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 31, 1998
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.)
605 NORTH HIGHWAY 169, TWELFTH FLOOR, PLYMOUTH, MINNESOTA 55441
---------------------------------------------------------------
(address of principal executive offices)
TELEPHONE (612) 513-4500 FAX (612) 513-4537 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 March 9, 1998, there were 9,957,654 shares outstanding of the registrant's
common stock, par value $.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 31, FEBRUARY 1, JANUARY 31, FEBRUARY 1,
1998 1997 1998 1997
----------- ----------- ----------- -----------
REVENUES:
Global Services $ 56,154 $ 47,246 $ 156,748 $ 133,929
Communication Systems 53,979 45,405 155,910 143,708
Financial Services 1,634 1,424 5,472 4,322
--------- --------- ---------- ---------
Total Revenues 111,767 94,075 318,130 281,959
--------- --------- ---------- ---------
COST OF SALES:
Global Services 40,294 35,742 112,383 98,655
Communication Systems 38,971 31,725 114,516 103,191
Financial Services 596 547 1,805 1,616
--------- --------- ---------- ---------
Total Cost of Sales 79,861 68,014 228,704 203,462
--------- --------- ---------- ---------
GROSS MARGIN 31,906 26,061 89,426 78,497
Selling, General
& Administrative Expenses 24,923 20,935 72,479 65,058
--------- --------- ---------- ---------
OPERATING INCOME 6,983 5,126 16,947 13,439
Interest Expense (1,242) (571) (2,683) (1,332)
Interest and Other Income (Expense), Net 55 (11) 171 (32)
--------- --------- ---------- ---------
INCOME BEFORE PROVISION FOR
INCOME TAXES 5,796 4,544 14,435 12,075
Provision for Income Taxes 2,521 1,829 6,063 4,992
--------- --------- ---------- ---------
NET INCOME $ 3,275 $ 2,715 $ 8,372 $ 7,083
--------- --------- ---------- ---------
--------- --------- ---------- ---------
NET INCOME PER SHARE - BASIC $ .33 $ .29 $ .87 $ .78
--------- --------- ---------- ---------
--------- --------- ---------- ---------
NET INCOME PER SHARE - DILUTED
$ .33 $ .29 $ .86 $ .76
--------- --------- ---------- ---------
--------- --------- ---------- ---------
WEIGHTED AVERAGE SHARES - BASIC 9,780 9,277 9,599 9,070
--------- --------- ---------- ---------
--------- --------- ---------- ---------
WEIGHTED AVERAGE SHARES - DILUTED 10,011 9,435 9,780 9,305
--------- --------- ---------- ---------
--------- --------- ---------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
JANUARY 31, APRIL 30,
1998 1997
---------- ----------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash $ 3,210 $ 5,147
Accounts receivable, net of allowances for doubtful
accounts of $1,325 and $1,783 96,058 76,027
Current lease receivables 17,174 19,595
Inventories 12,311 7,636
Costs and estimated earnings in excess of billings of
$16,609 and $11,948 23,212 11,556
Deferred income tax benefits 6,946 3,954
Prepaid expenses, deposits and other 5,916 2,925
-------- --------
TOTAL CURRENT ASSETS 164,827 126,840
-------- --------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment 107,919 93,895
Less-accumulated depreciation and amortization (60,144) (48,409)
-------- --------
NET PROPERTY AND EQUIPMENT 47,775 45,486
-------- --------
OTHER ASSETS:
Lease receivables, net of current portion 32,197 29,775
Goodwill, net of amortization of $7,147 and $5,443 44,652 21,264
Other assets, net 2,096 808
-------- --------
TOTAL OTHER ASSETS 78,945 51,847
-------- --------
$291,547 $224,173
-------- --------
-------- --------
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 31, APRIL 30,
1998 1997
--------- ---------
(Unaudited) (Audited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit $ 1,561 $ 389
Current maturities of discounted lease rentals 15,311 13,878
Accounts payable 24,497 24,486
Deferred revenue 19,763 18,680
Accrued -
Salaries and wages 9,855 13,065
Warranty costs 1,555 2,348
Other liabilities 6,595 10,333
Income taxes payable - 388
Billings in excess of costs and estimated
earnings of $15,584 and $12,829 10,510 5,789
--------- ---------
TOTAL CURRENT LIABILITIES 89,647 89,356
--------- ---------
LONG-TERM DEBT, net of current maturities 67,443 18,284
DISCOUNTED LEASE RENTALS, net of current maturities 24,233 24,043
DEFERRED INCOME TAXES 8,700 8,120
--------- ---------
SHAREHOLDERS' EQUITY:
Common stock - $.10 par value; 40,000,000
authorized shares; 9,957,654 and 9,387,458 shares
issued and outstanding 996 939
Capital in excess of par value 44,267 34,556
Retained earnings 58,565 50,192
Unamortized cost of stock (590) (142)
Foreign currency translation adjustments (1,714) (1,175)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 101,524 84,370
--------- ---------
$ 291,547 $ 224,173
--------- ---------
--------- ---------
The accompanying notes are an integral part of these consolidated balance
sheets.
