<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1997
[ ] 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)
<TABLE>
<S> <C>
DELAWARE 38-2774613
--------- ----------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
835 Mason Street, Suite 200, Dearborn, MI 48124
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (313) 277-2277
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
The number of shares of the registrant's only class of common stock outstanding
at November 18, 1997 was 15,902,867.
<PAGE> 2
FORWARD LOOKING STATEMENTS
This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E 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 and in other documents. Readers should pay particular
attention to the portion of this report describing the amendment of the report
to address the restatement of the Company's financial statements and should
also carefully review the risk factors that are described in the documents the
Company has filed and files, from time to time, with the Securities and
Exchange Commission.
AMENDED FILING OF FORM 10-Q FOR THE THREE-AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1997 / CORRECTION OF DISCLOSURES REGARDING RESTATEMENT OF
FINANCIAL STATEMENTS AND
CHANGES TO CERTAIN INFORMATION
On November 19, 1997, the Company filed its Third Quarter 1997 Form 10-Q, in
which it disclosed the impact of certain restatements, specifically a
correction of previously issued financial statements and the impact of the
acquisition of Compuflex Systems, Inc. The disclosures made at that time were
based on certain preliminary information that was finalized by filing an
Amended Form 10-K for 1996 on December 19, 1997, an 8-K on December 19, 1997,
an Amended Form 10-Q for the First Quarter 1997 on December 30, 1997 and an
Amended Form 10-Q for the Second Quarter 1997 on December 30, 1997. This filing
is made to conform Third Quarter 1997 Form 10-Q information to the final
information provided in those subsequent reports.
General information in the original Form 10-Q for the Third Quarter 1997 was
presented as of the original filing date, or earlier, as indicated. Unless
otherwise stated, such information has not been updated in this amended filing.
Financial statement disclosures contained in this Amended Form 10-Q for the
Third Quarter 1997 reflect, where appropriate, changes to conform to the
finalized data filed in previously filed amended reports.
2
<PAGE> 3
NATIONAL TECHTEAM, INC.
FORM 10-Q
INDEX
-----
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------
<S> <C>
ITEM 1.
Consolidated Statements of Operations
Three and Nine Months Ended
September 30, 1997 and 1996 4
Consolidated Statements of Financial Position
September 30, 1997 and December 31, 1996 5-6
Consolidated Statements of Cash Flows
Nine Months Ended
September 30, 1997 and 1996 7
Notes to the Consolidated Financial Statements - September 30, 1997 (Unaudited) 8-11
ITEM 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-15
PART II - OTHER INFORMATION
- ---------------------------
ITEM 6.
Exhibits and Reports on Form 8-K 16
SIGNATURES 16
</TABLE>
3
<PAGE> 4
PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ---------------------------------------
1997 1996 1997 1996
---- ---- ----- ----
(Restated -Note C) (Restated -Note C) (Restated -Note C)
REVENUES
<S> <C> <C> <C> <C>
$ 7,976,717 $ 8,643,477 $ 25,830,759 $ 23,030,396
Call Center Services ----------- ----------- ------------ ------------
Corporate Computer Services
Technical staffing . . . . . . . . . . 6,766,263 5,226,357 16,175,892 15,757,278
Systems integration . . . . . . . . . 3,809,721 3,723,356 9,034,719 8,732,697
Training programs . . . . . . . . . . 1,941,885 2,094,282 5,245,918 5,234,839
---------- ----------- ------------ -----------
Total Corporate Computer Services . . . . 12,517,869 11,043,995 30,456,529 29,724,814
----------- ----------- ------------ -----------
TOTAL REVENUES . . . . . . . . . . . . . . . . 20,494,586 19,687,472 56,287,288 52,755,210
COST OF SERVICES DELIVERED . . . . . . . . . . 19,426,396 14,924,347 49,952,505 40,360,196
----------- ---------- ------------ -----------
GROSS PROFIT . . . . . . . . . . . . . . . . . 1,068,190 4,763,125 6,334,783 12,395,014
----------- ---------- ------------ -----------
OTHER EXPENSES/(INCOME)
Selling, general and administrative . . . 3,295,828 2,812,355 10,043,177 7,113,729
Interest expense . . . . . . . . . . . . . -- 63,078 -- 124,406
Interest income . . . . . . . . . . . . . (704,432) -- (2,141,025) --
----------- ----------- ------------ ------------
2,591,396 2,875,433 7,902,152 7,238,135
----------- ----------- ------------ ------------
INCOME/(LOSS) BEFORE TAX PROVISIONS . . . . . . (1,523,206) 1,887,692 (1,567,369) 5,156,879
----------- ----------- ------------ ------------
TAX PROVISIONS . . . . . . . . . . . . . . . . (553,364) 792,000 (343,164) 2,532,300
----------- ----------- ------------ ------------
NET INCOME/(LOSS) . . . . . . . . . . . . . . . $ (969,842) $ 1,095,692 $ (1,224,205) $ 2,624,579
=========== =========== ============ ============
PRIMARY AND FULLY DILUTED EARNINGS/(LOSS) PER
SHARE . . . . . . . . . . . . . . . . . . . . $ (0.06) $ 0.09 (0.08) $ 0.22
=========== =========== ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING
Primary . . . . . . . . . . . . . . . . . 15,887,531 12,500,426 16,053,730 12,151,408
Fully diluted . . . . . . . . . . . . . . 15,887,531 12,594,440 16,053,730 12,189,941
</TABLE>
See accompanying notes.
4
<PAGE> 5
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
UNAUDITED
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
ASSETS ---------------- -------------
(Restated - Note C)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 32,847,434 $ 46,812,397
Securities available-for-sale . . . . . . . . . . . . . . . . 34,865,157 27,169,703
Accounts receivable (less allowances of $604,238
at September 30, 1997 and $245,000
at December 31, 1996) . . . . . . . . . . . . . . . . . . 21,210,833 23,228,787
Refundable income tax . . . . . . . . . . . . . . . . . . . . 1,946,013 1,413,461
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 716,383 647,565
Advances to vendors . . . . . . . . . . . . . . . . . . . . . 2,069,944 500,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,437,868 701,865
-------------- -------------
95,093,632 100,473,778
-------------- -------------
PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE
Office furniture and equipment . . . . . . . . . . . . . . . 18,640,899 12,623,273
Purchased software . . . . . . . . . . . . . . . . . . . . . 2,966,295 2,801,307
Leasehold improvements . . . . . . . . . . . . . . . . . . . 1,581,474 1,380,140
Transportation equipment . . . . . . . . . . . . . . . . . . 280,158 192,907
-------------- -------------
Less -- Accumulated depreciation and amortization . . . . . . 23,468,826 16,997,627
8,394,493 5,101,211
-------------- -------------
15,074,333 11,896,416
-------------- -------------
OTHER ASSETS
Goodwill (less accumulated amortization of $1,548,436 at
September 30, 1997 and $551,061 at December 31, 1996) . . 6,286,037 1,509,457
Investment in WebCentric . . . . . . . . . . . . . . . . . . -- 804,518
Accounts receivable -- long term . . . . . . . . . . . . . . 2,063,013 --
Deferred income tax . . . . . . . . . . . . . . . . . . . . . 1,712,887 534,187
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,638,694 1,617,172
-------------- -------------
11,700,631 4,465,334
-------------- -------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 121,868,596 $ 116,835,528
============== =============
</TABLE>
See accompanying notes.
5
<PAGE> 6
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
UNAUDITED
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY ------------ ------------
(RESTATED -
NOTE C)
<S> <C> <C>
CURRENT LIABILITIES
Short-term debt . . . . . . . . . . . . . . . . . . . . . . $ -- $ 299,400
Accounts payable . . . . . . . . . . . . . . . . . . . . . 3,228,822 4,239,363
Accrued payroll, related taxes and withholdings . . . . . . 3,079,583 3,624,512
Deferred income tax . . . . . . . . . . . . . . . . . . . . 304,235 389,343
Deferred revenues and unapplied receipts . . . . . . . . . 834,803 255,940
Accrued expenses and taxes . . . . . . . . . . . . . . . . 602,387 874,329
Capital lease obligation . . . . . . . . . . . . . . . . . 133,000 62,000
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 141,072
------------ ------------
8,182,830 9,885,959
------------ ------------
LONG-TERM LIABILITIES
Deferred Foundation Platform license fees . . . . . . . . . 5,296,139 2,050,000
Capital lease obligation . . . . . . . . . . . . . . . . . -- 133,000
Long-term debt . . . . . . . . . . . . . . . . . . . . . . -- 171,700
Minority interest . . . . . . . . . . . . . . . . . . . . . 321 74,647
------------ ------------
5,296,460 2,429,347
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01
Authorized -- 5,000,000 shares
None issued
Common stock, par value $.01
Authorized -- 45,000,000 shares
Issued:
16,028,096 shares at September 30, 1997 . . . . . 160,281
15,440,531 shares at December 31, 1996 . . . . . . 154,405
Additional paid-in capital. . . . . . . . . . . . . . . . . 103,613,921 98,636,681
Retained earnings . . . . . . . . . . . . . . . . . . . . . 5,242,656 6,466,884
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,016,858 105,257,970
Less -- Treasury stock (137,225 shares at September 30, 1997 and
161,983 shares at December 31, 1996) . . . . . . . . . 627,552 737,748
------------ ------------
Total shareholders' equity . . . . . . . . . . . . . . . . 108,389,306 104,520,222
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . $121,868,596 $116,835,528
============ ============
</TABLE>
See accompanying notes.
6
<PAGE> 7
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------
1997 1996
---- ----
(RESTATED - NOTE C) (RESTATED - NOTE C)
<S> <C> <C>
OPERATING ACTIVITIES
Net income/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,224,205) $ 2,624,579
Adjustments to reconcile net income to net cash provided by/(used in) operating
activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 5,070,966 2,297,667
Provision for uncollectible accounts receivable . . . . . . . . . . . . . . . . . 359,238 --
Provision for deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . (1,263,808) 388,900
Deferred Foundation Platform license fees . . . . . . . . . . . . . . . . . . . . 3,246,139 --
Long-term accounts receivable from customer . . . . . . . . . . . . . . . . . . . (2,063,013) --
Treasury stock contributed to 401(k) plan . . . . . . . . . . . . . . . . . . . . 110,196 151,895
Minority interest in net loss of subsidiary . . . . . . . . . . . . . . . . . . . (74,326) --
Changes in current assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,663,181 (8,094,258)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (68,818) (570,087)
Advances to vendors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,569,944) --
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . (711,625) (407,527)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,072,251) 1,812,734
Accrued payroll, related taxes and withholdings . . . . . . . . . . . . . . . (502,027) 76,148
Federal income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (532,552) (160,116)
Deferred revenues and unapplied receipts . . . . . . . . . . . . . . . . . . 578,863 280,809
Accrued expenses and taxes . . . . . . . . . . . . . . . . . . . . . . . . . (271,942) --
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . (141,072) (459,027)
------------- -----------
Net cash provided by/(used in) operating activities . . . . . . . . . . . . . . . 1,533,000 (2,058,283)
------------- -----------
INVESTING ACTIVITIES
Purchases of property, equipment and software . . . . . . . . . . . . . . . . . . . . (6,143,951) (5,914,605)
Development of training manuals . . . . . . . . . . . . . . . . . . . . . . . . . . . (306,667) (70,225)
Purchase of securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . (7,695,454) --
Cash paid in conjunction with acquisitions, net of cash acquired . . . . . . . . . . . (1,645,086) (1,233,901)
Loss from sales of property and equipment and other assets . . . . . . . . . . . . . . (29,024) --
Other assets -- net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,611) (31,150)
------------- -----------
Net cash (used in) investing activities . . . . . . . . . . . . . . . . . . . . . (15,832,793) (7,249,881)
------------- -----------
FINANCING ACTIVITIES
Proceeds from short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . -- 8,166,575
Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . -- 480,212
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . 937,930 1,189,182
Payments on short-term borrowings and capital lease obligations . . . . . . . . . . . (430,396) (1,349,984)
Payments on long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . (172,704) (214,262)
------------- -----------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . 334,830 8,271,723
------------- -----------
(Decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . (13,964,963) (1,036,441)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . . . 46,812,397 2,038,543
------------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . $ 32,847,434 $ 1,002,102
============= ===========
</TABLE>
See accompanying notes.
7
<PAGE> 8
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 1997 (UNAUDITED)
The Annual Report of the Company on Form 10-K for the year ended December 31,
1996 ("The 1996 Form 10-K") contains additional information and should be read
in conjunction with this report. The 1996 Form 10-K will be amended to reflect
changes made in accordance with the restatements discussed in Note C.
The consolidated financial statements included herein have been prepared by
National TechTeam, Inc. ("TechTeam" or "Company") without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to such rules and regulations.
The information provided in this report reflects all adjustments consisting of
normal recurring accruals which are, in the opinion of management, necessary to
present fairly the results of operations for these periods. The results of
operations for these periods are not necessarily indicative of the results
expected for the full year.
NOTE A -- EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of common
shares and common share equivalents outstanding. Common share equivalents
consist of stock options and are calculated using the treasury stock method.
NOTE B -- REVENUES FROM MAJOR CLIENTS
Revenues from major clients were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
AMOUNT PERCENT OF TOTAL AMOUNT PERCENT OF TOTAL
Three Months Ended September 30, ------ ---------------- ------ ----------------
- --------------------------------
<S> <C> <C> <C> <C>
Hewlett-Packard Company $4,017,014 19.6% $ 4,955,208 25.2%
Ford Motor Company 4,098,940 20.0 3,847,739 19.5
Chrysler Corporation 3,195,757 15.6 1,532,751 7.8
United Parcel Service 1,392,297 6.8 1,044,644 5.3
Nine Months Ended September 30 (Restated - Note C).
- ---------------------------------------------------
Hewlett-Packard Company $13,984,470 24.8% $14,628,054 27.7%
Ford Motor Company 11,736,779 20.9 12,421,250 23.6
Chrysler Corporation 7,654,360 13.6 4,157,539 7.9
United Parcel Service 4,195,413 7.5 1,057,644 2.0
</TABLE>
NOTE C -- RESTATEMENTS
CORRECTION OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
- ----------------------------------------------------
The Company has restated the previously issued fourth quarter 1996 and first
aSnd second quarter 1997 financial statements. The restatements relate to: (1)
DCertain 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 and first quarter 1997. 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) The impact of the restatements described in (1) on subsequent
quarters.
8
<PAGE> 9
(3) Certain compensation-related and other adjustments dealing with the accrual
of payroll expenses and revenues. The effect of these restatements will be
reflected in an amended Form 10-K report to be filed by the Company for 1996
and amended Form 10-Q reports to be filed by the Company for the first and
second quarters of 1997.
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 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.
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. The accompanying
consolidated financial statements for the three and nine months ended September
30, 1996 include the operations of Compuflex for the three and nine months
ended October 31, 1996.
Included in the operating results of the Company for the three and nine months
ended September 30, 1997 are approximately $415,000 and $4,745,940,
respectively, of revenues and $65,785 and $(129,011), respectively, of net
income/(loss) of Compuflex prior to the date of acquisition (July 30, 1997).
Compuflex's net income for July 1997 of $65,785, included twice in the
accompanying consolidated statements of operations for the nine months ended
September 30, 1997 as a result of conforming fiscal years, has been included as
an adjustment to consolidated retained earnings.
Financial Impact of Restatements
<TABLE>
<CAPTION>
1996 QUARTERS ENDED CALENDAR
---------------------------------------------------------------- YEAR
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, 1996
------------- ------------ ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
REVENUES
As previously reported $ 14,407,611 $ 15,831,227 $ 18,390,472 $ 20,521,686 $ 69,150,996
Effect of correction of previously -- -- -- (2,263,840) (2,263,840)
issued financial statements
Effect of Compuflex pooling of
interests 1,166,000 1,662,900 1,297,000 1,173,100 5,299,000
------------ ------------ ------------ ------------ ------------
As restated $ 15,573,611 $ 17,494,127 $ 19,687,472 $ 19,430,946 $ 72,186,156
============ ============ ============ ============ ============
NET INCOME / (LOSS):
As previously reported $ 865,731 $ 1,044,156 $ 962,692 $ 1,901,053 $ 4,773,632
Effect of correction of previously -- -- -- (1,833,243) (1,833,243)
issued financial statements
Effect of Compuflex pooling of
interests 75,600 (111,400) 133,000 8,601 105,801
------------ ------------ ------------ ------------ ------------
As restated $ 941,331 $ 932,756 $ 1,095,692 $ 76,411 $ 3,046,190
============ ============ ============ ============ ============
NET INCOME / (LOSS) PER SHARE:
As previously reported $ 0.08 $ 0.09 $ 0.08 $ 0.13 $ 0.38
Effect of correction of previously -- -- -- (0.13) (0.15)
issued financial statements
Effect of Compuflex pooling of
interests -- (0.01) 0.01 (0.00) (0.00)
------------ ------------ ------------ ------------ ------------
As restated $ 0.08 $ 0.08 $ 0.09 $ 0.00 $ 0.23
============ ============ ============ ============ ============
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
1997 QUARTERS ENDED
------------------------------- YEAR TO DATE
CONSOLIDATED STATEMENT OF OPERATIONS MARCH 31 JUNE 30 JUNE 30,
------------ ----------- ------------
<S> <C> <C> <C>
REVENUES:
As previously reported $ 20,715,682 $ 18,450,825 $ 39,166,507
Effect of correction of previously issued financial statements (3,485,990) 112,185 (3,373,805)
Effect of Compuflex pooling of interests 1,346,900 4,745,940 6,092,840
------------ ------------ ------------
As restated $ 18,576,592 $ 23,308,950 $ 41,885,542
============ ============ ============
NET INCOME/(LOSS):
As previously reported $ 1,817,827 $ 79,766 $ 1,897,593
Effect of correction of previously issued financial statements (2,187,290) 35,334 (2,151,956)
Effect of Compuflex pooling of interests 5,100 (194,796) (189,696)
------------ ------------ ------------
As restated $ (364,363) $ (79,696) $ (444,059)
============ ============ ============
NET INCOME/(LOSS) PER SHARE:
As previously reported $ 0.12 $ 0.01 $ 0.13
Effect of correction of previously issued financial statements (0.14) 0.00 (0.15)
