Norstan, Inc.

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 o

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. o

As of July 17, 2002, 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 $48,920,000.

As of July 17, 2002 there were outstanding 12,416,341 shares of the registrant’s common stock, par value $.10 per share, its only class of equity securities.

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.

Norstan, Inc. (“Norstan” or the “Company”) is a full-service communications solutions and services company that delivers voice and data technologies and services, and remanufactured equipment to select corporate end-users and channel partners. Norstan also offers a full range of technologies for call center design, IP telephony/ PBX, messaging, infrastructure, conferencing, and mobility. Norstan manages the operations of its subsidiaries, Norstan Communications, Inc., Norstan Canada, Ltd., Norstan Financial Services, Inc., Vibes Technologies, Inc., Norstan International, Inc., and Norstan-UK Limited. The Company is headquartered in Minnetonka, Minnesota with sales and services throughout North America. Norstan’s common stock is listed on the Nasdaq stock market under the symbol NRRD.

Norstan drives its business by delivering legendary service through the installation of a broad array of technology platforms, software solutions and on-going system maintenance needs. The Company currently works with approximately 18,000 customers, drawing its customers from the banking/finance, healthcare, manufacturing, retail, government, education, utilities, finance/insurance and non-profit sectors. The Company derives revenues from technology service support sales to a broad channel of manufacturers, resellers and distributors and through partnerships with manufacturers offering best-in-class technology. Norstan also maintains a direct sales effort focused on Fortune 2000 companies and an inside sales force focused on smaller opportunities. The Company’s remanufactured equipment segment supports Norstan’s customer base, channel partners, resellers and distributors with efficient and reliable resale services.

To address the complex communication requirements of its customers, Norstan provides a broad range of products and services through three interrelated business segments: Communications Technology Solutions and Services, Resale Services, and Financial Services which accounted for 85.5%, 12.3%, and 2.2% of Norstan’s fiscal year 2002 revenues, respectively. Communications Technology Solutions and Services provides best-in-class technologies and services focused on selected enterprise customers throughout North America and technology implementation and support services for network providers, manufacturers, integrators, and resellers. Resale Services provides refurbished and re-certified voice and data products to end users. Financial Services supports the sales process by providing customers with customized financing alternatives.

The Company maintains 34 sales and service locations in 24 cities throughout the United States and Canada. Norstan serves approximately 18,000 customers across a broad range of industries and focuses its marketing efforts on middle-market and Fortune 2000 companies with complex technology and communication requirements. Current customers include Charles Schwab, Best Buy, IBM, and Harley-Davidson. Norstan’s strong emphasis on customer satisfaction is evidenced by a fiscal year 2002 survey. Administered by an independent third party, the survey recorded an overall customer satisfaction rating of 97.2%. This dedication to customer service, together with the Company’s breadth of service offerings, has resulted in Norstan becoming the fourth largest communications services provider in North America. The Company believes that its outstanding customer service will enable Norstan to capture a greater portion of each customer’s communication budgets in the future as well as provide other growth opportunities through multi-channel marketing (see Norstan’s Growth Strategy).

Norstan provides leading-edge technologies in its Communications Technology Solutions and Services and Resale Services segments. The Company has established strategic alliances with leading communication companies that enhance Norstan’s ability to offer best-in-class, custom-tailored solutions to its customers. Norstan improves the way its customers communicate. Strategic partners include Alcatel, Aspect Communications, Captaris, Cisco Systems, Ericsson, IntervoiceBrite, Latitude, Nortel Networks, Nuance, PolyCom, Rockwell FirstPoint Contact, Siemens, SpectraLink, SpeechWorks, Verint and VTEL.

In July 2002, Norstan completed the sale of its Network Services business to NetWolves Corporation for $7.5 million, including $3.75 million in cash and a promissory note for $3.75 million. Network Services provides multiple source long distance services and related consulting and professional services to its customers. Management concluded that Network Services lacks synergies with the Company’s strategic focus.

During fiscal 2001, Norstan divested its IT consulting business in order to focus on its core competencies of providing communications technology services and solutions to channel partners and direct enterprise customers. The two units that made up the Company’s IT consulting business, Connaissance Consulting and Norstan Consulting, were sold on February 7 and April 30, 2001, respectively. The absence of synergies between Norstan’s communications and consulting businesses and recurring losses within the consulting businesses also contributed to the decision to divest of this non-strategic business segment.

Until recently, intense global competition and accelerating technological change have driven businesses to depend on technology-based solutions to enhance their competitive position, and to improve productivity and the quality of their products and services. Current economic conditions, however, have significantly slowed that trend. Companies that traditionally relied on technology-based solutions as strategic business tools are postponing or curtailing technology decisions. This has had a significant effect on both the business climate and the telecommunications industry.

While customers continue to rely heavily on technology to reduce transaction costs by increasing operational efficiencies, the bias toward software-centric solutions in lieu of hardware continues. Notwithstanding the slow economic conditions, growth continues to occur in areas such as customer contact solutions, CTI (computer telephony integration), unified media, convergence (IP telephony), and mobility.

Current financial pressures also are making it increasingly difficult for communications equipment manufacturers to support a direct distribution model. Most independent distribution channels lack an adequate geographic footprint, infrastructure, processes, and resources to effectively fulfill the manufacturer’s need to deploy complex high-end technology solutions. This has resulted in the need for systems integration and support services through third-party providers. A key competency being driven by the market is the ability to effectively integrate disparate technology platforms into enterprise-wide applications solutions.

As a result of these factors, demand for communication services and products has been relatively flat. Phillips InfoTech (InfoTech), a market research firm specializing in telecommunications market information, estimates that the U.S. market for traditional voice PBX systems will continue to decline over the next five years as enterprises shift to converged solutions, a combined form of voice and data, also referred to as IP Telephony. In 2001, total PBX line shipments declined 12.2% from the same period in 2000. In contrast, IP line shipments grew nearly 230.0% to 1.6 million lines during the same period. Purchases associated with converged solutions are forecasted to grow approximately 29.0% between 2001 and 2002, increasing to 47.8% growth from 2002 to 2003. Recent slowdowns in technology spending may delay this development, however. Overall revenues in the U.S. marketplace for voice and convergence are projected to reach $5.6 billion by 2005. Field maintenance and repair is the largest, but slowest growing segment in services associated with the voice marketplace. This includes the maintenance and repair of PBX, Key/ Hybrid, Voice Processing: IVR, CTI, ACD and fax. Growth in 2001 was estimated by Phillips InfoTech at 2.8% to $4.2 billion, with expected growth to $4.8 billion by 2005. Spending in video conferencing totaled an estimated $600.0 million in 2001, and is projected to grow to $1.4 billion by 2006, while the audio and data conferencing market is projected to grow to $2.4 billion in 2004 from $1.7 billion in 2001, according to Wainhouse Research and Frost & Sullivan, market research firms specializing in collaboration and telecommunications data.

Norstan is a provider of a wide range of communication software, services and equipment that enable its customers to compete and succeed in the global marketplace. Norstan has leveraged its established reputation as a provider of premier communication products and services to deliver complex, high-end technology solutions to middle-market and Fortune 2000 companies. This broad range of offerings enables Norstan to serve as a single-source provider of communication solutions and services 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. Norstan believes that its customer relationships, its geographic reach and size, and its expertise in providing communication solutions and service will enable it to capitalize on the continuing growth and convergence of the hardware and software needs of middle-market and Fortune 2000 companies.

Norstan’s objective is to become the leading provider of communications technology solutions and services to the enterprise market in North America. Key to the achievement of this objective are the following elements:

Capitalize on the trend of “dis-integration” by manufacturers, integrators and distributors in the converged communications and information technology areas. Equipment and software providers are increasingly outsourcing functions that are not core competencies. This trend has led to the rapid development of outsourced manufacturing, installation and ongoing services rather than the use of limited resources to maintain North American-wide installation and servicing organizations. Norstan is one of the largest product-independent communications technology solutions and services organization targeting the enterprise market in North America.

Focus on delivering integrated solutions to select enterprise customers. Enterprise customers demand robust communications technology solutions and services that integrate multiple platforms, increase productivity, improve customer touch, reduce costs, offer custom-tailored best-in-class technologies and round-the-clock customer service while realizing the highest return on their investment. This requires expertise in selected practice areas, best-in-class product independence and a servicing capability that spans a wide geography. Norstan specializes in attracting and retaining high value customers who demand a broad spectrum of expertise, including customer contact solutions, voice and converged communications, communications services and enterprise mobility and infrastructure.

Capitalize on the growth and consolidation of the secondary market for re-sale and re-manufacture of voice and data equipment. The secondary market for telecommunications continues to grow and continues to be fragmented. The one exception to this fragmentation is the Resale Services Group, an alliance between Norstan and Siemens Enterprise Networks LLC, which controls nearly 70% of the resale and re-manufacture of Siemens equipment in North America. Through its wholly-owned subsidiary, Vibes Technologies, Inc. (Vibes), Norstan believes it can provide a new level of integrated direct and web-based service to the secondary market for such products as those manufactured by Cisco, Avaya and Nortel.

Provide superior customer service. Norstan’s dedication to providing service beyond its customers’ expectations has produced many favorable customer relationships and resulted in increased exposure to potential new customers. Norstan’s emphasis on customer satisfaction is evidenced by a fiscal year 2002 survey of Norstan’s customers, in which Norstan received an overall satisfaction rating of 97.2%. Customers were surveyed by an independent third party. The Company believes that its reputation for superior service will lead to opportunities in its multi-channel marketing and cross-selling strategy designed to expand the products and services it sells to its customer base.

Attract, develop and retain highly skilled professionals. Norstan will continue to attract, develop and retain the highest caliber of personnel by providing a rewarding work environment, competitive pay and benefits, and opportunities for individual growth and development. Norstan has had a long history of creating a values-based culture that emphasizes ethical actions and respect for the individual.

Norstan expects growth from each of its three primary and inter-related business strategies. Norstan’s Communications Technology Solutions and Services business provides best-in-class technologies and services focused on selected end-user customers throughout North America. Within this business segment is Norstan’s Communications Technology Channel Partner Development unit, which specializes in technology implementation and support services for network providers, manufacturers, integrators, and resellers. Norstan’s Resale Services business provides refurbished and re-certified voice and data products to end users.

The largest of these units is the Communications Technology Solutions and Services business, which has been organized into specific practice areas designed to provide opportunities for increased revenues from both new and existing customers. Norstan has defined these practice areas as Voice and Converged Solutions, Customer Contact Solutions, Communications Services and Enterprise Mobility and Infrastructure. Within each practice area, Norstan offers consulting, best-in-class technologies and legendary customer service.

Norstan’s Communications Technology Channel Partner Development business has successfully developed new channel partnerships with companies such as Alcatel, Calence, Highwire Networks, Mitel Networks, Datatec Systems, and VorTecs. In addition to the Company’s current direct enterprise marketing activities, Norstan is focused on marketing its industry-leading professional, consulting and traditional support services through a broad spectrum of enterprise solution providers. Such enterprise solution providers include CLECs, Incumbent Local Exchange Carriers (ILECs), Internet Service Providers (ISPs), and Applications Services Providers (ASPs) as well as other channel partners, such as Value-Added Resellers (VARs), Systems Integrators, and Manufacturer Direct channels.

Services offered to these multi-channel partners include a complete spectrum of capabilities from applications planning through solution implementation, network monitoring, installation, support, upgrades and maintenance. According to industry studies by InfoTech, the combined markets for these services are projected to be $28.0 billion by 2004 and are expected to grow at an average annual growth rate of nearly 40.0% between 2000 and 2004.

Finally, Norstan’s Resale Services business expects the re-sale of used telecommunication and data equipment to continue to grow and the segment to consolidate. Vibes is uniquely positioned to take advantage of this growth and consolidation with its state-of-the-art e-commerce web site. The combination of this web based approach and Norstan’s premier knowledge of the secondary market will provide the basis for growth in this business group.

Norstan provides customers with 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 the Company’s three business segments; Communications Technology Solutions and Services, Resale Services, and Financial Services:

Within its core Communications Technology segment are two interrelated business units:


	•	Direct Solutions and Services. Provides best-in-class technologies and services focused on selected end-user customers throughout North America.

	•	Channel Partner Services. Technology implementation and support services for network providers, manufacturers, integrators, and resellers.

Norstan’s product and service offerings are centered around four Practice Areas:


	–	Voice Systems

	–	IP Telephony

	–	Data Networking

	–	Video Conferencing

	–	Audio Conferencing

	–	Data Collaboration

	–	Advanced messaging


	–	Contact Center Switching Platforms

	–	Self Service: Interactive Voice Response & Speech Recognition

	–	CTI (Computer Telephony Integration)

	–	Intelligent and Pre-Call Routing

	–	Media Blending/ Web Enablement

	–	Work Force Optimization: Workforce Management & Quality Monitoring and Recording


	•	Wireless Voice Solutions (Dedicated and IP-based)

	•	Wireless LAN (802.11a & 802.11b)

	•	Access Gateways (Wireless Integration Solutions)

	•	Broadband Wireless Infrastructure for the Enterprise


	–	Remote System Monitoring & Diagnostic Analysis

	–	System Modifications (Moves, Adds, and Changes)

	–	Managed Communication Services

	–	24 x 7 Customer Support

	–	Customized Maintenance Contract Offerings

	–	Professional and Consultation Services

Within each Practice Area Norstan provides world class communications consulting services, leading edge technologies, and legendary implementation and support services.

Norstan’s Resale Services segment provides refurbished and re-certified voice and data products to end users. This business is comprised of two units:


	•	Resale Services Group is a 12-year alliance between Siemens Enterprise Networks LLC and Norstan. This business offers value-minded customers the highest quality refurbished systems, components, desktop products, accessories and services.

	•	Vibes Technologies, Inc., a wholly owned subsidiary of Norstan Communications, Inc., is a leader in telecom and data equipment remanufacture and repair, specializing in top-line key systems, phones, data and other components. They provide customers legendary customer service and expertise in systems manufactured by Nortel Networks, Avaya (formerly Lucent Technologies), Executone, Aspect Communications and Cisco Systems.

Norstan Financial Services provides Norstan customers with creative and flexible financial solutions for technology and business essential equipment acquisitions. These financial alternatives are offered under a private label leasing program through a partnership between Fidelity Leasing and Norstan Financial Services.

Norstan focuses its marketing efforts on middle-market and Fortune 2000 companies with complex communication requirements. Norstan has served approximately 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’s relationships with a wide range of leading technology companies enhance its ability to deliver the appropriate solution to each customer. Strategic alliance partners include Alcatel, Aspect Communications, Captaris, Cisco Systems, Ericsson, IntervoiceBrite, Latitude, Nortel Networks, Nuance, Polycom, Siemens, Sprint, Rockwell FirstPoint Contact, SpectraLink, SpeechWorks, Verint and VTEL. In addition, Norstan 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.

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.

Throughout the United States and Canada, Norstan’s product and services offerings are brought to market through three separate but complementary distribution channels. These channels use a direct,

This multi-channel distribution model uses the most cost-effective sales channels to bring Norstan’s products and service offerings to market. Each channel is staffed with Sales Professionals who are highly focused on their respective target markets. In addition to having a comprehensive understanding of their markets, these Professionals also have a sound understanding of all Norstan’s product and services offerings to recognize additional sales opportunities and maximize account share.

Within the Direct Solutions channel, each Sales Professional has been trained to use a comprehensive approach to evaluate each customer’s technology and service needs. The Sales Professional begins by working with the customer to fully understand the customer’s goals and objectives. Next the Sales Professional conducts a detailed analysis of the customer’s current and future communication and IT systems requirements, as well as service delivery needs. After determining the customer’s needs, the sales Professional and a Norstan Solutions Engineer develop a solution that satisfies current and anticipated requirements. Norstan’s Service Delivery team then works 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 team of Sales, Solutions Engineering and Service Delivery specialists are able to minimize service interruption for the customer.

Norstan also provides an ongoing customer service program tailored to meet each customer’s specific application requirements. This service program incorporates remote diagnostics, in-field service and support, additional training, and help desk resources from Norstan’s expert customer support team, located in four Solution Centers across North America.

Norstan’s marketing strategy both captures the maximum possible share of Norstan’s existing customers’ communication and IT budgets and also identifies and develops new customer relationships. Additionally, Norstan’s team of highly trained Enterprise Account Managers (EAM) focus on the Company’s largest and most strategic accounts. The EAMs work with the client’s senior-level management to gain a comprehensive understanding of their business needs, and to ensure the most effective deployment of Norstan’s resources to satisfy those business needs. Norstan believes the use of EAMs will provide high quality sales and customer service, and will advance Norstan’s ongoing marketing efforts. Norstan believes that highly satisfied and loyal customers are more likely to continue to choose Norstan to provide them with additional communication and IT products and services.

Norstan believes that providing exceptional customer service is an important element of its ability to compete effectively in the communication marketplace. Norstan has invested heavily in new technology designed to help resolve a substantial portion of customer support and service issues quickly and remotely. Norstan coordinates its customer service response through four centers located in Minneapolis, Cleveland, Los Angeles, and Montreal. In fiscal year 2002, these centers handled more than 450,000 customer calls with approximately 66.0% of the service-related calls addressed remotely. By comparison, only 18.0% of customer calls were resolved remotely in fiscal year 1994. For calls requiring immediate on-site service and

Norstan has approximately 150 employees in its four remote diagnostics and dispatch centers devoted primarily to providing customer service, and has more than 350 service technicians in the field. With Norstan’s remote problem resolution capability and its staff of highly trained technicians, the Company is able to promptly resolve customer support requests. Norstan’s commitment to customer service is evidenced by a fiscal year 2002 survey of Norstan’s communication customers that found an overall satisfaction rating of 97.2%. This survey was administered by an independent third party.

Norstan currently supports its clients with 34 sales and service locations in 24 cities within the United States and Canada, including the following:

Norstan had a total of 1,477 employees as of April 30, 2002, including 1,341 in the U.S. and 136 in Canada. The employee population consists of 274 in sales and marketing, 771 in operations, service and installation, 395 administrative and professional personnel and 37 consultants. Of these employees, 86 are covered by collective bargaining agreements. Norstan considers relations with its employees to be good and has not experienced any work stoppages.

Norstan’s marketing strategy is designed to capture a larger portion of existing customers’ communication and IT budgets and to identify and develop new customer relationships. 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 Norstan. Subject to this competitive environment, Norstan competes on the basis of: the depth and breadth of services and products offered; the ability to integrate IT and communication systems as the related technologies continue to converge; its reputation for providing superior customer service; and the number and strength of customer relationships.

Norstan also competes in its markets with Avaya Communications, of Basking Ridge, NJ; NextiraOne, a division of Platinum Equities, of Houston, TX; and RBOCs such as SBC Communications, San Antonio, TX and Telcos such as Verizon Communications of New York, NY.

Norstan relies upon a combination of nondisclosure and other contractual arrangements with certain key employees and business partners, 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 business partners and limits the distribution of proprietary information.

Except for the sale of long distance service, Norstan 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 became subject to certain state tariff regulations throughout the United States. Norstan 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. With the sale of Norstan Network Services in July of 2002, Norstan is no longer subject to these regulations.

As of April 30, 2002, Norstan had signed contracts for telecommunications products and professional services aggregating approximately $23.5 million, substantially all of which are expected to be fulfilled by the end of fiscal 2003. As of April 30, 2001, Norstan had signed contracts aggregating approximately $18.9 million, substantially all of which were fulfilled by the end of fiscal 2002. The usual time period between the execution of a contract and the completion of the installation is three to twelve months, depending on the size and complexity of the system.

The executive offices of Norstan are located in Minnetonka, Minnesota, where the Company leases approximately 165,000 square feet of office space. Norstan also has area headquarters in Brecksville, Ohio, and Phoenix, Arizona, where the Company leases approximately 42,750 and 34,400 square feet of office space, respectively. In addition to the space above, Norstan leases sales and service offices in 21 other cities within the United States. In Canada, Norstan leases approximately 28,800 square feet of office space in Toronto, Ontario, which serves as its Canadian headquarters. Norstan also leases sales and service offices in three other cities within the Canadian provinces of Alberta, Quebec and British Columbia. Norstan believes that the above-mentioned facilities are adequate and suitable for its current needs.

Norstan 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 Norstan for which the outcome is likely to have a material adverse effect upon the business, operating results and financial condition of the Company.

On February 25, 2002, Norstan was awarded $7.2 million resulting from a claim before the American Arbitration Association against the former owner of PRIMA Consulting (“PRIMA”) which claims arise out of the Company’s September 1997 acquisition of PRIMA. Subsequently, Norstan reached a settlement with Mr. Michael Vadini. The settlement provides that Norstan receive $3.0 million in cash, a promissory note issued by Mr. Vadini for $1.0 million to be paid in monthly installments beginning in June 2002, and certain real properties. As a result of the settlement, Norstan recorded a $3.0 million gain in the fourth quarter of fiscal 2002, based on cash received. Norstan recorded a full reserve against the real property and the promissory note and will record any future gains on the sale of the real properties and collection of the promissory note as amounts are assured of realization.

In May 2000, Norstan was sued in the U.S. District Court for the District of Minnesota by a former sales representative who claims he is owed $458,675 in additional commissions. On July 26, 2001, the U.S. District Court entered summary judgment in favor of the former sales representative and against Norstan. The Company believes the ruling is in error and has filed an appeal. However, there can be no assurance that Norstan will be successful in its appeal. Management believes that the April 30, 2002 consolidated financial statements adequately reflect Norstan’s exposure under this lawsuit.

Norstan did not submit any matters to a vote of security holders during the last quarter of the fiscal year covered by this report.

Norstan’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:

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 17, 2002, there were 4,029 holders of record of Norstan’s common stock.

Norstan has not recently declared or paid any cash dividends on its common stock and does not intend to pay cash dividends on its common stock in the foreseeable future. The Company currently expects to retain earnings to finance the operations and the expansion of its business. In addition, Norstan’s current revolving long-term credit agreement prohibits the payment of cash dividends without the prior written consent of the lenders thereunder.

The selected consolidated financial data set forth below as of and for the year ended April 30, 2002, have been derived from Norstan’s consolidated financial statements, which have been audited by Deloitte & Touche LLP, independent auditors. The selected consolidated financial data set forth below as of and for each of the fiscal years in the four-year period ended April 30, 2001 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.

The following table sets forth certain unaudited quarterly operating information for each of the eight quarters in the two year period ended April 30, 2002. 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 Norstan’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.

Norstan is a full service telecommunications company that delivers voice and data technologies and services, and remanufactured equipment to businesses and channel partners of all sizes. The Company delivers its products and services through three business segments, Communications Technology Solutions and Services, Resale Services and Financial Services, which accounted for 85.5%, 12.3% and 2.2% of fiscal year 2002 revenues, respectively. Communications Technology Solutions offerings include customer contact (call centers), collaboration (conferencing and messaging), converged communication (IP telephony and PBX systems), infrastructure (cabling, wiring, sound and signal) and mobile business networking. Communications Technology Services offerings include project consulting, project management, installation, system monitoring and support services maintenance. Resale Services offers refurbished and re-certified voice and data products. Financial Services supports the sales process by providing customized financing alternatives.

In fiscal year 2001, Norstan changed its reportable operating segments to reflect how it evaluates its operating performance and allocates resources. Prior to fiscal year 2001, the Company’s reportable segments included Consulting, Communications and Financial Services. As of April 30, 2001, Norstan divested its IT consulting business.

On February 4, 2002, Norstan announced that it had entered into a definitive agreement to sell its Network Services business to NetWolves Corporation (NASDAQ: WOLV) for $7.5 million. The transaction was completed on July 11, 2002. Pursuant to the terms of the purchase agreement, $3.75 million was received at closing and the remaining $3.75 million is due one year from closing, evidenced by a non-interest bearing note. The Company expects to record a gain on this sale of approximately $2.5 to $3.0 million in its first quarter of fiscal 2003 based on the $3.75 million cash received. Any additional gains related to payments received on the promissory note will be recorded when collection is assured.

Because of the disposition of the Consulting and Network Services business units, the applicable net assets and operating results have been separately reported as discontinued operations for all periods presented.

The following table sets forth certain items from Norstan’s consolidated statements of operations expressed as a percentage of total revenues:

The following table sets forth the gross margin percentages for each of Norstan’s business segments (continuing operations):

Revenues. Total revenues from continuing operations decreased $22.0 million or 8.2% to $247.5 million in fiscal year 2002 from $269.5 million in fiscal year 2001.

Revenues within the Communications Technology Solutions and Services segment decreased $22.1 million or 9.5% to $211.6 million in fiscal year 2002 from $233.7 million in fiscal year 2001. Revenues from Solutions’ product offerings were down 24.1% year-over-year as declines in legacy PBX system sales, call center solutions and conferencing system sales were only somewhat offset by increased revenues related to new product offerings and Channels activity. Services revenues were off slightly, down 1.6%, as increased service contract revenue was offset by decreased MAC (moves, adds and changes) and managed communications services revenues.

While the Company’s revenues have declined from fiscal 2001 to fiscal 2002, they have stabilized over the past four quarters. The continued slow economy has had a negative effect on revenues from the Company’s Solutions product offerings and MAC service offerings. However, Norstan’s new business model, concentrating on its core competencies, continues to gain traction with a renewed focus on providing direct solutions to select enterprise customers, communications technology solutions and services to channel partners and the remanufacture and resale of business communications products. The Company continues to pursue channel partners and other strategic relationships as evidenced by its new relationship with Nortel Networks announced in the Company’s second fiscal quarter. During fiscal 2002, and subsequent to year-end, Norstan broadened its channel strategy by adding several new relationships to its channels organization and expanded its relationship with Alcatel by signing agreements with many Alcatel business partners. These relationships have the potential to expand the Company’s geographic reach and capabilities within its Communications Technology Solutions and Services segment. During fiscal 2002, the Company opened sales offices in Dallas, Texas, Irvine, California and New York, New York.

Resale Services’ revenues increased $4.2 million or 15.8% to $30.4 million in fiscal 2002 as compared to $26.3 million in fiscal 2001. This was due to increased revenues from Vibes Technologies, Norstan’s integrated direct and web-based e-commerce business which remanufactures and resells voice and data equipment. Vibes revenues improved 52.2% during fiscal 2002 as compared to fiscal 2001, as a result of its expanded product offerings in both telecommunications and data equipment.

Financial Services’ fiscal 2002 revenue of $5.5 million was down 42.3% from $9.6 million in fiscal 2001. This decrease was attributed to Norstan’s strategic decision not to offer financing directly to its customers. Norstan Financial Services has partnered with Fidelity Leasing to provide financial alternatives to its customers under a private label leasing program. Revenues from Financial Services will continue to decline as its activity winds down.

Gross Margin. Norstan’s gross margin was relatively flat at $75.9 million and $75.7 million for the fiscal years ended April 30, 2002 and 2001, respectively. As a percent of total revenues, gross margin was 30.6% for fiscal year 2002 compared to 28.1% for fiscal year 2001.

Communications Technology Solutions and Services gross margin was relatively flat at $60.0 million in fiscal 2002 as compared to $59.2 million for fiscal 2001. Gross margin as a percent of revenues for this segment improved to 28.4% in fiscal 2002 as compared to 25.3% in fiscal 2001. The improved gross margin was the result of a change in the product/service mix, improved project management and contin-

Resale Services’ gross margin was down slightly to 36.7% of revenues in fiscal 2002 as compared to 37.5% in fiscal 2001. Gross margin for Financial Services were 84.2% and 69.8% for fiscal 2002 and 2001, respectively.

Selling, General and Administrative Expenses. Norstan’s selling, general and administrative expenses were $73.9 million in fiscal 2002 and $86.5 million in fiscal 2001, a decrease of $12.6 million or 14.6%. As a percent of revenues, selling, general and administrative expenses improved to 29.9% for fiscal 2002 as compared to 32.1% for fiscal 2001. Norstan has implemented a restructuring plan that has removed a significant amount of costs from its businesses over the past year. A majority of these efforts are complete and the current overall levels of selling, general and administrative expense are in line with the Company’s refocused business model. In addition, with the adoption of SFAS No. 142, the Company no longer records amortization expense related to previously recorded goodwill. Goodwill amortization was approximately $500,000 in fiscal 2001. Norstan continues to monitor expenditures and pursue cost control measures as applicable.

Restructuring Charge. During the fourth quarter of fiscal year 2001, Norstan recorded a restructuring charge of approximately $1.2 million relating to a workforce reduction and closure of certain facilities. This charge included the costs of severance relating to approximately seventy employees ($683,000), lease terminations and other facility costs ($500,000) related to non-strategic businesses as well as for continued cost reductions in the Communications Technology businesses. At the end of fiscal 2002, the Company had principally executed these plans and all affected people had been terminated.

Interest Expense. Interest expense decreased significantly in fiscal 2002 to $4.9 million as compared to $8.0 million for fiscal year 2001. Interest expense is incurred primarily in connection with Norstan’s revolving credit line used for working capital purposes. Average month-end borrowings outstanding under the Company’s revolving long-term credit agreements were $45.0 million for fiscal year 2002 and $68.9 million for fiscal year 2001. Weighted average interest rates under the Company’s revolving long-term credit agreements were 9.3% for fiscal year 2002 as compared to 11.7% for fiscal year 2001.

Other Income (Expense). Net other income of $651,000 was recorded in fiscal 2002 as compared to net other expense of $1.2 million in fiscal 2001. Fiscal 2002 net other income reflects interest income earned on certain promissory notes. The reported expense in 2001 was primarily due to the write-off of $1.1 million in fees related to a terminated financing transaction in the second quarter of fiscal 2001.

Income Taxes. During the fourth quarter of fiscal 2002, the Company recorded an $8.9 million income tax benefit reflecting the reduction of its valuation allowance related to its U.S. net operating loss carryforward. The reduction of the allowance was mainly due to the recently enacted U.S. federal five-year net operating loss carryback rules (resulting in a $7.7 million federal tax refund which was received in June 2002), fiscal 2002 taxable income, and the Company’s estimate of future operating earnings. Norstan provided no tax benefit on the loss in fiscal 2001. Norstan’s effective tax rate differs from the federal statutory rate primarily due to state income taxes and nondeductible goodwill amortization, as well as the effect of net operating loss carry forwards and related valuation allowance charges. As a result of Norstan recording a tax benefit in fiscal year 2002, the Company will begin to record a tax provision on earnings in fiscal 2003 in the range of a 38.0% to 39.0% effective tax rate.

Net Income (Loss) from Continuing Operations. Net income of $6.6 million or $0.52 per diluted share was reported for fiscal 2002 as compared to a net loss of $21.1 million or $1.86 per share incurred in fiscal year 2001.

Discontinued Operations. On February 4, 2002, the Company announced that it had entered into a definitive agreement to sell its Network Services business to NetWolves Corporation (NASDAQ: WOLV) for $7.5 million. The transaction was completed on July 11, 2002. Pursuant to the terms of the purchase agreement, $3.75 million was received at closing and the remaining $3.75 million is due one year from closing, evidenced by a non-interest bearing note. The Company expects to record a gain on this sale of

approximately $2.5 to $3.0 million in its first quarter of fiscal 2003 based on the $3.75 million cash received. Any additional gains related to payments received on the promissory note will be recorded when collection is assured. Network Services provides multiple source long distance services and related consulting and professional services.

During fiscal 2001, the Company divested its IT consulting business in order to focus on its core competencies of providing communications technology services and solutions to channel partners and direct enterprise customers. The absence of synergies between the Company’s communications and consulting businesses and recurring losses within the consulting businesses also contributed to the decision to divest of this non-strategic business segment.

Divestiture of the IT consulting business began on February 7, 2001 with the sale of the Company’s 75% interest in Connaissance Consulting to Connaissance’s founder. Terms of the sale required the payment of $3.0 million in cash at closing and delivery of promissory notes drawn in favor of the Company with an aggregate face amount of $13.0 million maturing on various dates commencing on April 30, 2001 and ending December 31, 2005. As of April 30, 2002, $1.0 million had been collected on one of the notes and the remaining $12.0 million had been fully reserved for (see additional discussion below).

The divestiture concluded with the sale of Norstan Consulting on April 30, 2001 to a management group led by Norstan Consulting’s former President and the Company’s former Vice Chairman. Terms of the sale required the payment of $500,000 in cash at closing and delivery of a promissory note drawn in favor of the Company in the face amount of $1.5 million maturing on August 28, 2001. In connection with the transaction, Norstan retained its rights to certain assets and assumed certain liabilities of Norstan Consulting. As of April 30, 2002, the promissory note had been paid in full.

The results of these two consulting business units have historically been reported as the Norstan’s “Consulting” business segment. With these sales, Consulting’s results are reported as discontinued operations at April 30, 2001.

Norstan’s consolidated financial statements have been restated to report separately the net assets and operating results of the discontinued Network Services and Consulting businesses for all periods presented. Summary operating results of the discontinued operations are as follows (in thousands):

In addition to the operating results above, Norstan also recorded a $1.2 million loss on disposal of discontinued operations in fiscal 2002. The loss on disposal includes the following: (i) a pretax charge of $5.0 million ($3.1 million after tax) for an additional reserve on the remaining promissory note receivable from the sale of Connaissance Consulting, and (ii) a pretax gain of $3.0 million ($1.9 million after tax) from the arbitration settlement related to PRIMA Consulting (see Note 11 to the Consolidated Financial Statements). During the fourth quarter of fiscal 2002, the purchaser of Connaissance Consulting defaulted on payments then due. Norstan held discussions with the purchaser, and, based upon these discussions and

Net Income (Loss). For fiscal 2002, Norstan reported net income of $7.5 million or $0.59 per diluted share as compared to a net loss of $36.3 million or $3.19 per diluted share in fiscal 2001.

Revenues. Total revenues from continuing operations decreased 9.3% to $269.5 million in fiscal year 2001 from $297.2 million in fiscal year 2000.

Revenues within the Communications Technology Solutions and Services segment decreased 10.9% to $233.7 million in fiscal year 2001 from $262.3 million in fiscal year 2000. This decrease was the result of lower revenues in Solutions’ practice areas including, call centers, PBX systems, and conferencing and messaging. In addition, revenues from Services’ moves, adds and changes were down year-over-year. These decreases were somewhat offset by increased revenues in convergence and from the inclusion of revenues from Norstan’s channel partners. In addition, the Company’s service contract revenue increased year-over-year.

Resale Services revenues increased 1.1% to $26.3 million in fiscal 2001 as compared to $26.0 million in fiscal 2000. Financial Services’ fiscal 2001 revenue of $9.6 million was up 7.5% from $8.9 million in fiscal 2000.

Gross Margin. Norstan’s gross margin was $75.7 million and $66.2 million for the fiscal years ended April 30, 2001 and 2000, respectively, an increase of 14.3%. As a percent of total revenues, gross margin was 28.1% for fiscal year 2001 compared to 22.3% for fiscal year 2000.

Gross margin as a percent of revenues for Communications Technology Solutions and Services improved to 25.3% in fiscal 2001 as compared to 19.5% in fiscal 2000. This improvement was the result of increased margins in install, service, moves, adds and changes and other infrastructure practices.

Resale Services’ gross margin improved to 37.5% of revenues in fiscal 2001 as compared to 34.7% in fiscal 2000. Gross margin for Financial Services were relatively flat between fiscal 2001 and 2000 at 69.8% and 69.5%, respectively.

Selling, General and Administrative Expenses. Norstan’s selling, general and administrative expenses decreased $9.9 million or 10.3% during fiscal 2001 to $86.5 million as compared to $96.4 million in fiscal 2000. As a percent of revenues, selling, general and administrative expenses were relatively flat year-to-year at 32.1% and 32.4% for fiscal 2001 and fiscal 2000, respectively. The Company has taken measures to remove a significant amount of costs from its business over the past few years including headcount reductions and closure of certain leased facilities. The Company continued to monitor expenditures and implemented additional cost control measures during fiscal 2002.

Interest Expense. Interest expense was $8.0 million for fiscal year 2001 as compared to $6.3 million for fiscal year 2000. Interest expense is incurred primarily in connection with the Company’s revolving credit line used for working capital purposes. Average month-end borrowings outstanding under the Company’s revolving long-term credit agreements were $68.9 million for fiscal year 2001 and $74.0 million for fiscal year 2000. Weighted average interest rates under Norstan’s revolving long-term credit agreements were 11.7% for fiscal year 2001 as compared to 7.1% for fiscal year 2000.

Other Income (Expense). Net other expense of $1.2 million was incurred in fiscal 2001 as compared to $78,000 in fiscal 2000. The increase in reported expense was primarily due to the write-off of $1.1 million in fees related to a terminated financing transaction in the second quarter of fiscal 2001.

Income Taxes. Norstan provided no tax benefit on the loss in fiscal 2001, while the effective income tax rate was 20.0% for fiscal year 2000. 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, the impact of the fiscal 2000 goodwill writedown discussed below, as well as the impact of net operating loss carryforwards.

Net (Loss) from Continuing Operations. A net loss of $21.1 million or $1.86 per basic and diluted share was incurred in fiscal year 2001, as compared to a net loss of $25.0 million or $2.41 per share in fiscal year 2000.

Discontinued Operations. As discussed above, Norstan’s consolidated financial statements have been restated to report separately the net assets and operating results of the discontinued Network Services and Consulting businesses for all periods presented.

The fiscal 2000 results of operations from discontinued operations include the following charges:

Restructuring Charge. During the second quarter of fiscal 2000, the Company recorded a restructuring charge of approximately $2.0 million related to its Consulting business. The $2.0 million charge consisted of noncancelable lease obligations for branch offices to be closed ($1.0 million), software and other asset write-offs ($800,000), and severance costs relating to these employees ($200,000).

Writedown of Goodwill. During the fourth quarter of fiscal year 2000, Norstan recorded a charge of $32.2 million to write down goodwill created in connection with its consulting business acquisitions, principally as a result of significant operating losses and negative cash flows incurred in the Consulting business segment during fiscal 2000.

Net (Loss). For fiscal 2001, the Company reported a net loss of $36.3 million or $3.19 per diluted share as compared to a net loss of $68.9 million or $6.37 per diluted share for fiscal 2000.

Financial Reporting Release No. 60, which was recently released by the Securities and Exchange Commission, requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 3 of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of Norstan’s Consolidated Financial Statements. 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 the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and assumptions, including those related to revenue recognition, valuation of deferred tax assets and valuation of accounts receivable. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. The following is a brief discussion of the more significant accounting policies and methods used by Norstan which require the most subjective and complex judgments. The Company considers these to be critical and could result in materially different amounts being reported under different conditions or using different assumptions.

Revenue Recognition. Norstan’s principal sources of revenues are derived from the sale, installation and service of its full range of voice and data technologies and services. Within the Communications Technologies segment, Solutions’ revenues from the sale and installation of products and systems are generally recognized under the percentage-of-completion method of accounting for long-term contracts and Services’ revenues from maintenance service contracts, moves, adds, and changes, and network integration services, are recognized as the services are provided. Service contracts are generally pre-billed

either on a quarterly or annual basis and any prepayments are reflected on the balance sheet as deferred revenue and taken into income over the service period on a straight-line basis. Resale Services’ 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.

If Norstan does not accurately estimate the resources required and the scope of work to be performed, or does not manage its projects properly within the planned periods of time or satisfy its obligations under its customer contracts, then future margins may be significantly and negatively affected or losses on existing contracts may need to be recognized. Any such resulting reductions in margins or contract losses could be material to the Company’s results of operations and would be reflected in the period in which they were identified.

Deferred Taxes. Norstan recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. Norstan regularly reviews its deferred tax assets for recoverability and establishes valuation allowances based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets. To the extent a valuation allowance is established in a given period, an expense within the tax provision in the statement of operations is recorded. Conversely, when a valuation allowance is reduced, a tax benefit is recorded in the statement of operations.

As of April 30, 2002, the Company had recorded valuation allowances of $1.7 million related to its capital loss carryforward and Canadian net operating loss carryforwards. During the fourth quarter of fiscal 2002, Norstan reversed the valuation allowance related to its U.S. net operating loss carryforward and recorded a tax benefit of $8.9 million. The reversal of this allowance was mainly due to the recently enacted U.S. federal five-year net operating loss carryback rules (resulting in a $7.7 million federal tax refund which was received in June 2002), fiscal 2002 taxable income and the Company’s estimates of future operating earnings. The remaining valuation allowance has been provided for the Company’s capital loss carryforward which expires in fiscal 2006, and the Company’s Canadian net operating loss carryforwards which expire through fiscal 2008. As of April 30, 2002, Norstan does not believe it is more likely than not that these tax assets will be realized. In the event that actual results differ from these estimates or that these estimates are adjusted in future periods or if uncertainties arise related to the Company’s ability to utilize some or all of the deferred tax assets, the Company may need to establish additional valuation allowances which could materially impact its financial position and results of operations.

Accounts Receivable. Norstan performs credit checks on all new contract customers with orders greater then $100,000. Credit limits are assessed according to current creditworthiness including but not limited to, the customer’s current financial condition, working capital and payment histories. Collection activity for service contract customers is performed on an ongoing basis with payments due quarterly in advance of service commencement. Norstan enforces a “service hold” policy if a customer is in default of its payment obligation and has provided no immediate commitment to pay. Bad debt reserves are established and continuously evaluated based on customer collections and payments, historical experience and any specific customer collection issues that may have been identified. While such credit losses have historically been within Norstan’s expectations and the provisions established, management cannot guarantee that the Company will continue to have similar experience. In addition, a significant change in the liquidity or financial position of any of the Company’s customers or any adverse change in general economic conditions could have a material impact on the collectibility of accounts receivable and future operating results.

In fiscal 2002, Norstan reported net income from continuing operations of $6.6 million as compared to significant net losses incurred during the fiscal years ended April 30, 2001 and 2000. The Company has

taken numerous actions in efforts to improve its cash flows including the disposition of its unprofitable IT consulting operations and reducing costs in its continuing businesses as evidenced by the $12.6 million reduction in selling, general and administrative expenses in fiscal 2002 as compared to fiscal 2001. These measures provided sufficient operational improvements and liquidity to allow the Company to meet its cash flow needs during fiscal 2002 while significantly reducing its long term debt and the related interest expense. On July 12, 2002 Norstan entered into a new $30.0 million credit facility (see Capital Resources). Based on these positive developments and the Company’s operating plans for fiscal 2003, management believes that cash flows generated by operations and other capital resources will be sufficient to meet its cash flow needs through at least April 30, 2003. However, there can be no assurance that the assumptions used by management in formulating its assessment will prove accurate. In the event that the Company requires supplemental sources of capital, there can be no assurance as to their availability on terms acceptable to the Company.

Cash Flows. Continuing operations provided net cash from operations of $14.4 million, $28.8 million and $21.4 million during fiscal 2002, 2001 and 2000, respectively. Net income from continuing operations improved to $6.6 million in fiscal 2002 as compared to losses of $21.1 million and $25.0 million in fiscal 2001 and 2000, respectively. This improvement together with a reduction in accounts receivable was offset by a reduction in Norstan’s trade accounts payable and an increase in income taxes receivable. Subsequent to year end, the $7.7 million federal tax refund related to the U.S. net operating loss carryback was collected. Net cash of $17.8 million was provided by investing activities in fiscal 2002, an increase of over $5.4 million from 2001. This increase was the result of the winding down of Norstan’s leasing activity which led to a significant reduction in investment in lease contracts between fiscal 2002 and 2001. In addition, capital expenditures were tightly controlled during fiscal 2002 and down from 2001. Cash of $14.3 million was used for investing activities in fiscal 2000. The change between fiscal 2001 and 2000 was due to increased proceeds from lease contracts along with decreased investments in lease contract and capital expenditures. Financing activities utilized net cash of $35.8 million, $25.3 million and $2.9 million in fiscal 2002, 2001 and 2000, respectively. The high level of cash used for financing activities in fiscal 2002 and 2001 was due to repayment of bank debt and discounted lease rentals. In addition, there were no discounted lease borrowings in fiscal 2002 and minimal borrowings in fiscal 2001. Management’s fiscal year-end goal of reducing long-term debt to $35.0 million was achieved as a result of the cash provided by continuing operations, investing activities and discontinued operations. As of April 30, 2002, outstanding long-term debt was $29.7 million.

Capital Expenditures. Norstan used $5.1 million for capital expenditures during fiscal year 2002 as compared to $7.5 million in fiscal 2001 and $9.1 million in fiscal 2000. These expenditures were primarily for capitalized costs incurred in connection with obtaining computer and telecommunications equipment used in providing outsourcing services. Norstan currently expects capital expenditures of $8.0 million to $10.0 million in fiscal 2003, principally related to computer equipment, software upgrades and other equipment and fixtures.

Investment in Lease Contracts. Norstan has historically made a significant investment in lease contracts with its customers. As previously discussed, the Company is winding down its leasing activities and providing customers with alternative financing through Fidelity Leasing. As a result, there was $3.0 million invested in lease contracts in fiscal 2002 as compared to $26.4 million and $32.5 million in fiscal 2001 and 2000, respectively. Net lease receivables decreased to $25.4 million at April 30, 2002 from $55.9 million at April 30, 2001. The Company utilizes its lease receivables and corresponding underlying equipment to borrow funds from financial institutions on a nonrecourse basis by discounting the stream of future lease payments. Proceeds from discounting are presented on the consolidated balance sheet as discounted lease rentals. Discounted lease rentals totaled $13.5 million at April 30, 2002 as compared to $26.8 million at April 30, 2001. Interest rates on these credit agreements at April 30, 2002 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. Norstan also sold certain leases to a third party on a nonrecourse basis during July and August 2001. Total proceeds from

Capital Resources. On July 12, 2002, Norstan entered into a new $30.0 million credit agreement with certain banks consisting of the following components: A) a $21.0 million revolving line of credit, with availability based on eligible receivables and inventory, as defined, and B) a $9.0 million term loan with quarterly payments of $1.0 million beginning October 25, 2002. The revolving line matures on June 28, 2004 and the term note matures on October 29, 2004. The term note is subject to certain prepayment provisions in the event the Company receives cash from the collection of the promissory note related to the sale of Network Services. The agreement also provides that if the term loan is paid to an amount less than $5.0 million, the Company has an option to increase the revolving commitment amount to $25.0 million provided accounts receivable and inventory levels support such an increase.

The revolving facility and term loan bear interest at the bank’s reference rate plus 1.0% or Eurodollar rate advance plus 3.0% through January 31, 2003 with provisions for future rate reductions if Norstan meets certain financial targets. Annual commitment fees range from ..375% to .25%. Under this agreement the Company is required to maintain minimum levels of EBITDA and achieve certain other financial ratios.

