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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

FOR THE FISCAL YEAR ENDED APRIL 30, 2000
OR

Commission file number 0-8141

NORSTAN, INC.

(Exact name of registrant as specified in its chapter)

5101 Shady Oak Road, Minnetonka, Minnesota 55343
(Address of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock ($.10 par value per share)
Common Stock Purchase Rights
(Title of class)

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes /x/ No / /

    Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /

    As of July 17, 2000, the aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average high and low prices on such date as reported by the Nasdaq National Market System was approximately $44,500,000.

    As of July 17, 2000 there were outstanding 11,271,003 shares of the registrant's common stock, par value $.10 per share, its only class of equity securities.

DOCUMENTS INCORPORATED BY REFERENCE

    Portions of the registrant's definitive proxy statement to be filed within 120 days after the end of the fiscal year covered by this report are incorporated by reference into Part III hereof.

TABLE OF CONTENTS

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PART I

Item 1. Business.

BUSINESS

Summary

    Norstan is a single-source provider of leading-edge technology solutions and world-class technology services including converged voice and data infrastructure, information technology, networking, internet conferencing, communication solutions and e-business solutions to more than 18,000 business clients worldwide. Headquartered in Minneapolis, Minnesota, Norstan employs over 2,200 people with offices located throughout North America.

    To address the complex communication and information technology (IT) requirements of its customers, Norstan provides a broad range of products and services through three business segments; Communications, Consulting and Financial Services which accounted for 77.0%, 20.9% and 2.1% of Norstan's fiscal year 2000 revenues, respectively. Within the Communications business segment; Communication Solutions offers a comprehensive portfolio of technology solutions including IP Telephony, traditional PBXs, unified messaging, long distance, and conferencing and call center solutions; Communication Services provides a full array of customer support services including maintenance and support services, systems modifications and managed communication services; Advanced Services Group provides unified media and converged infrastructure solutions, Voice-Over Data Networking and IP Telephony services; and Conferencing Solutions offers audio and video bridging services, internet conferencing, webcasting, consulting services and conferencing products. The Consulting business segment provides e-business solutions including e-commerce consulting services, e-business integration services, knowledge management consulting services, customer relationship management solutions and infrastructure services. The Financial Services segment supports the sales process by providing customers with customized financing alternatives.

    The Company operates in 59 locations in 45 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 communication requirements. Current customers include IBM, Kellogg Company, 3M and Harley-Davidson. Norstan's strong emphasis on customer satisfaction is evidenced by a fiscal year 2000 survey of Norstan's communication customers, in which Norstan received an overall satisfaction rating of 93.9%. This dedication to customer service, together with the Company's breadth of service offerings has resulted in Norstan becoming the fourth largest communications services provider in North America. The Company believes that its outstanding customer service will enable Norstan to capture a greater portion of each customer's communication and IT budgets in the future as well as provide other growth opportunities through multi-channel marketing (see Norstan's Growth Strategy)

    Norstan provides leading-edge technologies in both its Communications and Consulting operations. The Company has established strategic alliances with leading communication and IT companies that enhance Norstan's ability to offer objective solutions to its customers. Communication strategic alliance partners include Siemens, VTEL, PictureTel, Latitude, Cisco Systems, Sprint, Lucent Technologies (formerly Octel), Applied Voice Technology, Rockwell, SpeechWorks and SpectraLink. IT strategic alliance partners include IBM, Siebel Systems, Lotus, Mercator and Microsoft.

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. Businesses are looking to a variety of new technologies to enhance the

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performance of their communication 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 communication 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 communication and IT systems in this business environment, the selection, implementation, customization and maintenance of these systems are 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 communication and IT services, companies are able to focus on their core businesses; access specialized technical skills; implement solutions more rapidly; benefit from flexible staffing; and reduce the cost of recruiting, training and retaining communication and IT professionals.

    As a result of these factors, demand for communication and IT services and products has grown significantly. For calendar year 1999, Phillips InfoTech (InfoTech), a market research firm specializing in telecommunications market information, estimates that the U.S. market for switching, maintenance and professional services and application equipment was over $17 billion, and the U.S. market for telecommunications maintenance and professional services was estimated to be approximately $4 billion. As customers seek the competitive advantages that advanced communication and computer telephony integration can deliver, growth of certain segments of call processing are expected to be particularly strong. According to InfoTech, between 1999 and 2004, the U.S. market for voice mail, interactive voice response units, automated call distribution equipment and other telecommunications peripherals and applications is expected to grow at a compound annual growth rate of approximately 7.5%. By 2004, the U.S. market for these associated applications and peripherals is projected to be over $10 billion. The 1999 worldwide market for IT services was estimated at $605 billion and is projected to grow to $1.3 trillion by 2004 according to Dataquest, Inc., a unit of Gartner Group, the world's premier business technology advisor. The market will continue to be fueled by end-user demand for external service providers for everything from product support to e-business transformation services to business process outsourcing. Business management services are projected to achieve the fastest growth at a compound annual growth rate of 21% through 2004.

