-----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, I5yDGNJmgj/4eNkWtDJvTWmqBmP0nYZ4xcSEQR1dYcTzwBxz5Z8PZyJpQGL1Lciq PUNlgq6Cbmg5rOrM+V2yqA== 0000912057-97-025226.txt : 19970730 0000912057-97-025226.hdr.sgml : 19970730 ACCESSION NUMBER: 0000912057-97-025226 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19970430 FILED AS OF DATE: 19970729 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-08141 FILM NUMBER: 97646673 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-K 1 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED APRIL 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-8141 NORSTAN, INC. (Exact name of registrant as specified in its chapter) MINNESOTA 41-0835746 - ------------------------------------- ------------------------------------ (State of incorporation) (I.R.S. Employer identification No.) 605 NORTH HIGHWAY 169, TWELFTH FLOOR, PLYMOUTH, MINNESOTA 55441 (Address of principal executive offices) The Company's phone number: 612-513-4500 The Company's internet address: www.norstan.com Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK ($.10 PAR VALUE PER SHARE) COMMON STOCK PURCHASE RIGHTS - ------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of June 30, 1997, 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 $86,162,099. As of June 30, 1997, there were outstanding 9,426,503 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.................................................................... 4 Products and Services.............................................................. 4 Acquisitions....................................................................... 7 Marketing and Sales................................................................ 7 Customers and Customer Service..................................................... 8 Suppliers: Relationship with Siemens............................................... 8 Backlog............................................................................ 9 Competition........................................................................ 9 Canadian Operations................................................................ 9 Government Regulation.............................................................. 10 Employees.......................................................................... 10 General............................................................................ 11 ITEM 2. Properties........................................................................... 12 ITEM 3. Legal Proceedings.................................................................... 12 ITEM 4. Submission of Matters to a Vote of Security Holders.................................. 12 PART II ITEM 5. Market for the Company's Common Equity and Related Stockholder Matters............... 13 ITEM 6. Selected Consolidated Financial Data................................................. 14 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for the Fiscal Years 1997, 1996, and 1995.............................. 15 ITEM 8. Financial Statements and Supplementary Data.......................................... 20 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................................................................ 41 PART III ITEM 10. Directors and Executive Officers of the Registrant................................... 41 ITEM 11. Executive Compensation............................................................... 41 ITEM 12. Security Ownership of Certain Beneficial Owners and Management....................... 41 ITEM 13. Certain Relationships and Related Transactions....................................... 41 PART IV ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 42 SIGNATURES..................................................................................... 43
i PART I ITEM 1. BUSINESS. Norstan, Inc. (the Company) is a single-source technology provider creating integrated voice, video, and data solutions for 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 (Connect) was merged into an acquisition subsidiary and as the surviving corporation became a wholly owned subsidiary of the Company in June 1996. Norstan International, Inc. (NII) was incorporated in 1997. 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 1997, ROLM's name was changed to Siemens Business Communication Systems, Inc. (Siemens). 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 (CLI), PictureTel Corporation (PictureTel), 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, network integration, outsourcing and facilities management services. These services, which provide the Company with an important source of recurring revenue, were approximately 49% of the Company's total revenues for fiscal 1997. Norstan's marketing strategy is to increase sales to its existing customer base by capturing a larger portion of each customer's communication and information systems budget. 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 and facilities management 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, First Bank System, Inc., 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) and Telecommunications Industry Association (TIA), national trade associations, the United States market for private branch exchange (PBX) telephone systems grew from $2.8 billion in 1994 to $3.6 billion in 1996. Over this same period, the average price per telephone line increased from an estimated $553 to $580, while the number of lines shipped increased from 5.1 million to 6.3 million. These trade associations also project the market for PBX telephone systems to grow at a compound annual rate of 8.9% from $3.6 billion in 1996 to approximately $5.1 billion in 2000, representing an increase in the number of lines shipped to over 8.3 million and an increase in the average price per line to $619. - GROWTH OF NEW COMMUNICATIONS PRODUCTS AND MARKETS. Over the past several years, a variety of new communications technologies have emerged which enhance the capabilities of traditional telephone systems making businesses more efficient and productive. Manufacturers such as Aspect, CLI 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 10.6% between 1996 and 2000. Further,MTA and TIA estimate that the market for videoconferencing products in which the Company competes was approximately $3.7 billion in 1996 and is projected to grow at a compound annual rate of 34.5% between 1996 and 2000. - 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 and networking equipment market was estimated at $32.3 billion in 1996 and is projected to grow at a compound annual rate of 15% between 1996 and 2000. As the prevalence of computer networks continues to increase, and voice, video, and data are increasingly transmitted in a digital format using the same networks, Norstan believes that demand for services related to the integration of voice, video and data networks will continue to 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 Siemens, Aspect, CLI, PictureTel, 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, enables 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 94% 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 430,000 service calls per year. - DISTRIBUTION 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 continue to expand the portion of its revenues derived from the integration of communications products and services. - MANAGED SERVICES. As communications and information systems become more complex, businesses are finding it more cost effective to outsource some or all of their communications, data, and call center needs. Norstan offers its customers a wide array of managed communication and information services with outsourcing and facilities management agreements. Norstan may provide a customer all system equipment including PBX, local and wide area networks, servers, voice messaging and conferencing equipment, staffing, both management and administrative support, allowing the customer to concentrate on their core competencies. Norstan believes the managed services solution, whether fully turnkey or simple support of internal staff, provides its customers with a single source for the management of their voice, data, and call center environments. 3 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 6,500 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 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. - STRATEGIC ALLLIANCES. The development of strategic alliances with related and complimentary vendors allows Norstan to go to the market with the expertise to provide complete packages of managed services. By aligning itself with leaders in such fields as staffing and conferencing, Norstan is able to supplement its skill sets and better meet customers' expectations. - 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 systems integration 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, call center solutions, long distance services, conferencing products, refurbished equipment, cabling, leasing, outsourcing and network integration products and services. This array of products and services allows the Company to provide single source solutions to customers' communications needs. The Company's three major business segments are: products and systems, telecommunications services and financial services. Products and systems include the sale of new products and upgrades, as well as refurbished equipment and contributed approximately 50.8%, 55.0% and 57.4% of total revenues in fiscal 1997, 1996 and 1995, respectively. Telecommunications services include communications maintenance services, moves, adds and changes, network integration services, and long distance service and contributed approximately 47.7%, 43.2% and 40.9% of total revenues in fiscal 1997, 1996 and 1995, respectively. Financial services revenues result primarily from leasing activities and contributed approximately 1.5%, 1.8% and 1.7% of total revenues in fiscal 1997, 1996 and 1995, respectively. The products and services included in each of these segments are discussed below. 4 PRODUCTS AND SYSTEMS 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. 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. CALL CENTERS. 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 telephony integration (CTI), 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, Siemens 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 PROCESSING. Call processing is comprised of voice messaging and interactive voice response products. Voice messaging enables verbal communications to be sent, stored and retrieved at a later time, from a remote location, or forwarded to other parties by using a touch tone telephone. Norstan offers integrated voice messaging products from Siemens and stand alone voice messaging products from Octel and Applied Voice Technology (AVT) that are compatible with all major PBX systems. Voice messaging products range in price from approximately $5,000 to $500,000. Interactive voice response (IVR) products allow a caller to access a computer database to retrieve or input data by using a touch tone telephone. IVR 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. IVR products can also be utilized in a call center application to route calls and provide data on the call based on caller input or historical database information. Norstan began marketing IVR products in 1991 and currently markets models manufactured by Intervoice and Aspect which range in price from approximately $20,000 to $250,000. 5 CONFERENCING. The Company offers a robust array of video, voice and data conferencing products. 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 CLI since July 1991 (as of June 1, 1997, CLI merged with VTEL -Austin, TX). In addition to distributing CLI/VTEL 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, ranging from desktop video to boardroom systems. Videoconferencing products range in price from approximately $10,000 to over $100,000. Norstan also distributes Latitude Meeting Place voice/data conferencing products which allow up to 128 users from anywhere in the world to conference free of degradation of voice quality. Conferencing products range in price from $30,000 to $400,000. REFURBISHED EQUIPMENT. Since 1988, Norstan has engaged in the refurbishment and resale of previously owned Siemens products. In July 1990, the Company and Siemens entered into an agreement to refurbish and resell previously owned Siemens equipment in the United States. This agreement was renewed for an additional three-year period in October 1993 and subsequently extended to July 27, 1998. Under the agreement, Siemens pays the Company a fee for refurbishing the equipment and remarketing separate Siemens components, and the Company shares in the profit generated by this program. All refurbished equipment is certified by Siemens and covered by warranty for up to one year, depending on the type and quantity of equipment purchased. The Company and Siemens 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 Nortel (formerly Northern Telecom) equipment. In 1997, the refurbished product line was expanded to include Iwatsu, Aspect and Isotec products. TELECOMMUNICATIONS SERVICES 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. 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. 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, intranets and internets, 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 through the acquisition of Connect. See "Acquisitions" below. Norstan has approximately 320 employees focusing on data communications and is actively recruiting additional employees to continue its expansion into this area. 6 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. The Company and Sprint are currently negotiating a new agreement. 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. 