<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1998.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
NORSTAN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MINNESOTA 7385 41-0835746
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
605 NORTH HIGHWAY 169
TWELFTH FLOOR
PLYMOUTH, MINNESOTA 55441
(612) 513-4500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MR. KENNETH S. MACKENZIE
NORSTAN, INC.
605 NORTH HIGHWAY 169
TWELFTH FLOOR
PLYMOUTH, MINNESOTA 55441
(612) 513-4500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
With copies to:
<TABLE>
<S> <C>
PHILIP J. TILTON, ESQ. JEFFREY A. SCHUMACHER, ESQ.
MASLON EDELMAN BORMAN & BRAND, LLP SACHNOFF & WEAVER, LTD.
3300 NORWEST CENTER 30 SOUTH WACKER DRIVE, SUITE 2900
MINNEAPOLIS, MINNESOTA 55402-4140 CHICAGO, ILLINOIS 60606
(612) 672-8200 (312) 207-1000
</TABLE>
APPROXIMATE DATE OF THE COMMENCEMENT OF PROPOSED DISTRIBUTION: As soon as
practicable after this Registration Statement becomes effective.
------------------------
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) SHARE PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Common stock, par value $.10
per share(3)................. 2,530,000 shares $24 1/2 $61,985,000 $18,286
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 330,000 shares that are subject to an over-allotment option granted
to the Underwriters.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) of the Securities Act based upon a $24 1/2 per
share average of high and low sales prices of the Common Stock on the Nasdaq
National Market on July 28, 1998.
(3) Includes common stock rights. See Note 11 of Notes to Consolidated Financial
Statements.
----------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JULY 29, 1998
PROSPECTUS
, 1998
2,200,000 SHARES
[LOGO] NORSTAN
COMMON STOCK
Of the 2,200,000 shares of Common Stock offered hereby, 2,000,000 shares
are being sold by Norstan, Inc. ("Norstan" or the "Company") and 200,000 shares
are being sold by the Selling Shareholders. See "Selling Shareholders." The
Company will not receive any part of the proceeds from the sale of shares by the
Selling Shareholders.
The Common Stock is traded on the Nasdaq National Market under the symbol
"NRRD." On July 27, 1998, the last reported sale price of the Common Stock was
$25 1/4 per share. See "Price Range of Common Stock."
------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS(2)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............................. $ $ $ $
Total(3)............................... $ $ $ $
- --------------------------------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for a description of indemnification arrangements with
the Underwriters.
(2) Before deducting expenses, estimated at $300,000, which will be paid by the
Company.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 330,000 additional shares of Common Stock at the Price to the Public,
less Underwriting Discounts and Commissions, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to the Public, Underwriting Discounts and Commissions, Proceeds to the
Company and Proceeds to the Selling Shareholders will be $ ,
$ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock are being offered by the several Underwriters
when, as and if delivered to and accepted by the Underwriters and subject to
various prior conditions, including their right to reject orders in whole or in
part. It is expected that delivery of the share certificates will be made in New
York, New York, on or about , 1998.
<TABLE>
<S> <C>
ROBERT W. BAIRD & CO.
DONALDSON, LUFKIN & JENRETTE INCORPORATED
</TABLE>
<PAGE> 3
[Inside front cover: graphic depicting an organization chart which details the
Company's lines of business and the major product and service categories in each
line of business. It also includes a design depicting the convergence of
communications and information technologies.]
------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON
THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE
"UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
Consolidated Financial Statements and related Notes thereto appearing elsewhere
and incorporated by reference in this Prospectus. Unless indicated otherwise,
the information contained in this Prospectus assumes that the Underwriters'
over-allotment option is not exercised and all references to the "Company,"
"Norstan, Inc." or "Norstan" mean Norstan, Inc. and its subsidiaries.
THE COMPANY
Norstan is a leading provider of communications and information technology
("IT") solutions for over 18,000 customers in the United States, Canada and
England. To address the complex communications requirements of its customers,
Norstan provides a broad range of products and services, including telephone
systems, call center systems, voice processing, network integration, voice and
video conferencing, and facilities management services. Norstan's network of
over 800 field technicians and service consultants delivers communications
services to its customers. In addition, the Company provides a wide array of IT
solutions through Norstan IT Consulting Services. These solutions include the
design, implementation, maintenance and modification of IT applications and
systems. Norstan IT Consulting Services currently employs over 700 consultants
and generated a 70% increase in revenues during fiscal year 1998. As
communications and information technologies converge, Norstan's strategy is to
expand the breadth of its IT services offerings to serve as a single-source
provider of leading technology solutions to its customers.
The Company delivers its products and services through three business
units, Global Services, Communications Solutions and Financial Services, which
accounted for approximately 48%, 50% and 2% of Norstan's fiscal year 1998
revenues, respectively. Global Services includes Norstan IT Consulting Services
and Communications Services. Norstan IT Consulting Services provides IT services
including enterprise resource planning ("ERP") and sales management package
implementation, groupware consulting, Internet/intranet/ e-commerce solutions,
computer telephony integration ("CTI") and outsourced facilities management.
Communications Services provides customer support services for communications
systems, including maintenance services, systems modifications and long distance
services. Communications Solutions provides a broad array of solutions including
telephone systems, integrated voice processing, call center technologies and
video/ audio/data conferencing solutions. Financial Services supports the sales
process by providing customized financing alternatives. The Company believes
that its breadth of product and service offerings fosters long-term customer
relationships, affords cross-selling opportunities and minimizes the Company's
dependence on any single technology or industry.
The Company operates in 68 locations in 58 cities throughout the United
States and Canada. Norstan has served over 18,000 customers across a broad range
of industries in the last three years and focuses its marketing efforts on
middle-market and Fortune 500 companies with complex technology and
communications requirements. Current customers include British Petroleum, IBM,
Kaiser Permanente, John Deere, US Bancorp, 3M and Harley-Davidson. The Company
believes that its installed base of communications systems customers will offer
extensive opportunities for cross-selling IT consulting services. Management
also believes that Norstan IT Consulting Services customers will be a source of
additional communications business. Norstan's strong emphasis on customer
satisfaction is evidenced by a survey of Norstan's communications customers, in
which Norstan received an overall satisfaction rating of 93% in fiscal year
1998. The Company believes that its outstanding customer service will enable
Norstan to capture a greater portion of each customer's communications and IT
budgets in the future.
Norstan provides leading-edge technologies in both its IT and
communications operations. The Company has established strategic alliances with
leading IT and communications companies that allow Norstan to offer objective
solutions to its customers. IT strategic alliance partners include IBM, Siebel
Systems, Oracle, Lotus, PeopleSoft, Tivoli, Novell and Microsoft. Communications
strategic alliance partners include Siemens, Aspect, VTEL, PictureTel, Latitude,
Cisco Systems, Sprint, Lucent Technologies (formerly Octel) and Applied Voice
Technology.
3
<PAGE> 5
Norstan's objective is to capitalize on the accelerating convergence of
communications and information technologies. The convergence of voice, video and
data technologies will enable the Company to provide customers with a unified
technology solution. Norstan's established communications expertise, coupled
with its IT services capabilities, positions the Company to benefit from this
industry trend. Key business strategies to capitalize on this convergence
include: (i) increasing the Company's focus on providing technology services;
(ii) offering a broad range of communications and IT solutions; (iii)
attracting, developing and retaining highly skilled professionals; (iv)
providing superior customer service; and (v) offering leading-edge technologies
through strategic alliances. To complement these business strategies, Norstan's
growth strategy includes the following elements: (i) pursuing complementary IT
services acquisitions; (ii) continuing internal growth of Norstan IT Consulting
Services; and (iii) leveraging Norstan's existing base of over 18,000 customers.
THE OFFERING
Common Stock offered by the Company....... 2,000,000 shares
Common Stock offered by the Selling
Shareholders.............................. 200,000 shares
Common Stock to be outstanding after the
offering.................................. 12,474,281 shares(1)
Use of Proceeds........................... Repayment of indebtedness
and general corporate purposes
Nasdaq National Market symbol............. NRRD
- -----------------------------------
(1) Based upon 10,474,281 shares outstanding at July 27, 1998. Excludes options
outstanding on July 27, 1998 to purchase approximately 1,540,000 shares of
Norstan's common stock, par value $.10 per share ("Common Stock") (of which
244,000 shares are contingent upon shareholder approval of the amendment to
the 1995 Long-Term Incentive Plan referred to below), at a weighted average
exercise price of $18.92, plus an additional 92,000 shares of Common Stock
reserved for issuance in connection with future stock options and other
awards under the 1995 Long-Term Incentive Plan, the 1986 Long-Term Incentive
Plan of Norstan, Inc. and the Restated Non-Employee Directors' Stock Plan.
In addition, the Board of Directors of the Company has approved, subject to
approval by the shareholders, an amendment to the 1995 Long-Term Incentive
Plan, increasing the number of shares issuable thereunder by 1,200,000
shares. See Note 9 of Notes to Consolidated Financial Statements.
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
--------------------------------------------------------
1994 1995 1996 1997 1998
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Global Services
IT Consulting Services................................ $ -- $ 7,931 $ 14,426 $ 54,467 $ 92,746
Communications Services............................... 100,080 110,638 121,971 131,596 127,197
-------- -------- -------- -------- --------
Total Global Services............................... 100,080 118,569 136,397 186,063 219,943
Communications Solutions.............................. 127,514 166,675 179,332 205,983 228,979
Financial Services.................................... 4,305 5,001 5,635 6,029 7,443
-------- -------- -------- -------- --------
Total revenues...................................... 231,899 290,245 321,364 398,075 456,365
-------- -------- -------- -------- --------
Cost of sales:
Global Services
IT Consulting Services.................................. -- 6,417 11,000 43,315 66,457
Communications Services................................. 61,289 70,224 86,669 93,880 89,550
-------- -------- -------- -------- --------
Total Global Services................................. 61,289 76,641 97,669 137,195 156,007
Communications Solutions................................ 92,621 123,158 130,090 150,204 168,965
Financial Services...................................... 1,766 2,308 2,221 2,160 2,444
-------- -------- -------- -------- --------
Total cost of sales................................. 155,676 202,107 229,980 289,559 327,416
-------- -------- -------- -------- --------
Gross margin.............................................. 76,223 88,138 91,384 108,516 128,949
Selling, general and administrative expenses.............. 65,137 74,725 75,973 89,311 103,709
Restructuring charge(1)................................... -- -- -- -- 14,667
-------- -------- -------- -------- --------
Operating income.......................................... 11,086 13,413 15,411 19,205 10,573
Interest expense.......................................... (832) (1,587) (1,351) (1,866) (3,909)
Interest and other income (expense), net.................. (106) (54) 89 (22) (18)
-------- -------- -------- -------- --------
Income before cumulative effect of accounting change and
provision for income taxes.............................. 10,148 11,772 14,149 17,317 6,646
Provision for income taxes................................ 4,161 4,709 5,660 7,100 2,791
-------- -------- -------- -------- --------
Income before cumulative effect of accounting change...... 5,987 7,063 8,489 10,217 3,855
Cumulative effect of change in accounting for income
taxes(2)................................................ (375) -- -- -- --
-------- -------- -------- -------- --------
Net income................................................ $ 5,612 $ 7,063 $ 8,489 $ 10,217 $ 3,855
======== ======== ======== ======== ========
Net income before restructuring charge(1)................. $ 12,362
========
Net income per share -- basic............................. $ 0.70 $ 0.86 $ 1.00 $ 1.12 $ 0.40
======== ======== ======== ======== ========
Net income per share -- diluted........................... $ 0.67 $ 0.82 $ 0.94 $ 1.08 $ 0.39
======== ======== ======== ======== ========
Net income per share before restructuring
charge -- diluted(1).................................... $ 1.25
========
Weighted average shares -- basic.......................... 8,017 8,242 8,526 9,140 9,719
Weighted average shares -- diluted........................ 8,402 8,621 8,985 9,418 9,917
OTHER DATA (AT END OF THE FISCAL YEAR):
Number of employees....................................... 1,703 1,975 2,016 2,373 2,791
Number of IT consultants.................................. 0 13 62 290 616
</TABLE>
<TABLE>
<CAPTION>
AS OF APRIL 30, 1998
--------------------------
ACTUAL AS ADJUSTED(3)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................................................... $ 58,568 $ 58,568
Total assets.............................................................................. 275,608 275,608
Long-term debt, net of current maturities................................................. 52,440 5,144
Discounted lease rentals, net of current maturities....................................... 20,883 20,883
Total shareholders' equity................................................................ 97,671 144,967
</TABLE>
- ---------------
(1) In the fourth quarter of fiscal year 1998, the Company recorded a
restructuring charge of approximately $14.7 million in connection with
management's plan to reduce costs, consolidate and reorganize operations,
and improve operating efficiencies. See Note 3 of Notes to Consolidated
Financial Statements.
(2) On May 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." As a result, in fiscal
year 1994 the Company recorded a one-time charge of $375,000, or $0.05 per
diluted share, for the cumulative effect of the change in method of
accounting for income taxes.
(3) Adjusted to give effect to the sale of 2,000,000 shares of Common Stock
offered by the Company hereby at an assumed offering price of $25 1/4 per
share and the application of the net proceeds therefrom. See "Use of
Proceeds."
5
<PAGE> 7
RISK FACTORS
Each prospective investor should carefully consider the following factors,
among others, prior to purchasing any of the securities offered hereby.
TECHNOLOGICAL CHANGE AND NEW PRODUCTS; GROWTH STRATEGY BASED ON CONVERGENCE OF
TECHNOLOGIES
The markets for communications and IT products and services are
characterized by technological change and frequent new product introductions.
Accordingly, the Company believes that its future success will depend on its
ability to identify and incorporate in a timely manner new products and
enhancements to existing products and services that gain market acceptance.
Although Norstan does not manufacture any products, there can be no assurance
that the products and services that Norstan offers will not become
technologically obsolete, or that Norstan will be able to identify, market or
support new products successfully, that such new products will gain market
acceptance or that the Company will be able to respond effectively to
technological change.
A major element of Norstan's strategy is to leverage and expand its
customer base by offering a range of IT and communications systems products and
services utilizing converging technologies for voice, video and data
communications. The Company's ability to increase revenues in future periods
will depend to some extent on the success of its strategy to serve as customers'
single-source provider of integrated IT and communications systems products and
services. Norstan believes that as information and communications technologies
converge into a single technology, customers and potential customers will
increasingly seek a single-source provider of products and services based on
such technologies. However, many of the Company's existing and potential
customers currently purchase IT and communications products and services from
multiple vendors or on an unintegrated basis, and there can be no assurance that
customers will prefer to purchase such products and services from a single
source or, if they do, that they will choose the Company as that single source.
To the extent that customers prefer to purchase IT and communications products
and services from multiple vendors, on an unintegrated basis, or from a single
source other than the Company, the Company's strategy to increase revenues may
not be realized. See "Business -- Norstan's Growth Strategy."
ATTRACTION AND RETENTION OF EMPLOYEES
A significant component of the Company's business consists of the delivery
of consulting services. Norstan's success depends in large part upon its ability
to attract, develop, motivate and retain highly skilled and educated
professionals possessing technical expertise and business generation skills.
Qualified consultants and other technical resources are in great demand and are
likely to remain a limited resource for the foreseeable future. There can be no
assurance that the Company will be able to attract and retain sufficient numbers
of qualified personnel in the future. The Company has increased the number of
its IT consultants primarily through the acquisition of consulting businesses.
Accordingly, the Company faces an additional risk that consultants obtained
through acquisitions will choose to leave the Company rather than assimilate
into the Company's business environment. There can be no assurance that Norstan
will be able to retain a substantial majority of these employees in the long
term. The loss of a significant number of IT consultants could adversely affect
the Company's ability to secure and complete engagements and could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Business -- Human Resources."
RISKS OF ACQUISITION STRATEGY; RISKS RELATED TO COMPLETED ACQUISITIONS
The Company's most recent strategic acquisitions consist of Wordlink, Inc.
("Wordlink"), Vadini, Inc. (d/b/a PRIMA Consulting, Inc.) ("PRIMA") and Connect
Computer Company ("Connect"). The Company is actively seeking to acquire other
businesses that will contribute to the depth and versatility of Norstan IT
Consulting Services. The Company expects to continue acquiring businesses as an
element of its growth strategy. However, there can be no assurance that Norstan
will be able to identify suitable acquisition candidates or that, if identified,
the Company will be able to acquire such companies on suitable terms.
6
<PAGE> 8
Moreover, other companies are competing for acquisition candidates, which could
increase the price of acquisition targets and decrease the number of attractive
businesses available for acquisition.
There can be no assurance that the anticipated economic, operational and
other benefits of any completed or future acquisitions will be achieved or that
Norstan will be able to successfully integrate acquired businesses in a timely
manner without substantial costs, delays, or other operational or financial
problems. The difficulties of such integration may initially be increased by the
necessity of integrating personnel with disparate business backgrounds and
cultures. In addition, acquisitions may involve the expenditure of significant
funds. Failure to effectively integrate the acquired companies may adversely
affect the Company's ability to secure certain engagements and otherwise grow
its business. Customer dissatisfaction or performance problems at a single
acquired company could have an adverse effect on the reputation of Norstan as a
whole, resulting in increased difficulty in marketing services or acquiring
companies in the future. In addition, there can be no assurance that the
acquired companies will operate profitably. Acquisitions also involve a number
of additional risks, including diversion of management attention, potential loss
of key customers or personnel, risks associated with unanticipated problems,
liabilities or contingencies, and risks of entering markets in which Norstan has
limited or no direct expertise. The occurrence of some or all of the events
described in these risks could have a material adverse effect on the Company's
business, operating results and financial condition. See "Business -- Norstan's
Business Strategy."
DEPENDENCE ON STRATEGIC ALLIANCES
Norstan has a series of agreements authorizing Norstan to act as a
distributor of communications equipment from a variety of manufacturers. Norstan
currently has distribution agreements with Siemens Business Communications
Systems, Inc. ("Siemens"), Aspect, PictureTel, VTEL, Lucent Technologies
(formerly Octel), Iwatsu, Isoetec, Cisco Systems, Sprint, Latitude, Intervoice,
Applied Voice Technolgy and others. In addition, the Company 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. Periodically,
these distribution agreements expire and new agreements must be negotiated if
the Company desires to continue distributing the applicable manufacturer's
products. Norstan is currently negotiating the renewal of its agreement with
Siemens with respect to the distribution of new products. There can be no
assurance that Siemens (or any other manufacturer with whom the Company does
business) will elect to continue its relationship with Norstan on substantially
the same terms and conditions as contained in the parties' prior agreements. The
Company believes that an interruption, or substantial modification, of its
distribution relationship with Siemens could have a material adverse effect on
its business, operating results and financial condition. In addition, much of
Norstan's success is derived from market acceptance of each manufacturer's
products. These products compete with those offered by several other
communications equipment manufacturers. Reduced market acceptance for the
products Norstan distributes, as a result of competition or other factors, could
adversely Norstan's business, operating results and financial condition. See
"Business -- Strategic Alliances."
MANAGEMENT OF GROWTH
The Company opened four new branch locations and increased the number of
its consultants by 112% to 616 in fiscal year 1998. Norstan's ability to manage
the growth of its operations will require it to continue to improve its
operational, financial and other internal systems and to attract, develop,
motivate and retain its employees. The Company's rapid growth has presented and
will continue to present numerous challenges, such as the assimilation of
financial reporting systems and increased pressure on Norstan's management, and
will increase the demands on the Company's systems and internal controls. If
Norstan's management is unable to manage growth or new employees are unable to
achieve anticipated performance or utilization levels, its business, operating
results and financial condition could be materially and adversely affected. See
"Business -- Norstan's Growth Strategy."
7
<PAGE> 9
COMPETITION
The market for IT services includes a large number of competitors, is
subject to rapid change and is highly competitive. Primary competitors include
participants from a variety of market segments, including national accounting
firms, systems consulting and implementation firms, application software firms,
service groups of computer equipment companies, facilities management companies,
general management consulting firms and programming companies. Many of these
competitors have significantly greater financial, technical and marketing
resources and greater name recognition than the Company. In addition, the
Company competes with its customers' internal resources, particularly when these
resources represent a fixed cost to the customer. Such competition may impose
additional pricing pressures on the Company.
The communications industry is intensely competitive and rapidly changing.
Norstan's primary competitors in this area include Lucent Technologies, Nortel
and the Regional Bell Operating Companies ("RBOCs"). Many of its competitors
have longer operating histories, greater financial and human resources, and
greater name recognition than Norstan. The passage of the Telecommunications Act
of 1996 has fostered competition, by providing access to a number of entities
that were previously precluded from the industry. As a result of this
legislation, the pace of consolidation in this industry has accelerated. These
changes in the regulatory environment could potentially affect Norstan's ability
to compete successfully. See "Business -- Competition."
LIMITED PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
The Company relies upon a combination of nondisclosure and other
contractual arrangements with certain key employees, and trade secret, copyright
and trademark laws to protect its proprietary rights and the proprietary rights
of third parties from whom the Company licenses intellectual property. Norstan
enters into confidentiality agreements with certain of its employees and limits
the distribution of proprietary information. There can be no assurance that the
steps taken by the Company to protect its proprietary rights will be adequate to
prevent misappropriation of such rights or that the Company will be able to
detect unauthorized use and take appropriate steps to enforce its proprietary
rights. See "Business -- Intellectual Property Rights."
VARIABILITY OF QUARTERLY OPERATING RESULTS; SEASONALITY
Variations in the Company's revenues and operating results occur from
quarter to quarter as a result of a number of factors, including customer
engagements commenced and completed during a quarter, the number of business
days in a quarter, employee hiring and utilization rates, the timing of
acquisitions, the ability of customers to terminate engagements without penalty,
the size and scope of assignments and general economic conditions. Because a
significant portion of the Company's expenses are relatively fixed, a variation
in the number of customer projects or the timing of the initiation or completion
of projects can cause significant fluctuations in operating results from quarter
to quarter. Furthermore, the Company has historically experienced a seasonal
fluctuation in its operating results, with a larger proportion of its revenues
and operating income occurring during the fourth quarter of the fiscal year. See
"Management's Analysis of Financial Condition and Results of
Operations -- Unaudited Quarterly Results."
STOCK PRICE VOLATILITY
The market price of the Common Stock may vary substantially due to a
variety of factors, including quarterly fluctuations in results of operations,
adverse circumstances affecting the introduction or market acceptance of new
products and services offered by the Company, announcements of new products and
services by competitors, changes in the IT and communications systems
environments, changes in earnings estimates by analysts, sales of Common Stock
by existing shareholders, loss of key personnel and other factors. The market
price for the Common Stock may also be affected by the Company's ability to meet
analysts' or other market expectations, and any failure or anticipated failure
to meet such expectations, even if minor, could have a material adverse effect
on the market price of the Common Stock. In addition, the stock market is
subject to extreme price and volume fluctuations. This volatility has had a
significant effect on the market prices of securities issued by many companies
for reasons unrelated to the operating performance of these
8
<PAGE> 10
companies. The Company has issued shares of Common Stock as consideration
tendered in connection with its recent business acquisitions. A substantial
decrease in the market price of the Common Stock will greatly reduce its utility
as a currency to effect future acquisitions. Moreover, during the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such a
company. Any such litigation instigated against the Company could result in
substantial costs and a diversion of management's attention and resources, which
could have a material adverse effect on the Company's business, operating
results and financial condition. See "Price Range of Common Stock."
YEAR 2000
What is commonly known as the "Year 2000 issue" arises because many
computer and communications hardware and software systems use only two digits to
represent the year. As a result, these systems and programs may not calculate
dates beyond 1999, which may result in information errors or system failures.
