<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED AUGUST 1, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
COMMISSION FILE NUMBER 0-8141
NORSTAN, INC.
(Exact name of registrant as specified in its charter)
MINNESOTA 41-0835746
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
605 NORTH HIGHWAY 169, TWELFTH FLOOR, PLYMOUTH, MINNESOTA 55441
---------------------------------------------------------------
(address of principal executive offices)
TELEPHONE (612) 513-4500 FAX (612) 513-4537 INTERNET www.norstan.com
- -------------------------------------------------------------------------------
(Registrant's telephone number, facsimile number, Internet address)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes _X_. No ___.
On September 8, 1998, there were 10,588,581 shares outstanding of the
registrant's common stock, par value $.10 per share, its only class of
equity securities.
1
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PART I. FINANCIAL INFORMATION
ITEM 1.
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
AUGUST 1, AUGUST 2,
1998 1997
-------------- --------------
<S> <C> <C>
REVENUES:
Global Services
IT Consulting Services $ 31,675 $ 15,026
Communications Services 32,366 33,023
--------- --------
Total Global Services 64,041 48,049
Communications Solutions 50,055 45,212
Financial Services 1,754 2,181
--------- --------
TOTAL REVENUES 115,850 95,442
--------- --------
COST OF SALES:
Global Services
IT Consulting Services 20,903 11,062
Communications Services 21,799 23,894
--------- --------
Total Global Services 42,702 34,956
Communications Solutions 35,988 32,816
Financial Services 697 584
--------- --------
TOTAL COST OF SALES 79,387 68,356
--------- --------
GROSS MARGIN 36,463 27,086
Selling, General
& Administrative Expenses 30,837 23,157
--------- --------
OPERATING INCOME 5,626 3,929
Interest Expense (1,089) (594)
Interest and Other Income, Net 181 48
--------- --------
INCOME BEFORE PROVISION FOR
INCOME TAXES 4,718 3,383
Provision for Income Taxes 2,052 1,387
--------- --------
NET INCOME $ 2,666 $ 1,996
--------- --------
--------- --------
NET INCOME PER SHARE - BASIC $ 0.26 $ 0.21
--------- --------
--------- --------
NET INCOME PER SHARE - DILUTED $ 0.26 $ 0.21
--------- --------
--------- --------
WEIGHTED AVERAGE SHARES - BASIC 10,192 9,456
--------- --------
--------- --------
WEIGHTED AVERAGE SHARES - DILUTED 10,418 9,584
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
1
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AUGUST 1, APRIL 30,
1998 1998
----------- ----------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 4,497 $ 1,869
Accounts receivable, net of allowances for doubtful
accounts of $1,153 and $1,171 85,034 97,206
Current lease receivables 20,621 18,751
Inventories 11,370 10,008
Costs and estimated earnings in excess of billings of
$19,841 and $17,335 28,527 19,091
Deferred income tax benefits 2,437 2,488
Prepaid expenses, deposits and other 6,011 2,575
Prepaid income taxes 4,187 5,533
--------- --------
TOTAL CURRENT ASSETS 162,684 157,521
--------- --------
PROPERTY AND EQUIPMENT:
Furniture, fixtures and equipment 82,186 75,712
Less-accumulated depreciation and amortization (40,784) (37,713)
--------- --------
NET PROPERTY AND EQUIPMENT 41,402 37,999
--------- --------
OTHER ASSETS:
Lease receivables, net of current portion 36,550 34,998
Goodwill, net of amortization of $8,620 and $7,979 42,317 43,206
Other 1,741 1,884
--------- --------
TOTAL OTHER ASSETS 80,608 80,088
--------- --------
$ 284,694 $275,608
--------- --------
--------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
2
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
AUGUST 1, APRIL 30,
1998 1998
----------- ----------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 2,486 $ 3,257
Current maturities of discounted lease rentals 16,996 14,758
Accounts payable 21,095 24,135
Deferred revenue 20,501 19,953
Accrued -
Salaries and wages 8,086 15,123
Warranty costs 1,786 1,776
Other liabilities 7,846 10,509
Billings in excess of costs and estimated earnings of $18,912
and $16,390 10,691 9,442
-------- ---------
TOTAL CURRENT LIABILITIES 89,487 98,953
-------- ---------
LONG-TERM DEBT, NET OF CURRENT MATURITIES 60,067 52,440
DISCOUNTED LEASE RENTALS, NET OF CURRENT MATURITIES 27,076 20,883
DEFERRED INCOME TAXES 6,075 5,661
-------- ---------
SHAREHOLDERS' EQUITY:
Common stock - $.10 par value; 40,000,000 authorized shares;
10,588,581 and 9,963,716 shares issued and outstanding 1,059 996
Capital in excess of par value 49,267 44,741
Retained earnings 57,045 54,048
Unamortized cost of stock (3,196) (641)
Foreign currency translation adjustments (2,186) (1,473)
-------- ---------
TOTAL SHAREHOLDERS' EQUITY 101,989 97,671
-------- ---------
$284,694 $275,608
-------- ---------
-------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
UNAUDITED
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
AUGUST 1, AUGUST 2,
1998 1997
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 2,666 $ 1,996
Adjustments to reconcile net income to net cash used for
operating activities:
Restructuring charges paid (359) --
Depreciation and amortization 4,054 4,438
Deferred income taxes 437 4
Changes in operating items, net of acquisition effects:
