-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E7bhZQk2rPGx6i3+brNM7WT8uCtyDm1TGqeUJ69YTZhieW1YVZA9JvRAMqssl7hH svxhhgFdKwEW9aPFkKeYrQ== 0001047469-98-044089.txt : 19981216 0001047469-98-044089.hdr.sgml : 19981216 ACCESSION NUMBER: 0001047469-98-044089 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981031 FILED AS OF DATE: 19981215 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORSTAN INC CENTRAL INDEX KEY: 0000072418 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TELEPHONE INTERCONNECT SYSTEMS [7385] IRS NUMBER: 410835746 STATE OF INCORPORATION: MN FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08141 FILM NUMBER: 98770222 BUSINESS ADDRESS: STREET 1: 605 N HIGHWAY 169 STREET 2: 12TH FL CITY: PLYMOUTH STATE: MN ZIP: 55441 BUSINESS PHONE: 6124201100 MAIL ADDRESS: STREET 1: NORSTAN INC STREET 2: 6900 WEDGEWOOD ROAD CITY: MAPLE GROVE STATE: MN ZIP: 55311 FORMER COMPANY: FORMER CONFORMED NAME: NORSTAN RESEARCH & DEVELOPMENT CO DATE OF NAME CHANGE: 19770926 FORMER COMPANY: FORMER CONFORMED NAME: NORSTAN MANUFACTURING CO INC DATE OF NAME CHANGE: 19750918 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED OCTOBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ COMMISSION FILE NUMBER 0-8141 NORSTAN, INC. (Exact name of registrant as specified in its charter) MINNESOTA 41-0835746 ------------------------------- -------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5101 SHADY OAK ROAD, MINNETONKA, MINNESOTA 55343-4100 ------------------------------------------------------- (address of principal executive offices) TELEPHONE (612) 352-4000 FAX (612) 352-4949 INTERNET WWW.NORSTAN.COM - ------------------------------------------------------------------------------- (Registrant's telephone number, facsimile number, Internet address) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No . --- --- On December 4, 1998, there were 10,648,408 shares outstanding of the registrant's common stock, par value $.10 per share, its only class of equity securities. PART I. FINANCIAL INFORMATION ITEM 1. NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS UNAUDITED (In thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------------ ------------------------------------ OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1, 1998 1997 1998 1997 ----------------- ----------------- ----------------- ----------------- REVENUES Global Services IT Consulting Services $ 35,045 $ 22,038 $ 66,720 $ 37,064 Communications Services 32,897 30,508 65,263 63,531 ----------------- ---------------- ----------------- ----------------- Total Global Services 67,942 52,546 131,983 100,595 Communications Solutions 55,037 56,719 105,092 101,930 Financial Services 2,074 1,657 3,828 3,838 ----------------- ---------------- ----------------- ----------------- TOTAL REVENUES 125,053 110,922 240,903 206,363 ----------------- ---------------- ----------------- ----------------- COST OF SALES Global Services IT Consulting Services 22,568 15,507 43,471 26,569 Communications Services 22,537 21,627 44,336 45,521 ----------------- ---------------- ----------------- ----------------- Total Global Services 45,105 37,134 87,807 72,090 Communications Solutions 39,107 42,729 75,095 75,544 Financial Services 797 625 1,494 1,209 ----------------- ---------------- ----------------- ----------------- TOTAL COST OF SALES 85,009 80,488 164,396 148,843 ----------------- ---------------- ----------------- ----------------- GROSS MARGIN 40,044 30,434 76,507 57,520 Selling, General & Administrative Expenses 32,593 24,399 63,430 47,556 ----------------- ---------------- ----------------- ----------------- OPERATING INCOME 7,451 6,035 13,077 9,964 Interest Expense (1,163) (847) (2,252) (1,441) Other Income, Net 243 69 424 116 ----------------- ---------------- ----------------- ----------------- INCOME BEFORE TAXES 6,531 5,257 11,249 8,639 Provision for Income Taxes 2,840 2,155 4,892 3,542 ----------------- ---------------- ----------------- ----------------- NET INCOME $ 3,691 $ 3,102 $ 6,357 $ 5,097 ----------------- ---------------- ----------------- ----------------- ----------------- ---------------- ----------------- ----------------- NET INCOME PER SHARE - BASIC $ 0.35 $ 0.32 $ 0.61 $ 0.54 ----------------- ---------------- ----------------- ----------------- ----------------- ---------------- ----------------- ----------------- NET INCOME PER SHARE - DILUTED $ 0.35 $ 0.32 $ 0.61 $ 0.53 ----------------- ---------------- ----------------- ----------------- ----------------- ---------------- ----------------- ----------------- WEIGHTED AVERAGE SHARES - BASIC 10,500 9,566 10,345 9,510 ----------------- ---------------- ----------------- ----------------- ----------------- ---------------- ----------------- ----------------- WEIGHTED AVERAGE SHARES - DILUTED 10,597 9,760 10,507 9,667 ----------------- ---------------- ----------------- ----------------- ----------------- ---------------- ----------------- -----------------
The accompanying notes are an integral part of these consolidated financial statements. NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
OCTOBER 31, APRIL 30, 1998 1998 ------------------- ------------------ (UNAUDITED) (AUDITED) ASSETS CURRENT ASSETS: Cash $ 1,853 $ 1,869 Accounts receivable, net of allowances for doubtful accounts of $996 and $1,171 92,050 97,206 Current lease receivables 21,352 18,751 Inventories 20,451 10,008 Costs and estimated earnings in excess of billings of $20,681 and $17,335 33,719 19,091 Deferred income tax benefits 3,440 2,488 Prepaid expenses, deposits and other 8,156 2,575 Prepaid income taxes 2,192 5,533 -------------- ------------- TOTAL CURRENT ASSETS 183,213 157,521 -------------- ------------- PROPERTY AND EQUIPMENT: Furniture, fixtures and equipment 90,442 75,712 Less-accumulated depreciation and amortization (45,043) (37,713) -------------- ------------- NET PROPERTY AND EQUIPMENT 45,399 37,999 -------------- ------------- OTHER ASSETS: Lease receivables, net of current portion 39,496 34,998 Goodwill, net of amortization of $9,411 and $7,979 41,484 43,206 Other 1,903 1,884 -------------- ------------- TOTAL OTHER ASSETS 82,883 80,088 -------------- ------------- $ 311,495 $ 275,608 -------------- ------------- -------------- -------------
The accompanying notes are an integral part of these consolidated balance sheets. 2 NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
OCTOBER 31, APRIL 30, 1998 1998 ------------------- ------------------ (Unaudited) (Audited) LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt $ 1,730 $ 3,257 Current maturities of discounted lease rentals 19,727 14,758 Accounts payable 25,295 24,135 Deferred revenue 19,811 19,953 Accrued - Salaries and wages 8,921 15,123 Warranty costs 1,781 1,776 Other liabilities 7,516 10,509 Billings in excess of costs and estimated earnings of $14,862 and $16,390 12,040 9,442 -------------- ------------- TOTAL CURRENT LIABILITIES 96,821 98,953 -------------- ------------- LONG-TERM DEBT, NET OF CURRENT MATURITIES 68,734 52,440 DISCOUNTED LEASE RENTALS, NET OF CURRENT MATURITIES 32,693 20,883 DEFERRED INCOME TAXES 6,507 5,661 -------------- ------------- SHAREHOLDERS' EQUITY: Common stock - $.10 par value; 40,000,000 authorized shares; 10,645,408 and 9,963,716 shares issued and outstanding 1,065 996 Capital in excess of par value 50,093 44,741 Retained earnings 60,740 54,048 Unamortized cost of stock (2,907) (641) Foreign currency translation adjustments (2,251) (1,473) -------------- ------------- TOTAL SHAREHOLDERS' EQUITY 106,740 97,671 -------------- ------------- $ 311,495 $275,608 -------------- ------------- -------------- -------------
