-----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, HtCAJSLHOuTZIQIMeoxKDAqEpU0QfKt4+wjjkyFEhOnkjAkubETVTsxvM96K+lgT +etXxvuRIr1nl4n2gXLK4Q== 0001047469-99-028913.txt : 19990729 0001047469-99-028913.hdr.sgml : 19990729 ACCESSION NUMBER: 0001047469-99-028913 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990728 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-K SEC ACT: SEC FILE NUMBER: 000-08141 FILM NUMBER: 99672209 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-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED APRIL 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-8141 NORSTAN, INC. (Exact name of registrant as specified in its chapter) MINNESOTA 41-0835746 (State of incorporation) (I.R.S. Employer identification No.) 5101 SHADY OAK ROAD, MINNETONKA, MINNESOTA 55343 (Address of principal executive offices) The Company's phone number: 612-352-4000 The Company's internet address: WWW.NORSTAN.COM
Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK ($.10 PAR VALUE PER SHARE) COMMON STOCK PURCHASE RIGHTS (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of July 14, 1999, the aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average high and low prices on such date as reported by the Nasdaq National Market System was approximately $126,941,000. As of July 14, 1999, there were outstanding 10,791,726 shares of the registrant's common stock, par value $.10 per share, its only class of equity securities. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement to be filed within 120 days after the end of the fiscal year covered by this report are incorporated by reference into Part III hereof. i TABLE OF CONTENTS
PART I PAGE ---- ITEM 1. Business..................................................... 1 Summary.................................................... 1 Industry Overview.......................................... 2 The Norstan Solution....................................... 2 Norstan's Business Strategy............................... 3 Norstan's Growth Strategy.................................. 3 Products and Services...................................... 4 Customers.................................................. 7 Strategic Alliances........................................ 7 Sales and Marketing........................................ 7 Customer Service........................................... 8 Locations.................................................. 9 Human Resources............................................ 10 Competition................................................ 10 Intellectual Property Rights............................... 11 Government Regulation...................................... 11 Backlog.................................................... 11 ITEM 2. Properties................................................... 12 ITEM 3. Legal Proceedings............................................ 12 ITEM 4. Submission of Matters to a Vote of Security Holders.......... 12 PART II ITEM 5. Market for the Company's Common Equity and Related Shareholder Matters ..................................................... 13 ITEM 6. Selected Consolidated Financial Data......................... 14 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 15 ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk.... 21 ITEM 8. Financial Statements and Supplementary Data.................. 22 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 40 PART III ITEM 10. Directors and Executive Officers of the Registrant........... 40 ITEM 11. Executive Compensation....................................... 40 ITEM 12. Security Ownership of Certain Beneficial Owners and Management................................................... 40 ITEM 13. Certain Relationships and Related Transactions............... 40 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K..................................................... 41 SIGNATURES 42
ii PART I ITEM 1. BUSINESS. BUSINESS SUMMARY Norstan is a leading provider of communication and information technology ("IT") solutions for over 18,000 customers in the United States, Canada and England. To address the complex communication requirements of its customers, Norstan provides a broad range of products and services, including telephone systems, call center systems, voice processing, network integration, voice and video conferencing, and facilities management services. Norstan's network of approximately 700 field technicians and service consultants delivers communication services to its customers. In addition, the Company provides a wide array of IT solutions through IT Consulting Services. These solutions include the design, implementation, maintenance and modification of IT applications and systems. IT Consulting Services currently employs over 800 consultants and generated a 49% increase in revenues during fiscal year 1999. As communication and information technologies converge, Norstan's strategy is to expand the breadth of its IT consulting services offerings to serve as a single-source provider of leading technology solutions to its customers. The Company delivers its products and services through three business units, Global Services, Communication Solutions and Financial Services, which accounted for 56.8%, 41.6% and 1.6% of Norstan's fiscal year 1999 revenues, respectively. Global Services includes IT Consulting Services and Communication Services (see Note 12 to the Company's consolidated financial statements for financial information concerning each segment's operations). IT Consulting Services provides IT services including enterprise resource planning ("ERP") and enterprise resource management ("ERM") package implementation, Internet/Intranet/E-commerce solutions, multiservice networking services, strategic advisory services, application development and infrastructure services and outsourced facilities management. Communication Services provides customer support services for communication systems, including maintenance services, systems modifications and long distance services. Communication Solutions provides a broad array of solutions including telephone systems, integrated voice processing, call center technologies and video/audio/data conferencing solutions. Financial Services supports the sales process by providing customized financing alternatives. The Company believes that its breadth of product and service offerings fosters long-term customer relationships, affords cross-selling opportunities and minimizes the Company's dependence on any single technology or industry. The Company operates in 73 locations in 63 cities throughout the United States and Canada (see Note 12 to the Company's consolidated financial statements for financial information concerning the Company's Canadian operations). Norstan has served over 18,000 customers across a broad range of industries in the last three years and focuses its marketing efforts on middle-market and Fortune 500 companies with complex technology and communication requirements. Current customers include BP Amoco, IBM, Kellogg Company, John Deere, US Bancorp, 3M and Harley-Davidson. The Company believes that its installed base of communication systems customers will offer extensive opportunities for cross-selling IT consulting services. Management also believes that IT Consulting Services customers will be a source of additional communication business. Norstan's strong emphasis on customer satisfaction is evidenced by a survey of Norstan's communication customers, in which Norstan received an overall satisfaction rating of 91% in fiscal year 1999. The Company believes that its outstanding customer service will enable Norstan to capture a greater portion of each customer's communication and IT budgets in the future. Norstan provides leading-edge technologies in both its IT and communication operations. The Company has established strategic alliances with leading IT and communication companies that allow Norstan to offer objective solutions to its customers. IT strategic alliance partners include IBM, Siebel Systems, Oracle, Lotus, PeopleSoft, Tivoli, Novell and Microsoft. Communication strategic alliance partners include Siemens, Aspect, VTEL, PictureTel, Latitude, Cisco Systems, Sprint, Lucent Technologies (formerly Octel) and Applied Voice Technology. 1 INDUSTRY OVERVIEW In the current climate of intense global competition and accelerating technological change, businesses increasingly depend upon technology-based solutions to enhance their competitive position, and to improve their productivity and the quality of their products and services. Today's business environment mandates the availability of efficient voice and video communication channels and information in formats suited to a wide variety of users. Accordingly, businesses are looking to a variety of new technologies to enhance the performance of their communication systems and to allow IT systems to collect, analyze and communicate information within the enterprise and among customers and suppliers. An organization's ability to integrate and deploy new communication and IT technologies in a unified and cost-effective manner has become critical to competing successfully in today's rapidly changing business environment. While organizations recognize the importance of communication and IT systems in this business environment, the selection, implementation, customization and maintenance of these systems are becoming more complex and the resources required to perform these tasks are becoming increasingly scarce. Faced with a shortage of qualified technical resources and great demands to implement the latest technology, customers are increasingly relying on outside vendors to provide the necessary resources. By outsourcing communication and IT services, companies are able to focus on their core businesses; access specialized technical skills; implement solutions more rapidly; benefit from flexible staffing; and reduce the cost of recruiting, training and retaining communication and IT professionals. As a result of these factors, demand for IT and communication services and products has grown significantly. The 1998 worldwide market for IT services was estimated at $350 billion and is projected to grow to $620 billion by 2002 according to Dataquest, a leading IT market research and consulting firm. Dataquest also estimates that the market for these services is projected to grow at a 15% compound annual growth rate. For calendar year 1998, Phillips InfoTech, (InfoTech), a market research firm specializing in telecommunications market information, estimates that the U.S. market for switching, networking and application equipment was over $17 billion, and the U.S. market for telecommunications maintenance and professional services was estimated to be approximately $4 billion. As customers seek the competitive advantages that advanced communication and computer telephony integration can deliver, growth of certain segments of call processing are expected to be particularly strong. According to InfoTech, between 1998 and 2002, the U.S. market for voice mail, interactive voice response units, networking equipment, and other telecommunications peripherals and applications is expected to grow at a compound annual growth rate of approximately 8%. By 2002, the U.S. market for these associated applications and peripherals is projected to be over $15 billion. The markets and technologies for communication equipment and IT applications and systems continue to converge as communication equipment migrates from proprietary switches to software-driven systems operating on standardized computer platforms. As a result, businesses are integrating their communication and IT systems. In addition, many middle-market and Fortune 500 companies rely on multiple, often specialized, providers to help implement and manage their communication and IT systems. The Company believes that relying on multiple service providers, where there is no distinct responsible party, creates vendor relationships that are difficult and expensive to manage and adversely impacts the quality and compatibility of communication and IT solutions. As previously separate communication and IT technologies converge and their interoperability increases, more organizations will seek a unified technology solution. Norstan believes that these organizations will attempt to reduce costs and management complexity by establishing relationships with a small number of providers that offer a broad range of both communication and IT products and services throughout the full life cycle of a project. THE NORSTAN SOLUTION The Company is a single-source provider of a wide range of communication and IT solutions that enable its customers to compete and succeed in the global marketplace. The Company has leveraged its established reputation as a provider of premier communication products and services, along with the capability of its more than 800 IT consultants, to deliver a unified communication and IT solution to middle-market and Fortune 500 companies. This broad range of offerings enables Norstan to serve as a single-source provider of communication and IT solutions throughout the entire life cycle of a project. Norstan's ability to serve as a single-source provider results in closer integration, reduced risk and greater management control for the customer. The Company believes that its customer relationships, its geographic reach and size, and its expertise in providing both communication and IT solutions will enable it to capitalize on the continuing growth and convergence of communication and IT needs of middle-market and Fortune 500 companies. 2 NORSTAN'S BUSINESS STRATEGY The Company's objective is to become a leading provider of communication and IT offerings to middle-market and Fortune 500 companies. The Company's strategy to achieve this objective includes the following key elements: CAPITALIZE ON THE ACCELERATING CONVERGENCE OF COMMUNICATION AND INFORMATION TECHNOLOGIES. Norstan's established communication expertise, coupled with its IT consulting capabilities, positions the Company to exploit the convergence of voice, video and information technologies onto a single platform. Norstan believes that it is one of the few firms offering this combination of skills and services, enabling the Company to serve as a single-source provider of a unified technology solution. INCREASE FOCUS ON PROVIDING TECHNOLOGY SERVICES. As communication and information technologies converge, the Company intends to increase its percentage of revenues derived from technology services, which typically command higher margins than product sales. Management believes that its increased focus on technology services will enhance its overall profitability. Over the last three fiscal years, revenues from Norstan's Global Services business unit increased at a 26% annual compound growth rate and accounted for over 56.8% of revenues in fiscal year 1999. OFFER A BROAD RANGE OF COMMUNICATION AND IT SOLUTIONS. Norstan's broad range of voice, video and data solutions allows the Company to serve as a single-source provider for its customers' communication and IT needs. The ability to provide consulting services, hardware, software, training and on-going support enables Norstan to offer a unified communication and IT solution throughout the life cycle of a project. This capability will become increasingly important as communication and information technologies continue to converge and customers look to retain a single-source provider for all their communication and IT needs. ATTRACT, DEVELOP AND RETAIN HIGHLY SKILLED PROFESSIONALS. The Company seeks to attract, develop and retain the highest caliber of communication and IT consultants. Norstan places a strong emphasis on the career development and training of its IT consultants through its Team Manager program. Team Managers provide career guidance and ensure that employees maintain skills in state-of-the-art technologies. Norstan offers a competitive combination of employee benefits and incentives, including employee stock option and stock purchase programs, as well as incentive compensation based on the amount billed by individual consultants. PROVIDE SUPERIOR CUSTOMER SERVICE. Norstan believes its dedication to providing service beyond its customers' expectations has produced many favorable customer relationships and resulted in increased exposure to potential customers. Norstan's strong emphasis on customer satisfaction is evidenced by a survey of Norstan's communication customers, in which Norstan received an overall satisfaction rating of 91% in fiscal year 1999. The Company believes that its reputation for superior service will lead to opportunities for cross-selling additional products and services to its customer base. OFFER LEADING-EDGE TECHNOLOGIES. Norstan maintains several strategic alliances with business partners that allow it to offer leading-edge technologies. IT strategic alliance partners include IBM, Siebel Systems, Oracle, Lotus, PeopleSoft, Tivoli, Novell and Microsoft. Communication strategic alliance partners include Siemens, Aspect, VTEL, PictureTel, Latitude, Cisco Systems, Sprint, Lucent Technologies (formerly Octel) and Applied Voice Technology. These strategic alliances provide the Company with access to training, product support and current technology as well as the use of the "business partner" designation in marketing the Company's products and services. The Company intends to strengthen its existing alliances and pursue additional alliances with leading technology companies. NORSTAN'S GROWTH STRATEGY To achieve its growth objectives, the Company has adopted the following strategies: CONTINUE INTERNAL GROWTH OF NORSTAN IT CONSULTING SERVICES. The Company seeks to continue the rapid growth of IT Consulting Services by opening branch locations in targeted geographic markets. During fiscal year 1999, IT Consulting Services generated 22% internal revenue growth and opened five new branch locations in San Diego, CA, Kansas City, KS, Detroit, MI, Parsippany, NJ and Warren, NJ. Driven by customer demand, Norstan will continue to expand into other geographic markets. In addition, the Company intends to leverage existing communication locations through cross-selling efforts and the aggressive recruitment of IT consultants. PURSUE COMPLEMENTARY IT SERVICES ACQUISITIONS. To capitalize on the highly fragmented nature of the IT services industry, the Company intends to grow IT Consulting Services through acquisitions. Building on its experience of acquiring communication companies over the last ten years, Norstan has completed four acquisitions of IT services businesses since 1996. The Company will target additional acquisitions that provide complementary expertise, expand its domestic and international geographic presence, diversify its customer base and increase its consulting resources. 3 LEVERAGE EXISTING CUSTOMER RELATIONSHIPS. Norstan intends to grow its technology services business by leveraging the Company's existing base of over 18,000 customers. These relationships provide Norstan with significant advantages in marketing new communication and IT services and solutions. Management believes the convergence of communication and information technologies, together with the Company's high level of customer satisfaction, will position Norstan to become a preferred provider of both communication and IT solutions. PRODUCTS AND SERVICES Norstan provides customers with a single source for a broad range of communication and IT products and services to design, develop and implement technology solutions in a variety of customer environments. These products and services are delivered through three business units, Global Services, Communication Solutions and Financial Services. GLOBAL SERVICES. Global Services, which represented 56.8% of the Company's fiscal year 1999 revenues, consists of two operating groups: IT Consulting Services and Communication Services. The following table summarizes the products and services provided by these two groups. 4 GLOBAL SERVICES IT CONSULTING SERVICES
