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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-8141
NORSTAN, INC.
(Exact name of registrant as specified in its chapter)
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MINNESOTA 41-0835746
(I.R.S. Employer identification
(State of incorporation) No.)
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605 NORTH HIGHWAY 169, TWELFTH FLOOR, PLYMOUTH, MINNESOTA 55441
(Address of principal executive offices)
The Company's phone number: 612-513-4500 The Company's internet address:
WWW.NORSTAN.COM
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK ($.10 PAR VALUE PER SHARE)
COMMON STOCK PURCHASE RIGHTS
(Title of class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of July 27, 1998, the aggregate market value of the voting stock held by
non-affiliates of the registrant, computed by reference to the average high and
low prices on such date as reported by the Nasdaq National Market System was
approximately $178,941,000.
As of July 27, 1998, there were outstanding 10,474,281 shares of the
registrant's common stock, par value $.10 per share, its only class of equity
securities.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed within
120 days after the end of the fiscal year covered by this report are
incorporated by reference into Part III hereof.
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TABLE OF CONTENTS
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PART I
ITEM 1. Business.................................................... 1
Summary.....................................................
Industry Overview...........................................
The Norstan Solution........................................
Norstan's Business Strategy.................................
Norstan's Growth Strategy...................................
Products and Services.......................................
Customers and Engagements...................................
Strategic Alliances.........................................
Sales and Marketing......................................... 1
Customer Service............................................
Locations...................................................
Human Resources.............................................
Competition.................................................
Intellectual Property Rights................................
Government Regulation.......................................
Backlog.....................................................
ITEM 2. Properties.................................................. 2
ITEM 3. Legal Proceedings........................................... 3
ITEM 4. Submission of Matters to a Vote of Security Holders......... 3
PART II
ITEM 5. Market for the Company's Common Equity and Related
Shareholder Matters......................................... 4
ITEM 6. Selected Consolidated Financial Data........................ 5
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the Fiscal Years 1998, 1997,
and 1996.................................................... 6
ITEM 8. Financial Statements and Supplementary Data................. 8
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 9
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 9
ITEM 11. Executive Compensation...................................... 9
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 9
ITEM 13. Certain Relationships and Related Transactions.............. 9
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 10
SIGNATURES............................................................ 11
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PART I
ITEM 1. BUSINESS.
BUSINESS
SUMMARY
Norstan is a leading provider of communications and information technology
("IT") solutions for over 18,000 customers in the United States, Canada and
England. To address the complex communications requirements of its customers,
Norstan provides a broad range of products and services, including telephone
systems, call center systems, voice processing, network integration, voice and
video conferencing, and facilities management services. Norstan's network of
over 800 field technicians and service consultants delivers communications
services to its customers. In addition, the Company provides a wide array of IT
solutions through Norstan IT Consulting Services. These solutions include the
design, implementation, maintenance and modification of IT applications and
systems. Norstan IT Consulting Services currently employs over 700 consultants
and generated a 70% increase in revenues during fiscal year 1998. As
communications and information technologies converge, Norstan's strategy is to
expand the breadth of its IT services offerings to serve as a single-source
provider of leading technology solutions to its customers.
The Company delivers its products and services through three business
units, Global Services, Communications Solutions and Financial Services, which
accounted for approximately 48%, 50% and 2% of Norstan's fiscal year 1998
revenues, respectively. Global Services includes Norstan IT Consulting Services
and Communications Services. Norstan IT Consulting Services provides IT services
including enterprise resource planning ("ERP") and sales management package
implementation, groupware consulting, Internet/intranet/e-commerce solutions,
computer telephony integration ("CTI") and outsourced facilities management.
Communications Services provides customer support services for communications
systems, including maintenance services, systems modifications and long distance
services. Communications Solutions provides a broad array of solutions including
telephone systems, integrated voice processing, call center technologies and
video/audio/data conferencing solutions. Financial Services supports the sales
process by providing customized financing alternatives. The Company believes
that its breadth of product and service offerings fosters long-term customer
relationships, affords cross-selling opportunities and minimizes the Company's
dependence on any single technology or industry.
The Company operates in 68 locations in 58 cities throughout the United
States and Canada. Norstan has served over 18,000 customers across a broad range
of industries in the last three years and focuses its marketing efforts on
middle-market and Fortune 500 companies with complex technology and
communications requirements. Current customers include British Petroleum, IBM,
Kaiser Permanente, John Deere, US Bancorp, 3M and Harley-Davidson. The Company
believes that its installed base of communications systems customers will offer
extensive opportunities for cross-selling IT consulting services. Management
also believes that Norstan IT Consulting Services customers will be a source of
additional communications business. Norstan's strong emphasis on customer
satisfaction is evidenced by a survey of Norstan's communications customers, in
which Norstan received an overall satisfaction rating of 93% in fiscal year
1998. The Company believes that its outstanding customer service will enable
Norstan to capture a greater portion of each customer's communications and IT
budgets in the future.
Norstan provides leading-edge technologies in both its IT and
communications operations. The Company has established strategic alliances with
leading IT and communications companies that allow Norstan to offer objective
solutions to its customers. IT strategic alliance partners include IBM, Siebel
Systems, Oracle, Lotus, PeopleSoft, Tivoli, Novell and Microsoft. Communications
strategic alliance partners include Siemens, Aspect, VTEL, PictureTel, Latitude,
Cisco Systems, Sprint, Lucent Technologies (formerly Octel) and Applied Voice
Technology.
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INDUSTRY OVERVIEW
In the current climate of intense global competition and accelerating
technological change, businesses increasingly depend upon technology-based
solutions to enhance their competitive position, and to improve their
productivity and the quality of their products and services. Today's business
environment mandates the availability of efficient voice and video communication
channels and information in formats suited to a wide variety of users.
Accordingly, businesses are looking to a variety of new technologies to enhance
the performance of their communications systems and to allow IT systems to
collect, analyze and communicate information within the enterprise and among
customers and suppliers. An organization's ability to integrate and deploy new
communications and IT technologies in a unified and cost-effective manner has
become critical to competing successfully in today's rapidly changing business
environment.
While organizations recognize the importance of communications and IT
systems in this business environment, the selection, implementation,
customization and maintenance of these systems is becoming more complex and the
resources required to perform these tasks are becoming increasingly scarce.
Faced with a shortage of qualified technical resources and great demands to
implement the latest technology, customers are increasingly relying on outside
vendors to provide the necessary resources. By outsourcing communications and IT
services, companies are able to focus on their core businesses; access
specialized technical skills; implement communications and IT solutions more
rapidly; benefit from flexible staffing; and reduce the cost of recruiting,
training and retaining communications and IT professionals.
As a result of these factors, demand for IT and communications services and
products has grown significantly. In 1998, the worldwide market for IT services
is estimated at $350 billion and is projected to grow to $620 billion by 2002
according to Dataquest. Dataquest also estimates that the market for these
services is projected to grow at a 15% compound annual growth rate. For calendar
year 1998, industry sources estimate that the U.S. market for switching,
networking and application equipment is over $17 billion, and the U.S. market
for telecommunications maintenance and professional services is estimated to be
approximately $4 billion. As customers seek the competitive advantages that
advanced communications and computer telephony integration can deliver, growth
of certain segments of call processing are expected to be particularly strong.
Between 1996 and 2000, the U.S. market for voice mail, interactive voice
response units, networking equipment, and other telecommunications peripherals
and applications is expected to grow at a compound annual growth rate of
approximately 12%. By 2000, the U.S. market for these associated applications
and peripherals is projected to be over $14 billion.
The markets and technologies for communications equipment and IT
applications and systems continue to converge as communications equipment
migrates from proprietary switches to software-driven systems operating on
standardized computer platforms. As a result, businesses are integrating their
communications and IT systems. In addition, many middle-market and Fortune 500
companies rely on multiple, often specialized, providers to help implement and
manage their communications and IT systems. The Company believes that relying on
multiple service providers, where there is no distinct responsible party,
creates vendor relationships that are difficult and expensive to manage and
adversely impacts the quality and compatibility of communications and IT
solutions. As previously separate communications and IT technologies converge
and their interoperability increases, more organizations will seek a unified
technology solution. Norstan believes that these organizations will attempt to
reduce costs and management complexity by establishing relationships with a
small number of providers that offer a broad range of both communications and IT
products and services throughout the full life cycle of a project.
THE NORSTAN SOLUTION
The Company is a single-source provider of a wide range of communications
and IT solutions that enable its customers to compete and succeed in the global
marketplace. The Company has leveraged its established reputation as a provider
of premier communications products and services, along with the capability of
its more than 700 IT consultants, to deliver a unified communications and IT
solution to middle-market and Fortune 500 companies. This broad range of
offerings enables Norstan to serve as a single-source provider of communications
and IT solutions throughout the entire life cycle of a project. Norstan's
ability to serve as a
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single-source provider results in closer integration, reduced risk and greater
management control for the customer. The Company believes that its customer
relationships, its geographic reach and size, and its expertise in providing
both communications and IT solutions will enable it to capitalize on the
continuing growth and convergence of communications and IT needs of
middle-market and Fortune 500 companies.
NORSTAN'S BUSINESS STRATEGY
The Company's objective is to become a leading provider of communications
and IT offerings to middle-market and Fortune 500 companies. The Company's
strategy to achieve this objective includes the following key elements:
Capitalize on the Accelerating Convergence of Communications and
Information Technologies. Norstan's established communications expertise,
coupled with its IT consulting capabilities, positions the Company to exploit
the convergence of voice, video and information technologies onto a single
platform. Norstan believes that it is one of the few firms offering this
combination of skills and services, enabling the Company to serve as a
single-source provider of a unified technology solution.
Increase Focus on Providing Technology Services. As communications and
information technologies converge, the Company intends to increase its
percentage of revenues derived from technology services, which typically command
higher margins than product sales. Management believes that its increased focus
on technology services will enhance its overall profitability. Over the last
three fiscal years, revenues from Norstan's Global Services business unit
increased at a 27% annual compound growth rate and accounted for over 48% of
revenues in fiscal year 1998.
Offer a Broad Range of Communications and IT Solutions. Norstan's broad
range of voice, video and data solutions allows the Company to serve as a
single-source provider for its customers' communications and IT needs. The
ability to provide consulting services, hardware, software, training and
on-going support enables Norstan to offer a unified communications and IT
solution throughout the life cycle of a project. This capability will become
increasingly important as communications and information technologies continue
to converge and customers look to retain a single-source provider for all their
communications and IT needs.
Attract, Develop and Retain Highly Skilled Professionals. The Company seeks
to attract, develop and retain the highest caliber of communications and IT
consultants. Norstan places a strong emphasis on the career development and
training of its IT consultants through its Team Manager program. Team Managers
provide career guidance and ensure that employees maintain skills in
state-of-the-art technologies. Norstan offers a competitive combination of
employee benefits and incentives, including employee stock option and stock
purchase programs, as well as incentive compensation based on the amount billed
by individual consultants.
Provide Superior Customer Service. Norstan believes its dedication to
providing service beyond its customers' expectations has produced many favorable
customer relationships and resulted in increased exposure to potential
customers. Norstan's strong emphasis on customer satisfaction is evidenced by a
survey of Norstan's communications customers, in which Norstan received an
overall satisfaction rating of 93% in fiscal year 1998. The Company believes
that its reputation for superior service will lead to opportunities for
cross-selling additional products and services to its customer base.
Offer Leading-Edge Technologies. Norstan maintains several strategic
alliances with business partners that allow it to offer leading-edge
technologies. IT strategic alliance partners include IBM, Siebel Systems,
Oracle, Lotus, PeopleSoft, Tivoli, Novell and Microsoft. Communications
strategic alliance partners include Siemens, Aspect, VTEL, PictureTel, Latitude,
Cisco Systems, Sprint, Lucent Technologies (formerly Octel) and Applied Voice
Technology. These strategic alliances provide the Company with access to
training, product support and current technology as well as the use of the
"business partner" designation in marketing the Company's products and services.
The Company intends to strengthen its existing alliances and pursue additional
alliances with leading technology companies.
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NORSTAN'S GROWTH STRATEGY
To achieve its growth objectives, the Company has adopted the following
strategies:
Pursue Complementary IT Services Acquisitions. To capitalize on the highly
fragmented nature of the IT services industry, the Company intends to grow
Norstan IT Consulting Services through acquisitions. Building on its experience
of acquiring communications companies over the last ten years, Norstan has
completed three acquisitions of IT services businesses since 1996. The Company
will target additional acquisitions that provide complementary expertise, expand
its domestic and international geographic presence, diversify its customer base
and increase its consulting resources.
Continue Internal Growth of Norstan IT Consulting Services. The Company
seeks to continue the rapid growth of Norstan IT Consulting Services by opening
branch locations in targeted geographic markets. During fiscal year 1998,
Norstan IT Consulting Services generated 37.5% internal revenue growth and
opened four new branch locations in Atlanta, St. Louis, Chicago and Phoenix.
Norstan has targeted six to eight potential markets for future branch locations
over the next twelve months. In addition, the Company intends to leverage
existing communications locations through cross-selling efforts and the
aggressive recruitment of IT consultants. From the June 1996 acquisition of
Connect through the end of fiscal year 1998, Norstan IT Consulting Services has
increased its number of consultants at a compound annual growth rate of 55.0%,
excluding other acquisitions.
Leverage Existing Customer Relationships. Norstan intends to grow its
technology services business by leveraging the Company's existing base of over
18,000 customers. These relationships provide Norstan with significant
advantages in marketing new communications and IT services and solutions.
Management believes the convergence of communications and information
technologies, together with the Company's high level of customer satisfaction,
will position Norstan to become a preferred provider of both communications and
IT solutions.
PRODUCTS AND SERVICES
Norstan provides customers with a single source for a broad range of
communications and IT products and services to design, develop and implement
technology solutions in a variety of customer environments. These products and
services are delivered through three business units, Global Services,
Communications Solutions and Financial Services.
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Global Services. Global Services, which represented 48% of the Company's
fiscal year 1998 revenues, consists of two operating groups: Norstan IT
Consulting Services and Communications Services. The following table summarizes
the products and services provided by these two groups.
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GLOBAL SERVICES
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NORSTAN IT CONSULTING SERVICES
CATEGORY OF SERVICE DESCRIPTION OF SERVICES
Business Transformation Services - Develop strategic IT plans
- Provide business transformation and process
reengineering consulting services
- Provide information management consulting
- Provide vertical industry solutions focused on the
healthcare and financial services industries
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Enterprise Business Solutions - Customize packaged software solutions, including ERP
and customer management solutions
- Develop and implement call center strategies and
solutions
- Develop Internet/intranet/e-commerce solutions
- Provide network and system strategies
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Information Technology Services - Design and develop applications
- Provide data integration services
- Perform network and messaging services
- Provide operating systems and migration services
- Analyze customer businesses and systems
- Provide project management services for IT operations
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Managed Services - Manage networks and systems
- Support and maintain applications
- Provide support for network and client/server systems
- Perform product procurement and integration
- Provide standard/custom technical education and
training services
- Manage customer communications operations
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COMMUNICATIONS SERVICES
CATEGORY OF SERVICE DESCRIPTION OF SERVICES
Communications Maintenance - Provide maintenance services on customers'
Services communications systems hardware
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Moves, Adds and Changes - Transfer telephone systems to new user locations
- Add telephones or expansion cards in a telephone
system
- Change system and user features
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Long Distance Services - Offer a full range of long distance and network
services
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Communications Solutions. Communications Solutions, which represented 50%
of the Company's fiscal year 1998 revenues, focuses on the design, sale and
implementation of communications and other technology equipment. Communications
Solutions provides the following products and services:
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COMMUNICATIONS SOLUTIONS
CATEGORY OF PRODUCT OR SERVICE DESCRIPTION OF PRODUCTS AND SERVICES
Telephone Systems - Design, install and implement telephone switching
systems
- Supply telephone switching systems
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Call Center Systems - Design, install and implement call center systems
- Supply call center systems
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Call Processing Systems - Design, install and implement voice response and voice
messaging products
- Supply voice response and voice messaging products
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Conferencing Systems - Design, install and implement conferencing systems
- Provide audio, video and data conferencing products
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Refurbished Equipment - Refurbish and resell previously owned Siemens, Nortel,
Iwatsu, Aspect and Isoetec products
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Financial Services. Financial Services, which represented 2% of the
Company's fiscal year 1998 revenues, provides customers with efficient and
competitive financing for the purchase or lease of products and services.
Financial Services supports the sales process by offering customized lease
structures that eliminate the need for third-party financing.
CUSTOMERS
Norstan focuses its marketing efforts on middle-market and Fortune 500
companies with complex communications and IT requirements. Norstan has served
over 18,000 customers across a broad range of industries over the last three
fiscal years. No single customer accounted for more than 5% of Norstan's total
revenue during any of the last three fiscal years.
Norstan customers during fiscal year 1998 included the following:
NORSTAN IT CONSULTING SERVICES
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3M Grand Metropolitan Michelin
American Express Harley-Davidson Nationwide Insurance
AT&T IBM State Farm Insurance
British Petroleum Invacare SuperValu
Cargill John Deere US Bancorp
GMAC Kaiser Permanente Williams-Sonoma
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COMMUNICATIONS SERVICES AND COMMUNICATIONS SOLUTIONS
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American Freightways Cargill Imation
British Petroleum Fortis Insurance Medtronic
Best Buy Harley-Davidson Marquette University
CIBC IBM US Bancorp
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STRATEGIC ALLIANCES
The Company believes that its relationships with a wide range of leading
technology companies position Norstan to deliver the appropriate solution to
each customer. IT strategic alliance partners include IBM, Siebel Systems,
Oracle, Lotus, PeopleSoft, Tivoli, Novell and Microsoft. In addition, Siebel
Systems, a leading customer care and sales automation software provider, has
recently granted Premier Consulting Partner status to Connaissance Consulting (a
majority-owned Norstan affiliate).
Communications strategic alliance partners include Siemens, Aspect, VTEL,
PictureTel, Latitude, Cisco Systems, Sprint, Lucent Technologies (formerly
Octel) and Applied Voice Technology. In addition, the Company distributes
complementary communications products that fit specific segments of the
marketplace. These include hybrid switching systems, personal computer-based
voice processing and video conferencing systems, as well as data communications
products from Novell, Newbridge, Bay Networks, Compaq, Lotus and others.
Norstan has been a distributor of Siemens communications equipment since
1976 and is Siemens' largest independent distributor in North America. 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. Norstan and Siemens have also renewed an agreement through July 27,
2003 under which Norstan is an authorized agent for the refurbishment and sale
of previously owned Siemens equipment.
SALES AND MARKETING
Norstan has approximately 500 sales and marketing personnel within the
United States and Canada. The sales force includes product and service
specialists with expertise in IT consulting services, video conferencing, call
centers, telecommunications, education and training, and other areas. These
specialists partner with the sales representatives to develop integrated
technology solutions to address the specific technology needs of Norstan's
customers. Norstan uses several techniques to pursue new customer opportunities,
including telemarketing, seminars, participation in trade shows and advertising.
Norstan's sales representatives and specialists use a comprehensive
approach to evaluate each customer's technology needs. The sales representative
begins with a detailed analysis of the customer's current and future
communications and IT systems requirements. After determining the customer's
needs, the sales representative and product specialist develop a solution that
satisfies current and anticipated requirements. Norstan's consulting and
operations teams then work with the customer to plan the delivery and
implementation of the solution and to identify required training. By planning
the precise requirements of each phase of the solution delivery, Norstan's
specialists are able to minimize service interruption for the customer. Norstan
also provides an ongoing support program tailored to meet the customer's
specific application requirements that incorporates remote diagnostics, in-field
service and support, additional training and help desk support from Norstan's
customer support representatives.
Norstan's marketing strategy is to capture a larger portion of existing
customers' communications and IT budgets and to identify and develop new
customer relationships. In particular, the Company believes that its installed
base of communications systems customers offers extensive opportunities for the
marketing of IT consulting services. Management also believes that Norstan IT
Consulting Services will be a source of additional communications business.
Norstan anticipates that its high quality customer service will support ongoing
marketing efforts, as satisfied customers are more likely to choose Norstan to
supply additional communications and IT products and services. Also, Norstan is
investing in sales management automation systems, which will further efforts to
cross-sell the depth and breadth of its product offerings to existing customers.
CUSTOMER SERVICE
Norstan believes that providing exceptional customer service is an
important element of its ability to compete effectively in the communications
and IT marketplace. Norstan has invested heavily in new technology that is
designed to enable the Company to resolve a substantial portion of customer
support and
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service issues quickly and remotely. Norstan coordinates its customer service
response through three remote diagnostics and dispatch centers located in the
Minneapolis, Cleveland and Toronto areas. In fiscal year 1998, these centers
handled over 250,000 customer calls with approximately 46% of the
service-related calls addressed remotely. Only 18% of customer calls were
resolved remotely in fiscal year 1994. The Company's goal for fiscal year 1999
is to resolve in excess of 50% of service calls remotely. For calls requiring
immediate on-site service and support, Norstan maintains a highly trained force
of service technicians, design engineers and customer support representatives.
Norstan has over 125 employees in its three remote diagnostics and dispatch
centers devoted primarily to providing customer service and has 500 service
technicians in the field. With Norstan's remote problem resolution capability
and its highly trained staff of technicians, Norstan is able to promptly resolve
customer support requests. Norstan's commitment to customer service is evidenced
by a recent survey of Norstan's Communications Solutions customers that found an
overall satisfaction rating of 93% in fiscal year 1998.
LOCATIONS
The Company currently supports its Norstan IT Consulting Services,
Communications Services and Communications Solutions customers with locations in
the United States and Canada. Norstan IT Consulting Services plans to add
approximately six to eight additional locations during fiscal year 1999. The
Company maintains the following 68 locations in 58 cities:
NORSTAN IT CONSULTING SERVICES
Atlanta, GA
Baltimore, MD
Champaign, IL
Charlotte, NC
Chicago, IL
Cincinnati, OH
Cleveland, OH
Columbia, SC
Columbus, OH
Denver, CO
Des Moines, IA
Greensboro, NC
Greenville, SC
Indianapolis, IN
Milwaukee, WI
Minneapolis, MN
Omaha, NE
Phoenix, AZ
Pittsburgh, PA
Raleigh, NC
Richmond, VA
San Francisco, CA
St. Louis, MO
COMMUNICATIONS SERVICES AND COMMUNICATIONS SOLUTIONS
Albuquerque, NM
Amarillo, TX
Appleton, WI
Austin, TX
Baton Rouge, LA
Birmingham, AL
Calgary, Alberta
Cedar Rapids, IA
Chicago, IL
Cincinnati, OH
Cleveland, OH
Columbus, OH
Davenport, IA
Dayton, OH
Des Moines, IA
Edmonton, Alberta
El Paso, TX
Fargo, ND
Las Vegas, NV
Lexington, KY
Little Rock, AR
London, Ontario
Louisville, KY
Lubbock, TX
Madison, WI
Milwaukee, WI
Minneapolis, MN
Mobile, AL
Montreal, Quebec
New Orleans, LA
Oklahoma City, OK
Omaha, NE
Ottawa, Ontario
Phoenix, AZ
Pittsburgh, PA
Rochester, MN
Shreveport, LA
Sioux Falls, SD
Springdale, AR
Toledo, OH
Toronto, Ontario
Tucson, AZ
Tulsa, OK
Vancouver, British Columbia
Winnipeg, Manitoba
HUMAN RESOURCES
As of June 30, 1998, Norstan had 2,971 employees, of which over 700 were IT
consulting personnel and approximately 840 were communications field technicians
and service consultants. U.S. operations totaled
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2,749 employees, including 135 who are covered by collective bargaining
agreements. The Company's Canadian operations had a total of 222 employees.
The Company's success depends in large part on its ability to attract,
develop, motivate and retain highly skilled IT consultants. Qualified technical
employees are in great demand and are likely to remain a limited resource for
the foreseeable future. To retain these resources, Norstan places a strong
emphasis on the career development and training of its IT consultants and has
implemented several unique programs, including its Team Manager initiative. Team
Managers ensure that employee skills remain current with the industry and that
the employee is given adequate development experiences to create a fulfilling
work environment. Norstan also offers a competitive combination of employee
benefits and incentives, including employee stock options, stock purchase
programs and an attractive revenue-sharing arrangement whereby an individual
consultant's base compensation is supplemented with a percentage of the revenue
that the individual bills. Finally, Norstan IT Consulting Services has developed
a proprietary program in which key individuals in the organization are charged
with and rewarded for the successful opening of new branch office locations.
This program helps Norstan IT Consulting Services retain personnel and expand
its geographic reach.
Norstan also dedicates significant resources to recruiting consultants with
specific technical and industry expertise. In connection with its hiring
efforts, the Company employs internal recruiters and relies on personal and
business contacts to recruit professionals through referrals, contacts at trade
shows and job fairs.
The Company uses formal training programs to further develop its
professional resources. The Company also uses mentoring by placing junior IT
professionals under the guidance of senior IT professionals on certain customer
engagements. In addition, in order to expand the skills and develop the careers
of the Company's consultants and technical staff, the Company recently
introduced computer-based training resources covering 450 course topics.
COMPETITION
The communications industry is intensely competitive and rapidly changing.
Norstan's primary competitors in this area include Lucent Technologies, Nortel
and the RBOCs. Many of its competitors have longer operating histories, greater
financial and human resources, and greater name recognition than Norstan. The
passage of the Telecommunications Act of 1996 has fostered competition by
providing access to a number of entities that were previously precluded from the
industry. As a result of this legislation, the pace of consolidation in the
industry has accelerated. These changes in the regulatory environment could
potentially affect Norstan's ability to compete successfully.