The Company is taking steps to remediate the Year 2000 issues within its
internal systems and has held discussions with significant suppliers to ensure
that such parties are executing action plans designed to remediate Year 2000
issues involving systems or products that interface with the Company's systems
or may otherwise affect the Company's customers. There can be no assurance that
the Company's efforts or those of its suppliers or customers will satisfactorily
mitigate all Year 2000 issues faced by them. Inadequate resolution of these
issues may result in information or communications systems failures, which delay
or damage the Company's operations or, potentially, those of its customers,
creating an additional risk of third-party claims brought against the Company,
any of which could have a materially adverse effect on the Company's business,
operating results and financial condition.
CERTAIN ANTI-TAKEOVER EFFECTS
Norstan is subject to Minnesota statutes regulating business combinations
and restricting voting rights of certain persons acquiring shares of Norstan
(the "Minnesota Anti-Takeover Statutes"). In addition Norstan has adopted a
shareholder rights agreement (the "Shareholder Rights Agreement") providing for
the issuance to shareholders of rights to purchase additional shares of Common
Stock under certain circumstances. The Shareholder Rights Agreement combined
with the Minnesota Anti-Takeover Statutes may render more difficult or tend to
discourage a merger, tender offer or proxy contest, the assumption of control by
a holder of a large block of Norstan's securities, or the removal of incumbent
management.
RESTRICTIONS ON THE PAYMENT OF DIVIDENDS
Norstan has not recently declared or paid any cash dividends on its common
stock and does not intend to pay cash dividends in the foreseeable future.
Norstan currently expects to retain earnings to finance expansion of its
business. In addition, Norstan's revolving long-term credit agreement prohibits
the payment of cash dividends without the prior written consent of the lenders
thereunder. See "Dividend Policy."
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Included in this Prospectus are forward-looking statements relating to such
matters as anticipated financial performance, business prospects, technological
developments, new products and services, Year 2000 compliance and similar
matters. In order to comply with the terms of the Private Securities Litigation
Reform Act, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's forward-
looking statements. The risks and uncertainties that may affect the operations,
performance, developments and results of the Company's business include the
following: national and regional economic conditions; pending and future
legislation affecting the IT and telecommunications industries; the Company's
business in Canada and England; stability of foreign governments; 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; and 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.
9
<PAGE> 11
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company (after deducting underwriting discounts and
commissions and estimated offering expenses) are estimated to be approximately
$47.3 million. The Company anticipates that a substantial portion of the net
proceeds will be used to pay down borrowings that total approximately $60.0
million under an $80.0 million unsecured revolving long-term credit agreement
that it has with certain banks. Borrowings under this agreement are due May 31,
2001 and bear interest at the banks' prime commercial rate (8.5% at April 30,
1998), except for LIBOR, CD and commercial paper based options, which generally
bear interest at a rate lower than the banks' prime commercial rate (5.9% to
6.7% at April 30, 1998). Following such paydown, financing under the agreement
may be used by the Company for future acquisitions. The Company is continually
involved in the evaluation of, and discussions with, potential acquisition
candidates, but the Company currently has no agreements, understandings or
commitments regarding any future acquisitions. Proceeds in excess of that used
to repay indebtedness will be employed by the Company as working capital.
The Company will not receive any proceeds from the sale of Common Stock by
the Selling Shareholders.
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the Nasdaq National Market under the symbol
NRRD. The following table sets forth, for the periods indicated, the range of
high and low sale prices for the Common Stock as reported on the Nasdaq National
Market. 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 prices presented
below.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED APRIL 30, 1997:
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, 1998:
First Quarter............................................. $18 1/2 $14
Second Quarter............................................ 25 1/2 17 1/2
Third Quarter............................................. 25 1/2 22
Fourth Quarter............................................ 29 21 7/8
FISCAL YEAR ENDING APRIL 30, 1999:
First Quarter (through July 27, 1998)..................... $26 3/16 $22 3/4
</TABLE>
On July 27, 1998, the reported last sale price of the Common Stock was
$25 1/4 per share. The Company had 4,239 shareholders of record as of July 27,
1998.
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock for several
years. The Company currently anticipates that all of its earnings will be
retained for development of the Company's business and does not anticipate
paying any cash dividends in the foreseeable future.
10
<PAGE> 12
CAPITALIZATION
The following table sets forth the short-term debt and total capitalization
of the Company: (i) as of April 30, 1998; and (ii) as adjusted to reflect the
sale of 2,000,000 shares of Common Stock offered by the Company in this offering
at an assumed public offering price of $25 1/4 per share and the application of
the estimated net proceeds therefrom. The information set forth below should be
read in conjunction with the Consolidated Financial Statements and related Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF APRIL 30, 1998
-----------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Short-term debt............................................. $ 3,257 $ 3,257
Discounted lease rentals.................................... 14,758 14,758
-------- --------
Total short-term debt.................................. $ 18,015 $ 18,015
======== ========
Long-term debt, net of current maturities................... $ 52,440 $ 5,144
Discounted lease rentals, net of current maturities......... 20,883 20,883
-------- --------
Total long-term debt................................... 73,323 26,027
-------- --------
Shareholders' equity:
Common stock -- $.10 par value; 40,000,000 authorized
shares; 9,963,716 shares issued and outstanding,
actual; 11,963,716 shares issued as adjusted(1)........ 996 1,196
Capital in excess of par value............................ 44,741 91,837
Retained earnings......................................... 54,048 54,048
Unamortized cost of stock................................. (641) (641)
Foreign currency translation.............................. (1,473) (1,473)
-------- --------
Total shareholders' equity............................. 97,671 144,967
-------- --------
Total capitalization................................. $170,994 $170,994
======== ========
</TABLE>
- -------------------------
(1) Excludes options outstanding on July 27, 1998 to purchase approximately
1,540,000 shares of Common Stock (of which 244,000 shares are contingent
upon shareholder approval of the amendment to the 1995 Long-Term Incentive
Plan referred to below), at a weighted average exercise price of $18.92,
plus an additional 92,000 shares of Common Stock reserved for issuance in
connection with future stock options and other awards under the 1995
Long-Term Incentive Plan, the 1986 Long-Term Incentive Plan of Norstan, Inc.
and the Restated Non-Employee Directors' Stock Plan. In addition, the Board
of Directors of the Company has approved, subject to approval by the
shareholders, an amendment to the 1995 Long-Term Incentive Plan, increasing
the number of shares issuable thereunder by 1,200,000 shares. See Note 9 of
Notes to Consolidated Financial Statements.
11
<PAGE> 13
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, 1998 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
herein.
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
----------------------------------------------------------------
1994 1995 1996 1997 1998
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Global Services
IT Consulting Services........................... $ -- $ 7,931 $ 14,426 $ 54,467 $ 92,746
Communications Services.......................... 100,080 110,638 121,971 131,596 127,197
-------- -------- -------- -------- --------
Total Global Services.......................... 100,080 118,569 136,397 186,063 219,943
Communications Solutions........................... 127,514 166,675 179,332 205,983 228,979
Financial Services................................. 4,305 5,001 5,635 6,029 7,443
-------- -------- -------- -------- --------
Total revenues................................. 231,899 290,245 321,364 398,075 456,365
-------- -------- -------- -------- --------
Cost of sales:
Global Services
IT Consulting Services........................... -- 6,417 11,000 43,315 66,457
Communications Services.......................... 61,289 70,224 86,669 93,880 89,550
-------- -------- -------- -------- --------
Total Global Services.......................... 61,289 76,641 97,669 137,195 156,007
Communications Solutions........................... 92,621 123,158 130,090 150,204 168,965
Financial Services................................. 1,766 2,308 2,221 2,160 2,444
-------- -------- -------- -------- --------
Total cost of sales............................ 155,676 202,107 229,980 289,559 327,416
-------- -------- -------- -------- --------
Gross margin......................................... 76,223 88,138 91,384 108,516 128,949
Selling, general and administrative expenses......... 65,137 74,725 75,973 89,311 103,709
Restructuring charge(1).............................. -- -- -- -- 14,667
-------- -------- -------- -------- --------
Operating income..................................... 11,086 13,413 15,411 19,205 10,573
Interest expense..................................... (832) (1,587) (1,351) (1,866) (3,909)
Interest and other income (expense), net............. (106) (54) 89 (22) (18)
-------- -------- -------- -------- --------
Income before cumulative effect of accounting
change and provision for income taxes.............. 10,148 11,772 14,149 17,317 6,646
Provision for income taxes........................... 4,161 4,709 5,660 7,100 2,791
-------- -------- -------- -------- --------
Income before cumulative effect of accounting
change............................................. 5,987 7,063 8,489 10,217 3,855
Cumulative effect of change in accounting for income
taxes(2)........................................... (375) -- -- -- --
-------- -------- -------- -------- --------
Net income........................................... $ 5,612 $ 7,063 $ 8,489 $ 10,217 $ 3,855(3)
======== ======== ======== ======== ========
Net income per share -- basic........................ $ 0.70 $ 0.86 $ 1.00 $ 1.12 $ 0.40(3)
======== ======== ======== ======== ========
Net income per share -- diluted...................... $ 0.67 $ 0.82 $ 0.94 $ 1.08 $ 0.39(3)
======== ======== ======== ======== ========
Weighted average shares -- basic..................... 8,017 8,242 8,526 9,140 9,719
Weighted average shares -- diluted................... 8,402 8,621 8,985 9,418 9,917
OTHER DATA (AT END OF THE FISCAL YEAR):
Number of employees.................................. 1,703 1,975 2,016 2,373 2,791
Number of IT consultants............................. 0 13 62 290 616
</TABLE>
<TABLE>
<CAPTION>
AS OF APRIL 30,
----------------------------------------------------------------
1994 1995 1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................................... $ 32,961 $ 32,183 $ 24,899 $ 37,484 $ 58,568
Total assets......................................... 149,662 161,709 160,988 224,173 275,608
Long-term debt, net of current maturities............ 18,218 16,465 -- 18,284 52,440
Discounted lease rentals, net of current
maturities......................................... 18,845 16,313 15,961 24,043 20,883
Total shareholders' equity........................... 47,658 56,984 67,517 84,370 97,671
</TABLE>
- ---------------
(1) In the fourth quarter of fiscal year 1998, the Company recorded a
restructuring charge of approximately $14.7 million in connection with
management's plan to reduce costs, consolidate and reorganize operations,
and improve operating efficiencies. See Note 3 of Notes to Consolidated
Financial Statements.
(2) On May 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." As a result, in fiscal
year 1994 the Company recorded a one-time charge of $375,000, or $0.05 per
diluted share, for the cumulative effect of the change in method of
accounting for income taxes.
(3) Net income and net income per diluted share before the restructuring charge
for the year ended April 30, 1998 were $12,362,000 and $1.25 per share,
respectively.
12
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Norstan is a technology services company providing IT and communications
systems solutions to over 18,000 customers in the United States, Canada and
England. Headquartered in Minneapolis, Minnesota, with sales and service offices
located in 68 locations in the United States and Canada, the Company sells its
products and services to a wide variety of customers across numerous industries.
The Company provides IT consulting and communications services,
communications and technology products and financing alternatives through its
three business units, Global Services, Communications Solutions (formerly known
as Communications Systems) and Financial Services, which accounted for
approximately 48%, 50% and 2% of Norstan's fiscal year 1998 revenues,
respectively. In order to enhance overall profitability, the Company intends to
increase its percentage of revenues derived from technology services, which
typically command higher margins than product sales.
Due to the Company's continuing expansion and growth in the area of IT
consulting services, financial results for Global Services are now reported as:
(i) IT Consulting Services and (ii) Communications Services. Norstan IT
Consulting Services provides IT services including ERP and sales management
package implementation, groupware consulting, Internet/intranet/e-commerce
solutions, CTI and outsourced facilities management. Communications Services
provides customer support services for communications systems, including
maintenance services, systems modifications and long distance services.
Communications Solutions provides a broad array of solutions including telephone
systems, integrated voice processing, call center technologies and
video/audio/data conferencing solutions. The name change from Communications
Systems to Communications Solutions more accurately reflects the Company's
commitment to provide its customers with design, installation and implementation
services as well as the hardware and software components necessary for
successful implementation of complex communications systems. Financial Services
supports the sales process by providing customized financing alternatives. The
Company believes that its breadth of product and service offerings fosters
long-term client relationships, affords cross-selling opportunities and
minimizes the Company's dependence on any single technology or industry.
During fiscal year 1998, Norstan recorded a restructuring charge of $14.7
million in connection with management's plan to reduce costs, consolidate and
reorganize operations, and improve operating efficiencies. Restructuring efforts
focused primarily on the following: (i) consolidation of seven semi-autonomous
geographic sales and service organizations into a single, more focused sales and
operations organization; (ii) the consolidation of 36 warehouses and parts
locations into three strategically located distribution centers; and (iii) the
reorganization and integration of the Company's IT consulting services
operations, including the Norstan Call Center Solutions Group, Connect and
PRIMA, into a single, customer-focused organization. The restructuring charge
relates primarily to the write-down of certain assets to their fair market
values ($12.2 million), severance and employee benefit costs ($1.2 million) and
lease termination costs ($1.3 million). Net income and net income per diluted
share before the restructuring charge for the year ended April 30, 1998 were
$12,362,000 and $1.25 per share, respectively.
13
<PAGE> 15
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
consolidated statements of operations expressed as a percentage of total
revenues:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-----------------------------
1996 1997 1998
<S> <C> <C> <C>
Revenues:
Global Services
IT Consulting Services................................. 4.5% 13.7% 20.3%
Communications Services................................ 37.9 33.0 27.9
----- ----- -----
Total Global Services................................ 42.4 46.7 48.2
Communications Solutions.................................. 55.8 51.8 50.2
Financial Services........................................ 1.8 1.5 1.6
----- ----- -----
Total revenues......................................... 100.0 100.0 100.0
Cost of sales:
Global Services
IT Consulting Services................................. 3.4 10.9 14.6
Communications Services................................ 27.0 23.6 19.6
----- ----- -----
Total Global Services................................ 30.4 34.5 34.2
Communications Solutions.................................. 40.5 37.7 37.0
Financial Services........................................ 0.7 0.5 0.5
----- ----- -----
Total cost of sales.................................... 71.6 72.7 71.7
----- ----- -----
Gross margin................................................ 28.4 27.3 28.3
Selling, general and administrative expenses................ 23.6 22.5 22.8
Restructuring charge........................................ -- -- 3.2
----- ----- -----
Operating income............................................ 4.8% 4.8% 2.3%
===== ===== =====
Net income.................................................. 2.6% 2.6% 0.8%
===== ===== =====
</TABLE>
The following table sets forth the gross margin percentages for Global
Services, Communications Solutions and Financial Services.
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
--------------------------
1996 1997 1998
<S> <C> <C> <C>
Gross margin percentage:
Global Services
IT Consulting Services................................. 23.7% 20.5% 28.3%
Communications Services................................ 28.9 28.7 29.6
Total Global Services................................ 28.4 26.3 29.1
Communications Solutions.................................. 27.5 27.1 26.2
Financial Services........................................ 60.6 64.2 67.2
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues. Revenues increased 14.6% to $456.4 million in fiscal year 1998
from $398.1 million in fiscal year 1997. The increase was attributable to growth
in each of Norstan's three business units.
Revenues from Global Services increased 18.2% to $219.9 million in fiscal
year 1998 from $186.1 million in fiscal year 1997. Revenues from IT Consulting
Services increased 70.3% to $92.7 million in fiscal year 1998 from $54.5 million
in fiscal year 1997. This increase was a result of: (i) the acquisition of PRIMA
in September 1997 which contributed $17.9 million of revenue in fiscal year
1998; and (ii) internal revenue growth of 37.5%. Revenues from Communications
Services decreased 3.3% to $127.2 million in fiscal year 1998 from $131.6
million in fiscal year 1997. The decrease in Communications Services revenues
resulted from the sale of the Company's stand-alone cabling business in June
1997, which contributed approximately $5.0 million in revenues during fiscal
year 1997.
14
<PAGE> 16
Revenues from Communications Solutions increased 11.2% to $229.0 million in
fiscal year 1998 from $206.0 million in fiscal year 1997. The increase was
attributable to increased sales volumes in the Siemens PBX, videoconferencing
and refurbished equipment products through sales to new customers as well as
growth with existing customer relationships.
Revenues from Financial Services increased 23.5% to $7.4 million in fiscal
year 1998 from $6.0 million in fiscal year 1997. This increase is primarily
attributable to the increased size of the Company's leasing base.
Gross Margin. The Company's gross margin was $128.9 million and $108.5
million for the fiscal years ended April 30, 1998 and 1997, respectively. As a
percent of total revenues, gross margin was 28.3% for fiscal year 1998 compared
to 27.3% for fiscal year 1997.
Gross margin as a percent of revenues for Global Services was 29.1% for
fiscal year 1998 as compared to 26.3% for fiscal year 1997. The gross margin for
IT Consulting Services increased to 28.3% for fiscal year 1998 from 20.5% for
fiscal year 1997. The improved margin is a result of operating efficiencies
gained as the IT Consulting Services segment continued to grow as well as from
an increased emphasis on time-and-materials engagements. The gross margin for
Communications Services increased to 29.6% for fiscal year 1998 from 28.7% for
fiscal year 1997.
Gross margin as a percent of revenues for Communications Solutions was
26.2% for fiscal year 1998 as compared to 27.1% for fiscal year 1997. The
decrease in gross margin for fiscal year 1998 as compared to fiscal year 1997 is
primarily due to overall increases in product costs as a result of changes in
the sales mix and increased labor costs from subcontractors and overtime due to
the high level of installations during 1998. The overall decline in gross margin
was partially offset by improved margin in the sales of refurbished equipment.
Gross margin as a percent of revenues for Financial Services was 67.2% for
fiscal year 1998 as compared to 64.2% for fiscal year 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 16.1% to $103.7 million in fiscal year 1998
from $89.3 million in fiscal year 1997. As a percent of revenues, selling,
general and administrative expenses remained relatively consistent at 22.7% for
fiscal year 1998, as compared to 22.4% for fiscal year 1997.
Restructuring Charge. During fiscal year 1998, Norstan recorded a
restructuring charge of $14.7 million in connection with management's plan to
reduce costs, consolidate and reorganize operations, and improve operating
efficiencies. Restructuring efforts focused primarily on the following: (i)
consolidation of seven semi-autonomous geographic sales and service
organizations into a single, more focused sales and operations organization;
(ii) the consolidation of 36 warehouses and parts locations into three
strategically located distribution centers; and (iii) the reorganization and
integration of the Company's IT consulting services operations, including the
Norstan Call Center Solutions Group, Connect and PRIMA, into a single, customer-
focused organization. The restructuring charge relates primarily to the
write-down of certain assets to their fair market values ($12.2 million),
severance and employee benefit costs ($1.2 million) and lease termination costs
($1.3 million).
Interest Expense. Interest expense was $3.9 million for fiscal year 1998 as
compared to $1.9 million for fiscal year 1997. This increase was primarily the
result of higher borrowing levels in fiscal year 1998 to fund the PRIMA
acquisition as well as for working capital purposes. Average month-end
borrowings outstanding under the Company's revolving long-term credit agreements
(excluding amounts borrowed to finance leasing activities) were $53.2 million
for fiscal year 1998 and $24.5 million for fiscal year 1997. Weighted average
interest rates under the Company's revolving long-term credit agreements were
7.0% for fiscal year 1998 as compared to 7.5% for fiscal year 1997.
Income Taxes. The Company's effective income tax rate was 42% for fiscal
year 1998 and 41% for fiscal year 1997. The Company's effective tax rate differs
from the federal statutory rate primarily due to state income taxes and the
effect of nondeductible goodwill amortization.
Net Income. Net income was $3.9 million or $0.39 per diluted share in
fiscal year 1998, which includes the $14.7 million restructuring charge
representing $0.86 per diluted share, as compared to $10.2 million or
15
<PAGE> 17
$1.08 per diluted share in fiscal year 1997. Net income and net income per
diluted share before the restructuring charge for the year ended April 30, 1998
were $12,362,000 and $1.25 per share, respectively.
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues. Total revenues increased 23.9% to $398.1 million in fiscal year
1997 from $321.4 million in fiscal year 1996.
Revenues from Global Services increased 36.4% to $186.1 million in fiscal
year 1997 from $136.4 million in fiscal year 1996. Revenues from IT Consulting
Services increased 277.6% to $54.5 million in fiscal year 1997 from $14.4
million in fiscal year 1996. This increase was a result of the acquisition of
Connect in June 1996, which contributed $33.8 million of revenue in fiscal year
1997, and the over 70% growth experienced in the Company's outsourcing business.
Revenues from Communications Services increased 7.9% to $131.6 million in fiscal
year 1997 from $122.0 million in fiscal year 1996, due primarily to growth in
communications maintenance services and network services.
Revenues from Communications Solutions increased 14.9% to $206.0 million in
fiscal year 1997 from $179.3 million in fiscal year 1996. The increase resulted
primarily from increased sales volume of refurbished equipment and
videoconferencing products.
Revenues from Financial Services increased 7.0% to $6.0 million in fiscal
year 1997 from $5.6 million in fiscal year 1996. The increase was attributable
to the increased size of the Company's leasing base.
Gross Margin. The Company's gross margin was $108.5 million in fiscal year
1997 and $91.4 million in fiscal year 1996. As a percent of total revenues,
gross margin was 27.3% for fiscal year 1997 and 28.4% for fiscal year 1996.
Gross margin as a percent of revenues for Global Services was 26.3% for
fiscal year 1997 compared to 28.4% for fiscal year 1996. The gross margin for IT
Consulting Services decreased to 20.5% for fiscal year 1997 from 23.7% for
fiscal year 1996. This decrease is primarily attributable to non-recurring
operating costs and inefficiencies relating to the reorganization of the
Company's IT consulting operations as well as from decreased margins on certain
fixed-price contracts. Communications Services' gross margin remained relatively
constant at 28.7% for fiscal year 1997 as compared to 28.9% for fiscal year
1996.
Gross margin as a percent of revenues for Communications Solutions was
27.1% for fiscal year 1997 as compared to 27.5% for fiscal year 1996. The change
in the gross margin as a percentage of revenue was the result of shifts in the
product mix and competitive market conditions.
Gross margin as a percent of revenues for Financial Services was 64.2% for
fiscal year 1997 as compared to 60.6% for fiscal year 1996. The increase in
gross margin percentage for fiscal year 1997 as compared to fiscal year 1996 was
the result of decreasing interest rates.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 17.6% to $89.3 million in fiscal year 1997
from $76.0 million in fiscal year 1996. As a percent of revenues, selling,
general and administrative expenses decreased to 22.4% for fiscal year 1997 from
23.6% for fiscal year 1996. The decrease 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.
Interest Expense. Interest expense was $1.9 million for fiscal year 1997 as
compared to $1.4 million for fiscal year 1996. Weighted average interest rates
under the Company's revolving long-term credit agreements were 7.5% for fiscal
year 1997 as compared to 8.2% for fiscal year 1996. 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
year 1997 and $15.8 million for fiscal year 1996.
Income Taxes. The Company's effective income tax rate was 41% for fiscal
year 1997 and 40% for fiscal year 1996. The Company's effective tax rate differs
from the federal statutory rate primarily due to state income taxes and the
effect of nondeductible goodwill amortization.
16
<PAGE> 18
Net Income. Net income was $10.2 million or $1.08 per diluted share in 1997
and $8.5 million or $0.94 per diluted share in 1996.
UNAUDITED QUARTERLY RESULTS
The following table sets forth certain unaudited quarterly operating
information for each of the eight quarters in the period ending April 30, 1998.
This data includes, in the opinion of management, all normal recurring
adjustments necessary for the fair presentation of the information for the
periods presented when read in conjunction with the Company's Consolidated
Financial Statements and related Notes thereto. Results for any previous fiscal
quarter are not necessarily indicative of results for the full year or for any
future quarter. The Company has historically experienced a seasonal fluctuation
in its operating results, with a larger proportion of its revenues and operating
income occurring during the fourth quarter of the fiscal year.
