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 27, 2002
OR
| o | 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 | |
|
|
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| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
| 5101 Shady Oak Road, Minnetonka, Minnesota 55343-4100 (address of principal executive offices) |
| Telephone (952)352-4000 Fax (952)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 o.
On September 3, 2002, there were 12,562,400 shares outstanding of the registrant’s common stock, par value $0.10 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 | |||||||||||
| July 27, | July 28, | ||||||||||
| 2002 | 2001 | ||||||||||
REVENUES |
|||||||||||
Communications Technology Solutions and Services |
$ | 43,827 | $ | 51,264 | |||||||
Resale Services |
7,399 | 7,082 | |||||||||
Financial Services |
857 | 1,730 | |||||||||
Total Revenues |
52,083 | 60,076 | |||||||||
COST OF SALES |
|||||||||||
Communications Technology Solutions and Services |
30,587 | 36,471 | |||||||||
Resale Services |
4,894 | 4,322 | |||||||||
Financial Services |
94 | 484 | |||||||||
Total Cost of Sales |
35,575 | 41,277 | |||||||||
GROSS MARGIN |
|||||||||||
Communications Technology Solutions and Services |
13,240 | 14,793 | |||||||||
Resale Services |
2,505 | 2,760 | |||||||||
Financial Services |
763 | 1,246 | |||||||||
Total Gross Margin |
16,508 | 18,799 | |||||||||
Selling, General & Administrative Expenses |
15,739 | 17,970 | |||||||||
OPERATING INCOME (LOSS) |
769 | 829 | |||||||||
Interest Expense |
(692 | ) | (1,446 | ) | |||||||
Other Income (Expense), Net |
(7 | ) | 132 | ||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES |
70 | (485 | ) | ||||||||
Income tax provision |
27 | — | |||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS |
43 | (485 | ) | ||||||||
DISCONTINUED OPERATIONS: |
|||||||||||
Income from operations of discontinued operations,
net of tax provision of $13 in 2002 |
20 | 638 | |||||||||
Gain on disposal of discontinued operations,
net of tax provision of $324 in 2002 |
2,129 | — | |||||||||
NET INCOME |
$ | 2,192 | $ | 153 | |||||||
NET INCOME (LOSS) PER SHARE – BASIC |
|||||||||||
CONTINUING OPERATIONS |
$ | 0.00 | $ | (0.04 | ) | ||||||
DISCONTINUED OPERATIONS |
0.18 | 0.05 | |||||||||
NET INCOME (LOSS) PER SHARE – BASIC |
$ | 0.18 | $ | 0.01 | |||||||
NET INCOME (LOSS) PER SHARE — DILUTED |
|||||||||||
CONTINUING OPERATIONS |
$ | 0.00 | $ | (0.04 | ) | ||||||
DISCONTINUED OPERATIONS |
0.17 | 0.05 | |||||||||
NET INCOME (LOSS) PER SHARE — DILUTED |
$ | 0.17 | $ | 0.01 | |||||||
WEIGHTED AVERAGE SHARES OUTSTANDING: |
|||||||||||
BASIC |
12,258 | 11,909 | |||||||||
DILUTED |
13,024 | 12,398 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(In thousands, except share amounts)
| July 27, | April 30, | |||||||||
| 2002 | 2002 | |||||||||
ASSETS |
||||||||||
CURRENT ASSETS |
||||||||||
Cash |
$ | 3,091 | $ | 1,936 | ||||||
Accounts receivable, net of allowances for doubtful
accounts of $1,096 and $1,228 |
30,208 | 29,898 | ||||||||
Lease receivables |
10,248 | 13,404 | ||||||||
Inventories |
4,512 | 4,312 | ||||||||
Costs and estimated earnings in excess of billings of
$7,058 and $6,041 |
4,930 | 4,772 | ||||||||
Income taxes receivable |
— | 7,761 | ||||||||
Prepaid expenses, deposits and other |
7,566 | 6,753 | ||||||||
Net current assets of discontinued operations |
— | 2,985 | ||||||||
TOTAL CURRENT ASSETS |
60,555 | 71,821 | ||||||||
PROPERTY AND EQUIPMENT |
||||||||||
Furniture, fixtures and equipment |
85,586 | 85,210 | ||||||||
Less-accumulated depreciation and amortization |
(66,410 | ) | (64,058 | ) | ||||||
NET PROPERTY AND EQUIPMENT |
19,176 | 21,152 | ||||||||
OTHER ASSETS |
||||||||||
Lease receivables, net of current portion |
10,870 | 11,947 | ||||||||
Goodwill, net of accumulated amortization of $6,372 and $6,380 |
3,886 | 3,883 | ||||||||
Deferred income taxes |
12,250 | 12,592 | ||||||||
Net non-current assets of discontinued operations |
389 | 1,097 | ||||||||
Other |
107 | 73 | ||||||||
TOTAL OTHER ASSETS |
27,502 | 29,592 | ||||||||
TOTAL ASSETS |
$ | 107,233 | $ | 122,565 | ||||||
The accompanying notes are an integral part of these consolidated balance sheets.
