<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 JULY 31, 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
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(address of principal executive offices)
TELEPHONE (612) 352-4000 FAX (612) 352-4949 INTERNET WWW.NORSTAN.COM
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(Registrant's telephone number, facsimile number, Internet address)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X . No .
------ -----
On September 7, 1999, there were 10,850,996 shares outstanding of the
registrant's common stock, par value $0.10 per share, its only class of
equity securities.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1.
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
JULY 31, AUGUST 1,
1999 1998
------------------- ------------------
<S> <C> <C>
REVENUES
Global Services
IT Consulting Services $ 35,916 $ 31,675
Communication Services 35,182 32,366
------------------- ------------------
Total Global Services 71,098 64,041
Communication Solutions 42,848 50,055
Financial Services 2,258 1,754
------------------- ------------------
TOTAL REVENUES 116,204 115,850
------------------- ------------------
COST OF SALES
Global Services
IT Consulting Services 22,765 20,903
Communication Services 24,759 21,799
------------------- ------------------
Total Global Services 47,524 42,702
Communication Solutions 31,628 35,988
Financial Services 698 697
------------------- ------------------
TOTAL COST OF SALES 79,850 79,387
------------------- ------------------
GROSS MARGIN 36,354 36,463
Selling, General
& Administrative Expenses 32,833 30,837
------------------- ------------------
OPERATING INCOME 3,521 5,626
Interest Expense (1,426) (1,089)
Other Income (Expense), Net (462) 181
------------------- ------------------
INCOME BEFORE TAXES 1,633 4,718
Provision for Income Taxes 751 2,052
------------------- ------------------
NET INCOME $ 882 $ 2,666
------------------- ------------------
------------------- ------------------
NET INCOME PER SHARE -
BASIC $ 0.88 $ 0.26
------------------- ------------------
------------------- ------------------
DILUTED $ 0.88 $ 0.26
------------------- ------------------
------------------- ------------------
WEIGHTED AVERAGE SHARES -
BASIC 10,708 10,192
------------------- ------------------
------------------- ------------------
DILUTED 10,726 10,418
------------------- ------------------
------------------- ------------------
</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>
JULY 31, APRIL 30,
1999 1999
----------------- ----------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 1,122 $ 867
Accounts receivable, net of allowances for doubtful
accounts of $1,698 and $1,437 91,376 97,446
Current lease receivables 21,229 23,299
Inventories 19,763 16,846
Costs and estimated earnings in excess of billings of
$22,529 and $18,508 34,896 24,389
Deferred income tax benefits 1,321 1,516
Prepaid expenses, deposits and other 13,506 7,116
Prepaid income taxes 4,878 4,384
----------------- ----------------
TOTAL CURRENT ASSETS 188,091 175,863
----------------- ----------------
PROPERTY AND EQUIPMENT
Furniture, fixtures and equipment 99,512 97,385
Less-accumulated depreciation and amortization (51,772) (47,656)
----------------- ----------------
NET PROPERTY AND EQUIPMENT 47,740 49,729
----------------- ----------------
OTHER ASSETS
Lease receivables, net of current portion 39,642 39,736
Goodwill, net of amortization of $11,784 and $11,033 39,164 39,994
Other 2,714 3,194
----------------- ----------------
TOTAL OTHER ASSETS 81,520 82,924
----------------- ----------------
$ 317,351 $ 308,516
----------------- ----------------
----------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
2
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
JULY 31, APRIL 30,
1999 1999
--------------- ----------------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 1,961 $ 3,004
Current maturities of discounted lease rentals 19,736 21,550
Accounts payable 28,743 28,394
Deferred revenue 21,268 20,967
Accrued -
Salaries and wages 5,424 7,950
Warranty costs 1,787 1,795
Other liabilities 4,283 5,046
Billings in excess of costs and estimated earnings of $12,155
and $10,858 12,000 8,918
--------------- ----------------
TOTAL CURRENT LIABILITIES 95,202 97,624
--------------- ----------------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 73,375 61,411
DISCOUNTED LEASE RENTALS, NET OF CURRENT MATURITIES 29,727 32,604
DEFERRED INCOME TAXES 8,576 7,542
--------------- ----------------
SHAREHOLDERS' EQUITY
Common stock - $.10 par value; 40,000,000 authorized shares;
10,850,996 and 10,763,726 shares issued and outstanding 1,085 1,076
Capital in excess of par value 52,249 51,420
Retained earnings 61,146 60,264
Unamortized cost of stock (2,022) (1,805)
Accumulated other comprehensive income (1,987) (1,620)
--------------- ----------------
TOTAL SHAREHOLDERS' EQUITY 110,471 109,335
--------------- ----------------
--------------- ----------------
$ 317,351 $ 308,516
--------------- ----------------
