<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1999
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)
MINNESOTA 41-0835746
(State of incorporation) (I.R.S. Employer identification No.)
5101 SHADY OAK ROAD, MINNETONKA, MINNESOTA 55343
(Address of principal executive offices)
<TABLE>
<S> <C>
The Company's phone number: 612-352-4000 The Company's internet address: WWW.NORSTAN.COM
</TABLE>
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 14, 1999, 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 $126,941,000.
As of July 14, 1999, there were outstanding 10,791,726 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.
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I PAGE
----
<S> <C>
ITEM 1. Business..................................................... 1
Summary.................................................... 1
Industry Overview.......................................... 2
The Norstan Solution....................................... 2
Norstan's Business Strategy............................... 3
Norstan's Growth Strategy.................................. 3
Products and Services...................................... 4
Customers.................................................. 7
Strategic Alliances........................................ 7
Sales and Marketing........................................ 7
Customer Service........................................... 8
Locations.................................................. 9
Human Resources............................................ 10
Competition................................................ 10
Intellectual Property Rights............................... 11
Government Regulation...................................... 11
Backlog.................................................... 11
ITEM 2. Properties................................................... 12
ITEM 3. Legal Proceedings............................................ 12
ITEM 4. Submission of Matters to a Vote of Security Holders.......... 12
PART II
ITEM 5. Market for the Company's Common Equity and Related Shareholder
Matters ..................................................... 13
ITEM 6. Selected Consolidated Financial Data......................... 14
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 15
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk.... 21
ITEM 8. Financial Statements and Supplementary Data.................. 22
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 40
PART III
ITEM 10. Directors and Executive Officers of the Registrant........... 40
ITEM 11. Executive Compensation....................................... 40
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 40
ITEM 13. Certain Relationships and Related Transactions............... 40
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K..................................................... 41
SIGNATURES 42
</TABLE>
ii
<PAGE>
PART I
ITEM 1. BUSINESS.
BUSINESS
SUMMARY
Norstan is a leading provider of communication and information technology
("IT") solutions for over 18,000 customers in the United States, Canada and
England. To address the complex communication 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 approximately 700 field technicians and service consultants delivers
communication services to its customers. In addition, the Company provides a
wide array of IT solutions through IT Consulting Services. These solutions
include the design, implementation, maintenance and modification of IT
applications and systems. IT Consulting Services currently employs over 800
consultants and generated a 49% increase in revenues during fiscal year 1999.
As communication and information technologies converge, Norstan's strategy is
to expand the breadth of its IT consulting 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, Communication Solutions and Financial Services, which
accounted for 56.8%, 41.6% and 1.6% of Norstan's fiscal year 1999 revenues,
respectively. Global Services includes IT Consulting Services and
Communication Services (see Note 12 to the Company's consolidated financial
statements for financial information concerning each segment's operations).
IT Consulting Services provides IT services including enterprise resource
planning ("ERP") and enterprise resource management ("ERM") package
implementation, Internet/Intranet/E-commerce solutions, multiservice
networking services, strategic advisory services, application development and
infrastructure services and outsourced facilities management. Communication
Services provides customer support services for communication systems,
including maintenance services, systems modifications and long distance
services. Communication 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 73 locations in 63 cities throughout the United
States and Canada (see Note 12 to the Company's consolidated financial
statements for financial information concerning the Company's Canadian
operations). 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
communication requirements. Current customers include BP Amoco, IBM, Kellogg
Company, John Deere, US Bancorp, 3M and Harley-Davidson. The Company believes
that its installed base of communication systems customers will offer
extensive opportunities for cross-selling IT consulting services. Management
also believes that IT Consulting Services customers will be a source of
additional communication business. Norstan's strong emphasis on customer
satisfaction is evidenced by a survey of Norstan's communication customers,
in which Norstan received an overall satisfaction rating of 91% in fiscal
year 1999. The Company believes that its outstanding customer service will
enable Norstan to capture a greater portion of each customer's communication
and IT budgets in the future.
Norstan provides leading-edge technologies in both its IT and
communication operations. The Company has established strategic alliances
with leading IT and communication 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.
Communication strategic alliance partners include Siemens, Aspect, VTEL,
PictureTel, Latitude, Cisco Systems, Sprint, Lucent Technologies (formerly
Octel) and Applied Voice Technology.
1
<PAGE>
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 communication 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 communication 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 communication and IT
systems in this business environment, the selection, implementation,
customization and maintenance of these systems are 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
communication and IT services, companies are able to focus on their core
businesses; access specialized technical skills; implement solutions more
rapidly; benefit from flexible staffing; and reduce the cost of recruiting,
training and retaining communication and IT professionals.
As a result of these factors, demand for IT and communication services
and products has grown significantly. The 1998 worldwide market for IT
services was estimated at $350 billion and is projected to grow to $620
billion by 2002 according to Dataquest, a leading IT market research and
consulting firm. Dataquest also estimates that the market for these services
is projected to grow at a 15% compound annual growth rate. For calendar year
1998, Phillips InfoTech, (InfoTech), a market research firm specializing in
telecommunications market information, estimates that the U.S. market for
switching, networking and application equipment was over $17 billion, and the
U.S. market for telecommunications maintenance and professional services was
estimated to be approximately $4 billion. As customers seek the competitive
advantages that advanced communication and computer telephony integration can
deliver, growth of certain segments of call processing are expected to be
particularly strong. According to InfoTech, between 1998 and 2002, 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 8%. By
2002, the U.S. market for these associated applications and peripherals is
projected to be over $15 billion.
The markets and technologies for communication equipment and IT
applications and systems continue to converge as communication equipment
migrates from proprietary switches to software-driven systems operating on
standardized computer platforms. As a result, businesses are integrating
their communication and IT systems. In addition, many middle-market and
Fortune 500 companies rely on multiple, often specialized, providers to help
implement and manage their communication 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
communication and IT solutions. As previously separate communication 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 communication 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 communication
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 communication products and services, along with the
capability of its more than 800 IT consultants, to deliver a unified
communication 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 communication and IT solutions throughout the entire life cycle
of a project. Norstan's ability to serve as a 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 communication
and IT solutions will enable it to capitalize on the continuing growth and
convergence of communication and IT needs of middle-market and Fortune 500
companies.
2
<PAGE>
NORSTAN'S BUSINESS STRATEGY
The Company's objective is to become a leading provider of communication
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 COMMUNICATION AND
INFORMATION TECHNOLOGIES. Norstan's established communication 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 communication 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 26% annual compound growth rate
and accounted for over 56.8% of revenues in fiscal year 1999.
OFFER A BROAD RANGE OF COMMUNICATION 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' communication and IT needs. The
ability to provide consulting services, hardware, software, training and
on-going support enables Norstan to offer a unified communication and IT
solution throughout the life cycle of a project. This capability will become
increasingly important as communication and information technologies continue
to converge and customers look to retain a single-source provider for all
their communication and IT needs.
ATTRACT, DEVELOP AND RETAIN HIGHLY SKILLED PROFESSIONALS. The Company
seeks to attract, develop and retain the highest caliber of communication 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 communication customers, in which Norstan
received an overall satisfaction rating of 91% in fiscal year 1999. 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. Communication
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.
NORSTAN'S GROWTH STRATEGY
To achieve its growth objectives, the Company has adopted the following
strategies:
CONTINUE INTERNAL GROWTH OF NORSTAN IT CONSULTING SERVICES. The Company
seeks to continue the rapid growth of IT Consulting Services by opening
branch locations in targeted geographic markets. During fiscal year 1999, IT
Consulting Services generated 22% internal revenue growth and opened five new
branch locations in San Diego, CA, Kansas City, KS, Detroit, MI, Parsippany,
NJ and Warren, NJ. Driven by customer demand, Norstan will continue to expand
into other geographic markets. In addition, the Company intends to leverage
existing communication locations through cross-selling efforts and the
aggressive recruitment of IT consultants.
PURSUE COMPLEMENTARY IT SERVICES ACQUISITIONS. To capitalize on the
highly fragmented nature of the IT services industry, the Company intends to
grow IT Consulting Services through acquisitions. Building on its experience
of acquiring communication companies over the last ten years, Norstan has
completed four 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.
3
<PAGE>
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 communication and IT services and solutions.
Management believes the convergence of communication and information
technologies, together with the Company's high level of customer
satisfaction, will position Norstan to become a preferred provider of both
communication and IT solutions.
PRODUCTS AND SERVICES
Norstan provides customers with a single source for a broad range of
communication 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,
Communication Solutions and Financial Services.
GLOBAL SERVICES. Global Services, which represented 56.8% of the
Company's fiscal year 1999 revenues, consists of two operating groups: IT
Consulting Services and Communication Services. The following table
summarizes the products and services provided by these two groups.
4
<PAGE>
GLOBAL SERVICES
IT CONSULTING SERVICES
<TABLE>
<CAPTION>
<S> <C>
CATEGORY OF SERVICE DESCRIPTION OF SERVICES
------------------- -----------------------
E-Commerce - Develop E-Commerce and supply chain strategies
- Develop and implement web applications
- Provide Intranet consulting services
- Develop on-line business models
- Provide EDI consulting services
Strategic Advisory Services - Develop strategic IT plans
- Provide business transformation and technology
planning consulting services
- Provide information management consulting
- Provide change management and knowledge
management consulting services
Enterprise Relationship Management - Implement and customize marketing and
sales force automation packaged software solutions
- Develop and implement call center strategies and
solutions
- Provide application portfolio selection and assembly
services
- Develop customer service/field service applications
Enterprise Resource Planning - Implement and customize Oracle and PeopleSoft
packaged software solutions
- Provide data warehousing and business intelligence
consulting services
- Provide application portfolio selection and
services
- Develop and implement web enablement
Application Development & - Design and develop applications
Infrastructure Services - Develop and implement groupware/messaging applications
- Manage and monitor customer's network operations
- Design and implement technical architecture
- Provide standard/custom technical education and training
services
Multiservice Networking - Develop and implement call center solutions
- Integrate computer/telephony applications
- Provide audio, video and data conferencing services
- Provide network communication and architecture
consulting services
- Provide unified messaging and IP telephony consulting
services
Managed Services - Manage networks and systems
- Support and maintain applications
- Perform product procurement and integration
- Manage customer's communication operations
</TABLE>
5
<PAGE>
COMMUNICATION SERVICES
<TABLE>
<CAPTION>
<S> <C>
CATEGORY OF SERVICE DESCRIPTION OF SERVICES
------------------- -----------------------
Communication Maintenance - Provide maintenance services on customers'
Services communication systems hardware
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
Long Distance Services - Offer a full range of long distance and network
services
</TABLE>
COMMUNICATION SOLUTIONS. Communication Solutions, which represented 41.6%
of the Company's fiscal year 1999 revenues, focuses on the design, sale and
implementation of communication and other technology equipment. Communication
Solutions provides the following products and services:
COMMUNICATION SOLUTIONS
<TABLE>
<CAPTION>
<S> <C>
CATEGORY OF PRODUCT OR SERVICE DESCRIPTION OF PRODUCTS AND SERVICES
------------------------------ ------------------------------------
Telephone Systems - Design, install and implement PBX systems and other
telephone switching systems
- Supply PBX and other telephone switching systems
Call Center Systems - Design, install and implement call center systems
- Supply call center systems
Call Processing Systems - Design, install and implement voice response and
voice messaging products
- Supply voice response and voice messaging products
Conferencing Systems - Design, install and implement conferencing systems
- Provide audio, video and data conferencing products
Refurbished Equipment - Refurbish and resell previously owned Siemens,
Nortel, Iwatsu, Aspect and Isoetec products
</TABLE>
FINANCIAL SERVICES. Financial Services, which represented 1.6% of the
Company's fiscal year 1999 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.
