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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 þ No o

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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes o No þ

As of November 1, 2003 (the most recently completed fiscal second quarter), the aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average high and low prices on such date as reported by the Nasdaq National Market System was approximately $35,802,000.

As of July 19, 2004 there were outstanding 13,466,346 shares of the registrant’s common stock, par value $.10 per share, its only class of equity securities.

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.

Norstan, Inc. (Norstan, the Company, we, us, or our) is a full-service communications solutions and services company delivering voice and data technologies and services, and remanufactured equipment to corporate end-users and public sector companies. Norstan offers a full range of technologies for customer contact solutions and converged solutions, including applications such as messaging, conferencing and enterprise mobility. Additionally, we provide a host of communications services including ProtectNet® Life Cycle services, project management, implementation, field delivery, voice and data network monitoring, and managed and professional services.

Our mission is to improve the way our customers communicate. We offer a broad array of technology platforms, software solutions and on-going system maintenance services. Currently, we work with approximately 2,400 key customers, and have serviced approximately 12,000 sites over the past two years. We draw customers from a variety of industry groups, including the following:

We have established strategic relationships with market leading communications manufacturers that enable our ability to offer best-in-class, custom-tailored solutions to our customers. Norstan maintains 25 sales and service locations and 5 distribution centers in the United States and Canada. We serve numerous customer sites across a broad range of industries and focus our marketing efforts on middle-market and Fortune 2000 companies with complex technology and communications requirements. We believe our service capabilities will enable Norstan to capture a greater portion of each customer’s communication budgets in the future, as well as, provide other growth opportunities through multi-channel marketing.

To address the complex communications requirements of our customers, Norstan provides a broad range of products and services through two interrelated business segments: Communications Solutions and Services and Resale Services, which respectively accounted for 86.6% and 13.4% of Norstan’s fiscal 2004 revenues. Communications Solutions and Services provide solutions and services focused on enterprise and public sector customers in the U.S. and Canada, including hardware and software applications that support voice and data communications and customer contact solutions. Resale Services provides refurbished voice and data products to the secondary market.

In February 2004, we announced a reorganization of our Communications Solutions and Services business segment, which is comprised primarily of our Solutions and Services and Corporate Customer Services business units. Also included in this business segment are Norstan Convergence Development Group (Norstan CDG) and our Financial Services business units.


	•	*Solutions and Services.* Solutions and Services, the largest business within this segment, concentrates customer acquisition and retention efforts in two geographically focused business units. Each business unit is managed by a senior vice president with sales, operational, project management,


		financial performance and services delivery responsibilities that are aligned with specific solutions for customers in defined geographic markets.

	•	*Corporate Customer Services.* We have realigned several of our sales support and services functions to form our Corporate Customer Services organization. This organization focuses on providing support to the Solutions and Services team and meeting customer needs for products, service programs, engineering and professional services, product marketing, remote support, procurement and logistics.

Norstan CDG develops packaged and customized applications that help accelerate and enhance the migration strategies for the increasing number of customers embracing Internet Protocol (IP) telephony. Norstan CDG develop and deploys applications compatible with Cisco Systems’ IP solutions. This business delivers its solutions and services exclusively through reseller partners via the Norstan CDG IPT Alliance Partner Program.

Effective April 30, 2004, Financial Services was incorporated into the Communications Solutions and Services business segment. As a result of our strategic decision in fiscal 2002 to no longer offer financing directly to our customers, revenues for this business continue to decline as we completely wind down its operations. This fact, coupled with our restructuring efforts in fiscal 2004, make it no longer necessary to provide these results as a separate business segment.

Norstan’s Channels Development business unit, specializing in technology implementation and support services for network providers, manufacturers, integrators and resellers, has been integrated into the Solutions and Services business, expanding the sales and services support offered to current channel partners. At this time, Norstan is not actively pursuing new channel partner relationships.


	•	*Norstan Resale Services Group.* Norstan Resale Services Group, a business unit of Norstan Communications, Inc., offers customers refurbished telephony equipment, as well as, new video conferencing systems, components, desktop products, accessories and services. Such products and services were previously offered through Siemens Resale Services group prior to Siemens’ election in July 2004 to end its alliance with Norstan in the used equipment business.

	•	*Vibes Technologies, Inc.* Vibes Technologies, Inc., a wholly owned subsidiary of Norstan Communications, Inc., is a leader in telecom and data equipment remanufacture and repair, specializing in top-line key systems, phones, data and other components.

In March 2003, Norstan purchased from NetCom Systems, Inc. certain assets, including intellectual property, relating to NetCom’s voice over IP telephony applications software operations. This unit, renamed the Norstan Convergence Development Group, is involved in the development of applications that increase the effectiveness and productivity of IP communications systems. The acquisition consideration totaled $3.0 million, consisting of a cash payment of $1.1 million at closing and $1.1 million 120 days after the closing, and guaranteed payments aggregating $800,000 deliverable over the next two years. The purchase agreement provides that Norstan may pay NetCom Systems contingent consideration of up to $3.0 million based on the amount of new software license fees received by Norstan during the two-year period following the closing of the purchase transaction. At our discretion, up to 50% of any contingent consideration may be paid in shares of Norstan’s common stock. We hired certain key NetCom personnel associated with NetCom’s development of IP telephony applications software. In fiscal 2003, we recorded $2.6 million for intangible assets relating to proprietary technology and $400,000 in goodwill relating to the $3.0 million acquisition consideration. Results of Norstan CDG are included in our Communications Solutions and Services business segment.

In July 2002, we completed the sale of our Network Services business to NetWolves Corporation for $7.5 million, including $3.75 million in cash and a promissory note for $3.75 million. During the fourth quarter of fiscal 2003, we received $2.9 million in cash and other non-monetary assets in early settlement of this note. Management concluded that Network Services lacked synergies with our strategic focus.

There is a transformation happening within the enterprise market — a slow but steady migration from traditional private-branch exchange (PBX) networks to IP telephony. Voice over IP (VoIP) technology has improved in quality causing enterprises to evaluate the strategic benefits of IP solutions and the return on investments (ROI) associated with a migration as they purchase or upgrade their communications infrastructure. Network convergence has become widely accepted. The Internet is now a strategic method to deliver applications and services. IP communications is no longer a tactical decision for the enterprise — it is a strategic investment with a real ROI.

Demand for communications products and services are showing signs of modest improvement. Gartner Dataquest, a market research firm specializing in telecommunications market information, estimated in 2003, IP lines on both pure IP-PBX and IP-enabled systems composed approximately 14% of all premises switching equipment (PSE) line shipments, up from 9% the previous year. Within the IP market sector, 55% of lines ship on pure IP-PBX systems, while the remaining 45% ship on IP-enabled platforms. IP uptake remains highest in North America, while 20% of all PSE line shipments were IP in 2003. Within four years, Gartner expects IP line shipments to have overtaken traditional lines on premises switching systems. In 2007, Gartner Dataquest predicts 51% of all PSE lines will be IP, most of the rest will be traditional lines on IP-enabled systems, and a very small percentage will be traditional lines on PBX/key telephone systems.

According to industry research firm InfoTech, the forecast for revenue from converged IP telephony infrastructure applications and services for the U.S. enterprise segment is expected to exceed $10.0 billion in 2007, up from $1.9 billion in 2003. Additionally, revenue from converged applications on enterprise IP telephony systems is expected to reach $3.0 billion in 2007, up from $0.4 billion in 2003.

As the economy shows signs of recovery, and as the enterprise segment continues its dependence on technology-based solutions, information technology (IT) spending is expected to increase. Gartner believes that the market for IP telephony products and information technology services has reached an inflection point as investments are being made to upgrade or replace voice and data equipment purchased prior to the significant spending made in preparation of the Y2K changeover that occurred over four years ago. In previous years, these purchasing decisions had been delayed due to slow development and acceptance of new IP technology, and economic conditions, among other factors. In sum, we believe that the current mix of technological advances, economic conditions and enterprise dependence on technology-based solutions will create demand for new complex, business applications and upgrades in 2004 and beyond.

While customers continue to rely heavily on technology to reduce transaction costs by increasing operational efficiencies, the bias toward software-centric solutions in lieu of hardware continues. Notwithstanding macroeconomic conditions, growth continues to occur in areas such as customer contact solutions, computer telephony integration, unified media and convergence solutions (IP telephony).

Current financial pressures are also making it increasingly difficult for communications equipment manufacturers to support a direct distribution model. Moreover, most independent distribution channels lack an adequate geographic footprint, infrastructure, processes, and resources to effectively fulfill manufacturers’ need to deploy complex high-end technology solutions. These factors have resulted in the need to perform systems integration and support services through third-party providers. In addition, a key competency being driven by the market is the ability to effectively integrate disparate technology platforms into enterprise-wide applications solutions. As a third-party provider, Norstan believes we are well positioned to take advantage of this market opportunity.

While the recent economic outlook has been positive and overall levels of business capital spending in certain market segments, specifically information technology and telecommunications services industries, are showing signs of improvement, a lag in near-term spending continues to negatively affect our business performance. However, we believe that as the economy further strengthens and capital spending improves, customers will invest in communications systems and infrastructure.

In fiscal 2003 and the first half of fiscal 2004, Norstan’s strategy was one of gaining market share through geographic expansion into tier one markets. We broadened our presence into cities such as New York, Los Angeles, Dallas, Chicago and San Francisco. Our recent financial performance and financial constraints have resulted in our need to re-evaluate our investments in certain of these and other cities, such as Atlanta, Detroit and Philadelphia. Our strategic focus has now changed from one of broader geographic coverage, to one of increasing share by creating deeper coverage in specific markets with specific technologies. We will be more selective in our pursuit of new customers, markets, products and services. This change in strategic focus may result in lower revenues but higher profitability in fiscal 2005 than in fiscal 2004.

In fiscal 2001, our relationships with Nortel Networks and Cisco Systems expanded our geographic reach and are providing new revenue opportunities. With the addition of these new technology partners, we have been experiencing pricing pressure and a change in our product mix, which in part, has contributed to decreased product gross margins that negatively affected our financial performance. We believe that the restructuring undertaken in fiscal 2004 of our Communications Solutions and Services business segment and increased emphasis on project management capabilities will help reduce the negative affect on gross margins in the future.

Our Solutions and Services business focuses sales and operations in specific geographic markets. Within these geographies, communications solutions are offered where Norstan has an established customer base and expertise in services delivery in the areas of converged solutions, customer contact solutions, infrastructure and ProtectNet® Life Cycle services. Within this organization is a dedicated sales team focused on serving our installed customer base. Approximately 50% of our revenue is annuity in nature derived from the on-going services we provide these customers.

Our Resale Services segment expects increased volume from the re-sale of refurbished telecommunications and data equipment and industry consolidation. Vibes Technologies, Inc. is uniquely positioned to take advantage of these trends with its e-commerce web site. The combination of this web-based approach and Norstan’s knowledge of the secondary market is expected to provide the basis for growth in this business segment. Our Norstan Resale Services Group offers refurbished communications products and services from a variety of manufacturers to the secondary market.

We are focusing on several initiatives to better position our business to be successful in fiscal 2005:


	•	Improving company profitability — There are opportunities in many areas of our business to improve Norstan’s profitability, such as improving gross margins for our installation and services, decreasing the cost of customer acquisition, and reducing general and administrative overhead.

	•	Retaining our existing customers — We have built a substantial installed customer base consisting of Fortune 2000 and middle-market companies. We will continue to increase our resources committed to maintaining these relationships, offering our customers additional solutions and services that further improve their communications systems and their ability to run their businesses more efficiently.


	•	Delivering advanced business applications — A significant differentiator for Norstan is our capability to provide customers with advanced business applications and services to support them. We are delivering advanced business applications and strategic solutions, complementing these applications with knowledge, professional services and support upon which Norstan has built its reputation for over 30 years.

	•	Developing Resale Services — We will continue to develop our Resale Services businesses by adding additional voice and data products and accessories that will augment our existing offerings.

	•	Developing new business selectively — Competition within the areas of convergence and applications is fierce and the technology is complex. We will concentrate our new business development in geographic areas where opportunities, skills and resources exist, and on sales and services yielding the highest returns.

Norstan provides customers with a broad range of communication solutions and services. Our capabilities include the design, development and implementation and ongoing support of communications solutions in a variety of customer environments. These products and services are delivered through two business segments: Communications Solutions and Services and Resale Services.

Within its core Communications Solutions and Services segment are two interrelated business units:


	*Solutions and Services* — Provides best-in-class communications technologies and services focused on Fortune 2000 and middle-market enterprise customers in the U.S. and Canada. Product and service offerings are focused within four primary areas:


	*Norstan Convergence Development Group* — Specializes in the development of IP telephony applications to enhance and accelerate the enterprise customer’s convergence migration strategy.

Norstan’s Resale Services segment provides refurbished voice and data products to end users. This segment is comprised of two business units:


	*Norstan Resale Services Group* — Offers customers refurbished telephony equipment, as well as, new video conferencing systems, components, desktop products, accessories and services from ClearOne, Kentrox, Plantronics, Polycom, Siemens and SpectraLink. Prior to the expiration of Siemens’ alliance with Norstan in the resale business in July 2004, we managed the acquisition, marketing, refurbishment and resale of Siemens certified used telephony equipment. Effective August 1, 2004, we will buy and sell used Siemens equipment to refurbish and offer to the secondary market, primarily in the U.S. and Canada.

	*Vibes Technologies, Inc.* — A leader in telecom and data equipment remanufacture and repair, specializing in top-line key systems, phones, data and other components, providing customers legendary customer service and expertise in systems manufactured by Aspect Communications, Avaya, Cisco Systems, Executone, Nortel Networks, Plantronics, Polycom and SpectraLink.

Norstan focuses its marketing efforts on middle-market and Fortune 2000 companies with complex communication requirements. No single customer accounted for more than five percent of Norstan’s total revenue during any of the last three fiscal years. A sample of our current customers includes:

Our relationships and/or experience with a wide range of leading communications technology manufacturers enable us to deliver the appropriate solution to each of our customers. These include:

In addition, we distribute communication products that fit specific segments of the marketplace. These include hybrid switching systems, personal computer-based voice processing and video conferencing systems, as well as data communication products.

Norstan has been a distributor of Siemens equipment since 1976 and is currently Siemens’ largest distributor in North America. The term of the distribution agreement signed in January 1999, was for five years and has been extended one year, currently through January 2005. Our relationship with Siemens is integral to our business. Any significant disruption of this distribution relationship could have a material adverse impact on our financial condition and results of operations.

Norstan and Siemens have been parties in a used equipment alliance in which we managed the acquisition, marketing, refurbishment and resale of Siemens certified used telephony equipment, becoming the largest supplier of Siemens and ROLM refurbished equipment. On July 22, 2004, Siemens Information and Communication Networks, Inc., elected to end their alliance with us in the used equipment business effective at the expiration of the current agreement, July 31, 2004. Effective August 1, 2004, we will continue offering customers refurbished Siemens telephony equipment, in addition to new and used audio and video conferencing systems, wireless solutions, call center accessories, components, desktop products, and services through our Norstan Resale Services Group.

The termination of this resale alliance does not affect our ongoing distribution agreement with Siemens with respect to new equipment.

Norstan’s product and service offerings are brought to market through three separate but complementary businesses. These businesses use a variety of distribution channels to market and sell the Company’s products and services. These are reflected in our business units as follows:

This multi-channel distribution model uses the most cost-effective sales channels to bring Norstan’s products and service offerings to market. Each channel is staffed with sales professionals who are highly focused and have a comprehensive understanding of their markets. In addition, these professionals are aligned with specific manufacturer partners.

Within the Solutions and Services business, our sales professionals have been trained to evaluate each customer’s technology and service needs. The sales process begins by obtaining an understanding of the customer’s business goals and objectives. The sales professional conducts an analysis of the customer’s current and potential future communication and IT systems requirements, as well as service delivery needs. After assessing the customer’s business and communications needs, the sales professional and a Norstan solutions engineer develop a solution to satisfy the customer’s current and anticipated requirements. Norstan’s services delivery team then works with the customer to plan the delivery and implementation of the solution and to identify required training. By planning the precise requirements of each phase of the solution delivery, Norstan’s team of sales, solutions engineering and services delivery specialists are able to minimize service interruption for the customer.

Norstan also provides an ongoing customer service program designed to meet our customer’s application requirements. These service programs incorporate remote diagnostics, in-field service and support, additional training, and help desk resources from Norstan’s expert customer support team, located in Norstan’s Customer Solution Center, a virtual center comprised of strategically located solution centers across the U.S. and Canada.

Norstan’s marketing strategy is designed to capture a high percentage of existing customers’ communication and IT budgets and also identify and develop new customer relationships. Additionally, Norstan’s

team of highly trained National Account Managers (NAM) focuses on our largest and most strategic accounts. NAMs collaborate with the customer’s senior-level management to gain a comprehensive understanding of their business needs, and to ensure an effective deployment of Norstan’s resources to satisfy those business requirements. Norstan believes the use of NAMs will provide high quality sales and customer service, and will advance Norstan’s ongoing marketing efforts. Norstan believes highly satisfied and loyal customers are more likely to choose Norstan to provide them with additional communication and IT products and services.

The Norstan Convergence Development Group develops IP telephony applications to enhance customers’ convergence strategy distributed to targeted channel partners through the Norstan CDG IPT Alliance Partner Program. This program enables channel partners of our target manufacturers, such as Cisco Systems, to gain access to convergence applications to offer their client bases. Certification levels are available to accommodate partners who wish to sell, install and provide direct support for Norstan applications, as well as for partners who choose to sell applications but rely on Norstan to install and support their customers.