--------------- ----------------
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
3
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
UNAUDITED
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
JULY 31, AUGUST 1,
1999 1998
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 882 $ 2,666
Adjustments to reconcile net income to net cash used for operating
activities:
Restructuring charges paid (697) (359)
Depreciation and amortization 5,854 4,054
Deferred income taxes 1,197 437
Changes in operating items, net of acquisition effects:
Accounts receivable 5,824 13,991
Inventories (2,982) (1,281)
Costs and estimated earnings in excess of billings (10,654) (9,584)
Prepaid expenses, deposits and other (6,398) (3,239)
Accounts payable 400 (3,435)
Deferred revenue 357 213
Accrued liabilities (2,747) (10,276)
Prepaid income taxes (565) 1,493
Billings in excess of costs and estimated earnings 3,104 1,294
-------------- -------------
NET CASH USED FOR OPERATING ACTIVITIES (6,425) (4,026)
-------------- -------------
INVESTING ACTIVITIES
Additions to property and equipment, net (2,839) (5,763)
Investment in lease contracts (4,363) (9,295)
Collections from lease contracts 6,411 5,689
Other, net 608 (287)
-------------- -------------
NET CASH USED FOR INVESTING ACTIVITIES (183) (9,656)
-------------- -------------
FINANCING ACTIVITIES
Borrowings of long-term debt 60,845 99,158
Repayments of long-term debt (49,835) (92,041)
Repayment of debt assumed in acquisition - (1,267)
Borrowing of discounted lease rentals 2,757 13,332
Repayments of discounted lease rentals (7,393) (4,786)
Proceeds from sale of common stock 460 1,870
-------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,834 16,266
-------------- -------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 29 44
-------------- -------------
NET INCREASE IN CASH 255 2,628
CASH, BEGINNING OF PERIOD 867 1,869
-------------- -------------
-------------- -------------
CASH, END OF PERIOD $ 1,122 $ 4,497
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 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>
THREE MONTHS ENDED
--------------------------------------
JULY 31, AUGUST 1,
1999 1998
--------------- ---------------
<S> <C> <C>
Cash paid for:
Interest $ 2,068 $ 1,891
Income taxes $ 119 $ 7
Non-cash investing and financing activities:
Stock issued for acquisition $ - $ 114
</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
The Company reports net income per share pursuant to the requirements of the
Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
No. 128"). SFAS No. 128 requires presentation of basic and diluted earnings per
share (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.
A reconciliation of EPS calculations under SFAS No. 128 is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------
JULY 31, AUGUST 1,
1999 1998
---------------- ----------------
<S> <C> <C>
Net income $ 882 $ 2,666
---------------- ----------------
---------------- ----------------
Weighted average common
Shares outstanding - Basic 10,708 10,192
Effect of stock option and
Benefit plans 18 226
---------------- ----------------
Weighted average common
Shares outstanding - Diluted 10,726 10,418
---------------- ----------------
---------------- ----------------
Net income per share -
Basic $ 0.08 $ 0.26
---------------- ----------------
---------------- ----------------
Diluted $ 0.08 $ 0.26
---------------- ----------------
---------------- ----------------
</TABLE>
COMPREHENSIVE INCOME
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
approximately $515,000 and $2.0 million for the three month periods ended July
31, 1999 and August 1, 1998, respectively.
INTERNAL USE SOFTWARE
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 $1.1 million and $2.6 million of costs associated with
internal-use software developed or obtained during the three month periods ended
July 31, 1999 and August 1, 1998, respectively.
6
<PAGE>
RESTRUCTURING CHARGES
During fiscal years 1998 and 1999, the Company recorded restructuring
charges of $14.7 million and $1.5 million, respectively. These charges were
related to management's plan to reduce costs, consolidate and reorganize
operations, improve operating efficiencies and a workforce reduction in the
communications business. During the fiscal quarter ended July 31, 1999, payments
totaling $697,000 were charged against the restructuring reserves which were
established as part of the fiscal 1998 and 1999 restructuring charges. As of
July 31, 1999, the restructuring reserves have been fully utilized.
ACQUISITION
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 business clients operating in a multi-vendor network environment.
The merger agreement called for all shares of Wordlink common stock and all
vested stock options issued and outstanding to be converted 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 recorded the combination without restating prior periods' financial
statements.
VENDOR AGREEMENTS
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.
