UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED OCTOBER 27, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from__________to __________
Commission File Number 0-8141
NORSTAN, INC.
(Exact name of registrant as specified in its charter)
| Minnesota | 41-0835746 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
| 5101 Shady Oak Road, Minnetonka, Minnesota 55343-4100 |
| (address of principal executive offices) |
| Telephone (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. No.
On December 3, 2001, there were 12,275,052 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 | Six Months Ended | ||||||||||||||||||
| October 27, | October 28, | October 27, | October 28, | |||||||||||||||||
| 2001 | 2000 | 2001 | 2000 | |||||||||||||||||
REVENUES | ||||||||||||||||||||
| Communications Technology: | ||||||||||||||||||||
| Solutions and Services | $ | 53,280 | $ | 61,057 | $ | 104,544 | $ | 123,201 | ||||||||||||
| Resale | 8,004 | 6,863 | 15,086 | 13,596 | ||||||||||||||||
| Network Services | 5,564 | 7,420 | 11,564 | 14,980 | ||||||||||||||||
| Financial Services | 1,527 | 2,078 | 3,257 | 4,427 | ||||||||||||||||
Total Revenues | 68,375 | 77,418 | 134,451 | 156,204 | ||||||||||||||||
COST OF SALES | ||||||||||||||||||||
| Communications Technology: | ||||||||||||||||||||
| Solutions and Services | 37,299 | 46,406 | 73,770 | 94,303 | ||||||||||||||||
| Resale | 5,132 | 4,110 | 9,454 | 8,130 | ||||||||||||||||
| Network Services | 4,064 | 5,663 | 8,439 | 11,470 | ||||||||||||||||
| Financial Services | 254 | 467 | 738 | 1,165 | ||||||||||||||||
Total Cost of Sales | 46,749 | 56,646 | 92,401 | 115,068 | ||||||||||||||||
GROSS MARGIN | ||||||||||||||||||||
| Communications Technology: | ||||||||||||||||||||
| Solutions and Services | 15,981 | 14,651 | 30,774 | 28,898 | ||||||||||||||||
| Resale | 2,872 | 2,753 | 5,632 | 5,466 | ||||||||||||||||
| Network Services | 1,500 | 1,757 | 3,125 | 3,510 | ||||||||||||||||
| Financial Services | 1,273 | 1,611 | 2,519 | 3,262 | ||||||||||||||||
Total Gross Margin | 21,626 | 20,772 | 42,050 | 41,136 | ||||||||||||||||
| Selling, General & Administrative Expenses | 20,386 | 23,325 | 39,343 | 45,416 | ||||||||||||||||
OPERATING INCOME (LOSS) | 1,240 | (2,553 | ) | 2,707 | (4,280 | ) | ||||||||||||||
| Interest Expense | (1,250 | ) | (2,116 | ) | (2,696 | ) | (4,199 | ) | ||||||||||||
| Other Income (Expense), Net | 345 | (1,015 | ) | 477 | (1,023 | ) | ||||||||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | 335 | (5,684 | ) | 488 | (9,502 | ) | ||||||||||||||
| Income Tax (Benefit) Provision | — | — | — | — | ||||||||||||||||
INCOME (LOSS) FROM CONTINUING OPERATIONS | 335 | (5,684 | ) | 488 | (9,502 | ) | ||||||||||||||
DISCONTINUED OPERATIONS: | ||||||||||||||||||||
| Loss from operations of discontinued segment | — | (2,047 | ) | — | (5,769 | ) | ||||||||||||||
NET INCOME (LOSS) | $ | 335 | $ | (7,731 | ) | $ | 488 | $ | (15,271 | ) | ||||||||||
NET INCOME (LOSS) PER SHARE - (BASIC & DILUTED) CONTINUING OPERATIONS | $ | 0.03 | $ | (0.51 | ) | $ | 0.04 | $ | (0.86 | ) | ||||||||||
DISCONTINUED OPERATIONS | — | (0.18 | ) | — | (0.52 | ) | ||||||||||||||
EARNINGS PER SHARE | $ | 0.03 | $ | (0.69 | ) | $ | 0.04 | $ | (1.38 | ) | ||||||||||
WEIGHTED AVERAGE SHARES - | ||||||||||||||||||||
BASIC | 12,041 | 11,183 | 11,953 | 11,089 | ||||||||||||||||
DILUTED | 12,724 | 11,183 | 12,538 | 11,089 | ||||||||||||||||
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)
| October 27, | April 30, | |||||||||
| 2001 | 2001 | |||||||||
| (Unaudited) | (Audited) | |||||||||
ASSETS | ||||||||||
CURRENT ASSETS | ||||||||||
| Cash | $ | 1,945 | $ | 2,434 | ||||||
Accounts receivable, net of allowances for doubtful accounts of$1,448and$3,343 | 40,619 | 37,592 | ||||||||
| Lease receivables | 15,870 | 25,292 | ||||||||
| Inventories | 4,497 | 6,197 | ||||||||
Costs and estimated earnings in excess of billings of$9,092and$4,583 | 5,514 | 8,231 | ||||||||
| Prepaid expenses, deposits and other | 4,392 | 5,594 | ||||||||
| Net current assets of discontinued operations | 2,594 | 320 | ||||||||
TOTAL CURRENT ASSETS | 75,431 | 85,660 | ||||||||
PROPERTY AND EQUIPMENT | ||||||||||
| Furniture, fixtures and equipment | 97,461 | 96,146 | ||||||||
| Less-accumulated depreciation and amortization | (72,300 | ) | (66,492 | ) | ||||||
NET PROPERTY AND EQUIPMENT | 25,161 | 29,654 | ||||||||
OTHER ASSETS | ||||||||||
| Lease receivables, net of current portion | 21,256 | 30,635 | ||||||||
Goodwill, net of accumulated amortization of$6,380and$6,380 | 3,879 | 3,896 | ||||||||
| Deferred income taxes | 12,002 | 12,039 | ||||||||
| Net non-current assets of discontinued operations | 6,528 | 7,549 | ||||||||
| Other | 581 | 406 | ||||||||
TOTAL OTHER ASSETS | 44,246 | 54,525 | ||||||||
TOTAL ASSETS | $ | 144,838 | $ | 169,839 | ||||||
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)
| October 27, | April 30, | ||||||||||
| 2001 | 2001 | ||||||||||
| (Unaudited) | (Audited) | ||||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
CURRENT LIABILITIES | |||||||||||
| Current maturities of long-term debt | $ | 33,205 | $ | 21,015 | |||||||
| Current maturities of discounted lease rentals | 11,023 | 13,242 | |||||||||
| Accounts payable | 24,488 | 31,219 | |||||||||
| Deferred revenue | 21,535 | 22,105 | |||||||||
| Accrued - | |||||||||||
| Salaries and wages | 7,633 | 5,669 | |||||||||
| Warranty costs | 1,964 | 2,042 | |||||||||
| Other liabilities | 8,248 | 6,434 | |||||||||
Billings in excess of costs and estimated earnings of$18,579 and$11,812 | 7,475 | 8,276 | |||||||||
TOTAL CURRENT LIABILITIES | 115,571 | 110,002 | |||||||||
LONG-TERM DEBT, net of current maturities | 10,992 | 38,200 | |||||||||
DISCOUNTED LEASE RENTALS, net of current maturities | 9,183 | 13,552 | |||||||||
SHAREHOLDERS’ EQUITY | |||||||||||
Common stock - $.10 par value; 40,000,000 authorized shares;12,315,451and12,220,907shares issued and outstanding | 1,232 | 1,222 | |||||||||