3
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(In thousands, except share amounts)
| July 27, | April 30, | ||||||||||
| 2002 | 2002 | ||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|||||||||||
CURRENT LIABILITIES |
|||||||||||
Current maturities of long-term debt |
$ | 3,041 | $ | 4,127 | |||||||
Current maturities of discounted lease rentals |
8,545 | 7,230 | |||||||||
Accounts payable |
13,864 | 15,679 | |||||||||
Deferred revenue |
22,399 | 21,372 | |||||||||
Accrued - |
|||||||||||
Salaries and wages |
3,046 | 11,933 | |||||||||
Other liabilities |
6,933 | 7,810 | |||||||||
Net current liabilities of discontinued operations |
1,135 | — | |||||||||
Billings in excess of costs and estimated earnings of $24,121
and $27,579 |
5,206 | 5,663 | |||||||||
TOTAL CURRENT LIABILITIES |
64,169 | 73,814 | |||||||||
LONG-TERM DEBT, net of current maturities |
16,554 | 25,540 | |||||||||
DISCOUNTED LEASE RENTALS, net of current maturities |
6,928 | 6,295 | |||||||||
SHAREHOLDERS’ EQUITY |
|||||||||||
Common stock — $.10 par value; 40,000,000 authorized shares;
12,523,791 and 12,429,507 shares issued and outstanding |
1,252 | 1,243 | |||||||||
Capital in excess of par value |
56,135 | 55,856 | |||||||||
Accumulated deficit |
(35,219 | ) | (37,412 | ) | |||||||
Unamortized cost of stock |
(495 | ) | (674 | ) | |||||||
Accumulated other comprehensive loss |
(2,091 | ) | (2,097 | ) | |||||||
TOTAL SHAREHOLDERS’ EQUITY |
19,582 | 16,916 | |||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 107,233 | $ | 122,565 | |||||||
The accompanying notes are an integral part of these consolidated balance sheets.
4
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
UNAUDITED
(In thousands)
| Three Months Ended | |||||||||||
| July 27, | July 28, | ||||||||||
| 2002 | 2001 | ||||||||||
OPERATING ACTIVITIES |
|||||||||||
Net income (loss) from continuing operations |
$ | 43 | $ | (485 | ) | ||||||
Adjustments to reconcile net income (loss) from continuing
operations to net cash (used for) provided by continuing operations: |
|||||||||||
Restructuring charges paid |
— | (750 | ) | ||||||||
Depreciation and amortization |
2,569 | 3,665 | |||||||||
Deferred income taxes |
372 | — | |||||||||
Changes in operating items: |
|||||||||||
Accounts receivable |
(290 | ) | (1,465 | ) | |||||||
Inventories |
(198 | ) | 449 | ||||||||
Costs and estimated earnings in excess of billings |
(155 | ) | 2,271 | ||||||||
Prepaid expenses, deposits and other |
(817 | ) | 654 | ||||||||
Accounts payable |
(1,822 | ) | (4,195 | ) | |||||||
Deferred revenue |
1,019 | 841 | |||||||||
Income taxes payable/receivable |
7,782 | 30 | |||||||||
Accrued liabilities |
(9,367 | ) | 1,051 | ||||||||
Billings in excess of costs and estimated earnings |
(466 | ) | (532 | ) | |||||||
Net cash (used for) provided by operating activities |
(1,330 | ) | 1,534 | ||||||||
INVESTING ACTIVITIES |
|||||||||||
Additions to property and equipment, net |
(334 | ) | (1,897 | ) | |||||||
Investment in lease contracts |
(15 | ) | (1,858 | ) | |||||||
Proceeds from lease contracts |
4,261 | 5,913 | |||||||||
Other, net |
(76 | ) | (32 | ) | |||||||
Net cash provided by investing activities |
3,836 | 2,126 | |||||||||
FINANCING ACTIVITIES |
|||||||||||
Proceeds from the sale of leases |
— | 3,569 | |||||||||
Borrowings on long-term debt |
78,943 | 82,407 | |||||||||
Repayments of long-term debt |
(89,014 | ) | (87,512 | ) | |||||||
Borrowings on discounted lease rentals |
3,620 | — | |||||||||
Repayments of discounted lease rentals |
(1,681 | ) | (2,647 | ) | |||||||
Proceeds from sale of common stock |
289 | 191 | |||||||||
Net cash used for financing activities |
(7,843 | ) | (3,992 | ) | |||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
(10 | ) | (12 | ) | |||||||
NET CASH FLOW FROM CONTINUING OPERATIONS |
(5,347 | ) | (344 | ) | |||||||
NET CASH FLOW FROM DISCONTINUED OPERATIONS |
6,502 | (1,068 | ) | ||||||||
CASH, BEGINNING OF PERIOD |
1,936 | 2,106 | |||||||||
CASH, END OF PERIOD |
$ | 3,091 | $ | 694 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 27, 2002
UNAUDITED
