<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) December 19, 1997
National TechTeam, Inc.
(Exact name of registrant as specified in its charter)
Delaware 0-16284 38-2774613
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
835 Mason Street Dearborn, MI 48224
(Address of principal executive offices) (City, State) (Zip Code)
Registrant's telephone number, including area code (313) 277-2277
1
<PAGE> 2
ITEM 5. OTHER EVENTS.
On November 19, 1997 the Company filed its report on Form 10-Q for the
period ended September 30, 1997. Included in that report were restated
financial statements relating to (1) certain revenues from contemporaneous
purchase/sale transactions between the Company and licensees of its software
products occurring in the fourth quarter of 1996 and the first quarter of 1997;
and (2) certain other adjustments. In that report on Form 10-Q, the Company
also said that it would restate its consolidated financial statements to
include the accounts of Compuflex Systems, Inc., which was acquired by the
Company on July 30, 1997 in a transaction that has been accounted for as a
pooling of interests.
The Company has restated its financial statements for 1996 to include the
above mentioned restated financial information and the accounts of Compuflex
for all periods and is filing those restated financial statements on a
voluntary basis to supplement disclosures in other filings it has made and will
make.
Included with this report are the following information and supplemental
financial statements:
- Selected Consolidated Financial Data.
- Management Discussion and Analysis of Financial Condition and
Results of Operation.
- Report of Independent Auditors.
- Consolidated Statements of Operations - Years Ended December
31, 1996, 1995 and 1994.
- Consolidated Statements of Financial Position - December 31,
1996 and December 31, 1995.
- Consolidated Statements of Shareholders' Equity - Years ended
December 31, 1996, 1995 and 1994.
- Consolidated Statements of Cash Flows - Years ended December 31,
1996, 1995 and 1994.
- Notes to the Consolidated Financial Statements.
2
<PAGE> 3
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 hereunto duly authorized.
National TechTeam, Inc.
By: /s/Lawrence A. Mills
------------------------------
Its: Senior Vice President, Chief Financial Officer,
Treasurer and Secretary
Date: December 19, 1997
-----------------
3
<PAGE> 4
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth certain selected consolidated financial
data and is qualified by the more detailed Consolidated Financial Statements
and notes thereto included in Item 8 in this Form 8-K Report. The Statement
of Financial Position Data as of December 31, 1992, 1993, 1994, 1995, and
1996, and the Statement of Operations Data for each of the five years in the
period ended December 31, 1996 have been derived from the Company's
consolidated financial statements for such years, which have been audited by
Ernst & Young LLP, independent auditors.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(RESTATED - NOTE M)
<C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Call Center Services............ $31,433 $15,123 $ 7,173 $ 2,325 $ --
------- ------- ------- ------- -------
Corporate Computer Services
Technical staffing......... 20,907 20,095 16,935 12,866 7,064
Systems integration........ 12,819 7,841 5,530 2,647 1,079
Training programs.......... 7,027 4,018 4,613 5,387 3,771
------- ------- ------- ------- -------
Total Corporate Computer
Services..................... 40,753 31,954 27,078 20,900 11,914
------- ------- ------- ------- -------
Total revenues....................... 72,186 47,007 34,251 23,225 11,914
Cost of services delivered........... 57,176 36,476 26,129 17,321 9,103
------- ------- ------- ------- -------
Gross profit......................... 15,010 10,601 8,122 5,904 2,811
------- ------- ------- ------- -------
Other expenses/(income)
Selling, general and
administrative............. 10,112 6,080 4,603 2,208 1,544
Interest expense................ 205 79 59 108 78
Interest income................. (937) (74) (71) -- --
Gain on sale of investment...... -- -- (152) -- --
------- ------- ------- ------- -------
9,380 6,085 4,439 2,316 1,622
------- ------- ------- ------- -------
Income before tax provisions......... 5,630 4,516 3,683 3,588 1,189
Tax provisions....................... 2,584 1,892 1,524 1,357 341
------- ------- ------- ------- -------
Net income........................... $ 3,046 $ 2,624 $ 2,159 $ 2,231 $ 848
======= ======= ======= ======= =======
Primary earnings per share........... $0.23 $0.23 $0.20 $0.24 $ 0.10
======= ======= ======= ======= =======
Fully diluted earnings per share..... $0.23 $0.23 $0.19 $0.23 $ 0.10
======= ======= ======= ======= =======
Weighted average number of common
shares and common share
equivalents outstanding
Primary......................... 13,031 11,607 11,053 9,323 8,439
Fully diluted................... 13,054 11,607 11,151 9,540 8,750
DECEMBER 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS)
(RESTATED - NOTE M)
STATEMENT OF FINANCIAL POSITION DATA:
Current assets....................... $100,474 $17,344 $14,286 $ 7,045 $ 3,085
Current liabilities.................. 9,886 4,981 2,559 2,827 2,682
Total assets......................... 116,998 26,266 20,260 12,525 4,130
Long-term liabilities................ 2,483 866 147 233 104
Total shareholders' equity........... 104,520 20,419 17,554 9,465 1,344
</TABLE>
4
<PAGE> 5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 two
divisions, Call Center Services and Corporate Computer Services (technical
staffing, systems integration and training programs). Revenues from all service
offerings are recognized as services are performed.
Call Center Services consist of international telephone support for
end-users of computer hardware, software products and services. Call Center
Services are billed on a fee per call, fee per time spent on calls or per agent
basis, each as negotiated with clients. Under the terms of certain Call Center
Services contracts, clients are required to pay certain amounts at the
commencement of the contract, which payments are non-refundable and as to which
the Company has no further service obligation. Amounts billed under this
provision of such contracts aggregated $618,100 in 1996; $1,655,700 in 1995;
and $19,600 in 1994. National TechTeam has recognized these amounts as revenues
when they were billed. Absent unusual circumstances, in the future the Company
expects to negotiate these contracts so that the revenues are recognized over
the life of the contract. The Company has also licensed customers to use its
Foundation Platform, as 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; or (2) In those instances where
the license was granted in connection with a contemporaneous purchase as the
expenses of the transaction are recognized.
Technical staffing includes a variety of technical services, including the
placement of computer personnel at client sites to support end-user
applications through on-site help desks, as well as selected programming and
consulting services. Systems integration consists of database design, computer
product sales and networking services. Contracts for technical staffing and
systems integration are generally negotiated on an hourly rate basis or are
priced on a project basis. Training programs consist of instructor-led,
computer-based training for word processing, spreadsheets, graphics, data
bases, desktop publishing, operating systems, and systems administration for
NetWare, JAVA, NT, Windows, OS/2 and UNIX and mainframe operating systems. For
training programs, clients pay a fee per student trained or a fee for classes
offered, in some cases with an advance payment for the cost of the necessary
training materials.
