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: September 30, 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
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(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 October 31, 1999 was 13,233,796.
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.
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NATIONAL TECHTEAM, INC.
FORM 10-Q
INDEX
PAGE
INDEX NUMBER
PART I - FINANCIAL INFORMATION
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ITEM 1.
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Condensed Consolidated Statements of Operations (Unaudited) 3
Three and Nine Months Ended
September 30, 1999 and 1998
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Condensed Consolidated Statements of Financial Position (Unaudited) 4 - 5
September 30, 1999 and December 31, 1998
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Condensed Consolidated Statements of Cash Flows (Unaudited) 6
Nine Months Ended
September 30, 1999 and 1998
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Notes to the Condensed Consolidated Financial Statements - September 30, 1999 (Unaudited) 7 - 11
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ITEM 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 15
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PART II - OTHER INFORMATION
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ITEM 1.
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Legal Proceedings 16
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ITEM 6.
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Exhibits and Reports on Form 8-K 16
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Signatures 16
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PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1998 1998
1999 (AS RESTATED) 1999 (AS RESTATED)
-------------- --------------- -------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUES
Corporate Services
Corporate help desk services.................. $ 9,283 $ 8,337 $ 27,775 $ 21,207
Technical staffing............................ 5,153 6,084 17,042 19,537
Systems integration........................... 7,254 4,892 17,904 10,299
Training programs............................. 1,194 1,676 3,975 5,297
------------- -------------- ------------- --------------
Total Corporate Services......................... 22,884 20,989 66,696 56,340
------------- -------------- ------------- --------------
OEM Call Center Services......................... 6,384 4,736 21,278 17,867
Leasing Operations............................... 4,687 4,707 14,336 10,178
------------- -------------- ------------- --------------
TOTAL REVENUES....................................... 33,955 30,432 102,310 84,385
COST OF SERVICES DELIVERED........................... 28,059 26,124 84,069 69,284
------------- -------------- ------------- --------------
GROSS PROFIT......................................... 5,896 4,308 18,241 15,101
------------- -------------- ------------- --------------
OTHER EXPENSES
Selling, general and administrative.............. 4,883 4,590 15,320 13,921
Michigan Single Business Tax and other........... 205 7 618 529
------------- -------------- ------------- --------------
TOTAL OTHER EXPENSES................................. 5,088 4,597 15,938 14,450
------------- -------------- ------------- --------------
Operating income (loss).............................. 808 (289) 2,303 651
------------- -------------- ------------- --------------
Interest income...................................... 160 523 460 1,506
Interest expense..................................... 190 380 642 1,168
------------- -------------- ------------- --------------
NET INTEREST EXPENSE (INCOME)........................ 30 (143) 182 (338)
------------- -------------- ------------- --------------
Income (loss) before income taxes.................... 778 (146) 2,121 989
Income tax expense................................... 290 21 747 493
------------- -------------- ------------- --------------
NET INCOME (LOSS).................................... $ 488 $ (167) $ 1,374 $ 496
============= ============== ============= ==============
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE.......... $ 0.04 $ (0.01) $ 0.10 $ 0.03
============= ============== ============= ==============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS OUTSTANDING
Basic............................................ 13,207 14,223 13,293 15,135
Net effect of dilutive stock options............. 10 74 18 138
-------------- --------------- -------------- ---------------
Diluted.......................................... 13,217 14,307 13,311 15,273
============== =============== ============== ===============
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS), AS SET FORTH ABOVE................ $ 488 $ (167) $ 1,374 $ 496
Foreign currency translation adjustments............. 103 26 (62) 25
-------------- --------------- -------------- --------------
COMPREHENSIVE INCOME (LOSS).......................... $ 591 $ (141) $ 1,312 $ 521
============== =============== ============== ==============
See accompanying notes.
