Norstan (NRRD) 10-Q 2001 Q1 Quarterly report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the period ended July 29, 2000

or

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from         to         

Commission File Number 0-8141

NORSTAN, INC.
(Exact name of registrant as specified in its charter)

Minnesota	41-0835746
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5101 Shady Oak Road, Minnetonka, Minnesota 55343-4100
(address of principal executive offices)

Telephone (612) 352-4000 Fax (612) 352-4949 Internet www.norstan.com
(Registrant's telephone number, facsimile number, Internet address)

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes /x/  No / /

    On September 5, 2000, there were 11,334,125 shares outstanding of the registrant's common stock, par value $0.10 per share, its only class of equity securities.

PART I. FINANCIAL INFORMATION

ITEM 1.

NORSTAN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
(In thousands, except per share amounts)

			Three Months Ended
			July 29, 2000			July 31, 1999
REVENUES
	Communications		$	76,437		$	84,950
	Consulting			11,861			28,996
	Financial Services			2,349			2,258
		Total Revenues		90,647			116,204
COST OF SALES
	Communications			57,724			60,976
	Consulting			9,261			18,176
	Financial Services			698			698
		Total Cost of Sales		67,683			79,850
GROSS MARGIN
	Communications			18,713			23,974
	Consulting			2,600			10,820
	Financial Services			1,651			1,560
		Total Gross Margin		22,964			36,354
	Selling, General & Administrative Expenses			28,301			32,833
OPERATING INCOME (LOSS)				(5,337	)		3,521
	Interest Expense			(2,018	)		(1,426	)
	Other Income (Expense), Net			(185	)		(462	)
INCOME (LOSS) BEFORE TAXES				(7,540	)		1,633
	Provision for Income Taxes			—			751
NET INCOME (LOSS)			$	(7,540	)	$	882
NET INCOME (LOSS) PER SHARE—
BASIC			$	(0.69	)	$	0.08
DILUTED			$	(0.69	)	$	0.08
WEIGHTED AVERAGE SHARES—
BASIC				10,916			10,708
DILUTED				10,916			10,726

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

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NORSTAN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

			July 29, 2000			April 30, 1999
			(Unaudited)			(Audited)
ASSETS
CURRENT ASSETS
	Cash		$	2,741		$	29
	Accounts receivable, net of allowances for doubtful accounts of $4,829 and $5,628			66,224			74,106
	Lease receivables			23,259			25,859
	Inventories			12,559			12,799
	Costs and estimated earnings in excess of billings of $18,011 and $14,986			12,642			15,252
	Deferred income taxes			7,987			7,468
	Prepaid expenses, deposits and other			9,818			11,819
		TOTAL CURRENT ASSETS		135,230			147,332
PROPERTY AND EQUIPMENT
	Furniture, fixtures and equipment			105,195			104,070
	Less-accumulated depreciation and amortization			(66,108	)		(61,886	)
		NET PROPERTY AND EQUIPMENT		39,087			42,184
OTHER ASSETS
	Lease receivables, net of current portion			41,550			41,874
	Goodwill, net of accumulated amortization of $6,056 and $5,926			4,340			4,462
	Deferred income taxes			3,754			3,320
	Other			6,796			4,421
		TOTAL OTHER ASSETS		56,440			54,077
TOTAL ASSETS			$	230,757		$	243,593

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

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NORSTAN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

				July 29, 2000			April 30, 2000
				(Unaudited)			(Audited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
	Current maturities of long-term debt			$	2,103		$	1,194
	Current maturities of discounted lease rentals				20,881			20,550
	Accounts payable				28,310			32,463
	Deferred revenue				20,973			20,696
	Accrued
		Salaries and wages			6,534			8,332
		Warranty costs			1,791			1,790
		Other liabilities			6,394			6,850
	Billings in excess of costs and estimated earnings of $19,759 and $20,624				11,528			15,635
			TOTAL CURRENT LIABILITIES		98,514			107,510
LONG-TERM DEBT, net of current maturities					72,053			67,445
DISCOUNTED LEASE RENTALS, net of current maturities					22,862			24,285
OTHER LIABILITIES					1,860			1,864
SHAREHOLDERS' EQUITY
		Common stock—$.10 par value; 40,000,000 authorized shares; 11,591,550 and 11,239,113 shares issued and outstanding			1,159			1,124
		Capital in excess of par value			54,653			53,520
		Retained earnings (deficit)			(16,222	)		(8,682	)
		Unamortized cost of stock			(2,389	)		(1,707	)
		Accumulated other comprehensive income (loss)			(1,733	)		(1,766	)
			TOTAL SHAREHOLDERS' EQUITY		35,468			42,489
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY				$	230,757		$	243,593