Cost of services delivered consists of direct personnel compensation,
statutory and other benefits associated with such personnel, facility and
computer equipment costs, and other direct costs associated with providing
services to clients. Selling, general and administrative costs consist of
sales, marketing and administrative personnel compensation, statutory and other
benefits associated with such personnel, facility and equipment costs and other
indirect costs associated with the sales, marketing and administrative
functions of the Company.
5
<PAGE> 6
The following table sets forth the percentage relationship to revenues of
certain items in the Company's Consolidated Statements of Operations:
<TABLE>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
---- ---- ----
(Restated - Note M)
<S> <C> <C> <C>
Revenues
Call Center Services.................... 43.5% 32.1% 20.9%
----- ----- -----
Corporate Computer Services
Technical staffing................. 29.0 42.7 49.4
Systems integration................ 17.8 16.7 16.2
Training programs.................. 9.7 8.5 13.5
----- ----- -----
Total Corporate Computer Services....... 56.5 67.9 79.1
----- ----- -----
Total revenues............................... 100.0 100.0 100.0
Cost of services delivered................... 79.2 77.5 76.3
----- ----- -----
Gross profit................................. 20.8 22.5 23.7
----- ----- -----
Other expenses/(income)
Selling, general and administrative..... 14.0 12.9 13.4
Interest expense........................ 0.3 0.2 0.2
Interest income......................... (1.3) (0.2) (0.2)
Gain on sale of investment.............. -- -- (0.4)
----- ----- -----
13.0 12.9 13.0
----- ----- -----
Income before tax provisions................. 7.8 9.6 10.7
Tax provisions............................... 3.6 4.0 4.4
----- ----- -----
Net income................................... 4.2% 5.6% 6.3%
===== ===== =====
</TABLE>
Between 1994 and 1996, TechTeam's revenues increased at a compound annual
rate of 45.2%. 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 services that address a
broad range of those needs. The Company believes that the outsourcing trend
will continue and will provide continuing opportunities for both of its service
lines. TechTeam further believes that its service offerings are influenced
substantially by its clients' desires 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 desk top software.
National TechTeam's business is based on client relationships with major
corporations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Impact of Business with Major Clients."
Comparative Performance -- 1996 versus 1995
National TechTeam earned net income of $3,046,190, or $0.23 per share, for
1996 as compared to a net income of $2,623,667 or $0.23 per share, for 1995.
Revenues -- National TechTeam's total revenues increased by $25,109,624 in
1996 to $72,186,156, a 53.3% increase over revenues in 1995. Changes in
revenues resulted from the following:
Call Center Services -- Revenues from Call Center Services increased
by $16,310,310 in 1996. This was a 107.8% increase over Call Center
Services revenues in 1995. The increase was due to an increase to 36
contracts in place at December 31, 1996 compared to the 18 contracts at
December 31, 1995 and increased business with existing customers,
primarily Hewlett-Packard.
6
<PAGE> 7
Technical staffing -- Revenues from technical staffing increased by
$812,287 in 1996. This was a 4.0% increase over technical staffing
revenues in 1995. The increase was due to continued client demand for
TechTeam's help desk and computer services personnel at Ford and other
major accounts.
Systems integration -- Revenues from systems integration increased
by $4,977,961 in 1996. This was a 63.5% increase over systems integration
revenues in 1995. The increase was due principally to a growing demand by
existing clients for TechTeam's networking services.
Training programs -- Revenues from training programs increased by
$3,009,066 in 1996. This was a 74.9% increase over training revenues in
1995. The increase was due to increased enrollments in the Company's
training programs and the sale of $350,000 of computer-based training
materials to a new client.
Cost of services delivered -- The cost of services delivered increased by
$20,700,404 in 1996. This was a 56.8% increase over the cost of services
delivered in 1995. The increase was due principally to compensation costs for
an increased number of technical personnel, statutory and other benefits
associated with such personnel, facility and computer equipment costs, and
other direct costs associated with providing an increased volume of services to
clients. These costs were 79.2% and 77.5% of revenues in 1996 and 1995,
respectively.
Selling, general and administrative -- Selling, general and administrative
expenses increased by $4,032,334 in 1996. This was a 66.3% increase over
selling, general and administrative expenses in 1995. The increase was due
principally to compensation costs for an increased number of sales and
administrative personnel, statutory and other benefits associated with such
personnel, facility and equipment costs, and other indirect costs needed to
support the growth of the Company. These expenses were 14.0% of revenues in
1996 compared with 12.9% of revenues in 1995. This increase was due primarily
to expansion of National TechTeam's sales and internal management information
systems staffs to support the growth of the Company.
Interest income -- Commencing in October 1996, National TechTeam began
earning significant amounts of interest income on cash generated by the 1996
public stock offering.
Tax provisions -- TechTeam recognized $1,874,599 of Federal income tax in
1996, resulting in an effective tax rate of 38.1% compared to an effective tax
rate of 36.1% for 1995. The increase is due to the increase in foreign
operations. The Michigan Single Business Tax in 1996 was $709,000, with an
effective tax rate of 12.6% compared to an effective tax rate of 9.1% in 1995.
The increase is due to the taxes on the deferred revenue which is currently
taxable for Michigan Single Business Tax purposes.
Comparative Performance -- 1995 versus 1994
National TechTeam earned net income of $2,623,667, or $0.23 per share, for
1995 as compared to a net income of $2,158,949, or $0.20 per share, for 1994.
Revenues -- The Company's total revenues increased by $12,825,161 in 1995
to $47,076,532, a 37.4% increase over 1994 revenues. Changes in revenues
resulted from the following:
Call Center Services -- Revenues from Call Center Services increased
by $7,950,297 in 1995. This was a 110.8% increase over Call Center
Services revenues in 1994. The increase was due to an increase to 18
contracts in place at December 31, 1995 compared to the seven contracts
at December 31, 1994.
Technical staffing -- Revenues from technical staffing increased by
$3,159,598 in 1995. This was a 18.7% increase over technical staffing
revenues in 1994. The increase was due to continued client demand for
TechTeam's help desk and computer services personnel at Ford and other
major accounts.
Systems integration -- Revenues from systems integration increased
by $2,310,827 in 1995. This was a 41.8% increase over systems integration
revenues in 1994. The increase was due principally to a growing demand by
existing clients for TechTeam's networking and applications development
services.