Norstan’s former credit agreement consisted of the following: (i) $20.0 million term loan A with monthly payments through June 28, 2002, (ii) $15.4 million term loan B with monthly payments due to begin on July 31, 2002 maturing on December 31, 2002, and (iii) up to a $30.0 million revolving line of credit based on the Company’s level of receivables and inventory, as defined. The revolving line of credit and term loan A bore interest at the banks’ reference rate (4.75% at April 30, 2002 and 7.5% at April 30, 2001) plus 2.5%, while term loan B bore interest at the banks’ reference rate plus 4.0%. Borrowings under this agreement were $29.4 million and $55.2 million as of April 30, 2002 and 2001, respectively. The Company was required to maintain minimum levels of EBITDA and achieve certain other financial ratios. The Company was in compliance with or has obtained the appropriate waivers for such requirements as of April 30, 2002. Under the terms of the former credit agreement, the lenders were entitled to 489,545 warrants to purchase shares of the Company’s common stock, which were issued at various prices between $0.94 and $2.80 per share. These warrants were recorded at their estimated fair value at their respective dates of issuance, with the resulting costs being charged to expense (approximately $323,000 in fiscal 2001 and $155,000 in fiscal 2002).

Management of the Company believes that a combination of cash expected to be generated from operations, borrowing capacity available under the financing arrangements discussed above, and cash received or expected to be received from collection of promissory notes and other transactions will be adequate to meet the anticipated liquidity and capital resource requirements of its business through at least April 30, 2003. However, there can be no assurance that the assumptions used by management in formulating its assessment will prove accurate. In the event that the Company requires supplemental sources of capital, there can be no assurance as to their availability on terms acceptable to the Company.

Norstan has various contractual obligations and commitments to make future payments including debt agreements, lease obligations and discounted lease rental commitments. The following table summarizes future obligations under these contracts due by period as of April 30, 2002 (in thousands):

Norstan does not currently have any other material definitive commitments that require cash resources. However, management continually evaluates opportunities to expand its operations. This may include the expansion of strategic partner relationships, product/service offerings and/or our geographic footprint and may include acquisitions.

From time to time, Norstan may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products and services, and other 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, Norstan 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 Norstan’s business include the following: national and regional economic conditions; pending and future legislation affecting the telecommunications industries; Norstan’s business in Canada; stability of foreign governments; market acceptance of the Company’s products and services; Norstan’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 Norstan’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.

Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. Changes in these factors could cause fluctuations in the results of the Company’s operations and cash flows. In the ordinary course of business, Norstan is exposed to foreign currency and interest rate risks. These risks primarily relate to the sale of products and services to foreign customers and changes in interest rates on the Company’s long-term debt obligations, discounted lease rentals, capital leases and other long-term debt obligations.

For fixed rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not results of operations or cash flows. The Company does not have an obligation to prepay any fixed rate debt prior to maturity, and therefore, interest rate risk and changes in the fair market

For variable rate debt, changes in interest rates generally do not affect the fair market value of the debt instrument, but does affect future results of operations and cash flows. Norstan has variable rate debt of $29.4 million outstanding at April 30, 2002 with a weighted average interest rate of 8.0%. Assuming that the Company’s balance of variable rate debt remains constant at $29.4 million, each one-percent increase in interest rates would result in an annual increase in pre-tax interest expense, and a corresponding decrease in cash flows of $294,000. Conversely, each one-percent decrease in interest rates would result in an annual decrease in pre-tax interest expense, and a corresponding increase in cash flows of $294,000.

The Company periodically finances customer equipment purchases with fixed rate, sales-type leases. The resulting stream of future lease payments is, in turn, used to borrow funds from financial institutions at fixed rates on a nonrecourse basis. Norstan is not exposed to interest rate risk in connection with these arrangements because: (i) both the leases and the debt are at fixed interest rates; and (ii) Norstan typically enters into lending arrangements shortly after execution of the related leases.

The table appearing below presents principal amounts by year of anticipated maturity for Norstan’s debt obligations and related average interest rates based on the weighted average interest rates at the end of the period. Variable interest rates disclosed do not attempt to project future interest rates. This information should be read in conjunction with Notes 6 and 7 of the Notes to Consolidated Financial Statements.

Norstan is exposed to foreign currency rate risk. Substantially all foreign exchange exposure is attributable to the Canadian dollar. In general, with a net asset exposure, a weakening of the Canadian dollar relative to the U.S. dollar has a negative translation effect. Conversely, with a net asset exposure, a strengthening of the Canadian dollar would have the opposite effect. The average exchange rates for the Canadian dollar against the U.S. dollar during the year ended April 30, 2002 remained relatively unchanged.

Assets and liabilities outside the United States are located primarily in Canada. Norstan’s investments in foreign subsidiaries with a functional currency other than the U.S. dollar are not hedged. The potential loss in fair value resulting from a hypothetical 10% adverse change in the Canadian dollar exchange rate would not materially affect the Company’s consolidated financial position, results of operations or cash flows. Any gain or loss in fair value, associated with the Canadian dollar, in the Consolidated Balance Sheets of the Company would be recorded as a separate component of shareholders’ equity.

During the years ended April 30, 2002, 2001 and 2000, the average exchange rates for the Canadian dollar strengthened (weakened) against the U.S. dollar as follows:

Norstan currently does not have any derivative financial instruments in place to manage interest costs, but may consider utilizing such instruments in the future as a means to manage interest rate risk.

We have audited the accompanying consolidated balance sheet of Norstan, Inc. (a Minnesota corporation) and Subsidiaries as of April 30, 2002, and the related consolidated statements of operations, shareholders’ equity and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index at Item 8. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Norstan, Inc. and Subsidiaries as of April 30, 2002, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

Because of the requirement to retroactively reflect its Network Services segment as a discontinued operation in 2001 and prior periods (see Note 2 of the Consolidated Financial Statements) and if required by the Securities and Exchange Commission, the Company will engage its independent auditors to re-audit its fiscal 2001 and applicable prior periods’ financial statements to reflect the presentation of discontinued operations.

We have audited the accompanying consolidated balance sheets of Norstan, Inc. (a Minnesota corporation) and Subsidiaries as of April 30, 2001 and 2000, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the two years in the period ended April 30, 2001. These financial statements and the schedule referred to below 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 auditing standards generally accepted in the United States. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the two years in the period ended April 30, 2001 in conformity with accounting principles generally accepted in the United States.

Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule of Valuation and Qualifying Accounts is presented for purposes of complying with the Securities and Exchange Commission’s rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated balance sheets.

The accompanying notes are an integral part of these consolidated financial statements.

Norstan, Inc. (“Norstan” or the “Company”) is a full-service communications solutions and services company that delivers voice and data technologies and services, and remanufactured equipment to select corporate end-users and channel partners. Norstan also offers a full range of technologies for call center design, IP telephony/ PBX, messaging, infrastructure, conferencing, and mobility. Norstan manages the operations of its subsidiaries, Norstan Communications, Inc., Norstan Canada, Ltd., Norstan Financial Services, Inc., Vibes Technologies, Inc., Norstan International, Inc., and Norstan-UK Limited. The Company is headquartered in Minneapolis, Minnesota with sales and services throughout North America. Norstan’s common stock is listed on the Nasdaq stock exchange under the symbol NRRD.

Norstan drives its business by delivering legendary service through the installation of a broad array of technology platforms, software solutions and on-going system maintenance needs. The Company currently works with approximately 18,000 customers, drawing its customers from the banking/finance, healthcare, manufacturing, retail, government, education, utilities, finance/insurance and non-profit sectors. The Company derives revenues from technology service support sales to a broad channel of manufacturers, resellers and distributors and through partnerships with manufacturers offering best-in-class technology. Norstan also maintains a direct sales effort focused on Fortune 1000 companies, and an inside sales force focused on smaller opportunities. The Company’s remanufactured equipment segment supports Norstan’s customer base, channel partners, resellers and distributors with efficient and reliable resale services.

To address the complex communication requirements of its customers, Norstan provides a broad range of products and services through three interrelated business segments: Communications Technology Solutions and Services, Resale Services, and Financial Services which accounted for 85.5%, 12.3%, and 2.2% of fiscal year 2002 revenues, respectively. Communications Technology Solutions and Services provides best-in-class technologies and services focused on selected enterprise customers throughout North America and technology implementation and support services for network providers, manufacturers, integrators, and resellers. Resale Services provides refurbished and re-certified voice and data products to end users. Financial Services supports the sales process by providing customers with customized financing alternatives.

Company’s communications and IT consulting businesses and recurring losses within the consulting business contributed to the decision to divest of this non-strategic business segment.

Divestiture of the IT consulting business began on February 7, 2001 with the sale of the Company’s 75% interest in Connaissance Consulting to Connaissance’s founder. Terms of the sale required the payment of $3.0 million in cash at closing and delivery of promissory notes drawn in favor of the Company with an aggregate face amount of $13.0 million maturing on various dates, commencing on April 30, 2001 and ending December 31, 2005. As of April 30, 2002, $1.0 million had been collected on one of the notes and the remaining $12.0 million had been fully reserved for, including a charge of $5.0 million recorded during the fourth quarter of fiscal 2002 (see below).

The divestiture concluded with the sale of Norstan Consulting on April 30, 2001 to a management group led by Norstan Consulting’s former President and the Company’s former Vice Chairman. Terms of the sale required the payment of $500,000 in cash at closing and delivery of a promissory note drawn in favor of the Company in the face amount of $1.5 million maturing on August 28, 2001. In addition, as part of the transaction, Norstan retained its rights to certain assets and assumed certain liabilities of Norstan Consulting. As of April 30, 2002, the promissory note had been paid in full.

The results of these two business units have historically been reported as the Company’s “Consulting” business segment. With these sales, Consulting’s results are reported as discontinued operations for all periods presented.

Summary operating results of the discontinued operations are as follows (in thousands):

In addition to the operating results above, the Company also recorded a $1.2 million loss on disposal of discontinued operations in fiscal 2002. The loss on disposal includes the following: (i) a pretax charge of $5.0 million ($3.1 million after tax) for an additional reserve on the remaining promissory note receivable from the sale of Connaissance Consulting, and (ii) a pretax gain of $3.0 million ($1.9 million after tax) from the arbitration settlement related to PRIMA Consulting (see Note 11 to the Consolidated Financial Statements). During the fourth quarter of fiscal 2002, the purchaser of Connaissance Consulting defaulted on payments then due. Norstan held discussions with the purchaser, and, based upon these discussions and review of the purchaser’s financial position, management determined that a reserve was required for the remaining amount of the promissory note.

The accompanying consolidated financial statements include the accounts of Norstan and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the periods presented. Estimates are used for such items as allowances for doubtful accounts, inventory valuation, depreciable lives of property and equipment, warranty reserves, estimates of percentage completion under long-term contracts and others. Ultimate results could differ from those estimates.

Within the Communications Technologies segment, 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 and Services’ revenues from maintenance service contracts, moves, adds, and changes, and network integration services, are recognized as the services are provided. Resale Services’ revenues are 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 values of financial instruments, including long-term obligations, lease receivables and trade receivables, approximated their carrying values at April 30, 2002 and 2001 because of their short maturity or variable nature, except for discounted lease rentals for which book value was $13.5 million as compared to estimated fair value of $12.4 million as of April 30, 2002.

Inventories include purchased parts and equipment and are stated at the lower of cost, determined on a first-in, first-out basis, or estimated realizable value.

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. 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 operations. Property 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.

Pursuant to the requirements of Statement of Financial Accounting Standards No. 121 (“SFAS No. 121”), “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of,” in determining whether an impairment has occurred, the Company’s policy is to evaluate, at each balance sheet date, whether events and circumstances have taken place to indicate that the book value of the assets may not be recoverable. If such indicators were present, impairment would be assessed using estimates of undiscounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the book values of the assets, the assets would be written down to their estimated fair values. There were no such writedowns in fiscal 2002, 2001 or 2000.

On June 29, 2001, the Financial Accounting Standards Board approved two new statements, SFAS No. 141, “Business Combinations,” (“SFAS No. 141”) and SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”). Under SFAS No. 141, all business combinations will be accounted for under the purchase method beginning June 30, 2001. SFAS No. 142 includes requirements to test goodwill for impairment using a fair value approach, rather than amortizing the cost of goodwill over future periods. As a result, the Company’s amortization of goodwill, including goodwill recorded in past business combinations, ceased upon adoption of SFAS No. 142 in the first quarter of its fiscal year ending April 30, 2002. The Company has performed required tests regarding the realizability of the recorded goodwill and determined that no impairment charge is required as of April 30, 2002.

The following tables set forth pro forma net income (loss) and earnings (loss) per share (in thousands except per share amounts):

For Norstan’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.

Deferred income taxes are provided for differences between the financial statement carrying amounts and the tax basis of the Company’s assets and liabilities at currently enacted tax rates.

The Company reports net income (loss) per share pursuant to the requirements of the Statement of Financial Accounting Standards No. 128 “Earnings per Share” (“SFAS No. 128”). SFAS No. 128 requires presentation of basic and diluted earnings (loss) per share (EPS). Basic EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects potential dilution from outstanding stock options and other securities using the treasury stock method.

A reconciliation of EPS calculations under SFAS No. 128 is as follows (in thousands, except per share amounts):

For the fiscal years ended April 30, 2001 and 2000, approximately 55,000 and 61,000 in-the-money common share equivalents have been excluded from the computation of diluted earnings per share, as required under SFAS No. 128, as the effect of their inclusion would be anti-dilutive.

Norstan reports comprehensive income and its components pursuant to the requirements of SFAS No. 130, “Reporting Comprehensive Income”. This statement establishes standards for the reporting of comprehensive income and its components. For the Company, comprehensive income consists of net income (loss) adjusted for foreign currency translation adjustments and is presented in the Consolidated Statements of Shareholders’ Equity.

Statement of Financial Accounting Standards No. 133 (SFAS No. 133), “Accounting for Derivative Instruments and Hedging Activities”, was issued in June 1998 and amended by SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of SFAS No. 133” to require adoption at the beginning of the Company’s fiscal year ended April 30, 2002. The standard requires every derivative to be recorded on the balance sheet as either an asset or liability measured at fair value with changes in the derivative’s fair value recognized in earnings unless specific hedge accounting criteria are met. The adoption of SFAS No. 133 on May 1, 2001 had no impact on the Company’s financial position or results of operations.

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supercedes FASB Statement No. 121, “Accounting for the Impairment of Long-Lived Assets To Be Disposed Of” and the accounting and reporting provisions of APB Opinion No. 30. The changes required by SFAS No. 144 resolve significant implementation issues related to SFAS No. 121 and improve financial reporting by requiring that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. The requirements of SFAS No. 144 also broaden the presentation of discontinued operations to include more disposal transactions. The Company will adopt SFAS No. 144 in fiscal 2003 and does not anticipate a significant impact from the adoption on its financial position or results of operations.

During the fourth quarter of fiscal year 2001, Norstan recorded a restructuring charge of approximately $1.2 million relating to a workforce reduction and closure of certain facilities. This charge included the costs of severance relating to approximately seventy employees ($683,000) and lease terminations and other facility costs ($500,000) related to non-strategic businesses and for continued cost reductions in the Communications Technology businesses. At the end of fiscal 2002, the Company had principally executed these plans and all affected people had been terminated.

During the second quarter of fiscal year 2000, Norstan recorded a restructuring charge of approximately $2.0 million related to its IT consulting business. The charge consisted of noncancelable lease obligations for branch offices which were closed ($1.0 million), software and other asset write-offs ($800,000), and severance costs relating to three employees ($200,000).

During fiscal year 1999, Norstan recorded a restructuring charge of $1.5 million relating to a workforce reduction of approximately one hundred and twenty employees. This resource reduction, primarily 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 years 2002, 2001 and 2000, payments totaling $1.2 million, $500,000 and $2.0 million, respectively, were charged against the restructuring reserves which were established as part of the above-described restructuring charges. At April 30, 2002, a reserve of approximately $863,000 remained for future payments to be made related to the fiscal 2001 restructuring charges principally related to future lease obligations. This reserve is included in the net assets of discontinued operations, as it relates to the former Consulting operations (see Note 2). The reserves related to the fiscal 2000 and 1999 charges have been fully utilized as of April 30, 2002.

In the fourth quarter of fiscal 2000, Norstan recorded a charge of $32.2 million, or $2.38 per diluted share, for the write-down of goodwill related to the 1996 purchase of Connect Computer Company and the 1997 purchase of PRIMA Consulting. Yearly amortization of such goodwill was approximately $2.7 million.

This writedown resulted from management’s consideration of factors related to the performance of the Consulting segment, including operating losses and negative cash flows. Based on these considerations, the Company updated its operating and cash flow projections for the Consulting business. An analysis of the projected undiscounted future cash flows indicated that future recoverability of goodwill related to the Consulting operations was uncertain. Accordingly, an impairment charge was recorded.

As discussed in Note 2, Norstan divested its Consulting business as of April 30, 2001. The writedown of goodwill and related amortization is included in discontinued operations.

Norstan financed customer equipment purchases in the amounts of $3.0 million, $26.4 million, and $32.5 million during the fiscal years ended April 30, 2002, 2001 and 2000, 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):

The aggregate amount of gross lease receivables maturing in each of the five years following April 30, 2002 is as follows (in thousands):

On July 12, 2002, Norstan entered into a new $30.0 million credit agreement with certain banks consisting of the following components: A) a $21.0 million revolving line of credit, with availability based on eligible receivables and inventory, as defined, and B) a $9.0 million term loan with quarterly payments of $1.0 million beginning October 25, 2002. The revolving line matures on June 28, 2004 and the term note matures on October 29, 2004. The term note is subject to certain prepayment provisions in the event the Company receives cash from the collection of the promissory note related to the sale of Network Services. The agreement also provides that if the term loan is paid to an amount less than $5.0 million, the Company has an option to increase the revolving commitment amount to $25.0 million provided accounts receivable and inventory levels support such an increase.

were $29.4 million and $55.2 million as of April 30, 2002 and 2001, respectively. The Company was required to maintain minimum levels of EBITDA and achieve certain other financial ratios. The Company was in compliance with or has obtained the appropriate waivers for such requirements as of April 30, 2002. Under the terms of the former credit agreement, the lenders were entitled to 489,545 warrants to purchase shares of the Company’s common stock, which were issued at various prices between $0.94 and $2.80 per share. These warrants were recorded at their estimated fair value at their respective dates of issuance, with the resulting costs being charged to expense (approximately $323,000 in fiscal 2001 and $155,000 in fiscal 2002).

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 8% and payments are generally due in varying monthly installments through November 2005.

Aggregate maturities of discounted lease rentals as of April 30, 2002 are as follows (in thousands):

The domestic and foreign components of income (loss) from continuing operations before the provision (benefit) for income taxes are as follows (in thousands):

The provision (benefit) for income taxes consisted of the following (in thousands):

Total income tax expense (benefit) for fiscal years 2002, 2001 and 2000 was a benefit of $8.4 million, $0 and $17.1 million, respectively, allocated as follows:

The differences between taxes provided at the Company’s effective tax rate and income taxes computed using the federal statutory rate were as follows:

As a result of Norstan recording a tax benefit in fiscal year 2002, the Company will begin to record a tax provision on earnings in fiscal 2003 in the range of a 38.0% to 39.0% effective tax rate.

The tax effects of significant temporary differences representing deferred tax assets and liabilities are as follows as of April 30 (in thousands):

During the fourth quarter of fiscal 2002, Norstan recorded an $8.9 million income tax benefit reflecting the reduction of its valuation allowance related to its U.S. net operating loss carryforwards. The reduction of the allowance was mainly due to the recently enacted U.S. federal five-year net operating loss carryback rules (resulting in a $7.7 million federal tax refund which was received in June 2002), fiscal 2002 taxable income, and the Company’s estimate of future operating earnings.

The remaining valuation allowance has been provided for the Company’s capital loss carryforward which expires in fiscal 2006, and the Company’s Canadian net operating loss carryforwards which expire through fiscal 2008. As of April 30, 2002, Norstan does not believe it is more likely than not that these tax assets will be realized.

Realization of the remaining net deferred tax assets is dependent on the Company’s ability to generate sufficient future taxable income. With the execution of the Company’s 2002 operating plan and management’s expectations for 2003 and beyond, Norstan believes that it is more likely than not that the recorded asset will be realized. Should the Company’s operating strategies fail to produce sufficient taxable income in the future, Norstan would record an additional valuation allowance in the appropriate future reporting period, as required by generally accepted accounting principles. The Company’s U.S. net operating loss carryforwards expire from 2020 to 2021.

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 3,400,000 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, are generally exercisable at 33% per year and expire after ten years. At April 30, 2002, 1,325,023 shares were available for future grants.

The Restated Non-Employee Directors’ Stock Plan (“Directors’ Plan”) provides for a maximum of 500,000 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 are generally exercisable

over 4 years. Additional discretionary stock options may be awarded upon board approval and are generally exercisable immediately. All options are granted at a price equal to the market price on the date of grant 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, 2002, 65,470 shares had been issued as annual retainers and 67,030 shares were available for future grant/payment under the Directors’ Plan.

Additional information regarding options outstanding/exercisable at April 30, 2002 is as follows:

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, 2002, 140,706 shares and 996,216 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 three-year period. Amortization of $683,000, $669,000, and $104,500 has been charged to operations in 2002, 2001 and 2000, respectively.

The Company has an Employee Stock Purchase Plan (the “2000 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. Effective January 1, 2000, the 2000 Employee Stock Plan allows for quarterly share purchases at a price equal to the lesser of the closing market price of the Company’s stock on the first or last day of each calendar quarter. During fiscal 2002, 103,313 shares were issued under this plan and at April 30, 2002, 402,889 shares were available for future issuance. This plan was suspended as of April 1, 2001 due to lack of available shares. Norstan reinstated the plan as of October 1, 2001 with shareholder approval of an additional 500,000 shares being made available for the 2000 Employee Stock Plan.

Norstan 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 (loss) (in thousands) and net income (loss) per common share would have decreased to the following pro forma amounts:

The weighted average fair values of options granted and Employee Stock Plan shares were as follows:

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:

Norstan has 401(k) profit-sharing plans (the “401(k) Plans”) covering substantially all full-time employees. As of January 1, 2002, eligible employees may elect to defer up to 30% of their eligible compensation (previously 15%). 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 $2,295,000, $2,208,000 and $2,771,000 for the years ended April 30, 2002, 2001 and 2000, respectively.

In May 2000, Norstan was sued in the U.S. District Court for the District of Minnesota by a former sales representative who claims he is owed $458,675 in additional commissions. On July 26, 2001, the U.S. District Court entered summary judgment in favor of the former sales representative and against Norstan. The Company believes the ruling is in error and has filed an appeal. However, there can be no assurance that the Company will be successful in its appeal. Management believes that the April 30, 2002 consolidated financial statements adequately reflect Norstan’s exposure under this lawsuit.

Norstan 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 $8,310,000, $8,170,000 and $12,890,000 in fiscal years 2002, 2001, and 2000, respectively.

Future minimum lease payments under noncancelable leases with initial or remaining terms of one year or more were as follows at April 30, 2002 (in thousands):

Norstan has a shareholder rights plan, as amended in March 2001 (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 Norstan 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 Norstan, 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.

The Company delivers its products and services through three business units, Communications Technology Solutions and Services, Resale Services and Financial Services, which accounted for 85.5%, 12.3% and 2.2% of Norstan’s fiscal year 2002 revenues, respectively. Communications Technology Solutions offerings include customer contact (call centers), collaboration (conferencing and messaging), converged communication (IP telephony and PBX systems), infrastructure (cabling, wiring, sound and signal), and mobility. Communications Technology Services offerings include project consulting, project management, installation, system monitoring and support services maintenance. Resale Services offers remanufactured communications and data equipment. Financial Services supports the sales process by providing customized financing alternatives.

segments included Consulting, Communications and Financial Services. As of April 30, 2001, Norstan divested its IT consulting business (see Note 2). Accordingly, the net assets and operating results have been reported as discontinued operations. In addition, beginning in the fourth quarter of fiscal 2002, Norstan began reporting its Network Services segment as discontinued operations as well (see Note 2).

The Company’s disclosures under the requirements of SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information,” are as follows:


*	All corporate costs are allocated to continuing segments based on relative revenues of each segment.

The following table sets forth Norstan’s revenues, net income (loss) from continuing operations and consolidated asset information by geographic area as of and for the years ended April 30 (in thousands):

For the fiscal years ended April 30, 2001 and 2000, the Company’s independent public accountants were Arthur Andersen LLP. On May 31, 2002, Arthur Andersen LLP was dismissed as the Company’s independent auditors and Deloitte & Touche LLP was appointed as the Company’s independent auditors for fiscal 2002. Because of Arthur Andersen LLP’s June 2002 criminal conviction on obstruction of justice charges and because the former audit partner and manager have left Arthur Andersen LLP, the Company was not able to obtain the written consent of Arthur Andersen LLP as required by Section 7 of the Securities Act of 1933 (the Securities Act).

No changes in or disagreements with accountants which required reporting on Form 8-K have occurred within the two-year period ended April 30, 2002. Subsequent to April 30, 2002, the Company filed a Form 8-K on May 31, 2002, reporting a change in the Company’s independent auditors. The Company discontinued its engagement of Arthur Andersen LLP and engaged Deloitte and Touche LLP as the Company’s independent auditors for the fiscal year ended April 30, 2002.

Information with respect to Norstan’s directors and executive officers, 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 13, 2002, is incorporated herein by reference.

Information with respect to Executive Compensation set forth under “Executive Compensation” in Norstan’s definitive proxy statement for the annual meeting of shareholders to be held September 13, 2002, other than the subsections captioned “Report of the Compensation and Stock Option Committee” and “Performance Graph”, is incorporated herein by reference.

Information with respect to security ownership of certain beneficial owners and management, set forth under “Beneficial Ownership of Principal Shareholders and Management” in Norstan’s definitive proxy statement for the annual meeting of shareholders to be held September 13, 2002, is incorporated herein by reference.

Information with respect to certain relationships and related transactions, set forth under “Information Concerning Directors, Nominees and Executive Officers” in Norstan’s definitive proxy statement for the annual meeting of shareholders to be held September 13, 2002, is incorporated herein by reference.


	See Index to Consolidated Financial Statements and Financial Statement Schedules on page 26 of this report.


	All schedules to the Consolidated Financial Statements normally required by the applicable accounting regulations are included in Item 8 or are not applicable.


	Norstan filed Form 8-K on May 31, 2002, reporting a change in the Company’s independent auditors. The Company discontinued its engagement of Arthur Andersen LLP and engaged Deloitte & Touche LLP as the Company’s independent auditors for the fiscal year ended April 30, 2002.

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.


	By	/s/ James C. Granger



	James C. Granger
	Chief Executive Officer and President
	(Principal Executive Officer)


	By	/s/ Scott G. Christian



	Scott G. Christian
	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.

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.

