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 AUGUST 1, 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
- -------------------------------------------------------------------------------
(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 8, 1998, there were 10,588,581 shares outstanding of the
registrant's common stock, par value $.10 per share, its only class of
equity securities.
1
PART I. FINANCIAL INFORMATION
ITEM 1.
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED
-------------------------------
AUGUST 1, AUGUST 2,
1998 1997
-------------- --------------
REVENUES:
Global Services
IT Consulting Services $ 31,675 $ 15,026
Communications Services 32,366 33,023
--------- --------
Total Global Services 64,041 48,049
Communications Solutions 50,055 45,212
Financial Services 1,754 2,181
--------- --------
TOTAL REVENUES 115,850 95,442
--------- --------
COST OF SALES:
Global Services
IT Consulting Services 20,903 11,062
Communications Services 21,799 23,894
--------- --------
Total Global Services 42,702 34,956
Communications Solutions 35,988 32,816
Financial Services 697 584
--------- --------
TOTAL COST OF SALES 79,387 68,356
--------- --------
GROSS MARGIN 36,463 27,086
Selling, General
& Administrative Expenses 30,837 23,157
--------- --------
OPERATING INCOME 5,626 3,929
Interest Expense (1,089) (594)
Interest and Other Income, Net 181 48
--------- --------
INCOME BEFORE PROVISION FOR
INCOME TAXES 4,718 3,383
Provision for Income Taxes 2,052 1,387
--------- --------
NET INCOME $ 2,666 $ 1,996
--------- --------
--------- --------
NET INCOME PER SHARE - BASIC $ 0.26 $ 0.21
--------- --------
--------- --------
NET INCOME PER SHARE - DILUTED $ 0.26 $ 0.21
--------- --------
--------- --------
WEIGHTED AVERAGE SHARES - BASIC 10,192 9,456
--------- --------
--------- --------
WEIGHTED AVERAGE SHARES - DILUTED 10,418 9,584
--------- --------
--------- --------
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)
AUGUST 1, APRIL 30,
1998 1998
----------- ----------
(UNAUDITED) (AUDITED)
ASSETS
CURRENT ASSETS:
Cash $ 4,497 $ 1,869
Accounts receivable, net of allowances for doubtful
accounts of $1,153 and $1,171 85,034 97,206
Current lease receivables 20,621 18,751
Inventories 11,370 10,008
Costs and estimated earnings in excess of billings of
$19,841 and $17,335 28,527 19,091
Deferred income tax benefits 2,437 2,488
Prepaid expenses, deposits and other 6,011 2,575
Prepaid income taxes 4,187 5,533
--------- --------
TOTAL CURRENT ASSETS 162,684 157,521
--------- --------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment 82,186 75,712
Less-accumulated depreciation and amortization (40,784) (37,713)
--------- --------
NET PROPERTY AND EQUIPMENT 41,402 37,999
--------- --------
OTHER ASSETS:
Lease receivables, net of current portion 36,550 34,998
Goodwill, net of amortization of $8,620 and $7,979 42,317 43,206
Other 1,741 1,884
--------- --------
TOTAL OTHER ASSETS 80,608 80,088
--------- --------
$ 284,694 $275,608
--------- --------
--------- --------
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)
AUGUST 1, APRIL 30,
1998 1998
----------- ----------
(Unaudited) (Audited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 2,486 $ 3,257
Current maturities of discounted lease rentals 16,996 14,758
Accounts payable 21,095 24,135
Deferred revenue 20,501 19,953
Accrued -
Salaries and wages 8,086 15,123
Warranty costs 1,786 1,776
Other liabilities 7,846 10,509
Billings in excess of costs and estimated earnings of $18,912
and $16,390 10,691 9,442
-------- ---------
TOTAL CURRENT LIABILITIES 89,487 98,953
-------- ---------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 60,067 52,440
DISCOUNTED LEASE RENTALS, NET OF CURRENT MATURITIES 27,076 20,883
DEFERRED INCOME TAXES 6,075 5,661
-------- ---------
SHAREHOLDERS' EQUITY:
Common stock - $.10 par value; 40,000,000 authorized shares;
10,588,581 and 9,963,716 shares issued and outstanding 1,059 996
Capital in excess of par value 49,267 44,741
