-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Op9LlCrNkxglfM8A/Dyh4zx8oHnRnyYAEUXpOfxRO4eK6OI1m9oKCIAiix5jXbSY 3BUX+D3fO48hE27r4TWY4g== 0000912057-96-012760.txt : 19960621 0000912057-96-012760.hdr.sgml : 19960621 ACCESSION NUMBER: 0000912057-96-012760 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960604 ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960620 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORSTAN INC CENTRAL INDEX KEY: 0000072418 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TELEPHONE INTERCONNECT SYSTEMS [7385] IRS NUMBER: 410835746 STATE OF INCORPORATION: MN FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-08141 FILM NUMBER: 96583412 BUSINESS ADDRESS: STREET 1: 6900 WEDGWOOD RD STE 150 STREET 2: P O BOX 9003 CITY: MAPLE GROVE STATE: MN ZIP: 55311 BUSINESS PHONE: 6124201100 MAIL ADDRESS: STREET 1: NORSTAN INC STREET 2: 6900 WEDGEWOOD ROAD CITY: MAPLE GROVE STATE: MN ZIP: 55311 FORMER COMPANY: FORMER CONFORMED NAME: NORSTAN RESEARCH & DEVELOPMENT CO DATE OF NAME CHANGE: 19770926 FORMER COMPANY: FORMER CONFORMED NAME: NORSTAN MANUFACTURING CO INC DATE OF NAME CHANGE: 19750918 8-K/A 1 FORM 8-K/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 8-K/A No. 1 Current Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 Date of Report (Date of earliest event reported)........ June 4, 1996 NORSTAN, INC. - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) MINNESOTA 0-8141 41-0835746 - ---------------------------- ------------------------ --------------------- (State or other jurisdiction (Commission File Number) (I.R.S. Employer of incorporation) Identification Number) 609 North Highway 169 Plymouth, MN 55441 ---------------------------------------- (Address of principal executive offices) Registrant's telephone number, including area code ....... (612) 513-5000 Not Applicable ------------------------------------------------------------ (Former name or former address, if changed since last report) ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED. Report of Independent Accountants Balance Sheets as of December 31, 1995 and 1994 Statements of Operations for the years ended December 31, 1995 and 1994 Statements of Stockholders' Equity for the years ended December 31, 1995 and 1994 Statements of Cash Flows for the years ended December 31, 1995 and 1994 Notes to Financial Statements Unaudited Balance Sheets as of March 31, 1996 and 1995 Unaudited Statements of Operations for the quarter ended March 31, 1996 and 1995 Unaudited Statements of Stockholders' Equity for the quarter ended March 31, 1996 and 1995 Unaudited Statements of Cash Flows for the quarter ended March 31, 1996 and 1995 (b) PRO FORMA FINANCIAL INFORMATION. Pro Forma Consolidated Balance Sheet as of January 27, 1996 (unaudited) Pro Forma Consolidated Statements of Operations for the year ended April 30, 1995 and for the nine months ended January 27, 1996 (unaudited) Notes to Pro Forma Consolidated Financial Statements (c) EXHIBITS. The following documents are filed as an exhibit to this Form 8-K and are is incorporated herein by reference: EXHIBIT NO. DESCRIPTION ----------- ----------- 2 Agreement and Plan of Merger, dated May 24, 1996, by and among Norstan, Inc., CCC Acquisition Subsidiary and Connect Computer Company. 23 Consent of Coopers & Lybrand LLP -1- Report of Independent Accountants To the Stockholders and Board of Directors of Connect Computer Company: We have audited the accompanying balance sheets of Connect Computer Company as of December 31, 1995 and 1994, and the related statements of operations, stockholders' equity and cash flows for the years then ended. 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 Connect Computer Company as of December 31, 1995 and 1994, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. Minneapolis, Minnesota February 20, 1996, except as to Note 8, Subsequent Event, for which the date is March 1, 1996. -2-
CONNECT COMPUTER COMPANY BALANCE SHEETS AS OF DECEMBER 31, 1995 AND 1994 ASSETS 1995 1994 Current assets: Cash $ 18,374 Accounts receivable, net $3,909,318 2,241,786 Inventories 247,456 225,274 Prepaid expenses 159,715 112,191 Deferred income taxes 54,000 21,000 Note receivable 58,077 ----------- ----------- Total current assets 4,370,489 2,676,702 Furniture and equipment, net 2,010,871 1,220,228 Deferred income taxes 33,000 41,000 Other assets 78,038 21,200 ----------- ----------- Total assets $6,492,398 $3,959,130 ----------- ----------- ----------- ----------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable, bank 1,000,000 500,000 Current portion of long-term debt 129,996 171,912 Current portion of capital lease obligations 344,711 74,498 Accounts payable, including cash overdraft of $30,688 as of December 31, 1995 1,184,653 1,138,967 Accrued expenses 514,062 277,319 Income taxes payable 300,213 10,713 Deferred revenues 463,634 380,858 ----------- ----------- Total current liabilities 3,937,269 2,554,267 ----------- ----------- Long-term debt, less current portion 476,652 603,341 Capital lease obligations, less current portion 649,248 93,902 Deferred rent 87,744 85,748 Deferred compensation 59,500 19,500 Deferred gain on sale of equipment 15,418 Commitments Stockholders' equity: Common stock, $.01 par value; 100,000,000 shares authorized; shares issued and outstanding 3,353,100 and 3,348,500 at December 31, 1995 and 1994, respectively 33,531 33,485 Additional paid-in capital 8,287 8,000 Retained earnings 1,255,665 579,117 ----------- ----------- 1,297,483 620,602 Less: Promissory notes receivable from sale of common stock (15,498) (33,648) ----------- ----------- Total stockholders' equity 1,281,985 586,954 ----------- ----------- Total liabilities and stockholders' equity $6,492,398 $3,959,130 ----------- ----------- ----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -3-