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------------------------------------------------------------------------
AUG. 3, NOV. 2, FEB. 1, APR. 30, AUG. 2, NOV. 1, JAN. 31, APR. 30,
1996 1996 1997 1997 1997 1997 1998 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Global Services
IT Consulting Services...... $ 9,363 $13,682 $15,328 $16,094 $15,026 $22,038 $25,186 $30,496
Communications Services..... 31,562 32,076 31,918 36,040 33,023 30,508 30,968 32,698
------- ------- ------- ------- ------- ------- ------- -------
Total Global Services..... 40,925 45,758 47,246 52,134 48,049 52,546 56,154 63,194
Communications Solutions...... 49,820 48,483 45,405 62,275 45,212 56,719 53,979 73,069
Financial Services............ 1,486 1,412 1,424 1,707 2,181 1,657 1,634 1,971
------- ------- ------- ------- ------- ------- ------- -------
Total revenues............ 92,231 95,653 94,075 116,116 95,442 110,922 111,767 138,234
Cost of sales................... 66,900 68,548 68,014 86,097 68,356 80,488 79,861 98,711
------- ------- ------- ------- ------- ------- ------- -------
Gross margin.................... 25,331 27,105 26,061 30,019 27,086 30,434 31,906 39,523
Selling, general and
administrative expenses....... 22,180 21,944 20,935 24,252 23,157 24,399 24,923 31,230
Restructuring charge............ -- -- -- -- -- -- -- 14,667
------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss)......... 3,151 5,161 5,126 5,767 3,929 6,035 6,983 (6,374)
Interest expense................ (241) (520) (571) (534) (594) (847) (1,242) (1,226)
Interest and other income
(expense)..................... 7 (28) (11) 10 48 69 55 (190)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income
taxes......................... 2,917 4,613 4,544 5,243 3,383 5,257 5,796 (7,790)
Income taxes.................... 1,225 1,937 1,829 2,109 1,387 2,155 2,521 (3,272)
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)............... $ 1,692 $ 2,676 $ 2,715 $ 3,134 $ 1,996 $ 3,102 $ 3,275 $(4,518)
======= ======= ======= ======= ======= ======= ======= =======
Net income before restructuring
charge........................ $ 3,991
=======
Net income (loss) per share --
diluted....................... $ 0.19 $ 0.29 $ 0.29 $ 0.33 $ 0.21 $ 0.32 $ 0.33 $ (0.45)
======= ======= ======= ======= ======= ======= ======= =======
Net income per share before
restructuring charge --
diluted....................... $ 0.39
=======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities decreased in fiscal year 1998 as
compared to fiscal years 1997 and 1996 as a result of increases in accounts
receivable, costs and estimated earnings in excess of billings and income taxes
receivable. Net cash used in investing activities remained constant in fiscal
years 1998 and 1997 and increased from fiscal year 1996 as a result of increased
capital expenditures and investments in lease contracts, as noted below, and due
to acquisitions during 1998 and 1997. Net cash provided by financing activities
increased during fiscal years 1998 and 1997 as compared to 1996 due to increased
long-term borrowings related to acquisitions and to support the overall growth
of the Company.
Capital Expenditures. The Company used $19.9 million for capital
expenditures during fiscal year 1998 as compared to $24.2 million in fiscal year
1997 and $14.4 million in fiscal year 1996. These expenditures were
17
<PAGE> 19
primarily for capitalized costs incurred in connection with obtaining or
developing internal use software, computer equipment, facility expansion and
telecommunications equipment used in outsourcing arrangements and as spare
parts.
Investment in Lease Contracts. The Company has also made a significant
investment in lease contracts with its customers. The additional investment made
in lease contracts in fiscal year 1998 totaled $28.0 million. Net lease
receivables increased to $53.7 million at April 30, 1998 from $49.4 million at
April 30, 1997. 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 totaled $35.6
million at April 30, 1998. Interest rates on these credit agreements at April
30, 1998 ranged from 6.0% to 10.0%, while payments are due in varying monthly
installments through August 2005. Payments due to financial institutions are
made from monthly collections of lease receivables from customers.
Capital Resources. The Company has an $80.0 million unsecured revolving
long-term credit agreement with certain banks. Up to $30.0 million of borrowings
under this agreement may be in the form of commercial paper. In addition,
sublimits also exist related to the Company's support of its leasing activities.
Borrowings under this agreement are due May 31, 2001, and bear interest at the
banks' reference rate (8.50% at April 30, 1998), except for LIBOR, CD and
commercial paper based options, which generally bear interest at a rate lower
than the banks' reference rate (5.9% to 6.7% at April 30, 1998). Total
consolidated borrowings under this agreement at April 30, 1997 and 1998 were
$17.9 million and $52.4 million. There were no borrowings on account of the
Company's leasing activities at April 30, 1997 and 1998. Annual commitment fees
on the unused portions of the credit facility are 0.25%. Under the agreement,
the Company is required to maintain minimum levels of EBITDA and certain other
financial ratios. The Company has complied with or has obtained the appropriate
waivers for such requirements as of April 30, 1998.
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.
ACQUISITIONS
On June 19, 1998, the Company merged with Wordlink in a transaction
accounted for under the pooling-of-interests method. Wordlink delivers network
integration, groupware messaging, Internet/intranet/ e-commerce and education
solutions to customers operating in a multi-vendor network environment. The
agreement provided for the conversion of all shares of Wordlink common stock and
all vested Wordlink stock options issued and outstanding into approximately
$10.3 million of Common Stock. All outstanding Wordlink unvested stock options
were converted to the equivalent value of Norstan stock options. Wordlink's
stockholders' equity and operating results were not material in relation to the
Company's financial statements. As such, the Company will record the combination
without restating prior periods' consolidated statements of operations to
reflect the pooling-of-interests combination.
On September 30, 1997, the Company acquired PRIMA in a transaction
accounted for under the purchase method. PRIMA provides IT consulting services,
including information systems planning and development, consulting and
programming services for collaborative computing solutions, and ERP integration
services. The acquisition consideration totaled approximately $27.5 million,
consisting of $19.5 million in cash, $6.3 million of Common Stock and $1.7
million paid to certain members of PRIMA management under non-compete
agreements. In addition, the Company agreed to pay up to $3.5 million in
contingent consideration over a three-year period ending April 30, 2000 if
certain financial performance targets are achieved. This transaction resulted in
the recording of $24.9 million in goodwill and other intangible assets that are
being amortized on a straight-line basis over 15 years and three years,
respectively.
On June 4, 1996, the Company acquired 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. The acquisition
18
<PAGE> 20
consideration totaled approximately $15.0 million, consisting of $12.0 million
in cash, $2.0 million of 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, 1998, $2.0 million of such consideration
had been paid and the remaining $2.0 million has been earned and accrued). This
transaction resulted in the recording of $18.4 million in goodwill and other
intangible assets that are being amortized on a straight-line basis over 15
years and three years, respectively.
IMPACT OF YEAR 2000
The Company has completed an assessment and will modify or replace portions
of its hardware and software so that its computer systems will function properly
with respect to dates in 2000 and thereafter. The Company has also had
discussions with its significant suppliers to ensure that those parties have
appropriate plans to remediate Year 2000 issues where their systems and products
interface with the Company's systems or otherwise impact its operations or that
of its customers. The Company is assessing the extent to which its operations
are vulnerable should those organizations fail to properly remediate either
their computer systems or their current product offerings available to the
Company's customers.
The Company's comprehensive Year 2000 initiative is being managed by a team
of internal staff with the assistance of an outside consultant. The Company is
well under way with its efforts, which are scheduled to be completed by
mid-1999. The cost of the Year 2000 initiative is estimated to be approximately
$2 million to be incurred over the next two fiscal years.
While the Company believes its planning efforts are adequate to address its
Year 2000 concerns, the Year 2000 readiness of the Company's customers, and the
hardware and software offerings from the Company's suppliers and business
partners may vary. Although the Company does not believe that the Year 2000
matters discussed above will have a material impact on its business, financial
condition and results of operations, it is uncertain as to what extent the
Company may be affected by such matters.
FORWARD-LOOKING STATEMENTS
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, Year 2000 compliance and
similar matters. The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements including those made in this
document. In order to comply with the terms of the Private Securities Litigation
Reform Act, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, developments and results of the Company's business
include the following: national and regional economic conditions; pending and
future legislation affecting the IT and telecommunications industries; the
Company's business in Canada and England; stability of foreign governments;
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; and 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> 21
BUSINESS
SUMMARY
Norstan is a leading provider of communications and IT solutions for over
18,000 customers in the United States, Canada and England. To address the
complex communications requirements of its customers, Norstan provides a broad
range of products and services, including telephone systems, call center
systems, voice processing, network integration, voice and video conferencing,
and facilities management services. Norstan's network of over 800 field
technicians and service consultants delivers communications services to its
customers. In addition, the Company provides a wide array of IT solutions
through Norstan IT Consulting Services. These solutions include the design,
implementation, maintenance and modification of IT applications and systems.
Norstan IT Consulting Services currently employs over 700 consultants and
generated a 70% increase in revenues during fiscal year 1998. As communications
and information technologies converge, Norstan's strategy is to expand the
breadth of its IT services offerings to serve as a single-source provider of
leading technology solutions to its customers.
The Company delivers its products and services through three business
units, Global Services, Communications Solutions and Financial Services, which
accounted for approximately 48%, 50% and 2% of Norstan's fiscal year 1998
revenues, respectively. Global Services includes Norstan IT Consulting Services
and Communications Services. Norstan IT Consulting Services provides IT services
including ERP and sales management package implementation, groupware consulting,
Internet/intranet/e-commerce solutions, CTI and outsourced facilities
management. Communications Services provides customer support services for
communications systems, including maintenance services, systems modifications
and long distance services. Communications Solutions provides a broad array of
solutions including telephone systems, integrated voice processing, call center
technologies and video/audio/data conferencing solutions. Financial Services
supports the sales process by providing customized financing alternatives. The
Company believes that its breadth of product and service offerings fosters
long-term customer relationships, affords cross-selling opportunities and
minimizes the Company's dependence on any single technology or industry.
The Company operates in 68 locations in 58 cities throughout the United
States and Canada. Norstan has served over 18,000 customers across a broad range
of industries in the last three years and focuses its marketing efforts on
middle-market and Fortune 500 companies with complex technology and
communications requirements. Current customers include British Petroleum, IBM,
Kaiser Permanente, John Deere, US Bancorp, 3M and Harley-Davidson. The Company
believes that its installed base of communications systems customers will offer
extensive opportunities for cross-selling IT consulting services. Management
also believes that Norstan IT Consulting Services customers will be a source of
additional communications business. Norstan's strong emphasis on customer
satisfaction is evidenced by a survey of Norstan's communications customers, in
which Norstan received an overall satisfaction rating of 93% in fiscal year
1998. The Company believes that its outstanding customer service will enable
Norstan to capture a greater portion of each customer's communications and IT
budgets in the future.
Norstan provides leading-edge technologies in both its IT and
communications operations. The Company has established strategic alliances with
leading IT and communications companies that allow Norstan to offer objective
solutions to its customers. IT strategic alliance partners include IBM, Siebel
Systems, Oracle, Lotus, PeopleSoft, Tivoli, Novell and Microsoft. Communications
strategic alliance partners include Siemens, Aspect, VTEL, PictureTel, Latitude,
Cisco Systems, Sprint, Lucent Technologies (formerly Octel) and Applied Voice
Technology.
INDUSTRY OVERVIEW
In the current climate of intense global competition and accelerating
technological change, businesses increasingly depend upon technology-based
solutions to enhance their competitive position, and to improve their
productivity and the quality of their products and services. Today's business
environment mandates the availability of efficient voice and video communication
channels and information in formats suited to a wide variety of users.
Accordingly, businesses are looking to a variety of new technologies to enhance
the
20
<PAGE> 22
performance of their communications systems and to allow IT systems to collect,
analyze and communicate information within the enterprise and among customers
and suppliers. An organization's ability to integrate and deploy new
communications and IT technologies in a unified and cost-effective manner has
become critical to competing successfully in today's rapidly changing business
environment.
While organizations recognize the importance of communications and IT
systems in this business environment, the selection, implementation,
customization and maintenance of these systems is becoming more complex and the
resources required to perform these tasks are becoming increasingly scarce.
Faced with a shortage of qualified technical resources and great demands to
implement the latest technology, customers are increasingly relying on outside
vendors to provide the necessary resources. By outsourcing communications and IT
services, companies are able to focus on their core businesses; access
specialized technical skills; implement communications and IT solutions more
rapidly; benefit from flexible staffing; and reduce the cost of recruiting,
training and retaining communications and IT professionals.
As a result of these factors, demand for IT and communications services and
products has grown significantly. In 1998, the worldwide market for IT services
is estimated at $350 billion and is projected to grow to $620 billion by 2002
according to Dataquest. Dataquest also estimates that the market for these
services is projected to grow at a 15% compound annual growth rate. For calendar
year 1998, industry sources estimate that the U.S. market for switching,
networking and application equipment is over $17 billion, and the U.S. market
for telecommunications maintenance and professional services is estimated to be
approximately $4 billion. As customers seek the competitive advantages that
advanced communications and computer telephony integration can deliver, growth
of certain segments of call processing are expected to be particularly strong.
Between 1996 and 2000, the U.S. market for voice mail, interactive voice
response units, networking equipment, and other telecommunications peripherals
and applications is expected to grow at a compound annual growth rate of
approximately 12%. By 2000, the U.S. market for these associated applications
and peripherals is projected to be over $14 billion.
The markets and technologies for communications equipment and IT
applications and systems continue to converge as communications equipment
migrates from proprietary switches to software-driven systems operating on
standardized computer platforms. As a result, businesses are integrating their
communications and IT systems. In addition, many middle-market and Fortune 500
companies rely on multiple, often specialized, providers to help implement and
manage their communications and IT systems. The Company believes that relying on
multiple service providers, where there is no distinct responsible party,
creates vendor relationships that are difficult and expensive to manage and
adversely impacts the quality and compatibility of communications and IT
solutions. As previously separate communications and IT technologies converge
and their interoperability increases, more organizations will seek a unified
technology solution. Norstan believes that these organizations will attempt to
reduce costs and management complexity by establishing relationships with a
small number of providers that offer a broad range of both communications and IT
products and services throughout the full life cycle of a project.
THE NORSTAN SOLUTION
The Company is a single-source provider of a wide range of communications
and IT solutions that enable its customers to compete and succeed in the global
marketplace. The Company has leveraged its established reputation as a provider
of premier communications products and services, along with the capability of
its more than 700 IT consultants, to deliver a unified communications and IT
solution to middle-market and Fortune 500 companies. This broad range of
offerings enables Norstan to serve as a single-source provider of communications
and IT solutions throughout the entire life cycle of a project. Norstan's
ability to serve as a single-source provider results in closer integration,
reduced risk and greater management control for the customer. The Company
believes that its customer relationships, its geographic reach and size, and its
expertise in providing both communications and IT solutions will enable it to
capitalize on the continuing growth and convergence of communications and IT
needs of middle-market and Fortune 500 companies.
21
<PAGE> 23
NORSTAN'S BUSINESS STRATEGY
The Company's objective is to become a leading provider of communications
and IT offerings to middle-market and Fortune 500 companies. The Company's
strategy to achieve this objective includes the following key elements:
Capitalize on the Accelerating Convergence of Communications and
Information Technologies. Norstan's established communications expertise,
coupled with its IT consulting capabilities, positions the Company to exploit
the convergence of voice, video and information technologies onto a single
platform. Norstan believes that it is one of the few firms offering this
combination of skills and services, enabling the Company to serve as a
single-source provider of a unified technology solution.
Increase Focus on Providing Technology Services. As communications and
information technologies converge, the Company intends to increase its
percentage of revenues derived from technology services, which typically command
higher margins than product sales. Management believes that its increased focus
on technology services will enhance its overall profitability. Over the last
three fiscal years, revenues from Norstan's Global Services business unit
increased at a 27% annual compound growth rate and accounted for over 48% of
revenues in fiscal year 1998.
Offer a Broad Range of Communications and IT Solutions. Norstan's broad
range of voice, video and data solutions allows the Company to serve as a
single-source provider for its customers' communications and IT needs. The
ability to provide consulting services, hardware, software, training and
on-going support enables Norstan to offer a unified communications and IT
solution throughout the life cycle of a project. This capability will become
increasingly important as communications and information technologies continue
to converge and customers look to retain a single-source provider for all their
communications and IT needs.
Attract, Develop and Retain Highly Skilled Professionals. The Company seeks
to attract, develop and retain the highest caliber of communications and IT
consultants. Norstan places a strong emphasis on the career development and
training of its IT consultants through its Team Manager program. Team Managers
provide career guidance and ensure that employees maintain skills in
state-of-the-art technologies. Norstan offers a competitive combination of
employee benefits and incentives, including employee stock option and stock
purchase programs, as well as incentive compensation based on the amount billed
by individual consultants.
Provide Superior Customer Service. Norstan believes its dedication to
providing service beyond its customers' expectations has produced many favorable
customer relationships and resulted in increased exposure to potential
customers. Norstan's strong emphasis on customer satisfaction is evidenced by a
survey of Norstan's communications customers, in which Norstan received an
overall satisfaction rating of 93% in fiscal year 1998. The Company believes
that its reputation for superior service will lead to opportunities for
cross-selling additional products and services to its customer base.
Offer Leading-Edge Technologies. Norstan maintains several strategic
alliances with business partners that allow it to offer leading-edge
technologies. IT strategic alliance partners include IBM, Siebel Systems,
Oracle, Lotus, PeopleSoft, Tivoli, Novell and Microsoft. Communications
strategic alliance partners include Siemens, Aspect, VTEL, PictureTel, Latitude,
Cisco Systems, Sprint, Lucent Technologies (formerly Octel) and Applied Voice
Technology. These strategic alliances provide the Company with access to
training, product support and current technology as well as the use of the
"business partner" designation in marketing the Company's products and services.
The Company intends to strengthen its existing alliances and pursue additional
alliances with leading technology companies.
NORSTAN'S GROWTH STRATEGY
To achieve its growth objectives, the Company has adopted the following
strategies:
Pursue Complementary IT Services Acquisitions. To capitalize on the highly
fragmented nature of the IT services industry, the Company intends to grow
Norstan IT Consulting Services through acquisitions. Building on its experience
of acquiring communications companies over the last ten years, Norstan has
completed three
22
<PAGE> 24
acquisitions of IT services businesses since 1996. The Company will target
additional acquisitions that provide complementary expertise, expand its
domestic and international geographic presence, diversify its customer base and
increase its consulting resources.
Continue Internal Growth of Norstan IT Consulting Services. The Company
seeks to continue the rapid growth of Norstan IT Consulting Services by opening
branch locations in targeted geographic markets. During fiscal year 1998,
Norstan IT Consulting Services generated 37.5% internal revenue growth and
opened four new branch locations in Atlanta, St. Louis, Chicago and Phoenix.
Norstan has targeted six to eight potential markets for future branch locations
over the next twelve months. In addition, the Company intends to leverage
existing communications locations through cross-selling efforts and the
aggressive recruitment of IT consultants. From the June 1996 acquisition of
Connect through the end of fiscal year 1998, Norstan IT Consulting Services has
increased its number of consultants at a compound annual growth rate of 55.0%,
excluding other acquisitions.
Leverage Existing Customer Relationships. Norstan intends to grow its
technology services business by leveraging the Company's existing base of over
18,000 customers. These relationships provide Norstan with significant
advantages in marketing new communications and IT services and solutions.
Management believes the convergence of communications and information
technologies, together with the Company's high level of customer satisfaction,
will position Norstan to become a preferred provider of both communications and
IT solutions.
PRODUCTS AND SERVICES
Norstan provides customers with a single source for a broad range of
communications and IT products and services to design, develop and implement
technology solutions in a variety of customer environments. These products and
services are delivered through three business units, Global Services,
Communications Solutions and Financial Services.
23
<PAGE> 25
Global Services. Global Services, which represented 48% of the Company's
fiscal year 1998 revenues, consists of two operating groups: Norstan IT
Consulting Services and Communications Services. The following table summarizes
the products and services provided by these two groups.
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------------
GLOBAL SERVICES
- ----------------------------------------------------------------------------------------------------
NORSTAN IT CONSULTING SERVICES
CATEGORY OF SERVICE DESCRIPTION OF SERVICES
Business Transformation Services - Develop strategic IT plans
- Provide business transformation and process
reengineering consulting services
- Provide information management consulting
- Provide vertical industry solutions focused on the
healthcare and financial services industries
- ----------------------------------------------------------------------------------------------------
Enterprise Business Solutions - Customize packaged software solutions, including ERP
and customer management solutions
- Develop and implement call center strategies and
solutions
- Develop Internet/intranet/e-commerce solutions
- Provide network and system strategies
- ----------------------------------------------------------------------------------------------------
Information Technology Services - Design and develop applications
- Provide data integration services
- Perform network and messaging services
- Provide operating systems and migration services
- Analyze customer businesses and systems
- Provide project management services for IT operations
- ----------------------------------------------------------------------------------------------------
Managed Services - Manage networks and systems
- Support and maintain applications
- Provide support for network and client/server systems
- Perform product procurement and integration
- Provide standard/custom technical education and
training services
- Manage customer communications operations
- ------------------------------------------
COMMUNICATIONS SERVICES
CATEGORY OF SERVICE DESCRIPTION OF SERVICES
Communications Maintenance - Provide maintenance services on customers'
Services communications systems hardware
- ----------------------------------------------------------------------------------------------------
Moves, Adds and Changes - Transfer telephone systems to new user locations
- Add telephones or expansion cards in a telephone
system
- Change system and user features
- ----------------------------------------------------------------------------------------------------
Long Distance Services - Offer a full range of long distance and network
services
- ------------------------------------------
</TABLE>
24
<PAGE> 26
Communications Solutions. Communications Solutions, which represented 50%
of the Company's fiscal year 1998 revenues, focuses on the design, sale and
implementation of communications and other technology equipment. Communications
Solutions provides the following products and services:
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------------
COMMUNICATIONS SOLUTIONS
CATEGORY OF PRODUCT OR SERVICE DESCRIPTION OF PRODUCTS AND SERVICES
Telephone Systems - Design, install and implement telephone switching
systems
- Supply telephone switching systems
- ----------------------------------------------------------------------------------------------------
Call Center Systems - Design, install and implement call center systems
- Supply call center systems
- ----------------------------------------------------------------------------------------------------
Call Processing Systems - Design, install and implement voice response and voice
messaging products
- Supply voice response and voice messaging products
- ----------------------------------------------------------------------------------------------------
Conferencing Systems - Design, install and implement conferencing systems
- Provide audio, video and data conferencing products
- ----------------------------------------------------------------------------------------------------
Refurbished Equipment - Refurbish and resell previously owned Siemens, Nortel,
Iwatsu, Aspect and Isoetec products
- ------------------------------------------
</TABLE>
Financial Services. Financial Services, which represented 2% of the
Company's fiscal year 1998 revenues, provides customers with efficient and
competitive financing for the purchase or lease of products and services.
Financial Services supports the sales process by offering customized lease
structures that eliminate the need for third-party financing.
CUSTOMERS AND ENGAGEMENTS
Norstan focuses its marketing efforts on middle-market and Fortune 500
companies with complex communications and IT requirements. Norstan has served
over 18,000 customers across a broad range of industries over the last three
fiscal years. No single customer accounted for more than 5% of Norstan's total
revenue during any of the last three fiscal years.