The market for IT services includes a large number of competitors, is
subject to rapid change and is highly competitive. Primary competitors include
participants from a variety of market segments, including national accounting
firms, systems consulting and implementation firms, application software firms,
service groups of computer equipment companies, facilities management companies,
general management consulting firms and programming companies. Many of these
competitors have significantly greater financial, technical and marketing
resources and greater name recognition than the Company. In addition, the
Company competes with its customers' internal resources, particularly when these
resources represent a fixed cost to the customer. Such competition may impose
additional pricing pressures on the Company. See "Risk Factors -- Competition."
Subject to this competitive environment, the Company competes on the basis
of: (i) the depth and breadth of services and products offered; (ii) the ability
to integrate IT and communications systems as the related technologies continue
to converge; (iii) its reputation for providing superior customer service; and
(iv) the number and strength of customer relationships.
INTELLECTUAL PROPERTY RIGHTS
The Company relies upon a combination of nondisclosure and other
contractual arrangements with certain key employees, and trade secret, copyright
and trademark laws to protect its proprietary rights and the proprietary rights
of third parties from whom the Company licenses intellectual property. Norstan
enters into
9
<PAGE> 12
confidentiality agreements with certain of its employees and limits the
distribution of proprietary information. See "Risk Factors -- Limited Protection
of Intellectual Property Rights."
GOVERNMENT REGULATION
Except for the sale of long distance service, the Company is not subject to
any government regulations that have a material impact on its operations.
Effective May 1, 1992, the Company became a direct reseller of long distance
network services and accordingly became subject to certain state tariff
regulations throughout the United States. The Company is currently registered
and certified to provide interstate services in all 50 states and intrastate
services in 47 states. The Company is also subject to FCC regulations, which
require the filing of federal tariffs.
BACKLOG
As of April 30, 1998, the Company had signed contracts for
telecommunications products aggregating approximately $46.2 million,
substantially all of which are expected to be fulfilled by the end of fiscal
1999. As of April 30, 1997, the Company had signed contracts aggregating
approximately $47.3 million, substantially all of which were fulfilled by the
end of fiscal 1998. The usual time period between the execution of a contract
and the completion of the installation is one to six months, depending on the
size and complexity of the system.
10
<PAGE> 13
ITEM 2. PROPERTIES.
The executive offices of the Company are located in Plymouth, Minnesota,
where the Company leases approximately 53,400 square feet of office space. The
Company expects to move into new headquarters located in Hopkins, Minnesota in
the quarter ending October 31, 1998. The Company leases approximately 165,000
square feet of office space in this new location. The Company also has area
headquarters in Brecksville, Ohio, and Phoenix, Arizona, where the Company
leases approximately 61,250 and 34,400 square feet of office space,
respectively. In addition to the space above, the Company leases sales and
service offices in 47 other cities within the United States. In Canada, the
Company leases approximately 30,400 square feet of office space in North York,
Ontario, which serves as its Canadian headquarters. The Company also leases
sales and service offices in seven other cities within the Canadian provinces of
Alberta, Manitoba, Ontario, Quebec and British Columbia. The Company believes
that the above-mentioned facilities are adequate and suitable for its current
needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in legal actions in the ordinary course of its
business. Although the outcomes of any such legal actions cannot be predicted,
in the opinion of management there is no legal proceeding pending against or
involving the Company for which the outcome is likely to have a material adverse
effect upon the business, operating results and financial condition of the
Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders during
the last quarter of the fiscal year covered by this report.
11
<PAGE> 14
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's common stock is traded on the National Over-the-Counter
market and is listed on the national market system of the National Association
of Securities Dealers' Automated Quotations System ("NASDAQ") under the symbol
"NRRD". The following table sets forth the high and low sale prices for the
Company's common stock as reported by NASDAQ for each quarterly period during
the two most recent fiscal years(1):
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED APRIL 30, 1998:
First Quarter............................................... 18 1/2 14
Second Quarter.............................................. 25 1/2 17 1/2
Third Quarter............................................... 25 1/2 22
Fourth Quarter.............................................. 29 21 7/8
FISCAL YEAR ENDED APRIL 30, 1997:
First Quarter............................................... 19 1/2 13 1/8
Second Quarter.............................................. 20 1/4 15
Third Quarter............................................... 18 3/4 15 1/2
Fourth Quarter.............................................. 17 1/4 13 3/4
</TABLE>
The quotations reflect prices between dealers and do not include retail
mark-ups, mark-downs or commissions, and do not necessarily represent actual
transactions.
As of July 27, 1998, there were 4,239 holders of record of the Company's
common stock.
RESTRICTIONS ON THE PAYMENT OF DIVIDENDS
The Company has not recently declared or paid any cash dividends on the
common stock and does not intend to pay cash dividends on the common stock in
the foreseeable future. The Company currently expects to retain earnings to
finance expansion of its business. In addition, the Company's current revolving
long-term credit agreement prohibits the payment of cash dividends without the
prior written consent of the lenders thereunder.
ISSUANCE OF UNREGISTERED SECURITIES
The Company issued 151,515 unregistered shares of its common stock on
January 2, 1998 in connection with the Company's acquisition of PRIMA. A portion
of such shares were derivated into an escrow account established to provide a
source of payment for indemnification claims made by the Company, if any. The
escrow account will close on March 31, 1999 and all shares of the Company's
common stock remaining there, if any, will be distributed to the registered
holders. During the escrow period, registered holders have all the rights of a
shareholder, including the right to vote such shares, however, they many not
sell, transfer, pledge or otherwise encumber the shares. Such shares were issued
pursuant to Regulation D promulgated by the Securities and Exchange Commission
under the authority of the Securities Act of 1933, as amended.
12
<PAGE> 15
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data set forth below as of and for each
of the fiscal years in the five-year period ended April 30, 1998 have been
derived from the Company's consolidated financial statements, which have been
audited by Arthur Andersen LLP, independent public accountants. The selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and the notes thereto included elsewhere
in this report.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
----------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Global Services
IT Consulting Services............................. $ -- $ 7,931 $ 14,426 $ 54,467 $ 92,746
Communications Services............................ 100,080 110,638 121,971 131,596 127,197
-------- -------- -------- -------- --------
Total Global Services............................ 100,080 118,569 136,397 186,063 219,943
Communications Solutions............................. 127,514 166,675 179,332 205,983 228,979
Financial Services................................... 4,305 5,001 5,635 6,029 7,443
-------- -------- -------- -------- --------
Total revenues................................... 231,899 290,245 321,364 398,075 456,365
-------- -------- -------- -------- --------
Cost of sales:
Global Services
IT Consulting Services............................. -- 6,417 11,000 43,315 66,457
Communications Services............................ 61,289 70,224 86,669 93,880 89,550
-------- -------- -------- -------- --------
Total Global Services............................ 61,289 76,641 97,669 137,195 156,007
Communications Solutions............................. 92,621 123,158 130,090 150,204 168,965
Financial Services................................... 1,766 2,308 2,221 2,160 2,444
-------- -------- -------- -------- --------
Total cost of sales.............................. 155,676 202,107 229,980 289,559 327,416
-------- -------- -------- -------- --------
Gross margin........................................... 76,223 88,138 91,384 108,516 128,949
Selling, general and administrative expenses........... 65,137 74,725 75,973 89,311 103,709
Restructuring charge................................... -- -- -- -- 14,667
-------- -------- -------- -------- --------
Operating income....................................... 11,086 13,413 15,411 19,205 10,573
Interest expense....................................... (832) (1,587) (1,351) (1,866) (3,909)
Interest and other income (expense), net............... (106) (54) 89 (22) (18)
-------- -------- -------- -------- --------
Income before cumulative effect of accounting change
and provision for income taxes....................... 10,148 11,772 14,149 17,317 6,646
Provision for income taxes............................. 4,161 4,709 5,660 7,100 2,791
-------- -------- -------- -------- --------
Income before cumulative effect of accounting change... 5,987 7,063 8,489 10,217 3,855
Cumulative effect of change in accounting for income
taxes (1)............................................ (375) -- -- -- --
-------- -------- -------- -------- --------
Net income............................................. $ 5,612 $ 7,063 $ 8,489 $ 10,217 $ 3,855
======== ======== ======== ======== ========
Net income per share -- Basic.......................... $0.70 $0.86 $1.00 $1.12 $0.40
======== ======== ======== ======== ========
Net income per share -- Diluted........................ $0.67 $0.82 $0.94 $1.08 $0.39
======== ======== ======== ======== ========
Weighted average shares -- Basic....................... 8,017 8,242 8,526 9,140 9,719
======== ======== ======== ======== ========
Weighted average shares -- Diluted..................... 8,402 8,621 8,985 9,418 9,917
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF APRIL 30,
----------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................ $ 32,961 $ 32,183 $ 24,899 $ 37,484 $ 58,568
Total assets........................................... 149,662 161,709 160,988 224,173 275,608
Long-term debt, net of current maturities.............. 18,218 16,465 -- 18,284 52,440
Discounted lease rentals, net of current maturities.... 18,845 16,313 15,961 24,043 20,883
Shareholders' equity................................... 47,658 56,984 67,517 84,370 97,671
Cash dividends declared and paid....................... -- -- -- -- --
</TABLE>
- -------------------------
(1) On May 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." As a result, the Company
recorded a one-time charge of $375,000, or $.05 per share, in fiscal 1994
for the cumulative effect of the change in method of accounting for income
taxes.
(2) On June 20, 1996, the Company's Board of Directors approved a two-for-one
stock split effected in the form of a stock dividend. The stock split has
been retroactively reflected in the selected consolidated financial data
presented above.
13
<PAGE> 16
ITEM 7. 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, which accounted for
approximately 48%, 50% and 2% of Norstan's fiscal year 1998 revenues,
respectively. In order to enhance overall profitability, the Company intends to
increase its percentage of revenues derived from technology services, which
typically command higher margins than product sales.
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. Norstan IT
Consulting Services provides IT services including ERP and sales management
package implementation, groupware consulting, Internet/intranet/e-commerce
solutions, CTI and outsourced facilities management. Communications Services
provides customer support services for communications systems, including
maintenance services, systems modifications and long distance services.
Communications Solutions provides a broad array of solutions including telephone
systems, integrated voice processing, call center technologies and
video/audio/data conferencing solutions. The name change from Communications
Systems to Communications Solutions more accurately reflects the Company's
commitment to provide its customers with design, installation and implementation
services as well as the hardware and software components necessary for
successful implementation of complex communications systems. Financial Services
supports the sales process by providing customized financing alternatives. The
Company believes that its breadth of product and service offerings fosters
long-term client relationships, affords cross-selling opportunities and
minimizes the Company's dependence on any single technology or industry.
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). Net income and net income per diluted
share before the restructuring charge for the year ended April 30, 1998 were
$12,362,000 and $1.25 per share, respectively.
14
<PAGE> 17
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
consolidated statements of operations expressed as a percentage of total
revenues:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-----------------------------
1996 1997 1998
<S> <C> <C> <C>
Revenues:
Global Services
IT Consulting Services................................. 4.5% 13.7% 20.3%
Communications Services................................ 37.9 33.0 27.9
----- ----- -----
Total Global Services................................ 42.4 46.7 48.2
Communications Solutions.................................. 55.8 51.8 50.2
Financial Services........................................ 1.8 1.5 1.6
----- ----- -----
Total revenues......................................... 100.0 100.0 100.0
Cost of sales:
Global Services
IT Consulting Services................................. 3.4 10.9 14.6
Communications Services................................ 27.0 23.6 19.6
----- ----- -----
Total Global Services................................ 30.4 34.5 34.2
Communications Solutions.................................. 40.5 37.7 37.0
Financial Services........................................ 0.7 0.5 0.5
----- ----- -----
Total cost of sales.................................... 71.6 72.7 71.7
----- ----- -----
Gross margin................................................ 28.4 27.3 28.3
Selling, general and administrative expenses................ 23.6 22.5 22.8
Restructuring charge........................................ -- -- 3.2
----- ----- -----
Operating income............................................ 4.8% 4.8% 2.3%
===== ===== =====
Net income.................................................. 2.6% 2.6% 0.8%
===== ===== =====
</TABLE>
The following table sets forth the gross margin percentages for Global
Services, Communications Solutions and Financial Services.
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
--------------------------
1996 1997 1998
<S> <C> <C> <C>
Gross margin percentage:
Global Services
IT Consulting Services................................. 23.7% 20.5% 28.3%
Communications Services................................ 28.9 28.7 29.6
Total Global Services................................ 28.4 26.3 29.1
Communications Solutions.................................. 27.5 27.1 26.2
Financial Services........................................ 60.6 64.2 67.2
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues. Revenues increased 14.6% to $456.4 million in fiscal year 1998
from $398.1 million in fiscal year 1997. The increase was attributable to growth
in each of Norstan's three business units.
Revenues from Global Services increased 18.2% to $219.9 million in fiscal
year 1998 from $186.1 million in fiscal year 1997. Revenues from IT Consulting
Services increased 70.3% to $92.7 million in fiscal year 1998 from $54.5 million
in fiscal year 1997. This increase was a result of: (i) the acquisition of PRIMA
in September 1997 which contributed $17.9 million of revenue in fiscal year
1998; and (ii) internal revenue growth of 37.5%. Revenues from Communications
Services decreased 3.3% to $127.2 million in fiscal year 1998 from $131.6
million in fiscal year 1997. The decrease in Communications Services revenues
resulted from the sale of the Company's stand-alone cabling business in June
1997, which contributed approximately $5.0 million in revenues during fiscal
year 1997.
15
<PAGE> 18
Revenues from Communications Solutions increased 11.2% to $229.0 million in
fiscal year 1998 from $206.0 million in fiscal year 1997. The increase was
attributable to increased sales volumes in the Siemens PBX, videoconferencing
and refurbished equipment products through sales to new customers as well as
growth with existing customer relationships.
Revenues from Financial Services increased 23.5% to $7.4 million in fiscal
year 1998 from $6.0 million in fiscal year 1997. This increase is primarily
attributable to the increased size of the Company's leasing base.
Gross Margin. The Company's gross margin was $128.9 million and $108.5
million for the fiscal years ended April 30, 1998 and 1997, respectively. As a
percent of total revenues, gross margin was 28.3% for fiscal year 1998 compared
to 27.3% for fiscal year 1997.
Gross margin as a percent of revenues for Global Services was 29.1% for
fiscal year 1998 as compared to 26.3% for fiscal year 1997. The gross margin for
IT Consulting Services increased to 28.3% for fiscal year 1998 from 20.5% for
fiscal year 1997. The improved margin is a result of operating efficiencies
gained as the IT Consulting Services segment continued to grow as well as from
an increased emphasis on time-and-materials engagements. The gross margin for
Communications Services increased to 29.6% for fiscal year 1998 from 28.7% for
fiscal year 1997.
Gross margin as a percent of revenues for Communications Solutions was
26.2% for fiscal year 1998 as compared to 27.1% for fiscal year 1997. The
decrease in gross margin for fiscal year 1998 as compared to fiscal year 1997 is
primarily due to overall increases in product costs as a result of changes in
the sales mix and increased labor costs from subcontractors and overtime due to
the high level of installations during 1998. The overall decline in gross margin
was partially offset by improved margin in the sales of refurbished equipment.
Gross margin as a percent of revenues for Financial Services was 67.2% for
fiscal year 1998 as compared to 64.2% for fiscal year 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 16.1% to $103.7 million in fiscal year 1998
from $89.3 million in fiscal year 1997. As a percent of revenues, selling,
general and administrative expenses remained relatively consistent at 22.7% for
fiscal year 1998, as compared to 22.4% for fiscal year 1997.
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).
Interest Expense. Interest expense was $3.9 million for fiscal year 1998 as
compared to $1.9 million for fiscal year 1997. This increase was primarily the
result of higher borrowing levels in fiscal year 1998 to fund the PRIMA
acquisition as well as for working capital purposes. Average month-end
borrowings outstanding under the Company's revolving long-term credit agreements
(excluding amounts borrowed to finance leasing activities) were $53.2 million
for fiscal year 1998 and $24.5 million for fiscal year 1997. Weighted average
interest rates under the Company's revolving long-term credit agreements were
7.0% for fiscal year 1998 as compared to 7.5% for fiscal year 1997.
Income Taxes. The Company's effective income tax rate was 42% for fiscal
year 1998 and 41% for fiscal year 1997. 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 $3.9 million or $0.39 per diluted share in
fiscal year 1998, which includes the $14.7 million restructuring charge
representing $0.86 per diluted share, as compared to $10.2 million or
16
<PAGE> 19
$1.08 per diluted share in fiscal year 1997. Net income and net income per
diluted share before the restructuring charge for the year ended April 30, 1998
were $12,362,000 and $1.25 per share, respectively.
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues. Total revenues increased 23.9% to $398.1 million in fiscal year
1997 from $321.4 million in fiscal year 1996.
Revenues from Global Services increased 36.4% to $186.1 million in fiscal
year 1997 from $136.4 million in fiscal year 1996. Revenues from IT Consulting
Services increased 277.6% to $54.5 million in fiscal year 1997 from $14.4
million in fiscal year 1996. This increase was a result of the acquisition of
Connect in June 1996, which contributed $33.8 million of revenue in fiscal year
1997, and the over 70% growth experienced in the Company's outsourcing business.
Revenues from Communications Services increased 7.9% to $131.6 million in fiscal
year 1997 from $122.0 million in fiscal year 1996, due primarily to growth in
communications maintenance services and network services.
Revenues from Communications Solutions increased 14.9% to $206.0 million in
fiscal year 1997 from $179.3 million in fiscal year 1996. The increase resulted
primarily from increased sales volume of refurbished equipment and
videoconferencing products.
Revenues from Financial Services increased 7.0% to $6.0 million in fiscal
year 1997 from $5.6 million in fiscal year 1996. The increase was attributable
to the increased size of the Company's leasing base.
Gross Margin. The Company's gross margin was $108.5 million in fiscal year
1997 and $91.4 million in fiscal year 1996. As a percent of total revenues,
gross margin was 27.3% for fiscal year 1997 and 28.4% for fiscal year 1996.
Gross margin as a percent of revenues for Global Services was 26.3% for
fiscal year 1997 compared to 28.4% for fiscal year 1996. The gross margin for IT
Consulting Services decreased to 20.5% for fiscal year 1997 from 23.7% for
fiscal year 1996. This decrease is primarily attributable to non-recurring
operating costs and inefficiencies relating to the reorganization of the
Company's IT consulting operations as well as from decreased margins on certain
fixed-price contracts. Communications Services' gross margin remained relatively
constant at 28.7% for fiscal year 1997 as compared to 28.9% for fiscal year
1996.
Gross margin as a percent of revenues for Communications Solutions was
27.1% for fiscal year 1997 as compared to 27.5% for fiscal year 1996. The change
in the gross margin as a percentage of revenue was the result of shifts in the
product mix and competitive market conditions.
Gross margin as a percent of revenues for Financial Services was 64.2% for
fiscal year 1997 as compared to 60.6% for fiscal year 1996. The increase in
gross margin percentage for fiscal year 1997 as compared to fiscal year 1996 was
the result of decreasing interest rates.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 17.6% to $89.3 million in fiscal year 1997
from $76.0 million in fiscal year 1996. As a percent of revenues, selling,
general and administrative expenses decreased to 22.4% for fiscal year 1997 from
23.6% for fiscal year 1996. The decrease as a percentage of revenues resulted
from continued efforts to contain costs and volume-related efficiencies, as
sales volume increased without proportional increases in expenses.
Interest Expense. Interest expense was $1.9 million for fiscal year 1997 as
compared to $1.4 million for fiscal year 1996. Weighted average interest rates
under the Company's revolving long-term credit agreements were 7.5% for fiscal
year 1997 as compared to 8.2% for fiscal year 1996. Average month-end borrowings
outstanding under the Company's revolving long-term credit agreements (excluding
amounts borrowed to finance leasing activities) were $24.5 million for fiscal
year 1997 and $15.8 million for fiscal year 1996.
Income Taxes. The Company's effective income tax rate was 41% for fiscal
year 1997 and 40% for fiscal year 1996. 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.
17
<PAGE> 20
Net Income. Net income was $10.2 million or $1.08 per diluted share in 1997
and $8.5 million or $0.94 per diluted share in 1996.
UNAUDITED QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly operating
information for each of the eight quarters in the period ending April 30, 1998.
This data includes, in the opinion of management, all normal recurring
adjustments necessary for the fair presentation of the information for the
periods presented when read in conjunction with the Company's Consolidated
Financial Statements and related Notes thereto. Results for any previous fiscal
quarter are not necessarily indicative of results for the full year or for any
future quarter. The Company has historically experienced a seasonal fluctuation
in its operating results, with a larger proportion of its revenues and operating
income occurring during the fourth quarter of the fiscal year.
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------
AUG. 3, NOV. 2, FEB. 1, APR. 30, AUG. 2, NOV. 1, JAN. 31, APR. 30,
1996 1996 1997 1997 1997 1997 1998 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Global Services
IT Consulting Services...... $ 9,363 $13,682 $15,328 $16,094 $15,026 $22,038 $25,186 $30,496
Communications Services..... 31,562 32,076 31,918 36,040 33,023 30,508 30,968 32,698
------- ------- ------- ------- ------- ------- ------- -------
Total Global Services..... 40,925 45,758 47,246 52,134 48,049 52,546 56,154 63,194
Communications Solutions...... 49,820 48,483 45,405 62,275 45,212 56,719 53,979 73,069
Financial Services............ 1,486 1,412 1,424 1,707 2,181 1,657 1,634 1,971
------- ------- ------- ------- ------- ------- ------- -------
Total revenues............ 92,231 95,653 94,075 116,116 95,442 110,922 111,767 138,234
Cost of sales................... 66,900 68,548 68,014 86,097 68,356 80,488 79,861 98,711
------- ------- ------- ------- ------- ------- ------- -------
Gross margin.................... 25,331 27,105 26,061 30,019 27,086 30,434 31,906 39,523
Selling, general and
administrative expenses....... 22,180 21,944 20,935 24,252 23,157 24,399 24,923 31,230
Restructuring charge............ -- -- -- -- -- -- -- 14,667
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss)......... 3,151 5,161 5,126 5,767 3,929 6,035 6,983 (6,374)
Interest expense................ (241) (520) (571) (534) (594) (847) (1,242) (1,226)
Interest and other income
(expense)..................... 7 (28) (11) 10 48 69 55 (190)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes......................... 2,917 4,613 4,544 5,243 3,383 5,257 5,796 (7,790)
Income taxes.................... 1,225 1,937 1,829 2,109 1,387 2,155 2,521 (3,272)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)............... $ 1,692 $ 2,676 $ 2,715 $ 3,134 $ 1,996 $ 3,102 $ 3,275 $(4,518)
======= ======= ======= ======= ======= ======= ======= =======
Net income before restructuring
charge........................ $ 3,991
=======
Net income (loss) per share --
diluted....................... $ 0.19 $ 0.29 $ 0.29 $ 0.33 $ 0.21 $ 0.32 $ 0.33 $ (0.45)
======= ======= ======= ======= ======= ======= ======= =======
Net income per share before
restructuring charge --
diluted....................... $ 0.39
=======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities decreased in fiscal year 1998 as
compared to fiscal years 1997 and 1996 as a result of increases in accounts
receivable, costs and estimated earnings in excess of billings and income taxes
receivable. Net cash used in investing activities remained constant in fiscal
years 1998 and 1997 and increased from fiscal year 1996 as a result of increased
capital expenditures and investments in lease contracts, as noted below, and due
to acquisitions during 1998 and 1997. Net cash provided by financing activities
increased during fiscal years 1998 and 1997 as compared to 1996 due to increased
long-term borrowings related to acquisitions and to support the overall growth
of the Company.
Capital Expenditures. The Company used $19.9 million for capital
expenditures during fiscal year 1998 as compared to $24.2 million in fiscal year
1997 and $14.4 million in fiscal year 1996. These expenditures were
18
<PAGE> 21
primarily for capitalized costs incurred in connection with obtaining or
developing internal use software, computer equipment, facility expansion and
telecommunications equipment used in outsourcing arrangements and as spare
parts.
Investment in Lease Contracts. The Company has also made a significant
investment in lease contracts with its customers. The additional investment made
in lease contracts in fiscal year 1998 totaled $28.0 million. Net lease
receivables increased to $53.7 million at April 30, 1998 from $49.4 million at
April 30, 1997. 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 $35.6
million at April 30, 1998. Interest rates on these credit agreements at April
30, 1998 ranged from 6.0% to 10.0%, while payments are due in varying monthly
installments through August 2005. Payments due to financial institutions are
made from monthly collections of lease receivables from customers.
Capital Resources. The Company has an $80.0 million unsecured revolving
long-term credit agreement with certain banks. Up to $30.0 million of borrowings
under this agreement may be in the form of commercial paper. In addition,
sublimits also exist related to the Company's support of its leasing activities.