CONNECT COMPUTER COMPANY STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 1995 1994 Revenues: Technical and consulting services $ 17,234,329 $ 10,278,345 Product sales 6,068,987 5,916,591 ------------- ------------- 23,303,316 16,194,936 ------------- ------------- Costs and expenses: Cost of services 11,922,865 6,973,119 Cost of products sold 5,154,871 4,844,339 ------------- ------------- 17,077,736 11,817,458 ------------- ------------- Gross profit 6,225,580 4,377,478 Selling, general and administrative 4,918,274 3,857,566 ------------- ------------- Operating income 1,307,306 519,912 Other income (expense): Interest expense (179,416) (120,512) Interest and other income, net 62,658 6,115 ------------- ------------- Income before income taxes 1,190,548 405,515 Income taxes 514,000 180,000 ------------- ------------- Net income $ 676,548 $ 225,515 ------------- ------------- ------------- -------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -4-
CONNECT COMPUTER COMPANY STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 Additional Promissory Common Paid-In Note Retained Stock Capital Receivable Earnings Total Balances, December 31, 1993 $ 32,985 $ (28,960) $ 353,602 $ 357,627 Sale of common stock 500 $ 8,000 (8,500) Proceeds from payments of promissory notes receivable 3,812 3,812 1994 net income 225,515 225,515 ----------- ----------- ----------- ----------- ----------- Balances, December 31, 1994 33,485 8,000 (33,648) 579,117 586,954 Exercise of stock options 46 287 333 Proceeds from payments of promissory notes receivable 18,150 18,150 1995 net income 676,548 676,548 ----------- ----------- ----------- ----------- ----------- Balances, December 31, 1995 $ 33,531 $ 8,287 $ (15,498) $1,255,665 $1,281,985 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -5-
CONNECT COMPUTER COMPANY STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 1995 1994 Cash flows from operating activities: Net income $ 676,548 $ 225,515 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 638,173 484,075 Recognition of deferred gain on sale of equipment (15,418) (19,175) Deferred income taxes (25,000) (44,000) Deferred rent 1,996 49,717 Provision for write-down of inventories 35,736 Deferred compensation 40,000 19,500 Other 2,662 (21,200) Changes in operating assets and liabilities: Accounts receivable (1,667,532) (342,670) Inventories (22,182) 44,085 Prepaid expenses (47,524) (34,205) Accounts payable 14,998 66,945 Accrued expenses 236,743 168,607 Income taxes payable 289,500 10,713 Deferred revenues 82,776 (141,456) -------------- -------------- Net cash provided by operating activities 205,740 502,187 -------------- -------------- Cash flows from investing activities: Purchase of furniture and equipment (462,190) (817,127) Proceeds from payments of note receivable 58,077 72,226 Purchase of investments to fund deferred compensation liability (59,500) -------------- -------------- Net cash used in investing activities (463,613) (744,901) -------------- -------------- Cash flows from financing activities: Payments of note payable, bank (8,250,000) (4,105,000) Borrowings under note payable, bank 8,750,000 4,105,000 Payments of long-term debt (818,605) (438,272) Payments of capital lease obligation (141,067) (58,872) Proceeds from long-term debt 650,000 750,000 Increase in cash overdraft 30,688 Proceeds from the sale of common stock 333 Proceeds from payments of promissory notes receivable 18,150 3,812 -------------- -------------- Net cash provided by financing activities 239,499 256,668 -------------- --------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -6-
CONNECT COMPUTER COMPANY STATEMENTS OF CASH FLOWS, CONTINUED INCREASE (DECREASE) IN CASH FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 1995 1994 Net (decrease) increase in cash $ (18,374) $ 13,954 ------------ ------------ Cash, beginning of year 18,374 4,420 ------------ ------------ Cash, end of year - $18,374 ------------ ------------ ------------ ------------ Supplemental disclosures of cash flow information: Cash paid for interest $175,600 $120,512 ------------ ------------ ------------ ------------ Cash paid for income taxes $ 249,500 $ 200,000 ------------ ------------ ------------ ------------
