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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED APRIL 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-8141
NORSTAN, INC.
(Exact name of registrant as specified in its chapter)
MINNESOTA 41-0835746
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(State of incorporation) (I.R.S. Employer identification No.)
605 NORTH HIGHWAY 169, TWELFTH FLOOR, PLYMOUTH, MINNESOTA 55441
(Address of principal executive offices)
The Company's phone number: 612-513-4500
The Company's internet address: www.norstan.com
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK ($.10 PAR VALUE PER SHARE)
COMMON STOCK PURCHASE RIGHTS
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
As of June 30, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant, computed by reference to the average high
and low prices on such date as reported by the NASDAQ National Market System
was $86,162,099.
As of June 30, 1997, there were outstanding 9,426,503 shares of the registrant's
common stock, par value $.10 per share, its only class of equity securities.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed within
120 days after the end of the fiscal year covered by this report are
incorporated by reference into Part III hereof.
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TABLE OF CONTENTS
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PART I
ITEM 1. Business............................................................................. 1
Market Trends...................................................................... 2
Competitive Strengths.............................................................. 3
Growth Strategy.................................................................... 4
Products and Services.............................................................. 4
Acquisitions....................................................................... 7
Marketing and Sales................................................................ 7
Customers and Customer Service..................................................... 8
Suppliers: Relationship with Siemens............................................... 8
Backlog............................................................................ 9
Competition........................................................................ 9
Canadian Operations................................................................ 9
Government Regulation.............................................................. 10
Employees.......................................................................... 10
General............................................................................ 11
ITEM 2. Properties........................................................................... 12
ITEM 3. Legal Proceedings.................................................................... 12
ITEM 4. Submission of Matters to a Vote of Security Holders.................................. 12
PART II
ITEM 5. Market for the Company's Common Equity and Related Stockholder Matters............... 13
ITEM 6. Selected Consolidated Financial Data................................................. 14
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations for the Fiscal Years 1997, 1996, and 1995.............................. 15
ITEM 8. Financial Statements and Supplementary Data.......................................... 20
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure........................................................................ 41
PART III
ITEM 10. Directors and Executive Officers of the Registrant................................... 41
ITEM 11. Executive Compensation............................................................... 41
ITEM 12. Security Ownership of Certain Beneficial Owners and Management....................... 41
ITEM 13. Certain Relationships and Related Transactions....................................... 41
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 42
SIGNATURES..................................................................................... 43
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PART I
ITEM 1. BUSINESS.
Norstan, Inc. (the Company) is a single-source technology provider
creating integrated voice, video, and data solutions for customers primarily
in 18 states and throughout Canada. The Company was incorporated in 1960 as
a Minnesota corporation. Norstan Communications, Inc. (NCI) (formerly
Norstan Communications Systems, Inc.) was incorporated in 1974. Norstan
Financial Services, Inc. (NFS) (formerly Norstan Financial Corporation) was
incorporated in 1979. Norstan/Electronic Engineering Company was
incorporated in 1985 and merged into NCI in December 1988.
Norstan/Communication Consultants, Inc. (N/CCI) was incorporated in 1988 and
merged into NCI in May of 1990. Norstan Network Services, Inc. (NNS) was
incorporated in 1991. Norstan Network Services, Inc. of New Hampshire and
Norstan Canada Inc. (NCDA) were incorporated in 1992. Connect Computer
Company (Connect) was merged into an acquisition subsidiary and as the
surviving corporation became a wholly owned subsidiary of the Company in June
1996. Norstan International, Inc. (NII) was incorporated in 1997.
Norstan entered the communications business in 1973, has been a
distributor of Siemens ROLM Communications, Inc. (ROLM) communications
equipment since 1976 and has historically derived a substantial majority of
its revenues from the sale of telephone systems, communications maintenance
services and moves, adds and changes, which are modifications to customers'
communications systems. In 1997, ROLM's name was changed to Siemens Business
Communication Systems, Inc. (Siemens). In recent years, the Company has
expanded the array of products and services it provides to include those of
Aspect Telecommunications Corporation (Aspect), Compression Labs,
Incorporated (CLI), PictureTel Corporation (PictureTel), Sprint
Communications Company L.P. (Sprint), Octel Communications Corporation
(Octel) and others.
In addition to providing the equipment and related support required
for a specific installation, Norstan offers a variety of services, including
communications maintenance services, moves, adds and changes, leasing, long
distance service, network integration, outsourcing and facilities management
services. These services, which provide the Company with an important source
of recurring revenue, were approximately 49% of the Company's total revenues
for fiscal 1997.
Norstan's marketing strategy is to increase sales to its existing
customer base by capturing a larger portion of each customer's communication
and information systems budget. Generally, the first product sold to a
customer is a telephone system. Upon selling a system, Norstan's
representatives typically sign the customer to a service contract. Norstan
believes the high quality of its customer service supports ongoing marketing
efforts, as satisfied customers are more likely to choose Norstan to supply
additional communications products and services. In order to focus marketing
efforts effectively, Norstan's sales representatives strive to understand
each customer's business, enabling them to recommend communications solutions
that improve the flow of information and productivity. For example, a sales
representative may recommend voice messaging and videoconferencing equipment
to expand communications channels, reduce dependence on support personnel and
reduce the need for costly travel. For customers with a high volume of
calls, Norstan may recommend interactive voice response products, which allow
customers to access information via a touch tone telephone, or sophisticated
call centers which interface with the customer's computer system and direct
calls automatically to available personnel. For those customers who wish to
avoid the complexity and training required to operate and maintain their own
communications system and the technology risk associated with owning
communications equipment, Norstan provides complete communications
outsourcing and facilities management services.
The Company focuses its sales efforts on customer locations with
100 or more users and those customers with complex communications
requirements. The Company's wide array of products and services enables it
to offer single-source solutions to customers' communications needs. Current
customers of the Company include BP America Inc., Best Buy Co., Inc., Blue
Cross/Blue Shield, First Bank System, Inc., 3M Company, Harley-Davidson,
Inc., The Limited Stores, as well as many hospitals and a number of
government agencies in Minnesota, Iowa, Wisconsin, Ohio, Arizona and other
states and provinces.
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MARKET TRENDS
Norstan believes that as markets become more global, information driven
and competitive, businesses are placing an increasing emphasis on rapid and
comprehensive communications technology to improve employee productivity and
customer service. As a result, businesses are looking to a variety of new
technologies to enhance the performance of their communications systems and
to increase the speed, accuracy and availability of information. Norstan
believes that several trends contribute to a favorable market outlook for
communications systems integrators offering a broad range of products and
services such as those offered by the Company:
- CONTINUED MODEST GROWTH IN MARKET FOR PBX TELEPHONE SYSTEMS.
According to MultiMedia Telecommunications Association (MTA) and
Telecommunications Industry Association (TIA), national trade
associations, the United States market for private branch exchange
(PBX) telephone systems grew from $2.8 billion in 1994 to
$3.6 billion in 1996. Over this same period, the average price per
telephone line increased from an estimated $553 to $580, while the
number of lines shipped increased from 5.1 million to 6.3 million.
These trade associations also project the market for PBX telephone
systems to grow at a compound annual rate of 8.9% from $3.6 billion
in 1996 to approximately $5.1 billion in 2000, representing an
increase in the number of lines shipped to over 8.3 million and an
increase in the average price per line to $619.
- GROWTH OF NEW COMMUNICATIONS PRODUCTS AND MARKETS. Over the past
several years, a variety of new communications technologies have
emerged which enhance the capabilities of traditional telephone
systems making businesses more efficient and productive.
Manufacturers such as Aspect, CLI and Octel have introduced products,
including call centers, voice response units, videoconferencing
systems and voice messaging products, that improve the performance
and efficiency of communications systems. Industry sources expect the
number of communications technologies to continue to grow. The
United States market for call processing equipment, including call
centers, voice messaging and interactive voice response products, was
estimated at $5.4 billion in 1996 and is projected to grow at a
compound annual rate of 10.6% between 1996 and 2000. Further,MTA and
TIA estimate that the market for videoconferencing products in which
the Company competes was approximately $3.7 billion in 1996 and is
projected to grow at a compound annual rate of 34.5% between 1996 and
2000.
- CONVERGENCE OF VOICE, VIDEO AND DATA MARKETS. Since the
introduction of local and wide area computer networks, the market for
data communications has grown rapidly and comprises a growing portion
of the overall communications market. The data communications and
networking equipment market was estimated at $32.3 billion in 1996 and
is projected to grow at a compound annual rate of 15% between 1996
and 2000. As the prevalence of computer networks continues to
increase, and voice, video, and data are increasingly transmitted in
a digital format using the same networks, Norstan believes that demand
for services related to the integration of voice, video and data
networks will continue to increase.
- INCREASING COMPLEXITY OF MANAGING COMMUNICATIONS SYSTEMS.
Management believes businesses are increasingly turning to
communications systems integrators who are capable of providing a
single point of contact for communications needs. As the number and
complexity of communications technologies grow, United States
businesses have increasingly sought to narrow their vendor base to
those who offer a broad range of communications products and services,
which has led to consolidation among such vendors.
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COMPETITIVE STRENGTHS
The Company believes it possesses and is developing a number of
competitive strengths that will help it achieve its goal of becoming one of
the premier providers of integrated communications systems solutions in the
United States and Canada. These strengths include:
- ACCESS TO LEADING VOICE, VIDEO AND DATA PRODUCTS AND SERVICES. Norstan
maintains relationships with leading communications technology
manufacturers and service providers, including Siemens, Aspect, CLI,
PictureTel, Sprint and Octel. In addition, through its data
communications business, the Company has access to products and
services offered by Novell, Inc. (Novell), Cisco Systems, Inc.
(Cisco), Network Equipment Technologies, Inc. (NET), Microsoft
Corporation (Microsoft), Intel Corporation (Intel), Adtran, Inc.
(Adtran), Compaq Computer Corporation (Compaq) and Lotus Development
Corporation (Lotus). Norstan's knowledge of these technologies and
ability to remarket, support and integrate them into communications
solutions meeting diverse customer requirements, enables the Company
to provide its customers with integrated approaches to solving
communications issues. Further, Norstan's strong distribution network
enhances its access to leading technologies by offering a low cost
distribution alternative for established manufacturers, as well as for
manufacturers that lack the critical mass necessary to establish a
direct sales force in specific markets.
- INDEPENDENT SINGLE SOURCE SUPPLIER. Unlike companies that manufacture
communications equipment, Norstan's independence permits it to select
products on the basis of merit and to distribute a wide range of
products from a number of manufacturers. This independence also
enables Norstan to respond quickly to changing customer needs by
taking advantage of new technologies as they become available,
without incurring product development risk.
- CUSTOMER SERVICE. Norstan is committed to providing a
high level of customer service by exceeding its customers'
expectations. Customer satisfaction surveys, conducted by an
outside firm contracted by Norstan, indicate that 94% of Norstan's
customers are satisfied with the overall service and support they
receive. This level of satisfaction has increased, rising from 86%
in 1988 to the current level. The Company coordinates its customer
service response through three remote diagnostic and dispatch
centers which handle over 430,000 service calls per year.
- DISTRIBUTION EXPERTISE. Norstan believes it has access
to a wide array of leading communications products and is
continuing to develop the internal expertise necessary to provide
communications products and services on an integrated basis. The
availability of distribution rights for many communications
products, such as PBX systems and call centers, is limited, making
it difficult for many communications systems integration companies
to offer the range of products and services that Norstan offers.
In addition, the capital and training requirements necessary to
offer such products and services on an integrated basis are
substantial. Norstan believes that its access to leading products,
established distribution network and large customer base, together
with its continuing development of communications systems
integration expertise, have positioned the Company to continue to
expand the portion of its revenues derived from the integration of
communications products and services.
- MANAGED SERVICES. As communications and information
systems become more complex, businesses are finding it more cost
effective to outsource some or all of their communications, data,
and call center needs. Norstan offers its customers a wide array of
managed communication and information services with outsourcing and
facilities management agreements. Norstan may provide a customer
all system equipment including PBX, local and wide area networks,
servers, voice messaging and conferencing equipment, staffing, both
management and administrative support, allowing the customer to
concentrate on their core competencies. Norstan believes the
managed services solution, whether fully turnkey or simple support
of internal staff, provides its customers with a single source for
the management of their voice, data, and call center environments.
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GROWTH STRATEGY
Norstan has formulated a growth strategy intended to capitalize on its
competitive strengths. This growth strategy is focused on the following
elements:
- INCREASE SALES TO EXISTING CUSTOMERS. Norstan has a
large installed customer base, including approximately 6,500
customer locations covered by service contracts. This base
provides Norstan with the opportunity to capture an increasing
portion of each customer's communications requirements. Most
customers currently purchase only a portion of the products and
services offered by the Company. The cost of selling to existing
customers is generally lower than selling to new customers because
Norstan already understands the customer's business and
communications requirements. Additionally, Norstan's reputation is
already established with the customer, thereby enabling Norstan to
leverage its high level of customer service and more easily sell
new products and services.
- EXPANSION OF THE INSTALLED BASE BY ATTRACTING NEW
CUSTOMERS. Norstan continually works to attract new customers and
employs a specialized sales team focused on selling to non-Norstan
customers. Norstan believes its portfolio of products and
services, expertise in providing turnkey solutions to customers'
communications systems requirements and reputation for high quality
service enhance the Company's ability to attract new customers.
- STRATEGIC PARTNERSHIPS. Norstan continues to establish
strategic partnerships with both hardware and software
manufacturers. These partnerships enable Norstan to expand its
range of products and services and help to ensure continued access
to new products and technologies. In certain instances, strategic
partnerships also enhance Norstan's ability to expand
geographically by providing access to customers outside of the
markets historically served by Norstan.
- STRATEGIC ALLLIANCES. The development of strategic
alliances with related and complimentary vendors allows Norstan to
go to the market with the expertise to provide complete packages of
managed services. By aligning itself with leaders in such fields
as staffing and conferencing, Norstan is able to supplement its
skill sets and better meet customers' expectations.
- ACQUISITION STRATEGY. Norstan is actively seeking to
acquire complementary businesses that will contribute to the
success of Norstan's communications systems integration strategy.
Norstan targets systems integration companies that will provide
either new skills, products and services and/or permit expansion of
the geographic areas which Norstan serves. These acquisitions will
also expand Norstan's customer base, providing additional points of
entry for Norstan's communications products and services. See
"Acquisitions."
PRODUCTS AND SERVICES
The Company's core business has historically been the sale of telephone
systems, communications maintenance services and moves, adds and changes.
From this core business, the Company has expanded its operations and shifted
its product mix to incorporate new products and services, including call
processing products, call center solutions, long distance services,
conferencing products, refurbished equipment, cabling, leasing, outsourcing
and network integration products and services. This array of products and
services allows the Company to provide single source solutions to customers'
communications needs. The Company's three major business segments are:
products and systems, telecommunications services and financial services.
Products and systems include the sale of new products and upgrades, as well
as refurbished equipment and contributed approximately 50.8%, 55.0% and 57.4%
of total revenues in fiscal 1997, 1996 and 1995, respectively.
Telecommunications services include communications maintenance services,
moves, adds and changes, network integration services, and long distance
service and contributed approximately 47.7%, 43.2% and 40.9% of total
revenues in fiscal 1997, 1996 and 1995, respectively. Financial services
revenues result primarily from leasing activities and contributed
approximately 1.5%, 1.8% and 1.7% of total revenues in fiscal 1997, 1996 and
1995, respectively. The products and services included in each of these
segments are discussed below.
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PRODUCTS AND SYSTEMS
TELEPHONE SYSTEMS. Norstan offers a wide variety of private telephone
systems. These systems are typically comprised of a telephone switch and
individual telephones located at the customer site. A telephone switch is a
device that provides the connection between the customer's internal telephone
lines and the outside telephone network. The telephone switch, typically
owned by the customer, is available in three primary types: PBX, key system
and hybrid key system. PBX switches are generally used for installations of
more than 100 lines and can accommodate up to several thousand telephone
lines. A PBX condenses the number of internal phone lines to a significantly
smaller number of outside trunk lines which connect to the telephone network.
When an incoming call is received, the PBX switches the call to the
appropriate internal telephone extension. When a call is made from within
the business, the PBX determines whether the call is an internal call, in
which case the PBX switches the call to the appropriate internal telephone
extension, or an outgoing call, in which case the PBX directs the call to an
open outside line. The PBX also provides a base platform from which the
customer's telephone system can be upgraded with features such as voice
messaging and caller identification. In contrast to PBX systems, key systems
are relatively inexpensive and appropriate for small installations which
generally require fewer than 50 lines. Each telephone in a key system
displays all outside lines, allowing the user to directly select which
telephone line to use when making a call. Hybrid key systems share
attributes of both PBX systems and key systems and are typically appropriate
for installations requiring approximately 50 to 100 lines. The Company also
offers a number of different telephone models with a variety of features.
Telephone systems range in price from approximately $15,000 for a key system
with relatively few lines and features to over $1.0 million for the largest,
most complex PBX systems.
CALL CENTERS. Call centers are complex systems that can process a large
number of incoming calls per hour and are used by businesses in applications
such as reservation centers, customer support centers and catalog order
centers. Call centers utilize a variety of call processing technologies such
as interactive voice response products, voice messaging and computer
telephony integration (CTI), to maximize the efficiency of a large
call-receiving operation. A call center utilizing an interactive voice
response product can obtain information from a caller via a touch tone
telephone, permitting more detailed information on the caller to be retrieved
from a computer database and be available to an agent when answering the
call. Norstan offers a variety of call center products manufactured by
Aspect, Siemens and Executone which can service from two call-receiving
agents to over eight hundred call-receiving agents. Call centers range in
price from less than $40,000 to over $1.0 million.
CALL PROCESSING. Call processing is comprised of voice messaging and
interactive voice response products. Voice messaging enables verbal
communications to be sent, stored and retrieved at a later time, from a
remote location, or forwarded to other parties by using a touch tone
telephone. Norstan offers integrated voice messaging products from Siemens
and stand alone voice messaging products from Octel and Applied Voice
Technology (AVT) that are compatible with all major PBX systems. Voice
messaging products range in price from approximately $5,000 to $500,000.
Interactive voice response (IVR) products allow a caller to access a
computer database to retrieve or input data by using a touch tone telephone.
IVR products can be utilized in a stand alone application, such as when a
caller uses a touch tone telephone to obtain account information from a bank
or flight schedules from an airline's automated retrieval system. IVR
products can also be utilized in a call center application to route calls and
provide data on the call based on caller input or historical database
information. Norstan began marketing IVR products in 1991 and currently
markets models manufactured by Intervoice and Aspect which range in price
from approximately $20,000 to $250,000.
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CONFERENCING. The Company offers a robust array of video, voice and
data conferencing products. Videoconferencing allows persons at separate
locations to communicate using cameras, video screens, microphones and
speakers linked over digital networks. Norstan has distributed
videoconferencing equipment manufactured by CLI since July 1991 (as of June
1, 1997, CLI merged with VTEL -Austin, TX). In addition to distributing
CLI/VTEL products within a defined geographic region, the Company provides
installation and service support nationally for those products. In December
1995, the Company began to distribute videoconferencing equipment from
PictureTel, ranging from desktop video to boardroom systems.
Videoconferencing products range in price from approximately $10,000 to over
$100,000. Norstan also distributes Latitude Meeting Place voice/data
conferencing products which allow up to 128 users from anywhere in the world
to conference free of degradation of voice quality. Conferencing products
range in price from $30,000 to $400,000.
REFURBISHED EQUIPMENT. Since 1988, Norstan has engaged in the
refurbishment and resale of previously owned Siemens products. In July 1990,
the Company and Siemens entered into an agreement to refurbish and resell
previously owned Siemens equipment in the United States. This agreement was
renewed for an additional three-year period in October 1993 and subsequently
extended to July 27, 1998. Under the agreement, Siemens pays the Company a
fee for refurbishing the equipment and remarketing separate Siemens
components, and the Company shares in the profit generated by this program.
All refurbished equipment is certified by Siemens and covered by warranty for
up to one year, depending on the type and quantity of equipment purchased.
The Company and Siemens are currently negotiating a new agreement. In April
1993, Norstan expanded its refurbished equipment operations to include the
purchase, refurbishment and resale of previously owned Nortel (formerly
Northern Telecom) equipment. In 1997, the refurbished product line was
expanded to include Iwatsu, Aspect and Isotec products.
TELECOMMUNICATIONS SERVICES
COMMUNICATIONS MAINTENANCE SERVICES. Norstan provides service to its
customers for products it sells on a contract or time and material basis.
Telephone systems generally require a higher level of ongoing communications
maintenance than other products sold by the Company and generate the majority
of communications maintenance revenue. The Company coordinates service
through three remote diagnostic and dispatch centers located in Cleveland,
Minneapolis and Toronto. The Company offers a variety of service contracts
intended to meet the differing needs of customers. List prices for Norstan's
communications maintenance services range from approximately $25 to $65 per
line annually and are based primarily on the capacity and features of the
customer's communications system.
