<PAGE>
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 OCTOBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 0-8141
NORSTAN, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0835746
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5101 SHADY OAK ROAD, MINNETONKA, MINNESOTA 55343-4100
-------------------------------------------------------
(address of principal executive offices)
TELEPHONE (612) 352-4000 FAX (612) 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 .
--- ---
On December 4, 1998, there were 10,648,408 shares outstanding of the
registrant's common stock, par value $.10 per share, its only class of equity
securities.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1.
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------ ------------------------------------
OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1,
1998 1997 1998 1997
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUES
Global Services
IT Consulting Services $ 35,045 $ 22,038 $ 66,720 $ 37,064
Communications Services 32,897 30,508 65,263 63,531
----------------- ---------------- ----------------- -----------------
Total Global Services 67,942 52,546 131,983 100,595
Communications Solutions 55,037 56,719 105,092 101,930
Financial Services 2,074 1,657 3,828 3,838
----------------- ---------------- ----------------- -----------------
TOTAL REVENUES 125,053 110,922 240,903 206,363
----------------- ---------------- ----------------- -----------------
COST OF SALES
Global Services
IT Consulting Services 22,568 15,507 43,471 26,569
Communications Services 22,537 21,627 44,336 45,521
----------------- ---------------- ----------------- -----------------
Total Global Services 45,105 37,134 87,807 72,090
Communications Solutions 39,107 42,729 75,095 75,544
Financial Services 797 625 1,494 1,209
----------------- ---------------- ----------------- -----------------
TOTAL COST OF SALES 85,009 80,488 164,396 148,843
----------------- ---------------- ----------------- -----------------
GROSS MARGIN 40,044 30,434 76,507 57,520
Selling, General
& Administrative Expenses 32,593 24,399 63,430 47,556
----------------- ---------------- ----------------- -----------------
OPERATING INCOME 7,451 6,035 13,077 9,964
Interest Expense (1,163) (847) (2,252) (1,441)
Other Income, Net 243 69 424 116
----------------- ---------------- ----------------- -----------------
INCOME BEFORE TAXES 6,531 5,257 11,249 8,639
Provision for Income Taxes 2,840 2,155 4,892 3,542
----------------- ---------------- ----------------- -----------------
NET INCOME $ 3,691 $ 3,102 $ 6,357 $ 5,097
----------------- ---------------- ----------------- -----------------
----------------- ---------------- ----------------- -----------------
NET INCOME PER SHARE - BASIC $ 0.35 $ 0.32 $ 0.61 $ 0.54
----------------- ---------------- ----------------- -----------------
----------------- ---------------- ----------------- -----------------
NET INCOME PER SHARE - DILUTED $ 0.35 $ 0.32 $ 0.61 $ 0.53
----------------- ---------------- ----------------- -----------------
----------------- ---------------- ----------------- -----------------
WEIGHTED AVERAGE SHARES - BASIC 10,500 9,566 10,345 9,510
----------------- ---------------- ----------------- -----------------
----------------- ---------------- ----------------- -----------------
WEIGHTED AVERAGE SHARES - DILUTED 10,597 9,760 10,507 9,667
----------------- ---------------- ----------------- -----------------
----------------- ---------------- ----------------- -----------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
1998 1998
------------------- ------------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 1,853 $ 1,869
Accounts receivable, net of allowances for doubtful
accounts of $996 and $1,171 92,050 97,206
Current lease receivables 21,352 18,751
Inventories 20,451 10,008
Costs and estimated earnings in excess of billings of
$20,681 and $17,335 33,719 19,091
Deferred income tax benefits 3,440 2,488
Prepaid expenses, deposits and other 8,156 2,575
Prepaid income taxes 2,192 5,533
-------------- -------------
TOTAL CURRENT ASSETS 183,213 157,521
-------------- -------------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment 90,442 75,712
Less-accumulated depreciation and amortization (45,043) (37,713)
-------------- -------------
NET PROPERTY AND EQUIPMENT 45,399 37,999
-------------- -------------
OTHER ASSETS:
Lease receivables, net of current portion 39,496 34,998
Goodwill, net of amortization of $9,411 and $7,979 41,484 43,206
Other 1,903 1,884
-------------- -------------
TOTAL OTHER ASSETS 82,883 80,088
-------------- -------------
$ 311,495 $ 275,608
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
2
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
1998 1998
------------------- ------------------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 1,730 $ 3,257
Current maturities of discounted lease rentals 19,727 14,758
Accounts payable 25,295 24,135
Deferred revenue 19,811 19,953
Accrued -
Salaries and wages 8,921 15,123
Warranty costs 1,781 1,776
Other liabilities 7,516 10,509
Billings in excess of costs and estimated earnings of $14,862
and $16,390 12,040 9,442
-------------- -------------
TOTAL CURRENT LIABILITIES 96,821 98,953
-------------- -------------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 68,734 52,440
DISCOUNTED LEASE RENTALS, NET OF CURRENT MATURITIES 32,693 20,883
DEFERRED INCOME TAXES 6,507 5,661
-------------- -------------
SHAREHOLDERS' EQUITY:
Common stock - $.10 par value; 40,000,000 authorized shares;
10,645,408 and 9,963,716 shares issued and outstanding 1,065 996
Capital in excess of par value 50,093 44,741
Retained earnings 60,740 54,048
Unamortized cost of stock (2,907) (641)
Foreign currency translation adjustments (2,251) (1,473)
-------------- -------------
TOTAL SHAREHOLDERS' EQUITY 106,740 97,671
-------------- -------------
$ 311,495 $275,608
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
3
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------------
OCTOBER 31, NOVEMBER 1,
1998 1997
---------------- ----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 6,357 $ 5,097
Adjustments to reconcile net income to net cash used for operating
activities:
Restructuring charges paid (1,113) -
Depreciation and amortization 9,210 9,430
Deferred income taxes (158) 9
Changes in operating items, net of effects from acquisitions:
Accounts receivable 6,812 (16,275)
Inventories (10,390) (3,198)
Costs and estimated earnings in excess of billings (14,805) (12,808)
Prepaid expenses, deposits and other (5,386) (454)
Accounts payable 822 1,165
Deferred revenue (436) (392)
Accrued liabilities (8,906) (6,305)
Income taxes payable / receivable 3,469 (192)
Billings in excess of costs and estimated earnings 2,635 (95)
---------------- ----------------
NET CASH USED FOR OPERATING ACTIVITIES (11,889) (24,018)
---------------- ----------------