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. FINANCIAL SERVICES 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 1,250 leases. At the time of inception, the average lease transaction is approximately $50,000 and has a term of from 36 to 60 months. The Company financed over $31.5 million in customer equipment purchases for fiscal 1997. 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, 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 421 sales and marketing personnel within the United States and Canada including 300 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. 7 Norstan's sales representatives and specialists use a comprehensive approach in 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 semi-annual news magazines 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 94% 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 430,000 service calls per year, approximately 44% of which are addressed remotely. For calls requiring immediate on-site service and support, Norstan promptly dispatches 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, First Bank System, Inc., 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 in 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 1997, 1996 or 1995. SUPPLIERS: RELATIONSHIP WITH SIEMENS Norstan's principal suppliers include Siemens, Aspect, CLI, PictureTel, 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. 8 Norstan has been a distributor of Siemens communications equipment since 1976 and is Siemens' largest independent distributor. Siemens is the third largest manufacturer of PBX systems in the United States, accounting for an estimated 13% of United States sales of PBX systems in 1996, behind Lucent Technologies and Nortel (formerly Northern Telecom) which accounted for an estimated 30% and 28%, respectively. In July 1993, the Company executed a new distributor agreement with Siemens, 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 Siemens communications equipment in Minnesota, Wisconsin, Iowa, North Dakota, South Dakota, Ohio, Kentucky, Arizona, New Mexico, Oklahoma, Louisiana, Nevada, Texas, Arkansas, Mississippi, Florida, Alabama, parts of Nebraska, 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 Siemens products. In addition, Norstan and Siemens have an agreement under which Norstan is an authorized agent for the refurbishment and sale of previously owned Siemens equipment in the United States. This agreement also runs through July 1998. The Company and Siemens are currently negotiating a new agreement. The Company believes that any interruption of its business relationship with Siemens would have a material adverse effect on its business. BACKLOG As of April 30, 1997, the Company had signed contracts for products and services aggregating approximately $47.3 million, substantially all of which are expected to be fulfilled by the end of fiscal 1998. As of April 30, 1996, the Company had signed contracts aggregating approximately $46.9 million, substantially all of which were fulfilled by the end of fiscal 1997. 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 and Lucent, the seven Regional Bell Holding Companies (RHCs) and Nortel, have longer operating histories and significantly greater financial, technical, sales, marketing and other resources, as well as greater name recognition and larger distribution networks, than the Company. The passage of the Telecommunications Act of February 1996 has enabled 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 Siemens' communications business of IBM Canada Limited. Approximately 8%, 11% and 10% of the Company's revenues were generated by its Canadian operations for fiscal 1997, 1996 and 1995, respectively. On November 30, 1994, the Company acquired substantially all of the assets of Renaissance Investments, Ltd. 9 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 46 states, and is currently pursuing certification for intrastate services in two 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 2,167 employees as of April 30, 1997, consisting of 367 sales and marketing personnel, 1,367 operations, service and installation employees, and 433 administrative employees. Of these employees, approximately 150 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 206 employees as of April 30, 1997, consisting of 54 sales and marketing personnel, 103 operations, service and installation employees, and 49 administrative personnel. The Company considers relations with the Canadian employees to be good and has not experienced any work stoppages. 10 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 telecommunications systems and electronic telephone sets supplied by Siemens. Purchases of such equipment from Siemens 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 Siemens 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 Siemens, 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. 11 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. 12 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. PRICE RANGE OF COMMON STOCK The Company's common stock is traded on the National Over-the-Counter market and is listed on the national market system of the National Association of Securities Dealers' Automated Quotations System ("NASDAQ") under the symbol "NRRD". The following table sets forth the high and low 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, 1997: HIGH LOW First Quarter 19 1/2 13 1/8 Second Quarter 20 1/4 15 Third Quarter 18 3/4 15 1/2 Fourth Quarter 17 1/4 13 3/4 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 (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 30, 1997, there were approximately 1,600 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. ISSUANCE OF UNREGISTERED SECURITIES The Company issued 137,758 unregistered shares of its common stock on June 4, 1996, as part of the purchase price paid for Connect Computer Company. These shares had a fair market value of $2,000,000 and were issued to Connect shareholders (21 shareholders). These shares are being held in escrow on behalf of each Connect shareholder until June 4, 1998. During this escrow period, the shareholders have all the rights of a shareholder, including the right to vote such shares, however, they may not sell, transfer, pledge or otherwise encumer the shares. Such shares were issued in an exempt transaction pursuant to Section 4(2) of the Securities Act of 1933 as a transaction by an issuer not involving a public offering. There were no underwriters involved in this transaction. 13 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. The selected consolidated financial data set forth below as of and for each of the fiscal years in the five-year period ended April 30, 1997 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, ------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Revenues.................................................... $398,075 $321,364 $290,245 $231,899 $195,856 Cost of sales............................................... 289,560 229,980 202,107 155,676 128,228 -------- -------- -------- -------- -------- Gross margin................................................ 108,515 91,384 88,138 76,223 67,628 Selling, general and administrative expenses................ 89,310 75,973 74,725 65,137 58,609 -------- -------- -------- -------- -------- Operating income............................................ 19,205 15,411 13,413 11,086 9,019 Interest expense............................................ (1,866) (1,351) (1,587) (832) (841) Interest and other income (expense), net.................... (22) 89 (54) (106) 323 -------- -------- -------- -------- -------- Income before cumulative effect of accounting change and provision for income taxes................................ 17,317 14,149 11,772 10,148 8,501 Provision for income taxes.................................. 7,100 5,660 4,709 4,161 3,401 -------- -------- -------- -------- -------- Income before cumulative effect of accounting change........ 10,217 8,489 7,063 5,987 5,100 Cumulative effect of change in accounting for income taxes (1)................................................. -- -- -- (375) -- -------- -------- -------- -------- -------- Net income.................................................. $ 10,217 $ 8,489 $ 7,063 $ 5,612 $ 5,100 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Net income per common and common equivalent share: Income before cumulative effect of accounting change...... $ 1.08 $ .94 $ .81 $ .70 $ .62 Cumulative effect of change in accounting for income taxes (1)............................................... -- -- -- (.04) -- -------- -------- -------- -------- -------- Net income per share (2).................................... $ 1.08 $ .94 $ .81 $ .66 $ .62 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Weighted average number of common and common equivalent shares outstanding (2)................................... 9,435 9,028 8,750 8,504 8,166 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- AS OF APRIL 30, ------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- BALANCE SHEET DATA: Working capital............................................. $ 37,484 $ 24,899 $ 32,183 $ 32,961 $ 19,160 Total assets................................................ 224,173 160,988 161,709 149,662 120,731 Long-term debt, net of current maturities................... 18,284 -- 16,465 18,218 11,555 Discounted lease rentals, net of current maturities......... 24,043 15,961 16,313 18,845 12,785 Shareholders' equity........................................ 84,370 67,517 56,984 47,658 40,594 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. 14 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 for 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 including network integration services. 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. In June 1996, the Company acquired all of the common stock of Connect Computer Company (Connect) for consideration of approximately $15 million. This acquisition represented revenue of over $33 million in fiscal 1997, leading the growth of the Company's integration services. 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 49% of fiscal 1997 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. 15 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. 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, ------------------------------- 1997 1996 1995 --------- --------- --------- Revenues: Sales of products and systems................ 50.8% 55.0% 57.4% Telecommunications services.................. 47.7 43.2 40.9 Financial services........................... 1.5 1.8 1.7 --- --- --- Total revenues............................. 100.0 100.0 100.0 Cost of sales.................................. 72.7 71.6 69.6 --- --- --- Gross margin................................... 27.3 28.4 30.4 Selling, general and administrative expenses... 22.5 23.6 25.8 --- --- --- Operating income............................... 4.8% 4.8% 4.6% --- --- --- --- --- --- Net income..................................... 2.6% 2.6% 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, ------------------------------- 1997 1996 1995 --------- --------- --------- Gross margin percentage: Sales of products and systems............... 25.9% 26.3% 26.1% Telecommunications services................. 27.6 29.8 35.4 Financial services.......................... 64.2 60.6 53.8 FISCAL YEARS ENDED APRIL 30, 1997, 1996 AND 1995 REVENUES. Total revenues were $398.1 million, $321.4 million and $290.2 million for the fiscal years ended April 30, 1997, 1996 and 1995, respectively, representing an increase of 23.9% for fiscal 1997 as compared to fiscal 1996 and an increase of 10.7% for fiscal 1996 as compared to fiscal 1995. Sales of products and systems increased $25.2 million, or 14.2%, for fiscal 1997 as compared to fiscal 1996, and $10.3 million, or 6.2%, for fiscal 1996 as compared to fiscal 1995. The increases for fiscal 1997 and 1996 as compared to prior years, result primarily from increased sales volume in refurbished equipment, cabling operations and videoconferencing. Revenues from telecommunications services increased $51.1 million, or 36.8% for fiscal 1997 as compared to fiscal 1996, and $20.2 million, or 17.0%, for fiscal 1996 as compared to fiscal 1995. The increases in fiscal 1997 and 1996 result primarily from the growth in network integration services including the Connect acquisition. In addition, the growth in the Company's installed base of customers and expanded array of products and services has led to increased activity in communication maintenance services, moves, adds, and changes. The Company also achieved significant growth in revenues from long distance services and outsourcing arrangements. Revenues from financial services increased $394,000, or 7.0%, for fiscal 1997 as compared to fiscal 1996, and $634,000, or 12.7%, for fiscal 1996 as compared to fiscal 1995. The increase in revenues from financial services in both years is attributable to the increased size of the Company's leasing base, which is derived primarily from sales of products and systems. 16 GROSS MARGIN. The Company's gross margin was $108.5 million, $91.4 million, and $88.1 million, for the fiscal years ended April 30, 1997, 1996 and 1995, respectively. As a percent of total revenues, gross margin was 27.3% for fiscal 1997 compared to 28.4% for fiscal 1996 and 30.4% for fiscal 1995. Gross margin as a percent of revenues for the sale of products and systems was 25.9% for fiscal 1997 as compared to 26.3% for fiscal 1996 and 26.1% for fiscal 1995. 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 27.6% for fiscal 1997 as compared to 29.8% for fiscal 1996 and 35.4% for fiscal 1995. The decrease in gross margin for fiscal 1997 as compared to 1996 is primarily due to lower gross margins in the network integration services provided by Connect, relative to the Company's other services. However, operating margins generated by Connect have been higher than the Company's other service lines. The decrease for fiscal 1996 as compared to fiscal 1995 resulted 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 64.2% for fiscal 1997 as compared to 60.6% for fiscal 1996 and 53.8% for fiscal 1995. The increase in gross margin percentage for fiscal 1997 as compared to fiscal 1996 and fiscal 1996 as compared to fiscal 1995, is the result of decreasing interest rates. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were $89.3 million, $76.0 million and $74.7 million for the fiscal years ended April 30, 1997, 1996 and 1995, respectively, representing an increase of 17.6% for fiscal 1997 as compared to fiscal 1996 and 1.7% for fiscal 1996 as compared to fiscal 1995. As a percent of revenues, selling, general and administrative expenses declined to 22.5% for fiscal 1997 as compared to 23.6% for fiscal 1996 and 25.7% for fiscal 1995. 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 $1.9 million for fiscal 1997 as compared to $1.4 million for fiscal 1996 and $1.6 million for fiscal 1995. Weighted average interest rates under the Company's revolving long-term credit agreements were 7.5% for fiscal 1997 as compared to 8.2% for fiscal 1996 and 7.8% for fiscal 1995. Average month end borrowings outstanding under the Company's revolving long-term credit agreements (excluding amounts borrowed to finance leasing activities) were $24.5 million for fiscal 1997, $15.8 million for fiscal 1996 and $20.9 million for fiscal 1995. The Company's effective income tax rate was 41% for fiscal 1997 and 40% for fiscal 1996 and fiscal 1995. The Company's effective tax rate differs from the federal statutory rate primarily due to state income taxes. NET INCOME. Net income was $10.2 million or $1.08 per share in 1997, $8.5 million or $.94 per share in 1996, and $7.1 million or $.81 per share in 1995. 17 LIQUIDITY AND CAPITAL RESOURCES Working capital increased to $37.5 million at April 30, 1997 from $24.9 million at April 30, 1996. Net cash provided by operating activities was $18.7 million for the fiscal year ended April 30, 1997 as compared to $28.0 million for fiscal year 1996. For the fiscal year ended April 30, 1997, net income of $10.2 million, depreciation and amortization of $17.0 million, increased accounts payable and accrued liabilities of $9.6 million, decreased inventories of $3.5 million, and increased billings in excess of costs and estimated earnings of $1.2 million were partially offset by increased costs and estimated earnings in excess of billings of $6.4 million and increased accounts receivable of $16.3 million. 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 the 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 1997 were $24.2 million as compared to $14.4 million in fiscal 1996 and $17.3 million in fiscal 1995. These expenditures were primarily for telecommunications equipment used as spare parts, computer equipment, facility expansion and telecommunication equipment used in outsourcing arrangements. The Company expects capital expenditures in fiscal 1998 to be approximately $20 to $25 million. The Company has also made a significant investment in lease contracts with its customers. The additional investment made in lease contracts in fiscal 1997 totaled $31.5 million. Net lease receivables increased to $49.4 million at April 30, 1997 from $39.9 million at April 30, 1996. The Company expects to make an additional investment in lease contracts in fiscal 1998 of approximately $25 to $30 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 $592,000, totaled $37.9 million at April 30, 1997. Interest rates on these credit agreements at April 30, 1997 ranged from 6.0% to 10.0%, while payments are due in varying monthly installments through June 2003. 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 $15.0 million, consisting of $12.0 million cash and $2.0 million of Norstan common stock, and $1.0 million payable to certain members of Connect management under non-compete agreements. In addition, the Company has agreed to pay up to $4.0 million in contingent consideration over a three year period ending April 30, 1999, if certain operating income levels are achieved (as of April 30, 1997, $2.0 million of such consideration has been accrued). This transaction resulted in the recording of $16.4 million in goodwill which is being amortized on a straight-line basis over 15 years. The Company has a $40.0 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 and $6.0 million may be used to support the leasing activities of NFS and Norstan Canada, respectively. Borrowings under this agreement are due July 31, 1999 and bear interest at a bank's reference rate (8.50% and 8.25% at April 30, 1997 and April 30, 1996, respectively), except for LIBOR, CD and commercial paper based options which generally bear interest at a rate lower than the bank's reference rate. Total consolidated borrowings were $17,920,000 at April 30, 1997. There were no borrowings under this agreement at April 30, 1996. There were no borrowings on account of NFS or Norstan Canada under this agreement at April 30, 1997 or April 30, 1996. 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. 18 RECENTLY ISSUED ACCOUNTING STANDARDS Effective May 1, 1996, the Company adopted the provisions of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121), which 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. The adoption of SFAS No. 121 did not have a material impact on the Company's financial position or results of operations. In March 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share"(SFAS No. 128), which changes the way companies calculate their earnings per share data (EPS). SFAS No. 128 replaces primary EPS with basic EPS. Basic EPS is computed by dividing reported earnings by weighted average shares outstanding, excluding potentially dilutive securities. Fully diluted EPS, termed diluted EPS under SFAS No. 128, is also to be disclosed. The Company is required to adopt SFAS No. 128 in fiscal 1998 at which time all prior year EPS are to be restated in accordance with SFAS No. 128. If the Company had adopted the pronouncement during fiscal 1997, the effect of this accounting change on reported EPS data would have been as follows: YEARS ENDED APRIL 30, ------------------------------- 1997 1996 1995 --------- --------- --------- Primary EPS as reported...................... $ 1.08 $ .94 $ .81 Effect of SFAS No. 128....................... .04 .06 .05 --------- --------- --------- Basic EPS as restated........................ $ 1.12 $ 1.00 $ .86 --------- --------- --------- --------- --------- --------- Fully diluted EPS as reported................ $ -- $ -- $ -- Effect of SFAS No. 128....................... 1.08 .94 .81 --------- --------- --------- Diluted EPS as restated...................... $ 1.08 $ .94 $ .81 --------- --------- --------- --------- --------- --------- FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements including those in this Form 10-K.. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, developments and results of the Company's business include the following: national and regional economic conditions; pending and future legislation affecting the 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. 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. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENTS: PAGE Report of Independent Public Accountants ............................. 21 Consolidated Statements of Operations for the years ended April 30, 1997, 1996 and 1995 ..................................... 22 Consolidated Balance Sheets as of April 30, 1997 and 1996............. 23 Consolidated Statements of Shareholders' Equity for the years ended April 30, 1997, 1996 and 1995...................................... 25 Consolidated Statements of Cash Flows for the years ended April 30, 1997, 1996 and 1995...................................... 26 Notes to Consolidated Financial Statements............................ 27 Selected Quarterly Financial Data (unaudited)......................... 40 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. 20 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, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended April 30, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 1997 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Minneapolis, Minnesota, June 3, 1997 21 NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED APRIL 30, ---------------------------- 1997 1996 1995 -------- -------- -------- REVENUES: Sale of products and systems.............................. $202,199 $176,992 $166,675 Telecommunications services............................... 189,847 138,737 118,569 Financial services........................................ 6,029 5,635 5,001 -------- -------- -------- Total revenues.......................................... 398,075 321,364 290,245 -------- -------- -------- COST OF SALES: Products and systems...................................... 149,860 130,363 123,158 Telecommunications services............................... 137,540 97,396 76,641 Financial services........................................ 2,160 2,221 2,308 -------- -------- -------- Total cost of sales..................................... 289,560 229,980 202,107 -------- -------- -------- GROSS MARGIN................................................ 108,515 91,384 88,138 Selling, general and administrative expenses expenses..... 89,310 75,973 74,725 -------- -------- -------- OPERATING INCOME............................................ 19,205 15,411 13,413 Interest expense.......................................... (1,866) (1,351) (1,587) Interest and other income (expense), net.................. (22) 89 (54) -------- -------- -------- INCOME BEFORE PROVISION FOR INCOME TAXES.................... 17,317 14,149 11,772 Provision for income taxes................................ 7,100 5,660 4,709 -------- -------- -------- NET INCOME.................................................. $ 10,217 $ 8,489 $ 7,063 -------- -------- -------- -------- -------- -------- NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE........... $ 1.08 $ .94 $ .81 -------- -------- -------- -------- -------- -------- WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING........................................ 9,435 9,028 8,750 -------- -------- -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. 22 NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSETS
APRIL 30, ------------------ 1997 1996 -------- -------- CURRENT ASSETS: Cash...................................................... $ 5,147 $ 1,133 Accounts receivable, net of allowances for doubtful accounts of $1,783 and $1,079........................... 76,027 55,723 Current lease receivables................................. 19,595 15,316 Inventories............................................... 7,636 10,964 Costs and estimated earnings in excess of billings of $11,948 and $13,528..................................... 11,556 5,202 Deferred income tax benefits.............................. 3,954 3,427 Prepaid expenses, deposits and other...................... 2,925 2,443 -------- -------- TOTAL CURRENT ASSETS.................................... 126,840 94,208 -------- -------- PROPERTY AND EQUIPMENT: Machinery and equipment................................... 93,895 75,126 Less-accumulated depreciation and amortization............ (48,409) (40,815) -------- -------- NET PROPERTY AND EQUIPMENT.............................. 45,486 34,311 -------- -------- OTHER ASSETS: Lease receivables, net of current portion................. 29,775 24,556 Goodwill, net of amortization of $5,749 and $3,991........ 21,958 7,421 Other..................................................... 114 492 -------- -------- TOTAL OTHER ASSETS...................................... 51,847 32,469 -------- -------- $224,173 $160,988 -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated balance sheets. 23 NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) LIABILITIES AND SHAREHOLDERS' EQUITY
APRIL 30, ------------------ 1997 1996 -------- -------- CURRENT LIABILITIES: Current maturities of long-term debt...................... $ 389 $ - Current maturities of discounted lease rentals............ 13,878 12,202 Accounts payable.......................................... 24,486 15,053 Deferred revenue.......................................... 18,680 17,856 Accrued - Salaries and wages...................................... 13,065 10,424 Warranty costs.......................................... 2,348 1,655 Other liabilities....................................... 10,333 6,880 Income taxes payable...................................... 388 668 Billings in excess of costs and estimated earnings of $12,829 and $12,595................................... 5,789 4,571 -------- -------- TOTAL CURRENT LIABILITIES............................. 89,356 69,309 -------- -------- LONG-TERM DEBT, NET OF CURRENT MATURITIES................................. 18,284 - DISCOUNTED LEASE RENTALS, NET OF CURRENT MATURITIES................................. 24,043 15,961 DEFERRED INCOME TAXES....................................... 8,120 8,201 -------- -------- COMMITMENTS AND CONTINGENCIES (Notes 3 and 10) SHAREHOLDERS' EQUITY: Common stock - $.10 par value; 40,000,000 authorized shares; 9,387,458 and 8,717,538 shares issued and outstanding............................................. 939 872 Capital in excess of par value............................ 34,556 27,619 Retained earnings......................................... 50,192 39,975 Unamortized cost of stock................................. (142) (94) Foreign currency translation adjustments.................. (1,175) (855) -------- -------- TOTAL SHAREHOLDERS' EQUITY............................ 84,370 67,517 -------- -------- $224,173 $160,988 -------- -------- -------- --------
The accompanying notes are an integral part of these consolidated balance sheets. 24 NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED APRIL 30 (IN THOUSANDS)