6
<PAGE>
CUSTOMERS
Norstan focuses its marketing efforts on middle-market and Fortune 500
companies with complex communication 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 include the following:
IT CONSULTING SERVICES
<TABLE>
<CAPTION>
<S> <C> <C>
3M Harley-Davidson Nationwide Insurance
Acer Invacare Old Mutual
American Electric Power John Deere State Farm Insurance
American Express Kellogg Company StorageTek
Becton Dickinson Lucent Technologies SuperValu
Grand Metropolitan Michelin Williams-Sonoma
COMMUNICATION SERVICES AND COMMUNICATION SOLUTIONS
American Freightways Cargill Imation
BP Amoco Fortis Insurance Medtronic
Best Buy Harley-Davidson Marquette University
CIBC IBM US Bancorp
</TABLE>
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
granted Premier Consulting Partner status to Connaissance Consulting (a
majority-owned Norstan affiliate).
Communication 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 communication 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
communication products from Novell, Newbridge and others.
Norstan has been a distributor of Siemens communication equipment since
1976 and is Siemens' largest independent distributor in North America. The
term of the current distributor agreement with Siemens, signed in January
1999, is five years. Norstan and Siemens 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, communication services, education and training, and other
areas. These specialists partner with the sales representatives who have
primary responsibility for the customer relationship to develop integrated
technology solutions which 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 also maintains a new account sales team to
pursue new customer prospects.
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 communication 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.
7
<PAGE>
Norstan's marketing strategy is to capture a larger portion of existing
customers' communication and IT budgets and to identify and develop new
customer relationships. In particular, the Company believes that its
installed base of communication 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
communication 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 communication and IT
products and services.
CUSTOMER SERVICE
Norstan believes that providing exceptional customer service is an
important element of its ability to compete effectively in the communication
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 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 1999, these centers handled over 170,000 customer calls with
approximately 53% 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 2000 is to resolve in excess of 55% 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 approximately 120 employees in its three remote diagnostics
and dispatch centers devoted primarily to providing customer service and has
over 400 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 Communication
customers that found an overall satisfaction rating of 91% in fiscal year
1999.
8
<PAGE>
LOCATIONS
The Company currently supports its IT Consulting Services, Communication
Services and Communication Solutions customers with locations in the United
States and Canada. Driven by customer demand, Norstan will continue to add
new IT Consulting Services branches during fiscal year 2000. The Company
maintains the following 73 locations in 63 cities:
IT CONSULTING SERVICES
<TABLE>
<CAPTION>
<S> <C> <C>
Atlanta, GA Des Moines, IA Phoenix, AZ
Baltimore, MD Detroit, MI Pittsburgh, PA
Champaign, IL Greensboro, NC Raleigh, NC
Charlotte, NC Greenville, SC Richmond, VA
Chicago, IL Indianapolis, IN San Diego, CA
Cincinnati, OH Kansas City, KS San Francisco, CA
Cleveland, OH Milwaukee, WI St. Louis, MO
Columbia, SC Minneapolis, MN Warren, NJ
Columbus, OH Omaha, NE
Denver, CO Parsippany, NJ
COMMUNICATION SERVICES AND COMMUNICATION SOLUTIONS
Albuquerque, NM Edmonton, Alberta Oklahoma City, OK
Amarillo, TX El Paso, TX Omaha, NE
Appleton, WI Fargo, ND Ottawa, Ontario
Austin, TX Las Vegas, NV Phoenix, AZ
Baton Rouge, LA Lexington, KY Pittsburgh, PA
Birmingham, AL Little Rock, AR Rochester, MN
Calgary, Alberta London, Ontario Shreveport, LA
Cedar Rapids, IA Louisville, KY Sioux Falls, SD
Chicago, IL Lubbock, TX Springdale, AR
Cincinnati, OH Madison, WI Toledo, OH
Cleveland, OH Milwaukee, WI Toronto, Ontario
Columbus, OH Minneapolis, MN Tucson, AZ
Davenport, IA Mobile, AL Tulsa, OK
Dayton, OH Montreal, Quebec Vancouver, British Columbia
Des Moines, IA New Orleans, LA Winnipeg, Manitoba
</TABLE>
9
<PAGE>
HUMAN RESOURCES
As of April 30, 1999, Norstan had 2,657 regular employees, of which over
800 were IT consulting personnel and approximately 700 were communication
field technicians and service consultants. U.S. operations totaled 2,471
employees, including approximately 100 who are covered by collective
bargaining agreements. The Company's Canadian operations had a total of 186
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.
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
maintains access to computer-based training resources covering 450 course
topics.
COMPETITION
The communication 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.
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 communication 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.
10
<PAGE>
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 confidentiality agreements with
certain of its employees and limits the distribution of proprietary
information.
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 49 states. The Company is also subject to FCC regulations, which
require the filing of federal tariffs.
BACKLOG
As of April 30, 1999, the Company had signed contracts for
telecommunications products aggregating approximately $47.3 million,
substantially all of which are expected to be fulfilled by the end of fiscal
2000. As of April 30, 1998, the Company had signed contracts aggregating
approximately $46.2 million, substantially all of which were fulfilled by the
end of fiscal 1999. 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.
11
<PAGE>
ITEM 2. PROPERTIES.
The executive offices of the Company are located in Minnetonka,
Minnesota, where the Company leases approximately 234,000 square feet of
office space. 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 52 other cities within
the United States. In Canada, the Company leases approximately 36,000 square
feet of office space in Toronto, 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.
12
<PAGE>
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:
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
FISCAL YEAR ENDED APRIL 30, 1999:
<S> <C> <C>
First Quarter.......................... 26 3/16 22 3/4
Second Quarter......................... 23 5/16 13 1/8
Third Quarter.......................... 18 5/8 11 5/8
Fourth Quarter......................... 12 9/16 8
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
</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 14, 1999, there were 2,979 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.
13
<PAGE>
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, 1999 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,
-------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
REVENUES
Global Services
IT Consulting Services ................. $ 137,878 $ 92,746 $ 54,467 $ 14,426 $ 7,931
Communication Services ................. 136,130 127,197 131,596 121,971 110,638
--------- --------- --------- --------- ---------
Total Global Services ................ 274,008 219,943 186,063 136,397 118,569
Communication Solutions .................. 200,738 228,979 205,983 179,332 166,675
Financial Services ....................... 7,963 7,443 6,029 5,635 5,001
--------- --------- --------- --------- ---------
TOTAL REVENUES ....................... 482,709 456,365 398,075 321,364 290,245
--------- --------- --------- --------- ---------
COST OF SALES
Global Services
IT Consulting Services ................. 90,858 66,457 43,315 11,000 6,417
Communication Services ................. 92,460 89,550 93,880 86,669 70,224
--------- --------- --------- --------- ---------
Total Global Services ................ 183,318 156,007 137,195 97,669 76,641
Communication Solutions .................. 151,382 168,965 150,204 130,090 123,158
Financial Services ....................... 2,970 2,444 2,160 2,221 2,308
--------- --------- --------- --------- ---------
TOTAL COST OF SALES .................. 337,670 327,416 289,559 229,980 202,107
--------- --------- --------- --------- ---------
GROSS MARGIN ............................... 145,039 128,949 108,516 91,384 88,138
Selling, general and administrative expenses 128,665 103,709 89,311 75,973 74,725
Restructuring charges ...................... 1,522 14,667 -- -- --
--------- --------- --------- --------- ---------
OPERATING INCOME ........................... 14,852 10,573 19,205 15,411 13,413
Interest expense ........................... (4,886) (3,909) (1,866) (1,351) (1,587)
Interest and other income (expense), net ... 460 (18) (22) 89 (54)
--------- --------- --------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES ... 10,426 6,646 17,317 14,149 11,772
Provision for income taxes ................. 4,536 2,791 7,100 5,660 4,709
--------- --------- --------- --------- ---------
NET INCOME ................................. $ 5,890 $ 3,855 $ 10,217 $ 8,489 $ 7,063
========= ========= ========= ========= =========
NET INCOME PER SHARE:
BASIC .......................... $ 0.56 $ 0.40 $ 1.12 $ 1.00 $ 0.86
========= ========= ========= ========= =========
DILUTED ........................ $ 0.56 $ 0.39 $ 1.08 $ 0.94 $ 0.82
========= ========= ========= ========= =========
WEIGHTED AVERAGE SHARES:
BASIC .......................... 10,473 9,719 9,140 8,526 8,242
========= ========= ========= ========= =========
DILUTED ........................ 10,537 9,917 9,418 8,985 8,621
========= ========= ========= ========= =========
AS OF APRIL 30,
-------------------------------------------------------------
BALANCE SHEET DATA: 1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Working capital............................................ $ 78,239 $ 58,568 $ 37,484 $ 24,899 $ 32,183
Total assets............................................... 308,516 275,608 224,173 160,988 161,709
Long-term debt, net of current maturities.................. 61,411 52,440 18,284 -- 16,465
Discounted lease rentals, net of current maturities........ 32,604 20,883 24,043 15,961 16,313
Shareholders' equity....................................... 109,335 97,671 84,370 67,517 56,984
Cash dividends declared and paid........................... -- -- -- -- --
</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 selected consolidated financial data
presented above.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Norstan is a leading provider of communication and information technology
("IT") solutions for over 18,000 customers in the United States, Canada and
England. To address the complex communication 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
approximately 700 field technicians and service consultants delivers
communication services to its customers. In addition, the Company provides a
wide array of IT solutions through IT Consulting Services. These solutions
include the design, implementation, maintenance and modification of IT
applications and systems. IT Consulting Services currently employs over 800
consultants and generated a 49% increase in revenues during fiscal year 1999. As
communication and information technologies converge, Norstan's strategy is to
expand the breadth of its IT consulting 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, Communication Solutions and Financial Services, which accounted
for 56.8%, 41.6% and 1.6% of Norstan's fiscal year 1999 revenues, respectively.
Global Services includes IT Consulting Services and Communication Services. IT
Consulting Services provides IT services including enterprise resource planning
("ERP") and enterprise resource management ("ERM") package implementation,
Internet/Intranet/E-commerce solutions, multiservice networking services,
strategic advisory services, application development and infrastructure services
and outsourced facilities management. Communication Services provides customer
support services for communication systems, including maintenance services,
systems modifications and long distance services. Communication 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.
During fiscal year 1999, Norstan recorded a restructuring charge of $1.5
million relating to a workforce reduction. This resource reduction in the
communications business was made to bring the Company's expense structure in
line with anticipated growth. The restructuring charge related to the costs of
severance and other employment termination benefits.
