1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1999
[ ] 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)
835 Mason Street, Suite 200, 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 May 5, 1999 was 13,167,822.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS COULD
DIFFER FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS DESCRIBED HEREIN INCLUDING THOSE SET FORTH UNDER "FACTORS
AFFECTING FUTURE RESULTS" UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN, OR INCORPORATED
BY REFERENCE INTO, THIS REPORT.
2
NATIONAL TECHTEAM, INC.
FORM 10-Q
INDEX
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PAGE
INDEX NUMBER
- ------------------------------------------------------------------------------------------------------------------------
PART I - FINANCIAL INFORMATION
ITEM 1.
Consolidated Statements of Operations (Unaudited) 3
Three Months Ended
March 31, 1999 and 1998
Consolidated Statements of Financial Position (Unaudited) 4 - 5
March 31, 1999 and December 31, 1998
Consolidated Statements of Cash Flows (Unaudited) 6
Three Months Ended
March 31, 1999 and 1998
Notes to the Consolidated Financial Statements - March 31, 1999 (Unaudited) 7 - 10
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 20
PART II - OTHER INFORMATION
ITEM 1.
Legal Proceedings 21
ITEM 6.
Exhibits and Reports on Form 8-K 21
Signatures 22
- ------------------------------------------------------------------------------------------------------------------------
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3
PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- -------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
1999 1998
------------ ------------
REVENUES
Corporate Services
Corporate help desk services .............. $ 9,013,943 $ 6,775,865
Technical staffing ........................ 6,470,167 7,204,655
Systems integration ....................... 4,996,296 2,750,996
Training programs ......................... 1,394,612 1,848,219
------------ ------------
Total Corporate Services ..................... 21,875,018 18,579,735
------------ ------------
OEM Call Center Services ..................... 8,210,409 5,768,203
TechTeam Capital Group ....................... 4,001,783 2,109,149
------------ ------------
TOTAL REVENUES ................................... 34,087,210 26,457,087
COST OF SERVICES DELIVERED ....................... 28,403,552 21,398,941
------------ ------------
GROSS PROFIT ..................................... 5,683,658 5,058,146
------------ ------------
OTHER EXPENSES/(INCOME)
Selling, general and administrative .......... 5,065,525 4,665,187
Class action litigation and related matters... 5,085 226,515
Interest expense ............................. 232,281 336,072
------------ ------------
TOTAL OTHER EXPENSES ............................. 5,302,891 5,227,774
------------ ------------
Income/(loss) before interest income ............. 380,767 (169,628)
------------
Interest income .................................. 191,988 614,087
------------ ------------
INCOME BEFORE TAX PROVISIONS ..................... 572,755 444,459
Michigan Single Business Tax and other ........... 230,600 228,800
Federal Income Tax Provision ..................... 116,000 74,600
------------ ------------
TOTAL TAXES ...................................... 346,600 303,400
------------ ------------
NET INCOME ....................................... $ 226,155 $ 141,059
============ ============
BASIC AND DILUTED EARNINGS PER SHARE ............. $ 0.02 $ 0.01
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS OUTSTANDING
Basic ........................................ 13,483,040 15,423,402
Net effect of dilutive stock options ......... 38,225 212,277
------------ ------------
Diluted ...................................... 13,521,265 15,635,679
============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- -----------------------------------------------------------------------------------------------------------
NET INCOME, AS SET FORTH ABOVE ...................................... $ 226,155 $ 141,059
OTHER COMPREHENSIVE INCOME, NET OF TAX --------- ---------
Unrealized loss on securities available for sale ................ -- (19,910)
Foreign currency transaction adjustments ........................ (60,805) 565
--------- ---------
TOTAL OTHER COMPREHENSIVE INCOME/(LOSS) ............................. (60,805) (19,345)
--------- ---------
COMPREHENSIVE INCOME................................................. $ 165,350 $ 121,714
========= =========
See accompanying notes
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4
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------
ASSETS MARCH 31, 1999 DECEMBER 31, 1998
- --------------------------------------------------------------- ------------------ --------------------
CURRENT ASSETS
Cash and cash equivalents ................................. $ 13,095,494 $ 22,696,221
Accounts receivable (less allowances of $1,167,037 at
March 31, 1999 and $952,935 at December 31, 1998) ...... 26,949,434 23,803,577
Refundable income tax ..................................... 1,422,924 3,152,754
Inventories ............................................... 1,123,494 811,563
Prepaid expenses and other ................................ 2,098,340 1,704,217
Deferred income tax ....................................... 500,751 500,751
------------ ------------
45,190,437 52,669,083
------------ ------------
PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE
Office furniture and equipment ............................ 20,820,464 20,713,594
Purchased software ........................................ 5,078,597 4,923,651
Leasehold improvements .................................... 2,047,632 2,081,149
Transportation equipment .................................. 291,566 291,566
------------ ------------
28,238,259 28,009,960
Less -- Accumulated depreciation and amortization ......... 17,065,229 15,690,879
------------ ------------
11,173,030 12,319,081
------------ ------------
OTHER ASSETS
Assets of Leasing Operations .............................. 34,007,267 29,765,374
Intangibles (less accumulated amortization of $8,565,588 at
March 31, 1999 and $7,663,021 at December 31, 1998) .... 12,101,269 13,268,037
Investment in GE Joint Venture ............................ 956,612 883,125
Deferred income tax ....................................... 8,585,065 8,585,065
Other ..................................................... 1,751,741 1,452,338
------------ ------------
57,401,954 53,953,939
------------ ------------
TOTAL ASSETS .................................................. $113,765,421 $118,942,103
============ ============
See accompanying notes.
