1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1996
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--- ---
Commission file number 0-16284
NATIONAL TECHTEAM, INC.
-------------------------------
(Name of issuer in its charter)
DELAWARE 38-2774613
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
22000 Garrison Avenue, Dearborn, MI 48124
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (313) 277-2277
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
/X/ Yes / / No
The number of shares of the registrant's only class of common stock outstanding
at November 7, 1996 was 14,762,130.
2
NATIONAL TECHTEAM, INC.
FORM 10-Q
INDEX
PART I - FINANCIAL INFORMATION PAGE
------------------------------
ITEM 1.
Consolidated Statements of Operations
Three and Nine Months Ended
September 30, 1996 and 1995 3
Consolidated Statements of Financial Position
September 30, 1996 and December 31, 1995 4-5
Consolidated Statements of Cash Flows
Nine Months Ended
September 30, 1996 and 1995 6
Notes to the Unaudited Consolidated Financial Statements 7
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 8 - 11
PART II - OTHER INFORMATION
---------------------------
ITEM 5.
Public Offering of Securities 12
ITEM 6.
Exhibits and Reports on Form 8-K 12
SIGNATURES 12
2
3
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
----------- ------------ ------------ ----------
REVENUES
Call Center Services $ 8,643,477 $ 3,849,690 $ 23,030,396 $ 9,077,172
------------ ----------- ------------ ------------
Corporate Computer Services
Technical staffing 3,929,357 3,785,904 11,631,378 11,203,939
Systems integration 3,723,356 2,029,393 8,732,697 5,390,619
Training programs 2,094,282 897,215 5,234,839 2,961,595
------------ ----------- ------------ ------------
Total Corporate Computer Services 9,746,995 6,712,512 25,598,914 19,556,153
------------ ----------- ------------ ------------
TOTAL REVENUES 18,390,472 10,562,202 48,629,310 28,633,325
COST OF SERVICES DELIVERED 14,092,347 8,701,689 37,330,196 22,148,117
------------ ----------- ------------ ------------
GROSS PROFIT 4,298,125 1,860,513 11,299,114 6,485,208
------------ ----------- ------------ ------------
OTHER EXPENSES
Selling, general and administrative 2,601,355 1,177,375 6,301,729 3,625,260
Interest 30,078 6,462 66,806 9,712
------------ ----------- ------------ ------------
2,631,433 1,183,837 6,368,535 3,634,972
------------ ----------- ------------ ------------
INCOME BEFORE TAX PROVISIONS 1,666,692 676,676 4,930,579 2,850,236
TAX PROVISIONS 704,000 330,135 2,058,000 1,189,355
------------ ----------- ------------ ------------
NET INCOME $ 962,692 $ 346,541 $ 2,872,579 $ 1,660,881
============ =========== ============ ============
PRIMARY AND FULLY DILUTED
EARNINGS PER SHARE $ 0.08 $ 0.03 $ 0.25 $ 0.15
============ =========== ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON SHARE
EQUIVALENTS OUTSTANDING
Primary 11,851,899 11,395,066 11,638,012 11,344,863
Fully diluted 11,945,913 11,395,066 11,676,545 11,344,863
See accompanying notes.
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NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
UNAUDITED
ASSETS September 30, December 31,
1996 1995
------------- -------------
CURRENT ASSETS
Cash and cash equivalents $ 811,902 $ 1,717,543
Accounts receivable (less allowances of
$200,000 at September 30, 1996 and
December 31, 1995) 21,223,730 13,269,272
Note receivable - current portion 79,999 53,333
Inventories 1,339,632 769,545
Refundable income tax 95,605 -
Other 632,772 381,751
------------ ------------
24,183,640 16,191,444
------------ ------------
PROPERTY AND EQUIPMENT
Office furniture and equipment 10,876,483 6,622,953
Leasehold improvements 1,298,023 681,223
Transportation equipment 228,395 154,395
------------ ------------
12,402,901 7,458,571
Less - Accumulated depreciation and amortization 4,439,055 2,898,257
------------ ------------
7,963,846 4,560,314
------------ ------------
OTHER ASSETS
Goodwill (less accumulated amortization of $493,676
at September 30, 1996 and $354,512 at
December 31, 1995) 1,564,842 1,252,585
Investment in affiliate 782,480 -
Note receivable - long term 62,223 102,222
Other 223,437 178,958
------------ ------------
2,632,982 1,533,765
------------ ------------
TOTAL ASSETS $ 34,780,468 $ 22,285,523
============ ============
See accompanying notes.