MOVES, ADDS AND CHANGES. Norstan performs moves, adds and changes
related to its customers' telephone systems. Moves, adds and changes consist
of moving telephones to new user locations, adding telephones or expansion
cards in a telephone system and changing system and user features. Moves,
adds and changes are typically scheduled in advance by customers, as compared
to communications maintenance service calls which require prompt response.
DATA COMMUNICATIONS. In November 1993, Norstan formed a strategic
business unit to provide data communications services to customers. Data
communications services consist of consulting, design, integration and
implementation of local area networks, wide area networks, intranets and
internets, client/server environments and other data and image communications
applications. To support these efforts, Norstan provides products and
services offered by Novell, Cisco, NET, Microsoft, Intel, Adtran, Compaq and
Lotus. In October 1994, Norstan expanded its data communications efforts to
include computer telephony integration, which consists of integrating a
database or other data system with a telephone system. For example, a call
center could be integrated with a database so that when a customer calls a
catalog merchant to place an order, that customer's name, address and order
history would automatically be retrieved from the database and displayed on
the call-receiving agent's computer screen. In November 1994, the Company
expanded its data communication services into Canada and in June 1996, the
Company increased its data communication capabilities in the Midwest through
the acquisition of Connect. See "Acquisitions" below. Norstan has
approximately 320 employees focusing on data communications and is actively
recruiting additional employees to continue its expansion into this area.
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LONG DISTANCE SERVICE. Norstan has provided long distance service since
May 1990. The Company entered into a three-year direct resale agreement with
Sprint in May 1993, whereby Norstan offers customers a full range of long
distance and network services under the Company's private label. In August
1994, the Company and Sprint negotiated a new agreement which runs through
July 1997. The Company and Sprint are currently negotiating a new agreement.
CABLING. Cabling is the infrastructure that provides the pathway for
telephone systems, local area networks, wide area networks and other
communications systems to function. Cabling can be provided on a stand alone
basis or in conjunction with other products and services offered by the
Company.
OUTSOURCING. The Company believes that many businesses do not want to
dedicate internal resources to manage their communications systems and are
therefore contracting with companies who will manage their communications
systems through outsourcing agreements. Norstan provides communications
equipment and trained personnel to act as a customer's communications systems
department, thereby permitting the customer to focus on its primary business.
FINANCIAL SERVICES
LEASING. Norstan provides leasing services to enable its customers to
finance purchases of communications systems. Lease financing supports the
sales process by permitting customized lease structures to meet the needs of
customers and eliminating the need for third party financing. By acting as
lessor, the Company can typically provide lease terms with greater
flexibility than third party financing sources. Norstan also generally
provides communications maintenance services for leased equipment. The
Company currently has approximately 1,250 leases. At the time of inception,
the average lease transaction is approximately $50,000 and has a term of from
36 to 60 months. The Company financed over $31.5 million in customer
equipment purchases for fiscal 1997.
ACQUISITIONS
Norstan is actively seeking to acquire complementary businesses that
will contribute to the success of Norstan's communications systems
integration strategy.
On June 4, 1996, the Company acquired Connect, a provider of consulting,
design and implementation services based in Minneapolis with offices in
Milwaukee and Des Moines. The purchase price of this acquisition was
approximately $15 million plus certain incentive payments contingent upon
future operating performance of Connect.
On November 30, 1994, the Company acquired substantially all of the
assets of Renaissance Investments, Ltd., a technology planning and
integration services company based in Toronto, Ontario, specializing in local
area networks, wide area networks and graphical user interfaces. The
purchase price of this acquisition was approximately $726,000.
MARKETING AND SALES
Norstan has approximately 421 sales and marketing personnel within the
United States and Canada including 300 sales representatives who focus on
either new prospects or selling additional products and services to Norstan's
customer base. Included in the sales force are specialists in the areas of
videoconferencing, call centers, leasing, long distance service and training.
These specialists partner with the sales representatives to provide
integrated communications systems solutions for Norstan's customers.
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Norstan's sales representatives and specialists use a comprehensive
approach in evaluating each customer's communications needs and implementing
solutions. The sales representative begins with a detailed needs analysis of
the customer's current and future communications requirements. After
determining the customer's needs, Norstan proposes solutions to satisfy
current and anticipated requirements. Norstan's operations teams then work
with the customer to plan the installation of purchased technologies and
identify required training. By planning the precise requirements of each
installation, Norstan's specialists are able to install, test and bring new
equipment on-line with minimal service interruption. Finally, Norstan
provides an ongoing support program tailored to meet the customer's specific
application requirements incorporating remote diagnostics, in-field service
and support, additional training and help desk support from Norstan's
customer support representatives.
Norstan uses a variety of methods to communicate with customers and
prospect for new customers. The Company publishes semi-annual news magazines
describing available products and services, organizational changes and other
company news. Customers also receive product and service updates from
Norstan's sales representatives, field technicians and customer support
representatives. The Company pursues new customer opportunities through
in-person sales calls, telemarketing and advertising. Norstan also regularly
receives referrals from equipment manufacturers and customers, as well as
unsolicited requests for proposals for products and services.
CUSTOMERS AND CUSTOMER SERVICE
Norstan focuses its marketing initiatives on customers with 100 or more
users and those customers with complex communications requirements. The
Company believes that providing service exceeding customers' expectations, or
"legendary" customer service, is an important element of its ability to
compete effectively in the communications market. Norstan maintains a highly
trained force of service technicians, design engineers and customer support
representatives who provide on-site and remote service and support. Customer
satisfaction surveys, conducted by an outside firm contracted by Norstan,
indicate that 94% of Norstan's customers are satisfied with the overall
service and support they receive. This level of satisfaction has increased,
rising from 86% in 1988 to the current level. Norstan coordinates its
customer service response through three remote diagnostics and dispatch
centers located in Cleveland, Minneapolis and Toronto. These centers handle
over 430,000 service calls per year, approximately 44% of which are addressed
remotely. For calls requiring immediate on-site service and support, Norstan
promptly dispatches a service technician. Overall, Norstan has over 135
employees devoted primarily to providing customer service out of the service
centers.
The Company sells products and services across many industry segments,
including banking, government, insurance, health care, manufacturing,
publishing, public utilities, transportation and retail. Current customers
of the Company include BP America Inc., Best Buy Co., Inc., Blue Cross/Blue
Shield, First Bank System, Inc., 3M Company, Harley-Davidson, Inc., The
Limited Stores, as well as many hospitals and a number of government agencies
in Minnesota, Iowa, Wisconsin, Ohio, Arizona and other states and provinces.
In addition, through an agreement entered into in August 1993 with the
Midwest Higher Education Consortium, the Company has agreed to provide
certain videoconferencing equipment at specified terms to all state agencies
in the states of Illinois, Kansas, Michigan, Minnesota, Missouri, Nebraska,
Ohio and Wisconsin. This agreement designates Norstan as a recommended
vendor, but does not require any purchases by state agencies. No single
customer accounted for more than 5% of the Company's total revenue for fiscal
years 1997, 1996 or 1995.
SUPPLIERS: RELATIONSHIP WITH SIEMENS
Norstan's principal suppliers include Siemens, Aspect, CLI, PictureTel,
Sprint and Octel. In addition, the Company distributes complementary
communications products that fit specific segments in the marketplace such as
hybrid key systems and personal computer-based voice processing and
videoconferencing systems, as well as data communications products from
Novell, Newbridge, Bay Networks, Compaq, Lotus and others. In addition, the
Company has distribution arrangements with several manufacturers of other
products and services, as well as business partnerships that provide
technical support to complement Norstan's expertise.
8
<PAGE>
Norstan has been a distributor of Siemens communications equipment since
1976 and is Siemens' largest independent distributor. Siemens is the third
largest manufacturer of PBX systems in the United States, accounting for an
estimated 13% of United States sales of PBX systems in 1996, behind Lucent
Technologies and Nortel (formerly Northern Telecom) which accounted for an
estimated 30% and 28%, respectively. In July 1993, the Company executed a
new distributor agreement with Siemens, which has a term extending through
July 1998 and automatically renews for additional one-year periods, unless
terminated upon 90 days' notice prior to each renewal date. Pursuant to this
agreement, Norstan is the exclusive distributor of Siemens communications
equipment in Minnesota, Wisconsin, Iowa, North Dakota, South Dakota, Ohio,
Kentucky, Arizona, New Mexico, Oklahoma, Louisiana, Nevada, Texas, Arkansas,
Mississippi, Florida, Alabama, parts of Nebraska, as well as all of Canada.
In the event this agreement expires without renewal, Norstan is entitled to
receive parts, certain software upgrades and technical support for ten years
to enable Norstan to continue providing service to its customers with Siemens
products. In addition, Norstan and Siemens have an agreement under which
Norstan is an authorized agent for the refurbishment and sale of previously
owned Siemens equipment in the United States. This agreement also runs
through July 1998. The Company and Siemens are currently negotiating a new
agreement. The Company believes that any interruption of its business
relationship with Siemens would have a material adverse effect on its
business.
BACKLOG
As of April 30, 1997, the Company had signed contracts for products and
services aggregating approximately $47.3 million, substantially all of which
are expected to be fulfilled by the end of fiscal 1998. As of April 30,
1996, the Company had signed contracts aggregating approximately $46.9
million, substantially all of which were fulfilled by the end of fiscal 1997.
The usual time period between the execution of a contract and the completion
of the installation is one to six months, depending on the size and
complexity of the system.
COMPETITION
The communications industry is intensely competitive and rapidly
changing. In general, the Company competes on the basis of breadth of product
offering, system capability and reliability, service, support and price.
Many of the Company's competitors, including AT&T and Lucent, the seven
Regional Bell Holding Companies (RHCs) and Nortel, have longer operating
histories and significantly greater financial, technical, sales, marketing
and other resources, as well as greater name recognition and larger
distribution networks, than the Company. The passage of the
Telecommunications Act of February 1996 has enabled a number of entities with
greater resources to enter and compete in industries from which they were
previously precluded. Also, as a result of this legislation, many business
reorganizations are occurring. These changes in the regulatory environment
could potentially affect the Company's ability to compete successfully.
The Company also competes with a number of companies offering data
systems integration services, many of which have greater financial and other
resources than the Company. These companies could also attempt to increase
their presence in other segments of the communications market in which the
Company competes by introducing additional products or services targeted for
these market segments. There can be no assurance that the Company will be
able to compete successfully or that competition will not have a material
adverse effect on the Company's business, operating results and financial
condition.
CANADIAN OPERATIONS
In April 1992, Norstan acquired substantially all of the assets of the
Siemens' communications business of IBM Canada Limited. Approximately 8%,
11% and 10% of the Company's revenues were generated by its Canadian
operations for fiscal 1997, 1996 and 1995, respectively. On November 30,
1994, the Company acquired substantially all of the assets of Renaissance
Investments, Ltd.
9
<PAGE>
GOVERNMENT REGULATION
Except for the sale of long distance service, the Company is not subject
to any government regulations which have a material impact on its operations.
Effective May 1, 1992, the Company became a direct reseller of long distance
network services and accordingly became subject to certain state tariff
regulations throughout the United States. The Company is currently
registered and certified to provide interstate services in all 50 states and
intrastate services in 46 states, and is currently pursuing certification for
intrastate services in two additional states. The Company is also subject to
FCC regulations which require the filing of federal tariffs.
EMPLOYEES
The Company's U.S. operations had a total of 2,167 employees as of April
30, 1997, consisting of 367 sales and marketing personnel, 1,367 operations,
service and installation employees, and 433 administrative employees. Of
these employees, approximately 150 are covered by collective bargaining
agreements. The Company considers relations with its employees to be good and
has not experienced any work stoppages.
The Company's Canadian operations had a total of 206 employees as of
April 30, 1997, consisting of 54 sales and marketing personnel, 103
operations, service and installation employees, and 49 administrative
personnel. The Company considers relations with the Canadian employees to be
good and has not experienced any work stoppages.
10
<PAGE>
GENERAL
RAW MATERIALS
The Company purchases all the equipment that it markets and installs and
does not engage in any manufacturing operations. The most important
components utilized by the Company are the telecommunications systems and
electronic telephone sets supplied by Siemens. Purchases of such equipment
from Siemens account for the major portion of total equipment purchases. The
other parts and components utilized, such as telephones, electrical
components, wire and speakers, substantially all of which are purchased in
conjunction with Siemens telecommunications systems, are purchased from a
number of suppliers. It is anticipated that such other parts and components,
which are purchased pursuant to purchase orders rather than long term
contracts, will be readily available from present suppliers or, if necessary,
from alternate qualified manufacturers.
NFS is a financial service organization and uses no raw materials.
PATENTS
The Company and its subsidiaries have no patents, trademarks, licenses,
franchises or concessions that are of material importance to their business
with the exception of distributor agreements between the Company and Siemens,
and between the Company and other suppliers.
SEASONAL NATURE OF BUSINESS
Historically, operating results indicate that both revenues and earnings
generally increase in each quarter as each fiscal year progresses. This
results from seasonal performance of the Company and its employees as well as
from seasonal demands of the Company's customers.
WORKING CAPITAL PRACTICES
The Company and its subsidiaries have no special practices relating to
working capital items.
RESEARCH AND DEVELOPMENT
The Company and its subsidiaries do not engage in any material research
or development activities.
EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL PROTECTION REGULATION
Not applicable.
EFFECTS OF INFLATION
Market conditions have generally permitted the Company to adjust its
pricing to reflect increases in labor and product costs due to inflation.
Inflation has not had a significant impact on operating results during the
past three years.
11
<PAGE>
ITEM 2. PROPERTIES.
The executive offices of the Company and its subsidiaries are located in
Plymouth, Minnesota, where the Company leases approximately 53,400 square
feet of office space. The Company also has corporate offices in Maple Grove,
Minnesota, Brecksville, Ohio, and Phoenix, Arizona, where the Company leases
approximately 64,000, 61,250 and 34,400 square feet of office space,
respectively. In addition to the space above, the Company leases sales and
service offices in 38 other cities within the United States. In Canada, the
Company leases approximately 30,400 square feet of office space in North
York, Ontario, which serves as its Canadian headquarters. In addition, the
Company also leases sales and service offices in eight other cities within
the Canadian provinces of Alberta, Ontario, Quebec and British Columbia. The
Company believes that the above mentioned facilities are adequate and
suitable for its current needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in legal actions in the ordinary course of its
business. Although the outcomes of any such legal actions cannot be
predicted, in the opinion of management there is no legal proceeding pending
against or involving the Company for which the outcome is likely to have a
material adverse effect upon the business, operating results and financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company did not submit any matters to a vote of security holders
during the last quarter of the fiscal year covered by this report.
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
PRICE RANGE OF COMMON STOCK
The Company's common stock is traded on the National Over-the-Counter
market and is listed on the national market system of the National
Association of Securities Dealers' Automated Quotations System ("NASDAQ")
under the symbol "NRRD". The following table sets forth the high and low
quotations for the Company's common stock as reported by NASDAQ for each
quarterly period during the two most recent fiscal years(1):
FISCAL YEAR ENDED APRIL 30, 1997: HIGH LOW
First Quarter 19 1/2 13 1/8
Second Quarter 20 1/4 15
Third Quarter 18 3/4 15 1/2
Fourth Quarter 17 1/4 13 3/4
FISCAL YEAR ENDED APRIL 30, 1996: HIGH LOW
First Quarter 12 5/8 10 7/8
Second Quarter 13 12 1/8
Third Quarter 13 11 1/2
Fourth Quarter 13 7/8 12 1/4
(1) On June 20, 1996, the Company's Board of Directors approved a two-for-one
stock split effected in the form of a stock dividend. The stock split has
been retroactively reflected in the high and low quotations presented above.
The quotations reflect prices between dealers and do not include retail
mark-ups, mark-downs or commissions, and do not necessarily represent actual
transactions.
As of June 30, 1997, there were approximately 1,600 holders of record of
the Company's common stock.
RESTRICTIONS ON THE PAYMENT OF DIVIDENDS
The Company has not recently declared or paid any cash dividends on the
common stock and does not intend to pay cash dividends on the common stock in
the foreseeable future. The Company currently expects to retain earnings to
finance expansion of its business. In addition, the Company's current
revolving long-term credit agreement prohibits the payment of cash dividends
without the prior written consent of the lenders thereunder.
ISSUANCE OF UNREGISTERED SECURITIES
The Company issued 137,758 unregistered shares of its common stock on
June 4, 1996, as part of the purchase price paid for Connect Computer
Company. These shares had a fair market value of $2,000,000 and were issued
to Connect shareholders (21 shareholders). These shares are being held in
escrow on behalf of each Connect shareholder until June 4, 1998. During this
escrow period, the shareholders have all the rights of a shareholder,
including the right to vote such shares, however, they may not sell,
transfer, pledge or otherwise encumer the shares. Such shares were issued in
an exempt transaction pursuant to Section 4(2) of the Securities Act of 1933
as a transaction by an issuer not involving a public offering. There were no
underwriters involved in this transaction.
13
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The selected consolidated financial data set forth below as of and for
each of the fiscal years in the five-year period ended April 30, 1997 have
been derived from the Company's consolidated financial statements, which have
been audited by Arthur Andersen LLP, independent public accountants. The
selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the notes thereto
included elsewhere in this report.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED APRIL 30,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues.................................................... $398,075 $321,364 $290,245 $231,899 $195,856
Cost of sales............................................... 289,560 229,980 202,107 155,676 128,228
-------- -------- -------- -------- --------
Gross margin................................................ 108,515 91,384 88,138 76,223 67,628
Selling, general and administrative expenses................ 89,310 75,973 74,725 65,137 58,609
-------- -------- -------- -------- --------
Operating income............................................ 19,205 15,411 13,413 11,086 9,019
Interest expense............................................ (1,866) (1,351) (1,587) (832) (841)
Interest and other income (expense), net.................... (22) 89 (54) (106) 323
-------- -------- -------- -------- --------
Income before cumulative effect of accounting change and
provision for income taxes................................ 17,317 14,149 11,772 10,148 8,501
Provision for income taxes.................................. 7,100 5,660 4,709 4,161 3,401
-------- -------- -------- -------- --------
Income before cumulative effect of accounting change........ 10,217 8,489 7,063 5,987 5,100
Cumulative effect of change in accounting for income
taxes (1)................................................. -- -- -- (375) --
-------- -------- -------- -------- --------
Net income.................................................. $ 10,217 $ 8,489 $ 7,063 $ 5,612 $ 5,100
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Net income per common and common equivalent share:
Income before cumulative effect of accounting change...... $ 1.08 $ .94 $ .81 $ .70 $ .62
Cumulative effect of change in accounting for income
taxes (1)............................................... -- -- -- (.04) --
-------- -------- -------- -------- --------
Net income per share (2).................................... $ 1.08 $ .94 $ .81 $ .66 $ .62
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average number of common and common equivalent
shares outstanding (2)................................... 9,435 9,028 8,750 8,504 8,166
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
AS OF APRIL 30,
------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 37,484 $ 24,899 $ 32,183 $ 32,961 $ 19,160
Total assets................................................ 224,173 160,988 161,709 149,662 120,731
Long-term debt, net of current maturities................... 18,284 -- 16,465 18,218 11,555
Discounted lease rentals, net of current maturities......... 24,043 15,961 16,313 18,845 12,785
Shareholders' equity........................................ 84,370 67,517 56,984 47,658 40,594
Cash dividends declared and paid............................ -- -- -- -- --
</TABLE>
- ------------------------
(1) On May 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." As a result, the
Company recorded a one-time charge of $375,000, or $.04 per share, in
fiscal 1994 for the cumulative effect of the change in method of
accounting for income taxes.
(2) On June 20, 1996, the Company's Board of Directors approved a two-for-one
stock split effected in the form of a stock dividend. The stock split has
been retroactively reflected in the selected consolidated financial data
presented above.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
Norstan is a full service communications systems provider creating
integrated voice, video, and data solutions for customers primarily in 18
states and throughout Canada. Norstan entered the communications business in
1973 and has historically derived a substantial majority of its revenues from
the sale of telephone systems, communications maintenance services and moves,
adds and changes. Norstan's growth has resulted from acquisitions and
geographic expansion as well as from offering a broadening range of products
and services including network integration services.
Over the past several years, Norstan has expanded its offering of
products and services to include refurbished equipment, call processing
products, videoconferencing equipment, long distance service and cabling.
Recently, the Company has further expanded its products and services to
include data communications applications, network integration and complete
management of customers' communications systems through outsourcing
agreements.
In June 1996, the Company acquired all of the common stock of Connect
Computer Company (Connect) for consideration of approximately $15 million.
This acquisition represented revenue of over $33 million in fiscal 1997,
leading the growth of the Company's integration services.
Norstan offers leasing services to its customers through a wholly owned
subsidiary. Norstan believes its ability to provide lease financing to
customers supports the sales process by permitting customized lease
structures to meet the needs of customers and by eliminating the need for
third party financing.
Approximately 49% of fiscal 1997 revenues were derived from the sale of
services, including communications maintenance services, moves, adds and
changes, long distance service, network integration services, and leasing.
Management believes that services provide the Company with an important
source of recurring revenue.