55 EX-10.(J) 3 c70703exv10wxjy.txt EX-10.(J) STOCK PURCHASE AGREEMENT-NETWOLVES CORP EXHIBIT 10(j) ----------------------------------------- STOCK PURCHASE AGREEMENT BY AND AMONG NETWOLVES CORPORATION, NETWOLVES ACQUISITIONS, INC., NORSTAN, INC. AND NORSTAN NETWORK SERVICES, INC. JANUARY 30, 2002 --------------------------------------- THIS STOCK PURCHASE AGREEMENT (this "Agreement") dated as of January 30, 2002, by and among NETWOLVES CORPORATION, a New York corporation ("NetWolves"), NETWOLVES ACQUISITIONS, INC., a Delaware corporation and wholly owned subsidiary of NetWolves, as buyer (the "Buyer"), NORSTAN NETWORK SERVICES, INC., a Minnesota corporation (the "Company"), and NORSTAN, INC., a Minnesota corporation (the "Seller"). WHEREAS, the Seller owns all of the issued and outstanding shares of capital stock of the Company. The Company is in the business (the "Business") of providing multiple source long-distance telephone services and related consulting and professional services; and WHEREAS, the Buyer desires to purchase from the Seller all of the issued and outstanding capital stock of the Company, and the Seller desires to sell such shares in exchange for cash and a promissory note as described herein. In addition, and in consideration of, the payments made by the Buyer hereunder, the Seller has agreed to assume and retain certain liabilities of the Company. Capitalized terms not otherwise defined herein shall have the meanings set forth in Article VII hereof. NOW, THEREFORE, in consideration of the premises, the mutual promises herein made, and in consideration of the representations, warranties, and covenants herein contained, the parties hereto agree as follows: ARTICLE I PURCHASE AND SALE OF SHARES 1.1 SHARES. On and subject to the terms and conditions of this Agreement, at the Closing, the Buyer shall purchase from the Seller, and the Seller shall sell, transfer, assign, convey and deliver to the Buyer, all right, title and interest in and to all of the Seller's shares (the "Shares") of the common stock, par value $.01 per share, of the Company (the "Common Stock"), as more specifically identified on Schedule 5.1(b) hereto. 1.2 PURCHASE PRICE. (a) The consideration to be paid by the Buyer for the Shares; (the "Consideration") shall consist of $7,500,000.00 to be paid as follows: (i) $400,000.00 concurrently with the execution and delivery of this Agreement (the "Purchase Deposit"); (ii) a cash payment of $3,350,000.00 at the Closing and (iii) a non-negotiable promissory note dated the Closing Date in the principal amount of $3,750,000.00 in the form of Exhibit A attached hereto (the "Note"). A portion of the Consideration shall be allocated pursuant to Sections 1.2(b) and 2.5 hereof. The cash portion of the Consideration will be payable at the Closing by wire transfer or otherwise in immediately available funds to an account specified by the Seller. Prior to the Closing, the Seller shall provide all necessary information as to the account to which such payment shall be made. (b) In accordance with the Section 338(h)(10) election, as provided in Section 7.10(g) hereof, the Consideration shall be allocated among the assets of the Company based upon the net tax value of the assets of the Company in accordance with Section 1060 of the Code and the regulations thereunder. (c) In the event that the Agreement is terminated pursuant to Section 2.3 because of Buyer not obtaining the necessary financing to close the transaction contemplated by this Agreement, the Seller shall retain the Purchase Deposit (and any interest and income pertaining thereto) as liquidated damages for all obligations of the Buyer and NetWolves hereunder. If this Agreement is terminated for a reason other than Buyer not obtaining the necessary financing to satisfy its closing obligations, Seller shall promptly refund the Purchase Deposit to Buyer. ARTICLE II CLOSING; TERMINATION 2.1 THE CLOSING. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place at the offices of Blau, Kramer, Wactlar & Lieberman, P.C., 100 Jericho Quadrangle, Jericho, NY 11753, or at such other place as the parties may agree, at 11:00 a.m. on the fifth business day following the satisfaction (or waiver) of the conditions to closing set forth in Sections 3.1 and 3.2 hereof or as otherwise upon designation by a party in accordance with the provisions of Section 3.3 hereof or at such other time and date as the parties may agree, but no later than the ninetieth (90th) day following the execution and delivery of this Agreement. The date on which the Closing occurs shall be referred to hereinafter as the "Closing Date". 2.2 DELIVERIES AT THE CLOSING. (a) At the Closing, the Seller shall deliver to the Buyer: (i) copies of all consents of third parties (excluding Governmental Entities) that are (A) required for the purchase and sale hereunder or that are required for the consummation of the transactions contemplated hereby and for the Buyer's ownership of the Shares and the Company's continued operation of the Business following the Closing and (B) that are required in order to prevent a breach of or default under or a termination of any agreement, contract, license, commitment or lease to which the Company or the Seller is a party or to which the Shares or any of the assets of the Company are subject; (ii) an opinion, dated the Closing Date, of Maslon Edelman Borman & Brand, LLP, counsel to the Seller, in substantially the form of Exhibit B attached hereto; (iii) a written resignation, effective as of the Closing Date, of each director of the Company; (iv) a certificate as to the satisfaction of the conditions described in Sections 3.1(a), 3.1(c), 3.1(d), 3.1(e), 3.1(f) and 3.1(j) hereof; -2- (v) the Assignment and Assumption Agreement substantially in the form attached hereto as Exhibit H; (vi) certified copies of the Fundamental Documents, the authorizing resolutions and incumbency certificates of the Company and the Seller for the Documents; and (vii) each other document required to be delivered to Buyer pursuant to this Agreement. (b) At the Closing, the Buyer shall deliver to the Seller: (i) the cash portion of the Consideration in accordance with Section 1.2 hereof; (ii) the Note; (iii) a Security Agreement between the Company and the Seller in substantially the form of Exhibit D-2 attached hereto; (iv) a Pledge Agreement between the Buyer and Seller in substantially the form of Exhibit D-1 hereto; (v) an opinion, dated the Closing Date, of Blau, Kramer, Wactlar & Lieberman, P.C., counsel to the Buyer, in substantially the form of Exhibit C attached hereto; and (vi) certified copies of the Fundamental Documents of the Buyer, and the authorizing resolutions and incumbency certificates of the Buyer for the Documents. 2.3 TERMINATION. Anything contained in this Agreement, other than in this Section 2.3, to the contrary notwithstanding, this Agreement may be terminated in writing at any time on or before the Closing: (a) without liability on the part of any party hereto by mutual written consent of the Buyer and the Seller; (b) by the Buyer, if the Seller shall breach any of its material representations, warranties or obligations hereunder and such breach shall not have been cured or waived and the Seller shall not have provided reasonable assurance that such breach will be cured on or before the Closing Date; (c) by the Buyer by written notice to the Seller given at any time prior to the Closing Date stating that it has not obtained financing, sufficient in its judgment, to permit it to close the transaction contemplated by this Agreement, in which circumstance the Seller shall retain the Purchase Deposit as liquidated damages for all obligations of Buyer and NetWolves arising under the Agreement; -3- (d) by the Seller, if the Buyer shall breach any of its material representations, warranties or obligations hereunder and such breach shall not have been cured or waived and the Buyer shall not have provided reasonable assurance that such breach will be cured on or before the Closing Date; or (e) without liability on the part of any party hereto if the Closing shall not have occurred on or before the ninetieth (90th) day following the execution and delivery of this Agreement (the "Termination Date") (or such later date as may be agreed upon in writing by the parties hereto). Notwithstanding any provision to the contrary stated herein, if the Closing shall not have occurred on or before the Termination Date because Buyer has not obtained sufficient financing to close the transaction contemplated by this Agreement, Seller shall retain the Purchase Deposit (and any interest and income pertaining thereto) as liquidated damages (and not as a penalty) for Seller resulting from the failure of Buyer and NetWolves to complete the Closing. In the case of any termination pursuant to this Section 2.3(e), the parties hereto acknowledge that time is of the essence. 2.4 EFFECT OF TERMINATION. Except as provided in the next sentence of this paragraph, in the event of the termination of this Agreement pursuant to any paragraph of Section 2.3 hereof, the obligations of the parties to consummate the transactions contemplated hereby will expire, and none of the parties will have any further obligations under this Agreement except pursuant to Sections 2.4, 7.4 and 7.6 hereof, which sections shall survive termination of this Agreement. In the event of the termination of this Agreement pursuant to any paragraph of Section 2.3 hereof that is caused by a breach of a party, the party whose breach was the basis for the termination will not be relieved from any liability for its breach or its obligations pursuant to this Section 2.4 hereof, and the other party will have no further obligations under this Agreement except as provided in Sections 7.4, 7.9 and Article IX hereof. 2.5 ALLOCATION OF PURCHASE PRICE. For Federal income tax purposes only, the Buyer shall be deemed to have delivered cash in an amount to be determined by the parties prior to closing for the non-competition covenant of Seller contained in Section 7.8 hereof and the balance for the Shares. None of the parties shall take any action inconsistent with the allocation set forth in this Section 2.5. ARTICLE III CONDITIONS TO OBLIGATIONS OF PARTIES TO CLOSE 3.1 CONDITIONS TO OBLIGATION OF BUYER AND NETWOLVES. The obligation of the Buyer and NetWolves to consummate the transactions to be performed by them in connection with the Closing is subject to the full satisfaction and/or waiver of the following conditions as of the Closing: (a) Representations and Warranties. The representations and warranties of the Seller and the Company set forth in Article V hereof shall have been true and correct in all material respects when made, and shall be true and correct in all material respects as of the Closing Date. -4- (b) Consents. All consents by third parties (excluding Governmental Entities) shall have been obtained that are (a) required for the purchase and sale hereunder and/or that are required for the consummation of the transactions contemplated hereby, and (b) that are required in order to prevent a breach of or a default under or a termination of any material agreement, contract, document, license, lease or commitment to which the Company or the Seller is a party or to which the Shares or any portion of the assets of the Company are subject (collectively, the "Contracts"), including, without limitation, duly executed consents in form and substance reasonably satisfactory to the Buyer and its counsel, to the sale of the Shares to the Buyer or to the extent such consents are required under applicable Law or the terms of said Contracts or Intellectual Property. (c) Absence of Material Adverse Change. Since October 31, 2001 there shall have been no Material Adverse Change suffered by the Company or the Business. (d) Absence of Litigation. As of the Closing, there shall not be (i) any Order of any nature issued by a Governmental Entity with competent jurisdiction directing that the transactions provided for herein or any material aspect of them not be consummated as herein provided or (ii) any Proceeding before any Governmental Entity pending or threatened wherein an unfavorable Order (A) would prevent the performance of this Agreement or the other Documents or the consummation of any material aspect of the transactions or events contemplated hereby, (B) declare unlawful any material aspect of the transactions or events contemplated by this Agreement or the other Documents, (C) cause any material aspect of the transaction contemplated by this Agreement or the other Documents to be rescinded or (D) materially affect the right of the Buyer to own, operate or control the Shares or the right of the Company to operate the Business following the Closing. (e) Proceedings. All corporate and other proceedings taken or required to be taken by the Company and the Seller in connection with the transactions contemplated by this Agreement and the other Documents to be consummated at or prior to the Closing shall have been taken and all documents incident thereto shall be reasonably satisfactory in form and substance to the Buyer and its counsel. (f) Governmental Filings. All filings or registrations with and all consents or approvals of any Governmental Entities which are required for or in connection with the execution and delivery by the Company and the Seller of the Documents or the consummation of the transactions contemplated thereby shall have been effected and obtained. (g) Opinion of Counsel to Seller and the Company. The Buyer shall have received an opinion, dated the Closing Date, of Maslon Edelman Borman & Brand, LLP, counsel to the Seller and the Company, in substantially the form of Exhibit B attached hereto. (h) Leases; Services Agreements; Co-Marketing Agreement. The following agreements shall have been duly executed and delivered to the Buyer and shall be in full force and effect: (i) the sublease agreement with respect to certain premises at 5101 Shady Oak Road, Minnetonka, MN with the Seller in substantially the form found in Exhibit E attached hereto (the "Subleases"); (ii) transition services agreement with the Seller and its Affiliates, as applicable, in substantially the form of Exhibit F attached hereto (the "Transition Services Agreement"); (iii) a -5- marketing agreement with the Seller in substantially the form of Exhibit G attached hereto (the "Marketing Agreement"); and (iv) Assignment and Assumption Agreement in substantially the form of Exhibit H. (i) Release of Liens. The Buyer shall have received duly executed releases (including UCC-3 termination statements) of all Liens (other than Permitted Liens) on the assets of the Company in form and substance reasonably satisfactory to the Buyer and its counsel. (j) Performance by the Seller and the Company. The Company and the Seller shall have performed in all material respects their respective obligations under this Agreement. (k) Buyer shall have obtained sufficient financing to permit Buyer to close the transaction contemplated by this Agreement. 3.2 CONDITIONS TO OBLIGATION OF SELLER. The obligations of the Seller to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions as of the Closing: (a) Representations and Warranties. The representations and warranties of the Buyer and NetWolves set forth in Article VI hereof shall be true and correct in all material respects when made, and shall be true and correct in all material respects as of the Closing Date. (b) Absence of Litigation. As of the Closing, there shall not be (a) any Order of any nature issued by a Governmental Entity with competent jurisdiction directing that the transactions provided for herein or any material aspect of them not be consummated as herein provided or (b) any Proceeding before any Governmental Entity pending or threatened wherein an unfavorable Order would prevent the performance of this Agreement or the other Documents or the consummation in any material aspect of the transactions contemplated hereby, declare unlawful any material aspect of the transactions or events contemplated by this Agreement or the other Documents, or cause any material aspect of any transaction contemplated by this Agreement or the other Documents to be rescinded. (c) Governmental Filings. All filings or registrations with and all consents or approvals of any Governmental Entities which are required for or in connection with the execution and delivery by the Buyer of the Documents or the consummation of the transactions contemplated thereby shall have been effected and obtained. (d) Opinion of Counsel for Buyer and NetWolves. The Seller shall have received an opinion, dated the Closing Date, of Blau, Kramer, Wactlar & Lieberman, P.C., counsel to the Buyer and NetWolves, in substantially the form of Exhibit C attached hereto. (e) Subleases, Services Agreement; Marketing Agreement. The following agreements shall have been duly executed and delivered to the Seller and shall be in full force and effect: (i) the Subleases; (ii) the Transition Services Agreement; (iii) the Marketing Agreement; and (iv) the Assignment and Assumption Agreement in substantially the form of Exhibit H. -6- 3.3 MINIMUM CLOSING CONDITION. (a) Notwithstanding the conditions to the respective obligations of Buyer and NetWolves, on the one hand, and the Seller, on the other, to close as set forth in Section 3.1(f) and Section 3.2(c) hereof, if all other conditions to closing have been satisfied or waived, the parties agree that the conditions set forth in Section 3.1(f) and Section 3.2(c) hereof will be deemed satisfied upon (i) completion of all filings and registrations with Governmental Entities in connection with the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and (ii) receipt of related consents or approvals in the jurisdictions set forth on Schedule 3.3 hereto (the "Minimum Closing Condition"). Following completion of such filings and registrations and receipt of consents or approvals constituting the Minimum Closing Condition, either party may by written notice given to the other parties in accordance with Section 9.6 hereof, designate a Closing Date not sooner than five (5) business days after the date of the notice. (b) If a Closing Date is designated pursuant to Section 3.3(a) hereof, the parties, in addition to effecting the other deliveries specified in Sections 2.3 and 2.4 hereof, shall deliver appropriate evidence of filings and notices with all Governmental Entities in the jurisdictions not identified on Schedule 3.3 so that the consummation of the transactions contemplated hereby will not violate the Law in any such jurisdiction. ARTICLE IV CONDUCT OF BUSINESS PENDING THE CLOSING The Seller and the Company covenant and agree that, on and after the date hereof until the earlier to occur of the Closing or the termination of this Agreement pursuant to Section 2.5 hereof, unless the Buyer shall otherwise agree in writing: 4.1 ORDINARY COURSE. The Company shall, and shall cause its Subsidiaries to, carry on their respective businesses in the usual, regular and ordinary course in substantially the same manner as heretofore conducted and in compliance in all material respects with all applicable laws and regulations and shall use all reasonable efforts to preserve intact their present business organizations, keep available the services of their present officers and employees and preserve their relationships with customers, suppliers and others having business dealings with the Company and its Subsidiaries. 4.2 DIVIDENDS; CHANGES IN STOCK. The Company shall not, and shall not permit any of its Subsidiaries to, (i) declare or pay any dividends on or make other distributions in respect of any of its capital stock, (ii) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock or (iii) repurchase, redeem or otherwise acquire any shares of capital stock of the Company or any of its Subsidiaries or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities. -7- 4.3 ISSUANCE OF SECURITIES. The Company shall not, and shall not permit any of its Subsidiaries to, issue, deliver, sell, pledge or encumber, or authorize the issuance, delivery, sale, pledge or encumbrance of, any shares of its capital stock of any class or any securities convertible into, or any rights, warrants, calls, subscriptions or options to acquire, any such shares or convertible securities, or any other ownership interest (including stock appreciation rights or phantom stock) in the Company or any Subsidiary. 4.4 GOVERNING DOCUMENTS. The Company shall not, and shall not permit any of its Subsidiaries to, amend its articles of incorporation or by-laws (or similar organizational documents). 4.5 NO ACQUISITIONS. The Company shall not, and shall not permit any of its Subsidiaries to, acquire or agree to acquire (i) by merging or consolidating with, or by purchasing a substantial equity interest in or substantial portion of the assets of, or by any other manner, any business organization or division thereof or (ii) any assets that are material, individually or in the aggregate, to the Company and its Subsidiaries taken as a whole, except purchases of inventory and fixed assets in the ordinary course of business consistent with past practice. 4.6 NO DISPOSITIONS. Other than sales or licenses of its products in the ordinary course of business consistent with past practice, the Company shall not, and shall not permit any of its Subsidiaries to, sell, lease, license, encumber or otherwise dispose of, or agree to sell, lease, license, encumber or otherwise dispose of, any of its assets. 4.7 INDEBTEDNESS. The Company shall not, and shall not permit any of its Subsidiaries to, (i) incur or suffer to exist any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or warrants or rights to acquire any debt securities of the Company or any of its Subsidiaries, guarantee any debt securities of others, enter into any agreement to maintain any financial statement condition of another person or enter into any arrangement having the economic effect of any of the foregoing, except for working capital borrowings incurred in the ordinary course of business consistent with past practice, or (ii) make any loans, advances or capital contributions to, or investments in, any other person, other than to the Company. 4.8 ADVICE OF CHANGES; FILINGS. The Seller and the Company shall confer on a regular and frequent basis with NetWolves, as reasonably requested by NetWolves, and shall report on operational matters and promptly advise NetWolves orally and in writing of any material adverse change with respect to the business, operations, financial condition or prospects of the Company. The Seller and the Company shall promptly provide to, or make available for review by, NetWolves (or its counsel) -8- copies of all filings made by the Seller or the Company with any Governmental Entity. The Buyer shall have the right, directly and through its agents and representatives to contact customers, suppliers and employees of the Company upon prior notice to the Company of such intended contact but the Company may require that any representative present at any meeting between the Buyer and any customer, supplier or employee. 4.9 TAX MATTERS. Neither the Seller nor the Company shall make any tax election that would have an adverse effect on the Tax Liability or tax attributes of the Company or any of its Subsidiaries or settle or compromise any Tax Liability of the Company or any of its Subsidiaries. The Seller and the Company shall, before filing or causing to be filed any Tax Return of the Seller or the Company or any of its Subsidiaries or settling any Tax Liability not described in the preceding sentence, consult with NetWolves and its advisors as to the positions and elections that may be taken or made with respect to such return, and shall take such positions or make such elections as the Company and NetWolves shall jointly agree. 4.10 CAPITAL EXPENDItURES. Except as set forth on Schedule 5.6, neither the Company nor any of its Subsidiaries shall make or agree to make any new capital expenditure or expenditures which capital expenditures would exceed $50,000 in the aggregate. 4.11 DISCHARGE OF LIABILITIES. The Company shall not, and shall not permit any of its Subsidiaries to, pay, discharge, settle or satisfy any Liabilities, other than the payment, discharge, settlement or satisfaction, in the ordinary course of business consistent with past practice or in accordance with their terms, of Liabilities recognized or disclosed in the Financial Statements (or the notes thereto) of the Company or incurred since the date of such Financial Statements in the ordinary course of business consistent with past practice. 4.12 MATERIAL CONTRACTS. Except in the ordinary course of business, neither the Company nor any of its Subsidiaries shall (i) modify, amend or terminate any material contract to which the Company or such Subsidiary is a party, (ii) waive, release or assign any material rights or claims or (iii) waive the benefits of, or agree to modify in any manner, any confidentiality, standstill or similar agreement to which the Company or such Subsidiary is a party. 4.13 BENEFITS CHANGES. The Company shall not, and shall not permit any of its Subsidiaries to, (i) increase the compensation or benefits of any director, officer or employee, except for increases in the ordinary course that are consistent with past practice, (ii) adopt any amendment to a benefit plan that materially increases the cost thereof, (iii) enter into any employment or consulting agreement with any director, officer or employee or (iv) accelerate the payment of compensation or benefits to any director, officer or employee. -9- 4.14 GENERAL. Neither the Seller nor the Company shall authorize any of, or commit or agree to take any of, the foregoing actions otherwise prohibited by this Article IV. ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLER As a material inducement to NetWolves and the Buyer to enter into and perform its obligations under this Agreement, the Seller represents and warrants to NetWolves and the Buyer as set forth below. 5.1 ORGANIZATION AND CAPITALIZATION OF THE COMPANY. (a) Each of the Seller and the Company is a corporation duly organized, validly existing and in good standing under the laws of Minnesota, and the Company is qualified to do business in every jurisdiction in which the failure to so qualify could have a Material Adverse Effect on the Company. Schedule 5.1(a) lists all of the jurisdictions in which the Company is qualified to do business as a foreign corporation. Schedule 5.1(b) sets forth all names under which the Company has conducted the Business. The Seller owns all of the issued and outstanding capital stock of the Company and no other Person has any right to, or interest in, the outstanding capital stock of the Company or has any right, contingent or otherwise, to purchase, acquire or own, directly or indirectly, any equity interest in the Company. Schedule 5.1(a) lists all the directors and officers of the Company. The Seller has delivered to the Buyer correct and complete copies of the articles of incorporation and by-laws or other similar governing documents of the Company (as amended to date). The minute books (containing the records of meetings of the shareholders, the board of directors (or any similar person or body of persons), and any committees of the board of directors (or any similar person or body of persons)), the stock certificate books, and the stock record books of the Company, copies of which have been provided to the Buyer, are correct and complete in all respects. The Company is not in default under, or in violation of, any provision of its articles of incorporation or by-laws or other similar governing documents of the Company. (b) The entire authorized capital stock of the Company consists of 1,000,000 shares of Common Stock, of which 1,000 shares are issued and outstanding. All of the issued and outstanding shares have been duly authorized, are validly issued, fully paid, and nonassessable, and are owned of record and beneficially by the Seller in the amounts set forth on Schedule 5.1(b), free and clear of any Lien. There are no outstanding or authorized options, warrants, preemptive rights, purchase rights, subscription rights, conversion rights, exchange rights, or other contracts or commitments that could require the Company to issue, sell, or otherwise cause to become outstanding any of its capital stock. There are no outstanding or authorized stock appreciation, phantom stock, profit participation, or similar rights with respect to the Company. There are no voting trusts, proxies, or other agreements or understandings with respect to the voting of the capital stock of the Company. -10- 5.2 AUTHORIZATION OF TRANSACTION. The Company has all requisite corporate power and authority to own and operate the Business and to carry on the Business as now conducted. Each of the Company and the Seller has all requisite corporate power and authority to execute and deliver each Document to which it is a party and any and all instruments necessary or appropriate in order to effectuate fully the terms and conditions of each such Document and all related transactions and to perform its obligations under each such Document. Each Document to which the Company is a party has been duly and validly authorized by all necessary action (corporate or otherwise) on the part of the Company, and each Document to which the Company and/or the Seller is a party has been duly executed and delivered by the Company and/or the Seller, as the case may be, and constitutes the valid and legally binding obligation of the Company and/or the Seller, as the case may be, enforceable against such parties in accordance with its terms and conditions. 5.3 NON-CONTRAVENTION. Except as set forth on Schedule 5.3, neither the execution, delivery and performance of the Documents nor the consummation of the transactions contemplated by the Documents by the Company and/or the Seller, shall (a) violate any Law to which the Company, the Seller, the Business, the Shares or the assets of the Company is subject, (b) violate any provision of the Fundamental Documents of the Company, (c) conflict with, result in a breach of, constitute a default under, result in the acceleration of, create in any party the right to accelerate, terminate, modify, or cancel, or require any notice under, any of the Company's Intellectual Property or any Contract to which the Company and/or the Seller is a party or (d) result in the imposition of any Lien upon the Shares or any of the assets of the Company. Except as set forth on Schedule 5.3, neither the Company nor the Seller is required to give any notice to, make any filing with, or obtain any authorization, consent, or approval of any Governmental Entity or any consent or approval of any other Person in order for the parties to consummate the transactions contemplated by the Documents or in order for the Buyer to own the Shares and the Company to conduct the Business in the ordinary course following the Closing. 5.4 SUBSIDIARIES. Schedule 5.4 attached hereto is a list of all Subsidiaries of the Company, setting forth (i) the name and percentage ownership by the Company of each of its Subsidiaries, (ii) the name and ownership interests of all other holders of the capital stock, partnership interests or other equity interests thereof and (iii) the names of the officers and directors, members, managers or partners, as the case may be, of each such Subsidiary. The Company is, directly or indirectly, the record and beneficial owner of the number of shares of capital stock, partnership interests, limited liability company membership interests or other equity interests of each of its Subsidiaries as indicated on Schedule 5.4, there are no proxies with respect to such securities, and, except as set forth on Schedule 5.4, no securities of any of its Subsidiaries are or may become required to be issued, transferred or sold for any reason and all of the outstanding securities of each such Subsidiary have been duly authorized and are validly issued, fully paid and nonassessable and were not issued in violation of any preemptive rights and are owned free and clear of any Lien or agreement with respect thereto (except as otherwise disclosed on Schedule 5.4). Except for its Subsidiaries and except as otherwise set forth on Schedule 5.4, the -11- Company does not, directly or indirectly, have any ownership interest in any corporation, partnership, joint venture, limited liability company or other entity. Except as set forth in Schedule 5.4, there are no outstanding subscriptions, options, warrants, rights, calls, commitments, conversion rights, rights of exchange, plans or other agreements to which the Company or any of its Subsidiaries is a party providing for the purchase, issuance or sale of any capital stock, partnership interests, limited liability company membership interests or other equity interests of any of the Company's Subsidiaries or any securities convertible into, exchangeable into or exercisable for, shares of capital stock, partnership interests or other equity interests of any of the Company's Subsidiaries and there are no outstanding written agreements to which the Company or any of its Subsidiaries is a party with respect to the issuance, transfer or voting of the securities of any of the Company's Subsidiaries. 5.5 FINANCIAL STATEMENTS. The following financial statements are referred to collectively herein as the "Financial Statements": (a) the unaudited balance sheets of the Company dated as of April 30, 2000 and 2001, respectively, and the related statements of operations, and shareholders' equity for the respective fiscal years then ended April 30, 2000 and 2001; the balance sheet dated April 30, 2001 is hereinafter referred to as the "Balance Sheet"; and (b) the interim balance sheets of the Company dated as of December 31, 2001 (the "Latest Balance Sheet") and the interim balance sheet of the Company dated as of October 31, 2001 and the related statements of operations, and shareholders' equity, together with the accompanying supplementary information, for the three-month period then ended. Schedule 5.5(a) contains the Financial Statements described in (a) and (b) above. Except as specifically set forth on Schedule 5.5(b), each of the Financial Statements (including the notes thereto) (A) has been prepared in accordance with the books and records of the Company (which are true and correct in all material respects), (B) is true, correct and complete in all material respects, (C) fairly presents the financial condition, results of operations and changes in shareholders' equity which it purports to present as of the dates thereof and for the periods indicated thereon and (D) has been prepared in accordance with GAAP consistently applied throughout the periods covered thereby, subject, in the case of the Latest Balance Sheet, to the lack of footnotes and other presentation items and normal annual accruals. Since May 1, 1999, except as required by applicable Law or GAAP, there has been no change in any accounting principle, procedure or practice followed by the Company or in the method of applying any such principle, procedure or practice. 5.6 EVENTS SUBSEQUENT TO OCTOBER 31, 2001. Since October 31, 2001, the Company has operated the Business in the ordinary course consistent with past practice and the Company has not suffered any Material Adverse Change. Since that date, except as set forth on Schedule 5.6: (a) no party (including the Company) has accelerated, terminated, modified or canceled any agreement, contract, document, lease, or license (or series of related agreements, -12- contracts, leases, and licenses) involving more than $20,000 to which the Company is a party or by which the Company is bound or which is otherwise material to the Company or the Business and, to the knowledge of Seller, no party intends to take any such action; (b) the Company has not made any redemptions of, or dividends or distributions in respect of, the outstanding shares of its capital stock or increased the compensation of any director, officer or employee thereof; (c) exclusive of intracorporate cost sharing arrangements and transfers of cash to Seller, the Company has not paid any fee, interest, royalty or any other payment of any kind to the Seller or any Affiliate of the Company; (d) the Company has not incurred any material debt, Lien upon any of its respective assets or any increase in the amount payable by the Company under any credit or loan agreement to which the Company is a party; (e) there has not been any other material occurrence, event, incident, action, failure to act or transaction outside the ordinary course of business involving the Company; (f) the Company has not sold, leased, transferred, or assigned any of its material assets, tangible or intangible, other than for a fair consideration in the ordinary course of business; (g) the Company has not made any capital expenditure (or series of related capital expenditures) either involving more than $50,000 or outside the ordinary course of business; (h) the Company has not made any investment in, any loan to, or any acquisition of the securities or assets of, any other Person (or series of related capital investments, loans, and acquisitions) either involving more than $20,000 or outside the ordinary course of business; (i) the Company has not delayed or postponed the payment of material accounts payable and other Liabilities outside the ordinary course of business, exclusive of delayed payments to Sprint Corporation; (j) the Company has not cancelled, compromised, waived, or released any right or claim (or series of related rights and claims) either involving more than $20,000 or outside the ordinary course of business; (k) the Company has not granted any license or sublicense of any rights under, or with respect to, any Intellectual Property; (l) the Company has not entered into any employment contract or collective bargaining agreement, written or oral (other than ordinary course oral at-will employment arrangements, the generic terms of which are described on an aggregate basis (i.e., ranges of wages or salary, typical benefits, etc.) on Schedule 5.6 hereto), or modified the terms of any existing such contract or agreement; -13- (m) the Company has not made or pledged to make any charitable or other capital contribution outside the ordinary course of business; (n) neither the Seller nor the Company has failed to maintain in force the insurance policies referred to in Schedule 5.15 or insurance policies providing the same or substantially similar coverage; and (o) the Company has not committed to do any of the foregoing, whether orally or in writing. 5.7 ABSENCE OF UNDISCLOSED LIABILITIES. Except as set forth on Schedule 5.7, the Company has no Liabilities, except for (a) Liabilities reflected on the face of the liabilities section of the Latest Balance Sheet or the Balance Sheet, (b) Liabilities under any agreements, contracts, commitments, licenses or leases which have arisen prior to the date of the Latest Balance Sheet in the ordinary course of business (none of which relates to a breach of contract, breach of warranty, tort, infringement, violation of Law or Proceeding), and (c) Liabilities which have arisen since the date of the Latest Balance Sheet in the ordinary course of business (none of which relates to any breach of contract, breach of warranty, tort, infringement, violation of Law or Proceeding). 5.8 CREDITORS; BANKRUPTCY, ETC. Neither the Company nor the Seller is involved in any proceeding by or against the Company as a debtor in any court under the United States Bankruptcy Code or any other insolvency or debtors' relief act, whether state or Federal, or for the appointment of a trustee, receiver, liquidator, assignee, sequestrator or other similar official of the Company or for any part of the Company's property. 5.9 LEGAL COMPLIANCE. The Company has complied with all applicable Laws, Environmental and Safety Requirements, Orders and Permits, and no Proceeding is pending or, to the knowledge of Seller, threatened, alleging any failure to so comply. Schedule 5.9 sets forth a list of all Permits under which the Company is operating or bound. Such Permits (a) constitute all Permits used or required in the conduct of the Business as presently conducted, (b) are in full force and effect, (c) have not been violated and (d) are not subject to any pending or, to the knowledge of Seller, threatened Proceeding seeking their revocation or limitation. 5.10 TITLE TO PROPERTIES. (a) Except as set forth on Schedule 5.10(a), (A) the Company owns good and marketable title, free and clear of all Liens (other than Permitted Liens), to all of its respective assets, and (B) the assets of the Company include all assets, properties and interests in properties presently used by, and necessary for, the conduct of the Business by the Company in the ordinary course. -14- (b) The facilities, machinery, equipment and other tangible assets of the Company are in good condition (ordinary wear and tear expected) and repair (subject to routine maintenance and repair for similar assets of like age), fit for their particular purpose, and are usable in the ordinary course of the Business. The Company owns or leases under valid leases all machinery, equipment and other tangible assets necessary for the conduct of the Business as conducted as of the date hereof and as of the date of the Latest Balance Sheet. (c) Attached as Schedule 5.10(c) is a true and complete listing of all of the fixed assets of the Company. Schedule 5.10(c) specifies the locations of the assets of the Company. (d) The Company owns no real estate. Schedule 5.10(d) contains a list and brief description of all real property leased by the Company (the "Real Property"), as well as all buildings and other structures and material improvements located on such Real Property, the name of the lessor and any requirement of consent of the lessor to assignment, if any. The Real Property constitutes all real properties used or occupied by the Company in connection with the Business. With respect to the Real Property, the Company is the owner and holder of all of the leasehold estates purported to be granted by such lease and each lease is in full force and effect and constitutes a valid and binding obligation of the Company. The Company has delivered to the Buyer true and complete copies of all leases referred to in Schedule 5.10(d). (e) With respect to the Real Property, except as set forth in Schedule 5.10(e): (i) no portion thereof is subject to any pending condemnation Proceeding by any public or quasi-public authority and, to the knowledge of Seller, there is no threatened condemnation Proceeding with respect thereto; (ii) no notice of any increase in the assessed valuation of the Real Property and no notice of any contemplated special assessment has been received by the Company, and, to the knowledge of Seller, there is no threatened increase in the assessed valuation or special assessment pertaining to any of the Real Property; (iii) there are no leases or other agreements, written or oral, to which the Company is a party, granting to any party or parties (other than the Company) the right of use or occupancy of any portion of any parcel of Real Property; (iv) there are no parties (other than the Company or its lessees disclosed pursuant to paragraph (iii) above) in possession of any of the Real Property; (v) with respect to the Real Property, there have been no discussions or correspondence with the landlord thereof concerning renewal terms for those leases scheduled to expire within twelve (12) months of the date of this Agreement; and (vi) the physical condition of the Real Property is sufficient to permit the continued conduct of the Business as presently conducted subject to the provision of usual and customary maintenance and repair performed in the ordinary course with respect to similar properties of like age and construction. -15- 5.11 BANK ACCOUNTS; POWERS OF ATTORNEY. Schedule 5.11 sets forth a true and complete list of (i) all bank accounts and safe deposit boxes of the Company and all persons who are signatories thereunder or who have access thereto and (ii) the names of all Persons holding general or special powers of attorney from the Company and a summary of the terms thereof. 5.12 TAX MATTERS. Except as set forth on Schedule 5.12, the Company and each other corporation included in any consolidated or combined tax return or part of an affiliated group, within the meaning of Section 1504 of the Code, of which the Company is or has been a member, (A) have timely paid all Taxes required to be paid by them through the date hereof (including any Taxes shown due on any Tax Return) and (B) have filed or caused to be filed in a timely manner (within any applicable extension periods) all Tax Returns required to be filed by them with the appropriate Governmental Entities in all jurisdictions in which such Tax Returns are required to be filed, and all such Tax Returns are true and complete. All Taxes shown to be due on each of the Tax Returns filed by the Company have been timely paid in full. Except as set forth in Schedule 5.12: (i) no Liens have been filed and the Company has not been notified by the Internal Revenue Service or any other taxing authority that any issues have been raised (and are currently pending) by the Internal Revenue Service or any other taxing authority in connection with any Tax Return of the Company (or the failure to file a Tax Return), and no waivers of statutes of limitations have been given or requested with respect to the Company; (ii) there are no pending Tax audits of any Tax Returns of the Company; (iii) no unresolved deficiencies or additions to Taxes have been proposed, asserted or assessed against the Company or any member of any affiliated or combined group of which the Company was or is a member; (iv) the Company has made full and adequate provision (x) on the Latest Balance Sheet for all Taxes payable by it for all periods prior to the date of the Latest Balance Sheet and (y) on its books for all Taxes payable by it for all periods beginning on or after the date of the Latest Balance Sheet; (v) the Company has not nor will it incur any Liability with respect to any Taxes (a "Tax Liability") from and after the date of the Latest Balance Sheet other than Taxes incurred in the ordinary course of business and consistent with previous years; (vi) the Company has not been nor is now a "personal holding company" within the meaning of Section 542 of the Code or a United States real property holding corporation within the meaning of Section 897 of the Code; (vii) the Company and its predecessors have complied in all respects with all applicable Laws relating to the collection or withholding of Taxes (such as sales Taxes or withholding of Taxes from the wages of employees) and the Company is not liable for any Taxes for failure to comply with such Laws; and (viii) the Company is not now nor has the Company been a party to any Tax sharing agreement. The Company has not agreed to and the Company is not required to make any adjustments pursuant to Section 481 of the Code, and the Internal Revenue Service has not proposed any such adjustments or changes in the accounting methods of the Company. 5.13 INTELLECTUAL PROPERTY. (a) Schedule 5.13(a) identifies (i) all Intellectual Property consisting of patents, patent applications, trademarks and service marks, logos, trade names, corporate names, copyrights, computer programs and software, domain names, and url's used in connection with -16- the Business, (ii) each license, agreement or other permission which the Company has granted to any third party with respect to any Intellectual Property used in connection with the Business, and (iii) excluding readily available "off the shelf," "shrink wrapped" software, each item of Intellectual Property that any third party owns and that the Company uses in connection with the Business pursuant to license, sublicense, agreement or permission (clauses (ii) and (iii) are collectively referred to as "Licensed Intellectual Property"). (b) Except as set forth on Schedule 5.13(b), (i) the Company has not interfered with, infringed upon, misappropriated or otherwise come into conflict with any Intellectual Property rights of third parties or committed any acts of unfair competition, and the Company has not received any charge, complaint, claim, demand or notice alleging any such interference, infringement, misappropriation, conflict or act of unfair competition; (ii) the Company owns, has the right to use, sell, license and dispose of, and has the right to bring actions for the infringement of, and, where necessary, has made timely and proper application for, all Intellectual Property (other than the Licensed Intellectual Property) necessary or required for the conduct of the Business as currently conducted and as proposed to be conducted and such rights to use, sell, license, dispose of and bring actions are exclusive with respect to such Intellectual Property; (iii) there are no royalties, honoraria, fees or other payments payable by the Company to any Person by reason of the ownership, use, license, sale or disposition of the Intellectual Property; (iv) no activity, service or procedure currently conducted or proposed to be conducted by the Company violates or will violate any agreement governing the use of Licensed Intellectual Property; (v) the Company has taken reasonable and practicable steps (including, without limitation, entering into confidentiality and nondisclosure agreements with all officers, directors and employees of, and consultants to, the Company with access to or knowledge of the Intellectual Property) designed to safeguard and maintain the secrecy and confidentiality of, and their proprietary rights in, all Intellectual Property; (vi) no patent, formulation, invention, device, application or principle nor any Law exists or, to the knowledge of Seller, is pending or proposed that would have or could reasonably be expected to have a Material Adverse Effect on the Business as presently conducted or as contemplated to be conducted; (vii) the Company has not sent to any third party in the past five (5) years or otherwise communicated to another Person any charge, complaint, claim, demand or notice asserting infringement or misappropriation of, or other conflict with, any Intellectual Property right of the Company by such other Person or any acts of unfair competition by such other Person, nor, to the knowledge of Seller, is any such infringement, misappropriation, conflict or act of unfair competition occurring or threatened; and -17- (viii) the consummation of the transactions contemplated by the Documents will not result in a reduction, waiver or other diminishment of any material legal right represented by the Company's Intellectual Property utilized in the Business. 5.14 CONTRACTS AND COMMITMENTS. Except as set forth on Schedule 5.14 or as contemplated by this Agreement, the Company is not a party to any written or oral: (a) contract, agreement or arrangement for the employment of, or benefits to, any officer, individual employee, or other Person on a full-time, part-time, consulting or other basis; (b) instrument, agreement or indenture relating to Funded Indebtedness or to the mortgaging, pledging or otherwise placing a Lien on any material asset or material group of assets of the Company; (c) factoring arrangement or other agreement involving the sale of the Company's accounts receivable to a third party at a discount; (d) guarantee of any obligation for borrowed money or otherwise; (e) agreement with respect to the lending or investing of funds; (f) lease or agreement under which the Company is the lessee of or the holder or operator of any real or personal property owned by any other party; (g) lease or agreement under which the Company is the lessor of or permits any third party to hold or operate any real or personal property owned or controlled by the Company; (h) assignment, license, indemnification or agreement with respect to any form of intangible property, including, without limitation, any Intellectual Property or confidential information; (i) contract or group of related contracts with the same party (excluding purchase orders entered into in the ordinary course of business) for the purchase or sale of products or services under which the undelivered balance of such products and services has a selling price in excess of $20,000; (j) contract which prohibits the Company from freely engaging in business anywhere in the world; (k) contract relating to the purchase, distribution, marketing or sales of the Company or any other Person's products (other than purchase and sales orders entered into in the ordinary course of business consistent with past practices and the performance of which by the parties thereto is reasonably expected to be substantially completed within sixty (60) days of the execution thereof); (l) contract with any Affiliate; or -18- (m) other agreement or instrument material to the Business. Each agreement, lease, license, contract or commitment disclosed on Schedule 5.14 is valid and enforceable against the Company and the other parties thereto. Except as specifically disclosed in Schedule 5.14, the Company has performed in all material respects all obligations required to be performed by it and is not in default under or in breach of nor in receipt of any claim of default or breach under any such agreement, lease, license, contract or commitment to which it is a party; and no event has occurred which with the passage of time or the giving of notice or both would result in a default or breach under any such document. To the knowledge of Seller, no other party to any agreement, lease, license, contract, or commitment to which the Company is a party is in default under or in breach of such document and no event has occurred which with the passage of time or giving of notice or both would result in a default or breach under any such document. The Company has supplied the Buyer with (i) a true, correct and complete copy of each of the documents listed on Schedule 5.14, together with all amendments, waivers or other changes thereto, and (ii) a complete description of all oral agreements to which the Company is a party. 5.15 INSURANCE. Schedule 5.15 lists and briefly describes each insurance policy and self insurance arrangement maintained by or for the benefit of the Company with respect to its properties, assets and business, and all currently pending claims thereunder. All of such insurance policies are in full force and effect. Neither the Seller nor the Company is in default with respect to their obligations under any of such insurance policies and neither the Seller nor the Company has received any notification of cancellation or modification of any of such insurance policies or has any claim outstanding which could be expected to cause a material increase in rates applicable for the Company's insurance. There are no facts or circumstances which exist that might relieve any insurer under such insurance policies of its obligations to satisfy in full claims thereunder. The Company and/or the Seller, on behalf of the Company, maintains insurance coverage of a type and amount customary for entities of similar size engaged in similar lines of business as the Company. Schedule 5.15 lists each claim (and the disposition thereof) submitted since May 1, 1999 under any insurance policy and self insurance arrangement maintained by or for the benefit of the Company with respect to its properties, assets and business during such period. 5.16 LITIGATION. Except as set forth on Schedule 5.16, there are no Proceedings pending or, to the knowledge of Seller, threatened against the Company and there is no Basis for any of the foregoing. Schedule 5.16 also sets forth all Proceedings involving the Company during the last five (5) years which (i) alleged criminal conduct by the Company, (ii) resulted in the Company paying or receiving an amount in excess of $20,000 in connection with the adjudication or compromise of such matter or (iii) had a Material Adverse Effect on the Company. All materials provided to the Buyer relating to the matters described in Schedule 5.16 are true, correct and complete. -19- 5.17 EMPLOYEES. (a) Schedule 5.17(a) lists all current employees of the Company as of the Closing Date, their permanent classifications (if applicable), their current hourly rates of compensation or base salaries (as applicable) and the commencement date of their employment. In addition, to the extent any current employees are on leaves of absence, Schedule 5.17(a) indicates the nature of such leave of absence and each such employee's anticipated date of return to active employment. Schedule 5.17(a) also sets forth all former employees of the Company who left the employ of the Company within the past twelve (12) months, including their name and position. No executive, key employee or group of employees of the Company listed on Schedule 5.17(a) has indicated any plans to (i) terminate employment with the Company or (ii) not continue employment with the Company immediately after the Closing. The Company has complied in all material respects with all Laws relating to the hiring of employees and the employment of labor, including provisions thereof relating to immigration and citizenship (including proper completion and processing of Forms I-9 for all employees), wages, hours, equal opportunity, collective bargaining and the payment of social security and other Taxes. (b) Except as set forth on Schedule 5.17(b), (i) the Company is not delinquent in payments to any of its employees for any wages, salaries, commissions, bonuses or other direct compensation for any services performed by them to date or amounts required to be reimbursed to such employees and upon termination of the employment of any such employees, neither the Buyer nor the Company will by reason of anything done prior to the Closing be liable to any of such employees for severance pay or any other payments, (ii) there is no unfair labor practice charge or complaint against the Company pending before the National Labor Relations Board or any other Governmental Entity and none is or has been threatened, (iii) there is no labor strike, dispute, request for representation, slowdown or stoppage actually pending or threatened against or involving the Company, (iv) no labor union currently represents the employees of the Company, (v) to the knowledge of Seller, no labor union has taken any action with respect to organizing the employees of the Company, and (vi) neither any material grievance nor any arbitration proceeding arising out of employment by the Company is pending and no claim thereto has been asserted against the Company. Except as set forth in Schedule 5.17(b), the Company is not a party to, or bound by, any collective bargaining agreement, union contract or singular agreement. (c) Except as set forth on Schedule 5.17(c): (i) the Company is, and has at all times been, in compliance in all material respects with all applicable laws respecting employment and employment practices, including without limitation, terms and conditions of employment, wages, hours of work, employment discrimination and occupational safety and health, and are not engaged in any unfair labor practices as defined in the National Labor Relations Act or other applicable law, ordinance or regulation; (ii) to the knowledge of Seller, no charges with respect to or relating to the Company are pending before the Equal Employment Opportunity Commission or any other agency responsible for the prevention of unlawful employment practices; (iii) the Company has provided or will timely provide prior to the Closing Date all notices required by law to be given prior to the Closing Date by the Company of the transactions contemplated by this Agreement to all local, state or federal labor, wage-payment, equal employment opportunity, unemployment-insurance and related agencies; (iv) the transactions contemplated by this Agreement will not create any liability under any local, state or federal law -20- respecting reductions in workforce or the impact on employees of plant closings or sales of businesses; and (v) the Company and each member of its respective business enterprise has complied with, in all material respects, the Worker Adjustment and Retraining Notification Act. (d) Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated (either alone or in conjunction with any other event) hereby will: (i) result in any payment (including, without limitation, severance, unemployment compensation, golden parachute, bonus or otherwise) becoming due to any director or employee of the Company from the Company under any Plan (defined in Section 5.18 below) or otherwise; (ii) increase any benefits otherwise payable under any Plan or otherwise; or (iii) result in the acceleration of the time of payment or vesting of any such benefits. (e) The Company has no knowledge of any valid claim that may be asserted by any third party against the Company or any of the Designated Persons (as hereinafter defined) with respect to (i) the employment by, or association with the Company of any of the present officers or employees of or consultants to the Company (said officers, employees and/or consultants being hereinafter, collectively referred to as the "Designated Persons") or (ii) the use, in connection with the Business, by any of the Designated Persons of any information which the Company or any of the Designated Persons is prohibited from using, in each case under any prior agreements, arrangements or other preexisting set of facts, including, without limitation, any such agreement or arrangement between any of the Designated Persons, or any legal or equitable considerations applicable to, among other things, unfair competition, trade secrets or proprietary information. 5.18 EMPLOYEE BENEFITS. (a) Employee Benefit Plans. Schedule 5.18(a) sets forth a true and complete list of all Employee Benefit Plans (as used in this Section 5.18, the "Plans") (i) that cover any present or former employees or directors of the Company (A) that are maintained, sponsored or contributed to by or on behalf of the Company or (B) with respect to which the Company is obligated to contribute or has any Liability or potential Liability, whether direct or indirect or (ii) with respect to which the Company has any Liability or potential Liability on account of the maintenance or sponsorship thereof or contribution thereto by any present or former ERISA Affiliate of the Company. (b) Administration and Compliance of the Plans. Except as set forth on Schedule 5.18(b), with respect to each Plan: (i) there have been no violations of ERISA or other applicable Laws with respect thereto (including, without limitation, any nonexempt Prohibited Transactions); no fiduciary (as defined in Section 3(21) of ERISA) has any Liability for breach of fiduciary duty or any other failure to act or comply in connection with the administration or investment of the assets thereof; no action, suit, proceeding, hearing or investigation with respect to the administration or the investment of the assets thereof (other than routine claims for benefits) is pending or threatened; and the Company has no knowledge of any Basis for any such action, suit, proceeding, hearing, or investigation and each Plan has been administered in all material respects in accordance with its terms; -21- (ii) such Plan, if intended to be "qualified", within the meaning of Section 401(a) of the Code, has been determined by the Internal Revenue Service to be so qualified and the related trusts are exempt from Tax under Section 501(a) of the Code, and nothing has occurred that has or could adversely affect such qualification or exemption; (iii) the Company has timely deposited all amounts withheld from employees for pension, welfare or other benefits into the appropriate trusts or accounts; (iv) the Company has no liability for any post-employment or post-retirement health or life insurance, accident or other "welfare-type" benefits to former beneficiaries or dependents thereof, except for health continuation coverage as required by Section 4980B of the Code or Part 6, Title I of ERISA; there has been no communication to employees by the Company which could reasonably be interpreted to promise or guarantee such employees retiree health or life insurance or other such "welfare-type" benefits; (v) the Company has provided the Buyer with true and complete copies, to the extent applicable, of all documents pursuant to which such Plan is maintained and administered, the current summary plan description and any material modifications thereto, the two most recent annual reports (Form 5500 and attachments) and financial statements therefor, all governmental rulings, determinations, and opinions (and pending requests therefor), and if such Plan provides post-retirement or post-employment health and life insurance, accident, or other "welfare-type" benefits, the most recent valuation of the present and future obligations under such Plan; the foregoing documents accurately reflect all material terms of such Plan; and (vi) no benefit or amount payable or which may become payable by the Company pursuant to any Plan, agreement or contract with any employee shall constitute an "excess parachute payment" within the meaning of Section 280G of the Code (or any corresponding provision of state, local or foreign Tax law), which is or may be subject to the imposition of an excise tax under Section 4999 of the Code or which would not be deductible by reason of Section 280G of the Code. (c) Multi-Employer Plans, Controlled Group Liability, Etc. The Company and each of its ERISA Affiliates are not and have not ever maintained or been obligated to contribute to a Multiple Employer Plan, a Multi-Employer Plan, a Defined Benefit Pension Plan or a "multiple employer welfare arrangement" as that term is defined in Section 3(40) of ERISA. There does not now exist, nor do any circumstances exist that could result in any liability of the Company following the Closing (i) under Title IV of ERISA, (ii) under Section 302 of ERISA, (iii) under Sections 412 and 4971 of the Code, (iv) as a result of a failure to comply with the continuation coverage requirements of Section 601 et seq. of ERISA and Section 4980B of the Code, and (v) under corresponding or similar provisions of foreign laws or regulations. Without limiting the foregoing, neither the Company nor any ERISA Affiliate of the Company has engaged in any transaction described in Sections 4069, 4212 or 4204 of ERISA. 5.19 ENVIRONMENT AND SAFETY. (a) Except as set forth in Schedule 5.19, the Company has materially complied and is in material compliance with all Environmental and Safety Requirements (including, without -22- limitation, all permits, licenses and other authorizations that may be required thereunder) for the occupation of the Real Property and the operation of the Business or otherwise related to the Real Property or the Business. Schedule 5.19 contains a list of all permits, licenses and authorizations required under all Environmental and Safety Requirements. The Company has accurately prepared and timely filed with the appropriate Governmental Entities all reports, notifications, and filings required pursuant to Environmental and Safety Requirements affecting the Real Property or the Business. The Company has not received notice of any action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand or notice against the Company alleging any violation of, any liability (contingent or otherwise) or any corrective or remedial obligation under any Environmental and Safety Requirements or involving any of its current or past operations or any Real Property currently or formerly used by the Company. The Company has not expressly or by operation of law assumed, undertaken or become subject to any Liability of any other Person under any Environmental and Safety Requirements. Schedule 5.10(d) sets forth a complete and accurate list of all real property owned, leased or operated by the Company in connection with the Business. None of the following exists nor, to the knowledge of Seller, has ever existed, at any of the Real Property or any other real property previously owned or operated by the Company: (i) underground storage tanks; (ii) asbestos-containing material in any form or condition; (iii) materials or equipment containing polychlorinated biphenyls; and (iv) landfills, surface impoundments or disposal areas. No Environmental Lien has attached to any property owned, leased or operated by the Company. The Company has not been notified that it is potentially responsible or liable under or received any requests for information or other correspondence concerning any site or facility under CERCLA or any similar law. The Company has not entered into or received any consent, decree, compliance order, or administrative order pursuant to Environmental and Safety Requirements and under which there are continuing obligations. (b) The Company has not treated, stored, disposed of, arranged for or permitted the disposal of, transported, handled or released any substance, including, without limitation, any hazardous substance, or owned or operated any property or facility (and no such property or facility is contaminated by any such substance) in a manner that has given or would give rise to Liabilities pursuant to CERCLA, SWDA or any other Environmental and Safety Requirement, including any Liability for response costs, corrective action costs, personal injury, property damage, natural resources damage or attorney fees, or any investigative, corrective or remedial obligations. The transactions contemplated by this Agreement do not impose any obligations under any Environmental and Safety Requirements for site investigation or cleanup, or notification to any Governmental Entities or third parties. To the knowledge of Seller, no facts, events or conditions relating to the past or present properties, operations or facilities of the Company would prevent compliance by the Company or the Buyer with, or give rise to any Liability or investigatory, corrective or remedial obligation of the Buyer with respect to, Environmental and Safety Requirements, including, without limitation, any Liability related to environmental contamination or violations of health and safety requirements. (c) The Company has provided the Buyer with true, correct, and complete copies of all environmental reports and studies in the possession, custody or control of the Company with respect to the Business or any of the Real Property or real property owned or leased by the Company and, to the knowledge of Seller, there are no other environmental reports or studies with respect thereto. -23- 5.20 CUSTOMERS AND SUPPLIERS. Schedule 5.20 lists all material customers and all material suppliers of the Company during (i) the fiscal year ended 2000, (ii) the fiscal year ended 2001 and (iii) the fiscal year ending 2002 through September 30, 2001. Except as set forth on Schedule 5.20, no such customer, supplier or subcontractor has terminated or materially reduced its business with the Company since September 30, 2001. No changes have occurred to the customer base other than in the ordinary course of business. The Company has not received any notice or otherwise has any reason to believe that any of the customers, suppliers or subcontractors listed in Schedule 5.20 intends to terminate or materially reduce its business with the Company. 5.21 ACCOUNTS RECEIVABLE. The notes and accounts receivable reflected on the Latest Balance Sheet (net of allowances for doubtful accounts as reflected thereon) are valid receivables and, except as set forth on Schedule 5.21, have been collected or are current and collectible within ninety (90) days after the due date related to such receivables, subject to no valid counterclaims or set-offs, at the aggregate recorded amount thereof as shown on the Latest Balance Sheet. The notes and accounts receivable reflected on the books and records of the Company as of the Closing Date are valid receivables and, except as set forth on Schedule 5.21, are current and collectible within ninety (90) days after the due date or the execution date related to such receivables, subject to no valid counterclaims or set-offs, at the aggregate recorded amount thereof recorded on each books and records, net of the recorded amount of allowances for doubtful accounts computed in a manner consistent with the accounting practices used in the preparation of the Latest Balance Sheet. 5.22 ACCOUNTS AND NOTES PAYABLE. Except as set forth on Schedule 5.22, all accounts payable and notes payable by the Company to third parties as of the date hereof arose in the ordinary course of business. Schedule 5.22 sets forth the payee, the due date and the amount of all accounts and notes payable of the Company as of December 31, 2001. 5.23 WARRANTIES OF PRODUCTS AND SERVICES; PRODUCT LIABILITY; REGULATORY COMPLIANCE. (a) Except as set forth on Schedule 5.23, all products manufactured, sold, distributed, leased, installed, used, delivered or held in inventory by the Company (including, without limitation, all documentation furnished in connection therewith) are free from any material defects and conform in all material respects with all customary and reasonable standards for products of such type, with all applicable contractual commitments and with all express and implied warranties, and the Company has no Liability (and, to the knowledge of Seller, there is no Basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand against it giving rise to any Liability) for replacement or repair in connection with its Business or other damages, subject only to the reserve for warranty claims set forth on the face of the Latest Balance Sheet (rather than in any notes thereto). No product manufactured, sold, distributed, leased, installed, used or delivered by, or service provided by, the Company is subject to any guaranty, warranty or other indemnity beyond the applicable -24- standard terms and conditions of sale, lease or provision of services. Copies of the standard terms and conditions of sale, lease or provision of services for the Company (containing applicable guaranty, warranty and indemnity provisions) are set forth on Schedule 5.23. (b) Except as set forth on Schedule 5.23, since May 1, 1999, no Governmental Entity regulating the Business has commenced, or threatened to commence, any investigation or proceeding relating to the Business, and the Company has not been responsible for, subject to, become aware or otherwise been notified of, and does not now have any Liability (and, to the knowledge of Seller, there is no Basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand against it giving rise to any Liability), arising out of any injury to individuals or property as a result of or in connection with any of the services performed by the Company or any product manufactured, sold, distributed, leased, installed, used or delivered by, or service provided by, the Company. 5.24 INSIDER INTERESTS. Except as set forth on Schedule 5.24, and except for compensation to regular employees of the Company and with respect to intracorporate cost sharing arrangements, no current or former Affiliate of the Company or any Associate thereof, is now, or has been during the last five fiscal years, (i) a party to any transaction or contract with the Company, (ii) indebted to the Company, or (iii) to the knowledge of Seller the direct or indirect owner of an interest in any Person which is a present or potential competitor, supplier, lessor, subcontractor, or customer of the Company (other than non-affiliated holdings in publicly held companies), nor does any such Person receive income from any source other than the Company which should properly accrue to the Company. Except as set forth on Schedule 5.24, the Company and its Affiliates are not the guarantors or otherwise liable for any Liability (including indebtedness) of the Seller. 5.25 CONFLICTS OF INTERESTS. None of the Company or, to the knowledge of Seller, any officer, director, employee, agent or any other Person acting on behalf of the Company has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any Governmental Entity or other Person who was, is, or may be in a position to help or hinder the business of the Company (or assist in connection with any actual or proposed transaction) that (i) might subject the Company to any damage or penalty in any Proceeding, (ii) if not given in the past, might have had a Material Adverse Effect on the Company, or (iii) if not continued in the future, might have a Material Adverse Effect on the Company. 5.26 BROKERS. Schedule 5.26 sets forth a true and complete list of, and copies of all agreements with (or descriptions of all oral arrangements with), each agent, broker, investment banker, Person or firm who or which has acted on behalf, or under the authority, of the Company or the Seller or will be entitled to any fee or commission directly or indirectly from the Buyer or the Company in connection with any of the transactions contemplated hereby. -25- 5.27 CERTAIN PRACTICES. None of the Company, nor, to the knowledge of Seller, any officer, director, employee, consultant or agent thereof acting on its behalf has made, directly or indirectly, any payment or promise to pay, or gift or promise to give or authorized such a promise or gift, of any money or anything of value, directly or indirectly, to (a) any foreign, federal, state or local governmental official for the purpose of influencing any official act or decision of such official or inducing him or her to use his or her influence to affect any act or decision of a foreign, federal, state or local governmental agency or subdivision thereof or (b) any political party or official thereof or candidate for political office for the purpose of influencing any official act or decision of such party, official or candidate or inducing such party, official or candidate to use his, her or its influence to affect any act or decision of a foreign government or agency or subdivision thereof, in the case of both (a) and (b) above in order to assist the Company to obtain or retain business for or direct business to the Company under circumstances which would subject the Company to Liability. ARTICLE VI REPRESENTATIONS AND WARRANTIES OF BUYER AND NETWOLVES As a material inducement to the Seller to enter into and perform its obligations under this Agreement, the Buyer and NetWolves represent and warrant to the Seller as follows: 6.1 ORGANIZATION. The Buyer and NetWolves are corporations duly organized, validly existing and in good standing under the laws of the State of New York. 6.2 AUTHORIZATION OF TRANSACTION. Each of the Buyer and NetWolves have full corporate power and authority to execute and deliver each Document to which it is a party and any and all instruments necessary or appropriate in order to effectuate fully the terms and conditions of the Documents and all related transactions and to perform its obligations under the Documents. Each Document to which the Buyer or NetWolves is a party has been duly authorized by all necessary corporate action on the part of the Buyer or NetWolves, as the case may be, and has been duly executed and delivered by such entity and constitutes the valid and legally binding obligation of such entity, enforceable against such entity in accordance with its terms and conditions. 6.3 NO RESTRICTIONS AGAINST PURCHASE OF SHARES. Neither the execution, delivery and performance of the Documents nor the consummation of the transactions contemplated thereby, nor compliance by the Buyer or NetWolves, as the case may be, with any of the provisions thereof, will (i) violate, conflict with, or result in a material breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under any of the terms, conditions or provisions of the Fundamental Documents of the Buyer or NetWolves, as the case may be, or under any note, bond, mortgage, indenture, deed of trust, or other agreement to which the Buyer or NetWolves is -26- bound, or by which the Buyer or NetWolves or any of their respective properties or assets may be bound or affected, which in either case would prevent the Buyer's consummation of the transactions contemplated hereby, or (ii) violate any Law applicable to the Buyer or NetWolves or any of their respective properties or assets which would prevent the consummation of the transactions contemplated hereby. To the knowledge of Buyer and NetWolves, except as set forth on Schedule 6.3 no consent or approval by, notice to, or registration with, any Governmental Entity is required on the part of the Buyer or NetWolves in connection with the execution and delivery of this Agreement or the consummation by the Buyer or NetWolves of the transactions contemplated hereby which would prevent the consummation of the transactions contemplated hereby. ARTICLE VII INDEMNIFICATION AND ADDITIONAL AGREEMENTS 7.1 SURVIVAL. The representations, warranties, covenants and other agreements set forth in this Agreement or in any certificate or other writing delivered in connection with this Agreement shall survive the Closing and the consummation of the transactions contemplated hereby; provided, however, that any claim for Damages arising out of, or with respect to, the inaccuracy of any such representation or the breach of any such warranty must be asserted in writing by notice given to the other party on or before the earlier of (i) sixty (60) days following receipt by the parties hereto of an audit report prepared in the ordinary course by an independent accounting firm with respect to the financial statements of the Company for the first full fiscal year of the Company following the Closing Date and (ii) the date that is two (2) years following the Closing Date, failing which any such claim shall be waived and extinguished; provided, however, claims for Damages with respect to the inaccuracy of representations and breach of warranties contained in Sections 5.1, 5.2, 5.3, 5.10(a), 5.12, 5.18, 5.19, 5.26, 6.1, 6.2 and 6.3 hereof may be asserted until the expiration of the applicable statute of limitations (giving effect to any waivers or extensions thereof) for which any third party claims may be asserted. No right of a party seeking indemnification hereunder shall be affected by any examination made for or on behalf of such party, or the acceptance by such party of any certificate or opinion; provided further, however, to the extent a party has expressly waived compliance with a condition precedent to Closing, such waiver shall also constitute a waiver of any claim for indemnification as to such matter. 7.2 INDEMNIFICATION. (a) The Seller shall indemnify, defend and hold harmless the Buyer, NetWolves, their Affiliates and their respective successors, assigns, officers, directors, stockholders, and employees (collectively, the "Buyer Group") against any Damages that any member of the Buyer Group may suffer, sustain or become subject to as the result of, or arising from the breach by the Seller of any representation, warranty, covenant or agreement contained in this Agreement, any other Document or in any exhibit, schedule or attachment hereto or thereto or in any certificate delivered by the Seller in connection herewith or therewith. -27- (b) The Buyer and NetWolves shall indemnify and hold harmless the Seller and its officers, directors and employees, and successors and assigns (collectively, the "Seller Group") against any Damages which they may suffer, sustain or become subject to as the result of or arising from a breach of any representation, warranty, covenant or agreement by the Buyer contained in this Agreement, any other Document or in any exhibit, schedule or attachment hereto or thereto or in any certificate delivered by the Buyer in connection herewith or therewith. (c) Anything in Section 7.2(a) or (b) hereof to the contrary notwithstanding, a party shall not have the right to be indemnified for breaches of representations and warranties under this Agreement unless and until such party shall have incurred on a cumulative basis Damages in an amount exceeding $75,000 (the "Deductible Amount") and in such event the party may recover Damages in excess of the Deductible Amount; provided, however, that in no event shall the limitations set forth in this Section 7.2(c) hereof apply with respect to the representations and warranties set forth in Sections 5.1, 5.2, 5.3, 5.4, 5.10(a) or 5.26 hereof, any liability or obligation assumed by Seller pursuant to the Assignment and Assumption Agreement, or willful breaches. (d) Except as provided in Section 7.2(c) hereof, the Buyer Group shall first set off and apply against any amounts due and payable to the Seller pursuant to the Note an amount equal to the amount of any Damages in excess of the Deductible Amount suffered, sustained, incurred or required to be paid by the Buyer Group (or their assigns) pursuant to Section 7.2(a) hereof. Notwithstanding the foregoing, (i) the Buyer Group shall be obligated to set off only one-half (1/2) of any Damages in excess of the Deductible Amount, if any, resulting or arising from a breach of the representations and warranties contained in Section 5.5 hereof, with the remainder to be paid by Seller in cash and (ii) the Buyer Group shall not be obligated to set off any Damages incurred in the defense of any third party claim or arising from any liability or obligation assumed by Seller pursuant to the Assignment and Assumption Agreement which Damages shall be paid by the Seller in full in cash. (e) No items as to which any indemnification claim or other remedy is obtained by or on behalf of a party hereto can serve as the basis of an additional claim for indemnification or other remedy hereunder. No party shall be indemnified for Damages resulting from its own negligence. 7.3 INDEMNIFICATION PROCEDURES. (a) If any third party shall notify any party to this Agreement (the "Indemnified Party") with respect to any matter which may give rise to a claim for indemnification against any other party to this Agreement (the "Indemnifying Party") under Section 7.2 hereof (a "Third Party Claim"), then the Indemnified Party shall notify each Indemnifying Party thereof promptly; provided, however, that no delay on the part of the Indemnified Party in notifying any Indemnifying Party shall relieve the Indemnifying Party from any liability or obligation hereunder unless (and then solely to the extent) the Indemnifying Party is thereby prejudiced by the delay. Any Indemnifying Party will have the right to defend the Indemnified Party against the Third Party Claim with counsel of its choice reasonably satisfactory to the Indemnified Party so long as (A) the Indemnifying Party notifies the Indemnified Party in writing within fifteen (15) days after the Indemnified Party has given notice of the Third Party Claim that the -28- Indemnifying Party will indemnify the Indemnified Party from and against the entirety of any Damages the Indemnified Party may suffer resulting from, arising out of, relating to, in the nature of, or caused by the Third Party Claim (subject to the limitations set forth in Sections 7.2(c) and 7.2(d)), (B) the Indemnifying Party provides the Indemnified Party with evidence reasonably acceptable to the Indemnified Party that the Indemnifying Party will have the financial resources to defend against the Third Party Claim and fulfill its indemnification obligations hereunder, (C) the Third Party Claim involves only money damages and does not seek an injunction or other equitable relief, (D) settlement of, or an adverse judgment with respect to, the Third Party Claim is not, in the good faith and reasonable judgment of the Indemnified Party, likely to establish a precedential custom or practice adverse to the continuing business interests of the Indemnified Party, and (E) the Indemnifying Party conducts the defense of the Third Party Claim actively and diligently. The Indemnified Party may participate in the defense of such claim with co-counsel of its choice to the extent that the Indemnified Party believes in its sole discretion that such matter shall affect its ongoing business; provided, however, that the reasonable fees and expenses of the Indemnified Party's counsel shall be at the expense of the Indemnified Party unless (A) the Indemnifying Party has agreed in writing to pay such fees and expenses, (B) the Indemnifying Party has failed to assume the defense and employ counsel as provided herein or (C) a claim shall have been brought or asserted against the Indemnifying Party as well as the Indemnified Party, and such Indemnified Party shall have been advised in writing by counsel that there may be one or more factual or legal defenses available to it that are in conflict with those available to the Indemnifying Party, in which case such co-counsel shall be at the expense of the Indemnifying Party; provided, however, that the Indemnifying Party will not be required to pay the fees and expenses of more than one separate principal counsel (and any appropriate local counsel) for all Indemnified Parties. If, within such 15-day period, the Indemnifying Party does not assume the defense of such matter or fails to defend the matter in the manner set forth above, the Indemnified Party may defend against the matter in any manner that it reasonably may deem appropriate and may consent to the entry of any judgment with respect to the matter or enter into any settlement with respect to such matter without the consent of the Indemnifying Party and, subject to the limitations set forth in Sections 7.2(c) and 7.2(d), the Indemnifying Party will reimburse the Indemnified Party promptly and periodically for the costs of defending against such claim (including reasonable attorneys' fees and expenses) and, subject to the limitations set forth in Sections 7.2(c) and 7.2(d), the Indemnifying Party will remain responsible for any Damages the Indemnified Party may suffer resulting from, arising out of, relating to, in the nature of, or caused by the claim to the fullest extent provided herein. (b) With respect to any claim for indemnification hereunder which does not involve a Third Party Claim, the Indemnified Party will give the Indemnifying Party written notice of such claim. The Indemnifying Party may acknowledge and agree in writing to satisfy such claim within twenty (20) days of receipt of notice of such claim from the Indemnified Party (a "Validated Claim"). In the event that the Indemnifying Party shall dispute such a claim, the Indemnifying Party shall provide written notice of such dispute to the Indemnified Party within twenty (20) days of receipt of notice of such claim, setting forth the basis of such dispute. Upon resolution of such dispute in favor of indemnification pursuant to the arbitration provisions set forth in Section 7.3(d) hereof, such claim shall then be a Validated Claim. With respect to any Validated Claim, the Indemnifying Party shall be responsible for the payment of such claim -29- (subject to the limits set forth in Sections 7.2(c) and 7.2(d)); provided, however, that if the Seller is the Indemnifying Party, such claim shall first be deducted from the total principal of the Note. (c) Limitation on Remedies. The parties shall use reasonable efforts to collect the proceeds of any insurance which would have the effect of reducing Damages (in which case such proceeds shall reduce such Damages) and, if indemnification payments shall have been received prior to the collection of such proceeds, shall remit the amount of such proceeds (net of the cost of collection thereof) to the extent of indemnification payments received in respect of such Damages. To the extent that any Damages are reduced by receipt of payment under insurance policies, such payments (net of the expenses of the recovery thereof and any increase in premiums resulting therefrom) shall be credited against such Damages. (d) Arbitration of Indemnification Disputes. Any disputes relating to or arising under Sections 7.1 through 7.3 of this Agreement shall be resolved by mutually binding arbitration pursuant to the procedures set forth in this Section 7.3(d). Any party to this Agreement seeking resolution of any such dispute hereunder shall submit written notice of such dispute to the other parties hereto. Such notice shall be deemed to be a demand for arbitration. Such dispute shall then be submitted to an arbitrator mutually agreeable to the Seller and the Buyer. In the event the Seller and the Buyer are unable to mutually agree upon an arbitrator, the Seller and the Buyer shall each choose one arbitrator, and the two arbitrators chosen by the Seller and the Buyer will together choose a third arbitrator. The final determination of the arbitrator shall be binding upon the parties hereto, and the party who is liable to pay such claim shall pay all of the costs and expenses of such arbitration. Such arbitration shall be conducted in Minneapolis, Minnesota in accordance with the then applicable rules of the American Arbitration Association. The judgment of the arbitrator may be enforced in accordance with the laws in any Federal or state court in Minnesota having jurisdiction over such controversy or claim. 7.4 TRANSACTION EXPENSES. (a) The Buyer shall pay all of its expenses incurred in connection with the transactions contemplated hereby and the costs, including attorney's fees, attendant to the process of notifying, registering and obtaining approvals and consents from any Governmental Entities with jurisdiction in respect of the execution and delivery of the Agreement and the consummation of the transactions contemplated hereby. The Seller shall pay all of its expenses and the expenses of the Company incurred in connection with the transactions contemplated hereby, including all of the Liabilities of the Company for expenses or fees incident to or arising out of the negotiation, preparation, approval or authorization of this Agreement, the other Documents or the consummation (or preparation for the consummation) of the transactions contemplated hereby or thereby (including all attorneys' and accountants' fees, and brokerage fees incurred by or imposed upon the Company). (b) In no event shall the Buyer or the Company be liable for any income, capital gain, franchise or other similar Tax arising or imposed on the Seller or the Company as a result of the transactions contemplated herein, and the Seller shall pay all transfer, stamp (including documentary stamp taxes, if any) and other similar Taxes or governmental charges with respect to the transactions herein contemplated. Any Taxes imposed on the sale of the Shares at the Closing shall be borne by the Seller. -30- 7.5 EFFORTS TO CONSUMMATE; FURTHER ASSURANCES; TRANSITION ASSISTANCE. Subject to the terms and conditions herein provided, the parties hereto shall do or cause to be done all such acts and things as may be necessary, proper or advisable (including, without limitation, the completion and effectuation of all filings and registrations with, and the obtaining of all consents and approvals from, all applicable Governmental Entities), consistent with all applicable Laws, to consummate and make effective the transactions contemplated hereby as soon as reasonably practicable. Each of the parties hereto agrees that it will from time to time on or after the Closing promptly do, execute, acknowledge and deliver and will cause to be done, executed, acknowledged and delivered, all such further acts, deeds, certificates, bills of sale, assignments, transfers, conveyances, powers of attorney, assurances and other documents as may be reasonably requested by any of the other parties hereto for better assigning, transferring, granting, conveying, assuring and conferring right, title and interest to the Buyer of the Shares. Without limiting the generality of the foregoing, the parties hereto agree to cooperate with each other and to provide each other with all information and documentation reasonably necessary to (i) permit the preparation and filing of all federal, state, local, and other Tax returns and Tax elections with respect to the Business and (ii) effectuate all operational matters concerning operating the Business by the Buyer after the Closing in an efficient manner and consistent with the operation of the Business by the Company before the Closing. 7.6 CONFIDENTIALITY. (a) The Company and the Seller on the one hand and the Buyer on the other hand (for a period of two (2) years after the date hereof, if the Closing does not occur) shall keep confidential all information and materials regarding the other reasonably designated by such party or parties as confidential at the time of disclosure thereof; provided, that, the Buyer may disclose such information and materials of the Company and/or the Seller to its officers, directors, financing sources, Affiliates, representatives, accountants and counsel who need to have such information or materials to consummate the transactions contemplated by the Documents; provided, further, that the provisions of this Section 7.6 shall not bind the Company or the Buyer from using any of the information contained in their respective businesses. For purposes of this Agreement, confidential business information that does not constitute a trade secret under applicable law will not be treated as confidential information under this Section 7.6 after the second anniversary of the Closing, but will remain subject to any other limitation on use or disclosure under any other agreement, applicable law, or otherwise. Notwithstanding anything to the contrary contained herein, no party hereto shall be required to maintain as confidential any information or material which: (i) is now, or hereafter becomes, through no act or failure to act on the part of such party which would constitute a breach of this Section 7.6, generally known or available to the public; (ii) is known to such party at the time of the disclosure of such information; (iii) is hereafter furnished to such party by a third party, who, to the best knowledge of such party, is not under obligations of confidentiality to any other party, without restriction on disclosure; -31- (iv) is disclosed with the written approval of the party to which such information or material pertains; (v) is required to be disclosed by law, court order, or similar compulsion (including the obligations of the Seller under the rules and regulations of The Nasdaq Stock Market); provided, however, that, such disclosure shall be limited to the extent so required or compelled; and provided, further, however, that the party required to disclose such confidential information and material shall give the other party notice of such disclosure and cooperate with such other party in seeking suitable protection; or (vi) is pursuant to or in connection with any legal proceeding involving the parties hereto. (b) The Seller acknowledges that the Buyer and NetWolves would be irreparably damaged if the confidential knowledge and information possessed or hereafter acquired by the Seller relating to the Company, the Business and/or the Buyer (including, without limitation, the terms of any of the Documents and all other information regarding the financial condition, results of operations and prospects, and customer and supplier lists, pricing and terms relating to the Business) were disclosed to or utilized on behalf of others. Accordingly, the Seller shall not, and the Seller shall cause its Affiliates not to: (i) disclose to any person, firm, corporation or other business entity any non-public information concerning the Business or any of the terms of any of the Documents, for any purpose other than to satisfy the Seller's disclosure obligations under the Securities Exchange Act of 1934, as amended, and the rules and regulations of The Nasdaq Stock Market; (ii) make use of any such non-public information for such Seller's own purpose or for the benefit of any Person (other than the Buyer or the Company after the Closing); or (iii) make any statements, observations or opinions or communicate any information (whether oral or written) that disparages or is likely in any way to harm the reputation of the Business, the Buyer, the Company or their respective Affiliates or that is inconsistent with the purpose and intent of the Documents. 7.7 BROKER'S FEES. Each of the Seller and the Buyer shall be responsible for, and shall hold each of the other parties harmless against, any fees or commissions for which such party is liable to any broker, finder or agent with respect to the transactions contemplated by this Agreement. 7.8 NON-COMPETE; NON-SOLICITATION. The Seller hereby agrees, in consideration of a payment to be agreed upon prior to closing and other good and valuable consideration: (a) During the Non-Compete Period, the Seller shall not (except on behalf of the Buyer and the Company) engage in the Business directly or through any Subsidiary or Affiliate, -32- or permit any Subsidiary or Affiliate to engage in the Business, within the Restricted Territory (as defined below). As used in this Agreement, the term "Restricted Territory" means North America. The parties acknowledge that the territory consisting of the United States is the territory within which the Company currently has offices, conducts the Business, or solicits substantially all of its business. The parties further acknowledge that the Restricted Territory is the territory into which the parties reasonably anticipate that the Business will expand, and that Buyer's agreement to pay the Seller the Consideration is specifically based and conditioned in part on the potential of the Company to so expand. Nothing herein shall prohibit the Seller from being a passive owner of not more than one percent (1%) of the outstanding stock of any class of a corporation which is publicly traded, so long as the Seller has no active participation in the business of such corporation. (b) During the Non-Compete Period, the Seller shall not directly or indirectly through another Person (i) induce or attempt to induce any employee of the Company or of the Buyer to leave the employ of the Company, or the Buyer, as the case may be, or in any way interfere with the relationship between the Company or the Buyer, on the one hand, and any employee thereof, on the other hand, (ii) hire any person who is or was an employee of the Company or the Buyer until six (6) months after such individual's employment relationship with the Buyer or the Company has been terminated or (iii) induce or attempt to induce any customer, supplier, subcontractor, licensee or other business relation of the Company or the Buyer to cease doing business with the Company or the Buyer, or in any way interfere with the relationship between any such customer, supplier, subcontractor, licensee or business relation, on the one hand, and the Company or the Buyer, on the other hand. (c) During the Non-Compete Period, the Seller shall not, except on behalf of the Buyer, the Company or an Affiliate of the Buyer or the Company, directly or indirectly, whether alone or with any other Person as a partner, officer, director, employee, agent, shareholder, consultant, sales representative or otherwise, solicit, or assist in the solicitation of, any Person who is, or was during the period of the Seller's ownership of the Company, a customer of the Company, for the purpose of selling such Person services which are of the type provided by the Company as part of the Business; provided, however, that this clause (c) will apply only with respect to any Person with whom the Seller, or any other employee of the Company directly or indirectly under the Seller's supervision, has had contact on behalf of the Company at any time prior to the date hereof or at any time during the Non-Compete Period or about whom the Seller has received confidential information at any time prior to the date hereof or at any time during such period; and provided, further, that Seller shall not be restricted from marketing to customers of the Business products or services that do not in any way relate to the Business as of the date of this Agreement or as contemplated in the future. (d) If, at the time of enforcement of this Section 7.8, a court holds that the restrictions stated herein are unreasonable under the circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area. The parties hereto acknowledge that money damages would be an inadequate remedy for any breach of this Section 7.8. Therefore, in the event of a breach or threatened breach of this Section 7.8, the Company or the Buyer and/or their respective successors or assigns will be entitled to injunctive relief, in addition to other rights and -33- remedies existing in their favor, in order to enforce, or prevent any violations of, the provisions of this Section 7.8 (without posting a bond or other security). The Seller's performance under the Co-Marketing Agreement shall not be construed as a breach of any provisions of this Section 7.8. 7.9 PUBLIC ANNOUNCEMENTS. Except as required by law (including the rules and regulations of The Nasdaq Stock Market), any public announcements regarding the transactions contemplated hereby shall be made only with the mutual consent of Buyer and Seller. The Buyer and Seller shall cooperate fully with each other in effectuating the immediately preceding sentence. 7.10 TAX MATTERS. The following provisions shall govern the allocation of responsibility as between Buyer and Seller for certain tax matters following the Closing Date: (a) Tax Periods Ending on or Before the Closing Date. Buyer shall prepare or cause to be prepared and file or cause to be filed all Tax Returns for the Company for all periods ending on or prior to the Closing Date which are filed after the Closing Date, other than any Tax Return for the Company under which the Company is a member of the Seller Group, in which case the Seller shall prepare or cause to be prepared and file or cause to be filed such Tax Return. Buyer shall permit Seller to review and comment on each Tax Return it prepares and files described in the preceding sentence prior to filing and shall make such revisions to such Tax Returns as are reasonably requested by Seller. Seller shall reimburse Buyer for Taxes of the Company with respect to such periods within fifteen (15) days after payment by Buyer or the Company of such Taxes to the extent such Taxes are not reflected in the reserve for Tax Liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) shown on the face of the Final Closing Balance Sheet. In the event that the amount of Tax owed is different from that initially indicated by the Company, appropriate adjustments shall be made to compensate for such discrepancy. (b) Tax Periods Beginning Before and Ending After the Closing Date. Buyer shall prepare or cause to be prepared and file or cause to be filed any Tax Returns of the Company for Tax periods which begin before the Closing Date and end after the Closing Date. Seller shall pay to Buyer within fifteen (15) days after the date on which Taxes are paid with respect to such periods an amount equal to the portion of such Taxes which relates to the portion of such Taxable period ending on the Closing Date to the extent such Taxes are not reflected in the reserve for Tax Liability (rather than any reserve for deferred Taxes established to reflect timing differences between book and Tax income) shown on the face of the Final Closing Balance Sheet. For purposes of this Section 7.10, in the case of any Taxes that are imposed on a periodic basis and are payable for a Taxable period that includes (but does not end on) the Closing Date, the portion of such Tax which relates to the portion of such Taxable period ending on the Closing Date shall (x) in the case of any Taxes other than Taxes based upon or related to income or receipts, be deemed to be the amount of such Tax for the entire Taxable period multiplied by a fraction the numerator of which is the number of days in the Taxable period ending on the -34- Closing Date and the denominator of which is the number of days in the entire Taxable period, and (y) in the case of any Tax based upon or related to income or receipts be deemed equal to the amount which would be payable if the relevant Taxable period ended on the Closing Date. Any credits relating to a Taxable period that begins before and ends after the Closing Date shall be taken into account as though the relevant Taxable period ended on the Closing Date. All determinations necessary to give effect to the foregoing allocations shall be made in a manner consistent with prior practice of the Company. (c) Refunds and Tax Benefits. Any Tax refunds that are received by Buyer or the Company, and any amounts credited against Tax to which Buyer or the Company become entitled, that relate to Tax periods or portions thereof ending on or before the Closing Date shall be for the account of Sellers, and Buyer shall pay over to Seller any such refund or the amount of any such credit within fifteen (15) days after receipt or entitlement thereto. In addition, to the extent that a claim for refund or a proceeding results in a payment or credit against Tax by a taxing authority to the Buyer or the Company of any amount accrued on the Final Closing Balance Sheet, the Buyer shall pay such amount to Seller within fifteen (15) days after receipt or entitlement thereto. (d) Cooperation on Tax Matters. (i) Buyer, the Company and Seller shall cooperate fully, as and to the extent reasonably requested by the other party, in connection with the filing of Tax Returns pursuant to this Section 7.10 and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other party's request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. The Company and Seller agree (A) to retain all books and records with respect to Tax matters pertinent to the Company relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by Buyer or Seller, any extensions thereof) of the respective taxable periods, and to abide by all record retention agreements entered into with any taxing authority, and (B) to give the other party reasonable written notice prior to transferring, destroying or discarding any such books and records and, if the other party so requests, the Company or Seller, as the case may be, shall allow the other party to take possession of such books and records. (ii) Buyer and Seller further agree, upon request, to use their best efforts to obtain any certificate or other document from any Governmental Entity or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby). (iii) Buyer and Seller further agree, upon request, to provide the other party with all information that either party may be required to report pursuant to ss.6043 of the Code and all Treasury Department Regulations promulgated thereunder. -35- (e) Tax Sharing Agreements. All tax sharing agreements or similar agreements with respect to or involving the Company shall be terminated as of the Closing Date and, after the Closing Date, the Company shall not be bound thereby or have any liability thereunder. (f) Certain Taxes. All transfer, documentary, sales, use, stamp, registration and other such Taxes and fees (including any penalties and interest) incurred in connection with this Agreement shall be paid by Seller when due, and Seller will, at its own expense, file all necessary Tax Returns and other documentation with respect to all such transfer, documentary, sales, use, stamp, registration and other Taxes and fees, and, if required by applicable law, Buyer will, and will cause its affiliates to, join in the execution of any such Tax Returns and other documentation. (g) 338(h)(10) Election. The Buyer, NetWolves and Company and Seller hereby affirmatively elect to have the transaction contemplated hereby taxed under the provisions of Section 338(h)(10) of the Code with respect to the Company, and the Seller will execute and deliver to the Buyer promptly upon the Buyer's request all consents, elections and other documentation or filings which the Buyer reasonably believes to be required or advisable in connection with the making of said election, including Treasury Form 8594, together with a limited power of attorney irrevocably authorizing the Buyer to file the same with the Internal Revenue Service. ARTICLE VIII DEFINITIONS In addition to the words and terms defined elsewhere in this Agreement, the following words and terms shall have the following meanings, respectively, unless the context clearly requires otherwise: "Affiliate" means, with respect to any Person, any of (a) a director, officer or stockholder of such Person, (b) a spouse, parent, sibling or descendant of such Person (or a spouse, parent, sibling or descendant of any director or officer of such Person) and (c) any other Person that, directly or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, another Person. The term "control" includes, without limitation, the possession, directly or indirectly, of the power to direct the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. "Agreement" has the meaning assigned to such term in the preamble of this Agreement. "Assignment and Assumption Agreement" has the meaning assigned to such term in Section 2.4. "Balance Sheet" has the meaning assigned to such term in Section 5.5. "Basis" means any past or present fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction that forms or could form the basis for any specified consequence. -36- "Business" has the meaning assigned to such term in the preamble of this Agreement. "Buyer" has the meaning assigned to such term in the preamble of this Agreement. "Buyer Group" has the meaning assigned to such term in Section 7.2(a). "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act, as amended, and the rules and regulations promulgated thereunder. "Closing" has the meaning assigned to such term in Section 2.2. "Closing Date" has the meaning assigned to such term in Section 2.2. "COBRA" has the meaning assigned to such term in Section 5.18(b). "Code" means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated thereunder. "Co-Marketing Agreement" has the meaning assigned to such term in Section 3.1. "Common Stock" has the meaning assigned to such term in Section 1.1. "Company" has the meaning assigned to such term in the preamble of this Agreement. "Consideration" has the meaning assigned to such term in Section 1.2. "Contracts" has the meaning assigned to such term in Section 3.1(b). "Damages" means all actions, suits, proceedings, hearings, investigations, charges, complaints, claims, demands, injunctions, judgments, orders, decrees, rulings, damages, dues, penalties, fines, costs, amounts paid in settlement, Liabilities, obligations, Taxes, liens, losses, lost profits, diminution in value, expenses, and fees, including court costs and reasonable attorneys' fees and expenses (whether such attorneys' fees and expenses arise out of a dispute or claim between the parties or out of a dispute involving third parties), net of any related income tax benefit and insurance recoveries. "Defined Benefit Pension Plan" shall have the meaning set forth in Section 3(35) of ERISA. "Deductible Amount" has the meaning assigned to such term in Section 7.2(c). "Designated Persons" has the meaning assigned to such term in Section 5.17(e). "Documents" means this Agreement, the Note, the Assignment and Assumption Agreement, the Co-Marketing Agreement, the Leases, the Transition Service Agreement, and any other agreements contemplated hereby and thereby. "Employee Benefit Plan" means any (a) qualified or non-qualified Employee Pension Benefit Plan whether or not subject to ERISA (including any Multiple Employer Plans or Multi- -37- Employer Plans), (b) Employee Welfare Benefit Plan or (c) employee benefit, fringe benefit, bonus, incentive, deferred compensation, vacation, employment, change in control, stock option or other equity-based, severance plan or other plan, program, policy, practice or arrangement, whether or not subject to ERISA, whether or not written and whether or not funded. "Employee Pension Benefit Plan" shall have the meaning set forth in Section 3(2) of ERISA. "Employee Welfare Benefit Plan" shall have the meaning set forth in Section 3(1) of ERISA. "Environmental and Safety Requirements" means all Laws, Orders, contractual obligations and all common law concerning public health and safety, worker health and safety, and pollution or protection of the environment, including, without limitation, all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control, or cleanup of any hazardous materials, substances or wastes, chemical substances or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise or radiation, including, but not limited to, the Solid Waste Disposal Act, as amended, 42 U.S.C.ss.ss.6901, et seq., the Clean Air Act, as amended, 42 U.S.C.ss.ss.7401 et seq., the Federal Water Pollution Control Act, as amended, 33 U.S.C.ss.ss.1251 et seq., the Emergency Planning and Community Right-to-Know Act, as amended, 42 U.S.C.ss.ss. 11001 et seq., the Comprehensive Environmental Response, Compensation, and Liability Act, as amended, 42 U.S.C.ss.ss.9601 et seq., the Hazardous Materials Transportation Uniform Safety Act, as amended, 49 U.S.C.ss.ss.1804 et seq., the Occupational Safety and Health Act of 1970, as amended, and the rules and regulations promulgated thereunder. "ERISA Affiliate" means, with respect to any Person, any other Person that is a member of a "controlled group of corporations" with, or is under "common control" with, or is a member of the same "affiliated service group" with such Person as defined in Sections 414(b), 414(c), or 414(m) or 414(o) of the Code. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder. "Financial Statements" has the meaning assigned to such term in Section 5.5. "Fundamental Documents" means the documents by which any Person (other than an individual) establishes its legal existence or which govern its internal affairs. For example, the "Fundamental Documents" of a corporation would include its charter and by-laws and of a partnership would include its certificate of partnership and partnership agreement. "GAAP" means United States generally accepted accounting principles, applied on a consistent basis. "Governmental Entity" means any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign, Federal, state, county or local. -38- "NetWolves" has the meaning assigned to such term in the preamble of this Agreement. "Indemnified Party" has the meaning assigned to such term in Section 7.3(a). "Indemnifying Party" has the meaning assigned to such term in Section 7.3(a). "Intellectual Property" means (a) all inventions, all improvements thereto and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof, (b) all registered and unregistered trademarks, service marks, trade dress, logos, trade names, and corporate names including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith, (c) all copyrightable works, all copyrights and all applications, registrations and renewals in connection therewith, (d) all trade secrets, customer lists, supplier lists, pricing and cost information, business and marketing plans and other confidential business information, (e) all computer programs and related software, (f) all other proprietary rights, (g) all domain names, url's, and registrations in respect thereof and (h) all copies and tangible embodiments thereof. "Latest Balance Sheet" has the meaning assigned to such term in Section 5.5. "Law" means any constitution, law, statute, treaty, rule, directive, requirement or regulation or Order of any Governmental Entity. "Leases" has the meaning assigned to such term in Section 3.1. "Liability" means any liability or obligation, whether known or unknown, asserted or unasserted, absolute or contingent, accrued or unaccrued, liquidated or unliquidated and whether due or to become due, regardless of when asserted. "Licensed Intellectual Property" has the meaning assigned to such term in Section 5.13(a). "Lien" means any security interest, pledge, bailment (in the nature of a pledge or for purposes of security), mortgage, deed of trust, the grant of a power to confess judgment, conditional sales and title retention agreement (including any lease in the nature thereof), charge, encumbrance, easements, reservations, restrictions, clouds, rights of first refusal or first offer, options, or other similar arrangement or interest in real or personal property. "Material Adverse Change" means, with respect to any Person, any material adverse change in the business, operations, assets (including levels of working capital and components thereof), condition (financial or otherwise), operating results, liabilities, customer, supplier or employee relations or business prospects of such Person or any material casualty loss or damage to the assets of such Person, whether or not covered by insurance. "Material Adverse Effect" means, with respect to any Person, a material adverse effect on the business, operations, assets (including levels of working capital and components thereof), condition (financial or otherwise), operating results, liabilities, customer, supplier or employee relations or business prospects of such Person. -39- "Minimum Closing Condition" has the meaning assigned to such term in Section 3.3. "Multi-Employer Plan" shall have the meaning set forth in Section 3(37) of ERISA. "Multiple Employer Plan" shall have the meaning set forth in Section 413 of the Code. "Non-Compete Period" means the period ending on the third anniversary of the Closing Date. "Note" has the meaning assigned to such term in Section 2.1. "Orders" means judgments, writs, decrees, compliance agreements, injunctions or orders of and Governmental Entity or arbitrator. "Permits" means all permits, licenses, authorizations, registrations, franchises, approvals, certificates, variances and similar rights obtained, or required to be obtained, from Governmental Entities. "Permitted Liens" means (i) Liens for Taxes not yet due and payable or being contested in good faith by appropriate proceedings and for which there are adequate reserves on the books, (ii) workers or unemployment compensation Liens arising in the ordinary course of business; (iii) mechanic's, materialman's, supplier's, vendor's or similar Liens arising in the ordinary course of business securing amounts that are not delinquent and (iv) zoning ordinances, easements and other restrictions of legal record affecting real property which would be revealed by a survey and would not, individually or in the aggregate, materially interfere with the usefulness of such real property to the Business. "Person" shall be construed broadly and shall include an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, or a Governmental Entity (or any department, agency, or political subdivision thereof). "Plans" has the meaning assigned to such term in Section 5.18(a). "Proceeding" means any action, suit, proceeding, complaint, charge, hearing, inquiry or investigation before or by a Governmental Entity or arbitrator. "Prohibited Transaction" has the meaning set forth in Section 406 of ERISA and Section 4975 of the Code. "Purchase Price" means the Consideration. "Real Property" has the meaning assigned to such term in Section 5.10(d). "Restricted Territory" has the meaning assigned to such term in Section 7.8(a). "Seller" has the meaning assigned to such term in the preamble of this Agreement. "Seller Group" has the meaning assigned to such term in Section 7.2(b). -40- "Shares" has the meaning assigned to such term in Section 1.1. "Subsidiary" means any corporation with respect to which a specified Person (or a Subsidiary thereof) has the power to vote or direct the voting of sufficient securities to elect a majority of the directors. "Tax" as used in this Agreement, means any of the Taxes, and "Taxes" means, with respect to any Person, (a) all income taxes (including any tax on or based upon net income, gross income, income as specially defined, earnings, profits or selected items of income, earnings or profits) and all gross receipts, sales, use, ad valorem, transfer, franchise, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property or windfall profits taxes, alternative or add-on minimum taxes, customs duties and other taxes, fees, assessments or charges of any kind whatsoever, together with all interest and penalties, additions to tax and other additional amounts imposed by any taxing authority (domestic or foreign) on such Person (if any) and (b) any liability for the payment of any amount of the type described in the immediately preceding clause (a) as a result of being a "transferee" (within the meaning of Section 6901 of the Code or any other applicable Law) of another entity or a member of an affiliated or combined group. "Tax Liability" has the meaning assigned to such term in Section 5.12. "Tax Return" means any return, declaration, report, claim for refund, or information return or statement relating to Taxes, including any schedule or attachment thereto, and including any amendment thereof. "Third Party Claim" has the meaning assigned to such term in Section 7.3(a). "Transition Services Agreement" has the meaning assigned to such term in Section 3.1. "Validated Claim" has the meaning assigned to such term in Section 7.3(b). ARTICLE IX MISCELLANEOUS 9.1 NO THIRD PARTY BENEFICIARIES. Except as expressly set forth in Section 7.2 hereof, this Agreement shall not confer any rights or remedies upon any Person other than the parties hereto and their respective successors and permitted assigns, personal representatives, heirs and estates, as the case may be. 9.2 ENTIRE AGREEMENT. This Agreement and the other Documents referred to herein constitute the entire agreement among the parties hereto and supersedes any prior understandings, agreements or representations by or among the Parties, written or oral, that may have related in any way to the subject matter of any Document including, without limitation, the Letter of Intent dated August 24, 2001, as heretofore amended, among The Hawkeye Group, Inc., the Company and the Seller. -41- 9.3 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. No party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other parties hereto; provided, however, that the Buyer may (i) assign any or all of its rights and interests hereunder to one or more of its Affiliates, (ii) designate one or more of its Affiliates to perform its obligations hereunder (in any or all of which cases the Buyer nonetheless shall remain responsible for the performance of all of its obligations hereunder), (iii) collaterally assign any or all of its rights and interests hereunder to one or more lenders of the Buyer and/or the Company, (iv) assign its rights hereunder in connection with the sale of all or substantially all of its business or assets (whether by merger, sale of stock or assets, recapitalization or otherwise) and (v) merge the Company with or into the Buyer or one of their respective Subsidiaries. 9.4 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 9.5 HEADINGS. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 9.6 NOTICES. All notices, requests, demands, claims, and other communications hereunder shall be in writing. Any notice, request, demand, claim or other communication hereunder shall be deemed duly given when delivered personally to the recipient, telecopied to the intended recipient at the telecopy number set forth therefor below (with hard copy to follow), or sent to the recipient by reputable express courier service (charges prepaid) and addressed to the intended recipient as set forth below: If to NetWolves or the Buyer: Thomas Elliott The Hawkeye Group, Inc. 472 Wheelers Farms Road Milford, CT 06460 Telephone: (203) 882-4002 Telecopy: (203) 882-4051 with copies to: Paul Bork, Esq. David H. Lieberman Foley, Hoag & Eliot LLP Blau, Kramer, Wactlar & Lieberman, P.C. One Post Office Square 100 Jericho Quadrangle Boston, MA 02109 Jericho, NY 11753 -42- Telephone: (617) 832-1000 Telephone: (516) 822-4820 Telecopy: (617) 832-7000 Telecopy: (516) 822-5609 If to the Company or Seller: Scott G. Christian Norstan, Inc. 5101 Shady Oak Road Minnetonka, MN 55343 Telephone: (952) 352-4034 Telecopy: (952) 352-4461 with copies to: Philip J. Tilton, Esq. Maslon Edelman Borman & Brand, LLP 3300 Wells Fargo Center Minneapolis, MN 55402 Telephone: (612) 672-8357 Telecopy: (612) 672-8397 Jerry P. Lehrman, Esq. Norstan, Inc. 5101 Shady Oak Road Minnetonka, MN 55343 Telephone: (952) 352-4075 Telecopy: (952) 352-4907 Any party may send any notice, request, demand, claim or other communication hereunder to the intended recipient at the address set forth above using any other means, but no such notice, request, demand, claim or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other party notice in the manner herein set forth. 9.7 GOVERNING LAW. This Agreement will be governed by and construed and enforced in accordance with the substantive laws of Minnesota without regard to its principles of conflicts of laws. 9.8 AMENDMENTS AND WAIVERS. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by all of the parties hereto. No waiver by any party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior or subsequent default, misrepresentation, or breach of warranty -43- or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence. 9.9 INCORPORATION OF EXHIBITS AND SCHEDULES. The Exhibits, Schedules and other attachments identified in this Agreement are part of this Agreement as if set forth in full herein. 9.10 CONSTRUCTION. The parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent arises, this Agreement shall be construed as if drafted jointly by the parties and no presumption or burden of proof shall a rise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement. The word "including" shall mean including without limitation. Nothing in the Schedules hereto shall be deemed to adequately disclose an exception to a representation or warranty made herein unless the applicable Schedule identifies the exception with reasonable particularity and describes the relevant facts in reasonable detail. Without limiting the generality of the foregoing, the mere listing (or inclusion of a copy) of a document or other item shall not be deemed to adequately disclose an exception to a representation or warranty made herein (unless the representation or warranty has to do with the existence of the document or other item itself). The parties intend that each representation, warranty, and covenant contained herein shall have independent significance. If any party has breached any representation, warranty, or covenant contained herein in any respect, the fact that there exists another representation, warranty or covenant relating to the same subject matter (regardless of the relative levels of specificity) which the party has not breached shall not detract from or mitigate the fact that the Party is in breach of the first representation, warranty, or covenant. 9.11 INDEPENDENCE OF COVENANTS AND REPRESENTATIONS AND WARRANTIES. All covenants hereunder shall be given independent effect so that if a certain action or condition constitutes a default under a certain covenant, the fact that such action or condition is permitted by another covenant shall not affect the occurrence of such default, unless expressly permitted under an exception to such initial covenant. In addition, all representations and warranties hereunder shall be given independent effect so that if a particular representation or warranty proves to be incorrect or is breached, the fact that another representation or warranty concerning the same or similar subject matter is correct or is not breached will not affect the incorrectness of or a breach of a representation and warranty hereunder. 9.12 REMEDIES. The parties hereto shall each have and retain all other rights and remedies existing in their favor at Law or equity, including, without limitation, any actions for specific performance and/or injunctive or other equitable relief to enforce or prevent any violations of the provisions of this Agreement. -44- 9.13 SEVERABILITY. It is the desire and intent of the parties hereto that the provisions of this Agreement be enforced to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. Accordingly, if any particular provision of this Agreement shall be adjudicated by a court of competent jurisdiction to be invalid, prohibited or unenforceable for any reason, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. Notwithstanding the foregoing, if such provision could be more narrowly drawn so as not to be invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. 9.14 WAIVER OF JURY TRIAL. The Buyer and the Seller agree that neither of them nor any assignee or successor shall (a) seek a jury trial in any lawsuit, proceeding, counterclaim or any other action based upon or arising out of, this Agreement, the Documents, any related instruments, or the dealings or the relationship between or among any of them, or (b) seek to consolidate any such action with any other action in which a jury trial cannot be or has been waived. The provisions of this paragraph have been fully discussed by the Seller with its counsel, and these provisions shall be subject to no exceptions. The Seller has not agreed with or represented to any other party that the provisions of this paragraph will not be fully enforced in all instances. [remainder of page intentionally left blank] -45- IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase Agreement as an instrument under seal as of the date first above written. NETWOLVES CORPORATION By: /s/ Peter C. Castle ------------------------------ Name: Peter C. Castle Title: President NETWOLVES ACQUISITIONS, INC. By: /s/ Peter C. Castle ------------------------------ Name: Peter C. Castle Title: President NORSTAN, INC. By: /s/ Scott G. Christian ------------------------------ Name: Scott G. Christian Title: EVP & CFO NORSTAN NETWORK SERVICES, INC. By: /s/ Scott G. Christian ------------------------------ Name: Scott G. Christian Title: EVP & CFO -46- SUPPLEMENT TO STOCK PURCHASE AGREEMENT THIS SUPPLEMENT TO STOCK PURCHASE AGREEMENT (the "Supplement Agreement") is entered into this 9th day of July, 2002 by and among Norstan, Inc. ("Norstan") and Norstan Network Services, Inc. ("NNS"), both corporations organized under the laws of the State of Minnesota, together with NetWolves Corporation, a New York corporation ("NetWolves"), and NetWolves Acquisitions, Inc., a corporation organized under the laws of the State of Delaware. WITNESSETH: WHEREAS, the parties have entered into that certain Stock Purchase Agreement (the "Agreement"), dated as of January 30, 2002, and that certain Amendment Agreement dated as of April 30, 2002 (the "First Amendment"), providing for the purchase and sale of all of the issued and outstanding capital stock of NNS; WHEREAS, the parties intend to close the transactions contemplated by the Agreement and the First Amendment on this day; and WHEREAS, the parties desire that the transactions contemplated by the Agreement be given effect as of the opening of business on July 1, 2002, and the parties wish to memorialize their understanding on the terms and conditions set forth below. NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: AGREEMENT: Section 1. Effective Date. The parties agree that the effective date for the purchase and sale of the capital stock of NNS, as provided in the Agreement, shall be the opening of business on July 1, 2002. Section 2. Post-Effective Transactions. Certain cash transactions effected by or on behalf of NNS during the period subsequent to June 30 shall be accounted for and given effect by the parties as follows: (a) All cash distributions from NNS to Norstan or any of Norstan's subsidiaries, shall be reimbursed to NNS. (b) All cash payments made by Norstan or its subsidiaries on behalf of NNS shall be reimbursed to Norstan. This provision shall not apply to payments by Norstan or its subsidiaries against liabilities assumed by Norstan pursuant to -47- Section 3 of that certain Assignment and Assumption Agreement, dated as of July 9, 2002, by and between Norstan and NNS. (c) On the 15th day of August 2002, NNS shall render to Norstan an accounting of cash distributions made to Norstan and its subsidiaries after June 30, 2002, and Norstan shall render to NNS an accounting of payments made on behalf of NNS, together with reasonable support therefor, together with a listing setting forth the amount due Norstan pursuant to Section 3 below. Within three business days thereafter, the net debtor shall reimburse the other party in immediately available funds. Section 3. Benefit Plans. As of midnight on June 30, 2002, the employees of NNS ceased to participate in Norstan's employee benefit plans, exclusive of plans relating to medical and dental benefits. With respect to medical and dental benefits, Norstan plan coverage of NNS employees terminates at midnight of July 10, 2002. NNS agrees to pay to Norstan in accordance with Section 2 above, for each NNS employee determined as of July 1, 2002, an amount equal to the product of (i) (10/31) multiplied by (ii) the monthly premium for continued medical and dental insurance coverage payable pursuant to the Consolidated Omnibus Budget Reconciliation Act ("COBRA"). Section 4. Continued Effectiveness of Agreement. Except as supplemented hereby, the Agreement remains in full force and effect without modification, amendment or alternation and is binding upon and enforceable by the parties thereto. Section 5. Governing Law. This Supplement Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota without giving effect to principals of conflict of laws contained therein. Section 6. Counterparts. This Supplement Agreement may be executed in multiple counterparts, each of which shall be an original, but all of which, when taken together, shall be deemed one and the same instrument. -48- IN WITNESS WHEREOF, the parties hereto have executed this Amendment Agreement as an instrument under seal as of the date first above written. NORSTAN, INC. BY: /s/ Philip Tilton ----------------------------------------- Its: Attorney-in-Fact ------------------------------------ NORSTAN NETWORK SERVICES, INC. BY: /s/ Philip Tilton ----------------------------------------- Its: Attorney-in-Fact ------------------------------------ NETWOLVES CORPORATION BY: /s/ Peter C. Castle ----------------------------------------- Its: Secretary ------------------------------------ NETWOLVES ACQUISITION, INC. BY: /s/ Peter C. Castle ----------------------------------------- Its: Secretary ------------------------------------ -49- PROMISSORY NOTE $3,750,000 Jericho, New York July 9, 2002 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED UNLESS SO REGISTERED OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE. FOR VALUE RECEIVED, the undersigned, NetWolves Acquisitions, Inc. (the "Company"), promises to pay to Norstan, Inc., or its assigns ("Norstan"), at its offices at 5101 Shady Oak Road, Minnetonka, Minnesota 55343 or at such other place as the holder of this Note may designate from time to time, the principal sum of Three Million Seven Hundred Fifty Thousand and 00/100 Dollars ($3,750,000). 1. The entire principal amount of this Note which is outstanding on the first anniversary of the date hereof (the "Maturity Date"), shall be due and payable in full on the Maturity Date. Payments of principal and all other sums due and owing under this Note shall be made in lawful money of the United States of America. 2. This Note has been issued pursuant to that certain Stock Purchase Agreement, dated January 30, 2002, by and among the Company, Norstan, Norstan Network Services, Inc. ("NNS") and NetWolves Corporation (the "Stock Purchase Agreement"). 3. The Note shall be subject to "Default Interest" after the Maturity Date if the entire principal amount of the Note is not paid as of the Maturity Date, irrespective of any early acceleration hereunder. The Default Interest shall be interest of twelve percent (12%) per annum, compounded annually, on the unpaid principal (including any previously accrued Default Interest one year after the Maturity Date) of the Note. 4. Notwithstanding anything in this Note to the contrary, on the Maturity Date, Norstan shall be entitled to payment of all principal and Default Interest, if applicable, and shall have any and all rights to ask, demand, sue for, take or receive such payment. 5. This Note is subject to certain setoff rights vested in the Company pursuant to the terms and the conditions set forth in the Stock Purchase Agreement. 6. The Company's obligations hereunder are secured by: (i) that certain security agreement by and between Norstan and NNS; and (ii) that certain pledge agreement by and between the Company and Norstan, each of even date herewith. 7. By its acceptance of this Note, Norstan represents and warrants that it is acquiring this Note for its own account, for investment, and not with a view to the distribution of the Note, and Norstan agrees not to sell, pledge, hypothecate or otherwise transfer, dispose of, or offer for sale the Note in the absence of an effective registration statement covering it under the Securities Act of 1933, as amended, or a written opinion of counsel for Norstan that a registration statement is not required. -50- 8. This Note shall be governed by and construed in accordance with the laws of the State of Minnesota; this Note may not be amended or modified except pursuant to a written instrument executed by each of Norstan and the Company. 9. This Note may be assigned by Norstan without the consent of the Company but no such assignment shall change the non-negotiable nature of this Note. 10. This Note may not be amended by Norstan and the Company in any manner adverse to the interests of the holder of the Superior Indebtedness without the consent of such holder. NETWOLVES ACQUISITIONS, INC. By: /s/ Walter M. Groteke ------------------------ Its: President -51- EX-10.(K) 4 c70703exv10wxky.txt EX-10.(K) AMENDED/RESTATED CREDIT AGREEMENT EXHIBIT 10(k) SECOND AMENDED AND RESTATED CREDIT AGREEMENT by and among NORSTAN, INC., the Banks party thereto and U.S. BANK NATIONAL ASSOCIATION, as Agent and as Lead Arranger Dated as of July 12, 2002 SECOND AMENDED AND RESTATED CREDIT AGREEMENT THIS SECOND AMENDED AND RESTATED CREDIT AGREEMENT, dated as of July 12, 2002, is by and among NORSTAN, INC., a Minnesota corporation (the "Borrower"), the banks which are signatories hereto (individually, a "Bank" and, collectively, the "Banks") and U.S. BANK NATIONAL ASSOCIATION, a national banking association, one of the Banks, as agent for the Banks (in such capacity, the "Agent"). RECITALS A. The Borrower, the Banks, the Exiting Banks (defined below) and the Agent are parties to an Amended and Restated Credit Agreement dated as of December 20, 2000, as amended by a First Amendment dated as of March 19, 2001, a Second Amendment dated as of March 30, 2001, a Third Amendment dated as of April 4, 2001, a Fourth Amendment dated as of May 15, 2001 and a Fifth Amendment dated as of June 29, 2001 (as so amended, the "Existing Credit Agreement"). B. Pursuant to the Existing Credit Agreement, as of the Closing Date, the Banks and the Exiting Banks advanced, and there remain outstanding, Revolving Loans and Term B Loans (each as defined in the Existing Credit Agreement) (the "Existing Loans"). C. The Borrower has requested the Banks to restructure the credit facilities under the Existing Credit Agreement and the Borrower has requested, and, upon receipt by them of the Payoff Amount (defined below), the Exiting Lenders (defined below) have each agreed, to cease to be Banks under the Existing Credit Agreement. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration the receipt and adequacy of which is hereby acknowledged, the parties hereto hereby agree to amend and restate the Existing Credit Agreement in the entirety as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.1 DEFINED TERMS. As used in this Agreement the following terms shall have the following respective meanings (and such meanings shall be equally applicable to both the singular and plural form of the terms defined, as the context may require): "Accounts": With respect to any Person, the aggregate unpaid obligations of customers and other account debtors to such Person arising out of the sale or lease of goods or rendition of services by such Person on an open account or deferred payment basis. "Account Debtors": As defined in the Security Agreement executed by the Borrower or any Subsidiary (as the context may require). "Acquisition": Any transaction or series of transactions by which the Borrower acquires, either directly or through a Subsidiary or otherwise, (a) any or all of the stock or other securities of any class of any Person or (b) a substantial portion of the assets, or a division or line of business of any Person. "Adjusted Eurodollar Rate": With respect to each Interest Period applicable to a Eurodollar Rate Advance, the rate (rounded upward, if necessary, to the next one hundredth of one percent) determined by dividing the Eurodollar Rate for such Interest Period by 1.00 minus the Eurodollar Reserve Percentage. "Advance": Any portion of the outstanding Revolving Loans or Term Loan by a Bank as to which one of the available interest rate options and, if pertinent, an Interest Period, is applicable. An Advance may be a Eurodollar Rate Advance or a Prime Rate Advance. "Affiliate": When used with reference to any Person, (a) each Person that, directly or indirectly, controls, is controlled by or is under common control with, the Person referred to, (b) each Person which beneficially owns or holds, directly or indirectly, ten percent or more of any class of voting stock of the Person referred to (or if the Person referred to is not a corporation, five percent or more of the equity interest), (c) each Person, ten percent of more of the voting stock (or if such Person is not a corporation, ten percent or more of the equity interest) of which is beneficially owned or held, directly or indirectly, by the Person referred to, and (d) each of such Person's officers, directors, joint venturers and partners. The term control (including the terms "controlled by" and "under common control with") means the possession, directly, of the power to direct or cause the direction of the management and policies of the Person in question. "Agent": As defined in the opening paragraph hereof. "Aggregate Revolving Commitment Amounts": As of any date, the sum of the Revolving Commitment Amounts of all the Banks on such date. "Aggregate Revolving Outstandings": As of any date, the sum of the Revolving Outstandings of all Banks on such date. "Applicable Lending Office": For each Bank, the office of such Bank identified pursuant to Section 9.4 or such other domestic or foreign office of such Bank (or of an Affiliate of such Bank) as such Bank may specify from time to time to the Agent and the Borrower as the office by which its Advances are to be made and maintained. "Applicable Margin": For each Prime Rate Advance, for each Eurodollar Rate Advance (as in effect on the first day of the applicable Interest Period for such Eurodollar Rate Advance) and for each Unused Revolving Commitment Fee, the Applicable Margin set forth in the table below as in effect on the date of determination, determined based on the Cash Flow Leverage Ratio calculated as of the end of the most recent fiscal quarter of the Borrower (adjustment to the Applicable Margins to become effective on the first day of the first month following the date the Borrower is required to deliver its financial statements for the last month of any fiscal quarter under Section 5.1(c)): 3