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NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
UNAUDITED
LIABILITIES AND SHAREHOLDERS' EQUITY September 30, December 31,
1996 1995
------------ ------------
CURRENT LIABILITIES
Short-term debt $ 6,566,591 $ -
Current portion of long-term debt 181,104 96,884
Accounts payable 2,796,999 893,965
Accrued payroll, related taxes and withholdings 2,064,152 2,037,446
Deferred income tax 89,839 89,839
Federal income tax payable - 160,116
Deferred revenues and unapplied receipts 354,592 431,967
Other 371,911 128,312
------------ ------------
12,425,188 3,838,529
------------ ------------
LONG-TERM LIABILITIES
Deferred income tax 116,066 116,066
Long-term debt, less current portion 711,092 438,962
------------ ------------
827,158 555,028
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01
Authorized - 5,000,000 shares
None issue
Common stock, par value $.01
Authorized - 45,000,000 shares
Issued:
11,640,791 shares at September 30, 1996 116,408
11,407,666 shares at December 31, 1996 114,077
Additional paid-in capital 13,211,276 12,601,925
Retained earnings 8,955,551 6,082,972
------------ ------------
Total 22,283,235 18,798,974
Less - Treasury stock (168,823 shares at
September 30, 1996 and 200,000 shares at
December 31, 1995) 755,113 907,008
------------ ------------
Total shareholders' equity 21,528,122 17,891,966
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 34,780,468 $ 22,285,523
============ ============
See accompanying notes.
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NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
Nine Months Ended September 30,
--------------------------------------
1996 1995
------------ ------------
OPERATING ACTIVITIES
Net income $ 2,872,579 $ 1,660,881
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation and amortization 1,777,252 820,486
Provision for uncollectible accounts receivable - 13,143
Treasury stock contributed to 401(k) plan 151,895 -
Changes in current assets and liabilities:
Accounts receivable (7,954,458) (4,835,688)
Inventories (570,087) (32,595)
Advances to officers and employees - (143,257)
Other current assets (251,021) 271,022
Accounts payable 1,903,034 (169,947)
Accrued payroll, related taxes and withholdings 26,706 403,579
Federal income tax (255,721) 125,923
Deferred revenues and unapplied receipts (77,375) 24,380
Other current liabilities 243,599 135,053
------------ ------------
Net cash (used in) operating activities (2,133,597) (1,727,020)
------------ ------------
INVESTING ACTIVITIES
Purchases of property and equipment (4,944,330) (1,411,893)
Development of training manuals (70,225) (9,175)
Purchases of temporary investments - (450,000)
Investment in affiliate (782,480) -
Proceeds from sales of temporary investments - 3,950,000
Other-net (160,608) -
------------ ------------
Net cash provided by/(used in) investing activities (5,957,643) 2,078,932
------------ ------------
FINANCING ACTIVITIES
Proceeds from short-term borrowings 8,116,575
Proceeds from long-term borrowings 480,212 565,998
Proceeds from issuance of common stock 262,658 249,900
Purchase of Company common stock - (907,008)
Payments on short-term borrowings (1,549,984) -
Payments on long-term borrowings (123,862) (147,484)
------------ ------------
Net cash provided by/(used in) financing activities 7,185,599 (238,594)
------------ ------------
Increase/(decrease) in cash and cash equivalents (905,641) 113,318
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,717,543 412,559
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 811,902 $ 525,877
============ ============
See accompanying notes.
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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial statements included herein have been prepared by
National TechTeam, Inc. ("TechTeam" or "Company") without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations.
The information provided in this report reflects all adjustments consisting of
normal recurring accruals which are, in the opinion of management, necessary to
present fairly the results of operations for these periods. The results of
operations for these periods are not necessarily indicative of the results
expected for the full year.
NOTE A -- EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of common
shares and common share equivalents outstanding. Common share equivalents
consists of stock options and are calculated using the treasury stock method.
