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 29, 2000
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 (State or other jurisdiction of incorporation or organization) |
41-0835746 (I.R.S. Employer 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, 2000, there were 10,989,433 shares outstanding of the registrant's common stock, par value $0.10 per share, its only class of equity securities.
PART I. FINANCIAL INFORMATION
ITEM 1.
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share amounts)
|
Three Months Ended |
Nine Months Ended |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
January 29, 2000 |
January 30, 1999 |
January 29, 2000 |
January 30, 1999 |
|||||||||
REVENUES | |||||||||||||
Global Services | |||||||||||||
IT Consulting Services | $ | 22,710 | $ | 35,536 | $ | 93,573 | $ | 102,256 | |||||
Communication Services | 33,342 | 34,593 | 103,857 | 99,856 | |||||||||
Total Global Services | 56,052 | 70,129 | 197,430 | 202,112 | |||||||||
Communication Solutions | 33,885 | 39,492 | 120,513 | 144,584 | |||||||||
Financial Services | 2,227 | 1,888 | 6,669 | 5,716 | |||||||||
Total Revenues | 92,164 | 111,509 | 324,612 | 352,412 | |||||||||
COST OF SALES | |||||||||||||
Global Services | |||||||||||||
IT Consulting Services | 19,467 | 24,872 | 66,765 | 68,343 | |||||||||
Communication Services | 26,370 | 23,945 | 80,331 | 68,281 | |||||||||
Total Global Services | 45,837 | 48,817 | 147,096 | 136,624 | |||||||||
Communication Solutions | 27,035 | 34,911 | 95,283 | 110,006 | |||||||||
Financial Services | 689 | 735 | 2,062 | 2,229 | |||||||||
Total Cost of Sales | 73,561 | 84,463 | 244,441 | 248,859 | |||||||||
GROSS MARGIN | 18,603 | 27,046 | 80,171 | 103,553 | |||||||||
Selling, General & Administrative Expenses | 33,967 | 30,399 | 104,520 | 93,829 | |||||||||
Restructuring Charges | | 1,522 | 1,969 | 1,522 | |||||||||
OPERATING INCOME (LOSS) | (15,364 | ) | (4,875 | ) | (26,318 | ) | 8,202 | ||||||
Interest Expense | (1,754 | ) | (1,169 | ) | (4,570 | ) | (3,421 | ) | |||||
Other Income (Expense), Net | 300 | (110 | ) | 435 | 314 | ||||||||
INCOME (LOSS) BEFORE TAXES | (16,818 | ) | (6,154 | ) | (30,453 | ) | 5,095 | ||||||
Income Tax (Benefit) Provision | (5,046 | ) | (2,676 | ) | (7,348 | ) | 2,217 | ||||||
NET INCOME (LOSS) | $ | (11,772 | ) | $ | (3,478 | ) | $ | (23,105 | ) | $ | 2,878 | ||
NET INCOME (LOSS) PER SHARE | |||||||||||||
BASIC | $ | (1.08 | ) | $ | (0.33 | ) | $ | (2.14 | ) | $ | 0.28 | ||
DILUTED | $ | (1.08 | ) | $ | (0.33 | ) | $ | (2.14 | ) | $ | 0.27 | ||
WEIGHTED AVERAGE SHARES | |||||||||||||
BASIC | 10,855 | 10,572 | 10,775 | 10,420 | |||||||||
DILUTED | 10,855 | 10,572 | 10,775 | 10,527 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
|
January 29, 2000 |
April 30, 1999 |
|||||
---|---|---|---|---|---|---|---|
|
(Unaudited) |
|
|||||
ASSETS | |||||||
CURRENT ASSETS | |||||||
Cash | $ | 595 | $ | 867 | |||
Accounts receivable, net of allowances for doubtful accounts of $3,114 and $1,437 | 80,644 | 97,446 | |||||
Current lease receivables | 22,912 | 23,299 | |||||
Inventories | 18,761 | 16,846 | |||||
Costs and estimated earnings in excess of billings of $15,037 and $18,508 | 20,573 | 24,389 | |||||
Deferred income tax benefits | 3,014 | 1,516 | |||||
Prepaid expenses, deposits and other | 26,862 | 11,500 | |||||
TOTAL CURRENT ASSETS | 173,361 | 175,863 | |||||
PROPERTY AND EQUIPMENT |
|
|
|
|
|
|
|
Furniture, fixtures and equipment | 103,935 | 97,385 | |||||
Less-accumulated depreciation and amortization | (59,040 | ) | (47,656 | ) | |||
NET PROPERTY AND EQUIPMENT | 44,895 | 49,729 | |||||
OTHER ASSETS | |||||||
Lease receivables, net of current portion | 39,747 | 39,736 | |||||
Goodwill, net of amortization of $13,507 and $11,033 | 37,555 | 39,994 | |||||
Other | 3,613 | 3,194 | |||||
TOTAL OTHER ASSETS | 80,915 | 82,924 | |||||
$ | 299,171 | $ | 308,516 | ||||
The accompanying notes are an integral part of these consolidated balance sheets.