Borrowings under this agreement are due May 31, 2001, and bear interest at the
banks' reference rate (8.50% at April 30, 1998), except for LIBOR, CD and
commercial paper based options, which generally bear interest at a rate lower
than the banks' reference rate (5.9% to 6.7% at April 30, 1998). Total
consolidated borrowings under this agreement at April 30, 1997 and 1998 were
$17.9 million and $52.4 million. There were no borrowings on account of the
Company's leasing activities at April 30, 1997 and 1998. Annual commitment fees
on the unused portions of the credit facility are 0.25%. Under the agreement,
the Company is required to maintain minimum levels of EBITDA and certain other
financial ratios. The Company has complied with or has obtained the appropriate
waivers for such requirements as of April 30, 1998.
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.
ACQUISITIONS
On June 19, 1998, the Company merged with Wordlink 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 customers operating in a multi-vendor network environment. The
agreement provided for the conversion of all shares of Wordlink common stock and
all vested Wordlink stock options issued and outstanding into approximately
$10.3 million of Common Stock. All outstanding Wordlink unvested stock options
were converted to the equivalent value of 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 will record the combination
without restating prior periods' consolidated statements of operations to
reflect the pooling-of-interests combination.
On September 30, 1997, the Company acquired PRIMA in a transaction
accounted for under the purchase method. PRIMA provides IT consulting services,
including information systems planning and development, consulting and
programming services for collaborative computing solutions, and ERP integration
services. The acquisition consideration totaled approximately $27.5 million,
consisting of $19.5 million in cash, $6.3 million of Common Stock and $1.7
million paid to certain members of PRIMA management under non-compete
agreements. In addition, the Company agreed to pay up to $3.5 million in
contingent consideration over a three-year period ending April 30, 2000 if
certain financial performance targets are achieved. This transaction resulted in
the recording of $24.9 million in goodwill and other intangible assets that are
being amortized on a straight-line basis over 15 years and three years,
respectively.
On June 4, 1996, the Company acquired Connect in a transaction accounted
for under the purchase method. Connect is a provider of consulting, design and
implementation services for local and wide area networks, Internets and
intranets, client/server applications and workgroup computing. The acquisition
19
<PAGE> 22
consideration totaled approximately $15.0 million, consisting of $12.0 million
in cash, $2.0 million of Common Stock and $1.0 million payable to certain
members of Connect management under non-compete agreements. In addition, the
Company agreed to pay up to $4.0 million in contingent consideration over a
three-year period ending April 30, 1999, if certain financial performance
targets are achieved (as of April 30, 1998, $2.0 million of such consideration
had been paid and the remaining $2.0 million has been earned and accrued). This
transaction resulted in the recording of $18.4 million in goodwill and other
intangible assets that are being amortized on a straight-line basis over 15
years and three years, respectively.
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 million to be incurred over the next two fiscal years.
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.
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, Year 2000 compliance and
similar matters. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements including those made in this
document. In order to comply with the terms of the Private Securities Litigation
Reform Act, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, developments and results of the Company's business
include the following: national and regional economic conditions; pending and
future legislation affecting the IT and telecommunications industries; the
Company's business in Canada and England; stability of foreign governments;
market acceptance of the Company's products and services; the Company's
continued ability to provide integrated communications solutions for customers
in a dynamic industry; and other competitive factors. Because these and other
factors could affect the Company's operating results, past financial performance
should not necessarily be considered as a reliable indicator of future
performance, and investors should not use historical trends to anticipate future
period results.
20
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants.................... 22
Consolidated Statements of Operations for the years ended
April 30, 1996, 1997 and 1998............................. 23
Consolidated Balance Sheets as of April 30, 1997 and 1998... 24
Consolidated Statements of Shareholders' Equity for the
years ended April 30, 1996, 1997 and 1998................. 25
Consolidated Statements of Cash Flows for the years ended
April 30, 1996, 1997 and 1998............................. 26
Notes to Consolidated Financial Statements.................. 27
</TABLE>
FINANCIAL STATEMENT SCHEDULES:
All schedules have been omitted as not required, not applicable or because
the information to be presented is included in the consolidated financial
statements and related notes.
21
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Norstan, Inc.:
We have audited the accompanying consolidated balance sheets of Norstan,
Inc. (a Minnesota corporation) and Subsidiaries as of April 30, 1997 and 1998,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended April 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Norstan, Inc. and
Subsidiaries as of April 30, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
June 12, 1998
22
<PAGE> 25
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------------
1996 1997 1998
<S> <C> <C> <C>
REVENUES
Global Services
IT Consulting Services................................. $ 14,426 $ 54,467 $ 92,746
Communications Services................................ 121,971 131,596 127,197
-------- -------- --------
Total Global Services................................ 136,397 186,063 219,943
Communications Solutions.................................. 179,332 205,983 228,979
Financial Services........................................ 5,635 6,029 7,443
-------- -------- --------
Total revenues......................................... 321,364 398,075 456,365
-------- -------- --------
COST OF SALES
Global Services
IT Consulting Services................................. 11,000 43,315 66,457
Communications Services................................ 86,669 93,880 89,550
-------- -------- --------
Total Global Services................................ 97,669 137,195 156,007
Communications Solutions.................................. 130,090 150,204 168,965
Financial Services........................................ 2,221 2,160 2,444
-------- -------- --------
Total cost of sales.................................... 229,980 289,559 327,416
-------- -------- --------
GROSS MARGIN................................................ 91,384 108,516 128,949
Selling, general and administrative expenses.............. 75,973 89,311 103,709
Restructuring charge...................................... -- -- 14,667
-------- -------- --------
OPERATING INCOME............................................ 15,411 19,205 10,573
Interest expense.......................................... (1,351) (1,866) (3,909)
Interest and other income (expense), net.................. 89 (22) (18)
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 14,149 17,317 6,646
Provision for income taxes................................ 5,660 7,100 2,791
-------- -------- --------
NET INCOME.................................................. $ 8,489 $ 10,217 $ 3,855
======== ======== ========
NET INCOME PER SHARE -- BASIC............................... $ 1.00 $ 1.12 $ 0.40
======== ======== ========
NET INCOME PER SHARE -- DILUTED............................. $ 0.94 $ 1.08 $ 0.39
======== ======== ========
WEIGHTED AVERAGE SHARES -- BASIC............................ 8,526 9,140 9,719
======== ======== ========
WEIGHTED AVERAGE SHARES -- DILUTED.......................... 8,985 9,418 9,917
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE> 26
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF APRIL 30,
--------------------
1997 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................... $ 5,147 $ 1,869
Accounts receivable, net of allowances for doubtful
accounts of $1,783 and $1,171........................... 76,027 97,206
Current lease receivables................................. 19,595 18,751
Inventories............................................... 7,636 10,008
Costs and estimated earnings in excess of billings of
$11,948 and $17,335..................................... 11,556 19,091
Deferred income tax benefits.............................. 3,954 2,488
Prepaid expenses, deposits and other...................... 2,925 8,108
-------- --------
Total current assets............................... 126,840 157,521
-------- --------
PROPERTY AND EQUIPMENT
Machinery and equipment................................... 93,895 75,712
Less -- accumulated depreciation and amortization......... (48,409) (37,713)
-------- --------
Net property and equipment.............................. 45,486 37,999
-------- --------
OTHER ASSETS
Goodwill, net of accumulated amortization of $5,443 and
$7,979.................................................. 21,264 43,206
Lease receivables, net of current portion................. 29,775 34,998
Other..................................................... 808 1,884
-------- --------
Total other assets................................. 51,847 80,088
-------- --------
$224,173 $275,608
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt...................... $ 389 $ 3,257
Current maturities of discounted lease rentals............ 13,878 14,758
Accounts payable.......................................... 24,486 24,135
Deferred revenue.......................................... 18,680 19,953
Accrued liabilities
Salaries and wages...................................... 13,065 15,123
Warranty costs.......................................... 2,348 1,776
Other liabilities....................................... 10,721 10,509
Billings in excess of costs and estimated earnings of
$12,829 and $16,390..................................... 5,789 9,442
-------- --------
Total current liabilities.......................... 89,356 98,953
LONG-TERM DEBT, net of current maturities................... 18,284 52,440
DISCOUNTED LEASE RENTALS, net of current maturities......... 24,043 20,883
DEFERRED INCOME TAXES....................................... 8,120 5,661
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 3 AND 11)
SHAREHOLDERS' EQUITY
Common stock -- $.10 par value; 40,000,000 authorized
shares; 9,387,458 and 9,963,716 shares issued and
outstanding............................................. 939 996
Capital in excess of par value............................ 34,556 44,741
Retained earnings......................................... 50,192 54,048
Unamortized cost of stock................................. (142) (641)
Foreign currency translation adjustments.................. (1,175) (1,473)
-------- --------
Total shareholders' equity......................... 84,370 97,671
-------- --------
$224,173 $275,608
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
24
<PAGE> 27
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK FOREIGN
-------------------- CAPITAL IN CURRENCY
SHARES EXCESS OF RETAINED UNAMORTIZED TRANSACTION
OUTSTANDING AMOUNT PAR VALUE EARNINGS COST OF STOCK ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 30, 1995..... 4,215 $422 $26,031 $31,486 $(149) $ (806) $56,984
Stock issued for employee
benefit plans........... 144 14 2,024 -- 55 -- 2,093
Foreign currency
translation
adjustments............. -- -- -- -- -- (49) (49)
Effect of two-for-one
stock split............. 4,359 436 (436) -- -- -- --
Net income................ -- -- -- 8,489 -- -- 8,489
----- ---- ------- ------- ----- ------- -------
BALANCE, APRIL 30, 1996..... 8,718 872 27,619 39,975 (94) (855) 67,517
Stock issued for employee
benefit plans........... 531 53 4,951 -- (48) -- 4,956
Stock issued for
acquisition............. 138 14 1,986 -- -- -- 2,000
Foreign currency
translation
adjustments............. -- -- -- -- -- (320) (320)
Net income................ -- -- -- 10,217 -- -- 10,217
----- ---- ------- ------- ----- ------- -------
BALANCE, APRIL 30, 1997..... 9,387 939 34,556 50,192 (142) (1,175) 84,370
Stock issued for employee
benefit plans........... 258 25 3,892 1 (499) -- 3,419
Stock issued for
acquisition............. 319 32 6,293 -- -- -- 6,325
Foreign currency
translation
adjustments............. -- -- -- -- -- (298) (298)
Net income................ -- -- -- 3,855 -- -- 3,855
----- ---- ------- ------- ----- ------- -------
BALANCE, APRIL 30, 1998..... 9,964 $996 $44,741 $54,048 $(641) $(1,473) $97,671
===== ==== ======= ======= ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE> 28
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-----------------------------------
1996 1997 1998
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................ $ 8,489 $ 10,217 $ 3,855
Adjustments to reconcile net income to net cash
provided by operating activities:
Restructuring charge............................... -- -- 14,667
Depreciation and amortization...................... 12,517 16,964 21,115
Deferred income taxes.............................. (465) (45) 1,944
Changes in operating items, net of acquisition
effects:
Accounts receivable.............................. (3,961) (16,319) (18,803)
Inventories...................................... 167 3,532 (2,397)
Costs and estimated earnings in excess of
billings...................................... 5,715 (6,371) (7,584)
Prepaid expenses, deposits and other............. (111) (386) 498
Accounts payable................................. (1,403) 7,047 (745)
Deferred revenue................................. 2,815 468 1,291
Accrued liabilities.............................. 1,252 2,514 (5,823)
Income taxes payable/receivable.................. 510 (144) (6,136)
Billings in excess of costs and estimated
earnings...................................... 2,445 1,223 3,665
--------- --------- ---------
Net cash provided by operating activities..... 27,970 18,700 5,547
--------- --------- ---------
INVESTING ACTIVITIES
Additions to property and equipment, net.............. (14,385) (24,219) (19,873)
Cash paid for acquisitions, net of cash acquired...... -- (11,794) (20,450)
Investment in lease contracts......................... (17,622) (31,545) (28,049)
Collections from lease contracts...................... 18,240 21,949 23,589
Other, net............................................ (178) 314 (124)
--------- --------- ---------
Net cash used for investing activities............. (13,945) (45,295) (44,907)
--------- --------- ---------
FINANCING ACTIVITIES
Repayment of debt assumed in acquisition.............. -- (1,743) (2,013)
Borrowings on long-term debt.......................... 112,435 227,820 290,181
Repayments of long-term debt.......................... (128,993) (210,161) (253,102)
Borrowings on discounted lease rentals................ 13,173 22,396 13,472
Repayments of discounted lease rentals................ (12,767) (12,583) (15,717)
Proceeds from sale of common stock.................... 1,615 3,017 2,868
Tax benefits from shares issued to employees.......... 340 1,869 385
--------- --------- ---------
Net cash provided by (used for) financing
activities....................................... (14,197) 30,615 36,074
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................. (3) (6) 8
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH......................... (175) 4,014 (3,278)
CASH, BEGINNING OF YEAR................................. 1,308 1,133 5,147
--------- --------- ---------
CASH, END OF YEAR....................................... $ 1,133 $ 5,147 $ 1,869
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE> 29
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS:
Norstan is a technology services company providing information technology
("IT") and communications systems solutions to over 18,000 customers in the
United States, Canada and England. Norstan, Inc. ("Norstan" or the "Company")
manages the operations of its subsidiaries, Norstan Communications, Inc.
("NCI"), Norstan Canada Inc. ("NCDA"), Connect Computer Company ("Connect"),
Vadini, Inc. (d/b/a PRIMA Consulting, Inc.) ("PRIMA"), Connaissance Consulting,
LLC ("Connaissance"), Norstan Financial Services, Inc. ("NFS"), Norstan Network
Services, Inc. ("NNS"), Norstan Network Services, Inc. of New Hampshire, Norstan
International, Inc. ("NII") and Norstan-UK Limited. The Company is headquartered
in Minneapolis, Minnesota, with sales and service offices in 68 locations in the
United States and Canada. The Company provides IT consulting and communications
services, communications and technology products and competitive financing
through its three operating units, Global Services, Communications Solutions and
Financial Services. Through strategic partnerships and acquisitions, the Company
has become a single-source provider for its customers' integrated voice, video
and data network solutions.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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.
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.
Revenue Recognition:
Global Services' revenues from IT consulting, application development and
systems integration are recognized as services are provided. Revenues from
maintenance service contracts, moves, adds, and changes, resale of long distance
services, and network integration services, are also recognized as the services
are provided. Communications Solutions' revenues from the sale and installation
of products and systems are recognized under the percentage-of-completion method
of accounting for long-term contracts, while revenues generated from the
secondary equipment market are recognized upon performance of contractual
obligations, which is generally upon installation or shipment. Financial
Services' revenues are recognized over the life of the related lease receivables
using the effective interest method. In addition, Norstan grants credit to
customers and generally does not require collateral or any other security to
support amounts due, other than equipment originally leased.
Fair Value of Financial Instruments:
Fair values of long-term obligations, lease receivables and trade
receivables were estimated at their carrying values at April 30, 1997 and 1998,
and were estimated in accordance with the requirements of Statement of Financial
Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value of
Financial Instruments."
27
<PAGE> 30
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories:
Inventories include purchased parts and equipment and are stated at the
lower of cost, determined on a first-in, first-out basis, or realizable market
value.
Property and Equipment:
Property and equipment are stated at cost and include expenditures that
increase the useful lives of existing property and equipment. Maintenance,
repairs and minor renewals are charged to operations as incurred. Generally,
when property and equipment are disposed of, the related cost and accumulated
depreciation are removed from the respective accounts and any gain or loss is
reflected in the results of operations. For capitalized telecommunications
equipment used as spare parts, the composite depreciation method is used whereby
the cost of property retired less any salvage value is charged against
accumulated depreciation and no gain or loss is recognized. The net book value
of capitalized telecommunications equipment was $16,605,000 and $6,410,000 as of
April 30, 1997 and 1998, respectively (see Note 3). Machinery and equipment is
depreciated over the estimated useful lives of two to ten years under the
straight-line method for financial reporting purposes. Accelerated methods of
depreciation are used for income tax reporting. In the event that facts and
circumstances indicate that the carrying amount of property may not be
recoverable, an evaluation would be performed using such factors as recent
operating results, projected cash flows and management's plans for future
operations.
Goodwill:
Goodwill is being amortized on a straight-line basis over 15-20 years. The
Company periodically evaluates whether events or circumstances have occurred
that may indicate that the remaining estimated useful lives may warrant revision
or that the remaining goodwill balance may not be fully recoverable. In the
event that factors indicate that the goodwill in question should be evaluated
for possible impairment, a determination of the overall recoverability would be
made.
Foreign Currency:
For the Company's foreign operations, assets and liabilities are translated
at year-end exchange rates, and revenues and expenses are translated at average
exchange rates prevailing during the year. Translation adjustments are recorded
as a separate component of shareholders' equity.
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.
Earnings Per Share Data and Stock Split:
In the fiscal year ended April 30, 1998, the Company adopted SFAS No. 128
"Earnings per Share," which requires disclosure of basic earnings per share
("EPS") and diluted EPS, which replaces the existing primary EPS and fully
diluted EPS, as defined by Accounting Principles Board ("APB") Opinion No. 15.
Basic EPS is computed by dividing net income by the weighted average number of
shares of common stock outstanding during the year. Diluted EPS is computed
similarly to EPS as previously reported provided that, when applying the
treasury stock method to common equivalent shares, the Company must use its
average share price for the period rather than the more dilutive greater of the
average share price or end-of-period share price required by APB Opinion No. 15.
28
<PAGE> 31
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the adoption of SFAS No. 128, the Company's reported
earnings per share for all prior periods were restated. The effect of this
accounting change on reported EPS data is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
APRIL 30,
-----------------
1996 1997
<S> <C> <C>
Primary EPS as reported..................................... $0.94 $1.08
Effect of SFAS No. 128...................................... 0.06 0.04
----- -----
Basic EPS as restated....................................... $1.00 $1.12
===== =====
Fully diluted EPS as reported............................... $0.94 $1.08
Effect of SFAS No. 128...................................... -- --
----- -----
Diluted EPS as restated..................................... $0.94 $1.08
===== =====
</TABLE>
A reconciliation of EPS calculations under SFAS No. 128 is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------
1996 1997 1998
<S> <C> <C> <C>
Net income.................................................. $8,489 $10,217 $3,855
====== ======= ======
Weighted average common shares outstanding -- Basic......... 8,526 9,140 9,719
Effect of dilutive securities:
Stock option plans........................................ 452 269 196
Employee stock purchase plan.............................. 7 9 2
------ ------- ------
Weighted average common shares outstanding --Diluted... 8,985 9,418 9,917
====== ======= ======
Net income per share -- Basic............................... $ 1.00 $ 1.12 $ 0.40
====== ======= ======
Net income per share -- Diluted............................. $ 0.94 $ 1.08 $ 0.39
====== ======= ======
</TABLE>
On June 20, 1996, the Company's Board of Directors approved a two-for-one
stock split effected in the form of a stock dividend. The stock split has been
retroactively reflected in the accompanying consolidated financial statements
and related notes. All share and per share data have been restated to reflect
the stock split.
Supplemental Cash Flow Information:
Supplemental disclosure of cash flow information is as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------
1996 1997 1998
<S> <C> <C> <C>
Cash paid for:
Interest.................................................. $3,608 $3,996 $6,457
Income taxes.............................................. 5,218 4,995 5,545
Non-cash investing and financing activities:
Stock issued for acquisitions............................. $ -- $2,000 $6,325
Earnout and noncompete agreements related to
acquisitions........................................... $ -- $2,667 $2,333
</TABLE>
Recently Issued Accounting Standards:
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130, establishes
requirements for disclosure of comprehensive income
29
<PAGE> 32
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and becomes effective for the Company's fiscal year ended April 30, 1999.
Reclassification of earlier financial statements for comparative purposes is
required. The Company believes SFAS No. 130 will not have a significant impact
on the Company's financial statements.
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 $6.0 million of costs associated with internal-use
software developed or obtained during fiscal year 1998.
NOTE 3 -- RESTRUCTURING:
During fiscal year 1998, the Company 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 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).
NOTE 4 -- ACQUISITIONS:
On June 4, 1996, the Company acquired Connect in a transaction accounted
for under the purchase method. Connect is a provider of consulting, design and
implementation services for local and wide area networks, Internets and
intranets, client/server applications and workgroup computing. The acquisition
consideration totaled approximately $15.0 million, consisting of $12.0 million
in cash, $2.0 million of Norstan Common Stock and $1.0 million payable to
certain members of Connect management under non-compete agreements. In addition,
the Company agreed to pay up to $4.0 million in contingent consideration over a
three-year period ending April 30, 1999, if certain financial performance
targets are achieved (as of April 30, 1998, $2.0 million of such consideration
had been paid and the remaining $2.0 million has been earned and accrued). This
transaction resulted in the recording of $18.4 million in goodwill and other
intangible assets, which are being amortized on a straight-line basis over 15
years and three years, respectively.
On September 30, 1997, the Company acquired PRIMA in a transaction
accounted for under the purchase method. PRIMA provides IT consulting services,
including information systems planning and development, consulting and
programming services for collaborative computing solutions and ERP integration
services. The acquisition consideration totaled approximately $27.5 million,
consisting of $19.5 million in cash, $6.3 million of Norstan Common Stock and
$1.7 million paid to certain members of PRIMA management under non-compete
agreements. In addition, the Company agreed to pay up to $3.5 million in
contingent consideration over a three-year period ending April 30, 2000 if
certain financial performance targets are achieved. This transaction resulted in
the recording of $24.9 million in goodwill and other intangible assets, which
are being amortized on a straight-line basis over 15 years and three years,
respectively.
Pro forma information for Connect and PRIMA in the year of acquisition has
not been disclosed as such information was not materially different from the
Company's results of operations.
In June 1998, the Company merged with Wordlink 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
30
<PAGE> 33
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
agreement calls for all shares of Wordlink common stock and all vested stock
options issued and outstanding to be converted into approximately $10.3 million
of Norstan common stock. All outstanding Wordlink unvested stock options were
converted to the equivalent value of 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 will record the combination
without restating prior periods' financial statements.
NOTE 5 -- LEASE RECEIVABLES:
The Company provides financing for the Company's customers and has financed
customer equipment purchases in the amounts of $17,622,000, $31,545,000, and
$28,049,000 during fiscal years ended April 30, 1996, 1997 and 1998,
respectively. Leases are primarily accounted for as sales-type leases for
financial reporting purposes.
The components of lease receivables outstanding are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
AS OF APRIL 30,
-------------------
1997 1998
<S> <C> <C>
Gross lease receivables..................................... $ 53,258 $ 58,136
Residual values............................................. 9,048 8,297
Less:
Unearned income........................................... (11,091) (11,039)
Allowance for financing losses............................ (1,845) (1,645)
-------- --------
Total lease receivables - net............................... 49,370 53,749
Less -- current maturities.................................. (19,595) (18,751)
-------- --------
Long-term lease receivables................................. $ 29,775 $ 34,998
======== ========
</TABLE>
The aggregate amount of gross lease receivables maturing in each of the
five years following April 30, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
APRIL 30, AMOUNT
<S> <C>
1999...................................................... $22,654
2000...................................................... 16,666
2001...................................................... 10,500
2002...................................................... 5,709
2003 and thereafter....................................... 2,607
-------
$58,136
=======
</TABLE>
31
<PAGE> 34
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- DEBT OBLIGATIONS:
Long-Term Debt:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
AS OF APRIL 30,
-----------------
1997 1998
<S> <C> <C>
Bank financing:
Revolving credit agreement................................ $ 6,920 $ 385
Certificates of deposit and commercial paper.............. 11,000 52,000
Capital lease obligations and other long-term debt.......... 753 3,312
------- -------
Total long-term debt........................................ 18,673 55,697
Less -- current maturities.................................. (389) (3,257)
------- -------
$18,284 $52,440
======= =======
</TABLE>
Bank Financing:
The Company has an $80.0 million unsecured revolving long-term credit
agreement with certain banks. Up to $30.0 million of borrowings under this
agreement may be in the form of commercial paper. In addition, up to $8.0
million and $6.0 million may be used to support the leasing activities of NFS
and NCDA, respectively. Borrowings under this agreement are due May 31, 2001,
and bear interest at the banks' reference rate (8.50% at April 30, 1998), except
for LIBOR, CD and commercial paper based options, which generally bear interest
at a rate lower than the banks' reference rate (5.9% to 6.7% at April 30, 1998).
Total consolidated borrowings under this agreement at April 30, 1997 and 1998
were $17.9 million and $52.4 million. There were no borrowings on account of NFS
or NCDA at April 30, 1997 and 1998. Annual commitment fees on the unused
portions of the credit facility are 0.25%.
Under the agreement, the Company is required to maintain minimum levels of
EBITDA and certain other financial ratios. The Company has complied with or has
obtained the appropriate waivers for such requirements as of April 30, 1998.
Short-Term Borrowings:
In addition to borrowing funds under its revolving credit agreement, the
Company periodically borrows funds from banks on a short-term basis for working
capital purposes. There were no short-term borrowings during 1998 and 1996.
Short-term borrowing amounts during fiscal year 1997 were as follows:
<TABLE>
<S> <C>
Maximum amount outstanding during the year.................. $2,325,000
Average borrowings during the year.......................... $ 29,600
Weighted average interest rates during the year............. 8.36%
</TABLE>
NOTE 7 -- DISCOUNTED LEASE RENTALS:
NFS and NCDA utilize their lease receivables and corresponding underlying
equipment to borrow funds from financial institutions at fixed rates on a
nonrecourse or recourse basis by discounting the stream of future lease
payments. Proceeds from discounting are recorded on the consolidated balance
sheet as discounted lease rentals. Interest rates on these credit agreements
range from 6% to 10% and payments are generally due in varying monthly
installments through August 2005.