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
related 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
$12.4 million and $1.25 per share, respectively.
15
<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>
YEARS ENDED APRIL 30,
-------------------------------------
REVENUES: 1999 1998 1997
--------- ---------- ---------
<S> <C> <C> <C>
Global Services
IT Consulting Services......................... 28.6% 20.3% 13.7%
Communication Services ........................ 28.2 27.9 33.0
--------- ---------- ---------
Total Global Services .................. 56.8 48.2 46.7
Communication Solutions ......................... 41.6 50.2 51.8
Financial Services................................ 1.6 1.6 1.5
--------- ---------- ---------
Total revenues ................................ 100.0 100.0 100.0
Cost of sales:
Global Services
IT Consulting Services......................... 18.8 14.6 10.9
Communication Services......................... 19.2 19.6 23.6
--------- ---------- ---------
Total Global Services........................ 38.0 34.2 34.5
Communication Solutions.......................... 31.4 37.0 37.7
Financial Services................................ 0.6 0.5 0.5
--------- ---------- ---------
Total cost of sales............................ 70.0 71.7 72.7
--------- ---------- ---------
Gross margin........................................ 30.0 28.3 27.3
Selling, general and administrative expenses........ 26.7 22.8 22.5
Restructuring charges............................... 0.3 3.2 --
--------- ---------- ---------
Operating income.................................... 3.0% 2.3% 4.8%
========= ========== =========
Net income.......................................... 1.2% 0.8% 2.6%
========= ========== =========
The following table sets forth the gross margin percentages for Global
Services, Communication Solutions and Financial Services.
YEARS ENDED APRIL 30,
---------------------------------------
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Gross margin percentage:
Global Services
IT Consulting Services .................... 34.1% 28.3% 20.5%
Communication Services..................... 32.1 29.6 28.7
Total Global Services .................. 33.1 29.1 26.3
Communication Solutions....................... 24.6 26.2 27.1
Financial Services............................ 62.7 67.2 64.2
</TABLE>
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUES. Total revenues increased 5.8% to $482.7 million in fiscal year
1999 from $456.4 million in fiscal year 1998.
Revenues from Global Services increased 24.6% to $274.0 million in fiscal
year 1999 from $219.9 million in fiscal year 1998. Revenues from IT Consulting
Services increased 48.7% to $137.9 million in fiscal year 1999 from $92.7
million in fiscal year 1998. This increase was the result of growth in Norstan
Consulting's revenues including (i) internal revenue growth of 22%, (ii)
inclusion of a full year results from PRIMA acquired in September of 1997, and
(iii) inclusion of Wordlink, Inc. results since their acquisition in June of
1998. Revenues from Communication Services increased 7.0% to $136.1 million in
fiscal year 1999 from $127.2 million in fiscal year 1998. The increase in
Communication Services revenues resulted primarily from approximately 25% growth
in network services revenue and 6% growth in service contract revenue.
Revenues from Communication Solutions decreased 12.3% to $200.7 million in
fiscal year 1999 from $229.0 million in fiscal year 1998. The decrease was
primarily attributable to decreased sales volume in the Siemens PBX, call
center, conferencing and cabling product lines which resulted from distractions
in the overall marketing and sales effort during the significant third quarter
restructuring actions.
16
<PAGE>
Revenues from Financial Services increased 7.0% to $8.0 million in fiscal
year 1999 from $7.4 million in fiscal year 1998. This increase was primarily
attributable to the increased size of the Company's leasing base.
GROSS MARGIN. The Company's gross margin was $145.0 million and $128.9
million for the fiscal years ended April 30, 1999 and 1998, respectively. As a
percent of total revenues, gross margin was 30.0% for fiscal year 1999 compared
to 28.3% for fiscal year 1998.
Gross margin as a percent of revenues for Global Services was 33.1% for
fiscal year 1999 as compared to 29.1% for fiscal year 1998. The gross margin for
IT Consulting Services increased to 34.1% for fiscal year 1999 from 28.3% for
fiscal year 1998. The improved margin was primarily a result of Norstan
Consulting's increased billing rates and utilization of consultants and a
decreased emphasis on other lower margin IT Consulting Services such as
outsourcing, facilities management and education services. The gross margin for
Communication Services increased to 32.1% for fiscal year 1999 from 29.6% for
fiscal year 1998 in part from the efficiencies and cost savings resulting from
the organizational changes in fiscal years 1998 and 1999.
Gross margin as a percent of revenues for Communication Solutions was 24.6%
for fiscal year 1999 as compared to 26.2% for fiscal year 1998. The decrease in
gross margin for fiscal year 1999 as compared to fiscal year 1998 was primarily
due to cost overruns related to a large government contract which were
recognized in the third quarter of fiscal 1999.
Gross margin as a percent of revenues for Financial Services was 62.7% for
fiscal year 1999 as compared to 67.2% for fiscal year 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased 24.1% to $128.7 million in fiscal year 1999
from $103.7 million in fiscal year 1998. As a percent of revenues, selling,
general and administrative expenses increased to 26.7% for fiscal year 1999, as
compared to 22.8% for fiscal year 1998. This increase was primarily the result
of fiscal 1999 investments in the IT Consulting Services business including the
opening of five new consulting branch locations and the startup of Connaissance
Consulting.
RESTRUCTURING CHARGE. During the third quarter of fiscal year 1999, Norstan
recorded a restructuring charge of $1.5 million relating to a workforce
reduction. This resource reduction in the communications business was made to
bring the Company's expense structure in line with anticipated growth. The
restructuring charge related to the costs of severance and other employment
termination benefits.
INTEREST EXPENSE. Interest expense was $4.9 million for fiscal year 1999 as
compared to $3.9 million for fiscal year 1998. This increase was primarily the
result of higher borrowing levels in fiscal year 1999 due to the additional
investments in the IT Consulting Services business, including the operations of
PRIMA and Connaissance Consulting, as well as for working capital purposes.
Average month-end borrowings outstanding under the Company's revolving long-term
credit agreements were $64.9 million for fiscal year 1999 and $46.7 million for
fiscal year 1998. Weighted average interest rates under the Company's revolving
long-term credit agreements were 6.5% for fiscal year 1999 as compared to 7.0%
for fiscal year 1998.
INCOME TAXES. The Company's effective income tax rate was 43.5% for fiscal
year 1999 and 42.0% for fiscal year 1998. 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 $5.9 million or $0.56 per diluted share in fiscal
year 1999, as compared to $3.9 million or $0.39 per diluted share in fiscal year
1998. Net income and net income per diluted share before the restructuring
charge for the year ended April 30, 1998 were $12.4 million and $1.25 per share,
respectively.
FISCAL 1998 COMPARED TO FISCAL 1997
REVENUES. Total revenues increased 14.6% to $456.4 million in fiscal year
1998 from $398.1 million in fiscal year 1997.
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 1998 from $54.5 million in
fiscal 1997. This increase was a result of: (i) the acquisition of PRIMA in
September 1997, which contributed $17.9 million of revenue in fiscal 1998, and
(ii) internal revenue growth of 37.5%. Revenues from Communication Services
decreased 3.3% to $127.2 million in fiscal 1998 from $131.6 million in fiscal
1997. The decrease in Communication 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 1997.
17
<PAGE>
Revenues from Communication 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 was 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 and 27.3%
for fiscal year 1997.
Gross margin as a percent of revenues for Global Services was 29.1% for
fiscal year 1998 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 was 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
Communication Services increased to 29.6% for fiscal year 1998 from 28.7% for
fiscal year 1997.
Gross margin as a percent of revenues for Communication 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 was primarily
due to overall increases in product costs due to 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 margins 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 related 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
were $46.7 million for fiscal year 1998 and $22.1 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 $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 $12.4 million and
$1.25 per share, respectively.
18
<PAGE>
UNAUDITED QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly operating
information for each of the eight quarters in the two year period ending April
30, 1999. 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>
FOR THE QUARTERS ENDED
----------------------------------------------------------------------------------------------------
April 30, January 30, October 31, August 1, April 30, January 31, November 1, August 2,
1999 1999 1998 1998 1998 1998 1997 1997
--------- --------- --------- --------- --------- --------- --------- ---------
<C> <C> <C> <C> <C> <C> <C>
Revenues:
Global Services
IT Consulting Services... $ 35,622 $ 35,536 $ 35,045 $ 31,675 $ 30,496 $ 25,186 $ 22,038 $ 15,026
Communication Services... 36,274 34,593 32,897 32,366 32,698 30,968 30,508 33,023
--------- --------- --------- --------- --------- --------- --------- ---------
Total Global Services.. 71,896 70,129 67,942 64,041 63,194 56,154 52,546 48,049
Communication Solutions ... 56,154 39,492 55,037 50,055 73,069 53,979 56,719 45,212
Financial Services......... 2,247 1,888 2,074 1,754 1,971 1,634 1,657 2,181
--------- --------- --------- --------- --------- --------- --------- ---------
Total Revenues......... 130,297 111,509 125,053 115,850 138,234 111,767 110,922 95,442
Cost of Sales................ 88,811 84,463 85,009 79,387 98,711 79,861 80,488 68,356
--------- --------- --------- --------- --------- --------- --------- ---------
Gross Margin................. 41,486 27,046 40,044 36,463 39,523 31,906 30,434 27,086
Selling, General and
Administrative Expenses.... 34,836 30,399 32,593 30,837 31,230 24,923 24,399 23,157
Restructuring Charges ....... -- 1,522 -- -- 14,667 -- -- --
--------- --------- --------- --------- --------- --------- --------- ---------
Operating Income (Loss)...... 6,650 (4,875) 7,451 5,626 (6,374) 6,983 6,035 3,929
Interest Expense............. (1,465) (1,169) (1,163) (1,089) (1,226) (1,242) (847) (594)
Interest and Other
Income (Expense), net...... 146 (110) 243 181 (190) 55 69 48
--------- --------- --------- --------- --------- --------- --------- ---------
Income (Loss) Before
Income Taxes............... 5,331 (6,154) 6,531 4,718 (7,790) 5,796 5,257 3,383
Provision for Income Taxes... 2,320 (2,676) 2,840 2,052 (3,272) 2,521 2,155 1,387
--------- --------- --------- --------- --------- --------- --------- ---------
Net Income (Loss)............ $ 3,011 $ (3,478) $ 3,691 $ 2,666 $ (4,518) $ 3,275 $ 3,102 $ 1,996
========= ========= ========= ========= ========= ========= ========= =========
Net Income (Loss)
Per Share - Diluted........ $ 0.28 $ (0.33) $ 0.35 $ 0.26 $ (0.45) $ 0.33 $ 0.32 $ 0.21
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $6.4 million, $5.5 million and
$18.7 million for fiscal 1999, 1998 and 1997, respectively. Net cash of $38.5
million was used for investing activities in fiscal 1999 which decreased from
fiscal 1998 and 1997 levels of $44.9 million and $45.3 million, respectively.