3
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
NINE MONTHS ENDED
-------------------------
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
OPERATING ACTIVITIES:
Net income $ 8,372 $ 7,083
Adjustments to reconcile net income to net cash
(used for) provided by operating activities:
Depreciation and amortization 14,977 11,506
Deferred income taxes 518 1,643
Changes in operating items, net of effects
from acquisitions:
Accounts receivable (17,711) (15,438)
Inventories (4,752) 1,468
Costs and estimated earnings in excess of
billings (11,707) (6,083)
Prepaid expenses, deposits and other (2,851) (836)
Accounts payable (380) 5,311
Deferred revenue 1,131 272
Accrued liabilities (11,283) (4,111)
Income taxes payable (933) 331
Billings in excess of costs and estimated
earnings 4,756 1,785
--------- --------
NET CASH (USED FOR) PROVIDED BY
OPERATING ACTIVITIES (19,863) 2,931
--------- --------
INVESTING ACTIVITIES:
Additions to property and equipment, net (14,402) (16,675)
Cash paid for acquisitions, net of cash acquired (20,450) (11,794)
Investment in lease contracts (17,452) (17,773)
Collections from lease contracts 17,310 16,849
Other, net (13) 516
--------- --------
NET CASH USED FOR INVESTING ACTIVITIES (35,007) (28,877)
--------- --------
FINANCING ACTIVITIES:
Repayment of debt assumed in acquisitions (2,013) (1,743)
Borrowings of long-term debt 188,795 181,775
Repayments of long-term debt (139,365) (160,250)
Borrowings under short-term line of credit, net 950 (169)
Borrowings of discounted lease rentals 13,472 12,502
Repayments of discounted lease rentals (11,789) (9,506)
Proceeds from sale of common stock 2,873 2,943
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 52,923 25,552
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 10 1
--------- --------
NET DECREASE IN CASH (1,937) (393)
CASH, BEGINNING OF PERIOD 5,147 1,133
--------- --------
CASH, END OF PERIOD $ 3,210 $ 740
--------- --------
--------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
4
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1998
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 31, FEBRUARY 1,
1998 1997
----------- -----------
Cash paid for:
Interest $ 4,761 $ 2,936
Income taxes $ 4,985 $ 2,642
Noncash investing and financing activities:
Stock issued for acquisitions $ 6,325 $ 2,000
5
RECENTLY ISSUED ACCOUNTING STANDARD -
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 "Earnings per Share" (SFAS No.
128), which established new guidelines for computing and presenting earnings
per share data (EPS). SFAS No. 128 replaces primary EPS with basic EPS.