Notwithstanding the foregoing, (a) if the Borrower has not furnished the financial statements and reports required under Section 5.1(c) for the last month of any fiscal quarter by the time specified in such section, the Applicable Margins shall be calculated as if the Cash Flow Leverage Ratio as of the end of such fiscal quarter was greater than 1.75 to 1.00 for the period from the first day of the first month following the date the Borrower is required to deliver its financial statements for the last month of any fiscal quarter under Section 5.1(c) until the first day of the month following the month in which such financial statements and reports are delivered and (b) until and including December 31, 2002, the Applicable Margin for Eurodollar Rate Advances shall be 3.00%, the Applicable Margin for Prime Rate Advances shall be 1.00% and the Applicable Margin for Unused Revolving Commitment Fees shall be 0.375%. "Bank": As defined in the opening paragraph hereof. "Board": The Board of Governors of the Federal Reserve System or any successor thereto. "Borrower": As defined in the opening paragraph hereof. "Borrower Loan Documents": This Agreement, the Notes, and the Security Documents to which the Borrower is a party. "Borrowing Base": As of any date of determination, the sum of the following: (a) 75% of the lower of face amount or fair market value of Eligible Accounts, plus (b) 30% of the lower of cost (determined on a first-in, first-out basis) or fair market value of Eligible Inventory. "Borrowing Base Availability": As of any date of determination, the positive amount, if any (and not to exceed the Unused Revolving Commitments of all the Banks), by which the Borrowing Base exceeds the Revolving Outstandings of all the Banks. "Borrowing Base Certificate": A certificate in the form of Exhibit A hereto. 4 "Borrowing Base Deficiency": At the time of any determination, the amount, if any, by which Aggregate Revolving Outstandings exceed the Borrowing Base. "Business Day": Any day (other than a Saturday, Sunday or legal holiday in the State of Minnesota) on which national banks are permitted to be open in Minneapolis, Minnesota, and Chicago, Illinois. "Capital Expenditures": For any period, the sum of all amounts that would, in accordance with GAAP, be included as additions to property, plant and equipment on a consolidated statement of cash flows for the Borrower during such period, in respect of (a) the acquisition, construction, improvement, replacement or betterment of land, buildings, machinery, equipment or of any other fixed assets or leaseholds, (b) to the extent related to and not included in (a) above, materials, contract labor (excluding expenditures properly chargeable to repairs or maintenance in accordance with GAAP), and (c) other capital expenditures and other uses recorded as capital expenditures or similar terms having substantially the same effect (including expenditures for nonrecurrent tangible assets such as software). "Capitalized Lease": A lease of (or other agreement conveying the right to use) real or personal property with respect to which at least a portion of the rent or other amounts thereon constitute Capitalized Lease Obligations. "Capitalized Lease Obligations": As to any Person, the obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to use) real or personal property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP (including Statement of Financial Accounting Standards No. 13 of the Financial Accounting Standards Board) and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP (including such Statement No. 13). "Cash Flow Leverage Ratio": As of the last day of any fiscal quarter of the Borrower, the ratio of (a) Total Interest-bearing Debt as of such date (excluding Indebtedness existing on the date hereof secured by NFS Lease Accounts or Norstan Canada Lease Accounts and related leases, equipment and servicing arrangements), to (b) EBITDA for the period of four consecutive fiscal quarters of the Borrower ended on such date. "Closing Date": July 12, 2002. "Collateral": As defined in the Security Agreement executed by the Borrower or any Subsidiary (as the context may require). 5 "Contingent Obligation": With respect to any Person at the time of any determination, without duplication, any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness of any other Person (the "primary obligor") in any manner, whether directly or otherwise: (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or to purchase (or to advance or supply funds for the purchase of) any direct or indirect security therefor, (b) to purchase property, securities or services for the purpose of assuring the owner of such Indebtedness of the payment of such Indebtedness, (c) to maintain working capital, equity capital or other financial statement condition of the primary obligor so as to enable the primary obligor to pay such Indebtedness or otherwise to protect the owner thereof against loss in respect thereof, or (d) entered into for the purpose of assuring in any manner the owner of such Indebtedness of the payment of such Indebtedness or to protect the owner against loss in respect thereof; provided, that the term "Contingent Obligation" shall not include endorsements for collection or deposit, in each case in the ordinary course of business. "Default": Any event which, with the giving of notice (whether such notice is required under Section 7.1, or under some other provision of this Agreement, or otherwise) or lapse of time, or both, would constitute an Event of Default. "Defaulting Bank": At any time, any Bank that, at such time (a) has failed to make a Loan or any Advances thereunder required pursuant to the terms of this Agreement, including the funding of any participation in accordance with the terms of this Agreement, (b) has failed to pay to the Agent or any Bank an amount owed by such Bank pursuant to the terms of this Agreement, or (c) has been deemed insolvent or has become subject to a bankruptcy, receivership or insolvency proceeding, or to a receiver, trustee or similar official. "Dollars" and "$": Lawful money of the United States of America. "Dormant Subsidiaries": Norstan-UK Limited, Norstan Information Systems, Inc. and Summit Gear, Inc. "EBT": For any period of determination, the sum of the consolidated net income of the Borrower and its Subsidiaries plus income taxes (to the extent that income taxes were deducted in calculating consolidated net income), and calculated prior to extraordinary gains and losses and prior to gains and losses arising from discontinued operations, all as determined in accordance with GAAP. "EBITDA": For any period of determination, the sum of the consolidated net income of the Borrower and its Subsidiaries plus income taxes, Interest Expense, depreciation and amortization (in each case, to the extent that such amounts were deducted in calculating consolidated net income), and calculated prior to extraordinary gains and losses and prior to gains and losses arising from discontinued operations, all as determined in accordance with GAAP, provided that, for purposes of calculating the Cash Flow Leverage Ratio, the economic impact of Permitted Acquisitions by the Borrower or any Subsidiary which occur in the four fiscal quarters immediately preceding the last day of such period of determination shall be included, based upon the financial impact (as shown on financial statements to and in a form acceptable to the Banks) of such acquisition as if such business operations comprising such Permitted Acquisition had been under the Borrower's or such Subsidiary's ownership for such four fiscal quarter period. 6 "Eligible Accounts": The right of the Borrower, any Guarantor or Norstan Canada to receive payment for goods sold or services rendered, including any such right evidenced by instruments or chattel paper and any such right constituting retainage items or costs in excess of billings, provided such right to payment: (a) has arisen out of the sale of goods or the performance of services by the Borrower, such Guarantor or Norstan Canada within the United States or Canada, or, if such goods are sold or services performed outside the United States or Canada, is backed by a letter of credit issued or confirmed by a bank chartered under the laws of the United States or of any State; (b) is the valid, binding and legally enforceable obligation of the obligor and such right to payment has not been subordinated by the Borrower, such Guarantor or Norstan Canada to any other claim against the obligor and such obligor is not (i) the Borrower, or a Subsidiary or an Affiliate of the Borrower, (ii) a Person who is a shareholder, director, officer or employee of the Borrower, (iii) a debtor under any proceeding under the Bankruptcy Code or comparable provision of state or foreign law, (iv) an assignor for the benefit of creditors; and (v) the United States, a province, state, county or local government authority, or any department, agency or instrumentality of the forgoing, unless the Borrower such Subsidiary or Norstan Canada shall have instructed such entity to either (a) deposit all payments upon the Accounts owed by such entity into a lockbox acceptable to the Agent or (b) make such payments by other means acceptable to the Agent; (c) is assignable pursuant to the Uniform Commercial Code; (d) (i) except for accounts owing to Norstan Canada, is subject to a perfected first security interest in favor of the Agent and (ii) is free and clear of any other Lien; (e) is not subject to any claimed offset, counterclaim or other defense with respect thereto, but only to the extent of such claimed offset, counterclaim or other defense; (f) is not unpaid more than 90 days from the date of the relevant invoice; (g) is evidenced by a written invoice delivered to the Account Debtor with respect thereto; 7 (h) is not a right to payment arising under a lease of equipment by the Borrower, such Guarantor or Norstan Canada to any Person; (i) is not owed by an obligor located in New Jersey, Minnesota or Indiana, unless the Borrower, such Guarantor or Norstan Canada is in compliance with applicable laws of the same states with respect to which failure to comply would impair the Borrower's, such Guarantor's or Norstan Canada's ability to enforce its rights with respect to such Account; (j) is not subject to any repurchase obligations (other than normal customer service warranties relating to inventory sold by the Borrower, such Guarantor or Norstan Canada which have not been invoked by the applicable customer) on the part of the Borrower, such Guarantor or Norstan Canada or any accrued return privilege on the part of such obligor; (k) is not owing by an obligor for which 25% or more of the aggregate Accounts (measured based upon the face amount of such Accounts) owing by such obligor to the Borrower or any Subsidiary are past due beyond the period set forth in subsection (f) of this definition; and (l) does not comprise that portion of the Eligible Accounts owed to Norstan Canada which would cause the total Eligible Accounts owed to Norstan Canada to exceed 10% of the aggregate Eligible Accounts owed to each of the Borrower, the Guarantors and Norstan Canada, in each case but for this subclause (l) and in each case based upon the lower of face amount or fair market value of such Accounts; provided, that the Majority Banks shall, notwithstanding the foregoing, have the right, in the reasonable exercise of their discretion, to establish reserves against the aggregate amount of Eligible Accounts. Satisfaction of the conditions specified in clauses (a) through (l) of this definition shall be determined each month by the Agent in the reasonable exercise of its discretion. "Eligible Inventory": All inventory held by the Borrower, any Guarantor or Norstan Canada as raw materials or finished product held for sale in the ordinary course of business (including work in process, but excluding supplies) and which: (a) (i) except for inventory held by Norstan Canada, is subject to a perfected first security interest in favor of the Agent and (ii) is free and clear of any other Lien and is not leased to any Person; (b) is located at one of the Borrower's, such Guarantor's or Norstan Canada's business locations or is in transit to one of such business locations; (c) is not so identified to a contract to sell that it is evidenced by an Account; 8 (d) is of good and merchantable quality free from any defects which would affect the market value thereof; (e) is not, as reasonably determined by the Agent, nonsaleable in the ordinary course of the Borrower's or any Subsidiary's business; (f) is insured against loss or damage in accordance with the provisions of this Agreement and the applicable Security Agreement; (g) is not subject to or covered by a negotiable document of title, including, without limitation, negotiable warehouse receipts and negotiable bills of lading; (h) is not stored in a public warehouse or held by any Person as bailee, unless the terms of such storage or bailment are satisfactory to the Agent; (i) complies with all standards imposed by any governmental agency having regulatory authority over such goods and/or their use, manufacture or sale; (j) does not constitute slow-selling or obsolete inventory which have been identified as such on the Borrower's books and records in accordance with its past practices and with GAAP; (k) does not constitute over-ordered custom switches; and (l) does not comprise that portion of the Eligible Inventory held by Norstan Canada which would cause the total Eligible Inventory held by Norstan Canada to exceed 15% of the aggregate Eligible Inventory held by each of the Borrower, the Guarantors and Norstan Canada, in each case but for this subclause (l) and in each case based upon the lower of cost (determined on a first-in, first-out basis) or fair market value unpaid balance of such inventory; provided, that the Majority Banks shall, notwithstanding the foregoing, have the right, in the reasonable exercise of their discretion, to establish reserves against the aggregate amount of Eligible Inventory. Satisfaction of the conditions specified in clauses (a) through (l) of this definition shall be determined each month by the Agent in the reasonable exercise of its discretion. "ERISA": The Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate": Any trade or business (whether or not incorporated) that is a member of a group of which the Borrower is a member and which is treated as a single employer under Section 414 of the Code. "Eurodollar Business Day": A Business Day which is also a day for trading by and between banks in United States dollar deposits in the interbank Eurodollar market and a day on which banks are open for business in New York City. 9 "Eurodollar Rate Advance": An Advance with respect to which the interest rate is determined by reference to the Eurodollar Rate. "Eurodollar Rate": With respect to each Interest Period applicable to a Eurodollar Rate Advance, the average offered rate for deposits in United States dollars (rounded upward, if necessary, to the nearest 1/16 of 1%) for delivery of such deposits on the first day of such Interest Period, for the number of days in such Interest Period, which appears on Telerate page 3750 as of 11:00 AM, London time (or such other time as of which such rate appears) two Eurodollar Business Days prior to the first day of such Interest Period, or the rate for such deposits determined by the Agent at such time based on such other published service of general application as shall be selected by the Agent for such purpose; provided, that in lieu of determining the rate in the foregoing manner, the Agent may determine the rate based on rates at which United States dollar deposits are offered to the Agent in the interbank Eurodollar market at such time for delivery in Immediately Available Funds on the first day of such Interest Period in an amount approximately equal to the Advance by the Agent to which such Interest Period is to apply (rounded upward, if necessary, to the nearest 1/16 of 1%). "Telerate page 3750" means the display designated as such on the Telerate reporting system operated by Telerate System Incorporated (or such other page as may replace page 3750 for the purpose of displaying London interbank offered rates of major banks for United States dollar deposits). "Eurodollar Reserve Percentage": As of any day, that percentage (expressed as a decimal) which is in effect on such day, as prescribed by the Board for determining the maximum reserve requirement (including any basic, supplemental or emergency reserves) for a member bank of the Federal Reserve System, with deposits comparable in amount to those held by the Agent, in respect of "Eurocurrency Liabilities" as such term is defined in Regulation D of the Board. The rate of interest applicable to any outstanding Eurodollar Rate Advances shall be adjusted automatically on and as of the effective date of any change in the Eurodollar Reserve Percentage. "Event of Default": Any event described in Section 7.1. "Existing Credit Agreement": As defined in Recital A of this Agreement. "Existing Loans": As defined in Recital B of this Agreement. "Exiting Lenders": Harris Trust and Savings Bank and Wells Fargo Bank Minnesota, National Association. "Federal Funds Rate": For any day, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (a) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day and (b) if such rate is not so published for any Business Day, the Federal Funds Rate for such Business Day shall be the average rate quoted to U.S. Bank on such Business Day on such transactions as determined by the Agent. 10 "Fixed Charge Coverage Ratio": As of the last day of any fiscal quarter of the Borrower, the ratio of (i) EBITDA, plus to the extent not included in EBITDA, all payments on all NFS Lease Accounts and Norstan Canada Lease Accounts received by the Borrower or a Subsidiary (net of payments upon any Indebtedness secured thereby), minus Capital Expenditures not financed with Indebtedness (other than Indebtedness under this Agreement), minus income taxes paid in cash, minus Restricted Payments, to (ii) Mandatory Debt Repayments plus Interest Expense in each case determined in accordance with GAAP on a consolidated basis for the Borrower and its Subsidiaries for the last four fiscal quarters of the Borrower. "Fleet": Fleet Business Credit Corporation. "Fleet Intercreditor Agreement": An intercreditor agreement between the Agent, Fleet, the Borrower and any appropriate Subsidiary in form and substance acceptable to the Banks and Fleet, as the same may be amended, restated or otherwise modified from time to time. "GAAP": Generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of any date of determination. "Guaranties": Separate Guaranties given by the Guarantors in favor of the Agent and the Banks, as any of the same may be amended, restated or otherwise modified from time to time. "Guarantors": Norstan Financial Services, Inc., a Minnesota corporation; Norstan Communications, Inc., a Minnesota corporation; Norstan International, Inc., a Minnesota corporation; Vibes Technologies, Inc., a Minnesota corporation; and Norstan Canada, Inc. a Minnesota corporation. 11 "Holding Account": A deposit account belonging to the Agent for the benefit of the Banks into which the Borrower may be required to make deposits pursuant to the provisions of this Agreement, such account to be under the sole dominion and control of the Agent and not subject to withdrawal by the Borrower, with any amounts therein to be held for application toward any drawings made under any Letter of Credit. The Holding Account shall be a money market savings account or substantial equivalent (or other appropriate investment medium as the Borrower may from time to time request and to which the Agent in its sole discretion shall have consented) and shall bear interest in accordance with the terms of similar accounts held by the Agent for its customers. "Immediately Available Funds": Funds with good value on the day and in the city in which payment is received. "Indebtedness": With respect to any Person at the time of any determination, without duplication, all obligations, contingent or otherwise, of such Person which in accordance with GAAP should be classified upon the balance sheet of such Person as liabilities, but in any event including: (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid or accrued, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property purchased by such Person, (e) all obligations of such Person issued or assumed as the deferred purchase price of property or services (other than trade payables incurred in the ordinary course of such Person's business and not more than 90 days past due), (f) all obligations of others secured by any Lien on property owned or acquired by such Person, whether or not the obligations secured thereby have been assumed, (g) all Capitalized Lease Obligations of such Person, (h) all obligations of such Person in respect of interest rate protection agreements, (i) all obligations of such Person, actual or contingent, as an account party in respect of letters of credit or bankers' acceptances, (j) all obligations of any partnership or joint venture as to which such Person is or may become personally liable, and (k) all Contingent Obligations of such Person to the extent that such Contingent Obligations are or should be classified as liabilities on the balance sheet of such Person in accordance with GAAP. "Interest Expense": For any period of determination, the aggregate consolidated amount, without duplication, of interest paid, accrued or scheduled to be paid in respect of any Indebtedness of the Borrower and the Subsidiaries, including (a) all but the principal component of payments in respect of conditional sale contracts, Capitalized Leases and other title retention agreements, (b) commissions, discounts and other fees and charges with respect to letters of credit and bankers' acceptance financings and (c) net costs under interest rate protection agreements, but excluding the interest paid or accrued upon Indebtedness existing on the date hereof secured by NFS Lease Accounts or Norstan Canada Lease Accounts, in each case determined in accordance with GAAP. "Interest Period": With respect to each Eurodollar Rate Advance, the period commencing on the date of such Advance or on the last day of the immediately preceding Interest Period, if any, applicable to an outstanding Advance and ending one, two, three or six months thereafter, as the Borrower may elect in the applicable notice of borrowing, continuation or conversion; provided that: (1) Any Interest Period that would otherwise end on a day which is not a Eurodollar Business Day shall be extended to the next succeeding Eurodollar Business Day unless such Eurodollar Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Eurodollar Business Day; 12 (2) Any Interest Period that begins on the last Eurodollar Business Day of a calendar month (or a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Eurodollar Business Day of a calendar month; and (3) Any Interest Period applicable to an Advance on a Revolving Loan that would otherwise end after the Revolving Commitment Ending Date shall end on the Revolving Commitment Ending Date, and any Interest Period applicable to an Advance on a Term Loan that would otherwise end after the scheduled maturity of such Term Loan shall end on such maturity. Interest Periods shall be selected so that the installment payments on the Term Notes can be paid without having to pay a Eurodollar Rate Advance prior to the last day of the Interest Period applicable thereto. For purposes of determining an Interest Period, a month means a period starting on one day in a calendar month and ending on the numerically corresponding day in the next calendar month; provided, however, that if there is no numerically corresponding day in the month in which such an Interest Period is to end or if such an Interest Period begins on the last Business Day of a calendar month, then such Interest Period shall end on the last Business Day of the calendar month in which such Interest Period is to end. "Inventory": With respect to any Person, goods held for sale or lease or to be furnished under contracts of service by such entity, raw materials, and work in process or materials used or consumed in the business of such Person. "Investment": The acquisition, purchase, making or holding of any stock or other security, any loan, advance, contribution to capital, extension of credit (except for trade and customer accounts receivable for inventory sold or services rendered in the ordinary course of business and payable in accordance with customary trade terms), any acquisitions of real or personal property (other than real and personal property acquired in the ordinary course of business) and any purchase or commitment or option to purchase stock or other debt or equity securities of or any interest in another Person or any integral part of any business or the assets comprising such business or part thereof. The amount of any Investment shall be the original cost of such Investment plus the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment. "Letter of Credit": Any irrevocable issued by the Agent pursuant to this Agreement for the account of the Borrower or a Guarantor. "Letter of Credit Fee": As defined in Section 2.10. "Lien": With respect to any Person, any security interest, mortgage, pledge, lien, charge, encumbrance, title retention agreement or analogous instrument or device (including the interest of each lessor under any Capitalized Lease), in, of or on any assets or properties of such Person, now owned or hereafter acquired, whether arising by agreement or operation of law. 13 "Loan": A Revolving Loan or a Term Loan. "Loan Documents": This Agreement, the Notes and the Security Documents. "Majority Banks": As of any date of determination, such Banks, other than Defaulting Banks, holding at least 66.67% of the aggregate unpaid principal amount of the Notes, excluding Notes held by Defaulting Banks or, if no Loans are at the time outstanding hereunder, such Banks other than Defaulting Banks whose Total Percentages aggregate at least 66.67% of the Aggregate Revolving Outstandings (with Total Percentages being computed without reference to the Revolving Commitment Amounts of Defaulting Banks), provided that, if at any date of determination, there are two or fewer Banks, the "Majority Banks" shall constitute 100% of the Banks other than Defaulting Banks. "Mandatory Debt Repayments": For any period of determination, the sum of (a) all required principal payments upon all Indebtedness of the Borrower or any Subsidiary (including all payments, without duplication, with respect to Capitalized Lease Obligations of the Borrower and the Subsidiaries, but excluding (x) any mandatory prepayments applied to the Term Loans under Section 2.6(d) and (y) payments upon Indebtedness existing on the date hereof secured by NFS Lease Accounts or Norstan Canada Lease Accounts and related leases, equipment and servicing arrangements), provided, that (i) for the fiscal quarters ending on or about July 31, 2002, October 31, 2002, January 31, 2003 and April 30, 2003, the required principal payments with respect to the Term Loan shall be assumed to be $4,000,000 for the four fiscal quarters then ended and (ii) for all periods, the required principal payments with respect to the Existing Loans shall be assumed to be zero. "Multiemployer Plan": A multiemployer plan, as such term is defined in Section 4001 (a) (3) of ERISA, which is maintained (on the Closing Date, within the five years preceding the Closing Date, or at any time after the Closing Date) for employees of the Borrower or any ERISA Affiliate. "NCI": Norstan Communications, Inc. "Net Proceeds": With respect to the sale or disposition of property, sale of capital stock and offering of debt securities by the Borrower or a Subsidiary, or other non-recurring event, an amount equal to (a) the cash (including deferred cash proceeds) and other consideration received by the Borrower or a Subsidiary in connection with such transaction or event, minus (b) the sum of (i) any closing costs or selling costs arising in connection with such sale or offering and (ii) any sales or income tax paid or payable by the Borrower in connection with such transaction or event (excluding any tax for which the Borrower is reimbursed by the purchaser). "NFS": Norstan Financial Services, Inc., a Minnesota corporation. 14 "NFS Lease Account": An Account arising from a lease of Inventory by NFS. "Norstan Canada": Norstan Canada, Ltd., a Canadian corporation. "Norstan Canada Lease Account": An Account arising from a lease of Inventory by Norstan Canada. "Note": A Term Note or a Revolving Note. "NNS Note": That certain Promissory Note to be made by NetWolves Acquisitions, Inc. in favor of the Borrower in the amount of $3,750,000. "NNS Note Collateral": Collectively, (a) the NNS Note and the instruments and other agreements evidencing the NNS Note, and all interest, cash, instruments, agreements and other property from time to time received, receivable or otherwise distributed in respect of or in exchange for the NNS Note, (b) any and all collateral security now or hereafter securing all or any items of the NNS Note, and all agreements granting such security, and all rights, remedies, powers and privileges of NNS under all of the foregoing, and (c) all proceeds of any and all of the foregoing (including proceeds that constitute property of types described above in this definition). "NNS Sale Agreement": That certain Stock Purchase Agreement dated as of January 30, 2002 between the Borrower, NetWolves Corporation, a New York corporation and NetWolves Acquisitions, Inc., a Delaware corporation. "Obligations": The Borrower's obligations in respect of the due and punctual payment of principal and interest (including, without limitation and to the extent permitted by law, interest accruing after the commencement of a case by or against the Borrower under the United States Bankruptcy Code) on the Notes and Unpaid Drawings when and as due, whether by acceleration or otherwise and all fees (including Unused Revolving Commitment Fees and Letter of Credit Fees), expenses, indemnities, reimbursement and other obligations of the Borrower under this Agreement, any other Borrower Loan Document, and any letter of credit application and reimbursement agreement executed and delivered by the Borrower to U.S. Bank in connection with the issuance of any Letter of Credit, in all cases whether now existing or hereafter arising or incurred. "Operating Lease": A lease of (or other agreement conveying the right to use) real or personal property classified as an operating lease in accordance with GAAP. "PBGC": The Pension Benefit Guaranty Corporation, established pursuant to Subtitle A of Title IV of ERISA, and any successor thereto or to the functions thereof. "Permitted Acquisition": Any Acquisition by the Borrower or any Subsidiary of the stock or assets of Persons conducting businesses in the same general line of business as the Borrower, so long as (a) the Agent is notified of such Acquisition not less than 15 days prior to the proposed consummation thereof and is provided with such information as the Agent may request on the acquired business, (b) both 15 before and after giving effect to such Acquisition, no Default or Event of Default will have occurred and be continuing, (c) without limiting the generality of clause (b) above, after giving effect to any additional Revolving Loans to finance such Acquisition, the Borrowing Base Availability will not be less than $5,000,000, (d) the Borrower demonstrates to the satisfaction of the Majority Banks pro forma compliance with Sections 6.13, 6.14, 6.15, 6.16, 6.17 and 6.18 for the first four fiscal quarters ending after the closing of such Acquisition, (e) concurrently with the consummation of such Acquisition, the Agent shall have received the documents specified in Section 5.14, and (f) after giving effect to such Acquisition, the total consideration paid by the Borrower in connection with all Permitted Acquisitions completed during the four fiscal quarters preceding such Acquisition does not exceed the Permitted Acquisition Limit. For purposes of the foregoing, (a) "total consideration" shall mean, without duplication, cash or other consideration paid, the fair market value of property or stock exchanged (or the face amount, if preferred stock), the total amount of any deferred payments or purchase money debt, all Indebtedness incurred to the seller, and the total amount of any Indebtedness or other acquisition-related obligations (including, without limitation, obligations pursuant to non-compete or consulting arrangements) assumed or undertaken in such transactions and (b) "pro forma" means such financial covenants shall be calculated after giving effect to such Acquisition and any Indebtedness and Capitalized Lease Obligations incurred or assumed in connection therewith from any source (including any additional Revolving Loans to finance such Acquisition). "Permitted Acquisition Limit": With respect to any proposed Acquisition, (a) $2,500,000, if the pro forma Cash Flow Leverage Ratio (calculated in the manner set forth in the definition of Permitted Acquisition) is greater than or equal to 1.50 to 1.00 and (b) $5,000,000, if the pro forma Cash Flow Leverage Ratio (calculated in the manner set forth in the definition of Permitted Acquisition) is less than 1.50 to 1.00. "Person": Any natural person, corporation, partnership, joint venture, firm, association, trust, unincorporated organization, government or governmental agency or political subdivision or any other entity, whether acting in an individual, fiduciary or other capacity. "Plan": Each employee benefit plan (whether in existence on the Closing Date or thereafter instituted), as such term is defined in Section 3 of ERISA, maintained for the benefit of employees, officers or directors of the Borrower or of any ERISA Affiliate. "Pledge Agreements": Collectively, the separate Pledge Agreements of the Borrower, Norstan Canada, NCI and Norstan International, Inc. pursuant to which the Agent has been granted, for the benefit of the Banks, a security interest in the capital stock (or the equivalent) of certain direct and indirect Subsidiaries of the Borrower, as any of the same may be amended, supplemented, extended, restated or otherwise modified from time to time. "Primary Distribution Facilities": The primary distribution facilities of the Borrower and the Subsidiaries described on Schedule 1.1A. 16 "Prime Rate": The rate of interest from time to time publicly announced by the Agent as its "prime rate." The Agent may lend to its customers at rates that are at, above or below the Prime Rate. For purposes of determining any interest rate hereunder or under the Note which is based on the Prime Rate, such interest rate shall change as and when the Prime Rate changes. "Prime Rate Advance": An Advance with respect to which the interest rate is determined by reference to the Prime Rate. "Prohibited Transaction": The respective meanings assigned to such term in Section 4975 of the Code and Section 406 of ERISA. "Regulatory Change": Any change after the Closing Date in federal, state or foreign laws, regulations, guidelines or orders or the adoption or making after such date of any interpretations, directives or requests applying to a class of banks including any Bank under any federal, state or foreign laws, regulations, guidelines or orders (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reportable Event": A reportable event as defined in Section 4043 of ERISA and the regulations issued under such Section, with respect to a Plan, excluding, however, such events as to which the PBGC by regulation has waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event, provided that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waivers in accordance with Section 412(d) of the Code. "Restricted Payments": With respect to the Borrower, collectively, all dividends or other distributions of any nature (cash, securities other than common stock of the Borrower, assets or otherwise), and all payments on any class of equity securities (including warrants, options or rights therefor) issued by the Borrower, whether such securities are authorized or outstanding on the Closing Date or at any time thereafter and any redemption or purchase of, or distribution in respect of, any of the foregoing, whether directly or indirectly. "Revolving Commitment": With respect to a Bank, the agreement of such Bank to make Revolving Loans to the Borrower in an aggregate principal amount outstanding at any time not to exceed such Bank's Revolving Commitment Amount upon the terms and subject to the conditions and limitations of this Agreement. "Revolving Commitment Amount": With respect to a Bank, initially the amount set opposite such Bank's name on Schedule 1.1B hereto (as such Schedule may from time to time be amended) as its Revolving Commitment Amount, but as the same may be from time to time increased or reduced as provided by Sections 2.6(e) or 2.8. "Revolving Commitment Ending Date": As defined in Section 2.14. 17 "Revolving Commitment Percentage": With respect to any Bank, the percentage equivalent of a fraction, the numerator of which is the Revolving Commitment Amount of such Bank and the denominator of which is the Aggregate Revolving Commitment Amounts. "Revolving Loan": As defined in Section 2.1. "Revolving Loan Date": The date of the making of any Revolving Loans hereunder. "Revolving Note": A promissory note of the Borrower in the form of Exhibit B hereto. "Revolving Outstandings": As of any date of determination with respect to any Bank, the sum of (a) the aggregate unpaid principal balance of Advances outstanding under such Bank's Revolving Note on such date, (b) an amount equal to the aggregate stated amount of each Letter of Credit multiplied by such Bank's Revolving Commitment Percentage, and (c) an amount equal to the aggregate amount of Unpaid Drawings on such date (after applying any funds held in the Holding Account to the payment thereof) multiplied by such Bank's Revolving Commitment Percentage. "Revolving Outstandings Percentage": As of any date of determination with respect to any Bank, the percentage equivalent of a fraction the numerator of which is the Revolving Outstandings of such Bank on such date and the denominator of which is the Aggregate Revolving Outstandings on such date. "Security Agreements": Collectively, the separate Security Agreements of the Borrower and the Guarantors pursuant to which the Agent is granted, for the benefit of the Banks, a security interest in the personal property described therein, as the same may hereafter be amended, supplemented, extended, restated or otherwise modified from time to time, each in form and substance satisfactory to the Agent. "Security Documents": The Guaranties, the Security Agreements, the Pledge Agreements, any collateral assignment documents executed and delivered by the Borrower or any Subsidiary in any registered intellectual property and any other documents or instruments executed and delivered by any Person to secure or guaranty all or any part of the Obligations. "Subordination Agreement (Norstan Canada)": Subordination Agreement dated concurrently herewith given by Norstan Canada in favor of the Banks, as the same may be amended, restated or otherwise modified from time to time. "Subordinated Debt": The indebtedness of the Borrower to Norstan Canada which is subordinated to the Obligations pursuant to the Subordination Agreement (Norstan Canada) and any other Indebtedness of the Borrower or any Subsidiary, now existing or hereafter created, incurred or arising, which is subordinated in right of payment to the payment of the Obligations in a manner and to an extent (a) that Majority Banks have approved in writing prior to the creation of such Indebtedness, or (b) as to any Indebtedness of the Borrower or any Subsidiary existing on the date of this Agreement, that Majority Banks have approved as Subordinated Debt a writing delivered by Majority Banks to the Borrower on or prior to the Closing Date. 18 "Subsidiary": Any corporation or other entity of which securities or other ownership interests having ordinary voting power for the election of a majority of the board of directors or other Persons performing similar functions are owned by the Borrower either directly or through one or more Subsidiaries. "Tangible Net Worth": As of any date of determination, the sum of (a) the amounts set forth on the consolidated balance sheet of the Borrower as the sum of the common stock, preferred stock, additional paid-in capital, retained earnings, unamortized cost of stock and foreign currency translation adjustments of the Borrower (excluding treasury stock), less (b) the book value of all assets of the Borrower and its Subsidiaries that would be treated as intangibles under GAAP, including all such items as goodwill, trademarks, trade names, service marks, copyrights, patents, licenses, unamortized debt discount and expenses and the excess of the purchase price of the assets of any business acquired by the Borrower or any of its Subsidiaries over the book value of such assets. "Termination Date": The earliest of (a) the Revolving Commitment Ending Date, (b) the date on which the Revolving Commitments are terminated pursuant to Section 7.2 hereof or (c) the date on which the Revolving Commitment Amounts are reduced to zero pursuant to Section 2.8 hereof. "Term Loan": As defined in Section 2.1. "Term Loan Commitment": With respect to a Bank, the agreement of such Bank to make a Term Loan to the Borrower in an amount equal to such Bank's Term Loan Commitment Amount upon the terms and subject to the conditions of this Agreement. "Term Loan Commitment Amount": With respect to a Bank, the amount set opposite such Bank's name on Schedule 1.1B as its Term Loan Commitment Amount. "Term Loan Percentage": With respect to any Bank, the percentage equivalent of a fraction, the numerator of which is the amount of the Term Loan Commitment Amount of such Bank and the denominator of which is the sum of the Term Loan Commitment Amounts of all the Banks. "Term Note": A promissory note of the Borrower in the form of Exhibit C hereto. "Total Interest-bearing Debt": At the time of any determination, the amount, on a consolidated basis, of all Indebtedness of the Borrower for borrowed money or the deferred purchase price of property, or which bears interest on such date, after elimination of intercompany transactions, as determined in accordance with GAAP. "Total Percentage": With respect to any Bank, the percentage equivalent of a fraction, the numerator of which is the sum of the Revolving Commitment Amount of such Bank (or, if the Revolving Commitments have been terminated, the Revolving Outstandings of such Bank), the outstanding Term Loan of such Bank and the denominator of which is the sum of the Aggregate Revolving Commitment Amounts (or, if the Revolving Commitments have terminated, the Aggregate Revolving Outstandings) and the outstanding Term Loans of all the Banks. 19 "Unpaid Drawing": As defined in Section 2.7(b). "Unpaid Drawing Repayment Loan": As defined in Section 2.15. "Unused Revolving Commitment": With respect to any Bank as of any date of determination, the amount by which such Bank's Revolving Commitment Amount exceeds such Bank's Revolving Outstandings on such date. "Unused Revolving Commitment Fees": As defined in Section 2.9. "U.S. Bank": U.S. Bank National Association, in its individual corporate capacity. SECTION 1.2 ACCOUNTING TERMS AND CALCULATIONS. Except as may be expressly provided to the contrary herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP. To the extent any change in GAAP affects any computation or determination required to be made pursuant to this Agreement, such computation or determination shall be made as if such change in GAAP had not occurred unless the Borrower and Majority Banks agree in writing on an adjustment to such computation or determination to account for such change in GAAP. SECTION 1.3 COMPUTATION OF TIME PERIODS. In this Agreement, in the computation of a period of time from a specified date to a later specified date, unless otherwise stated the word "from" means "from and including" and the word "to" or "until" each means "to but excluding." SECTION 1.4 OTHER DEFINITIONAL TERMS. The words "hereof," "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. References to Sections, Exhibits, schedules and like references are to this Agreement unless otherwise expressly provided. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". Unless the context in which used herein otherwise clearly requires, "or" has the inclusive meaning represented by the phrase "and/or". ARTICLE II TERMS OF THE CREDIT FACILITIES SECTION 2.1 LENDING COMMITMENTS; PURPOSES. On the terms and subject to the conditions hereof, each Bank severally agrees to make the following lending facilities available to the Borrower: (a) Revolving Loans. Each Bank severally shall make available a revolving credit facility available as loans (each, a "Revolving Loan" and, collectively, the "Revolving Loans") to the Borrower on a revolving basis at any time and from time to time from the Closing Date to the Termination Date, during which period the Borrower may borrow, repay and reborrow in accordance with the provisions hereof, provided, that no Revolving Loan will be made in any amount which, after giving effect thereto, would cause the Aggregate Revolving Outstandings to exceed the lesser of Aggregate Revolving Commitment Amounts or the Borrowing Base. 20 (b) Term Loans. Upon the Closing Date, each Bank shall make available to the Borrower a term loan (each being a "Term Loan" and, collectively, the "Term Loans") in an amount by such Bank equal to its Term Loan Commitment Amount. SECTION 2.2 PROCEDURE FOR LOANS; NOTES. (a) Revolving Loans. (i) Any request by the Borrower for Revolving Loans hereunder shall be in writing, or by telephone promptly confirmed in writing or by facsimile transmission, and must be given so as to be received by the Agent not later than 1:00 P.M. (Minneapolis time) two Eurodollar Business Days prior to the requested Revolving Loan Date (which shall be a Business Day) if the Revolving Loans (or any portion thereof) are requested as Eurodollar Rate Advances and not later than 1:00 P.M. (Minneapolis time) on the requested Revolving Loan Date if the Revolving Loans are requested as Prime Rate Advances. Each request for Revolving Loans hereunder shall be irrevocable and shall be deemed a representation by the Borrower that on the requested Revolving Loan Date and after giving effect to the requested Revolving Loans the applicable conditions specified in Article III have been and will be satisfied. Each request for Revolving Loans hereunder shall specify (i) the requested Revolving Loan Date, (ii) the aggregate amount of Revolving Loans to be made on such date, which shall be in a minimum amount of $200,000 or, if more, an integral multiple of $100,000, (iii) whether such Revolving Loans are to be funded as Prime Rate Advances or Eurodollar Rate Advances, (iv) in the case of Eurodollar Rate Advances, the duration of the initial Interest Period applicable thereto, (v) a calculation acceptable to the Agent of the availability under the Borrowing Base on the requested Revolving Loan Date, after giving effect to the requested Revolving Loans, and (vi) if such Revolving Loans are to be Unpaid Drawing Repayment Loans, the Unpaid Drawing or Unpaid Drawings which are to be repaid with the proceeds of such Unpaid Drawing Repayment Loans. Without in any way limiting the Borrower's obligation to confirm in writing any telephone request for Revolving Loans hereunder, the Agent may rely on any such request which it believes in good faith to be genuine; and the Borrower hereby waives the right to dispute the Agent's record of the terms of such telephone request, absent gross negligence or willful misconduct on the part of the Agent. The Agent shall promptly notify each other Bank of the receipt of such request, the matters specified therein, and of such Bank's ratable share (based on such Bank's Revolving Commitment Percentage) of the requested Revolving Loans. On the date of the requested Revolving Loans, each Bank shall provide its share of the requested Revolving Loans to the Agent in Immediately Available Funds 21 not later than 4:00 P.M. (Minneapolis time). Unless the Agent determines that any applicable condition specified in Article III has not been satisfied, the Agent will make available to the Borrower at the Agent's principal office in Minneapolis, Minnesota in Immediately Available Funds not later than 5:00 P.M. (Minneapolis time) on the requested Revolving Loan Date the amount of the requested Revolving Loans. If the Agent has made a Revolving Loan to the Borrower on behalf of a Bank but has not received the amount of such Revolving Loan from such Bank by the time herein required, such Bank shall pay interest to the Agent on the amount so advanced at the Federal Funds Rate from the date of such Revolving Loan to the date funds are received by the Agent from such Bank, such interest to be payable with such remittance from such Bank of the principal amount of such Revolving Loan (provided, however, that the Agent shall not make any Revolving Loan on behalf of a Bank if the Agent has received prior notice from such Bank that it will not make such Revolving Loan). If the Agent does not receive payment from such Bank by the next Business Day after the date of any Revolving Loan, the Agent shall be entitled to recover such Revolving Loan, with interest thereon at the rate then applicable to such Revolving Loan, on demand, from the Borrower, without prejudice to the Agent's and the Borrower's rights against such Bank. If such Bank pays the Agent the amount herein required with interest at the overnight Federal Funds rate before the Agent has recovered from the Borrower, such Bank shall be entitled to the interest payable by the Borrower with respect to the Revolving Loan in question accruing from the date the Agent made such Revolving Loan. The Borrower shall provide to the Agent each Business Day, by not later than 4:00 P.M. (Minneapolis time) on such Business Day, a reconciliation in writing or by telecopier showing (i) the total amount of Revolving Loans on such day, (ii) whether such Revolving Loans constituted Unpaid Drawing Repayment Loans, and (iii) in the case of Unpaid Drawing Repayment Loans, the Unpaid Drawing or Unpaid Drawings repaid with the proceeds of such Unpaid Drawing Repayment Loans. The Agent shall provide copies of such reconciliation to the Banks on a monthly basis. (ii) Whenever any Unpaid Drawing exists for which there are not then funds in the Holding Account to cover the same and with respect to which the Agent has not otherwise received a request from the Borrower for Unpaid Drawing Repayment Loans pursuant to Section 2.2(a), the Borrower shall nevertheless, be deemed to have requested the Banks to make Unpaid Drawing Repayment Loans to pay such Unpaid Drawing and the Agent shall give the other Banks notice to that effect, specifying the amount of such Unpaid Drawing and the amount of the Unpaid Drawing Repayment Loan to be made by such Bank with respect thereto, in which event each Bank is authorized (and the Borrower does here so authorize each Bank) to, and shall, make an Unpaid Drawing Repayment Loan to the Borrower in an amount equal to such Bank's Revolving Commitment Percentage of the balance of the Unpaid Drawing which remains unpaid after applying any funds in the Holding Account to the payment thereof. The Agent shall notify each Bank by 1:00 P.M. (Minneapolis time) on the date such Unpaid Drawing occurs of the amount of the Unpaid Drawing Repayment Loan to be made by such Bank. 22 Notices received after such time shall be deemed to have been received on the next Business Day. Each Bank shall then make such Unpaid Drawing Repayment Loan (regardless of noncompliance with the applicable conditions precedent specified in Article III hereof and regardless of whether an Event of Default then exists) and each Bank shall provide the Agent with the proceeds of such Unpaid Drawing Repayment Loan in Immediately Available Funds, at the office of the Agent, not later than 4:00 P.M. (Minneapolis time) on the day on which such Bank received such notice (or, in the case of notices received after 1:00 P.M., Minneapolis time, is deemed to have received such notice). The Agent shall apply the proceeds of such Unpaid Drawing Repayment Loans directly to reimburse itself for such Unpaid Drawing. If any portion of any such amount paid to the Agent is recovered by or on behalf of the Borrower from the Agent in bankruptcy, by assignment for the benefit of creditors or otherwise, the loss of the amount so recovered shall be ratably shared between and among the Banks in the manner contemplated by Section 8.11 hereof. If at the time the Banks make funds available to the Agent pursuant to the provisions of this Section, the applicable conditions precedent specified in Article III shall not have been satisfied, the Borrower shall pay to the Agent for the account of the Banks interest on the funds so advanced at a floating rate per annum equal to the sum of the Prime Rate plus the Applicable Margin for Revolving Loans plus two percent (2.00%). (b) Term Loans. Not later than 1:00 P.M. Minneapolis time) two Eurodollar Business Days prior to the requested Closing Date if the Term Loans are requested as Eurodollar Rate Advances and not later than 1:00 P.M. (Minneapolis time) one Business Day prior to the requested Closing Date if the Term Loans are requested as Prime Rate Advances, the Borrower shall deliver to the Agent a written notice of borrowing. Such notice of borrowing shall be irrevocable and shall be deemed a representation by the Borrower that on the Closing Date and after giving effect to the Term Loans the applicable conditions specified in Article III have been and will be satisfied. Such notice of borrowing shall specify (i) the requested Closing Date, (ii) whether such Term Loans are to be funded as Eurodollar Rate Advances or Prime Rate Advances, and (iii) in the case of Eurodollar Rate Advances, the duration of the initial Interest Period applicable thereto. The Agent shall promptly notify each Bank of the receipt of such notice and the matters specified therein. On the requested Closing Date, each Bank shall provide to the Agent the amount of such Bank's Term Loan in Immediately Available Funds not later than 1:00 P.M., Minneapolis time. Unless the Agent determines that any applicable condition specified in Article III has not been satisfied, the Agent will make the proceeds of the Term Loans available to the Borrower at the Agent's main office on the requested date. (c) Conversions and Continuations. On the terms and subject to the limitations hereof, the Borrower shall have the option at any time and from time to time to convert all or any portion of the Advances into Prime Rate Advances or Eurodollar Rate Advances or to continue a Eurodollar Rate Advance as such; provided, however, that a Eurodollar Rate Advance may be converted or continued only on the last day of the Interest Period applicable thereto and, at the option of the Majority Banks, no Advance may be made as, converted to or continued as a Eurodollar Rate Advance if a Default or an Event of Default has occurred and is continuing on the 23 proposed date of continuation or conversion. Advances may be converted to, or continued as, Eurodollar Rate Advances only in an amount equal to $200,000 or an integral multiple of $200,000 in excess thereof. The Borrower shall give the Bank written notice of any continuation or conversion of any Advances and such notice must be given so as to be received by the Bank not later than 1:00 P.M. (Minneapolis time) two Eurodollar Business Days prior to the date of the requested date of conversion or continuation in the case of the continuation of, or conversion to, Eurodollar Rate Advances and not later than 1:00 p.m. (Minneapolis time) on the date of the requested conversion to Prime Rate Advances. Each such notice shall specify (a) the amount to be continued or converted, (b) the date for the continuation or conversion (which must be (i) the last day of the current Interest Period for any continuation or conversion of Eurodollar Rate Advances, (ii) a Eurodollar Business Day in the case of conversions to or continuations as Eurodollar Rate Advances, and (iii) a Business Day in the case of conversions to Prime Rate Advances), and (c) in the case of conversions to or continuations as Eurodollar Rate Advances, the Interest Period applicable thereto. Any notice given by the Borrower under this Section shall be irrevocable. If the Borrower shall fail to notify the Bank of the continuation of any Eurodollar Rate Advance within the time required by this Section, such Advance shall, at any time after the last day of the Interest Period applicable thereto, at the option of the Agent (a) automatically be converted into a Prime Rate Advance of the same principal amount or (b) automatically be continued as a Eurodollar Rate Advance having an Interest Period selected by the Agent. Notwithstanding anything to the contrary in the this Agreement, the Borrower will not permit there to be more than (a) five different Interest Periods for Term Loans constituting Eurodollar Rate Advances in effect at any one time and (b) five different Interest Periods for Revolving Loans constituting Eurodollar Rate Advances in effect at any time. SECTION 2.3 NOTES. The Revolving Loans of each Bank shall be evidenced by a single Revolving Note payable to the order of such Bank in a principal amount equal to such Bank's Revolving Commitment Amount originally in effect plus such Bank's ratable amount of the conditional increase of the Revolving Commitment Amounts contemplated by Section 2.6(e). The Term Loan of each Bank shall be evidenced by a Term Note payable to the order of such Bank in the principal amount equal to such Bank's Term Loan Commitment Amount. Each Bank shall enter in its ledgers and records the amount of its Term Loan and each Revolving Loan, the various Advances made and the payments made thereon, and each Bank is authorized by the Borrower to enter on a schedule attached to its Term Note or Revolving Note, as appropriate, a record of such Term Loan, Revolving Loans, Advances and payments; provided, however that the failure by any Bank to make any such entry or any error in making such entry shall not limit or otherwise affect the obligation of the Borrower hereunder and on the Notes, and, in all events (a) the principal amounts owing by the Borrower in respect of the Revolving Notes shall be the aggregate amount of all Revolving Loans made by the Banks less all payments of principal thereof made by the Borrower and (b) the principal amount owing by the Borrower in respect of the Term Notes shall be the aggregate amount of all Term Loans made by the Banks less all payments of principal thereof made by the Borrower. SECTION 2.4 INTEREST RATES, INTEREST PAYMENTS AND DEFAULT INTEREST. Interest shall accrue and be payable on the Loans as follows: 24 (a) Subject to paragraph (c) below, each Eurodollar Rate Advance shall bear interest on the unpaid principal amount thereof during the Interest Period applicable thereto at a rate per annum equal to the sum of (i) the Adjusted Eurodollar Rate for such Interest Period, plus (ii) the Applicable Margin. (b) Subject to paragraph (c) below, each Prime Rate Advance shall bear interest on the unpaid principal amount thereof at a varying rate per annum equal to the sum of (i) the Prime Rate, plus (ii) the Applicable Margin. (c) Upon the occurrence of any Event of Default, each Advance shall, at the option of the Majority Banks, bear interest until paid in full (i) during the balance of any Interest Period applicable to such Advance, at a rate per annum equal to the sum of the rate applicable to such Advance during such Interest Period plus 2.0%, and (ii) otherwise, at a rate per annum equal to the sum of (A) the Prime Rate, plus (B) the Applicable Margin for Prime Rate Advances, plus (C) 2.0%. (d) Interest shall be payable (i) with respect to each Eurodollar Rate Advance having an Interest Period of three months or less, on the last day of the Interest Period applicable thereto; (ii) with respect to any Eurodollar Rate Advance having an Interest Period greater than three months, on the last day of the Interest Period applicable thereto and on each day that would have been the last day of the Interest Period for such Advance had successive Interest Periods of three months duration been applicable to such Advance; (iii) with respect to any Prime Rate Advance, on the last day of each month; (iv) with respect to all Advances, upon any permitted prepayment (on the amount prepaid); and (v) with respect to all Advances, on the Termination Date; provided that interest under Section 2.4(c) shall be payable on demand. SECTION 2.5 REPAYMENT; PAYMENT TO HOLDING ACCOUNT. (a) Revolving Loans. The Revolving Loans, together with all accrued and unpaid interest thereon, shall be due and payable on the Termination Date. (b) Term Loan. The principal of the Term Loan shall be due and payable (a) in installments of $1,000,000 due and payable on each of October 25, 2002, January 24, 2003, April 30, 2003, August 1, 2003, October 31, 2003, January 30, 2004, April 30, 2004 and July 30, 2004 and (b) a final installment in the amount of all remaining principal of and interest upon the Term Loan due and payable on October 29, 2004, provided, however, that (y) any installment of principal due on any date specified above shall be reduced by any prepayments of principal applied to such installment pursuant to this Agreement and (z) if the aggregate principal amount outstanding under the Term Loan as of the date any principal payment is due is less than the amount specified for such date above, then the principal amount payable on such date shall be such amount outstanding. (c) Payment to Holding Account. The Borrower shall pay to the Holding Account on the Termination Date an amount equal to the aggregate face amount of the Letters of Credit. 25 SECTION 2.6 MANDATORY AND OPTIONAL PREPAYMENTS. (a) Optional Prepayments. The Borrower may prepay Prime Rate Advances, in whole or in part, at any time, without premium or penalty. Except upon an acceleration following an Event of Default or upon termination of the Revolving Commitment in whole, the Borrower may pay Eurodollar Rate Advances only on the last day of the Interest Period applicable thereto. Any such prepayment must, in the case of a Eurodollar Rate Advance, be accompanied by accrued and unpaid interest on the amount prepaid. Each prepayment shall be in an aggregate amount of (i) $200,000 or an integral multiple of $200,000 in excess thereof, in the case of any prepayment of Revolving Loans and (ii) $250,000 or an integral multiple of $250,000, in the case of any prepayment of Term Loans. Amounts paid (unless following an acceleration or upon termination of the Revolving Commitment in whole) or prepaid on Revolving under this Section 2.6 may be reborrowed upon the terms and subject to the conditions and limitations of this Agreement. Amounts paid or prepaid on the Term Loans may not be reborrowed. Amounts paid or prepaid on the Loans under this Section 2.6 shall be for the account of each Bank in proportion to its share of Loans being prepaid. Any prepayments of the Term Loans made pursuant to Section 2.6(a) shall be applied to the unpaid installments upon the Term Loan in inverse order of their maturities, provided that, with respect to any particular prepayment, the Borrower may give written notice to the Banks that such prepayment shall be applied to the principal installments of the Term Loan in order of their maturities and, so long as no Event of Default is then continuing, the Banks shall apply such prepayment in such manner. (b) Mandatory Prepayment of Revolving Loans. If at any time the Aggregate Revolving Outstandings exceed the Aggregate Revolving Commitment Amounts (including but not limited to any excess caused by a reduction in the Revolving Commitment Amounts pursuant to Sections 2.6(e) or 2.8 hereof), the Borrower shall repay the Revolving Notes in an aggregate amount equal to such excess, which prepayment shall be apportioned among the Banks' Revolving Notes in accordance with their respective Revolving Outstandings Percentages. (c) Mandatory Prepayments Due to Certain Transactions. At any time during the continuation of any Default or Event of Default, immediately upon the receipt thereof by the Borrower or any Subsidiary, the Borrower shall prepay the Loans in an aggregate amount of 100% of the Net Proceeds received in cash by the Borrower or any Subsidiary as a result of any public or private sale or offering by the Borrower of its capital stock . (d) Application of Certain Prepayments. Any prepayments made pursuant to Section 2.6(c), and any amounts received by the Agent upon the NNS Note Collateral pursuant to Section 5.13, shall in each case be applied in the following order by the Agent to the Loans ratably to each Bank according to its Revolving Commitment Percentage or Term Loan Percentage, as applicable: (x) first, to the unpaid principal installments upon the Term Loan in inverse order of their maturities, (y) second, to the unpaid principal balance of the Revolving Loans (other than reimbursement obligations with respect to letters of credit), and (z) third, to the Holding Account in the amount of the aggregate face amount of the Letters of Credit. 