This lower level of cash used for investing activities was due to decreased
acquisition activity and related cash requirements in fiscal 1999 as compared to
fiscal years 1998 and 1997, offset by increased investments in property and
equipment and lease contracts. Net cash provided by financing activities in
fiscal 1999 was $31.1 million, a decrease as compared to $36.1 million in fiscal
1998 and relatively unchanged as compared to $30.6 million in fiscal 1997. Net
borrowings on long-term debt were significantly lower in fiscal 1999 as compared
to 1998 as a result of the decreased acquisition activity as discussed above,
but were offset by increased discounted lease rental borrowings.
CAPITAL EXPENDITURES. The Company used $26.8 million for capital
expenditures during fiscal year 1999 as compared to $19.9 million in fiscal year
1998 and $24.2 million in fiscal year 1997. 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 fiscal year 1999 totaled $35.6 million as compared to
$28.0 million in fiscal 1998 and $31.5 million in fiscal 1997. Net lease
receivables increased to $63.0 million at April 30, 1999 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 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 $54.2 million at April 30, 1999
as compared to $35.6
19
<PAGE>
million at April 30, 1998. Interest rates on these credit agreements at April
30, 1999 ranged from 6.0% to 10.0%, while payments are due in varying monthly
installments through November 2005. Payments due to financial institutions
are made from monthly collections of lease receivables from customers.
CAPITAL RESOURCES. The Company has a $100.0 million unsecured revolving
long-term credit agreement with certain banks. Up to $30.0 million of borrowings
under this agreement may be in the form of commercial paper. In addition,
sublimits 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 (7.75% at April 30, 1999), except for LIBOR, CD and
commercial paper based options, which generally bear interest at a rate lower
than the banks' reference rate (5.5% to 6.0% at April 30, 1999). Total
consolidated borrowings under this agreement at April 30, 1998 and 1999 were
$52.4 million and $60.2 million, respectively. There were no borrowings on
account of the Company's leasing activities at April 30, 1998 and 1999. 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, 1999.
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 acquired 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
merger agreement provided for the conversion of all shares of Wordlink common
stock and all vested Wordlink stock options issued and outstanding into 420,539
shares of Norstan common stock valued at approximately $10.3 million. All
outstanding Wordlink unvested stock options were converted into the equivalent
value of Norstan stock options. Wordlink's shareholders' 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'
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 (no amounts were earned as of April 30, 1999). 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 fifteen 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
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, 1999, the maximum amount of such
consideration had been paid). 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 fifteen years and three years, respectively.
IMPACT OF YEAR 2000
The Company has completed an assessment of the hardware and software in its
internal information systems and has substantially completed the necessary
modifications. The Company is currently testing its critical systems to verify
proper date-handling functionality with respect to year 2000 and thereafter. The
Company is working with its significant suppliers and business partners to
ensure that those parties have appropriate Year 2000 readiness plans, and will
be able to continue to provide products and services to the Company. 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
product offerings.
20
<PAGE>
The Company's comprehensive Year 2000 initiative is being managed by a
team of internal staff who expect to complete the Year 2000 initiative in the
fall of 1999. The Company believes it is adequately addressing the Year 2000
issues. It does not believe that the Year 2000 matters discussed above will
have a material impact on its business, financial condition and results of
operations. However, there can be no assurance that the systems of other
companies will not fail, and that such failures would not have an adverse
effect on the Company. In order to mitigate the risk of supplier and business
partner non-compliance, the Year 2000 initiative also includes the creation
of contingency plans, both from technical and business process perspectives.
Based on the Company's assessments to date, the costs of the Year 2000
initiative are estimated to be approximately $2.0 million, of which
approximately $1.4 million has been incurred to date. The costs of the
project and the date on which the Company believes it will complete its Year
2000 initiative are forward-looking statements and are based on management's
best estimates, according to information available through the Company's
assessments to date. However, there can be no assurance that these estimates
will be achieved, and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the retention of these professionals, the ability to
locate and correct all relevant computer codes, and similar uncertainties. At
present the Company has not experienced any significant problems in these
areas.
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 communication solutions for customers
in a dynamic industry; and other competitive factors. Because these and other
factors could affect the Company's operating results, past financial
performance should not necessarily be considered as a reliable indicator of
future performance, and investors should not use historical trends to
anticipate future period results.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
In the ordinary course of business, the Company is exposed to foreign
currency and interest rate risks. These risks primarily relate to the sale of
products to foreign customers and changes in interest rates on the Company's
long-term debt obligations, discounted lease rentals, capital leases and
other long-term debt obligations.
The potential loss from a hypothetical 10% adverse change in foreign
currency rates on the Company's foreign installment contracts at April 30,
1999 would not materially affect the Company's consolidated financial
position, results of operations or cash flows.
The Company's unsecured revolving long-term credit agreement carries
interest rate risk that is generally related to either the banks' reference
rate, LIBOR or CD rates or commercial paper based options. If any of those
rates or options were to change while the Company was borrowing under the
agreement, interest expense would increase or decrease accordingly. As of
April 30, 1999, total consolidated borrowings under this agreement were $60.2
million.
The Company's has no earnings or cash flow exposure due to market risks
on its discounted lease rentals or its capital lease and other long-term debt
obligations as a result of the fixed-rate nature of the lease rentals,
capital leases and the debt. However, interest rate changes would effect the
fair market value of the lease rentals, capital leases and debt. At April 30,
1999, the Company had fixed rate lease rentals of $54.2 million and capital
lease and other long-term debt obligations of $4.2 million.
21
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
CONSOLIDATED FINANCIAL STATEMENTS:
<S> <C>
Report of Independent Public Accountants................................................................... 23
Consolidated Statements of Operations for the years ended April 30, 1997, 1998 and 1999.................... 24
Consolidated Balance Sheets as of April 30, 1998 and 1999.................................................. 25
Consolidated Statements of Shareholders' Equity for the years ended April 30, 1997, 1998 and 1999.......... 26
Consolidated Statements of Cash Flows for the years ended April 30, 1997, 1998 and 1999.................... 27
Notes to Consolidated Financial Statements................................................................. 28
</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.
22
<PAGE>
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, 1999 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, 1999. 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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
1999 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
June 8, 1999
23
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
--------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Global Services
IT Consulting Services ...................................... $ 137,878 $ 92,746 $ 54,467
Communication Services ...................................... 136,130 127,197 131,596
--------- --------- ---------
Total Global Services ................................ 274,008 219,943 186,063
Communication Solutions ........................................ 200,738 228,979 205,983
Financial Services ............................................. 7,963 7,443 6,029
--------- --------- ---------
TOTAL REVENUES .............................................. 482,709 456,365 398,075
--------- --------- ---------
COST OF SALES
Global Services
IT Consulting Services ...................................... 90,858 66,457 43,315
Communication Services ...................................... 92,460 89,550 93,880
--------- --------- ---------
Total Global Services ................................ 183,318 156,007 137,195
Communication Solutions ........................................ 151,382 168,965 150,204
Financial Services ............................................. 2,970 2,444 2,160
--------- --------- ---------
TOTAL COST OF SALES ......................................... 337,670 327,416 289,559
--------- --------- ---------
GROSS MARGIN ..................................................... 145,039 128,949 108,516
Selling, general and administrative expenses ................... 128,665 103,709 89,311
Restructuring charges .......................................... 1,522 14,667 --
--------- --------- ---------
OPERATING INCOME ................................................. 14,852 10,573 19,205
Interest expense ............................................... (4,886) (3,909) (1,866)
Interest and other income (expense), net ....................... 460 (18) (22)
--------- --------- ---------
INCOME BEFORE PROVISION FOR INCOME TAXES ......................... 10,426 6,646 17,317
Provision for income taxes ..................................... 4,536 2,791 7,100
--------- --------- ---------
NET INCOME ....................................................... $ 5,890 $ 3,855 $ 10,217
========= ========= =========
NET INCOME PER SHARE:
BASIC .................................................. $ 0.56 $ 0.40 $ 1.12
========= ========= =========
DILUTED ................................................ $ 0.56 $ 0.39 $ 1.08
========= ========= =========
WEIGHTED AVERAGE SHARES:
BASIC .................................................. 10,473 9,719 9,140
========= ========= =========
DILUTED ................................................ 10,537 9,917 9,418
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
24
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF APRIL 30,
------------------------
1999 1998
---------- ---------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash................................................................................ $ 867 $ 1,869
Accounts receivable, net of allowances for doubtful accounts of $1,437 and $1,171... 97,446 97,206
Current lease receivables........................................................... 23,299 18,751
Inventories......................................................................... 16,846 10,008
Costs and estimated earnings in excess of billings of $18,508 and $17,335........... 24,389 19,091
Deferred income taxes............................................................... 1,516 2,488
Prepaid expenses, deposits and other................................................ 11,500 8,108
---------- ---------
TOTAL CURRENT ASSETS............................................................. 175,863 157,521
---------- ---------
PROPERTY AND EQUIPMENT
Machinery and equipment............................................................. 97,385 75,712
Less -- accumulated depreciation and amortization................................... (47,656) (37,713)
---------- ---------
NET PROPERTY AND EQUIPMENT........................................................ 49,729 37,999
---------- ---------
OTHER ASSETS
Goodwill, net of accumulated amortization of $11,033 and $7,853..................... 39,994 43,206
Lease receivables, net of current portion........................................... 39,736 34,998
Other............................................................................... 3,194 1,884
---------- ---------
TOTAL OTHER ASSETS................................................................ 82,924 80,088
---------- ---------
$ 308,516 $ 275,608
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt................................................ $ 3,004 $ 3,257
Current maturities of discounted lease rentals...................................... 21,550 14,758
Accounts payable.................................................................... 28,394 24,135
Deferred revenue.................................................................... 20,967 19,953
Accrued liabilities:
Salaries and wages................................................................ 7,950 15,123
Warranty costs.................................................................... 1,795 1,776
Other liabilities................................................................. 5,046 10,509
Billings in excess of costs and estimated earnings of $10,858 and $16,390........... 8,918 9,442
---------- ---------
TOTAL CURRENT LIABILITIES........................................................ 97,624 98,953
LONG-TERM DEBT, net of current maturities............................................. 61,411 52,440
DISCOUNTED LEASE RENTALS, net of current maturities................................... 32,604 20,883
DEFERRED INCOME TAXES................................................................. 7,542 5,661
---------- ---------
COMMITMENTS AND CONTINGENCIES (NOTES 4 AND 11)
SHAREHOLDERS' EQUITY
Common stock -- $.10 par value; 40,000,000 authorized shares; 10,763,726 and
9,963,716 shares issued and outstanding........................................... 1,076 996
Capital in excess of par value...................................................... 51,420 44,741
Retained earnings................................................................... 60,264 54,048
Unamortized cost of stock........................................................... (1,805) (641)
Accumulated other comprehensive income.............................................. (1,620) (1,473)
---------- ---------
TOTAL SHAREHOLDERS' EQUITY....................................................... 109,335 97,671
---------- ---------
$ 308,516 $ 275,608
========== =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
25
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
-------------------- CAPITAL IN UNAMORTIZED OTHER
SHARES EXCESS OF RETAINED COST OF COMPREHENSIVE
OUTSTANDING AMOUNT PAR VALUE EARNINGS STOCK INCOME TOTAL
--------- --------- --------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Stock issued for employee
benefit plans ......... 379 38 6,607 -- (1,164) -- 5,481
Stock issued for
acquisition ........... 421 42 72 326 -- -- 440
Foreign currency
translation adjustments . -- -- -- -- -- (147) (147)
Net income ............... -- -- -- 5,890 -- -- 5,890
------ --------- --------- --------- -------- --------- ---------
BALANCE, APRIL 30, 1999 .. 10,764 $ 1,076 $ 51,420 $ 60,264 $ (1,805) $ (1,620) $ 109,335
====== ========= ========= ======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
26
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
--------------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ............................................... $ 5,890 $ 3,855 $ 10,217
Adjustments to reconcile net income to net cash
provided by operating activities:
Restructuring charges ................................. 1,522 14,667 --
Restructuring charges paid............................. (4,469) -- --
Depreciation and amortization ......................... 20,514 21,115 16,964
Deferred income taxes ................................. 2,871 1,944 (45)
Changes in operating items, net of acquisition effects:
Accounts receivable ................................. 1,851 (18,803) (16,319)
Inventories ......................................... (6,672) (2,397) 3,532
Costs and estimated earnings in excess of billings .. (5,272) (7,584) (6,371)
Prepaid expenses, deposits and other ................ (4,338) 498 (386)
Accounts payable .................................... 3,808 (745) 7,047
Deferred revenue .................................... 612 1,291 468
Accrued liabilities ................................. (10,705) (5,823) 2,514
Income taxes payable/receivable ..................... 1,330 (6,136) (144)
Billings in excess of costs and estimated earnings .. (515) 3,665 1,223
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........ 6,427 5,547 18,700
--------- --------- ---------
INVESTING ACTIVITIES
Additions to property and equipment, net ................. (26,760) (19,873) (24,219)
Cash paid for acquisitions, net of cash acquired ......... -- (20,450) (11,794)
Investment in lease contracts ............................ (35,569) (28,049) (31,545)
Collections from lease contracts ......................... 26,234 23,589 21,949
Other, net ............................................... (2,423) (124) 314
--------- --------- ---------
NET CASH USED FOR INVESTING ACTIVITIES ........... (38,518) (44,907) (45,295)
--------- --------- ---------
FINANCING ACTIVITIES
Repayment of debt assumed in acquisition ................. (1,267) (2,013) (1,743)
Borrowings on long-term debt ............................. 282,380 290,181 227,820
Repayments of long-term debt ............................. (273,479) (253,102) (210,161)
Borrowings on discounted lease rentals ................... 36,773 13,472 22,396
Repayments of discounted lease rentals ................... (18,249) (15,717) (12,583)
Proceeds from sale of common stock ....................... 4,620 2,868 3,017
Tax benefits from shares issued to employees ............. 316 385 1,869
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ........ 31,094 36,074 30,615
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH .................... (5) 8 (6)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH ............................ (1,002) (3,278) 4,014
CASH, BEGINNING OF YEAR .................................... 1,869 5,147 1,133
--------- --------- ---------
CASH, END OF YEAR .......................................... $ 867 $ 1,869 $ 5,147
========= ========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
27
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS:
Norstan is a leading provider of communication and information technology
("IT") solutions for 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, Ltd.
