended January 30, 1999 from $54.0 million in the similar period last
year. Communication Solutions revenues decreased $11.3 million, or 7.3%, to
$144.6 million for the nine month period ended January 30, 1999 as compared to
the similar period last year. Communication Solutions revenues were negatively
affected by the resource reduction and other organizational and leadership
changes which occurred in the third quarter of fiscal 1999. The disruption in
the sales force resulting from the resource reduction adversely affected volume
in the third quarter.
Revenues from Financial Services increased 15.5%, to $1.9 million in the
third quarter of fiscal year 1999 from $1.6 million in the similar quarter last
year. Revenues for the nine month period ended January 30, 1999 increased 4.5%,
to $5.7 million from $5.5 million in the similar period ended January 31, 1998.
GROSS MARGIN. The Company's gross margin decreased $4.9 million, or 15.2%,
to $27.0 million for the quarter ended January 30, 1999 as compared to $31.9
million for the similar quarter last year. For the nine month period ended
January 30, 1999, gross margin increased $14.1 million, or 15.8%, to $103.6
million as compared to $89.4 million for the similar period last year. As a
percent of total revenues, gross margin was 24.3% and 29.4% for the three and
nine month periods ended January 30, 1999 as compared to 28.5% and 28.1% for the
similar periods ended January 31, 1998. The decrease in the gross margin
percentage for the current three month period was the result of significantly
lower gross margins in Communication Solutions, were offset somewhat by
increased margins in Global Services.
Gross margin as a percent of revenues for Global Services was 30.4% and
32.4% for the three and nine month periods ended January 30, 1999 as compared to
28.2% and 28.3% for the similar periods last year. The gross margin for IT
Consulting Services increased to 30.0% and 33.2% for the three and nine month
periods of fiscal year 1999 from 26.2% and 27.5% for the same periods in fiscal
year 1998. These improved margins are a result of operating efficiencies gained
as the IT Consulting Services business continued to grow as well as from an
increased emphasis on time-and-materials engagements as opposed to fixed price
contracts. The gross margin for Communication Services increased to 30.8% and
31.6% from 29.9% and 28.9% for the three and nine months ended January 30, 1999
and January 31, 1998, respectively.
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Gross margin as a percent of revenues for Communication Solutions was 11.6%
and 23.9% for the three and nine months ended January 30, 1999 as compared to
27.8% and 26.6% for the comparable periods ended January 31, 1998. The decline
in the current quarter and year-to-date margin percentages is due largely to
non-recurring charges associated with the resolution of cost overruns on a large
government contract, as well as higher than anticipated installation costs
related to new product offerings.
Gross margin as a percent of revenues for Financial Services was 61.1% and
61.0% for the three and nine months ended January 30, 1999 as compared to 63.5%
and 67.0% for the similar periods last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 22.0% to $30.4 million in the third quarter
of fiscal year 1999 as compared to $24.9 million in the similar period last
year. For the nine month period, these expenses increased 29.5% to $93.8
million as compared to $72.5 million in the prior year period. As a percent
of revenues, selling, general and administrative expenses increased to 27.3%
and 26.6% for the three and nine month periods ended January 30, 1999, as
compared to 22.3% and 22.8% for the same periods last year. These increases
are partially due to the lower volume in the Communication Solutions
segment as well as increased investments in the IT Consulting Services
business including new product offerings, costs associated with the Wordlink
acquisition, investments in Connaissance Consulting and the opening of new
consulting offices in the past nine months.
RESTRUCTURING CHARGE. During the quarter ended January 30, 1999, the Company
recorded a restructuring charge of $1.5 million relating to a workforce
reduction announced early in the quarter. This resource reduction in the
communications business was made to bring the Company's expense structure in
line with anticipated growth. The restructuring charge reflects the costs of
severance and other employment termination benefits.
INTEREST EXPENSE. Interest expense was $1.2 million for the three month
periods ended January 30, 1999 and January 31, 1998. For the nine months ended
January 30, 1999 interest expense increased to $3.4 million from $2.7 million
for the same period last year. This increase was the result of higher borrowing
levels in fiscal year 1999 related to acquisitions and working capital
requirements.
