<PAGE>
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)
<PAGE>
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-
<PAGE>
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-
<PAGE>
<TABLE>
<CAPTION>
CONNECT COMPUTER COMPANY
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1994
ASSETS 1995 1994
<S> <C> <C>
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
----------- -----------
----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
-3-
<PAGE>
<TABLE>
<CAPTION>
CONNECT COMPUTER COMPANY
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
<S> <C> <C>
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
------------- -------------
------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
-4-
<PAGE>
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C>
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
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
-5-
<PAGE>
<TABLE>
<CAPTION>
CONNECT COMPUTER COMPANY
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
<S> <C> <C>
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
-------------- --------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
-6-
<PAGE>
<TABLE>
<CAPTION>
CONNECT COMPUTER COMPANY
STATEMENTS OF CASH FLOWS, CONTINUED
INCREASE (DECREASE) IN CASH
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
<S> <C> <C>
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
------------ ------------
------------ ------------
</TABLE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
3. FINANCING ARRANGEMENTS, CONTINUED:
LONG-TERM DEBT:
Long-term debt consists of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
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
---------- ----------
---------- ----------
</TABLE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
Connect Computer
Balance Sheet
Quarter Ending March 31, 1996
<TABLE>
<CAPTION>
<S> <C>
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
------------
------------
</TABLE>
-16-
<PAGE>
Connect Computer
Balance Sheet
Quarter Ending March 31, 1995
<TABLE>
<CAPTION>
<S> <C>
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
------------
------------
</TABLE>
-17-
<PAGE>
Connect Computer
Statements of Operations
Quarter ended March 31, 1996
<TABLE>
<CAPTION>
<S> <C>
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
----------
----------
</TABLE>
-18-
<PAGE>
Connect Computer
Statements of Operations
Quarter ended March 31, 1995
<TABLE>
<CAPTION>
<S> <C>
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
----------
----------
</TABLE>
-19-
<PAGE>
CONNECT COMPUTER COMPANY
STATEMENT OF STOCKHOLDERS' EQUITY
for the quarter ended March 31, 1996
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
Common Additional Retained Promissory
Stock Paid In Capital Earnings Note Receivable Total
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
-20-
<PAGE>
CONNECT COMPUTER COMPANY
STATEMENT OF STOCKHOLDERS' EQUITY
for the quarter ended March 31, 1995
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Common Additional Retained Promissory
Stock Paid In Captial Earnings Note Receivable Total
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
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
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
-21-
<PAGE>
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)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
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
-------- --------
-------- --------
</TABLE>
-22-
<PAGE>
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-
<PAGE>
NORSTAN, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF JANUARY 27, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
Pro Forma
ASSETS Norstan Connect Adjustments Pro Forma
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
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
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
balance sheet.
-24-
<PAGE>
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)
<TABLE>
<CAPTION>
Pro Forma
Norstan Connect Adjustments Pro Forma
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
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
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
financial statement.
-25-
<PAGE>
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)
<TABLE>
<CAPTION>
Pro Forma
Norstan Connect Adjustments Pro Forma
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
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
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of this pro forma consolidated
financial statement.
-26-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