INVESTING ACTIVITIES:
Additions to property and equipment, net (13,658) (8,686)
Cash paid for acquisitions, net of cash acquired - (11,450)
Investment in lease contracts (20,272) (10,468)
Collections from lease contracts 12,914 12,433
Other, net (556) (240)
---------------- ----------------
NET CASH USED FOR INVESTING ACTIVITIES (21,572) (18,411)
---------------- ----------------
FINANCING ACTIVITIES:
Repayment of debt assumed in acquisitions (1,267) (2,013)
Borrowings of long-term debt 179,108 147,450
Repayments of long-term debt (164,042) (105,912)
Borrowings of discounted lease rentals 26,425 6,898
Repayments of discounted lease rentals (9,513) (8,123)
Proceeds from sale of common stock 2,701 773
---------------- ----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 33,412 39,073
---------------- ----------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 33 30
---------------- ----------------
NET (DECREASE) INCREASE IN CASH (16) (3,326)
CASH, BEGINNING OF PERIOD 1,869 5,147
---------------- ----------------
CASH, END OF PERIOD $ 1,853 $ 1,821
---------------- ----------------
---------------- ----------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1998
UNAUDITED
The information furnished in this report is unaudited and reflects all
adjustments which are normal recurring adjustments and, which in the opinion of
management, are necessary to fairly present the operating results for the
interim periods. The operating results for the interim periods presented are not
necessarily indicative of the operating results to be expected for the full
fiscal year. This report should be read in conjunction with the Company's most
recent "Annual Report on Form 10-K."
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
FOREIGN CURRENCY
For the Company's foreign operations, assets and liabilities are translated
at exchange rates as of the balance sheet date, and revenues and expenses are
translated at average exchange rates prevailing during the period. Translation
adjustments are recorded as a separate component of shareholders' equity.
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows (in
thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------------
OCTOBER 31, 1998 NOVEMBER 1, 1997
----------------- ------------------
<S> <C> <C>
Cash paid for:
Interest $ 3,831 $ 3,017
Income taxes 1,448 2,978
Non-cash investing and financing activities:
Stock issued for acquisitions $ 114 $ 3,325
Obligations assumed in acquisition - 12,000
</TABLE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------- -------------------------------------
OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1,
1998 1997 1998 1997
---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net income $ 3,691 $ 3,102 $ 6,357 $ 5,097
---------------- ---------------- ---------------- -----------------
---------------- ---------------- ---------------- -----------------
Weighted average common shares
outstanding - Basic 10,500 9,566 10,345 9,510
Effect of stock option and
benefit plans 97 194 162 157
---------------- ---------------- ---------------- -----------------
Weighted average common shares
outstanding - Diluted 10,597 9,760 10,507 9,667
---------------- ---------------- ---------------- -----------------
---------------- ---------------- ---------------- -----------------
Net income per share - Basic $ 0.35 $ 0.32 $ 0.61 $ 0.54
---------------- ---------------- ---------------- -----------------
---------------- ---------------- ---------------- -----------------
Net income per share - Diluted $ 0.35 $ 0.32 $ 0.61 $ 0.53
---------------- ---------------- ---------------- -----------------
---------------- ---------------- ---------------- -----------------
</TABLE>
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 $3.6 million and $2.9 million for the three months ended October
31, 1998 and November 1, 1997, respectively, and approximately $5.6 million and
$5.0 million for the six months ended October 31, 1998 and November 1, 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 $4.5 million of costs associated with internal-use
software developed or obtained during the six months ended October 31, 1998.
6
<PAGE>
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 company paid acquisition
consideration aggregating 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 ($0.0 earned as of April 30,
1998). 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 merger agreement
provided for the conversion of all outstanding shares of Wordlink common
stock and all vested options into 420,539 shares of Norstan common stock
valued at approximately $10.3 million. Unvested options to purchase shares of
Wordlink 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
<PAGE>
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):
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
----------------------------------------------------------------------------
OCTOBER 31, 1998 NOVEMBER 1, 1997
------------------------------------- ----------------------------------
OPERATING OPERATING
REVENUES INCOME REVENUES INCOME
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Global Services:
IT Consulting Services $ 35,045 $ 1,524 $ 22,038 $ 2,508
Communications Services 32,897 2,176 30,508 1,304
---------------- --------------- --------------- ---------------
Total Global Services 67,942 3,700 52,546 3,812
Communications Solutions 55,037 2,679 56,719 1,431
Financial Services 2,074 1,072 1,657 792
---------------- --------------- --------------- ---------------
Totals $ 125,053 $ 7,451 $ 110,922 $ 6,035
---------------- --------------- --------------- ---------------
---------------- --------------- --------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
----------------------------------------------------------------------------
OCTOBER 31, 1998 NOVEMBER 1, 1997
------------------------------------- ----------------------------------
OPERATING OPERATING
REVENUES INCOME REVENUES INCOME
---------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Global Services:
IT Consulting Services $ 66,720 $ 2,690 $ 37,064 $ 3,172
Communications Services 65,263 5,667 63,531 3,175
---------------- --------------- --------------- ---------------
Total Global Services 131,983 8,357 100,595 6,347
Communications Solutions 105,092 2,714 101,930 1,661
Financial Services 3,828 2,006 3,838 1,956
---------------- --------------- --------------- ---------------
Totals $ 240,903 $ 13,077 $ 206,363 $ 9,964
---------------- --------------- --------------- ---------------
---------------- --------------- --------------- ---------------
</TABLE>
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, 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 information technology 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
<PAGE>
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 October 31, 1998, the Company's net income