Accounts receivable 13,991 (10,195)
Inventories (1,281) (1,205)
Costs and estimated earnings in excess of billings (9,584) (2,639)
Prepaid expenses, deposits and other (3,239) (153)
Accounts payable (3,435) (3,623)
Deferred revenue 213 605
Accrued liabilities (10,276) (9,956)
Income taxes payable 1,493 1,410
Billings in excess of costs and estimated earnings 1,294 1,505
-------- --------
NET CASH USED FOR OPERATING ACTIVITIES (4,026) (17,813)
-------- --------
INVESTING ACTIVITIES:
Additions to property and equipment, net (5,763) (3,557)
Investment in lease contracts (9,295) (4,709)
Collections from lease contracts 5,689 7,472
Other, net (287) 180
-------- --------
NET CASH USED FOR INVESTING ACTIVITIES (9,656) (614)
-------- --------
FINANCING ACTIVITIES:
Borrowings of long-term debt 99,158 67,183
Repayments of long-term debt (92,041) (49,562)
Repayment of debt assumed in acquisition (1,267) --
Borrowing of discounted lease rentals 13,332 --
Repayments of discounted lease rentals (4,786) (3,652)
Proceeds from sale of common stock 1,870 398
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 16,266 14,367
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 44 4
-------- --------
NET INCREASE (DECREASE) IN CASH 2,628 (4,056)
CASH, BEGINNING OF PERIOD 1,869 5,147
-------- --------
CASH, END OF PERIOD $ 4,497 $ 1,091
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 1, 1998
UNAUDITED
The information furnished in this report is unaudited and reflects all
adjustments which are normal recurring adjustments and, which in the opinion
of management, are necessary to fairly present the operating results for the
interim periods. The operating results for the interim periods presented are
not necessarily indicative of the operating results to be expected for the
full fiscal year. This report should be read in conjunction with the
Company's most recent "Annual Report on Form 10-K."
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
FOREIGN CURRENCY
For the Company's foreign operations, assets and liabilities are
translated at exchange rates as of the balance sheet date, and revenues and
expenses are translated at average exchange rates prevailing during the
period. Translation adjustments are recorded as a separate component of
shareholders' equity.
SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosure of cash flow information is as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------
AUGUST 1, AUGUST 2,
1998 1997
--------- ---------
<S> <C> <C>
Cash paid for:
Interest $ 1,891 $ 1,473
Income taxes 7 41
Non-cash investing and financing activities:
Stock issued in pooling-of-interests
transaction $ 114 $ --
</TABLE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the
financial statements. Estimates also affect the reported amounts of revenues
and expenses during the periods presented. Estimates are used for such items
as allowances for doubtful accounts, inventory reserves, depreciable lives of
property and equipment, warranty reserves and others. Ultimate results could
differ from those estimates.
5
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EARNINGS PER SHARE DATA
In the fiscal year ended April 30, 1998, the Company adopted Statement
of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS No.
128"), which established new guidelines for computing and presenting earnings
per share data ("EPS"), and retroactively restated EPS for all prior periods.
SFAS No. 128 requires presentation of basic and diluted EPS. Basic EPS is
computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period. Diluted EPS reflects potential
dilution from outstanding stock options and other securities using the
treasury stock method. The adoption of SFAS No.128 did not have a significant
effect on previously reported EPS information for the periods presented.
A reconciliation of EPS calculations under SFAS No. 128 is as follows
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
AUGUST 1, AUGUST 2,
1998 1997
--------- ---------
<S> <C> <C>
Net income $ 2,666 $ 1,996
-------- ---------
Weighted average common shares outstanding -- Basic 10,192 9,456
Effect of stock option and benefit plans 226 128
-------- ---------
Weighted average common shares outstanding -- Diluted 10,418 9,584
-------- ---------
Net income per share -- Basic $ 0.26 $ 0.21
-------- ---------
Net income per share -- Diluted $ 0.26 $ 0.21
-------- ---------
</TABLE>
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective May 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for reporting in
the financial statements all changes in equity during a period, except those
resulting from investments by and distributions to owners. For the Company,
comprehensive income represents net income adjusted for foreign currency
translation adjustments. Comprehensive income as defined by SFAS No. 130,
was approximately $2.0 million and $2.1 million for the three months ended
August 1, 1998 and August 2, 1997, respectively.
The Company adopted Statement of Position ("SOP") 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use," effective
May 1, 1997. The SOP requires the Company to capitalize certain costs
incurred in connection with developing or obtaining internal-use software.
