<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission file number 0-16284
NATIONAL TECHTEAM, INC.
(Name of issuer in its charter)
DELAWARE 38-2774613
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
835 Mason Street, Suite 200, Dearborn, MI 48124
(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 July 31, 1999 was 13,202,639.
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS COULD
DIFFER FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS DESCRIBED HEREIN INCLUDING THOSE SET FORTH UNDER "FACTORS
AFFECTING FUTURE RESULTS" UNDER "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN, OR INCORPORATED
BY REFERENCE INTO, THIS REPORT.
<PAGE> 2
NATIONAL TECHTEAM, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PAGE
INDEX NUMBER
- ------------------------------------------------------------------------------------------------------- ------
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1.
Condensed Consolidated Statements of Operations (Unaudited) 3
Three and Six Months Ended
June 30, 1999 and 1998
Condensed Consolidated Statements of Financial Position (Unaudited) 4 - 5
June 30, 1999 and December 31, 1998
Condensed Consolidated Statements of Cash Flows (Unaudited) 6
Six Months Ended
June 30, 1999 and 1998
Notes to the Condensed Consolidated Financial Statements - June 30, 1999 (Unaudited) 7 - 12
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations 13 - 16
PART II - OTHER INFORMATION
ITEM 1.
Legal Proceedings 17
ITEM 4.
Submission of Matters to a Vote of Security Holders 17
ITEM 5.
Other Information 18
ITEM 6.
Exhibits and Reports on Form 8-K 18
Signatures 19
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE> 3
PART 1 -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ------------------------------
1999 1998 1999 1998
(AS RESTATED) (AS RESTATED)
------------- -------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES
Corporate Services
Corporate help desk services.................. $ 9,478 $ 6,811 $ 18,492 $ 12,870
Technical staffing............................ 5,419 6,423 11,889 13,453
Systems integration........................... 5,654 2,656 10,650 5,407
Training programs............................. 1,386 1,773 2,781 3,621
------------- -------------- ------------- -------------
Total Corporate Services......................... 21,937 17,663 43,812 35,351
------------- --------------- -------------- --------------
OEM Call Center Services......................... 6,684 6,471 14,894 13,131
Leasing Operations............................... 5,647 3,362 9,649 5,471
------------- -------------- ------------- -------------
TOTAL REVENUES....................................... 34,268 27,496 68,355 53,953
COST OF SERVICES DELIVERED........................... 27,606 21,761 56,010 43,160
------------- -------------- ------------- -------------
GROSS PROFIT......................................... 6,662 5,735 12,345 10,793
------------- -------------- ------------- -------------
OTHER EXPENSES
Selling, general and administrative.............. 5,368 4,439 10,438 9,331
Michigan Single Business Tax and other........... 182 293 413 522
------------- -------------- ------------- -------------
TOTAL OTHER EXPENSES................................. 5,550 4,732 10,851 9,853
------------- -------------- ------------- -------------
Operating income..................................... 1,112 1,003 1,494 940
------------- -------------- ------------- -------------
Interest income...................................... 108 369 300 983
Interest expense..................................... 219 452 451 788
------------- -------------- ------------- -------------
NET INTEREST EXPENSE (INCOME)........................ 111 83 151 (195)
------------- -------------- ------------- -------------
Income before income taxes........................... 1,001 920 1,343 1,135
Income tax expense................................... 341 398 457 472
------------- -------------- ------------- -------------
NET INCOME........................................... $ 660 $ 522 $ 886 $ 663
============= ============== ============= =============
BASIC AND DILUTED EARNINGS PER SHARE................. $ 0.05 $ 0.04 $ 0.07 $ 0.04
============= ============== ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
AND COMMON SHARE EQUIVALENTS OUTSTANDING
Basic............................................ 13,193 15,060 13,337 15,591
Net effect of dilutive stock options............. 23 160 31 179
------------- -------------- ------------- -------------
Diluted.......................................... 13,216 15,220 13,368 15,770
============= ============== ============= =============
</TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET INCOME, AS SET FORTH ABOVE....................... $ 660 $ 522 $ 886 $ 663
Foreign currency translation adjustments............. (104) 1 (165) (11)
------------- -------------- ------------- -------------
COMPREHENSIVE INCOME................................. $ 556 $ 523 $ 721 $ 652
============= ============== ============= =============
</TABLE>
See accompanying notes.