improved over the quarter ended November 1, 1997, increasing 19.0% to $3.7
million or $.35 per common share, compared to $3.1 million, or $.32 per
common share. For the six month period ended October 31, 1998, net income
increased 24.7% to $6.4 million, or $.61 per common share, compared to $5.1
million, or $.53 per common share for the similar period ended November 1,
1997. All per share figures reflect diluted rather than basic EPS.
9
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
DOLLAR AMOUNTS AS A PERCENTAGE DOLLAR AMOUNTS AS A
OF REVENUES PERCENTAGE PERCENTAGE OF REVENUES PERCENTAGE
THREE MONTHS ENDED INCREASE SIX MONTHS ENDED INCREASE
----------------------------- ----------------- ------------------------- -------------
OCTOBER 31, NOVEMBER 1, FISCAL OCTOBER 31, NOVEMBER 1, FISCAL
1998 1997 1999 vs. 1998 1998 1997 1999 vs. 1998
-------------- ------------- --------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Global Services
IT Consulting Services 28.0% 19.9% 59.0% 27.7% 18.0% 80.0%
Communications Services 26.3% 27.5% 7.8% 27.1% 30.7% 2.7%
------------ ------------ ------------ ------------- ------------ ----------
Total Global Services 54.3% 47.4% 29.3% 54.8% 48.7% 31.2%
Communications Solutions 44.0% 51.1% (3.0%) 43.6% 49.4% 3.1%
Financial Services 1.7% 1.5% 25.2% 1.6% 1.9% 0.0%
------------ ------------ ------------ ------------- ------------ ----------
Total Revenues 100.0% 100.0% 12.7% 100.0% 100.0% 16.7%
COST OF SALES 68.0% 72.6% 5.6% 68.2% 72.1% 10.4%
------------ ------------ ------------ ------------- ------------ ----------
GROSS MARGIN 32.0% 27.4% 31.6% 31.8% 27.9% 33.0%
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 26.0% 22.0% 33.6% 26.4% 23.1% 33.4%
------------ ------------ ------------ ------------- ------------ ----------
OPERATING INCOME 6.0% 5.4% 23.5% 5.4% 4.8% 31.2%
Interest Expense and Other, Net (0.7%) (0.7%) 18.3% (0.8%) (0.6%) 38.0%
------------ ------------ ------------ ------------- ------------ ----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 5.3% 4.7% 24.2% 4.6% 4.2% 30.2%
Provision for Income Taxes 2.3% 1.9% 31.8% 2.0% 1.7% 38.1%
------------ ------------ ------------ ------------- ------------ ----------
NET INCOME 3.0% 2.8% 19.0% 2.6% 2.5% 24.7%
------------ ------------ ------------ ------------- ------------ ----------
------------ ------------ ------------ ------------- ------------ ----------
</TABLE>
The following table sets forth, for the periods indicated, the gross margin
percentages for global services, communication systems and financial services.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------- ------------------ ---------------- -----------------
OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1,
1998 1997 1998 1997
----------------- ------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
GROSS MARGIN PERCENTAGES:
Global Services
IT Consulting Services 35.6% 29.6% 34.9% 28.3%
Communications Services 31.5% 29.1% 32.1% 28.4%
Total Global Services 33.6% 29.3% 33.5% 28.3%
Communications Solutions 28.9% 24.7% 28.5% 25.9%
Financial Services 61.6% 62.3% 61.0% 68.5%
</TABLE>
10
<PAGE>
RESULTS OF OPERATIONS
REVENUES. Revenues increased 12.7% to $125.1 million for the quarter
ended October 31, 1998 as compared to $110.9 million for the prior year
quarter ended November 1, 1997. For the six month period ended October 31,
1998, revenues increased 16.7% to $240.9 million as compared to $206.4
million for the similar period last year.
Revenues from Global Services increased $15.4 million or 29.3%, and $31.4
million or 31.2%, during the comparable three and six month periods ended
October 31, 1998 and November 1, 1997, respectively. Revenues from IT
Consulting Services increased $13.0 million, or 59.0%, and $29.6 million, or
80.0%, during the comparable three and six month periods ended October 31,
1998 and November 1, 1997, respectively. These increases were generally the
result of: (i) the inclusion of the results of PRIMA, acquired in September
1997, for the three and six month periods ended October 31, 1998; (ii) the
merger with Wordlink during June 1998; and (iii) internal growth. Revenues
from Communications Services increased 8.0% to $32.9 million for the quarter
ended October 31, 1998 as compared to $30.5 million for the prior year
quarter. For the six month period ended October 31, 1998, Communications
Services revenues increased 2.7% to $65.3 million as compared to $63.5
million for the six month period ended November 1, 1997.
Revenues from Communications Solutions decreased 3.0% to $55.0 million in
the quarter ended October 31, 1998 from $56.7 million in the similar period
last year. Revenues increased $3.2 million, or 3.1%, to $105.1 million for
the six month period ended October 31, 1998 as compared to the similar period
last year. Over the past six months, Communications Solutions revenues were
impacted by weaker than projected orders and the general uncertainty and
volatility of the U.S. economy.
Revenues from Financial Services increased 25.2%, to $2.1 million in the
second quarter of fiscal year 1999 from $1.7 million in the similar quarter
last year. Revenues for the six month period ended October 31, 1998 were
relatively unchanged from the similar period ended November 1, 1997 at $3.8
million.