The accompanying notes are an integral part of these consolidated balance sheets. 3 NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS UNAUDITED (In thousands)
SIX MONTHS ENDED ------------------------------------- OCTOBER 31, NOVEMBER 1, 1998 1997 ---------------- ---------------- OPERATING ACTIVITIES: Net Income $ 6,357 $ 5,097 Adjustments to reconcile net income to net cash used for operating activities: Restructuring charges paid (1,113) - Depreciation and amortization 9,210 9,430 Deferred income taxes (158) 9 Changes in operating items, net of effects from acquisitions: Accounts receivable 6,812 (16,275) Inventories (10,390) (3,198) Costs and estimated earnings in excess of billings (14,805) (12,808) Prepaid expenses, deposits and other (5,386) (454) Accounts payable 822 1,165 Deferred revenue (436) (392) Accrued liabilities (8,906) (6,305) Income taxes payable / receivable 3,469 (192) Billings in excess of costs and estimated earnings 2,635 (95) ---------------- ---------------- NET CASH USED FOR OPERATING ACTIVITIES (11,889) (24,018) ---------------- ---------------- INVESTING ACTIVITIES: Additions to property and equipment, net (13,658) (8,686) Cash paid for acquisitions, net of cash acquired - (11,450) Investment in lease contracts (20,272) (10,468) Collections from lease contracts 12,914 12,433 Other, net (556) (240) ---------------- ---------------- NET CASH USED FOR INVESTING ACTIVITIES (21,572) (18,411) ---------------- ---------------- FINANCING ACTIVITIES: Repayment of debt assumed in acquisitions (1,267) (2,013) Borrowings of long-term debt 179,108 147,450 Repayments of long-term debt (164,042) (105,912) Borrowings of discounted lease rentals 26,425 6,898 Repayments of discounted lease rentals (9,513) (8,123) Proceeds from sale of common stock 2,701 773 ---------------- ---------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 33,412 39,073 ---------------- ---------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 33 30 ---------------- ---------------- NET (DECREASE) INCREASE IN CASH (16) (3,326) CASH, BEGINNING OF PERIOD 1,869 5,147 ---------------- ---------------- CASH, END OF PERIOD $ 1,853 $ 1,821 ---------------- ---------------- ---------------- ----------------
The accompanying notes are an integral part of these consolidated financial statements. 4 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OCTOBER 31, 1998 UNAUDITED The information furnished in this report is unaudited and reflects all adjustments which are normal recurring adjustments and, which in the opinion of management, are necessary to fairly present the operating results for the interim periods. The operating results for the interim periods presented are not necessarily indicative of the operating results to be expected for the full fiscal year. This report should be read in conjunction with the Company's most recent "Annual Report on Form 10-K." PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. FOREIGN CURRENCY For the Company's foreign operations, assets and liabilities are translated at exchange rates as of the balance sheet date, and revenues and expenses are translated at average exchange rates prevailing during the period. Translation adjustments are recorded as a separate component of shareholders' equity. SUPPLEMENTAL CASH FLOW INFORMATION Supplemental disclosure of cash flow information is as follows (in thousands):
SIX MONTHS ENDED --------------------------------------- OCTOBER 31, 1998 NOVEMBER 1, 1997 ----------------- ------------------ Cash paid for: Interest $ 3,831 $ 3,017 Income taxes 1,448 2,978 Non-cash investing and financing activities: Stock issued for acquisitions $ 114 $ 3,325 Obligations assumed in acquisition - 12,000
USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the periods presented. Estimates are used for such items as allowances for doubtful accounts, inventory reserves, depreciable lives of property and equipment, warranty reserves and others. Ultimate results could differ from those estimates. 5 EARNINGS PER SHARE DATA In the fiscal year ended April 30, 1998, the Company adopted Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS No. 128"), which established new guidelines for computing and presenting earnings per share data ("EPS"), and retroactively restated EPS for all prior periods. SFAS No. 128 requires presentation of basic and diluted EPS. Basic EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects potential dilution from outstanding stock options and other securities using the treasury stock method. The adoption of SFAS No.128 did not have a significant effect on previously reported EPS information for the periods presented. A reconciliation of EPS calculations under SFAS No. 128 is as follows (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------------------- ------------------------------------- OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1, 1998 1997 1998 1997 ---------------- ---------------- ---------------- ----------------- Net income $ 3,691 $ 3,102 $ 6,357 $ 5,097 ---------------- ---------------- ---------------- ----------------- ---------------- ---------------- ---------------- ----------------- Weighted average common shares outstanding - Basic 10,500 9,566 10,345 9,510 Effect of stock option and benefit plans 97 194 162 157 ---------------- ---------------- ---------------- ----------------- Weighted average common shares outstanding - Diluted 10,597 9,760 10,507 9,667 ---------------- ---------------- ---------------- ----------------- ---------------- ---------------- ---------------- ----------------- Net income per share - Basic $ 0.35 $ 0.32 $ 0.61 $ 0.54 ---------------- ---------------- ---------------- ----------------- ---------------- ---------------- ---------------- ----------------- Net income per share - Diluted $ 0.35 $ 0.32 $ 0.61 $ 0.53 ---------------- ---------------- ---------------- ----------------- ---------------- ---------------- ---------------- -----------------
RECENTLY ISSUED ACCOUNTING STANDARDS Effective May 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for reporting in the financial statements all changes in equity during a period, except those resulting from investments by and distributions to owners. For the Company, comprehensive income represents net income adjusted for foreign currency translation adjustments. Comprehensive income as defined by SFAS No. 130, was approximately $3.6 million and $2.9 million for the three months ended October 31, 1998 and November 1, 1997, respectively, and approximately $5.6 million and $5.0 million for the six months ended October 31, 1998 and November 1, 1997, respectively. The Company adopted Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use," effective May 1, 1997. The SOP requires the Company to capitalize certain costs incurred in connection with developing or obtaining internal-use software. The Company capitalized approximately $4.5 million of costs associated with internal-use software developed or obtained during the six months ended October 31, 1998. 