| Capital in excess of par value | 55,565 | 55,298 | |||||||||
| Accumulated deficit | (44,464 | ) | (44,952 | ) | |||||||
| Unamortized cost of stock | (1,102 | ) | (1,438 | ) | |||||||
| Accumulated other comprehensive loss | (2,139 | ) | (2,045 | ) | |||||||
TOTAL SHAREHOLDERS’ EQUITY | 9,092 | 8,085 | |||||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 144,838 | $ | 169,839 | |||||||
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)
| Six Months Ended | |||||||||||
| October 27, | October 28, | ||||||||||
| 2001 | 2000 | ||||||||||
OPERATING ACTIVITIES | |||||||||||
| Net income (loss) from continuing operations | $ | 488 | $ | (9,502 | ) | ||||||
| Adjustments to reconcile net income (loss) from continuing operations to net cash provided by continuing operations: | |||||||||||
| Restructuring costs paid | (732 | ) | — | ||||||||
| Depreciation and amortization | 7,925 | 10,263 | |||||||||
| Deferred income taxes | (10 | ) | 1,168 | ||||||||
| Changes in operating items: | |||||||||||
| Accounts receivable | (1,615 | ) | 10,115 | ||||||||
| Inventories | 1,691 | 3,386 | |||||||||
| Costs and estimated earnings in excess of billings | 2,713 | 3,162 | |||||||||
| Prepaid expenses, deposits and other | 1,202 | (2,820 | ) | ||||||||
| Accounts payable | (6,678 | ) | (1,084 | ) | |||||||
| Deferred revenue | (532 | ) | (62 | ) | |||||||
| Accrued liabilities | 4,445 | 1,358 | |||||||||
| Billings in excess of costs and estimated earnings | (784 | ) | (3,526 | ) | |||||||
Net cash provided by operating activities | 8,113 | 12,458 | |||||||||
INVESTING ACTIVITIES | |||||||||||
| Additions to property and equipment, net | (2,870 | ) | (6,247 | ) | |||||||
| Investment in lease contracts | (2,545 | ) | (15,313 | ) | |||||||
| Proceeds from lease contracts | 13,413 | 17,069 | |||||||||
| Other, net | (452 | ) | 1,290 | ||||||||
Net cash provided by (used for) investing activities | 7,546 | (3,201 | ) | ||||||||
FINANCING ACTIVITIES | |||||||||||
| Proceeds from the sale of leases | 6,430 | — | |||||||||
| Borrowings on long-term debt | 159,615 | 93,694 | |||||||||
| Repayments of long-term debt | (174,642 | ) | (88,307 | ) | |||||||
| Borrowings on discounted lease rentals | — | 4,012 | |||||||||
| Repayments of discounted lease rentals | (6,553 | ) | (10,668 | ) | |||||||
| Proceeds from sale of common stock | 277 | 768 | |||||||||
Net cash used for financing activities | (14,873 | ) | (501 | ) | |||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | (22 | ) | 51 | ||||||||
NET INCREASE IN CASH FROM CONTINUING OPERATIONS | 764 | 8,807 | |||||||||
NET CASH FLOW FROM DISCONTINUED OPERATIONS | (1,253 | ) | (6,834 | ) | |||||||
CASH, BEGINNING OF PERIOD | 2,434 | (18 | ) | ||||||||
CASH, END OF PERIOD | $ | 1,945 | $ | 1,955 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 27, 2001
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 the Company’s Annual Report on Form 10-K for the year ended April 30, 2001.
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.
DISCONTINUED OPERATIONS
During fiscal 2001, the Company 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. The Company’s inability to realize synergies between its communications and IT consulting businesses and recurring losses generated by the consulting business contributed to the Company’s decision to divest itself of this non-strategic business segment.
The Company’s divestiture of its IT consulting business began on February 7, 2001 with the sale of the Company’s 75 percent interest in Connaissance Consulting to Connaissance’s founder. Terms of the sale included a payment of $3.0 million in cash at closing and delivery of promissory notes drawn in favor of the Company with an aggregate face amount of $13.0 million maturing on various dates, commencing on April 30, 2001 and ending December 31, 2005.
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 included a 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 which matured in September, 2001 and remains unpaid. The promissory note is secured by certain assets of the business. In connection with the transaction, the Company retained its rights to certain assets and assumed certain liabilities of Norstan Consulting.
The results of operations 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 at April 30, 2001 and for future periods. The Company’s consolidated financial statements have been restated to report separately the net assets and operating results of the discontinued businesses for all periods presented.
5
Net assets of discontinued operations include the following (in thousands):
| As of | ||||||||||
| October 27, | April 30, | |||||||||
| 2001 | 2001 | |||||||||
| Assets: | ||||||||||
| Cash, accounts receivable and inventories | $ | — | $ | 500 | ||||||
| Notes receivable, prepaids and other assets | 10,010 | 10,809 | ||||||||
| Liabilities: | ||||||||||
| Accounts payable | (20 | ) | (652 | ) | ||||||
| Accrued - | ||||||||||
| Salaries & wages | — | (1,367 | ) | |||||||
| Future lease obligations | (857 | ) | (1,000 | ) | ||||||
| Other liabilities | (11 | ) | (421 | ) | ||||||
| Net assets of discontinued operations | 9,122 | 7,869 | ||||||||
| Less: Current portion | (2,594 | ) | (320 | ) | ||||||
| $ | 6,528 | $ | 7,549 | |||||||
Summary operating results of the discontinued operations are as follows (in thousands):
| For the periods ended | ||||||||
| October 28, 2000 | ||||||||
| Three | Six | |||||||
| Months | Months | |||||||
| Revenues | $ | 11,578 | $ | 23,438 | ||||
| Cost of Sales | 7,629 | 16,889 | ||||||
| Gross margin | 3,949 | 6,549 | ||||||
| Sales, general and administrative expenses | 5,948 | 12,158 | ||||||
| Operating loss | (1,999 | ) | (5,609 | ) | ||||
| Other income (expense), net | (48 | ) | (160 | ) | ||||
| Net loss from discontinued operations | $ | (2,047 | ) | $ | (5,769 | ) | ||
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.