    The markets and technologies for communication equipment and IT applications and systems continue to converge as communication equipment migrates from proprietary switches to software-driven systems operating on standardized computer platforms. As a result, businesses are integrating their communication and IT systems. In addition, many middle-market and Fortune 500 companies rely on multiple, often specialized, providers to help implement and manage their communication 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 communication and IT solutions. As previously separate communication 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 communication 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 communication 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 communication products and services, along with the capability of its IT consultants, to deliver a unified communication 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 communication and IT solutions throughout the entire life cycle of a project. Norstan's ability to serve

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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 communication and IT solutions will enable it to capitalize on the continuing growth and convergence of communication and IT needs of middle-market and Fortune 500 companies.

Norstan's Business Strategy

    The Company's objective is to become a leading provider of communication 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 Communication and Information Technologies.  Norstan's established communication 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 communication 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.

    Offer a Broad Range of Communication 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' communication and IT needs. The ability to provide consulting services, hardware, software, training and on-going support enables Norstan to offer a unified communication and IT solution throughout the life cycle of a project. This capability will become increasingly important as communication and information technologies continue to converge and customers look to retain a single-source provider for all their communication and IT needs.

    Attract, Develop and Retain Highly Skilled Professionals.  The Company seeks to attract, develop and retain the highest caliber of communication and IT consultants and service personnel. Norstan places a strong emphasis on the career development and training of its IT consultants through its Consulting Manager program. Consulting 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 fiscal year 2000 survey of Norstan's communication customers, in which Norstan received an overall satisfaction rating of 93.9%. The Company believes that its reputation for superior service will lead to opportunities in its multi-channel marketing strategy and for cross-selling additional products and services to its customer base.

    Offer Leading-Edge Technologies.  Norstan maintains several strategic alliances with business partners that enhance Norstan's ability to offer leading-edge technologies. Communication strategic alliance partners include Siemens, VTEL, PictureTel, Latitude, Cisco Systems, Sprint, Lucent Technologies (formerly Octel), Applied Voice Technology, Rockwell, SpeechWorks and SpectraLink. IT strategic alliance partners include IBM, Siebel Systems, Lotus, Mercator and Microsoft. These strategic alliances provide the Company with access to training, product support and current technology as well as the use of the

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"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

    The Company has expanded its traditional "direct-to-the-end-user" marketing strategy with a multi-channel marketing organization that focuses on expanded opportunities. This strategy is intended to bring the Company's core competencies in communication and professional services to the forefront of its new business model. More specifically, Norstan is now focused on marketing its industry-leading professional, consulting and traditional support services through a broad spectrum of enterprise solution providers in addition to the Company's current direct enterprise marketing activities. Such enterprise solution providers include Competitive Local Exchange Carriers (CLECs), Incumbent Local Exchange Carriers (ILECs), Internet Service Providers (ISPs), and Applications Services Providers (ASPs) as well as other channel partners, such as Value-Added Resellers (VARs), Systems Integrators, and Manufacturer Direct channels.

    The Company's growth strategy is centered around the development of marketing relationships and alliances with other enterprise solution providers looking to deliver to their customers the leading-edge New Economy technology solutions that Norstan provides. These include Customer Relationship Management, Custom Contact Center, Unified Media, Hosted Internet Conferencing, Network Management Services and Converged Infrastructure, including Internet Protocol (IP) Telephony. Norstan's new business partners can turn to the Company for assistance when their own focus or capabilities lie outside the required comprehensive support services. This will open Norstan to a large, fast-growing, and essentially untapped layer of service opportunities for these enterprise solution providers seeking to better serve their own end-user customers.

    Services offered to these multi-channel partners include a complete spectrum of capabilities from applications planning through solution implementation, network monitoring, installation, support and maintenance. According to industry studies by InfoTech, the combined markets for these services are projected to be $28 billion by 2004 and expected to grow at an average annual growth rate of nearly 40% between 2000 and 2004. InfoTech participated with Norstan in the development of the Company's growth strategy.