GROSS MARGIN. The Company's gross margin increased $9.6 million, or
31.6%, to $40.0 million for the quarter ended October 31, 1998 as compared to
$30.4 million for the similar quarter last year. For the six month period
ended October 31, 1998, gross margin increased $19.0 million, or 33.0%, to
$76.5 million as compared to $57.5 million for the similar period last year.
As a percent of total revenues, gross margin was 32.0% and 31.8% for the
three and six month periods ended October 31, 1998 as compared to 27.4% and
27.9% for the similar periods ended November 1, 1997. These increases are the
result of a shift in the mix of products and services offered toward higher
margin IT consulting services.
Gross margin as a percent of revenues for Global Services was 33.6% and
33.5% for the three and six month periods ended October 31, 1998 as compared
to 29.3% and 28.3% for the similar periods last year. The gross margin for IT
Consulting Services increased to 35.6% and 34.9% for the three and six month
periods of fiscal year 1999 from 29.6% and 28.3% for the same periods in
fiscal year 1998. These improved margins are 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 31.5% and 32.1% from
29.1% and 28.4% for the three and six months ended October 31, 1998 and
November 1, 1997, respectively.
Gross margin as a percent of revenues for Communications Solutions was
28.9% and 28.5% for the three and six months ended October 31, 1998 as
compared to 24.7% and 25.9% for the comparable period ended November 1, 1997.
The current gross margin percentages in Communications Solutions are higher
than those experienced in fiscal 1998 and there is no assurance that these
margins will be maintained in future periods.
11
<PAGE>
Gross margin as a percent of revenues for Financial Services was 61.6%
and 61.0% for the three and six months ended October 31, 1998 as compared to
62.3% and 68.5% for the similar periods last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 33.6% to $32.6 million in the second
quarter of fiscal year 1999 as compared to $24.4 million in the similar
period last year. For the six month period, these expenses increased 33.4% to
$63.4 million as compared to $47.6 million in the prior year period. As a
percent of revenues, selling, general and administrative expenses increased
to 26.0% and 26.4% for the three and six month periods ended October 31,
1998, as compared to 22.0% and 23.1% for the same periods last year. These
increases are partially due to the increased investments in the IT Consulting
Services business including costs associated with the Wordlink acquisition,
investments in Connaissance Consulting and the opening of new consulting
offices in the past six months.
INTEREST EXPENSE. Interest expense was $1.2 million as compared to
$847,000 for the three month periods ended October 31, 1998 and November 1,
1997, respectively. For the six months ended October 31, 1998 interest
expense increased to $2.3 million from $1.4 million for the same period last
year. This increase was the result of higher borrowing levels in fiscal year
1999 related to acquisitions and working capital requirements.
INCOME TAXES. The Company's effective income tax rate was 43.5% for the
three and six months ended October 31, 1998 and 41% for the similar periods
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 $3.7 million or $0.35 per diluted share in the
second quarter of fiscal year 1999, as compared to $3.1 million or $0.32 per
diluted share for the second quarter of fiscal year 1998. Net income was $6.4
million or $0.61 per diluted share, and $5.1 million, or $0.53 per diluted
share, for the six month periods ended October 31, 1998 and November 1, 1997,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities decreased in the first six months
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 inventories, 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 six months 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 $13.7 million for capital
expenditures during the six months ended October 31, 1998 as compared to $8.7
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.
12
<PAGE>
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 year-to-date in fiscal year 1999 totaled $20.3
million. Net lease receivables increased to $60.8 million, at October 31,
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 $52.4 million at October 31, 1998 as compared to $35.6
million at April 30, 1998. Interest rates on these credit agreements at
October 31, 1998 ranged from approximately 6.0% to 10.0%, while payments are
due in varying monthly installments through September 2005. Payments due to
financial institutions are made from monthly collections of lease receivables
from customers.
CAPITAL RESOURCES. The Company has a $100.0 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 (8.0% at October 31, 1998), except
for LIBOR, CD and commercial-paper-based options, which generally bear
interest at a rate lower than the banks' reference rate (5.5% to 6.3% at
October 31, 1998). Total consolidated borrowings under this agreement at
October 31, 1998 and April 30, 1998 were $67.4 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.
13
<PAGE>
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On September 24, 1998, 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 David R. Richard
Richard Cohen Dr. Jagdish N. Sheth
Connie M. Levi Herbert F. Trader
Gerald D. Pint
14
<PAGE>
(c) The following items were voted upon at the Annual Meeting:
(1) Election of Directors:
<TABLE>
<CAPTION>
NAME VOTES FOR VOTES WITHHELD
----------------- --------- --------------
<S> <C> <C>
Paul Baszucki 8,340,269 770,994
Richard Cohen 8,339,362 771,901
Connie M. Levi 8,340,481 770,782
Gerald D. Pint 8,289,017 822,246
David R. Richard 8,310,029 801,234
Dr. Jagdish N. Sheth 8,341,109 770,154
Herbert F. Trader 8,288,575 822,688
</TABLE>
(2) The shareholders approved an amendment to the company's 1995
Long-Term Incentive Plan to increase the number of shares of
common stock reserved for issuance thereunder by 1,200,000
shares. A total of 6,192,525 shares were voted for the amendment,
1,414,815 shares were voted against, 68,636 shares abstained and
1,435,287 were broker non-votes.