Our Resale Services business units offer value-minded customers the highest quality refurbished systems, components, desktop products, new accessories and services available in the U.S. and Canada. Sales are driven through qualified and trained telesales account executives focused on existing customer accounts and strategic prospects. This telesales group works closely with our Solutions and Services business and channel partners. Through the Vibestech.com web site, additional sales and service are available to our customers. Norstan’s Resale Services provides a total life cycle solution for our customers and enables Norstan to maintain these customer relationships for many years.

Norstan believes providing exceptional customer service is a critical element in our ability to compete effectively in the communication marketplace. We have invested in new technology designed to resolve a substantial portion of our customer’s support and service issues quickly and remotely. Norstan coordinates its customer service response through our Customer Solutions Center, a virtual center comprised of strategically located centers in Minneapolis and Cleveland with smaller centers focused on specific customer sets in Los Angeles and Montreal. In fiscal 2004, these centers handled more than 350,000 customer calls with approximately 65% of the service-related calls addressed remotely. For calls requiring immediate on-site service and support, Norstan maintains a force of highly trained service technicians, design engineers and customer support representatives that can respond to the client’s physical location.

Norstan has approximately 130 employees in its four remote diagnostics and dispatch centers devoted primarily to providing customer service, and more than 260 service technicians in the field. With Norstan’s remote problem resolution capability and our staff of highly trained technicians, we are able to promptly resolve customer support requests and service needs. Norstan’s commitment to customer service is evidenced by a fiscal 2004 survey of Norstan’s communication customers that found an overall satisfaction rating of 97%. This survey was administered by an independent third party.

Headquartered in Minnetonka, Minnesota, Norstan currently supports its customers with sales, service and/or distribution centers located in 28 cities within the United States and Canada:

As of April 30, 2004, Norstan had 1,090 employees, including 990 in the U.S. and 100 in Canada. Norstan’s employee population consists of 192 in sales and marketing, 628 in operations, service and installation, 237 administrative and professional personnel and 33 consultants. Of these employees, 78 are covered by collective bargaining agreements. We believe relations with our employees are good and we have not experienced any work stoppages.

Our marketing strategy is designed to capture a larger portion of existing customers’ communication and IT budgets and to identify and develop new customer relationships. Norstan also competes with its customers’ internal resources for those who may maintain their own equipment, particularly when these resources represent a fixed cost to the customer. Such competition may impose additional pricing pressures on Norstan. Subject to this competitive environment, Norstan competes on the basis of the depth and breadth of services and products we offer; our ability to integrate IT and communication systems as the underlying technologies continue to converge; our reputation for providing superior customer service; and, the number and strength of our customer relationships.

Norstan also competes in its markets with Avaya Communications, NextiraOne, a division of Platinum Equities, and Regional Bell Operating Companies, such as SBC Communications, and telcos such as Verizon Communications. In addition, we may compete with regionally located service providers.

Following the termination of the alliance with Siemens in the resale business, Norstan Resale Services Group will now compete directly with Siemens in this market.

Norstan relies upon a combination of nondisclosure and other contractual arrangements with certain key employees and business partners, and trade secret, copyright and trademark laws and intellectual property laws to protect our proprietary rights and the proprietary rights of third parties from whom we license intellectual property. We enter into confidentiality agreements with certain employees and business partners and limit the distribution of proprietary information.

With the sale of Norstan Network Services in July 2002, we are no longer subject to government regulations that have a material effect on our operations.

As of April 30, 2004, Norstan had signed contracts for telecommunications products and professional services aggregating approximately $19.2 million, substantially all of which are expected to be fulfilled by the end of fiscal 2005. As of April 30, 2003, Norstan had signed contracts aggregating approximately $20.2 million, substantially all of which were fulfilled by the end of fiscal 2004. The usual time period between the execution of a contract and the completion of the installation is three to twelve months, depending on the size and complexity of the system.

We conduct our operations in leased facilities. Our executive offices are located in Minnetonka, Minnesota, where we occupy approximately 129,000 square feet of office space. We also have locations in Brecksville, Ohio, and Phoenix, Arizona, where we occupy approximately 42,750 and 22,440 square feet of office space, respectively. In addition, Norstan occupies sales and service offices in 16 other cities within the United States. In Canada, Norstan occupies approximately 30,700 square feet of office space in Toronto, Ontario, which serves as our Canadian headquarters. Norstan also occupies sales and service offices in three other cities within the Canadian provinces of Alberta, Quebec and British Columbia. We believe that the above-mentioned facilities are adequate and suitable for our current needs.

In April 2004, Norstan received a commitment adjustment letter from the Universal Services Administrative Company (USAC), which oversees the Federal Communications Commission’s Schools and Libraries Program of the Universal Service Fund, also called the “E-rate program.” Funding commitments under the E-rate program provide for discounts on eligible services such as telecommunications services, internet access, network equipment and wiring of instructional buildings and classrooms to connect to the Internet. The letter informed Norstan that USAC had undertaken an audit of the Navajo Preparatory School (Navajo Prep) project for funding year 2001, in which Norstan had installed specific equipment and service for which we received approximately $2.2 million. The audit report concluded that Navajo Prep had not complied with key requirements of the E-rate program and, consistent with E-rate policies, USAC is seeking recovery of the full amount disbursed to Norstan on behalf of Navajo Prep. On June 1, 2004, Norstan filed an appeal with USAC and is continuing its investigation of the Navajo Prep project. While we will continue to defend and appeal USAC’s decision, Norstan may be required to repay all or a portion of the $2.2 million. Accordingly, we established a reserve of $2.2 million in the fourth quarter of fiscal 2004.

In February 2002, Norstan was awarded $7.2 million resulting from a claim before the American Arbitration Association against the former owner of PRIMA Consulting (PRIMA) which claims arose out of our September 1997 acquisition of PRIMA. Subsequently, we reached a settlement with the former owner, Mr. Michael Vadini. The settlement provides that Norstan receive $3.0 million in cash, a promissory note issued by Mr. Vadini for $1.0 million to be paid in monthly installments beginning in June 2002, and certain real properties. As a result of the settlement, we recorded a $3.0 million pre-tax gain in the fourth quarter of fiscal 2002, based on the amount of cash received. We recorded a full reserve against the real property and the promissory note and will record any future gains on the sale of the real properties and collection of the promissory note as amounts are assured of realization. In December 2002, after receiving the first six $83,333 monthly installment payments, we agreed to accept a lump sum payment of $470,000 in settlement of the remaining monthly installments which totaled approximately $500,000 at that time. We recorded a gain, net of tax, of approximately $591,000 through discontinued operations relating to payments received on the promissory note during fiscal 2003. In addition, in May 2003, one of the real properties was sold and a pre-tax gain of approximately $253,000 was recorded through discontinued operations in the first quarter of fiscal 2004. In addition, in January 2004, a second real property was sold and a pre-tax gain of approximately $341,000 was recorded through discontinued operations in the third quarter of fiscal 2004.

We are involved in other legal actions in the ordinary course of our business. Although the outcome of any such legal actions cannot be predicted, in the opinion of management there are no other legal proceedings pending against or involving Norstan for which the outcome is likely to have a material adverse effect upon our business, operating results or financial condition.

Norstan did not submit any matters to a vote of security holders during the last quarter of the fiscal year covered by this report.

Our common stock is traded on the National Over-the-Counter market and is listed on the national market system of the National Association of Securities Dealers’ Automated Quotations system (NASDAQ) under the symbol NRRD. The following table sets forth the high and low sale prices for our common stock as reported by NASDAQ for each quarterly period during the two most recent fiscal years:

As of July 19, 2004, there were 3,640 holders of record of Norstan’s common stock.

Norstan has not recently declared or paid any cash dividends on our common stock and does not intend to pay cash dividends on our common stock in the foreseeable future. We currently expect to retain earnings to finance the operations and the expansion of our business. In addition, our current long-term credit agreement prohibits the payment of cash dividends without the prior written consent of our lender thereunder.

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, 2004, have been derived from our consolidated financial statements, which have been audited by Deloitte & Touche LLP, an independent registered public accounting firm. 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.

General. We are a full-service communications solutions and services company delivering voice and data technologies and services, and remanufactured equipment to corporate end-users and public sector companies. We offer a full range of technologies for customer contact solutions and converged solutions, including applications such as messaging, conferencing and enterprise mobility. Additionally, we provide a host of communications services including ProtectNet® Life Cycle services, project management, implementation, field delivery, voice and data network monitoring, and managed and professional services.

We drive our business by delivering communications solutions and services through the installation of a broad array of technology platforms, software solutions and on-going system maintenance needs. Currently, we work with approximately 2,400 key customers, and have serviced approximately 12,000 sites over the past two years. We draw customers from a variety of industry groups. Norstan maintains a direct sales force focused on the delivery of complex applications for current and potential Fortune 2000 and middle-market customers and an inside sales organization focused on other opportunities. Our remanufactured equipment segment supports a diverse customer base, including Norstan’s customer base, resellers, distributors and other end users with efficient and reliable secondary market solutions.

Operating Segments. To address the complex communications requirements of our customers, Norstan provides a broad range of products and services through two interrelated business segments: Communications Solutions and Services and Resale Services, which accounted for 86.6% and 13.4% of our fiscal 2004 revenues, respectively. Communications Solutions and Services provide solutions and services focused on enterprise and public sector customers throughout the U.S. and Canada, including hardware and software applications that support voice and data communications and customer contact solutions. Resale Services provides refurbished voice and data products to the secondary market.

The following table summarizes the source of our revenues by product/ service offerings over the past three fiscal years:

Effective April 30, 2004, our previously reported business segment, Financial Services, was incorporated into our Communications Solutions and Services business segment. As a result of our strategic decision in fiscal 2002 to no longer offer financing directly to our customers, revenues for this business continue to decline as we completely wind down its operations and it is no longer necessary to provide these results as a separate business segment. Financing is currently offered under a private-label leasing program through an arrangement with Citicapital Technology Finance, Inc., formerly Fidelity Leasing.

We are focusing on several initiatives to better position our business to be successful in fiscal 2005:


	•	Improving company profitability — There are opportunities in many areas of our business to improve Norstan’s profitability, such as improving gross margins for our installation and services, decreasing the cost of customer acquisition, and reducing general and administrative overhead.

	•	Retaining our existing customers — We have built a substantial installed customer base consisting of Fortune 2000 and middle-market companies. We will continue to increase our resources committed to maintaining these relationships, offering our customers additional solutions and services that further improve their communications systems and their ability to run their businesses more efficiently.

	•	Delivering advanced business applications — A significant differentiator for Norstan is our capability to provide customers with advanced business applications and services to support them. We are delivering advanced business applications and strategic solutions, complementing these applications with knowledge, professional services and support upon which Norstan has built its reputation for over 30 years.

	•	Developing Resale Services — We will continue to develop our Resale Services businesses by adding additional voice and data products and accessories that will augment our existing offerings.

	•	Developing new business selectively — Competition within the areas of convergence and applications is fierce and the technology is complex. We will concentrate our new business development in geographic areas where opportunities, skills and resources exist, and on sales and services yielding the highest returns.

Fiscal 2004 Restructuring. During fiscal 2004, we took significant actions to reorganize and refocus the sales and service efforts of our Communications Solutions and Services business segment. We reduced our workforce by more than 20.0% to a headcount of 1,090 at April 30, 2004 from 1,366 at April 30, 2003. We consolidated certain facilities to concentrate our customer acquisition and retention efforts in those geographic markets where we can deliver our solutions and services in a more efficient and profitable manner. In addition, asset impairment charges related to certain capitalized system application costs and hardware costs were recorded.

As the effect of these restructuring efforts were realized during fiscal 2004, our quarterly operating income (excluding restructuring and other charges) improved quarter-over-quarter throughout the year. We expect the benefits from these cost reduction measures will continue in fiscal 2005 and beyond.

Discontinued Operations. Over the past few years, we have disposed of certain non-strategic business units. In fiscal 2001, we sold our IT consulting businesses; Connaissance Consulting and Norstan Consulting. In fiscal 2003, we sold our Network Services business. Because of the sale of these business units, their results of operations are reported as discontinued operations for all periods presented.

The following table sets forth certain items from our consolidated statements of operations expressed as a percentage of total revenues:

The following table sets forth the gross margin percentages for each of our business segments:

Revenues. Total revenues from continuing operations decreased approximately $1.1 million or less than 1.0% to $225.8 million in fiscal 2004 from $226.9 million in fiscal 2003.

Revenues within the Communications Solutions and Services segment decreased $2.2 million or 1.1% to $195.5 million in fiscal 2004 from $197.7 million in fiscal 2003. Revenues from Solutions were down 1.2% year-over-year. Our fiscal 2004 Solutions revenues from customer contact solutions, IP telephony and newer voice solution product offerings were up approximately $18.0 million or 70.0% over fiscal 2003. These increases were offset by lower volume related to our traditional voice solutions product offerings, infrastructure and other products. Service revenues for fiscal 2004 were down less than 1.0% compared to 2003. Our service contract revenues and volume of moves, adds and changes (MAC) were flat year-over-year. In addition, revenues from our professional services and managed communications services were up slightly, generally offset by decreased conferencing and channels activity.

As previously stated, our Financial Services operations are winding down, and the revenues from it continue to decline. As a result, we are reporting the results of this former business segment as a component of Communications Solutions and Services for all periods presented. Financial Services fiscal 2004 revenues were $2.2 million, down 30.3% from fiscal 2003. This decrease was attributed to our strategic decision not to offer financing directly to our customers.

Resale Services’ revenues increased $1.1 million or 3.9% to $30.3 million in fiscal 2004, as compared to $29.2 million in fiscal 2003. Revenues for Vibes Technologies, our integrated direct and web-based e-commerce business which remanufactures and resells voice and data equipment, were up 5.9% year-over-year. In addition, our Siemens Resale Services group revenues were up 1.2% in the comparable periods. Opportunities for further growth within this segment include the addition of new product offerings

Gross Margin. Norstan’s gross margin decreased $2.9 million or 4.2% to $65.4 million from $68.2 million in fiscal 2003. As a percent of total revenues, gross margin was 28.9% in fiscal 2004 compared to 30.1% in fiscal 2003.

Gross margin percentages for any specific period of time are affected by numerous factors, including but not limited to, competitive market pricing, product and/or service mix, labor utilization, project cost overruns, and operations spending.

Communications Solutions and Services gross margin decreased $3.4 million to $54.7 million in fiscal 2004 as compared to $58.1 million in fiscal 2003. Gross margin as a percent of revenues for this segment was 28.0% in fiscal 2004 as compared to 29.4% in fiscal 2003.

Within this segment, Solutions’ margins were 19.0% and 22.0% in fiscal 2004 and 2003, respectively. This decrease was generally the result of our expansion efforts, changing product mix, continued pricing pressure at point of sale and cost overruns on certain projects. Services’ margins were relatively unchanged in fiscal 2004 at 32.3% as compared to 32.5% in fiscal 2003. During fiscal 2004, Services’ margins were favorably impacted by the restructuring actions taken during the year offset by customer price sensitivity, increased training costs and our changing mix of service offerings.

Resale Services’ gross margin was up slightly to 35.1% of revenues in fiscal 2004, as compared to 34.6% in fiscal 2003. The increase is primarily the result of changes in the mix of products sold during the comparable periods. Norstan’s alliance with Siemens in the refurbished equipment business terminated at the end of July 2004. Commencing on August 1, 2004, Norstan Resale Services Group now competes directly with Siemens in procurement as well as the resale of refurbished equipment to end users. Although NRSG’s margins or other aspects of its financial performance may be impacted by these changes, management cannot currently assess whether these factors will have a material adverse impact on our results of operations or financial condition.

Selling, General and Administrative Expenses. Norstan’s selling, general and administrative expenses were $65.3 million in fiscal 2004 compared to $66.8 million in fiscal 2003, a decrease of $1.5 million or 2.2%. As a percent of revenues, selling, general and administrative expenses improved slightly to 28.9% in fiscal 2004, compared to 29.5% in fiscal 2003. The decrease in fiscal 2004 selling, general and administrative expenses was primarily the result of the restructuring efforts undertaken during the year. The resulting reduction in personnel and related costs were somewhat offset by investments we made in fiscal 2004 related to marketing and business development including expansion into certain tier one cities, IP telephony applications and service retention efforts. These lower levels of spending should continue as we closely monitor all of our expenses and as we fully realize the benefit from the restructuring actions taken in fiscal 2004.

Restructuring and Other Charges. As explained below, we recorded approximately $13.5 million in restructuring and other charges in fiscal 2004. No such charges were recorded in fiscal 2003.

During the second quarter of fiscal 2004, we recorded restructuring and other charges of $4.2 million, consisting of a restructuring charge of $3.7 million and a write-off of certain fixed assets of approximately $500,000. These charges were primarily within our Communications Solutions and Services segment and relate to actions completed by the end of our second fiscal quarter. The restructuring charge of $3.7 million related to a workforce reduction of approximately 150 people as we continued to right-size our organization and bring our expense structure in-line with anticipated revenues and changing market demand for our solutions and services. This charge consisted of $3.3 million in severance costs and other related employment benefits, together with $400,000 in lease termination and other facility costs. In addition, we recorded a charge of approximately $500,000 for the write-off of certain assets. These assets consisted primarily of non-recoverable capitalized system applications costs and other hardware costs.

