-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D+ONvUHlGdkBHk8VThehq+R+/MsYLf1XadoioONswzNRY0Tekyb0WO81OWUjvYQq wauetkCWJXwpbTi1xhgJRw== 0001047469-99-035653.txt : 19990915 0001047469-99-035653.hdr.sgml : 19990915 ACCESSION NUMBER: 0001047469-99-035653 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990914 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORSTAN INC CENTRAL INDEX KEY: 0000072418 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TELEPHONE INTERCONNECT SYSTEMS [7385] IRS NUMBER: 410835746 STATE OF INCORPORATION: MN FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08141 FILM NUMBER: 99710983 BUSINESS ADDRESS: STREET 1: 605 N HIGHWAY 169 STREET 2: 12TH FL CITY: PLYMOUTH STATE: MN ZIP: 55441 BUSINESS PHONE: 6124201100 MAIL ADDRESS: STREET 1: NORSTAN INC STREET 2: 6900 WEDGEWOOD ROAD CITY: MAPLE GROVE STATE: MN ZIP: 55311 FORMER COMPANY: FORMER CONFORMED NAME: NORSTAN RESEARCH & DEVELOPMENT CO DATE OF NAME CHANGE: 19770926 FORMER COMPANY: FORMER CONFORMED NAME: NORSTAN MANUFACTURING CO INC DATE OF NAME CHANGE: 19750918 10-Q 1 10-Q 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 ----------------------------------------------------- (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 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. PART I. FINANCIAL INFORMATION ITEM 1. NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED ----------------------------------------- JULY 31, AUGUST 1, 1999 1998 ------------------- ------------------ 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 ------------------- ------------------ ------------------- ------------------
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)
JULY 31, APRIL 30, 1999 1999 ----------------- ---------------- (UNAUDITED) (AUDITED) 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 ----------------- ---------------- ----------------- ----------------
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)
JULY 31, APRIL 30, 1999 1999 --------------- ---------------- (Unaudited) (Audited) 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 --------------- ---------------- --------------- ----------------
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)
THREE MONTHS ENDED -------------------------------- JULY 31, AUGUST 1, 1999 1998 -------------- ------------- 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 -------------- ------------- -------------- -------------
The accompanying notes are an integral part of these consolidated financial statements. 4 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):
THREE MONTHS ENDED -------------------------------------- JULY 31, AUGUST 1, 1999 1998 --------------- --------------- Cash paid for: Interest $ 2,068 $ 1,891 Income taxes $ 119 $ 7 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. 5 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):
THREE MONTHS ENDED ------------------------------------- JULY 31, AUGUST 1, 1999 1998 ---------------- ---------------- 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 ---------------- ---------------- ---------------- ----------------
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 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):
FOR THE QUARTER ENDED -------------------------------------------------------------------------------- JULY 31, 1999 AUGUST 1, 1998 --------------------------------------- ------------------------------------- OPERATING OPERATING REVENUES INCOME (LOSS) REVENUES INCOME ---------------- ------------------- --------------- ----------------- 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 ---------------- ------------------- --------------- ----------------- ---------------- ------------------- --------------- -----------------
7 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 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 SELECTED CONSOLIDATED FINANCIAL DATA
DOLLAR AMOUNTS AS A PERCENTAGE OF REVENUES PERCENTAGE THREE MONTHS ENDED CHANGE ------------------------------------------------- JULY 31, AUGUST 1, FISCAL 1999 1998 2000 VS. 1999 ----------------------------------------------- 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%) ----------------------------------------------- -----------------------------------------------
The following table sets forth, for the periods indicated, the gross margin percentages for Global Services, Communication Solutions and Financial Services.
THREE MONTHS ENDED ----------------------------------------- JULY 31, AUGUST 1, 1999 1998 ---------------- ---------------- 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%
10 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 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 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 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 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 EX-27 2 EXHIBIT 27
5 1,000 3-MOS APR-30-2000 MAY-01-1999 JUL-31-1999 1,122 0 93,074 1,698 19,763 188,091 99,512 51,772 317,351 95,202 103,102 0 0 1,085 109,386 317,351 42,848 116,204 31,628 79,850 33,295 0 1,426 1,633 751 882 0 0 0 882 .08 .08
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