Norstan customers during fiscal year 1998 included the following:
NORSTAN IT CONSULTING SERVICES
<TABLE>
<S> <C> <C>
3M Grand Metropolitan Michelin
American Express Harley-Davidson Nationwide Insurance
AT&T IBM State Farm Insurance
British Petroleum Invacare SuperValu
Cargill John Deere US Bancorp
GMAC Kaiser Permanente Williams-Sonoma
</TABLE>
COMMUNICATIONS SERVICES AND COMMUNICATIONS SOLUTIONS
<TABLE>
<S> <C> <C>
American Freightways Cargill Imation
British Petroleum Fortis Insurance Medtronic
Best Buy Harley-Davidson Marquette University
CIBC IBM US Bancorp
</TABLE>
25
<PAGE> 27
Examples of some of Norstan's major engagements include the following:
A Midwest manufacturer began as a Norstan customer in 1977 when Norstan
sold and installed a telephone PBX switch. Over time, Norstan upgraded the
telephone switches for the customer's ten locations and helped ensure that its
communications systems remained current with the latest technology. After
identifying additional communications needs, Norstan provided the customer with
call center software, CTI applications, interactive voice response units and
audio conferencing systems. Norstan currently provides full outsourcing of the
customer's telecommunications operations. In August 1997, Norstan identified
several consulting opportunities that Norstan IT Consulting Services was
uniquely positioned to satisfy. Since that time, Norstan IT Consulting Services
has been involved in a variety of consulting engagements, including developing
network strategies, implementing networks, managing project build schedules and
conducting a Year 2000 audit.
A leading manufacturer of home health care and mobility products has relied
on Norstan IT Consulting Services to lead several key IT projects. For example,
the customer selected Norstan IT Consulting Services to implement an Oracle ERP
system that will replace its core legacy applications. Included in this ERP
implementation are the development of a product configurator and web-based order
entry system, both of which will be integrated with the Oracle application
suite. Norstan's IT Consulting Services has also led the implementation of Lotus
Notes, which will serve as the customer's enterprise platform for messaging and
groupware applications. During this implementation, Norstan's IT Consulting
Services personnel have developed key interdepartment workflow applications and
have assisted in reengineering and automating the customer's account service
center.
A Midwest insurance company became a Norstan customer approximately 20
years ago with the installation of multinode PBX systems. Subsequently, this
insurance company has relied on Norstan to upgrade their PBX systems to meet
their capacity and technology requirements. Norstan also implemented a broad
array of communications technologies including interactive voice response units,
voice messaging and callpath, an application bridge that allows CTI. During the
past year, this customer awarded Norstan's Call Center Solutions Group with a
major call center consulting engagement. This engagement involves designing and
assisting with the implementation of a complete call center solution.
STRATEGIC ALLIANCES
The Company believes that its relationships with a wide range of leading
technology companies position Norstan to deliver the appropriate solution to
each customer. IT strategic alliance partners include IBM, Siebel Systems,
Oracle, Lotus, PeopleSoft, Tivoli, Novell and Microsoft. In addition, Siebel
Systems, a leading customer care and sales automation software provider, has
recently granted Premier Consulting Partner status to Connaissance Consulting (a
majority-owned Norstan affiliate).
Communications strategic alliance partners include Siemens, Aspect, VTEL,
PictureTel, Latitude, Cisco Systems, Sprint, Lucent Technologies (formerly
Octel) and Applied Voice Technology. In addition, the Company distributes
complementary communications products that fit specific segments of the
marketplace. These include hybrid switching systems, personal computer-based
voice processing and video conferencing systems, as well as data communications
products from Novell, Newbridge, Bay Networks, Compaq, Lotus and others.
Norstan has been a distributor of Siemens communications equipment since
1976 and is Siemens' largest independent distributor in North America. The
current distributor agreement with Siemens, which commenced in July 1993, has
been renewed through July 27, 1999 while a new distribution agreement is being
negotiated. Norstan and Siemens have also renewed an agreement through July 27,
2003 under which Norstan is an authorized agent for the refurbishment and sale
of previously owned Siemens equipment.
SALES AND MARKETING
Norstan has approximately 500 sales and marketing personnel within the
United States and Canada. The sales force includes product and service
specialists with expertise in IT consulting services, video conferencing,
26
<PAGE> 28
call centers, telecommunications, education and training, and other areas. These
specialists partner with the sales representatives to develop integrated
technology solutions to address the specific technology needs of Norstan's
customers. Norstan uses several techniques to pursue new customer opportunities,
including telemarketing, seminars, participation in trade shows and advertising.
Norstan's sales representatives and specialists use a comprehensive
approach to evaluate each customer's technology needs. The sales representative
begins with a detailed analysis of the customer's current and future
communications and IT systems requirements. After determining the customer's
needs, the sales representative and product specialist develop a solution that
satisfies current and anticipated requirements. Norstan's consulting and
operations teams then work with the customer to plan the delivery and
implementation of the solution and to identify required training. By planning
the precise requirements of each phase of the solution delivery, Norstan's
specialists are able to minimize service interruption for the customer. Norstan
also provides an ongoing support program tailored to meet the customer's
specific application requirements that incorporates remote diagnostics, in-field
service and support, additional training and help desk support from Norstan's
customer support representatives.
Norstan's marketing strategy is to capture a larger portion of existing
customers' communications and IT budgets and to identify and develop new
customer relationships. In particular, the Company believes that its installed
base of communications systems customers offers extensive opportunities for the
marketing of IT consulting services. Management also believes that Norstan IT
Consulting Services will be a source of additional communications business.
Norstan anticipates that its high quality customer service will support ongoing
marketing efforts, as satisfied customers are more likely to choose Norstan to
supply additional communications and IT products and services. Also, Norstan is
investing in sales management automation systems, which will further efforts to
cross-sell the depth and breadth of its product offerings to existing customers.
CUSTOMER SERVICE
Norstan believes that providing exceptional customer service is an
important element of its ability to compete effectively in the communications
and IT marketplace. Norstan has invested heavily in new technology that is
designed to enable the Company to resolve a substantial portion of customer
support and service issues quickly and remotely. Norstan coordinates its
customer service response through three remote diagnostics and dispatch centers
located in the Minneapolis, Cleveland and Toronto areas. In fiscal year 1998,
these centers handled over 250,000 customer calls with approximately 46% of the
service-related calls addressed remotely. Only 18% of customer calls were
resolved remotely in fiscal year 1994. The Company's goal for fiscal year 1999
is to resolve in excess of 50% of service calls remotely. For calls requiring
immediate on-site service and support, Norstan maintains a highly trained force
of service technicians, design engineers and customer support representatives.
Norstan has over 125 employees in its three remote diagnostics and dispatch
centers devoted primarily to providing customer service and has 500 service
technicians in the field. With Norstan's remote problem resolution capability
and its highly trained staff of technicians, Norstan is able to promptly resolve
customer support requests. Norstan's commitment to customer service is evidenced
by a recent survey of Norstan's Communications Solutions customers that found an
overall satisfaction rating of 93% in fiscal year 1998.
27
<PAGE> 29
LOCATIONS
The Company currently supports its Norstan IT Consulting Services,
Communications Services and Communications Solutions customers with locations in
the United States and Canada. Norstan IT Consulting Services plans to add
approximately six to eight additional locations during fiscal year 1999. The
Company maintains the following 68 locations in 58 cities:
NORSTAN IT CONSULTING SERVICES
Atlanta, GA
Baltimore, MD
Champaign, IL
Charlotte, NC
Chicago, IL
Cincinnati, OH
Cleveland, OH
Columbia, SC
Columbus, OH
Denver, CO
Des Moines, IA
Greensboro, NC
Greenville, SC
Indianapolis, IN
Milwaukee, WI
Minneapolis, MN
Omaha, NE
Phoenix, AZ
Pittsburgh, PA
Raleigh, NC
Richmond, VA
San Francisco, CA
St. Louis, MO
COMMUNICATIONS SERVICES AND COMMUNICATIONS SOLUTIONS
Albuquerque, NM
Amarillo, TX
Appleton, WI
Austin, TX
Baton Rouge, LA
Birmingham, AL
Calgary, Alberta
Cedar Rapids, IA
Chicago, IL
Cincinnati, OH
Cleveland, OH
Columbus, OH
Davenport, IA
Dayton, OH
Des Moines, IA
Edmonton, Alberta
El Paso, TX
Fargo, ND
Las Vegas, NV
Lexington, KY
Little Rock, AR
London, Ontario
Louisville, KY
Lubbock, TX
Madison, WI
Milwaukee, WI
Minneapolis, MN
Mobile, AL
Montreal, Quebec
New Orleans, LA
Oklahoma City, OK
Omaha, NE
Ottawa, Ontario
Phoenix, AZ
Pittsburgh, PA
Rochester, MN
Shreveport, LA
Sioux Falls, SD
Springdale, AR
Toledo, OH
Toronto, Ontario
Tucson, AZ
Tulsa, OK
Vancouver, British Columbia
Winnipeg, Manitoba
HUMAN RESOURCES
As of June 30, 1998, Norstan had 2,971 employees, of which over 700 were IT
consulting personnel and approximately 840 were communications field technicians
and service consultants. U.S. operations totaled 2,749 employees, including 135
who are covered by collective bargaining agreements. The Company's Canadian
operations had a total of 222 employees.
The Company's success depends in large part on its ability to attract,
develop, motivate and retain highly skilled IT consultants. Qualified technical
employees are in great demand and are likely to remain a limited resource for
the foreseeable future. To retain these resources, Norstan places a strong
emphasis on the career development and training of its IT consultants and has
implemented several unique programs, including its Team Manager initiative. Team
Managers ensure that employee skills remain current with the industry and that
the employee is given adequate development experiences to create a fulfilling
work environment. Norstan also offers a competitive combination of employee
benefits and incentives, including employee stock options, stock purchase
programs and an attractive revenue-sharing arrangement whereby an individual
consultant's base compensation is supplemented with a percentage of the revenue
that the individual bills. Finally, Norstan IT Consulting Services has developed
a proprietary program in which key individuals in the organization are
28
<PAGE> 30
charged with and rewarded for the successful opening of new branch office
locations. This program helps Norstan IT Consulting Services retain personnel
and expand its geographic reach.
Norstan also dedicates significant resources to recruiting consultants with
specific technical and industry expertise. In connection with its hiring
efforts, the Company employs internal recruiters and relies on personal and
business contacts to recruit professionals through referrals, contacts at trade
shows and job fairs.
The Company uses formal training programs to further develop its
professional resources. The Company also uses mentoring by placing junior IT
professionals under the guidance of senior IT professionals on certain customer
engagements. In addition, in order to expand the skills and develop the careers
of the Company's consultants and technical staff, the Company recently
introduced computer-based training resources covering 450 course topics.
COMPETITION
The communications industry is intensely competitive and rapidly changing.
Norstan's primary competitors in this area include Lucent Technologies, Nortel
and the RBOCs. Many of its competitors have longer operating histories, greater
financial and human resources, and greater name recognition than Norstan. The
passage of the Telecommunications Act of 1996 has fostered competition by
providing access to a number of entities that were previously precluded from the
industry. As a result of this legislation, the pace of consolidation in the
industry has accelerated. These changes in the regulatory environment could
potentially affect Norstan's ability to compete successfully.
The market for IT services includes a large number of competitors, is
subject to rapid change and is highly competitive. Primary competitors include
participants from a variety of market segments, including national accounting
firms, systems consulting and implementation firms, application software firms,
service groups of computer equipment companies, facilities management companies,
general management consulting firms and programming companies. Many of these
competitors have significantly greater financial, technical and marketing
resources and greater name recognition than the Company. In addition, the
Company competes with its customers' internal resources, particularly when these
resources represent a fixed cost to the customer. Such competition may impose
additional pricing pressures on the Company. See "Risk Factors -- Competition."
Subject to this competitive environment, the Company competes on the basis
of: (i) the depth and breadth of services and products offered; (ii) the ability
to integrate IT and communications systems as the related technologies continue
to converge; (iii) its reputation for providing superior customer service; and
(iv) the number and strength of customer relationships.
INTELLECTUAL PROPERTY RIGHTS
The Company relies upon a combination of nondisclosure and other
contractual arrangements with certain key employees, and trade secret, copyright
and trademark laws to protect its proprietary rights and the proprietary rights
of third parties from whom the Company licenses intellectual property. Norstan
enters into confidentiality agreements with certain of its employees and limits
the distribution of proprietary information. See "Risk Factors -- Limited
Protection of Intellectual Property Rights."
GOVERNMENT REGULATION
Except for the sale of long distance service, the Company is not subject to
any government regulations that 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 47 states. The Company is also subject to FCC regulations, which
require the filing of federal tariffs.
29
<PAGE> 31
PROPERTIES
The executive offices of the Company are located in Plymouth, Minnesota,
where the Company leases approximately 53,400 square feet of office space. The
Company expects to move into new headquarters located in Hopkins, Minnesota in
the quarter ending October 31, 1998. The Company leases approximately 165,000
square feet of office space in this new location. The Company also has area
headquarters in Brecksville, Ohio, and Phoenix, Arizona, where the Company
leases approximately 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 47 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. The Company also leases
sales and service offices in seven other cities within the Canadian provinces of
Alberta, Manitoba, Ontario, Quebec and British Columbia. The Company believes
that the above-mentioned facilities are adequate and suitable for its current
needs.
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.
30
<PAGE> 32
MANAGEMENT
The following table sets forth certain information with respect to the
Company's executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITIONS WITH THE COMPANY
<S> <C> <C>
Paul Baszucki........................ 58 Chairman of the Board of Directors and Director
David R. Richard..................... 56 President, Chief Executive Officer and Director
Richard Cohen........................ 54 Vice Chairman of the Board of Directors and
Director
Kenneth S. MacKenzie................. 57 Executive Vice President and Chief Financial
Officer
Kevin E. Paulsen..................... 43 Executive Vice President of Global Services
James J. Radabaugh................... 51 Executive Vice President of Communications
Solutions
Roger D. Van Beusekom................ 59 Executive Vice President of Financial Services
Constance M. Levi.................... 58 Director
Gerald D. Pint....................... 62 Director
Dr. Jagdish N. Sheth................. 59 Director
Herbert F. Trader.................... 61 Director
</TABLE>
Paul Baszucki has been Chairman of the Board of Directors of the Company
since May 1997 and has served as a director since 1975. He was Chief Executive
Officer of the Company from 1986 to May 1997. Mr. Baszucki was Co-Chairman of
the Board of Directors of the Company from June 1995 to May 1997 and Vice
Chairman of the Board of Directors of the Company from 1987 to June 1995. He
served as President and Chief Operating Officer of the Company from 1984 to
1987. Prior to 1984, Mr. Baszucki was Chief Executive Officer of Norstan
Communications. Mr. Baszucki is also a director of Washington Scientific
Industries and G & K Services.
David R. Richard has been President and Chief Executive Officer of the
Company since May 1997 and has served as a director since September 1997. From
January 1996 to May 1997, Mr. Richard served as General Manager of Services for
IBM North America, and from April 1992 to January 1996, he was General Manager
of the Southwestern Area for IBM.
Richard Cohen has been Vice Chairman of the Board of Directors of the
Company since 1984 and has served as a director since 1971. Mr. Cohen served as
Treasurer of the Company from 1971 to June 1997 and Chief Financial Officer of
the Company from May 1991 to June 1997.
Kenneth S. MacKenzie has been Executive Vice President and Chief Financial
Officer of the Company since June 1997. From March 1996 to June 1997, Mr.
MacKenzie served as Vice President of Strategic Alliances of Manpower, an
employment services organization. From December 1995 to March 1996, Mr.
MacKenzie was employed as Vice President of McKesson Drug, a distributor of
drugs and toiletries. From December 1994 to December 1995, he was Director of
Managed Services of Manpower. From August 1992 to December 1994, Mr. MacKenzie
was General Manager of Tascor, an outsourcing services organization. From April
1990 to August 1992, he was Chief Financial Officer of Eduquest, an IBM
educational business unit.
Kevin E. Paulsen has served as Executive Vice President of Global Services
since August 1997. From 1977 to 1997, Mr. Paulsen was employed by IBM. During
the period from August 1996 to August 1997, Mr. Paulsen served as Vice President
of Integration Services of IBM Global Services for IBM's Midwestern Area. From
January 1995 to July 1996, Mr. Paulsen was Director of Integration Services for
the Texas and Louisiana territories of IBM Global Services. During 1994, he was
Business Operations Executive for Consulting and Systems Integration for IBM's
Southwestern Area. During 1993, Mr. Paulsen was Business Unit Executive for
IBM's Consulting Services for Texas general business accounts, and from January
1991 through December 1992, Mr. Paulsen was the Business Planning Manager for
IBM's Southwestern Area.
31
<PAGE> 33
James J. Radabaugh has been the Executive Vice President of Communications
Solutions since May 1996. Mr. Radabaugh has been employed by Norstan since 1990,
serving in a variety of capacities, including operations, customer services and
field support. Prior to 1990, Mr. Radabaugh was employed by ROLM Corporation in
various management positions.
Roger D. Van Beusekom has been an Executive Vice President of Financial
Services since February 1996. From May 1994 to February 1996, he was Executive
Vice President and General Manager of Norstan Financial Services. From August
1986 to May 1994, he was President of Norstan Financial Services.
Constance M. Levi has served as a director since 1993. She was President of
the Greater Minneapolis Chamber of Commerce from August 1988 until her
retirement in 1994. She is a Trustee of the Lutheran Brotherhood Family of
Funds. She was formerly the chairperson of Hamline University Board, Chair of
the Ethics Division of the Amdahl Commission and Majority Leader of the
Minnesota House of Representatives. She is or has been a director or member of
numerous governmental, public service, and nonprofit boards and organizations.
Gerald D. Pint has served as a director since 1983. Since 1993 he has been
a telecommunications consultant. He was the Group Vice President for the Telecom
Systems Group of 3M from 1989 until his retirement from 3M in 1993. He was Group
Vice President for Electro Telecommunications Group of 3M from 1982 to 1989. Mr.
Pint is also a director of Inventronics and Communications Systems.
Dr. Jagdish N. Sheth has served as a director since 1995. He has been the
Charles H. Kellstadt Professor of Marketing at Emory University's Goizueta
Business School since 1991. Prior to his present position, he was the Robert E.
Brooker Professor of Marketing at the University of Southern California, the
Walter H. Stellner Distinguished Professor of Marketing at the University of
Illinois, and served on the faculty of Columbia University as well as of the
Massachusetts Institute of Technology. Dr. Sheth is nationally and
internationally known for his scholarly contributions in the areas of marketing,
customer satisfaction, global competition and strategic thinking.
Herbert F. Trader has served as a director since 1983. Mr. Trader has been
a consultant specializing in international marketing and management and in
telecommunication-delivered computer services since 1995. Mr. Trader was Vice
President and Director, International Programs of William C. Norris Institute, a
nonprofit corporation which promotes the use of computer technology to enhance
education and information exchange on an international level, from 1991 to 1995.
From 1987 until his retirement in 1991, he was Vice President, Training and
Education Group, for Control Data Corporation, a computer company. He was
President of the Business Development Group for Control Data Corporation from
1985 to 1987. Mr. Trader is also a director of Jump-Tech.
The Company's executive officers are appointed annually by, and serve at
the discretion of, the Board of Directors. Each executive officer is a full-time
employee of the Company. The Board of Directors currently consists of seven
members who are elected at each annual shareholders' meeting.
32
<PAGE> 34
SELLING SHAREHOLDERS
The following table sets forth the number of shares of Common Stock owned
by each Selling Shareholder as of the date hereof and after giving effect to
this offering. The Company will not receive any proceeds from the sale of Common
Stock by the Selling Shareholders. Except where otherwise noted, each person in
the following table has, to the knowledge of the Company, sole voting and
investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO SHARES TO OWNED AFTER
THE OFFERING(1) BE SOLD THE OFFERING(1)
-------------------- IN THE --------------------
NAME NUMBER PERCENT OFFERING NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
Dennis Graham..................................... 134,209 1.3% 50,000 84,209 *
Nellrose Elliott-Graham........................... 134,362 1.3 30,000 104,362 *
June Simpson Elliott.............................. 38,389 * 7,000 31,389 *
Robert James Elliott.............................. 38,389 * 7,000 31,389 *
</TABLE>
- ---------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "Commission") and generally includes
voting or investment power with respect to securities. Shares of Common
Stock subject to options, warrants and convertible securities currently
exercisable or convertible, or exercisable or convertible within 60 days,
are deemed outstanding, including for purposes of computing the percentage
ownership of the person holding such option, warrant or convertible
security, but not for purposes of computing the percentage of any other
holder.
33
<PAGE> 35
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement dated
, 1998 (the "Underwriting Agreement"), the underwriters named
below (the "Underwriters"), who are represented by Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") and Robert W. Baird & Co. Incorporated (the
"Representatives"), have severally agreed to purchase from the Company and the
Selling Shareholders the respective number of shares of Common Stock set forth
opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Robert W. Baird & Co. Incorporated..........................
---------
Total.................................................. 2,200,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The Underwriters are obligated to purchase and
accept delivery of all shares of Common Stock offered hereby (other than those
covered by the over-allotment option described below) if any are purchased.
The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the offering price set forth on the cover page of
this Prospectus and in part to certain dealers (including the Underwriters) at
such price less a concession not in excess of $ per share. The Underwriters
may allow, and such dealers may re-allow, to certain other dealers a concession
not in excess of $ per share. After this offering, the offering price and
other selling terms may be changed by the Representatives at any time without
notice.
The Company has granted to the Underwriters an option, exercisable within
30 days after the date of this Prospectus, to purchase from time to time, in
whole or in part, up to an aggregate of 330,000 additional shares of Common
Stock at the public offering price less underwriting discounts and commissions.
The Underwriters may exercise such option solely to cover over-allotments, if
any, made in connection with this offering. To the extent that the Underwriters
exercise such option, each Underwriter will become obligated, subject to certain
conditions, to purchase its pro rata portion of such additional shares based on
such Underwriter's percentage underwriting commitment as indicated in the
preceding table.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain civil liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
The Company, its executive officers and directors, and certain shareholders
of the Company (including the Selling Shareholders) have agreed subject to
certain exceptions, not to: (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock; or (ii) enter into any
swap or other arrangement that transfers all or a portion of the economic
consequences associated with the ownership of any Common Stock (regardless of
whether any of the transactions described in clause (i) or (ii)is to be settled
by the delivery of Common Stock, or such other securities, in cash or otherwise)
for a period of 90 days after the date of this Prospectus without the prior
written consent of DLJ. In addition, during such period, the Company has also
agreed not to file any registration statement with respect to, and each of its
executive officers, directors and certain stockholders of the Company (including
the Selling Shareholders) has agreed not to make any demand for, or exercise any
right with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
without DLJ's prior written consent.
Other than in the United States, no action has been taken by the Company,
the Selling Shareholders or the Underwriters that would permit a public offering
of the shares of Common Stock offered hereby in any jurisdiction where action
for that purpose is required. The shares of Common Stock offered hereby may not
be
34
<PAGE> 36
offered or sold, directly or indirectly, nor may this Prospectus or any other
offering material or advertisements in connection with the offer and sale of any
such shares of Common Stock be distributed or published in any jurisdiction,
except under circumstances that will result in compliance with the applicable
rules and regulations of such jurisdiction. Persons into whose possession this
Prospectus comes are advised to inform themselves about and to observe any
restrictions relating to the offering of the Common Stock and the distribution
of this Prospectus. This Prospectus does not constitute an offer to sell or a
solicitation of any offer to buy any shares of Common Stock offered hereby in
any jurisdiction in which such an offer or a solicitation is unlawful.
The Underwriters and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the Commission. In general, a passive market maker may not bid
for or purchase shares of Common Stock at a price that exceeds the highest
independent bid. In addition, the net daily purchases made by any passive market
maker generally may not exceed 30% of its average daily trading volume in the
Common Stock during a specified two-month prior period, or 200 shares, whichever
is greater. A passive market maker must identify passive market making bids as
such on the Nasdaq electronic inter-dealer reporting system. Passive market
making may stabilize or maintain the market price of the Common Stock above
independent market levels. Underwriters and dealers are not required to engage
in passive market making and may end passive market making activities at any
time.
In connection with this offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot this offering,
creating a syndicate short position. In addition, the Underwriters may bid for
and purchase shares of Common Stock in the open market to cover syndicate short
positions or to stabilize the price of the Common Stock. These activities may
stabilize or maintain the market price of the Common Stock above independent
market levels. The Underwriters are not required to engage in these activities
and may end any of these activities at any time.
