-----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, QPGt+k0fBxPwCglPbJKWabje5hMh1OjegvYvNDQ9sdipNs2P+1wZ/RRhGwaHgXzv KkDkAtJJTSIC/guIf/0b4g== 0000912057-96-015630.txt : 19960730 0000912057-96-015630.hdr.sgml : 19960730 ACCESSION NUMBER: 0000912057-96-015630 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19960430 FILED AS OF DATE: 19960729 SROS: NASD 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-08141 FILM NUMBER: 96599965 BUSINESS ADDRESS: STREET 1: 6900 WEDGWOOD RD STE 150 STREET 2: P O BOX 9003 CITY: MAPLE GROVE STATE: MN ZIP: 55311 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-K405 1 10-K405 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, 1996 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 charter) MINNESOTA 41-0835746 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 605 NORTH HIGHWAY 169, TWELFTH FLOOR, PLYMOUTH, MINNESOTA 55441 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) The Company's telephone number, including area code: 612-513-4500 Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Shares of Common Stock (par value $.10 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. Yes X No ---- ---- As of June 28, 1996, 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 $92,354,129. As of June 28, 1996, there were outstanding 4,435,697 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. TABLE OF CONTENTS Page ---- PART I Item 1. Business . . . . . . . . . . . . . . .. . . . . . . . . . . 1 Market Trends . . . . . . . . . . . . . . . . . . . . . . 2 Competitive Strengths . . . . . . . . . . . . . . . . . . 3 Growth Strategy . . . . . . . . . . . . . . . . . . . . . 3 Products and Services . . . . . . . . . . . . . . . . . . 4 Acquisitions . . . . . . . . . . . . . . . . . . . . . . . 7 Marketing and Sales . . . . . . . . . . . . . . . . . . . 7 Customers and Customer Service . . . . . . . . . . . . . . 7 Suppliers: Relationship with ROLM . . . . . . . . . . . . 8 Backlog . . . . . . . . . . . . . . . . . . . . . . . . . 8 Competition . . . . . . . . .. . . . . . . . . . . . . . . 8 Canadian Operations . . . . . . . . . . . . . . . . . . . 9 Government Regulation . . . . . . . . . . . . . . . . . . 9 Employees . . . . . . . . . . . . . . . . . . . . . . . . 9 General . . . . . . . . . . . . . . . . . . . . . . . . . 10 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . 11 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 11 Item 4. Submission of Matters to a Vote of Security Holders . . . . . 11 PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters . . . . . . . . . . . . . 12 Item 6. Selected Consolidated Financial Data . . . . . . . . . . . . 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for the Fiscal Years 1996, 1995, and 1994 . . . . . . . . . . . . . . . . . . . 14 Item 8. Financial Statements and Supplementary Data . . . . . . . . . 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . 39 PART III Item 10. Directors and Executive Officers of the Registrant . . . . . 39 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . 39 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . 39 Item 13. Certain Relationships and Related Transactions . . . . . . . 39 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . 40 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 i PART I Item 1. BUSINESS. Norstan, Inc. (the Company) is a single-source technology provider creating integrated voice, video, and data solutions to customers primarily in 18 states and throughout Canada. The Company was incorporated in 1960 as a Minnesota corporation. Norstan Communications, Inc. (NCI) (formerly Norstan Communications Systems, Inc.) was incorporated in 1974. Norstan Financial Services, Inc. (NFS) (formerly Norstan Financial Corporation) was incorporated in 1979. Norstan/Electronic Engineering Company was incorporated in 1985 and merged into NCI in December 1988. Norstan/Communication Consultants, Inc. (N/CCI) was incorporated in 1988 and merged into NCI in May of 1990. Norstan Network Services, Inc. (NNS) was incorporated in 1991. Norstan Network Services, Inc. of New Hampshire and Norstan Canada Inc. (NCDA) were incorporated in 1992. Connect Computer Company was merged into an acquisition subsidiary and as the surviving corporation became a wholly owned subsidiary of the Company in June, 1996. Norstan entered the communications business in 1973, has been a distributor of Siemens ROLM Communications, Inc. (ROLM) communications equipment since 1976 and has historically derived a substantial majority of its revenues from the sale of telephone systems, communications maintenance services and moves, adds and changes, which are modifications to customers' communications systems. In recent years, the Company has expanded the array of products and services it provides to include those of Aspect Telecommunications Corporation ("Aspect"), Compression Labs, Incorporated ("Compression Labs"), Sprint Communications Company L.P. ("Sprint"), Octel Communications Corporation ("Octel") and others. In addition to providing the equipment and related support required for a specific installation, Norstan offers a variety of services, including communications maintenance services, moves, adds and changes, leasing, long distance service, management of customers' communications needs through outsourcing agreements and data communications integration. These services, which provide the Company with an important source of recurring revenue, were approximately 45% of the Company's total revenues for fiscal 1996. Norstan's marketing strategy is to increase sales to its existing customer base by capturing a larger portion of each customer's communications requirements. Generally, the first product sold to a customer is a telephone system. Upon selling a system, Norstan's representatives typically sign the customer to a service contract. Norstan believes the high quality of its customer service supports ongoing marketing efforts, as satisfied customers are more likely to choose Norstan to supply additional communications products and services. In order to focus marketing efforts effectively, Norstan's sales representatives strive to understand each customer's business, enabling them to recommend communications solutions that improve the flow of information and productivity. For example, a sales representative may recommend voice messaging and videoconferencing equipment to expand communications channels, reduce dependence on support personnel and reduce the need for costly travel. For customers with a high volume of calls, Norstan may recommend interactive voice response products, which allow customers to access information via a touch tone telephone, or sophisticated call centers which interface with the customer's computer system and direct calls automatically to available personnel. For those customers who wish to avoid the complexity and training required to operate and maintain their own communications system and the technology risk associated with owning communications equipment, Norstan provides complete communications outsourcing services. The Company focuses its sales efforts on customer locations with 100 or more users and those customers with complex communications requirements. The Company's wide array of products and services enables it to offer single-source solutions to customers' communications needs. Current customers of the Company include BP America Inc., Best Buy Co., Inc., Blue Cross/Blue Shield of Minnesota, Iowa and Arizona, First Bank System, Inc., Manulife Financial, 3M Company, Harley-Davidson, Inc., The Limited Stores, as well as many hospitals and a number of government agencies in Minnesota, Iowa, Wisconsin, Ohio, Arizona and other states and provinces. 1 MARKET TRENDS Norstan believes that as markets become more global, information driven and competitive, businesses are placing an increasing emphasis on rapid and comprehensive communications technology to improve employee productivity and customer service. As a result, businesses are looking to a variety of new technologies to enhance the performance of their communications systems and to increase the speed, accuracy and availability of information. Norstan believes that several trends contribute to a favorable market outlook for communications systems integrators offering a broad range of products and services such as those offered by the Company: - CONTINUED MODEST GROWTH IN MARKET FOR PBX TELEPHONE SYSTEMS. According to MultiMedia Telecommunications Association (MTA), a national trade association, the United States market for private branch exchange ("PBX") telephone systems grew from $2.0 billion in 1993 to a projected $2.3 billion in 1995. Over this same period, the average price per telephone line increased from an estimated $544 to $567, while the number of lines shipped increased from 3.6 million to 4.0 million. MTA states that "the market is being driven by three trends: movement toward more open architecture to support customer demand for more and more sophisticated applications; greater interoperability with PCs, LAN servers, and emerging broadband network technologies; increase in distribution channels and cross-industry alliances allowing PBX vendors and manufacturers to leverage their tradition of reliability and support to capture multimedia solution markets." MTA also projects the market for PBX telephone systems to grow at a compound annual rate of 5.6% to approximately $2.7 billion in 1998, representing an increase in the number of lines shipped to over 4.4 million and an increase in the average price per line to $607. - GROWTH OF NEW COMMUNICATIONS PRODUCTS AND MARKETS. Over the past several years, a variety of new communications technologies has emerged which enhance the capabilities of traditional telephone systems. Manufacturers, such as Aspect, Computer Communications Systems, Compression Labs and Octel have introduced products, including call centers, voice response units, videoconferencing systems and voice messaging products, that improve the performance and efficiency of communications systems. Industry sources expect the number of communications technologies to continue to grow. The United States market for call processing equipment, including call centers, voice messaging and interactive voice response products, was estimated at $5.4 billion in 1996 and is projected to grow at a compound annual rate of 12.0% between 1996 and 1998. Further, the MTA estimates that the market for videoconferencing products in which the Company competes wasapproximately $3.6 billion in 1996 and is projected to grow at a compound annual rate of 47.3% between 1996 and 1997. - CONVERGENCE OF VOICE, VIDEO AND DATA MARKETS. Since the introduction of local and wide area computer networks, the market for data communications has grown rapidly and comprises a growing portion of the overall communications market. The data communications market was estimated at$30.1 billion in 1996 and is projected to grow at a compound annual rate of 24.1% between 1996 and 1998. As the prevalence of computer networks continues to increase and voice, video, data andimages are increasingly transmitted in a digital format using the same networks, Norstan believesthat demand for services related to the integration of voice, video and data networks will increase. - INCREASING COMPLEXITY OF MANAGING COMMUNICATIONS SYSTEMS. Management believes businesses are increasingly turning to communications systems integrators who are capable of providing a single point of contact for communications needs. As the number and complexity of communications technologies grow, United States businesses have increasingly sought to narrow their vendor base to those who offer a broad range of communications products and services, which has led to consolidation among such vendors. 2 COMPETITIVE STRENGTHS The Company believes it possesses and is developing a number of competitive strengths that will help it achieve its goal of becoming one of the premier providers of integrated communications systems solutions in the United States and Canada. These strengths include: - ACCESS TO LEADING VOICE, VIDEO AND DATA PRODUCTS AND SERVICES. Norstan maintains relationships with leading communications technology manufacturers and service providers, including ROLM, Aspect, Compression Labs, Sprint and Octel. In addition, through its data communications business, the Company has access to products and services offered by Novell, Inc. ("Novell"), Cisco Systems, Inc. ("Cisco"), Network Equipment Technologies, Inc. ("NET"), Microsoft Corporation ("Microsoft"), Intel Corporation ("Intel"), Adtran, Inc. ("Adtran"), Compaq Computer Corporation ("Compaq") and Lotus Development Corporation ("Lotus"). Norstan's knowledge of these technologies and ability to remarket, support and integrate them into communications solutions meeting diverse customer requirements, enable the Company to provide its customers with integrated approaches to solving communications issues. Further, Norstan's strong distribution network enhances its access to leading technologies by offering a low cost distribution alternative for established manufacturers, as well as for manufacturers that lack the critical mass necessary to establish a direct sales force in specific markets. - INDEPENDENT SINGLE SOURCE SUPPLIER. Unlike companies that manufacture communications equipment, Norstan's independence permits it to select products on the basis of merit and to distribute a wide range of products from a number of manufacturers. This independence also enables Norstan to respond quickly to changing customer needs by taking advantage of new technologies as they become available, without incurring product development risk. - CUSTOMER SERVICE. Norstan is committed to providing a high level of customer service by exceeding its customers' expectations. Customer satisfaction surveys, conducted by an outside firm contracted by Norstan, indicate that 93% of Norstan's customers are satisfied with the overall service and support they receive. This level of satisfaction has increased, rising from 86% in 1988 to the current level. The Company coordinates its customer service response through three remote diagnostic and dispatch centers which handle over 225,000 service calls per year. - DISTRIBUTION AND INTEGRATION EXPERTISE. Norstan believes it has access to a wide array of leading communications products and is continuing to develop the internal expertise necessary to provide communications products and services on an integrated basis. The availability of distribution rights for many communications products, such as PBX systems and call centers, is limited, making it difficult for many communications systems integration companies to offer the range of products and services that Norstan offers. In addition, the capital and training requirements necessary to offer such products and services on an integrated basis are substantial. Norstan believes that its access to leading products, established distribution network and large customer base, together with its continuing development of communications systems integration expertise, have positioned the Company to expand the portion of its revenues derived from the integration of communications products and services. The June 1996 acquisition of Connect Computer Company accelerated the Company's growth as a communications integrator. See "Acquisitions". GROWTH STRATEGY Norstan has formulated a growth strategy intended to capitalize on its competitive strengths. This growth strategy is focused on the following elements: - INCREASE SALES TO EXISTING CUSTOMERS. Norstan has a large installed customer base, including approximately six thousand customer locations covered by service contracts. This base provides Norstan with the opportunity to capture an increasing portion of each customer's communications requirements. Most customers currently purchase only a portion of the products and services offered by the Company. The cost of selling to existing customers is generally lower than selling to new customers because Norstan already understands the customer's business and communications requirements. Additionally, Norstan's reputation is already established with the 3 customer, thereby enabling Norstan to leverage its high level of customer service and more easily sell new products and services. - EXPANSION OF THE INSTALLED BASE BY ATTRACTING NEW CUSTOMERS. Norstan continually works to attract new customers and employs a specialized sales team focused on selling to non-Norstan customers. Norstan believes its portfolio of products and services, expertise in providing turnkey solutions to customers' communications systems requirements and reputation for high quality service enhance the Company's ability to attract new customers. - STRATEGIC PARTNERSHIPS. Norstan continues to establish strategic partnerships with both hardware and software manufacturers. These partnerships enable Norstan to expand its range of products and services and help to ensure continued access to new products and technologies. In certain instances, strategic partnerships also enhance Norstan's ability to expand geographically by providing access to customers outside of the markets historically served by Norstan. - ACQUISITION STRATEGY. Norstan is actively seeking to acquire complementary businesses that will contribute to the success of Norstan's communications systems integration strategy. Norstan targets communications companies that will provide either new skills, products and services and/or permit expansion of the geographic areas which Norstan serves. These acquisitions will also expand Norstan's customer base, providing additional points of entry for Norstan's communications products and services. See "Acquisitions." PRODUCTS AND SERVICES The Company's core business has historically been the sale of telephone systems, communications maintenance services and moves, adds and changes. From this core business, the Company has expanded its operations and shifted its product mix to incorporate new products and services, including call processing products, long distance services, videoconferencing products, refurbished equipment, cabling, leasing, outsourcing and data integration products and services. This array of products and services allows the Company to provide single source solutions to customers' communications needs. TELEPHONE SYSTEMS. Norstan offers a wide variety of private telephone systems. These systems are typically comprised of a telephone switch and individual telephones located at the customer site. A telephone switch is a device that provides the connection between the customer's internal telephone lines and the outside telephone network. The telephone switch, typically owned by the customer, is available in three primary types: PBX, key system and hybrid key system. PBX switches are generally used for installations of more than 100 lines and can accommodate up to several thousand telephone lines. A PBX condenses the number of internal phone lines to a significantly smaller number of outside trunk lines which connect to the telephone network. When an incoming call is received, the PBX switches the call to the appropriate internal telephone extension. When a call is made from within the business, the PBX determines whether the call is an internal call, in which case the PBX switches the call to the appropriate internal telephone extension, or an outgoing call, in which case the PBX directs the call to an open outside line. The PBX also provides a base platform from which the customer's telephone system can be upgraded with features such as voice messaging and caller identification. In contrast to PBX systems, key systems are relatively inexpensive and appropriate for small installations which generally require fewer than 50 lines. Each telephone in a key system displays all outside lines allowing the user to directly select which telephone line to use when making a call. Hybrid key systems share attributes of both PBX systems and key systems and are typically appropriate for installations requiring approximately 50 to 100 lines. Norstan markets approximately 20 models of PBX systems, key systems and hybrid key systems. The Company also offers a number of different telephone models with a variety of features. Telephone systems range in price from approximately $15,000 for a key system with relatively few lines and features to over $1.0 million for the largest, most complex PBX systems. Telephone systems contributed approximately 27% and 31% of total revenues in fiscal 1996 and 1995, respectively. 4 COMMUNICATIONS MAINTENANCE SERVICES. Norstan provides service to its customers for products it sells on a contract or time and material basis. Telephone systems generally require a higher level of ongoing communications maintenance than other products sold by the Company and generate the majority of communications maintenance revenue. The Company coordinates service through three remote diagnostic and dispatch centers located in Cleveland, Minneapolis and Toronto. The Company offers a variety of service contracts intended to meet the differing needs of customers. List prices for Norstan's communications maintenance services range from approximately $25 to $65 per line annually and are based primarily on the capacity and features of the customer's communications system. Communications maintenance services contributed approximately 22% and 21% of total revenues in fiscal 1996 and 1995, respectively. MOVES, ADDS AND CHANGES. Norstan performs moves, adds and changes related to its customers' telephone systems. Moves, adds and changes consist of moving telephones to new user locations, adding telephones or expansion cards in a telephone system and changing system and user features. Moves, adds and changes are typically scheduled in advance by customers as compared to communications maintenance service calls which require prompt response. Moves, adds and changes contributed approximately 12% and 11% of total revenues in fiscal 1996 and 1995, respectively. CALL PROCESSING. Call processing is comprised of three primary areas: call centers, voice messaging and interactive voice response products. Call centers are complex systems that can process a large number of incoming calls per hour and are used by businesses in applications such as reservation centers, customer support centers and catalog order centers. Call centers utilize a variety of call processing technologies such as interactive voice response products, voice messaging and computer interaction, to maximize the efficiency of a large call-receiving operation. A call center utilizing an interactive voice response product can obtain information from a caller via a touch tone telephone, permitting more detailed information on the caller to be retrieved from a computer database and be available to an agent when answering the call. Norstan offers a variety of call center products manufactured by Aspect, ROLM and Executone which can service from two call-receiving agents to over eight hundred call-receiving agents. Call centers range in price from less than $40,000 to over $1.0 million. Call centers contributed approximately 6% of total revenues in both fiscal 1996 and 1995. Voice messaging enables verbal communications to be sent, stored and retrieved at a later time and from a remote location or forwarded to other parties by using a touch tone telephone. Norstan offers integrated voice messaging products from ROLM and stand alone voice messaging products that are compatible with all major PBX systems from Octel and Applied Voice Technology. Voice messaging products range in price from approximately $5,000 to $500,000. Voice messaging products contributed approximately 6% of total revenues in both fiscal 1996 and 1995. Interactive voice response products allow a caller to access a computer data base to retrieve or input data by using a touch tone telephone. Interactive voice response products can be utilized in a stand alone application, such as when a caller uses a touch tone telephone to obtain account information from a bank or flight schedules from an airline's automated retrieval system. Interactive voice response products can also be utilized in a call center application to route calls and provide data on the caller based on information input by the caller via a touch tone telephone. Norstan began marketing interactive voice response products in 1991 and currently markets models manufactured by Computer Communication Systems and Intervoice which range in price from approximately $20,000 to $150,000. Interactive voice response products contributed less than 1% of total revenues in both fiscal 1996 and 1995. LONG DISTANCE SERVICE. Norstan has provided long distance service since May 1990. The Company entered into a three-year direct resale agreement with Sprint in May 1993, whereby Norstan offers customers a full range of long distance and network services under the Company's private label. In August 1994, the Company and Sprint negotiated a new agreement which runs through July 1997. Long distance service contributed approximately 6% and 5% of total revenues in fiscal 1996 and 1995, respectively. 