2
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
|
January 29, 2000 |
April 30, 1999 |
|||||
---|---|---|---|---|---|---|---|
|
(Unaudited) |
|
|||||
LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||
CURRENT LIABILITIES |
|
|
|
|
|
|
|
Current maturities of long-term debt | $ | 1,446 | $ | 3,004 | |||
Current maturities of discounted lease rentals | 21,864 | 21,550 | |||||
Accounts payable | 27,070 | 28,394 | |||||
Deferred revenue | 21,682 | 20,967 | |||||
Accrued | |||||||
Salaries and wages | 4,978 | 7,950 | |||||
Warranty costs | 1,797 | 1,795 | |||||
Other current liabilities | 8,731 | 5,046 | |||||
Billings in excess of costs and estimated earnings of $15,877 and $10,858 | 9,781 | 8,918 | |||||
TOTAL CURRENT LIABILITIES | 97,349 | 97,624 | |||||
LONG-TERM DEBT, net of current maturities |
|
|
75,720 |
|
|
61,411 |
|
DISCOUNTED LEASE RENTALS, net of current maturities |
|
|
28,332 |
|
|
32,604 |
|
OTHER LIABILITIES |
|
|
1,808 |
|
|
|
|
DEFERRED INCOME TAXES |
|
|
8,059 |
|
|
7,542 |
|
SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
Common stock$.10 par value; 40,000,000 authorized shares; 11,173,233 and 10,763,726 shares issued and outstanding | 1,117 | 1,076 | |||||
Capital in excess of par value | 53,174 | 51,420 | |||||
Retained earnings | 37,159 | 60,264 | |||||
Unamortized cost of stock | (2,047 | ) | (1,805 | ) | |||
Accumulated other comprehensive income | (1,500 | ) | (1,620 | ) | |||
TOTAL SHAREHOLDERS' EQUITY | 87,903 | 109,335 | |||||
$ | 299,171 | $ | 308,516 | ||||
The accompanying notes are an integral part of these consolidated balance sheets.