("NCDA"), Norstan Consulting, Inc. ("NCON") Connaissance Consulting, LLC
("Connaissance"), Norstan Financial Services, Inc. ("NFS"), Norstan Network
Services, Inc. ("NNS"), Norstan International, Inc. ("NII"), and Norstan-UK
Limited ("NUK"). The Company is headquartered in Minnetonka, Minnesota, with
sales and service offices in 73 locations in the United States and Canada. The
Company provides IT consulting and communication services, communications and
technology products and competitive financing through its three operating units,
Global Services, Communication Solutions and Financial Services. Through
strategic partnerships and acquisitions, the Company has become a single-source
provider of a wide range of communication and IT solutions that enable its
customers to compete and succeed in the global marketplace.
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. Communication 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 financial instruments, including long-term obligations, lease
receivables and trade receivables, were estimated at their carrying values at
April 30, 1999 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."
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.
28
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $5,770,000 and $6,410,000 as of
April 30, 1999 and 1998, respectively. 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.
29
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
EARNINGS PER SHARE DATA
The Company reports net income per share pursuant to the requirements of the
Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS
No. 128"). SFAS No. 128 requires presentation of basic and diluted earnings per
share (EPS). Basic EPS is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Diluted
EPS reflects potential dilution from outstanding stock options and other
securities using the treasury stock method.
A reconciliation of EPS calculations under SFAS No. 128 is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net income .............................................. $ 5,890 $ 3,855 $ 10,217
============ ============ ============
Weighted average common shares outstanding -- Basic ..... 10,473 9,719 9,140
Effect of dilutive securities:
Stock option plans .................................... 64 196 269
Employee stock purchase plan .......................... -- 2 9
------------ ------------ ------------
Weighted average common shares outstanding -- Diluted 10,537 9,917 9,418
============ ============ ============
Net income per share:
Basic ........................................ $ 0.56 $ 0.40 $ 1.12
============ ============ ============
Diluted ...................................... $ 0.56 $ 0.39 $ 1.08
============ ============ ============
</TABLE>
COMPREHENSIVE INCOME
Effective May 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This statement establishes standards for the reporting of
comprehensive income and its components. For the Company, comprehensive income
consists of net income adjusted for foreign currency translation adjustments and
is presented in the Consolidated Statements of Shareholders' Equity. The
adoption of SFAS 130 had no impact on total shareholders' equity. Prior year
financial statements have been reclassified to conform to the SFAS requirements.
SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosure of cash flow information is as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash paid for:
Interest................................................. $ 7,910 $ 6,457 $ 3,996
Income taxes............................................. $ 1,641 $ 5,545 $ 4,995
Non-cash investing and financing activities:
Stock issued for acquisitions............................ $ 114 $ 6,325 $ 2,000
Earnout and noncompete agreements related to acquisitions $ -- $ 2,333 $ 2,667
</TABLE>
RECENTLY ISSUED ACCOUNTING STANDARDS:
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 $8.8 million and $6.0 million of costs associated with
internal-use software developed or obtained during fiscal years 1999 and 1998,
respectively.
30
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 3 -- RESTRUCTURING:
During fiscal year 1999, the Company recorded a restructuring charge of
$1.5 million relating to a workforce reduction. This resource reduction in the
communications business was made to bring the Company's expense structure in
line with anticipated growth. The restructuring charge related to the costs of
severance and other employment termination benefits.
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) the 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
related 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).
During fiscal 1999, payments totaling $4,469,000 were charged against the
restructuring reserves which were established as part of the fiscal 1998 and
1999 restructuring charges. At April 30, 1999, there remained a reserve of
approximately $700,000 for future costs to be incurred related to the original
restructuring charges.
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, 1999, the maximum amount of such
consideration had been paid). 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 fifteen 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 (no amounts were earned as of April
30, 1999). 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.
Pro forma information to reflect the operations of Connect and PRIMA in the
years of acquisition have not been disclosed as such information was not
materially different from the Company's reported results.
On June 19, 1998, the Company acquired 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 merger agreement called for all shares of Wordlink common stock and all
vested stock options issued and outstanding to be converted into 420,539 shares
of Norstan common stock valued at approximately $10.3 million. All outstanding
Wordlink unvested stock options were converted into the equivalent value of
Norstan stock options. Wordlink's shareholders' equity and operating results
were not material in relation to the Company's financial statements. As such,
the Company recorded the combination without restating prior periods' financial
statements.
31
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 5 -- LEASE RECEIVABLES:
The Company has financed customer equipment purchases in the amounts of
$35.6 million, $28.0 million, and $31.5 million during the fiscal years ended
April 30, 1999, 1998 and 1997, 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,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Gross lease receivables..................... $ 67,723 $ 58,136
Residual values............................. 8,060 8,297
Less:
Unearned income........................... (11,387) (11,039)
Allowance for financing losses............ (1,361) (1,645)
----------- -----------
Total lease receivables -- net.............. 63,035 53,749
Less -- current maturities.................. (23,299) (18,751)
=========== ===========
Long-term lease receivables................. $ 39,736 $ 34,998
=========== ===========
</TABLE>
The aggregate amount of gross lease receivables maturing in each of the five
years following April 30, 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING APRIL 30, AMOUNT
--------------------------------- ------------
<S> <C>
2000........................ $ 27,080
2001........................ 20,331
2002........................ 11,348
2003........................ 5,149
2004 and thereafter......... 3,815
------------
$ 67,723
============
</TABLE>
NOTE 6 -- DEBT OBLIGATIONS:
LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
AS OF APRIL 30,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Bank financing:
Revolving credit agreement............................ $ 780 $ 385
Certificates of deposit and commercial paper.......... 59,410 52,000
Capital lease obligations and other long-term debt...... 4,225 3,312
------------ ------------
Total long-term debt.................................... 64,415 55,697
Less -- current maturities.............................. (3,004) (3,257)
------------ ------------
$ 61,411 $ 52,440
============ ============
</TABLE>
32
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BANK FINANCING:
The Company has an $100.0 million unsecured revolving long-term credit
agreement with certain banks. Up to $30.0 million of borrowings under this
agreement may be in the form of commercial paper. In addition, sublimits 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 (7.75% at April 30, 1999), except for LIBOR, CD and commercial paper based
options, which generally bear interest at a rate lower than the banks' reference
rate (5.5% to 6.0% at April 30, 1999). Total consolidated borrowings under this
agreement at April 30, 1999 and 1998 were $60.2 million and $52.4 million,
respectively. 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, 1999.
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 1999 and 1998.
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 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 November
2005.
Discounted lease rentals consisted of the following (in thousands):
<TABLE>
<CAPTION>
AS OF APRIL 30,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Total discounted lease rentals..... 54,154 35,641
Less -- current maturities......... (21,550) (14,758)
----------- -----------
$ 32,604 $ 20,883
=========== ===========
</TABLE>
Aggregate maturities of discounted lease rentals as of April 30, 1999 are
as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING APRIL 30, AMOUNT
------------------------------ --------------
<S> <C>
2000..................... $ 21,550
2001..................... 15,632
2002..................... 8,795
2003..................... 4,480
2004 and thereafter...... 3,697
--------------
$ 54,154
==============
</TABLE>
33
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Domestic.................... $ 10,850 $ 5,914 $ 16,215
Foreign..................... (424) 732 1,102
----------- ----------- -----------
$ 10,426 $ 6,646 $ 17,317
=========== =========== ===========
</TABLE>
The provision (benefit) for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current
Domestic...................... $ 2,865 $ 410 $ 7,361
Foreign....................... (1,200) 437 (216)
----------- ----------- -----------
1,665 847 7,145
Deferred
Domestic...................... 2,201 2,840 (572)
Foreign....................... 670 (896) 527
----------- ----------- -----------
2,871 1,944 (45)
----------- ----------- -----------
Provision for income taxes.... $ 4,536 $ 2,791 $ 7,100
=========== =========== ===========
</TABLE>
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,
---------------------------------
1999 1998 1997
--------- --------- --------
<S> <C> <C> <C>
Federal statutory rate.......................... 35.0% 35.0% 35.0%
State income taxes, net of federal tax benefit.. 5.0 5.0 5.0
Goodwill and other, net......................... 3.5 2.0 1.0
--------- --------- --------
43.5% 42.0% 41.0%
========= ========= ========
</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>
1999 1998
----------------- --------------
<S> <C> <C>
Accelerated depreciation.................. $ (43,124) $ (34,627)
Capital and operating leases.............. 34,738 27,335
Long-term contract costs.................. (1,213) (753)
Inventory and warranty reserves........... 713 480
Allowance for doubtful accounts........... 1,111 1,116
Vacation reserves......................... 541 1,016
Self insurance reserve.................... 518 457
Other, net................................ 690 2,039
Valuation allowance....................... -- (236)
----------------- --------------
Net deferred tax liabilities......... $ (6,026) $ (3,173)
================= ==============
</TABLE>
34
<PAGE>
NORSTAN'S INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
2,400,000 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 25% per year and expire after
ten years. At April 30, 1999, 997,300 shares were available for future
grants. During June 1999, the Company granted 377,300 stock options, of which
approximately 234,400 are contingent upon future performance of the Company's
various operating units.