5 VIDEOCONFERENCING. Videoconferencing allows persons at separate locations to communicate using cameras, video screens, microphones and speakers linked over digital networks. Norstan has distributed videoconferencing equipment manufactured by Compression Labs since July 1991. In addition to distributing Compression Labs' products within a defined geographic region, the Company provides installation and service support nationally for those products. In December 1995, the Company began to distribute videoconferencing equipment from PictureTel, Inc., ranging from desktop video to boardroom systems. Videoconferencing products range in price from approximately $18,000 to over $100,000. Videoconferencing equipment contributed approximately 5% and 4% of total revenues in fiscal 1996 and 1995, respectively. REFURBISHED EQUIPMENT. Since 1988, Norstan has engaged in the refurbishment and resale of previously owned ROLM products. In July 1990, the Company and ROLM entered into an agreement to refurbish and resell previously owned ROLM equipment in the United States. This agreement was renewed for an additional three-year period in October 1993. Under the agreement, ROLM pays the Company a fee for refurbishing the equipment and remarketing separate ROLM components, and the Company shares in the profit generated by this program, which includes the profit on sales of refurbished systems by ROLM direct sales offices. All refurbished equipment is certified by ROLM and covered by warranty for up to one year, depending on the type and quantity of equipment purchased. The Company and ROLM are currently negotiating a new agreement. In April 1993, Norstan expanded its refurbished equipment operations to include the purchase, refurbishment and resale of previously owned Northern Telecom equipment. Refurbished equipment operations contributed approximately 5% and 4% of total revenues in fiscal 1996 and 1995, respectively. CABLING. Cabling is the infrastructure that provides the pathway for telephone systems, local area networks, wide area networks and other communications systems to function. Cabling can be provided on a stand alone basis or in conjunction with other products and services offered by the Company. Cabling operations contributed approximately 5% and 6% of total revenues in fiscal 1996 and 1995, respectively. LEASING. Norstan provides leasing services to enable its customers to finance purchases of communications systems. Lease financing supports the sales process by permitting customized lease structures to meet the needs of customers and eliminating the need for third party financing. By acting as lessor, the Company can typically provide lease terms with greater flexibility than third party financing sources. Norstan also generally provides communications maintenance services for leased equipment. The Company currently has approximately 1,200 leases. At the time of inception, the average lease transaction is approximately $40,000 and has a term of approximately 48 months. The Company financed over $17.6 million in customer equipment purchases for fiscal 1996. Leasing contributed approximately 2% to the Company's total revenues in both fiscal 1996 and 1995. OUTSOURCING. The Company believes that many businesses do not want to dedicate internal resources to manage their communications systems and are therefore contracting with companies who will manage their communications systems through outsourcing agreements. Norstan provides communications equipment and trained personnel to act as a customer's communications systems department, thereby permitting the customer to focus on its primary business. Outsourcing contributed approximately 2% and less than 1% of total revenues in fiscal 1996 and 1995, respectively. DATA COMMUNICATIONS. In November 1993, Norstan formed a strategic business unit to provide data communications services to customers. Data communications services consist of consulting, design, integration and implementation of local area networks, wide area networks, client/server environments and other data and image communications applications. To support these efforts, Norstan provides products and services offered by Novell, Cisco, NET, Microsoft, Intel, Adtran, Compaq and Lotus. In October 1994, Norstan expanded its data communications efforts to include computer telephony integration, which consists of integrating a database or other data system with a telephone system. For example, a call center could be integrated with a database so that when a customer calls a catalog merchant to place an order, that customer's name, address and order history would automatically be retrieved from the database and displayed on the call-receiving agent's computer screen. In November 1994, the Company expanded its data communication services into Canada and in June 1996, the Company increased its data communication capabilities in the Midwest. See "Acquisitions" below. Norstan has approximately 280 employees focusing on data communications and is actively recruiting additional employees to continue its expansion into this area. Data communications contributed less than 2% of total revenues in both fiscal 1996 and 1995. 6 ACQUISITIONS Norstan is actively seeking to acquire complementary businesses that will contribute to the success of Norstan's communications systems integration strategy. On June 4, 1996, the Company acquired Connect Computer Company (Connect), a provider of consulting, design and implementation services based in Minneapolis with offices in Milwaukee and Des Moines. The purchase price of this acquisition was approximately $15 million plus certain incentive payments contingent upon future operating performance of Connect. On November 30, 1994, the Company acquired substantially all of the assets of Renaissance Investments, Ltd., a technology planning and integration services company based in Toronto, Ontario, specializing in local area networks, wide area networks and graphical user interfaces. The purchase price of this acquisition was approximately $726,000. MARKETING AND SALES Norstan has approximately 409 sales and marketing personnel within the United States and Canada including 203 sales representatives who focus on either new prospects or selling additional products and services to Norstan's customer base. Included in the sales force are specialists in the areas of videoconferencing, call centers, leasing, long distance service and training. These specialists partner with the sales representatives to provide integrated communications systems solutions for Norstan's customers. Norstan's sales representatives and specialists use a comprehensive approach to evaluating each customer's communications needs and implementing solutions. The sales representative begins with a detailed needs analysis of the customer's current and future communications requirements. After determining the customer's needs, Norstan proposes solutions to satisfy current and anticipated requirements. Norstan's operations teams then work with the customer to plan the installation of purchased technologies and identify required training. By planning the precise requirements of each installation, Norstan's specialists are able to install, test and bring new equipment on-line with minimal service interruption. Finally, Norstan provides an ongoing support program tailored to meet the customer's specific application requirements incorporating remote diagnostics, in-field service and support, additional training and help desk support from Norstan's customer support representatives. Norstan uses a variety of methods to communicate with customers and prospect for new customers. The Company publishes quarterly newsletters describing available products and services, organizational changes and other company news. Customers also receive product and service updates from Norstan's sales representatives, field technicians and customer support representatives. The Company pursues new customer opportunities through in-person sales calls, telemarketing and advertising. Norstan also regularly receives referrals from equipment manufacturers and customers, as well as unsolicited requests for proposals for products and services. CUSTOMERS AND CUSTOMER SERVICE Norstan focuses its marketing initiatives on customers with 100 or more users and those customers with complex communications requirements. The Company believes that providing service exceeding customers' expectations, or "legendary" customer service, is an important element of its ability to compete effectively in the communications market. Norstan maintains a highly trained force of service technicians, design engineers and customer support representatives who provide on-site and remote service and support. Customer satisfaction surveys, conducted by an outside firm contracted by Norstan, indicate that 93% of Norstan's customers are satisfied with the overall service and support they receive. This level of satisfaction has increased, rising from 86% in 1988 to the current level. Norstan coordinates its customer service response through three remote diagnostics and dispatch centers located in Cleveland, Minneapolis and Toronto. These centers handle over 225,000 service calls per year, approximately 41% of which are addressed remotely. For calls requiring immediate on-site service and support, Norstan promptly dispatches 7 a service technician. Overall, Norstan has over 135 employees devoted primarily to providing customer service out of the service centers. The Company sells products and services across many industry segments, including banking, government, insurance, health care, manufacturing, publishing, public utilities, transportation and retail. Current customers of the Company include BP America Inc., Best Buy Co., Inc., Blue Cross/Blue Shield of Minnesota, Iowa and Arizona, First Bank System, Inc., Manulife Financial, 3M Company, Harley-Davidson, Inc., The Limited Stores, as well as many hospitals and a number of government agencies in Minnesota, Iowa, Wisconsin, Ohio, Arizona and other states and provinces. In addition, through an agreement entered into in August 1993 with the Midwest Higher Education Consortium, the Company has agreed to provide certain videoconferencing equipment at specified terms to all state agencies of the states of Illinois, Kansas, Michigan, Minnesota, Missouri, Nebraska, Ohio and Wisconsin. This agreement designates Norstan as a recommended vendor, but does not require any purchases by state agencies. No single customer accounted for more than 5% of the Company's total revenue for fiscal years 1996 and 1995. SUPPLIERS: RELATIONSHIP WITH ROLM Norstan's principal suppliers include ROLM, Aspect, Compression Labs, Sprint and Octel. In addition, the Company distributes complementary communications products that fit specific segments in the marketplace such as hybrid key systems and personal computer-based voice processing and videoconferencing systems, as well as data communications products from Novell, Newbridge, Bay Networks, Compaq, Lotus and others. In addition, the Company has distribution arrangements with several manufacturers of other products and services, as well as business partnerships that provide technical support to complement Norstan's expertise. Norstan has been a distributor of ROLM communications equipment since 1976 and is ROLM's largest independent distributor. ROLM is the third largest manufacturer of PBX systems in the United States, accounting for an estimated 14% of United States sales of PBX systems in 1995, behind Lucent Technologies (formerly AT&T) and Northern Telecom, which accounted for an estimated 30% and 27%, respectively. In July 1993, the Company executed a new distributor agreement with ROLM, which has a term extending through July 1998 and automatically renews for additional one-year periods, unless terminated upon 90 days' notice prior to each renewal date. Pursuant to this agreement, Norstan is the exclusive distributor of ROLM communications equipment in Minnesota, Wisconsin, Iowa, North Dakota, South Dakota, Ohio, Kentucky, Arizona, New Mexico, Oklahoma, Louisiana, Nevada and parts of Nebraska, Texas, Arkansas, Mississippi, Florida and Alabama, as well as all of Canada. In the event this agreement expires without renewal, Norstan is entitled to receive parts, certain software upgrades and technical support for ten years to enable Norstan to continue providing service to its customers with ROLM products. In addition, Norstan and ROLM have an agreement under which Norstan is an authorized agent for the refurbishment and sale of previously owned ROLM equipment in the United States. This agreement runs through September 1996 and may be terminated upon six months' notice. The Company and ROLM are currently negotiating a new agreement. The Company believes that any interruption of its business relationship with ROLM would have a material adverse effect on its business. BACKLOG As of April 30, 1996, the Company had signed contracts for products and services aggregating approximately $46.9 million, substantially all of which are expected to be fulfilled by the end of fiscal 1997. As of April 30, 1995, the Company had signed contracts aggregating approximately $36.1 million, substantially all of which were fulfilled by the end of fiscal 1996. 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. COMPETITION The communications industry is intensely competitive and rapidly changing. In general, the Company competes on the basis of breadth of product offering, system capability and reliability, service, support and price. Many of the Company's competitors, including AT&T, the seven Regional Bell Holding Companies ("RHCs") and Northern Telecom, have longer operating histories and significantly greater financial, technical, sales, marketing and other resources, as well as greater name recognition and larger distribution networks, 8 than the Company. The passage of the Telecommunications Act of February 1996 is enabling a number of entities with greater resources to enter and compete in industries from which they were previously precluded. Also, as a result of this legislation, many business reorganizations are occurring. These changes in the regulatory environment could potentially affect the Company's ability to compete successfully. The Company also competes with a number of companies offering data systems integration services, many of which have greater financial and other resources than the Company. These companies could also attempt to increase their presence in other segments of the communications market in which the Company competes by introducing additional products or services targeted for these market segments. There can be no assurance that the Company will be able to compete successfully or that competition will not have a material adverse effect on the Company's business, operating results and financial condition. CANADIAN OPERATIONS In April 1992, Norstan acquired substantially all of the assets of the ROLM communications business of IBM Canada Limited. In fiscal 1996, Norstan's Canadian operations continued to improve their profitability after incurring significant losses in fiscal years 1994 and 1993. Approximately 11% and 10% of the Company's revenues were generated by its Canadian operations for fiscal 1996 and 1995, respectively. On November 30, 1994, the Company acquired substantially all of the assets of Renaissance Investments, Ltd. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Canadian Operations" and Note 10 of Notes to Consolidated Financial Statements. GOVERNMENT REGULATION Except for the sale of long distance service, the Company is not subject to any government regulations which 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 45 states, and is currently pursuing certification for intrastate services in three additional states. The Company is also subject to FCC regulations which require the filing of federal tariffs. EMPLOYEES The Company's U.S. operations had a total of 1,802 employees as of April 30, 1996, consisting of 360 sales and marketing personnel, 1,086 operations, service and installation employees, and 356 administrative employees. Of these employees, approximately 140 are covered by collective bargaining agreements. The Company considers relations with its employees to be good and has not experienced any work stoppages. The Company's Canadian operations had a total of 214 employees as of April 30, 1996, consisting of 49 sales and marketing personnel, 128 operations, service and installation employees, and 37 administrative personnel. The Company considers relations with the Canadian employees to be good and has not experienced any work stoppages. 9 GENERAL RAW MATERIALS The Company purchases all the equipment that it markets and installs and does not engage in any manufacturing operations. The most important components utilized by the Company are the telecommunication systems and electronic telephone sets supplied by ROLM. Purchases of such equipment from ROLM account for the major portion of total equipment purchases. The other parts and components utilized, such as telephones, electrical components, wire and speakers, substantially all of which are purchased in conjunction with ROLM telecommunications systems, are purchased from a number of suppliers. It is anticipated that such other parts and components, which are purchased pursuant to purchase orders rather than long term contracts, will be readily available from present suppliers or, if necessary, from alternate qualified manufacturers. NFS is a financial service organization and uses no raw materials. PATENTS The Company and its subsidiaries have no patents, trademarks, licenses, franchises or concessions that are of material importance to their business with the exception of distributor agreements between the Company and ROLM, and between the Company and other suppliers. SEASONAL NATURE OF BUSINESS Historically, operating results indicate that both revenues and earnings generally increase in each quarter as each fiscal year progresses. This results from seasonal performance of the Company and its employees as well as from seasonal demands of the Company's customers. WORKING CAPITAL PRACTICES The Company and its subsidiaries have no special practices relating to working capital items. RESEARCH AND DEVELOPMENT The Company and its subsidiaries do not engage in any material research or development activities. EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL PROTECTION REGULATION Not applicable. EFFECTS OF INFLATION Market conditions have generally permitted the Company to adjust its pricing to reflect increases in labor and product costs due to inflation. Inflation has not had a significant impact on operating results during the past three years. 10 Item 2. PROPERTIES. The executive offices of the Company and its subsidiaries are located in Plymouth, Minnesota, where the Company leases approximately 53,400 square feet of office space. The Company also has corporate offices in Maple Grove, Minnesota, Brecksville, Ohio, and Phoenix, Arizona, where the Company leases approximately 64,000, 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 38 other cities within the United States. In Canada, the Company leases approximately 30,400 square feet of office space in North York, Ontario, which serves as its Canadian headquarters. In addition, the Company also leases sales and service offices in eight other cities within the Canadian provinces of Alberta, 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. 11 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 quotations for the Company's common stock as reported by NASDAQ for each quarterly period during the two most recent fiscal years(1): FISCAL YEAR ENDED APRIL 30, 1996: HIGH LOW First Quarter 12 5/8 10 7/8 Second Quarter 13 12 1/8 Third Quarter 13 11 1/2 Fourth Quarter 13 7/8 12 1/4 HIGH LOW FISCAL YEAR ENDED APRIL 30, 1995: First Quarter 9 1/2 7 7/8 Second Quarter 10 1/4 8 5/8 Third Quarter 10 8 1/2 Fourth Quarter 12 1/4 9 1/4 (1) 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 high and low quotations presented above. 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 June 28, 1996, there were approximately 1,300 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. 12 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, 1996 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, ------------------------------------------------ 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Revenues...................................................... $321,364 $290,245 $231,899 $195,856 $142,426 Cost of sales................................................. 229,980 202,107 155,676 128,228 90,823 ------- -------- -------- -------- -------- Gross margin.................................................. 91,384 88,138 76,223 67,626 51,603 Selling, general and administrative expenses.................. 75,973 74,725 65,137 58,609 44,790 ------- -------- -------- -------- -------- Operating income.............................................. 15,411 13,413 11,086 9,019 6,813 Interest expense.............................................. (1,351) (1,587) (832) (841) (1,050) Interest and other income (expense), net ..................... 89 (54) (106) 323 130 ------- -------- -------- -------- -------- Income before cumulative effect of accounting change and provision for income taxes............................... 14,149 11,772 10,148 8,501 5,893 Provision for income taxes.................................... 5,660 4,709 4,461 3,401 2,298 ------- -------- -------- -------- -------- Income before cumulative effect of accounting change....................................................... 8,489 7,063 5,987 5,100 3,595 Cumulative effect of change in accounting for income taxes (1).............................................. - - (375) - - ------- -------- -------- -------- -------- Net income.................................................... $8,489 $ 7,063 $ 5,612 $5,100 $ 3,595 ------- -------- -------- -------- -------- ------- -------- -------- -------- -------- Net income per common and common equivalent share: Income before cumulative effect of accounting change......... $ .94 $ .81 $ .70 $ .62 $ .47 Cumulative effect of change in accounting for income taxes(1) - - (.04) - - ------- -------- -------- -------- -------- Net income per share (2)...................................... $ .94 $ .81 $ .66 $ .62 $ .47 ------- -------- -------- -------- -------- ------- -------- -------- -------- -------- Weighted average number of common and common equivalent shares outstanding (2)...................................... 9,028 8,750 8,504 8,166 7,686 ------- -------- -------- -------- -------- ------- -------- -------- -------- --------
AS OF APRIL 30, ------------------------------------------------- 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- BALANCE SHEET DATA: Working capital............................ $ 24,899 $ 32,183 $ 32,961 $ 19,160 $ 18,333 Total assets............................... 160,988 161,709 149,662 120,731 108,079 Long-term debt, net of current maturities............................... - 16,465 18,218 11,555 12,873 Discounted lease rentals, net of current maturities....................... 15,961 16,313 18,845 12,785 9,438 Shareholders' equity....................... 67,517 56,984 47,658 40,594 33,163 Cash dividends declared and paid........... - - - - -
___________ (1) On May 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." As a result, the Company recorded a one-time charge of $375,000, or $.04 per share, in fiscal 1994 for the cumulative effect of the change in method of accounting for income taxes. (2) 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. 13 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL Norstan is a full service communications systems provider creating integrated voice, video, and data solutions to customers primarily in 18 states and throughout Canada. Norstan entered the communications business in 1973 and has historically derived a substantial majority of its revenues from the sale of telephone systems, communications maintenance services and moves, adds and changes. Norstan's growth has resulted from acquisitions and geographic expansion as well as from offering a broadening range of products and services. Norstan commenced distribution of ROLM communications products in Minnesota and the Milwaukee metropolitan area in 1976 and by 1985 had expanded its sales activity into the remainder of Wisconsin, as well as Iowa, Nebraska, North Dakota and South Dakota. In 1985, the Company expanded its ROLM distribution business into Ohio and portions of Kentucky by acquiring the assets of Solsound Industries, Inc. In 1988, Norstan expanded its ROLM distribution business into Arizona and New Mexico by acquiring the assets of Communications Consultants, Inc. In July 1991, ROLM awarded the Company the right to sell and service ROLM products in all or portions of Oklahoma, Louisiana, Nevada, Texas, Arkansas, Mississippi, Florida and Alabama. In July 1990, the Company and ROLM entered into an agreement to refurbish and resell previously owned ROLM equipment in the United States. Under this agreement, ROLM pays the Company a fee for refurbishing the equipment and remarketing separate ROLM components, and the Company shares in the profit generated by this program, which includes the profit on sales of refurbished systems by ROLM direct sales offices. The agreement was renewed in October 1993 for an additional three-year period. The Company and ROLM are currently negotiating a new agreement. In April 1992, the Company acquired substantially all of the assets of the ROLM communications business owned by IBM Canada Limited, for a purchase price of approximately $4.4 million. This acquisition, which represented annual revenues of approximately $18 million, formed the basis of the Company's Canadian operations. The Company's Canadian operations generated net after-tax income of $546,000 and $446,000 in fiscal 1996 and 1995 after having incurred net after-tax losses of $651,000 and $541,000 in fiscal 1994 and 1993, respectively. See "Canadian Operations." Over the past several years, Norstan has expanded its offering of products and services to include refurbished equipment, call processing products, videoconferencing equipment, long distance service and cabling. Recently, the Company has further expanded its products and services to include data communications applications, network integration and complete management of customers' communications systems through outsourcing agreements. Norstan offers leasing services to its customers through a wholly owned subsidiary. Norstan believes its ability to provide lease financing to customers supports the sales process by permitting customized lease structures to meet the needs of customers and by eliminating the need for third party financing. Approximately 45% of fiscal 1996 revenues were derived from the sale of services, including communications maintenance services, moves, adds and changes, long distance service, network integration services, and leasing. Management believes that services provide the Company with an important source of recurring revenue. RESULTS OF OPERATIONS The Company's revenues consist of the sales of products and systems, telecommunications services and financial services. Products and systems revenues result from the sale of new products and upgrades, as well as refurbished equipment. Revenues from telecommunications services result primarily from communications maintenance services, moves, adds and changes, network integration services, and long distance service. Financial services revenues result primarily from leasing activities. 14 The following table sets forth, for the periods indicated, certain items from the Company's consolidated statements of operations expressed as a percentage of total revenues. FISCAL YEARS ENDED APRIL 30, ---------------------------- 1996 1995 1994 --------- --------- -------- Revenues: Sales of products and systems . . . . . . . 55.0% 57.4% 55.0% Telecommunications services . . . . . . . . 43.2 40.9 43.2 Financial services . . . . .. . . . . . . . 1.8 1.7 1.8 --------- --------- -------- Total revenues. . . . . . . . . . . . . . 100.0 100.0 100.0 Cost of sales . . . . . . . . . . . . . . . . 