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5
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY MARCH 31, 1999 DECEMBER 31, 1998
- ----------------------------------------------------------------- ------------------ -------------------
CURRENT LIABILITIES
Accounts payable ............................................ $ 2,691,830 $ 4,107,175
Accrued payroll, related taxes and withholdings ............. 4,293,714 4,269,473
Deferred income tax ......................................... 62,920 62,920
Deferred revenues and unapplied receipts .................... 1,478,004 2,028,738
Accrued expenses and taxes .................................. 1,349,172 1,145,125
Current portion of notes payable ............................ 5,717,607 8,023,606
Other ....................................................... 329,787 398,248
------------- -------------
15,923,034 20,035,285
------------- -------------
LONG-TERM LIABILITIES
Notes Payable ............................................... 7,325,076 7,311,887
Deferred income tax ......................................... 7,260,973 7,260,973
------------- -------------
14,586,049 14,572,860
------------- -------------
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01
Authorized -- 5,000,000 shares
None issued
Common stock, par value $.01
Authorized -- 45,000,000 shares
Issued:
16,711,400 shares at March 31, 1999 ................... 167,114
16,703,800 shares at December 31, 1998 ................ 167,038
Additional paid-in capital .................................. 111,375,456 111,414,245
Retained earnings ........................................... 987,355 761,199
Accumulated other comprehensive income/(loss) ............... (4,969) 55,836
------------- -------------
Total ....................................................... 112,524,956 112,398,318
Less -- Treasury stock (3,383,241 shares at March 31, 1999
and 3,179,226 shares at December 31, 1998) ............... 29,268,618 28,064,360
------------- -------------
Total shareholders' equity .................................. 83,256,338 84,333,958
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................... $ 113,765,421 $ 118,942,103
============= =============
See accompanying notes.
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NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
----------------------------------------
1999 1998
------------------ ------------------
OPERATING ACTIVITIES
Net income........................................................... $ 226,155 $ 141,059
Adjustments to reconcile net income to net cash operating activities:
Depreciation................................................... 2,811,185 870,623
Amortization................................................... 951,942 349,428
Provision for uncollectible accounts receivable................ 247,888 45,849
Treasury stock contributed to 401(k) plan and other............ 201,445 183,828
Unrealized gain/(loss) on investments.......................... -- (19,910)
Net undistributed earnings of affiliate........................ (73,487) --
Changes in current assets and liabilities:
Accounts receivable........................................ (3,472,000) (4,011,954)
Inventories................................................ (311,931) 102,852
Interest receivable........................................ 78,255 7,171
Prepaid expenses and other current assets.................. (394,123) 1,723,832
Accounts payable........................................... (1,415,345) (9,559,917)
Accrued payroll, related taxes and withholdings............ 24,241 (271,388)
Federal income tax......................................... 1,729,830 1,428,147
Deferred revenues and unapplied receipts................... (550,731) (229,179)
Accrued expenses and taxes................................. 204,047 337,087
Other current liabilities.................................. (68,460) (146,000)
----------------- -----------------
Net cash provided by/(used in) operating activities............ 188,911 (9,048,472)
----------------- -----------------
INVESTING ACTIVITIES
Purchases of property, equipment and software........................ (228,299) (640,644)
Sales/ (Purchase) of leased equipment................................ (5,776,377) 4,209,710
Purchase of subsidiaries, net of cash equipment...................... -- 278,666
Investment in direct financing leases and residuals.................. 312,475 2,632,209
Proceeds from sales of securities available-for-sale................. -- 3,019,278
Other ............................................................... (299,403) (343,663)
----------------- ------------------
Net cash provided by/(used in) investing activities............... (5,991,604) 9,155,556
----------------- ------------------
FINANCING ACTIVITIES
Purchase of Company common stock..................................... (1,478,617) (5,950,940)
Proceeds from issuance of common stock............................... 34,200 24,440
Payments on notes payable............................................ (2,292,812) (1,311,790)
Other................................................................ (60,805) --
----------------- -----------------
Net cash (used in) financing activities........................... (3,798,034) (7,238,290)
----------------- -----------------
Decrease in cash and cash equivalents............................. (9,600,727) (7,131,206)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................... 22,696,221 24,927,349
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $ 13,095,494 $ 17,796,143
================= =================
See accompanying notes.
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NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - MARCH 31, 1999
(UNAUDITED)
The Annual Report of the Company on Form 10-K for the year ended December 31,
1998 ("The 1998 Form 10-K") contains financial statements and additional
information and should be read in conjunction with this report.
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.
Certain reclassifications have been made to the 1998 financial statements in
order to conform to the 1999 financial statement presentation.
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
consist of stock options and are calculated using the treasury stock method.
NOTE B -- REVENUES FROM MAJOR CLIENTS
Revenues from major clients were as follows:
- --------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------------------------
1999 1998
--------------------------------------- ---------------------------------------
AMOUNT PERCENT OF TOTAL AMOUNT PERCENT OF TOTAL
------------------- ------------------- ------------------- -------------------
GE TechTeam, L.P.................... $ 8,210,409 24.0% $ 4,839,938 18.3%
Chrysler Corporation................ 7,500,049 22.0% 4,758,157 18.0%
Ford Motor Company.................. 5,942,670 17.4% 3,760,338 14.2%
Wayne County, Michigan 1,682,650 4.9% 681,725 2.6%
International provider of
shipping services.............. 1,546,553 4.5% 1,571,860 5.9%
Hewlett-Packard Company............. -0- -0- 3,533,826 13.4%
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NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MARCH 31, 1999 (continued)
(UNAUDITED)
NOTE C -- LEGAL PROCEEDINGS
Refer to Part II, Item 1 for a description of legal proceedings.
NOTE D -- STOCK REPURCHASES
In February 1998, the Company announced a stock repurchase program to purchase
up to 1,500,000 shares of common stock during the period ending August 15, 1998,
unless extended. The Company repurchased 1,500,000 shares under this program for
$14,863,799 by September 30, 1998.
In May 1998, the Company announced a second stock repurchase program to purchase
up to an additional 1,000,000 shares of common stock during the period ending
November 26, 1998, unless extended. The Company repurchased 1,000,000 shares
under this program for $9,075,000 by September 30, 1998.
In August 1998, the Company announced a third stock repurchase program to
purchase up to an additional 2,000,000 shares of common stock during the period
ending August 26, 1999, unless extended. During the first quarter of 1999, the
Company repurchased 231,700 shares for $1,478,617. The total shares repurchased
under this plan total 873,500 shares for $5,734,999.