(3) The shareholders approved the appointment of Arthur Andersen LLP as
independent auditors for the fiscal year ending April 30, 1999. A
total of 9,047,305 shares were voted for the appointment of Arthur
Andersen LLP, 6,950 shares were voted against, and there were a total
of 57,008 abstentions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 10. (a) Fifth Amendment to Credit Agreement, dated as of
September 28, 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) Sixth Amendment to Credit Agreement, dated as of
October 21, 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
15
<PAGE>
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 14, 1998 By /s/ DAVID R. RICHARD
---------------------------
David R. Richard
Chief Executive Officer,
President and Director
Date: December 14, 1998 By /s/ KENNETH S. MACKENZIE
---------------------------
Kenneth S. MacKenzie
Chief Financial Officer
(Principal Financial and
Accounting Officer)
16
<PAGE>
FIFTH AMENDMENT TO CREDIT AGREEMENT
THIS FIFTH AMENDMENT TO CREDIT AGREEMENT dated as of September 28,
1998 ("this Amendment") is by and between NORSTAN, INC., a Minnesota corporation
(the "Borrower"), the banks which are signatories hereto (individually, a "Bank"
and, collectively, the "Banks") and U.S. BANK NATIONAL ASSOCIATION, a national
banking association, one of the Banks, as agent for the Banks (in such capacity,
the "Agent").
RECITALS
A. The Borrower, U.S. Bank National Association (in its individual
corporate capacity, "U.S. Bank"), M&I Marshall & Ilsley Bank ("M&I Bank), Harris
Trust and Savings Bank ("Harris," and, together with U.S. Bank and M&I Bank
collectively, the "Existing Banks") and the Agent are parties to a Credit
Agreement dated as of July 23, 1996, as amended by a First Amendment dated as of
October 11, 1996, a Second Amendment dated as of September 26, 1997, a Third
Amendment dated as of March 20, 1998 and a Fourth Amendment dated as of July 23,
1998 (as so amended, the "Credit Agreement").
B. The Borrower desires to add Norwest Bank Minnesota, National
Association ("Norwest") as a Bank under the Credit Agreement and the Agent and
the Existing Banks are willing to permit Norwest to become a Bank under the
Credit Agreement upon the terms and conditions set forth therein and in this
Amendment.
C. The parties hereto desire to amend the Credit Agreement in the
respects hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and for other good
and valuable consideration the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
Section 1. DEFINITIONS. Capitalized terms used herein and not
otherwise defined herein, but which are defined in the Credit Agreement, shall
have the meanings ascribed to such terms in the Credit Agreement unless the
context otherwise requires.
Section 2. ADDITION OF NORWEST AS A BANK. Subject to Section 5
hereof, Norwest hereby assumes, adopts and, agrees to become a party, as a Bank,
to the Credit Agreement and to each other Loan Document to which the Banks are
parties, with a Revolving Commitment Amount stated in the amended Exhibit 1.1A
to the Credit Agreement adopted by Section 3 of this Amendment, and the parties
hereto, other than Norwest, acknowledge and consent to such actions by Norwest.
Upon the effectiveness of this Amendment, as provided in Section 5 hereof,
Norwest shall be a Bank under the Credit Agreement and the other Loan Documents
and shall have all of the rights, privileges and benefits of a Bank under the
Credit Agreement and the other Loan Documents, and all of the duties of a Bank
thereunder, in each case as if Norwest had been initially a party to the Credit
Agreement. Upon the effectiveness of
1.1A-1
<PAGE>
this Amendment, U.S. Bank shall sell and assign to Norwest, and Norwest shall
purchase and accept from U.S. Bank, at par, and without recourse to or
warranties of any kind by U.S. Bank, a portion of U.S. Bank's Revolving
Commitment Amount equal to $10,000,000, and corresponding portions of (i)
U.S. Bank's Commercial Paper Sublimit, (ii) U.S. Bank's Letter of Credit
Sublimit and (iii) the principal and interest accrued on U.S. Bank's
Revolving Note (such amounts shall be collectively referred to as the
"Transferred Interest").
Section 3. AMENDMENTS TO CREDIT AGREEMENT. Subject to Section 5
hereof, the Credit Agreement is hereby amended as follows:
(a) All references to the "Banks" contained in the Credit Agreement
shall be deemed to include, collectively, Norwest and each of the Existing
Banks.
(b) Exhibit 1.1A to the Credit Agreement is deleted and Exhibit 1.1A
of this Amendment is inserted in its place.
(c) The addresses for notices to Norwest shall be as set forth below
their respective signature blocks on the signature pages to this Amendment
unless and until such addresses are changed in accordance with Section 9.4 of
the Credit Agreement.
Section 4. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. To induce
the Banks and the Agent to execute and deliver this Amendment (which
representations and warranties shall survive the execution and delivery of this
Amendment), the Borrower represents and warrants to the Agent and the Banks
that:
(a) this Amendment, the Amended U.S. Bank Note (as hereinafter
defined) and the Norwest Note (as hereinafter defined) have been duly
authorized, executed and delivered by it and this Amendment, the Amended
U.S. Bank Note and the Norwest Note constitute the legal, valid and binding
obligations of the Borrower enforceable against the Borrower in accordance
with their respective terms, subject to limitations as to enforceability
which might result from bankruptcy, insolvency, reorganization, moratorium
or similar laws or equitable principles relating to or limiting creditors'
rights generally;
(b) the Credit Agreement, as amended by this Amendment, constitutes
the legal, valid and binding obligation of the Borrower enforceable against
the Borrower in accordance with its terms, subject to limitations as to
enforceability which might result from bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles relating
to or limiting creditors' rights generally;
(c) the execution, delivery and performance by the Borrower of this
Amendment, the Amended U.S. Bank Note and the Norwest Note (i) have been
duly authorized by all requisite corporate action and, if required,
shareholder action, (ii) do not require the consent or approval of any
governmental or regulatory body or agency, and (iii) will not (A) violate
(1) any provision of law, statute, rule or regulation or its certificate of
incorporation or bylaws, (2) any order of any court or any rule, regulation
or order of any other agency or government binding upon it, or (3) any
provision of any material
1.1A-1
<PAGE>
indenture, agreement or other instrument to which it is a party or by which
any of its properties or assets are or may be bound, or (B) result in a
breach of or constitute (alone or with due notice or lapse of time or both)
a default under any indenture, agreement or other instrument referred to in
clause (iii)(A)(3) of this Section 4(c);
(d) as of the date hereof, no Default or Event of Default has
occurred which is continuing; and
(e) all the representations and warranties contained in Article IV of
the Credit Agreement are true and correct in all material respects with the
same force and effect as if made by the Borrower on and as of the date
hereof.