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

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NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
UNAUDITED
(In thousands)

				Three Months Ended
				July 29, 2000			July 31, 1999
OPERATING ACTIVITIES
	Net income (loss)			$	(7,540	)	$	882
	Adjustments to reconcile net income (loss) to net cash used for operating activities:
		Restructuring costs paid			(197	)		(697	)
		Depreciation and amortization			5,222			5,854
		Deferred income taxes			(949	)		1,197
		Changes in operating items:
			Accounts receivable		7,891			5,824
			Inventories		243			(2,982	)
			Costs and estimated earnings in excess of billings		2,620			(10,654	)
			Prepaid expenses, deposits and other		(154	)		(6,398	)
			Accounts payable		(4,152	)		400
			Deferred revenue		270			357
			Accrued liabilities		(2,058	)		(2,747	)
			Income taxes payable/receivable		2,161			(565	)
			Billings in excess of costs and estimated earnings		(4,116	)		3,104
		Net cash used for operating activities			(759	)		(6,425	)
INVESTING ACTIVITIES
	Additions to property and equipment, net				(1,705	)		(2,839	)
	Investment in lease contracts				(7,566	)		(4,363	)
	Collections from lease contracts				10,511			6,411
	Other, net				(2,530	)		608
		Net cash used for investing activities			(1,290	)		(183	)
FINANCING ACTIVITIES
	Borrowings of long-term debt				52,843			60,845
	Repayments of long-term debt				(47,337	)		(49,835	)
	Borrowings of discounted lease rentals				4,033			2,757
	Repayments of discounted lease rentals				(5,153	)		(7,393	)
	Proceeds from sale of common stock				377			460
		Net cash provided by financing activities			4,763			6,834
EFFECT OF EXCHANGE RATE CHANGES ON CASH					(2	)		29
NET INCREASE IN CASH					2,712			255
CASH, BEGINNING OF PERIOD					29			867
CASH, END OF PERIOD				$	2,741		$	1,122

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

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NORSTAN, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JULY 29, 2000

UNAUDITED

    The information furnished in this report is unaudited and reflects all adjustments which are normal recurring adjustments and, which in the opinion of management, are necessary to fairly present the operating results for the interim periods. The operating results for the interim periods presented are not necessarily indicative of the operating results to be expected for the full fiscal year. This report should be read in conjunction with the Company's most recent "Annual Report on Form 10-K."

PRINCIPLES OF CONSOLIDATION

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

FOREIGN CURRENCY

    For the Company's foreign operations, assets and liabilities are translated at exchange rates as of the balance sheet date, and revenues and expenses are translated at average exchange rates prevailing during the period. Translation adjustments are recorded as a separate component of shareholders' equity.

SUPPLEMENTAL CASH FLOW INFORMATION

    Supplemental disclosure of cash flow information is as follows (in thousands):

		Three Months Ended
		July 29, 2000		July 31, 1999
Cash paid for:
	Interest	$	3,572	$	2,068
	Income taxes	$	32	$	119

RECENTLY ISSUED ACCOUNTING STANDARDS

    Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities", was issued in June 1998 and amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of SFAS No. 133" to require adoption at the beginning of the Company's fiscal year ending April 30, 2002. The standard requires every derivative to be recorded on the balance sheet as either an asset or liability measured at fair value with changes in the derivative's fair value recognized in earnings unless specific hedge accounting criteria are met. SFAS No. 133 is not expected to have a material effect on the Company's financial position or results of operations.