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 awarded 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, 1999, 17,740 shares had been issued as annual retainers and
83,760 shares were available for future grant/payment under the Directors'
Plan.
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 OPTIONS EXERCISE OPTIONS EXERCISE
PRICE PRICE PRICE
------------- -------------- -------------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
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 granted.............. 854,043 $ 20.57 -- -- 5,000 $ 18.31
Options canceled............. (435,966) $ 18.97 (33,160) $ 11.38 -- --
Options exercised............ (36,600) $ 14.95 (32,240) $ 10.88 -- --
------------- -------------- -----------
BALANCE-- APRIL 30, 1999...... 1,218,777 $ 18.91 54,800 $ 10.66 70,500 $ 14.27
============= ============== ============== ============== =========== ==========
Options exercisable at:
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
============= ============== ============== ============== =========== ==========
April 30, 1999............... 147,070 $ 16.75 26,400 $ 11.19 51,833 $ 12.76
============= ============== ============== ============== =========== ==========
</TABLE>
35
<PAGE>
NORSTAN'S INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Additional information regarding options outstanding/exercisable at April 30,
1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE NUMBER OF WEIGHTED
OPTIONS EXERCISE EXERCISE REMAINING OPTIONS AVERAGE
OUTSTANDING PRICE RANGE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
--------------- ------------- --------- ---------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1995 PLAN............ 476,400 $ 9.50-$15.47 $ 14.92 8.68 years 81,400 $ 14.61
193,500 $16.00-$17.50 $ 17.48 8.25 years 38,700 $ 17.47
212,000 $17.77-$23.63 $ 19.89 8.88 years 22,400 $ 20.99
336,877 $24.00-$28.25 $ 24.24 9.12 years 4,570 $ 27.37
--------------- ------------- --------- ---------------- ----------- ---------------
1,218,777 $ 9.50-$28.25 $ 18.91 8.77 years 147,070 $ 16.75
=============== ============= ========= ================ =========== ===============
1986 PLAN............ 10,800 $ 4.25-$ 6.88 $ 5.71 3.13 years 2,400 $ 4.25
44,000 $11.88 $ 11.88 6.11 years 24,000 $ 11.88
--------------- ------------- --------- ---------------- ----------- ---------------
54,800 $ 4.25-$11.88 $ 10.66 5.52 years 26,400 $ 11.19
=============== ============= ========= ================ =========== ===============
DIRECTORS' PLAN...... 40,000 $ 7.63-$12.50 $ 10.07 5.05 years 36,000 $ 9.79
5,000 $18.31 $ 18.31 9.40 years 5,000 $ 18.31
25,500 $20.06 $ 20.06 8.41 years 10,833 $ 20.06
--------------- ------------- --------- ---------------- ----------- ---------------
70,500 $ 7.63-$20.06 $ 14.27 6.57 years 51,833 $ 12.76
=============== ============= ========= ================ =========== ===============
</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, 1999, 140,706 shares and 186,041 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 generally amortized over a four-year
period. Amortization of $544,200, $165,800, and $70,000 has been charged to
operations in 1999, 1998 and 1997, respectively.
The Company also has an Employee Stock Purchase Plan (the "Employee Stock
Plan") 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 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 1999, 224,389 shares were issued under this plan and, at April 30, 1999,
259,400 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,
--------------------------------------
1999 1998 1997
--------- --------- ----------
<S> <C> <C> <C>
Net income:
As reported .............. $ 5,890 $ 3,855 $ 10,217
Pro forma ................ $ 3,050 $ 1,968 $ 9,360
Net income per common share:
As reported
Basic ............... $ 0.56 $ 0.40 $ 1.12
Diluted ............. $ 0.56 $ 0.39 $ 1.08
Pro forma
Basic ............... $ 0.29 $ 0.20 $ 1.02
Diluted ............. $ 0.29 $ 0.20 $ 0.99
</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.
36
<PAGE>
NORSTAN'S INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The weighted average fair values of options granted and Employee Stock
Plan shares were as follows:
<TABLE>
<CAPTION>
DIRECTORS' EMPLOYEE
1995 PLAN 1986 PLAN PLAN STOCK PLAN
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Fiscal 1997 grants...... $ 7.95 N/A -- $ 2.96
Fiscal 1998 grants...... $ 8.99 N/A $ 11.63 $ 5.54
Fiscal 1999 grants...... $ 9.36 N/A $ 7.54 $ 4.32
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the weighted-average assumptions
used for grants in each fiscal year as follows:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------------------------
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Risk-free interest rate................... 5.00% 6.06% 6.28%
Expected life of options.................. 7 years 7 years 7 years
Expected life of Employee Stock Plan...... 1 year 1 year 1 year
Expected volatility....................... 37% 36% 35%
Expected dividend yield................... N/A N/A N/A
</TABLE>
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) PLANS:
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 on a portion of this deferral and/or qualified
nonelective contributions to employee accounts. Company contributions to the
401(k) Plans were $3,582,000, $1,822,000, and $1,746,000 for the years ending
April 30, 1999, 1998 and 1997, 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.
37
<PAGE>
NORSTAN'S INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $13,415,000, $11,494,000, and $10,914,000 in
fiscal years 1999, 1998, and 1997, respectively.
Future minimum lease payments under noncancelable leases with initial or
remaining terms of one year or more were as follows at April 30, 1999 (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDING APRIL 30, AMOUNT
----------------------------- -----------
<S> <C>
2000......................... $ 8,462
2001......................... 6,746
2002......................... 5,181
2003......................... 4,073
2004 and thereafter.......... 14,112
-----------
$ 38,574
===========
</TABLE>
VENDOR AGREEMENTS:
Norstan has been a distributor of Siemens communication equipment since
1976 and is Siemens' largest independent distributor in North America. The
term of the current distributor agreement with Siemens, signed in January
1999, is five years. Norstan and Siemens 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.
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. Generally, 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 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 delivers its products and services through three business
units, Global Services, Communication Solutions and Financial Services, which
accounted for 56.8%, 41.6% and 1.6% of Norstan's fiscal year 1999 revenues,
respectively. Global Services includes IT Consulting Services and
Communication Services. IT Consulting Services provides IT services including
enterprise resource planning ("ERP") and enterprise resource management
("ERM") package implementation, Internet/Intranet/E-commerce solutions,
multiservice networking services, strategic advisory services, application
development and infrastructure services and outsourced facilities management.
Communication Services provides customer support services for communication
systems, including maintenance services, systems modifications and long
distance services. Communication 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 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:
38
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
GLOBAL SERVICES
--------------------------------------------
IT CONSULTING COMMUNICATION TOTAL GLOBAL COMMUNICATION FINANCIAL
SERVICES SERVICES SERVICES SOLUTIONS SERVICES CORPORATE TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1999:
Revenue................. $ 137,878 $ 136,130 $ 274,008 $ 200,738 $ 7,963 $ -- $ 482,709
Operating income(1)..... 6,493 11,054 17,547 (6,482) 3,787 -- 14,852
Depreciation and
amortization.......... 6,770 4,714 11,484 4,662 14 4,354 20,514
Identifiable assets..... 74,411 60,944 135,355 55,000 63,187 54,974 308,516
Capital expenditures.... 3,442 7,829 11,271 7,800 -- 7,689 26,760
- ----------------------------------------------------------------------------------------------------------------------------
1998:
Revenue................. $ 92,746 $ 127,197 $ 219,943 $ 228,979 $ 7,443 $ -- $ 456,365
Operating income(2)(3) . 6,089 (2,101) 3,988 2,751 3,834 -- 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
- ----------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Segment totals include allocation of the fiscal year 1999 restructuring
charge of $1,522,000. Operating income of each segment, prior to the
allocation of the restructuring charge to each unit, was as follows: IT
Consulting Services - $6,596,000; Communication Services - $11,482,000;
Total Global Services - $18,078,000; Communication Solutions
-$(5,491,000); and Financial Services - $3,787,000. (See Note 3).
(2) Fiscal 1998 operating income figures have been restated to reflect
changes in how SG&A expenses have been allocated in fiscal 1999.
(3) 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--$7,243,000; Communications Services--$6,002,000;
Total Global Services $13,245,000; Communications Solutions--$8,161,000;
and Financial Services--$3,834,000. (See Note 3).
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>
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
REVENUES:
United States...................... $ 445,825 $ 423,446 $ 365,796
Canada............................. 36,884 32,919 32,279
----------- ----------- ---------
$ 482,709 $ 456,365 $ 398,075
=========== =========== =========
NET INCOME:
United States...................... $ 6,129 $ 4,679 $ 9,426
Canada............................. (239) (824) 791
----------- ----------- ---------
$ 5,890 $ 3,855 $ 10,217
=========== =========== =========
ASSETS:
United States...................... $ 287,316 $ 258,192 $ 207,942
Canada............................. 21,200 17,416 16,231
----------- ----------- ---------
$ 308,516 $ 275,608 $ 224,173
=========== =========== =========
</TABLE>
Revenues, net income and assets from other international operations including
the European Community are immaterial and as such are not separately listed
above. These amounts are included in the US figures as listed.
39
<PAGE>
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, 1999.
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 21, 1999, 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 21, 1999, 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 21, 1999, 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 21, 1999, is incorporated
herein by reference.
40
<PAGE>
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 22 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 43 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.
41
<PAGE>
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 28, 1999
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.