During the fourth quarter of fiscal 2004, we recorded additional restructuring and other charges of $9.4 million. Approximately $7.2 million of this amount was for our reorganization efforts announced in February 2004. Included in these efforts was a reorganization of our Communications Solutions and Services segment to better focus our efforts and to streamline sales and services to improve profitability. Solutions and Services now concentrates customer acquisition and retention efforts into two geographically focused business units. In addition, our sales support and service functions have been realigned to better serve our solutions and services team and our customers’ needs. This restructuring charge includes $2.4 million in costs associated with employee and severance costs related to a workforce reduction of 100 people (80 were terminated as of April 30, 2004), $3.9 million related to facilities exit and other contractual costs, and $831,000 in other asset impairment charges. The remaining $2.2 million charge relates to a claim made by the Universal Services Administrative Company (USAC) regarding a specific E-rate project completed by Norstan. The USAC is seeking a recovery of amounts dispursed by the USAC to Norstan on behalf of one of our customers. We are appealing this claim. However, as we may be required to repay a portion or all of the disputed funding, we have established the requisite reserve (see Note 12 to the Consolidated Financial Statements).

Interest Expense. Interest expense was $2.3 million in fiscal 2004, as compared to $2.2 million in fiscal 2003. Interest expense is incurred primarily under our long-term credit facilities. Average month-end borrowings outstanding under our long-term credit agreements were $20.0 million in fiscal 2004 and $21.2 million in fiscal 2003. Weighted average interest rates under the long-term credit agreements were 6.1% in fiscal 2004 compared to 6.8% in fiscal 2003. Interest costs in fiscal 2004 increased as compared to 2003 due to higher borrowings and costs under our new credit facility entered into during the current year.

Other Income (Expense). Net other income of $105,000 was recorded in fiscal 2004 compared to net other expense of $4,000 in fiscal 2003.

Income Taxes. In fiscal 2004, we recorded a tax benefit from continuing operations of $6.0 million, compared to a tax benefit of $323,000 in fiscal 2003. Fiscal 2004 reflects an effective rate of 38%, representing the effect of the Company’s federal statutory rate adjusted for state income taxes and other permanent tax items. The fiscal 2003 benefit reflects the reduction of certain valuation allowances relating to our capital loss and Canadian net operating loss carryforwards.

We anticipate recording a tax provision on earnings in fiscal 2005 at an effective tax rate of 38.0% to 39.0%.

Net Income (Loss) from Continuing Operations. A net loss of $9.8 million or $0.75 per diluted share was reported in fiscal 2004, as compared to a net loss of $404,000 or $0.03 per share in fiscal 2003.

In July 2002, we sold our Network Services business to NetWolves Corporation (NASDAQ: WOLV) for $7.5 million. Pursuant to the terms of the purchase agreement, $3.75 million was received at closing and the remaining $3.75 million was due one year from closing, evidenced by a non-interest bearing promissory note in favor of Norstan. We recorded a pre-tax gain on this sale of $2.7 million in the first quarter of fiscal 2003 based on the $3.75 million cash received. During the fourth quarter of fiscal 2003, we received payment of $2.9 million in cash as well as other non-monetary assets in early settlement of the promissory note. We recorded a pre-tax gain of $2.8 million in the fourth quarter of fiscal 2003 based on the amount of cash received in settlement of the promissory note. The non-monetary asset, consisting of 300,000 shares of unregistered NetWolves Corporation common stock, has been reflected at a zero value until such time as the unregistered common stock is monetized or monetizable. Network Services provided multiple source long distance services and related consulting and professional services. Because of the sale of this business unit, Network Services results of operations have been reported as discontinued operations for all periods presented.

During fiscal 2001, we divested our IT consulting business starting in February 2001 with the sale of our 75% interest in Connaissance Consulting to Connaissance’s founder. Terms of the sale required the payment of $3.0 million in cash at closing and delivery of promissory notes drawn in favor of Norstan with an aggregate face amount of $13.0 million maturing on various dates, commencing on April 30, 2001 and ending December 31, 2005. To date, $1.0 million has been collected on one of the notes and the remaining $12.0 million has been fully reserved for, including a charge of $5.0 million recorded during the fourth quarter of fiscal 2002 (see below). The divestiture concluded with the sale of Norstan Consulting on April 30, 2001 to a management group led by Norstan Consulting’s former President and the Company’s former Vice Chairman. Terms of the sale required the payment of $500,000 in cash at closing and delivery of a promissory note drawn in favor of the Company in the face amount of $1.5 million maturing on August 28, 2001. In addition, as part of the transaction, we retained our rights to certain assets and assumed certain liabilities of Norstan Consulting. As of April 30, 2002, the promissory note had been paid in full. The results of these two business units are reported as discontinued operations for all periods presented.

Summary operating results of discontinued operations were as follows (in thousands):

In addition to the operating results above, we recorded a gain on the disposal of discontinued operations of $366,000, net of tax, in fiscal 2004. This gain on disposal resulted primarily from the sale of certain properties we received as part of the Vadini settlement related to the February 2002 arbitration award (see Note 12 to the Consolidated Financial Statements).

In fiscal 2003, we recorded a net gain on the disposal of discontinued operations of $5.3 million. The gain on disposal included the following: (i) a pre-tax gain on the sale of Norstan’s Network Services business of $5.5 million ($5.0 million after tax), (ii) a $591,000 gain, net of tax, related to payments on the promissory note we received as part of the PRIMA Consulting arbitration settlement of February 2002, and (iii) a $269,000 net loss related to additional costs incurred in the disposition of Connaissance Consulting. The after-tax gain on the sale of our Network Services business reflects the reversal of a $1.9 million tax valuation allowance which had been previously established for our capital loss carryforwards. The sale of the Network Services business allowed us to fully utilize these capital loss carryforwards.

We also recorded a $1.2 million loss on disposal of discontinued operations in fiscal 2002. The loss on disposal includes the following: (i) a pre-tax charge of $5.0 million ($3.1 million after tax) for an additional reserve on the remaining promissory note receivable from the sale of Connaissance Consulting, and (ii) a pre-tax gain of $3.0 million ($1.9 million after tax) from the arbitration settlement related to PRIMA Consulting (see Note 12 to the Consolidated Financial Statements). During the fourth quarter of fiscal 2002, the purchaser of Connaissance Consulting defaulted on payments then due. We held discussions with the

Net Income (Loss). For fiscal 2004, we reported a net loss of $9.4 million, or $0.72 per diluted share, as compared to net income of $4.9 million, or $0.39 per diluted share in fiscal 2003.

Revenues. Total revenues from continuing operations decreased $20.6 million or 8.3% to $226.9 million in fiscal 2003 from $247.5 million in fiscal 2002.

Revenues within the Communications Solutions and Services segment decreased 8.9% to $197.7 million in fiscal 2003, from $217.1 million in fiscal 2002. Revenues from Solutions’ product offerings were down 7.6% year-over-year as a result of lower revenues in our legacy product offerings, somewhat offset by increased revenues from more recent additions to our portfolio. Services revenues were down 8.3% due to a decrease in revenues from our service contracts, MAC (moves, adds and changes) and convergence/professional services partially offset by increased channels activity and managed communications services.

Resale Services revenues decreased $1.2 million or 3.9% to $29.2 million in fiscal 2003, as compared to $30.4 million in fiscal 2002. Revenues from Vibes Technologies were up 4.2% year-over-year. This was offset by a 13.1% decrease in revenues in our Siemens Resale Services group.

Gross Margin. Our gross margin decreased $7.6 million or 10.0% to $68.2 million from $75.9 million in fiscal 2002. As a percent of total revenues, gross margin was 30.1% in fiscal 2003 compared to 30.6% in fiscal 2002. Overall, fiscal 2003 gross margin percentages were positively affected, as compared to fiscal 2002, by a reduction in incentive compensation for our operations departments resulting from our lower than expected performance.

Gross margin for Communications Solutions and Services decreased $6.6 million to $58.1 million in fiscal 2003 as compared to $64.7 million for fiscal 2002. Gross margin as a percent of revenues for this segment were 29.4% in fiscal 2003 as compared to 29.8% in fiscal 2002.

Solutions’ margins were 21.3% and 25.7% in fiscal 2003 and 2002, respectively. This decline was the result of increased pricing pressure at the point of sale, changing product mix, current economic conditions, as well as cost overruns on certain projects. Services’ margins were 32.5% in fiscal 2003 and 29.9% in fiscal 2002. Fiscal 2003 margins were favorably affected by reduced incentive compensation and lower headcounts as compared to the previous year.

Resale Services’ gross margin was down slightly to 34.6% of revenues in fiscal 2003, as compared to 36.7% in fiscal 2002 primarily as a result of a change in the mix of products sold during the comparable periods.

Selling, General and Administrative Expenses. Norstan’s selling, general and administrative expenses were $66.8 million in fiscal 2003 and $73.9 million in fiscal 2002, a decrease of $7.1 million or 9.7%. As a percent of revenues, selling, general and administrative expenses improved slightly to 29.5% in fiscal 2003, compared to 29.9% in fiscal 2002. The decrease in selling, general and administrative expenses was the result of significantly lower incentive compensation expense in fiscal 2003 as compared to fiscal 2002, as well as continued efforts to right size our operations in light of the current economic environment. At the same time during fiscal 2003, we made investments in expansion into tier one cities, acquisition of assets in IP application development, and additional service sales initiatives and customer retention specialists.

Interest Expense. Interest expense decreased significantly in fiscal 2003 to $2.2 million, as compared to $4.9 million in fiscal 2002. Interest expense is incurred primarily under our long-term credit facility. Average month-end borrowings outstanding under our long-term credit agreements were $21.2 million in fiscal 2003 and $45.0 million in fiscal 2002. Weighted average interest rates under our long-term credit agreements were 6.8% in fiscal 2003 compared to 9.3% in fiscal 2002.

Other Income (Expense). Net other expense of $4,000 was recorded in fiscal 2003 as compared to net other income of $651,000 in fiscal 2002. Fiscal 2002 net other income reflects interest income earned on certain promissory notes.

Income Taxes. In fiscal 2003, we recorded a tax benefit from continuing operations of $323,000, compared to a tax benefit of $8.9 million in fiscal 2002. Fiscal 2003 reflects an effective rate of 39%, representing the effect of our federal statutory rate adjusted for state income taxes and other permanent tax items. In addition, the tax benefit recorded in fiscal 2003 reflects the reduction of certain valuation allowances relating to our capital loss and Canadian net operating loss carryforwards. The fiscal 2002 benefit reflects the reduction of the valuation allowance principally associated with our U.S. net operating loss carryforward.

Net Income (Loss) from Continuing Operations. A net loss of $404,000 or $0.03 per diluted share was reported in fiscal 2003, as compared to net income of $6.6 million or $0.52 per share in fiscal 2002.

Discontinued Operations. As discussed above, Norstan’s consolidated financial statements have been restated to report separately the net assets and operating results of the discontinued Network Services and Consulting businesses for all periods presented.

Net Income. For fiscal 2003, we reported net income of $4.9 million or $0.39 per diluted share, as compared to net income of $7.5 million or $0.59 per diluted share for fiscal 2002.

The Securities and Exchange Commission requires all companies to include a discussion of critical accounting policies or methods used in the preparation of financial statements. Note 4 of the Notes to the Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and assumptions, including those related to revenue recognition, valuation of deferred tax assets, valuation of accounts receivable and estimation of restructuring costs associated with facility closures and workforce reductions. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances. The following is a brief discussion of the more significant accounting policies and methods used by Norstan which require the most subjective and complex judgments. We consider these to be critical and changes in applications of these policies could result in materially different amounts being reported under different conditions or using different assumptions.

Revenue Recognition. Norstan’s principal sources of revenues are derived from the sale, installation and service of our full range of voice and data technologies and services. Within our Communications Solutions and Services segment, revenues from the sale and installation of products and systems are generally recognized under the percentage-of-completion method of accounting for long-term contracts and revenues from maintenance service contracts, moves, adds, and changes, and professional services, are recognized as the services are provided and revenues from the sale of IP application software are generally recognized upon delivery. At April 30, 2004, we had backlog of approximately $19.2 million relating to contracts in process of completion. Service contracts are generally pre-billed either on a quarterly or annual basis and are reflected on the balance sheet as deferred revenue and recognized as revenue over the service period on a straight-line basis. Resale Services’ revenues generated from the secondary equipment market are recognized upon performance of contractual obligations, which is generally upon shipment.

If we do not accurately estimate the resources required and the scope of work to be performed, or we do not manage our projects properly within the planned periods of time or satisfy our obligations under our

customer contracts, then future margins may be significantly and negatively affected or losses on existing contracts may need to be recognized. Any such resulting reductions in margins or contract losses could be material to our financial condition and results of operations and would be reflected in the period in which they were identified or incurred.

Valuation of Deferred Tax Assets. Norstan recognizes deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. At April 30, 2004, we had $19.0 million in net deferred tax assets, including $7.5 million relating to net operating loss carryforwards. We regularly review our deferred tax assets for recoverability and establish valuation allowances based on historical taxable income, projected future taxable income by tax jurisdiction, and the expected timing of the reversals of existing temporary differences. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against the net deferred tax assets. In the event that actual results differ from our estimates or that these estimates are adjusted in future periods or if uncertainties arise related to our ability to utilize some or all of the deferred tax assets, we may need to establish additional valuation allowances which could materially impact our financial condition and results of operations. To the extent a valuation allowance is established in a given period, an expense within the tax provision in the statement of operations is recorded. Conversely, when a valuation allowance is reduced, a tax benefit is recorded in the statement of operations.

In the event that actual results differ significantly from our estimates of future operating results or that these estimates are adjusted in future periods or if uncertainties arise related to the Company’s ability to utilize some or all of the deferred tax assets, we may need to establish additional valuation allowances for some or all of our net deferred tax assets which could materially impact our financial condition and results of operations.

Valuation of Accounts Receivable. Norstan typically performs credit checks on new install contract customers with orders greater than $100,000. Credit limits are assessed according to current creditworthiness including, but not limited to, the customer’s current financial condition, working capital and payment histories. Collection activity for service contract customers is performed on an ongoing basis with payments generally due in advance of service commencement. In addition, we have a “service hold” policy if a customer is in default of its payment obligation and has provided no immediate commitment to pay. Bad debt reserves are established and continuously evaluated based on customer collections and payments, historical experience and any specific customer collection issues that may have been identified. While such credit losses have historically been within our expectations and the provisions established, we cannot guarantee that we will continue to have similar experience. In addition, a material change in the liquidity or financial position of any of our major customers or any adverse change in general economic conditions could have a material impact on the collectibility of accounts receivable and future operating results.

Restructuring and Other Charges. In fiscal 2004, Norstan initiated certain restructuring actions, including workforce reductions, lease terminations, other facility exit and contractual costs and asset impairment charges. These restructuring actions require our management to utilize significant estimates related to the expenses for severance and other employee separation costs, facility exit and other exit costs, the amount and timing of estimated sublease rentals that could be reasonably obtained and realizable values of assets made redundant or obsolete. Total accrued restructuring and other charges at April 30, 2004 totaled $8.6 million, of which $4.0 million relates to facility exit and other contractual costs. Included in our accrued restructuring accrual is an estimate of remaining future contractual lease payments. As required by generally accepted accounting principles, we have estimated sublease rentals that could be reasonably received upon sublease of the applicable facilities. We estimated such sublease rentals through the remaining terms of the underlying lease agreements to be approximately $4.8 million at April 30, 2004. Should any of the assumptions (such as the sublease rate or timing) utilized by us to determine estimated sublease rentals be significantly different than ultimate results, our results of operations and cash flows could be significantly impacted.

General. We have historically funded our working capital needs, capital expenditures and other investment activities through cash flows generated from operations, net proceeds from lease contracts, borrowings from long-term credit facilities and more recently, proceeds from dispositions of discontinued operations. As we move forward, we anticipate that funds generated from operations and borrowing capabilities under our current credit agreement should be sufficient to fund anticipated operating activities, planned capital expenditures and scheduled debt repayments. In connection with the termination of the alliance with Siemens for refurbished equipment effective at the end of July 2004, we anticipate incremental working capital requirements of approximately $2.0 to $3.0 million related to accounts receivable and inventory. As of April 30, 2004, we had cash totaling $2.7 million and access to $5.0 million to draw upon under our revolving credit facility.

Sources and Uses of Cash. Continuing operations utilized net cash of $3.0 million in fiscal 2004 and provided net cash of $2.1 million and $14.7 million during fiscal 2003 and 2002, respectively. These decreases are primarily the result of the decline in our operating results as we reported a net loss from continuing operations of $9.8 million in fiscal 2004 and $404,000 in fiscal 2003 as compared to net income of $6.6 million in fiscal 2002.

Investing activities provided net cash of $2.4 million, $6.7 million and $17.5 million in fiscal 2004, 2003 and 2002, respectively. This continued decrease in cash provided by investing activities is due primarily to the reduction in proceeds from lease contracts; $6.9 million in fiscal 2004 as compared to $13.4 million and $25.6 million in fiscal 2003 and 2002, respectively. Historically, our lease portfolio has been a significant source of cash for our business. However, it will continue to decrease over the next few fiscal years as our leasing activity winds down with projected cash provided from lease collections of approximately $4.6 million in fiscal 2005.

Financing activities provided net cash of $2.3 million in fiscal 2004 as compared to utilizing net cash of $18.0 million and $35.8 million in fiscal 2003 and 2002, respectively. These changes in year-over-year cash provided by/used for financing activities are the result of changes in the nature of our bank financing and leasing debt positions. During fiscal 2003 and 2002, we were able to significantly reduce our long-term debt using both cash provided by continuing operations and investing activities as well as cash provided by dispositions of certain discontinued operations. However, in fiscal 2004, the net cash we utilized in continuing operations, including payments relating to the restructuring and other charges recorded, as well as investments in both our presence in certain tier one cities and our Convergence Development Group, were financed primarily by cash provided by our lease portfolio and additional borrowings under our long-term credit facility. In addition, as our leasing activity winds down, we are no longer borrowing additional funds based on lease receivables. New borrowings related to our lease receivables were $3.6 million in fiscal 2003 while there were no new discounted lease rental borrowings during fiscal 2004 and 2002.