    In addition, the Company will provide a complete "end-to-end" offering for Network Management Support and Services, including 24-hour monitoring, remote trouble shooting, and the traditional "break-fix" capability to the data networking and Internet Protocol Telephony markets. Demand for Network Management Services is projected to increase significantly as business enterprises increase mission-critical e-Business voice and data applications over their data networks, a trend fueled by implementation of IP Telephony. These IP solutions are projected to grow at an average annual rate of 138% over the next four years, according to a study published by InfoTech. The requirement for 100% availability of integrated voice-data applications will demand that these networks be continuously monitored for quality of service and "up-time."

    The Company has established a New Business Development Group whose mission is to ensure maximum penetration for these market opportunities through the development of new channels and strategic alliances. In July 2000, the Company entered into agreements with Rockwell Electronic Commerce Corporation and Science Applications International Corporation (SAIC) establishing two new channels for the delivery of Norstan's products and services.

    Norstan also 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 communication and IT services and solutions. Management believes the convergence of communication and information technologies, together with the Company's high level of customer satisfaction, will position Norstan to become a preferred provider of both communication and IT solutions.

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Products and Services

    Norstan provides customers with a broad range of communication 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, Communications, Consulting and Financial Services and are summarized in the following tables:

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Customers

    Norstan focuses its marketing efforts on middle-market and Fortune 500 companies with complex communication 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 include the following:

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Strategic Alliances

    The Company believes that its relationships with a wide range of leading technology companies enhance Norstan's ability to deliver the appropriate solution to each customer. Communication strategic alliance partners include Siemens, VTEL, PictureTel, Latitude, Cisco Systems, Sprint, Lucent Technologies (formerly Octel), Applied Voice Technology, Rockwell, SpeechWorks and SpectraLink. In addition, the Company distributes complementary communication products that fit specific segments of the marketplace. These include hybrid switching systems, personal computer-based voice processing and video conferencing systems, as well as data communication products from Novell, Newbridge and others. IT strategic alliance partners include IBM, Siebel Systems, Lotus, Mercator and Microsoft. Siebel Systems, a leading customer care and sales automation software provider, has granted Premier Consulting Partner status to Connaissance Consulting (a majority-owned Norstan affiliate).

    Norstan has been a distributor of Siemens communication equipment since 1976 and is Siemens' largest independent distributor in North America. The term of the current distributor agreement with Siemens, signed in January 1999, is five years. 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 over 400 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, call centers, communication services, education and training, and other areas. These specialists partner with the sales representatives who have primary responsibility for the customer relationship to develop integrated technology solutions which 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 also maintains a new account sales team to pursue new customer prospects.

    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 communication and IT systems requirements. After determining the customer's needs, the sales representative and product specialist develop a solution that satisfies current and anticipated future 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 designed to capture a larger portion of existing customers' communication and IT budgets and to identify and develop new customer relationships. In particular, the Company believes that its installed base of communication 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 communication 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 communication and IT products and services.

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Customer Service

    Norstan believes that providing exceptional customer service is an important element of its ability to compete effectively in the communication and IT marketplace. Norstan has invested heavily in new technology designed to help it 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 2000, these centers handled over 220,000 customer calls with approximately 59% of the service-related calls being addressed remotely. Only 18% of customer calls were resolved remotely in fiscal year 1994. The Company's goal for fiscal year 2001 is to resolve in excess of 60% of service calls remotely. For calls requiring immediate on-site service and support, Norstan maintains a force of highly trained service technicians, design engineers and customer support representatives.

    Norstan has approximately 140 employees in its three remote diagnostics and dispatch centers devoted primarily to providing customer service and has over 400 service technicians in the field. With Norstan's remote problem resolution capability and its staff of highly trained technicians, Norstan is able to promptly resolve customer support requests. Norstan's commitment to customer service is evidenced by a fiscal year 2000 survey of Norstan's communication customers that found an overall satisfaction rating of 93.9%.

Locations

    The Company currently supports its Communications and Consulting business clients with sales and service locations in the United States and Canada. The Company maintains 59 sales and service locations in 45 cities, including the following:

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Employees

    The Company's U.S. operations had a total of 2,077 employees as of April 30, 2000, consisting of 382 sales and marketing personnel, 793 operations, service and installation employees, 556 consulting employees and 346 administrative employees. Of these employees, approximately 95 were covered by collective bargaining agreements. The Company considers relations with its employees to be good and has not experienced any work stoppages.