32
<PAGE> 35
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Discounted lease rentals consisted of the following (in thousands):
<TABLE>
<CAPTION>
AS OF APRIL 30,
--------------------
1997 1998
<S> <C> <C>
Nonrecourse borrowings...................................... $ 37,329 $ 35,635
Recourse borrowings......................................... 592 6
-------- --------
Total discounted lease rentals.............................. 37,921 35,641
Less -- current maturities.................................. (13,878) (14,758)
-------- --------
$ 24,043 $ 20,883
======== ========
</TABLE>
Aggregate maturities of discounted lease rentals as of April 30, 1998 are
as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING APRIL 30, AMOUNT
<S> <C>
1999........................................................ $14,758
2000........................................................ 9,978
2001........................................................ 6,438
2002........................................................ 3,222
2003 and thereafter......................................... 1,245
-------
$35,641
=======
</TABLE>
NOTE 8 -- INCOME TAXES:
The domestic and foreign components of income before the provision for
income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
----------------------------
1996 1997 1998
<S> <C> <C> <C>
Domestic.................................................. $13,365 $16,215 $5,914
Foreign................................................... 784 1,102 732
------- ------- ------
$14,149 $17,317 $6,646
======= ======= ======
</TABLE>
The provision (benefit) for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
--------------------------
1996 1997 1998
<S> <C> <C> <C>
Current
Domestic.................................................. $5,656 $7,361 $ 410
Foreign................................................... 469 (216) 437
------ ------ ------
6,125 7,145 847
------ ------ ------
Deferred
Domestic.................................................. (235) (572) 2,840
Foreign................................................... (230) 527 (896)
------ ------ ------
(465) (45) 1,944
------ ------ ------
Provision for income taxes............................. $5,660 $7,100 $2,791
====== ====== ======
</TABLE>
33
<PAGE> 36
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between the effective tax rate and income taxes computed
using the federal statutory rate were as follows:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------
1996 1997 1998
<S> <C> <C> <C>
Federal statutory rate...................................... 35% 35% 35%
State income taxes, net of federal tax benefit.............. 4 5 5
Goodwill and other, net..................................... 1 1 2
-- -- --
40% 41% 42%
== == ==
</TABLE>
The tax effects of significant temporary differences representing deferred
tax assets and liabilities are as follows as of April 30 (in thousands):
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Accelerated depreciation.................................... $(30,613) $(34,627)
Amortization of intangible assets........................... (497) 146
Capital and operating leases................................ 21,394 27,335
Long-term contract costs.................................... (147) (753)
Inventory and warranty reserves............................. 891 480
Allowance for doubtful accounts............................. 1,470 1,116
Vacation reserves........................................... 1,226 1,016
Self insurance reserve...................................... 578 457
Other, net.................................................. 1,762 1,893
Valuation allowance......................................... (230) (236)
-------- --------
Net deferred tax liabilities........................... $ (4,166) $ (3,173)
======== ========
</TABLE>
NOTE 9 -- STOCK OPTIONS AND STOCK PLANS:
The 1986 Long-Term Incentive Plan of Norstan, Inc. ("1986 Plan") provided
for the granting of non-qualified stock options, incentive stock options and
restricted stock. The 1986 Plan, as amended in fiscal year 1994, provided for a
maximum of 1,600,000 shares to be granted to key employees in the form of stock
options or restricted stock. As of September 20, 1995, with the adoption of a
successor plan, no additional grants will be issued under the 1986 Plan.
The Norstan, Inc. 1995 Long-Term Incentive Plan ("1995 Plan") permits the
granting of non-qualified stock options, incentive stock options, stock
appreciation rights and restricted stock, providing for a maximum of 1,200,000
shares to be granted as performance awards and other stock-based awards. Stock
options are granted at a price equal to the market price on the date of grant,
and are generally exercisable at 20%-25% per year and expire after ten years. At
April 30, 1998, 298,500 shares were available for future grants. During June
1998, the Company granted 535,500 stock options of which approximately 244,000
are contingent upon future shareholder approval.
The Restated Non-Employee Directors' Stock Plan ("Directors' Plan")
provides for a maximum of 292,000 shares to be granted. As determined by the
Board of Directors, options for 20,000 shares are to be granted to each
non-employee director of the Company upon election and additional discretionary
stock options may be amended upon board approval. These options are granted at a
price equal to the market price on the date of grant, exercisable at 20% to 25%
per year and expire after ten years. In addition, the Directors' Plan provides
for the payment of an annual retainer to each non-employee director on the date
of each annual meeting of shareholders. As of April 30, 1998, 14,440 shares had
been issued as annual retainers and 92,060 shares were available for future
grant/payment under the Directors' Plan.
34
<PAGE> 37
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Shares subject to option are summarized as follows:
<TABLE>
<CAPTION>
1995 PLAN 1986 PLAN DIRECTORS' PLAN
-------------------------- -------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
STOCK AVERAGE STOCK AVERAGE STOCK AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
<S> <C> <C> <C> <C> <C> <C>
BALANCE -- APRIL 30, 1995...... N/A N/A 644,400 $ 4.23 140,000 $ 3.86
Options granted.............. -- -- 225,000 11.87 20,000 12.50
Options canceled............. -- -- (29,400) 9.18 -- --
Options exercised............ -- -- (162,100) 2.84 -- --
-------- ------ -------- ------ -------- ------
BALANCE -- APRIL 30, 1996...... N/A N/A 677,900 6.88 160,000 4.94
Options granted.............. 310,500 $15.01 -- -- -- --
Options canceled............. -- -- (96,000) 9.62 -- --
Options exercised............ -- -- (296,100) 3.49 (120,000) 3.24
-------- ------ -------- ------ -------- ------
BALANCE -- APRIL 30, 1997...... 310,500 15.01 285,800 9.49 40,000 10.06
Options granted.............. 647,000 17.76 -- -- 25,500 20.06
Options canceled............. (104,900) 15.62 (62,200) 10.86 -- --
Options exercised............ (15,300) 15.01 (103,400) 7.00 -- --
-------- ------ -------- ------ -------- ------
BALANCE -- APRIL 30, 1998...... 837,300 $17.06 120,200 $10.92 65,500 $13.96
======== ====== ======== ====== ======== ======
Options exercisable at:
April 30, 1996............... N/A N/A 375,936 $ 4.23 140,000 $ 4.00
======== ====== ======== ====== ======== ======
April 30, 1997............... -- $ -- 103,036 $ 7.43 28,000 $ 9.02
======== ====== ======== ====== ======== ======
April 30, 1998............... 57,100 $14.72 46,640 $10.79 39,500 $11.47
======== ====== ======== ====== ======== ======
</TABLE>
Additional information regarding options outstanding/exercisable at April
30, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED
OPTIONS EXERCISE PRICE AVERAGE REMAINING OPTIONS AVERAGE
OUTSTANDING RANGE EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
<S> <C> <C> <C> <C> <C> <C>
1995 PLAN.............. 150,000 $14.13-$14.19 $14.16 9.00 years 20,000 $14.19
226,300 $15.00-$16.00 $15.03 8.35 years 37,100 $15.01
321,000 $17.50 $17.50 9.26 years -- $ --
140,000 $19.50-$28.25 $22.44 9.57 years -- $ --
------- ------------- ------ ---------- ------ ------
837,300 $14.13-$28.25 $17.06 9.02 years 57,100 $14.72
======= ============= ====== ========== ====== ======
1986 PLAN.............. 17,200 $ 4.25-$6.88 $ 5.17 3.65 years 6,640 $ 4.25
103,000 $11.88 $11.88 7.11 years 40,000 $11.88
------- ------------- ------ ---------- ------ ------
120,200 $ 4.25-$11.88 $10.92 6.61 years 46,640 $10.79
======= ============= ====== ========== ====== ======
DIRECTORS' PLAN........ 20,000 $ 7.63 $ 7.63 4.70 years 20,000 $ 7.63
20,000 $12.50 $12.50 7.39 years 12,000 $12.50
25,500 $20.06 $20.06 9.41 years 7,500 $20.06
------- ------------- ------ ---------- ------ ------
65,500 $ 7.63-$20.06 $13.96 7.36 years 39,500 $11.47
======= ============= ====== ========== ====== ======
</TABLE>
The Company has awarded restricted stock grants to selected employees under
the 1986 Plan and the 1995 Plan. Recipients of restricted stock awards under
these plans were not required to make any payments for the stock or provide
consideration other than the rendering of services. Shares of stock awarded
under the plans are subject to certain restrictions on transfer and all or part
of the shares awarded to an employee may be subject to forfeiture upon the
occurrence of certain events, including termination of employment. Through April
30, 1998, 140,706 shares and 59,100 shares have been awarded under the 1986 Plan
and the 1995 Plan, respectively. The fair market value of the shares granted
under these plans is amortized over a three- to four-year period. Amortization
of $137,000, $70,000, and $165,800 has been charged to operations in 1996, 1997
and 1998, respectively.
35
<PAGE> 38
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has maintained an Employee Stock Purchase Plan (the "Employee
Stock Plan") since 1980 that allows employees to set aside up to 10% of their
earnings for the purchase of shares of the Company's common stock. The Employee
Stock Plan was amended effective July 1998 to allow shares to be purchased
quarterly rather than annually under the Employee Stock Plan at a price equal to
85% of the low market price on the last day of the quarter rather than the last
day of the calendar year. During fiscal year 1998, 100,813 shares were issued
under this plan and, at April 30, 1998, 483,773 shares were available for future
issuance.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock option
plans. Accordingly, no compensation cost has been recognized in the accompanying
statements of operations. Had compensation cost been recognized based on the
fair values of options at the grant dates consistent with the provisions of SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company's net income (in
thousands) and net income per common share would have been decreased to the
following pro forma amounts:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------
1996 1997 1998
<S> <C> <C> <C>
Net income:
As reported............................................... $8,489 $10,217 $3,855
Pro forma................................................. 7,964 9,360 1,968
Net income per common share:
As reported
basic.................................................. $ 1.00 $ 1.12 $ 0.40
diluted................................................ 0.94 1.08 0.39
Pro forma
basic.................................................. $ 0.93 $ 1.02 $ 0.20
diluted................................................ 0.89 0.99 0.20
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to May 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
The weighted average fair values of options granted and Employee Stock Plan
shares were as follows:
<TABLE>
<CAPTION>
EMPLOYEE
1995 PLAN 1986 PLAN DIRECTORS' PLAN STOCK PLAN
<S> <C> <C> <C> <C>
Fiscal 1996 grants................................ -- $6.49 $ 7.29 $2.15
Fiscal 1997 grants................................ $7.95 N/A -- $2.96
Fiscal 1998 grants................................ $8.99 N/A $11.63 $5.54
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in fiscal years 1996, 1997 and 1998:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------------
1996 1997 1998
<S> <C> <C> <C>
Risk-free interest rate............................. 5.74% 6.28% 6.06%
Expected life of options............................ 7 years 7 years 7 years
Expected life of Employee Stock Plan................ 1 year 1 year 1 year
Expected volatility................................. 57% 35% 36%
Expected dividend yield............................. -- -- --
</TABLE>
36
<PAGE> 39
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax benefits associated with the exercise of stock options or issuance
of shares under the Company's stock option plans, not related to expenses
recognized for financial reporting purposes, have been credited to capital in
excess of par value in the accompanying consolidated balance sheets.
NOTE 10 -- 401(K) PLAN:
The Company has 401(k) profit-sharing plans (the "401(k) Plans") covering
substantially all full-time employees. Eligible employees may elect to defer up
to 15% of their eligible compensation. The Company may make discretionary
matching contributions of up to 6% of each plan participant's eligible
compensation. Company contributions to the 401(k) Plans were $1,267,000,
$1,746,000 and $1,822,000 for the years ending April 30, 1996, 1997 and 1998,
respectively.
NOTE 11 -- COMMITMENTS AND CONTINGENCIES:
Legal Proceedings:
The Company is involved in legal actions in the ordinary course of its
business. Although the outcomes of any such legal actions cannot be predicted,
in the opinion of management there is no legal proceeding pending against or
involving the Company for which the outcome is likely to have a material adverse
effect upon the consolidated financial position or results of operations of the
Company.
Operating Lease Commitments:
The Company and its subsidiaries conduct a portion of their operations in
leased facilities. Most of the leases require payment of maintenance, insurance,
taxes and other expenses in addition to the minimum annual rentals. Lease
expense, as recorded in the accompanying consolidated statements of operations,
was $10,501,000, $10,914,000, and $11,494,000 in fiscal years 1996, 1997, and
1998, respectively.
Future minimum lease payments under noncancelable leases with initial or
remaining terms of one year or more were as follows at April 30, 1998 (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDING APRIL 30, AMOUNT
<S> <C>
1999........................................................ $ 7,270
2000........................................................ 6,515
2001........................................................ 5,319
2002........................................................ 4,182
2003 and thereafter......................................... 18,611
-------
$41,897
=======
</TABLE>
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.
Shareholder Rights Plan:
The Company has a shareholder rights plan, as amended in March 1998 (the
"Plan"), which expires in 2008. Under the Plan, shareholders are deemed the
owners of "Rights" attaching to each share of common stock. Upon any person (an
"Acquiring Person") becoming the owner of 15% or more of the issued and
outstanding shares of the Company's common stock (a "Stock Acquisition Date"),
each Right will enable the holder to purchase an additional share of the
Company's common stock at a price equal to 50% of the then current market price.
In the event that the Company is acquired in a merger or other business
combination transaction where the Company is not the surviving corporation or
50% or more of the Company's assets or
37
<PAGE> 40
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
earnings power is sold, each Right entitles the holder to receive, upon exercise
of the Right at the then current purchase price of the Right, common stock of
the acquiring entity that has a value of two times the purchase price of the
Right. The Plan also authorizes the Company, under certain circumstances, to
redeem the Rights at a redemption price of $0.01 per Right and, following any
Stock Acquisition Date, to exchange one share of the Company's common stock for
each Right held by a shareholder other than an Acquiring Person.
NOTE 12 -- BUSINESS SEGMENTS AND GEOGRAPHIC AREAS:
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) Communication Services. Norstan IT Consulting Services provides IT services
including ERP and sales management package implementation, groupware consulting,
Internet/intranet/e-commerce solutions, CTI and outsourced facilities
management. Communications Services provides customer support services for
communications systems, including maintenance services, systems modifications
and long distance services. Communications Solutions provides a broad array of
solutions including telephone systems, integrated voice processing, call center
technologies and video/audio/data conferencing solutions. The name change from
Communications Systems to Communications Solutions more accurately reflects the
Company's commitment to provide its customers with design, installation and
implementation services as well the hardware and software components necessary
for successful implementation of complex communications systems. Financial
Services supports the sales process by providing customized financing
alternatives. The Company believes that its breadth of product and service
offerings fosters long-term client relationships, affords cross-selling
opportunities and minimizes the Company's dependence on any single technology or
industry.
38
<PAGE> 41
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company elected early adoption of 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. Disclosures under SFAS No. 131 are as
follows:
<TABLE>
<CAPTION>
GLOBAL SERVICES
------------------------------ TOTAL
IT CONSULTING COMMUNICATIONS GLOBAL COMMUNICATIONS FINANCIAL
SERVICES SERVICES SERVICES SOLUTIONS SERVICES CORPORATE TOTAL
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
1996:
Revenue.................. $14,426 $121,971 $136,397 $179,332 $ 5,635 $ -- $321,364
Operating income......... 685 6,141 6,826 6,368 2,217 -- 15,411
Depreciation and
amortization........... 389 4,262 4,651 4,350 13 3,503 12,517
Identifiable assets...... 4,081 42,459 46,540 40,807 36,916 36,725 160,988
Capital expenditures..... 475 4,714 5,189 4,900 20 4,276 14,385
1997:
Revenue.................. $54,467 $131,596 $186,063 $205,983 $ 6,029 $ -- $398,075
Operating income......... 3,239 6,395 9,634 6,754 2,817 -- 19,205
Depreciation and
amortization........... 2,245 4,938 7,183 5,117 14 4,650 16,964
Identifiable assets...... 26,865 51,463 78,328 49,000 47,928 48,917 224,173
Capital expenditures..... 2,202 7,335 9,537 7,400 14 7,268 24,219
1998:
Revenue.................. $92,746 $127,197 $219,943 $228,979 $ 7,443 $ -- $456,365
Operating income(1)...... 6,976 (678) 6,298 199 4,076 -- 10,573
Depreciation and
amortization........... 4,434 5,730 10,164 5,657 15 5,279 21,115
Identifiable assets...... 63,554 55,465 119,019 52,000 52,616 51,973 275,608
Capital expenditures..... 2,115 5,998 8,113 5,900 20 5,840 19,873
</TABLE>
- ---------------
(1) Segment totals include allocation of the fiscal year 1998 restructuring
charge of $14,667,000. Operating income of each segment, prior to the
allocation of the restructuring charge to each unit, was as follows: IT
Consulting Services -- $8,130,000; Communications Services -- $7,425,000;
Total Global Services -- $15,555,000; Communications Solutions --
$5,609,000; and Financial Services -- $4,076,000. (See Note 3.)
39
<PAGE> 42
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the Company's operations and related asset
information by geographic area as of and for the years ended April 30 (in
thousands):
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
REVENUES:
United States................................. $287,171 $365,796 $423,446
Canada........................................ 34,193 32,279 32,919
-------- -------- --------
$321,364 $398,075 $456,365
======== ======== ========
NET INCOME:
United States................................. $ 7,943 $ 9,426 $ 4,679
Canada........................................ 546 791 (824)
-------- -------- --------
$ 8,489 $ 10,217 $ 3,855
======== ======== ========
ASSETS:
United States................................. $142,151 $207,942 $258,192
Canada........................................ 18,837 16,231 17,416
-------- -------- --------
$160,988 $224,173 $275,608
======== ======== ========
</TABLE>
40
<PAGE> 43
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No changes in or disagreements with accountants which required reporting on
Form 8-K have occurred within the two-year period ended April 30, 1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the directors and executive officers of the
Company, set forth under "Information Concerning Directors, Nominees and
Executive Officers" and under "Compliance with Section 16 (a)" in the Company's
definitive proxy statement for the annual meeting of shareholders to be held
September 24, 1998, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to Executive Compensation set forth under
"Executive Compensation" in the Company's definitive proxy statement for the
annual meeting of shareholders to be held September 24, 1998, other than the
subsections captioned "Report of the Compensation and Stock Option Committee"
and "Performance Graph", is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial owners
and management, set forth under "Beneficial Ownership of Principal Shareholders
and Management" in the Company's definitive proxy statement for the annual
meeting of shareholders to be held September 24, 1998, is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related transactions,
set forth under "Information Concerning Directors, Nominees and Executive
Officers" in the Company's definitive proxy statement for the annual meeting of
shareholders to be held September 24, 1998, is incorporated herein by reference.
41
<PAGE> 44
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
1. Financial Statements
See Index to Consolidated Financial Statements and Financial
Statement Schedules on page of this report.
2. Financial Statement Schedules
All schedules to the Consolidated Financial Statements normally
required by the applicable accounting regulations are omitted since the
required information is included in the Consolidated Financial
Statements or the Notes thereto or is not applicable.
3. Exhibits
See Index to Exhibits on page of this report.
(B) REPORTS ON FORMS 8-K.
No reports on Form 8-K were filed by the Company during the last quarter of
the fiscal year covered by this report.
42
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) 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.
Dated: July 22, 1998
NORSTAN, INC.
Registrant
By /s/ DAVID R. RICHARD
------------------------------------
David R. Richard
Chief Executive Officer, President
and Director
By /s/ KENNETH S. MACKENZIE
------------------------------------
Kenneth S. MacKenzie
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE DATE
--------- ----
<C> <S>
/s/ PAUL BASZUCKI July 22, 1998
- -----------------------------------------------------
Paul Baszucki
Chairman of the Board
July 22, 1998
- -----------------------------------------------------
Richard Cohen
Vice-Chairman of the Board
/s/ DAVID R. RICHARD July 22, 1998
- -----------------------------------------------------
David R. Richard
CEO, President and Director
July 22, 1998
- -----------------------------------------------------
Dr. Jagdish N. Sheth
Director
/s/ CONNIE M. LEVI July 23, 1998
- -----------------------------------------------------
Connie M. Levi
Director
/s/ GERALD D. PINT July 23, 1998
- -----------------------------------------------------
Gerald D. Pint
Director
/s/ HERBERT F. TRADER July 23, 1998
- -----------------------------------------------------
Herbert F. Trader
Director
</TABLE>
43
<PAGE> 46
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<C> <S> <C>
3(a) Restated Articles of Incorporation of the Company, as
amended [filed as Exhibit 3(a) to the Company's Annual
Report on Form 10-K for the year ended April 30, 1988 (File
No. 0-8141) and incorporated herein by reference];
Amendments adopted September 9, 1993 and June 20, 1996
[filed as Exhibit 3(a) to the Company's Annual Report on
Form 10-K for the year ended April 30, 1996 (File No.
0-8141) and incorporated herein by reference]...............
3(b) Bylaws of the Company [filed as Exhibit 3(b) to the
Company's Annual Report on Form 10-K for the year ended
April 30, 1993 (File No. 0-8141) and incorporated herein by
reference]; Amendments adopted August 8, 1995 [filed as
Exhibit 3(b) to the Company's Annual Report on Form 10-K for
the year ended April 30, 1996 (File No. 0-8141) and
incorporated herein by reference]; Amendments adopted
September 20, 1995, July 30, 1996 and April 9, 1997.........
3(c) Rights Agreement dated May 17, 1988 between Norstan, Inc.
and Norwest Bank Minnesota, N.A. [filed as Exhibit 1 to the
Company's Registration Statement on Form 8-A (File No.
0-8141) and incorporated herein by reference]...............
10(a) Agreement for ROLM Authorized Distributors, effective July
27, 1993, between Norstan Communications, Inc. and ROLM
Company [filed as Exhibit 10(a) to the Company's Annual
Report on Form 10-K for the year ended April 30, 1993 (File
No. 0-8141) and incorporated herein by reference]...........
10(b) Credit Agreement dated as of July 23, 1996, among Norstan,
Inc., First Bank National Association, and Harris Trust and
Savings Bank and the Sumitomo Bank Limited, Chicago Branch;
First Amendment to Credit Agreement dated October 11, 1996
[filed as Exhibit 10 to the Company's quarterly report on
Form 10-Q for the period ended August 3, 1996 (File No.
0-8141) and incorporated herein by reference]...............
10(c) Loan and Security Agreement dated April 29, 1993, between
Norstan Financial Services, Inc. and Sanwa Business Credit
Corporation [filed as Exhibit 10(b) to the Company's Current
Report on Form 8-K, dated April 29, 1993 (File No. 0-8141)
and incorporated herein by reference]; First Amendment dated
December 30, 1993 [filed as Exhibit 10(c) to the Company's
Annual Report on Form 10-K for the year ended April 30, 1994
(File No. 0-8141) and incorporated herein by reference].....
10(d)(1) 1990 Employee Stock Purchase Plan of Norstan, Inc., as
amended May 29, 1998........................................
10(e)(1) Norstan, Inc. 1986 Long-Term Incentive Plan, as amended
[filed as Exhibit 10(e) to the Company's Annual Report on
Form 10-K for the year ended April 30, 1993 (File No.
0-8141) and incorporated herein by reference]; Amendments
adopted August 8, 1995 and July 30, 1996 [filed as Exhibit
10(e) to the Company's Annual Report on Form 10-K for the
year ended April 30, 1996 (File No. 0-8141) and incorporated
herein by reference]........................................
10(f)(1) Norstan, Inc. Restated Non-Employee Directors' Stock Plan,
[filed as Exhibit 28.1 to the Company's Registration
Statement on Form S-8 dated September 27, 1995 (File No.
0-8141) and incorporated herein by reference]...............
10(g)(1) Norstan, Inc. 1995 Long-Term Incentive Plan [filed as
Exhibit 28.1 to the Company's Registration Statement on Form
S-8 dated September 27, 1995 (File No. 0-8141) and
incorporated herein by reference]; Amendment adopted July
30, 1996 [filed as Exhibit 10(g) to the Company's Annual
Report on Form 10-K for the year ended April 30, 1996 (File
No. 0-8141) and incorporated herein by reference]; Amendment
adopted August 16, 1996.....................................
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
<C> <S> <C>
10(h)(1) Employment Agreement dated April 7, 1995 between Paul
Baszucki and the Company [filed as Exhibit 10(h) to the
Company's Annual Report on Form 10-K for the year ended
April 30, 1995 (File No. 0-8141) and incorporated herein by
reference]..................................................
10(i)(1) Employment Agreement dated April 7, 1995 between Richard
Cohen and the Company [filed as Exhibit 10(i) to the
Company's Annual Report on Form 10-K for the year ended
April 30, 1995 (File No. 0-8141) and incorporated herein by
reference]..................................................
10(j)(1) Employment Agreement dated April 30, 1997 between David R.
Richard and the Company.....................................
10(k) Agreement and Plan of Merger dated May 24, 1996 among the
Company, Connect Computer Company and CCC Acquisition
Subsidiary, Inc. [filed as Exhibit 2 to the Company's
Current Report on Form 8-K dated June 4, 1996 (File No.
0-8141) and incorporated herein by reference]...............
10(l)(1) Third Amendment to Credit Agreement, dated as of March 20,
1998, by and among the Company, certain banks as signatories
thereto (the "Banks") and First Bank National Association,
as one of the Banks and as agent for the Banks..............