INCOME TAXES. The Company's effective income tax rate was 43.5% for the
three and nine months ended January 30, 1999 and 43.5% and 42%, respectively,
for the similar periods last year. 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. In the third quarter of fiscal 1999, the Company incurred a net
loss of $3.5 million or $0.33 per diluted share, as compared to net income of
$3.3 million or $0.33 per diluted share for the third quarter of fiscal year
1998. Net income was $2.9 million or $0.27 per diluted share, and $8.4 million,
or $0.86 per diluted share, for the nine month periods ended January 30, 1999
and January 31, 1998, respectively.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities decreased in the first nine months of
fiscal year 1999 as compared to the similar period last year as a result of a
decrease in accounts receivable which was offset by increases in inventories,
costs and estimated earnings in excess of billings and prepaid expenses and
decreases in accrued liabilities and billings in excess of costs and estimated
earnings. Net cash used for investing activities decreased in the first nine
months of fiscal year 1999 as compared to the similar period in fiscal year 1998
as a result of a decrease in cash paid for acquisitions offset by increased
capital expenditures and investments in lease contracts.
CAPITAL EXPENDITURES. The Company used $19.7 million for capital
expenditures during the nine months ended January 30, 1999, as compared to $14.4
million in the similar period last year. 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 investment made in lease
contracts year-to-date in fiscal year 1999 totaled $26.6 million. Net lease
receivables increased to $60.6 million, at January 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 or recourse basis by discounting the stream of future lease
payments. Proceeds from discounting are presented on the consolidated balance
sheet as discounted lease rentals. Discounted lease rentals totaled $47.1
million at January 30, 1999 as compared to $35.6 million at April 30, 1998.
Interest rates on these credit agreements at January 30, 1999 ranged from
approximately 6.0% to 10.0%, while payments are due in varying monthly
installments through September 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 also exist related to the Company's support of its leasing activities.
Borrowings under this agreement are due May 31, 2001, and generally bear
interest at the banks' reference rate (7.75% at January 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 6.3% at January 30, 1999).
Total consolidated borrowings under this agreement at January 30, 1999 and April
30, 1998 were $77.3 million and $52.4 million, respectively. Annual commitment
fees on the unused portions of the credit facility are 0.25%.
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.
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IMPACT OF YEAR 2000
The Company has completed an assessment of the hardware and software in
its core business information systems and has substantially completed the
necessary modifications. The Company is testing its systems to verify proper
functionality with respect to dates in 2000 and thereafter. The Company has
also had discussions with its significant suppliers to ensure that those
parties have appropriate plans to remediate Year 2000 issues where their
systems and products interface with the Company's systems or otherwise affect
its operations or that of its customers. 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 current product
offerings available to the Company's customers.
The Company's comprehensive Year 2000 initiative is being managed by a team
of internal staff. The Company is well under way with its efforts, which are
scheduled to be completed by the fall of 1999. The cost of the Year 2000
initiative is estimated to be approximately $2.0 million, to be incurred over
fiscal year 1999 and fiscal year 2000.
While the Company believes its planning efforts are adequate to address its
Year 2000 concerns, the Year 2000 readiness of the Company's customers, and the
hardware and software offerings from the Company's suppliers and business
partners may vary. Although the Company does not believe that the Year 2000
matters discussed above will have a material impact on its business, financial
condition and results of operations, it is uncertain as to what extent the
Company may be affected by such matters.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course
of its business. Although the outcome of any such legal action
cannot be predicted, in the opinion of management there is no
legal proceeding pending against or involving the Company for
which the outcome is likely to have a material adverse effect
upon the consolidated financial position or results of operations
of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORSTAN, INC.
----------------------------------
Registrant
Date: March 15, 1999 By /s/ David R. Richard
--------------------------------
David R. Richard
Chief Executive Officer,
President and Director
Date: March 15, 1999 By /s/ Kenneth S. MacKenzie
--------------------------------
Kenneth S. MacKenzie
Chief Financial Officer
(Principal Financial and Accounting Officer)
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