SIGNATURE DATE
--------- ----
/s/ PAUL BASZUCKI 7/22/99
-----------------
Paul Baszucki
Chairman of the Board
/s/ RICHARD COHEN 7/22/99
-----------------
Richard Cohen
Vice-Chairman of the Board
/s/ DAVID R. RICHARD 7/27/99
--------------------
David R. Richard
CEO, President and Director
/s/ DR. JAGDISH N. SHETH 7/23/99
------------------------
Dr. Jagdish N. Sheth
Director
/s/ CONNIE M. LEVI 7/23/99
------------------
Connie M. Levi
Director
/s/ GERALD D. PINT 7/23/99
-------------------
Gerald D. Pint
Director
/s/ HERBERT F. TRADER 7/26/99
---------------------
Herbert F. Trader
Director
42
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<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 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 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 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 and incorporated herein by
reference]; Amendments adopted September 20,
1995, July 30, 1996 and April 9, 1997 [filed as
Exhibit 3(b) to the Company's Annual Report on
Form 10-K for the year ended April 30, 1998 and
incorporated herein by reference]
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 and
incorporated herein by reference]; Amended and
Restated Rights Agreement dated April 1, 1998
[filed as Exhibit 1 to the Company's
Registration Statement on Form 8-A/A (Amendment
No. 1) dated April 1, 1998 and incorporated
herein by reference]; First Amendment to Amended
and Restated Rights Agreement dated February 28,
1999 [filed as Exhibit 4.1 to the Company's
Registration Statement on Form 8-A/A (Amendment
No. 2) dated April 21, 1999 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 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 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 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 and incorporated herein by reference]
10(d)(1) 1990 Employee Stock Purchase Plan of Norstan, Inc.,
as amended May 29, 1998 [filed as Exhibit 10(d)(1)
to the Company's Annual Report on Form 10-K for the
year ended April 30, 1998 and incorporated herein
by reference]
43
<PAGE>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
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 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 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 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 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 and incorporated herein
by reference]; Amendment adopted August 16, 1996
[filed as Exhibit 10(g)(1) to the Company's Annual
Report on Form 10-K for the year ended April 30,
1998 and incorporated herein by reference]
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 and incorporated
herein by reference]
10(i)(1) Consulting Agreement dated September 1, 1998
between Richard Cohen and the Company
10(j)(1) Employment Agreement dated April 30, 1997 between
David R. Richard and the Company [filed as Exhibit
10(j)(1) to the Company's Annual Report on Form
10-K for the year ended April 30, 1998 and
incorporated herein by reference]
10(k)(1) 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 and incorporated herein by reference]
10(k)(2) Amended and Restated Stock Purchase Agreement
dated September 5, 1997 by and among the Company,
Vadini, Inc. (d.b.a. PRIMA Consulting) and Michael
Vadini [filed as Exhibit 2 to the Company's
Current Report on Form 8-K dated October 8, 1997
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 US
Bank National Association, as one of the Banks and
as agent for the Banks [filed as Exhibit 10(l)(1)
to the Company's Annual Report on Form 10-K for
the year ended April 30, 1998 and incorporated
herein by reference]
10(l)(2) Fourth Amendment to Credit Agreement, dated as of
July 23, 1998, by and among the Company, certain
banks as signatories thereto (the "Banks") and US
Bank National Association, as one of the Banks and
as agent for the Banks [filed as Exhibit 10 to the
Company's Quarterly Report on Form 10-Q for the
period ended August 1, 1998 and incorporated
herein by reference]
44
<PAGE>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
10(l)(3) Fifth Amendment to Credit Agreement, dated as of
September 28, 1998, by and among the Company,
certain banks as signatories thereto (the "Banks")
and US Bank National Association, as one of the
Banks and as agent for the Banks [filed as Exhibit
10(a) to the Company's Quarterly Report on Form
10-Q for the period ended October 31, 1998 and
incorporated herein by reference]
10(l)(4) Sixth Amendment to Credit Agreement, dated as of
October 21, 1998, by and among the Company,
certain banks as signatories thereto (the "Banks")
and US Bank National Association, as one of the
Banks and as agent for the Banks [filed as Exhibit
10(b) to the Company's Quarterly Report on Form
10-Q for the period ended October 31, 1998 and
incorporated herein by reference]
10(l)(5) Seventh Amendment to Credit Agreement, dated as of
May 31, 1999, by and among the Company, certain
banks as signatories thereto (the "Banks") and US
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 [filed as Exhibit 10(m) to the Company's
Annual Report on Form 10-K for the year ended
April 30, 1998 and incorporated herein by
reference]
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., 5101 Shady Oak Road, Minnetonka, Minnesota 55343, 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>
CONSULTING AGREEMENT
THIS AGREEMENT, made as of September 1, 1998, by and between
RICHARD COHEN, of Minneapolis, Minnesota ("Consultant") and NORSTAN, INC., a
Minnesota corporation (the "Company"),
W I T N E S S E T H:
WHEREAS, Consultant has been employed by the Company on a
full-time basis for a period in excess of 20 years in various executive
management positions; and
WHEREAS, the continued availability of Consultant's experience
and knowledge are considered to be important to the continued success of the
Company's business; and
WHEREAS, the Company wishes to retain the services of
Consultant as an adviser and consultant to the Company and to restrict his right
to compete with the Company, for the term of the agreement, and Consultant is
willing to provide such services and to agree to such restrictions on the terms
and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises, and of the
mutual covenants hereinafter set forth, the parties do hereby agree as follows:
1. CONSULTING PERIOD. The Company agrees to retain the
services of Consultant and Consultant agrees to provide the services hereinafter
described, for the period beginning on September 1, 1998 and ending on August
31, 2001 (the "Consulting Period") provided that on August 31, 1999 and on each
August 31 thereafter (the "Renewal Date"), the Consulting Period shall be
extended upon satisfactory completion of the annual objectives by Consultant and
the mutual written agreement of the parties to a date which is 36 months after
the Renewal Date. Notwithstanding, in no event shall the Consulting Period
extend beyond April 30, 2004 under this agreement.
2. DUTIES.
a. CONSULTING SERVICES. During the Consulting Period,
Consultant shall hold himself available to consult with and advise the officers,
directors, and other representatives of the Company concerning such matters
relating to the operations of the Company based upon mutually agreed upon annual
objectives and as the Board of Directors of the Company shall otherwise
determine. Consultant shall make himself available to render such services at
all reasonable times by telephone or letter and, upon reasonable advance notice,
in person; provided, that Consultant shall not be required to perform consulting
or advisory services for more than 1000 hours during any annual period during
the Consulting Period and shall not be required to perform consulting or
advisory services during any period in which he is precluded from doing so by
reason of incapacity or ill health.
b. SERVICES AS A DIRECTOR. Consultant shall continue to
serve as a
<PAGE>
Director of the Company until the expiration of his current term, whereupon
the Company agrees, except for due cause, to have him included among
management's nominees for election to its Board of Directors for each
succeeding term ending not later than one year after the expiration of the
Consulting Period. Consultant agrees that, except insofar as he may be unable
to do so by reason of incapacity or ill health, he shall serve as a Director
of the Company and of any of its subsidiaries during any part of the
Consulting Period for which he may be elected to such a position. Consultant
shall be entitled to standard Director's fees for any period during which he
is serving as a Director of the Company, which fees shall be in addition to
any compensation payable to Consultant pursuant to this Agreement.
3. COMPENSATION. During the Consulting Period,
Consultant shall be compensated as follows:
a. RETAINER. During the Consulting Period, Consultant
shall be paid a retainer at the rate of $150,000 per year, payable in equal
monthly installments of $12,500.00 with the first payment due on September 30,
1998.
b. FACILITIES. During the Consulting Period, Company
shall have no obligation to provide office space or any facilities or services
on behalf of Consultant and Consultant acknowledges that he shall be solely
responsible to provide such facilities and services.
c. TRAVEL EXPENSES. Consultant shall be reimbursed by
the Company for all reasonable travel expenses incurred by him at the request of
the Company in the performance of his duties pursuant to this Agreement, to the
extent such expenses are substantiated and are consistent with the general
policies of the Company relating to the reimbursement of such expenses.
d. FRINGE BENEFITS. Consultant shall not be entitled to
participate in any of the pension, profit sharing, or other employee benefit
plans or fringe benefit programs which are from time to time maintained by the
Company for its employees.
e. STOCK OPTIONS/GRANTS. Consultant's current
outstanding stock options and g rants shall continue to be maintained pursuant
to the terms and conditions of the applicable stock option and restricted stock
agreements.
4. DEATH. If Consultant shall die during the Consulting
Period, the Company's obligation to pay the retainer under section 3.a. shall
cease except for amounts unpaid for prior service.
5. COMPETITION.
a. Consultant covenants and agrees that during the
Consulting Period, he will not, except with the express written consent of the
Board of Directors of the Company, engage directly or indirectly in, or permit
his name to be used in connection with, any competitive business in the
geographic area serviced by the Company or its subsidiaries.
<PAGE>
b. For the purposes of this paragraph 5: (i) the phrase,
"engage directly or indirectly in" shall encompass: (A) all of Consultant's
activities whether on his own account or as an employee, director, officer,
agent, consultant, independent contractor, or partner of or in any person, firm,
or corporation (other than the Company and its subsidiaries), and (B)
Consultant's ownership of more than 10% of the voting stock of any corporation,
5% or more of the gross income of which is derived from any business or
businesses in which Consultant may not then engage; and (ii) the phrase
"competitive business shall mean: (A) the sale of telephone, telecommunications,
data, network or similar equipment, (B) sale of consulting and/or maintenance
services, and (C) any other business in which the Company or its subsidiaries is
then engaged.
6. ENFORCEMENT. If, at the time of enforcement of any
provision of paragraph 5, a court shall hold that the period, scope, or
geographical area restrictions stated therein are unreasonable under
circumstances then existing, the maximum period, scope, or geographical area
reasonable under the circumstances shall be substituted for the stated period,
scope, or area. In the event of a breach by Consultant of any of the provisions
of paragraph 5, the Company may, in addition to any other rights and remedies
existing in its favor: (a) discontinue the payment of any amounts, or the
provision of any benefits, required to be paid or provided to Consultant
pursuant to this Agreement; and (b) apply to any court of law or equity of
competent jurisdiction for specific performance and/or injunctive or other
relief in order to enforce or prevent any violations of the provisions hereof.
7. STATUS OF CONSULTANT. During the Consulting Period,
Consultant's relationship to the Company shall be solely that of an independent
contractor. Subject to the provisions of paragraph 5 hereof, Consultant shall be
free to dispose of such portion of his time during normal business hours as he
is not obligated to devote to the Company hereunder in such manner, and to such
persons, firms, and corporations, as he sees fit. Consultant agrees that he will
not take any position inconsistent with his status as an independent contractor
hereunder in any federal, state, or local income or other tax return.
8. SUCCESSORS.
a. OF THE COMPANY. The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation, or
otherwise) to all or substantially all of the business and/or assets of the
Company to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would have been required to
perform it if no such succession had taken place. As used in this Agreement,
"Company" shall mean the Company as herein before defined, and any successor to
the business and/or assets of the Company which executes and delivers the
agreement provided for in this paragraph 8 or which otherwise becomes bound by
all the terms and provisions of this Agreement as a matter of law.
b. OF CONSULTANT. This Agreement shall inure to the
benefit of and shall be enforceable by Consultant, his legal representative, or
other successors in interest.