15
<PAGE>
RESULTS OF OPERATIONS
The Company's revenues consist of the sales of products and systems,
telecommunications services and financial services. Products and systems
revenues result from the sale of new products and upgrades, as well as
refurbished equipment. Revenues from telecommunications services result
primarily from communications maintenance services, moves, adds and changes,
network integration services, and long distance service. Financial services
revenues result primarily from leasing activities.
The following table sets forth, for the periods indicated, certain items from
the Company's consolidated statements of operations expressed as a percentage
of total revenues.
FISCAL YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
Revenues:
Sales of products and systems................ 50.8% 55.0% 57.4%
Telecommunications services.................. 47.7 43.2 40.9
Financial services........................... 1.5 1.8 1.7
--- --- ---
Total revenues............................. 100.0 100.0 100.0
Cost of sales.................................. 72.7 71.6 69.6
--- --- ---
Gross margin................................... 27.3 28.4 30.4
Selling, general and administrative expenses... 22.5 23.6 25.8
--- --- ---
Operating income............................... 4.8% 4.8% 4.6%
--- --- ---
--- --- ---
Net income..................................... 2.6% 2.6% 2.4%
--- --- ---
--- --- ---
The following table sets forth, for the periods indicated, the gross margin
percentages for sales of products and systems, telecommunications services and
financial services.
FISCAL YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
Gross margin percentage:
Sales of products and systems............... 25.9% 26.3% 26.1%
Telecommunications services................. 27.6 29.8 35.4
Financial services.......................... 64.2 60.6 53.8
FISCAL YEARS ENDED APRIL 30, 1997, 1996 AND 1995
REVENUES. Total revenues were $398.1 million, $321.4 million and $290.2
million for the fiscal years ended April 30, 1997, 1996 and 1995,
respectively, representing an increase of 23.9% for fiscal 1997 as compared
to fiscal 1996 and an increase of 10.7% for fiscal 1996 as compared to fiscal
1995.
Sales of products and systems increased $25.2 million, or 14.2%, for
fiscal 1997 as compared to fiscal 1996, and $10.3 million, or 6.2%, for
fiscal 1996 as compared to fiscal 1995. The increases for fiscal 1997 and
1996 as compared to prior years, result primarily from increased sales volume
in refurbished equipment, cabling operations and videoconferencing.
Revenues from telecommunications services increased $51.1 million, or
36.8% for fiscal 1997 as compared to fiscal 1996, and $20.2 million, or
17.0%, for fiscal 1996 as compared to fiscal 1995. The increases in fiscal
1997 and 1996 result primarily from the growth in network integration
services including the Connect acquisition. In addition, the growth in the
Company's installed base of customers and expanded array of products and
services has led to increased activity in communication maintenance services,
moves, adds, and changes. The Company also achieved significant growth in
revenues from long distance services and outsourcing arrangements.
Revenues from financial services increased $394,000, or 7.0%, for
fiscal 1997 as compared to fiscal 1996, and $634,000, or 12.7%, for fiscal
1996 as compared to fiscal 1995. The increase in revenues from financial
services in both years is attributable to the increased size of the Company's
leasing base, which is derived primarily from sales of products and systems.
16
<PAGE>
GROSS MARGIN. The Company's gross margin was $108.5 million, $91.4
million, and $88.1 million, for the fiscal years ended April 30, 1997, 1996
and 1995, respectively. As a percent of total revenues, gross margin was
27.3% for fiscal 1997 compared to 28.4% for fiscal 1996 and 30.4% for fiscal
1995. Gross margin as a percent of revenues for the sale of products and
systems was 25.9% for fiscal 1997 as compared to 26.3% for fiscal 1996 and
26.1% for fiscal 1995. These changes in the gross margin percentages from the
sale of products and systems are primarily the result of shifts in the
product mix and competitive market conditions.
Gross margin as a percent of revenues for telecommunications services
was 27.6% for fiscal 1997 as compared to 29.8% for fiscal 1996 and 35.4% for
fiscal 1995. The decrease in gross margin for fiscal 1997 as compared to
1996 is primarily due to lower gross margins in the network integration
services provided by Connect, relative to the Company's other services.
However, operating margins generated by Connect have been higher than the
Company's other service lines. The decrease for fiscal 1996 as compared to
fiscal 1995 resulted from changes in the mix of services, increased service
support costs, additional training and development costs required to support
the Company's expanded line of product offerings, as well as from decreased
margin percentages attributable to moves, adds and changes.
Gross margin as a percent of revenues for financial services was 64.2%
for fiscal 1997 as compared to 60.6% for fiscal 1996 and 53.8% for fiscal
1995. The increase in gross margin percentage for fiscal 1997 as compared to
fiscal 1996 and fiscal 1996 as compared to fiscal 1995, is the result of
decreasing interest rates.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $89.3 million, $76.0 million and $74.7 million
for the fiscal years ended April 30, 1997, 1996 and 1995, respectively,
representing an increase of 17.6% for fiscal 1997 as compared to fiscal 1996
and 1.7% for fiscal 1996 as compared to fiscal 1995. As a percent of
revenues, selling, general and administrative expenses declined to 22.5% for
fiscal 1997 as compared to 23.6% for fiscal 1996 and 25.7% for fiscal 1995.
These decreases as a percentage of revenues resulted from continued efforts
to contain costs and volume related efficiencies, as sales volume increased
without proportional increases in expenses. Additionally, in fiscal 1996,
the Company shifted certain administrative resources to an operational and
product line support function; the related costs were included in cost of
sales for fiscal 1996.
OTHER COSTS AND EXPENSES. Interest expense was $1.9 million for fiscal
1997 as compared to $1.4 million for fiscal 1996 and $1.6 million for fiscal
1995. Weighted average interest rates under the Company's revolving
long-term credit agreements were 7.5% for fiscal 1997 as compared to 8.2% for
fiscal 1996 and 7.8% for fiscal 1995. Average month end borrowings
outstanding under the Company's revolving long-term credit agreements
(excluding amounts borrowed to finance leasing activities) were $24.5 million
for fiscal 1997, $15.8 million for fiscal 1996 and $20.9 million for fiscal
1995.
The Company's effective income tax rate was 41% for fiscal 1997 and 40%
for fiscal 1996 and fiscal 1995. The Company's effective tax rate differs
from the federal statutory rate primarily due to state income taxes.
NET INCOME. Net income was $10.2 million or $1.08 per share in 1997,
$8.5 million or $.94 per share in 1996, and $7.1 million or $.81 per share in
1995.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $37.5 million at April 30, 1997 from $24.9
million at April 30, 1996. Net cash provided by operating activities was
$18.7 million for the fiscal year ended April 30, 1997 as compared to $28.0
million for fiscal year 1996. For the fiscal year ended April 30, 1997, net
income of $10.2 million, depreciation and amortization of $17.0 million,
increased accounts payable and accrued liabilities of $9.6 million, decreased
inventories of $3.5 million, and increased billings in excess of costs and
estimated earnings of $1.2 million were partially offset by increased costs
and estimated earnings in excess of billings of $6.4 million and increased
accounts receivable of $16.3 million.
Working capital decreased to $24.9 million at April 30, 1996 from $32.2
million at April 30, 1995. Net cash provided by operating activities was
$28.0 million for the fiscal year ended April 30, 1996 as compared to $20.2
million for the fiscal year 1995. For the fiscal year ended April 30, 1996,
net income of $8.5 million, depreciation and amortization of $12.5 million,
decreased costs and estimated earnings in excess of billings of $5.7 million,
increased deferred revenue of $2.8 million and increased billings in excess
of costs and estimated earnings of $2.4 million were only partially offset by
increased accounts receivable of $4.0 million.
Capital expenditures for fiscal 1997 were $24.2 million as compared to
$14.4 million in fiscal 1996 and $17.3 million in fiscal 1995. These
expenditures were primarily for telecommunications equipment used as spare
parts, computer equipment, facility expansion and telecommunication equipment
used in outsourcing arrangements. The Company expects capital expenditures
in fiscal 1998 to be approximately $20 to $25 million.
The Company has also made a significant investment in lease contracts
with its customers. The additional investment made in lease contracts in
fiscal 1997 totaled $31.5 million. Net lease receivables increased to $49.4
million at April 30, 1997 from $39.9 million at April 30, 1996. The Company
expects to make an additional investment in lease contracts in fiscal 1998 of
approximately $25 to $30 million. The Company utilizes its lease receivables
and corresponding underlying equipment to borrow funds from financial
institutions on a nonrecourse or recourse basis by discounting the stream of
future lease payments. Proceeds from discounting are presented on the
consolidated balance sheet as discounted lease rentals. Discounted lease
rentals, including recourse borrowings of $592,000, totaled $37.9 million at
April 30, 1997. Interest rates on these credit agreements at April 30, 1997
ranged from 6.0% to 10.0%, while payments are due in varying monthly
installments through June 2003. Payments due to financial institutions are
made from monthly collections of lease receivables from customers.
In June 1996, the Company acquired all of the common stock of Connect
Computer Company (Connect), a provider of consulting, design and
implementation services. The acquisition consideration totaled approximately
$15.0 million, consisting of $12.0 million cash and $2.0 million of Norstan
common stock, and $1.0 million payable to certain members of Connect
management under non-compete agreements. In addition, the Company has agreed
to pay up to $4.0 million in contingent consideration over a three year
period ending April 30, 1999, if certain operating income levels are achieved
(as of April 30, 1997, $2.0 million of such consideration has been accrued).
This transaction resulted in the recording of $16.4 million in goodwill which
is being amortized on a straight-line basis over 15 years.
The Company has a $40.0 million unsecured revolving long-term credit
agreement with certain banks. Up to $15.0 million of borrowings under this
agreement may be in the form of commercial paper and up to $8.0 million and
$6.0 million may be used to support the leasing activities of NFS and Norstan
Canada, respectively. Borrowings under this agreement are due July 31, 1999
and bear interest at a bank's reference rate (8.50% and 8.25% at April 30,
1997 and April 30, 1996, respectively), except for LIBOR, CD and commercial
paper based options which generally bear interest at a rate lower than the
bank's reference rate. Total consolidated borrowings were $17,920,000 at
April 30, 1997. There were no borrowings under this agreement at April 30,
1996. There were no borrowings on account of NFS or Norstan Canada under
this agreement at April 30, 1997 or April 30, 1996.
Management of the Company believes that a combination of cash generated
from operations, existing bank facilities and additional borrowing capacity,
in aggregate, are adequate to meet the anticipated liquidity and capital
resource requirements of its business. Sources of additional financing, if
needed, may include further debt financing or the sale of equity or other
securities.
18
<PAGE>
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective May 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No.
121), which establishes accounting standards for the recognition and
measurement of impairment of long-lived assets, certain identifiable
intangibles, and goodwill either to be held or disposed of. The adoption of
SFAS No. 121 did not have a material impact on the Company's financial
position or results of operations.
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share"(SFAS No. 128), which changes the way companies
calculate their earnings per share data (EPS). SFAS No. 128 replaces primary
EPS with basic EPS. Basic EPS is computed by dividing reported earnings by
weighted average shares outstanding, excluding potentially dilutive
securities. Fully diluted EPS, termed diluted EPS under SFAS No. 128, is also
to be disclosed. The Company is required to adopt SFAS No. 128 in fiscal
1998 at which time all prior year EPS are to be restated in accordance with
SFAS No. 128. If the Company had adopted the pronouncement during fiscal
1997, the effect of this accounting change on reported EPS data would have
been as follows:
YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
Primary EPS as reported...................... $ 1.08 $ .94 $ .81
Effect of SFAS No. 128....................... .04 .06 .05
--------- --------- ---------
Basic EPS as restated........................ $ 1.12 $ 1.00 $ .86
--------- --------- ---------
--------- --------- ---------
Fully diluted EPS as reported................ $ -- $ -- $ --
Effect of SFAS No. 128....................... 1.08 .94 .81
--------- --------- ---------
Diluted EPS as restated...................... $ 1.08 $ .94 $ .81
--------- --------- ---------
--------- --------- ---------
FORWARD-LOOKING STATEMENTS AND
FACTORS THAT MAY AFFECT FUTURE RESULTS
From time to time, the Company may publish forward-looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements including those in this Form 10-K.. In order
to comply with the terms of the safe harbor, the Company notes that a variety
of factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in
the Company's forward-looking statements. The risks and uncertainties that
may affect the operations, performance, developments and results of the
Company's business include the following: national and regional economic
conditions; pending and future legislation affecting the telecommunications
industry; the Company's operations in Canada; market acceptance of the
Company's products and services; the Company's continued ability to provide
integrated communications solutions for customers in a dynamic industry, as
well as other competitive factors.
Because these and other factors could affect the Company's operating results,
past financial performance should not necessarily be considered as a reliable
indicator of future performance, and investors should not use historical
trends to anticipate future period results.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS: PAGE
Report of Independent Public Accountants ............................. 21
Consolidated Statements of Operations for the years ended
April 30, 1997, 1996 and 1995 ..................................... 22
Consolidated Balance Sheets as of April 30, 1997 and 1996............. 23
Consolidated Statements of Shareholders' Equity for the years ended
April 30, 1997, 1996 and 1995...................................... 25
Consolidated Statements of Cash Flows for the years ended
April 30, 1997, 1996 and 1995...................................... 26
Notes to Consolidated Financial Statements............................ 27
Selected Quarterly Financial Data (unaudited)......................... 40
FINANCIAL STATEMENT SCHEDULES:
All schedules have been omitted as not required, not applicable or
because the information to be presented is included in the consolidated
financial statements and related notes.
20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Norstan, Inc.:
We have audited the accompanying consolidated balance sheets of Norstan, Inc.
(a Minnesota corporation) and Subsidiaries as of April 30, 1997 and 1996, and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended April 30, 1997.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Norstan, Inc. and
Subsidiaries as of April 30, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended April 30, 1997 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
June 3, 1997
21
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Sale of products and systems.............................. $202,199 $176,992 $166,675
Telecommunications services............................... 189,847 138,737 118,569
Financial services........................................ 6,029 5,635 5,001
-------- -------- --------
Total revenues.......................................... 398,075 321,364 290,245
-------- -------- --------
COST OF SALES:
Products and systems...................................... 149,860 130,363 123,158
Telecommunications services............................... 137,540 97,396 76,641
Financial services........................................ 2,160 2,221 2,308
-------- -------- --------
Total cost of sales..................................... 289,560 229,980 202,107
-------- -------- --------
GROSS MARGIN................................................ 108,515 91,384 88,138
Selling, general and administrative expenses expenses..... 89,310 75,973 74,725
-------- -------- --------
OPERATING INCOME............................................ 19,205 15,411 13,413
Interest expense.......................................... (1,866) (1,351) (1,587)
Interest and other income (expense), net.................. (22) 89 (54)
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 17,317 14,149 11,772
Provision for income taxes................................ 7,100 5,660 4,709
-------- -------- --------
NET INCOME.................................................. $ 10,217 $ 8,489 $ 7,063
-------- -------- --------
-------- -------- --------
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE........... $ 1.08 $ .94 $ .81
-------- -------- --------
-------- -------- --------
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING........................................ 9,435 9,028 8,750
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
APRIL 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 5,147 $ 1,133
Accounts receivable, net of allowances for doubtful
accounts of $1,783 and $1,079........................... 76,027 55,723
Current lease receivables................................. 19,595 15,316
Inventories............................................... 7,636 10,964
Costs and estimated earnings in excess of billings of
$11,948 and $13,528..................................... 11,556 5,202
Deferred income tax benefits.............................. 3,954 3,427
Prepaid expenses, deposits and other...................... 2,925 2,443
-------- --------
TOTAL CURRENT ASSETS.................................... 126,840 94,208
-------- --------
PROPERTY AND EQUIPMENT:
Machinery and equipment................................... 93,895 75,126
Less-accumulated depreciation and amortization............ (48,409) (40,815)
-------- --------
NET PROPERTY AND EQUIPMENT.............................. 45,486 34,311
-------- --------
OTHER ASSETS:
Lease receivables, net of current portion................. 29,775 24,556
Goodwill, net of amortization of $5,749 and $3,991........ 21,958 7,421
Other..................................................... 114 492
-------- --------
TOTAL OTHER ASSETS...................................... 51,847 32,469
-------- --------
$224,173 $160,988
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
23
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
APRIL 30,
------------------
1997 1996
-------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 389 $ -
Current maturities of discounted lease rentals............ 13,878 12,202
Accounts payable.......................................... 24,486 15,053
Deferred revenue.......................................... 18,680 17,856
Accrued -
Salaries and wages...................................... 13,065 10,424
Warranty costs.......................................... 2,348 1,655
Other liabilities....................................... 10,333 6,880
Income taxes payable...................................... 388 668
Billings in excess of costs and estimated earnings of
$12,829 and $12,595................................... 5,789 4,571
-------- --------
TOTAL CURRENT LIABILITIES............................. 89,356 69,309
-------- --------
LONG-TERM DEBT,
NET OF CURRENT MATURITIES................................. 18,284 -
DISCOUNTED LEASE RENTALS,
NET OF CURRENT MATURITIES................................. 24,043 15,961
DEFERRED INCOME TAXES....................................... 8,120 8,201
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 3 and 10)
SHAREHOLDERS' EQUITY:
Common stock - $.10 par value; 40,000,000 authorized
shares; 9,387,458 and 8,717,538 shares issued and
outstanding............................................. 939 872
Capital in excess of par value............................ 34,556 27,619
Retained earnings......................................... 50,192 39,975
Unamortized cost of stock................................. (142) (94)
Foreign currency translation adjustments.................. (1,175) (855)
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................ 84,370 67,517
-------- --------
$224,173 $160,988
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
24
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED APRIL 30
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL FOREIGN
-------------------- IN EXCESS UNAMORTIZED CURRENCY
OUTSTANDING OF PAR RETAINED COST OF TRANSLATION
SHARES AMOUNT VALUE EARNINGS STOCK ADJUSTMENTS
----------- ------ --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - APRIL 30, 1994................ 4,071 $407 $24,132 $24,423 $(291) $(1,013)
Stock issued for employee benefit
plans................................. 144 15 1,899 - 142 -
Foreign currency translation
adjustments........................... - - - - - 207
Net income.............................. - - - 7,063 - -
----- ------ --------- -------- ----------- -----------
BALANCE - APRIL 30, 1995................ 4,215 422 26,031 31,486 (149) (806)
Stock issued for employee benefit
plans................................. 144 14 2,024 - 55 -
Foreign currency translation
adjustments........................... - - - - - (49)
Effect of two-for-one stock split....... 4,359 436 (436) - - -
Net income.............................. - - - 8,489 - -
----- ------ --------- -------- ----------- -----------
BALANCE - APRIL 30, 1996................ 8,718 872 27,619 39,975 (94) (855)
Stock issued for employee benefit
plans................................. 531 53 4,951 - (48) -
Stock issued for acquisition............ 138 14 1,986 - - -
Foreign currency translation
adjustments........................... - - - - - (320)
Net income.............................. - - - 10,217 - -
----- ------ --------- -------- ----------- -----------
BALANCE - APRIL 30, 1997................ 9,387 $939 $34,556 $50,192 $(142) $(1,175)
----- ------ --------- -------- ----------- -----------
----- ------ --------- -------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 10,217 $ 8,489 $ 7,063
Adjustments to reconcile net income to net cash provided
by operating activities -
Depreciation and amortization........................... 16,964 12,517 10,830
Deferred income taxes................................... (45) (465) (132)
Changes in operating items, net of acquisition effects:
Accounts receivable................................... (16,319) (3,961) (7,807)
Inventories........................................... 3,532 167 1,034
Costs and estimated earnings in excess of billings.... (6,371) 5,715 4,150
Prepaid expenses, deposits and other.................. (386) (111) (503)
Accounts payable and accrued liabilities.............. 9,561 (151) 4,567
Deferred revenue...................................... 468 2,815 1,405
Billings in excess of costs and estimated earnings.... 1,223 2,445 (866)
Income taxes payable.................................. (144) 510 448
--------- --------- ---------
Net cash provided by operating activities............... 18,700 27,970 20,189
--------- --------- ---------
INVESTING ACTIVITIES:
Additions to property and equipment, net.................. (24,219) (14,385) (17,313)
Cash paid for acquisitions, net of cash acquired.......... (11,794) - (726)
Investment in lease contracts............................. (31,545) (17,622) (16,246)
Collections from lease contracts.......................... 21,949 18,240 17,746
Other, net................................................ 314 (178) 13
--------- --------- ---------
Net cash used for investing activities.................. (45,295) (13,945) (16,526)
--------- --------- ---------
FINANCING ACTIVITIES:
Repayment of short-term debt.............................. - - (423)
Repayment of debt assumed in acquisition.................. (1,743) - -
Borrowings under revolving credit agreements.............. 227,715 112,435 122,950
Repayments under revolving credit agreements.............. (209,795) (128,900) (124,610)
Borrowings on discounted lease rentals.................... 22,396 13,173 9,056
Repayments of discounted lease rentals.................... (12,583) (12,767) (11,631)
Borrowings of other long-term debt........................ 105 - -
Repayments of other long-term debt........................ (366) (93) (229)
Proceeds from sale of common stock........................ 3,017 1,615 1,353
Tax benefits from shares issued to employees.............. 1,869 340 412
--------- --------- ---------
Net cash provided by (used for) financing activities.... 30,615 (14,197) (3,122)
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (6) (3) 12
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH............................. 4,014 (175) 553
CASH, BEGINNING OF YEAR..................................... 1,133 1,308 755
--------- --------- ---------
CASH, END OF YEAR........................................... $ 5,147 $ 1,133 $ 1,308
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS:
Norstan, Inc. (Norstan or the Company) manages the operations of its
subsidiaries, Norstan Communications, Inc. (NCI), Norstan Canada Inc. (NCDA),
Connect Computer Company (Connect), Norstan Financial Services, Inc. (NFS),
Norstan Network Services, Inc. (NNS), Norstan Network Services, Inc. of New
Hampshire, and Norstan International, Inc. (NII).