3
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
UNAUDITED
(In thousands)
|
Nine Months Ended |
||||||
---|---|---|---|---|---|---|---|
|
January 29, 2000 |
January 30, 1999 |
|||||
OPERATING ACTIVITIES | |||||||
Net income (loss) | $ | (23,105 | ) | $ | 2,878 | ||
Adjustments to reconcile net income (loss) to net cash used for operating activities: | |||||||
Restructuring charges | 1,969 | 1,552 | |||||
Restructuring charges paid | (1,560 | ) | (2,494 | ) | |||
Depreciation and amortization | 17,968 | 14,372 | |||||
Deferred income taxes | (985 | ) | 4,224 | ||||
Changes in operating items, net of acquisition effects: | |||||||
Accounts receivable | 16,859 | 3,174 | |||||
Inventories | (1,891 | ) | (9,258 | ) | |||
Costs and estimated earnings in excess of billings | 3,886 | (3,600 | ) | ||||
Prepaid expenses, deposits and other | (10,527 | ) | (2,497 | ) | |||
Accounts payable | (1,355 | ) | (946 | ) | |||
Deferred revenue | 678 | 566 | |||||
Accrued liabilities | 313 | (13,066 | ) | ||||
Income taxes receivable | (4,800 | ) | (3,758 | ) | |||
Billings in excess of costs and estimated earnings | 839 | (1,084 | ) | ||||
Net cash used for operating activities | (1,711 | ) | (9,937 | ) | |||
INVESTING ACTIVITIES | |||||||
Additions to property and equipment, net | (9,519 | ) | (19,702 | ) | |||
Investment in lease contracts | (20,595 | ) | (26,636 | ) | |||
Collections from lease contracts | 21,579 | 19,584 | |||||
Other, net | 170 | (618 | ) | ||||
Net cash used for investing activities | (8,365 | ) | (27,372 | ) | |||
FINANCING ACTIVITIES | |||||||
Borrowings of long-term debt | 183,815 | 248,464 | |||||
Repayments of long-term debt | (171,071 | ) | (225,244 | ) | |||
Repayment of debt assumed in acquisition | | (1,267 | ) | ||||
Borrowing of discounted lease rentals | 12,190 | 26,416 | |||||
Repayments of discounted lease rentals | (16,163 | ) | (14,869 | ) | |||
Proceeds from sale of common stock | 1,065 | 3,837 | |||||
Net cash provided by financing activities | 9,836 | 37,337 | |||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | (32 | ) | 27 | ||||
NET (DECREASE) INCREASE IN CASH | (272 | ) | 55 | ||||
CASH, BEGINNING OF PERIOD | 867 | 1,869 | |||||
CASH, END OF PERIOD | $ | 595 | $ | 1,924 | |||
The accompanying notes are an integral part of these consolidated financial statements.
4
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 29, 2000
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):
|
Nine Months Ended |
|||||
---|---|---|---|---|---|---|
|
January 29, 2000 |
January 30, 1999 |
||||
Cash paid for: | ||||||
Interest | $ | 6,829 | $ | 5,652 | ||
Income taxes | $ | 1,437 | $ | 1,617 | ||
Non-cash investing and financing activities: |
|
|
|
|
|
|
Stock issued for acquisition | $ | | $ | 114 |
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.
EARNINGS PER SHARE DATA
The Company reports net income (loss) per share in accordance with the requirements of 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
5
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):
|
Three Months Ended |
Nine Months Ended |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
January 29, 2000 |
January 30, 1999 |
January 29, 2000 |
January 30, 1999 |
||||||||
Net (loss) income | $ | (11,772 | ) | $ | (3,478 | ) | $ | (23,105 | ) | $ | 2,878 | |
Weighted average common Shares outstandingBasic | 10,855 | 10,572 | 10,775 | 10,420 | ||||||||
Effect of stock option and Benefit plans |
|
|
|
|
|
|
|
|
|
|
|
107 |
Weighted average common shares outstandingDiluted | 10,855 | 10,572 | 10,775 | 10,527 | ||||||||
Net (loss) income per share | ||||||||||||
Basic | $ | (1.08 | ) | $ | (0.33 | ) | $ | (2.14 | ) | $ | 0.28 | |
Diluted | $ | (1.08 | ) | $ | (0.33 | ) | $ | (2.14 | ) | $ | 0.27 | |
COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with the requirements of SFAS No. 130, "Reporting Comprehensive Income". 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 $11.5 million and $3.3 million for the three month periods ended January 29, 2000 and January 30, 1999, respectively. For the nine month periods ended January 29, 2000 and January 30, 1999, comprehensive income was a loss of approximately $23.0 million and income of approximately $2.3 million, respectively.