    The Company's Canadian operations had a total of 170 employees as of April 30, 2000, consisting of 55 sales and consulting personnel, 88 operations, service and installation employees, and 27 administrative personnel. The Company considers relations with the Canadian employees to be good and has not experienced any work stoppages.

Competition

    The communication 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 may 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.

    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 communication 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.

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 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 49 states. The Company is also subject to FCC regulations, which require the filing of federal tariffs.

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Backlog

    As of April 30, 2000, the Company had signed contracts for telecommunications products aggregating approximately $35.9 million, substantially all of which are expected to be fulfilled by the end of fiscal 2001. As of April 30, 1999, the Company had signed contracts aggregating approximately $47.3 million, substantially all of which were fulfilled by the end of fiscal 2000. The usual time period between the execution of a contract and the completion of the installation is one to six months, depending on the size and complexity of the system.

Item 2. Properties.

    The executive offices of the Company are located in Minnetonka, Minnesota, where the Company leases approximately 234,000 square feet of office space. 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 42 other cities within the United States. In Canada, the Company leases approximately 36,000 square feet of office space in Toronto, 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.

Item 3. Legal Proceedings.

    The Company is involved in legal actions in the ordinary course of its business. Although the outcomes of any such legal actions cannot be predicted, in the opinion of management there is no legal proceeding pending against or involving the Company for which the outcome is likely to have a material adverse effect upon the business, operating results and financial condition of the Company.

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

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

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PART II

Item 5. Market for the Company's Common Equity and Related Stockholder Matters.

Price Range of Common Stock

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

    The quotations reflect prices between dealers and do not include retail mark-ups, mark-downs or commissions, and do not necessarily represent actual transactions.

    As of July 17, 2000, there were 2,854 holders of record of the Company's common stock.

Restrictions on the Payment of Dividends

    The Company has not recently declared or paid any cash dividends on the common stock and does not intend to pay cash dividends on the common stock in the foreseeable future. The Company currently expects to retain earnings to finance the operations and the expansion of its business. In addition, the Company's current revolving long-term credit agreement prohibits the payment of cash dividends without the prior written consent of the lenders thereunder.

Item 6. Selected Consolidated Financial Data.

    The selected consolidated financial data set forth below as of and for each of the fiscal years in the five-year period ended April 30, 2000 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

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Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and the notes thereto included elsewhere in this report.

    On June 20, 1996, the Company's Board of Directors approved a two-for-one stock split effected in the form of a stock dividend. The stock split has been retroactively reflected in the selected 1996 consolidated financial data presented above.

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

General

    Norstan is a single-source provider of leading-edge technology solutions and world-class technology services including converged voice and data infrastructure, information technology, networking, internet conferencing, communication solutions and e-business solutions to more than 18,000 business clients worldwide. To address the complex communication requirements of its customers, Norstan provides a broad range of products and services through three business segments; Communications, Consulting and Financial Services which accounted for 77.0%, 20.9% and 2.1% of Norstan's fiscal year 2000 revenues, respectively. Within the Communications business segment; Communication Solutions offers a comprehensive portfolio of technology solutions including IP Telephony, traditional PBXs, unified messaging, long distance and conferencing and call center solutions; Communication Services provides a full array of customer support services including maintenance and support services, systems modifications and managed communication services; Advanced Services Group provides unified media and converged infrastructure solutions and Voice-Over Data Networking and IP Telephony services and Conferencing Solutions offers audio and video bridging services, internet conferencing, webcasting, consulting services and conferencing products. The Consulting business segment provides e-business solutions including e-commerce consulting services, e-business integration services, knowledge management consulting services, customer relationship management solutions and infrastructure services. The Financial Services segment supports the sales process by providing customized financing alternatives.

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:

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    The following table sets forth the gross margin percentages for Communications, Consulting and Financial Services:

Fiscal 2000 Compared to Fiscal 1999

    Revenues.  Total revenues decreased 13.3% to $418.5 million in fiscal year 2000 from $482.7 million in fiscal year 1999.