35
<PAGE> 37
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated in this Prospectus by reference and made a part hereof:
(i) the Company's Annual Report on Form 10-K for the fiscal year ended
April 30, 1998; and
(ii) the description of the Common Stock contained in its Registration
Statement on Form 8-A filed pursuant to Section 12 of the Exchange Act (and
all amendments thereto and reports filed for the purpose of updating such
description).
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), subsequent to the date of this Prospectus and prior to the
termination of the offering described herein, shall be deemed to be incorporated
by reference in this Prospectus from the respective dates those documents are
filed. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, on the written or oral request of such
person, a copy of any or all of the documents referred to above which have been,
or may be, incorporated in this Prospectus by reference, other than exhibits to
such documents. Request for such copies should be directed to Mr. John
Nardecchia, Norstan, Inc., 6900 Wedgwood Road, Suite 150, Maple Grove, Minnesota
55311, (612) 420-1186.
AVAILABLE INFORMATION
This Prospectus is part of a Registration Statement on Form S-3 (together
with all amendments and exhibits thereto, the "Registration Statement") which
the Company has filed with the Commission under the Securities Act relating to
the securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information, reference is made to the Registration Statement. Statements
made in this Prospectus as to the contents of any contract, agreement or other
document referred to herein are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference.
The Company is subject to the informational reporting requirements of the
Exchange Act and in accordance therewith files reports, proxy and information
statements and other information with the Commission. Such reports, proxy and
information statements and other information as well as the Registration
Statement and Exhibits of which this Prospectus is a part filed by the Company
may be inspected and copied at the public reference facilities of the
Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC
20549, as well as at the following Regional Offices: 7 World Trade Center, 13th
Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such material can be obtained from the
Commission by mail at prescribed rates. Requests should be directed to the
Commission's Public Reference Section, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, DC 20549. Material filed by the Company can also be
inspected at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street N.W., Washington, D.C. 20006. The Company is an electronic
filer with the Commission pursuant to and within the meaning of Rules 101 and
901 of Regulation S-T. The Commission maintains a site on the World Wide Web
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the Commission's site is: http://www.sec.gov.
36
<PAGE> 38
LEGAL MATTERS
The legality of the issuance of the shares offered hereby will be passed
upon for the Company by Maslon Edelman Borman & Brand, LLP, Minneapolis,
Minnesota. Certain legal matters will be passed upon for the Underwriters by
Sachnoff & Weaver, Ltd., Chicago, Illinois.
EXPERTS
The consolidated financial statements of Norstan, Inc. as of April 30, 1997
and 1998 and for each of the three years in the period ended April 30, 1998
included in this Prospectus and elsewhere in the Registration Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
37
<PAGE> 39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public Accountants.................... F-2
Consolidated Statements of Operations for the years ended
April 30, 1996, 1997 and 1998............................. F-3
Consolidated Balance Sheets as of April 30, 1997 and 1998... F-4
Consolidated Statements of Shareholders' Equity for the
years ended April 30, 1996, 1997 and 1998................. F-5
Consolidated Statements of Cash Flows for the years ended
April 30, 1996, 1997 and 1998............................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
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.
F-1
<PAGE> 40
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 1998,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended April 30, 1998. 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 1998, and the results of their operations
and their cash flows for each of the three years in the period ended April 30,
1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
June 12, 1998
F-2
<PAGE> 41
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------------
1996 1997 1998
<S> <C> <C> <C>
REVENUES
Global Services
IT Consulting Services................................. $ 14,426 $ 54,467 $ 92,746
Communications Services................................ 121,971 131,596 127,197
-------- -------- --------
Total Global Services................................ 136,397 186,063 219,943
Communications Solutions.................................. 179,332 205,983 228,979
Financial Services........................................ 5,635 6,029 7,443
-------- -------- --------
Total revenues......................................... 321,364 398,075 456,365
-------- -------- --------
COST OF SALES
Global Services
IT Consulting Services................................. 11,000 43,315 66,457
Communications Services................................ 86,669 93,880 89,550
-------- -------- --------
Total Global Services................................ 97,669 137,195 156,007
Communications Solutions.................................. 130,090 150,204 168,965
Financial Services........................................ 2,221 2,160 2,444
-------- -------- --------
Total cost of sales.................................... 229,980 289,559 327,416
-------- -------- --------
GROSS MARGIN................................................ 91,384 108,516 128,949
Selling, general and administrative expenses.............. 75,973 89,311 103,709
Restructuring charge...................................... -- -- 14,667
-------- -------- --------
OPERATING INCOME............................................ 15,411 19,205 10,573
Interest expense.......................................... (1,351) (1,866) (3,909)
Interest and other income (expense), net.................. 89 (22) (18)
-------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 14,149 17,317 6,646
Provision for income taxes................................ 5,660 7,100 2,791
-------- -------- --------
NET INCOME.................................................. $ 8,489 $ 10,217 $ 3,855
======== ======== ========
NET INCOME PER SHARE -- BASIC............................... $ 1.00 $ 1.12 $ 0.40
======== ======== ========
NET INCOME PER SHARE -- DILUTED............................. $ 0.94 $ 1.08 $ 0.39
======== ======== ========
WEIGHTED AVERAGE SHARES -- BASIC............................ 8,526 9,140 9,719
======== ======== ========
WEIGHTED AVERAGE SHARES -- DILUTED.......................... 8,985 9,418 9,917
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 42
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
AS OF APRIL 30,
--------------------
1997 1998
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................... $ 5,147 $ 1,869
Accounts receivable, net of allowances for doubtful
accounts of $1,783 and $1,171........................... 76,027 97,206
Current lease receivables................................. 19,595 18,751
Inventories............................................... 7,636 10,008
Costs and estimated earnings in excess of billings of
$11,948 and $17,335..................................... 11,556 19,091
Deferred income tax benefits.............................. 3,954 2,488
Prepaid expenses, deposits and other...................... 2,925 8,108
-------- --------
Total current assets............................... 126,840 157,521
-------- --------
PROPERTY AND EQUIPMENT
Machinery and equipment................................... 93,895 75,712
Less -- accumulated depreciation and amortization......... (48,409) (37,713)
-------- --------
Net property and equipment.............................. 45,486 37,999
-------- --------
OTHER ASSETS
Goodwill, net of accumulated amortization of $5,443 and
$7,979.................................................. 21,264 43,206
Lease receivables, net of current portion................. 29,775 34,998
Other..................................................... 808 1,884
-------- --------
Total other assets................................. 51,847 80,088
-------- --------
$224,173 $275,608
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt...................... $ 389 $ 3,257
Current maturities of discounted lease rentals............ 13,878 14,758
Accounts payable.......................................... 24,486 24,135
Deferred revenue.......................................... 18,680 19,953
Accrued liabilities
Salaries and wages...................................... 13,065 15,123
Warranty costs.......................................... 2,348 1,776
Other liabilities....................................... 10,721 10,509
Billings in excess of costs and estimated earnings of
$12,829 and $16,390..................................... 5,789 9,442
-------- --------
Total current liabilities.......................... 89,356 98,953
LONG-TERM DEBT, net of current maturities................... 18,284 52,440
DISCOUNTED LEASE RENTALS, net of current maturities......... 24,043 20,883
DEFERRED INCOME TAXES....................................... 8,120 5,661
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 3 AND 11)
SHAREHOLDERS' EQUITY
Common stock -- $.10 par value; 40,000,000 authorized
shares; 9,387,458 and 9,963,716 shares issued and
outstanding............................................. 939 996
Capital in excess of par value............................ 34,556 44,741
Retained earnings......................................... 50,192 54,048
Unamortized cost of stock................................. (142) (641)
Foreign currency translation adjustments.................. (1,175) (1,473)
-------- --------
Total shareholders' equity......................... 84,370 97,671
-------- --------
$224,173 $275,608
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 43
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK FOREIGN
-------------------- CAPITAL IN CURRENCY
SHARES EXCESS OF RETAINED UNAMORTIZED TRANSACTION
OUTSTANDING AMOUNT PAR VALUE EARNINGS COST OF STOCK ADJUSTMENTS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 30, 1995..... 4,215 $422 $26,031 $31,486 $(149) $ (806) $56,984
Stock issued for employee
benefit plans........... 144 14 2,024 -- 55 -- 2,093
Foreign currency
translation
adjustments............. -- -- -- -- -- (49) (49)
Effect of two-for-one
stock split............. 4,359 436 (436) -- -- -- --
Net income................ -- -- -- 8,489 -- -- 8,489
----- ---- ------- ------- ----- ------- -------
BALANCE, APRIL 30, 1996..... 8,718 872 27,619 39,975 (94) (855) 67,517
Stock issued for employee
benefit plans........... 531 53 4,951 -- (48) -- 4,956
Stock issued for
acquisition............. 138 14 1,986 -- -- -- 2,000
Foreign currency
translation
adjustments............. -- -- -- -- -- (320) (320)
Net income................ -- -- -- 10,217 -- -- 10,217
----- ---- ------- ------- ----- ------- -------
BALANCE, APRIL 30, 1997..... 9,387 939 34,556 50,192 (142) (1,175) 84,370
Stock issued for employee
benefit plans........... 258 25 3,892 1 (499) -- 3,419
Stock issued for
acquisition............. 319 32 6,293 -- -- -- 6,325
Foreign currency
translation
adjustments............. -- -- -- -- -- (298) (298)
Net income................ -- -- -- 3,855 -- -- 3,855
----- ---- ------- ------- ----- ------- -------
BALANCE, APRIL 30, 1998..... 9,964 $996 $44,741 $54,048 $(641) $(1,473) $97,671
===== ==== ======= ======= ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 44
NORSTAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-----------------------------------
1996 1997 1998
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................ $ 8,489 $ 10,217 $ 3,855
Adjustments to reconcile net income to net cash
provided by operating activities:
Restructuring charge............................... -- -- 14,667
Depreciation and amortization...................... 12,517 16,964 21,115
Deferred income taxes.............................. (465) (45) 1,944
Changes in operating items, net of acquisition
effects:
Accounts receivable.............................. (3,961) (16,319) (18,803)
Inventories...................................... 167 3,532 (2,397)
Costs and estimated earnings in excess of
billings...................................... 5,715 (6,371) (7,584)
Prepaid expenses, deposits and other............. (111) (386) 498
Accounts payable................................. (1,403) 7,047 (745)
Deferred revenue................................. 2,815 468 1,291
Accrued liabilities.............................. 1,252 2,514 (5,823)
Income taxes payable/receivable.................. 510 (144) (6,136)
Billings in excess of costs and estimated
earnings...................................... 2,445 1,223 3,665
--------- --------- ---------
Net cash provided by operating activities..... 27,970 18,700 5,547
--------- --------- ---------
INVESTING ACTIVITIES
Additions to property and equipment, net.............. (14,385) (24,219) (19,873)
Cash paid for acquisitions, net of cash acquired...... -- (11,794) (20,450)
Investment in lease contracts......................... (17,622) (31,545) (28,049)
Collections from lease contracts...................... 18,240 21,949 23,589
Other, net............................................ (178) 314 (124)
--------- --------- ---------
Net cash used for investing activities............. (13,945) (45,295) (44,907)
--------- --------- ---------
FINANCING ACTIVITIES
Repayment of debt assumed in acquisition.............. -- (1,743) (2,013)
Borrowings on long-term debt.......................... 112,435 227,820 290,181
Repayments of long-term debt.......................... (128,993) (210,161) (253,102)
Borrowings on discounted lease rentals................ 13,173 22,396 13,472
Repayments of discounted lease rentals................ (12,767) (12,583) (15,717)
Proceeds from sale of common stock.................... 1,615 3,017 2,868
Tax benefits from shares issued to employees.......... 340 1,869 385
--------- --------- ---------
Net cash provided by (used for) financing
activities....................................... (14,197) 30,615 36,074
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH................. (3) (6) 8
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH......................... (175) 4,014 (3,278)
CASH, BEGINNING OF YEAR................................. 1,308 1,133 5,147
--------- --------- ---------
CASH, END OF YEAR....................................... $ 1,133 $ 5,147 $ 1,869
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 45
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS:
Norstan is a technology services company providing information technology
("IT") and communications systems solutions to over 18,000 customers in the
United States, Canada and England. Norstan, Inc. ("Norstan" or the "Company")
manages the operations of its subsidiaries, Norstan Communications, Inc.
("NCI"), Norstan Canada Inc. ("NCDA"), Connect Computer Company ("Connect"),
Vadini, Inc. (d/b/a PRIMA Consulting, Inc.) ("PRIMA"), Connaissance Consulting,
LLC ("Connaissance"), Norstan Financial Services, Inc. ("NFS"), Norstan Network
Services, Inc. ("NNS"), Norstan Network Services, Inc. of New Hampshire, Norstan
International, Inc. ("NII") and Norstan-UK Limited. The Company is headquartered
in Minneapolis, Minnesota, with sales and service offices in 68 locations in the
United States and Canada. The Company provides IT consulting and communications
services, communications and technology products and competitive financing
through its three operating units, Global Services, Communications Solutions and
Financial Services. Through strategic partnerships and acquisitions, the Company
has become a single-source provider for its customers' integrated voice, video
and data network solutions.
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:
Global Services' revenues from IT consulting, application development and
systems integration are recognized as services are provided. Revenues from
maintenance service contracts, moves, adds, and changes, resale of long distance
services, and network integration services, are also recognized as the services
are provided. Communications Solutions' revenues from the sale and installation
of products and systems are recognized under the percentage-of-completion method
of accounting for long-term contracts, while revenues generated from the
secondary equipment market are recognized upon performance of contractual
obligations, which is generally upon installation or shipment. Financial
Services' revenues are recognized over the life of the related lease receivables
using the effective interest method. In addition, Norstan grants credit to
customers and generally does not require collateral or any other security to
support amounts due, other than equipment originally leased.
Fair Value of Financial Instruments:
Fair values of long-term obligations, lease receivables and trade
receivables were estimated at their carrying values at April 30, 1997 and 1998,
and were estimated in accordance with the requirements of Statement of Financial
Accounting Standards ("SFAS") No. 107, "Disclosures about Fair Value of
Financial Instruments."
F-7
<PAGE> 46
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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 that
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 are 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 value 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 $6,410,000 as of
April 30, 1997 and 1998, respectively (see Note 3). 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. In the event that facts and
circumstances indicate that the carrying amount of property may not be
recoverable, an evaluation would be performed using such factors as recent
operating results, projected cash flows and management's plans for future
operations.
Goodwill:
Goodwill is being amortized on a straight-line basis over 15-20 years. The
Company periodically evaluates whether events or circumstances have occurred
that 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.
Earnings Per Share Data and Stock Split:
In the fiscal year ended April 30, 1998, the Company adopted SFAS No. 128
"Earnings per Share," which requires disclosure of basic earnings per share
("EPS") and diluted EPS, which replaces the existing primary EPS and fully
diluted EPS, as defined by Accounting Principles Board ("APB") Opinion No. 15.
Basic EPS is computed by dividing net income by the weighted average number of
shares of common stock outstanding during the year. Diluted EPS is computed
similarly to EPS as previously reported provided that, when applying the
treasury stock method to common equivalent shares, the Company must use its
average share price for the period rather than the more dilutive greater of the
average share price or end-of-period share price required by APB Opinion No. 15.
F-8
<PAGE> 47
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As a result of the adoption of SFAS No. 128, the Company's reported
earnings per share for all prior periods were restated. The effect of this
accounting change on reported EPS data is as follows:
<TABLE>
<CAPTION>
YEARS ENDED
APRIL 30,
-----------------
1996 1997
<S> <C> <C>
Primary EPS as reported..................................... $0.94 $1.08
Effect of SFAS No. 128...................................... 0.06 0.04
----- -----
Basic EPS as restated....................................... $1.00 $1.12
===== =====
Fully diluted EPS as reported............................... $0.94 $1.08
Effect of SFAS No. 128...................................... -- --
----- -----
Diluted EPS as restated..................................... $0.94 $1.08
===== =====
</TABLE>
A reconciliation of EPS calculations under SFAS No. 128 is as follows (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------
1996 1997 1998
<S> <C> <C> <C>
Net income.................................................. $8,489 $10,217 $3,855
====== ======= ======
Weighted average common shares outstanding -- Basic......... 8,526 9,140 9,719
Effect of dilutive securities:
Stock option plans........................................ 452 269 196
Employee stock purchase plan.............................. 7 9 2
------ ------- ------
Weighted average common shares outstanding --Diluted... 8,985 9,418 9,917
====== ======= ======
Net income per share -- Basic............................... $ 1.00 $ 1.12 $ 0.40
====== ======= ======
Net income per share -- Diluted............................. $ 0.94 $ 1.08 $ 0.39
====== ======= ======
</TABLE>
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.
Supplemental Cash Flow Information:
Supplemental disclosure of cash flow information is as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------
1996 1997 1998
<S> <C> <C> <C>
Cash paid for:
Interest.................................................. $3,608 $3,996 $6,457
Income taxes.............................................. 5,218 4,995 5,545
Non-cash investing and financing activities:
Stock issued for acquisitions............................. $ -- $2,000 $6,325
Earnout and noncompete agreements related to
acquisitions........................................... $ -- $2,667 $2,333
</TABLE>
F-9
<PAGE> 48
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Recently Issued Accounting Standards:
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130, establishes
requirements for disclosure of comprehensive income and becomes effective for
the Company's fiscal year ended April 30, 1999. Reclassification of earlier
financial statements for comparative purposes is required. The Company believes
SFAS No. 130 will not have a significant impact on the Company's financial
statements.
The Company adopted Statement of Position ("SOP") 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use," effective
May 1, 1997. The SOP requires the Company to capitalize certain costs incurred
in connection with developing or obtaining internal-use software. The Company
capitalized approximately $6.0 million of costs associated with internal-use
software developed or obtained during fiscal year 1998.
NOTE 3 -- RESTRUCTURING:
During fiscal year 1998, the Company recorded a restructuring charge of
$14.7 million in connection with management's plan to reduce costs, consolidate
and reorganize operations, and improve operating efficiencies. Restructuring
efforts focused primarily on the following: (i) consolidation of seven
semi-autonomous geographic sales and service organizations into a single, more
focused sales and operations organization; (ii) the consolidation of 36
warehouses and parts locations into three strategically located distribution
centers; and (iii) the reorganization and integration of the IT consulting
services operations, including the Norstan Call Center Solutions Group, Connect,
and PRIMA into a single, customer-focused organization. The restructuring charge
relates primarily to the write-down of certain assets to their fair market
values ($12.2 million), severance and employee benefit costs ($1.2 million), and
lease termination costs ($1.3 million).
NOTE 4 -- ACQUISITIONS:
On June 4, 1996, the Company acquired 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. 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, 1998, $2.0 million of such consideration
had been paid and the remaining $2.0 million has been earned and accrued). This
transaction resulted in the recording of $18.4 million in goodwill and other
intangible assets, which are being amortized on a straight-line basis over 15
years and three years, respectively.
On September 30, 1997, the Company acquired PRIMA in a transaction
accounted for under the purchase method. PRIMA provides IT consulting services,
including information systems planning and development, consulting and
programming services for collaborative computing solutions and ERP integration
services. The acquisition consideration totaled approximately $27.5 million,
consisting of $19.5 million in cash, $6.3 million of Norstan Common Stock and
$1.7 million paid to certain members of PRIMA management under non-compete
agreements. In addition, the Company agreed to pay up to $3.5 million in
contingent consideration over a three-year period ending April 30, 2000 if
certain financial performance targets are achieved. This transaction resulted in
the recording of $24.9 million in goodwill and other intangible assets, which
are being amortized on a straight-line basis over 15 years and three years,
respectively.
Pro forma information for Connect and PRIMA in the year of acquisition has
not been disclosed as such information was not materially different from the
Company's results of operations.
F-10
<PAGE> 49
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1998, the Company merged with Wordlink in a transaction accounted
for under the pooling-of-interests method. Wordlink delivers network
integration, groupware messaging, Internet/intranet/ e-commerce and education
solutions to business clients operating in a multi-vendor network environment.
The agreement calls for all shares of Wordlink common stock and all vested stock
options issued and outstanding to be converted into approximately $10.3 million
of Norstan common stock. All outstanding Wordlink unvested stock options were
converted to the equivalent value of Norstan stock options. Wordlink's
stockholders' equity and operating results were not material in relation to the
Company's financial statements. As such, the Company will record the combination
without restating prior periods' financial statements.
NOTE 5 -- LEASE RECEIVABLES:
The Company provides financing for the Company's customers and has financed
customer equipment purchases in the amounts of $17,622,000, $31,545,000, and
$28,049,000 during fiscal years ended April 30, 1996, 1997 and 1998,
respectively. Leases are primarily accounted for as sales-type leases for
financial reporting purposes.
The components of lease receivables outstanding are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
AS OF APRIL 30,
-------------------
1997 1998
<S> <C> <C>
Gross lease receivables..................................... $ 53,258 $ 58,136
Residual values............................................. 9,048 8,297
Less:
Unearned income........................................... (11,091) (11,039)
Allowance for financing losses............................ (1,845) (1,645)
-------- --------
Total lease receivables - net............................... 49,370 53,749
Less -- current maturities.................................. (19,595) (18,751)
-------- --------
Long-term lease receivables................................. $ 29,775 $ 34,998
======== ========
</TABLE>
The aggregate amount of gross lease receivables maturing in each of the
five years following April 30, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
APRIL 30, AMOUNT
<S> <C>
1999...................................................... $22,654
2000...................................................... 16,666
2001...................................................... 10,500
2002...................................................... 5,709
2003 and thereafter....................................... 2,607
-------
$58,136
=======
</TABLE>
F-11
<PAGE> 50
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- DEBT OBLIGATIONS:
Long-Term Debt:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
AS OF APRIL 30,
-----------------
1997 1998
<S> <C> <C>
Bank financing:
Revolving credit agreement................................ $ 6,920 $ 385
Certificates of deposit and commercial paper.............. 11,000 52,000
Capital lease obligations and other long-term debt.......... 753 3,312
------- -------
Total long-term debt........................................ 18,673 55,697
Less -- current maturities.................................. (389) (3,257)
------- -------
$18,284 $52,440
======= =======
</TABLE>
Bank Financing:
The Company has an $80.0 million unsecured revolving long-term credit
agreement with certain banks. Up to $30.0 million of borrowings under this
agreement may be in the form of commercial paper. In addition, up to $8.0
million and $6.0 million may be used to support the leasing activities of NFS
and NCDA, respectively. Borrowings under this agreement are due May 31, 2001,
and bear interest at the banks' reference rate (8.50% at April 30, 1998), except
for LIBOR, CD and commercial paper based options, which generally bear interest
at a rate lower than the banks' reference rate (5.9% to 6.7% at April 30, 1998).
Total consolidated borrowings under this agreement at April 30, 1997 and 1998
were $17.9 million and $52.4 million. There were no borrowings on account of NFS
or NCDA at April 30, 1997 and 1998. Annual commitment fees on the unused
portions of the credit facility are 0.25%.
Under the agreement, the Company is required to maintain minimum levels of
EBITDA and certain other financial ratios. The Company has complied with or has
obtained the appropriate waivers for such requirements as of April 30, 1998.
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 during 1998 and 1996.
Short-term borrowing amounts during fiscal year 1997 were as follows:
<TABLE>
<S> <C>
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%
</TABLE>
NOTE 7 -- 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 August 2005.