     In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition" (SAB No. 101), which provides guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB No. 101 is effective for the Company's fiscal quarter ending April 30, 2001. SAB No. 101 is not expected to have a material effect on the Company's financial position or results of operations.

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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.

EARNINGS PER SHARE DATA

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

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

		Three Months Ended
		July 29, 2000			July 31, 1999
Net income (loss)		$	(7,540	)	$	882
Weighted average common shares outstanding—Basic			10,916			10,708
Effect of stock option and benefit plans			—			18
Weighted average common shares outstanding—Diluted			10,916			10,726
Net income (loss) per share—
	Basic	$	(0.69	)	$	0.08
	Diluted	$	(0.69	)	$	0.08

COMPREHENSIVE INCOME

    The Company reports comprehensive income and its components pursuant to the requirements of SFAS No. 130, "Reporting Comprehensive Income". This statement establishes standards for the reporting of comprehensive income and its components. For the Company, comprehensive income consists of net income (loss) adjusted for foreign currency translation adjustments. Comprehensive income (loss), as defined by SFAS No. 130, was a loss of approximately $7.5 million for the three months ended July 29, 2000 and income of $515,000 for the similar period ended July 31, 1999.

RESTRUCTURING CHARGES

    During the second quarter of fiscal 2000, the Company recorded a restructuring charge of approximately $2.0 million related to its Consulting business. The emphasis of the restructuring was to

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consolidate branch offices and reduce certain general and administrative costs. Norstan Consulting has transitioned to a project-based business model in which the physical presence of geographic branches has become far less important than the ability to move skilled consulting resources to customer engagements. The $2.0 million charge consisted of noncancelable lease obligations for branch offices to be closed ($1.0 million), software and other asset write-offs ($800,000), and severance costs ($200,000).

    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 the fiscal quarters ended July 29, 2000 and July 31, 1999, payments totaling $197,000 and $697,000 were charged against the restructuring reserves which were established as part of the above-described restructuring charges. At July 29, 2000, a reserve of approximately $440,000 remained for future payments to be made related to the most recent restructuring charge.

WRITEDOWN OF GOODWILL

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

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.

INCOME TAXES

    The Company did not record any income tax benefit related to the current quarter's loss. For the three months ended July 31, 1999, the Company's effective income tax rate was 46.0%, which differed from the federal statutory rate primarily due to state income taxes and the effect of nondeductible goodwill amortization.

    Realization of the net deferred tax asset is dependent on the Company's ability to generate sufficient future taxable income. Although realization is not assured, the Company believes that it is more likely than not that the recorded asset will be realized.

CAPITAL RESOURCES

    As of July 29, 2000, the Company had an $85.0 million revolving credit agreement with certain banks. Sublimits exist related to the Company's support of its leasing activities. Borrowings under this agreement bear interest at rates based on the banks' reference rate, as well as LIBOR or CD based options. Interest rates on borrowings outstanding as of July 29, 2000 ranged from 7.1% to 12.0%. Total consolidated borrowings under this agreement at July 29, 2000 and April 30, 2000 were $71.2 million

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and $66.8 million, respectively. There were no borrowings on account of the Company's leasing activities at July 29, 2000 and April 30, 2000. 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 achieve certain other financial ratios.

    As of July 29, 2000, the Company was in violation of certain covenants under this credit agreement. The Company has been provided a temporary forbearance period until September 25, 2000 with respect to these covenant violations. In addition, borrowing capacity has been reduced to $78.0 million as of July 31, 2000. The Company expects to repay borrowings under this agreement with anticipated proceeds from the new financing arrangements discussed below.

    On August 14, 2000, the Company received a letter of commitment from a new banking group for funding of up to $80.0 million. The commitment includes $50.0 million available under a revolving credit agreement (subject to borrowing base limitations related to eligible accounts receivable, inventories and lease receivables) and $30.0 million in the form of a term note. Under this credit facility, the first $10.0 million borrowed under the revolving line will bear interest at 2.25% above the banks' reference rate. Additional revolver borrowings in excess of $10.0 million will bear interest at between 1.0% and 1.5% above the banks' reference rate depending on the Company's EBITDA for applicable periods. The rate of interest charged on the term loan will be 6.0% above the greater of 9.0% and the banks' reference rate. The revolving credit agreement will be effective through the third anniversary of the agreements' initial closing date. The term note will mature on the first anniversary of the initial closing date. Under the agreement, the Company will be required to comply with various financial and other covenants.