NOTE B -- REVENUES FROM MAJOR CLIENTS
Revenues from major clients were as follows:
1996 1995
---- ----
Amount Percent of Total Amount Percent of Total
------ ---------------- ------ ----------------
Three Months Ended September 30
- -------------------------------
Hewlett-Packard Company $ 4,955,208 26.9% $ 1,709,297 16.2%
Ford Motor Company 3,847,739 20.9 4,015,244 38.0
Price Waterhouse, LLP 1,779,826 9.7 - -
Chrysler Corporation 1,532,751 8.3 875,220 8.3
United Parcel Service 1,044,644 5.7 - -
Corel Corporation - - 675,065 6.4
Nine Months Ended September 30
- ------------------------------
Hewlett-Packard Company $14,628,054 30.1% $ 3,318,672 11.6%
Ford Motor Company 12,421,250 25.5 11,892,321 41.5
Chrysler Corporation 4,157,539 8.5 2,906,981 10.2
Price Waterhouse, LLP 2,095,794 4.3 - -
United Parcel Service 1,057,644 2.2 - -
Corel Corporation 268,459 0.6 2,275,512 8.0
NOTE C --SECONDARY STOCK OFFERING
On October 2, 1996, the Company concluded a secondary stock offering. A total
of 3,225,000 new shares of common stock were issued with net proceeds, before
expenses of the offering, aggregating $77,851,500.
The proceeds will be used for general corporate purposes, including domestic
and international call center expansion, capital expenditures, working capital
and acquisitions.
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8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
The Company originally commenced operations as a computer hardware
reseller and evolved into a provider of instructor-led, computer-based training
for its computer hardware clients. During the late 1980's the Company added IT
staffing and systems integration services as a complement to its existing
training business. In 1993, as a result of the Company's growing expertise in
providing IT staffing of on-site help desks, TechTeam entered the call center
industry. Today, the Company's IT outsourcing services cover a broad range of
IT, including planning, design, implementation and support. Although the
Company's services are complementary, TechTeam has divided its service
offerings into two divisions, Call Center Services and Corporate Computer
Services (technical staffing, systems integration and training programs).
Revenues from all service offerings are recognized as services are performed.
Call Center Services consist of international telephone support for
end-users of computer hardware and software products. Call Center Services are
billed on a fee per call, fee per time spent on calls or per agent basis, each
as negotiated with clients. Under the terms of certain Call Center Services
contracts, clients are required to pay certain amounts at the commencement of
the contract, which payments are non-refundable and as to which the Company has
no further service obligation. Amounts billed under this provision of such
contracts aggregated $485,900 for the three months ended September 30, 1995,
and $618,100 and $915,900 for the nine months ended September 30, 1996 and
1995, respectively. The Company has recognized these amounts as revenues when
they were billed. Absent unusual circumstances, in the future the Company
expects to negotiate these contracts so that the revenues are recognized over
the life of the contract.
Technical staffing includes a variety of technical services, including the
placement of computer personnel at client sites to support end-user
applications through on-site help desks, as well as selected programming and
consulting services. Systems integration consists of database design, computer
product sales and networking services. Contracts for technical staffing and
systems integration are generally negotiated on an hourly rate basis or are
priced on a project basis. Training programs consist of instructor-led,
computer-based training for word processing, spreadsheets, graphics, data
bases, desktop publishing, operating systems, and systems administration for
NetWare, JAVA, NT, Windows, OS/2 and UNIX and mainframe operating systems. For
training programs, clients pay a fee per student trained or a fee for classes
offered, in some cases with an advance payment for the cost of the necessary
training materials.
Cost of services delivered consists of direct personnel compensation,
statutory and other benefits associated with such personnel, facility and
computer equipment costs, and other direct costs associated with providing
services to clients. Selling, general and administrative costs consist of
sales, marketing and administrative personnel compensation, statutory and other
benefits associated with such personnel, facility and equipment costs and other
indirect costs associated with the sales and administrative functions of the
Company.