6
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows (in thousands):
| Six Months Ended | |||||||||
| October 27, | October 28, | ||||||||
| 2001 | 2000 | ||||||||
| Cash paid for: | |||||||||
| Interest | $ | 3,017 | $ | 6,314 | |||||
| Income taxes | $ | 59 | $ | 69 | |||||
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133 (SFAS No. 133), “Accounting for Derivative Instruments and Hedging Activities”, was issued in June 1998 and amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities – Deferral of the Effective Date of SFAS No. 133” to require adoption at the beginning of the Company’s fiscal year ending April 30, 2002. The standard requires every derivative to be recorded on the balance sheet as either an asset or liability measured at fair value with changes in the derivative’s fair value recognized in earnings unless specific hedge accounting criteria are satisfied. The Company’s adoption of SFAS No. 133 on May 1, 2001 did not have a material effect on the Company’s financial position or results of operations.
On June 29, 2001, the Financial Accounting Standards Board approved two new statements, SFAS No. 141, “Business Combinations,” (“SFAS No. 141”) and SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”). Under SFAS No. 141, all business combinations will be accounted for under the purchase method beginning June 30, 2001. SFAS No. 142 includes requirements to test goodwill for impairment using a fair value approach, rather than amortizing the cost of goodwill over future periods. As a result, the Company’s amortization of goodwill, including goodwill recorded in past business combinations, ceased upon adoption of the new accounting standards. The Company adopted SFAS No. 142 in the first quarter of its fiscal year ending April 30, 2002. The Company’s annual goodwill amortization was approximately $450,000, which ceased effective May 1, 2001 upon adoption of the new rules. The Company is currently evaluating the impairment testing provisions of SFAS No. 142, and has not yet determined the effect of SFAS No. 142 on its consolidated financial position and results of operations. Should an impairment be determined to exist, the Company would record an impairment as a change in accounting principle and restate its first quarter and year-to-date results.
The following tables set forth proforma net income and earnings per share (in thousands except per share amounts):
| Six Months Ended | ||||||||
| October 27, | October 28, | |||||||
| 2001 | 2000 | |||||||
| Net income (loss) as reported | $ | 488 | $ | (15,271 | ) | |||
| Add back: Goodwill amortization | — | 251 | ||||||
| Adjusted net income (loss) | $ | 488 | $ | (15,020 | ) | |||
| Earnings (loss) per share as reported (Basic and Diluted) | $ | 0.04 | $ | (1.38 | ) | |||
| Goodwill amortization | — | .02 | ||||||
| Adjusted earnings (loss) per share (Basic and Diluted) | $ | 0.04 | $ | (1.36 | ) | |||
7
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 may differ from those estimates.
EARNINGS PER SHARE DATA
The Company reports net income (loss) per share pursuant to the requirements of the Statement of Financial Accounting Standards No. 128 “Earnings per Share” (“SFAS No. 128”). SFAS No. 128 requires presentation of basic and diluted earnings (loss) per share (EPS). Basic EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects potential dilution from outstanding stock options and other securities using the treasury stock method.
COMPREHENSIVE INCOME
The Company reports comprehensive income and its components pursuant to the requirements of SFAS No. 130, “Reporting Comprehensive Income”. This statement establishes standards for the reporting of comprehensive income and its components. For the Company, comprehensive income consists of net income (loss) adjusted for foreign currency translation adjustments. Comprehensive net income, as defined by SFAS No. 130, was approximately $197,000 for the three months ended October 27, 2001 and a net loss of $8.0 million for the similar period ended October 28, 2000. For the six month period ended October 27, 2001, the Company had comprehensive income of $394,000 as compared to a comprehensive loss of $15.5 million for the similar period last year.
RESTRUCTURING CHARGES
During the fourth quarter of fiscal year 2001, the Company recorded a restructuring charge of approximately $1.2 million relating to a workforce reduction and closure of certain facilities. This charge included the costs of severance ($683,000) and lease terminations and other facility costs ($500,000) related to non-strategic businesses including Network Services and Financial Services and for continued cost reductions in the Communications Technology businesses.
During the six months ended October 27, 2001, payments totaling $732,000 were charged against the restructuring reserve which was established as part of the above-described restructuring charge. At October 27, 2001, a reserve of approximately $451,000 remained for future payments to be made related to this restructuring charge.
VENDOR AGREEMENTS
Norstan has been a distributor of Siemens communication equipment since 1976 and is Siemens’ largest independent distributor in North America. The term of the current distributor agreement with Siemens, signed in January 1999, is five years. Norstan and Siemens are also parties to an agreement scheduled to expire on July 27, 2003 pursuant to which Norstan is authorized to refurbish and sell previously owned Siemens equipment.
8
INCOME TAXES
Deferred income taxes are provided for differences between the financial reporting basis and tax basis of the Company’s assets and liabilities at currently enacted tax rates.
Realization of the Company’s net deferred tax asset is dependent on the Company’s ability to generate sufficient future taxable income. Although realization is not assured, the Company believes that it is more likely than not that the recorded asset will be realized. Should the Company’s operating strategies fail to produce sufficient taxable income in the future, the Company would record an additional valuation allowance in the appropriate future reporting period, as required by accounting principles generally accepted in the United States.
The Company did not record any income tax provision related to the current year’s net income or income tax benefit for the previous year’s net losses based on projections of the full fiscal year’s results and the effective tax rate, also reflecting the impact of operating loss carry forwards generated in prior fiscal years.
BANK FINANCING
As of April 30, 2001, the Company had a $78.0 million credit agreement with certain banks. In December 2000, the Company entered into a restructured credit facility with the banks which consisted of the following components; A) $15.0 million term loan, B) $15.0 million term loan, C) $18.0 million term loan, and D) up to $30.0 million revolving line of credit based on the Company’s level of receivables and inventory. All components of this facility were to mature no later than June 29, 2001. The term loans bore interest at the banks’ reference rate plus 3.5% to 4.5% (11.0% to 12.0% at April 30, 2001) and the revolving facility bore interest at the banks’ reference rate plus 2.5% (10.0% at April 30, 2001). Certain portions of the borrowings under this facility were classified as long-term as of April 30, 2001 as a result of the credit facility restructuring discussed below.