Supplemental disclosures of noncash investing and financing activities: The Company acquired equipment under capital leases with an initial carrying value of $966,626 and $50,584 in 1995 and 1994, respectively. During 1994, the Company acquired $13,075 of leasehold improvements in exchange for a $13,075 interest-bearing note. During 1994, the Company issued 50,000 shares of common stock to an employee of the Company for a $8,500 interest-bearing note. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. -7- CONNECT COMPUTER COMPANY NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BUSINESS DESCRIPTION: Connect Computer Company (the Company) provides support, technical consulting, training and development services for personal computer communications and local area networking technologies primarily to customers in the midwestern region of the United States. The Company also markets certain related hardware and software products. 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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant area which requires the use of management estimates relates to the allowance for doubtful accounts receivable. INVENTORIES: Inventories, primarily consisting of finished goods, are valued at the lower of cost or market with cost determined using a method which approximates the first-in, first-out (FIFO) method. FURNITURE AND EQUIPMENT: Furniture and equipment are recorded at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the assets. Maintenance and repairs are charged to expense as incurred. Expenditures that result in enhancement of asset value are capitalized. Upon retirement or other disposition of furniture or equipment, the applicable cost and accumulated depreciation are removed from the accounts and any gain or loss on disposition is included in current operations. REVENUE RECOGNITION: Service contracts: Revenue from service contracts and related expenses, such as commissions, are deferred and recognized ratably over related contract periods commensurate with the performance of services. Training fees: Revenues from fees charged to customers for training are recognized during the period the customers attend the training. Product revenues: Revenues from product sales are generally recognized when the related hardware or software products are shipped. -8- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: INCOME TAXES: Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax currently payable for the period and the change during the period in deferred tax assets and liabilities. 2. SELECTED BALANCE SHEET INFORMATION: ACCOUNTS RECEIVABLE: Accounts receivable at December 31, 1995 and 1994 consisted of the following: 1995 1994 Accounts receivable $3,912,318 $2,244,786 Less allowance for uncollectible accounts 3,000 3,000 ----------- ----------- $3,909,318 $2,241,786 ----------- ----------- ----------- ----------- FURNITURE AND EQUIPMENT: Furniture and equipment at December 31, 1995 and 1994 consisted of the following: 1995 1994 Furniture and equipment, at cost $3,791,968 $2,363,152 Less accumulated depreciation and amortization 1,781,097 1,142,924 ----------- ----------- $2,010,871 $1,220,228 ----------- ----------- ----------- ----------- OTHER ASSETS: Other assets at December 31, 1995 and 1994 consisted of the following: 1995 1994 Investments (Note 7) $59,500 Lease deposits 18,538 $21,200 -------- -------- $78,038 $21,200 -------- -------- -------- -------- -9- 2. SELECTED BALANCE SHEET INFORMATION, CONTINUED: ACCRUED EXPENSES: Accrued expenses at December 31, 1995 and 1994 consisted of the following: 1995 1994 Compensation $252,521 $116,321 Vacation 119,281 66,921 Other 142,260 94,077 ---------- ---------- $514,062 $277,319 ---------- ---------- ---------- ---------- 3. FINANCING ARRANGEMENTS: NOTE PAYABLE AND LONG-TERM DEBT, BANK: The Company has a revolving line of credit expiring in May 1997 that bears interest at the bank's reference rate plus .5% (the reference rate was 8.5% at December 31, 1995 and 1994). The line of credit agreement provides for borrowings of up to $1,000,000, limited to 80% of the Company's eligible accounts receivable balance, as defined. This note and the term note described below are collateralized by substantially all property and equipment, accounts receivable, inventories and term insurance policies with a combined benefit of $1,000,000 on the life of a stockholder of the Company. The notes are also personally guaranteed by an officer and stockholder of the Company. The agreement for this note and the term note described below contain certain restrictive covenants which, among other things, requires the Company to maintain tangible net worth, as defined, of not less than $500,000; requires the Company to maintain a debt to net worth ratio of not more than 6.5 to 1.0, 4.5 to 1.0 and 3.5 to 1.0 as of December 31, 1995, December 31, 1996 and May 31, 1997, respectively; and prohibits the payment of dividends. -10- 3. FINANCING ARRANGEMENTS, CONTINUED: LONG-TERM DEBT: Long-term debt consists of the following at December 31, 1995 and 1994:
1995 1994 Term note payable, bank: Payable in monthly principal installments of $10,833 plus interest computed at the bank's reference rate plus 2%. The bank's reference rate was 8.5% at December 31, 1995. $ 606,648 Small Business Administration loan payable: Payable in monthly installments of $11,995 including principal and interest computed at the bank's reference rate plus 2.75%, balance due February 2001. $ 684,649 Note payable, warrant repurchase. 83,100 Note payable, corporation: Payable in monthly installments of $785 including principal and interest at 10%, balance due October 1, 1995. 7,504 ---------- ---------- Total long-term debt 606,648 775,253 Less current portion 129,996 171,912 ---------- ---------- Long-term debt, less current portion $ 476,652 $ 603,341 ---------- ---------- ---------- ----------