Section 5. CONDITIONS TO EFFECTIVENESS OF THIS AMENDMENT. This
Amendment shall not become effective until, and shall become effective on the
date (the "Fifth Amendment Effective Date") when, each and every one of the
following conditions shall have been satisfied:
(a) executed counterparts of this Amendment, duly executed by the
Borrower and each of the Banks, shall have been delivered to the Agent;
(b) U.S. Bank shall have received a new promissory note substantially
in the form attached hereto as Exhibit A (the "Amended U.S. Bank Note"),
which Amended U.S. Bank Note shall constitute an amendment and restatement
of the Revolving Note payable to U.S. Bank;
(c) Norwest shall have received a promissory note substantially in
the form attached hereto as Exhibit B duly executed by the Borrower (the
"Norwest Note"), which Norwest Note shall constitute Norwest's Revolving
Note under the Credit Agreement;
(d) the Agent shall have received from each Guarantor a Consent and
Agreement of Guarantor in the form of Exhibits C-1 through C-8 hereto (the
"Guarantor Agreements") duly completed and executed by such Guarantor;
(e) the Agent shall have received a copy of the resolutions of the
Board of Directors of the Borrower authorizing the execution, delivery and
performance by the Borrower of this Amendment, the Amended U.S. Bank Note
and the Norwest Note certified by an officer thereof, together with a
certificate of an officer of the Borrower certifying as to the incumbency
and the true signatures of the officers authorized to execute this
Amendment, the Amended U.S. Bank Note and the Norwest Note on behalf of the
Borrower;
(f) the Agent shall have received the favorable opinion of counsel to
Borrower, covering the matters set forth in Exhibit D hereto; and
Upon the Fifth Amendment Effective Date, (i) the Agent shall notify the Borrower
and the Banks that this Amendment has become effective, but the failure of the
Agent to give such notice shall not affect the validity of this Amendment or
prevent it from becoming effective, (ii) Norwest shall pay to U.S. Bank in cash
or cash equivalents the purchase price for the Transferred Interest,
1.1A-3
<PAGE>
in the amount or the sum of $10,000,000. From and after the Fifth Amendment
Effective Date, all interest, Revolving Commitment Fees and Letter of Credit
Fees accrued on the Transferred Interest for the billing period in which the
Fifth Amendment Effective Date falls shall be paid to the Agent as provided
in the Credit Agreement, and distributed by the Agent (A) with respect to
amounts accrued before the Fifth Amendment Effective Date, to U.S. Bank and
(B) with respect to amounts accrued on or after the Fifth Amendment Effective
Date, to Norwest.
Section 7. COUNTERPARTS AND EFFECTIVENESS. This Amendment may be
executed in any number of counterparts, and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed an original, but all such counterparts together shall constitute but one
of the same instrument.
Section 8. LEGAL EXPENSES. The Borrower agrees to reimburse the
Agent for all reasonable out-of-pocket expenses (including attorneys' fees and
legal expenses of Dorsey & Whitney LLP, counsel for the Agent) incurred in
connection with the negotiation, preparation, execution and delivery of this
Amendment.
Section 9. AFFIRMATION. Each party hereto affirms and acknowledges
that (a) the Credit Agreement as amended by this Amendment remains in full force
and effect in accordance with its terms, (b) all references to the "Credit
Agreement" or any similar term contained in any other Loan Document shall be
deemed to be references to the Credit Agreement as amended hereby and (c) all
references to the "Revolving Notes" or any similar term contained in the Credit
Agreement or any other Loan Document shall be deemed to be references to the
Amended U.S. Bank Note, the Norwest Note and the Revolving Notes previously
issued by the Borrower to each of Harris and M&I.
Section 10. CHOICE OF LAW. This Amendment shall be governed by, and
construed in accordance with, the internal law, and not the law of conflicts, of
the State of Minnesota, but giving effect to federal laws applicable to national
banks.
Section 11. SUCCESSORS AND ASSIGNS. This Amendment shall be binding
upon the Borrower, the Banks, the Agent and their respective successors and
assigns, and shall inure to the benefit of the Borrower, the Banks and the
successors and assigns of the Banks and the Agent.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
1.1A-1
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed as of the day and year first above written.
NORSTAN, INC.
