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 25, 2003
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 | |
| (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 February 26, 2003, there were 12,708,786 shares outstanding of the registrant’s common stock, par value $0.10 per share, its only class of equity securities.
PART I. FINANCIAL INFORMATION
ITEM 1.
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share amounts)
| Three Months Ended | Nine Months Ended | |||||||||||||||||||
| January 25, | January 26, | January 25, | January 26, | |||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||||||
REVENUES |
||||||||||||||||||||
Communications Technology Solutions and Services |
$ | 51,242 | $ | 53,811 | $ | 143,801 | $ | 158,355 | ||||||||||||
Resale Services |
6,804 | 7,673 | 21,632 | 22,759 | ||||||||||||||||
Financial Services |
712 | 1,083 | 2,485 | 4,340 | ||||||||||||||||
Total Revenues |
58,758 | 62,567 | 167,918 | 185,454 | ||||||||||||||||
COST OF SALES |
||||||||||||||||||||
Communications Technology Solutions and Services |
37,329 | 39,510 | 102,320 | 113,281 | ||||||||||||||||
Resale Services |
4,439 | 5,019 | 13,955 | 14,473 | ||||||||||||||||
Financial Services |
(19 | ) | 132 | 130 | 869 | |||||||||||||||
Total Cost of Sales |
41,749 | 44,661 | 116,405 | 128,623 | ||||||||||||||||
GROSS MARGIN |
||||||||||||||||||||
Communications Technology Solutions and Services |
13,913 | 14,301 | 41,481 | 45,074 | ||||||||||||||||
Resale Services |
2,365 | 2,654 | 7,677 | 8,286 | ||||||||||||||||
Financial Services |
731 | 951 | 2,355 | 3,471 | ||||||||||||||||
Total Gross Margin |
17,009 | 17,906 | 51,513 | 56,831 | ||||||||||||||||
Selling, General & Administrative Expenses |
16,397 | 17,652 | 48,952 | 55,254 | ||||||||||||||||
OPERATING INCOME |
612 | 254 | 2,561 | 1,577 | ||||||||||||||||
Interest Expense |
(510 | ) | (1,127 | ) | (1,689 | ) | (3,823 | ) | ||||||||||||
Other Income (Expense), Net |
32 | 273 | 25 | 750 | ||||||||||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES |
134 | (600 | ) | 897 | (1,496 | ) | ||||||||||||||
Provision for Income Tax |
51 | — | 341 | — | ||||||||||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS |
83 | (600 | ) | 556 | (1,496 | ) | ||||||||||||||
DISCONTINUED OPERATIONS: |
||||||||||||||||||||
Income from operations of discontinued
operations, net of tax provision of
$13 in 2003 |
— | 760 | 20 | 2,144 | ||||||||||||||||
Gain on disposal of discontinued operations,
net of tax provision of $204 and $623 in 2003 |
333 | — | 2,617 | — | ||||||||||||||||
NET INCOME |
$ | 416 | $ | 160 | $ | 3,193 | $ | 648 | ||||||||||||
NET INCOME (LOSS) PER SHARE — BASIC |
||||||||||||||||||||
CONTINUING OPERATIONS |
$ | 0.01 | $ | (0.05 | ) | $ | 0.05 | $ | (0.13 | ) | ||||||||||
DISCONTINUED OPERATIONS |
0.02 | 0.06 | 0.21 | 0.18 | ||||||||||||||||
NET INCOME (LOSS) PER SHARE — BASIC |
$ | 0.03 | $ | 0.01 | $ | 0.26 | $ | 0.05 | ||||||||||||
NET INCOME (LOSS) PER SHARE — DILUTED |
||||||||||||||||||||
CONTINUING OPERATIONS |
$ | 0.01 | $ | (0.05 | ) | $ | 0.04 | $ | (0.12 | ) | ||||||||||
DISCONTINUED OPERATIONS |
0.02 | 0.06 | 0.20 | 0.17 | ||||||||||||||||
NET INCOME (LOSS) PER SHARE — DILUTED |
$ | 0.03 | $ | 0.01 | $ | 0.24 | $ | 0.05 | ||||||||||||
WEIGHTED AVERAGE SHARES OUTSTANDING |
||||||||||||||||||||
BASIC |
12,524 | 12,054 | 12,443 | 12,024 | ||||||||||||||||
DILUTED |
13,131 | 12,769 | 13,079 | 12,633 | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(In thousands, except share amounts)
| January 25, | April 30, | |||||||||
| 2003 | 2002 | |||||||||
ASSETS |
||||||||||
CURRENT ASSETS |
||||||||||
Cash |
$ | 3,212 | $ | 1,936 | ||||||
Accounts receivable, net of allowances for doubtful
accounts of $934 and $1,228 |
35,499 | 29,898 | ||||||||
Lease receivables |
8,133 | 13,404 | ||||||||
Inventories |
6,721 | 4,312 | ||||||||
Costs and estimated earnings in excess of billings of
$8,870 and $6,041 |
6,625 | 4,772 | ||||||||
Income taxes receivable |
— | 7,761 | ||||||||
Prepaid expenses, deposits and other |
5,508 | 6,753 | ||||||||
Net current assets of discontinued operations |
5 | 2,985 | ||||||||
TOTAL CURRENT ASSETS |
65,703 | 71,821 | ||||||||
PROPERTY AND EQUIPMENT |
||||||||||
Furniture, fixtures and equipment |
88,298 | 85,210 | ||||||||
Less-accumulated depreciation and amortization |
(70,737 | ) | (64,058 | ) | ||||||
NET PROPERTY AND EQUIPMENT |
17,561 | 21,152 | ||||||||
OTHER ASSETS |
||||||||||
Lease receivables, net of current portion |
6,870 | 11,947 | ||||||||
Goodwill, net of accumulated amortization of $6,393 and $6,369 |
3,911 | 3,883 | ||||||||
Deferred income taxes |
11,794 | 12,592 | ||||||||
Net non-current assets of discontinued operations |
476 | 1,097 | ||||||||
Other |
124 | 73 | ||||||||
TOTAL OTHER ASSETS |
23,175 | 29,592 | ||||||||
TOTAL ASSETS |
$ | 106,439 | $ | 122,565 | ||||||
The accompanying notes are an integral part of these consolidated balance sheets.