On June 29, 2001, the Company entered into an agreement with the banks to restructure its existing senior debt facility. The new credit facility consists of the following components; A) $20.0 million term loan (“Term Loan A”) with various monthly principal payments due commencing on August 31, 2001 and ending on June 28, 2002, B) $15.4 million term loan (“Term Loan B”) with various principal payments due beginning on July 31, 2002, or earlier if Term Loan A is paid off early, and maturing on December 31, 2002, and C) up to a $30.0 million revolving line of credit based on the Company’s level of receivables and inventory and maturing on June 28, 2002. The revolving facility and Term Loan A bear interest at the banks’ reference rate (5.5% at October 27, 2001) plus 2.5%, while Term Loan B bears interest at the banks’ reference rate plus 4.0%. As of October 27, 2001, the company had outstanding borrowings of $43.0 million under this facility.
Annual commitment fees on the unused portions of the credit facility are 0.25%. Under the terms and conditions of the credit agreement, the Company is required to maintain minimum levels of EBITDA and achieve certain other financial ratios. As of October 27, 2001, the Company was in compliance with all applicable financial covenants.
Under the terms of the December 2000 and June 2001 restructured credit agreements, the banks received warrants to purchase shares of the Company’s common stock. As of April 30, 2001, 389,545 warrants had been issued to the banks at various prices between $0.94 and $1.13 per share. In addition, on June 29, 2001, 100,000 warrants were issued at $2.80 per share. These warrants were recorded at their estimated fair value at the dates of issuance. All shares of common stock underlying the warrants issued to the banks are subject to demand and incidental (piggyback) registration rights.
9
The Company has implemented a restructuring plan to address the Company’s future liquidity and capital resource requirements. Management of the Company believes that a combination of A) cash expected to be generated from operations, B) borrowing capacity available under the financing arrangements discussed above, C) other debt facilities, D) issuance of debt or equity securities, E) lease financing, and F) cash to be generated from the sale or divestiture of certain assets of the Company, will be adequate to meet the anticipated liquidity and capital resource requirements of its business through at least April 30, 2002. The Company has not developed specific plans for the issuance or sale of debt or equity securities and there can be no assurance that if the Company is required to raise capital through such means that the Company will be successful in this regard.
BUSINESS SEGMENTS
The Company delivers its products and services through four business segments, Communications Technology Solutions and Services, Resale, Network Services and Financial Services. The Company’s interim disclosures under the requirements of SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information,” are as follows (in thousands):
| For the Quarter Ended | |||||||||||||||||
| October 27, | October 28, | ||||||||||||||||
| 2001 | 2000 | ||||||||||||||||
| Operating | Operating | ||||||||||||||||
| Revenues | Income (Loss) | Revenues | Income (Loss) | ||||||||||||||
| Communications Technology: | |||||||||||||||||
| Solutions and Services | $ | 53,280 | $ | 39 | $ | 61,057 | $ | (3,450 | ) | ||||||||
| Resale | 8,004 | 732 | 6,863 | 498 | |||||||||||||
| Network Services | 5,564 | (62 | ) | 7,420 | (622 | ) | |||||||||||
| Financial Services | 1,527 | 531 | 2,078 | 1,021 | |||||||||||||
| Totals | $ | 68,375 | $ | 1,240 | $ | 77,418 | $ | (2,553 | ) | ||||||||
| For the Six Months Ended | |||||||||||||||||
| October 27, | October 28, | ||||||||||||||||
| 2001 | 2000 | ||||||||||||||||
| Operating | Operating | ||||||||||||||||
| Revenues | Income (Loss) | Revenues | Income (Loss) | ||||||||||||||
| Communications Technology: | |||||||||||||||||
| Solutions and Services | $ | 104,544 | $ | 21 | $ | 123,201 | $ | (6,587 | ) | ||||||||
| Resale | 15,086 | 1,735 | 13,596 | 1,395 | |||||||||||||
| Network Services | 11,564 | (211 | ) | 14,980 | (1,053 | ) | |||||||||||
| Financial Services | 3,257 | 1,162 | 4,427 | 1,965 | |||||||||||||
| Totals | $ | 134,451 | $ | 2,707 | $ | 156,204 | $ | (4,280 | ) | ||||||||
10
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Norstan, Inc. (“Norstan” or the “Company”) is a full-service telecommunications solutions company that delivers voice and data technologies and services, and remanufactured equipment to select corporate end-users and channel partners. Norstan also offers a full range of technologies for call center design, messaging, infrastructure, conferencing, and mobility. Norstan manages the operations of its subsidiaries, Norstan Communications, Inc., Norstan Canada, Ltd., Norstan Financial Services, Inc., Norstan Network Services, Inc., Vibes Technologies, Inc., Norstan International, Inc., and Norstan-UK Limited. The Company is headquartered in Minneapolis, Minnesota, with sales and service offices in 30 locations in the United States and Canada.
The Company delivers its products and services through four business segments, Communications Technology Solutions and Services, Resale, Network Services and Financial Services, which accounted for 77.9%, 11.7%, 8.2% and 2.2% of Norstan’s revenues for the fiscal quarter ended October 27, 2001, respectively. Communications Technology Solutions offerings include customer contact-call centers, collaboration-conferencing and messaging, converged communication – IP telephony and PBX systems, infrastructure cabling, wiring, sound and signal and mobile business networking. Communications Technology Services offerings include project consulting, project management, installation, system monitoring and support services maintenance. Resale offers refurbished and re-certified voice and data products. Network Services offers multiple source local and long distance services and Financial Services supports the sales process by providing customized financing alternatives.
In fiscal year 2001, the Company changed its reportable operating segments to reflect how it evaluates its operating performance and allocates resources. Prior to fiscal year 2001, the Company’s reportable segments included Consulting, Communications and Financial Services. As of April 30, 2001, the Company divested its IT consulting business. Accordingly, the net assets and operating results have been separately reported as discontinued operations.
SUMMARY
During the quarter ended October 27, 2001, the Company reported net income of $335,000 or $0.03 per common share, as compared to a net loss of $7.7 million or $0.69 per common share for the quarter ended October 28, 2000. For the six month period ended October 27, 2001, the Company reported net income of $488,000 or $0.04 per common share, as compared to a net loss of $15.3 million, or $1.38 per share, for the similar period last year.