7
<PAGE> 8
Training programs -- Revenues from training programs decreased by
$595,561 in 1995. This was a 12.9% decrease from training revenues in
1994. The decrease was due to a reduced scope of training services for a
major client.
Cost of services delivered -- The cost of services delivered increased by
$10,346,265 in 1995. This was a 39.6% increase over the cost of services
delivered in 1994. The increase was due principally to compensation costs for
an increased number of technical personnel, statutory and other benefits
associated with such personnel, facility and computer equipment costs, and
other direct costs associated with providing an increased volume of services to
clients. These costs were 77.5% and 76.3% of revenues in 1995 and 1994,
respectively.
Selling, general and administrative -- Selling, general and administrative
expenses increased by $1,476,675 in 1995. This was a 32.1% increase over
selling, general and administrative expenses in 1994. The increase was due
principally to compensation costs for an increased number of sales and
administrative personnel, statutory and other benefits associated with such
personnel, facility and equipment costs, other indirect costs needed to support
the growth of the Company. These expenses were 12.9% and 13.4% of revenues in
1995 and 1994, respectively.
Tax provisions -- National TechTeam recognized $1,481,936 of Federal
income tax in 1995, resulting in an effective tax rate of 36.1% for 1995
compared to an effective tax rate of 36.1% for 1994. The Michigan Single
Business Tax in 1995 was $410,000, with an effective tax rate of 9.1% compared
to an effective tax rate of 8.3% for 1994. These taxes are tied more closely
to revenues than net income. This inflates the effective tax rate when income
is lower.
Impact of Business with Major Clients
Historically, National TechTeam has been heavily dependent upon Ford for a
major portion of its revenues. Management recognizes the need to diversify its
client base from both a client and industry perspective. The Company has had
some success in this regard as Hewlett-Packard became TechTeam's largest client
in 1996. However, the Company continues to seek additional business from its
largest clients and those clients will continue to constitute a high percentage
of National TechTeam's total revenues for the foreseeable future. TechTeam's
services are not specific to any single industry and can be beneficial to most
large corporations. National 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.
Continuing efforts to increase sales outside of Ford have produced positive
results, as total revenues from non-Ford clients were $61,173,387 in 1996,
$35,986,968 in 1995, and $23,873,818 in 1994, a compound annual growth rate of
60.1%.
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<PAGE> 9
Impact of Business with Major Clients -- continued
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1996 1995 1994
---- ---- ----
(Restated - Note M)
<S> <C> <C> <C>
Hewlett-Packard Company
Revenues for the period......................... $19,266,318 $7,269,445 $ --
Percentage increase from prior period........... 165.0 % --* --%
Percentage of total revenues.................... 26.7 % 15.4 % --%
Ford Motor Company
Revenues for the period......................... $16,311,769 $15,584,964 $14,195,853
Percentage increase from prior period........... 4.7 % 9.8 % 3.6%
Percentage of total revenues.................... 22.6 % 33.1 % 41.4%
Chrysler Corporation
Revenues for the period......................... $ 5,485,038 $ 4,162,419 $ 3,294,788
Percentage increase from prior period........... 31.8 % 26.3 % 160.2%
Percentage of total revenues.................... 7.6 % 8.8 % 9.6%
Corel Corporation
Revenues for the period......................... $ 268,459 $ 2,737,601 $ 3,687,298
Percentage increase/(decrease) from
prior period (90.2)% (25.8)% 789.4%
Percentage of total revenues.................... 0.4 % 5.8 % 10.8%
Novell, Inc.
Revenues for the period......................... $ -- $ 522,973 $ 2,260,203
Percentage increase/(decrease) from
prior period (100.0)% (76.7)% 31.6%
Percentage of total revenues.................... -- % 1.1 % 6.6%
</TABLE>
- ------------
* First year of business relationship
Services provided to Ford and Chrysler consist of contract computer
end-user support including on-site help desks and call center services,
programming services, documentation services, and classroom training programs.
TechTeam provides these services to virtually all Ford divisions and two
finance-related Ford subsidiaries. Services provided to Hewlett-Packard, Corel
and Novell consist of technical product post-sales support provided from
TechTeam call center sites.
Revenues from Hewlett-Packard first commenced in mid-1995 with the award
of the first contract for call center services. 1996 was the first full year of
services under that contract. Additional contracts have been awarded in 1996.
Revenues from Corel first commenced in late 1993 and continued into early
1996 at which time Corel made a strategic decision to bring its call center
outsourcing service back in-house. The Company believes Corel's decision is
unrelated to the Company's performance.
Revenues from Novell (product support related to WordPerfect application
software) first commenced in mid-1993 and continued until late 1995 at which
time Novell discontinued outsourced telephone support for its customers. The
Company believes Novell's decision is unrelated to the Company's performance
and, shortly after discontinuation of service, the WordPerfect business unit
was sold to Corel Corporation.
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
Over the three year period commencing January 1, 1994, the Company's
business has been financed by cash provided by operations and the issuance of
common stock, primarily $5,020,834 of private placements in 1994, shares issued
throughout the period under stock option plans and $77,851,500 from a public
offering in 1996. Indicators of the Company's financial strength are summarized
below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1996 1995 1994
---- ---- ----
(Restated - Note M)
<S> <C> <C> <C>
Working capital............................... $90,479,119 $12,362,615 $11,726,801
Current ratio................................. 10.1 3.5 5.6
Debt as a percentage of total capitalization.. 0.2% 5.4% 2.7%
Shareholders' equity.......................... $104,520,199 $20,419,466 $17,554,426
</TABLE>
The Company's working capital was $90,479,119 at December 31, 1996, an
increase of 631.9% from December 31, 1995. This increase was due primarily to
funds provided by the public stock offering in 1996 and 1996 operating results
(reflected primarily in higher accounts receivable balances due to increased
sales).
TechTeam has line-of-credit agreements with NBD Bank and Chase Manhattan
Bank which provide for short-term borrowings of up to $6,000,000 and
$1,250,000, respectively; both lines-of-credit are unsecured. NBD Bank
borrowings are at the prime rate and Chase Manhattan Bank borrowings are at
prime plus 1.5%. Borrowings under these lines at December 31,1996 were
$299,400.
In 1995, National TechTeam invested $1,057,000 in telecommunications
hardware and software which was financed through a five year bank term note.
Management believes sufficient cash resources exist to support its current
growth strategies through currently available cash, future operations, and the
Company's existing bank credit arrangement.
10
<PAGE> 11
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
National TechTeam, Inc.