6 RESTRUCTURING CHARGE During fiscal year 1998, Norstan recorded a restructuring charge of $14.7 million in connection with management's plan to reduce costs, consolidate and reorganize operations, and improve operating efficiencies. Restructuring efforts focused primarily on the following: (i) consolidation of seven semi-autonomous geographic sales and service organizations into a single, more focused sales and operations organization; (ii) the consolidation of 36 warehouses and parts locations into three strategically located distribution centers; and (iii) the reorganization and integration of the Company's IT consulting services operations, including the Norstan Call Center Solutions Group, Connect and PRIMA, into a single, customer- focused organization. The restructuring charge relates primarily to the write-down of certain assets to their fair market values ($12.2 million), severance and employee benefit costs ($1.2 million) and lease termination costs ($1.3 million). ACQUISITIONS On September 30, 1997, the Company acquired PRIMA Consulting, Inc. (PRIMA) in a transaction accounted for under the purchase method. PRIMA provides IT consulting services, including information systems planning and development, consulting and programming services for collaborative computing solutions and ERP integration services. The company paid acquisition consideration aggregating approximately $27.5 million, consisting of $19.5 million in cash, $6.3 million of Norstan common stock and $1.7 million paid to certain members of PRIMA management under non-compete agreements. In addition, the Company agreed to pay up to $3.5 million in contingent consideration over a three-year period ending April 30, 2000 if certain financial performance targets are achieved ($0.0 earned as of April 30, 1998). This transaction resulted in the recording of $24.9 million in goodwill and other intangible assets, which are being amortized on a straight-line basis over fifteen years and three years, respectively. In June 1998, Wordlink, Inc. (Wordlink) was merged with and into a wholly owned subsidiary of the Company in a transaction accounted for under the pooling-of-interests method. Wordlink delivers network integration, groupware messaging, Internet/intranet, e-commerce and education solutions to business clients operating in a multi-vendor network environment. The merger agreement provided for the conversion of all outstanding shares of Wordlink common stock and all vested options into 420,539 shares of Norstan common stock valued at approximately $10.3 million. Unvested options to purchase shares of Wordlink common stock were converted into Norstan stock options. Wordlink's stockholders' equity and operating results were not material in relation to the Company's financial statements. As such, the Company has recorded the combination without restating prior periods' financial statements. VENDOR AGREEMENTS Under its agreement with Siemens, the Company purchases communications equipment and products for field application and installation. The current distributor agreement with Siemens, which commenced in July 1993, has been renewed through July 27, 1999 while a new distribution agreement is being negotiated. BUSINESS SEGMENTS The Company adopted SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," effective April 30, 1998. Adoption of this statement required the Company to provide the disclosure of segment information but did not require significant changes in the way geographic information was disclosed. 7 The Company operates in three business segments, Global Services, Communications Solutions, and Financial Services. Due to the Company's continuing expansion and growth in the area of IT consulting services, financial results for Global Services are now reported as (i) IT Consulting Services and (ii) Communications Services. Interim disclosures under SFAS No. 131 are as follows (in thousands):
FOR THE QUARTER ENDED ---------------------------------------------------------------------------- OCTOBER 31, 1998 NOVEMBER 1, 1997 ------------------------------------- ---------------------------------- OPERATING OPERATING REVENUES INCOME REVENUES INCOME ---------------- --------------- --------------- --------------- Global Services: IT Consulting Services $ 35,045 $ 1,524 $ 22,038 $ 2,508 Communications Services 32,897 2,176 30,508 1,304 ---------------- --------------- --------------- --------------- Total Global Services 67,942 3,700 52,546 3,812 Communications Solutions 55,037 2,679 56,719 1,431 Financial Services 2,074 1,072 1,657 792 ---------------- --------------- --------------- --------------- Totals $ 125,053 $ 7,451 $ 110,922 $ 6,035 ---------------- --------------- --------------- --------------- ---------------- --------------- --------------- ---------------
FOR THE SIX MONTHS ENDED ---------------------------------------------------------------------------- OCTOBER 31, 1998 NOVEMBER 1, 1997 ------------------------------------- ---------------------------------- OPERATING OPERATING REVENUES INCOME REVENUES INCOME ---------------- --------------- --------------- --------------- Global Services: IT Consulting Services $ 66,720 $ 2,690 $ 37,064 $ 3,172 Communications Services 65,263 5,667 63,531 3,175 ---------------- --------------- --------------- --------------- Total Global Services 131,983 8,357 100,595 6,347 Communications Solutions 105,092 2,714 101,930 1,661 Financial Services 3,828 2,006 3,838 1,956 ---------------- --------------- --------------- --------------- Totals $ 240,903 $ 13,077 $ 206,363 $ 9,964 ---------------- --------------- --------------- --------------- ---------------- --------------- --------------- ---------------
FORWARD-LOOKING STATEMENTS From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, product pricing, management of growth, integration of acquisitions, technological developments, new products, Year 2000 compliance and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements including those made in this document. In order to comply with the terms of the Private Securities Litigation Reform Act, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, developments and results of the Company's business include the following: national and regional economic conditions; pending and future legislation affecting the information technology and telecommunications industries; the Company's business in Canada and England; stability of foreign governments; market acceptance of the Company's products and services; the Company's continued ability to provide integrated communications solutions for customers in a dynamic industry; and other competitive factors. Because these and other factors could affect the Company's operating results, past financial performance should not necessarily be considered as a reliable indicator of future performance, and investors should not use historical trends to anticipate future period results. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Norstan is a technology services company providing IT and communications systems solutions to over 18,000 customers in the United States, Canada and England. Headquartered in Minneapolis, Minnesota, with sales and service offices located in 68 locations in the United States and Canada, the Company sells its products and services to a wide variety of customers across numerous industries. The Company provides IT consulting and communications services, communications and technology products and financing alternatives through its three business units, Global Services, Communications Solutions (formerly known as Communications Systems) and Financial Services. SUMMARY During the quarter ended October 31, 1998, the Company's net income improved over the quarter ended November 1, 1997, increasing 19.0% to $3.7 million or $.35 per common share, compared to $3.1 million, or $.32 per common share. For the six month period ended October 31, 1998, net income increased 24.7% to $6.4 million, or $.61 per common share, compared to $5.1 million, or $.53 per common share for the similar period ended November 1, 1997. All per share figures reflect diluted rather than basic EPS. 9 SELECTED CONSOLIDATED FINANCIAL DATA