Norstan is a full service communications systems provider creating
integrated voice, video and data communications solutions for customers
primarily in 18 states and throughout Canada. Norstan is the largest
independent distributor of private communications systems and application
products manufactured by Siemens Business Communication Systems, Inc.
(Siemens), formerly Siemens ROLM Communications Inc. (ROLM) and has
historically derived a substantial majority of its revenues from the sale of
telephone systems, communications maintenance services and moves, adds and
changes. The Company's products and services also include call processing
products, long distance services, video/audio conferencing products,
refurbished equipment, cabling, leasing, outsourcing and data integration
products and services. NFS provides financing for the Company's customers.
The Company sells its products and services to a wide variety of customers
and industries. A substantial portion of the Company's operations are located
in the Mideast, Midwest and Southwestern regions of the United States.
Under its agreement with Siemens, the Company purchases communications
equipment and products for field application and installation. The current
distributor agreement with Siemens extends through July 1998. The Company
believes that any interruption of its business relationship with Siemens
would have a material adverse effect on its business.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the
financial statements. Estimates also affect the reported amounts of revenues
and expenses during the periods presented. Estimates are used for such items
as allowances for doubtful accounts, inventory reserves, depreciable lives of
property and equipment, warranty reserves and others. Ultimate results could
differ from those estimates.
REVENUE RECOGNITION:
Revenues from the sale of products and systems, including new products
and upgrades, as well as revenues generated from the secondary equipment
market, are recognized upon performance of contractual obligations, which is
generally upon installation or shipment. Revenues for certain installation
contracts are recognized under the percentage of completion method of
accounting for long-term contracts. Revenues from telecommunications
services, including maintenance/service revenues, moves, adds, and changes
(MAC) revenues, revenues from the resale of long distance services, and
network integration services, are recognized as the services are provided.
Financial services revenues are recognized over the life of the related lease
receivables using the effective interest method. In addition, the Company
grants credit to customers and generally does not require collateral or any
other security to support amounts due.
27
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
INVENTORIES:
Inventories include purchased parts and equipment and are stated at the
lower of cost, determined on a first-in, first-out basis, or realizable
market value.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and include expenditures which
increase the useful lives of existing property and equipment. Maintenance,
repairs and minor renewals are charged to operations as incurred. Generally,
when property and equipment is disposed of, the related cost and accumulated
depreciation are removed from the respective accounts and any gain or loss is
reflected in the results of operations. For capitalized telecommunications
equipment used as spare parts, the composite depreciation method is used
whereby the cost of property retired less any salvage is charged against
accumulated depreciation and no gain or loss is recognized. The net book
value of capitalized telecommunications equipment was $16,605,000 and
$14,933,000 as of April 30, 1997 and 1996, respectively. Machinery and
equipment is depreciated over the estimated useful lives of two to ten years
under the straight-line method for financial reporting purposes. Accelerated
methods of depreciation are used for income tax reporting.
GOODWILL:
Goodwill is being amortized on a straight-line basis over 15 - 20 years.
The Company periodically evaluates whether events or circumstances have
occurred which may indicate that the remaining estimated useful lives may
warrant revision or that the remaining goodwill balance may not be fully
recoverable. In the event that factors indicate that the goodwill in question
should be evaluated for possible impairment, a determination of the overall
recoverability would be made.
FOREIGN CURRENCY:
For the Company's foreign operations, assets and liabilities are
translated at year-end exchange rates, and revenues and expenses are
translated at average exchange rates prevailing during the year. Translation
adjustments are recorded as a separate component of shareholders' equity.
INCOME TAXES:
Deferred income taxes are provided for differences between the financial
reporting basis and tax basis of the Company's assets and liabilities at
currently enacted tax rates.
SHARE DATA AND STOCK SPLIT:
Net income per common and common equivalent share is based on the
weighted average number of shares of common stock outstanding during the
year, adjusted for the dilutive effect of common stock equivalents.
On June 20, 1996, the Company's Board of Directors approved a
two-for-one stock split effected in the form of a stock dividend. The stock
split has been retroactively reflected in the accompanying consolidated
financial statements and related notes. All share and per share data have
been restated to reflect the stock split.
28
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosure of cash flow information is as follows (in
thousands):
YEARS ENDED APRIL 30,
----------------------
1997 1996 1995
------ ------ ------
Cash paid for:
Interest........................................ $3,996 $3,608 $3,650
Income taxes.................................... 4,995 5,218 3,911
Non-cash investing and financing activities:
Stock issued for acquisition.................... $2,000 $ - $ -
Non-compete agreements related to acquisition... 667 - -
RECENTLY ISSUED ACCOUNTING STANDARDS:
Effective May 1, 1996, the Company adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
(SFAS No. 121), which establishes accounting standards for the recognition
and measurement of impairment of long-lived assets, certain identifiable
intangibles, and goodwill either to be held or disposed of. The adoption of
SFAS No. 121 did not have a material impact on the Company's financial
position or results of operations.
In March 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings per Share" (SFAS No. 128), which changes the way companies
calculate their earnings per share data (EPS). SFAS No. 128 replaces primary
EPS with basic EPS. Basic EPS is computed by dividing reported earnings by
weighted average shares outstanding, excluding potentially dilutive
securities. Fully diluted EPS, termed diluted EPS under SFAS No. 128, is also
to be disclosed. The Company is required to adopt SFAS No. 128 in fiscal
1998 at which time all prior year EPS are to be restated in accordance with
SFAS No. 128. If the Company had adopted the pronouncement during fiscal
1997, the effect of this accounting change on reported EPS data would have
been as follows:
YEARS ENDED APRIL 30,
---------------------
1997 1996 1995
----- ----- -----
Primary EPS as reported......................... $1.08 $ .94 $ .81
Effect of SFAS No. 128.......................... .04 .06 .05
----- ----- -----
Basic EPS as restated........................... $1.12 $1.00 $ .86
----- ----- -----
----- ----- -----
Fully diluted EPS as reported................... $ - $ - $ -
Effect of SFAS No. 128.......................... 1.08 .94 .81
----- ----- -----
Diluted EPS as restated......................... $1.08 $ .94 $ .81
----- ----- -----
----- ----- -----
29
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 - ACQUISITION:
On June 4, 1996, the Company acquired Connect Computer Company
(Connect), in a transaction accounted for under the purchase method. Connect
is a provider of consulting, design and implementation services for local and
wide area networks, internets and intranets, client server applications and
workgroup computing, with offices in Minneapolis, Milwaukee, and Des Moines.
The acquisition consideration totaled approximately $15.0 million,
consisting of $12.0 million in cash, $2.0 million of Norstan common stock and
$1.0 million payable to certain members of Connect management under
non-compete agreements. In addition, the Company agreed to pay up to $4.0
million in contingent consideration over a three year period ending April 30,
1999, if certain financial performance targets are achieved (as of April 30,
1997, $2.0 million of such consideration has been accrued). This transaction
resulted in the recording of $16.4 million in goodwill which is being
amortized on a straight-line basis over 15 years. The Company financed the
cash portions of the acquisition through borrowings under its existing credit
facility. Pro forma information in the year of acquisition has not been
disclosed as such information was not materially different from the Company's
results of operations.
NOTE 4 - SUMMARIZED FINANCIAL INFORMATION OF NFS:
NATURE OF BUSINESS:
NFS provides financing for the Company's customers and has financed
customer equipment purchases from the Company in the amounts of $30,409,000,
$15,385,000, and $14,415,000 during fiscal years ended April 30, 1997, 1996
and 1995, respectively. Leases are primarily accounted for as sales-type
leases for financial reporting purposes.
Summarized financial information of NFS is as follows (in thousands):
BALANCE SHEETS
ASSETS
AS OF APRIL 30,
----------------
1997 1996
------- -------
Cash and other.................................... $ 694 $ 1,595
Lease receivables, net............................ 47,234 35,321
------- -------
$47,928 $36,916
------- -------
------- -------
LIABILITIES AND SHAREHOLDER'S EQUITY
Discounted lease rentals.......................... $35,906 $25,132
Other liabilities................................. 5,442 6,787
Shareholder's equity.............................. 6,580 4,997
------- -------
$47,928 $36,916
------- -------
------- -------
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED APRIL 30,
-----------------------------
1997 1996 1995
------- ------- -------
Interest and other income............... $ 5,417 $ 5,081 $ 4,656
Interest expense........................ (1,770) (1,788) (2,017)
Other expenses.......................... (1,204) (1,454) (1,037)
------- ------- -------
Income before provision for income
taxes............................... 2,443 1,839 1,602
Provision for income taxes............ 859 394 629
------- ------- -------
Net income.............................. $ 1,584 $ 1,445 $ 973
------- ------- -------
------- ------- -------
30
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 - SUMMARIZED FINANCIAL INFORMATION OF NFS (CONTINUED):
The components of lease receivables outstanding are summarized as
follows (in thousands):
AS OF APRIL 30,
------------------
1997 1996
-------- --------
Gross lease receivables........................... $ 52,124 $ 38,484
Residual values................................... 8,634 7,390
Less:
Unearned income................................. (11,679) (8,803)
Allowance for financing losses.................. (1,845) (1,750)
-------- --------
Total lease receivables - net..................... 47,234 35,321
Less - current maturities......................... (18,894) (14,157)
-------- --------
Long-term lease receivables....................... $ 28,340 $ 21,164
-------- --------
-------- --------
The aggregate amount of gross lease receivables maturing in each of the
five years following April 30, 1997 is as follows (in thousands):
YEARS ENDING APRIL 30, AMOUNT
- -------------------------------------------------- -------
1998.............................................. $19,332
1999.............................................. 14,891
2000.............................................. 9,560
2001.............................................. 5,528
2002 and thereafter............................... 2,813
-------
$52,124
-------
-------
The consolidated balance sheets as of April 30, 1997 and 1996 also include
$9,642,000 and $6,602,000, respectively, of net lease receivables from customers
of NCI and NCDA.
NOTE 5 - DEBT OBLIGATIONS:
LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
AS OF APRIL 30,
----------------
1997 1996
------- -------
Bank Financing:
Revolving Credit Agreement...................... $ 6,920 $ -
Certificates of Deposit......................... 11,000 -
Capital Lease Obligations......................... 753 -
------- -------
Total Long-Term Debt.............................. 18,673 -
Less - Current Maturities......................... 389 -
------- -------
$18,284 $ -
------- -------
------- -------
31
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 - DEBT OBLIGATIONS (CONTINUED):
BANK FINANCING:
The Company has a $40,000,000 unsecured revolving long-term credit
agreement with certain banks. Up to $15,000,000 of borrowings under this
agreement may be in the form of commercial paper. In addition, up to
$8,000,000 and $6,000,000 may be used to support the leasing activities of
NFS and NCDA, respectively. Borrowings under this agreement are due July
31, 1999, and bear interest at the banks' reference rate (8.50% at April 30,
1997), except for LIBOR, CD and commercial paper based options which
generally bear interest at a rate lower than the banks' reference rate. Total
consolidated borrowings under this agreement at April 30, 1997, were
$17,920,000. There were no borrowings under this agreement at April 30,
1996. There were no borrowings on account of NFS or NCDA at April 30, 1997,
or April 30, 1996. Annual commitment fees on the unused portions of the
credit facility are .25%.
Under the agreement, the Company is required to maintain minimum levels
of tangible net worth and certain other financial ratios. The Company has
complied with or has obtained the appropriate waivers for such requirements
as of and for the year ended April 30, 1997.
SHORT-TERM BORROWINGS:
In addition to borrowing funds under its revolving credit agreement, the
Company periodically borrows funds from banks on a short-term basis for
working capital purposes. There were no short-term borrowings outstanding as
of April 30, 1997 or 1996. Short-term borrowing amounts during fiscal years
1997 and 1996 were as follows :
1997 1996
---------- -------
Maximum amount outstanding during the year........ $2,325,000 -
Average borrowings during the year................ $ 29,600 -
Weighted average interest rates during the year... 8.36% -
NOTE 6 - DISCOUNTED LEASE RENTALS:
NFS and NCDA utilize their lease receivables and corresponding
underlying equipment to borrow funds from financial institutions at fixed
rates on a nonrecourse or recourse basis by discounting the stream of future
lease payments. Proceeds from discounting are recorded on the consolidated
balance sheet as discounted lease rentals. Interest rates on these credit
agreements range from 6% to 10% and payments are generally due in varying
monthly installments through June 2003.
Discounted lease rentals of NFS and NCDA consisted of the following (in
thousands):
AS OF APRIL 30,
----------------
1997 1996
------- -------
Nonrecourse borrowings............................ $37,329 $26,467
Recourse borrowings............................... 592 1,696
------- -------
Total discounted lease rentals.................... 37,921 28,163
Less - current maturities....................... (13,878) (12,202)
------- -------
$24,043 $15,961
------- -------
------- -------
In addition to the recourse to NFS and/or NCDA as described above,
recourse to Norstan, Inc. relative to discounted lease rentals was limited to
$418,000 as of April 30, 1997 and $883,000 as of April 30, 1996.
32
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 - DISCOUNTED LEASE RENTALS (CONTINUED):
Aggregate maturities of discounted lease rentals as of April 30, 1997
are as follows (in thousands):
YEARS ENDING APRIL 30, AMOUNT
- -------------------------------------------------- -------
1998.............................................. $13,878
1999.............................................. 10,832
2000.............................................. 6,828
2001.............................................. 4,285
2002 and thereafter............................... 2,098
-------
$37,921
-------
-------
NOTE 7 - INCOME TAXES:
The domestic and foreign components of income before the provision for
income taxes are as follows (in thousands):
YEARS ENDED APRIL 30,
-------------------------
1997 1996 1995
------- ------- -------
Domestic.......................................... $16,215 $13,365 $11,363
Foreign........................................... 1,102 784 409
------- ------- -------
$17,317 $14,149 $11,772
------- ------- -------
------- ------- -------
The provision (benefit) for income taxes consisted of the following (in
thousands):
YEARS ENDED APRIL 30,
-------------------------
1997 1996 1995
------- ------- -------
Current
Domestic........................................ $ 7,361 $ 5,656 $ 4,325
Foreign......................................... (216) 469 516
------- ------- -------
7,145 6,125 4,841
------- ------- -------
Deferred
Domestic........................................ (572) (235) 179
Foreign......................................... 527 (230) (311)
------- ------- -------
(45) (465) (132)
------- ------- -------
Provision for income taxes...................... $ 7,100 $ 5,660 $ 4,709
------- ------- -------
------- ------- -------
The differences between the effective tax rate and income taxes computed
using the federal statutory rate were as follows:
YEARS ENDED APRIL 30,
-------------------------
1997 1996 1995
------- ------- -------
Federal statutory rate............................ 35% 35% 35%
State income taxes, net of federal tax benefit.... 5 4 4
Other, net........................................ 1 1 1
------- ------- -------
41% 40% 40%
------- ------- -------
------- ------- -------
33
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 - INCOME TAXES (CONTINUED):
The Company has recorded the following net deferred income taxes as of
April 30 (in thousands):
1997 1996
------- --------
Current deferred income tax benefits.............. $ 4,865 $ 3,782
Current deferred income taxes..................... (911) (355)
-------- --------
Net current deferred income tax benefits........ 3,954 3,427
-------- --------
Noncurrent deferred income tax benefits........... 24,765 18,499
Noncurrent deferred income taxes.................. (32,655) (26,476)
Valuation allowance............................... (230) (224)
-------- --------
Net noncurrent deferred income taxes............ (8,120) (8,201)
-------- --------
Net deferred income taxes....................... $ (4,166) $ (4,774)
-------- --------
-------- --------
The tax effects of significant temporary differences representing
deferred tax assets and liabilities are as follows as of April 30 (in
thousands):
1997 1996
---------- ----------
Accelerated depreciation.......................... $ (30,613) $ (24,281)
Amortization of intangible assets................. (497) (774)
Capital leases.................................... (596) (581)
Operating leases.................................. 21,990 16,400
Long-term contract costs.......................... (147) 319
Inventory reserves................................ 143 400
Allowance for doubtful accounts................... 1,470 1,111
Vacation reserves................................. 1,226 991
Warranty reserves................................. 748 450
Tax credits and carryforwards..................... 100 -
Self insurance reserv............................. 578 377
Other, net........................................ 1,662 1,038
Valuation allowance............................... (230) (224)
---------- ----------
Net deferred tax liabilities.................... $ (4,166) $ (4,774)
---------- ----------
---------- ----------
NOTE 8 - STOCK OPTIONS AND STOCK PLANS:
The 1986 Long-Term Incentive Plan of Norstan, Inc. (1986 Plan) provides
for the granting of non-qualified stock options, incentive stock options, and
restricted stock. The 1986 Plan, as amended in fiscal 1994, provides for a
maximum of 1,600,000 shares to be granted to key employees in the form of
stock options or restricted stock. As of September 20, 1995, no additional
grants are to be issued under the 1986 Plan.
The Norstan, Inc. 1995 Long-Term Incentive Plan (1995 Plan) permits the
granting of non-qualified stock options, incentive stock options, stock
appreciation rights and restricted stock, providing for a maximum of
1,200,000 shares to be granted as performance awards and other stock-based
awards. These options are granted at a price equal to the market price on
the date of grant, exercisable at 20% per year and expiring after ten years.
At April 30, 1997, 877,500 shares were available for future grants.
34
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - STOCK OPTIONS AND STOCK PLANS (CONTINUED):
The Restated Non-Employee Directors' Stock Plan (Directors' Plan)
provides for a maximum of 292,000 shares to be granted. Options for 20,000
shares are to be granted to each non-employee director of the Company upon
election as a director at a price equal to the market price on the date of
grant, exercisable at 20% per year and expiring after ten years. In addition
to the granting of options, the Directors' Plan provides for the payment of
an annual retainer to each non-employee director. On the date of each annual
meeting of shareholders, each non-employee director is to receive an annual
retainer paid in shares of common stock of the Company. The annual retainer
paid to each non-employee director at the September 1995 and 1996 annual
meeting of shareholders was $10,000 or 800 shares, and $12,000 or 700 shares,
respectively (based on the fair market value of the shares on the date of the
meetings). As of April 30, 1997, 12,000 shares had been issued as an annual
retainer to non-employee directors and 120,000 shares were available for
future grant/payment under the Directors' Plan.