CATEGORY OF SERVICE DESCRIPTION OF SERVICES ------------------- ----------------------- E-Commerce - Develop E-Commerce and supply chain strategies - Develop and implement web applications - Provide Intranet consulting services - Develop on-line business models - Provide EDI consulting services Strategic Advisory Services - Develop strategic IT plans - Provide business transformation and technology planning consulting services - Provide information management consulting - Provide change management and knowledge management consulting services Enterprise Relationship Management - Implement and customize marketing and sales force automation packaged software solutions - Develop and implement call center strategies and solutions - Provide application portfolio selection and assembly services - Develop customer service/field service applications Enterprise Resource Planning - Implement and customize Oracle and PeopleSoft packaged software solutions - Provide data warehousing and business intelligence consulting services - Provide application portfolio selection and services - Develop and implement web enablement Application Development & - Design and develop applications Infrastructure Services - Develop and implement groupware/messaging applications - Manage and monitor customer's network operations - Design and implement technical architecture - Provide standard/custom technical education and training services Multiservice Networking - Develop and implement call center solutions - Integrate computer/telephony applications - Provide audio, video and data conferencing services - Provide network communication and architecture consulting services - Provide unified messaging and IP telephony consulting services Managed Services - Manage networks and systems - Support and maintain applications - Perform product procurement and integration - Manage customer's communication operations
5 COMMUNICATION SERVICES
CATEGORY OF SERVICE DESCRIPTION OF SERVICES ------------------- ----------------------- Communication Maintenance - Provide maintenance services on customers' Services communication systems hardware Moves, Adds and Changes - Transfer telephone systems to new user locations - Add telephones or expansion cards in a telephone system - Change system and user features Long Distance Services - Offer a full range of long distance and network services
COMMUNICATION SOLUTIONS. Communication Solutions, which represented 41.6% of the Company's fiscal year 1999 revenues, focuses on the design, sale and implementation of communication and other technology equipment. Communication Solutions provides the following products and services: COMMUNICATION SOLUTIONS
CATEGORY OF PRODUCT OR SERVICE DESCRIPTION OF PRODUCTS AND SERVICES ------------------------------ ------------------------------------ Telephone Systems - Design, install and implement PBX systems and other telephone switching systems - Supply PBX and other telephone switching systems Call Center Systems - Design, install and implement call center systems - Supply call center systems Call Processing Systems - Design, install and implement voice response and voice messaging products - Supply voice response and voice messaging products Conferencing Systems - Design, install and implement conferencing systems - Provide audio, video and data conferencing products Refurbished Equipment - Refurbish and resell previously owned Siemens, Nortel, Iwatsu, Aspect and Isoetec products
FINANCIAL SERVICES. Financial Services, which represented 1.6% of the Company's fiscal year 1999 revenues, provides customers with efficient and competitive financing for the purchase or lease of products and services. Financial Services supports the sales process by offering customized lease structures that eliminate the need for third party financing. 6 CUSTOMERS Norstan focuses its marketing efforts on middle-market and Fortune 500 companies with complex communication and IT requirements. Norstan has served over 18,000 customers across a broad range of industries over the last three fiscal years. No single customer accounted for more than 5% of Norstan's total revenue during any of the last three fiscal years. Norstan customers include the following: IT CONSULTING SERVICES
3M Harley-Davidson Nationwide Insurance Acer Invacare Old Mutual American Electric Power John Deere State Farm Insurance American Express Kellogg Company StorageTek Becton Dickinson Lucent Technologies SuperValu Grand Metropolitan Michelin Williams-Sonoma COMMUNICATION SERVICES AND COMMUNICATION SOLUTIONS American Freightways Cargill Imation BP Amoco Fortis Insurance Medtronic Best Buy Harley-Davidson Marquette University CIBC IBM US Bancorp
STRATEGIC ALLIANCES The Company believes that its relationships with a wide range of leading technology companies position Norstan to deliver the appropriate solution to each customer. IT strategic alliance partners include IBM, Siebel Systems, Oracle, Lotus, PeopleSoft, Tivoli, Novell and Microsoft. In addition, Siebel Systems, a leading customer care and sales automation software provider, has granted Premier Consulting Partner status to Connaissance Consulting (a majority-owned Norstan affiliate). Communication strategic alliance partners include Siemens, Aspect, VTEL, PictureTel, Latitude, Cisco Systems, Sprint, Lucent Technologies (formerly Octel) and Applied Voice Technology. In addition, the Company distributes complementary communication products that fit specific segments of the marketplace. These include hybrid switching systems, personal computer-based voice processing and video conferencing systems, as well as data communication products from Novell, Newbridge and others. Norstan has been a distributor of Siemens communication equipment since 1976 and is Siemens' largest independent distributor in North America. The term of the current distributor agreement with Siemens, signed in January 1999, is five years. Norstan and Siemens have also renewed an agreement through July 27, 2003 under which Norstan is an authorized agent for the refurbishment and sale of previously owned Siemens equipment. SALES AND MARKETING Norstan has approximately 500 sales and marketing personnel within the United States and Canada. The sales force includes product and service specialists with expertise in IT consulting services, video conferencing, call centers, communication services, education and training, and other areas. These specialists partner with the sales representatives who have primary responsibility for the customer relationship to develop integrated technology solutions which address the specific technology needs of Norstan's customers. Norstan uses several techniques to pursue new customer opportunities, including telemarketing, seminars, participation in trade shows and advertising. Norstan also maintains a new account sales team to pursue new customer prospects. Norstan's sales representatives and specialists use a comprehensive approach to evaluate each customer's technology needs. The sales representative begins with a detailed analysis of the customer's current and future communication and IT systems requirements. After determining the customer's needs, the sales representative and product specialist develop a solution that satisfies current and anticipated requirements. Norstan's consulting and operations teams then work with the customer to plan the delivery and implementation of the solution and to identify required training. By planning the precise requirements of each phase of the solution delivery, Norstan's specialists are able to minimize service interruption for the customer. Norstan also provides an ongoing support program tailored to meet the customer's specific application requirements that incorporates remote diagnostics, in-field service and support, additional training and help desk support from Norstan's customer support representatives. 7 Norstan's marketing strategy is to capture a larger portion of existing customers' communication and IT budgets and to identify and develop new customer relationships. In particular, the Company believes that its installed base of communication systems customers offers extensive opportunities for the marketing of IT consulting services. Management also believes that Norstan IT Consulting Services will be a source of additional communication business. Norstan anticipates that its high quality customer service will support ongoing marketing efforts, as satisfied customers are more likely to choose Norstan to supply additional communication and IT products and services. CUSTOMER SERVICE Norstan believes that providing exceptional customer service is an important element of its ability to compete effectively in the communication and IT marketplace. Norstan has invested heavily in new technology that is designed to enable the Company to resolve a substantial portion of customer support and service issues quickly and remotely. Norstan coordinates its customer service response through three remote diagnostics and dispatch centers located in the Minneapolis, Cleveland and Toronto areas. In fiscal year 1999, these centers handled over 170,000 customer calls with approximately 53% of the service-related calls addressed remotely. Only 18% of customer calls were resolved remotely in fiscal year 1994. The Company's goal for fiscal year 2000 is to resolve in excess of 55% of service calls remotely. For calls requiring immediate on-site service and support, Norstan maintains a highly trained force of service technicians, design engineers and customer support representatives. Norstan has approximately 120 employees in its three remote diagnostics and dispatch centers devoted primarily to providing customer service and has over 400 service technicians in the field. With Norstan's remote problem resolution capability and its highly trained staff of technicians, Norstan is able to promptly resolve customer support requests. Norstan's commitment to customer service is evidenced by a recent survey of Norstan's Communication customers that found an overall satisfaction rating of 91% in fiscal year 1999. 8 LOCATIONS The Company currently supports its IT Consulting Services, Communication Services and Communication Solutions customers with locations in the United States and Canada. Driven by customer demand, Norstan will continue to add new IT Consulting Services branches during fiscal year 2000. The Company maintains the following 73 locations in 63 cities: IT CONSULTING SERVICES
Atlanta, GA Des Moines, IA Phoenix, AZ Baltimore, MD Detroit, MI Pittsburgh, PA Champaign, IL Greensboro, NC Raleigh, NC Charlotte, NC Greenville, SC Richmond, VA Chicago, IL Indianapolis, IN San Diego, CA Cincinnati, OH Kansas City, KS San Francisco, CA Cleveland, OH Milwaukee, WI St. Louis, MO Columbia, SC Minneapolis, MN Warren, NJ Columbus, OH Omaha, NE Denver, CO Parsippany, NJ COMMUNICATION SERVICES AND COMMUNICATION SOLUTIONS Albuquerque, NM Edmonton, Alberta Oklahoma City, OK Amarillo, TX El Paso, TX Omaha, NE Appleton, WI Fargo, ND Ottawa, Ontario Austin, TX Las Vegas, NV Phoenix, AZ Baton Rouge, LA Lexington, KY Pittsburgh, PA Birmingham, AL Little Rock, AR Rochester, MN Calgary, Alberta London, Ontario Shreveport, LA Cedar Rapids, IA Louisville, KY Sioux Falls, SD Chicago, IL Lubbock, TX Springdale, AR Cincinnati, OH Madison, WI Toledo, OH Cleveland, OH Milwaukee, WI Toronto, Ontario Columbus, OH Minneapolis, MN Tucson, AZ Davenport, IA Mobile, AL Tulsa, OK Dayton, OH Montreal, Quebec Vancouver, British Columbia Des Moines, IA New Orleans, LA Winnipeg, Manitoba
9 HUMAN RESOURCES As of April 30, 1999, Norstan had 2,657 regular employees, of which over 800 were IT consulting personnel and approximately 700 were communication field technicians and service consultants. U.S. operations totaled 2,471 employees, including approximately 100 who are covered by collective bargaining agreements. The Company's Canadian operations had a total of 186 employees. The Company's success depends in large part on its ability to attract, develop, motivate and retain highly skilled IT consultants. Qualified technical employees are in great demand and are likely to remain a limited resource for the foreseeable future. To retain these resources, Norstan places a strong emphasis on the career development and training of its IT consultants and has implemented several unique programs, including its Team Manager initiative. Team Managers ensure that employee skills remain current with the industry and that the employee is given adequate development experiences to create a fulfilling work environment. Norstan also offers a competitive combination of employee benefits and incentives, including employee stock options, stock purchase programs and an attractive revenue-sharing arrangement whereby an individual consultant's base compensation is supplemented with a percentage of the revenue that the individual bills. Norstan also dedicates significant resources to recruiting consultants with specific technical and industry expertise. In connection with its hiring efforts, the Company employs internal recruiters and relies on personal and business contacts to recruit professionals through referrals, contacts at trade shows and job fairs. The Company uses formal training programs to further develop its professional resources. The Company also uses mentoring by placing junior IT professionals under the guidance of senior IT professionals on certain customer engagements. In addition, in order to expand the skills and develop the careers of the Company's consultants and technical staff, the Company maintains access to computer-based training resources covering 450 course topics. COMPETITION The communication industry is intensely competitive and rapidly changing. Norstan's primary competitors in this area include Lucent Technologies, Nortel and the RBOCs. Many of its competitors have longer operating histories, greater financial and human resources, and greater name recognition than Norstan. The passage of the Telecommunications Act of 1996 has fostered competition by providing access to a number of entities that were previously precluded from the industry. As a result of this legislation, the pace of consolidation in the industry has accelerated. These changes in the regulatory environment could potentially affect Norstan's ability to compete successfully. The market for IT services includes a large number of competitors, is subject to rapid change and is highly competitive. Primary competitors include participants from a variety of market segments, including national accounting firms, systems consulting and implementation firms, application software firms, service groups of computer equipment companies, facilities management companies, general management consulting firms and programming companies. Many of these competitors have significantly greater financial, technical and marketing resources and greater name recognition than the Company. In addition, the Company competes with its customers' internal resources, particularly when these resources represent a fixed cost to the customer. Such competition may impose additional pricing pressures on the Company. Subject to this competitive environment, the Company competes on the basis of: (i) the depth and breadth of services and products offered; (ii) the ability to integrate IT and communication systems as the related technologies continue to converge; (iii) its reputation for providing superior customer service; and (iv) the number and strength of customer relationships. 10 INTELLECTUAL PROPERTY RIGHTS The Company relies upon a combination of nondisclosure and other contractual arrangements with certain key employees, and trade secret, copyright and trademark laws to protect its proprietary rights and the proprietary rights of third parties from whom the Company licenses intellectual property. Norstan enters into confidentiality agreements with certain of its employees and limits the distribution of proprietary information. GOVERNMENT REGULATION Except for the sale of long distance service, the Company is not subject to any government regulations that have a material impact on its operations. Effective May 1, 1992, the Company became a direct reseller of long distance network services and accordingly became subject to certain state tariff regulations throughout the United States. The Company is currently registered and certified to provide interstate services in all 50 states and intrastate services in 49 states. The Company is also subject to FCC regulations, which require the filing of federal tariffs. BACKLOG As of April 30, 1999, the Company had signed contracts for telecommunications products aggregating approximately $47.3 million, substantially all of which are expected to be fulfilled by the end of fiscal 2000. As of April 30, 1998, the Company had signed contracts aggregating approximately $46.2 million, substantially all of which were fulfilled by the end of fiscal 1999. The usual time period between the execution of a contract and the completion of the installation is one to six months, depending on the size and complexity of the system. 11 ITEM 2. PROPERTIES. The executive offices of the Company are located in Minnetonka, Minnesota, where the Company leases approximately 234,000 square feet of office space. The Company also has area headquarters in Brecksville, Ohio, and Phoenix, Arizona, where the Company leases approximately 61,250 and 34,400 square feet of office space, respectively. In addition to the space above, the Company leases sales and service offices in 52 other cities within the United States. In Canada, the Company leases approximately 36,000 square feet of office space in Toronto, Ontario, which serves as its Canadian headquarters. The Company also leases sales and service offices in seven other cities within the Canadian provinces of Alberta, Manitoba, Ontario, Quebec and British Columbia. The Company believes that the above-mentioned facilities are adequate and suitable for its current needs. ITEM 3. LEGAL PROCEEDINGS. The Company is involved in legal actions in the ordinary course of its business. Although the outcomes of any such legal actions cannot be predicted, in the opinion of management there is no legal proceeding pending against or involving the Company for which the outcome is likely to have a material adverse effect upon the business, operating results and financial condition of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company did not submit any matters to a vote of security holders during the last quarter of the fiscal year covered by this report. 12 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. PRICE RANGE OF COMMON STOCK The Company's common stock is traded on the National Over-the-Counter market and is listed on the national market system of the National Association of Securities Dealers' Automated Quotations System ("NASDAQ") under the symbol "NRRD". The following table sets forth the high and low sale prices for the Company's common stock as reported by NASDAQ for each quarterly period during the two most recent fiscal years:
HIGH LOW -------- -------- FISCAL YEAR ENDED APRIL 30, 1999: First Quarter.......................... 26 3/16 22 3/4 Second Quarter......................... 23 5/16 13 1/8 Third Quarter.......................... 18 5/8 11 5/8 Fourth Quarter......................... 12 9/16 8 FISCAL YEAR ENDED APRIL 30, 1998: First Quarter.......................... 18 1/2 14 Second Quarter......................... 25 1/2 17 1/2 Third Quarter.......................... 25 1/2 22 Fourth Quarter......................... 29 21 7/8
The quotations reflect prices between dealers and do not include retail mark-ups, mark-downs or commissions, and do not necessarily represent actual transactions. As of July 14, 1999, there were 2,979 holders of record of the Company's common stock. RESTRICTIONS ON THE PAYMENT OF DIVIDENDS The Company has not recently declared or paid any cash dividends on the common stock and does not intend to pay cash dividends on the common stock in the foreseeable future. The Company currently expects to retain earnings to finance expansion of its business. In addition, the Company's current revolving long-term credit agreement prohibits the payment of cash dividends without the prior written consent of the lenders thereunder. 13 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. The selected consolidated financial data set forth below as of and for each of the fiscal years in the five-year period ended April 30, 1999 have been derived from the Company's consolidated financial statements, which have been audited by Arthur Andersen LLP, independent public accountants. The selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto included elsewhere in this report.