DOLLAR AMOUNTS AS A PERCENTAGE DOLLAR AMOUNTS AS A OF REVENUES PERCENTAGE PERCENTAGE OF REVENUES PERCENTAGE THREE MONTHS ENDED INCREASE SIX MONTHS ENDED INCREASE ----------------------------- ----------------- ------------------------- ------------- OCTOBER 31, NOVEMBER 1, FISCAL OCTOBER 31, NOVEMBER 1, FISCAL 1998 1997 1999 vs. 1998 1998 1997 1999 vs. 1998 -------------- ------------- --------------- ------------ ------------ -------------- REVENUES: Global Services IT Consulting Services 28.0% 19.9% 59.0% 27.7% 18.0% 80.0% Communications Services 26.3% 27.5% 7.8% 27.1% 30.7% 2.7% ------------ ------------ ------------ ------------- ------------ ---------- Total Global Services 54.3% 47.4% 29.3% 54.8% 48.7% 31.2% Communications Solutions 44.0% 51.1% (3.0%) 43.6% 49.4% 3.1% Financial Services 1.7% 1.5% 25.2% 1.6% 1.9% 0.0% ------------ ------------ ------------ ------------- ------------ ---------- Total Revenues 100.0% 100.0% 12.7% 100.0% 100.0% 16.7% COST OF SALES 68.0% 72.6% 5.6% 68.2% 72.1% 10.4% ------------ ------------ ------------ ------------- ------------ ---------- GROSS MARGIN 32.0% 27.4% 31.6% 31.8% 27.9% 33.0% SELLING, GENERAL & ADMINISTRATIVE EXPENSES 26.0% 22.0% 33.6% 26.4% 23.1% 33.4% ------------ ------------ ------------ ------------- ------------ ---------- OPERATING INCOME 6.0% 5.4% 23.5% 5.4% 4.8% 31.2% Interest Expense and Other, Net (0.7%) (0.7%) 18.3% (0.8%) (0.6%) 38.0% ------------ ------------ ------------ ------------- ------------ ---------- INCOME BEFORE PROVISION FOR INCOME TAXES 5.3% 4.7% 24.2% 4.6% 4.2% 30.2% Provision for Income Taxes 2.3% 1.9% 31.8% 2.0% 1.7% 38.1% ------------ ------------ ------------ ------------- ------------ ---------- NET INCOME 3.0% 2.8% 19.0% 2.6% 2.5% 24.7% ------------ ------------ ------------ ------------- ------------ ---------- ------------ ------------ ------------ ------------- ------------ ----------
The following table sets forth, for the periods indicated, the gross margin percentages for global services, communication systems and financial services.
THREE MONTHS ENDED SIX MONTHS ENDED ----------------- ------------------ ---------------- ----------------- OCTOBER 31, NOVEMBER 1, OCTOBER 31, NOVEMBER 1, 1998 1997 1998 1997 ----------------- ------------------ ---------------- ----------------- GROSS MARGIN PERCENTAGES: Global Services IT Consulting Services 35.6% 29.6% 34.9% 28.3% Communications Services 31.5% 29.1% 32.1% 28.4% Total Global Services 33.6% 29.3% 33.5% 28.3% Communications Solutions 28.9% 24.7% 28.5% 25.9% Financial Services 61.6% 62.3% 61.0% 68.5%
10 RESULTS OF OPERATIONS REVENUES. Revenues increased 12.7% to $125.1 million for the quarter ended October 31, 1998 as compared to $110.9 million for the prior year quarter ended November 1, 1997. For the six month period ended October 31, 1998, revenues increased 16.7% to $240.9 million as compared to $206.4 million for the similar period last year. Revenues from Global Services increased $15.4 million or 29.3%, and $31.4 million or 31.2%, during the comparable three and six month periods ended October 31, 1998 and November 1, 1997, respectively. Revenues from IT Consulting Services increased $13.0 million, or 59.0%, and $29.6 million, or 80.0%, during the comparable three and six month periods ended October 31, 1998 and November 1, 1997, respectively. These increases were generally the result of: (i) the inclusion of the results of PRIMA, acquired in September 1997, for the three and six month periods ended October 31, 1998; (ii) the merger with Wordlink during June 1998; and (iii) internal growth. Revenues from Communications Services increased 8.0% to $32.9 million for the quarter ended October 31, 1998 as compared to $30.5 million for the prior year quarter. For the six month period ended October 31, 1998, Communications Services revenues increased 2.7% to $65.3 million as compared to $63.5 million for the six month period ended November 1, 1997. Revenues from Communications Solutions decreased 3.0% to $55.0 million in the quarter ended October 31, 1998 from $56.7 million in the similar period last year. Revenues increased $3.2 million, or 3.1%, to $105.1 million for the six month period ended October 31, 1998 as compared to the similar period last year. Over the past six months, Communications Solutions revenues were impacted by weaker than projected orders and the general uncertainty and volatility of the U.S. economy. Revenues from Financial Services increased 25.2%, to $2.1 million in the second quarter of fiscal year 1999 from $1.7 million in the similar quarter last year. Revenues for the six month period ended October 31, 1998 were relatively unchanged from the similar period ended November 1, 1997 at $3.8 million. GROSS MARGIN. The Company's gross margin increased $9.6 million, or 31.6%, to $40.0 million for the quarter ended October 31, 1998 as compared to $30.4 million for the similar quarter last year. For the six month period ended October 31, 1998, gross margin increased $19.0 million, or 33.0%, to $76.5 million as compared to $57.5 million for the similar period last year. As a percent of total revenues, gross margin was 32.0% and 31.8% for the three and six month periods ended October 31, 1998 as compared to 27.4% and 27.9% for the similar periods ended November 1, 1997. These increases are the result of a shift in the mix of products and services offered toward higher margin IT consulting services. Gross margin as a percent of revenues for Global Services was 33.6% and 33.5% for the three and six month periods ended October 31, 1998 as compared to 29.3% and 28.3% for the similar periods last year. The gross margin for IT Consulting Services increased to 35.6% and 34.9% for the three and six month periods of fiscal year 1999 from 29.6% and 28.3% for the same periods in fiscal year 1998. These improved margins are a result of operating efficiencies gained as the IT Consulting Services business continued to grow as well as from an increased emphasis on time-and-materials engagements. The gross margin for Communications Services increased to 31.5% and 32.1% from 29.1% and 28.4% for the three and six months ended October 31, 1998 and November 1, 1997, respectively. Gross margin as a percent of revenues for Communications Solutions was 28.9% and 28.5% for the three and six months ended October 31, 1998 as compared to 24.7% and 25.9% for the comparable period ended November 1, 1997. The current gross margin percentages in Communications Solutions are higher than those experienced in fiscal 1998 and there is no assurance that these margins will be maintained in future periods. 11 Gross margin as a percent of revenues for Financial Services was 61.6% and 61.0% for the three and six months ended October 31, 1998 as compared to 62.3% and 68.5% for the similar periods last year. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 33.6% to $32.6 million in the second quarter of fiscal year 1999 as compared to $24.4 million in the similar period last year. For the six month period, these expenses increased 33.4% to $63.4 million as compared to $47.6 million in the prior year period. As a percent of revenues, selling, general and administrative expenses increased to 26.0% and 26.4% for the three and six month periods ended October 31, 1998, as compared to 22.0% and 23.1% for the same periods last year. These increases are partially due to the increased investments in the IT Consulting Services business including costs associated with the Wordlink acquisition, investments in Connaissance Consulting and the opening of new consulting offices in the past six months. INTEREST EXPENSE. Interest expense was $1.2 million as compared to $847,000 for the three month periods ended October 31, 1998 and November 1, 1997, respectively. For the six months ended October 31, 1998 interest expense increased to $2.3 million from $1.4 million for the same period last year. This increase was the result of higher borrowing levels in fiscal year 1999 related to acquisitions and working capital requirements. INCOME TAXES. The Company's effective income tax rate was 43.5% for the three and six months ended October 31, 1998 and 41% for the similar periods last year. The Company's effective tax rate differs from the federal statutory rate primarily due to state income taxes and the effect of nondeductible goodwill amortization. NET INCOME. Net income was $3.7 million or $0.35 per diluted share in the second quarter of fiscal year 1999, as compared to $3.1 million or $0.32 per diluted share for the second quarter of fiscal year 1998. Net income was $6.4 million or $0.61 per diluted share, and $5.1 million, or $0.53 per diluted share, for the six month periods ended October 31, 1998 and November 1, 1997, respectively. LIQUIDITY AND CAPITAL RESOURCES Net cash used for operating activities decreased in the first six months of fiscal year 1999 as compared to the similar period last year as a result of a decrease in accounts receivable which was somewhat offset by increases in inventories, costs and estimated earnings in excess of billings and prepaid expenses and a decrease in accrued liabilities. Net cash used for investing activities increased in the first six months of fiscal year 1999 as compared to the similar period in fiscal year 1998 as a result of increased capital expenditures and investments in lease contracts. CAPITAL EXPENDITURES. The Company used $13.7 million for capital expenditures during the six months ended October 31, 1998 as compared to $8.7 million in the similar period last year. These expenditures were primarily for capitalized costs incurred in connection with obtaining or developing internal use software, computer equipment, facility expansion and telecommunications equipment used in outsourcing arrangements and as spare parts. 12 INVESTMENT IN LEASE CONTRACTS. The Company has also made a significant investment in lease contracts with its customers. The additional investment made in lease contracts year-to-date in fiscal year 1999 totaled $20.3 million. Net lease receivables increased to $60.8 million, at October 31, 1998 from $53.7 million at April 30, 1998. The Company utilizes its lease receivables and corresponding underlying equipment to borrow funds from financial institutions on a nonrecourse or recourse basis by discounting the stream of future lease payments. Proceeds from discounting are presented on the consolidated balance sheet as discounted lease rentals. Discounted lease rentals totaled $52.4 million at October 31, 1998 as compared to $35.6 million at April 30, 1998. Interest rates on these credit agreements at October 31, 1998 ranged from approximately 6.0% to 10.0%, while payments are due in varying monthly installments through September 2005. Payments due to financial institutions are made from monthly collections of lease receivables from customers. CAPITAL RESOURCES. The Company has a $100.0 million unsecured revolving long-term credit agreement with certain banks. Up to $30.0 million of borrowings under this agreement may be in the form of commercial paper. In addition, sublimits also exist related to the Company's support of its leasing activities. Borrowings under this agreement are due May 31, 2001, and bear interest at the banks' reference rate (8.0% at October 31, 1998), except for LIBOR, CD and commercial-paper-based options, which generally bear interest at a rate lower than the banks' reference rate (5.5% to 6.3% at October 31, 1998). Total consolidated borrowings under this agreement at October 31, 1998 and April 30, 1998 were $67.4 million and $52.4 million. Annual commitment fees on the unused portions of the credit facility are 0.25%. Management of the Company believes that a combination of cash generated from operations, existing bank facilities and additional borrowing capacity, in aggregate, are adequate to meet the anticipated liquidity and capital resource requirements of its business. Sources of additional financing, if needed, may include further debt financing, or the sale of equity or other securities. IMPACT OF YEAR 2000 The Company has completed an assessment and will modify or replace portions of its hardware and software so that its computer systems will function properly with respect to dates in 2000 and thereafter. The Company has also had discussions with its significant suppliers to ensure that those parties have appropriate plans to remediate Year 2000 issues where their systems and products interface with the Company's systems or otherwise impact its operations or that of its customers. The Company is assessing the extent to which its operations are vulnerable should those organizations fail to properly remediate either their computer systems or their current product offerings available to the Company's customers. The Company's comprehensive Year 2000 initiative is being managed by a team of internal staff with the assistance of an outside consultant. The Company is well under way with its efforts, which are scheduled to be completed by mid-1999. The cost of the Year 2000 initiative is estimated to be approximately $2.0 million to be incurred over fiscal year 1999 and fiscal year 2000. While the Company believes its planning efforts are adequate to address its Year 2000 concerns, the Year 2000 readiness of the Company's customers, and the hardware and software offerings from the Company's suppliers and business partners may vary. Although the Company does not believe that the Year 2000 matters discussed above will have a material impact on its business, financial condition and results of operations, it is uncertain as to what extent the Company may be affected by such matters. 13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is involved in legal actions in the ordinary course of its business. Although the outcome of any such legal action cannot be predicted, in the opinion of management there is no legal proceeding pending against or involving the Company for which the outcome is likely to have a material adverse effect upon the consolidated financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) On September 24, 1998, the annual meeting of shareholders of the Company (the "Annual Meeting") was held. (b) At the Annual Meeting, the following directors were elected: Paul Baszucki David R. Richard Richard Cohen Dr. Jagdish N. Sheth Connie M. Levi Herbert F. Trader Gerald D. Pint 14 (c) The following items were voted upon at the Annual Meeting: (1) Election of Directors:
NAME VOTES FOR VOTES WITHHELD ----------------- --------- -------------- Paul Baszucki 8,340,269 770,994 Richard Cohen 8,339,362 771,901 Connie M. Levi 8,340,481 770,782 Gerald D. Pint 8,289,017 822,246 David R. Richard 8,310,029 801,234 Dr. Jagdish N. Sheth 8,341,109 770,154 Herbert F. Trader 8,288,575 822,688