COMMON STOCK CAPITAL FOREIGN -------------------- IN EXCESS UNAMORTIZED CURRENCY OUTSTANDING OF PAR RETAINED COST OF TRANSLATION SHARES AMOUNT VALUE EARNINGS STOCK ADJUSTMENTS ----------- ------ --------- -------- ----------- ----------- 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....... 4,359 436 (436) - - - Net income.............................. - - - 8,489 - - ----- ------ --------- -------- ----------- ----------- BALANCE - APRIL 30, 1996................ 8,718 872 27,619 39,975 (94) (855) Stock issued for employee benefit plans................................. 531 53 4,951 - (48) - Stock issued for acquisition............ 138 14 1,986 - - - Foreign currency translation adjustments........................... - - - - - (320) Net income.............................. - - - 10,217 - - ----- ------ --------- -------- ----------- ----------- BALANCE - APRIL 30, 1997................ 9,387 $939 $34,556 $50,192 $(142) $(1,175) ----- ------ --------- -------- ----------- ----------- ----- ------ --------- -------- ----------- -----------
The accompanying notes are an integral part of these consolidated financial statements. 25 NORSTAN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED APRIL 30, ------------------------------- 1997 1996 1995 --------- --------- --------- OPERATING ACTIVITIES: Net income................................................ $ 10,217 $ 8,489 $ 7,063 Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization........................... 16,964 12,517 10,830 Deferred income taxes................................... (45) (465) (132) Changes in operating items, net of acquisition effects: Accounts receivable................................... (16,319) (3,961) (7,807) Inventories........................................... 3,532 167 1,034 Costs and estimated earnings in excess of billings.... (6,371) 5,715 4,150 Prepaid expenses, deposits and other.................. (386) (111) (503) Accounts payable and accrued liabilities.............. 9,561 (151) 4,567 Deferred revenue...................................... 468 2,815 1,405 Billings in excess of costs and estimated earnings.... 1,223 2,445 (866) Income taxes payable.................................. (144) 510 448 --------- --------- --------- Net cash provided by operating activities............... 18,700 27,970 20,189 --------- --------- --------- INVESTING ACTIVITIES: Additions to property and equipment, net.................. (24,219) (14,385) (17,313) Cash paid for acquisitions, net of cash acquired.......... (11,794) - (726) Investment in lease contracts............................. (31,545) (17,622) (16,246) Collections from lease contracts.......................... 21,949 18,240 17,746 Other, net................................................ 314 (178) 13 --------- --------- --------- Net cash used for investing activities.................. (45,295) (13,945) (16,526) --------- --------- --------- FINANCING ACTIVITIES: Repayment of short-term debt.............................. - - (423) Repayment of debt assumed in acquisition.................. (1,743) - - Borrowings under revolving credit agreements.............. 227,715 112,435 122,950 Repayments under revolving credit agreements.............. (209,795) (128,900) (124,610) Borrowings on discounted lease rentals.................... 22,396 13,173 9,056 Repayments of discounted lease rentals.................... (12,583) (12,767) (11,631) Borrowings of other long-term debt........................ 105 - - Repayments of other long-term debt........................ (366) (93) (229) Proceeds from sale of common stock........................ 3,017 1,615 1,353 Tax benefits from shares issued to employees.............. 1,869 340 412 --------- --------- --------- Net cash provided by (used for) financing activities.... 30,615 (14,197) (3,122) --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (6) (3) 12 --------- --------- --------- NET INCREASE (DECREASE) IN CASH............................. 4,014 (175) 553 CASH, BEGINNING OF YEAR..................................... 1,133 1,308 755 --------- --------- --------- CASH, END OF YEAR........................................... $ 5,147 $ 1,133 $ 1,308 --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these consolidated financial statements. 26 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), Connect Computer Company (Connect), Norstan Financial Services, Inc. (NFS), Norstan Network Services, Inc. (NNS), Norstan Network Services, Inc. of New Hampshire, and Norstan International, Inc. (NII). Norstan is a full service communications systems provider creating integrated 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 Business Communication Systems, Inc. (Siemens), formerly 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, video/audio conferencing 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 Siemens, the Company purchases communications equipment and products for field application and installation. The current distributor agreement with Siemens extends through July 1998. The Company believes that any interruption of its business relationship with Siemens 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. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the periods presented. Estimates are used for such items as allowances for doubtful accounts, inventory reserves, depreciable lives of property and equipment, warranty reserves and others. Ultimate results could differ from those estimates. REVENUE RECOGNITION: 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. 27 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): 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. 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 are removed from the respective accounts and any gain or loss is reflected in the results of operations. For capitalized telecommunications equipment used as spare parts, the composite depreciation method is used whereby the cost of property retired less any salvage is charged against accumulated depreciation and no gain or loss is recognized. The net book value of capitalized telecommunications equipment was $16,605,000 and $14,933,000 as of April 30, 1997 and 1996, 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. GOODWILL: Goodwill is being amortized on a straight-line basis over 15 - 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 goodwill balance may not be fully recoverable. In the event that factors indicate that the goodwill in question should be evaluated for possible impairment, a determination of the overall recoverability would be made. FOREIGN CURRENCY: For the Company's foreign operations, assets and liabilities are translated at year-end exchange rates, and revenues and expenses are translated at average exchange rates prevailing during the year. Translation adjustments are recorded as a separate component of shareholders' equity. INCOME TAXES: Deferred income taxes are provided for differences between the financial reporting basis and tax basis of the Company's assets and liabilities at currently enacted tax rates. SHARE DATA AND STOCK SPLIT: 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. 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. All share and per share data have been restated to reflect the stock split. 28 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, ---------------------- 1997 1996 1995 ------ ------ ------ Cash paid for: Interest........................................ $3,996 $3,608 $3,650 Income taxes.................................... 4,995 5,218 3,911 Non-cash investing and financing activities: Stock issued for acquisition.................... $2,000 $ - $ - Non-compete agreements related to acquisition... 667 - - RECENTLY ISSUED ACCOUNTING STANDARDS: Effective May 1, 1996, the Company adopted the provisions of 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), which 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. The adoption of SFAS No. 121 did not have a material impact on the Company's financial position or results of operations. In March 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share" (SFAS No. 128), which changes the way companies calculate their earnings per share data (EPS). SFAS No. 128 replaces primary EPS with basic EPS. Basic EPS is computed by dividing reported earnings by weighted average shares outstanding, excluding potentially dilutive securities. Fully diluted EPS, termed diluted EPS under SFAS No. 128, is also to be disclosed. The Company is required to adopt SFAS No. 128 in fiscal 1998 at which time all prior year EPS are to be restated in accordance with SFAS No. 128. If the Company had adopted the pronouncement during fiscal 1997, the effect of this accounting change on reported EPS data would have been as follows: YEARS ENDED APRIL 30, --------------------- 1997 1996 1995 ----- ----- ----- Primary EPS as reported......................... $1.08 $ .94 $ .81 Effect of SFAS No. 128.......................... .04 .06 .05 ----- ----- ----- Basic EPS as restated........................... $1.12 $1.00 $ .86 ----- ----- ----- ----- ----- ----- Fully diluted EPS as reported................... $ - $ - $ - Effect of SFAS No. 128.......................... 1.08 .94 .81 ----- ----- ----- Diluted EPS as restated......................... $1.08 $ .94 $ .81 ----- ----- ----- ----- ----- ----- 29 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 - 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 $15.0 million, consisting of $12.0 million in cash, $2.0 million of Norstan common stock and $1.0 million payable to certain members of Connect management under non-compete agreements. In addition, the Company agreed to pay up to $4.0 million in contingent consideration over a three year period ending April 30, 1999, if certain financial performance targets are achieved (as of April 30, 1997, $2.0 million of such consideration has been accrued). This transaction resulted in the recording of $16.4 million in goodwill which is being amortized on a straight-line basis over 15 years. The Company financed the cash portions of the acquisition through borrowings under its existing credit facility. Pro forma information in the year of acquisition has not been disclosed as such information was not materially different from the Company's results of operations. 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 $30,409,000, $15,385,000, and $14,415,000 during fiscal years ended April 30, 1997, 1996 and 1995, respectively. Leases are primarily 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, ---------------- 1997 1996 ------- ------- Cash and other.................................... $ 694 $ 1,595 Lease receivables, net............................ 47,234 35,321 ------- ------- $47,928 $36,916 ------- ------- ------- ------- LIABILITIES AND SHAREHOLDER'S EQUITY Discounted lease rentals.......................... $35,906 $25,132 Other liabilities................................. 5,442 6,787 Shareholder's equity.............................. 6,580 4,997 ------- ------- $47,928 $36,916 ------- ------- ------- ------- STATEMENTS OF OPERATIONS FOR THE YEARS ENDED APRIL 30, ----------------------------- 1997 1996 1995 ------- ------- ------- Interest and other income............... $ 5,417 $ 5,081 $ 4,656 Interest expense........................ (1,770) (1,788) (2,017) Other expenses.......................... (1,204) (1,454) (1,037) ------- ------- ------- Income before provision for income taxes............................... 2,443 1,839 1,602 Provision for income taxes............ 859 394 629 ------- ------- ------- Net income.............................. $ 1,584 $ 1,445 $ 973 ------- ------- ------- ------- ------- ------- 30 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, ------------------ 1997 1996 -------- -------- Gross lease receivables........................... $ 52,124 $ 38,484 Residual values................................... 8,634 7,390 Less: Unearned income................................. (11,679) (8,803) Allowance for financing losses.................. (1,845) (1,750) -------- -------- Total lease receivables - net..................... 47,234 35,321 Less - current maturities......................... (18,894) (14,157) -------- -------- Long-term lease receivables....................... $ 28,340 $ 21,164 -------- -------- -------- -------- The aggregate amount of gross lease receivables maturing in each of the five years following April 30, 1997 is as follows (in thousands): YEARS ENDING APRIL 30, AMOUNT - -------------------------------------------------- ------- 1998.............................................. $19,332 1999.............................................. 14,891 2000.............................................. 9,560 2001.............................................. 5,528 2002 and thereafter............................... 2,813 ------- $52,124 ------- ------- The consolidated balance sheets as of April 30, 1997 and 1996 also include $9,642,000 and $6,602,000, respectively, of net lease receivables from customers of NCI and NCDA. NOTE 5 - DEBT OBLIGATIONS: LONG-TERM DEBT: Long-term debt consists of the following (in thousands): AS OF APRIL 30, ---------------- 1997 1996 ------- ------- Bank Financing: Revolving Credit Agreement...................... $ 6,920 $ - Certificates of Deposit......................... 11,000 - Capital Lease Obligations......................... 753 - ------- ------- Total Long-Term Debt.............................. 18,673 - Less - Current Maturities......................... 