FISCAL YEARS ENDED APRIL 30, ------------------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- STATEMENTS OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUES Global Services IT Consulting Services ................. $ 137,878 $ 92,746 $ 54,467 $ 14,426 $ 7,931 Communication Services ................. 136,130 127,197 131,596 121,971 110,638 --------- --------- --------- --------- --------- Total Global Services ................ 274,008 219,943 186,063 136,397 118,569 Communication Solutions .................. 200,738 228,979 205,983 179,332 166,675 Financial Services ....................... 7,963 7,443 6,029 5,635 5,001 --------- --------- --------- --------- --------- TOTAL REVENUES ....................... 482,709 456,365 398,075 321,364 290,245 --------- --------- --------- --------- --------- COST OF SALES Global Services IT Consulting Services ................. 90,858 66,457 43,315 11,000 6,417 Communication Services ................. 92,460 89,550 93,880 86,669 70,224 --------- --------- --------- --------- --------- Total Global Services ................ 183,318 156,007 137,195 97,669 76,641 Communication Solutions .................. 151,382 168,965 150,204 130,090 123,158 Financial Services ....................... 2,970 2,444 2,160 2,221 2,308 --------- --------- --------- --------- --------- TOTAL COST OF SALES .................. 337,670 327,416 289,559 229,980 202,107 --------- --------- --------- --------- --------- GROSS MARGIN ............................... 145,039 128,949 108,516 91,384 88,138 Selling, general and administrative expenses 128,665 103,709 89,311 75,973 74,725 Restructuring charges ...................... 1,522 14,667 -- -- -- --------- --------- --------- --------- --------- OPERATING INCOME ........................... 14,852 10,573 19,205 15,411 13,413 Interest expense ........................... (4,886) (3,909) (1,866) (1,351) (1,587) Interest and other income (expense), net ... 460 (18) (22) 89 (54) --------- --------- --------- --------- --------- INCOME BEFORE PROVISION FOR INCOME TAXES ... 10,426 6,646 17,317 14,149 11,772 Provision for income taxes ................. 4,536 2,791 7,100 5,660 4,709 --------- --------- --------- --------- --------- NET INCOME ................................. $ 5,890 $ 3,855 $ 10,217 $ 8,489 $ 7,063 ========= ========= ========= ========= ========= NET INCOME PER SHARE: BASIC .......................... $ 0.56 $ 0.40 $ 1.12 $ 1.00 $ 0.86 ========= ========= ========= ========= ========= DILUTED ........................ $ 0.56 $ 0.39 $ 1.08 $ 0.94 $ 0.82 ========= ========= ========= ========= ========= WEIGHTED AVERAGE SHARES: BASIC .......................... 10,473 9,719 9,140 8,526 8,242 ========= ========= ========= ========= ========= DILUTED ........................ 10,537 9,917 9,418 8,985 8,621 ========= ========= ========= ========= ========= AS OF APRIL 30, ------------------------------------------------------------- BALANCE SHEET DATA: 1999 1998 1997 1996 1995 --------- --------- --------- --------- --------- Working capital............................................ $ 78,239 $ 58,568 $ 37,484 $ 24,899 $ 32,183 Total assets............................................... 308,516 275,608 224,173 160,988 161,709 Long-term debt, net of current maturities.................. 61,411 52,440 18,284 -- 16,465 Discounted lease rentals, net of current maturities........ 32,604 20,883 24,043 15,961 16,313 Shareholders' equity....................................... 109,335 97,671 84,370 67,517 56,984 Cash dividends declared and paid........................... -- -- -- -- --
On June 20, 1996, the Company's Board of Directors approved a two-for-one stock split effected in the form of a stock dividend. The stock split has been retroactively reflected in the selected consolidated financial data presented above. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Norstan is a leading provider of communication and information technology ("IT") solutions for over 18,000 customers in the United States, Canada and England. To address the complex communication requirements of its customers, Norstan provides a broad range of products and services, including telephone systems, call center systems, voice processing, network integration, voice and video conferencing, and facilities management services. Norstan's network of approximately 700 field technicians and service consultants delivers communication services to its customers. In addition, the Company provides a wide array of IT solutions through IT Consulting Services. These solutions include the design, implementation, maintenance and modification of IT applications and systems. IT Consulting Services currently employs over 800 consultants and generated a 49% increase in revenues during fiscal year 1999. As communication and information technologies converge, Norstan's strategy is to expand the breadth of its IT consulting services offerings to serve as a single-source provider of leading technology solutions to its customers. The Company delivers its products and services through three business units, Global Services, Communication Solutions and Financial Services, which accounted for 56.8%, 41.6% and 1.6% of Norstan's fiscal year 1999 revenues, respectively. Global Services includes IT Consulting Services and Communication Services. IT Consulting Services provides IT services including enterprise resource planning ("ERP") and enterprise resource management ("ERM") package implementation, Internet/Intranet/E-commerce solutions, multiservice networking services, strategic advisory services, application development and infrastructure services and outsourced facilities management. Communication Services provides customer support services for communication systems, including maintenance services, systems modifications and long distance services. Communication Solutions provides a broad array of solutions including telephone systems, integrated voice processing, call center technologies and video/audio/data conferencing solutions. Financial Services supports the sales process by providing customized financing alternatives. The Company believes that its breadth of product and service offerings fosters long-term customer relationships, affords cross-selling opportunities and minimizes the Company's dependence on any single technology or industry. During fiscal year 1999, Norstan recorded a restructuring charge of $1.5 million relating to a workforce reduction. This resource reduction in the communications business was made to bring the Company's expense structure in line with anticipated growth. The restructuring charge related to the costs of severance and other employment termination benefits. During fiscal year 1998, Norstan recorded a restructuring charge of $14.7 million in connection with management's plan to reduce costs, consolidate and reorganize operations, and improve operating efficiencies. Restructuring efforts focused primarily on the following: (i) consolidation of seven semi-autonomous geographic sales and service organizations into a single, more focused sales and operations organization; (ii) the consolidation of 36 warehouses and parts locations into three strategically located distribution centers; and (iii) the reorganization and integration of the Company's IT consulting services operations, including the Norstan Call Center Solutions Group, Connect and PRIMA, into a single, customer-focused organization. The restructuring charge related primarily to the write-down of certain assets to their fair market values ($12.2 million), severance and employee benefit costs ($1.2 million) and lease termination costs ($1.3 million). Net income and net income per diluted share before the restructuring charge for the year ended April 30, 1998 were $12.4 million and $1.25 per share, respectively. 15 RESULTS OF OPERATIONS The following table sets forth certain items from the Company's consolidated statements of operations expressed as a percentage of total revenues:
YEARS ENDED APRIL 30, ------------------------------------- REVENUES: 1999 1998 1997 --------- ---------- --------- Global Services IT Consulting Services......................... 28.6% 20.3% 13.7% Communication Services ........................ 28.2 27.9 33.0 --------- ---------- --------- Total Global Services .................. 56.8 48.2 46.7 Communication Solutions ......................... 41.6 50.2 51.8 Financial Services................................ 1.6 1.6 1.5 --------- ---------- --------- Total revenues ................................ 100.0 100.0 100.0 Cost of sales: Global Services IT Consulting Services......................... 18.8 14.6 10.9 Communication Services......................... 19.2 19.6 23.6 --------- ---------- --------- Total Global Services........................ 38.0 34.2 34.5 Communication Solutions.......................... 31.4 37.0 37.7 Financial Services................................ 0.6 0.5 0.5 --------- ---------- --------- Total cost of sales............................ 70.0 71.7 72.7 --------- ---------- --------- Gross margin........................................ 30.0 28.3 27.3 Selling, general and administrative expenses........ 26.7 22.8 22.5 Restructuring charges............................... 0.3 3.2 -- --------- ---------- --------- Operating income.................................... 3.0% 2.3% 4.8% ========= ========== ========= Net income.......................................... 1.2% 0.8% 2.6% ========= ========== ========= The following table sets forth the gross margin percentages for Global Services, Communication Solutions and Financial Services. YEARS ENDED APRIL 30, --------------------------------------- 1999 1998 1997 ----------- ---------- ---------- Gross margin percentage: Global Services IT Consulting Services .................... 34.1% 28.3% 20.5% Communication Services..................... 32.1 29.6 28.7 Total Global Services .................. 33.1 29.1 26.3 Communication Solutions....................... 24.6 26.2 27.1 Financial Services............................ 62.7 67.2 64.2
FISCAL 1999 COMPARED TO FISCAL 1998 REVENUES. Total revenues increased 5.8% to $482.7 million in fiscal year 1999 from $456.4 million in fiscal year 1998. Revenues from Global Services increased 24.6% to $274.0 million in fiscal year 1999 from $219.9 million in fiscal year 1998. Revenues from IT Consulting Services increased 48.7% to $137.9 million in fiscal year 1999 from $92.7 million in fiscal year 1998. This increase was the result of growth in Norstan Consulting's revenues including (i) internal revenue growth of 22%, (ii) inclusion of a full year results from PRIMA acquired in September of 1997, and (iii) inclusion of Wordlink, Inc. results since their acquisition in June of 1998. Revenues from Communication Services increased 7.0% to $136.1 million in fiscal year 1999 from $127.2 million in fiscal year 1998. The increase in Communication Services revenues resulted primarily from approximately 25% growth in network services revenue and 6% growth in service contract revenue. Revenues from Communication Solutions decreased 12.3% to $200.7 million in fiscal year 1999 from $229.0 million in fiscal year 1998. The decrease was primarily attributable to decreased sales volume in the Siemens PBX, call center, conferencing and cabling product lines which resulted from distractions in the overall marketing and sales effort during the significant third quarter restructuring actions. 16 Revenues from Financial Services increased 7.0% to $8.0 million in fiscal year 1999 from $7.4 million in fiscal year 1998. This increase was primarily attributable to the increased size of the Company's leasing base. GROSS MARGIN. The Company's gross margin was $145.0 million and $128.9 million for the fiscal years ended April 30, 1999 and 1998, respectively. As a percent of total revenues, gross margin was 30.0% for fiscal year 1999 compared to 28.3% for fiscal year 1998. Gross margin as a percent of revenues for Global Services was 33.1% for fiscal year 1999 as compared to 29.1% for fiscal year 1998. The gross margin for IT Consulting Services increased to 34.1% for fiscal year 1999 from 28.3% for fiscal year 1998. The improved margin was primarily a result of Norstan Consulting's increased billing rates and utilization of consultants and a decreased emphasis on other lower margin IT Consulting Services such as outsourcing, facilities management and education services. The gross margin for Communication Services increased to 32.1% for fiscal year 1999 from 29.6% for fiscal year 1998 in part from the efficiencies and cost savings resulting from the organizational changes in fiscal years 1998 and 1999. Gross margin as a percent of revenues for Communication Solutions was 24.6% for fiscal year 1999 as compared to 26.2% for fiscal year 1998. The decrease in gross margin for fiscal year 1999 as compared to fiscal year 1998 was primarily due to cost overruns related to a large government contract which were recognized in the third quarter of fiscal 1999. Gross margin as a percent of revenues for Financial Services was 62.7% for fiscal year 1999 as compared to 67.2% for fiscal year 1998. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 24.1% to $128.7 million in fiscal year 1999 from $103.7 million in fiscal year 1998. As a percent of revenues, selling, general and administrative expenses increased to 26.7% for fiscal year 1999, as compared to 22.8% for fiscal year 1998. This increase was primarily the result of fiscal 1999 investments in the IT Consulting Services business including the opening of five new consulting branch locations and the startup of Connaissance Consulting. RESTRUCTURING CHARGE. During the third quarter of fiscal year 1999, Norstan recorded a restructuring charge of $1.5 million relating to a workforce reduction. This resource reduction in the communications business was made to bring the Company's expense structure in line with anticipated growth. The restructuring charge related to the costs of severance and other employment termination benefits. INTEREST EXPENSE. Interest expense was $4.9 million for fiscal year 1999 as compared to $3.9 million for fiscal year 1998. This increase was primarily the result of higher borrowing levels in fiscal year 1999 due to the additional investments in the IT Consulting Services business, including the operations of PRIMA and Connaissance Consulting, as well as for working capital purposes. Average month-end borrowings outstanding under the Company's revolving long-term credit agreements were $64.9 million for fiscal year 1999 and $46.7 million for fiscal year 1998. Weighted average interest rates under the Company's revolving long-term credit agreements were 6.5% for fiscal year 1999 as compared to 7.0% for fiscal year 1998. INCOME TAXES. The Company's effective income tax rate was 43.5% for fiscal year 1999 and 42.0% for fiscal year 1998. The Company's effective tax rate differs from the federal statutory rate primarily due to state income taxes and the effect of nondeductible goodwill amortization. NET INCOME. Net income was $5.9 million or $0.56 per diluted share in fiscal year 1999, as compared to $3.9 million or $0.39 per diluted share in fiscal year 1998. Net income and net income per diluted share before the restructuring charge for the year ended April 30, 1998 were $12.4 million and $1.25 per share, respectively. FISCAL 1998 COMPARED TO FISCAL 1997 REVENUES. Total revenues increased 14.6% to $456.4 million in fiscal year 1998 from $398.1 million in fiscal year 1997. Revenues from Global Services increased 18.2% to $219.9 million in fiscal year 1998 from $186.1 million in fiscal year 1997. Revenues from IT Consulting Services increased 70.3% to $92.7 million in fiscal 1998 from $54.5 million in fiscal 1997. This increase was a result of: (i) the acquisition of PRIMA in September 1997, which contributed $17.9 million of revenue in fiscal 1998, and (ii) internal revenue growth of 37.5%. Revenues from Communication Services decreased 3.3% to $127.2 million in fiscal 1998 from $131.6 million in fiscal 1997. The decrease in Communication Services revenues resulted from the sale of the Company's stand-alone cabling business in June 1997, which contributed approximately $5.0 million in revenues during fiscal 1997. 17 Revenues from Communication Solutions increased 11.2% to $229.0 million in fiscal year 1998 from $206.0 million in fiscal year 1997. The increase was attributable to increased sales volumes in the Siemens PBX, videoconferencing and refurbished equipment products through sales to new customers as well as growth with existing customer relationships. Revenues from Financial Services increased 23.5% to $7.4 million in fiscal year 1998 from $6.0 million in fiscal year 1997. This increase was primarily attributable to the increased size of the Company's leasing base. GROSS MARGIN. The Company's gross margin was $128.9 million and $108.5 million for the fiscal years ended April 30, 1998 and 1997, respectively. As a percent of total revenues, gross margin was 28.3% for fiscal year 1998 and 27.3% for fiscal year 1997. Gross margin as a percent of revenues for Global Services was 29.1% for fiscal year 1998 compared to 26.3% for fiscal year 1997. The gross margin for IT Consulting Services increased to 28.3% for fiscal year 1998 from 20.5% for fiscal year 1997. The improved margin was a result of operating efficiencies gained as the IT Consulting Services segment continued to grow as well as from an increased emphasis on time-and-materials engagements. The gross margin for Communication Services increased to 29.6% for fiscal year 1998 from 28.7% for fiscal year 1997. Gross margin as a percent of revenues for Communication Solutions was 26.2% for fiscal year 1998 as compared to 27.1% for fiscal year 1997. The decrease in gross margin for fiscal year 1998 as compared to fiscal year 1997 was primarily due to overall increases in product costs due to changes in the sales mix and increased labor costs from subcontractors and overtime due to the high level of installations during 1998. The overall decline in gross margin was partially offset by improved margins in the sales of refurbished equipment. Gross margin as a percent of revenues for Financial Services was 67.2% for fiscal year 1998 as compared to 64.2% for fiscal year 1997. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased 16.1% to $103.7 million in fiscal year 1998 from $89.3 million in fiscal year 1997. As a percent of revenues, selling, general and administrative expenses remained relatively consistent at 22.7% for fiscal year 1998, as compared to 22.4% for fiscal year 1997. RESTRUCTURING CHARGE. During fiscal year 1998, Norstan recorded a restructuring charge of $14.7 million in connection with management's plan to reduce costs, consolidate and reorganize operations, and improve operating efficiencies. Restructuring efforts focused primarily on the following: (i) consolidation of seven semi-autonomous geographic sales and service organizations into a single, more focused sales and operations organization; (ii) the consolidation of 36 warehouses and parts locations into three strategically located distribution centers; and (iii) the reorganization and integration of the Company's IT consulting services operations, including the Norstan Call Center Solutions Group, Connect and PRIMA, into a single, customer-focused organization. The restructuring charge related primarily to the write-down of certain assets to their fair market values ($12.2 million), severance and employee benefit costs ($1.2 million) and lease termination costs ($1.3 million). INTEREST EXPENSE. Interest expense was $3.9 million for fiscal year 1998 as compared to $1.9 million for fiscal year 1997. This increase was primarily the result of higher borrowing levels in fiscal year 1998 to fund the PRIMA acquisition as well as for working capital purposes. Average month-end borrowings outstanding under the Company's revolving long-term credit agreements were $46.7 million for fiscal year 1998 and $22.1 million for fiscal year 1997. Weighted average interest rates under the Company's revolving long-term credit agreements were 7.0% for fiscal year 1998 as compared to 7.5% for fiscal year 1997. INCOME TAXES. The Company's effective income tax rate was 42% for fiscal year 1998 and 41% for fiscal year 1997. The Company's effective tax rate differs from the federal statutory rate primarily due to state income taxes and the effect of nondeductible goodwill amortization. NET INCOME. Net income was $3.9 million or $0.39 per diluted share in fiscal year 1998, which includes the $14.7 million restructuring charge, representing $0.86 per diluted share, as compared to $10.2 million or $1.08 per diluted share in fiscal year 1997. Net income and net income per diluted share before the restructuring charge for the year ended April 30, 1998 were $12.4 million and $1.25 per share, respectively. 18 UNAUDITED QUARTERLY RESULTS The following table sets forth certain unaudited quarterly operating information for each of the eight quarters in the two year period ending April 30, 1999. This data includes, in the opinion of management, all normal recurring adjustments necessary for the fair presentation of the information for the periods presented when read in conjunction with the Company's Consolidated Financial Statements and related Notes thereto. Results for any previous fiscal quarter are not necessarily indicative of results for the full year or for any future quarter. The Company has historically experienced a seasonal fluctuation in its operating results, with a larger proportion of its revenues and operating income occurring during the fourth quarter of the fiscal year.