26 (e) Permanent Reduction and Conditional Increase of Revolving Commitments. The Revolving Commitment Amounts that are from time to time in effect shall be reduced ratably by any prepayments made by the Borrower under Section 2.6(c) that are applied to the Revolving Loans or paid to the Holding Account pursuant to Section 2.6(d). Further, if the Term Loan is paid or prepaid under this Agreement so that the unpaid balance of the Term Loan is not more than $5,000,000, then, so long as no Default or Event of Default is then continuing, the Borrower shall have the one-time option (exercisable upon 5 Business Days' written notice to the Banks given at any time after the Term Loans have been so paid or prepaid) to increase ratably the Revolving Commitment Amounts which are then in effect by $4,000,000. Upon the effective date of an increase in the Revolving Commitment Amounts in the manner set forth in this Section, the Agent shall deliver to the Borrower and each Bank a revised Schedule 1.1B reflecting the increased Revolving Commitment Amounts. (f) Borrowing Base Deficiency. If at any time a Borrowing Base Deficiency exists, the Borrower shall immediately pay on the principal of the Revolving Loans an amount equal to such Borrowing Base Deficiency. Amounts paid on the Revolving Loans under this Section 2.6(f) shall be for the account of each Bank in proportion to its share of outstanding Revolving Loans. If, after paying all outstanding Revolving Loans, a Borrowing Base Deficiency still exists, the Borrower shall pay into the Holding Account an amount equal to the amount of the remaining Borrowing Base Deficiency. SECTION 2.7 ISSUANCE AND RENEWAL OF LETTERS OF CREDIT; DRAWINGS; REPAYMENTS; BANK PARTICIPATIONS. (a) The Letters of Credit. Subject to Section 2.7(f) and the other terms and conditions of this Agreement, the Agent agrees to issue Letters of Credit for the account of the Borrower from time to time prior to the Termination Date in such amounts as the Borrower shall request; provided, however, that: (i) No Letter of Credit will be issued in any amount which, after giving effect to such issuance, would cause either (A) the Aggregate Revolving Outstandings to exceed the Aggregate Revolving Commitment Amounts or (ii) the sum of the Unpaid Drawings under the Letters of Credit plus the aggregate amount available to be drawn under the Letters of Credit (including such Letter of Credit) to exceed $8,000,000; (ii) No Letter of Credit shall have a stated available amount of less than $50,000; and (iii) Without the prior written consent of all of the Banks, no Letter of Credit shall expire later than 365 days after the date of issuance thereof. (b) Repayment. In the event of any drawing on any Letter of Credit, the Borrower shall reimburse U.S. Bank for such drawing by 12:00 noon (Minneapolis time) on the day such drawing is honored by U.S. Bank. Any amount by which the Borrower has failed to reimburse U.S. Bank for the full amount of such drawing under the Letter of Credit by 12:00 noon (Minneapolis time) on the date U.S. Bank honored such drawing, until reimbursed from the proceeds of Unpaid Drawing Repayment Loans or out of funds available in the Holding Account, is an "Unpaid Drawing." 27 (c) Participations. Each Bank hereby purchases, and U.S. Bank hereby sells to each Bank, an undivided fractional risk participation interest, equal to such Bank's Revolving Percentage of each Letter of Credit, in all drawings (including Unpaid Drawings) made and honored under each Letter of Credit, in U.S. Bank's reimbursement rights with respect to drawings (including Unpaid Drawings) made and honored under each Letter of Credit (as set forth herein and in any letter of credit application and reimbursement agreement form executed by the Borrower in favor of U.S. Bank in connection with the issuance of each Letter of Credit). Upon receipt of the notice given by the Agent pursuant to Section 2.2(b) hereof, each Bank shall pay to U.S. Bank its pro rata share, based on its Revolving Commitment Percentage, of any Unpaid Drawing, less the amount, if any, of the Unpaid Drawing Repayment Loan made by such Bank with respect to such Unpaid Drawing, by not later than 3:00 p.m. (Minneapolis time) on the day on which such Bank received such notice (or, in the case of notices received after 1:00 p.m., Minneapolis time, is deemed to have received such notice). If U.S. Bank has not received such participation payment from such Bank by the time required in the preceding sentence such Bank shall pay interest to U.S. Bank at the Federal Funds Rate on the amount of such participation payment from the date on which such notice was received or was deemed to have been received, as the case may be, to the date such participation payment is received by U.S. Bank, such interest to be payable with the remittance of such participation payment by such Bank. If U.S. Bank does not receive such participation payment from such Bank by the next Business Day after the date such notice was given (or was deemed given) by U.S. Bank to such Bank, U.S. Bank shall be entitled to receive interest on such participation payment at the Federal Funds Rate, without prejudice to U.S. Bank's rights against such Bank. The obligations of each Bank to make payment to U.S. Bank of such Bank's participation payments with respect to Unpaid Drawings pursuant to this Section 2.7(c), and U.S. Bank's right to receive the same, shall be absolute and unconditional under any and all circumstances and irrespective of any rights of setoff, counterclaim, withholding, reduction or other defense to payment which any Bank may have or have had against U.S. Bank, the Borrower or any other Person. (d) Indemnification of U.S. Bank. To the extent that U.S. Bank is not reimbursed or indemnified by the Borrower or to the extent that any amounts so received by U.S. Bank are required to be returned to the Borrower or any statutory representative of the Borrower for any reason whatsoever, each other Bank will reimburse and indemnify U.S. Bank on demand for and against its pro rata share, based on its Revolving Commitment Percentage, of the amount of any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed upon, incurred by or asserted against U.S. Bank in its capacity as such, acting pursuant hereto or in any way relating to or arising out of this Agreement, any Letter of Credit, or any action taken or omitted to be taken by U.S. Bank under this Agreement or any Letter of Credit, including, without limitation, any amounts (herein 28 called "Disgorgement Amounts") received by U.S. Bank from or on behalf of the Borrower in reimbursement of an Unpaid Drawing which are rescinded in whole or in part or which U.S. Bank may be otherwise required to pay or repay in whole or in part to the Borrower, any statutory representative of the Borrower or creditors of the Borrower acting as such statutory representative; provided, however, that except with respect to Disgorgement Amounts, as to which the liability of each Bank to reimbursement and indemnify U.S. Bank in accordance with its Revolving Commitment Percentage shall be absolute and unconditional under all circumstances whatsoever, no other Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from U.S. Bank's own gross negligence or willful misconduct. The obligations of the Banks to U.S. Bank under this Section 2.7(d) shall survive the termination of this Agreement and the expiration of any Letter of Credit. Nothing in this Section 2.7(d) shall be deemed to prejudice the right of any Bank to recover from U.S. Bank any amounts paid by such Bank to U.S. Bank pursuant to this Section 2.7(d) in the event that it is determined by a court of competent jurisdiction that the payment with respect to any Letter of Credit by U.S. Bank, in respect of which payment was made by such Bank, constituted gross negligence or willful misconduct on the part of U.S. Bank. (e) Obligations Absolute. The obligation of the Borrower under Section 2.7(b) to repay U.S. Bank for any amount drawn on any Letter of Credit and to repay the Banks for any Unpaid Drawing Repayment Loans shall be absolute, unconditional and irrevocable, shall continue for so long as any Letter of Credit is outstanding notwithstanding any termination of this Agreement, and shall be paid strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including without limitation the following circumstances: (i) Any lack of validity or enforceability of any Letter of Credit; (ii) The existence of any claim, setoff, defense or other right which the Borrower may have or claim at any time against any beneficiary, transferee or holder of any Letter of Credit (or any Person for whom any such beneficiary, transferee or holder may be acting), the Agent or any Bank or any other Person, whether in connection with any Letter of Credit, this Agreement, the transactions contemplated hereby, or any unrelated transaction; or (iii) Any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever. Neither the Agent nor any Bank nor officers, directors or employees of any thereof shall be liable or responsible for, and the obligations of the Borrower to the Agent and the Banks shall not be impaired by: (A) The use which may be made of any Letter of Credit or for any acts or omissions of any beneficiary, transferee or holder thereof in connection therewith; 29 (B) The validity, sufficiency or genuineness of documents, or of any endorsements thereon, even if such documents or endorsements should, in fact, prove to be in any or all respects invalid, insufficient, fraudulent or forged; (C) The acceptance by the Agent of documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary; or (D) Any other action of the Agent in making or failing to make payment under any Letter of Credit if in good faith and in conformity with U.S. or foreign laws, regulations or customs applicable thereto. Notwithstanding the foregoing, the Borrower shall have a claim against U.S. Bank, and U.S. Bank shall be liable to the Borrower, to the extent, but only to the extent, of any direct, as opposed to consequential, damages suffered by the Borrower which the Borrower proves were caused by the U.S. Bank's own willful misconduct or gross negligence in determining whether documents presented under any Letter of Credit comply with the terms thereof. (f) Procedures for Letters of Credit. Each request for an Letter of Credit shall be made by the Borrower in writing, by facsimile transmission or electronic conveyance received by the Agent by 2:00 P.M., Minneapolis time, on a Business Day which is not less than one Business Day preceding the requested date of issuance (which shall also be a Business Day). Each request for an Letter of Credit shall be deemed a representation by the Borrower that on the date of issuance of such Letter of Credit and after giving effect thereto the applicable conditions specified in Article III have been and will be satisfied. The Agent may require that such request be made on such letter of credit application and reimbursement agreement form as the Agent may from time to time specify, along with satisfactory evidence of the authority and incumbency of the officers of the Borrower making such request. The Agent shall promptly notify the other Banks of the receipt of the request and the matters specified therein. On the date of each issuance of an Letter of Credit the Agent shall send notice to the other Banks of such issuance, accompanied by a copy of the Additional Letter or Letters of Credit so issued. Letters of Credit shall be issued in support of obligations of the Borrower and the Subsidiaries under performance and surety bond incurred in the ordinary course of business. SECTION 2.8 OPTIONAL REDUCTION OF REVOLVING COMMITMENT AMOUNTS OR TERMINATION OF REVOLVING COMMITMENTS. The Borrower may, at any time, upon not less than three Business Days prior written notice to the Banks, reduce the Revolving Commitment Amounts, ratably, with any such reduction in a minimum aggregate amount for all the Banks of $1,000,000, or, if more, in an integral multiple of $1,000,000; provided, however, that the Borrower may not at any time reduce the Aggregate Revolving Commitment Amounts below the Aggregate Revolving Outstandings. The Borrower may, at any time when no Letters of Credit is outstanding, upon not less than three Business Days prior written notice to the Banks, terminate the Revolving Commitments in their entirety. Upon termination of the Revolving Commitments pursuant to this Section, the Borrower shall pay to the Agent for the account of the Banks the full amount of all outstanding Advances, all accrued and unpaid interest thereon, all unpaid Unused Revolving Commitment Fees accrued to the date of such termination, and all other unpaid obligations of the Borrower to the Agent and the Banks hereunder and shall pay into the Holding Account an amount equal to the aggregate face amount of the Letters of Credit. 30 SECTION 2.9 UNUSED REVOLVING COMMITMENT FEES. The Borrower shall pay to the Agent for the account of each Bank, in arrears at the end of each fiscal quarter of the Borrower, fees (the "Unused Revolving Commitment Fees") in an equal to the Applicable Margin for Unused Revolving Commitment Fees (on a per annum basis) of the average daily Unused Revolving Commitment of such Bank for the period from the Closing Date to the Termination Date. Such Unused Revolving Commitment Fees are payable fiscal quarterly in arrears on each January 31, April 30, July 31 and October 31 and on the Termination Date. SECTION 2.10 LETTER OF CREDIT FEES. (a) For each Letter of Credit issued, the Borrower shall pay to the Agent for the account of the Banks, in advance on the date of issuance, a fee (a "Letter of Credit Fee") in an amount determined by applying a per annum rate of equal to the Applicable Margin for Eurodollar Rate Advance in effect on such date to the original face amount of the Letter of Credit for the period from the date of issuance to the scheduled expiration date of such Letter of Credit. Notwithstanding the forgoing, if any Letter of Credit is cancelled, or is drawn, prior to the earlier of the Termination Date or expiration date thereof (and any such draw does not give rise to an Unpaid Draw that is not satisfied with the proceeds of a Revolving Loan), then, so long as no Event of Default is then continuing, each Bank shall severally refund to the Borrower a portion of the Letter of Credit Fee previously paid to such Bank by the Borrower with respect to such Letter of Credit equal to the product of (i) the amount of the Letter of Credit Fee paid to such Bank with respect to such Letter of Credit multiplied by (ii) a fraction, the numerator of which is the number of days between (but not including) the day the such Letter of Credit is cancelled or so drawn and the scheduled expiration date of such Letter of Credit and the denominator of which is the number of days between (but not including) the date of the issuance of such Letter of Credit and the scheduled expiration date of such Letter of Credit. Each Bank may set off any refund of the Letter of Credit Fees contemplated by the forgoing sentence against any amounts due and payable to such Bank on the date such refund is payable. (b) In addition to the Letter of Credit Fee, the Borrower shall pay to U.S. Bank (i) upon issuance of each Letter of Credit issued from and after the Closing Date, for the account of U.S. Bank a "fronting fee" in the amount of 0.125% times the amount available to be drawn upon such Letter of Credit and (ii) for the account of U.S. Bank, on demand, all issuance, amendment, drawing and other fees regularly charged by the U.S. Bank to its letter of credit customers and all out-of-pocket expenses incurred by U.S. Bank in connection with the issuance, amendment, administration or payment of any Letter of Credit. 31 SECTION 2.11 COMPUTATION. Unused Revolving Commitment Fees and interest on Loans shall be computed on the basis of actual days elapsed and a year of 360 days. SECTION 2.12 FEE LETTER. The Borrower shall pay to the Agent fees in accordance with the terms of a letter agreement between the Borrower and the Agent concerning such fees. The Agent may separately agree with any Bank to pay a portion of such fees to such Bank, but shall not be obligated to pay such portion to such Bank unless and until the same is received from the Borrower. SECTION 2.13 PAYMENTS. Payments and prepayments of principal of, and interest on, the Notes and all fees, expenses and other obligations under this Agreement payable to the Agent or the Banks shall be made without setoff or counterclaim in Immediately Available Funds not later than 1:00 P.M. (Minneapolis time) on the dates called for under this Agreement and the Notes to the Agent at its main office in Minneapolis, Minnesota. Funds received after such time shall be deemed to have been received on the next Business Day. The Agent will promptly distribute in like funds to each Bank its ratable share of each such payment of principal, interest, Unused Revolving Commitment Fees and Letter of Credit Fees received by the Agent for the account of the Banks. Whenever any payment to be made hereunder or on the Revolving Notes or Term Notes shall be stated to be due on a day which is not a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time, in the case of a payment of principal, shall be included in the computation of any interest on such principal payment. SECTION 2.14 REVOLVING COMMITMENT ENDING DATE. The "Revolving Commitment Ending Date" is June 28, 2004. SECTION 2.15 USE OF LOAN PROCEEDS. The Term Loan shall continue a portion (equal to the principal amount of such Loan) of the Borrower's Existing Loans outstanding under the Existing Credit Agreement. The initial Revolving Loans shall be used to refinance the Existing Loans and to pay the fees, costs and expenses of the Agent and the Banks payable pursuant to this Agreement. The proceeds of any subsequent Revolving Loans shall be used for (i) repayment to U.S. Bank of Unpaid Drawings (any such Revolving Loan being also referred to herein as an "Unpaid Drawing Repayment Loan") and (ii) other general corporate purposes of the Borrower. No part of the proceeds of any Loans shall be used, directly or indirectly, to purchase or carry any margin stock (as defined in Regulation U of the Board) or to extend credit to others for the purpose of purchasing or carrying such margin stock. SECTION 2.16 INTEREST RATE NOT ASCERTAINABLE, ETC. If, on or prior to the date for determining the Adjusted Eurodollar Rate in respect of the Interest Period for any Eurodollar Rate Advance, any Bank determines (which determination shall be conclusive and binding, absent error) that: (a) deposits in dollars (in the applicable amount) are not being made available to such Bank in the relevant market for such Interest Period, or (b) the Adjusted Money Market Rate or the Adjusted Eurodollar Rate, as the case may be, will not adequately and fairly reflect the cost to such Bank of funding or maintaining Eurodollar Rate Advances for such Interest Period, 32 such Bank shall forthwith give notice to the Borrower and the other Banks of such determination, whereupon the obligation of such Bank to make or continue, or to convert any Advances to, Eurodollar Rate Advances shall be suspended until such Bank notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist. While any such suspension continues, all further Advances by such Bank shall be made with an interest rate option to which such suspension does not apply. No such suspension shall affect the interest rate then in effect during the applicable Interest Period for any Eurodollar Rate Advance outstanding at the time such suspension is imposed. SECTION 2.17 INCREASED COST. If any Regulatory Change: (a) shall subject any Bank (or its Applicable Lending Office) to any tax, duty or other charge with respect to its Eurodollar Rate Advances, its Notes or its obligation to make Eurodollar Rate Advances or shall change the basis of taxation of payment to any Bank (or its Applicable Lending Office) of the principal of or interest on its Eurodollar Rate Advances or any other amounts due under this Agreement in respect of its Eurodollar Rate Advances or its obligation to make Eurodollar Rate Advances (except for changes in the rate of tax on the overall net income of such Bank or its Applicable Lending Office imposed by the jurisdiction in which such Bank's principal office or Applicable Lending Office is located); or (b) shall impose, modify or deem applicable any reserve, special deposit or similar requirement (including, without limitation, any such requirement imposed by the Board, but excluding any such requirement to the extent included in calculating the applicable Adjusted Eurodollar Rate) against assets of, deposits with or for the account of, or credit extended by, any Bank's Applicable Lending Office or against Letters of Credit issued by the Agent or shall impose on any Bank (or its Applicable Lending Office) or on the United States market for certificates of deposit or the interbank Eurodollar market any other condition affecting its Eurodollar Rate Advances, its Notes or its obligation to make Eurodollar Rate Advances or affecting any Letter of Credit; and the result of any of the foregoing is to increase the cost to such Bank (or its Applicable Lending Office) of making or maintaining any Eurodollar Rate Advance or issuing or maintaining any Letter of Credit, or to reduce the amount of any sum received or receivable by such Bank (or its Applicable Lending Office) under this Agreement or under its Notes, then, within 30 days after demand by such Bank (with a copy to the Agent), the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such increased cost or reduction. Each Bank will promptly notify the Borrower and the Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section and will designate a different Applicable Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. A certificate of any Bank claiming compensation under this Section, setting forth the additional amount or amounts to be paid to it hereunder and stating in reasonable detail the basis for the charge and the method of computation, shall be conclusive in the absence of error. In determining such amount, any Bank may use any reasonable averaging and attribution methods. Failure on the part of any Bank to demand compensation for any increased costs or reduction in amounts received or receivable with respect to any Interest Period shall not constitute a waiver of such Bank's rights to demand compensation for any increased costs or reduction in amounts received or receivable in any subsequent Interest Period. 33 SECTION 2.18 ILLEGALITY. If any Regulatory Change shall make it unlawful or impossible for any Bank to make, maintain or fund any Eurodollar Rate Advances, such Bank shall notify the Borrower and the Agent, whereupon the obligation of such Bank to make or continue, or to convert any Advances to, Eurodollar Rate Advances shall be suspended until such Bank notifies the Borrower and the Agent that the circumstances giving rise to such suspension no longer exist. Before giving any such notice, such Bank shall designate a different Applicable Lending Office if such designation will avoid the need for giving such notice and will not, in the judgment of such Bank, be otherwise disadvantageous to such Bank. If such Bank determines that it may not lawfully continue to maintain any Eurodollar Rate Advances, as the case may be, to the end of the applicable Interest Periods, all of the affected Advances shall be automatically converted to Prime Rate Advances as of the date of such Bank's notice, and upon such conversion the Borrower shall indemnify such Bank in accordance with Section 2.20. SECTION 2.19 CAPITAL ADEQUACY. In the event that any Regulatory Change reduces or shall have the effect of reducing the rate of return on any Bank's capital or the capital of its parent corporation (by an amount such Bank deems material) as a consequence of its Commitments and/or its Loans and/or any Letters of Credit or any Bank's obligations to make Advances to cover Letters of Credit to a level below that which such Bank or its parent corporation could have achieved but for such Regulatory Change (taking into account such Bank's policies and the policies of its parent corporation with respect to capital adequacy), then the Borrower shall, within 30 days after written notice and demand from such Bank to the Borrower (with a copy to the Agent), pay to such Bank additional amounts sufficient to compensate such Bank or its parent corporation for such reduction. Any determination by such Bank under this Section and any certificate as to the amount of such reduction given to the Borrower by such Bank shall be final, conclusive and binding for all purposes, absent manifest error. SECTION 2.20 FUNDING LOSSES; EURODOLLAR RATE ADVANCES. The Borrower shall compensate each Bank, upon its written request to the Borrower, for all losses, expenses and liabilities (including any interest paid by such Bank to lenders of funds borrowed by it to make or carry Eurodollar Rate Advances to the extent not recovered by such Bank in connection with the re-employment of such funds and including loss of anticipated profits) which such Bank may sustain: (i) if for any reason, other than a default by such Bank, a funding of a Eurodollar Rate Advance does not occur on the date specified there for in the Borrower's request or notice as to such Advance under Section 2.2, or (ii) if, for whatever reason (including, but not limited to, acceleration of the maturity of Advances following an Event of Default), any repayment of a Eurodollar Rate Advance, or a conversion pursuant to Section 2.18, occurs on any day other than the last day of the Interest Period applicable thereto. A Bank's request for compensation shall set forth the basis for the amount requested and shall be final, conclusive and binding, absent error. 34 SECTION 2.21 DISCRETION OF BANKS AS TO MANNER OF FUNDING. Each Bank shall be entitled to fund and maintain its funding of Eurodollar Rate Advances in any manner it may elect, it being understood, however, that for the purposes of this Agreement all determinations hereunder (including, but not limited to, determinations under Section 2.20) shall be made as if such Bank had actually funded and maintained each Eurodollar Rate Advance during the Interest Period for such Advance through the issuance of its certificates of deposit, or the purchase of deposits, having a maturity corresponding to the last day of the Interest Period and bearing an interest rate equal to the Eurodollar Rate, as the case may be, for such Interest Period. SECTION 2.22 REPLACEMENT OF CERTAIN BANKS. If any Bank shall become affected by any of the changes or events described in Section 2.16, 2.17, 2.18, 2.19 or 2.20 (any such Bank hereinafter referred to as a "Subject Bank") and shall give notice to the Borrower of any of the changes or events thereunder, the Borrower may, so long as no Default or Event of Default has occurred and is continuing, upon at least five (5) Business Days' notice to the Agent and such Subject Bank by the Borrower, designate a replacement lender (a "Replacement Bank") acceptable to the Agent, to which such Subject Bank shall, subject to its receipt (unless a later date for the remittance thereof shall be agreed upon by Borrower and the Subject Bank) of all amounts due and owing to such Subject Bank under Section 2.16, 2.17, 2.18, 2.19 or 2.20 assign all (but not less than all) of its rights, obligations, Loans, Revolving Commitment and Term Loan Commitment pursuant to an Assignment Agreement in the form of Exhibit E; provided, that all amounts owed to such Subject Bank by the Borrower (except liabilities which by the terms hereof survive the payment in full of the Loans and termination of this Agreement) shall be paid in full as of the date of such assignment. Upon any assignment by any Bank pursuant to this Section becoming effective, the Replacement Bank shall thereupon be deemed to be a "Bank" for all purposes of this Agreement and such Subject Bank shall thereupon cease to be a "Bank" for all purposes of this Agreement and shall have no further rights or obligations hereunder (other than pursuant to Sections 2.16, 2.17, 2.18, 2.19 or 2.20 while such Subject Bank was a Bank). ARTICLE III CONDITIONS PRECEDENT SECTION 3.1 CONDITIONS OF INITIAL LOANS. The making of the initial Revolving Loans and the Term Loans shall be subject to the prior or simultaneous fulfillment of the following conditions: (a) Documents. The Agent shall have received the following, in form and substance acceptable to the Agent, in sufficient counterparts (except for the Notes and the fee letter): (i) A Revolving Note and a Term Note, drawn to the order of each Bank in the appropriate amount, executed by a duly authorized officer (or officers) of the Borrower and dated the Closing Date. (ii) A Consent and Agreement of Guarantors in the form prescribed by the Banks and dated the Closing Date, executed by a duly authorized officer of such Guarantor. 35 (iii) Separate Amended and Restated Security Agreements, each in the form prescribed by the Agent and dated the Closing Date and executed by a duly authorized officer of the Borrower and each Guarantor. (iv) Separate Amended and Restated Pledge Agreements, each in the form prescribed by the Agent and dated the Closing Date, executed by a duly authorized officer of the Borrower, Norstan Canada, NCI and Norstan International, Inc. (v) A copy of the corporate resolution of the Borrower authorizing the execution, delivery and performance of the Borrower Loan Documents, certified as of the Closing Date by the Secretary or an Assistant Secretary of the Borrower. (vi) An incumbency certificate showing the names and titles and bearing the signatures of the officers of the Borrower authorized to execute the Borrower Loan Documents and to request Revolving Loans hereunder, certified as of the Closing Date by the Secretary or an Assistant Secretary of the Borrower (vii) A copy of the Articles of Incorporation of the Borrower with all amendments thereto, certified by the appropriate governmental official of the jurisdiction of its incorporation as of a date acceptable to the Agent. (viii) A certificate of good standing for the Borrower in the jurisdiction of its incorporation, and in the other states identified on Schedule 4.22 for which the Borrower was in good standing on the Closing Date, certified by the appropriate governmental officials as of a date acceptable to the Banks. (ix) A copy of the bylaws of the Borrower, certified as of the Closing Date by the Secretary or an Assistant Secretary of the Borrower. (x) A copy of the corporate resolution of each Guarantor authorizing the execution, delivery and performance of the Guarantor's Consent. (xi) An incumbency certificate for each Guarantor showing the names and titles and bearing the signatures of the officers of such Guarantor authorized to execute the Guarantor's Consent, certified as of the Closing Date by the Secretary or an Assistant Secretary of such Guarantor. (xii) A copy of the Articles of Incorporation of each Guarantor with all amendments thereto, certified by the appropriate governmental official of the jurisdiction of its incorporation as of a date acceptable to the Agent. (xiii) A certificate of good standing for each Guarantor in the jurisdiction of its incorporation, and in the other states identified on Schedule 4.22 for which such Guarantor was in good standing on the Closing Date, certified by the appropriate governmental officials as of a date acceptable to the Agent. 36 (xiv) A copy of the bylaws of each Guarantor, certified as of the Closing Date by the Secretary or an Assistant Secretary of such Guarantor. (xv) Insurance certificates in form and substance acceptable to the Agent and listing the Agent as loss payee thereon and as additional insured, indicating that the Borrower and each Subsidiary has obtained insurance of the type specified in this Agreement and in the Security Agreements. (xvi) An initial Borrowing Base Certificate, completed as of the Closing Date and otherwise in form and substance acceptable to the Agent. (xvii) A fee letter in favor of the Agent setting forth the fees contemplated by Section 2.12, duly executed by the Borrower. (xviii) Completed UCC searches for the Borrower and the Subsidiaries in such jurisdications deemed appropriate by the Banks and otherwise satisfactory to the Banks demonstrating that there are no Liens superior to the Liens of the Banks in the property of the Borrower. (xix) An Acknowledgment of Exiting Lender, substantially in the form of Exhibit D hereto, duly executed by the applicable Exiting Lender. (xx) A written confirmation calculating of all Obligations owing to each Bank (other than the Exiting Banks) under the Existing Credit Agreement as of the Closing Date prepared by such Bank's business group responsible for administering the Existing Loans. (xxi) The Banks shall have received draft audited consolidated financial statements of the Borrower of type specified in Section 5.1(a) for the fiscal year ending April 30, 2002. (xxii) The Agent shall have received the original Promissory Note given by Michael A. Vadini in favor of the Borrower in the amount of $1,000,000, duly endorsed in blank to the Agent pursuant to an endorsement in the form prescribed by the Agent. (xxiii) The Agent shall have received a reaffirmation of the Fleet Intercreditor Agreement in the form prescribed by the Agent, duly executed by Fleet. (xxiv) The Agent shall have received a subordination agreement in the form prescribed by the Agent, duly executed by Norstan Canada, Ltd. (xxv) The Agent shall have confirmed that, upon the funding of the Loans including the initial Revolving Loans, all accrued and unpaid interest upon the Existing Loans under the Existing Credit Agreement shall be paid in full on the Closing Date, either from the proceeds of such Loans or from cash furnished by the Borrower at Closing Date. 37 (b) Certain Fees. The Borrower shall have paid to the Agent the fees payable in accordance with the fee letter set forth in Section 2.12. (c) Opinion. The Borrower shall have requested Maslon, Edelman Borman & Brand, its counsel, to prepare a written opinion, addressed to the Banks and dated the Closing Date, covering matters acceptable to the Banks and their counsel, and such opinion shall have been delivered to the Agent in sufficient counterparts for each Bank. (d) Compliance. The Borrower shall have performed and complied with all agreements, terms and conditions contained in this Agreement required to be performed or complied with by the Borrower prior to or simultaneously with the Closing Date. (e) Other Matters. All corporate and legal proceedings relating to the Borrower and the Guarantors and all instruments and agreements in connection with the transactions contemplated by this Agreement shall be satisfactory in scope, form and substance to the Agent, the Banks and their special counsel, and the Agent shall have received all information and copies of all documents, including records of corporate proceedings, as any Bank or such special counsel may reasonably have requested in connection therewith, such documents where appropriate to be certified by proper corporate or governmental authorities. (f) Fees and Expenses. The Agent shall have received all fees and other amounts due and payable by the Borrower on or prior to the Closing Date, including the fees and expenses of the Agent or counsel to the Agent payable pursuant to Section 9.2. SECTION 3.2 CONDITIONS PRECEDENT TO ALL LOANS. The making hereunder of any Revolving Loans (including the initial Revolving Loans), Term Loans and the issuance of any Letter of Credit shall be subject to the fulfillment of the following conditions: (a) Representations and Warranties. The representations and warranties contained in Article IV shall be true and correct on and as of the Closing Date and on the date of each Revolving Loan or the date of the issuance of any Letter of Credit, with the same force and effect as if made on such date. (b) No Default. No Default or Event of Default shall have occurred and be continuing on the Closing Date and on the date of each Revolving Loan or the date of the issuance of any Letter of Credit or will exist after giving effect to the Revolving Loans made on such date or the date any Letter of Credit is issued. (c) Notices and Requests. In the case of Revolving Loans the Agent shall have received the Borrower's request for such Revolving Loans as required under Section 2.2 (except as otherwise provided in Section 2.2 (b)). 38 ARTICLE IV REPRESENTATIONS AND WARRANTIES To induce the Banks to enter into this Agreement, to grant the Revolving Commitments and to make the Loans hereunder, and to induce U.S. Bank to issue Letters of Credit, the Borrower represents and warrants to the Banks: SECTION 4.1 ORGANIZATION, STANDING, ETC. The Borrower is a corporation duly incorporated and validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to carry on its business as now conducted, to enter into this Agreement and to issue the Notes and to perform its obligations under the Borrower Loan Documents. Each Subsidiary is a corporation duly incorporated and validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all requisite corporate power and authority to carry on its business as now conducted, to enter into the Loan Documents to which it is a party and to perform its obligations under such Loan Documents. Each of the Borrower and the Subsidiaries (a) holds all certificates of authority, licenses and permits necessary to carry on its business as presently conducted in each jurisdiction in which it is carrying on such business, except where the failure to hold such certificates, licenses or permits would not have a material adverse effect on the business, operations, property, assets or condition, financial or otherwise, of the Borrower and the Subsidiaries taken as a whole, and (b) is duly qualified and in good standing as a foreign corporation in each jurisdiction in which the character of the properties owned, leased or operated by it or the business conducted by it makes such qualification necessary and the failure so to qualify would permanently preclude the Borrower or such Subsidiary from enforcing its rights with respect to any assets or expose the Borrower or such Subsidiary to any liability, which in either case would be material to the Borrower and the Subsidiaries taken as a whole. SECTION 4.2 AUTHORIZATION AND VALIDITY. The execution, delivery and performance by the Borrower and each Subsidiary of the Loan Documents to which it is a party have been duly authorized by all necessary corporate action by the Borrower or such Subsidiary, and this Agreement constitutes, and the Notes and other Loan Documents when executed will constitute, the legal, valid and binding obligations of the Borrower or each Subsidiary party thereto, enforceable against the Borrower or such Subsidiary in accordance with their respective terms, subject to limitations as to enforceability which might result from bankruptcy, insolvency, moratorium and other similar laws affecting creditors' rights generally and subject to limitations on the availability of equitable remedies. SECTION 4.3 NO CONFLICT; NO DEFAULT. The execution, delivery and performance by the Borrower or any Subsidiary of the Loan Documents to which it is a party will not (a) violate any provision of any law, statute, rule or regulation or any order, writ, judgment, injunction, decree, determination or award of any court, governmental agency or arbitrator presently in effect having applicability to the Borrower or such Subsidiary, (b) violate or contravene any provision of the Articles of Incorporation, bylaws or other organizational documents of the Borrower or such Subsidiary, or (c) result in a breach of or constitute a default under any indenture, loan or credit agreement or any other agreement, lease or instrument to which the Borrower or such Subsidiary is a party or by which it or any of its properties may be bound or result in the creation of any Lien thereunder. Neither the Borrower nor any Subsidiary is in default under or in violation of any such law, statute, rule or regulation, order, writ, judgment, injunction, decree, determination or award or (except as provided in the forgoing sentence) any such indenture, loan or credit agreement or other agreement, lease or instrument in any case in which the consequences of such default or violation could have a material adverse effect on the business, operations, properties, assets or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole. 39 SECTION 4.4 GOVERNMENT CONSENT. No order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any governmental or public body or authority is required on the part of the Borrower or any Subsidiary to authorize, or is required in connection with the execution, delivery and performance of, or the legality, validity, binding effect or enforceability of, the Loan Documents to which it is a party. SECTION 4.5 FINANCIAL STATEMENTS AND CONDITION. The Borrower's audited consolidated financial statements as at April 30, 2001 and its unaudited financial statements as at April 30, 2002 as heretofore furnished to the Banks, have been prepared in accordance with GAAP on a consistent basis (except for year-end audit adjustments as to the interim statements) and fairly present the financial condition of the Borrower and its Subsidiaries as at such dates and the results of their operations and changes in financial position for the respective periods then ended. As of the dates of such financial statements, neither the Borrower nor any Subsidiary had any material obligation, contingent liability, liability for taxes or long-term lease obligation which is not reflected in such financial statements or in the notes thereto. Other than as may have been previously disclosed to the Banks in writing, since April 30, 2002 there has been no material adverse change in the business, operations, property, assets or condition, financial or otherwise, of the Borrower and its Subsidiaries taken as a whole. SECTION 4.6 LITIGATION. Except as disclosed in Schedule 4.6 hereto, there are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any Subsidiary or any of their properties before any court or arbitrator, or any governmental department, board, agency or other instrumentality which, if determined adversely to the Borrower or such Subsidiary, would have a material adverse effect on the business, operations, property or condition (financial or otherwise) of the Borrower and the Subsidiaries taken as a whole or on the ability of the Borrower or any Subsidiary to perform its obligations under the Loan Documents. SECTION 4.7 ENVIRONMENTAL, HEALTH AND SAFETY LAWS. Except as disclosed on Schedule 4.7, there does not exist any violation by the Borrower or any Subsidiary of any applicable federal, state or local law, rule or regulation or order of any government, governmental department, board, agency or other instrumentality relating to environmental, pollution, health or safety matters which will or threatens to impose a material liability on the Borrower or a Subsidiary or which would require a material expenditure by the Borrower or such Subsidiary to cure. Except as disclosed on Schedule 4.7, neither the Borrower nor any Subsidiary has received any notice to the effect that any part of its operations or properties is not in material compliance with any such law, rule, regulation or order or notice that it or its property is the subject of any governmental investigation evaluating whether any remedial action is needed to respond to any release of any toxic or hazardous waste or substance into the environment, which non-compliance or remedial action could reasonably be expected to have a material adverse effect on the business, operations, properties, assets or condition (financial or otherwise) of the Borrower and its Subsidiaries taken as a whole. 40 SECTION 4.8 ERISA. Each Plan complies with all material applicable requirements of ERISA and the Code and with all material applicable rulings and regulations issued under the provisions of ERISA and the Code setting forth those requirements. No Reportable Event has occurred and is continuing with respect to any Plan. All of the minimum funding standards applicable to such Plans have been satisfied and there exists no event or condition which would permit the institution of proceedings to terminate any Plan under Section 4042 of ERISA. The current value of the Plans' benefits guaranteed under Title IV of ERISA does not exceed the current value of the Plans' assets allocable to such benefits. SECTION 4.9 FEDERAL RESERVE REGULATIONS. Neither the Borrower nor any Subsidiary is engaged principally or as one of its important activities in the business of extending credit for the purpose of purchasing or carrying margin stock (as defined in Regulation U of the Board). The value of all margin stock owned by the Borrower does not constitute more than 25% of the value of the assets of the Borrower. SECTION 4.10 TITLE TO PROPERTY; LEASES; LIENS; SUBORDINATION. Each of the Borrower and the Subsidiaries has (a) good and marketable title to its real properties and (b) good and sufficient title to, or valid, subsisting and enforceable leasehold interest in, its other material properties, including all real properties, other properties and assets, referred to as owned by the Borrower and its Subsidiaries in the most recent financial statement referred to in Section 4.5 (other than property disposed of since the date of such financial statements in the ordinary course of business). None of such properties owned by the Borrower or any Subsidiary is subject to a Lien, except as allowed under Section 6.12. Neither the Borrower nor any Subsidiary subordinated any of its rights under any obligation owing to it to the rights of any other person. SECTION 4.11 TAXES. Each of the Borrower and the Subsidiaries has filed all federal, state and local tax returns required to be filed and has paid or made provision for the payment of all taxes due and payable pursuant to such returns and pursuant to any assessments made against it or any of its property and all other taxes, fees and other charges imposed on it or any of its property by any governmental authority (other than taxes, fees or charges the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in accordance with GAAP have been provided on the books of the Borrower). No material tax Liens have been filed and no material claims are being asserted with respect to any such taxes, fees or charges. The charges, accruals and reserves on the books of the Borrower in respect of taxes and other governmental charges are adequate and the Borrower knows of no proposed material tax assessment against it or any Subsidiary or any basis therefor. SECTION 4.12 TRADEMARKS, PATENTS. Each of the Borrower and the Subsidiaries possesses or has the right to use all of the patents, trademarks, trade names, service marks and copyrights, and applications therefor, and all technology, know-how, processes, methods and designs used in or necessary for the conduct of its business, without known conflict with the rights of others. 41 SECTION 4.13 BURDENSOME RESTRICTIONS. Neither the Borrower nor any Subsidiary is a party to or otherwise bound by any indenture, loan or credit agreement or any lease or other agreement or instrument or subject to any charter, corporate or partnership restriction which would foreseeably have a material adverse effect on the business, properties, assets, operations or condition (financial or otherwise) of the Borrower or such Subsidiary or on the ability of the Borrower or any Subsidiary to carry out its obligations under any Loan Document. SECTION 4.14 FORCE MAJEURE. Since the date of the most recent financial statement referred to in Section 4.5, the business, properties and other assets of the Borrower and the Subsidiaries have not been materially and adversely affected in any way as the result of any fire or other casualty, strike, lockout, or other labor trouble, embargo, sabotage, confiscation, condemnation, riot, civil disturbance, activity of armed forces or act of God. SECTION 4.15 INVESTMENT COMPANY ACT. Neither the Borrower nor any Subsidiary is an "investment company" or a company "controlled" by an investment company within the meaning of the Investment Company Act of 1940, as amended. SECTION 4.16 PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Borrower nor any Subsidiary is a "holding company" or a "subsidiary company" of a holding company or an "affiliate" of a holding company or of a subsidiary company of a holding company within the meaning of the Public Utility Holding Company Act of 1935, as amended. SECTION 4.17 RETIREMENT BENEFITS. Under Statement of Financial Accounting Standard No. 106 of the Financial Accounting Standards Board and the accounting rules with respect thereto, the present value of the expected cost to the Borrower and the Subsidiaries of post-retirement medical and insurance benefits with respect to employees, as estimated by the Borrower in accordance with GAAP is not material. SECTION 4.18 FULL DISCLOSURE. Subject to the following sentence, neither the financial statements referred to in Section 4.5 nor any other certificate, written statement, exhibit or report furnished by or on behalf of the Borrower in connection with or pursuant to this Agreement contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements contained therein not misleading. Certificates or statements furnished by or on behalf of the Borrower to the Banks consisting of projections or forecasts of future results or events have been prepared in good faith and based on good faith estimates and assumptions of the management of the Borrower, and the Borrower has no reason to believe that such projections or forecasts are not reasonable. SECTION 4.19 SUBSIDIARIES. Schedule 4.19 sets forth as of the date of this Agreement a list of all Subsidiaries and the number and percentage of the shares of each class of capital stock owned beneficially or of record by the Borrower or any Subsidiary therein, and the jurisdiction of incorporation of each Subsidiary. Except as otherwise indicated in Schedule 4.19, all shares of each Subsidiary owned by the Borrower or by any other Subsidiary are validly issued and fully paid and nonassessable. SECTION 4.20 REGISTERED INTELLECTUAL PROPERTY. Schedule 4.20 hereto lists all patents, trademarks and copyrights owned by the Borrower or any Guarantor as of the Closing Date and recorded with the U.S. Office of Patents and Trademarks or U.S. Office of Copyrights, as applicable. 42 Section 4.21 DORMANT SUBSIDIARIES. None of the Dormant Subsidiaries has any business operations or any liabilities or assets having a book value in excess of $50,000. Section 4.22 HIGH REVENUE STATES. Schedule 4.22 hereto lists, for the Borrower and each Guarantor, each state in which such Borrower's or such Guarantor's business operations generated 5% or more of the Borrower's consolidated gross revenues as of the Closing Date. ARTICLE V AFFIRMATIVE COVENANTS Until any obligation of the Banks hereunder to make the Loans, and any obligation of U.S. Bank to issue the Letters of Credit shall have expired or been terminated and the Notes and all of the other Obligations have been paid in full, and no amount is available to be drawn under the under the Letters of Credit, unless the Majority Banks shall otherwise consent in writing: SECTION 5.1 FINANCIAL STATEMENTS AND REPORTS. The Borrower will furnish to the Banks: (a) As soon as available and in any event within 90 days after the end of each fiscal year of the Borrower, (i) the consolidated financial statements of the Borrower and the Subsidiaries consisting of at least statements of operations, cash flows and shareholders' equity and a consolidated balance sheet as at the end of such year, setting forth in each case in comparative form corresponding figures from the previous annual audit, and with respect to the consolidated statements, certified without qualification by Deloitte & Touche or other independent certified public accountants of recognized national standing selected by the Borrower and acceptable to the Agent and (ii) a statement of the Borrower's Contingent Obligations as at the end of such fiscal year. (b) Together with the audited financial statements required under Section 5.1 (a)(i), a statement by the accounting firm performing such audit to the effect that it has reviewed this Agreement and that in the course of performing its examination nothing came to its attention that caused it to believe that any Default or Event of Default exists, or, if such Default or Event of Default exists, describing its nature. (c) As soon as available and in any event within 30 days after the end of each calendar month (or 45 days in the case of the last month of any fiscal quarter), (i) unaudited consolidated statements of operations for the Borrower and the Subsidiaries for such month and for the year to date and statements of cash flows for the period from the beginning of such fiscal year to the end of such month and a consolidated balance sheet of the Borrower and the Subsidiaries as at the end of such month, setting forth in comparative form (i) figures for the corresponding period for the preceding fiscal year and (ii) figures for the corresponding period appearing in the budgeted financial statements furnished by the Borrower to the Banks as of the Closing Date, each accompanied by a certificate signed by the chief financial officer of the Borrower stating that such financial statements present fairly the financial condition of the Borrower and the Subsidiaries and that the same have been prepared in accordance with GAAP. 43 (d) As soon as practicable and in any event within 45 days after the end of each fiscal quarter of the Borrower (or, with respect to its fiscal quarter ended on or about April 20, 2002, by July 31, 2002), a Compliance Certificate in the form of Exhibit E hereto signed by the chief financial officer of the Borrower demonstrating in reasonable detail compliance (or noncompliance, as the case may be) with Sections 6.13, 6.14, 6.15, 6.16, 6.17 and 6.18 as at the end of such fiscal quarter and stating that as at the end of such fiscal quarter there did not exist any Default or Event of Default or, if such Default or Event of Default existed, specifying the nature and period of existence thereof and what action the Borrower proposes to take with respect thereto. (e) As soon as practicable and in any event within 60 days after the beginning of each fiscal year of the Borrower, statements of forecasted consolidated income for the Borrower and the Subsidiaries for each fiscal quarter in such fiscal year and a forecasted consolidated balance sheet of the Borrower and the Subsidiaries, together with supporting assumptions, as at the end of each fiscal quarter, all in reasonable detail and reasonably satisfactory in scope to Majority Banks. (f) Within one Business Day of any officer of the Borrower becoming aware of any Default or Event of Default, a notice describing the nature thereof and what action the Borrower proposes to take with respect thereto. (g) Within one Business Day of any officer of the Borrower becoming aware of the occurrence, with respect to any Plan, of any Reportable Event or any Prohibited Transaction, a notice specifying the nature thereof and what action the Borrower proposes to take with respect thereto, and, when received, copies of any notice from PBGC of intention to terminate or have a trustee appointed for any Plan. (h) Promptly upon the mailing or filing thereof, copies of all financial statements, reports and proxy statements mailed to the Borrower's shareholders, and copies of all registration statements, periodic reports and other documents filed with the Securities and Exchange Commission (or any successor thereto) or any national securities exchange. (i) Promptly upon their distribution, copies of all financial statements, reports and proxy statements which the Borrower or any Subsidiary shall have sent to its stockholders. (j) Promptly after the sending or filing thereof, copies of all regular and periodic financial reports (including all Form 10-K and Form 10-Q reports) which the Borrower or any Subsidiary shall file with the Securities and Exchange Commission or any national securities exchange. (k) As soon as practicable and in any event within 30 days after the end of each month, a Borrowing Base Certificate signed by an appropriate financial officer of the Borrower, reporting the Borrowing Base as of the last day of the month just ended, and on the first Business Day of each week updated information with respect to the gross amount of Accounts together with a calculation of the amount available for borrowing, certified by an appropriate financial officer of the Borrower. 44 (l) From time to time, such other information regarding the business, operation and financial condition of the Borrower and the Subsidiaries as any Bank may reasonably request. SECTION 5.2 CORPORATE EXISTENCE. The Borrower will maintain, and cause each Subsidiary to maintain, its corporate existence in good standing under the laws of its jurisdiction of incorporation and its qualification to transact business in each jurisdiction where failure so to qualify would permanently preclude the Borrower or such Subsidiary from enforcing its rights with respect to any material asset or would expose the Borrower or such Subsidiary to any material liability; provided, however, that nothing herein shall prohibit the merger or liquidation of any Subsidiary allowed under Section 6.1. SECTION 5.3 INSURANCE. The Borrower shall maintain, and shall cause each Subsidiary to maintain, with financially sound and reputable insurance companies such insurance as may be required by law and such other insurance in such amounts and against such hazards as is customary in the case of reputable firms engaged in the same or similar business and similarly situated. SECTION 5.4 PAYMENT OF TAXES AND CLAIMS. The Borrower shall file, and cause each Subsidiary to file, all tax returns and reports which are required by law to be filed by it and will pay, and cause each Subsidiary to pay, before they become delinquent all taxes, assessments and governmental charges and levies imposed upon it or its property and all claims or demands of any kind (including but not limited to those of suppliers, mechanics, carriers, warehouses, landlords and other like Persons) which, if unpaid, might result in the creation of a Lien upon its property; provided that the foregoing items need not be paid if they are being contested in good faith by appropriate proceedings, and as long as the Borrower's or such Subsidiary's title to its property is not materially adversely affected, its use of such property in the ordinary course of its business is not materially interfered with and adequate reserves with respect thereto have been set aside on the Borrower's or such Subsidiary's books in accordance with GAAP. SECTION 5.5 INSPECTION. The Borrower shall permit any Person designated by the Agent or any Bank to visit and inspect any of the properties, corporate books and financial records of the Borrower and the Subsidiaries, to examine and to make copies of the books of accounts and other financial records of the Borrower and the Subsidiaries, and to discuss the affairs, finances and accounts of the Borrower and the Subsidiaries with, and to be advised as to the same by, its officers at such reasonable times and intervals as the Agent or such Bank may designate. So long as no Event of Default exists, such visits, inspections, audits and examinations shall be at the expense of the Agent and the Banks, but any such visits, inspections, audits and examinations shall be at the expense of the Borrower if such visits, inspections, audits and examinations (a) are made while any Event of Default is continuing, or (b) constitute the semi-annual collateral audit to be conducted by the Agent. 45 SECTION 5.6 MAINTENANCE OF PROPERTIES. The Borrower will maintain, and cause each Subsidiary to maintain, its properties used or useful in the conduct of its business in good condition, repair and working order, and supplied with all necessary equipment, and make all necessary repairs, renewals, replacements, betterments and improvements thereto, to the extent and as may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times. SECTION 5.7 BOOKS AND RECORDS. The Borrower will keep, and will cause each Subsidiary to keep, adequate and proper records and books of account in which full and correct entries will be made of its dealings, business and affairs. SECTION 5.8 COMPLIANCE. The Borrower will comply, and will cause each Subsidiary to comply, in all material respects with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject; provided, however, that failure so to comply shall not be a breach of this covenant if such failure does not have, or is not reasonably expected to have, a materially adverse effect on the properties, business, prospects or condition (financial or otherwise) of the Borrower or such Subsidiary and the Borrower or such Subsidiary is acting in good faith and with reasonable dispatch to cure such noncompliance. SECTION 5.9 NOTICE OF LITIGATION. The Borrower will give prompt written notice to the Agent of the commencement of any action, suit or proceeding before any court or arbitrator or any governmental department, board, agency or other instrumentality affecting the Borrower or any Subsidiary or any property of the Borrower or a Subsidiary or to which the Borrower or a Subsidiary is a party in which an adverse determination or result could have a material adverse effect on the business, operations, property or condition (financial or otherwise) of the Borrower and the Subsidiaries taken as a whole or on the ability of the Borrower or any Subsidiary to perform its obligations under this Agreement and the other Loan Documents, stating the nature and status of such action, suit or proceeding. SECTION 5.10 ERISA. The Borrower will maintain, and cause each Subsidiary to maintain, each Plan in compliance with all material applicable requirements of ERISA and of the Code and with all material applicable rulings and regulations issued under the provisions of ERISA and of the Code and will not and not permit any of the ERISA Affiliates to (a) engage in any transaction in connection with which the Borrower or any of the ERISA Affiliates would be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code, in either case in an amount exceeding $50,000, (b) fail to make full payment when due of all amounts which, under the provisions of any Plan, the Borrower or any ERISA Affiliate is required to pay as contributions thereto, or permit to exist any accumulated funding deficiency (as such term is defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, with respect to any Plan in an aggregate amount exceeding $100,000 or (c) fail to make any payments in an aggregate amount exceeding $100,000 to any Multiemployer Plan that the Borrower or any of the ERISA Affiliates may be required to make under any agreement relating to such Multiemployer Plan or any law pertaining thereto. 46 SECTION 5.11 ENVIRONMENTAL MATTERS; REPORTING. The Borrower will observe and comply with, and cause each Subsidiary to observe and comply with, all laws, rules, regulations and orders of any government or government agency relating to health, safety, pollution, hazardous materials or other environmental matters to the extent non-compliance could result in a material liability or otherwise have a material adverse effect on the Borrower and the Subsidiaries taken as a whole. The Borrower will give the Agent prompt written notice of any violation as to any environmental matter by the Borrower or any Subsidiary and of the commencement of any judicial or administrative proceeding relating to health, safety or environmental matters (a) in which an adverse determination or result could result in the revocation of or have a material adverse effect on any operating permits, air emission permits, water discharge permits, hazardous waste permits or other permits held by the Borrower or any Subsidiary which are material to the operations of the Borrower or such Subsidiary, or (b) which will or threatens to impose a material liability on the Borrower or such Subsidiary to any Person or which will require a material expenditure by the Borrower or such Subsidiary to cure any alleged problem or violation. SECTION 5.12 LANDLORD WAIVERS. Upon the written request of the Agent, the Borrower shall undertake its commercially reasonable best efforts to obtain, and to cause its Subsidiaries that have granted security interests to the Agent to obtain, the execution of landlord waivers in form and substance acceptable to the Agent by the lessor with respect to any of the Borrower's or such Subsidiaries' business premises (each, a "Lessor"), whereby each such Lessor would, among other things, acknowledge the security interest in favor of the Agent and the Banks in the Borrower's or such Subsidiaries' assets and agree to allow the Agent and the Banks to have access to the leased premises in order to enforce such security interest or protect such collateral. The foregoing obligations of the Borrower are in addition to its obligations under the Security Agreements. SECTION 5.13 NNS NOTE COLLATERAL. (i) The Borrower acknowledges and confirms that, upon the execution and delivery to the Borrower thereof by the obligors thereon, the NNS Note Collateral constitutes "Collateral" under and within the meaning of the Borrower's Security Agreement. Except as the Agent may otherwise agree, the Borrower shall cause all certificates, instruments and other agreements representing or evidencing NNS Note Collateral received by the Borrower or any Subsidiary to be delivered to the Agent promptly upon receipt thereof. All such certificates, instruments and agreements shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to the Agent. After the execution and delivery thereof, neither the Borrower nor any Subsidiary shall forgive, cancel, compromise, modify, amend or extend the time for payment of, or waive any default under, any of the NNS Note Collateral, or modify or amend, or waive any default under, any agreement with respect to the NNS Note Collateral, or consent to or acquiesce in any of the foregoing, without in each case the prior written consent of the Banks. (ii) Notwithstanding whether an Event of Default has occurred, any and all cash paid, payable or otherwise distributed in respect of principal of, or in exchange for, any NNS Note Collateral shall be immediately paid to the Agent to apply, to the Obligations in the manner set forth Section 2.6(d). Such proceeds of NNS Note Collateral shall, if received by the Borrower or any Subsidiary, be received in trust for the benefit of the Agent, be segregated from the other property or funds of the Borrower or such Subsidiary, and be forthwith delivered to the Agent in the same form as so received (with any necessary endorsement or assignment). 