On December 10, 2003, we entered into a new five year $27.5 million secured credit agreement with Wells Fargo Foothill, Inc. consisting of the following components: A) a $5.0 million revolving credit facility, and B) a $22.5 million term loan payable in 30 monthly installments of $333,333 beginning on February 1, 2004, with the remaining unpaid principal due and payable upon maturity at December 9, 2008. Availability under the revolving credit facility is generally based on a percentage of eligible recurring service and maintenance revenues, as defined. This credit agreement is secured by substantially all of our assets.

The $5.0 million revolving credit facility currently bears interest at the bank’s reference rate plus 2.0% or LIBOR plus 4.0% with provisions for future rate reductions based on certain of our financial ratios. The term loan bears interest at the bank’s reference rate plus 3.5%. Annual unused line fees on the revolver are 0.5% and other monthly and annual fees are due to the lender throughout the duration of the agreement. In addition, we are required to meet certain financial and other covenants, including maintaining $2.0 million in excess availability. The agreement requires us to maintain, on a quarterly basis, minimum levels of EBITDA (earnings before interest, taxes, depreciation and amortization) and limits our capital expenditures on an annual basis. As of April 30, 2004, borrowings under this agreement were $20.8 million with an average interest rate of 7.5%. We were in compliance with all applicable financial covenants as of April 30, 2004.

Proceeds from the new term note were used to repay and terminate our previous credit agreement. As a result of the termination of our previous credit agreement, we wrote-off the remaining $162,000 in unamortized debt financing costs during the third quarter of fiscal 2004. In connection with our new secured credit agreement, we capitalized approximately $575,000 in debt financing costs which are being amortized over the term of the new agreement.

During the periods presented in this annual report, prior to December 10, 2003, Norstan operated under a previous credit agreement with certain banks, as amended from time to time, consisting of a revolving line of credit and term loan, each secured by substantially all the assets of Norstan. The previous credit agreement provided for interest at various rates ranging from the banks’ reference rate plus 0.5% to the reference rate plus 2.0%, or the Eurodollar rate advance plus 2.5% to the Eurodollar rate advance plus 4.0%, plus annual commitment fees ranging from 0.375% to 0.25%.

In addition to our cash flows from continuing operations, we have had a significant amount of cash provided by the disposition of discontinued operations during the past few fiscal years. For fiscal 2004, cash provided by discontinued operations was $382,000 as compared to $8.7 million and $3.4 million in fiscal 2003 and 2002, respectively. While we have divested ourselves of our non-strategic business units, we have retained certain assets from these transactions that will be a source of cash in the future when they are monetized and payments are received.

We believe that a combination of cash expected to be generated from operations and borrowing capacity available under our current financing arrangements will be adequate to fund anticipated operating activities, capital expenditures and debt repayments until at least April 30, 2005. There is no assurance that additional financing, if needed, will be available in the future on acceptable terms.

Capital Expenditures. We used $2.9 million for capital expenditures during fiscal 2004 as compared to $5.2 million and $5.1 million in fiscal 2003 and 2002, respectively. These expenditures were primarily for computer hardware and software systems. We currently expect capital expenditures of approximately $4.0 to $5.0 million in fiscal 2005, which will be financed by cash from operations or from borrowings under our long-term credit facility.

Investment in Lease Contracts. Norstan has historically made a significant investment in lease contracts with its customers. As previously discussed, the Company continues to wind down its leasing activities and provide its customers with financing through Citicapital Technology Finance, Inc. As a result, there was only $97,000 invested in lease contracts in fiscal 2004 as compared to $235,000 and $3.0 million in fiscal 2003 and 2002, respectively. Net lease receivables decreased to $5.6 million at April 30, 2004 from $12.3 million at April 30, 2003. We have historically utilized our lease receivables and corresponding underlying equipment to borrow funds from financial institutions on a nonrecourse basis by discounting the stream of future lease payments. Proceeds from discounting are presented on the consolidated balance sheet as discounted lease rentals. Discounted lease rentals totaled $3.6 million at April 30, 2004 (of which $2.8 million is current and will be due in fiscal 2005) as compared to $8.5 million at April 30, 2003. Interest rates on these credit agreements at April 30, 2004 ranged from 6.0% to 8.0%, while payments are due in varying monthly installments through March 2007. Payments due to financial institutions are made from monthly collections of lease receivables from customers. We also sold certain leases to a third party on a nonrecourse basis during July and August 2001. Total proceeds from these sales were $6.4 million which is reflected on the Consolidated Statements of Cash Flow in “Financing Activities”.

In March 2003, we purchased certain assets and intellectual property from NetCom Systems, Inc. (NetCom) related to NetCom’s voice over Internet Protocol (IP) telephony applications software operations. This group is involved in the development of applications that increase the effectiveness and productivity of IP communications systems. The software assets purchased as part of this transaction include the NetCom Internet Protocol Application (NIPA) Framework — an IP application framework/ architecture which provides a base for the development of efficient and effective IP solutions. Currently, the NIPA Framework is used specifically with Cisco’s AVVID enterprise architecture; however, it can be interfaced with multiple

manufacturers of IP solutions. In addition to the NIPA Framework, we acquired certain applications which have been developed to effectively meet specific needs of IP telephony users, including; Soft BossAdmin, IP ZonePage, IP Call Block, IP 911 Alert, IP Dial-Out and IP GMS (Guest Management Services). The acquisition consideration totaled $3.0 million, consisting of a cash payment of $1.1 million at closing, $1.1 million paid in the first quarter of fiscal 2004 and guaranteed payments of $800,000 payable over the next two years ($400,000 paid April 2004 with the remaining $400,000 due April 2005). The purchase agreement provides that we may pay additional purchase consideration up to $3.0 million based on the amount of new software license fees received by Norstan during the two-year period following the closing. At our discretion, up to 50% of any contingent consideration may be paid in shares of Norstan’s common stock. We have and will continue to fund the purchase of these assets from borrowings under our credit facility. We also hired certain key NetCom personnel who were involved in development of IP telephony applications software. In fiscal 2003, we recorded $2.6 million for intangible assets relating to proprietary technology and $400,000 in goodwill relating to the $3.0 million acquisition consideration. This group is doing business as Norstan Convergence Development Group and its results of operations are included in our Communications Solutions and Services segment.

We have various contractual obligations and commitments to make future payments including debt agreements, lease obligations and discounted lease rental commitments. The following table summarizes future obligations under these contracts due by period as of April 30, 2004 (in thousands):

We do not currently have any other material definitive commitments that require cash resources.

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources other than operating leases disclosed above, that are material to investors.

In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46). FIN 46 requires a variable interest entity (VIE) to be consolidated when a company is subject to the majority of the risk of loss from the VIE’s activities or is entitled to receive the majority of the entity’s residual returns, or both. In December 2003, the FASB issued a revision to FIN 46 (FIN 46R) which partially delayed the effective date of the interpretation to March 31, 2004 and added additional scope exceptions. The adoption of FIN 46R did not have a material impact on our consolidated results of operations, financial position or cash flows as we do not have a VIE.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise became effective September 30, 2003. The adoption of SFAS No. 150 did not have a material impact on our consolidated results of operations, financial position or cash flows.

From time to time, we may publish forward-looking statements. These forward-looking statements are based on management’s expectations and beliefs concerning future events. Forward-looking statements are necessarily subject to risks, uncertainties and other factors, many of which are outside of our control, that could cause actual results to differ materially from such statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements including those made in this document. In order to comply with the terms of the Private Securities Litigation Reform Act, Norstan notes that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements. Some of the risks and uncertainties that may affect the operations, performance, developments and results of our business include the following: national and regional economic conditions; pending and future legislation affecting the telecommunications industries; Norstan’s business in Canada; the stability of foreign governments; market acceptance of our products and services; factors related to the development of new technologies; our continued ability to provide integrated communication solutions for customers in a dynamic industry; product pricing and margins, including uncertain impact of the termination of the alliance with Siemens on the margins in the Norstan Resale Services Group business; labor costs; funding and sourcing of adequate inventory; access to adequate additional financing, if needed; management of growth; integration of acquisitions; and other competitive factors. The foregoing list is not exhaustive, and we disclaim any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements. Because these and other factors could affect our 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.

Market risk represents the risk of changes in value of a financial instrument, derivative or non-derivative, caused by fluctuations in interest rates, foreign exchange rates and equity prices. Changes in these factors could cause fluctuations in the results of our operations and cash flows. In the ordinary course of business, we are exposed to foreign currency and interest rate risks. These risks primarily relate to the sale of products and services to foreign customers and changes in interest rates on our long-term debt obligations, discounted lease rentals, capital leases and other long-term debt obligations.

For fixed rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not results of operations or cash flows. We do not have an obligation to prepay any fixed rate debt prior to maturity, and therefore, interest rate risk and changes in the fair market value of fixed rate debt will not have an effect on results of operations or cash flows until we decide, or are required, to refinance such debt.

For variable rate debt, changes in interest rates generally do not affect the fair market value of the debt instrument, but does affect future results of operations and cash flows. We had variable rate debt of $20.8 million outstanding at April 30, 2004 with a weighted average interest rate of 7.5%. Assuming our balance of variable rate debt remains constant at $20.8 million, each one-percent increase in interest rates would result in an annual increase in interest expense, and a corresponding decrease in pre-tax cash flows,

We have periodically financed customer equipment purchases with fixed rate, sales-type leases. The resulting stream of future lease payments was, in turn, used to borrow funds from financial institutions at fixed rates. We are not exposed to interest rate risk in connection with these arrangements because: (i) both the leases and the debt are at fixed interest rates; and (ii) we typically entered into lending arrangements shortly after execution of the related leases.

The table appearing below presents principal amounts by year of anticipated maturity for our debt obligations and related average interest rates based on the weighted average interest rates at the end of the period. Variable interest rates disclosed do not attempt to project future interest rates. This information should be read in conjunction with Notes 6 and 7 of the Notes to Consolidated Financial Statements (in thousands).

We are exposed to foreign currency rate risk. Substantially all foreign exchange exposure is related to the value of the Canadian dollar. In general, with a net asset exposure, a weakening of the Canadian dollar relative to the U.S. dollar has a negative translation effect. Conversely, with a net asset exposure, a strengthening of the Canadian dollar would have the opposite effect. The average exchange rates for the Canadian dollar against the U.S. dollar have improved in fiscal 2004 as compared to the average rates during fiscal 2003.

Assets and liabilities outside the United States are located primarily in Canada. Our investments in foreign subsidiaries with a functional currency other than the U.S. dollar are not hedged. The potential loss in fair value resulting from a hypothetical 10% adverse change in the Canadian dollar exchange rate would not materially affect our consolidated financial position, results of operations or cash flows. Any gain or loss in fair value, associated with the Canadian dollar would be recorded as a separate component of shareholders’ equity.

During fiscal 2004, 2003 and 2002, the average exchange rates for the Canadian dollar strengthened (weakened) against the U.S. dollar as follows:

We do not purchase or hold any derivative financial instruments for trading or speculative purposes. We also currently do not have any derivative financial instruments in place to manage interest costs, but may consider utilizing such instruments in the future as a means to manage interest rate risk.

We have audited the accompanying consolidated balance sheets of Norstan, Inc. and subsidiaries (the “Company”) as of April 30, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended April 30, 2004. Our audits also included the financial statement schedule listed in the Index at Item 8. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America). 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of April 30, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

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

Norstan operates principally through its subsidiaries: Norstan Communications, Inc., Norstan Canada, Ltd., Vibes Technologies, Inc. and Norstan Financial Services, Inc. Headquartered in Minnetonka, Minnesota, we have sales and services locations in the United States and Canada. Norstan’s common stock is listed on the NASDAQ stock market under the symbol NRRD. Our mission is to improve the way our customers communicate. We offer a broad array of technology platforms, software solutions and on-going system maintenance services. Currently, we work with approximately 2,400 key customers, and have serviced approximately 12,000 sites over the past two years. We draw customers from a variety of industry groups.

In March 2003, we purchased certain assets and intellectual property from NetCom Systems, Inc. (NetCom) related to NetCom’s voice over IP telephony applications software operations. The acquisition consideration totaled $3.0 million, consisting of a cash payment of $1.1 million at closing and $1.1 million 120 days after the closing and guaranteed payments of $800,000 payable over the next two years ($400,000 paid April 2004 with the remaining $400,000 due April 2005). The purchase agreement provides that we may pay NetCom contingent consideration up to $3.0 million based on the amount of new software license fees received by Norstan during the two-year period following the closing. At our discretion, up to 50% of any contingent consideration may be paid in shares of Norstan’s common stock. We have and will continue to fund the purchase of these assets from borrowings under our credit facility. We also hired certain key NetCom personnel who were involved in NetCom’s development of IP telephony applications software. This group is doing business as Norstan Convergence Development Group and its results of operations are included in our Communications Solutions and Services segment.

The following table summarizes the fair value of the assets acquired as determined by an independent appraisal (in thousands):

The amortizable intangible assets relating to proprietary technology are being amortized over five years on a straight-line basis. In accordance with Statement of Financial Accounting Standards (SFAS) No. 142,

“Goodwill and Other Intangible Assets,” the goodwill acquired in the acquisition is not amortized. Any contingent consideration that we may be required to pay will be accounted for as additional goodwill. The intangible assets and goodwill acquired have been allocated to our Communications Solutions and Services business segment. Pro forma results related to the acquisition were not material to our financial condition or results of operations.

In February 2002, we agreed to sell our Network Services business to NetWolves Corporation (NASDAQ: WOLV) for $7.5 million. The transaction was effective on July 1, 2002. Pursuant to the terms of the purchase agreement, $3.75 million was received at closing and the remaining $3.75 million was due one year from closing, evidenced by a non-interest bearing promissory note in favor of Norstan. We recorded a pre-tax gain on this sale of $2.7 million in the first quarter of fiscal 2003 based on the $3.75 million cash received. During the fourth quarter of fiscal 2003, we received payment of $2.9 million in cash as well as other non-monetary assets in early settlement of the promissory note. We recorded a pre-tax gain of $2.8 million in the fourth quarter of fiscal 2003 based on the amount of cash received in settlement of the promissory note. The non-monetary asset, consisting of 300,000 shares of unregistered NetWolves Corporation common stock, has been reflected at a zero value until such time as the unregistered common stock is monetized or monetizable. Network Services provided multiple source long distance services and related consulting and professional services. Because of the sale of this business unit, Network Services results of operations have been reported as discontinued operations for all periods presented.

During fiscal 2001, we divested our IT consulting business in order to focus on our core competencies of providing communications technology services and solutions to direct enterprise customers and channel partners. In addition to refocusing our strategy, the absence of realized synergies between our communications and IT consulting businesses and recurring losses within the consulting business contributed to our decision to divest of this non-strategic business segment. Our IT consulting business results are reported as discontinued operations for all periods presented.

Net assets (liabilities) of discontinued operations included the following (in thousands):

Summary operating results of discontinued operations were as follows (in thousands):

In fiscal 2003, we recorded a net gain on the disposal of discontinued operations of $5.3 million. The gain on disposal included the following: (i) a pre-tax gain on the sale of Norstan’s Network Services business of $5.5 million ($5.0 million after tax), (ii) a $591,000 gain, net of tax, related to payments on the promissory note we received as part of the PRIMA Consulting arbitration settlement of February 25, 2002, and (iii) a $269,000 net loss related to additional costs incurred in the disposition of our consulting business. The after-tax gain on the sale of Network Services business reflects the reversal of a $1.9 million tax valuation allowance which had been previously established for our capital loss carryforwards. The sale of the Network Services business allowed us to fully utilize these capital loss carryforwards.

We also recorded a $1.2 million loss on disposal of discontinued operations in fiscal 2002. The loss on disposal includes the following: (i) a pre-tax charge of $5.0 million ($3.1 million after tax) for an additional reserve on the remaining promissory note receivable from the sale of Connaissance Consulting, and (ii) a pre-tax gain of $3.0 million ($1.9 million after tax) from the arbitration settlement related to PRIMA Consulting (see Note 12). During fiscal 2002, the purchaser of one of our IT consulting businesses defaulted on payments then due. We held discussions with the purchaser, and, based upon these discussions and review of the purchaser’s financial position, management determined that a reserve was required for the remaining amount of the promissory note.

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

The preparation of our financial statements, in conformity with accounting principles generally accepted in the United States of America, requires us 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

valuation, depreciable lives of property and equipment, valuation of deferred tax assets, warranty reserves, estimates of percentage of completion under long-term contracts and others. Ultimate results could differ from those estimates.

Within our Communications Solutions and Services business segment, revenues from the sale and installation of products and systems are recognized under the percentage-of-completion method of accounting for long-term contracts. Revenues from maintenance service contracts, moves, adds, and changes, and network integration services, are recognized as the services are provided and financial services’ revenues are recognized over the life of the related lease receivables using the effective interest method. Resale Services’ revenues are generated from the secondary equipment market and are recognized upon performance of contractual obligations, which is generally upon shipment. In addition, we grant credit to our customers and generally do not require collateral or any other security to support amounts due.

Fair values of financial instruments, including long-term obligations, lease receivables and trade receivables, approximated their carrying values at April 30, 2004 and 2003 because of their short maturity or variable interest rate nature, except for discounted lease rentals for which book value was $3.6 million and $8.5 million as compared to estimated fair value of $3.4 million and $7.9 million as of April 30, 2004 and 2003, respectively.

Inventories include purchased parts and equipment and are stated at the lower of cost, determined on a weighted-average cost basis, or estimated realizable value.

Property and equipment are stated at cost and include expenditures that increase the useful lives of existing property and equipment. Maintenance, repairs and minor renewals are charged to operations as incurred. When property and equipment are disposed of, the related cost and accumulated depreciation are removed from the respective accounts and any gain or loss is reflected in operations. Property 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.