Retained earnings 57,045 54,048
Unamortized cost of stock (3,196) (641)
Foreign currency translation adjustments (2,186) (1,473)
-------- ---------
TOTAL SHAREHOLDERS' EQUITY 101,989 97,671
-------- ---------
$284,694 $275,608
-------- ---------
-------- ---------
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
--------------------
AUGUST 1, AUGUST 2,
1998 1997
--------- ---------
OPERATING ACTIVITIES:
Net income $ 2,666 $ 1,996
Adjustments to reconcile net income to net cash used for
operating activities:
Restructuring charges paid (359) --
Depreciation and amortization 4,054 4,438
Deferred income taxes 437 4
Changes in operating items, net of acquisition effects:
Accounts receivable 13,991 (10,195)
Inventories (1,281) (1,205)
Costs and estimated earnings in excess of billings (9,584) (2,639)
Prepaid expenses, deposits and other (3,239) (153)
Accounts payable (3,435) (3,623)
Deferred revenue 213 605
Accrued liabilities (10,276) (9,956)
Income taxes payable 1,493 1,410
Billings in excess of costs and estimated earnings 1,294 1,505
-------- --------
NET CASH USED FOR OPERATING ACTIVITIES (4,026) (17,813)
-------- --------
INVESTING ACTIVITIES:
Additions to property and equipment, net (5,763) (3,557)
Investment in lease contracts (9,295) (4,709)
Collections from lease contracts 5,689 7,472
Other, net (287) 180
-------- --------
NET CASH USED FOR INVESTING ACTIVITIES (9,656) (614)
-------- --------
FINANCING ACTIVITIES:
Borrowings of long-term debt 99,158 67,183
Repayments of long-term debt (92,041) (49,562)
Repayment of debt assumed in acquisition (1,267) --
Borrowing of discounted lease rentals 13,332 --
Repayments of discounted lease rentals (4,786) (3,652)
Proceeds from sale of common stock 1,870 398
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,266 14,367
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 44 4
-------- --------
NET INCREASE (DECREASE) IN CASH 2,628 (4,056)
CASH, BEGINNING OF PERIOD 1,869 5,147
-------- --------
CASH, END OF PERIOD $ 4,497 $ 1,091
-------- --------
-------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
4
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 1, 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):
THREE MONTHS ENDED
------------------------
AUGUST 1, AUGUST 2,
1998 1997
--------- ---------
Cash paid for:
Interest $ 1,891 $ 1,473
Income taxes 7 41
Non-cash investing and financing activities:
Stock issued in pooling-of-interests
transaction $ 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
In the fiscal year ended April 30, 1998, the Company adopted Statement
of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS No.
128"), which established new guidelines for computing and presenting earnings
per share data ("EPS"), and retroactively restated EPS for all prior periods.
SFAS No. 128 requires presentation of basic and diluted EPS. Basic EPS is
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period. Diluted EPS reflects potential
dilution from outstanding stock options and other securities using the
treasury stock method. The adoption of SFAS No.128 did not have a significant
effect on previously reported EPS information for the periods presented.
A reconciliation of EPS calculations under SFAS No. 128 is as follows
(in thousands, except per share amounts):
THREE MONTHS ENDED
-----------------------
AUGUST 1, AUGUST 2,
1998 1997
--------- ---------
Net income $ 2,666 $ 1,996
-------- ---------
Weighted average common shares outstanding -- Basic 10,192 9,456
Effect of stock option and benefit plans 226 128
-------- ---------
Weighted average common shares outstanding -- Diluted 10,418 9,584
-------- ---------
Net income per share -- Basic $ 0.26 $ 0.21
-------- ---------
Net income per share -- Diluted $ 0.26 $ 0.21
-------- ---------
RECENTLY ISSUED ACCOUNTING STANDARDS
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 $2.0 million and $2.1 million for the three months ended
August 1, 1998 and August 2, 1997, respectively.