2
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
UNAUDITED
(In thousands, except share amounts)
| January 25, | April 30, | ||||||||||
| 2003 | 2002 | ||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|||||||||||
CURRENT LIABILITIES |
|||||||||||
Current maturities of long-term debt |
$ | 3,043 | $ | 4,127 | |||||||
Current maturities of discounted lease rentals |
6,056 | 7,230 | |||||||||
Accounts payable |
14,917 | 15,679 | |||||||||
Deferred revenue |
22,039 | 21,372 | |||||||||
Accrued - |
|||||||||||
Salaries and wages |
2,705 | 11,933 | |||||||||
Other liabilities |
6,945 | 7,810 | |||||||||
Billings in excess of costs and estimated earnings of $16,439
and $27,579 |
6,702 | 5,663 | |||||||||
TOTAL CURRENT LIABILITIES |
62,407 | 73,814 | |||||||||
LONG-TERM DEBT, net of current maturities |
18,008 | 25,540 | |||||||||
DISCOUNTED LEASE RENTALS, net of current maturities |
4,562 | 6,295 | |||||||||
SHAREHOLDERS’ EQUITY |
|||||||||||
Common stock — $.10 par value; 40,000,000 authorized shares;
12,709,536 and 12,429,507 shares issued and outstanding |
1,271 | 1,243 | |||||||||
Capital in excess of par value |
56,585 | 55,856 | |||||||||
Accumulated deficit |
(34,218 | ) | (37,412 | ) | |||||||
Unamortized cost of stock |
(240 | ) | (674 | ) | |||||||
Accumulated other comprehensive loss |
(1,936 | ) | (2,097 | ) | |||||||
TOTAL SHAREHOLDERS’ EQUITY |
21,462 | 16,916 | |||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 106,439 | $ | 122,565 | |||||||
The accompanying notes are an integral part of these consolidated balance sheets.
3
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
UNAUDITED
(In thousands)
| Nine Months Ended | |||||||||||
| January 25, | January 26, | ||||||||||
| 2003 | 2002 | ||||||||||
OPERATING ACTIVITIES |
|||||||||||
Net income (loss) from continuing operations |
$ | 556 | $ | (1,496 | ) | ||||||
Adjustments to reconcile net income (loss) from continuing
operations to net cash (used for) provided by continuing operations: |
|||||||||||
Restructuring charges paid |
— | (974 | ) | ||||||||
Depreciation and amortization |
7,098 | 10,848 | |||||||||
Deferred income taxes |
339 | (429 | ) | ||||||||
Changes in operating items: |
|||||||||||
Accounts receivable |
(5,541 | ) | (6,462 | ) | |||||||
Inventories |
(2,387 | ) | 1,641 | ||||||||
Costs and estimated earnings in excess of billings |
(1,845 | ) | 3,320 | ||||||||
Prepaid expenses, deposits and other |
1,247 | (1,301 | ) | ||||||||
Accounts payable |
(796 | ) | (6,851 | ) | |||||||
Deferred revenue |
614 | 2,007 | |||||||||
Income taxes payable/receivable |
8,234 | 2,485 | |||||||||
Accrued liabilities |
(10,083 | ) | 4,999 | ||||||||
Billings in excess of costs and estimated earnings |
1,028 | 730 | |||||||||
Net cash (used for) provided by operating activities |
(1,536 | ) | 8,517 | ||||||||
INVESTING ACTIVITIES |
|||||||||||
Additions to property and equipment, net |
(2,975 | ) | (3,714 | ) | |||||||
Investment in lease contracts |
(228 | ) | (2,719 | ) | |||||||
Proceeds from lease contracts |
10,621 | 18,773 | |||||||||
Other, net |
112 | (102 | ) | ||||||||
Net cash provided by investing activities |
7,530 | 12,238 | |||||||||
FINANCING ACTIVITIES |
|||||||||||
Proceeds from the sale of leases |
— | 6,430 | |||||||||
Borrowings on long-term debt |
124,988 | 236,492 | |||||||||
Repayments of long-term debt |
(133,603 | ) | (253,032 | ) | |||||||
Borrowings on discounted lease rentals |
3,620 | — | |||||||||
Repayments of discounted lease rentals |
(6,560 | ) | (9,630 | ) | |||||||
Proceeds from sale of common stock |
757 | 487 | |||||||||
Net cash used for financing activities |
(10,798 | ) | (19,253 | ) | |||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
16 | (32 | ) | ||||||||
NET CASH FLOW FROM CONTINUING OPERATIONS |
(4,788 | ) | 1,470 | ||||||||
NET CASH FLOW FROM DISCONTINUED OPERATIONS |
6,064 | (608 | ) | ||||||||
CASH, BEGINNING OF PERIOD |
1,936 | 2,106 | |||||||||
CASH, END OF PERIOD |
$ | 3,212 | $ | 2,968 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 25, 2003
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 gai