10(m) Lease Agreement, dated December 23, 1997, by and between
Thomas Edward Limited Partnership and the Company...........
22 Subsidiaries of Norstan, Inc................................
23(a) Consent of Independent Public Accountants...................
27 Financial Data Schedule.....................................
</TABLE>
A copy of any of the exhibits listed or referred to above will be furnished at a
reasonable cost to any shareholder of the Company, upon receipt of a written
request from such person for any such exhibit. Such request should be sent to
Norstan, Inc., 605 North Highway 169, Twelfth Floor, Plymouth, Minnesota 55441,
Attention: Investor Relations.
(1) Items that are management contracts or compensatory plans or arrangements
required to be filed as an exhibit pursuant to Item 14(c) of this Form 10-K.
45
<PAGE> 1
EXHIBIT 10(D)(1)
1990 EMPLOYEE STOCK PURCHASE PLAN
OF
NORSTAN, INC.
As Amended May 29, 1998
1. Purpose. The purpose of this 1990 Employee Stock Purchase Plan (the
"Plan") is to secure to Norstan, Inc. (the "Company"), its Subsidiaries and its
shareholders the advantages of the incentive inherent in stock ownership on the
part of the employees of the Company and its Subsidiaries and to provide the
employees with a proprietary interest in and a greater concern for the welfare
of the Company as an incentive to continued service with the Company and its
Subsidiaries.
2. Stock Subject to the Plan. A total of 1,856,000 shares of the common
stock, par value $.10 per share ("Common Stock"), of the Company may be issued
under this Plan (after giving effect to a two-for-one split of the Company's
Common Stock on July 31, 1996), subject to adjustment as provided herein.
3. Eligibility. Any employee of the Company or its Subsidiaries who has
attained the age of 18 and completed one month of employment is eligible to
participate in this Plan. For purposes of this Plan, "Subsidiary" means any
entity, at least 75% of the outstanding voting stock or voting power of which is
beneficially owned, directly or indirectly, presently or in the future, by the
Company.
4. Participation. Any eligible employee may elect to participate in this
Plan at any time during the continuance of this Plan by delivering to the
Company an authorization for payroll deductions, executed by the participating
employee (the "Participant"), in such form as may be prescribed by the Company
from time to time.
An employee's participation in this Plan is entirely
voluntary. Each employee shall understand that there are risks involved in stock
ownership and that the Company, its Subsidiaries and their officers and
directors are making no recommendations to their employees regarding the
purchase of shares of the Company, which is a personal decision for each
employee.
5. Employee Contributions. A Participant shall, by completing the form
described in paragraph 4 hereof, authorize payroll deductions in an amount
specified by the Participant in said form. No payroll deduction shall be less
than $10.00 per pay period, nor more, per pay period, than 10% of the gross pay
of the Participant. Such authorization form shall be effective only for the
calendar year specified therein. Subsequent to the completion of such
authorization form, not more than one change in the authorized payroll deduction
may be made by the Participant in each such calendar year.
-1-
<PAGE> 2
6. Stock Purchase; Purchase Price. After the end of each calendar quarter,
the amounts contributed hereunder by each Participant shall be applied to
purchase from the Company authorized but unissued shares of Common Stock,
provided that the Participant has been continuously employed by the Company or
its Subsidiaries through the end of such calendar quarter.
The purchase price for the shares purchased hereunder shall be
85% of the low price for the Common Stock reported on NASDAQ on the last
business day of such calendar quarter.
7. Refund of Employee Contributions. At any time prior to the end of a
calendar quarter, all amounts contributed hereunder by a Participant by
authorized payroll deductions shall be refunded without interest to the
Participant at his or her request.
If a Participant's employment with the Company or its
Subsidiaries is terminated for any reason, or upon the death of the Participant,
all amounts deducted under this Plan from the Participant's gross pay during the
calendar quarter in which such termination or death occurs shall be refunded,
without interest, to the Participant.
If the Board of Directors of the Company suspends or
terminates this Plan as hereinafter provided, it shall have the power to cause
all amounts deducted hereunder from the Participants' gross pay during the
calendar quarter in which such suspension or termination occurs to be refunded,
without interest, to the Participants.
8. Income Tax Consequences. Each Participant shall understand that, under
the Internal Revenue Code of 1986, as amended, where stock is transferred by an
employer to an employee for an amount less than the fair market value of stock,
the employee must include in his or her income the difference between the fair
market value and the amount paid by the employee for the stock. In connection
with the purchase of shares by a Participant pursuant to this Plan, the Company
shall have the right to withhold from the Participant's other compensation, or
to require the Participant to remit to the Company, an amount sufficient to
satisfy any applicable federal, state or local tax withholding requirements.
9. Reports. The Company shall provide to each Participant under this Plan
a copy of the Company's Annual Report to Shareholders each year during the
continuance of this Plan.
10. Assignment. The interest of a Participant hereunder with respect to any
shares is not subject to the claims of creditors, or to assignment or transfer
other than by will or the laws of descent and distribution.
11. Dilution or Other Adjustments; Dividends. In the event of any change in
the capital structure of the Company, including but not limited to a change
resulting from a stock dividend or split-up, or combination or reclassification
of shares, the Board of Directors shall make such adjustments with respect to
the shares subject to this Plan, or any provision of this Plan, as it deems
equitable to prevent dilution or enlargement of the interests of Participants in
this Plan.
-2-
<PAGE> 3
12. Merger, Consolidation, Reorganization, Liquidation. If the Company or
any of its Subsidiaries shall become a party to any corporate merger,
consolidation, major acquisition of property for stock, reorganization,
liquidation, or similar transaction, the Board of Directors shall have the power
to make such arrangements as it deems necessary, which may include termination
of this Plan, with respect to the amounts deducted hereunder from the
Participants' gross pay, and such arrangements shall be binding upon all
persons, including without limitation, the Company, its shareholders, and any
Participant in this Plan.
13. Administration of the Plan. This Plan shall be administered by the
Board of Directors of the Company; however, the Board of Directors may, from
time to time, delegate its administrative or other duties under the Plan to an
agent. The Board of Directors shall have full power and authority to construe,
interpret and administer this Plan and to make determinations which shall be
final, conclusive and binding upon all persons, including without limitation,
the Company, its shareholders, and any Participant in this Plan. The Board of
Directors shall have the power to provide regulations for the administration of
this Plan and to make any changes in such regulations as from time to time it
deems necessary.
14. Amendment and Termination. The Board of Directors shall have the right
at any time during the continuance of this Plan to amend, modify, supplement,
suspend or terminate this Plan, provided that in the absence of the approval of
the holders of a majority of the shares of Common Stock present in person or by
proxy at a duly constituted meeting of shareholders of the Company, no such
amendment, modification or supplement shall (i) increase the aggregate number of
shares which may be issued under this Plan, unless such increase is by reason of
any change in capital structure referred to in paragraph 11 hereof or (ii)
materially modify the requirements of plan eligibility.
15. Transition Provisions. After June 30, 1998, the amounts contributed by
each Participant under the Plan prior to June 30, 1998 shall be applied to
purchase from the Company authorized but unissued shares of Common Stock,
provided that the Participant has been continuously employed by the Company or
its Subsidiaries through June 30, 1998. The purchase price for the shares
purchased shall be 85% of the low price for the Common Stock reported on NASDAQ
on June 30, 1998.
At any time prior to June 30, 1998, all amounts contributed by each
Participant under the Plan by authorized payroll deductions shall be refunded
without interest to the Participant at his or her request. After June 30, 1998,
all purchases shall be governed by this Plan as amended and effective on July 1,
1998.
16. Securities Laws. The issuance of shares of Common Stock pursuant to
this Plan shall be subject to all applicable laws, rules and regulations; and
shares shall not be issued hereunder except upon approval of appropriate
governmental agencies or stock exchanges as may be required.
-3-
<PAGE> 4
17. Miscellaneous.
a. A prospectus covering the shares offered under this Plan shall be
given to each employee who is eligible to participate herein.
b. Each employee who becomes a Participant in this Plan shall be deemed
to have accepted all the terms and conditions contained in this Plan, and shall
be fully bound thereby.
c. This Plan shall be subject to changes, if any, which may be ordered
by the United States Securities and Exchange Commission or the appropriate
regulatory authorities in any states in which this Plan is registered or filed.
d. This Plan shall be construed according to the laws of the State of
Minnesota.
18. Effective Date. This Plan, as amended, was adopted at meetings of Board
of Directors on March 12, 1998 and May 29, 1998 and shall be effective on July
1, 1998. The Plan, in its original form, was effective as of June 26, 1989, the
date of its adoption by the Board of Directors and subsequently amended on July
14, 1993.
19. Compliance with Section 16(b). In the case of employees who are or may
be subject to Section 16 of the Securities Exchange Act of 1934 (the "Act"), it
is the intent of the Company that the Plan and any award granted hereunder
satisfy and be interpreted in a manner that satisfies the applicable
requirements of Rule 16b-3, so that such persons will be entitled to the
benefits of Rule 16b-3 or other exemptive rules under Section 16 of the Act and
will not be subjected to liability thereunder. If any provision of the Plan or
any award would otherwise conflict with the intent expressed herein, that
provision, to the extent possible, shall be interpreted and deemed so as to
avoid such conflict. To the extent of any remaining irreconcilable conflict with
such intent, such provision or award shall be deemed void as applicable to
employees who are or may be subject to Section 16 of the Act.
-4-
<PAGE> 1
EXHIBIT 10(L)(1)
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT is dated as of March 20, 1998
("this Amendment") by and among NORSTAN, INC., a Minnesota corporation (the
"Borrower"), the banks which are signatories hereto (each individually, a
"Bank," and collectively, the "Banks"), and FIRST 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, 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, and a Second Amendment dated as of September 26, 1997 (as
so amended, the "Credit Agreement").
B. The parties hereto desire to amend the Credit Agreement in certain
respects.
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 6
hereof, the Credit Agreement is hereby amended as follows:
(a) The definition of "Guarantors" set forth in Recital B of the
Credit Agreement is amended to include "Vadini, Inc., a North Carolina
corporation, d/b/a PRIMA Consulting Inc. ("PRIMA")," "Norstan International,
Inc., a Minnesota corporation ("Norstan International")" and
Norstan-UK, Limited, a corporation incorporated in London, England
("Norstan - UK")."
(b) The definitions of "Adjusted Leverage Ratio," "Applicable Margin,"
"Cash Flow Leverage Ratio," "Interest Coverage Ratio" and "Tangible Net Worth"
set forth in Section 1.1 of the Credit Agreement are amended in their
entireties to read as follows:
(i) "Adjusted Leverage Ratio": At the time of any determination, the
ratio of (a) Total Indebtedness less Indebtedness of NFS to (b) Tangible Net
<PAGE> 2
Worth, all as determined in accordance with GAAP (but determined using the
equity method of accounting with respect to NFS).
(ii) "Applicable Margin": With respect to:
Pricing Level IV: (a) Reference Rate Advances: 0.05%
(b) CD Rate Advances: 1.25%
(c) Eurodollar Rate Advances: 1.25%
Pricing Level III: (a) Reference Rate Advances: 0.25%
(b) CD Rate Advances: 1.0%
(c) Eurodollar Rate Advances: 1.0%
Pricing Level II: (a) Reference Rate Advances: 0.0%
(b) CD Rate Advances: 0.75%
(c) Eurodollar Rate Advances: 0.75%
Pricing Level I: (a) Reference Rate Advances: 0.0%
(b) CD Rate Advances: 0.50%
(c) Eurodollar Rate Advances: 0.50%
(iii) "Cash Flow Leverage Ratio": As of the last day of any fiscal
quarter, the ratio of (a) the sum (without duplication) of the aggregate
principal amount of all outstanding Capitalized Lease Obligations of the
Borrower and the Subsidiaries and that portion of Total Indebtedness bearing
interest determined as of that date, to (b) EBITDA for the four consecutive
fiscal quarters ending on that date, all as determined in accordance with GAAP
(but determined using the equity method of accounting with respect to NFS).
(iv) "Interest Coverage Ratio": As of the last day of any fiscal
quarter, the ratio of (a) EBITDA for the four consecutive fiscal quarters
ending on that date, to (b) Interest Expense, in each case determined for said
period in accordance with GAAP (but determined using the equity method of
accounting with respect to NFS).
-2-
<PAGE> 3
(v) "Tangible Net Worth": As of any date of determination,
the sum of the amounts set forth on the consolidated balance sheet of
the Borrower as the sum of the common stock, preferred stock,
additional paid-in capital, retained earnings, unamortized cost of
stock and foreign currency translation adjustments of the Borrower
(excluding treasury stock), less the book value of all assets of the
Borrower and its Subsidiaries that would be treated as intangibles
under GAAP, including all such items as goodwill, trademarks, trade
names, service marks, copyrights, patents, licenses, unamortized debt
discount and expenses and the excess of the purchase price of the
assets of any business acquired by the Borrower or any of its
Subsidiaries over the book value of such assets.
(c) Section 1.1 of the Credit Agreement is amended by
inserting therein the following definitions of "Net Proceeds" and "Pricing
Level" in appropriate alphabetical order:
"Net Proceeds": With respect to the sale or disposition of
property, sale of capital stock and offering of debt securities by the
Borrower, or other non-recurring event, an amount equal to (a) the cash
(including deferred cash proceeds) and other consideration received by
the Borrower in connection with such transaction or event, minus (b)
the sum of (i) the unpaid principal-balance on the date of any such
sale or offering of any Indebtedness that is secured by a Lien not
proscribed by Section 6.12 and affecting such property, and which is
required to be repaid on the date of such sale or offering, (ii) any
closing costs or selling costs arising in connection with such sale or
offering, and (iii) any sales or income tax paid or payable by the
Borrower in connection with such transaction or event (excluding any
tax for which the Borrower is reimbursed by the purchaser).
"Pricing Level": Shall mean that level of pricing in effect
for any fiscal quarter determined in accordance with the following:
Pricing Level IV: Shall be in effect during any fiscal quarter
if the Cash Flow Leverage Ratio as of the last day of the most recently
completed fiscal quarter was greater than or equal to 2.75 to 1.0.
Pricing Level III: Shall be in effect during any fiscal
quarter if the Cash Flow Leverage Ratio as of the last day of the most
recently completed fiscal quarter was no less than 2.0 to 1.0 and no
greater than 2.74 to 1.0.
Pricing Level II: Shall be in effect during any fiscal quarter
if the Cash Flow Leverage Ratio as of the last day of the most recently
completed fiscal quarter was no less than 1.0 to 1.0 and no greater
than 1.99 to 1.0.
-3-
<PAGE> 4
Pricing Level I: Shall be in effect during any fiscal quarter
if the Cash Flow Leverage Ratio as of the last day of the most recently
completed fiscal quarter was less than 1.0 to 1.0.
(d) Section 2.5 of the Credit Agreement is amended by adding
thereto the following subsection 2.5(f) at the end thereof:
2.5(f) Subject to the last two sentences of this Section
2.5(f), any change in the interest rate applicable to an Advance due to
a change in the Pricing Level shall, for CD Rate Advances and
Eurodollar Rate Advances, be effective on the first day after delivery
of the financial statements described in Section 5.1(c) and shall
continue until the day on which such statements are delivered for the
following fiscal quarter. Notwithstanding the foregoing, if the
Borrower has not furnished the quarterly financial statements and
reports required under Sections 5.1(c) and 5.1(d) for any fiscal
quarter by the sixtieth day after the end of such fiscal quarter, the
Applicable Margin shall be calculated as if the Cash Flow Leverage
Ratio for such fiscal quarter was greater than or equal to 2.75 to 1.0
for the period from the sixty-first day after the end of such fiscal
quarter until such date on which such financial statements and reports
are delivered.
(e) Section 2.7 of the Credit Agreement is amended in its
entirety to read as follows:
Section 2.7 Prepayment of the Revolving Commitment.
2.7(i) Mandatory Prepayment. On the date of the occurrence
of any of the following events, the Borrower shall prepay the
Revolving Loans in an aggregate amount of 100% of the Net
Proceeds received in cash by the Borrower as a result of any of
the following events: (A) sales of assets of the Borrower,
other than sales of inventory, in excess of $1,000,000 in the
aggregate during any fiscal year of the Borrower, to the extent
the resulting Net Proceeds are not used to purchase similar
assets within one year from the date of such sales, and (B) any
public or private sale or offering by the Borrower of its
capital stock or debt securities.
2.7(ii) Optional Prepayments. The Borrower may prepay
Reference Rate Advances, in whole or in part, at any time,
without premium or penalty. Except upon an acceleration
following an Event of Default or upon termination of the
Revolving Commitments in whole, the Borrower may pay Eurodollar
Rate Advances and CD Rate Advances only on the last day of the
Interest Period applicable thereto. Any such prepayment must,
in the case of a Eurodollar Rate Advance or a CD Rate Advance,
be accompanied by accrued and unpaid interest
-4-
<PAGE> 5
on the amount prepaid. Each prepayment shall be in an aggregate
amount for all the Banks of $300,000 ($200,000, in the case of a
Reference Rate Advance) or an integral multiple of $100,000 in excess
thereof. Amounts paid (unless following an acceleration or upon
termination of the Revolving Commitments in whole) or prepaid on
Advances under this Section 2.7 may be reborrowed upon the terms and
subject to the conditions and limitations of this Agreement. Amounts
paid or prepaid on the Advances under this Section 2.7 shall be for
the account of each Bank in proportion to its share of outstanding
Revolving Loans.
(f) Sections 2.14(a) and (b) of the Credit Agreement are amended in
their entireties to read as follows:
2.14(a) The Company shall pay quarterly in arrears on the last
day of each calendar quarter and on the Termination Date, a Letter of
Credit Fee in an amount determined by applying a rate per annum equal
to the Applicable Margin with respect to Eurodollar Rate Advances then
in effect to the average daily aggregate principal amount of Commercial
Paper Notes (Midwest) issued by the Borrower and outstanding under the
Commercial Paper Program, all as more specifically set forth in the
Commercial Paper Program Documents.
2.14(b) For each Standby Letter of Credit issued, the company
shall pay in advance, on the date of issuance thereof and on the date
of any extension thereof, a fee (a "Letter of Credit Fee") in an
amount determined by applying a rate per annum equal to the Applicable
Margin with respect to Eurodollar Rate Advances then in effect to the
original face amount of the Standby Letter of Credit for the period
from the date of issuance or extension to the scheduled expiration
date of such Letter of Credit.
(g) Section 2.18 of the Credit Agreement is amended by deleting
therefrom the date "July 31, 1999" and inserting in its place the date
"May 31, 2001".
(h) Section 6.4 of the Credit Agreement is amended in its
entirety to read as follows:
Section 6.4 Change in Nature of Business. The Borrower will
not, and will not permit any Subsidiary to, make any material change
in the nature of the business of the Borrower or such Subsidiary, as
carried on at the date hereof, except for changes in business related
to the communications and information technology industries.
(i) Section 6.5 of the Credit Agreement is amended in its
entirety to read as follows:
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<PAGE> 6
Section 6.5 Subsidiaries. After the date of this Agreement,
the Borrower will not, and will not permit any Subsidiary to, form or
acquire any corporation which would thereby become a Subsidiary, unless
(a) 100% of the issued and outstanding capital stock of such Subsidiary
is owned by Norstan, Inc. or by a 100%-owned Subsidiary of
Norstan, Inc., (b) each line of business of such Subsidiary is within
the communications and information technology industries and (c) the
aggregate amount of the Borrower's Investment or Investments in all
such Subsidiaries shall not exceed the amounts set for in Section
6.10(1).
(j) Section 6.8 of the Credit Agreement is amended in its
entirety to read as follows:
Section 6.8 Capital Expenditures. The Borrower will not, and
will not permit any Subsidiary to, make Capital Expenditures in an
amount exceeding, on a consolidated basis in any fiscal year, an amount
equal to (a) seven percent (7%) of the consolidated revenues of the
Borrower and the Subsidiaries as reported in their consolidated
financial statements for the preceding fiscal year, plus (b) for the
fiscal year ending April 30, 1998 only, Capital Expenditures
attributable to the PRIMA Acquisition.
(k) Section 6.10(k) of the Credit Agreement is amended in its
entirety to read as follows:
6.10(k) Loans and advances by the Borrower to Norstan
Communications, Inc., Norstan Network Services, Inc., Connect Computer
Company, PRIMA, Norstan-UK and Norstan International and (for
purposes other than to finance lease account receivables, as specified
in 6.10(j) above) to Norstan Canada;
(l) Section 6.10(l) of the Credit Agreement is amended in its
entirety to read as follows:
6.10(l) Purchases or acquisitions by the Borrower of
substantially all of the real and personal property of, or the capital stock
of, another Person engaged in the communications and information technology
industries; provided that (i) the purchase price paid for such assets shall not
exceed, in the aggregate (including any contingent payments based on
profitability of the assets acquired) for any such purchase or acquisition,
$15,000,000; (ii) there shall be no more than three such separate purchases or
acquisitions during any consecutive twelve month period; (iii) no Default or
Event of Default has occurred or would occur as a result thereof; (iv) the
Borrower will deliver to the Lender pro forma financial statements
demonstrating in reasonable detail that the Borrower would have complied with
Sections 6.16, 6.17, 6.18, and 6.19 had such purchase or acquisition been
consummated prior to the end of the
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<PAGE> 7
most recently completed fiscal quarter, and that based on the Borrower's
projections, the Borrower will comply with Sections 6.16, 6.17, 6.18 and
6.19 at the end of the current fiscal quarter after giving effect to such
purchase or acquisition; and (v) EBITDA for the Person so acquired was not
less than $1 for the four most recently completed fiscal quarters of such
Person prior to the date of such purchase or acquisition;
(m) Section 6.11(k) of the Credit Agreement is amended in its
entirety to read as follows:
6.11(k) Unsecured Indebtedness of the Borrower (other than as
permitted by other clauses of this Section 6.11); provided, however, that
the aggregate principal amount of such Indebtedness outstanding at any
time shall not exceed $10,000,000.
(n) Sections 6.15, 6.16, 6.17, 6.18, 6.19, 6.20 and 6.21 of the
Credit Agreement are amended in their entireties to read as follows:
Section 6.15 Intentionally Omitted.
Section 6.16 Minimum EBITDA. The Borrower will not permit EBITDA as
of the last day of any fiscal quarter for the four consecutive fiscal
quarters then ended to be less than (i) $35,000,000 from April 30, 1998
through April 29, 1999, (ii) $40,000,000 at the end of any fiscal quarter
ending on or after April 30, 1999 through April 29, 2000, and (iii)
$45,000,000 at the end of any fiscal quarter thereafter.
Section 6.17 Cash Flow Leverage Ratio. The Borrower will not permit
the Cash Flow Leverage Ratio, as of the last day of any fiscal quarter,
to be more than 3.00 to 1.0.
Section 6.18 Adjusted Leverage Ratio. The Borrower will not permit
the Adjusted Leverage Ratio to be more than 3.00 to 1.0 as of the end of
any fiscal quarter.
Section 6.19 Interest Coverage Ratio. The Borrower will not permit
the Interest Coverage Ratio, as of the last day of any fiscal quarter, to
be less than 8.0 to 1.0.
Section 6.20 Ratio of NFS Total Senior Debt to NFS Tangible Net
Worth. The Borrower will not permit the ratio of the NFS Total Senior
Debt to the NFS Tangible Net Worth to be more than 12.0 to 1.0 at any time.
-7-
<PAGE> 8
Section 6.21 NFS Total Reserve as Percentage of NFS Total Gross
Investment. The Borrower will not permit the NFS Total Reserve to be
less than 2.0% of the NFS Total Gross Investment at any time.
(o) Each reference to "ROLM Company" set forth in Section 7.1(n) of
the Credit Agreement shall mean a reference to "Siemens Business Communications
Systems, Inc."
(p) Exhibit 1.1A to the Credit Agreement is deleted and Exhibit 1.1A
to this Amendment is inserted in its place and Exhibit 1.1C to the Credit
Agreement is deleted and Exhibit 1.1C to this Amendment is inserted in its
place.
(q) Schedules 4.19, 6.10, 6.11, 6.12 and 6.13 to the Credit
Agreement are deleted and Schedules 4.19, 6.10, 6.11, 6.12 and 6.13 to this
Amendment are inserted in lieu therefor.
Section 3. Termination of PRIMA Bridge Loan Facility. On the effective
date of this Amendment the PRIMA Bridge Loan Facility and the Credit Agreement
dated as of September 26, 1997 and the Loan Documents as defined therein are
hereby terminated. As of such date, the outstanding principal balance of the
PRIMA Bridge Loan shall be deemed outstanding under the Credit Agreement as
amended hereby and shall bear interest and be repaid in accordance therewith.
All accrued and unpaid interest and unpaid Unused Revolving Commitment Fees (as
defined in the PRIMA Bridge Loan Facility Credit Agreement) on the PRIMA Bridge
Loan Facility shall be paid by the Borrower on such date. On the effective date
of this Amendment, the Banks shall pay such amounts to each other as required so
that each Bank's percentage of the Revolving Outstandings is equal to each
Bank's Revolving Commitment Percentage.