The Company adopted Statement of Position ("SOP") 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use," effective
May 1, 1997. The SOP requires the Company to capitalize certain costs
incurred in connection with developing or obtaining internal-use software.
The Company capitalized approximately $2.6 million of costs associated with
internal-use software developed or obtained during the fiscal quarter ended
August 1, 1998.
6
RESTRUCTURING CHARGE
During fiscal year 1998, Norstan recorded a restructuring charge of
$14.7 million in connection with management's plan to reduce costs,
consolidate and reorganize operations, and improve operating efficiencies.
Restructuring efforts focused primarily on the following: (i) consolidation
of seven semi-autonomous geographic sales and service organizations into a
single, more focused sales and operations organization; (ii) the
consolidation of 36 warehouses and parts locations into three strategically
located distribution centers; and (iii) the reorganization and integration of
the Company's IT consulting services operations, including the Norstan Call
Center Solutions Group, Connect and PRIMA, into a single, customer- focused
organization. The restructuring charge relates primarily to the write-down of
certain assets to their fair market values ($12.2 million), severance and
employee benefit costs ($1.2 million) and lease termination costs ($1.3
million).
ACQUISITIONS
On September 30, 1997, the Company acquired PRIMA Consulting, Inc.
(PRIMA) in a transaction accounted for under the purchase method. PRIMA
provides IT consulting services, including information systems planning and
development, consulting and programming services for collaborative computing
solutions and ERP integration services. The 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 fifteen years and three years, respectively.
In June 1998, Wordlink, Inc. (Wordlink) was merged with and into a
wholly owned subsidiary of the Company in a transaction accounted for under
the pooling-of-interests method. Wordlink delivers network integration,
groupware messaging, Internet/intranet/, e-commerce and education solutions
to business clients operating in a multi-vendor network environment. The
agreement provided for the conversion of all outstanding shares of Wordlink
common stock and all vested options into approximately $10.3 million of
Norstan common stock (420,539 shares). Unvested options to purchase shares
of Worlink common stock were converted into Norstan stock options. Wordlink's
stockholders' equity and operating results were not material in relation to
the Company's financial statements. As such, the Company has recorded the
combination without restating prior periods' financial statements.
VENDOR AGREEMENTS
Under its agreement with Siemens, the Company purchases communications
equipment and products for field application and installation. The current
distributor agreement with Siemens, which commenced in July 1993, has been
renewed through July 27, 1999 while a new distribution agreement is being
negotiated.
BUSINESS SEGMENTS
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," effective April 30, 1998. Adoption of
this statement required the Company to provide the disclosure of segment
information but did not require significant changes in the way geographic
information was disclosed.
7
The Company operates in three business segments, Global Services,
Communications Solutions, and Financial Services. Due to the Company's
continuing expansion and growth in the area of IT consulting services,
financial results for Global Services are now reported as (i) IT Consulting
Services and (ii) Communications Services. Interim disclosures under SFAS No.
131 are as follows (in thousands):
FOR THE THREE MONTHS ENDED
------------------------------------------------------
AUGUST 1, 1998 AUGUST 2, 1997
------------------------------------------------------
OPERATING OPERATING
REVENUES INCOME REVENUES INCOME
--------- --------- --------- ---------
Global Services:
IT Consulting Services $ 31,675 $ 1,166 $ 15,026 $ 664
Communications Services 32,366 3,487 33,023 1,861
--------- -------- --------- --------
Total Global Services 64,041 4,653 48,049 2,525
Communications Solutions 50,055 32 45,212 241
Financial Services 1,754 941 2,181 1,163
--------- -------- --------- --------
Totals $ 115,850 $ 5,626 $ 95,442 $ 3,929
--------- -------- --------- --------
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, the affect of the labor strike by the Communication Workers of
America against US West, 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 communications solutions for
customers in a dynamic industry; and other competitive factors.