The Company capitalized approximately $2.6 million of costs associated with
internal-use software developed or obtained during the fiscal quarter ended
August 1, 1998.
6
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RESTRUCTURING CHARGE
During fiscal year 1998, Norstan recorded a restructuring charge of
$14.7 million in connection with management's plan to reduce costs,
consolidate and reorganize operations, and improve operating efficiencies.
Restructuring efforts focused primarily on the following: (i) consolidation
of seven semi-autonomous geographic sales and service organizations into a
single, more focused sales and operations organization; (ii) the
consolidation of 36 warehouses and parts locations into three strategically
located distribution centers; and (iii) the reorganization and integration of
the Company's IT consulting services operations, including the Norstan Call
Center Solutions Group, Connect and PRIMA, into a single, customer- focused
organization. The restructuring charge relates primarily to the write-down of
certain assets to their fair market values ($12.2 million), severance and
employee benefit costs ($1.2 million) and lease termination costs ($1.3
million).
ACQUISITIONS
On September 30, 1997, the Company acquired PRIMA Consulting, Inc.
(PRIMA) in a transaction accounted for under the purchase method. PRIMA
provides IT consulting services, including information systems planning and
development, consulting and programming services for collaborative computing
solutions and ERP integration services. The 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 fifteen years and three years, respectively.
In June 1998, Wordlink, Inc. (Wordlink) was merged with and into a
wholly owned subsidiary of the Company in a transaction accounted for under
the pooling-of-interests method. Wordlink delivers network integration,
groupware messaging, Internet/intranet/, e-commerce and education solutions
to business clients operating in a multi-vendor network environment. The
agreement provided for the conversion of all outstanding shares of Wordlink
common stock and all vested options into approximately $10.3 million of
Norstan common stock (420,539 shares). Unvested options to purchase shares
of Worlink common stock were converted into Norstan stock options. Wordlink's
stockholders' equity and operating results were not material in relation to
the Company's financial statements. As such, the Company has recorded the
combination without restating prior periods' financial statements.
VENDOR AGREEMENTS
Under its agreement with Siemens, the Company purchases communications
equipment and products for field application and installation. The current
distributor agreement with Siemens, which commenced in July 1993, has been
renewed through July 27, 1999 while a new distribution agreement is being
negotiated.
BUSINESS SEGMENTS
The Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," effective April 30, 1998. Adoption of
this statement required the Company to provide the disclosure of segment
information but did not require significant changes in the way geographic
information was disclosed.
7
<PAGE>
The Company operates in three business segments, Global Services,
Communications Solutions, and Financial Services. Due to the Company's
continuing expansion and growth in the area of IT consulting services,
financial results for Global Services are now reported as (i) IT Consulting
Services and (ii) Communications Services. Interim disclosures under SFAS No.
131 are as follows (in thousands):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
------------------------------------------------------
AUGUST 1, 1998 AUGUST 2, 1997
------------------------------------------------------
OPERATING OPERATING
REVENUES INCOME REVENUES INCOME
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Global Services:
IT Consulting Services $ 31,675 $ 1,166 $ 15,026 $ 664
Communications Services 32,366 3,487 33,023 1,861
--------- -------- --------- --------
Total Global Services 64,041 4,653 48,049 2,525
Communications Solutions 50,055 32 45,212 241
Financial Services 1,754 941 2,181 1,163
--------- -------- --------- --------
Totals $ 115,850 $ 5,626 $ 95,442 $ 3,929
--------- -------- --------- --------
</TABLE>
FORWARD-LOOKING STATEMENTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, the affect of the labor strike by the Communication Workers of
America against US West, 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.
8
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Norstan is a technology services company providing IT and communications
systems solutions to over 18,000 customers in the United States, Canada and
England. Headquartered in Minneapolis, Minnesota, with sales and service
offices located in 68 locations in the United States and Canada, the Company
sells its products and services to a wide variety of customers across
numerous industries.
The Company provides IT consulting and communications services,
communications and technology products and financing alternatives through its
three business units, Global Services, Communications Solutions (formerly
known as Communications Systems) and Financial Services.
SUMMARY
During the quarter ended August 1, 1998, the Company's net income
improved over the quarter ended August 2, 1997, increasing 33.6% to
$2,666,000 or $.26 per common share, compared to $1,996,000, or $.21 per
common share. These per share figures reflect diluted rather than basic EPS.