The information furnished in this report is unaudited and reflects normal recurring adjustments and such other adjustments which, in the opinion of management, are necessary to present fairly 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 Norstan’s Annual Report on Form 10-K for the year ended April 30, 2002.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Norstan and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
DISCONTINUED OPERATIONS
Network Services:
On February 4, 2002, Norstan announced that it had entered into a definitive agreement to sell its Network Services business to NetWolves Corporation (NASDAQ: WOLV) for $7.5 million. The transaction was completed on July 9, 2002, effective on July 1, 2002. Pursuant to the terms of the purchase agreement, $3.75 million was received at closing and the remaining $3.75 million is due one year from closing, evidenced by a non-interest bearing promissory note in favor of Norstan. The Company recorded a pre-tax gain on this sale of $2.7 million in its first quarter of fiscal 2003 based solely on the $3.75 million cash received. Any additional gains related to receipt of the promissory note will be recorded when collection is assured. Network Services provides multiple source long distance services and related consulting and professional services. Because of the sale of this business unit, Network Services results of operations have been reported as discontinued operations for all periods presented.
Consulting:
During fiscal 2001, Norstan divested its IT consulting business in order to focus on its core competencies of providing communications technology services and solutions to channel partners and direct enterprise customers. In addition to refocusing Norstan’s strategy, the absence of realized synergies between the Company’s communications and IT consulting businesses and recurring losses within the consulting business contributed to the decision to divest of this non-strategic business segment.
Divestiture of the IT consulting business began on February 7, 2001 with the sale of the Company’s 75% interest in Connaissance Consulting to Connaissance’s founder. Terms of the sale required the payment of $3.0 million in cash at closing and delivery of promissory notes drawn in favor of Norstan with an aggregate face amount of $13.0 million maturing on various dates, commencing on April 30, 2001 and ending December 31, 2005. As of July 27, 2002, $1.0 million had been collected on one of the notes and the remaining $12.0 million had been fully reserved for, including a charge of $5.0 million recorded during the fourth quarter of fiscal 2002.
6
The divestiture concluded with the sale of Norstan Consulting on April 30, 2001 to a management group led by Norstan Consulting’s former President and the Company’s former Vice Chairman. Terms of the sale required the payment of $500,000 in cash at closing and delivery of a promissory note drawn in favor of the Company in the face amount of $1.5 million maturing on August 28, 2001. In addition, as part of the transaction, Norstan retained its rights to certain assets and assumed certain liabilities of Norstan Consulting. As of July 27, 2002, the promissory note had been paid in full.
The results of these two business units have historically been reported as the Company’s “Consulting” business segment. With these sales, Consulting’s results are reported as discontinued operations for all periods presented.
Financial Information Related to Discontinued Operations:
Net assets of discontinued operations include the following (in thousands):
| As of | ||||||||||
| July 27, | April 30, | |||||||||
| 2002 | 2002 | |||||||||
Assets: |
||||||||||
Cash, accounts receivable and inventories |
$ | — | $ | 1,571 | ||||||
Net property and equipment |
— | 621 | ||||||||
Notes receivable, prepaids and other assets |
1,469 | 4,769 | ||||||||
Liabilities: |
||||||||||
Accounts payable |
(611 | ) | (1,487 | ) | ||||||
Accrued - |
||||||||||
Salaries & wages |
— | (106 | ) | |||||||
Future lease obligations |
(1,204 | ) | (863 | ) | ||||||
Other liabilities |
(400 | ) | (423 | ) | ||||||
Net assets (liabilities) of discontinued operations |
(746 | ) | 4,082 | |||||||
Less: Current portion (asset)/liability |
1,135 | </ | ||||||||