We have audited the accompanying consolidated statements of financial
position of National TechTeam, Inc. and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Compuflex Systems, Inc., a wholly-owned subsidiary, which statements reflect
total assets constituting 15% in 1995, and total revenues constituting 11% in
1995 and 12% in 1994 of the related consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to data included for Compuflex Systems, Inc., is
based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
As discussed in Note M to the consolidated financial statements, the
Company has restated its previously issued financial statements for the year
ended December 31, 1996, to revise its revenue recognition pertaining to
certain license fee revenues related to contemporaneous purchase/sale
transactions and to reflect certain compensation adjustments.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of National TechTeam,
Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
February 26, 1997, except for Note M
which is dated December 12, 1997
Detroit, Michigan
11
<PAGE> 12
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994
---- ---- ----
(Restated - Note M)
<S> <C> <C> <C>
REVENUES -- NOTE B
Call Center Services............... $31,433,604 $15,123,294 $ 7,172,997
----------- ----------- -----------
Corporate Computer Services
Technical staffing............ 20,907,237 20,094,950 16,935,352
Systems integration........... 12,818,545 7,840,584 5,529,757
Training programs............. 7,026,770 4,017,704 4,613,265
----------- ----------- -----------
Total Corporate Computer Services.. 40,752,552 31,953,238 27,078,374
----------- ----------- -----------
TOTAL REVENUES.......................... 72,186,156 47,076,532 34,251,371
COST OF SERVICES DELIVERED.............. 57,176,020 36,475,616 26,129,315
----------- ----------- -----------
GROSS PROFIT............................ 15,010,136 10,600,916 8,122,056
----------- ----------- -----------
OTHER EXPENSES/(INCOME)
Selling, general and
administrative................... 10,112,768 6,080,434 4,603,759
Interest expense................... 204,813 78,709 59,411
Interest income.................... (937,234) (73,830) (71,467)
Gain on sale of investment......... -- -- (152,471)
----------- ----------- -----------
9,380,347 6,085,313 4,439,232
----------- ----------- -----------
INCOME BEFORE TAX PROVISIONS............ 5,629,789 4,515,603 3,682,824
TAX PROVISIONS -- NOTE F................ 2,583,599 1,891,936 1,523,875
----------- ----------- -----------
NET INCOME.............................. $ 3,046,190 $ 2,623,667 $ 2,158,949
=========== =========== ===========
PRIMARY EARNINGS PER SHARE.............. $ 0.23 $ 0.23 $ 0.20
=========== =========== ===========
FULLY DILUTED EARNINGS PER SHARE........ $ 0.23 $ 0.23 $ 0.19
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES AND COMMON SHARE
EQUIVALENTS OUTSTANDING
Primary............................ 13,030,530 11,606,692 11,052,974
Fully diluted...................... 13,053,984 11,606,692 11,150,927
</TABLE>
See accompanying notes.
12
<PAGE> 13
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
ASSETS 1996 1995
---- ----
(Restated - Note M)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents............................. $ 46,812,397 $ 1,766,043
Securities available-for-sale......................... 27,169,703 --
Accounts receivable -- Note B......................... 23,228,787 14,228,172
Note receivable -- current portion.................... -- 53,333
Refundable income tax................................. 1,413,461 --
Inventories........................................... 647,565 769,545
Advances to vendors................................... 500,000 --
Other................................................. 701,865 526,651
------------ -----------
100,473,778 17,343,744
------------ -----------
PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE
Office furniture and equipment........................ 12,810,673 7,218,953
Purchased software.................................... 2,917,307 1,050,300
Leasehold improvements................................ 1,380,140 681,223
Transportation equipment.............................. 192,907 154,395
------------ -----------
17,301,027 9,104,871
Less -- Accumulated depreciation and amortization..... 5,404,611 3,081,657
------------ -----------
11,896,416 6,023,214
------------ -----------
OTHER ASSETS
Goodwill (less accumulated amortization of $551,081
at December 31, 1996 and $345,512 at
December 31, 1995)............................... 1,509,437 1,252,585
Investment in affiliates -- Note H.................... 1,049,516 245,000
Deferred income tax................................... 912,400 --
Note receivable -- long term.......................... -- 102,222
Other................................................. 1,156,771 1,298,958
------------ -----------
4,628,124 2,898,765
------------ -----------
TOTAL ASSETS.......................................... $116,998,318 $26,265,723
============ ===========
</TABLE>
See accompanying notes.
13
<PAGE> 14
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
---- ----
(Restated - Note M)
<S> <C> <C>
CURRENT LIABILITIES
Line of credit............................................. $ 299,400 $ 300,000
Current portion of long-term debt.......................... 62,000 158,884
Accounts payable........................................... 4,239,363 1,067,965
Accrued payroll, related taxes and withholdings............ 3,554,512 2,037,446
Deferred income tax -- Note F.............................. 389,343 489,639
Federal income tax payable................................. -- 160,116
Deferred revenues and unapplied receipts................... 255,940 431,967
Accrued expenses and taxes................................. 874,329 106,042
Other...................................................... 319,772 229,070
------------ -----------
9,994,659 4,981,129
------------ -----------
LONG-TERM LIABILITIES
Deferred Foundation Platform license fees.................. 2,050,000 --
Deferred income tax -- Note F.............................. 162,813 214,566
Long-term debt............................................. 196,000 650,562
Minority interest.......................................... 74,647 --
------------ -----------
2,483,460 865,128
------------ -----------
SHAREHOLDERS' EQUITY -- NOTES E, G, J AND K
Preferred stock, par value $.01
Authorized -- 5,000,000 shares
None issued
Common stock, par value $.01
Authorized -- 45,000,000 shares
Issued:
15,444,530 shares at December 31, 1996........... 154,405
11,839,906 shares at December 31, 1995........... 118,399
Additional paid-in capital................................. 98,636,680 17,823,203
Retained earnings.......................................... 6,466,862 3,384,872
------------ -----------
Total...................................................... 105,257,947 21,326,474
Less -- Treasury stock (161,983 shares at December 31, 1996
and 200,000 shares at December 31, 1995).............. 737,748 907,008
------------ -----------
Total shareholders' equity................................. 104,520,199 20,419,466
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY...................... $116,998,318 $26,265,723
============ ===========
</TABLE>
See accompanying notes.