Because these and other factors could affect the Company's operating
results, past financial performance should not necessarily be considered as a
reliable indicator of future performance, and investors should not use
historical trends to anticipate future period results.
8
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Norstan is a technology services company providing IT and communications
systems solutions to over 18,000 customers in the United States, Canada and
England. Headquartered in Minneapolis, Minnesota, with sales and service
offices located in 68 locations in the United States and Canada, the Company
sells its products and services to a wide variety of customers across
numerous industries.
The Company provides IT consulting and communications services,
communications and technology products and financing alternatives through its
three business units, Global Services, Communications Solutions (formerly
known as Communications Systems) and Financial Services.
SUMMARY
During the quarter ended August 1, 1998, the Company's net income
improved over the quarter ended August 2, 1997, increasing 33.6% to
$2,666,000 or $.26 per common share, compared to $1,996,000, or $.21 per
common share. These per share figures reflect diluted rather than basic EPS.
9
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
consolidated statements of operations expressed as a percentage of total
revenues:
DOLLAR AMOUNTS AS A
PERCENTAGE OF REVENUES
------------------------ PERCENTAGE
THREE MONTHS ENDED CHANGE
------------------------ -------------
AUGUST 1, AUGUST 2, FISCAL
1998 1997 1999 VS. 1998
--------- --------- -------------
REVENUES:
Global Services
IT Consulting Services 27.3% 15.7% 110.8%
Communications Services 28.0% 34.6% (2.0)%
----- ----- -----
Total Global Services 55.3% 50.3% 33.3%
Communications Solutions 43.2% 47.4% 10.7%
Financial Services 1.5% 2.3% (19.6)%
----- ----- -----
Total Revenues 100.0% 100.0% 21.4%
COST OF SALES: 68.5% 71.6% 16.1%
----- ----- -----
GROSS MARGIN 31.5% 28.4% 34.6%
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 26.6% 24.3% 33.2%
----- ----- -----
OPERATING INCOME 4.9% 4.1% 43.2%
Interest Expense and Other, Net (0.8%) (0.6%) 66.3%
----- ----- -----
INCOME BEFORE PROVISION FOR INCOME TAXES 4.1% 3.5% 39.5%
Provision for Income Taxes 1.8% 1.4% 48.0%
----- ----- -----
NET INCOME 2.3% 2.1% 33.6%
----- ----- -----
----- ----- -----
The following table sets forth, for the periods indicated, the gross
margin percentages for Global Services, Communications Solutions and
Financial Services.
THREE MONTHS ENDED
-----------------------
AUGUST 1, AUGUST 2,
1998 1997
--------- ---------
GROSS MARGIN
Global Services
IT Consulting Services 34.0% 26.4%
Communications Services 32.7% 27.6%
Total Global Services 33.3% 27.3%
Communications Solutions 28.1% 27.4%
Financial Services 60.3% 73.2%
10
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUES. Revenues increased 21.4% to $115.9 million for the quarter
ended August 1, 1998 as compared to $95.4 million for the prior year quarter
ended August 2, 1997.
Revenues from Global Services increased 33.3% to $64.0 million for the
quarter ended August 1, 1998 as compared to $48.0 million for the similar
period last year. Revenues from IT Consulting Services increased 110.8% to
$31.7 million in the first quarter of fiscal year 1999 from $15.0 million in
the first quarter of fiscal year 1998. This increase was generally the result
of: (i) the inclusion of the first quarter results of PRIMA, acquired in
September 1997; (ii) the merger with Wordlink during June 1998; and (iii)
internal growth. Revenues from Communications Services decreased 2.0% to
$32.4 million for the quarter ended August 1, 1998 from $33.0 in the
comparable period last year. The decrease in Communications Services revenues
resulted from a decrease in demand for moves, adds and changes.