The scheduled maturity of long-term debt as of December 31, 1995 are as follows: 1996 1997 $129,996 1998 129,996 1999 129,996 2000 129,996 Thereafter 86,664 ---------- $ 606,648 ---------- ---------- NOTE PAYABLE, WARRANT REPURCHASE: During 1993, the Company repurchased warrants to purchase 1,500,000 shares of common stock, at $.13 per share, from a former stockholder in exchange for an unsecured $270,000 note that was payable in monthly installments, with interest at 8%. This note was repaid in August 1995. -11- 4. LEASE COMMITMENTS: CAPITAL LEASES: The Company leases certain furniture and equipment under capital lease agreements. Monthly lease payments are due through November 2000 with interest at rates ranging from 5% to 14.25%. The original cost of equipment under capital leases was $977,181 and $158,555, net of accumulated amortization of $234,000 and $86,000 at December 31, 1995 and 1994, respectively. OPERATING LEASES: The Company leases its facilities and certain equipment under operating lease agreements which expire at various dates through March 1999. The facilities leases require the Company to pay a pro rata share of the lessor's operating costs. Rent expense, including a pro rata share of the lessor's facilities operating costs, was approximately $596,828 and $482,000 for the years ended December 31, 1995 and 1994, respectively. Future minimum lease payments under noncancellable capital and operating lease agreements are as follows: CAPITAL OPERATING LEASES LEASES 1996 $ 420,327 $ 329,065 1997 360,110 223,315 1998 270,731 188,783 1999 48,374 47,191 2000 26,693 ----------- --------- Total lease payments 1,126,235 $ 788,354 ---------- ---------- Less interest (132,276) ----------- Present value of capital lease obligation 993,959 Less current portion (344,711) ----------- Capital lease obligation, less current portion $ 649,248 ----------- ----------- -12- 5. STOCKHOLDERS' EQUITY: COMMON STOCK: In 1994, the Company's Board of Director and stockholders amended the Articles of Incorporation of the Company, increasing the authorized $.01 par value common stock to 100,000,000 shares, and declared a stock dividend of 30 common shares for each share of common stock outstanding. The Board also approved a proportionate adjustment of outstanding stock options. This action was reflected in these financial statements as a stock split effected in the form of a dividend. On August 1, 1993, the Company granted an employee options to purchase 173,730 shares of common stock at $.12 per share, the estimated fair market value of the Company's common stock on the date of grant (as determined by the Board of Directors). The options, which expire if not exercised by August 1, 2003, vest 33% after the first year and 33% annually thereafter. 1994 STOCK OPTION PLAN: In May 1994, the Company's stockholders approved an incentive stock option plan (the Plan) under which 1,000,000 shares of common stock were reserved for grants of incentive and nonqualified stock options to directors, officers and employees at exercise prices not less than 100% of the fair market value, as determined by the Board of Directors, on the date of grant (110% in the case of a 10% or greater stockholder). All options granted under the Plan become exercisable over periods established at the time of grant, however, certain options may vest earlier if certain financial performance benchmarks are achieved by the Company. A summary of selected information regarding the 1994 Stock Option Plan activity for the years ended December 31, 1995 and 1994 is as follows: SHARES PRICE PER SHARE Balance, December 31, 1993 - - Granted 303,666 $.17 Exercised - - ----------- ----------------- Balance, December 31, 1994 303,666 $.17 Granted 350,541 $.17 - $.37 Exercised (1,797) $.17 Cancelled (140,706) $.17 - $.30 ----------- ----------------- Balance, December 31, 1995 511,704 $.17 - $.37 ----------- ----------------- ----------- ----------------- As of December 31, 1995, 84,942 of these options were exercisable. -13- 5. STOCKHOLDERS' EQUITY, CONTINUED: ACCOUNTING FOR STOCK BASED COMPENSATION: In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards, "Accounting for Stock Based Compensation" (SFAS No. 123). As permitted by SFAS No. 123, the Company will adopt the new standard in 1996. Management has not selected from the implementation alternatives and therefore has not determined the impact, if any, this standard will have on the Company's 1996 financial position or results of operations. 6. INCOME TAXES: The components of the income tax provision (benefit) for the years ended December 31, 1995 and 1994 are as follows: 1995 1994 Current: Federal $412,000 $168,000 State 127,000 56,000 Deferred: Federal (19,000) (33,000) State (6,000) (11,000) ---------- ---------- $ 514,000 $ 180,000 ---------- ---------- ---------- ---------- The effective rates for income taxes for the years ended December 31, 1995 and 1994, differ from the statutory federal corporate income tax rate principally due to state income taxes, net of the federal income tax benefit. The net deferred income tax assets of approximately $87,000 and $62,000, as of December 31, 1995 and 1994, respectively, resulted primarily from future taxable temporary differences related to the difference in the book and tax bases of property, plant and equipment, and future deductible temporary differences related to rent and deferred compensation recognized for financial reporting purposes that is not