Effect of Compuflex pooling of interests 0.00 (0.02) (0.02)
------------ ------------ ------------
As restated $ (0.02) $ (0.01) $ (0.04)
============ ============ ============
CONSOLIDATED STATEMENT OF FINANCIAL POSITION DECEMBER 31 MARCH 31 JUNE 30, 1997
------------ ----------- -------------
CURRENT ASSETS:
As previously reported $ 98,900,418 $ 96,571,229 $ 94,739,463
Effect of correction of previously issued financial statements 494,060 (64,340) (103,092)
Effect of Compuflex pooling of interests 1,079,300 1,216,000 1,250,568
------------ ------------ ------------
As restated $100,473,778 $ 97,722,889 $ 95,886,939
============ ============ ============
CURRENT LIABILITIES:
As previously reported $ 8,340,959 $ 7,596,316 $ 6,023,040
Effect of correction of previously issued financial statements 748,600 76,700 76,700
Effect of Compuflex pooling of interests 905,100 861,400 1,669,803
------------ ------------ ------------
As restated $ 9,994,659 $ 8,534,416 $ 7,769,543
============ ============ ============
RETAINED EARNINGS:
As previously reported $ 10,856,604 $ 12,674,431 $ 12,754,197
Effect of correction of previously issued financial statements (1,833,243) (4,020,533) (3,985,199)
Effect of Compuflex pooling of interests (2,556,500) (2,551,400) (2,892,887)
------------ ------------ ------------
As restated $ 6,466,861 $ 6,102,498 $ 5,876,111
============ ============ ============
TOTAL ASSETS/LIABILITIES AND SHAREHOLDERS'
EQUITY:
As previously reported $111,962,058 $117,465,200 $116,436,798
Effect of correction of previously issued financial statements 1,191,060 1,730,047 1,653,195
Effect of Compuflex pooling of interests 3,845,200 3,879,300 4,131,013
------------ ------------ ------------
As restated $116,998,318 $123,074,547 $122,221,006
============ ============ ============
</TABLE>
NOTE D -- PENDING ACQUISITION OF CAPRICORN CAPITAL GROUP, INC.
On September 30, 1997, the Company entered into a Letter of Intent with the
sole shareholder of Capricorn Capital Group, Inc. ("Capricorn"), whereby the
Company would acquire all of the capital stock of Capricorn in exchange for a
base consideration of $3.5 million in cash, $1.5 million in restricted shares
of TechTeam Common Stock and options to purchase 50,000 shares of TechTeam
Common Stock at its current market value, and a contingent payment tied to
Capricorn's earnings performance in the three-year period following the
acquisition. The Letter is subject to a number of conditions, including due
diligence review by TechTeam, the preparation of a definitive purchase agreement
and approval of the transaction by the boards of directors of both companies.
The Letter of Intent provides for a breakup fee of $200,000 to Capricorn's sole
shareholder if the transaction fails to close unless such failure to close is
due to a default, breach or failure to proceed by Capricorn's sole shareholder
or by reason of legal impediments on the part of either party.
The Company has also entered into contemporaneous purchase/sale agreements
with Capricorn in the fourth quarter of 1996 and the first quarter of 1997 that
obligated the Company to acquire computer hardware from Capricorn with
Capricorn agreeing to purchase a license of the Foundation Platform. At
September 30, 1997, the deferred revenue recorded by the Company
10
<PAGE> 11
NOTE D -- PENDING ACQUISITION OF CAPRICORN CAPITAL GROUP, INC. -- Continued
amounted to $4.3 million (see Note C). Should the acquisition close, the
deferred revenue recorded at that date and unamortized cost of the software
license acquired by Capricorn will be eliminated in consolidation. Further,
the purchase obligation of the Company to acquire computer equipment would then
also be eliminated. Should the acquisition not close, the purchase commitment
would continue to obligate the Company to a $28 million cost of the equipment
plus a 15% fee over a period not to exceed seven years.
NOTE E -- LEGAL PROCEEDINGS
The Company and two of its officers have been named as defendants in several
putative shareholder class action lawsuits filed in the United States District
Court for the Eastern District of Michigan. The complaints are similar in
asserting claims under sections 10 (b) and 20 (a) of the Securities Exchange
Act of 1934 arising out of alleged misrepresentations and omissions by the
Company in connection with certain of its announcements and filings relating
primarily to the Company's earnings in the first quarter of 1997. Management
believes these claims are without merit and intends to defend these actions
vigorously. No estimate of the outcome of this litigation can currently be
made, and no provision for any such liability or the costs of defense, has been
made in the accompanying financial statements. The Company believes that these
costs will be covered, at least in part, by insurance.