Revenues from Communications Solutions increased 10.7% to $50.1 million
in the quarter ended August 1, 1998 from $45.2 million in the similar period
last year. The increase was attributable to increased sales volumes in call
centers, conferencing, voice processing products, and refurbished equipment
through sales to new customers as well as growth with existing customer
relationships.
Revenues from Financial Services decreased 19.6% to $1.8 million in the
first quarter of fiscal year 1999 from $2.2 million in the similar period
last year. This decrease is the result of a non-recurring early lease
termination recorded in the first quarter of fiscal 1998.
GROSS MARGIN. The Company's gross margin was $36.5 million and $27.1
million for the three months ended August 1, 1998 and August 2, 1997,
respectively. As a percent of total revenues, gross margin was 31.5% for the
first quarter of fiscal year 1999 compared to 28.4% for the first quarter of
fiscal year 1998.
Gross margin as a percent of revenues for Global Services was 33.3% for
the three months ended August 1, 1998 as compared to 27.3% for the similar
period last year. The gross margin for IT Consulting Services increased to
34.0% for the first quarter of fiscal year 1999 from 26.4% for the same
period last year. The improved margin is a result of operating efficiencies
gained as the IT Consulting Services business continued to grow as well as
from an increased emphasis on time-and-materials engagements. The gross
margin for Communications Services increased to 32.7% from 27.6% for the
comparable three month periods ended August 1, 1998 and August 2, 1997.
Gross margin as a percent of revenues for Communications Solutions was
28.1% for the three months ended August 1, 1998 as compared to 27.4% for the
comparable period ended August 2, 1997.
Gross margin as a percent of revenues for Financial Services was 60.3%
for the three months ended August 1, 1998 as compared to 73.2% for the
similar period last year.
11
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 33.2% to $30.8 million in the first quarter
of fiscal year 1999 from $23.2 million in the similar period last year. As a
percent of revenues, selling, general and administrative expenses increased
to 26.6% for the three months ended August 1, 1998, as compared to 24.3% for
the same period last year. This increase is generally the result of
increased investments in the IT Consulting Services business including costs
associated with the PRIMA and Wordlink acquisitions, investments in
Connaissance Consulting and the opening of new consulting offices in the past
six months.
INTEREST EXPENSE. Interest expense was $1.1 million for the three months
ended August 1, 1998 as compared to $.6 million for the same period last
year. This increase was the result of higher borrowing levels in fiscal year
1999 related primarily to acquisitions.
INCOME TAXES. The Company's effective income tax rate was 43.5% for the
three months ended August 1, 1998 and 41% 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. Net income was $2.7 million or $0.26 per diluted share in
the first quarter of fiscal year 1999, as compared to $2.0 million or $0.21
per diluted share for the comparable period in fiscal year 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities decreased in the first quarter of
fiscal year 1999 as compared to the similar period last year as a result of a
decrease in accounts receivable which was somewhat offset by increases in
costs and estimated earnings in excess of billings and prepaid expenses and a
decrease in accrued liabilities. Net cash used for investing activities
increased in the first quarter of fiscal year 1999 as compared to the similar
period in fiscal year 1998 as a result of increased capital expenditures and
investments in lease contracts.
CAPITAL EXPENDITURES. The Company used $5.8 million for capital
expenditures during the three months ended August 1, 1998 as compared to $3.6
million in the similar period last year. These expenditures were primarily
for capitalized costs incurred in connection with obtaining or developing
internal use software, computer equipment, facility expansion and
telecommunications equipment used in outsourcing arrangements and as spare
parts.