recognized for tax reporting purposes, allowances for bad debts and inventory obsolescence reserves established for financial reporting purposes, and certain inventory costs capitalized for tax reporting purposes. Management expects that the Company will fully realize the benefits attributable to these future deductible temporary differences. Therefore, no valuation allowance has been recorded at December 31, 1995 or 1994, related to the deferred tax asset. -14- 7. EMPLOYEE BENEFIT PLANS: The Company offers a defined contribution savings plan to all of its employees. Participants may contribute up to 15% of their compensation per year. At the discretion of the Board of Directors, the Company may match up to a maximum of 10% of the first 10% of each participant's contributions. Company contributions to the plan were $20,824 and $19,096 for the years ended December 31, 1995 and 1994, respectively. The Company also offers a nonqualified, deferred compensation plan to certain employees. Participants may elect to defer and contribute a portion of their annual compensation to the plan. The Company may, at its sole discretion, elect to make an annual contribution to each participant's deferred compensation account. Contributions to the plan accrue interest at rates defined by the plan. Upon attainment of age 65 or upon a participant's death, the participant or their beneficiary shall receive monthly payments from the plan totaling contributions to the participant's account plus accrued interest. During 1995 and 1994, the Company contributed $40,000 and $19,500 to the deferred compensation plan, respectively. The Company has purchased investments in certain mutual funds to fund these Company contributions. As of December 31, 1995, these investments, which include debt and equity securities and are considered by management to be "available for sale," are carried at cost which approximates fair value based upon quoted market prices. 8. SUBSEQUENT EVENT: On March 1, 1996, the Company signed a letter of intent to sell all of the issued and outstanding capital stock of the Company for $14,000,000, including cash and stock of the acquiring company, plus contingent cash consideration of up to $4,000,000, dependent on the Company's future performance. The letter of intent, which expires on April 30, 1996, may be terminated at any time by the mutual agreement of the potential buyer and the Company's stockholders, and provides that the proposed structure may be adjusted. -15- Connect Computer Balance Sheet Quarter Ending March 31, 1996
Current Assets: Cash $ 82,027 Accounts Receivable, net 4,910,538 Inventories 379,255 Prepaid Expenses 152,687 Deferred Income Taxes 54,000 ------------ Total Current Assets 5,578,506 Furniture & Equipment, net 2,209,416 Deferred Income Taxes 33,000 ------------ Total Assets $ 7,820,921 ------------ ------------ Current Liabilities: Note Payable, Bank 700,000 Current Portion of Long-Term Debt 130,155 Current Portion of Capital Lease Obligations 447,101 Accounts Payable 3,090,738 Accrued Expenses 257,886 Income Taxes Payable 171,713 Deferred Revenues 431,990 ------------ Total Current Liabilities 5,229,583 Long-Term Debt, less current portion 433,320 Capital lease obligations, less current portion 543,440 Deferred Rent 84,937 Deferred Compensation 72,250 ------------ Total Liabilities 6,363,531 Stockholder's Equity: Common Stock 33,531 Additional Paid-in-Capital 8,287 Retained Earnings, Prior 1,255,665 Retained Earnings, Current 172,233 ------------ 1,469,716 Less: Promissory Notes Receivable (12,326) ------------ Total Stockholder's Equity 1,457,390 ------------ Total Liabilities & Stockholder's Equity $ 7,820,921 ------------ ------------
-16- Connect Computer Balance Sheet Quarter Ending March 31, 1995
Current Assets: Cash $ 16,882 Accounts Receivable, net 2,734,347 Inventories 273,534 Prepaid Expenses 213,480 Deferred Income Taxes 13,000 ------------ Total Current Assets 3,251,243 Furniture & Equipment, net 1,336,846 Deferred Income Taxes 33,000 ------------ Total Assets $4,621,089 ------------ ------------ Current Liabilities: Note Payable, Bank 500,000 Current Portion of Long-Term Debt 129,371 Current Portion of Capital Lease Obligations 132,958 Accounts Payable 1,745,983 Accrued Expenses 177,443 Income Taxes Payable 21,000 Deferred Revenues 458,596 ------------ Total Current Liabilities 3,165,351 Long-Term Debt, less current portion 656,706 Capital lease obligations, less current portion 42,939 Deferred Rent 96,168 Deferred Compensation 29,500 ------------ Total Liabilities 3,990,664 Stockholder's Equity: Common Stock 33,485 Additional Paid-in-Capital 7,999 Retained Earnings, Prior 579,117 Retained Earnings, Current 37,841 ------------ 658,443 Less: Promissory Notes Receivable (28,018) ------------ Total Stockholder's Equity 630,425 ------------ Total Liabilities & Stockholder's Equity $ 4,621,089 ------------ ------------
-17- Connect Computer Statements of Operations Quarter ended March 31, 1996
Revenues: Technical & Consulting Services 5,682,495 Product Sales 3,151,617 ---------- Total Revenue 8,834,112 ---------- Costs & Expenses Cost of Services 3,910,997 Cost of Products Sold 2,707,753 ---------- Total Cost of Revenue 6,618,750 ---------- Gross Profit 2,215,362 SG&A Expenses 1,812,648 ---------- Operating Income 402,714 Interest Expense 60,980 ---------- Income before income taxes 341,734 Income Taxes 169,500 ---------- Net Income 172,234 ---------- ----------