Basic EPS is computed by dividing reported earnings by weighted average
shares outstanding, excluding potentially dilutive securities. Fully diluted
EPS, termed diluted EPS under SFAS No. 128, is also to be disclosed. The
Company adopted SFAS No. 128 in the third quarter of fiscal 1998. As a
result, the Company's reported EPS data has been restated as follows for the
three and nine month periods ended February 1, 1997:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
FEBRUARY 1, FEBRUARY 1,
1997 1997
------------------ -----------------
Primary EPS as reported $ .29 $ .75
Effect of SFAS No. 128 - .03
------------------ -----------------
BASIC EPS AS RESTATED $ .29 $ .78
------------------ -----------------
------------------ -----------------
Fully diluted EPS as reported $ - $ -
Effect of SFAS No. 128 .29 .76
------------------ -----------------
DILUTED EPS AS RESTATED $ .29 $ .76
------------------ -----------------
------------------ -----------------
A reconciliation of EPS calculations under SFAS No. 128 is as follows for the
three and nine month periods ended January 31, 1998 and February 1, 1997:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ -------------------------
JANUARY 31, FEBRUARY 1, JANUARY 31, FEBRUARY 1,
1998 1997 1998 1997
----------- ----------- ----------- -----------
NET INCOME $ 3,275 $2,715 $8,372 $7,083
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - BASIC 9,780 9,277 9,599 9,070
Effect of dilutive securities:
Stock option plans 229 148 180 225
Employee stock purchase plan 2 10 1 10
----------- ----------- ----------- -----------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING - DILUTED 10,011 9,435 9,780 9,305
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET INCOME PER SHARE - BASIC $ .33 $ .29 $ .87 $ .78
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET INCOME PER SHARE - DILUTED $ .33 $ .29 $ .86 $ .76
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
6
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 other items. Ultimate results could differ
from those estimates.
RECLASSIFICATIONS -
Certain amounts in the fiscal 1997 financial statements have been
reclassified to conform to the fiscal 1998 presentation. Such
reclassifications had no effect on previously reported net income or
shareholders' equity.
ACQUISITIONS -
On September 30, 1997, the Company acquired Vadini, Inc. d/b/a PRIMA
Consulting Inc. (PRIMA), in a transaction accounted for under the purchase
method. PRIMA operates in the information technology consulting business,
including information systems planning and development, consulting and
programming services for collaborative computing solutions and enterprise
resource planning integration services.
The acquisition consideration totaled approximately $27.5 million, consisting
of $19.5 million in cash, $6.3 million of Norstan common stock and $1.7
million paid to certain members of PRIMA management under non-compete
agreements. In addition, the Company agreed to pay up to $3.5 million in
contingent consideration over a three year period ending April 30, 2000 if
certain financial performance targets are achieved. This transaction
resulted in the recording of $24.9 million in goodwill and other intangible
assets which are being amortized on a straight-line basis over 15 years and 3
years, respectively. The Company financed the cash payments made in
connection with the acquisition through borrowings under its credit
facilities. Pro forma information in the year of acquisition has not been
disclosed because such information was not materially different from the
Company's results of operations.
On June 4, 1996, the Company acquired Connect Computer Company (Connect), in
a transaction accounted for under the purchase method. Connect is a provider
of consulting, design and implementation services for local and wide area
networks, internets and intranets, client server applications and workgroup
computing.
The acquisition consideration totaled approximately $15.0 million, consisting
of $12.0 million in cash, $2.0 million of Norstan common stock and $1.0
million payable to certain members of Connect's management under non-compete
agreements. In addition, the Company agreed to pay up to $4.0 million in
contingent consideration over a three year period ending April 30, 1999 if
certain financial performance targets are achieved (as of January 31, 1998,
$2.0 million of such consideration has been paid and the remaining $2.0
million has been accrued). These transactions resulted in a total
7
of $18.4 million in goodwill and other intangible assets which are being
amortized on a straight-line basis over 15 years and 3 years, respectively.
The Company financed the cash payments made in connection with the
acquisition through borrowings under its credit facility. Pro forma
information in the year of acquisition (fiscal 1997) has not been disclosed
because such information was not materially different from the Company's
results of operations.
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS -
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements including those presented in this Form 10-Q.
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 telecommunications industry; the Company's
operations in Canada; market acceptance of the Company's products and
services; the Company's continued ability to provide integrated
communications solutions for customers in a dynamic industry, as well as
other competitive factors.
Because these and other factors could affect the Company's operating results,
past financial performance should not necessarily be considered as a reliable
indicator of future performance, and investors should not use historical
trends to anticipate future period results.