9
<PAGE>
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>
DOLLAR AMOUNTS AS A
PERCENTAGE OF REVENUES
------------------------ PERCENTAGE
THREE MONTHS ENDED CHANGE
------------------------ -------------
AUGUST 1, AUGUST 2, FISCAL
1998 1997 1999 VS. 1998
--------- --------- -------------
<S> <C> <C> <C>
REVENUES:
Global Services
IT Consulting Services 27.3% 15.7% 110.8%
Communications Services 28.0% 34.6% (2.0)%
----- ----- -----
Total Global Services 55.3% 50.3% 33.3%
Communications Solutions 43.2% 47.4% 10.7%
Financial Services 1.5% 2.3% (19.6)%
----- ----- -----
Total Revenues 100.0% 100.0% 21.4%
COST OF SALES: 68.5% 71.6% 16.1%
----- ----- -----
GROSS MARGIN 31.5% 28.4% 34.6%
SELLING, GENERAL &
ADMINISTRATIVE EXPENSES 26.6% 24.3% 33.2%
----- ----- -----
OPERATING INCOME 4.9% 4.1% 43.2%
Interest Expense and Other, Net (0.8%) (0.6%) 66.3%
----- ----- -----
INCOME BEFORE PROVISION FOR INCOME TAXES 4.1% 3.5% 39.5%
Provision for Income Taxes 1.8% 1.4% 48.0%
----- ----- -----
NET INCOME 2.3% 2.1% 33.6%
----- ----- -----
----- ----- -----
</TABLE>
The following table sets forth, for the periods indicated, the gross
margin percentages for Global Services, Communications Solutions and
Financial Services.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
AUGUST 1, AUGUST 2,
1998 1997
--------- ---------
<S> <C> <C>
GROSS MARGIN
Global Services
IT Consulting Services 34.0% 26.4%
Communications Services 32.7% 27.6%
Total Global Services 33.3% 27.3%
Communications Solutions 28.1% 27.4%
Financial Services 60.3% 73.2%
</TABLE>
10
<PAGE>
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUES. Revenues increased 21.4% to $115.9 million for the quarter
ended August 1, 1998 as compared to $95.4 million for the prior year quarter
ended August 2, 1997.
Revenues from Global Services increased 33.3% to $64.0 million for the
quarter ended August 1, 1998 as compared to $48.0 million for the similar
period last year. Revenues from IT Consulting Services increased 110.8% to
$31.7 million in the first quarter of fiscal year 1999 from $15.0 million in
the first quarter of fiscal year 1998. This increase was generally the result
of: (i) the inclusion of the first quarter results of PRIMA, acquired in
September 1997; (ii) the merger with Wordlink during June 1998; and (iii)
internal growth. Revenues from Communications Services decreased 2.0% to
$32.4 million for the quarter ended August 1, 1998 from $33.0 in the
comparable period last year. The decrease in Communications Services revenues
resulted from a decrease in demand for moves, adds and changes.
Revenues from Communications Solutions increased 10.7% to $50.1 million
in the quarter ended August 1, 1998 from $45.2 million in the similar period
last year. The increase was attributable to increased sales volumes in call
centers, conferencing, voice processing products, and refurbished equipment
through sales to new customers as well as growth with existing customer
relationships.
Revenues from Financial Services decreased 19.6% to $1.8 million in the
first quarter of fiscal year 1999 from $2.2 million in the similar period
last year. This decrease is the result of a non-recurring early lease
termination recorded in the first quarter of fiscal 1998.
GROSS MARGIN. The Company's gross margin was $36.5 million and $27.1
million for the three months ended August 1, 1998 and August 2, 1997,
respectively. As a percent of total revenues, gross margin was 31.5% for the
first quarter of fiscal year 1999 compared to 28.4% for the first quarter of
fiscal year 1998.
Gross margin as a percent of revenues for Global Services was 33.3% for
the three months ended August 1, 1998 as compared to 27.3% for the similar
period last year. The gross margin for IT Consulting Services increased to
34.0% for the first quarter of fiscal year 1999 from 26.4% for the same
period last year. The improved margin is a result of operating efficiencies
gained as the IT Consulting Services business continued to grow as well as
from an increased emphasis on time-and-materials engagements. The gross
margin for Communications Services increased to 32.7% from 27.6% for the
comparable three month periods ended August 1, 1998 and August 2, 1997.
Gross margin as a percent of revenues for Communications Solutions was
28.1% for the three months ended August 1, 1998 as compared to 27.4% for the
comparable period ended August 2, 1997.
Gross margin as a percent of revenues for Financial Services was 60.3%
for the three months ended August 1, 1998 as compared to 73.2% for the
similar period last year.
11
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 33.2% to $30.8 million in the first quarter
of fiscal year 1999 from $23.2 million in the similar period last year. As a
percent of revenues, selling, general and administrative expenses increased
to 26.6% for the three months ended August 1, 1998, as compared to 24.3% for
the same period last year. This increase is generally the result of
increased investments in the IT Consulting Services business including costs
associated with the PRIMA and Wordlink acquisitions, investments in
Connaissance Consulting and the opening of new consulting offices in the past
six months.
INTEREST EXPENSE. Interest expense was $1.1 million for the three months
ended August 1, 1998 as compared to $.6 million for the same period last
year. This increase was the result of higher borrowing levels in fiscal year
1999 related primarily to acquisitions.
INCOME TAXES. The Company's effective income tax rate was 43.5% for the
three months ended August 1, 1998 and 41% for the similar period last year.
The Company's effective tax rate differs from the federal statutory rate
primarily due to state income taxes and the effect of nondeductible goodwill
amortization.