3
<PAGE> 4
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
ASSETS 1999 1998
- ----------------------------------------------------------------------- ------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.......................................... $ 12,768 $ 22,696
Securities available-for-sale...................................... 1,270
Accounts receivable (less allowances of $750,000 at
June 30, 1999 and $953,000 at December 31, 1998)................ 26,590 23,804
Refundable income tax.............................................. 1,539 3,153
Inventories........................................................ 1,200 811
Prepaid expenses and other......................................... 2,515 1,704
Deferred income tax................................................ 625 438
------------------- -------------------
46,507 52,606
------------------- -------------------
PROPERTY, EQUIPMENT AND PURCHASED SOFTWARE
Office furniture and equipment..................................... 20,018 20,714
Purchased software................................................. 5,019 4,924
Leasehold improvements............................................. 1,905 2,081
Transportation equipment........................................... 271 291
------------------- -------------------
27,213 28,010
Less-- Accumulated depreciation and amortization................... 17,813 15,691
------------------- -------------------
9,400 12,319
------------------- -------------------
OTHER ASSETS
Leased equipment and other investments in leases................... 32,743 29,766
Intangibles (less accumulated amortization of $9,514,000 at
June 30, 1999 and $7,663,000 at December 31, 1998).............. 11,153 13,268
Investment in GE Joint Venture..................................... 954 883
Deferred income tax................................................ 680 1,324
Other.............................................................. 1,585 1,452
------------------- -------------------
47,115 46,693
------------------- -------------------
TOTAL ASSETS........................................................... $ 103,022 $ 111,618
=================== ===================
</TABLE>
See accompanying notes.
4
<PAGE> 5
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
- ----------------------------------------------------------------------- ------------------ -------------------
(IN THOUSANDS)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable................................................... $ 2,707 $ 4,107
Accrued payroll, related taxes and withholdings.................... 5,415 4,269
Deferred revenues and unapplied receipts........................... 1,191 2,029
Accrued expenses and taxes......................................... 1,554 1,145
Current portion of notes payable................................... 3,450 8,024
Other.............................................................. 266 398
------------------- -------------------
14,583 19,972
------------------- -------------------
LONG-TERM DEBT......................................................... 5,448 7,312
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01, 5,000,000 shares authorized,
none issued
Common stock, par value $.01, 45,000,000 shares authorized,
Issued-- 16,711,400 and 16,703,800 shares at
June 30, 1999 and December 31, 1998, respectively............... 167 167
Additional paid-in capital......................................... 111,273 111,414
Retained earnings.................................................. 1,647 761
Accumulated other comprehensive income(loss)....................... (109) 56
------------------- -------------------
112,978 112,398
Less -- Treasury stock (3,532,824 and 3,179,226 shares
at June 30, 1999 and December 31, 1998, respectively)........... 29,987 28,064
------------------- -------------------
Total shareholders' equity......................................... 82,991 84,334
=================== ===================
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 103,022 $ 111,618
=================== ===================
</TABLE>
See accompanying notes.
5
<PAGE> 6
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
---------------------------------------
1999 1998
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................................ $ 886 $ 663
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and Amortization............................... 9,984 6,629
Treasury stock contributed to 401(k) plan and other......... 574 339
Changes in operating assets and liabilities................. (2,859) (5,909)
----------------- ------------------
Net cash provided by operating activities................... 8,585 1,722
----------------- ------------------
INVESTING ACTIVITIES
Sale (purchase) of property, equipment and software, net........... 797 (2,802)
Purchase of leased equipment, net................................. (9,522) (3,262)
Investment in direct financing leases and residuals............... 681
Sale(purchase) of securities available-for-sale................... (1,270) 12,741
Other ............................................................ (133) (162)
----------------- ------------------
Net cash provided by(used in) investing activities............. (9,447) 6,515
----------------- ------------------
FINANCING ACTIVITIES
Purchase of Company common stock.................................. (2,497) (18,368)
Proceeds from issuance of common stock............................ 34 368
(Payments) proceeds on notes payable, net......................... (6,438) 1,882
Other............................................................. (165)
----------------- ------------------
Net cash used in financing activities.......................... (9,066) (16,118)
----------------- ------------------
Decrease in cash and cash equivalents.......................... (9,928) (7,881)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD...................... 22,696 24,927
----------------- ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................ $ 12,768 $ 17,046
================= ==================
</TABLE>
See accompanying notes.
6
<PAGE> 7
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - JUNE 30, 1999
(UNAUDITED)
The accompanying unaudited consolidated financial statements have been prepared
by National TechTeam, Inc. ("TechTeam" or "Company") in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six month period ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Registrant Company and
Subsidiaries' annual report on Form 10-K for the year ended December 31, 1998.
Certain reclassifications have been made to the 1998 financial statements in
order to conform to the 1999 financial statement presentation.
NOTE A -- RESTATEMENT OF JUNE 30, 1998 STATEMENT OF OPERATIONS
As discussed in the December 31, 1998 Form 10-K net income for the three month
period ended June 30, 1998 was restated to reflect a reduction of $312,000.
Revenues decreased by $170,000 related to earnings and billing adjustments to
the GE Joint Venture and expenses increased by $302,000 due to recognition of
additional health care costs. Income tax expense was reduced by $160,000 related
to these changes.
NOTE B -- EARNINGS PER SHARE
Earnings per share is computed using the weighted average number of common
shares and common share equivalents outstanding. Common share equivalents
consist of stock options and are calculated using the treasury stock method.
NOTE C -- REVENUES FROM MAJOR CLIENTS
Revenues from clients which represented ten percent or more of total revenue are
as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------------
1999 1998
------------------------------------- --------------------------------------
(IN THOUSANDS)
--------------------------------------------------------------------------------
AMOUNT PERCENT OF TOTAL AMOUNT PERCENT OF TOTAL
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
GE TechTeam, L.P.................... $ 6,684 19.5% $ 4,506 16.4%
DaimlerChrysler..................... 5,370 15.7% 5,440 19.8%
Ford Motor Company.................. 3,506 10.2% 3,639 13.2%
</TABLE>
7
<PAGE> 8
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - JUNE 30, 1999
(UNAUDITED)
NOTE C -- REVENUES FROM MAJOR CLIENTS (continued)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------------------------
1999 1998
------------------------------------- ------------------------------------
(IN THOUSANDS)
------------------------------------------------------------------------------
AMOUNT PERCENT OF TOTAL AMOUNT PERCENT OF TOTAL
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
GE TechTeam, L.P.................... $ 14,894 21.8% $ 7,910 14.6%
DaimlerChrysler..................... 12,870 18.8% 11,132 20.6%
Ford Motor Company.................. 8,043 11.8% 7,399 13.7%
</TABLE>
NOTE D -- LEGAL PROCEEDINGS
Refer to Part II, Item 1 for a description of legal proceedings.
NOTE E -- STOCK REPURCHASES
In February 1998, the Company announced a stock repurchase program to purchase
up to 1,500,000 shares of common stock during the period ending August 15, 1998,
unless extended. The Company repurchased 1,500,000 shares under this program for
$14,864,000 by September 30, 1998.
In May 1998, the Company announced a second stock repurchase program to purchase
up to an additional 1,000,000 shares of common stock during the period ending
November 26, 1998, unless extended. The Company repurchased 1,000,000 shares
under this program for $9,075,000 by September 30, 1998.
In August 1998, the Company announced a third stock repurchase program to
purchase up to an additional 2,000,000 shares of common stock during the period
ending August 26, 1999, unless extended. During 1999, the Company repurchased
402,100 shares for $2,497,000. The total shares repurchased under this plan
total 1,043,900 shares for $6,753,000.
8
<PAGE> 9
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - JUNE 30, 1999
(UNAUDITED)
NOTE F -- SEGMENT REPORTING
<TABLE>
<CAPTION>
CORPORATE SERVICES
------------------------------------------------------------
CORPORATE OEM CALL LEASING
HELP DESK TECHNICAL SYSTEMS TRAINING CENTER OPERATIONS
SERVICES STAFFING INTEGRATION PROGRAMS TOTAL SERVICES TOTAL
---------- ---------- ----------- --------- --------- ---------- ---------- ---------
(IN THOUSANDS)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Three months ended
June 30, 1999
Revenues............ $ 9,478 $ 5,419 $ 5,654 $ 1,386 $ 21,937 $ 6,684 $ 5,647 $ 34,268
Gross profit........ 2,311 1,270 1,316 304 5,201 63 1,398 6,662
Depreciation and
amortization.... 882 45 35 133 1,095 0 3,555 4,650
Expenditures for
property, net.... (662) 22 3 28 (609) 0 (416) (1,025)
Three months ended
June 30, 1998
Revenues............ $ 6,811 $ 6,423 $ 2,656 $ 1,773 $ 17,663 $ 6,471 $ 3,362 $ 27,496
Gross profit........ 1,848 1,480 560 641 4,529 189 1,017 5,735
Depreciation and
amortization.... 877 139 57 36 1,109 0 1,368 2,477
Expenditures for
property, net... 967 643 262 168 2,040 0 (220) 1,820
</TABLE>
9
<PAGE> 10
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - JUNE 30, 1999
(UNAUDITED)
NOTE F -- SEGMENT REPORTING (continued)
<TABLE>
<CAPTION>
CORPORATE SERVICES
------------------------------------------------------------
CORPORATE OEM CALL LEASING
HELP DESK TECHNICAL SYSTEMS TRAINING CENTER OPERATIONS
SERVICES STAFFING INTEGRATION PROGRAMS TOTAL SERVICES TOTAL
---------- ---------- ----------- ---------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
--------------------------------------------------------------------------------------------------
Six months ended
June 30, 1999
Revenues............ $ 18,492 $ 11,889 $ 10,650 $ 2,781 $ 43,812 $ 14,894 $ 9,649 $ 68,355
Gross profit........ 3,854 3,006 2,182 245 9,287 737 2,321 12,345
Depreciation and
amortization.... 1,815 94 75 272 2,256 0 6,542 8,798
Expenditures for
property, net.... (531) 25 20 59 (427) 0 (370) (797)
Six months ended
June 30, 1998
Revenues............ $ 12,870 $ 13,453 $ 5,407 $ 3,621 $ 35,351 $ 13,131 $ 5,471 $ 53,953
Gross profit........ 2,656 3,372 968 905 7,901 1,181 1,711 10,793
Depreciation and
amortization.... 1,755 911 358 228 3,252 0 2,970 6,222
Expenditures for
property, net... 2,256 215 274 75 2,820 0 (18) 2,802
Segment Assets
June 30, 1999 $ 17,933 $ 6,864 $ 7,055 $ 2,059 $ 33,911 $ 9,534 $ 43,106 $ 86,551
December 31, 1998 16,070 6,895 6,119 2,126 31,210 8,661 41,389 81,260
</TABLE>
10
<PAGE> 11
NATIONAL TECHTEAM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JUNE 30, 1999 (continued)
(UNAUDITED)
NOTE F -- SEGMENT REPORTING (continued)
A reconciliation of the totals reported for the operating segments to the
applicable line item in the consolidated financial statements is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Depreciation and amortization
Total for reportable segments................. $ 4,650 $ 2,477 $ 8,798 $ 6,222
Corporate assets.............................. 579 333 1,186 407
-------------- -------------- -------------- --------------
Total depreciation and amortization........ $ 5,229 $ 2,810 $ 9,984 $ 6,629
============== ============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Assets
Total assets for reportable segments.......... $ 86,551 $ 81,260
Corporate assets.............................. 16,471 30,358
-------------- --------------
Total assets............................... $ 103,022 $ 111,618
============== ==============
</TABLE>
NOTE G -- GE TECHTEAM, L.P.
During 1997, the Company formed GE TechTeam, L.P. (the "GE Joint Venture"), a
joint venture between TechTeam and a unit of General Electric Appliances
Division ("GEA"). The GE Joint Venture was formed to market and service extended
warranty contracts for the personal computer industry. The GE Joint Venture,
headquartered in Dallas, Texas, is operated by TechTeam and by GE Service
Management, an operating unit of GEA. GE Service Management is a leading
provider of extended service plans and warranty administration for products
ranging from major appliances and consumer electronics to personal computers. GE
Service Management offers extended service plans that cover numerous
manufacturers, makes, and models, and it provides comprehensive service coverage
for post-warranty products and service needs. TechTeam shares in the profits, if
any, (up to an agreed upon limit) of this portion of the GE Joint Venture's
business pro rata based on its partnership interest, 49.45%. Losses, if any, are
reimbursed to the GE Joint Venture by GEA. Operations for this portion of the
business were not profitable in 1997, 1998 or 1999 to date.
On March 31, 1998, the Company sold its OEM call center contracts, consisting of
its remaining unexpired contracts with Hewlett-Packard Corporation and a
contract with 3Com Corporation, to GEA for $1.4 million. GEA then contributed
those contracts to the GE Joint Venture for an agreed value of $1.4 million and
an agreement that GEA received all the joint venture's earnings from these
contracts until GEA recovered the $1.4 million. TechTeam recognized the gain
related to this sale as the GE Joint Venture recorded earnings related to these
contracts for a one year period ended March 31, 1999. On April 1, 1999, TechTeam
began sharing in the profits or losses on these contracts based on its
partnership interest of 49.45%. Such earnings amounted to $110,000 for the
quarter ended June 30, 1999 and $294,000 for the six month period ended June 30,
1999.
11
<PAGE> 12
The GE Joint Venture also provides telephone and computer support for other
manufacturers and retailers of personal computers. TechTeam shares in the
profits and losses of this portion of the GE Joint Venture's business pro rata
based on its partnership interest. Such losses amounted to $90,860 for the
quarter ended June 30, 1999 and $17,380 for the six month period ended June 30,
1999.
Summarized financial data for the GE Joint Venture follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- -------------------------------
Statement of Operations 1999 1998 1999 1998
------------- ------------- ------------- -------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues..................................... $ 7,042 $ 2,529 $ 15,323 $ 6,058
Expenses..................................... 8,067 3,999 17,699 10,279
------------- ------------- ------------- -------------
Pre-tax loss................................. $ (1,025) $ (1,470) $ (2,376) $ (4,221)
============= ============= ============= =============
</TABLE>
12
<PAGE> 13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain of the statements contained in this report that are not historical facts
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. Our actual results may differ materially from those
included in the forward-looking statements. We caution readers not to place
undue reliance on these forward-looking statements, which reflect management's
opinions only as of the date hereof. We do not undertake an obligation to revise
or publicly release the results of any revisions to these forward-looking
statements. You should carefully review the risk factors described in other
documents the Company files from time to time with the SEC, including the Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 and the
Quarterly Report on Form 10-Q filed by the Company in fiscal 1999.
COMPANY OVERVIEW
National TechTeam, Inc. ("TechTeam" or "Company") is a leading provider of
information technology ("IT") outsourcing support services to large national and
multinational corporations, government agencies, and service organizations. The
Company offers its services through three global units: (1) Corporate Services,
which provides corporations with help desk support, technical staffing, systems
integration, and custom training; (2) OEM Call Center Services, which provides
end user customers of its clients with inbound telephone support for their
computer products; and (3) Leasing Operations, which consists primarily of
leasing computer-related hardware and integrated services to corporate
customers.
CORPORATE SERVICES
As a provider of Single Point of Contact help desk and desktop management
programs, TechTeam provides centralized delivery of IT technical support
services. TechTeam's Corporate Services consists of corporate help desk
services, technical staffing, systems integration, and training programs.
Corporate Help Desk Services
TechTeam provides help desk services to assist major companies in managing their
internal IT systems. The Company's technical staff uses its experience and
knowledge in launching and delivering corporate help desk programs to define and
execute corporate IT support solutions to meet its clients' specific needs. The
Company's help desk solutions include numerous options for call tracking,
Internet-based callback support, telecommunications systems, product knowledge
bases, statistical reporting, real-time scheduling, and forecasting.
Systems Integration
TechTeam's systems integration team performs all phases of network
implementations, from project planning and management, to full-scale network
server and workstation installations. After the implementation, the systems
integration team performs a wide range of maintenance services to the client
ranging from desk-side support to network monitoring.
Technical Staffing
TechTeam maintains a staff of trained technical personnel to provide computer
and technical support to its clients at the clients' facilities. Services most
often provided are on-site help desk, programming, consulting, and systems
implementation and maintenance. The Company's adaptive management and proactive
methodology enables its staff to work closely with its clients, understand their
computing environments, and work together to design and install technology to
meet their business needs.
13
<PAGE> 14
Training Programs
Training programs include a wide array of applications within the office
automation, network, and client-server marketplace. Clients are offered a full
spectrum of delivery options including course catalogs, registration services,
computer equipment, networks, course materials, certified trainers, evaluation
options, desk-side tutorials, testing, feedback to help desks, and reporting.
OEM CALL CENTER SERVICES
TechTeam provides OEM call center services through the GE Joint Venture. The GE
Joint Venture started in the Fall of 1997, with TechTeam providing the
technicians to answer support calls on the Consumer Support Program (CSP), a
computer and peripheral warranty program sold by GE. The GE Joint Venture
provides CSP with troubleshooting, support, and dispatch services on personal
computers, peripheral hardware, and software. In April 1998, TechTeam sold its
existing OEM call center business with Hewlett-Packard and 3Com to the GE Joint
Venture. Accordingly, TechTeam provides OEM technical support through the GE
Joint Venture.
LEASING OPERATIONS
In January 1998, TechTeam acquired TechTeam Capital Group in order to provide
lease financing to its client base. TechTeam Capital Group writes leases for
computer, telecommunications, and many forms of capital equipment ranging in
lease terms from 2 - 5 years. Project financing is also available for roll-in or
build-out periods from 6 - 12 months. Lease options include operating leases,
direct financing leases, technology refreshes, and sale/leasebacks.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO JUNE 30, 1998
Revenues increased 24.6% to $34.2 million from $27.5 million. The increase
resulted primarily from revenue increases in corporate help desk services of
$2.6 million, systems integration services of $3 million and leasing operations
of $2.3 million offset by small decreases in several other product lines.
Corporate help desk services increased due to expanding services to several
existing large clients coupled with the addition of several smaller customers.
Systems integration revenues increased due to a large contract with a local
government agency to replace workstations and upgrade internal networks. The
Leasing operations revenue increase was due to the sale of $1.1 million of
certain lease assets and lease revenue rights to a third party combined with
increased equipment lease sales.
Gross profit decreased as a percentage of sales to 19.4% from 20.8%. OEM call
center services margins were down as a result of decreased call volumes related
to the GE TechTeam Joint Venture through which the company shares in certain
project revenues and losses (see note F of the consolidated financial
statements). Training program margins decreased due to the completion of
nonrecurring training programs resulting in under utilization of training
personnel. Gross profit for the other segment lines of business for the second
quarter of 1999 remained consistent with those of the second quarter of 1998.
Selling, General and Administrative expense decreased as a percentage of sales
to 15.7 % from 16.1%, due primarily to the Company's continuing efforts in cost
containment.
14
<PAGE> 15
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO JUNE 30, 1998
Revenues increased 26.7% to $68.3 million from $54 million. The increase
resulted primarily from revenue increases in corporate help desk services of
$5.6 million, systems integration services of $5.2 million, leasing operations
of $4.2 million, OEM Call Center Services of $1.8 and decreased revenue in
technical staffing of $1.5 million. Corporate help desk services increased due
to expanding services to several existing large clients in the Global Help Desk
area along with the addition of several smaller customers. Systems integration
revenues increased due to a large contract with a local government agency to
replace workstations and upgrade internal networks and increased projects with
several existing clients in the automotive industry. The Leasing operations
revenue increase was due to the sale of $1.1 million of certain lease assets and
lease revenue rights to a third party combined with an increase in lease volume
due to the addition of several new customers and placing additional assets with
existing customers due to growth by these customers. OEM Call Center Services
increased due to the GE TechTeam joint venture expanding warranty administration
services for a major personal computer manufacturer late in 1998 and this
business has continued through the current period. Technical staffing decreased
due to the completion of certain non-recurring projects near the end of 1998.
Gross profit decreased as a percentage of sales to 18% from 20%. OEM call center
services margins were down as a result of decreased call volumes related to the
GE TechTeam Joint Venture through which the company shares in certain project
revenues and losses, combined with lower margins related to the new warranty
business mentioned above (see note F of the consolidated financial statements).
Training program margins decreased due to the completion of nonrecurring
training programs resulting in under utilization of training personnel. Gross
margins for the other segment lines of business for the six-month period ended
June 30, 1999 remained consistent with those of the same period in 1998.
Selling, General and Administrative expense decreased as a percentage of sales
to 15.3% from 17.3%, due primarily to the Company's continuing efforts in cost
containment.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Provided from Operations
Cash flow provided from operating activities was $8.6 million for the six months
ended June 30, 1999. Cash flow provided was primarily due to earnings, combined
with $10 million of non-cash depreciation expense mainly related to the leasing
operations, offset by a net decrease in operating assets and liabilities.
Cash Flow Used by Investing Activities
Cash flow used by investing activities was $9.4 million, principally to purchase
equipment to be leased to customers for the leasing operations.
Cash Flow (Used in) Financing Activities
Cash flow used in financing activities was $9 million. The Company used $6.4
million to pay down debt and $2.5 million to repurchase Company stock in
accordance with the stock repurchase program (see notes to the financial
statements for more discussion on the stock repurchase program).
The Company's working capital position at June 30, 1999 was $32 million compared
to $32.6 at December 31, 1998.
The Company has line-of-credit agreements with Bank One and Chase Manhattan Bank
which provide for short-term borrowings of up to $25 million and $310,000,
respectively: both lines-of-credit are unsecured. Bank One borrowings are at the
prime rate and Chase Manhattan Bank borrowings are at prime plus 1.5%. There
were no borrowings under these lines at June 30, 1999.
15
<PAGE> 16
The Company believes that cash flows from operations, together with current
short-term assets and borrowings available under the Company's lines-of-credit
will continue to be sufficient to meet its ongoing working capital needs.
YEAR 2000 DISCLOSURE
TechTeam has a Y2K Steering Committee reporting directly to the CEO and the
Board of Directors. The Steering Committee is charged with evaluating TechTeam's
risks, recommending solutions and implementing the solution to the various
problems that exist, and monitoring the remediation efforts. The entire
management of TechTeam is responsible to assure that the changes necessary are
made to achieve readiness for the Year 2000. TechTeam is engaged in a
comprehensive effort to meet the Year 2000 problems.
TechTeam has established four phases necessary to assure readiness: 1) inventory
- - identify key business areas potentially affected by Y2K concerns; 2) analysis
- - determine the impact and preparation of a plan to address the issue; 3)
remediation - making the necessary changes to bring the system into compliance;
and 4) validation - testing to ensure compliance.
TechTeam began the inventory process of its worldwide business systems in 1997
to determine their compliance. This process was conducted by a team of internal
employees in cooperation with OEM hardware and software manufacturers. In 1998,
the scope of the inventory was expanded to include facilities and
non-information technology related systems and equipment. TechTeam has
identified substantially all internal systems having material Year 2000 issues.
Analysis of systems critical to the delivery of TechTeam's services, which are
within TechTeam's control, to address Y2K issues has been completed on 75% of
critical systems. Of these critical systems, about 70% have been remediated.
TechTeam expects to complete the analysis, remediation and validation of its
critical systems by September 30, 1999.
TechTeam has replaced its non-compliant financial system at a cost of $2.3
million. TechTeam has completed the remediation of its internal call center
software, also known as the GCC. TechTeam also utilizes many office automation
products from Microsoft Corporation. Microsoft has provided patches such that
TechTeam can complete remediation of its workstations. This is true of other
vendors as well, such as Sun Microsystems, Oracle, SGI, Novell, Aspect and
Siemens. TechTeam estimates that it will spend an additional $250,000 to
$500,000 in 1999 to complete its Y2K project. As necessary, these estimates will
be refined in the future. These expenses may not include all of the cost
implementing contingency plans, which are in the process of being developed.
These estimates also do not include any litigation or warranty costs related to
Y2K issues because they cannot be reasonably estimated.
In addition, since a significant amount of TechTeam services to its clients
involve service related support of technology within the desktop services area,
TechTeam is working with appropriate clients to assess all facets of support
that will be required of the company by its clients. Any expenses incurred by
TechTeam will be accompanied by additional revenues from its clients.
The most likely IT "worst case scenario" would be the failure of a telephone
switch at one of TechTeam's support centers. The recovery procedure would be to
divert traffic to another center. The most likely non-IT "worst case scenario"
would be loss of operations at one of TechTeam's support centers due to
environmental or security considerations. The recovery procedure would be to
divert traffic to another center. It is worth noting that less than 1 percent of
TechTeam's weekly support center traffic normally occurs on weekends, such as
the first two days of January 2000. Significant impact to TechTeam, and it's
clients for such a failure would not occur until 08:00 EST, Monday, January 3,
2000, which gives TechTeam additional time to react on behalf of itself and it's
clients. In all other lines of business, where the service is TechTeam staff
located at the client site, or leasing, the service can continue, without
interruption, for several weeks without interface to TechTeam's IT or non-IT
systems.
16
<PAGE> 17
PART II -- OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Between August 27, 1997 and October 24, 1997, four actions were filed against
the Company, William F. Coyro, Jr. currently the Chairman of the Board of
Directors and formerly an officer of the Company, and Lawrence A. Mills, a
former officer of the Company. These actions were consolidated into a single
action, alleging violations of Section 10 (b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated there under, as well as claims against the
individual defendants for alleged "controlling person" liability under Section
20(a) of the Securities Exchange Act. On December 24, 1998, the Company and the
individual defendants entered into an agreement in principle to settle the
consolidated class action lawsuits for the payment of $11 million to the
plaintiffs. On August 11, 1999, U.S. District Court Judge Avern Cohn of the
Eastern District of Michigan granted final approval of the Stipulation of
Settlement formalizing the agreement in principle.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on May 26, 1999. The holders
of 12,171,533 shares were present in person or by proxy, representing attendance
by at least 85% of the outstanding shares.
The following is a summary of the matters voted on at that meeting.
(a) The following persons were elected to the Company's Board of
Directors. The number of shares cast in favor and withheld were as follows:
<TABLE>
<CAPTION>
Name For Withheld
---------- --------
<S> <C> <C>
Kim A. Cooper 11,996,559 174,974
William F. Coyro, Jr. 11,996,559 174,974
Peter T. Kross 11,996,559 174,974
Harry A. Lewis 11,996,559 174,974
Wallace D. Riley 11,996,559 174,974
Richard G. Somerlott 11,996,559 174,974
</TABLE>
17
<PAGE> 18
ITEM 5. OTHER INFORMATION
SHAREHOLDER PROPOSALS OR NOMINATIONS
In accordance with the Company's Bylaws, any shareholder proposal or nomination
of a person for election to the Board of Directors must be submitted in writing
to the Secretary of the Company not less than 90 nor more than 120 days in
advance of the date specified in the Company's proxy statement in connection
with the previous year's Annual Meeting of shareholders. The submission must
include certain specified information concerning the proposal or nominee, as the
case may be, and information about the proponent's ownership of the Company's
common stock. Proposals or nominations not meeting these requirements will not
be entertained at the Annual Meeting. A proponent should contact the Secretary
regarding the proper form and content of submissions.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.14 Mutual Separation Agreement and General Release between National
TechTeam, Inc. and Lawrence A. Mills dated February 12, 1999
(Filed as Exhibit 10.14 to the registrant's Form 10-Q for the
quarter ended March 31, 1999, SEC File 0-16284, and incorporated
herein by reference).
27 Financial Data Schedule
(b) Reports on Form 8-K.
1. May 5, 1999 -- "National TechTeam, Inc. Announces Appointment of
Peter T. Kross to the Board of Directors."
2. April 29, 1999 -- "National TechTeam, Inc. Announces Revenues and
Earnings for the First Quarter 1999."
3. April 16, 1999 -- "National TechTeam Appoints M. Anthony Tam to
Vice President and Chief Financial Officer."
4. April 5, 1999-- "National TechTeam Announces Cost Containment
Program."
ITEMS 2 AND 3 ARE NOT APPLICABLE AND HAVE BEEN OMITTED
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National TechTeam, Inc.
-----------------------
(Registrant)
Date: 8/15/99 By: /s/Harry A. Lewis
------------------------------
Harry A. Lewis
Chief Executive Officer
and President
Date: 8/15/99 By: /s/M. Anthony Tam
------------------------------
M. Anthony Tam
Vice President,
Chief Financial Officer and
Treasurer
19
<PAGE> 20
Exhibit Index
-------------
Exhibit No. Description
------------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 12,768
<SECURITIES> 1,270
<RECEIVABLES> 26,590
<ALLOWANCES> 750
<INVENTORY> 1,200
<CURRENT-ASSETS> 46,507
<PP&E> 27,213
<DEPRECIATION> 17,813
<TOTAL-ASSETS> 103,022
<CURRENT-LIABILITIES> 14,583
<BONDS> 5,448
0
0
<COMMON> 167
<OTHER-SE> 82,824
<TOTAL-LIABILITY-AND-EQUITY> 103,022
<SALES> 0
<TOTAL-REVENUES> 34,268
<CGS> 0
<TOTAL-COSTS> 27,606
<OTHER-EXPENSES> 5,550
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 219
<INCOME-PRETAX> 1001
<INCOME-TAX> 341
<INCOME-CONTINUING> 660
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 660
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.05
</TABLE>