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9
The following table sets for the percentage relationship to revenues of certain
items in the Company's Consolidated Statements of Operations:
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1996 1995 1996 1995
---- ---- ---- ----
REVENUES
Call Center Services 47.0% 36.5% 47.4% 31.7%
------ ------ ------ -----
Corporate Computer Services
Technical staffing 21.4 35.8 23.9 39.1
Systems integration 20.2 19.2 17.9 18.9
Training programs 11.4 8.5 10.8 10.3
------ ------ ------ -----
Total Corporate Computer Services 53.0 63.5 52.6 68.3
------ ------ ------ -----
TOTAL REVENUES 100.0 100.0 100.0 100.0
COST OF SERVICES DELIVERED 76.6 82.4 76.8 77.4
------ ------ ------ -----
GROSS PROFIT 23.4 17.6 23.2 26.6
------ ------ ------ -----
OTHER EXPENSES
Selling, general and administrative 14.1 11.2 13.0 12.6
Interest 0.2 .0 0.1 .0
------ ------ ------ -----
14.3 11.2 13.1 12.6
------ ------ ------ -----
INCOME BEFORE TAX PROVISIONS 9.1 6.4 10.1 10.0
TAX PROVISIONS 3.9 3.1 4.2 4.2
------ ------ ------ -----
NET INCOME 5.2% 3.3% 5.9% 5.8%
====== ====== ====== =====
Comparative Performance ---- Third Quarter of 1996 versus Third Quarter of 1995
TechTeam earned net income of $962,692, or $0.08 per share, for the Third
Quarter of 1996 as compared to a net income of $346,541, or $0.03 per share,
for theThird Quarter of 1995.
Revenues ---- TechTeam's total revenues increased by $7,828,270 in the Third
Quarter of 1996 to $18,390,472, a 74.1% increase over revenues in the Third
Quarter of 1995. Changes in revenues resulted from the following:
Call Center Services ---- Revenues from Call Center Services increased
by $4,793,787 in the Third Quarter of 1996. This was a 124.5% increase over
Call Center Services revenues in the Third Quarter of 1995. The increase was
due to an increase to 33 contracts in place at September 30, 1996 compared to
the 15 contracts at September 30, 1995 and increased business with existing
clients, primarily Hewlett-Packard.
Technical staffing ---- Revenues from technical staffing increased by
$143,453 in the Third Quarter of 1996. This was a 3.8% increase over
technical staffing revenues in the Third Quarter of 1995. The increase was
due to continued client demand for TechTeam's help desk and computer services
personnel at Ford and other major accounts.
Systems integration ---- Revenues from systems integration increased by
$1,693,963 in the Third Quarter of 1996. This was a 83.5% increase over
systems integration revenues in the Third Quarter of 1995. The increase was
due principally to a growing demand by new and existing clients for
TechTeam's networking services.
Training programs ----Revenues from training programs increased by
$1,197,067 in the Third Quarter of 1996. This was a 133.4% increase over
training revenues in the Third Quarter of 1995. The increase was due to
increased enrollments in the Company's training programs.
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Cost of services delivered ---- The cost of services delivered increased by
$5,390,658 in the Third Quarter of 1996. This was a 61.9% increase over the
cost of services delivered in the Third Quarter of 1995. The increase was due
principally to compensation costs for an increased number of technical
personnel, statutory and other benefits associated with such personnel,
facility and computer equipment costs, and other direct costs associated with
providing an increased volume of services to clients. These costs were 76.6%
and 82.4% of revenues for the Third Quarter of 1996 and 1995, respectively.
Third Quarter of 1995 amounts included certain non-recurring expenses,
primarily related to the charge to expense of the remaining assets of the
Company's European training facilities and the settlement of a lawsuit.
Selling, general and administrative ---- Selling, general and administrative
expenses increased by $1,423,980 in the Third Quarter of 1996. This was a
120.9% increase over selling, general and administrative expenses in the Third
Quarter of 1995. The increase was due principally to compensation costs for an
increased number of sales and administrative personnel, statutory and other
benefits associated with such personnel, facility and equipment costs, and
other indirect costs needed to support the growth of the Company. These
expenses were 14.1% of revenues in the Third Quarter of 1996 compared with
11.2% of revenues in the Third Quarter of 1995. This increase was due to an
increased number of sales personnel and increased expenditures on the Company's
technology infrastructure, both to support increased sales expectations in
future periods.
Tax provisions ---- TechTeam recognized $522,000 of Federal income tax in the
Third Quarter of 1996, resulting in an effective tax rate of 35.2% compared to
an effective tax rate of 38.4% for theThird Quarter 1995. The Michigan Single
Business Tax in the Third Quarter of 1996 was $182,000, with an effective tax
rate of 10.9% compared to an effective tax rate of 16.9% in the Third Quarter
of 1995.
Comparative Performance ---- First Nine Months of 1996 versus First Nine Months
of 1995
TechTeam earned net income of $2,872,579, or $0.25 per share, for the first
nine months of 1996 as compared to a net income of $1,189,355 or $0.15 per
share, for the first nine months of 1995.