F-12
<PAGE> 51
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Discounted lease rentals consisted of the following (in thousands):
<TABLE>
<CAPTION>
AS OF APRIL 30,
--------------------
1997 1998
<S> <C> <C>
Nonrecourse borrowings...................................... $ 37,329 $ 35,635
Recourse borrowings......................................... 592 6
-------- --------
Total discounted lease rentals.............................. 37,921 35,641
Less -- current maturities.................................. (13,878) (14,758)
-------- --------
$ 24,043 $ 20,883
======== ========
</TABLE>
Aggregate maturities of discounted lease rentals as of April 30, 1998 are
as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING APRIL 30, AMOUNT
<S> <C>
1999........................................................ $14,758
2000........................................................ 9,978
2001........................................................ 6,438
2002........................................................ 3,222
2003 and thereafter......................................... 1,245
-------
$35,641
=======
</TABLE>
NOTE 8 -- INCOME TAXES:
The domestic and foreign components of income before the provision for
income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
----------------------------
1996 1997 1998
<S> <C> <C> <C>
Domestic.................................................. $13,365 $16,215 $5,914
Foreign................................................... 784 1,102 732
------- ------- ------
$14,149 $17,317 $6,646
======= ======= ======
</TABLE>
The provision (benefit) for income taxes consisted of the following (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
--------------------------
1996 1997 1998
<S> <C> <C> <C>
Current
Domestic.................................................. $5,656 $7,361 $ 410
Foreign................................................... 469 (216) 437
------ ------ ------
6,125 7,145 847
------ ------ ------
Deferred
Domestic.................................................. (235) (572) 2,840
Foreign................................................... (230) 527 (896)
------ ------ ------
(465) (45) 1,944
------ ------ ------
Provision for income taxes............................. $5,660 $7,100 $2,791
====== ====== ======
</TABLE>
F-13
<PAGE> 52
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between the effective tax rate and income taxes computed
using the federal statutory rate were as follows:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------
1996 1997 1998
<S> <C> <C> <C>
Federal statutory rate...................................... 35% 35% 35%
State income taxes, net of federal tax benefit.............. 4 5 5
Goodwill and other, net..................................... 1 1 2
-- -- --
40% 41% 42%
== == ==
</TABLE>
The tax effects of significant temporary differences representing deferred
tax assets and liabilities are as follows as of April 30 (in thousands):
<TABLE>
<CAPTION>
1997 1998
<S> <C> <C>
Accelerated depreciation.................................... $(30,613) $(34,627)
Amortization of intangible assets........................... (497) 146
Capital and operating leases................................ 21,394 27,335
Long-term contract costs.................................... (147) (753)
Inventory and warranty reserves............................. 891 480
Allowance for doubtful accounts............................. 1,470 1,116
Vacation reserves........................................... 1,226 1,016
Self insurance reserve...................................... 578 457
Other, net.................................................. 1,762 1,893
Valuation allowance......................................... (230) (236)
-------- --------
Net deferred tax liabilities........................... $ (4,166) $ (3,173)
======== ========
</TABLE>
NOTE 9 -- STOCK OPTIONS AND STOCK PLANS:
The 1986 Long-Term Incentive Plan of Norstan, Inc. ("1986 Plan") provided
for the granting of non-qualified stock options, incentive stock options and
restricted stock. The 1986 Plan, as amended in fiscal year 1994, provided for a
maximum of 1,600,000 shares to be granted to key employees in the form of stock
options or restricted stock. As of September 20, 1995, with the adoption of a
successor plan, no additional grants will be issued under the 1986 Plan.
The Norstan, Inc. 1995 Long-Term Incentive Plan ("1995 Plan") permits the
granting of non-qualified stock options, incentive stock options, stock
appreciation rights and restricted stock, providing for a maximum of 1,200,000
shares to be granted as performance awards and other stock-based awards. Stock
options are granted at a price equal to the market price on the date of grant,
and are generally exercisable at 20%-25% per year and expire after ten years. At
April 30, 1998, 298,500 shares were available for future grants. During June
1998, the Company granted 535,500 stock options of which approximately 244,000
are contingent upon future shareholder approval.
The Restated Non-Employee Directors' Stock Plan ("Directors' Plan")
provides for a maximum of 292,000 shares to be granted. As determined by the
Board of Directors, options for 20,000 shares are to be granted to each
non-employee director of the Company upon election and additional discretionary
stock options may be amended upon board approval. These options are granted at a
price equal to the market price on the date of grant, exercisable at 20% to 25%
per year and expire after ten years. In addition, 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. As of April 30, 1998, 14,440 shares had
been issued as annual retainers and 92,060 shares were available for future
grant/payment under the Directors' Plan.
F-14
<PAGE> 53
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1995...... N/A N/A 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...... N/A N/A 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 granted.............. 647,000 17.76 -- -- 25,500 20.06
Options canceled............. (104,900) 15.62 (62,200) 10.86 -- --
Options exercised............ (15,300) 15.01 (103,400) 7.00 -- --
-------- ------ -------- ------ -------- ------
BALANCE -- APRIL 30, 1998...... 837,300 $17.06 120,200 $10.92 65,500 $13.96
======== ====== ======== ====== ======== ======
Options exercisable at:
April 30, 1996............... N/A N/A 375,936 $ 4.23 140,000 $ 4.00
======== ====== ======== ====== ======== ======
April 30, 1997............... -- $ -- 103,036 $ 7.43 28,000 $ 9.02
======== ====== ======== ====== ======== ======
April 30, 1998............... 57,100 $14.72 46,640 $10.79 39,500 $11.47
======== ====== ======== ====== ======== ======
</TABLE>
Additional information regarding options outstanding/exercisable at April
30, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF WEIGHTED AVERAGE NUMBER OF WEIGHTED
OPTIONS EXERCISE PRICE AVERAGE REMAINING OPTIONS AVERAGE
OUTSTANDING RANGE EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
<S> <C> <C> <C> <C> <C> <C>
1995 PLAN.............. 150,000 $14.13-$14.19 $14.16 9.00 years 20,000 $14.19
226,300 $15.00-$16.00 $15.03 8.35 years 37,100 $15.01
321,000 $17.50 $17.50 9.26 years -- $ --
140,000 $19.50-$28.25 $22.44 9.57 years -- $ --
------- ------------- ------ ---------- ------ ------
837,300 $14.13-$28.25 $17.06 9.02 years 57,100 $14.72
======= ============= ====== ========== ====== ======
1986 PLAN.............. 17,200 $ 4.25-$6.88 $ 5.17 3.65 years 6,640 $ 4.25
103,000 $11.88 $11.88 7.11 years 40,000 $11.88
------- ------------- ------ ---------- ------ ------
120,200 $ 4.25-$11.88 $10.92 6.61 years 46,640 $10.79
======= ============= ====== ========== ====== ======
DIRECTORS' PLAN........ 20,000 $ 7.63 $ 7.63 4.70 years 20,000 $ 7.63
20,000 $12.50 $12.50 7.39 years 12,000 $12.50
25,500 $20.06 $20.06 9.41 years 7,500 $20.06
------- ------------- ------ ---------- ------ ------
65,500 $ 7.63-$20.06 $13.96 7.36 years 39,500 $11.47
======= ============= ====== ========== ====== ======
</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, 1998, 140,706 shares and 59,100 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 amortized over a three- to four-year period. Amortization
of $137,000, $70,000, and $165,800 has been charged to operations in 1996, 1997
and 1998, respectively.
F-15
<PAGE> 54
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has maintained an Employee Stock Purchase Plan (the "Employee
Stock Plan") since 1980 that allows employees to set aside up to 10% of their
earnings for the purchase of shares of the Company's common stock. The Employee
Stock Plan was amended effective July 1998 to allow shares to be purchased
quarterly rather than annually under the Employee Stock Plan at a price equal to
85% of the low market price on the last day of the quarter rather than the last
day of the calendar year. During fiscal year 1998, 100,813 shares were issued
under this plan and, at April 30, 1998, 483,773 shares were available for future
issuance.
The Company applies APB 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 (in
thousands) and net income per common share would have been decreased to the
following pro forma amounts:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------
1996 1997 1998
<S> <C> <C> <C>
Net income:
As reported............................................... $8,489 $10,217 $3,855
Pro forma................................................. 7,964 9,360 1,968
Net income per common share:
As reported
basic.................................................. $ 1.00 $ 1.12 $ 0.40
diluted................................................ 0.94 1.08 0.39
Pro forma
basic.................................................. $ 0.93 $ 1.02 $ 0.20
diluted................................................ 0.89 0.99 0.20
</TABLE>
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:
<TABLE>
<CAPTION>
EMPLOYEE
1995 PLAN 1986 PLAN DIRECTORS' PLAN STOCK PLAN
<S> <C> <C> <C> <C>
Fiscal 1996 grants................................ -- $6.49 $ 7.29 $2.15
Fiscal 1997 grants................................ $7.95 N/A -- $2.96
Fiscal 1998 grants................................ $8.99 N/A $11.63 $5.54
</TABLE>
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 years 1996, 1997 and 1998:
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------------
1996 1997 1998
<S> <C> <C> <C>
Risk-free interest rate............................. 5.74% 6.28% 6.06%
Expected life of options............................ 7 years 7 years 7 years
Expected life of Employee Stock Plan................ 1 year 1 year 1 year
Expected volatility................................. 57% 35% 36%
Expected dividend yield............................. -- -- --
</TABLE>
F-16
<PAGE> 55
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
NOTE 10 -- 401(K) PLAN:
The Company has 401(k) profit-sharing plans (the "401(k) Plans") 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) Plans were $1,267,000,
$1,746,000 and $1,822,000 for the years ending April 30, 1996, 1997 and 1998,
respectively.
NOTE 11 -- COMMITMENTS AND CONTINGENCIES:
Legal Proceedings:
The Company is involved in legal actions in the ordinary course of its
business. Although the outcomes of any such legal actions cannot be predicted,
in the opinion of management there is no legal proceeding pending against or
involving the Company for which the outcome is likely to have a material adverse
effect upon the consolidated financial position or results of operations of the
Company.
Operating Lease Commitments:
The Company and its subsidiaries conduct a portion of their operations in
leased facilities. Most of the leases require payment of maintenance, insurance,
taxes and other expenses in addition to the minimum annual rentals. Lease
expense, as recorded in the accompanying consolidated statements of operations,
was $10,501,000, $10,914,000, and $11,494,000 in fiscal years 1996, 1997, and
1998, respectively.
Future minimum lease payments under noncancelable leases with initial or
remaining terms of one year or more were as follows at April 30, 1998 (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDING APRIL 30, AMOUNT
<S> <C>
1999........................................................ $ 7,270
2000........................................................ 6,515
2001........................................................ 5,319
2002........................................................ 4,182
2003 and thereafter......................................... 18,611
-------
$41,897
=======
</TABLE>
Vendor Agreements:
Under its agreement with Siemens, the Company purchases communications
equipment and products for field application and installation. The current
distributor agreement with Siemens, which commenced in July 1993, has been
renewed through July 27, 1999 while a new distribution agreement is being
negotiated.
Shareholder Rights Plan:
The Company has a shareholder rights plan, as amended in March 1998 (the
"Plan"), which expires in 2008. Under the Plan, shareholders are deemed the
owners of "Rights" attaching to each share of common stock. Upon any person (an
"Acquiring Person") becoming the owner of 15% or more of the issued and
outstanding shares of the Company's common stock (a "Stock Acquisition Date"),
each Right will enable the holder to purchase an additional share of the
Company's common stock at a price equal to 50% of the then current market price.
In the event that the Company is acquired in a merger or other business
combination transaction where the Company is not the surviving corporation or
50% or more of the Company's assets or
F-17
<PAGE> 56
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
earnings power is sold, each Right entitles the holder to receive, upon exercise
of the Right at the then current purchase price of the Right, common stock of
the acquiring entity that has a value of two times the purchase price of the
Right. The Plan also authorizes the Company, under certain circumstances, to
redeem the Rights at a redemption price of $0.01 per Right and, following any
Stock Acquisition Date, to exchange one share of the Company's common stock for
each Right held by a shareholder other than an Acquiring Person.
NOTE 12 -- BUSINESS SEGMENTS AND GEOGRAPHIC AREAS:
The Company operates in three business segments, Global Services,
Communications Solutions, and Financial Services. Due to the Company's
continuing expansion and growth in the area of IT consulting services, financial
results for Global Services are now reported as (i) IT Consulting Services and
(ii) Communication Services. Norstan IT Consulting Services provides IT services
including ERP and sales management package implementation, groupware consulting,
Internet/intranet/e-commerce solutions, CTI and outsourced facilities
management. Communications Services provides customer support services for
communications systems, including maintenance services, systems modifications
and long distance services. Communications Solutions provides a broad array of
solutions including telephone systems, integrated voice processing, call center
technologies and video/audio/data conferencing solutions. The name change from
Communications Systems to Communications Solutions more accurately reflects the
Company's commitment to provide its customers with design, installation and
implementation services as well the hardware and software components necessary
for successful implementation of complex communications systems. Financial
Services supports the sales process by providing customized financing
alternatives. The Company believes that its breadth of product and service
offerings fosters long-term client relationships, affords cross-selling
opportunities and minimizes the Company's dependence on any single technology or
industry.
F-18
<PAGE> 57
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company elected early adoption of SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information," effective April 30, 1998.
Adoption of this statement required the Company to provide the disclosure of
segment information but did not require significant changes in the way
geographic information was disclosed. Disclosures under SFAS No. 131 are as
follows:
<TABLE>
<CAPTION>
GLOBAL SERVICES
------------------------------ TOTAL
IT CONSULTING COMMUNICATIONS GLOBAL COMMUNICATIONS FINANCIAL
SERVICES SERVICES SERVICES SOLUTIONS SERVICES CORPORATE TOTAL
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
1996:
Revenue.................. $14,426 $121,971 $136,397 $179,332 $ 5,635 $ -- $321,364
Operating income......... 685 6,141 6,826 6,368 2,217 -- 15,411
Depreciation and
amortization........... 389 4,262 4,651 4,350 13 3,503 12,517
Identifiable assets...... 4,081 42,459 46,540 40,807 36,916 36,725 160,988
Capital expenditures..... 475 4,714 5,189 4,900 20 4,276 14,385
1997:
Revenue.................. $54,467 $131,596 $186,063 $205,983 $ 6,029 $ -- $398,075
Operating income......... 3,239 6,395 9,634 6,754 2,817 -- 19,205
Depreciation and
amortization........... 2,245 4,938 7,183 5,117 14 4,650 16,964
Identifiable assets...... 26,865 51,463 78,328 49,000 47,928 48,917 224,173
Capital expenditures..... 2,202 7,335 9,537 7,400 14 7,268 24,219
1998:
Revenue.................. $92,746 $127,197 $219,943 $228,979 $ 7,443 $ -- $456,365
Operating income(1)...... 6,976 (678) 6,298 199 4,076 -- 10,573
Depreciation and
amortization........... 4,434 5,730 10,164 5,657 15 5,279 21,115
Identifiable assets...... 63,554 55,465 119,019 52,000 52,616 51,973 275,608
Capital expenditures..... 2,115 5,998 8,113 5,900 20 5,840 19,873
</TABLE>
- ---------------
(1) Segment totals include allocation of the fiscal year 1998 restructuring
charge of $14,667,000. Operating income of each segment, prior to the
allocation of the restructuring charge to each unit, was as follows: IT
Consulting Services -- $8,130,000; Communications Services -- $7,425,000;
Total Global Services -- $15,555,000; Communications Solutions --
$5,609,000; and Financial Services -- $4,076,000. (See Note 3.)
F-19
<PAGE> 58
NORSTAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth the Company's operations and related asset
information by geographic area as of and for the years ended April 30 (in
thousands):
<TABLE>
<CAPTION>
1996 1997 1998
<S> <C> <C> <C>
REVENUES:
United States................................. $287,171 $365,796 $423,446
Canada........................................ 34,193 32,279 32,919
-------- -------- --------
$321,364 $398,075 $456,365
======== ======== ========
NET INCOME:
United States................................. $ 7,943 $ 9,426 $ 4,679
Canada........................................ 546 791 (824)
-------- -------- --------
$ 8,489 $ 10,217 $ 3,855
======== ======== ========
ASSETS:
United States................................. $142,151 $207,942 $258,192
Canada........................................ 18,837 16,231 17,416
-------- -------- --------
$160,988 $224,173 $275,608
======== ======== ========
</TABLE>
F-20
<PAGE> 59
[Inside back cover: map detailing where the Company does business and where the
Company has locations.]
<PAGE> 60
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE SELLING
SHAREHOLDERS OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 6
Use of Proceeds........................ 10
Price Range of Common Stock............ 10
Dividend Policy........................ 10
Capitalization......................... 11
Selected Consolidated Financial Data... 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 13
Business............................... 20
Management............................. 31
Selling Shareholders................... 33
Underwriting........................... 34
Incorporation of Certain Documents By
Reference............................ 36
Available Information.................. 36
Legal Matters.......................... 37
Experts................................ 37
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,200,000 SHARES
[LOGO] NORSTAN
COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
DONALDSON, LUFKIN & JENRETTE
ROBERT W. BAIRD & CO.
INCORPORATED
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 61
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the issuance and distribution of
the securities registered hereby, other than underwriting discounts and fees,
are set forth in the following table:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 18,286
National Association of Securities Dealers, Inc. filing
fee....................................................... 6,698
Accounting fees............................................. 75,000
Nasdaq National Market additional listing fee............... 17,500
Printing and related expenses............................... 75,000
Legal fees and expenses..................................... 75,000
Blue sky fees and expenses.................................. 7,500
Miscellaneous............................................... 25,016
--------
Total.................................................. $300,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company is governed by Minnesota Statutes Chapter 302A. Minnesota
Statutes Section 302A.521 provides that a corporation shall indemnify any person
made or threatened to be made a party to any proceeding by reason of the former
or present official capacity of such person against judgments, penalties, fines,
including, without limitation, excise taxes assessed against such person with
respect to an employee benefit plan, settlements, and reasonable expenses,
including attorney's fees and disbursements, incurred by such person in
connection with the proceeding, if, with respect to the acts or omissions of
such person complained of in the proceeding, such person has not been
indemnified by another organization or employee benefit plan for the same
expenses with respect to the same acts or omissions; acted in good faith;
received no improper personal benefit and Section 302A.255, if applicable, has
been satisfied; in the case of a criminal proceeding, had no reasonable cause to
believe the conduct was unlawful; and in the case of acts or omissions by
persons in their official capacity for the corporation, reasonably believed that
the conduct was in the best interests of the corporation, or in the case of acts
or omissions by persons in their capacity for other organizations, reasonably
believed that the conduct was not opposed to the best interests of the
corporation. Subdivision 4 of Section 302A.521 of the Minnesota Statutes
provides that a company's articles of incorporation or bylaws may prohibit such
indemnification or place limits upon the same. The Company's articles and bylaws
do not include any such prohibition or limitation. As a result, the Company is
bound by the indemnification provisions set forth in Section 302A.521 of the
Minnesota Statutes.
As permitted by Section 302A.251 of the Minnesota Statutes, the Articles of
Incorporation of the Company provide that a director shall have no personal
liability to the Company and its shareholders for breach of his fiduciary duty
as a director, to the fullest extent permitted by law.
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
<C> <S>
1 Form of Underwriting Agreement
5 Opinion of Maslon Edelman Borman & Brand, LLP
23(1) Consent of Arthur Andersen LLP
23(2) Consent of Maslon Edelman Borman & Brand, LLP (included in
Exhibit 5)
24 Power of Attorney (included on Page II-3)
27 Financial Data Schedule
</TABLE>
II-1
<PAGE> 62
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(a) for purposes of determining any liability under the Securities Act of
1933, each filing of the Registrant's annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that
is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(c) (1) for purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as a part of
this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the Registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to
be part of this registration statement as of the time it was
declared effective.
(2) for the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 63
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Minneapolis, State of Minnesota, on July 29, 1998.
NORSTAN, INC.
Registrant
By: /s/ DAVID R. RICHARD
------------------------------------
Name: David R. Richard
Title: President and Chief
Executive Officer (Principal
Executive Officer)
By: /s/ KENNETH S.
MACKENZIE
------------------------------------
Name: Kenneth S. MacKenzie
Title: Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each person whose signature appears below
hereby constitutes and appoints David R. Richard and Kenneth S. MacKenzie, each
or either of them, his or her true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement (including
registration statements filed pursuant to Rule 462(b) under the Securities Act
of 1933 and all amendments thereto) and to file the same with all exhibits
thereto, and other documents in connection therewith with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents or any of them, or
their or his or her substitutes, may lawfully do or cause to be done by virtue
thereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below on the 29th day of July, 1998 by
the following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
<C> <S>
/s/ PAUL BASZUCKI Chairman of the Board of Directors
- -----------------------------------------------------
Paul Baszucki
/s/ DAVID R. RICHARD President, Chief Executive Officer (Principal
- ----------------------------------------------------- Executive Officer) and Director
David R. Richard
Vice Chairman of the Board of Directors
- -----------------------------------------------------
Richard Cohen
/s/ CONSTANCE M. LEVI Director
- -----------------------------------------------------
Constance M. Levi
/s/ GERALD D. PINT Director
- -----------------------------------------------------
Gerald D. Pint
Director
- -----------------------------------------------------
Dr. Jagdish N. Sheth
/s/ HERBERT F. TRADER Director
- -----------------------------------------------------
Herbert F. Trader
</TABLE>
II-3
<PAGE> 64
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF DOCUMENT PAGE NO.
<C> <S> <C>
1 Form of Underwriting Agreement
5 Opinion of Maslon Edelman Borman & Brand, LLP *
23(1) Consent of Arthur Andersen LLP
23(2) Consent of Maslon Edelman Borman & Brand, LLP (included in
Exhibit 5)
24 Power of Attorney (included on Page II-3)
27 Financial Data Schedule
</TABLE>
- -------------------------
* To be filed by amendment
<PAGE> 1
EXHIBIT 1
__________ Shares
NORSTAN, INC.
Common Stock
UNDERWRITING AGREEMENT
September __, 1998
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ROBERT W. BAIRD & CO. INCORPORATED
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
Norstan, Inc., a Minnesota corporation (the "COMPANY"), proposes to
issue and sell to the several underwriters named in Schedule I hereto (the
"UNDERWRITERS"), and certain shareholders of the Company named in Schedule II
hereto (the "SELLING SHAREHOLDERS") severally propose to sell to the several
Underwriters, an aggregate of _______________ shares of the Common Stock, par
value $.10 per share, of the Company (the "FIRM SHARES"), of which
______________ are to be issued and sold by the Company and ____________ are to
be sold be the Selling Shareholders, each Selling Shareholder selling the number
of shares set forth opposite such Selling Shareholder's name in the middle
column on Schedule II hereto. Certain Selling Shareholders also severally
propose to sell to the several Underwriters not more than an additional _______
shares of the Common Stock, par value $.10 per share, of the Company (the
"ADDITIONAL SHARES"), each Selling Shareholder selling up to the amount set
forth opposite such Selling Shareholder's name in the last column on Schedule II
hereto, if requested by the Underwriters as provided in Section 2 hereof. The
Firm Shares and the Additional Shares are hereinafter referred to collectively
as the "SHARES." The shares of common stock of the Company to be outstanding
after giving effect to the sales contemplated hereby are hereinafter referred to
as the "COMMON STOCK." The Company and the Selling Shareholders are hereinafter
sometimes referred to collectively as the "SELLERS."
SECTION 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "ACT"), a registration statement on Form S-3 (File No.
<PAGE> 2
333- ), including a prospectus, relating to the Shares. The registration
statement, as amended at the time it became effective, including the information
(if any) deemed to be part of the registration statement at the time of
effectiveness pursuant to Rule 430A under the Act, is hereinafter referred to as
the "REGISTRATION STATEMENT"; and the prospectus in the form first used to
confirm sales of Shares is hereinafter referred to as the "PROSPECTUS"
(including, in the case of all references to the Registration Statement or the
Prospectus, documents incorporated therein by reference). If the Company has
filed or is required pursuant to the terms hereof to file a registration
statement pursuant to Rule 462(b) under the Act registering additional shares of
Common Stock (a "RULE 462(B) REGISTRATION STATEMENT"), then, unless otherwise
specified, any reference herein to the term "Registration Statement" shall be
deemed to include such Rule 462(b) Registration Statement. The terms
"SUPPLEMENT" and "AMENDMENT" or "AMEND" as used in this Agreement with respect
to the Registration Statement or the Prospectus shall include all documents
subsequently filed by the Company with the Commission pursuant to the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "EXCHANGE ACT") that are deemed to be
incorporated by reference in the Prospectus.