8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY -
During the quarter ended January 31, 1998, the Company's net income improved
over the quarter ended February 1, 1997, increasing 20.6% to $3,275,000, or
$.33 per common share, compared to $2,715,000, or $.29 per common share. For
the nine month period ended January 31, 1998, the Company's net income
increased 18.2% to $8,372,000, or $.86 per common share, compared to
$7,083,000, or $.76 per common share, for the same period last year. These
per share figures reflect diluted rather than basic EPS.
RESULTS OF OPERATIONS -
The Company's revenues consist of revenues from the delivery and/or sale of
global services, communication systems and financial services. Revenues from
global services result primarily from communications maintenance services,
information technology (IT) professional services, moves, adds and changes
and long distance services. Revenues from the sale of communication systems
result from the sale of new products and upgrades, as well as refurbished
equipment. Financial services revenues result primarily from leasing
activities. The following table sets forth, for the periods indicated,
certain items from the Company's consolidated statements of operations.
9
SELECTED CONSOLIDATED FINANCIAL DATA
DOLLAR AMOUNTS AS A DOLLAR AMOUNTS AS A
PERCENTAGE OF REVENUES PERCENTAGE PERCENTAGE OF REVENUES PERCENTAGE
THREE MONTHS ENDED INCREASE NINE MONTHS ENDED INCREASE
-------------------------- ------------- -------------------------- -------------
JANUARY 31, FEBRUARY 1, FISCAL JANUARY 31, FEBRUARY 1, FISCAL
1998 1997 1998 VS. 1997 1998 1997 1998 VS. 1997
----------- ----------- ------------- ----------- ----------- -------------
REVENUES:
Global Services 50.2% 50.2% 18.9% 49.3% 47.5% 17.0%
Communication Systems 48.3% 48.3% 18.9% 49.0% 51.0% 8.5%
Financial Services 1.5% 1.5% 14.7% 1.7% 1.5% 26.6%
----------- ----------- ------------- ----------- ----------- -------------
Total Revenues 100.0% 100.0% 18.8% 100.0% 100.0% 12.8%
COST OF SALES 71.5% 72.3% 17.4% 71.9% 72.2% 12.4%
----------- ----------- ------------- ----------- ----------- -------------
GROSS MARGIN 28.5% 27.7% 22.4% 28.1% 27.8% 13.9%
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 22.3% 22.3% 19.0% 22.8% 23.1% 11.4%
----------- ----------- ------------- ----------- ----------- -------------
OPERATING INCOME 6.2% 5.4% 36.2% 5.3% 4.8% 26.1%
Interest Expense and Other, Net (1.0%) (0.6%) 104.0% (0.8%) (0.5%) 84.2%
----------- ----------- ------------- ----------- ----------- -------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 5.2% 4.8% 27.6% 4.5% 4.3% 19.5%
Provision for Income Taxes 2.3% 1.9% 37.8% 1.9% 1.8% 21.4%
----------- ----------- ------------- ----------- ----------- -------------
NET INCOME 2.9% 2.9% 20.6% 2.6% 2.5% 18.2%
----------- ----------- ------------- ----------- ----------- -------------
----------- ----------- ------------- ----------- ----------- -------------
The following table sets forth, for the periods indicated, the gross margin
percentages for global services, communication systems and financial services.
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- --------------------------
JANUARY 31, FEBRUARY 1, JANUARY 31, FEBRUARY 1,
1998 1997 1998 1997
----------- ----------- ---------- -----------
GROSS MARGIN PERCENTAGES:
Global Services 28.2% 24.3% 28.3% 26.3%
Communication Systems 27.8% 30.1% 26.5% 28.2%
Financial Services 63.5% 61.6% 67.0% 62.6%
10
RESULTS OF OPERATIONS
REVENUES. Revenues increased 18.8% to $111,767,000 for the quarter
ended January 31, 1998, as compared to $94,075,000 for the corresponding
period last year. For the nine month period ended January 31, 1998, revenues
increased 12.8%, to $318,130,000 as compared to $281,959,000 for the same
period last year. Revenues from global services increased $8,908,000, or
18.9% and $22,819,000, or 17.0% in the comparable three and nine month
periods ended January 31, 1998 and February 1, 1997, respectively. This
growth was led by IT professional services which includes the results of
recently acquired PRIMA and the continued growth of Connect, which was
acquired in June 1996. IT professional services revenues grew at 64% and 63%
for the comparable three and nine month periods ended January 31, 1998 and
February 1, 1997, respectively. Overall, revenues from other traditional
telecommunications services were relatively unchanged for the comparable
three and nine month periods.