FOR THE QUARTERS ENDED ---------------------------------------------------------------------------------------------------- April 30, January 30, October 31, August 1, April 30, January 31, November 1, August 2, 1999 1999 1998 1998 1998 1998 1997 1997 --------- --------- --------- --------- --------- --------- --------- --------- Revenues: Global Services IT Consulting Services... $ 35,622 $ 35,536 $ 35,045 $ 31,675 $ 30,496 $ 25,186 $ 22,038 $ 15,026 Communication Services... 36,274 34,593 32,897 32,366 32,698 30,968 30,508 33,023 --------- --------- --------- --------- --------- --------- --------- --------- Total Global Services.. 71,896 70,129 67,942 64,041 63,194 56,154 52,546 48,049 Communication Solutions ... 56,154 39,492 55,037 50,055 73,069 53,979 56,719 45,212 Financial Services......... 2,247 1,888 2,074 1,754 1,971 1,634 1,657 2,181 --------- --------- --------- --------- --------- --------- --------- --------- Total Revenues......... 130,297 111,509 125,053 115,850 138,234 111,767 110,922 95,442 Cost of Sales................ 88,811 84,463 85,009 79,387 98,711 79,861 80,488 68,356 --------- --------- --------- --------- --------- --------- --------- --------- Gross Margin................. 41,486 27,046 40,044 36,463 39,523 31,906 30,434 27,086 Selling, General and Administrative Expenses.... 34,836 30,399 32,593 30,837 31,230 24,923 24,399 23,157 Restructuring Charges ....... -- 1,522 -- -- 14,667 -- -- -- --------- --------- --------- --------- --------- --------- --------- --------- Operating Income (Loss)...... 6,650 (4,875) 7,451 5,626 (6,374) 6,983 6,035 3,929 Interest Expense............. (1,465) (1,169) (1,163) (1,089) (1,226) (1,242) (847) (594) Interest and Other Income (Expense), net...... 146 (110) 243 181 (190) 55 69 48 --------- --------- --------- --------- --------- --------- --------- --------- Income (Loss) Before Income Taxes............... 5,331 (6,154) 6,531 4,718 (7,790) 5,796 5,257 3,383 Provision for Income Taxes... 2,320 (2,676) 2,840 2,052 (3,272) 2,521 2,155 1,387 --------- --------- --------- --------- --------- --------- --------- --------- Net Income (Loss)............ $ 3,011 $ (3,478) $ 3,691 $ 2,666 $ (4,518) $ 3,275 $ 3,102 $ 1,996 ========= ========= ========= ========= ========= ========= ========= ========= Net Income (Loss) Per Share - Diluted........ $ 0.28 $ (0.33) $ 0.35 $ 0.26 $ (0.45) $ 0.33 $ 0.32 $ 0.21 ========= ========= ========= ========= ========= ========= ========= =========
LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $6.4 million, $5.5 million and $18.7 million for fiscal 1999, 1998 and 1997, respectively. Net cash of $38.5 million was used for investing activities in fiscal 1999 which decreased from fiscal 1998 and 1997 levels of $44.9 million and $45.3 million, respectively. This lower level of cash used for investing activities was due to decreased acquisition activity and related cash requirements in fiscal 1999 as compared to fiscal years 1998 and 1997, offset by increased investments in property and equipment and lease contracts. Net cash provided by financing activities in fiscal 1999 was $31.1 million, a decrease as compared to $36.1 million in fiscal 1998 and relatively unchanged as compared to $30.6 million in fiscal 1997. Net borrowings on long-term debt were significantly lower in fiscal 1999 as compared to 1998 as a result of the decreased acquisition activity as discussed above, but were offset by increased discounted lease rental borrowings. CAPITAL EXPENDITURES. The Company used $26.8 million for capital expenditures during fiscal year 1999 as compared to $19.9 million in fiscal year 1998 and $24.2 million in fiscal year 1997. These expenditures were primarily for capitalized costs incurred in connection with obtaining or developing internal use software, computer equipment, facility expansion and telecommunications equipment used in outsourcing arrangements and as spare parts. INVESTMENT IN LEASE CONTRACTS. The Company has also made a significant investment in lease contracts with its customers. The additional investment made in lease contracts in fiscal year 1999 totaled $35.6 million as compared to $28.0 million in fiscal 1998 and $31.5 million in fiscal 1997. Net lease receivables increased to $63.0 million at April 30, 1999 from $53.7 million at April 30, 1998. The Company utilizes its lease receivables and corresponding underlying equipment to borrow funds from financial institutions on a nonrecourse basis by discounting the stream of future lease payments. Proceeds from discounting are presented on the consolidated balance sheet as discounted lease rentals. Discounted lease rentals totaled $54.2 million at April 30, 1999 as compared to $35.6 19 million at April 30, 1998. Interest rates on these credit agreements at April 30, 1999 ranged from 6.0% to 10.0%, while payments are due in varying monthly installments through November 2005. Payments due to financial institutions are made from monthly collections of lease receivables from customers. CAPITAL RESOURCES. The Company has a $100.0 million unsecured revolving long-term credit agreement with certain banks. Up to $30.0 million of borrowings under this agreement may be in the form of commercial paper. In addition, sublimits exist related to the Company's support of its leasing activities. Borrowings under this agreement are due May 31, 2001, and bear interest at the banks' reference rate (7.75% at April 30, 1999), except for LIBOR, CD and commercial paper based options, which generally bear interest at a rate lower than the banks' reference rate (5.5% to 6.0% at April 30, 1999). Total consolidated borrowings under this agreement at April 30, 1998 and 1999 were $52.4 million and $60.2 million, respectively. There were no borrowings on account of the Company's leasing activities at April 30, 1998 and 1999. Annual commitment fees on the unused portions of the credit facility are 0.25%. Under the agreement, the Company is required to maintain minimum levels of EBITDA and certain other financial ratios. The Company has complied with or has obtained the appropriate waivers for such requirements as of April 30, 1999. Management of the Company believes that a combination of cash generated from operations, existing bank facilities and additional borrowing capacity, in aggregate, are adequate to meet the anticipated liquidity and capital resource requirements of its business. Sources of additional financing, if needed, may include further debt financing, or the sale of equity or other securities. ACQUISITIONS On June 19, 1998, the Company acquired Wordlink in a transaction accounted for under the pooling-of-interests method. Wordlink delivers network integration, groupware messaging, Internet/intranet/e-commerce and education solutions to customers operating in a multi-vendor network environment. The merger agreement provided for the conversion of all shares of Wordlink common stock and all vested Wordlink stock options issued and outstanding into 420,539 shares of Norstan common stock valued at approximately $10.3 million. All outstanding Wordlink unvested stock options were converted into the equivalent value of Norstan stock options. Wordlink's shareholders' equity and operating results were not material in relation to the Company's financial statements. As such, the Company has recorded the combination without restating prior periods' consolidated statements of operations to reflect the pooling-of-interests combination. On September 30, 1997, the Company acquired PRIMA in a transaction accounted for under the purchase method. PRIMA provides IT consulting services, including information systems planning and development, consulting and programming services for collaborative computing solutions, and ERP integration services. The acquisition consideration totaled approximately $27.5 million, consisting of $19.5 million in cash, $6.3 million of Common Stock and $1.7 million paid to certain members of PRIMA management under non-compete agreements. In addition, the Company agreed to pay up to $3.5 million in contingent consideration over a three-year period ending April 30, 2000 if certain financial performance targets are achieved (no amounts were earned as of April 30, 1999). This transaction resulted in the recording of $24.9 million in goodwill and other intangible assets that are being amortized on a straight-line basis over fifteen years and three years, respectively. On June 4, 1996, the Company acquired Connect in a transaction accounted for under the purchase method. Connect is a provider of consulting, design and implementation services for local and wide area networks, Internets and intranets, client/server applications and workgroup computing. The acquisition consideration totaled approximately $15.0 million, consisting of $12.0 million in cash, $2.0 million of Common Stock and $1.0 million payable to certain members of Connect management under non-compete agreements. In addition, the Company agreed to pay up to $4.0 million in contingent consideration over a three-year period ending April 30, 1999, if certain financial performance targets are achieved (as of April 30, 1999, the maximum amount of such consideration had been paid). This transaction resulted in the recording of $18.4 million in goodwill and other intangible assets that are being amortized on a straight-line basis over fifteen years and three years, respectively. IMPACT OF YEAR 2000 The Company has completed an assessment of the hardware and software in its internal information systems and has substantially completed the necessary modifications. The Company is currently testing its critical systems to verify proper date-handling functionality with respect to year 2000 and thereafter. The Company is working with its significant suppliers and business partners to ensure that those parties have appropriate Year 2000 readiness plans, and will be able to continue to provide products and services to the Company. The Company is assessing the extent to which its operations are vulnerable should those organizations fail to properly remediate either their computer systems or their product offerings. 20 The Company's comprehensive Year 2000 initiative is being managed by a team of internal staff who expect to complete the Year 2000 initiative in the fall of 1999. The Company believes it is adequately addressing the Year 2000 issues. It does not believe that the Year 2000 matters discussed above will have a material impact on its business, financial condition and results of operations. However, there can be no assurance that the systems of other companies will not fail, and that such failures would not have an adverse effect on the Company. In order to mitigate the risk of supplier and business partner non-compliance, the Year 2000 initiative also includes the creation of contingency plans, both from technical and business process perspectives. Based on the Company's assessments to date, the costs of the Year 2000 initiative are estimated to be approximately $2.0 million, of which approximately $1.4 million has been incurred to date. The costs of the project and the date on which the Company believes it will complete its Year 2000 initiative are forward-looking statements and are based on management's best estimates, according to information available through the Company's assessments to date. However, there can be no assurance that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the retention of these professionals, the ability to locate and correct all relevant computer codes, and similar uncertainties. At present the Company has not experienced any significant problems in these areas. FORWARD-LOOKING STATEMENTS From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, Year 2000 compliance and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements including those made in this document. In order to comply with the terms of the Private Securities Litigation Reform Act, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, developments and results of the Company's business include the following: national and regional economic conditions; pending and future legislation affecting the IT and telecommunications industries; the Company's business in Canada and England; stability of foreign governments; market acceptance of the Company's products and services; the Company's continued ability to provide integrated communication solutions for customers in a dynamic industry; and other competitive factors. Because these and other factors could affect the Company's operating results, past financial performance should not necessarily be considered as a reliable indicator of future performance, and investors should not use historical trends to anticipate future period results. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. In the ordinary course of business, the Company is exposed to foreign currency and interest rate risks. These risks primarily relate to the sale of products to foreign customers and changes in interest rates on the Company's long-term debt obligations, discounted lease rentals, capital leases and other long-term debt obligations. The potential loss from a hypothetical 10% adverse change in foreign currency rates on the Company's foreign installment contracts at April 30, 1999 would not materially affect the Company's consolidated financial position, results of operations or cash flows. The Company's unsecured revolving long-term credit agreement carries interest rate risk that is generally related to either the banks' reference rate, LIBOR or CD rates or commercial paper based options. If any of those rates or options were to change while the Company was borrowing under the agreement, interest expense would increase or decrease accordingly. As of April 30, 1999, total consolidated borrowings under this agreement were $60.2 million. The Company's has no earnings or cash flow exposure due to market risks on its discounted lease rentals or its capital lease and other long-term debt obligations as a result of the fixed-rate nature of the lease rentals, capital leases and the debt. However, interest rate changes would effect the fair market value of the lease rentals, capital leases and debt. At April 30, 1999, the Company had fixed rate lease rentals of $54.2 million and capital lease and other long-term debt obligations of $4.2 million. 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
PAGE CONSOLIDATED FINANCIAL STATEMENTS: Report of Independent Public Accountants................................................................... 23 Consolidated Statements of Operations for the years ended April 30, 1997, 1998 and 1999.................... 24 Consolidated Balance Sheets as of April 30, 1998 and 1999.................................................. 25 Consolidated Statements of Shareholders' Equity for the years ended April 30, 1997, 1998 and 1999.......... 26 Consolidated Statements of Cash Flows for the years ended April 30, 1997, 1998 and 1999.................... 27 Notes to Consolidated Financial Statements................................................................. 28
FINANCIAL STATEMENT SCHEDULES: All schedules have been omitted as not required, not applicable or because the information to be presented is included in the consolidated financial statements and related notes. 22 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Norstan, Inc.: We have audited the accompanying consolidated balance sheets of Norstan, Inc. (a Minnesota corporation) and Subsidiaries as of April 30, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended April 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Norstan, Inc. and Subsidiaries as of April 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 1999 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, June 8, 1999 23 NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED APRIL 30, -------------------------------------- 1999 1998 1997 --------- --------- --------- REVENUES Global Services IT Consulting Services ...................................... $ 137,878 $ 92,746 $ 54,467 Communication Services ...................................... 136,130 127,197 131,596 --------- --------- --------- Total Global Services ................................ 274,008 219,943 186,063 Communication Solutions ........................................ 200,738 228,979 205,983 Financial Services ............................................. 7,963 7,443 6,029 --------- --------- --------- TOTAL REVENUES .............................................. 482,709 456,365 398,075 --------- --------- --------- COST OF SALES Global Services IT Consulting Services ...................................... 90,858 66,457 43,315 Communication Services ...................................... 92,460 89,550 93,880 --------- --------- --------- Total Global Services ................................ 183,318 156,007 137,195 Communication Solutions ........................................ 151,382 168,965 150,204 Financial Services ............................................. 2,970 2,444 2,160 --------- --------- --------- TOTAL COST OF SALES ......................................... 337,670 327,416 289,559 --------- --------- --------- GROSS MARGIN ..................................................... 145,039 128,949 108,516 Selling, general and administrative expenses ................... 128,665 103,709 89,311 Restructuring charges .......................................... 1,522 14,667 -- --------- --------- --------- OPERATING INCOME ................................................. 14,852 10,573 19,205 Interest expense ............................................... (4,886) (3,909) (1,866) Interest and other income (expense), net ....................... 460 (18) (22) --------- --------- --------- INCOME BEFORE PROVISION FOR INCOME TAXES ......................... 10,426 6,646 17,317 Provision for income taxes ..................................... 4,536 2,791 7,100 --------- --------- --------- NET INCOME ....................................................... $ 5,890 $ 3,855 $ 10,217 ========= ========= ========= NET INCOME PER SHARE: BASIC .................................................. $ 0.56 $ 0.40 $ 1.12 ========= ========= ========= DILUTED ................................................ $ 0.56 $ 0.39 $ 1.08 ========= ========= ========= WEIGHTED AVERAGE SHARES: BASIC .................................................. 10,473 9,719 9,140 ========= ========= ========= DILUTED ................................................ 10,537 9,917 9,418 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 24 NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
AS OF APRIL 30, ------------------------ 1999 1998 ---------- --------- ASSETS CURRENT ASSETS Cash................................................................................ $ 867 $ 1,869 Accounts receivable, net of allowances for doubtful accounts of $1,437 and $1,171... 97,446 97,206 Current lease receivables........................................................... 23,299 18,751 Inventories......................................................................... 16,846 10,008 Costs and estimated earnings in excess of billings of $18,508 and $17,335........... 24,389 19,091 Deferred income taxes............................................................... 1,516 2,488 Prepaid expenses, deposits and other................................................ 11,500 8,108 ---------- --------- TOTAL CURRENT ASSETS............................................................. 175,863 157,521 ---------- --------- PROPERTY AND EQUIPMENT Machinery and equipment............................................................. 97,385 75,712 Less -- accumulated depreciation and amortization................................... (47,656) (37,713) ---------- --------- NET PROPERTY AND EQUIPMENT........................................................ 49,729 37,999 ---------- --------- OTHER ASSETS Goodwill, net of accumulated amortization of $11,033 and $7,853..................... 39,994 43,206 Lease receivables, net of current portion........................................... 39,736 34,998 Other............................................................................... 3,194 1,884 ---------- --------- TOTAL OTHER ASSETS................................................................ 82,924 80,088 ---------- --------- $ 308,516 $ 275,608 ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt................................................ $ 3,004 $ 3,257 Current maturities of discounted lease rentals...................................... 21,550 14,758 Accounts payable.................................................................... 28,394 24,135 Deferred revenue.................................................................... 20,967 19,953 Accrued liabilities: Salaries and wages................................................................ 7,950 15,123 Warranty costs.................................................................... 1,795 1,776 Other liabilities................................................................. 5,046 10,509 Billings in excess of costs and estimated earnings of $10,858 and $16,390........... 8,918 9,442 ---------- --------- TOTAL CURRENT LIABILITIES........................................................ 97,624 98,953 LONG-TERM DEBT, net of current maturities............................................. 61,411 52,440 DISCOUNTED LEASE RENTALS, net of current maturities................................... 32,604 20,883 DEFERRED INCOME TAXES................................................................. 7,542 5,661 ---------- --------- COMMITMENTS AND CONTINGENCIES (NOTES 4 AND 11) SHAREHOLDERS' EQUITY Common stock -- $.10 par value; 40,000,000 authorized shares; 10,763,726 and 9,963,716 shares issued and outstanding........................................... 1,076 996 Capital in excess of par value...................................................... 51,420 44,741 Retained earnings................................................................... 60,264 54,048 Unamortized cost of stock........................................................... (1,805) (641) Accumulated other comprehensive income.............................................. (1,620) (1,473) ---------- --------- TOTAL SHAREHOLDERS' EQUITY....................................................... 109,335 97,671 ---------- --------- $ 308,516 $ 275,608 ========== =========