NOTE E -- SEGMENT REPORTING
- ------------------------------------------------------------------------------------------------------------------------
CORPORATE SERVICES
---------------------------------------------------------------
CORPORATE OEM CALL TECHTEAM
HELP DESK TECHNICAL SYSTEMS TRAINING CENTER CAPITAL
SERVICES STAFFING INTEGRATION PROGRAMS TOTAL SERVICES GROUP TOTAL
------------------------ ------------ ------------ ------------------------ ------------ ------------
Three months ended
March 31, 1999
- ----------------------
Revenues............. $ 9,013,943 $ 6,470,167 $ 4,996,296 $ 1,394,612 $21,875,018 $ 8,210,409 $ 4,001,783 $34,087,210
Gross profit/(loss).. 1,542,710 1,736,090 865,587 (59,413) 4,084,974 675,150 923,534 5,683,658
Depreciation and
amortization...... 156,415 166,307 63,510 42,659 428,891 133,147 2,077,227 2,639,265
Segment assets....... 18,097,296 7,511,333 6,925,187 1,618,617 34,152,433 10,490,226 43,120,970 87,763,629
Expenditures for
property.......... 50,809 54,022 20,630 13,857 139,318 43,251 45,730 228,299
Three months ended
March 31, 1998
Revenues............. $ 6,775,865 $ 7,204,655 $ 2,750,996 $ 1,848,219 $18,579,735 $ 5,768,203 $ 2,109,149 $26,457,087
Gross profit......... 186,740 1,892,019 408,471 151,991 2,639,221 1,939,568 479,357 5,058,146
Depreciation and
amortization...... 69,462 73,856 28,208 18,959 190,485 59,128 21,617 271,230
Segment assets....... 16,070,102 6,895,028 6,119,084 2,126,195 31,210,409 8,660,881 41,388,447 81,259,737
Expenditures for
property.......... 164,069 174,447 66,627 44,781 449,924 139,661 51,059 640,644
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NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MARCH 31, 1999 (continued)
(UNAUDITED)
NOTE E -- SEGMENT REPORTING (continued)
A reconciliation of the totals reported for the operating segments to the
applicable line item in the consolidated financial statements is as follows:
- ------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
-------------- ---------------
1999 1998
-------------- ---------------
Gross Profit
Total gross profit for reportable segments........................... $ 5,683,658 $ 5,058,146
Less: Amortization of goodwill....................................... 301,108 502,680
Cost of Global Call Center development........................ 97,607 260,134
-------------- ---------------
Total gross profit............................................ $ 5,284,943 $ 4,295,332
============== ===============
Depreciation and amortization (other than goodwill)
Total for reportable segments.................................... $ 2,639,265 $ 271,230
Depreciation of Corporate assets................................. 822,754 446,141
-------------- ---------------
Total depreciation and amortization........................... $ 3,462,019 $ 717,371
============== ===============
MARCH 31, 1999 DECEMBER 31,
1999 1998
-------------- ---------------
Assets
Total assets for reportable segments............................. $ 87,763,629 $ 81,259,737
Corporate assets................................................. 26,001,792 37,682,366
-------------- ---------------
Total assets.................................................. $ 113,765,421 $ 118,942,103
============== ===============
9
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NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MARCH 31, 1999 (continued)
(UNAUDITED)
NOTE F -- GE TECHTEAM, L.P.
During 1997, the Company formed GE TechTeam, L.P. (the "GE Joint Venture"), a
joint venture between TechTeam and a unit of General Electric Appliances
Division ("GEA"). The GE Joint Venture was formed to market and service extended
warranty contracts for the personal computer industry. The GE Joint Venture,
headquartered in Dallas, Texas, is operated by TechTeam and by GE Service
Management, an operating unit of GEA. GE Service Management is a leading
provider of extended service plans and warranty administration for products
ranging from major appliances and consumer electronics to personal computers. GE
Service Management offers extended service plans that cover numerous
manufacturers, makes, and models, and it provides comprehensive service coverage
for post-warranty products and service needs. TechTeam shares in the profits, if
any, (up to an agreed upon limit) of this portion of the GE Joint Venture's
business pro rata based on its partnership interest, 49.45%. Losses, if any, are
reimbursed to the GE Joint Venture by GEA. Operations for this portion of the
business were not profitable in 1997, 1998 or 1999 to date.
On March 31, 1998, the Company sold its OEM call center contracts, consisting of
its remaining unexpired contracts with Hewlett-Packard Corporation and a
contract with 3Com Corporation, to GEA for $1.4 million. GEA then contributed
those contracts to the GE Joint Venture for an agreed value of $1.4 million and
an agreement that GEA shall receive all the joint venture's earnings from these
contracts until GEA has recovered the $1.4 million. TechTeam is recognizing the
gain related to this sale as the GE Joint Venture records earnings related to
these contracts. Such earnings amounted to $264,268 for the First Quarter of
1999.
In September 1998, the GE Joint Venture began providing telephone and computer
support for a major manufacturer of personal computers. TechTeam shares in the
profits and losses of this portion of the GE Joint Venture's business pro rata
based on its partnership interest. In the First Quarter of 1999, TechTeam
recognized $73,487 of earnings related to this contract; this amount was
recorded by TechTeam as a reduction in its cost of services for the OEM Call
Center Services line of business. Summarized financial data for the GE Joint
Venture follows:
- ------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31,
-------------------------------
STATEMENT OF OPERATIONS 1999 1998
-------------- -------------
Revenues................................................................. $ 8,281,022 $ 3,528,811
Expenses................................................................. 9,632,177 6,280,827
------------- -------------
Pre-tax income........................................................... $ (1,351,155) $ (2,752,016)
============= =============
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ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain of the statements contained in this report that are not historical facts
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. Our actual results may differ materially from those
included in the forward-looking statements. These forward-looking statements
involve risks and uncertainties including, but not limited to, those described
in the portion of this Item 2 entitled "Factors Affecting Future Results." We
caution readers not to place undue reliance on these forward-looking statements,
which reflect management's opinions only as of the date hereof. We do not
undertake an obligation to revise or publicly release the results of any
revisions to these forward-looking statements. You should carefully review the
risk factors described in other documents the Company files from time to time
with the SEC, including the Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 and the Quarterly Reports on Form 10-Q filed by the Company in
fiscal 1999.