BUSINESS SEGMENTS
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," effective April 30, 1998. The Company
operates in three business segments, Global Services, Communication Solutions,
and Financial Services. Financial results for Global Services are reported as
(i) IT Consulting Services and (ii) Communication Services. Within the following
table, all corporate general and administrative expenses have been allocated to
the business segments. Interim disclosures under SFAS No. 131 are as follows (in
thousands):
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
--------------------------------------------------------------------------------
JULY 31, 1999 AUGUST 1, 1998
--------------------------------------- -------------------------------------
OPERATING OPERATING
REVENUES INCOME (LOSS) REVENUES INCOME
---------------- ------------------- --------------- -----------------
<S> <C> <C> <C> <C>
Global Services:
IT Consulting Services $ 35,916 $ 60 $ 31,675 $ 1,166
Communication Services 35,182 3,737 32,366 3,487
---------------- ------------------- --------------- -----------------
Total Global Services 71,098 3,797 64,041 4,653
Communication Solutions 42,848 (1,336) 50,055 32
Financial Services 2,258 1,060 1,754 941
---------------- ------------------- --------------- -----------------
Totals $ 116,204 $ 3,521 $ 115,850 $ 5,626
---------------- ------------------- --------------- -----------------
---------------- ------------------- --------------- -----------------
</TABLE>
7
<PAGE>
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 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.
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 obligations under
the Company's revolving credit agreement, discounted lease rentals, and other
long-term debt.
The potential loss from a hypothetical 10% adverse change in foreign currency
rates on the Company's foreign installment contracts at July 31, 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 borrowing 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 July 31, 1999,
total consolidated borrowings under this agreement were $72.2 million.
The Company 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 these obligations. However,
interest rate changes would affect the fair market value of the lease rentals,
capital leases and other long-term debt obligations. At July 31, 1999, the
Company had fixed rate lease rentals of $49.5 million and capital lease and
other long-term debt obligations of $3.1 million.
8
<PAGE>
ITEM 2.
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. As communication and information technologies converge, Norstan's
strategy is to expand the breadth of its IT consulting service 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. 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.
SUMMARY
During the quarter ended July 31, 1999, the Company's net income was
$882,000 or $0.08 per common share, as compared to $2.7 million or $0.26 per
common share for the quarter ended August 1, 1998. All per share figures reflect
diluted rather than basic EPS.
9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
DOLLAR AMOUNTS AS A
PERCENTAGE OF REVENUES PERCENTAGE
THREE MONTHS ENDED CHANGE
-------------------------------------------------
JULY 31, AUGUST 1, FISCAL
1999 1998 2000 VS. 1999
-----------------------------------------------
<C> <C> <C>
REVENUES
Global Services
IT Consulting Services 30.9% 27.3% 13.4%
Communication Services 30.3% 28.0% 8.7%
-----------------------------------------------
Total Global Services 61.2% 55.3% 11.0%
Communication Solutions 36.9% 43.2% (14.4%)
Financial Services 1.9% 1.5% 28.7%
-----------------------------------------------
Total Revenues 100.0% 100.0% 0.3%
COST OF SALES 68.7% 68.5% 0.6%
-----------------------------------------------
GROSS MARGIN 31.3% 31.5% (0.3%)
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 28.3% 26.6% 6.5%
-----------------------------------------------
OPERATING INCOME 3.0% 4.9% (37.4%)
Interest Expense and Other, Net (1.6%) (0.8%) 108.0%
-----------------------------------------------
INCOME BEFORE PROVISION FOR INCOME TAXES 1.4% 4.1% (65.4%)
Income Tax Provision 0.6% 1.8% (63.4%)
-----------------------------------------------
NET INCOME 0.8% 2.3% (66.9%)
-----------------------------------------------
-----------------------------------------------
</TABLE>
The following table sets forth, for the periods indicated, the gross margin
percentages for Global Services, Communication Solutions and Financial Services.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
JULY 31, AUGUST 1,
1999 1998
---------------- ----------------
<S> <C> <C>
GROSS MARGIN PERCENTAGES
Global Services
IT Consulting Services 36.6% 34.0%
Communication Services 29.6% 32.7%
Total Global Services 33.2% 33.3%
Communication Solutions 26.2% 28.1%
Financial Services 69.1% 60.3%
</TABLE>
10
<PAGE>
RESULTS OF OPERATIONS
REVENUES. Revenues increased $354,000 to $116.2 million in the first quarter
of fiscal year 2000 as compared to $115.9 million for the first quarter of
fiscal year 1999.
Revenues from Global Services increased 11.0% to $71.1 million for the first
quarter ended July 31, 1999 as compared to $64.0 million for the similar period
last year. Revenues from IT Consulting Services increased 13.4% to $35.9 million
in the first quarter ended July 31, 1999 from $31.7 million in the similar
period last year. This increase was primarily the result of increased revenues
for Connaissance Consulting, outsourcing and conferencing, as well as internal
growth in Norstan Consulting. Revenues from Communication Services increased
8.7% to $35.2 million for the quarter ended July 31, 1999 as compared to $32.4
million for the prior year quarter. This increase resulted from growth in all
service lines including moves, adds and changes, maintenance services and
network services.