Sales of communication systems increased $8,574,000, or 18.9%, and
$12,202,000, or 8.5%, during the comparable three and nine month periods
ended January 31, 1998, and February 1, 1997, respectively. The strong
revenue increase during the current quarter was partly due to the relatively
weak third quarter revenues of last year. The nine month increase reflects a
continued rebound from the slower product sales of the first quarter of
fiscal 1998 and better reflects management's overall expectations of this
segment's ongoing growth prospects. Revenues from financial services
increased $210,000, or 14.7%, and increased $1,150,000, or 26.6%, during the
comparable three and nine month periods ended January 31, 1998 and February
1, 1997, respectively.
GROSS MARGIN. The Company's gross margin increased $5,845,000,
or 22.4%, to $31,906,000 for the three months ended January 31, 1998 as
compared to $26,061,000 for the three months ended February 1, 1997. For the
nine month period ended January 31, 1998, gross margin increased $10,929,000,
or 13.9%, to $89,426,000 as compared to $78,497,000 for the similar period
ended February 1, 1997. As a percent of total revenues, gross margin was
28.5% and 28.1% for the three and nine month periods ended January 31, 1998
as compared to 27.7% and 27.8% for the comparable three and nine month
periods ended February 1, 1997. These increases in fiscal 1998 reflect a
shift in the Company's mix of products and services towards higher margin
global services.
Gross margin as a percent of revenues for global services was 28.2%
and 28.3% for the three and nine month periods ended January 31, 1998, as
compared to 24.3% and 26.3% for the comparable periods ended February 1,
1997. These increases reflect the change in mix of services Norstan
provides. As IT professional services become a more integral component of
Norstan's business, global services' margins are expected to continue to
improve.
Gross margin as a percent of revenues for the sale of communication
systems was 27.8% and 26.5% for the three and nine month periods ended
January 31, 1998 as compared to 30.1% and 28.2% for the similar periods ended
February 1, 1997. These decreases are generally the result of
non-transferable increases in product costs, additional use of subcontractors
and overtime due to high levels of installations, and the change in mix of
products sold.
11
Gross margin as a percent of revenues for financial services was
63.5% and 67.0% for the three and nine month periods ended January 31, 1998,
and 61.6% and 62.6% for the similar periods ended February 1, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative (SG&A) expenses increased $3,988,000, or 19.0%, for the
quarter ended January 31, 1998 as compared to the quarter ended February 1,
1997. For the nine months ended January 31, 1998, SG&A expenses increased
$7,421,000, or 11.4%, as compared to the similar period last year. As a
percent of revenues, SG&A expenses remained at 22.3% for the three month
periods ended January 31, 1998 and February 1, 1997. For the comparable
nine month periods ended January 31, 1998 and February 1, 1997, SG&A expense
decreased to 22.8% from 23.1%. These improvements in SG&A as a percent of
revenue are expected to be maintained or improved going forward as the
benefits of process improvements and continued cost control efforts are
realized.
OPERATING INCOME. Operating income increased $1,857,000, or 36.2%,
to $6,983,000 for the quarter ended January 31, 1998 as compared to
$5,126,000 for the quarter ended February 1, 1997. For the nine months ended
January 31, 1998, operating income increased $3,508,000, or 26.1%, to
$16,947,000, as compared to $13,439,000 for the similar period last year. As
a percent of revenues, operating income increased to 6.2% from 5.4% for the
three month periods ended January 31, 1998, and February 1, 1997,
respectively. For the comparable nine month periods ended January 31, 1998
and February 1, 1997, operating income as a percent of revenues increased to
5.3% from 4.8%.