Pursuant to the requirements of SFAS No. 144, “Accounting for the Impairment of Long-Lived Assets,” in determining whether an impairment has occurred, our policy is to evaluate, at each balance sheet date, whether events and circumstances have taken place to indicate that the book value of our assets may not be recoverable. If such indicators were present, impairment would be assessed using estimates of undiscounted cash flows attributable to the assets. In the event such cash flows are not expected to be sufficient to recover the book values of the assets, the assets would be written down to their estimated fair values. There were no writedowns recorded under SFAS No. 144 in fiscal 2004, 2003 or 2002, except for those included in restructuring and other charges (see Note 5).

Pursuant to the requirements of SFAS No. 142, we test goodwill for impairment on an annual basis or more frequently if circumstances warrant using a fair value approach. We have performed the required tests regarding the realizability of the recorded goodwill and determined that no impairment charge was required

in fiscal 2004, 2003 or 2002. In addition, we recorded amortization expense of $534,000 and $88,000 in fiscal 2004 and 2003, respectively, related to the intangible assets acquired as part of our fiscal 2003 IP telephony applications software acquisition from NetCom (see Note 2). There was no amortization expense in fiscal 2002 relating to other intangible assets. The amortization expense is included in our selling, general and administrative expenses.

The components of goodwill and other intangible assets were as follows as of April 30, (in thousands):

The change in the gross carrying amounts of goodwill and other intangible assets for the years ended April 30, were as follows (in thousands):

The weighted average amortization period related to our intangible assets is five years. The following table sets forth our estimate of amortization expenses related to other intangible assets for each of the next five years (in thousands):

We are subject to warranty claims for products and overall solutions that may fail to perform as expected due to design, installation or manufacturing deficiencies. Customers continue to require their outside suppliers to guarantee or warrant their products/ solutions and bear the cost of repair or replacement of such products/ solutions. Depending on the terms under which we supply products/ solutions to our customers, a customer may hold us responsible for some or all of the repair, replacement or redesign/ reinstallation costs of defective products/ solutions, when the product/ solution supplied did not perform as represented. We generally provide customers a warranty on products consistent with the warranty we receive from the original equipment manufacturer. In most instances, the original equipment manufacturer

bears the cost to replace defective products. We provide the necessary labor to redesign, reinstall or replace products/ solutions that did not perform as represented. Our policy is to reserve for estimated future costs based upon historical trends of actual costs incurred. The warranty reserve is included in other accrued liabilities within our consolidated balance sheets.

The following table presents a summary of the warranty provision (in thousands):

For our 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 within accumulated other comprehensive income (loss).

Deferred income taxes are provided for differences between the financial statement carrying amounts and the tax basis of our assets and liabilities at currently enacted tax rates.

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

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

For fiscal 2004 and 2003, respectively, approximately 2.0 million and 1.8 million common stock equivalents have been excluded from the computation of diluted earnings per share as required under SFAS No. 128, as the effect of their inclusion would be anti-dilutive.

We report comprehensive income (loss) and its components pursuant to the requirements of SFAS No. 130, “Reporting Comprehensive Income”. For Norstan, comprehensive income (loss) consists of net income (loss) adjusted for foreign currency translation adjustments and is presented in the Consolidated Statements of Shareholders’ Equity.

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). FIN 46 requires a variable interest entity (“VIE”) to be consolidated when a company is subject to the majority of the risk of loss from the VIE’s activities or is entitled to receive the majority of the entity’s residual returns, or both. In December 2003, the FASB issued a revision to FIN 46 (“FIN 46R”) which partially delayed the effective date of the interpretation to March 31, 2004 and added additional scope exceptions. The adoption of FIN 46R did not have a material impact on our consolidated results of operations, financial position or cash flows as we do not have a VIE.

better serve our solutions and services team and our customers’ needs. This restructuring charge includes $2.4 million in costs associated with employee and severance costs related to a workforce reduction of 100 people (80 were terminated as of April 30, 2004), $3.9 million related to facilities exit and other contractual costs, and $831,000 in other asset impairment charges. The remaining $2.2 million charge relates to a claim made by the Universal Services Administrative Company (USAC) regarding a specific E-rate project completed by Norstan. The USAC is seeking a recovery of amounts dispursed by the USAC to Norstan on behalf of one of our customers. We are appealing this claim. However, as we may be required to repay a portion or all of the disputed funding, we have established the requisite reserve (see Note 12).

As of April 30, 2004, there remained reserves of approximately $8.6 million in the accompanying consolidated balance sheet; $5.8 million included in other accrued current liabilities and $2.8 million in other long-term liabilities. We anticipate the majority of the remaining restructuring costs will be paid by the end of our second quarter in fiscal 2005 with the exception of certain facility costs which will extend through fiscal 2012.

The following table summarizes the restructuring and other charges taken during fiscal 2004 and the remaining reserves reflected on our consolidated balance sheet (in thousands):

Norstan financed customer equipment purchases in the amounts of $97,000, $235,000 and $3.0 million during fiscal 2004, 2003 and 2002, respectively. This decline is a result of our strategic decision not to offer financing directly to our customers. Leases are primarily accounted for as sales-type leases for financial reporting purposes.

The aggregate amount of gross lease receivables maturing in each of the three years following April 30, 2004 is as follows (in thousands):

Aggregate maturities of long-term debt as of April 30, 2004 were as follows (in thousands):

In December 2003, we entered into a new five year $27.5 million secured credit agreement with Wells Fargo Foothill, Inc. consisting of the following components: A) a $5.0 million revolving credit facility, and B) a $22.5 million term loan payable in 30 monthly installments of $333,333 beginning on February 1, 2004, with the remaining unpaid principal due and payable upon maturity at December 9, 2008. Availability under the revolving credit facility is generally based on a percentage of eligible recurring service and maintenance revenues, as defined. This credit agreement is secured by substantially all of our assets.

annual basis. As of April 30, 2004, borrowings under this agreement were $20.8 million with an average interest rate of 7.5%. We were in compliance with all applicable financial covenants as of April 30, 2004.

Prior to December 10, 2003, Norstan operated under a previous credit agreement with certain banks, as amended from time to time, consisting of a revolving line of credit and term loan, each secured by substantially all the assets of Norstan. The previous credit agreement provided for interest at various rates ranging from the banks’ reference rate plus 0.5% to the reference rate plus 2.0%, or the Eurodollar rate advance plus 2.5% to the Eurodollar rate advance plus 4.0%, plus annual commitment fees ranging from 0.375% to 0.25%.

We believe that a combination of cash expected to be generated from operations and borrowing capacity available under our current financing arrangements will be adequate to fund anticipated operating activities, capital expenditures and debt repayments until at least April 30, 2005. There is no assurance that the assumptions used by management in formulating this assessment will prove accurate or that additional financing, if needed, will be available in the future on acceptable terms.

We have historically utilized our lease receivables and corresponding underlying equipment to borrow funds from financial institutions at fixed rates on a nonrecourse basis by discounting the stream of future lease payments. Proceeds from discounting are recorded on our consolidated balance sheet as discounted lease rentals. Interest rates on these credit agreements range from 6.0% to 8.0% and payments are generally due in varying monthly installments through March 2007.

Aggregate maturities of discounted lease rentals as of April 30, 2004 were as follows (in thousands):

The domestic and foreign components of income (loss) from continuing operations before the income tax benefit were as follows (in thousands):

The provision (benefit) for income taxes (including continuing and discontinued operations) consisted of the following (in thousands):

The differences between taxes provided at our effective tax rate and income taxes computed using the federal statutory rate were as follows:

The tax effects of significant temporary differences representing deferred tax assets and liabilities were as follows (in thousands):

In fiscal 2004, we recorded a tax benefit for the net operating losses generated in the U.S. and Canada. We believe that this net operating loss carryforward is realizable based on our improved quarterly operating results (excluding restructuring and other charges) achieved during fiscal 2004, our projections of fiscal 2005, and long-term projections of taxable income.

During fiscal 2003, we reversed the previously recorded valuation allowance related to our capital loss carryforward and a portion of the previously recorded valuation allowance related to our Canadian net operating loss carryforwards. The reversal of these valuation allowances was due to the capital gain generated from the sale of our Network Services business, our fiscal 2003 Canadian taxable income, management’s then current estimate of future Canadian taxable earnings, and the expiration date of these net operating loss carryforwards.

During the fourth quarter of fiscal 2002, we recorded an $8.9 million income tax benefit principally reflecting the reduction of our valuation allowance related to our U.S. net operating loss carryforwards. The reduction of the allowance was mainly due to the recently enacted U.S. federal five-year net operating loss carryback rules (resulting in a $7.7 million federal tax refund which was received in June 2002), fiscal 2002 taxable income, and our estimates of future operating earnings and taxable income.

Realization of our net deferred tax assets is dependent on our ability to generate sufficient future taxable income. With our results of operations in fiscal 2004 and management’s expectations for fiscal 2005 and beyond, management believes that it is more likely than not that the recorded assets will be realized. Should our operating strategies fail to produce sufficient taxable income in the future, we would need to record a valuation allowance in the appropriate future reporting period as required by generally accepted accounting principles. Our U.S. net operating loss carryforwards of $15.8 million expire from 2020 to 2021, and our Canadian net operating loss carryforwards of $6.8 million expire through fiscal 2011.

The 1986 Long-Term Incentive Plan of Norstan, Inc. (1986 Plan) provided for the granting of non-qualified stock options, incentive stock options and restricted stock. The 1986 Plan, as amended in fiscal 1994, provided for a maximum of 1,600,000 shares to be granted to key employees in the form of stock options or restricted stock. As of September 20, 1995, with the adoption of a successor plan, no additional grants will be issued under the 1986 Plan.

The Norstan, Inc. 1995 Long-Term Incentive Plan (1995 Plan) permits the granting of non-qualified stock options, incentive stock options, stock appreciation rights and restricted stock, providing for a maximum of 3,900,000 shares to be granted as performance awards and other stock-based awards. Stock options are granted at a price equal to the market price on the date of grant, are generally exercisable at 33% per year and generally expire after ten years. At April 30, 2004, 851,253 shares were available for future grants.

The Restated Non-Employee Directors’ Stock Plan (Directors’ Plan) provides for a maximum of 650,000 shares to be granted. As determined by our Board of Directors, options for 20,000 shares are to be granted to each non-employee director of Norstan upon election and are generally exercisable over four years. Additional discretionary stock options may be awarded upon board approval and are generally exercisable immediately. All options are granted at a price equal to the market price on the date of grant and generally expire after ten years. In addition, the Directors’ Plan provides for the ability to pay annual retainers to each non-employee director on the date of the annual meeting of shareholders. As of April 30, 2004, 65,470 shares had been issued as annual retainers and 140,530 shares were available for future grant/payment under the Directors’ Plan.

Additional information regarding options outstanding/exercisable at April 30, 2004 was as follows:

We have 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. Restricted shares granted under the 1995 Plan were 111,500, 34,500, and 96,500 during fiscal 2004, 2003 and 2002, respectively. The fair market value of the shares granted under these plans is generally amortized over a three-year period. Amortization expense was $129,000, $612,000, and $683,000 in fiscal 2004, 2003 and 2002, respectively.

We also have an employee stock purchase plan (the 2000 Employee Stock Plan) that allows employees to set aside up to 10% of their earnings for the purchase of shares of our common stock at a price equal to 85% of the lesser of the closing market price of Norstan’s stock on the first or last day of each calendar quarter. The number of shares issued under this plan were 310,028, 304,912 and 103,313 during fiscal 2004, 2003 and 2002, respectively. At April 30, 2004, 287,949 shares were available for future issuance.

Under the terms of our former credit agreement (see Note 7) our previous lenders were granted 489,545 warrants to purchase shares of our common stock. These warrants were recorded at their estimated fair value at their respective dates of issuance, with the resulting costs being charged to expense. Such costs were approximately $155,000 and $323,000 in fiscal 2002 and 2001, respectively.

As of April 30, 2004, these former lenders hold warrants to purchase the following shares of our common stock:

We apply APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for our 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”, as amended by SFAS No. 148, our net income (loss) (in thousands) and net income (loss) per common share would have changed to the following pro forma amounts:

The weighted average fair values of options granted under the listed equity plans were as follows:

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the weighted-average assumptions used for grants in each fiscal year as follows:

Norstan has a shareholder rights plan, as amended in March 2001 (the Rights Plan), which expires in 2008. Under the Rights Plan, shareholders are deemed the owners of “Rights” attaching to each share of common stock. Generally, upon any person (an Acquiring Person) becoming the owner of 15% or more of the issued and outstanding shares of our common stock (a Stock Acquisition Date), each Right will enable the holder to purchase an additional share of Norstan’s common stock at a price equal to 50% of the then current market price. In the event that we are acquired in a merger or other business combination transaction where Norstan is not the surviving corporation or 50% or more of our assets or earnings power is sold, each Right entitles the holder to receive, upon exercise of the Right at the then current purchase price of the Right, common stock of the acquiring entity that has a value of two times the purchase price of the Right. The Rights Plan also authorizes Norstan, under certain circumstances, to redeem the Rights at a redemption price of $0.01 per Right and, following any Stock Acquisition Date, to exchange one share of our common stock for each Right held by a shareholder other than an Acquiring Person.

Norstan has a 401(k) profit-sharing plan (the 401(k) Plan) covering substantially all full-time employees. As of January 1, 2002, eligible employees may elect to defer up to 30% of their eligible compensation (previously 15%). The Company may make discretionary matching contributions on a portion of this deferral and/or qualified non-elective contributions to employee accounts. Our contributions to the 401(k) Plan were $1,794,000, $1,884,000 and $2,295,000 in fiscal 2004, 2003 and 2002, respectively.

In April 2004, we received a Commitment Adjustment Letter from the Universal Services Administrative Company (USAC), which oversees the Federal Communications Commission’s School and Libraries Program of the Universal Service Fund, also called the “E-rate program.” Funding commitments under the E-rate program provide for discounts on eligible services such as telecommunications services, internet access, network equipment and wiring of instructional buildings and classrooms to connect to the Internet. The letter informed Norstan that USAC had undertaken an audit of the Navajo Preparatory School (Navajo Prep) project for funding year 2001, in which we had installed specific equipment and services for which we received approximately $2.2 million. The audit report concluded that Navajo Prep had not complied with key requirements of the E-rate program and, consistent with E-rate policies, USAC is seeking recovery of the full amount disbursed to Norstan on behalf of Navajo Prep. We have filed an appeal with USAC and we are continuing an investigation of the Navajo Prep project. While we will continue to defend and appeal USAC’s decision, we may be required to repay a portion or all of the $2.2 million. Accordingly, we established a reserve of $2.2 million in the fourth quarter of fiscal 2004.

In February 2002, we were awarded $7.2 million resulting from a claim before the American Arbitration Association against the former owner of PRIMA Consulting (PRIMA) which claims arose out of our September 1997 acquisition of PRIMA. Subsequently, we reached a settlement with the former owner, Mr. Michael Vadini. The settlement provided that Norstan receive $3.0 million in cash, a promissory note issued by Mr. Vadini for $1.0 million to be paid in monthly installments beginning in June 2002, and certain real properties. As a result of the settlement, we recorded a $3.0 million pre-tax gain in the fourth quarter of fiscal 2002, based on the amount of cash received. We recorded a full reserve against the real property and the promissory note and planned to record any future gains on the sale of the real properties and collection of the promissory note as amounts are assured of realization. In December 2002, after receiving the first six $83,333 monthly installment payments, we agreed to accept a lump sum payment of $470,000 in settlement of the remaining monthly installments which totaled approximately $500,000 at that time. We recorded a gain, net of tax, of approximately $591,000 through discontinued operations relating to payments received on the promissory note during fiscal 2003. In May 2003, one of the real properties was sold and a pre-tax gain of approximately $253,000 was recorded through discontinued operations in the first quarter of fiscal 2004. In addition, in January 2004, a second real property was sold and a pre-tax gain of approximately $341,000 was recorded through discontinued operations in the third quarter of fiscal 2004.

We conduct our 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 $7,572,000, $7,551,000 and $8,310,000 in fiscal 2004, 2003, and 2002, respectively.

Future minimum lease payments under noncancelable operating leases with initial or remaining terms of one year or more were as follows at April 30, 2004 (in thousands):

Included in the above amounts is approximately $8.0 million related to the restructuring and other charges (see Note 5).

integral to our business. Any significant disruption of this distribution relationship could have a material adverse impact on our financial condition and results of operations.

The termination of this resale alliance does not affect our ongoing distribution agreement with Siemens with respect to new equipment.

In addition, we maintain relationships with a wide range of leading technology companies including Aspect Communications, Applied Voice and Speech Technologies (AVST), Cisco Systems, Ericsson, Intervoice, Nortel Networks, ScanSoft, SpectraLink, Verint, and Witness Systems.

We deliver our products and services through two business units: Communications Solutions and Services and Resale Services, which accounted for 86.6% and 13.4% of our fiscal 2004 revenues, respectively. Communications Solutions and Services delivers voice and data technologies and services to corporate end-users and public sector companies. Our solutions’ portfolio includes a full range of technologies for customer contact solutions and converged solutions, including applications such as messaging, conferencing and enterprise mobility. Additionally, we provide a host of communications services including ProtectNet® Life Cycle services, project management, implementation, field delivery, voice and data network monitoring, and managed and professional services. Resale Services offers refurbished voice and data products.

In evaluating financial performance, management focuses on operating income (loss) as a segment’s measure of profit or loss. The accounting policies of our segments are the same as those described in the Summary of Significant Accounting Policies (see Note 4).