47 SECTION 5.14 PLEDGE OF ASSETS IN PERMITTED ACQUISITIONS. Unless otherwise agreed by the Majority Banks, immediately upon the closing of a Permitted Acquisition, the Borrower, any Subsidiary and any Person acquired in such Permitted Acquisition shall execute and deliver to the Agent documents and instruments in the form reasonably prescribed by the Agent (i) to pledge to the Agent for the benefit of the Banks the stock or other equity interests of any Person acquired in such Permitted Acquisition and the assets of such Person, in each case as security for the Obligations and (ii) whereunder any Person acquired in such Acquisition shall absolutely and unconditionally guaranty the Obligations. SECTION 5.15 PLEDGE OF ASSETS IN AND GUARANTY OF NORSTAN CANADA. Upon the occurrence of any Event of Default, at the request of the Majority Banks, the Borrower will cause Norstan Canada to execute and deliver to the Agent documents and instruments in the form reasonably prescribed by the Agent (i) to pledge to the Agent for the benefit of the Banks the assets of such Person as security for the Obligations and (ii) whereunder such Person shall absolutely and unconditionally guaranty the Obligations. SECTION 5.16 GOOD STANDING CERTIFICATES. Within 30 days after the Closing Date, the Borrower will furnish to the Agent good standing certificates or the equivalent for each Borrower and each Guarantor in each state identified on Schedule 4.22 hereof for which the Borrower did not furnish to the Agent a good standing certificate or the equivalent on the Closing Date. SECTION 5.17 REGISTERED INTELLECTUAL PROPERTY. Within 30 days of any request therefor by the Agent, the Borrower will execute, or cause to be executed, and deliver to the Agent, collateral assignment documents in form and substance acceptable to the Agent sufficient to cover all patents, trademarks and copyrights listed on Schedule 4.22 hereto that are not subject to an existing collateral assignment document in favor of the Agent. ARTICLE VI NEGATIVE COVENANTS Until any obligation of the Banks hereunder to make the Loans, and any obligation of U.S. Bank to issue the Letters of Credit shall have expired or been terminated and the Notes and all of the other Obligations have been paid in full, and no amount is available to be drawn under the under the Letters of Credit, unless the Majority Banks shall otherwise consent in writing: SECTION 6.1 MERGER. The Borrower will not merge or consolidate or enter into any analogous reorganization or transaction with any Person or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution) or permit any Subsidiary to do any of the foregoing; provided, however, (a) any Subsidiary may be merged with or liquidated into the Borrower or any Guarantor (if the Borrower or such Guarantor is the surviving corporation) and (b) any Person acquired in a Permitted Acquisition may be merged or liquidated into the Borrower or any Guarantor (if the Borrower or such Guarantor is the surviving corporation). 48 SECTION 6.2 SALE OF ASSETS. The Borrower will not, and will not permit any Subsidiary to, sell, transfer, lease or otherwise convey all or any substantial part of its assets except for: (a) sales and leases of Inventory in the ordinary course of business or ordinary course sales of obsolete or worn-out equipment; (b) sales or transfers by a Subsidiary to the Borrower or a Guarantor; (c) other sales or transfers of assets by the Borrower or a Subsidiary so long as (i) such sales or transfers do not exceed $1,000,000 in the aggregate in any fiscal year and (ii) no Default or Event of Default is then continuing or would arise therefrom. SECTION 6.3 PLANS. The Borrower will not permit, and will not allow any Subsidiary to permit, any event to occur or condition to exist which would permit any Plan to terminate under any circumstances which would cause the Lien provided for in Section 4068 of ERISA to attach to any assets of the Borrower or any Subsidiary; and the Borrower will not permit the underfunded amount of Plan benefits guaranteed under Title IV of ERISA to exceed $100,000. SECTION 6.4 CHANGE IN NATURE OF BUSINESS. The Borrower will not, and will not permit any Subsidiary to, make any material change in the nature of the business of the Borrower or such Subsidiary, as carried on at the date hereof, except for changes in business related to and necessitated by changes in the communications and information technology industries generally. SECTION 6.5 SUBSIDIARIES. Except for Subsidiaries acquired in Permitted Acquisitions, after the date of this Agreement, the Borrower will not, and will not permit any Subsidiary to, form or acquire any corporation or limited liability company which would thereby become a Subsidiary. SECTION 6.6 NEGATIVE PLEDGES; SUBSIDIARY RESTRICTIONS. The Borrower will not, and will not permit any Subsidiary to, enter into any agreement, bond, note or other instrument with or for the benefit of any Person other than the Banks which would prohibit the Borrower or such Subsidiary from granting, or otherwise limit the ability of the Borrower or such Subsidiary to grant, to the Banks any Lien on any assets or properties of the Borrower or such Subsidiary (except as may be provided in any documents evidencing or securing Indebtedness existing on the date hereof secured by NFS Lease Accounts or Norstan Canada Lease Accounts and related leases, equipment and servicing arrangements). The Borrower will not permit any Subsidiary to place or allow any restriction, directly or indirectly, on the ability of such Subsidiary to (a) pay dividends or any distributions on or with respect to such Subsidiary's capital stock or (b) make loans or other cash payments to the Borrower. SECTION 6.7 RESTRICTED PAYMENTS. The Borrower will not make any Restricted Payments. 49 SECTION 6.8 SUBORDINATED DEBT. The Borrower will not, and will not permit any Subsidiary to, (a) make any scheduled payment of the principal of or interest on any Subordinated Debt which would be prohibited by the terms of such Subordinated Debt and any related subordination agreement; (b) directly or indirectly make any prepayment on or purchase, redeem or defease any Subordinated Debt or offer to do so (whether such prepayment, purchase or redemption, or offer with respect thereto, is voluntary or mandatory); (c) amend or cancel the subordination provisions applicable to any Subordinated Debt; (d) take or omit to take any action if as a result of such action or omission the subordination of such Subordinated Debt, or any part thereof, to the Obligations might be terminated, impaired or adversely affected; or (e) omit to give the Agent prompt notice of any notice received from any holder of Subordinated Debt, or any trustee therefor, or of any default under any agreement or instrument relating to any Subordinated Debt by reason whereof such Subordinated Debt might become or be declared to be due or payable. SECTION 6.9 INVESTMENTS. The Borrower will not, and will not permit any Subsidiary to, acquire for value, make, have or hold any Investments, except: (a) Investments existing on the date of this Agreement and listed in Schedule 6.9 hereto, but not any renewal or extension thereof (except for renewals or extensions of Investments reasonably determined by the Borrower to be not material in amount). (b) Travel advances to management personnel and employees in the ordinary course of business. (c) Investments in readily marketable direct obligations issued or guaranteed by the United States or any agency thereof and supported by the full faith and credit of the United States. (d) Certificates of deposit or bankers' acceptances issued by any commercial bank organized under the laws of the United States or any State thereof which has (i) combined capital and surplus of at least $100,000,000, and (ii) a credit rating with respect to its unsecured indebtedness from a nationally recognized rating service that is satisfactory to the Agent. (e) Commercial paper given the highest or next to highest rating by a nationally recognized rating service. (f) Repurchase agreements relating to securities issued or guaranteed as to principal and interest by the United States of America. (g) Other readily marketable Investments in debt securities and money market funds which are reasonably acceptable to the Majority Banks. (h) Any Investment by the Borrower or any Subsidiary in the stock of any Subsidiary. (i) Loans and advances by the Borrower to any Guarantor made in the ordinary course of business to finance the normal operations of such Guarantor, provided that no Event of Default is then continuing or would result therefrom. (j) Loans and advances by the Borrower to Norstan Canada made in the ordinary course of business to finance the normal operations of Norstan Canada, provided that (i) no Event of Default is then continuing or would result therefrom and (ii) the principal amount of such loans and advances does not exceed $2,000,000 at any time. 50 (k) Loans and advances by Norstan Canada to the Borrower made in the ordinary course of business, provided that (i) no Event of Default is then continuing or would arise therefrom and (ii) such loans and advances have been subordinated to the Obligations pursuant to the Subordination Agreement (Norstan Canada). (l) Indebtedness of any Subsidiary to the Borrower on account of unpaid dividends owed by that Subsidiary to the Borrower. (m) Indebtedness of employees to the Borrower arising under the Borrower's employee personal computer purchase program in the ordinary course of business, so long as the aggregate amount of such Indebtedness outstanding at any one time does not exceed $50,000. (n) Advances in the form of progress payments, prepaid rent or security deposits, each in the ordinary course of business. (o) The NNS Note Collateral and other promissory notes or other amounts payable to the Borrower or any Subsidiary by a Person other than the Borrower or a Subsidiary and in existence on the date hereof. (p) Permitted Acquisitions. (q) Other Investments in an aggregate amount not exceeding $1,000,000 outstanding at any time. provided, however, that any Investments under clauses (c), (d), (e) or (f) above shall mature within one year of the acquisition thereof by the Borrower or a Subsidiary. SECTION 6.10 INDEBTEDNESS. The Borrower will not, and will not permit any Subsidiary to, incur, create, issue, assume or suffer to exist any Indebtedness, except: (a) The Obligations. (b) Indebtedness existing on the date of this Agreement (other than Indebtedness of the type specified in Section 6.10(c)) and disclosed on Schedule 6.10(a) hereto, but not including any extension or refinancing thereof. (c) Indebtedness existing on the date hereof secured by NFS Lease Accounts or Norstan Canada Lease Accounts and related leases, equipment and servicing arrangements and disclosed on Schedule 6.10(b), but not including any extension or refinancing thereof. (d) Indebtedness secured by Liens permitted under Section 6.11(g) hereof, provided that the principal amount of Indebtedness secured by Liens permitted by Section 6.11(g) shall not exceed (i) $3,000,000 at any time on or before April 30, 2003 and (ii) $5,000,000 at any time after April 30, 2003. 51 (e) Indebtedness of the Borrower under lines of credit for foreign exchange transactions and for wire transfers and daylight overdrafts. (f) Subordinated Indebtedness and renewals thereof. (g) Contingent Obligations permitted under Section 6.12. (h) Indebtedness incurred as seller financing of Permitted Acquisitions, provided, that (i) such Indebtedness is unsecured, and (ii) such Indebtedness is Subordinated Debt. (i) Current liabilities, other than for borrowed money, incurred in the ordinary course of business and calculated in accordance with GAAP. (j) Intercompany Indebtedness of the type specified in Sections 6.9(i), (j), (k) and (l). (k) Other unsecured Indebtedness in an aggregate principal amount not exceeding $1,000,000 outstanding at any time. SECTION 6.11 LIENS. The Borrower will not, and will not permit any Subsidiary to, create, incur, assume or suffer to exist any Lien, or enter into, or make any commitment to enter into, any arrangement for the acquisition of any property through conditional sale, lease-purchase or other title retention agreements, with respect to any property now owned or hereafter acquired by the Borrower or a Subsidiary, except: (a) Liens existing on the date of this Agreement and disclosed on Schedule 6.11 hereto. (b) Deposits or pledges to secure payment of workers' compensation, unemployment insurance, old age pensions or other social security obligations, in the ordinary course of business of the Borrower or a Subsidiary. (c) Liens for taxes, fees, assessments and governmental charges not delinquent or to the extent that payment therefor shall not at the time be required to be made in accordance with the provisions of Section 5.4. (d) Liens of carriers, warehousemen, mechanics and materialmen, and other like Liens arising in the ordinary course of business, for sums not due or to the extent that payment therefor shall not at the time be required to be made in accordance with the provisions of Section 5.4. (e) Liens incurred or deposits or pledges made or given in connection with, or to secure payment of, indemnity, performance or other similar bonds. 52 (f) Encumbrances in the nature of zoning restrictions, easements and rights or restrictions of record on the use of real property and landlord's Liens under leases on the premises rented, which do not materially detract from the value of such property or impair the use thereof in the business of the Borrower or a Subsidiary. (g) The interest of any lessor under any Capitalized Lease entered into after the Closing Date or purchase money Liens on property acquired after the Closing Date; provided, that, (i) the Indebtedness secured thereby is otherwise permitted by this Agreement and (ii) such Liens are limited to the property acquired and do not secure Indebtedness other than the related Capitalized Lease Obligations or the purchase price of such property. (h) Liens arising out of a judgment or judgments against the Borrower or any Subsidiary for the payment of money in an aggregate amount not exceeding $300,000 with respect to which an appeal is being prosecuted and a stay of execution pending such appeal has been secured. (i) Liens against the NFS Lease Accounts, Norstan Canada Lease Accounts and related leases, equipment and servicing arrangements securing any financing permitted under Section 6.10(c). SECTION 6.12 CONTINGENT OBLIGATIONS. The Borrower will not, and will not permit any Subsidiary to, be or become liable on any Contingent Obligations except: (a) Contingent Obligations (other than Guaranties set forth in Section 6.12(b) hereof) existing on the date of this Agreement and described on Schedule 6.12(a) hereto. (b) Guaranties by the Borrower guaranties existing on the date of this Agreement with respect to the Indebtedness permitted by Section 6.10(c) and described on Schedule 6.12(b) hereto. (c) normal product warranties and indemnities in favor of suppliers and customers entered into in the ordinary course of business and relating to inventory sold by the Borrower or a Subsidiary. SECTION 6.13 OPERATING LEASES. The Borrower will not, and will not permit any Subsidiary to become liable for, whether directly or by assignment, for rent or other amounts (exclusive of customary reimbursements for taxes, insurance or maintenance expenses) under any Operating Leases in an amount exceeding, on a consolidated basis, $9,000,000 in any fiscal year. SECTION 6.14 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 the following amounts for the following periods: (a) $10,000,000 during the fiscal year ending on or about April 30, 2003, (b) $11,000,000 during the fiscal year ending on or about April 30, 2004 and (c) $12,000,000 during the fiscal year ending on or about April 30, 2005. 53 SECTION 6.15 TANGIBLE NET WORTH. The Borrower will not permit the Tangible Net Worth to be less than: (i) as of the last day of any fiscal quarter during the fiscal year ending April 30, 2003, $12,500,000; (ii) as of the last day of any fiscal quarter during the fiscal year ending April 30, 2004 and each fiscal year thereafter, the greater of (A) the Tangible Net Worth required to be maintained by the Borrower to be in compliance with this Section 6.15 as of the last day of the preceding fiscal year and (B) 95 percent (95%) of the Borrower's Tangible Net Worth as at the last day of the preceding fiscal year, provided that, the minimum amount of Tangible Net Worth required to be maintained pursuant to this Section shall be automatically and permanently increased by the amount of the Net Proceeds received by the Borrower in connection with the issuance of any equity securities of the Borrower from and after the Closing Date. SECTION 6.16 QUARTERLY EARNINGS. The Borrower shall not permit EBT, calculated on a cumulative basis for the two preceding fiscal quarters, to be less than $0.00 as of the last day of any fiscal quarter (commencing with the last day of the fiscal quarter ending on or about October 31, 2002). SECTION 6.17 FIXED CHARGE COVERAGE RATIO. The Borrower will not permit the Fixed Charge Coverage Ratio to be less than (a) 1.20 to 1.00 as of the last day of the Borrower's fiscal quarters ending on or about January 31, 2003 and April 30, 2003 and (b) 1.30 to 1.00 as of the last day of each other fiscal quarter of the Borrower. SECTION 6.18 CASH FLOW LEVERAGE RATIO. The Borrower will not permit the Cash Flow Leverage Ratio at any time to be more than: (i) 2.25 to 1.00 as of the last day of the Borrower's fiscal quarters ending on or about July 31, 2002 and October 31, 2002, (ii) 2.00 to 1.00 as of the last day of the Borrower's fiscal quarter ending on or about January 31, 2003, and (iii) 1.75 to 1.00 as of the last day of the Borrower's fiscal quarter ending on or about April 30, 2003 and each fiscal quarter ending thereafter. SECTION 6.19 LOAN PROCEEDS. The Borrower will not, and will not permit any Subsidiary to, use any part of the proceeds of any Loan directly or indirectly, and whether immediately, incidentally or ultimately, (a) to purchase or carry margin stock (as defined in Regulation U of the Board) or to extend credit to others for the purpose of purchasing or carrying margin stock or to refund Indebtedness originally incurred for such purpose or (b) for any purpose which entails a violation of, or which is inconsistent with, the provisions of Regulations G, U or X of the Board. SECTION 6.20 INVENTORY VALUE. As of any date of determination, the Borrower will not, and will not permit any Subsidiary to, permit any Inventory of the Borrower or any Subsidiary having an aggregate value at cost in excess of 30% of the aggregate value at cost of all of the Inventory of the Borrower and the Subsidiaries to be stored at a location other than the Primary Distribution Facilities. 54 ARTICLE VII EVENTS OF DEFAULT AND REMEDIES SECTION 7.1 EVENTS OF DEFAULT. The occurrence of any one or more of the following events shall constitute an Event of Default: (a) The Borrower shall fail to make when due, whether by acceleration or otherwise, any payment of principal of or interest on any Note or any other Obligation required to be made to the Agent or any Bank pursuant to this Agreement. (b) Any representation or warranty made by or on behalf of the Borrower, any Subsidiary or any Guarantor in this Agreement or any other Loan Document or by or on behalf of the Borrower, any Subsidiary or any Guarantor in any certificate, statement, report or document herewith or hereafter furnished to any Bank or the Agent pursuant to this Agreement or any other Loan Document shall prove to have been false or misleading in any material respect on the date as of which the facts set forth are stated or certified. (c) The Borrower shall fail to comply with Sections 2.6, 5.2, 5.3, 5.12, 5.13 or 5.14 hereof, or any Section of Article VI hereof. (d) The Borrower shall fail to comply with any other agreement, covenant, condition, provision or term contained in this Agreement (other than those hereinabove set forth in this Section 7.1) and such failure to comply shall continue for 30 calendar days after whichever of the following dates is the earliest: (i) the date the Borrower gives notice of such failure to the Banks, (ii) the date the Borrower should have given notice of such failure to the Banks pursuant to Section 5.1, or (iii) the date the Agent or any Bank gives notice of such failure to the Borrower. (e) The Borrower, any Subsidiary or any Guarantor shall become insolvent or shall generally not pay its debts as they mature or shall apply for, shall consent to, or shall acquiesce in the appointment of a custodian, trustee or receiver of the Borrower, such Subsidiary or such Guarantor or for a substantial part of the property thereof or, in the absence of such application, consent or acquiescence, a custodian, trustee or receiver shall be appointed for the Borrower, a Subsidiary or a Guarantor or for a substantial part of the property thereof and shall not be discharged within 30 days, or the Borrower, any Subsidiary or a Guarantor shall make an assignment for the benefit of creditors. (f) Any bankruptcy, reorganization, debt arrangement or other proceedings under any bankruptcy or insolvency law shall be instituted by or against the Borrower, a Subsidiary or any Guarantor, and, if instituted against the Borrower, a Subsidiary or any Guarantor, shall have been consented to or acquiesced in by the Borrower, such Subsidiary or such Guarantor, or shall remain undismissed for 30 days, or an order for relief shall have been entered against the Borrower, such Subsidiary or such Guarantor. (g) Any dissolution or liquidation proceeding not permitted by Section 6.1 shall be instituted by or against the Borrower or a Subsidiary or any dissolution or liquidation proceeding shall be instituted by or against any Guarantor, and, if instituted against the Borrower, any Subsidiary or any Guarantor, shall be consented to or acquiesced in by the Borrower, such Subsidiary or such Guarantor or shall remain for 45 days undismissed. 55 (h) A judgment or judgments for the payment of money in excess of the sum of $1,000,000 in the aggregate shall be rendered against the Borrower or a Subsidiary and the Borrower or such Subsidiary shall not discharge the same or provide for its discharge in accordance with its terms, or procure a stay of execution thereof, prior to any execution on such judgment by such judgment creditor, within 30 days from the date of entry thereof, and within said period of 30 days, or such longer period during which execution of such judgment shall be stayed, appeal therefrom and cause the execution thereof to be stayed during such appeal. (i) The maturity of any material Indebtedness of the Borrower or a Subsidiary shall be accelerated by reason of default, or the Borrower or a Subsidiary shall fail to pay any such material Indebtedness when due (after the lapse of any applicable grace period) or, in the case of such Indebtedness payable on demand, when demanded (after the lapse of any applicable grace period), or any event shall occur or condition shall exist shall continue for more than the period of grace, if any, applicable thereto and shall have the effect of causing, or permitting the holder of any such Indebtedness or any trustee or other Person acting on behalf of such holder to cause, such material Indebtedness to become due prior to its stated maturity or to realize upon any collateral given as security therefor. For purposes of this Section, Indebtedness of the Borrower or a Subsidiary shall be deemed "material" if it exceeds $1,000,000 as to any item of Indebtedness or in the aggregate for all items of Indebtedness with respect to which any of the events described in this Section 7.1(i) has occurred. (j) Any execution or attachment shall be issued whereby any substantial part of the property of the Borrower or any Subsidiary shall be taken or attempted to be taken and the same shall not have been vacated or stayed within 30 days after the issuance thereof. (k) Any Guarantor shall repudiate or purport to revoke its Guaranty, or any Guaranty for any reason shall cease to be in full force and effect as to the Guarantor executing and delivering the same or shall be judicially declared null and void as to such Guarantor. (l) 50% or more of any class of the capital stock of the Borrower shall come to be owned by a single Person, or by two or more Persons acting together in holding such stock for a common purpose. (m) The Borrower or a Subsidiary shall cease to be the sole shareholder of the stock of any Guarantor or of Norstan Canada. (n) Any Security Document shall, at any time, cease to be in full force and effect or shall be judicially declared null and void, or the validity or the enforceability thereof shall be contested by the Borrower or any Guarantor. 56 (o) Any default or event of default (however denominated) shall occur under any Security Document. SECTION 7.2 REMEDIES. If (a) any Event of Default described in Sections 7.1(e), (f) or (g) shall occur with respect to the Borrower, the Revolving Commitments shall automatically terminate (except as provided in Section 2.2(b)) and the Notes and all other Obligations shall automatically become immediately due and payable, the Borrower shall without demand pay into the Holding Account an amount equal to the aggregate face amount of each Letter of Credit; or (b) any other Event of Default shall occur and be continuing, then, upon receipt by the Agent of a request in writing from the Majority Banks, the Agent shall (i) declare the Revolving Commitments terminated, whereupon the Revolving Commitments shall terminate (except as provided in Section 2.2(b)), (ii) declare the outstanding unpaid principal balance of the Notes, the accrued and unpaid interest thereon and all other Obligations to be forthwith due and payable, whereupon the Notes, all accrued and unpaid interest thereon and all such Obligations shall immediately become due and payable, in each case without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, anything in this Agreement or in the Notes to the contrary notwithstanding, (iii) demand that the Borrower pay into the Holding Account an amount equal to the aggregate face amount of each Letter of Credit, whereupon the Borrower shall pay such amount, (v) exercise all rights and remedies under any of the Loan Documents, and (vi) enforce all rights and remedies under any applicable law. SECTION 7.3 OFFSET. In addition to the remedies set forth in Section 7.2, upon the occurrence of any Event of Default and thereafter while the same be continuing, the Borrower hereby irrevocably authorizes each Bank to set off any Obligations owed to such Bank against all deposits and credits of the Borrower with, and any and all claims of the Borrower against, such Bank. Such right shall exist whether or not such Bank shall have made any demand hereunder or under any other Loan Document, whether or not the Obligations, or any part thereof, or deposits and credits held for the account of the Borrower is or are matured or unmatured, and regardless of the existence or adequacy of any collateral, guaranty or any other security, right or remedy available to such Bank or the Banks. Each Bank agrees that, as promptly as is reasonably possible after the exercise of any such setoff right, it shall notify the Borrower of its exercise of such setoff right; provided, however, that the failure of such Bank to provide such notice shall not affect the validity of the exercise of such setoff rights. Nothing in this Agreement shall be deemed a waiver or prohibition of or restriction on any Bank to all rights of banker's Lien, setoff and counterclaim available pursuant to law. ARTICLE VIII THE AGENT The following provisions shall govern the relationship of the Agent with the Banks. SECTION 8.1 APPOINTMENT AND AUTHORIZATION. Each Bank appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such respective powers under the Loan Documents as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto. Neither the Agent nor any of its directors, officers or employees shall be liable for any action taken or omitted to be taken by it under or in connection with the Loan Documents, except for its own gross negligence or willful misconduct. The Agent shall act as an independent contractor in performing its obligations as Agent hereunder and nothing herein contained shall be deemed to create any fiduciary relationship among or between the Agent, the Borrower or the Banks. 57 SECTION 8.2 NOTE HOLDERS. The Agent may treat the payee of any Note as the holder thereof until written notice of transfer shall have been filed with it, signed by such payee and in form satisfactory to the Agent. SECTION 8.3 CONSULTATION WITH COUNSEL. The Agent may consult with legal counsel selected by it with reasonable care and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. SECTION 8.4 LOAN DOCUMENTS. The Agent shall not be under a duty to examine or pass upon the validity, effectiveness, genuineness or value of any of the Loan Documents or any other instrument or document furnished pursuant thereto, and the Agent shall be entitled to assume that the same are valid, effective and genuine and what they purport to be. SECTION 8.5 U.S. BANK AND AFFILIATES. With respect to its Revolving Commitment and the Loans made by it, U.S. Bank shall have the same rights and powers under the Loan Documents as any other Bank and may exercise the same as though it were not the Agent consistent with the terms thereof, and U.S. Bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower as if it were not the Agent. SECTION 8.6 ACTION BY AGENT. Except as may otherwise be expressly stated in this Agreement, the Agent shall be entitled to use its discretion with respect to exercising or refraining from exercising any rights which may be vested in it by, or with respect to taking or refraining from taking any action or actions which it may be able to take under or in respect of, the Loan Documents. The Agent shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Majority Banks, and such instructions shall be binding upon all holders of Notes; provided, however, that the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to the Loan Documents or applicable law. The Agent shall incur no liability under or in respect of any of the Loan Documents by acting upon any notice, consent, certificate, warranty or other paper or instrument believed by it to be genuine or authentic or to be signed by the proper party or parties and to be consistent with the terms of this Agreement. SECTION 8.7 CREDIT ANALYSIS. Each Bank has made, and shall continue to make, its own independent investigation or evaluation of the operations, business, property and condition, financial and otherwise, of the Borrower in connection with entering into this Agreement and has made its own appraisal of the creditworthiness of the Borrower. Except as explicitly provided herein, the Agent has no duty or responsibility, either initially or on a continuing basis, to provide any Bank with any credit or other information with respect to such operations, business, property, condition or creditworthiness, whether such information comes into its possession on or before the first Event of Default or at any time thereafter. 58 SECTION 8.8 NOTICES OF EVENT OF DEFAULT, ETC. In the event that the Agent shall have acquired actual knowledge of any Event of Default or Default, the Agent shall promptly give notice thereof to the Banks. SECTION 8.9 INDEMNIFICATION. Each Bank agrees to indemnify the Agent, as Agent (to the extent not reimbursed by the Borrower), ratably according to such Bank's share of the Aggregate Revolving Commitment Amounts from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on or incurred by the Agent in any way relating to or arising out of the Loan Documents or any action taken or omitted by the Agent under the Loan Documents, provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent's gross negligence or willful misconduct. No payment by any Bank under this Section shall relieve the Borrower of any of its obligations under this Agreement. SECTION 8.10 PAYMENTS AND COLLECTIONS. All funds received by the Agent in respect of any payments made by the Borrower on the Term Notes shall be distributed forthwith by the Agent among the Banks, in like currency and funds as received, ratably according to each Bank's Term Loan Percentage. All funds received by the Agent in respect of (a) any payments made by the Borrower on the Revolving Notes, (b) any reimbursement payments made by the Borrower with respect to Unpaid Drawings that were funded by Unpaid Drawing Repayment Loans and/or participation payments made by the Banks under Section 2.7(b), and (c) any payments by the Bank of Revolving Commitment Fees, shall be distributed forthwith by the Agent among the Banks, in like currency and funds as received, ratably according to each Bank's Revolving Outstandings Percentage. All funds received by the Agent in respect of any payments made by the Borrower for Letter of Credit Fees shall be distributed forthwith by the Agent among the Banks, in like currency and funds as received, ratably according to each Bank's Revolving Commitment. After any Event of Default has occurred, all funds received by the Agent, whether as payments by the Borrower or as realization on collateral or on any Guaranties, shall (except as may otherwise be required by law) be distributed by the Agent in the following order: (a) first to the Agent or any Bank who has incurred unreimbursed costs of collection with respect to any Obligations hereunder, ratably to the Agent and each Bank in the proportion that the costs incurred by the Agent or such Bank bear to the total of all such costs incurred by the Agent and all Banks; (b) next to the Agent for the account of the Banks (in accordance with their respective Revolving Percentages) for application on the Notes and Unpaid Drawings; (c) next to the Agent for the account of the Banks (in accordance with their respective Revolving Outstandings Percentages) for any unpaid Revolving Commitment Fees owing by the Borrower hereunder; (d) next to the Agent for the account of the Banks (in accordance with their respective Revolving Commitment Percentages) for any unpaid Letter of Credit Fees owing by the Borrower; and (e) last to the Agent to be held in the Holding Account to cover the Letters of Credit. The provisions of this Section 8.10 shall not apply to payments of the issuance, amendment, drawing and other fees and out-of-pocket expenses of U.S. Bank under Section 2.10, and the fees set forth in the fee letter under Section 2.12, respectively. 59 SECTION 8.11 SHARING OF PAYMENTS. If any Bank shall receive and retain any payment, voluntary or involuntary, whether by setoff, application of deposit balance or security, or otherwise, in respect of the Obligations owing to such Bank under this Agreement or the Notes in excess of such Bank's share, as determined under this Agreement, of the Obligations then due and payable to the Banks under this Agreement, then such Bank shall purchase from the other Banks for cash and at face value and without recourse, such participation in the Notes held by such other Banks as shall be necessary to cause such excess payment to be shared ratably as aforesaid with such other Banks; provided, that if such excess payment or part thereof is thereafter recovered from such purchasing Bank, the related purchases from the other Banks shall be rescinded ratably and the purchase price restored as to the portion of such excess payment so recovered, but without interest. Subject to the participation purchase obligation above, each Bank agrees to exercise any and all rights of setoff, counterclaim or banker's lien first fully against any Notes and participations therein held by such Bank, next to any other Indebtedness of the Borrower to such Bank arising under or pursuant to this Agreement and to any participations held by such Bank in Obligations of the Borrower arising under or pursuant to this Agreement, and only then to any other Obligations of the Borrower to such Bank. SECTION 8.12 ADVICE TO BANKS. The Agent shall forward to the Banks copies of all notices, financial reports and other communications received hereunder from the Borrower by it as Agent, excluding, however, notices, reports and communications which by the terms hereof are to be furnished by the Borrower directly to each Bank. SECTION 8.13 RESIGNATION. If at any time U.S. Bank shall deem it advisable, in its sole discretion, it may submit to each of the Banks and the Borrower a written notification of its resignation as Agent under this Agreement, such resignation to be effective upon the appointment of a successor Agent, but in no event later than 30 days from the date of such notice. Upon submission of such notice, the Majority Banks may appoint a successor Agent. SECTION 8.14 DEFAULTING BANK. (a) Remedies Against a Defaulting Bank. In addition to the rights and remedies that may be available to the Agent or the Borrower under this Agreement or applicable law, if at any time a Bank is a Defaulting Bank such Defaulting Bank's right to participate in the administration of the Loans, this Agreement and the other Loan Documents, including without limitation, any right to vote in respect of, to consent to or to direct any action or inaction of the Agent or to be taken into account in the calculation of the Majority Banks, shall be suspended while such Bank remains a Defaulting Bank. If a Bank is a Defaulting Bank because it has failed to make timely payment to the Agent of any amount required to be paid to the Agent hereunder (without giving effect to any notice or cure periods), in addition to other rights and remedies which the Agent or the Borrower may have under the immediately preceding provisions or otherwise, the Agent shall be entitled (i) to collect interest from such Defaulting Bank on such delinquent payment for the period from the date on which the payment was due until the date on which the payment is made at the Federal Funds Rate, (ii) to withhold or setoff and to apply in satisfaction of the defaulted payment and any related interest, any amounts otherwise payable to such Defaulting Bank under this Agreement or any other Loan Document until such defaulted payment and related interest has been paid in full and such default no longer exists and (iii) to bring an action or suit against such Defaulting Bank in a court of competent jurisdiction to recover the defaulted amount and any related interest. 60 Any amounts received by the Agent in respect of a Defaulting Bank's Loans shall not be paid to such Defaulting Bank and shall be held uninvested by the Agent and either applied against the purchase price of such Loans under the following subsection (b) or paid to such Defaulting Bank upon the default of such Defaulting Bank being cured. (b) Purchase from Defaulting Bank. Any Bank that is not a Defaulting Bank shall have the right, but not the obligation, in its sole discretion, to acquire all of a Defaulting Bank's Commitments. If more than one Bank exercises such right, each such Bank shall have the right to acquire such proportion of such Defaulting Bank's Commitments on a pro rata basis. Upon any such purchase, the Defaulting Bank's interest in its Loans and its rights hereunder (but not its liability in respect thereof or under the Loan Documents or this Agreement to the extent the same relate to the period prior to the effective date of the purchase) shall terminate on the date of purchase, and the Defaulting Bank shall promptly execute all documents reasonably requested to surrender and transfer such interest to the purchaser. The purchase price for the Commitments of a Defaulting Bank shall be equal to the amount of the principal balance of the Loans outstanding and owed by the Borrower to the Defaulting Bank. The purchaser shall pay to the Defaulting Bank in Immediately Available Funds on the date of such purchase the principal of and accrued and unpaid interest and fees on the Loans made by such Defaulting Bank hereunder (it being understood that such accrued and unpaid interest and fees may be paid pro rata to the purchasing Bank and the Defaulting Bank by the Agent at a subsequent date upon receipt of payment of such amounts from the Borrower). Prior to payment of such purchase price to a Defaulting Bank, the Agent shall apply against such purchase price any amounts retained by the Agent pursuant to the last sentence of the immediately preceding subsection (a). The Defaulting Bank shall be entitled to receive amounts owed to it by the Borrower under the Loan Documents which accrued prior to the date of the default by the Defaulting Bank, to the extent the same are received by the Agent from or on behalf of the Borrower. There shall be no recourse against any Bank or the Agent for the payment of such sums except to the extent of the receipt of payments from any other party or in respect of the Loans. ARTICLE IX MISCELLANEOUS SECTION 9.1 MODIFICATIONS. Notwithstanding any provisions to the contrary herein, any term of this Agreement may be amended with the written consent of the Borrower; provided that no amendment, modification or waiver of any provision of this Agreement or any other Loan Document or consent to any departure therefrom by the Borrower or other party thereto shall in any event be effective unless the same shall be in writing and signed by the Majority Banks, and then such amendment, modification, waiver or consent shall be effective only in the specific instance and for the purpose for which given. Notwithstanding the foregoing, no such amendment, modification, waiver or consent shall: (a) Reduce the rate or extend the time of payment of interest thereon, or reduce the amount of the principal thereof, or modify any of the provisions of any Note with respect to the payment or repayment thereof, without the consent of the holder of each Note so affected; or 61 (b) Increase the amount or extend the time of any Revolving Commitment of any Bank, without the consent of such Bank; or (c) Reduce the rate or extend the time of payment of any fee payable to a Bank, without the consent of the Bank affected; or (d) Amend the definition of Majority Banks or otherwise reduce the percentage of the Banks required to approve or effectuate any such amendment, modification, waiver, or consent, without the consent of all the Banks; or (e) Amend any of Article 2 or any of the foregoing Sections 9.1 (a) through (d) or this Section 9.1 (e) without the consent of all the Banks; or (f) Amend any provision of this Agreement relating to the Agent in its capacity as Agent without the consent of the Agent; or (g) Amend any provision of this Agreement relating to the Letters of Credit without the consent of U.S. Bank; or (h) Release any Guarantor from its obligations under its Guaranty; or (i) Except as may otherwise be expressly provided in any of the other Loan Documents, release any material portion of collateral securing all or any part of the Obligations without the consent of all the Banks. SECTION 9.2 EXPENSES. Whether or not the transactions contemplated hereby are consummated, the Borrower agrees to reimburse the Agent upon demand for all reasonable out-of-pocket expenses paid or incurred by the Agent (including filing and recording costs and fees and expenses of Dorsey & Whitney, counsel to the Agent), in connection with the negotiation, preparation, approval, review, execution, delivery, amendment, modification and interpretation of this Agreement and the other Loan Documents and any commitment letters, letters of intent, financial analyses or term sheets relating thereto. The Borrower shall also reimburse the Agent and, after the occurrence of an Event of Default, each Bank upon demand for all reasonable out-of-pocket expenses (including expenses of legal counsel) paid or incurred by the Agent or any Bank in connection with the collection and enforcement of this Agreement and any other Loan Document. The obligations of the Borrower under this Section shall survive any termination of this Agreement. SECTION 9.3 WAIVERS, ETC. No failure on the part of the Agent or the holder of a Revolving Note to exercise and no delay in exercising any power or right hereunder or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any power or right preclude any other or further exercise thereof or the exercise of any other power or right. The remedies herein and in the other Loan Documents provided are cumulative and not exclusive of any remedies provided by law. 62 SECTION 9.4 NOTICES. Except when telephonic notice is expressly authorized by this Agreement, any notice or other communication to any party in connection with this Agreement shall be in writing and shall be sent by manual delivery, telegram, telex, facsimile transmission, overnight courier or United States mail (postage prepaid) addressed to such party at the address specified on the signature page hereof, or at such other address as such party shall have specified to the other party hereto in writing. All periods of notice shall be measured from the date of delivery thereof if manually delivered, from the date of sending thereof if sent by telegram, telex or facsimile transmission, from the first Business Day after the date of sending if sent by overnight courier, or from four days after the date of mailing if mailed; provided, however, that any notice to the Agent or any Bank under Article II hereof shall be deemed to have been given only when received by the Agent or such Bank. SECTION 9.5 TAXES. The Borrower agrees to pay, and save the Agent and the Banks harmless from all liability for, any stamp or other taxes which may be payable with respect to the execution or delivery of this Agreement or the issuance of the Revolving Notes, which obligation of the Borrower shall survive the termination of this Agreement. SECTION 9.6 SUCCESSORS AND ASSIGNS; PARTICIPATIONS; FOREIGN AND PURCHASING BANKS. (a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Agent, the Banks, all future holders of the Notes, and their respective successors and assigns, except that the Borrower may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Bank. (b) Any Bank may, in the ordinary course of its commercial banking business and in accordance with applicable law, at any time sell to one or more banks or other financial institutions ("Participants") participating interests in a minimum aggregate amount of $3,000,000 in any Revolving Loan or Term Loan or other Obligation owing to such Bank, any Revolving Note or Term Note held by such Bank, and any Revolving Commitment or Term Loan Commitment of such Bank, or any other interest of such Bank hereunder. In the event of any such sale by a Bank of participating interests to a Participant, (i) such Bank's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, (ii) such Bank shall remain solely responsible for the performance thereof, (iii) such Bank shall remain the holder of any such Revolving Note or Term Note for all purposes under this Agreement, (iv) the Borrower and the Agent shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement and (v) the agreement pursuant to which such Participant acquires its participating interest herein shall provide that such Bank shall retain the sole right and responsibility to enforce the Obligations, including, without limitation the right to consent or agree to any amendment, modification, consent or waiver with respect to this Agreement or any other Loan Document, provided that such agreement may provide that such Bank will not consent or agree to any such amendment, modification, consent or waiver with respect to the matters set forth in Sections 9.1(a)(e) without the prior consent of such 63 Participant. Each Borrower agrees that if amounts outstanding under this Agreement, the Revolving Notes, the Term Notes and the Loan Documents are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have, to the extent permitted by applicable law, the right of setoff in respect of its participating interest in amounts owing under this Agreement and any Revolving Note, Term Note or other Loan Document to the same extent as if the amount of its participating interest were owing directly to it as a Bank under this Agreement or any Revolving Note or Term Note or other Loan Document; provided, that such right of setoff shall be subject to the obligation of such Participant to share with the Banks, and the Banks agree to share with such Participant, as provided in Section 8.11. Each Borrower also agrees that each Participant shall be entitled to the benefits of Sections 2.16, 2.17, 2.18, 2.19, 2.20 and 9.2 with respect to its participation in the Revolving Commitments, Term Loan Commitments, Revolving Loans and Term Loans; provided, that no Participant shall be entitled to receive any greater amount pursuant to such subsections than the transferor Bank would have been entitled to receive in respect of the amount of the participation transferred by such transferor Bank to such Participant had no such transfer occurred. (c) Each Bank may, from time to time, with the consent of the Agent and the Borrower (neither of which consents shall be unreasonably withheld or delayed; and if an Event of Default shall have occurred and be continuing, then consent of the Borrower shall not be required), assign to other lenders ("Assignees") all or part of its rights or obligations hereunder or under any Loan Document in a minimum aggregate amount of $3,000,000 evidenced by any Revolving Note then held by that Bank, together with equivalent proportions of its Revolving Commitment, any Term Note then held by that Bank, its Term Loan Commitment pursuant to written agreements executed by such assigning Bank, such Assignee(s), the Borrower and the Agent in substantially the form of Exhibit F, which agreements shall specify in each instance the portion of the Obligations evidenced by the Revolving Notes and Term Notes which is to be assigned to each Assignee and the portion of the Revolving Commitment and Term Loan Commitment of such Bank to be assumed by each Assignee (each, an "Assignment Agreement"); provided, however, that the assigning Bank must pay to the Agent a processing and recordation fee of $3,500. Upon the execution of each Assignment Agreement by the assigning Bank, the relevant Assignee, the Borrower and the Agent, payment to the assigning Bank by such Assignee of the purchase price for the portion of the Obligations being acquired by it and receipt by the Borrower of a copy of the relevant Assignment Agreement, (x) such Assignee lender shall thereupon become a "Bank" for all purposes of this Agreement with a pro rata share of the Revolving Commitment and a Term Loan Commitment Amount in the amount set forth in such Assignment Agreement and with all the rights, powers and obligations afforded a Bank under this Agreement, (y) such assigning Bank shall have no further liability for funding the portion of its Commitment assumed by such Assignee and (z) the address for notices to such Assignee shall be as specified in the Assignment Agreement executed by it. Concurrently with the execution and delivery of each Assignment Agreement, the assigning Bank shall surrender to the Agent the Revolving Note and Term Note a portion of which is being assigned, and the Borrower shall execute and deliver a Revolving Note and Term Note to the Assignee in the amount of its Revolving Commitment and its Term Loan Commitment Amount, respectively, and a new Revolving Note and Term Note to the assigning Bank in the amount of its Revolving Commitment and Term Loan Commitment, respectively, after giving effect to the reduction occasioned by such assignment, all such Notes to constitute "Revolving Notes" and "Term Notes" for all purposes of this Agreement and of the other Loan Documents. 64 (d) The Borrower shall not be liable for any costs incurred by the Banks in effecting any participation under subparagraph (b) of this subsection or by the Banks in effecting any assignment under subparagraph (c) of this subsection except with respect to the Agent as provided in this Section 9.6. (e) Each Bank may disclose to any Assignee or Participant and to any prospective Assignee or Participant any and all financial information in such Bank's possession concerning the Borrower or any of the Subsidiaries which has been delivered to such Bank by or on behalf of the Borrower or any of the Subsidiaries pursuant to this Agreement or which has been delivered to such Bank by or on behalf of the Borrower or its Subsidiaries in connection with such Bank's credit evaluation of such Borrower or any of its Subsidiaries prior to entering into this Agreement, provided that prior to disclosing such information, such Bank shall first obtain the agreement of such prospective Assignee or Participant to comply with the provisions of Section 9.7. (f) Notwithstanding any other provision in this Agreement, any Bank may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and any note held by it in favor of any federal reserve bank in accordance with Regulation A of the Board or U. S. Treasury Regulation 31 CFR ss. 203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. SECTION 9.7 CONFIDENTIALITY OF INFORMATION. The Agent and each Bank shall use reasonable efforts to assure that information about the Borrower and its operations, affairs and financial condition, not generally disclosed to the public or to trade and other creditors, which is furnished to the Agent or such Bank pursuant to the provisions hereof is used only for the purposes of this Agreement and any other relationship between any Bank and the Borrower and shall not be divulged to any Person other than the Banks, their Affiliates and their respective officers, directors, employees and agents, except: (a) to their attorneys and accountants, (b) in connection with the enforcement of the rights of the Banks hereunder and under the Notes and the Guaranties or otherwise in connection with applicable litigation, (c) in connection with assignments and participations and the solicitation of prospective assignees and participants referred to in the immediately preceding Section, and (d) as may otherwise be required or requested by any regulatory authority having jurisdiction over any Bank or by any applicable law, rule, regulation, judicial process or legal process, the opinion of such Bank's counsel concerning the making of such disclosure to be binding on the parties hereto. No Bank shall incur any liability to the Borrower by reason of any disclosure permitted by this Section 9.7. 65 SECTION 9.8 GOVERNING LAW AND CONSTRUCTION. THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE UNITED STATES APPLICABLE TO NATIONAL BANKS. Whenever possible, each provision of this Agreement and the other Loan Documents and any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be interpreted in such manner as to be effective and valid under such applicable law, but, if any provision of this Agreement, the other Loan Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto shall be held to be prohibited or invalid under such 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, the other Loan Documents or any other statement, instrument or transaction contemplated hereby or thereby or relating hereto or thereto. SECTION 9.9 CONSENT TO JURISDICTION. AT THE OPTION OF THE AGENT, THIS AGREEMENT AND THE OTHER BORROWER LOAN DOCUMENTS MAY BE ENFORCED IN ANY FEDERAL COURT OR MINNESOTA STATE COURT SITTING IN HENNEPIN COUNTY, MINNESOTA; AND THE BORROWER CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE BORROWER COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP CREATED BY THIS AGREEMENT, THE AGENT AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE. SECTION 9.10 SURVIVAL OF AGREEMENT. All representations, warranties, covenants and agreement made by the Borrower herein or in the other Borrower Loan Documents and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be deemed to have been relied upon by the Banks and shall survive the making of the Revolving Loans by the Banks and the execution and delivery to the Banks by the Borrower of the Notes, regardless of any investigation made by or on behalf of the Banks, and shall continue in full force and effect as long as any Obligation is outstanding and unpaid and so long as the Revolving Commitments have not been terminated; provided, however, that the obligations of the Borrower under Section 9.2, 9.5, 9.11 and 9.18 shall survive payment in full of the Obligations and the termination of the Revolving Commitments. SECTION 9.11 INDEMNIFICATION. The Borrower hereby agrees to defend, protect, indemnify and hold harmless the Agent and the Banks and their respective Affiliates and the directors, officers, employees, attorneys and agents of the Agent and the Banks and their respective Affiliates (each of the foregoing being an "Indemnitee" and all of the foregoing being collectively the "Indemnitees") from and against any and all claims, actions, damages, liabilities, judgments, costs and expenses (including all reasonable fees and disbursements of counsel which may be incurred in the investigation or defense of any matter) imposed upon, incurred by or asserted against any Indemnitee, whether direct, indirect or consequential and whether based on any federal, state, local or foreign laws or regulations (including securities laws, environmental laws, commercial laws and regulations), under common law or on equitable cause, or on contract or otherwise: 66 (a) by reason of, relating to or in connection with the execution, delivery, performance or enforcement of any Loan Document, any commitments relating thereto, or any transaction contemplated by any Loan Document; or (b) by reason of, relating to or in connection with any credit extended or used under the Loan Documents or any act done or omitted by any Person, or the exercise of any rights or remedies thereunder, including the acquisition of any collateral by the Banks by way of foreclosure of the Lien thereon, deed or bill of sale in lieu of such foreclosure or otherwise; provided, however, that the Borrower shall not be liable to any Indemnitee for any portion of such claims, damages, liabilities and expenses resulting from such Indemnitee's gross negligence or willful misconduct. In the event this indemnity is unenforceable as a matter of law as to a particular matter or consequence referred to herein, it shall be enforceable to the full extent permitted by law. This indemnification applies, without limitation, to any act, omission, event or circumstance existing or occurring on or prior to the later of the Termination Date or the date of payment in full of the Obligations, including specifically Obligations arising under clause (b) of this Section. The indemnification provisions set forth above shall be in addition to any liability the Borrower may otherwise have. Without prejudice to the survival of any other obligation of the Borrower hereunder the indemnities and obligations of the Borrower contained in this Section shall survive the payment in full of the other Obligations. SECTION 9.12 CAPTIONS. The captions or headings herein and any table of contents hereto are for convenience only and in no way define, limit or describe the scope or intent of any provision of this Agreement. SECTION 9.13 ENTIRE AGREEMENT. This Agreement and the other Borrower Loan Documents embody the entire agreement and understanding between the Borrower, the Agent and the Banks with respect to the subject matter hereof and thereof. This Agreement supersedes all prior agreements and understandings relating to the subject matter hereof. Nothing contained in this Agreement or in any other Loan Document, expressed or implied, is intended to confer upon any Persons other than the parties hereto any rights, remedies, obligations or liabilities hereunder or thereunder. SECTION 9.14 COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Agreement by signing any such counterpart. SECTION 9.15 BORROWER ACKNOWLEDGEMENTS. The Borrower hereby acknowledges that (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement, the other Loan Documents, (b) neither the Agent nor any Bank has any fiduciary relationship to the Borrower, the relationship being solely that of debtor and creditor, (c) no joint venture exists between the Borrower and the Agent or any Bank, and (d) neither the Agent nor any Bank undertakes any responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the business or operations of the Borrower and the Borrower shall rely entirely upon its own judgment with respect to its business, and any review, inspection or supervision of, or information supplied to, the Borrower by the Agent or any Bank is for the protection of the Banks and neither the Borrower nor any third party is entitled to rely thereon. 67 SECTION 9.16 EFFECT OF EXISTING CREDIT AGREEMENT. This Agreement amends and replaces in its entirety the Existing Credit Agreement, provided, that the obligations of the Borrower incurred under the Existing Credit Agreement shall continue under this Agreement, and shall not in any circumstance be terminated, extinguished or discharged hereby but shall hereafter be governed by the terms of this Agreement. SECTION 9.17 REAFFIRMATION OF SECURITY DOCUMENTS AND WARRANT DOCUMENTS. The Borrower confirms to and agrees with the Banks and the Agent that (a) the Obligations are and continue to be secured by the security interest granted by the Borrower in favor of the Agent under the Security Documents to which it is a party, and all of the terms, conditions, provisions, agreements, requirements, promises, obligations, duties, covenants and representations of the Borrower under such documents and any and all other documents and agreements entered into with respect to the Obligations are incorporated herein by reference and are hereby ratified and affirmed in all respects by the Borrower and (b) each reference to the "Credit Agreement" in each Security Document to which it is a party shall be deemed to be a reference to this Agreement, as the same may be amended, restated or modified from time to time. SECTION 9.18 GENERAL RELEASE. The Borrower hereby releases and discharges the Agent, each Bank, each Exiting Bank, and each of their officers, directors, employees, agents and attorneys, from any and all claims, actions and liabilities of any kind or nature that it or any one claiming through or under the Borrower ever had or may now have, whether now known or hereafter discovered, arising out of any acts or omissions occurring prior to the date of this Agreement that relate to: (i) any lending relationship or loan commitment between the Agent, the Banks, each Exiting Bank and the Borrower prior to the date of this Agreement; (ii) the Existing Credit Agreement and the "Loan Documents" (as defined in the Existing Credit Agreement"); or (iii) the negotiations preceding the execution and delivery of this Agreement. Notwithstanding anything to the contrary herein, the Borrower further confirms to and agrees with the Banks and the Exiting Lenders that the Warrant Documents (as defined in the Existing Credit Agreement) and the Registration Rights Agreement relating thereto shall each remain in full force and effect and are hereby ratified and affirmed in all respects by the Borrower. SECTION 9.19 EXITING LENDERS. On the Closing Date, the aggregate unpaid principal amount of the Existing Loans made by each Exiting Lender under the Existing Credit Agreement and related Note issued to such Exiting Lender thereunder, together with all interest and fees provided for in the Existing Credit Agreement (as to any Exiting Lender, its "Payoff Amount"), shall be repaid in full from the proceeds of Loans made by the Banks and other funds provided by the Borrower, and the commitments of the Exiting Lenders under the Existing Credit Agreement or hereunder, as the case may be, shall terminate. The Borrower shall give the Agent notice with respect to such Payoff Amount with respect to each Exiting Lender. The Agent shall distribute to each Exiting Lender by not later than 5:00 P.M. (Minneapolis time) on the Exit Date out of the proceeds of the Loans made for such purpose and from the other funds provided by the Borrower, the amount required to pay such Exiting Lender's Payoff Amount in full, whereupon: (a) such Exiting Lender shall no longer be a party to the Existing Credit Agreement or this Agreement, as the case may be (except to the extent provided in Section 9.10 thereof with respect to the survival of certain provisions, which shall remain in effect as to the Exiting Lenders); and (b) such Exiting Lenders shall not be deemed to be a "Bank" hereunder (except for purposes of the forgoing clause (a). 68 SECTION 9.20 RELEASE OF NORSTAN CANADA SECURITY DOCUMENTS. Upon and after the Closing Date, (a) the Guaranty and Security Agreement (each as defined in the Existing Credit Agreement) of Norstan Canada are hereby released and discharged and (b) the Agent authorizes the Borrower to file with the appropriate filing authorities financing statements and other appropriate termination documents or notices (each in the form approved in advance by the Agent's counsel in its reasonable discretion) terminating the financing statements and Canadian lien perfection notices filed by the Agent with respect to the Security Agreement of Norstan Canada. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 69 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. NORSTAN, INC. By: /s/ Scott G. Christian ----------------------- Its: EVP & CFO Address: 5101 Shady Oak Road Minnetonka, MN 55343 Attention: Robert J. Vold With copies to: Mr. Clark Whitmore Maslon Edelman Borman &Brand 3300 Norwest Center Minneapolis, MN 55402 Signature Page to Second Amended and Restated Credit Agreement dated July 12, 2002 S-1 U.S. BANK NATIONAL ASSOCIATION, as Agent and as a Bank By: /s/ Nicholas G. Myers ------------------------ Its: Assistant Vice President Address: U.S. Bank Place 601 Second Avenue South Minneapolis, MN 55402-4302 Attention: Nicholas Myers Telecopier:612/973-0823 Signature Page to Second Amended and Restated Credit Agreement dated July 12, 2002 S-2 M&I MARSHALL & ILSLEY BANK By: /s/ John W. Howard Jr. ------------------------- Its: Senior Vice President By: /s/ Gene Bygd ------------------------- Its: Vice President Address for Notices: 651 Nicollet Mall Minneapolis, MN 55402 Attention: John (Chip) Howard Telecopier: 612/904-8015 Signature Page to Second Amended and Restated Credit Agreement dated July 12, 2002 S-3 SCHEDULE 1.1B TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT LENDING COMMITMENTS