SECTION 2. Agreements to Sell and Purchase and Lock-Up Agreements. On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, (i) the Company agrees to issue and sell
______________ Firm Shares, (ii) each Selling Shareholder agrees, severally and
not jointly, to sell the number of Firm Shares set forth opposite such Selling
Shareholder's name in the middle column on Schedule II hereto, and (iii) each
Underwriter agrees, severally and not jointly, to purchase from each Seller at a
price per Share of $______ (the "PURCHASE PRICE") the number of Firm Shares
(subject to such adjustments to eliminate fractional shares as you may
determine) that bears the same proportion to the total number of Firm Shares to
be sold by such Seller as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto bears to the total number of Firm
Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, (i) the Company agrees
to issue and sell ________ Additional Shares, and (ii) the Underwriters shall
have the right to purchase up to _______ Additional Shares from the Company
at the Purchase Price. Additional Shares may be purchased solely for the purpose
of covering over-allotments made in connection with the offering of the Firm
Shares. The Underwriters may exercise their right to purchase Additional Shares
in whole or in part from time to time by giving written notice thereof to the
Company within 30 days after the date of this Agreement. You shall give any such
notice on behalf of the Underwriters and such notice shall specify the aggregate
number of Additional Shares to be purchased pursuant to such exercise and the
date for payment and delivery thereof, which date shall be a business day (i) no
earlier than two business days after such notice has been given (and, in any
event, no earlier than the Closing Date (as hereinafter defined)) and (ii) no
later than ten business days after such notice has been given. If any Additional
Shares are to be purchased, each Underwriter, severally and not jointly, agrees
to purchase from the Selling Shareholders the number of Additional Shares
(subject to such
2
<PAGE> 3
adjustments to eliminate fractional shares as you may determine) which bears the
same proportion to the total number of Additional Shares to be purchased from
the Selling Shareholders as the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule I bears to the total number of Firm Shares.
Each Seller hereby agrees not to (i) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise transfer or dispose
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or (ii) enter
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any Common Stock
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise), except to the Underwriters pursuant to this Agreement, for a
period of 90 days after the date of the Prospectus (the "LOCK-UP PERIOD")
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"). Notwithstanding the foregoing, during the Lock-Up Period
(i) the Company may grant stock options pursuant to the Company's existing stock
option plan; provided that such options are, by their terms, not exercisable
during the Lock-Up Period; and (ii) the Company may issue shares of Common Stock
upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof. The Company also agrees not to file any
registration statement with respect to any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock
during the Lock-Up Period without the prior written consent of DLJ. In addition,
each Selling Shareholder agrees that, during the Lock-Up Period without the
prior written consent of DLJ, it will not make any demand for, or exercise any
right with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock. The
Company shall, prior to or concurrently with the execution of this Agreement,
deliver an agreement executed by (i) each Selling Shareholder, (ii) each of the
directors and officers of the Company who is not a Selling Shareholder and (iii)
each shareholder listed on Annex I hereto to the effect that such person will
not, during the period commencing on the date such person signs such agreement
and ending at the expiration of the Lock-Up Period, without the prior written
consent of DLJ, (A) engage in any of the transactions described in the first
sentence of this paragraph or (B) make any demand for, or exercise any right
with respect to, the registration of any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock.
SECTION 3. Terms of Public Offering. The Sellers are advised by you
that the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
SECTION 4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as DLJ shall request no later than two business days
prior to the Closing Date or the applicable Option Closing Date (as defined
below), as the case may be. The Shares shall be delivered by or on behalf of the
Sellers with any transfer taxes thereon duly paid by the respective Sellers, to
3
<PAGE> 4
DLJ through the facilities of The Depository Trust Company ("DTC"), for the
respective accounts of the several Underwriters, against payment to the Sellers
of the Purchase Price therefore by wire transfer of Federal or other funds
immediately available in New York City. The certificates representing the Shares
shall be made available for inspection not later than 9:30 A.M., New York City
time, on the business day prior to the Closing Date or the applicable Option
Closing Date (as defined below), as the case may be, at the office of DTC or its
designated custodian (the "DESIGNATED OFFICE"). The time and date of delivery
and payment for the Firm Shares shall be 9:00 A.M., New York City time, on
September ___, 1998 or such other time on the same or such other date as DLJ and
the Company shall agree in writing. The time and date of delivery and payment
for the Firm Shares are hereinafter referred to as the "CLOSING DATE." The time
and date of delivery and payment for any Additional Shares to be purchased by
the Underwriters shall be 9:00 A.M., New York City time, on the date specified
in the applicable exercise notice given by you pursuant to Section 2 or such
other time on the same or such other date as DLJ and the Company shall agree in
writing. The time and date of delivery and payment for any Additional Shares are
hereinafter referred to as the "OPTION CLOSING DATE."
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 9 of this Agreement
shall be delivered at the offices of Sachnoff & Weaver, Ltd., 30 South Wacker
Dr., 29th floor, Chicago, Illinois 60606, and the Shares shall be delivered at
the Designated Office, all on the Closing Date or such Option Closing Date, as
the case may be.
SECTION 5. Agreements of the Company. The Company agrees with you:
a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information; (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes; (iii) when any amendment to the
Registration Statement becomes effective; (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective; and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
b) To furnish to you three signed copies of the Registration Statement
as first filed with the Commission and of each amendment to it, including all
exhibits and documents incorporated therein by reference, and to furnish to you
and each Underwriter designated by you such number of conformed copies of the
Registration Statement as so filed and of each
4
<PAGE> 5
amendment to it, without exhibits but including documents incorporated therein
by reference, as you may reasonably request.
c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the Commission
within the applicable period specified in Rule 424(b) under the Act; during the
period specified in Section 5(d) below, not to file any further amendment to the
Registration Statement and not to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to which you
shall have reasonably objected after being so advised; and, during such period,
to prepare and file with the Commission, promptly upon your reasonable request,
any amendment to the Registration Statement or amendment or supplement to the
Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
and any documents incorporated therein by reference as such Underwriter or
dealer may reasonably request.
e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances when
the Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the Prospectus so that
the statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the securities laws or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary
5
<PAGE> 6
prospectus or the offering or sale of the Shares, in any jurisdiction in which
it is not now so subject.
g) To mail and make generally available to its shareholders as soon as
practicable an earnings statement covering the twelve-month period ending
October 31, 1999 that shall satisfy the provisions of Section 11(a) of the Act,
and to advise you in writing when such statement has been so made available.
h) During the period of three years after the date of this Agreement,
to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company and its subsidiaries as you may reasonably
request.
i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of the Sellers' obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the Company's
counsel, the Company's accountants and any Selling Shareholder's counsel (in
addition to the Company's counsel) in connection with the registration and
delivery of the Shares under the Act and all other fees and expenses in
connection with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the Prospectus and all amendments and supplements to any
of the foregoing, including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein; (ii) all costs and
expenses related to the transfer and delivery of the Shares to the Underwriters,
including any transfer or other taxes payable thereon; iii) all costs of
printing or producing this Agreement and any other agreements or documents in
connection with the offering, purchase, sale or delivery of the Shares; (iv) all
expenses in connection with the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the several states and
all costs of printing or producing any Preliminary and Supplemental Blue Sky
Memoranda in connection therewith (including the filing fees and fees and
disbursements of counsel for the Underwriters in connection with such
registration or qualification and memoranda relating thereto); (v) the filing
fees and disbursements of counsel for the Underwriters in connection with the
review and clearance of the offering of the Shares by the National Association
of Securities Dealers, Inc.; (vi) all fees and expenses in connection with the
listing of the additional Shares on the Nasdaq National Market; (vii) the cost
of printing certificates representing the Shares; (viii) the costs and charges
of any transfer agent, registrar and/or depositary; and (ix) all other costs and
expenses incident to the performance of the obligations of the Company and the
Selling Shareholders hereunder for which provision is not otherwise made in this
Section. The provisions of this Section shall not supersede or otherwise affect
the agreement that the Company and the Selling Shareholders may otherwise have
for allocation of such expenses among themselves.
6
<PAGE> 7
j) To file an additional listing application for the Shares with The
Nasdaq Stock Market, Inc. and to use its best efforts to maintain the listing of
the Shares on the Nasdaq National Market for a period of three years after the
date of this Agreement.
k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so covered
in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
SECTION 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
a) The Registration Statement has become effective (other than any Rule
462(b) Registration Statement to be filed by the Company after the effectiveness
of this Agreement); any Rule 462(b) Registration Statement filed after the
effectiveness of this Agreement will become effective no later than 10:00 P.M.,
New York City time, on the date of this Agreement; and no stop order suspending
the effectiveness of the Registration Statement is in effect, and no proceedings
for such purpose are pending before or threatened by the Commission.
b) (i) Each document, if any, filed or to be filed pursuant to the
Exchange Act and incorporated by reference in the Prospectus complied or will
comply when so filed in all material respects with the Exchange Act; (ii) the
Registration Statement (other than any Rule 462(b) Registration Statement to be
filed by the Company after the effectiveness of this Agreement), when it became
effective, did not contain and, as amended, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading;
(iii) the Registration Statement (other than any Rule 462(b) Registration
Statement to be filed by the Company after the effectiveness of this Agreement)
and the Prospectus comply and, as amended or supplemented, if applicable, will
comply in all material respects with the Act; (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, such Rule 462(b) Registration Statement and any amendments thereto,
when they become effective (A) will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (B) will comply in
all material respects with the Act; and (v) the Prospectus does not contain and,
as amended or supplemented, if applicable, will not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, except that the representations and warranties set forth
in this paragraph do not apply to statements or omissions in the Registration
Statement or
7
<PAGE> 8
the Prospectus based upon information relating to any Underwriter furnished to
the Company in writing by such Underwriter through you expressly for use
therein.
c) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
d) Each of the Company and its subsidiaries has been duly incorporated,
is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation and has the corporate power and authority to carry
on its business as described in the Prospectus and to own, lease and operate its
properties, and each is duly qualified and is in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the nature
of its business or its ownership or leasing of property requires such
qualification, except where the failure to be so qualified would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole (a
"MATERIAL ADVERSE EFFECT").
e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company or any of its subsidiaries relating to or entitling any person to
purchase or otherwise to acquire any shares of the capital stock of the Company
or any of its subsidiaries, except as otherwise disclosed in the Registration
Statement.
f) All of the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Shareholders) have been duly
authorized and validly issued and are fully paid, non-assessable and not subject
to any preemptive or similar rights; and the Shares to be issued and sold by the
Company have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights.
g) All of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and are
fully paid and non-assessable, and are owned by the Company, directly or
indirectly through one or more subsidiaries, free and clear of any security
interest, claim, lien, encumbrance or adverse interest of any nature.
h) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
8
<PAGE> 9
i) Neither the Company nor any of its subsidiaries is in violation of
its respective charter or by-laws or in default in the performance of any
obligation, agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is material to
the Company and its subsidiaries, taken as a whole, to which the Company or any
of its subsidiaries is a party or by which the Company or any of its
subsidiaries or their respective property is bound.
j) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities laws or Blue Sky laws of the various states); (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any of its subsidiaries or any
indenture, loan agreement, mortgage, lease or other agreement or instrument that
is material to the Company and its subsidiaries, taken as a whole, to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries or their respective property is bound; (iii) violate or
conflict with any applicable law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having jurisdiction over
the Company, any of its subsidiaries or their respective property or; (iv)
result in the suspension, termination or revocation of any Authorization (as
defined below) of the Company or any of its subsidiaries or any other impairment
of the rights of the holder of any such Authorization.
k) There are no legal or governmental proceedings pending or threatened
to which the Company or any of its subsidiaries is or could be a party or to
which any of their respective property is or could be subject that are required
to be described in the Registration Statement or the Prospectus and are not so
described; nor are there any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that are not
so described or filed as required.
l) Neither the Company nor any of its subsidiaries has violated any
foreign, federal, state or local law or regulation relating to the protection of
human health and safety, the environment or hazardous or toxic substances or
wastes, pollutants or contaminants ("ENVIRONMENTAL LAWS"), any provisions of the
Employee Retirement Income Security Act of 1974, as amended, or any provisions
of the Foreign Corrupt Practices Act or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the aggregate, would
not have a Material Adverse Effect.
m) Each of the Company and its subsidiaries has such permits, licenses,
consents, exemptions, franchises, authorizations and other approvals (each, an
"AUTHORIZATION") of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory organizations and all
courts and other tribunals, including, without limitation, under any applicable
Environmental Laws, as are necessary to own, lease, license and operate its
respective properties and to conduct its business, except where the failure to
have any such Authorization or to make any such filing or notice would not,
singly or in the aggregate, have a
9
<PAGE> 10
Material Adverse Effect. Each such Authorization is valid and in full force and
effect and each of the Company and its subsidiaries is in compliance with all
the terms and conditions thereof and with the rules and regulations of the
authorities and governing bodies having jurisdiction with respect thereto; and
no event has occurred (including, without limitation, the receipt of any notice
from any authority or governing body) which allows or, after notice or lapse of
time or both, would allow, revocation, suspension or termination of any such
Authorization or results or, after notice or lapse of time or both, would result
in any other impairment of the rights of the holder of any such Authorization;
and such Authorizations contain no restrictions that are burdensome to the
Company or any of its subsidiaries; except where such failure to be valid and in
full force and effect or to be in compliance, the occurrence of any such event
or the presence of any such restriction would not, singly or in the aggregate,
have a Material Adverse Effect.
n) There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
Authorization, any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate, have a
Material Adverse Effect.
o) This Agreement has been duly authorized, executed and delivered by
the Company.
p) Arthur Andersen LLP are independent public accountants with respect
to the Company and its subsidiaries as required by the Act.
q) The consolidated financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement thereto), together
with related schedules and notes, present fairly the consolidated financial
position, results of operations and changes in financial position of the Company
and its subsidiaries on the basis stated therein at the respective dates or for
the respective periods to which they apply; such statements and related
schedules and notes have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods involved,
except as disclosed therein; the supporting schedules, if any, included in the
Registration Statement present fairly in accordance with generally accepted
accounting principles the information required to be stated therein; and the
other financial and statistical information and data set forth in the
Registration Statement and the Prospectus (and any amendment or supplement
thereto) are, in all material respects, accurately presented and prepared.
r) The Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
s) There are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the Company to
file a registration statement
10
<PAGE> 11
under the Act with respect to any securities of the Company or to require the
Company to include such securities with the Shares registered pursuant to the
Registration Statement.
t) Since the respective dates as of which information is given in the
Prospectus, other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company and its
subsidiaries, taken as a whole, (ii) there has not been any material adverse
change or any development involving a prospective material adverse change in the
capital stock or in the long-term debt of the Company or any of its subsidiaries
and (iii) neither the Company nor any of its subsidiaries has incurred any
material liability or obligation, direct or contingent.
u) The Company and its subsidiaries have good and marketable title in
fee simple to all real property and good and marketable title to all personal
property owned by them which is material to the business of the Company and its
subsidiaries, in each case free and clear of all liens, encumbrances and defects
except such as are described in the Prospectus or such as do not materially
affect the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company and its subsidiaries; and
any real property and buildings held under lease by the Company and its
subsidiaries are held by them under valid, subsisting and enforceable leases
with such exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings by the Company and its
subsidiaries, in each case except as described in the Prospectus.
v) The Company and its subsidiaries own or possess, or can acquire on
reasonable terms, all patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures), trademarks,
service marks and trade names ("INTELLECTUAL PROPERTY") currently employed by
them in connection with the business now operated by them except where the
failure to own or possess or otherwise be able to acquire such intellectual
property would not, singly or in the aggregate, have a Material Adverse Effect;
and neither the Company nor any of its subsidiaries has received any notice of
infringement of or conflict with asserted rights of others with respect to any
of such intellectual property which, singly or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would have a Material Adverse
Effect.
w) The Company and each of its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; and neither the Company nor any of its subsidiaries (i) has received
notice from any insurer or agent of such insurer that substantial capital
improvements or other material expenditures will have to be made in order to
continue such insurance or (ii) has any reason to believe that it will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers at a cost that would not
have a Material Adverse Effect.
11
<PAGE> 12
x) No "nationally recognized statistical rating organization" as such
term is defined for purposes of Rule 436(g)(2) under the Act has indicated to
the Company that it is considering (i) the downgrading, suspension or withdrawal
of, or any review for a possible change that does not indicate the direction of
the possible change in, any rating assigned to the Company or any securities of
the Company or (ii) any change in the outlook for any rating of the Company or
any securities of the Company.
y) No relationship, direct or indirect, exists between or among the
Company or any of its subsidiaries on the one hand, and the directors, officers,
shareholders, customers or suppliers of the Company or any of its subsidiaries
on the other hand, which is required by the Act to be described in the
Registration Statement or the Prospectus which is not so described.
z) The pro forma financial statements of the Company and its
subsidiaries and the related notes thereto set forth in the Registration
Statement and the Prospectus (and any supplement or amendment thereto) have been
prepared on a basis consistent with the historical financial statements of the
Company and its subsidiaries, give effect to the assumptions used in the
preparation thereof on a reasonable basis and in good faith and present fairly
the historical and proposed transactions contemplated by the Registration
Statement and the Prospectus. Such pro forma financial statements have been
prepared in accordance with the applicable requirements of Rule 11-02 of
Regulation S-X promulgated by the Commission. The pro forma financial and
statistical information and data set forth in the Registration Statement and the
Prospectus (and any supplement or amendment thereto) are, in all material
respects, accurately presented and prepared on a basis consistent with the pro
forma financial statements.
aa) There is no (i) significant unfair labor practice complaint,
grievance or arbitration proceeding pending or threatened against the Company or
any of its subsidiaries before the National Labor Relations Board or any state
or local labor relations board, (ii) strike, labor dispute, slowdown or stoppage
pending or threatened against the Company or any of its subsidiaries or (iii)
union representation question existing with respect to the employees of the
Company and its subsidiaries, except for such actions specified in clause (i),
(ii) or (iii) above, which, singly or in the aggregate, would not have a
Material Adverse Effect. To the best of the Company's knowledge, no collective
bargaining organizing activities are taking place with respect to the Company or
any of its subsidiaries.
bb) The Company and each of its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
cc) All material tax returns required to be filed by the Company and
each of its subsidiaries in any jurisdiction have been filed, other than those
filings being contested in good
12
<PAGE> 13
faith, and all material taxes, including withholding taxes, penalties and
interest, assessments, fees and other charges due pursuant to such returns or
pursuant to any assessment received by the Company or any of its subsidiaries
have been paid, other than those being contested in good faith and for which
adequate reserves have been provided.
dd) Each certificate signed by any officer of the Company and delivered
to the Underwriters or counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to the Underwriters as to the matters
covered thereby.
SECTION 7. Representations and Warranties of the Selling Shareholders.
Each Selling Shareholder represents and warrants to each Underwriter that:
a) Such Selling Shareholder is the lawful owner of the Shares to be
sold by such Selling Shareholder pursuant to this Agreement and has, and on the
Closing Date will have, good and clear title to such Shares, free of all
restrictions on transfer, liens, encumbrances, security interests, equities and
claims whatsoever.
b) The Shares to be sold by such Selling Shareholder will have been
duly authorized and are validly issued, fully paid and non-assessable.
c) Such Selling Shareholder has, and on the Closing Date will have,
full legal right, power and authority, and all authorizations and approvals
required by law, to enter into this Agreement, the Letter of Transmittal and
Custody Agreement signed by such Selling Shareholder and ________________ ,
as Custodian, relating to the deposit of the Shares to be sold by such Selling
Shareholder (the "CUSTODY AGREEMENT") and the Irrevocable Power of
Attorney of such Selling Shareholder appointing certain individuals as such
Selling Shareholder's attorneys-in-fact (the "ATTORNEYS") to the extent set
forth therein, relating to the transactions contemplated hereby and by the
Registration Statement and the Custody Agreement (the "POWER OF ATTORNEY") and
to sell, assign, transfer and deliver the Additional Shares to be sold by such
Selling Shareholder in the manner provided herein and therein.
d) This Agreement has been duly authorized, executed and delivered by
or on behalf of such Selling Shareholder.
e) The Custody Agreement of such Selling Shareholder has been duly
authorized, executed and delivered by such Selling Shareholder and is a valid
and binding agreement of such Selling Shareholder, enforceable in accordance
with its terms.
f) The Power of Attorney of such Selling Shareholder has been duly
authorized, executed and delivered by such Selling Shareholder and
is a valid and binding instrument of such Selling Shareholder, enforceable
in accordance with its terms, and, pursuant to such Power of Attorney, such
Selling Shareholder has, among other things, authorized the Attorneys, or any
one of them, to execute and deliver on such Selling Shareholder's behalf this
Agreement and any other document that they, or any one of them, may deem
necessary or desirable in connection
13
<PAGE> 14
with the transactions contemplated hereby and thereby and to deliver the Shares
to be sold by such Selling Shareholder pursuant to this Agreement.
g) Upon delivery of and payment for the Shares to be sold by such
Selling Shareholder pursuant to this Agreement, good and clear title to such
Shares will pass to the Underwriters, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever.
h) The execution, delivery and performance of this Agreement, the
Custody Agreement and Power of Attorney of such Selling Shareholder by or on
behalf of such Selling Shareholder, the compliance by such Selling Shareholder
with all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby will not (i) require any consent,
approval, authorization or other order of, or qualification with, any court or
governmental body or agency (except such as may be required under the securities
laws or Blue Sky laws of the various states); (ii) conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
organizational documents of such Selling Shareholder, if such Selling
Shareholder is not an individual, or any indenture, loan agreement, mortgage,
lease or other agreement or instrument to which such Selling Shareholder is a
party or by which such Selling Shareholder or any property of such Selling
Shareholder is bound; or (iii) violate or conflict with any applicable law or
any rule, regulation, judgment, order or decree of any court or any governmental
body or agency having jurisdiction over such Selling Shareholder or any property
of such Selling Shareholder.
i) The information in the Registration Statement under the caption
"Principal and Selling Shareholders" that specifically relates to such Selling
Shareholder does not, and will not on the Closing Date, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
j) At any time during the period described in Section 5(d), if there is
any change in the information referred to in Section 7(i), such Selling
Shareholder will immediately notify you of such change.
k) Such Selling Shareholder has not taken, and will not take, directly
or indirectly, any action designed to, or which might reasonably be expected to,
cause or result in stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Shares pursuant to the
distribution contemplated by this Agreement, and other than as permitted by the
Act, such Selling Shareholder has not distributed and will not distribute any
prospectus or other offering material in connection with the offering and sale
of the Shares.
l) Certificate(s) in negotiable form for up to the maximum number of
shares of Common Stock that may be sold by such Selling Shareholder to the
Underwriters (except for shares of Common Stock to be sold to the Underwriters
that will be issuable to such Selling Shareholder pursuant to currently
exercisable stock options) have been placed in custody with the Custodian for
the purpose of effecting delivery thereof under this Agreement.
14
<PAGE> 15
m) Except as noted on Attachment A of his respective Power of Attorney,
such Selling Shareholder is not a "member" of the NASD, a controlling
shareholder of a "member", a "person associated with a member" or an "affiliate"
of a "member" or a member of the "immediate family" of any of the foregoing or
an "underwriter or related person" with respect to the proposed offering of the
Common Stock.
n) Such Selling Shareholder will furnish any and all information which
the Company, the Underwriters or their respective counsel deems necessary or
desirable in connection with the preparation and filing of all amendments,
post-effective amendments and supplements to the Registration Statement, any
Prospectus or any other filing with any regulatory body or agency (including the
NASD), as well as any and all information which the Commission, the NASD or any
state securities regulatory authority may request.
o) Each certificate signed by or on behalf of such Selling Shareholder
and delivered to the Underwriters or counsel for the Underwriters shall be
deemed to be a representation and warranty by such Selling Shareholder to the
Underwriters as to the matters covered thereby.