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SELECTED CONSOLIDATED FINANCIAL DATA
| DOLLAR AMOUNTS AS A | DOLLAR AMOUNTS AS A | ||||||||||||||||||||||||||
| PERCENTAGE OF REVENUES | PERCENTAGE | PERCENTAGE OF REVENUES | PERCENTAGE | ||||||||||||||||||||||||
| Three Months Ended | CHANGE | Six Months Ended | CHANGE | ||||||||||||||||||||||||
| October 27, | October 28, | Fiscal | October 27, | October 28, | Fiscal | ||||||||||||||||||||||
| 2001 | 2000 | 2002 vs. 2001 | 2001 | 2000 | 2002 vs. 2001 | ||||||||||||||||||||||
REVENUES: | |||||||||||||||||||||||||||
| Communications Technology: | |||||||||||||||||||||||||||
| Solutions and Services | 77.9 | % | 78.9 | % | (12.7 | %) | 77.8 | % | 78.9 | % | (15.1 | %) | |||||||||||||||
| Resale | 11.7 | % | 8.8 | % | 16.6 | % | 11.2 | % | 8.7 | % | 11.0 | % | |||||||||||||||
| Network Services | 8.2 | % | 9.6 | % | (25.0 | %) | 8.6 | % | 9.6 | % | (22.8 | %) | |||||||||||||||
| Financial Services | 2.2 | % | 2.7 | % | (26.5 | %) | 2.4 | % | 2.8 | % | (26.4 | %) | |||||||||||||||
| Total Revenues | 100.0 | % | 100.0 | % | (11.7 | %) | 100.0 | % | 100.0 | % | (13.9 | %) | |||||||||||||||
COST OF SALES | 68.4 | % | 73.2 | % | (17.5 | %) | 68.7 | % | 73.7 | % | (19.7 | %) | |||||||||||||||
GROSS MARGIN | 31.6 | % | 26.8 | % | 4.1 | % | 31.3 | % | 26.3 | % | 2.2 | % | |||||||||||||||
SELLING, GENERAL & ADMINISTRATIVE EXPENSES | 29.8 | % | 30.1 | % | (12.6 | %) | 29.3 | % | 29.0 | % | (13.4 | %) | |||||||||||||||
OPERATING INCOME (LOSS) | 1.8 | % | (3.3 | %) | (148.6 | %) | 2.0 | % | (2.7 | %) | (163.2 | %) | |||||||||||||||
| Interest Expense and Other, Net | (1.3 | %) | (4.0 | %) | (71.1 | %) | (1.6 | %) | (3.4 | %) | (57.5 | %) | |||||||||||||||
NET INCOME (LOSS) | |||||||||||||||||||||||||||
| Continuing Operations | 0.5 | % | (7.3 | %) | 105.9 | % | 0.4 | % | (6.1 | %) | 105.1 | % | |||||||||||||||
| Discontinued Operations | — | (2.7 | %) | 100.0 | % | — | (3.7 | %) | 100.0 | % | |||||||||||||||||
NET INCOME (LOSS) | 0.5 | % | (10.0 | %) | 104.3 | % | 0.4 | % | (9.8 | %) | 103.2 | % | |||||||||||||||
The following table sets forth, for the periods indicated, the gross margin percentages for Company’s business segments (continuing operations):
| Three Months Ended | Six Months Ended | ||||||||||||||||
| October 27, | October 28, | October 27, | October 28, | ||||||||||||||
| 2001 | 2000 | 2001 | 2000 | ||||||||||||||
| GROSS MARGIN PERCENTAGES | |||||||||||||||||
| Communications Technology: | |||||||||||||||||
| Solutions and Services | 30.0 | % | 24.0 | % | 29.4 | % | 23.5 | % | |||||||||
| Resale | 35.9 | % | 40.1 | % | 37.3 | % | 40.2 | % | |||||||||
| Network Services | 27.0 | % | 23.7 | % | 27.0 | % | 23.4 | % | |||||||||
| Financial Services | 83.4 | % | 77.5 | % | 77.3 | % | 73.7 | % | |||||||||
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RESULTS OF OPERATIONS
REVENUES.Revenues decreased 11.7% to $68.4 million in the second quarter of fiscal year 2002, compared to $77.4 million for the second quarter of fiscal year 2001. For the comparable six month periods ended October 27, 2001 and October 28, 2000, revenues decreased 13.9% to $134.5 million as compared to $156.2 million.
Revenues within the Communications Technology Solutions and Services segment decreased 12.7% to $53.3 million for the second quarter ended October 27, 2001, compared to $61.1 million for the similar period last year. Revenues decreased 15.1% to $104.5 million for the six month period ended October 27, 2001 from $123.2 million for the same period last year. These decreases were primarily the result of lower revenues in Solutions’ product offerings including call centers, PBX systems, and conferencing, offset somewhat by increased service contract revenues and conferencing services revenues.
With the continued slow economy, near term revenue projections within this segment are difficult. However, the Company’s new business model, concentrating on its core competencies, is gaining traction with a renewed focus on providing direct solutions to enterprise customers, communications technology services to channel partners and the remanufacture and resale of business communications products. In addition, the Company continues to aggressively pursue channel partners and other strategic relationships as evidenced by the recently announced relationship with Nortel Networks. This relationship has the potential to expand the Company’s geographic reach and capabilities within its Communications Technology Solutions and Services segment.
Resale revenues increased 16.6% to $8.0 million for the quarter ended October 27, 2001 as compared to $6.9 million for the same period ended October 28, 2000. For the comparable six month periods ended October 27, 2001 and October 28, 2000, revenues within this segment increased 11.0% to $15.1 million as compared to $13.6 million. These increases were due to increased revenues from Vibes Technologies, the Company’s integrated direct and web-based e-commerce business which remanufactures and resells voice and data equipment.
Network Services’ revenues decreased 25.0% to $5.6 million in the second quarter of fiscal year 2002, as compared to $7.4 million for the similar quarter last year. During the comparable six month periods ended October 27, 2001 and October 28, 2000, revenues decreased 22.8% to $11.6 million from $15.0 million. These decreases were due to the Company’s decreased emphasis on pursuing additional Network Services’ revenue. Financial Services’ revenues declined 26.5% to $1.5 million as compared to $2.1 million a year ago. For the six month period ended October 27, 2001, revenues decreased 26.4% to $3.3 million as compared to $4.4 million for the similar period last year. These decreases were attributed to the Company’s strategic decision not to offer financing directly to its customers. Norstan Financial Services has partnered with Fidelity Leasing to provide financial alternatives to its customers under a private label leasing program. Revenues from Network Services and Financial Services will continue to decline as these activities wind down.
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GROSS MARGIN.The Company’s gross margin was $21.6 million for the quarter ended October 27, 2001 an increase of 4.1% from $20.8 million for the quarter ended October 28, 2000. For the six month period ended October 27, 2001, gross margin increased 2.2%, to $42.1 million as compared to $41.1 million for the similar period last year. As a percent of total revenues, gross margin improved to 31.6% and 31.3% for the three and six month periods ended October 27, 2001 as compared to 26.8% and 26.3% for the similar periods ended October 28, 2000.
Gross margin as a percent of revenues for Communications Technology Solutions and Services was 30.0% and 29.4% for the three and six month periods ended October 27, 2001 as compared to 24.0% and 23.5% for the comparable periods ended October 28, 2000. These increases are the result of a change in the Company’s product/service mix, improved project management and continued efforts to control operating expenses. In addition, the Company has been diligent in evaluating new sales on the basis of the quality of revenue offered.