In addition, the Company received notice of the commencement of an
investigation by the Securities and Exchange Commission which appear to relate
to, among other matters the Company's recognition of certain revenues arising
from contemporaneous purchase / sale transactions between the Company and
licensees of its software products in the fourth quarter 1996 and first quarter
1997.
NOTE F -- RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD
In June 1997, The Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which requires that an enterprise classify
items of other comprehensive income, as defined therein, by their nature in a
financial statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
equity section of the balance sheet. The Company intends to fully comply with
the provisions of this statement upon its required adoption in the first
quarter of 1998, and does not anticipate a significant impact to the financial
statements.
Also in June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures About Segments of an Enterprise and Related Information."
This statement establishes standards for reporting financial and descriptive
information about operating segments. Under SFAS No. 131, information
pertaining to the Company's operating segments will be reported on the basis
that is used internally for evaluating segment performance and making resource
allocation determinations. Management is currently studying the potential
effects of adoption of this statement, which is required in 1998.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact of Statement 128 on the calculation
of earnings per share is not expected to be material for any of the periods
presented.
11
<PAGE> 12
ITEM 7. 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 for the three and nine month
periods ended September 30, 1996. The Company has recognized these amounts as
revenues when they are 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, 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.
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.
12
<PAGE> 13
The following table sets forth the percentage relationship to revenues of
certain items in the Company's Consolidated Statements of Operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------------------------
1997 1996 1997 1996
---- ---- ---- ----
(Restated - Note (Restated - (Restated -
Revenues C) Note C) Note C)
<S> <C> <C> <C> <C>
Call Center Services 38.9% 43.9% 45.9% 43.7%
----------- ---------- ---------- ----------
Corporate Computer Services
Technical staffing ............... 33.0 26.6 28.7 29.9
Systems integration ............... 18.6 18.9 16.1 16.6
Training programs.................. 9.5 10.6 9.3 9.8
----------- ---------- ---------- ----------
Total Corporate Computer Services.... 61.1 56.1 54.1 56.3
----------- ---------- ---------- ----------
Total revenues............................. 100.0 100.0 100.0 100.0
Cost of services delivered................. 94.8 75.8 88.8 76.5
----------- ---------- ---------- ----------
Gross profit............................... 5.2 24.2 11.3 23.5
----------- ---------- ---------- ----------
Other expenses/(income)
Selling, general and administrative.. 16.1 14.3 17.8 13.5
Interest expense..................... -- 0.3 -- 0.2
Interest income...................... (3.4) -- (3.8) --
----------- ---------- ---------- ----------
12.7 14.6 14.0 13.7
----------- ---------- ---------- ----------
Income before tax provisions............... (7.4) 9.6 (2.8) 9.8
Tax provisions............................. (2.7) 4.0 (0.6) 4.8
----------- ---------- ---------- ----------
Net income................................. (4.7)% 5.6% (2.2)% 5.0%
=========== ========== ========== ==========
</TABLE>
Between 1994 and 1996, TechTeam's revenues increased at a compound annual
rate of 51.4%. The Company believes that its growth has benefited from the
trend among large corporations to outsource much of their information
technology needs and TechTeam's ability to provide 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.
Comparative Performance -- Third Quarter 1997 versus Third Quarter 1996
National TechTeam incurred a net loss of $969,842, or $(0.06) per share, for
the third quarter 1997 as compared to a net income of $1,095,692, or $0.09 per
share, for the third quarter 1996.
Revenues -- National TechTeam's total revenues increased by $807,114 in the
third quarter 1997 to $20,494,586, a 4.1% increase over revenues in the third
quarter 1996. Changes in revenues resulted from the following:
Call Center Services -- Revenues from Call Center Services decreased by
$666,760 in the third quarter 1997. This was a 7.7% decrease from Call
Center Services revenues in the third quarter 1996. The decrease resulted
from a change in the mix of customers and calls received, with more calls
coming from OEM customers for which the Company has experienced a lower
revenue per call. However, the number of Call Center Services contracts
increased to 40 as compared with 33 at September 30, 1996.
Technical staffing -- Revenues from technical staffing increased by
$1,539,906 in the third quarter 1997. This was a 29.5% increase over
technical staffing revenues in the third quarter 1996. The increase was
due to continued client demand for TechTeam's help desk and computer
services personnel at major accounts.
13
<PAGE> 14
Systems integration -- Revenues from systems integration increased by
$86,365 in the third quarter 1997. This was a 2.3% increase over systems
integration revenues in the third quarter 1996.