INTERNAL USE SOFTWARE
The Company records the costs of internal use software in accordance with the requirements of Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use". The SOP requires the Company to capitalize certain costs incurred in connection with developing or obtaining internal-use software. The Company capitalized approximately $2.9 million and $6.8 million of costs associated with internal-use software developed or obtained during the nine month periods ended January 29, 2000 and January 30, 1999, respectively.
6
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 nine month period ended January 29, 2000, 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 January 29, 2000, these restructuring reserves have been fully utilized.
In addition, during the second quarter of fiscal 2000, the Company recorded a restructuring charge of approximately $2.0 million related to its IT consulting business. The emphasis of the restructuring is to consolidate branch offices and reduce certain general and administrative costs. Norstan Consulting is transitioning to a project-based business model in which the physical presence of geographic branches becomes far less important than the ability to move skilled consulting resources to customer engagements. The $2.0 million charge consists of noncancelable lease obligations for branch offices to be closed ($1.0 million), software and other asset write-offs ($800,000), and severance costs ($200,000). During the fiscal quarter ended January 29, 2000, approximately $863,000 was charged against the restructuring reserve established for these costs.
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
7
general and administrative expenses have been allocated to the business segments. Interim disclosures under SFAS No. 131 are as follows (in thousands):
|
For the Three Months Ended |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
January 29, 2000 |
January 30, 1999 |
|||||||||||
|
Revenues |
Operating Income (Loss) |
Revenues |
Operating Income (Loss) |
|||||||||
Global Services: | |||||||||||||
IT Consulting Services | $ | 22,710 | $ | (10,569 | ) | $ | 35,536 | $ | 1,065 | ||||
Communication Services | 33,342 | 329 | 34,593 | 1,884 | |||||||||
Total Global Services | 56,052 | (10,240 | ) | 70,129 | 2,949 | ||||||||
Communication Solutions | 33,885 | (6,198 | ) | 39,492 | (8,615 | ) | |||||||
Financial Services | 2,227 | 1,074 | 1,888 | 791 | |||||||||
Totals | $ | 92,164 | $ | (15,364 | ) | $ | 111,509 | $ | (4,875 | ) | |||
|
For the Nine Months Ended |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
January 29, 2000 |
January 30, 1999 |
|||||||||||
|
Revenues |
Operating Income (Loss) |
Revenues |
Operating Income (Loss) |
|||||||||
Global Services: | |||||||||||||
IT Consulting Services | $ | 93,573 | $ | (15,430 | ) | $ | 102,256 | $ | 3,755 | ||||
Communication Services | 103,857 | 1,093 | 99,856 | 7,581 | |||||||||
Total Global Services | 197,430 | (14,337 | ) | 202,112 | 11,336 | ||||||||
Communication Solutions | 120,513 | (15,157 | ) | 144,584 | (5,908 | ) | |||||||
Financial Services | 6,669 | 3,176 | 5,716 | 2,774 | |||||||||
Totals | $ | 324,612 | $ | (26,318 | ) | $ | 352,412 | $ | 8,202 | ||||
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
8
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 January 29, 2000 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 or to rates related to other available 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 January 29, 2000, total consolidated borrowings under this agreement were $74.7 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 January 29, 2000, the Company had fixed rate lease rentals of $50.2 million and capital lease and other long-term debt obligations of $2.5 million.
9
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 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. Within IT Consulting Services, Norstan Consulting delivers total customer care solutions to its clients through planning, designing, implementing and integrating technical solutions.
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 customer care solutions with an emphasis on e-business and enterprise relationship 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.
RECENT DEVELOPMENTS
Subsequent to quarter end, the Company announced significant cost savings measures related to the IT Consulting Services business segment. On March 9, 2000, approximately 180 consultants and sales positions were eliminated to align the Company's resources with current and projected revenues. The eliminated jobs represented about 25% of the total workforce of the Company's information technology business unit, Norstan Consulting. These actions were taken to bring the Company's consultant utilization rate back in line with industry averages and reduce over capacity, particularly in practice areas that are less in demand. The Company is refining its skill base in order to focus on and facilitate future growth in customer care solutions with an emphasis on e-business and enterprise relationship management.