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 and the New Notes (as defined below in Section 6(b)
hereof) have been duly authorized, executed and delivered by it and this
Amendment and the New Notes constitute the legal, valid and binding
obligation of the Borrower enforceable against the Borrower in accordance
with their 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
-8-
<PAGE> 9
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 the
Amendment and the New Notes (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 4(c);
(d) as of the date hereof, no unwaived Default or Event of Default has
occurred which is continuing; and
(e) all the representations and warranties contained in Section 4 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. Waiver. The Borrower has informed the Banks that the
Adjusted Leverage Ratio for the period ended November 1, 1997 was 2.1 to 1.0
which is in excess of the maximum level of 2.0 to 1.0 allowed under Section
6.18 of the Credit Agreement. Upon satisfaction of the conditions set forth in
Section 6 of this Amendment, the Banks hereby waive Event of Default under the
Credit Agreement described in the immediately preceding sentence for the period
ended November 1, 1997. This waiver is limited to the express terms hereof and
shall not extend to any other Default, Event of Default or any other period.
This waiver shall not be and shall not be deemed to be a course of dealing upon
which the Borrower may rely with respect to any other Default, Event of Default
or request for a waiver and the Borrower hereby expressly waives any such
claim.
Section 6. Conditions to Effectiveness of this Amendment. This
Amendment shall not become effective until, and shall become effective 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;
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<PAGE> 10
(b) executed Revolving Notes (the "New Notes") in the form of Exhibit
1.1C shall have been received by the Agent on behalf of each of the Banks.
(c) the Agent shall have received from each of the Guarantors, other
than PRIMA, Norstan International and Norstan-UK, a Consent and Agreement of
Guarantor in the form of Attachment 1 hereto (the "Guarantor Agreements")
duly completed and executed by such Guarantor;
(d) the Agent shall have received from each of PRIMA, Norstan
International and Norstan-UK a duly executed Guaranty in the form of
Exhibit A hereto;
(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, certified by its
Secretary or an Assistant Secretary, together with a certificate of the
Secretary or an Assistant Secretary of the Borrower certifying as to the
incumbency and the true signatures of the officers authorized to execute
this Amendment on behalf of the Borrower;
(f) a copy of the corporate resolution of each of PRIMA, Norstan
International and Norstan-UK authorizing the execution, delivery and
performance of its respective Guaranty;
(g) an incumbency certificate for each of PRIMA, Norstan International
and Norstan-UK showing the names and titles and bearing the signatures
of its officers authorized to execute its respective Guaranty, certified as
of the Closing Date by the Secretary or an Assistant Secretary of PRIMA,
Norstan International and Norstan-UK, respectively;
(h) a copy of the Articles of Incorporation of each of PRIMA, Norstan
International and Norstan-UK with all amendments thereto, certified by
the appropriate governmental official of the jurisdiction of its
incorporation as of a date not more than ten days prior to the date hereof;
(i) a certificate of good standing for each of PRIMA, Norstan
International and Norstan-UK in the jurisdiction of its incorporation,
certified by the appropriate governmental officials as of a date not more
than ten days prior to the date hereof;
(j) a copy of the bylaws of each of PRIMA, Norstan International and
Norstan-UK, certified as of the Closing Date by the Secretary or an
Assistant Secretary of PRIMA, Norstan International and Norstan-UK,
respectively; and
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<PAGE> 11
(d) 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.
(e) This Amendment shall be binding upon the Borrower, the
Agent and the Banks and their respective successors and assigns, and
shall inure to the benefit of the Borrower, the Agent and the Banks
and the successors and assigns of the Agent and the Banks.
[THE REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK.]
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<PAGE> 12
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 Robert J. Vold
--------------------------------
Its Treasurer
-----------------------------
FIRST BANK NATIONAL ASSOCIATION,
as a Bank and as Agent
By David Shipiro
--------------------------------
Its Commercial Banking Officer
-----------------------------
HARRIS TRUST AND SAVING BANK
By Catherine Ciolek
--------------------------------
Its Vice President
-----------------------------
THE SUMITOMO BANK, LIMITED,
CHICAGO BRANCH
By Jeffrey P. Norton
--------------------------------
Its Vice President
-----------------------------
By John W. Howard, Jr.
--------------------------------
Its Vice President & Manager
-----------------------------
[Signature Page to Third Amendment to Credit Agreement]
S-1
<PAGE> 1
EXHIBIT 10(M)
L E A S E
ARTICLE 1. LEASE TERMS
1.1 LANDLORD AND TENANT. This lease ("Lease") is entered into this 23RD DAY
OF DECEMBER, 1997 by and between Thomas Edward Limited Partnership, a
Minnesota Limited Partnership, ("Landlord") and Norstan, Inc., a Minnesota
Corporation ("Tenant").
1.2 PREMISES. Landlord hereby rents, leases, lets and demises to tenant the
following property ("Premises") consisting of (i): Approximately 85,819
square feet of office space on floors one, two, three and four as depicted
on the floor plans attached hereto as EXHIBIT A ("Phase I Premises") and
(ii): Approximately 148,302 square feet consisting of the future floor 5,
the second floor warehouse annex, the third floor warehouse annex and the
warehouse area as depicted on EXHIBIT B attached hereto ("Phase II
Premises") in the property located at 5101 SHADY OAK ROAD IN MINNETONKA,
MINNESOTA ("Building"). A site plan of the building and a description of the
shell improvements to the future fifth (5th) floor portion of the Premises
are attached hereto as EXHIBITS C AND D. All other areas of the Premises
shall be delivered in the "as is" condition except as depicted in sections
6.1, 6.2, 6.3, and 6.4. The total square foot area of the Phase I and Phase
II Premises is approximately 234,121 square feet. The square foot area of
the building is currently 198,011 square feet, and will increase to
approximately 234,121 square feet upon addition of the future fifth floor.
For the purposes of this Lease, the determination of the number of square
feet in the Premises, and the number of square feet in the Building shall be
made using the "BOMA" measurement method. "As-built" measurements will be
taken of the Buildings and Premises as soon as construction has progressed
to the point where such measurement is possible. Landlord will certify such
"as-built" measurements to Tenant, which measurements Tenant shall have the
right to review and confirm. In the event that Landlord and Tenant are
unable to agree upon the "as built" measurements, landlord and Tenant agree
to adhere to the measurements determined by a neutral third party, which
third party shall be determined mutually by Tenant and Landlord. Landlord
and Tenant shall thereafter execute an addendum to this Lease in the form of
attached EXHIBIT E, confirming said measurements and adjusting (i) the area
of the Building and Premises, (ii) the Base Rent, and (iii) Tenant's pro
rata share, to reflect the actual rentable square foot area of the Building
and Premises, and such addendum shall thereupon be deemed attached hereto,
incorporated herein, and by this reference made a part of this Lease. Until
such time as said as-built measurements are available, Tenant agrees that
the estimated square footage of the Premises and Building as set forth in
this section shall be utilized to compute Base Rent, Tenant's pro-rata share
of Operating Expenses, and any other sums due hereunder based in whole or in
part on the square footage of the Premises or the Building.
1.3 LEASE TERM. The term of this Lease shall commence on JULY 1, 1998
("Commencement Date") and shall terminate 161 MONTHS thereafter on NOVEMBER
30, 2011, unless sooner terminated as hereinafter provided. The Landlord
shall deliver the Phase I Premises on the commencement Date and the Phase II
Premises on the Commencement of Lease Month eighteen (18). Upon written
notice to Landlord prior to February 13, 1998, Tenant shall have the option
to delay its occupancy of portions of the Phase I Premises by substituting
some or all of the Phase II second floor annex, third floor annex, or if
available the Phase II warehouse into the Premises. No such substitution
shall result in a reduction of the initial area of the Premises below 85,819
square feet. Upon receipt of notice from Tenant indicating the areas to be
substituted, Landlord and Tenant shall enter into an addendum to the Lease
to reflect the newly constituted Premises and if the substitution results in
a net increase in the area of the Premises, the addendum will adjust the
area of the Premises and pro-rata share of operating expenses, and will
adjust the Base Rental Rate to reflect the net gain area at a Base Rental
Rate of $3.85 per square foot in addition to the Base Rent depicted in
section 1.4. In the event of a substitution (i) the Tenant improvement
allowance described in section 6.3 shall be available for the substitution
space, and (ii) the Phase I area which was subject to the substitution shall
be delivered to Tenant no later than December 1, 1999, and (iii) the Tenant
improvement allowance described in section 6.2 shall be available for the
Phase I area, which was subject to the substitution. In the event that
Tenant does not vacate the Premises upon the expiration or termination of
this Lease, Tenant shall be a tenant at will for the holdover period and all
of the terms and provisions of this Lease shall be applicable during that
period, except that Tenant shall pay Landlord as base rental for the period
of such holdover an amount equal to one and one half (1 1/2) times the base
rent which would have been payable by Tenant had the holdover period been a
part of the original term of this Lease, together with all additional rent
as provided in this Lease. Tenant agrees to vacate and deliver the Premises
to Landlord upon Tenant's receipt of notice from Landlord to vacate. The
rental payable during the holdover period shall be payable to Landlord on
demand. No holding over by Tenant, whether with or without the consent of
Landlord, shall operate to extend the term of this Lease.
Tenant, upon written notice to Landlord, shall have the right to accelerate
the delivery date for and its occupancy of the Phase I area which was
subject to a substitution, the second floor annex, third floor annex
<PAGE> 2
of Phase II, or the future fifth floor or warehouse area during the first
eighteen (18) months of the Lease. In the event Tenant exercises this right,
Landlord shall be obligated to and shall deliver such areas to Tenant as
soon as such areas can be accessed and improved by Landlord for occupancy by
Tenant. Upon delivery of such areas, the Tenant's Base Rent and pro rata
share of operating expenses shall be increased to reflect the addition of
such space to the Premises effective as of the date of delivery. Base Rent
shall be adjusted based upon the applicable rental rates set forth in
section 1.4.
Landlord agrees to allow Tenant to occupy the Premises for the purpose of
installing its furnishings, fixtures and equipment for a thirty (30) day
period immediately preceding the Commencement Date, ("early occupancy
period"). During the first fifteen (15) days of the early occupancy period
the Tenant's installation workers shall cooperate and coordinate their work
with Landlord's contractor such that Tenant's work will not interfere with
the completion of Landlord's work. During the last fifteen (15) days of the
early occupancy period, the Tenant shall have exclusive occupancy of the
Premises, subject to Landlord's right of access for the purpose of
maintenance of the premises and completion of punch list items thereon.
Tenant's early occupancy shall be subject to all of the terms and conditions
of this lease, except payment of rent and operating expenses.
<TABLE>
<CAPTION>
1.4 BASE RENT. The Initial Base Rent is: Months Monthly Base Rent Per Sq. Ft.
------ ----------------- -----------
<S> <C> <C> <C>
1-17 $ 42,909.50 $6.00
18-48 $100,282.38 $5.12
49-96 $106,746.43 $5.45
97-161 $113,209.97 $5.78
</TABLE>
Such Base Rent is subject to adjustment as provided in sections 1.2,
6.2, and 6.3.
Option Terms:
162-221 MARKET MARKET
222-281 MARKET MARKET
Base Rent payable during the term of this Lease is based on the following
rates for each area of the Premises:
<TABLE>
<CAPTION>
Months Phase I Phase II Phase II Phase II
------ Premises Premises Premises Premises
-------- (5th Floor) (annex) (whse.)
----------- -------- --------
<S> <C> <C> <C> <C> <C>
1-17 $6.00 psf N/A N/A N/A
18-48 $6.00 psf $7.00 psf $3.85 psf $3.85 psf
49-96 $6.50 psf $7.50 psf $4.00 psf $4.00 psf
97-161 $7.00 psf $8.00 psf $4.15 psf $4.15 psf
</TABLE>
Such Base Rent is subject to adjustment as provided in sections 6.2 and 6.3.
1.5 PERMITTED USE: OFFICE AND WAREHOUSE FUNCTIONS RELATED TO SERVICES AND
PRODUCTS OF COMMUNICATION.
1.6 SECURITY DEPOSIT: INTENTIONALLY OMITTED
1.7 PRO RATA SHARE: FORTY-THREE FOURTEEN ONE-HUNDREDTHS PERCENT (43.34%),
adjusting to one-hundred percent (100%) upon occupancy of the Phase II Premises.
* subject to adjustment as provided in Section 2.2 hereof.
1.8 ADDRESSES. LANDLORD'S ADDRESS: TENANT'S ADDRESS:
--------- ------------------- -----------------
Thomas Edwards Limited Partnership Norstan, Inc.
C/O CSM CORPORATION, INC. 5101 Shady Oak Road
2575 UNIVERSITY AVE. W., SUITE 150 Minnetonka, MN 55343
ST. PAUL, MN 55114-1024
ARTICLE 2. RENT, OPERATING EXPENSES AND SECURITY DEPOSIT
2.1 BASE RENT. Tenant agrees to pay monthly as base rent during the term of this
Lease the sum of
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<PAGE> 3
money set forth in Section 1.4 of this Lease, which amount shall be payable to
Landlord at the address shown above. One monthly installment shall be due and
payable on or before the Commencement Date; provided, if the Commencement Date
should be a date other than the first day of a calendar month, the monthly
rental set forth above shall be prorated to the end of that calendar month. All
succeeding installments of rent shall be due and payable on or before the first
day of each succeeding calendar month during the term of this Lease. Tenant
shall pay, as additional rent, all other sums due under this Lease. Except as
otherwise provided in this section, if Landlord, for any reason whatsoever
(other than Tenant's default), cannot deliver possession of the Premises to the
Tenant on the Commencement Date, this Lease shall not be void or voidable, nor
shall Landlord be liable for any loss or damage resulting therefrom (except as
depicted in this section), nor shall the expiration of the term be extended, but
all rent shall be abated until Landlord delivers possession.
Landlord and Tenant agree that payment of Base Rent and operating expenses
payable under the Lease shall commence upon expiration of the early occupancy
period described in section 1.3 of this Lease. Landlord agrees to provide Tenant
15 days prior written notice of the date on which the early occupancy period
will commence.
In the event that Landlord has not delivered the Phase I Premises on or before
July 1, 1 998, subject to force majeure or Tenant caused delays, Landlord agrees
to pay Tenant's base rent, operating expense charges and holdover rent charges,
if applicable at Tenant's existing Wedgewood facility from July 1, 1998 until
such time that Landlord delivers the Phase I Premises to Tenant. Tenant
Represents that the scheduled Base Rent obligation under the Wedgewood Lease is
$61,382.46 per month and the Tenant's estimated 1997 contribution to operating
expenses is $47,221.07 per month. Tenant agrees that Landlord's liability shall
not exceed 150% of the scheduled Base Rent and 100% of the 1998 estimated
operating expenses, monthly.
If Landlord is unable to deliver the Phase I Premises to Tenant on or before
July 1, 1998, Tenant may request partial occupancy of the Premises on a floor by
floor basis until such time as the entire Premises are available, and Landlord
will permit such occupancy subject to availability and city approval.
Should Landlord fail to deliver the Phase I Premises to Tenant on or before
September 1, 1998, subject to force majeure or Tenant caused delays, Tenant may
terminate this Lease with no further obligation upon delivery of written notice
to Landlord on or before September 5, 1998, whereupon this Lease shall be null
and void and of no force and effect.
2.2 OPERATING EXPENSES. Tenant shall also pay as additional rent Tenant's pro
rata share of the operating expenses of Landlord for the Building. Landlord may
invoice Tenant monthly for Tenant's pro rata share of the estimated operating
expenses for each calendar year, which amount shall be adjusted once per year by
Landlord based upon anticipated operating expenses. Within six (6) months
following the close of each calendar year, Landlord shall provide Tenant an
accounting showing in reasonable detail the computations of additional rent due
under this Section. In the event the accounting shows that the total of the
monthly payments made by Tenant exceeds the amount of additional rent due by
Tenant under this Section, the accounting shall be accompanied by evidence of a
credit to Tenant's next rental due. In any event the accounting shows that the
total of the monthly payments made by Tenant is less than the amount of
additional rent due by Tenant under this Section, the accounting shall be
accompanied by an invoice for the additional rent. Notwithstanding any other
provisions in this Lease, during the year in which this Lease terminates,
Landlord, prior to the termination date, shall invoice Tenant for Tenant's pro
rata share of the then current estimate for operating expenses. If this Lease
shall terminate on a day other than the last day of a calendar year, the amount
of any additional rent payable by Tenant applicable to the year in which the
termination shall occur shall be prorated on the ratio that the number of days
from the Commencement of the calendar year to and including such termination
date bears to 365. Tenant agrees to pay any additional rent due under this
Section within thirty (30) days following receipt of the invoice or accounting
showing additional rent due. Within ninety (90) days of receipt of the operating
expense reconciliation for the previous year, Tenant shall have the right to
audit Landlord's books and records as they pertain to operating expenses for the
immediate preceding calendar year, in Landlord's office and with reasonable
notice. If Tenant does not provide notice to Landlord within ninety (90) days of
its intent to audit, Tenant shall automatically waive and release its right to
audit for the preceding calendar year. The cost of said audit shall be borne by
Tenant unless the audit discloses that Tenant has overpaid its proportionate
share of operating expenses for the calendar year in question by more than five
percent (5%), in which case the reasonable expense of the audit shall be borne
by Landlord. If the audit reveals that Landlord's actual statement was incorrect
in any amount, the resulting excess or deficiency shall be paid by or reimbursed
to Tenant as the case may be. Tenant's pro rata share set forth in Section 1.7
shall, subject to reasonable adjustment by Landlord, be equal to a percentage
based upon a fraction, the numerator of which is the net rentable area of the
Premises as set forth and the denominator of which shall be the net rentable
area of the completed
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portions of the building (i.e., the fifth floor will be excluded from this
computation until completed), as the same may change from time to time.
2.3 DEFINITION OF OPERATING EXPENSES. The term "operating expenses" includes
all reasonable expenses incurred by Landlord with respect to the maintenance and
operation of the Building, including, but not limited to, the following:
maintenance, repair and replacement costs; electricity, fuel, water, sewer, gas
and other common Building utility charges; equipment used for maintenance and
operation of the Building; operational expenses; exterior window washing and
janitorial services; trash and snow removal; landscaping and pest control;
management fees not to exceed three percent (3%) of gross rents (exclusive of
the amortization of the Tenant Improvement Allowance depicted in sections 6.2
and 6.3), wages and benefits payable to employees of Landlord whose duties are
directly connected with the operation and maintenance of the Building; all
services, supplies, repairs, replacements or other expenses for maintaining and
operating the Building or project including parking and common areas;
improvements made to the Building which are required under any governmental law
or regulation that was not applicable to the Building at the time it was
constructed; installation of any device or other equipment which improves the
operating efficiency of any system within the Premises and thereby reduces
operating expenses; all other expenses which would generally be regarded as
operating, repair, replacement and maintenance expenses; all real property taxes
and installments of special assessments, including dues and assessments by means
of deed restrictions and/or owners' associations which accrue against the
Building during the term of this Lease and legal fees incurred in connection
with actions to reduce the same so long as any reduction associated with said
action accrues to Tenant; and all insurance premiums Landlord is required to pay
or deems necessary to pay, including fire and extended coverage, and rent loss
and public liability insurance, with respect to the Building. Roof replacements
shall be amortized over the useful life of the roof. Parking lot replacements
shall be recovered in the year the work was performed so long as no more than
20% of the Parking area is replaced in one calendar year. The cost of Parking
lot replacement involving replacement of in excess of 20% of the parking area in
any year shall be amortized over the useful life of the replacement.
Notwithstanding the above, Landlord agrees that the total cost of operating
expenses including property taxes for the building shall not exceed the
following during the calendar years 1998-2000:
CALENDAR YEAR OPERATING EXPENSES
1998 $329,000.00
1999 $342,400.00
2000 $356,100.00
Provided that increases in property taxes resulting from the addition of the
fifth floor shall not be subject to the cap, and shall be recoverable as
operating expenses without regard to the cap.
2.4 INCREASE IN INSURANCE PREMIUMS. During any part of the Lease Term during
which the building is being operated as a multi-tenant facility, if an increase
in any insurance premiums paid by Landlord for the Building is caused by
Tenant's use of the Premises. If Tenant vacates the Premises and causes an
increase in such premiums, then Tenant shall pay as additional rent the amount
of such increase to Landlord.
2.5 SECURITY DEPOSIT. Intentionally deleted.
ARTICLE 3. OCCUPANCY AND USE
3.1 USE. Tenant warrants and represents to Landlord that the Premises shall be
used and occupied only for the purpose as set forth in Section 1.5. Tenant shall
occupy the Premises, conduct its business and control its agents, employees,
invitees and visitors in such a manner as is lawful, reputable and will not
create a nuisance. Tenant shall not permit any operation which emits any odor or
matter which intrudes into other portions of the Building or otherwise interfere
with, annoy or disturb any other lessee in its normal business operations or
Landlord in its management of the Building. Tenant shall not permit any waste on
the Premises to be used in any way which would, in the reasonable opinion of
Landlord, be extra hazardous on account of fire or which would, in any way,
increase or render void the fire insurance on the Building.
3.2 SIGNS. No sign of any type or description shall be erected, placed or
painted in or about the Premises or Building which are visible from the exterior
of the Premises, except those signs submitted to Landlord in writing, and which
signs are in conformance with Landlord's sign criteria, if any, established for
the Building.
Notwithstanding the above, Landlord agrees that, subject to city approval,
Tenant shall have the right to install and maintain two (2) building signs and
one ground monument sign within the project in a size, location and design
reasonably acceptable to Landlord.
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3.3 COMPLIANCE WITH LAWS, RULES, REGULATIONS. Tenant, at Tenant's sole cost and
expense, shall comply with all laws, ordinances, orders, rules and regulations
of state, federal, municipal or other agencies or bodies having jurisdiction
over the use, condition or occupancy of the Premises. Tenant will comply with
the reasonable rules and regulations of the Building adopted by Landlord.
Landlord shall have the right at all times to change and amend the rules and
regulations in any reasonable manner and with reasonable notice as may be deemed
advisable for the safety, care, cleanliness, preservation of good order and
operation or use of the Building or the Premises. All rules and regulations of
the Building will be sent by Landlord to Tenant in writing and shall thereafter
be carried out and observed by Tenant.
3.4 WARRANTY OF POSSESSION. Landlord warrants that it has the right and
authority to execute this Lease, and Tenant, upon payment of the required rents
and subject to the terms, conditions, covenants and agreements contained in this
Lease, shall have possession of the Premises during the full term of this Lease
as well as any extension or renewal thereof. Landlord shall not be responsible
for the acts or omissions of any other lessee or third party that may interfere
with Tenant's use and enjoyment of the Premises.
3.5 RIGHT OF ACCESS. Landlord or its authorized agents shall at any and all
reasonable times and with reasonable notice have the right to enter the Premises
to inspect the same, to show the Premises to prospective purchasers, mortgagees,
insurers other interested parties or in the last six (6) months of the Lease
prospective lessees, and to alter, improve or repair the Premises or any other
portion of the Building. Tenant hereby waives any claim for damages for injury
or inconvenience to or interference with Tenant's business, any loss of
occupancy or use of the Premises, and any other loss occasioned thereby unless
such loss is caused by the gross negligence of the Landlord. Landlord shall have
the right to use any and all means which Landlord may deem proper to open any
door in an emergency without liability therefor. Tenant shall permit Landlord to
erect, use, maintain and repair pipes, cables, conduits, plumbing, vents and
wires in, to and through the Premises as often and to the extent that Landlord
may now or hereafter deem to be necessary or appropriate for the proper use,
operation and maintenance of the Building.
ARTICLE 4. UTILITIES AND ACTS OF OTHERS
4.1 BUILDING SERVICES. Tenant shall pay when due, all charges for utilities
furnished to or for the use or benefit of Tenant or the Premises. Tenant shall
have no claim for rebate of rent on account of any interruption in service,
unless such interruption was caused by the gross negligence of Landlord.
4.2 THEFT OR BURGLARY. Landlord shall not be liable to Tenant for losses to
Tenant's property or personal injury caused by criminal acts or entry by
unauthorized persons into the Premises or the Building, unless such loss or
injury was caused by the gross negligence of Landlord.
ARTICLE 5. REPAIRS AND MAINTENANCE
5.1. LANDLORD REPAIRS. Landlord shall not be required to make any improvements,
replacements or repairs of any kind or character to the Premises or the Building
during the term of this Lease except as are set forth in this Section. Landlord
shall maintain only the roof, foundation, parking and common areas, the
structural soundness of the exterior walls, doors, corridors, and other
structures serving the Premises, provided, that Landlord's cost of maintaining,
replacing and repairing the items set forth in this Section are operating
expenses subject to the additional rent provisions in Section 2.2 and 2.3.
Landlord shall not be liable to Tenant, except as expressly provided in this
Lease, for any damage or inconvenience, and Tenant shall not be entitled to any
abatement or reduction of rent by reason of any repairs, alterations or
additions made by Landlord under this Lease, unless such damage or inconvenience
constitutes a constructive eviction of Tenant and is the result of Landlord's
negligent acts or omissions. Notwithstanding the above, Landlord shall be
responsible, at its sole expense, for repair and replacement of the structural
elements of the building shell, and for replacement, if necessary of the cooling
tower and boiler, electric transformers and switch gear provided that normal
maintenance and repair of the cooling tower and boiler including minor
replacements shall be performed by Tenant at Tenant's expense. Landlord's repair
and replacement of the roof and normal maintenance of the structural components
of the exterior of the building shall be a component of and included in
operating expenses under section 2.3.