Resale’s gross margin as a percent of revenues was 35.9% and 37.3% for the three and six month periods ended October 27, 2001 compared to 40.1% and 40.2% for the similar periods ended October 28, 2000.
Network Services’ gross margin as a percent of revenues was 27.0% for the three and six month periods ended October 27, 2001 compared to 23.7% and 23.4% for the comparable periods ended October 28, 2000. Gross margin as a percent of revenues for Financial Services was 83.4% and 77.3% for the three and six month periods ended October 27, 2001 and 77.5% and 73.7% for the similar period ended October 28, 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.Selling, general and administrative expenses decreased 12.6% to $20.4 million in the second quarter of fiscal year 2002, from $23.3 million in the similar period last year. For the six month period ended October 27, 2001, selling, general and administrative expenses decreased 13.4% to $39.3 million compared to $45.4 million for the same period last year. As a percent of revenues, selling, general and administrative expenses were 29.8% and 29.3% for the three and six month periods ended October 27, 2001 compared to 30.1% and 29.0% for the similar periods last year. The Company has taken measures to remove a significant amount of costs from its businesses over the past year. In addition, with the adoption of SFAS No. 142, the Company no longer records amortization expense related to previously recorded goodwill. The Company continues to monitor expenditures and pursue cost control measures.
INTEREST EXPENSE.Interest expense decreased 41.0% to $1.3 million for the quarter ended October 27, 2001 from $2.1 million for the same quarter last year. For the six month period ended October 27, 2001 interest expense decreased 36.0% to $2.7 million from $4.2 million in the comparable six month period ended October 28, 2000. The decrease in interest expense was primarily the result of a decrease in the borrowings under the Company’s revolving long-term credit facilities which were at $43.0 million as of October 27, 2001 compared to $69.9 million as of October 28, 2000 as well as reduced weighted average interest rates. Continued decreases in interest expense are anticipated as the Company continues efforts to reduce its debt.
INCOME TAXES.The Company did not record any income tax provision related to the current quarter’s or year-to-date net income or income tax benefit for the previous year’s net loss based on projections of the full fiscal year’s results and the effective tax rate, also reflecting the impact of operating loss carry forwards generated in prior fiscal years.
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NET INCOME FROM CONTINUING OPERATIONS.The Company reported net income from continuing operations of $335,000 or $0.03 per basic and diluted share for the quarter ended October 27, 2001, as compared to a net loss of $5.7 million or $0.51 per share for the same quarter last year. For the six month period ended October 27, 2001, net income from continuing operations was $488,000 or $0.04 per basic and diluted share compared to a net loss of $9.5 million or $0.86 per share for the comparable period ended October 28, 2000.
DISCONTINUED OPERATIONS.During fiscal 2001, the Company 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. The Company’s inability to realize synergies between its communications and IT consulting businesses and recurring losses generated by the consulting business contributed to the Company’s decision to divest itself of this non-strategic business segment.
The Company’s divestiture of its IT consulting business began on February 7, 2001 with the sale of the Company’s 75 percent interest in Connaissance Consulting to Connaissance’s founder. Terms of the sale included a payment of $3.0 million in cash at closing and delivery of promissory notes drawn in favor of the Company with an aggregate face amount of $13.0 million maturing on various dates, commencing on April 30, 2001 and ending December 31, 2005.
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 included a 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 which matured in September, 2001 and remains unpaid. The promissory note is secured by certain assets of the business. In connection with the transaction, the Company retained its rights to certain assets and assumed certain liabilities of Norstan Consulting.
The results of operations 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 at April 30, 2001 and for future periods. The Company’s consolidated financial statements have been restated to report separately the net assets and operating results of the discontinued businesses for all periods presented.
Summary operating results of the discontinued operations are as follows (in thousands):
| For the periods ended | ||||||||
| October 28, 2000 | ||||||||
| Three | Six | |||||||
| Months | Months | |||||||
| Revenues | $ | 11,578 | $ | 23,438 | ||||
| Cost of Sales | 7,629 | 16,889 | ||||||
| Gross margin | 3,949 | 6,549 | ||||||
| Sales, general and administrative expenses | 5,948 | 12,158 | ||||||
| Operating loss | (1,999 | ) | (5,609 | ) | ||||
| Other income (expense), net | (48 | ) | (160 | ) | ||||
| Net loss from discontinued operations | $ | (2,047 | ) | $ | (5,769 | ) | ||
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NET INCOME (LOSS).For the quarter ended October 27, 2001, the Company reported net income of $335,000 or $0.03 per basic and diluted share, as compared to a net loss of $7.7 million or $0.69 per share in the same quarter last year. For the six month period ended October 27, 2001, the Company reported net income of $488,000 or $0.04 per basic and diluted share, as compared to a net loss of $15.3 million or $1.38 per share in the comparable period last year.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended October 27, 2001, continuing operating activities provided cash of $8.1 million compared to $12.5 million in the similar period last year. Investing activities provided cash of $7.5 million in the current six month period as compared to utilizing cash of $3.2 million in the similar period last year. This change is the result of reduced spending on capital assets and significant reduction in investments in lease contracts. The funds provided by current operations and investing activities were used to repay the Company’s long-term debt. As a result, financing activities utilized cash of $14.9 million during the six months ended October 27, 2001 as compared to $501,000 in the comparable six month period ended October 28, 2000.
CAPITAL EXPENDITURES.The Company used $2.9 million for capital expenditures during the six month period ended October 27, 2001, compared to $6.2 million in the similar period last year. This reduction was the result of increased focus on cost controls and better utilization of current resources. These expenditures were primarily for equipment costs incurred in connection with outsourcing and managed services arrangements.
INVESTMENT IN LEASE CONTRACTS.The Company has historically made a significant investment in lease contracts with its customers. As previously discussed, the Company is winding down its leasing activities. The additional investment made in lease contracts in the first six months of fiscal year 2002 totaled $2.5 million as compared to $15.3 million in the comparable period of fiscal 2001. Net lease receivables decreased to $37.1 million at October 27, 2001 from $55.9 million at April 30, 2001.
The Company utilizes its lease receivables and corresponding underlying equipment to borrow funds from financial institutions on a nonrecourse basis by discounting the stream of future lease payments. Proceeds from discounting are presented on the consolidated balance sheet as discounted lease rentals. Discounted lease rentals totaled $20.2 million at October 27, 2001 as compared to $26.8 million at April 30, 2001. Interest rates on these credit agreements at October 27, 2001 ranged from approximately 6.0% to 10.0%, while payments are due in varying monthly installments through November 2005. Payments due to financial institutions are made from monthly collections of lease receivables from customers. The Company also sold certain leases to a third party on a non-recourse basis during July and August 2001. Total proceeds from these sales were $6.4 million which is reflected on the Consolidated Statements of Cash Flow in “Financing Activities”.