In conjunction with this workforce reduction, the Company is also addressing non-personnel related spending. The combined effect of these actions is expected to produce estimated annual savings of up to $20 million.
SUMMARY
During the quarter ended January 29, 2000, the Company reported a net loss of $11.8 million or $1.08 per common share, as compared to a net loss of $3.5 million or $0.33 per common share for the quarter ended January 30, 1999. For the nine month period ended January 29, 2000, the Company incurred a net loss of $23.1 million, or $2.14 per common share, compared to net income of $2.9 million, or $0.27 per common share for the similar period ended January 30, 1999.
10
SELECTED CONSOLIDATED FINANCIAL DATA
|
Dollar Amounts as a Percentage of Revenues Three Months Ended |
Percentage Change |
Dollar Amounts as a Percentage of Revenues Nine Months Ended |
Percentage Change |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
January 29, 2000 |
January 30, 1999 |
Fiscal 2000 vs. 1999 |
January 29, 2000 |
January 30, 1999 |
Fiscal 2000 vs. 1999 |
|||||||
REVENUES: | |||||||||||||
Global Services | |||||||||||||
IT Consulting Services | 24.6 | % | 31.9 | % | (36.1 | )% | 28.8 | % | 29.0 | % | (8.5 | )% | |
Communication Services | 36.2 | % | 31.0 | % | (3.6 | )% | 32.0 | % | 28.4 | % | 4.0 | % | |
Total Global Services | 60.8 | % | 62.9 | % | (20.1 | )% | 60.8 | % | 57.4 | % | (2.3 | )% | |
Communication Solutions | 36.8 | % | 35.4 | % | (14.2 | )% | 37.1 | % | 41.0 | % | (16.7 | )% | |
Financial Services | 2.4 | % | 1.7 | % | 18.0 | % | 2.1 | % | 1.6 | % | 16.7 | % | |
Total Revenues | 100.0 | % | 100.0 | % | (17.4 | )% | 100.0 | % | 100.0 | % | (7.9 | )% | |
COST OF SALES |
|
79.8 |
% |
75.7 |
% |
(13.0 |
)% |
75.3 |
% |
70.6 |
% |
(1.8 |
)% |
GROSS MARGIN | 20.2 | % | 24.3 | % | (31.2 | )% | 24.7 | % | 29.4 | % | (22.6 | )% | |
SELLING, GENERAL & ADMINISTRATIVE EXPENSES | 36.9 | % | 27.3 | % | 11.7 | % | 32.2 | % | 26.6 | % | 11.4 | % | |
RESTRUCTURING CHARGES | | 1.4 | % | N/A | 0.6 | % | 0.5 | % | 29.4 | % | |||
OPERATING INCOME (LOSS) | (16.7 | )% | (4.4 | )% | (215.2 | )% | (8.1 | )% | 2.3 | % | (420.9 | )% | |
Interest Expense and Other, Net | (1.6 | )% | (1.1 | )% | 13.8 | % | (1.3 | )% | (0.9 | )% | 33.1 | % | |
INCOME (LOSS) BEFORE TAXES | (18.3 | )% | (5.5 | )% | (173.3 | )% | (9.4 | )% | 1.4 | % | (697.7 | )% | |
Income Tax (Benefit) Provision | (5.5 | )% | (2.4 | )% | 88.5 | % | (2.3 | )% | 0.6 | % | (431.5 | )% | |
NET INCOME (LOSS) | (12.8 | )% | (3.1 | )% | (238.5 | )% | (7.1 | )% | 0.8 | % | (902.7 | )% | |
The following table sets forth, for the periods indicated, the gross margin percentages for Global Services, Communication Solutions and Financial Services.