(2) The shareholders approved an amendment to the company's 1995 Long-Term Incentive Plan to increase the number of shares of common stock reserved for issuance thereunder by 1,200,000 shares. A total of 6,192,525 shares were voted for the amendment, 1,414,815 shares were voted against, 68,636 shares abstained and 1,435,287 were broker non-votes. (3) The shareholders approved the appointment of Arthur Andersen LLP as independent auditors for the fiscal year ending April 30, 1999. A total of 9,047,305 shares were voted for the appointment of Arthur Andersen LLP, 6,950 shares were voted against, and there were a total of 57,008 abstentions. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Exhibit 10. (a) Fifth Amendment to Credit Agreement, dated as of September 28, 1998, by and among the Company, certain banks as signatories thereto (the "Banks") and U.S. Bank National Association, as one of the Banks and as agent for the Banks. (b) Sixth Amendment to Credit Agreement, dated as of October 21, 1998, by and among the Company, certain banks as signatories thereto (the "Banks") and U.S. Bank National Association, as one of the Banks and as agent for the Banks. (b) Reports on Form 8-K. None 15 S I G N A T U R E S Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORSTAN, INC. ------------------------------ Registrant Date: December 14, 1998 By /s/ DAVID R. RICHARD --------------------------- David R. Richard Chief Executive Officer, President and Director Date: December 14, 1998 By /s/ KENNETH S. MACKENZIE --------------------------- Kenneth S. MacKenzie Chief Financial Officer (Principal Financial and Accounting Officer) 16 EX-10.(A) 2 EXHIBIT 10(A) FIFTH AMENDMENT TO CREDIT AGREEMENT THIS FIFTH AMENDMENT TO CREDIT AGREEMENT dated as of September 28, 1998 ("this Amendment") is by and between NORSTAN, INC., a Minnesota corporation (the "Borrower"), the banks which are signatories hereto (individually, a "Bank" and, collectively, the "Banks") and U.S. BANK NATIONAL ASSOCIATION, a national banking association, one of the Banks, as agent for the Banks (in such capacity, the "Agent"). RECITALS A. The Borrower, U.S. Bank National Association (in its individual corporate capacity, "U.S. Bank"), M&I Marshall & Ilsley Bank ("M&I Bank), Harris Trust and Savings Bank ("Harris," and, together with U.S. Bank and M&I Bank collectively, the "Existing Banks") and the Agent are parties to a Credit Agreement dated as of July 23, 1996, as amended by a First Amendment dated as of October 11, 1996, a Second Amendment dated as of September 26, 1997, a Third Amendment dated as of March 20, 1998 and a Fourth Amendment dated as of July 23, 1998 (as so amended, the "Credit Agreement"). B. The Borrower desires to add Norwest Bank Minnesota, National Association ("Norwest") as a Bank under the Credit Agreement and the Agent and the Existing Banks are willing to permit Norwest to become a Bank under the Credit Agreement upon the terms and conditions set forth therein and in this Amendment. C. The parties hereto desire to amend the Credit Agreement in the respects hereinafter set forth. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: Section 1. DEFINITIONS. Capitalized terms used herein and not otherwise defined herein, but which are defined in the Credit Agreement, shall have the meanings ascribed to such terms in the Credit Agreement unless the context otherwise requires. Section 2. ADDITION OF NORWEST AS A BANK. Subject to Section 5 hereof, Norwest hereby assumes, adopts and, agrees to become a party, as a Bank, to the Credit Agreement and to each other Loan Document to which the Banks are parties, with a Revolving Commitment Amount stated in the amended Exhibit 1.1A to the Credit Agreement adopted by Section 3 of this Amendment, and the parties hereto, other than Norwest, acknowledge and consent to such actions by Norwest. Upon the effectiveness of this Amendment, as provided in Section 5 hereof, Norwest shall be a Bank under the Credit Agreement and the other Loan Documents and shall have all of the rights, privileges and benefits of a Bank under the Credit Agreement and the other Loan Documents, and all of the duties of a Bank thereunder, in each case as if Norwest had been initially a party to the Credit Agreement. Upon the effectiveness of 1.1A-1 this Amendment, U.S. Bank shall sell and assign to Norwest, and Norwest shall purchase and accept from U.S. Bank, at par, and without recourse to or warranties of any kind by U.S. Bank, a portion of U.S. Bank's Revolving Commitment Amount equal to $10,000,000, and corresponding portions of (i) U.S. Bank's Commercial Paper Sublimit, (ii) U.S. Bank's Letter of Credit Sublimit and (iii) the principal and interest accrued on U.S. Bank's Revolving Note (such amounts shall be collectively referred to as the "Transferred Interest"). Section 3. AMENDMENTS TO CREDIT AGREEMENT. Subject to Section 5 hereof, the Credit Agreement is hereby amended as follows: (a) All references to the "Banks" contained in the Credit Agreement shall be deemed to include, collectively, Norwest and each of the Existing Banks. (b) Exhibit 1.1A to the Credit Agreement is deleted and Exhibit 1.1A of this Amendment is inserted in its place. (c) The addresses for notices to Norwest shall be as set forth below their respective signature blocks on the signature pages to this Amendment unless and until such addresses are changed in accordance with Section 9.4 of the Credit Agreement. Section 4. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. To induce the Banks and the Agent to execute and deliver this Amendment (which representations and warranties shall survive the execution and delivery of this Amendment), the Borrower represents and warrants to the Agent and the Banks that: (a) this Amendment, the Amended U.S. Bank Note (as hereinafter defined) and the Norwest Note (as hereinafter defined) have been duly authorized, executed and delivered by it and this Amendment, the Amended U.S. Bank Note and the Norwest Note constitute the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, subject to limitations as to enforceability which might result from bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (b) the Credit Agreement, as amended by this Amendment, constitutes the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, subject to limitations as to enforceability which might result from bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (c) the execution, delivery and performance by the Borrower of this Amendment, the Amended U.S. Bank Note and the Norwest Note (i) have been duly authorized by all requisite corporate action and, if required, shareholder action, (ii) do not require the consent or approval of any governmental or regulatory body or agency, and (iii) will not (A) violate (1) any provision of law, statute, rule or regulation or its certificate of incorporation or bylaws, (2) any order of any court or any rule, regulation or order of any other agency or government binding upon it, or (3) any provision of any material 1.1A-1 indenture, agreement or other instrument to which it is a party or by which any of its properties or assets are or may be bound, or (B) result in a breach of or constitute (alone or with due notice or lapse of time or both) a default under any indenture, agreement or other instrument referred to in clause (iii)(A)(3) of this Section 4(c); (d) as of the date hereof, no Default or Event of Default has occurred which is continuing; and (e) all the representations and warranties contained in Article IV of the Credit Agreement are true and correct in all material respects with the same force and effect as if made by the Borrower on and as of the date hereof. Section 5. CONDITIONS TO EFFECTIVENESS OF THIS AMENDMENT. This Amendment shall not become effective until, and shall become effective on the date (the "Fifth Amendment Effective Date") when, each and every one of the following conditions shall have been satisfied: (a) executed counterparts of this Amendment, duly executed by the Borrower and each of the Banks, shall have been delivered to the Agent; (b) U.S. Bank shall have received a new promissory note substantially in the form attached hereto as Exhibit A (the "Amended U.S. Bank Note"), which Amended U.S. Bank Note shall constitute an amendment and restatement