EX-22 5 c70703exv22.txt EX-22 SUBSIDIARIES OF NORSTAN, INC. EXHIBIT 22 SUBSIDIARIES OF NORSTAN, INC.

EX-23 6 c70703exv23.txt EX-23.1 INDEPENDENT AUDITORS' CONSENT EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement File Nos. 33-62967, 33-62971, 33-72928, 333-32394, 333-68059, 333-37913, 333-55764 and 333-86410 of Norstan, Inc. on Form S-8(3) of our report dated June 7, 2002 (except for Note 6 as to which the date is July 12, 2002), appearing in this Annual Report on Form 10-K of Norstan, Inc. for the year ended April 30, 2002. Deloitte & Touche LLP Minneapolis, Minnesota July 29, 2002 -----END PRIVACY-ENHANCED MESSAGE-----


TABLE OF CONTENTS
		Customer Service
		Locations
		Employees
		Competition
		Intellectual Property Rights
		Government Regulation
		Backlog
	Item 2. Properties.
	Item 3. Legal Proceedings.
	Item 4. Submission of Matters to a Vote of Security Holders.
PART II
	Item 5. Market for the Company’s Common Equity and Related Stockholder Matters.
	Item 6. Selected Consolidated Financial Data.
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
	Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.
PART III
	Item 10. Directors and Executive Officers of the Registrant.
	Item 11. Executive Compensation.
	Item 12. Security Ownership of Certain Beneficial Owners and Management.
	Item 13. Certain Relationships and Related Transactions.
PART IV
	Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
SIGNATURES
EXHIBIT INDEX
EX-10.(j) Stock Purchase Agreement-Netwolves Corp
EX-10.(k) Amended/Restated Credit Agreement
EX-22 Subsidiaries of Norstan, Inc.
EX-23.1 Independent Auditors' Consent