-18- Connect Computer Statements of Operations Quarter ended March 31, 1995
Revenues: Technical & Consulting Services 3,710,036 Product Sales 1,466,382 ---------- Total Revenue 5,176,418 ---------- Costs & Expenses Cost of Services 2,614,041 Cost of Products Sold 1,330,593 ---------- Total Cost of Revenue 3,944,634 ---------- Gross Profit 1,231,784 SG&A Expenses 1,124,354 ---------- Operating Income 107,430 Interest Expense 42,589 ---------- Income before income taxes 64,841 Income Taxes 27,000 ---------- Net Income 37,841 ---------- ----------
-19- CONNECT COMPUTER COMPANY STATEMENT OF STOCKHOLDERS' EQUITY for the quarter ended March 31, 1996
----------------------------------------------------------------------- Common Additional Retained Promissory Stock Paid In Capital Earnings Note Receivable Total ----------------------------------------------------------------------- Balances, December 31, 1995 33,531 $ 8,287 $ 1,255,665 $ (15,498) $ 1,281,985 Proceeds from promissory note receivable 3,172 3,172 Net Income for three months ended 3-31-95 172,233 172,233 ----------------------------------------------------------------------- Balances, March 31, 1996 33,531 $ 8,287 $ 1,427,898 $ (12,326) $ 1,457,390 ----------------------------------------------------------------------- -----------------------------------------------------------------------
-20- CONNECT COMPUTER COMPANY STATEMENT OF STOCKHOLDERS' EQUITY for the quarter ended March 31, 1995
---------------------------------------------------------------------- Common Additional Retained Promissory Stock Paid In Captial Earnings Note Receivable Total ---------------------------------------------------------------------- Balances, December 31, 1994 33,485 $ 8,000 $ 579,117 $ (33,648) $ 586,954 Proceeds from promissory note receivable 5,630 5,630 Net Income for three months ended 3-31-95 37,841 37,841 ---------------------------------------------------------------------- Balances, March 31, 1995 33,485 $ 8,000 $ 616,958 $ (28,018) $ 630,425 ---------------------------------------------------------------------- ----------------------------------------------------------------------
-21- CONNECT COMPUTER COMPANY Statements of Cash Flow Increase in cash Quarter ended March 31, 1996 and 1995 Audited Financials (12-31-95) to Internal Financials (3-31-96)
Beginning Cash Balance $0 $ 18,374 Cash flows from Operating Activities: Net Income 172,234 37,841 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 264,141 132,090 Deferred Rent (2,807) 10,420 Deferred Compensation 12,750 10,000 Changes in operating assets/liabilities: Trust Account/Other Assets 5,788 21,200 Accounts Receivable (1,001,220) (434,484) Inventory (131,827) (48,260) Prepaid Expenses 7,028 (101,289) Accounts Payable 1,936,773 607,016 Accrued Expenses (213,456) (160,880) Deferred Taxes 87,000 62,000 Income Taxes Payable (300,213) (10,713) Commissions Payable 41,993 36,004 Deferred Revenues (31,644) 62,320 ---------- ---------- Net cash provided by operating activities $ 846,541 $ 223,265 ---------- ---------- Cash flows from investing activities: Purchase of furniture and equipment (462,658) (248,708) ---------- ---------- Net cash used in investing activities $ (462,658) $ (248,708) ---------- ---------- Cash flows from financing activities: Payments of note payable, bank (2,000,000) (2,600,000) Borrowings under note payable, bank 1,700,000 2,600,000 Payments of long term debt (Net of additions) (43,173) 10,825 Payments of capital lease obligation (3,418) 7,497 Proceeds from promissory notes receivable 3,172 5,530 Decrease in cash overdraft (30,688) ---------- ---------- Net cash used in financing activities $ (374,107) $ 23,952 ---------- ---------- Net increase in cash $ 9,776 $ (1,492) -------- -------- Cash, end of period $ 9,776 $ 16,882 -------- -------- -------- --------
-22- PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS The following pro forma unaudited consolidated financial information consists of Pro Forma Unaudited Statements of Operations for the year ended April 30, 1995 and for the nine months ended January 27, 1996 and a Pro Forma Unaudited Consolidated Balance Sheet as of January 27, 1996. The Unaudited Pro Forma Consolidated Financial Statements give effect to the proposed acquisition of CCC. The Pro Forma Unaudited Consolidated Statements of Operations give effect to such transaction (the Transaction) as if it had occurred on May 1, 1994. The Pro Forma Unaudited Consolidated Balance sheet gives effect to the Transaction as if it had occurred on January 27, 1996. On May 24, 1996, Norstan executed an agreement pursuant to which it would acquire all of the issued and outstanding common stock of Connect, in exchange for $8.2 million in cash and $2 million of Norstan common stock, to be valued at the average closing price for Norstan common stock during the twenty days ending on May 28, 1996 at the date the Transaction is consummated. The agreement also contains a provision whereby Connect shareholders can receive up to $4 million in contingent consideration over a three year period ending April 30, 1999, if certain operating income levels are achieved. Norstan has also agreed to pay $2.7 million in exchange for all outstanding Connect stock options, and $1.1 