5.2 TENANT REPAIRS. Tenant shall, at all times throughout the term of this
Lease, including renewals and extensions, and at its sole expense, keep and
maintain the Premises in a clean, safe, sanitary and first class condition and
in compliance with all applicable laws, codes, ordinances, rules and
regulations. Tenant's obligations hereunder shall include, but not be limited
to, the maintenance, repair and replacement, if necessary, of all heating,
ventilation, air conditioning, lighting and plumbing fixtures and equipment,
fixtures, motors and machinery, all interior walls, partitions, doors and
windows, including the regular painting thereof, all exterior entrances,
windows, doors and docks and the replacement of all broken glass. When used in
this provision, the term "repairs" shall include replacements or renewals when
necessary, and all
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such repairs made by the Tenant shall be equal in quality and class to the
original work. The Tenant shall keep and maintain all portions of the Premises
and the sidewalk and areas adjoining the same in a clean and orderly condition,
free of accumulation of dirt, rubbish, ice and snow in accumulations of less
than one (1) inch. If Tenant fails, refuses or neglects to maintain or repair
the Premises as required in this Lease after notice shall have been given
Tenant, in accordance with this Lease, Landlord may make such repairs without
liability to Tenant for any loss or damage that may accrue to Tenant's
merchandise, fixtures or other property or to Tenant's business by reason
thereof, and upon completion thereof, Tenant shall pay to Landlord all costs
plus fifteen percent (15%) for overhead incurred by Landlord in making such
repairs upon presentation to Tenant of bill therefor.
5.3. TENANT DAMAGES. Tenant shall not allow any damage to be committed on any
portion of the Premises or Building or common areas, and at the termination of
this lease, by lapse of time or otherwise, Tenant shall deliver the Premises to
Landlord in as good condition as existed at the Commencement Date of this Lease,
ordinary wear and tear excepted. The cost and expense of repairs necessary to
restore the condition of the Premises shall be borne by Tenant.
ARTICLE 6. ALTERATIONS AND IMPROVEMENTS
6.1 LANDLORD IMPROVEMENTS. Landlord shall complete the exterior site and
parking lot improvements to the west of the Premises as depicted on EXHIBIT C
and the majority of the fifth floor construction on or before July 1, 1998.
Landlord shall exercise reasonable efforts to minimize disruption of Tenant's
business activities during Landlord's completion of work after July 1, 1998,
provided that most work may be completed during normal construction hours.
Landlord shall complete the exterior site and parking lot improvements to the
southeast of the Premises as depicted on EXHIBIT C on or before December 1,
1999.
In the event that Tenant elects to accelerate its Phase II Premises occupancy,
and the area of accelerated occupancy exceeds 35,000 square feet, Landlord
agrees to complete the exterior improvements to the southeast of the Premises as
depicted on EXHIBIT C no later than 90 days after Tenant's notice of projected
occupancy of the Phase II Premises, except that Landlord shall not be required
to perform such work during the calendar months of November, December, January,
February, March and April.
6.2 PHASE I PREMISES INTERIOR IMPROVEMENTS. On or before February 13, 1998
Tenant shall submit to Landlord construction drawings for the Phase I
improvements, which plans shall be subject to Landlord's review and approval,
which approval shall not be unreasonably withheld. In the event that acceptable
working drawings are not received by Landlord on or before February 13, 1998,
then Landlord's obligation to pay Tenant's base rent, operating expenses and
holdover costs for the Wedgewood facility, pursuant to section 2.1 hereof, shall
be delayed one (1) day for each day after February 13, 1998 that Tenant has
failed to provide acceptable working drawings to Landlord, provided that the
delay contributes to the late delivery of the Premises. Landlord agrees to seek
competitive bids for the construction of the Phase I improvements based on a
standard construction schedule. Landlord and Tenant agree to mutually select
contractor(s) to perform the improvements and enter into a contract(s) for the
improvements at a mutually agreed upon price. Any changes to the scope of work
must be made through written change orders signed by Tenant. Landlord and Tenant
agree that Landlord shall have the sole discretion to schedule the construction
work including fast tracking of the construction of the improvements, provided
that fast track costs shall not be a component of the improvement allowance
depicted in this section, and Landlord shall endeavor to deliver the Premises on
or before July 1, 1998.
Landlord shall provide an allowance of up to $17.50 per square foot towards
construction of the improvements of the Premises described as Phase I in section
1.2 of the Lease (Phase I Improvements), which allowance shall be paid directly
to the contractor under customary and normal construction lending procedures.
Upon completion of the Phase I Improvements, Landlord shall provide Tenant
documentation of final construction costs, with back up and detail information
related thereto. Tenant agrees to immediately reimburse Landlord for any costs
for construction of the Phase I Improvements in excess of the allowance set
forth above. Landlord and Tenant agree that the Phase I Tenant Improvement costs
incurred by Landlord, up to $17.50 per square foot, shall be amortized over the
initial term of this lease at a 9% annual interest rate. The amortization shall
be paid monthly in addition to and as a part of the Base Rent for the premises.
Landlord and Tenant agree to promptly enter into an addendum to the lease in a
form similar to EXHIBIT E, to confirm such increase in the Base Rent.
6.3 PHASE II PREMISES INTERIOR IMPROVEMENTS. On or before May 31, 1999, Tenant
shall submit to Landlord construction drawings for the leasehold improvements to
the second (2nd) floor warehouse annex, the third (3rd) floor warehouse annex
the future fifth (5th) floor, and for conversion of up to 14,000 square feet of
the 83,000 square foot warehouse area currently occupied by K-Tel International,
Inc., to
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office space (the "Phase II Improvements"), which plans shall be subject to
Landlord's review and approval, which approval shall not be unreasonably
withheld. Landlord agrees to seek competitive bids for the construction of the
Phase If improvements based on a standard construction schedule and Landlord and
Tenant agree to mutually select contractors to perform the improvements.
Landlord shall provide an allowance of up to $25.00 per square foot towards
construction of the Phase II Improvements, which allowance shall be paid
directly to the contractor under customary and normal construction lending
procedures; provided that said allowance shall only be applicable and payable
with respect to Phase II Improvements which are commenced prior to December 1,
1999. Upon completion of the Phase II Improvements, Landlord shall provide
Tenant documentation of final construction costs, with back up and detail
information related thereto. Tenant agrees to immediately reimburse Landlord for
any costs for construction of the Phase II Improvements in excess of the
allowance set forth above. Landlord and Tenant agree that the Phase II Tenant
Improvement costs incurred by Landlord, up to $25.00 per square foot, shall be
amortized over the remaining initial term of this lease at a 9% interest rate.
The amortization shall be paid monthly in addition to and as a part of the Base
Rent for the premises. Landlord and Tenant agree to promptly enter into an
addendum to the lease in a form similar to EXHIBIT E, to confirm such increase
in the Base Rent.
6.4 BUILDING CODE COMPLIANCE ALLOWANCE. Landlord shall provide Tenant an
allowance of $100,000.00 towards the cost of any modifications required to
comply with current building codes, including but not limited to requirements of
the Americans With Disabilities Act. This allowance shall not include nor be
applicable to costs of relocation of the sprinkler system lateral runs or heads
to accommodate specific space plan designs.
In the event that the cost of modifications required to comply with current
building codes is expected to exceed $100,000.00, Tenant may terminate this
Lease with no further obligation on or before February 13, 1998 with written
notice delivered to Landlord on or before February 17, 1998. If Tenant exercises
its option to terminate depicted in this section, Landlord shall have the right
to fund the cost over $100,000.00 and Tenant's option to terminate shall be null
and void.
6.5 ADDITIONAL TENANT IMPROVEMENTS. After the original construction of the Phase
I and Phase II improvements, tenant shall not make or allow to be made any
alterations or physical additions in or to the Premises without first obtaining
the written consent of Landlord, which consent may not be unreasonably denied.
Any alterations, physical additions or improvements to the Premises made by
Tenant shall at once become the property of Landlord and shall be surrendered to
Landlord upon the termination of this Lease; provided, however, Landlord, at its
option, may, as a condition of its approval of the alteration or addition,
require Tenant to remove any physical additions and/or repair any alterations in
order to restore the Premises to the conditions existing at the time Tenant took
possession, all costs of removal and/or alterations to be borne by Tenant. This
clause shall not apply to moveable equipment or furniture owned by Tenant, which
may be removed by Tenant at the end of the term of this Lease.
6.6 TENANT IMPROVEMENT WARRANTY. Landlord agrees that all Tenant improvement
work performed in and about the Premises will be warranted for a period of
twelve (12) months following the completion of the work. The warranty shall not
be applicable to repairs necessitated by normal wear and tear or Tenant-caused
damages.
ARTICLE 7. CASUALTY AND INSURANCE
7.1 SUBSTANTIAL DESTRUCTION. If all or a substantial portion of the Premises or
the Building should be totally destroyed by fire or other casualty, or if the
Premises or the Building should be damaged so that rebuilding cannot reasonably
be completed within one hundred eighty (180) working days after the date of
written notification by Tenant to Landlord of the destruction, or if insurance
proceeds are not made available to Landlord, or are inadequate, for restoration,
this Lease shall terminate at the option of Landlord by written notice to Tenant
within sixty (60) days following the occurrence, and the rent shall be abated
for the unexpired portion of the Lease effective as of the date of the written
notification.
7.2 PARTIAL DESTRUCTION. If the Premises should be partially damaged by fire or
other casualty, and rebuilding or repairs can reasonably be completed within one
hundred eighty (180) working days from the date of written notification by
Tenant to Landlord of the destruction, and insurance proceeds are adequate and
available to Landlord for restoration, this Lease shall not terminate, and
Landlord shall at its sole risk and expense proceed with reasonable diligence to
rebuild or repair the Building or other improvements to substantially the same
condition in which they existed prior to the damage. If the Premises are to be
rebuilt or repaired and are untenantable in whole or in part following the
damage, and the damage or destruction
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was not caused or contributed to by act or negligence of Tenant, its agents,
employees, invitees or those for whom Tenant is responsible, the rent payable
under this Lease during the period for which the Premises are untenantable shall
be adjusted to such an extent as may be fair and reasonable under the
circumstances. In the event that Landlord fails to complete the necessary
repairs or rebuilding within one hundred eighty (180) working days from the date
of written notification by Tenant to Landlord of the destruction, Tenant may at
its option terminate this Lease by delivering written notice of termination to
Landlord, whereupon all rights and obligations under this Lease shall cease to
exist.
7.3 PROPERTY INSURANCE. Landlord shall not be obligated in any way or manner to
insure any personal property (including, but not limited to, any furniture,
machinery, goods or supplies) of Tenant upon or within the Premises, any
fixtures installed or paid for by Tenant upon or within the Premises, or any
improvements which Tenant may construct on the Premises. Tenant shall maintain
property insurance on its personal property and shall also maintain plate glass
insurance. Tenant shall have no right in or claim to the proceeds of any policy
of insurance maintained by Landlord even if the cost of such insurance is borne
by Tenant as set forth in Article 2.
7.4 WAIVER OF SUBROGATION. Anything in this Lease to the contrary withstanding,
Landlord and Tenant hereby waive and release each other of and from any and all
right of recovery, claim, action or cause of action, against each other, their
agents, officers and employees, for any loss or damage that may occur to the
Premises, the improvements of the Building or personal property within the
Building, by reason of fire or the elements, regardless of cause or origin,
including negligence of Landlord or Tenant and their agents, officers and
employees. Landlord and Tenant agree immediately to give their respective
insurance companies which have issued policies of insurance covering all risk of
direct physical loss, written notice of the terms of the mutual waivers
contained in this Section.
7.5 HOLD HARMLESS. Landlord shall not be liable to Tenant's employees, agents,
invitees, licensees or visitors, or to any other person, for an injury to person
or damage to property on or about the Premises caused by any act or omission of
Tenant, its agents, servants or employees, or of any other person entering upon
the Premises under express or implied invitation by Tenant, or caused by the
improvements located on the Premises becoming out of repair, the failure or
cessation of any service provided by Landlord (including security service and
devices), or caused by leakage of gas, oil, water or steam or by electricity
emanating from the Premises. Tenant agrees to indemnify and hold harmless
Landlord of and from any loss, attorney's fees, expenses or claims arising out
of any such damage or injury.
Tenant shall not be liable to Landlord or its employees, agents, invitees,
licensees or visitors, or to any other person, for an injury to person or damage
to property in the Building or common areas serving the Building caused by any
act or omission of Landlord, its agents, servants or employees. Landlord agrees
to indemnify and hold harmless Tenant of and from any loss, attorneys' fees,
expenses or claims arising out of any such damage or injury.
7.6 PUBLIC LIABILITY INSURANCE. Tenant shall during the term hereof keep in full
force and effect at its expense a policy or policies of public liability
insurance with respect to the Premises and the business of Tenant, on terms and
with companies approved in writing by Landlord, in which Landlord shall be
covered by being named as an additional insured party, under reasonable limits
of liability not less than $2,000,000, or such greater coverage as Landlord may
reasonably require, combined single limit coverage for injury or death. Such
policy or policies shall provide that thirty (30) days' written notice must be
given to Landlord prior to cancellation thereof. Tenant shall furnish evidence
satisfactory to Landlord at the time this Lease is executed that such coverage
is in full force and effect.
7.8 LANDLORD'S INSURANCE. Landlord shall maintain in full force and effect
during the lease term: an "all risk" commercial property insurance coverage
policy in the amount of the full replacement value of the Building, as the value
may exist from time to time.
ARTICLE 8. CONDEMNATION
8.1 SUBSTANTIAL TAKING. If all or a substantial part of the Premises are taken
for any public or quasi-public use under any governmental law, ordinance or
regulation, or by right of eminent domain or by purchase in lieu thereof, and
the taking would prevent or materially interfere with the use of the Premises
for the purpose for which it is then being used, this Lease shall terminate and
the rent shall be abated during the unexpired portion of this Lease effective on
the date physical possession is taken by the condemning authority. Tenant shall
have no claim to the condemnation award or proceeds in lieu thereof, except that
Tenant shall be entitled to maintain an action for and recover a separate award
as permitted under applicable law.
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8.2 PARTIAL TAKING. If all or a substantial part of the Premises are taken for
any public or quasi-public use under any governmental law, ordinance or
regulation, or by right of eminent domain or by purchase in lieu thereof, and
this Lease is not terminated as provided in Section 8.1 above, the rent payable
under this Lease during the unexpired portion of the term shall be adjusted to
such an extent as may be fair and reasonable under the circumstances. Tenant
shall have no claim to the condemnation award or proceeds in lieu thereof,
except that Tenant shall be entitled to maintain an action for and recover a
separate award as permitted under applicable law.
ARTICLE 9. ASSIGNMENT OR SUBLEASE
9.1 LANDLORD ASSIGNMENT. Landlord shall have the right to sell, transfer or
assign, in whole or in part, its rights and obligations under this Lease and in
the Building. Any such sale, transfer or assignment shall operate to release
Landlord from any and all liabilities under this Lease arising after the date of
such sale, assignment or transfer.
9.2 TENANT ASSIGNMENT. Tenant shall not assign, in whole or in part, this Lease,
or allow it to be assigned, in whole or in part, by operation of law or
otherwise or mortgage or pledge the same, or sublet the Premises, in whole or in
part, without the prior written consent of Landlord, which consent shall not be
unreasonably withheld, and in no event shall said such assignment or sublease
ever release Tenant or any guarantor from any obligation or liability hereunder.
No assignee or sublessee of the Premises or any portion thereof may assign or
sublet the Premises or any portion thereof, without Landlord's prior written
consent.
9.3 CONDITIONS OF ASSIGNMENT. If Tenant desires to assign or sublet all or any
part of the Premises, it shall so notify Landlord at least fifteen (15) days in
advance of the date on which Tenant desires to make such assignment or sublease.
Tenant shall provide Landlord with a copy of the proposed assignment or sublease
and such information as Landlord might request concerning the proposed sublessee
or assignee to allow Landlord to make informed judgments as to the financial
condition, reputation, operations and general desirability of the proposed
sublessee or assignee. Within seven (7) days after Landlord's receipt of
Tenant's proposed assignment or sublease and all required information concerning
the proposed sublease or assignee, Landlord shall have the following options:
(1) cancel this Lease as to the Premises or portion thereof proposed to be
assigned or sublet; (2) consent to the proposed assignment or sublease, and, if
the rent due and payable by any assignee or sublessee under any such permitted
assignment or sublease (or a combination of the rent payable under such
assignment or sublease plus any bonus or any other consideration or any payment
incident thereto) exceeds the rent payable under this Lease for such space after
subtracting costs of procurement of sublessee, Tenant shall pay to Landlord half
(1/2) of such excess rent and other excess consideration within ten (10) days
following receipt thereof by Tenant; or (3) refuse, with reasonable discretion
and judgement, to consent to the proposed assignment or sublease. Upon the
occurrence of an event of default, if all or any part of the Premises are then
assigned or sublet, Landlord, in addition to any other remedies provided by this
Lease or provided by law, may, at its option, collect directly from the assignee
or sublessee all rents becoming due to Tenant by reason of the assignment or
sublease, and Landlord shall have a security interest in all properties on the
Premises to secure payment of such sums. Any collection directly by Landlord
from the assignee or sublessee shall not be construed to constitute a novation
or a release of Tenant or any guarantor from the further performance of its
obligations under this Lease.
9.4 RIGHTS OF MORTGAGE. Tenant accepts this Lease subject and subordinate to any
recorded mortgage presently existing or hereafter created upon the Building and
to all existing recorded restrictions, covenants, easements and agreements with
respect to the Building. Landlord is hereby irrevocably vested with full power
and authority to subordinate Tenant's interest under this Lease to any first
mortgage lien hereafter placed on the Premises, and Tenant agrees upon demand to
execute additional instruments subordinating this Lease as Landlord may require.
If the interests of Landlord under this Lease shall be transferred by reason of
foreclosure or other proceedings for enforcement of any first mortgage or deed
of trust on the Premises, Tenant shall be bound to the transferee (sometimes
called the "Purchaser") at the option of the Purchaser, under the terms,
covenants and conditions of this Lease for the balance of the term remaining,
including any extensions or renewals, with the same force and effect as if the
Purchaser were Landlord under this Lease, and, if requested by the Purchaser,
Tenant agrees to attorn to the Purchaser, including the first mortgagee under
any such mortgage if it be the Purchaser, as its Landlord. Notwithstanding the
foregoing, Tenant shall not be disturbed in its possession of the Premises so
long as Tenant is not in default hereunder.
9.5 TENANT'S STATEMENT. Tenant agrees to furnish, from time to time, within ten
(10) days after receipt of a request from Landlord or Landlord's mortgagee, a
statement certifying, if applicable, the following: Tenant is in possession of
the Premises; the Premises are acceptable; the Lease is in full force and
effect; the Lease is unmodified; Tenant claims no present charge, lien, or claim
or offset against rent;
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the rent is paid for the current month, but is not prepaid for more than one
month and will not be prepaid for more than one month in advance; there is no
existing default by reason of some act or omission by Landlord; and such other
matters as may be reasonably required by Landlord or Landlord's mortgagee.
Tenant's failure to deliver such statement, in addition to being a default under
this Lease, shall be deemed to establish conclusively that this Lease is in full
force and effect except as declared by Landlord, that Landlord is not in default
of any of its obligations under this Lease, and that Landlord has not received
more than one month's rent in advance. Tenant agrees to furnish, from time to
time, within ten (10) days after receipt of a request from Landlord, a current
financial statement of Tenant, certified as true and correct by Tenant.
ARTICLE 10. LANDLORD'S LIEN AND SECURITY AGREEMENT
10.1 LANDLORD'S LIEN. Intentionally Deleted
ARTICLE 1 1. DEFAULT AND REMEDIES
11.1 DEFAULT BY TENANT. The following shall be deemed to be events of default
("Default") by Tenant under this Lease: (1) Tenant shall fail to pay when due
any installment of rent or any other payment required pursuant to this Lease
within five (5) days of written notice from Landlord; (2) Tenant shall fail to
comply with any term, provision or covenant of this Lease, other than the
payment of rent, and the failure is not cured within ten (10) days after
written notice to Tenant; (3) Tenant shall file a petition or if an involuntary
petition is filed against Tenant, or becomes insolvent, under any applicable
federal or state bankruptcy or insolvency law or admit that it cannot meet its
financial obligations as they become due; or a receiver or trustee shall be
appointed for all or substantially all of the assets of Tenant; or Tenant shall
make a transfer in fraud of creditors or shall make an assignment for the
benefit of creditors; or (4) Tenant shall do or permit to be done any act which
results in a lien being filed against the Premises or the Building and/or
project of which the Premises are a part.
In the event that an order for relief is entered in any case under Title 11,
U.S.C. (the "Bankruptcy Code") in which Tenant is the debtor and: (A) Tenant as
debtor-in-possession, or any trustee who may be appointed in the case (the
"Trustee") seeks to assume the lease, then Tenant, or Trustee if applicable, in
addition to providing adequate assurance described in applicable provisions of
the Bankruptcy Code, shall provide adequate assurance to Landlord of Tenant's
future performance under the Lease by depositing with Landlord a sum equal to
the lesser of twenty-five percent (25%) of the rental and other charges due for
the balance of the Lease term or six (6) months' rent ("Security"), to be held
(without any allowance for interest thereon) to secure Tenant's obligation under
the Lease, and (B) Tenant, or Trustee if applicable, seeks to assign the Lease
after assumption of the same, then Tenant, in addition to providing adequate
assurance described in applicable provisions of the Bankruptcy Code, shall
provide adequate assurance to Landlord of the proposed assignee's future
performance under the Lease by depositing with Landlord a sum equal to the
Security to be held (without any allowance or interest thereon) to secure
performance under the Lease. Nothing contained herein expresses or implies, or
shall be construed to express or imply, that Landlord is consenting to
assumption and/or assignment of the Lease by Tenant, and Landlord expressly
reserves all of its rights to object to any assumption and/or assignment of the
Lease. Neither Tenant nor any Trustee shall conduct or permit the conduct of any
"fire", "bankruptcy", "going out of business" or auction sale in or from the
Premises.
11.2 REMEDIES FOR TENANT'S DEFAULT. Upon the occurrence of a Default as defined
above, Landlord may elect (i) to cancel and terminate this Lease and this Lease
shall not be treated as an asset of Tenant' bankruptcy estate or (ii) to
terminate Tenant's right to possession only without canceling and terminating
Tenant's continued liability under this lease. Notwithstanding the fact that
initially Landlord elects under (ii) to terminate Tenant's right to possession
only, Landlord shall have the continuing right to cancel and terminate this
Lease by giving three (3) days' written notice to Tenant of such further
election, and shall have the right to pursue any remedy at law or in equity that
may be available to Landlord.
In the event of election under (ii) to terminate Tenant's right to possession
only, Landlord may, at Landlord's option, enter the Premises and take and hold
possession thereof, without such entry into possession terminating this Lease or
releasing Tenant in whole or in part from Tenant's obligation to pay all amounts
hereunder for the full stated term. Upon such reentry, Landlord may remove all
persons and property from the Premises and such property may be removed and
stored in a public warehouse or elsewhere at the cost and for the account of
Tenant, without becoming liable for any loss or damage which may be occasioned
thereby. Such reentry shall be conducted in the following manner: without resort
to judicial process or notice of any kind if Tenant has abandoned or voluntarily
surrendered possession of the Premises; and, otherwise, by resort to judicial
process. Upon and after entry into possession without termination of the Lease,
Landlord may, but is not obligated to, relet the Premises, or any part thereof,
to any one other than
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the Tenant, for such time and upon such terms as Landlord, in Landlord's sole
discretion, shall determine. Landlord may make alterations and repairs to the
Premises to the extent deemed by Landlord necessary or desirable to relet the
Premises.
Upon such reentry, Tenant shall be liable to Landlord as follows:
A. For all attorneys' fees incurred by Landlord in connection with
exercising any remedy hereunder;
B. For the unpaid installments of base rent, additional rent or other
unpaid sums which were due prior to such reentry, including
interest and late payment fees, which sums shall be payable
immediately.
C. For the installments of base rent, additional rent, and other sums
falling due pursuant to the provisions of this Lease for the period
after reentry during which the Premises remain vacant, including
late payment charges and interest, which sums shall be payable as
they become due hereunder.
D. For all expenses incurred in releasing the Premises, including
leasing commissions, attorneys' fees, and costs of alteration or
repairs, which shall be payable by Tenant as they are incurred by
Landlord; and
E. While the Premises are subject to any new lease or leases made
pursuant to this Section, for the amount by which the monthly
installments payable under such new lease or leases is less than
the monthly installment for all charges payable pursuant to this
Lease, which deficiencies shall be payable monthly.
Notwithstanding Landlord's election to terminate Tenant's right to possession
only, and notwithstanding any reletting without termination, Landlord, at any
time thereafter, may elect to terminate this Lease, and to recover (in lieu of
the amounts which would thereafter be payable pursuant to the foregoing, but not
in diminution of the amounts payable as provided above before termination), as
damages for loss of bargain and not as a penalty, an aggregate sum equal to the
amount by which the present value of the rental value of the Premises for the
unexpired portion of the term of this Lease at the time of such election, is
less than the Present Value of the Base Rent, additional rent and all other
charges which would have been payable by Tenant for the unexpired portion of the
term of this Lease, using a nine percent (9%) discount rate, which deficiency
and all expenses incident thereto, including commissions, attorneys' fees,
expenses of alterations and repairs, shall be due to Landlord as of the time
Landlord exercises said election, notwithstanding that the term had not expired.