    Revenues from Communications decreased 10.3% to $322.3 million in fiscal year 2000 from $359.4 million in fiscal year 1999. Communications revenues decreased as a result of weaker sales in most Communication Solutions product lines including Siemens PBX, voice processing and conferencing. These decreases were somewhat offset by an increase in Network Services revenues. Also within this segment, Communication Services revenues decreased on a year-to-year basis. Maintenance service contract revenues were flat while revenues from moves, adds and changes and cabling services were down as compared to fiscal 1999. Overall, performance in the Communications segment was negatively affected by significant management and organizational changes occurring during the fiscal year. In addition, customer concerns about the Year 2000 issue resulted in depleted budgets, postponed equipment purchases and installations and delayed communications and IT projects until after January 1, 2000. This is also evident in the performance of the Company's Consulting segment.

    Revenues from Consulting decreased 24.3% to $87.3 million in fiscal year 2000 from $115.3 million in fiscal year 1999. The decrease in Consulting revenues was partially due to the disruption experienced in Norstan Consulting's business as it transitioned from a staff augmentation, geographic consulting model to a project based consulting model. In addition, significant management and organizational changes were made to address problems within the Consulting segment during the fiscal year. These changes resulted from problems associated with weak sales, decreased productivity and reduced consultant utilization in fiscal 2000. Consulting revenues were also negatively impacted by the overall slowdown in IT consulting projects as a result of Year 2000 issues. Norstan Consulting's revenue decrease was only somewhat offset by an increase in Connaissance Consulting's fiscal 2000 revenues.

    Revenues from Financial Services increased 11.8% to $8.9 million in fiscal year 2000 from $8.0 million in fiscal year 1999. This increase was primarily attributable to the increased size of the Company's leasing base.

    Gross Margin.  The Company's gross margin was $97.7 million and $145.0 million for the fiscal years ended April 30, 2000 and 1999, respectively. As a percent of total revenues, gross margin was 23.4% for fiscal year 2000 compared to 30.0% for fiscal year 1999.

    Gross margin as a percent of revenues for Communications was 21.7% for fiscal year 2000 as compared to 27.8% for fiscal year 1999. During fiscal 2000, gross margin as a percent of revenues in both Communication Solutions and Communication Services declined as compared to fiscal 1999. These decreases were the result of staffing for higher volumes of revenues which did not materialize, charges associated with project cost overruns and revaluations of inventory which were recorded during the fiscal year. In addition, Communication Solutions' gross margin continues to be adversely affected by competitive price pressure on communication equipment and by increased product costs.

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    Gross margin as a percent of revenues for Consulting was 24.8% for fiscal year 2000 as compared to 34.8% for fiscal year 1999. The decline in Consulting's gross margin was caused primarily by lower utilization of consultants which occurred as Norstan Consulting transitioned its business model and while significant management and organizational changes were undertaken.

    Gross margin as a percent of revenues for Financial Services was 69.5% for fiscal year 2000 as compared to 62.7% for fiscal year 1999.

    Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased 11.8% to $143.8 million in fiscal year 2000 from $128.7 million in fiscal year 1999. As a percent of revenues, selling, general and administrative expenses increased to 34.4% for fiscal year 2000, as compared to 26.7% for fiscal year 1999. The percentage increase was primarily due to the lower than planned sales volume in the Communications and Consulting business segments. The Company budgeted for, staffed and built the infrastructure to support higher revenue levels which did not materialize during the fiscal year.

    The Company has begun to take significant cost saving measures within the Consulting segment. On March 9, 2000, approximately 180 consultants and sales positions were eliminated. The eliminated jobs represented about 25% of the total workforce of Norstan Consulting. These actions were taken to bring the Company's consultant utilization rate back in line with industry averages and reduce excess capacity, particularly in practice areas that are less in demand. The Company is refining its skill base in order to focus on and facilitate future growth in customer care solutions with an emphasis on e-business and enterprise relationship management. In conjunction with the workforce reduction, the Company also addressed non-personnel related spending in both the Consulting and Communications business segments. The combined effect of these actions is expected to produce estimated annual savings of up to $30 million.

    Restructuring Charges.  During the second quarter of fiscal 2000, the Company recorded a restructuring charge of approximately $2.0 million related to its Consulting business. The emphasis of the restructuring was to consolidate branch offices and reduce certain general and administrative costs. Norstan Consulting has transitioned to a project-based business model in which the physical presence of geographic branches becomes far less important than the ability to move skilled consulting resources to customer engagements. The $2.0 million charge consisted of noncancelable lease obligations for branch offices to be closed ($1.0 million), software and other asset write-offs ($800,000), and severance costs ($200,000).