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Three Months Ended |
Nine Months Ended |
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January 29, 2000 |
January 30, 1999 |
January 29, 2000 |
January 30, 1999 |
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GROSS MARGIN PERCENTAGES: | |||||||||
Global Services | |||||||||
IT Consulting Services | 14.3 | % | 30.0 | % | 28.7 | % | 33.2 | % | |
Communication Services | 20.9 | % | 30.8 | % | 22.7 | % | 31.6 | % | |
Total Global Services | 18.2 | % | 30.4 | % | 25.5 | % | 32.4 | % | |
Communication Solutions | 20.2 | % | 11.6 | % | 20.9 | % | 23.9 | % | |
Financial Services | 69.1 | % | 61.1 | % | 69.1 | % | 61.0 | % |
RESULTS OF OPERATIONS
REVENUES. Revenues decreased 17.4% to $92.2 million in the quarter ended January 29, 2000 as compared to $111.5 million for the quarter ended January 30, 1999. For the nine month period ended January 29, 2000, revenues decreased 7.9% to $324.6 million as compared to $352.4 million for the similar period last year.
Revenues from Global Services decreased 20.1% to $56.1 million for the quarter ended January 29, 2000 as compared to $70.1 million for the similar quarter last year. Global Services revenues decreased $4.7 million, or 2.3%, to $197.4 million for the nine month period ended January 29, 2000 as compared to $202.1 million for the similar period last year. Revenues from IT Consulting Services decreased 36.1% to $22.7 million for the three month period ended January 29, 2000 from $35.5 million for the same period
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last year. IT Consulting Services revenues decreased 8.5% to $93.6 million for the nine month period ended January 29, 2000 from $102.3 million in the similar period last year. These decreases in revenue in the IT consulting business for the three and nine month periods ended January 29, 2000 were primarily the result of three factors. First, IT Consulting Services continues to transition its business from a staff augmentation, geographic consulting model, to a project consulting model focused on customer care solutions. Second, customers' Year 2000 concerns led to postponement of other IT projects as they focused their resources on resolution of Year 2000 issues. Finally, significant management and organizational changes were made during the second and third quarters of fiscal year 2000. These factors resulted in weaker sales, loss of productivity and lower consultant utilization. Revenues from Communication Services decreased 3.6% to $33.3 million for the quarter ended January 29, 2000 as compared to $34.6 million for the prior year quarter. For the nine month period ended January 29, 2000, Communication Services revenues increased 4.0% to $103.9 million as compared to $99.9 million for the nine month period ended January 30, 1999. For the quarter, a significant decrease in moves, adds and changes revenue was somewhat offset by an increase in network services revenue. Year to date, strong growth in network services as well as growth in service contract revenue offset a decrease in revenue from moves, adds and changes.
Revenues from Communication Solutions decreased 14.2% to $33.9 million, in the third quarter ended January 29, 2000 as compared to $39.5 million in the similar period last year. During the comparable nine month periods ended January 29, 2000 and January 30, 1999 revenues decreased 16.7% to $120.5 million from $144.6 million. These decreases in Communication Solutions revenue were the result of weaker sales in most product lines which were partially offset by strong third quarter increases in call center and voice processing solutions revenue. Executive management changes occurring during the third quarter also had a disruptive impact on Communication Solutions results for the periods ended January 29, 2000.
Revenues from Financial Services increased 18.0% to $2.2 million in the quarter ended January 29, 2000 from $1.9 million in the similar quarter last year. Revenues for the nine month period ended January 29, 2000 increased 16.7% to $6.7 million as compared to $5.7 million in the similar period last year.
GROSS MARGIN. The Company's gross margin decreased $8.4 million, or 31.2%, to $18.6 million for the quarter ended January 29, 2000 as compared to $27.0 million for the similar quarter last year. For the nine month period ended January 29, 2000, gross margin decreased $23.4 million, or 22.6%, to $80.2 million as compared to $103.6 million for the similar period last year. As a percent of total revenues, gross margin was 20.2% and 24.7% for the three and nine month periods ended January 29, 2000 as compared to 24.3% and 29.4% for the similar periods ended January 30, 1999.