Shares subject to option are summarized as follows:
<TABLE>
<CAPTION>
1995 PLAN 1986 PLAN DIRECTORS' PLAN
---------------------------- ---------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
STOCK AVERAGE STOCK AVERAGE STOCK AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
---------- ---------------- ---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - APRIL 30, 1994...... - $ - 680,424 $ 3.16 140,000 $ 3.86
Options granted........... - - 110,000 9.24 - -
Options canceled.......... - - (17,172) 3.04 - -
Options exercised......... - - (128,852) 3.01 - -
---------- ---------------- ---------- ---------------- ---------- ----------------
BALANCE - APRIL 30, 1995...... - - 644,400 4.23 140,000 3.86
Options granted........... - - 225,000 11.87 20,000 12.50
Options canceled.......... - - (29,400) 9.18 - -
Options exercised......... - - (162,100) 2.84 - -
---------- ---------------- ---------- ---------------- ---------- ----------------
BALANCE - APRIL 30, 1996...... - - 677,900 6.88 160,000 4.94
Options granted........... 310,500 $ 15.01 - - - -
Options canceled.......... - - (96,000) 9.62 - -
Options exercised......... - - (296,100) 3.49 (120,000) 3.24
---------- ---------------- ---------- ---------------- ---------- ----------------
BALANCE - APRIL 30, 1997...... 310,500 $ 15.01 285,800 $ 9.49 40,000 $ 10.06
---------- ---------------- ---------- ---------------- ---------- ----------------
---------- ---------------- ---------- ---------------- ---------- ----------------
OPTIONS EXERCISABLE AT:
April 30, 1995.............. - $ - 472,836 $ 2.93 132,000 $ 3.64
---------- ---------------- ---------- ---------------- ---------- ----------------
---------- ---------------- ---------- ---------------- ---------- ----------------
April 30, 1996.............. - $ - 375,936 $ 4.23 140,000 $ 4.00
---------- ---------------- ---------- ---------------- ---------- ----------------
---------- ---------------- ---------- ---------------- ---------- ----------------
April 30, 1997.............. - $ - 103,036 $ 7.43 28,000 $ 9.02
---------- ---------------- ---------- ---------------- ---------- ----------------
---------- ---------------- ---------- ---------------- ---------- ----------------
</TABLE>
35
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - STOCK OPTIONS AND STOCK PLANS (CONTINUED):
Additional information regarding options outstanding/exercisable at
April 30, 1997 is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED WEIGHTED NUMBER OF WEIGHTED
OPTIONS EXERCISE AVERAGE AVG REMAINING OPTIONS AVERAGE
OUTSTANDING PRICE RANGE EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
------------ ---------------- ---------------- ------------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
1995 Plan 310,500 $ 15.00 - $16.00 $ 15.01 9.25 YEARS - $ -
------------ ---------------- ---------------- ------------------ ------------ ----------------
------------ ---------------- ---------------- ------------------ ------------ ----------------
1986 Plan 33,600 $ 2.63 - $3.38 $ 3.29 1.45 years 24,276 $ 3.26
33,200 $ 4.25 - $5.00 $ 4.48 4.01 years 19,760 $ 4.63
36,000 $ 6.88 - $9.75 $ 7.74 6.41 years 24,000 $ 7.46
183,000 $ 11.88 $ 11.88 8.11 years 35,000 $ 11.88
------------ ---------------- ---------------- ------------------ ------------ ----------------
285,800 $ 2.63 - $11.88 $ 9.49 6.63 YEARS 103,036 $ 7.43
------------ ---------------- ---------------- ------------------ ------------ ----------------
------------ ---------------- ---------------- ------------------ ------------ ----------------
Directors' Plan 20,000 $ 7.62 $ 7.62 5.67 years 20,000 $ 7.62
20,000 $ 12.50 $ 12.50 8.33 years 8,000 $ 12.50
------------ ---------------- ---------------- ------------------ ------------ ----------------
40,000 $ 7.62 - $12.50 $ 10.06 7.00 YEARS 28,000 $ 9.02
------------ ---------------- ---------------- ------------------ ------------ ----------------
------------ ---------------- ---------------- ------------------ ------------ ----------------
</TABLE>
The Company has awarded restricted stock grants to selected employees
under the 1986 Plan and the 1995 Plan. Recipients of restricted stock awards
under these plans were not required to make any payments for the stock or
provide consideration other than the rendering of services. Shares of stock
awarded under the plans are subject to certain restrictions on transfer and
all or part of the shares awarded to an employee may be subject to forfeiture
upon the occurrence of certain events, including termination of employment.
Through April 30, 1997, 140,706 shares and 12,000 shares have been awarded
under the 1986 Plan and the 1995 Plan, respectively. The fair market value
of the shares granted under these plans is generally amortized over a four
year period. Amortization of $70,000, $137,000, and $74,000 has been charged
to operations in 1997, 1996 and 1995, respectively.
The Company has maintained an Employee Stock Purchase and Bonus Plan
(the Employee Stock Plan) since 1980 which allows employees to set aside up
to 10% of their earnings for the purchase of shares of the Company's common
stock. Shares are purchased annually under the Employee Stock Plan at a
price equal to 85% of the market price on the last day of the calendar year.
During fiscal 1997, 126,260 shares were issued under this plan and, at April
30, 1997, 584,586 shares were available for future issuance.
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock option plans. Accordingly, no compensation cost has
been recognized in the accompanying statements of operations. Had
compensation cost been recognized based on the fair values of options at the
grant dates consistent with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the Company's net income and net income per common
share would have been decreased to the following pro forma amounts:
YEARS ENDED APRIL 30,
-----------------------
1997 1996
--------- -------
Net income.......................... As reported $ 10,217 $ 8,489
Pro forma 9,360 7,964
Net income per common share.........
As reported $ 1.08 $ 0.94
Pro forma 0.99 0.88
36
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 - STOCK OPTIONS AND STOCK PLANS (CONTINUED):
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to May 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
The weighted average fair values of options granted and Employee Stock
Plan shares were as follows:
EMPLOYEE
1995 PLAN 1986 PLAN DIRECTORS' PLAN STOCK PLAN
--------- --------- --------------- ----------
Fiscal 1996 grants - $6.49 $7.29 $2.15
Fiscal 1997 grants $7.95 - - $2.96
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in fiscal 1996 and 1997:
YEARS ENDED APRIL 30,
----------------------
1997 1996
---------- ---------
Risk-free interest rate........................... 6.28% 5.74%
Expected life of options.......................... 7 years 7 years
Expected life of Employee Stock Plan shares....... 1 year 1 year
Expected volatility............................... 35% 57%
Expected dividend yield........................... - -
The tax benefits associated with the exercise of stock options or
issuance of shares under the Company's stock option plans, not related to
expenses recognized for financial reporting purposes, have been credited to
capital in excess of par value in the accompanying consolidated balance
sheets.
37
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 - 401(k) PLAN:
The Company has adopted the Norstan, Inc. Incentive Savings Plan, a
401(k) profit-sharing plan (the 401(k) Plan) covering substantially all
full-time employees. Eligible employees may elect to defer up to 15% of
their eligible compensation. The Company may make discretionary matching
contributions of up to 6% of each plan participant's eligible compensation.
Company contributions to the 401(k) Plan were $1,554,000, $1,267,000 and
$1,078,000 for the years ending April 30, 1997, 1996 and 1995, respectively.
NOTE 10 - COMMITMENTS AND CONTINGENCIES:
LEGAL PROCEEDINGS:
The Company is involved in legal actions in the ordinary course of its
business. Although the outcomes of any such legal actions cannot be
predicted, in the opinion of management there is no legal proceeding pending
against or involving the Company for which the outcome is likely to have a
material adverse effect upon the consolidated financial position or results
of operations of the Company.
OPERATING LEASE COMMITMENTS:
The Company and its subsidiaries conduct a portion of their operations
in leased facilities. Most of the leases require payment of maintenance,
insurance, taxes and other expenses in addition to the minimum annual
rentals. Lease expense, as recorded in the accompanying consolidated
statements of operations, was $10,914,000 in 1997, $10,501,000 in 1996, and
$8,661,000 in 1995.
Future minimum lease payments under noncancelable leases with initial or
remaining terms of one year or more were as follows at April 30, 1997 (in
thousands):
YEARS ENDING APRIL 30, AMOUNT
- -------------------------------------------------- --------
1998.............................................. $ 6,327
1999.............................................. 4,712
2000.............................................. 3,942
2001.............................................. 2,480
2002 and thereafter............................... 3,832
--------
$ 21,293
--------
--------
CUSTOMER COMMITMENTS:
The Company has entered into sales contracts with certain customers
containing future performance obligations. Although the financial impact of
these performance obligations is not determinable, management believes they
will not have a material effect on the future operating results of the
Company.
38
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (CONTINUED):
SHAREHOLDER RIGHTS PLAN:
In May 1988, the Board of Directors authorized a shareholder rights plan
which provides for a dividend distribution of one right for each outstanding
share of common stock to shareholders of record on June 13, 1988. The rights
will become exercisable in the event, with certain exceptions, an acquiring
party accumulates 20% or more of the voting power of the Company, or the
commencement of a tender or exchange offer which would result in the party
having beneficial ownership of 30% or more of the voting power of the
Company. Each right entitles the holder to purchase from the Company one
share of common stock at $12.50 per share, subject to adjustment. In
addition, upon the occurrence of certain events, holders of the rights will
be entitled to purchase either the Company's common stock at one-fourth of
its market value or stock in an acquiring party at one-half of its market
value.
NOTE 11 - OPERATIONS BY GEOGRAPHIC AREA:
The following table sets forth the Company's operations by geographic
area as of and for the years ended April 30, (in thousands):
1997 1996 1995
--------- --------- ---------
REVENUES:
United States........................ $ 365,796 $ 287,171 $ 262,235
Canada............................... 32,279 34,193 28,010
--------- --------- ---------
$ 398,075 $ 321,364 $ 290,245
--------- --------- ---------
--------- --------- ---------
NET INCOME:
United States........................ $ 9,426 $ 7,943 $ 6,617
Canada............................... 791 546 446
--------- --------- ---------
$ 10,217 $ 8,489 $ 7,063
--------- --------- ---------
--------- --------- ---------
IDENTIFIABLE ASSETS:
United States........................ $ 207,942 $ 142,151 $ 143,443
Canada............................... 16,231 18,837 18,266
--------- --------- ---------
$ 224,173 $ 160,988 $ 161,709
--------- --------- ---------
--------- --------- ---------
39
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
1997
Revenues...................... $ 92,231 $ 95,653 $ 94,075 $ 116,116
--------- --------- --------- ---------
--------- --------- --------- ---------
Gross margin.................. $ 25,331 $ 27,105 $ 26,061 $ 30,018
--------- --------- --------- ---------
--------- --------- --------- ---------
Operating income.............. $ 3,151 $ 5,161 $ 5,126 $ 5,767
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income.................... $ 1,692 $ 2,676 $ 2,715 $ 3,134
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common and
common equivalent share..... $ .18 $ .28 $ .29 $ .33
--------- --------- --------- ---------
--------- --------- --------- ---------
1996
Revenues...................... $ 72,401 $ 78,705 $ 81,630 $ 88,628
--------- --------- --------- ---------
--------- --------- --------- ---------
Gross margin.................. $ 20,418 $ 22,306 $ 23,182 $ 25,478
--------- --------- --------- ---------
--------- --------- --------- ---------
Operating income.............. $ 2,738 $ 4,003 $ 4,150 $ 4,520
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income.................... $ 1,433 $ 2,148 $ 2,293 $ 2,615
--------- --------- --------- ---------
--------- --------- --------- ---------
Net income per common and
common equivalent share..... $ .16 $ .24 $ .26 $ .29
--------- --------- --------- ---------
--------- --------- --------- ---------
Throughout each year, the income tax provision is recorded based upon
estimates of the overall expected tax rate for that year.
40
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
No changes in or disagreements with accountants which required reporting
on Form 8-K have occurred within the two-year period ended April 30, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to the directors and executive officers of the
Company, set forth under "Information Concerning Directors, Nominees and
Executive Officers" and under "Compliance with Section 16 (a)" in the
Company's definitive proxy statement for the annual meeting of shareholders
to be held September 23, 1997, is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to Executive Compensation set forth under
"Executive Compensation" in the Company's definitive proxy statement for the
annual meeting of shareholders to be held September 23, 1997, other than the
subsections captioned "Report of the Compensation and Stock Option Committee"
and "Performance Graph", is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information with respect to security ownership of certain beneficial
owners and management, set forth under "Beneficial Ownership of Principal
Shareholders and Management" in the Company's definitive proxy statement for
the annual meeting of shareholders to be held September 23, 1997, is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to certain relationships and related
transactions, set forth under "Information Concerning Directors, Nominees and
Executive Officers" in the Company's definitive proxy statement for the
annual meeting of shareholders to be held September 23, 1997, is incorporated
herein by reference.
41
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
l. Financial Statements
See Index to Consolidated Financial Statements and Financial
Statement Schedules on page 20 of this report.
2. Financial Statement Schedules
All schedules to the Consolidated Financial Statements normally
required by the applicable accounting regulations are omitted since
the required information is included in the Consolidated Financial
Statements or the Notes thereto or is not applicable.
3. Exhibits
See Index to Exhibits on page 45 of this report.
(b) REPORTS ON FORMS 8-K.
No reports on Form 8-K were filed by the Company during the last quarter
of the fiscal year covered by this report.
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this Report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: July 22, 1997
NORSTAN, INC.
Registrant
By /s/ David R. Richard
--------------------------
David R. Richard
Chief Executive Officer,
President and Director
By /s/ Kenneth S. MacKenzie
--------------------------
Kenneth S. MacKenzie
Chief Financial Officer
(Principal Financial and
Accounting Officer)
43
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Date
--------- ----
- ----------------------------------
Paul Baszucki
Chairman of the Board
/s/ Richard Cohen July 22, 1997
- ----------------------------------
Richard Cohen
Vice-Chairman of the Board
/s/ David R. Richard July 22, 1997
- ----------------------------------
David R. Richard
CEO, President and Director
/s/ Winston E. Munson July 24, 1997
- ----------------------------------
Winston E. Munson
Secretary and Director
/s/ Dr. Jagdish N. Sheth July 22, 1997
- ----------------------------------
Dr. Jagdish N. Sheth
Director
/s/ Arnold Lehrman July 22, 1997
- ----------------------------------
Arnold Lehrman
Director
/s/ Connie M. Levi July 23, 1997
- ----------------------------------
Connie M. Levi
Director
/s/ Gerald D. Pint July 23, 1997
- ----------------------------------
Gerald D. Pint
Director
/s/ Stanley Schweitzer July 23, 1997
- ----------------------------------
Stanley Schweitzer
Director
/s/ Herbert F. Trader July 23, 1997
- ----------------------------------
Herbert F. Trader
Director
44
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description Page
- -------- ----------- ----
3(a) Restated Articles of Incorporation of the Company, as
amended [filed as Exhibit 3(a) to the Company's
Annual Report on Form 10-K for the year ended
April 30, 1988 (File No. 0-8141) and incorporated herein
by reference]; Amendments adopted September 9, 1993 and
June 20, 1996 [filed as Exhibit 3(a) to the Company's
Annual Report on Form 10-K for the year ended April 30,
1996 (File No. 0-8141) and incorporated herein by reference].
3(b) Bylaws of the Company [filed as Exhibit 3(b) to the
Company's Annual Report on Form 10-K for the year ended
April 30, 1993 (File No. 0-8141) and incorporated herein by
reference]; Amendments adopted August 8, 1995 [filed as
Exhibit 3(b) to the Company's Annual Report on Form 10-K
for the year ended April 30, 1996 (File No. 0-8141) and
incorporated herein by reference]; Amendments adopted
September 20, 1995, July 30, 1996 and April 9, 1997.
3(c) Rights Agreement dated May 17, 1988 between Norstan, Inc.
and Norwest Bank Minnesota, N.A. [filed as Exhibit 1 to
the Company's Registration Statement on Form 8-A (File No.
0-8141) and incorporated herein by reference].
10(a) Agreement for ROLM Authorized Distributors, effective
July 27, 1993, between Norstan Communications, Inc. and
ROLM Company [filed as Exhibit 10(a) to the Company's
Annual Report on Form 10-K for the year ended April 30,
1993 (File No. 0-8141) and incorporated herein by
reference].
10(b) Credit Agreement dated as of July 23, 1996, among Norstan,
Inc., First Bank National Association, and Harris Trust and
Savings Bank and the Sumitomo Bank Limited, Chicago
Branch; First Amendment to Credit Agreement dated
October 11, 1996 [filed as Exhibit 10 to the Company's
quarterly report on Form 10-Q for the period ended August 3,
1996 (File No. 0-8141) and incorporated herein by reference].
10(c) Loan and Security Agreement dated April 29, 1993, between
Norstan Financial Services, Inc. and Sanwa Business Credit
Corporation [filed as Exhibit 10(b) to the Company's Current
Report on Form 8-K, dated April 29, 1993 (File No. 0-8141)
and incorporated herein by reference]; First Amendment dated
December 30, 1993 [filed as Exhibit 10(c) to the Company's
Annual Report on Form 10-K for the year ended April 30, 1994
(File No. 0-8141) and incorporated herein by reference].
(1)10(d) 1990 Employee Stock Purchase and Bonus Plan of Norstan,
Inc., as amended [filed as Exhibit 10(d) to the Company's
Annual Report on Form 10-K for the year ended April 30,
1993 (File No. 0-8141) and incorporated herein by reference].
45
<PAGE>
Exhibit
No. Description Page
- -------- ----------- ----
(1)10(e) Norstan, Inc. 1986 Long-Term Incentive Plan, as amended
[filed as Exhibit 10(e) to the Company's Annual Report on
Form 10-K for the year ended April 30, 1993 (File No.
0-8141) and incorporated herein by reference]; Amendments
adopted August 8, 1995 and July 30, 1996 [filed as
Exhibit 10(e) to the Company's Annual Report on Form 10-K
for the year ended April 30, 1996 (File No. 0-8141) and
incorporated herein by reference].
(1)10(f) Norstan, Inc. Restated Non-Employee Directors' Stock Plan,
[filed as Exhibit 28.1 to the Company's Registration
Statement on Form S-8 dated September 27, 1995 (File
No. 0-8141) and incorporated herein by reference].
(1)10(g) Norstan, Inc. 1995 Long-Term Incentive Plan [filed as
Exhibit 28.1 to the Company's Registration Statement on
Form S-8 dated September 27, 1995 (File No. 0-8141) and
incorporated herein by reference]; Amendment adopted
July 30, 1996 [filed as Exhibit 10(g) to the Company's Annual
Report on Form 10-K for the year ended April 30, 1996
(File No. 0-8141) and incorporated herein by reference];
Amendment adopted August 16, 1996.
(1)10(h) Employment Agreement dated April 7, 1995 between
Paul Baszucki and the Company [filed as Exhibit 10(h) to the
Company's Annual Report on Form 10-K for the year ended April
30, 1995 (File No. 0-8141) and incorporated herein by
reference].
(1)10(i) Employment Agreement dated April 7, 1995 between Richard
Cohen and the Company [filed as Exhibit 10(i) to the
Company's Annual Report on Form 10-K for the year ended
April 30, 1995 (File No. 0-8141) and incorporated herein by
reference].
(1)10(j) Employment Agreement dated April 30, 1997 between David
R. Richard and the Company.
10(k) Agreement and Plan of Merger dated May 24, 1996 among the
Company, Connect Computer Company and CCC Acquisition
Subsidiary, Inc. [filed as Exhibit 2 to the Company's Current
Report on Form 8-K dated June 4, 1996 (File No. 0-8141) and
incorporated herein by reference].
11 Statement Regarding Computation of Earnings Per Share 47
22 Subsidiaries of Norstan, Inc. 48
23.1 Consent of Independent Public Accountants 49
27 Financial Data Schedule
A copy of any of the exhibits listed or referred to above will be furnished
at a reasonable cost to any shareholder of the Company, upon receipt of a
written request from such person for any such exhibit. Such request should
be sent to Norstan, Inc., 605 North Highway 169, Twelfth Floor, Plymouth,
Minnesota 55441, Attention: Investor Relations.
(1) Items that are management contracts or compensatory plans or
arrangements required to be filed as an exhibit pursuant to Item 14(c) of
this Form 10-K.
46
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BYLAWS
OF
NORSTAN, INC.
In Effect 6/30/97
<PAGE>
INDEX
-----
Page
----
Article I OFFICES . . . . . . . . . . . . . . . . . . 1
Article II SHAREHOLDERS . . . . . . . . . . . . . . . . . . 1
Section 2.01 Regular Meetings . . . . . . . . . . 1
Section 2.02 Special Meetings . . . . . . . . . . 1
Section 2.03 Demand by Shareholders . . . . . . . 2
Section 2.04 Notice . . . . . . . . . . . . . . . 3
Section 2.05 Quorum . . . . . . . . . . . . . . . 4
Section 2.06 Voting Rights. . . . . . . . . . . . 4
Section 2.07 Share Register . . . . . . . . . . . 4
Section 2.08 Voting of Shares by Organizations
and Legal Representatives. . . . . . 5
Section 2.09 Proxies. . . . . . . . . . . . . . . 7
Section 2.10 Action Without a Meeting . . . . . . 7
Section 2.11 Inspectors of Election . . . . . . . 7
Section 2.12 Nominations of Directors . . . . . . 8
Section 2.13 Proposals by Shareholders. . . . . . 12
Section 2.14 Order of Business. . . . . . . . . . 12
Article III BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . 13
Section 3.01 Board to Manage. . . . . . . . . . . 13
Section 3.02 Number, Qualifications and Terms . . 13
Section 3.03 Annual Meeting . . . . . . . . . . . 13
Section 3.04 Regular Meetings . . . . . . . . . . 14
Section 3.05 Special Meetings . . . . . . . . . . 14
Section 3.06 Notice . . . . . . . . . . . . . . . 15
Section 3.07 Quorum . . . . . . . . . . . . . . . 15
Section 3.08 Manner of Acting . . . . . . . . . . 16
Section 3.09 Presumption of Assent. . . . . . . . 16
Section 3.10 Absent Directors . . . . . . . . . . 16
Section 3.11 Action Without a Meeting . . . . . . 17
Section 3.12 Resignation. . . . . . . . . . . . . 17
Section 3.13 Removal. . . . . . . . . . . . . . . 18
Section 3.14 Vacancies. . . . . . . . . . . . . . 18
Section 3.15 Compensation . . . . . . . . . . . . 18
Section 3.16 Age Limitation . . . . . . . . . . . 19
Article IV COMMITTEES . . . . . . . . . . . . . . . . . . . 19
Section 4.01 Generally. . . . . . . . . . . . . . 19
Section 4.02 Membership . . . . . . . . . . . . . 19
Section 4.03 Quorum . . . . . . . . . . . . . . . 19
Section 4.04 Procedure. . . . . . . . . . . . . . 19
Section 4.05 Minutes. . . . . . . . . . . . . . . 20
Article V OFFICERS. . . . . . . . . . . . . . . . . . . . . . . 20
i
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Page
----
Section 5.01 Number . . . . . . . . . . . . . . . 20
Section 5.02 Election and Term of Office. . . . . 20
Section 5.03 Resignation. . . . . . . . . . . . . 21
Section 5.04 Removal. . . . . . . . . . . . . . . 21
Section 5.05 Vacancy. . . . . . . . . . . . . . . 21
Section 5.06 Chairman of the Board. . . . . . . . 21
Section 5.07 Vice Chairman of the Board . . . . . 21
Section 5.08 Chief Executive Officer. . . . . . . 21
Section 5.09 President. . . . . . . . . . . . . . 22
Section 5.10 Chief Operating Officer. . . . . . . 22
Section 5.11 Vice President . . . . . . . . . . . 22
Section 5.12 Secretary. . . . . . . . . . . . . . 23
Section 5.13 Chief Financial Officer. . . . . . . 23
Section 5.14 Treasurer. . . . . . . . . . . . . . 24
Section 5.15 Assistant Secretaries and
Assistant Treasurers . . . . . . . . 24
Section 5.16 Contracts, etc.. . . . . . . . . . . 25
Section 5.17 Compensation . . . . . . . . . . . . 25
Article VI INDEMNIFICATION . . . . . . . . . . . . . . . . . . 25
Article VII CERTIFICATES FOR SHARES
AND THEIR TRANSFER . . . . . . . . . . . . . . . . . 26
Section 7.01 Certificates for Shares. . . . . . . 26
Section 7.02 Transfer of Shares . . . . . . . . . 27
Article VIII DISTRIBUTIONS . . . . . . . . . . . . . . . . . . 27
Article IX FISCAL YEAR . . . . . . . . . . . . . . . . . . 28
Article X SEAL . . . . . . . . . . . . . . . . . . 28
Article XI AMENDMENT . . . . . . . . . . . . . . . . . . 28
Article XII GOVERNING LAW . . . . . . . . . . . . . . . . . . 28
ii
<PAGE>
BYLAWS
OF
NORSTAN, INC.