The accompanying notes are an integral part of these consolidated balance sheets. 25 NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK ACCUMULATED -------------------- CAPITAL IN UNAMORTIZED OTHER SHARES EXCESS OF RETAINED COST OF COMPREHENSIVE OUTSTANDING AMOUNT PAR VALUE EARNINGS STOCK INCOME TOTAL --------- --------- --------- ---------- ----------- ------------- --------- BALANCE, APRIL 30, 1996 .. 8,718 $ 872 $ 27,619 $ 39,975 $ (94) $ (855) $ 67,517 Stock issued for employee benefit plans ......... 531 53 4,951 -- (48) -- 4,956 Stock issued for acquisition ........... 138 14 1,986 -- -- -- 2,000 Foreign currency translation adjustments . -- -- -- -- -- (320) (320) Net income ............... -- -- -- 10,217 -- -- 10,217 ------ --------- --------- --------- -------- --------- --------- BALANCE, APRIL 30, 1997 .. 9,387 $ 939 $ 34,556 $ 50,192 $ (142) $ (1,175) $ 84,370 Stock issued for employee benefit plans ......... 258 25 3,892 1 (499) -- 3,419 Stock issued for acquisition ........... 319 32 6,293 -- -- -- 6,325 Foreign currency translation adjustments . -- -- -- -- -- (298) (298) Net income ............... -- -- -- 3,855 -- -- 3,855 ------ --------- --------- --------- -------- --------- --------- BALANCE, APRIL 30, 1998... 9,964 $ 996 $ 44,741 $ 54,048 $ (641) $ (1,473) $ 97,671 Stock issued for employee benefit plans ......... 379 38 6,607 -- (1,164) -- 5,481 Stock issued for acquisition ........... 421 42 72 326 -- -- 440 Foreign currency translation adjustments . -- -- -- -- -- (147) (147) Net income ............... -- -- -- 5,890 -- -- 5,890 ------ --------- --------- --------- -------- --------- --------- BALANCE, APRIL 30, 1999 .. 10,764 $ 1,076 $ 51,420 $ 60,264 $ (1,805) $ (1,620) $ 109,335 ====== ========= ========= ======== ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 26 NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED APRIL 30, -------------------------------------------- 1999 1998 1997 --------- --------- --------- OPERATING ACTIVITIES Net income ............................................... $ 5,890 $ 3,855 $ 10,217 Adjustments to reconcile net income to net cash provided by operating activities: Restructuring charges ................................. 1,522 14,667 -- Restructuring charges paid............................. (4,469) -- -- Depreciation and amortization ......................... 20,514 21,115 16,964 Deferred income taxes ................................. 2,871 1,944 (45) Changes in operating items, net of acquisition effects: Accounts receivable ................................. 1,851 (18,803) (16,319) Inventories ......................................... (6,672) (2,397) 3,532 Costs and estimated earnings in excess of billings .. (5,272) (7,584) (6,371) Prepaid expenses, deposits and other ................ (4,338) 498 (386) Accounts payable .................................... 3,808 (745) 7,047 Deferred revenue .................................... 612 1,291 468 Accrued liabilities ................................. (10,705) (5,823) 2,514 Income taxes payable/receivable ..................... 1,330 (6,136) (144) Billings in excess of costs and estimated earnings .. (515) 3,665 1,223 --------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES ........ 6,427 5,547 18,700 --------- --------- --------- INVESTING ACTIVITIES Additions to property and equipment, net ................. (26,760) (19,873) (24,219) Cash paid for acquisitions, net of cash acquired ......... -- (20,450) (11,794) Investment in lease contracts ............................ (35,569) (28,049) (31,545) Collections from lease contracts ......................... 26,234 23,589 21,949 Other, net ............................................... (2,423) (124) 314 --------- --------- --------- NET CASH USED FOR INVESTING ACTIVITIES ........... (38,518) (44,907) (45,295) --------- --------- --------- FINANCING ACTIVITIES Repayment of debt assumed in acquisition ................. (1,267) (2,013) (1,743) Borrowings on long-term debt ............................. 282,380 290,181 227,820 Repayments of long-term debt ............................. (273,479) (253,102) (210,161) Borrowings on discounted lease rentals ................... 36,773 13,472 22,396 Repayments of discounted lease rentals ................... (18,249) (15,717) (12,583) Proceeds from sale of common stock ....................... 4,620 2,868 3,017 Tax benefits from shares issued to employees ............. 316 385 1,869 --------- --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES ........ 31,094 36,074 30,615 --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH .................... (5) 8 (6) --------- --------- --------- NET INCREASE (DECREASE) IN CASH ............................ (1,002) (3,278) 4,014 CASH, BEGINNING OF YEAR .................................... 1,869 5,147 1,133 --------- --------- --------- CASH, END OF YEAR .......................................... $ 867 $ 1,869 $ 5,147 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 27 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- NATURE OF BUSINESS: Norstan is a leading provider of communication and information technology ("IT") solutions for over 18,000 customers in the United States, Canada and England. Norstan, Inc. ("Norstan" or the "Company") manages the operations of its subsidiaries, Norstan Communications, Inc. ("NCI"), Norstan Canada, Ltd. ("NCDA"), Norstan Consulting, Inc. ("NCON") Connaissance Consulting, LLC ("Connaissance"), Norstan Financial Services, Inc. ("NFS"), Norstan Network Services, Inc. ("NNS"), Norstan International, Inc. ("NII"), and Norstan-UK Limited ("NUK"). The Company is headquartered in Minnetonka, Minnesota, with sales and service offices in 73 locations in the United States and Canada. The Company provides IT consulting and communication services, communications and technology products and competitive financing through its three operating units, Global Services, Communication Solutions and Financial Services. Through strategic partnerships and acquisitions, the Company has become a single-source provider of a wide range of communication and IT solutions that enable its customers to compete and succeed in the global marketplace. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the periods presented. Estimates are used for such items as allowances for doubtful accounts, inventory reserves, depreciable lives of property and equipment, warranty reserves and others. Ultimate results could differ from those estimates. REVENUE RECOGNITION: Global Services' revenues from IT consulting, application development and systems integration are recognized as services are provided. Revenues from maintenance service contracts, moves, adds, and changes, resale of long distance services, and network integration services, are also recognized as the services are provided. Communication Solutions' revenues from the sale and installation of products and systems are recognized under the percentage-of-completion method of accounting for long-term contracts, while revenues generated from the secondary equipment market are recognized upon performance of contractual obligations, which is generally upon installation or shipment. Financial Services' revenues are recognized over the life of the related lease receivables using the effective interest method. In addition, Norstan grants credit to customers and generally does not require collateral or any other security to support amounts due, other than equipment originally leased. FAIR VALUE OF FINANCIAL INSTRUMENTS: Fair values of financial instruments, including long-term obligations, lease receivables and trade receivables, were estimated at their carrying values at April 30, 1999 and 1998, and were estimated in accordance with the requirements of Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value of Financial Instruments." INVENTORIES: Inventories include purchased parts and equipment and are stated at the lower of cost, determined on a first-in, first-out basis, or realizable market value. 28 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY AND EQUIPMENT: Property and equipment are stated at cost and include expenditures that increase the useful lives of existing property and equipment. Maintenance, repairs and minor renewals are charged to operations as incurred. Generally, when property and equipment are disposed of, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss is reflected in the results of operations. For capitalized telecommunications equipment used as spare parts, the composite depreciation method is used whereby the cost of property retired less any salvage value is charged against accumulated depreciation and no gain or loss is recognized. The net book value of capitalized telecommunications equipment was $5,770,000 and $6,410,000 as of April 30, 1999 and 1998, respectively. Machinery and equipment is depreciated over the estimated useful lives of two to ten years under the straight-line method for financial reporting purposes. Accelerated methods of depreciation are used for income tax reporting. In the event that facts and circumstances indicate that the carrying amount of property may not be recoverable, an evaluation would be performed using such factors as recent operating results, projected cash flows and management's plans for future operations. GOODWILL: Goodwill is being amortized on a straight-line basis over 15-20 years. The Company periodically evaluates whether events or circumstances have occurred that may indicate that the remaining estimated useful lives may warrant revision or that the remaining goodwill balance may not be fully recoverable. In the event that factors indicate that the goodwill in question should be evaluated for possible impairment, a determination of the overall recoverability would be made. FOREIGN CURRENCY: For the Company's foreign operations, assets and liabilities are translated at year-end exchange rates, and revenues and expenses are translated at average exchange rates prevailing during the year. Translation adjustments are recorded as a separate component of shareholders' equity. INCOME TAXES: Deferred income taxes are provided for differences between the financial reporting basis and tax basis of the Company's assets and liabilities at currently enacted tax rates. 29 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) EARNINGS PER SHARE DATA The Company reports net income per share pursuant to the requirements of the Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 requires presentation of basic and diluted earnings per share (EPS). Basic EPS is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects potential dilution from outstanding stock options and other securities using the treasury stock method. A reconciliation of EPS calculations under SFAS No. 128 is as follows (in thousands, except per share amounts):
YEARS ENDED APRIL 30, ------------------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Net income .............................................. $ 5,890 $ 3,855 $ 10,217 ============ ============ ============ Weighted average common shares outstanding -- Basic ..... 10,473 9,719 9,140 Effect of dilutive securities: Stock option plans .................................... 64 196 269 Employee stock purchase plan .......................... -- 2 9 ------------ ------------ ------------ Weighted average common shares outstanding -- Diluted 10,537 9,917 9,418 ============ ============ ============ Net income per share: Basic ........................................ $ 0.56 $ 0.40 $ 1.12 ============ ============ ============ Diluted ...................................... $ 0.56 $ 0.39 $ 1.08 ============ ============ ============
COMPREHENSIVE INCOME Effective May 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". This statement establishes standards for the reporting of comprehensive income and its components. For the Company, comprehensive income consists of net income adjusted for foreign currency translation adjustments and is presented in the Consolidated Statements of Shareholders' Equity. The adoption of SFAS 130 had no impact on total shareholders' equity. Prior year financial statements have been reclassified to conform to the SFAS requirements. SUPPLEMENTAL CASH FLOW INFORMATION: Supplemental disclosure of cash flow information is as follows (in thousands):
YEARS ENDED APRIL 30, ------------------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Cash paid for: Interest................................................. $ 7,910 $ 6,457 $ 3,996 Income taxes............................................. $ 1,641 $ 5,545 $ 4,995 Non-cash investing and financing activities: Stock issued for acquisitions............................ $ 114 $ 6,325 $ 2,000 Earnout and noncompete agreements related to acquisitions $ -- $ 2,333 $ 2,667
RECENTLY ISSUED ACCOUNTING STANDARDS: The Company adopted Statement of Position ("SOP") 98-1, "Accounting for Costs of Computer Software Developed or Obtained for Internal Use," effective May 1, 1997. The SOP requires the Company to capitalize certain costs incurred in connection with developing or obtaining internal-use software. The Company capitalized approximately $8.8 million and $6.0 million of costs associated with internal-use software developed or obtained during fiscal years 1999 and 1998, respectively. 30 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 3 -- RESTRUCTURING: During fiscal year 1999, the Company recorded a restructuring charge of $1.5 million relating to a workforce reduction. This resource reduction in the communications business was made to bring the Company's expense structure in line with anticipated growth. The restructuring charge related to the costs of severance and other employment termination benefits. During fiscal year 1998, the Company recorded a restructuring charge of $14.7 million in connection with management's plan to reduce costs, consolidate and reorganize operations, and improve operating efficiencies. Restructuring efforts focused primarily on the following: (i) the consolidation of seven semi-autonomous geographic sales and service organizations into a single, more focused sales and operations organization; (ii) the consolidation of 36 warehouses and parts locations into three strategically located distribution centers; and (iii) the reorganization and integration of the IT consulting services operations, including the Norstan Call Center Solutions Group, Connect, and PRIMA into a single, customer-focused organization. The restructuring charge related primarily to the write-down of certain assets to their fair market values ($12.2 million), severance and employee benefit costs ($1.2 million), and lease termination costs ($1.3 million). During fiscal 1999, payments totaling $4,469,000 were charged against the restructuring reserves which were established as part of the fiscal 1998 and 1999 restructuring charges. At April 30, 1999, there remained a reserve of approximately $700,000 for future costs to be incurred related to the original restructuring charges. NOTE 4 -- ACQUISITIONS: On June 4, 1996, the Company acquired Connect in a transaction accounted for under the purchase method. Connect is a provider of consulting, design and implementation services for local and wide area networks, Internets and intranets, client/server applications and workgroup computing. The acquisition consideration totaled approximately $15.0 million, consisting of $12.0 million in cash, $2.0 million of Norstan Common Stock and $1.0 million payable to certain members of Connect management under non-compete agreements. In addition, the Company agreed to pay up to $4.0 million in contingent consideration over a three-year period ending April 30, 1999, if certain financial performance targets are achieved (as of April 30, 1999, the maximum amount of such consideration had been paid). This transaction resulted in the recording of $18.4 million in goodwill and other intangible assets, which are being amortized on a straight-line basis over fifteen years and three years, respectively. On September 30, 1997, the Company acquired PRIMA in a transaction accounted for under the purchase method. PRIMA provides IT consulting services, including information systems planning and development, consulting and programming services for collaborative computing solutions and ERP integration services. The acquisition consideration totaled approximately $27.5 million, consisting of $19.5 million in cash, $6.3 million of Norstan Common Stock and $1.7 million paid to certain members of PRIMA management under non-compete agreements. In addition, the Company agreed to pay up to $3.5 million in contingent consideration over a three-year period ending April 30, 2000 if certain financial performance targets are achieved (no amounts were earned as of April 30, 1999). This transaction resulted in the recording of $24.9 million in goodwill and other intangible assets, which are being amortized on a straight-line basis over fifteen years and three years, respectively. Pro forma information to reflect the operations of Connect and PRIMA in the years of acquisition have not been disclosed as such information was not materially different from the Company's reported results. On June 19, 1998, the Company acquired Wordlink in a transaction accounted for under the pooling-of-interests method. Wordlink delivers network integration, groupware messaging, Internet/intranet/e-commerce and education solutions to business clients operating in a multi-vendor network environment. The merger agreement called for all shares of Wordlink common stock and all vested stock options issued and outstanding to be converted into 420,539 shares of Norstan common stock valued at approximately $10.3 million. All outstanding Wordlink unvested stock options were converted into the equivalent value of Norstan stock options. Wordlink's shareholders' equity and operating results were not material in relation to the Company's financial statements. As such, the Company recorded the combination without restating prior periods' financial statements. 31 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 5 -- LEASE RECEIVABLES: The Company has financed customer equipment purchases in the amounts of $35.6 million, $28.0 million, and $31.5 million during the fiscal years ended April 30, 1999, 1998 and 1997, respectively. Leases are primarily accounted for as sales-type leases for financial reporting purposes. The components of lease receivables outstanding are summarized as follows (in thousands):
AS OF APRIL 30, ------------------------- 1999 1998 ----------- ----------- Gross lease receivables..................... $ 67,723 $ 58,136 Residual values............................. 8,060 8,297 Less: Unearned income........................... (11,387) (11,039) Allowance for financing losses............ (1,361) (1,645) ----------- ----------- Total lease receivables -- net.............. 63,035 53,749 Less -- current maturities.................. (23,299) (18,751) =========== =========== Long-term lease receivables................. $ 39,736 $ 34,998 =========== ===========
The aggregate amount of gross lease receivables maturing in each of the five years following April 30, 1999 is as follows (in thousands):
YEARS ENDING APRIL 30, AMOUNT --------------------------------- ------------ 2000........................ $ 27,080 2001........................ 20,331 2002........................ 11,348 2003........................ 5,149 2004 and thereafter......... 3,815 ------------ $ 67,723 ============