    Management of the Company believes that a combination of cash expected to be generated from operations, and borrowing capacity available under the new financing arrangements discussed above will be adequate to meet the anticipated liquidity and capital resource requirements of its business through at least April 30, 2001.

BUSINESS SEGMENTS

    The Company delivers its products and services through three business segments, Communications, Consulting and Financial Services. The Company's interim disclosures under the requirements of SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," are as follows (in thousands):

	For the Quarter Ended
	July 29, 2000					July 31, 1999
	Revenues		Operating Income (Loss)			Revenues		Operating Income (Loss)
Communications	$	76,437	$	(1,413	)	$	84,950	$	4,376
Consulting		11,861		(4,905	)		28,996		(1,792	)
Financial Services		2,349		981			2,258		937
Totals	$	90,647	$	(5,337	)	$	116,204	$	3,521

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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

    Norstan is a single-source provider of leading-edge technology solutions and world-class technology services including converged voice and data infrastructure, information technology, networking, internet conferencing, communication solutions and e-business solutions to more than 18,000 business clients worldwide. To address the complex communication requirements of its customers, Norstan provides a broad range of products and services through three business segments; Communications, Consulting and Financial Services which accounted for 84.3%, 13.1% and 2.6% of Norstan's revenues for the fiscal quarter ended July 29, 2000, respectively. Within the Communications business segment; Communication Solutions offers a comprehensive portfolio of technology solutions including IP Telephony, traditional PBXs, unified messaging, long distance and conferencing and call center solutions; Communication Services provides a full array of customer support services including maintenance and support services, systems modifications and managed communication services; Advanced Services Group provides unified media and converged infrastructure solutions, Voice-Over Data Networking and IP Telephony services and Conferencing Solutions offers audio and video bridging services, internet conferencing, webcasting, consulting services and conferencing products. The Consulting business segment provides e-business solutions including e-commerce consulting services, e-business integration services, knowledge management consulting services, customer relationship management solutions and infrastructure services. The Financial Services segment supports the sales process by providing customized financing alternatives.

SUMMARY

    During the quarter ended July 29, 2000, the Company reported a net loss of $7.5 million or $0.69 per common share, as compared to net income of $882,000 or $0.08 per common share for the quarter ended July 31, 1999.

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SELECTED CONSOLIDATED FINANCIAL DATA

			DOLLAR AMOUNTS AS A PERCENTAGE OF REVENUES
			Three Months Ended				PERCENTAGE CHANGE
			July 29, 2000		July 31, 1999		Fiscal 2001 vs. 2000
REVENUES
	Communications		84.3	%	73.1	%	(10.0	)%
	Consulting		13.1	%	25.0	%	(59.1	)%
	Financial Services		2.6	%	1.9	%	4.0	%
		Total Revenues	100.0	%	100.0	%	(22.0	)%
COST OF SALES			74.7	%	68.7	%	(15.2	)%
GROSS MARGIN			25.3	%	31.3	%	(36.8	)%
SELLING, GENERAL & ADMINISTRATIVE EXPENSES			31.2	%	28.3	%	(13.8	)%
OPERATING INCOME (LOSS)			(5.9	)%	3.0	%	(251.6	)%
	Interest Expense and Other, Net		(2.4	)%	(1.6	)%	16.7	%
INCOME (LOSS) BEFORE TAXES			(8.3	)%	1.4	%	(561.7	)%
	Provision for Income Taxes		0.0	%	0.6	%	(100.0	)%
NET INCOME (LOSS)			(8.3	)%	0.8	%	(954.9	)%

    The following table sets forth, for the periods indicated, the gross margin percentages for Communications, Consulting and Financial Services.

		Three Months Ended
		July 29, 2000		July 31, 1999
GROSS MARGIN PERCENTAGES
	Communications	24.5	%	28.2	%
	Consulting	21.9	%	37.3	%
	Financial Services	70.3	%	69.1	%

RESULTS OF OPERATIONS

    REVENUES.  Revenues decreased 22.0% to $90.6 million in the first quarter of fiscal year 2001 as compared to $116.2 million for the first quarter of fiscal year 2000.

    Revenues from Communications decreased 10.0% to $76.4 million for the first quarter ended July 29, 2000 as compared to $85.0 million for the similar period last year. This decrease was the result of weaker sales in Siemens, conferencing and voice processing products which were somewhat offset by increases in call center and IP telephony solution sales.

    Revenues from Consulting decreased 59.1% to $11.9 million in the first quarter ended July 29, 2000 from $29.0 million in the similar period last year. This decrease is the result of significantly lower volume at Norstan Consulting which has reduced its workforce by approximately two-thirds over the past year as it has transitioned its business to a national practice focusing on e-business, customer relationship management and strategic advisory service practices. This decrease was only somewhat offset by an increase in Connaissance Consulting revenues.

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    Revenues from Financial Services increased $91,000 or 4.0% in the first quarter of fiscal year 2001 as compared to the similar quarter last year.

    GROSS MARGIN.  The Company's gross margin decreased $13.4 million to $23.0 million for the quarter ended July 29, 2000 as compared to $36.4 million for the similar quarter last year. As a percent of total revenues, gross margin was 25.3% for the three month period ended July 29, 2000 as compared to 31.3% for the similar period ended July 31, 1999.

    The gross margin for Communications decreased to 24.5% during the first quarter of fiscal year 2001 as compared to 28.2% for the same period in fiscal year 2000. This decrease was the result of continued competitive price pressure on communications equipment and by increased product costs.

    Consulting's gross margin decreased to 21.9% as compared to 37.3% during the first quarter of fiscal 2001 as compared to the similar period in fiscal 2000. This decease was primarily the result of lower than planned utilization of consultants and lower average billing rates as the transition of Consulting's business practices progresses. Both utilization and billing rates are expected to improve as the new consulting practices are established.

    Gross margin as a percent of revenues for Financial Services was 70.3% for the three month period ended July 29, 2000 as compared to 69.1% for the similar period last year.

    SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.  Selling, general and administrative expenses decreased 13.8% to $28.3 million in the first quarter of fiscal year 2001 as compared to $32.8 million in the similar period last year. As a percent of revenues, selling, general and administrative expenses increased to 31.2% for the three month period ended July 29, 2000, as compared to 28.3% for the same period last year. This increase was due to lower revenue volume in the Communications and Consulting business segments. While the Company has taken measures to remove a significant amount of costs from the business in recent quarters, additional investments are also being made in building its Advance Solutions Group practice, new channel partner relationships and its e-commerce presence, vibestech.com.

    INTEREST EXPENSE.  Interest expense was $2.0 million and $1.4 million for the three month periods ended July 29, 2000 and July 31, 1999, respectively. This increase was primarily the result of higher average borrowing levels during the quarter related to working capital requirements.

    INCOME TAXES.  The Company did not record any income tax benefit related to the current quarter's loss. For the three months ended July 31, 1999, the Company's effective income tax rate was 46.0%, which differed from the federal statutory rate primarily due to state income taxes and the effect of nondeductible goodwill amortization.

    NET INCOME (LOSS).  In the first quarter of fiscal 2001, the Company reported a net loss of $7.5 million or $0.69 per share, as compared to net income of $882,000 or $0.08 per share for the first quarter of fiscal 2000.

LIQUIDITY AND CAPITAL RESOURCES

    Net cash used for operating activities decreased significantly in the first quarter of fiscal year 2001 as compared to the similar period last year as a result of improved asset management. Net cash used for investing activities increased in the first quarter of fiscal year 2001 as compared to the similar period in fiscal year 2000 as a result of increases in investments in lease contracts and other items. Net cash provided by financing activities decreased in the comparable quarters as a result of an increase in net borrowings of discounted lease rentals somewhat offset by a decrease in net borrowings of long-term debt.