SECTION 8. Indemnification.
a) The Sellers, jointly and severally, agree to indemnify and hold
harmless each Underwriter, its directors, its officers and each person, if any,
who controls any Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, from and against any and all losses, claims,
damages, liabilities and judgments (including, without limitation, any legal or
other expenses incurred in connection with investigating or defending any
matter, including any action, that could give rise to any such losses, claims,
damages, liabilities or judgments) caused by any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement (or
any amendment thereto), the Prospectus (or any amendment or supplement thereto)
or any preliminary prospectus, or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue statement or
omission or alleged untrue statement or omission based upon information relating
to any Underwriter furnished in writing to the Company by such Underwriter
through you expressly for use therein; provided, however, that the foregoing
indemnity agreement with respect to any preliminary prospectus shall not inure
to the benefit of any Underwriter who failed to deliver a Prospectus (as then
amended or supplemented, provided by the Company to the several Underwriters in
the requisite quantity and on a timely basis to permit proper delivery on or
prior to the Closing Date) to the person asserting any losses, claims, damages
and liabilities and judgments caused by any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus, or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading, if
such material misstatement or omission or alleged material misstatement or
omission was cured in such Prospectus and such Prospectus was required by law to
be delivered at or prior to the written confirmation of sale to such person.
Notwithstanding the foregoing, the aggregate liability of any Selling
Shareholder pursuant to this Section 8(a) shall be
15
<PAGE> 16
limited to an amount equal to the total proceeds (before deducting underwriting
discounts and commissions and expenses) received by such Selling Shareholder
from the Underwriters for the sale of the Shares sold by such Selling
Shareholder hereunder.
b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement, each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, each Selling
Shareholder and each person, if any, who controls such Selling Shareholder
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act to
the same extent as the foregoing indemnity from the Sellers to such Underwriter
but only with reference to information relating to such Underwriter furnished in
writing to the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 8(a) and 8(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 8(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses of such counsel, except as provided below, shall be at the expense of
such Underwriter). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the indemnified party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in connection with any one
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for (i) the fees and expenses of more than one separate firm of attorneys
(in addition to any local counsel) for all Underwriters, their officers and
directors and all persons, if any, who control any Underwriter within the
meaning of either Section 15 of the Act or Section 20 of the Exchange Act, (ii)
the fees and expenses of more than one separate firm of attorneys (in addition
to any local counsel) for the Company, its directors, its officers who sign the
Registration Statement and all persons, if any, who control the Company within
the meaning of either such Section and (iii) the fees and expenses of more than
one separate firm of attorneys (in addition to any local counsel) for all
Selling Shareholders and all persons, if any, who control any Selling
Shareholder within the
16
<PAGE> 17
meaning of either such Section, and all such fees and expenses shall be
reimbursed as they are incurred. In the case of any such separate firm for the
Underwriters, their officers and directors and such control persons of any
Underwriters, such firm shall be designated in writing by DLJ. In the case of
any such separate firm for the Company and such directors, officers and control
persons of the Company, such firm shall be designated in writing by the Company.
In the case of any such separate firm for the Selling Shareholders and such
control persons of any Selling Shareholders, such firm shall be designated in
writing by the Attorneys. The indemnifying party shall indemnify and hold
harmless the indemnified party from and against any and all losses, claims,
damages, liabilities and judgments by reason of any settlement of any action (i)
effected with the indemnifying party's written consent or (ii) effected without
the indemnifying party's written consent if the settlement is entered into more
than twenty business days after the indemnifying party shall have received a
request from the indemnified party for reimbursement for the fees and expenses
of counsel (in any case where such fees and expenses are at the expense of the
indemnifying party) and, prior to the date of such settlement, the indemnifying
party shall have failed to comply with such reimbursement request. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement or compromise of, or consent to the entry of
judgment with respect to, any pending or threatened action in respect of which
the indemnified party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the indemnified
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability on claims that
are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
d) To the extent the indemnification provided for in this Section 8 is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by each
of the Sellers on the one hand and the Underwriters on the other hand from the
offering of the Shares or (ii) if the allocation provided by clause 8(d)(i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause 8(d)(i) above
but also the relative fault of each of the Sellers on the one hand and the
Underwriters on the other hand in connection with the statements or omissions
which resulted in such losses, claims, damages, liabilities or judgments, as
well as any other relevant equitable considerations. The relative benefits
received by each of the Sellers on the one hand and the Underwriters on the
other hand shall be deemed to be in the same proportion as the total net
proceeds from the offering (after deducting underwriting discounts and
commissions, but before deducting expenses) received by each of the Sellers, and
the total underwriting discounts and commissions received by the Underwriters,
bear to the total price to the public of the Shares, in each case as set forth
in the table on the cover page of the Prospectus. The relative fault of each of
the Sellers on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the Selling
Shareholders on the one hand or the
17
<PAGE> 18
Underwriters on the other hand and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or defending any matter, including any action,
that could have given rise to such losses, claims, damages, liabilities or
judgments. Notwithstanding the provisions of this Section 8, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 8(d) are several in proportion to the respective number
of Shares purchased by each of the Underwriters hereunder and not joint.
e) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
f) Each Selling Shareholder hereby designates ________________________,
_______________________________, as its authorized agent, upon which process
may be served in any action which may be instituted in any state or federal
court in the State of New York by any Underwriter, any director or officer of
any Underwriter or any person controlling any Underwriter asserting a claim for
indemnification or contribution under or pursuant to this Section 8, and each
Selling Shareholder will accept the jurisdiction of such court in such action,
and waives, to the fullest extent permitted by applicable law, any defense based
upon lack of personal jurisdiction or venue. A copy of any such process shall
be sent or given to such Selling Shareholder, at the address for notices
specified in Section 12 hereof.
SECTION 9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.
18
<PAGE> 19
b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York City
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for that purpose shall have been commenced or shall be pending
before or contemplated by the Commission.
c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by ____________________ and _____________________, in their
capacities as the ______________________ and the _______________________ of the
Company, confirming the matters set forth in Sections 6(t), 9(a) and 9(b) and
that the Company has complied with all of the agreements and satisfied all of
the conditions herein contained and required to be complied with or satisfied by
the Company on or prior to the Closing Date.
d) Since the respective dates as of which information is given in the
Prospectus, other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company and its subsidiaries, taken as
a whole; (ii) there shall not have been any change or any development involving
a prospective change in the capital stock or in the long-term debt of the
Company or any of its subsidiaries; and (iii) neither the Company nor any of its
subsidiaries shall have incurred any liability or obligation, direct or
contingent, the effect of which, in any such case described in clause 9(d)(i),
9(d)(ii) or 9(d)(iii), in your judgment, is material and adverse and, in your
judgment, makes it impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
e) All the representations and warranties of each Selling Shareholder
contained in this Agreement shall be true and correct on the Closing Date with
the same force and effect as if made on and as of the Closing Date and you shall
have received on the Closing Date a certificate dated the Closing Date from each
Selling Shareholder to such effect and to the effect that such Selling
Shareholder has complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by
such Selling Shareholder on or prior to the Closing Date.
f) You shall have received on the Closing Date an opinion (satisfactory
to you and counsel for the Underwriters), dated the Closing Date, of Mason
Edelman Borman & Brand, LLP, counsel for the Company and the Selling
Shareholders, to the effect that:
i) each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of its jurisdiction of incorporation and has the
corporate power and authority to carry on its business as described in
the Prospectus and to own, lease and operate its properties;
19
<PAGE> 20
ii) each of the Company and its subsidiaries is duly qualified and
is in good standing as a foreign corporation authorized to do business
in each jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification, except
where the failure to be so qualified would not have a Material Adverse
Effect;
iii) all the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Shareholders) have been
duly authorized and validly issued and are fully paid, non-assessable
and not subject to any preemptive or similar rights;
iv) the Shares to be issued and sold by the Company hereunder have
been duly authorized and, when issued and delivered to the Underwriters
against payment therefor as provided by this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights;
v) all of the outstanding shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued and
are fully paid and non-assessable, and are owned by the Company,
directly or indirectly through one or more subsidiaries, free and clear
of any security interest, claim, lien, encumbrance or adverse interest
of any nature;
vi) this Agreement has been duly authorized, executed and delivered
by the Company and by or on behalf of each Selling Shareholder;
vii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
viii) the Registration Statement has become effective under the Act,
no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, and to the best of such counsel's
knowledge after due inquiry, pending before or contemplated by the
Commission;
ix) the statements under the captions "Risk Factors - Certain
Anti-Takeover Provisions" and "Underwriting" in the Prospectus and Item
15 of Part II of the Registration Statement, in each case insofar as
such statements constitute a summary of the legal matters, documents or
proceedings referred to therein, fairly present the information called
for with respect to such legal matters, documents and proceedings;
x) neither the Company nor any of its subsidiaries is in violation
of its respective charter or by-laws and, to the best of such counsel's
knowledge after due inquiry, neither the Company nor any of its
subsidiaries is in default in the performance of any obligation,
agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is
material to the
20
<PAGE> 21
Company and its subsidiaries, taken as a whole, to which the Company
or any of its subsidiaries is a party or by which the Company or any
of its subsidiaries or their respective property is bound;
xi) the execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof
and the consummation of the transactions contemplated hereby will not
(A) require any consent, approval, authorization or other order of, or
qualification with, any court or governmental body or agency (except
such as may be required under the securities laws or Blue Sky laws of
the various states); (B) conflict with or constitute a breach of any of
the terms or provisions of, or a default under, the charter or by-laws
of the Company or any of its subsidiaries or any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is
material to the Company and its subsidiaries, taken as a whole, to
which the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or their respective property is
bound; (C) violate or conflict with any applicable law or any rule,
regulation, judgment, order or decree of any court or any governmental
body or agency having jurisdiction over the Company, any of its
subsidiaries or their respective property; or (D) result in the
suspension, termination or revocation of any Authorization of the
Company or any of its subsidiaries or any other impairment of the
rights of the holder of any such Authorization;
xii) after due inquiry, such counsel does not know of any legal or
governmental proceedings pending or threatened to which the Company or
any of its subsidiaries is or could be a party or to which any of their
respective property is or could be subject that are required to be
described in the Registration Statement or the Prospectus and are not
so described, or of any statutes, regulations, contracts or other
documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not so described or filed as required;
xiii) neither the Company nor any of its subsidiaries has violated
any Environmental Law, any provisions of the Employee Retirement Income
Security Act of 1974, as amended, or any provisions of the Foreign
Corrupt Practices Act or the rules and regulations promulgated
thereunder, except for such violations which, singly or in the
aggregate, would not have a Material Adverse Effect;
xiv) each of the Company and its subsidiaries has such
Authorizations of, and has made all filings with and notices to, all
governmental or regulatory authorities and self-regulatory
organizations and all courts and other tribunals, including, without
limitation, under any applicable Environmental Laws, as are necessary
to own, lease, license and operate its respective properties and to
conduct its business, except where the failure to have any such
Authorization or to make any such filing or notice would not, singly or
in the aggregate, have a Material Adverse Effect; each such
Authorization is valid and in full force and effect and each of the
Company and its subsidiaries is in compliance with all the terms and
conditions thereof and with the rules and regulations of
21
<PAGE> 22
the authorities and governing bodies having jurisdiction with respect
thereto; and no event has occurred (including, without limitation, the
receipt of any notice from any authority or governing body) which
allows or, after notice or lapse of time or both, would allow,
revocation, suspension or termination of any such Authorization or
results or, after notice or lapse of time or both, would result in any
other impairment of the rights of the holder of any such Authorization;
and such Authorizations contain no restrictions that are burdensome to
the Company or any of its subsidiaries; except where such failure to be
valid and in full force and effect or to be in compliance, the
occurrence of any such event or the presence of any such restriction
would not, singly or in the aggregate, have a Material Adverse Effect;
xv) the Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be, an "investment company" as
such term is defined in the Investment Company Act of 1940, as amended;
xvi) to the best of such counsel's knowledge after due inquiry,
there are no contracts, agreements or understandings between the
Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to
any securities of the Company or to require the Company to include such
securities with the Shares registered pursuant to the Registration
Statement;
xvii) (A) each document, if any, filed pursuant to the Exchange Act
and incorporated by reference in the Prospectus (except for financial
statements and other financial data included therein as to which no
opinion need be expressed) complied when so filed as to form with the
Exchange Act; (B) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for the financial statements
and other financial data included therein as to which no opinion need
be expressed) comply as to form with the Act; (C) such counsel has no
reason to believe that at the time the Registration Statement became
effective or on the date of this Agreement, the Registration Statement
and the prospectus included therein (except for the financial
statements and other financial data as to which such counsel need not
express any belief) contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; and (D) such
counsel has no reason to believe that the Prospectus, as amended or
supplemented, if applicable (except for the financial statements and
other financial data, as aforesaid) contains any untrue statement of a
material fact or omits to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading;
xviii) each Selling Shareholder is the lawful owner of the Shares to
be sold by such Selling Shareholder pursuant to this Agreement and has
good and clear title to such Shares, free of all restrictions on
transfer, liens, encumbrances, security interests, equities and claims
whatsoever;
22
<PAGE> 23
xix) each Selling Shareholder has full legal right, power and
authority, and all authorizations and approvals required by law, to
enter into this Agreement and the Custody Agreement and the Power of
Attorney of such Selling Shareholder and to sell, assign, transfer and
deliver the Shares to be sold by such Selling Shareholder in the manner
provided herein and therein;
xx) the Custody Agreement of each Selling Shareholder has been duly
authorized, executed and delivered by such Selling Shareholder and is a
valid and binding agreement of such Selling Shareholder, enforceable in
accordance with its terms;
xxi) the Power of Attorney of each Selling Shareholder has been duly
authorized, executed and delivered by such Selling Shareholder and is a
valid and binding instrument of such Selling Shareholder, enforceable
in accordance with its terms, and, pursuant to such Power of Attorney,
such Selling Shareholder has, authorized the Attorneys, or any one of
them, to execute and deliver on such Selling Shareholder's behalf this
Agreement and any other document they, or any one of them, may deem
necessary or desirable in connection with the transactions contemplated
hereby and thereby and to deliver the Shares to be sold by such Selling
Shareholder pursuant to this Agreement;
xxii) upon delivery of and payment for the Shares to be sold by each
Selling Shareholder pursuant to this Agreement, good and clear title to
such Shares will pass to the Underwriters, free of all restrictions on
transfer, liens, encumbrances, security interests, equities and claims
whatsoever; and
xxiii) the execution, delivery and performance of this Agreement and
the Custody Agreement and Power of Attorney of each Selling Shareholder
by such Selling Shareholder, the compliance by such Selling Shareholder
with all the provisions hereof and thereof and the consummation of the
transactions contemplated hereby and thereby will not require any
consent, approval, authorization or other order of, or qualification
with, any court or governmental body or agency (except such as may be
required under the securities laws or Blue Sky laws of the various
states), conflict with or constitute a breach of any of the terms or
provisions of, or a default under, the organizational documents of such
Selling Shareholder, if such Selling Shareholder is not an individual,
or any indenture, loan agreement, mortgage, lease or other agreement or
instrument to which such Selling Shareholder is a party or by which any
property of such Selling Shareholder is bound or violate or conflict
with any applicable law or any rule, regulation, judgment, order or
decree of any court or any governmental body or agency having
jurisdiction over such Selling Shareholder or any property of such
Selling Shareholder.
The opinion of Maslon Edelman Bormany & Brand, LLP described in Section
9(f) above shall be rendered to you at the request of the Company and the
Selling Shareholders and shall so state therein.
23
<PAGE> 24
g) You shall have received on the Closing Date an opinion, dated the
Closing Date, of Sachnoff & Weaver, Ltd., counsel for the Underwriters, as to
the matters referred to in Sections 9(f)(iv) and 9(f)(vi) (but only with respect
to the Company), 9(f)(ix) (but only with respect to the statements under the
caption "Description of Capital Stock" and "Underwriting") and clauses
9(f)(xvii)(B), 9(f)(xvii)(C) and 9(f)(xvii)(D).
In giving such opinions with respect to the matters covered by Section
9(f)(xvii) above, Maslon Edelman Borman & Brand, LLP may state that their
opinion and belief are based upon their participation in the preparation of the
Registration Statement and Prospectus and any amendments or supplements thereto
and documents incorporated therein by reference and review and discussion of the
contents thereof, but are without independent check or verification except as
specified. In giving such opinions with respect to the matters covered by
clauses 9(f)(xvii)(B), 9(f)(xvii)(C), 9(f)(xvii)(D) above, Sachnoff & Weaver,
Ltd. may state that their opinion and belief are based upon their participation
in the preparation of the Registration Statement and Prospectus and any
amendments or supplements thereto (other than the documents incorporated therein
by reference) and review and discussion of the contents thereof (including the
documents incorporated therein by reference), but are without independent check
or verification except as specified.
h) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you, from Arthur Andersen LLP, independent
public accountants, containing the information and statements of the type
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial information contained
in or incorporated by reference into the Registration Statement and the
Prospectus.
i) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
j) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
k) The Company and the Selling Shareholders shall not have failed on or
prior to the Closing Date to perform or comply with any of the agreements herein
contained and required to be performed or complied with by the Company or the
Selling Shareholders, as the case may be, on or prior to the Closing Date.
l) You shall have received on the Closing Date, a certificate of each
Selling Shareholder who is not a U.S. Person (as defined under applicable U.S.
federal tax legislation) to the effect that such Selling Shareholder is no a
U.S. Person, which certificate may be in the form of a properly completed and
executed United State Treasury Department Form W-8 (or other applicable form or
statement specified by Treasury Department regulations in lieu thereof).
The several obligations of the Underwriters to purchase any Additional Shares
hereunder are subject to the delivery to you on the applicable Option Closing
Date of such documents as
24
<PAGE> 25
you may reasonably request with respect to the good standing of the Company, the
due authorization and issuance of such Additional Shares and other matters
related to the issuance of such Additional Shares.
SECTION 10. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Sellers if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis; change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus; (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market; (iii) the
suspension of trading of any securities of the Company on any exchange or in the
over-the-counter market; (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of any
court or other governmental authority which in your opinion has or will have a
Material Adverse Effect; (v) or the declaration of a banking moratorium by
either federal or New York State authorities; or (vi) the taking of any action
by any federal, state or local government or agency in respect of its monetary
or fiscal affairs which in your opinion has a material adverse effect on the
financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase the
Firm Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion which
the number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 10 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters and arrangements satisfactory to you,
the Company and the Selling Shareholders for purchase of such
25
<PAGE> 26
Firm Shares are not made within 48 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter, the
Company or the Selling Shareholders. In any such case which does not result in
termination of this Agreement, either you or the Sellers shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and the
Prospectus or any other documents or arrangements may be effected. If, on an
Option Closing Date, any Underwriter or Underwriters shall fail or refuse to
purchase Additional Shares and the aggregate number of Additional Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Additional Shares to be purchased on such date, the non-defaulting
Underwriters shall have the option to (i) terminate their obligation hereunder
to purchase such Additional Shares or (ii) purchase not less than the number of
Additional Shares that such non-defaulting Underwriters would have been
obligated to purchase on such date in the absence of such default. Any action
taken under this paragraph shall not relieve any defaulting Underwriter from
liability in respect of any default of any such Underwriter under this
Agreement.
SECTION 11. Agreements of the Selling Shareholders. Each Selling
Shareholder agrees with you and the Company:
a) To pay or to cause to be paid all transfer taxes payable in
connection with the transfer of the Shares to be sold by such Selling
Shareholder to the Underwriters.
b) To do and perform all things to be done and performed by such
Selling Shareholder under this Agreement prior to the Closing Date and to
satisfy all conditions precedent to the delivery of the Shares to be sold by
such Selling Shareholder pursuant to this Agreement.
SECTION 12. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to Norstan,
Inc., 605 North Highway 169, Twelfth Floor, Plymouth, Minnesota 55441; (ii) if
to the Selling Shareholders, to [NAME OF ATTORNEY-IN-FACT] c/o [ADDRESS OF
ATTORNEY-IN-FACT]; and (iii) if to any Underwriter or to you, to you c/o
Donaldson, Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York,
New York 10172, Attention: Syndicate Department, or in any case to such other
address as the person to be notified may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Selling Shareholders and the
several Underwriters set forth in or made pursuant to this Agreement shall
remain operative and in full force and effect, and will survive delivery of and
payment for the Shares, regardless of (i) any investigation, or statement as to
the results thereof, made by or on behalf of any Underwriter, the officers or
directors of any Underwriter, any person controlling any Underwriter, the
Company, the officers or directors of the Company, any person controlling the
Company, any Selling Shareholder or any person controlling such Selling
Shareholder; (ii) acceptance of the Shares and payment for them hereunder; (iii)
and termination of this Agreement.
26
<PAGE> 27
If for any reason the Shares are not delivered by or on behalf of any
Seller as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Sellers agree, jointly and severally, to
reimburse the several Underwriters for all out-of-pocket expenses (including the
fees and disbursements of counsel) incurred by them. Notwithstanding any
termination of this Agreement, the Company shall be liable for all expenses
which it has agreed to pay pursuant to Section 5(i) hereof. The Sellers also
agree, jointly and severally, to reimburse the several Underwriters, their
directors and officers and any persons controlling any of the Underwriters for
any and all fees and expenses (including, without limitation, the fees and
disbursements of counsel) incurred by them in connection with enforcing their
rights hereunder (including, without limitation, pursuant to Section 8 hereof).
Except as otherwise provided, this Agreement has been and is made
solely for the benefit of and shall be binding upon the Company, the Selling
Shareholders, the Underwriters, the Underwriters' directors and officers, any
controlling persons referred to herein, the Company's directors and the
Company's officers who sign the Registration Statement and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts, each of which
shall be an original or facsimile, which together shall constitute one and the
same instrument.
27
<PAGE> 28
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Shareholders and the several Underwriters.
Very truly yours,
NORSTAN, INC.
By: ___________________________________
Title: ___________________________________
THE SELLING SHAREHOLDERS NAMED IN
SCHEDULE II HERETO, ACTING
SEVERALLY
By: ___________________________________
Attorney-in-fact
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
ROBERT W. BAIRD & CO. INCORPORATED
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: ___________________________________
Title: ___________________________________
<PAGE> 29
SCHEDULE I
Number of Firm Shares
Underwriters to be Purchased
Donaldson, Lufkin & Jenrette Securities
Corporation
Robert W. Baird & Co. Incorporated
Total
------------
<PAGE> 30
SCHEDULE II
Selling Shareholders
Number of Firm Number of Additional
Name Shares Being Sold Shares Being Sold
____________________ ____________________
Total
<PAGE> 31
Annex I
[Insert names of shareholders of the Company who will be required to sign lock
ups]
<PAGE> 1
EXHIBIT 23(1)
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
Arthur Andersen LLP
Minneapolis, Minnesota
July 29, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-START> MAY-01-1997
<PERIOD-END> APR-30-1998
<CASH> 1,869
<SECURITIES> 0
<RECEIVABLES> 98,377
<ALLOWANCES> (1,171)
<INVENTORY> 10,008
<CURRENT-ASSETS> 157,521
<PP&E> 75,712
<DEPRECIATION> (37,713)
<TOTAL-ASSETS> 275,608
<CURRENT-LIABILITIES> 98,953
<BONDS> 73,323
0
0
<COMMON> 996
<OTHER-SE> 96,675
<TOTAL-LIABILITY-AND-EQUITY> 275,608
<SALES> 228,979
<TOTAL-REVENUES> 456,365
<CGS> 168,965
<TOTAL-COSTS> 445,792
<OTHER-EXPENSES> 118,376
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,927
<INCOME-PRETAX> 6,646
<INCOME-TAX> 2,791
<INCOME-CONTINUING> 3,855
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,855
<EPS-PRIMARY> 0.40
<EPS-DILUTED> 0.39
</TABLE>