14
<PAGE> 15
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK
----- ------- -------- ---------
(Restated - Note M)
<S> <C> <C> <C> <C>
Balance at January 1, 1994................................... $ 96,512 $10,766,070 $(1,397,744) $ --
Proceeds from issuance of 1,060,731 shares of
common stock - Note G ................................ 10,607 5,010,227 -- --
Proceeds from issuance of 308,625 shares under
stock option plans - Note J .......................... 3,087 574,123 -- --
Issuance of 32,810 shares of common stock - Note G...... 328 151,986 -- --
Tax benefit from exercise of employee stock options
and other ............................................ -- 180,381 -- --
Retirement of 1,427 shares of common stock.............. (14) (86) -- --
Net income for 1994..................................... -- -- 2,158,949 --
-------- ----------- ---------- ---------
Balance at December 31, 1994................................. 110,520 16,682,701 761,205 --
Proceeds from issuance of 418,500 shares under
stock option plans -- Note J.......................... 4,185 256,475 -- --
Tax benefit from exercise of employee stock options
and other............................................. -- 310,221 -- --
Purchase of common stock - Note K....................... -- -- -- (907,008)
Issuance of 369,472 shares of common stock - Note G..... 3,694 573,806 -- --
Net income for 1995..................................... -- -- 2,623,667 --
-------- ----------- ---------- ---------
Balance at December 31, 1995................................. 118,399 17,823,203 3,384,872 (907,008)
Proceeds from issuance of 3,225,000 shares of
common stock - Note G ................................ 32,250 77,819,250 -- --
Proceeds from issuance of 289,100 shares under
stock option plans - Note J........................... 2,891 778,469 -- --
Shares issued to acquire Coup, Inc...................... 800 259,200 -- --
Shares issued to acquire U.S.A. Computer Training
Centers, Inc.......................................... 65 76,277 -- --
Tax benefit from exercise of employee stock options
and other............................................. -- 1,654,579 -- --
Contributions to 401(k) plan and other.................. -- 225,702 -- 169,260
Adjustment to retained earnings to align year-ends of
pooled entities - Note M ............................. -- -- 35,800 --
Net income for 1996..................................... -- -- 3,046,190 --
-------- ----------- ---------- ---------
Balance at December 31, 1996............................ $154,405 $98,636,680 $ 6,466,862 $(737,748)
======== =========== ============ =========
</TABLE>
See accompanying notes.
15
<PAGE> 16
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
---- ---- ----
(Restated - Note M)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................... $ 3,046,190 $ 2,623,667 $ 2,158,949
Adjustments to reconcile net income to net cash provided by/
(used in) operating activities:
Depreciation and amortization................................. 2,942,544 1,864,850 1,231,779
Provision for uncollectible accounts receivable............... 25,000 153,795 30,308
Treasury stock contributed to 401(k) plan..................... 169,260 -- --
Provision for deferred income tax............................. (603,624) 237,895 223,310
Deferred Foundation Platform license fees..................... 2,050,000 -- --
(Gain) on sale of investment.................................. -- -- (152,471)
(Gain)/loss on sales of equipment and other................... (17,860) 55,209 (3,878)
Changes in current assets and liabilities:
Accounts receivable...................................... (9,202,315) (5,602,966) (3,165,007)
Inventories.............................................. 121,980 (269,797) (130,574)
Advances to vendors...................................... (500,000) -- --
Other current assets..................................... (235,115) (74,320) (246,168)
Accounts payable......................................... 3,185,398 530,062 (95,073)
Accrued payroll, related taxes and withholdings.......... 1,571,508 1,169,465 306,459
Federal income tax....................................... (1,573,577) 498,974 (871,831)
Deferred revenues and unapplied receipts................. 182,157 384,427 (99,091)
Accrued expenses and taxes............................... 874,329 106,042 --
Other current liabilities................................ (689,866) (31,352) (232,233)
----------- ----------- -----------
Net cash provided by/(used in) operating activities........... 1,346,009 1,645,951 (1,045,521)
----------- ----------- -----------
INVESTING ACTIVITIES
Purchases of property, equipment and software...................... (9,356,719) (4,697,327) (954,698)
Development of training manuals.................................... (211,027) (117,970) (116,722)
Purchases of securities available-for-sale......................... (27,169,703) (100,000) (12,388,000)
Proceeds from sale of temporary investments........................ -- 3,600,000 8,888,000
Proceeds from sale of investment................................... -- -- 160,000
Investment in affiliates........................................... (804,516) -- (245,000)
Collection/(issuance) of note receivable........................... 155,555 (155,555) --
Proceeds from sales of property and equipment and other assets..... 11,000 22,630 23,227
Other assets -- net................................................ 59,359 26,936 13,082
----------- ----------- -----------
Net cash used in investing activities......................... (37,316,051) (1,421,286) (4,620,111)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from short-term borrowings................................ 8,116,575 310,000 297,800
Proceeds from long-term borrowings................................. 480,212 565,998 --
Proceeds from issuance of common stock............................. 79,436,062 838,160 5,598,044
Tax benefit from exercise of employee stock options................ 1,654,579 310,221 180,381
Purchase of Company common stock................................... -- (907,008) --
Payments on short-term borrowings.................................. (8,024,359) (40,000) --
Payments on long-term borrowings................................... (919,174) (206,652) (432,471)
----------- ----------- -----------
Net cash provided by financing activities..................... 80,743,895 870,719 5,643,754
----------- ----------- -----------
Increase/(decrease) in cash and cash equivalents.............. 44,773,853 1,095,384 (21,878)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.......................... 2,038,544 670,659 692,537
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR................................ $46,812,397 $ 1,766,043 $ 670,659
=========== =========== ===========
</TABLE>
See accompanying notes.
16
<PAGE> 17
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 (AS RESTATED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation: The consolidated financial statements include the
accounts of National TechTeam, Inc., its wholly-owned subsidiaries Compuflex
Systems, Inc., TechTeam Europe, Ltd. and National TechTeam of Illinois, Inc.,
formerly Micro Systems Group, Inc. ("MSG") and the Company's 75% interest in
National TechTeam Europe, N.V., a joint venture. Collectively, these companies
are referred to as the "Company" or "TechTeam." Intercompany accounts and
transactions have been eliminated as appropriate. Certain reclassifications
have been made to the 1995 and 1994 financial statements in order to conform to
the 1996 financial statement presentation.
Cash and cash equivalents: Cash includes both interest bearing and
non-interest bearing deposits which are available on demand. Cash equivalents
include all liquid investments with a maturity of three months or less when
purchased, including money market funds held at banks.
Securities available-for-sale: The Company's management determines the
appropriate classification of securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. The December 31,
1996 securities available-for-sale are stated at market value which
approximates cost. Securities available-for-sale are invested primarily in
obligations of states and other political subdivisions.