Norstan’s disclosures under the requirements of SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information,” are as follows:


*	Communications Solutions and Services includes amounts which were previously reported in a separate segment, Financial Services.


**	All corporate costs, excluding depreciation and amortization, are allocated to continuing segments based on relative revenues of each segment.

The following table sets forth our revenues, net income (loss) from continuing operations and asset information by geographic area as of and for the years ended April 30 (in thousands):

The following is quarterly financial data for the fiscal years ended April 30, 2004 and 2003 (in thousands, except per share amounts):

No changes in or disagreements with accountants which required reporting on Form 8-K have occurred within the three-year period ended April 30, 2004.

Evaluation of disclosure controls procedures. As of the end of the period covered by this report, Norstan conducted an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that Norstan’s disclosure controls and procedures are effective to ensure that information that is required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time period specified in the rules of the Securities Exchange Commission.

Changes in internal controls. There were no changes in Norstan’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Information with respect to Norstan’s directors and executive officers, 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 15, 2004, is incorporated herein by reference. In addition, the information called for by Item 10, as to the audit committee and the audit committee’s financial expert, is set forth under “Board Activities and Committees” and “Report of the Audit Committee” in our definitive proxy statement, is incorporated herein by reference.

Code of Ethics. In fiscal 2004, we adopted a Code of Ethics that applies to all of our officers, directors and employees. We have asked and had all of our executive team, all of our managers and our board of directors sign our Code of Ethics. All employees are expected to adhere to and advocate the principles incorporated in the Code of Ethics. The text of our Code of Ethics is posted on our website at www.norstan.com in the section titled “Investor Relations.” In addition, we intend to promptly disclose (i) any substantive amendments to the Code (ii) any waiver, including any implicit waiver, from a provision of the Code that is granted to any officer or director of the Company by posting such information on our website at the address and location specified above.

Information with respect to Executive Compensation set forth under “Executive Compensation” in our definitive proxy statement for the annual meeting of shareholders to be held September 15, 2004, other than the subsections captioned “Report of the Compensation and Stock Option Committee” and “Performance Graph”, is incorporated herein by reference.

Information with respect to security ownership of certain beneficial owners and management, set forth under “Beneficial Ownership of Principal Shareholders and Management” in our definitive proxy statement for the annual meeting of shareholders to be held September 15, 2004, is incorporated herein by reference.

Information with respect to certain relationships and related transactions, set forth under “Information Concerning Directors, Nominees and Executive Officers” in our definitive proxy statement for the annual meeting of shareholders to be held September 15, 2004, is incorporated herein by reference.

Information with respect to principal accountant fees and services, set forth under “Report of the Audit Committee” in Norstan’s definitive proxy statement for the annual meeting of shareholders to be held September 15, 2004, is incorporated herein by reference.


	See Index to Consolidated Financial Statements and Financial Statement Schedules on page 30 of this report.


	All schedules to the Consolidated Financial Statements normally required by the applicable accounting regulations are included in Item 8 or are not applicable.

The Company filed five reports on Form 8-K for our fiscal fourth quarter ended April 30, 2004 as follows:

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.


	By	/s/ Scott G. Christian



	Scott G. Christian
	Chief Executive Officer and President
	(Principal Executive Officer)


	By	/s/ Robert J. Vold



	Robert J. Vold
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

A copy of any of the exhibits listed or referred to above will be furnished at a reasonable cost to any shareholder of the Company, upon receipt of a written request from such person for any such exhibit. Such request should be sent to Norstan, Inc., 5101 Shady Oak Road, Minnetonka, Minnesota 55343, Attention: Investor Relations.

62 EX-10.(D) 2 c86814exv10wxdy.txt EMPLOYMENT AGREEMENT-SCOTT G. CHRISTIAN EXHIBIT 10(d) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, made effective as of the 8th day of February, 2004, by and between Scott G. Christian ("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 February 8, 2004; WHEREAS, Executive's experience and knowledge are considered to be necessary to the continued success of the Company's business; 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 February 8, 2004 and ending on February 28, 2006; provided, that on March 1, 2006, and on each March 1 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 24 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 $350,000 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, bi-weekly 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. 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. 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 as determined by the Board in its sole discretion. Nothing in this section shall obligate the Board to grant any stock options and/or restricted stock awards in any amounts or intervals. 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 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. 2 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, 401(k) plan, 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 earned through the effective date of such termination. Nothing in this section is intended to vest or accelerate any quarterly or annual AIP (Annual Incentive Plan) payments. 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 initial or 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 (b) the Company terminates Executive's employment for reasons other than those specified in subparagraph 7.a. of this Agreement, then Executive shall receive the compensation and benefits set forth in paragraph 8 below. 3 (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 monthly cell phone expense (in a comparable amount) 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 (as such term is used in Sections 13(d) and 14(d) of the Exchange Act, including any affiliate or associate as defined in Rule 12(b)-2 under the Exchange Act of such person, other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company) becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or (ii) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or (iii) the stockholders of the Company approve a definitive agreement to merge or consolidate the Company with or into another corporation or other enterprise in which the holders of outstanding stock of the Company entitled to vote in elections of directors immediately before such merger or consolidation hold less than 50% of the voting power of the 4 survivor of such merger or consolidation or its parent, or approve a plan of liquidation; or (iv) at least 80% of the Company's assets are sold and transferred to another corporation or other enterprise that is not a subsidiary, direct or indirect, or other affiliate of the Company. 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 all 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 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 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 5 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 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 6 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. (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. 7 (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 or to become employed by any business enterprise with which the Executive may then be employed, 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 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 8 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. 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 9 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 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. 10 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: If to the Company, to: Norstan, Inc. 5101 Shady Oak Road Minnetonka, MN 55343 Attention: Chairman of the Board cc: VP & General Counsel, or If to Executive, to: Scott G. Christian 5450 Tamarack Circle Minnetonka, MN 55345 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. 11 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 --------------------------- Chairman of the Board /s/ Scott G. Christian ---------------------------- Scott G. Christian (the "Executive") 12 EX-10.(E) 3 c86814exv10wxey.txt EMPLOYMENT AGREEMENT-ROBERT J. VOLD EXHIBIT 10(e) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, made effective as of the 8th day of February 2004, by and between Robert J. Vold ("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 Senior Vice President & Chief Financial Officer of Norstan, Inc., effective as of February 8, 2004; WHEREAS, Executive's experience and knowledge are considered to be necessary to the continued success of the Company's business; 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 February 8, 2004 and ending on February 28, 2006; provided, that on March 1, 2006, and on each March 1 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 24 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 Chief Financial 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 $200,000 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, bi-weekly 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. 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 all of its executive officers, in accordance with the provisions of such plans or programs as are from time to time in effect. d. Other Benefits. Executive shall be granted stock options and restricted stock awards in amounts consistent with his position as Chief Financial Officer of the Company as determined by the Board in its sole discretion. Nothing in this section shall obligate the Board to grant any stock options and/or restricted stock awards in any amounts or intervals. 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 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 2 may be entitled to receive under the provisions of any pension, 401(k) plan, 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 earned through the effective date of such termination. Nothing in this section is intended to vest or accelerate any quarterly or annual AIP (Annual Incentive Plan) payments. 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 initial or 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 (b) the Company terminates Executive's employment for reasons other than those specified in 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 3 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 monthly cell phone expense (in a comparable amount) 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 (as such term is used in Sections 13(d) and 14(d) of the Exchange Act, including any affiliate or associate as defined in Rule 12(b)-2 under the Exchange Act of such person, other than the Company, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company) becomes a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities; or (ii) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be, for purposes of this Agreement, considered as though such person were a member of the Incumbent Board; or (iii) the stockholders of the Company approve a definitive agreement to merge or consolidate the Company with or into another corporation or other enterprise in which the holders of outstanding stock of the Company entitled to vote in elections of directors immediately before such merger or consolidation hold less than 50% of the voting power of the survivor of such merger or consolidation or its parent, or approve a plan of liquidation; or 4 (iv) at least 80% of the Company's assets are sold and transferred to another corporation or other enterprise that is not a subsidiary, direct or indirect, or other affiliate of the Company. 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 all 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 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 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. 5 (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 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 6 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. (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 7 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 or to become employed by any business enterprise with which the Executive may then be employed, 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 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: 8 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. 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 9 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 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 10 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: If to the Company, to: Norstan, Inc. 5101 Shady Oak Road Minnetonka, MN 55343 Attention: Chairman of the Board cc: VP & General Counsel, or If to Executive, to: Robert J. Vold 15410 - 48th Avenue North Plymouth, MN 55446 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. 11 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/ Scott G. Christian -------------------------------------- President & Chief Executive Officer /s/ Robert J. Vold -------------------------------------- Robert J. Vold (the "Executive") EX-10.(F) 4 c86814exv10wxfy.txt CONSULTING AGREEMENT-PAUL BASZUCKI EXHIBIT 10(F) CONSULTING AGREEMENT THIS AGREEMENT, made as of February 1, 2001, by and between PAUL BASZUCKI, of Minneapolis, Minnesota ("Consultant") and NORSTAN, INC., a Minnesota corporation (the "Company"), W I T N E S S E T H: WHEREAS, Consultant has been employed with the Company for a period in excess of 20 years in various executive management positions and more recently pursuant to the terms and conditions of the Amended and Restated Employment Agreement dated April 7, 1995 (the "Employment Agreement"); and WHEREAS, the continued availability of Consultant's experience and knowledge are considered to be important to the continued success of the Company's business after the termination of his Employment Agreement; and WHEREAS, the Company wishes to retain the services of Consultant as an adviser and consultant to the Company and to restrict his right to compete with the Company, for the term of this Agreement, and Consultant is willing to provide such services and to agree to such restrictions on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises, and of the mutual covenants hereinafter set forth, the parties do hereby agree as follows: 1. Consulting Period. The Company agrees to retain the services of Consultant and Consultant agrees to provide the services hereinafter described, for the period beginning on the expiration of his current Employment Agreement with the Company (the "Commencement Date") and ending on the date three (3) years from such Commencement Date (the "Consulting Period"). Consultant shall have the right, at any time, to terminate the Employment Agreement and begin receiving compensation payments under this Consulting Agreement. 2. Duties. a. Consulting Services. During the Consulting Period, Consultant shall hold himself available to consult with and advise the officers, directors, and other representatives of the Company concerning such matters relating to the operations of the Company and as the Chief Executive Officer and Board of Directors shall determine. Consultant shall make himself available to render such services at all reasonable times by telephone or letter and, upon reasonable advance notice, in person; provided, that Consultant shall not be required to perform consulting or advisory services during any period in which he is precluded from doing so by reason of incapacity or ill health. b. Services as a Director. The Company agrees, except for due cause, to have him included among management's nominees for election to its Board of Directors for each succeeding term ending not later than one year after the expiration of the Consulting Period. Consultant agrees that, except insofar as he may be unable to do so by reason of incapacity or ill health, he shall serve as a Director of the Company and of any of its subsidiaries during any part of the Consulting Period for which he may be elected to such a position. Consultant shall be 1 entitled to standard Director's fees for any period during which he is serving as a Director of the Company, which fees shall be in addition to any compensation payable to Consultant pursuant to this Agreement. 3. Compensation. During the Consulting Period, Consultant shall be compensated as follows: a. Retainer. During the Consulting Period, Consultant shall be paid a retainer at the rate of $255,000 per year, payable in equal monthly installments of $21,250 with the first payment due on the first day of the month following the Commencement Date, provided that in no event shall Consultant receive compensation in any manner under this Agreement and this Agreement shall become void if Consultant is (i) terminated pursuant to Sections 4 or 7(a) of his Employment Agreement, or (ii) receiving payments pursuant to Sections 5 or 8 of his Employment Agreement, or (iii) receiving payments pursuant to a termination without cause under his Employment Agreement. b. Facilities. During the Consulting Period, Company shall provide office space and secretarial services as necessary to enable Consultant to perform his services under this Agreement. c. Travel Expenses. Consultant shall be reimbursed by the Company for all reasonable travel expenses incurred by him at the request of the Company in the performance of his duties pursuant to this Agreement, to the extent such expenses are substantiated and are consistent with the general policies of the Company relating to the reimbursement of such expenses. d. Fringe Benefits Consultant shall not be entitled to participate in any of the pension, profit sharing, or other employee benefit plans or fringe benefit programs which are from time to time maintained by the Company for its employees, except pursuant to a COBRA election for the applicable period available under the law e. Stock Options/Grants. Consultant's current outstanding stock options and grants shall continue to be governed by the terms and conditions of the applicable stock option and restricted stock agreements through the expiration of the Consulting Period. 4. Death or Disability. If Consultant shall die or become disabled during the Consulting Period, the Company shall continue to pay the retainer to Consultant or, in the event of death, to his estate under section 3.a. for the balance of the Consulting Period. 5. Competition. a. Consultant covenants and agrees that during the Consulting Period, he will not, except with the express written consent of the Board of Directors of the Company, engage directly or indirectly in, or permit his name to be used in connection with, any competitive business in the geographic area serviced by the Company or its subsidiaries. b. For the purposes of this paragraph 5: (i) the phrase, "engage directly or indirectly in" shall encompass: (A) all of Consultant's activities whether on his own account or as an employee, director, officer, agent, consultant, independent contractor, or partner of or in any person, firm, or corporation (other than the Company and its subsidiaries), and (B) Consultant's 2 ownership of more than 10% of the voting stock of any corporation, 5% or more of the gross income of which is derived from any business or businesses in which Consultant may not then engage; and (ii) the phrase "competitive business shall mean: (A) the sale of telephone, telecommunications, data, network or similar equipment, (B) sale of consulting and/or maintenance services, and (C) any other business in which the Company or its subsidiaries is then engaged. 6. Enforcement. If, at the time of enforcement of any provision of paragraph 5, a court shall hold that the period, scope, or geographical area restrictions stated therein are unreasonable under circumstances then existing, the maximum period, scope, or geographical area reasonable under the circumstances shall be substituted for the stated period, scope, or area. In the event of a breach by Consultant of any of the provisions of paragraph 5, the Company may, in addition to any other rights and remedies existing in its favor: (a) discontinue the payment of any amounts, or the provision of any benefits, required to be paid or provided to Consultant pursuant to this Agreement; and (b) apply to any court of law or equity of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce or prevent any violations of the provisions hereof. 7. Status of Consultant. During the Consulting Period, Consultant's relationship to the Company shall be solely that of an independent contractor. Subject to the provisions of paragraph 5 hereof, Consultant shall be free to dispose of such portion of his time during normal business hours as he is not obligated to devote to the Company hereunder in such manner, and to such persons, firms, and corporations, as he sees fit. Consultant agrees that he will not take any position inconsistent with his status as an independent contractor hereunder in any federal, state, or local income or other tax return. 8. Successors. a. Of the Company. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as herein before defined, and any successor to the business and/or assets of the Company which executes and delivers the agreement provided for in this paragraph 8 or which otherwise becomes bound by all the terms and provisions of this Agreement as a matter of law. b. Of Consultant. This Agreement shall inure to the benefit of and shall be enforceable by Consultant, his legal representative, or other successors in interest. 9. General Provisions. a. Assignment. It is agreed that neither Consultant nor any beneficiary shall have any right to commute, sell, assign, transfer, or otherwise convey the right to receive any payment or other benefit hereunder, which payments and benefits, and the rights thereto, are expressly declared to be non-assignable and nontransferable. Except as provided in paragraph 8.a., the Company shall have no right to assign or transfer its rights or obligations under this Agreement, and of any beneficiary or Consultant, shall be solely those of an unsecured creditor of the Company. Any asset acquired by the Company, in connection with the liabilities assumed 3 by it under this Agreement shall not be deemed to be held under any trust for the benefit of the Consultant or his beneficiaries or to be considered security for the performance of the obligations of the Company, but shall be, and remain, a general, un-pledged, unrestricted asset of the Company. b. 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 thereto 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 without giving effect to the principles of conflict of laws of such state. g. Notices. Any notice to be served under this Agreement shall be in writing and shall be mailed by registered or certified mail, registry or certification fee and postage prepaid and return receipt requested, addressed: If to the Company, to: Norstan, Inc. 5101 Shady Oak Road Minnetonka, Minnesota 55343 Attention: Board of Directors; or If to Consultant, to: PAUL BASZUCKI 250 Wakefield Road Orono, Minnesota 55391; or to such other place as either party may specify in writing, delivered in accordance with the provisions of this subparagraph. 4 i. Survival. The rights and obligations of the parties shall survive the term of the Consulting Period to the extent that any performance is required under this Agreement after the expiration or termination of such term. j. Entire Agreement. This Agreement constitutes the entire agreement of the parties with respect to the subject matter thereof, and supersedes all previous agreements between the parties relating to the same subject matter. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. NORSTAN, INC. By /s/ Paul Baszucki ---------------------- PAUL BASZUCKI By /s/ James C. Granger ------------------------ President and Chief Executive Officer 5 EX-10.(H) 5 c86814exv10wxhy.txt FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT EXHIBIT 10(h) FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment") is entered into as of June 11, 2004, but effective as of April 30, 2004, among NORSTAN COMMUNICATIONS INC., a Minnesota corporation ("Communications (US)"), VIBES TECHNOLOGIES, INC., a Minnesota corporation ("Vibes"; Communications (US) and Vibes are referred to hereinafter each individually as "Borrower", and collectively, as "Borrowers"), NORSTAN, INC., a Minnesota corporation ("Parent"), NORSTAN FINANCIAL SERVICES INC., a Minnesota corporation ("Norstan Financial"), NORSTAN CANADA INC., a Minnesota corporation ("Canada Holdings"), NORSTAN INTERNATIONAL, INC., a Minnesota corporation ("UK Holdings") and NORSTAN CANADA LTD., an Ontario corporation ("Communications (Canada)"; Parent, Norstan Financial, Canada Holdings, Norstan International, UK Holdings and Communications (Canada) are referred to hereinafter each individually as a " Credit Party", and individually and collectively, jointly and severally, as the "Credit Parties") and WELLS FARGO FOOTHILL, INC., a California corporation, as agent for lenders ("Agent"). WHEREAS, Borrowers, Credit Parties (Borrowers and Credit Parties are referred to hereinafter each individually as "Company", and collectively, as "Companies"), Agent and Lenders are parties to a Loan and Security Agreement dated as of December 10, 2003 (as amended, restated, supplemented or otherwise modified from time to time, and as amended hereby, the "Loan Agreement"); WHEREAS, the Companies have requested that Agent amend the Loan Agreement, and Agent has agreed to do so subject to the terms and conditions contained herein. NOW THEREFORE, in consideration of the promises and mutual agreements herein contained, the parties hereto agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Loan Agreement 2. Amendments to Loan Agreement. Subject to the satisfaction of the conditions set forth in Section 3 hereof, the Loan Agreement is hereby amended as follows: (a) Clause (i) of Section 7.18(a) of the Loan Agreement is amended and restated in its entirety as follows: (i) MINIMUM EBITDA. EBITDA, measured on a month-end basis, of at least the required amount set forth in the following table for the applicable period set forth opposite thereto:

Notwithstanding the foregoing, if Agent and the Companies cannot agree on appropriate EBITDA covenant levels based upon the Projections for any fiscal year, or if the Projections delivered to Agent for any fiscal year are not reasonably satisfactory to Agent in form and substance in terms of projected amounts and assumptions, quarterly EBITDA covenant levels contained in this clause (i) of Section 7 .18( a) for each 12-month period beginning with the 12-month period ending on July 31, 2005 shall be determined by Agent in its reasonable discretion, provided, however, that such 12-month EBITDA covenant levels shall not be less than $13,500,000. 3. Conditions Precedent to Amendment. The satisfaction of each of the following, unless waived by Agent in its sole discretion, shall constitute conditions precedent to the effectiveness of this Amendment, and upon the satisfaction and/or waiver of such conditions, this Amendment shall be effective as of April 30, 2004: (a) Agent shall have received this Amendment, duly executed by each Company; (b) Agent shall have received the amendment fee described in Section 4 hereof; and - 2 - (c) No Event of Default or event which with the giving of notice or passage of time would constitute an Event of Default shall have occurred and be continuing on the date hereof, nor shall result from the consummation of the transaction contemplated herein. 4. Amendment Fee. In addition to any other fee payable under the Loan Agreement, the Companies shall pay to Agent an amendment fee in the amount of $25,000 which shall be fully earned and payable on the date hereof. 5. Miscellaneous. (a) Warranties and Absence of Defaults. In order to induce Agent to enter into this Amendment, each Company hereby warrants to Agent, as of the date hereof, that: (i) The representations and warranties of each Company contained in the Loan Agreement are true and correct as of the date hereof as if made on the date hereof; and (ii) No Event of Default or event which, with giving of notice or the passage of time or both, would become an Event of Default, exists as of the date hereof. (b) Expenses. Each Company agrees, on a joint and several basis, to pay on demand all costs and expenses of Agent (including the fees and expenses of outside counsel for Agent) in connection with the preparation, negotiation, execution, delivery and administration of this Amendment and all other instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith. In addition, each Company agrees, on a joint and several basis, to pay, and save Agent harmless from all liability for, any stamp or other taxes which may be payable in connection with the execution or delivery of this Amendment or the Loan Agreement and the execution and delivery of any instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith. All obligations provided in this Section 5(b) shall survive any termination of this Amendment and the Loan Agreement. (c) Governing Law. This Amendment shall be a contract made under and governed by the internal laws of the State of Illinois. (d) Counterparts. This Amendment may be executed in any number of counterparts, and by the parties hereto on the same or separate counterparts, and each such counterpart, when executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Amendment. - 3 - IN WITNESS WHEREOF. the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized and delivered as of the date first above written. NORSTAN COMMUNICATIONS INC. an Minnesota corporation By /s/ Alice S. Vazquez -------------------------------- Title VP Treasurer VIBES TECHNOLOGIES, INC., an Minnesota corporation By /s/ Alice S. Vazquez -------------------------------- Title VP Treasurer NORSTAN, INC., a Minnesota corporation By /s/ Alice S. Vazquez -------------------------------- Title VP Treasurer NORSTAN FINANCIAL SERVICES INC., a Minnesota corporation By /s/ Alice S. Vazquez -------------------------------- Title VP Treasurer NORSTAN CANADA INC., a Minnesota corporation By /s/ Alice S. Vazquez -------------------------------- Title VP Treasurer - 4 - NORSTAN INTERNATIONAL, INC., a Minnesota corporation By /s/ Alice S. Vazquez -------------------------------- Title VP Treasurer NORSTAN CANADA LTD., an Ontario corporation By /s/ Alice S. Vazquez -------------------------------- Title VP Treasurer WELLS FARGO FOOTHILL, INC. a California corporation, as Agent By /s/ John T. Leonard -------------------------------- Title Vice President - 5 - EX-10.(I) 6 c86814exv10wxiy.txt SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT EXHIBIT 10(i) SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT THIS SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT (this "Amendment") is entered into as of July 21, 2004 among NORSTAN COMMUNICATIONS INC., a Minnesota corporation ("Communications (US)"), VIBES TECHNOLOGIES, INC., a Minnesota corporation ("Vibes"; Communications (US) and Vibes are referred to hereinafter each individually as "Borrower", and collectively, as "Borrowers"), NORSTAN, INC., a Minnesota corporation ("Parent"), NORSTAN FINANCIAL SERVICES INC., a Minnesota corporation ("Norstan Financial"), NORSTAN CANADA INC., a Minnesota corporation ("Canada Holdings"), NORSTAN INTERNATIONAL, INC., a Minnesota corporation ("UK Holdings") and NORSTAN CANADA LTD., an Ontario corporation ("Communications (Canada)"; Parent, Norstan Financial, Canada Holdings, Norstan International, UK Holdings and Communications (Canada) are referred to hereinafter each individually as a " Credit Party", and individually and collectively, jointly and severally, as the "Credit Parties") and WELLS FARGO FOOTHILL, INC., a California corporation, as agent for lenders ("Agent"). WHEREAS, Borrowers, Credit Parties (Borrowers and Credit Parties are referred to hereinafter each individually as "Company", and collectively, as "Companies"), Agent and Lenders are parties to a Loan and Security Agreement dated as of December 10, 2003 (as amended, restated, supplemented or otherwise modified from time to time, and as amended hereby, the "Loan Agreement"); WHEREAS, the Companies have requested that Agent amend the Loan Agreement, and Agent has agreed to do so subject to the terms and conditions contained herein. NOW THEREFORE, in consideration of the promises and mutual agreements herein contained, the parties hereto agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Loan Agreement. 2. Amendments to Loan Agreement. Subject to the satisfaction of the conditions set forth in Section 3 hereof, the Loan Agreement is hereby amended as follows: (a) The definition of the term "Siemen's Agreement" contained in Section 1.1 of the Loan Agreement is hereby amended and restated as follows: "Siemen's Agreement" means the Agreement for Siemens Authorized Distributors dated as of January 26, 1999, as the same has been amended, supplemented, extended or otherwise modified through the date hereof. (b) A new defined term, "Norstan Resale Business Projections", is hereby added to Section 1.1 of the Loan Agreement in appropriate alphabetical order as follows: "Norstan Resale Business Projections" means, with respect to the fiscal year ending April 30, 2005, the projections of Communications (US)'s resale revenue of refurbished products, excluding revenue under the Siemens Agreement and resale revenue of refurbished products sold by Vibes, delivered to Agent prior to the termination of the Rolm/Norstan Equipment Service Agreement dated as of October 1, 1993 and, with respect to each fiscal year thereafter, Communications (US)'s forecasted resale revenue of refurbished products, excluding revenue under the Siemens Agreement and resale revenue of refurbished products sold by Vibes, all prepared on a consistent basis with the projections delivered to Agent for the fiscal year ending April 30, 2005, together with appropriate supporting details and a statement of underlying assumptions. (c) A new clause (i) is hereby added at the end of Section 6.3 of the Loan Agreement as follows: (i) as soon as available, but in any event within 30 days prior to the start of each of Borrowers' fiscal years commencing with the fiscal year ending April 30, 2005, copies of Norstan Resale Business Projections, in form and substance (including as to scope and underlying assumptions) satisfactory to Agent, in its sole discretion, for the forthcoming fiscal year, quarter by quarter, certified by the chief financial officer of each Borrower as being such officer's good faith best estimate of the resale revenue of refurbished products, excluding revenue under the Siemens Agreement and resale revenue of refurbished products sold by Vibes, during the period covered thereby; provided, however, that Norstan Resale Business Projections for the fiscal year ending April 30, 2005 shall be delivered to Agent prior to the termination of the Rolm/Norstan Under Equipment Services Agreement dated as of October 1, 1999. (d) A new clause (iii) of Section 7.18(a) of the Loan Agreement is hereby added to the Loan Agreement in appropriate numerical order as follows: (i) NORSTAN RESALE BUSINESS REVENUE COVENANT. Resale revenue of refurbished products, excluding revenue under the Siemens Agreement and resale revenue of refurbished products sold by Vibes, measured on a fiscal quarter-end basis, of at least 75% of the revenue projected for such fiscal quarter as reflected on the Norstan Resale Business Projections delivered to Agent pursuant to Section 6.3(i). 3. Conditions Precedent to Amendment. The satisfaction of each of the following, unless waived by Agent in its sole discretion, shall constitute conditions precedent to the effectiveness of this Amendment: (a) Agent shall have received this Amendment, duly executed by each Company; and - 2 - (b) No Event of Default or event which with the giving of notice or passage of time would constitute an Event of Default shall have occurred and be continuing on the date hereof, nor shall result from the consummation of the transaction contemplated herein. 4. Amendment Fee. In addition to any other fee payable under the Loan Agreement, the Companies shall pay to Agent an amendment fee in the amount of $15,000 which shall be fully earned and payable on the date hereof. 5. Miscellaneous. (a) Warranties and Absence of Defaults. In order to induce Agent to enter into this Amendment, each Company hereby warrants to Agent, as of the date hereof, that: (i) The representations and warranties of each Company contained in the Loan Agreement are true and correct as of the date hereof as if made on the date hereof; and (ii) No Event of Default or event which, with giving of notice or the passage of time or both, would become an Event of Default, exists as of the date hereof. (b) Expenses. Each Company agrees, on a joint and several basis, to pay on demand all costs and expenses of Agent (including the fees and expenses of outside counsel for Agent) in connection with the preparation, negotiation, execution, delivery and administration of this Amendment and all other instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith. In addition, each Company agrees, on a joint and several basis, to pay, and save Agent harmless from all liability for, any stamp or other taxes which may be payable in connection with the execution or delivery of this Amendment or the Loan Agreement and the execution and delivery of any instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith. All obligations provided in this Section 5(b) shall survive any termination of this Amendment and the Loan Agreement. (c) Governing Law. This Amendment shall be a contract made under and governed by the internal laws of the State of Illinois. (d) Counterparts. This Amendment may be executed in any number of counterparts, and by the parties hereto on the same or separate counterparts, and each such counterpart, when executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Amendment. - 3 - IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized and delivered as of the date first above written. NORSTAN COMMUNICATIONS INC., an Minnesota corporation By /s/ Alice S. Vazquez Title VP Treasurer VIBES TECHNOLOGIES, INC., an Minnesota corporation By /s/ Alice S. Vazquez Title VP Treasurer NORSTAN, INC., a Minnesota corporation By /s/ Alice S. Vazquez Title VP Treasurer NORSTAN FINANCIAL SERVICES INC., a Minnesota corporation By /s/ Alice S. Vazquez Title VP Treasurer NORSTAN CANADA INC., a Minnesota corporation By /s/ Alice S. Vazquez Title VP Treasurer - 4 - NORSTAN INTERNATIONAL, INC., a Minnesota corporation By /s/ Alice S. Vazquez Title VP Treasurer NORSTAN CANADA LTD., an Ontario corporation By /s/ Alice S. Vazquez Title VP Treasurer WELLS FARGO FOOTHILL, INC., a California corporation, as Agent By John T. Leonard Title Vice President - 5 - EX-22 7 c86814exv22.txt SUBSIDIARIES . . . EXHIBIT 22 SUBSIDIARIES OF NORSTAN, INC.

EX-23 8 c86814exv23.txt CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statement File Nos. 333-108076, 333-109963, 33-62967, 33-62971, 333-32394, 333-68059, 333-37913, 333-55764, 333-86410, and 333-106335 of Norstan, Inc. on Form S-8(3) of our report dated July 22, 2004, appearing in this Annual Report on Form 10-K of Norstan, Inc. for the year ended April 30, 2004. DELOITTE & TOUCHE LLP Minneapolis, Minnesota July 27, 2004 EX-31.1 9 c86814exv31w1.txt CERTIFICATION PURSUANT TO SECTION 302-CEO EXHIBIT 31.1 CERTIFICATION I, Scott G. Christian, certify that: 1) I have reviewed this annual report on Form 10-K of Norstan, Inc. 2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Scott G. Christian - ------------------------------------- Scott G. Christian President and Chief Executive Officer (Principal Executive Officer) July 27, 2004 EX-31.2 10 c86814exv31w2.txt CERTIFICATION PURSUANT TO SECTION 302-CFO EXHIBIT 31.2 CERTIFICATION I, Robert J. Vold, certify that: 1) I have reviewed this annual report on Form 10-K of Norstan, Inc. 2) Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3) Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this annual report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. /s/ Robert J. Vold - ----------------------------------------------- Robert J. Vold Senior Vice President & Chief Financial Officer (Principal Financial Officer) July 27, 2004 EX-32 11 c86814exv32.txt CERTIFICATION PURSUANT TO SECTION 906-CEO/CFO EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Norstan, Inc. (the Company) on Form 10-K for the period ended April 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the Report), each of the undersigned, the President and Chief Executive Officer (Principal Executive Officer) and the Senior Vice President and Chief Financial Officer (Principal Financial Officer), respectively, of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Scott G. Christian ------------------------------------------------- President and Chief Executive Officer (Principal Executive Officer) July 27, 2004 /s/ Robert J. Vold ------------------------------------------------- Senior Vice President and Chief Financial Officer (Principal Financial Officer) July 27, 2004 -----END PRIVACY-ENHANCED MESSAGE-----


Minnesota (State of incorporation)		41-0835746 (I.R.S. Employer identification No.)
5101 Shady Oak Road, Minnetonka, Minnesota 55343 (Address of principal executive offices)

The Company’s phone number:		The Company’s internet address:
952-352-4000		www.norstan.com


			Page

PART I
	Item 1.	Business		1
		Overview		1
		Recent Acquisitions and Dispositions		2
		Industry Overview		3
		Business Strategy		4
		Products and Services		5
		Customers		6
		Strategic Relationships		6
		Sales and Marketing		7
		Customer Service		8
		Locations		9
		Employees		9
		Competition		9
		Intellectual Property Rights		9
		Government Regulation		9
		Backlog		10
	Item 2.	Properties		10
	Item 3.	Legal Proceedings		10
	Item 4.	Submission of Matters to a Vote of Security Holders		11
PART II
	Item 5.	Market for the Company’s Common Equity. Related Stockholder Matters and Issuer Purchases of Equity Securities		12
	Item 6.	Selected Consolidated Financial Data		13
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		27
	Item 8.	Financial Statements and Supplementary Data		30
	Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		57
	Item 9A.	Controls and Procedures		57
PART III
	Item 10.	Directors and Executive Officers of the Registrant		57
	Item 11.	Executive Compensation		57
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		57
	Item 13.	Certain Relationships and Related Transactions		58
	Item 14.	Principal Accountant Fees and Services		58
PART IV
	Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		59
SIGNATURES				60
Employment Agreement-Scott G. Christian
Employment Agreement-Robert J. Vold
Consulting Agreement-Paul Baszucki
First Amendment to Loan and Security Agreement
Second Amendment to Loan and Security Agreement
Subsidiaries
Consent of Independent Registered Public Accounting Firm
Certification Pursuant to Section 302-CEO
Certification Pursuant to Section 302-CFO
Certification Pursuant to Section 906-CEO/CFO


• banking/finance		• education
• healthcare		• utilities
• manufacturing		• finance/insurance
• retail		• non-profits
• government


Converged Solutions

• IP telephony		• Data collaboration
• Voice systems		• Advanced messaging
• Data networking		• Wireless voice and data solutions
• Audio conferencing
Customer Contact Solutions

• Contact center switching platforms		• Performance optimization
• Self service: interactive voice response		• Workforce management
and speech recognition		• Quality monitoring and recording
• Computer Telephony Integration (CTI)		• Analytics
• Intelligent and pre-call routing		• E-Learning
• Media blending/web enablement
Infrastructure

• Structured cabling
• Optical networks
• Multimedia solutions
Services

• Customer Solution Center		• Voice and data network monitoring
• Implementation services and field delivery		• Cabling services
• Professional services		• Managed services
• Project management services		• Procurement and logistics
• ProtectNet® Life Cycle and complete care services


Communications Solutions and Services:

• Aspect Communications • Applied Voice & Speech Technology (AVST) • Cisco Systems • Ericsson • Intervoice • Nortel Networks		• ScanSoft • Siemens • SpectraLink • Verint • Witness Systems
Resale Services:

• Aspect Communications • Avaya • Cisco Systems • ClearOne • Executone • Kentrox		• Nortel Networks • Plantronics • Polycom • Siemens • SpectraLink


• Alltel Corp. • Beringer Blass Wine Estates • Best Buy • Cabela’s • Canadian Imperial Bank of Commerce • Cargill • City of Phoenix		• City of Coquitlam • DirectTV • FedEx Freight • Mercury • SMDC Health System • Wells Fargo Bank


Business Unit		Distribution Channels


Solutions and Services		• Enterprise sales focused on end-user accounts and prospects • Inside sales focused on installed customer accounts
Resale Services		• Telesales sales focused on enterprise end-users of voice and data equipment • Web-based e-business through www.vibestech.com website
Norstan CDG		• Target IP telephony manufacturer partners


United States		Canada


Birmingham, AL Brooklyn Park, MN Chicago, IL Cincinnati, OH Cleveland, OH Columbus, OH Dallas, TX Des Moines, IA Eagan, MN Irvine, CA Louisville, KY	Maple Grove, MN Milford, MA Milwaukee, WI Minnetonka, MN New Orleans, LA New York, NY Phoenix, AZ Tempe, AZ Tulsa, OK West Orange, NJ	Calgary, AB Edmonton, AB Markham, ON Montreal, QC Ste Foy, QC Toronto, ON Vancouver, BC


	Item 4. Submission of Matters to a Vote of Security Holders.