million in bonuses to Connect management and employees. Further, Norstan will pay $1 million to certain members of Connect management under non-compete agreements. The Pro Forma Unaudited Consolidated Financial Statements give effect to certain adjustments related to the acquisition, including (i) Norstan's issuance of long-term debt and the related interest expense; (ii) the issuance of 68,879 shares of Norstan common stock; (iii) goodwill created by the acquisition and related amortization; (iv) the recording of payments for non-compete agreements and bonuses, and for cancellation of stock options, as described above; and (v) adjustments to eliminate amounts attributable to a division of Connect that will be sold to its majority shareholder prior to the acquisition. The Pro Forma Unaudited Consolidated Financial Statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto incorporated by reference in this information statement. The Pro Forma Unaudited Consolidated Financial Statements do not purport to represent what the results of operations or financial position of Norstan would actually have been if the aforementioned Transaction in fact had occurred on May 1, 1994 or on January 27, 1996 or at any future date. -23- NORSTAN, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED BALANCE SHEET AS OF JANUARY 27, 1996 (IN THOUSANDS)
Pro Forma ASSETS Norstan Connect Adjustments Pro Forma ---------- ---------- ----------- ---------- Current assets: Cash $ 2,566 $ 12 $ (550) (1) $ 2,028 Accounts receivable 58,536 3,776 (350) (6) 61,962 Current lease receivables 14,920 - - 14,920 Inventories 11,892 288 (50) (6) 12,130 Costs and estimated earnings in excess of billings 8,245 - - 8,245 Deferred income tax benefits 3,486 - - 3,486 Prepaid expenses, deposits and other 3,407 170 - 3,577 ---------- ---------- ---------- ---------- Total current assets 103,052 4,246 (950) 106,348 Property and equipment, net 32,513 2,040 (300) (6) 34,253 ---------- ---------- ---------- ---------- Other assets: Lease receivables, net 24,467 - - 24,467 Franchise rights and other intangible assets, net 7,434 - 13,498 (3) 21,932 1,000 (4) Other 578 - - 578 ---------- ---------- ---------- ---------- Total other assets 32,479 - 14,498 46,977 ---------- ---------- ---------- ---------- $ 168,044 $ 6,286 $ 13,248 $ 187,578 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ - $ 715 $ - $ 715 Current maturities of discounted lease rentals 12,887 - - 12,887 Accounts payable 13,642 2,256 (550) (6) 15,348 Accrued liabilities 35,086 934 1,096 (7) 36,020 (1,096) (1) Income taxes payable 568 - - 568 Billings in excess of costs and estimated earnings 4,093 - - 4,093 ---------- ---------- ---------- ---------- Total current liabilities 66,276 3,905 (550) 69,631 Long-term debt, net of current maturities 12,050 1,079 13,000 (1) 26,729 (50) (6) 650 (4) Discounted lease receivables, net of current maturities 16,618 - - 16,618 Deferred income taxes 8,758 - (500) (8) 8,258 ---------- ---------- ---------- ---------- Shareholders' equity: Common stock 433 34 7 (2) 440 (34) (5) Capital in excess of par value 27,697 8 1,993 (2) 29,690 (8) (5) Retained earnings 37,361 1,275 (79) (5) 37,361 (100) (6) (1,096) (7) Notes receivable from sale of stock - (15) 15 (5) - Unamortized cost of stock (128) - - (128) Foreign currency translation adjustments (1,021) - - (1,021) ---------- ---------- ---------- ---------- Total shareholders' equity 64,342 1,302 698 66,342 ---------- ---------- ---------- ---------- $ 168,044 $ 6,286 $ 13,248 $ 187,578 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
The accompanying notes are an integral part of this pro forma consolidated balance sheet. -24- NORSTAN, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED APRIL 30, 1995 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Pro Forma Norstan Connect Adjustments Pro Forma --------- --------- ----------- --------- Revenues: Sales of products and systems $ 166,675 $ 6,293 $ - $ 172,968 Telecommunications services 118,569 12,216 (3,315) (1) 127,470 Financial services 5,001 - - 5,001 --------- --------- --------- --------- Total revenues 290,245 18,509 (3,315) 305,439 Cost of sales: Products and systems 123,158 5,046 - 128,204 Telecommunications services 76,641 8,591 (2,250) (1) 82,982 Financial services 2,308 - - 2,308 --------- --------- --------- --------- Total cost of sales 202,107 13,637 (2,250) 213,494 --------- --------- --------- --------- Gross margin 88,138 4,872 (1,065) 91,945 Selling, general and administrative expenses 74,725 4,379 (591) (1) 79,663 250 (2) 900 (3) --------- --------- --------- --------- Operating income 13,413 493 (1,624) 12,282 Interest expense (1,587) - (1,040) (4) (2,627) Interest and other income (expense), net (54) - - (54) --------- --------- --------- --------- Income before provision for income taxes 11,772 493 (2,664) 9,601 Provision for income taxes 4,709 217 (209) (1) 4,201 (516) (5) --------- --------- --------- --------- Net income $ 7,063 $ 276 $ (1,939) $ 5,400 --------- --------- --------- --------- --------- --------- --------- --------- Net income per common and common equivalent share $ 1.61 $ 1.22 --------- --------- --------- --------- Weighted average number of common and common equivalent shares outstanding 4,375 - 69 (6) 4,444 --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of this pro forma