If Landlord, after such reentry, leases the Premises, then the rent payable
under such new lease shall be conclusive evidence of the rental value of the
Premises for the unexpired portion of the term of this Lease, so long as the
rental rate for the new Lease is commercially reasonable.
If this Lease shall be terminated by reason of bankruptcy or insolvency of
Tenant, Landlord shall be entitled to recover from Tenant or Tenant's estate, as
liquidated damages for loss of bargain and not as a penalty, the amount
determined by the immediately preceding paragraph.
11.3 LANDLORD'S RIGHT TO PERFORM FOR ACCOUNT OF TENANT. If Tenant shall be in
Default under this Lease, Landlord may cure the Default at any time for the
account and at the expense of Tenant. If Landlord cures a Default on the part of
Tenant, Tenant shall reimburse Landlord upon demand for any amount expended by
Landlord in connection with the cure, including, without limitation, attorneys'
fees and interest.
11.4 INTEREST, ATTORNEY'S FEES AND LATE CHANGE . In the event of a Default by
Tenant: (1) if a monetary default, interest shall accrue on any sum due and
unpaid at the rate of the lesser of fifteen percent (1 5%) per annum or the
highest rate permitted by law and, if Landlord places in the hands of an
attorney the enforcement of all or any part of this Lease, the collection of any
rent due or to become due or recovery of the possession of the Premises, Tenant
agrees to pay Landlord's costs of collection, including reasonable attorney's
fees for the services of the attorney, whether suit is actually filed or not.
Other remedies for nonpayment of rent notwithstanding, if the monthly rental
payment or any other payment due from Tenant to Landlord is not received by
Landlord on or before the seventh (7th) day of the month for which the rent is
due, a late payment charge of five percent (5%) of such past due amount shall
become due and payable in addition to such amounts owed under this Lease.
11.5 ADDITIONAL REMEDIES, WAIVERS, ETC.
A. The rights and remedies of Landlord set forth herein shall be in
addition to any other right and
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remedy now and hereafter provided by law. All rights and remedies
shall be cumulative and not exclusive of each other. Landlord may
exercise its rights and remedies at any times, in any order, to any
extent, and as often as Landlord deems advisable without regard to
whether the exercise of one right or remedy precedes, concurs with
or succeeds the exercise of another.
B. A single or partial exercise of a right or remedy shall not
preclude a further exercise thereof, or the exercise of another
right or remedy from time to time.
C. No delay or omission by Landlord in exercising a right or remedy
shall exhaust or impair the same or constitute a waiver of, or
acquiesce to, a Default.
D. No waiver of Default shall extend to or affect any other Default or
impair any right or remedy with respect thereto.
E. No action or inaction by Landlord shall constitute a waiver of
Default.
F. No waiver of a Default shall be effective unless it is in writing
and signed by Landlord.
ARTICLE 12. RELOCATION
12.1 RELOCATION OPTION. Intentionally Deleted
ARTICLE 13. AMENDMENT AND LIMITATION OF WARRANTIES
13.1 ENTIRE AGREEMENT. IT IS EXPRESSLY AGREED BY TENANT, AS A MATERIAL
CONSIDERATION FOR THE EXECUTION OF THIS LEASE, THAT THIS LEASE, WITH THE
SPECIFIC REFERENCES TO WRITTEN EXTRINSIC DOCUMENTS, IS THE ENTIRE AGREEMENT OF
THE PARTIES: THAT THERE ARE, AND WERE, NO VERBAL REPRESENTATIONS, WARRANTIES,
UNDERSTANDINGS, STIPULATIONS, AGREEMENTS OR PROMISES PERTAINING TO THIS LEASE OR
TO THE EXPRESSLY MENTIONED WRITTEN EXTRINSIC DOCUMENTS NOT INCORPORATED IN
WRITING IN THIS LEASE.
13.2 AMENDMENT. THIS LEASE MAY NOT BE ALTERED, WAIVED, AMENDED OR EXTENDED
EXCEPT BY AN INSTRUMENT IN WRITING SIGNED BY LANDLORD AND TENANT.
13.3 LIMITATION OF WARRANTIES. LANDLORD AND TENANT EXPRESSLY AGREE THAT THERE
ARE AND SHALL BE NO IMPLIED WARRANTIES OR MERCHANTABILITY, HABITABILITY, FITNESS
FOR A PARTICULAR PURPOSE OR OF ANY OTHER KIND ARISING OUT OF THIS LEASE, AND
THERE ARE NO WARRANTIES WHICH EXTEND BEYOND THOSE EXPRESSLY SET FORTH IN THIS
LEASE.
ARTICLE 14. MISCELLANEOUS
14.1 SUCCESSORS AND ASSIGNS. This Lease shall be binding upon and inure to the
benefit of Landlord and Tenant and their respective heirs, personal
representatives, successors and assigns. It is hereby covenanted and agreed that
should Landlord's interest in the Premises cease to exist for any reason during
this Lease, then notwithstanding the happening of such event this Lease
nevertheless shall remain unimpaired and in full force and effect, and Tenant
hereunder agrees to attorn to the then owner of the Premises.
14.2 USE OR RENT TAX. If applicable in the jurisdiction where the Premises are
issued, Tenant shall pay and be liable for all rental, sales and use taxes or
other similar taxes, if any, levied or imposed by any city, state, county or
other governmental body having authority, such payments to be in addition to all
other payments required to be paid to Landlord under the terms of this Lease.
Any such payment shall be paid concurrently with the payment of the rent,
additional rent, operating expenses or other charge upon which the tax is based
as set forth above.
14.3 ACT OF GOD. Neither Tenant nor Landlord shall not be required to perform
any non-monetary covenant or obligation in this Lease, or be liable in damages
to the other party, so long as the performance or non-performance of the
covenant or obligation is delayed, caused or prevented by an act of God, force
majeure or by the other party.
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14.4 HEADINGS. The section headings appearing in this Lease are inserted only as
a matter of convenience and in no way define, limit, construe or describe the
scope or intent of any Section.
14.5 NOTICE. All rent and other payments required to be made by Tenant shall be
payable to Landlord at the address set forth in Section 1.8. All payments
required to be made by Landlord to Tenant shall by payable at the address set
forth in Section 1.8, or at any other address within the United States as Tenant
may specify from time to time by written notice. Any notice or document required
or permitted to be delivered by the terms of this Lease shall be deemed to be
delivered (whether or not actually received) when deposited in the United States
Mail, postage prepaid, certified mail, return receipt requested, addressed to
the parties at the respective addresses set forth in Section 1.8.
14.6 TENANT'S AUTHORITY. If Tenant executes this Lease as a corporation, each of
the persons executing this Lease on behalf of Tenant does hereby personally
represent and warrant that Tenant is a duly authorized and existing corporation,
that Tenant is qualified to do business in the state in which the Premises are
located, that the corporation has full right and authority to enter into this
Lease, and that each person signing on behalf of the corporation is authorized
to do so.
14.7 HAZARDOUS SUBSTANCES. Tenant, its agents or employees, shall not bring or
permit to remain on the Premises or Building any asbestos, petroleum or
petroleum products, explosives, toxic materials, or substances defined as
hazardous wastes, hazardous materials, or hazardous substances under any
federal, state, or local law or regulation ("Hazardous Materials"). Tenant's
violation of the foregoing prohibition shall constitute a material breach and
default hereunder and Tenant shall indemnify, hold harmless and defend Landlord
from and against any claims, damages, penalties, liabilities, and costs
(including reasonable attorney fees and court costs) caused by or arising out of
(i) a violation of the foregoing prohibition by Tenant or (ii) the presence of
any Hazardous Materials on, under, or about the Premises or the Building during
the term of the Lease caused by or arising, in whole or in part, out of the
actions of Tenant, its agents or employees. Tenant shall clean up, remove,
remediate and repair any soil or ground water contamination and damage caused by
the presence and any release of any Hazardous Materials in, on, under or about
the Premises or the Building during the term of the Lease caused by or arising,
in whole or in part, out of the actions of Tenant, its agents or employees, in
conformance with the requirements of applicable law. Tenant shall immediately
give Landlord written notice of any suspected breach of this paragraph; upon
learning of the presence of any release of any Hazardous Materials, and upon
receiving any notices from governmental agencies pertaining to Hazardous
Materials which may affect the Premises or the Building. The obligations of
Tenant hereunder shall survive the expiration of earlier termination, for any
reason, of this Lease. Landlord agrees to indemnify and hold Tenant harmless
from any and all claims, damages, penalties, liabilities or costs arising by
reason of the existence of hazardous substances on or about the Building prior
to Tenant's occupancy thereof.
14.8 SEVERABILITY. If any provision of this Lease or the application thereof to
any person or circumstances shall be invalid or unenforceable to any extent, the
remainder of this Lease and the application of such provisions to other persons
or circumstances shall not be affected thereby and shall be enforced to the
greatest extent permitted by law.
14.9 LANDLORD'S LIABILITY. If Landlord shall be in default under this Lease and,
if as a consequence of such default, Tenant shall recover a money judgment
against Landlord, such judgment shall be satisfied only out of the right, title
and interest of Landlord in the Building as the same may then be encumbered and
neither Landlord nor any person or entity comprising Landlord shall be liable
for any deficiency. In no event shall Tenant have the right to levy execution
against any property of Landlord nor any person or entity comprising Landlord
other than its interest in the Building as herein expressly provided.
14.10 BROKERAGE. Landlord and Tenant each represents and warrants to the other
that there is no obligation to PAY any brokerage fee, commission, finder's fee
or other similar charge in connection with this Lease, other than fees due to
KURT KNOFF AND MARIA MAUGHN OF CB COMMERCIAL/MADISON COMMERCIAL which are the
responsibility of LANDLORD. Each party covenants that it will defend, indemnify
and hold harmless the other party from and against any loss or liability by
reason of brokerage or similar services alleged to have been rendered to, at the
instance of, or agreed upon by said indemnifying party. Notwithstanding anything
herein to the contrary, Landlord and Tenant agree that there shall be no
brokerage fee or commission due on expansions, options or renewals by Tenant.
14.1 1 MANAGEMENT AGENT. Landlord hereby notifies Tenant that the person
authorized to execute this Lease and manage the Premises is CSM Corporation, a
Minnesota corporation, which has been appointed to act as the agent in leasing
management and operation of the Building for owner and is authorized to accept
service of process and receive or give receipts for notices and demands on
behalf of Landlord. Landlord reserves the right to change the identity and
status of its duly authorized agent upon written notice
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to Tenant.
14.12 OPTION TO EXTEND. Tenant may extend the term of this Lease for two (2)
additional sixty (60) month terms under the same conditions contained herein,
except that the Base Rental shall be adjusted to reflect the prevailing market
rate for comparable space in the Minneapolis southwest suburbs. In no case
shall the adjusted Base Rent be less than the latest Base Rent paid by Tenant
during the primary term of the lease or extension thereof. Tenant may exercise
its option to extend the term of the Lease upon twelve (12) months prior written
notice to Landlord, stating its irrevocable exercise of its option to extend the
term of the Lease. In the event that Tenant falls to deliver timely notice of
its exercise of this option, Tenant's right and option to extend shall be deemed
null and void. It shall be a condition of the exercise of this option that
Tenant not be in default in the performance of its obligations under this Lease.
14.13 ARCHITECTURAL/DESIGN/CONSTRUCTION AGREEMENT. Landlord will provide tenant
a $2.00/square foot allowance to be applied towards architectural design, and
Tenant's project management fees incurred by Tenant in connection with the
design and construction of Phase I and Phase 11 Premises including but not
limited to all costs of interior design, construction drawings and supervision
of the construction of the interior office improvements, all of which shall be
paid by tenant, but excluding the design and construction of the structural
components of the fifth floor expansion which shall be paid by Landlord. The
allowance shall be payable to Tenant in two equal payments, the first half
payment shall be due to Tenant after landlord's receipt of acceptable Phase I
construction drawings, and the second half shall be due after the receipt of
acceptable Phase 11 construction drawings.
14.14 PARKING. Landlord agrees to provide at no expense to Tenant except as
depicted in sections 2.2 and 2.3, Tenant 583 parking spaces west of premises and
45 existing parking spaces southeast of the Premises depicted on EXHIBIT C upon
lease commencement. Sixty-two additional spaces southeast of the Premises will
be provided at no expense to Tenant except as depicted in sections 2.2 and 2.3
prior to the commencement of the Lease month 18 in the area marked "New Parking"
on EXHIBIT C. Additional parking spaces will be provided by Landlord at Tenant's
request. The location, scope and cost of the additional parking spaces shall be
mutually agreed upon by Landlord and Tenant, with Landlord's costs associated
with the construction of the additional parking area being paid by Tenant
monthly as additional Base Rent over the remaining term of the Lease, based on
an amortization of such costs over the remaining term of the Lease amortized at
a 10 1/2% interest rate, which payments shall commence on the first day of the
month first following the date of completion of the additional parking area.
14.15 TERMINATION OF K-TEL INTERNATIONAL LEASE. Landlord and Tenant acknowledge
that Landlord Has the option to terminate the Lease between K-tel International,
Inc. and Thomas Edward Limited Partnership pursuant to section 7 of the Addendum
to said Lease. Landlord agrees to exercise its option to terminate said lease
effective July 31, 1998, provided that Tenant, by written notice to Landlord
delivered before January 20, 1998, requests such termination, which request
shall include a payment by Tenant to Landlord of $35,000, to reimburse Landlord
for the termination fee that Landlord will be required to pay K-Tel
International by reason of such early termination.
In the event that Tenant requests that Landlord terminate the Lease with K-Tel
International, Inc. as aforesaid, then Tenant's obligation to pay Base Rent and
additional rent with respect to the warehouse space vacated by K-Tel
International, under the same terms and conditions contained herein, shall
commence August 1, 1998.
14.16 LANDLORD DEFAULT. In the event that landlord is in default of its
obligations under this Lease and has not cured said default, or made reasonable
effort towards curing said default within thirty (30) days of receipt of written
notice from Tenant, then Tenant shall have the right to cure said default and
withhold an amount equal to the reasonable cost of curing said default from
Tenant's next rent payment due.
14.17 OPTION TO TERMINATE. In the event that Landlord has not secured approval
of its application for rezoning of the Building to an industrial planned unit
development and approval of fifth floor on or before February 13, 1998, Tenant
may, by written notice to landlord given not later than February 1 8, 1 998, (i)
elect to terminate this Lease, in which case this Lease shall be null and void
and of no further force and effect, or, (ii) elect to have this Lease remain in
full force and effect, as to all of the Premises described in section 1.2
hereof, except the future fifth (5th) floor, in which case the Landlord shall
have no obligations with respect to the construction and delivery of the future
fifth (5th) floor and the area of the Premises, the Base Rental Rate, and
Tenant's prorated share of operating expenses shall be adjusted to reflect the
omission of the future floor five from the Premises. For the purposes of clause
(ii) above, Landlord and Tenant agree that the future floor five area is 36,110
square feet and that the Base Rental Rate for floor five (5) is $7.00 per square
foot for lease months 1 8 through 48, $7.50 per square foot for Lease months 49
through 96 and $8.00 per square foot for Lease months 97-161. In the event that
Tenant makes the election
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described in clause (ii) above, Tenant further agrees to comply with any
conditions or limitations on office/warehouse mix imposed by the city of
Minnetonka, with respect to the use of the Premises.
14.18 SUBMISSION OF LEASE. Submission of this Lease to Tenant for signature does
not constitute a reservation of space or an option to lease. This Lease is not
effective until execution by and delivery to both Landlord and Tenant.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease effective the
day and year first above written.
LANDLORD: TENANT:
THOMAS EDWARD LIMITED PARTNERSHIP NORSTAN, INC.
BY: /s/ BY: /s/
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ITS: Partner ITS: CFO
---------------------------------- --------------------------------
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EXHIBIT A 1 OF 4
[MAP]
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EXHIBIT A 2 OF 4
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EXHIBIT A 3 OF 4
[MAP]
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EXHIBIT A 4 OF 4
[MAP]
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EXHIBIT B 1 OF 3
[MAP]
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EXHIBIT B 2 OF 3
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EXHIBIT B 3 OF 3
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EXHIBIT C
[MAP]
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EXHIBIT D
LANDLORD IMPROVEMENTS
For
NORSTAN, INC.
Modern Merchandising Building
Minnetonka, Minnesota
Prepared by
CSM CORPORATION
December 22, 1997
The landlord will provide the following improvements to the tenant at landlords
expense:
1. Exterior shell shall be structural steel and insulated metal frame
walls with brick veneer exterior. Interior elevations of the exterior
walls shall be plain exposed gypsum board, taped and sanded to the roof
deck (paint ready).
2. Exterior Window systems shall be thermally broken aluminum storefront
glazing, units with thermal insulated, reflective glass.
3. Shell building existing ceilings is an exposed prime painted structural
steel and metal deck with a single ply EPDM membrane, insulated roof
system.
4. Shell building floor is the existing 3 V-," inch reinforced, concrete
floor.
5. Brass upright sprinkler heads for minimum (light hazard) density
requirements (laterals only, no drops) are included as part of shell
building construction.
6. Four (4) toilet rooms, stacked above the corresponding toilets below,
finished to "paint-ready" condition are included as part of the shell
building construction. These shall include: (7) water closets, (1)
urinal (6) lavatories, toilet partitions and accessories. Toilet rooms
shall receive Dal Tile (group 1, group 2 colors) or equivalent, a 4'-4"
high wainscot of ceramic tile on plumbing wall and wall adjacent to
toilet only. Water closets shall be building standard pressure-assisted
tank type units. Lavatories shall be wall mounted type. One budding
standard handicap electric water cooler is included. Toilet accessories
include handicap crab bars as required by applicable code, toilet paper
holders, feminine napkin holders, soap dispensers, and paper towel
dispensers.
7. A 600 ampere 480/277 volt main electrical service to a 480/277 volt
distribution panel for the landlord supplied HVAC equipment within the
premises is included in the shell building construction.
8. Gas heating/electric cooling roof top heating and air conditioning
units (excluding distribution ductwork and diffusers) designed to
supply approx. 1 ton tempered air per 400 square feet of floor area,
shall be included as part of the shell building construction.
9. Modifications to the existing two-gang elevator to provide one (1)
additional stop, shall be provided as part of the shell building
construction.
<PAGE> 25
All other improvements shall be at tenant's sole expense, including but not
limited to the following:
A. Gypsum wall construction.
B. Interior doors.
C. Interior hardware.
D. Interior hollow metal frames.
E. Tenant finish Heating, Ventilation, and Air Conditioning.
F. Muzak or telephone communication systems.
G. Security systems or access control systems.
H. Appliances, vending machines, kitchen equipment.
I. Office furniture, moveable partitions, etc.
J. Extra cooling capacity for tenant furnished equipment
K. Millwork/Built ins: counters, cabinets, shelving, closets, etc.
L. Computer terminal outlets, wiring, or systems.
M. Tenant finish electrical items, i.e., light fixtures, power feeds,
outlets, disconnects, etc., except as listed within the above Landlords
scope of work.
N. Plumbing rough ins, connections, stub ups, Vent risers, fixtures, etc..
0. Ramps and/or overhead doors to accommodate Drive-in capability, dock
revelers, shelters, etc.
P. Tenant signage.
Q. Additional structural reinforcement for tenant's roof top units,
including roof curb, roof deck penetration, and roof repair. These
items shall be performed by the owners shell building, roofing
contractor in order to maintain the roof warranty.
R. Increased City of Minnetonka, Sewer Access Charge (SAC) over and above
$0.38 per square foot.
S. Gas piping to tenant equipment. A meter socket is provided at the
nearest building manifold location.
T. Construction general conditions, including but not limited to: building
permits, field supervision, Clean up, dumpsters, and project
management, except as listed within the above Landlords scope of work.
<PAGE> 26
ADDENDUM TO LEASE
This is an ADDENDUM to that certain Lease dated December 23, 1997, ('Lease") by
and between Thomas Edward Limited Partnership, a Minnesota Limited Partnership,
("Landlord") and Norstan, Inc., a Minnesota corporation, ("Tenant"), and is
entered into effective this 6th day of January, 1998.
In consideration of the mutual covenants herein contained, and other good and
valuable consideration, Landlord and Tenant hereby confirm and/or agree as
follows:
1. SECTION 1.4 PREMISES. Landlord and Tenant acknowledge and confirm that the
rentable area of the Premises, according to "as-build" measurements, is as
follows:
First Floor Office 4,641 Square Feet
Second Floor Office 7,098 Square Feet
Third Floor Office 37,970 Square Feet
Fourth Floor Office 36,110 Square Feet
Fifth Floor Office 36,110 Square Feet
Second Floor Warehouse Annex 14,617 Square Feet
Third Floor Warehouse Annex 14,575 Square Feet
Warehouse Area 83,000 Square Feet
Total: 234,121 Square Feet
(Pending verification
of the fifth floor
office area)
2. SECTION 1.7 PRO RATA SHARE. Landlord and Tenant acknowledge and confirm that
Tenant's pro rata share of operating expenses shall be forty-three and
thirty-four one hundredths (43.34%), (adjusting to 100% upon occupancy of the
Phase III premises).
3. MISCELLANEOUS. If any provision of the Lease is inconsistent with the
provisions contained herein, then and in such event the provisions of this
Addendum shall control. Except as expressly modified herein, all other terms and
conditions of the Lease shall remain unchanged, and in full force and effect.
LANDLORD: TENANT:
Thomas Edward Limited Partnership Norstan, Inc.
BY: /s/ BY: /s/
-------------------------- ------------------------------
ITS: Partner ITS: CFO
-------------------------- ------------------------------
<PAGE> 27
EXHIBIT E
ADDENDUM TO LEASE
This is an ADDENDUM to that certain Lease dated __________________, ("Lease") by
and between CSM ______________, INC., a Minnesota corporation, ("Landlord") and
____________________, a _________________ corporation. ("Tenant"), and is
entered into effective this day of 1998.
In consideration of the mutual covenants herein contained, and other good and
valuable consideration, Landlord and Tenant hereby confirm and/or agree as
follows:
1. SECTION 1.2 PREMISES. Landlord and Tenant acknowledge and confirm that the
rentable area of the Premises, according to "as-built" measurements, is
____________.
2. SECTION 1.4 BASE RENT. The Base Rent for the Lease Term shall be:
Lease Monthly Annual Per
Months Base Rent Base Rent Sg. Ft.
The Landlord and Tenant acknowledge and agree that the above stated Base Rent
reflects and incorporates the adjustments required by Section of the Lease.
3. SECTION 1.7 PRO RATA SHARE. Landlord and Tenant acknowledge and confirm that
Tenant's pro rata share of operating expenses shall be _________________ percent
(____%).
4. MISCELLANEOUS. If any provision of the Lease is inconsistent with the
provisions contained herein, then and in such event the provisions of this
Addendum shall control. Except as expressly modified herein, all other terms and
conditions of the Lease shall remain unchanged, and in full force and effect.
LANDLORD: TENANT:
CSM , INC.
--------------- ------------------------------------
BY BY:
-------------------------- ---------------------------------
ITS: ITS:
------------------------- --------------------------------
<PAGE> 1
EXHIBIT 22
SUBSIDIARIES OF NORSTAN, INC.
<TABLE>
<CAPTION>
PERCENTAGE OF
STATE OF VOTING SECURITIES
NAME INCORPORATION OWNED BY THE COMPANY
---- ------------- --------------------
<S> <C> <C>
Norstan Communications, Inc. Minnesota 100%
Norstan Financial Services, Inc. Minnesota 100%
Norstan Canada Inc. Minnesota 100%
Norstan Network Services, Inc. Minnesota 100%
Connect Computer Company Minnesota 100%
Vadini, Inc. (d/b/a PRIMA Consulting) Minnesota 100%
Norstan International, Inc. Minnesota 100%
Norstan Network Services, Inc.
of New Hampshire New Hampshire 100%
Norstan Information Systems, Inc. Minnesota 100%
Summit Gear, Inc. Minnesota 100%
</TABLE>
<PAGE> 1
EXHIBIT 23(A)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Form 10-K into the Company's previously filed
Registration Statements on Form S-8 relating to the 1986 Long-Term Incentive
Plan of Norstan, Inc. (Registration Nos. 33-30323 and 33-72928), the 1990
Employee Stock Purchase and Bonus Plan of Norstan, Inc. (Registration Nos.
33-32310, 33-44470 and 33-72926), the 1995 Long-Term Incentive Plan of Norstan,
Inc. (Registration No. 33-62957), and the Restated Non-Employee Directors' Stock
Plan of Norstan, Inc. (Registration No. 33-62971).
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
July 23, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<CASH> 1,869
<SECURITIES> 0
<RECEIVABLES> 98,377
<ALLOWANCES> (1,171)
<INVENTORY> 10,008
<CURRENT-ASSETS> 157,521
<PP&E> 75,712
<DEPRECIATION> (37,713)
<TOTAL-ASSETS> 275,608
<CURRENT-LIABILITIES> 98,953
<BONDS> 73,323
0
0
<COMMON> 996
<OTHER-SE> 96,675
<TOTAL-LIABILITY-AND-EQUITY> 275,608
<SALES> 228,979
<TOTAL-REVENUES> 456,365
<CGS> 168,965
<TOTAL-COSTS> 445,792
<OTHER-EXPENSES> 118,376
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,927
<INCOME-PRETAX> 6,646
<INCOME-TAX> 2,791
<INCOME-CONTINUING> 3,855
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,855
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.39
</TABLE>