INVESTMENT IN LEASE CONTRACTS. The Company has also made a significant
investment in lease contracts with its customers. The additional investment
made in lease contracts in the first quarter of fiscal year 1999 totaled $9.3
million. Net lease receivables increased to $57.2 million, at August 1, 1998
from $53.7 million at April 30, 1998. The Company utilizes its lease
receivables and corresponding underlying equipment to borrow funds from
financial institutions on a nonrecourse or recourse basis by discounting the
stream of future lease payments. Proceeds from discounting are presented on
the consolidated balance sheet as discounted lease rentals. Discounted lease
rentals totaled $44.1 million at August 1, 1998 as compared to $35.6 million
at April 30, 1998. Interest rates on these credit agreements at August 1,
1998 ranged from 6.0% to 10.0%, while payments are due in varying monthly
installments through August 2005. Payments due to financial institutions are
made from monthly collections of lease receivables from customers.
12
CAPITAL RESOURCES. The Company has an $80.0 million unsecured revolving
long-term credit agreement with certain banks. Up to $30.0 million of
borrowings under this agreement may be in the form of commercial paper. In
addition, sublimits also exist related to the Company's support of its
leasing activities. Borrowings under this agreement are due May 31, 2001, and
bear interest at the banks' reference rate (8.50% at August 1, 1998), except
for LIBOR, CD and commercial-paper-based options, which generally bear
interest at a rate lower than the banks' reference rate (5.9% to 6.4% at
August 1, 1998). Total consolidated borrowings under this agreement at August
1, 1998 and April 30, 1998 were $59.0 million and $52.4 million. 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 and will modify or replace
portions of its hardware and software so that its computer systems will
function properly with respect to dates in 2000 and thereafter. The Company
has also had discussions with its significant suppliers to ensure that those
parties have appropriate plans to remediate Year 2000 issues where their
systems and products interface with the Company's systems or otherwise impact
its operations or that of its customers. The Company is assessing the extent
to which its operations are vulnerable should those organizations fail to
properly remediate either their computer systems or their current product
offerings available to the Company's customers.
The Company's comprehensive Year 2000 initiative is being managed by a
team of internal staff with the assistance of an outside consultant. The
Company is well under way with its efforts, which are scheduled to be
completed by mid-1999. The cost of the Year 2000 initiative is estimated to
be approximately $2.0 million to be incurred over fiscal year 1999 and fiscal
year 2000.
While the Company believes its planning efforts are adequate to address
its Year 2000 concerns, the Year 2000 readiness of the Company's customers,
and the hardware and software offerings from the Company's suppliers and
business partners may vary. Although the Company does not believe that the
Year 2000 matters discussed above will have a material impact on its
business, financial condition and results of operations, it is uncertain as
to what extent the Company may be affected by such matters.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of
its business. Although the 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 420,539 unregistered shares of its common stock on
June 19, 1998, in connection with the acquisition of Wordlink, Inc.
("Wordlink"). These shares had a fair market value of approximately
$10,250,000 and were issued to holders of Wordlink common stock and
holders of vested options to purchase Wordlink common stock in a
transaction exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"). Pursuant to
agreements governing the acquisition of Wordlink (collectively, the
"Merger Agreements"), ten percent of the shares issued are held in an
escrow account as security for the payment of indemnification claims
that may be brought by the Company. During the escrow period, which
expires on June 19, 1999, the owners of the esrowed shares shall have
all the rights of a shareholder, including the right to vote such
shares; provided, however, they may not sell, transfer, pledge or
otherwise encumber the escrowed shares. Under the terms of the Merger
Agreements, the Company is obligated to register under the Securities
Act the offer and sale of approximately 260,000 of the shares issued
to effect the Wordlink acquisition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 10. Fourth Amendment to Credit Agreement , dated as of July 23,
1998, 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
(b) Reports on Form 8-K.
None
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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 14, 1998 By /s/ David R. Richard
------------------------------------
David R. Richard
Chief Executive Officer,
President and Director
Date: September 14, 1998 By /s/ Kenneth S. MacKenzie
------------------------------------
Kenneth S. MacKenzie
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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