of the Revolving Note payable to U.S. Bank; (c) Norwest shall have received a promissory note substantially in the form attached hereto as Exhibit B duly executed by the Borrower (the "Norwest Note"), which Norwest Note shall constitute Norwest's Revolving Note under the Credit Agreement; (d) the Agent shall have received from each Guarantor a Consent and Agreement of Guarantor in the form of Exhibits C-1 through C-8 hereto (the "Guarantor Agreements") duly completed and executed by such Guarantor; (e) the Agent shall have received a copy of the resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance by the Borrower of this Amendment, the Amended U.S. Bank Note and the Norwest Note certified by an officer thereof, together with a certificate of an officer of the Borrower certifying as to the incumbency and the true signatures of the officers authorized to execute this Amendment, the Amended U.S. Bank Note and the Norwest Note on behalf of the Borrower; (f) the Agent shall have received the favorable opinion of counsel to Borrower, covering the matters set forth in Exhibit D hereto; and Upon the Fifth Amendment Effective Date, (i) the Agent shall notify the Borrower and the Banks that this Amendment has become effective, but the failure of the Agent to give such notice shall not affect the validity of this Amendment or prevent it from becoming effective, (ii) Norwest shall pay to U.S. Bank in cash or cash equivalents the purchase price for the Transferred Interest, 1.1A-3 in the amount or the sum of $10,000,000. From and after the Fifth Amendment Effective Date, all interest, Revolving Commitment Fees and Letter of Credit Fees accrued on the Transferred Interest for the billing period in which the Fifth Amendment Effective Date falls shall be paid to the Agent as provided in the Credit Agreement, and distributed by the Agent (A) with respect to amounts accrued before the Fifth Amendment Effective Date, to U.S. Bank and (B) with respect to amounts accrued on or after the Fifth Amendment Effective Date, to Norwest. Section 7. COUNTERPARTS AND EFFECTIVENESS. This Amendment may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one of the same instrument. Section 8. LEGAL EXPENSES. The Borrower agrees to reimburse the Agent for all reasonable out-of-pocket expenses (including attorneys' fees and legal expenses of Dorsey & Whitney LLP, counsel for the Agent) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment. Section 9. AFFIRMATION. Each party hereto affirms and acknowledges that (a) the Credit Agreement as amended by this Amendment remains in full force and effect in accordance with its terms, (b) all references to the "Credit Agreement" or any similar term contained in any other Loan Document shall be deemed to be references to the Credit Agreement as amended hereby and (c) all references to the "Revolving Notes" or any similar term contained in the Credit Agreement or any other Loan Document shall be deemed to be references to the Amended U.S. Bank Note, the Norwest Note and the Revolving Notes previously issued by the Borrower to each of Harris and M&I. Section 10. CHOICE OF LAW. This Amendment shall be governed by, and construed in accordance with, the internal law, and not the law of conflicts, of the State of Minnesota, but giving effect to federal laws applicable to national banks. Section 11. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon the Borrower, the Banks, the Agent and their respective successors and assigns, and shall inure to the benefit of the Borrower, the Banks and the successors and assigns of the Banks and the Agent. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 1.1A-1 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. NORSTAN, INC. By /s/ Robert J. Vold ------------------------------------ Its Treasurer --------------------------- U.S. BANK NATIONAL ASSOCIATION, as a Bank and as Agent By /s/ David Shapiro ------------------------------------ Title Assistant Vice President --------------------------------- M & I MARSHALL & ILSLEY BANK By /s/ Jeffrey P. Norton ------------------------------------ Title Vice President --------------------------------- By /s/ John W. Howard ------------------------------------ Title Vice President --------------------------------- HARRIS TRUST & SAVINGS BANK By /s/ Andrew K. Peterson ------------------------------------ Title Vice President --------------------------------- 1.1A-5 NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By /s/ Brad Sullivan ----------------------------------- Title Portfolio Manager -------------------------------- Address for Notices: -------------------- 7900 Xerxes Avenue South Bloomington, Minnesota 55431-2206 Telephone: (612) 316-4186 Facsimile: (612) 316-4203 1.1A-1 EXHIBIT 1.1A TO FIFTH AMENDMENT TO CREDIT AGREEMENT EXHIBIT 1.1A TO CREDIT AGREEMENT REVOLVING COMMITMENT AMOUNTS AND SUBLIMITS
Revolving Commercial Standby Commitment Revolving Paper Letter of Credit Bank Amount Percentage Sublimit Sublimit - ------ ----------- ---------- ----------- ---------------- U.S. Bank $40,000,000 50% $15,000,000 $2,500,000 National Association Harris Trust $20,000,000 25% $ 7,500,000 $1,250,000 And Savings Bank Marshall & $10,000,000 12.5% $ 3,750,000 $ 625,000 Ilsley Bank Norwest Bank $10,000,000 12.5% $ 3,750,000 $ 625,000 Minnesota, National Association ----------- ----- ----------- ---------- Total $80,000,000 100% $30,000,000 $5,000,000
1.1A-7 EX-10.(B) 3 EXHIBIT 10(B) SIXTH AMENDMENT TO CREDIT AGREEMENT THIS SIXTH AMENDMENT TO CREDIT AGREEMENT dated as of October 21, 1998 ("this Amendment") is by and between NORSTAN, INC., a Minnesota corporation (the "Borrower"), the banks which are signatories hereto (individually, a "Bank" and, collectively, the "Banks") and U.S. BANK NATIONAL ASSOCIATION, a national banking association, one of the Banks, as agent for the Banks (in such capacity, the "Agent"). RECITALS A. The Borrower, U.S. Bank National Association (in its individual corporate capacity, "U.S. Bank"), M&I Marshall & Ilsley Bank ("M&I Bank"), Harris Trust and Savings Bank ("Harris"), Norwest Bank Minnesota, National Association ("Norwest," and, together with U.S. Bank, M&I Bank and Harris collectively, the "Banks") and the Agent are parties to a Credit Agreement dated as of July 23, 1996, as amended by a First Amendment dated as of October 11, 1996, a Second Amendment dated as of September 26, 1997, a Third Amendment dated as of March 20, 1998, a Fourth Amendment dated as of July 23, 1998 and a Fifth Amendment dated as of September 28, 1998 (as so amended, the "Credit Agreement"). B. The parties hereto desire to amend the Credit Agreement in the respects hereinafter set forth. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: Section 1. DEFINITIONS. Capitalized terms used herein and not otherwise defined herein, but which are defined in the Credit Agreement, shall have the meanings ascribed to such terms in the Credit Agreement unless the context otherwise requires. Section 2. AMENDMENTS TO CREDIT AGREEMENT. Subject to Section 4 hereof, the Credit Agreement is hereby amended as follows: (a) Exhibit 1.1A to the Credit Agreement is deleted and Exhibit A of this Amendment is inserted in its place. Section 3. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. To induce the Banks and the Agent to execute and deliver this Amendment (which representations and warranties shall survive the execution and delivery of this Amendment), the Borrower represents and warrants to the Agent and the Banks that: [Signature Page to Sixth Amendment to Credit Agreement] S-1 (a) this Amendment, the Amended M&I Bank Note (as hereinafter defined) and the Amended Norwest Note (as hereinafter defined) have been duly authorized, executed and delivered by it and this Amendment, the Amended M&I Bank Note and the Amended Norwest Note constitute the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, subject to limitations as to enforceability which might result from bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (b) the Credit Agreement, as amended by this Amendment, constitutes the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, subject to limitations as to enforceability which might result from bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (c) the execution, delivery and performance by the Borrower of this Amendment, the Amended M&I Bank Note and the Amended Norwest Note (i) have been duly authorized by all requisite corporate action and, if required, shareholder action, (ii) do not require the consent or approval of any governmental or regulatory body or agency, and (iii) will not (A) violate (1) any provision of law, statute, rule or regulation or its certificate of incorporation or bylaws, (2) any order of any court or any rule, regulation or order of any other agency or government binding upon it, or (3) any provision of any material indenture, agreement or other instrument to which it is a party or by which any of its properties or assets are or may be bound, or (B) result in a breach of or constitute (alone or with due notice or lapse of time or both) a default under any indenture, agreement or other instrument referred to in clause (iii)(A)(3) of this Section 3(c); (d) as of the date hereof, no Default or Event of Default has occurred which is continuing; and (e) all the representations and warranties contained in Article IV of the Credit Agreement are true and correct in all material respects with the same force and effect as if made by the Borrower on and as of the date hereof. Section 4. CONDITIONS TO EFFECTIVENESS OF THIS AMENDMENT. This Amendment shall not become effective until, and shall become effective on the date (the "Sixth Amendment Effective Date") when, each and every one of the following conditions shall have been satisfied: (a) executed counterparts of this Amendment, duly executed by the Borrower and each of the Banks, shall have been delivered to the Agent; (b) M&I Bank shall have received a new promissory note substantially in the form attached hereto as Exhibit B (the "Amended M&I Bank Note"), which Amended M&I Bank Note shall constitute an amendment and restatement of the Revolving Note dated July 23, 1998 payable to M&I Bank; [Signature Page to Sixth Amendment to Credit Agreement] S-2 (c) Norwest shall have received a new promissory note substantially in the form attached hereto as Exhibit C duly executed by the Borrower (the "Amended Norwest Note"), which Amended Norwest Note shall constitute an amendment and restatement of the Revolving Note dated September 28, 1998 payable to Norwest; (d) the Agent shall have received from each Guarantor a Consent and Agreement of Guarantor in the form of Exhibits D-1 through D-8 hereto (the "Guarantor Agreements") duly completed and executed by such Guarantor; (e) the Agent shall have received a copy of the resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance by the Borrower of this Amendment, the Amended M&I Bank Note and the Amended Norwest Note certified by an officer thereof, together with a certificate of an officer of the Borrower certifying as to the incumbency and the true signatures of the officers authorized to execute this Amendment, the Amended M&I Bank Note and the Amended Norwest Note on behalf of the Borrower; and (f) the Agent shall have received the favorable opinion of counsel to Borrower, covering the matters set forth in Exhibit E hereto. Upon the Sixth Amendment Effective Date, the Agent shall notify the Borrower and the Banks that this Amendment has become effective, but the failure of the Agent to give such notice shall not affect the validity of this Amendment or prevent it from becoming effective. Section 5. COUNTERPARTS AND EFFECTIVENESS. This Amendment may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one of the same instrument. Section 6. LEGAL EXPENSES. The Borrower agrees to reimburse the Agent for all reasonable out-of-pocket expenses (including attorneys' fees and legal expenses of Dorsey & Whitney LLP, counsel for the Agent) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment. Section 7. AFFIRMATION. Each party hereto affirms and acknowledges that (a) the Credit Agreement as amended by this Amendment remains in full force and effect in accordance with its terms, (b) all references to the "Credit Agreement" or any similar term contained in any other Loan Document shall be deemed to be references to the Credit Agreement as amended hereby and (c) all references to the "Revolving Notes" or any similar term contained in the Credit Agreement or any other Loan Document shall be deemed to be references to the Amended M&I Bank Note, the Amended Norwest Note and the Revolving Notes previously issued by the Borrower to each of U.S. Bank and Harris. Section 8. CHOICE OF LAW. This Amendment shall be governed by, and construed in accordance with, the internal law, and not the law of conflicts, of the State of Minnesota, but giving effect to federal laws applicable to national banks. [Signature Page to Sixth Amendment to Credit Agreement] S-3 Section 9. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon the Borrower, the Banks, the Agent and their respective successors and assigns, and shall inure to the benefit of the Borrower, the Banks and the successors and assigns of the Banks and the Agent. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] [Signature Page to Sixth Amendment to Credit Agreement] S-4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. NORSTAN, INC. By /s/ Robert J. Vold -------------------------------- Its Treasurer ---------------------------- U.S. BANK NATIONAL ASSOCIATION, as a Bank and as Agent By /s/ David Shapiro -------------------------------- Its Assistant Vice President ---------------------------- M & I MARSHALL & ILSLEY BANK By /s/ Doug Nelson -------------------------------- Its Vice President ---------------------------- By /s/ Stephen F. Geimer -------------------------------- Its Vice President ---------------------------- HARRIS TRUST & SAVINGS BANK By /s/ George M. Dluhy -------------------------------- Its Vice President ---------------------------- NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By /s/ Brad Sullivan -------------------------------- Its Portfolio Manager ---------------------------- [Signature Page to Sixth Amendment to Credit Agreement] S-5 EXHIBIT 1.1A TO SIXTH AMENDMENT TO CREDIT AGREEMENT EXHIBIT 1.1A TO CREDIT AGREEMENT REVOLVING COMMITMENT AMOUNTS AND SUBLIMITS
Revolving Commercial Standby Commitment Revolving Paper Letter of Credit Bank Amount Percentage Sublimit Sublimit - -------- ----------- ---------- ----------- ---------------- U.S. Bank $40,000,000 40% $12,000,000 $ 2,000,000 National Association Harris Trust $20,000,000 20% $ 6,000,000 $ 1,000,000 And Savings Bank Marshall & $20,000,000 20% $ 6,000,000 $ 1,000,000 Ilsley Bank Norwest Bank $20,000,000 20% $ 6,000,000 $ 1,000,000 Minnesota, National Association ------------ ----- ----------- ----------- Total $100,000,000 100% $30,000,000 $ 5,000,000
A-1 EX-27 4 EXHIBIT 27
5 1,000 6-MOS APR-30-1999 MAY-01-1998 OCT-31-1998 1,853 0 93,046 996 21,352 183,213 90,442 45,043 311,495 98,821 101,427 1,065 0 0 105,675 311,495 105,092 240,903 75,095 164,396 63,006 0 2,252 11,249 4,892 6,357 0 0 0 6,357 .61 .61
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