389 - ------- ------- $18,284 $ - ------- ------- ------- ------- 31 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5 - DEBT OBLIGATIONS (CONTINUED): BANK FINANCING: The Company has a $40,000,000 unsecured revolving long-term credit agreement with certain banks. Up to $15,000,000 of borrowings under this agreement may be in the form of commercial paper. In addition, up to $8,000,000 and $6,000,000 may be used to support the leasing activities of NFS and NCDA, respectively. Borrowings under this agreement are due July 31, 1999, and bear interest at the banks' reference rate (8.50% at April 30, 1997), except for LIBOR, CD and commercial paper based options which generally bear interest at a rate lower than the banks' reference rate. Total consolidated borrowings under this agreement at April 30, 1997, were $17,920,000. There were no borrowings under this agreement at April 30, 1996. There were no borrowings on account of NFS or NCDA at April 30, 1997, or April 30, 1996. Annual commitment fees on the unused portions of the credit facility are .25%. Under the agreement, the Company is required to maintain minimum levels of tangible net worth and certain other financial ratios. The Company has complied with or has obtained the appropriate waivers for such requirements as of and for the year ended April 30, 1997. SHORT-TERM BORROWINGS: In addition to borrowing funds under its revolving credit agreement, the Company periodically borrows funds from banks on a short-term basis for working capital purposes. There were no short-term borrowings outstanding as of April 30, 1997 or 1996. Short-term borrowing amounts during fiscal years 1997 and 1996 were as follows : 1997 1996 ---------- ------- Maximum amount outstanding during the year........ $2,325,000 - Average borrowings during the year................ $ 29,600 - Weighted average interest rates during the year... 8.36% - 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 June 2003. Discounted lease rentals of NFS and NCDA consisted of the following (in thousands): AS OF APRIL 30, ---------------- 1997 1996 ------- ------- Nonrecourse borrowings............................ $37,329 $26,467 Recourse borrowings............................... 592 1,696 ------- ------- Total discounted lease rentals.................... 37,921 28,163 Less - current maturities....................... (13,878) (12,202) ------- ------- $24,043 $15,961 ------- ------- ------- ------- 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 $418,000 as of April 30, 1997 and $883,000 as of April 30, 1996. 32 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, 1997 are as follows (in thousands): YEARS ENDING APRIL 30, AMOUNT - -------------------------------------------------- ------- 1998.............................................. $13,878 1999.............................................. 10,832 2000.............................................. 6,828 2001.............................................. 4,285 2002 and thereafter............................... 2,098 ------- $37,921 ------- ------- NOTE 7 - INCOME TAXES: The domestic and foreign components of income before the provision for income taxes are as follows (in thousands): YEARS ENDED APRIL 30, ------------------------- 1997 1996 1995 ------- ------- ------- Domestic.......................................... $16,215 $13,365 $11,363 Foreign........................................... 1,102 784 409 ------- ------- ------- $17,317 $14,149 $11,772 ------- ------- ------- ------- ------- ------- The provision (benefit) for income taxes consisted of the following (in thousands): YEARS ENDED APRIL 30, ------------------------- 1997 1996 1995 ------- ------- ------- Current Domestic........................................ $ 7,361 $ 5,656 $ 4,325 Foreign......................................... (216) 469 516 ------- ------- ------- 7,145 6,125 4,841 ------- ------- ------- Deferred Domestic........................................ (572) (235) 179 Foreign......................................... 527 (230) (311) ------- ------- ------- (45) (465) (132) ------- ------- ------- Provision for income taxes...................... $ 7,100 $ 5,660 $ 4,709 ------- ------- ------- ------- ------- ------- The differences between the effective tax rate and income taxes computed using the federal statutory rate were as follows: YEARS ENDED APRIL 30, ------------------------- 1997 1996 1995 ------- ------- ------- Federal statutory rate............................ 35% 35% 35% State income taxes, net of federal tax benefit.... 5 4 4 Other, net........................................ 1 1 1 ------- ------- ------- 41% 40% 40% ------- ------- ------- ------- ------- ------- 33 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7 - INCOME TAXES (CONTINUED): The Company has recorded the following net deferred income taxes as of April 30 (in thousands): 1997 1996 ------- -------- Current deferred income tax benefits.............. $ 4,865 $ 3,782 Current deferred income taxes..................... (911) (355) -------- -------- Net current deferred income tax benefits........ 3,954 3,427 -------- -------- Noncurrent deferred income tax benefits........... 24,765 18,499 Noncurrent deferred income taxes.................. (32,655) (26,476) Valuation allowance............................... (230) (224) -------- -------- Net noncurrent deferred income taxes............ (8,120) (8,201) -------- -------- Net deferred income taxes....................... $ (4,166) $ (4,774) -------- -------- -------- -------- The tax effects of significant temporary differences representing deferred tax assets and liabilities are as follows as of April 30 (in thousands): 1997 1996 ---------- ---------- Accelerated depreciation.......................... $ (30,613) $ (24,281) Amortization of intangible assets................. (497) (774) Capital leases.................................... (596) (581) Operating leases.................................. 21,990 16,400 Long-term contract costs.......................... (147) 319 Inventory reserves................................ 143 400 Allowance for doubtful accounts................... 1,470 1,111 Vacation reserves................................. 1,226 991 Warranty reserves................................. 748 450 Tax credits and carryforwards..................... 100 - Self insurance reserv............................. 578 377 Other, net........................................ 1,662 1,038 Valuation allowance............................... (230) (224) ---------- ---------- Net deferred tax liabilities.................... $ (4,166) $ (4,774) ---------- ---------- ---------- ---------- NOTE 8 - STOCK OPTIONS AND STOCK PLANS: The 1986 Long-Term Incentive Plan of Norstan, Inc. (1986 Plan) provides for the granting of non-qualified stock options, incentive stock options, and restricted stock. 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. As of September 20, 1995, no additional grants are to be issued under the 1986 Plan. The Norstan, Inc. 1995 Long-Term Incentive Plan (1995 Plan) permits the granting of non-qualified stock options, incentive stock options, stock appreciation rights and restricted stock, providing for a maximum of 1,200,000 shares to be granted as performance awards and other stock-based awards. These options are granted 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, 1997, 877,500 shares were available for future grants. 34 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 - STOCK OPTIONS AND STOCK PLANS (CONTINUED): The Restated Non-Employee Directors' Stock Plan (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. In addition to the granting of options, the Directors' Plan provides for the payment of an annual retainer to each non-employee director. On the date of each annual meeting of shareholders, 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 and 1996 annual meeting of shareholders was $10,000 or 800 shares, and $12,000 or 700 shares, respectively (based on the fair market value of the shares on the date of the meetings). As of April 30, 1997, 12,000 shares had been issued as an annual retainer to non-employee directors and 120,000 shares were available for future grant/payment under the Directors' Plan. Shares subject to option are summarized as follows:
1995 PLAN 1986 PLAN DIRECTORS' PLAN ---------------------------- ---------------------------- ---------------------------- WEIGHTED WEIGHTED WEIGHTED STOCK AVERAGE STOCK AVERAGE STOCK AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ---------- ---------------- ---------- ---------------- ---------- ---------------- BALANCE - APRIL 30, 1994...... - $ - 680,424 $ 3.16 140,000 $ 3.86 Options granted........... - - 110,000 9.24 - - Options canceled.......... - - (17,172) 3.04 - - Options exercised......... - - (128,852) 3.01 - - ---------- ---------------- ---------- ---------------- ---------- ---------------- BALANCE - APRIL 30, 1995...... - - 644,400 4.23 140,000 3.86 Options granted........... - - 225,000 11.87 20,000 12.50 Options canceled.......... - - (29,400) 9.18 - - Options exercised......... - - (162,100) 2.84 - - ---------- ---------------- ---------- ---------------- ---------- ---------------- BALANCE - APRIL 30, 1996...... - - 677,900 6.88 160,000 4.94 Options granted........... 310,500 $ 15.01 - - - - Options canceled.......... - - (96,000) 9.62 - - Options exercised......... - - (296,100) 3.49 (120,000) 3.24 ---------- ---------------- ---------- ---------------- ---------- ---------------- BALANCE - APRIL 30, 1997...... 310,500 $ 15.01 285,800 $ 9.49 40,000 $ 10.06 ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- OPTIONS EXERCISABLE AT: April 30, 1995.............. - $ - 472,836 $ 2.93 132,000 $ 3.64 ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- April 30, 1996.............. - $ - 375,936 $ 4.23 140,000 $ 4.00 ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- April 30, 1997.............. - $ - 103,036 $ 7.43 28,000 $ 9.02 ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- ---------------- ---------- ----------------
35 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 - STOCK OPTIONS AND STOCK PLANS (CONTINUED): Additional information regarding options outstanding/exercisable at April 30, 1997 is as follows:
NUMBER OF WEIGHTED WEIGHTED NUMBER OF WEIGHTED OPTIONS EXERCISE AVERAGE AVG REMAINING OPTIONS AVERAGE OUTSTANDING PRICE RANGE EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE ------------ ---------------- ---------------- ------------------ ------------ ---------------- 1995 Plan 310,500 $ 15.00 - $16.00 $ 15.01 9.25 YEARS - $ - ------------ ---------------- ---------------- ------------------ ------------ ---------------- ------------ ---------------- ---------------- ------------------ ------------ ---------------- 1986 Plan 33,600 $ 2.63 - $3.38 $ 3.29 1.45 years 24,276 $ 3.26 33,200 $ 4.25 - $5.00 $ 4.48 4.01 years 19,760 $ 4.63 36,000 $ 6.88 - $9.75 $ 7.74 6.41 years 24,000 $ 7.46 183,000 $ 11.88 $ 11.88 8.11 years 35,000 $ 11.88 ------------ ---------------- ---------------- ------------------ ------------ ---------------- 285,800 $ 2.63 - $11.88 $ 9.49 6.63 YEARS 103,036 $ 7.43 ------------ ---------------- ---------------- ------------------ ------------ ---------------- ------------ ---------------- ---------------- ------------------ ------------ ---------------- Directors' Plan 20,000 $ 7.62 $ 7.62 5.67 years 20,000 $ 7.62 20,000 $ 12.50 $ 12.50 8.33 years 8,000 $ 12.50 ------------ ---------------- ---------------- ------------------ ------------ ---------------- 40,000 $ 7.62 - $12.50 $ 10.06 7.00 YEARS 28,000 $ 9.02 ------------ ---------------- ---------------- ------------------ ------------ ---------------- ------------ ---------------- ---------------- ------------------ ------------ ----------------
The Company has awarded restricted stock grants to selected employees under the 1986 Plan and the 1995 Plan. Recipients of restricted stock awards under these plans were not required to make any payments for the stock or provide consideration other than the rendering of services. Shares of stock awarded under the plans are subject to certain restrictions on transfer and all or part of the shares awarded to an employee may be subject to forfeiture upon the occurrence of certain events, including termination of employment. Through April 30, 1997, 140,706 shares and 12,000 shares have been awarded under the 1986 Plan and the 1995 Plan, respectively. The fair market value of the shares granted under these plans is generally amortized over a four year period. Amortization of $70,000, $137,000, and $74,000 has been charged to operations in 1997, 1996 and 1995, respectively. The Company has maintained an Employee Stock Purchase and Bonus Plan (the Employee Stock 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 Employee Stock Plan at a price equal to 85% of the market price on the last day of the calendar year. During fiscal 1997, 126,260 shares were issued under this plan and, at April 30, 1997, 584,586 shares were available for future issuance. The Company applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized in the accompanying statements of operations. Had compensation cost been recognized based on the fair values of options at the grant dates consistent with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and net income per common share would have been decreased to the following pro forma amounts: YEARS ENDED APRIL 30, ----------------------- 1997 1996 --------- ------- Net income.......................... As reported $ 10,217 $ 8,489 Pro forma 9,360 7,964 Net income per common share......... As reported $ 1.08 $ 0.94 Pro forma 0.99 0.88 36 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8 - STOCK OPTIONS AND STOCK PLANS (CONTINUED): Because the SFAS No. 123 method of accounting has not been applied to options granted prior to May 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The weighted average fair values of options granted and Employee Stock Plan shares were as follows: EMPLOYEE 1995 PLAN 1986 PLAN DIRECTORS' PLAN STOCK PLAN --------- --------- --------------- ---------- Fiscal 1996 grants - $6.49 $7.29 $2.15 Fiscal 1997 grants $7.95 - - $2.96 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in fiscal 1996 and 1997: YEARS ENDED APRIL 30, ---------------------- 1997 1996 ---------- --------- Risk-free interest rate........................... 6.28% 5.74% Expected life of options.......................... 7 years 7 years Expected life of Employee Stock Plan shares....... 1 year 1 year Expected volatility............................... 