Gross margin as a percent of revenues for Global Services was 18.2% and 25.5% for the three and nine month periods ended January 29, 2000 as compared to 30.4% and 32.4% for the similar periods last year. The gross margin for IT Consulting Services was 14.3% and 28.7% for the third quarter and year-to-date fiscal year 2000 as compared to 30.0% and 33.2% for the similar periods in fiscal year 1999. The decline in IT Consulting Services gross margin was caused by lower utilization of consultants which occurred as the business continued its transition from a geographic-based staff augmentation model to a project model emphasizing customer care solutions. In addition, significant management and organizational change resulted in lower sales and consultant utilization. The gross margin for Communication Services decreased to 20.9% and 22.7% from 30.8% and 31.6% for the three and nine month periods ended January 29, 2000 and January 30, 1999, respectively.
Gross margin as a percent of revenues for Communication Solutions was 20.2% and 20.9% for the three and nine months ended January 29, 2000 as compared to 11.6% and 23.9% for the comparable periods ended January 30, 1999.
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The decreases in gross margin percentages in the Communication Services and Communication Solutions business segments were partially the result of staffing for higher volumes of revenue which did not materialize. In addition, charges associated with project cost overruns and revaluation of inventory in both business segments were recorded during the second quarter of fiscal 2000. Communication Solutions' gross margins continue to be adversely affected by competitive price pressure on communications equipment.
Gross margin as a percent of revenues for Financial Services was 69.1% for the three and nine months ended January 29, 2000 as compared to 61.1% and 61.0% for the similar periods last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 11.7% to $34.0 million in the quarter ended January 29, 2000, as compared to $30.4 million in the similar period last year. For the nine month period, these expenses increased 11.4% to $104.5 million as compared to $93.8 million in the prior year period. As a percent of revenues, selling, general and administrative expenses increased to 36.9% and 32.2% for the three and nine month periods ended January 29, 2000, as compared to 27.3% and 26.6% for the same periods last year. The percentage increases were primarily the result of lower than planned sales volumes in IT Consulting Services and Communication Solutions as well as the recognition of additional bad debt provision in the second quarter.
RESTRUCTURING CHARGE. During the second quarter ending October 30, 1999, the Company recorded a restructuring charge of approximately $2.0 million related to its IT consulting business. The emphasis of the restructuring is to consolidate branch offices and reduce certain general and administrative costs. Norstan Consulting is transitioning to a project-based business model in which the physical presence of geographic branches becomes far less important than the ability to move skilled consulting resources to customer engagements. The $2.0 million charge consists of noncancelable lease obligations for branch offices to be closed ($1.0 million), software and other asset write-offs ($800,000) and severance costs ($200,000). Approximately $863,000 was charged against this restructuring reserve during the current quarter ended January 29, 2000.
INTEREST EXPENSE. Interest expense was $1.8 million and $1.2 million for the three month periods ended January 29, 2000 and January 30, 1999, respectively. For the nine months ended January 29, 2000, interest expense increased to $4.6 million from $3.4 million for the same period last year. These increases were primarily the result of higher borrowing levels during the three and nine month periods as well as higher effective interest rates.
SALE OF EDUCATION BUSINESS. In October 1999, the Company sold its web-based consumer education business to TechSkills.com (formerly AmeriTrain) of Milwaukee, Wisconsin. Terms of the sale called for the transfer of four training sites and 32 instructors and other education services staff to TechSkills.com. The total sale price was approximately $2.6 million.
INCOME TAXES. During the periods ended January 29, 2000, the Company recorded a tax benefit related to the third quarter and fiscal year-to-date losses of approximately 30% and 24%, respectively, based on projections of the full fiscal year's results and effective tax rate, also reflecting the impact of non-deductible goodwill amortization. This compares to a 43.5% provision recorded for the three and nine month periods ended January 30, 1999.