RESULTS OF OPERATIONS
OVERVIEW
The Company originally commenced operations as a value added reseller of
computer hardware and software that also provided training for its computer
products. 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 three divisions,
Corporate Services (corporate help desk/call center services, technical
staffing, systems integration and training programs), OEM Call Center Services,
and TechTeam Capital Group. Revenues from all service offerings are recognized
as services are performed.
Corporate help desk/call center services consist of telephone support for
corporate users of computer hardware, software products and services. TechTeam
provides these services from both its own call centers and at client sites
through on-site help desks to support end-user applications. Corporate help
desk/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. The Company licenses
clients to use its Global Call Center, a software product developed by the
Company's wholly-owned subsidiary, WebCentric Communications, Inc. Revenues from
these licenses are recognized either: (1) on a usage basis, when the licenses
are granted in connection with on-going services; (2) as the expenses of the
transaction are recognized in those instances where the license was granted in
connection with a contemporaneous purchase; or (3) as lump sum fees when the
client acquires the rights to use and is allowed access to the Global Call
Center without any on-going service obligation by the Company. Technical
staffing includes a variety of technical services, 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, databases,
desktop publishing, operating systems, and systems administration for NetWare,
JAVA, NT, Windows, OS/2, 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.
OEM Call Center Services consist of national telephone support for the end-user
customers of TechTeam's clients. Through the end of the First Quarter 1998,
TechTeam provided OEM Call Center Services which were billed on a fee per call,
fee per time spent on calls or per agent basis, each as negotiated with clients.
Commencing in the Fourth Quarter 1997, TechTeam also provided OEM Call Center
Services on a per agent basis to a joint venture formed with General Electric
Appliances Division ("GEA"). Effective March 31, 1998, the OEM Call Center
business conducted directly by TechTeam was terminated as a result of: 1) The
scheduled expiration of the two largest of the Company's contracts with
Hewlett-Packard; and 2) The sale to GEA of the remaining unexpired contracts
with Hewlett-Packard and a contract with 3Com Corporation. The Company's
decision to sell these OEM call center contracts was consistent with its
strategic direction to concentrate on corporate help desk solutions. As a
result, commencing in the Second Quarter 1998, revenues consist of billings to
the GE TechTeam joint venture and revenues recognized from the sale of the
contracts to GEA in March 1998.
11
12
Since 1980, TechTeam Capital Group, LLC has been providing financing for high
technology and capital equipment in the United States.
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, marketing and administrative functions of the
Company.
The following table sets forth the percentage relationship to revenues of
certain items in the Company's Consolidated Statements of Operations:
- ---------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 1998
------------- -------------
REVENUES
Corporate Services
Corporate help desk services............................................. 26.4% 25.6%
Technical staffing....................................................... 19.0 27.2
Systems integration...................................................... 14.7 10.4
Training programs........................................................ 4.1 7.0
------------- -------------
Total Corporate Services.................................................... 64.2 70.2
OEM Call Center Services.................................................... 24.1 21.8
TechTeam Capital Group...................................................... 11.7 8.0
------------- -------------
TOTAL REVENUES.................................................................. 100.0 100.0
COST OF SERVICES DELIVERED...................................................... 83.3 80.9
------------- -------------
GROSS PROFIT.................................................................... 16.7 19.1
------------- -------------
OTHER EXPENSES
Selling, general and administrative......................................... 14.9 17.6
Class action litigation and related matters................................. -- 0.8
Interest expense............................................................ 0.7 1.3
------------- -------------
TOTAL OTHER EXPENSES............................................................ 15.6 19.7
------------- -------------
INCOME/(LOSS) BEFORE INTEREST INCOME............................................ 1.1 (0.6)
INTEREST INCOME................................................................. 0.6 2.3
------------- -------------
INCOME/(LOSS) BEFORE TAX PROVISIONS............................................. 1.7 1.6
Michigan Single Business Tax and other.......................................... 0.7 0.9
Federal income tax.............................................................. 0.3 0.2
------------- -------------
TOTAL TAX PROVISION............................................................. 1.0 1.1
------------- -------------
NET INCOME/(LOSS)............................................................... 0.7% 0.5%
============= =============
Between 1995 and 1998, TechTeam's revenues increased at a compound annual rate
of 35.4%. The Company believes that its growth has benefited from the trend
among large corporations to outsource much of their information technology needs
and TechTeam's ability to provide integrated services that address a broad range
of those needs. The Company believes that the outsourcing trend will continue
and will provide continuing opportunities for all of its service lines. TechTeam
further believes that its service offerings are influenced substantially by its
clients' desire to focus on their core businesses and to leave information
technology needs to the Company for which information technology is its core
business. TechTeam's training programs have encountered cyclical enrollment
trends, influenced by the timing and extent to which clients are upgrading
desktop software.
TechTeam's business is based on client relationships with major corporations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Factors Affecting Future Results -- Impact of Business with Major
Clients."
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COMPARATIVE PERFORMANCE -- FIRST QUARTER 1999 VERSUS 1998
TechTeam earned a net income of $226,155 or $0.02 per share, for the First
Quarter 1999 as compared to a net income of $141,059, or $0.01 per share, for
the First Quarter 1998.
REVENUES
TechTeam's total revenues increased by $7,630,123 in 1999 to $34,087,210, a
28.8% increase over revenues in 1998. Changes in revenues resulted from the
following:
Corporate Services
Corporate help desk/call center services
Revenues from Corporate help desk/call center services increased by
$2,238,078 in the three months ended March 31, 1999. This was a 33.0%
increase over Corporate help desk/call center services revenues for the
equivalent period in 1998. This increase was due to an increase in call
center volumes over the prior year.
Technical staffing
Revenues from technical staffing decreased by $734,488 in the three
months ended March 31, 1999. This was a 10.2% decrease over technical
staffing revenues for the equivalent period in 1998 This decrease was due
to decreased client demand for TechTeam's computer services personnel at
selected accounts.