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NATIONAL TECHTEAM, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
- ------------------------------------------------------------------------ -------------------- --------------------
(IN THOUSANDS)
CURRENT ASSETS
Cash and cash equivalents.......................................... $ 12,422 $ 22,696
Securities available-for-sale...................................... 1,641
Accounts receivable (less allowances of $450,000 at
September 30, 1999 and $953,000 at December 31, 1998)........... 25,772 23,804
Refundable income tax.............................................. 903 3,153
Inventories........................................................ 1,206 811
Prepaid expenses and other......................................... 1,732 1,704
Deferred income tax................................................ 572 438
------------------- -------------------
44,248 52,606
------------------- -------------------
PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE
Office furniture and equipment..................................... 20,259 20,714
Purchased software................................................. 5,054 4,924
Leasehold improvements............................................. 1,911 2,081
Transportation equipment........................................... 271 291
------------------- -------------------
27,495 28,010
Less-- Accumulated depreciation and amortization................... 19,070 15,691
------------------- -------------------
8,425 12,319
------------------- -------------------
OTHER ASSETS
Leased equipment and other investments in leases................... 41,971 29,766
Intangibles (less accumulated amortization of $9,911,000 at
September 30, 1999 and $7,663,000 at December 31, 1998)......... 10,206 13,268
Investment in GE Joint Venture..................................... 1,106 883
Deferred income tax................................................ 1,078 1,324
Other.............................................................. 1,515 1,452
------------------- -------------------
55,876 46,693
------------------- -------------------
TOTAL ASSETS........................................................... $ 108,549 $ 111,618
=================== ===================
See accompanying notes.
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NATIONAL TECHTEAM, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued)
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
- ------------------------------------------------------------------------ -------------------- --------------------
(IN THOUSANDS)
CURRENT LIABILITIES
Accounts payable................................................... $ 3,759 $ 4,107
Accrued payroll, related taxes and withholdings.................... 4,369 4,269
Deferred revenues and unapplied receipts........................... 942 2,029
Accrued expenses and taxes......................................... 2,410 1,145
Current portion of long-term debt.................................. 7,520 8,024
Other.............................................................. 206 398
------------------- -------------------
19,206 19,972
------------------- -------------------
LONG-TERM DEBT......................................................... 5,568 7,312
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01, 5,000,000 shares authorized,
none issued
Common stock, par value $.01, 45,000,000 shares authorized,
Issued-- 16,711,400 and 16,703,800 shares at
September 30, 1999 and December 31, 1998, respectively.......... 167 167
Additional paid-in capital......................................... 111,115 111,414
Retained earnings.................................................. 2,135 761
Accumulated other comprehensive income (loss)...................... (6) 56
------------------- -------------------
113,411 112,398
Less -- Treasury stock (3,487,967 and 3,179,226 shares
at September 30, 1999 and December 31, 1998, respectively)...... 29,636 28,064
------------------- -------------------
Total shareholders' equity......................................... 83,775 84,334
------------------- -------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 108,549 $ 111,618
=================== ===================
See accompanying notes.
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NATIONAL TECHTEAM, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
-------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1999 1998
------------------ ------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income........................................................ $ 1,374 $ 496
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and Amortization............................... 15,250 11,002
Treasury stock contributed to 401(k) plan and other......... 592 337
Changes in operating assets and liabilities................. (820) (14,817)
----------------- -----------------
Net cash provided by (used in) operating activities......... 16,396 (2,982)
----------------- -----------------
INVESTING ACTIVITIES
Purchase of leased equipment, net................................. (21,078) (6,354)
Sale (purchase) of securities available-for-sale.................. (1,641) 29,000
Investment in direct financing leases and residuals............... 895 2,409
Purchase of property, equipment and software, net................. (12) (3,754)
Other ............................................................ (62) (619)
----------------- -----------------
Net cash provided by (used in) investing activities............ (21,898) 20,682
----------------- -----------------
FINANCING ACTIVITIES
Purchase of Company common stock.................................. (2,497) (25,000)
Payments on notes payable, net.................................... (2,247) (257)
Proceeds from issuance of common stock............................ 34 384
Other............................................................. (62) 510
----------------- -----------------
Net cash used in financing activities.......................... (4,772) (24,363)
----------------- -----------------
Decrease in cash and cash equivalents.......................... (10,274) (6,663)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...................... 22,696 24,927
----------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................ $ 12,422 $ 18,264
================= =================
See accompanying notes.
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NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 1999
(UNAUDITED)
The accompanying unaudited consolidated financial statements have been prepared
by National TechTeam, Inc. ("TechTeam" or "Company") in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine month period ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company and Subsidiaries'
annual report on Form 10-K for the year ended December 31, 1998.