OTHER COSTS AND EXPENSES. Interest expense increased to $1,242,000
as compared to $571,000 for the three month periods ended January 31, 1998
and February 1, 1997, respectively. For the nine month period ended January
31, 1998, interest expense increased to $2,683,000 from $1,332,000 for the
similar period last year. These increases were primarily a result of higher
borrowing levels under revolving credit agreements relating to the PRIMA and
Connect acquisitions and other working capital requirements.
The Company's effective tax rate was 43.5% and 42.0% for the three
and nine month periods ended January 31, 1998 as compared to 40.3% and 41.3%
for the similar periods ended February 1, 1997. The Company's effective tax
rate differs from the federal statutory rate primarily due to the effect of
non-deductible goodwill amortization and state income taxes. The provisions
for income taxes have been recorded based upon management's estimate of the
annualized effective tax rate.
NET INCOME. Net income was $3,275,000, or $.33 per common share, and
$2,715,000, or $.29 per common share, for the quarters ended January 31, 1998
and February 1, 1997, respectively. Net income was $8,372,000, or $.86 per
common share, and $7,083,000, or $.76 per common share, for the nine month
periods ended January 31, 1998 and February 1, 1997, respectively. These per
share figures reflect diluted rather than basic EPS.
12
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL. Working capital increased to $75,180,000 at January
31, 1998 from $37,484,000 at April 30, 1997. The current ratio was 1.84 to
1.0 at January 31, 1998 as compared to 1.42 to 1.0 at April 30, 1997.
Operating activities used net cash of $19,863,000 and provided net cash of
$2,931,000 for the nine months ended January 31, 1998 and February 1, 1997,
respectively.
CAPITAL RESOURCES. In July 1996, the Company entered into a
$40,000,000 unsecured revolving long-term credit agreement with certain
banks. Up to $15,000,000 of borrowings under this agreement may be in the
form of commercial paper. In addition, up to $8,000,000 and $6,000,000 may
be used to support the leasing activities of Norstan Financial Services, Inc.
(NFS) and Norstan Canada, respectively. Borrowings under this agreement are
due July 31, 1999, and bear interest at the banks' reference rate (8.50% at
January 31, 1998), except for LIBOR, CD and commercial paper based options
which generally bear interest at a rate lower than the banks' reference rate.
Total consolidated borrowings under this agreement were $40,000,000 and
$17,920,000 at January 31, 1998 and April 30, 1997, respectively. There were
no borrowings on account of NFS at January 31, 1998 or April 30, 1997.
In September 1997, the Company entered into an additional $40,000,000
unsecured revolving credit agreement with First Bank, N.A. Borrowings under
this agreement are due March 31, 1998, and bear interest at the bank's
reference rate (8.50% at January 31, 1998), except for LIBOR based options
which generally bear interest at a rate lower than the bank's reference rate.
Total consolidated borrowings under this agreement were $27,350,000 at
January 31, 1998. This bridge facility was put in place for 180 days to
finance the PRIMA acquisition and provide cash for other general corporate
purposes.
The Company has received a written commitment from its existing bank
group for a new $80,000,000 long-term revolving credit facility which will
replace the above mentioned credit facility and bridge loan. This new
agreement is intended to be in place prior to March 31, 1998. As a result,
borrowings under the bridge facility are classified as long-term at January
31, 1998.
Borrowings by the Company in fiscal 1998 and 1997 have been made to
finance the acquisitions of PRIMA and Connect, for working capital and
general corporate purposes, as well as to invest in property and equipment.
Net capital expenditures for the nine months ended January 31, 1998
were $14,402,000 and $16,675,000 for the similar period last year. These
expenditures were primarily for the purchase of computer equipment, software,
telecommunications equipment used as spare parts and for outsourcing
arrangements, and other facility expansions. At January 31, 1998, there were
no outstanding material commitments for future capital expenditures. The
Company also has a significant investment in lease contracts with its
customers. The additional investment in lease contracts totaled $17,452,000
for the nine months ended January 31, 1998 and $17,773,000 for the similar
period last year. Total lease receivables remained relatively unchanged
between January 31, 1998 and April 30, 1997.
13
In September 1997, the Company acquired all of the common stock of
PRIMA, a provider of information technology consulting services. The
acquisition consideration totaled approximately $27.5 million, consisting of
$19.5 million cash, $6.3 million of Norstan common stock and $1.7 million
paid to certain members of PRIMA management under non-compete agreements.