	High		Low

Fiscal year ended April 30, 2004:
First Quarter	$	4.09	$	3.02
Second Quarter		4.39		2.47
Third Quarter		4.10		2.45
Fourth Quarter		4.00		2.55
Fiscal year ended April 30, 2003:
First Quarter	$	7.23	$	2.71
Second Quarter		3.95		2.18
Third Quarter		5.27		2.70
Fourth Quarter		3.91		2.51



			Years Ended April 30,

			2004			2003			2002			2001			2000


			(In Thousands, Except Per Share Amounts)
Statements of Operations Data:
REVENUES			$	225,849		$	226,896		$	247,497		$	269,520		$	297,200
COST OF SALES				160,486			158,653			171,640			193,823			230,952

GROSS MARGIN				65,363			68,243			75,857			75,697			66,248
Selling, general and administrative expenses				65,319			66,781			73,917			86,517			96,417
Restructuring and other charges				13,548			—			—			1,183			—

OPERATING INCOME (LOSS)				(13,504	)		1,462			1,940			(12,003	)		(30,169	)
Interest expense				(2,346	)		(2,185	)		(4,887	)		(7,988	)		(6,315	)
Other income (expense), net				105			(4	)		651			(1,154	)		(78	)

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES				(15,745	)		(727	)		(2,296	)		(21,145	)		(36,562	)
		Income tax benefit(a)		(5,983	)		(323	)		(8,936	)		—			(11,608	)

INCOME (LOSS) FROM CONTINUING OPERATIONS				(9,762	)		(404	)		6,640			(21,145	)		(24,954	)

DISCONTINUED OPERATIONS:(b)
	INCOME (LOSS) FROM DISCONTINUED OPERATIONS			—			20			2,140			(11,087	)		(43,995	)
	GAIN (LOSS) ON DISPOSAL OF DISCONTINUED OPERATIONS			366			5,276			(1,240	)		(4,038	)		—

NET INCOME (LOSS)			$	(9,396	)	$	4,892		$	7,540		$	(36,270	)	$	(68,949	)

NET INCOME (LOSS) PER COMMON SHARE:
	BASIC — Continuing operations		$	(0.75	)	$	(0.03	)	$	0.55		$	(1.86	)	$	(2.31	)
	Discontinued operations			0.03			0.42			0.07			(1.33	)		(4.06	)

	BASIC EPS		$	(0.72	)	$	0.39		$	0.62		$	(3.19	)	$	(6.37	)

	DILUTED — Continuing operations		$	(0.75	)	$	(0.03	)	$	0.52		$	(1.86	)	$	(2.31	)
	Discontinued operations			0.03			0.42			0.07			(1.33	)		(4.06	)

	DILUTED EPS		$	(0.72	)	$	0.39		$	0.59		$	(3.19	)	$	(6.37	)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
	BASIC			13,056			12,492			12,149			11,373			10,818

	DILUTED			13,056			12,492			12,823			11,373			10,818


(a)		The income tax benefit recorded in fiscal 2003 and 2002 includes the reversal of a portion of our valuation allowances (see Note 9 to the Consolidated Financial Statements).

(b)		Discontinued Operations reflects the results of our former Consulting and Network Services business segments (see Note 3 to the Consolidated Financial Statements).



	As of April 30,

	2004		2003		2002			2001			2000


	(In Thousands)
Balance Sheet Data:
Working capital (deficit)	$	2,086	$	1,565	$	(1,993	)	$	(24,342	)	$	31,133
Total assets		100,444		103,960		122,565			167,627			236,906
Long-term debt, net of current maturities		16,833		15,600		25,540			38,200			67,257
Discounted lease rentals, net of current maturities		750		3,600		6,295			13,552			24,285
Shareholders’ equity		15,555		23,590		16,916			8,085			42,489


	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.


(a)		Converged Solutions includes IP telephony, voice systems, audio conferencing, data networking/collaboration and wireless voice and data solutions. Customer Contact Solutions includes contact center platforms, interactive voice response and speech recognition as well as computer telephony integration. Infrastructure/ Other includes structured cabling, optical networks and multimedia solutions.


	Item 1. Business.


	Overview


	*Resale Services*


	Recent Acquisitions and Dispositions



	Years Ending April 30,

									2009 and
	2005		2006		2007		2008		Thereafter		Total

Bank debt	$	4,000	$	4,000	$	1,000	$	—	$	11,833	$	20,833
Operating leases		5,924		5,073		3,778		3,439		7,450		25,664
Other debt		400		—		—		—		—		400
Discounted lease rentals		2,802		727		23		—		—		3,552
Other contractual obligations(a)		765		258		258		—		—		1,281

Total contractual obligations	$	13,891	$	10,058	$	5,059	$	3,439	$	19,283	$	51,730


(a)		Other contractual obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Other contractual obligations exclude agreements that are cancelable without penalty.


	Item 7A. Quantitative and Qualitative Disclosures About Market Risk.


	Page

Consolidated Financial Statements:
Report of Independent Registered Public Accounting Firm		31
Consolidated Statements of Operations for the years ended April 30, 2004, 2003 and 2002		32
Consolidated Balance Sheets as of April 30, 2004 and 2003		33
Consolidated Statements of Shareholders’ Equity for the years ended April 30, 2004, 2003 and 2002		34
Consolidated Statements of Cash Flows for the years ended April 30, 2004, 2003 and 2002		35
Notes to Consolidated Financial Statements		36
Financial Statement Schedule:
Schedule II — Valuation and Qualifying Accounts		56



					Common Stock													Accumulated
									Capital in						Unamortized			Other
		Comprehensive			Shares				Excess of			Accumulated			Cost of			Comprehensive
		Income (Loss)			Outstanding		Amount		Par Value			Deficit			Stock			Income (Loss)			Total

Balance at April 30, 2001						12,221	$	1,222	$	55,298		$	(44,952	)	$	(1,438	)	$	(2,045	)	$	8,085
Net income		$	7,540			—		—		—			7,540			—			—			7,540
Stock issued for employee benefit plans						209		21		515			—			764			—			1,300
Related income tax cost						—		—		(112	)		—			—			—			(112	)
Issuance of stock warrants						—		—		155			—			—			—			155
Foreign currency translation adjustments			(52	)		—		—		—			—			—			(52	)		(52	)

	Comprehensive income	$	7,488

Balance at April 30, 2002						12,430		1,243		55,856			(37,412	)		(674	)		(2,097	)		16,916
Net income		$	4,892			—		—		—			4,892			—			—			4,892
Stock issued for employee benefit plans						354		35		898			—			540			—			1,473
Related income tax cost						—		—		137			—			—			—			137
Foreign currency translation adjustments			172			—		—		—			—			—			172			172

	Comprehensive income	$	5,064

Balance at April 30, 2003						12,784		1,278		56,891			(32,520	)		(134	)		(1,925	)		23,590
Net loss		$	(9,396	)		—		—		—			(9,396	)		—			—			(9,396	)
Stock issued for employee benefit plans						481		49		1,141			—			(238	)		—			952
Related income tax cost						—		—		181			—			—			—			181
Issuance of common stock						100		10		261			—			—			—			271
Foreign currency translation adjustments			(43	)		—		—		—			—			—			(43	)		(43	)

	Comprehensive loss	$	(9,439	)

Balance at April 30, 2004						13,365	$	1,337	$	58,474		$	(41,916	)	$	(372	)	$	(1,968	)	$	15,555



							Other Intangible
	Goodwill						Assets

	2004			2003			2004			2003


Gross carrying amount	$	10,990		$	10,830		$	2,640		$	2,633
Accumulated amortization		(6,513	)		(6,451	)		(622	)		(88	)

Net carrying amount	$	4,477		$	4,379		$	2,018		$	2,545


				Other
				Intangible
		Goodwill		Assets

Balance at April 30, 2002		$	10,252	$	—
	Acquired in acquisition		400		2,633
	Currency translation adjustment		178		—

Balance at April 30, 2003			10,830		2,633
	Acquired in acquisition		26		7
	Currency translation adjustment		134		—

Balance at April 30, 2004		$	10,990	$	2,640


Years Ending April 30,

2005	$	534
2006		534
2007		534
2008		416
2009		—

	$	2,018


							Facility Exit
				Employee/			And Other			Disputed
	Asset			Severance			Contractual			Funding
	Impairments			Costs			Costs			Claim		Total

Balance at April 30, 2003	$	—		$	—		$	—		$	—	$	—
Restructuring and other charges		1,443			5,704			4,210			2,191		13,548
Utilization/cash payments		(1,443	)		(3,359	)		(189	)		—		(4,991	)

Balance at April 30, 2004	$	—		$	2,345		$	4,021		$	2,191	$	8,557


Years Ending April 30,

2005	$	4,400
2006		4,000
2007		1,000
2008		—
2009		11,833

	$	21,233



		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 at April 30, 2001			1,922,875		$	7.04		40,000		$	11.88		194,500		$	8.15
	Options granted		95,500			2.92		—			—		45,000			3.74
	Options canceled		(586,325	)		13.63		(5,000	)		11.88		—			—
	Options exercised		(30,025	)		1.26		—			—		—			—

Balance at April 30, 2002			1,402,025			3.39		35,000			11.88		239,500			7.32
	Options granted		987,363			5.49		—			—		77,500			3.23
	Options canceled		(157,826	)		4.43		—			—		(21,000	)		8.22
	Options exercised		(28,101	)		1.22		—			—		(5,000	)		1.11

Balance at April 30, 2003			2,203,461			4.75		35,000		$	11.88		291,000			6.28
	Options granted		523,750			3.73		—			—		45,000			3.25
	Options canceled		(503,119	)		4.76		(10,000	)		11.88		(25,000	)		9.32
	Options exercised		(59,176	)		1.51		—			—		(5,000	)		1.11

Balance at April 30, 2004			2,164,916		$	4.59		25,000		$	11.88		306,000		$	5.67

Options exercisable at:
	April 30, 2002		826,447		$	4.47		35,000		$	11.88		199,500		$	7.61

	April 30, 2003		1,269,676		$	4.65		35,000		$	11.88		243,000		$	6.76

	April 30, 2004		1,467,236		$	4.67		25,000		$	11.88		286,000		$	5.79



	Options Outstanding								Options Exercisable

							Weighted
					Weighted		Average				Weighted
	Number of		Exercise Price		Average		Remaining		Number of		Average
	Options		Range		Exercise Price		Contractual Life		Options		Exercise Price

1995 Plan		537,850	$	1.11 - $2.83	$	1.34		6.87 years		531,020	$	1.33
		617,922	$	3.10 - $3.93	$	3.64		8.49 years		194,613	$	3.56
		1,009,144	$	4.71 - $24.00	$	6.90		7.03 years		741,603	$	7.36

		2,164,916	$	1.11 - $24.00	$	4.59		7.41 years		1,467,236	$	4.67

1986 Plan		25,000	$	11.88	$	11.88		1.11 years		25,000	$	11.88
Directors’ Plan		182,500	$	1.11 - $3.80	$	3.19		8.36 years		170,500	$	3.20
		81,000	$	4.77 - $9.00	$	5.63		6.08 years		73,000	$	5.68
		42,500	$	12.50 - $20.06	$	16.38		2.53 years		42,500	$	16.38

		306,000	$	1.11 - $20.06	$	5.67		6.94 years		286,000	$	5.79


	Number of		Exercise
Warrants Issued	Shares		Price		Expiration Date

February 28, 2001		209,545	$	1.13		February 28, 2011
March 30, 2001		180,000	$	0.94		March 30, 2011
June 29, 2001		100,000	$	2.80		June 29, 2011

		489,545


					Employee
	1995		Directors’		Stock
	Plan		Plan		Plan

Fiscal 2002 grants	$	2.55	$	3.26	$	0.70
Fiscal 2003 grants	$	3.14	$	1.96	$	0.47
Fiscal 2004 grants	$	2.51	$	2.18	$	0.44


	Communications							Discontinued
	Solutions &			Resale				Operations
	Services*			Services		Corporate**		(see Note 3)		Total

2004:
Revenue	$	195,509		$	30,340	$	—	$	—	$	225,849
Operating income (loss)		(14,963	)		1,459		—		—		(13,504	)
Depreciation and amortization		5,227			450		2,575		—		8,252
Identifiable assets		61,485			10,395		28,037		527		100,444
Capital expenditures		1,819			194		896		—		2,909

2003:
Revenue	$	197,688		$	29,208	$	—	$	—	$	226,896
Operating income (loss)		(1,193	)		2,655		—		—		1,462
Depreciation and amortization		5,906			666		2,908		—		9,480
Identifiable assets		66,650			9,284		27,483		543		103,960
Capital expenditures		3,458			78		1,705		—		5,241

2002:
Revenue	$	217,095		$	30,402	$	—	$	—	$	247,497
Operating income (loss)		(1,140	)		3,080		—		—		1,940
Depreciation and amortization		8,887			702		4,374		—		13,963
Identifiable assets		80,572			10,251		27,660		4,082		122,565
Capital expenditures		3,400			17		1,681		—		5,098



		Quarters Ended

		April 30,			January 31,			November 1,			August 2,			April 30,			January 25,			October 26,			July 27,
		2004			2004			2003			2003			2003			2003			2002			2002

Revenues		$	57,474		$	55,045		$	56,446		$	56,884		$	58,978		$	58,758		$	57,077		$	52,083
Cost of sales			40,709			39,033			39,826			40,918			42,248			41,749			39,081			35,575

Gross margin			16,765			16,012			16,620			15,966			16,730			17,009			17,996			16,508
SG&A expenses			14,172			14,832			17,469			18,847			17,829			16,397			16,816			15,739
Restructuring and other charges			9,368			—			4,180			—			—			—			—			—

Operating income (loss)			(6,775	)		1,180			(5,029	)		(2,881	)		(1,099	)		612			1,180			769
Interest expense			(618	)		(727	)		(553	)		(448	)		(496	)		(510	)		(487	)		(692	)
Other income (expense), net			24			59			18			7			(28	)		32			(1	)		(7	)

Income (loss) before taxes			(7,369	)		512			(5,564	)		(3,322	)		(1,623	)		134			692			70
Income tax (benefit) provision(a)			(2,717	)		200			(2,169	)		(1,296	)		(664	)		51			263			27

Net income (loss) from continuing operations			(4,652	)		312			(3,395	)		(2,026	)		(959	)		83			429			43

Income from discontinued operations, net(b)			—			—			—			—			—			—			—			20
Gain (loss) on disposal of discontinued operations, net(b)			9			208			(5	)		154			2,659			333			155			2,129

Net income (loss)		$	(4,643	)	$	520		$	(3,400	)	$	(1,872	)	$	1,700		$	416		$	584		$	2,192

Net income (loss) per diluted share:
	Continuing operations	$	(0.35	)	$	0.02		$	(0.26	)	$	(0.16	)	$	(0.08	)	$	0.01		$	0.03		$	0.00
	Discontinued operations		0.00			0.02			0.00			0.01			0.21			0.02			0.01			0.17

Net income (loss) per share		$	(0.35	)	$	0.04		$	(0.26	)	$	(0.15	)	$	0.13		$	0.03		$	0.04		$	0.17

Weighted average diluted shares			13,200			13,518			12,984			12,856			12,614			13,131			12,817			13,024


		Balance at		Charged to						Balance at
		Beginning of		Costs and						End of
(In thousands)		Year		Expenses			Deductions			Year

Year ended April 30, 2004
	Allowance for doubtful accounts	$	965	$	330		$	(576	)	$	719

	Allowance for financing losses	$	972	$	172		$	(80	)	$	1,064

	Restructuring reserves	$	—	$	9,914		$	(3,548	)	$	6,366

	Discontinued operations reserve	$	269	$	—		$	(99	)	$	170

Year ended April 30, 2003
	Allowance for doubtful accounts	$	1,228	$	(210	)	$	(53	)	$	965

	Allowance for financing losses	$	2,356	$	749		$	(2,133	)	$	972

	Discontinued operations reserve	$	863	$	—		$	(594	)	$	269

Year ended April 30, 2002
	Allowance for doubtful accounts	$	3,343	$	597		$	(2,712	)(a)	$	1,228

	Allowance for financing losses	$	1,848	$	1,350		$	(842	)	$	2,356

	Restructuring reserves	$	1,318	$	—		$	(1,318	)	$	—

	Discontinued operations reserve	$	1,248	$	—		$	(385	)	$	863


(a)		Includes $0.1 million related to Norstan Network Services, which was reclassified to discontinued operations.


	Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.


	Item 10. Directors and Executive Officers of the Registrant.