Certain reclassifications have been made to the 1998 financial statements in
order to conform to the 1999 financial statement presentation.
NOTE A -- RESTATEMENT OF SEPTEMBER 30, 1998 STATEMENT OF OPERATIONS
As disclosed in the December 31, 1998 Form 10-K, net income for the three-month
and nine-month periods ended September 30, 1998 were restated. Net income for
the quarter ended September 30, 1998 was decreased by $1,166,000. The decrease
resulted from $875,000 of GE Joint Venture billing adjustments, increases in
cost of services of $483,000 and increases in health care costs of $410,000,
offset by income tax reductions from these changes of $602,000.
Net income for the nine-month period ended September 30, 1998 was reduced by
$1,478,000 due to the above mentioned third quarter adjustments combined with
$312,000 of 1998 second quarter adjustments. Net income for the second quarter
of 1998 decreased due to revenue reductions of $170,000 related to earnings and
billing adjustments to the GE Joint Venture and increases in health care costs
by $302,000 offset by income tax reductions from these changes of $160,000.
NOTE B -- 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 C -- REVENUES FROM MAJOR CLIENTS
Revenues from clients which represented ten percent or more of total revenue are
as follows:
- ----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
1999 1998
--------------------------------------- ----------------------------------------
(IN THOUSANDS
---------------------------------------------------------------------------------
AMOUNT PERCENT OF TOTAL AMOUNT PERCENT OF TOTAL
----------------- ----------------- ----------------- -----------------
DaimlerChrysler..................... $ 6,287 18.5% $ 7,847 25.8%
Ford Motor Company.................. 6,264 18.5% 5,033 16.5%
GE TechTeam, L.P.................... 6,255 18.4% 5,611 18.4%
Wayne County, Michigan.............. 4,044 11.9% 2,138 7.0%
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NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 1999
(UNAUDITED)
NOTE C -- REVENUES FROM MAJOR CLIENTS (continued)
- ----------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------
1999 1998
---------------------------------------- --------------------------------------
(IN THOUSANDS)
--------------------------------------------------------------------------------
AMOUNT PERCENT OF TOTAL AMOUNT PERCENT OF TOTAL
----------------- ----------------- ----------------- -----------------
DaimlerChrysler..................... $ 21,763 21.3% $ 18,979 22.5%
Ford Motor Company.................. 18,367 17.9% 12,431 14.7%
GE TechTeam, L.P.................... 21,149 20.7% 13,521 16.0%
Wayne County, Michigan.............. 8,157 8.0% 3,402 4.0%
NOTE D -- LEGAL PROCEEDINGS
Refer to Part II, Item 1 for a description of legal proceedings.
NOTE E -- SEGMENT REPORTING
- --------------------------------------------------------------------------------------------------------------------------
CORPORATE SERVICES
-------------------------------------------------------------
CORPORATE OEM CALL
HELP DESK TECHNICAL SYSTEMS TRAINING CENTER LEASING
SERVICES STAFFING INTEGRATION PROGRAMS TOTAL SERVICES OPERATIONS TOTAL
------------ ---------- ------------ ---------- ------------ ------------ ------------- -----------
(IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------------
Three months ended
September 30, 1999
Revenues............. $ 9,283 $ 5,153 $ 7,254 $ 1,194 $ 22,884 $ 6,384 $ 4,687 $ 33,955
Gross profit (loss).. 2,169 839 1,299 (65) 4,242 637 1,017 5,896
Depreciation and
amortization..... 791 44 35 132 1,002 23 3,627 4,652
Expenditures for
property, net.... 406 2 (7) 31 432 0 307 739
Three months ended
September 30, 1998
Revenues............. $ 8,337 $ 6,084 $ 4,892 $ 1,676 $ 20,989 $ 4,736 $ 4,707 $ 30,432
Gross profit (loss).. 1,460 941 996 61 3,458 (231) 1,081 4,308
Depreciation and
amortization..... 504 236 188 64 992 132 3,044 4,168
Expenditures for
property, net.... 144 151 15 32 342 0 135 477
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NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 1999
(UNAUDITED)
NOTE E -- SEGMENT REPORTING (continued)
- ---------------------------------------------------------------------------------------------------------------------------
CORPORATE SERVICES
---------------------------------------------------------------
CORPORATE OEM CALL
HELP DESK TECHNICAL SYSTEMS TRAINING CENTER LEASING
SERVICES STAFFING INTEGRATION PROGRAMS TOTAL SERVICES OPERATIONS TOTAL
------------ --------- ------------- ------------- ---------- ----------- ---------- ----------