ARTICLE I
OFFICES
The principal office of the corporation shall be located in Minnesota.
The corporation may have such other offices, either within or without
Minnesota, as the Board of Directors may designate or as the business of the
corporation may require from time to time.
The registered office of the corporation required by chapter 302A,
Minnesota Statutes, to be maintained in Minnesota may be, but need not be,
identical with the principal office in Minnesota, and the address of the
registered office may be changed from time to time by the Board of Directors.
ARTICLE II
SHAREHOLDERS
Section 2.01. REGULAR MEETINGS. The Board of Directors may cause
regular meetings of the shareholders to be held on an annual basis for the
purpose of electing directors and for the transaction of such other business
as may come before the meeting. Such regular meetings shall be held on the
date and at the time and place fixed by the Board of Directors.
Section 2.02. SPECIAL MEETINGS. Special meetings of the shareholders
may be called for any purpose or purposes at any time, by the chairman of the
Board of Directors, a vice chairman of the Board of Directors, the chief
executive officer, the
1
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president, the chief financial officer, two or more directors or a
shareholder or shareholders holding ten percent or more of the voting shares.
Special meetings shall be held on the date and at the time and place
fixed by the chairman of the Board of Directors or the Board of Directors,
except that a special meeting called by or at the demand of a shareholder or
shareholders pursuant to section 2.03 of these bylaws shall be held in the
county where the principal executive office is located.
The business transacted at a special meeting shall be limited to the
purposes stated in the notice of the meeting.
Section 2.03. DEMAND BY SHAREHOLDERS. If a regular meeting of
shareholders has not been held during the immediately preceding 15 months, a
shareholder or shareholders holding three percent or more of all voting
shares may demand a regular meeting of shareholders. A shareholder or
shareholders holding ten percent or more of the voting shares may demand a
special meeting of shareholders. The demand for a regular or a special
meeting shall be given in writing to the chairman of the Board of Directors,
the chief executive officer or the chief financial officer of the
corporation. Within 30 days after receipt of the demand by one of those
officers, the Board of Directors shall cause a meeting of shareholders to be
called and held on notice no later than 90 days after receipt of the demand,
all at the expense of the corporation. If the Board of Directors fails to
cause a meeting to be called and held as required by this section, the
shareholder or shareholders making the demand may
2
<PAGE>
call the meeting by giving notice as required by section 2.04 of these
bylaws, all at the expense of the corporation.
Section 2.04. NOTICE. Notice of all meetings of shareholders shall be
given to every holder of voting shares, except where the meeting is an
adjourned meeting and the date, time and place of the meeting were announced
at the time of adjournment. The notice shall be given at least five days
before the date of the meeting, and not more than 60 days before the date of
the meeting. The notice shall contain the date, time and place of the
meeting, and any other information required by this Article II. In the case
of a special meeting, the notice shall contain a statement of the purposes of
the meeting. The notice may also contain any other information deemed
necessary or desirable by the Board of Directors or by any other person or
persons calling the meeting.
A shareholder may waive notice of a meeting of shareholders. A waiver
of notice by a shareholder entitled to notice shall be effective whether
given before, at or after the meeting, and whether given in writing, orally
or by attendance. Attendance by a shareholder at a meeting shall be a waiver
of notice of that meeting, except where the shareholder objects at the
beginning of the meeting to the transaction of business because the meeting
is not lawfully called or convened, or objects before a vote on an item of
business because the item may not lawfully be considered at that meeting and
does not participate in the consideration of the item at that meeting.
3
<PAGE>
Section 2.05. QUORUM. The holders of a majority of the voting power of
the shares entitled to vote at a meeting present in person or by proxy at the
meeting shall constitute a quorum for the transaction of business. If a
quorum is present when a duly called or held meeting is convened, the
shareholders present may continue to transact business until adjournment,
even though the withdrawal of a number of shareholders originally present
leaves less than the proportion or number otherwise required for a quorum.
Section 2.06. VOTING RIGHTS. The Board of Directors may fix a date not
more than 60 days before the date of a meeting of shareholders as the date
for the determination of the holders of voting shares entitled to notice of
and to vote at the meeting. When a date is so fixed, only shareholders on
that date are entitled to notice of and permitted to vote at that meeting of
shareholders. If no record date is fixed for the determination of
shareholders entitled to notice of or to vote at a meeting of shareholders,
the date on which notice of the meeting is first mailed shall be the record
date for such determination of shareholders. When a determination of
shareholders entitled to vote at any meeting of shareholders has been made as
provided in this section, such determination shall apply to any adjournment
thereof.
Section 2.07. SHARE REGISTER. The officer or agent
having charge of the share register of the corporation shall maintain a share
register, not more than one year old, containing a complete list of the
shareholders with the address of and the
4
<PAGE>
number, class and issuance dates of shares held by each. The share register
shall be kept on file at the principal executive office of the corporation,
or at another place or places within the United States determined by the
Board of Directors, and shall be subject to inspection by any shareholder at
any time during usual business hours.
A resolution approved by the affirmative vote of a majority of the
directors present may establish a procedure whereby a shareholder may certify
in writing to the corporation that all or a portion of the shares registered
in the name of the shareholder are held for the account of one or more
beneficial owners. Upon receipt by the corporation of the writing, the
persons specified as beneficial owners, rather than the actual shareholder,
shall be deemed the shareholders for the purposes specified in the writing.
A shareholder shall have one vote for each voting share held. Shares
owned by two or more shareholders may be voted by any one of them unless the
corporation receives written notice from any one of them denying the
authority of that person to vote those shares. Except as provided herein, a
holder of voting shares may vote any portion of the shares in any way the
shareholder chooses. If a shareholder votes without designating the
proportion or number of shares voted in a particular way, the shareholder
shall be deemed to have voted all of the shares in that way.
Section 2.08. VOTING OF SHARES BY ORGANIZATIONS AND
LEGAL REPRESENTATIVES. Shares of the corporation registered in
5
<PAGE>
the name of another domestic or foreign corporation may be voted by the
president or another legal representative of that corporation. Except as
provided herein, shares of the corporation registered in the name of a
subsidiary shall not be entitled to vote on any matter. Shares of the
corporation in the name of or under the control of the corporation or a
subsidiary in a fiduciary capacity shall not be entitled to vote on any
matter, except to the extent that the settlor or beneficial owner possesses
and exercises a right to vote or gives the corporation binding instructions
on how to vote the shares.
Shares under the control of a person in a capacity as a personal
representative, administrator, executor, guardian, conservator or
attorney-in-fact may be voted by the person, either in person or by proxy,
without registration of those shares in the name of the person. Shares
registered in the name of a trustee of a trust or in the name of a custodian
may be voted by the person, either in person or by proxy, but a trustee of a
trust or a custodian shall not vote shares held by the person unless they are
registered in the name of the person.
Shares registered in the name of a trustee in bankruptcy or a receiver
may be voted by the trustee or receiver either in person or by proxy. Shares
under the control of a trustee in bankruptcy or a receiver may be voted by
the trustee or receiver without registering the shares in the name of the
trustee or receiver, if authority to do so is contained in an appropriate
order of the court by which the trustee or receiver was appointed.
6
<PAGE>
Shares registered in the name of any organization not described herein
may be voted either in person or by proxy by the legal representative of that
organization.
A shareholder whose shares are pledged may vote those shares until the
shares are registered in the name of the pledgee.
Section 2.09. PROXIES. A shareholder may cast or authorize the casting
of a vote by filing a written appointment of a proxy with an officer of the
corporation at or before the meeting at which the appointment is to be
effective. An appointment of a proxy for shares held jointly by two or more
shareholders shall be valid if signed by any one of them, unless the
corporation receives from any one of those shareholders written notice either
denying the authority of that person to appoint a proxy or appointing a
different proxy. The appointment of a proxy shall be valid for eleven months
unless a longer period is expressly provided in the appointment.
Section 2.10. ACTION WITHOUT A MEETING. An action required or
permitted to be taken at a meeting of the shareholders may be taken without a
meeting by written action signed by all of the shareholders entitled to vote
on that action. The written action shall be effective when it has been
signed by all of those shareholders, unless a different effective time is
provided in the written action.
Section 2.11. INSPECTORS OF ELECTION. In advance of any meeting of
shareholders, the Chairman of the Board shall appoint two or more inspectors
of election, who need not be
7
<PAGE>
shareholders, as to the matters to be submitted to a vote at any such
meeting, or any adjournment thereof. The inspectors of election when so
appointed shall take charge of all proxies and ballots and shall determine
the number of shares outstanding, the voting power of each, the shares
represented at the meeting, and the existence of a quorum. They shall
determine all questions relating to the qualifications of voters, the
authenticity, validity, and effect of proxies, and the acceptance or
rejection of votes, challenges, and questions arising in any way in
connection with the right to vote and the counting and tabulation of such
votes. They shall determine the number of votes cast for any office or for
or against any proposal, and shall determine and report the results to the
meeting. The inspectors shall take an oath that they will perform their
duties impartially, in good faith, and to the best of their ability and as
expeditiously as is practical. If, for any reason, an inspector previously
appointed shall fail to attend or refuse or be unable to serve, the vacancy
shall be filled by the Chairman of the Board in advance of convening the
meeting, or at the meeting by the person acting as Chairman. Each report of
the inspectors shall be in writing and signed by the inspectors. The report
of a majority shall be the report of the inspectors.
Section 2.12. NOMINATIONS OF DIRECTORS.
(a) Nominations of candidates for election as directors at any annual
meeting or any special meeting of shareholders may be made (i) by, or at the
direction of, the Board of Directors or (ii) by any shareholder of record
entitled
8
<PAGE>
to vote at such meeting. Only persons nominated in accordance with
procedures set forth in this Section 2.12 shall be eligible for election as
directors at any meeting of shareholders.
(b) Nominations, other than those made by, or at the direction of, the
Board of Directors, shall be made pursuant to timely notice in writing to the
Secretary of the corporation as set forth in this Section 2.12. To be timely,
a shareholder's notice shall be delivered to, or mailed and received at, the
principal executive offices of the corporation not less than sixty (60) days
nor more than ninety (90) days prior to the date of the scheduled meeting,
regardless of postponements, deferrals, or adjournments of that meeting to a
later date; PROVIDED, HOWEVER, that if less than seventy (70) days' notice or
prior public disclosure of the date of the scheduled meeting is given or
made, notice by the shareholder to be timely must be so delivered or received
not later than the close of business on the tenth (10th) day following the
earlier of the day on which such notice of the date of the scheduled meeting
was mailed or the day on which such public disclosure was made.
(c) Such shareholder's notice shall set forth (i) as
to each person whom the shareholder proposes to nominate for election as a
director (A) the name, age, business address and residence address of such
person, (B) the principal occupation or employment of such person, (C) the class
and number of shares of the corporation's equity securities which are
beneficially owned (as such term is defined in Rule 13d-3 or 13d-5 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"))
9
<PAGE>
by such person on the date of such shareholder notice and (D) any other
information relating to such person that would be required to be disclosed
pursuant to Schedule 13D under the Exchange Act in connection with the
acquisition of shares, and pursuant to Regulation 14A under the Exchange Act,
in connection with the solicitation of proxies with respect to nominees for
election as directors; and (ii) as to the shareholder giving the notice (A)
the name and address, as they appear on the corporation's books, of such
shareholder and any other shareholder who is a record or beneficial owner of
any equity securities of the corporation and who is known by such shareholder
to be supporting such nominee(s) and (B) the class and number of shares of
the corporation's equity securities which are beneficially owned, as defined
above, and owned of record by such shareholder on the date of such
shareholder notice and the number of shares of the corporation's equity
securities beneficially owned and owned of record by any person known by such
shareholder to be supporting such nominee(s) on the date of such shareholder
notice. At the request of the Board of Directors, any person nominated by,
or at the direction of, the Board of Directors for election as a director at
any annual or special meeting shall furnish to the Secretary of the
corporation that information required to be set forth in a shareholder's
notice of nomination which pertains to the nominee.
(d) No person shall be elected as a director of the corporation unless
nominated in accordance with the procedures set forth in this Section 2.12.
Ballots bearing the names of all the persons who have been nominated for
election as directors at
10
<PAGE>
any annual or special meeting in accordance with the procedures set forth in
this Section 2.12 shall be provided for use at the meeting.
(e) The Chairman of the Board may reject any nomination by a
shareholder not timely made in accordance with the requirements of this
Section 2.12. If the Chairman of the Board determines that the information
provided in a shareholder's notice does not satisfy the informational
requirements of this Section 2.12 in any material respect, the Secretary of
the corporation shall promptly notify such shareholder of the deficiency in
the notice. The shareholder shall have an opportunity to cure the deficiency
by providing additional information to the Secretary within such period of
time, not to exceed ten (10) days from the date such deficiency notice is
given to the shareholder, as the Chairman of the Board shall reasonably
determine. If the deficiency is not cured within such period, or if the
Chairman of the Board determines that the additional information provided by
the shareholder, together with the information previously provided, does not
satisfy the requirements of this Section 2.12 in any material respect, then
the Chairman of the Board may reject such shareholder's nomination. The
Secretary of the corporation shall notify a shareholder in writing whether
such person's nomination has been made in accordance with the time and
information requirements of this Section 2.12. Notwithstanding the procedure
set forth in this Section 2.12, if the Chairman of the Board does not make a
determination as to the validity of any nominations by a
11
<PAGE>
shareholder, the chairman of the annual or special meeting of shareholders
shall determine and declare at the meeting whether a nomination was made in
accordance with the terms of this Section 2.12. If the chairman of such
meeting determines that a nomination was not made in accordance with the
terms of this Section 2.12, he or she shall so declare at the meeting and the
defective nomination shall be disregarded.
Section 2.13. PROPOSALS BY SHAREHOLDERS.
(a) At any annual meeting or any special meeting of shareholders, only
such business shall be conducted, and only such proposals shall be acted upon
as shall have been brought before the meeting (i) by, or at the direction of,
the Board of Directors, or (ii) by any shareholder of the Company who
complies with the requirements of Rule 14a-8 under the Securities Exchange
Act of 1934, as amended.
(b) This provision shall not prevent the consideration and approval or
disapproval at any meeting of reports of officers, directors and committees
of the Board of Directors, but, in connection with such reports, no new
business shall be acted upon at such meeting unless stated, filed and
received as herein provided.
Section 2.14. ORDER OF BUSINESS. All meetings of shareholders shall be
conducted in accordance with such rules as are prescribed by the chairman of
the meeting. The order of business at all meetings of the shareholders shall
be as determined by the chairman of the meeting.
12
<PAGE>
ARTICLE III
BOARD OF DIRECTORS
Section 3.01. BOARD TO MANAGE. The business and affairs of the
corporation shall be managed by or under the direction of the Board of
Directors, subject to the rights of the shareholders of the corporation as
provided in these Bylaws or the Articles of Incorporation or pursuant to
chapter 302A, Minnesota Statutes.
Section 3.02. NUMBER, QUALIFICATIONS AND TERMS. The number of
directors of the corporation shall not be less than three nor greater than
fifteen and shall be set from time to time by a resolution adopted by the
affirmative vote of two-thirds of the directors. The Board of Directors may,
at any time, increase the number of directors up to a maximum of fifteen or
decrease the number of directors except that any such decrease shall not
result in the removal of a director except a director named by the Board of
Directors to fill a vacancy. Directors shall be natural persons. Each
director shall hold office until his or her successor is elected and has
qualified, or until his or her earlier death, resignation, removal or
disqualification. Directors need not be residents of Minnesota or
shareholders of the corporation.
Section 3.03. ANNUAL MEETING. The Board of Directors shall meet for
the purpose of organization, the election of officers and the transaction of
other business, as soon as practicable after each annual meeting of
shareholders, on the same day and at the same place where such annual meeting
shall be
13
<PAGE>
held. Notice of such meeting need not be given. In the event such annual
meeting is not so held, the annual meeting of the Board of Directors may be
held at such other time or place (within or without the State of Minnesota)
as shall be specified in a notice thereof given as hereinafter provided in
Section 3.06 of these Bylaws.
Section 3.04. REGULAR MEETINGS. Regular meetings of the Board of
Directors shall be held at such time and place as the Board of Directors may
fix. If any day fixed for a regular meeting shall be a legal holiday at the
place where the meeting is to be held, then the meeting which would otherwise
be held on that day shall be held at the same time and place on the next
succeeding business day. Notice of regular meetings of the Board of
Directors need not be given except as otherwise required by statute or these
Bylaws.
Section 3.05. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called from time to time by or at the request of the
chairman of the Board of Directors, a vice chairman of the Board of
Directors, the chief executive officer, the president or any director. The
person calling a special meeting of the Board of Directors may fix the date,
time and place of the meeting. If the place fixed for the meeting is outside
of Minnesota, the Board of Directors may change the place of the meeting to a
location within Minnesota.
A conference among directors by any means of communication through which
the directors may simultaneously hear each other during the conference shall
constitute a meeting of the
14
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Board of Directors, if the same notice is given of the conference as would be
required by Section 3.06 of these Bylaws for a meeting, and if the number of
directors participating in the conference would be sufficient to constitute
a quorum at a meeting. Participation in a meeting by such means shall
constitute presence in person at the meeting.
Section 3.06. NOTICE. Notice of any special meeting shall be given at
least five days previously thereto by written notice mailed to each director
at his or her business address or at least 24 hours prior thereto delivered
personally or by telegram. If mailed, such notice shall be deemed to be
delivered when deposited in the United States mail so addressed, with postage
thereon prepaid. If notice be given by telegram, such notice shall be deemed
to be delivered when the telegram is delivered to the telegraph company. A
director may waive notice of a meeting of the Board of Directors. A waiver
of notice by a director entitled to notice shall be effective whether given
before, at or after the meeting, and whether given in writing, orally or by
attendance. Attendance by a director at a meeting shall be a waiver of notice
of that meeting, except where the director objects at the beginning of the
meeting to the transaction of business because the meeting is not lawfully
called or convened and does not participate thereafter in the meeting.
Section 3.07. QUORUM. A majority of the directors currently holding
office present at a meeting shall constitute a quorum for the transaction of
business. In the absence of a
15
<PAGE>
quorum, a majority of the directors present may adjourn a meeting from time
to time until a quorum is present. If a quorum is present when a duly called
or held meeting is convened, the directors present may continue to transact
business until adjournment, even though the withdrawal of a number of
directors originally present leaves less than the number otherwise required
for a quorum.
Section 3.08. MANNER OF ACTING. Except as otherwise provided in
Minnesota Statutes, chapter 302A, the Board of Directors shall take action by
the affirmative vote of a majority of directors present at a duly held
meeting.
Section 3.09. PRESUMPTION OF ASSENT. A director who is present at a
meeting of the Board of Directors when an action is approved by the
affirmative vote of a majority of the directors present is presumed to have
assented to the action approved, unless the director objects at the beginning
of the meeting to the transaction of business because the meeting is not
lawfully called or convened and does not participate thereafter in the
meeting, or votes against the action at the meeting or is prohibited from
voting on the action due to a conflict of interest.