    Writedown of Goodwill.  During the fourth quarter of fiscal year 2000, the Company recorded a charge of $32.2 million to write down goodwill created in connection with its consulting business acquisitions, principally as a result of significant operating losses and negative cash flows incurred in the Consulting business segment during fiscal 2000.

    Interest Expense.  Interest expense was $6.3 million for fiscal year 2000 as compared to $4.9 million for fiscal year 1999. Interest expense is incurred primarily in connection with the Company's revolving credit line used for working capital purposes. Average month-end borrowings outstanding under the Company's revolving long-term credit agreements were $74.0 million for fiscal year 2000 and $64.9 million for fiscal year 1999. Weighted average interest rates under the Company's revolving long-term credit agreements were 7.1% for fiscal year 2000 as compared to 6.5% for fiscal year 1999.

    Other Income (Expense), net.  In October 1999, the Company sold its web-based consumer education business to TechSkills.com (formerly AmeriTrain) of Milwaukee, Wisconsin. Terms of the sale called for the transfer of four training sites and 32 instructors and other education services staff to TechSkills.com. The total sale price was approximately $2.6 million, with a $734,000 gain recorded in fiscal year 2000.

    Income Taxes.  The Company's effective income tax rate was 20.0% for fiscal year 2000 and 43.5% for fiscal year 1999. 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, as well as the impact of the fiscal 2000 goodwill writedown discussed previously.

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    Net Income (Loss).  A net loss of $68.9 million or $6.37 per basic and diluted share was incurred in fiscal year 2000, as compared to net income of $5.9 million or $0.56 per diluted share in fiscal year 1999. The net loss before the writedown of goodwill for the year ended April 30, 2000 was $43.0 million or $3.98 per share.

Fiscal 1999 Compared to Fiscal 1998

    Revenues.  Total revenues increased 5.8% to $482.7 million in fiscal year 1999 from $456.4 million in fiscal year 1998.

    Revenues from Communications decreased 6.9% to $359.4 million in fiscal year 1999 from $385.9 million in fiscal year 1998. The decrease was primarily attributable to decreased sales volume in the Siemens PBX, call center, and conferencing product lines which resulted from distractions in the overall marketing and sales effort during the significant third quarter restructuring actions. These decreases were some what offset by an increase in Network Services revenue and maintenance service contract revenue of 25% and 6%, respectively.

    Revenues from Consulting increased 83.1% to $115.3 million in fiscal year 1999 from $63.0 million in fiscal year 1998. This increase was the result of growth in Norstan Consulting's revenues including (i) internal revenue growth of 22%, (ii) inclusion of a full year results from PRIMA Consulting, which was acquired in September of 1997, (iii) inclusion of Wordlink, Inc. results since June of 1998, and (iv) inclusion of Connaissance Consulting results.

    Revenues from Financial Services increased 7.0% to $8.0 million in fiscal year 1999 from $7.4 million in fiscal year 1998. This increase was primarily attributable to the increased size of the Company's leasing base.

    Gross Margin.  The Company's gross margin was $145.0 million and $128.9 million for the fiscal years ended April 30, 1999 and 1998, respectively. As a percent of total revenues, gross margin was 30.0% for fiscal year 1999 compared to 28.3% for fiscal year 1998.

    Gross margin as a percent of revenues for Communications was 27.8% for fiscal year 1999 as compared to 26.6% for fiscal year 1998. Within Communications, Network Services' increase in gross margin more than offset a decrease in Communications Solutions' product gross margin. Communication Services' gross margin was relatively flat year-to-year.

    Gross margin as a percent of revenues for Consulting was 34.8% for fiscal year 1999 as compared to 33.9% for fiscal year 1998. The improved margin was primarily a result of Norstan Consulting's increased billing rates and utilization of consultants and a decreased emphasis on lower margin IT consulting as well as the inclusion of Connaissance Consulting.

    Gross margin as a percent of revenues for Financial Services was 62.7% for fiscal year 1999 as compared to 67.2% for fiscal year 1998.

    Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased 24.1% to $128.7 million in fiscal year 1999 from $103.7 million in fiscal year 1998. As a percent of revenues, selling, general and administrative expenses increased to 26.7% for fiscal year 1999, as compared to 22.7% for fiscal year 1998. This increase was primarily the result of fiscal 1999 investments in the Consulting business segment, including the opening of five new consulting branch locations and the startup of Connaissance Consulting.