(IN THOUSANDS)
---------------------------------------------------------------------------------------------------
Nine months ended
September 30, 1999
Revenues............. $ 27,775 $ 17,042 $ 17,904 $ 3,975 $ 66,696 $ 21,278 $ 14,336 $ 102,310
Gross profit......... 6,023 3,844 3,481 180 13,528 1,375 3,338 18,241
Depreciation and
amortization..... 2,606 138 110 404 3,258 23 10,169 13,450
Expenditures for
property, net.... (125) 27 13 90 5 0 (63) (58)
Nine months ended
September 30, 1998
Revenues............. $ 21,207 $ 19,537 $ 10,299 $ 5,297 $ 56,340 $ 17,867 $ 10,178 $ 84,385
Gross profit......... 4,116 4,313 1,964 966 11,359 950 2,792 15,101
Depreciation and
amortization..... 2,259 1,147 546 292 4,244 132 6,014 10,390
Expenditures for
property, net.... 1,036 366 289 107 1,798 0 117 1,915
Segment Assets
September 30, 1999... $ 13,099 $ 6,535 $ 8,095 $ 1,443 $ 29,172 $ 2,841 $ 54,709 $ 86,722
December 31, 1998.... 16,070 6,895 6,119 2,126 31,210 8,661 41,389 81,260
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NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 1999
(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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
Depreciation and amortization
Total for reportable segments................. $ 4,652 $ 4,168 $ 13,450 $ 10,390
Corporate assets.............................. 614 205 1,800 612
-------------- -------------- -------------- --------------
Total depreciation and amortization........ $ 5,266 $ 4,373 $ 15,250 $ 11,002
============== ============== ============== ==============
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- --------------
(IN THOUSANDS)
Assets
Total assets for reportable segments.......... $ 86,722 $ 81,260
Corporate assets.............................. 21,827 30,358
-------------- --------------
Total assets............................... $ 108,549 $ 111,618
============== ==============
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. The
GE Joint Venture provides call taking and service contract administration
services for GE Service Management. 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.
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NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 1999
(UNAUDITED)
NOTE F -- GE TECHTEAM, L.P. (continued)
The GE Joint Venture also provides call center services to original equipment
manufacturers of personal computer products. TechTeam shares in the profits and
losses of this portion of the GE Joint Venture's business pro rata based on its
partnership interest. Such earnings amounted to $101,000 for the quarter ended
September 30, 1999 and $223,000 for the nine month period ended September 30,
1999.
Summarized financial data for the GE Joint Venture follows:
-------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
Statement of Operations
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
Revenues..................................... $ 6,121 $ 6,170 $ 21,450 $ 12,228
Expenses..................................... (8,114) (7,833) (25,813) (17,861)
Cost reimbursement - GE Appliances........... 2,196 1,424 4,809 5,394
------------- ------------- ------------- --------------
Pre-tax income (loss)........................ $ 203 $ (239) $ 446 $ (239)
============= ============= ============= ==============
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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. 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 year ended December 31, 1998 and the Quarterly
Reports on Form 10-Q filed by the Company in fiscal 1999.
COMPANY OVERVIEW
National TechTeam, Inc. ("TechTeam" or "Company") is a leading provider of
information technology ("IT") outsourcing support services to large national and
multinational corporations, government agencies, and service organizations. The
Company offers its services through three global units: (1) Corporate Services,
which provides corporations with help desk support, technical staffing, systems
integration, and custom training; (2) OEM Call Center Services, which provides
end user customers of its clients with inbound telephone support for their
computer products; and (3) Leasing Operations, which consists primarily of
leasing computer-related hardware and integrated services to corporate
customers.
CORPORATE SERVICES
As a provider of Single Point of Contact help desk and desktop management
programs, TechTeam provides centralized delivery of IT technical support
services. TechTeam's Corporate Services consists of corporate help desk
services, technical staffing, systems integration, and training programs.