By /s/ Robert J. Vold
------------------------------------
Its Treasurer
---------------------------
U.S. BANK NATIONAL ASSOCIATION,
as a Bank and as Agent
By /s/ David Shapiro
------------------------------------
Title Assistant Vice President
---------------------------------
M & I MARSHALL & ILSLEY BANK
By /s/ Jeffrey P. Norton
------------------------------------
Title Vice President
---------------------------------
By /s/ John W. Howard
------------------------------------
Title Vice President
---------------------------------
HARRIS TRUST & SAVINGS BANK
By /s/ Andrew K. Peterson
------------------------------------
Title Vice President
---------------------------------
1.1A-5
<PAGE>
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By /s/ Brad Sullivan
-----------------------------------
Title Portfolio Manager
--------------------------------
Address for Notices:
--------------------
7900 Xerxes Avenue South
Bloomington, Minnesota 55431-2206
Telephone: (612) 316-4186
Facsimile: (612) 316-4203
1.1A-1
<PAGE>
EXHIBIT 1.1A TO FIFTH
AMENDMENT TO CREDIT AGREEMENT
EXHIBIT 1.1A TO
CREDIT AGREEMENT
REVOLVING COMMITMENT AMOUNTS AND SUBLIMITS
<TABLE>
<CAPTION>
Revolving Commercial Standby
Commitment Revolving Paper Letter of Credit
Bank Amount Percentage Sublimit Sublimit
- ------ ----------- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
U.S. Bank $40,000,000 50% $15,000,000 $2,500,000
National
Association
Harris Trust $20,000,000 25% $ 7,500,000 $1,250,000
And Savings
Bank
Marshall & $10,000,000 12.5% $ 3,750,000 $ 625,000
Ilsley Bank
Norwest Bank $10,000,000 12.5% $ 3,750,000 $ 625,000
Minnesota,
National
Association
----------- ----- ----------- ----------
Total $80,000,000 100% $30,000,000 $5,000,000
</TABLE>
1.1A-7
<PAGE>
SIXTH AMENDMENT TO CREDIT AGREEMENT
THIS SIXTH AMENDMENT TO CREDIT AGREEMENT dated as of October 21, 1998
("this Amendment") is by and between NORSTAN, INC., a Minnesota corporation (the
"Borrower"), the banks which are signatories hereto (individually, a "Bank" and,
collectively, the "Banks") and U.S. BANK NATIONAL ASSOCIATION, a national
banking association, one of the Banks, as agent for the Banks (in such capacity,
the "Agent").
RECITALS
A. The Borrower, U.S. Bank National Association (in its individual
corporate capacity, "U.S. Bank"), M&I Marshall & Ilsley Bank ("M&I Bank"),
Harris Trust and Savings Bank ("Harris"), Norwest Bank Minnesota, National
Association ("Norwest," and, together with U.S. Bank, M&I Bank and Harris
collectively, the "Banks") and the Agent are parties to a Credit Agreement dated
as of July 23, 1996, as amended by a First Amendment dated as of October 11,
1996, a Second Amendment dated as of September 26, 1997, a Third Amendment dated
as of March 20, 1998, a Fourth Amendment dated as of July 23, 1998 and a Fifth
Amendment dated as of September 28, 1998 (as so amended, the "Credit
Agreement").
B. The parties hereto desire to amend the Credit Agreement in the respects
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration the receipt and adequacy of which are hereby
acknowledged, the parties hereto hereby agree as follows:
Section 1. DEFINITIONS. Capitalized terms used herein and not otherwise
defined herein, but which are defined in the Credit Agreement, shall have the
meanings ascribed to such terms in the Credit Agreement unless the context
otherwise requires.
Section 2. AMENDMENTS TO CREDIT AGREEMENT. Subject to Section 4 hereof,
the Credit Agreement is hereby amended as follows:
(a) Exhibit 1.1A to the Credit Agreement is deleted and Exhibit A of
this Amendment is inserted in its place.
Section 3. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. To induce the
Banks and the Agent to execute and deliver this Amendment (which representations
and warranties shall survive the execution and delivery of this Amendment), the
Borrower represents and warrants to the Agent and the Banks that:
[Signature Page to Sixth Amendment to Credit Agreement]
S-1
<PAGE>
(a) this Amendment, the Amended M&I Bank Note (as hereinafter
defined) and the Amended Norwest Note (as hereinafter defined) have been
duly authorized, executed and delivered by it and this Amendment, the
Amended M&I Bank Note and the Amended Norwest Note constitute the legal,
valid and binding obligations of the Borrower enforceable against the
Borrower in accordance with their respective terms, subject to limitations
as to enforceability which might result from bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles relating
to or limiting creditors' rights generally;
(b) the Credit Agreement, as amended by this Amendment, constitutes
the legal, valid and binding obligation of the Borrower enforceable against
the Borrower in accordance with its terms, subject to limitations as to
enforceability which might result from bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles relating
to or limiting creditors' rights generally;
(c) the execution, delivery and performance by the Borrower of this
Amendment, the Amended M&I Bank Note and the Amended Norwest Note (i) have
been duly authorized by all requisite corporate action and, if required,
shareholder action, (ii) do not require the consent or approval of any
governmental or regulatory body or agency, and (iii) will not (A) violate
(1) any provision of law, statute, rule or regulation or its certificate of
incorporation or bylaws, (2) any order of any court or any rule, regulation
or order of any other agency or government binding upon it, or (3) any
provision of any material indenture, agreement or other instrument to which
it is a party or by which any of its properties or assets are or may be
bound, or (B) result in a breach of or constitute (alone or with due notice
or lapse of time or both) a default under any indenture, agreement or other
instrument referred to in clause (iii)(A)(3) of this Section 3(c);
(d) as of the date hereof, no Default or Event of Default has
occurred which is continuing; and
(e) all the representations and warranties contained in Article IV of
the Credit Agreement are true and correct in all material respects with the
same force and effect as if made by the Borrower on and as of the date
hereof.