Systems integration
Revenues from systems integration increased by $2,245,300 in the three
months ended March 31, 1999. This was a 81.6% increase from systems
integration revenues for the equivalent period in 1998. This increase was
due to increased hardware sales and related services.
Training programs
Revenues from training programs decreased by $453,607 in the three months
ended March 31, 1999. This was a 24.5% decrease from training revenues
for the equivalent period in 1998. This decrease was due to decreased
enrollments in the Company's training programs.
OEM Call Center Services
Revenues from OEM Call Center Services increased by $2,442,206 in 1999. This was
a 42.3% increase over OEM Call Center Services revenues in 1998. The increase
was primarily driven by demand for services provided to the Company's joint
venture with GEA which aggregated $8,210,409 for the First Quarter 1999. On
March 31, 1998, the Company sold its OEM call center contracts, consisting of
its remaining unexpired contracts with Hewlett-Packard Corporation and a
contract with 3Com Corporation, to GEA for $1.4 million. GEA then contributed
those contracts to the GE TechTeam joint venture for an agreed value of $1.4
million and an agreement that GEA shall receive all of the joint venture's
earnings until GEA has recovered the $1.4 million. TechTeam is recognizing the
gain related to this sale as the joint venture records earnings on the
contracts. Such earnings amounted to $264,268 for the First Quarter 1999.
TechTeam Capital Group
In January 1998, TechTeam acquired TechTeam Capital Group, Inc. Revenues from
TechTeam Capital Group increased by $1,892,634 in the first quarter of 1999.
This was a 89.7% increase over the same period in 1998. This increase was
primarily due to increased financing activities as well as realizing three full
months of operations in the current year; 1998 figures include revenues since
the acquisition of TechTeam Capital Group on January 31, 1998.
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COST OF SERVICES DELIVERED
The cost of services delivered increased by $5,859,558 in 1999. This was a 26.0%
increase over the cost of services delivered in 1998. 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. As a percentage of revenues, these
costs declined to 83.3% in 1999 from 85.2% in 1998.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses increased by $400,338 in 1999. This
increase is attributable to the growth in the Company's overall business. These
expenses were 14.9% of revenues in 1999 compared with 17.6% of revenues in 1998.
This decrease was due primarily to the Company's continuing efforts in cost
containment. The Company expects selling, general and administrative expenses to
increase in dollar amount, but to decrease as a percentage of revenue. The
foregoing is a forward looking statement.
INTEREST EXPENSE
In January 1998, TechTeam acquired TechTeam Capital Group, LLC which had
financed a portion of its leasing activities through use of various forms of
long-term and short-term debt. The interest costs of this debt are reported in
this category.
INTEREST INCOME
Commencing in October 1996, TechTeam began earning significant amounts of
interest income on cash generated by the 1996 public stock offering. For 1999,
interest income was $191,988 compared to $614,087 in 1998. The decline in
interest income between 1998 and 1999 results from increased use of cash for
operations, repurchase of Company's shares, and financing TechTeam Capital
Group's capital outlays. (See Liquidity and Capital Resources.)
TAX PROVISIONS
TechTeam recognized $116,000 of Federal income tax in 1999, resulting in an
effective tax rate of 33.9% compared to an effective tax rate of 34.6% for 1998.
The 1999 and 1998 effective tax rates differ due to changing amounts of
permanent book/tax differences, primarily goodwill and tax-exempt interest. The
Michigan Single Business Tax and state income taxes in 1999 were $230,600 with
an effective tax rate of 40.3% compared to an effective rate of 51.5% in 1998.
These Single Business taxes are tied more closely to factors other than pre-tax
income which inflate the effective tax rate when income is lower.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business has been financed by cash provided by operations, shares
issued throughout the period under stock option plans and the proceeds of a
public offering of its capital stock in 1996. Indicators of the Company's
financial strength are summarized below:
- --------------------------------------------------------------------------------------------------------------------------
MARCH 31, 1999 DECEMBER 31, 1998
-------------------- ---------------------
Working capital........................................................ $ 29,267,403 $ 32,633,798
Current ratio.......................................................... 2.8 2.6
Debt as a percentage of total capitalization........................... 12.8% 15.4%
Shareholders' equity................................................... $ 83,256,338 $ 84,333,958
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The Company's working capital was $29,267,403 at March 31, 1999, a decrease of
11.4% from December 31, 1998, the decrease primarily resulting from application
of funds to repurchase of Company common stock, offset by requirements to fund
the Company's higher level of operating activities -- (see below). As of March
31, 1999, TechTeam had approximately $13 million in cash and cash equivalents.
Available cash will be used for general corporate purposes, including domestic
and international call center expansion, capital expenditures, working capital,
acquisitions and stock repurchases under the Company's stock repurchase program.
In the first quarter of 1998, TechTeam acquired Capricorn Capital Group, Inc.
(now TechTeam Capital Group, LLC). Currently, the Company has no arrangements or
understandings with respect to any acquisitions, although it continually
monitors acquisition opportunities.
In February 1998, the Board of Directors of the Company authorized a stock
repurchase program. The program provided for the open market and other purchase
of up to 1,500,000 shares of the Company's stock. The Company repurchased
1,500,000 shares under this program for $14,863,799 by September 30, 1998.
In May 1998, the Board of Directors of the Company authorized another stock
repurchase program. The program provided for the open market and other purchase
of up to an additional 1,000,000 shares of the Company's stock. The Company
repurchased 1,000,000 shares under this program for $9,075,000 by September 30,
1998.
In August 1998, the Company announced a third stock repurchase program to
purchase up to an additional 2,000,000 shares of common stock during the period
ending August 26, 1999, unless extended. During the first quarter of 1999, the
Company repurchased 231,700 shares for $1,478,617. Total shares repurchased
under this plan are 873,500 for $5,734,999.
TechTeam has line-of-credit agreements with First Chicago NBD Bank and Chase
Manhattan Bank which provide for short-term borrowings of up to $25,000,000 and
$310,000, respectively; both lines-of-credit are unsecured. First Chicago NBD
Bank borrowings are at the prime rate and Chase Manhattan Bank borrowings are at
prime plus 1.5%. There were no borrowings under these lines at March 31, 1999.