Revenues from Communication Solutions decreased 14.4% to $42.8 million in
the quarter ended July 31, 1999 from $50.1 million in the similar period last
year. This decrease was primarily due to a decline in revenues from the
company's cabling business. The Company is continuing to reposition the
cabling business from general cabling work to more technical work which
supports multiservice networking solutions. In addition, revenues from
conferencing, call centers and voice processing products all decreased
quarter to quarter.
Revenues from Financial Services increased 28.7% to $2.3 million in the
first quarter of fiscal year 2000 from $1.8 million in the similar quarter last
year.
GROSS MARGIN. The Company's gross margin decreased $109,000 to $36.4 million
for the quarter ended July 31, 1999 as compared to $36.5 million for the similar
quarter last year. As a percent of total revenues, gross margin was 31.3% for
the three month period ended July 31, 1999 as compared to 31.5% for the similar
period ended August 1, 1998.
Gross margin as a percent of revenues for Global Services was 33.2% for the
three month period ended July 31, 1999 as compared to 33.3% for the similar
period last year. The gross margin for IT Consulting Services increased to 36.6%
during the first quarter of fiscal year 2000 as compared to 34.0% for the same
period in fiscal year 1999. The improved margin was primarily the result of
Norstan Consulting's increased billing rates and utilization of consultants and
improvements in Connaissance Consulting's margins. The gross margin for
Communication Services decreased to 29.6% from 32.7% for the three months ended
July 31, 1999 and August 1, 1998, respectively. This decrease was primarily the
result of excess capacity within the Communication Services' operations group
due to lower volume of installations during the first quarter of fiscal year
2000.
Gross margin as a percent of revenues for Communication Solutions was 26.2%
for the three month period ended July 31, 1999 as compared to 28.1% for the
comparable period ended August 1, 1998. The decline in current quarter margin
percentage is due largely to decreased cabling margins as well as decreased
margins relating to communication systems, voice processing and conferencing
products.
Gross margin as a percent of revenues for Financial Services was 69.1% for
the three month period ended July 31, 1999 as compared to 60.3% for the similar
period last year.
11
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 6.5% to $32.8 million in the first quarter of
fiscal year 2000 as compared to $30.8 million in the similar period last year.
As a percent of revenues, selling, general and administrative expenses increased
to 28.3% for the three month period ended July 31, 1999, as compared to 26.6%
for the same period last year. This increase was primarily due to the lower than
expected volumes in the Communication Solutions segment and the IT Consulting
Services group.
INTEREST EXPENSE. Interest expense was $1.4 million and $1.1 million for the
three month periods ended July 31, 1999 and August 1, 1998, respectively. This
increase was primarily the result of higher borrowing levels during the quarter
related to working capital requirements.
INCOME TAXES. The Company's effective income tax rate was 46.0% for the
three month period ended July 31, 1999 and 43.5% for the similar period 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 first quarter of fiscal 2000, net income was $882,000 or
$0.08 per diluted share, as compared to $2.7 million or $0.26 per diluted share
for the first quarter of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities increased in the first quarter of
fiscal year 2000 as compared to the similar period last year as a result of
increases in inventories, costs and estimated earnings in excess of billings and
prepaid expenses and decreases in accrued liabilities. Net cash used for
investing activities decreased in the first quarter of fiscal year 2000 as
compared to the similar period in fiscal year 1999 as a result of decreases in
capital expenditures and investments in lease contracts. Net cash provided by
financing activities decreased in the comparable quarters as a result of a
decrease in net borrowings of discounted lease rentals somewhat offset by an
increase in net borrowings of long-term debt.
CAPITAL EXPENDITURES. The Company used $2.8 million for capital expenditures
during the three months ended July 31, 1999, as compared to $5.8 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 and facility expansion.
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 the first quarter of fiscal year 2000 totaled $4.4
million. Net lease receivables decreased slightly to $60.9 million at July 31,
1999 from $63.0 million at April 30, 1999.
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 $49.5 million at July 31, 1999 as compared to
$54.2 million at April 30, 1999. Interest rates on these credit agreements at
July 31, 1999 ranged from approximately 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.
12
<PAGE>
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 generally bear
interest at the banks' reference rate (8.0% at July 31, 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 July 31, 1999). Total
consolidated borrowings under this agreement at July 31, 1999 and April 30, 1999
were $72.2 million and $60.2 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.
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 has also substantially completed the
testing of 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.
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 $1.6 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.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course
of its business. Although the 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
14
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORSTAN, INC.
------------------------
Registrant
Date: September 13, 1999 By /s/ David R. Richard
----------------------------------
David R. Richard
Chief Executive Officer,
President and Director
Date: September 13, 1999 By /s/ Kenneth S. MacKenzie
-----------------------------------
Kenneth S. MacKenzie
Chief Financial Officer
(Principal Financial and Accounting
Officer)
15
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