Corporate Help Desk Services
TechTeam provides help desk services to assist major companies in managing their
internal IT systems. The Company's technical staff uses its experience and
knowledge in launching and delivering corporate help desk programs to define and
execute corporate IT support solutions to meet its clients' specific needs. The
Company's help desk solutions include numerous options for call tracking,
Internet-based callback support, telecommunications systems, product knowledge
bases, statistical reporting, real-time scheduling, and forecasting.
Systems Integration
TechTeam's systems integration team performs all phases of network
implementations, from project planning and management, to full-scale network
server and workstation installations. After the implementation, the systems
integration team performs a wide range of maintenance services to the client
ranging from desk-side support to network monitoring.
Technical Staffing
TechTeam maintains a staff of trained technical personnel to provide computer
and technical support to its clients at the clients' facilities. Services most
often provided are on-site help desk, programming, consulting, and systems
implementation and maintenance. The Company's adaptive management and proactive
methodology enables its staff to work closely with its clients, understand their
computing environments, and work together to design and install technology to
meet their business needs.
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Training Programs
Training programs include a wide array of applications within the office
automation, network, and client-server marketplace. Clients are offered a full
spectrum of delivery options including course catalogs, registration services,
computer equipment, networks, course materials, certified trainers, evaluation
options, desk-side tutorials, testing, feedback to help desks, and reporting.
OEM CALL CENTER SERVICES
TechTeam offers OEM call center services through the GE Joint Venture. TechTeam
provides the Joint Venture with technicians to answer support calls related to
extended warranty contracts for the personal computer industry. See Note F in
the notes to the consolidated financial statements for additional information on
the GE TechTeam Joint Venture.
LEASING OPERATIONS
In January 1998, TechTeam acquired TechTeam Capital Group in order to provide
lease financing to its client base. TechTeam Capital Group writes leases for
computer, telecommunications, and many forms of capital equipment ranging in
lease terms from 2 - 5 years. Project financing is also available for roll-in or
build-out periods from 6 - 12 months. Lease options include operating leases,
direct financing leases, technology refreshes, and sale/leasebacks.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998
Revenues increased 11.8% to $34.0 million from $30.4 million. The increase
resulted primarily from revenue increases in systems integration services of
$2.4 million and OEM Call Center Services of $1.6 million. Systems integration
revenues increased due to a large contract with a local government agency to
replace workstations, upgrade internal networks and provide certain year 2000
remediation services. The OEM Call Center Services revenue increase was due to
the GE Joint Venture adding a new warranty customer in the third quarter coupled
with additional need for Company technicians to staff existing business.
Gross profit increased as a percentage of sales to 17.4% from 14.1%. The
increase was primarily due to realizing better margins on existing corporate
help desk revenues through expansion of ongoing projects while containing the
related incremental costs.
Selling, General and Administrative expense decreased as a percentage of revenue
to 14.2% from 15.1%, due primarily to the Company's continuing efforts in cost
containment.
Interest income decreased to $0.2 million from $0.5 million. The decrease
resulted from having a lower average cash and cash equivalent balance during
1999. The decrease in cash is explained in the Liquidity and Capital Resources
section on the following page.
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RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO SEPTEMBER 30, 1998
Revenues increased 21.2% to $102.3 million from $84.4 million. The increase
resulted primarily from revenue increases in corporate help desk services of
$6.6 million, systems integration services of $7.6 million, leasing operations
of $4.1 million, OEM Call Center Services of $3.4 million which were offset by
decreased revenue in technical staffing of $2.5 million. Corporate help desk
services increased due to expanding services to several existing large clients
in the Global Help Desk area along with the addition of several smaller
customers. Systems integration revenues increased due to a large contract with a
local government agency to replace workstations, upgrade internal networks and
provide certain year 2000 remediation services. The Leasing operations revenue
increase was due to the sale of certain lease assets and lease revenue rights to
a third party combined with an increase in lease volume due to the addition of
several new customers and placing additional assets with existing customers due
to growth by these customers. OEM Call Center Services increased due to the GE
TechTeam joint venture expanding warranty administration services for a major
personal computer manufacturer late in 1998 and this business has continued
through the current period. Technical staffing decreased due to the completion
of certain non-recurring projects near the end of 1998.
Gross profit remained constant at 17.9% for the nine months ended September 30,
1999 compared to the same period in 1998. Gross margins for each segment line of
business for the nine-month period ended September 30, 1999 remained consistent
with those of the same period in 1998.