Inventories: Inventories are stated at the lower of cost (determined by
the first-in, first-out method) or market and consist principally of computer
equipment and software.
Property, equipment and purchased software: Property, equipment and
purchased software are stated at cost. Property and equipment are depreciated
on the straight-line method over their estimated useful lives, ranging from 3
to 10 years. Leasehold improvements are amortized on a straight-line basis over
the lesser of the lease term or the estimated useful lives of the improvements.
Purchased software is amortized over 3 to 5 years.
Capitalized Software Costs: The Company capitalizes certain computer
software costs which are amortized on a straight line basis over the economic
lives of the related products not to exceed five years.
Goodwill: Represents the excess cost over the fair value of net assets
acquired in the acquisition of MSG, Coup, Inc., U.S.A. Computer Training
Centers, Inc. and others and is amortized on a straight-line basis over 10
years. The carrying value of goodwill will be reviewed if the facts and
circumstances suggest that it may be impaired.
Revenue recognition: Revenues from Call Center Services and Corporate
Computer Services are recognized as services are performed. Revenues from
product sales are recognized when title is transferred to the client. Under the
terms of certain Call Center Services contracts, clients are required to pay
certain amounts at the commencement of the contract, which payments are
non-refundable and as to which the Company has no further service obligation.
Amounts billed under this provision of such contracts aggregated $618,100 in
1996; $1,655,700 in 1995; and $19,600 in 1994. All such amounts were
recognized as revenues when billed. The Company has also licensed customers to
use its Foundation Platform, 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; or (2) In those instances where
the license was granted in connection with a contemporaneous purchase as the
expenses of the transaction are recognized. No Foundation Platform license
revenues were recognized in 1994, 1995 or 1996.
Deferred revenue: TechTeam receives advance payments from clients under
certain lease and maintenance agreements. These payments are recognized as
revenues when earned. All deferred revenue recorded at December 31 is expected
to be earned in the subsequent year. See "Revenue recognition" regarding
deferred Foundation Platform license fees.
Deferred income taxes: Deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
17
<PAGE> 18
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Stock options: TechTeam accounts for employee stock options under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations.
Earnings per share: Earnings per share is computed using the weighted
average number of common shares and common share equivalents outstanding during
each year presented. Common share equivalents consist of stock options and
warrants and are calculated using the treasury stock method.
Use of estimates: Preparation of financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
the estimates and assumptions made.
NOTE B -- DESCRIPTION OF THE BUSINESS
The Company provides call center services and corporate computer services
for major companies on an international scale. Revenues and accounts receivable
from major clients are summarized as follows.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---- ---- -----
<C> <C> <C> <C>
Hewlett-Packard Company
Revenues for the period............... $19,266,318 $7,269,445 $ --
Accounts receivable at end of period.. 3,104,422 2,923,934 --
Ford Motor Company
Revenues for the period............... 16,311,769 15,584,964 14,195,853
Accounts receivable at end of period.. 5,052,263 4,863,948 2,487,263
Chrysler Corporation
Revenues for the period............... 5,485,038 4,162,419 3,294,788
Accounts receivable at end of period.. 1,843,888 1,221,121 1,457,237
Corel Corporation
Revenues for the period............... 268,459 2,737,601 3,687,298
Accounts receivable at end of period.. -- 268,550 537,972
Novell, Inc.
Revenues for the period............... -- 522,973 2,260,203
Accounts receivable at end of period.. 11,220 193,682 508,736
</TABLE>
Allowances for potentially uncollectible accounts receivable were as
follows: December 31, 1996 -- $245,000; December 31, 1995 -- $220,000. The
Company generally does not require collateral from its clients. Credit losses
experienced have been consistent with the Company's management's expectations.
18
<PAGE> 19
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE C -- LEASES
The Company leases its call center facilities, corporate and other offices
and certain office equipment under noncancelable operating leases. These leases
are renewable with various options and terms. Total rental expense was
$2,028,618 in 1996, $1,496,574 in 1995, and $1,105,992 in 1994.
Minimum future payments under noncancelable operating leases with initial
terms of one year or more were:
<TABLE>
<CAPTION>
DECEMBER 31,
YEAR 1996
--------------------------- ------------
<S> <C>
1997..................... $2,328,375
1998..................... 2,425,689
1999..................... 2,418,147
2000..................... 2,157,768
2001..................... 955,271
</TABLE>
NOTE D -- FINANCING ARRANGEMENTS AND LONG-TERM DEBT
TechTeam has agreements with NBD Bank and Chase Manhattan Bank
which provide for short-term borrowings of up to $6,000,000 and
$1,250,000, respectively; both lines-of-credit are unsecured. NBD Bank
borrowings are at the prime rate and Chase Manhattan Bank borrowings
are at prime plus 1.5%. Borrowings under these lines at December
31,1996 were $299,400.
The following amounts relate to short-term borrowings:
<TABLE>
<CAPTION>
MAXIMUM AMOUNT AVERAGE DAILY AMOUNT AVERAGE COST OF
PERIOD BORROWED BORROWED BORROWINGS
- ------------------------------------------------------------------------------------
<C> <C> <C> <C>
Year ended December 31,
1996................... $6,300,000 $545,584 8.38%
1995................... 400,000 9,916 8.88
1994................... 1,560,000 178,767 6.96
</TABLE>
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1995
---- ----
<C> <C> <C>
Total amounts due under term notes................. $258,000 $809,446
Less -- current portion............................ 62,000 158,884
-------- --------
$196,000 $650,562
</TABLE> ======== ========
Interest paid was $204,813 in 1996, $78,709 in 1995, and $59,411 in 1994.
19
<PAGE> 20
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE E -- EMPLOYEE RETIREMENT PLAN
The Company has a 401(k) Retirement Savings Plan which covers
substantially all employees. Under the provisions of the Plan, the Company will
match employee contributions in amounts up to 3% of gross compensation;
contributions were $350,425 in 1996, $247,181 in 1995, and $163,087 in 1994.
The Company's policy is to fund employee contributions and the Company's
matching contributions each pay period. Contributions are deposited with the
trustee, NBD Bank, and then invested in six funds at the direction of the
participants. Effective in 1996, the Company's matching contributions are
credited only to the National TechTeam Stock Fund for the benefit of each
participant.