NOTE 6 -- DEBT OBLIGATIONS: LONG-TERM DEBT: Long-term debt consists of the following (in thousands):
AS OF APRIL 30, --------------------------- 1999 1998 ------------ ------------ Bank financing: Revolving credit agreement............................ $ 780 $ 385 Certificates of deposit and commercial paper.......... 59,410 52,000 Capital lease obligations and other long-term debt...... 4,225 3,312 ------------ ------------ Total long-term debt.................................... 64,415 55,697 Less -- current maturities.............................. (3,004) (3,257) ------------ ------------ $ 61,411 $ 52,440 ============ ============
32 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) BANK FINANCING: The Company has an $100.0 million unsecured revolving long-term credit agreement with certain banks. Up to $30.0 million of borrowings under this agreement may be in the form of commercial paper. In addition, sublimits exist related to the Company's support of its leasing activities. Borrowings under this agreement are due May 31, 2001, and bear interest at the banks' reference rate (7.75% at April 30, 1999), except for LIBOR, CD and commercial paper based options, which generally bear interest at a rate lower than the banks' reference rate (5.5% to 6.0% at April 30, 1999). Total consolidated borrowings under this agreement at April 30, 1999 and 1998 were $60.2 million and $52.4 million, respectively. Annual commitment fees on the unused portions of the credit facility are 0.25%. Under the agreement, the Company is required to maintain minimum levels of EBITDA and certain other financial ratios. The Company has complied with or has obtained the appropriate waivers for such requirements as of April 30, 1999. SHORT-TERM BORROWINGS: In addition to borrowing funds under its revolving credit agreement, the Company periodically borrows funds from banks on a short-term basis for working capital purposes. There were no short-term borrowings during 1999 and 1998. NOTE 7 -- DISCOUNTED LEASE RENTALS: NFS and NCDA utilize their lease receivables and corresponding underlying equipment to borrow funds from financial institutions at fixed rates on a nonrecourse basis by discounting the stream of future lease payments. Proceeds from discounting are recorded on the consolidated balance sheet as discounted lease rentals. Interest rates on these credit agreements range from 6% to 10% and payments are generally due in varying monthly installments through November 2005. Discounted lease rentals consisted of the following (in thousands):
AS OF APRIL 30, -------------------------- 1999 1998 ----------- ----------- Total discounted lease rentals..... 54,154 35,641 Less -- current maturities......... (21,550) (14,758) ----------- ----------- $ 32,604 $ 20,883 =========== ===========
Aggregate maturities of discounted lease rentals as of April 30, 1999 are as follows (in thousands):
YEARS ENDING APRIL 30, AMOUNT ------------------------------ -------------- 2000..................... $ 21,550 2001..................... 15,632 2002..................... 8,795 2003..................... 4,480 2004 and thereafter...... 3,697 -------------- $ 54,154 ==============
33 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE 8 -- INCOME TAXES: The domestic and foreign components of income before the provision for income taxes are as follows (in thousands):
YEARS ENDED APRIL 30, ------------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Domestic.................... $ 10,850 $ 5,914 $ 16,215 Foreign..................... (424) 732 1,102 ----------- ----------- ----------- $ 10,426 $ 6,646 $ 17,317 =========== =========== ===========
The provision (benefit) for income taxes consisted of the following (in thousands):
YEARS ENDED APRIL 30, ---------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Current Domestic...................... $ 2,865 $ 410 $ 7,361 Foreign....................... (1,200) 437 (216) ----------- ----------- ----------- 1,665 847 7,145 Deferred Domestic...................... 2,201 2,840 (572) Foreign....................... 670 (896) 527 ----------- ----------- ----------- 2,871 1,944 (45) ----------- ----------- ----------- Provision for income taxes.... $ 4,536 $ 2,791 $ 7,100 =========== =========== ===========
The differences between the effective tax rate and income taxes computed using the federal statutory rate were as follows:
YEARS ENDED APRIL 30, --------------------------------- 1999 1998 1997 --------- --------- -------- Federal statutory rate.......................... 35.0% 35.0% 35.0% State income taxes, net of federal tax benefit.. 5.0 5.0 5.0 Goodwill and other, net......................... 3.5 2.0 1.0 --------- --------- -------- 43.5% 42.0% 41.0% ========= ========= ========
The tax effects of significant temporary differences representing deferred tax assets and liabilities are as follows as of April 30 (in thousands):
1999 1998 ----------------- -------------- Accelerated depreciation.................. $ (43,124) $ (34,627) Capital and operating leases.............. 34,738 27,335 Long-term contract costs.................. (1,213) (753) Inventory and warranty reserves........... 713 480 Allowance for doubtful accounts........... 1,111 1,116 Vacation reserves......................... 541 1,016 Self insurance reserve.................... 518 457 Other, net................................ 690 2,039 Valuation allowance....................... -- (236) ----------------- -------------- Net deferred tax liabilities......... $ (6,026) $ (3,173) ================= ==============
34 NORSTAN'S INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 9 -- STOCK OPTIONS AND STOCK PLANS: The 1986 Long-Term Incentive Plan of Norstan, Inc. ("1986 Plan") provided for the granting of non-qualified stock options, incentive stock options and restricted stock. The 1986 Plan, as amended in fiscal year 1994, provided for a maximum of 1,600,000 shares to be granted to key employees in the form of stock options or restricted stock. As of September 20, 1995, with the adoption of a successor plan, no additional grants will be issued under the 1986 Plan. The Norstan, Inc. 1995 Long-Term Incentive Plan ("1995 Plan") permits the granting of non-qualified stock options, incentive stock options, stock appreciation rights and restricted stock, providing for a maximum of 2,400,000 shares to be granted as performance awards and other stock-based awards. Stock options are granted at a price equal to the market price on the date of grant, and are generally exercisable at 25% per year and expire after ten years. At April 30, 1999, 997,300 shares were available for future grants. During June 1999, the Company granted 377,300 stock options, of which approximately 234,400 are contingent upon future performance of the Company's various operating units. The Restated Non-Employee Directors' Stock Plan ("Directors' Plan") provides for a maximum of 292,000 shares to be granted. As determined by the Board of Directors, options for 20,000 shares are to be granted to each non-employee director of the Company upon election and additional discretionary stock options may be awarded upon board approval. These options are granted at a price equal to the market price on the date of grant, exercisable at 20% to 25% per year and expire after ten years. In addition, the Directors' Plan provides for the payment of an annual retainer to each non-employee director on the date of each annual meeting of shareholders. As of April 30, 1999, 17,740 shares had been issued as annual retainers and 83,760 shares were available for future grant/payment under the Directors' Plan. Shares subject to option are summarized as follows:
1995 PLAN 1986 PLAN DIRECTORS' PLAN ------------------------------ ------------------------------- ------------------------- WEIGHTED WEIGHTED WEIGHTED STOCK AVERAGE STOCK AVERAGE STOCK AVERAGE OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE PRICE PRICE PRICE ------------- -------------- -------------- -------------- ----------- ---------- BALANCE--APRIL 30, 1996........ N/A N/A 677,900 $ 6.88 160,000 $ 4.94 Options granted.............. 310,500 $ 15.01 -- -- -- -- Options canceled............. -- -- (96,000) $ 9.62 -- -- Options exercised............ -- -- (296,100) $ 3.49 (120,000) $ 3.24 ------------- -------------- ----------- BALANCE--APRIL 30, 1997........ 310,500 $ 15.01 285,800 $ 9.49 40,000 $ 10.06 Options granted.............. 647,000 $ 17.76 -- -- 25,500 $ 20.06 Options canceled............. (104,900) $ 15.62 (62,200) $ 10.86 -- -- Options exercised............ (15,300) $ 15.01 (103,400) $ 7.00 -- -- ------------- -------------- ----------- BALANCE--APRIL 30, 1998........ 837,300 $ 17.06 120,200 $ 10.92 65,500 $ 13.96 Options granted.............. 854,043 $ 20.57 -- -- 5,000 $ 18.31 Options canceled............. (435,966) $ 18.97 (33,160) $ 11.38 -- -- Options exercised............ (36,600) $ 14.95 (32,240) $ 10.88 -- -- ------------- -------------- ----------- BALANCE-- APRIL 30, 1999...... 1,218,777 $ 18.91 54,800 $ 10.66 70,500 $ 14.27 ============= ============== ============== ============== =========== ========== Options exercisable at: April 30, 1997............... -- -- 103,036 $ 7.43 28,000 $ 9.02 ============= ============== ============== ============== =========== ========== April 30, 1998............... 57,100 $ 14.72 46,640 $ 10.79 39,500 $ 11.47 ============= ============== ============== ============== =========== ========== April 30, 1999............... 147,070 $ 16.75 26,400 $ 11.19 51,833 $ 12.76 ============= ============== ============== ============== =========== ==========
35 NORSTAN'S INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Additional information regarding options outstanding/exercisable at April 30, 1999 is as follows:
WEIGHTED WEIGHTED NUMBER OF AVERAGE AVERAGE NUMBER OF WEIGHTED OPTIONS EXERCISE EXERCISE REMAINING OPTIONS AVERAGE OUTSTANDING PRICE RANGE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE --------------- ------------- --------- ---------------- ----------- --------------- 1995 PLAN............ 476,400 $ 9.50-$15.47 $ 14.92 8.68 years 81,400 $ 14.61 193,500 $16.00-$17.50 $ 17.48 8.25 years 38,700 $ 17.47 212,000 $17.77-$23.63 $ 19.89 8.88 years 22,400 $ 20.99 336,877 $24.00-$28.25 $ 24.24 9.12 years 4,570 $ 27.37 --------------- ------------- --------- ---------------- ----------- --------------- 1,218,777 $ 9.50-$28.25 $ 18.91 8.77 years 147,070 $ 16.75 =============== ============= ========= ================ =========== =============== 1986 PLAN............ 10,800 $ 4.25-$ 6.88 $ 5.71 3.13 years 2,400 $ 4.25 44,000 $11.88 $ 11.88 6.11 years 24,000 $ 11.88 --------------- ------------- --------- ---------------- ----------- --------------- 54,800 $ 4.25-$11.88 $ 10.66 5.52 years 26,400 $ 11.19 =============== ============= ========= ================ =========== =============== DIRECTORS' PLAN...... 40,000 $ 7.63-$12.50 $ 10.07 5.05 years 36,000 $ 9.79 5,000 $18.31 $ 18.31 9.40 years 5,000 $ 18.31 25,500 $20.06 $ 20.06 8.41 years 10,833 $ 20.06 --------------- ------------- --------- ---------------- ----------- --------------- 70,500 $ 7.63-$20.06 $ 14.27 6.57 years 51,833 $ 12.76 =============== ============= ========= ================ =========== ===============
The Company has awarded restricted stock grants to selected employees under the 1986 Plan and the 1995 Plan. Recipients of restricted stock awards under these plans were not required to make any payments for the stock or provide consideration other than the rendering of services. Shares of stock awarded under the plans are subject to certain restrictions on transfer and all or part of the shares awarded to an employee may be subject to forfeiture upon the occurrence of certain events, including termination of employment. Through April 30, 1999, 140,706 shares and 186,041 shares have been awarded under the 1986 Plan and the 1995 Plan, respectively. The fair market value of the shares granted under these plans is generally amortized over a four-year period. Amortization of $544,200, $165,800, and $70,000 has been charged to operations in 1999, 1998 and 1997, respectively. The Company also has an Employee Stock Purchase Plan (the "Employee Stock Plan") that allows employees to set aside up to 10% of their earnings for the purchase of shares of the Company's common stock. The Employee Stock Plan was amended effective July 1998 to allow shares to be purchased quarterly rather than annually at a price equal to 85% of the low market price on the last day of the quarter rather than the last day of the calendar year. During fiscal year 1999, 224,389 shares were issued under this plan and, at April 30, 1999, 259,400 shares were available for future issuance. The Company applies APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized in the accompanying statements of operations. Had compensation cost been recognized based on the fair values of options at the grant dates consistent with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income (in thousands) and net income per common share would have been decreased to the following pro forma amounts:
YEARS ENDED APRIL 30, -------------------------------------- 1999 1998 1997 --------- --------- ---------- Net income: As reported .............. $ 5,890 $ 3,855 $ 10,217 Pro forma ................ $ 3,050 $ 1,968 $ 9,360 Net income per common share: As reported Basic ............... $ 0.56 $ 0.40 $ 1.12 Diluted ............. $ 0.56 $ 0.39 $ 1.08 Pro forma Basic ............... $ 0.29 $ 0.20 $ 1.02 Diluted ............. $ 0.29 $ 0.20 $ 0.99
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to May 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. 36 NORSTAN'S INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The weighted average fair values of options granted and Employee Stock Plan shares were as follows:
DIRECTORS' EMPLOYEE 1995 PLAN 1986 PLAN PLAN STOCK PLAN --------- --------- ---------- ---------- Fiscal 1997 grants...... $ 7.95 N/A -- $ 2.96 Fiscal 1998 grants...... $ 8.99 N/A $ 11.63 $ 5.54 Fiscal 1999 grants...... $ 9.36 N/A $ 7.54 $ 4.32
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:
YEARS ENDED APRIL 30, ------------------------------------------ 1999 1998 1997 ----------- ---------- ----------- Risk-free interest rate................... 5.00% 6.06% 6.28% Expected life of options.................. 7 years 7 years 7 years Expected life of Employee Stock Plan...... 1 year 1 year 1 year Expected volatility....................... 37% 36% 35% Expected dividend yield................... N/A N/A N/A
The tax benefits associated with the exercise of stock options or issuance of shares under the Company's stock option plans, not related to expenses recognized for financial reporting purposes, have been credited to capital in excess of par value in the accompanying consolidated balance sheets. NOTE 10 -- 401(K) PLANS: The Company has 401(k) profit-sharing plans (the "401(k) Plans") covering substantially all full-time employees. Eligible employees may elect to defer up to 15% of their eligible compensation. The Company may make discretionary matching contributions on a portion of this deferral and/or qualified nonelective contributions to employee accounts. Company contributions to the 401(k) Plans were $3,582,000, $1,822,000, and $1,746,000 for the years ending April 30, 1999, 1998 and 1997, respectively. NOTE 11 -- COMMITMENTS AND CONTINGENCIES: LEGAL PROCEEDINGS: The Company is involved in legal actions in the ordinary course of its business. Although the outcomes of any such legal actions cannot be predicted, in the opinion of management there is no legal proceeding pending against or involving the Company for which the outcome is likely to have a material adverse effect upon the consolidated financial position or results of operations of the Company. 37 NORSTAN'S INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) OPERATING LEASE COMMITMENTS: The Company and its subsidiaries conduct a portion of their operations in leased facilities. Most of the leases require payment of maintenance, insurance, taxes and other expenses in addition to the minimum annual rentals. Lease expense, as recorded in the accompanying consolidated statements of operations, was $13,415,000, $11,494,000, and $10,914,000 in fiscal years 1999, 1998, and 1997, respectively. Future minimum lease payments under noncancelable leases with initial or remaining terms of one year or more were as follows at April 30, 1999 (in thousands):
YEARS ENDING APRIL 30, AMOUNT ----------------------------- ----------- 2000......................... $ 8,462 2001......................... 6,746 2002......................... 5,181 2003......................... 4,073 2004 and thereafter.......... 14,112 ----------- $ 38,574 ===========
VENDOR AGREEMENTS: Norstan has been a distributor of Siemens communication equipment since 1976 and is Siemens' largest independent distributor in North America. The term of the current distributor agreement with Siemens, signed in January 1999, is five years. Norstan and Siemens have also renewed an agreement through July 27, 2003 under which Norstan is an authorized agent for the refurbishment and sale of previously owned Siemens equipment. SHAREHOLDER RIGHTS PLAN: The Company has a shareholder rights plan, as amended in March 1998 (the "Plan"), which expires in 2008. Under the Plan, shareholders are deemed the owners of "Rights" attaching to each share of common stock. Generally, upon any person (an "Acquiring Person") becoming the owner of 15% or more of the issued and outstanding shares of the Company's common stock (a "Stock Acquisition Date"), each Right will enable the holder to purchase an additional share of the Company's common stock at a price equal to 50% of the then current market price. In the event that the Company is acquired in a merger or other business combination transaction where the Company is not the surviving corporation or 50% or more of the Company's assets or earnings power is sold, each Right entitles the holder to receive, upon exercise of the Right at the then current purchase price of the Right, common stock of the acquiring entity that has a value of two times the purchase price of the Right. The Plan also authorizes the Company, under certain circumstances, to redeem the Rights at a redemption price of $0.01 per Right and, following any Stock Acquisition Date, to exchange one share of the Company's common stock for each Right held by a shareholder other than an Acquiring Person. NOTE 12 -- BUSINESS SEGMENTS AND GEOGRAPHIC AREAS: The Company delivers its products and services through three business units, Global Services, Communication Solutions and Financial Services, which accounted for 56.8%, 41.6% and 1.6% of Norstan's fiscal year 1999 revenues, respectively. Global Services includes IT Consulting Services and Communication Services. IT Consulting Services provides IT services including enterprise resource planning ("ERP") and enterprise resource management ("ERM") package implementation, Internet/Intranet/E-commerce solutions, multiservice networking services, strategic advisory services, application development and infrastructure services and outsourced facilities management. Communication Services provides customer support services for communication systems, including maintenance services, systems modifications and long distance services. Communication Solutions provides a broad array of solutions including telephone systems, integrated voice processing, call center technologies and video/audio/data conferencing solutions. Financial Services supports the sales process by providing customized financing alternatives. The Company believes that its breadth of product and service offerings fosters long-term customer relationships, affords cross-selling opportunities and minimizes the Company's dependence on any single technology or industry. The Company elected early adoption of SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," effective April 30, 1998. Adoption of this statement required the Company to provide the disclosure of segment information but did not require significant changes in the way geographic information was disclosed. Disclosures under SFAS No. 131 are as follows: 38 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