NET INCOME. Net income was $2.7 million or $0.26 per diluted share in
the first quarter of fiscal year 1999, as compared to $2.0 million or $0.21
per diluted share for the comparable period in fiscal year 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities decreased in the first quarter of
fiscal year 1999 as compared to the similar period last year as a result of a
decrease in accounts receivable which was somewhat offset by increases in
costs and estimated earnings in excess of billings and prepaid expenses and a
decrease in accrued liabilities. Net cash used for investing activities
increased in the first quarter of fiscal year 1999 as compared to the similar
period in fiscal year 1998 as a result of increased capital expenditures and
investments in lease contracts.
CAPITAL EXPENDITURES. The Company used $5.8 million for capital
expenditures during the three months ended August 1, 1998 as compared to $3.6
million in the similar period last year. These expenditures were primarily
for capitalized costs incurred in connection with obtaining or developing
internal use software, computer equipment, facility expansion and
telecommunications equipment used in outsourcing arrangements and as spare
parts.
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 the first quarter of fiscal year 1999 totaled $9.3
million. Net lease receivables increased to $57.2 million, at August 1, 1998
from $53.7 million at April 30, 1998. The Company utilizes its lease
receivables and corresponding underlying equipment to borrow funds from
financial institutions on a nonrecourse or recourse basis by discounting the
stream of future lease payments. Proceeds from discounting are presented on
the consolidated balance sheet as discounted lease rentals. Discounted lease
rentals totaled $44.1 million at August 1, 1998 as compared to $35.6 million
at April 30, 1998. Interest rates on these credit agreements at August 1,
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.
12
<PAGE>
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 August 1, 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 6.4% at
August 1, 1998). Total consolidated borrowings under this agreement at August
1, 1998 and April 30, 1998 were $59.0 million and $52.4 million. Annual
commitment fees on the unused portions of the credit facility are 0.25%.
Management of the Company believes that a combination of cash generated
from operations, existing bank facilities and additional borrowing capacity,
in aggregate, are adequate to meet the anticipated liquidity and capital
resource requirements of its business. Sources of additional financing, if
needed, may include further debt financing, or the sale of equity or other
securities.
IMPACT OF YEAR 2000
The Company has completed an assessment and will modify or replace
portions of its hardware and software so that its computer systems will
function properly with respect to dates in 2000 and thereafter. The Company
has also had discussions with its significant suppliers to ensure that those
parties have appropriate plans to remediate Year 2000 issues where their
systems and products interface with the Company's systems or otherwise impact
its operations or that of its customers. The Company is assessing the extent
to which its operations are vulnerable should those organizations fail to
properly remediate either their computer systems or their current product
offerings available to the Company's customers.
The Company's comprehensive Year 2000 initiative is being managed by a
team of internal staff with the assistance of an outside consultant. The
Company is well under way with its efforts, which are scheduled to be
completed by mid-1999. The cost of the Year 2000 initiative is estimated to
be approximately $2.0 million to be incurred over fiscal year 1999 and fiscal
year 2000.
While the Company believes its planning efforts are adequate to address
its Year 2000 concerns, the Year 2000 readiness of the Company's customers,
and the hardware and software offerings from the Company's suppliers and
business partners may vary. Although the Company does not believe that the
Year 2000 matters discussed above will have a material impact on its
business, financial condition and results of operations, it is uncertain as
to what extent the Company may be affected by such matters.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of
its business. Although the 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.
ITEM 2. ISSUANCE OF UNREGISTERED SECURITIES
The Company issued 420,539 unregistered shares of its common stock on
June 19, 1998, in connection with the acquisition of Wordlink, Inc.
("Wordlink"). These shares had a fair market value of approximately
$10,250,000 and were issued to holders of Wordlink common stock and
holders of vested options to purchase Wordlink common stock in a
transaction exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"). Pursuant to
agreements governing the acquisition of Wordlink (collectively, the
"Merger Agreements"), ten percent of the shares issued are held in an
escrow account as security for the payment of indemnification claims
that may be brought by the Company. During the escrow period, which
expires on June 19, 1999, the owners of the esrowed shares shall have
all the rights of a shareholder, including the right to vote such
shares; provided, however, they may not sell, transfer, pledge or
otherwise encumber the escrowed shares. Under the terms of the Merger
Agreements, the Company is obligated to register under the Securities
Act the offer and sale of approximately 260,000 of the shares issued
to effect the Wordlink acquisition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 10. Fourth Amendment to Credit Agreement , dated as of July 23,
1998, by and among the Company, certain banks as
signatories thereto (the "Banks") and U.S. Bank National
Association, as one of the Banks and as agent for the
Banks
(b) Reports on Form 8-K.
None
14
<PAGE>
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORSTAN, INC.