NOTE F -- TAX PROVISIONS
Tax provisions are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
---- ---- ----
(Restated - Note M)
<S> <C> <C> <C>
Federal income tax:
Currently payable.................. $2,555,823 $1,327,267 $ 994,690
Deferred (credit).................. (681,224) 154,669 223,310
---------- ---------- ----------
Total.............................. 1,874,599 1,481,936 1,218,000
Michigan single business tax.......... 709,000 410,000 305,875
---------- ---------- ----------
$2,583,599 $1,891,936 $1,523,875
========== ========== ==========
Tax payments.......................... $2,310,000 $ 905,000 $2,022,000
========== ========== ==========
</TABLE>
A reconciliation of the Federal income tax provision and the amount
computed by applying the Federal statutory income tax rate to income before
Federal income tax follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
---- ---- ----
(Restated - Note M)
<C> <C> <C> <C>
Income tax at Federal statutory rate of 34%.............. $1,673,068 $1,395,905 $1,148,163
Goodwill, intangibles and other permanent differences.... 225,721 111,031 69,837
Tax reserve reversed..................................... (24,190) (25,000) --
---------- ---------- ----------
$1,874,599 $1,481,936 $1,218,000
========== ========== ==========
</TABLE>
20
<PAGE> 21
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE F -- TAX PROVISIONS -- Continued
The principal components of deferred Federal income tax balances, and the
classification thereof in the Consolidated Statements of Financial Position,
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1996 1995
------------------- -------------------
(Restated - Note M)
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Allowance for uncollectible accounts
receivable.......................... $ 76,500 $ -- $68,000 $ --
Deferred Foundation Platform
license fees........................ 697,000 -- -- --
Other.................................. 138,900 276,700 15,226 --
Prepaid expenses....................... -- 112,643 -- 89,839
Accelerated tax depreciation........... -- 162,813 -- 614,366
-------- -------- ------- --------
$912,400 $552,156 $83,226 $704,205
======== ======== ======= ========
</TABLE>
21
<PAGE> 22
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE G -- STOCK TRANSACTIONS
A summary of stock transactions other than those discussed in Notes H and
J for the three years ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
SHARES PROCEEDS
---------- -----------
<S> <C> <C>
1994
Warrants issued in 1990 and 1991 and exercised in 1994..... 41,667 $ 45,834
Private placement of common shares......................... 32,810 184,796
Retirement of 1,427 shares................................. (14) (100)
Private placement of common shares at
$5.00 per share........................................ 618,000 3,090,000
$4.70 per share........................................ 401,064 1,885,000
---------- -----------
1,093,527 $ 5,205,530
========== ===========
1995
Private placement of common shares......................... 369,472 $ 577,500
========== ===========
1996
Public offering of shares @ $24.14, net of underwriters
discount.................................................. 3,225,000 $77,851,500
========== ===========
</TABLE>
NOTE H -- ACQUISITION AND SUBSEQUENT EVENT
TechTeam acquired 15% of the shares of WebCentric Communications, Inc.
("WebCentric") in September 1996 and the remaining 85% of the shares in January
1997. The transaction was structured as a cash and stock-for-stock exchange.
Cash totalling $2,330,449 and 270,848 shares (valued at $3,995,183) of
TechTeam's unrestricted and restricted common stock were issued. The purchase
method of accounting was used to record the acquisition and $6,408,081 was
recorded as goodwill.
NOTE I -- RELATED PARTY TRANSACTIONS
TechTeam was involved in the following related party transactions:
a) Paid legal fees of $306,641 in 1996, $119,876 in 1995, and $73,591 in
1994 to law firms whose members included directors, officers or
shareholders of TechTeam.
b) Paid $480,488 in 1996, $39,587 in 1995, and $42,444 in 1994 for
employee travel expenses to a travel agency which is 50%-owned by a
TechTeam director.
c) Advanced $243,800 to Executive Officers in 1995, which was repaid in
1995.
d) Advanced $107,000 to an insurance company in 1995 that carries an
insurance policy on the life of an Executive Officer.
e) Loaned $160,000 to an Executive Officer in 1995 which was repaid in
1996.
f) Paid $59,626 in 1996 for rental expense for an office building leased
from an Executive Officer.
22
<PAGE> 23
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE I -- RELATED PARTY TRANSACTIONS -- Continued
g) Guaranteed a loan of $375,000 to an Executive Officer in 1996.
h) In connection with the Company's acquisition of certain software in
1995, the Company issued 142,653 shares of common stock to the
developer of the software. The developer is wholly-owned by
directors and officers of Compuflex Systems, Inc.
NOTE J -- STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals or exceeds the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
The Company's 1990 Nonqualified Stock Option Plan has authorized the grant
of options to management personnel and others for up to 3,800,000 shares of the
Company's common stock. Generally, options granted have 6 year terms and vest
and become exercisable ratably over the first five years of their term.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996: a range of risk-free interest rates of 5.38% to
7.08% based on the expected life of the options; a volatility factor of the
expected market price of the Company's common stock of .786; and a
weighted-average expected life of the option of 3 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Pro forma net income................... $2,328,090 $2,455,351
Pro forma primary and fully diluted
earnings per share................. $0.18 $0.21
</TABLE>
23
<PAGE> 24
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE J -- STOCK OPTIONS -- Continued
A summary of the Company's stock option activity, and related information,
follows:
<TABLE>
<CAPTION>
EMPLOYEES DIRECTORS OTHERS
---------------------- --------------------- -----------------------
TOTAL SHARES PRICE SHARES PRICE SHARES PRICE
SHARES ------ ------- ------ ------- ------ --------
------
<S> <C> <C> <C> <C> <C> <C> <C>
Outstanding
January 1, 1994....... 956,103 563,250 0.59-4.82 235,000 0.59-4.82 157,853 0.59-35.05
Granted............... 485,287 385,287 3.51-6.38 100,000 7.00 --
Exercised............. (308,625) (153,625) 0.59-2.88 -- (155,000) 0.59-3.00
Cancelled............. (22,500) (22,500) 3.81-6.38 -- --
---------- ---------- -------- --------
Outstanding
December 31, 1994 1,110,265 772,412 0.59-6.38 335,000 0.59-7.00 2,853 35.05
Granted............... 338,000 338,000 (1) 4.50-5.31 -- -- -- --
Exercised............. (418,500) (233,500) 0.59-2.88 (185,000) 0.59 -- --
Cancelled............. (208,000) (208,000)(1) 4.50-6.38 -- -- -- --
---------- ---------- -------- --------
OuOutstanding
December 31, 1995 821,765 668,912 1.20-6.38 150,000 4.82-7.00 2,853 35.05
Granted............... 759,711 606,165 0.70-25.75 139,275 5.00-25.75 14,267 3.16-7.71
Exercised............. (289,100) (259,100) 1.20-7.00 (30,000) 4.82-7.00 -- --
Cancelled............. (117,500) (57,500) 4.50-25.75 (60,000) 5.00 -- --
---------- ---------- -------- --------
Outstanding
December 31, 1996..... 1,174,876 (2) 958,477 0.70-25.75 199,275 4.82-25.75 17,120 3.16-35.05
========== ========== ======== ========
</TABLE>
(1) In February 1995, the Company cancelled 183,000 options at prices ranging
from $5.00 to $6.38 and regranted them at $4.50.