NET INCOME. In the second quarter of fiscal 2000, the Company incurred a net loss of $11.8 million or $1.08 per share, as compared to a net loss of $3.5 million or $0.33 per share for the same period in fiscal 1999. The nine month period ending January 29, 2000 resulted in a net loss of $23.1 million or $2.14 per share, compared to net income of $2.9 million, or $0.27 per share, for the similar period last year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities decreased significantly in the first nine months of fiscal year 2000 as compared to the similar period last year as decreases in accounts receivable and costs and
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estimated earnings in excess of billings offset increases in prepaid expenses. Net cash used for investing activities also decreased significantly in the first nine months of fiscal year 2000 as compared to the similar period in fiscal year 1999 as a result of decreases in investments in lease contracts and capital expenditures. Net cash provided by financing activities decreased in the comparable periods primarily as a result of a decrease in net borrowings of discounted lease rentals and lower net borrowings under the Company's revolving credit agreement.
CAPITAL EXPENDITURES. The Company used $9.5 million for capital expenditures during the nine months ended January 29, 2000, as compared to $19.7 million in the similar period last year. These expenditures were primarily for capitalized costs incurred in connection with obtaining or developing internal use software and computer equipment.
INVESTMENT IN LEASE CONTRACTS. The Company has made a significant investment in lease contracts with its customers. The additional investment made in lease contracts year-to-date in fiscal 2000 totaled $13.7 million. Net lease receivables decreased slightly to $60.7 million at January 29, 2000 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 $50.0 million at January 29, 2000 as compared to $54.2 million at April 30, 1999. Interest rates on these credit agreements at January 29, 2000 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.
CAPITAL RESOURCES. The Company has a $100.0 million revolving long-term credit agreement with certain banks. Sublimits exist related to the Company's support of its leasing activities. Borrowings under this agreement are due May 31, 2001. Borrowings under this agreement bear interest at rates based on the banks' reference rate, as well as LIBOR or CD based options. Interest rates on borrowings outstanding as of January 29, 2000 ranged from 6.4% to 9.0%. Total consolidated borrowings under this agreement at January 29, 2000 and April 30, 1999 were $74.7 million and $60.2 million, respectively. Annual commitment fees on the unused portions of the credit facility are 0.25%.
As of October 30, 1999, the Company was in violation of certain covenants under this credit agreement. The Company has obtained waivers for these violations under an amendment to the agreement dated as of January 24, 2000. Pursuant to this amendment, the Company's borrowings under the agreement will bear interest at rates higher than that experienced during the quarter ended January 29, 2000. In addition, as of January 29, 2000, the Company was in violation of certain of the covenants under the revolving long-term credit agreement. The Company is currently working with its banks to obtain waivers for these violations. The Company believes it has the ability and intent to execute an amendment to the credit agreement and receive applicable waivers.
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.
IMPACT OF YEAR 2000
The Company experienced no significant system problems at the beginning of calendar 2000. In addition, the Company is not aware of any material problems being experienced by its suppliers and business partners. The Company believes it has adequately addressed the Year 2000 issue related to its internal systems and that it did not have a material impact on its business, financial condition or its results of operations.
During the fiscal period ended January 29, 2000, the Company completed an assessment of its systems hardware and software, completed testing of its critical systems to verify date-handling functionality, and made all necessary modifications. This comprehensive Year 2000 initiative cost the Company approximately $2.0 million. The Company continues to monitor its systems' performance.
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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
Exhibit 10.(a) Eighth Amendment to Credit Agreement, dated as of January 24, 2000, by and among the Company, certain banks as signatories thereto (the "Banks") and U.S. Bank National Association, as one of the Banks and as agent for the Banks.
None
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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.
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NORSTAN, INC. Registrant |
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Date: March 13, 2000 |
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By |
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/s/ PAUL BASZUCKI Paul Baszucki Chairman and Chief Executive Officer |
Date: March 13, 2000 |
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By |
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/s/ RICHARD COHEN Richard Cohen Vice Chairman and Chief Financial Officer (Principal Financial and Accounting Officer) |
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