71.6 69.6 67.1 --------- --------- -------- Gross margin. . . . . . . . . . . . . . . . . 28.4 30.4 32.9 Selling, general and administrative expenses. 23.6 25.8 28.1 --------- --------- -------- Operating income. . . . . . . . . . . . . . . 4.8% 4.6% 4.8% --------- --------- -------- --------- --------- -------- Net income. . . . . . . . . . . . . . . . . . 2.6% 2.4% 2.4% --------- --------- -------- --------- --------- -------- The following table sets forth, for the periods indicated, the gross margin percentages for sales of products and systems, telecommunications services and financial services. FISCAL YEARS ENDED APRIL 30, ---------------------------- 1996 1995 1994 --------- --------- -------- Gross margin percentage: Sales of products and systems . . . . . . . 26.3% 26.1% 27.4% Telecommunications services . . . . . . . . 29.8 35.4 38.8 Financial services. . . . . . . . . . . . . 60.6 53.8 59.0 FISCAL YEARS ENDED APRIL 30, 1996, 1995 AND 1994 REVENUES. Total revenues were $321.4 million, $290.2 million and $231.9 million for the fiscal years ended April 30, 1996, 1995 and 1994, respectively, representing an increase of 10.7% for fiscal 1996 as compared to fiscal 1995 and an increase of 25.2% for fiscal 1995 as compared to fiscal 1994. Sales of products and systems increased $10.3 million, or 6.2%, for fiscal 1996 as compared to fiscal 1995, and $39.2 million, or 30.7%, for fiscal 1995 as compared to fiscal 1994. The increases for fiscal 1996 and 1995 as compared to prior years, result primarily from increased sales volume in each of the Company's largest product categories - telephone systems, call processing products, cabling and videoconferencing products. Revenues from telecommunications services increased $20.2 million, or 17.0% for fiscal 1996 as compared to fiscal 1995, and $18.5 million, or 18.5%, for fiscal 1995 as compared to fiscal 1994. The increases in fiscal 1996 and 1995 as compared to prior years result primarily from the growth in the Company's installed base of customers and expanded array of products and services. This growth in customer base has led to increased communication maintenance services, moves, adds, and changes activity, network integration services, and long distance services. Revenues from financial services increased $634,000, or 12.7%, for fiscal 1996 as compared to fiscal 1995, and $696,000, or 16.2%, for fiscal 1995 as compared to fiscal 1994. The increase in revenues from financial services in both years is attributable to the increased size of the Company's leasing base. 15 GROSS MARGIN. The Company's gross margin was $91.4 million, $88.1 million, and $76.2 million, for the fiscal years ended April 30, 1996, 1995 and 1994, respectively. As a percent of total revenues, gross margin was 28.4% for fiscal 1996 compared to 30.4% for fiscal 1995 and 32.9% for fiscal 1994. Gross margin as a percent of revenues for the sale of products and systems was 26.3% for fiscal 1996 as compared to 26.1% for fiscal 1995 and 27.4% for fiscal 1994. These changes in the gross margin percentages from the sale of products and systems are primarily the result of shifts in the product mix and competitive market conditions. Gross margin as a percent of revenues for telecommunications services was 29.8% for fiscal 1996 as compared to 35.4% for fiscal 1995 and 38.8% for fiscal 1994. These decreases result from changes in the mix of services, increased service support costs, additional training and development costs required to support the Company's expanded line of product offerings, as well as from decreased margin percentages attributable to moves, adds and changes. Gross margin as a percent of revenues for financial services was 60.6% for fiscal 1996 as compared to 53.9% for fiscal 1995 and 59.0% for fiscal 1994. The respective increase and decrease in gross margin percentage for fiscal 1996 as compared to fiscal 1995 and fiscal 1995 as compared to fiscal 1994, are the result of changing borrowing costs in a dynamic interest rate environment. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were $76.0 million, $74.7 million and $65.1 million for the fiscal years ended April 30, 1996, 1995 and 1994, respectively, representing an increase of 1.7% for fiscal 1996 as compared to fiscal 1995 and 14.7% for fiscal 1995 as compared to fiscal 1994. As a percent of revenues, selling, general and administrative expenses declined to 23.6% for fiscal 1996 as compared to 25.7% for fiscal 1995 and 28.1% for fiscal 1994. These decreases as a percentage of revenues resulted from continued efforts to contain costs and volume related efficiencies, as sales volume increased without proportional increases in expenses. Additionally, in fiscal 1996, the Company shifted certain administrative resources to an operational and product line support function; the related costs were included in cost of sales for fiscal 1996. OTHER COSTS AND EXPENSES. Interest expense was $1.4 million for fiscal 1996 as compared to $1.6 million for fiscal 1995 and $.8 million for fiscal 1994. Weighted average interest rates under the Company's revolving long-term credit agreements were 8.2% for fiscal 1996 as compared to 7.8% for fiscal 1995 and 5.7% for fiscal 1994. Average month end borrowings outstanding under the Company's revolving long-term credit agreements (excluding amounts borrowed to finance leasing activities) were $15.8 million for fiscal 1996, $20.9 million for fiscal 1995 and $15.2 million for fiscal 1994. The Company's effective income tax rate was 40% for fiscal 1996 and fiscal 1995 and 41% for fiscal 1994. The Company's effective tax rate differs from the federal statutory rate primarily due to state income taxes. INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE. Income before cumulative effect of the change in accounting for income taxes was $8.5 million or $.94 per share in 1996, $7.1 million or $.81 per share in 1995, and $6.0 million or $.70 per share in 1994. ACCOUNTING CHANGE In the first quarter of fiscal 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." As a result, the Company recorded a one-time charge of $375,000, or $.04 per share, in fiscal 1994 for the cumulative effect of the change in method of accounting for income taxes. 16 CANADIAN OPERATIONS In April 1992, the Company acquired substantially all of the assets of the ROLM communications business owned by IBM Canada Limited. The Company experienced difficulties in the first two years of operations in Canada as aggressive price competition and the loss of service customers resulted in reduced service revenues. The Company's Canadian operations incurred a net after-tax loss of $651,000 in fiscal 1994. Operations in Canada improved in fiscal 1995, resulting in an after-tax profit of $446,000. Further improvements were made in fiscal 1996, resulting in an after-tax profit of $546,000. In fiscal 1995, the Company acquired substantially all of the assets of Renaissance Investments, Ltd., a technology planning and integration services company. Results of the Canadian operations in future periods continue to be dependent on the Company's ability to better position itself in the Canadian marketplace as a full service communications systems integrator as well as its ability to expand the installed customer base. Furthermore, the Company's Canadian operations' long-term profitability is dependent on the economic viability of the Canadian economy. LIQUIDITY AND CAPITAL RESOURCES Working capital decreased to $24.9 million at April 30, 1996 from $32.2 million at April 30, 1995. Net cash provided by operating activities was $28.0 million for the fiscal year ended April 30, 1996 as compared to $20.2 million for fiscal year 1995. For the fiscal year ended April 30, 1996, net income of $8.5 million, depreciation and amortization of $12.5 million, decreased costs and estimated earnings in excess of billings of $5.7 million, increased deferred revenue of $2.8 million and increased billings in excess of costs and estimated earnings of $2.4 million were only partially offset by increased accounts receivable of $4.0 million. Capital expenditures for fiscal 1996 were $14.4 million as compared to $17.3 million in fiscal 1995 and $9.1 million in fiscal 1994. These expenditures were primarily for telecommunications equipment used as spare parts, computer equipment and facility expansion. The Company expects capital expenditures in fiscal 1997 to be approximately $15 to $20 million. The Company has also made a significant investment in lease contracts with its customers. The additional investment made in lease contracts in fiscal 1996 totaled $17.6 million. Net lease receivables decreased to $39.9 million at April 30, 1996 from $40.5 million at April 30, 1995. The Company expects to make an additional investment in lease contracts in fiscal 1997 of approximately $15 million. The Company utilizes its lease receivables and corresponding underlying equipment to borrow funds from financial institutions on a nonrecourse or recourse basis by discounting the stream of future lease payments. Proceeds from discounting are presented on the consolidated balance sheet as discounted lease rentals. Discounted lease rentals, including recourse borrowings of $1.7 million, totaled $28.2 million at April 30, 1996. Interest rates on these credit agreements at April 30, 1996 ranged from 6.0% to 10.0%, while payments are due in varying monthly installments through July 2001. Payments due to financial institutions are made from monthly collections of lease receivables from customers. In June 1996, the Company acquired all of the common stock of Connect Computer Company (Connect), a provider of consulting, design and implementation services. The acquisition consideration totaled approximately $15 million, consisting of $8.2 million cash and $2 million of Norstan common stock, as well as $2.7 million paid in exchange for all outstanding Connect stock options, $1.1 million in bonuses paid to Connect management and employees, and $1 million payable to certain members of Connect management under non-compete agreements. In addition, the Company has agreed to pay up to $4 million in contingent consideration over a three year period ending April 30, 1999, if certain operating income levels are achieved. The Company has a $35.0 million unsecured revolving long-term credit agreement with certain banks. Up to $15.0 million of borrowings under this agreement may be in the form of commercial paper and up to $8.0 million may be used to support the Company's domestic leasing activities. Under this agreement, the total credit facility of $35.0 million will be reduced by $750,000 per fiscal quarter effective January 31, 1995. As of April 30, 1996, the total capacity of the credit facility was $30,500,000. Borrowings under this agreement are due May 2, 1998 and bear interest at a bank's reference rate (8.25% and 9.00% at April 30, 1996 and April 30, 1995, respectively), except for LIBOR, CD and commercial paper based options which 17 generally bear interest at a rate lower than the bank's reference rate. There were no borrowings under this agreement at April 30, 1996, and total consolidated borrowings were $16,465,000 at April 30, 1995 (of which $322,000 was borrowed on the account of NFS). 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. RECENTLY ISSUED ACCOUNTING STANDARD SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ("SFAS No. 121"), issued in March 1995 and effective for fiscal years beginning after December 15, 1995, establishes accounting standards for the recognition and measurement of impairment of long-lived assets, certain identifiable intangibles, and goodwill either to be held or disposed of. Management believes the adoption of SFAS No. 121 will not have a material impact on the Company's financial position or results of operations. FACTORS THAT MAY AFFECT FUTURE RESULTS There are a number of factors that could affect the Company's future operating results, including national and regional economic conditions; pending and future legislation affecting the telecommunications industry; the Company's operations in Canada; market acceptance of the Company's products and services; the Company's continued ability to provide integrated communications solutions for customers in a dynamic industry, as well as other competitive factors. Statements regarding the Company's operations, performance and results for fiscal 1997 discussed in this report are forward-looking and therefore are subject to certain risks and uncertainties. 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. 18 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENTS: PAGE ---- Report of Independent Public Accountants . . . . . . . . . . . . . . 20 Consolidated Statements of Operations for the years ended April 30, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . . . 21 Consolidated Balance Sheets as of April 30, 1996 and 1995. . . . . . 22 Consolidated Statements of Shareholders' Equity for the years ended April 30, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . . . 24 Consolidated Statements of Cash Flows for the years ended April 30, 1996, 1995 and 1994. . . . . . . . . . . . . . . . . . . 25 Notes to Consolidated Financial Statements . . . . . . . . . . . . . 26 Selected Quarterly Financial Data (unaudited). . . . . . . . . . . . 38 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. 19 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, 1996 and 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended April 30, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 1996 in conformity with generally accepted accounting principles. As explained in Note 7 to the financial statements, effective May 1, 1993, the Company changed its method of accounting for income taxes. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, June 20, 1996 20 NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEARS ENDED APRIL 30, -------------------------------- 1996 1995 1994 -------- -------- -------- REVENUES: Sale of products and systems . . . . . . . . $176,992 $166,675 $127,514 Telecommunications services. . . . . . . . . 138,737 118,569 100,080 Financial services . . . . . . . . . . . . . 5,635 5,001 4,305 -------- -------- -------- Total revenues . . . . . . . . . . . . . . 321,364 290,245 231,899 -------- -------- -------- COST OF SALES: Products and systems . . . . . . . . . . . . 130,363 123,158 92,621 Telecommunications services. . . . . . . . . 97,396 76,641 61,289 Financial services . . . . . . . . . . . . . 2,221 2,308 1,766 -------- -------- -------- Total cost of sales. . . . . . . . . . . . 229,980 202,107 155,676 -------- -------- -------- GROSS MARGIN . . . . . . . . . . . . . . . . . 91,384 88,138 76,223 Selling, general and administrative expenses . . . . . . . . . . . . . . . . . 75,973 74,725 65,137 -------- -------- -------- OPERATING INCOME . . . . . . . . . . . . . . . 15,411 13,413 11,086 Interest expense . . . . . . . . . . . . . . (1,351) (1,587) (832) Interest and other income (expense), net . . 89 (54) (106) -------- -------- -------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE AND PROVISION FOR INCOME TAXES . . . . . . . . . 14,149 11,772 10,148 Provision for income taxes . . . . . . . . . 5,660 4,709 4,161 -------- -------- -------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE . . . . . . . . . . . . 8,489 7,063 5,987 Cumulative effect of change in accounting for income taxes . . . . . . . . . . . . . - - (375) -------- -------- -------- NET INCOME . . . . . . . . . . . . . . . . . . $ 8,489 $ 7,063 $ 5,612 -------- -------- -------- -------- -------- -------- NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE: Income before cumulative effect of accounting change. . . . . . . . . . . . . $ .94 $ .81 $ .70 Cumulative effect of change in accounting for income taxes . . . . . . . . . . . . . - - (.04) -------- -------- -------- NET INCOME PER SHARE . . . . . . . . . . . . . $ .94 $ .81 $ .66 -------- -------- -------- -------- -------- -------- WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING . . . . . . . . . . . . . 9,028 8,750 8,504 -------- -------- -------- -------- -------- -------- The accompanying notes are an integral part of these consolidated financial statements. 21 NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS
APRIL 30, ------------------- 1996 1995 -------- -------- CURRENT ASSETS: Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,133 $ 1,308 Accounts receivable, net of allowances for doubtful accounts of $1,079 and $804 . . . . . . . . . . . . . . . . . . . . . . . . . . 55,723 51,779 Current lease receivables (Note 4). . . . . . . . . . . . . . . . . . 15,316 14,122 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,964 11,137 Costs and estimated earnings in excess of billings of $13,528 and $16,691 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,202 10,926 Deferred income tax benefits (Note 7) . . . . . . . . . . . . . . . . 3,427 3,634 Prepaid expenses, deposits and other. . . . . . . . . . . . . . . . . 2,443 2,331 -------- -------- Total current assets. . . . . . . . . . . . . . . . . . . . . . . . 94,208 95,237 -------- -------- PROPERTY AND EQUIPMENT: Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . 75,126 64,652 Less-accumulated depreciation and amortization. . . . . . . . . . . . (40,815) (32,885) -------- -------- Net property and equipment. . . . . . . . . . . . . . . . . . . . . 34,311 31,767 -------- -------- OTHER ASSETS: Lease receivables, net (Note 4) . . . . . . . . . . . . . . . . . . . 24,556 26,381 Franchise rights and other intangible assets, net of amortization of $3,991 and $3,435 (Note 2). . . . . . . . . . . . . . . . . . . . . 7,421 7,904 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 492 420 -------- -------- Total other assets. . . . . . . . . . . . . . . . . . . . . . . . . 32,469 34,705 -------- -------- $160,988 $161,709 -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated balance sheets. 22 NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) LIABILITIES AND SHAREHOLDERS' EQUITY
APRIL 30, ------------------- 1996 1995 -------- -------- CURRENT LIABILITIES: Current maturities of long-term debt . . . . . . . . . . . . . . . . . . $ - $ 93 Current maturities of discounted lease rentals . . . . . . . . . . . . . 12,202 11,449 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,053 16,467 Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,856 15,045 Accrued - Salaries and wages . . . . . . . . . . . . . . . . . . . . . . . . . . 10,424 10,841 Warranty costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,655 1,756 Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,880 5,118 Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . 668 158 Billings in excess of costs and estimated earnings of $12,595 and $10,121 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,571 2,127 -------- -------- Total current liabilities. . . . . . . . . . . . . . . . . . . . . . 69,309 63,054 -------- -------- LONG-TERM DEBT, NET OF CURRENT MATURITIES (Note 5) . . . . . . . . . . . . . . . . . . . - 16,465 DISCOUNTED LEASE RENTALS, NET OF CURRENT MATURITIES (Note 6) . . . . . . . . . . . . . . . . . . . 15,961 16,313 DEFERRED INCOME TAXES (Note 7) . . . . . . . . . . . . . . . . . . . . . . 8,201 8,893 -------- -------- COMMITMENTS AND CONTINGENCIES (Notes 9 and 11) SHAREHOLDERS' EQUITY (Notes 8 and 9): Common stock - $.10 par value; 40,000,000 and 20,000,000 authorized shares; 8,717,538 and 4,215,441 shares issued and outstanding. . . . . . . . . 872 422 Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . 27,619 26,031 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,975 31,486 Unamortized cost of stock . . . . . . . . . . . . . . . . . . . . . . . (94) (149) Foreign currency translation adjustments . . . . . . . . . . . . . . . . (855) (806) -------- -------- Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . 67,517 56,984 -------- -------- $160,988 $161,709 -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated balance sheets. 23 NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED APRIL 30 (IN THOUSANDS)
COMMON STOCK FOREIGN ------------------- CAPITAL IN CURRENCY OUTSTANDING EXCESS OF RETAINED UNAMORTIZED TRANSLATION SHARES AMOUNT PAR VALUE EARNINGS COST OF STOCK ADJUSTMENTS ----------- ------ ---------- -------- ------------- ----------- BALANCE - APRIL 30, 1993 . . . . . 3,982 $398 $22,642 $18,811 $(905) $(352) Stock issued for employee benefit plans . . . . . . . . . . . . . 92 9 1,530 - 614 - Purchase and retirement of stock . (3) - (40) - - - Foreign currency translation adjustments . . . . . . . . . . - - - - - (661) Net income . . . . . . . . . . . - - - 5,612 - - ----------- ------ ---------- -------- ------------- ----------- BALANCE - APRIL 30, 1994 . . . . . 4,071 407 24,132 24,423 (291) (1,013) Stock issued for employee benefit plans. . . . . . . . . . . . . . 144 15 1,899 - 142 - Foreign currency translation adjustments. . . . . . . . . . . - - - - - 207 Net income . . . . . . . . . . . . - - - 7,063 - - ----------- ------ ---------- -------- ------------- ----------- BALANCE - APRIL 30, 1995 . . . . . 4,215 422 26,031 31,486 (149) (806) Stock issued for employee benefit plans . . . . . . . . . . . . . 144 14 2,024 - 55 - Foreign currency translation adjustments . . . . . . . . . . - - - - - (49) Effect of two-for-one stock split (Note 11). . . . . . . . . . . . 4,359 436 (436) - - - Net income . . . . . . . . . . . . - - - 8,489 - - ----------- ------ ---------- -------- ------------- ----------- BALANCE - APRIL 30, 1996 . . . . . 8,718 $872 $27,619 $39,975 $ (94) $(855) ----------- ------ ---------- -------- ------------- ----------- ----------- ------ ---------- -------- ------------- -----------
The accompanying notes are an integral part of these consolidated statements. 24 NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED APRIL 30, ------------------------------ 1996 1995 1994 ---- ---- ---- OPERATING ACTIVITIES: Net income............................... $ 8,489 $ 7,063 $ 5,612 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization........... 12,517 10,830 8,717 Deferred income taxes................... (465) (132) 1,386 Cumulative effect of change in accounting for income taxes............ - - 375 Changes in operating items, net of effects from acquisition: Accounts receivable.................... (3,961) (7,807) (8,281) Inventories............................ 167 1,034 (3,640) Costs and estimated earnings in excess of billings.................... 5,715 4,150 (7,685) Prepaid expenses, deposits and other................................. (111) (503) 122 Accounts payable and accrued liabilities........................... (151) 4,567 2,852 Deferred revenue....................... 2,815 1,405 1,836 Billings in excess of costs and estimated earnings.................... 2,445 (866) 346 Income taxes payable................... 510 448 - ------- ------- -------- Net cash provided by operating activities.......................... 27,970 20,189 1,640 ------- ------- -------- INVESTING ACTIVITIES: Additions to property and equipment, net..................................... (14,385) (17,313) (9,093) Cash paid for Acquisition (Note 3)....... - (726) - Investment in lease contracts............ (17,622) (16,246) (25,149) Collections from lease contracts......... 18,240 17,746 14,263 Other, net............................... (178) 13 6 ------- ------- -------- Net cash used for investing activities........................... (13,945) (16,526) (19,973) ------- ------- -------- FINANCING ACTIVITIES: Repayment of short-term debt............. - (423) - Borrowings under revolving credit agreements.............................. 112,435 122,950 122,180 Repayments under revolving credit agreements.............................. (128,900) (124,610) (115,288) Borrowings on discounted lease rentals... 13,173 9,056 18,901 Repayments of discounted lease rentals... (12,767) (11,631) (9,167) Repayments of other long-term debt....... (93) (229) (276) Repurchase of common stock............... - - (40) Proceeds from sale of common stock....... 1,615 1,353 1,362 Tax benefits from shares issued to employees............................... 340 412 227 ------- ------- -------- Net cash provided by (used for) financing activities................. (14,197) (3,122) 17,899 ------- ------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH..................................... (3) 12 (30) ------- ------- -------- NET INCREASE (DECREASE) IN CASH........... (175) 553 (464) CASH, BEGINNING OF PERIOD................. 1,308 755 1,219 ------- ------- -------- CASH, END OF PERIOD ...................... $ 1,133 $ 1,308 $ 755 ------- ------- -------- ------- ------- --------