			Page

PART I
	Item 1.	Business		1
		Summary		1
		Industry Overview		2
		The Norstan Solution		3
		Norstan’s Business Strategy		3
		Norstan’s Growth Strategy		4
		Products and Services		4
		Customers		6
		Strategic Alliances		6
		Sales and Marketing		6
		Customer Service		7
		Locations		8
		Employees		8
		Competition		8
		Intellectual Property Rights		8
		Government Regulation		9
		Backlog		9
	Item 2.	Properties		9
	Item 3.	Legal Proceedings		9
	Item 4.	Submission of Matters to a Vote of Security Holders		10
PART II
	Item 5.	Market for the Company’s Common Equity and Related Stockholder Matters		11
	Item 6.	Selected Consolidated Financial Data		12
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
	Item 7A.	Quantitative and Qualitative Disclosure About Market Risk		23
	Item 8.	Financial Statements and Supplementary Data		26
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		51
PART III
	Item 10.	Directors and Executive Officers of the Registrant		51
	Item 11.	Executive Compensation		51
	Item 12.	Security Ownership of Certain Beneficial Owners and Management		51
	Item 13.	Certain Relationships and Related Transactions		51
PART IV
	Item 14.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		52
SIGNATURES				53


American Freightways		Alltel Corp.
Best Buy		Bristol Myers Squibb
Canadian Imperial Bank of Commerce		Harley-Davidson
DirectTV		IBM
Honeywell		United Parcel Service Of America, Inc.


Core Business Unit		Distribution Channels


Direct Solutions and Services		• Direct enterprise sales focused on selected end user accounts.
		• Telesales organization focused on mid-tier and below accounts.
Channel Partner Services		• Channel account managers focused on manufacturers, network providers, integrators, and resellers.
Resale Services		• Telesales sales people focused on enterprise end-users of voice and data equipment.
		• Web-based e-business through Norstan’s www.Vibestech.com website.


	High		Low

Fiscal year ended April 30, 2002:
First Quarter	$	4.090	$	1.130
Second Quarter		5.060		2.300
Third Quarter		6.400		2.800
Fourth Quarter		7.490		4.900
Fiscal year ended April 30, 2001:
First Quarter	$	6.563	$	3.250
Second Quarter		5.500		2.688
Third Quarter		4.000		0.688
Fourth Quarter		2.250		0.906


Minnesota (State of incorporation)		41-0835746 (I.R.S. Employer identification No.)


The Company’s phone number: 952-352-4000	The Company’s internet address: www.norstan.com


Birmingham, AL Boston, MA Calgary, Alberta Cedar Rapids, IA Chicago, IL Cincinnati, OH Cleveland, OH Columbus, OH Dallas, TX Davenport, IA		Des Moines, IA Edmonton, Alberta Irvine, CA Louisville, KY Madison, WI Milford, MA Milwaukee, WI Minneapolis, MN Montreal, Quebec New Orleans, LA		New York, NY Oklahoma City, OK Phoenix, AZ Riverside, CA San Diego, CA Toronto, Ontario Tulsa, OK Vancouver, British Columbia


	Item 5. Market for the Company’s Common Equity and Related Stockholder Matters.



			Fiscal Years Ended April 30,

			2002			2001			2000			1999			1998


			(In Thousands, Except Per Share Data)
Statements of Operations Data:
REVENUES			$	247,497		$	269,520		$	297,200		$	337,548		$	369,457
COST OF SALES				171,640			193,823			230,952			242,491			267,568

GROSS MARGIN				75,857			75,697			66,248			95,057			101,889
Selling, general and administrative expenses				73,917			86,517			96,417			87,214			85,201
Restructuring charges				—			1,183			—			1,419			14,204

OPERATING INCOME (LOSS)				1,940			(12,003	)		(30,169	)		6,424			2,484
Interest expense				(4,887	)		(7,988	)		(6,315	)		(4,782	)		(3,823	)
Other income (expense), net				651			(1,154	)		(78	)		387			515

INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES				(2,296	)		(21,145	)		(36,562	)		2,029			(824	)
		Income tax provision (benefit)(a)		(8,936	)		—			(11,608	)		883			(346	)

INCOME (LOSS) FROM CONTINUING OPERATIONS				6,640			(21,145	)		(24,954	)		1,146			(478	)

DISCONTINUED OPERATIONS:(b)
	INCOME (LOSS) FROM DISCONTINUED OPERATIONS			2,140			(11,087	)		(43,995	)		4,744			4,333
	LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS			(1,240	)		(4,038	)		—			—			—

NET INCOME (LOSS)			$	7,540		$	(36,270	)	$	(68,949	)	$	5,890		$	3,855

NET INCOME (LOSS) PER COMMON SHARE:
	BASIC — Continuing Operations		$	0.55		$	(1.86	)	$	(2.31	)	$	0.11		$	(0.05	)
	Discontinued Operations			0.07			(1.33	)		(4.06	)		0.45			0.44

	BASIC EPS		$	0.62		$	(3.19	)	$	(6.37	)	$	0.56		$	0.39

	DILUTED — Continuing Operations		$	0.52		$	(1.86	)	$	(2.31	)	$	0.11		$	(0.05	)
	Discontinued Operations			0.07			(1.33	)		(4.06	)		0.45			0.44

	DILUTED EPS		$	0.59		$	(3.19	)	$	(6.37	)	$	0.56		$	0.39

WEIGHTED AVERAGE COMMON SHARES:
	BASIC			12,149			11,373			10,818			10,473			9,719

	DILUTED			12,823			11,373			10,818			10,537			9,917



	As of April 30,

	2002			2001			2000		1999		1998

Balance Sheet Data:
Working capital (deficit)	$	(1,993	)	$	(24,342	)	$	31,133	$	78,239	$	58,568
Total assets		122,565			167,627			236,906		308,516		275,608
Long-term debt, net of current maturities		25,540			38,200			67,257		61,411		52,440
Discounted lease rentals, net of current maturities		6,295			13,552			24,285		32,604		20,883
Shareholders’ equity		16,916			8,085			42,489		109,335		97,671
Cash dividends declared and paid		—			—			—		—		—



		For the Quarters Ended

		April 30,			January 26,			October 27,			July 28,			April 30,			January 27,			October 28,			July 29,
		2002			2002			2001			2001			2001			2001			2000			2000

Revenues		$	62,043		$	62,567		$	62,811		$	60,076		$	65,139		$	63,157		$	69,998		$	71,226
Cost of Sales			43,017			44,661			42,685			41,277			44,717			45,507			50,983			52,616

Gross Margin			19,026			17,906			20,126			18,799			20,422			17,650			19,015			18,610
SG&A Expenses			18,663			17,652			19,632			17,970			22,378			21,520			21,791			20,828
Restructuring Charges			—			—			—			—			1,183			—			—			—

Operating Income (Loss)			363			254			494			829			(3,139	)		(3,870	)		(2,776	)		(2,218	)
Interest Expense			(1,064	)		(1,127	)		(1,250	)		(1,446	)		(1,705	)		(2,084	)		(2,116	)		(2,083	)
Other Income (Expense), net			(99	)		273			345			132			(119	)		(8	)		(1,019	)		(8	)

Income (Loss) Before Taxes			(800	)		(600	)		(411	)		(485	)		(4,963	)		(5,962	)		(5,911	)		(4,309	)
Income Tax (Benefit) Provision(a)			(8,936	)		—			—			—			—			—			—			—

Net Income (Loss) from Continuing Operations			8,136			(600	)		(411	)		(485	)		(4,963	)		(5,962	)		(5,911	)		(4,309	)

Income (Loss) from Discontinued Operations(b)			(4	)		760			746			638			(3,694	)		(2,342	)		(1,820	)		(3,231	)
Loss on Disposal of Discontinued Operations(b)			(1,240	)		—			—			—			(4,038	)		—			—			—

Net Income (Loss)		$	6,892		$	160		$	335		$	153		$	(12,695	)	$	(8,304	)	$	(7,731	)	$	(7,540	)

Net Income (Loss) Per Diluted Share:
	Continuing Operations	$	0.63		$	(0.05	)	$	(0.03	)	$	(0.04	)	$	(0.42	)	$	(0.52	)	$	(0.53	)	$	(0.39	)
	Discontinued Operations		(0.10	)		0.06			0.06			0.05			(0.66	)		(0.21	)		(0.16	)		(0.30	)

Net Income (Loss) Per Share		$	0.53		$	0.01		$	0.03		$	0.01		$	(1.08	)	$	(0.73	)	$	(0.69	)	$	(0.69	)

Weighted Average Diluted Shares			12,904			12,769			12,724			12,398			11,765			11,425			11,183			10,916


(a)		The income tax benefit recorded in fiscal 2002 relates to the reversal of a portion of the Company’s valuation allowance (see Note 8 to the Consolidated Financial Statements).

(b)		Discontinued Operations reflects the results of the former Consulting and Network Services business segments (see Note 2 to the Consolidated Financial Statements).


Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.



			Years Ended April 30,

			2002			2001			2000

Revenues
	Communications Technology Solutions and Services			85.5	%		86.7	%		88.3	%
	Resale Services			12.3			9.7			8.7
	Financial Services			2.2			3.6			3.0

		Total Revenues		100.0	%		100.0	%		100.0	%
Cost of sales				69.4			71.9			77.7

Gross margin				30.6			28.1			22.3
Selling, general and administrative expenses				29.9			32.1			32.4
Restructuring charges				—			0.4			—

Operating income (loss)				0.7	%		(4.4	)%		(10.1	)%

Net income (loss) — continuing operations				2.7	%		(7.8	)%		(8.4	)%
Net income (loss) — discontinued operations				0.3	%		(5.6	)%		(14.8	)%

Net income (loss)				3.0	%		(13.4	)%		(23.2	)%


	Item 1. Business.


	Summary


	Industry Overview


	The Norstan Solution



	Years Ending April 30,

							2007 and
	2003		2004		2005 to 2006		Thereafter		Total

Bank debt	$	3,927	$	4,000	$	21,500	$	—	$	29,427
Operating leases		6,856		5,048		7,005		10,839		29,748
Capital leases		200		40		—		—		240
Discounted lease rentals		7,230		3,723		2,572		—		13,525

Total contractual obligations	$	18,213	$	12,811	$	31,077	$	10,839	$	72,940


	Item 7A. Quantitative and Qualitative Disclosure About Market Risk.


	Page

Consolidated Financial Statements:
Report of Independent Auditors		27
Report of Independent Public Accountants		28
Consolidated Statements of Operations for the years ended April 30, 2002, 2001 and 2000		29
Consolidated Balance Sheets as of April 30, 2002 and 2001		30
Consolidated Statements of Shareholders’ Equity for the years ended April 30, 2002, 2001 and 2000		31
Consolidated Statements of Cash Flows for the years ended April 30, 2002, 2001 and 2000		32
Notes to Consolidated Financial Statements		33
Financial Statement Schedule:
Schedule II – Valuation and Qualifying Accounts		50


	THIS IS A COPY OF A PREVIOUSLY ISSUED ARTHUR ANDERSEN LLP REPORT.



					Common Stock							Retained						Accumulated
									Capital in			Earnings/			Unamortized			Other
		Comprehensive			Shares				Excess of			(Accumulated			Cost of			Comprehensive
		Income (Loss)			Outstanding		Amount		Par Value			Deficit)			Stock			Income (Loss)			Total

Balance, April 30, 1999						10,764	$	1,076	$	51,420		$	60,264		$	(1,805	)	$	(1,620	)	$	109,335
Net loss		$	(68,949	)		—		—		—			(68,949	)		—			—			(68,949	)
Stock issued for employee benefit plans						475		48		1,945			3			98			—			2,094
Related income tax benefit						—		—		155			—			—			—			155
Foreign currency translation adjustments			(146	)		—		—		—			—			—			(146	)		(146	)

	Comprehensive loss	$	(69,095	)

Balance, April 30, 2000						11,239	$	1,124	$	53,520		$	(8,682	)	$	(1,707	)	$	(1,766	)	$	42,489
Net loss		$	(36,270	)		—		—		—			(36,270	)		—			—			(36,270	)
Stock issued for employee benefit plans						982		98		1,574			—			269			—			1,941
Related income tax cost						—		—		(119	)		—			—			—			(119	)
Issuance of stock warrants						—		—		323			—			—			—			323
Foreign currency translation adjustments			(279	)		—		—		—			—			—			(279	)		(279	)

	Comprehensive loss	$	(36,549	)

Balance, April 30, 2001						12,221	$	1,222	$	55,298		$	(44,952	)	$	(1,438	)	$	(2,045	)	$	8,085
Net income		$	7,540			—		—		—			7,540			—			—			7,540
Stock issued for employee benefit plans						209		21		515			—			764			—			1,300
Related income tax cost						—		—		(112	)		—			—			—			(112	)
Issuance of stock warrants						—		—		155			—			—			—			155
Foreign currency translation adjustments			(52	)		—		—		—			—			—			(52	)		(52	)

	Comprehensive income	$	7,488

Balance, April 30, 2002						12,430	$	1,243	$	55,856		$	(37,412	)	$	(674	)	$	(2,097	)	$	16,916


	Note 4 — Restructuring Charges and Goodwill Writedown:


Years Ending April 30,	Amount

2003	$	13,499
2004		7,777
2005		4,492
2006		1,780
2007 and thereafter		170

	$	27,718


		2002			2001

Accelerated depreciation		$	(56,753	)	$	(55,540	)
Capital and operating leases			49,737			48,790
Reserves and allowances			4,037			5,992
Net operating loss carryforward — U.S.			10,278			20,375
Net operating loss carryforward — Canada			1,094			1,094
Net capital loss carryforward			608			608
Valuation allowances			(1,702	)		(11,302	)
Other, net			5,293			2,022

	Net deferred taxes	$	12,592		$	12,039



		1995 Plan					1986 Plan					Directors’ Plan

					Weighted					Weighted				Weighted
		Stock			Average		Stock			Average		Stock		Average
		Options			Exercise Price		Options			Exercise Price		Options		Exercise Price

Balance — April 30, 1999			1,218,777		$	18.91		54,800		$	10.66		70,500	$	14.27
	Options granted		1,198,400			7.94		—			—		24,000		8.10
	Options canceled		(1,045,217	)		14.97		(6,000	)		6.88		—		—
	Options exercised		(2,300	)		5.62		(4,800	)		4.25		—		—

Balance — April 30, 2000			1,369,660		$	12.34		44,000		$	11.88		94,500	$	12.70
	Options granted		1,191,950			2.04		—			—		100,000		3.86
	Options canceled		(637,585	)		9.12		(4,000	)		11.88		—		—
	Options exercised		(1,150	)		1.11		—			—		—		—

Balance — April 30, 2001			1,922,875		$	7.04		40,000		$	11.88		194,500	$	8.15
	Options granted		95,500			2.92		—			—		45,000		3.74
	Options canceled		(586,325	)		13.63		(5,000	)		11.88		—		—
	Options exercised		(30,025	)		1.26		—			—		—		—

Balance — April 30, 2002			1,402,025		$	3.39		35,000		$	11.88		239,500	$	7.32

Options exercisable at:
	April 30, 2000		332,668		$	14.35		34,000		$	11.88		82,500	$	11.63

	April 30, 2001		852,034		$	7.97		40,000		$	11.88		154,500	$	8.14

	April 30, 2002		826,447		$	4.47		35,000		$	11.88		199,500	$	7.61


	Number of				Weighted		Weighted Average		Number of		Weighted
	Options		Exercise		Average		Remaining		Options		Average
	Outstanding		Price Range		Exercise Price		Contractual Life		Exercisable		Exercise Price

1995 Plan		578,275	$	1.11 - $1.95	$	1.15		8.89 years		364,571	$	1.12
		348,350	$	2.03 - $3.95	$	3.19		8.60 years		137,090	$	3.29
		475,400	$	4.71 - $24.00	$	8.43		7.43 years		324,786	$	8.72

		1,402,025	$	1.11 - $24.00	$	3.39		8.32 years		826,447	$	4.47

1986 Plan		35,000	$	11.88	$	11.88		3.11 years		35,000	$	11.88

Directors’ Plan		105,000	$	1.11 - $4.77	$	3.28		8.96 years		92,000	$	3.21
		84,000	$	5.09 - $9.00	$	6.62		6.18 years		60,000	$	7.18
		50,500	$	12.50 - $20.06	$	16.89		4.71 years		47,500	$	16.69

		239,500	$	1.11 - $20.06	$	7.32		7.09 years		199,500	$	7.61


					Directors’		Employee
	1995 Plan		1986 Plan		Plan		Stock Plan

Fiscal 2000 grants	$	3.77		N/A	$	3.91	$	2.69
Fiscal 2001 grants	$	2.04		N/A	$	3.86	$	1.63
Fiscal 2002 grants	$	2.91		N/A	$	3.74	$	4.00


	Communications
	Technology									Discontinued
	Solutions and			Resale		Financial				Operations
	Services			Services		Services		Corporate*		(see Note 2)		Total

2002:
Revenue	$	211,568		$	30,402	$	5,527	$	—	$	—	$	247,497
Operating income (loss)		(2,595	)		3,080		1,455		—		—		1,940
Depreciation and amortization		8,882			702		5		4,374		—		13,963
Identifiable assets		56,573			10,251		24,415		27,865		3,461		122,565
Capital expenditures (net)		3,413			17		—		1,668		—		5,098

2001:
Revenue	$	233,700		$	26,250	$	9,570	$	—	$	—	$	269,520
Operating income (loss)		(15,680	)		1,638		2,039		—		—		(12,003	)
Depreciation and amortization		10,047			455		10		4,949		—		15,461
Identifiable assets		65,566			11,236		52,224		32,023		6,578		167,627
Capital expenditures (net)		3,853			1,739		—		1,876		—		7,468

2000:
Revenue	$	262,325		$	25,971	$	8,904	$	—	$	—	$	297,200
Operating income (loss)		(36,137	)		2,867		3,101		—		—		(30,169	)
Depreciation and amortization		12,280			98		9		6,049		—		18,436
Identifiable assets		93,328			6,950		65,997		53,039		17,592		236,906
Capital expenditures (net)		5,994			84		13		2,982		—		9,073


	Note 13 — Inability To Obtain Consent of Prior Independent Public Accountants (Unaudited)


		Balance at		Charged to
		Beginning		Costs and					Balance at
(In thousands)		of Year		Expenses		Deductions			End of Year

For the year ended April 30, 2002
	Allowance for doubtful accounts	$	3,343	$	597	$	(2,712	)(a)	$	1,228

	Allowance for financing losses	$	1,848	$	1,350	$	(842	)	$	2,356

	Restructuring reserves	$	1,318	$	—	$	(1,318	)	$	—

	Discontinued operations reserve	$	1,248	$	—	$	(385	)	$	863

For the year ended April 30, 2001
	Allowance for doubtful accounts	$	5,628	$	2,411	$	(4,696	)(b)	$	3,343

	Allowance for financing losses	$	1,411	$	437	$	—		$	1,848

	Restructuring reserves	$	637	$	1,183	$	(502	)	$	1,318

	Discontinued operations reserve	$	—	$	1,248	$	—		$	1,248

For the year ended April 30, 2000
	Allowance for doubtful accounts	$	1,437	$	7,344	$	(3,153	)	$	5,628

	Allowance for financing losses	$	1,361	$	50	$	—		$	1,411

	Restructuring reserves	$	697	$	1,969	$	(2,029	)	$	637


(a)		Includes $102,400 related to Norstan Network Services, which was reclassified to discontinued operations.

(b)		Includes $1.5 million related to Norstan Consulting, which was reclassified to discontinued operations.


Item 9.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.


	Item 10. Directors and Executive Officers of the Registrant.


	Item 12. Security Ownership of Certain Beneficial Owners and Management.


	Item 13. Certain Relationships and Related Transactions.


	Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.