GLOBAL SERVICES -------------------------------------------- IT CONSULTING COMMUNICATION TOTAL GLOBAL COMMUNICATION FINANCIAL SERVICES SERVICES SERVICES SOLUTIONS SERVICES CORPORATE TOTAL - ---------------------------------------------------------------------------------------------------------------------------- 1999: Revenue................. $ 137,878 $ 136,130 $ 274,008 $ 200,738 $ 7,963 $ -- $ 482,709 Operating income(1)..... 6,493 11,054 17,547 (6,482) 3,787 -- 14,852 Depreciation and amortization.......... 6,770 4,714 11,484 4,662 14 4,354 20,514 Identifiable assets..... 74,411 60,944 135,355 55,000 63,187 54,974 308,516 Capital expenditures.... 3,442 7,829 11,271 7,800 -- 7,689 26,760 - ---------------------------------------------------------------------------------------------------------------------------- 1998: Revenue................. $ 92,746 $ 127,197 $ 219,943 $ 228,979 $ 7,443 $ -- $ 456,365 Operating income(2)(3) . 6,089 (2,101) 3,988 2,751 3,834 -- 10,573 Depreciation and amortization.......... 4,434 5,730 10,164 5,657 15 5,279 21,115 Identifiable assets..... 63,554 55,465 119,019 52,000 52,616 51,973 275,608 Capital expenditures.... 2,115 5,998 8,113 5,900 20 5,840 19,873 - ---------------------------------------------------------------------------------------------------------------------------- 1997: Revenue ................ $ 54,467 $ 131,596 $ 186,063 $ 205,983 $ 6,029 $ -- $ 398,075 Operating income........ 3,239 6,395 9,634 6,754 2,817 -- 19,205 Depreciation and amortization.......... 2,245 4,938 7,183 5,117 14 4,650 16,964 Identifiable assets..... 26,865 51,463 78,328 49,000 47,928 48,917 224,173 Capital expenditures.... 2,202 7,335 9,537 7,400 14 7,268 24,219 - ----------------------------------------------------------------------------------------------------------------------------
(1) Segment totals include allocation of the fiscal year 1999 restructuring charge of $1,522,000. Operating income of each segment, prior to the allocation of the restructuring charge to each unit, was as follows: IT Consulting Services - $6,596,000; Communication Services - $11,482,000; Total Global Services - $18,078,000; Communication Solutions -$(5,491,000); and Financial Services - $3,787,000. (See Note 3). (2) Fiscal 1998 operating income figures have been restated to reflect changes in how SG&A expenses have been allocated in fiscal 1999. (3) Segment totals include allocation of the fiscal year 1998 restructuring charge of $14,667,000. Operating income of each segment, prior to the allocation of the restructuring charge to each unit, was as follows: IT Consulting Services--$7,243,000; Communications Services--$6,002,000; Total Global Services $13,245,000; Communications Solutions--$8,161,000; and Financial Services--$3,834,000. (See Note 3). The following table sets forth the Company's operations and related asset information by geographic area as of and for the years ended April 30 (in thousands):
1999 1998 1997 ----------- ----------- --------- REVENUES: United States...................... $ 445,825 $ 423,446 $ 365,796 Canada............................. 36,884 32,919 32,279 ----------- ----------- --------- $ 482,709 $ 456,365 $ 398,075 =========== =========== ========= NET INCOME: United States...................... $ 6,129 $ 4,679 $ 9,426 Canada............................. (239) (824) 791 ----------- ----------- --------- $ 5,890 $ 3,855 $ 10,217 =========== =========== ========= ASSETS: United States...................... $ 287,316 $ 258,192 $ 207,942 Canada............................. 21,200 17,416 16,231 ----------- ----------- --------- $ 308,516 $ 275,608 $ 224,173 =========== =========== =========
Revenues, net income and assets from other international operations including the European Community are immaterial and as such are not separately listed above. These amounts are included in the US figures as listed. 39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. No changes in or disagreements with accountants which required reporting on Form 8-K have occurred within the two-year period ended April 30, 1999. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information with respect to the directors and executive officers of the Company, set forth under "Information Concerning Directors, Nominees and Executive Officers" and under "Compliance with Section 16(a)" in the Company's definitive proxy statement for the annual meeting of shareholders to be held September 21, 1999, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. Information with respect to Executive Compensation set forth under "Executive Compensation" in the Company's definitive proxy statement for the annual meeting of shareholders to be held September 21, 1999, other than the subsections captioned "Report of the Compensation and Stock Option Committee" and "Performance Graph", is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information with respect to security ownership of certain beneficial owners and management, set forth under "Beneficial Ownership of Principal Shareholders and Management" in the Company's definitive proxy statement for the annual meeting of shareholders to be held September 21, 1999, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information with respect to certain relationships and related transactions, set forth under "Information Concerning Directors, Nominees and Executive Officers" in the Company's definitive proxy statement for the annual meeting of shareholders to be held September 21, 1999, is incorporated herein by reference. 40 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS. 1. Financial Statements See Index to Consolidated Financial Statements and Financial Statement Schedules on page 22 of this report. 2. Financial Statement Schedules All schedules to the Consolidated Financial Statements normally required by the applicable accounting regulations are omitted since the required information is included in the Consolidated Financial Statements or the Notes thereto or is not applicable. 3. Exhibits See Index to Exhibits on page 43 of this report. (b) REPORTS ON FORMS 8-K. No reports on Form 8-K were filed by the Company during the last quarter of the fiscal year covered by this report. 41 SIGNATURES Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: July 28, 1999 NORSTAN, INC. Registrant By: /s/ DAVID R. RICHARD ----------------------------------------------- David R. Richard Chief Executive Officer, President and Director By: /s/ KENNETH S. MACKENZIE ----------------------------------------------- Kenneth S. MacKenzie Chief Financial Officer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE DATE --------- ---- /s/ PAUL BASZUCKI 7/22/99 ----------------- Paul Baszucki Chairman of the Board /s/ RICHARD COHEN 7/22/99 ----------------- Richard Cohen Vice-Chairman of the Board /s/ DAVID R. RICHARD 7/27/99 -------------------- David R. Richard CEO, President and Director /s/ DR. JAGDISH N. SHETH 7/23/99 ------------------------ Dr. Jagdish N. Sheth Director /s/ CONNIE M. LEVI 7/23/99 ------------------ Connie M. Levi Director /s/ GERALD D. PINT 7/23/99 ------------------- Gerald D. Pint Director /s/ HERBERT F. TRADER 7/26/99 --------------------- Herbert F. Trader Director 42 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- 3(a) Restated Articles of Incorporation of the Company, as amended [filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended April 30, 1988 and incorporated herein by reference]; Amendments adopted September 9, 1993 and June 20, 1996 [filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended April 30, 1996 and incorporated herein by reference] 3(b) Bylaws of the Company [filed as Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended April 30, 1993 and Incorporated herein by reference]; Amendments adopted August 8, 1995 [filed as Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended April 30, 1996 and incorporated herein by reference]; Amendments adopted September 20, 1995, July 30, 1996 and April 9, 1997 [filed as Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended April 30, 1998 and incorporated herein by reference] 3(c) Rights Agreement dated May 17, 1988 between Norstan, Inc. and Norwest Bank Minnesota, N.A. [filed as Exhibit 1 to the Company's Registration Statement on Form 8-A and incorporated herein by reference]; Amended and Restated Rights Agreement dated April 1, 1998 [filed as Exhibit 1 to the Company's Registration Statement on Form 8-A/A (Amendment No. 1) dated April 1, 1998 and incorporated herein by reference]; First Amendment to Amended and Restated Rights Agreement dated February 28, 1999 [filed as Exhibit 4.1 to the Company's Registration Statement on Form 8-A/A (Amendment No. 2) dated April 21, 1999 and incorporated herein by reference] 10(a) Agreement for ROLM Authorized Distributors, effective July 27, 1993, between Norstan Communications, Inc. and ROLM Company [filed as Exhibit 10(a) to the Company's Annual Report on Form 10-K for the year ended April 30, 1993 and incorporated herein by reference] 10(b) Credit Agreement dated as of July 23, 1996, among Norstan, Inc., First Bank National Association, and Harris Trust and Savings Bank and the Sumitomo Bank Limited, Chicago Branch; First Amendment to Credit Agreement dated October 11, 1996 [filed as Exhibit 10 to the Company's quarterly report on Form 10-Q for the period ended August 3, 1996 and incorporated herein by reference] 10(c) Loan and Security Agreement dated April 29, 1993, between Norstan Financial Services, Inc. and Sanwa Business Credit Corporation [filed as Exhibit 10(b) to the Company's Current Report on Form 8-K, dated April 29, 1993 and incorporated herein by reference]; First Amendment dated December 30, 1993 [filed as Exhibit 10(c) to the Company's Annual Report on Form 10-K for the year ended April 30, 1994 and incorporated herein by reference] 10(d)(1) 1990 Employee Stock Purchase Plan of Norstan, Inc., as amended May 29, 1998 [filed as Exhibit 10(d)(1) to the Company's Annual Report on Form 10-K for the year ended April 30, 1998 and incorporated herein by reference] 43 EXHIBIT NO. DESCRIPTION ----------- ----------- 10(e)(1) Norstan, Inc. 1986 Long-Term Incentive Plan, as amended [filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K for the year ended April 30, 1993 and incorporated herein by reference]; Amendments adopted August 8, 1995 and July 30, 1996 [filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K for the year ended April 30, 1996 and incorporated herein by reference] 10(f)(1) Norstan, Inc. Restated Non-Employee Directors' Stock Plan, [filed as Exhibit 28.1 to the Company's Registration Statement on Form S-8 dated September 27, 1995 and incorporated herein by reference] 10(g)(1) Norstan, Inc. 1995 Long-Term Incentive Plan [filed as Exhibit 28.1 to the Company's Registration Statement on Form S-8 dated September 27, 1995 and incorporated herein by reference]; Amendment adopted July 30, 1996 [filed as Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended April 30, 1996 and incorporated herein by reference]; Amendment adopted August 16, 1996 [filed as Exhibit 10(g)(1) to the Company's Annual Report on Form 10-K for the year ended April 30, 1998 and incorporated herein by reference] 10(h)(1) Employment Agreement dated April 7, 1995 between Paul Baszucki and the Company filed as Exhibit 10(h) to the Company's Annual Report on Form 10-K for the year ended April 30, 1995 and incorporated herein by reference] 10(i)(1) Consulting Agreement dated September 1, 1998 between Richard Cohen and the Company 10(j)(1) Employment Agreement dated April 30, 1997 between David R. Richard and the Company [filed as Exhibit 10(j)(1) to the Company's Annual Report on Form 10-K for the year ended April 30, 1998 and incorporated herein by reference] 10(k)(1) Agreement and Plan of Merger dated May 24, 1996 among the Company, Connect Computer Company and CCC Acquisition Subsidiary, Inc [filed as Exhibit 2 to the Company's Current Report on Form 8-K dated June 4, 1996 and incorporated herein by reference] 10(k)(2) Amended and Restated Stock Purchase Agreement dated September 5, 1997 by and among the Company, Vadini, Inc. (d.b.a. PRIMA Consulting) and Michael Vadini [filed as Exhibit 2 to the Company's Current Report on Form 8-K dated October 8, 1997 and incorporated herein by reference] 10(l)(1) Third Amendment to Credit Agreement, dated as of March 20, 1998, by and among the Company, certain banks as signatories thereto (the "Banks") and US Bank National Association, as one of the Banks and as agent for the Banks [filed as Exhibit 10(l)(1) to the Company's Annual Report on Form 10-K for the year ended April 30, 1998 and incorporated herein by reference] 10(l)(2) Fourth Amendment to Credit Agreement, dated as of July 23, 1998, by and among the Company, certain banks as signatories thereto (the "Banks") and US Bank National Association, as one of the Banks and as agent for the Banks [filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the period ended August 1, 1998 and incorporated herein by reference] 44 EXHIBIT NO. DESCRIPTION ----------- ----------- 10(l)(3) Fifth Amendment to Credit Agreement, dated as of September 28, 1998, by and among the Company, certain banks as signatories thereto (the "Banks") and US Bank National Association, as one of the Banks and as agent for the Banks [filed as Exhibit 10(a) to the Company's Quarterly Report on Form 10-Q for the period ended October 31, 1998 and incorporated herein by reference] 10(l)(4) Sixth Amendment to Credit Agreement, dated as of October 21, 1998, by and among the Company, certain banks as signatories thereto (the "Banks") and US Bank National Association, as one of the Banks and as agent for the Banks [filed as Exhibit 10(b) to the Company's Quarterly Report on Form 10-Q for the period ended October 31, 1998 and incorporated herein by reference] 10(l)(5) Seventh Amendment to Credit Agreement, dated as of May 31, 1999, by and among the Company, certain banks as signatories thereto (the "Banks") and US Bank National Association, as one of the Banks and as agent for the Banks 10(m) Lease Agreement, dated December 23, 1997, by and between Thomas Edward Limited Partnership and the Company [filed as Exhibit 10(m) to the Company's Annual Report on Form 10-K for the year ended April 30, 1998 and incorporated herein by reference] 22 Subsidiaries of Norstan, Inc 23(a) Consent of Independent Public Accountants 27 Financial Data Schedule
A copy of any of the exhibits listed or referred to above will be furnished at a reasonable cost to any shareholder of the Company, upon receipt of a written request from such person for any such exhibit. Such request should be sent to Norstan, Inc., 5101 Shady Oak Road, Minnetonka, Minnesota 55343, Attention: Investor Relations. (1) Items that are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 14(c) of this Form 10-K. 45 EX-10.(I)(1) 2 EXHIBIT 10(I)(1) CONSULTING AGREEMENT THIS AGREEMENT, made as of September 1, 1998, by and between RICHARD COHEN, of Minneapolis, Minnesota ("Consultant") and NORSTAN, INC., a Minnesota corporation (the "Company"), W I T N E S S E T H: WHEREAS, Consultant has been employed by the Company on a full-time basis for a period in excess of 20 years in various executive management positions; and WHEREAS, the continued availability of Consultant's experience and knowledge are considered to be important to the continued success of the Company's business; and WHEREAS, the Company wishes to retain the services of Consultant as an adviser and consultant to the Company and to restrict his right to compete with the Company, for the term of the agreement, and Consultant is willing to provide such services and to agree to such restrictions on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises, and of the mutual covenants hereinafter set forth, the parties do hereby agree as follows: 1. CONSULTING PERIOD. The Company agrees to retain the services of Consultant and Consultant agrees to provide the services hereinafter described, for the period beginning on September 1, 1998 and ending on August 31, 2001 (the "Consulting Period") provided that on August 31, 1999 and on each August 31 thereafter (the "Renewal Date"), the Consulting Period shall be extended upon satisfactory completion of the annual objectives by Consultant and the mutual written agreement of the parties to a date which is 36 months after the Renewal Date. Notwithstanding, in no event shall the Consulting Period extend beyond April 30, 2004 under this agreement. 2. DUTIES. a. CONSULTING SERVICES. During the Consulting Period, Consultant shall hold himself available to consult with and advise the officers, directors, and other representatives of the Company concerning such matters relating to the operations of the Company based upon mutually agreed upon annual objectives and as the Board of Directors of the Company shall otherwise determine. Consultant shall make himself available to render such services at all reasonable times by telephone or letter and, upon reasonable advance notice, in person; provided, that Consultant shall not be required to perform consulting or advisory services for more than 1000 hours during any annual period during the Consulting Period and shall not be required to perform consulting or advisory services during any period in which he is precluded from doing so by reason of incapacity or ill health. b. SERVICES AS A DIRECTOR. Consultant shall continue to serve as a Director of the Company until the expiration of his current term, whereupon the Company agrees, except for due cause, to have him included among management's nominees for election to its Board of Directors for each succeeding term ending not later than one year after the expiration of the Consulting Period. Consultant agrees that, except insofar as he may be unable to do so by reason of incapacity or ill health, he shall serve as a Director of the Company and of any of its subsidiaries during any part of the Consulting Period for which he may be elected to such a position. Consultant shall be entitled to standard Director's fees for any period during which he is serving as a Director of the Company, which fees shall be in addition to any compensation payable to Consultant pursuant to this Agreement. 3. COMPENSATION. During the Consulting Period, Consultant shall be compensated as follows: a. RETAINER. During the Consulting Period, Consultant shall be paid a retainer at the rate of $150,000 per year, payable in equal monthly installments of $12,500.00 with the first payment due on September 30, 1998. b. FACILITIES. During the Consulting Period, Company shall have no obligation to provide office space or any facilities or services on behalf of Consultant and Consultant acknowledges that he shall be solely responsible to provide such facilities and services. c. TRAVEL EXPENSES. Consultant shall be reimbursed by the Company for all reasonable travel expenses incurred by him at the request of the Company in the performance of his duties pursuant to this Agreement, to the extent such expenses are substantiated and are consistent with the general policies of the Company relating to the reimbursement of such expenses. d. FRINGE BENEFITS. Consultant shall not be entitled to participate in any of the pension, profit sharing, or other employee benefit plans or fringe benefit programs which are from time to time maintained by the Company for its employees. e. STOCK OPTIONS/GRANTS. Consultant's current outstanding stock options and g rants shall continue to be maintained pursuant to the terms and conditions of the applicable stock option and restricted stock agreements. 4. DEATH. If Consultant shall die during the Consulting Period, the Company's obligation to pay the retainer under section 3.a. shall cease except for amounts unpaid for prior service. 5. COMPETITION. a. Consultant covenants and agrees that during the Consulting Period, he will not, except with the express written consent of the Board of Directors of the Company, engage directly or indirectly in, or permit his name to be used in connection with, any competitive business in the geographic area serviced by the Company or its subsidiaries. b. For the purposes of this paragraph 5: (i) the phrase, "engage directly or indirectly in" shall encompass: (A) all of Consultant's activities whether on his own account or as an employee, director, officer, agent, consultant, independent contractor, or partner of or in any person, firm, or corporation (other than the Company and its subsidiaries), and (B) Consultant's ownership of more than 10% of the voting stock of any corporation, 5% or more of the gross income of which is derived from any business or businesses in which Consultant may not then engage; and (ii) the phrase "competitive business shall mean: (A) the sale of telephone, telecommunications, data, network or similar equipment, (B) sale of consulting and/or maintenance services, and (C) any other business in which the Company or its subsidiaries is then engaged. 6. ENFORCEMENT. If, at the time of enforcement of any provision of paragraph 5, a court shall hold that the period, scope, or geographical area restrictions stated therein are unreasonable under circumstances then existing, the maximum period, scope, or geographical area reasonable under the circumstances shall be substituted for the stated period, scope, or area. In the event of a breach by Consultant of any of the provisions of paragraph 5, the Company may, in addition to any other rights and remedies existing in its favor: (a) discontinue the payment of any amounts, or the provision of any benefits, required to be paid or provided to Consultant pursuant to this Agreement; and (b) apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce or prevent any violations of the provisions hereof. 