YEAR 2000 DISCLOSURE
TechTeam has a Y2K Steering Committee reporting directly to the CEO and the
Board of Directors. The Steering Committee is charged with evaluating
TechTeam's risks, recommending solutions and implementing the solution to the
various problems that exist, and monitoring the remediation efforts. The entire
management of TechTeam is responsible to assure that the changes necessary are
made to achieve readiness for the Year 2000. TechTeam is engaged in a
comprehensive effort to meet the Year 2000 problems.
TechTeam has established four phases necessary to assure readiness: 1) inventory
- - identify key business areas potentially affected by Y2K concerns; 2) analysis
- - determine the impact and preparation of a plan to address the issue; 3)
remediation - making the necessary changes to bring the system into compliance;
and 4) validation - testing to ensure compliance.
TechTeam began the inventory process of its worldwide business systems in 1997
to determine their compliance. This process was conducted by a team of internal
employees in cooperation with OEM hardware and software manufacturers. In 1998,
the scope of the inventory was expanded to include facilities and
non-information technology related systems and equipment. As of December 31,
1998, TechTeam has identified substantially all internal systems having
potential Year 2000 issues.
Analysis of systems critical to the delivery of TechTeam's services, which are
within TechTeam control, to address Y2K issues has been completed on 90% of
critical systems. Of these critical systems, about 70% have been remediated.
TechTeam expects to complete the analysis, remediation and validation of its
critical systems by June 30, 1999. Analysis of non-critical systems has been
completed on 90% of these systems. TechTeam expects to complete the analysis,
remediation and validation of its non-critical systems by August 31, 1999.
TechTeam has replaced its non-compliant financial system. It spent $2.3 million
(capitalized over 7 years) to replace the financial system. TechTeam is
currently completing the remediation of its internal call center software also
known as the GCC. This effort will be complete by August 1, 1999. TechTeam also
utilizes many office automation products from Microsoft Corporation. Microsoft
has provided patches such that TechTeam can complete remediation of its
workstations. This is true of other vendors as well, such as Sun Microsystems,
Oracle, SGI, Novell, Aspect and Siemens. TechTeam estimates that it will spend
an additional $250,000 to $500,000 in 1999 to complete its Y2K project. As
necessary, these estimates will be refined in the future. These expenses may not
include all of the cost implementing contingency plans, which are in the process
of being developed. These estimates also do not include any litigation or
warranty costs related to Y2K issues because they cannot be reasonably
estimated.
In addition, since a significant amount of TechTeam services to its clients
involve service related support of technology within the desktop services area,
TechTeam is working with appropriate clients to assess all facets of support
that will be required of the company by its clients. Any expenses incurred by
TechTeam will be accompanied by additional revenues from its clients.
Use of independent verification and validation processes consistent with
industry standards, such as external audit of TechTeam's new accounting system,
have been and will be utilized to insure complete uninterrupted operability on
critical systems.
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The most likely IT "worst case scenario" would be the failure of a telephone
switch at one of TechTeam's support centers. The recovery procedure would be
to divert traffic to another center, which could take 2 to 4 hours. The most
likely non-IT "worst case scenario" would be loss of operation at one of
TechTeam's support centers due to environmental or security considerations. The
recovery procedure would be to divert traffic to another center, which could
take 2 to 4 hours. It is worth noting that less than 1 percent of TechTeam's
weekly support center traffic occurs on weekends, such as the first two days of
January 2000. Significant impact to TechTeam, and it's clients for such a
failure would not occur until 08:00 EST, Monday, January 3, 2000, which gives
TechTeam additional time to react on behalf of itself and it's clients. In all
other lines of business, where the service is TechTeam staff located at the
client site, or leasing, the service can continue, without interruption, for
several weeks without interface to TechTeam's IT or non-IT systems.
FACTORS AFFECTING FUTURE RESULTS
LITIGATION:
The Company has been sued for alleged violations of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, as well
as claims against the individual defendants for alleged "controlling person"
liability under Section 20(a) of the Securities Exchange Act. The Company has
reached an agreement in principle to resolve these suits. It is possible that
these lawsuits will not be resolved on the terms proposed by the parties. The
failure of the completion of the settlement could have material adverse effect
on the Company's financial condition, results of operations, and cash flows.
IMPACT OF BUSINESS WITH MAJOR CLIENTS:
Historically, TechTeam has been heavily dependent upon major clients for a
substantial portion of its revenues. Any loss of (or failure to retain a
significant amount of business with) its key clients could have a material
adverse impact on the Company. Ford Motor Company accounted for 22.6%, 21.3%,
and 16.6% of the Company's revenues for the years ended December 31, 1996, 1997,
and 1998, respectively. In 1997 and 1998, Hewlett-Packard accounted for 21.3%
and 1.1%, respectively, of the Company's revenues. In the past several years,
DaimlerChrysler Corporation ("DaimlerChrysler") had also become a major client,
representing between 5 and 10% of the Company's total revenues in years prior to
1997. The percentage of total revenues derived from DaimlerChrysler increased to
14.6% and 23.1% in 1997 and 1998, respectively. Additionally, an international
provider of shipping services became a significant client generating 6.5% and
5.8% of total revenues in 1997 and 1998, respectively. Ford, DaimlerChrysler,
and the international provider of shipping services are expected to continue to
constitute a high percentage of TechTeam's revenues for the foreseeable future.
In 1997 the GE Joint Venture represented 1.5% of the Company's revenues; in 1998
that percentage grew to 20.6 % as a result of the following: (1) A full year's
services for the GE Joint Venture; (2) The sale of the OEM call center product
support business to the GE Joint Venture in March 1998; and (3) The commencement
in August 1998 of OEM call center support by the GE Joint Venture for a major
manufacturer of personal computers.