The accompanying notes are an integral part of these consolidated statements. 25 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF BUSINESS: Norstan, Inc. (Norstan or the Company) manages the operations of its subsidiaries, Norstan Communications, Inc. (NCI), Norstan Canada Inc. (NCDA), Norstan Network Services, Inc. (NNS) and Norstan Financial Services, Inc. (NFS). Norstan is a full service communications systems provider creating voice, video and data communications solutions for customers primarily in 18 states and throughout Canada. Norstan is the largest independent distributor of private communications systems and application products manufactured by Siemens ROLM Communications Inc. (ROLM) and has historically derived a substantial majority of its revenues from the sale of telephone systems, communications maintenance services and moves, adds and changes. The Company's products and services also include call processing products, long distance services, videoconferencing products, refurbished equipment, cabling, leasing, outsourcing and data integration products and services. NFS provides financing for the Company's customers. The Company sells its products and services to a wide variety of customers and industries. A substantial portion of the Company's operations are located in the Mideast, Midwest and Southwestern regions of the United States. Under its agreement with ROLM, the Company purchases communications equipment and products for field application and installation. The current distributor agreement with ROLM extends through July 1998. The Company believes that any interruption of its business relationship with ROLM would have a material adverse effect on its business. 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. REVENUE RECOGNITION: Revenues from the sale of products and systems, including new products and upgrades, as well as revenues generated from the secondary equipment market, are recognized upon performance of contractual obligations, which is generally upon installation or shipment. Revenues for certain installation contracts are recognized under the percentage of completion method of accounting for long-term contracts. Revenues from telecommunications services, including maintenance/service revenues, moves, adds, and changes (MAC) revenues, revenues from the resale of long distance services, and network integration services, are recognized as the services are provided. Financial services revenues are recognized over the life of the related lease receivables using the effective interest method. In addition, the Company grants credit to customers and generally does not require collateral or any other security to support amounts due. 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. 26 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): PROPERTY AND EQUIPMENT: Property and equipment are stated at cost and include expenditures which 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 is disposed of, the related cost and accumulated depreciation is 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 is charged against accumulated depreciation and no gain or loss is recognized. The net book value of capitalized telecommunications equipment was $14,933,000 and $13,984,000 as of April 30, 1996 and 1995, 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. FRANCHISE RIGHTS AND OTHER INTANGIBLE ASSETS: Franchise rights and other intangible assets are being amortized on a straight-line basis over 20 years. The Company periodically evaluates whether events or circumstances have occurred which may indicate that the remaining estimated useful lives may warrant revision or that the remaining intangible asset balance may not be recoverable. In the event that factors indicate that the intangible assets in question should be evaluated for possible impairment, a determination of the overall recoverability of such intangible assets 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: The Company and its subsidiaries file a consolidated federal income tax return and separate state returns. 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. SHARE DATA: Net income per common and common equivalent share is based on the weighted average number of shares of common stock outstanding during the year, adjusted for the dilutive effect of common stock equivalents. As described in Note 11, net income per common and common equivalent share for all periods presented has been restated to reflect the June 20, 1996 stock split. 27 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): SUPPLEMENTAL CASH FLOW INFORMATION: Supplemental disclosure of cash flow information is as follows (in thousands): YEARS ENDED APRIL 30, ------------------------ 1996 1995 1994 ------ ------ ------ Cash paid during each period for: Interest . . . . . . . . . . . . . . . . . . $3,608 $3,650 $2,537 Income taxes . . . . . . . . . . . . . . . . 5,218 3,911 2,543 RECENTLY ISSUED ACCOUNTING STANDARD: Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"), issued in March 1995 and effective for fiscal years beginning after December 15, 1995, establishes accounting standards for the recognition and measurement of impairment of long-lived assets, certain identifiable intangibles, and goodwill either to be held or disposed of. Management believes the adoption of SFAS No. 121 will not have a material impact on the Company's financial position or results of operations. 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. NOTE 3 - ACQUISITION: In November 1994, the Company acquired certain assets and assumed certain liabilities of Toronto-based Renaissance Investments Ltd. (Renaissance). Renaissance, a technology planning and integration services company, specializes in local and wide area networks and graphical user interfaces, and has been operating under the name of Renaissance Connects since 1990. The purchase price of the assets was approximately $726,000. In addition, the Company repaid approximately $423,000 of short-term bank obligations assumed in the acquisition. Pro forma information in the year of acquisition for this acquisition has not been disclosed as such information was not materially different from the Company's results of operations. 28 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - SUMMARIZED FINANCIAL INFORMATION OF NFS: NATURE OF BUSINESS: NFS provides financing for the Company's customers and has financed customer equipment purchases from the Company in the amounts of $15,385,000, $14,415,000, and $20,643,000 during fiscal years ended April 30, 1996, 1995 and 1994, respectively. Leases are accounted for as sales-type leases for financial reporting purposes. Summarized financial information of NFS is as follows (in thousands): BALANCE SHEETS ASSETS AS OF APRIL 30, ----------------- 1996 1995 ------- ------- Cash and other . . . . . . . . . . . . . . . . . . . . . $ 1,595 $ 1,740 Lease receivables, net . . . . . . . . . . . . . . . . . 35,321 34,879 Due from affiliated companies. . . . . . . . . . . . . . - 168 ------- ------- $36,916 $36,787 ------- ------- ------- ------- LIABILITIES AND SHAREHOLDER'S EQUITY Discounted lease rentals . . . . . . . . . . . . . . . . $25,132 $26,597 Other liabilities. . . . . . . . . . . . . . . . . . . . 6,787 6,638 Shareholder's equity . . . . . . . . . . . . . . . . . . 4,997 3,552 ------- ------- $36,916 $36,787 ------- ------- ------- ------- STATEMENTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, ----------------------------- 1996 1995 1994 -------- ------- -------- Interest and other income. . . . . . . . . . . $ 5,081 $ 4,656 $ 4,181 Interest expense . . . . . . . . . . . . . . . (1,788) (2,017) (1,673) Other expenses . . . . . . . . . . . . . . . . (1,454) (1,037) (1,536) -------- ------- -------- Income before provision for income taxes . . 1,839 1,602 972 Provision for income taxes . . . . . . . . . 394 629 123 -------- ------- -------- Net income . . . . . . . . . . . . . . . . . . $ 1,445 $ 973 $ 849 -------- ------- -------- -------- ------- -------- 29 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - SUMMARIZED FINANCIAL INFORMATION OF NFS (CONTINUED): The components of lease receivables outstanding are summarized as follows (in thousands): AS OF APRIL 30, -------------------- 1996 1995 --------- --------- Gross lease receivables. . . . . . . . . . . . . . . $ 36,158 $ 37,164 Residual values. . . . . . . . . . . . . . . . . . . 7,390 7,613 Less: Unearned income. . . . . . . . . . . . . . . . . . (8,528) (8,398) Allowance for financing losses . . . . . . . . . . (1,750) (1,500) --------- --------- Total lease receivables - net. . . . . . . . . . . . 33,270 34,879 Less - current maturities. . . . . . . . . . . . . . (13,535) (12,902) --------- --------- Long-term lease receivables. . . . . . . . . . . . . $ 19,735 $ 21,977 --------- --------- --------- --------- The aggregate amount of gross lease receivables maturing in each of the five years following April 30, 1996 is as follows (in thousands): YEARS ENDING APRIL 30, AMOUNT --------------------------------------------------------- ------- 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . $15,266 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . 10,619 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,375 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,004 2001 and thereafter . . . . . . . . . . . . . . . . . . . 894 ------- $36,158 ------- ------- The consolidated balance sheets as of April 30, 1996 and 1995 also include $6,602,000 and $5,624,000, respectively, of net lease receivables from customers of NCDA and NCI. NOTE 5 - DEBT OBLIGATIONS: LONG-TERM DEBT: Long-term debt consists of the following (in thousands): AS OF APRIL 30, -------------------- 1996 1995 --------- --------- Bank financing: Revolving credit agreement . . . . . . . . . . . . $ - $ 4,465 Commercial paper . . . . . . . . . . . . . . . . . - 12,000 Capital lease obligation, paid in 1996 . . . . . . . - 93 --------- --------- Total long-term debt . . . . . . . . . . . . . . . . - 16,558 Less - current maturities. . . . . . . . . . . . . . - (93) --------- --------- $ - $ 16,465 --------- --------- --------- --------- 30 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 - DEBT OBLIGATIONS (CONTINUED): BANK FINANCING: The Company has a $35,000,000 unsecured revolving long-term credit agreement with certain banks. Under this agreement, the total credit facility of $35,000,000 is reduced by $750,000 per fiscal quarter effective January 1995. As of April 30, 1996, the total capacity of the credit facility was $30,500,000. There were no borrowings under this agreement at April 30, 1996, and total consolidated borrowings were $16,465,000 at April 30, 1995 (of which $322,000 was borrowed on the account of NFS). Borrowings under this agreement are due May 2, 1998 and bear interest at a bank's reference rate (8.25% and 9.00% at April 30, 1996 and April 30, 1995, respectively), except for LIBOR, CD and commercial paper based options which generally bear interest at a rate lower than the bank's reference rate. The Company is able to borrow up to $15,000,000 of this credit facility in the form of commercial paper. In addition, NFS is able to borrow up to $8,000,000 of this facility from Norstan, Inc. Annual commitment fees on the unused portion of the credit facility are 3/8 of one percent. Under the agreement, the Company is required to maintain minimum levels of tangible net worth and certain other financial ratios. The Company was in compliance with such requirements as of April 30, 1996. SHORT-TERM BORROWINGS: In addition to the Company 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 outstanding as of April 30, 1996 or 1995. Short-term borrowing amounts during fiscal years 1996 and 1995 were as follows : 1996 1995 ---- ---- Maximum amount outstanding during the year................ - $5,000 Average borrowings during the year........................ - 465 Weighted average interest rates during the year........... - 7.6% NOTE 6 - 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 or recourse 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 July 2001. Discounted lease rentals of NFS and NCDA consisted of the following (in thousands): AS OF APRIL 30, --------------- 1996 1995 ---- ---- Nonrecourse borrowings.............................. $ 26,467 $ 24,712 Recourse borrowings................................. 1,696 3,050 -------- -------- Total discounted lease rentals...................... 28,163 27,762 Less - current maturities......................... (12,202) (11,449) -------- -------- $ 15,961 $ 16,313 -------- -------- -------- -------- In addition to the recourse to NFS and/or NCDA as described above, recourse to Norstan, Inc. relative to discounted lease rentals was limited to $883,000 as of April 30, 1996 and $986,000 as of April 30, 1995. 31 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 - DISCOUNTED LEASE RENTALS (CONTINUED): Aggregate maturities of discounted lease rentals as of April 30, 1996 are as follows (in thousands): YEARS ENDING APRIL 30, AMOUNT ---------------------- ------ 1997.................. $12,202 1998.................. 7,795 1999.................. 4,901 2000.................. 2,216 2001 and thereafter... 1,049 ------- $28,163 ------- ------- NOTE 7 - INCOME TAXES: The Company adopted SFAS No. 109, "Accounting for Income Taxes", as of May 1, 1993 and recorded a $375,000 charge to consolidated net income for the cumulative effect of the change in method of accounting for income taxes. The Company has recorded the following net deferred income taxes as of April 30 (in thousands): 1996 1995 ---- ---- Current deferred income tax benefits............ $ 3,782 $ 3,959 Current deferred income taxes................... (355) (325) ------- -------- Net current deferred income tax benefits........ 3,427 3,634 ------- -------- Noncurrent deferred income tax benefits......... 18,499 13,260 Noncurrent deferred income taxes................ (26,476) (21,929) Valuation allowance............................. (224) (224) ------- -------- Net noncurrent deferred income taxes............ (8,201) (8,893) ------- -------- Net deferred income taxes....................... $(4,774) $ (5,259) ------- -------- ------- -------- The tax effects of significant temporary differences representing deferred tax assets and liabilities are as follows as of April 30 (in thousands): 1996 1995 ---- ---- Accelerated depreciation......................... $(24,281) $(19,669) Amortization of intangible assets................ (774) (923) Capital leases................................... (581) (546) Operating leases................................. 16,400 11,142 Long-term contract costs......................... 319 606 Inventory reserves............................... 400 676 Allowance for doubtful accounts.................. 1,111 901 Vacation reserves................................ 991 958 Warranty reserves................................ 450 489 Tax credits and carryforwards.................... - 220 Self insurance reserve........................... 377 245 Other, net....................................... 1,038 866 Valuation allowance.............................. (224) (224) -------- -------- Net deferred tax liabilities..................... $ (4,774) $ (5,259) -------- -------- -------- -------- 32 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 - INCOME TAXES (CONTINUED): The domestic and foreign components of income (loss) before the cumulative effect of accounting change and provision for income taxes are as follows (in thousands): YEARS ENDED APRIL 30, ----------------------------------- 1996 1995 1994 ---------- ----------- ----------- Domestic . . . . . . . . $ 13,365 $ 11,363 $ 11,164 Foreign . . . . . . . . 784 409 (1,016) ---------- ----------- ----------- $ 14,149 $ 11,772 $ 10,148 ---------- ---------- ----------- ---------- ---------- ----------- The provision (benefit) for income taxes consisted of the following (in thousands): YEARS ENDED APRIL 30, ------------------------------------- 1996 1995 1994 ----------- ----------- ----------- Current Domestic . . . . . . . $ 5,656 $ 4,325 $ 3,144 Foreign . . . . . . . . 469 516 (369) ----------- ----------- ----------- 6,125 4,841 2,775 ----------- ----------- ----------- Deferred Domestic . . . . . . .. (235) 179 1,382 Foreign . . . . . . . . (230) (311) 4 ----------- ----------- ----------- (465) (132) 1,386 ----------- ----------- ----------- Provision for income taxes $ 5,660 $ 4,709 $ 4,161 ----------- ----------- ----------- ----------- ----------- ----------- The differences between the effective tax rate and income taxes computed using the federal statutory rate were as follows:
YEARS ENDED APRIL 30, ---------------------------- 1996 1995 1994 -------- -------- -------- Federal statutory rate . . . . . . . . . . . . . . . . . 35% 35% 34% State income taxes, net of federal tax benefit . . . . . 4 4 4 Other, net . . . . . . . . . . . . . . . . . . . . . . . 1 1 3 -------- -------- -------- 40% 40% 41% -------- -------- -------- -------- -------- --------
33 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 - STOCK OPTIONS AND STOCK PLAN: The Company has adopted the 1986 Long-Term Incentive Plan of Norstan, Inc. (1986 Plan), a stock plan which provides for the granting of non-qualified stock options, incentive stock options, and restricted stock. The following is a summary of activity of the 1986 Plan: YEARS ENDED APRIL 30, ------------------------------- 1996 1995 1994 --------- --------- --------- Options outstanding, beginning of year 644,400 680,424 674,424 Granted . . . . . . . . . . . . . . . . 225,000 110,000 6,000 Exercised - at prices from $2.63 to $4.25 per share (162,100) (128,852) - Forfeited . . . . . . . . . . . . . . . . (29,400) (17,172) - --------- --------- --------- Options outstanding, end of year . . . . 677,900 644,400 680,424 --------- --------- --------- --------- --------- --------- The 1986 Plan, as amended in fiscal 1994, provides for a maximum of 1,600,000 shares to be granted to key employees in the form of stock options or restricted stock. At April 30, 1996, options outstanding under the 1986 Plan were exercisable to fiscal year 2006 at prices from $2.63 to $11.88 per share. There were 677,900 options outstanding under the 1986 Plan at April 30, 1996, of which options for approximately 376,000 shares were exercisable at that date. In 1995, the Company adopted the Norstan, Inc. 1995 Long-Term Incentive Plan (1995 Plan) which permits the granting of non-qualified stock options, incentive stock options, stock appreciation rights and restricted stock. The 1995 Plan provides for a maximum of 1,200,000 shares to be granted as performance awards and other stock-based awards. At April 30, 1996, there were no options outstanding under the 1995 Plan and 1,200,000 shares available for future grant. In 1987, the Company adopted the Directors' Stock Option Plan which was restated in September 1995. The Restated Non-Employee Directors' Stock Plan (Restated Directors' Plan) provides for a maximum of 292,000 shares to be granted. Options for 20,000 shares are to be granted to each non-employee director of the Company upon election as a director at a price equal to the market price on the date of grant, exercisable at 20% per year and expiring after ten years. At April 30, 1996, options for 160,000 shares were outstanding and exercisable at prices ranging from $3.07 to $12.50 per share. In addition to the granting of options, the Restated Directors' Plan provides for the payment of an annual retainer to each non-employee director. On the date of each annual meeting of shareholders, each non-employee director is to receive an annual retainer paid in shares of common stock of the Company. The annual retainer paid to each non-employee director at the September 1995 annual meeting of shareholders was $10,000 or 800 shares (based on the fair market value of the shares on the date of the meeting). As of April 30, 1996, 6,400 shares had been issued as an annual retainer to non-employee directors. At April 30, 1996, 125,600 shares were available for future grant/payment under the Restated Directors' Plan. The Company has maintained an Employee Stock Purchase and Bonus Plan (the Plan) since 1980 which allows employees to set aside up to 10% of their earnings for the purchase of shares of the Company's common stock. Shares are purchased annually under the Plan at a price equal to 85% of the market price on the last day of the calendar year. During fiscal 1996, 142,454 shares were issued under the Plan and, at April 30, 1996, approximately 710,000 shares were available for future issuance. The tax benefits associated with the exercise of stock options or issuance of shares under the Plan, 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. 34 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 - STOCK OPTIONS AND STOCK PLAN (CONTINUED): The Company has adopted a Restricted Stock Award Plan which provided for the awarding of 300,000 shares of Company stock to selected employees. In addition, restricted stock was granted under the 1986 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. In fiscal 1996, 7,000 shares were awarded under the 1986 Plan. Through April 30, 1996, 283,500 shares have been awarded under the Restricted Stock Award Plan and 140,706 shares have been awarded under the 1986 Plan. The fair market value of the shares granted under these plans is generally amortized over a four year period. Amortization of $137,000, $74,000, and $146,000 has been charged to operations in 1996, 1995 and 1994, respectively. NOTE 9 - 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. 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 $10,501,000 in 1996, $8,661,000 in 1995, and $8,319,000 in 1994. Future minimum lease payments under noncancelable leases with initial or remaining terms of one year or more were as follows at April 30, 1996 (in thousands): YEARS ENDING APRIL 30, AMOUNT ------------------------------ ---------- 1997 . . . . . . . . . . . . $ 6,086 1998 . . . . . . . . . . . . 5,036 1999 . . . . . . . . . . . . 3,599 2000 . . . . . . . . . . . . 2,765 2001 and Thereafter . . . . . 3,120 ---------- $ 20,606 ---------- ---------- CUSTOMER COMMITMENTS: The Company has entered into sales contracts with certain customers containing future performance obligations. Although the financial impact of these performance obligations is not determinable, management believes they will not have a material effect on the future operating results of the Company. 35 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 - COMMITMENTS AND CONTINGENCIES (CONTINUED): SHAREHOLDER RIGHTS PLAN: In May 1988, the Board of Directors authorized a shareholder rights plan which provides for a dividend distribution of one right for each outstanding share of common stock to shareholders of record on June 13, 1988. The rights will become exercisable in the event, with certain exceptions, an acquiring party accumulates 20% or more of the voting power of the Company, or the commencement of a tender or exchange offer which would result in the party having beneficial ownership of 30% or more of the voting power of the Company. Each right entitles the holder to purchase from the Company one share of common stock at $12.50 per share, subject to adjustment. In addition, upon the occurrence of certain events, holders of the rights will be entitled to purchase either the Company's common stock at one-fourth of its market value or stock in an acquiring party at one-half of its market value. NOTE 10 - OPERATIONS BY GEOGRAPHIC AREA: The following table sets forth the Company's operations by geographic area as of and for the years ended April 30, 1996, 1995 and 1994 (in thousands): 1996 1995 1994 --------- --------- --------- REVENUES: United States . . . . . . . . . . $ 287,171 $ 262,235 $ 211,130 Canada . . . . . . . . . . . . . 34,193 28,010 20,769 ---------- ---------- ---------- $ 321,364 $ 290,245 $ 231,899 ---------- ---------- ---------- ---------- ---------- ---------- NET INCOME (LOSS): United States . . . . . . . . . . $ 7,943 $ 6,617 $ 6,263 Canada . . . . . . . . . . . . . 546 446 (651) ---------- ---------- ---------- $ 8,489 $ 7,063 $ 5,612 ---------- ---------- ---------- ---------- ---------- ---------- IDENTIFIABLE ASSETS: United States . . . . . . . . . . $ 142,151 $ 143,443 $ 137,038 Canada . . . . . . . . . . . . . 18,837 18,266 12,624 ---------- ---------- ---------- $ 160,988 $ 161,709 $ 149,662 ---------- ---------- ---------- ---------- ---------- ---------- 36 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11 - SUBSEQUENT EVENTS: ACQUISITION: On June 4, 1996, the Company acquired Connect Computer Company (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, with offices in Minneapolis, Milwaukee, and Des Moines. The acquisition consideration totaled approximately $15 million, consisting of $8.2 million cash and $2 million of Norstan common stock, as well as $2.7 million paid in exchange for all outstanding Connect stock options, $1.1 million in bonuses paid to Connect management and employees, and $1 million payable to certain members of Connect management under non-compete agreements. In addition, the Company agreed to pay up to $4 million in contingent consideration over a three year period ending April 30, 1999, if certain operating income levels are achieved. The Company financed the cash portions of the acquisition through borrowings under its existing credit facility. STOCK SPLIT: 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 accompanying consolidated financial statements and related notes as if it had occurred as of April 30, 1996. All share and per share data have been restated to reflect the stock split. 37 NORSTAN, INC. AND SUBSIDIARIES SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER 1996 ---------- ----------- ---------- ---------- - ---- Revenues $ 72,401 $ 78,705 $ 81,630 $ 88,628 ---------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- Gross Margin $ 20,418 $ 22,306 $ 23,182 $ 25,478 ---------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- Operating Income $ 2,738 $ 4,003 $ 4,150 $ 4,520 ---------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- Net Income $ 1,433 $ 2,148 $ 2,293 $ 2,615 ---------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- Net income per common and common equivalent share $ .16 $ .24 $ .26 $ .29 ---------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- 1995 - ---- Revenues $ 62,824 $ 71,998 $ 74,612 $ 80,811 ---------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- Gross Margin $ 19,736 $ 22,060 $ 22,421 $ 23,921 ---------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- Operating Income $ 2,332 $ 3,449 $ 3,524 $ 4,108 ---------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- Net Income $ 1,203 $ 1,869 $ 1,871 $ 2,120 ---------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- Net income per common and common equivalent share $ .14 $ .22 $ .22 $ .24 ---------- ----------- ---------- ---------- ---------- ----------- ---------- ---------- Throughout each year, the income tax provision is recorded based upon estimates of the overall expected tax rate for that year. 38 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, 1996. 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 12, 1996, 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 12, 1996, 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 12, 1996, 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" and under "Certain Transactions" in the Company's definitive proxy statement for the annual meeting of shareholders to be held September 12, 1996, is incorporated herein by reference. 39 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS. l. Financial Statements See Index to Financial Statements and Financial Statement Schedules on page 19 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. 