Section 3.10. ABSENT DIRECTORS. A director may give advance written
consent or opposition to a proposal to be acted on at a Board of Directors
meeting. If the director is not present at the meeting, consent or
opposition to a proposal shall not constitute presence for purposes of
determining the existence of a quorum, but consent or opposition shall be
counted as a vote in favor of or against the proposal and shall be entered in
the
16
<PAGE>
minutes or other record of action at the meeting, if the proposal acted on at
the meeting is substantially the same or has substantially the same effect as
the proposal to which the director has consented or objected.
Section 3.11. ACTION WITHOUT A MEETING. An action required or
permitted to be taken at a meeting of the Board of Directors may be taken by
written action signed by all of the directors, and in the case of an action
which need not be approved by the shareholders, such action may be taken by
written action signed by the number of directors that would be required to
take such action at a meeting of the Board of Directors at which all
directors were present.
The written action shall be effective when signed by the required number
of directors, unless a different effective time is provided in the written
action.
When written action is permitted to be taken by less than all directors,
all directors shall be notified immediately of its text and effective date.
Failure to provide the notice shall not invalidate the written action. A
director who does not sign or consent to the written action shall have no
liability for the action or actions taken thereby.
Section 3.12. RESIGNATION. A director may resign at any time by giving
written notice to the corporation. The resignation shall be effective
without acceptance when the notice is given to the corporation, unless a
later effective time is specified in the notice.
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Section 3.13. REMOVAL. Any one or all of the directors may be removed
at any time, with or without cause, by the affirmative vote of the holders of
a majority of the common voting shares. A director may be removed at any
time, with or without cause, by the affirmative vote of a majority of the
remaining directors present if the director was named by the Board of
Directors to fill a vacancy, and the shareholders have not elected directors
in the interval between the time of appointment to fill the vacancy and the
time of removal.
Section 3.14. VACANCIES. Any vacancy occurring on the Board of
Directors may be filled by the affirmative vote of a majority of the
remaining directors, even though less than a quorum. Vacancies on the Board
of Directors resulting from newly created directorships may be filled by the
affirmative vote of a majority of the directors serving at the time of the
increase. A director elected to fill a vacancy shall hold office until a
qualified successor is elected by the shareholders at the next regular or
special meeting of the shareholders, or until his or her earlier death,
resignation, removal or disqualification.
Section 3.15. COMPENSATION. The Board of Directors may provide for the
payment to each director of a fixed annual or quarterly fee, a fixed fee for
attendance at each meeting of the Board or any committee thereof, and/or for
any other form or method of compensation as may be determined by the Board of
Directors. The Board of Directors may also provide for the payment of the
expenses of each director for attendance at each meeting of the Board or of
any committee thereof. No such
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payment shall preclude any director from serving the corporation in any other
capacity and receiving compensation therefor.
Section 3.16. AGE LIMITATION. No person, who is not an employee of the
Company, shall be nominated or renominated for director or elected or
appointed as a director if that person has attained the age of 65.
ARTICLE IV
COMMITTEES
Section 4.01. GENERALLY. A resolution approved by the affirmative vote
of a majority of the directors currently holding office may establish
committees having the authority of the Board of Directors in the management
of the business of the corporation to the extent provided in the resolution.
Committees shall be subject at all times to the direction and control of the
Board of Directors.
Section 4.02. MEMBERSHIP. A committee shall consist of one or more
natural persons, who need not be directors, appointed by affirmative vote of
a majority of the directors present.
Section 4.03. QUORUM. A majority of the members of the committee
present at a meeting shall constitute a quorum for the transaction of
business, unless a larger or smaller proportion or number is provided in a
resolution approved by the affirmative vote of a majority of the directors
present.
Section 4.04. PROCEDURE. The provisions of Sections 3.05, 3.06, 3.07,
3.08 and 3.11 of these Bylaws shall apply to
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committees and members of committees to the same extent as those sections
apply to the Board of Directors and directors.
Section 4.05. MINUTES. Minutes, if any, of committee meetings shall be
made available upon request to members of the committee and to any director.
ARTICLE V
OFFICERS
Section 5.01. NUMBER. The Board of Directors shall from time to time
elect a chief executive officer and a chief financial officer and may elect a
chairman, co-chairmen and chairman emeritus of the Board of Directors, one or
more vice chairmen of the Board of Directors, a president, a chief operating
officer, one or more vice presidents, a secretary, a treasurer, and such
other officers and assistant officers as it may deem necessary. Each officer
shall be a natural person. Any two or more offices may be held by the same
person.
Section 5.02. ELECTION AND TERM OF OFFICE. The officers of the
corporation shall be elected by the Board of Directors. In the absence of an
election or appointment of officers by the Board of Directors, the person or
persons exercising the principal functions of the chief executive officer or
the chief financial officer shall be deemed to have been elected to those
offices. Each officer shall hold office until his or her successor is
elected and has qualified, or until his or her earlier death, resignation,
removal or disqualification. The election or appointment of a person as an
officer or agent shall not, of itself, create contract rights.
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Section 5.03. RESIGNATION. An officer may resign at any time by giving
written notice to the corporation. The resignation shall be effective
without acceptance when the notice is given to the corporation, unless a
later effective date is specified in the notice.
Section 5.04. REMOVAL. An officer may be removed at any time, with or
without cause, by a resolution approved by the affirmative vote of a majority
of the Board of Directors.
Section 5.05. VACANCY. A vacancy in any office because of death,
resignation, removal, disqualification or other cause may, or in the case of
a vacancy in the office of chief executive officer or chief financial officer
shall, be filled by the Board of Directors for the unexpired portion of the
term.
Section 5.06. CHAIRMAN, CO-CHAIRMEN AND CHAIRMAN EMERITUS OF THE BOARD.
A chairman, co-chairmen and chairman emeritus of the Board of Directors may
be elected by the Board of Directors. The chairman shall, when present,
preside at all meetings of the Board of Directors and of the shareholders,
and shall perform such duties as shall be prescribed by the Board of
Directors. A co-chairman shall perform such duties as shall be prescribed by
the Board of Directors. The chairman emeritus shall perform such duties as
shall be prescribed by the Board of Directors.
Section 5.07. VICE CHAIRMAN OF THE BOARD. One or more vice chairmen of
the Board of Directors may be elected by the Board of Directors, and shall
perform such duties as shall be prescribed by the Board of Directors.
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Section 5.08. CHIEF EXECUTIVE OFFICER. The chief
executive officer shall:
(a) Have general active management of the business of the corporation;
(b) In the absence of the chairman of the Board of Directors, preside
at all meetings of the Board of Directors and of the shareholders;
(c) See that all orders and resolutions of the
Board of Directors are carried into effect; and
(d) Perform other duties prescribed by the Board of Directors.
Section 5.09. PRESIDENT. In the absence of the chief executive officer
or in the event of his or her death, inability or refusal to act, the
president shall perform the duties of the chief executive officer, and when
so acting, shall have all the powers of and be subject to all the
restrictions upon the chief executive officer. The president may sign, with
the secretary or an assistant secretary, certificates for shares of the
corporation, and shall perform other duties as shall be prescribed by the
Board of Directors or by the chief executive officer.
Section 5.10. CHIEF OPERATING OFFICER. The chief operating officer
shall perform such duties as shall be prescribed by the Board of Directors or
by the chief executive officer.
Section 5.11. VICE PRESIDENT. In the absence of the president or in
the event of his or her death, inability or
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refusal to act, the vice president (or in the event there be more than one
vice president, the vice presidents in the order designated at the time of
their election) shall perform the duties of the president, and when so
acting, shall have all the powers of and be subject to all the restrictions
upon the president. A vice president shall perform other duties as shall be
prescribed by the Board of Directors or by the chief executive officer.
Section 5.12. SECRETARY. The secretary shall:
(a) Maintain records of and, whenever necessary, certify all
proceedings of the Board of Directors and the shareholders;
(b) See that all notices are duly given in accordance with the
provisions of these bylaws or as required by law;
(c) Be custodian of the corporate records and of the corporate seal,
if any;
(d) See that a share register of the corporation
is maintained in accordance with section 2.07 of these bylaws;
(e) Sign with the chief executive officer, or the president
certificates for shares of the corporation; and
(f) Perform other duties prescribed by the Board of Directors or by
the chief executive officer.
Section 5.13. CHIEF FINANCIAL OFFICER. The chief
financial officer shall:
(a) Keep accurate financial records for the corporation;
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(b) Deposit all moneys, drafts and checks in the name of and to the
credit of the corporation in the banks and depositories designated by the
Board of Directors;
(c) Endorse for deposit all notes, checks and drafts received by the
corporation as ordered by the Board of Directors, making proper vouchers
therefor;
(d) Disburse corporate funds and issue checks and drafts in the name of
the corporation, as ordered by the Board of Directors;
(e) Render to the Board of Directors and the chief executive officer,
whenever requested, an account of all transactions by the chief financial
officer and of the financial condition of the corporation;
(f) Perform other duties prescribed by the Board of Directors or by the
chief executive officer; and
(g) If required by the Board of Directors, give a bond for the faithful
discharge of his or her duties in such sum and with such surety or sureties
as the Board of Directors shall determine.
Section 5.14. TREASURER. In the absence of the chief financial officer
or in the event of his or her death, inability or refusal to act, the
treasurer shall perform the duties of the chief financial officer, and when
so acting, shall have all the powers of and be subject to all the
restrictions upon the chief financial officer. The treasurer shall perform
other duties as shall be prescribed by the Board of Directors or by the chief
executive officer.
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Section 5.15. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The
assistant secretaries may sign with the chief executive officer or the
president certificates for shares of the corporation. The assistant
treasurers shall, if required by the Board of Directors, give bonds for the
faithful discharge of their duties in such sums and with such sureties as the
Board of Directors shall determine. The assistant secretaries and assistant
treasurers shall perform such duties as shall be prescribed by the secretary
or by the chief financial officer or by the Board of Directors or by the
chief executive officer.
Section 5.16. CONTRACTS, ETC. The chairman of the Board of Directors,
any vice chairman of the Board of Directors, the chief executive officer, the
president, the chief operating officer, any vice president or the chief
financial officer may sign and deliver in the name of the corporation any
deeds, mortgages, bonds, contracts, certificates for shares or other
instruments pertaining to the business of the corporation, except in cases in
which the authority to sign and deliver is required by law to be exercised by
another person or is expressly delegated by the Articles of Incorporation or
these Bylaws or by the Board of Directors to some other officer or agent of
the corporation.
Section 5.17. COMPENSATION. The compensation of the
officers shall be fixed from time to time by the Board of Directors and no
officer shall be prevented from receiving such compensation by reason of the
fact that he or she is also a director of the corporation.
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ARTICLE VI
INDEMNIFICATION
The corporation shall indemnify a person made or threatened to be made a
party to a proceeding by reason of the former or present official capacity of
the person with the corporation in accordance with, and to the fullest extent
permitted by, the provisions of chapter 302A, Minnesota Statutes.
The corporation may purchase and maintain insurance at its expense to
protect itself or on behalf of a person in that person's official capacity
with the corporation or a subsidiary, against any liability asserted against
and incurred by the person in or arising from that capacity, whether or not
the corporation would be required by law to indemnify the person against the
liability.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Section 7.01. CERTIFICATES FOR SHARES. The shares of the corporation
shall be either certificated shares or uncertificated shares. Each holder of
certificated shares shall be entitled to a certificate of shares.
A certificate representing shares of the corporation shall contain on
its face the name of the corporation, a statement that the corporation is
incorporated under the laws of Minnesota, the name of the person to whom it
is issued, the number and class of shares, and the designation of the series,
if any, of shares represented by the certificate. A new share certificate
may be issued in place of one that is alleged to have
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been lost, stolen or destroyed. All certificates surrendered to the
corporation for transfer shall be canceled and no new certificate shall be
issued until the former certificate for a like number of shares shall have
been surrendered and canceled, except that in case of a certificate that is
alleged to have been lost, stolen or destroyed a new one may be issued
therefor upon such terms and indemnity to the corporation as the Board of
Directors may prescribe.
Section 7.02. TRANSFER OF SHARES. Transfer of shares of the
corporation shall be made only on the share register of the corporation by
the record holder thereof or by his or her legal representative, who shall
furnish proper evidence of authority to transfer, or by his or her attorney
thereunto authorized by power of attorney duly executed and filed with the
secretary of the corporation, and on surrender for cancellation of the
certificate for such shares, or by evidence of transfer. The person in whose
name shares stand on the share register of the corporation shall be deemed by
the corporation to be the owner thereof for all purposes unless a different
beneficial owner shall have been designated as provided in section 2.07 of
these bylaws.
ARTICLE VIII
DISTRIBUTIONS
The Board of Directors may authorize, and the corporation may make, a
distribution only if the corporation will be able to pay its debts in the
ordinary course of business after making the distribution. For purposes of
this section,
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"distribution" means a direct or indirect transfer of money or other
property, other than shares of the corporation, with or without
consideration, or an incurrence of indebtedness by the corporation to or for
the benefit of its shareholders in respect of its shares. A distribution may
be in the form of a dividend or a distribution in liquidation or as
consideration for the purchase, redemption or other acquisition of the
corporation's shares, or otherwise.
ARTICLE IX
FISCAL YEAR
The fiscal year of the corporation shall commence on May 1 and end on
April 30 next succeeding.
ARTICLE X
SEAL
The Board of Directors may provide a corporate seal which shall be
circular in form and shall have inscribed thereon the state of incorporation
and the words "Corporate Seal."
ARTICLE XI
AMENDMENT
These Bylaws may be amended or repealed and new Bylaws may be adopted by
the Board of Directors, or by the shareholders, as provided in Chapter 302A,
Minnesota Statutes. No amendment shall be adopted that is inconsistent with
the provisions of the corporation's Articles of Incorporation.
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ARTICLE XII
GOVERNING LAW
The corporation is subject to the provisions of Chapter 302A, Minnesota
Statutes. All references in these bylaws to Chapter 302A, Minnesota Statutes
shall mean and include such chapter as currently enacted or hereafter amended.
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT, made effective as of the 30th day of April,
1997, by and between David R. Richard ("Executive") and NORSTAN, INC., a
Minnesota corporation (the "Company"),
W I T N E S S E T H:
WHEREAS, the Company will employ Executive as President and Chief Executive
Officer of Norstan, Inc., effective as of May 1, 1997;
WHEREAS, Executive's experience and knowledge are considered to be
necessary to the continued success of the Company's business;
WHEREAS, the Company desires to encourage the Executive's continued
dedication and attention to his assigned duties without distraction from
circumstances arising from a possible change in control of the Company;
WHEREAS, the Company wishes to enter into an agreement with Executive
governing the terms and conditions of his employment, and Executive is willing
to be employed on the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the premises, and of the mutual
covenants hereinafter set forth, the parties do hereby agree as follows:
1. EMPLOYMENT PERIOD. The Company agrees to employ Executive, and
Executive agrees to serve in the full-time employ of the Company, for the
period (the "Employment Period") beginning on May 1, 1997 and ending on April
30, 1999; PROVIDED, that on April 30, 1998, and on each April 30 thereafter
("Renewal Date"), the Employment Period shall automatically be extended to
the date which is 24 months after such Renewal Date unless, not later than
such Renewal Date, the Company gives Executive written notice that the
Employment Period shall not be so extended; PROVIDED FURTHER, that in the
event of a "Change in Control" (as defined in subparagraph 7.e. below), the
Employment Period shall automatically be extended to the date which is 36
months after the date on which the Change in Control occurs. Notwithstanding
the foregoing, in no event shall the Employment Period continue beyond the
earliest to occur of the date of Executive's 65th birthday, the date as of
which Executive's employment is terminated pursuant to paragraph 4 or
paragraph 7, or the date of the Executive's death.
2. DUTIES. During the Employment Period, Executive shall serve as
President and Chief Executive Officer of Norstan, Inc., or, except as
otherwise provided in this Agreement, in such other executive positions as
the Chairman of the Board of Directors of the Company shall from time to time
determine. Executive shall perform such executive and managerial duties
consistent with such positions as the Chairman of the Board of Directors of
the Company shall from time to time direct. Executive shall devote his best
efforts and all of his business time and attention (except for usual vacation
periods and reasonable periods of illness or other incapacity) to the
business of the Company and its subsidiaries.
<PAGE>
3. COMPENSATION. During the Employment Period, Executive shall be
compensated as follows:
a. SALARY. Executive shall be paid a salary at a rate which is not
less than $275,000 per year, exclusive of bonuses, if any, which may from time
to time be awarded to Executive pursuant to any authorized bonus, incentive, or
similar plan maintained by the Company. Executive's salary shall be subject to
annual review and shall be paid in equal, semi-monthly installments.
b. EXPENSES. Executive shall be reimbursed for all reasonable
business expenses incurred in the performance of his duties pursuant to this
Agreement, to the extent such expenses are substantiated and are consistent with
the general policies of the Company and its subsidiaries relating to the
reimbursement of expenses of executive officers.
c. FRINGE BENEFITS. In addition to any other compensation provided
under this Agreement, Executive shall be entitled to participate, during the
Employment Period, in any and all pension, profit sharing, and other employee
benefit plans or fringe benefit programs which are from time to time maintained
by the Company for its executive officers, in accordance with the provisions of
such plans or programs as are from time to time in effect. These fringe
benefits include automobile, country club and moving expenses.
d. OTHER BENEFITS. Executive shall be granted stock options and
restricted stock awards in amounts consistent with his positions as President
and Chief Executive Officer of the Company. In addition although the parties do
not believe that Executive will suffer any loss by reason of his employment by
Company, Company and Executive agree to share in any such loss resulting from
the cancellation or rescission of certain stock options granted to Executive by
his current employer and to arrive at a method for apportioning any such loss.
e. DEDUCTIONS AND WITHHOLDING. All compensation and other benefits
payable to or on behalf of Executive pursuant to this Agreement shall be subject
to such deductions and withholding as may be agreed to by Executive or required
by applicable law.
4. DISABILITY. If, during the Employment Period, Executive shall become
incapacitated by accident or illness and, as determined under the Long-Term
Disability Plan of the Company, shall be unable to perform the duties of the
positions he then occupies for a period of 150 consecutive days, the Company
shall have the right to terminate the Employment Period effective at any time
after such 150 day period of disability by giving 30 days advance written notice
to Executive. If the Employment Period is thus terminated, Executive shall not
be entitled to receive any compensation or other benefits pursuant to this
Agreement, other than compensation or benefits accrued through the effective
date of such termination.
5. DEATH. If Executive shall die during the Employment Period without
having been notified, pursuant to subparagraph 7.a. below, of a breach of any
of the terms of this Agreement in any material respect, his base salary (at
the rate in effect at the time of his death) shall be continued for a period
of 12 months to the beneficiary named in the last written instrument
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signed by Executive for the purposes of this Agreement and received by the
Company prior to his death. If Executive fails to name a beneficiary, such
amounts shall be paid to his estate.
6. OTHER BENEFITS. The compensation provisions of this Agreement shall
be in addition to, and not in derogation or diminution of, any benefits that
Executive or his beneficiaries may be entitled to receive under the
provisions of any pension, profit sharing, disability, or other employee
benefit plan now or hereafter maintained by the Company.
7. TERMINATION.
a. FOR CAUSE BY COMPANY. The Company may terminate Executive's
employment for cause upon 60 days prior written notice to Executive. Such
notice shall specify in reasonable detail the nature of the cause and, during
such 60 day period, Executive shall have the opportunity to cure the stated
cause. If Executive fails to cure a stated cause, the Employment Period shall
terminate at the end of the 60 day notice period, but without prejudice to
Executive's right to contest the existence of any stated cause and/or to contest
the fact that the cause has not been cured. For the purposes of this Agreement,
cause shall mean any conduct by Executive involving an act or acts of dishonesty
on the part of the Executive constituting a felony and resulting or intended to
result directly or indirectly in gain or personal enrichment at the expense of
the Company, or any failure by Executive to substantially comply with the terms
of this Agreement in any material respect.
b. INELIGIBILITY. If the Company terminates Executive's
employment for cause, or if Executive voluntarily terminates his employment
under circumstances other than those specified in subparagraphs 7.c., or
14.a., Executive shall not be entitled to receive any compensation or other
benefits pursuant to this Agreement, other than compensation or benefits
accrued through the effective date of such termination.
c. ELIGIBILITY. If, after or due to a "Change in Control" (as such
term is defined in subparagraph 7.e. below), and prior to the expiration of the
then current extension of the Employment Period, (a) Executive voluntarily
terminates his employment (i) because he has been reassigned to a position of
lesser rank or status or because he has been transferred to a location which is
more than 25 miles from his previous principal place of employment, or because
his base salary or incentive compensation has been reduced, or because his
benefits have been reduced (unless such reduction is made uniformly in a plan of
general application to all of the Company's eligible employees); or (ii) for
Good Reason (as defined below); or (iii) if his health should become impaired to
an extent that makes his continued performance of his duties hereunder hazardous
to his physical or mental health or his life, provided that the Executive shall
have furnished the Company with a written statement from a qualified physician
to such effect and provided, further, that, at the Company's request, the
Executive shall submit to an examination by a physician selected by the Company
and such doctor shall have concurred in the conclusion of the Executive's
doctor; or (iv) for any reason in Executive's sole discretion at any time within
18 months after the date of a Change in Control of the Company by giving thirty
(30) days prior notice of his intention to terminate; or (b) the Company
terminates Executive's
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employment for reasons other than those specified in paragraph 4 or
subparagraph 7.a. of this Agreement, then Executive shall receive the
compensation and benefits set forth in paragraph 8 below.