Revenues ---- TechTeam's total revenues increased by $19,995,985 in the first
nine months of 1996 to $48,629,310, a 69.8% increase over revenues in the first
nine months of 1995. Changes in revenues resulted from the following:
Call Center Services ---- Revenues from Call Center Services increased
by $13,953,224 in the first nine months of 1996. This was a 153.7% increase
over Call Center Services revenues in the first nine months of 1995. The
increase was due to an increase to 33 contracts in place at September 30,
1996 compared to the 15 contracts at September 30, 1995 and increased
business with existing clients, primarily Hewlett-Packard.
Technical staffing ---- Revenues from technical staffing increased by
$427,439 in the first nine months of 1996. This was a 3.8% increase over
technical staffing revenues in the first nine months of 1995. The increase
was due to continued client demand for TechTeam's help desk and computer
services personnel at Ford and other major accounts.
Systems integration ---- Revenues from systems integration increased by
$3,342,078 in the first nine months of 1996. This was a 62.0% increase over
systems integration revenues in the first nine months of 1995. The increase
was due principally to a growing demand by new and existing clients for
TechTeam's networking services.
Training programs ----Revenues from training programs increased by
$2,273,244 in the first nine months of 1996. This was a 76.8% increase over
training revenues in the first nine months of 1995. The increase was due to
increased enrollments in the Company's training programs and the sale of
$350,000 of computer-based training materials to a new client.
Cost of services delivered ---- The cost of services delivered increased by
$15,182,079 in the first nine months of 1996. This was a 68.5% increase over
the cost of services delivered in the first nine months of 1995. The increase
was due principally to compensation costs for an increased number of technical
personnel, statutory and other benefits associated with such personnel,
facility and computer equipment costs, and other direct costs associated with
providing an increased volume of services to clients. These costs were 76.8%
and 77.4% of revenues for the first nine months ended September 30, 1996 and
1995, respectively.
10
11
Selling, general and administrative ---- Selling, general and administrative
expenses increased by $2,676,469 in the first nine months of 1996. This was a
73.8% increase over selling, general and administrative expenses in the first
nine months of 1995. The increase was due principally to compensation costs
for an increased number of sales and administrative personnel, statutory and
other benefits associated with such personnel, facility and equipment costs,
and other indirect costs needed to support the growth of the Company. These
expenses were 13.0% of revenues in the first nine months of 1996 compared with
12.6% of revenues in the first nine months of 1995. This increase was due to
an increased number of sales personnel and increased expenditures on the
Company's technology infrastructure, both to support increased sales
expectations in future periods.
Tax provisions ---- TechTeam recognized $1,553,000 of Federal income tax in the
first nine months of 1996, resulting in an effective tax rate of 35.1% compared
to an effective tax rate of 34.7% for first nine months of 1995. The Michigan
Single Business Tax in the first nine months of 1996 was $505,000, with an
effective tax rate of 10.2% compared to an effective tax rate of 10.8% in the
first nine months of 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, TechTeam had working capital of $11,758,452. This is
a decrease in working capital of $594,463 since December 31, 1995, due
primarily to a temporary increase in short-term borrowings associated with
capital expenditures.
TechTeam has a line-of-credit agreement with NBD Bank which provides for
short-term borrowings of up to $6,000,000; the credit is unsecured. The
line-of-credit is at the prime rate. The credit agreement was fully utilized
at September 30, 1996 and was repaid in October 1996 from proceeds of the
secondary offering discussed in Note C.
11
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PART II
ITEM 5 - PUBLIC OFFERING OF SECURITIES
In early October 1996, the Company received approximately $77 million from the
public sale of 3,225,000 shares of its common stock.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
11. Computation of Earnings Per Share
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1996.
SIGNATURES
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 thereunto duly authorized.
National TechTeam, Inc.
------------------------------------
(Registrant)
Date: November 11, 1996 By: /s/William F. Coyro Jr.
-------------------------------
William F. Coyro Jr.
Chairman of the Board and
Chief Executive Officer
Date: November 11, 1996 By: /s/Lawrence A. Mills
-------------------------------
Lawrence A. Mills
Senior Vice President,
Chief Financial Officer and
Treasurer
12
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NATIONAL TECHTEAM
EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
11 Computation of Earnings 14
27 Financial Data Schedule 15
13