40 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 25, 1996 NORSTAN, INC. Registrant By /s/ PAUL BASZUCKI ---------------------------- Paul Baszucki, Co-Chairman of the Board and Chief Executive Officer By /s/ RICHARD COHEN ---------------------------- Richard Cohen, Vice-Chairman of the Board and Chief Financial Officer (Principal Financial and Accounting Officer) 41 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/ SIDNEY R. COHEN July 25, 1996 - ---------------------------------- Sidney R. Cohen, Co-Chairman of the Board and Director /s/ PAUL BASZUCKI July 25, 1996 - ---------------------------------- Paul Baszucki, Co-Chairman of the Board, Chief Executive Officer and Director /s/ RICHARD COHEN July 25, 1996 - ---------------------------------- Richard Cohen, Vice-Chairman of the Board, Chief Financial Officer and Director (Principal Financial and Accounting Officer) /s/ WINSTON E. MUNSON July 25, 1996 - ---------------------------------- Winston E. Munson, Secretary and Director /s/ DR. JAGDISH N. SHETH July 25, 1996 - ---------------------------------- Dr. Jagdish N. Sheth, Director /s/ ARNOLD LEHRMAN July 25, 1996 - ---------------------------------- Arnold Lehrman, Director /s/ CONNIE M. LEVI July 25, 1996 - ---------------------------------- Connie M. Levi, Director /s/ GERALD D. PINT July 25, 1996 - ---------------------------------- Gerald D. Pint, Director /s/ STANLEY SCHWEITZER July 25, 1996 - ---------------------------------- Stanley Schweitzer, Director /s/ HERBERT F. TRADER July 25, 1996 - ---------------------------------- Herbert F. Trader, Director 42 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION PAGE - ------- ----------- ---- 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 (File No. 0-8141) and incorporated herein by reference]; Amendments adopted September 9, 1993 and June 20, 1996. 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 (File No. 0-8141) and incorporated herein by reference]; Amendments adopted August 8, 1995. 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 (File No. 0-8141) 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 (File No. 0-8141) and incorporated herein by reference]. 10(b) Credit Agreement dated as of October 28, 1994, among Norstan, Inc., First Bank National Association, and Harris Trust and Savings Bank [filed as Exhibit 10(b) to the Company's Annual Report on Form 10-K for the year ended April 30, 1995 (File No. 0-8141) 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 (File No. 0-8141) 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 (File No. 0-8141) and incorporated herein by reference]. (1)10(d) 1990 Employee Stock Purchase and Bonus Plan of Norstan, Inc., as amended [filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K for the year ended April 30, 1993 (File No. 0-8141) and incorporated herein by reference]. (1)10(e) 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 (File No. 0-8141) and incorporated herein by reference]; Amendment adopted August 8, 1995 and July 9, 1996. 43 EXHIBIT NO. DESCRIPTION PAGE - ------- ----------- ---- (1)10(f) 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 (File No. 0-8141) and incorporated herein by reference]. (1)10(g) 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 (File No. 0-8141) and incorporated herein by reference]; Amendment adopted July 9, 1996. (1)10(h) Consulting Agreement dated March 4, 1995 between Sidney Cohen and Norstan, Inc. [filed as Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended April 30, 1995 (File No. 0-8141) and incorporated herein by reference]. (1)10(i) 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 (File No. 0-8141) and incorporated herein by reference]. (1)10(j) Employment Agreement dated April 7, 1995 between Richard Cohen and the Company [filed as Exhibit 10(i) to the Company's Annual Report on Form 10-K for the year ended April 30, 1995 (File No. 0-8141) and incorporated herein by reference]. (1)10(k) Employment Agreement dated April 7, 1995 between Max Mayer and the Company [filed as Exhibit 10(j) to the Company's Annual Report on Form 10-K for the year ended April 30, 1995 (File No. 0-8141) and incorporated herein by reference]. 10(l) 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 (File No. 0-8141) and incorporated herein by reference]. 11 Statement Regarding Computation of Earnings Per Share 45 22 Subsidiaries of Norstan, Inc. 46 23.1 Consent of Independent Public Accountants 47 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., 605 North Highway 169, Twelfth Floor, Plymouth, Minnesota 55441, 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. 44 EX-3.A 2 EXHIBIT 3(A) - ART. OF INC. Exhibit 3(a) RESTATED ARTICLES OF INCORPORATION OF NORSTAN, INC. As Amended [SEAL] TO ALL TO WHOM THESE PRESENTS SHALL COME, GREETING: WHEREAS, Articles of Incorporation, duly signed and acknowledged under oath, have been filed for record in the office of the Secretary of State, on the --1st-- day of July, A. D. 1960 for the incorporation of Norstan Mfg. Company, Inc. - ----------------------------------------------------------------------------- under and in accordance with the provisions of the Minnesota Business Corporation Act, Minnesota Statutes, Chapter 301; NOW, THERFORE, I, Joseph L. Donovan, Secretary of State of the State of Minnesota, by virtue of the powers and duties vested in me by law, do hereby certify that the said Norstan Mfg. Company, Inc. - ----------------------------------------------------------------------------- is a legally organized Corporation under the laws of this State. Witness my official signature hereunto subscribed and the Great Seal of the State of Minnesota hereunto affixed this --first-- day of July in the year of our Lord one thousand nine hundred and sixty. /s/ Joseph L. Donovan ------------------------------------ Secretary of State. ARTICLES OF INCORPORATION OF NORSTAN MFG. COMPANY, INC. We, the undersigned, of full age, for the purpose of forming a corporation under and pursuant to the provisions of Chapter 301, Minnesota Statutes, known as the Minnesota Business Corporation Act, and laws amendatory thereof and supplementary thereto, do hereby associate ourselves as a body corporate and adopt the following Articles of Incorporation: ARTICLE I. The name of this corporation is: NORSTAN MFG. COMPANY, INC. ARTICLE II. Its purposes are as follows: To design, develop, research, produce and assemble amusement and other devices and otherwise deal in goods, wares and merchandise of every class and description; To hold, buy, sell, lease, mortgage or otherwise encumber real and personal property or any interest therein, of all kinds and descriptions; To hold, buy, sell, and invest in notes, stocks, bonds or, other investments of all kinds; and To engage in such other activities as in the judgment of the board of directors are reasonably necessary to carry out any of the foregoing purposes and, in general, to have and exercise all powers conferred by the laws of the State of Minnesota in futherance of the purposes hereinbefore expressed. ARTICLE III. Its duration shall be perpetual. ARTICLE IV. The location and post office address of its registered office in this state is 938 Northwestern Bank Building, Minneapolis, Minnesota. ARTICLE V. The amount of stated capital with which this corporation will begin business is One Thousand and no/100 ($1,000.00) Dollars. ARTICLE VI. The total authorized capital stock of this corporation is one million (1,000,000) shares of common stock of the par value of ten cents ($.10) each. All shares, when issued, shall be fully paid for and shall be non-assessable. The shareholders shall not have any pre-emptive rights of any kind and the corporation by its directors may offer for sale and sell, or grant options to subscribe for, or purchase, the same at such times and under such conditions as shall be determined to be for the best interests of the corporation. ARTICLE VII. The names and post office addresses of each of the incorporators are: Name Post Office Address ------ ---------------------- Norman H. Stensager 8228 First Avenue South, Bloomington, Minnesota Sheldon J. Gensler 2851 Huntington Avenue, St. Louis Park, Minnesota Agnes Ellefson 22 East 22nd Street, Minneapolis, Minnesota ARTICLE VIII. The names, post office addresses and terms of office of the first directors are: Name Post Office Address Term ------ ---------------------- ------ Norman H. Stensager 8228 First Avenue South, Bloomington, Minnesota 1 year Sheldon J. Gensler 2851 Huntington Avenue, St. Louis Park, Minnesota 1 year Irvin E. Schermer 2306 Parkwoods Road, St. Louis Park, Minnesota 1 year Fred P. Berdass 2622 Raleigh Avenue, St. Louis Park, Minnesota 1 year Charles C. DeMoss 3322 Holmes Avenue South, Minneapolis, Minnesota 1 year - 2 - IN WITNESS WHEREOF, We have hereunto set our hands and seals this 28th day of June, 1960. /s/ Norman H. Stensager IN THE PRESENCE OF: ------------------------ /s/ Irwin E. Schermer Norman H. Stensager - ------------------------ /s/ Bernie E. Shingler - ------------------------ /s/ Sheldon J. Gensler ------------------------ Sheldon J. Gensler /s/ Agnes Ellefson ------------------------ Agnes Ellefson STATE OF MINNESOTA ) ) SS COUNTY OF HENNEPIN ) On this 28th day of June, 1960, personally appeared before me, a notary public, Norman H. Stensager, Sheldon J. Gensler and Agnes Ellefson, to me known to be the persons named in and who executed the foregoing Articles of Incorporation and each acknowledged this to be of his own free act and deed for the uses and purposes therein expressed. /s/ Irwin E. Schermer ------------------------ (Notarial Seal) CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION OF NORSTAN MFG. COMPANY, INC. We, the undersigned, Norman H. Stensager and Charles C. DeMoss, respectively the president and secretary of Norstan Mfg. Company, Inc., a corporation subject to the provisions of Chapter 301, Minnesota Statutes 1953, known as the Minnesota Business Corporation Act, do hereby certify that pursuant to Section 301.26, Subdivision 11 of said Act, on August 31, 1960, by written authorization signed by all of the holders of shares of stock of said corporation who would be entitled to a notice of meeting of shareholders, Article I. of the Articles of Incorporation of said corporation was amended to read as follows: "ARTICLE I. The name of this corporation is: NORSTAN RESEARCH & DEVELOPMENT COMPANY." IN WITNESS WHEREOF, We have subscribed our names and caused the corporate seal of said corporation to be hereto affixed this 14th day of September, 1960. NORSTAN MFG. COMPANY, INC. By /s/ Norman H. Stensager ------------------------- Its President And /s/ Charles C. DeMoss ------------------------ Its Secretary STATE OF MINNESOTA ) )SS COUNTY OF HENNEPIN ) Norman H. Stensager and Charles C. DeMoss, being first duly sworn, on oath depose and say: that they are respectively the president and secretary of Norstan Mfg. Company, Inc., the corporation named in the foregoing certificate; that said certificate contains a true statement of the action of the shareholders of said corporation, duly held as aforesaid; that the seal attached is the corporate seal of said corporation; that said certificate is executed on behalf of said corporation, by its express authority; that they further acknowledged the same to be their free act and deed and the free act and deed of said corporation. /s/ Norman H. Stensager --------------------------- Norman H. Stensager /s/ Charles C. DeMoss --------------------------- Charles C. DeMoss Subscribed and sworn to before me this 14th day of September, 1960. /s/ Sheldon L. Gensler - ---------------------- (Notarial Seal) CERTIFICATE OF CHANGE OF REGISTERED OFFICE BY NORSTAN RESEARCH & DEVELOPMENT COMPANY We, Sidney R. Cohen and Richard Cohen, respectively the President and Secretary of Norstan Research & Development Company, a Minnesota corporation organized under or subject to the provisions of Chapter 301, Minnesota Statutes, hereby certify that the following resolutions were adopted by the Board of Directors of said corporation on the 15th day of July, A. D. 1971, to wit: RESOLVED that the registered office in this state be changed from 938 Northwestern Bank Building in the City of Minneapolis, County of Hennepin, to 524 North Fifth Street, in the City of Minneapolis, County of Hennepin. RESOLVED that the effective date of the change of registered office shall be the date of the filing hereof with the Secretary of State of Minnesota. RESOLVED FURTHER that the President and the Secretary of this corporation be and are hereby authorized and directed to make, execute and acknowledge a certificate under the corporate seal of this corporation embracing the foregoing resolutions and to cause such certificate to be filed in accordance with the provisions of Chapter 301, Minnesota Statutes. /s/ Sidney R. Cohen ------------------------- President /s/ Richard Cohen ------------------------- Secretary (Corporate Seal) Subscribed and sworn to before me this 15th day of July, 1971. /s/ Winston E. Munson - ------------------------------- (Notarial Seal) CERTIFICATE OF RESTATED ARTICLES OF INCORPORATION OF NORSTAN RESEARCH & DEVELOPMENT COMPANY We, the undersigned, President and Secretary, respectively, of Norstan Research & Development Company, a Minnesota corporation, do hereby certify that at a duly called meeting of the shareholders of said corporation held on the 12th day of July, 1973, prior notice of which meeting had been duly mailed to each shareholder of record, the following resolutions adopting Restated Articles of Incorporation were adopted by the affirmative vote of the holders of a majority of the voting power of all shareholders entitled to vote and said resolutions did not receive the negative vote of the holders of more than one-fourth of the voting power of all shareholders entitled to vote: RESOLVED, That the shareholders of Norstan Research & Development Company do hereby adopt the following Restated Articles of Incorporation, which consist of the original Articles of Incorporation, as amended to date, together with certain additional amendments to said original Articles of Incorporation and which Restated Articles of Incorporation shall, and hereby do, supersede and take the place of the existing Articles of Incorporation of Norstan Research & Development Company and all amendments thereto. RESTATED ARTICLES OF INCORPORATION OF NORSTAN RESEARCH & DEVELOPMENT COMPANY ARTICLE I The name of the corporation is NORSTAN RESEARCH & DEVELOPMENT COMPANY. ARTICLE II The corporation shall have the following purposes: To design, develop, research, produce and assemble amusement and other devices and other wise deal in goods, wares and merchandise of every class and description; To hold, buy, sell, lease, mortgage or otherwise encumber real and personal property or any interest therein, of all kinds and descriptions; To hold, buy, sell and invest in notes, stocks, bonds or other investments of all kinds; and To engage in such other activities as in the judgment of the Board of Directors are reasonably necessary to carry out any of the foregoing purposes. In addition, the corporation shall have general business purposes and shall have unlimited power to engage in, and to do any lawful act concerning, any and all lawful businesses for which corporations may be organized under the Minnesota Business Corporation Act and all amendments thereto. ARTICLE III The duration of the corporation shall be perpetual. ARTICLE IV The location and post office address of the corporation's registered office in the State of Minnesota shall be 524 North Fifth Street, Minneapolis, Minnesota 55401. ARTICLE V The total authorized number of par value common shares of the corporation shall be Three Million (3,000,000), all of one class, and par value of each share shall be Ten Cents($.10). ARTICLE VI The shareholders of the corporation shall not have the pre-emptive right to subscribe for or to purchase any of the shares or other securities, warrants or rights of the corporation, now or hereafter authorized, including any of the same which may, from time to time, be in the treasury of the corporation. The shareholders of the corporation are hereby denied the right of cumulative voting. ARTICLE VII The amount of stated capital at the time of the adoption of these Restated Articles of Incorporation is the sum of Seventy-Seven Thousand Seven Hundred Fifty Dollars ($77,750.00) ARTICLE VIII The names and post office addresses of the directors of the corporation at the time of the adoption of these Restated Articles of Incorporation are as follows: NAME ADDRESS Sidney R. Cohen 524 North Fifth Street Minneapolis, Minnesota Arnold Lehrman Shelard Plaza, Suite 660 Highway 12 & County Road 18 Minneapolis, Minnesota Richard W. Cohen 524 North Fifth Street Minneapolis, Minnesota Winston E. Munson 1000 First National Bank Building Minneapolis, Minnesota Sheldon J. Gensler 2716 Tanglewood Drive Sarasota, Florida David B. Trach 2531 Kipling Avenue Minneapolis, Minnesota Carl A. Berg 8821 Science Center Drive New Hope, Minnesota James S. Sidwell 8521 Westmoreland St. Louis Park, Minnesota -2- The number of directors of the corporation shall not be less than three (3) nor more than fifteen (15), and each shall hold office for a term of one (1) year or such shorter term as may be specifically provided at the time of election and until his successor is duly elected. The terms of office of the above directors shall be until the next annual meeting of shareholders and until their respective successors are duly elected. ARTICLE IX The Board of Directors shall have the power and authority to make and alter the Bylaws of the corporation subject to the power of the shareholders to change or repeal such Bylaws; provided, however, that the Board of Directors shall not alter any Bylaw fixing their qualifications, classifications, terms of office, or number, except that the Board of Directors may make or alter any Bylaw to increase their number up to a maximum of fifteen (15). ARTICLE X The power and authority to accept and reject subscriptions for shares and other securities, and to allot shares and other securities, and to otherwise issue, sell, transfer and otherwise dispose of the shares and other securities of the corporation, whether authorized and unissued or in the treasury of the corporation and whether made or done before or after incorporation, is hereby granted to and vested in the Board of Directors of the corporation. The Board of Directors, without action by the shareholders, may from time to time, offer for subscription, or otherwise issue or sell, or grant rights, warrants or options for the subscription to or purchase of any of the authorized share or other securities of the corporation not then issued or which may have been issued and reacquired as treasury shares or other securities by the corporation, and any or all of any increased shares or other securities of any class that may hereafter be authorized for such consideration as the directors may determine. In connection with any rights, warrants or options granted by the Board of Directors, the Board of Directors is authorized to fix the terms, provisions and conditions of such rights, warrants or options, including the conversion basis or bases and the option or warrant price or prices at which shares may be purchased or subscribed for and to authorize the issuance thereof. The Board of Directors may specify in amount or value the proportions of the consideration over and above the par value of any share, on its issue or sale, which shall be capital and which shall be surplus. Bonds, debentures, certificates of indebtedness, bonds convertible into shares, debentures convertible into shares, or other debt securities, may be issued, sold or -3- disposed of pursuant to resolution of the Broad of Directors, without action by the shareholders, for such consideration and upon such terms and conditions as may be deemed advisable by the Board of Directors in the exercise of its discretion. The Board of Directors is hereby authorized and empowered to fix or alter, as to shares unallotted at the time, any or all of the following matters, to-wit: (1) the dividend rate; (2) the redemption price; (3) the liquidation price; (4) the conversion rights; (5) the sinking or purchase fund rights of any shares or other securities; or (6) the number of shares in any series of any class, all in the manner and in accordance with the statutes, as the same may be from time to time, for such cases made and provided. ARTICLE XI The holders of a majority of the outstanding shares of the corporation entitled to vote on the questions, respectively, shall have the power to authorize the Board of Directors to sell, lease, exchange or otherwise dispose of all or substantially all of the property and assets of the corporation, including its good will, upon such terms and conditions and for such consideration, which may be money, shares, bonds or other instruments for the payment of money or other property, as the Board of Directors deems expedient; to amend the Restated Articles of Incorporation of the corporation; and to adopt or reject an agreement of consolidation or merger. - 4 - FURTHER RESOLVED, That the President and the Secretary of the corporation are hereby authorized and directed to prepare, execute and file for record a proper Certificate of Restated Articles of Incorporation of Norstan Research & Development Company, reciting that the Restated Articles of Incorporation supersede and take the place of the existing Articles of Incorporation of Norstan Research & Development Company and all amendments thereto, and said officers are hereby authorized and directed to pay all fees in connection therewith, and to do all other acts and things necessary, required or convenient to carry out the purposes hereof. The undersigned do hereby further certify that the total authorized number of shares has been increased to Three Million (3,000,000), all of said shares being of one class and each share having the par value of Ten Cents ($.10); and that the Restated Articles of Incorporation supersede and take the place of the existing Articles of Incorporation of Norstan Research & Development Company and all amendments thereto. IN WITNESS WHEREOF, the undersigned, as President and Secretary, respectively, of Norstan Research & Development Company have hereunto set their respective hands and affixed the corporate seal of said corporation this 13 day of July, 1973. [SEAL] IN PRESENCE OF: NORSTAN RESEARCH & DEVELOPMENT COMPANY /s/ Sara Rietz /s/ Sidney R. Cohen - ------------------------- ------------------------------ Sidney R. Cohen, President /s/ Arnold Lehrman /s/ Winston E. Munson - ------------------------- ------------------------------ Winston E. Munson, Secretary - 5 - STATE OF MINNESOTA) ) SS. COUNTY OF HENNEPIN) On this 13th day of July, 1973, before me, a Notary Public, within and for said County, personally appeared Sidney R. Cohen and Winston E. Munson, to me personally known, who being each by me duly sworn, did say that they are respectively the President and Secretary of NORSTAN RESEARCH & DEVELOPMENT COMPANY, the corporation named in the foregoing instrument, and that the seal affixed to said instrument is the corporate seal of said corporation, and that said instrument was signed and sealed in behalf of said corporation by authority of its shareholders, and said Sidney R. Cohen and Winston E. Munson acknowledged said instrument to be the free act and deed of said corporation. /s/ Roger V. Stagberg ---------------------------------- Notary Public, Hennepin County [SEAL] CERTIFICATE OF RESTATED ARTICLES OF INCORPORATION OF NORSTAN RESEARCH & DEVELOPMENT COMPANY We, the undersigned, President and Secretary, respectively, of Norstan Research & Development Company, a Minnesota corporation, do hereby certify that at a duly called meeting of the shareholders of said corporation held on the 18th day of July, 1974, prior notice of which meeting had been duly mailed to each shareholder of record, the following resolutions adopting Restated Articles of Incorporation were adopted by the affirmative vote of the holders of more than two-thirds of the voting power of all shareholders entitled to vote: RESOLVED, That the shareholders of Norstan Research & Development Company do hereby adopt the following Restated Articles of Incorporation which consist of the existing Restated Articles of Incorporation, together with certain amendments thereto, and which Restated Articles of Incorporation shall, and hereby do, supersede and take the place of the existing Restated Articles of Incorporation of Norstan Research & Development Company and all amendments thereto. RESTATED ARTICLES OF INCORPORATION OF NORSTAN RESEARCH & DEVELOPMENT COMPANY ARTICLE I The name of the corporation is NORSTAN RESEARCH & DEVELOPMENT COMPANY. ARTICLE II The corporation shall have the following purposes: To design, develop, research, produce and assemble amusement and other devices and otherwise deal in goods, wares and merchandise of every class and description; To hold, buy, sell, lease, mortgage or otherwise encumber real and personal property or any interest therein, of all kinds and descriptions; To hold, buy, sell and invest in notes, stocks, bonds or other investments of all kinds; and To engage in such other activities as in the judgement of the Board of Directors are reasonably necessary to carry out any of the foregoing purposes. In addition, the corporation shall have general business purposes and shall have unlimited power to engage in, and to do any lawful act concerning, any and all lawful businesses for which corporations may be organized under the Minnesota Business Corporation Act and all amendments thereto. ARTICLE III The duration of the corporation shall be perpetual. ARTICLE IV The location and post office address of the corporation's registered office in the State of Minnesota shall be 524 North Fifth Street, Minneapolis, Minnesota 55401. ARTICLE V The total authorized number of par value common shares of the corporation shall be Three Million (3,000,000), all of one class, and the par value of each share shall be Ten Cents ($.10). ARTICLE VI The shareholders of the corporation shall not have the pre-emptive right to subscribe for or to purchase any of the shares or other securities, warrants or rights of the corporation, now or hereafter authorized, including any of the same which may, from time to time, be in the treasury of the corporation. The shareholders of the corporation are hereby denied the right of cumulative voting. ARTICLE VII The amount of stated capital at the time of the adoption of these Restated Articles of Incorporation is the sum of Ninety-Seven Thousand Nine Hundred Fifty and no/100 Dollars ($97,950.00). ARTICLE VIII The names and post office addresses of the directors of the corporation at the time of the adoption of these Restated Articles of Incorporation are as follows: NAME ADDRESS Sidney R. Cohen 524 North Fifth Street Minneapolis, Minnesota Arnold Lehrman Shelard Plaza, Suite 660 400 South County Road 18 Minneapolis, Minnesota Richard W. Cohen 524 North Fifth Street Minneapolis, Minnesota Winston E. Munson 1000 First National Bank Bldg. Minneapolis, Minnesota Sheldon J. Gensler 2716 Tanglewood Drive Sarasota, Florida David B. Trach 2531 Kipling Avenue St. Louis Park, Minnesota Carl A. Berg 8821 Science Center Drive New Hope, Minnesota James S. Sidwell 8521 Westmoreland Lane St. Louis Park, Minnesota The number of directors of the corporation shall not be less than three (3) nor more than fifteen (15), and