Management recognizes the need to diversify its client base from both a client
and industry perspective. However, because TechTeam believes that its existing
client base presents opportunities for the cross marketing of its services, the
Company will continue to seek additional business from its largest clients. The
Company anticipates that its major clients will continue to account for a high
percentage of TechTeam's revenues in the future. TechTeam's services are not
specific to any single industry and can be beneficial to most large
corporations. TechTeam's technical staffing and training programs cover most of
the popular software applications and can be customized to improve the
productivity of microcomputer users in most companies. TechTeam provided
services to
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approximately 524 customers in 1998.
MANAGEMENT OF GROWTH:
The Company's revenues have grown from $47.1 million in 1995 to $72.2 million in
1996, $81.3 million in 1997 and $116.9 million in 1998. The Company intends to
pursue the continued growth of its business; however, there can be no assurance
that such growth will be achieved. The Company's future operating results will
depend in part on management's ability to manage any future growth and control
expenses. An unexpected decline in revenues without a corresponding and timely
reduction in staffing and other expenses, or a staffing increase that is not
accompanied by a corresponding increase in revenues, could have a material
adverse effect on the Company's operating results.
Although the market in which the Company participates has experienced
significant growth in recent years, continued growth in the industry may be
adversely impacted by, among other things, recessionary pressures or a slowdown
in the rate of technological advances. A slowdown or reversal of industry growth
could impact the Company's ability to grow.
COMPETITION:
The Company faces intense competition in both the call center and corporate
computer services markets. In the call center market, the Company competes with
other call center companies, some of which have substantially greater resources
including more call center locations, greater financial resources, a larger
client base and more name recognition. In the corporate computer services
market, the Company competes with many entities including systems implementation
firms, application software firms, staffing firms, large accounting firms,
facilities management firms and computer consulting firms. Many of these firms
have far greater resources, clients and name recognition than the Company.
The Company also faces significant competition in both markets from its own
clients and potential clients whose internal resources represent a fixed cost to
the client. Such competition may impose additional pricing pressures on the
Company. There can be no assurance that the Company will compete successfully
with its existing competitors or with any new competitors.
CONTRACT RISKS:
The great majority of the Company's contracts are terminable without cause on
short notice, often upon 90 days notice. Other of the Company's contracts expire
on set dates and may not be renewed or replaced. Terminations and non-renewals
of major contracts can have a significant impact upon the Company's revenues and
operating results.
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RELIANCE ON SENIOR MANAGEMENT:
The success of the Company is highly dependent upon the efforts, direction, and
guidance of its senior management. Although the Company has entered into
employment and noncompetition agreements with certain of its executive officers,
the Company's continued growth and success also depends in part on its ability
to attract and retain qualified managers and on the ability of its executive
officers and key employees to manage its operations successfully. The loss of
any of these senior executives or the Company's inability to attract, retain, or
replace key management personnel in the future, could have a material adverse
effect on it.
ATTRACTION AND RETENTION OF EMPLOYEES:
The Company's business involves the delivery of professional services and is
labor-intensive. The Company's success depends in large part upon its ability to
attract, develop, motivate and retain highly skilled technical employees.
Qualified technical employees are in great demand and are likely to remain a
limited resource for the foreseeable future. There can be no assurance that the
Company will be able to attract and retain sufficient numbers of highly skilled
technical employees in the future. The loss of technical personnel could have a
material adverse effect on the Company's business, operating results and
financial condition, including its ability to secure and complete engagements.
PROJECT RISKS:
Many of the Company's engagements involve projects that are critical to the
operations of its clients' businesses and provide benefits that may be difficult
to quantify. The Company's failure or inability to meet a client's expectations
in the performance of its services could result in a material adverse change to
the client's operations and therefore could give rise to claims against the
Company or damage the Company's reputation, adversely affecting its relationship
with its client, its business, operating results and financial condition.
VARIABILITY OF QUARTERLY OPERATING RESULTS:
Variations in the Company's revenue and operating results occur from time to
time as a result of a number of factors, such as the significance of client
engagements commenced and completed during a quarter, the number of business
days in a quarter and employee hiring and utilization rates. The timing of
revenues is difficult to forecast because the Company's sales cycle can be
relatively long and may depend on factors such as the size and scope of
assignments and general economic conditions. Because a high percentage of the
Company's expenses are relatively fixed, a variation in the number of clients,
assignments or the timing of the initiation or the completion of client
assignments, particularly at or near the end of any quarter, can cause
significant variations in operating results from quarter to quarter and could
result in losses to the Company. In addition, the Company's engagements
generally are terminable by the client without penalty.
VOLATILITY OF STOCK PRICE:
The market price of the Company's stock has fluctuated over a wide range during
the past several years and may continue to do so in the future. The market price
of the common stock could be subject to significant fluctuations in response to
various factors or events, including among other things, the depth and liquidity
of the trading market of the common stock, quarterly variations and actual
anticipated operating results, growth rates, changes in estimates by analysts,
market conditions in the industry in which the Company competes, announcements
by competitors, regulatory actions, litigation including class action litigation
and general economic conditions. In addition, the stock market has from time to
time experienced significant price and volume fluctuations, which have
particularly affected the market prices of the stocks of high technology
companies. As result of the foregoing, the Company's operating results and
prospects from time to time may be below the expectations of public market
analysts and investors. Any such event would likely result in a material adverse
effect on the price of the common stock.
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CYCLICALITY:
Certain of the Company's clients and potential clients are in industries, such
as the automobile and financial services industries, that experience cyclical
variations in profitability, which may in turn affect their willingness or
ability to fund systems projects such as those for which the Company may be
engaged. The Company's experience indicates, however, that competitive pressures
in cyclical industries could compel businesses to undertake projects even during
periods of losses or reduced profitability.
INTERRUPTION OF TELECOMMUNICATIONS SERVICES:
The Company's operations are dependent on its ability to protect its call
centers against damage from fire, power loss, telecommunications failure or
similar event. The Company has taken precautions to protect itself from events
that could interrupt its operations, including off-site storage of back-up data,
contractual arrangements for back-up facilities with a leading disaster recovery
services company and Halon fire suppression systems in the data centers (which
are designed to extinguish a fire without damaging computer equipment). No
assurance can be given that such precautions will be adequate, and operations
may still be interrupted, even for extended periods. In addition, the on-line
services provided by the Company are dependent on telecommunications links to
the regional Bell operating companies for which the Company currently has no
back-up. Any damage to call centers or any failure of the Company's
telecommunication links that cause interruptions in the Company's operations
could have a material adverse effect on the Company's business, operating
results or financial condition. The Company's property and business interruption
insurance with current limits of $2 million may not be adequate to compensate
the Company for all losses that may occur.
GROWTH THROUGH ACQUISITIONS AND NEW PRODUCTS:
The Company's business strategy includes growth through acquisitions of
businesses and technology sources complementary to the Company's business. The
Company has acquired several significantly smaller companies in the past and
believes that it has been successful in integrating the acquired assets and
businesses into the Company's operations. There can be no assurance, however,
that future acquisitions will be consummated on acceptable terms or that any
acquired assets or business will be successfully integrated into the Company's
operations. Further, acquisitions may involve special risks such as diversion of
management's attention, unanticipated events, legal liabilities and amortization
of intangibles, any of which could have an adverse effect on the Company's
operations and earnings.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS:
Certain risks are inherent in the Company's business strategy which includes
plans for the global expansion of its operations. Among other things, the
Company may encounter difficulties in marketing, selling and delivering its
services due to differences in cultures, languages, labor and employment
policies and differing political and social systems. In addition, the Company
may encounter significant effects on its operations and financial condition as a
result of currency fluctuations and differing tax laws.
RAPID TECHNOLOGICAL CHANGES; DEPENDENCE ON NEW SOLUTIONS:
The Company's success will depend in part on its ability to develop IT solutions
that keep pace with continuing changes in IT, evolving industry standards and
changing client preferences. There can be no assurance that the Company will be
successful in adequately addressing these developments on a timely basis or
that, if these developments are addressed, the Company will be successful in the
marketplace. In addition, there can be no assurance that products or
technologies developed by others will not render the Company's services
uncompetitive or obsolete. The Company's failure to address these developments
could have a material adverse effect on the Company's business, operating
results and financial condition.
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INTELLECTUAL PROPERTY RIGHTS:
The Company's success is dependent upon certain methodologies it utilizes in
designing, installing and integrating computer software and information systems
and other proprietary intellectual property rights. The Company's business
includes the development of custom software in connection with specific client
engagements. Ownership of such software is generally assigned to the client. The
Company also develops certain foundation and application software products, or
software "tools," which remain the property of the Company.
The Company relies upon a combination of nondisclosure and other contractual
arrangements and trade secret, copyright and trademark laws to protect its
proprietary rights and the proprietary rights of third parties from whom the
Company licenses intellectual property. The Company enters into confidentiality
agreements with its employees and limits distribution of proprietary
information. There can be no assurance that the steps taken by the Company in
this regard will be adequate to deter misappropriation of proprietary
information or that the Company will be able to detect unauthorized use and take
appropriate steps to enforce its intellectual property rights.
Although the Company believes that its services do not infringe on the
intellectual property rights of others and that it has all rights necessary to
utilize the intellectual property employed in its business, the Company is
subject to the risk of litigation alleging infringement of third-party
intellectual property rights. Any such claims could require the Company to spend
significant sums in litigation, pay damages, develop non-infringing intellectual
property or acquire licenses of the intellectual property which is the subject
of asserted infringement.
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PART II -- OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company, one of its officers, William F. Coyro Jr. and one of its former
officers Lawrence A. Mills, have been named as defendants in a putative
consolidated class action filed in the United States District Court for the
Eastern District of Michigan. On January 22, 1998 four original actions, all
filed between August 27 and October 24, 1997, were consolidated into a single
action. Plaintiffs in the underlying actions purport to represent various
classes consisting of all persons who purchased shares of the Company's common
stock during certain class periods, the longest of which was from September 27,
1996 through July 18, 1997. Plaintiffs allege in their complaints that the
Company and the individual defendants engaged in a scheme to artificially
inflate the price of the Company's common stock by improperly accelerating the
recognition of revenue from the licensing of the Company's proprietary software.
Plaintiffs assert claims against all defendants for alleged violation of Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder, as well as claims against the individual defendants for alleged
"controlling person" liability under Section 20(a) of the Securities Exchange
Act. In December 1998, the Company and the individual defendants reached an
agreement in principle to settle the consolidated class action lawsuits for the
payment of $11 million to the plaintiffs. The agreement is subject to the final
approval of the Court and the possibility of appeal.
In addition, the Company is the subject of a related investigation initiated on
September 9, 1997 by the United States Securities and Exchange Commission
("SEC"). The SEC has stated that the purpose of investigation is to determine
whether the Company may have violated certain provisions of the Securities Act
of 1933 and the Securities Exchange Act of 1934 in connection with its
recognition of revenue from the licensing of its proprietary software. This
investigation is ongoing and the outcome cannot be predicted at this time,
although the Company believes it has complied fully with all applicable
provisions of the federal securities laws.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.14 Mutual Separation Agreement and General Release between National TechTeam, Inc. and Lawrence A.
Mills dated February 12, 1999.
27 Financial Data Schedule
(b) Reports on Form 8-K.
1. May 5, 1999-- "National TechTeam, Inc. Announces Appointment of Peter T. Kross to the Board of
Directors."
2. April 29, 1999-- "National TechTeam, Inc. Announces Revenues and Earnings for the First Quarter
1999."
3. April 16, 1999 -- "National TechTeam Appoints M. Anthony Tam to Vice President and Chief
Financial Officer."
4. April 5, 1999-- "National TechTeam Announces Cost Containment Program."
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED
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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: May 14, 1999 By: /s/ Harry A. Lewis
------------------
Harry A. Lewis
Chief Executive Officer
and President
Date: May 14, 1999 By: /s/ M. Anthony Tam
------------------
M. Anthony Tam
Vice President,
Chief Financial Officer and Treasurer
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.14 Mutual Separation Agreement between National Tech
Team, Inc. and Lawrence A. Mills dated February 12,
1999.
27 Financial Data Schedule