Training programs -- Revenues from training programs decreased by
$152,397 in the third quarter 1997. This was a 7.3% decrease from training
revenues in the third quarter 1996. The decrease was due to the cyclical
nature of customer enrollments.
Cost of services delivered -- The cost of services delivered increased by
$4,502,049 in the third quarter 1997. This was a 30.2% increase over the cost
of services delivered in the third quarter 1996. 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 94.8%
and 75.8% of revenues in 1997 and 1996, respectively. The increase in these
rates is attributable to the reduced revenues per call discussed under Revenues
- - Call Center Services, costs incurred in the development of the Company's
Foundation Platform and those related to the start-up of new projects and a
service interruption by a major customer.
Selling, general and administrative -- Selling, general and administrative
expenses increased by $483,473 in the third quarter 1997. This was a 17.2%
increase over selling, general and administrative expenses in the third quarter
1996. 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
16.1% of revenues in 1997 compared with 14.3% of revenues in 1996. This
increase was due primarily to expansion of National TechTeam's administrative
infrastructure to support the anticipated growth of the Company and amounts
accrued for potentially uncollectible accounts.
Interest income -- Commencing in October 1996, National TechTeam began
earning significant amounts of interest income on cash generated by the 1996
public stock offering. For the three months ended September 30, 1997 interest
income was $704,432 compared to a pre-tax loss of $1,523,206.
Tax provisions -- TechTeam recognized $(602,964) of Federal income tax in
the third quarter 1997, resulting in an effective tax rate of 38.3% compared to
an effective tax rate of 35.8% for 1996. The Federal effective tax rate is
higher in 1997 due to the adjustment of prior year taxes. The state income and
business taxes in the third quarter 1997 was $49,600, with an effective tax
rate of (3.3)% compared to an effective tax rate of 9.64% in the third quarter
1996. These taxes are tied more closely to revenues than net income which
causes aberrations in the effective tax rate when income is negative as it was
in the third quarter 1997.
Comparative Performance -- First Nine Months 1997 versus First Nine Months 1996
National TechTeam incurred net loss of $1,224,205, or $(0.08) per share, for
the first nine months 1997 as compared to a net income of $2,624,579, or $0.22
per share, for the first nine months 1996.
Revenues -- National TechTeam's total revenues increased by $3,532,078 in
the first nine months 1997 to $56,287,288, a 6.7% increase over revenues in the
first nine months 1996. Changes in revenues resulted from the following:
Call Center Services -- Revenues from Call Center Services increased by
$2,800,363 in the first nine months 1997. This was a 12.2% increase over Call
Center Services revenues in the first nine months 1996. The increase was
due to an increase to 40 contracts in place at September 30, 1997 compared
to the 33 contracts at September 30, 1996.
Technical staffing -- Revenues from technical staffing increased by
$418,614 in the first nine months 1997. This was a 2.7% increase over
technical staffing revenues in the first nine months 1996.
Systems integration -- Revenues from systems integration increased by
$302,022 in the first nine months 1997. This was a 3.5% increase over systems
integration revenues in the first nine months 1996.
14
<PAGE> 15
Training programs -- Revenues from training programs increased by
$11,079 in the first nine months 1997. This was a 0.2% increase over
training revenues in the first nine months 1996.
Cost of services delivered -- The cost of services delivered increased by
$9,592,309 in the first nine months 1997. This was a 23.8% increase over the
cost of services delivered in the first nine months 1996. 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 88.8%
and 76.5% of revenues in 1997 and 1996, respectively. The increase in these
rates is attributable to the reduced revenues per call discussed under Revenues
- - Call Center Services for the third quarter 1997, costs incurred in the
development of the Company's Foundation Platform and those related to the
start-up of new projects.
Selling, general and administrative -- Selling, general and administrative
expenses increased by $2,929,448 in the first nine months 1997. This was a
41.2% increase over selling, general and administrative expenses in the first
nine months 1996. 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 17.8% of revenues in 1997 compared with 13.5% of revenues in
1996. This increase was due primarily to expansion of National TechTeam's
administrative infrastructure to support the anticipated 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. For the first nine months 1997, interest income was
$2,141,025 compared to a pre-tax loss of $1,567,369.
Tax provisions -- TechTeam recognized $(700,364) of Federal income tax in
the first nine months 1997, resulting in an effective tax rate of 36.4%
compared to an effective tax rate of 43.6% for 1996. The Federal effective tax
rate is lower in 1997 due to investments in tax exempt securities. The state
income and business taxes in the first nine months 1997 was $357,200, with an
effective tax rate of 22.8% compared to an effective tax rate of 9.79% in the
first nine months 1996. These taxes are tied more closely to revenues than net
income which inflates the effective tax rate when income is low as it has been
for the first nine months 1997.