each shall hold office for a term of one (1) year or such shorter term as may be specifically provided at the time of election and until his successor is duly elected. The terms of office of the above directors shall be until the next annual meeting of shareholders and until their respective successors are duly elected. ARTICLE IX The Board of Directors shall have the power and authority to make and alter the Bylaws of the corporation subject to the power of the shareholders to change or repeal such Bylaws; provided, however, that the Board of Directors shall not alter any Bylaw fixing their qualifications, classifications, terms of office, or number, except that the Board of Directors may make or alter any Bylaw to increase their number up to a maximum of fifteen (15). ARTICLE X The power and authority to accept and reject subscriptions for shares and other securities, and to allot shares and other securities, and to otherwise issue, sell, transfer and otherwise dispose of the shares and other securities of the corporation, whether authorized and unissued or in the treasury of the corporation and whether made or done before or after incorporation, is hereby granted to and vested in the Board of Directors of the corporation. The Board of Directors, without action by the shareholders, may from time to time, offer for subscription, or otherwise issue or sell, or grant rights, warrants or options for the subscription to or purchase of any of the authorized shares or other securities of the corporation not then issued or which may have been issued and reacquired as treasury shares or other securities by the corporation, and any or all of any increased shares or other securities of any class that may hereafter be authorized for such consideration as the directors may determine. In connection with any rights, warrants or options granted by the Board of Directors, the Board of Directors is authorized to fix the terms, provisions and conditions of such rights, warrants or options, including the conversion basis or bases and the option or warrant price or prices at which shares may be purchased or subscribed for and to authorize the issuance thereof. The Board of Directors may specify in amount or value the proportions of the consideration over and above the par value of any share, on its issue or sale, which shall be capital and which shall be surplus. Bonds, debentures, certificates of indebtedness, bonds convertible into shares, debentures convertible into shares, or other debt securities, may be issued, sold or disposed of pursuant to resolutions of the Board of Directors, without action by the shareholders, for such consideration and upon such terms and conditions as may be deemed advisable by the Board of Directors in the exercise of its discretion. The Board of Directors is hereby authorized and empowered to fix or alter, as to shares unallotted at the time, any or all of the following matters, to-wit: (1) the dividend rate; (2) the redemption price; (3) the liquidation price; (4) the conversion rights; (5) the sinking or purchase fund rights of any shares or other securities; or (6) the number of shares in any series of any class, all in the manner and in accordance with the statutes, as the same may be from time to time, for such cases made and provided. ARTICLE XI The holders of a majority of the outstanding shares of the corporation entitled to vote on the questions, respectively, shall have the power to authorize the Board of Directors to sell, lease, exchange or otherwise dispose of all or substantially all of the property and assets of the corporation, including its good will, upon such terms and conditions and for such consideration, which may be money, shares, bonds or other instruments for the payment of money or other property, as the Board of Directors deems expedient; to amend the Restated Articles of Incorporation of the corporation; and to adopt or reject an agreement of consolidation or merger. FURTHER RESOLVED, That the President and the Secretary of the corporation are hereby authorized and directed to prepare, execute and file for record a proper Certificate of Restated Articles of Incorporation of Norstan Research & Development Company, reciting that the Restated Articles of Incorporation supersede and take the place of the existing Restated Articles of Incorporation of Norstan Research & Development Company and all amendments thereto, and said officers are hereby authorized and directed to pay all fees in connection therewith, and to do all other acts and things necessary, required or convenient to carry out the purposes hereof. The undersigned do hereby further certify that the total authorized number of shares is Three Million (3,000,000), all of said shares being of one class and each share having the par value of Ten Cents ($.10); and that the Restated Articles of Incorporation superscede and take the place of the existing Restated Articles of Incorporation of Norstan Research & Development Company and all amendments thereto. IN WITNESS WHEREOF, the undersigned, as President and Secretary, respectively, of Norstan Research & Development Company have hereunto set their respective hands and affixed the corporate seal of said corporation this 18th day of July, 1974. IN PRESENCE OF: NORSTAN RESEARCH & DEVELOPMENT COMPANY /s/ Frederick L. Thorson /s/ Sidney R. Cohen - ------------------------------- ------------------------------- Sidney R. Cohen, President /s/ George R. A. Johnson /s/ Winston E. Munson - ------------------------------- ------------------------------- Winston E. Munson, Secretary STATE OF MINNESOTA) ) SS. COUNTY OF HENNEPIN) On this 18th day of July, 1974, before me, a Notary Public, within and for said County, personally appeared Sidney R. Cohen and Winston E. Munson, to me personally known, who being each by me duly sworn, did say that they are respectively the President and Secretary of NORSTAN RESEARCH & DEVELOPMENT COMPANY, the corporation named in the forgoing instrument, and that the seal affixed to said instrument is the corporate seal of said corporation, and that said instrument was signed and sealed in behalf of said corporation by authority of its shareholders, and said Sidney R. Cohen and Winston E. Munson acknowledged said instrument to be the free act and deed of said corporation /s/ Frederick L. Thorson ----------------------------------- Notary Public, Hennepin County FREDERICK L. THORSON Notary Public, Hennepin County, Minn. My Commission Expires April 20, 1977. CONSENT TO USE OF SIMILAR CORPORATE NAME OR TITLE BY Norstan Research & Development Company ------------------------------------------------- Name of Consenting Corporation TO Norstan Communications Systems, Inc. ------------------------------------------------- Name of New Corporation To: Secretary of State State Capitol, St. Paul, Minn. 55101 The Norstan Research & Development Company, a corporation created, organized and existing under and by virtue of the laws of the (State of Minnesota), hereby consents to the use of the name Norstan Communications Systems, Inc. - -------------------------------------------------------------------------------- by a corporation organized or qualified under the laws of the State of Minnesota, and hereby requests the Secretary of State of the State of Minnesota to accept for record the Amendment to the Articles of Incorporation of said corporation, setting forth therein its name as above. In Testimony Whereof, we have hereunto affixed our signatures and the seal of the corporation consistent with the provisions of Section 301.05, Subd. 2, Minnesota Statutes, this 23rd day of June__________________ A.D. 1975. AFFIX CORPORATE SEAL NORSTAN RESEARCH & DEVELOPMENT COMPANY -------------------------------------- Title of consenting corporation By /s/ Sidney R. Cohen ------------------------------------ Sidney R. Cohen, President ATTEST: /s/ Winston E. Munson - ---------------------------------- Winston E. Munson, Secretary Filing fee $4.00 ARTICLES OF AMENDMENT OF ARTICLES OF INCORPORATION OF NORSTAN RESEARCH & DEVELOPMENT COMPANY We, the undersigned, President and Secretary, respectively, of Norstan Research & Development Company, a Minnesota corporation, do hereby certify that at the annual meeting of the shareholders of said corporation duly held at the main office of the Northwestern National Bank of Minneapolis, Minneapolis, Minnesota, on the 21st day of July, 1977, pursuant to written notice of the time, place and purpose of said meeting, the following resolutions amending the Articles of Incorporation of said corporation were duly adopted by the shareholders of said corporation: RESOLVED, that Article I of the Articles of Incorporation of the Company be amended to read as follows: "The name of the corporation is Norstan, Inc." FURTHER RESOLVED, that the President and Secretary of the corporation are hereby authorized and directed to prepare, execute and file for record a proper Certificate of Amendment of Articles of Incorporation of Norstan Research & Development Company, and said officers are hereby authorized and directed to do all other acts and things necessary, required or convenient to carry out the purposes hereof. IN WITNESS WHEREOF, the undersigned, as President and Secretary, respectively, of Norstan Research & Development Company have hereunto set their respective hands and caused the seal of said corporation to be hereunto affixed this 28th day of July, 1977. IN PRESENCE OF: NORSTAN RESEARCH & DEVELOPMENT COMPANY /s/ Roger V. Stagberg /s/ Sidney R. Cohen - ------------------------------- ------------------------------- Its President /s/ Geneviene Neumann /s/ Winston E. Munson - ------------------------------- ------------------------------- Its Secretary (Corporate Seal) STATE OF MINNESOTA) ) ss. COUNTY OF HENNEPIN) On this 29th day of May, 1977, before me, a Notary Public within and for said County, personally appeared Sidney R. Cohen and Winston E. Munson, to me personally known, who, being each by me duly sworn, did say that they are respectively the President and the Secretary of Norstan Research & Development Company, the corporation named in the foregoing instrument, and that the seal affixed to said instrument is the corporate seal of said corporation, and that said instrument was signed and sealed in behalf of said corporation by authority of its Board of Directors, and said Sidney R. Cohen and Winston E. Munson acknowledged said instrument to be the free act and deed of said corporation. /s/ Roger V. Stagberg ---------------------------------------- (Notary Public) -2- CERTIFICATE OF CHANGE OF REGISTERED OFFICE By NORSTAN, INC. We, Sidney R. Cohen and Winston E. Munson respectively the _________ President and ________ Secretary of Norstan, Inc. a Minnesota corporation organized under or subject to the provisions of Chapter 301 Minnesota Statutes, hereby certify that the following resolutions were adopted by the Board of Directors of said corporation on the 16th day of August, A.D. 1979, to wit: "Resolved that the registered office in this state be changed from 524 North Fifth Street in the city of Minneapolis County of Hennepin to number 15755 - 32nd Avenue North in the city of Plymouth County of Hennepin" "Resolved that the effective date of the change of registered office shall be the date of the filing hereof with the Secretary of State of Minnesota." "Resolved further that the _______ President and the _______ Secretary of this corporation be and are hereby authorized and directed to make, execute and acknowledge a certificate under the corporate seal of this corporation embracing the foregoing resolutions and to cause such certificate to be filed in accordance with the provisions of Chapter 301, Minnesota Statutes." /s/ SIDNEY R. COHEN -------------------------- President Sidney R. Cohen /s/ WINSTON E. MUNSON -------------------------- Secretary Winston E. Munson CORPORATE SEAL Subscribed and sworn to before me this 16th day of August A.D. 1979. /s/ FREDERICK L. THORSON -------------------------- Notary Public Hennepin County, Minn. My Commission Expires: 4/20/84 NOTARIAL SEAL ARTICLES OF AMENDMENT OF RESTATED ARTICLES OF INCORPORATION OF NORSTAN, INC. We, the undersigned, President and Secretary, respectively, of Norstan, Inc., a Minnesota corporation, do hereby certify that at the annual meeting of the shareholders of said corporation duly held in the Directors Room at the main office of the Northwestern National Bank of Minneapolis, Minneapolis, Minnesota, on the 20th day of August, 1981, pursuant to written notice of the time, place and purpose of said meeting, the following resolutions amending the Restated Articles of Incorporation of said corporation were duly adopted by the shareholders of said corporation: RESOLVED, that Article V of the Restated Articles of Incorporation of Norstan, Inc. be and the same be amended to read as follows: "ARTICLE V "The total authorized number of par value common shares of the corporation shall be Ten Million (10,000,000), all of one class, and the par value of each share shall be Ten Cents ($.10)." FURTHER RESOLVED, that the President and the Secretary of the corporation are hereby authorized and directed to prepare, execute, and file for record a proper Certificate of Amendment of the Restated Articles of Incorporation of Norstan, Inc., and said officers are hereby authorized and directed to do all other acts and things necessary, required or convenient to carry out the purposes hereof. IN WITNESS WHEREOF, the undersigned, as President and Secretary, respectively, of Norstan, Inc. have hereunto Set their respective hands and caused the seal of and corporation to be hereunto affixed this 24th day of August, 1981. in presence of: NORSTAN, INC. /s/ Cynthia Michael /s/ Sidney R. Cohen - ----------------------------------- By ----------------------------------- Its President /s/ Diana L. McGrail /s/ Winston E. Munson - ----------------------------------- By ----------------------------------- Its Secretary (Corporate Seal) STATE OF MINNESOTA) ) ss. COUNTY OF HENNEPIN) On this 24th day of August, 1981, before me, a Notary Public within and for said County personally appeared Sidney R. Cohen and Winston E. Munson, to me personally known, who, being each by me duly sworn, did say that they are respectively the President and the Secretary of Norstan, Inc., the corporation named in the foregoing instrument, and that the seal affixed to said instrument is the corporate seal of said corporation, and that said instrument was signed and sealed in behalf of said corporation by authority of its Board of Directors, and said Sidney R. Cohen and Winston E. Munson acknowledged said instrument to be the free act and deed of said corporation. /s/ Diana L. McGrail -------------------------------------- Notary Public [SEAL] -2- ARTICLES OF AMENDMENT OF RESTATED ARTICLES OF INCORPORATION OF NORSTAN, INC. We, the undersigned, Paul Baszucki and Winston E. Munson, respectively the President and Secretary of Norstan, Inc., a corporation subject to the provisions of Chapter 302A, Minnesota Statutes, do hereby certify that at a meeting of the shareholders of said corporation, duly held on the 29th day of September, 1987, pursuant to notice duly mailed to all shareholders of record, the following resolutions were duly adopted by the affirmative vote of the holders of more than a majority of the voting power of the shares outstanding and entitled to vote: RESOLVED, that the Restated Articles of Incorporation of Norstan, Inc. shall be hereby amended by adding thereto a new Article XII which shall read as follows: "ARTICLE XII "A director of the corporation shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (a) for any breach of the director's duty of loyalty to the corporation or its shareholders, (b) for acts or omissions not in good faith or that involved intentional misconduct or a knowing violation of law, (c) under section 302A.559 of the Minnesota Business Corporation Act or section 80A.23 of the Minnesota Securities Act, (d) for any transaction from which the director derived an improper personal benefit, or (e) for any act or omission occurring prior to the effective date of this Article XII. If the Minnesota Business Corporation Act is amended after approval by the shareholders of this Article to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the corporation shall be eliminated or limited to the fullest extent permitted by the Minnesota Business Corporation Act, as so amended. "Any repeal or modification of the foregoing paragraph by the shareholders of the corporation shall not adversely affect any right or protection of a director of the corporation existing at the time of such repeal or modification." FURTHER RESOLVED, That the President and the Secretary of the corporation are hereby authorized and directed to prepare, execute, and file for record with the Secretary of State of the State of Minnesota proper Articles of Amendment of the Restated Articles of Incorporation, setting forth the foregoing amendment, and to pay all fees in connection therewith, all as required by law, and to do all other acts and things necessary, required or convenient to carry out the purposes hereof. IN WITNESS WHEREOF, we have subscribed our names this 29th day of September, 1987. /s/ Paul Baszucki --------------------------------------- Paul Baszucki, President (CORPORATE SEAL) /s/ Winston E. Munson --------------------------------------- Winston E. Munson, Secretary STATE OF MINNESOTA) ) ss. COUNTY OF HENNEPIN) The foregoing instrument was acknowledged before me this 29th day of September, 1987 by Paul Baszucki and Winston E. Munson, respectively the president and the secretary of Norstan, Inc., a Minnesota corporation, on behalf of said corporation. /s/ Diana L. McGrail -------------------------------------- Notary Public -2- [SEAL] STATE OF MINNESOTA OFFICE OF THE SECRETARY OF STATE Notice of Change of Registered Office-Registered Agent or Both by - ------------------------------------------------------------------------------- Name of Corporation Norstan, Inc. - ------------------------------------------------------------------------------- Pursuant to Minnesota Statutes, Section 302A.123, the undersigned hereby certifies that the Board of Directors of the above named Minnesota Corporation has resolved to change the corporation's registered office or agent: Note: the 'From' address must be the registered office address as shown in item #2 on the rejection notice label. FROM - ------------------------------------------------------------------------------- Agent's (Fill in this box only of you already have an agent. Do NOT list Name the corporate name in this box.) - ------------------------------------------------------------------------------- Address (No. & Street) 15755 32nd Ave N - ------------------------------------------------------------------------------- City County MN Zip Plymouth Henn 55340 - ------------------------------------------------------------------------------- TO - ------------------------------------------------------------------------------- Agent's Name - ------------------------------------------------------------------------------- Address (You may not list a P.O. Box, but you may list a rural route (No. & Street) and box number.) 6900 Wedgwood Road Suite 150 - ------------------------------------------------------------------------------- City County MN Zip Maple Grove Henn 55369 - ------------------------------------------------------------------------------- The new address may not be a post office box. It must be a street address, pursuant to Minnesota Statutes, Section 302A.011, Subd. 3. This change is effective on the day it is filed with the Secretary of State, unless you indicate another date, no later than 30 days after filing with the Secretary of State, in this box: ------------------------------ August 1, 1988 ------------------------------ I certify that I am authorized to execute this certificate and I further certify that I understand that by signing this Certificate I am subject to the penalties of perjury as set forth in section 609.48 as if I had signed this certificate under oath. ------------------------------------------------------------------ Name of Officer or Other Authorized Signature Agent or Corporation James D. Bonneville /s/ James D. Bonneville ------------------------------------------------------------------ Title or Office Date Exe. VP Finance & Admin Feb. 7, 1989 ------------------------------------------------------------------ Do not write below this line. For Secretary of State's use only. - ------------------------------------------------------------------------------- Receipt Number File Data D.A.R. - ------------------------------------------------------------------------------- - ------------------------------------------- FILING FEE: $25.00 Return To: Corporation Division Office of the Secretary of State 180 State Office Building St. Paul, MN 55155 CERTIFICATE OF AMENDMENT OF RESTATED ARTICLES OF INCORPORATION OF NORSTAN, INC. The undersigned, Ervin F. Kamm, Jr. and Winston E. Munson, the President and Secretary, respectively, of Norstan, Inc., a corporation subject to the provisions of Chapter 302A, Minnesota Statutes (the "Corporation"), do hereby certify that by a required majority of the shareholders at the duly called annual meeting of shareholders of the Corporation, held on September 9, 1993, the following resolutions were duly adopted: RESOLVED, that Article V of the Restated Articles of Incorporation of Norstan, Inc. be and the same be amended to read as follows: "ARTICLE V "The total authorized number of par value common shares of the corporation shall be Twenty Million (20,000,000), all of one class, and the par value of each share shall be Ten Cents ($.10)." FURTHER RESOLVED, that the President and Secretary of the corporation are hereby authorized and directed to prepare, execute and file for record a proper Certificate of Amendment of the Restated Articles of Incorporation of Norstan, Inc., and said officers are hereby authorized and directed to do all other acts and things necessary, required or convenient to carry out the purposes hereof. IN WITNESS WHEREOF, the undersigned have signed this Certificate of Amendment this 9th day of September, 1993. /s/ Ervin F. Kamm, Jr. -------------------------------- Ervin F. Kamm, Jr., President /s/ Winston E. Munson -------------------------------- Winston E. Munson, Secretary STATE OF MINNESOTA SECRETARY OF STATE NOTICE OF CHANGE OF REGISTERED OFFICE/ REGISTERED AGENT Please read the instructions on the back before completing this form. 1. Corporate Name: Norstan, Inc. 2. Registered Office Address (No. & Street): List a complete street address or rural route box number. A POST OFFICE BOX IS NOT ACCEPTABLE. 605 Highway 169, Plymouth Hennepin 55441 Street City County MN Zip 3. Registered Agent (Registered agents are required for foreign corporations but optional for MINNESOTA corporations): None If you do not wish to designate an agent, you must list "NONE" in this box. DO NOT LIST THE CORPORATE NAME In compliance with Minnesota Statutes, Section 302A.123, 303.10, 308A.025, 317.19, 317A.123 or 322b.135 I certify that the above listed company has resolved to change the company's registered office and/or agent as listed above. I certify that I am authorized to execute this certificate and I further certify that I understand that by signing this certificate I am subject to the penalties of perjury as set forth in MINNESOTA STATUTES SECTION 609.48 as if I had signed this certificate under oath. /s/ Winston E. Munson - ------------------------------------------ SIGNATURE OF AUTHORIZED PERSON Winston E. Munson Name and Telephone Number of a Contract Person: Winston E. Munson (612) 305-1458 --------------------------------- - -------------------------------------------------------------------------------- OFFICE USE ONLY Filing Fee: Minnesota Corporations, Cooperatives and Limited Liability Companies: $35.00 Non-Minnesota Corporations: $50.00 Make checks payable to: Secretary of State Return to: Minnesota Secretary of State 180 State Office Building 100 Constitution Ave. St. Paul, MN 55155-1299 (612) 296-2803 ARTICLES OF AMENDMENT OF RESTATED ARTICLES OF INCORPORATION OF NORSTAN, INC. I, the undersigned, Paul Baszucki, Co-Chairman of the Board of Directors and Chief Executive Officer of Norstan, Inc., a corporation subject to the provisions of Chapter 302A, Minnesota statutes, known as the Minnesota Business Corporation Act, do hereby certify that the resolutions hereinafter set forth were duly adopted by the affirmative vote of a majority of the director present and entitled to vote at a meeting of the Board of Directors duly held on June 20, 1996, pursuant to which the Board of Directors declared a share division in the form of a 2 for 1 stock split on the outstanding shares of common stock of the Corporation and increased the authorized common stock of the Corporation: NOW, THEREFORE, BE IT RESOLVED, that the directors hereby declare a two-for-one stock split of the outstanding common stock of the Corporation, payable in shares of common stock of the Corporation on July 31, 1996 to the shareholders of record of the Corporation, in proportion to their holdings, at the close of business on July 15, 1996 ("Record Date"), said shares to be issued from the authorized and unissued common stock of the Corporation, and that sufficient shares of the authorized and unissued common stock of the Corporation are hereby set aside for this purpose, and that a required amount of earned surplus, if any, at the par value of $.10 per share shall be transferred to the capital account of the Corporation in connection with this stock split; and RESOLVED FURTHER, that Norwest Bank Minnesota, N.A. is hereby authorized and directed to issue on July 31, 1996 to the stockholders of record at the close of business on July 15, 1996, in payment of said stock split, stock certificates for as many whole shares of fully paid and nonassessable common stock of the Corporation as said stockholders shall be entitled to under this resolution: and RESOLVED FURTHER, that all options for the purchase of common stock of the Corporation that are outstanding but not exercised at the Record Date shall be adjusted as follows: (i) the number of shares covered by each such option at the Record Date shall be multiplied by two (2); and (ii) the exercise price per share of each such option at the Record Date shall be divided by two and rounded to the nearest one cent ($.01); and the number of shares reserved for issuance at the Record Date under the Corporation's Shareholder Rights Plan and the Corporation's Option Plans including the 1986 Long-Term Incentive Plan, 1995 Long-Term Incentive Plan, Restated Non-Employee Director's Stock Plan, and the Employee Stock Purchase Plan shall be adjusted by multiplying such numbers of shares by two; RESOLVED FURTHER, that in any case where a legend is affixed to the original stock, the stock issued as a result of the stock split of said original stock shall carry the same legend; and RESOLVED FURTHER, that the officers of the Corporation are hereby authorized and directed to prepare, execute, file and deliver such documents and take such other action as they may deem necessary to effect such stock split, including but not limited to the filing of notices with the Securities and Exchange Commission and the Nasdaq Stock Market, and the preparation and delivery of notices to holders of stock options setting forth the adjustments described above. RESOLVED FURTHER, that the Board of Directors pursuant to the provisions of the Minnesota Business Corporation Act, hereby authorizes the amendment of the Corporation's Restated Articles of Incorporation increasing the shares of authorized common stock from 20,000,000 shares, par value $.10, to 40,000,000 shares, par value $.10; FURTHER RESOLVED, that, to effect said amendment, Article V of the Corporation's Restated Articles of Incorporation hereby is amended to read as follows: "ARTICLE V "The total authorized number of par value common shares of the corporation shall be Forty Million (40,000,000), all of one class, and the par value of each share shall be Ten Cents ($.10)." I further certify that the Amendment to the Restated Articles of Incorporation referred to in the foregoing resolutions will not adversely affect the rights or preferences of the holders of outstanding shares of any class or series of capital stock of the Corporation and will not result in the percentage of authorized shares that remains unissued after the stock split exceeding the percentage of authorized shares that were unissued before the stock split. IN WITNESS WHEREOF, I have hereunto set my hand this 9th day of July, 1996. /s/ Paul Baszucki ---------------------------------------- Paul Baszucki, Co-Chairman of the Board of Directors and Chief Executive Officer EX-3.B 3 EXHIBIT 3(B) - BYLAWS OF NORSTAN Exhibit 3(b) BYLAWS OF NORSTAN, INC. As Amended BYLAWS OF NORSTAN, INC. In Effect 7/23/96 INDEX Page ---- Article I OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . 1 Article II SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . 1 Section 2.01 Regular Meetings. . . . . . . . . . . . . . . . 1 Section 2.02 Special Meetings. . . . . . . . . . . . . . . . 1 Section 2.03 Demand by Shareholders. . . . . . . . . . . . . 2 Section 2.04 Notice. . . . . . . . . . . . . . . . . . . . . 3 Section 2.05 Quorum. . . . . . . . . . . . . . . . . . . . . 4 Section 2.06 Voting Rights . . . . . . . . . . . . . . . . . 4 Section 2.07 Share Register. . . . . . . . . . . . . . . . . 4 Section 2.08 Voting of Shares by Organizations and Legal Representatives . . . . . . . . . . . . . 5 Section 2.09 Proxies . . . . . . . . . . . . . . . . . . . . 7 Section 2.10 Action Without a Meeting. . . . . . . . . . . . 7 Section 2.11 Inspectors of Election. . . . . . . . . . . . . 7 Section 2.12 Nominations of Directors. . . . . . . . . . . . 8 Section 2.13 Proposals by Shareholders . . . . . . . . . . . 12 Section 2.14 Order of Business . . . . . . . . . . . . . . . 12 Article III BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . 13 Section 3.01 Board to Manage . . . . . . . . . . . . . . . . 13 Section 3.02 Number, Qualifications and Terms. . . . . . . . 13 Section 3.03 Annual Meeting. . . . . . . . . . . . . . . . . 13 Section 3.04 Regular Meetings. . . . . . . . . . . . . . . . 14 Section 3.05 Special Meetings. . . . . . . . . . . . . . . . 14 Section 3.06 Notice. . . . . . . . . . . . . . . . . . . . . 15 Section 3.07 Quorum. . . . . . . . . . . . . . . . . . . . . 15 Section 3.08 Manner of Acting. . . . . . . . . . . . . . . . 16 Section 3.09 Presumption of Assent . . . . . . . . . . . . . 16 Section 3.10 Absent Directors. . . . . . . . . . . . . . . . 16 Section 3.11 Action Without a Meeting. . . . . . . . . . . . 17 Section 3.12 Resignation . . . . . . . . . . . . . . . . . . 17 Section 3.13 Removal . . . . . . . . . . . . . . . . . . . . 18 Section 3.14 Vacancies . . . . . . . . . . . . . . . . . . . 18 Section 3.15 Compensation. . . . . . . . . . . . . . . . . . 18 Article IV COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 4.01 Generally . . . . . . . . . . . . . . . . . . . 19 Section 4.02 Membership. . . . . . . . . . . . . . . . . . . 19 Section 4.03 Quorum. . . . . . . . . . . . . . . . . . . . . 19 Section 4.04 Procedure . . . . . . . . . . . . . . . . . . . 19 Section 4.05 Minutes . . . . . . . . . . . . . . . . . . . . 20 Article V OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 5.01 Number. . . . . . . . . . . . . . . . . . . . . 20 i Page ---- Section 5.02 Election and Term of Office . . . . . . . . . . 20 Section 5.03 Resignation . . . . . . . . . . . . . . . . . . 21 Section 5.04 Removal . . . . . . . . . . . . . . . . . . . . 21 Section 5.05 Vacancy . . . . . . . . . . . . . . . . . . . . 21 Section 5.06 Chairman of the Board . . . . . . . . . . . . . 21 Section 5.07 Vice Chairman of the Board. . . . . . . . . . . 21 Section 5.08 Chief Executive Officer . . . . . . . . . . . . 21 Section 5.09 President . . . . . . . . . . . . . . . . . . . 22 Section 5.10 Chief Operating Officer . . . . . . . . . . . . 22 Section 5.11 Vice President. . . . . . . . . . . . . . . . . 22 Section 5.12 Secretary . . . . . . . . . . . . . . . . . . . 23 Section 5.13 Chief Financial Officer . . . . . . . . . . . . 23 Section 5.14 Treasurer . . . . . . . . . . . . . . . . . . . 24 Section 5.15 Assistant Secretaries and Assistant Treasurers. . . . . . . . . . . . . . 24 Section 5.16 Contracts, etc. . . . . . . . . . . . . . . . . 25 Section 5.17 Compensation. . . . . . . . . . . . . . . . . . 25 Article VI INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . 25 Article VII CERTIFICATES FOR SHARES AND THEIR TRANSFER . . . . . . . . 26 Section 7.01 Certificates for Shares . . . . . . . . . . . . 26 Section 7.02 Transfer of Shares. . . . . . . . . . . . . . . 27 Article VIII DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . 27 Article IX FISCAL YEAR. . . . . . . . . . . . . . . . . . . . . . . . 28 Article X SEAL . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Article XI AMENDMENT. . . . . . . . . . . . . . . . . . . . . . . . . 28 Article XII GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . 28 ii BYLAWS OF NORSTAN, INC. ARTICLE I OFFICES The principal office of the corporation shall be located in Minnesota. The corporation may have such other offices, either within or without Minnesota, as the Board of Directors may designate or as the business of the corporation may require from time to time. The registered office of the corporation required by chapter 302A, Minnesota Statutes, to be maintained in Minnesota may be, but need not be, identical with the principal office in Minnesota, and the address of the registered office may be changed from time to time by the Board of Directors. ARTICLE II SHAREHOLDERS Section 2.01. REGULAR MEETINGS. The Board of Directors may cause regular meetings of the shareholders to be held on an annual basis for the purpose of electing directors and for the transaction of such other business as may come before the meeting. Such regular meetings shall be held on the date and at the time and place fixed by the Board of Directors. Section 2.02. SPECIAL MEETINGS. Special meetings of the shareholders may be called for any purpose or purposes at any time, by the chairman of the Board of Directors, a vice chairman of the Board of Directors, the chief executive officer, the -1- president, the chief financial officer, two or more directors or a shareholder or shareholders holding ten percent or more of the voting shares. Special meetings shall be held on the date and at the time and place fixed by the chairman of the Board of Directors or the Board of Directors, except that a special meeting called by or at the demand of a shareholder or shareholders pursuant to section 2.03 of these bylaws shall be held in the county where the principal executive office is located. The business transacted at a special meeting shall be limited to the purposes stated in the notice of the meeting. Section 2.03. DEMAND BY SHAREHOLDERS. If a regular meeting of shareholders has not been held during the immediately preceding 15 months, a shareholder or shareholders holding three percent or more of all voting shares may demand a regular meeting of shareholders. A shareholder or shareholders holding ten percent or more of the voting shares may demand a special meeting of shareholders. The demand for a regular or a special meeting shall be given in writing to the chairman of the Board of Directors, the chief executive officer or the chief financial officer of the corporation. Within 30 days after receipt of the demand by one of those officers, the Board of Directors shall cause a meeting of shareholders to be called and held on notice no later than 90 days after receipt of the demand, all at the expense of the corporation. If the Board of Directors fails to cause a meeting to be called and held as required by this section, the shareholder or shareholders making the demand may -2- call the meeting by giving notice as required by section 2.04 of these bylaws, all at the expense of the corporation. Section 2.04. NOTICE. Notice of all meetings of shareholders shall be given to every holder of voting shares, except where the meeting is an adjourned meeting and the date, time and place of the meeting were announced at the time of adjournment. The notice shall be given at least five days before the date of the meeting, and not more than 60 days before the date of the meeting. The notice shall contain the date, time and place of the meeting, and any other information required by this Article II. In the case of a special meeting, the notice shall contain a statement of the purposes of the meeting. The notice may also contain any other information deemed necessary or desirable by the Board of Directors or by any other person or persons calling the meeting. A shareholder may waive notice of a meeting of shareholders. A waiver of notice by a shareholder entitled to notice shall be effective whether given before, at or after the meeting, and whether given in writing, orally or by attendance. Attendance by a shareholder at a meeting shall be a waiver of notice of that meeting, except where the shareholder objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened, or objects before a vote on an item of business because the item may not lawfully be considered at that meeting and does not participate in the consideration of the item at that meeting. -3- Section 2.05. QUORUM. The holders of a majority of the voting power of the shares entitled to vote at a meeting present in person or by proxy at the meeting shall constitute a quorum for the transaction of business. If a quorum is present when a duly called or held meeting is convened, the shareholders present may continue to transact business until adjournment, even though the withdrawal of a number of shareholders originally present leaves less than the proportion or number otherwise required for a quorum. Section 2.06. VOTING RIGHTS. The Board of Directors may fix a date not more than 60 days before the date of a meeting of shareholders as the date for the determination of the holders of voting shares entitled to notice of and to vote at the meeting. When a date is so fixed, only shareholders on that date are entitled to notice of and permitted to vote at that meeting of shareholders. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting of shareholders, the date on which notice of the meeting is first mailed shall be the record date for such determination of shareholders. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment thereof. Section 2.07. SHARE REGISTER. The office or agent having charge of the share register of the corporation shall maintain a share register, not more than one year old, containing a complete list of the shareholders with the address of and the -4- number, class and issuance dates of shares held by each. The share register shall be kept on file at the principal executive office of the corporation, or at another place or places within the United States determined by the Board of Directors, and shall be subject to inspection by any shareholder at any time during usual business hours. A resolution approved by the affirmative vote of a majority of the directors present may establish a procedure whereby a shareholder may certify in writing to the corporation that all or a portion of the shares registered in the name of the shareholder are held for the account of one or more beneficial owners. Upon receipt by the corporation of the writing, the persons specified as beneficial owners, rather than the actual shareholder, shall be deemed the shareholders for the purposes specified in the writing. A shareholder shall have one vote for each voting share held. Shares owned by two or more shareholders may be voted by any one of them unless the corporation receives written notice from any one of them denying the authority of that person to vote those shares. Except as provided herein, a holder of voting shares may vote any portion of the shares in any way the shareholder chooses. If a shareholder votes without designating the proportion or number of shares voted in a particular way, the shareholder shall be deemed to have voted all of the shares in that way. Section 2.08. VOTING OF SHARES BY ORGANIZATIONS AND LEGAL REPRESENTATIVES. Shares of the corporation registered in -5- the name of another domestic or foreign corporation may be voted by the president or another legal representative of that corporation. Except as provided herein, shares of the corporation registered in the name of a subsidiary shall not be entitled to vote on any matter. Shares of the corporation in the name of or under the control of the corporation or a subsidiary in a fiduciary capacity shall not be entitled to vote on any matter, except to the extent that the settlor or beneficial owner possesses and exercises a right to vote or gives the corporation binding instructions on how to vote the shares. Shares under the control of a person in a capacity as a personal representative, administrator, executor, guardian, conservator or attorney-in-fact may be voted by the person, either in person or by proxy, without registration of those shares in the name of the person. Shares registered in the name of a trustee of a trust or in the name of a custodian may be voted by the person, either in person or by proxy, but a trustee of a trust or a custodian shall not vote shares held by the person unless they are registered in the name of the person. Shares registered in the name of a trustee in bankruptcy or a receiver may be voted by the trustee or receiver either in person or by proxy. Shares under the control of a trustee in bankruptcy or a receiver may be voted by the trustee or receiver without registering the shares in the name of the trustee or receiver, if authority to do so is contained in an appropriate order of the court by which the trustee or receiver was appointed. -6- Shares registered in the name of any organization not described herein may be voted either in person or by proxy by the legal representative of that organization. A shareholder whose shares are pledged may vote those shares until the shares are registered in the name of the pledgee. Section 2.09. PROXIES. A shareholder may cast or authorize the casting of a vote by filing a written appointment of a proxy with an officer of the corporation at or before the meeting at which the appointment is to be effective. An appointment of a proxy for shares held jointly by two or more shareholders shall be valid if signed by any one of them, unless the corporation receives from any one of those shareholders written notice either denying the authority of that person to appoint a proxy or appointing a different proxy. The appointment of a proxy shall be valid for eleven months unless a longer period is expressly provided in the appointment. Section 2.10. ACTION WITHOUT A MEETING. An action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting by written action signed by all of the shareholders entitled to vote on that action. The written action shall be effective when it has been signed by all of those shareholders, unless a different effective time is provided in the written action. Section 2.11. INSPECTORS OF ELECTION. In advance of any meeting of shareholders, the Chairman of the Board shall appoint two or more inspectors of election, who need not be -7- shareholders, as to the matters to be submitted to a vote at any such meeting, or any adjournment thereof. The inspectors of election when so appointed shall take charge of all proxies and ballots and shall determine the number of shares outstanding, the voting power of each, the shares represented at the meeting, and the existence of a quorum. They shall determine all questions relating to the qualifications of voters, the authenticity, validity, and effect of proxies, and the acceptance or rejection of votes, challenges, and questions arising in any way in connection with the right to vote and the counting and tabulation of such votes. They shall determine the number of votes cast for any office or for or against any proposal, and shall determine and report the results to the meeting. The inspectors shall take an oath that they will perform their duties impartially, in good faith, and to the best of their ability and as expeditiously as is practical. If, for any reason, an inspector previously appointed shall fail to attend or refuse to be unable to serve, the vacancy shall be filled by the Chairman of the Board in advance of convening the meeting, or at the meeting by the person acting as Chairman. Each report of the inspectors shall be in writing and signed by the inspectors. The report of a majority shall be the report of the inspectors. Section 2.12. NOMINATIONS OF DIRECTORS. (a) Nominations of candidates for election as directors at any annual meeting or any special meeting of shareholders may be made (i) by, or at the direction of, the Board of Directors or (ii) by any shareholder of record entitled -8- to vote at such meeting. Only persons nominated in accordance with procedures set forth in this Section 2.12 shall be eligible for election as directors at any meeting of shareholders. (b) Nominations, other than those made by, or at the direction of, the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation as set forth in this Section 2.12. To be timely, a shareholder's notice shall be delivered to, or mailed and received at, the principal executive offices of the corporation not less than sixty (60) days nor more than ninety (90) days prior to the date of the scheduled meeting, regardless of postponements, deferrals, or adjournments of that meeting to a later date; PROVIDED, HOWEVER, that if less than seventy (70) days' notice or prior public disclosure of the date of the scheduled meeting is given or made, notice by the shareholder to be timely must be so delivered or received not later than the close of business on the tenth (10) day following the earlier of the day on which such notice of the date of the scheduled meeting was mailed or the day on which such public disclosure was made. (c) Such shareholder's notice shall set forth (i) as to each person whom the shareholder proposes to nominate for election as a director (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the class and number of shares of the corporation's equity securities which are beneficially owned (as such term is defined in Rule 13d-3 or 13d-5 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) -9- by such person on the date of such shareholder notice and (D) any other information relating to such person that would be required to be disclosed pursuant to Schedule 13D under the Exchange Act in connection with the acquisition of shares, and pursuant to Regulation 14A under the Exchange Act, in connection with the solicitation of proxies with respect to nominees for election as directors; and (ii) as to the shareholder giving the notice (A) the name and address, as they appear on the corporation's books, of such shareholder and any other shareholder who is a record or beneficial owner of any equity securities of the corporation and who is known by such shareholder to be supporting such nominee(s) and (B) the class and number of shares of the corporation's equity securities which are beneficially owned, as defined above, and owned of record by such shareholder on the date of such shareholder notice and the number of shares of the corporation's equity securities beneficially owned and owned of record by any person known by such shareholder to be supporting such nominee(s) on the date of such shareholder notice. At the request of the Board of Directors, any person nominated by, or at the direction of, the Board of Directors for election as a director at any annual or special meeting shall furnish to the Secretary of the corporation that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. (d) No person shall be elected as a director of the corporation unless nominated in accordance with the procedures set forth in this Section 2.12. Ballots bearing the names of all the persons who have been nominated for election as directors at -10- any annual or special meeting in accordance with the procedures set forth in this Section 2.12 shall be provided for use at the meeting. (e) The Chairman of the Board may reject any nomination by a shareholder not timely made in accordance with the requirements of this Section 2.12. If the Chairman of the Board determines that the information provided in a shareholder's notice does not satisfy the informational requirements of this Section 2.12 in any material respect, the Secretary of the corporation shall promptly notify such shareholder of the deficiency in the notice. The shareholder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within such period of time, not to exceed ten (10) days from the date such deficiency notice is given to the shareholder, as the Chairman of the Board shall reasonably determine. If the deficiency is not cured within such period, or if the Chairman of the Board determines that the additional information provided by the shareholder, together with the information previously provided, does not satisfy the requirements of this Section 2.12 in any material respect, then the Chairman of the Board may reject such shareholders' nomination. The Secretary of the corporation shall notify a shareholder in writing whether such person's nomination has been made in accordance with the time and information requirements of this Section 2.12. Notwithstanding the procedure set forth in this Section 2.12, if the Chairman of the Board does not make a determination as to the validity of any nominations by a -11- shareholder, the chairman of the annual or special meeting of shareholders shall determine and declare at the meeting whether a nomination was made in accordance with the terms of this Section 2.12. If the chairman of such meeting determines that a nomination was not made in accordance with the terms of this Section 2.12, he or she shall so declare at the meeting and the defective nomination shall be disregarded. Section 2.13. PROPOSALS BY SHAREHOLDERS. (a) At any annual meeting or any special meeting of shareholders, only such business shall be conducted, and only such proposals shall be acted upon as shall have been brought before the meeting (i) by, or at the direction of, the Board of Directors, or (ii) by any shareholder of the Company who complies with the requirements of Rule 14a-8 under the Securities Exchange Act of 1934, as amended. (b) This provision shall not prevent the consideration and approval or disapproval at any meeting of reports of officers, directors and committees of the Board of Directors, but, in connection with such reports, no new business shall be acted upon at such meeting unless stated, filed and received as herein provided. Section 2.14. ORDER OF BUSINESS. All meetings of shareholders shall be conducted in accordance with such rules as are prescribed by the chairmen of the meeting. The order of business at all meetings of the shareholders shall be as determined by the chairman of the meeting. -12- ARTICLE III BOARD OF DIRECTORS Section 3.01. BOARD TO MANAGE. The business and affairs of the corporation shall be managed by or under the direction of the Board of Directors, subject to the rights of the shareholders of the corporation as provided in these Bylaws or the Articles of Incorporation or pursuant to chapter 302A, Minnesota Statutes. Section 3.02. NUMBER, QUALIFICATIONS AND TERMS. The number of directors of the corporation shall not be less than three nor greater than fifteen and shall be set from time to time by a resolution adopted by the affirmative vote of two-thirds of the directors. The Board of Directors may, at any time, increase the number of directors up to a maximum of fifteen or decrease the number of directors except that any such decrease shall not result in the removal of a director except a director named by the Board of Directors to fill a vacancy. Directors shall be natural persons. Each director shall hold office until his or her successor is elected and has qualified, or until his or her earlier death, resignation, removal or disqualification. Directors need not be residents of Minnesota or shareholders of the corporation. Section 3.03. ANNUAL MEETING. The Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of other business, as soon as practicable after each annual meeting of shareholders, on the same day and at the same place where such annual meeting shall be -13- held. Notice of such meeting need not be given. In the event such annual meeting is not so held, the annual meeting of the Board of Directors may be held at such other time or place (within or without the State of Minnesota) as shall be specified in a notice thereof given as hereinafter provided in Section 3.06 of these Bylaws. Section 3.04. REGULAR MEETINGS. Regular meetings of the Board of Directors shall be held at such time and place as the Board of Directors may fix. If any day fixed for a regular meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting which would otherwise be held on that day shall be held at the same time and place on the next succeeding business day. Notice of regular meetings of the Board of Directors need not be given except as otherwise required by statute or these Bylaws. Section 3.05. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called from time to time by or at the request of the chairman of the Board of Directors, a vice chairman of the Board of Directors, the chief executive officer, the president or any director. The person calling a special meeting of the Board of Directors may fix the date, time and place of the meeting. If the place fixed for the meeting is outside of Minnesota, the Board of Directors may change the place of the meeting to a location within Minnesota. A conference among directors by any means of communication through which the directors may simultaneously hear each other during the conference shall constitute a meeting of the -14- Board of Directors, if the same notice is given of the conference as would be required by Section 3.06 of these Bylaws for a meeting, and if the number of directors participating in the conference would be sufficient to constitute a quorum at a meeting. Participation in a meeting by such means shall constitute presence in person at the meeting. Section 3.06. NOTICE. Notice of any special meeting shall be given at least five days previously thereto by written notice mailed to each director at his or her business address or at least 24 hours prior thereto delivered personally or by telegram. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage thereon prepaid. If notice be given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to the telegraph company. A director may waive notice of a meeting of the Board of Directors. A waiver of notice by a director entitled to notice shall be effective whether given before, at or after the meeting, and whether given in writing, orally or by attendance. Attendance by a director at a meeting shall be a waiver of notice of that meeting, except where the director objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and does not participate thereafter in the meeting. Section 3.07. QUORUM. A majority of the directors currently holding office present at a meeting shall constitute a quorum for the transaction of business. In the absence of a -15- quorum, a majority of the directors present may adjourn a meeting from time to time until a quorum is present. If a quorum is present when a duly called or held meeting is convened, the directors present may continue to transact business until adjournment, even though the withdrawal of a number of directors originally present leaves less than the number otherwise required for a quorum. Section 3.08. MANNER OF ACTING. Except as otherwise provided in Minnesota Statutes, chapter 302A, the Board of Directors shall take action by the affirmative vote of a majority of directors present at a duly held meeting. Section 3.09. PRESUMPTION OF ASSENT. A director who is present at a meeting of the Board of Directors when an action is approved by the affirmative vote of a majority of the directors present is presumed to have assented to the action approved, unless the director objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and does not participate thereafter in the meeting, or votes against the action at the meeting or is prohibited from voting on the action due to a conflict of interest. Section 3.10. ABSENT DIRECTORS. A director may give advance written consent or opposition to a proposal to be acted on at a Board of Directors meeting. If the director is not present at the meeting, consent or opposition to a proposal shall not constitute presence for purposes of determining the existence of a quorum, but consent or opposition shall be counted as a vote in favor of or against the proposal and shall be entered in the -16- minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected. Section 3.11. ACTION WITHOUT A MEETING. An action required or permitted to be taken at a meeting of the Board of Directors may be taken by written action signed by all of the directors, and in the case of an action which need not be approved by the shareholders, such action may be taken by written action signed by the number of directors that would be required to take such action at a meeting of the Board of Directors at which all directors were present. The written action shall be effective when signed by the required number of directors, unless a different effective time is provided in the written action. When written action is permitted to be taken by less than all directors, all directors shall be notified immediately of its text and effective date. Failure to provide the notice shall not invalidate the written action. A director who does not sign or consent to the written action shall have no liability for the action or actions taken thereby. Section 3.12. RESIGNATION. A director may resign at any time by giving written notice to the corporation. The resignation shall be effective without acceptance when the notice is given to the corporation, unless a later effective time is specified in the notice. -17- Section 3.13. REMOVAL. Any one or all of the directors may be removed at any time, with or without cause, by the affirmative vote of the holders of a majority of the common voting shares. A director may be removed at any time, with or without cause, by the affirmative vote of a majority of the remaining directors present if the director was named by the Board of Directors to fill a vacancy, and the shareholders have not elected directors in the interval between the time of appointment to fill the vacancy and the time of removal. Section 3.14. VACANCIES. Any vacancy occurring on the Board of Directors may be filled by the affirmative vote of a majority of the remaining directors, even though less than a quorum. Vacancies on the Board of Directors resulting from newly created directorships may be filled by the affirmative vote of a majority of the directors serving at the time of the increase. A director elected to fill a vacancy shall hold office until a qualified successor is elected by the shareholders at the next regular or special meeting of the shareholders, or until his or her earlier death, resignation, removal or disqualification. Section 3.15. COMPENSATION. The Board of Directors may provide for the payment to each director of a fixed annual or quarterly fee, a fixed fee for attendance at each meeting of the Board or any committee thereof, and/or for any other form or method of compensation as may be determined by the Board of Directors. The Board of Directors may also provide for the payment of the expenses of each director for attendance at each meeting of the Board or of any committee thereof. No such -18- payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. ARTICLE IV COMMITTEES Section 4.01. GENERALLY. A resolution approved by the affirmative vote of a majority of the directors currently holding office may establish committees having the authority of the Board of Directors in the management of the business of the corporation to the extent provided in the resolution. Committees shall be subject at all times to the direction and control of the Board of Directors. Section 4.02. MEMBERSHIP. A committee shall consist of one or more natural persons, who need not be directors, appointed by affirmative vote of a majority of the directors present. Section 4.03. QUORUM. A majority of the members of the committee present at a meeting shall constitute a quorum for the transaction of business, unless a larger or smaller proportion or number is provided in a resolution approved by the affirmative vote of a majority of the directors present. Section 4.04. PROCEDURE. The provisions of Sections 3.05, 3.06, 3.07, 3.08 and 3.11 of these Bylaws shall apply to committees and members of committees to the same extent as those sections apply to the Board of Directors and directors. -19- Section 4.05. MINUTES. Minutes, if any, of committee meetings shall be made available upon request to members of the committee and to any director. ARTICLE V OFFICERS Section 5.01. NUMBER. The Board of Directors shall from time to time elect a chief executive officer and a chief financial officer and may elect a chairman or co-chairmen of the Board of Directors, one or more vice chairmen of the Board of Directors, a president, a chief operating officer, one or more vice presidents, a secretary, a treasurer, and such other officers and assistant officers as it may deem necessary. Each officer shall be a natural person. Any two or more offices may be held by the same person. Section 5.02. ELECTION AND TERM OF OFFICE. The officers of the corporation shall be elected by the Board of Directors. In the absence of an election or appointment of officers by the Board of Directors, the person or persons exercising the principal functions of the chief executive officer or the chief financial officer shall be deemed to have been elected to those offices. Each officer shall hold office until his or her successor is elected and has qualified, or until his or her earlier death, resignation, removal or disqualification. The election or appointment of a person as an officer or agent shall not, of itself, create contract rights. Section 5.03. RESIGNATION. An officer may resign at any time by giving written notice to the corporation. The resig- -20- nation shall be effective without acceptance when the notice is given to the corporation, unless a later effective date is specified in the notice. Section 5.04. REMOVAL. An officer may be removed at any time, with or without cause, by a resolution approved by the affirmative vote of a majority of the Board of Directors. Section 5.05. VACANCY. A vacancy in any office because of death, resignation, removal, disqualification or other cause may, or in the case of a vacancy in the office of chief executive officer or chief financial officer shall, be filled by the Board of Directors for the unexpired portion of the term. Section 5.06. CHAIRMAN OR CO-CHAIRMEN OF THE BOARD. A chairman or co-chairmen of the Board of Directors may be elected by the Board of Directors. The chairman shall, when present, preside at all meetings of the Board of Directors and of the shareholders, and shall perform such duties as shall be prescribed by the Board of Directors. Section 5.07. VICE CHAIRMAN OF THE BOARD. One or more vice chairmen of the Board of Directors may be elected by the Board of Directors, and shall perform such duties as shall be prescribed by the Board of Directors. Section 5.08. CHIEF EXECUTIVE OFFICER. The chief executive officer shall: (a) Have general active management of the business of the corporation; -21- (b) In the absence of the chairman of the Board of Directors, preside at all meetings of the Board of Directors and of the shareholders; (c) See that all orders and resolutions of the Board of Directors are carried into effect; and (d) Perform other duties prescribed by the Board of Directors. Section 5.09. PRESIDENT. In the absence of the chief executive officer or in the event of his or her death, inability or refusal to act, the president shall perform the duties of the chief executive officer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the chief executive officer. The president may sign, with the secretary or an assistant secretary, certificates for shares of the corporation, and shall perform other duties as shall be prescribed by the Board of Directors or by the chief executive officer. Section 5.10. CHIEF OPERATING OFFICER. The chief operating officer shall perform such duties as shall be prescribed by the Board of Directors or by the chief executive officer. Section 5.11. VICE PRESIDENT. In the absence of the president or in the event of his or her death, inability or refusal to act, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated at the time of their election) shall perform the duties of the president, and when so acting, shall have all the powers of -22- and be subject to all the restrictions upon the president. A vice president shall perform other duties as shall be prescribed by the Board of Directors or by the chief executive officer. Section 5.12. SECRETARY. The secretary shall: (a) Maintain records of and, whenever necessary, certify all proceedings of the Board of Directors and the shareholders; (b) See that all notices are duly given in accordance with the provisions of these bylaws or as required by law; (c) Be custodian of the corporate records and of the corporate seal, if any; (d) See that a share register of the corporation is maintained in accordance with section 2.07 of these bylaws; (e) Sign with the chief executive officer, or the president certificates for shares of the corporation; and (f) Perform other duties prescribed by the Board of Directors or by the chief executive officer. Section 5.13. CHIEF FINANCIAL OFFICER. The chief financial officer shall: (a) Keep accurate financial records for the corporation; (b) Deposit all moneys, drafts and checks in the name of and to the credit of the corporation in the banks and depositories designated by the Board of Directors; (c) Endorse for deposit all notes, checks and drafts received by the corporation as ordered by the Board of Directors, making proper vouchers therefor; -23- (d) Disburse corporate funds and issue checks and drafts in the name of the corporation, as ordered by the Board of Directors; (e) Render to the Board of Directors and the chief executive officer, whenever requested, an account of all transactions by the chief financial officer and of the financial condition of the corporation; (f) Perform other duties prescribed by the Board of Directors or by the chief executive officer; and (g) If required by the Board of Directors, give a bond for the faithful discharge of his or her duties in such sum and with such surety or sureties as the Board of Directors shall determine. Section 5.14. TREASURER. In the absence of the chief financial officer or in the event of his or her death, inability or refusal to act, the treasurer shall perform the duties of the chief financial officer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the chief financial officer. The treasurer shall perform other duties as shall be prescribed by the Board of Directors or by the chief executive officer. Section 5.15. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The assistant secretaries may sign with the chief executive officer or the president certificates for shares of the corporation. The assistant treasurers shall, if required by the Board of Directors, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of -24- Directors shall determine. The assistant secretaries and assistant treasurers shall perform such duties as shall be prescribed by the secretary or by the chief financial officer or by the Board of Directors or by the chief executive officer. Section 5.16. CONTRACTS, ETC. The chairman of the Board of Directors, any vice chairman of the Board of Directors, the chief executive officer, the president, the chief operating officer, any vice president or the chief financial officer may sign and deliver in the name of the corporation any deeds, mortgages, bonds, contracts, certificates for shares or other instruments pertaining to the business of the corporation, except in cases in which the authority to sign and deliver is required by law to be exercised by another person or is expressly delegated by the Articles of Incorporation or these Bylaws or by the Board of Directors to some other officer or agent of the corporation. Section 5.17. COMPENSATION. The compensation of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such compensation by reason of the fact that he or she is also a director of the corporation. ARTICLE VI INDEMNIFICATION The corporation shall indemnify a person made or threatened to be made a party to a proceeding by reason of the former or present official capacity of the person with the -25- corporation in accordance with, and to the fullest extent permitted by, the provisions of chapter 302A, Minnesota Statutes. The corporation may purchase and maintain insurance at its expense to protect itself or on behalf of a person in that person's official capacity with the corporation or a subsidiary, against any liability asserted against and incurred by the person in or arising from that capacity, whether or not the corporation would be required by law to indemnify the person against the liability. ARTICLE VII CERTIFICATES FOR SHARES AND THEIR TRANSFER Section 7.01. CERTIFICATES FOR SHARES. The shares of the corporation shall be either certificated shares or uncertificated shares. Each holder of certificated shares shall be entitled to a certificate of shares. A certificate representing shares of the corporation shall contain on its face the name of the corporation, a statement that the corporation is incorporated under the laws of Minnesota, the name of the person to whom it is issued, the number and class of shares, and the designation of the series, if any, of shares represented by the certificate. A new share certificate may be issued in place of one that is alleged to have been lost, stolen or destroyed. All certificates surrendered to the corporation for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares shall have been surrendered and canceled, except that in case of a certificate that is alleged to have been -26- lost, stolen or destroyed a new one may be issued therefor upon such terms and indemnity to the corporation as the Board of Directors may prescribe. Section 7.02. TRANSFER OF SHARES. Transfer of shares of the corporation shall be made only on the share register of the corporation by the record holder thereof or by his or her legal representative, who shall furnish proper evidence of authority to transfer, or by his or her attorney thereunto authorized by power of attorney duly executed and filed with the secretary of the corporation, and on surrender for cancellation of the certificate for such shares, or by evidence of transfer. The person in whose name shares stand on the share register of the corporation shall be deemed by the corporation to be the owner thereof for all purposes unless a different beneficial owner shall have been designated as provided in section 2.07 of these bylaws. ARTICLE VIII DISTRIBUTIONS The Board of Directors may authorize, and the corporation may make, a distribution only if the corporation will be able to pay its debts in the ordinary course of business after making the distribution. For purposes of this section, "distribution" means a direct or indirect transfer of money or other property, other than shares of the corporation, with or without consideration, or an incurrence of indebtedness by the corporation to or for the benefit of its shareholders in respect of its shares. A distribution may be in the form of a dividend -27- or a distribution in liquidation or as consideration for the purchase, redemption or other acquisition of the corporation's shares, or otherwise. ARTICLE IX FISCAL YEAR The fiscal year of the corporation shall commence on May 1 and end on April 30 next succeeding. ARTICLE X SEAL The Board of Directors may provide a corporate seal which shall be circular in form and shall have inscribed thereon the state of incorporation and the words "Corporate Seal." ARTICLE XI AMENDMENT These Bylaws may be amended or repealed and new Bylaws may be adopted by the Board of Directors, or by the shareholders, as provided in Chapter 302A, Minnesota Statutes. No amendment shall be adopted that is inconsistent with the provisions of the corporation's Articles of Incorporation. ARTICLE XII GOVERNING LAW The corporation is subject to the provisions of Chapter 302A, Minnesota Statutes. All references in these bylaws to Chapter 302A, Minnesota Statutes shall mean and include such chapter as currently enacted or hereafter amended. -28- EX-10.E 4 EXHIBIT 10(E) - INCENTIVE PLAN 1986 Exhibit 10(e) NORSTAN, INC. 1986 LONG-TERM INCENTIVE PLAN As Amended Amendment adopted August 8, 1995 to amend paragraph 11 to read as follows: 11. CHANGE IN CONTROL. In case of a "Change in Control" (as such term is hereinafter defined), each employee of the Company and its subsidiaries shall be fully vested (as of the date of the Change in Control) in all shares of restricted stock, performance awards, stock appreciation rights and stock options granted or awarded under this Plan and any and all restrictions or performance requirements on the issuance, exercise or sale of said grants, awards, shares or rights under said restricted stock awards, stock performance awards, stock appreciation rights and stock options shall be waived or removed as of the date of the Change in Control. For purposes of this Plan, a Change in Control shall be deemed to occur when and if: e. Any Person (meaning any individual, firm, Corporation, partnership, trust or other entity, and includes a "group" (as that term is used in Sections 13(d) and 14(d) of the Act), but excludes Continuing Directors (as defined below) and benefit plans sponsored by the Company): (1) makes a tender or exchange offer for any shares of the Company's outstanding voting securities at any point in time (the "Company Stock") pursuant to which any shares of the Company's Stock are purchased; or (2) together with its "affiliates" and "associates" (as those terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934 (the "Act")) becomes the "beneficial owner" (within the meaning of Rule 13d-3 under the Act) of at least 20% of Company's Stock; or f. the stockholders of the Company approve a definitive agreement or plan to merge or consolidate the Company with or into another unaffiliated corporation, to sell or otherwise dispose of all or substantially all of its assets, or to liquidate the Company; or g. a majority of the members of the Board become individuals other than Continuing Directors (as defined below). A "Continuing Director" means: (a) any member of the Board as of June 8, 1995, and (b) any other member of the Board, from time to time, who was (i) nominated for election by the Board, or (ii) appointed by the Board to fill a vacancy on the Board or to fill a newly-created directorship, in each case excluding any individual nominated or appointed (y) at a Board meeting at which the majority of directors present are not Continuing Directors or (z) by unanimous written action of the Board unless a majority or the directors taking such action are Continuing Directors. Amendment adopted July 9, 1996 to amend paragraph 5(c) to read as follows: c. PAYMENT. Payment may be made in cash, or by such other form or forms as determined by the Committee, including shares of Common Stock, withholding of shares of Common Stock that would otherwise be issued, a cashless exercise program of a broker or agent, or any combination thereof as determined by the Committee, which has a fair market value which is not less than the option price on the date of exercise. EX-10.G 5 EXHIBIT 10(G) - INCENTIVE PLAN 1995 Exhibit 10(g) NORSTAN, INC. 1995 LONG-TERM INCENTIVE PLAN As Amended Amendment adopted July 9, 1996 adding the following paragraph (d) to Section 8: d. Notwithstanding the foregoing provisions of Section 8, the Committee may impose such additional restrictions, limitations or requirements as it deems appropriate on the vesting of any Award in the event of a Change in Control before such Award shall be deemed to be fully vested. In the event that no such additional restrictions, limitations or requirements on the vesting of any Award in the event of a Change in Control are imposed in the Award Agreement, the Change in Control provisions set forth in the preceding paragraphs of this Section 8 shall govern such Award. EX-11 6 EXHIBIT 11 - STMT COMPUTATION EXHIBIT 11 NORSTAN, INC. AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE (In Thousands, Except Per Share Amounts) YEARS ENDED APRIL 30, -------------------------------- 1996 1995 1994 ---------- ---------- ---------- PRIMARY EARNINGS PER SHARE - Weighted average number of issued shares outstanding 8,526 8,242 8,018 Effect of: 1986 Long-Term Incentive Plan 398 414 404 Restated Non-Employee Directors' Stock Plan 96 82 70 Employee Stock Purchase Plan 8 12 12 ---------- ---------- ---------- Shares outstanding used to compute primary earnings per share 9,028 8,750 8,504 ---------- ---------- ---------- ---------- ---------- ---------- Net income $ 8,489 $ 7,063 $ 5,612 ---------- ---------- ---------- ---------- ---------- ---------- Primary earnings per share $ .94 $ .81 $ .66 ---------- ---------- ---------- ---------- ---------- ---------- YEARS ENDED APRIL 30, -------------------------------- 1996 1995 1994 ---------- ---------- ---------- FULLY DILUTED EARNINGS PER SHARE - Weighted average number of shares used for primary earnings per share 9,028 8,750 8,504 Effect of: 1986 Long-Term Incentive Plan 8 6 12 Restated Non-Employee Directors' Stock Plan 2 2 2 Employee Stock Purchase Plan - 2 6 ---------- ---------- ---------- Shares outstanding used to compute fully diluted earnings per share 9,038 8,760 8,524 ---------- ---------- ---------- ---------- ---------- ---------- Net income $ 8,489 $ 7,063 $ 5,612 ---------- ---------- ---------- ---------- ---------- ---------- Fully diluted earnings per share $ .94 $ .81 $ .66 ---------- ---------- ---------- ---------- ---------- ---------- 45 EX-22 7 EXHIBIT 22 - SUBSIDIARIES EXHIBIT 22 SUBSIDIARIES OF NORSTAN, INC. Percentage of State of Voting Securities Name Incorporation Owned by the Company - ---- ------------- -------------------- Norstan Communications, Inc. Minnesota 100% Norstan Financial Services, Inc. Minnesota 100% Norstan Canada Inc. Minnesota 100% Norstan Network Services, Inc. Minnesota 100% Norstan Network Services, Inc. of New Hampshire New Hampshire 100% Norstan Information Systems, Inc. Minnesota 100% Summit Gear, Inc. Minnesota 100% Connect Computer Company Minnesota 100% 46 EX-23.1 8 EXHIBIT 23.1 - CONSENT ARTHUR ANDERSON EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K into the Company's previously filed Registration Statements on Form S-8 relating to the 1986 Long- Term Incentive Plan of Norstan, Inc. (Registration Nos. 33-30323 and 33-72928), the 1990 Employee Stock Purchase and Bonus Plan of Norstan, Inc. (Registration Nos. 33-32310, 33-44470 and 33-72926), the 1995 Long-Term Incentive Plan of Norstan, Inc. (Registration No. 33-62957), and the Restated Non-Employee Directors' Stock Plan of Norstan, Inc. (Registration No. 33-62971). ARTHUR ANDERSEN LLP Minneapolis, Minnesota, July 25, 1996 47 EX-27 9 EXHIBIT 27 - FDS
5 1,000 12-MOS APR-30-1996 MAY-01-1996 APR-30-1996 1,133 0 56,802 1,079 10,964 94,208 75,126 40,815 160,988 69,309 15,961 0 0 872 66,645 160,988 176,992 321,364 130,363 229,980 75,884 0 1,351 14,149 5,660 8,489 0 0 0 8,489 .94 .94
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