consolidated financial statement. -25- NORSTAN, INC. AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED JANUARY 27, 1996 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Pro Forma Norstan Connect Adjustments Pro Forma --------- --------- ----------- --------- Revenues: Sales of products and systems $ 129,112 $ 5,240 $ - $ 134,352 Telecommunications services 99,464 14,169 (3,060) (1) 110,573 Financial services 4,161 - - 4,161 --------- --------- --------- --------- Total revenues 232,737 19,409 (3,060) 249,086 Cost of sales: Products and systems 96,001 4,413 - 100,414 Telecommunications services 69,105 9,824 (2,241) (1) 76,688 Financial services 1,725 - - 1,725 --------- --------- --------- --------- Total cost of sales 166,831 14,237 (2,241) 178,827 --------- --------- --------- --------- Gross margin 65,906 5,172 (819) 70,259 Selling, general and administrative expenses 55,015 4,037 (560) (1) 59,355 188 (2) 675 (3) --------- --------- --------- --------- Operating income 10,891 1,135 (1,122) 10,904 Interest expense (1,165) - (780) (4) (1,945) Interest and other income (expense), net 65 - - 65 --------- --------- --------- --------- Income before provision for income taxes 9,791 1,135 (1,902) 9,024 Provision for income taxes 3,916 492 (112) (1) 3,909 (387) (5) --------- --------- --------- --------- Net income $ 5,875 $ 643 $ (1,403) $ 5,115 --------- --------- --------- --------- --------- --------- --------- --------- Net income per common and common equivalent share $ 1.31 $ 1.12 --------- --------- --------- --------- Weighted average number of common and common equivalent shares outstanding 4,495 - 69 (6) 4,564 --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of this pro forma consolidated financial statement. -26- NOTES TO PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEET AS OF JANUARY 27, 1996 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. Reflects the borrowing on Norstan's line of credit and the payment for CCC's common stock transaction related expenses. The adjustment also reflects the first payment to certain members of Connect management under non-compete agreements. The net cash used for the transaction is as follows: Borrowing on line of credit $13,000 Payment for common stock (8,178) Cancellation of Connect stock options (2,726) Payment for bonuses summarized in 7. (1,096) First payment for non-compete agreements (350) Payment for transaction expenses (1,200) -------- Total Adjustment $(550) ------ 2. Reflects the issuance of 68,879 shares of Norstan common stock assuming a market value of $29.03 per share, for total consideration of $2,000. 3. Reflects the cost exceeding the identifiable assets acquired of Connect. The final allocation of the purchase price will be determined upon consummation of the Transaction or shortly thereafter. 4. Reflects the assigned value for the non-compete agreements. The first payment of approximately $350 to be made pursuant to these agreements is reflected in 1. above; the remaining $650 has been recorded as a long-term liability in the accompanying balance sheet. 5. Reflects the elimination of Connect's shareholders' equity. 6. Reflects that upon the closing of the Transaction, a division, Connect Education Services (CES), will be sold to the majority shareholder of Connect. These pro forma adjustments reflect the elimination of CES's assets, liabilities and shareholders' equity as of January 27, 1996. 7. Reflects the recording of bonuses by Connect prior to the close of the Transaction. 8. Reflects the estimated net deferred tax asset arising from the Transaction. -27- NOTES TO PRO FORMA UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEAR ENDED APRIL 30, 1995 AND THE NINE MONTHS ENDED JANUARY 27, 1996: 1. Reflects that upon the closing of the Transaction, a division, Connect Education Services (CES), will be sold to the majority shareholder of Connect. These pro forma adjustments reflect the elimination of the results of operations of CES for the respective periods. 2. Reflects amortization expense relating to the $1 million non-compete agreement arising from the Transaction. These costs are being amortized on a straight-line basis over the four year term of the agreement. 3. Reflects amortization expense relating to the $13.5 million of goodwill arising from the Transaction amortized on a straight-line basis over 15 years. The final allocation of the purchase price will be determined upon consummation of the Transaction or shortly thereafter. 4. Reflects the additional interest expense from the line of credit borrowing computed at Norstan's current borrowing rate of approximately 8.0%. 5. Reflects the income tax effect on pro forma adjustments at a 40% tax rate adjusted for the pro forma effect of non-deductible goodwill amortization. 6. Reflects the issuance of 68,879 shares of common stock for consideration in the Transaction. -28- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: June 20, 1996 NORSTAN, INC. By /s/ Richard Cohen -------------------------------------- Its Chief Financial Officer -29- EXHIBIT INDEX Exhibit No. Description - ----------- ----------- * 2 Agreement and Plan of Merger, dated May 24, 1996, by and among Norstan, Inc., CCC Acquisition Subsidiary and Connect Computer Company *23 Consent of Coopers & Lybrand LLP * Previously filed -30- -----END PRIVACY-ENHANCED MESSAGE-----