------------------------------------------
Registrant
Date: September 14, 1998 By /s/ David R. Richard
------------------------------------
David R. Richard
Chief Executive Officer,
President and Director
Date: September 14, 1998 By /s/ Kenneth S. MacKenzie
------------------------------------
Kenneth S. MacKenzie
Chief Financial Officer
(Principal Financial and Accounting
Officer)
15
<PAGE>
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT is dated as of July 23, 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 U.S. BANK NATIONAL ASSOCIATION
(formerly known as 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 First Bank National Association, Harris Trust
and Savings Bank, The Sumitomo Bank, Limited, Chicago Branch ("Sumitomo") and
the Agent are parties to a Credit Agreement dated as of July 23, 1996, as
amended by a First Amendment dated as of October 11, 1996, a Second Amendment
dated as of September 26, 1997 and a Third Amendment dated as of March 20, 1998
(as so amended, the "Credit Agreement").
B. M&I Marshall & Ilsley Bank ("M&I Bank") is the successor in
interest to Sumitomo, and the parties hereto desire to confirm that M&I Bank is
the successor to Sumitomo as a Bank under the Credit Agreement.
C. The parties hereto desire to amend the Credit Agreement in certain
respects and to amend and restate in its entirety the existing Revolving Note of
Sumitomo, now held by M&I Bank as successor in interest to Sumitomo, so that
said Revolving Note will reflect on its face that it is payable to M&I Bank.
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. CONFIRMATION OF M&I BANK AS SUCCESSOR TO SUMITOMO. M&I
Bank, by executing this Amendment, confirms that is the successor in interest to
Sumitomo, that it has assumed and is bound by all of the rights, powers, duties,
obligations and liabilities of Sumitomo as a Bank under the Credit Agreement and
the other Loan Documents, including, without limitation, the Revolving
Commitment and Revolving Commitment Amount of Sumitomo, and that it does hereby
confirm, ratify and approve the Credit Agreement and each other Loan Document.
The Borrower, U,S. Bank National Association, Harris Trust and Savings
-1-
<PAGE>
Association and the Agent hereby acknowledge and consent to the assumption of
Sumitomo's rights, powers, duties, obligations and liabilities under the Credit
Agreement by M&I Bank.
Section 3. AMENDMENTS TO CREDIT AGREEMENT. Subject to Section 6
hereof, the Credit Agreement is hereby amended as follows:
(a) Section 1.1 thereof is amended by adding thereto, in alphabetical
order, the following new defined terms:
"CONNAISSANCE": Connaissance Consulting, LLC, a Minnesota
limited liability company.
"CONNAISSANCE AGREEMENT": The Master Control Agreement of
Connaissance Consulting, LLC dated as of March 25, 1998 among Connaissance
Consulting, Inc. (to be known as Lusenhop & Associates, Inc.) and Norstan
Communications, Inc., pursuant to which Norstan Communications, Inc. agreed
to acquire initially a 75% membership interest in Connaissance for capital
contributions in an aggregate amount of up to $100,000, to make loans to
Connaissance in an aggregate principal amount of up to $2,000,000 and, upon
certain conditions, to acquire the remaining 25% of the membership interest
in Connaissance on May 1, 2001.
"CONNAISSANCE CONTINGENT OBLIGATION": As determined on the last
day of each fiscal quarter, an amount equal to the product of one fourth
(1/4) of the Consulting Revenue of Connaissance for the period of twelve
consecutive calendar months ending on such day multiplied by the applicable
Revenue Multiple based on the EBIT Margin for such twelve-month period in
accordance with the following table:
<TABLE>
<CAPTION>
EBIT Margin Revenue Multiple
----------- ----------------
<S> <C>
Less than 15% 2x
At least 15% but less than 20% 3x
At least 20% but less than 25% 5x
25% or more 6x
</TABLE>
"CONSULTING EBIT": As such term is defined in the Connaissance
Agreement.
"CONSULTING REVENUE": As such term is defined in the
Connaissance Agreement.
"COVENANT 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, plus that portion of Total
Indebtedness bearing interest determined as of that date, plus,
-2-
<PAGE>
commencing April 30, 1999, the Connaissance Contingent Obligation
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).
"EBIT MARGIN": As of the last day of any fiscal quarter, a
fraction, expressed as a percentage, the numerator of which is the
Consulting EBIT for the period of twelve consecutive calendar months ending
on such day and the denominator is the Consulting Revenue for such
twelve-month period.
"PRICING 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, plus that portion of Total
Indebtedness bearing interest determined as of that date, plus, commencing
on either (i) the earliest date on which both Consulting Revenue is at
least $25,000,000 and EBIT Margin is at least 10% or (ii) if the Borrower's
auditors determine that the Connaissance Contingent Obligation is a
liability under GAAP, the date on which such liability is determined by
such auditors to have been incurred, one-half of the Connaissance
Contingent Obligation 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).
(b) The definition of the term "Cash Flow Leverage Ratio" set forth
in Section 1.1 of the Credit Agreement is deleted.