15
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
Indicators of the Company's financial strength are summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(Restated -
Note C)
<S> <C> <C>
Working capital.................................... $ 86,910,802 $ 90,587,819
Current ratio....................................... 11.6 10.2
Debt as a percentage of total capitalization........ 0.0% 0.4%
Shareholders' equity................................ $ 108,389,306 $ 104,520,222
</TABLE>
TechTeam has a line-of-credit agreement with NBD Bank which provides for
short-term borrowings of up to $25,000,000; the credit is unsecured. Borrowings
in excess of $10,000,000 are limited to 75% of eligible accounts receivable and
100% of cash and cash equivalents. The line of credit is at the prime rate or
more favorable rates, depending on the term of any loans. There were no
borrowings under the credit agreement at September 30, 1997.
In the first quarter 1997, National TechTeam signed an agreement with
Capricorn Capital Group, Inc., a major distributor, to supply to TechTeam $28
million of computer hardware and related services under a long-term contract.
The key provisions of the contract are: (1) TechTeam may acquire the computer
hardware and services at the vendor's cost plus 15%. The margin is payable
annually at the beginning of each of the three contract years. (2) Purchase
obligations not met in any of the first three years may be carried over to
subsequent years up to a total of seven years. Management believes that this
arrangement will permit the Company to obtain favorable pricing under a
long-term arrangement for hardware and related services, which will further the
Company's goal of offering its customers a life cycle management program which
will include the providing of hardware, software, training and upgrades for a
flat monthly fee.
16
<PAGE> 17
PART II
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
11. Computation of Earnings Per Share
27. Financial Data Schedule
(b) Reports on Form 8-K: A form 8-K was filed by the Company on August
14, 1997 covering the Company's merger with Compuflex Systems, Inc.
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.
<TABLE>
<S> <C>
National TechTeam, Inc.
-----------------------
(Registrant)
Date: January 23, 1998 By: /s/William F. Coyro Jr.
------------------------
William F. Coyro Jr.
Chairman of the Board and
Chief Executive Officer
Date: January 23, 1998 By: /s/Lawrence A. Mills
--------------------
Lawrence A. Mills
Senior Vice President,
Chief Financial Officer, Treasurer
and Secretary
</TABLE>
17
<PAGE> 18
EXHIBIT INDEX
11. STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
27. FINANCIAL DATA SCHEDULE
<PAGE> 1
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY
Average shares outstanding............................ 15,697,704 11,738,638 15,631,501 11,771,199
Net effect of dilutive stock options --
based on the treasury stock method using
average market price.............................. 189,827 761,788 422,229 380,207
------------ ----------- ------------ -----------
Total................................................. 15,887,531 12,500,426 16,053,730 12,151,408
------------ ----------- ------------ -----------
Net income/(loss)................................... $ (969,842) $ 1,095,692 $ (1,224,205) $ 2,624,579
============ =========== ============ ===========
Per share amount...................................... $ (0.06) $ 0.09 $ (0.08) $ 0.22
============ =========== ============ ===========
FULLY DILUTED
Average shares outstanding............................ 15,697,704 11,738,638 15,631,501 11,771,199
Net effect of dilutive stock options -- based on the
treasury stock method using the quarter-end market
price if higher than average market price......... 189,827 855,802 422,229 418,742
------------ ----------- ------------ -----------
Total................................................. 15,887,531 12,594,440 16,053,730 12,189,941
------------ ----------- ------------ -----------
Net income/(loss)..................................... $ (969,842) $ 1,095,692 $ (1,224,205) $ 2,624,579
============ =========== ============ ===========
Per share amount...................................... $ (0.06) $ 0.09 $ (0.08) $ 0.22
============ =========== ============ ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 32847434
<SECURITIES> 34865157
<RECEIVABLES> 21210833
<ALLOWANCES> 604283
<INVENTORY> 716383
<CURRENT-ASSETS> 95093632
<PP&E> 15074333
<DEPRECIATION> 8394493
<TOTAL-ASSETS> 121868596
<CURRENT-LIABILITIES> 8182830
<BONDS> 0
0
0
<COMMON> 160281
<OTHER-SE> 121708315
<TOTAL-LIABILITY-AND-EQUITY> 121868596
<SALES> 3809721
<TOTAL-REVENUES> 20494586
<CGS> 3814472
<TOTAL-COSTS> 19426396
<OTHER-EXPENSES> 3295828
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1523206)
<INCOME-TAX> (553364)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (969842)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