7. STATUS OF CONSULTANT. During the Consulting Period, Consultant's relationship to the Company shall be solely that of an independent contractor. Subject to the provisions of paragraph 5 hereof, Consultant shall be free to dispose of such portion of his time during normal business hours as he is not obligated to devote to the Company hereunder in such manner, and to such persons, firms, and corporations, as he sees fit. Consultant agrees that he will not take any position inconsistent with his status as an independent contractor hereunder in any federal, state, or local income or other tax return. 8. SUCCESSORS. a. OF THE COMPANY. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as herein before defined, and any successor to the business and/or assets of the Company which executes and delivers the agreement provided for in this paragraph 8 or which otherwise becomes bound by all the terms and provisions of this Agreement as a matter of law. b. OF CONSULTANT. This Agreement shall inure to the benefit of and shall be enforceable by Consultant, his legal representative, or other successors in interest. 9. GENERAL PROVISIONS. a. ASSIGNMENT. It is agreed that neither Consultant nor any beneficiary shall have any right to commute, sell, assign, transfer, or otherwise convey the right to receive any payment or other benefit hereunder, which payments and benefits, and the rights thereto, are expressly declared to be non-assignable and nontransferable. Except as provided in paragraph 8.a., the Company shall have no right to assign or transfer its rights or obligations under this Agreement, and of any beneficiary or Consultant, shall be solely those of an unsecured creditor of the Company. Any asset acquired by the Company, in connection with the liabilities assumed by it under this Agreement shall not be deemed to be held under any trust for the benefit of the Consultant or his beneficiaries or to be considered security for the performance of the obligations of the Company, but shall be, and remain, a general, un-pledged, unrestricted asset of the Company. c. CUT-HEADINGS. The headings of all of the paragraphs and subparagraphs of this Agreement are inserted for convenience of reference only, and shall not affect the construction or interpretation of this Agreement. d. MODIFICATION, AMENDMENT, WAIVER. No modification, amendment, or waiver of any provision of this Agreement shall be effective unless approved in writing by both parties. The failure at any time to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and shall not affect the right of either party thereafter to enforce each and every provision of this Agreement in accordance with its terms. e. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. f. NO STRICT CONSTRUCTION. The language used in this Agreement shall be deemed to be the language chosen by the parties thereto to express their mutual intent, and no rule of strict construction shall be applied against any person. g. APPLICABLE LAW. All questions concerning the construction, validity, and interpretation of this Agreement shall be governed by the laws of the State of Minnesota. h. NOTICES. Any notice to be served under this Agreement shall be in writing and shall be mailed by registered or certified mail, registry or certification fee and postage prepaid and return receipt requested, addressed: If to the Company, to: Norstan, Inc. 605 North Highway 169 Plymouth, Minnesota 55441 Attention: Board of Directors; or If to Consultant, to: Richard Cohen 6990 Tupa Drive Edina, Minnesota 55439; or to such other place as either party may specify in writing, delivered in accordance with the provisions of this subparagraph. i. SURVIVAL. The rights and obligations of the parties shall survive the term of the Consulting Period to the extent that any performance is required under this Agreement after the expiration or termination of such term. j. ENTIRE AGREEMENT. This Agreement dated September 1, 1998 constitutes the entire agreement of the parties with respect to the subject matter thereof, and supersedes all previous agreements between the parties relating to the same subject matter. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. NORSTAN, INC. By /s/ David Richard -------------------------------- Chief Executive Officer By /s/ Richard Cohen -------------------------------- Richard Cohen EX-10.(1)(5) 3 EXHIBIT 10(1)(5) SEVENTH AMENDMENT TO CREDIT AGREEMENT THIS SEVENTH AMENDMENT TO CREDIT AGREEMENT is dated as of May 31, 1999, but is effective as of April 30, 1999 ("this Amendment"), by and among NORSTAN, INC., a Minnesota corporation (the "Borrower"), the banks which are signatories hereto (each individually, a "Bank," and collectively, the "Banks"), and U.S. BANK NATIONAL ASSOCIATION (formerly known as First Bank National Association), a national banking association, one of the Banks, as agent for the Banks (in such capacity, the "Agent"). RECITALS A. The Borrower, the Banks and the Agent are parties to a Credit Agreement dated as of July 23, 1996, as amended by a First Amendment dated as of October 11, 1996, a Second Amendment dated as of September 26, 1997, a Third Amendment dated as of March 20, 1998, a Fourth Amendment dated as of July 23, 1998, a Fifth Amendment dated as of September 28, 1998 and a Sixth Amendment dated as of October 21, 1998 (as so amended, the "Credit Agreement"). B. The parties hereto desire to amend the Credit Agreement in certain respects and to waive certain Events of Default. C. The Borrower has formed or acquired three new Subsidiaries, namely, Norstan Consulting Holding Company, Norstan Consulting, Inc. and Norstan Canada, Ltd., each of which Subsidiaries is required by the terms of the Credit Agreement to become a Guarantor of the Borrower's obligations under the Credit Agreement. D. Effective, January 1, 1999, Connect Computer Corporation, Vadini, Inc. d/b/a Prima Consulting, Inc. and Wordlink, Inc. were merged with and into Norstan Consulting, Inc. E. The operations of Norstan Canada, Inc. ceased as of April 30, 1999 and the assets thereof were transferred to Norstan Canada, Ltd. as of May 1, 1999. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: Section 1. DEFINITIONS. Capitalized terms used herein and not otherwise defined herein, but which are defined in the Credit Agreement, shall have the meanings ascribed to such terms in the Credit Agreement unless the context otherwise requires. Section 2. AMENDMENTS TO CREDIT AGREEMENT. Subject to Section 5 hereof, the Credit Agreement is hereby amended as follows: (a) Article IV thereof is amended by adding thereto the following new Section 4.20: Section 4.20 YEAR 2000. The Borrower has reviewed and assessed its business operations and computer systems and applications to address the "year 2000 problem" (that is, that computer applications and equipment used by the Borrower, directly or indirectly through third parties, may be unable to properly perform date-sensitive functions before, during and after January 1, 2000). The Borrower reasonably believes that the year 2000 problem will not result in a material adverse change in the Borrower's business condition (financial or otherwise), operations, properties or prospects or ability to repay the Bank. The Borrower is in the process of implementing a plan to remediate year 2000 problems and will complete implementation of such plan with respect to any material year 2000 problems, and testing thereof, by September 30, 1999. The Borrower agrees that this representation will be true and correct on and shall be deemed made by the Borrower on each date the Borrower requests any Advance under this Agreement or the Note or delivers any information to the Bank. The Borrower will promptly deliver to the Bank such information relating to this representation and covenant as the Bank may request from time to time. (b) Section 6.5 thereof is amended to read as follows: Section 6.5 SUBSIDIARIES. After the date of this Agreement, the Borrower will not, and will not permit any Subsidiary to, form or acquire any corporation which would thereby become a Subsidiary, unless (a) 100% of the issued and outstanding capital stock of such Subsidiary is owned by Norstan, Inc. or by a 100%-owned Subsidiary of Norstan, Inc., (b) each line of business of such Subsidiary is within the communications and information technology industries and (c) the aggregate amount of the Borrower's Investment or Investments in all such Subsidiaries shall not exceed the amounts set forth in Section 6.10(l); provided, however, that Norstan Communications, Inc. shall be permitted to acquire the initial 75% of the membership interest in Connaissance contemplated by the Connaissance Agreement and on May 1, 2001, to acquire the remaining 25% of the membership interest in Connaissance in accordance with the Connaissance Agreement and to invest an additional $200,000 in Connaissance for the sole purpose of acquiring certain assets of ASP Consulting; and provided, further, that the Borrower shall be permitted to acquire 100% of the issued and outstanding capital stock of Wordlink, Inc. notwithstanding the Borrower's failure to comply with clauses (iii) and (iv) of Section 6.10(l) at the time of such acquisition. (c) Section 6.8 thereof is amended to read as follows: Section 6.8 CAPITAL EXPENDITURES. The Borrower will not, and will not permit any Subsidiary to, make Capital Expenditures in an amount exceeding, on a consolidated basis in any fiscal year, an amount equal to (a) seven percent (7%) of the consolidated revenues of the Borrower and the Subsidiaries as reported in their consolidated financial statements for the preceding fiscal year, PLUS (b) for the fiscal year ending April 30, 1998 only, Capital Expenditures attributable to the PRIMA Acquisition, plus (c) Capital - 2 - Expenditures attributable to the acquisition of membership interests in Connaissance pursuant to the Connaissance Agreement and the $200,000 Investment in Connaissance for the purpose of acquiring certain assets of ASP Consulting, as permitted under Section 6.5. (d) Section 6.10(k) thereof is amended to read as follows: 6.10(k) Loans and advances (i) by the Borrower to Norstan Communications, Inc., Norstan Network Services, Inc., Norstan Consulting, Inc. (with respect to Connect Computer Company, PRIMA and Wordlink, Inc., all of which were merged with and into Norstan Consulting, Inc. effective January 1, 1999), Norstan-UK, Norstan International and Connaissance and (for purposes other than to finance lease account receivables, as specified in 6.10(j) above) to Norstan Canada, and (ii) by Norstan Communications, Inc. to Connaissance as contemplated by the Connaissance Agreement, provided that, prior to the Borrower's acquisition of the remaining 25% membership interest in Connaissance pursuant to the Connaissance Agreement, the aggregate amount of such loans and advances to Connaissance shall not exceed $4,000,000 at any time outstanding prior to April 30, 2000 and $3,000,000 at any time outstanding on or after April 30, 2000. (e) Section 6.16 thereof is amended to read as follows: Section 6.16 MINIMUM EBITDA. The Borrower will not permit EBITDA to be less than (a) $9,000,000 for the period of one fiscal quarter ending April 30, 1999, (b) $16,000,000 for the period of two consecutive fiscal quarters ending July 31, 1999, (c) $26,000,000 for the period of three consecutive fiscal quarters ending October 31, 1999, (d) $35,000,000 for the period of four consecutive fiscal quarters ending January 31, 2000 and (e) $40,000,000 for each period of four consecutive fiscal quarters ending on or after April 30, 2000. (f) Section 6.19 thereof is amended to read as follows: Section 6.19 INTEREST COVERAGE RATIO. The Borrower will not permit the Interest Coverage Ratio to be less than (a) 6.0 to 1.0 as of April 30, 1999, July 31, 1999 and October 31, 1999 and (b) 8.0 to 1.0 as of January 31, 2000 and as of the last day of any fiscal quarter ending thereafter. Section 3. WAIVER. The Borrower has informed the Banks that it was not in compliance with its covenant under Section 6.10(k)(ii) hereof as constituted prior to the date hereof, in that the aggregate outstanding principal of loans and advances from Norstan Communications, Inc. to Connaissance was in excess of $2,000,000, and that it was not in compliance with its covenant under Section 6.16 of the Credit Agreement for the period ended January 31, 1999, in that its actual EBITDA for the period of four consecutive fiscal quarters ended on that date was less than $35,000,000. Each such instance of noncompliance constitutes an Event of Default under the Credit Agreement. Upon satisfaction of the conditions set forth in - 3 - Section 5 of this Amendment, the Banks hereby waive the Events of Default under the Credit Agreement described in the preceding sentences. This waiver is limited to the express terms hereof and shall not extend to any other Default, Event of Default or any other period. This waiver shall not be and shall not be deemed to be a course of dealing upon which the Borrower may rely with respect to any other Default, Event of Default or request for a waiver and the Borrower hereby expressly waives any such claim. Section 4. REPRESENTATIONS AND WARRANTIES OF THE BORROWER. To induce the Banks and the Agent to execute and deliver this Amendment (which representations and warranties shall survive the execution and delivery of this Amendment), the Borrower represents and warrants to the Agent and the Banks that: (a) this Amendment has been duly authorized, executed and delivered by it and this Amendment constitutes the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, subject to limitations as to enforceability which might result from bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (b) the Credit Agreement, as amended by this Amendment, constitutes the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with its terms, subject to limitations as to enforceability which might result from bankruptcy, insolvency, reorganization, moratorium or similar laws or equitable principles relating to or limiting creditors' rights generally; (c) the execution, delivery and performance by the Borrower of the Amendment (i) have been duly authorized by all requisite corporate action and, if required, shareholder action, (ii) do not require the consent or approval of any governmental or regulatory body or agency, and (iii) will not (A) violate (1) any provision of law, statute, rule or regulation or its certificate of incorporation or bylaws, (2) any order of any court or any rule, regulation or order of any other agency or government binding upon it, or (3) any provision of any material indenture, agreement or other instrument to which it is a party or by which any of its properties or assets are or may be bound, or (B) result in a breach of or constitute (alone or with due notice or lapse of time or both) a default under any indenture, agreement or other instrument referred to in clause (iii)(A)(3) of this Section 4(c); (d) as of the date hereof, no unwaived Default or Event of Default has occurred which is continuing; and (e) all the representations and warranties contained in Article IV of the Credit Agreement are true and correct in all material respects with the same force and effect as if made by the Borrower on and as of the date hereof. - 4 - Section 5. CONDITIONS TO EFFECTIVENESS OF THIS AMENDMENT. This Amendment shall not become effective until, and shall become effective when, each and every one of the following conditions shall have been satisfied: (a) the Agent shall have received executed counterparts of this Amendment, duly executed by the Borrower and each of the Banks; (b) the Agent shall have received from the Guarantors a Consent and Agreement of Guarantors in the form of Exhibit A hereto (the "Guarantor Agreements") duly completed and executed by each Guarantor; (c) the Agent shall have received from each of Norstan Consulting Holding Company, Norstan Consulting, Inc. and Norstan Canada, Ltd. a Guaranty substantially in the same form as the Guaranties heretofore executed by the other Guarantors, duly executed by each such Subsidiary; (d) the Agent shall have received a copy of the resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance by the Borrower of this Amendment, certified by its Secretary or an Assistant Secretary, together with a certificate of the Secretary or an Assistant Secretary of the Borrower certifying as to the incumbency and the true signatures of the officers authorized to execute this Amendment on behalf of the Borrower; and (e) the Agent shall have received the favorable opinion of counsel to the Borrower covering the matters set forth in Exhibit B hereto, which opinion shall be in form and substance satisfactory to the Agent. Upon receipt of all of the foregoing, the Agent shall notify the Borrower and the Banks that this Amendment has become effective (but the failure of the Agent to give such notice shall not affect the validity of this Amendment or prevent it from becoming effective), whereupon this Amendment shall be retroactively effective as of April 30, 1999. Section 6. AFFIRMATION; REAFFIRMATION. Each party hereto affirms and acknowledges that (a) the Credit Agreement as amended by this Amendment remains in full force and effect in accordance with its terms and (b) all references to the "Credit Agreement" or any similar term contained in any other Loan Document shall be deemed to be references to the Credit Agreement as amended hereby. The Borrower hereby confirms, ratifies, approves and reaffirms each of the Loan Documents and agrees that each of the Loan Documents, as amended hereby, remains in full force and effect. Section 7. GENERAL. (a) The Borrower agrees to reimburse the Agent upon demand for all reasonable expenses (including reasonable attorneys fees and legal expenses) incurred by - 5 - the Agent in the preparation, negotiation and execution of this Amendment and any other document required to be furnished herewith, and to pay and save the Agent harmless from all liability for any stamp or other taxes which may be payable with respect to the execution or delivery of this Amendment, which obligations of the Borrower shall survive any termination of the Credit Agreement. (b) This Amendment may be executed in as many counterparts as may be deemed necessary or convenient, and by the different parties hereto on separate counterparts, each of which, when so executed, shall be deemed an original but all such counterparts shall constitute but one and the same instrument. (c) Any provision of this Amendment which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining portions hereof or affecting the validity or enforceability of such provisions in any other jurisdiction. (d) This Amendment shall be governed by, and construed in accordance with, the internal law, and not the law of conflicts, of the State of Minnesota, but giving effect to federal laws applicable to national banks. (e) This Amendment shall be binding upon the Borrower, the Agent and the Banks and their respective successors and assigns, and shall inure to the benefit of the Borrower, the Agent and the Banks and the successors and assigns of the Agent and the Banks. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] - 6 - IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the day and year first above written. NORSTAN, INC. By: /s/ Robert J. Vold ----------------------------------- Its: Treasurer ---------------------------------- U.S. BANK NATIONAL ASSOCIATION, as a Bank and as Agent By: /s/ David Shapiro ----------------------------------- Its: Assistant Vice President ---------------------------------- HARRIS TRUST AND SAVINGS BANK By: /s/ Andrew K. Peterson ----------------------------------- Its: Managing Director ---------------------------------- M&I MARSHALL & ILSLEY BANK By: /s/ Stephen F. Geimer ----------------------------------- Its: Vice President ------------------------------- By: /s/ Robert A. Nielsen ----------------------------------- Its: Assistant Vice President NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By: /s/ Brad Sullivan ----------------------------------- Its: Assistant Vice President [Signature Page to Seventh Amendment to Credit Agreement] S-1 EX-23.(A) 4 EXHIBIT 23A(A) EXHIBIT 23(A) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated June 8, 1999 included in this Form 10-K, into the Company's previously filed Registration Statement Nos. 33-30323, 33-32310, 33-44470, 33-72926, 33-62957, 33-62971, 33-72928 and 333-37913. /s/ ARTHUR ANDERSEN LLP Minneapolis, Minnesota, July 28, 1999 EX-27 5 EXHIBIT 27
5 1,000 12-MOS APR-30-1999 MAY-01-1998 APR-30-1999 867 0 98,883 1,437 16,846 175,863 97,385 47,656 308,516 97,624 94,015 1,076 0 0 108,259 308,516 200,738 482,709 151,382 337,670 129,727 0 4,886 10,426 4,536 5,890 0 0 0 5,890 0.56 0.56
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