(c) The definition of the term "EBITDA" set forth in Section 1.1
thereof is amended to read as follows:
"EBITDA": For any period of determination, the sum of the
consolidated net income of the Borrower before deductions for income taxes,
Interest Expense, depreciation and amortization plus, for the fiscal
quarter ending April 30, 1998 only, the one-time restructuring charge in
the amount of approximately $14,667,000 recorded by the Borrower on April
30, 1998, all as determined in accordance with GAAP (but determined using
the equity method of accounting with respect to NFS).
(d) The definition of the term "Pricing Level" set forth in Section
1.1 thereof is amended to read as follows:
"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
Pricing 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.
-3-
<PAGE>
Pricing Level III: Shall be in effect during any fiscal quarter if
the Pricing 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
Pricing 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.
Pricing Level I: Shall be in effect during any fiscal quarter if the
Pricing Cash Flow Leverage Ratio as of the last day of the most recently
completed fiscal quarter was less than 1.0 to 1.0.
(c) Section 6.5 of the Credit Agreement is amended in its entirety to
read as follows:
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(l); provided, however, that Norstan
Communications, Inc. shall be permitted to acquire the initial 75% of the
membership interest in Connaissance contemplated by the Connaissance
Agreement and on May 1, 2001 to acquire the remaining 25% of the membership
interest in Connaissance in accordance with the Connaissance Agreement; and
provided, further, that the Borrower shall be permitted to acquire 100% of
the issued and outstanding capital stock of Wordlink, Inc. notwithstanding
the Borrower's failure to comply with clauses (iii) and (iv) of Section
6.10(l) at the time of such acquisition.
(d) 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, plus (c)
Capital Expenditures attributable to the acquisition of membership
interests in Connaissance pursuant to the Connaissance Agreement.
(e) Section 6.10(k) of the Credit Agreement is amended in its
entirety to read as
-4-
<PAGE>
follows:
6.10(k) Loans and advances (i) by the Borrower to Norstan
Communications, Inc., Norstan Network Services, Inc., Connect Computer
Company, PRIMA, Norstan-UK, Norstan International, Connaissance and
Wordlink, Inc. and (for purposes other than to finance lease account
receivables, as specified in 6.10(j) above) to Norstan Canada, and (ii) by
Norstan Communications, Inc. to Connaissance as contemplated by the
Connaissance Agreement, provided that the aggregate amount of such loans
and advances to Connaissance shall not exceed $2,000,000 at any time
outstanding prior to the Borrower's acquisition of the remaining 25%
membership interest in Connaissance pursuant to the Connaissance Agreement.
(f) Clause (a) of Section 6.13 thereof is amended to read as follows:
(a) Contingent Obligations existing on the date of this
Agreement and described on Exhibit 6.13 and the Connaissance
Contingent Obligation;
(g) Section 6.17 thereof is amended to read as follows:
Section 6.17 COVENANT CASH FLOW LEVERAGE RATIO. The Borrower will
not permit the Covenant Cash Flow Leverage Ratio, as of the last day of any
fiscal quarter, to be more than 3.00 to 1.0.
Section 4. WAIVER. The Borrower has informed the Banks that it
failed to satisfy its covenant under Section 6.16 of the Credit Agreement for
the period ended April 30, 1998 and, for that reason, it also failed to satisfy
the requirements of clauses (iii) and (iv) of Section 6.10(l) when it acquired
the stock of Wordlink, Inc. Each such instance of noncompliance constitutes an
Event of Default under the Credit Agreement. Upon satisfaction of the
conditions set forth in Section 6 of this Amendment, the Banks hereby waive the
Events of Default under the Credit Agreement described in the immediately
preceding sentence for the period ended April 30, 1998. 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 5. 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 Amended M&I Revolving Note (as defined in
Section 5 hereof) have been duly authorized, executed and delivered by it
and this Amendment and the Amended M&I Revolving Note constitute the legal,
valid and binding obligation of the Borrower enforceable against the
Borrower in accordance with
-5-
<PAGE>
their respective terms, subject to limitations as to enforceability which
might result from bankruptcy, insolvency, reorganization, moratorium or
similar laws or equitable principles relating to or limiting creditors'
rights generally;
(b) the Credit Agreement, as amended by this Amendment, constitutes
the legal, valid and binding obligation of the Borrower enforceable against
the Borrower in accordance with its terms, subject to limitations as to
enforceability which might result from bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles relating
to or limiting creditors' rights generally;
(c) the execution, delivery and performance by the Borrower of the
Amendment and the Amended M&I Revolving Note (i) have been duly authorized
by all requisite corporate action and, if required, shareholder action,
(ii) do not require the consent or approval of any governmental or
regulatory body or agency, and (iii) will not (A) violate (1) any provision
of law, statute, rule or regulation or its certificate of incorporation or
bylaws, (2) any order of any court or any rule, regulation or order of any
other agency or government binding upon it, or (3) any provision of any
material indenture, agreement or other instrument to which it is a party or
by which any of its properties or assets are or may be bound, or (B) result
in a breach of or constitute (alone or with due notice or lapse of time or
both) a default under any indenture, agreement or other instrument referred
to in clause (iii)(A)(3) of this Section 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 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) the Agent shall have received executed counterparts of this
Amendment, duly executed by the Borrower and each of the Banks;
(b) the Agent shall have received from each of the Guarantors a
Consent and Agreement of Guarantor in the form of Attachment 1 hereto (the
"Guarantor Agreements") duly completed and executed by such Guarantor;
(c) 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
-6-
<PAGE>
certifying as to the incumbency and the true signatures of the officers
authorized to execute this Amendment on behalf of the Borrower;
(d) the Agent shall have received from the Borrower a Revolving Note
substantially in the form of Exhibit 1.1C to the Credit Agreement (the
"Amended M&I Revolving Note"), made payable to M&I Bank in the amount of
M&I Bank's (formerly Sumitomo's) Revolving Commitment Amount and executed
by the Borrower, which Amended M&I Note shall constitute an amendment and
restatement of the existing Revolving Note of Sumitomo referred to in
recital C to this Amendment; and
(e) the Agent shall have received the favorable opinion of counsel to
the Borrower covering the matters set forth in Exhibit B hereto, which
opinion shall be in form and substance satisfactory to the Agent.