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    CAPITAL EXPENDITURES.  The Company used $1.7 million for capital expenditures during the three months ended July 29, 2000, as compared to $2.8 million in the similar period last year. These expenditures were primarily for capitalized costs incurred in connection with obtaining or developing internal use software, computer equipment and system integration.

    INVESTMENT IN LEASE CONTRACTS.  The Company has also made a significant investment in lease contracts with its customers. The additional investment made in lease contracts in the first quarter of fiscal year 2001 totaled $7.6 million. Net lease receivables decreased to $64.8 million at July 29, 2000 from $67.7 million at April 30, 2000.

    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 $43.7 million at July 29, 2000 as compared to $44.8 million at April 30, 2000. Interest rates on these credit agreements at July 29, 2000 ranged from approximately 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.

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    CAPITAL RESOURCES.  As of July 29, 2000, the Company had an $85.0 million revolving credit agreement with certain banks. Sublimits exist related to the Company's support of its leasing activities. Borrowings under this agreement bear interest at rates based on the banks' reference rate, as well as LIBOR or CD based options. Interest rates on borrowings outstanding as of July 29, 2000 ranged from 7.1% to 12.0%. Total consolidated borrowings under this agreement at July 29, 2000 and April 30, 2000 were $71.2 million and $66.8 million, respectively. There were no borrowings on account of the Company's leasing activities at July 29, 2000 and April 30, 2000. 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 achieve certain other financial ratios.

    As of July 29, 2000, the Company was in violation of certain covenants under this credit agreement. The Company has been provided a temporary forbearance period until September 25, 2000 with respect to these covenant violations. In addition, borrowing capacity has been reduced to $78.0 million as of July 31, 2000. The Company expects to repay borrowings under this agreement with anticipated proceeds from the new financing arrangements discussed below.

    On August 14, 2000, the Company received a letter of commitment from a new banking group for funding of up to $80.0 million. The commitment includes $50.0 million available under a revolving credit agreement (subject to borrowing base limitations related to eligible accounts receivable, inventories and lease receivables) and $30.0 million in the form of a term note. Under this credit facility, the first $10.0 million borrowed under the revolving line will bear interest at 2.25% above the banks' reference rate. Additional revolver borrowings in excess of $10.0 million will bear interest at between 1.0% and 1.5% above the banks' reference rate depending on the Company's EBITDA for applicable periods. The rate of interest charged on the term loan will be 6.0% above the greater of 9.0% and the banks' reference rate. The revolving credit agreement will be effective through the third anniversary of the agreements' initial closing date. The term note will mature on the first anniversary of the initial closing date. Under the agreement, the Company will be required to comply with various financial and other covenants.

    Management of the Company believes that a combination of cash expected to be generated from operations, and borrowing capacity available under the new financing arrangements discussed above will be adequate to meet the anticipated liquidity and capital resource requirements of its business through at least April 30, 2001.

FORWARD-LOOKING STATEMENTS

    From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, product pricing, management of growth, integration of acquisitions, technological developments, new products 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; 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.

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    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.

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 obligations under 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 July 29, 2000 would not materially affect the Company's consolidated financial position, results of operations or cash flows.

    The Company's current 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 borrowing 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 July 29, 2000, total consolidated borrowings under this agreement were $71.2 million.

    The Company 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 these obligations. However, interest rate changes would affect the fair market value of the lease rentals, capital leases and other long-term debt obligations. At July 29, 2000, the Company had fixed rate lease rentals of $43.7 million and capital lease and other long-term debt obligations of $3.0 million.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

    The Company is involved in legal actions in the ordinary course of its business. Although the outcome of any such legal action cannot be predicted, in the opinion of management there is no legal proceeding pending against or involving the Company for which the outcome is likely to have a material adverse effect upon the consolidated financial position or results of operations of the Company.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits.

    None

(b)

Reports on Form 8-K.

    None

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SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NORSTAN, INC. Registrant
Date: September 11, 2000	By	/s/ PAUL BASZUCKI   Paul Baszucki
		Chairman and Chief Executive Officer
Date: September 11, 2000	By	/s/ RICHARD COHEN   Richard Cohen
		Chief Financial Officer (Principal Financial and Accounting Officer)

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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION
SIGNATURES