    Restructuring Charges.  During the third quarter of fiscal year 1999, Norstan recorded a restructuring charge of $1.5 million relating to a workforce reduction. This resource reduction in the Communications business was made to bring the Company's expense structure in line with anticipated growth. The restructuring charge related to the costs of severance and other employment termination benefits.

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    Interest Expense.  Interest expense was $4.9 million for fiscal year 1999 as compared to $3.9 million for fiscal year 1998. This increase was primarily the result of higher borrowing levels in fiscal year 1999 due to the additional investments in the Consulting business, including the operations of PRIMA Consulting and Connaissance Consulting, as well as for working capital purposes. Average month-end borrowings outstanding under the Company's revolving long-term credit agreements were $64.9 million for fiscal year 1999 and $46.7 million for fiscal year 1998. Weighted average interest rates under the Company's revolving long-term credit agreements were 6.5% for fiscal year 1999 as compared to 7.0% for fiscal year 1998.

    Income Taxes.  The Company's effective income tax rate was 43.5% for fiscal year 1999 and 42.0% for fiscal year 1998. 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 $5.9 million or $0.56 per diluted share in fiscal year 1999, as compared to $3.9 million or $0.39 per diluted share in fiscal year 1998.

Unaudited Quarterly Results

    The following table sets forth certain unaudited quarterly operating information for each of the eight quarters in the two year period ending April 30, 2000. 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.

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Liquidity and Capital Resources

    Cash Flows.  Net cash provided by operating activities was $17.9 million, $6.4 million and $5.5 million for fiscal 2000, 1999 and 1998, respectively. Net cash of $15.8 million was used for investing activities in fiscal 2000, which was a decrease from fiscal 1999 and 1998 levels of $38.5 million and $44.9 million, respectively. This lower level of cash used for investing activities in fiscal year 2000 compared to fiscal 1999 and 1998 was mainly due to decreased investments in property and equipment. Financing activities utilized $2.9 million in cash in fiscal 2000 as compared to providing cash of $31.1 million in fiscal 1999 and $36.1 million in fiscal 1998.

    Capital Expenditures.  The Company used $11.0 million for capital expenditures during fiscal year 2000 as compared to $26.8 million in fiscal year 1999 and $19.9 million in fiscal year 1998. These expenditures were primarily for capitalized costs incurred in connection with obtaining or developing internal use software and computer equipment.

    Investment in Lease Contracts.  The Company continues to make a significant investment in lease contracts with its customers. The additional investment made in lease contracts in fiscal year 2000 totaled $32.5 million as compared to $35.6 million in fiscal 1999 and $28.0 million in fiscal 1998. Net lease receivables increased to $67.7 million at April 30, 2000 from $63.0 million at April 30, 1999. The Company utilizes its lease receivables and corresponding underlying equipment to borrow funds from financial institutions on a nonrecourse basis by discounting the stream of future lease payments. Proceeds from discounting are presented on the consolidated balance sheet as discounted lease rentals. Discounted lease rentals totaled $44.8 million at April 30, 2000 as compared to $54.2 million at April 30, 1999. Interest rates on these credit agreements at April 30, 2000 ranged from 6.0% to 10.0%, while payments are due in varying monthly installments through November 2005. Payments due to financial institutions are made from monthly collections of lease receivables from customers.

    Capital Resources.  As of June 30, 2000, the Company had a $90.0 million revolving credit agreement with certain banks. Sublimits exist related to the Company's support of its leasing activities. Borrowings under this agreement bear interest at rates based on the banks' reference rate, as well as LIBOR or CD based options. Interest rates on borrowings outstanding as of April 30, 2000 ranged from 7.1% to 10.3%. Total consolidated borrowings under this agreement at April 30, 2000 and April 30, 1999 were $66.8 million and $60.2 million, respectively. There were no borrowings on account of the Company's leasing activities at April 30, 2000 and 1999. 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 achieve certain other financial ratios.

    As of April 30, 2000, the Company was in violation of certain covenants under this credit agreement. The Company has been provided a temporary forbearance period until September 25, 2000 with respect to these covenant violations. In addition, borrowing capacity has been reduced to $78.0 million as of July 31, 2000. Additional financial reporting and collateral are also required. The Company expects to repay borrowings under this agreement with anticipated proceeds from the new financing arrangements discussed below.