Upon receipt of all of the foregoing, the Agent shall (i) notify the Borrower
and the Banks that this Amendment has become effective (but the failure of the
Agent to give such notice shall not affect the validity of this Amendment or
prevent it from becoming effective) and (ii) deliver the Amended M&I Revolving
Note to M&I Bank, whereupon the unpaid principal and accrued but unpaid interest
outstanding under said existing Revolving Note of Sumitomo shall be outstanding
and unpaid under the Amended M&I Revolving Note. Upon receipt of the Amended
M&I Revolving Note, M&I Bank shall return to the Borrower said existing
Revolving Note of Sumitomo marked "renewed but not paid" or words to similar
effect. The execution and delivery of this Amendment is not intended as a
novation or as a discharge of the Borrower's existing obligations under the Loan
Documents, which obligations shall continue in full force and effect.
Section 7. AFFIRMATION. Each party hereto affirms and acknowledges
that (a) the Credit Agreement as amended by this Amendment remains in full force
and effect in accordance with its terms, (b) all references to the "Credit
Agreement" or any similar term contained in any other Loan Document shall be
deemed to be references to the Credit Agreement as amended hereby, (c) all
references to the "Banks" contained in the Loan Documents shall be deemed to
include M&I Bank, and (d) all references to the "Revolving Notes" or "Notes"
contained in the Loan Documents shall be deemed to include the Amended M&I
Revolving Note.
Section 8. GENERAL.
(a) The Borrower agrees to reimburse the Agent upon demand for all
reasonable expenses (including reasonable attorneys fees and legal
expenses) incurred by the Agent in the preparation, negotiation and
execution of this Amendment and any other document required to be furnished
herewith, and to pay and save the Agent harmless from all liability for any
stamp or other taxes which may be payable with respect to the execution or
delivery of this Amendment, which obligations of the Borrower shall survive
any termination of the Credit Agreement.
-7-
<PAGE>
(b) This Amendment may be executed in as many counterparts as may be
deemed necessary or convenient, and by the different parties hereto on
separate counterparts, each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
instrument.
(c) Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining portions hereof or affecting the validity or
enforceability of such provisions in any other jurisdiction.
(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.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as of the day and year first above written.
NORSTAN, INC.
By /s/ Robert J. Vold
Its Treasurer
--------------------------------
U.S. BANK NATIONAL ASSOCIATION,
as a Bank and as Agent
By /s/ David Shapiro
Its Assistant Vice President
--------------------------------
HARRIS TRUST AND SAVINGS BANK
By /s/ Catherine C. Ciolek
Its Vice President
--------------------------------
M&I MARSHALL & ILSLEY BANK
By /s/ Doug Nelson & Mark Hogen
Its Vice Presidents
--------------------------------
[Signature Page to Fourth Amendment to Credit Agreement]
S-9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> AUG-01-1998
<CASH> 4,497
<SECURITIES> 0
<RECEIVABLES> 86,187
<ALLOWANCES> 1,153
<INVENTORY> 11,370
<CURRENT-ASSETS> 162,684
<PP&E> 82,186
<DEPRECIATION> 40,784
<TOTAL-ASSETS> 284,694
<CURRENT-LIABILITIES> 89,487
<BONDS> 87,143
0
0
<COMMON> 1,059
<OTHER-SE> 100,930
<TOTAL-LIABILITY-AND-EQUITY> 284,694
<SALES> 50,055
<TOTAL-REVENUES> 115,850
<CGS> 35,988
<TOTAL-COSTS> 79,387
<OTHER-EXPENSES> 30,656
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,089
<INCOME-PRETAX> 4,718
<INCOME-TAX> 2,052
<INCOME-CONTINUING> 2,666
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,666
<EPS-PRIMARY> 0.26
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