35% 57% Expected dividend yield........................... - - The tax benefits associated with the exercise of stock options or issuance of shares under the Company's stock option plans, not related to expenses recognized for financial reporting purposes, have been credited to capital in excess of par value in the accompanying consolidated balance sheets. 37 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9 - 401(k) PLAN: The Company has adopted the Norstan, Inc. Incentive Savings Plan, a 401(k) profit-sharing plan (the 401(k) Plan) covering substantially all full-time employees. Eligible employees may elect to defer up to 15% of their eligible compensation. The Company may make discretionary matching contributions of up to 6% of each plan participant's eligible compensation. Company contributions to the 401(k) Plan were $1,554,000, $1,267,000 and $1,078,000 for the years ending April 30, 1997, 1996 and 1995, respectively. NOTE 10 - 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 $10,914,000 in 1997, $10,501,000 in 1996, and $8,661,000 in 1995. Future minimum lease payments under noncancelable leases with initial or remaining terms of one year or more were as follows at April 30, 1997 (in thousands): YEARS ENDING APRIL 30, AMOUNT - -------------------------------------------------- -------- 1998.............................................. $ 6,327 1999.............................................. 4,712 2000.............................................. 3,942 2001.............................................. 2,480 2002 and thereafter............................... 3,832 -------- $ 21,293 -------- -------- 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. 38 NORSTAN, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10 - 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 11 - 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, (in thousands): 1997 1996 1995 --------- --------- --------- REVENUES: United States........................ $ 365,796 $ 287,171 $ 262,235 Canada............................... 32,279 34,193 28,010 --------- --------- --------- $ 398,075 $ 321,364 $ 290,245 --------- --------- --------- --------- --------- --------- NET INCOME: United States........................ $ 9,426 $ 7,943 $ 6,617 Canada............................... 791 546 446 --------- --------- --------- $ 10,217 $ 8,489 $ 7,063 --------- --------- --------- --------- --------- --------- IDENTIFIABLE ASSETS: United States........................ $ 207,942 $ 142,151 $ 143,443 Canada............................... 16,231 18,837 18,266 --------- --------- --------- $ 224,173 $ 160,988 $ 161,709 --------- --------- --------- --------- --------- --------- 39 NORSTAN, INC. AND SUBSIDIARIES SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER --------- --------- --------- --------- 1997 Revenues...................... $ 92,231 $ 95,653 $ 94,075 $ 116,116 --------- --------- --------- --------- --------- --------- --------- --------- Gross margin.................. $ 25,331 $ 27,105 $ 26,061 $ 30,018 --------- --------- --------- --------- --------- --------- --------- --------- Operating income.............. $ 3,151 $ 5,161 $ 5,126 $ 5,767 --------- --------- --------- --------- --------- --------- --------- --------- Net income.................... $ 1,692 $ 2,676 $ 2,715 $ 3,134 --------- --------- --------- --------- --------- --------- --------- --------- Net income per common and common equivalent share..... $ .18 $ .28 $ .29 $ .33 --------- --------- --------- --------- --------- --------- --------- --------- 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 --------- --------- --------- --------- --------- --------- --------- --------- Throughout each year, the income tax provision is recorded based upon estimates of the overall expected tax rate for that year. 40 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, 1997. 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 23, 1997, 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 23, 1997, 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 23, 1997, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information with respect to certain relationships and related transactions, set forth under "Information Concerning Directors, Nominees and Executive Officers" in the Company's definitive proxy statement for the annual meeting of shareholders to be held September 23, 1997, is incorporated herein by reference. 41 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 Consolidated Financial Statements and Financial Statement Schedules on page 20 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 45 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. 42 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 22, 1997 NORSTAN, INC. Registrant By /s/ David R. Richard -------------------------- David R. Richard Chief Executive Officer, President and Director By /s/ Kenneth S. MacKenzie -------------------------- Kenneth S. MacKenzie Chief Financial Officer (Principal Financial and Accounting Officer) 43 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 --------- ---- - ---------------------------------- Paul Baszucki Chairman of the Board /s/ Richard Cohen July 22, 1997 - ---------------------------------- Richard Cohen Vice-Chairman of the Board /s/ David R. Richard July 22, 1997 - ---------------------------------- David R. Richard CEO, President and Director /s/ Winston E. Munson July 24, 1997 - ---------------------------------- Winston E. Munson Secretary and Director /s/ Dr. Jagdish N. Sheth July 22, 1997 - ---------------------------------- Dr. Jagdish N. Sheth Director /s/ Arnold Lehrman July 22, 1997 - ---------------------------------- Arnold Lehrman Director /s/ Connie M. Levi July 23, 1997 - ---------------------------------- Connie M. Levi Director /s/ Gerald D. Pint July 23, 1997 - ---------------------------------- Gerald D. Pint Director /s/ Stanley Schweitzer July 23, 1997 - ---------------------------------- Stanley Schweitzer Director /s/ Herbert F. Trader July 23, 1997 - ---------------------------------- Herbert F. Trader Director 44 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 [filed as Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended April 30, 1996 (File No. 0-8141) and incorporated herein by reference]. 3(b) Bylaws of the Company [filed as Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended April 30, 1993 (File No. 0-8141) and incorporated herein by reference]; Amendments adopted August 8, 1995 [filed as Exhibit 3(b) to the Company's Annual Report on Form 10-K for the year ended April 30, 1996 (File No. 0-8141) and incorporated herein by reference]; Amendments adopted September 20, 1995, July 30, 1996 and April 9, 1997. 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 July 23, 1996, among Norstan, Inc., First Bank National Association, and Harris Trust and Savings Bank and the Sumitomo Bank Limited, Chicago Branch; First Amendment to Credit Agreement dated October 11, 1996 [filed as Exhibit 10 to the Company's quarterly report on Form 10-Q for the period ended August 3, 1996 (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]. 45 Exhibit No. Description Page - -------- ----------- ---- (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]; Amendments adopted August 8, 1995 and July 30, 1996 [filed as Exhibit 10(e) to the Company's Annual Report on Form 10-K for the year ended April 30, 1996 (File No. 0-8141) and incorporated herein by reference]. (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 30, 1996 [filed as Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended April 30, 1996 (File No. 0-8141) and incorporated herein by reference]; Amendment adopted August 16, 1996. (1)10(h) 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(i) 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(j) Employment Agreement dated April 30, 1997 between David R. Richard and the Company. 10(k) 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 47 22 Subsidiaries of Norstan, Inc. 48 23.1 Consent of Independent Public Accountants 49 27 Financial Data Schedule A copy of any of the exhibits listed or referred to above will be furnished at a reasonable cost to any shareholder of the Company, upon receipt of a written request from such person for any such exhibit. Such request should be sent to Norstan, Inc., 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. 46 EX-3.B 2 AMENDED BYLAWS BYLAWS OF NORSTAN, INC. In Effect 6/30/97 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 Section 3.16 Age Limitation . . . . . . . . . . . 19 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 i Page ---- Section 5.01 Number . . . . . . . . . . . . . . . 20 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 officer 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 or 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 (10th) 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 shareholder's 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 chairman 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. Section 3.16. AGE LIMITATION. No person, who is not an employee of the Company, shall be nominated or renominated for director or elected or appointed as a director if that person has attained the age of 65. 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 19 committees and members of committees to the same extent as those sections apply to the Board of Directors and directors. 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, co-chairmen and chairman emeritus 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. 20 Section 5.03. RESIGNATION. An officer 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 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, CO-CHAIRMEN AND CHAIRMAN EMERITUS OF THE BOARD. A chairman, co-chairmen and chairman emeritus 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. A co-chairman shall perform such duties as shall be prescribed by the Board of Directors. The chairman emeritus 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. 21 Section 5.08. CHIEF EXECUTIVE OFFICER. The chief executive officer shall: (a) Have general active management of the business of the corporation; (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 22 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 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; 23 (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; (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. 24 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 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. 25 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 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 26 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 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, 27 "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 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. 28 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. 29 EX-10.J 3 DAVID RICHARD EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, made effective as of the 30th day of April, 1997, by and between David R. Richard ("Executive") and NORSTAN, INC., a Minnesota corporation (the "Company"), W I T N E S S E T H: WHEREAS, the Company will employ Executive as President and Chief Executive Officer of Norstan, Inc., effective as of May 1, 1997; WHEREAS, Executive's experience and knowledge are considered to be necessary to the continued success of the Company's business; WHEREAS, the Company desires to encourage the Executive's continued dedication and attention to his assigned duties without distraction from circumstances arising from a possible change in control of the Company; WHEREAS, the Company wishes to enter into an agreement with Executive governing the terms and conditions of his employment, and Executive is willing to be employed on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises, and of the mutual covenants hereinafter set forth, the parties do hereby agree as follows: 1. EMPLOYMENT PERIOD. The Company agrees to employ Executive, and Executive agrees to serve in the full-time employ of the Company, for the period (the "Employment Period") beginning on May 1, 1997 and ending on April 30, 1999; PROVIDED, that on April 30, 1998, and on each April 30 thereafter ("Renewal Date"), the Employment Period shall automatically be extended to the date which is 24 months after such Renewal Date unless, not later than such Renewal Date, the Company gives Executive written notice that the Employment Period shall not be so extended; PROVIDED FURTHER, that in the event of a "Change in Control" (as defined in subparagraph 7.e. below), the Employment Period shall automatically be extended to the date which is 36 months after the date on which the Change in Control occurs. Notwithstanding the foregoing, in no event shall the Employment Period continue beyond the earliest to occur of the date of Executive's 65th birthday, the date as of which Executive's employment is terminated pursuant to paragraph 4 or paragraph 7, or the date of the Executive's death. 2. DUTIES. During the Employment Period, Executive shall serve as President and Chief Executive Officer of Norstan, Inc., or, except as otherwise provided in this Agreement, in such other executive positions as the Chairman of the Board of Directors of the Company shall from time to time determine. Executive shall perform such executive and managerial duties consistent with such positions as the Chairman of the Board of Directors of the Company shall from time to time direct. Executive shall devote his best efforts and all of his business time and attention (except for usual vacation periods and reasonable periods of illness or other incapacity) to the business of the Company and its subsidiaries. 