    On August 14, 2000, the Company received a letter of commitment from a new banking group for funding of up to $80.0 million. The commitment includes $50.0 million available under a revolving credit agreement (subject to borrowing base limitations related to eligible accounts receivable, inventories and lease receivables) and $30.0 million in the form of a term note. Under this credit facility, the first $10.0 million borrowed under the revolving line will bear interest at 2.25% above the banks' reference rate. Additional revolver borrowings in excess of $10.0 million will bear interest at between 1.0% and 1.5% above the banks' reference rate depending on the Company's EBITDA for applicable periods. The rate of interest charged on the term loan will be 6.0% above the greater of 9.0% and the banks' reference rate. The revolving credit agreement will be effective through the third anniversary of the agreements' initial

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closing date. The term note will mature on the first anniversary of the initial closing date. Under the agreement, the Company will be required to comply with various financial and other covenants.

    Management of the Company believes that a combination of cash expected to be generated from operations, and borrowing capacity available under the new financing arrangements discussed above will be adequate to meet the anticipated liquidity and capital resource requirements of its business through at least April 30, 2001.

Acquisitions

    On June 19, 1998, the Company acquired Wordlink, Inc. (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 merger agreement provided for the conversion of all shares of Wordlink common stock and all vested Wordlink stock options issued and outstanding into 420,539 shares of Norstan common stock valued at approximately $10.3 million. All outstanding Wordlink unvested stock options were converted into the equivalent value of Norstan stock options. Wordlink's shareholders' equity and operating results were not material in relation to the Company's financial statements. As such, the Company has recorded 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 Consulting (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. This transaction resulted in the recording of $24.9 million in goodwill and other intangible assets.

    On June 4, 1996, the Company acquired Connect Computer Company (Connect) in a transaction accounted for under the purchase method. Connect is a provider of consulting, design and implementation services for local and wide area networks, Internets and intranets, client/server applications and workgroup computing. The acquisition 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 paid $4.0 million in contingent consideration over a three-year period ending April 30, 1999. This transaction resulted in the recording of $18.4 million in goodwill and other intangible assets.

Impact of Year 2000

    The Company experienced no significant system problems at the beginning of calendar 2000. In addition, the Company is not aware of any material problems experienced by its suppliers and business partners. The Company believed it adequately addressed the Year 2000 issue related to its internal systems and that it did not have a material impact on its business, financial condition or its results of operations.

    During the third quarter of fiscal 2000, the Company completed an assessment of its systems hardware and software, completed testing of its critical systems to verify date-handling functionality, and made all necessary modifications. This comprehensive Year 2000 initiative cost the Company approximately $2.0 million. The Company continues to monitor its systems' performance, and does not anticipate future issues related to Year 2000 matters.

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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; stability of foreign governments; market acceptance of the Company's products and services; the Company's continued ability to provide integrated communication 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.

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

    In the ordinary course of business, the Company is exposed to foreign currency and interest rate risks. These risks primarily relate to the sale of products to foreign customers and changes in interest rates on the Company's long-term debt obligations, discounted lease rentals, capital leases and other long-term debt obligations.

    The potential loss from a hypothetical 10% adverse change in foreign currency rates on the Company's foreign installment contracts at April 30, 2000 would not materially affect the Company's consolidated financial position, results of operations or cash flows.

    The Company's current unsecured revolving long-term credit agreement carries interest rate risk that is generally related to either the banks' reference rate, LIBOR or CD rates or commercial paper based options. If any of those rates or options were to change while the Company was borrowing under the agreement, interest expense would increase or decrease accordingly. As of April 30, 2000, total consolidated borrowings under this agreement were $66.8 million.

    The Company has no earnings or cash flow exposure due to market risks on its discounted lease rentals or its capital lease and other long-term debt obligations as a result of the fixed-rate nature of the lease rentals, capital leases and obligations. However, interest rate changes would affect the fair market value of the lease rentals, capital leases and debt. At April 30, 2000, the Company had fixed rate lease rentals of $44.8 million and capital lease and other long-term debt obligations of $1.8 million.

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Item 8. Financial Statements and Supplementary Data.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES

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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, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended April 30, 2000. These financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and this schedule based on our audits.

    We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2000 in conformity with accounting principles generally accepted in the United States.

    Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule of Valuation and Qualifying Accounts is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

ARTHUR ANDERSEN LLP

Minneapolis, Minnesota,
June 16, 2000
(except for certain matters discussed in Note 6, as to which the date is August 15, 2000)

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NORSTAN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Amounts)

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

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NORSTAN, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share Amounts)

The accompanying notes are an integral part of these consolidated balance sheets.

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NORSTAN, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In Thousands)