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BANK FINANCING
As of April 30, 2001, the Company had a $78.0 million credit agreement with certain banks. In December 2000, the Company entered into a restructured credit facility with the banks which consisted of the following components; A) $15.0 million term loan, B) $15.0 million term loan, C) $18.0 million term loan, and D) up to $30.0 million revolving line of credit based on the Company’s level of receivables and inventory. All components of this facility were to mature no later than June 29, 2001. The term loans bore interest at the banks’ reference rate plus 3.5% to 4.5% (11.0% to 12.0% at April 30, 2001) and the revolving facility bore interest at the banks’ reference rate plus 2.5% (10.0% at April 30, 2001). Certain portions of the borrowings under this facility were classified as long-term as of April 30, 2001 as a result of the credit facility restructuring discussed below.
On June 29, 2001, the Company entered into an agreement with the banks to restructure its existing senior debt facility. The new credit facility consists of the following components; A) $20.0 million term loan (“Term Loan A”) with various monthly principal payments due commencing on August 31, 2001 and ending on June 28, 2002, B) $15.4 million term loan (“Term Loan B”) with various principal payments due beginning on July 31, 2002, or earlier if Term Loan A is paid off early, and maturing on December 31, 2002, and C) up to a $30.0 million revolving line of credit based on the Company’s level of receivables and inventory and maturing on June 28, 2002. The revolving facility and Term Loan A bear interest at the banks’ reference rate (5.5% at October 27, 2001) plus 2.5%, while Term Loan B bears interest at the banks’ reference rate plus 4.0%. As of October 27, 2001, the company had outstanding borrowings of $43.0 million under this facility.
Annual commitment fees on the unused portions of the credit facility are 0.25%. Under the terms and conditions of the credit agreement, the Company is required to maintain minimum levels of EBITDA and achieve certain other financial ratios. As of October 27, 2001, the Company was in compliance with all applicable financial covenants.
Under the terms of the December 2000 and June 2001 restructured credit agreements, the banks received warrants to purchase shares of the Company’s common stock. As of April 30, 2001, 389,545 warrants had been issued to the banks at various prices between $0.94 and $1.13 per share. In addition, on June 29, 2001, 100,000 warrants were issued at $2.80 per share. These warrants were recorded at their estimated fair value at the dates of issuance. All shares of common stock underlying the warrants issued to the banks are subject to demand and incidental (piggyback) registration rights.
The Company has implemented a restructuring plan to address the Company’s future liquidity and capital resource requirements. Management of the Company believes that a combination of A) cash expected to be generated from operations, B) borrowing capacity available under the financing arrangements discussed above, C) other debt facilities, D) issuance of debt or equity securities, E) lease financing, and F) cash to be generated from the sale or divestiture of certain assets of the Company, will be adequate to meet the anticipated liquidity and capital resource requirements of its business through at least April 30, 2002. The Company has not developed specific plans for the issuance or sale of debt or equity securities and there can be no assurance that if the Company is required to raise capital through such means that the Company will be successful in this regard.
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RECENTLY ISSUED ACCOUNTING STANDARDS
On June 29, 2001, the Financial Accounting Standards Board approved two new statements, SFAS No. 141, “Business Combinations,” (“SFAS No. 141”) and SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”). Under SFAS No. 141, all business combinations will be accounted for under the purchase method beginning June 30, 2001. SFAS No. 142 includes requirements to test goodwill for impairment using a fair value approach, rather than amortizing the cost of goodwill over future periods. As a result, the Company’s amortization of goodwill, including goodwill recorded in past business combinations, ceased upon adoption of the new accounting standards. The Company adopted SFAS No. 142 in the first quarter of its fiscal year ending April 30, 2002. The Company’s annual goodwill amortization was approximately $450,000, which ceased effective May 1, 2001 upon adoption of the new rules. The Company is currently evaluating the impairment testing provisions of SFAS No. 142, and has not yet determined the effect of SFAS No. 142 on its consolidated financial position and results of operations. Should an impairment be determined to exist, the Company would record an impairment as a change in accounting principle and restate its first quarter and year-to-date results.
The following tables set forth proforma net income and earnings per share (in thousands except per share amounts):
| Six Months Ended | ||||||||
| October 27, | October 28, | |||||||
| 2001 | 2000 | |||||||
| Net income (loss) as reported | $ | 488 | $ | (15,271 | ) | |||
| Add back: Goodwill amortization | — | 251 | ||||||
| Adjusted net income (loss) | $ | 488 | $ | (15,020 | ) | |||
| Earnings (loss) per share as reported (Basic and Diluted) | $ | 0.04 | $ | (1.38 | ) | |||
| Goodwill amortization | — | .02 | ||||||
| Adjusted earnings (loss) per share (Basic and Diluted) | $ | 0.04 | $ | (1.36 | ) | |||
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, product pricing, management of growth, integration of acquisitions, technological developments, new products 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: ability to obtain adequate financing, national and regional economic conditions; pending and future legislation affecting the IT and telecommunications industries; the Company’s business in Canada; stability of foreign governments; market acceptance of the Company’s products and services; the Company’s continued ability to provide integrated communication solutions for customers in a dynamic industry; and other competitive factors.
Because these and other factors could affect the Company’s operating results, past financial performance should not necessarily be considered as a reliable indicator of future performance, and investors should not use historical trends to anticipate future period results.
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QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
GENERAL. Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. Changes in these factors could cause fluctuations in the results of the Company’s operations and cash flows. In the ordinary course of business, the Company is exposed to foreign currency and interest rate risks. These risks primarily relate to the sale of products and services to foreign customers and changes in interest rates on the Company’s long-term debt obligations, discounted lease rentals, capital leases and other long-term debt obligations.
INTEREST RATE RISK.For fixed rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not results of operations or cash flows. The Company does not have an obligation to prepay any fixed rate debt prior to maturity, and therefore, interest rate risk and changes in the fair market value of fixed rate debt will not have an effect on results of operations or cash flows until the Company decides, or is required, to refinance such debt.
For variable rate debt, changes in interest rates generally do not affect the fair market value of the debt instrument, but does affect future results of operations and cash flows. The Company has variable rate debt of $43.0 million outstanding at October 27, 2001 with a weighted average interest rate of 8.5%. Assuming that the Company’s balance of variable rate debt remains constant at $43.0 million, each one-percent increase in interest rates would result in an annual increase in interest expense, and a corresponding decrease in cash flows of $430,000. Conversely, each one-percent decrease in interest rates would result in an annual decrease in interest expense, and a corresponding increase in cash flows of $430,000.