3. COMPENSATION. During the Employment Period, Executive shall be compensated as follows: a. SALARY. Executive shall be paid a salary at a rate which is not less than $275,000 per year, exclusive of bonuses, if any, which may from time to time be awarded to Executive pursuant to any authorized bonus, incentive, or similar plan maintained by the Company. Executive's salary shall be subject to annual review and shall be paid in equal, semi-monthly installments. b. EXPENSES. Executive shall be reimbursed for all reasonable business expenses incurred in the performance of his duties pursuant to this Agreement, to the extent such expenses are substantiated and are consistent with the general policies of the Company and its subsidiaries relating to the reimbursement of expenses of executive officers. c. FRINGE BENEFITS. In addition to any other compensation provided under this Agreement, Executive shall be entitled to participate, during the Employment Period, in any and all pension, profit sharing, and other employee benefit plans or fringe benefit programs which are from time to time maintained by the Company for its executive officers, in accordance with the provisions of such plans or programs as are from time to time in effect. These fringe benefits include automobile, country club and moving expenses. d. OTHER BENEFITS. Executive shall be granted stock options and restricted stock awards in amounts consistent with his positions as President and Chief Executive Officer of the Company. In addition although the parties do not believe that Executive will suffer any loss by reason of his employment by Company, Company and Executive agree to share in any such loss resulting from the cancellation or rescission of certain stock options granted to Executive by his current employer and to arrive at a method for apportioning any such loss. e. DEDUCTIONS AND WITHHOLDING. All compensation and other benefits payable to or on behalf of Executive pursuant to this Agreement shall be subject to such deductions and withholding as may be agreed to by Executive or required by applicable law. 4. DISABILITY. If, during the Employment Period, Executive shall become incapacitated by accident or illness and, as determined under the Long-Term Disability Plan of the Company, shall be unable to perform the duties of the positions he then occupies for a period of 150 consecutive days, the Company shall have the right to terminate the Employment Period effective at any time after such 150 day period of disability by giving 30 days advance written notice to Executive. If the Employment Period is thus terminated, Executive shall not be entitled to receive any compensation or other benefits pursuant to this Agreement, other than compensation or benefits accrued through the effective date of such termination. 5. DEATH. If Executive shall die during the Employment Period without having been notified, pursuant to subparagraph 7.a. below, of a breach of any of the terms of this Agreement in any material respect, his base salary (at the rate in effect at the time of his death) shall be continued for a period of 12 months to the beneficiary named in the last written instrument 2 signed by Executive for the purposes of this Agreement and received by the Company prior to his death. If Executive fails to name a beneficiary, such amounts shall be paid to his estate. 6. OTHER BENEFITS. The compensation provisions of this Agreement shall be in addition to, and not in derogation or diminution of, any benefits that Executive or his beneficiaries may be entitled to receive under the provisions of any pension, profit sharing, disability, or other employee benefit plan now or hereafter maintained by the Company. 7. TERMINATION. a. FOR CAUSE BY COMPANY. The Company may terminate Executive's employment for cause upon 60 days prior written notice to Executive. Such notice shall specify in reasonable detail the nature of the cause and, during such 60 day period, Executive shall have the opportunity to cure the stated cause. If Executive fails to cure a stated cause, the Employment Period shall terminate at the end of the 60 day notice period, but without prejudice to Executive's right to contest the existence of any stated cause and/or to contest the fact that the cause has not been cured. For the purposes of this Agreement, cause shall mean any conduct by Executive involving an act or acts of dishonesty on the part of the Executive constituting a felony and resulting or intended to result directly or indirectly in gain or personal enrichment at the expense of the Company, or any failure by Executive to substantially comply with the terms of this Agreement in any material respect. b. INELIGIBILITY. If the Company terminates Executive's employment for cause, or if Executive voluntarily terminates his employment under circumstances other than those specified in subparagraphs 7.c., or 14.a., Executive shall not be entitled to receive any compensation or other benefits pursuant to this Agreement, other than compensation or benefits accrued through the effective date of such termination. c. ELIGIBILITY. If, after or due to a "Change in Control" (as such term is defined in subparagraph 7.e. below), and prior to the expiration of the then current extension of the Employment Period, (a) Executive voluntarily terminates his employment (i) because he has been reassigned to a position of lesser rank or status or because he has been transferred to a location which is more than 25 miles from his previous principal place of employment, or because his base salary or incentive compensation has been reduced, or because his benefits have been reduced (unless such reduction is made uniformly in a plan of general application to all of the Company's eligible employees); or (ii) for Good Reason (as defined below); or (iii) if his health should become impaired to an extent that makes his continued performance of his duties hereunder hazardous to his physical or mental health or his life, provided that the Executive shall have furnished the Company with a written statement from a qualified physician to such effect and provided, further, that, at the Company's request, the Executive shall submit to an examination by a physician selected by the Company and such doctor shall have concurred in the conclusion of the Executive's doctor; or (iv) for any reason in Executive's sole discretion at any time within 18 months after the date of a Change in Control of the Company by giving thirty (30) days prior notice of his intention to terminate; or (b) the Company terminates Executive's 3 employment for reasons other than those specified in paragraph 4 or subparagraph 7.a. of this Agreement, then Executive shall receive the compensation and benefits set forth in paragraph 8 below. (i) For purposes of this Agreement, "Good Reason" shall mean (A) a failure by the Company to comply with any material provision of this Agreement which has not been cured within ten (10) days after notice of such noncompliance has been given by the Executive to the Company, or (B) any purported termination of the Executive's employment which is not effected pursuant to a notice of termination which notice shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. d. WITHOUT CAUSE BY COMPANY. If, other than caused by a Change in Control, the Company terminates Executive's employment at any time prior to the expiration of the initial or then current extension of the Employment Period for reasons other than those specified in paragraph 4 or subparagraph 7.a. of this Agreement, then Executive shall continue to receive his base salary and fringe benefits (automobile, car phone and country club expense) for a period of 12 months. e. CHANGE IN CONTROL, DEFINED. For the purposes of this Agreement, a Change in Control shall be deemed to occur when and if, during the Employment Period: (i) 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): (A) 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 (B) 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 (ii) 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 4 (iii) 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 April 1, 1997, 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 of the directors taking such action are Continuing Directors. 8. COMPENSATION ON CHANGE IN CONTROL. In the event of a termination under subparagraph 7.c. above, during the Period of Employment or any extension thereof: (i) The Company shall pay the Executive any earned and accrued but unpaid installment of base salary through the Date of Termination, at the rate in effect on the Date of Termination, or if greater, on the date immediately preceding the date that a Change in Control occurs, and all other unpaid amounts to which the Executive is entitled as of the Date of Termination under any compensation plan or program of the Company, including, without limitation, all accrued vacation time; such payments to be made in a lump sum on or before the fifth day following the Date of Termination. (ii) In lieu of any further salary payments to the Executive for periods subsequent to the Date of Termination, the Company shall pay as liquidated damages to the Executive an amount equal to the product of (A) the sum of (1) the Executive's annual salary rate in effect as of the Date of Termination, or if greater, on the date immediately preceding the date that a Change in Control occurs, and (2) the greater of: (i) the prior year's actual incentive payment to the Executive under the Company's incentive plan for that year or (ii) the dollar amount payable at 100% of target under the Company's then current incentive plan for the year in which occurs such Date of Termination, and (B) the number two (2); such payment to be made in a lump sum on or before the fifth day following the Date of Termination. (iii) The Company shall pay all other damages to which the Executive is entitled as a result of such termination, including damages for any and al loss of benefits to the Executive under the Company's employee welfare benefit plans and perquisite programs which the Executive would have received had the Executive's employment continued for an additional two (2) years, and including all reasonable legal fees and expenses incurred by him as a result of such termination, including the fees and expenses of 5 enforcing the terms of this Agreement; payment of such fees to be made within thirty (30) days following the Company's receipt of an appropriate invoice therefor. (iv) For a period of not less than twenty-four (24) months following the Executive's Date of Termination, the Company will reimburse the Executive in an amount not to exceed $15,000 for all reasonable expenses of a reputable outplacement organization incurred by him (but not including any arrangement by which the Executive prepays expenses for a period of greater than thirty (30) days) in seeking employment with another employer. (v) Executive shall be fully vested in all shares of restricted stock, performance awards, stock appreciation rights and stock options granted to him under the Norstan, Inc. 1995 Long-Term Incentive Plan (or any predecessor or successor plan) on the date of a Change in Control. (vi) The present value (as defined herein) of the liquidated damages payable to the Executive under subsection (ii) above, and any other payments otherwise payable to the Executive by the Company on or after a Change in Control, as defined in Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), which are deemed under said Section 280G to constitute "parachute payments" (as defined in Section 280G without regard to Section 280G(b)(2)(A)(ii)), shall be less than three times the Executive's base amount (as defined herein). In the event that the present value of such payments equals or exceeds such amount, the provisions set forth in this subparagraph (vi) will apply, and liquidated damages or other severance benefits payable to the Executive under this Agreement will be made only in accordance with this subparagraph (vi) notwithstanding any provision to the contrary in this Agreement. (A) Not later than thirty days after the Date of Termination, the Company will provide the Executive with a schedule indicating by category the present value of the liquidated damages payable to the Executive under this Agreement, all other benefits payable to the Executive under this Agreement (specifying the paragraph, subparagraph or clause under which each such payment is to be made) and any other payments otherwise payable to the Executive by the Company on or after the Change in Control, which, in the Company's opinion, constitute parachute payments under Section 280G of the Code. No payments under this Agreement shall be made until after thirty days from the receipt of such schedule by the Executive. At any time prior to the expiration of said 30-day period, the Executive shall have the right to select from all or part 6 of any category of payment to be made under this Agreement those payments to be made to the Executive in an amount the present value of which (when combined with the present value of any other payments otherwise payable to the Executive by the Company that are deemed parachute payments) is less than 300 percent of the Executive's base amount. If the Executive fails to exercise his right to make a selection, only a lump sum cash severance payment equal to one dollar less than 300 percent of the Executive's base amount (reduced by the present value of any other payments otherwise payable to the Executive by the Company that are deemed parachute payments and increased, to the extent such increase will not cause the payment to be an excess parachute payment under Section 280G of the Code, by interest from the Date of Termination to the date of payment at the Federal short-term rate, compounded annually, promulgated under Section 1274(d) of the Code as effective for the month in which the Date of Termination occurs) shall be made to the Executive on the day after the expiration of the period extending thirty days from his receipt of the schedule provided for hereunder, and no other liquidated damages or other benefits under subparagraphs (ii), (iii), (iv) and (v) above of this Agreement shall be paid to the Executive. (B) If the Company fails to supply the schedule within thirty days of the Date of Termination, then the provisions of this subparagraph (vi) shall not apply and the Company shall be obligated to pay to the Executive the full amount of liquidated damages and other benefits under this Agreement, without regard to subparagraph (vi). (C) If the Executive disagrees with the schedule prepared by the Company, then the Executive shall have the right to submit the schedule to arbitration, in accordance with the provisions of paragraph 12 herein. The period in which the Executive may select his benefits under this Agreement shall be extended until fifteen days after a final and binding arbitration award is issued or a final judgment, order or decree of a court of competent jurisdiction is entered upon such arbitration award (the time for appeal therefrom having expired and no appeal having been perfected), and the Company's period for paying the Executive's unpaid benefits under this Agreement shall be extended until ten days thereafter. If the Executive fails to make a selection within said fifteen day period, the Company shall pay the unpaid benefits within five days following the expiration of the Executive's fifteen day period. 