<PAGE>
9. GENERAL PROVISIONS.
a. ASSIGNMENT. It is agreed that neither Consultant nor
any beneficiary shall have any right to commute, sell, assign, transfer, or
otherwise convey the right to receive any payment or other benefit hereunder,
which payments and benefits, and the rights thereto, are expressly declared to
be non-assignable and nontransferable. Except as provided in paragraph 8.a., the
Company shall have no right to assign or transfer its rights or obligations
under this Agreement, and of any beneficiary or Consultant, shall be solely
those of an unsecured creditor of the Company. Any asset acquired by the
Company, in connection with the liabilities assumed by it under this Agreement
shall not be deemed to be held under any trust for the benefit of the Consultant
or his beneficiaries or to be considered security for the performance of the
obligations of the Company, but shall be, and remain, a general, un-pledged,
unrestricted asset of the Company.
c. CUT-HEADINGS. The headings of all of the paragraphs
and subparagraphs of this Agreement are inserted for convenience of reference
only, and shall not affect the construction or interpretation of this Agreement.
d. MODIFICATION, AMENDMENT, WAIVER. No modification,
amendment, or waiver of any provision of this Agreement shall be effective
unless approved in writing by both parties. The failure at any time to enforce
any of the provisions of this Agreement shall in no way be construed as a waiver
of such provisions and shall not affect the right of either party thereafter to
enforce each and every provision of this Agreement in accordance with its terms.
e. SEVERABILITY. Whenever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and valid
under applicable law, but if any provision of this Agreement shall be held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.
f. NO STRICT CONSTRUCTION. The language used in this
Agreement shall be deemed to be the language chosen by the parties thereto to
express their mutual intent, and no rule of strict construction shall be applied
against any person.
g. APPLICABLE LAW. All questions concerning the
construction, validity, and interpretation of this Agreement shall be governed
by the laws of the State of Minnesota.
h. NOTICES. Any notice to be served under this Agreement
shall be in writing and shall be mailed by registered or certified mail,
registry or certification fee and postage prepaid and return receipt requested,
addressed:
If to the Company, to:
<PAGE>
Norstan, Inc.
605 North Highway 169
Plymouth, Minnesota 55441
Attention: Board of Directors; or
If to Consultant, to:
Richard Cohen
6990 Tupa Drive
Edina, Minnesota 55439;
or to such other place as either party may specify in writing, delivered in
accordance with the provisions of this subparagraph.
i. SURVIVAL. The rights and obligations of the
parties shall survive the term of the Consulting
Period to the extent that any performance is required
under this Agreement after the expiration or
termination of such term.
j. ENTIRE AGREEMENT. This Agreement dated September 1,
1998 constitutes the entire agreement of the parties with respect to the subject
matter thereof, and supersedes all previous agreements between the parties
relating to the same subject matter.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
NORSTAN, INC.
By /s/ David Richard
--------------------------------
Chief Executive Officer
By /s/ Richard Cohen
--------------------------------
Richard Cohen
<PAGE>
SEVENTH AMENDMENT TO CREDIT AGREEMENT
THIS SEVENTH AMENDMENT TO CREDIT AGREEMENT is dated as of May
31, 1999, but is effective as of April 30, 1999 ("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 Banks and the Agent are parties to a
Credit Agreement dated as of July 23, 1996, as amended by a First Amendment
dated as of October 11, 1996, a Second Amendment dated as of September 26, 1997,
a Third Amendment dated as of March 20, 1998, a Fourth Amendment dated as of
July 23, 1998, a Fifth Amendment dated as of September 28, 1998 and a Sixth
Amendment dated as of October 21, 1998 (as so amended, the "Credit Agreement").
B. The parties hereto desire to amend the Credit Agreement in
certain respects and to waive certain Events of Default.
C. The Borrower has formed or acquired three new Subsidiaries,
namely, Norstan Consulting Holding Company, Norstan Consulting, Inc. and Norstan
Canada, Ltd., each of which Subsidiaries is required by the terms of the Credit
Agreement to become a Guarantor of the Borrower's obligations under the Credit
Agreement.
D. Effective, January 1, 1999, Connect Computer Corporation,
Vadini, Inc. d/b/a Prima Consulting, Inc. and Wordlink, Inc. were merged with
and into Norstan Consulting, Inc.
E. The operations of Norstan Canada, Inc. ceased as of April
30, 1999 and the assets thereof were transferred to Norstan Canada, Ltd. as of
May 1, 1999.
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
5 hereof, the Credit Agreement is hereby amended as follows:
(a) Article IV thereof is amended by adding thereto the
following new Section 4.20:
<PAGE>
Section 4.20 YEAR 2000. The Borrower has reviewed and assessed
its business operations and computer systems and applications to
address the "year 2000 problem" (that is, that computer applications
and equipment used by the Borrower, directly or indirectly through
third parties, may be unable to properly perform date-sensitive
functions before, during and after January 1, 2000). The Borrower
reasonably believes that the year 2000 problem will not result in a
material adverse change in the Borrower's business condition (financial
or otherwise), operations, properties or prospects or ability to repay
the Bank. The Borrower is in the process of implementing a plan to
remediate year 2000 problems and will complete implementation of such
plan with respect to any material year 2000 problems, and testing
thereof, by September 30, 1999. The Borrower agrees that this
representation will be true and correct on and shall be deemed made by
the Borrower on each date the Borrower requests any Advance under this
Agreement or the Note or delivers any information to the Bank. The
Borrower will promptly deliver to the Bank such information relating to
this representation and covenant as the Bank may request from time to
time.
(b) Section 6.5 thereof is amended 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 forth 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 to
invest an additional $200,000 in Connaissance for the sole purpose of
acquiring certain assets of ASP Consulting; 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.
(c) Section 6.8 thereof is amended 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
- 2 -
<PAGE>
Expenditures attributable to the acquisition of membership interests in
Connaissance pursuant to the Connaissance Agreement and the $200,000
Investment in Connaissance for the purpose of acquiring certain assets
of ASP Consulting, as permitted under Section 6.5.
(d) Section 6.10(k) thereof is amended to read as follows:
6.10(k) Loans and advances (i) by the Borrower to Norstan
Communications, Inc., Norstan Network Services, Inc., Norstan
Consulting, Inc. (with respect to Connect Computer Company, PRIMA and
Wordlink, Inc., all of which were merged with and into Norstan
Consulting, Inc. effective January 1, 1999), Norstan-UK, Norstan
International and Connaissance 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, prior to the
Borrower's acquisition of the remaining 25% membership interest in
Connaissance pursuant to the Connaissance Agreement, the aggregate
amount of such loans and advances to Connaissance shall not exceed
$4,000,000 at any time outstanding prior to April 30, 2000 and
$3,000,000 at any time outstanding on or after April 30, 2000.
(e) Section 6.16 thereof is amended to read as follows:
Section 6.16 MINIMUM EBITDA. The Borrower will not permit
EBITDA to be less than (a) $9,000,000 for the period of one fiscal
quarter ending April 30, 1999, (b) $16,000,000 for the period of two
consecutive fiscal quarters ending July 31, 1999, (c) $26,000,000 for
the period of three consecutive fiscal quarters ending October 31,
1999, (d) $35,000,000 for the period of four consecutive fiscal
quarters ending January 31, 2000 and (e) $40,000,000 for each period of
four consecutive fiscal quarters ending on or after April 30, 2000.
(f) Section 6.19 thereof is amended to read as follows:
Section 6.19 INTEREST COVERAGE RATIO. The Borrower will not
permit the Interest Coverage Ratio to be less than (a) 6.0 to 1.0 as of
April 30, 1999, July 31, 1999 and October 31, 1999 and (b) 8.0 to 1.0
as of January 31, 2000 and as of the last day of any fiscal quarter
ending thereafter.
Section 3. WAIVER. The Borrower has informed the Banks that it
was not in compliance with its covenant under Section 6.10(k)(ii) hereof as
constituted prior to the date hereof, in that the aggregate outstanding
principal of loans and advances from Norstan Communications, Inc. to
Connaissance was in excess of $2,000,000, and that it was not in compliance with
its covenant under Section 6.16 of the Credit Agreement for the period ended
January 31, 1999, in that its actual EBITDA for the period of four consecutive
fiscal quarters ended on that date was less than $35,000,000. Each such instance
of noncompliance constitutes an Event of Default under the Credit Agreement.
Upon satisfaction of the conditions set forth in
- 3 -
<PAGE>
Section 5 of this Amendment, the Banks hereby waive the Events of Default
under the Credit Agreement described in the preceding sentences. 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 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 has been duly authorized, executed and
delivered by it and 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;
(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 (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
Article IV of the Credit Agreement are true and correct in all material
respects with the same force and effect as if made by the Borrower on
and as of the date hereof.
- 4 -
<PAGE>
Section 5. 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 the Guarantors a
Consent and Agreement of Guarantors in the form of Exhibit A hereto
(the "Guarantor Agreements") duly completed and executed by each
Guarantor;
(c) the Agent shall have received from each of Norstan
Consulting Holding Company, Norstan Consulting, Inc. and Norstan
Canada, Ltd. a Guaranty substantially in the same form as the
Guaranties heretofore executed by the other Guarantors, duly executed
by each such Subsidiary;
(d) 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; 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 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), whereupon this Amendment shall be retroactively
effective as of April 30, 1999.
Section 6. AFFIRMATION; REAFFIRMATION. 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 and (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. The Borrower hereby confirms, ratifies, approves and reaffirms
each of the Loan Documents and agrees that each of the Loan Documents, as
amended hereby, remains in full force and effect.
Section 7. GENERAL.
(a) The Borrower agrees to reimburse the Agent upon demand for
all reasonable expenses (including reasonable attorneys fees and legal
expenses) incurred by
- 5 -
<PAGE>
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.
(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.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
- 6 -
<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/ Andrew K. Peterson
-----------------------------------
Its: Managing Director
----------------------------------
M&I MARSHALL & ILSLEY BANK
By: /s/ Stephen F. Geimer
-----------------------------------
Its: Vice President
-------------------------------
By: /s/ Robert A. Nielsen
-----------------------------------
Its: Assistant Vice President
NORWEST BANK MINNESOTA,
NATIONAL ASSOCIATION
By: /s/ Brad Sullivan
-----------------------------------
Its: Assistant Vice President
[Signature Page to Seventh Amendment to Credit Agreement]
S-1
<PAGE>
EXHIBIT 23(A)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated June 8, 1999 included in this Form 10-K, into the Company's
previously filed Registration Statement Nos. 33-30323, 33-32310, 33-44470,
33-72926, 33-62957, 33-62971, 33-72928 and 333-37913.
/s/ ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
July 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> APR-30-1999
<CASH> 867
<SECURITIES> 0
<RECEIVABLES> 98,883
<ALLOWANCES> 1,437
<INVENTORY> 16,846
<CURRENT-ASSETS> 175,863
<PP&E> 97,385
<DEPRECIATION> 47,656
<TOTAL-ASSETS> 308,516
<CURRENT-LIABILITIES> 97,624
<BONDS> 94,015
1,076
0
<COMMON> 0
<OTHER-SE> 108,259
<TOTAL-LIABILITY-AND-EQUITY> 308,516
<SALES> 200,738
<TOTAL-REVENUES> 482,709
<CGS> 151,382
<TOTAL-COSTS> 337,670
<OTHER-EXPENSES> 129,727
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,886
<INCOME-PRETAX> 10,426
<INCOME-TAX> 4,536
<INCOME-CONTINUING> 5,890
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,890
<EPS-BASIC> 0.56
<EPS-DILUTED> 0.56
</TABLE>