The Company periodically finances customer equipment purchases with fixed rate, sales-type leases. The resulting stream of future lease payments is, in turn, used to borrow funds from financial institutions at fixed rates on a nonrecourse basis. The Company is not exposed to interest rate risk in connection with these arrangements because: (i) both the leases and the debt are at fixed interest rates; and (ii) Norstan typically enters into lending arrangements shortly after execution of the related leases.
FOREIGN CURRENCY RISK.The Company is exposed to foreign currency rate risk. Substantially all foreign exchange exposure is the Canadian dollar. In general, with a net asset exposure, a weakening of the Canadian dollar relative to the U.S. dollar has a negative translation effect. Conversely, with a net asset exposure, a strengthening of the Canadian dollar would have the opposite effect. The average exchange rates for the Canadian dollar against the U.S. dollar during the year ended April 30, 2001 and for the six months ended October 27, 2001 remained relatively unchanged.
Assets and liabilities outside the United States are located primarily in Canada. The Company’s investments in its foreign subsidiary with a functional currency other than the U.S. dollar are not hedged. The potential loss in fair value resulting from a hypothetical 10% adverse change in the Canadian dollar exchange rate would not materially affect the Company’s consolidated financial position, results of operations or cash flows. Any gain or loss in fair value, associated with the Canadian dollar, in the Consolidated Balance Sheets of the Company would be recorded as a separate component of shareholders’ equity.
DERIVATIVE FINANCIAL INSTRUMENTS. The Company currently does not have any derivative financial instruments in place to manage interest costs, but may consider utilizing such instruments in the future as a means to manage interest rate risk.
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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 outcome of any such legal action cannot be predicted, in the opinion of management there is no legal proceeding pending against or involving the Company for which the outcome is likely to have a material adverse effect upon the consolidated financial position or results of operations of the Company. | ||
| The Company is pursuing various claims before the American Arbitration Association against the former owner of PRIMA Consulting (“PRIMA”) and certain former employees of PRIMA, which claims arise out of the Company’s September 1997 acquisition of PRIMA. The Company alleges that the respondents breached various covenants contained in agreements entered into in connection with the purchase transaction, aided and abetted tortious interference with those contracts and misappropriated trade secrets resulting in a substantial deterioration in the value of the acquired business. The Company further alleges an alternative claim of fraud in the inducement based on the former owner’s voiding of non-competes prior to Norstan’s acquisition of PRIMA. In addition, the Company has asserted claims in North Carolina federal district court against the new company established by the former owner of PRIMA for tortious interference with contracts and misappropriation of trade secrets. | ||
| The Company is seeking to recover compensatory damages of approximately $22.5 million, together with punitive damages. Although management believes the Company’s claims are meritorious, there can be no assurance that the Company will prevail in the arbitration proceeding, or in the event that the Company does prevail in the arbitration proceeding, of the amount of any damages that may be awarded to the Company. Further, there can be no assurance that the respondents will have sufficient assets to satisfy any award received by the Company pursuant to the arbitration proceeding. | ||
| In May 2000, Norstan was sued in the U.S. District Court for the District of Minnesota by a former sales representative who claims he is owed $458,675 in additional commissions. Norstan denies that the former sales representative is entitled to any additional commissions. Norstan filed a counterclaim, seeking reimbursement of overpayments that had been made to the sales representative. On July 26, 2001, the U.S. District Court entered summary judgment in favor of the former sales representative and against Norstan. The Company believes the ruling is in error and has filed an appeal. However, there can be no assurance that the Company will be successful in its appeal. Management believes that the October 27, 2001 consolidated financial statements adequately reflect the Company’s exposure under this lawsuit. |
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| ITEM 2. | CHANGES IN SECURITIES AND USE OF PROCEEDS | |
| Not applicable. | ||
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | |
| None. | ||
| ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS | |
| (a) | On September 13, 2001, the annual meeting of shareholders of the Company (the “Annual Meeting”) was held. | |
| (b) | At the Annual Meeting, the following directors were elected: |
| Paul Baszucki | Dr. Jagdish N. Sheth | |
| James C. Granger | Herbert F. Trader | |
| Connie M. Levi | Mercedes Walton | |
| Alan L. Mendelson |
| (c) | The following items were voted upon at the Annual Meeting: | |
| (1) | Election of Directors: |
| Name | Votes For | Votes Withheld | ||||||
| Paul Baszucki | 9,192,415 | 1,045,053 | ||||||
| James C. Granger | 9,233,317 | 1,004,151 | ||||||
| Connie M. Levi | 9,168,318 | 1,069,150 | ||||||
| Alan L. Mendelson | 9,218,113 | 1,019,355 | ||||||
| Dr. Jagdish N. Sheth | 9,221,557 | 1,015,911 | ||||||
| Herbert F. Trader | 9,167,740 | 1,069,728 | ||||||
| Mercedes Walton | 9,225,451 | 1,012,017 | ||||||
| (2) | The shareholders approved an amendment to the Company’s 1995 Long-Term Incentive Plan to increase the number of shares of common stock issuable thereunder from 2,900,000 to 3,400,000 shares. A total of 4,308,516 shares were voted for the amendment to this plan, 1,308,018 shares were voted against, and 43,246 abstained. | |
| (3) | The shareholders approved an amendment to the Company’s Restated Non-Employee Directors’ Stock Plan to increase the number of shares of common stock issuable thereunder from 400,000 to 500,000 shares. A total of 4,277,901 shares were voted for the amendment to this plan, 1,324,215 shares were voted against, and 57,664 abstained. |
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| (4) | The shareholders approved an amendment to the Company’s Restated Non-Employee Directors’ Stock Plan to eliminate the fixed vesting schedule pertaining to automatic stock option grants to newly elected non-employee directors and to vest in the Board of Directors the authority to determine, in the Board’s discretion, the vesting schedules for future automatic stock option grants. A total of 5,161,752 shares were voted for the amendment to this plan, 416,557 shares were voted against, and 81,471 abstained. | |
| (5) | The shareholders approved an amendment to the 2000 Employee Stock Purchase Plan of Norstan, Inc. increasing the number of shares of common stock issuable thereunder from 800,000 to 1,300,000 shares. A total of 5,296,904 shares were voted for the amendment to this plan, 299,022 shares were voted against, and 63,854 abstained. | |
| (6) | The shareholders approved the appointment of Arthur Andersen LLP as independent auditors for the fiscal year ending April 30, 2002. A total of 10,100,695 shares were voted for the appointment of Arthur Andersen LLP, 75,891 shares were voted against and 60,882 abstained. | |
| ITEM 5. | OTHER INFORMATION | |
| None. | ||
| ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K | |
| (a) | Exhibits. | |
| None. | ||
| (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: December 11, 2001 | By | /s/ James C. Granger James C. Granger Chief Executive Officer and President (Principal Executive Officer) | ||
| Date: December 11, 2001 | By | /s/ Scott G. Christian Scott G. Christian Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | ||
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