(2) Of the 1,174,876 options outstanding at December 31, 1996
a) 62,478 are currently exercisable through the fourth quarter 1998;
b) 115,000 are currently exercisable through the fourth quarter 1999;
c) 149,787 are currently exercisable through the second quarter 2000;
d) 102,711 are currently exercisable through the second quarter 2001;
e) 232,900 are currently exercisable through the fourth quarter 2006; and
f) 512,000 will be exercisable in the first quarter 1997 through the third
quarter 2002.
NOTE K -- STOCK BUY-BACK PROGRAM
In February, 1995, the Board of Directors of the Company authorized a
stock buy-back program. The program provided for the open market purchase of up
to $4,000,000 of the Company's common stock. The repurchase program terminated
July 31, 1995 with 200,000 shares repurchased at a total cost of $907,008.
24
<PAGE> 25
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE L -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly consolidated results of operations are summarized as follows:
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
----------- ----------- ------------- ------------
(Restated - Note M)
<S> <C> <C> <C> <C>
1994
Revenues......................... $7,868,655 $8,725,114 $8,982,097 $8,675,505
Income before tax provisions..... 702,365 1,463,672 1,336,303 178,484
Net income....................... 417,499 879,506 763,538 98,406
Earnings per share............... 0.04 0.08 0.07 0.01
1995
Revenues......................... $9,661,595 $10,888,283 $11,510,833 $15,014,921
Income before tax provisions..... 1,127,662 1,478,894 913,675 995,372
Net income....................... 670,627 904,109 488,540 560,391
Earnings per share............... 0.06 0.08 0.04 0.05
1996
Revenues......................... $15,573,611 $17,494,127 $19,687,472 $19,460,846
Income before tax provisions..... 1,619,731 1,649,456 1,887,692 472,910
Net income....................... 941,331 932,756 1,095,692 76,411
Earnings per share............... 0.08 0.08 0.09 0.00
</TABLE>
Quarterly earnings per share may not add to annual earnings per share
because of rounding and new shares issued during the year.
NOTE M -- RESTATEMENTS
Correction of Previously Issued Financial Statements
The Company has restated the previously issued 1996 financial statements.
The restatements relate to: (1) Certain license fee revenues related to
contemporaneous purchase/sale transactions between the Company and the
licensees of its software products occurring in the fourth quarter 1996. Those
revenues have now been deferred and will be recognized as income in future
periods when the expenses of the related contemporaneous purchase/sale
transactions are recognized. (2) Certain compensation related adjustments.
Acquisition of Compuflex Systems, Inc.
On July 30, 1997, the Company acquired Compuflex Systems, Inc.
("Compuflex"). The Company acquired 98% of the issued and outstanding shares
of Compuflex's common stock, in exchange for 509,034 shares of common stock of
the Company at the ratio of 1 Company share for each 7.01 shares of Compuflex.
The remaining 2% of the issued and outstanding shares of Compuflex were
acquired for cash. The market value of the common stock and cash used in the
acquisition approximated $8.5 million. Outstanding Compuflex stock options
were converted into options to purchase 170,470 shares of the Company's common
stock.
Compuflex provides technical staffing services. This acquisition has been
accounted for as a pooling of interests and, accordingly, the consolidated
financial statements have been restated to include the accounts of Compuflex
for all periods presented.
25
<PAGE> 26
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
NOTE M -- RESTATEMENTS -- Continued
Prior to the combination, Compuflex's fiscal year ended July 31. In
recording the pooling of interests combination, Compuflex's financial
statements for the twelve months ended January 31, 1997 were combined with
National TechTeam's financial statements for the year ended December 31, 1996.
Compuflex's financial statements for the years ended July 31, 1996 and July 31,
1995 were combined with National TechTeam's financial statements for the year
ended December 31, 1995 and December 31, 1994, respectively. Compuflex's
unaudited results of operations for the six months ended July 31, 1996 included
sales of $2,828,900 and a net loss of $35,800. An adjustment has been made to
stockholders' equity as of December 31, 1996 to eliminate the effect of
including Compuflex's results of operations for the six months ended July 31,
1996, in both the years ended December 31, 1996 and 1995.
Financial Impact of Restatements
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994
---- ---- -----
<S> <C> <C> <C>
REVENUES
As previously reported $69,150,996 $41,713,632 $30,152,971
Effect of correction of previously issued
financial statements (2,263,840) -- --
Effect of Compuflex pooling of interests 5,299,000 5,362,900 4,098,400
----------- ----------- -----------
As restated $72,186,156 $47,076,536 $34,251,371
=========== =========== ===========
NET INCOME / (LOSS)
As previously reported $ 4,773,632 $ 2,399,067 $ 1,971,049
Effect of correction of previously issued
financial statements (1,833,242) -- --
Effect of Compuflex pooling of interests 105,800 224,600 187,900
----------- ----------- -----------
As restated $ 3,046,190 $ 2,623,667 $ 2,158,949
=========== =========== ===========
NET INCOME / (LOSS) PER PRIMARY SHARE
As previously reported $ 0.38 $ 0.21 $ 0.18
Effect of correction of previously issued
financial statements (0.15) -- --
Effect of Compuflex pooling of interests -- 0.02 0.02
----------- ----------- -----------
As restated $ 0.23 $ 0.23 $ 0.20
=========== =========== ===========
NET INCOME / (LOSS) PER FULLY DILUTED SHARE
As previously reported $ 0.38 $ 0.21 $ 0.18
Effect of correction of previously issued
financial statements (0.15) -- --
Effect of Compuflex pooling of interests -- 0.02 0.01
----------- ----------- -----------
As restated $ 0.23 $ 0.23 $ 0.19
=========== =========== ===========
RETAINED EARNINGS
As previously reported $10,856,604 $ 6,082,972 $ 3,683,905
Effect of correction of previously issued
financial statements (1,833,242) -- --
Effect of Compuflex pooling of interests (2,556,500) (2,698,100) (2,922,700)
----------- ----------- -----------
As restated $ 6,466,862 $ 3,384,872 $ 761,205
=========== =========== ===========
</TABLE>
26