Selling, General and Administrative expense decreased as a percentage of revenue
to 15.0% from 16.5%, due primarily to the Company's continuing efforts in cost
containment.
Interest income decreased to $0.5 million from $1.5 million. The decrease
resulted from having a lower average cash and cash equivalent balance during
1999. The decrease in cash is explained in the Liquidity and Capital section
below.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Provided from Operations
Cash flow provided from operating activities was $16.4 million for the nine
months ended September 30, 1999. Cash flow provided was primarily due to
earnings, combined with $15.3 million of non-cash depreciation expense mainly
related to the leasing operations, offset by a net decrease of $0.8 million in
operating assets and liabilities.
Cash Flow Used by Investing Activities
Cash flow used by investing activities was $22.0 million, principally to
purchase equipment to be leased to customers for the leasing operations.
Cash Flow Used in Financing Activities
Cash flow used in financing activities was $4.8 million. The Company used $2.2
million to pay down debt and $2.5 million to repurchase Company stock in
accordance with the stock repurchase program.
The Company's working capital position at September 30, 1999 was $25.0
million compared to $32.6 million at December 31, 1998.
The Company has line-of-credit agreements with Bank One and Chase Manhattan Bank
which provide for short-term borrowings of up to $25 million and $310,000,
respectively: both lines-of-credit are unsecured. Bank One 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 September 30, 1999.
The Company believes that cash flows from operations, together with current
short-term assets and borrowings available under the Company's lines-of-credit
will continue to be sufficient to meet its ongoing working capital needs.
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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. TechTeam has
identified all internal systems having material Year 2000 issues.
Analysis of systems critical to the delivery of TechTeam's services issues have
been completed on all critical systems. All of these systems have been
remediated to vendor specifications. Where feasible the systems have been
validated.
TechTeam has replaced its non-compliant financial system at a cost of $2.3
million. TechTeam has completed the remediation of its internal call center
software, also known as the GCC. 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 have spent a total of $200,000 in 1999
to complete its Y2K project. Much of the remediation was performed with vendor
patches at little or no cost to TechTeam or under maintenance contract.
Accordingly, other than internal labor required for remediation, these efforts
resulted in minimal additional expenses. The estimated expenses may not include
all of the cost of implementing contingency plans, which are in the process of
being finalized. Further, though no claims have been made these estimates also
do not include any litigation or warranty costs related to Y2K which may
potentially occur.
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 likely be accompanied by additional revenues from its clients.
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. The most likely non-IT "worst case scenario"
would be loss of operations at one of TechTeam's support centers due to
environmental or security considerations. The recovery procedure would be to
divert traffic to another center. It is worth noting that less than 1 percent of
TechTeam's weekly support center traffic normally 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.
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PART II -- OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Between August 27, 1997 and October 24, 1997, four actions were filed against
the Company, William F. Coyro, Jr. currently the Chairman of the Board of
Directors and formerly an officer of the Company, and Lawrence A. Mills, a
former officer of the Company. These actions were consolidated into a single
action, alleging violations of Section 10 (b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated there under, as well as claims against the
individual defendants for alleged "controlling person" liability under Section
20(a) of the Securities Exchange Act. On December 24, 1998, the Company and the
individual defendants entered into an agreement in principle to settle the
consolidated class action lawsuits for the payment of $11 million to the
plaintiffs. On August 11, 1999, U.S. District Court Judge Avern Cohn of the
Eastern District of Michigan granted final approval of the Stipulation of
Settlement formalizing the agreement in principle.
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
(Filed as Exhibit 10.14 to the registrant's Form 10-Q for the
quarter ended March 31, 1999, SEC File 0-16284, and incorporated
herein by reference).
27 Financial Data Schedule
(b) Reports on Form 8-K. No reports were filed on Form 8-K during the quarter
ended September 30, 1999.
ITEMS 2, 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED
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: 11/15/99 By: /s/Harry A. Lewis
---------------------
Harry A. Lewis
Chief Executive Officer
and President
Date: 11/15/99 By: /s/M. Anthony Tam
---------------------
M. Anthony Tam
Vice President,
Chief Financial Officer
and Treasurer
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Exhibit Index
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Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule