<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K-A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (date of earliest event reported): January 31, 1998
NATIONAL TECHTEAM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 0-16284 38-2774613
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer Identification No.)
incorporation)
</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
1
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On January 31, 1998, the transactions that were contemplated by the Agreement
and Plan of Merger dated January 19, 1998 (the "Merger Agreement") by and
between David M. Sachs, Capricorn Capital Group, Inc., a Michigan corporation
("Capricorn"), BM Woodbridge Place 104 Inc., a Michigan corporation ("Sub") and
National TechTeam Inc., a Delaware corporation ("Company") were completed. In
that transaction, Sub, which was a wholly-owned subsidiary of the Company, was
merged into Capricorn with Capricorn being the surviving corporation. David M.
Sachs, the sole shareholder of Capricorn, received 500,000 shares of the
Company's common stock in exchange for all the shares of capital stock of
Capricorn. As a result, Capricorn became a wholly-owned subsidiary of the
Company and Mr. Sachs became a shareholder of the Company.
The number of shares of common stock issued to Mr. Sachs for all of the capital
stock of Capricorn was the result of arm's length negotiations between the
Company and Mr. Sachs. As required by the Merger Agreement, the Company received
an opinion of an independent third party appraiser that the fair market value of
Capricorn was in excess of $5,000,000.00.
In addition to the 500,000 shares of common stock he received, Mr. Sachs
received the right to receive up to 325,000 additional shares of common stock of
the Company, with the exact number of those contingent shares, if any,
determined as follows. Promptly after the completion of the audited financial
statements of Capricorn for the year ending December 31, 2000 the Company's
auditors shall compute the average pre-tax earnings of Capricorn for the three
period ended December 31, 2000 and the amount if any (the "Contingent Earnings
Amount"), by which those average annual pre-taxes earnings exceed $250,000.00
per year. The Company would then issue Mr. Sachs additional shares, up to a
maximum of 325,000 additional shares, in an amount equal to 200% of the
Contingent Earnings Amount divided by $10.00.
The Company is obligated under the merger agreement to file a registration
statement under the Securities Act of 1933, as amended, to register a total of
350,000 of the 500,000 shares of the Company's common stock that was issued to
Mr. Sachs. The Company is not obligated to register the remaining 150,000 shares
or any contingent shares that may be issued to Mr. Sachs.
The Company had 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 software designed by the Company known as
the Foundation Platform, which provides the capabilities to offer Internet
controlled telephony services on the World Wide Web and other networks.
Capricorn, which is headquartered in Farmington Hills, Michigan, is an equipment
leasing company that specializes in leasing computer equipment. The Company
intends to have Capricorn continue in that business.
2
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
a) Financial Statements of Business Acquired.
Audited financial statements of Capricorn Capital Group, Inc. for the
year ended September 30, 1997 are filed as Exhibit 99 to this Form 8K
beginning on page 10.
b) Pro Forma Financial Information.
The following pro forma combined financial information of National
TechTeam gives effect to the acquisition of Capricorn Capital Group as
of December 31, 1997.
The pro forma combined balance sheet was prepared as if the
acquisition had occurred on December 31, 1997.
The pro forma statement of income was prepared as if the
acquisition had occurred prior to the beginning of the fiscal year
presented.
The pro forma combined balance sheet and statements of
operations are not necessarily indicative of the consolidated
financial position or results of operations as they might have been
had the acquisition actually occurred on the dates indicated.
3
<PAGE> 4
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined statement of operations of the National
TechTeam, Inc. (the Company) for the year ended December 31, 1997 (Pro Forma
Statement of Operations), and the unaudited pro forma combined balance sheet of
the Company as of December 31, 1997 (Pro Forma Balance Sheet) have been prepared
to illustrate the estimated effect of the merger of the Company and Capricorn
Capital Group, Inc. (Capricorn). The pro forma financial information does not
reflect any expected cost savings from the synergies that are expected to result
from the merger, which could be significant, although there can be no assurance
with respect thereto. The Pro Forma Statement of Operations gives pro forma
effect to the merger as if it had occurred on January 1, 1997. The Pro Forma
Balance Sheet gives pro forma effect to the merger as if it had occurred on
December 31, 1997. The pro forma financial information does not purport to be
indicative of the results of operations or financial position of the Company
that would have actually been obtained had such merger been completed as of the
assumed dates and for the period presented, or which may be obtained in the
future. The pro forma adjustments are described in the accompanying notes and
are based upon available information and certain assumptions that the Company
and Capricorn believe are reasonable. The pro forma financial information should
be read in conjunction with the separate historical consolidated financial
statements of the Company and Capricorn and the notes thereto.
The acquisition of Capricorn will be accounted for by the purchase method of
accounting. Under purchase accounting, the total purchase price will be
allocated to the tangible and intangible assets and liabilities of Capricorn
based upon their respective fair values as of the closing date. A preliminary
allocation of the purchase price has been made to major categories of assets and
liabilities in the accompanying pro forma financial information based on
available information. The actual allocation of purchase price and the resulting
effect on income from operations may differ significantly from the pro forma
amounts included herein. These pro forma adjustments represent the Company and
Capricorn management's' preliminary determination of purchase accounting
adjustments and are based upon available information and certain assumptions
that the Company and Capricorn believe to be reasonable. Consequently, the
amounts reflected in the Pro Forma Balance Sheet are subject to change, and the
final amounts may differ substantially.
4
<PAGE> 5
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------ ------------------------------------
FOR THE YEAR FOR THE YEAR
ENDED 12/31/97 ENDED 9/30/97
"COMPANY" "CAPRICORN" ADJUSTMENTS COMBINED
---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues................................ $ 81,326,935 $ 22,046,152 $ 103,373,087
Cost of services delivered.............. 72,806,618 13,570,634 86,377,252
------------- ------------ --------------
Gross profit............................ 8,520,317 8,475,518 16,995,835
Other expenses/(income).................
Selling, general, and 14,320,465 7,091,736 $ 75,218 E 21,487,419
administrative....................
Interest expense.................... 69,492 2,311,679 2,381,171
Interest income..................... (3,038,555) (126,293) (3,164,848)
Gain on sale of investment.......... -- (83,125) (83,125)
------------ ------------ --------------- --------------
11,351,402 9,193,997 75,218 20,620,617
Income before tax provisions............ (2,831,085) (718,479) (75,218) (3,624,782)
Tax provisions.......................... (873,242) (461,500) 29,240 F (1,305,502)
------------ ------------ --------------- --------------
Net income.............................. $ (1,957,843) $ (256,979) $ (104,458) $ (2,319,280)
============ ============ =============== ==============
Earnings per share...................... $ (0.12) $ (0.16)
============ ==============
Average number of common shares
and common share equivalents
outstanding
Basic............................ 15,663,716 15,663,716
Diluted.......................... 15,663,716 15,663,716
</TABLE>
See notes to unaudited pro forma combined financial statements.
5
<PAGE> 6
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------ ------------------------------------
FOR THE YEAR FOR THE YEAR
ENDED 12/31/97 ENDED 9/30/97
"COMPANY" "CAPRICORN" ADJUSTMENTS COMBINED
----------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
CURRENT ASSETS
- --------------
Cash and cash equivalent................ $ 24,927,348 $ 745,460 $ 25,672,808
Securities available for sale........... 39,094,615 120,144 39,214,759
Accounts receivable..................... 26,479,816 1,185,498 27,665,314
Inventory............................... 218,622 666,377 884,999
Refundable income tax................... 2,466,777 2,466,777
Deferred income tax..................... 338,532 338,532
Prepaid expenses and other.............. 2,781,777 1,153,377 3,935,154
--------------- --------------- -------------
TOTAL CURRENT ASSETS.................... 96,307,487 3,870,856 100,178,343
TOTAL FIXED ASSETS (NET) 13,724,192 5,403,965 19,128,157
OTHER ASSETS
Intangibles............................. 7,324,064 $ 1,612,183 A 8,936,247
Equipment leased to others.............. 17,964,438 17,964,438
Deferred initial direct costs........... 110,514 110,514
Net investment in direct
financing leases.................... 6,566,797 6,566,797
Net investment in lease residuals....... 1,022,893 1,022,893
Advance to Capricorn
Capital Group, Inc.................. 604,002 (604,002) B --
Deferred income tax..................... 1,689,334 1,689,334
Other................................... 1,639,582 241,127 1,880,709
--------------- --------------- -------------
TOTAL OTHER ASSETS...................... 11,256,982 25,905,769 38,170,932
=============== =============== =============
TOTAL ASSETS............................ $ 121,288,661 $ 35,180,590 $ 157,477,432
=============== =============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
- -----------------------------------------
CURRENT LIABILITIES
Accounts payable........................ $ 3,707,985 $ 3,080,488 (604,002) B $ 6,184,471
Accrued payroll......................... 4,350,863 48,552 4,399,415
Accrued expenses and taxes.............. 533,391 128,900 662,291
Dividend payable........................ 449,000 449,000
Deferred income tax..................... 466,880 466,880
Notes payable........................... 24,585,088 24,585,088
Deferred revenue/unap rec............... 1,353,398 1,736,474 3,089,872
Other................................... 147,036 147,036
--------------- --------------- -------------
TOTAL CURRENT LIABILITIES............... 10,559,553 30,028,502 39,984,053
LONG TERM LIABILITIES
Capital lease obligations............... 119,765 119,765
Deferred income tax..................... 195,941 1,513,834 1,709,775
Other................................... 375,437 A 375,437
Deferred Foundation Platform
license fees........................ 813,205 813,205
--------------- -------------
TOTAL LONG TERM LIABILITIES............. 1,128,911 1,513,834 3,018,182
SHAREHOLDERS' EQUITY
Common stock............................ 160,377 50,118 (50,118) D 160,377
Additional paid in capital.............. 105,586,223 4,875,000 A,D 110,461,223
Other................................... (84,652) (84,652)
Retained earnings....................... 4,509,019 3,588,136 (3,588,136) D 4,509,019
--------------- --------------- -------------
Total................................... 110,170,967 3,638,254 115,045,967
Less: treasury stock.................... 570,770 570,770
--------------- --------------- -------------
TOTAL SHAREHOLDERS' EQUITY.............. 109,600,197 3,638,254 114,475,197
--------------- --------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY................ $121,288,661 $ 35,180,590 $ 157,477,432
=============== =============== =============
</TABLE>
See notes to unaudited pro forma combined financial statements.
6
<PAGE> 7
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
A) The Pro Forma Statement of Operations assumes that the merger occurred
on January 1, 1997. For purposes of the Pro Forma Statement of
Operations for the year ended December 31, 1997, Capricorn's historical
statement of operations for the fiscal year ended September 30, 1997
was combined with the Company's historical statement of operations for
the fiscal year ended December 31, 1997.
The acquisition of Capricorn will be accounted for by the purchase
method of accounting. Under purchase accounting, the total purchase
price will be allocated to the tangible and intangible assets and
liabilities of Capricorn based upon their respective fair values as of
the closing date based on valuations and other studies which are not
yet available. A preliminary allocation of the purchase price has been
made to major categories of assets and liabilities in the accompanying
pro forma financial information based on available information. The
actual allocation of purchase price and the resulting effect on income
from operations may differ significantly from the pro forma amounts
included herein. These pro forma adjustments represent the Company and
Capricorn management's preliminary determination of purchase accounting
adjustments and are based upon available information and certain
assumptions that the Company and Capricorn believe to be reasonable.
Consequently, the amounts reflected in the Pro Forma Balance Sheet are
subject to change, and the final amounts may differ substantially.
Certain reclassifications have been made to the historical financial
statements of National TechTeam, Inc. and Capricorn Capital Group, Inc.
to conform to the pro forma presentation. Such reclassifications are
not material to the combined unaudited pro forma financial statements.
B) To record excess purchase price resulting from the purchase of
Capricorn Capital Group, Inc.
C) To record the elimination of Intercompany Receivable/Payables.
D) To record the elimination of the Common Stock of Capricorn Capital
Group, Inc, and the consolidation of Retained Earnings.
E) To record the goodwill amortization expense for fiscal year 1997 and
reduction of expense for deferred compensation.
Amortization Expense............................... $ 161,218
Reduction of Compensation Expense
related to Employment Agreement............... (86,000)
----------
Net entry.......................................... $ 75,218
==========
F) To record the tax effect of pro forma statement of
operation adjustments.
7
<PAGE> 8
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.
Dated: April 14, 1998
NATIONAL TECHTEAM, INC.
By /s/ Lawrence A. Mills
-----------------------
Lawrence A. Mills
Vice President, Chief Financial Officer,
Treasurer and Secretary
8
<PAGE> 9
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION
23 Consent of Independent Auditors
99 Capricom Capital Group, INC. and SUBSIDIARIES
Consolidated Financial Statements for the year
ended September 30, 1997
<PAGE> 1
EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS
[WOLNEWITZ & VERRELLI, P.C. LETTERHEAD]
We have issued our report dated November 10, 1997 with respect to the
consolidated balance sheet of Capricorn Capital Group, Inc. and subsidiaries as
of September 30, 1997 and the related consolidated Statements of operations,
changes in stockholders' equity, and cash flows for the year then ended. We
consent to the incorporation by reference of that report in the Form 8-K for
National TechTeam, Inc. to be filed on April 14, 1998.
/s/ Wolnewitz & Verrelli, P.C.
April 14, 1998
9
<PAGE> 1
EXHIBIT 99
CAPRICORN CAPITAL GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEAR ENDED SEPTEMBER 30, 1997
<PAGE> 2
[WOLNEWITZ & VERRELLI LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Capricorn Capital Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Capricorn Capital
Group, Inc. and Subsidiaries as of September 30, 1997 and the related
consolidated statements of operations, changes in stockholder's equity and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
September 30, 1997 and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
/s/ Wolnewitz & Verrelli, P.C.
November 10, 1997
<PAGE> 3
CAPRICORN CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30,1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
CASH AND CASH EQUIVALENTS $ 745,460
ACCOUNTS RECEIVABLE (net of $50,000 allowance)
Lessees 673,692
Equipment sales 511,806
INVENTORIES - net 666,377
LOANS RECEIVABLE
Related parties (Note 2) 525,169
Unrelated parties (Note 3) 520,851
Employees 18,198
EQUIPMENT LEASED TO OTHERS (net of 17,964,438
accumulated depreciation of $25,742,201)
(Notes 6 and 8)
DEFERRED INITIAL DIRECT COSTS 110,514
NET INVESTMENT IN DIRECT FINANCING 6,566,797
LEASES (Note 5)
NET INVESTMENT IN LEASE RESIDUALS (net 1,022,893
of unearned income of $548,514)
OTHER INVESTMENTS 120,144
PROPERTY, EQUIPMENT AND INTANGIBLE 5,403,965
ASSETS - net (Note 4)
PREPAID AND OTHER ASSETS 241,127
ACCRUED INTEREST RECEIVABLE (Note 2) 89,159
--------------
TOTAL ASSETS $ 35,180,590
==============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 4
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<S> <C>
LIABILITIES
NOTES PAYABLE (Note 6)
Nonrecourse $17,581,449
Other 7,003,639
ACCOUNTS PAYABLE
Leased equipment 1,711,805
Other 1,368,683
ACCRUED LIABILITIES
Interest 128,900
Commissions, payroll and other 48,552
DEFERRED REVENUE 1,736,474
DEFERRED INCOME TAX (Note 7) 1,513,834
DIVIDENDS PAYABLE (Note 10) 449,000
-----------
TOTAL LIABILITIES 31,542,336
-----------
STOCKHOLDER'S EQUITY
COMMON AND PREFERRED STOCK (Note 10) 50,118
RETAINED EARNINGS 3,588,136
-----------
TOTAL STOCKHOLDER'S EQUITY 3,638,254
-----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $35,180,590
===========
</TABLE>
<PAGE> 5
CAPRICORN CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
OPERATING REVENUE
Leasing
Operating $15,513,557
Direct financing 781,054
-----------
Total leasing $16,294,611
Residual income 603,881
Equipment sales 4,872,812
Warehouse 211,226
Other 63,622 5,751,541
----------- ------------
Total revenue 22,046,152
------------
OPERATING COSTS AND EXPENSES:
Leasing
Operating - depreciation and
initial direct costs 10,271,641
Direct financing - initial direct costs 40,933 10,312,574
-----------
Cost of sales, equipment 3,258,060
Operating expense 6,796,715
Interest expense 2,311,679 12,366,454
----------- ------------
Total cost of sales 22,679,028
------------
Operating loss (632,876)
OTHER INCOME (EXPENSE)
Loss on sale of leased equipment and
other assets (374,322)
Gain on sale of stock 83,125
Equity in income of
unconsolidated investments 6,272
Interest income 126,293
Miscellaneous 73,029 (85,603)
----------- ------------
LOSS BEFORE PROVISION FOR FEDERAL
INCOME TAXES
(718,479)
PROVISION (BENEFIT) FOR FEDERAL INCOME
TAXES (Note 7) (461,500)
------------
NET LOSS $(256,979)
============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
CAPRICORN CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEAR ENDED SEPTEMBER 30,1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Capital Retained
Stock Earnings
<S> <C> <C>
BALANCE, OCTOBER 1, 1996 $ 100,236 $ 6,294,997
Redemption and retirement of stock (Note 10) (50,118) (2,449,882)
Net loss 0 (256,979)
--------- -----------
BALANCE, SEPTEMBER 30, 1997 $ 50,118 $ 3,588,136
========= ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 7
CAPRICORN CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
CASH FLOW FROM OPERATING ACTIVITIES
Net loss $ (256,979)
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 10,785,743
Increase in lease residuals (573,848)
Loss on sale of fixed assets 374,322
Gain on sale of stock (83,125)
Decrease in direct finance leases 1,051,642
Decrease in initial direct costs 68,379
Accounts receivable (362,385)
Inventory 1,275,881
Other assets 591,962
Accounts payable 788,985
Accrued liabilities 419,218
Dividends payable (36,300)
Deferred revenue 1,692,738
Deferred income taxes (267,559)
Income taxes payable (222,494)
------------
Net cash provided by operating activities 15,246,180
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of lease equipment 1,924,161
Proceeds from sale of fixed assets 176,900
Proceeds from sale of investments 883,750
Purchase of leased equipment (7,649,395)
Purchase of fixed and intangible assets (4,315,235)
Increase in notes receivable (301,396)
------------
Net cash (used) by investing activities (9,281,215)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable 19,220,298
Principle payments on notes payable (23,973,840)
Shares retired (2,500,000)
------------
Net cash (used) by financing activities (7,253,542)
------------
Decrease in cash (1,288,577)
Cash and cash equivalents, beginning of year 2,034,037
------------
Cash and cash equivalents, end of year $ 745,460
============
ADDITIONAL CASH FLOW INFORMATION - Cash paid
during the year for:
Interest (includes interest paid by lessees
directly to financial institutions in satisfaction
of nonrecourse debt obligations) $ 2,190,809
Income tax 28,552
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 8
CAPRICORN CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
FOR THE YEAR ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include those of Capricorn Capital
Group, Inc., and its wholly owned subsidiaries, CCG Management, Inc.
and Capricorn Maintenance, Inc., and PC Remarketing Group, a division,
(collectively the "Company"). PC Remarketing Group was sold in October, 1996
(See Note 12). All significant intercompany accounts and transactions have
been eliminated.
The Company is engaged primarily in computer and technical equipment leasing
and remarketing. The Company also sells and assembles computers on a retail
and corporate basis.
Unclassified balance sheet - Due to the long-term nature of assets
applicable to Company operations, an unclassified balance sheet more
accurately reflects its financial position.
Cash and cash equivalents - Cash equivalents are comprised of highly liquid
debt instruments with original maturities of 90 days or less.
Inventories consist of equipment held for sale or lease and are stated at
the lower of cost, based on specific identification, or market.
Lease accounting policies - FASB Statement of Financial Accounting Standards
No. 13 "Accounting for Leases" requires that a lessor account for each lease
by either the direct financing, sales-type or operating method.
Leased assets:
Direct financing and sales-type leased assets consist of the present
value of the future minimum lease payments plus the present value of
the residual (collectively referred to as the net investment).
Residual is the estimated fair market value at lease termination. In
estimating the equipment's fair value at lease termination, the
Company relies largely on historical experience by equipment type and
manufacturer, adjusted for known trends. The Company's estimates are
reviewed continuously to ensure realization, however, the amount the
Company will ultimately realize could differ from the estimated
amounts.
6
<PAGE> 9
Operating leased assets consist of the equipment cost, less the amount
depreciated to date.
Revenue, costs and expenses:
Operating leases - Revenue consists of the contractual lease payments
and is recognized on a straight line basis over the lease term. Costs
and expenses are principally depreciation of the equipment.
Depreciation is recognized on a straight line basis over the lease
term to the Company's estimate of the equipment's fair market value at
the lease termination, also commonly referred to as "residual" value.
In estimating the equipment's fair value at lease termination, the
Company relies largely on historical experience by equipment type and
manufacturer, adjusted for known trends. Initial direct financing
costs related to operating leases are capitalized and amortized over
the lease term.
Direct financing leases - Revenue consists of interest earned on the
present value of the lease payments and residual. Revenue is
recognized periodically over the lease term as a constant percentage
return on the net investment. Costs of these leases principally
consist of initial direct financing costs which are capitalized and
amortized over the lease term.
Sales-type leases - Revenue consists of the present value of the total
contractual lease payments which is recognized at the lease inception.
Costs and expenses consist of the equipment's net book value at lease
inception, less the present value of any residual. Interest earned on
the present value of the lease payments and residual, which is
recognized periodically over the lease term as a constant percentage
return on the net investment, is included in direct financing lease
revenue in the statement of operations.
Net Investment in Lease Residuals - The Company acts as a broker in arranging
certain lease transactions and recognizes fees for such services as earned. In
certain cases, estimated residual values (i.e. the Company's share of estimated
proceeds from sale or re-lease of equipment at lease termination) are recorded
as revenue at discounted present values at the closing of the transaction. The
excess of the actual residual value received by the Company over the discounted
present value (unearned income) is recognized as revenue upon the sale or
re-lease of the equipment at the termination of the lease.
Other Investments at September 30, 1997 includes a $77,570 investment in
Capricorn Capital Group de Mexico (CCGM), a corporation formed to conduct
leasing business with Chrysler de Mexico. The Company has a 49% ownership
interest in CCGM and accounts for its investment under the equity method. All of
CCGM's liabilities are nonrecourse to the Company.
7
<PAGE> 10
Property, Equipment and Related Depreciation - Property and equipment are
recorded at cost or, in the case of assets under capital leases, at the present
value of future lease payments. That property which is capitalized is
depreciated using accelerated and straight line methods over estimated useful
lives which range from 3 to 39 years.
Intangible Assets subject to amortization includes a software license. This
license is being amortized using the straight line method over a five year life
(Note 4).
Deferred Revenue primarily consists of a deposit received from a customer for
the purchase of equipment. Revenue will be recognized as the purchases are made.
During the year ended September 30, 1997, the Company recognized $70,900 of
revenue related to sale of equipment to this customer (Note 11).
Gain (Loss) on Sale of Equipment - The Company occasionally sells certain
noncancelable lease contracts and equipment leased to others to third parties
prior to the expiration of the original lease term. The Company also sells
equipment when the underlying lease has expired and the equipment has been
returned to the Company. The gain or loss from such transactions is generally
recorded at the time of sale unless a permanent asset impairment has been
earlier recognized and is included in the consolidated statement of operations
as a gain or loss at that time.
Income Taxes - Effective October 1, 1993, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes",
which requires an asset and liability approach to financial accounting and
reporting of income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which differences are expected to affect taxable income. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense is the tax payable or refundable for
the period plus or minus the change during the period in deferred tax assets and
liabilities.
Concentration of Risks - The Company's largest customer accounted for
approximately 75% of the 1997 lease revenues. This customer operates in the
automotive manufacturing industry and is nationally based. Management does not
believe that there is a significant geographic concentration of risk.
At September 30, 1997, approximately 76% of the Company's lessee accounts
receivable are due from customers who operate in the automotive manufacturing
industry.
8
<PAGE> 11
The Company maintains cash at two banks and one brokerage firm. Cash accounts
at the banks are insured by the Federal Deposit Insurance Corporation for up to
$100,000. Amounts in excess of insured limits were approximately $640,000 at
September 30, 1997.
Estimates - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. TRANSACTIONS WITH RELATED PARTIES
Loans receivable from related parties at September 30, 1997 consist of the
following:
<TABLE>
<S> <C>
Non-interest bearing advances to CCGM (49% $ 385
ownership interest)
Unsecured loans receivable from stockholder 436,491
and officers, bearing interest at 8%, due
on demand
Unsecured note receivable from related 88,293
Company, bearing interest at 8%, due --------
in monthly payments of $2,000, balance
due December 31, 1999
TOTAL $525,169
========
</TABLE>
Advances to CCGM represent monies used to purchase equipment leased to others
and for working capital needs. The amounts were repaid subsequent to year-end.
The unsecured loan receivable from stockholder represents short-term advances in
varying amounts that are repaid by the stockholder on a mutually agreed upon
basis with the Company's management.
Interest Income recognized from related party loans was approximately $46,800 in
1997. Total interest receivable from related party loans was approximately
$51,180 at September 30, 1997.
9
<PAGE> 12
3. NOTES AND LOANS RECEIVABLE - UNRELATED PARTIES
<TABLE>
<S> <C>
Loan receivable from unrelated company, $ 100,000
bearing interest at 8%, due on demand,
unsecured
Nonrecourse loan receivable to unrelated 89,436
company, non-interest bearing, due
September, 1998, secured by a secondary
interest in equipment costing approximately
$413,500
Loan receivable from unrelated party, 26,943
bearing interest at 8%, due on demand,
unsecured
Note receivable from sale of a partnership 260,000
interest, bearing interest at 9 1/2%, due
December 31, 1997, secured by a security
interest in any and all property of the
purchaser
Note receivable from sale of PC Remarketing 44,472
Group assets, bearing interest at 8%, ---------
payable in monthly installments of $2,940,
due December 1, 1998, unsecured
TOTAL $ 520,851
=========
</TABLE>
10
<PAGE> 13
4. PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS
Property, equipment and intangible assets at September 30, 1997 consists of
the following:
<TABLE>
<S> <C>
Buildings and improvements $1,751,001
Office equipment 691,831
Automobiles 27,020
Computer software 497,765
Software license 4,124,581
Leasehold improvements 120,773
----------
Total 7,212,971
Less accumulated depreciation and amortization 1,809,006
----------
Property, equipment and
intangible assets - net $5,403,965
==========
</TABLE>
In March, 1997, the Company acquired license rights in certain application
software which entitles the Company to use the software in business dealings
with its customers. The Company also acquired sub-license rights to the
software.
5. NET INVESTMENT IN DIRECT FINANCING LEASES
The net investment in direct financing leases as of September 30, 1997
consists of the following:
<TABLE>
<S> <C>
Total minimum lease payments receivable $6,461,314
Estimated residual values of leased 784,653
property (unguaranteed)
Less unearned income (710,910)
Initial direct costs 31,740
----------
TOTAL $6,566,797
==========
</TABLE>
11
<PAGE> 14
At September 30, 1997, minimum lease payments receivable under direct financing
leases are due as follows:
Fiscal year:
<TABLE>
<S> <C>
1998 $4,126,716
1999 1,525,336
2000 498,315
2001 210,114
2002 100,833
----------
TOTAL $6,461,314
==========
</TABLE>
6. NOTES PAYABLE
Nonrecourse - The Company generally finances its lease transactions by assigning
the noncancelable rentals to various financial institutions on a nonrecourse
basis. Proceeds from the assignment of lease rentals represent the present value
of payments due under the lease, discounted at a rate determined by the
financial institutions, ranging from 6.0% to 12.0% per annum. Repayment of these
amounts corresponds to the receipt of lessee rental payments, the majority of
which are received directly by the financial institutions (see Notes 5 and 8).
The difference between monthly rentals due under these assigned leases and the
amortization of the nonrecourse notes payable represents interest income or
expense. In the event of a default by a lessee under a lease which has been
assigned on a nonrecourse basis, the financial institution has a first lien
against the underlying equipment but has no further recourse against the
Company. Nonrecourse notes payable at September 30, 1997 amounted to
$16,705,461.
The Company also finances, on a nonrecourse basis, a portion of the equipment
cost on certain operating leases. The financing source receives the amount of
the nonrecourse loan, without interest, from the remarketing proceeds of the
equipment after the expiration of the term of the underlying lease. Nonrecourse
notes payable at September 30, 1997 amounted to $875,988.
12
<PAGE> 15
Other notes payable at September 30, 1997 consist of the following:
<TABLE>
<CAPTION>
Effective Annual
Interest Rate (%)
-----------------
<S> <C> <C>
Mortgage payable on Arizona 11.50 $ 461,548
estate due in monthly
installments of $5,195
including interest with a
balloon payment of $442,000
due in 2000, collateralized
by land and building with a
net book value of $827,011
Mortgage payable due in 8.25 233,792
monthly installments of
$1,920, including interest,
due in 2019, collateralized
by a building with a net
book value of $324,931
Note payable to a former 8.0 612,288
stockholder/officer for
repurchase of stock, due in
quarterly installments of
$62,500, including interest,
due in 2001, subordinated to
commercial lender, secured
by a life insurance policy on
the stockholder of the Company
Notes payable to a 7.72-9.16 606,112
corporation due through 1998,
collateralized by underlying
leased equipment
Note payable to unrelated 10.0 1,872,876
company, due in monthly
installments of $50,000,
final payment due in 2001,
secured by all assets of the
Company and the personal
guarantee of the stockholder
</TABLE>
13
<PAGE> 16
<TABLE>
<S> <C> <C>
Note payable to unrelated 10.0 258,558
company, due in monthly
installments based on the
rental stream of certain
noncancellable lease
agreements, final payment
due 2000, secured by the
underlying leased equipment
Note payable to bank, 8.5 207,235
bearing interest at 8.5%,
due in monthly payments of
$7,469, final maturity in
2000, secured by personal
guarantee of the stockholder
Note payable to unrelated 8.5 2,751,230
company for the purchase ----------
of a software license, due
in annual installments of
$840,000, balance due 2001,
unsecured
TOTAL $7,003,639
==========
</TABLE>
Future minimum principal payments on all notes payable for periods subsequent to
September 30, 1997, are as follows:
<TABLE>
<S> <C>
Fiscal year:
1998 $13,909,816
1999 5,475,327
2000 3,483,533
2001 1,409,591
2002 306,821
-----------
TOTAL $24,585,088
===========
</TABLE>
7. INCOME TAXES
The geographical sources of earnings (losses) before income taxes were as
follows:
<TABLE>
<S> <C>
United States $ (724,751)
Outside United States 6,272
-----------
TOTAL $ (718,479)
===========
</TABLE>
14
<PAGE> 17
The components of the income tax provision (benefit) charged or credited to
operations is as follows:
<TABLE>
<S> <C>
Current $ (193,941)
Deferred (267,559)
----------
TOTAL $ (461,500)
==========
</TABLE>
The reasons for the difference between the U.S. Federal income tax rate and the
effective income tax rate for earnings are as follows:
<TABLE>
<S> <C>
U.S. Federal income tax (benefit) rate (34.0)%
Taxes on non-deductible expenses .5
Tax benefit resulting from re-evaluation (30.7)
of future taxes likely to be paid on -----
outstanding timing differences (using
a 34.0% tax rate)
TOTAL (64.2)%
=====
</TABLE>
Deferred tax assets and liabilities at September 30, 1997 were as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Expenses not deducted for tax purposes:
Bad debt expense $ 21,554
Inventory write-off 51,000
Depreciation 203,595
-----------
Gross deferred tax assets 276,149
Less, valuation allowance (73,903)
-----------
Total deferred assets 202,246
Deferred tax liabilities:
Lease accounting 1,665,923
Deferred income tax expenses,
already deducted for tax purposes:
State taxes 33,589
Capital gains, not yet recognized for tax 16,568
-----------
Gross deferred tax liabilities 1,716,080
-----------
Net deferred tax liabilities $ 1,513,834
===========
</TABLE>
15
<PAGE> 18
For financial reporting purposes, the Company has an approximate $749,600 net
operating loss carryforward which will expire in the year 2017.
The most recent audits conducted by the Internal Revenue Service have included
the Company's Federal income tax filings for the years ended September 30, 1990
through 1993. All years prior to fiscal year 1989 are closed to further
assessment due to the expiration of the Statue of Limitations.
8. OPERATING LEASE REVENUE
Future lease revenues anticipated under noncancelable operating leases at
September 30, 1997 are as follows:
<TABLE>
<S> <C>
Fiscal year:
1998 $ 8,049,549
1999 2,937,000
2000 949,509
2001 59,304
2002 50,746
-----------
TOTAL $12,046,108
===========
</TABLE>
9. RENTAL EXPENSE
During the year ended September 30, 1997, the Company leased office facilities
in Michigan under noncancelable operating lease agreements. Rental expense
related to these leases was approximately $240,500 in Fiscal 1997. The Company
also leases various equipment under other operating leases. Rental expense
related to these leases was approximately $18,500 in 1997. Total future minimum
lease payments as of September 30, 1997 are as follows:
<TABLE>
<S> <C>
Fiscal year:
1998 $ 188,109
1999 100,299
---------
TOTAL $ 288,408
=========
</TABLE>
16
<PAGE> 19
10. CAPITAL STOCK
Capital stock consists of the following at September 30, 1997:
<TABLE>
<S> <C>
Preferred stock, non-voting;
$1 par value, authorized,
100,000 shares, issued and
outstanding, 50,000 shares $ 50,000
Common stock - voting, Class A; $1 par
value, authorized, 50,000 shares,
issued and outstanding, 118 shares 118
Common stock - non-voting, Class B;
$1 par value, authorized, 50,000
shares, issued and outstanding,
zero shares 0
-----------
TOTAL $ 50,118
===========
</TABLE>
The preferred shareholder agreement with the Company calls for annual dividends
of $3.92 per share, but only after first being approved by the Board of
Directors each year. Preferred shareholders have cumulative rights in the event
that dividends are not declared.
During the years ended September 30, 1997, 1996 and 1995, no preferred dividends
were declared by the Board of Directors with there being $588,000 in cumulative,
undeclared dividends as of the end of the year. Such dividends must be declared
and paid before common shareholders can be considered by the Board for a
dividend distribution. In addition, the Company recorded $449,000 in dividend
liabilities as of September 30, 1997, having been declared in 1994 and 1993, but
being unpaid as of the balance sheet date.
The preferred shares, which are non-callable, have a liquidation preference of
$65.35 per share (as compared with the $1 par value) in the event of a voluntary
or involuntary liquidation dissolution, or winding down of the Company. In
addition, any cumulative, unpaid dividends must also be remitted to preferred
shareholders in that event.
During the year ended September 30, 1997, the Company repurchased 118 shares of
its Class A, common stock and 50,000 shares of its preferred stock from a
majority stockholder for $2,500,000. The excess of the cost of shares acquired
over the par value resulted in a charge to retained earnings, as reflected in
the accompanying statement of stockholder's equity.
17
<PAGE> 20
11. AGREEMENT TO SELL GOODS AND SERVICES
In March of 1997, the Company agreed to sell equipment over the ensuing three
years to National TechTeam, Inc. (NT) in exchange for minimal cash deposits to
be received by the Company from NT. If merchandise in the following amounts has
not been purchased by NT by the successive three March dates following the
agreement date, the Company has the right to keep the required deposits also
indicated below:
<TABLE>
<CAPTION>
Deposit Required
To be Made by NT,
Required Year ending March
Year ending March Purchases by NT Year Amount
----------------- --------------- ---- ------
<S> <C> <C> <C>
1998 $ 12,000,000 1997 $1,800,000
1999 8,000,000 1998 1,200,000
2000 8,000,000 1999 1,200,000
</TABLE>
The underlying agreement calls for the Company to earn a 15% gross profit on the
goods and services sold. Deposit money is to be applied against the gross profit
portion of the sale price only. As of September 30, 1997, the Company has sold
$472,900 of goods and services to NT under the agreement, upon which a $70,900
gross profit has been earned, reducing the initial $1,800,000 deposit (deferred
revenue) liability to a $1,729,000 recorded balance.
12. SALE OF PC REMARKETING GROUP
On November 18, 1996, the Company entered into an agreement to sell its PC
Remarketing Group division for approximately $165,000. For the year ended
September 30, 1996, this division's unaudited financial statements recorded the
following:
<TABLE>
<S> <C>
Sales $ 2,542,180
Cost of goods sold (2,133,035)
-----------
Gross profit 409,145
Operating expenses (505,656)
-----------
Operating loss $ (96,511)
===========
</TABLE>
During the first 49 days of Fiscal year 1997, this division reported an
operating income of $2,100. In addition, the Company realized a $110,000 loss
before income tax effects upon the sale of the division's net assets. Management
has decided not to treat this sale as a discontinued operation for financial
reporting purposes, as similar operations still have to be maintained within the
Company's other divisions.
18
<PAGE> 21
13. SUBSEQUENT EVENT
On January 19, 1998, the sole shareholder entered into an agreement and plan of
merger with a subsidiary of National TechTeam, Inc., whereby, the Company will
ultimately become a wholly-owned subsidiary of National TechTeam, Inc. The
estimated closing date of the plan of merger is January 30, 1998.
********
19