In addition, the Company has agreed to pay up to $3.5 million in contingent
consideration over a three year period ending April 30, 2000 if certain
financial performance targets are achieved. This transaction resulted in the
recording of $24.9 million in goodwill and other intangible assets which are
being amortized on a straight-line basis over 15 years and 3 years,
respectively
In June 1996, the Company acquired all of the common stock of
Connect, a provider of consulting, design and implementation services. The
acquisition consideration totaled approximately $15.0 million, consisting of
$12.0 million cash, $2.0 million of Norstan common stock and $1.0 million
payable to certain members of Connect's management under non-compete
agreements. In addition, the Company has agreed to pay up to $4.0 million
in contingent consideration over a three year period ending April 30, 1999 if
certain financial performance targets are achieved (as of January 31, 1998,
$2.0 million of such consideration has been paid and the remaining $2.0
million has been accrued). These transactions resulted in the recording of
$18.4 million in goodwill and other intangible assets which are being
amortized on a straight-line basis over 15 years and 3 years, respectively.
NFS and Norstan Canada utilize their lease receivables and
corresponding underlying equipment to borrow funds from financial
institutions at fixed rates generally on a nonrecourse basis by discounting
the stream of future lease payments. Proceeds from discounting are presented
on the consolidated balance sheets as discounted lease rentals. Interest
rates on these credit agreements range from 6% to 10%, and payments are due
in varying monthly installments through August 2005. Payments due financial
institutions on a monthly basis are made from monthly collections of lease
receivables from customers. Discounted lease rentals consisted of the
following (in thousands):
JANUARY 31, APRIL 30,
1998 1997
---------- ----------
Discounted lease rentals $ 39,544 $ 37,921
Less-current maturities (15,311) (13,878)
---------- ----------
$ 24,233 $ 24,043
---------- ----------
---------- ----------
Management of the Company believes that a combination of cash to be
generated from operations, existing bank facilities and available borrowing
capacity, in aggregate, are adequate to meet the currently 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. Future growth of the Company is
dependent upon the proper capital being available to support both internal
growth and acquisitions. The Company is currently investigating various
alternative sources of long-term financing to ensure that the proper capital
structure is in place to meet such future capital requirements.
YEAR 2000. The Company utilizes software and related technologies
throughout its business that will be affected by the date change in the year
2000. An internal study is currently under way to determine the full scope
and related costs to insure that the Company's systems continue to meet
internal needs and those of its customers. It is anticipated that a
substantial portion of the total cost of resolving this issue will be
incurred over the next two years. Maintenance, modification and certain
other costs will be expensed as incurred, while the costs of new software
will be capitalized and amortized over the software's useful life.
14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of
its business. Although the outcomes of any such legal actions
cannot be predicted, in the opinion of management there is no legal
proceeding pending against or involving the Company for which the
outcome is likely to have a material adverse effect upon the
consolidated financial position or results of operations of the
Company.
ITEM 2. ISSUANCE OF UNREGISTERED SECURITIES
The Company issued 151,515 unregistered shares of its common stock
on January 2, 1998, as part of the purchase agreement between the
Company and PRIMA Consulting. These shares had a fair market value
of $3,000,000 and were issued to the founders of PRIMA. These
shares are being held in escrow on behalf of the founders of PRIMA
and will be released on March 31, 1999. During this escrow period,
the shareholders have all the rights of a shareholder, including
the right to vote such shares, however, they may not sell,
transfer, pledge or otherwise encumber the shares. Such shares
were issued in an exempt transaction pursuant to Regulation D
promulgated by the Securities and Exchange Commission under the
authority of the Securities Act of 1933, as amended. There were no
underwriters involved in this transaction.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
None
(b) Reports on Form 8-K.
None
15
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: March 16, 1998 By /s/ David R. Richard
------------------------
David R. Richard
Chief Executive Officer,
President and Director
Date: March 16, 1998 By /s/ Kenneth S. MacKenzie
------------------------
Kenneth S. MacKenzie
Chief Financial Officer
(Principal Financial and Accounting
Officer)
16