(i) For purposes of this Agreement, "Good Reason" shall mean
(A) a failure by the Company to comply with any material provision of this
Agreement which has not been cured within ten (10) days after notice of such
noncompliance has been given by the Executive to the Company, or (B) any
purported termination of the Executive's employment which is not effected
pursuant to a notice of termination which notice shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated.
d. WITHOUT CAUSE BY COMPANY. If, other than caused by a Change in
Control, the Company terminates Executive's employment at any time prior to the
expiration of the initial or then current extension of the Employment Period for
reasons other than those specified in paragraph 4 or subparagraph 7.a. of this
Agreement, then Executive shall continue to receive his base salary and fringe
benefits (automobile, car phone and country club expense) for a period of 12
months.
e. CHANGE IN CONTROL, DEFINED. For the purposes of this Agreement, a
Change in Control shall be deemed to occur when and if, during the Employment
Period:
(i) any Person (meaning any individual, firm, corporation,
partnership, trust or other entity, and includes a "group" (as
that term is used in Sections 13(d) and 14(d) of the Act), but
excludes Continuing Directors (as defined below) and benefit
plans sponsored by the Company):
(A) makes a tender or exchange offer for any shares of the
Company's outstanding voting securities at any point in time
(the "Company Stock") pursuant to which any shares of the
Company's Stock are purchased; or
(B) together with its "affiliates" and "associates" (as
those terms are defined in Rule 12b-2 under the Securities
Exchange Act of 1934 (the "Act")) becomes the "beneficial
owner" (within the meaning of Rule 13d-3 under the Act) of
at least 20% of Company's Stock; or
(ii) the stockholders of the Company approve a definitive
agreement or plan to merge or consolidate the Company with or
into another unaffiliated corporation, to sell or otherwise
dispose of all or substantially all of its assets, or to
liquidate the Company; or
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(iii) a majority of the members of the Board become individuals
other than Continuing Directors (as defined below).
A "Continuing Director" means: (a) any member of the Board as of April
1, 1997, and (b) any other member of the Board, from time to time, who was
(i) nominated for election by the Board or (ii) appointed by the Board to
fill a vacancy on the Board or to fill a newly-created directorship, in each
case excluding any individual nominated or appointed (y) at a Board meeting
at which the majority of directors present are not Continuing Directors or
(z) by unanimous written action of the Board unless a majority of the
directors taking such action are Continuing Directors.
8. COMPENSATION ON CHANGE IN CONTROL. In the event of a termination under
subparagraph 7.c. above, during the Period of Employment or any extension
thereof:
(i) The Company shall pay the Executive any earned and accrued
but unpaid installment of base salary through the Date of
Termination, at the rate in effect on the Date of Termination, or
if greater, on the date immediately preceding the date that a Change
in Control occurs, and all other unpaid amounts to which the
Executive is entitled as of the Date of Termination under any
compensation plan or program of the Company, including, without
limitation, all accrued vacation time; such payments to be made in a
lump sum on or before the fifth day following the Date of Termination.
(ii) In lieu of any further salary payments to the Executive for
periods subsequent to the Date of Termination, the Company shall pay
as liquidated damages to the Executive an amount equal to the
product of (A) the sum of (1) the Executive's annual salary rate
in effect as of the Date of Termination, or if greater, on the date
immediately preceding the date that a Change in Control occurs,
and (2) the greater of: (i) the prior year's actual incentive
payment to the Executive under the Company's incentive plan for that
year or (ii) the dollar amount payable at 100% of target under the
Company's then current incentive plan for the year in which occurs
such Date of Termination, and (B) the number two (2); such payment to
be made in a lump sum on or before the fifth day following the
Date of Termination.
(iii) The Company shall pay all other damages to which the
Executive is entitled as a result of such termination, including
damages for any and al loss of benefits to the Executive under the
Company's employee welfare benefit plans and perquisite programs
which the Executive would have received had the Executive's
employment continued for an additional two (2) years, and including
all reasonable legal fees and expenses incurred by him as a result
of such termination, including the fees and expenses of
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enforcing the terms of this Agreement; payment of such fees to be made
within thirty (30) days following the Company's receipt of an
appropriate invoice therefor.
(iv) For a period of not less than twenty-four (24) months
following the Executive's Date of Termination, the Company will
reimburse the Executive in an amount not to exceed $15,000 for all
reasonable expenses of a reputable outplacement organization
incurred by him (but not including any arrangement by which the
Executive prepays expenses for a period of greater than thirty (30)
days) in seeking employment with another employer.
(v) Executive shall be fully vested in all shares of restricted
stock, performance awards, stock appreciation rights and stock
options granted to him under the Norstan, Inc. 1995 Long-Term
Incentive Plan (or any predecessor or successor plan) on the date of
a Change in Control.
(vi) The present value (as defined herein) of the liquidated
damages payable to the Executive under subsection (ii) above, and
any other payments otherwise payable to the Executive by the
Company on or after a Change in Control, as defined in Section
280G of the Internal Revenue Code of 1986, as amended (the "Code"),
which are deemed under said Section 280G to constitute "parachute
payments" (as defined in Section 280G without regard to Section
280G(b)(2)(A)(ii)), shall be less than three times the
Executive's base amount (as defined herein). In the event that the
present value of such payments equals or exceeds such amount, the
provisions set forth in this subparagraph (vi) will apply, and
liquidated damages or other severance benefits payable to the
Executive under this Agreement will be made only in accordance
with this subparagraph (vi) notwithstanding any provision to the
contrary in this Agreement.
(A) Not later than thirty days after the Date of
Termination, the Company will provide the Executive with a
schedule indicating by category the present value of the
liquidated damages payable to the Executive under this
Agreement, all other benefits payable to the Executive under
this Agreement (specifying the paragraph, subparagraph or
clause under which each such payment is to be made) and any
other payments otherwise payable to the Executive by the Company
on or after the Change in Control, which, in the Company's
opinion, constitute parachute payments under Section 280G of the
Code. No payments under this Agreement shall be made until
after thirty days from the receipt of such schedule by the
Executive. At any time prior to the expiration of said 30-day
period, the Executive shall have the right to select from all or
part
6
<PAGE>
of any category of payment to be made under this
Agreement those payments to be made to the Executive in an
amount the present value of which (when combined with the
present value of any other payments otherwise payable to the
Executive by the Company that are deemed parachute payments)
is less than 300 percent of the Executive's base amount. If
the Executive fails to exercise his right to make a
selection, only a lump sum cash severance payment equal to one
dollar less than 300 percent of the Executive's base amount
(reduced by the present value of any other payments otherwise
payable to the Executive by the Company that are deemed
parachute payments and increased, to the extent such increase
will not cause the payment to be an excess parachute payment
under Section 280G of the Code, by interest from the Date of
Termination to the date of payment at the Federal short-term
rate, compounded annually, promulgated under Section 1274(d) of
the Code as effective for the month in which the Date of
Termination occurs) shall be made to the Executive on the day
after the expiration of the period extending thirty days from his
receipt of the schedule provided for hereunder, and no other
liquidated damages or other benefits under subparagraphs
(ii), (iii), (iv) and (v) above of this Agreement shall be paid
to the Executive.
(B) If the Company fails to supply the schedule within
thirty days of the Date of Termination, then the provisions of
this subparagraph (vi) shall not apply and the Company shall
be obligated to pay to the Executive the full amount of
liquidated damages and other benefits under this Agreement,
without regard to subparagraph (vi).
(C) If the Executive disagrees with the schedule prepared
by the Company, then the Executive shall have the right to
submit the schedule to arbitration, in accordance with the
provisions of paragraph 12 herein. The period in which the
Executive may select his benefits under this Agreement shall be
extended until fifteen days after a final and binding
arbitration award is issued or a final judgment, order or
decree of a court of competent jurisdiction is entered upon
such arbitration award (the time for appeal therefrom having
expired and no appeal having been perfected), and the Company's
period for paying the Executive's unpaid benefits under this
Agreement shall be extended until ten days thereafter. If the
Executive fails to make a selection within said fifteen day
period, the Company shall pay the unpaid benefits within five
days following the expiration of the Executive's fifteen day
period.
7
<PAGE>
(D) For purposes of this subparagraph (vi), "present value"
means the value determined in accordance with the principles
of Section 1274(b)(2) of the Code under regulations
promulgated under Section 280G of the Code, and "base amount"
means the annualized includible compensation for the base
period payable to the Executive by the Company and includible
in the Executive's gross income for Federal income tax purposes
during the shorter of the period consisting of the most recent
five taxable years ending before the date of any Change in
Control of the Company or the portion of such period during
which the Executive was an employee of the Company.
(E) In the event that Section 280G of the Code, or any
successor statute, is repealed, this subparagraph (vi) shall
cease to be effective on the effective date of such repeal.
(vii) The Executive shall not be required to mitigate damages or the
amount of any payment provided for under this Agreement by seeking
other employment or otherwise, nor shall the amount of any payment
provided for under this Agreement be reduced by any compensation
earned by the Executive as the result of employment by another
employer after the Date of Termination, or otherwise.
9. COMPETITION.
a. During the Employment Period, Executive will not, except with the
express written consent of the Chairman of the Board of Directors of the Company
become engaged in, or permit his name to be used in connection with any business
other than the businesses of the Company and its subsidiaries, whether or not
such other business is a competitive business.
b. Executive covenants and agrees that for a period of 12 months
after the termination of the Employment Period, or for such longer period as
Executive is receiving payments pursuant to paragraph 8, he will not, except
with the express written consent of the then Chairman of the Board of Directors
of the Company, engage directly or indirectly in, or permit his name to be used
in connection with any competitive business in the geographic area serviced by
the Company or its subsidiaries. Executive further covenants and agrees for a
period of 12 months from the date of termination of his employment hereunder not
to solicit or assist anyone else in the solicitation of, any of the Company's
then-current employees to terminate their employment with the Company and to
become employed by any business enterprise with which the Executive may then be
associated, affiliated or connected.
c. For the purposes of this paragraph 9: (i) the phrase, "engage
directly or indirectly in" shall encompass: (A) all of Executive's activities
whether on his own account or as an employee, director, officer, agent,
consultant, independent contractor, or partner of or in any
8
<PAGE>
person, firm, or corporation (other than the Company and its subsidiaries),
or (B) Executive's ownership of more than 10% of the voting stock of any
corporation, 5% or more of the gross income of which is derived from any
business or businesses in which Executive may not then engage; and (ii) the
phrase "competitive business" shall mean: (A) the sale of telephone,
telecommunications, or similar equipment, or (B) any other business in which
the Company or its subsidiaries is then engaged.
d. Notwithstanding the foregoing, the restrictions set forth in
subparagraph 9.b. shall not apply if Executive's employment is terminated under
any of the circumstances described in subparagraphs 7.c. or 14.a.
10. CONFIDENTIAL INFORMATION. Executive agrees that he will not,
without the prior written consent of the Board of Directors of the Company,
during the term or after termination of his employment under this Agreement,
directly or indirectly disclose to any individual, corporation, or other
entity (other than the Company or any subsidiary thereof, their officers,
directors, or employees entitled to such information, or to any other person
or entity to whom such information is regularly disclosed in the normal
course of the Company's business) or use for his own or such another's
benefit, any information, whether or not reduced to written or other tangible
form, which:
a. is not generally known to the public or in the industry;
b. has been treated by the Company or any of its subsidiaries as
confidential or proprietary; and
c. is of competitive advantage to the Company or any of its
subsidiaries and in the confidentiality of which the Company or any of its
subsidiaries has a legally protectable interest.
Information which becomes generally known to the public or in the industry, or
in the confidentiality of which the Company and its subsidiaries cease to have a
legally protectable interest, shall cease to be subject to the restrictions of
this paragraph.
11. ENFORCEMENT. If, at the time of enforcement of any provision of
paragraphs 9 or 10, a court shall hold that the period, scope, or geographical
area restrictions stated therein are unreasonable under circumstances then
existing, the maximum period, scope, or geographical area reasonable under the
circumstances shall be substituted for the stated period, scope, or area. In
the event of a breach by Executive of any of the provisions of paragraphs 9 or
10, the Company may, in addition to any other rights and remedies existing in
its favor, apply to any court of law or equity of competent jurisdiction for
specific performance and/or injunctive or other relief in order to enforce or
prevent any violations of the provisions hereof.
9
<PAGE>
12. ARBITRATION. Except to the extent provided in paragraph 11, any
controversy or claim arising out of or relating to this Agreement, or any breach
thereof, shall be settled by arbitration before three arbitrators, and judgment
rendered by the arbitrators, or a majority of them, may be entered in any court
having jurisdiction thereof. Within 30 days after notice by either party to the
other requesting such arbitration, each party shall appoint a disinterested and
neutral arbitrator, and the two thus chosen shall appoint a third disinterested
and neutral arbitrator. If the two arbitrators so appointed cannot agree upon
the appointment of a third arbitrator, then such third arbitrator shall be
appointed by the Chief Judge of the United States District Court for the
district that then includes the City of Minneapolis. Such arbitration shall be
conducted in the City of Minneapolis in conformity with the procedures provided
under the Uniform Arbitration Act, as adopted by the State of Minnesota and as
then in effect. Except as provided in paragraph 13 of this Agreement, the
parties shall each pay their own expenses in connection with such arbitration
and any related proceedings.
13. PAYMENT OF COSTS. If a dispute arises regarding a termination of
Executive's employment after a Change in Control and Executive obtains a final
judgment in his favor from which no appeal may be taken, whether because the
time to do so has expired or otherwise, or his claim is settled by the Company
prior to the rendering of such a judgment, all reasonable legal fees and
expenses incurred by Executive in contesting or disputing any such termination,
in seeking to obtain or enforce any right or benefit provided for in this
Agreement, or in otherwise pursuing his claim will be promptly paid by the
Company, with interest thereon at the highest Minnesota statutory rate for
interest on judgments against private parties, from the date of payment thereof
by Executive to the date of reimbursement to him by the Company.
14. SUCCESSORS.
a. OF THE COMPANY. The Company will require any successor (whether
direct or indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform it if no such
succession had taken place. Failure of the Company to obtain such agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle Executive to terminate his employment with the
Company and to receive the payments and benefits provided for in paragraph 8.
As used in this Agreement, "Company" shall mean the Company as hereinbefore
defined, and any successor to the business and/or assets of the Company which
executes and delivers the agreement provided for in this paragraph 14 or which
otherwise becomes bound by all the terms and provisions of this Agreement as a
matter of law.
b. OF EXECUTIVE. This Agreement and all rights of the Executive
hereunder shall inure to the benefit of and be enforceable by the Executive's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while any
amounts would still be payable to him hereunder if he had continued to
10
<PAGE>
live, all such amounts, unless otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to the Executive's devisee,
legatee, or other designee or, if there be no such designee, to the
Executive's estate.
15. GENERAL PROVISIONS.
a. ASSIGNMENTS. Executive's rights and interests under this
Agreement may not be assigned, pledged, or encumbered by him without the
Company's written consent.
b. EFFECT OF HEADINGS. The headings of all of the paragraphs and
subparagraphs of this Agreement are inserted for convenience of reference only,
and shall not affect the construction or interpretation of this Agreement.
c. MODIFICATION, AMENDMENT, WAIVER. No modification, amendment, or
waiver of any provision of this Agreement shall be effective unless approved in
writing by both parties. The failure at any time to enforce any of the
provisions of this Agreement shall in no way be construed as a waiver of such
provisions and shall not affect the right of either party thereafter to enforce
each and every provision of this Agreement in accordance with its terms.
d. SEVERABILITY. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be held to be
prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating the remainder of such provision or the remaining provisions of this
Agreement.
e. NO STRICT CONSTRUCTION. The language used in this Agreement shall
be deemed to be the language chosen by the parties hereto to express their
mutual intent, and no rule of strict construction shall be applied against any
person.
f. APPLICABLE LAW. All questions concerning the construction,
validity, and interpretation of this Agreement shall be governed by the laws of
the State of Minnesota.
g. NOTICES. Any notice to be served under this Agreement shall be in
writing and shall be mailed by registered mail, registry fee and postage prepaid
and return receipt requested, addressed:
11
<PAGE>
If to the Company, to:
Norstan, Inc.
605 North Highway 169, 12th Floor
Plymouth, MN 55441
Attention: Chairman of the Board; or
If to Executive, to:
David R. Richard
605 North Highway 169, 12th Floor
Plymouth, MN 55441
or to such other place as either party may specify in writing, delivered in
accordance with the provisions of this subparagraph.
h. SURVIVAL. The rights and obligations of the parties shall survive
the term of Executive's employment to the extent that any performance is
required under this Agreement after the expiration or termination of such term.
i. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
of the parties with respect to the subject matter thereof, and supersedes all
previous agreements between the parties relating to the same subject matter.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the day and year first above written.
NORSTAN INC. (the "Company")
By /s/ Paul Baszucki
------------------------------
Chief Executive Officer
David R. Richard (the "Executive")
/s/ David R. Richard
-------------------------------
12
<PAGE>
EXHIBIT 11
NORSTAN, INC. AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
--------------------------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE -
Weighted average number of
issued shares outstanding 9,140 8,526 8,242
Effect of:
1995 Long-Term Incentive Plan 20 - -
1986 Long-Term Incentive Plan 201 398 414
Restated Non-Employee Directors' Stock Plan 64 96 82
Employee Stock Purchase Plan 10 8 12
------- ------ ------
Shares outstanding used to compute
primary earnings per share 9,435 9,028 8,750
------- ------ ------
------- ------ ------
Net income $10,217 $8,489 $7,063
------- ------ ------
------- ------ ------
PRIMARY EARNINGS PER SHARE $ 1.08 $ .94 $ .81
------- ------- -------
------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
--------------------------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
FULLY DILUTED EARNINGS PER SHARE -
Weighted average number of shares used
for primary earnings per share 9,435 9,028 8,750
Effect of:
1995 Long-Term Incentive Plan 1 - -
1986 Long-Term Incentive Plan 1 8 6
Restated Non-Employee Directors' Stock Plan - 2 2
Employee Stock Purchase Plan - - 2
------- ------ -------
Shares outstanding used to compute
fully diluted earnings per share 9,437 9,038 8,760
------- ------ -------
------- ------ -------
Net income $10,217 $8,489 $7,063
------- ------ ------
------- ------ ------
FULLY DILUTED EARNINGS PER SHARE $ 1.08 $ .94 $ .81
------- ------ ------
------- ------ ------
</TABLE>
47
<PAGE>
EXHIBIT 22
SUBSIDIARIES OF NORSTAN, INC.
<TABLE>
<CAPTION>
Percentage of
State of Voting Securities
Name Incorporation Owned by the Company
- ---- ------------- --------------------
<S> <C> <C>
Norstan Communications, Inc. Minnesota 100%
Norstan Financial Services, Inc. Minnesota 100%
Norstan Canada Inc. Minnesota 100%
Norstan Network Services, Inc. Minnesota 100%
Connect Computer Company Minnesota 100%
Norstan International, Inc. Minnesota 100%
Norstan Network Services, Inc.
of New Hampshire New Hampshire 100%
Norstan Information Systems, Inc. Minnesota 100%
Summit Gear, Inc. Minnesota 100%
</TABLE>
48
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report included in this Form 10-K into the Company's
previously filed Registration Statements on Form S-8 relating to the 1986
Long-Term Incentive Plan of Norstan, Inc. (Registration Nos. 33-30323 and
33-72928), the 1990 Employee Stock Purchase and Bonus Plan of Norstan, Inc.
(Registration Nos. 33-32310, 33-44470 and 33-72926), the 1995 Long-Term
Incentive Plan of Norstan, Inc. (Registration No. 33-62957), and the Restated
Non-Employee Directors' Stock Plan of Norstan, Inc. (Registration No.
33-62971).
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
July 23, 1997
49
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> APR-30-1997
<PERIOD-START> MAY-01-1996
<PERIOD-END> APR-30-1997
<CASH> 5,147
<SECURITIES> 0
<RECEIVABLES> 77,810
<ALLOWANCES> 1,783
<INVENTORY> 7,636
<CURRENT-ASSETS> 126,840
<PP&E> 93,895
<DEPRECIATION> 48,409
<TOTAL-ASSETS> 224,173
<CURRENT-LIABILITIES> 89,356
<BONDS> 24,043
0
0
<COMMON> 939
<OTHER-SE> 83,431
<TOTAL-LIABILITY-AND-EQUITY> 224,173
<SALES> 202,199
<TOTAL-REVENUES> 398,075
<CGS> 149,860
<TOTAL-COSTS> 289,560
<OTHER-EXPENSES> 89,332
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,866
<INCOME-PRETAX> 17,317
<INCOME-TAX> 7,100
<INCOME-CONTINUING> 10,217
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,217
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
</TABLE>