Section 4. CONDITIONS TO EFFECTIVENESS OF THIS AMENDMENT. This Amendment
shall not become effective until, and shall become effective on the date (the
"Sixth Amendment Effective Date") when, each and every one of the following
conditions shall have been satisfied:
(a) executed counterparts of this Amendment, duly executed by the
Borrower and each of the Banks, shall have been delivered to the Agent;
(b) M&I Bank shall have received a new promissory note substantially
in the form attached hereto as Exhibit B (the "Amended M&I Bank Note"),
which Amended M&I Bank Note shall constitute an amendment and restatement
of the Revolving Note dated July 23, 1998 payable to M&I Bank;
[Signature Page to Sixth Amendment to Credit Agreement]
S-2
<PAGE>
(c) Norwest shall have received a new promissory note substantially
in the form attached hereto as Exhibit C duly executed by the Borrower (the
"Amended Norwest Note"), which Amended Norwest Note shall constitute an
amendment and restatement of the Revolving Note dated September 28, 1998
payable to Norwest;
(d) the Agent shall have received from each Guarantor a Consent and
Agreement of Guarantor in the form of Exhibits D-1 through D-8 hereto (the
"Guarantor Agreements") duly completed and executed by such Guarantor;
(e) the Agent shall have received a copy of the resolutions of the
Board of Directors of the Borrower authorizing the execution, delivery and
performance by the Borrower of this Amendment, the Amended M&I Bank Note
and the Amended Norwest Note certified by an officer thereof, together with
a certificate of an officer of the Borrower certifying as to the incumbency
and the true signatures of the officers authorized to execute this
Amendment, the Amended M&I Bank Note and the Amended Norwest Note on behalf
of the Borrower; and
(f) the Agent shall have received the favorable opinion of counsel to
Borrower, covering the matters set forth in Exhibit E hereto.
Upon the Sixth Amendment Effective Date, the Agent shall notify the Borrower and
the Banks that this Amendment has become effective, but the failure of the Agent
to give such notice shall not affect the validity of this Amendment or prevent
it from becoming effective.
Section 5. COUNTERPARTS AND EFFECTIVENESS. This Amendment may be executed
in any number of counterparts, and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed an
original, but all such counterparts together shall constitute but one of the
same instrument.
Section 6. LEGAL EXPENSES. The Borrower agrees to reimburse the Agent for
all reasonable out-of-pocket expenses (including attorneys' fees and legal
expenses of Dorsey & Whitney LLP, counsel for the Agent) incurred in connection
with the negotiation, preparation, execution and delivery of this Amendment.
Section 7. AFFIRMATION. Each party hereto affirms and acknowledges that
(a) the Credit Agreement as amended by this Amendment remains in full force and
effect in accordance with its terms, (b) all references to the "Credit
Agreement" or any similar term contained in any other Loan Document shall be
deemed to be references to the Credit Agreement as amended hereby and (c) all
references to the "Revolving Notes" or any similar term contained in the Credit
Agreement or any other Loan Document shall be deemed to be references to the
Amended M&I Bank Note, the Amended Norwest Note and the Revolving Notes
previously issued by the Borrower to each of U.S. Bank and Harris.
Section 8. CHOICE OF LAW. This Amendment shall be governed by, and
construed in accordance with, the internal law, and not the law of conflicts,
of the State of Minnesota, but giving effect to federal laws applicable to
national banks.
[Signature Page to Sixth Amendment to Credit Agreement]
S-3
<PAGE>
Section 9. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon
the Borrower, the Banks, the Agent and their respective successors and assigns,
and shall inure to the benefit of the Borrower, the Banks and the successors and
assigns of the Banks and the Agent.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
[Signature Page to Sixth Amendment to Credit Agreement]
S-4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first above written.
NORSTAN, INC.
By /s/ Robert J. Vold
--------------------------------
Its Treasurer
----------------------------
U.S. BANK NATIONAL ASSOCIATION,
as a Bank and as Agent
By /s/ David Shapiro
--------------------------------
Its Assistant Vice President
----------------------------
M & I MARSHALL & ILSLEY BANK
By /s/ Doug Nelson
--------------------------------
Its Vice President
----------------------------
By /s/ Stephen F. Geimer
--------------------------------
Its Vice President
----------------------------
HARRIS TRUST & SAVINGS BANK
By /s/ George M. Dluhy
--------------------------------
Its Vice President
----------------------------
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By /s/ Brad Sullivan
--------------------------------
Its Portfolio Manager
----------------------------
[Signature Page to Sixth Amendment to Credit Agreement]
S-5
<PAGE>
EXHIBIT 1.1A TO SIXTH
AMENDMENT TO CREDIT AGREEMENT
EXHIBIT 1.1A TO
CREDIT AGREEMENT
REVOLVING COMMITMENT AMOUNTS AND SUBLIMITS
<TABLE>
<CAPTION>
Revolving Commercial Standby
Commitment Revolving Paper Letter of Credit
Bank Amount Percentage Sublimit Sublimit
- -------- ----------- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
U.S. Bank $40,000,000 40% $12,000,000 $ 2,000,000
National
Association
Harris Trust $20,000,000 20% $ 6,000,000 $ 1,000,000
And Savings
Bank
Marshall & $20,000,000 20% $ 6,000,000 $ 1,000,000
Ilsley Bank
Norwest Bank $20,000,000 20% $ 6,000,000 $ 1,000,000
Minnesota,
National
Association
------------ ----- ----------- -----------
Total $100,000,000 100% $30,000,000 $ 5,000,000
</TABLE>
A-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 1,853
<SECURITIES> 0
<RECEIVABLES> 93,046
<ALLOWANCES> 996
<INVENTORY> 21,352
<CURRENT-ASSETS> 183,213
<PP&E> 90,442
<DEPRECIATION> 45,043
<TOTAL-ASSETS> 311,495
<CURRENT-LIABILITIES> 98,821
<BONDS> 101,427
1,065
0
<COMMON> 0
<OTHER-SE> 105,675
<TOTAL-LIABILITY-AND-EQUITY> 311,495
<SALES> 105,092
<TOTAL-REVENUES> 240,903
<CGS> 75,095
<TOTAL-COSTS> 164,396
<OTHER-EXPENSES> 63,006
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,252
<INCOME-PRETAX> 11,249
<INCOME-TAX> 4,892
<INCOME-CONTINUING> 6,357
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,357
<EPS-PRIMARY> .61
<EPS-DILUTED> .61
</TABLE>