7 (D) For purposes of this subparagraph (vi), "present value" means the value determined in accordance with the principles of Section 1274(b)(2) of the Code under regulations promulgated under Section 280G of the Code, and "base amount" means the annualized includible compensation for the base period payable to the Executive by the Company and includible in the Executive's gross income for Federal income tax purposes during the shorter of the period consisting of the most recent five taxable years ending before the date of any Change in Control of the Company or the portion of such period during which the Executive was an employee of the Company. (E) In the event that Section 280G of the Code, or any successor statute, is repealed, this subparagraph (vi) shall cease to be effective on the effective date of such repeal. (vii) The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer after the Date of Termination, or otherwise. 9. COMPETITION. a. During the Employment Period, Executive will not, except with the express written consent of the Chairman of the Board of Directors of the Company become engaged in, or permit his name to be used in connection with any business other than the businesses of the Company and its subsidiaries, whether or not such other business is a competitive business. b. Executive covenants and agrees that for a period of 12 months after the termination of the Employment Period, or for such longer period as Executive is receiving payments pursuant to paragraph 8, he will not, except with the express written consent of the then Chairman of the Board of Directors of the Company, engage directly or indirectly in, or permit his name to be used in connection with any competitive business in the geographic area serviced by the Company or its subsidiaries. Executive further covenants and agrees for a period of 12 months from the date of termination of his employment hereunder not to solicit or assist anyone else in the solicitation of, any of the Company's then-current employees to terminate their employment with the Company and to become employed by any business enterprise with which the Executive may then be associated, affiliated or connected. c. For the purposes of this paragraph 9: (i) the phrase, "engage directly or indirectly in" shall encompass: (A) all of Executive's activities whether on his own account or as an employee, director, officer, agent, consultant, independent contractor, or partner of or in any 8 person, firm, or corporation (other than the Company and its subsidiaries), or (B) Executive's ownership of more than 10% of the voting stock of any corporation, 5% or more of the gross income of which is derived from any business or businesses in which Executive may not then engage; and (ii) the phrase "competitive business" shall mean: (A) the sale of telephone, telecommunications, or similar equipment, or (B) any other business in which the Company or its subsidiaries is then engaged. d. Notwithstanding the foregoing, the restrictions set forth in subparagraph 9.b. shall not apply if Executive's employment is terminated under any of the circumstances described in subparagraphs 7.c. or 14.a. 10. CONFIDENTIAL INFORMATION. Executive agrees that he will not, without the prior written consent of the Board of Directors of the Company, during the term or after termination of his employment under this Agreement, directly or indirectly disclose to any individual, corporation, or other entity (other than the Company or any subsidiary thereof, their officers, directors, or employees entitled to such information, or to any other person or entity to whom such information is regularly disclosed in the normal course of the Company's business) or use for his own or such another's benefit, any information, whether or not reduced to written or other tangible form, which: a. is not generally known to the public or in the industry; b. has been treated by the Company or any of its subsidiaries as confidential or proprietary; and c. is of competitive advantage to the Company or any of its subsidiaries and in the confidentiality of which the Company or any of its subsidiaries has a legally protectable interest. Information which becomes generally known to the public or in the industry, or in the confidentiality of which the Company and its subsidiaries cease to have a legally protectable interest, shall cease to be subject to the restrictions of this paragraph. 11. ENFORCEMENT. If, at the time of enforcement of any provision of paragraphs 9 or 10, a court shall hold that the period, scope, or geographical area restrictions stated therein are unreasonable under circumstances then existing, the maximum period, scope, or geographical area reasonable under the circumstances shall be substituted for the stated period, scope, or area. In the event of a breach by Executive of any of the provisions of paragraphs 9 or 10, the Company may, in addition to any other rights and remedies existing in its favor, apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce or prevent any violations of the provisions hereof. 9 12. ARBITRATION. Except to the extent provided in paragraph 11, any controversy or claim arising out of or relating to this Agreement, or any breach thereof, shall be settled by arbitration before three arbitrators, and judgment rendered by the arbitrators, or a majority of them, may be entered in any court having jurisdiction thereof. Within 30 days after notice by either party to the other requesting such arbitration, each party shall appoint a disinterested and neutral arbitrator, and the two thus chosen shall appoint a third disinterested and neutral arbitrator. If the two arbitrators so appointed cannot agree upon the appointment of a third arbitrator, then such third arbitrator shall be appointed by the Chief Judge of the United States District Court for the district that then includes the City of Minneapolis. Such arbitration shall be conducted in the City of Minneapolis in conformity with the procedures provided under the Uniform Arbitration Act, as adopted by the State of Minnesota and as then in effect. Except as provided in paragraph 13 of this Agreement, the parties shall each pay their own expenses in connection with such arbitration and any related proceedings. 13. PAYMENT OF COSTS. If a dispute arises regarding a termination of Executive's employment after a Change in Control and Executive obtains a final judgment in his favor from which no appeal may be taken, whether because the time to do so has expired or otherwise, or his claim is settled by the Company prior to the rendering of such a judgment, all reasonable legal fees and expenses incurred by Executive in contesting or disputing any such termination, in seeking to obtain or enforce any right or benefit provided for in this Agreement, or in otherwise pursuing his claim will be promptly paid by the Company, with interest thereon at the highest Minnesota statutory rate for interest on judgments against private parties, from the date of payment thereof by Executive to the date of reimbursement to him by the Company. 14. SUCCESSORS. a. OF THE COMPANY. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle Executive to terminate his employment with the Company and to receive the payments and benefits provided for in paragraph 8. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined, and any successor to the business and/or assets of the Company which executes and delivers the agreement provided for in this paragraph 14 or which otherwise becomes bound by all the terms and provisions of this Agreement as a matter of law. b. OF EXECUTIVE. This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Executive should die while any amounts would still be payable to him hereunder if he had continued to 10 live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 15. GENERAL PROVISIONS. a. ASSIGNMENTS. Executive's rights and interests under this Agreement may not be assigned, pledged, or encumbered by him without the Company's written consent. b. EFFECT OF HEADINGS. The headings of all of the paragraphs and subparagraphs of this Agreement are inserted for convenience of reference only, and shall not affect the construction or interpretation of this Agreement. c. MODIFICATION, AMENDMENT, WAIVER. No modification, amendment, or waiver of any provision of this Agreement shall be effective unless approved in writing by both parties. The failure at any time to enforce any of the provisions of this Agreement shall in no way be construed as a waiver of such provisions and shall not affect the right of either party thereafter to enforce each and every provision of this Agreement in accordance with its terms. d. SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. e. NO STRICT CONSTRUCTION. The language used in this Agreement shall be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction shall be applied against any person. f. APPLICABLE LAW. All questions concerning the construction, validity, and interpretation of this Agreement shall be governed by the laws of the State of Minnesota. g. NOTICES. Any notice to be served under this Agreement shall be in writing and shall be mailed by registered mail, registry fee and postage prepaid and return receipt requested, addressed: 11 If to the Company, to: Norstan, Inc. 605 North Highway 169, 12th Floor Plymouth, MN 55441 Attention: Chairman of the Board; or If to Executive, to: David R. Richard 605 North Highway 169, 12th Floor Plymouth, MN 55441 or to such other place as either party may specify in writing, delivered in accordance with the provisions of this subparagraph. h. SURVIVAL. The rights and obligations of the parties shall survive the term of Executive's employment to the extent that any performance is required under this Agreement after the expiration or termination of such term. i. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of the parties with respect to the subject matter thereof, and supersedes all previous agreements between the parties relating to the same subject matter. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the day and year first above written. NORSTAN INC. (the "Company") By /s/ Paul Baszucki ------------------------------ Chief Executive Officer David R. Richard (the "Executive") /s/ David R. Richard ------------------------------- 12 EX-11 4 STATEMENT RE COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 NORSTAN, INC. AND SUBSIDIARIES STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED APRIL 30, -------------------------------------------- 1997 1996 1995 ------- ------- ------- PRIMARY EARNINGS PER SHARE - Weighted average number of issued shares outstanding 9,140 8,526 8,242 Effect of: 1995 Long-Term Incentive Plan 20 - - 1986 Long-Term Incentive Plan 201 398 414 Restated Non-Employee Directors' Stock Plan 64 96 82 Employee Stock Purchase Plan 10 8 12 ------- ------ ------ Shares outstanding used to compute primary earnings per share 9,435 9,028 8,750 ------- ------ ------ ------- ------ ------ Net income $10,217 $8,489 $7,063 ------- ------ ------ ------- ------ ------ PRIMARY EARNINGS PER SHARE $ 1.08 $ .94 $ .81 ------- ------- ------- ------- ------- -------
YEARS ENDED APRIL 30, -------------------------------------------- 1997 1996 1995 ------- ------- -------- FULLY DILUTED EARNINGS PER SHARE - Weighted average number of shares used for primary earnings per share 9,435 9,028 8,750 Effect of: 1995 Long-Term Incentive Plan 1 - - 1986 Long-Term Incentive Plan 1 8 6 Restated Non-Employee Directors' Stock Plan - 2 2 Employee Stock Purchase Plan - - 2 ------- ------ ------- Shares outstanding used to compute fully diluted earnings per share 9,437 9,038 8,760 ------- ------ ------- ------- ------ ------- Net income $10,217 $8,489 $7,063 ------- ------ ------ ------- ------ ------ FULLY DILUTED EARNINGS PER SHARE $ 1.08 $ .94 $ .81 ------- ------ ------ ------- ------ ------
47 EX-22 5 SUBSIDIARIES OF NORSTAN, INC. 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% Connect Computer Company Minnesota 100% Norstan International, Inc. Minnesota 100% Norstan Network Services, Inc. of New Hampshire New Hampshire 100% Norstan Information Systems, Inc. Minnesota 100% Summit Gear, Inc. Minnesota 100%
48 EX-23.1 6 CONSENT OF ARTHUR ANDERSEN LLP 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 23, 1997 49 EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS APR-30-1997 MAY-01-1996 APR-30-1997 5,147 0 77,810 1,783 7,636 126,840 93,895 48,409 224,173 89,356 24,043 0 0 939 83,431 224,173 202,199 398,075 149,860 289,560 89,332 0 1,866 17,317 7,100 10,217 0 0 0 10,217 1.08 1.08
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